4.2. Information on credit risks

4.2.1. Exposure to credit risk

Pursuant to Rule Thirteen in the Solvency Circular concerning the capital requirements for credit risk, exposure is understood to be any asset item and all items included in the Group’s memorandum accounts involving credit risk and not deducted from the Group’s eligible capital. Accordingly, inclusion is made mainly of customer lending items, with their corresponding undrawn balances, letters of credit and guarantees, debt securities and capital instruments, cash and deposits in central banks and credit institutions, assets purchased or sold under a repurchase agreement (asset and liability repos), financial derivatives and fixed assets.

Below is a presentation of the original exposure and the allowances for losses under the advanced measurement and standardized approaches as of December 31, 2012 and 2011. In accordance with section one of Rule Twenty-eight of the Solvency Circular, only the exposure net of allowances is presented for those exposures calculated under the standardized approach.

In the comparison between the two exercises there can be seen to be a growth in credit risk exposures calculated by the standard method. This is basically due to the entry of Unnim into the Group's portfolio and the increased lending activity in the Group's subsidiaries in Latin America:

• The original exposure to central and regional government and other public-sector authorities falls due to lower volumes in repos.
• Exposure to companies increases due to the incorporation of the Unnim loan book into the Group's portfolio and the increased activity in this segment in the Latin American subsidiaries of Mexico, Venezuela and Chile.
• In the case of retail exposure, the growth in the original exposure is once more explained by Unnim, with €3 billion, and the growth of business in the Latin American subsidiaries.
• The increased exposure in the category of real-estate collateralized loans is due to a combination of two effects: the Unnim portfolio (€10.5 billion) and a fall by a transfer of part of the portfolio of Spain to internal models.
• The increased exposure to default corresponds basically to Unnim.

With respect to exposure by credit risk calculated using internal models, the categories of Institutions and Corporates is reduced by the deleveraging in the Spanish market mentioned above.

The increase in the retail categories is due basically to the transfer to internal consumer, credit card and mortgage models.

2012

(Million euros)

				Exposure after applying conversion factors
Category of exposure	Original exposure (1)	Provisions (2)	Exposure net of provisions (3)	On-balance-sheet exposure after mitigation techniques	Off-balance-sheet exposure after mitigation techniques	Fully adjusted value of the exposure	Average CCF	EAD
Central governments and central banks	108,378	-193	108,185	97,958	3,197	101,155	73%	100,299
Regional governments and local authorities	9,361	0	9,361	6,775	255	7,030	43%	6,884
Public-sector institutions and other public entities	3,096	-1	3,095	2,990	1,365	4,355	40%	3,539
Multilateral development banks	187	0	187	67	133	200	12%	83
International organizations	34	0	34	34	0	34	1%	34
Institutions	18,855	-12	18,843	12,799	5,937	18,736	16%	13,761
Corporates	98,219	-1,686	96,533	56,930	33,486	90,417	31%	67,341
Retail	55,783	-195	55,589	38,875	13,778	52,653	11%	40,345
Collateralized with real-estate property	54,193	-169	54,024	51,164	45	51,209	23%	51,174
Default status	11,489	-2,581	8,908	8,014	55	8,069	61%	8,048
High risk	1,596	-73	1,523	1,327	37	1,364	22%	1,335
Guaranteed bonds	503	0	503	503	0	503	0%	503
Short-term to institutions and corporates	656	0	656	645	0	645	0%	645
Mutual funds	53	0	53	24	28	52	100%	52
Other exposures	23,081	-7	23,074	27,350	489	27,838	31%	27,502
TOTAL STANDARDIZED APPROACH	385,483	-4,916	380,567	305,457	58,804	364,261	-	321,544
Central governments and central banks	1,092	-2		1,947	859	2,805	51%	2,382
Institutions	77,129	-53		71,686	5,882	77,568	60%	75,187
Corporates	133,851	-6,284		75,084	56,583	131,668	55%	106,014
Retail	94,022	-1,501		83,895	10,159	94,054	27%	86,653
Secured by real-estate collateral	70,970	-445		70,590	380	70,970	10%	70,630
Qualifying revolving retail	16,415	-622		6,742	9,674	16,415	28%	9,427
Other retail assets	6,636	-434		6,563	105	6,668	32%	6,596
TOTAL ADVANCED MEASUREMENT APPROACH	306,095	-7,841		232,611	73,483	306,095	-	270,237
SUBTOTAL CREDIT RISK (securitizations and equity positions not included)	691,577	-12,757		538,069	132,287	670,356	-	591,781
Securitized positions	9,409	-177		9,361	0	9,361	0	9,277
Standardized Approach	6,685	-47	6,637	6,637	-	6,637	0	6,553
Advanced Measurement Approach	2,724	-130		2,724	-	2,724	0	2,724
Equity	6,234	-225		5,744	-	5,744	0	6,234
Simple Method	947	-66		947	-	947	0	947
Non-trading equity instruments in sufficiently diversified portfolios	694	-64		694	-	694	0	694
Exchange-traded equity instruments	253	-2		253	-	253	0	253
PD/LGD Method	4,798	0		4,798	-	4,798	0%	4,798
Internal Models	489	-159		0	-	0	0%	489
TOTAL CREDIT RISK	707,220	-13,160		553,174	132,287	685,462	-	607,292

(1) Gross exposure prior to the application of risk mitigation techniques.
(2) It includes provisions for the impairment of assets (financial and non-financial) and other valuation adjustments, with the exception of the generic provision included in the capital base as more Additional Capital, as per Rule Eight in the Solvency Circular.
(3) Exposures are adjusted solely by provisions in the case of exposures by the Standardized Approach.

2011

(Million euros)

				Exposure after applying conversion factors
Category of exposure	Original exposure (1)	Provisions (2)	Exposure net of provisions (3)	On-balance-sheet exposure after mitigation techniques	Off-balance-sheet exposure after mitigation techniques	Fully adjusted value of the exposure	Average CCF	EAD
Central governments and central banks	112,419	-11	112,408	79,807	3,532	83,339	70%	82,274
Regional governments and local authorities	12,128	0	12,128	7,117	3,061	10,178	63%	9,044
Public-sector institutions and other public entities	4,115	0	4,114	3,218	807	4,025	49%	3,613
Multilateral development banks	39	-	39	34	22	55	0%	34
International organizations	12	0	12	12	0	12	0%	12
Institutions	16,293	-24	16,269	12,278	4,198	16,476	18%	13,014
Corporates	92,579	-1,576	91,003	57,107	30,261	87,368	41%	69,518
Retail	48,151	-287	47,864	33,445	13,312	46,757	16%	35,618
Collateralized with real-estate property	45,300	-111	45,189	43,680	211	43,891	49%	43,784
Default status	8,632	-1,175	7,457	7,395	7	7,402	59%	7,399
High risk	1,874	-42	1,833	1,754	55	1,809	48%	1,781
Guaranteed bonds	78	0	78	78	0	78	0%	78
Short-term to institutions and corporates	895	0	895	895	0	895	0%	895
Mutual funds	216	0	216	164	52	216	99%	215
Other exposures	20,522	-12	20,510	26,208	788	26,997	70%	26,763
TOTAL STANDARDIZED APPROACH	363,252	-3,237	360,015	273,192	56,306	329,497	-	294,042
Central governments and central banks	1,909	-4		2,755	993	3,748	48%	3,228
Institutions	98,320	-44		91,098	7,674	98,772	56%	95,412
Corporates	156,313	-3,356		91,360	62,661	154,021	52%	123,761
Retail	82,430	-1,059		76,550	5,880	82,430	33%	78,512
Secured by real-estate collateral	68,859	-392		68,643	217	68,859	12%	68,668
Qualifying revolving retail	10,374	-536		4,711	5,663	10,374	34%	6,648
Other retail assets	3,196	-131		3,196	0	3,196	100%	3,196
TOTAL ADVANCED MEASUREMENT APPROACH	338,972	-4,464		261,763	77,208	338,972	-	300,913
SUBTOTAL CREDIT RISK (securitizations and equity positions not included)	702,224	-7,701		534,955	133,514	668,469	-	594,954
Securitized positions	8,396	-255		8,264	0	8,264	0	8,264
Standardized Approach	6,351	-131	6,220	6,220	-	6,220	0	6,220
Advanced Measurement Approach	2,045	-123		2,045	-	2,045	0	2,045
Equity	6,426	-433		5,946	-	5,946	0	6,426
Simple Method	1,216	-314		1,216	-	1,216	0	1,216
Non-trading equity instruments in sufficiently diversified portfolios	610	-27		610	-	610	0	610
Exchange-traded equity instruments	606	-287		606	-	606	0	606
PD/LGD Method	4,730	-2		4,730	-	4,730	0%	4,730
Internal Models	480	-117		0	-	0	0%	480
TOTAL CREDIT RISK	717,045	-8,389		549,165	133,514	682,679	-	609,644

(1) Gross exposure prior to the application of risk mitigation techniques.
(2) It includes provisions for the impairment of assets (financial and non-financial) and other valuation adjustments, with the exception of the generic provision included in the capital base as more Additional Capital, as per Rule Eight in the Solvency Circular.
(3) Exposures are adjusted solely by provisions in the case of exposures by the Standardized Approach.

4.2.2. Average value of the exposures throughout 2012 and 2011.

(Million euros)

	Original average exposure for the period
Category of exposure	2012	2011
Central governments and central banks	107,063	105,229
Regional governments and local authorities	9,034	8,811
Public-sector institutions and other public entities	2,967	4,162
Multilateral development banks	82	45
International organizations	396	12
Institutions	19,396	16,483
Corporates	96,500	84,920
Retail	55,665	46,872
Collateralized with real-estate property	49,547	46,236
Default status	9,978	8,714
High risk	1,749	1,967
Guaranteed bonds	361	34
Short-term to institutions and corporates	757	694
Mutual funds	140	138
Other exposures	21,852	17,870
TOTAL STANDARDIZED APPROACH	375,485	342,188
Central governments and central banks	1,515	3,059
Institutions	91,627	96,325
Corporates	143,931	157,715
Retail	92,077	82,726
Secured by real-estate collateral	70,933	69,324
Qualifying revolving retail	15,119	10,109
Other retail assets	6,024	3,294
TOTAL ADVANCED MEASUREMENT APPROACH	329,149	339,826
SUBTOTAL CREDIT RISK (securitizations and equity positions not included)	704,633	682,014
Securitized positions	9,073	8,234
Standardized Approach	6,603	6,063
Advanced Measurement Approach	2,469	2,171
Equity	6,069	6,875
Simple Method	1,068	1,294
Non-trading equity instruments in sufficiently diversified portfolios	649	787
Exchange-traded equity instruments	419	507
PD/LGD Method	4,526	5,054
Internal Models	475	527
TOTAL CREDIT RISK	719,776	697,122

4.2.3. Distribution by geographical area

The following chart present the distribution by significant geographic areas of the original exposure by country pursuant to the obligor's country. The breakdown includes exposure under the standardized and advanced measurement approaches, without including positions in equity.

2012

(Million euros)

	Original exposure by geographical area
Category of exposure	Total	Europe	Mexico	U.S.	South America	Rest of the World
Central governments and central	108,378	72,769	12,857	5,732	17,000	20
banks	9,361	1,752	6,387	968	189	65
Regional governments and local	3,096	1,337	0	269	1,490	0
authorities	18,855	9,019	2,522	89	7,127	98
Public-sector institutions and other	98,219	20,409	18,244	35,990	23,111	465
public entities	55,783	19,075	7,020	6,214	23,450	25
Institutions	54,193	19,618	10,795	12,379	11,397	4
Corporates	6,685	1,824	82	4,779	0	0
Retail	37,598	19,896	7,847	2,821	6,916	117
TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH	392,168	165,698	65,756	69,240	90,679	794
Central governments and central banks	1,092	40	3	218	552	280
Institutions	77,129	71,030	19	3,827	310	1,944
Corporates	133,851	116,677	1,260	8,203	3,130	4,581
Retail	94,022	81,271	12,604	18	40	89
Securitized positions	2,724	2,674	0	13	0	38
TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH	308,819	271,692	13,885	12,279	4,032	6,931
TOTAL CREDIT RISK	700,986	437,390	79,641	81,520	94,711	7,725

Note: Equity positions are not included.

The next table shows the distribution by geographical area of the book balances of the non-performing and impaired exposures of financial and non-financial assets and for contingent liabilities.

2012

(Million euros)

	Total	Europe	Mexico	U.S. and Puerto Rico	South America	Rest of the World
Non-performing and impaired exposures	19,824	17,017	1,315	834	634	25

Note: Accounting balances solvency perimeter. Equity positions are not included.

The next table shows the distribution by geographical area of the book balances of the allowances for financial asset losses and for contingent liabilities.

2012

(Million euros)

	Total	Europe	Mexico	U.S. and Puerto Rico	South America	Rest of the World
Non-performing and impaired exposures	14,917	10,766	1,683	924	1,505	39

Note: Accounting balances solvency perimeter. Equity positions are not included.

4.2.4. Distribution by sector

The following table shows the distribution by economic sector (standardized and advanced measurement approaches) of the original exposure. The breakdown does not include positions in equity.

2012

(Million euros)

	Original exposure by sector
Category of exposure	Total	EECC, Insurance and Financial Brokerage	Public sector	Agriculture	Industry	Construction	Commercial	Individuals	Other sectors
Central governments and central banks	108,378		15.5%
Regional governments and local authorities	9,361		1.3%
Public-sector institutions and other public entities	3,096		0.4%
Institutions	18,855	2.7%
Corporates	98,219	0.9%		0.5%	1.8%	1.2%	5.9%		2.5%
Retail	55,783	0.1%		0.1%	0.4%	0.2%	0.9%	5.2%	0.9%
Collateralized with real-estate property	54,193			0.1%	0.1%	0.9%	0.4%	5.0%	0.3%
Securitized positions	6,685	0.3%	0.5%				0.2%
Other exposures	37,598	0.4%		0.1%	0.2%	0.3%	0.3%	0.8%	2.9%
TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH	392,168	4.3%	17.8%	0.7%	2.5%	2.7%	7.6%	10.9%	6.6%
Central governments and central banks	1,092		0.2%
Institutions	77,129	7.4%	3.6%
Corporates	133,851	2.1%	0.6%	0.1%	6.8%	2.0%	2.1%	0.0%	3.3%
Retail	94,022							13.4%
Securitized positions	2,724	0.4%
TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH	308,819	9.9%	4.3%	0.1%	6.8%	2.0%	2.1%	13.4%	3.4%
TOTAL CREDIT RISK	700,986	14.2%	22.2%	0.8%	9.3%	4.8%	9.7%	24.3%	9.9%

Note: Equity positions are not included.

The following table shows the distribution by counterparty of the book balances of the non-performing and impaired exposures of financial assets and contingent liabilities.

2012

(Million euros)

	Total	EECC, Insurance and Financial Brokerage	Public sector	Corporates	Retail	Other sectors
Non-performing and impaired exposures	19,824	1.8%	1.0%	62.2%	26.3%	8.7%

Note: Accounting balances solvency perimeter. Equity positions are not included.

The next table shows the distribution by counterparty of the book balances of allowances for financial asset losses and for contingent exposures:

2012

(Million euros)

	Total	EECC, Insurance and Financial Brokerage	Public sector	Corporates	Retail	Other sectors
Specific value adjustments	9,830	1.8%	0.8%	68.5%	21.7%	7.2%
Generic provisions	5,047
Country risk	40
Value adjustments and provisions, total	14,917

Note: Accounting balances solvency perimeter. Equity positions are not included.

4.2.5. Distribution by residual maturity

The following table presents the distribution of original exposure by residual maturity, broken down by category of exposure under the standardized and advanced measurement approaches:

2012

(Million euros)

		Original exposure by residual maturity
Category of exposure	Total	Less than 1 year	Between 1 and 5 years	Over 5 years
Central governments and central banks	108,378	68,441	25,664	14,273
Regional governments and local authorities	9,361	2,163	1,385	5,813
Public-sector institutions and other public entities	3,096	1,674	880	542
Institutions	18,855	9,625	5,263	3,967
Corporates	98,219	37,817	36,889	23,513
Retail	55,783	21,417	20,565	13,802
Collateralized with real-estate property	54,193	5,588	14,870	33,735
Securitized positions	6,685	133	1,303	5,249
Other exposures (1)	37,598	19,067	8,968	9,562
TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH	392,167	165,925	115,786	110,455
Central governments and central banks	1,092	174	311	607
Institutions	77,129	37,894	19,022	20,213
Corporates	133,851	61,948	38,989	32,914
Retail	94,022	696	4,224	89,102
Securitized positions	2,724	63	490	2,171
TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH	308,819	100,775	63,036	145,007
TOTAL CREDIT RISK (2)	700,986	266,701	178,822	255,463

(1) Other exposures includes mainly cash (under 1 year) and fixed assets (over 5 years).
(2) Equity Positions are not included.

4.2.6. Value adjustments for impairment losses and allowances for contingent risks and commitments

The following table presents the movement recorded in the years 2012 and 2011 in the allowance for impairment losses of financial assets on the balance sheet and for contingent liabilities and commitments, including country risk, generic and specific allowances.

2012

(Million euros)

Item	Financial assets value adjustments and provisions	Provisions for Contingent Liabilities and Commitments	Total
BALANCE AT START OF 2010	10,039	291	10,330
Increase in impairment charged to income	10,643	105	10,747
Decrease in impairment credited to income	-2,333	-44	-2,377
Institutions acquired by the Group during the year	2,067	5	2,072
Institutions disposed of during the year	0	0	0
Transfers to written-off loans	-4,143	0	-4,143
Exchange differences and other transactions	-1,471	-16	-1,487
BALANCE AT END OF YEAR 2011	14,801	341	15,142
For impaired portfolio	9,889	166	10,055
For current non-impaired portfolio	4,912	175	5,087

Note: Solvency perimeter.

2011

(Million euros)

Item	Financial assets value adjustments and provisions	Provisions for Contingent Liabilities and Commitments	Total
BALANCE AT START OF 2011	10,093	264	10,357
Increase in impairment charged to income	6,103	17	6,120
Decrease in impairment credited to income	-1,551	-24	-1,574
Institutions acquired by the Group during the year	305	12	317
Institutions disposed of during the year	0	0	-
Transfers to written-off loans	-4,114	0	-4,114
Exchange differences and other transactions	-797	22	-775
BALANCE AT END OF YEAR 2012	10,039	291	10,330
For impaired portfolio	6,903	135	7,038
For current non-impaired portfolio	3,105	157	3,262

Note: Solvency perimeter.

4.2.7. Total impairment losses for the period

The following table shows details of impairment losses and allowances on financial assets and contingent risks and commitments, as well as derecognition of losses previously recognized in asset write-offs recorded directly in the income statement in 2012 and 2011.

(Million euros)

Items	2012	2011
Financial assets	7,980	4,226
Of which:
Recovery of written-off assets	337	327
Contingent exposure and commitments [recoveries (–)]	61	-6
TOTAL IMPAIRMENT LOSSES	8,041	4,220

Note: Solvency perimeter.