Asset/Liability Management

The Assets and Liabilities Management unit is responsible for actively managing structural interest-rate and foreign-exchange positions, as well as the Group’s overall liquidity and shareholders’ funds.

Liquidity management helps to finance the recurrent growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of finance. A core principle in the BBVA Group’s liquidity management continues to be to encourage the financial independence of its subsidiaries in America. This aims to ensure that the cost of liquidity is correctly reflected in price formation and that there is sustainable growth in the lending business.

In the first quarter of 2012, short-term and long-term wholesale financial markets were conditioned by the ECB’s second liquidity auction on February 29. The success of this measure is reflected in its high uptake, both in terms of amount and the number of participants. It also led to an easing of the risk premiums of the peripheral countries, opened up the markets for medium and long-term senior debt financing, and led to a more positive behavior in the short-term markets, which are largely conditioned by the high level of liquidity due to the mentioned liquidity injections. The balance of the ECB deposit facility as of March 30, 2012 was a high €778,702m. This positive tone of the medium-term financial markets shifted toward a more negative situation at the end of the quarter as a result of the deterioration in the economic outlook for Europe and some doubts about the level of adjustment needed in peripheral countries.

In this context, BBVA has successfully issued senior debt for €2,000m at 193 basis points over the midswap rate. To sum up, BBVA’s proactive policy in its liquidity management, its retail business model, its lower volume of debt redemptions compared to its peers and its relatively small volume of assets give it a comparative advantage against its European competitors. Moreover, the increased proportion of retail deposits on the liability side of the balance sheet in all the geographical areas continues to allow the Group to strengthen its liquidity position and to improve its financing structure.

The Bank’s capital management has a twofold aim: to maintain the levels of capitalization appropriate to the business targets in all the countries in which it operates; and, at the same time, to maximize the return on shareholders’ funds through the efficient allocation of capital to the different units, good management of the balance sheet and proportionate use of the various instruments that comprise the Group’s equity: common stock, preferred shares and subordinated debt.

In the first quarter of the year, BBVA’s Annual General Meeting once more approved the “Dividend Option” program, to offer shareholders a wider range of remuneration on their shares. This mechanism also allows for the accumulation of capital through a higher proportion of retained earnings in the current year.

In addition, March 30 marked the end of the period for voluntary conversion of Mandatory Subordinated Bonds issued in December 2011 as a result of an exchange of the preferred shares held by retail investors. The conversion was taken up by 27.84% of the issue (€3,430m), and as a result 158 million new shares were issued (3.2% of total Group shares). In conclusion, the current levels of capitalization ensure the Bank’s compliance with all of its capital objectives.

Foreign-exchange risk management of BBVA’s long-term investments, basically stemming from its franchises in the Americas, aims to preserve the Group’s capital ratios and ensure the stability of its income statement. In the first quarter of the year, BBVA maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area, with aggregate hedging of close to 50%. In addition to this corporate-level hedging, dollar positions are held at a local level by some of the subsidiary banks. The foreign-exchange risk of the earnings expected in the Americas for 2012 is also strictly managed. In the first quarter, the impact of variations in exchange rates has been neutral on the income statement, and slightly positive on capital ratios.

For 2012 as a whole, the same prudent and proactive policy will be pursued in managing the Group’s foreign-exchange risk from the standpoint of its effect on capital ratios and on the income statement

The unit also actively manages the structural interest-rate exposure on the Group’s balance sheet. This aims to maintain a steady growth in net interest income in the short and medium term, regardless of interest-rate fluctuations.

In the first quarter of 2012, the results of this management have been very satisfactory, with extremely limited risk strategies in Europe, the United States and Mexico. These strategies are managed both with hedging derivatives (caps, floors, swaps, FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings).