Assets/Liability Management

The Assets and Liabilities Management unit 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 finance 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 continues to be to encourage the financial independence of its subsidiaries in the Americas. This aims to ensure that the cost of liquidity is correctly reflected in price formation and that there is sustainable growth in the lending business. Short-term and long-term wholesale financial markets were affected by heightened uncertainty along the third quarter of 2011. The long-term markets have remained practically closed to the European financial sector, with the exception of the issue of several covered bonds in the last week of August. Moreover, the short-term markets have been affected by the lack of appetite of American investors due to the uncertainties regarding the possible effects of the Greek default on the French banking system and the sustainability of Italian finances. Against this backdrop, BBVA’s proactive policy in its liquidity management, its retail business model and a smaller volume of assets give it a comparative advantage against its European peers. BBVA has already covered its medium- and long-term financing needs for 2011 thanks to the total issued in the year (approximately €10,000m), as well as the liquidity contributed by its main businesses in Spain. In addition, the debt maturity profile for the coming years, with an average of €10,000m per year, can be addressed comfortably in a scenario of very low lending activity in Spain and natural growth of customer deposits. The favorable trend in the proportion of retail deposits in the structure of the balance sheet in all the geographical areas continues to allow the Group to strengthen its liquidity position and to improve its financing structure.

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 the efficient allocation of capital to different units, good management of the balance sheet and proportionate use of the various instruments that comprise the Group’s equity: shares, preferred shares and subordinated debt. In the first nine months of 2011, BBVA’s Annual General Meeting approved the introduction of a “Dividend Option” program, to offer shareholders a wider range of remuneration on their capital. In addition, in July 2011 the Board of Directors has approved the total conversion of the mandatory convertible subordinated bonds issued in September 2009 (worth €2,000m) into newly issued BBVA ordinary shares. In conclusion, the current levels of capitalization ensure the Bank’s compliance with all of its capital objectives, as has been recognized in the EBA stress tests published in July 2011.

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 the stability of its income statement. In the six months ended June 30, 2011, BBVA has maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area, with aggregate hedging of close to 50%. 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 in the Americas for 2011 is also strictly managed. In the first nine months of the year, hedging has mitigated the negative impact of exchange rates on the capital and the Group’s income statement. For the rest of 2011, and 2012 as a whole, 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 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 the first nine months of 2011, 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, FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings).