The main highlights for the BBVA Group in the first quarter of 2012 are as follows:
- High quality of earnings in the period.
- Organic capital generation that enabled the 9% of core capital to be attained under the European Bank Authority (EBA) criteria and allows the Group to comply its recommendations in advance.
- Positive news in the Group’s liquidity management.
- Stability of the asset quality indicators.
In terms of earnings, the main points to highlight over the quarter are as follows:
- Strength of the earnings of a more recurring nature (net interest income and fees), which grew at a faster rate than operating expenses in the first quarter.
- Other revenue performed well. Equity-accounted income reflects the favorable contribution of China Citic Bank (CNCB), net trading income (NTI) performed better than in the previous two quarters, and the insurance business maintained its positive performance.
- Stabilization of costs compared to the previous quarter, since the greatest investment effort was carried out in previous periods. The efficiency ratio closed March at 47.5% (48.4% as of December 2011).
- To sum up, generation of high quality net attributable profit thanks to recurring earnings, which totaled €1,005m. This figure is very much in line with the quarterly average of earnings excluding one-offs over 2011.
In terms of solvency, the organic generation of earnings over the first three months of 2012 has enabled the EBA capital recommendations to be attained prior to their June 30, 2012 deadline. BBVA closed the quarter with 9% of core capital according to EBA criteria, 10.7% under Basel II. It should be noted that the Group was able to comply with this recommendation without having to sell any strategic assets, without having to resort to public aid and, finally, without modifying shareholder remuneration.
The liquidity position also improved in the period and in the financing structure of the euro balance sheet. With regards to the first, BBVA reopened the markets with its successful issue of €2,000m of 18 months senior debt. Its high demand (1.5 times the amount issued) allowed for a reduction in its price. The high number of buyers (approximately 260, of which 80% were not Spanish) shows the international investment community’s confidence in BBVA. In the second case, the European Central Bank (ECB) 3 year liquidity auction has enabled the swap of collateralized financing instruments from short term to long term.
In terms of asset quality, the stability of the main risk indicators was especially noteworthy: risk premium at 1.22% (versus 1.20% in 2011), NPA ratio at 4.0% (same level as at the end of 2011 and 4.1% as of March 2011) and coverage ratio at 60% (61% in both December and March 2011). Another relevant topic in the quarter was the implementation, on February 3, 2012, of Royal Decree-Act 02/2012 whose aim is to successfully restructure the Spanish financial system, reactivate the real estate industry and the credit supply and, as a result, increase confidence and access to the capital markets of the country’s banking sector. The primary measures of the Royal Decree-Act are focused on increasing banks’ provisions and capital requirements in proportion to the real estate assets owned by each financial entity, and on making available mechanisms to support the sector’s consolidation process that is already underway. Specifically for BBVA, the estimated additional need for loan-loss provisions net of taxes would total €1.5bn, should the price decline forecasted in the Royal Decree-Act materialize.
Furthermore, Unnim Banc (Unnim) was acquired at the auction managed by the Ordered Banking Restructuring Fund (FROB). Unnim is the result of the merger of three Catalan savings banks, or cajas, (Manlleu, Sabadell and Terrassa), which operate primarily in Catalonia, one of the most economically prosperous and dynamic autonomous communities of Spain. The transaction, where risk is ring-fenced, will allow BBVA to progress strongly into this region and attain a market share that is more in line with its average market share throughout the country. The effects of the integration should be visible throughout the second half of 2012.
Other topics worth highlighting include:
- The Group launched a new website for shareholders and investors, which has resulted in an improvement in transparency, a substantial increase in financial information and improved accessibility and user friendliness.
- BBVA was awarded for its technological advances in 2011 by AFSM, the International Association made up of directors of Technology Services from various companies and institutions.
Finally, the most important aspects of the business areas can be summarized as follows:
- Spain continues to be immersed in a process of financial deleveraging as a result of the country’s current situation. In this context, and with falling interest rates, there was positive price management. The latter is the result of the ECB liquidity auction and the ongoing consolidation of the financial system. In summary, the liquidity gap and the customer spread in the area improved, resulting in a positive impact on the evolution of net interest income. Other revenue decreased due to the increased contribution to the Deposit Guarantee Fund (DGF). Costs remain closely in check and impairment losses on financial assets went up due to the impact of the deterioration of the economy. Despite the above, the area continues to generate earnings: €229m in the first quarter of 2012.
- Eurasia progressed favorably thanks to the growing contribution of the stake in CNCB and the strong performance of Garanti, which as of December 2011, became the leading Turkish bank in terms of earnings and profitability. As a result, profits posted between January and March 2012 rose to €299m, 51.7% higher than in the previous year.
- Mexico maintained its sound earnings from recent quarters. This positive performance is based on increased business, primarily from the retail portfolio and, specifically, from those segments with greater loyalty. Moreover, customer funds are focused on lower-cost products, putting price before volume. This allows for an increase in the customer spread and, therefore, the net interest income, which rose 9.4% over the last year at constant exchange rates. Positive evolution of other revenue, containment in the year-on-year growth of operating expenses and stability of the risk premium. As a result of the above, the net attributable profit for the area for the first part of the year was €430m, representing a year-on-year rise of 3.6% at constant exchange rates.
- South America continues to increase its earnings and is again the area with the greatest growth. This trend is the result of the dynamic activity, excellent price management, improved credit quality indicators and the positive performance of the pension and insurance businesses in the region. This, which is widespread in all the countries, enables the Group to continue attributable profit of €370m in the quarter for a year-on-year increase of 27.1%.
- In the United States, there was again growth in the target portfolios and, therefore, a new improvement in the loan-book mix. In terms of customer funds, those of lower-cost performed well. Additionally, excellent price management in a context of very low interest rates with a flatter curve, together with the sound evolution of fees, despite the legal restrictions that took effect in 2011 and their negative impact on the year-on-year comparison. This was combined with the cost control and the significant improvement in asset quality, which substantially reduce the risk premium. As a result, in the first three months of 2012, the United States generated a net attributable profit of €115m, 15.6% up on the same figure for the previous year.