January - September 2012

Asset/Liability Management

The Assets and Liabilities Management unit is responsible for 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 recurring 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 third quarter of 2012, long-term wholesale financial markets in Europe were once more affected by the extreme volatility of the sovereign risk premium, although there was a significant improvement in September. The measures adopted by the ECB at its meeting on September 6 have led to a significant reduction in risk premiums in Europe and thus the opening of the medium-term financial markets. In this environment, BBVA has successfully completed several senior debt deals with a very significant demand, demonstrating its access to the market at very successful conditions in terms of price and amount.

Short-term finance in Europe has also performed very well, with great stability in the amounts gathered.

The environment outside Europe has also been very constructive. BBVA has successfully completed issues in Mexico and Peru, among other markets. This situation of greater international stability has also enabled the Group to strengthen its retail liquidity position thanks to its customer-centric approach.

To sum up, BBVA’s proactive policy in its liquidity management, its proven ability to access the market in difficult environments, 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 strengthen the Group’s liquidity position and to improve its financing structure.

The Bank’s capital management has a twofold aim: to maintain levels of capitalization appropriate to the business targets in all the countries in which it operates and, at the same time, to maximize return on shareholders’ funds through the efficient allocation of capital to the various 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 July this year BBVA paid in cash the first interim dividend against 2012 earnings, for an amount of €0.10 per share. In September it once again announced payment of its traditional second dividend through the remuneration scheme known as the “Dividend Option”, which offers shareholders a wider range of remuneration alternatives for their shares. This mechanism also allows the Group to accumulate capital through a higher proportion of retained earnings in the current year.

In addition, the acquisition of Unnim was completed in the third quarter of 2012. The deal consumed around 10 basis points of core capital. There was also the announcement of a tender offer to repurchase 15 issues of preferred securities and subordinated bonds distributed through Unnim’s retail network (T1, UT2 and LT2) at 95% of their nominal value for €490m, in exchange for the Bank’s treasury shares. Thus, BBVA offers a solution to Unnim customers and provides them with liquidity and profitability (some of these instruments paid no coupon). In addition, the deal protects the interests of BBVA shareholders, since this exchange is not dilutive, and it will have a positive impact on the Group’s generation of core capital in the fourth quarter of 2012. Thus, the Unnim acquisition will be practically neutral in terms of capital consumption.

In the third quarter, BBVA Bancomer issued USD 1.5 billion in subordinated debt, thus strengthening the Group’s Tier II capital.

In conclusion, the current solvency levels enable the Bank to fulfill all of its capital objectives. Also of note is the analysis conducted by Oliver Wyman, which confirmed BBVA’s sound capital position that places it in Group 0 (banks with no capital requirements). The Group estimates that under the new Basel III regulations it will reach a fully-loaded core ratio of over 9% at the end of 2013, taking into account organic generation and other capital accumulation operations already announced.

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 adequacy ratios and ensure the stability of its income statement.

In the third 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 third quarter, the impact of variations in exchange rates has been positive, both on the income statement and on capital adequacy 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 adequacy 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 nine months 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).