Risk management

Credit risk

BBVA Group's risk metrics have continued to perform positively throughout the year:

  • Credit risk remained flat in the last quarter, with a cumulative decline of 4.0% since the end of 2016 (up 2.0% both in the quarter and over the year at constant exchange rates). The deleveraging process continued in Spain. At constant exchange rates in year-on-year terms, Turkey and Mexico grew by 4.3% and 6.9% respectively, South America 9.5% (Argentina by 67.9%, Chile and Colombia around 10%) and the United States remained practically stable (up 0.4%).
  • Non-performing loans maintained their downward trend, falling by 2.1% over the quarter and 13.2% relative to December 2016. At constant exchange rates, the figures were down 0.8% over the quarter and down 10.5% in annual terms. Good performance in Spain and the United States and increases mainly in Turkey and South America, due to the deterioration of some wholesale customers.
  • The Group’s NPL ratio improved again (down 9 basis points over the last three months and 47 basis points compared with the close of 2016) to 4.4% as of 31-Dec-2017, driven by the decline in non-performing loans.
  • Provisions also declined, both in the last three months and over the year (down 11.5% and 19.6%, respectively). At constant exchange rates, the rates of variation were down 9.2% and 15.2% since September 2017 and December 2016, respectively.
  • As a result, the NPL coverage ratio closed at 65%.
  • Finally, the cumulative cost of risk as of December 2017 was 0.87%, showing stable progress in 2017 and closing three basis points above the cumulative figure for 2016 (0.84%).

Non-performing loans (Million euros)

Credit risks (1) (Million euros)

31-12-17(2) 30-09-17 30-06-17 31-03-17 31-12-16
Non-performing loans and contingent liabilities 20,492 20,932 22,422 23,236 23,595
Credit risks 461,303 461,794 471,548 480,517 480,720
Provisions 13,319 15,042 15,878 16,385 16,573
NPL ratio (%) 4.4 4.5 4.8 4.8 4.9
NPL coverage ratio (%) 65 72 71 71 70
  • (1) Include gross loans and advances to customers plus guarantees given.
  • (2) Figures without considering the reclassification of non-current assets held for sale​.

Non-performing loans evolution (Million euros)

4Q 17(1) 3Q 17 2Q 17 1Q 17 4Q 16
Beginning balance 20,932 22,422 23,236 23,595 24,253
Additions 3,757 2,268 2,525 2,490 3,000
Recoveries (2,142) (2,001) (1,930) (1,698) (2,141)
Net variation 1,616 267 595 792 859
Write-offs (1,980) (1,575) (1,070) (1,132) (1,403)
Exchange rate differences and other (75) (181) (340) (18) (115)
Period-end balance 20,492 20,932 22,422 23,236 23,595
Memorandum item:
Non-performing loans 19,753 20,222 21,730 22,572 22,915
Non-performing contingent liabilities 739 710 691 664 680
  • (1) Figures without considering the reclassification of non-current assets held for sale​. Temporary data.

Structural risks

Liquidity and funding

Management of liquidity and funding in BBVA aims 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, always in compliance with current regulatory requirements.

A core principle in BBVA's management of the Group's liquidity and funding is the financial independence of its banking subsidiaries abroad. This principle prevents the propagation of a liquidity crisis among the Group's different areas and ensures that the cost of liquidity is correctly reflected in the price formation process.

In 2017 liquidity and funding conditions remained comfortable across BBVA Group's global footprint:

  • The financial soundness of the Group's banks continues to be based on the funding of lending activity, fundamentally through the use of stable customer funds.
  • In the Eurozone, the liquidity situation is comfortable and the credit gap has narrowed on the balance sheet thanks to the positive behavior of customer liabilities.
  • In Mexico, the liquidity position is sound, despite market volatility. Deposits have shown a very positive trend over the year, leading to a considerable narrowing of the credit gap.
  • In the United States, the credit gap has widened because of the area's deliberate strategy to control the cost of deposits. It is worth noting that in the first quarter of 2017 Standard & Poors (S&P) upgraded its outlook for BBVA Compass’ rating (BBB+) from negative to stable.
  • The liquidity situation in Turkey is comfortable, boosted by a maintenance of good market conditions, with a slight increase in the credit gap as a result of the growth of lending spurred by the government's Credit Guarantee Fund (CGF) program.
  • In South America, the liquidity situation remains comfortable, allowing a reduction of the growth of wholesale deposits to match growth in lending activity.
  • In the fourth quarter of 2017, BBVA S.A. carried out an issuance of additional Tier 1 in the American market for USD 1 billion, with the prospectus registered with the SEC. In total, BBVA S.A. issued €7.1 billion in 2017, of which €5.8 billion were on the wholesale funding markets, using the formats of senior debt (€2.5 billion), Tier 2 (‎€1 billion), senior non-preferred (€1.5 billion) and Tier 1 (USD 1 billion). It also closed a number of private issuance transactions of senior non-preferred securities for a total of €290m, Tier 2 securities for about €500m and additional Tier 1 for €500m.
  • The long-term wholesale funding markets have remained stable in the other geographical areas where the Group operates.
  • In Mexico, BBVA Bancomer has carried out two local senior debt issuances for a total of MXN 7 billion, with maturities of three and five years.
  • In the United States, BBVA Compass returned to the markets in the second quarter with a five-year senior debt issue of USD 750m.
  • In Turkey, Garanti's securities issuances have continued to strengthen its balance-sheet structure over the whole year. Worth noting are the following issuances: senior debt of USD 500m, subordinated debt of USD 750m, collateralized bonds for a total of 1,680m liras, securitizations for USD 685m, and renewal of syndicated loans with a new two-year tranche.
  • In South America, BBVA Chile has also made a number of senior debt issuances with maturities ranging from four to ten years on the local market for an equivalent of €505m. BBVA Continental in Peru has also issued €182m on the local market through a number of issues with a maturity of three years; and in Argentina, BBVA Francés has issued a total of €49m in two-year and three-year bonds, as well as making a capital increase of €400m.
  • Short-term funding has continued to perform positively, in a context marked by a high level of liquidity.
  • BBVA Group's liquidity coverage ratio (LCR) has remained comfortably above 100% throughout 2017, without including liquidity transfers between subsidiaries; in other words, no kind of excess liquidity levels in the subsidiaries abroad is considered in the calculation of the consolidated ratio. As of 31 December 2017, the LCR stood at 128%. Although this requirement is only established at Group level, the minimum level is easily exceeded in all the subsidiaries (Eurozone, 151%; Mexico, 148%; Turkey, 134%; and the United States, 144%1).
    • (1) Compass LCR calculated according to local regulation (Fed Modified LCR).

    Foreign exchange

    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.

    The year 2017 was notable for the depreciation against the euro of the main currencies in which the Group operates: the U.S. dollar down 12.1%, the Mexican peso down 8.0% and the Turkish lira down 18.5%. In this context, BBVA has maintained its policy of actively hedging its main investments in emerging countries, covering on average between 30% and 50% of earnings expected for the fiscal year and around 70% of the excess CET1 capital ratio (which is not naturally covered by the ratio itself). In accordance with this policy, the sensitivity of the CET1 ratio to a depreciation of 10% of the main emerging currencies (Mexican peso or Turkish lira) against the euro remains at around one negative basis point for each of these currencies, and the coverage level of the expected earnings for 2018 in these two countries is around 50% in Mexico and 40% in Turkey.

    Interest rates

    The aim of managing interest-rate risk is to maintain a sustained growth of net interest income in the short and medium term, irrespective of interest-rate fluctuations, while controlling the impact on the capital adequacy ratio through the valuation of the portfolio of available-for-sale assets.

    The Group's banks have fixed-income portfolios to manage the balance-sheet structure. In 2017, the results of this management have been satisfactory, with limited risk strategies in all the Group's banks.

    Finally, the following is worth noting with respect to the monetary policy pursued by the different central banks of the main geographical areas where BBVA operates:

    • No relevant changes in the Eurozone, where rates remain at 0% and the deposit facility rate at -0.40%.
    • In the United States the upward trend in interest rates continues, with three hikes in 2017 to 1.50%.
    • In Mexico, Banxico made five interest-rate hikes during the year, leaving the monetary policy level at 7.25%.
    • In Turkey, the period has been marked by the Central Bank's (CBRT's) interest-rate hikes, which have increased the average funding rate to 12.75%.
    • In South America, the monetary authorities have continued their expansive policies, lowering rates in Peru (100 basis points), Colombia (275 basis points) and Chile (100 basis points). In Argentina, where inflation has resisted falling, there has been an increase of 400 basis points in the interest rate.

    Economic capital

    Consumption of economic risk capital (ERC) at the close of December 2017 stood at €34,401m in consolidated terms, which is equivalent to a decline of 1.7% with respect to the September figure. At constant exchange rates, the variation was up 1.1%, located in: credit risk, due to an increase in activity (higher activity in Turkey and South America); trading risk; focused in Spain and Mexico; and operational risk, due to the annual update of the model. This was partially offset by a fall in the equity investment valuation , due to the decline in Telefónica’s stock price; structural risk, explained by the increased hedges on the Turkish lira and Mexican peso; fixed assets ; and rate interest, especially focused in Mexico.

    Attributable economic risk capital breakdown
    (Percentage as of December 2017)