January-March 2013

Structural risks

The Assets and Liabilities Management unit in BBVA’s Financial Area is responsible for managing structural interest-rate and foreign-exchange positions, as well as the Group’s overall liquidity.

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 is the financial independence of its subsidiaries abroad. This principle prevents the contagion of a liquidity crisis among the Group’s different areas and guarantees correct transmission of the cost of liquidity to the price formation process.

In the first quarter of 2013, long-term wholesale financial markets in Europe continued to improve in the wake of the measures adopted by the European Central Bank (ECB) at its meeting on September 6 and the progress made in the new European construction. As a result, there has been a significant reduction in risk premiums in peripheral countries during the period. Against this background, BBVA successfully completed three operations on the international markets, two senior debt issuances in Europe for €3,000m, and a 10-year mortgage-covered bond totaling €1,000m, all with a very significant level of demand. This demonstrates once again BBVA’s access to the markets under very successful conditions in terms of price and amount.

Short-term finance in Europe has also performed very well, with significant growth in the amounts gathered. Also worth mentioning is the excellent performance of BBVA’s retail franchise in Spain, which managed to gather deposits above budget expectations, as a result of its focus on customers and the Bank’s financial soundness. As a result of this improvement in liquidity and the good prospects for the future, BBVA has returned a significant part of the LTRO during the first quarter of 2013, using the first available windows to do so.

The environment outside Europe has also been very constructive. BBVA has strengthened its liquidity position in all the jurisdictions in which the Group operates.

To sum up, BBVA’s proactive policy in its liquidity management, the growth in customer funds in all geographical areas, its proven ability to access the market in difficult environments, its retail business model, its lower volume of debt redemptions compared with its peers and the relatively small size of its balance sheet, all give it a comparative advantage against its European peers. Moreover, the increased proportion of retail deposits on the liability side of the balance sheet in all geographical areas continues to strengthen the Group’s liquidity position and to improve its financing structure.

Foreign-exchange risk management of BBVA’s long-term investments, basically stemming from its franchises abroad, aims to preserve the Group’s capital adequacy ratios and ensure the stability of its income statement.

In the first quarter of 2013, BBVA maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area, close to 50% in aggregate terms. 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 abroad for 2013 is also strictly managed. The impact of variations in exchange rates (net of hedging) has been positive in the first quarter of 2013, both on the income statement and on capital adequacy ratios. The devaluation in Venezuela in February has had a practically neutral impact on the core capital ratio. For 2013, 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 quarter of 2013, the results of this management have been very satisfactory, with limited risk strategies in Europe, the United States and Mexico. These strategies are managed both with hedging derivatives (caps, floors, swaps and FRAs) and with balance-sheet instruments (government bonds with the highest credit and liquidity ratings).