The area of Spain includes the Retail Network, with the segments made up of individual customers, private banking and small companies and businesses in the domestic market; Corporate and Business Banking (CBB), which handles the needs of SMEs, corporations, government and developers in the country; Corporate and Investment Banking (CIB), which includes business with large corporations and multinational groups, and the liquidity assets management and distribution business in the domestic market; and other units, among them BBVA Seguros and Asset Management (management of mutual and pension funds in Spain).
Industry Trends
In 2012, the commercial activity of Spanish credit institutions was carried out in a very difficult environment marked by:
- Greater uncertainty and weak economic growth.
- The debt crisis in Europe and difficulties in accessing the international wholesale finance markets. Financial tension that kept the markets practically closed during much of the year and increased dependence on finance from the ECB.
- High volatility of the financial markets.
With respect to the Spanish financial system, macroeconomic weakness and the necessary deleveraging process in the Spanish economy has led to a significant stagnation in demand for credit. This is limiting growth in volumes and has had a negative effect on the NPA ratio, which at the end of November stood at 11.4% according to Bank of Spain data.
The second quarter of the year was also a key time in terms of the progress made in the restructuring of the Spanish financial system, with the culmination of several stages of the schedule set in the Memorandum of Understanding (MoU):
- In September the conclusions of the bottom-up exercise conducted by Oliver Wyman mentioned above were made public. The results of this stress test once more showed the disparity within the Spanish financial system, with a core of strong banks and vulnerability limited to a specific part of the industry. On the basis of these results, Spanish banks can be split into four groups:
Group 0: banks which do not have capital deficit, including BBVA.
Group 1: banks which are already controlled by the FROB.
Group 2: banks which cannot comply with capital deficit by themselves.
Group 3: banks with a credible plan to comply with private capital deficit.
- In November, the European Commission approved the restructuring plans of the four Spanish banks taken into administration. According to the Commission, the four will need an injection of €37 billion in public funds, less than the €52.5 billion needed according to the stress tests conducted by Oliver Wyman on the banks. In exchange, the Commission imposed a 60% reduction of their existing assets by 2017.
- The banks included initially in Group 3 have managed to meet their capital needs independently.
- December 20 saw the approval of the recapitalization plans of the banks included in Group 2. The capital they will receive as a whole was estimated at €1,865 million. As in the case of the banks taken into administration, they will have to reduce the assets on their balance sheets as of December 31, 2010 by between 25% and 40% (depending on the bank) by 2017.
- The asset management company SAREB was set up on November 28, and the transfer of toxic assets by the nationalized banks was completed on December 31; in exchange, these banks received senior debt issued by SAREB and guaranteed by the State. The transfer of assets for Group 2 will take place during the first quarter of 2013 and will require a new share capital increase and the issue of subordinated debt, which will be subscribed by the current shareholders and by new ones who join.
- On November 27, the Fund for the Orderly Restructuring of the Banking Sector (FROB) awarded Banco de Valencia to CaixaBank. The total cost of this sale, including other support measures requested, is less than the amount that winding up the bank would involve.
In short, the restructuring process will enable a reduction of the installed capacity in the industry and lead to a financial system with fewer but solvent, healthy and more efficient banks.
Earnings and Activity
The most significant aspect of earnings in the area in 2012 is the resilience of income, in an environment marked by very low activity and fierce competition to attract liabilities, strict cost control and a significant increase in provisions to cover the impairment of assets related to the real-estate sector in Spain.
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| Spain | Millions of Euros | ||
|---|---|---|---|
| 2012 | 2011 | % Change 2012-2011 |
|
| NET INTEREST INCOME | 4,836 | 4,391 | 10.1 |
| Net fees and commissions | 1,607 | 1,461 | 10.0 |
| Net gains (losses) on financial assets and liabilities and net exchange differences | (13) | 11 | n.s. |
| Other operating income and expenses | 355 | 464 | (23.6) |
| GROSS INCOME | 6,784 | 6,328 | 7.2 |
| Operating expenses | (2,818) | (2,787) | 1.1 |
| Administration costs | (2,722) | (2,689) | 1.2 |
| Personnel expenses | (1,679) | (1,687) | (0.5) |
| General and administrative expenses | (1,043) | (1,002) | 4.0 |
| Depreciation and amortization | (96) | (98) | (1.9) |
| OPERATING INCOME | 3,967 | 3,541 | 12.0 |
| Impairment losses on financial assets (net) | (5,710) | (1,711) | 233.6 |
| Provisions (net) and other gains (losses) | (98) | 68 | n.s. |
| INCOME BEFORE TAX | (1,841) | 1,897 | n.s. |
| Income tax | 575 | (546) | n.s. |
| INCOME FROM CONTINUING TRANSACTIONS | (1,267) | 1,352 | n.s. |
| Income from discontinued transactions (net) | - | - | n.s. |
| NET INCOME | (1,267) | 1,352 | n.s. |
| Net income attributed to non-controlling interests | (1) | (0) | 106.4 |
| NET INCOME ATTRIBUTED TO PARENT COMPANY | (1,267) | 1,352 | n.s. |
The changes in the main headings of the income statement of this business area are:
“Net interest income” for 2012 stood at €4,836 million, an increase of 10.1% on the €4,391 million in the previous year. This was despite the environment of lower volumes, thanks to good price management through repricing of loans, and protection the mortgage portfolio from interest rate fluctuations.
The balance under the heading “Net fees and commissions” totaled €1,607 million, up 10% on 2011, despite the aforementioned decline in activity.
The heading “Other operating income and expenses” totaled €355 million, a 23.6% reduction, due to the increased allocations to the Deposit Guarantee Fund, which were not offset by the good performance of income from the insurance business.
As a result, “Gross income” in 2012 amounted to €6,784 million, up 7.2% on the €6,328 million posted in 2011, a very positive performance taking into account the environment in which it was generated.
The balance of “Operating expenses” for 2012 amounted to €2,818 million, up 1.1% on 2011, with €2,787 million due to the incorporation of Unnim. Even so, they have increased below the rate of inflation as a result of strict controls.
As a result, “Operating income” for 2012 stood at €3,967 million, up 12% on the €3,541 million posted in 2011, while the efficiency ratio improved compared to 2011, thanks to the better performance of revenue. It closed 2012 at 41.5% (44% in 2011).
In 2012, the balance under the heading “Impairment losses on financial assets (net)” amounted to €5,710 million, compared with €1,711 million in 2011. This positive result enabled the Group to absorb the significant increase in loan-loss provisions to cover the impairment of assets related to the real-estate sector in Spain. Consequently, the coverage ratio in the area improved to 67%, compared with 44% at the end of the previous year.
The balance under the headings “Provisions (net)” and “Other gains (losses)” in 2012 stood at €98 million, compared with €68 million in 2011.
Because of the considerable provisions made, “Income before tax” for 2012 stood at a negative €1,841 million, compared with a €1,897 million profit in 2011.
Consequently, the balance of “Income tax” for 2012 amounted to a positive €575 million, compared with €546 million in tax expense the previous year.
As a result, “Net income attributed to parent company” in 2012 totaled a loss of €1,267 million, compared with a profit of €1,352 million in 2011. Excluding the higher provisions for real estate assets mentioned earlier, the area contributed income of €1,211 million.
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| Spain | Millions of Euros | ||
|---|---|---|---|
| 2012 | 2011 | % Change 2012-2011 |
|
| Total Assets | 317,151 | 311,987 | 1.7 |
| Loans and advances to customers | 210,982 | 214,277 | (1.5) |
| Total customer funds | 129,640 | 109,421 | 18.5 |
| Off-balance-sheet funds | 52,735 | 51,159 | 3.1 |
| Economic capital allocated | 12,110 | 10,558 | 14.7 |
| Efficiency ratio (%) | 41.5 | 44.0 |
|
| NPA Ratio (%) | 6.9 | 4.8 |
|
| NPA Coverage Ratio (%) | 67 | 44 |
|
| Risk premium (%) | 2.66 | 0.78 |
|
The changes in the main headings of activity in this business area are as follows:
As of December 31, 2012, the balance of “gross lending to customers” stood at €210,982 million, down 1.5% on the €214,277 million posted as of December 31, 2011. Excluding the balance contributed by the integration of Unnim, the decline is 11.1%, in line with the deleveraging process underway in the country’s economy.
As for the asset quality of BBVA’s portfolio in Spain, the NPA ratio as of December 31, 2012 is 6.9%. Excluding the impact of Unnim, the figure is 5.9%, up 11 basis points on the one posted at the close of December 2011. This is due to the difficult economic situation in the country and the deleveraging process underway. However, this ratio is lower than that in the sector as a whole. The coverage ratio as of the same date rose to 67% as a result of the increase in provisions needed due to the greater impairment of the assets associated with real estate sector.
“On-balance-sheet funds” stood at €129,640 million as of December 31, 2012, up 18.5% since December 2011. Even excluding the balance contributed by Unnim, this heading shows a significant increase of 7.7%, due in part to the competitive advantage of an efficient and well dimensioned distribution network in the context of the current restructuring underway in the industry, and underpinned by good management in deposit gathering and the renewals of existing contracts completed by the commercial network.
“Off-balance-sheet funds” managed by BBVA in Spain amounted to €52,735 million, up 3.1% on the same date of the previous year. Of this amount, €19,116 million correspond to mutual funds, which were down 2.1% over the year, while pension funds, which amounted to €18,313 million as of December 31 2012, were up 6.3% year-on-year, thanks to the positive management of renewals and new accounts, strongly supported by the new range of products developed by BBVA. Specifically, in the fourth quarter of 2012, the Group launched six new products that complete the range of pension plans and Basque social insurance entities available for its customers.
This has enabled BBVA to maintain its position as the number one manager in both mutual and pension funds in Spain, with market shares of 17.3% in mutual funds (according to the latest information available as of November) and 19.1% in pensions (according to data published by Inverco in September).
Products and Services
BBVA has a value offer which is adapted to the needs of each of the segments in which it operates. During 2012, it launched several products and services that have improved the area’s positioning.
In the individual customer segment, the Group continued working on developing the necessary applications to respond to demand for mortgage products with sufficient speed and flexibility, and also on having an appropriate pricing and risk control policy to enable it to continue to support customers with payment difficulties by allowing loan installments to be adapted to their economic capacity at any given time.
In on-balance-sheet funds, the area’s policy aimed at increasing the customer base by using funds and transactional services as levers for attracting funds. The policy included the launch of the “Adiós Comisiones” (Goodbye, commissions) campaign, which eliminates account fees for customers whose pensions or salaries are paid directly into their bank accounts, and offers them free debit or credit cards, as well as additional advantages in other financial products to reward their loyalty to the Bank. A notable new feature in time deposits has been deposits whose interest rates are linked to the level of customer loyalty. These were products were key to increasing the customer base in 2012.
In pension funds, particularly noteworthy were the “Plan Tranquilidad 17B” and “Plan Tranquilidad 20B” guaranteed fixed-income plans, as well as the bonus campaigns, launched in the last part of the year, with bonuses of between 2-4%, depending on the amount contributed.
In 2012, the Group created the Premium unit with the aim of extending the BBVA private banking model to three types of clients: value customers (over €60,000 in funds or salaries of over €3,000), high value added (over €300,000 in funds) and high-net-worth customers (over €2,000,000). All three types of customer are included in this segment, but the specific range of products and services offered depend on the particular nature of each sub-segment. This new segment is a continuation of the strategy started by Private Banking two years ago, with special emphasis on attracting and retaining customers and on differentiation.
In Corporate and Business Banking (CBB), BBVA has confirmed its leading role in the distribution of credit facilities under preferential conditions with the signing of the ICO-2012 Agreement, with lines such as “Investment”, “Internationalization”, “Liquidity”, “Entrepreneurs”, “Home Restoration”, “SGR Guarantee” and others intended for segments such as foreign trade, the domestic market and tourism.
In the current environment of deleveraging and sluggish activity, BBVA remains committed to supporting economic activity and to maintaining its offer of products and services to Spanish companies. The “International Synergies” project was launched during the third quarter of 2012. The aim of this project is for corporate clients of BBVA in Spain to be provided with a global range of services in all the countries in which the Group operates. In 2012, the cycle of conferences "Growing Abroad", organized by the international department of this area, has continued to support Spanish companies in their international expansion process as a means for promoting economic growth.
In Institutions, two particularly important developments are worthy of note: first, BBVA’s contribution of €2,600 million to the mechanism for payment of suppliers established by the government in late February as a way of injecting liquidity into the Spanish productive system; and second, the advisory work for the Ministry of Economy and Competitiveness and the Ministry of Finance and Public Administrations for the creation and development of the Regional Liquidity Fund (FLA). The Spanish banking system will participate with €8,000 million, €1,600 million of which will be contributed by BBVA.