Capital base

In the fourth quarter of 2011, the most notable event with respect to the capital base was the publication by the European Banking Authority (EBA) of the new capital recommendations applicable to certain financial institutions in Europe, aimed at recovering investor confidence in their solvency. These recommendations consist of a minimum core capital ratio of 9% (using the specific criteria defined by the EBA), including an additional exceptional, temporary cushion for exposure to sovereign debt, which will have to be achieved by June 2012.

For the BBVA Group, the amount estimated at first in October using information from June 2011, was €7.1 billion. The Group’s strategy to comply with this recommendation is based on the following fundamental pillars: organic generation of capital quarter by quarter; management of capital instruments; and, to a lesser extent, compliance with the forecast timetable for implementing the internal models approved by the Bank of Spain. With data for the close of September, the figure fell to €6.3 billion, of which €2.3 billion correspond to sovereign exposure. The reduction on the original figure was mainly the result of organic capital generation in the third quarter of 2011.

An additional €5.3 billion were generated in the fourth quarter of the year, as follows:

  • There was a successful completion of the exchange of preference shares for mandatory convertible bonds, which are 100% eligible as core capital. The exchange was subscribed by nearly all the investors, at 98.7% of the nominal amount, or a total of €3.4 billion.
  • A further €0.9 billion of capital was generated organically, explained basically by recurring earnings, the current dividend policy, and the slight increase in lending.
  • There was a positive effect from the tax benefit for goodwill impairment in the United States, which amounted to €0.4 billion.
  • The floor set by the capital advanced measurement approach for operational risk was eliminated. This floor was established in December 2009 when the internal operational risk models for Spain and Mexico entered into force. The effect has been of an extra €0.6 billion.

Thus, 84% of the capital recommendation has been achieved as of December 31, 2011. In the first half of 2012, the Group’s organic generation of capital will cover the remaining amount. This will allow BBVA to meet with ease the core Tier 1 ratio (according to EBA criteria) of 9% by June 2012.

As a result of the above, the capital base according to BIS II standards also substantially improved its quality over the quarter and in the year as a whole. As of December 31, 2011, core capital stood at €34,161m, 15.3% up on the figure for September 2011 and 13.5% more than in December 2010. As a result, the core ratio went up to 10.3%.

Bank capital (Tier I) increased by €2,109m over the quarter, a rise of 6.6%, with the Tier I ratio standing at 10.3% (9.8% as of 30-Sep-2011), an improvement of 48 basis points over the quarter.

Other eligible capital (Tier II) at the same date, which includes subordinate debt, surplus generic provisions, eligible unrealized gains, and the deduction for holdings in financial and insurance entities, was €8,609m, a fall over the quarter of 5.1%, mainly due to the amortization of an subordinated debt issue. As a result, Tier II stood at 2.6% as of 31-Dec-2011 (2.8% as of 30-Sep-2011).

Total capital brings the capital base to €42,770m, 4.0% up on the previous quarter.

Risk-weighted assets (RWA) amounted to €330,771m, an increase of 1.6% on the figure for September, basically due to exchange-rate variations and the slight growth in lending over the quarter, above all in Mexico and South America. The entry into force of the tighter Basel 2.5 requirements (increased RWA for market risk when including stressed VaR) was offset by a lower operational risk requirement due to the elimination of the capital floor in the advanced models.

Finally, the BIS ratio as of 31-Dec-2011 stood at 12.9% (12.6% as of 30-Sep-2011).

Capital base (BIS II Regulation)

(Million euros)

31-12-11 30-09-11 30-06-11 31-03-11 31-12-10
Shareholders' funds 40,952 41,552 38,677 38,107 36,689
Adjustments and deductions (10,222) (11,923) (11,904) (11,654) (8,592)
Mandatory convertible bonds 3,430 - 2,000 2,000 2,000
Core capital 34,161 29,628 28,773 28,452 30,097
Preference shares 1,759 5,157 5,114 5,128 5,164
Deductions (1,759) (2,733) (2,452) (2,367) (2,239)
Capital (Tier I) 34,161 32,053 31,435 31,214 33,023
Subordinated debt and other 11,258 11,800 12,266 12,613 12,140
Deductions (2,649) (2,733) (2,452) (2,367) (2,239)
Other eligible capital (Tier II) 8,609 9,067 9,814 10,246 9,901
Capital base 42,770 41,120 41,249 41,460 42,924
Minimum capital requirement (BIS II Regulation) 26,462 26,037 25,703 25,523 25,066
Capital surplus 16,308 15,083 15,547 15,937 17,858
Risk-weighted assets 330,771 325,458 321,282 319,044 313,327
BIS ratio (%) 12.9 12.6 12.8 13.0 13.7
Core capital (%) 10.3 9.1 9.0 8.9 9.6
Tier I (%) 10.3 9.8 9.8 9.8 10.5
Tier II (%) 2.6 2.8 3.1 3.2 3.2

Status of EBA capital recommendation at December 2011

(Billion euros)

Core ratio evolution following EBA criteria

Core capital evolution

(Million euros and percentage)