This area includes all those activities not included in the business areas. Basically, this segment records the costs from head offices with a strictly corporate function and makes allocations to corporate and miscellaneous provisions, such as early retirement. It also includes the assets and liabilities derived from the management of structural liquidity, interest rate and exchange-rate risks by the Asset/Liability Management unit, as well as their impact on results that are not recognized in the business areas via transfer pricing. It also includes portfolios and assets, with their corresponding results, where management is not linked to customer relations, such as Holdings in Industrial and Financial Companies and Real Estate Management.
Over the whole year of 2010, the net interest income from Corporate Activities amounted to negative €163m, as compared to the positive €437m in 2009. This net interest income has been negatively affected, on the one hand, by the finalization of the mortgage loan repricing after the 2009 fall in interest rates and, on the other hand, due to the recent rise of the interest rate curve in the euro zone. However, the substantial contribution over the year of net trading income from the positive contribution of the ALCO portfolios throughout the first half-year resulted in gross income of €684m, 33.7% below the same figure for 2009. Operating expenses increased to €798m, compared with €755m in 2009, due to new investments in the new technological platform as well as image and brand identity. Operating income accumulated to December was –€114m (€276m in 2009).
Impairment on financial assets amounted to €916m in 2010, significantly over the €107m recorded in 2009. This increase in the volume of impairment is primarily due to greater generic provisions made in the first half of the year to improve the Group’s coverage. Furthermore, the heading “Provisions (net) and other gains/losses” also increased to €893m, which basically includes the provisions for early retirement and write-offs for acquired and foreclosed assets. Thus, the net attributable profit for the year came to –€1,245m (–€105m the previous year).
Asset/Liability Management
The Asset/Liability Management is responsible for actively managing structural interest rate and foreign exchange positions, as well as the Group’s overall liquidity and shareholders’ funds.
Liquidity management helps to fund the recurrent 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 to encourage the financial independence of its banking subsidiaries in the Americas. This aims to ensure that the cost of liquidity is correctly reflected in price formation and the sustainable growth in the lending business. After the period of tranquility originating out of the results of the European Bank’s stress tests in July 2010, the crisis in Ireland has again generated unusual financial market volatility. This has been the result of an acute perception of sovereign debt risk attributed to various European countries during the months of October, November and December. BBVA has continued to operate with complete normality against this backdrop, and carried out a significant capital increase in November, and was the first banking institution to open doors to the liquidity market in January 2011 with a new issue of covered bonds. The above mentioned, together with the favorable development of the weight of retail deposits in the balance sheet structure in all of its regions, continue to enable the Group to reinforce its liquidity. For 2011 as a whole, BBVA’s current and potential sources of liquidity continue to readily overcome expected drainage.
The Group’s capital management has a twofold aim: to maintain the levels of capitalization appropriate to the business targets in all the countries in which it operates; and, at the same time, to maximize the return on shareholders’ funds through efficient allocation of capital to different units, sound management of the balance sheet and proportionate use of the various instruments that comprise the Group’s equity: stock, preferred stock and subordinate debt. In this last quarter, BBVA has very successfully executed a capital increase after the announcement of its purchase of 24.9% of the Turkish bank Garanti. The current levels of capitalization ensure compliance with all of its capital objectives.
Foreign exchange risk management of BBVA’s long-term investments, basically stemming from its franchises in the Americas, aims to preserve the Group’s capital ratios and ensure stability of its income statement, while controlling the impact on reserves and the costs of this management. In 2010, BBVA has maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area. Its aggregate hedging was close to 30%. In addition to this corporate-level hedging, dollar positions are held at a local level by some of the subsidiary banks. The Group also hedges its foreign exchange exposure on expected 2010 and 2011 results in the Americas. In 2010, the favorable performance of most of the currencies in the Americas has had a positive effect on the Group’s equity and income statement. For 2011, the same prudent and proactive policy will be pursued in managing the Group’s foreign exchange risk from the perspective of its effect on capital ratios and on the income statement.
The unit also actively manages the structural interest rate exposure on the Group’s balance sheet. This keeps the performance of short and medium-term net interest income more uniform by cutting out interest rate fluctuations. In 2010, the results of this management have been highly satisfactory. Strategies were implemented to provide a hedge against a less positive economic outlook in Europe for the whole of 2010 and 2011, with limited risk on the balance sheets in the United States and Mexico. These strategies are managed both with hedging derivatives (caps, floors, swaps, FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings). At the close of the year, the Group held asset portfolios denominated in euros, U.S. dollars and Mexican pesos.
Holdings in Industrial and Financial Companies
This unit manages the portfolio of industrial and financial investments in companies operating in the telecommunications, media, electricity, oil, gas and financial sectors. Like Asset/Liability Management, this unit lies within the Group’s Finance Division.
BBVA applies strict requirements to this portfolio in terms of risk-control procedures, use of economic capital and return on investment, diversifying investments across different sectors. It also applies dynamic hedging and monetization management strategies to holdings. In 2010, investments were made totaling €434m and divestitures came to €409m.
On December 31, 2010, the market value of the Holdings in Industrial & Financial Companies portfolio was €4,168m, with unrealized capital gains of €993m.
In 2010, the management of the industrial and financial holdings generated €317m in dividends and €142m in trading income, giving a net attributable profit of €404m.
Real Estate Management
The Group has always worked with expert teams for the management of the real estate and developer sector. Thus, the Real Estate Management unit focus is to provide specialized management of the real estate assets it has acquired from foreclosures, repossessions, purchases from distressed customers and the assets in BBVA Propiedad, the real estate fund. In 2010, the Group has continued to make an important provision effort for these assets (€657m) with the aim to maintain their coverage above 30%, taking as reference updated appraisals.