In the fourth quarter of 2011 BBVA confirmed the main trends identified over the year and since the start of the crisis: recurring earnings, stability of the indicators of credit quality, organic capital generation, and prudent liquidity management. This standout performance is due to BBVA’s approach to banking based on four pillars: a business model focused on a long-term and lasting relationship with its customer base; management based on prudence and anticipation; a corporate governance framework underpinned by principles of integrity, prudence and transparency; and finally, an appropriate diversification in terms of geographical areas, businesses and customers.
In terms of earnings generation, the main points to highlight over the quarter are as follows:
- A continued upward trend in earnings of a more recurring nature (i.e. gross income excluding NTI or dividends). These represent most of the Group’s gross income, thanks to the positive performance of net interest income, income by the equity method and the insurance business.
- Other income also performed well. Dividends include those from Telefónica, while net trading income (NTI) has recovered from its low contribution in the third quarter.
- Operating expenses were up due to the Group’s investment program. Despite this, the efficiency ratio closed December at 48.4%, one of the best among the Bank’s peers.
- Impairment losses on financial assets were up, basically due to increased loan loss provisions, in line with higher revenue over the quarter.
- There was goodwill impairment in the United States of €1,011m after tax. This is an accounting entry that does not negatively affect the Group’s liquidity or solvency. It reflects the lower growth prospects of the economy and banking business in the country. Given its one-off nature, comments on the accounts will be made excluding this effect where possible.
- The net attributable profit, excluding the one-off mentioned above, was €872m, up on the €804m for the previous quarter. The total for the year as a whole was €4,015m.
The Group has maintained its main asset quality indicators stable for yet another quarter (the eighth since December 2009). The NPA ratio closed 30-Dec-2011 at 4.0% and the coverage ratio at 61%. There were improvements in the indicators in the United States and South America, while in Spain and Mexico they remain stable.
There is also a notable capacity to generate organic capital. This is one of the pillars underpinning compliance with the capital recommendations set by the European Banking Authority (EBA). The EBA has set a capital recommendations for the main European banks, with a minimum core capital ratio of 9% (under the special criteria defined by the EBA), and an additional exceptional, temporary buffer to cover sovereign risk exposure. EBA’s aim is to restore market confidence with respect to the solvency of the European financial institutions. In the case of BBVA, the final figure, which takes the September 2011 figures as a base, is €6.3 billion, of which €2.3 billion is allocated for the sovereign buffer. The time limit for compliance with this exceptional capital recommendation is June 30, 2012. The Group bases its strategy for compliance on the following pillars:
- Quarter-by-quarter organic capital generation. Since December 2007, the Group has generated a quarterly average of around 20 basis points.
- Management of capital instruments, such as the successful exchange of preference shares for mandatory convertible bonds, which are 100% eligible as core capital. The exchange among investors has had a subscription rate of 98.7%, amounting to a total of €3.4 billion. This operation also demonstrates the high level of capillarity of BBVA’s network and the confidence that customers have in the Bank.
- To a lesser extent, compliance with the planned timetable for implementing the internal models approved at the time by the Bank of Spain.
As explained in the section on the capital base in this report, as of December 31, 2011 84% of the recommendation had already been met. In the first half of 2012, the Group’s organic generation of capital will cover the remaining amount. This will allow it to meet with ease the core Tier 1 ratio (under EBA criteria) of 9% by June 2012.
As customary, on 10-Jan-2012 the Bank paid an interim dividend against 2011 results of €0.10 per share. It had been approved by the BBVA Board of Directors on December 20.
Making use of the new lending facility provided by the European Central Bank (ECB), BBVA took up €11,000m at the extraordinary 36-month auction on December 21. This figure is equivalent to the sum of its wholesale debt redemptions for 2012. It means that the Group has “liquidity coverage” and demonstrates its prudence in liquidity risk management in line with the profile of maturities in upcoming years. However, it does not imply that the Group will not issue debt in 2012 if conditions improve.
The most important aspects of the business areas are summed up below:
- Spain continues to be immersed in a process of financial deleveraging, which is necessary and positive for the country’s economy. This, combined with the positive development in customer funds on balance sheet (including promissory notes and excluding repos and other balances related to Markets), this is having a positive impact on the liquidity gap in the area. From the point of view of earnings, net interest income has shown a notable resilience, thanks to the defense of spreads and the strict control of operating expenses. The area generated a profit of €202m for the quarter, and €1,363m for the year as a whole. In terms of asset quality, the NPA ratio and coverage ratio remain stable and compare very favorably with those in the system as a whole.
- In Eurasia the contribution from Garanti was highly positive. According to September data, it has become the most profitable bank in Turkey. The stake in the Chinese bank CNCB also made a favorable contribution. The profit for the quarter was €322m and for the year as a whole €1,027m. As a percentage of the total, this already accounts for 25.6% of the Group’s earnings excluding one-offs, and thus provides a significant level of geographical diversification. It is a reflection of the Group’s commitment to emerging countries with economic growth potential.
- Mexico posted solid results in 2011 that set it apart from its main competitors. This is mainly the result of the positive performance of gross income, which was up 4.3% year-on-year at constant exchange rates. The improvement was due to a greater volume of business, good price management and the positive performance of the insurance business. The good performance of revenue has allowed the significant investment undertaken in innovation, technology and infrastructure to continue. This takes advantage of the opportunities offered by the Mexican market and maintains the Bank as one of the most efficient in the local banking sector, with an efficiency ratio of 36.2%. In addition, growth in lending volume has been accompanied by good risk management, with the result that the cumulative risk premium improved by 36 basis points over the year to 3.29%. Thus the net attributable profit for 2011 was €1,741m, 5.4% more than in 2010 at constant exchange rates.
- South America continues with its positive performance thanks to significant improvement in business activity. Also worth noting are the excellent price management, positive performance of income from fees and commissions (despite regulatory limitations), and the rigorous policy of risk admission, which has led to a clear improvement in asset quality. As a result, the area was able to make further progress with its growth plans and provided a net attributable profit in 2011 of €1,007m, a year-on-year increase of 16.2% at constant exchange rates.
- In the United States there was a renewed improvement in the loan-book mix, with a further increase in the weight of target portfolios; and in the mix of customer funds, where the share of lower-cost funds continues to increase. The changes in the loan-book mix has had a clear impact on asset quality in the area, with the NPA ratio and coverage ratio improving on the figures for the previous quarter. In terms of earnings, net interest income was resilient and loan-loss provisions declined. This explains why the net attributable profit for 2011, excluding goodwill impairment, was 23.2% up on the 2010 figure at €289m.