Major steps were taken in the second quarter of 2012 to restructure and reform thoroughly the financial sector in Spain:

• On June 9, the Spanish government received a favorable response from the Eurogroup to its request for financial assistance of up to €100 billion to recapitalize the weakest banks. In exchange, a rigorous and credible feasibility plan will be required, above all from the banks receiving the funds, which will be closely supervised at national and international level.
• An independent risk evaluation has been conducted for the Spanish system’s loan portfolio with the aim of certifying the amount of capital required and the sector’s resilience to a substantial additional deterioration of the economic situation. The results have made clear that in a very adverse scenario (even worse than that applied in other stress tests to Ireland, Portugal and Greece), between €51 billion and €62 billion of additional capital would be required. This figure is below the €100 billion mentioned above, and relatively moderate taking into account the size of the Spanish economy (it accounts for 6% of GDP at most).
• At the same time, an individual evaluation of each bank is being carried out by independent auditors, covering the processes of risk admission and monitoring, classification of transactions and provisions by portfolio, as well as an appraisal of the value of collateral and foreclosed assets. This process is expected to be completed by July 31.
• Finally, based on the analysis carried out by the independent auditors, an external consultant will calculate each bank’s capital requirements, using the same scenarios and hypotheses of loss absorption used to evaluate the financial system as a whole. The results of this exercise are expected to be available in the second half of September.

During this restructuring process, the Group has continued to perform positively and sets itself apart from most of its peers in the sector, with a high level of resilience in earnings and stable credit quality, despite the extremely adverse environment for the financial industry. Overall, the Bank is well positioned to face these future challenges for the system, as reflected in the International Monetary Fund’s (IMF) June 2012 report on the situation of the financial system in Spain:

• The BBVA Group “is a large internationally active bank, well-diversified in terms of its geographic footprints and business model”.
• The BBVA Group “appears to be able to cover the February provisioning requirements, particularly leveraging off the relatively high Group-wide pre-provision profits, and is expected to be able to absorb the additional May provisioning requirements on performing loans.”

Thus from the point of view of earnings for the period, the highlights are very similar to the previous quarters:

• A continued positive performance of earnings of a more recurring nature, i.e. of gross income excluding net trading income (NTI) or dividends. Its quarterly amount grew by 2.7% over the last three months. In other income, NTI performed particularly well. It included the results of the securitization bond repurchase offer executed in June, and the Telefónica dividend.
• Also of note is the significant increase in loan-loss provisions aimed at reflecting the impairment of assets related to the Spanish real-estate sector. This impairment amounted to €1,060m. Thus, at the close of the first semester of 2012, the Group has booked provisions for €1,434m, approximately one third of the required amount by Royal Decree Laws 02/2012 and 18/2012.
• In conclusion, the net attributable profit between April and June was €505m, with an accumulated figure to June of €1,510m. Excluding the charge related to the impairment mentioned in the previous paragraph, the adjusted net attributable profit was €2,374m.

In terms of solvency, BBVA continues to comply with the capital recommendations of the European Banking Authority (EBA). It closed the quarter with 9.2% of core capital according to EBA criteria, or 10.8% under Basel II.

In terms of asset quality, the NPA ratio was once more stable. As of June 30, 2012 it remained at 4.0%. The coverage ratio improved to 66% (60% in March 2012) as a result of the higher provisions set aside.

Other significant highlights in the quarter were:

• BBVA has undertaken a process of repurchase of securitization bonds for a nominal amount of €638m, generating capital gains of €250m. This transaction is an additional source of capital for the Bank, and also a way of providing liquidity for bondholders.
• The Group has agreed the sale of the Puerto Rico business to Oriental Financial Group for USD 500m. The closing of this deal is subject to regulatory approval. The limited size of the franchise on the island (where it is the seventh bank by deposits, with a market share of under 6%) limits the possibility of implementing the BBVA business model, which aims for large markets and requires a bigger critical mass.
• BBVA has announced the start of a process of studying alternative strategies for its pension business in Latin America, which it expects to last several quarters. Despite the highly attractive nature of the business, its limited relationship and synergies with the banking business are arguments in favor of starting this review process. However, the Group maintains its strategic commitment with the Latin American market and will continue to invest in the region with the aim of ensuring sustained growth in its banking and insurance activities.
• On July 10, 2012 the Group paid a dividend of €0.10 per share in cash.
• BBVA and the Fundación Universidad Rey Juan Carlos received the SIC 2012 Award for Innovation in recognition of the joint start-up of the Technological Risk Management Research Center. The award was granted by the specialized magazine SIC (Seguridad en Informática y Comunicaciones – Security in IT and Communications).
• BBVA’s new website for shareholders, investors and analysts has won an award as the most improved website over last year at the IR Summit 2012 organized by IR Global Rankings and held and sponsored by Nasdaq at its headquarters in New York.

Finally, the trends by business areas were similar to those commented in previous quarters:

• Spain generated an operating income for the quarter of €1,018m, 7.6% up on the figure for the previous quarter. Net interest income was particularly outstanding, due to positive price management of the area in an environment of falling interest rates. Net fees and commissions and NTI decreased affected by lower banking activity due to the financial deleveraging process underway and the country’s difficult macroeconomic situation. Additionally, operating expenses remained under control. In terms of loan-loss provisions, it is important to note that assets related to the real-estate sector continued to deteriorate on previous quarters. The most notable aspect of activity in the area has been the favorable performance over the quarter of deposits in the retail segment.
• Eurasia continues to make good progress due to the good performance of Garanti and the growing contribution from the stake in China Citic Bank (CNCB). As a result, the net attributable profit for the six months ended June 30, 2012 was €576m, 28.9% up on the same period in 2011.
• Mexico maintains its sustained growth in activity, above all in the retail portfolio. On the lending side, there has been a notable increase in consumer lending and credit cards, and loans to small businesses. On the customer deposits side, low-cost customer funds continued to make steady progress. As a result, customer spread is still improving, as is the net interest income, which rose 8.7% over the last 12 months at constant exchange rates. The insurance business also performed well. Operating expenses maintained its steady pace of year-on-year growth, while the risk premium was stable. As a result of the above, the net attributable profit for the first half of the year was €865m, representing a year-on-year rise of 2.4% at constant exchange rates.
• Activity in South America continues to be strong, maintaining customer spreads and delivering positive performance in the asset quality indicators. This has enabled the area to maintain its expansion and growth plans while posting a year-on-year growth in the accumulated net attributable profit for the half-year of €703m (up 24.8%).
• The most notable aspect in the United States was once more the improvement in asset quality. As a result of this, the accumulated risk premium at the close of the half-year was 0.26% (1.01% a year ago). This improvement offsets the flat performance of the more recurring revenue, which can be explained in part by the environment of very low interest rates with a relatively flat yield curve (which will remain unvaried over the coming quarters), and in part by the regulatory changes that came into force in 2011, which hit the year-on-year comparison of income from fees. As a result, the area closed the six months ended June 30, 2012 with a net attributable profit of €245m, 24.2% up on the same period last year.