Other legal disclosure requirements

Alternative Performance Measures (APMs)

BBVA presents its results in accordance with the International Financial Reporting Standards (EU-IFRS). However, it also considers that some alternative performance measures (APMs) provide useful additional financial information that should be taken into account when evaluating performance. These APMs are also used when making financial, operational and planning decisions within the Entity. The Group firmly believes that they give a true and fair view of its financial information. These APMs are generally used in the financial sector as indicators for monitoring the assets, liabilities and economic and financial situation of entities.

BBVA Group’s APMs are given below. They are presented in accordance with the European Securities and Markets Authority (ESMA) guidelines, published on October 5, 2015 ESMA/2015/1415en). These guidelines are aimed at promoting the usefulness and transparency of APMs included in prospectuses or regulated information to protect investors in the European Union. In accordance with the indications given in the guidelines, BBVA Group’s APMs:

Book value per share

The book value per share determines the value of the company on its books for each share held by the shareholder.

Explanation of the formula: The figures for both the shareholders’ funds and accumulated other comprehensive income are taken from the balance sheet. Shareholders’ funds are adjusted to take into account the execution of the “dividend-option” at the closing dates on which it was agreed to deliver this type of dividend before publication. The denominator includes the final number of outstanding shares excluding own shares (treasury shares). The denominator is also adjusted to include the capital increase resulting from the execution of the “dividend-options” explained above. Both the numerator and the denominator take into account specific balances.

Relevance of its use: It is important to know the company’s book value for each share issued. It is a generally used ratio, not only in the banking sector but also in others.

Book value per share

31-12-2015 31-03-2016 30-06-2016 30-09-2016 31-12-2016
Numerator (million euros) + Shareholders' funds 50,639 50,555 51,761 52,248 52,821
+ Dividend-option adjustment - 675 - 455 -
+ Accumulated other comprehensive income (3,349) (4,171) (4,327) (4,681) (5,458)
Denominator (shares) + Number of shares outstanding 6,367 6,367 6,480 6,480 6,567
+ Dividend-option - 114 - 86 -
- Treasury shares 39 26 28 11 7
= Book value per share (euros/share) 7.47 7.29 7.35 7.33 7.22

Tangible book value per share

The tangible book value per share determines the value of the company on its books for each share held by shareholders in the event of liquidation.

Explanation of the formula: The figures for shareholders’ funds, accumulated other comprehensive income and intangible assets are all taken from the balance sheet. Shareholders’ funds are adjusted to take into account the execution of the “dividendoption” at the closing dates on which it was agreed to deliver this type of dividend before publication. The denominator includes the final number of shares outstanding excluding own shares (treasury shares). The denominator is also adjusted to include the result of the capital increase resulting from the execution of the “dividend-options” explained above. Both the numerator and the denominator take into account specific balances.

Relevance of its use: It is important to know the company’s book value for each share issued, after deducting intangible assets. It is a generally used ratio, not only in the banking sector but also in others.

Tangible book value per share

31-12-2015 31-03-2016 30-06-2016 30-09-2016 31-12-2016
Numerator (million euros) + Shareholders' funds 50,639 50,555 51,761 52,248 52,821
+ Dividend-option adjustment - 675 - 455 -
+ Accumulated other comprehensive income (3,349) (4,171) (4,327) (4,681) (5,458)
- Intangible assets 10,052 9,858 9,936 9,503 9,786
Denominator (shares) + Number of shares outstanding 6,367 6,367 6,480 6,480 6,567
+ Dividend-option - 114 - 86 -
- Treasury shares 39 26 28 11 7
= Tangible book value per share (euros/share) 5.88 5.76 5.81 5.88 5.73

Dividend yield

This is the remuneration given to the shareholders in the last twelve calendar months divided into the closing price for the period.

Explanation of the formula: The remuneration per share takes into account the gross amounts per share paid out over the last twelve months, both in cash and through the flexible remuneration system called the “dividend-option”.

Relevance of its use: This ratio is generally used by analysts, shareholders and investors for companies and entities that are traded on the stock market. It compares the dividend paid by a company every year with its market price.

Dividend yield

31-12-2015 31-03-2016 30-06-2016 30-09-2016 31-12-2016
Numerator (euros) Σ Dividends 0.37 0.37 0.37 0.37 0.37
Denominator (euros) Closing price 6.74 5.84 5.06 5.38 6.41
= Dividend yield 5.5% 6.3% 7.3% 6.9% 5.8%

Non-performing loan (NPL) ratio

This is the ratio between the risks classified for accounting purposes as non-performing loans and the total credit risk balance for customers and contingent risks.

Explanation of the formula: Both non-performing loans and credit risk include contingent liabilities, now called collateral given. Their calculation is based on the headings in the first table on the Risk management section.

Relevance of its use: This is one of the main indicators used in the banking sector to monitor the current situation and changes in credit risk quality, and specifically the relationship between risks classified in the accounts as non-performing loans and the total balance of credit risk, with respect to customers and contingent liabilities.

Non-Performing Loans (NPL) ratio

31-12-2015 31-03-2016 30-06-2016 30-09-2016 31-12-2016
Numerator (million euros) NPL 25,996 25,473 24,834 24,253 23,595
Denominator (million euros) Credit Risk 482,518 478,429 483,169 472,521 480,720
= Non-Performing Loans (NPLs) ratio 5.4% 5.3% 5.1% 5.1% 4.9%

NPL coverage ratio

It reflects the degree to which the impairment of non-performing loans has been covered in the accounts via loan-loss provisions.

Explanation of the formula: Non-performing loans include contingent liabilities, now called collateral given. Their calculation is based on the headings in the first table on the Risk management section.

Relevance of its use: This is one of the main indicators used in the banking sector to monitor the situation and changes in the quality of credit risk, reflecting the degree to which the impairment of non-performing loans has been covered in the accounts via loan-loss provisions.

NPL coverage ratio

31-12-2015 31-03-2016 30-06-2016 30-09-2016 31-12-2016
Numerator (million euros) Provisions 19,405 18,740 18,264 17,397 16,573
Denominator (million euros) NPLs 25,996 25,473 24,834 24,253 23,595
= NPL coverage ratio 74% 74% 74% 72% 70%

Efficiency ratio

It measures the percentage of gross income consumed by an entity’s operating expenses.

Explanation of the formula: Operating expenses are the sum of personnel expenses, plus administrative expenses, plus depreciation.

Relevance of its use: This ratio is generally used in the banking sector. It is also a ratio linked to one of the Group’s six Strategic Priorities.

Efficiency ratio

2016
2015 Jan.-Mar. Jan.-Jun. Jan.-Sep. Jan.-Dec.
Numerator (million euros) Operating expenses 12,317 3,174 6,332 9,549 12,791
Denominator (million euros) Gross income 23,680 5,788 12,233 18,431 24,653
= Efficiency ratio 52.0% 54.8% 51.8% 51.8% 51.9%

ROE

The ROE ratio (return on equity) measures the return obtained on an entity’s shareholders’ funds.

Explanation of the formula: Annualized net attributable profit: it measures the net profit attributable to the Group after deducting the results from non-controlling interests. If the metric is presented on a date before the close of the fiscal year, the numerator must be annualized. If extraordinary items (results from corporate operations) are included in the net attributable profit for the months covered, they are eliminated from the figure before it is annualized, and then added to the metric once it has been annualized.

Average shareholders’ funds: These are shareholders’ funds adjusted to take into account the result of the “dividend-option” at the closing dates before publication on which it was agreed to distribute this type of dividend. Average shareholders’ funds are a moving weighted average of shareholders’ funds over the last twelve calendar months.

Relevance of its use: This ratio is very commonly used not only in the banking sector but also in other sectors to measure the return obtained on shareholders’ funds.

In addition, a derivative of this metric may be reported, such as ROE not including the results from corporate operations. In this case the numerator will not include the results from corporate operations.

ROE

2016
2015 Jan.-Mar. Jan.-Jun. Jan.-Sep. Jan.-Dec.
Numerator (million euros) Annualized net attributable profit 2,642 2,853 3,684 3,736 3,475
Denominator (million euros) Average shareholders’ funds 50,767 50,923 51,253 51,590 51,947
= ROE 5.2% 5.6% 7.2% 7.2% 6.7%

ROTE

The ROTE ratio (return on tangible equity) measures the return on an entity’s shareholders’ funds, excluding intangible assets.

Explanation of the formula:

Annualized net attributable profit: calculated in the same way as ROE above.

Average shareholders’ funds: calculated in the same way as ROE above.

Average intangible assets: intangible assets on the balance sheet, including goodwill and other intangible assets. The average balance is calculated in the same way as for shareholders’ funds.

Relevance of its use: This metric is generally used not only in the banking sector but also in other sectors to measure the return obtained on shareholders’ funds not including intangible assets.

A derivative of this metric may also be reported, such as ROTE not including the results from corporate operations. In this case the numerator does not include the results from corporate operations.

ROTE

2016
2015 Jan.-Mar. Jan.-Jun. Jan.-Sep. Jan.-Dec.
Numerator (million euros) Annualized net attributable profit 2,642 2,853 3,684 3,736 3,475
Denominator (million euros) + Average shareholders’ funds 50,767 50,923 51,253 51,590 51,590
- Average intangible assets 9,634 10,054 9,961 9,875 9,819
= ROTE 6.4% 7.0% 8.9% 9.0% 8.2%

ROA

The ROA ratio (return on assets) measures the return obtained on an entity’s assets.

Explanation of the formula:

Annualized net income: If the metric is presented on a date before the close of the fiscal year, the numerator must be annualized. If extraordinary items (results from corporate operations) are included in the net attributable profit for the months covered, they are eliminated from the figure before it is annualized, and then added to the metric once it has been annualized.

Average total assets: A moving weighted average of the total assets in the last twelve calendar months.

Relevance of its use: This ratio is generally used not only in the banking sector but also in other sectors to measure the return obtained on assets.

A derivative of this metric may also be reported, such as ROA not including the results from corporate operations. In this case the numerator does not include the results from corporate operations.

ROA

2016
2015 Jan.-Mar. Jan.-Jun. Jan.-Sep. Jan.-Dec.
Numerator (million euros) Annualized net income 3,328 3,924 4,970 4,972 4,693
Denominator (million euros) Average total assets 716,379 749,242 742,470 739,330 735,636
= ROA 0.46% 0.52% 0.52% 0.67% 0.64%

RORWA

The RORWA ratio (return on risk-weighted assets) measures the accounting return obtained on average risk-weighted assets.

Explanation of the formula:

Annualized net income: calculated in the same way as ROA above.

Average risk-weighted assets (RWA): a moving weighted average of RWA over the last twelve calendar months.

Relevance of its use: This ratio is generally used in the banking sector to measure the return obtained on RWA.

A derivative of this metric may also be reported, such as RORWA not including the results from corporate operations. In this case the numerator does not include the results from corporate operations.

RORWA

2016
2015 Jan.-Mar. Jan.-Jun. Jan.-Sep. Jan.-Dec.
Numerator (million euros) Annualized net income 3,328 3,924 4,970 4,972 4,693
Denominator (million euros) Average RWA 380,844 399,448 397,873 395,447 394,356
= RORWA 0.87% 0.98% 1.25% 1.26% 1.19%

Other customer funds

It includes off-balance sheet funds (mutual funds, pension funds and other off-balance sheet funds) and customer portfolios.

Explanation of the formula: Sum of mutual funds + pension funds + other off-balance sheet funds + customer portfolios; as displayed in the table on the Balance sheet and business activity section.

Relevance of its use: This metric is generally used in the banking sector, as apart from on-balance sheet funds, financial institutions manage other types of customer funds, such as mutual funds, pension funds, etc.

Other customer funds

(Million euros)

31-12-15 31-03-16 30-06-16 30-09-16 31-12-16
+ Mutual funds 54,419 53,147 53,487 54,555 55,037
+ Pension Funds 31,542 31,410 32,061 32,628 33,418
+ Other off-balance sheet funds 3,786 3,611 3,370 3,156 2,831
+ Customer portfolios 42,074 42,907 41,198 40,494 40,805
= Other customer funds 131,822 131,076 130,116 130,833 132,092

Main risks and uncertainties

BBVA Group’s risk management system and risk exposure is described in Note 7 “Risk management” of the accompanying Consolidated Financial Statements

Economic outlook

Global growth is expected to be slightly higher than 3% in 2017 and 2018, sustained by support from central banks, relative calm on the financial markets and the recovery of emerging economies. The key in this scenario of weak economic growth within a context of reduced global trade and a greater aversion to the spread of globalization lies in addressing the economic consequences of some of the risks linked to economic policies. First, there is the uncertainty in connection with the economic policy of the new administration in the United States, particularly regarding protectionism and its potential global effects. Second, while the impact of Brexit (the referendum at the end of June resulting in a victory for those wanting the United Kingdom to leave the European Union) has not had a systemic impact, there is nevertheless lingering uncertainty regarding the negotiations related to it, which could weigh heavily on economic confidence in 2017. An additional factor is concern with respect to the results of a very busy electoral calendar throughout Europe.

The 2017 outlook for Spain is one of moderate growth of up to 2.7%, in light of the weakening of some support factors such as fiscal policy and an increase in oil prices.

The recovery in the rest of Europe faces the risk of a slowdown associated with political uncertainty or the reversal of the reforms implemented in some countries. In this context, we expect a GDP growth of 1.7% in 2016 and 1.6% in 2017.

In the United States, there are still major doubts regarding economic policy, particularly with respect to trade agreements, as well as the rate of interest rate hikes by the FED and their resulting impact on emerging economies. In light of the foregoing, the average growth in 2016 will slow to 1.6% and then increase slightly above 2% in 2017. In this scenario, the FED is expected to conduct a gradual normalization process in a context characterized by the uncertainty of the external environment together with the FED’s own concerns regarding the trending growth in productivity and the economy’s potential GDP growth.

The key for emerging economies is management of their vulnerability to sudden movements of capital. There has been increased inflationary pressure in Turkey, which could lead to a tougher monetary policy in an environment of growth of approximately 2.5% in 2016 and 2017. The pace of economic growth in Mexico could have tapered off slightly to below 2% in 2016 and this slowdown may become more pronounced, down to 1% in 2017, given the uncertainty associated with the trade measures adopted by the United States. The GDP of South America as a whole could contract by over 2% in 2016, though it should recover and post growth of slightly over 1% in 2017 thanks to the increased contribution from the foreign sector, the end of the downturn in Brazil, private investment in Argentina and the plans for public-sector investment in countries such as Peru and Colombia.

However, in the more medium and longer term, the greatest risk for the global economy remains linked to the imbalances in China’s economy. In this regard, concerns regarding a substantial slowdown in 2016 were allayed after reports of 6.6% growth (6.9% in 2015). However, the outlook continues to be for a gradual slowdown to around 6% in 2017. In the long term, doubts regarding the prospects of growth remain, given the slow progress of structural reforms in some key areas, particularly in state-owned companies.

Staff information

One of BBVA’s six Strategic Priorities to make progress in its digital transformation is “a first-class workforce”. This entails attracting, developing, motivating and retaining a first class workforce, and providing the best employee experience. To do so, the Organization is being transformed, fostering a new culture, with new ways of working (an organization based on projects, communities of expertise, agile methodology, collaborative tools, etc.) and flatter structures. A new variable remuneration model was also implemented in line with the strategic objectives.

BBVA Group. Basic employee data

(Number)

2016 2015
Number of employees 134,792 137,968
Average length of service (years) 10.1 10.1
Average age (years) 37.2 37.0
Diversity (% women) 54.1 53.9
Turnover (%) 8.3 8.5

As part of the reorganization carried out on the structure of the Group in 2016, Talent & Culture defined its role as an area that must support the Bank to achieve its strategic objectives and create a competitive advantage through a first class workforce, inspired by our Purpose and working together as a single team.

Talent & Culture bases its activity on two fundamental pillars: transparency and consistency. Three basic principles have also been defined to guide this activity:

Talent & Culture has conducted a strategic prioritization process for selecting the global programs in which to make progress. Thus, among the new projects launched were those related to professional careers, internal mobility, values, performance and the leadership model

Professional development

A relevant aspect for professional development at BBVA is the biennial process for determining each professional’s strengths and areas for improvement. The last process was carried out in 2015, when each professional received feedback from his/her manager and training and development plans were established and subsequently executed in 2016. In addition to the performance indicators, the results of the process proved to be key in identifying critical talent in the Group and supporting promotion decisions.

BBVA Group makes a variety of resources available to employees so they can grow professionally and improve their skills:

Workplace

BBVA conducts a general satisfaction and commitment survey involving all employees every two years. The purpose of this survey is to ascertain the views of our employees, their concerns and the areas for improvement on which they consider we should work in the future. The 2016 survey was answered by over 70% of BBVA employees worldwide, with 83% of them being satisfied or very satisfied.

Within the scope of responsible investment, BBVA assumed its Socially Responsible Investment (SRI) commitment in 2008 when it joined the United Nations Principles for Responsible Investment through the Employee Pension Plan.

With respect to occupational health and safety, BBVA honors its commitment to guarantee healthy working environments and improve the quality of life of people through health promotion and prevention campaigns and training, information and awareness-raising activities. The occupational health and safety plan in Spain is part of the preventive planning that sets yearly targets based on the occupational risk prevention activities scheduled for the period. It includes risk assessments and monitoring of corrective measures, evacuation drills and emergency plans, training for workers, coordination of business activity, healthcare monitoring through medical checkups, health promotion campaigns, protection for vulnerable workers, adapting workstations with specific ergonomic material to prevent related pathologies (back pain, carpal tunnel syndrome, etc.).

Occupational health in Spain

(Number)

2016 2015 2014
Number of technical preventive actions 2,424 3,033 2,157
Number of preventive actions to improve working conditions 2,981 3,761 2,869
Appointments for health checks 15,100 17,659 16,145
Employees represented in health and safety committees (%) 100 100 100
Absenteeism rate (%) (1) 2.4 2.5 2.2

The rights and working conditions of Group employees are included in the rules, conventions and agreements concluded in each entity with the corresponding workers’ representatives in accordance with local legislation. On matters of freedom of association and labor union representation, BBVA always aims for solutions via consensus. It places a very high value on dialog and negotiation as the best way of resolving any conflict in accordance with the pertinent local regulations in force in the countries where BBVA operates.

The XXIII Collective Labor Agreement for the Spanish banking sector, covering our entire workforce, was signed in April 2016 and will remain in force until December 31, 2018. Additional business agreements supplement and develop the provisions of the Labor Agreement, such as the agreement to adapt the provisions of the Collective Labor Agreement with respect to remuneration.

Labor union representatives sitting on company committees are elected every four years by personal, free, direct and secret vote. The labor representatives are kept apprised of any changes in relevant organization that could occur in the Company, as provided for by the pertinent legislation currently in force.

BBVA Spain has also concluded a Merger Labor Agreement to integrate the employees of Catalunya Banc (CX) into BBVA. This was done in July, harmonizing the employment conditions of all CX employees to those current in BBVA.

Remuneration

BBVA has an advanced remuneration system based on the reciprocal long-term generation of value for professionals in line with shareholder interests and dependent on prudent management. This system is adapted to legal specifications in force at any time and also incorporates the standards and principles of the best generally accepted national and international practices.

Remuneration is made up of two clearly differentiated parts:

Volunteer work

The BBVA Corporate Volunteering Policy covers all countries. It manifests BBVA’s pledge to volunteer work of this type and provides employees with the conditions in which they can engage in corporate volunteer work that generates a positive social impact. Most volunteering activities seek to reinforce initiatives in connection with education, primarily to boost financial education, and thus support the strategic lines set out in the responsible business model. Some of the Group’s educational volunteer projects include:

Environmental information

Environmental commitment

Sustainable development is a priority for BBVA Group, given that as a financial institution it has a considerable impact on the environment, whether through the consumption of natural resources, management of its buildings, use of paper, travel, etc. (direct impact), or through the environmental consequences of BBVA Group products and services, particularly those related to financing, asset management and supply chain activities (indirect impact).

This commitment is set out in the Group’s Environmental Policy, whose scope is global and affects all the activities carried out by the Group, i.e. banks and activities of subsidiaries in which BBVA has effective control.

Objectives of the environmental policy

The objectives of BBVA Group’s environmental policy are:

Main environmental actions in 2016

The main environmental actions that BBVA Group carried out during 2016 are described below:

As of December 31, 2016, the accompanying Consolidated Financial Statements of BBVA Group have no material item that would warrant inclusion in the environmental information document under the Ministry of the Economy Order dated October 8, 2001.

Innovation and technology

As commented in the Strategy section, BBVA is engaged in a process of digital transformation, the main aim of which is to achieve its aspiration of strengthening relationships with its customers and being the best Bank for them. The Engineering division’s mission is therefore to enable a technology strategy that provides the foundation for this transformation, thus becoming more customer-centric and establishing a more global strategy, fast to develop, digital, flexible, and leveraged on data. This must be done while continuing to provide support to the Bank’s core business: a) catering to the demand for traditional business (multi-segment, multi-product, multi-channel, etc.); and b) contributing reliability, with the necessary tools to ensure adequate internal controls, based on consistent information and data. Likewise, another Engineering objective is to provide the Group with all the tools it needs to drive profitability, new productivity paradigms and new business processes.

Customers are at the heart of digital transformation. To deliver on their requirements it is necessary to offer real-time operation, making all the necessary information and procedures available anywhere, anytime, and any channel. The area’s responsibilities therefore need to be revised, particularly regarding rapid product development, the open ecosystem concept and the critical role that data are going to play. Therefore, the main lines of work focus on the following:

New technology stack: cloud paradigms

With customers increasingly making use of digital channels, and therefore driving an exponential increase in transaction numbers, the Group has developed its IT model into a more uniform and scalable system, boosting cloud technology.

In 2016 Engineering has worked on constructing the fundamental building blocks of the technology stack that includes the entire BBVA Group and shares the cloud attributes such as flexibility and stability that are demanded by the digital world, while strictly complying with regulatory requirements. This new stack will enable real-time access, a new approach to data management and the optimization of processing costs, meaning customers benefit from a service that caters directly to their needs.

Strategic alliances

Engineering has driven creation of a network of strategic alliances, giving traction to BBVA’s digital transformation and complementing its technology stack. Establishing an ecosystem of strategic alliances with some of the leading businesses in the market ensures the adoption of innovative technologies, business digitalization and promptness, deployment and global operational solutions. Furthermore, by building a network of technological alliances with strategic partners, BBVA will work in close cooperation with some of the foremost companies in their respective fields, such as Salesforce, Red Hat, Amazon Web Services or Cisco.

Productivity and reliability

Productivity is one of the key aspects of the BBVA transformation process. Greater productivity is critical to providing our customers with the best service while being profitable. Engineering is therefore working on the following:

It is critical to obtain the best possible performance from infrastructures, architectures, operations and internal processes, and to do so in a way that is fully reliable. Reliability is another key factor for the Engineering function and digital transformation. Reliability must be at the heart of businesses, guaranteeing utmost quality standards; both internally, when providing service to other BBVA units, and from an external point of view, when providing a service to customers.

Operational and technological risk management

Main security and customer protection initiatives

One standout initiative for the future in terms of the security and protection of technology channels is the complete account opening process via mobile devices, meaning customers do not have to go into a branch to open an account. This service has been designed pursuant to the directives of SEPBLAC (the Spanish’s Financial Unit and AML/CFT Supervisory Authority that reports to the Commission for the Prevention of Money Laundering and Monetary Infractions), and incorporates modern facial recognition technology, with capabilities to identify forged national identity cards. These technologies will be gradually incorporated into the most critical processes of our relationship with our customers via technological channels.

Work has been carried out in the field of business continuity, meaning contingency plans for low-probability but extremely high-impact events. Business impact analysis has been updated and implemented, reviewing technology dependency on critical processes to improve service recovery in the event of IT system malfunction. Business continuity plans have also been activated in several incidents that have affected BBVA Group, such as the flooding of the Mapocho River affecting the Bank’s headquarters in Chile, social disturbances that affected the headquarters in Mexico and Venezuela, and the impact of Hurricane Mathew in the south of the United States.

At the same time, digital transformation has established itself as a strategic priority for the financial sector in general and for BBVA in particular. In this context, it is vital that we ensure effective protection for BBVA’s brand and assets, as well as our customers’ data, from the threats present in the virtual environment. To achieve this, BBVA has created a reliable and efficient center for cyber-attack prevention, alerts and response. This ensures that the Group develops at the same pace as organized technological crime.

BBVA has also consolidated deployment of the cybersecurity standard designed by NIST (National Institute for Standards and Technologies) as a benchmark framework for management and control.

Finally, it is important to note that BBVA is utterly committed to protecting its customers. It therefore works closely with regulators and the rest of the industry across its global footprint.

Customer Care Service and Customer Ombudsman

The law governing the activities of the Customer Care Service and Customer Ombudsman in 2016 is determined under Article 17 of Ministerial Order ECO/734/2004 of March 11, issued by the Spanish Ministry of the Economy, governing customer care departments and services and the customer ombudsman in financial institutions. They are also subject to BBVA Group’s Customer Protection Charter in Spain, approved by the BBVA Board of Directors in 2015, which regulates the activities and powers of the Customer Care Service and Customer Ombudsman.

Thus, BBVA’s Customer Care Service processes claims and complaints addressed to the Customer Ombudsman and, initially, to the Customer Care Service, except for matters falling within the powers of the Customer Ombudsman as established in the aforementioned Charter.

Report on the activity of the Customer Care Service in Spain

In 2016, the Customer Care Service consolidated the initial guidelines issued in 2015 and, in keeping with the European guidelines on complaints established by the pertinent authorities (the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA)) worked on detecting recurring, system-related or potential problems at the Entity. Two key functions of the BBVA quality strategy are anticipation and root cause analysis. The Customer Care Service is one of the fundamental elements for identifying and proposing action plans to improve customer experience and comply with regulatory requirements.

Customer claims and complaints received by the BBVA Customer Care Service in Spain amounted to 25,562 cases in 2016, of which 2,502 were not admitted for processing as they did not comply with the requirements stipulated in Ministerial Order ECO/734; 20,279 were resolved by the Customer Care Service itself and concluded in the same year (88% of the total). A further 2,781 cases were pending analysis. In 2015, the complaints received numbered 17,647 and the cases resolved and concluded 14,315 (92% of the total).

Complaints handled by Customer Care Service by complaint type

(Percentage)

2016 2015
Resources 24 26
Assets products/ loans 27 20
Insurances 7 8
Collection and payment services 8 17
Financial counselling and quality service 7 9
Credit cards 10 9
Securities and equity portfolios 5 4
Other 12 7
Total 100 100

Complaints handled by Customer Care Service according to resolution

(Number)

2016 2015
In favor of the person submitting the complaint 7,071 4,750
Partially in favor of the person submitting the complaint 2,830 1,738
In favor of the BBVA Group 10,378 7,827
Total 20,279 14,315

Quality governance has become one of the essential factors driving the corporate strategy and objectives defined for service quality. The various committees working on quality governance help improvement measures to be adopted in the areas in which errors or bad practices have been detected by creating work groups that operate with the support of the Bank’s senior management. In 2016, this Service proposed 73 improvement plans, of which 58 have already been implemented.

The Customer Care Service continues to work through periodic committee meetings to unify criteria. The result of this work is an internal tool that groups together procedures, management criteria, standards, regulations and response models applicable to each type of case.

Additionally, to comply with the recommendations from the regulators, an ambitious training plan has been created for all the members who are part of the Service’s team. The plan aims to broaden the legal understanding of managers while dealing in depth with the practical aspects of banking management: operational procedures, marketing and protocols for action in the retail network.

In line with the demands of society, the Service is particularly sensitive to protection for mortgage debtors. It proposes solutions to enable debtors to pay their obligations to the Entity, working closely with the Social Housing Policy Department, where it is an active member of the Central Mortgage Debtor Protection Committee.

The outsourcing last year of non-complex tasks of complaints admission and management was consolidated this year, resulting in more agile and justified responses, guaranteeing compliance with the guidelines.

The complaints management tool implemented at the start of 2015 is now fully operational. It has become an essential element not only for the management of claims and complaints but also for root cause analysis.

Moreover, the Network Quality and Internal Quality units were incorporated into Quality and Customer Care in 2016. The aim has been to generate a single quality model that would enable us to satisfy our strategic priority of providing a new standard in customer experience, incorporating a single vision that prevents inefficiency and dispersion.

Activity report on the BBVA Group Customer Ombudsman in Spain

The number of customer complaints presented to the Customer Ombudsman for resolution in 2016 was 1,501. Of these, 100 were finally not processed as they did not meet the requirements set out in Ministerial Order ECO/734/2004; 91.7% of the complaints (1,377) were resolved and concluded within the year, with 24 cases pending further analysis.

Complaints handled by the Customer Ombudsman by complaint type

(Number)

2016 2015
Insurance and welfare product 590 459
Assets operations 305 161
Investment services 141 59
Liabilities operations 175 101
Other banking products (credit card, ATM, etc.) 100 48
Collection and payment services 63 37
Other 127 100
Total 1,501 965

The type of complaints managed in the table above follow the criteria established by the Complaints Department of the Bank of Spain in their requests for information.

Complaints handled by Customer Ombudsman according to resolution

(Number)

2016 2015
In favor of the person submitting the complaint - 2
Partially in favor of the person submitting the complaint 861 544
In favor of the BBVA Group 516 324
Total 1,377 870

58.3% of the customers who submitted a complaint to the Ombudsman in 2016 reported some level of satisfaction either because of the decision of the Customer Ombudsman or its role as mediator between BBVA Group entities and customers.

The Customer Ombudsman issues its decisions on the basis of legislation currently in force, the contractual relationships between the parties, current standards on transparency and customer protection, best banking practices and, in particular, the principle of fairness.

The independent nature of the role of the Customer Ombudsman is essential. The decisions of the Ombudsman in favor of the customer are binding on Group entities.

Among the actions taken by BBVA Group in 2016 in response to suggestions made by the Customer Ombudsman are the following:

Customers who are not satisfied with the Customer Ombudsman’s response may refer the matter to the official supervisory bodies (the Bank of Spain, CNMV and the Directorate General of Insurance and Pension Funds). The Customer Ombudsman always informs customers of this right.

The number of complaints examined and/or resolved by the Customer Ombudsman that were then submitted to the supervisory bodies at the instigation of the customers in 2016 was 108.

Offshore financial centers

BBVA maintains a policy on activities in entities permanently registered in offshore financial centers, which includes a plan for reducing the number of offshore financial centers in which the Group is present.

As of December 31, 2016, the BBVA Group’s permanent establishments registered in offshore financial centers considered tax havens are as follows:

Branches of the BBVA Group’s banks in the Cayman Islands

As of December 31, 2016, the BBVA Group had two banking branches registered in the Cayman Islands engaging in Corporate Banking activities. As of the date these Annual Consolidated Financial Statements were drawn up, BBVA Compass has carried out all the procedures required for the closure of the branch it had until December 31, 2016 on Grand Cayman. The branch was not active and had no outstanding balances. It was awaiting authorization from the corresponding authority (Cayman Islands Monetary Authority) for its effective closure. The activities and business of these branches (which do not include the provision of private banking services) are pursued under the strictest compliance with applicable law, both in the jurisdictions in which they are domiciled and in those where their operations are effectively managed, in this case the United States of America.

The main figures of the balance sheets of these branches as of December 31, 2016 and 2015 are as follows:

BBVA Group Branches at off-shore entities (Grand Cayman)

(Million euros)

Main figures of the balance sheets 31-12-16 31-12-15
BBVA S.A. branch
Loans and advances to customers 805 807
Deposits from customers 430 432
BBVA Compass branch
Loans and advances to customers - -
Deposits from customers - 100

Issuers of securities

As of December 31, 2016, only two issuers registered in Grand Cayman remain, and the processes for the repurchase and/or redemption of the securities issued will depend on the time of their liquidation, to which are added two other issuers from the Garanti Group.

The accompanying table presents a comparative list of the issues outstanding as of December 31, 2016 and 2015:

Issues outstanding at off-shore entities (Grand Cayman)

(Million euros)

Issuing entity 31-12-16 31-12-15
Subordinated debts(1)
BBVA Global Finance LTD 188 347
Other debt securities
Continental DPR Finance Company(2) 102 152
Garanti Diversified Payment Rights Finance Company 1,760 1,617
RPV Company 1,457 1,496
TOTAL 3,508 3,612

Supervision and control of the permanent establishments of the BBVA Group in offshore financial centers

The BBVA Group applies risk management criteria and policies to all its permanent establishments in offshore financial centers that are identical to those for the rest of the companies making up the Group.

During the reviews carried out annually on each and every one of the BBVA Group’s permanent establishments in offshore financial centers, BBVA’s Internal Audit Department checks the following: that their activities match the definition of their social object, that they comply with corporate policies and procedures in matters relating to knowledge of the customers and prevention of money laundering, that the information submitted to the parent company is true, and that they comply with tax obligations. In addition, every year a specific review of Spanish legislation applicable to the transfer of funds between the Group’s banks in Spain and its companies established in offshore centers is performed.

Furthermore, in 2016 BBVA’s Legal & Compliance and Internal Audit Departments have supervised the action plans deriving from the audit reports on each one of the establishments.

As far as external audits are concerned, one of the functions of the Audit Committee is to select an external auditor for the Consolidated Group and for all the companies in it. For 2016, all of the BBVA Group’s permanent establishments registered in offshore financial centers have the same external auditor (Deloitte), except Continental DPR Finance Company.

Contractual obligations and off-balance sheet

Information on contingent risks and commitments can be found in Note 33 of the accompanying Consolidated Financial Statements. Information on sale and purchase commitments and future payment obligations can be found in Note 35 of the accompanying Consolidated Financial Statements.

Capital and treasury stock

Information on common stock and transactions with treasury stock can be found in Notes 26 and 29 of the accompanying Consolidated Financial Statements.

Patents, licenses or similar

At the time of preparing the accompanying Consolidated Financial Statements, the BBVA Group is not materially dependent on the issuance of patents, licenses and industrial, mercantile or financial contracts or on new manufacturing processes in carrying out its business purpose.

Subsequent events

The interim dividend approved on December 21, 2016 was paid out on January 12, 2017, as detailed in Note 4 of the accompanying Consolidated Financial Statements.

On February 1, 2017, BBVA´s shareholder remuneration policy for 2017 was announced, as described in Note 4 of the accompanying Consolidated Financial Statements.

From January 1, 2017 to the date of preparation of these Consolidated Financial Statements, no other subsequent events not mentioned above in these Consolidated Financial Statements have taken place that significantly affect the Group’s earnings or its equity position.

Annual Corporate Governance Report

In accordance with the provisions of Article 540 of the Spanish Corporate Act, the BBVA Group prepared the Annual Corporate Governance Report for 2016 (which is an integral part of the Management Report for that year) following the content guidelines set down in Order ECC/461/2013, dated March 20, and in CNMV Circular 5/2013, dated June 12 in the wording provided by CNMV Circular 7/2015, dated December 22, including a section detailing the degree to which the Bank is compliant with existing corporate governance recommendations in Spain. In addition, all the information required by Article 539 of the Spanish Corporate Act can be accessed on BBVA’s website www.bbva.com.

Subir