Industry Trends
The situation in Europe was very complex in 2012 and once again affected the banking system in the euro zone. The wholesale financial markets have been affected by the high volatility of the risk premiums of the peripheral countries and by the successive reviews of sovereign ratings which, in turn, were reflected in those of their financial institutions. In the last quarter, the first steps were taken to set up single banking supervision, which is considered key to breaking the link between sovereign and banking risk.
In Turkey, after the tougher lending conditions and rise in interest rates imposed by its Central Bank, prospects of a more moderate inflation rate, a steadily improving current-account deficit and a slight slowdown in growth of domestic demand, have in the second half of 2012 led to a fall in the official interest rate and a reduction in the overnight lending rate. The year-on-year growth in lending has remained high (20%), although below the 2011 figures, and the NPA ratio remains low. Finally, it should be noted that in November the credit rating agency Fitch upgraded Turkey from speculative (BBB-) to investment grade (BB+) with a stable outlook. Among the reasons given for this are the Turkish economy’s sound banking sector and favorable growth prospects in the medium and long term.
Finally, in China the financial sector plan was published in September, following on from the Five-Year Plan (2011-2015). It restated the intention to abolish interest-rate controls, promote financial innovation and bolster the framework of financial regulation. The Plan also establishes a goal of increasing the weight of the financial sector as a proportion of GDP in terms of added value from 4.4% in the last decade to 15% by 2015. In this context, growth in the banking sector remains relatively stable. However, the proportion of long-term loans has increased, reflecting the fact that credit flows are already moving toward public infrastructure projects and corporate investment.
Eurasia includes activity in Europe excluding Spain and Asia. For these purposes, Europe includes BBVA Portugal, Consumer Finance Italy and Portugal, the retail businesses of the branches in Paris, London and Brussels, wholesale activity carried out in the region (except Spain), and Turkey (which includes the stake in Garanti). Asia includes all the wholesale and retail businesses carried out on the continent and the stake in CNCB and CIFH.
Throughout 2012, BBVA has steadily progressed with its multi-channel strategy to provide services to customers as well as possible, in the way which is most convenient for them. It has continued to transform its physical distribution model, with different types of branches, which are increasingly better adapted to customers’ needs. This year, it has inaugurated its “flagship” branch. This is a new kind of branch which puts the customer at the core of the relationship with the Bank. Spaces where the customer can operate independently are combined with others with specialized advisory services and areas for exhibitions, talks or other activities, always with the aim of attracting new customers. This new initiative goes hand in hand with other models of smaller branches, which cover the most basic financial needs and offer a self-service focused relationship model, without overlooking approachability and convenience.
Finally, BBVA remains committed to developing applications that promote the use of mobile banking. This channel now has over 675,000 users.
Earnings and Activity
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| Eurasia | Millions of Euros | ||
|---|---|---|---|
| 2012 | 2011 | % Change 2012-2011 |
|
| NET INTEREST INCOME | 847 | 802 | 5.5 |
| Net fees and commissions | 451 | 391 | 15.4 |
| Net gains (losses) on financial assets and liabilities and net exchange differences | 131 | 113 | 16.4 |
| Other operating income and expenses | 781 | 655 | 19.2 |
| GROSS INCOME | 2,210 | 1,961 | 12.7 |
| Operating expenses | (778) | (648) | 20.0 |
| Administration costs | (724) | (604) | 19.8 |
| Personnel expenses | (404) | (359) | 12.7 |
| General and administrative expenses | (319) | (246) | 30.1 |
| Depreciation and amortization | (54) | (44) | 23.6 |
| OPERATING INCOME | 1,432 | 1,313 | 9.0 |
| Impairment losses on financial assets (net) | (328) | (149) | 120.8 |
| Provisions (net) and other gains (losses) | (50) | 11 | n.s. |
| INCOME BEFORE TAX | 1,054 | 1,176 | (10.4) |
| Income tax | (103) | (145) | (28.6) |
| INCOME FROM CONTINUING TRANSACTIONS | 950 | 1,031 | (7.8) |
| Income from discontinued transactions (net) | 0 | 0 | n.s. |
| NET INCOME | 950 | 1,031 | (7.8) |
| Net income attributed to non-controlling interests | 0 | - | n.s. |
| NET INCOME ATTRIBUTED TO PARENT COMPANY | 950 | 1,031 | (7.8) |
The analysis of the changes in the main headings of the income statement for this business area should take into account that Garanti was incorporated into the Group’s earnings in March 2011 and therefore added nearly one quarter less that year than in 2012. These changes are as follows:
The “Net interest income” generated by the area in 2012 is €847 million, an increase of 5.5% on the €802 million recorded in 2011.
The balance of “Net fees and commissions” in 2012 totaled €451 million, with an increase of 15.4% on the €391 million posted in 2011.
As of December 31, 2012 “Net gains (losses) on financial assets and liabilities” and “Exchange differences (net)” was €131 million, compared with €113 million in 2011.
The “Other operating income and expenses” balance for 2012 totaled €781 million, compared with €655 million in 2011, up 19.2% due to the growing contribution of CNCB.
As a result, “Gross income” at the close of 2012 stood at €2,210 million, an increase of 12.7% on the €1,961 million posted last year, thanks to the capacity of both Garanti and CNCB to generate recurring revenue.
The “Operating expenses” balance in 2012 was €778 million, up 20% on the €648 million posted in 2011, due to the investments made, mainly in emerging countries.
As a result of the above, “Operating income” for 2012 stood at €1,432 million, an increase of 9% on the €1,313 million in 2011.
The balance of “Impairment losses on financial assets (net)” at the close of 2012 stood at €328 million, up 120.8% on the figure of €149 million in 2011, due to one-off provisions made in Portugal.
The balance of “Provisions (net)” and “Other gains (losses)” in 2012 has been €50 million, which compares with €11 million in the previous year.
“Income before tax” in 2012 totaled €1,054 million, down 10.4% on the €1,176 million in 2011, due to the aforementioned provisions made in Portugal.
The balance of “Income tax” in 2012 was €103 million, down 28.6% on the €145 million posted in 2011.
As a result of the above, “Net income” for 2012 totaled €950 million, a 7.8% decrease on the €1,031 million in 2011.
Europe contributed 34.8% to the above result, i.e. €331 million (down 28.8% year-on-year). Of particular note is the continued excellent performance of Turkey, whose income stood at €314 million, a rise of 62.8% on the previous year (partly because Garanti contributed for the 12 months in 2012, while in 2011 it began to contribute at the end of March). In the rest of Europe, the net attributable profit fell 93.9% in the same period to €17 million. This is due to reduced activity with wholesale customers, turbulence in the markets and the aforementioned loan-loss provisions made in Portugal.
Garanti is a bank that serves 11.5 million customers with a workforce of 20,318. It has a network of 936 branches and 3,508 ATMs. Its most notable figures in 2012 are as follows:
- Continued progress in lending (up 9.4% year-on-year), particularly in the local currency (up 16%). There has been a notable boost in the retail portfolio, with positive growth rates that are above the sector average, in highly profitable products such as loans to the automobile sector and mortgages.
- Customer deposits have continued to rise (up 1.4% in the year) thanks to the strong growth in Turkish lira-denominated deposits (up 4.3%).
- Excellent management of customer spreads, thanks mainly to a reduction in the cost of liabilities. In the fourth quarter of 2012 this cost fell once more, leading to an additional increase in the spread and thus an improvement in the bank’s profitability ratios.
- Together with the high yield generated by inflation-linked bonds, this has helped strengthen the bank’s gross income.
- In addition, Garanti Group is notable for its high core Tier I capital ratio (16.3%) calculated under Basel II, where it leads the field among its peers.
- To sum up, increased activity, a diversified revenue base and disciplined cost management have allowed the Garanti Group to generate a net attributable profit of €1,453 million in 2012.
Finally, Asia has posted a cumulative net attributable profit of €620 million, accounting for 65.2% of earnings in the area. Most of this amount comes from the contribution from CNCB. According to the latest data published as of September 2012, the bank’s cumulative net attributable profit increased by 12.4% year-on-year. With respect to activity, deposits are positive, with a bigger increase than in lending (up 19.7% and 15.3% in year-on-year terms, respectively). Finally, CNCB improved its capital ratio, which calculated under the local criterion stood at 13.7% at the close of the third quarter of 2012.
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| Eurasia | Millions of Euros | ||
|---|---|---|---|
| 2012 | 2011 | % Change 2012-2011 |
|
| Total Assets | 48,282 | 53,354 | (9.5) |
| Loans and advances to customers | 30,228 | 34,740 | (13.0) |
| Total customer funds | 16,484 | 21,142 | (22.0) |
| Off-balance-sheet funds | 1,195 | 1,036 | 15.3 |
| Economic capital allocated | 4,607 | 4,245 | 8.5 |
| Efficiency ratio (%) | 35.2 | 33.1 |
|
| NPA Ratio (%) | 2.8 | 1.5 |
|
| NPA Coverage Ratio (%) | 87 | 123 |
|
| Risk premium (%) | 0.97 | 0.46 |
|
The changes in the main headings of activity in this business area are as follows:
As of December 31, 2012, the balance of “loans and advances to customers (gross)” stood at €30,228 million, down 13% on the €34,740 million posted as of December 31, 2011. The reduced loan portfolio with wholesale clients, due to the deleveraging process under way in Europe, account for this situation. In contrast, lending activity in the retail business performed well. The volume of lending has increased by 11.3% over the last twelve months. There is a notable contribution from the balances in Turkey, which account for 36.8% of gross customer lending in the area. They increased by 15.1% on the figure at the same date the previous year.
As for the risk indicators, there has been a rise in the NPA ratio, which as of December 31, 2012 stood at 2.8%, an increase of 130 basis points on the figure posted at the close of 2011. However, this figure continues to be low and is due, mainly, to the lower volume of lending. The coverage ratio ended the year at 87% and the risk premium at 0.97%.
As of December 31, 2012, “on-balance-sheet customer funds” stood at €16,484 million, down 22% on the €21,142 million as of December 31, 2011. In the same way as with assets, customer liabilities in Turkey performed well, while in the Paris, London and Brussels branches wholesale deposits fell, influenced by a very complex situation in the euro zone that has resulted in wholesale financial markets being affected by the high volatility of the risk premiums of the peripheral countries and by the successive reviews of sovereign ratings, which have also been reflected in the ratings of their financial institutions. However, tensions in the financial markets in the euro zone eased in the last quarter and this has resulted in a recovery in deposits in the wholesale segment.
Products and Services
During 2012, Garanti has added over 50 new products and services. Around 35% of these new products and services are connected with mobile banking or Internet, showing Garanti’s innovative spirit and reinforcing its leadership in this segment. Particularly important have been:
New technologies-Garanti Bank is the leading bank in Turkey as far as new technologies applied to banking are concerned. This is borne out by Internet banking statistics, which show that Garanti has a 25% market share in number of customers, 29% in financial transactions and 52% in number of online payments, according to the official banking association data. The figures are even higher in market share in mobile banking: 37% in customers, 45% in financial transactions and 49% in payments by cell phone.
During 2012, mobile applications for Iphone, Ipad, Blackberry and Android have been launched or renewed, with new features added. The “e-trader” is an application which has been developed for all these devices. It allows customers to monitor their portfolios and keep track of the markets in real time. As a result of all these innovations, the number of users of Garanti mobile banking has risen by 141% since the start of 2012.
Deposits-Under this heading, the launch of “time deposits in gold” is particularly important. Customers who wish to deposit their own gold pieces can have them valued every week at over 100 Garanti branches across Turkey. Practically all the gold acquired is used to cover the percentage of compulsory reserves which, according to the Central Bank of Turkey (CBT), can be deposited in gold instead of the local currency (30% of total reserves).
Cash management-As one of the products designed to meet companies’ needs, this heading includes “Direct Debit Discount”, a new cash management product which allows companies to discount their direct debits receivable to meet their financial requirements.
Support to SMEs-To encourage companies to become more involved in Internet banking, a number of products were launched in 2012, such as “E-Commerce Package”, which aims to increase SMEs’ use of email