BBVA in 2013

Asset/Liability and Capital Management and Wholesale Funding

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The Asset/Liability and Capital Management and Wholesale Funding unit in BBVA’s Financial Area is responsible for managing structural interest-rate and foreign-exchange positions, as well as the Group’s overall liquidity and shareholders’ funds. Earnings from the management of liquidity and the structural interest-rate positions in each balance sheet are registered in the corresponding areas. With respect to the management of exchange-rate risk of BBVA’s long-term investments, the results are included in the Corporate Center. Likewise, this aggregate includes the earnings from specific issues of capital instruments to ensure adequate management of the Group’s global solvency.

Liquidity management helps to finance the recurring growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of finance. A core principle in the BBVA Group’s liquidity management is the financial independence of its subsidiaries abroad. This principle prevents the propagation of a liquidity crisis among the different areas and guarantees correct transmission of the cost of liquidity to the price formation process and to the sustainable growth of lending activity.

In 2013, short and long-term wholesale financial markets performed very well in Europe and in Spain as a result of the measures adopted by the ECB, the significant progress made in European construction and in banking union, and the improvement in the outlook for economic growth and in risk perception among the European countries. The rate of activity in the primary issuance market has been steady and stable. This situation has enabled the reopening of the market in early 2013 for the main Spanish financial institutions.

Against this backdrop, BBVA has been able to access the markets with complete normality, as demonstrated by the successful issues of covered bonds, senior debt and regulatory capital (eligible as additional Tier I). In the first quarter, the Group completed three public senior debt and covered bond issues on the wholesale markets for a total amount of €4 billion (€3 billion in senior debt and €1 billion in covered bonds), with a very high level of demand and acceptance among foreign fixed-income investors.

Outside Europe, the situation has also been positive in the geographical areas where BBVA operates, enabling the Bank to strengthen its liquidity position in all the regions where it is present.

To sum up, BBVA’s proactive policy in its liquidity management, the growth in customer funds in all geographical areas, its proven ability to access the market, even in difficult environments, its retail business model and the relatively small size of its balance sheet, all give it a comparative advantage against its peers. Moreover, the increased proportion of retail deposits on the liability side of the balance sheet continues to strengthen the Group’s liquidity position and to improve its financing structure.

Foreign-exchange risk management of BBVA’s long-term investments, basically stemming from its franchises abroad, aims to preserve the Group’s capital adequacy ratios and ensure the stability of its income statement.

In 2013, BBVA maintained a policy of actively hedging its investments in Mexico, Chile, Peru and Colombia and the dollar area, at close to 50% in aggregate terms. In addition to this corporate-level hedging, dollar positions are held at a local level by some of the subsidiary banks. The foreign-exchange risk of the earnings expected from abroad for 2013 is also strictly managed. The impact of variations in exchange rates in 2013 has been partly offset by the hedging positions held, which have counteracted a possibly more negative effect on the Group’s income statement and capital ratios. For 2014, the same prudent and proactive policy will be pursued in managing the Group’s foreign-exchange risk from the standpoint of its effect on capital adequacy ratios and on the income statement.

The unit also actively manages the structural interest-rate exposure on the Group’s balance sheet. This aims to maintain a steady growth in net interest income in the short and medium term, regardless of interest-rate fluctuations.

In 2013, the results of this management have been very satisfactory, with extremely limited risk strategies in Europe, the United States and Mexico. These strategies are managed both with hedging derivatives (caps, floors, swaps and FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings).

The Bank’s capital management has a twofold aim: to maintain levels of capitalization appropriate to the business targets in all the countries in which it operates and, at the same time, to maximize return on shareholders’ funds through the efficient allocation of capital to the various units, good management of the balance sheet and proportionate use of the various instruments that comprise the Group’s equity: common stock, preferred securities, conditional convertible bonds and subordinated debt.

The highlights as regards capital management in 2013 are summarized below:

  • In April, BBVA carried out the system of remuneration known as the “dividend option” at €0.12 gross per share, offering shareholders the chance to receive the amount equivalent to the traditional final dividend, either in newly issued BBVA shares or if they prefer in cash. Therefore, the number of ordinary BBVA shares issued in the free-of-charge capital increase was 83,393,714. This resulted in capital savings of 16 basis points. Additionally, in October BBVA implemented again the “dividend option” remuneration system for a gross €0.10 per share. On this occasion, the holders of 88.3% of free allotment rights opted to receive new shares. Therefore, the number of ordinary BBVA shares issued under the paid-up capital increase was 61,627,952, with a capital saving of 15 basis points.
  • On June 30, when the mandatory subordinated convertible bonds, which were issued in December 2011, matured, BBVA carried out the mandatory conversion of outstanding bonds. As a result, 192,083,232 new shares have been issued.
  • The Bank successfully completed an issue of contingent convertible securities into shares for the amount of USD 1,500m, with final demand exceeding USD 9,000m. BBVA has thus become the first European issuer of the new generation of Tier I instruments that will be eligible as additional Tier I capital under Basel III.
  • In addition, BBVA Colombia has issued 365,000m Colombian pesos (around €155m) of subordinated debt, which has strengthen the Group’s Tier II capital. Furthermore, the Bank has exercised the call on a subordinated debt issue by BBVA Bancomer for 3,000m Mexican pesos. Lastly, in Peru, Banco Continental has completed a 15-year $45m issue.
  • BBVA has also materialized the capital gains from the completion of the sale of its pension business in Latin America and of BBVA Panama, which have had a very positive effect on the Group’s capital.
  • In the fourth quarter of 2013, BBVA closed the sale of 5.1% of its stake in CNBC as part of the new agreement signed with CITIC Group. This sale has a positive impact on the Group’s solvency, particularly under the new BIS III regulations.
  • Lastly, turning to regulation, Royal Decree 14/2013, dated November 29, which aims to adapt the European regulations CRR 575/2013 and CRD 2013/36, both dated June 26, came into effect as Spanish Law in January 2014. It includes a change in the treatment of deferred tax assets, in line with the regulation in force in other States of the European Union. The latter improves the forecast for core equity Tier I under BIS III regulations for the BBVA Group.

In conclusion, the current levels of capitalization enable the Bank to fulfill all of its capital objectives.