UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

[  ]        REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

[  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

OR

[  ]        SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 1-10110

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

Kingdom of Spain

(Jurisdiction of incorporation or organization)

Calle Azul, 4

28050 Madrid

Spain

(Address of principal executive offices)

Ricardo Gómez Barredo

Calle Azul, 4

28050 Madrid

Spain

Telephone number +34 91 537 7000

Fax number +34 91 537 6766

(Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of Each Class	Name of Each Exchange on which Registered
American Depositary Shares, each representing the right to receive one ordinary share, par value €0.49 per share	New York Stock Exchange
Ordinary shares, par value €0.49 per share	New York Stock Exchange*
3.000% Fixed Rate Senior Notes due 2020	New York Stock Exchange

*         The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Title of Each Class	Name of Each Exchange on which Registered
Non-Step Non-Cumulative Contingent Convertible Perpetual Preferred Tier 1 Securities	Irish Stock Exchange

The number of outstanding shares of each class of stock of the Registrant as of December 31, 2017, was:

Ordinary shares, par value €0.49 per share—6,667,886,580

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X]  No [  ] 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes [  ]  No [X] 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]  No [  ] 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]  No [  ] 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer [X]  Accelerated filer [  ]  Non-accelerated filer [  ]  Emerging growth company [  ] 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP [  ]  International Financial Reporting Standards as Issued by the International Accounting Standards Board [X]  Other [  ] 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 [  ]  Item 18 [  ] 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]  No [X] 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

		PAGE
PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	4
A.	Directors and Senior Management	4
B.	Advisers	4
C.	Auditors	4
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4
ITEM 3.	KEY INFORMATION	5
A.	Selected Consolidated Financial Data	5
B.	Capitalization and Indebtedness	8
C.	Reasons for the Offer and Use of Proceeds	8
D.	Risk Factors	8
ITEM 4.	INFORMATION ON THE COMPANY	33
A.	History and Development of the Company	33
B.	Business Overview	35
C.	Organizational Structure	67
D.	Property, Plants and Equipment	67
E.	Selected Statistical Information	68
F.	Competition	90
G.	Cybersecurity and Fraud Management	93
ITEM 4A.	UNRESOLVED STAFF COMMENTS	93
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	93
A.	Operating Results	98
B.	Liquidity and Capital Resources	146
C.	Research and Development, Patents and Licenses, etc.	151
D.	Trend Information	151
E.	Off-Balance Sheet Arrangements	153
F.	Tabular Disclosure of Contractual Obligations	154
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	155
A.	Directors and Senior Management	155
B.	Compensation	162
C.	Board Practices	171
D.	Employees	178
E.	Share Ownership	181
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	182
A.	Major Shareholders	182
B.	Related Party Transactions	183
C.	Interests of Experts and Counsel	184
ITEM 8.	FINANCIAL INFORMATION	184
A.	Consolidated Statements and Other Financial Information	184
B.	Significant Changes	186
ITEM 9.	THE OFFER AND LISTING	186
A.	Offer and Listing Details	186
B.	Plan of Distribution	193
C.	Markets	193
D.	Selling Shareholders	193
E.	Dilution	193
F.	Expenses of the Issue	193
ITEM 10.	ADDITIONAL INFORMATION	193
A.	Share Capital	193
B.	Memorandum and Articles of Association	193
C.	Material Contracts	196
D.	Exchange Controls	199
E.	Taxation	200
F.	Dividends and Paying Agents	205
G.	Statement by Experts	205
H.	Documents on Display	205
I.	Subsidiary Information	205
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	206
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	214
A.	Debt Securities	214
B.	Warrants and Rights	214
C.	Other Securities	214
D.	American Depositary Shares	214
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	215
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	215
ITEM 15.	CONTROLS AND PROCEDURES	215
ITEM 16.	[RESERVED]	217
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	217
ITEM 16B.	CODE OF ETHICS	218
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	218
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	219
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	219
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	220
ITEM 16G.	CORPORATE GOVERNANCE	220
ITEM 16H.	MINE SAFETY DISCLOSURE	222
PART III
ITEM 17.	FINANCIAL STATEMENTS	222
ITEM 18.	FINANCIAL STATEMENTS	222
ITEM 19.	EXHIBITS	222

CERTAIN TERMS AND CONVENTIONS

The terms below are used as follows throughout this report:

·“BBVA”, the “Bank”, the “Company”, the “Group”, the “BBVA Group” or first person personal pronouns, such as “we”, “us”, or “our”, mean Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires. 

·“BBVA Bancomer” means Grupo Financiero BBVA Bancomer, S.A. de C.V. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

·“BBVA Compass” means BBVA Compass Bancshares, Inc. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

·“Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015 prepared in accordance with the International Financial Reporting Standards adopted by the European Union (“EU-IFRS”) required to be applied under the Bank of Spain’s Circular 4/2004 (as defined herein) and in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).  

·“Garanti” means Türkiye Garanti Bankası A.Ş., and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

·“Latin America” refers to Mexico and the countries in which we operate in South America and Central America.

In this report, “$”, “U.S. dollars”, and “dollars” refer to United States Dollars and “€” and “euro” refer to Euro.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include words such as “believe”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and similar expressions or variations on such expressions and includes statements regarding future growth rates. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information in this Annual Report, including, without limitation, the information under the items listed below, identifies important factors that could cause such differences:

·“Item 3. Key Information—Risk Factors”;

·“Item 4. Information on the Company”;

·“Item 5. Operating and Financial Review and Prospects”; and

·“Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

Other important factors that could cause actual results to differ materially from those in forward-looking statements include, among others:

·political, economic and business conditions in Spain, the European Union (“EU”), Latin America, Turkey, the United States and other regions, countries or territories in which we operate;

1

·changes in applicable laws and regulations, including increased capital and provision requirements and taxation, and steps taken towards achieving an EU fiscal and banking union;

·the monetary, interest rate and other policies of central banks in the EU, Spain, the United States, Mexico, Turkey and elsewhere;

·changes or volatility in interest rates, foreign exchange rates (including the euro to U.S. dollar exchange rate), asset prices, equity markets, commodity prices, inflation or deflation;

·market adjustments in the real estate sectors in Spain, Mexico and the United States;

·the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation;

·changes in consumer spending and savings habits, including changes in government policies which may influence spending, saving and investment decisions;

·adverse developments in emerging countries, in particular Latin America and Turkey, including unfavorable political and economic developments, social instability and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policies;

·our ability to hedge certain risks economically;

·downgrades in our credit ratings or in the Kingdom of Spain’s credit ratings;

·the success of our acquisitions, divestitures, mergers and strategic alliances;

·our ability to make payments on certain substantial unfunded amounts relating to commitments with personnel;

·the performance of our international operations and our ability to manage such operations;

·weaknesses or failures in our Group’s internal or outsourced processes, systems (including information technology systems) and security;

·our success in managing the risks involved in the foregoing, which depends, among other things, on our ability to anticipate events that are not captured by the statistical models we use; and

·force majeure and other events beyond our control.

Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

2

PRESENTATION OF FINANCIAL INFORMATION

Accounting Principles

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with EU-IFRS. The Bank of Spain issued Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (as amended or supplemented from time to time, “Circular 4/2004”), which requires Spanish credit institutions to adapt their accounting system to the principles derived from the adoption by the European Union of EU-IFRS.

Differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB are not material for the years ended December 31, 2017, 2016 and 2015. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and are in compliance with IFRS-IASB.

The financial information as of and for the years ended December 31, 2015, 2014 and 2013 may differ from previously reported financial information as of such dates and for such periods in our respective annual reports on Form 20-F for certain prior years, as a result mainly of the retrospective revisions referred to below (see “―Retrospective Revisions”). 

Retrospective Revisions

New presentation models required by Circular 5/2015 of the CNMV

Our consolidated financial statements for the year ended December 31, 2017 and 2016 were prepared in accordance with the presentation models required by Circular 5/2015 of the National Securities Market Commission or “CNMV” (Comisión Nacional del Mercado de Valores). This Circular seeks to adapt the content of the financial information published by credit institutions and the format in which financial statements are presented to the mandatory regulation adopted by the European Union for credit institutions.

The information relating to the year ended December 31, 2015 was restated in accordance with the presentation models referred to above. The presentation of our consolidated financial statements in accordance with these models has had no significant impact on the financial statements for the year ended December 31, 2015 included in the Consolidated Financial Statements.

Reclassifications of certain operating expenses

In the fourth quarter of 2015, we reclassified several operating expenses related to technology from our Corporate Center to our Banking Activity in Spain segment. This reclassification was the result of the reassignment of technology-related management resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015.

Business combinations

Certain financial information for the year ended December 31, 2015 has been restated, with no significant impact, as a result of the end in 2016 of the purchase accounting period relating to the stake in Garanti acquired in 2015, as required by IFRS 3 “Business Combinations” (see Note 18 to the Consolidated Financial Statements).

Statistical and Financial Information

The following principles should be noted in reviewing the statistical and financial information contained herein:

·Average balances, when used, are based on the beginning and the month-end balances during each year. We do not believe that such monthly averages present trends that are materially different from those that would be presented by daily averages.

3

·Unless otherwise stated, any reference to loans refers to both loans and advances.

·Financial information with respect to segments or subsidiaries may not reflect consolidation adjustments.

·Certain numerical information in this Annual Report may not compute due to rounding. In addition, information regarding period-to-period changes is based on numbers which have not been rounded.

Venezuela

The local financial statements of the Group subsidiaries in Venezuela are expressed in Venezuelan bolivar and are converted into euros for purposes of preparing the Group’s consolidated financial statements. Venezuela has strict foreign exchange restrictions and different exchange rates in place.

In past years, we have used different exchange rates to prepare the Group’s consolidated financial statements:

·Since December 31, 2015, the Board of Directors considers that the use of the Venezuelan official exchanges rates for converting bolivars into euros in preparing the Group’s consolidated financial statements does not reflect the true picture of the financial statements of the Group and the financial position of the Group’s subsidiaries in Venezuela.

·Consequently, as of December 31, 2017, 2016 and 2015, the Group has used foreign exchange rates of 18,181, 1,893 and 469 Venezuelan bolivars per euro, respectively in the conversion of the financial statements of the Group’s subsidiaries in Venezuela. These exchanges rates have been calculated taking into account the estimated evolution of inflation in Venezuela, which in the absence of published official  data has been estimated to be 800%, 300% and 170%, as of December 31, 2017, 2016 and 2015, respectively (see Note 2.2.20 to the Consolidated Financial Statements). These inflation rates have been calculated based on the best estimates of the Group, in light of available information and sectorial considerations that affect the Group’s subsidiaries in Venezuela.

PART I

ITEM 1.       IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A.Director and Senior Management

Not Applicable.

B.Advisers 

Not Applicable.

C.Auditors 

Not Applicable.

ITEM 2.       OFFER STATISTICS AND EXPECTED TIMETABLE

       Not Applicable.

4

ITEM 3. KEY INFORMATION

A.Selected Consolidated Financial Data

The historical financial information set forth below for the years ended December 31, 2017, 2016 and 2015 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited consolidated financial statements for 2014 and 2013 are not included in this document, and the historical financial information set forth below for such years instead are derived from the respective financial statements included in annual reports on Form 20-F for certain prior years previously filed by us with retrospective adjustments made for the application of certain changes in accounting principles.

For information concerning the preparation and presentation of the financial information contained herein, see “Presentation of Financial Information”.

	Year Ended December 31,
	2017	2016	2015	2014	2013 (1)
	(In Millions of Euros, Except Per Share/ADS Data (In Euros))
Consolidated Statement of Income Data
Interest and similar income	29,296	27,708	24,783	22,838	23,512
Interest and similar expenses	(11,537)	(10,648)	(8,761)	(8,456)	(9,612)
Net interest income	17,758	17,059	16,022	14,382	13,900
Dividend income	334	467	415	531	235
Share of profit or loss of entities accounted for using the equity method	4	25	174	343	694
Fee and commission income	7,150	6,804	6,340	5,530	5,478
Fee and commission expenses	(2,229)	(2,086)	(1,729)	(1,356)	(1,228)
Net gains(losses) on financial assets and liabilities(2)	938	1,661	865	1,435	1,608
Exchange differences, net	1,030	472	1,165	699	903
Other operating income	1,439	1,272	1,315	959	1,234
Other operating expenses	(2,223)	(2,128)	(2,285)	(2,705)	(3,002)
Income on insurance and reinsurance contracts	3,342	3,652	3,678	3,622	3,761
Expenses on insurance and reinsurance contracts	(2,272)	(2,545)	(2,599)	(2,714)	(2,831)
Gross income	25,270	24,653	23,362	20,725	20,752
Administration costs	(11,112)	(11,366)	(10,836)	(9,414)	(9,701)
Depreciation and amortization	(1,387)	(1,426)	(1,272)	(1,145)	(1,095)
Provisions or reversal of provisions	(745)	(1,186)	(731)	(1,142)	(609)
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss	(4,803)	(3,801)	(4,272)	(4,340)	(5,612)
Net operating income	7,222	6,874	6,251	4,684	3,735
Impairment or reversal of impairment on non-financial assets	(364)	(521)	(273)	(297)	(467)
Gains (losses) on derecognition of non-financial assets and subsidiaries, net	47	70	(2,135)	46	(1,915)
Negative goodwill recognized in profit or loss	-	-	26	-	-
Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	26	(31)	734	(453)	(399)
Operating profit before tax	6,931	6,392	4,603	3,980	954
Tax (expense) or income related to profit or loss from continuing operations	(2,169)	(1,699)	(1,274)	(898)	16
Profit from continuing operations	4,762	4,693	3,328	3,082	970
Profit from discontinued operations, net (3)	-	-	-	-	1,866
Profit	4,762	4,693	3,328	3,082	2,836
Profit attributable to parent company	3,519	3,475	2,642	2,618	2,084
Profit attributable to non-controlling interests	1,243	1,218	686	464	753
Per share/ADS(4) Data
Profit from continuing operations	0.71	0.71	0.52	0.50	0.17
Diluted profit attributable to parent company (5)	0.48	0.49	0.37	0.40	0.33
Basic profit attributable to parent company	0.48	0.49	0.37	0.40	0.33
Dividends declared (In Euros)	0.170	0.160	0.160	0.080	0.100
Dividends declared (In U.S. dollars)	0.204	0.169	0.174	0.097	0.138
Number of shares outstanding (at period end)	6,667,886,580	6,566,615,242	6,366,680,118	6,171,338,995	5,785,954,443

5

⁽¹⁾Restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).

⁽²⁾Comprises the following income statement line items contained in the Consolidated Financial Statements: “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities held for trading, net” and “Gains (losses) from hedge accounting, net”.

⁽³⁾For 2013, includes the capital gains from the sale of Afore Bancomer in Mexico and the South America pension fund administrators, as well as the earnings recorded by these companies up to the date of these sales.

⁽⁴⁾Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.

⁽⁵⁾Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period including the average number of estimated shares to be converted and, for comparative purposes, a correction factor to account for the capital increases carried out in April 2013, October 2013, April 2014, October 2014, December 2014, April 2015, October 2015, December 2015, April 2016, October 2016 and April 2017, excluding the weighted average number of treasury shares during the period (6,642 million, 6,468 million, 6,290 million, 5,905 million and 5,597 million shares in 2017, 2016, 2015, 2014 and 2013, respectively). With respect to the years ended December 31, 2017, 2016 and 2015, see Note 5 to the Consolidated Financial Statements.

	As of and for Year Ended December 31,
	2017	2016	2015	2014	2013 (1)
	(In Millions of Euros, Except  Percentages)
Consolidated Balance Sheet Data
Total assets	690,059	731,856	749,855	631,942	582,697
Net assets	53,323	55,428	55,282	51,609	44,565
Capital	3,267	3,218	3,120	3,024	2,835
Loans and receivables	431,521	465,977	471,828	376,086	350,945
Customer deposits	376,379	401,465	403,362	319,334	300,490
Debt certificates	63,915	76,375	81,980	71,917	74,676
Non-controlling interest	6,979	8,064	7,992	2,511	2,371
Total equity	53,323	55,428	55,282	51,609	44,565
Consolidated ratios
Profitability ratios:
Net interest margin(2)	2.52%	2.32%	2.27%	2.40%	2.32%
Return on average total assets(3)	0.7%	0.6%	0.5%	0.5%	0.5%
Return on average shareholders' funds(4)	6.4%	6.7%	5.3%	5.6%	5.0%
Credit quality data
Loan loss reserve (5)	12,784	16,016	18,742	14,273	14,990
Loan loss reserve as a percentage of loans and receivables, net	2.96%	3.44%	3.97%	3.83%	4.27%
Non-performing asset ratio (NPA ratio) (6)	4.49%	4.90%	5.37%	5.98%	6.95%
Impaired loans and advances to customers	19,390	22,915	25,333	22,703	25,445
Impaired contingent liabilities to customers (7)	739	680	664	413	410
	20,129	23,595	25,997	23,116	25,855
Loans and advances to customers (8)	401,074	430,629	432,921	353,029	338,664
Contingent liabilities to customers	47,671	50,540	49,876	33,741	33,543
	448,745	481,169	482,797	386,770	372,207

⁽¹⁾Information has been restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).

⁽²⁾Represents net interest income as a percentage of average total assets.

6

⁽³⁾Represents profit as a percentage of average total assets.

⁽⁴⁾Represents profit attributable to parent company for the year as a percentage of average shareholders’ funds for the year, excluding “Non-controlling interest”.

⁽⁵⁾Represents impairment losses on loans and receivables to credit institutions and loans and advances to customers. See Note 13 to the Consolidated Financial Statements.

⁽⁶⁾Represents the sum of impaired loans and advances to customers and impaired contingent liabilities to customers divided by the sum of loans and advances to customers and contingent liabilities to customers.

⁽⁷⁾We include contingent liabilities in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired contingent liabilities should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with contingent liabilities (consisting mainly of financial guarantees provided to third-parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If impaired contingent liabilities were not included in the calculation of our NPA ratio, such ratio would generally be higher for the periods covered, amounting to approximately 4.8%,5.3%,5.9%, 6.4% and 7.5% as of December 31, 2017, 2016, 2015, 2014 and 2013, respectively.

⁽⁸⁾Includes impaired loans.

Exchange Rates

Spain’s currency is the euro. Except as indicated below with respect to the consolidated income statement or unless otherwise indicated, the amounts that have been converted to euro in this Annual Report have been done so at the corresponding exchange rate published by the European Central Bank (“ECB”) on December 31 of the relevant period. Income statement items have been converted at the average exchange rates for the period.

For convenience in the analysis of the information, the following tables describe, for the periods and dates indicated, information concerning the noon buying rate for euro, expressed in U.S. dollars per €1.00. The term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.

Year Ended December 31,	Average (1)
2013	1.3303
2014	1.3210
2015	1.1032
2016	1.1029
2017	1.1396
2018 (through March 30, 2018)	1.2290

⁽¹⁾Calculated by using the average of the exchange rates on the last day of each month during the period.

Month Ended	High	Low
September 30, 2017	1.2041	1.1747
October 31, 2017	1.1847	1.1580
November 30, 2017	1.1936	1.1577
December 31, 2017	1.2022	1.1725
January 31, 2018	1.2488	1.1922
February 28, 2018	1.2482	1.2211
March 31, 2018 (through March 30, 2018)	1.2440	1.2216

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in U.S. dollars per €1.00, on March 30, 2018, was $1.2320. 

As of December 31, 2017, approximately 46.3% of our assets and approximately 45.7% of our liabilities were denominated in currencies other than euro. See Note 2.2.16 to our Consolidated Financial Statements.

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For a discussion of our foreign currency exposure, please see Note 7.4.2 to our Consolidated Financial Statements (“Market Risk—Structural Exchange-Rate Risk”) and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

B.   Capitalization and Indebtedness

Not Applicable.

C.   Reasons for the Offer and Use of Proceeds

Not Applicable.

D.   Risk Factors

Macroeconomic Risks

Economic conditions in the countries where the Group operates could have a material adverse effect on the Group’s business, financial condition and results of operations

Despitethe recentgrowth of the global economy, uncertainty remains.The deterioration of economic conditions in the countries where the Group operates could adversely affect the cost and availability of funding for the Group, the quality of the Group’s loan and investment securities portfolios and levels of deposits and profitability, which may also require the Group to take impairments on its exposures to the sovereign debt of one or more countries or otherwise adversely affect the Group’s business, financial condition and results of operations. In addition, the process the Group uses to estimate losses inherent in its credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of its borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of the Group’s estimates, which may, in turn, affect the reliability of the process and the sufficiency of the Group’s loan loss provisions.

The Group faces, among others, the following economic risks:

·weak economic growth or recession in the countries where it operates;

·changes in the institutional environment in the countries where it operates could evolve into sudden and intense economic and/or regulatory downturns;

·deflation, mainly in Europe, or significant inflation, such as the significant inflation recently experienced by Venezuela and, to a lesser extent, Argentina;

·changes in foreign exchange rates as they result in changes in the reported earnings of the Group’s subsidiaries outside the Eurozone, and their assets, including their risk-weighted assets, and liabilities;

·a lower interest rate environment, even a prolonged period of negative interest rates in some areas where the Bank operates, which could lead to decreased lending margins and lower returns on assets;

·a higher interest rate environment, including as a result of an increase in interest rates by the Federal Reserve or any further tightening of monetary policies, including to address inflationary pressures and currency devaluations in Latin America, which could endanger a still tepid and fragile economic recovery and make it more difficult for customers of the Group’s mortgage and consumer loan products to service their debts;

·adverse developments in the real estate market, especially in Spain, Mexico, the United States and Turkey, given the Group’s exposures to such markets;

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·poor employment growth and structural challenges restricting employment growth, such as in Spain, where unemployment has remained relatively high, which may negatively affect the household income levels of the Group’s retail customers and may adversely affect the recoverability of the Group’s retail loans, resulting in increased loan loss provisions;

·lower oil prices, which could particularly affect producing areas, such as Venezuela, Mexico, Texas or Colombia, to which the Group is materially exposed;

·changes in laws, regulations and policies as a result of election processes in the different geographies in which the Group operates, which may negatively affect the Group’s business or customers in those geographies and other geographies in which the Group operates;

·the potential exit by an EU Member State from the European Monetary Union (“EMU”), which could materially adversely affect the European and global economy, cause a redenomination of financial instruments or other contractual obligations from the euro to a different currency and substantially disrupt capital, interbank, banking and other markets, among other effects;

·the possible political, economic and regulatory impacts in the United Kingdom and the EU derived from the outcome of the referendum held in the United Kingdom on June 23, 2016, which resulted in a vote in favor of the United Kingdom leaving the EU and the UK government giving notice to the EU under Article 50(2) of the Treaty on European Union of its intention to withdraw from the EU. The possible impact of the United Kingdom exiting the EU could include, among other things, political instability in the United Kingdom, the EU as a whole, or countries forming part of the EU; regulatory changes in the United Kingdom and/or in the EU; economic slowdown in the United Kingdom, in the EU and/or outside the EU; deterioration of the creditworthiness of borrowers based in or related to the United Kingdom and/or the EU; and volatility in financial markets which could limit or condition BBVA’s or any other issuer’s access to capital markets, all of which may arise regardless of the uncertainty as to the timing and duration of the exit process; and

·an eventual government default or restructuring on public debt, which could affect the Group primarily in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is generally high in several countries in which the Group operates.

For additional information relating to certain economic risks that the Group faces in Spain, see “—Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition”. For additional information relating to certain economic risks that the Group faces in emerging market economies such as Latin America and Turkey, see “—The Group may be materially adversely affected by developments in the emerging markets where it operates”.  

Any of the above risks could have a material adverse effect on the Group’s business, financial condition and results of operations.

Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition

The Group has historically developed its lending business in Spain, which continues to be one of the main focuses of its business. The Group’s loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy since 2009. After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted in the period 2009-10 and 2012-13. The effects of the financial crisis were particularly pronounced in Spain given its heightened need for foreign financing as reflected by its high current account deficit, resulting from the gap between domestic investment and savings, and its public deficit. The current account imbalance has been corrected and the public deficit is in a downward trend, with GDP growth above 3% in 2015, 2016 and 2017 and unemployment falling to 17.2% in the fourth quarter of 2017. However, real or perceived difficulties in servicing public or private debt, triggered by foreign or domestic factors such as an increase in global financial risk or a decrease in the rate of domestic growth, could increase Spain’s financing costs, hindering economic growth, employment and households’ gross disposable income.

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The Spanish economy is particularly sensitive to economic conditions in the Eurozone, the main market for Spanish goods and services exports. Accordingly, an interruption in the recovery in the Eurozone might have an adverse effect on Spanish economic growth. Given the relevance of the Group’s loan portfolio in Spain, any adverse changes affecting the Spanish economy could have a material adverse effect on the Group’s business, financial condition and results of operations.

We may be adversely affected by political events in Catalonia

Our Spanish business includes extensive operations in Catalonia. Although actions carried out by the Spanish Government have helped diminish the level of uncertainty in the region resulting from its pro-independence movement, regional elections carried out in December 2017 resulted in pro-independence parties winning the majority of seats. As of the date of this Annual Report, a new government has not yet been formed. There is still significant uncertainty regarding the outcome of political and social tensions in Catalonia, which could result in volatile capital markets and other financing conditions in Spain or otherwise adversely affect the environment in which we operate in Catalonia and the rest of Spain, any of which could have an adverse effect on our business, liquidity, financial condition and results of operations.

Any decline in the Kingdom of Spain’s sovereign credit ratings could adversely affect the Group’s business, financial condition and results of operations

Since the Bank is a Spanish company with substantial operations in Spain, its credit ratings may be adversely affected by the assessment by rating agencies of the creditworthiness of the Kingdom of Spain. As a result, any decline in the Kingdom of Spain’s sovereign credit ratings could result in a decline in the Bank’s credit ratings. In addition, the Group holds a substantial amount of securities issued by the Kingdom of Spain, autonomous communities within Spain and other Spanish issuers. Any decline in the Kingdom of Spain’s credit ratings could adversely affect the value of the Kingdom of Spain’s and other public or private Spanish issuers’ respective securities held by the Group in its various portfolios or otherwise materially adversely affect the Group’s business, financial condition and results of operations. Furthermore, the counterparties to many of the Group’s loan agreements could be similarly affected by any decline in the Kingdom of Spain’s credit ratings, which could limit their ability to raise additional capital or otherwise adversely affect their ability to repay their outstanding commitments to the Group and, in turn, materially and adversely affect the Group’s business, financial condition and results of operations.

The Group may be materially adversely affected by developments in the emerging markets where it operates

The economies of some of the emerging markets where the Group operates, mainly Latin America and Turkey, experienced significant volatility in recent decades, characterized, in some cases, by slow or declining growth, declining investment and hyperinflation.

Emerging markets are generally subject to greater risks than more developed markets. For example, there is typically a greater risk of loss from unfavorable political and economic developments, social and geopolitical instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies, and political unrest, such as the attempted coup in Turkey on July 15, 2016 and state of emergency entitling the exercise of additional powers by the Turkish government first declared on July 20, 2016 and which continues to be in place. In addition, these emerging markets are affected by conditions in other related markets and in global financial markets generally and some are particularly affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. As a global economic recovery remains fragile, there are risks of deterioration. If the global economic conditions deteriorate, the business, financial condition, operating results and cash flows of the Bank’s subsidiaries in emerging economies, mainly in Latin America and Turkey, may be materially adversely affected.

Furthermore, financial turmoil in any particular emerging market could negatively affect other emerging markets or the global economy in general. Financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets, and may reduce liquidity to companies located in the affected markets. An increase in the perceived risks associated with investing in emerging economies in general, or the emerging market economies

10

where the Group operates in particular, could dampen capital flows to such economies and adversely affect such economies.

In addition, any changes in laws, regulations and policies pursued by the U.S. Government may adversely affect the emerging markets in which the Group operates, particularly Mexico due to the trade and other ties between Mexico and the United States. See “—Our business could be adversely affected by global political developments, particularly with regard to U.S. policies that affect Mexico” below.

If economic conditions in the emerging market economies where the Group operates deteriorate, the Group’s business, financial condition and results of operations could be materially adversely affected.

Our business could be adversely affected by global political developments, particularly with regard to U.S. policies that affect Mexico

Changes in economic, political and regulatory conditions in the United States or in U.S. laws and policies governing foreign trade and foreign relations could create uncertainty in the international markets and could have a negative impact on the Mexican economy and public finances. This correlation is due, in part, to the high level of economic activity between the two countries generally, including the trade facilitated by the North American Free Trade Agreement (“NAFTA”), as well as due to their physical proximity.

Following the U.S. elections in November 2016 and the change in the U.S. administration for the four-year period from 2017 to 2020, there is uncertainty regarding future U.S. policies with respect to matters of importance to Mexico and its economy, particularly including trade and immigration. In particular, since August 16, 2017, the U.S. administration has been renegotiating the terms of NAFTA with its Mexican and Canadian counterparts. The U.S. administration, which has also stated that it may withdraw from the agreement, seeks to lower the trade deficit between the United States and Mexico, eliminate certain subsidies and practices by State-owned companies (such as Petróleos Mexicanos (Pemex)) which are perceived to distort the market and achieve stronger protection for U.S. digital trade and intellectual properties. Because the Mexican economy is heavily influenced by the U.S. economy, the re-negotiation, or even termination, of NAFTA and/or the adoption of other U.S. government policies may adversely affect economic conditions in Mexico. Any decision taken by the U.S. administration that has an impact on the Mexican economy, such as by reducing the levels of remittances, reducing commercial activity among the two countries or slowing direct foreign investment in Mexico, could adversely affect the Group’s business, financial condition and results of operations.

U.S. immigration policies could also affect trade and other relations between Mexico and the United States and have other consequences for Mexican government policies. These factors could have an impact on Mexico’s GDP growth, the exchange rate between the U.S. dollar or euro and the Mexican peso, levels of foreign direct investment and portfolio investment in Mexico, interest rates, inflation and the Mexican economy generally, which in turn, may have an impact on the Group’s business, financial condition and results of operations.

The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions

Severe market events such as the past sovereign debt crisis, rising risk premiums and falls in share market prices, have resulted in the Group recording large write-downs on its credit market exposures in recent years. Several factors could further depress the valuation of our assets. Current political processes such as the implementation of “Brexit”, which will result in the United Kingdom leaving the European Union, the surge of populist trends in several European countries or potential changes in U.S. economic policies implemented by the U.S. administration, could increase global financial volatility and lead to the reallocation of assets. Doubts on the asset quality of European banks also affected their evolution in the market during 2016 and such doubts remained in 2017. In addition, uncertainty about China’s growth expectations and its policymaking capability to address certain severe future challenges has recently resulted in sudden and intense deterioration of the valuation of global assets and further increased volatility in the global financial markets. Additionally, in dislocated markets, hedging and other risk management strategies may not be as effective as they are in more normal market conditions due in part to the decreasing credit quality of hedge counterparties. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

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Exposure to the real estate market makes the Group vulnerable to developments in this market

The Group has substantial exposure to the real estate market, mainly in Spain, Mexico and the United States. The Group is exposed to the real estate market due to the fact that real estate assets secure many of its outstanding loans and due to the significant amount of real estate assets held on its balance sheet and its stakes in real estate companies such as Metrovacesa, S.A. and Testa Residencial SOCIMI, S.A. Any deterioration of real estate prices could materially and adversely affect the Group’s business, financial condition and results of operations.

Legal, Regulatory and Compliance Risks

The Group is subject to substantial regulation and regulatory and governmental oversight. Changes in the regulatory framework could have a material adverse effect on its business, results of operations and financial condition

The financial services industry is among the most highly regulated industries in the world. In response to the global financial crisis and the European sovereign debt crisis, governments, regulatory authorities and others have made and continue to make proposals to reform the regulatory framework for the financial services industry to enhance its resilience against future crises. Legislation has already been enacted and regulations issued in response to some of these proposals. The regulatory framework for financial institutions is likely to undergo further significant change.This creates significant uncertainty for the Group and the financial industry in general. The wide range of recent actions or current proposals includes, among other things, provisions for more stringent regulatory capital and liquidity standards, restrictions on compensation practices, special bank levies and financial transaction taxes, recovery and resolution powers to intervene in a crisis including “bail-in” of creditors, separation of certain businesses from deposit taking, stress testing and capital planning regimes, heightened reporting requirements and reforms of derivatives, other financial instruments, investment products and market infrastructures.

In addition, the new institutional structure in Europe for supervision, with the creation of the single supervisor, and for resolution, with the single resolution mechanism, is changing the supervisory landscape. The specific effects of a number of new laws and regulations remain uncertain because the drafting and implementation of these laws and regulations are still ongoing. In addition, since some of these laws and regulations have been recently adopted, the manner in which they are applied to the operations of financial institutions is still evolving. No assurance can be given that laws or regulations will be enforced or interpreted in a manner that will not have a material adverse effect on the Group’s business, financial condition, results of operations and cash flows. In addition, regulatory scrutiny under existing laws and regulations has become more intense.

Furthermore, regulatory and supervisory authorities have substantial discretion in how to regulate and supervise banks, and this discretion, and the means available to regulators and supervisors, have been steadily increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions that are deemed to be systemically important (including global systemically important banks (“G-SIBs”) and institutions deemed to be of local systemic importance, domestic systemically important banks (“D-SIBs”), such as the Bank).

In addition, local regulations in certain jurisdictions where the Group operates differ in a number of material respects from equivalent regulations in Spain or the United States. Changes in regulations may have a material adverse effect on the Group’s business, results of operations and financial condition, particularly in Mexico, the United States, Turkey, Venezuela and Argentina. Furthermore, regulatory fragmentation, with some countries implementing new and more stringent standards or regulation, could adversely affect the Group’s ability to compete with financial institutions based in other jurisdictions which do not need to comply with such new standards or regulation. In addition, financial institutions which are based in other jurisdictions, including the United States, could benefit from any deregulation efforts implemented in such jurisdictions. Moreover, to the extent recently adopted regulations are implemented inconsistently in the various jurisdictions in which the Group operates, the Group may face higher compliance costs.

Any required changes to the Group’s business operations resulting from the legislation and regulations applicable to such business could result in significant loss of revenue, limit the Group’s ability to pursue business opportunities in which the Group might otherwise consider engaging, affect the value of assets that the Group holds,

12

require the Group to increase its prices and therefore reduce demand for its products, impose additional costs on the Group or otherwise adversely affect the Group’s businesses. For example, the Group is subject to substantial regulation relating to liquidity. Future liquidity standards could require it to maintain a greater proportion of its assets in highly liquid but lower-yielding financial instruments, which would negatively affect its net interest margin. Moreover, the Group’s regulators, as part of their supervisory function, periodically review the Group’s allowance for loan losses. Such regulators may require the Group to increase its allowance for loan losses or to recognize further losses. Any such additional provisions for loan losses, as required by these regulators whose views may differ from those of the Group’s management, could have an adverse effect on the Group’s earnings and financial condition.

Adverse regulatory developments or changes in government policy relating to any of the foregoing or other matters could have a material adverse effect on the Group’s business, results of operations and financial condition.

Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations

As a Spanish credit institution, the Bank is subject to Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (the “CRD IV Directive”), through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit institutions is Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012 (the “CRR” and, together with the CRD IV Directive and any measures implementing the CRD IV Directive or the CRR which may from time to time be applicable in Spain, “CRD IV”), which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through Royal Decree-Law 14/2013, of November 29, Law 10/2014, of June 26, on the organization, supervision and solvency of credit institutions (“Law 10/2014”), Royal Decree 84/2015, of February 13 (“RD 84/2015”), Bank of Spain Circular 2/2014, of January 31 and Bank of Spain Circular 2/2016, of February 2 (the “Bank of Spain Circular 2/2016”). On November 23, 2016, the European Commission published a package of proposals with further reforms to CRD IV, Directive 2014/59/EU, of May 15 establishing a framework for the recovery and resolution of credit institutions and investment firms (the “BRRD”) and Regulation (EU) No 806/2014 of the European Parliament and of the Council of July 15, 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (the “SRM Regulation”) (the “EU Banking Reforms”), including measures to increase the resilience of EU institutions and enhance financial stability. The timing for the final implementation of these reforms as at the date of this Annual Report is unclear. As of the date of this Annual Report, the EU Banking Reforms are being subject to further discussions and possible amendments at the European Parliament and the European Commission.

CRD IV, among other things, established minimum “Pillar 1” capital requirements and increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards. The “combined buffer requirement” introduced five new capital buffers: (i) the capital conservation buffer, (ii) the G-SIB buffer, (iii) the institution-specific countercyclical buffer, (iv) the D-SIB buffer, and (v) the systemic risk buffer. The “combined buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and is required to be satisfied with common equity tier 1 (“CET1”) capital.

The G-SIB buffer applies to those institutions included on the list of G-SIBs, which is updated annually by the Financial Stability Board (the “FSB”). The Bank has been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, it will no longer be required to maintain a G-SIB buffer.

The Bank of Spain announced on November 24, 2017 that the Bank continues to be considered a D-SIB, and consequently the Bank was required to maintain a fully-loaded D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, with the result that the D-SIB buffer applicable to the Bank for 2018 is a CET1 capital ratio of 0.5625% on a consolidated basis.

13

The Bank of Spain agreed in December 2015 to set the countercyclical capital buffer applicable to credit exposures in Spain at 0% from January 1, 2016. These percentages are revised each quarter. The Bank of Spain agreed in March 2018 to maintain the countercyclical capital buffer at 0% for the second quarter of 2018.

The Bank of Spain has greater discretion in relation to the institution-specific countercyclical buffer, the buffer for D-SIBs and the systemic risk buffer (a buffer to prevent systemic or macro prudential risks). With the entry into force of the Single Supervisory Mechanism (the “SSM”) on November 4, 2014, the ECB also has the ability to provide certain recommendations in this respect.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No. 1024/2013 of October 15, 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), also contemplates that in addition to the minimum “Pillar 1” capital requirements and the combined buffer requirements, supervisory authorities may impose (above “Pillar 1” requirements and below the combined buffer requirements) further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum “own funds” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

In accordance with the SSM Regulation, the ECB has fully assumed its new supervisory responsibilities of BBVA and the Group within the SSM. The ECB is required, under the Regulation (EU) No 468/2014 of the ECB of April 16, 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated authorities (the “SSM Framework Regulation”), to carry out a supervisory review and evaluation process (the “SREP”) of BBVA and the Group at least on an annual basis.

In addition to the above, the European Banking Authority (the “EBA”) published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of the SREP (the “EBA SREP Guidelines”). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional “Pillar 2” own funds requirements to be implemented from January 1, 2016. Under these guidelines, national supervisors should set a composition requirement for the “Pillar 2” requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital, as it has also been included in the EU Banking Reforms. The EBA SREP Guidelines and the EU Banking Reforms also contemplate that national supervisors should not set additional own funds requirements in respect of risks which are already covered by the “combined buffer requirement” and/or additional macro-prudential requirements.

Any additional “Pillar 2” own funds requirement that may be imposed on the Bank and/or the Group by the ECB pursuant to the SREP will require the Bank and/or the Group to hold capital levels above the minimum “Pillar 1” capital requirements.

As a result of the most recent SREP carried out by the ECB in 2017, we have been informed by the ECB that, effective from January 1, 2018, we are required to maintain (i) a CET1 phased-in capital ratio of 8.4375% (on a consolidated basis) and 7.875% (on an individual basis); and (ii) a phased-in total capital ratio of 11.9375% (on a consolidated basis) and 11.375% (on an individual basis).

This phased-in total capital ratio of 11.9375% on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.875% CET1); and (vi) the D-SIB buffer (0.5625% CET1).

 As of December 31, 2017, the Bank’s phased-in total capital ratio was 15.37% on a consolidated basis and 22.54% on an individual basis. As of December 31, 2017, the Bank’s CET1 phased-in capital ratio was 11.67% on a consolidated basis and 17.67% on an individual basis. Such ratios exceed the applicable regulatory requirements described above, but there can be no assurance that the total capital requirements imposed on the Bank and/or the Group from time to time may not be higher than the levels of capital available at such point in time. There can also be no assurance as to the result of any future SREP carried out by the ECB and whether this will impose any further “Pillar 2” additional own funds requirements on the Bank and/or the Group.

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The EU Banking Reforms propose new requirements that capital instruments should meet in order to be considered as Additional Tier 1 instruments or Tier 2 instruments. In accordance with the EU Banking Reforms (as they currently stand), these new requirements are not subject to a grandfathering or exemption regime for currently issued Additional Tier 1 instruments and/or Tier 2 instruments. As a result, such instruments could be subject to regulatory uncertainties on their inclusion as capital if the EU Banking Reforms are approved in the form in which they were originally published, which may lead to regulatory capital shortfalls and ultimately a breach of the applicable minimum regulatory capital requirements.

Any failure by the Bank and/or the Group to maintain its “Pillar 1” minimum regulatory capital ratios, any “Pillar 2” additional own funds requirements and/or any “combined buffer requirement” could result in the imposition of restrictions or prohibitions on “discretionary payments” by the Bank as discussed below or administrative actions or sanctions, which, in turn, may have a material adverse effect on the Group’s results of operations.

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any entity not meeting its “combined buffer requirement” is required to determine its Maximum Distributable Amount (“MDA”) as described therein. Until the MDA has been calculated and communicated to the Bank of Spain, where applicable, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA limit.

Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also result in a requirement to determine the MDA and restrict discretionary payments to such MDA. Pursuant to the EU Banking Reforms, MDA could also be affected by a breach of MREL (as defined below) (see “—Any failure by the Bank and/or the Group to comply with its MREL could have a material adverse effect on the Bank’s business, financial condition and results of operations.” below).

As set out in the “Opinion of the European Banking Authority on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions” published on December 16, 2015 (the “December 2015 EBA Opinion”), in the EBA’s opinion competent authorities should ensure that the CET1 capital to be taken into account in determining the CET1 capital available to meet the “combined buffer requirement” for the purposes of the MDA calculation is limited to the amount not used to meet the “Pillar 1” and, if applicable, “Pillar 2” own funds requirements of the institution. There can be no assurance as to how and when binding effect will be given to the December 2015 EBA Opinion in Spain, including as to the consequences for an institution of its capital levels falling below those necessary to meet these requirements. The EU Banking Reforms propose certain amendments in order to clarify, for the purposes of restrictions on distributions, the hierarchy between the “Pillar 2” additional own funds requirements, the minimum “own funds” “Pillar 1” requirements, the own funds and eligible liabilities requirement, MREL and the “combined buffer requirements” (which is referred to as “stacking order”). Furthermore, pursuant to the EU Banking Reforms, an institution would not be entitled to make distributions relating to CET1 capital or payments in respect of variable remuneration or discretionary pension revenues, before having made the payments due on Additional Tier 1 instruments.

On July 1, 2016, the EBA published additional information explaining how supervisors intend to use the results of an EU-wide stress test for SREP in 2016 (which results were published on July 29, 2016). The EBA stated, among other things, that the incorporation of the quantitative results of the EU-wide stress test into SREP assessments may include setting additional supervisory monitoring metrics in the form of capital guidance. Such guidance will not be included in MDA calculations but competent authorities would expect banks to meet that guidance except when explicitly agreed. Competent authorities have remedial tools if an institution refuses to follow such guidance. The EU Banking Reforms also propose that a distinction be made between “Pillar 2” capital requirements and “Pillar 2” capital guidance, with only the former being mandatory requirements. Notwithstanding the foregoing, the EU Banking Reforms propose that, in addition to certain other measures, supervisory authorities be entitled to impose further “Pillar 2” capital requirements where an institution repeatedly fails to follow the “Pillar 2” capital guidance previously imposed.

15

The ECB has also set out in its recommendation of December 28, 2017 on dividend distribution policies that credit institutions should establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements and the outcomes of the SREP.

Any failure by the Bank and/or the Group to comply with its regulatory capital requirements could also result in the imposition of further “Pillar 2” requirements and the adoption of any early intervention or, ultimately, resolution measures by resolution authorities pursuant to Law 11/2015 of June 18 on the Recovery and Resolution of Credit Institutions and Investment Firms (Ley 11/2015 de 18 de junio de recuperación y resolución de entidades de crédito y empresas de servicios de inversión), as amended, replaced or supplemented from time to time (“Law 11/2015”), which, together with Royal Decree 1012/2015 of November 6 by virtue of which Law 11/2015 is developed and Royal Decree 2606/1996 of December 20 on credit entities’ deposit guarantee fund is amended (“RD 1012/2015”), has implemented the BRRD into Spanish law. See “—Bail-in and write-down powers under the BRRD and the SRM Regulation may adversely affect our business and the value of any securities we may issue” below.

At its meeting of January 12, 2014, the oversight body of the Basel Committee on Banking Supervision (“BCBS”) endorsed the definition of the leverage ratio set forth in CRD IV, to promote consistent disclosure, which applied from January 1, 2015. As of the date of this Annual Report, there is no applicable regulation in Spain which establishes a specific leverage ratio requirement for credit institutions. However,the EU Banking Reforms propose a binding leverage ratio requirement of 3% of Tier 1 capital that is added to an institution’s own funds requirements and that an institution must meet in addition to its risk based requirements.

Basel III implementation differs across jurisdictions in terms of timing and applicable rules. This lack of uniformity among implemented rules may lead to an uneven playing field and to competition distortions. Moreover, the lack of regulatory coordination, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect a bank with global operations such as the Bank and could undermine its profitability.

There can be no assurance that the implementation of the above capital requirements will not adversely affect the Bank’s ability to pay “discretionary payments” or result in the cancellation of such payments (in whole or in part), or require the Bank to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Bank’s business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect the Bank’s return on equity and other financial performance indicators.

Bail-in and write-down powers under the BRRD and the SRM Regulation may adversely affect our business and the value of any securities we may issue

The BRRD (which has been implemented in Spain through Law 11/2015 and RD 1012/2015) and the SRM Regulation are designed to provide authorities with a credible set of tools to intervene sufficiently early and quickly in unsound or failing credit institutions or investment firms (each, an “institution”) so as to ensure the continuity of the institution’s critical financial and economic functions, while minimizing the impact of an institution’s failure on the economy and financial system. The BRRD further provides that any extraordinary public financial support through additional financial stabilization tools is only to be used by a Member State as a last resort, after having assessed and utilized the resolution tools set out below to the maximum extent possible while maintaining financial stability.

In accordance with Article 20 of Law 11/2015, an institution will be considered as failing or likely to fail in any of the following circumstances: (i) it is, or is likely in the near future to be, in significant breach of its solvency or any other requirements necessary for maintaining its authorization; (ii) its assets are, or are likely in the near future to be, less than its liabilities; (iii) it is, or is likely in the near future to be, unable to pay its debts as they fall due; or (iv) it requires extraordinary public financial support (except in limited circumstances). The determination that an institution is failing or likely to fail may depend on a number of factors which may be outside of that institution’s control.

As provided in the BRRD, Law 11/2015 contains four resolution tools and powers which may be used alone or in combination where a Relevant Spanish Resolution Authority (as defined below) considers that (i) an institution is failing or likely to fail, (ii) there is no reasonable prospect that any other measure would prevent the failure of such

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institution within a reasonable timeframe and (iii) a resolution action, instead of the winding up of the institution under normal insolvency proceedings, is in the public interest. The four resolution tools are (i) sale of business, which enables resolution authorities to direct the sale of the institution or the whole or part of its business on commercial terms; (ii) bridge institution, which enables resolution authorities to transfer all or part of the business of the institution to a “bridge institution” (an entity created for this purpose that is wholly or partially in public control), which may limit the capacity of the institution to meet its repayment obligations; (iii) asset separation, which enables resolution authorities to transfer certain categories of assets (normally impaired or otherwise problematic) to one or more asset management vehicles to allow them to be managed with a view to maximizing their value through eventual sale or orderly wind-down (this can be used together with another resolution tool only); and (iv) the Spanish Bail-in Power (as defined below). Any exercise of the Spanish Bail-in Power by the Relevant Spanish Resolution Authority may include the write down and/or conversion into equity or other securities or obligations (which equity, securities and obligations could also be subject to any future application of the Spanish Bail-in Power) of certain unsecured debt claims of an institution.

“Relevant Spanish Resolution Authority” means the Spanish Fund for the Orderly Restructuring of Banks (Fondo de Restructuración Ordenada Bancaria) (“FROB”), the European Single Resolution Mechanism (“SRM”) and, as the case may be, according to Law 11/2015, the Bank of Spain and the CNMV, and any other entity with the authority to exercise the Spanish Bail-in Power from time to time. “Spanish Bail-in Power” means any write-down, conversion, transfer, modification, or suspension power existing from time to time under: (i) any law, regulation, rule or requirement applicable from time to time in Spain, relating to the transposition or development of the BRRD (as amended, replaced or supplemented from time to time), including, but not limited to (a) Law 11/2015, (b) RD 1012/2015; and (c) the SRM Regulation, each as amended, replaced or supplemented from time to time; or (ii) any other law, regulation, rule or requirement applicable from time to time in Spain pursuant to which (a) obligations or liabilities of banks, investment firms or other financial institutions or their affiliates can be reduced, cancelled, modified, transferred or converted into shares, other securities, or other obligations of such persons or any other person (or suspended for a temporary period or permanently) or (b) any right in a contract governing such obligations may be deemed to have been exercised.

In accordance with Article 48 of Law 11/2015 (and subject to any exclusions that may be applied by the Relevant Spanish Resolution Authority under Article 43 of Law 11/2015), in the case of any application of the Spanish Bail-in Power, the sequence of any resulting write-down or conversion by the Relevant Spanish Resolution Authority shall be in the following order: (i) CET1 items; (ii) the principal amount of Additional Tier 1 instruments; (iii) the principal amount of Tier 2 capital instruments; (iv) the principal amount of other subordinated claims that are not Additional Tier 1 capital or Tier 2 capital; and (v) the principal or outstanding amount of the remaining eligible liabilities in the order of the hierarchy of claims in normal insolvency proceedings.

The BRRD, Law 11/2015 and the SRM Regulation provide for resolution authorities to have the further power to permanently write-down or convert into equity capital instruments at the point of non-viability (“Non-Viability Loss Absorption”) of an institution or a group. The point of non-viability of an institution is the point at which the Relevant Spanish Resolution Authority determines that the institution meets the conditions for resolution or will no longer be viable unless the relevant capital instruments are written down or converted into equity or extraordinary public support is to be provided and without such support the Relevant Spanish Resolution Authority determines that the institution would no longer be viable. The point of non-viability of a group is the point at which the group infringes or there are objective elements to support a determination that the group, in the near future, will infringe its consolidated solvency requirements in a way that would justify action by the Relevant Spanish Resolution Authority in accordance with article 38.3 of Law 11/2015. Non-Viability Loss Absorption may be imposed prior to or in combination with any other exercise of the Spanish Bail-in Power or any other resolution tool or power (where the conditions for resolution referred to above are met).

Any application of the Spanish Bail-in Power (including a Non-Viability Loss Absorption) under the BRRD shall be in accordance with the hierarchy of claims in normal insolvency proceedings (unless otherwise provided by Applicable Banking Regulations). “Applicable Banking Regulations” means at any time the laws, regulations, requirements, guidelines and policies relating to capital adequacy, resolution and/or solvency then applicable to the Bank and/or the Group including, without limitation to the generality of the foregoing, CRD IV, the BRRD and those laws, regulations, requirements, guidelines and policies relating to capital adequacy, resolution and/or solvency then in effect in Spain (whether or not such regulations, requirements, guidelines or policies have the force of law and whether or not they are applied generally or specifically to the Bank and/or the Group).

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To the extent that any resulting treatment of a holder of the Bank’s securities pursuant to the exercise of the Spanish Bail-in Power (except as indicated below with respect to a Non-Viability Loss Absorption) is less favorable than would have been the case under such hierarchy in normal insolvency proceedings, a holder of such affected securities would have a right to compensation under the BRRD and the SRM Regulation based on an independent valuation of the institution, in accordance with Article 10 of RD 1012/2015 and the SRM Regulation. Any such compensation, however, together with any other compensation provided by any Applicable Banking Regulations (including, among such other compensation, in accordance with article 36.5 of Law 11/2015) is unlikely to compensate that holder for the losses it has actually incurred and there is likely to be a considerable delay in the recovery of such compensation. Compensation payments (if any) are also likely to be made considerably later than when amounts may otherwise have been due under the affected securities. In addition, in the case of a Non-Viability Loss Absorption it is not clear that a holder of the affected securities would have a right to compensation under the BRRD and the SRM Regulation if any resulting treatment of such holder pursuant to the exercise of the Spanish Bail-in Power was less favorable than would have been the case under such hierarchy in normal insolvency proceedings.

The powers set out in the BRRD, as implemented through Law 11/2015 and RD 1012/2015, and the SRM Regulation impact how credit institutions and investment firms are managed, as well as, in certain circumstances, the rights of creditors. Pursuant to Law 11/2015, upon any application of the Spanish Bail-in Power (including a Non-Viability Loss Absorption), holders of, among others, unsecured debt securities, subordinated obligations and shares issued by us may be subject to, among other things, a write-down (including to zero) and/or conversion into equity or other securities or obligations on any application of the Spanish Bail-in Power. The exercise of any such powers (or any of the other resolution powers and tools) may result in such holders of such securities losing some or all of their investment or otherwise having their rights under such securities adversely affected, including by becoming holders of further subordinated instruments. Such exercise could also involve modifications to, or the disapplication of, provisions in the terms and conditions of certain securities including alteration of the principal amount or any interest payable on debt instruments, the maturity date or any other dates on which payments may be due, as well as the suspension of payments for a certain period. As a result, the exercise of the Spanish Bail-in Power (including, where applicable, the Non-Viability Loss Absorption) with respect to such securities or the taking by an authority of any other action, or any suggestion that the exercise or taking of any such action may happen, could materially adversely affect the rights of holders of such securities, the market price or value or trading behavior of our securities and/or the ability of the Bank to satisfy its obligations under any such securities.

The exercise of the Spanish Bail-in Power (including by imposing a Non-Viability Loss Absorption) by the Relevant Spanish Resolution Authority is likely to be inherently unpredictable and may depend on a number of factors which may also be outside of the Bank’s control. In addition, as the Relevant Spanish Resolution Authority will retain an element of discretion, holders of such securities may not be able to refer to publicly available criteria in order to anticipate any potential exercise of any such Spanish Bail-in Power (including a Non-Viability Loss Absorption). Because of this inherent uncertainty, it will be difficult to predict when, if at all, the exercise of any such powers by the Relevant Spanish Resolution Authority may occur.

This uncertainty may adversely affect the value of the unsecured debt securities, subordinated obligations and shares issued by us. The price and trading behavior of such securities may be affected by the threat of a possible exercise of any power under Law 11/2015 and/or the SRM Regulation (including any early intervention measure before any resolution) or any suggestion of such exercise, even if the likelihood of such exercise is remote. Moreover, the Relevant Spanish Resolution Authority may exercise any such powers without providing any advance notice to the holders of affected securities.

In addition, the EBA has published certain regulatory technical standards and implementing technical standards to be adopted by the European Commission and certain other guidelines. These standards and guidelines could be potentially relevant to determining when or how a Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power (including by imposing a Non-Viability Loss Absorption). Included in this are guidelines on the treatment of shareholders in bail-in or the write-down and conversion of capital instruments, and on the rate of conversion of debt to equity or other securities or obligations in any bail-in. No assurance can be given that these standards and guidelines will not be detrimental to the rights under, and the value of, unsecured debt securities, subordinated obligations and shares issued by us.

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Any failure by the Bank and/or the Group to comply with its MREL could have a material adverse effect on the Bank’s business, financial condition and results of operations

The BRRD prescribes that banks shall hold a minimum level of own funds and eligible liabilities in relation to total liabilities known as the minimum requirement for own funds and eligible liabilities (“MREL”). According to Commission Delegated Regulation (EU) 2016/1450 of May 23, 2016 (the “MREL Delegated Regulation”), the level of own funds and eligible liabilities required under MREL will be set by the resolution authority for each bank (and/or group) based on, among other things, the criteria set forth in Article 45.6 of the BRRD, including the systemic importance of the institution. Eligible liabilities may be senior or subordinated, provided that, among other requirements, they have a remaining maturity of at least one year and, if governed by a non-EU law, they must be able to be written down or converted by the resolution authority of a Member State under that law or through contractual provisions.

MREL came into force on January 1, 2016. However, the EBA has recognized the impact which this requirement may have on banks’ funding structures and costs, and the MREL Delegated Regulation states that the resolution authorities shall determine an appropriate transitional period but that this shall be as short as possible.

In addition, as a result of the EU Banking Reforms, Directive (EU) 2017/2399 of the European Parliament and of the Council of December 12, 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy was approved with the aim to harmonize national laws on insolvency and recovery and resolution of credit institutions and investment firms, by creating a new credit class of “non-preferred” senior debt that should only be bailed-in after junior ranking instruments but before other senior liabilities. In this regard, on June 23, 2017 Royal Decree-Law 11/2017 of June 23 on urgent measures in financial matters (Real Decreto-ley 11/2017, de 23 de junio, de medidas urgentes en materia financiera) introduced into Spanish law the new class of “non-preferred” senior debt.

On November 9, 2015, the FSB published its final Total Loss-Absorbing Capacity (“TLAC”) Principles and Term Sheet (the “TLAC Principles and Term Sheet”), proposing that G-SIBs maintain significant minimum amounts of liabilities that are subordinated (by law, contract or structurally) to certain prior-ranking liabilities, such as guaranteed insured deposits, and forming a new standard for G-SIBs. The TLAC Principles and Term Sheet contain a set of principles on loss-absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet for the implementation of these principles in the form of an internationally agreed standard. The TLAC Principles and Term Sheet require a minimum TLAC requirement to be determined individually for each G-SIB at the greater of (i) 16% of risk-weighted assets as of January 1, 2019 and 18% as of January 1, 2022, and (ii) 6% of the Basel III Tier 1 leverage ratio exposure measured as of January 1, 2019, and 6.75% as of January 1, 2022. The Bank is no longer classified as a G-SIB by the FSB with effect from January 1, 2017. However, if the Bank were to be so classified in the future or if TLAC requirements as set out below are adopted and implemented in Spain and extended to non-G-SIBs through the imposition of requirements similar to MREL as set out below, then this could create additional minimum requirements for the Bank.

In addition, the EU Banking Reforms establish some exemptions which could allow outstanding senior debt instruments to be used to comply with MREL. However, there is uncertainty regarding the final form of the EU Banking Reforms insofar as such eligibility is concerned and how those regulations and exemptions are to be interpreted and applied. This uncertainty may impact upon the ability of BBVA to comply with its MREL (at both individual and consolidated levels (together, “MRELs”)) by the relevant deadline. In this regard, the EBA submitted on December 14, 2016 its final report on the implementation and design of the MREL framework (the “EBA MREL Report”), which contains a number of recommendations to amend the current MREL framework. Additionally, the EU Banking Reforms contain the legislative proposal of the European Commission for the amendment of the MREL framework and the implementation of the TLAC standards. The EU Banking Reforms propose the amendment of a number of aspects of the MREL framework to align it with the TLAC standards included in the TLAC Principles and Term Sheet. To maintain coherence between the MREL rules applicable to G-SIBs and those applicable to non-G-SIBs, the EU Banking Reforms also propose a number of changes to the MREL rules applicable to non-G-SIBs. While the EU Banking Reforms propose for minimum harmonized or “Pillar 1” MRELs for G-SIBs, in the case of non-G-SIBs, it is proposed that MRELs will be imposed on a bank-specific basis. For G-SIBs, it is also proposed that a supplementary or “Pillar 2” MRELs may be further imposed on a bank-specific basis. The EU Banking Reforms further provide for the resolution authorities to give guidance to an institution to have own funds and eligible liabilities in excess of the requisite levels for certain purposes.

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Neither the BRRD nor the MREL Delegated Regulation provides details on the implications of a failure by an institution to comply with its MREL requirement. However, the EU Banking Reforms propose that this be addressed by the relevant authorities on the basis of their powers to address or remove impediments to resolution, the exercise of their supervisory powers under the CRD IV Directive, early intervention measures, and administrative penalties and other administrative measures.

Furthermore, in accordance with the EBA MREL Report, the EBA recommends that resolution authorities and competent authorities should engage in active monitoring of compliance with their respective requirements and considers that (i) the powers of resolution authorities to respond to a breach of MREL should be enhanced (which would require resolution authorities to be given the power to require the preparation and execution of an MREL restoration plan, to use their powers to address impediments to resolvability, to request that distribution restrictions be imposed on an institution by a competent authority and to request a joint restoration plan in cases where an institution breaches both MREL and minimum capital requirements); (ii) resolution authorities should assume a lead role in responding to a failure to issue or roll over MREL-eligible debt leading to a breach of MREL; and (iii) if there are both losses and a failure to roll over or issue MREL-eligible debt, both the relevant resolution authority and relevant competent authority should attempt to agree on a joint restoration plan (provided that both authorities believe that the institution is not failing or likely to fail). In addition, under the EBA Guidelines on triggers for use of early intervention measures of May 8, 2015 a significant deterioration in the amount of eligible liabilities and own funds held by an institution for the purposes of meeting its MRELs may put an institution in a situation where conditions for early intervention are met, which may result in the application by the competent authority of early intervention measures.

Further, as outlined in the EBA MREL Report, the EBA’s recommendation is that an institution will not be able to use the same CET 1 capital to meet both MREL and the combined buffer requirements. In addition, the EU Banking Reforms provide that, in the case of the own funds of an institution that may otherwise contribute to the combined buffer requirement where there is any shortfall in MREL, this will be considered as a failure to meet the combined buffer requirement such that those own funds will automatically be used instead to meet that institution’s MRELs and will no longer count towards its combined buffer requirement. Accordingly, this could trigger a limit on discretionary payments (see “—Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”).  

Additionally, if the FROB, the SRM or a Relevant Spanish Resolution Authority finds that there could exist any obstacles to resolvability by the Bank and/or the Group, a higher MREL could be imposed.

Moreover, with respect to the EU Banking Reforms, there are uncertainties concerning how the subsidiaries of the Group would be treated in determining the resolution group of the Bank and the applicable MRELs, which may lead to a situation where the consolidated MREL of the Bank would not fully reflect its multiple-point-of-entry resolution strategy.

Any failure or perceived failure by the Bank and/or the Group to comply with its MREL may have a material adverse effect on the Bank’s business, financial conditions and results of operations and could result in the imposition of restrictions or prohibitions on discretionary payments by the Bank, including the payment of dividends and interest or distributions on Additional Tier 1 instruments. There can also be no assurance as to the relationship between the “Pillar 2” additional own funds requirements, the “combined buffer requirement”, the MRELs once implemented in Spain and the restrictions or prohibitions on discretionary payments.

Increased taxation and other burdens imposed on the financial sector may have a material adverse effect on the Bank’s business, financial condition and results of operations

On February 14, 2013, the European Commission published a proposal (the “Commission’s Proposal”) for a Directive for a common financial transaction tax (“FTT”) in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the “participating Member States”). However, Estonia has since stated that it will not participate.

The Commission’s Proposal has very broad scope and could, if introduced, apply to certain dealings in securities issued by the Group or other issuers (including secondary market transactions) in certain circumstances.

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Under the Commission’s Proposal, the FTT could apply in certain circumstances to persons both within and outside the participating Member States. Generally, it would apply to certain dealings in securities where at least one party is a financial institution and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (i) by transacting with a person established in a participating Member State or (ii) where the financial instrument which is subject to the dealings is issued in a participating Member State.

However, the FTT proposal remains subject to negotiation among the participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate and participating Member States may decide not to participate.

Law 18/2014, of October 15, introduced a 0.03% tax on bank deposits in Spain. This tax is payable annually by Spanish banks. There can be no assurance that additional national or transnational bank levies or financial transaction taxes will not be adopted by the authorities of the jurisdictions where the Bank operates.

Any levies or taxes imposed on the Bank pursuant to the foregoing or otherwise in any of the jurisdictions where it operates could have a material adverse effect on the Bank′s business, financial condition and results of operations.

Contributions for assisting in the future recovery and resolution of the Spanish banking sector may have a material adverse effect on the Bank’s business, financial condition and results of operations

Law 11/2015 and RD 1012/2015 require Spanish credit institutions, including BBVA, to make at least an annual ordinary contribution to the National Resolution Fund (Fondo de Resolución Nacional), payable on request of the FROB. The total amount of contributions to be made to the National Resolution Fund by all Spanish banking entities must equal at least 1% of the aggregate amount of all deposits guaranteed by the Deposit Guarantee Fund (Fondo de Garantía de Depósitos de Entidades de Crédito) by December 31, 2024. The contribution will be adjusted to the risk profile of each institution in accordance with the criteria set out in Council Implementing Regulation (EU) 2015/81 of December 19, 2014 and RD 1012/2015. The FROB may, in addition, collect extraordinary contributions.

Furthermore, Law 11/2015 also provides for an additional charge (tasa) which shall be used to further fund the activities of the FROB, in its capacity as a resolution authority, which charge shall equal 2.5% of the above annual ordinary contribution to be made to the National Resolution Fund.

Moreover, Commission Delegated Regulation (EU) 2017/2361 of September 14, 2017 establishes the system of contributions to the administrative expenditures of the Single Resolution Board, to be paid by credit institutions in the EU. In addition, since 2016, the Bank has been required to make contributions directly to the EU Single Resolution Fund, once the National Resolution Fund has been integrated into it. See “—Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on the Bank’s business, financial condition and results of operations”.

Any levies, taxes or funding requirements imposed on the Bank pursuant to the foregoing or otherwise in any of the jurisdictions where it operates could have a material adverse effect on the Bank’s business, financial condition and results of operations.

Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on the Bank’s business, financial condition and results of operations

The project of achieving a European banking union was launched in the summer of 2012. Its main goal is to resume progress towards the European single market for financial services by restoring confidence in the European banking sector and ensuring the proper functioning of monetary policy in the Eurozone.

Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the SRM.

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The SSM is intended to assist in making the banking sector more transparent, unified and safer. In accordance with the SSM Framework Regulation, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular the direct supervision of the largest European banks (including the Bank), on November 4, 2014.

The SSM represents a significant change in the approach to bank supervision at a European and global level, even if it is not expected to result in any radical change in bank supervisory practices in the short term. The SSM has resulted in the direct supervision by the ECB of the largest financial institutions, including the Bank, and indirect supervision of around 3,500 financial institutions. In the coming years, the SSM is expected to work to establish a new supervisory culture importing best practices from the 19 supervisory authorities that form part of the SSM. Several steps have already been taken in this regard, such as (i) the publication of the Supervisory Guidelines, (ii) the approval of the SSM Framework Regulation, (iii) the approval of Regulation (EU) 2016/445 of the ECB of March 14, 2016 on the exercise of options and discretions available in Union law, and (iv) a set of guidelines on the application of CRR’s national options and discretions. In addition, the SSM represents an extra cost for the financial institutions that fund it through payment of supervisory fees.

The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost. The SRM Regulation establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and a Single Resolution Fund. The new Single Resolution Board started operating on January 1, 2015 and fully assumed its resolution powers on January 1, 2016. The Single Resolution Fund has also been in place since January 1, 2016, funded by contributions from European banks in accordance with the methodology approved by the Council of the European Union. The Single Resolution Fund is intended to reach a total amount of €55 billion by 2024 and to be used as a separate backstop only after an 8% bail-in of a bank’s total liabilities including own funds has been applied to cover capital shortfalls (in line with the BRRD).

By allowing for the consistent application of EU banking rules through the SSM, the banking union is expected to help resume momentum toward economic and monetary union. In order to complete such union, a single deposit guarantee scheme is still needed, which may require a change to the existing European treaties. This is the subject of continued negotiation by European leaders to ensure further progress is made in European fiscal, economic and political integration.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as the Bank’s main supervisory authority may have a material effect on the Bank’s business, financial condition and results of operations. In addition, on January 29, 2014, the European Commission released its proposal on the structural reforms of the European banking sector, which will impose new constraints on the structure of European banks. The proposal is aimed at ensuring the harmonization between the divergent national initiatives in Europe. It includes a prohibition on proprietary trading similar to that contained in Section 619 of the Dodd-Frank Act (also known as the Volcker Rule) and a mechanism to potentially require the separation of trading activities (including market-making), such as in the Financial Services (Banking Reform) Act 2013, complex securitizations and risky derivatives.

There can be no assurance that regulatory developments related to the EU fiscal and banking union, and initiatives undertaken at the EU level, will not have a material adverse effect on the Bank’s business, financial condition and results of operations.

The Group’s anti-money laundering and anti-terrorism policies may be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing

Group companies are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although the Group believes that its current policies and procedures are sufficient to comply with applicable rules and regulations, it cannot guarantee that its anti-money laundering and anti-terrorism financing policies and procedures will not be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism financing. Any of such events may have severe consequences, including sanctions, fines and, notably, reputational consequences, which could have a material adverse effect on the Group’s financial condition and results of operations.

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The Group is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs

The Group is required to comply with the laws and regulations of various jurisdictions where it conducts operations. In particular, its operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the United Kingdom Bribery Act of 2010, and economic sanction programs, including those administered by the United Nations, the EU and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Group’s business, the Group may deal with entities the employees of which are considered government officials. In addition, economic sanctions programs restrict the Group’s business dealings with certain sanctioned countries, individuals and entities.

Although the Group has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that its employees, directors, officers, partners, agents and service providers will not take actions in violation of the Group’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which it or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on the Group, limits being placed on the Group’s activities, the Group’s authorizations and licenses being revoked, damage to the Group’s reputation and other consequences that could have a material adverse effect on the Group’s business, results of operations and financial condition. Further, litigation or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.

Local regulation may have a material effect on the Bank’s business, financial condition, results of operations and cash flows

The Bank’s operations are subject to regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in the various jurisdictions outside Spain where it operates. Regulations in certain jurisdictions where the Bank operates differ in a number of material respects from equivalent regulations in Spain. For example, local regulations may require the Bank’s subsidiaries and affiliates to meet capital requirements that are different from those applicable to the Bank as a Spanish bank, they may prohibit certain activities permitted to be undertaken by the Bank in Spain or they may require certain approvals to be obtained in connection with such subsidiaries and affiliates’ activities. Changes in regulations may have a material effect on the Group’s business and operations, particularly changes affecting Mexico, the United States or Turkey, which are the Group’s most significant jurisdictions by assets other than Spain.

Furthermore, the governments in certain regions where the Group operates have exercised, and continue to exercise, significant influence over the local economy. Governmental actions, including changes in laws or regulations or in the interpretation of existing laws or regulations, concerning the economy and state-owned enterprises, or otherwise affecting the Group’s activity, could have a significant effect on the private sector entities in general and on the Bank’s subsidiaries and affiliates in particular. In addition, the Group’s activities in emerging economies, such as Venezuela, are subject to a heightened risk of changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps, exchange controls, government restrictions on dividends and tax policies. Any of these risks could have a material adverse effect on the Group’s business, financial condition and results of operations.

Liquidity and Financial Risks

The Bank has a continuous demand for liquidity to fund its business activities. The Bank may suffer during periods of market-wide or firm-specific liquidity constraints, and liquidity may not be available to it even if its underlying business remains strong

Liquidity and funding continue to remain a key area of focus for the Group and the industry as a whole. Like all major banks, the Group is dependent on confidence in the short- and long-term wholesale funding markets. Should the Group, due to exceptional circumstances or otherwise, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be affected.

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The Bank’s profitability or solvency could be adversely affected if access to liquidity and funding is constrained or made more expensive for a prolonged period of time. Under extreme and unforeseen circumstances, such as the closure of financial markets and uncertainty as to the ability of a significant number of firms to ensure they can meet their liabilities as they fall due, the Group’s ability to meet its financial obligations as they fall due or to fulfill its commitments to lend could be affected through limited access to liquidity (including government and central bank facilities). In such extreme circumstances, the Group may not be in a position to continue to operate without additional funding support, which it may be unable to access. These factors may have a material adverse effect on the Group’s solvency, including its ability to meet its regulatory minimum liquidity requirements. These risks can be exacerbated by operational factors such as an over-reliance on a particular source of funding or changes in credit ratings, as well as market-wide phenomena such as market dislocation, regulatory change or major disasters.

In addition, corporate and institutional counterparties may seek to reduce aggregate credit exposures to the Bank (or to all banks), which could increase the Group’s cost of funding and limit its access to liquidity. The funding structure employed by the Group may also prove to be inefficient, thus giving rise to a level of funding cost where the cumulative costs are not sustainable over the longer term. The funding needs of the Group may increase and such increases may be material to the Group’s business, financial condition and results of operations.

Withdrawals of deposits or other sources of liquidity may make it more difficult or costly for the Group to fund its business on favorable terms or cause the Group to take other actions

Historically, one of the Group’s principal sources of funds has been savings and demand deposits. Large-denomination time deposits may, under some circumstances, such as during periods of significant interest-rate-based competition for these types of deposits, be a less stable source of deposits than savings and demand deposits. The level of wholesale and retail deposits may also fluctuate due to other factors outside the Group’s control, such as a loss of confidence (including as a result of political initiatives, including bail-in and/or confiscation and/or taxation of creditors’ funds) or competition from investment funds or other products. The introduction in 2013 of a national tax on outstanding deposits could be negative for the Group’s activities in Spain.

Moreover, there can be no assurance that, in the event of a sudden or unexpected withdrawal of deposits or shortage of funds in the banking systems or money markets in which the Group operates, or where such withdrawal specifically affects the Group, the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets. Furthermore, in such an event, the Bank could be subject to the adoption of an early intervention or, ultimately, resolution measure by a Relevant Spanish Resolution Authority pursuant to Law 11/2015 (including, among others but without limitation, the Spanish Bail-in Power (including a Non-Viability Loss Absorption)). See “—Bail-in and write-down powers under the BRRD and the SRM Regulation may adversely affect our business and the value of any securities we may issue”. 

In addition, if public sources of liquidity, such as the ECB extraordinary measures adopted in response to the financial crisis since 2008, are removed from the market, there can be no assurance that the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets or taking additional deleverage measures, and could be subject to the adoption of any early intervention or, ultimately, resolution measures by resolution authorities pursuant to Law 11/2015 (including, among others but without limitation, the Spanish Bail-in Power (including a Non-Viability Loss Absorption)).

Implementation of internationally accepted liquidity ratios might require changes in business practices that affect the profitability of the Bank’s business activities

The liquidity coverage ratio (“LCR”) is a quantitative liquidity standard developed by the BCBS to ensure that those banking organizations to which this standard is to apply have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The final standard was announced in January 2013 by the BCBS. The LCR has been progressively implemented since 2015 in accordance with the CRR, with banks having to fully comply (100%) with such ratio from January 1, 2018.

The BCBS’s net stable funding ratio (“NSFR”) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their on- and off-balance sheet activities that reduces the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure. The BCBS

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contemplates that the NSFR, including any revisions, must be implemented by member countries as a minimum standard by January 1, 2018, with no phase-in scheduled. The EU Banking Reforms propose the introduction of a harmonized binding requirement for the NSFR across the EU.

Various elements of the LCR and the NSFR, as they are implemented by national banking regulators and complied with by the Bank, may cause changes that affect the profitability of business activities and require changes to certain business practices, which could expose the Bank to additional costs (including increased compliance costs) or have a material adverse effect on the Bank’s business, financial condition or results of operations. These changes may also cause the Bank to invest significant management attention and resources to make any necessary changes.

The Group’s businesses are subject to inherent risks concerning borrower and counterparty credit quality which have affected and are expected to continue to affect the recoverability and value of assets on the Group’s balance sheet

The Group has exposures to many different products, counterparties and obligors and the credit quality of its exposures can have a significant effect on the Group’s earnings. Adverse changes in the credit quality of the Group’s borrowers and counterparties or collateral, or in their behavior or businesses, may reduce the value of the Group’s assets, and materially increase the Group’s write-downs and provisions for impairment losses. Credit risk can be affected by a range of factors, including an adverse economic environment, reduced consumer and/or government spending, global economic slowdown, changes in the rating of individual counterparties, the debt levels of individual contractual counterparties and the economic environment they operate in, increased unemployment, reduced asset values, increased personal or corporate insolvency levels, reduced corporate profits, changes (and the timing, quantum and pace of these changes) in interest rates, counterparty challenges to the interpretation or validity of contractual arrangements and any external factors of a legislative or regulatory nature. In recent years, the global economic crisis has driven cyclically high bad debt charges.

Non-performing or low credit quality loans have in the past and can continue to negatively affect the Bank’s results of operations. The Bank cannot assure that it will be able to effectively control the level of the impaired loans in its total loan portfolio. At present, default rates are partly cushioned by low rates of interest which have improved customer affordability, but the risk remains of increased default rates as interest rates start to rise. The timing, quantum and pace of any rise is a key risk factor. All new lending is dependent on the Group’s assessment of each customer’s ability to pay, and there is an inherent risk that the Group has incorrectly assessed the credit quality or willingness of borrowers to pay, possibly as a result of incomplete or inaccurate disclosure by those borrowers or as a result of the inherent uncertainty that is involved in the exercise of constructing models to estimate the true risk of lending to counterparties. The Group estimates and establishes reserves for credit risks and potential credit losses inherent in its credit exposure. This process, which is critical to the Group’s results and financial condition, requires difficult, subjective and complex judgments, including forecasts of how macro-economic conditions might impair the ability of borrowers to repay their loans. As is the case with any such assessments, there is always a risk that the Group will fail to adequately identify the relevant factors or that it will fail to estimate accurately the effect of these identified factors, which could have a material adverse effect on the Group’s business, financial condition or results of operations.

The Group’s business is particularly vulnerable to volatility in interest rates

The Group’s results of operations are substantially dependent upon the level of its net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond the Group’s control, including fiscal and monetary policies of governments and central banks, regulation of the financial sectors in the markets in which it operates, domestic and international economic and political conditions and other factors. Changes in market interest rates,including cases of negative reference rates, can affect the interest rates that the Group receives on its interest-earning assets differently to the rates that it pays for its interest-bearing liabilities. This may, in turn, result in a reduction of the net interest income the Group receives, which could have a material adverse effect on its results of operations.

In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to changes in interest rates. In addition, a rise in interest rates could reduce the demand for credit

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and the Group’s ability to generate credit for its clients, as well as contribute to an increase in the credit default rate. As a result of these and the above factors, significant changes or volatility in interest rates could have a material adverse effect on the Group’s business, financial condition or results of operations.

The Group has a substantial amount of commitments with personnel considered wholly unfunded due to the absence of qualifying plan assets

The Group’s commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Provisions for Pensions and Similar Obligations” in its consolidated balance sheets included in the Consolidated Financial Statements. For more information, please see Note 25 to the Consolidated Financial Statements.

The Group faces liquidity risk in connection with its ability to make payments on its unfunded commitments with personnel, which it seeks to mitigate, with respect to post-employment benefits, by maintaining insurance contracts which were contracted with insurance companies owned by the Group. The insurance companies have recorded in their balance sheets specific assets (fixed interest deposit and bonds) assigned to the funding of these commitments. The insurance companies also manage derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. The Group seeks to mitigate liquidity risk with respect to early retirements and post-employment welfare benefits through oversight by the Assets and Liabilities Committee (“ALCO”) of the Group. The Group’s ALCO manages a specific asset portfolio to mitigate the liquidity risk resulting from the payments of these commitments. These assets are government and covered bonds which are issued at fixed interest rates with maturities matching the aforementioned commitments. The Group’s ALCO also manages derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. Should BBVA fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Bank and certain of its subsidiaries are dependent on their credit ratings and any reduction of their credit ratings could materially and adversely affect the Group’s business, financial condition and results of operations

The Bank and certain of its subsidiaries are rated by various credit rating agencies. The credit ratings of the Bank and such subsidiaries are an assessment by rating agencies of their ability to pay their obligations when due. Any actual or anticipated decline in the Bank’s or such subsidiaries’ credit ratings to below investment grade or otherwise may increase the cost of and decrease the Group’s ability to finance itself in the capital markets, secured funding markets (by affecting its ability to replace downgraded assets with better-rated ones), or interbank markets, through wholesale deposits or otherwise, harm its reputation, require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and make third parties less willing to transact business with the Group or otherwise materially adversely affect its business, financial condition and results of operations. Furthermore, any decline in the Bank’s or such subsidiaries’ credit ratings to below investment grade or otherwise could breach certain agreements or trigger additional obligations under such agreements, such as a requirement to post additional collateral, which could materially adversely affect the Group’s business, financial condition and results of operations.

Highly-indebted households and corporations could endanger the Group’s asset quality and future revenues

In recent years, households and businesses have reached a high level of indebtedness, particularly in Spain, which has created increased risk in the Spanish banking system. In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to upward movements in interest rates and the profitability of the loans more vulnerable to interest rate decreases. Highly indebted households and businesses are less likely to be able to service debt obligations as a result of adverse economic events, which could have an adverse effect on the Group’s loan portfolio and, as a result, on its financial condition and results of operations. Moreover, the increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt, reducing the number of new products that the Group may otherwise be able to sell to them and limiting the Group’s ability to attract new customers who satisfy its credit standards, which could have an adverse effect on the Group’s ability to achieve its growth plans.

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The Group depends in part upon dividends and other funds from subsidiaries

Some of the Group’s operations are conducted through its financial services subsidiaries. As a result, the Bank’s ability to pay dividends, to the extent the Bank decides to do so, depends in part on the ability of the Group’s subsidiaries to generate earnings and to pay dividends to BBVA. Payment of dividends, distributions and advances by the Group’s subsidiaries will be contingent upon their earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. For instance, the repatriation of dividends from the Group’s Venezuelan and Argentinean subsidiaries have been subject to certain restrictions and there is no assurance that further restrictions will not be imposed. Additionally, the Bank’s right to receive any assets of any of the Group’s subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of subsidiaries’ creditors, including trade creditors. The Group also has to comply with increased capital requirements, which could result in the imposition of restrictions or prohibitions on discretionary payments including the payment of dividends and other distributions to the Bank by its subsidiaries (see “—Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”).

Business and Industry Risks

The Group faces increasing competition in its business lines

The markets in which the Group operates are highly competitive and this trend will likely continue with new business models likely to be developed in coming years which impact is unforeseeable. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which the Group must now compete.

The Group also faces competition from non-bank competitors, such as payment platforms, e-commerce businesses, department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, mutual funds, pension funds, insurance companies, and public debt.

In the last years, the financial services sector has experienced a significant transformation, closely linked to the development of the Internet and mobile technologies. Part of that transformation involves the entrance of new players, such as non-bank digital providers that compete (and cooperate) between them and with banks in most of the areas of financial services as well as large digital players such as Amazon, Facebook or Apple, who have also started to offer financial services (mainly, payments and credit) ancillary to their core value proposition. However, as of the date of this Annual Report, there is an uneven playing field between banks and such non-bank players. For example, banking groups are subject to prudential regulations that have implications for most of their businesses, including those in which they compete with non-bank players that are only subject to activity-specific regulations or benefit from regulatory uncertainty. In addition, fintech activities are generally subject to additional rules on internal governance when they are carried out within a banking group. For instance, the CRD IV Directive limits the ratio between the variable and the fixed salary that financial institutions can pay to certain staff members identified as risk takers. This places banking groups at a competitive disadvantage for attracting and retaining digital talent and for retaining the founders and management teams of acquired start-ups.

Existing loopholes in the regulatory framework are another source of uneven playing fields between banks and non-bank players. Some new services or business models are not yet covered under existing regulations. In these cases, asymmetries between players arise since regulated providers often face obstacles to engage in unregulated activities. For instance, the EBA has recommended to competent authorities that they prevent credit institutions, payment institutions and e-money institutions from buying, holding or selling virtual currencies.

The Group’s future success may depend, in part, on its ability to use technology to provide products and services that provide convenience to customers. Despite the technological capabilities the Group has been developing and its commitment to digitalization, as a result of the uneven playing field referred to above or for other reasons, the Group may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers, which would adversely affect the Group’s business, financial condition and results of operations.

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In addition, companies offering new applications and financial-related services based on artificial intelligence are becoming more competitive. The often lower cost and higher processing speed of these new applications and services can be especially attractive to technologically-adept purchasers. As technology continues to evolve, more tasks currently performed by people may be replaced by automation, machine learning and other advances outside of the Group’s control. If the Group is not able to successfully keep pace with these technological advances, its business may be adversely impacted.

In addition, the project of achieving a European capital markets union was launched by the European Commission as a plan to mobilize capital in Europe, being one of its main objectives to provide businesses with a greater choice of funding at lower costs and to offer new opportunities for savers and investors. These objectives are expected to be achieved by developing a more diversified financial system complementing bank financing with deep and developed capital markets, which may adversely affect the Group’s business, financial condition and results of operations.

The Group faces risks related to its acquisitions and divestitures

The Group’s mergers and acquisitions activity involves divesting its interests in some businesses and strengthening other business areas through acquisitions. The Group may not complete these transactions in a timely manner, on a cost-effective basis or at all. Even though the Group reviews the companies it plans to acquire, it is generally not feasible for these reviews to be complete in all respects. As a result, the Group may assume unanticipated liabilities, or an acquisition may not perform as well as expected. In addition, transactions such as these are inherently risky because of the difficulties of integrating people, operations and technologies that may arise. There can be no assurance that any of the businesses the Group acquires can be successfully integrated or that they will perform well once integrated. Acquisitions may also lead to potential write-downs due to unforeseen business developments that may adversely affect the Group’s results of operations.

The Group’s results of operations could also be negatively affected by acquisition or divestiture-related charges, amortization of expenses related to intangibles and charges for impairment of long-term assets. The Group may be subject to litigation in connection with, or as a result of, acquisitions or divestitures, including claims from terminated employees, customers or third parties, and the Group may be liable for future or existing litigation and claims related to the acquired business or divestiture because either the Group is not indemnified for such claims or the indemnification is insufficient. These effects could cause the Group to incur significant expenses and could materially adversely affect its business, financial condition and results of operations.

The Group is party to lawsuits, tax claims and other legal proceedings

Due to the nature of the Group’s business, the Bank and its subsidiaries are involved in litigation, arbitration and regulatory proceedings in jurisdictions around the world, the financial outcome of which is unpredictable, particularly where the claimants seek unspecified or undeterminable damages, or where the cases argue novel legal theories, involve a large number of parties or are at early stages of discovery. An adverse outcome or settlement in these proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, cash flows, results of operations and reputation.

In addition, responding to the demands of litigation may divert management’s time and attention and financial resources. While the Group provisions such risks based on its assessment of such matters and in accordance with applicable accounting rules, it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to the Group, could exceed the amount of provisions made for such risks, which, in turn, could have a material adverse effect on the Group’s business, financial condition and results of operations. See “Item 8. Financial information—Consolidated Statements and Other Financial Information—Legal proceedings” and Note 24 to the Bank’s Consolidated Financial Statements for additional information on the Group’s legal, regulatory and arbitration proceedings.

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The Group’s ability to maintain its competitive position depends significantly on its international operations, which expose the Group to foreign exchange, political and other risks in the countries in which it operates, which could cause an adverse effect on its business, financial condition and results of operations

The Group operates commercial banks and insurance and other financial services companies in various countries and its overall success as a global business depends upon its ability to succeed in differing economic, social and political conditions. The Group is particularly sensitive to developments in Mexico, the United States, Turkey and Argentina, which represented 12.86%, 10.67%, 11.43% and 1.35% of the Group’s assets as at December 31, 2017, respectively.

The Group is confronted with different legal and regulatory requirements in many of the jurisdictions in which it operates. See “―Legal, Regulatory and Compliance Risks―Local regulation may have a material effect on the Bank’s business, financial condition, results of operations and cash flows”. These include, but are not limited to, different tax regimes and laws relating to the repatriation of funds or nationalization or expropriation of assets. The Group’s international operations may also expose it to risks and challenges which its local competitors may not be required to face, such as exchange rate risk, difficulty in managing a local entity from abroad, political risk which may be particular to foreign investors and limitations on the distribution of dividends.

The Group’s presence in locations such as the Latin American markets or Turkey requires it to respond to rapid changes in market conditions in these countries and exposes the Group to increased risks relating to emerging markets. See “—Macroeconomic Risks—The Group may be materially adversely affected by developments in the emerging markets where it operates”. There can be no assurance that the Group will succeed in developing and implementing policies and strategies that are effective in each country in which it operates or that any of the foregoing factors will not have a material adverse effect on its business, financial condition and results of operations.

Financial, Reporting and Other Operational Risks

Our financial results, regulatory capital and ratios may be negatively affected by changes to accounting standards

We report our results and financial position in accordance with the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, which has been replaced by the Bank of Spain’s Circular 4/2017 for financial statements as of January 1, 2018 and later, and in compliance with IFRS-IASB. Changes to IFRS or interpretations thereof may cause our future reported results and financial position to differ from current expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a retrospective basis. Such changes may also affect our regulatory capital and ratios. We monitor potential accounting changes and, when possible, we determine their potential impact and disclose significant future changes in our financial statements that we expect as a result of those changes. Currently, there are a number of issued but not yet effective IFRS changes, as well as potential IFRS changes, some of which could be expected to impact our reported results, financial position and regulatory capital in the future. In particular, IFRS 9, requires us to record credit losses on loans at inception net of expected loss basis instead of recording credit losses on an incurred loss basis. For further information about developments in financial accounting and reporting standards, see Note 2.3 to the Consolidated Financial Statements (“Recent IFRS pronouncements”).

Weaknesses or failures in the Group’s internal or outsourced processes, systems and security could materially adversely affect its results of operations, financial condition or prospects, and could result in reputational damage

Operational risks, through inadequate or failed internal processes, systems (including financial reporting and risk monitoring processes) or security, or from people-related or external events, including the risk of fraud and other criminal acts carried out by Group employees or against Group companies, are present in the Group’s businesses. These businesses are dependent on processing and reporting accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Any weakness in these internal processes, systems or security could have an adverse effect on the Group’s results, the reporting of such results, and on the ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of the Group’s systems could disrupt its business, result in the disclosure of confidential information and create significant financial

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and legal exposure for the Group. Although the Group devotes significant resources to maintain and regularly update its processes and systems that are designed to protect the security of its systems, software, networks and other technology assets, there is no assurance that all of its security measures will provide absolute security. Furthermore, the Group has outsourced certain functions (such as the storage of certain information) to third parties and, as a result, it is dependent on the adequacy of the internal processes, systems and security measures of such third parties. Any actual or perceived inadequacies, weaknesses or failures in the Group’s systems, processes or security or the systems, processes or security of such third parties could damage the Group’s reputation (including harming customer confidence) or could otherwise have a material adverse effect on its business, financial condition and results of operations.  

The financial industry is increasingly dependent on information technology systems, which may fail, may not be adequate for the tasks at hand or may no longer be available

Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks, including the Bank, may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned.

Furthermore, the Group is under continuous threat of loss due to cyber-attacks, especially as it continues to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that it faces are e-fraud and breach of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers’ or the Group’s accounts. A breach of sensitive customer data, such as account numbers, could present significant reputational, legal and/or regulatory costs to the Group.

Over the past few years, there have been a series of distributed denial of service attacks on financial services companies. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks have not been conducted to steal financial data, but meant to interrupt or suspend a company’s internet service. While these events may not result in a breach of client data and account information, the attacks can adversely affect the performance of a company’s website and in some instances have prevented customers from accessing a company’s website. Distributed denial of service attacks, hacking and identity theft risks could cause serious reputational harm. Cyber threats are rapidly evolving and the Group may not be able to anticipate or prevent all such attacks. The Group’s risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, its plans to continue to provide internet banking and mobile banking channels, and its plans to develop additional remote connectivity solutions to serve its customers. The Group may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.

Additionally, fraud risk may increase as the Company offers more products online or through mobile channels.

In addition to costs that may be incurred as a result of any failure of its IT systems, the Group could face fines from bank regulators if it fails to comply with applicable banking or reporting regulations as a result of any such IT failure or otherwise.

The Group faces security risks, including denial of service attacks, hacking, social engineering attacks targeting its colleagues and customers, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect its business or reputation, and create significant legal and financial exposure

The Group’s computer systems and network infrastructure and those of third parties, on which it is highly dependent, are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. The Group’s business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in its computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access the Group’s network, products and services, its customers and other third parties may use personal mobile

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devices or computing devices that are outside of its network environment and are subject to their own cybersecurity risks.

The Group, its customers, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in the Group’s systems or the systems of third parties or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of the Group, its employees, its customers or of third parties, damage its systems or otherwise materially disrupt the Group’s or its customers’ or other third parties’ network access or business operations. As cyber threats continue to evolve, the Group may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Group’s systems and implement controls, processes, policies and other protective measures, the Group may not be able to anticipate all security breaches, nor may it be able to implement guaranteed preventive measures against such security breaches. Cyber threats are rapidly evolving and the Group may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss.

Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as the Group continues to increase its mobile-payment and other internet-based product offerings and expand its internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and “spear phishing” attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of the Group’s systems to disclose sensitive information in order to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to the Group’s data may not be disclosed to it in a timely manner.

The Group also faces indirect technology, cybersecurity and operational risks relating to the customers, clients and other third parties with whom it does business or upon whom it relies to facilitate or enable its business activities, including, for example, financial counterparties, regulators and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including the Group. This consolidation, interconnectivity and complexity increase the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack or other information or security breach, termination or constraint could, among other things, adversely affect the Group’s ability to effect transactions, service its clients, manage its exposure to risk or expand its business.

Cyber-attacks or other information or security breaches, whether directed at the Group or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on its systems has been successful, whether or not this perception is correct, may damage the Group’s reputation with customers and third parties with whom it does business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause the Group serious negative consequences, including loss of customers and business opportunities, significant business disruption to its operations and business, misappropriation or destruction of its confidential information and/or that of its customers, or damage to the Group’s or its customers’ and/or third parties’ computers

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or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in the Group’s security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact its results of operations, liquidity and financial condition.

The Group could be the subject of misinformation

The Group may be the subject of intentional misinformation and misrepresentations deliberately propagated to harm the Group’s reputation or for other deceitful purposes. Such misinformation could also be propagated by profiteering short sellers seeking to gain an illegal market advantage by spreading false information concerning the Group. The Group cannot assure that it will effectively neutralize and contain any false information that may be propagated regarding the Group, which could have an adverse effect on the Group’s business, financial condition and results of operations.

BBVA’s financial statements and periodic disclosure under securities laws may not give you the same information as financial statements prepared under U.S. accounting rules and periodic disclosures provided by domestic U.S. issuers

Publicly available information about public companies in Spain is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States. In addition, although BBVA is subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of foreign private issuers such as BBVA under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Finally, BBVA maintains its financial accounts and records and prepares its financial statements in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 (as amended) and in compliance with IFRS-IASB, which differs in certain respects from U.S. GAAP, the financial reporting standard to which many investors in the United States may be more accustomed.

The Bank’s financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of its operations and financial position

The preparation of financial statements in accordance with IFRS-IASB requires the use of estimates. It also requires management to exercise judgment in applying relevant accounting policies. The key areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated and individual financial statements, include impairment of certain financial assets, the assumptions used to quantify certain provisions and for the actuarial calculation of post-employment benefit liabilities and commitments, the useful life and impairment losses of tangible and intangible assets, the valuation of goodwill and purchase price allocation of business combinations, the fair value of certain unlisted financial assets and liabilities, the recoverability of deferred tax assets and the exchange rate and the inflation rate of Venezuela. There is a risk that if the judgment exercised or the estimates or assumptions used subsequently turn out to be incorrect then this could result in significant loss to the Group, beyond that anticipated or provided for, which could have an adverse effect on the Group’s business, financial condition and results of operations.

Observable market prices are not available for many of the financial assets and liabilities that the Group holds at fair value and a variety of techniques to estimate the fair value are used. Should the valuation of such financial assets or liabilities become observable, for example as a result of sales or trading in comparable assets or liabilities by third parties, this could result in a materially different valuation to the current carrying value in the Group’s financial statements.

The further development of standards and interpretations under IFRS-IASB could also significantly affect the results of operations, financial condition and prospects of the Group.

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ITEM 4.INFORMATION ON THE COMPANY

A.History and Development of the Company

BBVA’s predecessor bank, BBV (Banco Bilbao Vizcaya), was incorporated as a public limited company (a “sociedad anónima” or S.A.) under the Spanish Corporations Law on October 1, 1988. BBVA was formed following the merger of Argentaria into BBV (Banco Bilbao Vizcaya), which was approved by the shareholders of each entity on December 18, 1999 and registered on January 28, 2000. It conducts its business under the commercial name “BBVA”. BBVA is registered with the Commercial Registry of Vizcaya (Spain). It has its registered office at Plaza de San Nicolás 4, Bilbao, Spain, 48005, and operates out of Calle Azul, 4, 28050, Madrid, Spain telephone number +34-91-374-6201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Banco Bilbao Vizcaya Argentaria, S.A. New York Branch (1345 Avenue of the Americas, 44th Floor, New York, New York 10105 (Telephone: 212-728-1660)). BBVA is incorporated for an unlimited term.

Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. The main capital expenditures from 2015 to the date of this Annual Report were the following:

2017

Acquisition of an additional 9.95% of Garanti

On March 22, 2017, we acquired 41,790,000,000 shares (in the aggregate) of Garanti (amounting to 9.95% of the total issued share capital of Garanti) from Doğuş Holding A.Ş. and Doğuş Araştırma Geliştirme ve Müşavirlik Hizmetleri A.Ş., under certain agreements entered into on February 21, 2017, at a purchase price of 7.95 Turkish Liras (“TL”) per share (approximately 3,322 million TL or €859 million in the aggregate).

2016

In 2016 there were no significant capital expenditures.

2015

Acquisition of an additional 14.89% of Garanti

On July 27, 2015, we acquired 62,538,000,000 shares (in the aggregate) of Garanti from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, under certain agreements entered into on November 19, 2014. The total price effectively paid by BBVA amounted to 8.765 TL per batch of 100 shares, amounting to approximately TL 5,481 million and €1,857 million applying a 2.9571 TL/EUR exchange rate.

Following this acquisition, we held 39.90% of Garanti’s share capital and started to fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity. On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “―2017” above. 

In accordance with the IFRS-IASB accounting rules, at the date of achieving effective control over Garanti, BBVA had to measure at fair value its previously acquired stake of 25.01% in Garanti (classified as a joint venture accounted for under the equity method). This resulted in a negative impact in “Gains (losses) on derecognition of non-financial assets and subsidiaries, net” in the consolidated income statement of the BBVA Group for the year ended December 31, 2015, which resulted, in turn, in a net negative impact in the “Profit attributable to parent company” of the BBVA Group in 2015 amounting to €1,840 million. Such accounting impact did not result in any additional cash outflow from BBVA. Most of this impact resulted from the depreciation of the TL against the Euro since the acquisition by BBVA of such stake until the date of achieving such effective control.

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Acquisition of Catalunya Banc

On April 24, 2015, once the necessary authorizations had been obtained and all the agreed conditions precedent had been fulfilled, BBVA announced the acquisition of 1,947,166,809 shares of Catalunya Banc, S.A. (“Catalunya Banc”) (approximately 98.4% of its share capital) for a price of approximately €1,165 million.

Previously, on July 21, 2014, the Management Commission of the FROB had accepted BBVA’s bid in the competitive auction for the acquisition of Catalunya Banc.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2015 to the date of this Annual Report were the following:

2017

Agreement for the sale of BBVA’s stake in BBVA Chile

On November 28, 2017, BBVA received a binding offer from The Bank of Nova Scotia group (“Scotiabank”) for the acquisition, at a price of approximately $2,200 million, of BBVA’s stake in Banco Bilbao Vizcaya Argentaria Chile, S.A. (“BBVA Chile”) as well as in other companies of its Group in Chile whose operations are complementary to the banking business (amongst them, BBVA Seguros de Vida, S.A.). BBVA owns, directly and indirectly, approximately 68.19% of BBVA Chile’s share capital. The offer received does not include BBVA’s stake in the automobile financing companies which are part of the Forum group and in other Chilean entities which are engaged in corporate activities of the BBVA Group.  

On December 5, 2017, BBVA accepted the offer and entered into a sale and purchase agreement.

Completion of the transaction is subject to obtaining the relevant regulatory approvals.

Agreement for the creation of a joint venture and transfer of the real estate business in Spain

On November 28, 2017, BBVA reached an agreement with an affiliate of Cerberus Capital Management, L.P. (“Cerberus”) for the creation of a joint venture to which the real estate business of BBVA in Spain will be transferred (the “Spun-off Business”). BBVA will contribute the Spun-off Business to a single company (the “Newco”) and will sell 80% of the shares of such Newco to Cerberus at the closing date of the transaction.

The Spun-off Business comprises: (i) foreclosed real estate assets (the “REOs”), with a gross book value of approximately €13,000 million, taking as starting point the situation of the REOs on June 26, 2017; and (ii) the necessary assets and employees to manage the Spun-off Business in an autonomous manner. For the purpose of the agreement with Cerberus, the Spun-off Business was valued at approximately €5,000 million.

Considering the valuation of the Spun-off Business previously mentioned and assuming that all the Spun-off  Business’ REOs on June 26, 2017 will be contributed to the Newco, the sale price for 80% of the shares would amount to approximately €4,000 million. The final price will be determined based on the volume of REOs effectively contributed, which may vary depending on, among other matters, the sales carried out from the date of reference (June 26, 2017) until the date of closing of the transaction.

The consummation of the transaction is subject to obtaining the relevant authorizations from the competent authorities.

2016

In 2016 there were no significant capital divestitures.

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2015

Sale of the participation in Citic International Financial Holdings Limited (CIFH)

On December 23, 2014, the BBVA Group signed an agreement to sell its 29.68% participation in Citic International Financial Holdings Limited (“CIFH”) to China CITIC Bank Corporation Limited (“CNCB”). CIFH is a non-listed subsidiary of CNCB domiciled in Hong Kong. On August 27, 2015, BBVA completed the sale of this participation. The selling price of HK$8,162 million was registered under “Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations”.

Partial sale of China CITIC Bank Corporation Limited (CNCB)

On January 23, 2015, the BBVA Group signed an agreement to sell a 4.9% stake in CNCB to UBS AG, London Branch (“UBS”), which in turn entered into transactions pursuant to which such CNCB shares were to be transferred to a third party, with the ultimate economic benefit of ownership of such CNCB shares being transferred to Xinhu Zhongbao Co., Ltd (Xinhu) (collectively, the “Relevant Transactions”). On March 12, 2015, after having obtained the necessary approvals, BBVA completed the sale. The selling price to UBS was HK$5.73 per share, amounting to a total of HK$13,136 million, equivalent to approximately €1,555 million (with an exchange rate of €/HK$=8.45 as of the date of the closing).

In addition to the sale of this 4.9% stake, the BBVA Group made various sales of CNCB shares in the market during 2015. In total, a participation of 6.34% in CNCB was sold during 2015. The impact of these sales on the Consolidated Financial Statements of the BBVA Group was a gain, net of taxes, of approximately €705 million in 2015. This gain, gross of taxes, was recognized under “Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations” in the consolidated income statement for 2015. See Note 50 to our Consolidated Financial Statements for additional information.

B. Business Overview

BBVA is a highly diversified international financial group, with strengths in the traditional banking businesses of retail banking, asset management, private banking and wholesale banking. We also have investments in some of Spain’s leading companies.

The BBVA Group is a customer-centric global financial services group founded in 1857. It has a solid leadership position in the Spanish market, it is the largest financial institution in Mexico in terms of assets, it has leading franchises in South America and the Sunbelt Region of the United States and it is the leading shareholder in Garanti, Turkey’s biggest bank in terms of market capitalization. Its diversified business is focused on high-growth markets and it relies on technology as a key sustainable competitive advantage. Corporate responsibility is at the core of its business model. BBVA fosters financial education and inclusion, and supports scientific research and culture.

The BBVA Group operates in Spain through Banco Bilbao Vizcaya Argentaria, S.A., a private-law entity subject to the laws and regulations governing banking entities operating in Spain. It carries out its activity through branches and agencies across the country and abroad. In addition to the transactions it carries out directly, Banco Bilbao Vizcaya Argentaria, S.A. is the parent company of the BBVA Group, which includes a group of subsidiaries, joint ventures and associates performing a wide range of activities.

As of December 31, 2017, the BBVA Group had 131,856 employees, 72 million customers, 8,271 branchesand 31,688 ATMs and was present in 35 countries. As of such date the BBVA Group was composed of 331 consolidated entities and 76 entities accounted for using the equity method.

The Group is committed to offering a compelling digital proposition and is focused on offering more products online and through mobile channels, improving the functionality of its digital offerings and refining customer experience. In 2017, the number of digital and mobile customers and the volume of digital sales continued to increase.

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Operating Segments

Set forth below are the Group’s current seven operating segments:

·Banking Activity in Spain.

·Non-Core Real Estate (until March 2017, this operating segment was referred to as Real Estate Activity in Spain).

·The United States.

·Mexico. 

·Turkey. 

·South America.

·Rest of Eurasia.

In addition to the operating segments referred to above, the Group has a Corporate Center which includes those items that have not been allocated to an operating segment. It includes the Group’s general management functions, including costs from central units that have a strictly corporate function; management of structural exchange rate positions carried out by the Financial Planning unit; specific issues of capital instruments to ensure adequate management of the Group’s overall capital position; proprietary portfolios such as holdings in some of Spain’s leading companies and their corresponding results; certain tax assets and liabilities; provisions related to commitments with pensioners; and goodwill and other intangibles.

The breakdown of the Group’s total assets by operating segments as of December 31, 2017, 2016 and 2015 is as follows:

	As of December 31,
	2017	2016(1)	2015 (1)
	(In Millions of Euros)
Banking Activity in Spain	319,417	335,847	343,793
Non-Core Real Estate	9,714	13,713	17,122
The United States	80,493	88,902	86,454
Mexico	89,344	93,318	99,591
Turkey	78,694	84,866	89,003
South America	74,636	77,918	70,657
Rest of Eurasia	17,265	19,106	19,579
Subtotal Assets by Operating Segment	669,563	713,670	726,199
Corporate Center and other adjustments	20,495	18,186	23,656
Total Assets BBVA Group	690,059	731,856	749,855

⁽¹⁾  The figures corresponding to 2016 and 2015 have been restated due to changes in the structure of BBVA’s internal organization in a manner that caused the composition of the reportable segments to change. These changes were not significant.

The following table sets forth information relating to the profit (loss) attributable to parent company by each of BBVA’s operating segments and Corporate Center for the years ended December 31, 2017, 2016 and 2015:

	Profit/(Loss) Attributable to Parent Company			% of Profit/(Loss) Attributable to Parent Company
	For the Year Ended December 31,
	2017	2016	2015	2017	2016	2015
	(In Millions of Euros)			(In Percentage)
Banking Activity in Spain	1,381	905	1,080	26	21	24
Non-Core Real Estate	(501)	(595)	(496)	(9)	(14)	(11)
The United States	511	459	517	10	11	11
Mexico	2,162	1,980	2,094	40	46	46
Turkey	826	599	371	15	14	8
South America	861	771	905	16	18	20
Rest of Eurasia	125	151	70	2	4	2
Subtotal operating segments	5,363	4,269	4,541	100	100	100
Corporate Center	(1,844)	(794)	(1,899)
Profit attributable to parent company	3,519	3,475	2,642

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The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2017, 2016 and 2015 and reconciles the income statement of the various operating segments to the consolidated income statement of the Group:

	Operating Segments
	Banking Activity in Spain	Non-Core Real Estate	The United States	Mexico	Turkey(1)	South America	Rest of Eurasia	Corporate Center	Total	Adjustments (2)	BBVA Group
	(In Millions of Euros)
2017
Net interest income	3,738	71	2,158	5,437	3,331	3,200	180	(357)	17,758	-	17,758
Gross income	6,180	(17)	2,919	7,080	4,115	4,451	468	73	25,270	-	25,270
Net margin before provisions(3)	2,802	(132)	1,061	4,635	2,612	2,444	160	(811)	12,770	-	12,770
Operating profit/(loss) before tax	1,866	(673)	784	2,948	2,147	1,691	177	(2,009)	6,931	-	6,931
Profit attributable to parent company	1,381	(501)	511	2,162	826	861	125	(1,844)	3,519	-	3,519
2016
Net interest income	3,877	60	1,953	5,126	3,404	2,930	166	(455)	17,059	-	17,059
Gross income	6,416	(6)	2,706	6,766	4,257	4,054	491	(31)	24,653	-	24,653
Net margin before provisions(3)	2,837	(130)	863	4,371	2,519	2,160	149	(907)	11,862	-	11,862
Operating profit/(loss) before tax	1,268	(743)	612	2,678	1,906	1,552	203	(1,084)	6,392	-	6,392
Profit attributable to parent company	905	(595)	459	1,980	599	771	151	(794)	3,475	-	3,475
2015
Net interest income	4,015	71	1,811	5,387	2,194	3,202	176	(432)	16,426	(404)	16,022
Gross income	6,803	(28)	2,631	7,081	2,434	4,477	465	(183)	23,680	(318)	23,362
Net margin before provisions(3)	3,363	(154)	825	4,459	1,273	2,498	113	(1,015)	11,363	(109)	11,254
Operating profit/(loss) before tax	1,540	(716)	685	2,772	853	1,814	103	(1,172)	5,879	(1,276)	4,603
Profit attributable to parent company	1,080	(496)	517	2,094	371	905	70	(1,899)	2,642	-	2,642

⁽¹⁾The information for the year ended December 31, 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.

⁽²⁾ Adjustments in 2015 include (i) adjustments made to account for the fact that, until July 2015, in the consolidated financial statements Garanti was accounted for using the equity method rather than using the management criteria referred to above; and (ii) adjustments relating to the reclassification in the fourth quarter of 2015, of certain operating expenses related

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to technology from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015.

⁽³⁾ “Net margin before provisions” is calculated as “Gross income” less “Administration costs” and “Depreciation and amortization”.

The following tables set forth information relating to the balance sheet of the main operating segments as of December 31, 2017, 2016 and 2015:

	As of December 31, 2017
	Banking Activity in Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia
	(In Millions of Euros)
Total Assets	319,417	80,493	89,344	78,694	74,636	17,265
Loans and advances to customers	188,463	55,122	46,463	53,446	49,870	15,261
Of which:
Residential mortgages	77,366	11,048	8,235	5,113	11,425	1,968
Consumer finance	9,804	6,841	10,883	15,839	10,609	297
Loans	7,845	6,312	6,486	11,047	7,970	282
Credit cards	1,959	529	4,397	4,792	2,640	15
Loans to enterprises	46,259	29,506	18,668	30,459	20,655	11,075
Loans to public sector	15,952	5,133	3,111	1	867	510
Total Liabilities	309,731	77,250	85,950	70,253	69,885	16,330
Customer deposits	177,763	61,357	49,414	44,691	45,492	6,700
Of which:
Current and savings accounts	119,003	44,915	32,232	11,751	22,822	4,176
Time deposits	47,599	11,423	7,669	32,705	18,717	2,254
Other customer funds	6,680	208	4,497	43	4,137	231
Total Equity	9,686	3,243	3,394	8,441	4,751	935
	As of December 31, 2016
	Banking Activity in Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia
	(In Millions of Euros)
Total Assets	335,847	88,902	93,318	84,866	77,918	19,106
Loans and advances to customers	187,201	62,000	47,938	57,941	50,333	15,835
Of which:
Residential mortgages	81,659	12,893	8,410	5,801	11,441	2,432
Consumer finance	7,141	7,413	11,286	15,819	10,527	231
Loans	5,374	6,838	6,630	10,734	7,781	217
Credit cards	1,767	575	4,656	5,085	2,745	15
Loans to enterprises	43,472	33,084	18,684	33,836	21,495	12,340
Loans to public sector	18,268	4,594	3,862	-	685	57
Total Liabilities	325,230	84,719	89,244	75,798	73,425	17,705
Customer deposits	180,544	65,760	50,571	47,244	47,684	9,396
Of which:
Current and savings accounts	98,989	49,430	31,112	12,237	23,369	4,442
Time deposits	70,696	13,765	7,048	35,231	20,509	4,773
Other customer funds	5,124	-	5,324	21	4,456	107
Total Equity	10,617	4,183	4,074	9,068	4,493	1,401

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	As of December 31, 2015
	Banking Activity in Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia
	(In Millions of Euros)
Total Assets	339,775	86,454	99,594	89,003	70,661	23,469
Loans and advances to customers	192,068	60,599	49,075	57,768	44,970	16,143
Of which:
Residential mortgages	85,029	13,182	9,099	6,215	9,810	2,614
Consumer finance	6,126	7,364	11,588	14,156	9,278	322
Loans	4,499	6,784	6,550	9,010	6,774	305
Credit cards	1,627	580	5,037	5,146	2,504	17
Loans to enterprises	43,149	31,882	18,160	31,918	19,896	12,619
Loans to public sector	20,798	4,442	4,197	-	630	216
Total Liabilities	329,195	82,413	93,413	83,246	66,287	22,319
Customer deposits	185,471	63,715	49,553	47,148	41,998	15,053
Current and savings accounts	81,218	45,717	32,165	9,697	21,011	5,031
Time deposits	78,403	14,456	7,049	33,695	16,990	9,319
Other customer funds	14,906	-	5,738	-	4,031	609
Total Equity	10,581	4,041	6,181	5,757	4,374	1,150

Banking Activity in Spain

The Banking Activity in Spain operating segment includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Center area and Non-Core Real Estate. The main business units included in this operating segment are:

·Spanish Retail Network: including individual customers, private banking, small companies and businesses in the domestic market;

·Corporate and Business Banking (CBB): which manages small and medium sized enterprises (“SMEs”), companies and corporations, public institutions and developer segments;

·Corporate and Investment Banking (C&IB): responsible for business with large corporations and multinational groups and the trading floor and distribution business in Spain; and

·Other units: which include the insurance business unit in Spain (BBVA Seguros), and the Asset Management unit, which manages Spanish mutual funds and pension funds. Loan production to real estate developers that are not in difficulties are also included here.

In addition, Banking Activity in Spain includes certain loans and advances portfolios, finance and structural euro balance sheet positions.

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The following table sets forth information relating to the activity of this operating segment as of December 31, 2017, 2016 and 2015:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Total Assets	319,417	335,847	343,793
Loans and advances to customers	188,463	187,201	192,028
Of which:
Residential mortgages	77,366	81,659	85,029
Consumer finance	9,804	7,141	6,207
Loans	7,845	5,374	4,577
Credit cards	1,959	1,767	1,631
Loans to enterprises	46,259	43,472	43,635
Loans to public sector	15,952	18,268	20,892
Customer deposits	177,763	180,544	188,116
Of which:
Current and savings accounts	119,003	98,989	81,270
Time deposits	47,599	70,696	81,048
Other customer funds	6,680	5,124	14,861
Assets under management	62,054	56,147	54,910
Mutual funds	37,992	32,648	31,927
Pension funds	24,022	23,448	22,860
Other placements	40	51	123

Loans and advances to customers of this operating segment as of December 31, 2017 amounted to €188,463 million, a 0.7% increase compared with the €187,201 million recorded as of December 31, 2016, mainly as a result of a €3,074 million increase in repurchase agreements (repos) and other loans, increased activity with clients in France, and a €2,787 million increase in loans to enterprises, of which approximately €800 million related to unimpaired loans transferred from the Non-Core Real Estate operating segment, partially offset by a €4,293 million decrease in residential mortgages continuing the trend of last year.

Customer deposits of this operating segment as of December 31, 2017 amounted to €177,763 million, a 1.5% decrease compared with the €180,544 million recorded as of December 31, 2016, mainly as a result of a €23,097 million decrease in time deposits partially offset by a €20,014 million increase in current and savings accounts. Due to the low interest rate environment and the consequent low profitability of time deposits, there was a transfer from time deposits to current and savings accounts and, to a lesser extent, mutual funds. 

Mutual funds of this operating segment as of December 31, 2017 amounted to €37,992 million, a 16.4% increase compared with the €32,648 million recorded as of December 31, 2016, continuing the trend of the previous year. Increased activity in mutual funds was mainly attributable the low return on deposits and the improvement of the markets. Pension funds of this operating segment as of December 31, 2017 amounted to €24,022 million, a 2.4% increase compared with the €23,448 million recorded as of December 31, 2016.

The non-performing asset ratio of this operating segment as of December 31, 2017 was 5.2% compared with 5.8% as of December 31, 2016. This operating segment’s non-performing assets coverage ratio (which reflects the degree to which the impairment of non-performing assets has been covered in the Group’s consolidated financial statements through loan loss provisions) decreased to 50% as of December 31, 2017, from 53% as of December 31, 2016.

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Non-Core Real Estate

This operating segment was set up with the aim of providing specialized and structured management of the real estate assets accumulated by the Group as a result of the economic crisis in Spain. It primarily includes lending to real estate developers and foreclosed real estate assets (except for those new loans to developers that are included in the Banking Activity in Spain segment). In November 2017, BBVA reached an agreement with a subsidiary of Cerberus for the creation of a joint venture to which the real estate business of BBVA in Spain will be transferred, which represents the majority of the assets and the business of this operating segment. BBVA will retain a 20% interest in such joint venture, while Cerberus will acquire a 80% interest in exchange of approximately €4,000 million. For additional information on this transaction, see “—History and Development of the Company—Capital Divestitures—2017—Agreement for the creation of a joint venture and transfer of the real estate business in Spain”.

Loans and advances to customers of this operating segment have significantly declined over recent years. As of December 31, 2017, loans and advances to customers amounted to €5,042 million, a 44.4% decrease compared with the €9,070 million recorded as of December 31, 2016.

Non-performing assets of this segment have continued to decline and as of December 31, 2017 and were 4.5 p.p. lower than as of December 31, 2016. The coverage of non-performing and potential problem loans of this segment decreased to 55.6% as of December 31, 2017, compared with 59.4% as of December 31, 2016 of the total amount of real-estate assets in this operating segment.

The number of real estate assets sold amounted to 36,041 units in 2017, 67.2% higher than in 2016. 

 The United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 92% of the operating segment’s balance sheet as of December 31, 2017. Given its size in this segment, most of the comments below refer to BBVA Compass. This operating segment also includes the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations.

The following table sets forth information relating to the business activity of this operating segment as of December 31, 2017, 2016 and 2015:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Total Assets	80,493	88,902	86,454
Loans and advances to customers	55,122	62,000	60,599
Of which:
Residential mortgages	11,048	12,893	13,182
Consumer finance	6,841	7,413	7,364
Loans	6,312	6,838	6,784
Credit cards	529	575	580
Loans to enterprises	29,506	33,084	31,882
Loans to public sector	5,133	4,594	4,442
Customer deposits	61,357	65,760	63,715
Of which:
Current and savings accounts	44,915	49,430	45,717
Time deposits	11,423	13,765	14,456
Other customer funds	208	-	-
Assets under management	-	-	-

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The U.S. dollar depreciated 12.1% against the euro as of December 31, 2017 compared with December 31, 2016, negatively affecting the business activity of the United States operating segment as of December 31, 2017 expressed in euro. See “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2017 amounted to €55,122 million, a 11.1% decrease compared with the €62,000 million recorded as of December 31, 2016, mainly due to the depreciation of the U.S. dollar against the euro. Excluding this impact, loans and advances to customers increased by 1.2% driven by an overall increase in commercial loans as well as consumer loans, particularly in residential real estate loans. See “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates” for an explanation on how we exclude the impact of changes in exchange rates when comparing amounts as of two different dates.

Customer deposits of this operating segment as of December 31, 2017 amounted to €61,357 million, a 6.7% decrease compared with the €65,760 million recorded as of December 31, 2016, mainly due to the depreciation of the U.S. dollar against the euro. Excluding this impact, customers deposits increased by 6.2% mainly as a result of a 3.4% increase in current and savings accounts due primarily to marketing efforts, partially offset by a 5.6% decrease in time deposits.

The non-performing asset ratio of this operating segment as of December 31, 2017 was 1.3% compared with 1.5% as of December 31, 2016. This operating segment’s non-performing assets coverage ratio decreased to 104% as of December 31, 2017, from 94% as of December 31, 2016.

Mexico

The Mexico operating segment comprises the banking and insurance businesses conducted in Mexico by the BBVA Bancomer financial group.

The following table sets forth information relating to the business activity of this operating segment as of December 31, 2017, 2016 and 2015:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Total Assets	89,344	93,318	99,591
Loans and advances to customers	46,463	47,938	49,074
Of which:
Residential mortgages	8,235	8,410	9,099
Consumer finance	10,883	11,286	11,588
Loans	6,486	6,630	6,550
Credit cards	4,397	4,656	5,037
Loans to enterprises	18,668	18,684	18,160
Loans to public sector	3,111	3,862	4,197
Customer deposits	49,414	50,571	49,552
Of which:
Current and savings accounts	32,232	31,112	32,165
Time deposits	7,669	7,048	7,049
Other customer funds	4,497	5,324	5,738
Assets under management	19,472	19,111	21,557
Mutual funds	16,430	16,331	17,894
Pension funds	-	-	-
Other placements	3,041	2,780	3,663

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The Mexican peso depreciated 8.0% against the euro as of December 31, 2017 compared with December 31, 2016, negatively affecting the business activity of the Mexico operating segment as of December 31, 2017 expressed in euro. See “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2017 amounted to €46,463 million, a 3.1% decrease compared with the €47,938 million recorded as of December 31, 2016, primarily due to the depreciation of the Mexican peso against the euro and, to a lesser extent, prepayments in the commercial portfolio in the fourth quarter of 2017. Assuming constant exchange rates, loans and advances to customers increased by 5.3% explained by overall increases in all the lines, in line with the growth of the Mexican banking system.

Customer deposits of this operating segment as of December 31, 2017 amounted to €49,414 million, a 2.3% decrease compared with the €50,571 million recorded as of December 31, 2016, primarily due to the depreciation of the Mexican peso against the euro. Excluding this impact, customer deposits increased by 6.2% driven by the performance of time deposits and current and savings accounts, supported by the growth of the Mexican banking system.

Mutual funds of this operating segment as of December 31, 2017 amounted to €16,430 million, a 0.6% increase compared with the €16,331 million recorded as of December 31, 2016.

This operating segment’s non-performing asset ratio was 2.3% as of December 31, 2017 and 2016. This operating segment’s non-performing assets coverage ratio decreased to 123% as of December 31, 2017, from 127% as of December 31, 2016.

Turkey

This operating segment comprises the banking and insurance businesses conducted by Garanti and its consolidated subsidiaries.

The following table sets forth information relating to the business activity of this operating segment as of December 31, 2017, 2016 and 2015:  

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Total Assets	78,694	84,866	89,003
Loans and advances to customers	53,446	57,941	57,768
Of which:
Residential mortgages	5,113	5,801	5,884
Consumer finance	15,839	15,819	15,940
Loans	11,047	10,734	10,607
Credit cards	4,792	5,085	5,332
Loans to enterprises	30,459	33,836	33,472
Loans to public sector	1	-	-
Customer deposits	44,691	47,244	47,148
Of which:
Current and savings accounts	11,751	12,237	11,889
Time deposits	32,705	35,231	35,543
Other customer funds	43	21	25
Assets under management	3,902	3,753	3,620
Mutual funds	1,265	1,192	1,243
Pension funds	2,637	2,561	2,378
Other placements	-	-	-

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The Turkish lira depreciated 18.5% against the euro as of December 31, 2017 compared to December 31, 2016, negatively affecting the business activity of the Turkey operating segment as of December 31, 2017 expressed in euro. See “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2017 amounted to €53,446 million, a 7.8% decrease compared with the €57,941 million recorded as of December 31, 2016, mainly as a result of the impact of the depreciation of the Turkish lira. Excluding this impact, loans and advances to customers increased by 13.1% supported by the strong growth showed by the Turkish financial sector mainly as a result of the growth of lending spurred by the government’s Credit Guarantee Fund (CGF) program.

Customer deposits of this operating segment as of December 31, 2017 amounted to €44,691 million, a 5.4% decrease compared with the €47,244 million recorded as of December 31, 2016, mainly as a result of the impact of the depreciation of the Turkish lira. Excluding this impact, customer deposits grew by 16.0%, above the average of the sector, with current and savings accounts increasing by 17.8%, reaching 26.3% of the total customer deposits and lowering the overall funding costs.

Mutual funds of this operating segment as of December 31, 2017 amounted to €1,265 million, a 6.1% increase compared with the €1,192 million recorded as of December 31, 2016. Excluding the exchange rate effect, there was a 30.1% increase as a result of a greater volume of funds, the increased use of alternative sale channels (including the  implementation of a new e-platform), generally higher share prices and higher interest rates.

Pension funds of this operating segment as of December 31, 2017 amounted to €2,637 million, a 3.0% increase compared with the €2,561 million recorded as of December 31, 2016. Excluding the exchange rate effect, there was a 26.3% increase, mainly as a result of the introduction of a mandatory pension plan by the Turkish government since the beginning of 2017 as well as the implementation of a new e-platform, the positive trend in the economy and higher interest rates.

The non-performing asset ratio of this operating segment as of December 31, 2017 was 3.9% compared with 2.7% as of December 31, 2016.  This operating segment’s non-performing assets coverage ratio decreased to 85% as of December 31, 2017, from 124% as of December 31, 2016. These changes were mainly as a result of increased impairments of wholesale loans.

South America

The South America operating segment includes the BBVA Group’s banking and insurance businesses in the region.

The business units included in the South America operating segment are:

·Retail and Corporate Banking: includes banks in Argentina, Chile, Colombia, Paraguay, Peru, Uruguay and Venezuela.

·Insurance: includes insurance businesses in Argentina, Chile, Colombia and Venezuela.

In November 2017, BBVA reached an agreement for the sale of BBVA’s stake in BBVA Chile. For additional information, see “—History and Development of the Company—Capital Divestitures—2017—Agreement for the sale of BBVA’s stake in BBVA Chile”.

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The following table sets forth information relating to the business activity of this operating segment as of December 31, 2017, 2016 and 2015:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Total Assets	74,636	77,918	70,657
Loans and advances to customers	49,870	50,333	44,970
Of which:
Residential mortgages	11,425	11,441	9,810
Consumer finance	10,609	10,527	9,089
Loans	7,970	7,781	6,585
Credit cards	2,640	2,745	2,504
Loans to enterprises	20,655	21,495	20,084
Loans to public sector	867	685	630
Customer deposits	45,492	47,684	41,998
Of which:
Current and savings accounts	22,822	23,369	21,011
Time deposits	18,717	20,509	16,990
Other customer funds	4,137	4,456	4,229
Assets under management	12,197	11,902	9,729
Mutual funds	5,248	4,859	3,793
Pension funds	6,949	7,043	5,936
Other placements	-	-	-

All the currencies of the countries in which BBVA operates in South America depreciated against the euro as of December 31, 2017, negatively affecting the business activity of the South America operating segment as of December 31, 2017 expressed in euro. See “Item 5.Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”.

Loans and advances to customers of this operating segment as of December 31, 2017 amounted to €49,870 million, a 0.9% decrease compared with the €50,333 million recorded as of December 31, 2016, mainly as a result of the impact of the depreciation of all the currencies of the region. Excluding this impact, loans and advances to customers increased by 11.3%, mainly as a result of a €1,335 million increase in loans to enterprises, and a €1,102 million increase in consumer loans. By country, the main variation was related to Argentina where loans and advances to customers, at constant exchange rates, increased by €2,172 million.

Customer deposits of this operating segment as of December 31, 2017 amounted to €45,492 million, a 4.6% decrease compared with the €47,684 million recorded as of December 31, 2016, mainly as a result of the impact of the depreciation of all the currencies of the region. Excluding this impact, customer deposits increased by 10.2%, mainly as a result of an increase in current and savings accounts. By country, the main variation was related to Argentina where customer deposits, at constant exchange rates, increased by €1,733 million.

Mutual funds of this operating segment as of December 31, 2017 amounted to €5,248 million, an 8.0% increase compared with the €4,859 million recorded as of December 31, 2016, mainly as a result of increased activity in Argentina and Colombia during the first quarter of the year, which more than offset the impact of the depreciation of the currencies of the region.

The non-performing asset ratio of this operating segment as of December 31, 2017 was 3.4% compared with 2.9% as of December 31, 2016, due to weaker economic conditions in the region during the first part of the year,

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alleviated slightly in the last quarter when the non-performing asset ratio decreased by 8 b.p. This operating segment’s non-performing assets coverage ratio decreased to 89% as of December 31, 2017, from 103% as of December 31, 2016, mainly as a result of the weaker economic conditions during the first part of the year 2017.

Rest of Eurasia

This operating segment includes the retail and wholesale banking businesses carried out by the Group in Europe (primarily Portugal) and Asia, excluding Spain and Turkey.

The following table sets forth information relating to the business activity of this operating segment as of December 31, 2017, 2016 and 2015:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Total Assets	17,265	19,106	19,579
Loans and advances to customers	15,261	15,835	16,165
Of which:
Residential mortgages	1,968	2,432	2,614
Consumer finance	297	231	322
Loans	282	217	305
Credit cards	15	15	17
Loans to enterprises	11,075	12,340	12,619
Loans to public sector	510	57	216
Customer deposits	6,700	9,396	12,409
Of which:
Current and savings accounts	4,176	4,442	5,024
Time deposits	2,254	4,773	6,684
Other customer funds	231	107	609
Assets under management	376	366	331
Mutual funds	-	-	-
Pension funds	376	366	331
Other placements	-	-	-

Loans and advances to customers of this operating segment as of December 31, 2017 amounted to €15,261 million, a 3.6% decrease compared with the €15,835 million recorded as of December 31, 2016, mainly as a result of a €1,266 million decrease in loans to enterprises as a result of the loss of certain customers in the Global Finance Asia area.

Customer deposits of this operating segment as of December 31, 2017 amounted to €6,700 million, a 28.7% decrease compared with the €9,396 million recorded as of December 31, 2016, mainly as a result of a €2,520 million decrease in time deposits, mainly as a result of the reclassification of certain customer deposits between this operating segment and the operating segment of Banking Activity in Spain.

Pension funds of this operating segment as of December 31, 2017 amounted to €376 million, a 2.7% increase compared with the €366 million recorded as of December 31, 2016.

The non-performing asset ratio of this operating segment as of December 31, 2017 was 2.4% compared with 2.6% as of December 31, 2016. This operating segment’s non-performing assets coverage ratio decreased to 74% as of December 31, 2017, from 85% as of December 31, 2016.

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Insurance Activity

See Note 23 to our Consolidated Financial Statements for information on our insurance activity.

Monetary Policy

The integration of Spain into the European Monetary Union (“EMU”) on January 1, 1999 implied the yielding of monetary policy sovereignty to the Eurosystem. The “Eurosystem” is composed of the ECB and the national central banks of the 19 member countries that form the EMU.

The Eurosystem determines and executes the policy for the single monetary union of the 19 member countries of the EMU. The Eurosystem collaborates with the central banks of member countries to take advantage of the experience of the central banks in each of its national markets. The basic tasks carried out by the Eurosystem include:

·defining and implementing the single monetary policy of the EMU;

·conducting foreign exchange operations in accordance with the set exchange policy;

·lending to national monetary financial institutions in collateralized operations;

·holding and managing the official foreign reserves of the member states; and

·promoting the smooth operation of the payment systems.

In addition, the Treaty on the EU (“EU Treaty”) establishes a series of rules designed to safeguard the independence of the system, in its institutional as well as its administrative functions.

Supervision and Regulation

Since September 2012, significant progress has been made toward the establishment of a European banking union. The banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the SRM. As a further step to a fully-fledged banking union, in November 2015, the European Commission put forward a proposal for a European Deposit Insurance Scheme (EDIS), which intends to provide a stronger and more uniform degree of insurance cover for all retail depositors in the banking union.

Pursuant to Article 127(6) of the Treaty on the Functioning of the EU and the SSM Framework Regulation, the ECB is responsible for specific tasks concerning the prudential supervision of credit institutions established in participating Member States. Since 2014, it carries out these supervisory tasks within the SSM framework, composed of the ECB and the relevant national authorities. The ECB is responsible for the effective and consistent functioning of the SSM, with a view to carrying out effective banking supervision, contributing to the safety and soundness of the banking system and the stability of the financial system.

Its main aims are to:

·ensure the safety and soundness of the European banking system;

·increase financial integration and stability; and

·ensure consistent supervision.

The ECB, in cooperation with the relevant national supervisors, is responsible for the effective and consistent functioning of the SSM.

It has the authority to:

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·conduct supervisory reviews, on-site inspections and investigations;

·grant or withdraw banking licenses;

·assess banks’ acquisitions and disposals of qualifying holdings;

·ensure compliance with EU prudential rules; and

·set higher capital requirements (“buffers”) in order to counter any financial risks.

In addition, since November 2014, it assumed the direct supervision of the 123 significant banks of the participating countries, including Banco Bilbao Vizcaya Argentaria, S.A. Ongoing supervision of the significant banks is carried out by Joint Supervisory Teams (“JSTs”). Each significant bank has a dedicated JST, comprising staff of the ECB and the relevant national supervisors (in our case, the Bank of Spain).

The criteria for determining whether a bank is considered significant (and therefore whether it falls under the ECB’s direct supervision) are set out in the SSM Framework Regulation and the SSM Framework Regulation. To qualify as significant, a bank must fulfill at least one of these criteria:

·size: the total value of its assets exceeds €30 billion;

·economic importance: for the specific country or the EU economy as a whole;

·cross border activities: the total value of its assets exceeds €5 billion and the ratio of its cross-border assets/liabilities in more than one other participating Member State to its total assets/liabilities is above 20%; or

·direct public financial assistance: it has requested or received funding from the European Stability Mechanism (the “ESM”) or the European Financial Stability Facility.

The ECB can decide at any time to classify a bank as significant to ensure that high supervisory standards are applied consistently.

The ECB indirectly supervises banks that are not considered significant (also known as “less significant” institutions), which continue to be supervised by their national supervisors, in close cooperation with the ECB. See “—Bank of Spain” below for an explanation of the tasks to be performed by the Bank of Spain.

Bank of Spain

The Bank of Spain was established in 1962 as a public law entity (entidad de derecho público) that operates as Spain’s autonomous central bank. In addition, it has the ability to function as a private bank. Except in its public functions, the Bank of Spain’s relations with third parties are governed by private law, and its actions are subject to the civil and business law codes and regulations.

Until January 1, 1999, the Bank of Spain was also the sole entity responsible for implementing Spanish monetary policy. For a description of monetary policy since the introduction of the euro, see “—Monetary Policy”.

Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the Eurosystem:

·defining and implementing the Eurosystem’s monetary policy, with the principal aim of maintaining price stability across the Eurozone;

·conducting currency exchange operations consistent with the provisions of Article 219 of the EU Treaty, and holding and managing the Member States’ official currency reserves;

·promoting the sound working of payment systems in the Eurozone; and

·issuing legal tender banknotes.

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Recognizing the foregoing functions as a fully-fledged member of the Eurosystem, the Bank of Spain Law of Autonomy (Ley de Autonomía del Banco de España) stipulates the performance of the following functions by the Bank of Spain:

·holding and managing currency and precious metal reserves not transferred to the ECB;

·promoting the proper working and stability of the financial system and, without prejudice to the functions of the ECB, the proper working of the national payment systems, providing emergency liquidity assistance (ELA);

·promoting the sound working and stability of the financial system and, without prejudice to the functions of the ECB, of national payment systems;

·placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;

·preparing and publishing statistics relating to its functions, and assisting the ECB in the compilation of the necessary statistical information;

·providing treasury services and acting as financial agent for government debt;

·advising the government, preparing the appropriate reports and studies; and

·exercising all other powers attributed to it by legislation.

As indicated above, on November 4, 2014 the ECB assumed responsibility for the supervision of Eurozone banks, following a year-long preparatory phase that included an in-depth examination of the resilience and balance sheets of the largest banks in the Eurozone. For all the banks not supervised directly by the ECB, around 3,500 banks, the ECB will also set and monitor the relevant supervisory standards and work closely with the national competent authorities in the supervision of these banks.

The ECB has set up homogenous criteria for all the supervised institutions under the SSM and has assumed decision-making power. National authorities, such as the Bank of Spain, provide their knowledge on their financial systems and the entities located in their jurisdictions. Therefore, the role of the Bank of Spain continues to be relevant for financial entities located in Spain. In particular, the Bank of Spain’s tasks include the following:

·it collaborates with the ECB in the supervision of significant entities through its participation in the JSTs of the relevant Spanish banks, and has a leading role in the on-site inspections;

·the Bank of Spain supervises directly the less significant Spanish banks. The ECB’s indirect supervision of these entities is focused on the homogenization of supervisory criteria and reception of information;

·there are several supervisory competences over banking entities, for example money laundering and terrorist financing, customer protection and certain aspects of the monitoring of the financial markets that are out of the scope of the SSM and remain under the purview of the Bank of Spain;

·the Bank of Spain participates in certain administrative processes controlled by the ECB, such as the granting or withdrawal of licenses and the application of fit and proper tests to members of the board and senior management of Spanish banks, and supports the ECB in cross-border tasks such as the definition of policies, methodologies or crisis management;

·the Bank of Spain continues to supervise other institution such as appraisal companies or specialist credit institutions, e-money issuing entities, mutual guarantee and re-guarantee companies; and

·the Bank of Spain participates in the governing bodies of the SSM contributing to the adoption of decisions affecting all credit institutions located in the Eurozone.

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Single Resolution Fund

The Single Resolution Fund (the “Fund”) was established pursuant to Regulation (EU) No 806/2014 as a single financing arrangement for all the Member States participating in the SSM.

The Fund should be used in resolution procedures where the Single Resolution Board (“SRB”) considers it necessary to ensure the effective application of the resolution tools. The Fund should have adequate financial resources to allow for an effective functioning of the resolution framework by being able to intervene, where necessary, for the effective application of the resolution tools and to protect financial stability without recourse to taxpayers’ money.

The SRB should calculate the annual contributions to the Fund on the basis of a single target level established as 1% of the amount of covered deposits of all of the credit institutions authorized in all of the participating Member States. The SRB should ensure that the available financial means of the Fund reach at least the target level by the end of an initial period of eight years from  January 1, 2016. The annual contribution to the Fund should be based on a flat contribution determined on the basis of an institution’s liabilities excluding own funds and covered deposits and a risk-adjusted contribution depending on the risk profile of that institution.

Deposit Guarantee Fund of Credit Institutions

The Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos or “FGD”), which operates under the guidance of the Bank of Spain, was set up by virtue of Royal Decree-Law 16/2011, of October 14. It is an independent legal entity and enjoys full authority to fulfill its functions. Royal Decree-Law 16/2011 unified the three previous guarantee funds that existed in Spain: the Deposit Guarantee Fund of Saving Banks, the Deposit Guarantee Fund of Credit Entities and the Deposit Guarantee Fund of Banking Establishments.

The main objective of the FGD is to guarantee deposits and securities held by credit institutions, up to the limit of €100,000. It also has the authority to carry out any such actions necessary to reinforce the solvency and operation of credit institutions in difficulty, with the purpose of defending the interests of depositors and deposit guarantee funds.

In order to fulfill its purposes, the FGD receives annual contributions from member credit institutions. The current annual contribution requirement is €2 for every €1,000 guaranteed deposits held by the respective member institution as of year-end. The Minister of the Economy and Finance is authorized to reduce the contributions when the FGD’s equity is considered sufficient to meet its needs. Moreover, it may suspend contributions when the FGD’s total equity reaches 1% of the calculation base of the contributions of the member institutions as a whole. Under certain circumstances defined by law, there may be extraordinary contributions from the institutions, and the European Central Bank may also require exceptional contributions of an amount set by law.

As of December 31, 2017, 2016 and 2015 all of the Spanish banks belonging to the BBVA Group were members of the FGD and were thus obligated to make annual contributions to it.

Investment Guarantee Fund

Royal Decree 948/2001, of August 3, regulates investor guarantee schemes (Fondo de Garantía de Inversores) related to both investment firms and to credit institutions. These schemes are set up through an investment guarantee fund for securities broker and broker-dealer firms and the deposit guarantee funds already in place for credit institutions. A series of specific regulations have also been enacted, defining the system for contributing to the funds.

The General Investment Guarantee Fund Management Company was created in a relatively short period of time and is a business corporation with capital in which all the fund members hold an interest. Member firms must make a joint annual contribution to the fund equal to 0.06% over the 5% of the securities that they hold on their client’s behalf. However, it is foreseen that these contributions may be reduced if the fund reaches a level considered to be sufficient.

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Liquidity Requirements – Minimum Reserve Ratio

The legal framework for the minimum reserve ratio is set out in Regulation (EC) No. 2818/98 of the ECB of December 1, 1998 on the application of minimum reserves (ECB/1998/15). The reserve coefficient for overnight deposits, deposits with agreed maturity or period of notice up to two years, debt securities issued with maturity up to two years and money market paper is 1%. For deposits with agreed maturity or period of notice over two years, repos and debt securities issued with maturity over two years there is no required reserve coefficient.

According to the Delegated Regulation (EU) 2015/61 issued by the European Commission of October 10, 2014, the LCR ratio came into force in Europe on October 1, 2015, with an initial 60% minimum requirement, progressively increased (phased-in) up to 100% in 2018.

Investment Ratio

In the past, the government used the investment ratio to allocate funds among specific sectors or investments. As part of the liberalization of the Spanish economy, it was gradually reduced to a rate of zero percent as of December 31, 1992. However, the law that established the ratio has not been abolished and the government could re-impose the ratio, subject to applicable EU requirements.

Capital Requirements

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) proposed a number of fundamental reforms to the regulatory capital framework for internationally active banks (the “Basel III capital reforms”). The Basel III capital reforms raised the quantity and quality of capital required to be held by a financial institution with an emphasis on Common Equity Tier 1 capital (the “CET1 capital”). 

As a Spanish credit institution, we are subject to the CRD IV Directive, through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit entities is the CRR, which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through Royal Decree-Law 14/2013, Law 10/2014, RD 84/2015, Bank of Spain Circular 2/2014 and Bank of Spain Circular 2/2016. On November 23, 2016, the European Commission published a package of proposals, the EU Banking Reforms, including, among others, proposed changes to the CRD IV Directive and CRR in order to increase the resilience of EU institutions and enhance financial stability. The timing for the final implementation of the EU Banking Reforms is unclear.

Among other things, CRD IV established minimum “Pillar 1” capital requirements both on a consolidated and individual basis (which includes a CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6% and a total capital ratio of 8% of risk-weighted assets). Additionally, CRD IV increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards (being phased-in from 2016 until 2019). The “combined buffer requirement” has introduced five new capital buffers: (i) the capital conservation buffer, (ii) the G-SIB buffer, (iii) the institution-specific countercyclical buffer, (iv) the D-SIB buffer and (v) the systemic risk buffer.

The combination of the capital conservation buffer, the institution-specific countercyclical buffer and the higher of (depending on the institution) the systemic risk buffer, the G-SIB buffer and the D-SIB buffer, in each case (if applicable to the relevant institution—in the event that the systemic risk buffer only applies to local exposures, such buffer is added to the higher of the G-SIB buffer or the D-SIB buffer) is referred to as the “combined buffer requirement”. This “combined buffer requirement” is in addition to the “Pillar 1” and the “Pillar 2” capital requirements and is required to be satisfied with CET1 capital.

The G-SIB buffer applies to those institutions included on the list of G-SIBs, which is updated annually by the FSB. We have been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, we will not be required to maintain a G-SIB buffer any longer.

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The Bank of Spain announced on November 24, 2017 that we are considered a D-SIB, and consequently we will be required to maintain a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, and the D-SIB buffer applicable to BBVA for 2018 is a CET1 capital ratio of 0.5625% on a consolidated basis.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of the SSM Framework Regulation, also contemplate that in addition to the minimum “Pillar 1” capital requirements and the combined buffer requirements, supervisory authorities may impose (above “Pillar 1” requirements and below the combined buffer requirements) further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum “own funds” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

Accordingly, any additional “Pillar 2” own funds requirement that may be imposed on us and/or the Group by the ECB pursuant to the SREP will require us and/or the Group to hold capital levels in addition to the ones required by the “Pillar 1” capital requirements and the combined buffer requirements.

As a result of the most recent SREP carried out by the ECB in 2017, we have been informed by the ECB that, effective from January 1, 2018, we are required to maintain (i) a CET1 phased-in capital ratio of 8.4375% (on a consolidated basis) and 7.875% (on an individual basis); and (ii) a phased-in total capital ratio of 11.9375% (on a consolidated basis) and 11.375% (on an individual basis).

This phased-in total capital ratio of 11.9375% on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.875% CET1); and (vi) the D-SIB buffer (0.5625% CET1).

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any entity not meeting its “combined buffer requirement” is required to determine its MDA as described therein. Until the MDA has been calculated and communicated to the Bank of Spain, where applicable, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 Instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA limit. Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict the discretionary payments to such MDA. See “Item 3. Key Information ―Risk Factors―Legal, Regulatory and Compliance Risks―Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations” for additional information.

Capital Management

Basel Capital Accord - Economic Capital

The Group’s capital management is performed at both the regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and the CRR. See Note 32 to the Consolidated Financial Statements.

The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, and preferred and subordinated issues of equity and hybrid instruments. In recent years we have taken various actions in connection with our capital management and in order to comply with various capital requirements applicable to us. We may make securities issuances or undertake asset sales in the future, which could involve outright sales of businesses or reductions in interests held by us, which could be material and could be undertaken at less than their respective book values, resulting in material losses thereon, in connection with our capital management and in order to comply with capital requirements or otherwise.

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The Bank has obtained the Bank of Spain’s approval with respect to its internal model of capital estimation (“IRB”) concerning certain portfolios and its operational risk internal model.

From an economic standpoint, capital management seeks to optimize value creation at the Group and at its different business units.

The Group allocates economic capital (“CER”) commensurate with the risks incurred by each business. This is based on the concept of unexpected loss at a certain level of statistical confidence, depending on the Group’s targets in terms of capital adequacy. The CER calculation combines lending risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk and fixed asset and technical risks in the case of insurance companies.

Shareholders’ equity, as calculated under BIS rules, is an important metric for the Group. However, for the purpose of allocating capital to operating segments the Group prefers CER. It is risk-sensitive and thus better reflects management policies for the individual businesses and the business portfolio. These provide an equitable basis for assigning capital to businesses according to the risks incurred and make it easier to compare returns.

To internal effects of management and pursuit of the operating segments, the Group realizes a capital allocation to each operating segment.

Concentration of Risk

According to the CRR, an institution’s exposure to a client or group of connected clients shall be considered a large exposure where its value is equal to or exceeds 10% of its eligible capital, and such institution shall have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying, managing, monitoring, reporting and recording all large exposures and subsequent changes to them, in accordance with the CRR. Where an institution is subject to Part Three, Title II, Chapter 3 of the CRR, its 20 largest exposures on a consolidated basis, excluding those exempted from the application of Article 395(1) of the CRR, shall be made available to the competent authorities. Additionally to the aforementioned exposures, an institution shall also report its 10 largest exposures on a consolidated basis to institutions as well as its 10 largest exposures on a consolidated basis to unregulated financial entities, as well as any exposure  to a client or group of connected clients greater than €300 million (before taking into account the effect of credit risk mitigation measures).

The CRR also imposes certain limits to large exposures. In particular, an institution shall not incur an exposure, after taking into account the effect of credit risk mitigation measures, to a client or group of connected clients the value of which exceeds 25% of its eligible capital. Where that client is an institution or where a group of connected clients includes one or more institutions, that value shall not exceed the higher of 25% of the institution’s eligible capital or €150 million, provided that the sum of exposure values, after taking into account the effect of credit risk mitigation measures, to all connected clients that are not institutions does not exceed 25% of the institution’s eligible capital. Where 25% of an institution’s eligible capital is less than €150 million, the value of the exposure, after taking into account the effect of credit risk mitigation measures, shall not exceed a reasonable limit in terms of the institution’s eligible capital. That limit shall be determined by the institution in accordance with the policies and procedures referred to in Article 81 of the CRD IV Directive, to address and control concentration risk. This limit shall not exceed 100% of the institution’s eligible capital.

Legal and Other Restricted Reserves

We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Requirements”.

Impairment on Financial Assets

For a discussion of non-performing loan provisions and credit risk, see Note 2.2.1 to the Consolidated Financial Statements.

Regulation of the Disclosure of Fees and Interest Rates

Banks must publish their preferential rates, rates applied on overdrafts, and fees and commissions charged in connection with banking transactions. Banking clients must be provided with written disclosure adequate to permit

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customers to ascertain transaction costs. The foregoing regulations are enforced by the Bank of Spain in response to bank client complaints.

Law 44/2002, of November 22, concerning measures to reform the Spanish financial system, contained a rule concerning the calculation of variable interest applicable to loans and credit secured by mortgages, bails, pledges or any other equivalent guarantee.

Employee Pension Plans

Under the relevant collective labor agreements, BBVA and some of its subsidiaries provide supplemental pension payments to certain active and retired employees and their beneficiaries. These payments supplement social security benefits from the Spanish state. See Note 2.2.12 and Note 25 to the Consolidated Financial Statements.

Dividends

A bank may generally dedicate all of its net profits and its distributable reserves to the payment of dividends. In no event may dividends be paid from non-distributable reserves. For additional information see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.

Although banks are not legally required to seek prior approval from the Bank of Spain or the ECB before declaring interim dividends, we inform them on a voluntary basis upon the declaration of an interim dividend. It should be noted that the ECB recommendation dated December 28, 2017 addressed to, among others, significant supervised entities and significant supervised groups, such as BBVA and its Group, recommends credit institutions to establish dividend policies using conservative and prudent assumptions so that, after any such distribution, they are able to satisfy the applicable capital requirements and any other requirements resulting from the supervisory review and evaluation process (SREP).

Since January 1, 2016, according to CRD IV, those credit entities required to calculate their MDA will be subject to restrictions on discretionary payments, which includes, among others, dividend payments. See “—Capital Requirements”.

Our Bylaws allow for dividends to be paid in cash or in kind as determined by shareholders’ resolution.

Scrip Dividend

As in 2013, 2014, 2015 and 2016, during 2017 a scrip dividend scheme called “Dividend Option” was approved by the annual general meeting of shareholders held on March 17, 2017, whereby a resolution for a capital increase to be charged to voluntary reserves for the implementation of a “Dividend Option” in 2017 was passed. This resolution allowed BBVA to implement one “Dividend Option” in April 2017 and, as a consequence of the execution of the related capital increase, 101,271,338 new ordinary shares were issued.

In connection therewith, BBVA shareholders were given the option to receive all or part of their remuneration in newly issued ordinary shares of BBVA or in cash.

On February 1, 2017 BBVA updated its shareholders’ remuneration policy in order to implement a fully in cash remuneration policy after the execution of the 2017 “Dividend Option”. This fully in cash remuneration is expected to be composed, for each financial year, of an interim dividend and a final dividend, subject to any applicable restrictions and authorizations.

Limitations on Types of Business

Spanish banks are subject to certain limitations on the types of businesses in which they may engage directly, but they are subject to few limitations on the types of businesses in which they may engage indirectly. Law 10/2014 and RD 84/2015 established the regulation for governance, authorization, supervision and solvency for credit institutions. 

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Mortgage Legislation

Law 2/1981, of March 25, on mortgage market, as amended by Law 41/2007, regulates the different aspects of the Spanish mortgage market and establishes additional rules for the mortgage and financial system.

Royal Decree 716/2009, of April 24, implemented several aspects of Law 2/1981. The most significant aspect implemented by Royal Decree 716/2009 was the modification on the loan-to-value ratio requirement intending to improve the quality of Spanish mortgage-backed securities.

Increasing social pressure for the reform of mortgage legislation in Spain has resulted in changes to such legislation, which are described below.

Royal Decree 6/2012, of March 9, on urgent measures to protect mortgage debtors without financial resources introduced measures to enable the restructuring of mortgage debt and easing of collateral foreclosure aimed to protect especially vulnerable debtors.

Such measures include the following:

·the moderation of interest rates charged on mortgage arrears;

·the improvement of extrajudicial procedures as an alternative to legal foreclosure;

·the introduction of a voluntary code of conduct among lenders for regulated mortgage debt restructuring affecting especially vulnerable debtors; and

·where restructuring is unviable, lenders may, where appropriate and on an optional basis, offer the debtor partial debt forgiveness.

In addition, Royal Decree 27/2012, of November 15, on urgent measures to enhance the protection of mortgage debtors provided for a two-year moratorium, from the date of its adoption, on evictions applicable to debtor groups especially susceptible to social exclusion, which may remain at their homes for such period.

Law 1/2013, of May 14, on measures to protect mortgagees, debt restructuring and social rents, introduced important modifications to mortgage law and civil procedure law. The most relevant modifications are:

·extension of the two-year moratorium, established by Royal Decree 27/2012, until May 15, 2015;

·broadening the potential beneficiaries of the moratorium of Royal Decree 6/2012;

·limitation of the interest rates applied for delay or arrears;

·in the context of an auction, the base value of the property shall be the value set forth in the relevant mortgage deed and in no case shall it be less than 75% of the official appraisal value of the property;

·the possibility of suspension of enforcement proceedings when the loan or credit facility secured by the mortgage contains abusive clauses; and

·modification of the out-of-court notarial procedure.

Royal Decree 11/2014, following the judgment of the EU Court of Justice of July 17, 2014 regarding Spanish foreclosure processes, allows debtors to appeal against a court’s resolution which rejects his or her opposition to the execution of a mortgage.

The Mortgage Credit Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property was adopted on February 4, 2014. This Directive aims to create a Union-wide mortgage credit market with a high level of consumer protection. It applies to both secured credit and home loans. Member States will have to transpose its provisions into their national law by March 2016.

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The main purpose of Royal Decree-Law 1/2015 of February 27 on the “second chance” mechanism is to regulate such mechanism. This allows an individual who has been declared bankrupt to be discharged of outstanding obligations as long as he or she fulfills certain requirements: (i) the bankruptcy proceedings must have concluded, (ii) the debtor must have acted in good faith, the Royal Decree being restrictive as to when a debtor is considered to have acted in good faith, and (iii) the bankruptcy judge has to approve the terms of the discharge (and may revoke his or her approval under certain circumstances upon request of any creditor in the following five years). Discharge from mortgage obligations would only apply to the outstanding debts after the foreclosure, as long as such debts are considered ordinary or subordinate according to the Spanish Insolvency Law. Co-debtors and guarantors, if any, would remain liable.

Law 25/2015, of July 28, on the “second chance” mechanism reducing the financial burden and other measures of a social nature, entered into force on July 30, 2015. The passage through parliament of Royal Decree-Law 1/2015 allowed some new changes to be added, such as introduction of a fee protection account for insolvency managers, limits on the remuneration of insolvency managers and the introduction of greater flexibility to a number of elements of the second chance mechanism.

Royal Decree-Law 1/2017 of January 20, on urgent measures on consumer protection on mortgage interest floor clauses, provides for an extrajudicial procedure pursuant to which consumers may claim from banks amounts that might have been wrongly charged pursuant to interest floor clauses that are deemed to be abusive and null (in light of the judgment of the Court of Justice of the European Union of December 21, 2016).

Royal Decree-Law 5/2017, of March 17, expanded the number of beneficiaries of the Code of Good Practice (established in Royal Decree 6/2012, as modified by Law 1/2013); provided the possibility to those beneficiaries of the suspension of evictions referenced in Law 1/2013 to automatically suspend evictions in certain homes until May 2020; and urged the government to propose, within eight months from its entry into force, policies targeted at facilitating mortgage debtors included in its scope of application to recover their usual residence when such debtors have been subject to a foreclosure proceeding.

Spain is in the process of implementing Mortgage Credit Directive 2014/17/EU. The future law will apply to credits and loans to individuals in connection with residential real estate properties. The most relevant modifications included in the draft law are:

·the draft law covers credits and loans to individuals in connection with residential real estate properties (including land and the preservation of real estate properties), excluding reverse mortgages;

·establishes a seven-day period for consumers to evaluate the mortgage-related documents, supervised by a Notary Public (Notario Público);

·clarifies some controversial issues in which litigation has arisen in the past years (mainly, benchmark interest rates references, foreign currencies submission and default interests);

·establishes the possible fees that may be charged on borrowers;

·forbids linked sales; and

·settles rules regarding the early termination of mortgages based exclusively on the amount of defaulted payments by the borrower (in light of recent court decisions declaring null and void some early termination clauses for their abusive terms).

Consumer Alternative Dispute Resolution Systems For Consumer Disputes

Law 7/2017, of November 4, seeks to ensure access for Spanish and European consumers to independent, impartial, transparent and effective alternative dispute resolution systems. For financial institutions, a specific law shall be passed and financial institutions will be forced to participate in those alternative dispute resolution mechanism.

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Payment Accounts

Royal Decree-Law 19/2017 of November 24, implements Directive 2014/92/EU on comparability of fees related to payment accounts, payment account switching and access to basic payment accounts. This Royal Decree-Law:

·regulates the right of access for legal residents in the EU and conditions for refusal;

·establishes the services linked to basic payment accounts and the maximum fees that may be charged by banks (which, in Spain, will be set by the Ministry of Economy);

·introduces changes to the information that should be provided to clients on features, costs, and conditions of services;

·facilitates account switching;

·introduces the Fee Information Document (FID) and the Statement of Fees (SoF) which provide information on fees to clients; and

·establishes that the Bank of Spain may offer free access to websites that provide comparative information on the terms offered by financial entities with respect to payment accounts.

Payment Services

The second Payment Services Directive (EU) 2015/2366 (PSD 2), which had to be implemented by member states by January 13, 2018, is still in the process of being implemented in Spain. The future law will modify the payment service market regulation by regulating the services of payment service providers, account information providers and payment initiation providers, and their relationship with credit institutions, as well as introducing regulatory technical standards for strong customer authentication, among many other changes.

Mutual Fund Regulation

Law 22/2014 of November 12, introduced a new legal regime for private investment entities in order to implement (i) Directive 2011/61/EU of the European Parliament and of the Council of June 8 on Alternative Investment Fund Managers, and (ii) Directive 2013/14/EU of the European Parliament and of the Council of May 21.

Asset Management Activities

Asset management activities in the EU are expected to be significantly impacted by the new regulation referred to below:

·Regulation (EU) 2017/1131 of the European Parliament and of the Council of June 14, 2017 on money market funds (“MMFs”), which (with the exception of certain articles which are in force since July 20, 2017) will apply from July 21, 2018. The Regulation introduces a broad set of new regulatory measures that apply to MMFs established, managed or marketed in the EU. In light of the perceived systemic risk presented by MMFs, the Regulation aims to make these investment products more resilient and resistant to contagion risks. It does this by imposing rules on eligible assets, portfolio diversification, portfolio maturity and valuation of assets and introduces new categories of MMFs that can offer a constant net asset value per share if they meet certain requirements. The Regulation is meant to be an important step in adopting a uniform set of rules that are designed to ensure that MMFs are, as far as possible, in a position to honor redemption requests from investors, especially during stressed market conditions, and therefore remain a reliable tool for investors’ cash management needs.

·Proposal for a Regulation (EU) on pan-European Personal Pension Product (“PEPP”). The PEPP is expected to constitute one of the key measures towards the Commission’s project to create a single market for capital in the EU. It aims to provide pension providers with the tools to offer PEPPs outside their national markets, thereby creating a large and competitive EU-level market for personal pensions which

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allows consumers to voluntarily complement their savings for retirement, while benefitting from solid consumer protection. PEPPs will have the same standard features wherever they are sold in the EU and can be offered by a broad range of providers, such as insurance companies, banks, occupational pension funds, investment firms and asset managers. They will complement existing state-based, occupational and national personal pensions, but not replace or harmonize national personal pension regimes. In accordance with the Proposal, PEPP providers will need to be authorized by the European Insurance and Occupational Pensions Authority (EIOPA).

·Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories. 

·Royal Decree 62/2018, of February 9, reduces the maximum fees which may be charged to investors in connection with pension funds and plans and allows them to fully withdraw their savings after ten years of having made them. This Royal Decree introduces other minor changes to the regulation of pension funds and plans in Spain. 

Spanish Corporate Enterprises Act

The consolidated text of the Corporate Enterprises Act adopted under Legislative Royal Decree 1/2010, of July 2, repealed the former Companies Act, adopted under Legislative Royal Decree 1564/1989, of December 22. This royal legislative decree has consolidated the legislation for public limited companies (sociedades anónimas) and limited liability companies (sociedades de responsabilidad limitada) in a single text, bringing together the contents of the two aforementioned acts, as well as a part of the Securities Exchange Act.

Law 25/2011 of August 1, partially amended the Corporate Enterprises Act and incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies.

In addition, the Entrepreneur Act (Law 14/2013) and an amendment to the Insolvency Act (Legislative Royal Decree 11/2014) introduced some modifications on the Spanish Corporate Enterprises Act. Also, an amendment on corporate governance was introduced by Law 31/2014 of December 3. The main changes introduced by this law are related to the rights of shareholders (assistance, information and voting), the calling of a general shareholders’ meeting and the duties of the board of directors and the audit committee, appointments committee and remuneration committee.

Spanish Auditing Law

Law 22/2015, of July 20, on Auditing, adapted Spain’s internal legislation to the changes incorporated in Directive 2014/56/EU of the European Parliament and of the Council, of April 16, amending Directive 2006/43/EC of the European Parliament and of the Council of May 17, on statutory audits of annual accounts and consolidated accounts, to the extent that they were inconsistent. Together with this Directive, approval was also given to Regulation (EU) nº 537/2014 of the European Parliament and of the Council, of April 16, on specific requirements regarding statutory audit of public-interest entities. Such Directive and Regulation constitute the fundamental legal regime that should govern audit activity in the European Union. Law 22/2015 regulates general aspects of access to audit practice and the requirements to be followed in that practice, from objectivity and independence, to the organization of auditors and performance of their work, as well as the regime for their oversight and the sanctions available to ensure the efficacy of the regulations.

Law 11/2015 of June 18, on the recovery and resolution of credit institutions and investment firms

Law 11/2015 transposes a very important part of EU Law into Spanish law in respect of the recovery and resolution mechanisms for credit institutions and investment firms (the “institutions”). It further assumes many of the provisions of Law 9/2012 of November 14, 2012 on the restructuring and resolution of credit institutions, which it partially repeals.

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The regime set in place constitutes a special and full administrative procedure that seeks to ensure maximum speed in the intervention of an institution so as to provide for the continuity of its core functions, while minimizing the impact of its non-viability on the economic system and on public resources.

Compared to Law 9/2012, Law 11/2015 regulates internal recapitalization as a resolution instrument conceived as a “bail-in” arrangement (the absorption of losses by the shareholders and by the creditors of an institution under resolution).

Internal recapitalization is a new resolution instrument, since the loss-absorption mechanism makes it extensive to all the institution’s creditors, and not only to the shareholders and the subordinated creditors as envisaged under Law 9/2012 of November 14, 2012.

In this respect, liabilities eligible for bail-in are all the institution’s liabilities that are not expressly excluded or have not been excluded further to a decision by the FROB. These liabilities shall be susceptible to amortization or conversion into capital for the internal recapitalization of the institution concerned. Among the liabilities excluded are deposits guaranteed by the Deposit Guarantee Fund (up to €100,000) and liabilities incurred with employees, trade creditors and the tax or social security authorities.

Certain changes were made to the regime applicable in the event of the insolvency of an institution, in order to provide greater protection to the deposits of individuals and SMEs. In this respect, the following shall be considered as privileged credits: (i) deposits guaranteed by the Deposit Guarantee Fund (maximum of €100,000) and the rights to which they may have been subrogated should the guarantee have been made effective and (ii) the portion of the deposits of individuals and SMEs that exceeds the guaranteed level, and those deposits of those individuals and SMEs that would be guaranteed had they not been set up in branches located outside the EU.

For additional information on Law 11/2015, see “Item 3. Key Information―Risk Factors―Bail-in and write-down powers under the BRRD and the SRM Regulation may adversely affect our business and the value of any securities we may issue”. 

Royal Decree 1012/2015 of November 6, on development of Law on recovery and resolution of credit entities and investment firms and modification of Royal Decree on deposit guarantee funds of credit entities

Royal Decree 1012/2015 partially transposes the BRRD and develops Law 11/2015 (described above).

Royal Decree 1012/2015 includes a package of measures aimed at: (i) establishing the criteria for the application of the regulation for the resolution of credit entities, (ii) establishing the content of the recovery and resolution plans for credit entities, (iii) regulating the use of the resolution instruments set in Law 11/2015, and in particular, the actions to be carried out by the FROB, (iv) establishing the regime applicable to the FROB in connection with the managing of the funds addressed to finance the resolution procedures and to the contributions that credit entities must make to the National Resolution Fund and, (v) establishing the regime applicable to the resolution of cross border entities.

Law 5/2015 of April 27, on promoting corporate financing

Among other matters, Law 5/2015 establishes a number of changes to encourage bank financing to SMEs, sets out the new legal framework for financial credit entities and regulates crowd funding. Law 5/2015 has also introduced amendments on other matters, including securitizations and debt issuance. It consolidates into one piece of legislation what has, until now, been a dispersed legal framework on securitization.

Law 5/2015 imposes an obligation on credit institutions to provide SMEs at least three months prior notice in the event the funding flow to an SME is to be cancelled or reduced by at least 35%. In so doing, the law aims to provide SMEs sufficient time to find new funding sources or to adjust the management of their own funds to avoid sudden liquidity deficiencies.

The main novelties of this new regime are the following: (i) private limited liability companies (sociedades limitadas or S.L.s) can issue and guarantee standard debt securities issuances capped at twice their own funds, (ii) the quantitative limit on debt issuances by non-listed public limited liability companies (sociedades anónimas or S.A.s) is removed, (iii) the management body of an issuer is authorized to approve standard debt securities issuances which do not yield part of the profits, unless stated otherwise in the issuer’s articles of association and (iv) it is

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clarified that it is unnecessary to appoint a commissioner and set up a syndicate of bondholders in debt issuances governed by foreign law and aimed at international markets.

U.S. Regulation

BBVA is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956, as amended (the “BHC Act”). As such, BBVA is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). BBVA has also elected to become a financial holding company. BBVA’s New York branch is supervised by the Federal Reserve through the Federal Reserve Bank of New York, as well as licensed and supervised by the New York State Department of Financial Services. BBVA Compass, including its main bank subsidiary Compass Bank, is regulated extensively under U.S. federal and state law. In addition, certain of BBVA Compass’ non-bank subsidiaries are subject to regulation under U.S. federal and state law.

The legislative, regulatory and supervisory framework in the United States governing the financial services sector has undergone significant change since the financial crisis and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) . Moreover, the intensity of supervisory and regulatory scrutiny has also increased.

While most of the changes required by the Dodd-Frank Act that impact BBVA and its subsidiaries have been implemented or are expected to follow a known trajectory, new changes under the Donald J. Trump administration may be forthcoming, and the exact nature and impact of such changes cannot yet be determined with complete certainty. President Trump has issued an executive order that sets forth principles for the reform of the federal financial regulatory framework, and the Republican majority in Congress has also suggested an agenda for financial regulatory change. It is too early to assess whether there will be any major changes in the regulatory environment or merely a rebalancing of the post-financial crisis framework. We expect that BBVA Compass’ business will remain subject to extensive regulation and supervision.

Financial Regulatory Authorities

Owing to its status as a bank holding company, BBVA’s direct and indirect activities and investments in the United States are limited to banking activities and certain non-banking activities that are “closely related to banking,” as determined by the Federal Reserve, and certain other activities permitted under the BHC Act. BBVA also is required to obtain the prior approval of the Federal Reserve before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting securities of any U.S. bank or bank holding company. A bank holding company is required to act as a source of financial strength for its U.S. bank subsidiaries. Among other things, this source of strength obligation may result in a requirement for BBVA, as controlling shareholder, to inject capital into its U.S. bank subsidiary. BBVA’s U.S. branches and agencies are also subject to additional liquidity requirements, and in certain cases the entirety of BBVA’s U.S. operations are subject to additional risk management requirements. In addition, BBVA is subject to requirements related to the adequacy and reporting of its home country capital and stress testing standards.

The Federal Reserve’s Regulation YY requires foreign banking organizations with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”). BBVA Compass Bancshares, Inc.  is our designated IHC and holds all of BBVA’s U.S. bank and nonbank subsidiaries, including BBVA’s U.S. bank subsidiary, Compass Bank. BBVA Compass Bancshares, Inc. is a bank holding company within the meaning of the BHC Act, has elected to become a financial holding company, and is subject to supervision and regulation by the Federal Reserve through the Federal Reserve Bank of Atlanta.  BBVA Compass Bancshares, Inc.  is subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. As a bank holding company, it must also act as a source of strength to its bank subsidiaries. BBVA Compass Bancshares, Inc. is also subject to the Alabama State Banking Department’s requirements for bank holding companies that hold Alabama state-chartered banks, like Compass Bank, under the bank holding company laws of the State of Alabama. BBVA Compass Bancshares, Inc. is also subject to supervision and regulation by the Consumer Financial Protection Bureau (“CFPB”).  

Compass Bank is subject to supervision and regulation by a variety of U.S. regulatory agencies. Compass Bank is an Alabama state-chartered bank, is a member of the Federal Reserve System, and has branches in Alabama,

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Arizona, California, Colorado, Florida, New Mexico, and Texas. Compass Bank is supervised and examined by the Federal Reserve, the Alabama State Banking Department and, with respect to consumer financial laws and regulations, the CFPB. In addition, certain aspects of Compass Bank’s branch operations in Arizona, California, Colorado, Florida, New Mexico, and Texas are subject to examination by the respective state banking regulators in such states. Compass Bank is a depository institution insured by, and subject to the regulation of, the Federal Deposit Insurance Corporation (the “FDIC”). 

BBVA Bancomer, S.A.’s agency office in Houston, Texas is a non-FDIC insured agency office of BBVA Bancomer, S.A., an indirect subsidiary of BBVA, which is licensed under the laws of the State of Texas and supervised by the Texas Department of Banking and the Federal Reserve.

Bancomer Transfer Services, Inc., a non-banking affiliate of BBVA and a direct subsidiary of BBVA Bancomer USA, Inc., is licensed as a money transmitter by the State of California Department of Business Oversight, the Texas Department of Banking, and certain other state regulatory agencies. Bancomer Transfer Services, Inc. is also registered as a money services business with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury.

BBVA’s indirect U.S. broker-dealer subsidiary, BBVA Securities Inc. (“BSI”), is subject to regulation and supervision by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) with respect to its securities activities, as well as various U.S. state regulatory authorities. Additionally, the securities underwriting and dealing activities of BSI are subject to regulation and supervision by the Federal Reserve.

The activities of BBVA’s U.S. investment adviser affiliates are regulated and supervised by the SEC. In addition, Compass Bank has registered with the SEC and the Municipal Securities Rulemaking Board as a municipal advisor pursuant to the Dodd-Frank Act’s municipal advisor registration requirements.

BBVA’s U.S. insurance agency affiliate is subject to regulation and supervision by various U.S. state insurance regulatory authorities.

BBVA is provisionally registered as a “swap dealer” as defined in the Commodity Exchange Act and the regulations promulgated thereunder  with the U.S. Commodity Futures Trading Commission (the “CFTC”), which subjects BBVA to regulation and supervision by the CFTC. BBVA’s world-wide swap activities are also subject to regulations adopted by the European Commission pursuant to the European Market Infrastructure Regulation (“EMIR”) and the EU’s Markets in Financial Instruments Directive (“MiFID”) and other European regulations and directives. Compass Bank (and other entities of the BBVA Group) may register as a swap dealer if required by its swap activities or if it is determined to be beneficial to its business.

Currently, BBVA does not anticipate that it will be required to register as a “security-based swap dealer” with the SEC, once such registration requirement comes into effect.

Enhanced Prudential Standards

The Federal Reserve has imposed greater risk-based and leverage capital requirements, liquidity requirements, capital planning and stress testing requirements, risk management requirements and other enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets. Under the enhanced prudential standard regulations applicable to foreign banking organizations with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies, BBVA designated BBVA Compass Bancshares, Inc. as its IHC. As BBVA’s IHC, BBVA Compass Bancshares, Inc. is subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. BBVA’s U.S. branches and agencies (and in certain cases, the entire U.S. operations of BBVA) are also subject to liquidity buffer and risk management requirements. In addition, BBVA is subject to requirements related to the adequacy and reporting of its home country capital and stress testing standards. The Federal Reserve has proposed but not yet finalized the single-counterparty credit limits requirements and an early remediation framework for large U.S. bank holding companies and large FBOs with respect to their combined U.S. operations. The proposed rule would apply both to BBVA Compass and to the combined U.S. operations of BBVA with different levels of stringency.

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The U.S. Congress is currently considering a bill that would raise the total consolidated asset threshold for certain enhanced prudential standards from $50 billion to $250 billion. The bill would exempt bank holding companies with consolidated assets of less than $100 billion from these enhanced prudential standards, effective immediately upon enactment of the bill. Bank holding companies with consolidated assets between $100 billion to $250 billion would be exempt from these enhanced prudential standards following an 18-month period, unless the Federal Reserve either determined to apply some or all of these standards to some or all such bank holding companies or to subject such bank holding companies to less stringent versions of these standards. Currently the bill does not specifically address whether the threshold for enhanced prudential standards applicable to IHCs, such as BBVA Compass Bancshares, Inc., would also be raised.  It is too early to tell whether this bill will become law and how it will affect the threshold for enhanced prudential standards applicable to IHCs.

Capital 

BBVA Compass Bancshares, Inc. and Compass Bank are subject to the U.S. Basel III capital rule (“U.S. Basel III”), which is based on the Basel III regulatory capital standards established by the Basel Committee. Certain aspects of U.S. Basel III, such as the minimum capital ratios and the methodology for calculating risk-weighted assets, became effective on January 1, 2015 for BBVA Compass Bancshares, Inc. and Compass Bank. The minimum regulatory capital ratios under U.S. Basel III for bank holding companies are the following: Common Equity Tier 1 risk-based capital ratio of 4.5%; Tier 1 risk-based capital ratio of 6.0%; Total risk-based capital ratio of 8.0%; and Tier 1 leverage ratio of 4.0%.

Other aspects of the rule, such as a capital conservation buffer and certain regulatory deductions from and adjustments to capital, are being phased in over several years. The phase in period for the capital conservation buffer began on January 1, 2016, with an initial phase-in amount of greater than 0.625%. The phase-in amount for 2017 was greater than 1.25%.  The required capital conservation buffer is greater than 1.875% in 2018. The capital conservation buffer will fully phase-in at greater than 2.5% beginning on January 1, 2019. Failure to maintain the capital conservation buffer will result in increasingly stringent restrictions on a banking organization’s ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers.

U.S. Basel III also revised the capital thresholds for the prompt corrective action framework for insured depository institutions. Under the prompt corrective action framework, U.S. federal banking regulators rate insured depository institutions on the basis of five capital categories: “well-capitalized” (the highest rating), “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized” (the lowest rating). The federal banking regulators are required to take mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to insured depository institutions in the three undercapitalized categories. The severity of those actions would depend upon the capital category to which the insured depository institution is assigned. To qualify as “well capitalized,” Compass Bank must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a Total risk-based capital ratio of at least 10.0%, and a Tier 1 leverage ratio of at least 5.0%, and not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

The Federal Reserve has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the U.S. Basel III capital rule. For purposes of the Federal Reserve’s Regulation Y, including determining whether a bank holding company meets the requirements to be a financial holding company, bank holding companies, such as BBVA Compass Bancshares, Inc., must maintain a Tier 1 Risk-Based Capital Ratio of 6 percent or greater and a Total Risk-Based Capital Ratio of 10 percent or greater to be well-capitalized.  If the Federal Reserve Board were to apply the same or a very similar well-capitalized standard to bank holding companies as that applicable to Compass Bank, BBVA Compass Bancshares Inc.’s capital ratios as of December 31, 2017 would exceed such revised well-capitalized standard.

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Total Loss-Absorbing Capital and Long-Term Debt Requirements

The Federal Reserve’s final rule on the TLAC of U.S. G-SIBs and the IHCs of non-U.S. G-SIBs does not apply since neither the BBVA Compass nor BBVA are G-SIBs and are therefore not subject to the rule.

Annual Capital Plans and Stress Testing

Under enhanced prudential standards applicable to bank holding companies with $50 billion or more of total consolidated assets, BBVA Compass is required to submit annual capital plans to the Federal Reserve and generally may pay dividends and make other capital distributions only in accordance with a capital plan as to which the Federal Reserve has not objected. Under the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”) process, BBVA Compass’ capital plan must include an assessment of the expected uses and sources of capital over a forward-looking planning horizon of at least nine quarters, a detailed description of BBVA Compass’ process for assessing capital adequacy, BBVA Compass’ capital policy, and a discussion of any expected changes to BBVA Compass’ business plan that are likely to have a material impact on its capital adequacy or liquidity. Based on a quantitative assessment, including a supervisory stress test conducted as part of the CCAR process, the Federal Reserve will either object to BBVA Compass’ capital plan, in whole or in part, or provide a notice of non-objection to BBVA Compass. If the Federal Reserve objects to a capital plan, BBVA Compass may not make any capital distribution other than those with respect to which the Federal Reserve has indicated its non-objection.

Under revised CCAR rules that became effective on March 6, 2017, the Federal Reserve is no longer allowed to object to the capital plans of large and noncomplex bank holding companies, including BBVA Compass, on a qualitative, as opposed to quantitative, basis. Instead, the Federal Reserve may evaluate the strength of BBVA Compass’ qualitative capital planning process through the regular supervisory process and targeted horizontal reviews of particular aspects of capital planning.

In addition to capital planning requirements BBVA Compass and Compass Bank are subject to stress testing requirements under the Federal Reserve’s enhanced prudential standards rule and the Dodd-Frank Act. BBVA Compass must conduct semi-annual company-run stress tests and is subject to an annual supervisory stress test conducted by the Federal Reserve.

For the capital plan and stress test cycle that began January 1, 2017, BBVA Compass submitted its capital plan to the Federal Reserve by April 5, 2017 and the Federal Reserve published summary results on June 28, 2017. The Federal Reserve did not object to BBVA Compass’ 2017 capital plan. For the capital plan and stress test cycle beginning January 1, 2018, BBVA Compass is required to submit its capital plan to the Federal Reserve by April 5, 2018 and the Federal Reserve is required to publish summary results by June 30, 2018. Although management believes that the capital plan that BBVA Compass plans to submit is reasonable and fiscally sound, BBVA Compass can make no assurances that the Federal Reserve will not object to BBVA Compass’ capital plan.

Liquidity

The Federal Reserve and other federal banking regulators have issued liquidity coverage ratio (“LCR”) requirements, which are based on the Basel Committee’s LCR standard and are designed to ensure that covered banking organizations have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. This standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations. As a consolidated U.S. bank holding company with total assets of $50 billion or more that is not an advanced approaches bank holding company, BBVA Compass is subject to a modified version of the LCR, pursuant to which, as of January 1, 2017, BBVA Compass has been required to maintain a minimum of 100% of the fully phased-in modified LCR. In addition, effective October 1, 2018, BBVA Compass will be required to disclose certain quantitative and qualitative information related to its LCR calculation after each calendar quarter.

On June 1, 2016, the Federal Reserve and other federal banking regulators proposed a rule to implement a net stable funding ratio (“NSFR”), which is based on additional quantitative liquidity standards developed by the Basel Committee and is designed to ensure that an institution maintains sufficiently stable funding over a one-year time horizon. The proposal includes a modified, less stringent version of the NSFR that would apply to consolidated U.S. bank holding companies with total assets of $50 billion or more that are not advanced approaches bank holding companies, such as BBVA Compass.

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Resolution Planning

Under Title I of the Dodd-Frank Act and implementing regulations issued by the Federal Reserve and the FDIC, BBVA must prepare and submit annually a plan for the orderly resolution of its U.S. subsidiaries and U.S. operations in the event of future material financial distress or failure (the “Title I Resolution Plan”). For foreign-based companies subject to these resolution planning requirements, such as BBVA, the Title I Resolution Plan relates to subsidiaries, branches, agencies and businesses that are domiciled in, or whose activities are carried out in whole or in material part in, the United States. BBVA filed its last Title I Resolution Plan in December 2015 and is required to file its next Title I Resolution Plan on or before December 31, 2018. In addition, Compass Bank is subject to the FDIC rule requiring insured depository institutions with total assets of $50 billion or more to submit periodically to the FDIC a plan for resolution in the event of failure under the Federal Deposit Insurance Act.

Volcker Rule

The Volcker Rule prohibits an insured depository institution, such as Compass Bank, and its affiliates from (1) engaging in “proprietary trading” and (2) investing in or sponsoring certain types of funds (covered funds) subject to certain limited exceptions. The final rules contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, and permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. In the case of non-U.S. banking entities, such as BBVA, there is also an exemption permitting activities conducted solely outside of the United States, provided that certain criteria are satisfied. The final Volcker Rule regulations impose significant compliance and reporting obligations on banking entities. BBVA Compass is subject to the enhanced compliance program under the Volcker Rule but does not expect to be required to report metrics to the regulators. BBVA is of the view that the impact of the Volcker Rule is not material to its business operations.

Derivatives

Title VII of the Dodd-Frank Act amended the Commodity Exchange Act and the Securities Exchange Act of 1934 to establish a comprehensive framework for the regulation of over-the-counter (“OTC”) derivatives by the CFTC and the SEC, including by imposing mandatory clearing, exchange trading and transaction reporting requirements on such derivatives.  In addition, Title VII required the CFTC and SEC to adopt rules regarding the registration of certain entities that deal or are major market participants in certain OTC derivatives, as well as rules imposing capital, margin, business conduct, record keeping and other requirements on such entities. While the CFTC has completed the majority of its regulations in this area, most of which are in effect, the SEC has not yet adopted a number of its Title VII regulations. In December 2016, the CFTC reproposed regulations to impose position limits on certain futures and option contracts in specified energy, metal and agricultural commodities and for economically equivalent swaps.  This proposal has not yet been finalized. In addition, the Federal Reserve, FDIC, Office of the Comptroller of the Currency, the Farm Credit Administration and the Federal Housing Finance Agency adopted final rules establishing initial and variation margin requirements for non-cleared swaps and security-based swaps between certain entities, while the CFTC adopted final rules establishing initial and variation margin requirements for non-cleared swaps between certain entities. All swap dealers must currently comply with the variation margin requirements (to the extent applicable to a particular transaction); however, the initial margin requirements are still being phased in, generally based on the transactional volume of the parties and their affiliates.

In general, as a non-U.S. swap dealer, BBVA is not subject to all CFTC requirements, including certain business conduct standards, when entering into swaps with non-U.S. counterparties.  In addition, subject to conditions, BBVA may comply with EU OTC derivatives requirements in lieu of some CFTC requirements, including portfolio reconciliation, portfolio compression and trade confirmation requirements, pursuant to substituted compliance determinations issued by the CFTC. 

Deposit Insurance and Assessments

Deposits at Compass Bank are insured by the Deposit Insurance Fund (“DIF”) as administered by the FDIC, up to the applicable limits established by law. The DIF is funded through assessments on banks, such as Compass Bank.  Changes in the methodology used to calculate these assessments resulting from the Dodd-Frank Act increased the assessments that Compass Bank is required to pay to the FDIC.  In addition, in March 2016, the FDIC issued a final rule imposing a surcharge on the assessments of insured depository institutions with total consolidated assets of $10 billion or more, such as Compass Bank, to raise the DIF’s reserve ratio. These surcharges will cease on

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December 31, 2018.  The FDIC also collects Financing Corporation deposit assessments, which are calculated off of the assessment base established by the Dodd-Frank Act. Compass Bank pays the DIF assessment, less offset available by means of prepaid assessment credits, as well as the Financing Corporation assessments.

Revised Supervisory Rating System and Corporate Governance Requirements for Large Financial Institutions

In August 2017, the Federal Reserve issued a proposal to revise its supervisory rating system for “Large Financial Institutions”, the definition of which includes financial institutions with total consolidated assets of at least $50 billion which are not considered to be systemically important. The revised supervisory rating system, if finalized, would apply to, among other entities, IHCs established pursuant to the Federal Reserve’s Regulation YY, including BBVA Compass. Under the proposal, Large Financial Institutions would receive separate ratings from the Federal Reserve for (1) capital planning and positions, (2) liquidity risk management and positions and (3) governance and controls. Each of these component areas would receive one of the following four ratings: (i) Satisfactory, (ii) Satisfactory Watch, (iii) Deficient-1, and (iv) Deficient-2. As proposed, a covered company would have to maintain a rating of “Satisfactory” or “Satisfactory Watch” for each of the three components to be considered “well managed.” Existing statutes and regulations provide benefits to firms considered to be “well managed,” such as the ability to engage in additional permitted activities. Also in August 2017, the Federal Reserve issued proposed guidance intended to enhance the effectiveness of boards of directors and refocus the Federal Reserve’s supervisory expectations for boards of directors on their core responsibilities, and also to delineate between roles and responsibilities for boards of directors and for senior management. Although the proposed guidance would not directly apply to BBVA Compass, the Federal Reserve solicited comments on how the guidance could be adapted to apply to IHC, signaling that BBVA Compass could fall within the scope of a related future proposal.

Transactions with Affiliates and Insiders

The Dodd-Frank Act broadened the application of Sections 23A and 23B of Federal Reserve Act, although the Federal Reserve has not yet implemented such changes in Regulation W (“Reg W”). Reg W places various qualitative and quantitative restrictions on BBVA and its non-bank subsidiaries with regard to borrowing or otherwise obtaining credit from their U.S. banking affiliates or engaging in certain other transactions involving those subsidiaries. Such transactions must be on terms that would ordinarily be offered to unaffiliated entities, must be secured by designated amounts of specified collateral, are subject to quantitative limitations. Under the Dodd-Frank Act changes, credit exposure arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements are subject to the collateral and quantitative limitations. The Reg W restrictions also apply to certain transactions of BBVA’s New York branch with certain of its affiliates.

Consumer Protection Regulations

The regulations that the CFPB may adopt could affect the nature of the consumer activities that BBVA Compass Bancshares, Inc., Compass Bank and BBVA’s New York branch may conduct, and may impose restrictions and limitations on the conduct of such activities. The CFPB has promulgated many mortgage-related rules since it was established under the Dodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher-priced mortgages. These rules have created operational and strategic challenges for Compass Bank, as it is both a mortgage originator and a servicer.

Durbin Amendment’s Rules Affecting Debit Card Interchange Fees

Under the Durbin Amendment to the Dodd-Frank Act, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.

Incentive Compensation Regulations and Other Regulations Applicable to SEC-regulated Entities

The Dodd-Frank Act requires the SEC to cause issuers with listed securities, which may include foreign private issuers such as BBVA, to establish a “claw back” policy to recoup previously awarded employee compensation in

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the event of an accounting restatement. The SEC proposed rules in 2015 to implement this provision. In addition, the Dodd-Frank Act requires U.S. regulatory agencies to prescribe regulations with respect to incentive-based compensation at financial institutions in order to prevent inappropriate behavior that could lead to a material financial loss. In 2016, federal regulators reproposed a rule that would require, among other things, the deferral of a percentage of certain incentive-based compensation for senior executives and certain other employees and, under certain circumstances, clawback of incentive-based compensation.

The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions in the Securities Act, the Exchange Act and the Investment Advisers Act of 1940.

Anti-Money Laundering; Office of Foreign Assets Control

A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to BBVA and certain of its affiliates impose obligations to maintain appropriate policies, procedures, and controls to detect, prevent, and report money laundering. In particular, the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), as amended, requires financial institutions operating in the United States to, among other things, (i) give special attention to correspondent and payable-through bank accounts, (ii) implement enhanced reporting due diligence, and “know your customer” standards for private banking and correspondent banking relationships, (iii) scrutinize the beneficial ownership and activity of certain non-U.S. and private banking customers (especially for so-called politically exposed persons), and (iv) develop and maintain anti-money laundering programs, customer identification procedures, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement compliance programs with respect to the sanctions programs administered by the Office of Foreign Assets Control. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution.

Cybersecurity

In October 2016, the federal banking regulators issued an advance notice of proposed rulemaking regarding enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including BBVA Compass and its U.S. bank subsidiaries. The proposed standards would expand existing cybersecurity regulations and guidance to focus on cyber risk governance and management; management of internal and external dependencies; and incident response, cyber resilience and situational awareness. In addition, the proposal contemplates more stringent standards for institutions with systems that are critical to the financial sector.

Disclosure of Iranian Activities under Section 13(r) of the Exchange Act

The BBVA Group discloses the following information pursuant to Section 13(r) of the Exchange Act, which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified executive orders, including activities not prohibited by U.S. law and conducted outside the United States by non-U.S. affiliates in compliance with local law. In order to comply with this requirement, the Company has requested relevant information from its affiliates globally.

The BBVA Group has the following activities, transactions and dealings with Iran requiring disclosure:

Legacy contractual obligations related to counter indemnities. Before 2007, the BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, one of which remains outstanding while another one was cancelled on January 1, 2017. For the year ended December 31, 2017, no fees and/or commissions have been recorded in connection with these counter indemnities. In addition, during this period the BBVA Group incurred in deferral commissions expenses of $334.92 in connection with the outstanding counter indemnity and cancellation expenses of $138.80 in connection with the other counter indemnity. The BBVA Group does not allocate direct costs to fees

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and commissions and therefore has not disclosed a separate profit measure. In accordance with Council Regulation (EU) Nr. 267/2012 of March 23, 2012, any payments of amounts due to Bank Melli under these counter indemnities were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. The BBVA Group is committed to terminating the outstanding counter indemnity as soon as contractually possible and does not intend to enter into new business relationships involving Bank Melli.

Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for one employee of the Iranian embassy in Spain and, until 2017, it maintained bank accounts in Spain for a former employee of the Iranian embassy in Spain. Both employees are Spanish citizens. Estimated gross revenues for the year ended December 31, 2017, from embassy-related activity, which include fees and/or commissions, did not exceed $2,628.34. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. The BBVA Group is committed to terminating these business relationships as soon as legally possible.

C.   Organizational Structure

As of December 31, 2017, the BBVA Group was composed of 331 consolidated entities and 76 entities accounted for using the equity method.

The companies are principally domiciled in the following countries: Argentina, Belgium, Bolivia, Brazil, Cayman Islands, Chile, Colombia, France, Germany, Ireland, Italy, Luxembourg, Mexico, Netherlands, Peru, Poland, Portugal, Spain, Switzerland, Turkey, United Kingdom, United States of America, Uruguay and Venezuela. In addition, BBVA has an active presence in Asia.

Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2017.

Subsidiary	Country of Incorporation	Activity	BBVA Voting Power	BBVA Ownership	Total Assets (1)
			(in Percentages)		(In Millions of Euros)
BBVA BANCOMER	Mexico	Bank	100.00	100.00	79,732
GARANTI	Turkey	Bank	49.85	49.85	69,738
COMPASS BANK	The United States	Bank	100.00	100.00	62,075
BANCO CONTINENTAL, S.A.	Peru	Bank	92.24	46.12	19,320
BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.	Chile	Bank	68.19	68.19	17,982
BBVA SEGUROS, S.A., DE SEGUROS Y REASEGUROS	Spain	Insurance	99.96	99.96	17,890
BBVA COLOMBIA, S.A.	Colombia	Bank	95.47	95.47	15,718
BBVA BANCO FRANCES, S.A.	Argentina	Bank	66.55	66.55	8,957
BANCO BILBAO VIZCAYA ARGENTARIA (PORTUGAL), S.A.	Portugal	Bank	100.00	100.00	4,687
GARANTIBANK INTERNATIONAL NV	Netherlands	Bank	100.00	100.00	4,101
PENSIONES BBVA BANCOMER, S.A. DE C.V., GRUPO FINANCIERO BBVA BANCOMER	Mexico	Insurance	100.00	100.00	3,924
SEGUROS BBVA BANCOMER, S.A. DE C.V., GRUPO FINANCIERO BBVA BANCOMER	Mexico	Insurance	100.00	100.00	2,980

⁽¹⁾Information for non-EU subsidiaries has been calculated using the prevailing exchange rates on December 31, 2017.

D.   Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,019 branch offices in Spain and, principally through our various subsidiaries, 5,252 branch offices abroad as of December 31, 2017. As of December 31, 2017, approximately 67% of our branches in Spain and 69% of our branches abroad (65% excluding those branches relating to the Garanti group) were rented from third parties pursuant to short-term leases that may be renewed by mutual agreement.

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E.   Selected Statistical Information

The following is a presentation of selected statistical information for the periods indicated. Where required under Industry Guide 3, we have provided such selected statistical information separately for our domestic and foreign activities, pursuant to our calculation that our foreign operations are significant according to Rule 9-05 of Regulation S-X.

Average Balances and Rates

The tables below set forth selected statistical information on our average balance sheets, which are based on the beginning and month-end balances in each year. We do not believe that monthly averages present trends materially different from those that would be presented by daily averages. Interest income figures, when used, include interest income on non-accruing loans to the extent that cash  payments have been received. Loan fees are included in the computation of interest revenue.

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	Average Balance Sheet - Assets and Interest from Earning Assets
	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	Average Balance	Interest	Average Yield (1)	Average Balance	Interest	Average Yield (1)	Average Balance	Interest	Average Yield (1)
	(In Millions of Euros, Except Percentages)
Assets
Cash and balances with central banks and other demand deposits	33,917	83	0.25%	26,209	10	0.05%	23,542	2	0.02%
Debt securities and derivatives	177,164	4,724	2.67%	202,388	5,072	2.51%	211,589	4,673	2.21%
Domestic	110,491	1,089	0.99%	133,009	1,772	1.33%	143,760	1,947	1.35%
Foreign	66,673	3,636	5.45%	69,379	3,300	4.76%	67,829	2,726	4.02%
Loans and receivables	444,518	24,003	5.40%	454,299	22,301	4.91%	421,300	19,881	4.72%
Loans and advances to central banks	10,945	258	2.36%	15,326	229	1.50%	12,004	140	1.17%
Loans and advances to credit institutions	26,420	485	1.83%	28,078	218	0.78%	27,171	270	0.99%
Loans and advances to customers	407,153	23,261	5.71%	410,895	21,853	5.32%	382,125	19,471	5.10%
In euros	196,893	3,449	1.75%	201,967	3,750	1.86%	196,987	4,301	2.18%
Domestic	187,281	3,377	1.80%	192,186	3,685	1.92%	192,508	4,285	2.23%
Foreign	9,612	72	0.75%	9,781	65	0.66%	4,479	16	0.37%
In other currency	210,261	19,812	9.42%	208,928	18,104	8.67%	185,139	15,170	8.19%
Domestic	15,329	403	2.63%	15,355	348	2.27%	14,923	284	1.91%
Foreign	194,932	19,409	9.96%	193,573	17,756	9.17%	170,216	14,886	8.75%
Other assets(2)	48,872	485	0.99%	52,748	325	0.62%	49,128	226	0.46%
Total average assets (3)	704,471	29,296	4.16%	735,645	27,708	3.77%	705,559	24,783	3.51%

⁽¹⁾Rates have been presented on a non-taxable equivalent basis.

⁽²⁾Includes “Hedging derivatives”, “Fair value changes of the hedged items in portfolio hedges of interest rate risk”, “Joint ventures, associates and unconsolidated subsidiaries”, “Insurance and reinsurance assets”, “Tangible assets”, “Intangible assets”, “Tax assets”, “Other assets” and “Non-current assets and disposal groups held for sale”.

⁽³⁾Foreign activity represented 46.99% of the total average assets for the year ended December 31, 2017, 49.84% for the year ended December 31, 2016 and 41.86% for the year ended December 31, 2015.

	Average Balance Sheet - Liabilities and Interest Paid on Interest Bearing Liabilities
	Year Ended December 31, 2017			Year Ended December 31, 2016			Year Ended December 31, 2015
	Average Balance	Interest	Average Yield (1)	Average Balance	Interest	Average Yield (1)	Average Balance	Interest	Average Yield (1)
	(In Millions of Euros, Except Percentages)
Liabilities
Deposits from central banks and credit institutions	90,619	2,212	2.44%	101,975	1,866	1.83%	99,289	1,559	1.57%
Customer deposits	392,057	7,007	1.79%	398,851	5,944	1.49%	366,249	4,390	1.20%
In euros	186,261	461	0.25%	195,310	766	0.39%	187,721	1,024	0.55%
Domestic	176,429	447	0.25%	185,046	739	0.40%	182,351	1,015	0.56%
Foreign	9,832	14	0.14%	10,264	26	0.26%	5,370	9	0.17%
In other currency	205,796	6,546	3.18%	203,541	5,178	2.54%	178,528	3,366	1.89%
Domestic	12,076	95	0.78%	11,543	39	0.34%	9,529	(53)	(0.55)%
Foreign	193,720	6,451	3.33%	191,998	5,139	2.68%	168,999	3,419	2.02%
Debt certificates	84,221	1,631	1.94%	89,876	1,738	1.93%	89,672	1,875	2.09%
Other liabilities (2)	82,699	687	0.83%	89,328	1,101	1.23%	96,049	936	0.97%
Total average liabilities	649,597	11,537	1.78%	680,029	10,648	1.57%	651,259	8,760	1.35%
Shareholders' equity	54,874	-	-	55,616	-	-	54,300	-	-
Total average liabilities and equity (3)	704,471	11,537	1.64%	735,645	10,648	1.45%	705,559	8,760	1.24%

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⁽¹⁾Rates have been presented on a non-taxable equivalent basis.

⁽²⁾Includes “Financial liabilities held for trading”, “Hedging derivatives”, “Fair value changes of the hedged items in portfolio hedges of interest rate risk”, “Liabilities under insurance and reinsurance contracts”, “Provisions”, “Tax liabilities”, “Other liabilities”, “Liabilities included in disposal groups classified as held for sale”.

⁽³⁾Foreign activity represented 46.99% of the total average liabilities for the year ended December 31, 2017, 45.62% for the year ended December 31, 2016 and 41.86% for the year ended December 31, 2015.

Changes in Net Interest Income-Volume and Rate Analysis

The following tables allocate changes in our net interest income between changes in volume and changes in rate for 2017 compared with 2016, and 2016 compared with 2015. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following table are interest payments on loans which are made in a period other than the period in which they are due. Loan fees were included in the computation of interest income.

	2017/2016
	Increase (Decrease) Due to Changes in
	Volume (1)	Rate  (2)	Net Change
	(In Millions of Euros)
Interest income
Cash and balances with central banks	3	71	74
Securities portfolio and derivatives	(632)	285	(347)
Loans and advances to central banks	(66)	94	29
Loans and advances to credit institutions	(13)	279	266
Loans and advances to customers	(199)	1,606	1,408
In euros	(94)	(206)	(301)
Domestic	(94)	(214)	(308)
Foreign	(0)	7	7
In other currencies	115	1,593	1,708
Domestic	(1)	56	55
Foreign	116	1,537	1,653
Other assets	(24)	184	160
Total income	(931)	2,519	1,588
Interest expense
Deposits from central banks and credit institutions	(208)	554	346
Customer deposits	(101)	1,164	1,063
In euros	(35)	(269)	(305)
Domestic	(34)	(258)	(292)
Foreign	(1)	(12)	(13)
In other currencies	57	1,311	1,368
Domestic	2	54	56
Foreign	56	1,256	1,312
Debt certificates	(109)	3	(106)
Other liabilities	(82)	(332)	(414)
Total expense	(500)	1,389	889
Net interest income	(431)	1,130	699

70

⁽¹⁾     The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.

⁽²⁾    The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

	2016/2015
	Increase (Decrease) Due to Changes in
	Volume (1)	Rate  (2)	Net Change
	(In Millions of Euros)
Interest income
Cash and balances with central banks	-	7	8
Securities portfolio and derivatives	(83)	482	399
Loans and advances to central banks	45	44	89
Loans and advances to credit institutions	65	(117)	(52)
Loans and advances to customers	2,063	319	2,382
In euros	12	(564)	(552)
Domestic	(7)	(593)	(600)
Foreign	20	29	48
In other currencies	2,051	883	2,934
Domestic	8	56	64
Foreign	2,043	827	2,870
Other assets	22	77	99
Total income	2,112	813	2,925
Interest expense
Deposits from central banks and credit institutions	82	225	307
Customer deposits	477	1,076	1,553
In euros	23	(282)	(258)
Domestic	15	(290)	(275)
Foreign	8	9	17
In other currencies	454	1,357	1,812
Domestic	(11)	103	92
Foreign	465	1,255	1,720
Debt certificates	64	(201)	(137)
Other liabilities	(24)	188	165
Total expense	600	1,288	1,888
Net interest income	1,512	(475)	1,037

⁽¹⁾    The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.

⁽²⁾    The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

71

Interest Earning Assets—Margin and Spread

The following table analyzes the levels of our average earning assets and illustrates the comparative gross and net yields and spread obtained for each of the years indicated.

	December 31,
	2017	2016	2015
	(In Millions of Euro, except Percentages)
Average interest earning assets	655,599	682,897	647,177
Gross yield(1)	4.5%	4.1%	3.8%
Net yield(2)	4.2%	3.8%	3.5%
Net interest margin(3)	2.7%	2.5%	2.5%
Average effective rate paid on all interest-bearing liabilities	2.0%	1.8%	1.6%
Spread(4)	2.4%	2.3%	2.3%

⁽¹⁾    Gross yield represents total interest income divided by average interest earning assets.

⁽²⁾    Net yield represents total interest income divided by total average assets.

⁽³⁾    Net interest margin represents net interest income as percentage of average interest earning assets.

⁽⁴⁾    Spread is the difference between gross yield and the average cost of interest-bearing liabilities.

ASSETS

Interest-Bearing Deposits in Other Banks

As of December 31, 2017, interbank deposits (excluding deposits with central banks) represented 3.8% of our total assets. Of such interbank deposits, 25.6% were held outside of Spain and 74.4% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. However, such deposits are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.

Securities Portfolio

As of December 31, 2017, our total securities portfolio (consisting of investment securities and loans and receivables) was carried on our consolidated balance sheet at a carrying amount (equivalent to its market or appraised value as of such date) of€112,660 million,representing 16.3% of our total assets. €32,617 million, or 29.0%, of our securities portfolio consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2017 on the investment securities that BBVA held was 2.4%, compared with an average yield of approximately 5.4%% earned on loans and advances during 2017. See Notes 10 and 12 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 16 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.

The following tables analyze the amortized cost and fair value of debt securities as of December 31, 2017, December 31, 2016 and December 31, 2015, respectively. The trading portfolio is not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.

72

	As of December 31, 2017
	Amortized cost	Fair Value (1)	Unrealized Gains	Unrealized Losses
	(In Millions of Euros)
DEBT SECURITIES
AVAILABLE FOR SALE PORTFOLIO
Domestic	24,716	25,605	906	(17)
Spanish Government and other government agencies debt securities	22,765	23,539	791	(17)
Other debt securities	1,951	2,066	114	-
Issued by Central Banks	-	-	-	-
Issued by credit institutions	891	962	72	-
Issued by other institutions	1,061	1,103	43	-
Foreign	40,557	40,647	661	(572)
The United States	12,479	12,317	35	(198)
U.S. Treasury and other U.S. Government agencies debt securities	3,052	3,018	-	(34)
States and political subdivisions debt securities	5,573	5,482	8	(99)
Other debt securities	3,854	3,817	28	(65)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	56	57	1	-
Issued by other institutions	3,798	3,759	26	(65)
Mexico	9,755	9,658	45	(142)
Mexican Government and other government agencies debt securities	8,101	8,015	34	(120)
Other debt securities	1,654	1,643	11	(22)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	212	209	1	(3)
Issued by other institutions	1,442	1,434	10	(19)
Turkey	5,052	4,985	48	(115)
Turkey Government and other government agencies debt securities	5,033	4,967	48	(114)
Other debt securities	19	19	1	(1)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	19	19	-	(1)
Issued by other institutions	-	-	-	-
Other countries	13,271	13,687	533	(117)
Other foreign governments and other government agencies debt securities	6,774	7,022	325	(77)
Other debt securities	6,497	6,664	208	(40)
Issued by Central Banks	1,330	1,331	2	(1)
Issued by credit institutions	2,535	2,654	139	(19)
Issued by other institutions	2,632	2,679	66	(19)
TOTAL AVAILABLE FOR SALE PORTFOLIO	65,273	66,251	1,567	(588)
HELD TO MATURITY PORTFOLIO
Domestic	5,984	6,043	59	-
Spanish Government and other government agencies debt securities	5,754	5,812	58	-
Other domestic debt securities	230	231	1	-
Issued by Central Banks	-	-	-	-
Issued by credit institutions	203	204	1	-
Issued by other institutions	27	27	-	-
Foreign	7,770	7,759	30	(42)
Government and other government agencies debt securities	6,864	6,844	18	(39)
Other debt securities	906	915	12	(3)
TOTAL HELD TO MATURITY PORTFOLIO	13,754	13,801	89	(42)
TOTAL DEBT SECURITIES	79,027	80,053	1,656	(630)

73

⁽¹⁾ Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

	As of December 31, 2016
	Amortized cost	Fair Value (1)	Unrealized Gains	Unrealized Losses
	(In Millions of Euros)
DEBT SECURITIES
AVAILABLE FOR SALE PORTFOLIO
Domestic	24,731	25,540	828	(19)
Spanish Government and other government agencies debt securities	22,427	23,119	711	(18)
Other debt securities	2,305	2,421	117	(1)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	986	1,067	82	-
Issued by other institutions	1,319	1,354	36	(1)
Foreign	49,253	49,040	773	(987)
The United States	14,256	14,043	48	(261)
U.S. Treasury and other U.S. Government agencies debt securities	1,702	1,683	1	(19)
States and political subdivisions debt securities	6,758	6,654	8	(112)
Other debt securities	5,797	5,706	39	(130)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	95	97	2	-
Issued by other institutions	5,702	5,609	37	(130)
Mexico	11,525	11,200	19	(343)
Mexican Government and other government agencies debt securities	9,728	9,438	11	(301)
Other debt securities	1,797	1,763	8	(42)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	86	87	2	(1)
Issued by other institutions	1,710	1,675	6	(41)
Turkey	5,550	5,443	73	(180)
Turkey Government and other government agencies debt securities	5,055	4,961	70	(164)
Other debt securities	495	482	2	(16)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	448	436	2	(15)
Issued by other institutions	47	46	-	(1)
Other countries	17,923	18,354	634	(203)
Other foreign governments and other government agencies debt securities	7,882	8,156	373	(98)
Other debt securities	10,041	10,197	261	(105)
Issued by Central Banks	1,657	1,659	4	(2)
Issued by credit institutions	3,269	3,311	96	(54)
Issued by other institutions	5,115	5,227	161	(49)
TOTAL AVAILABLE FOR SALE PORTFOLIO	73,985	74,580	1,601	(1,006)
HELD TO MATURITY PORTFOLIO
Domestic	8,625	8,717	92	-
Spanish Government and other government agency debt securities	8,063	8,153	90	-
Other domestic debt securities	562	564	2	-
Issued by Central Banks	-	-	-	-
Issued by credit institutions	494	496	2	-
Issued by other institutions	68	68	-	-
Foreign	9,071	8,902	16	(185)
Government and other government agency debt securities	7,982	7,830	13	(165)
Other debt securities	1,089	1,072	4	(21)
TOTAL HELD TO MATURITY PORTFOLIO	17,696	17,619	108	(185)
		-
TOTAL DEBT SECURITIES	91,681	92,199	1,709	(1,192)

74

⁽¹⁾ Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

	As of December 31, 2015
	Amortized cost	Fair Value (1)	Unrealized Gains	Unrealized Losses
	(In Millions of Euros)
DEBT SECURITIES
AVAILABLE FOR SALE PORTFOLIO
Domestic	43,500	45,668	2,221	(53)
Spanish Government and other government agencies debt securities	38,763	40,799	2,078	(41)
Other debt securities	4,737	4,869	144	(11)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	2,702	2,795	94	-
Issued by other institutions	2,035	2,074	50	(11)
Foreign	62,734	62,641	1,132	(1,226)
The United States	13,890	13,717	63	(236)
U.S. Treasury and other U.S. Government agencies debt securities	2,188	2,177	4	(15)
States and political subdivisions debt securities	4,629	4,612	9	(26)
Other debt securities	7,073	6,927	50	(195)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	71	75	5	(1)
Issued by other institutions	7,002	6,852	45	(194)
Mexico	12,627	12,465	73	(235)
Mexican Government and other government agencies debt securities	10,284	10,193	70	(160)
Other debt securities	2,343	2,272	4	(75)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	260	254	1	(7)
Issued by other institutions	2,084	2,019	3	(68)
Turkey	13,414	13,265	116	(265)
Turkey Government and other government agencies debt securities	11,801	11,682	111	(231)
Other debt securities	1,613	1,584	4	(34)
Issued by Central Banks	-	-	-	-
Issued by credit institutions	1,452	1,425	3	(30)
Issued by other institutions	162	159	1	(4)
Other countries	22,803	23,194	881	(490)
Other foreign governments and other government agencies debt securities	9,778	10,356	653	(76)
Other debt securities	13,025	12,838	227	(414)
Issued by Central Banks	2,277	2,273	-	(4)
Issued by credit institutions	3,468	3,488	108	(88)
Issued by other institutions	7,280	7,077	119	(322)
TOTAL AVAILABLE FOR SALE PORTFOLIO	106,234	108,310	3,354	(1,278)
TOTAL HELD TO MATURITY PORTFOLIO	-	-	-	-
TOTAL DEBT SECURITIES	106,234	108,310	3,354	(1,278)

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⁽¹⁾ Fair values for listed securities are determined on the basis of their quoted prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

As of December 31, 2017 the carrying amount of the debt securities classified within the available for sale portfolio by rating categories defined by external rating agencies, were as follows:

	As of December 31, 2017
	Debt Securities Available for Sale
	Carrying Amount (In Millions of Euros)	%
AAA	687	1.0%
AA+	10,738	16.2%
AA	507	0.8%
AA-	291	0.4%
A+	664	1.0%
A	683	1.0%
A-	1,330	2.0%
BBB+	35,175	53.1%
BBB	7,958	12.0%
BBB-	5,583	8.4%
BB+ or below	1,564	2.4%
Without rating	1,071	1.6%
TOTAL	66,251	100.0%

The following tables analyze the amortized cost and fair value of our ownership of equity securities as of December 31, 2017, 2016 and 2015, respectively. See Note 10 to the Consolidated Financial Statements.

	As of December 31, 2017
	Amortized cost	Fair Value (1)	Unrealized Gains	Unrealized Losses
	(In Millions of Euros)
EQUITY SECURITIES
AVAILABLE FOR SALE PORTFOLIO
Domestic	2,222	2,250	29	(1)
Equity listed	2,189	2,188	-	(1)
Equity unlisted	33	62	29	-
Foreign	880	976	110	(15)
United States	509	543	40	(6)
Equity listed	11	11	-	-
Equity unlisted	498	532	40	(6)
Other countries	371	432	70	(9)
Equity listed	204	229	33	(7)
Equity unlisted	167	202	37	(2)
TOTAL AVAILABLE FOR SALE PORTFOLIO	3,102	3,225	139	(16)
TOTAL EQUITY SECURITIES	3,102	3,225	139	(16)
TOTAL INVESTMENT SECURITIES	82,129	83,278	1,795	(646)

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 ⁽¹⁾       Fair values for listed securities are determined on the basis of their quoted prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

	As of December 31, 2016
	Amortized cost	Fair Value (1)	Unrealized Gains	Unrealized Losses
	(In Millions of Euros)
EQUITY SECURITIES
AVAILABLE FOR SALE PORTFOLIO
Domestic	3,748	2,822	19	(945)
Equity listed	3,690	2,763	17	(944)
Equity unlisted	57	59	2	(1)
Foreign-	1,501	1,820	336	(17)
United States	553	588	35	-
Equity listed	16	38	22	-
Equity unlisted	537	550	13	-
Other countries	948	1,231	301	(17)
Equity listed	777	1,028	268	(15)
Equity unlisted	171	203	33	(2)
TOTAL AVAILABLE FOR SALE PORTFOLIO	5,248	4,641	355	(962)
TOTAL EQUITY SECURITIES	5,248	4,641	355	(962)
TOTAL INVESTMENT SECURITIES	96,930	96,839	2,064	(2,154)

⁽¹⁾       Fair values for listed securities are determined on the basis of their quoted prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

	As of December 31, 2015
	Amortized cost	Fair Value (1)	Unrealized Gains	Unrealized Losses
	(In Millions of Euros)
EQUITY SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic	3,476	2,939	22	(559)
Equity listed	3,402	2,862	17	(558)
Equity unlisted	74	78	5	(1)
Foreign	1,728	2,177	501	(51)
United States	590	616	26	-
Equity listed	41	62	21	-
Equity unlisted	549	554	5	-
Other countries	1,138	1,561	475	(51)
Equity listed	986	1,313	371	(44)
Equity unlisted	152	248	103	(7)
TOTAL AVAILABLE FOR SALE PORTFOLIO	5,204	5,116	522	(610)
TOTAL EQUITY SECURITIES	5,204	5,116	522	(610)
TOTAL INVESTMENT SECURITIES	111,438	113,426	3,876	(1,888)

⁽¹⁾     Fair values for listed securities are determined on the basis of their quoted prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

77

The following table analyzes the maturities of our debt investment and fixed income securities, excluding trading portfolio, by type and geographical area as of December 31, 2017:

	Maturity at One Year or Less		Maturity After One Year to Five Years		Maturity after Five Years to 10 Years		Maturity after 10 Years		Total
	Amount	Yield % (1)	Amount	Yield %  (1)	Amount	Yield %  (1)	Amount	Yield %  (1)	Amount
	(Millions of Euros, Except Percentages)
DEBT SECURITIES
AVAILABLE-FOR-SALE PORTFOLIO
Domestic
Spanish government and other government agencies debt securities	3,632	1.67	2,658	2.87	12,305	2.49	4,944	4.43	23,539
Other debt securities	365	3.05	1,513	2.96	21	5.64	166	17.73	2,066
Total Domestic	3,998	1.80	4,172	2.90	12,325	2.47	5,110	3.20	25,605
Foreign
The United States	387	1.27	2,284	1.95	1,984	2.45	7,661	2.13	12,317
U.S. Treasury and other government agencies debt securities	258	0.24	1,421	1.78	1,339	2.10	-	-	3,018
States and political subdivisions debt securities	1	6.85	1	3.34	50	2.60	5,430	2.04	5,482
Other debt securities	127	3.32	862	2.24	596	3.25	2,231	2.38	3,817
Mexico	746	8.42	2,958	3.25	2,674	1.96	3,280	5.10	9,658
Mexican Government and other government agencies debt securities	690	8.52	2,074	3.04	2,210	1.50	3,041	4.53	8,015
Other debt securities	55	6.89	884	3.78	465	5.15	239	5.32	1,643
Turkey	350	0.02	2,716	0.00	1,914	0.05	5	4.96	4,985
Turkey Government and other government agencies debt securities	350	0.02	2,698	0.00	1,913	0.05	5	4.96	4,967
Other debt securities	-	-	19	-	-	-	-	-	19
Other countries	4,739	6.11	3,134	2.16	2,442	3.09	3,373	4.03	13,687
Securities of other foreign governments(2)	2,188	3.51	802	2.43	1,563	2.25	2,470	4.07	7,022
Other debt securities of other countries	2,551	8.80	2,332	2.07	879	4.76	903	3.89	6,664
Total Foreign	6,222	5.74	11,092	1.87	9,014	1.94	14,319	2.74	40,647
TOTAL AVAILABLE-FOR-SALE	10,220	4.11	15,263	2.16	21,339	2.26	19,429	2.87	66,251
HELD-TO-MATURITY PORTFOLIO
Domestic
Spanish government	2,900	3.93	106	2.88	845	2.26	1,903	2.18	5,754
Other debt securities	177	3.07	53	2.95	-	-	-	-	230
Total Domestic	3,078	3.88	159	2.90	845	2.26	1,903	2.18	5,984
Total Foreign	2,430	2.73	2,346	0.03	1,646	0.00	1,348	1.09	7,770
TOTAL HELD-TO-MATURITY	5,508	3.38	2,505	0.21	2,491	0.77	3,251	1.70	13,754
TOTAL DEBT SECURITIES	15,728	3.85	17,768	1.89	23,830	2.10	22,680	2.70	80,005

⁽¹⁾     Rates have been presented on a non-taxable equivalent basis.

⁽²⁾     Securities of other foreign governments mainly include investments made by our subsidiaries in securities issued by the governments of the countries where they operate.

Loans and Advances to Credit Institutions and Central Banks

As of December 31, 2017, our total loans and advances to credit institutions and central banks amounted to €33,597 million, or 4.9% of total assets. Net of our impairment losses, loans and advances to credit institutions and central banks amounted to €33,561 million as of December 31, 2017, or 4.9% of our total assets.

78

Loans and Advances to Customers

As of December 31, 2017, our total loans and advances to customers amounted to €401,074 million, or 58.1% of total assets. Net of our impairment losses, loans and advances to customers amounted to €388,326 million as of December 31, 2017, or 56.3% of our total assets. As of December 31, 2017 our loans and advances to customers in Spain amounted to €180,033 million. Our loans and advances to customers outside Spain amounted to €221,041 million as of December 31, 2017. For a discussion of certain mandatory ratios relating to our loan portfolio, see “—Business Overview—Supervision and Regulation—Capital Requirements” and “—Business Overview— Supervision and Regulation—Investment Ratio”.

  Loans by Geographic Area

The following table shows, by domicile of the customer, our net loans and advances to customers as of December 31, 2017, 2016, 2015, 2014 and 2013:

	As of December 31,
	2017	2016	2015	2014	2013
	(In Millions of Euros)
Domestic	180,033	182,492	192,227	178,410	188,434
Foreign
Europe	25,308	25,763	23,327	19,696	18,650
The United States	53,526	60,388	58,677	47,819	35,858
Mexico	48,463	50,242	51,842	49,904	41,823
Turkey	49,690	54,174	54,252	-	-
South America	39,814	53,512	47,862	53,616	50,291
Other	4,240	4,058	4,735	3,586	3,606
Total foreign	221,041	248,137	240,695	174,620	150,228
Total loans and advances	401,074	430,629	432,921	353,030	338,662
Impairment losses	(12,748)	(15,974)	(18,691)	(14,244)	(14,950)
Total net lending (1)	388,326	414,655	414,231	338,785	323,712

⁽¹⁾     Total net lending includes financial assets held for trading for loans and advances to customers.

 Loans by Type of Customer

The following table shows, by domicile and type of customer, our net loans and advances to customers at each of the dates indicated. The classification by type of customer is based principally on regulatory authority requirements in each country.

	As of December 31,
	2017	2016	2015	2014	2013
	(In Millions of Euros)
Domestic
Government	18,116	20,741	23,549	23,421	22,287
Agriculture	1,231	1,076	1,064	1,221	1,281
Industrial	14,707	13,670	15,079	13,507	13,844
Real estate and construction	11,786	15,179	18,621	20,170	25,456
Commercial and financial	16,075	13,111	11,557	18,439	15,615
Loans to individuals(1)	99,780	102,299	105,157	86,362	90,838
Other	18,338	16,415	17,200	15,289	19,113
Total Domestic	180,033	182,492	192,227	178,410	188,434
Foreign
Government	14,289	14,132	15,062	13,691	10,314
Agriculture	2,646	3,236	3,251	3,127	3,727
Industrial	37,319	43,402	41,834	24,072	14,985
Real estate and construction	17,885	21,822	20,343	12,982	15,243
Commercial and financial	31,584	33,933	32,019	25,441	31,802
Loans to individuals(1)	78,162	89,981	89,132	72,223	59,840
Other	39,156	41,630	39,054	23,082	14,318
Total Foreign	221,040	248,137	240,695	174,620	150,228
Total Loans and Advances	401,074	430,629	432,921	353,030	338,662
Impairment losses	(12,748)	(15,974)	(18,691)	(14,244)	(14,950)
Total net lending(2)	388,326	414,655	414,231	338,785	323,712

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 ⁽¹⁾      Includes mortgage loans to households for the acquisition of housing.

 ⁽²⁾      Total net lending includes financial assets held for trading for loans and advances to customers.

The following table sets forth a breakdown, by currency, of our net loan portfolio as of December 31, 2017, 2016, 2015, 2014 and 2013:

	As of December 31,
	2017	2016	2015	2014	2013
	(In Millions of Euros)
In euros	199,399	199,289	204,549	182,903	190,135
In other currencies	188,926	215,366	209,681	155,882	133,578
Total net lending (1)	388,326	414,655	414,231	338,785	323,712

 ⁽¹⁾      Total net lending includes financial assets held for trading for loans and advances to customers.

As of December 31, 2017, loans by BBVA and its subsidiaries to associates and jointly controlled companies amounted to €510 million, compared with €442 million as of December 31, 2016. Loans outstanding to the Spanish government and its agencies amounted to €18,116 million, or 4.5% of our total loans and advances as of December 31, 2017, compared with €20,741 million, or 4.8% of our total loans and advances as of December 31, 2016. None of our loans to companies controlled by the Spanish government are guaranteed by the government and, accordingly, we apply normal credit criteria in extending credit to such entities. Moreover, we carefully monitor such loans because governmental policies necessarily affect such borrowers.

Diversification in our loan portfolio is our principal means of reducing the risk of loan losses. We also carefully monitor our loans to borrowers in sectors or countries experiencing liquidity problems. Our exposure to our five largest borrowers as of December 31, 2017, excluding government-related loans, amounted to €19,061 million or approximately 4.92% of our total outstanding loans and advances. As of December 31, 2017 there did not exist any concentration of loans exceeding 10% of our total outstanding loans and advances, other than by category as disclosed in the table above.

Maturity and Interest Sensitivity

The following table sets forth an analysis by maturity of our total loans and advances to customers by domicile of the branch office that issued the loan and the type of customer as of December 31, 2017. The determination of maturities is based on contract terms.

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	Maturity
	Due in One Year or Less	Due After One Year Through Five Years	Due After Five Years	Total
	(in Millions of Euros)
Domestic
Government	7,422	5,848	4,845	18,116
Agriculture	480	521	230	1,231
Industrial	6,100	5,471	3,137	14,707
Real estate and construction	3,353	3,799	4,635	11,786
Commercial and financial	11,091	3,289	1,696	16,075
Loans to individuals	11,625	23,846	64,308	99,780
Other	7,280	7,385	3,673	18,338
Total Domestic	47,351	50,158	82,524	180,033
Foreign
Government	1,464	1,752	11,073	14,289
Agriculture	1,544	752	350	2,646
Industrial	14,777	14,020	8,522	37,319
Real estate and construction	6,750	7,039	4,096	17,885
Commercial and financial	18,553	9,569	3,462	31,584
Loans to individuals	19,183	19,666	39,312	78,162
Other	12,835	16,868	9,452	39,156
Total Foreign	75,106	69,666	76,268	221,040
Total loans and advances	122,457	119,824	158,792	401,074

The following table sets forth a breakdown of our fixed and variable rate loans which had a maturity of one year or more as of December 31, 2017.

	Interest Sensitivity of Outstanding Loans and Advances Maturing in More Than One Year
	Domestic	Foreign	Total
	(In Millions of Euros)
Fixed rate	24,485	81,181	105,666
Variable rate	108,197	64,753	172,950
Total loans and advances	132,682	145,934	278,616

Impairment Losses on Loans and Advances

For a discussion of loan loss reserves, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Impairment losses on financial assets” and Note 2.2.1 to the Consolidated Financial Statements.

The following table provides information, by domicile of customer, regarding our loan loss reserve and movements of loan charge-offs and recoveries for periods indicated.

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	As of and for the year ended December 31,
	2017	2016	2015	2014	2013
	(In Millions of Euros)
Loan loss reserve at beginning of period:
Domestic	9,113	12,357	9,832	10,510	9,638
Foreign	6,903	6,385	4,441	4,480	4,506
Total Loan loss reserve at beginning of period	16,016	18,742	14,273	14,990	14,144
Loans charged off:
Total domestic (1)	(3,709)	(3,298)	(3,340)	(2,628)	(1,965)
Total foreign (2)	(2,330)	(2,400)	(1,933)	(1,836)	(1,709)
Total Loans charged off:	(6,039)	(5,698)	(5,273)	(4,464)	(3,674)
Provision for possible loan losses:
Domestic	1,155	1,095	1,933	2,308	3,420
Foreign	3,078	3,046	2,804	2,439	2,522
Total Provision for possible loan losses	4,233	4,141	4,737	4,747	5,942
Acquisition and disposition of subsidiaries (3)	(5)	-	6,572	-	(30)
Effect of foreign currency translation	(926)	(601)	(862)	(119)	(557)
Other	(495)	(567)	(705)	(881)	(835)
Loan loss reserve at end of period:
Domestic	7,234	9,113	12,357	9,832	10,510
Foreign	5,550	6,903	6,385	4,441	4,480
Total Loan loss reserve at end of period	12,784	16,016	18,742	14,273	14,990
Loan loss reserve as a percentage of total loans and receivables at end of period	2.96%	3.44%	3.97%	3.83%	4.27%
Net loan charge-offs as a percentage of total loans and receivables at end of period	1.40%	1.22%	1.12%	1.19%	1.05%

⁽¹⁾   Domestic loans charged off in 2017, 2016, 2015, 2014 and 2013 were mainly related to the real estate sector.

⁽²⁾Foreign loans charged off in 2017 include €1,903million related to real estate loans and loans to individuals and others and €407 million related to commercial and financial loans. Loans charged off in 2016 include €2,012 million related to real estate loans and loans to individuals and others and €361  million related to commercial and financial loans. Loans charged off in 2015 include €1,904 million related to real estate loans and loans to individuals and others and €16 million related to commercial and financial loans. Foreign loans charged off in 2014 include €1,806 million related to real estate loans and loans to individuals and others and €30 million related to commercial and financial loans. Loans charged off in 2013 include €1,592 million related to real estate loans and loans to individuals and others, €114 million related to commercial and financial loans and €3 million related to loans to governmental and non-governmental agencies.

⁽³⁾Includes amounts related to the acquisition of Garanti and Catalunya Banc in 2015. See Note 18 to the Consolidated Financial Statements.

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When the recovery of any recognized amount is considered to be remote, this amount is removed from the consolidated balance sheet, without prejudice to any actions taken by the consolidated entities in order to collect the amount until their rights extinguish in full through expiry, forgiveness or for other reasons.

The loans charged off amounted to €6,039 million during the year ended December 31, 2017 compared with €5,698 million during the year ended December 31, 2016.

Our loan loss reserves as a percentage of total loans and advances decreased to 3.0% as of December 31, 2017 from 3.4 % as of December 31, 2016.

Impaired Loans

As described in Note 2.2.1 to the Consolidated Financial Statements, loans are considered to be impaired loans when there are reasonable doubts that the loans will be recovered in full and/or the related interest will be collected for the amounts and on the dates initially agreed upon, taking into account the guarantees received by the consolidated entities to ensure (in part or in full) the performance of the loans.

Amounts collected in relation to impaired loans and receivables are used to recognize the related accrued interest and any excess amount is used to reduce the unpaid principal. The approximate amount of interest income on our impaired loans which was included in profit attributable to parent company in 2017, 2016, 2015, 2014 and 2013 was €347.4 million, €264.2 million, €253.9 million, €231.2 million and €253.3 million, respectively.

The following table provides information regarding our impaired loans, by domicile and type of customer, as of the dates indicated:

	As of December 31,
	2017	2016	2015	2014	2013
	(In Millions of Euros)
Impaired loans
Domestic	12,730	16,360	19,481	18,563	20,985
Public sector	158	270	191	172	158
Other resident sector	12,572	16,090	19,290	18,391	20,826
Foreign	6,671	6,565	5,882	4,167	4,493
Public sector	13	42	21	8	11
Other non-resident sector	6,658	6,523	5,860	4,159	4,482
Total impaired loans	19,401	22,925	25,363	22,730	25,478
Total loan loss reserve	(12,784)	(16,016)	(18,742)	(14,273)	(14,990)
Impaired loans net of reserves	6,617	6,909	6,621	8,457	10,488
Impaired loans as a percentage of total loans and receivables, net	4.50%	4.92%	5.38%	6.10%	7.26%
Impaired loans (net of reserve) as a percentage of total loans and receivables, net	1.53%	1.48%	1.40%	2.27%	2.99%

Our total impaired loans amounted to €19,401 million as of December 31, 2017, a 15.37% decrease compared with €22,925 million as of December 31, 2016. This decrease was mainly attributable to the reduction of the Group’s exposure to the real estate sector in Spain.

As mentioned in Note 2.2.1 to the Consolidated Financial Statements, our loan loss reserve includes loss reserve for impaired assets and loss reserve for unimpaired assets but which present an inherent loss. As of December 31, 2017, the loan loss reserve amounted to €12,784 million, a 20.18% decrease compared with €16,016 million as of December 31, 2016. This decrease in our loan loss reserve is mainly attributable to a decline in impaired loans, particularly in the construction sector. As of December 31, 2015, 2014 and 2013, the loan reserve amounted to €18,742 million, €14,273 million and €14,990 million, respectively.

The following tables provide information, by domicile and type of customer, regarding our impaired loans and the loan loss reserves for impaired assets taken for each impaired loan category, as of December 31, 2017 and 2016:

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2017	Impaired Loans	Loan Loss Reserve	Impaired Loans as a Percentage of Loans by Category
	(In Millions of Euros)
Domestic:
Government	158	(34)	0.87%
Credit institutions	-	-	0.00%
Other sectors	12,572	(5,204)	7.76%
Agriculture	95	(43)	7.75%
Industrial	902	(449)	6.13%
Real estate and construction	3,647	(2,037)	30.94%
Commercial and other financial	1,055	(557)	6.56%
Loans to individuals	5,911	(1,676)	5.92%
Other	961	(442)	5.24%
Total Domestic	12,730	(5,238)	7.07%
Foreign:
Government	13	(8)	0.09%
Credit institutions	11	(6)	0.40%
Other sectors	6,647	(3,424)	3.22%
Agriculture	70	(41)	2.65%
Industrial	756	(434)	2.02%
Real estate and construction	517	(214)	2.89%
Commercial and other financial	651	(390)	2.06%
Loans to individuals	2,505	(1,345)	3.21%
Other	2,148	(999)	5.49%
Total Foreign	6,671	(3,437)	3.02%
Collective allowance for incurred but not reported losses	-	(4,109)
Total impaired loans	19,401	(12,784)	4.85%
2016	Impaired Loans	Loan Loss Reserve	Impaired Loans as a Percentage of Loans by Category
	(In Millions of Euros)
Domestic:
Government	270	(31)	1.30%
Credit institutions	-	-	-
Other sectors	16,090	(7,385)	9.95%
Agriculture	104	(47)	9.64%
Industrial	1,134	(581)	8.29%
Real estate and construction	6,262	(3,521)	41.25%
Commercial and other financial	1,206	(731)	9.19%
Loans to individuals	5,992	(1,744)	5.86%
Other	1,392	(761)	8.48%
Total Domestic	16,360	(7,416)	8.96%
Foreign:
Government	42	(12)	0.30%
Credit institutions	10	(7)	0.00%
Other sectors	6,523	(3,356)	2.79%
Agriculture	117	(67)	3.62%
Industrial	1,159	(457)	2.67%
Real estate and construction	537	(245)	2.46%
Commercial and other financial	661	(346)	1.95%
Loans to individuals	2,809	(1,573)	3.12%
Other	1,240	(675)	2.98%
Total Foreign	6,565	(3,375)	2.65%
Collective allowance for incurred but not reported losses	-	(5,224)
Total impaired loans	22,925	(16,016)	5.65%

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Troubled Debt Restructurings

As of December 31, 2017, of the total troubled debt restructurings of €21,311 million, as described in Note 7.3 and Appendix VIII to our Consolidated Financial Statements, €9,191 million were not considered impaired loans.

Potential Problem Loans

The identification of “Potential problem loans” is based on the analysis of historical non-performing asset ratio trends, categorized by products/clients and geographical locations. This analysis is focused on the identification of portfolios with non-performing asset ratio higher than our average non-performing asset ratio. Once these portfolios are identified, we segregate such portfolios into groups with similar characteristics based on the activities to which they are related, geographical location, type of collateral, solvency of the client and loan to value ratio. 

The non-performing asset ratio in our domestic real estate and construction portfolio was 30.9% as of December 31, 2017 (compared with 41.2% as of December 31, 2016), substantially higher than the average non-performing asset ratio for all of our domestic activities (7.1% as of December 31, 2017 and 9.0% as of December 31, 2016) and the average non-performing asset ratio for all of our consolidated activities (4.4% as of December 31, 2017 and 4.9% as of December 31, 2016). Within such portfolio, construction loans and property development loans (which exclude mainly infrastructure and civil construction) had a non-performing asset ratio of 26.2% as of December 31, 2017 (compared with 25.3% as of December 31, 2016). Given such non-performing asset ratio, we performed an analysis in order to define the level of loan provisions attributable to these loan portfolios (see Note 2.2.1 to our Consolidated Financial Statements).

Foreign Country Outstandings

The following table sets forth, as of the end of the years indicated, the aggregate amounts of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 1% of our total assets as of December 31, 2017, December 31, 2016 and December 31, 2015. Cross-border outstandings do not include loans in local currency made by our subsidiary banks to customers in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans made by our subsidiaries in South America, Mexico, Turkey and the United States or other regions which are not listed below.

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	2017		2016		2015
	Amount	% of Total Assets	Amount	% of Total Assets	Amount	% of Total Assets
	(In Millions of Euros, Except Percentages)
United Kingdom	8,444	1.2%	5,854	0.8%	7,306	1.0%
Mexico	2,635	0.4%	1,947	0.3%	2,134	0.3%
Turkey	7,754	1.1%	1,665	0.2%	1,974	0.3%
Other OECD	7,885	1.1%	7,745	1.1%	8,124	1.1%
Total OECD	26,718	3.9%	17,211	2.4%	19,538	2.7%
Central and South America	3,980	0.6%	4,001	0.6%	3,434	0.5%
Other	3,787	0.5%	4,056	0.6%	4,888	0.7%
Total	34,485	5.0%	25,268	3.5%	27,860	3.8%

The following table sets forth the amounts of our cross-border outstandings as of December 31 of the years indicated below by type of borrower where outstandings in the borrower’s country exceeded 1% of our total assets.

	Governments	Banks and Other Financial Institutions	Commercial, Industrial and Other	Total
	(In Millions of Euros)
As of December 31, 2017
Mexico	280	61	2,295	2,635
Turkey	3,211	1,488	3,055	8,444
United Kingdom	-	7,003	1,441	7,754
Total	3,491	8,552	6,791	18,833
As of December 31, 2016
Mexico	160	5	1,781	1,947
Turkey	105	439	1,120	1,665
United Kingdom	-	3,732	2,122	5,854
Total	266	4,176	5,024	9,466
As of December 31, 2015
Mexico	166	4	1,965	2,134
United Kingdom	-	4,661	2,646	7,306
Total	166	4,665	4,611	9,440

The Bank of Spain requires that minimum reserves be maintained for cross-border risk arising with respect to loans and other outstandings to countries, or residents of countries, falling into certain categories established by the Bank of Spain on the basis of the level of perceived transfer risk. The category that a country falls into is determined by us, subject to review by the Bank of Spain.

The following table shows the minimum required reserves with respect to each category of country for BBVA’s level of coverage as of December 31, 2017.

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Categories(1)	Minimum Percentage of Coverage (Outstandings Within Category)
Countries belonging to the OECD whose currencies are listed in the Spanish foreign exchange market	0.0
Countries with transitory difficulties(2)	10.1
Doubtful countries(2)	22.8
Very doubtful countries(2)(3)	83.5
Bankrupt countries(4)	100.0

⁽¹⁾   Any outstanding which is guaranteed may be treated, for the purposes of the foregoing, as if it were an obligation of the guarantor.

⁽²⁾  Coverage for the aggregate of these three categories (countries with transitory difficulties, doubtful countries and very doubtful countries) must equal at least 35% of outstanding loans within the three categories. The Bank of Spain has recommended up to 50% aggregate coverage.

⁽³⁾   Outstandings to very doubtful countries are treated as impaired under Bank of Spain regulations.

⁽⁴⁾  Outstandings to bankrupt countries must be charged off immediately. As a result, no such outstandings are reflected on our consolidated balance sheet. Notwithstanding the foregoing minimum required reserves, certain interbank outstandings with an original maturity of three months or less have minimum required reserves of 50%. We met or exceeded the minimum percentage of required coverage with respect to each of the foregoing categories.

Our exposure to borrowers in countries with difficulties (the last four categories in the foregoing table), excluding our exposure to subsidiaries or companies we manage and trade-related debt, amounted to €130 million, €104 million and €130 million as of December 31, 2017, 2016 and 2015, respectively. These figures do not reflect loan loss reserves of 19.1%, 35.6%, and 29.2% respectively, of the relevant amounts outstanding at such dates. Deposits with or loans to borrowers in all such countries as of December 31, 2017 did not in the aggregate exceed 0.02% of our total assets.

The country-risk exposures described in the preceding paragraph as of December 31, 2017, 2016 and 2015 do not include exposures for which insurance policies have been taken out with third parties that include coverage of the risk of confiscation, expropriation, nationalization, non-transfer, non-convertibility and, if appropriate, war and political violence. The sums insured as of December 31, 2017, 2016 and 2015 amounted to $124 million, $90 million and $81 million, respectively (approximately €104 million, €85 million and €74 million, respectively, based on a euro/dollar exchange rate on December 31, 2017 of $1.00 = €0.83, on December 31, 2016 of $1.00 = €0.95, and on December 31, 2015 of $1.00 = €0.92).

LIABILITIES

Deposits

The principal components of our customer deposits are domestic demand and savings deposits and foreign time deposits. The following tables provide information regarding our deposits by principal geographic area for the dates indicated.

87

	As of December 31, 2017
	Customer Deposits	Bank of Spain and Other Central Banks	Other Credit Institutions	Total
	(In Millions of Euros)
Total Domestic	165,559	28,044	5,518	199,121
Foreign
Europe	22,177	101	34,849	57,128
The United States	58,164	87	3,961	62,212
Mexico	52,387	3,316	2,429	58,132
Turkey	36,815	3,713	953	41,482
South America	38,764	1,792	2,999	43,555
Other	2,511	-	3,806	6,317
Total Foreign	210,819	9,010	48,998	268,826
Total	376,379	37,054	54,516	467,949

	As of December 31, 2016
	Customer Deposits	Bank of Spain and Other Central Banks	Other Credit Institutions	Total
	(In Millions of Euros)
Total Domestic	161,022	26,602	6,768	194,392
Foreign
Europe	30,949	101	38,338	69,388
The United States	62,311	38	5,040	67,388
Mexico	54,117	2,400	3,663	60,180
Turkey	38,211	3,191	1,463	42,865
South America	50,282	2,407	4,035	56,724
Other	4,572	-	4,194	8,766
Total Foreign	240,442	8,138	56,733	305,312
Total	401,465	34,740	63,501	499,706

	As of December 31, 2015
	Customer Deposits	Bank of Spain and Other Central Banks	Other Credit Institutions	Total
	(In Millions of Euros)
Total Domestic	168,689	19,014	8,262	195,965
Foreign
Europe	35,770	101	39,896	75,767
The United States	62,988	619	7,391	70,998
Mexico	51,422	11,254	1,643	64,319
Turkey	36,036	4,348	1,786	42,170
South America	44,469	3,341	4,423	52,233
Other	3,988	1,411	5,142	10,541
Total Foreign	234,673	21,073	60,281	316,027
Total	403,362	40,087	68,543	511,992

For an analysis of our deposits, including non-interest bearing demand deposits, interest-bearing demand deposits, saving deposits and time deposits, see Note 22 to the Consolidated Financial Statements.

88

As of December 31, 2017, the maturity of our time deposits (excluding interbank deposits) in denominations of $100,000 or greater was as follows:

	As of December 31, 2017
	Domestic	Foreign	Total
	(In Millions of Euros)
3 months or under	6,694	40,738	47,432
Over 3 to 6 months	3,405	5,839	9,245
Over 6 to 12 months	6,401	8,643	15,044
Over 12 months	8,639	7,481	16,120
Total	25,140	62,701	87,841

Time deposits from Spanish and foreign financial institutions amounted to €25,941 million as of December 31, 2017, substantially all of which were in excess of $100,000.

Large denomination deposits may be a less stable source of funds than demand and savings deposits because they are more sensitive to variations in interest rates. For a breakdown by currency of customer deposits as of December 31, 2017, 2016 and 2015, see Note 22 to the Consolidated Financial Statements.

Short-term Borrowings

Securities sold under agreements to repurchase and promissory notes issued by us constituted the only categories of short-term borrowings that equaled or exceeded 30% of stockholders’ equity as of December 31, 2017, 2016 and 2015.

	As of and for the Year Ended December 31, 2017		As of and for the Year Ended December 31, 2016		As of and for the Year Ended December 31, 2015
	Amount	Average rate	Amount	Average rate	Amount	Average rate
	(In Millions of Euro, Except Percentages)
Securities sold under agreements to repurchase (principally Spanish treasury bills):
As of end of period	33,208	1.7%	39,682	1.6%	50,342	1.0%
Average during period	32,475	2.4%	39,589	1.4%	47,954	0.9%
Maximum quarter-end balance	33,863	-	41,399	-	50,342	-
Bank promissory notes:
As of end of period	1,462	0.7%	1,033	0.2%	516	0.3%
Average during period	704	1.0%	883	0.7%	2,239	1.0%
Maximum quarter-end balance	1,462	-	1,079	-	3,354	-
Bonds and subordinated debt :
As of end of period	4,321	5.8%	14,708	3.7%	14,741	3.4%
Average during period	7,717	5.4%	15,092	3.5%	15,320	2.2%
Maximum quarter-end balance	10,848	-	16,016	-	15,693	-
Total short-term borrowings as of end of period	38,991	2.1%	55,423	2.1%	65,598	1.5%

Return Ratios

The following table sets out our return ratios:

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	As of or for the Year Ended December 31,
	2017	2016	2015
	(In Percentages)
Return on shareholders' funds (1)	6.4%	6.7%	5.3%
Return on assets(2)	0.7%	0.6%	0.5%
Dividend pay-out ratio(3)	21.1%	36.1%	45.9%
Equity to assets ratio(4)	7.8%	7.6%	7.7%

⁽¹⁾    Represents profit attributable to parent company for the year as a percentage of average stockholder’s funds for the year.

⁽²⁾    Represents profit attributable to parent company as a percentage of average total assets for the year.

⁽³⁾  Represents dividends declared by BBVA (including the cash remuneration paid under the “Dividend Option” scheme) as a percentage of profit attributable to parent company. This ratio does not take into account the non-cash remuneration paid by BBVA under the “Dividend Option” scheme (in the form of BBVA shares or ADSs). See “—Business Overview—Supervision and Regulation—Dividends—Scrip Dividend” and “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.  

⁽⁴⁾    Represents average total equity over average total assets.

EQUITY

Accumulated other comprehensive income (loss)

As of December 31, 2017, the accumulated other comprehensive loss amounted to €8,792 million, a 61.1% increase compared to the €5,458 million recorded as of December 31, 2016. As of December 31, 2015, the balance amounted to €3,349 million.

The majority of the balance is related to the conversion to euros of the financial statements balances from consolidated entities whose functional currency is not euros. In this regard, the increase in “Foreign currency translation” (from €5,185 million in 2016 to €9,159 million in 2017) was mainly related to the depreciation of the Mexican peso and the Turkish lira.

F.    Competition

The commercial banking sector in Spain has undergone significant consolidation. In the majority of the markets where we provide financial services, the Banco Santander Group is our largest competitor, but the restructuring processes that have been underway for several years have increased the size of certain banks, such as Bankia (an integration of seven regional saving banks, led by Caja Madrid), Caixabank (which acquired Banco de Valencia, Banca Cívica and Barclays’s Spanish operations) and Banco Sabadell. Furthermore, in June 2017, Banco Santander announced the acquisition of 100% of the share capital of Banco Popular as part of the resolution strategy adopted by the Single Resolution Board (SRB) for the latter. This has further increased the market share of Banco Santander in Spain.

We face strong competition in all of our principal areas of operations. The low interest rate environment which depresses interest income and the ongoing de-leveraging process makes competition quite fierce in the Spanish market. In particular, competition is particularly intense in the credit market for lending to small and medium enterprises (SMEs), where new credit interest rates have fallen from an average of 5.5% between January 2012 and May 2014 to around 2.6% at December 2017, barely exceeding credit costs.

In addition, in the aftermath of the financial crisis, the need for a more balanced funding structure led to increased competition for deposits in Spain. While the low interest rate environment has depressed deposits’ remuneration, there seems to be a zero interest rate floor as deposit rates are not entering negative territory. Former Spanish savings banks, many of which have become commercial banks and received financial or other forms of

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support from the Spanish government and the European Stability Mechanism, and money market mutual funds provide strong competition for savings deposits and, in the case of savings banks, for other retail banking services.

Credit cooperatives, which are active principally in rural areas where they provide savings and loan services and related services such as the financing of agricultural machinery and supplies, are also a source of competition. The entry of “fintech companies” and online banks into the Spanish banking system has also increased competition, especially in payment services. Insurance companies and other financial service firms also compete for customer funds. Like commercial banks, former savings banks, insurance companies and other financial service firms are expanding the services offered to consumers in Spain. We face competition in mortgage loans from savings banks and, to a lesser extent, cooperatives.

Furthermore, the EU Directive on Investment Services took effect on December 31, 1995. The EU Directive permits all brokerage houses authorized to operate in other member states of the EU to carry out investment services in Spain. Although the EU Directive is not specifically addressed to banks, it affects the activities of banks operating in Spain. Besides, several initiatives have been implemented recently in order to facilitate the creation of a Pan-European financial market. For example, SEPA (Single Euro Payments Area), which is a payment-integration initiative for simplification of bank transfers, direct debits and payment cards mainly within the EU and the MiFID project (Markets in Financial Instruments Directive), which has been complemented with the introduction of MiFID II in January 2018, a Directive that aims to create a European framework for investment services. In addition, decisive steps are being taken towards achieving a banking union in Europe (as agreed at a Eurogroup meeting in June 2012). The ECB started to work as a single supervisor in November 2014, supervising more than 120 entities (including BBVA) in the Eurozone. Moreover, the foundations of a single resolution mechanism were set with the agreement on the regulation and contributions to the Fund and the appointment of the SRB which is operational since January 1, 2015. A new instrument of bank direct recapitalization was created within the ESM. The bail-in tool included in the BRRD entered into force on January 1, 2016. The creation of a common deposit-guarantee scheme (the EDIS) was proposed by the European Commission in November 2015 in order to complete the current banking union process. More recently, in November 2017, the Bank of Spain Circular 4/2017 entered into force and modified the calculation of provisions by Spanish banks in order to adjust them to IFRS 9. 

Following the financial turmoil, a number of banks have disappeared or have been absorbed by other banks. We believe this trend will likely continue in the future, with a number of mergers and acquisitions between financial entities both domestically and at the European level. In Spain, the recapitalization of several entities with public funds and their subsequent privatization, with the purpose of achieving a stronger banking sector, has intensified this process. In this vein, Bankia and BMN merged in December 2017. In the United States, the government has facilitated the purchase of troubled banks by other competitors in the context of the financial crisis, and European governments, including the Spanish government, have expressed their willingness to facilitate these types of operations.

In the United States, where we operate primarily through BBVA Compass, the competitive landscape has also been significantly affected by the financial crisis. The U.S. banking industry has experienced significant impairment of its assets since 2009, which resulted in losses in selected product categories and slow loan growth. However, this trend has stabilized more recently and U.S. commercial banks have largely recovered from the crisis, although the mortgage delinquency rate remained high at 3.62% in September 2017, according to the Federal Reserve. Commercial banks continue to make strides toward healthy balance sheets, with delinquency and charge-off rates falling throughout 2017. Consumer delinquencies of the system have actually returned to pre-crisis levels. Commercial real estate asset quality has also improved steadily with the delinquency rate at 0.76% as of September 2017 according to the Federal Reserve. Asset quality has improved since the crisis, and we expect these positive trends to continue on the back of rising economic confidence.

In Turkey, where we operate through Garanti, competition remains high. The three public banks that operate in the country accounted for 31% of the total assets of financial institutions as of December 31, 2017, whereas private banks (including Garanti) accounted for 59% and development banks and participation banks (banks that operate under the ethos of Islamic banking) together accounted for the remaining 10%. 2017 turned out to be better than anticipated after a slowdown in the economy in the third quarter of 2016. Timely and effective stimulus measures taken by the government by means of supportive fiscal policies facilitated a quick recovery of the economy. In this vein, the government introduced a TL 250 billion guarantee scheme under the Credit Guarantee Fund. In 2017, TL 200 billion of the fund was utilized. Consequently, loans to corporations in local currency grew by approximately

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30% during the year, leading the 25% increase in TL loans (i.e., loans denominated in TL). Consumer loans also registered a strong 18% growth, while amounts drew under? credit cards grew by 14% in 2017. Total customer deposits grew by 18% during the year. The growth in TL customer deposits fell short of the strong TL lending growth, and increased by 13%. Foreign currency customer deposits grew strongly by 14% in U.S. dollars terms.

In Mexico, where we operate through BBVA Bancomer, the banking industry remained solvent despite the recent volatile environment in the financial markets. During 2017, total bank lending to the private sector showed double-digit nominal growth, in line with last year’s growth rate (an increase of 12.7% in 2017, compared to an increase of 12.9% in 2016). The amount of total bank deposits slightly decreased its nominal growth rate from 12.6% in 2016 to 12.0% in 2017 year-on-year. The similar growth rates in loans and deposits helped maintain a balance. With regards to solvency, the overall capitalization level of the Mexican banking system reached 15.7% as of November 30, 2017, well above the minimum regulatory requirement.

In Mexico, changes in banking regulation could have a significant potential impact on competition. The most relevant regulatory developments in 2016 and 2017 include the following:

●   adoption of measures to increase security in financial transactions and combat identity theft; definition of identification methods to be implemented in the signing of contracts and the request for means of payment, cash withdrawals and transfers, which include biometric validation and non-face-to-face identification (digital onboarding); and

●  adoption of measures to promote competition, supervision and legal security of Financial Technology Institutions (FTIs). The new proposed Fintech law, still under discussion in Congress, aims to regulate the creation of FTIs associated with crowdfunding and e-money. Likewise, it provides for the so-called innovative models, which would allow FTIs, financial institutions and other legal persons (Start-ups) to provide their services in a manner that differs from that prevailing in the market, on a temporary basis and benefiting from exceptions to the applicable regulation. In addition, the draft law allow FTIs and other financial institutions to use virtual assets (cryptocurrencies), subject to their recognition and regulation by the Mexican Central Bank (Banco de Mexico). Finally, the draft law includes an obligation for financial institutions and FTIs to set up Application Program Interfaces (APIs) for the distribution of open, aggregate and transactional data (the latter subject to prior authorization from the client).

It is early to determine the definitive impact that the proposed Fintech law will have on the Mexican financial system, especially because it is still under discussion. However, the proposal has been positively received by the financial institutions, as it will provide FTIs with a legal framework and will create a more equal environment for all players in the financial system.

In addition, any changes in laws, regulations and policies pursued by the actual U.S. Government may adversely affect, directly or indirectly, the financial and economic activities of the emerging markets in which the Group operates, particularly Mexico due to the strong trade and other ties between Mexico and the United States. In particular, if the United States was to withdraw from NAFTA, this could have a material adverse effect on Mexico’s economy.

In recent years, the financial services sector has undergone significant transformation in relation to the development of the Internet and mobile technologies and the entrance of new players into activities previously provided in the main by financial services providers. Whereas commercial banks were almost the sole providers of the whole range of financial products, from credit to deposits, or payments and investment services, today, a set of non-bank digital providers compete (and cooperate) among each other and with banks in the provision of financial services. These new FinTech providers are generally startup firms that are specialized in a specific service or niche of the financial services market, however, large digital players such as Amazon, Facebook or Apple have also started to offer financial services (mainly, in relation to payments and credit) ancillary to their core business.

In this new competitive environment, banks and other players are calling for a level playing field (LPF) that ensures fair competition among the different financial services providers. Regulations on consumer protection and the integrity of the financial system (such as anti-money laundering regulations or regulations for combating the financing of terrorism) are generally activity-specific and, therefore, meet the principle of LPF, except for some exemptions based on the size of the firm. However, with regards to financial stability, banking groups are subject to

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prudential regulations that have implications for most of their activities, including those in which they compete with non-bank players that are only subject to activity-specific regulations or that may be able to benefit from regulatory uncertainty. Therefore, FinTech activities are generally more highly regulated when they are carried out within a banking group than if they are conducted by a purely FinTech provider. For instance, the CRD IV Directive (CRD) limits the ratio between the variable and the fixed salary that financial institutions can pay to certain staff members identified as risk takers. This places banking groups at a competitive disadvantage in respect of attracting and retaining key management and personnel of any start-up they may acquire .

Existing loopholes in the regulatory framework are another cause of an uneven playing field between banks and non-bank players. Some new services or business models are not yet subject to existing regulations. In such cases, not only potential risks to financial stability, consumer protection and the integrity of the financial system are unaddressed, but asymmetries arise between players since regulated providers often face obstacles that unregulated providers do not face. For instance, the European Banking Authority (EBA) has recommended that the competent authorities prevent credit institutions, payment institutions and e-money institutions from buying, holding or selling virtual currencies.

G.   Cybersecurity and Fraud Management

We have 141 Business Continuity Plans in place across 22 countries, as well as an insurance policy to cover certain contingencies.

Digital transformation has become a strategic priority for the financial sector and in particular for BBVA. In this regard, it is vital to protect our trademark, our assets and the information of our customers from existent threats in the digital world.

To obtain this objective, we have a Computer Emergency Response Team (CERT) which is responsible for preventing, alerting and responding to cyber threats. We believe that the CERT can adapt quickly and innovate solutions to solve the challenges needed to digitally transform the BBVA Group, while keeping up with the frequent changes to cyber-crime technology.

With the objective of maintaining the best practices of the international financial sector, in 2016 a Technology and Cybersecurity Committee was created in the BBVA Group. This committee is composed of four Board members and is chaired by the Chief Executive Officer of BBVA.

Lastly, BBVA has a strong commitment to the protection of its customers, and to this end we work closely with regulators and the bank industry in those countries in which the BBVA Group has a presence, with the goal that customers are always protected.

During 2017, BBVA made progress in the integrity management of all external and internal fraud prevention processes, including the establishment of a corporate fraud committee. The BBVA Group’s global anti-fraud program is focused on preventing and mitigating the impact of fraudulent activities.

ITEM 4A.     UNRESOLVED STAFF COMMENTS

None.

ITEM 5.     OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

The BBVA Group is a customer-centric global financial services group founded in 1857. It has a solid leadership position in the Spanish market, it is the largest financial institution in Mexico in terms of assets, it has leading franchises in South America and the Sunbelt Region of the United States and it is the leading shareholder in Garanti, Turkey’s biggest bank in terms of market capitalization. Its diversified business is focused on high-growth markets and it relies on technology as a key sustainable competitive advantage. Corporate responsibility is at the core of its business model. BBVA fosters financial education and inclusion, and supports scientific research and culture.

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The BBVA Group operates in Spain through Banco Bilbao Vizcaya Argentaria, S.A., a private-law entity subject to the laws and regulations governing banking entities operating in Spain. It carries out its activity through branches and agencies across the country and abroad. In addition to the transactions it carries out directly, Banco Bilbao Vizcaya Argentaria, S.A. is the parent company of the BBVA Group, which includes a group of subsidiaries, joint ventures and associates performing a wide range of activities.

As of December 31, 2017, the BBVA Group had 131,856 employees, 72 million customers, 8,271 branches and 31,688 ATMs and was present in 35 countries. As of such date the BBVA Group was composed of 331 consolidated entities and 76 entities accounted for using the equity method.

Critical Accounting Policies

The Consolidated Financial Statements as of and for the years ended December 31, 2017, 2016 and 2015 were prepared by the Bank’s directors in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, and in compliance with IFRS-IASB, and by applying the basis of consolidation, accounting policies and measurement bases described in Note 2 to the Consolidated Financial Statements, so that they present fairly the Group’s total equity and financial position as of December 31, 2017, 2016 and 2015, and its results of operations and consolidated cash flows for the years ended December 31, 2017, 2016 and 2015. The Consolidated Financial Statements were prepared on the basis of the accounting records kept by the Bank and by each of the other Group companies and include the adjustments and reclassifications required to unify the accounting policies and measurement bases used by the Group. See Note 2.2 to the Consolidated Financial Statements.

In preparing the Consolidated Financial Statements, estimates were made by the Group and the consolidated companies in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates relate mainly to the following:

·         The impairment on certain financial assets.

·   The assumptions used to quantify other provisions and for the actuarial calculation of the post-employment benefit liabilities and commitments.

·         The useful life and impairment losses of tangible and intangible assets.

·         The valuation of goodwill and price allocation of business combinations.

·         The fair value of certain unlisted financial assets and liabilities.

·         The recoverability of deferred tax assets.

·         The exchange rate and the inflation rate of Venezuela.

Although these estimates were made on the basis of the best information available as of December 31, 2017, 2016 and 2015, respectively, events that take place in the future might make it necessary to revise these estimates (upwards or downwards) in coming years.

Note 2 to the Consolidated Financial Statements contains a summary of our significant accounting policies. We consider certain of these policies to be particularly important due to their effect on the financial reporting of our financial condition and results of operations and because they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the Consolidated Financial Statements. The nature of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our Consolidated Financial Statements and the discussion below.

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We have identified the accounting policies enumerated below as critical to the understanding of our financial condition and results of operations, since the application of these policies requires significant management assumptions and estimates that could result in materially different amounts to be reported if the assumptions used or underlying circumstances were to change.

See Note 2.3 to the Consolidated Financial Statements for information on changes to IFRS or their interpretation that will become effective after the date of this Annual Report. 

Fair value of financial instruments

The fair value of an asset or a liability on a given date is taken to be the price that would be received upon the sale of an asset, or paid, upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The most objective and common reference for the fair value of an asset or a liability is the price that would be paid for it on an organized, transparent and deep market (“quoted price” or “market price”). 

If there is no market price for a given asset or liability, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, by using mathematical measurement models sufficiently tried and trusted by the international financial community. Such estimates would take into consideration the specific features of the asset or liability to be measured and, in particular, the various types of risk associated with the asset or liability. However, the limitations inherent to the measurement models developed and the possible inaccuracies of the assumptions required by these models may signify that the fair value of an asset or liability thus estimated does not coincide exactly with the price for which the asset or liability could be purchased or sold on the date of its measurement.

See Notes 2.2.1 and 8 to the Consolidated Financial Statements, which contain a summary of our significant accounting policies.

Derivatives and other future transactions

These instruments include outstanding foreign currency purchase and sale transactions, outstanding securities purchase and sale transactions, futures transactions relating to securities, exchange rates or interest rates, forward interest rate agreements, options relating to exchange rates, securities or interest rates and various types of financial swaps.

All derivatives are recognized on the balance sheet at fair value from the date of arrangement. If the fair value of a derivative is positive, it is recorded as an asset and if it is negative, it is recorded as a liability. Unless there is evidence to the contrary, it is understood that on the date of arrangement the fair value of the derivatives is equal to the transaction price. Changes in the fair value of derivatives after the date of arrangement are recognized in the heading “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net” in the consolidated income statement.

Specifically, the fair value of the standard financial derivatives included in the held for trading portfolios is equal to their daily quoted price. If, under exceptional circumstances, their quoted price cannot be established on a given date, these derivatives are measured using methods similar to those used to measure over-the-counter (“OTC”) derivatives.

The fair value of OTC derivatives is equal to the sum of the future cash flows arising from the instruments discounted at the measurement date (“present value” or “theoretical value”). These derivatives are measured using methods recognized by the financial markets, including the net present value (“NPV”) method and option price calculation models.

Financial derivatives that have equity instruments as their underlying, whose fair value cannot be determined in a sufficiently objective manner and are settled by delivery of those instruments, are measured at cost.

Financial derivatives designated as hedging items are included in the heading of the balance sheet “Hedging derivatives”. These financial derivatives are valued at fair value.

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See Note 2.2.1 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies with respect to these instruments.

Goodwill in consolidation

Pursuant to IFRS 3, if the difference on the date of a business combination between the sum of the consideration transferred, the amount of all the non-controlling interests and the fair value of equity interest previously held in the acquired entity, on one hand, and the fair value of the assets acquired and liabilities assumed, on the other hand, is positive, it is recorded as goodwill on the asset side of the balance sheet. Goodwill represents the future economic benefits from assets that cannot be individually identified and separately recognized.

Goodwill is not amortized and is subject periodically to an impairment analysis. Any impaired goodwill is written off.

If the difference is negative, it is recognized directly in the income statement under the heading “Negative goodwill recognized in profit or loss”.

Goodwill is allocated to one or more cash-generating units, or CGUs, expected to benefit from the synergies arising from business combinations. The CGUs units represent the Group’s smallest identifiable business and/or geographical segments as managed internally by its directors within the Group.

The CGUs to which goodwill has been allocated are tested for impairment based on the carrying amount of the unit including the allocated goodwill. Such testing is performed at least annually and whenever there is an indication of impairment.

For the purpose of determining the impairment of a CGU to which a part or all of goodwill has been allocated, the carrying amount of that CGU, adjusted by the theoretical amount of the goodwill attributable to the non-controlling interest, shall be compared to its recoverable amount. The resulting difference shall be apportioned by reducing, firstly, the carrying amount of the goodwill allocated to that unit and, secondly, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This shall be done by allocating the remaining difference in proportion to the carrying amount of each of the assets in the CGU. In any case, impairment losses on goodwill can never be reversed.

See Notes 2.2.7 and 2.2.8 to the Consolidated Financial Statements, which contain a summary of our significant accounting policies related to goodwill.

The results from each of these tests on the dates mentioned were as follows:

As of December 31, 2017, 2016 and 2015, no impairment had been identified in any of the main CGUs.

The Group’s most significant goodwill corresponds to the CGU in the United States. The calculation of the impairment loss used the cash flow projections estimated by the Group’s management, based on the latest budgets available for the next five years. As of December 31, 2017, the Group used a sustainable growth rate of 4.0% (the same rate was considered as of December 31, 2016 and 2015) to extrapolate the cash flows in perpetuity starting on the fifth year (2022), based on the real GDP growth rate of the United States and the income recurrence. The rate used to discount the cash flows is the cost of capital assigned to the CGU, 10.0% as of December 31, 2017 (10% and 9.8% as of December 31, 2016 and 2015, respectively), which consists of the risk free rate plus a risk premium.

As of December 31, 2017 if the discount rate had increased or decreased by 50 basis points, the recoverable amount would have decreased or increased by €1,159 million and €1,371 million respectively (€1,106 million and €1,309 million respectively as of December 31, 2016). If, as of December 31, 2017, the growth rate had increased or decreased by 50 basis points, the recoverable amount would have increased or decreased by €661 million and €559 million respectively (€521 million and €441 million respectively as of December 31, 2016).

As of December 31, 2017 the recoverable amounts of our main CGUs were in excess of their carrying value and, as such, were not at risk of impairment.

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Insurance contracts

The methods and techniques used to calculate the mathematical reserves for insurance contracts mainly involve the valuation of the estimated future cash flows, discounted at the technical interest rate for each contract. Changes in insurance mathematical reserves may occur in the future as a consequence of changes in interest rates and other key assumptions. See Notes 2.2.9 and 23 to the Consolidated Financial Statements, which contain a summary of our significant accounting policies and assumptions about our most significant insurance contracts.

Post-employment benefits and other long term commitments to employees

Pension and post-retirement benefit costs and credits are based on actuarial calculations. Inherent in these calculations are assumptions including discount rates, rate of salary increase and expected return on plan assets. Changes in pension and post-retirement costs may occur in the future as a consequence of changes in interest rates, expected return on assets or other assumptions. See Notes 2.2.12 and 25 to the Consolidated Financial Statements, which contain a summary of our significant accounting policies about pension and post-retirement benefit costs and credits.

Impairment losses on financial assets

As we describe in Note 2.2.1 to the Consolidated Financial Statements, a loan is considered to be an impaired loan and, therefore, its carrying amount is adjusted to reflect the effect of its impairment when there is objective evidence that events have occurred which give rise to a negative impact on the future cash flows that were estimated at the time the transaction was arranged. The potential impairment of these assets is determined individually or collectively.

The amount of the impairment losses incurred on financial assets determined individually represents the excess of their respective carrying amounts over the present values of their expected future cash flows. These cash flows are discounted using the original effective interest rate. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective rate determined under the contract. As an exception to the rule described above, the market value of listed debt instruments is deemed to be a fair estimate of the present value of their expected future cash flows.

Impairment losses on financial assets collectively evaluated for impairment are calculated by using statistical procedures, and they are deemed equivalent to the portion of losses incurred on the date that the consolidated financial statements are prepared that has yet to be allocated to specific assets. The BBVA Group also estimates losses through statistical processes that apply historical data and other specific parameters that, although having been generated as of closing date for these consolidated financial statements, have arisen on an individual basis following the reporting date (“incurred but not reported losses”). 

The incurred loss is calculated taking into account three key factors: exposure at default, probability of default and loss given default.

•     Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.

•     Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The PD is associated with the rating/scoring of each counterparty/transaction. In addition, the PD calculation includes the loss identification period (‘LIP’) parameter, which is the period between the time at which the event that generates a given loss occurs and the time when the loss is identified at an individual level. The analysis of the LIPs is carried out on the basis of uniform risk portfolios.

•     Loss given default (LGD) is the estimate of the loss arising in the event of default. It depends mainly on the characteristics of the counterparty, and the valuation of the guarantees or collateral associated with the asset. In order to calculate the LGD at each balance sheet date, the Group evaluates the whole amount expected to be obtained over the remaining life of the financial asset. The recoverable amount from executable secured collateral is estimated based on the property valuation, discounting the necessary adjustments to adequately account for the potential fall in value until its execution and sale, as well as execution costs, maintenance costs and sale costs. When a property right is contractually acquired at the

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end of the foreclosure process or when the assets of distressed borrowers are purchased, the asset is recognized in the financial statements (see Note 2.2.4 to the Consolidated Financial Statements).

The estimates of the portfolio’s inherent risks and overall recovery vary with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.

Key judgments used in determining the allowance for loan losses include: (i) risk ratings for pools of commercial loans and advances; (ii) market and collateral values and discount rates for individually evaluated loans; (iii) product type classifications for consumer and commercial loans and advances; (iv) loss rates used for consumer and commercial loans and advances; (v) adjustments made to assess current events and conditions; (vi) considerations regarding domestic, global and individual countries economic uncertainty; and (vii) overall credit conditions.

A.    Operating Results

Factors Affecting the Comparability of our Results of Operations and Financial Condition

Trends in Exchange Rates

We are exposed to foreign exchange rate risk in that our reporting currency is the euro, whereas certain of our subsidiaries and investees keep their accounts in other currencies, principally Mexican pesos, U.S. dollars, Turkish liras, Argentine pesos, Chilean pesos, Colombian pesos, Venezuelan bolivar and Peruvian new soles. For example, if Latin American currencies, the U.S. dollar or the Turkish lira depreciate against the euro, when the results of operations of our subsidiaries in the countries using these currencies are included in our consolidated financial statements, the euro value of their results declines, even if, in local currency terms, their results of operations and financial condition have remained the same. By contrast, the appreciation of Latin American currencies, the U.S. dollar or the Turkish lira against the euro would have a positive impact on the results of operations of our subsidiaries in the countries using these currencies when their results of operations are included in our consolidated financial statements. Accordingly, changes in exchange rates may limit the ability of our results of operations, stated in euro, to fully show the performance in local currency terms of our subsidiaries.

The assets and liabilities of our subsidiaries which maintain their accounts in currencies other than the euro have been converted to the euro at the period-end exchange rates for inclusion in our Consolidated Financial Statements. Income statement items have been converted at the average exchange rates for the period. The following table sets forth the exchange rates of several Latin American currencies, the U.S. dollar and the Turkish lira against the euro, expressed in local currency per €1.00 as averages for 2017, 2016 and 2015 and as of December 31, 2017, 2016 and 2015 according to the ECB.

	Average Exchange Rates			Period-End Exchange Rates
	Year Ended December 31, 2017	Year Ended December 31, 2016	Year Ended December 31, 2015	As of December 31, 2017	As of December 31, 2016	As of December 31, 2015
Mexican peso	21.3297	20.6637	17.6109	23.6614	21.7718	18.9147
U.S. dollar	1.1296	1.1069	1.1094	1.1993	1.0541	1.0887
Argentine peso	18.7375	16.3348	10.2526	22.5830	16.5846	14.1267
Chilean peso	732.6007	748.5030	725.6894	738.0074	703.2349	769.8229
Colombian peso	3,333.3333	3,378.3784	3,048.7805	3,584.2294	3,164.5570	3,424.6575
Peruvian new sol	3.6813	3.7333	3.5314	3.8813	3.5310	3.7092
Venezuelan bolivar (*)	18,181.8182	1,893.9394	469.4836	18,181.8182	1,893.9394	469.4836
Turkish lira	4.1213	3.3427	3.0246	4.5464	3.7072	3.1765

(*)   With respect to each of 2017, 2016 and 2015, these alternative exchange rates (see “Presentation of Financial Information―Venezuela”) have been used as reference.

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During 2017, the Mexican peso, the U.S. dollar, the Argentine peso, the Venezuelan bolivar and the Turkish lira depreciated against the euro in average terms. In particular, the Venezuelan bolivar depreciated significantly (see “Presentation of Financial Information—Venezuela”).On the other hand, the Chilean peso, the Colombian peso and the Peruvian new sol appreciated against the euro in average terms.  With respect to period-end exchange rates, all of the above currencies depreciated against the euro. The overall effect of changes in exchange rates was negative both for the period-on-period comparison of the Group’s income statement and the period-on-period comparison of the Group’s balance sheet.

During 2016, all of the above currencies depreciated against the euro in average terms, except for the U.S. dollar. In particular, the Venezuelan bolivar depreciated significantly (see “Presentation of Financial Information―Venezuela”). With respect to period-end exchange rates, there was a period-on-period appreciation against the euro of the U.S. dollar, Chilean peso, Colombian peso and Peruvian new sol, and a period-on-period depreciation of the rest of currencies against euro, which was particularly significant for the Venezuelan bolivar. The overall effect of changes in exchange rates was negative both for the period-on-period comparison of the Group’s income statement and the period-on-period comparison of the Group’s balance sheet.

When comparing two dates or periods in this Annual Report we have sometimes excluded the impact of changes in exchange rates by assuming constant exchange rates. In doing this, with respect to income statement amounts, we have used the average exchange rate for the more recent period for both periods and, with respect to balance sheet amounts, we have used the closing exchange rate of such more recent period.

Consolidation of Garanti

On November 19, 2014, the Group signed agreements with Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk to acquire 62,538,000,000 additional shares of Garanti in the aggregate (equivalent to 14.89% of the capital of Garanti). Upon the closing of this acquisition in July 2015, we held 39.90% of Garanti’s share capital and started to consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity. On March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4­. Information on the Company―History and Development of the Company―Capital expenditures―2017”.

The acquisition completed in 2015 resulted in certain changes in our operating segments. In particular, since January 1, 2015, our former Eurasia segment has been recast into the following two segments: Turkey, which consists of our stake in Garanti (25.01% until July 27, 2015, 39.90% from July 27, 2015 to March 22, 2017 and 49.85% since March 22, 2017), and Rest of Eurasia, which includes the retail and wholesale businesses carried out in Europe and Asia, other than in Spain and Turkey.

Acquisition of Catalunya Banc

On April 24, 2015, once the necessary authorizations had been obtained and all the agreed conditions precedent had been fulfilled, BBVA announced the acquisition of 1,947,166,809 shares of Catalunya Banc, S.A. (approximately 98.4% of its share capital) for a price of approximately €1,165 million. Previously, on July 21, 2014, the Management Commission of the FROB had accepted BBVA’s bid in the competitive auction for the acquisition of Catalunya Banc. Such acquisition had an impact on the results of operations of the Banking Activity in Spain segment during 2015. As of December 31, 2016, Catalunya Banc had been fully merged into BBVA.

Operating Environment

Our results of operations are dependent, to a large extent, on the level of demand for our products and services (primarily loans and deposits but also intermediation of financial products such as sovereign or corporate debt) in the countries in which we operate. Demand for our products and services in those countries is affected by the performance of their respective economies in terms of gross domestic product (GDP), as well as prevailing levels of employment, inflation and, particularly, interest rates. The demand for loans and saving products correlates positively with income, which correlates in turn with the GDP, employment and corporate profits evolution. Regarding interest rates, they have a direct impact on banking results as the banking activity mainly relies on the generation of positive interest margins by paying lower interest on liabilities, primarily deposits, than the interest received on assets, primarily loans. However, it should be noted that higher interest rates, all else being equal, also reduce the demand for banking loans and increase the cost of funding of the banking business.

99

Global GDP growth improved in 2017 to approximately 3.7% according to BBVA Research estimates, above the growth in 2016 (3.3%) and surpassing the long-term average of around 3.5%. The improvement has been more prominent in advanced economies, such as the United States and Europe, although some emerging market areas, such as Latin America, have also shown significant growth. Global GDP growth perspectives are around 3.8% for both 2018 and 2019 according to BBVA Research forecasts.

Regarding the evolution of key economic areas for the Group, after growing by 3.3% in 2016, the Spanish economy continued to expand at a high rate of 3.1% in 2017. According to BBVA Research’s current estimates, growth is expected to slow to below 3% in 2018. Some of the supporting drivers of the Spanish economy, which had an expansionary effect on growth, have weakened or reversed: the fall in oil prices has stopped, the euro has slightly appreciated, interest rates have not registered further decreases and the fiscal policy stance is less growth-supportive than in the past. However, improvements in the credit market and the structural economic reforms implemented in Spain, including related to the labor market, are expected to remain anchors for economic growth in Spain.

Mexican GDP grew by 2.3% in 2017 as a result mainly of a rebound in the fourth quarter of the year of 0.8% over the previous quarter.  BBVA Research forecasts GDP growth to remain at around 2% in 2018, supported by the resilience of private consumption in an environment of lower inflation than in the past and by exports, which have been supported by stronger activity in the U.S. industrial sector. However Mexico’s outlook is plagued with uncertainty, which mainly stems from the U.S. administration’s economic policy, especially regarding trade and migration issues. Against this backdrop, a sound fiscal policy and monetary policy oriented to maintaining price stability is crucial to limiting the impact of uncertainties around the Mexican economy.

South American GDP growth (based on the weighted average of Argentina, Brazil, Chile, Colombia, Paraguay, Peru, Uruguay and Venezuela, according to their GDP size) recovered from negative levels (-2.4% in 2016) to 0.9% according to BBVA Research estimates, supported by global growth and the rise in commodity prices. The external environment is expected to continue to support growth, which together with the expected recovery in investment and the effect of the depreciation of local currencies in 2017, are expected to allow GDP growth to exceed 1% in 2018. Inflation pressures remain relatively contained in the region (except in Argentina). This relatively positive scenario might be affected by risks related to U.S. policy actions, the outcome of local elections and any delays in planned investment.

The U.S. economy improved over the course of 2017, with GDP growth reaching 2.3% (compared to 1.5% in 2016), driven by personal consumption and fixed investment, which more than offset the impact of catastrophic weather events. A tax reform was approved at the end of 2017 and a further fiscal stimulus plan was launched in early 2018. As a result of this, together with an improved global outlook and high confidence levels both for households and firms, GDP growth is expected to accelerate to around 2.8% in 2018, according to BBVA Research forecasts. In this context, and despite the still moderated pace of inflation, the Federal Reserves is expected to continue raising interest rates. Despite the improvement of the economy, growth could be affected in the medium to long term by protectionist policies.

As regards Turkey, 2017 GDP growth is estimated to have strongly accelerated to 7.0% from 3.2% in 2016. A positive global environment, domestic demand supported by a strong labor market and the growth of lending spurred by the government’s Credit Guarantee Fund (CGF) program have all positively affected growth. Inflation has surpassed two-digit levels driven by domestic demand pressures, commodity prices and the lagged effects of the depreciation of the Turkish lira, although it is expected to fall in the coming months. The Turkish central bank has tightened monetary policy by raising interest rates by 75 basis points, in response to demand and depreciation pressures. Over the course of 2018, demand pressures are expected to diminish and overall GDP growth is forecast to reach 4.5% by BBVA Research.

BBVA Group results of operations for 2017 compared with 2016

The table below shows the Group’s consolidated income statements for 2017 and 2016:

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Interest and similar income	29,296	27,708	5.7
Interest and similar expenses	(11,537)	(10,648)	8.3
Net interest income	17,759	17,059	4.1
Dividend income	334	467	(28.5)
Share of profit or loss of entities accounted for using the equity method	4	25	(84.0)
Fee and commission income	7,150	6,804	5.1
Fee and commission expenses	(2,229)	(2,086)	6.9
Net gains (losses) on financial assets and liabilities (1)	938	1,661	(43.5)
Exchange differences, net	1,030	472	118.2
Other operating income	1,439	1,272	13.1
Other operating expenses	(2,223)	(2,128)	4.5
Income on insurance and reinsurance contracts	3,342	3,652	(8.5)
Expenses on insurance and reinsurance contracts	(2,272)	(2,545)	(10.7)
Gross income	25,270	24,653	2.5
Administration costs	(11,112)	(11,366)	(2.2)
Personnel expenses	(6,571)	(6,722)	(2.2)
Other administrative expenses	(4,541)	(4,644)	(2.2)
Depreciation and amortization	(1,387)	(1,426)	(2.7)
Net margin before provisions	12,771	11,861	7.7
Provisions or reversal of provisions	(745)	(1,186)	(37.2)
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss	(4,803)	(3,801)	26.4
Impairment or reversal of impairment on non-financial assets	(364)	(521)	(30.1)
Gains (losses) on derecognition of non-financial assets and subsidiaries, net	47	70	(32.9)
Negative goodwill recognized in profit or loss	-	-	-
Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	26	(31)	n.m.(2)
Operating profit before tax	6,931	6,392	8.4
Tax expense or income related to profit or loss from continuing operations	(2,169)	(1,699)	27.7
Profit from continuing operations	4,762	4,693	1.5
Profit from discontinued operations, net	-	-	-
Profit	4,762	4,693	1.5
Profit attributable to parent company	3,519	3,475	1.3
Profit attributable to non-controlling interests	1,243	1,218	2.1

100

⁽¹⁾Comprises the following income statement line items contained in the Consolidated Financial Statements: “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”; “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net”; “Gains (losses) on financial assets and liabilities held for trading, net” and “Gains (losses) from hedge accounting, net”.

⁽²⁾Not meaningful.

The changes in our consolidated income statements for 2017 and 2016 were as follows:

Net interest income

The following table summarizes net interest income for 2017 compared with 2016.

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Interest and similar income	29,296	27,708	5.7
Interest and similar expenses	(11,537)	(10,648)	8.3
Net interest income	17,759	17,059	4.1

Net interest income for the year ended December 31, 2017 amounted to €17,759 million, a 4.1% increase compared with the €17,059 million recorded for the year ended December 31, 2016, mainly as a result of higher interest rates of

101

interest-earning assets, particularly foreign loans and advances to customers,  which more than offset the higher growth in interest and similar expenses. By segment, the increase in net interest income was driven mainly by net interest income increases in the following regions:

·in the United States, mainly as a result of the impact of the Federal Reserve Board benchmark interest rate increases;

·in Mexico, mainly as a result of higher interest rates applicable to loans and advances to customers and, to a lesser extent, an increase in the average volume of loans and advances to customers; and

·in South America, generally due to increases in the average volume of interest-earning assets, particularly loans and advances to customers, in the countries of this region where BBVA operates;

and which was partially offset by:

·the performance of the Banking Activity in Spain operating segment, which was adversely affected by the lower average volumes of interest-earning assets (mainly securities, derivatives and loans); and

·the performance of the Turkey operating segment, as a result of the negative impact of the depreciation of the Turkish lira which more than offset the higher interest rates of interest-earning assets, particularly loans and advances to customers, and the growth in activity, particularly in cash and cash balances with central banks.

Dividend income

Dividend income for the year ended December 31, 2017 amounted to €334 million, a 28.5% decrease compared with the €467 million recorded for the year ended December 31, 2016, mainly as a result of our divestment in CNCB, a 2.14% stake of which we sold  in 2017, and lower dividends from Telefónica, S.A.

Share of profit or loss of entities accounted for using the equity method

Share of profit of entities accounted for using the equity method for the year ended December 31, 2017 amounted to €4 million, compared with the €25 million recorded for the year ended December 31, 2016.

Fee and commission income

The breakdown of fee and commission income for 2017 and 2016 is as follows:

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Bills receivables	46	52	(11.5)
Current accounts	507	469	8.1
Credit and debit cards	2,834	2,679	5.8
Checks	212	207	2.4
Transfers and others payment orders	601	578	4.0
Insurance product commissions	192	178	7.9
Commitment fees	231	237	(2.5)
Contingent risks	396	406	(2.5)
Asset Management	923	839	10.0
Securities fees	385	335	14.9
Custody securities	122	122	-
Other	700	701	(0.1)
Fee and commission income	7,150	6,804	5.1

102

Fee and commission income increased by 5.1% to €7,150 million for the year ended December 31, 2017 from €6,804 million for the year ended December 31, 2016, mainly as a result of an increase in fees and commissions from the use of credit cards in South America, Mexico, Spain and the United States, and an increase in securities fees and asset management fees in Spain.

Fee and commission expenses

The breakdown of fee and commission expenses for 2017 and 2016 is as follows:

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Credit and debit cards	1,458	1,334	9.3
Transfers and others payment orders	102	102	-
Commissions for selling insurance	60	63	(4.8)
Other fees and commissions	610	587	3.9
Fee and commission expenses	2,229	2,086	6.9

Fee and commission expenses increased by 6.9% to €2,229 million for the year ended December 31, 2017 from €2,086 million for the year ended December 31, 2016, primarily due to an increase in commissions paid by the BBVA Group to other financial institutions in connection with the use of credit and debit cards in South America, Mexico and Spain.

Net gains (losses) on financial assets and liabilities

Net gains on financial assets and liabilities decreased 43.5% to €938 million for the year ended December 31, 2017, compared with a gain of €1,661 million for the year ended December 31, 2016, primarily as result of the lower sales of ALCO (Assets and Liabilities Committee) portfolios in Spain. In addition, the gain in the prior period was partially due to the sale of our stake in VISA Europe, Ltd. recorded in the second quarter of 2016, which resulted in a €225 million gain.

The table below provides a breakdown of net gains (losses) on financial assets and liabilities for the years ended December 31, 2017 and 2016:

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net	985	1,375	(28.4)
Available-for-sale financial assets	843	1,271	(33.7)
Loans and receivables	133	95	40.6
Other	9	10	(7.1)
Gains (losses) on financial assets and liabilities held for trading, net	218	248	(12.1)
Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net	(56)	114	n.m.(1)
Gains (losses) from hedge accounting, net	(209)	(76)	175.0
Net gains (losses) on financial assets and liabilities	938	1,661	(43.5)

⁽¹⁾Not meaningful.

Exchange differences, net

Exchange differences, net increased to €1,030 million for the year ended December 31, 2017 from €472 million for the year ended December 31, 2016 as a result mainly of certain financial operations particularly in Turkey.  

Other operating income and expenses

Other operating income for the year ended December 31, 2017 increased 13.1% to €1,439 million, compared with the €1,272 million recorded for the year ended December 31, 2016, mainly as a result of higher income from real estate-related services in Spain.

103

Other operating expenses for the year ended December 31, 2017 amounted to €2,223 million, a 4.5% increase compared with the €2,128 million recorded for the year ended December 31, 2016, mainly as a result of  higher expenses from real estate-related services in Spain.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance contracts for the year ended December 31, 2017 was €3,342 million, an 8.5% decrease compared with the €3,652 million of income recorded for the year ended December 31, 2016, mainly as a result of lower insurance activity in Spain and the impact of the depreciation of some currencies against the euro.  

Expenses on insurance and reinsurance contracts for the year ended December 31, 2017 were €2,272 million, a 10.7% decrease compared with the €2,545 million expense recorded for the year ended December 31, 2016, mainly as a result of the lower insurance activity in Spain and the impact of the depreciation of some currencies against the euro mentioned above, which had a corresponding impact on expenses on insurance and reinsurance contracts.

Administration costs

Administration costs, which include personnel expenses and other administrative expenses, for the year ended December 31, 2017 amounted to an expense of €11,112 million, a 2.2% decrease compared with the €11,366 million recorded for the year ended December 31, 2016, driven by declines in both personnel expenses and other administrative expenses, mainly as a result of some synergies in Spain (following the integration of Catalunya Banc) and the impact of the depreciation of some currencies, particularly the Turkish Lira.

The table below provides a breakdown of personnel expenses for the years ended December 31, 2017 and 2016:

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Wages and salaries	5,163	5,267	(2.0)
Social security costs	761	784	(2.9)
Defined contribution plan expense	87	87	-
Defined benefit plan expense	62	67	(7.5)
Other personnel expenses	497	516	(3.7)
Personnel expenses	6,571	6,722	(2.2)

The table below provides a breakdown of other administrative expenses for 2017 and 2016:

	Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Technology and systems	692	673	2.8
Communications	269	294	(8.5)
Advertising	352	398	(11.6)
Property, fixtures and materials	1,033	1,080	(4.4)
Of which:
Rent expenses	581	616	(5.7)
Taxes other than income tax	456	433	5.3
Other expenses	1,738	1,766	(1.6)
Other administrative expenses	4,541	4,644	(2.2)

Depreciation and amortization

Depreciation and amortization of this operating segment for the year ended December 31, 2017 was €1,387 million, a 2.7% decrease compared with the €1,426 million recorded for the year ended December 31, 2016, mainly as a result of the impact of the depreciation of some currencies against the euro.

104

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2017 was an expense of €745 million, a 37.2% decrease compared with the €1,186 million expense recorded for the year ended December 31, 2016, mainly attributable to the provisions recorded in 2016 related to the invalidity of clauses limiting interest rates in certain mortgage loans with customers (the so-called “cláusulas suelo”) in Spain. BBVA has made additional provisions during 2017 to cover possible contingencies and claims that may arise in connection with this matter in amounts that BBVA considers not significant.

Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss

Impairment on financial assets for the year ended December 31, 2017 was a loss of €4,803 million, a 26.4% increase compared with the €3,801 million net loss recorded for the year ended December 31, 2016, mainly as a result of the recognition of impairment losses of €1,123 million relating to our slightly above 5% stake in Telefónica, S.A. resulting from the fact that its stock price fell below our acquisition cost for a prolonged period The Group’s non-performing asset ratio was 4.4% as of December 31, 2017, compared with 4.9% as of December 31, 2016.

Impairment or reversal of impairment on non-financial assets

Impairment losses on non-financial assets for the year ended December 31, 2017 was a loss of €364 million, a 30.1% decrease compared with the €521 million recorded for the year ended December 31, 2016, mainly due to lower impairment losses on real estate investment properties in Spain.

Gains (losses) on derecognition of non-financial assets and subsidiaries, net

Gains on derecognition of non-financial assets and subsidiaries, net, for the year ended December 31, 2017 amounted to €47 million, a 32.9% decrease compared with the €70 million gain recorded for the year ended December 31, 2016.

Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

Profit from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations for the year ended December 31, 2017 was €26 million, compared with the €31 million loss recorded for the year ended December 31, 2016.

Operating profit before tax

As a result of the foregoing, operating profit before tax for the year ended December 31, 2017 amounted to €6,931 million, an 8.4% increase compared with the €6,392 million operating profit before tax recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations for the year ended December 31, 2017 was an expense of €2,169 million, a 27.7% increase compared with the €1,699 million expense recorded for the year ended December 31, 2016, mainly as a result of the higher operating profit before tax, and the recognition of the impairment losses relating to our stake in Telefónica, S.A. which adversely affected our operating profit before tax but had no impact on taxable income.

Profit

As a result of the foregoing, profit for the year ended December 31, 2017 amounted to €4,762 million, a 1.5% increase compared with the €4,693 million recorded for the year ended December 31, 2016.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company for the year ended December 31, 2017 amounted to €3,519 million, a 1.3% increase compared with the €3,475 million recorded for the year ended December 31, 2016.

105

Profit attributable to non-controlling interests

Profit attributable to non-controlling interests for the year ended December 31, 2017 amounted to €1,243 million, a 2.1% increase compared with the €1,218 million profit attributable to non-controlling interests recorded for the year ended December 31, 2016, mainly as a result of the stronger performance of our Peruvian and Argentinian operations where there are minority shareholders,  as well as our reduction of our stake in our Argentinian operations during the year, which more than offset the effect of the completion, in March 2017, of the acquisition of an additional 9.95% stake in Garanti (which resulted in a reduction in the stake held by others in Garanti).

BBVA Group results of operations for 2016 compared with 2015

The table below shows the Group’s consolidated income statements for 2016 and 2015:

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Interest and similar income	27,708	24,783	11.8
Interest and similar expenses	(10,648)	(8,761)	21.5
Net interest income	17,059	16,022	6.5
Dividend income	467	415	12.5
Share of profit or loss of entities accounted for using the equity method	25	174	(85.6)
Fee and commission income	6,804	6,340	7.3
Fee and commission expenses	(2,086)	(1,729)	20.6
Net gains (losses) on financial assets and liabilities (1)	1,661	865	92.0
Exchange differences, net	472	1,165	(59.5)
Other operating income	1,272	1,315	(3.3)
Other operating expenses	(2,128)	(2,285)	(6.9)
Income on insurance and reinsurance contracts	3,652	3,678	(0.7)
Expenses on insurance and reinsurance contracts	(2,545)	(2,599)	(2.1)
Gross income	24,653	23,362	5.5
Administration costs	(11,366)	(10,836)	4.9
Personnel expenses	(6,722)	(6,273)	7.2
Other administrative expenses	(4,644)	(4,563)	1.8
Depreciation and amortization	(1,426)	(1,272)	12.1
Net margin before provisions	11,861	11,254	5.4
Provisions or reversal of provisions	(1,186)	(731)	62.2
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss	(3,801)	(4,272)	(11.0)
Impairment or reversal of impairment on non-financial assets	(521)	(273)	90.8
Gains (losses) on derecognition of non-financial assets and subsidiaries, net	70	(2,135)	n.m.(2)
Negative goodwill recognized in profit or loss	-	26	(100.0)
Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	(31)	734	n.m. (2)
Operating profit before tax	6,392	4,603	38.9
Tax expense or income related to profit or loss from continuing operations	(1,699)	(1,274)	33.4
Profit from continuing operations	4,693	3,328	41.0
Profit from discontinued operations, net	-	-	-
Profit	4,693	3,328	41.0
Profit attributable to parent company	3,475	2,642	31.5
Profit attributable to non-controlling interests	1,218	686	77.6

⁽¹⁾Comprises the following income statement line items contained in the Consolidated Financial Statements: “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”; “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net”; “Gains (losses) on financial assets and liabilities held for trading, net” and “Gains (losses) from hedge accounting, net”.

106

⁽²⁾Not meaningful.

The changes in our consolidated income statements for 2016 and 2015 were as follows:

Net interest income

The following table summarizes net interest income for 2016 compared with 2015.

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Interest and similar income	27,708	24,783	11.8
Interest and similar expenses	(10,648)	(8,761)	21.5
Net interest income	17,059	16,022	6.5

Net interest income for the year ended December 31, 2016 amounted to €17,059 million, a 6.5% increase compared with the €16,022 million recorded for the year ended December 31, 2015 mainly as a result of the following changes:

·in Turkey, net interest income increased as a result of the change in the consolidation method of Garanti in July 2015 and, to a lesser extent, increases in volumes and yields on loans and decreased cost of deposits, partially offset by a decline in the value of the Turkish lira;

·in the United States, net interest income increased mainly as a result of the impact of the appreciation of the U.S. dollar and, to a lesser extent, the impact of the growth in loans and advances to customers, as well as improving pricing of such loans and advances driven by higher yields in new loan production and the lower costs of deposits;

·in the Banking Activity in Spain, net interest income decreased compared to the previous year, mainly as a result of a decrease in loan volumes in an environment of low interest rates;

and was partially offset by the following changes:

·in Mexico, net interest income decreased mainly as a result of the impact of the depreciation of the Mexican peso, which more than offset the higher volumes in lending and fund gathering; and

·in South America, net interest income decreased mainly as a result of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso, which more than offset the increase in fees related to bills, receivables, checks and credit cards, particularly in Colombia and Argentina.

Dividend income

Dividend income for the year ended December 31, 2016 amounted to €467 million, a 12.5% increase compared with the €415 million recorded for the year ended December 31, 2015, mainly as a result of an increase in the collection of dividends from our investments in Telefónica S.A. and CNCB.

Share of profit or loss of entities accounted for using the equity method

Share of profit or loss of entities accounted for using the equity method for the year ended December 31, 2016 amounted to €25 million, an 85.6% decrease compared with the €174 million recorded for the year ended December 31, 2015. This decrease was mainly attributable to the fact that in 2015 the results of operations of Garanti were accounted for using the equity method for six months (through June 30, 2015), whereas we consolidated Garanti’s results throughout 2016 using the full integration method.

Fee and commission income

The breakdown of fee and commission income for 2016 and 2015 is as follows:

107

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Bills receivables	52	94	(44.5)
Current accounts	469	405	15.7
Credit and debit cards	2,679	2,336	14.7
Checks	207	239	(13.2)
Transfers and others payment orders	578	474	21.9
Insurance product commissions	178	171	4.2
Commitment fees	237	172	37.5
Contingent risks	406	360	12.9
Asset Management	839	686	22.4
Securities fees	335	283	18.2
Custody securities	122	314	(61.1)
Other	701	807	(13.1)
Fee and commission income	6,804	6,340	7.3

Fee and commission income increased by 7.3% to €6,804 million for the year ended December 31, 2016 from €6,340 million for the year ended December 31, 2015 mainly as a result of the change in the consolidation method of Garanti and, to a lesser extent, increased collection and payment services income, particularly transfers, fees and commissions from credit cards in Mexico and South America.

Fee and commission expenses

The breakdown of fee and commission expenses for 2016 and 2015 is as follows:

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Credit and debit cards	1,334	1,113	19.9
Transfers and others payment orders	102	92	10.9
Commissions for selling insurance	63	69	(8.7)
Other fees and commissions	587	454	29.3
Fee and commission expenses	2,086	1,729	20.6

Fee and commission expenses increased by 20.6% to €2,086 million for the year ended December 31, 2016 from €1,729 million for the year ended December 31, 2015 mainly as a result of the change in the consolidation method of Garanti, the contribution of Catalunya Banc and, to a lesser extent, due to higher expenses assigned to insurance and credit and debit card commissions.

Net gains (losses) on financial assets and liabilities

Net gains on financial assets and liabilities increased by 92.0% to €1,661 million for the year ended December 31, 2016 from €865 million for the year ended December 31, 2015, mainly as a result of higher ALCO (Assets and Liabilities Committee) portfolio sales in Spain.

The table below provides a breakdown of net gains (losses) on financial assets and liabilities for the years ended December 31, 2016 and 2015. Beginning January 1, 2016, we modified the sub-captions included in net gain (losses) on financial assets and liabilities. As a result, the breakdown shown below is not directly comparable with the sub-captions included in the 2015 Form 20-F under net gains (losses) on financial assets and liabilities:

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net	1,375	1,055	30.3
Available-for-sale financial assets	1,271	980	29.7
Loans and receivables	95	76	23.9
Other	10	(1)	n.m.(1)
Gains (losses) on financial assets and liabilities held for trading, net	248	(409)	n.m.(1)
Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net	114	126	(9.2)
Gains (losses) from hedge accounting, net	(76)	93	n.m.(1)
Net gains (losses) on financial assets and liabilities	1,661	865	92.0

108

⁽¹⁾Not meaningful.

Exchange differences, net

Exchanges differences, net decreased from €1,165 million for the year ended December 31, 2015 to €472 million for the year ended December 31, 2016, due primarily to the evolution of foreign currencies and exchange rate management, including hedging arrangements.

Other operating income and expenses

Other operating income amounted to €1,272 million for the year ended December 31, 2016, a 3.3% decrease compared with €1,315 million for the year ended December 31, 2015, mainly due to the lower income from non-financial services.

Other operating expenses for the year ended December 31, 2016, amounted to €2,128 million, a 6.9% decrease compared with the €2,285 million recorded for the year ended December 31, 2015 due primarily to lower expenses from real estate companies. 

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance for the year ended December 31, 2016 was €3,652 million, a 0.7% decrease compared with €3,678 million gain recorded for the year ended December 31, 2015.

Expenses on insurance and reinsurance contracts for the year ended December 31, 2016 were €2,545 million, a 2.1% decrease compared with the €2,599 million gain recorded for the year ended December 31, 2015.

Administration costs

Administration costs for the year ended December 31, 2016 amounted to €11,366 million, a 4.9% increase compared with the €10,836 million recorded for the year ended December 31, 2015, mainly due to the change in the consolidation method of Garanti and the higher contribution of Catalunya Banc, partially offset by the effect of the depreciation of the currencies in Mexico and South America.

The table below provides a breakdown of personnel expenses for the years ended December 31, 2016 and 2015. Beginning January 1, 2016, we modified the sub-captions included in administration costs. As a result, the breakdown shown below is not directly comparable with the sub-captions included in the 2015 Form 20-F under administration costs.

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Wages and salaries	5,267	4,868	8.2
Social security costs	784	733	7.0
Defined contribution plan expense	87	84	3.6
Defined benefit plan expense	67	57	17.5
Other personnel expenses	516	531	(2.8)
Personnel expenses	6,722	6,273	7.2

Wages and salary expenses increased 7.2% from €6,273 million for the year ended December 31, 2015 to €6,722 million for the year ended December 31, 2016, mainly as a result of the change in the consolidation method of Garanti.

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The table below provides a breakdown of other administrative expenses for 2016 and 2015:

	Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Technology and systems	673	625	7.7
Communications	294	281	4.8
Advertising	398	387	2.9
Property, fixtures and materials	1,080	1,030	4.9
Of which:
Rent expenses	616	591	32.2
Taxes other than income tax	433	466	(75.6)
Other expenses	1,766	1,775	(61.3)
Other administrative expenses	4,644	4,563	n.m.(1)

⁽¹⁾Not meaningful.

Technology and systems expenses increased 7.7% from €625 million for the year ended December 31, 2015 to €673 million for the year ended December 31, 2016, mainly due to the change in the consolidation method of Garanti and higher spending on technology. Property, fixtures and materials expenses increased from €1,030 million for the year ended December 31, 2015 to €1,080 million mainly as a result of the change in the consolidation method of Garanti and the higher contribution of Catalunya Banc.  

Depreciation and amortization

Depreciation and amortization for the year ended December 31, 2016 was €1,426 million, an 12.1% increase compared with the €1,272 million recorded for the year ended December 31, 2015 mainly as a result of the change in the consolidation method of Garanti, the acquisition of Catalunya Banc and, to a lesser extent, the amortization of software and hardware particularly in the United States affected by the mild appreciation of the U.S. dollar.

Provisions or reversal of provisions

Provisions for the year ended December 31, 2016 totaled €1,186 million, a 62.2% increase compared with the €731 million recorded for the year ended December 31, 2015 mostly as a result of higher provisions related to the invalidity of clauses limiting of interest rates in certain mortgage loans with customers (the so-called “cláusulas suelo”) of €577 million (€404 million after tax).

Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss

Impairment on financial assets for the year ended December 31, 2016 was a loss of €3,801 million, a 11.0% decrease compared with the €4,272 million loss recorded for the year ended December 31, 2015 mainly due to decreased impaired assets as a result of lower additions to non-performing assets in Spain, higher recovery of written-off assets of the Non-Core Real Estate segment and the impact of the depreciation of the majority of our operating currencies against the euro. These effects were partially offset by the change in the consolidation method of Garanti. The Group’s non-performing asset ratio was 4.9% as of December 31, 2016, compared with 5.4% as of December 31, 2015.

Impairment or reversal of impairment on non-financial assets

Impairment on non-financial assets for the year ended December 31, 2016 was a loss of €521 million, a 90.8% increase compared with the €273 million recorded for the year ended December 31, 2015, due to impairments losses on real estate investment properties in Spain.

Gains (losses) on derecognition of non-financial assets and subsidiaries, net

Gains on derecognition of non-financial assets and subsidiaries, net for the year ended December 31, 2016 amounted to €70 million, compared with a loss of €2,135 million recognized for the year ended December 31, 2015. The loss recorded for the year ended December 31, 2015 was mainly the result of the fair value measurement of the stake we

110

already held in Garanti at the time we acquired our additional 14.89% stake in Garanti, which we had to make as a result of the purchase of an additional stake in Garanti and the change in its consolidation method.

Negative goodwill recognized in profit or loss

There was no negative goodwill recognized in profit or loss for the year ended December 31, 2016. There was €26 million negative goodwill recognized in profit or loss for the year ended December 31, 2015 as a result of the acquisition of Catalunya Banc.

Profit ( loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

Loss from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations for the year ended December 31, 2016 amounted to €31 million, compared with a gain of €734 million for the year ended December 31, 2015. The gain in 2015 related mainly to capital gains from the sale of the 6.34% stake in CNCB.

Operating profit before tax

As a result of the foregoing, operating profit before tax for the year ended December 31, 2016 was €6,392 million, a 38.9% increase from the €4,603 million recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations for the year ended December 31, 2016 was €1,699 million, compared with a €1,274 million expense recorded for the year ended December 31, 2015, as a result of higher operating profit before tax and a lower proportion of income with low or zero tax rates (primarily dividends and equity-accounted earnings).

Profit from continuing operations

As a result of the foregoing, profit from continuing operations for the year ended December 31, 2016 was €4,693 million, a 41.0% increase from the €3,328 million recorded for the year ended December 31, 2015.

Profit from discontinued operations, net

There was no profit from discontinued operations for the year ended December 31, 2016, nor for the year ended December 31, 2015.

Profit

As a result of the foregoing, profit for the year ended December 31, 2016 was €4,693 million, a 41.0% increase from the €3,328 million recorded for the year ended December 31, 2015.

Profit attributable to parent company

Profit attributable to parent company for the year ended December 31, 2016 was €3,475 million, a 31.5% increase from the €2,642 million recorded for the year ended December 31, 2015.

Profit attributable to non-controlling interests

Profit attributable to non-controlling interests for the year ended December 31, 2016 was €1,218 million, a 77.6% increase compared with €686 million for the year ended December 31, 2015, mainly as a result of the change in the consolidation method of Garanti and stronger performance of our Peruvian and Argentinian operations where there are minority shareholders, partially offset by the depreciation of the Venezuelan bolivar.

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Results of Operations by Operating Segment

The information contained in this section is presented under management criteria.

The tables set forth below reconcile the income statement of our operating segments presented in this section to the consolidated income statement of the Group. The “Adjustments” column reflects the differences between the Group income statement and the income statement calculated in accordance with management operating segment reporting criteria for 2015, which are the following:

·The treatment of Garanti: Information from January 1, 2015 through June 30, 2015 was calculated and presented under management criteria according to which the assets, liabilities and income statement of Garanti were included in every line item of the balance sheet and the income statement based on our 25.01% interest in Garanti until July 2015. For purposes of the Group financial statements the participation in Garanti was accounted under “Share of profit or loss of entities accounted for using the equity method” through June 30, 2015.

·The creation of a line in the income statement called “Profit from corporate operations” which is in place of “Profit from discontinued operations” in the Group financial statements and which includedin 2015 the gains from the sale of our 6.34% participation in CNCB during 2015 and the impact of our acquisition of a 14.89% stake in Garanti in 2015 (which required us to (i) measure at fair value our prior 25.01% stake in Garanti, which was then classified as a joint venture accounted by the using of the equity method, and (ii) fully consolidate Garanti in the consolidated financial statements of the BBVA Group).

112

	For the Year Ended December 31, 2017
	Banking Activity in Spain	Non-Core Real Estate	United States	Mexico	Turkey	South America	Rest of Eurasia	Corporate Center	Total	Adjustments	Group Income
	(In Millions of Euros)
Net interest income	3,738	71	2,158	5,437	3,331	3,200	180	(357)	17,758	-	17,758
Net fees and commissions	1,561	3	647	1,217	703	713	164	(86)	4,921	-	4,921
Net gains (losses) on financial assets and liabilities and exchange differences, net (1)	555	-	111	249	14	480	123	436	1,968	-	1,968
Other operating income and expenses, net (2)	327	(91)	2	177	67	59	1	80	622	-	622
Gross income	6,180	(17)	2,919	7,080	4,115	4,451	468	73	25,270	-	25,270
Administration costs	(3,066)	(97)	(1,671)	(2,189)	(1,325)	(1,886)	(297)	(581)	(11,112)	-	(11,112)
Depreciation and amortization	(313)	(18)	(187)	(256)	(178)	(121)	(11)	(303)	(1,387)	-	(1,387)
Net margin before provisions	2,802	(132)	1,061	4,635	2,612	2,444	160	(811)	12,770	-	12,770
Impairment losses on financial assets, net(3)	(567)	(138)	(241)	(1,652)	(453)	(650)	23	(1,125)	(4,803)	-	(4,803)
Provisions or reversal of provisions	(369)	(403)	(36)	(35)	(12)	(103)	(6)	(73)	(1,036)	-	(1,036)
Operating  profit/ (loss) before tax	1,866	(673)	784	2,948	2,147	1,691	177	(2,009)	6,931	-	6,931
Tax expense or income related to profit or loss from continuing operations	(482)	170	(273)	(786)	(426)	(486)	(52)	166	(2,169)	-	(2,169)
Profit from continuing operations	1,384	(502)	511	2,162	1,720	1,205	125	(1,843)	4,762	-	4,762
Profit from discontinued operations /Profit from corporate operations, net	-	-	-	-	-	-	-	-	-	-	-
Profit	1,384	(502)	511	2,162	1,720	1,205	125	(1,843)	4,762	-	4,762
Profit attributable to non-controlling interests	(3)	1	-	-	(895)	(345)	-	(1)	(1,242)	-	(1,243)
Profit attributable to parent company	1,381	(501)	511	2,162	826	861	125	(1,844)	3,519	-	3,519

⁽¹⁾  Includes “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net”, “Gains (losses) on financial assets and    liabilities held for trading, net”, “Gains (losses) from hedge accounting, net” and “Exchange differences, net”.

⁽²⁾  Includes share of profit or loss of entities accounted for using the equity method.

⁽³⁾  Referred as “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss” in “Item 3. Key Information—Selected Consolidated Financial Data”.

113

	For the Year Ended December 31, 2016
	Banking Activity in Spain	Non-Core Real Estate	United States	Mexico	Turkey	South America	Rest of Eurasia	Corporate Center	Total	Adjustments	Group Income
	(In Millions of Euros)
Net interest income	3,877	60	1,953	5,126	3,404	2,930	166	(455)	17,059	-	17,059
Net fees and commissions	1,477	6	638	1,149	731	634	194	(110)	4,718	-	4,718
Net gains (losses) on financial assets and liabilities and exchange differences, net (1)	786	(3)	142	222	77	464	87	357	2,133	-	2,133
Other operating income and expenses, net (2)	277	(68)	(27)	270	46	25	45	177	744	-	744
Gross income	6,416	(6)	2,706	6,766	4,257	4,054	491	(31)	24,653	-	24,653
Administration costs	(3,252)	(96)	(1,652)	(2,149)	(1,524)	(1,793)	(330)	(569)	(11,366)	-	(11,366)
Depreciation and amortization	(327)	(27)	(190)	(247)	(214)	(100)	(12)	(307)	(1,426)	-	(1,426)
Net margin before provisions	2,837	(130)	863	4,371	2,519	2,160	149	(907)	11,862	-	11,862
Impairment losses on financial assets, net(3)	(763)	(138)	(221)	(1,626)	(520)	(526)	30	(37)	(3,801)	-	(3,801)
Provisions or reversal of provisions	(807)	(475)	(30)	(67)	(93)	(82)	23	(139)	(1,668)	-	(1,668)
Operating  profit/ (loss) before tax	1,268	(743)	612	2,678	1,906	1,552	203	(1,084)	6,392	-	6,392
Tax expense or income related to profit or loss from continuing operations	(360)	148	(153)	(697)	(390)	(487)	(52)	293	(1,699)	-	(1,699)
Profit from continuing operations	908	(595)	459	1,981	1,515	1,065	151	(791)	4,693	-	4,693
Profit from discontinued operations /Profit from corporate operations, net	-	-	-	-	-	-	-	-	-	-	-
Profit	908	(595)	459	1,981	1,515	1,065	151	(791)	4,693	-	4,693
Profit attributable to non-controlling interests	(3)	-	-	(1)	(917)	(294)	-	(3)	(1,218)	-	(1,218)
Profit attributable to parent company	905	(595)	459	1,980	599	771	151	(794)	3,475	-	3,475

⁽¹⁾  Includes “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net”, “Gains (losses) on financial assets and    liabilities held for trading, net”, “Gains (losses) from hedge accounting, net” and “Exchange differences, net”.

 ⁽²⁾  Includes share of profit or loss of entities accounted for using the equity method.

⁽³⁾ Referred as “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss” in “Item 3. Key Information—Selected Consolidated Financial Data”.

114

	For the Year Ended December 31, 2015
	Banking Activity in Spain	Non-Core Real Estate	United States	Mexico	Turkey	South America	Rest of Eurasia	Corporate Center	Total	Adjustments(5)	Group Income
	(In Millions of Euros)
Net interest income	4,015	71	1,811	5,387	2,194	3,202	176	(432)	16,426	(404)	16,022
Net fees and commissions	1,593	2	616	1,223	471	718	170	(88)	4,705	(94)	4,611
Net gains (losses) on financial assets and liabilities and exchange differences, net (1)	1,011	4	186	198	(273)	595	125	163	2,009	21	2,030
Other operating income and expenses, net (2)	185	(105)	18	273	42	(38)	(6)	172	540	159	699
Gross income	6,803	(28)	2,631	7,081	2,434	4,477	465	(183)	23,680	(318)	23,362
Administration costs	(3,072)	(101)	(1,602)	(2,402)	(1,043)	(1,875)	(336)	(595)	(11,027)	191	(10,836)
Depreciation and amortization	(368)	(25)	(204)	(219)	(118)	(104)	(15)	(237)	(1,290)	18	(1,272)
Net margin before provisions	3,363	(154)	825	4,459	1,273	2,498	113	(1,015)	11,363	(109)	11,254
Impairment losses on financial assets, net(3)	(1,342)	(179)	(142)	(1,633)	(422)	(614)	(4)	(3)	(4,339)	67	(4,272)
Provisions or reversal of provisions	(481)	(383)	2	(53)	2	(71)	(6)	(154)	(1,144)	(1,261)	(2,405)
Operating  profit/ (loss) before tax	1,540	(716)	685	2,772	853	1,814	103	(1,172)	5,879	(1,276)	4,603
Tax expense or income related to profit or loss from continuing operations	(454)	221	(168)	(678)	(166)	(565)	(33)	402	(1,441)	167	(1,274)
Profit from continuing operations	1,086	(495)	517	2,094	687	1,248	70	(770)	4,438	(1,109)	3,328
Profit from discontinued operations /Profit from corporate operations, net (4)	-	-	-	-	-	-	-	(1,109)	(1,109)	1,109	-
Profit	1,086	(495)	517	2,094	687	1,248	70	(1,880)	3,328	-	3,328
Profit attributable to non-controlling interests	(6)	(1)	-	(1)	(316)	(343)	1	(19)	(686)	-	686
Profit attributable to parent company	1,080	(496)	517	2,094	371	905	70	(1,899)	2,642	-	2,642

   ⁽¹⁾ Includes “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities held for trading, net”, “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net”, “Gains (losses) from hedge accounting, net” and “Exchange differences, net”.

⁽²⁾ Includes share of profit or loss of entities accounted for using the equity method.

⁽³⁾ Referred as “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss” in “Item 3. Key Information—Selected Consolidated Financial Data”.

⁽⁴⁾ For Group income (derived from the Group income statement) this line represents “Profit from discontinued operations” and for operating segments (presented in accordance with management criteria) it represents “Profit from corporate operations”.

⁽⁵⁾ Adjustments in 2015 include (i) adjustments made to account for the fact that, until July 2015, in the consolidated financial statements Garanti was accounted for using the equity method rather than using the management criteria referred to above; and (ii) adjustments relating to the reclassification, in the fourth quarter of 2015, of certain operating expenses related to technology from the Corporate Center to the Banking Activity in Spain segment. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain segment during 2015.

115

Results of Operations by Operating Segment for 2017 Compared with 2016

BANKING ACTIVITY IN SPAIN

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	3,738	3,877	(3.6)
Net fees and commissions	1,561	1,477	5.7
Net gains (losses) on financial assets and liabilities and exchange differences, net	555	786	(29.4)
Other operating income and expenses, net	(111)	(123)	(9.3)
Income and expenses on insurance and reinsurance contracts	438	400	9.6
Gross income	6,180	6,416	(3.7)
Administration costs	(3,066)	(3,252)	(5.7)
Depreciation and amortization	(313)	(327)	(4.4)
Net margin before provisions	2,802	2,837	(1.3)
Impairment losses on financial assets, net	(567)	(763)	(25.7)
Provisions or reversal of provisions	(369)	(807)	(54.3)
Operating profit/(loss) before tax	1,866	1,268	47.2
Tax expense or income related to profit or loss from continuing operations	(482)	(360)	33.9
Profit from continuing operations	1,384	908	52.5
Profit from corporate operations, net	-	-	-
Profit	1,384	908	52.5
Profit attributable to non-controlling interests	(3)	(3)	(3.6)
Profit attributable to parent company	1,381	905	52.7

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €3,738 million, a 3.6% decrease compared with the €3,877 million recorded for the year ended December 31, 2016, mainly as a result of a decrease in the average volume of interest-earning assets, particularly in the securities portfolio and derivatives as a result of the sale of certain wholesales portfolios and, to a lesser extent, lower average loans and advances to customers, partially offset by the lower funding cost of interest-bearing liabilities. The net interest margin over this operating segment’s total average assets amounted to 1.18% for 2017 compared with 1.15% for 2016.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €1,561 million, a 5.7% increase compared with the €1,477 million recorded for the year ended December 31, 2016, mainly as a result of an increase in securities fees due to increased activity in our wholesale businesses and the growth in mutual funds driven primarily by higher share prices.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences of this operating segment for the year ended December 31, 2017 was a net gain of €555 million, a 29.4% decrease compared with the €786 million net gain recorded for the year ended December 31, 2016, mainly as a result of lower sales of ALCO (Assets and Liabilities Committee) portfolios. The gain in the prior period was also partially due to the gains from the sale of our stake in VISA Europe, Ltd. recorded in the second quarter of 2016.

116

Other operating income and expenses, net

    Other net operating expenses of this operating segment for the year ended December 31, 2017 were €111 million, a 9.3% decrease compared with the €123 million of net expenses recorded for the year ended December 31, 2016, mainly as a result of a reduced annual contribution to the Single Resolution Fund and increased income from insurance activity.

Income and expenses on insurance and reinsurance contracts

Net income on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2017 was a gain of €438 million, a 9.6% increase compared with the €400 million gain recorded for the year ended December 31, 2016, mainly as a result of the lower claims ratio and new contracts originated.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to an expense of €3,066 million, a 5.7% decrease compared with the €3,252 million recorded for the year ended December 31, 2016, mainly as a result of a €66 million decrease in salaries, a €38 million decrease in rent expenses due to a reduction in the number of branches, a €20 million decrease in IT expenses and a €23 million decrease in third party services expenses. There has been a decrease in administration costs for the six consecutive quarters ended December 31, 2017 due to the synergies related to the integration of Catalunya Banc and the implementation of efficiency plans.

Impairment losses on financial assets, net

Impairment losses on financial assets of this operating segment for the year ended December 31, 2017 was a net loss of €567 million, a 25.7% decrease compared with the €763 million recorded for the year ended December 31, 2016, mainly as a result of decreased impaired assets due to the improvement of credit quality, partially offset by the increase in the size of the loan portfolio by year end. The non-performing asset ratio of this operating segment as of December 31, 2017 was 5.2% compared with 5.8% as of December 31, 2016.

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2017 were €369 million, a 54.3% decrease compared with the €807 million recorded for the year ended December 31, 2016. Provisions recorded in 2016 were adversely affected by provisioning related to the invalidity of clauses limiting interest rates in certain mortgage loans with customers (the so-called “cláusulas suelo”).  BBVA has made additional provisions during 2017 to cover possible contingencies and claims that may arise in connection with this matter in amounts that BBVA considers not significant.

Operating profit/ (loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2017 was €1,866 million, a 47.2% increase compared with the €1,268 million recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2017 was an expense of €482 million, a 33.9% increase compared with the €360 million expense recorded for the year ended December 31, 2016 mainly as a result of the higher operating profit before tax. The tax expense amounted to 25.8% of the operating profit before tax for the year ended December 31, 2017, and 28.4% for the year ended December 31, 2016.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 amounted to €1,381 million, a 52.7% increase compared with the €905 million recorded for the year ended December 31, 2016.

117

NON-CORE REAL ESTATE

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	71	60	19.5
Net fees and commissions	3	6	(50.7)
Net gains (losses) on financial assets and liabilities and exchange differences, net	-	(3)	(100.0)
Other operating income and expenses, net	(91)	(68)	33.2
Income and expenses on insurance and reinsurance contracts	-	-	-
Gross income	(17)	(6)	157.8
Administration costs	(97)	(96)	0.5
Depreciation and amortization	(18)	(27)	(33.8)
Net margin before provisions	(132)	(130)	1.2
Impairment losses on financial assets, net	(138)	(138)	0.4
Provisions or reversal of provisions	(403)	(475)	(15.2)
Operating profit/(loss) before tax	(673)	(743)	(9.4)
Tax expense or income related to profit or loss from continuing operations	170	148	15.4
Profit from continuing operations	(502)	(595)	(15.6)
Profit from corporate operations, net	-	-	-
Profit	(502)	(595)	(15.6)
Profit attributable to non-controlling interests	1	-	n.m.(1)
Profit attributable to parent company	(501)	(595)	(15.8)

(1)   Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €71 million, a 19.5% increase compared with the €60 million recorded for the year ended December 31, 2016, mainly as a result of higher interest income from construction sector loans.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €3 million, a 50.7% decrease compared with the €6 million recorded for the year ended December 31, 2016, mainly as a result of a decrease in insurance product commissions.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2017 were €91 million, compared with the €68 million of net expenses recorded for the year ended December 31, 2016, mainly as a result of a €32 million decrease in income from non-financial services.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to €97 million, a 0.5% increase compared with the €96 million recorded for the year ended December 31, 2016.

Impairment losses on financial assets, net

Impairment losses on financial assets of this operating segment for the year ended December 31, 2017 was a net loss of €138 million, a 0.4% increase compared with the €138 million recorded for the year ended December 31, 2016. The non-performing asset ratio of this operating segment as of December 31, 2017 was 52.8% compared with 56.1% as of December 31, 2016.

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Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2017 were €403 million, a 15.2% decrease compared with the €475 million recorded for the year ended December 31, 2016, mainly as a result of portfolio sales.

Operating profit/ (loss) before tax

As a result of the foregoing, operating loss before tax of this operating segment for the year ended December 31, 2017 was €673 million, a 9.4% decrease compared with the €743 million loss recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax income related to loss from continuing operations of this operating segment for the year ended December 31, 2017 amounted to €170 million, a 15.4% increase compared with the €148 million gain recorded for the year ended December 31, 2016. Consequently, tax income amounted to 25.3% of the operating loss before tax for the year ended December 31, 2017, and 19.9% for the year ended December 31, 2016.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 was a loss of €501 million, a 15.8% decrease compared with the €595 million loss recorded for the year ended December 31, 2016.

UNITED STATES

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	2,158	1,953	10.5
Net fees and commissions	647	638	1.5
Net gains (losses) on financial assets and liabilities and exchange differences, net	111	142	(22.2)
Other operating income and expenses, net	2	(27)	n.m.(1)
Income and expenses on insurance and reinsurance contracts	-	-	-
Gross income	2,919	2,706	7.9
Administration costs	(1,671)	(1,652)	1.1
Depreciation and amortization	(187)	(190)	(1.9)
Net margin before provisions	1,061	863	22.9
Impairment losses on financial assets, net	(241)	(221)	8.9
Provisions or reversal of provisions	(36)	(30)	21.4
Operating profit/(loss) before tax	784	612	28.2
Tax expense or income related to profit or loss from continuing operations	(273)	(153)	78.6
Profit from continuing operations	511	459	11.3
Profit from corporate operations, net	-	-	-
Profit	511	459	11.3
Profit attributable to non-controlling interests	-	-	-
Profit attributable to parent company	511	459	11.3

(1)   Not meaningful.

In 2017 the U.S. dollar depreciated 2.0% against the euro in average terms, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2017 and in the results of operations

119

of the United States operating segment for such year expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”. 

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €2,158 million, a 10.5% increase compared with the €1,953 million recorded for the year ended December 31, 2016, mainly as a result of higher interest rates (including as a result of the impact of the Federal Reserve Board benchmark interest rate increases), particularly related to loans and advances to customers, and, to a lesser extent, in the securities portfolio and derivatives, partially offset by the effect of higher interests on deposits, particularly from Federal Home Loan Banks. The net interest margin over total average assets of this operating segment amounted to 2.58% for 2017 compared with 2.26% for 2016.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €647 million, a 1.5% increase compared with the €638 million recorded for the year ended December 31, 2016, mainly as a result of the increase in commissions, particularly in credit and debit card commissions.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains (losses) on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2017 was a net gain of €111 million, a 22.2% decrease compared with the €142 million gain recorded for the year ended December 31, 2016, mainly as a result of lower sales of ALCO (Assets and Liabilities Committee) securities and mortgage portfolios.

Other operating income and expenses, net

Other net operating income of this operating segment for the year ended December 31, 2017 was €2 million, compared with the €27 million of net expenses recorded for the year ended December 31, 2016, mainly as a result of the lower contribution made to the Deposit Guarantee Fund.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to €1,671 million, a 1.1% increase compared with the €1,652 million recorded for the year ended December 31, 2016, mainly as a result of increases in general and administrative expenses, particularly IT, consulting and marketing expenses, and, to a lesser extent, an increase in personnel expenses.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2017 were €241 million, an 8.9% increase compared with the €221 million recorded for the year ended December 31, 2016, mainly as a result of the impact of additional allowances for loan losses related to the impact of hurricanes Harvey and Irma, and higher loan-loss provisioning related to consumer portfolios, partially offset by decreased impaired assets due to the improvement in the credit quality indicators of energy loans during 2017. The non-performing asset ratio of this operating segment as of December 31, 2017 was 1.2%, compared with 1.5% as of December 31, 2016.

Operating profit/ (loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2017 was €784 million, a 28.2% increase compared with the €612 million of operating profit recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2017 was €273 million, a 78.6% increase compared with the €153 million expense recorded for the year ended December 31, 2016, mainly as a result of the higher operating profit before tax and the impact of the remeasurement of deferred tax assets and liabilities due to the impact of the Tax Cuts and Jobs Act signed into legislation on December 22, 2017 (pursuant to which the corporate tax rate was also reduced). Consequently, the tax expense

120

amounted to 34.9% of the operating profit before tax for the year ended December 31, 2017, compared with 25.0% for the year ended December 31, 2016.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 amounted to €511 million, an 11.3% increase compared with the €459 million recorded for the year ended December 31, 2016.

MEXICO

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	5,437	5,126	6.1
Net fees and commissions	1,217	1,149	5.9
Net gains (losses) on financial assets and liabilities and exchange differences, net	249	222	12.3
Other operating income and expenses, net	(239)	(237)	1.0
Income and expenses on insurance and reinsurance contracts	416	507	(17.8)
Gross income	7,080	6,766	4.6
Administration costs	(2,189)	(2,149)	1.9
Depreciation and amortization	(256)	(247)	3.8
Net margin before provisions	4,635	4,371	6.0
Impairment losses on financial assets, net	(1,652)	(1,626)	1.6
Provisions or reversal of provisions	(35)	(67)	(47.8)
Operating profit/(loss) before tax	2,948	2,678	10.1
Tax expense or income related to profit or loss from continuing operations	(786)	(697)	12.8
Profit from continuing operations	2,162	1,981	9.2
Profit from corporate operations, net	-	-	-
Profit	2,162	1,981	9.2
Profit attributable to non-controlling interests	-	(1)	n.m.(1)
Profit attributable to parent company	2,162	1,980	9.2

(1)   Not meaningful.

In 2017, the Mexican peso depreciated 3.1% against the euro in average terms, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2017 and in the results of operations of the Mexico operating segment for such year expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”. 

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €5,437 million, a 6.1% increase compared with the €5,126 million recorded for the year ended December 31, 2016, and a 9.5% increase excluding the negative exchange rate effect. The increase was mainly as a result of higher interest rates, particularly due to the effect of the higher interest rates on the securities portfolio and loans and advances to customers, and to a lesser extent, an increase in the average volume of loans and advances to customers. The net interest margin over total average assets of this operating segment amounted to 5.65% for 2017 compared with 5.47% for 2016.

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Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €1,217 million, a 5.9% increase compared with the €1,149 million recorded for the year ended December 31, 2016, mainly as a result of an overall increase in commissions, particularly in credit and debit card commissions and fees from online and investment banking, partially offset by a decrease in commissions for selling insurance and the impact of the depreciation of the Mexican peso against the euro.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2017 were €249 million, a 12.3% increase compared with the €222 million gain recorded for the year ended December 31, 2016, mainly as a result of portfolio sales.

Other operating income and expenses, net

Other operating income and expenses, net of this operating segment for the year ended December 31, 2017 was a net expense of €239 million, a 1.0% increase compared with the €237 million of net expenses recorded for the year ended December 31, 2016.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2017 was €416 million, a 17.8% decrease compared with the €507 million income recorded for the year ended December 31, 2016, mainly as a result of the higher rate of claims brought by customers (particularly in the last quarter of 2017) as a result of the impact of natural disasters that took place during 2017.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 were €2,189 million, a 1.9% increase compared with the €2,149 million recorded for the year ended December 31, 2016, mainly as a result of the increase in general and administrative expenses, particularly IT expenses, and, to a lesser extent, the increase in personnel expenses. The increase was below Mexico’s inflation rate for the year.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2017 were €1,652 million, a 1.6% increase compared with the €1,626 million recorded for the year ended December 31, 2016. Excluding the impact of the depreciation of the Mexican peso, the increase in impairment losses on financial assets (4.9%) was in line with the increase recorded in loans and advances to customers (5.3%). The non-performing asset ratio of this operating segment was 2.3% as of December 31, 2017 and 2016.

Operating profit/ (loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2017 was €2,948 million, a 10.1% increase compared with the €2,678 million of operating profit recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2017 was €786 million, a 12.8% increase compared with the €697 million expense recorded for the year ended December 31, 2016, mainly as a result of the higher operating profit before tax. Consequently, the tax expense amounted to 26.7% of the operating profit before tax for the year ended December 31, 2017, and 26.0% for the year ended December 31, 2016.

122

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 amounted to €2,162 million, a 9.2% increase compared with the €1,980 million recorded for the year ended December 31, 2016.

TURKEY

Since July 2015 we have fully consolidated Garanti’s results in our consolidated financial statements. From July 2015 to March 2017, we held 39.90% of Garanti’s share capital and, on March 22, 2017, we completed the acquisition of an additional 9.95% stake in Garanti. See “Item 4. Information on the Company—History and Development of the Company—Capital expenditures—2017”.

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	3,331	3,404	(2.1)
Net fees and commissions	703	731	(3.9)
Net gains (losses) on financial assets and liabilities and exchange differences, net	14	77	(81.2)
Other operating income and expenses, net	5	(18)	n.m.(1)
Income and expenses on insurance and reinsurance contracts	62	64	(2.6)
Gross income	4,115	4,257	(3.3)
Administration costs	(1,325)	(1,524)	(13.1)
Depreciation and amortization	(178)	(214)	(16.7)
Net margin before provisions	2,612	2,519	3.7
Impairment losses on financial assets, net	(453)	(520)	(13.0)
Provisions or reversal of provisions	(12)	(93)	(87.2)
Operating profit/(loss) before tax	2,147	1,906	12.7
Tax expense or income related to profit or loss from continuing operations	(426)	(390)	9.2
Profit from continuing operations	1,720	1,515	13.5
Profit from corporate operations, net	-	-	n.m.(1)
Profit	1,720	1,515	13.5
Profit attributable to non-controlling interests	(895)	(917)	(2.4)
Profit attributable to parent company	826	599	37.9

(1)   Not meaningful.

The Turkish lira depreciated 18.9% against the euro in average terms during 2017, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2017 and in the results of operations of the Turkey operating segment for such year expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €3,331 million, a 2.1% decrease compared with the €3,404 million recorded for the year ended December 31, 2016, mainly as a result of the depreciation of the Turkish lira. Excluding this impact, there was a 20.6% increase in net interest income, mainly as a result of higher interest rates, particularly in loans and advances to customers and inflation-linked bonds, and the growth in activity, particularly in cash and cash balances with central banks, in line with the growth of the Turkish financial sector. The net interest margin over total average assets of this operating segment amounted to 4.05% for 2017 compared to 3.81% for 2016.

123

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €703 million, a 3.9% decrease compared with the €731 million recorded for the year ended December 31, 2016, mainly as a result of the depreciation of the Turkish lira. Excluding this impact, there was an 18.5% increase in net fees and commissions, mainly as a result of an increase in credit and debit card commissions, which amounted to €51 million, and, to a lesser extent, due to an increase in checks and bills receivables commissions, which increased by €32 million.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2017 were €14 million, an 81.2% decrease compared with the €77 million gain recorded for the year ended December 31, 2016. The gain in 2016 was partially due to the sale of Garanti’s stake in VISA Europe, Ltd. recorded in the second quarter of 2016.

Other operating income and expenses, net

Other net operating income of this operating segment for the year ended December 31, 2017 was €5 million, compared with the €18 million of net expenses recorded for the year ended December 31, 2016, mainly as a result of a €13 million increase in financial income from real estate-related services.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2017 was €62 million, a 2.6% decrease compared with the €64 million income recorded for the year ended December 31, 2016, mainly as a result of the depreciation of the Turkish lira.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to €1,325 million, a 13.1% decrease compared with the €1,524 million recorded for the year ended December 31, 2016, mainly as a result of the depreciation of the Turkish lira. Excluding this impact, administration costs increased by 7.2%, mainly as a result of the 11.9% inflation rate, which led to a €78 million increase in personnel expenses and an €11 million increase in general and administrative expenses.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2017 were €453 million, a 13.0% decrease compared with the €520 million recorded for the year ended December 31, 2016, mainly as a result of the impact of the depreciation of the Turkish lira. Excluding this impact, impairment losses on financial assets increased by 7.3%, mainly as a result of the deterioration of the credit quality and the increase in the size of the loan portfolio. The non-performing asset ratio of this operating segment as of December 31, 2017 was 3.9% compared with 2.7% as of December 31, 2016. This increase was mainly the result of increased impairments of  wholesale loans, the majority of which had already been fully provisioned.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2017 was €2,147 million, a 12.7% increase compared with the €1,906 million of operating profit recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2017 was €426 million, a 9.2% increase compared with the €390 million expense recorded for the year ended December 31, 2016, mainly as a result of the higher operating profit before tax. Consequently, the tax expense

124

amounted to 19.9% of the operating profit before tax for the year ended December 31, 2017, and 20.5% for the year ended December 31, 2016.

Profit attributable to non-controlling interests

Profit attributable to non-controlling interests of this operating segment for the year ended December 31, 2017 amounted to €895 million, a 2.4% decrease compared with the €917 million recorded for the year ended December 31, 2016 mainly as a result of the completion of our acquisition of an additional 9.95% stake in Garanti on March 22, 2017, which more than offset the effect of the higher operating profit before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 amounted to €826 million, a 37.9% increase compared with the €599 million recorded for the year ended December 31, 2016 mainly as a result of the higher operating profit before tax and our acquisition of an additional 9.95% stake in Garanti during the year.

SOUTH AMERICA

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	3,200	2,930	9.2
Net fees and commissions	713	634	12.4
Net gains (losses) on financial assets and liabilities and exchange differences, net	480	464	3.4
Other operating income and expenses, net	(113)	(133)	(15.0)
Income and expenses on insurance and reinsurance contracts	172	158	8.8
Gross income	4,451	4,054	9.8
Administration costs	(1,886)	(1,793)	5.2
Depreciation and amortization	(121)	(100)	20.8
Net margin before provisions	2,444	2,160	13.1
Impairment losses on financial assets, net	(650)	(526)	23.6
Provisions or reversal of provisions	(103)	(82)	26.2
Operating profit/(loss) before tax	1,691	1,552	8.9
Tax expense or income related to profit or loss from continuing operations	(486)	(487)	(0.3)
Profit from continuing operations	1,205	1,065	13.1
Profit from corporate operations, net	-	-	-
Profit	1,205	1,065	13.1
Profit attributable to non-controlling interests	(345)	(294)	17.0
Profit attributable to parent company	861	771	11.6

In 2017, the Venezuelan bolivar depreciated significantly against the euro in average terms compared with the year ended December 31, 2016. In the year ended December 31, 2017 the Group used the estimated exchange rate of 18,182 Venezuelan bolivars per euro. See “Presentation of Financial Information―Venezuela”. In addition, the Argentine peso depreciated 12.8% against the euro in average terms. On the other hand, the Chilean peso, Colombian peso and Peruvian new sol appreciated in average terms against the euro compared with the year ended December 31, 2016, by 2.1%, 1.4% and 1.4%, respectively. In the aggregate, changes in exchange rates resulted in a negative impact on most of the headings of the results of operations of the South America operating segment for the year ended December 31, 2017 expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”.

125

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €3,200 million, a 9.2% increase compared with the €2,930 million recorded for the year ended December 31, 2016, mainly as a result of growth in the average volume of interest-earning assets, particularly loans and advances to customers, and, to a lesser extent, in the securities portfolio and derivatives, partially offset by the depreciation of the Venezuelan bolivar and the Argentine peso. Assuming constant exchange rates, net interest income increased by 15.1%. The net interest margin over total average assets of this operating segment amounted to 4.22% for 2017 compared with 4.09% for 2016.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €713 million, a 12.4% increase compared with the €634 million recorded for the year ended December 31, 2016, mainly as a result of an increase in credit and debit card commissions, which amounted to €33 million, and, to a lesser extent, due to an increase in checks and bills receivables commissions which increased by €13 million, partially offset by the depreciation of local currencies against the euro. By country, the main variation was registered in Argentina where net fees and commissions, at constant exchange rates, increased by €65 million.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2017 were €480 million, a 3.4% increase compared with the €464 million gain recorded for the year ended December 31, 2016, mainly as a result of foreign-currency operations.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2017 were €113 million, a 15.0% decrease compared with the €133 million recorded for the year ended December 31, 2016, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and the Argentine peso.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2017 was €172 million, a 8.8% increase compared with the €158 million income recorded for the year ended December 31, 2016, mainly as a result of the performance in Colombia where income on insurance and reinsurance contracts, at constant exchange rates, increased by €14 million.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to €1,886 million, a 5.2% increase compared with the €1,793 million recorded for the year ended December 31, 2016, in line with the average inflation rate in most countries and partially offset by the impact of the depreciation of the Venezuelan bolivar and the Argentine peso.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2017 were €650 million, a 23.6% increase compared with the €526 million recorded for the year ended December 31, 2016, mainly as a result of increased impaired assets due to the deterioration of credit quality with certain customers, partially offset by the decrease in the volume of the loan portfolio, the higher recovery of written-off assets and the depreciation of the Venezuelan bolivar and the Argentine peso. The non-performing asset ratio of this operating segment as of December 31, 2017 was 3.4% compared with 2.9% as of December 31, 2016.

126

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2017 were €103 million, a 26.2% increase compared with the €82 million recorded for the year ended December 31, 2016, mainly as a result of an increase in contingent liabilities.      

Operating profit/ (loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2017 was €1,691 million, an 8.9% increase compared with the €1,552 million of operating profit recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2017 was €486 million, a 0.3% decrease compared with the €487 million expense recorded for the year ended December 31, 2016, mainly as a result of the impact of the depreciation of the Venezuelan bolivar and the Argentine peso. Assuming constant exchange rates, tax expenses increased by 10.1%, in line with the 8.9% increase in operating profit before tax. Consequently, the tax expense amounted to 28.7% of the operating profit before tax for the year ended December 31, 2017, and 31.4% for the year ended December 31, 2016.

Profit attributable to non-controlling interests

Profit attributable to non-controlling interests of this operating segment for the year ended December 31, 2017 amounted to €345 million, a 17.0% increase compared with the €294 million recorded for the year ended December 31, 2016 mainly as a result of the stronger performance of our Peruvian and Argentinian operations, where there are minority shareholders, as well as our reduction of our stake in our Argentinian operations during 2017.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 amounted to €861 million, an 11.6% increase compared with the €771 million recorded for the year ended December 31, 2016.

REST OF EURASIA

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	180	166	8.7
Net fees and commissions	164	194	(15.2)
Net gains (losses) on financial assets and liabilities and exchange differences, net	123	87	40.4
Other operating income and expenses, net	1	45	(97.3)
Income and expenses on insurance and reinsurance contracts	-	-	-
Gross income	468	491	(4.8)
Administration costs	(297)	(330)	(9.9)
Depreciation and amortization	(11)	(12)	(10.4)
Net margin before provisions	160	149	7.0
Impairment losses on financial assets, net	23	30	(24.3)
Provisions or reversal of provisions	(6)	23	n.m.(1)
Operating profit/(loss) before tax	177	203	(12.9)
Tax expense or income related to profit or loss from continuing operations	(52)	(52)	0.3
Profit from continuing operations	125	151	(17.4)
Profit from corporate operations, net	-	-	-
Profit	125	151	(17.4)
Profit attributable to non-controlling interests	-	-	-
Profit attributable to parent company	125	151	(17.4)

127

(1)   Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2017 amounted to €180 million, an 8.7% increase compared with the €166 million recorded for the year ended December 31, 2016, mainly as a result of the performance of the Global Finance unit in Europe, particularly retail business and Corporate and Investment Banking (C&IB),  and, to a lesser extent the performance of the Global Markets unit in Europe, partially offset by performance of the Global Markets unit in Asia.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 amounted to €164 million, a 15.2% decrease compared with the €194 million recorded for the year ended December 31, 2016, mainly as a result of a decrease in securities fees.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences of this operating segment for the year ended December 31, 2017 were €123 million, a 40.4% increase compared with the €87 million net gain recorded for the year ended December 31, 2016, mainly as a result of the €21 million increase in the gains on financial assets in retail businesses, particularly in Portugal (€13 million increase) and the €28 million increase of the Global Markets unit in Europe, partially offset by the €25 million decrease of the Global Markets unit in Asia.

 Other operating income and expenses, net

Other net operating income of this operating segment for the year ended December 31, 2017 was €1 million, compared with the €45 million net income recorded for the year ended December 31, 2016, mainly as a result of our divestment in CNCB, a 2.14% stake of which we sold in 2017, which resulted in lower dividends from CNCB.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to €297 million, a 9.9% decrease compared with the €330 million recorded for the year ended December 31, 2016, mainly as a result of the expense reduction efforts in the Corporate and Investment Banking (C&IB) unit in Asia and the retail business in Europe.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2017 amounted to a €23 million gain, a 24.3% decrease compared with the €30 million gain recorded for the year ended December 31, 2016, mainly as a result of the release of provisions, particularly in Portugal. The non-performing asset ratio of this operating segment as of December 31, 2017 was 1.2% compared with 1.5% as of December 31, 2016.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2017 was €177 million, a 12.9% decrease compared with the €203 million of operating profit recorded for the year ended December 31, 2016.

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Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2017 was €52 million, a 0.3% increase compared with the €52 million expense recorded for the year ended December 31, 2016, mainly as a result of a higher effective tax rate attributable in part to lower dividends received in 2017. Consequently, the tax expense amounted to a 29.5% of the operating profit before tax for the year ended December 31, 2017, and 25.6% for the year ended December 31, 2016.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 amounted to €125 million, a 17.4% decrease compared with the €151 million recorded for the year ended December 31, 2016.

CORPORATE CENTER

	For The Year Ended December 31,
	2017	2016	Change
	(In Millions of Euros)		(In %)
Net interest income	(357)	(455)	(21.6)
Net fees and commissions	(86)	(110)	(21.2)
Net gains (losses) on financial assets and liabilities and exchange differences, net	436	357	22.2
Other operating income and expenses, net	99	197	(49.7)
Income and expenses on insurance and reinsurance contracts	(19)	(21)	(9.8)
Gross income	73	(31)	n.m.(1)
Administration costs	(581)	(569)	2.2
Depreciation and amortization	(303)	(307)	(1.3)
Net margin before provisions	(811)	(907)	(10.6)
Impairment losses on financial assets, net	(1,125)	(37)	n.m.(1)
Provisions or reversal of provisions	(73)	(139)	(47.3)
Operating profit/(loss) before tax	(2,009)	(1,084)	85.4
Tax expense or income related to profit or loss from continuing operations	166	293	(43.3)
Profit from continuing operations	(1,843)	(791)	133.1
Profit from corporate operations, net	-	-	-
Profit	(1,843)	(791)	133.1
Profit attributable to non-controlling interests	(1)	(3)	(60.0)
Profit attributable to parent company	(1,844)	(794)	132.3

(1)   Not meaningful.

Net interest income / (expense)

Net interest expense of this operating segment for the year ended December 31, 2017 was €357 million, a 21.6% decrease compared with the €455 million expense recorded for the year ended December 31, 2016, mainly as a result of the lower funding cost of the Group’s investments.

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Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2017 was an expense of €86 million, a 21.2% decrease compared with an expense of €110 million loss recorded for the year ended December 31, 2016, mainly as a result of an increase in funds commissions income.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences of this operating segment for the year ended December 31, 2017 were €436 million, a 22.2% increase compared with the €357 million gain recorded for the year ended December 31, 2016, mainly as a result of the sale of a 2.14% stake in CNCB in 2017.

Other operating income and expenses, net

Other net operating income of this operating segment for the year ended December 31, 2017 was €99 million, a 49.7% decrease compared with the €197 million net income recorded for the year ended December 31, 2016, mainly as a result of the decreased dividends from Telefónica, S.A. as it lowered its dividends from €0.55 per share to €0.4 per share, and from CNCB, which also lowered its dividends and also due to the smaller stake held by the Group in CNCB (following the sale of a 2.14% stake in 2017).

Income and expenses on insurance and reinsurance contracts

Income and expenses on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2017 was an expense of €19 million, a 9.8% decrease compared with the €21 million expense recorded for the year ended December 31, 2016.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2017 amounted to €581 million, a 2.2% increase compared with the €569 million recorded for the year ended December 31, 2016, mainly as a result of the €15 million increase in fixed remuneration and also due to a €11 million increase in general and administrative expenses, particularly IT expenses.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2017 were €1,125 million, compared with the €37 million recorded for the year ended December 31, 2016, mainly as a result of the recognition of impairment losses of €1,123 million relating to our slightly above 5% stake in Telefónica, S.A. resulting from the fact that its stock price fell below our acquisition cost for a prolonged period.

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2017 were €73 million, a 47.3% decrease compared with the €139 million recorded for the year ended December 31, 2016, mainly due to lower provisions for early retirements.

Operating profit/ (loss) before tax

As a result of the foregoing, operating loss before tax of this operating segment for the year ended December 31, 2017 was €2,009 million, compared with the €1,084 million loss recorded for the year ended December 31, 2016.

Tax expense or income related to profit or loss from continuing operations

Tax income related to loss from continuing operations of this operating segment for the year ended December 31, 2017 amounted to €166 million, a 43.3% decrease compared with the €293 million income recorded for the year ended December 31, 2016, despite the increase in operating loss before tax since the recognition of the impairment losses relating to our stake in Telefónica, S.A., had no impact on taxable income. Consequently, the tax income

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amounted to 8.3% of the operating loss before tax for the year ended December 31, 2017, and 27.0% for the year ended December 31, 2016.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2017 was a loss of €1,844 million, compared with the €794 million loss recorded for the year ended December 31, 2016.

Results of Operations by Operating Segment for 2016 Compared with 2015

BANKING ACTIVITY IN SPAIN

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	3,877	4,015	(3.5)
Net fees and commissions	1,477	1,593	(7.3)
Net gains (losses) on financial assets and liabilities and exchange differences, net	786	1,011	(22.2)
Other operating income and expenses, net	(123)	(168)	(26.9)
Income and expenses on insurance and reinsurance contracts	400	352	13.5
Gross income	6,416	6,803	(5.7)
Administration costs	(3,252)	(3,072)	5.9
Depreciation and amortization	(327)	(368)	(11.2)
Net margin before provisions	2,837	3,363	(15.6)
Impairment losses on financial assets, net	(763)	(1,342)	(43.1)
Provisions or reversal of provisions	(807)	(481)	67.7
Operating profit/(loss) before tax	1,268	1,540	(17.7)
Tax expense or income related to profit or loss from continuing operations	(360)	(454)	(20.7)
Profit from continuing operations	908	1,086	(16.4)
Profit from corporate operations, net	-	-	-
Profit	908	1,086	(16.4)
Profit attributable to non-controlling interests	(3)	(6)	(52.8)
Profit attributable to parent company	905	1,080	(16.2)

Net interest income

 Net interest income of this operating segment for the year ended December 31, 2016 amounted to €3,877 million, a 3.5% decrease compared with the €4,015 million recorded for the year ended December 31, 2015, mainly as a result of a decrease in loan volumes in an environment of low interest rates, where lower yields on loans were partially offset by cheaper funding.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €1,477 million, a 7.3% decrease compared with the €1,593 million recorded for the year ended December 31, 2015, mainly due to lower contribution from fees and commissions arising from securities services, including investment banking.

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Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €786 million, a 22.2% decrease compared with the €1,011 million gain recorded for the year ended December 31, 2015, mainly as a result of lower ALCO portfolio sales.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2016 were €123 million, a 26.9% decrease compared with the €168 million expense recorded for the year ended December 31, 2015, mainly as a result of a reduced annual contribution to the Single Resolution Fund.

Income and expenses on insurance and reinsurance contracts

Net income on insurance and reinsurance contracts for the year ended December 31, 2016 was €400 million, a 13.5% increase compared with €352 million net income recorded for the year ended December 31, 2015, mainly due to the integration of Catalunya Banc and a higher amount of net premiums.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were of €3,252 million, 5.9% higher compared with the €3,072 million in expenses recorded for the year ended December 31, 2015, substantially all of which was a result of the acquisition of Catalunya Banc and the related subsequent integration costs.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 was a loss of €763 million, a 43.1% decrease compared with the €1,342 million loss recorded for the year ended December 31, 2015, mainly due to the continued improvement of credit quality in Spain. This operating segment’s non-performing asset ratio decreased to 5.8% as of December 31, 2016 from 6.6% as of December 31, 2015.

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €807 million, 67.7% higher than the €481 million provisions recorded for the year ended December 31, 2015, and were mainly attributable to higher provisions related to the invalidity of clauses limiting interest rates in certain mortgage loans with customers (the so-called “cláusulas suelo”) of €577 million (€404 million after tax).

Operating profit/(loss) before tax

As a result of the foregoing, operating profit before tax of this operating segment for the year ended December 31, 2016 amounted to €1,268 million, a 17.7% decrease compared with the €1,540 million of operating profit recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2016 was €360 million, a 20.7% decrease compared with the €454 million expense recorded for the year ended December 31, 2015, mainly as a result of the 18.1% decrease in operating profit before tax. Such income tax was levied at a 30% tax rate.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €905 million, a 16.2% decrease compared with the €1,080 million recorded for the year ended December 31, 2015.

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NON-CORE REAL ESTATE

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	60	71	(16.2)
Net fees and commissions	6	2	138.9
Net gains (losses) on financial assets and liabilities and exchange differences, net	(3)	4	n.m.(1)
Other operating income and expenses, net	(68)	(105)	(35.0)
Income and expenses on insurance and reinsurance contracts	-	-	-
Gross income	(6)	(28)	(76.5)
Administration costs	(96)	(101)	(4.9)
Depreciation and amortization	(27)	(25)	11.2
Net margin before provisions	(130)	(154)	(15.2)
Impairment losses on financial assets, net	(138)	(179)	(23.1)
Provisions or reversal of provisions	(475)	(383)	23.9
Operating profit/(loss) before tax	(743)	(716)	3.8
Tax expense or income related to profit or loss from continuing operations	148	221	(33.2)
Profit from continuing operations	(595)	(495)	20.3
Profit from corporate operations, net	-	-	-
Profit	(595)	(495)	20.3
Profit attributable to non-controlling interests	-	(1)	(100.0)
Profit attributable to parent company	(595)	(496)	20.1

(1)   Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to net interest income of €60 million, a 16.2% decrease compared with the net interest income of €71 million recorded for the year ended December 31, 2015.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €6 million, compared with the €2 million recorded for the year ended December 31, 2015.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net losses on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €3 million, compared with the €4 million gain recorded for the year ended December 31, 2015.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2016 were €68 million, a 35.0% decrease compared with the €105 million expense recorded for the year ended December 31, 2015, mainly as a result of lower impairment related to the Bank’s participation in Metrovacesa S.A.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €96 million, 4.9% lower compared with the €101 million expense recorded for the year ended December 31, 2015, mainly as a result of a 16.5% decrease in other administrative expenses.

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Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 were €138 million, a 23.1% decrease compared with the €179 million recorded for the year ended December 31, 2015, mainly as a result of higher recovery of written-off assets as well as lower losses from real estate asset collateral.

   Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €475 million, 23.9% higher than the €383 million expense recorded for the year ended December 31, 2015, as a result of higher impairments mainly due to the reallocation of certain loans from the Banking Activity in Spain segment to the Non-Core Real Estate segment relating to foreclosed assets, which resulted in higher loan loss provisions. The purpose of this reallocation was to better reflect the risk profile of the loan portfolios of each segment. With respect to the foreclosed assets of this segment, we updated their appraisal value to reflect higher haircuts on the less liquid assets, in respect of which we had limited market references and a wide price valuation range. The portfolios which were most impacted by this update were our land portfolios.

    Operating profit/(loss) before tax

As a result of the foregoing, the operating loss before tax of this operating segment for the year ended December 31, 2016 was €743 million, a 3.8% increase compared with the €716 million loss recorded for the year ended December 31, 2015.

    Tax expense or income related to profit or loss from continuing operations

Tax income related to loss from continuing operations of this operating segment for the year ended December 31, 2016 amounted to €148 million, a 33.2% decrease compared with the €221 million of income recorded for the year ended December 31, 2015, mainly as a result of the reversal of certain deductions that were applied in prior years in connection with impairments in participations.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 was a loss of €595 million, compared with the €496 million loss recorded for the year ended December 31, 2015.

UNITED STATES

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	1,953	1,811	7.9
Net fees and commissions	638	616	3.5
Net gains (losses) on financial assets and liabilities and exchange differences, net	142	186	(23.6)
Other operating income and expenses, net	(27)	18	n.m.(1)
Income and expenses on insurance and reinsurance contracts	-	-	-
Gross income	2,706	2,631	2.8
Administration costs	(1,652)	(1,602)	3.1
Depreciation and amortization	(190)	(204)	(6.7)
Net margin before provisions	863	825	4.6
Impairment losses on financial assets, net	(221)	(142)	56.0
Provisions or reversal of provisions	(30)	2	n.m.(1)
Operating profit/(loss) before tax	612	685	(10.6)
Tax expense or income related to profit or loss from continuing operations	(153)	(168)	(8.8)
Profit from continuing operations	459	517	(11.2)
Profit from corporate operations, net	-	-	-
Profit	459	517	(11.2)
Profit attributable to non-controlling interests	-	-	-
Profit attributable to parent company	459	517	(11.2)

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(1)   Not meaningful.

In 2016 the U.S. dollar appreciated 0.2% against the euro on average terms, resulting in a positive exchange rate effect on our income statement and in the results of operations of the United States operating segment for the year ended December 31, 2016 expressed in euros. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”. 

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €1,953 million, a 7.9% increase compared with the €1,811 million recorded for the year ended December 31, 2015, mainly as a result of increased activity, particularly in loans and advances to customers, as well as improved pricing of such loans and advances driven by higher yields in new loan production and the lower cost of deposits.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €638 million, a 3.5% increase compared with the €616 million recorded for the year ended December 31, 2015, mainly as a result of an increase in securities fees which generated an impact of €123 million, and, to a lesser extent, due to an increase in checks and bills receivables commissions which translated into a €9 million increase, partially offset by a €108 million decrease in other commissions.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €142 million, a 23.6% decrease compared with the €186 million net gain recorded for the year ended December 31, 2015, mainly as a result of the difficult situation in the markets and lower sales of ALCO portfolios.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2016 were €27 million, compared with the €18 million operating income recorded for the year ended December 31, 2015, mainly due to a €17 million decrease in dividends from the Federal Reserve System. In addition, in 2015 other operating income and expense, net benefited from the income generated by the sale of Capital Investment Counsel Inc.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €1,652 million, a 3.1% increase compared with the €1,602 million expense recorded for the year ended December 31, 2015, mainly as a result of a €40 million increase in personnel expenses and, to a lesser extent, due to a €10 million increase in other administrative expenses. Among the main variations, fixed remuneration increased the costs by €29 million, and variable remuneration increased the costs by €13 million. Additionally, there was a positive exchange rate effect of €5 million.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 were €221 million, a 56.0% increase compared with the €142 million loss recorded for the year ended December 31, 2015, mainly as a result of increased impaired financial assets due to the increase registered in the loan portfolio and

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the deterioration in credit quality, particularly related to the rise in provisions following the rating downgrades on some companies that operate in the energy, metal and mining sectors during the first quarter of 2016. This increase in impairment losses on financial assets was partially offset by lower recovery of written-off assets. The non-performing asset ratio of this operating segment as of December 31, 2016 was 1.5% compared with 0.9% as of December 31, 2015.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit before tax of this operating segment for the year ended December 31, 2016 amounted to €612 million, a 10.6% decrease compared with the €685 million of operating profit recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2016 was €153 million, an 8.8% decrease compared with the €168 million recorded for the year ended December 31, 2015, mainly as a result of the 10.6% decrease in the operating profit before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €459 million, an 11.2% decrease compared with the €517 million recorded for the year ended December 31, 2015.

MEXICO

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	5,126	5,387	(4.9)
Net fees and commissions	1,149	1,223	(6.1)
Net gains (losses) on financial assets and liabilities and exchange differences, net	222	198	12.3
Other operating income and expenses, net	(237)	(260)	(9.0)
Income and expenses on insurance and reinsurance contracts	507	533	(4.9)
Gross income	6,766	7,081	(4.4)
Administration costs	(2,149)	(2,402)	(10.5)
Depreciation and amortization	(247)	(219)	12.6
Net margin before provisions	4,371	4,459	(2.0)
Impairment losses on financial assets, net	(1,626)	(1,633)	(0.5)
Provisions or reversal of provisions	(67)	(53)	25.6
Operating profit/(loss) before tax	2,678	2,772	(3.4)
Tax expense or income related to profit or loss from continuing operations	(697)	(678)	2.7
Profit from continuing operations	1,981	2,094	(5.4)
Profit from corporate operations, net	-	-	-
Profit	1,981	2,094	(5.4)
Profit attributable to non-controlling interests	(1)	(1)	-
Profit attributable to parent company	1,980	2,094	(5.4)

(1)   Not meaningful.

In 2016, the Mexican peso depreciated 14.8% against the euro in average terms, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2016 and in the results

136

of operations of the Mexico operating segment for such year expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”. 

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €5,126 million, a 4.9% decrease compared with the €5,387 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso, which more than offset the higher volumes in lending and fund gathering.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €1,149 million, a 6.1% decrease compared with the €1,223 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €181 million). Excluding this impact, net fees and commissions increased mainly as a result of an increase in commissions for selling insurance, and, to a lesser extent, due to an increase in insurance product commissions, partially offset by a decrease in brokerage commissions.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €222 million, a 12.3% increase compared with the €198 million gain recorded for the year ended December 31, 2015, mainly as a result of gains derived from hedging activity partially offset by the impact of the depreciation of the Mexican peso in the last quarter of 2016.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2016 were €237 million, compared with the €260 million of other operating expenses recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €38 million). Excluding this impact, other operating income and expenses, net decreased mainly as a result of an increase in expenses related to non-banking activity (like administration costs relating to foreclosed assets) and expenses related to ATMs and frauds, partially offset by a €27 million decrease in the contribution to the Mexican Deposit Guarantee Fund (IPAB) year-on-year.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2016 was €507 million, a 4.9% decrease compared with income of €533 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €79 million).

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €2,149 million, a 10.6% decrease compared with the €2,402 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €355 million). Excluding this impact, administration costs increased mainly as a result of a €92 million increase in personnel expenses, primarily related to variable remuneration and, to a lesser extent, due to IT expenses, which increased costs by €23 million, and a €10 million increase in other administrative expenses for the ongoing renovation and remodeling of branch offices and the change of headquarters.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 were €1,626 million, a 0.5% decrease compared with the €1,633 million loss recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the Mexican peso (which had an estimated impact of approximately €241 million). Excluding this impact, the change in impairment losses on financial assets was mainly

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as a result of an increase in impaired assets due to the increase registered in the loan portfolio and the deterioration in credit quality. This increase in impairment losses on financial assets was partially offset due to higher recovery of written-off assets. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.3% compared with 2.6% as of December 31, 2015.

Provisions or reversal of provisions

Provisions in this operating segment for 2016 were €67 million compared with the €53 million recorded for 2015, as a result of higher provisions related to restructuring costs.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit before tax of this operating segment for the year ended December 31, 2016 amounted to €2,678 million, a 3.4% decrease compared with the operating profit of €2,772 million recorded for the year ended December 31, 2015.

 Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2016 was €697 million, a 2.7% increase compared with the expense of €678 million recorded for the year ended December 31, 2015.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €1,980 million, a 5.4% decrease compared with the €2,094 million recorded for the year ended December 31, 2015.

TURKEY

Since July 2015 (following the acquisition of an additional 14.89% stake in Garanti) we have fully consolidated Garanti’s results in our consolidated financial statements. Until then, in accordance with IFRS 8, information for Turkey was presented under management criteria, pursuant to which Garanti’s information was proportionally consolidated based on our interest in Garanti (25.01% during the six-month period ended June 30, 2015). See “Item 4­. Information on the Company―History and Development of the Company―Capital expenditures―2017” for information on the evolution of our stake in Garanti.

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	3,404	2,194	55.1
Net fees and commissions	731	471	55.2
Net gains (losses) on financial assets and liabilities and exchange differences, net	77	(273)	n.m.(1)
Other operating income and expenses, net	(18)	2	n.m.(1)
Income and expenses on insurance and reinsurance contracts	64	40	62.0
Gross income	4,257	2,434	74.9
Administration costs	(1,524)	(1,043)	46.2
Depreciation and amortization	(214)	(118)	81.8
Net margin before provisions	2,519	1,273	97.8
Impairment losses on financial assets, net	(520)	(422)	23.2
Provisions or reversal of provisions	(93)	2	n.m.(1)
Operating profit/(loss) before tax	1,906	853	123.5
Tax expense or income related to profit or loss from continuing operations	(390)	(166)	135.4
Profit from continuing operations	1,515	687	120.6
Profit from corporate operations, net	-	-	-
Profit	1,515	687	120.6
Profit attributable to non-controlling interests	(917)	(316)	190.2
Profit attributable to parent company	599	371	61.4

138

(1)   Not meaningful.

As indicated above, since July 2015 (following the acquisition of an additional 14.89% stake in Garanti), Garanti was fully consolidated by us. Such consolidation affected the comparability of our results for the periods discussed below for all the accounting lines items of the income statement. Additionally the Turkish lira depreciated 10% against the euro in average terms during 2016, resulting in a negative exchange rate effect on our consolidated income statement for the year ended December 31, 2016 and in the results of operations of the Turkey operating segment for such year expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”. 

 Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €3,404 million, a 55.1% increase compared with the €2,194 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti, which more than offset the adverse impact of exchange rates, as well as due to increases in volumes and yields on loans and a decreased cost of deposits.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €731 million, a 55.2% increase compared with the €471 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti which more than offset the adverse impact of changes in exchange rates (which had an estimated impact of €45 million). Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti and excluding the impact of variations in exchange rates, net fees and commissions increased mainly as a result of an increase in checks and bills receivables commissions and, to a lesser extent, due to an increase in contingent risk commissions.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences of this operating segment for the year ended December 31, 2016 were €77 million, compared with the €273 million loss recorded for the year ended December 31, 2015, as a result mainly of capital gains from the divestment of ALCO portfolios, the proceeds of our sale of VISA Europe Ltd. to VISA Inc. in November 2015 (€87 million gross of tax) which were received in 2016 and gains on financial assets of the Global Markets unit in Turkey, partially offset by a negative exchange rate effect of €26 million.

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2016 were €18 million, compared with operating income of €2 million recorded for the year ended December 31, 2015, mainly as a result of increased amounts payable as a contribution to the Deposit Guarantee Fund. Additionally there were higher expenses as a result of the high inflation rate and the investments made in the upgrading, modernization and digitalization of traditional channels.

Income and expenses on insurance and reinsurance contracts

Income on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2016 was €64 million, a 62.0% increase compared with the €40 million of operating income recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti.

139

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €1,524 million, a 46.2% increase compared with the €1,043 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti which more than offset the impact of changes in exchange rates. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, and excluding the impact of variations in exchange rates, the change in administration costs was mainly as a result of the high inflation, the 30% increase in the minimum wage since January 2016 and an increase in variable remuneration in personnel expenses.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 were €520 million, a 23.2% increase compared with the €422 million loss recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti which more than offset the impact of changes in exchange rates. Excluding the effect of the acquisition of the additional stake in Garanti and the resulting change in the consolidation method of Garanti, and excluding the impact of variations in exchange rates, the change in impairment losses on financial assets, net was mainly as a result of increased impaired assets due to the increase in the loan portfolio and the deterioration in credit quality, and increased impairment losses related to the subsidiary in Romania. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.7% compared with 2.8% as of December 31, 2015.

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €93 million, compared with the €2 million reversal recorded for the year ended December 31, 2015, and were mainly provisions for contingent liabilities and commitments.

Operating profit/(loss) before tax

As a result of the foregoing, operating profit/(loss) before tax of this operating segment for the year ended December 31, 2016 amounted to €1,906 million, a 123.5% increase compared with the €853 million recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2016 was €390 million, a 135.4% increase compared with the €166 million recorded for the year ended December 31, 2015, as a result of the change in the consolidation method of Garanti.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €599 million, a 61.4% increase compared with the €371 million recorded for the year ended December 31, 2015.

SOUTH AMERICA

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	2,930	3,202	(8.5)
Net fees and commissions	634	718	(11.6)
Net gains (losses) on financial assets and liabilities and exchange differences, net	464	595	(22.0)
Other operating income and expenses, net	(133)	(219)	(39.4)
Income and expenses on insurance and reinsurance contracts	158	181	(12.8)
Gross income	4,054	4,477	(9.5)
Administration costs	(1,793)	(1,875)	(4.4)
Depreciation and amortization	(100)	(104)	(3.3)
Net margin before provisions	2,160	2,498	(13.5)
Impairment losses on financial assets, net	(526)	(614)	(14.2)
Provisions or reversal of provisions	(82)	(71)	15.2
Operating profit/(loss) before tax	1,552	1,814	(14.4)
Tax expense or income related to profit or loss from continuing operations	(487)	(565)	(13.8)
Profit from continuing operations	1,065	1,248	(14.7)
Profit from corporate operations, net	-	-	-
Profit	1,065	1,248	(14.7)
Profit attributable to non-controlling interests	(294)	(343)	(14.2)
Profit attributable to parent company	771	905	(14.9)

140

All the currencies of the region depreciated in average terms against the euro compared with the year ended December 31, 2015 and resulted in a negative impact on the results of operations of the South America operating segment for the year ended December 31, 2016 expressed in euro. See “―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”. In the year ended December 31, 2016, the Group used the estimated exchange rate of 1,893 Venezuelan bolivars per euro. See “Presentation of Financial Information―Venezuela”.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €2,930 million, an 8.5% decrease compared with the €3,202 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €572 million), which more than offset the increase in fees related to bills, receivables, checks and credit cards, particularly in Colombia and Argentina.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €634 million, an 11.6% decrease compared with the €718 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €131 million). Excluding this impact, net fees and commissions increased mainly as a result of an increase in credit and debit card commissions which generated an increase of €33 million, and, to a lesser extent, due to an increase in checks and bills receivables commissions which translated into a €26 million increase, partially offset by a €27 million decrease in other commissions. By country, the main variation was registered in Argentina where net fees and commissions, at constant exchange rates, increased by €19 million due to higher commissions as a result of local and regional incentives of VISA.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €464 million, a 22.0% decrease compared with the €595 million gain recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €172 million). By country, the main variation was registered in Colombia where net gains (losses) on financial assets and liabilities and exchange differences, net at constant exchange rates, decreased by €75 million due to the fair value measurement of our previously acquired stake in Credibanco.

141

Other operating income and expenses, net

Other net operating expenses of this operating segment for the year ended December 31, 2016 were €133 million, compared with the €219 million of other net operating expenses recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately € 121 million). Excluding this impact, the change in other operating income and expenses, net was mainly due to a €27 million decrease in other operating income. By country, the main variation was registered in Venezuela where other operating expenses, at constant exchange rates, increased by €30 million.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €1,793 million, a 4.4% decrease compared with the €1,875 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso (which had an estimated impact of approximately €348 million). Excluding this impact, administration costs increased mainly as a result of a €148 million increase in personnel expenses, and, to a lesser extent, due to a €118 million increase in other administrative expenses. Among the main variations, fixed remuneration increased the costs by €94 million, and IT expenses increased the costs by €24 million. All the changes were impacted by the high inflation in certain countries in the region. By country, the main variation was registered in Argentina where administration costs, at constant exchange rates, increased by €171 million mainly due to an increase in personnel expenses and other administrative expenses which was attributable in part to the high inflation.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 were €526 million, a 14.2% decrease compared with the €614 million recorded for the year ended December 31, 2015, mainly as a result of decreased impaired assets due to the decrease registered in the loan portfolio and the depreciation of the currencies of the region (which had an estimated impact of approximately €72 million). This decrease in impairment losses on financial assets was partially offset by the lower recovery of written-off assets. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.9% compared with 2.3% as of December 31, 2015. By country, the main variation was registered in Chile where impairment losses on financial assets, at constant exchange rates, decreased by €31 million.

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €82 million, a 15.2% increase compared with the €71 million provisions recorded for the year ended December 31, 2015, mainly as a result of higher provisions relating to restructuring costs related to the Group’s transformation process.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit before tax of this operating segment for the year ended December 31, 2016 amounted to €1,552 million, a 14.4% decrease compared with the operating profit of €1,814 million recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2016 was €487 million, a 13.8% decrease compared with the €565 million recorded for the year ended December 31, 2015, mainly as a result of the impact of the depreciation of the currencies of the region, particularly the Venezuelan bolivar and Argentine peso, and the lower operating profit before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €771 million, a 14.9% decrease compared with the €905 million recorded for the year ended December 31, 2015.

142

REST OF EURASIA

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	166	176	(5.9)
Net fees and commissions	194	170	13.8
Net gains (losses) on financial assets and liabilities and exchange differences, net	87	125	(30.3)
Other operating income and expenses, net	45	(6)	n.m.(1)
Gross income	491	465	5.7
Administration costs	(330)	(336)	(2.0)
Depreciation and amortization	(12)	(15)	(18.7)
Net margin before provisions	149	113	31.7
Impairment losses on financial assets, net	30	(4)	n.m.(1)
Provisions or reversal of provisions	23	(6)	n.m.(1)
Operating profit/(loss) before tax	203	103	96.4
Tax expense or income related to profit or loss from continuing operations	(52)	(33)	56.9
Profit from continuing operations	151	70	115.0
Profit from corporate operations, net	-	-	-
Profit	151	70	115.0
Profit attributable to non-controlling interests	-	-	-
Profit attributable to parent company	151	70	115.0

(1)   Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 amounted to €166 million, a 5.9% decrease compared with the €176 million recorded for the year ended December 31, 2015, mainly due to the low interest rate environment, leading to fewer transactions, as a result of macroeconomic conditions in the Eurozone.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 amounted to €194 million, a 13.8% increase compared with the €170 million recorded for the year ended December 31, 2015, mainly as a result of an increase in commissions which generated an increase of €18 million, and, to a lesser extent, due to an increase in securities fees which translated into a €9 million increase, partially offset by a €3 million decrease in contingent risk commissions.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €87 million, a 30.3% decrease compared with the €125 million gain recorded for the year ended December 31, 2015, mainly as a result of a lower contribution from trading income.

Other operating income and expenses, net

Other net operating income of this operating segment for the year ended December 31, 2016 was €45 million, compared with the €6 million of net expense recorded for the year ended December 31, 2015, mainly as a result of a €46 million increase in income from dividends received from CNCB.

143

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €330 million, a 2.0% decrease compared with the €336 million recorded for the year ended December 31, 2015, mainly as a result of a €13 million decrease in personnel expenses, partially offset by an increase in other administrative expenses of €7 million. Among the main variations, fixed remuneration costs decreased by €16 million, and remuneration based on equity instruments decreased such costs by €4 million.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 amounted to a €30 million gain, compared with the €4 million loss recorded for the year ended December 31, 2015, mainly as a result of the release of provisions in Portugal, Belgium and in the Corporate & Investment Banking unit for the European customers. The non-performing asset ratio of this operating segment as of December 31, 2016 was 2.7% compared with 2.5% as of December 31, 2015.

Operating profit/(loss) before tax

As a result of the foregoing, the operating profit before tax of this operating segment for the year ended December 31, 2016 amounted to €203 million, a 96.4% increase compared with the €103 million of operating profit recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax expense related to profit from continuing operations of this operating segment for the year ended December 31, 2016 was €52 million, a 56.9% increase compared with the €33 million expense recorded for the year ended December 31, 2015, mainly as a result of the higher operating income before tax.

Profit attributable to parent company

As a result of the foregoing, profit attributable to parent company of this operating segment for the year ended December 31, 2016 amounted to €151 million, a 115.0% increase compared with the €70 million recorded for the year ended December 31, 2015.

CORPORATE CENTER

	For The Year Ended December 31,
	2016	2015	Change
	(In Millions of Euros)		(In %)
Net interest income	(455)	(432)	5.5
Net fees and commissions	(110)	(88)	24.7
Net gains (losses) on financial assets and liabilities and exchange differences, net	357	163	118.8
Other operating income and expenses, net	197	192	2.9
Income and expenses on insurance and reinsurance contracts	(21)	(19)	9.4
Gross income	(31)	(183)	(83.0)
Administration costs	(569)	(595)	(4.4)
Depreciation and amortization	(307)	(237)	29.8
Net margin before provisions	(907)	(1,015)	(10.6)
Impairment losses on financial assets, net	(37)	(3)	n.m.(1)
Provisions or reversal of provisions	(139)	(154)	(9.5)
Operating profit/(loss) before tax	(1,084)	(1,172)	(7.6)
Tax expense or income related to profit or loss from continuing operations	293	402	(27.2)
Profit from continuing operations	(791)	(770)	2.7
Profit from corporate operations, net	-	(1,109)	(100.0)
Profit	(791)	(1,880)	(57.9)
Profit attributable to non-controlling interests	(3)	(19)	(83.9)
Profit attributable to parent company	(794)	(1,899)	(58.2)

144

(1)   Not meaningful.

Net interest income

Net interest income of this operating segment for the year ended December 31, 2016 was net interest expense of €455 million, a 5.5% increase compared with the €432 million of net interest expense recorded for the year ended December 31, 2015, primarily as a result of higher expenses related to the purchase price allocation of Catalunya Banc.

Net fees and commissions

Net fees and commissions of this operating segment for the year ended December 31, 2016 was an expense of €110 million, a 24.7% increase compared with the €88 million expense recorded for the year ended December 31, 2015.

Net gains (losses) on financial assets and liabilities and exchange differences, net

Net gains on financial assets and liabilities and exchange differences, net of this operating segment for the year ended December 31, 2016 were €357 million, a 118.8% increase compared with the €163 million gain recorded for the year ended December 31, 2015, mainly as a result of higher gains of the ALCO management.

Other operating income and expenses, net

Other net operating income of this operating segment for the year ended December 31, 2016 was €197 million, a 2.9% increase compared with the €192 million of operating income recorded for the year ended December 31, 2015, mainly as a result of the purchase price allocation of the current business of the insurance companies of Catalunya Banc(which contributed €9 million), partially offset by a €13 million decrease in the share of profit or loss of entities accounted for using the equity method.

Income and expenses on insurance and reinsurance contracts

Expenses on insurance and reinsurance contracts of this operating segment for the year ended December 31, 2016 were €21 million, a 9.4% increase compared with expenses of €19 million recorded for the year ended December 31, 2015.

Administration costs

Administration costs of this operating segment for the year ended December 31, 2016 were €569 million, a 4.4% decrease compared with the €595 million recorded for the year ended December 31, 2015, mainly as a result of a €49 million decrease in other administrative expenses, partially offset by an increase in personnel expenses. Among the main variations, branch allocation expenses decreased the costs by €70 million, and lower redundancy expenses decreased the costs by €21 million.

Impairment losses on financial assets, net

Impairment losses on financial assets, net of this operating segment for the year ended December 31, 2016 was a loss of €37 million, compared with the €3 million recorded for the year ended December 31, 2015, mainly as a result of higher impairment of debt securities and higher country risk loan-loss provisions.

Provisions or reversal of provisions

Provisions of this operating segment for the year ended December 31, 2016 totaled €139 million, an 9.5% decrease compared with the €154 million provisions recorded for the year ended December 31, 2015 due to lower provisions for early retirements.

145

Operating profit/(loss) before tax

As a result of the foregoing, operating loss before tax of this operating segment for the year ended December 31, 2016 was €1,084 million, compared with the €1,172 million loss recorded for the year ended December 31, 2015.

Tax expense or income related to profit or loss from continuing operations

Tax income related to loss from continuing operations of this operating segment for the year ended December 31, 2016 amounted to €293 million, compared with the €402 million of income recorded for the year ended December 31, 2015, mainly as a result of a lower operating loss before tax. In addition, in 2015 there were higher tax deductions as a result of the sale of participations.

Profit from corporate operations, net

There was no profit from corporate operations, net of this operating segment for the year ended December 31, 2016, whereas there was a €1,109 million loss recorded for the year ended December 31, 2015, which resulted from the sale of the 6.43% stake in CNCB.

Profit attributable to parent company

As a result of the foregoing, the profit attributable to parent company of this operating segment for the year ended December 31, 2016 was a loss of €794 million, compared with the €1,899 million loss recorded for the year ended December 31, 2015.

B.   Liquidity and Capital Resources

Liquidity risk management and controls are explained in Note 7.5.1 to the Consolidated Financial Statements. In addition, information on encumbered assets is provided in Note 7.5.2 to the Consolidated Financial Statements. For information concerning our short-term borrowing, see “Item 4. Information on the Company—Selected Statistical Information—Liabilities—Short-term Borrowings”.

Liquidity and finance management of the BBVA Group’s balance sheet seeks to fund the 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 and finance management is the financial independence of its banking subsidiaries. This aims to ensure that the cost of liquidity is correctly reflected in price formation. Accordingly, we maintain a liquidity pool at an individual LMU level at each of Banco Bilbao Vizcaya Argentaria, S.A. and our banking subsidiaries, including BBVA Compass, BBVA Bancomer, Garanti and our Latin American subsidiaries.

The table below shows the composition of the liquidity pool of Banco Bilbao Vizcaya Argentaria, S.A. and each of our significant subsidiaries as of December 31, 2017:

	BBVA Eurozone (1)	BBVA Bancomer	BBVA Compass	Garanti	Others
	(In Millions of Euros)
Cash and balances with central banks	15,634	8,649	2,150	6,692	6,083
Assets for credit operations with central banks	47,429	5,731	24,039	5,661	6,333
Central governments issues	26,784	3,899	2,598	5,661	6,274
Of Which: Spanish government securities	20,836	-	-	-	-
Other issues	20,645	1,831	7,023	-	58
Loans	-	-	14,417	-	-
Other non-eligible liquid assets	7,986	575	621	1,607	345
Accumulated available balance	71,050	14,955	26,810	13,959	12,761
Average balance	67,823	13,896	27,625	13,862	13,211

146

(1)It includes Spain, Portugal and Rest of Eurasia.

Management of liquidity and structural finance within the BBVA Group is based on the principle of the financial autonomy of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability in periods of high risk. This decentralized management also helps avoid possible contagion due to a crisis that could affect only one or several BBVA Group entities, which must cover their liquidity needs independently in the markets where they operate. Liquidity Management Units (LMUs) have been set up for this reason in the geographical areas where the main foreign subsidiaries operate, and also for the parent company of the Group (Banco Bilbao Vizcaya Argentaria, S.A.), within the Euro currency scope, which LMU includes BBVA Portugal and Rest of Eurasia.

 The Finance Division, through Global Asset Liabilities Management (ALM) manages the BBVA Group’s liquidity and funding. It plans and executes the funding of the long-term structural gap of each LMU and proposes to ALCO the actions to adopt in this regard in accordance with the policies and limits established by the Executive Committee.

 As a first core element, the Bank’s targets in terms of liquidity and funding risk are centered on the Liquidity Coverage Ratio (LCR) and the Loan-to-Stable-Customer-Deposits (LtSCD) ratio. LCR is a regulatory measurement aimed at ensuring entities’ resilience in a scenario of liquidity stress within a time horizon of 30 days. BBVA, within its risk appetite framework and its limits and alerts schemes, has established a requirement for compliance with the LCR ratio both for the Group as a whole and for each of the LMUs individually. The internal levels required were designed to comply in advance with the implementation of the regulatory requirements of 2018, at a level above 100%.

LCR came into force in Europe on October 1, 2015, with an initial 60% minimum requirement, progressively increased (phased-in) up to 100% in 2018. Throughout 2017, LCR at the BBVA Group remained above 100%. As of December 31, 2017, LCR was 128%.

Although this regulatory requirement is mandatory at a group level for Eurozone banks, the LCR of all of our banking subsidiaries exceeded 100% as of December 31, 2017. Liquidity excesses in subsidiaries are not deemed to be transferable to other subsidiaries when calculating the consolidated LCR. Excluding High Quality Liquid Assets (HQLA), our consolidated LCR was 149% as of December 31, 2017, 21% above the required LCR.

For the purpose of establishing the (maximum) target levels for LtSCD in each LMU and providing an optimal funding structure reference in terms of risk appetite, Global Risk Management (“GRM”)-Structural Risks identifies and assesses the economic and financial variables that condition the funding structures in the various geographical areas. The behavior of the indicators reflects that the funding structure remained robust in 2017 and 2016, in the sense that all the LMUs maintained levels of self-funding with stable customer funds which were higher than the required levels.

The second core element in liquidity and funding risk management is the achievement of proper diversification of the funding structure, avoiding excessive reliance on short-term funding and establishing a maximum level of short-term borrowing comprising both wholesale funding as well as less stable funds from non-retail customers. Regarding long-term funding, its maturity profile does not show significant concentrations, which contributes to the adaptation of the anticipated securities issuance schedule to financial conditions of the markets. Moreover, concentration risk is monitored at the LMU level, with a view to ensuring the right diversification both by counterparty and by instrument type.

The third element promotes the short-term resilience of the liquidity risk profile, helping ensure that each LMU has sufficient collateral to address the risk of wholesale markets closing. Basic Capacity is the short-term liquidity risk management and control metric that is defined as the relationship between the available explicit assets, such as collaterals for central banks, and the maturities of wholesale liabilities and volatile funds, at different terms, with special relevance being given to 30-day maturities.

Our principal source of funds is our customer deposit base, which consists primarily of demand, savings and time deposits. In addition to relying on our customer deposits, we also access the interbank market (overnight and time deposits) and domestic and international capital markets for our additional liquidity requirements. To access the

147

capital markets, we have in place a series of domestic and international programs for the issuance of commercial paper and medium- and long-term debt. Another source of liquidity is our generation of cash flow from our operations. Finally, we supplement our funding requirements with borrowings from the Bank of Spain and from the ECB or the respective central banks of the countries where our subsidiaries are located. See Note 9 to the Consolidated Financial Statements for information on our borrowings from central banks.

The following table shows the balances as of December 31, 2017, 2016 and 2015 of our principal sources of funds (including accrued interest, hedge transactions and issue expenses):

		As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Deposits from central banks	37,054	34,740	40,087
Deposits from credit institutions	54,516	63,501	68,543
Customer deposits	376,379	401,465	403,362
Debt certificates	63,915	76,375	81,980
Other financial liabilities	11,850	13,129	12,141
Total	543,714	589,210	606,113

 Customer deposits

Customer deposits amounted to €376,379 million as of December 31, 2017, compared with €401,465 million as of December 31, 2016 and €403,362 million as of December 31, 2015.

Our customer deposits, excluding assets sold under repurchase agreements, amounted to €367,300 million as of December 31, 2017 compared with €387,974 million as of December 31, 2016 and €380,094 million as of December 31, 2015.

The decline in customer deposits in 2017 was mainly as a result of the reclassification as non-current assets and liabilities held for sale of the assets and liabilities of BBVA Chile and the real estate business in Spain as a result of the agreements entered into with Scotiabank and Cerberus, respectively. See “Item 4. Information on the Company—History and Development of the Company—Capital Divestitures—2017—Agreement for the creation of a joint venture and transfer of the real estate business in Spain”. 

Amounts due to credit institutions

Amounts due to credit institutions, including central banks, amounted to €91,570 million as of December 31, 2017, compared with €98,241 million as of December 31, 2016 and €108,630 million as of December 31, 2015. The decrease as of December 31, 2017 compared with December 31, 2016, was mainly attributable to the lower volume of deposits from credit institutions, as a result of the reclassification as non-current assets and liabilities held for sale of the assets and liabilities of BBVA Chile as a result of the agreement entered into with Scotiabank.

		As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Deposits from credit institutions	54,516	63,501	68,543
Deposits from central banks	37,054	34,740	40,087
Total	91,570	98,241	108,630

Capital markets

We make debt issuances in the domestic and international capital markets in order to finance our activities and as of December 31, 2017 we had €47,027 million of senior debt outstanding, comprising €42,561 million in bonds and debentures and €4,466 million in promissory notes and other securities, compared with €59,390 million, €58,173 million and €1,217 million outstanding as of December 31, 2016, respectively (€66,165 million, €65,517

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million and €648 million outstanding, respectively, as of December 31, 2015). See Note 22.4 to the Consolidated Financial Statements.

In addition, we had a total of €17,153 million in subordinated debt and €163 million in preferred securities outstanding as of December 31, 2017, compared with €15,718 million and €987 million outstanding as of December 31, 2016, respectively.

The breakdown of the outstanding subordinated debt and preferred securities by issuer, maturity, interest rate and currency is disclosed in Appendix VI of the Consolidated Financial Statements.

The following is a breakdown as of December 31, 2017 of the maturities of our debt securities (including bonds) from credit institutions and subordinated liabilities. Regulatory equity instruments have been classified according to their contractual maturity:

	Demand	Up to 1 Month	1 to 3 Months	3 to 12 Months	1 to 5 Years	Over 5 Years	Total
	(In Millions of Euros)
Senior debt	29	1,831	4,688	3,403	31,348	5,837	47,026
Subordinated debt and preferred securities	109	-	4	69	4,378	12,755	17,316
Total	139	1,831	4,692	3,472	35,726	18,591	64,341

Generation of Cash Flow

We operate in Spain, Mexico, Turkey, the United States and over 30 other countries, mainly in Europe, Latin America, and Asia. Our banking subsidiaries around the world, including BBVA Compass, are subject to supervision and regulation by a variety of regulatory bodies relating to, among other things, the satisfaction of different solvency, resolution and/or governance requirements. The obligation to satisfy such requirements may affect the ability of our banking subsidiaries, including BBVA Compass, to transfer funds to us in the form of cash dividends, loans or advances. In addition, under the laws of the various jurisdictions where our subsidiaries, including BBVA Compass, are incorporated, dividends may only be paid out of funds legally available and, in certain cases, subject to the prior approval of the competent regulatory or supervisory authorities. For example, BBVA Compass is incorporated in Alabama and under Alabama law it is not able to pay any dividends without the prior approval of the Superintendent of Banking of Alabama if the dividend would exceed the total net earnings for the year combined with the bank’s retained net earnings of the preceding two years.

Even where any applicable requirements are met and funds are legally available, the relevant regulator could advise against the transfer of funds to us in the form of cash dividends, loans or advances, for prudence reasons or otherwise.

There is no assurance that in the future other similar restrictions will not be adopted or that, if adopted, they will not negatively affect our liquidity. The geographic diversification of our businesses, however, may help to limit the effect on the Group of any restrictions that could be adopted in any given country.

We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.

See Note 51 of the Consolidated Financial Statements for additional information on our consolidated statements of cash flows.

Capital

As of December 31, 2017 and 2016, equity is calculated in accordance with current regulation on minimum capital base requirements for Spanish credit institutions – both as individual entities and as a consolidated group. Such regulation dictates how to calculate such equity levels, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market.

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The minimum capital base requirements established by the current regulation are calculated according to the Group’s exposure to credit and dilution risk, counterparty and liquidity risk relating to the trading portfolio, exchange-rate risk and operational risk. In addition, the Group must fulfill the risk concentration limits established in said regulation and the internal corporate governance obligations.

As a result of the most recent SREP carried out by the ECB in 2017, we have been informed by the ECB that, effective from January 1, 2018, we are required to maintain (i) a CET1 phased-in capital ratio of 8.4375% (on a consolidated basis) and 7.875% (on an individual basis); and (ii) a phased-in total capital ratio of 11.9375% (on a consolidated basis) and 11.375% (on an individual basis).

This phased-in total capital ratio of 11.9375% on a consolidated basis includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%); (ii) the “Pillar 1” Additional Tier 1 capital requirement (1.5%); (iii) the “Pillar 1” Tier 2 capital requirement (2%); (iv) the additional CET1 capital requirement under “Pillar 2” (1.5%); (v) the capital conservation buffer (1.875% CET1); and (vi) the D-SIB buffer (0.5625% CET1).

Since BBVA was not part of the list of global systemically important financial institutions (which is updated every year by the Financial Stability Board (FSB)) as of January 1, 2018, the G-SIB buffer will not apply to BBVA in 2018. The FSB or the Bank of Spain may include BBVA in this list in the future.

However, the Bank of Spain announced on November 24, 2017 that the Bank will continue to be considered a D-SIB, and consequently the Bank is required to maintain a D-SIB buffer of a CET1 capital ratio of 0.75% on a consolidated basis. The D-SIB buffer is being phased-in from January 1, 2016 to January 1, 2019, with the result that the D-SIB buffer applicable to the Bank for 2018 is a CET1 capital ratio of 0.5625% on a consolidated basis.

Our consolidated ratios as of December 31, 2017 and December 31, 2016 were as follows:

	As of December 31,	As of December 31,	% Change
	2017	2016	2017-2016
	(In Millions of Euros)
Ordinary Tier I Capital	50,935	54,339	(6.3)
Adjustments	(8,594)	(6,969)	23.3
Mandatory convertible bonds	-	-	-
CORE CAPITAL ( a)	42,341	47,370	(10.6)
Preferred securities	6,296	6,496	(3.1)
Adjustments	(1,657)	(3,783)	(56.2)
CAPITAL (TIER I) (b)	46,980	50,083	(6.2)
OTHER ELIGIBLE CAPITAL (TIER II) ( c)	8,798	8,810	(0.1)
CAPITAL BASE (TIER I + TIER II) ( d)	55,778	58,893	(5.3)
Minimum capital requirement	29,030	31,116	(6.7)
CAPITAL SURPLUS	26,748	27,777	(3.7)
RISK WEIGHTED ASSETS (RWA) ( e)	362,875	388,951	(6.7)
BIS RATIO (d)/( e)	15.37%	15.14%
CORE CAPITAL (a)/ ( e)	11.67%	12.18%
TIER I (b)/ ( e)	12.95%	12.88%
TIER II ( c)/( e)	2.42%	2.27%

As of December 31, 2017, the phased-in Common Equity Tier 1 (CET1) stood at 11.67%, decreasing by 51 basis points with respect to December 31, 2016. This decrease was mainly attributable to the phase-in calendar concerning minority interests and deductions which increased to 80% in 2017 from 60% in 2016, which had a negative impact of 57 basis points in the year-on-year change. In addition, the CET1 ratio was adversely affected by corporate transactions carried out during 2017, in particular the acquisition of an additional 9.95% stake in Garanti and the sale of a 2.14% stake in CNCB. Both transactions had a combined negative impact on the ratio of 13 basis points. These effects were partially offset by the organic generation of capital as a result of the increased profit, net of dividends paid and remunerations.

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The recognition of impairment losses of €1,123 million in connection with our stake in Telefónica, S.A. in 2017 had no impact on our equity or the capital ratios since these unrealized losses were already accounted for.

During 2017, the BBVA Group continued to strengthen its capital position with the issuance of two series of new perpetual securities contingently convertible into shares, classified as additional Tier 1 equity instruments (contingent convertible securities) amounting to €500 million and $1,000 million, respectively. The amount of the latter issuance was not included in the Group’s Tier 1 capital as of December 31, 2017 as the required authorization from the supervisor for its inclusion had not been received as of such date. This authorization was received at the start of 2018.

Regarding Tier 2 instruments, in 2017 Banco Bilbao Vizcaya Argentaria, S.A. issued subordinated debt in an aggregate amount of €1,500 million, and Garanti issued subordinated debt in an aggregate amount of $750 million.

Finally, the total phased-in capital ratio stood at 15.37% as of December 31, 2017, reflecting the effects discussed above.

These levels were above the requirements established by the ECB in its SREP letter and the systemic buffers applicable to the BBVA Group for the CET1 ratio in 2017 (11.125%).

Risk-weighted assets as of December 31, 2017 decreased by approximately 6.7% compared to December 31, 2016, mainly as a result of the depreciation of certain local currencies and the efficient management and allocation of capital in line with the strategic objectives of the Group.

C.   Research and Development, Patents and Licenses, etc.

In 2017, we continued to foster the use of new technologies as a key component of our global development strategy. We explored new business and growth opportunities, focusing on three major areas: emerging technologies; digital banking; and data driven initiatives, in each case with the customer as the focal point of our banking business.

The BBVA Group is not materially dependent on the issuance of patents, licenses and industrial, mercantile or financial contracts or on new manufacturing processes in carrying out its business purpose.

D.   Trend Information

The European financial services sector is expected to remain competitive in the current challenging environment. Further consolidation in the sector through mergers, acquisitions or alliances, might be possible. Some banks have exited some lines of their non-core businesses and activities.

There are four main trends that are expected to shape the sector profitability in the future: the slow economic recovery, the low (or even negative) interest rate environment, the surge of alternative finance providers and the completion and the implementation of the already existing financial regulatory reforms. At the same time there are new and evolving risks, such as market based and asset management activities, misconduct risks and the decline of correspondent banking, among others.

For a discussion on the slow economic recovery trend, see “―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Operating Environment”. Regarding the second trend, the impact of the ultra-expansionary monetary policy is significant in the sector’s results, where the reductions of credit interest rates cannot be compensated by a similar contraction of the deposit rates as customers are not accustomed to negative deposit rates and that funding source is crucial for banks. This is particularly important in a country like Spain, where mortgages account for a significant proportion of credit (more than 40%) and nine out of 10 mortgages are estimated to be on variable rates. Further, alternative finance providers are growing very fast in line with technological advances and becoming a very important competitor for the banking industry (see also “Item 4. Information on the Company―Competition”). These entities, which form part of the shadow

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banking sector, do not have to comply with a regulation scheme as strict as that applicable to banks. Finally, regarding the fourth trend, it is possible that, in the framework of the banking union and in the inception of the capital markets union, regulatory changes and enhanced institutional architecture might contribute to a more competitive and less fragmented landscape. Having said that, a comprehensive analysis and understanding of the already implemented regulatory changes would be needed before the introduction of new measures.

There are still some challenges to be addressed, such as the banking conduct and culture and their implications on consumer and investor protection issues. An ethical behavior is of the utmost importance for the banking business to recover the trust that was lost during the last financial crisis.

Financial stability and consumer protection are the final goals of the global financial regulatory reform that started nine years ago. However, if such reform is applied locally, inconsistently and heterogeneously, it can lead to divergences, regulatory inconsistencies and regulatory arbitrages with unintended consequences. In addition to that, the lack of homogeneity at the European level makes it difficult for investors to evaluate financial institutions and often impose additional burdens on financial institutions. This could reduce the potential synergies for the Group, as it might not be allowed to sell the same products across all the jurisdictions in which it carries out its activities.

Regarding consumer protection rules, the European Commission proposed on February 10, 2016 the application of the revised Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) of the European Parliament and of the European Council be delayed by one year until January 3, 2018. Six days later, the European Parliament also proposed the deferral of its transposition into national legislation for one year, until July 3, 2017. This decision responded to concerns expressed by the European Securities and Markets Authority (the “ESMA”) regarding the fact that neither the competent authorities, nor market participants, would have the necessary information technology systems ready in time for earlier implementation.

Broadly, MiFID II / MiFIR goals are fostering investor protection, enhancing market transparency, multilateral trading (instead of bilateral or OTC trading) and competition and improving corporate governance and compliance, all at the same time. It represents a significant overhaul of MiFID -that came into force in 2007- and will have a significant impact in European markets and all types of financial instruments, both equity and non-equity. It represents a significant effort in terms of costs for regulators, supervisors and financial entities to adapt their systems to the new requirements.

For fostering investor protection, MiFID II / MiFIR establish (i) stricter requirements for product design, distribution and follow-up; (ii) tougher conditions for the provision of independent services; (iii) the prohibition, subject to certain exceptions, of any remuneration, discount or non-monetary benefit in exchange for advisory services, including research and (iv) a detailed cost disclosure.

The greater pre-trade transparency and multilateral trading in markets might result in narrower margins due to a compression of spreads and in a change of paradigm in the competitive landscape. In addition, the higher post-trade transparency may have unintended consequences as a result of the availability of public information related to transactions closed on book positions.

Another key regulation for consumer protection in Europe is the Packaged Retail and Insurance-based Investment Products (“PRIIPs”). The original proposal from the European Commission was released on July 3, 2012 and the regulation on Key Information Documents (“KIDs”) for PRIIPS was passed and published in the Official Journal of the EU on November 26, 2014 and was expected to become effective on January 1, 2017. However, the Commission decided to extend by one year the implementation of the PRIIPS regulation in order to align its implementation with MiFID II and assure a smooth implementation for European consumers and ensure legal certainty for the sector.

 The PRIIPs regulation aims at increasing transparency and comparability among investment products. As such, financial institutions have to provide consumers with the most relevant information to make their investment decisions with a clear understanding of all the risks, costs and possible performance scenarios involved. The European Supervisory Authorities (“ESAs”) launched a Joint Consultation Paper on November 10, 2015 with the proposed Regulatory Technical Standards (RTS) that define the Level 2 requirements of the PRIIPs Regulation, including both presentation and content of the KIDs. On June 30, 2016 the Commission adopted a delegated act setting the RTS specifying the content and underlying methodology of the KIDs. However, on September 14, 2016

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the European Parliament voted down the delegated act and called for certain modifications. The final version of the RTS was published in the Official Journal of the EU on April 8, 2017 and is in effect from January 1, 2018.

Furthermore, there are other challenges to be mentioned within the Euro Area such as the possibility of several countries imposing new taxes on the financial industry (such as bank levies, financial activity taxes or FTT). In addition, there is an agreement to introduce a FTT at the European Union level. Such proposal was made by the European Commission for introducing a tax within eleven Member States of the European Union. The introduction of such tax was initially expected by January 1, 2014 but it was later postponed to January 1, 2016, then to mid-2016 and is now stalled because it lost the support of one Member State.

Differing tax regimes could set incentives for banks to operate, or transactions to take place, in those geographies where the tax pressure is lower. The implementation of new regulations in countries where we operate which results in increased tax pressure could have a material impact on our profitability.

The Bank Recovery and Resolution Directive (BRRD) is binding since January 2015, and the bail-in tool since 2016. The BRRD sets a common framework for all EU countries with the intention to pre-empt bank crises and resolve financial institutions in an orderly manner in the event of failure, whilst preserving essential bank operations and minimizing taxpayers’ costs, thus helping to restore confidence in Europe’s financial sector. The bail-in tool implies that a bank’s creditors will be written-down or converted into equity in a resolution scenario, and that they should afford much of the burden to help recapitalize a failed bank instead of taxpayers. For that to be effective, the BRRD requires banks to have enough liabilities that could be eligible to bail-in – the Minimum Required Eligible Liabilities (MREL). Despite the impact on banks’ liability structure, we believe the introduction of the bail-in tool and the MREL enhances banks’ fundamentals, encourages positive discrimination between issuers, breaks down the sovereign-banking link and increases market discipline.

The EBA submitted on December 14, 2016 its final report on the implementation and design of the MREL framework, which contains a number of recommendations to amend the current MREL framework. Additionally, the EU Banking Reforms contain the legislative proposal of the European Commission for the amendment of the MREL framework and the implementation of the TLAC standards.

The legislative proposal which is currently under negotiations in the EU Council and the EU Parliament, is aimed at amending both the current banking prudential and resolution frameworks. The revision includes the implementation of several international standards into EU law (some regulatory pieces adopted by the Basel Committee after 2010 and the TLAC standard) and the introduction of a package of technical improvements. In parallel, a legislative proposal to harmonize creditor hierarchy of senior debt across the EU was approved through a fast track process at the end of 2017. EU Member States must transpose this in order to align their creditor hierarchies by creating a new class of debt “senior non-preferred debt” which ranks below traditional senior debt but above subordinated debt. This new class of liabilities will be fully eligible to count towards banks’ MREL requirements.

The negotiations for the rest of the package are not expected to conclude before the end of 2018, following which Member States will have at least one year to transpose or to comply with the directives and regulations. Therefore, at this stage, there is still uncertainty concerning important matters such as the definitive calibration of MREL for EU banks.

E.   Off-Balance Sheet Arrangements

In addition to loans, we had outstanding the following amounts of our off-balance sheet arrangements as of the dates indicated:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Bank guarantees	38,889	39,722	39,971
Letters of credit	8,781	10,210	9,367
Total financial guarantees given	47,671	49,932	49,338

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In addition to the off-balance sheet arrangements described above, the following tables provide information regarding commitments to extend credit and assets under management as of December 31, 2017, 2016 and 2015:

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Credit institutions	946	859	921
Government and other government agencies	2,198	3,110	2,570
Other resident sectors	32,990	28,323	27,334
Non-resident sector	58,133	74,961	92,795
Total contingent liabilities	94,268	107,253	123,620
Total contingent risks and contingent liabilities	141,939	157,185	172,958

	As of December 31,
	2017	2016	2015
	(In Millions of Euros)
Mutual funds	60,939	55,037	54,419
Pension funds	33,985	33,418	31,542
Customer portfolios	36,901	40,805	42,074
Other resources	3,081	2,831	3,786
Total assets under management	134,906	132,091	131,822

See Notes 33 and 36 to the Consolidated Financial Statements for additional information with respect to our off-balance sheet arrangements.

F.   Tabular Disclosure of Contractual Obligations

Our consolidated contractual obligations as of December 31, 2017 based on when they are due, were as follows:

	Less Than One Year	One to Three Years	Three to Five Years	Over Five Years	Total
	(In Millions of Euros)
Senior debt	9,841	11,927	19,421	5,837	47,026
Subordinated debt and preferred securities	182	1,429	2,950	12,755	17,316
Deposits from customers	341,447	14,932	4,349	15,650	376,380
Capital lease obligations	-	-	-	-	-
Operating lease obligations	343	301	531	2,410	3,584
Purchase obligations	29	-	-	-	29
Post-employment benefits (1)	871	1,504	1,165	1,982	5,522
Insurance commitments (2)	1,560	1,119	1,502	5,042	9,223
Total (3)	354,274	31,213	29,917	43,676	459,080

(1)Represents the Group’s estimated aggregate amounts for pension commitments in defined-benefit plans and other post-employment commitments (such as early retirement and welfare benefits), based on certain actuarial assumptions. Post-employment benefits are detailed in Note 25 to the Consolidated Financial Statements.

(2)Liabilities under insurance and reinsurance contracts.

(3)The majority of the senior and subordinated debt was issued at fixed rates (see Note 22.4 to the Consolidated Financial Statements). Floating-rate amounts were calculated based on the conditions prevailing as of December 31, 2017. The

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financial cost of such issuances for 2017, 2016 and 2015 is detailed in Note 37.2 to the Consolidated Financial Statements.

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Our Board of Directors is committed to a good corporate governance system in the design and operation of our corporate bodies in the best interests of the Company and our shareholders.

Our Board of Directors is subject to Board Regulations that reflect and implement the principles and elements of BBVA’s concept of corporate governance. These Board Regulations comprise standards for the internal management and operation of the Board and its Committees, as well as the rights and obligations of directors in the performance of their duties, which are contained in the directors’ charter.

General shareholders’ meetings are subject to their own set of regulations on issues such as how they operate and what rights shareholders enjoy regarding such meetings. These establish the possibility of exercising or delegating votes over remote communication media.

Our Board of Directors has approved a report on corporate governance and a report on directors’ remuneration for 2017, according to the forms set forth under Spanish regulation for listed companies.

Shareholders and investors may find the documents referred to above on our website (www.bbva.com).

Our website was created as an instrument to facilitate information and communication with shareholders. It provides special direct access to all information considered relevant to BBVA’s corporate governance system in a user-friendly manner. In addition, all the information required by article 539 of the Corporate Enterprises Act can be accessed on BBVA’s website (www.bbva.com).

A.       Directors and Senior Management

We are managed by a Board of Directors that, once the pending acceptances and approvals indicated below (see “—The Board of Directors”), are obtained, will be composed of 15 members.

Pursuant to article 1 of the Board Regulations, Bank directorships may be executive or non-executive. Executive directors are those who perform management functions in the Company or its Group entities, regardless of the legal relationship they have with such companies. All other Board members will be considered non-executives and they may be proprietary, independent or other external directors.

Independent directors are those non-executive directors who have been appointed in view of their personal and professional background who can perform their duties without being constrained by their relations with the Company or its Group, its significant shareholders or its executives. Under the Board Regulations, directors cannot be deemed independent if they:

(a)  have been employees or executive directors in Group companies, unless threeor five years have elapsed, respectively since they ceased as employees or executive directors, as the case may be;

(b)  receive from the Company or its Group entities, any amount or benefit for an item other than remuneration for their directorship, except where the sum is insignificant. This does not include either dividends or pension supplements that a director may receive due to a former professional or employment relationship, provided these are unconditional and, consequently, the company paying them may not at its own discretion, suspend, amend or revoke their accrual unless there has been a breach of duty;

(c)  are partners of the external auditor or in charge of the audit report or have been so in the last three years, whether the audit in question was carried out on the Company or any other Group entity;

(d)  are executive directors or senior managers of another company in which a Company’s executive director or senior manager is an external director;

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(e)  maintain any significant business relationship with the Company or with any Group company or have done so over the last year, either in their own name or as a significant shareholder, director or senior manager of a company that maintains or has maintained such a relationship. Business relationship here means any relationship as supplier of goods or services, including financial goods or services, and as advisor or consultant;

(f)  are significant shareholders, executive directors or senior managers of any entity that receives, or has received over the last three years,donations from the Company or its Group. Those persons who are merely trustees in a foundation receiving donations shall not be deemed to be included under this letter;

(g)  are spouses, or spousal equivalents or related up to second degree of kinship to an executive director or senior manager of the Company;

(h)  have not been proposed by the Appointments Committee for appointment or renewal;

(i)   have held a directorship for a continuous period of more than 12 years; or

(j)   are related to any significant shareholder or shareholder represented on the Board of Directors under any of the circumstances described under letters (a), (e), (f) or (g) above. In the event of kinship relationships mentioned in letter (g), the limitation will apply not only with respect to the shareholder, but also with respect to their proprietary directors in the company in which the shareholder holds an interest.

Directors who hold shares in the Bank may be considered independent provided they comply with the above conditions and their shareholding is not legally considered to be significant.

Regulations of the Board of Directors

The principles and elements comprising our corporate governance are set forth in our Board Regulations, which govern the internal procedures and the operation of the Board and its Committees and directors’ rights and duties as described in their charter.

The full text of the Board Regulations can be found on the Bank’s corporate website (www.bbva.com).

The following provides a brief description of several significant matters covered in the Regulations of the Board of Directors.

Performance of Directors’ Duties

Directors must comply with their duties as defined by legislation and by our Bylaws in a manner that is faithful to the interests of the Company.

They will participate in the deliberations, discussions and debates on matters submitted for their consideration, expressing their opposition when they consider that a draft resolution submitted to the Board may be contrary to the Company’s interests and will be appraised of the necessary information to be able to form their own opinions regarding questions corresponding to our corporate bodies. They may request any additional information and advice they require to comply with their duties. They must devote to their duties the time and effort which is necessary to perform them efficiently and they are obliged to attend the meetings of corporate bodies and of the Board Committees on which they sit, unless they can justify the reason for their absence.

The directors may also request the Board of Directors for assistance from external experts on matters subject to their consideration whose special complexity or importance so requires.

Conflicts of Interest

The rules comprising the BBVA directors’ charter detail different situations in which conflicts of interest could arise between directors, their family members and/or organizations with which they are linked, and the BBVA Group. They set out procedures for such cases, in order to avoid conduct contrary to our best interests. The rules contained in the BBVA Board of Directors’ charter are in line with the specific regulation established on the Spanish Corporate Enterprises Act.

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These rules help ensure directors’ conduct reflects stringent ethical codes, in keeping with applicable standards and according to core values of the BBVA Group.

Incompatibilities

Directors are also subject to the rules on limitations and incompatibilities established under the applicable regulations at any time and, in particular, to the provisions of Spanish Law 10/2014 and Circular 2/2016, of the Bank of Spain, for credit institutions on supervision and solvency. A director of BBVA may not be a director in companies in which the Group or any of the Group companies hold a stake, subject to the exceptions set forth below. Non-executive directors may hold a directorship in the Bank’s associated companies or in any other Group company provided the directorship is not related to the Group’s holding in such companies. As an exception and when proposed by the Bank, executive directors are able to hold directorships in companies directly or indirectly controlled by the Bank with the approval of the Executive Committee, and in other associated companies with the approval of the Board of Directors.

Directors may not provide professional services to enterprises competing with the Bank or any of the Group entities, unless they have received express prior authorization from the Board of Directors or the general shareholders’ meeting, as the case may be, or unless such services or activities were provided or performed before they became directors of the Bank, they do not involve effective competition with the Bank and they were reported to the Bank at the time of appointment.

Term of Directorships and Director Age Limit

Directors will stay in office for the term set out in our Bylaws (three years). If they have been co-opted, they will stay in office until the first general shareholders’ meeting is held. The general shareholders’ meeting may then ratify their appointment for the term of office established under our Bylaws.

BBVA’s Board of Directors Regulations establishes an age limit for sitting on the Bank’s Board. Directors must present their resignation at the first meeting of the Bank’s Board of Directors to be held after the general shareholders’ meeting that approves the accounts for the year in which they reach the age of seventy-five years.

Appointment and Re-election of Directors

The proposals that the Board submits to the Company’s general shareholders’ meeting for the appointment or re-election of directors and the appointments the Board makes directly to cover vacancies, exercising its powers of co-option will be approved at the proposal of the Appointments Committee in the case of independent directors, and following a report from said Committee for all other directors.

In all such cases the proposal must be accompanied by a report of the Board explaining the grounds on which the Board of Directors has assessed the competence, experience and merits of the candidate proposed, which will be attached to the minutes of the general shareholders’ meeting or of the Board of Directors.

To such end, the Appointments Committee will evaluate the balance of skills, knowledge and expertise on the Board of Directors, as well as the conditions that candidates should display to fill the vacancies arising, assessing the dedication necessary to be able to suitably perform their duties in view of the needs that the Company’s governing bodies may have at any time.

Directors’ Resignation and Dismissal

Furthermore, in the following circumstances, reflected in the Board Regulations, directors must place their office at the disposal of the Board of Directors and accept its decision regarding their continuity or non-continuity in office. Should the Board resolve they do not continue in office, they will be obliged to tender their resignation:

·when they are affected by circumstances of incompatibility or prohibition as defined under prevailing legislation, in our Bylaws or in the Board Regulations;

·when significant changes occur in their professional or personal situation that may affect the condition by virtue of which they were appointed to the Board of Directors;

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·when they are in serious dereliction of their duties as directors;

·when for reasons attributable to the director in his or her condition as such, serious damage has been done to the Company’s net worth, credit or reputation; or

·when they lose their suitability to hold the position of director of the Bank.

Evaluation

Article 17 of the Board Regulations indicates that the Board of Directors will assess the quality and efficiency of the Board’s operation and will assess the performance of the duties of the Chairman of the Board (process which will be led by the Lead Director). Such assessment will always begin with the report submitted by the Appointments Committee. Likewise, the Board will carry out the evaluation of the operation of its Committees, on the basis of the report that each Committee submits to the Board of Directors.

Moreover, article 5 of the Board Regulations establishes that the Chairman, who is responsible for the efficient running of the Board of Directors, will organize and coordinate the periodic assessment of the Board’s performance with the Chairs of the relevant Committees. Pursuant to the provisions of the Board Regulations, as in previous years, in 2017 the Board of Directors assessed the quality and efficiency of its own operation and of its Committees, as well as the performance of the duties of the Chairman both as Chairman of the Board and as first executive of the Bank.

The Board of Directors

Our 2018 annual general shareholders’ meeting held on March 16, 2018 approved to establish the number of members of the Board of Directors in 15. Currently, our Board of Directors comprises 13 members, including one member who was elected at such 2018 annual general shareholders’ meeting but whose suitability has not yet been approved by our supervisor (the ECB). Two additional individuals were elected to our Board at such meeting but have not yet accepted their appointment. As a result, as a Spanish corporate law matter, such individuals are not yet considered to be members of our Board of Directors. In addition, the suitability of such individuals has not yet been approved by our supervisor.

The following table sets forth the names of the members of the Board of Directors as of that date of this Annual Report on Form 20-F, their date of appointment and, if applicable, re-election, their current positions and their present principal outside occupation and main employment history.

Name	Birth Year	Current Position	Date Nominated	Date Re-elected	Present Principal Outside Occupation and Employment History(*)
Francisco González Rodríguez(1)	1944	Group Executive Chairman	January 28, 2000	March 11, 2016	Chairman of the Board of Directors and Group Executive Chairman of BBVA since January 2000; Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer.
Carlos Torres Vila (1) (6)	1966	Chief Executive Officer	May 4, 2015	March 11, 2016	Chief Executive Officer of BBVA since May 2015. Chairman of the Technology and Cybersecurity Committee. Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer. He started at BBVA on September 2008 holding senior management posts such as Head of Digital Banking from March 2014 to May 2015 and BBVA Strategy & Corporate Development Director from January 2009 to March 2014.
Tomás Alfaro Drake(6) (4)	1951	External Director	March 18, 2006	March 17, 2017	Director of Internal Development and Professor in the Finance department of Universidad Francisco de Vitoria.
José Miguel Andrés Torrecillas (2) (3) (5) (7)	1955	Independent Director	March 13, 2015	March 16, 2018	Chairman of the Audit and Compliance Committee. Chairman of Ernst & Young Spain from 2004 to 2014, where he was a partner since 1987 and also held a series of senior offices, including Director of the Banking Group from 1989 to 2004 and Managing Director of the Audit and Advisory practices at Ernst & Young Italy and Portugal from 2008 to 2013.
Belén Garijo López (2) (4)	1960	Independent Director	March 16, 2012	March 16, 2018	Chair of the Remuneration Committee. Member of the Executive Board of Merck Group and CEO of Merck Healthcare, member of the Board of Directors of L’Oréal and Chair of the International Executive Committee of PhRMA, ISEC (Pharmaceutical Research and Manufacturers of America).
José Manuel González-Páramo Martínez-Murillo	1958	Executive Director	May 29, 2013	March 17, 2017	Executive Director of BBVA since May 2013. Member of the European Central Bank (ECB) Governing Council and Executive Committee from 2004 to 2012. Chairman of European DataWarehouse GmbH. Head of BBVA’s Global Economics, Regulation and Public Affairs Area.
Sunir Kumar Kapoor (6)	1963	Independent Director	March 11, 2016	Not applicable	President and CEO of UBmatrix Inc from 2005 to 2011. Executive Vice President and CMO of Cassatt Corporation from 2004 to 2005. Oracle Corporation, Vice President Collaboration Suite from 2002 to 2004. Founder and CEO of Tsola Inc from 1999 to 2001. President and CEO of E-Stamp Corporation from 1996 to 1999. Vice President of Strategy, Marketing and Planning of Oracle Corporation from 1994 to 1996. Currently, he is an independent consultant to various leading companies in the technology sector, such as cloud infrastructures or data analysis.
Carlos Loring Martínez de Irujo(1) (5) (4)	1947	External Director	February 28, 2004	March 17, 2017	Was Partner of J&A Garrigues from 1977 to 2004, where he has also held a series of senior offices, including Director of M&A Department, Director of Banking and Capital Markets Department and member of its Management Committee.
Lourdes Máiz Carro (2) (3) (4)	1959	Independent Director	March 14, 2014	March 17, 2017	Was Secretary of the Board of Directors and Director of Legal Services at Iberia, Líneas Aéreas de España from 2001 until 2016. Joined theSpanish State Counsel Corps (Cuerpo de Abogados del Estado) and from 1992 until 1993 she was Deputy to the Director in the Ministry of Public Administration. From 1993 to 2001 held various senior positions in the Public Administration.
José Maldonado Ramos(1)(3) (5)	1952	External Director	January 28, 2000	March 16, 2018	Was appointed Director and General Secretary of BBVA in January 2000. Took early retirement as Bank executive in December 2009.

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Juan Pi Llorens (2) (5) (6)	1950	Independent Director	July 27, 2011	March 16, 2018	Chairman of the Risk Committee. Had a professional career at IBM holding various senior posts at a national and international level including Vice President for Sales at IBM Europe, Vice President of Technology & Systems Group at IBM Europe and Vice President of the Finance Services Sector at GMU (Growth Markets Units) in China. He was executive President of IBM Spain.
Susana Rodríguez Vidarte (1)(3)(5)	1955	External Director	May 28, 2002	March 17, 2017	Professor of Strategy at the Faculty of Economics and Business Sciences at Universidad de Deusto. Doctor in Economic and Business Sciences from Universidad de Deusto.
Jan Paul Marie Francis Verplancke (**)	1963	Independent Director	March 16, 2018	Not applicable	Was Director, Chief Information Officer, Group Head of Technology and Banking Operations, of Standard Chartered Bank, between 2004 and 2015. Before that, he held several positions in multinational companies, such as Vicepresident of Technology and Chief Information Officer, in the EMEA region of Dell (1999-2004) and Vicepresident of Information of the Youth Category (USA) of Levi Strauss (1998-1999).
(*)                Where no date is provided, the position is currently held. (**)              Appointed as director in the 2018 annual general shareholders’ meeting held on March 16, 2018. As of the date of this Annual Report, the approval by our supervisor (the ECB) of Mr. Verplancke’s suitability as member of the Board is still pending. (1)                Member of the Executive Committee. (2)                Member of the Audit and Compliance Committee. (3)                Member of the Appointments Committee. (4)                Member of the Remuneration Committee. (5)                Member of the Risk Committee. (6)                Member of the Technology and Cybersecurity Committee. (7)                Lead Director.

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Additionally, the Bank’s 2018 annual general shareholders’ meeting held on March 16, 2018 resolved to appoint:

Jaime Félix Caruana Lacorte, who was born in 1952, and will foreseeably have the condition of independent director of the Bank. He was General Director of the Bank of International Settlements (BIS) between 2009 and 2017. Between 2006 and 2009 he was Head of the Monetary, Capital Markets Department and Financial Counselor and General Manager at the International Monetary Fund (IMF), he was Chair of the Basel’s Banking Supervision Committee between 2003 and 2006, he was Governor of the Bank of Spain between 2000 and 2006, and he was General Manager of Banking Supervision at the Bank of Spain between 1999 and 2000.

Ana Cristina Peralta Moreno, who was born in 1961, and will foreseeably have the condition of independent director of the Bank. She was General Director of Risks and Member of the Management Committee of Banco Pastor, between 2008 and 2011. Before that, she held several positions at Bankinter, including Chief Risk Officer and Member of the Management Committee between 2004 and 2008. She has also held the position of independent director in Deutsche Bank SAE (2014-2018) and Banco Etcheverría (2013-2014).

Jaime Félix Caruana Lacorte and Ana Cristina Peralta Moreno have not yet accepted their appointment. As a result, as a Spanish corporate law matter, such individuals are not yet considered to be members of our Board of Directors. In addition, the suitability of such individuals has not yet been approved by our supervisor.

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Senior Management

Our senior managers were each appointed for an indefinite term. Their positions as of the date of this Annual Report on Form 20-F are as follows:

Name	Current Position	Present Principal Outside Occupation and Employment History(*)
Francisco González Rodríguez	Group Executive Chairman	Chairman of the Board of Directors and Group Executive Chairman of BBVA since January 2000; Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer.
Carlos Torres Vila	Chief Executive Officer	Chief Executive Officer of BBVA since May 2015. Chairman of the Technology and Cybersecurity Committee. Director of Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer. He started at BBVA in September 2008 holding senior management posts such as Head of Digital Banking from March 2014 to May 2015 and BBVA Strategy & Corporate Development Director from January 2009 to March 2014.
José Manuel González-Páramo Martínez-Murillo	Head of Global Economics, Regulation & Public Affairs	Executive Director of BBVA since May 2013, and Head of BBVA’s Global Economics, Regulation and Public Affairs. Member of the ECB’s Governing Council and Executive Committee from 2004 to 2012. Chairman of European DataWarehouse GmbH.
Eduardo Arbizu Lostao	Head of Legal & Compliance	Head of Legal department of BBVA since 2002; Chief Executive Officer and Managing Director of Retail Operations in Continental Europe (France, Spain, Portugal, Italy and Greece) from 1997 to 2002 at Barclays.
Domingo Armengol Calvo	General Secretary	General Secretary of BBVA since 2009. Deputy Secretary of the Board from 2005 to 2009 and Head of the Institutional Legal Department of BBVA from 2000 to 2009.
Juan Asúa Madariaga	Head of Corporate & Investment Banking	Head of Corporate & Investment Banking in BBVA. Head of Spain and Portugal in BBVA from 2007 to 2012. Head of Corporate and Middle cap companies of Spain and Portugal in BBVA from 2006 to 2007.
Ricardo Forcano García	Head of Talent & Culture	Head of Talent & Culture since July 2016. Previously, he held other posts at BBVA such as Head of Business Development Growth Markets from 2015 to 2016 and Head of New Business Models from 2011 to 2012. Prior to joining BBVA he was Deputy Director of Corporate Strategy of Endesa from 2003 to 2007.
Ricardo Gómez Barredo	Head of Accounting & Supervisors	Head of Accounting & Supervisors since July 2016. Head of Global Accounting and Information Management from 2011 to 2016 and Head of Financial Planning and Management Control of BBVA’s Group from 2007 to 2011.
Ricardo Enrique Moreno García	Head of Engineering	Head of Engineering since May 2015. Previously he was Transformation Process Manager of the BBVA Group from 2006 to 2010 and Managing Director of BBVA Banco Francés from 2010 to 2015.
Eduardo Osuna Osuna	Mexico Country Manager	Mexico Country Manager since May 2015 and General Manager of BBVA Bancomer. Previously he was Head of Commercial Banking of BBVA Bancomer from 2010 to 2012 and Head of Government and Corporate Banking of BBVA Bancomer from 2012 to 2015.
Cristina de Parias Halcón	Spain Country Manager	Spain Country Manager since May 2015. Head of Spain and Portugal from 2014 to 2015 and Head of the Central Area in Spain from 2011 to 2014. She joined BBVA in 1998 and has held positions in digital business development, payment systems, Uno-e and consumer finance from 1998 to 2011.
David Puente Vicente	Head of Data	Head of Data since March 2017. Prior to this post, he was Head of Business Development Spain since May 2015. Previously, he held others posts at BBVA such as Head of New Business Models from 2004 to 2006 and Head of CEO’s Office from 2009 to 2012. He was Senior Associate at Mckinsey & Company from 2002 to 2004.
Francisco Javier Rodríguez Soler	Head of Strategy & M&A	Head of Strategy & M&A since May 2015. Prior to this post, he was Head of M&A and Corporate Development of BBVA from 2010 to 2015. Prior to joining BBVA in 2008, he was Head of Strategy and M&A of Endesa.
Jaime Sáenz de Tejada Pulido	Head of Finance	Head of Finance since May 2015. Head of Strategy and Finance from 2014 to 2015 and Head of Spain and Portugal from 2012 to 2014. Business Development Manager of Spain and Portugal at BBVA from 2011 to 2012. Central Area Manager of Madrid and Castilla La Mancha from 2007 to 2010.
Jorge Sáenz-Azcúnaga Carranza	Head of Country Monitoring	Head of Country Monitoring since July 2016. He joined BBVA in 1993 and he has held various senior posts such as Head of CEO Office from 2002 to 2005, Head of Strategy and Planning, Spain & Portugal from 2008 to 2013 and Country Networks - Head of Business Monitoring Spain, USA and Turkey from 2015 to 2016.
José Luis de los Santos Tejero	Head of Internal Audit	Head of Internal Audit since 2002 and senior manager since May 2015. From October 1999 until December 2001 he was Deputy Director of Internal Audit and Director of Methodology and Specialized Areas. Between June 1998 and October 1999 he was Director of Internal Audit of the Argentaria Group.
Rafael Salinas Martínez de Lecea	Head of Global Risk Management	Head of Global Risk Management since May 2015. Prior to this post, he was Head of Risk and Portfolio Management from 2006 to 2015 and CFO of Banco de Crédito Local de España from 2003 to 2005.
Derek Jensen White	Head of Customer and Client Solutions	Head of Customer and Client Solutions since 2016. Prior to joining BBVA he held various senior posts at Barclays such as Chief Customer Experience Officer, Global Retail & Business Banking from 2011 to 2013 and Chief Design & Digital Officer from 2013 to 2016.

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(*)    Where no date is provided, positions are currently held.

B.   Compensation

The provisions of BBVA’s Bylaws that relate to compensation of directors are in accordance with the relevant provisions of Spanish law. Furthermore, BBVA has a remuneration policy for BBVA directors (the “Directors’  

Remuneration Policy”) which is aligned with the specific regulations applicable to credit institutions and the best practices on the market.

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Directors’ Remuneration Policy

The Directors’ Remuneration Policy for 2017, 2018 and 2019 was approved by the general shareholders’ meeting held on March 17, 2017, by a majority of 96.54%. This policy is available at our website (www.bbva.com).

BBVA has defined its Directors’ Remuneration Policy on the basis of the general principles of the Group’s remuneration policy, taking into consideration compliance with legal requirements applicable to credit institutions and those applicable in the different sectors in which it operates, as well as alignment with best market practices, while including items devised to reduce exposure to excessive risks and to adjust remuneration to the targets, values and long-term interests of the Group.

On the basis of the principles of the Group’s remuneration policy, and pursuant to the statutory requirements established by applicable regulations, BBVA has devised a specific incentives system for staff whose professional activities have a significant impact on the Group’s risk profile (the “Identified Staff”), which includes BBVA executive directors and BBVA Senior Management, that is aligned with the regulations and recommendations applicable to the remuneration schemes of this staff. The result is a remuneration scheme based, inter alia, on the following basic characteristics applicable to executive directors and Senior Management:

·Adequate balance between the fixed and variable components of total remuneration, in line with applicable regulations, designed to provide flexibility with regard to payment and amounts of the variable components, allowing for such components to be reduced, in part or in full, where appropriate. The proportion between the two components is established in accordance with the type of functions carried out by each beneficiary.

·The variable remuneration shall be based on effective risk management and linked to the level of achievement of financial and non-financial targets previously established and defined at the Group, area and individual level, that take into account present and future risks assumed and the Group’s long-term interests.

·The variable remuneration for each financial year will not accrue, or will accrue in a reduced amount, should a certain level of profit and capital ratio not be achieved, and it shall be subject to ex ante adjustments, so that it shall be reduced at the time of the performance assessment in the event of negative performance in the Group’s results or other parameters such as the level of achievement of budgeted targets.

·The annual variable remuneration shall be calculated on the basis of: (i) annual performance indicators (financial and non-financial); (ii) scales of achievement, as per the weightings allocated to each indicator; and (iii) a “target” annual variable remuneration, representing the amount of annual variable remuneration if 100% of the pre-established targets are met. The resulting amount shall constitute the annual variable remuneration of each beneficiary.

·The annual variable remuneration shall be subject to the following specific settlement and payment rules:

·60% of the annual variable remuneration shall be deferred over a period of five years.

·60% of the deferred portion of the annual variable remuneration shall be established in BBVA shares, whereas for the upfront portion, the share-based component shall be 50%.

·Shares vested as annual variable remuneration shall be subject to a lock-up for a one-year period after delivery, except for the transfer of those shares required to honor the payment of taxes.

·Additionally, upon vesting of the shares, executive directors will not be allowed to transfer a number of shares equivalent to twice their annual fixed remuneration for at least three years after their delivery. This shall likewise not apply to the transfer of those shares required to honor the payment of taxes.

·The deferred component of annual variable remuneration may be reduced, in part or in full, but never increased, based on the result of multi-year performance indicators aligned with the Group’s core risk

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management and control metrics, related to the solvency, capital, liquidity, funding or profitability, or to the share performance and recurring results of the Group, measured over a period of three years.

·The deferred component of annual variable remuneration, subject to the multi-year performance indicators, shall be delivered, if conditions are met, under the following schedule: 60% after the third year of deferral, 20% after the fourth year of deferral and 20% after the fifth year of deferral.

·Resulting cash portions of the deferred annual variable remuneration to be vested, after assessment of multi-year performance indicators, shall be updated according to the criteria established by the Board of Directors.

·No personal hedging strategies or insurance may be used in connection with remuneration or liability that may undermine the effects of alignment with sound risk management.

·The variable component of remuneration for a financial year shall be limited to a maximum amount of 100% of the fixed component of total remuneration, unless the general shareholders’ meeting resolves to increase this percentage up to a maximum of 200%.

·The entire annual variable remuneration shall be subject to malus and clawback arrangements during the whole deferral and lock-up period, as follows:

Up to 100% of the annual variable remuneration of each Identified Staff member corresponding to each financial year shall be subject to malus and clawback arrangements, both linked to a downturn in financial performance of the Bank as a whole, or of a specific unit or area, or of exposures generated by an Identified Staff member, when such downturn in financial performance arises from any of the following circumstances:

a)misconduct, fraud or serious infringement of the Code of Conduct and other applicable internal rules by an Identified Staff member;

b)regulatory sanctions or judicial convictions due to events that could be attributed to a specific unit or to the staff responsible for such events;

c)significant failure of risk management committed by the Bank or by a business or risk control unit, to which the willful misconduct or gross negligence of an Identified Staff member contributed; or

d)restatement of the Bank’s annual accounts, except where such restatement is due to a change in applicable accounting legislation.

For these purposes, the Bank will compare the performance assessment carried out for the Identified Staff member with the ex post evolution of some of the criteria that contributed to achieve the targets. Both malus and clawback will apply to the annual variable remuneration of the financial year in which the event giving rise to application of the malus and/or clawback arrangements occurred, and they may be applied during the entire period of deferral and lock-up applicable to the annual variable remuneration.

Notwithstanding the foregoing, in the event that these scenarios give rise to a dismissal or termination of contract of the Identified Staff member due to serious and guilty breach of duties, malus arrangements may apply to the entire deferred annual variable remuneration pending payment at the date of the dismissal or termination of contract, in light of the extent of the damage caused.

In any case, the variable remuneration is paid or vests only if it is sustainable considering the Group’s situation as a whole, and justified on the basis of the performance of the Bank, the business unit and of the Identified Staff member concerned.

As regards non-executive directors, their remuneration system, in accordance with the Bank’s Bylaws and Directors’ Remuneration Policy, is based on the criteria of responsibility, dedication and incompatibilities inherent to their role, and consists entirely of fixed remuneration.

Remuneration for non-executive directors received in 2017

The remuneration paid to the non-executive members of the Board of Directors during 2017 is indicated below in thousands of euros. The figures are given individually for each non-executive director and itemized. The table

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shows the non-executive members of the Board of Directors as of December 31, 2017. Certain changes were effected in the composition of our Board of Directors following the 2018 annual general shareholders’ meeting held on March 16, 2018 (see “—A. Directors and Senior Management—The Board of Directors” for updated information on the composition of our Board and its Committees).

	Board of Directors	Executive Committee	Audit & Compliance Committee	Risks Committee	Remunerations Committee	Appointments Committee	Technology and  Cybersecurity Committee	Total
Tomás Alfaro Drake	129	-	71	-	25	102	43	370
José Miguel Andrés Torrecillas	129	-	179	107	-	41	-	455
José Antonio Fernández Rivero	129	167	-	-	43	-	25	363
Belén Garijo López	129	-	71	-	80	-	-	280
Sunir Kumar Kapoor	129	-	-	-	-	-	43	172
Carlos Loring Martínez de Irujo	129	167	-	107	25	-	-	427
Lourdes Máiz Carro	129	-	71	-	25	41	-	266
José Maldonado Ramos	129	167	-	62	-	41	-	399
Juan Pi Llorens	129	-	71	125	45	-	43	412
Susana Rodríguez Vidarte	129	167	-	107	-	41	-	443
Total (1)	1,287	667	464	508	243	265	154	3,587

⁽¹⁾  Includes the amounts received for memberships of the different committees during 2017. The composition of these committees was modified on May 31, 2017. The composition of certain committees was further modified followingthe 2018 annual general shareholders’ meeting held on March 16, 2018 (see “—A. Directors and Senior Management—The Board of Directors” for updated information on the composition of our Board and its Committees).

In addition, José Luis Palao García-Suelto and James Andrew Stott, who ceased as directors on March 17, 2017 and on May 31, 2017, respectively, received a total amount of €70 thousand and €178 thousand, respectively, as members of the Board of Directors and of the different Board committees.

Moreover, during 2017, €126 thousand was paid in healthcare and casualty insurance premiums for non-executive members of the Board of Directors.

Remuneration for executive directors received in 2017

During 2017, the executive directors received the amount of the fixed remuneration corresponding to that year, established in the Directors’ Remuneration Policy.

Likewise, the executive directors received the annual variable remuneration corresponding to 2016 which payment vested during the first quarter of 2017, in accordance with the settlement and payment system established under the former directors’ remuneration policy, approved by the general shareholders’ meeting held on March 13, 2015. In accordance with that settlement and payment system:

·The upfront payment of the annual variable remuneration for executive directors corresponding to 2016 (corresponding to 50% of the total annual variable remuneration) was made in equal parts in cash and in BBVA shares.

·The remaining 50% of the annual variable remuneration, both in cash and in shares, has been deferred in its entirety for a three-year period, with its accrual and payment subject to compliance with a series of multi-year indicators.

·All the shares delivered pursuant to the indicated rules will be subject to a lock-up for a one-year period from the date of delivery. This lock-up will be applied to the net amount of the shares, after discounting the amount of shares whose sale would be necessary to honor the payment of taxes accruing on the shares received.

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·A prohibition against hedging has been established, both regarding vested shares that have been delivered but are still subject to a lock-up and shares pending delivery.

·The deferred component of the annual variable remuneration will be subject to updating under the terms established by the Board of Directors.

·The variable component of the remuneration of executive directors corresponding to 2016 is limited to a maximum amount of 200% of the fixed component of total remuneration, as agreed by the general shareholders’ meeting.

Furthermore, following approval of the new Directors’ Remuneration Policy by the 2017 general shareholders’ meeting, the annual variable remuneration awarded for 2016 and subsequent years is subject to malus and clawback arrangements during the entire deferral and lock-up period, pursuant to the terms therein.

Likewise, in accordance with the settlement and payment system applicable to the annual variable remuneration for 2014 and 2013, pursuant to the applicable policy for said years, the executive directors have received the deferred component of the annual variable remuneration for those years, delivery of which was due in the first quarter of 2017.

The remuneration paid to the executive directors during 2017 is indicated below in thousands of euros, for cash amounts, and number of shares, for share amounts. The figures are given individually for each executive director and itemized:

	Fixed remuneration in cash	2016 annual variable remuneration in cash (1)	Deferred variable remuneration in cash from previous years (2)	Total cash 2017	2016 annual variable remuneration in BBVA shares (1)	Deferred variable remuneration in BBVA shares from previous years (2)	Total shares 2017
Group Executive Chairman	2,475	734	622	3,831	114,204	66,947	181,151
Chief Executive Officer	1,965	591	182	2,738	91,915	19,703	111,618
Head of Global Economics, Regulation & Public Affairs (“Head of GERPA”)	834	89	50	972	13,768	5,449	19,217
Total	5,274	1,414	853	7,541	219,887	92,099	311,986

⁽¹⁾Amounts corresponding to 50% of the 2016 annual variable remuneration.

⁽²⁾Amounts corresponding to the sum of the deferred component of the annual variable remuneration from previous years (2014 and 2013), and their corresponding updating in cash, payment or delivery of which was made in 2017, in accordance with the settlement and payment system applicable to the annual variable remuneration for 2014 and 2013, as broken down below:

Annual variable remuneration for 2014— The executive directors received the amount corresponding to the second third of the deferred annual variable remuneration for 2014, both in cash and shares: €321 thousand and 37,392 BBVA shares in the case of the Group Executive Chairman; €101 thousand and 11,766 BBVA shares in the case of the Chief Executive Officer; and €32 thousand and 3,681 BBVA shares in the case of the Head of GERPA.

Annual variable remuneration for 2013—The executive directors received the amount corresponding to the last third of the deferred annual variable remuneration for 2013, both in cash and shares: €301 thousand and 29,555 BBVA shares in the case of the Group Executive Chairman; €81 thousand and 7,937 BBVA shares in the case of the Chief Executive Officer; and €18 thousand and 1,768 BBVA shares in the case of the Head of GERPA.

As of December 31, 2017, the last third corresponding to the deferred variable remuneration for 2014 was pending payment, delivery of which has taken place in the first quarter of 2018, in accordance with the settlement and payment system established for that year.

In accordance with the conditions established in the settlement and payment system previously mentioned, 50% of executive directors’ annual variable remuneration corresponding to 2016 and 2015 remains deferred, to be paid in future years, where applicable, according to the aforementioned system.

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In addition, during 2017 executive directors received remuneration in kind, which includes insurance premiums and others, for a total aggregate amount of €217 thousand, of which €16 thousand corresponded to the Group Executive Chairman; €121 thousand to the Chief Executive Officer; and €79 thousand to the Head of GERPA.

Annual variable remuneration for executive directors for 2017

Following year-end 2017, the annual variable remuneration for executive directors corresponding to that year has been determined, applying the conditions established at the beginning of 2017, as set forth in the Directors’ Remuneration Policy, in the following terms:

·40% of the annual variable remuneration corresponding to 2017 has been paid in the first quarter of 2018, in equal parts in cash and in shares, which amounts to €660 thousand and 90,933 BBVA shares in the case of the Group Executive Chairman; €562 thousand and 77,493 BBVA shares in the case of the Chief Executive Officer; and €87 thousand and 12,029 BBVA shares in the case of the Head of GERPA.

·The remaining 60% has been deferred for a five-year period, subject to compliance with the multi-year performance indicators, and will vest, 40% in cash and 60% in shares, under the following schedule: 60% of the deferred component after the third year of deferral; 20% after the fourth year of deferral; and 20% after the fifth year of deferral. In accordance with the aforementioned, the maximum amount corresponding to the total deferred component that could be received by executive directors is as follows: €792 thousand and 163,680 BBVA shares in the case of the Group Executive Chairman; €675 thousand and 139,488 BBVA shares in the case of the Chief Executive Officer; and €105 thousand and 21,654 BBVA shares in the case of the Head of GERPA.

The deferred component of the annual variable remuneration will be subject to compliance with the multi-year performance indicators determined by the Board of Directors at the beginning of the year, calculated over the first three years of deferral. The application of these indicators may lead to a reduction of the deferred component, in part or in full, but may in no event lead to an increase in its amount.

The remaining rules applicable for the settlement and payment of 2017 annual variable remuneration have been detailed under the subheading “—Directors’ Remuneration Policy”. 

Remuneration for Senior Management received in 2017

During 2017, members of Senior Management have received the amount of the fixed remuneration corresponding to that year and the annual variable remuneration corresponding to 2016, which payment vested during the first quarter of 2017, according to the settlement and payment system set forth in the remuneration policy applicable to the Senior Management in that year. In accordance with that settlement and payment system:

·The upfront payment of the 2016 annual variable remuneration for members of the Senior Management (corresponding to 50% of the total annual variable remuneration) was made in equal parts in cash and in BBVA shares.

·The remaining 50% of the annual variable remuneration, both in cash and in shares, has been deferred in its entirety for a three-year period, with its accrual and payment subject to compliance with a series of multi-year indicators.

·All the shares delivered pursuant to the indicated rules shall be subject to a lock-up for a one-year period from the date of delivery. This lock-up will be applied to the net amount of the shares, after discounting the amount of shares whose sale would be necessary to honor the payment of taxes accruing on the shares received.

·A prohibition against hedging has been established, both regarding vested shares that have been delivered but are still subject to a lock-up and shares pending delivery.

·The deferred component of the annual variable remuneration will be subject to updating under the terms established by the Board of Directors.

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·The variable component of the remuneration corresponding to 2016 for the Senior Management is limited to a maximum amount of 200% of the fixed component of total remuneration as agreed by the general shareholders’ meeting.

Furthermore, the annual variable remuneration awarded for 2016 and subsequent years is subject to malus and clawback arrangements during the entire deferral and lock-up period.

The remuneration paid to members of the Senior Management as a whole, excluding executive directors, during 2017 is indicated below, in thousands of euros for cash amounts and number of shares for shares amounts.

	Fixed remuneration in cash	2016 annual variable remuneration in cash (1)	Deferred variable remuneration in cash from previous years (2)	Total cash 2017	2016 annual variable remuneration in BBVA shares (1)	Deferred variable remuneration in BBVA shares from previous years (2)	Total shares 2017
Total Members of the Senior Management (*)	15,673	2,869	1,016	19,558	441,596	110,105	551,701

^(*) This section includes aggregate information regarding those who were members of the Senior Management, excluding executive directors, as of December 31, 2017 (15 members).

⁽¹⁾ Amounts corresponding to 50% of the 2016 annual variable remuneration.

⁽²⁾ Amounts corresponding to the sum of the deferred component of the annual variable remuneration from previous years (2014 and 2013), and their corresponding updating in cash, payment or delivery of which was made in 2017 to members of the Senior Management who were entitled to them, as broken down below:

Annual variable remuneration for 2014— Members of the Senior Management, excluding executive directors, received the amount corresponding to the second third of the deferred annual variable remuneration for 2014, in an aggregate amount of €555 thousand and 64,873 BBVA shares.

Annual variable remuneration for 2013— Members of the Senior Management, excluding executive directors, received the amount corresponding to the last third of the deferred annual variable remuneration for 2013, in an aggregate amount of €461 thousand and 45,232 BBVA shares.

As of December 31, 2017, the last third corresponding to the deferred variable remuneration for 2014 was pending payment, delivery of which has taken place in the first quarter of 2018, in accordance with the settlement and payment system established for that year.

Likewise, 50% of members of the Senior Management’s annual variable remuneration corresponding to 2016 and 2015 remains deferred, to be paid in future years, where applicable, according to the settlement and payment system established for said years. 

Additionally, during 2017, members of the Senior Management as a whole, excluding executive directors, have received remuneration in kind, which includes insurance premiums and others, for a total aggregate amount of €684 thousand.

Remuneration system in shares with deferred delivery for non-executive directors

BBVA has a remuneration system in shares with deferred delivery for its non-executive directors, which was approved by the general shareholders’ meeting held on March 18, 2006 and extended by resolutions of the general shareholders’ meetings held on March 11, 2011 and on March 11, 2016, respectively, for a further five-year period in each case.

This system is based on the annual allocation to non-executive directors of a number of “theoretical shares”, equivalent to 20% of the total remuneration in cash received by each director in the previous year, calculated

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according to the average closing prices of BBVA shares during the sixty trading sessions prior to the annual general shareholders’ meetings approving the corresponding financial statements for each year.

These shares will be vested, where applicable, to each beneficiary on the date they leave directorship for any reason other than serious breach of their duties.

The number of “theoretical shares” allocated in 2017 to each non-executive director beneficiary of the remuneration system in shares with deferred delivery, corresponding to 20% of the total remuneration received in cash by said directors in 2016, was as follows:

	Theoretical shares allocated in 2017	Theoretical shares accumulated as of December 31, 2017
Tomás Alfaro Drake	10,630	73,082
José Miguel Andrés Torrecillas	14,002	23,810
José Antonio Fernández Rivero	11,007	102,053
Belén Garijo López	7,313	26,776
Sunir Kumar Kapoor	4,165	4,165
Carlos Loring Martínez de Irujo	11,921	86,891
Lourdes Máiz Carro	7,263	15,706
José Maldonado Ramos	10,586	67,819
Juan Pi Llorens	10,235	42,609
Susana Rodríguez Vidarte	13,952	92,558
Total (1)	101,074	535,469

⁽¹⁾   In addition, in 2017, 8,752 theoretical shares were allocated to José Luis Palao García-Suelto and 10,226 theoretical shares were allocated to James Andrew Stott, who ceased as directors on March 17, 2017 and on May 31, 2017, respectively.

Pension commitments

The Bank has undertaken pension commitments in favor of the Chief Executive Officer and the Head of GERPA, in accordance with the Bylaws, the Directors’ Remuneration Policy and their respective contracts entered into with the Bank, to cover retirement, disability and death.

As regards the Chief Executive Officer, the Directors’ Remuneration Policy provides for a new benefits framework whereby the previously applicable defined-benefits system has been transformed into a defined-contribution system, according to which he is entitled, provided he does not leave his position as Chief Executive Officer due to serious breach of his duties, to a retirement benefit on reaching the legal retirement age, as a lump sum or as income, which amount shall result from the funds accumulated by the Bank until December 2016 to cover the commitments under the previously applicable defined-benefits system and the sum of the annual contributions made by the Bank as of January 1, 2017, to cover the retirement benefit under the new defined-contribution system, along with the corresponding accumulated yields.

Should the contractual relationship be terminated before he reaches legal retirement age, for reason other than serious breach of his duties, the retirement benefit to which the Chief Executive Officer is entitled, when he reaches the age legally established,shall be calculated on the basis of the contributions made by the Bank up to that date, along with the corresponding accumulated yields, with no additional contributions to be made by the Bank upon his cessation of directorship.

The amount established in the Directors’ Remuneration Policy for the Chief Executive Officer, as an annual contribution to cover the retirement benefit under the new defined-contribution scheme, amounts to €1,642 thousand, amount which shall be updated in the same proportion as the annual fixed remuneration for the Chief Executive Officer, in the terms established in said Directors’ Remuneration Policy.

Likewise, pursuant to the Directors’ Remuneration Policy, 15% of the aforementioned agreed annual contribution shall be based on variable components and be considered “discretionary pension benefits”, thus subject

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to the conditions of delivery in shares, lock-up and clawback established in applicable regulations, as well as to those other conditions of variable remuneration applicable to them pursuant to the Directors’ Remuneration Policy.

On the other hand, the Bank will assume payment of the annual insurance premiums in order to top up the coverage for death and disability of the Chief Executive Officer’s benefits scheme, in the terms established in the Directors’ Remuneration Policy.

Pursuant to the foregoing, in 2017 an amount of €1,853 thousand was recorded to satisfy the benefits commitments undertaken with the Chief Executive Officer, an amount which includes the contribution to retirement coverage (€1,642 thousand), as well as to death and disability coverage (€211 thousand), with the total accumulated fund to cover retirement commitments amounting to €17,503 thousand as of December 31, 2017.

15% of the agreed annual contribution to retirement (€246 thousand) was recorded in 2017 as “discretionary pension benefits” and, following year-end 2017, said amount has been adjusted according to the criteria established for the determination of the Chief Executive Officer’s annual variable remuneration for 2017. Accordingly, the “discretionary pension benefits” for 2017 have been determined in an amount of €288 thousand, amount which will be included in the accumulated fund for pension commitments in 2018, subject to the same conditions as the deferred component of annual variable remuneration for 2017, as well as the conditions established in the Directors’ Remuneration Policy.

As regards the Head of GERPA, the pension scheme established in the Directors’ Remuneration Policy establishes an annual contribution of 30% of his fixed remuneration as of January 1, 2017, to cover retirement benefit, as well as payment of the corresponding annual insurance premiums in order to top up the coverage for death and disability.

As in the case of the Chief Executive Officer, 15% of the abovementioned agreed annual contribution, shall be based on variable components and be considered “discretionary pension benefits”, thus subject to the conditions of delivery in shares, lock-up and clawback established in applicable regulations, as well as to the other conditions of variable remuneration applicable to them pursuant to the Directors’ Remuneration Policy.

The Head of GERPA shall be entitled, on reaching legal retirement age, as a lump sum or as income, to the benefits arising from the contributions made by the Bank to cover pension commitments, plus the corresponding accumulated yields up to that date, provided he does not leave his position due to serious breach of his duties. In the event of voluntary termination of his contractual relationship before the legal retirement age, benefits shall be limited to 50% of the contributions made by the Bank to that date, along with the corresponding accumulated yields, with the Bank’s contributions ceasing upon the cessation of his directorship.

Pursuant to the foregoing, in 2017 an amount of €393 thousand was recorded to satisfy the benefits commitments undertaken with the Head of GERPA, an amount which includes the contribution to retirement coverage (€250 thousand), as well as to death and disability coverage (€143 thousand), with the total accumulated fund to cover retirement commitments amounting to €842 thousand as of December 31, 2017.

15% of the agreed annual contribution to retirement (€38 thousand) was registered in 2017 as “discretionary pension benefits” and, following year-end 2017, said amount has been adjusted according to the criteria established for the determination of the Head of GERPA’s annual variable remuneration for 2017. Accordingly, the “discretionary pension benefits” for 2017 have been determined in an amount of €46 thousand, amount which will be included in the accumulated fund in 2018, subject to the same conditions as the deferred component of annual variable remuneration for 2017, as well as the other conditions established in the Directors’ Remuneration Policy.

There are no other pension obligations undertaken in favor of other executive directors.

An amount of €5,630 thousand has been recorded to attend the benefits commitments undertaken with members of the Senior Management, excluding executive directors, an amount which includes the contribution to retirement coverage (€4,910 thousand), as well as to death and disability coverage (€720 thousand), with the total accumulated fund to cover retirement commitments with the Senior Management amounting to €55,689 thousand as of December 31, 2017.

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As in the case of executive directors, 15% of the annual contributions agreed for members of the Senior Management shall be based on variable components and be considered “discretionary pension benefits”, thus subject to the conditions of delivery in shares, lock-up and clawback established in applicable regulations, as well as to the other conditions of variable remuneration applicable to them pursuant to their remuneration policy.

Pursuant to the foregoing, from the annual contribution to cover retirement recorded in 2017, an amount of €585 thousand was recorded in 2017 as “discretionary pension benefits” and, following year-end 2017, said amount has been adjusted according to the criteria established for the determination of the Senior Management’s annual variable remuneration for 2017. Accordingly, the “discretionary pension benefits” for 2017 have been determined in an amount of €589 thousand, amount which will be included in the accumulated fund in 2018, subject to the same conditions as the deferred component of annual variable remuneration for 2017, as well as the other conditions established for these benefits in their remuneration policy.

Extinction of contractual relationship

In accordance with the Directors’ Remuneration Policy, approved by the 2017 general shareholders’ meeting, the Bank has no commitments to pay severance indemnity to executive directors.

The new contractual framework defined in the Directors’ Remuneration Policy for the Chief Executive Officer and the Head of GERPA includes a post-contractual non-compete agreement for a period of two years, after they cease as BBVA executive directors, in accordance with which they shall receive remuneration in an amount equivalent to one annual fixed remuneration for every year of duration of the non-compete arrangement, which shall be paid periodically over the course of the two years, provided that cessation of directorship is not due to retirement, disability or serious breach of duties.

C.    Board Practices

Committees

Our corporate governance system is based on the distribution of functions between the Board, the Executive Committee and the other specialized Board Committees, namely: the Audit and Compliance Committee; the Appointments Committee; the Remuneration Committee; the Risk Committee; and the Technology and Cybersecurity Committee.

Additional information on our Board Committees, including their current composition, is provided below. The composition of certain of these Board Committees is expected to change in 2018, once the new directors appointed in the 2018 annual general shareholders’ meeting take up their duties.

Executive Committee

Our Board of Directors is assisted in fulfilling its responsibilities by the Executive Committee (Comisión Delegada Permanente) of the Board of Directors.

As of the date of this Annual Report, BBVA’s Executive Committee is comprised of two executive directors and three non-executive directors. The Chairman of the Committee is Mr. Francisco González Rodríguez, and the remaining members are Mr. Carlos Torres Vila, Mr. Carlos Loring Martínez de Irujo, Mr. José Maldonado Ramos and Mrs. Susana Rodríguez Vidarte.

According to our Board Regulations, the Executive Committee will be apprised of such business as the Board of Directors resolves to confer on it, in accordance with prevailing legislation, our Bylaws or our Board Regulations.

The Executive Committee shall meet on the dates indicated in the annual calendar of scheduled meetings and when the chairman or acting chairman so decides. During 2017, the Executive Committee met nineteen (19) times.

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Audit and Compliance Committee

This committee shall perform the duties required under applicable laws, regulations and our Bylaws. Essentially, its mission is to assist the Board in overseeing the financial information and the exercise of the Group control duties.

The Board Regulations establish that the Audit and Compliance Committee shall have a minimum of four members, one of which shall be appointed by the Board taking into account his/her knowledge and background in accounting, auditing or both. In accordance with the Board Regulation, they shall all be independent directors, one of whom shall act as Chairman, also appointed by the Board. See “Item 16.A. Audit Committee Financial Expert”. 

As of the date of this Annual Report, the members of the Audit and Compliance Committee are Mrs. Belén Garijo López, Mrs. Lourdes Máiz Carro, Mr. Juan Pi Llorens and Mr. José Miguel Andrés Torrecillas, holding the latter the Chairmanship of the Committee.

Under the Board Regulations and the charter of the Audit and Compliance Committee, the scope of its functions is as follows (for purposes of the below, “entity” refers to BBVA):

·report to the general shareholders’ meeting on questions raised with respect to those matters falling within the Committee’s competence and, in particular, on the result of the audit explaining how it has contributed to the completeness of the financial information and the function performed by the Committee in this process;

·oversee the efficacy of the internal control of the Company, the internal audit and the risk-management systems in the process of drawing up and reporting the regulatory financial information, including tax risks. Also to discuss with the financial auditor any significant weaknesses in the internal control system detected when the audit is conducted without undermining its independence. For such purposes, and where appropriate, the Committee may submit recommendations or proposals to the Board of Directors, and the corresponding period for monitoring;

·oversee the process of drawing up and reporting financial information and submit recommendations or proposals to the Board of Directors aimed at safeguarding its completeness;

·submit to the Board of Directors proposals on the selection, appointment, re-election and replacement of the external auditor, taking responsibility for the selection process in accordance with applicable regulations, as well as their contractual conditions, and regularly collect information from the external auditor regarding the audit plan and its implementation, as well as preserving the auditor’s independence in the performance of their duties;

·establish correct relations with the external auditor in order to receive information on any matters that may jeopardize their independence, for examination by the Committee, and any others relating to the process of the financial auditing; as well as those other communications provided for by law and by the auditing regulations. Each year it must unfailingly receive the external auditors’ declaration of their independence with regard to the Company or entities directly or indirectly related to it, as well as detailed and individualized information on additional services provided of any kind and the corresponding fees received by the external auditor or by persons or entities linked to them as provided for under the legislation on financial auditing;

·each year before the external financial auditor issues their report on the financial statements, to issue a report expressing an opinion on whether the independence of the external financial auditor has been compromised. This report must unfailingly contain the reasoned valuation of the provision of each of the additional services referred to in the previous subsection, considered individually and as a whole, other than the legally-required audit and with respect to the regime of independence or to the standards regulating the audit activity;

·report, prior to the Board of Directors adopting resolutions, on all those matters established by law, by our Bylaws and by the Board Regulations, and in particular on:

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·the financial information that the Company must periodically publish;

·the creation or acquisition of a holding in special-purpose entities or entities domiciled in countries or territories considered tax havens; and

·related-party transactions;

·oversee compliance with applicable domestic and international regulations on matters related to money laundering, conduct on the securities markets, data protection and the scope of Group activities with respect to anti-trust regulations. Also to ensure that any requests for action or information made by official authorities with competence in these matters are dealt with in due time and in due form;

·ensure that the codes of ethics and of internal conduct on the securities market, as they apply to Group personnel, comply with regulatory requirements and are adequate;

·especially to oversee compliance with the provisions applicable to directors contained in the Board Regulations, as well as their compliance with the applicable standards of conduct on the securities markets;

·any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution; and

·the Committee shall also monitor the independence of external auditors. This entails the following two duties:

·preventing any influence over the auditor’s warnings, opinions or recommendations. To this end, ensure that compensation for the auditor’s work does not compromise either its quality or independence, in compliance with current legislation on auditing at all times; and

·stipulating as incompatible the provision of audit and consulting services unless they are works required by supervisors or whose provision by the auditor is allowed by applicable legislation, and there are not available in the market alternatives as regards content, quality or efficiency of equal value to those which the auditor could provide; in this case approval by the Committee shall be required, but this decision can be delegated in advance to its Chairman. The auditor shall be prohibited from providing prohibited services outside the audit, in compliance with what is set out at all times by audit legislation.

The Committee leads the selection process of the external auditor for the Bank and its Group. It must verify that the audit schedule is being carried out under the service agreement and that it satisfies the requirements of the competent authorities and the Bank’s governing bodies. The Committee will also require the auditors, at least once each year, to assess the quality of the Group’s internal oversight procedures.

The Audit and Compliance Committee meets as often as necessary to comply with its functions, although an annual calendar of meetings will be drawn up in accordance with its duties. During 2017, the Audit and Compliance Committee met fourteen (14) times.

Executives heading areas that manage matters within the scope of its competence, especially the Accounting, Internal Audit and Compliance departments, may be called to attend the Audit and Compliance Committee’s meetings and, at the request of these executives, other staff from these departments who have particular knowledge or responsibility in the matters contained in the agenda, when their presence at the meeting is deemed advisable. However, only the Committee members and the secretary will be present when the results and conclusions of the meeting are assessed.

The Committee may engage external advisory services for relevant issues when it considers that these cannot be properly provided by experts or technical staff within the Group on grounds of specialization or independence.

Likewise, the Committee may call on the personal cooperation and reports of any employee or member of the management team when it considers it necessary to comply with its functions in relevant issues.

The Committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, among other things, regulate its operation.

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Appointments Committee

The Appointments Committee is tasked with assisting the Board on issues related to the selection and appointment of Board members and other matters contained in the Board Regulations.

In compliance with the Board Regulations, this Committee shall comprise a minimum of three members who must be non-executive directors appointed by the Board of Directors, which will also appoint its Chairman. The Chairman and the majority of its members must be independent directors.

As of the date of this Annual Report, the members of the Appointments Committee are Mrs. Lourdes Máiz Carro, Mr. José Maldonado Ramos, Mrs. Susana Rodríguez Vidarte and Mr. José Miguel Andrés Torrecillas, holding the latter the Chairmanship of the Committee.

The duties of the Appointments Committee under the Board Regulations are as follows:

·submit proposals to the Board of Directors on the appointment, reelection or separation of independent directors and report on proposals for the appointment, re-election or separation of the other directors.

To such end, the Committee will evaluate the balance of skills, knowledge and expertise on the Board of Directors, as well as the conditions that candidates should display to fill the vacancies arising, assessing the dedication necessary to be able to suitably perform their duties in view of the needs that the Company’s governing bodies may have at any time.

The Committee will ensure that when filling new vacancies, the selection procedures are not marred by implicit biases that may entail any discrimination and in particular discrimination that may hinder the selection of female directors, trying to ensure that women who display the professional profile being sought are included on the shortlists.

Likewise, when drawing up proposals within its scope of competence for the appointment of directors the Committee will take into account in case they may be considered suitable, any applications that may be made by any member of the Board of Directors for potential candidates to fill the vacancies;

·submit proposals to the Board of Directors for policies on the selection and diversity of members of the Board of Directors;

·establish a target for representation of the underrepresented gender in the Board of Directors and draw up guidelines on how to reach that target;

·analyze the structure, size and composition of the Board of Directors, at least once a year when carrying out its operational assessment;

·analyze the suitability of the various members of the Board of Directors;

·perform an annual review of the status of each director, so that this may be reflected in the annual corporate governance report;

·report the proposals for the appointment of the Chairman and the Secretary and, where applicable, the Deputy Chairman and the Deputy Secretary;

·report on the performance of the duties of the Chairman of the Board, for the purposes of the periodic assessment by the Board of Directors, under the terms established in the Board Regulations;

·examine and organize the succession of the Chairman in conjunction with the Lead Director and, as applicable, file proposals with the Board of Directors so that the succession takes place in a planned and orderly manner;

·review the Board of Directors’ policy on the selection and appointment of members of senior management, and file recommendations with the Board when applicable;

·report on proposals for appointment and separation of senior managers; and

·any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution or by applicable legislation.

In the performance of its duties, the Appointments Committee will consult with the Chairman of the Board via the Committee chair, especially with respect to matters related to executive directors and senior managers.

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In accordance with our Board Regulations, the Committee may request the attendance at its sessions of persons with tasks in the Group that are related to the Committee’s duties. It may also obtain such advice as may be necessary to establish an informed opinion on matters related to its business.

The chair of the Appointments Committee will convene it as often as necessary to perform its functions. During 2017, the Appointments Committee met five (5) times.

Remuneration Committee

The Remuneration Committee is the body that assists the Board in matters related to remuneration, as set out in the Board Regulations. It seeks to ensure that the remuneration policy established by the Company is duly observed.

Under the Board Regulations, the Committee will comprise a minimum of three members appointed by the Board. All the members must be non-executive directors, with a majority of independent directors, including the Committee Chair.

At the date of this Annual Report, the members of the Remuneration Committee are Mr. Tomás Alfaro Drake, Mr. Carlos Loring Martínez de Irujo, Mrs. Lourdes Máiz Carro and Mrs. Belén Garijo López, holding the latter the Chairmanship of the Committee.

In accordance with the Board Regulations, the scope of the functions of the Remuneration Committee is as follows:

·propose to the Board of Directors, for its submission to the general shareholders’ meeting, the directors’ remuneration policy, with respect to its items, amounts, and parameters for its determination and its vesting. Also to submit the corresponding report, in the terms established by applicable law at any time;

·determine the extent and amount of the individual remunerations, entitlements and other economic compensations and other contractual conditions for the executive directors, so that these can be reflected in their contracts. The Committee’s proposals on such matters will be submitted to the Board of Directors;

·propose the annual report on the remuneration of the Bank’s directors to the Board of Directors each year, which will then be submitted to the annual general shareholders’ meeting, in compliance with the applicable legislation;

·propose the remuneration policy to the Board of Directors for senior managers and employees whose professional activities have a significant impact on the Company’s risk profile;

·propose the basic conditions of the senior management contracts to the Board of Directors, and directly supervise the remuneration of the senior managers in charge of risk management and compliance functions within the Company;

·oversee observance of the remuneration policy established by the Company and periodically review the remuneration policy applied to directors, senior managers and employees whose professional activities have a significant impact on the Company’s risk profile;

·verify the information on directors and senior managers remunerations contained in the different corporate documents, including the annual report on directors’ remuneration; and

·any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution or by applicable legislation.

In the performance of its duties, the Remuneration Committee will consult with the Chairman of the Board via the Committee Chair, especially with respect to matters related to executive directors and senior managers.

Pursuant to our Board Regulations, the Committee may request the attendance at its meetings of persons with tasks in the Group that are related to the Committee’s duties. It may also obtain such advice as may be necessary to establish an informed opinion on matters related to its business.

The Remuneration Committee will meet as often as necessary to perform its duties, convened by its Chair. During 2017, the Remuneration Committee met on five (5) occasions.

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Risk Committee

The Board’s Risk Committee’s essential function is to assist the Board of Directors in the determination and monitoring of the Group risk management and control policy and its strategy within this scope.

The Risk Committee will comprise a minimum of three members, appointed by the Board of Directors, which will also appoint its Chairman. All Committee members must be non-executive directors, of whom at least one third must be independent directors. Its Chairman must also be an independent director.

As of the date of this Annual Report, the members of the Risk Committee are Mr. José Miguel Andrés Torrecillas, Mr. Carlos Loring Martínez de Irujo, Mr. José Maldonado Ramos, Mrs. Susana Rodríguez Vidarte and Mr. Juan Pi Llorens, holding the latter the Chairmanship of the Committee.

Under the Board Regulations, it has the following duties:

·analyze and assess proposals related to the Group’s risk management, control and strategy. In particular, these will identify:

·the Group’s risk appetite; and

·establishment of the level of risk considered acceptable according to the risk profile and capital at risk, broken down by the Group’s businesses and areas of activity;

·analyze and assess the control and management policies for the Group’s different risks and information and internal control systems;

·the measures established to mitigate the impact of the risks identified, should they materialize;

·monitor the performance of the Group’s risks and their fit with the strategies and policies defined and the Group’s risk appetite;

·analyze, prior to submitting them to the Board of Directors or the Executive Committee, those risk transactions that must be put to its consideration;

·review whether the prices of assets and liabilities offered to customers take fully into account the Bank’s business model and risk strategy and, if not, present a remedy plan to the Board of Directors;

·participate in the process of establishing the remuneration policy, checking that it is consistent with sound and effective risk management and does not encourage risk-taking that exceeds the level of tolerated risk of the Company;

·check that the Company and its Group has the means, systems, structures and resources in line with best practices that enable it to implement its risk-management strategy, ensuring that the entity’s risk management mechanisms are matched to its strategy; and

·any other duties that may have been allocated under the Board Regulations or attributed to the Committee by a Board of Directors resolution or by applicable legislation.

Pursuant to our Board Regulations, the Committee may request the attendance of the Head of the Global Risk Management Area at its meetings and also of other executives heading different risks areas or the persons who, within the Group organization, have missions related to its functions. It may also obtain such advice as may be necessary to establish an informed opinion on matters related to its business.

The Committee meets as often as necessary to comply with its duties, usually fortnightly. In 2017, it held twenty (20) meetings.

The Committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, among other things, regulate its operation.

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Technology and Cybersecurity Committee

The Technology and Cybersecurity Committee’s essential functions are to assist the Board of Directors in the understanding of the risks associated to technology and information systems related to the Group’s activity and the oversight of its management and control and in the supervision of the infrastructure and technology strategy of the Group.

The Technology and Cybersecurity Committee will have a minimum of three members appointed by the Board among its directors, which will nominate the chairman of this Committee. For this purpose, the Board will take into consideration the knowledge and experience in technology, information systems and cyber-security matters of its members.

As of the date of this Annual Report, the members of the Technology and Cybersecurity Committee are Mr. Tomás Alfaro Drake, Mr. Sunir Kumar Kapoor, Mr. Juan Pi Llorens and Mr. Carlos Torres Vila, holding the latter the Chairmanship of the Committee.

Under its regulations, the Technology and Cybersecurity Committee has the following responsibilities:

- Oversight of technology-related risks and cyber-security management, which include the following:

·Assess the main technology-related risks to which the Bank is exposed, including information security and cyber-security risks, and the steps management has taken to monitor and control its exposure to such risks.

·Review policies and systems in place for the assessment, control and management of the Group’s technology-related risks and its infrastructure, including responses to cyber-attacks and recovery plans.

·Obtain business continuity planning reports on technology and infrastructure matters from management.

·Obtain reports from management, as and when appropriate, on:

·IT-related compliance risks; and

·The steps taken to identify, assess, monitor, manage and mitigate those risks.

·Additionally, the Technology and Cybersecurity Committee will be informed of any relevant event that may occur regarding cyber-security issues. These are deemed to be those which, individually or in the aggregate, may have a material impact on the Group’s equity, results of operation or reputation. In any case, such events shall be informed to the chair of the Committee as soon as possible.

- Keeping abreast about the technology strategy of the Group, which include the following:

·Obtaining reports from management, as and when appropriate, on technology strategy and trends that may affect the Company’s strategic plans, including the monitoring of overall industry trends.

·Obtaining reports from management, as and when appropriate, on the metrics established by the Group for the management and control of IT-related matters, including the progress of the developments and investments carried out by the Group in this field.

·Obtaining reports from management, as and when appropriate, on matters related to new technologies, applications, information systems and best practices that affect the Group’s IT strategy or plans.

·Obtaining reports from management on the core policies, strategic projects and plans defined by the engineering area of the Bank.

·Informing the Board of Directors and, if applicable, the Executive Committee, on any IT-related matters falling within the scope of their functions.

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For a better performance of its functions, channels for an appropriate coordination between the Technology and Cybersecurity Committee and the Audit and Compliance Committee will be established to ensure:

 (i) the Technology and Cybersecurity Committee has access to the conclusions of the work performed by the Internal Audit Department in technology and cybersecurity matters; and

(ii) the Audit and Compliance Committee is informed on IT-related systems and processes that are related to or affect the Bank’s internal control systems and other matters falling within the scope of its functions.

The Committee meets as often as necessary to comply with its functions. In 2017 it held seven (7) meetings.

The Committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, among other things, they regulate the Committee’s operation.

D.   Employees

As of December 31, 2017, we, through our various affiliates, had 131,856 employees. Approximately  88% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.

	As of December 31, 2017
Country	BBVA	Bank Subsidiaries	Non-bank Subsidiaries	Total
Spain	26,048	-	4,536	30,584
United Kingdom	125	-	-	125
France	72	-	-	72
Italy	51	-	5	56
Germany	44	-	-	44
Switzerland	-	121	-	121
Portugal	-	472	-	472
Belgium	27	-	-	27
The Netherlands (Holland)	-	242	-	242
Russia	3	-	-	3
Romania	-	1,255	-	1,255
Ireland	-	4	-	4
Luxembourg	-	-	3	3
Turkey	-	21,118	-	21,118
Finland	-	-	39	39
Total Europe	26,370	23,212	4,583	54,165
The United States	131	10,797	-	10,928
Argentina	-	6,264	-	6,264
Brazil	-	-	6	6
Colombia	-	6,769	-	6,769
Venezuela	-	4,159	-	4,159
Mexico	-	37,207	-	37,207
Uruguay	-	592	-	592
Paraguay	-	446	-	446
Bolivia	-	-	379	379
Chile	-	4,852	-	4,852
Cuba	1	-	-	1
Peru	-	5,955	-	5,955
Total Latin America	1	66,244	385	66,630
Hong Kong	85	-	-	85
Japan	3	-	-	3
China	18	-	2	20
Singapore	8	-	-	8
India	2	-	-	2
South Korea	2	-	-	2
United Arab Emirates	2	-	-	2
Taiwan	9	-	-	9
Indonesia	2	-	-	2
Total Asia	131	-	2	133
Total	26,633	100,253	4,970	131,856

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As of December 31, 2016, we, through our various subsidiaries, had 134,792 employees. Approximately 88% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.

	As of December 31, 2016
Country	BBVA	Bank Subsidiaries	Non-bank Subsidiaries	Total
Spain	26,884	-	4,567	31,451
United Kingdom	150	-	-	150
France	78	-	-	78
Italy	53	-	8	61
Germany	45	-	-	45
Switzerland	-	125	-	125
Portugal	-	490	-	490
Belgium	32	-	-	32
The Netherlands (Holland)	-	248	-	248
Russia	3	-	-	3
Romania	-	1,290	-	1,290
Ireland	-	4	-	4
Luxembourg	-	-	3	3
Turkey	-	22,140	-	22,140
Finland	-	-	39	39
Total Europe	27,245	24,297	4,617	56,159
The United States	128	10,416	-	10,544
Argentina	-	6,439	-	6,439
Brazil	1	-	7	8
Colombia	-	7,228	-	7,228
Venezuela	-	4,888	-	4,888
Mexico	-	37,378	-	37,378
Uruguay	-	618	-	618
Paraguay	-	463	-	463
Bolivia	-	-	366	366
Chile	-	4,522	-	4,522
Cuba	1	-	-	1
Peru	-	6,010	-	6,010
Total Latin America	2	67,546	373	67,921
Hong Kong	89	-	-	89
Japan	10	-	-	10
China	18	-	8	26
Singapore	10	-	-	10
India	2	-	-	2
South Korea	17	-	-	17
United Arab Emirates	3	-	-	3
Taiwan	7	-	-	7
Indonesia	2	-	-	2
Total Asia	158	-	8	166
Australia	2	-	-	2
Total Oceania	2	-	-	2
Total	27,535	102,259	4,998	134,792

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As of December 31, 2015, we, through our various subsidiaries, had 137,968 employees. Approximately 88% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.

	As of December 31, 2015
Country	BBVA	Bank Subsidiaries	Non-bank Subsidiaries	Total
Spain	23,975	22	8,906	32,903
United Kingdom	161	-	-	161
France	84	-	-	84
Italy	55	-	23	78
Germany	46	-	-	46
Switzerland	-	125	-	125
Portugal	-	522	-	522
Belgium	32	-	-	32
The Netherlands (Holland)	-	246	-	246
Russia	3	72	-	75
Romania	-	1,187	-	1,187
Ireland	-	4	-	4
Luxembourg	-	-	3	3
Turkey	8	22,178	-	22,186
Finland	-	-	-	-
Total Europe	24,364	24,356	8,932	57,652
The United States	149	11,004	-	11,153
Argentina	-	5,974	-	5,974
Brazil	2	-	7	9
Colombia	-	7,257	-	7,257
Venezuela	-	5,233	-	5,233
Mexico	-	38,499	-	38,499
Uruguay	-	632	-	632
Paraguay	-	482	-	482
Bolivia	-	-	331	331
Chile	-	4,672	-	4,672
Cuba	1	-	-	1
Peru	-	5,857	-	5,857
Total Latin America	3	68,606	338	68,947
Hong Kong	128	-	-	128
Japan	10	-	-	10
China	16	-	14	30
Singapore	10	-	-	10
India	2	-	-	2
South Korea	22	-	-	22
United Arab Emirates	3	-	-	3
Taiwan	7	-	-	7
Indonesia	2	-	-	2
Total Asia	200	-	14	214
Australia	2	-	-	2
Total Oceania	2	-	-	2
Total	24,718	103,966	9,284	137,968

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The terms and basic conditions of employment in private sector banks in Spain are negotiated with trade unions representing sector bank employees. Wage negotiations take place on an industry-wide basis. This process has historically produced collective bargaining agreements binding upon all Spanish banks and their employees. On June 15, 2016, the XXIII collective bargain agreement was signed. This agreement became effective as of January 1, 2015 and is set to expire on December 31, 2018.

As of December 31, 2017, 2016 and 2015, we had 1,300, 1,598 and 1,507 temporary employees in our Spanish offices, respectively.

E.    Share Ownership

As of March 28, 2018, the members of the Board of Directors owned an aggregate of BBVA shares as shown in the table below:

Name	Directly owned shares	Indirectly owned shares	Total shares	% Capital Stock
Francisco González Rodríguez	2,614,214	1,748,522	4,362,736	0.065%
Carlos Torres Vila	380,138	-	380,138	0.006%
Tomás Alfaro Drake	18,114	-	18,114	0.000%
José Miguel Andrés Torrecillas	10,828	-	10,828	0.000%
Belén Garijo López	-	-	-	-
José Manuel González-Páramo Martínez-Murillo	88,225	-	88,225	0.001%
Sunir Kumar Kapoor	-	-	-	-
Carlos Loring Martínez de Irujo	59,390	-	59,390	0.001%
Lourdes Máiz Carro	-	-	-	-
José Maldonado Ramos	38,761	-	38,761	0.001%
Juan Pi Llorens	-	-	-	-
Susana Rodríguez Vidarte	26,980	1,046	28,026	0.000%
Jan Verplancke	-	-	-	-
TOTAL	3,236,650	1,749,568	4,986,218	0.075%

BBVA has not granted options on its shares to any members of its administrative, supervisory or management bodies.

As of March 28, 2018 the Senior Management (excluding executive directors) owned an aggregate of BBVA shares as shown in the table below:

Name	Directly owned shares	Indirectly owned shares	Total shares	% Capital Stock
Eduardo Arbizu Lostao	326,634	-	326,634	0.005%
Domingo Armengol Calvo	111,628	-	111,628	0.002%
Juan Asúa Madariaga	422,164	31,790	453,954	0.007%
Ricardo Forcano García	48,724	-	48,724	0.001%
Ricardo Gómez Barredo	59,651	-	59,651	0.001%
Ricardo Enrique Moreno García	72,472	-	72,472	0.001%
Eduardo Osuna Osuna	31,874	-	31,874	0.000%
Cristina de Parias Halcón	171,804	-	171,804	0.003%
David Puente Vicente	65,218	-	65,218	0.001%
Francisco Javier Rodríguez Soler	109,348	-	109,348	0.001%
Jorge Sáenz-Azcúnaga Carranza	94,682	-	94,682	0.001%
Jaime Sáenz de Tejada Pulido	307,160	-	307,160	0.005%
Rafael Salinas Martínez de Lecea	179,718	18,873	198,591	0.003%
José Luis de los Santos Tejero	209,118	23,279	232,397	0.003%
Derek Jensen White	47,761	-	47,761	0.001%
TOTAL	2,257,956	73,942	2,331,898	0.035%

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As of March 27, 2018 a total of 19,402 employees (excluding the members of the Senior Management and executive directors) owned 55,855,885 shares, which represented 0.84% of our capital stock.

 ITEM 7.      MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

  As of March 27, 2018, no person, corporation or government beneficially owned, directly or indirectly, five percent or more of BBVA’s shares. BBVA’s major shareholders do not have voting rights which are different from those held by the rest of its shareholders. To the extent known to us, BBVA is not controlled, directly or indirectly, by any other corporation, government or any other natural or legal person. As of March 27, 2018, there were 889,597 registered holders of BBVA’s shares, with an aggregate of 6,667,886,580 shares, of which 586 shareholders with registered addresses in the United States held a total of 1,351,088,478 shares (including shares represented by American Depositary Shares evidenced by American Depositary Receipts (“ADRs”)). Since certain of such shares and ADRs are held by nominees, the foregoing figures are not representative of the number of beneficial holders.

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B.   Related Party Transactions

Loans to Directors, Senior Management and Other Related Parties

As of December 31, 2017 and 2016, there were no loans granted by the Group’s entities to the members of the Board of Directors. As of December 31, 2015 the amount availed against the loans by the Group’s entities to the members of the Board of Directors was €200 thousand. The amount availed against the loans by the Group’s entities to the members of Senior Management  (excluding the executive directors) amounted to €4,049 thousand, €5,573 thousand and €6,641 thousand as of December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017 and 2016, there were no loans granted to parties related to the members of the Board of Directors. As of December 31, 2015, the amount availed against the loans to parties related to the members of the Bank’s Board of Directors was €10,000 thousand. As of December 31, 2017, 2016 and 2015 the amount availed against the loans to parties related to members of the Senior Management amounted to €85 thousand, €98 thousand and €113 thousand, respectively.

As of December 31, 2017, 2016 and 2015 no guarantees had been granted to any member of the Board of Directors.

As of December 31, 2017 and 2016, the amount availed against guarantees arranged with members of the Senior Management totaled €28 thousand. As of December 31, 2015 no guarantees had been granted to any member of the Senior Management.

As of December 31, 2017, 2016 and 2015 the amount availed against commercial loans and guarantees arranged with parties related to the members of the Bank’s Board of Directors and the Senior Management totaled €8 thousand, €8 thousand and €1,679 thousand, respectively.

Related Party Transactions in the Ordinary Course of Business

Loans extended to related parties (including guarantees) were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features.

BBVA subsidiaries engage, on a regular and routine basis, in a number of customary transactions with other BBVA subsidiaries, including:

·overnight call deposits;

·time deposits;

·foreign exchange purchases and sales;

·derivative transactions, such as forward purchases and sales;

·money market fund transfers;

·letters of credit for imports and exports;

·financial guarantees;

·service level agreements;

and other similar transactions within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, to associates and to family members of all the above and to other BBVA non-banking subsidiaries or affiliates. All these transactions have been made:

·in the ordinary course of business;

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·on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons; and

·did not involve more than the normal risk of collectability or present other unfavorable features.

C.      Interests of Experts and Counsel

Not Applicable.

ITEM 8.     FINANCIAL INFORMATION

A.      Consolidated Statements and Other Financial Information

Financial Information

See Item 18.  

Dividends

The table below sets forth the gross amount of interim, final and total cash dividends paid by BBVA on its shares for the years 2013 to 2017. The rate used to convert euro amounts to U.S. dollars was the noon buying rate at the end of each year.

	Per Share
	First Interim		Second Interim		Third Interim		Final		Total
	€	$	€	$	€	$	€	$	€	$
2013	€ 0.100	$ 0.138	(*)	(*)	-	-	(*)	(*)	€ 0.100	$ 0.138
2014	€ 0.080	$ 0.097	(*)	(*)	(*)	(*)	(*)	(*)	€ 0.080	$ 0.097
2015	€ 0.080	$ 0.087	(*)	(*)	€ 0.080	$ 0.087	(*)	(*)	€ 0.160	$ 0.174
2016	€ 0.080	$ 0.084	(*)	(*)	€ 0.080	$ 0.084	(*)	(*)	€ 0.160	$ 0.169
2017	€ 0.090	$ 0.108	-	-	-	-	€ 0.150	$ 0.185	€ 0.240	$ 0.293

(*)  In execution of the 2013, 2014, 2015, 2016 and 2017 “Dividend Option” schemes described under “Item 4. Information on the Company—Business Overview —Supervision and Regulation—Dividends” approved by the shareholders in the respective general shareholders’ meetings, BBVA shareholders were given the option to receive their remuneration in newly issued ordinary shares or in cash.

On February 1, 2017 BBVA updated its shareholders’ remuneration policy in order to implement a fully in cash remuneration policy after the execution of the 2017 Dividend Option, which took place during April 2017 (see “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”). This fully in cash shareholders’ remuneration policy is expected to be composed, for each financial year, of an interim dividend and a final dividend, subject to any applicable restrictions and authorizations. On April 10, 2018, the final dividend for 2017 will be paid. The rate used to convert euro amounts to U.S. dollars was 1.232 as of March 30, 2018.

We have paid annual dividends to our shareholders since the date we were founded. The cash dividend for a year is proposed by the Board of Directors to be approved by the annual general shareholders’ meeting following the end of the year to which it relates and includes any interim dividend that may be passed by the Board of Directors during that period. The scrip dividends, if applicable, are proposed for approval of our shareholders in the annual general shareholders’ meeting, for being implemented during a period of one year from their approval. Interim and final dividends are payable to holders of record on the record date for the dividend payment date. Unclaimed cash

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dividends revert to BBVA five years after declaration. For additional information see “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”.

While we expect to declare and pay dividends on our shares in the future, the payment of dividends will depend upon the results of BBVA, market conditions, the regulatory framework, the recommendations or restrictions regarding dividends that may be adopted by domestic or European regulatory bodies or authorities and other factors.

Subject to the terms of the deposit agreement entered into with the Bank of New York Mellon, holders of ADSs are entitled to receive dividends (in cash or scrip, as applicable) attributable to the shares represented by the ADSs evidenced by ADRs to the same extent as if they were holders of such shares.

BBVA may not pay dividends except out of its annual results and its distributable reserves, after taking into account the applicable capital adequacy requirements and any recommendations on payment of dividends, and any other required authorization or restriction, if applicable. Capital adequacy requirements are applied on both a consolidated and individual basis. See “Item 4. Information on the Company— Business Overview—Supervision and Regulation—Capital Requirements” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital”. Under applicable capital adequacy requirements, we estimate that as of December 31, 2017, BBVA had approximately €15.4 billion of reserves in excess of applicable capital and reserve requirements (based on an 11.25% phased-in total capital minimum requirement). 

Legal Proceedings

As mentioned in “Item 3. Key Information—Risk Factors—Risks Relating to Us and Our Business—The Group is party to lawsuits, tax claims and other legal proceedings”, we operate in an increasingly regulated and litigious environment with a potential exposure to liability and other costs, which may not be easy to estimate.

In this environment, the entities of the Group are party to legal proceedings, arising from the ordinary course of business, in a number of jurisdictions (including, among others, Spain, Mexico and the United States). This includes, for example, administrative proceedings such as the proceeding initiated by the Spanish National Commission on Markets and Competition (CNMC) which resulted, on February 13, 2018, in four Spanish financial entities (including the Bank) being sanctioned for allegedly coordinating to fix above-market prices in the contracting of financial derivatives used to hedge the interest rate risk in syndicated loans for project financing. While we cannot predict the outcome of these proceedings, according to the procedural status of these proceedings and our assessment of these matters, BBVA believes that none of such proceedings, individually or in the aggregate, if resolved adversely, would result in a material adverse effect on the Group’s financial position, results of operations or liquidity. The Group’s management believes that adequate provisions have been made in respect of such legal proceedings, and considers that the possible contingencies that may arise from such ongoing proceedings are not material.

“Floor” Clauses

In its consolidated financial statements for the year ended December 31, 2016, BBVA considered the legal proceedings related to “floor” clauses limiting the interest rates in mortgages loans with consumers (commonly referred to as “cláusulas suelo”) to be material. In such year, in light of the decision of the Court of Justice of the European Union of December 2016 and after analyzing the portfolio of mortgage loans to consumers in which there were “floor” clauses, BBVA made a provision of €577 million (with an impact on “Profit attributable to parent company” of approximately €404 million) that was recorded in the income statement of 2016, to cover possible contingencies and claims. This provision has been used for such purpose during 2017. BBVA has made additional provisions during 2017 to cover possible contingencies and claims that may arise in connection with this matter in amounts that BBVA considers not significant.

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B.      Significant Changes

No significant change has occurred since the date of the Consolidated Financial Statements other than those mentioned in this Annual Report or our Consolidated Financial Statements.

ITEM 9.       THE OFFER AND LISTING

A.     Offer and Listing Details

BBVA’s shares are listed on the Spanish stock exchanges in Madrid, Bilbao, Barcelona and Valencia (the “Spanish Stock Exchanges”) and listed on the computerized trading system of the Spanish Stock Exchanges (the “Automated Quotation System”). BBVA’s shares are also listed on the Mexican and London stock exchanges as well as quoted on SEAQ International in London. BBVA’s shares are listed on the New York Stock Exchange as American Depositary Shares (ADSs).

ADSs are listed on the New York Stock Exchange and are also traded on the Lima (Peru) Stock Exchange, by virtue of an exchange agreement entered into between these two exchanges. Each ADS represents the right to receive one share.

Fluctuations in the exchange rate between the euro and the dollar will affect the dollar equivalent of the euro price of BBVA’s shares on the Spanish Stock Exchanges and the price of BBVA’s ADSs on the New York Stock Exchange. Cash dividends are paid by BBVA in euro, and exchange rate fluctuations between the euro and the dollar will affect the dollar amounts received by holders of ADRs on conversion by The Bank of New York Mellon (acting as depositary) of cash dividends on the shares underlying the ADSs evidenced by such ADRs.

As of December 31, 2017, State Street Bank and Trust Co., The Bank of New York Mellon, SA NV and Chase Nominees Ltd in their capacity as international custodian/depositary banks, held 12.53%, 6.48% and 3.80% of BBVA common stock, respectively. Of said positions held by the custodian banks, BBVA is not aware of any individual shareholders with direct or indirect holdings greater than or equal to 3% of BBVA common stock outstanding.

The table below sets forth, for the periods indicated, the high and low sales closing prices for the shares of BBVA on the Automated Quotation System:

	Euro per Share
	High	Low
Fiscal year ended December 31, 2013
Annual	9.33	6.24
Fiscal year ended December 31, 2014
Annual	9.93	7.72
Fiscal year ended December 31, 2015
Annual	9.73	6.71
Fiscal year ended December 31, 2016
Annual	6.76	4.76
First Quarter	6.64	5.24
Second Quarter	6.76	4.76
Third Quarter	5.75	4.79
Fourth Quarter	6.61	5.29
Fiscal year ended December 31, 2017
Annual	7.93	5.97
First Quarter	7.27	5.97
Second Quarter	7.80	6.79
Third Quarter	7.93	7.17
Fourth Quarter	7.51	7.02
Month ended October 31, 2017	7.51	7.18
Month ended November 30, 2017	7.48	7.02
Month ended December 31, 2017	7.37	7.07
Fiscal year ended December 31, 2018
Month ended January 31, 2018	7.64	7.08
Month ended February 28, 2018	7.46	6.89
Month ended March 31, 2018 (through March 29, 2018)	6.79	6.26

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From January 1, 2017 through December 31, 2017 the percentage of outstanding shares held by BBVA and its affiliates ranged between 0.004% and 0.278%, calculated on a daily basis. As of March 14, 2018, the percentage of outstanding shares held by BBVA and its affiliates was 0.319 %.  

The table below sets forth the reported high and low sales closing prices for the ADSs of BBVA on the New York Stock Exchange for the periods indicated.

	U.S. Dollars per ADR
	High	Low
Fiscal year ended December 31, 2013
Annual	12.78	8.22
Fiscal year ended December 31, 2014
Annual	13.54	9.39
Fiscal year ended December 31, 2015
Annual	10.65	7.33
Fiscal year ended December 31, 2016
Annual	7.63	5.30
First Quarter	7.32	5.97
Second Quarter	7.63	5.30
Third Quarter	6.46	5.33
Fourth Quarter	7.21	5.92
Fiscal year ended December 31, 2017
Annual	9.27	6.40
First Quarter	7.87	6.40
Second Quarter	8.70	7.29
Third Quarter	9.27	8.52
Fourth Quarter	8.76	8.26
Month ended October 31, 2017	8.76	8.32
Month ended November 30, 2017	8.71	8.26
Month ended December 31, 2017	8.66	8.34
Fiscal year ended December 31, 2018
Month ended January 31, 2018	9.54	8.54
Month ended February 28, 2018	9.35	8.32
Month ended March 31, 2018 (through March 29, 2018)	8.26	7.65

Securities Trading in Spain

The Spanish securities market for equity securities consists of the Automated Quotation System and the four stock exchanges located in Madrid, Bilbao, Barcelona and Valencia. During 2017, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

Automated Quotation System. The Automated Quotation System (Sistema de Interconexión Bursátil) links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates certain of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by

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investors and brokers. The Automated Quotation System is operated and regulated by Sociedad de Bolsas, S.A. (“Sociedad de Bolsas”), a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish Stock Exchange directly. Since January 1, 2000, Spanish banks have been allowed to place trades on the Automated Quotation System and have been allowed to become members of the Spanish Stock Exchanges. We are currently a member of the four Spanish Stock Exchanges and can trade through the Automated Quotation System.

Sociedad de Bolsas reinstated the Operating Rules of the Spanish Automated Quotation System by means of Sociedad de Bolsas Circular 1/2017, of December 18, which came into effect January 3, 2018. Changes introduced in such Operating Rules include changes to the way trading is technically undertaken (e.g. by introducing new types of orders such as “hidden orders” and “combined blocks”, VWAP trades and midpoint orders), the suppression of the New Market segment and the introduction of a Market Making scheme as per MiFID2 standards .  BBVA, as an active market member in the Spanish market has adapted its technical means and procedures to such changes.

In a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day, an opening price is established for each security traded on the Automated Quotation System based on orders placed at that time. The regime concerning opening prices was changed by an internal rule issued by the Sociedad de Bolsas. In this new regime all references to maximum changes in share prices are substituted by static and dynamic price ranges for each listed share, calculated on the basis of the most recent historical volatility of each share, and made publicly available and updated on a regular basis by the Sociedad de Bolsas. The computerized trading hours are from 9:00 a.m. to 5:30 p.m., during which time the trading price of a security is permitted to vary by up to the stated levels. If, during the open session, the quoted price of a share exceeds these static or dynamic price ranges, Volatility Auctions are triggered, resulting in new static or dynamic price ranges being set for the share object of the same. Between 5:30 p.m. and 5:35 p.m. a closing price is established for each security through an auction system similar to the one held for the pre-opening early in the morning.

Trading hours for block trades (i.e., operations involving a large number of shares) are also from 9:00 a.m. to 5:30 p.m.

Between 5:30 p.m. and 8:00 p.m., special operations, whether Authorized  or Communicated,  can take place outside the computerized matching system of the Sociedad de Bolsas if they fulfill certain requirements. In such respect Communicated special operations(those that do notneed the prior authorization of the Sociedad de Bolsas) can be traded if all of the following requirements are met: (i) the trade price of the share must be within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day; (ii) the market member executing the trade must have previously covered certain positions in securities and cash before executing the trade; and (iii) the size of the trade must involve at least €300,000 and represent at least a 20% of the average daily trading volume of the shares in the Automated Quotation System during the preceding three months. If any of the aforementioned requirements is not met, a special operation may still take place, but it will need to take the form of Authorized  special operation (i.e., those needing the prior authorization of the Sociedad de Bolsas). Such authorization will only be upheld if any of the following requirements are met:

·the trade involves more than €1.5 million and more than 40% of the average daily volume of the stock during the preceding three months;

·the transaction derives from a merger or spin-off process or from the reorganization of a group of companies;

·the transaction is executed for the purposes of settling a litigation or completing a complex group of contracts; or

·the Sociedad de Bolsas finds other justifiable cause.

Information with respect to the computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas by the end of the trading day and published in the Boletín de Cotización and in the computer system by the beginning of the next trading day.

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Sociedad de Bolsas is also the manager of the IBEX 35® Index. This index is made up by the 35 most liquid securities traded on the Spanish Market and, technically, it is a price index that is weighted by capitalization and adjusted according to the free float of each company comprised in the index. Apart from its quotation on the four Spanish Exchanges, BBVA is also currently included in the IBEX 35® Index.

Clearing and Settlement System

On April 1, 2003, by virtue of Law 44/2002 and of Order ECO 689/2003 of March 27, 2003 approved by the Spanish Ministry of Economy, the integration of the two main existing book-entry settlement systems existing in Spain at the time (the equity settlement system Servicio de Compensación y Liquidación de Valores (“SCLV”) and the Public Debt settlement system Central de Anotaciones de Deuda del Estado (“CADE”)) took place. As a result of this integration,a single entity, known as Sociedad de Gestión de los Sistemas de Registro Compensación y Liquidación de Valores (“Iberclear”) assumed the functions formerly performed by SCLV and CADE according to the legal regime then stated in article 44 bis of the Spanish Securities Market Act (Law 24/1988).

Notwithstanding the above, rules concerning the book-entry settlement systems enacted before this date by SCLV and the Bank of Spain, as former manager of CADE, continued in force, but any reference to the SCLV or CADE was deemed to be substituted by Iberclear.

In addition, and according to Law 41/1999, Iberclear currently manages the ARCO Securities settlement system (the “ARCO System”) for securities in book-entry form listed on the four Spanish Stock Exchanges, on the Spanish Public Debt Book-Entry Market, on “AIAF Mercado de Renta Fija”, or on other Multilateral Trading Facilities that have appointed Iberclear for such purposes. Cash settlement, from February 18, 2008 for all systems is managed through the TARGET2-Banco de España payment system.

Laws 32/2011 and 11/2015 amended the Spanish Securities Market Act and Royal Decree 878/2015 replaced Royal Decree 116/1992 from February 3, 2016, introducing changes to the Spanish clearing, settlement and book-entry registry procedures applicable to securities transactions so as to allow post-trading Spanish systems to integrate into the TARGET2 Securities System (T2S). The project to reform Spain’s clearing, settlement and registry system and connect it to the T2S (the “Reform”) introduced significant changes that affected all classes of securities and all post-trade activities.

The Reform was implemented in two phases:

The first phase took place from April 27, 2016 and involved setting up a new system for equities including all the changes envisaged in the Reform, encompassing the incorporation of central counterparty clearing (performed by, among others, BME Clearing, S.A.U.) in a post-trading scheme compatible with the T2S (including with respect to messages, account structure, definition of operations, etc.). Accordingly, the SCLV (Servicio de Compensación y Liquidación de Valores) platform was discontinued.

The T+3 settlement cycle for trades executed in trading venues, affecting mainly equities, was reduced to T+2 from October 2016, in line with what is set forth in European Regulation 909/2014, of July 23 on improving securities settlement in the European Union and on Central Securities Depositories (“CSDR”).

The CADE platform continued to operate unchanged until the last quarter of 2017, and cash settlements in the new system continue to be made through the TARGET2-Bank of Spain cash accounts.

The second phase started on September 18, 2017, when Iberclear successfully connected itself to T2S. At this time, fixed-income securities were transferred to the new system (being the CADE discontinued), as well as equity securities, with both types of securities beginning to be also settled in accordance with the procedures, formats and time periods of the T2S and under the ARCO System. This successful migration to T2S meant the culmination of the Reform.

The latest amendments to Iberclear’s Rulebook reflecting the Reform were officially published in the Spanish Official Gazette (May 3 and August 18, 2016 and September 14, 2017) while each Spanish Stock Exchange has approved its respective new rulebook between April 2016 and December 2017.

During the last quarter of 2017, Iberclear filed for authorization as Central Securities Depository pursuant to

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CSDR.

Under Law 41/1999 and Royal Decree 878/2015 (which replaced Royal Decree 116/1992 on February 3, 2016), transactions carried out on the Spanish Stock Exchanges are cleared and settled through Iberclear and its participants (each an entidad participante), through the ARCO System. Only Iberclear participants to this ARCO System are entitled to use it, with participation restricted to credit entities, investment firms authorized to render custody services, certain public bodies, and Central Securities Depositories and Central Counterparties authorized under their respective European Union Regulations. BBVA is currently a participant in Iberclear. Iberclear and its participants are responsible for maintaining records of purchases and sales under the book-entry system. In order to be listed, shares of Spanish companies must be held in book-entry form. Iberclear, maintains a “two-step” book-entry registry reflecting the number of shares held by each of its participants as well as the amount of such shares held on behalf of beneficial owners. Each participant, in turn, maintains a registry of the owners of such shares. Spanish law considers the legal owner of the shares to be:

·the participant appearing in the records of Iberclear as holding the relevant shares in its own name, or

·the investor appearing in the records of the participant as holding the shares.

Obtaining legal title to shares of a company listed on a Spanish Stock Exchange requires the participation of an investment firm, bank or other entity authorized under Spanish law to record the transfer of shares in book-entry form in its capacity as Iberclear participant for the equity securities settlement system. To evidence title to shares, at the owner’s request the relevant participant entity must issue a certificate of ownership. In the event the owner is a participant entity, Iberclear is in charge of the issuance of the certificate with respect to the shares held in the participant entity’s own name.

According to the Securities Market Act brokerage commissions are not regulated. Brokers’ fees, to the extent charged, will apply upon transfer of title of our shares from the depositary to a holder of ADSs, and upon any later sale of such shares by such holder. Transfers of ADSs do not require the participation of a member of a Spanish Stock Exchange. The deposit agreement provides that holders depositing our shares with the depositary in exchange for ADSs or withdrawing our shares in exchange for ADSs will pay the fees of the official stockbroker or other person or entity authorized under Spanish law applicable both to such holder and to the depositary.

Securities Market Legislation

The Securities Markets Act was enacted in 1988 with the purpose of reforming the organization and supervision of the Spanish securities markets. This legislation and the regulation implementing it:

·established an independent regulatory authority, the CNMV, to supervise the securities markets;

·established a framework for the regulation of trading practices, tender offers and insider trading;

·required stock exchange members to be corporate entities;

·required companies listed on a Spanish Stock Exchange to file annual audited financial statements and to make public quarterly financial information;

·established the legal framework for the Automated Quotation System;

·exempted the sale of securities from transfer and value added taxes;

·deregulated brokerage commissions; and

·provided for transfer of shares by book-entry or by delivery of evidence of title.

On February 14, 1992, Royal Decree No. 116/92 established the clearance and settlement system and the book-entry system, and required that all companies listed on a Spanish Stock Exchange adopt the book-entry system. On February 3, 2016 Royal Decree 878/2015 came into force and replaced Royal Decree 116/1992 (Royal Decree 827/2017, of September 1, amended Royal Decree 878/2015 by reflecting certain aspects of the Reform).

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On April 12, 2007, the Spanish Congress approved Law 6/2007, which amends the Securities Markets Act in order to adapt it to Directive 2004/25/EC on takeover bids, and Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (amending Directive 2001/34/EC). Regarding the transparency of listed companies, Law 6/2007 amended the reporting requirements and the disclosure regime, and established changes in the supervision system. On the takeover bids side, Law 6/2007 has established the cases in which a company must launch a takeover bid and the ownership thresholds at which a takeover bid must be launched. It also regulates conduct rules for the board of directors of target companies and the squeeze-out and sell-out when a 90% of the share capital is held after a takeover bid. Additionally, Law 6/2007 was further developed by Royal Decree 1362/2007, on transparency requirements for issuers of listed securities, which was subsequently amended (see “—Trading by the Bank and its Affiliates in the Shares”).

On December 19, 2007, the Spanish Congress approved Law 47/2007, which amends the Securities Markets Act in order to adapt it to Directive 2004/37/EC on markets in financial instruments (MiFID), Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, and Directive 2006/73/EC implementing Directive 2004/39/EC with respect to organizational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive. Further MiFID implementation was introduced by Royal Decree 217/2008.

The Regulation of the European Parliament and of the Council on short selling and certain aspects of credit default swaps (EU) No 236/2012 (Regulation) has been in force since March 25, 2012 and became directly effective in EU countries from November 1, 2012. This Regulation introduced a pan-European regulatory framework for dealing with short selling and requires persons to disclose short positions in relation to shares of EU listed companies and EU sovereign debt. For significant net short positions in shares of EU listed companies, these regulations create a two-tier reporting model: (i) when a net short position reaches 0.20% of an issuer’s share capital (and at every 0.1% thereafter), such position must be privately reported to the relevant regulator; and (ii) when such position reaches 0.50% (and at every 0.1% thereafter) of an issuer’s share capital, apart from being disclosed to the regulators, such position must be publicly reported to the market.

Law 9/2012 and Royal Decree 1698/2012 implemented European Directive 2010/73/EU (which amended Directive 2003/71/EC, on the prospectus to be published when securities are offered to the public or admitted to trading and Directive 2004/109/EC, on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market). The main changes to requirements applicable to prospectuses introduced by Regulation (EU) 2017/1129 of the European Parliament and of the Council, of October 14, will come into effect on July 21, 2019.

Directive 2014/65/EU of the European Parliament and of the Council of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MIFID II), and Regulation (EU) 600/2014 of the European Parliament and Council of May 15, 2014 on markets in financial instruments and amending Regulation (EU) 648/2012 (MiFIR), were published on June 12, 2014 and, when fully implemented and in force, will affect the Spanish securities market legislation, markets and infrastructures. This could translate into higher compliance costs for financial institutions. As of December 31, 2017, the only implementation of MiFID II into Spanish Law was that introduced by Royal Decree-Law 21/2017, of December 29, which dealt only with certain matters related to Spanish regulated markets, multilateral trading facilities, and organized trading facilities.

Royal Legislative Decree 4/2015, of October 23, approved the reinstated text of the Securities Markets Act.

Trading by the Bank and its Affiliates in the Shares

Trading by subsidiaries in their parent companies shares is restricted by the Corporate Enterprises Act.

Neither BBVA nor its affiliates may purchase BBVA’s shares unless the making of such purchases is authorized at a meeting of BBVA’s shareholders by means of a resolution establishing, among other matters, the maximum number of shares to be acquired and the authorization term, which cannot exceed five years. Restricted reserves equal to the purchase price of any shares that are purchased by BBVA or its subsidiaries must be made by the purchasing entity. The total number of shares held by BBVA and its subsidiaries may not exceed ten percent of BBVA’s total capital, as per the treasury stock limits set forth in the Corporate Enterprises Act (Royal Legislative

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Decree 1/2010). It is the practice of Spanish banking groups, including ours, to establish subsidiaries to trade in their parent company’s shares in order to meet imbalances of supply and demand, to provide liquidity (especially for trades by their customers) and to modulate swings in the market price of their parent company’s shares.

Reporting Requirements

Royal Decree 1362/2007 requires that any person or entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% and 90% of the capital stock of a company listed on a Spanish Stock Exchange must, within four stock exchange business days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the ratio of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer.

In addition, any company listed on a Spanish Stock Exchange must report on a non-public basis to the CNMV, within four Stock Exchange business days, any acquisition by such company (or an affiliate) of the company’s own shares if such acquisition, together with any previous one from the date of the last communication, exceeds 1% of its capital stock, regardless of the balance retained. Members of the board of directors must report the ratio of voting rights held at the time of their appointment as members of the board, when they are ceased as members, and each time they transfer or acquire share capital of a company listed on the Spanish Stock Exchanges, regardless of the size of the transaction. Additionally, since we are a credit entity, any individual or company who intends to acquire a significant participation in BBVA’s share capital must obtain prior approval from the Bank of Spain in order to carry out the transaction. See “Item 10. Additional Information—Exchange Controls—Restrictions on Acquisitions of Shares”. 

Royal Decree 1362/2007 also establishes reporting requirements in connection with any entity acting from a tax haven or a country where no securities regulatory commission exists, in which case the threshold of three percent is reduced to one percent.

Royal Decree 1362/2007 was amended in 2015 in order to, among other matters, include some changes to the reporting requirements applicable to major shareholdings. In particular, cash settled instruments creating long positions on underlying listed shares shall be disclosed if the specified shareholding threshold is reached or exceeded; cash holdings and holdings as a result of financial instruments shall be aggregated for disclosure purposes and a disclosure exemption for shareholding positions held by financial entities in their trading books is available.

Regulation (EU) No 596/2014 of the European Parliament and of the Council of April 16, 2014 on market abuse and its implementing regulations entered into force on July 3, 2016, involving a number of changes for BBVA as a listed issuer, including in relation to areas such as disclosure of inside information to the market, maintenance of insider lists and disclosure of restrictions on dealings by directors and persons discharging managerial responsibilities.

Each Spanish bank is required to provide to the Bank of Spain a list dated the last day of each quarter of all the bank’s shareholders that are financial institutions and other non-financial institution shareholders owning at least 0.25% of a bank’s total share capital. Furthermore, the banks are required to inform the Bank of Spain, as soon as they become aware, and in any case not later than in 15 days, of each acquisition by a person or a group of at least one percent of such bank’s total share capital.

Ministerial Order EHA/1421/2009 developed the requirements set forth in the Securities Market Act on the publication of significant information. In this respect, the principles to be followed and conditions to be met by entities when they publish and report significant information are set forth, along with the content requirements, including when significant information is connected with accounting, financial or operational projections, forecasts or estimates. The reporting entity must designate at least one interlocutor whom the CNMV may consult or from whom it may request information relating to dissemination of the significant information. Lastly, some of the circumstances in which it is considered that an entity is failing to comply with the duty to publish and report significant information are described. These include, among others, cases in which significant information is disseminated at meetings with investors or shareholders or at presentations to analysts or to media professionals, but is not communicated, at the same time, to the CNMV.

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Ministerial Order EHA/1421/2009 was modified by ministerial Order ECC/461/2013 which imposed on securities issuers the duty of publishing notices of significant information through their websites.

Circular 4/2009 of the CNMV further develops Ministerial Order EHA1421/2009. In this respect, the Circular sets forth a precise proceeding for the actual report of the significant information and draws up an illustrative list of the events that may be deemed to constitute significant information. This list includes, among others, events connected with strategic agreements and mergers and acquisitions, information relating to the reporting entity’s financial statements or those of its consolidated group, information on notices of call and official matters and information on significant changes in factors connected with the activities of the reporting entity and its group.

Tax Requirements

According to Law 10/2014, an issuer’s parent company (credit entity or listed company) is required, on an annual basis, to provide the Spanish tax authorities with the following: (i) disclosure of information regarding those investors with Spanish Tax residency obtaining income from securities and (ii) the amount of income obtained by them in each period.

B.Plan of distribution

Not Applicable.

C.Markets

See “Item 9. The Offer and Listing”.

D.Selling Shareholders

Not Applicable.

E.Dilution

Not Applicable.

F.Expenses of the Issue

Not Applicable.

ITEM 10.      ADDITIONAL INFORMATION

A.      Share Capital

Not Applicable.

B.      Memorandum and Articles of Association

Spanish law and BBVA’s Bylaws are the main sources of regulation affecting the Company. All rights and obligations of BBVA’s shareholders are contained in BBVA’s Bylaws and in Spanish law. Pursuant to Royal Decree 84/2015 of February 13, implementing Law 10/2014, amendments of the Bylaws of a bank are subject to notice or prior authorization of the Bank of Spain.

Registry and Company’s Objects and Purposes

BBVA is registered with the Commercial Registry of Vizcaya (Spain). Its registration number at the Commercial Registry of Vizcaya is volume 2,083, Company section folio 1, sheet BI-17-1, 1st entry. Its corporate purpose is to engage in all kinds of activities, operations, acts, contracts and services within the banking business or directly or indirectly related to it that are permitted or not prohibited by prevailing provisions and ancillary

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activities. Its corporate purpose also includes the acquisition, holding, utilization and divestment of securities, public offerings to buy and sell securities, and any kind of holdings in any company or enterprise. BBVA’s corporate purpose is contained in Article 3 of BBVA’s Bylaws.

Certain Powers of the Board of Directors

In general, provisions regarding directors are contained in our Bylaws. Also, our Board Regulations govern the internal procedures and the operation of the Board of Directors and its Committees and directors’ rights and duties as described in their charter. The referred Board Regulations limit a director’s right to vote on a proposal, arrangement or contract in which the director is materially interested and require retirement of directors at a certain age. Directors are not required to hold shares of BBVA in order to be appointed as such. As regards compensation in shares for executive directors, please see “Item 6. Directors, Senior Management and Employees—B. Compensation”. 

Lastly, the Board Regulations contain a series of ethical standards. For more information please see “Item 6. Directors, Senior Management and Employees”. 

Certain Provisions Regarding Privileged Shares

Our Bylaws authorize us to issue ordinary, non-voting, redeemable and privileged shares. As of the date of the filing of this Annual Report, we have no non-voting, redeemable or privileged shares outstanding.

The Company may issue shares that confer some privilege over ordinary shares under the legally established terms and conditions, complying with the formalities prescribed for amending our Bylaws.

Redemption of shares may only occur according to the terms set forth when they are issued. Redeemable shares must be fully paid-up at the time of their subscription. If the redemption right was attributed exclusively to the issuer, it may not be enforced until three years have elapsed since the issue. Redemption of redeemable shares must be charged to earnings or to free reserves or be made with the proceeds of a new share issue made under a resolution from the general shareholders’ meeting or, as the case may be, from the Board of Directors, for the purpose of financing the redemption transaction. If the redemption of these shares is charged to earnings or to free reserves, the Company must set up a reserve for the amount of the nominal value of the shares redeemed. If the redemption is not charged to earnings or free reserves or made with the proceeds of the issuance of new shares, it may only be carried out under the requirements established for the reduction of share capital by refunding contributions.

Holders of non-voting shares, if issued, are entitled to receive a minimum fixed or variable annual dividend, as resolved by the general shareholders’ meeting and/or the Board of Directors at the time of deciding to issue the shares. The right of non-voting shares to accumulate unpaid dividends whenever funds to pay dividends are not available, any preemptive subscription rights associated with non-voting shares, and the ability of holders of non-voting shares to recover voting rights also must be established at the time of deciding to issue the shares. Once the minimum dividend has been agreed upon, holders of non-voting shares will be entitled to the same dividend as holders of ordinary shares.

Certain Provisions Regarding Shareholders Rights

As of the date of the filing of this Annual Report, our capital is comprised of one class of ordinary shares, all of which have the same rights.

Once the allocation requirements established by law and in our Bylaws have been covered, dividends may be paid out to shareholders and charged to the year’s profit or to unrestricted reserves, in proportion to the capital they may have paid up, provided the value of the total net assets is not, or as a result of such distribution would not be, less than the share capital. Shareholders will participate in the distribution of earnings in proportion to their capital paid-up. The right to collect a dividend lapses after five years as of the date in which it was first available to the shareholders. Shareholders also have the right to participate in proportion to their capital paid-up in any distribution of net assets resulting from our liquidation. For more information regarding dividends see “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”. 

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Each voting share will confer the right to one vote on the holder present or represented at the general shareholders’ meeting. However, unpaid shares with respect to which a shareholder is in default of the resolutions of the Board of Directors relating to their payment will not be entitled to vote. Our Bylaws contain no provisions regarding cumulative voting.

Our Bylaws do not contain any provisions relating to sinking funds or potential liability of shareholders to further capital calls by us.

Our Bylaws do not establish that special quorums are required to change the rights of shareholders. Under Spanish law, the rights of shareholders may only be changed by an amendment to the Bylaws that complies with the requirements explained below under “—Shareholders’ Meetings”, plus the affirmative vote of the majority of the shares of the class that will be affected by the amendment.

Shareholders’ Meetings

The annual general shareholders’ meeting has its own set of regulations on issues such as how it operates and what rights shareholders enjoy regarding general meetings. These establish the possibility of exercising or delegating votes over remote communication media.

General shareholders’ meetings may be annual or extraordinary. The annual general shareholders’ meeting is held within the first six months of each year. It will give approval, among other things and where applicable, to the corporate management of the Company and the financial statements for the previous year and resolve as to the allocation of profits or losses. Extraordinary general shareholders’ meetings are those meetings that are not ordinary. In any case, the requirements mentioned below for constitution and adoption of resolutions are applicable to both categories of general shareholders’ meetings.

General shareholders’ meetings will be called at the initiative of and according to the agenda determined by the Board of Directors, whenever it deems necessary or advisable for the Company’s interests, and in any case on the dates or in the periods determined by law and the Company Bylaws, or upon the request of one or several shareholders representing at least three percent of our share capital.

Our general shareholders’ meeting Regulations establish that annual and extraordinary general shareholders’ meetings must be called within the notice period required by law. This will be done by means of an announcement published by the Board of Directors or its proxy in the Official Gazette of the Companies Registry (“BORME”) or one of the most widely disseminated daily newspapers in Spain within the notice period required by law, as well as being disseminated on the CNMV (the Spanish Securities Market Commission) website and the Company website, except when legal provisions establish other media for disseminating the notice.

The Company’s general shareholders’ meetings may be attended by anyone owning the minimum number of shares established in our Bylaws (500), provided that their holding is registered in the corresponding accounting records five days before the meeting is scheduled and that they keep at least that same number of shares until the meeting is held. Holders of fewer shares may group together until they make up at least that number, appointing a representative.

General shareholders’ meetings will be validly constituted at first summons with the presence of at least 25% of our voting capital, either in person or by proxy. No minimum quorum is required to hold a general shareholders’ meeting at second summons. In either case, resolutions will be agreed by the majority of the votes. However, a general shareholders’ meeting will only be validly held with the presence of 50% of our voting capital at first summons or of 25% of the voting capital at second summons, in the case of resolutions concerning the following matters:

·debt issuances;

·share capital increases or decreases;

·the exclusion or limitation of the pre-emptive subscription rights over new shares;

·transformation, merger of BBVA or spin-off and global assignment of assets and liabilities;

·the off-shoring of domicile, and

·any other amendment to the Bylaws.

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In these cases, resolutions may only be approved with the vote of the absolute majority of the shares if at least 50% of the voting capital is present or represented at the general shareholders’ meeting. If the voting capital present or represented at the meeting at second summons is less than 50% (but over 25%), then resolutions may only be adopted by two-thirds of the shares present or represented.

Additionally, our Bylaws state that, in order to adopt resolutions approving the replacement of the corporate purpose, the transformation, total spin-off, the winding up of BBVA and amending that paragraph of the relevant article of our Bylaws, two-thirds of the subscribed voting capital must attend the general shareholders’ meeting at first summons, or 60% of that capital at second summons.

Restrictions on the Ownership of Shares

Our Bylaws do not provide for any restrictions on the ownership of our ordinary shares. Spanish law, however, provides for certain restrictions which are described below under “—Exchange Controls—Restrictions on Acquisitions of Shares”. 

Restrictions on Foreign Investments

The Spanish Stock Exchanges are open to foreign investors. Investments in shares of Spanish companies by foreign entities or individuals may be freely executed but require the notification to the Spanish Foreign Investment Authorities for administrative statistical and economical purposes. See “—Exchange Controls”. In addition, they are subject to certain restrictions and requirements which are also applicable to investments by domestic entities or individuals.

Current Spanish regulations provide that foreign investors may freely transfer out of Spain any amounts of invested capital, capital gains and dividends subject to applicable taxes. See “—Exchange Controls”. 

C.Material Contracts

Shareholders’ Agreement in Connection with Garanti

On November 1, 2010, in connection with the acquisition of our initial stake in Garanti, we entered into a shareholders’ agreement with Doğuş, which was subsequently amended and restated on November 19, 2014. The amended and restated shareholders’ agreement ceased to be in effect upon the closing, on March 22, 2017, of our acquisition of an additional 9.95% stake in Garanti.

While the amended and restated shareholders’ agreement allowed BBVA to appoint the Chairman of Garanti’s board of directors, the majority of its members and Garanti’s CEO, it also provided for a list of reserved matters which had to be implemented or approved (either at a meeting of the shareholders or of the board) with each party’s consent. For example, Doğuş’ consent was necessary to approve any decisions in connection with the disposal or discontinuance of, or material changes to, any line of business or business entity within the Garanti group that had a value in excess of 25% of the Garanti group’s total net assets, in one financial year. In addition, the amended and restated shareholders’ agreement provided for certain rights of first offer, tag-along rights and a lock-up period in respect of Garanti shares owned by Doğuş. Moreover, the parties agreed to seek to maintain Garanti’s listing on the Istanbul Exchange and to distribute at least 25% of Garanti’s distributable profits as long as they held a certain stake in Garanti.

Joint Venture Agreement with Cerberus

On November 28, 2017 BBVA and various BBVA Group companies entered into a Joint Venture agreement with Promontoria Marina, S.L.U. (hereinafter, "Promontoria"), a company managed by Cerberus, in connection with the contribution of the Spun-off Business (hereinafter, the "Joint Venture Agreement"). 

The Joint Venture Agreement provides for:

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(i)The contribution by BBVA of the assets that comprise the Spun-off Business to Newco by means of (a) a contribution through a capital increase of those assets of the Spun-off Business that are not subject to any Particular Condition Precedent (hereinafter, the "Capital Increase") and (b) a contribution, without a capital increase, pursuant to section 118 of General Accounting Plan, of such assets of the Spun-off Business that are subject to any Particular Condition Precedent, as defined below (hereinafter, the "Contribution to Account 118"). The Contribution to Account 118 of a given asset will be subject to any Particular Condition Precedent applicable to such asset being satisfied, which may take place after the Closing date and up to, with certain exceptions, December 31, 2018. The Capital Increase and the Contribution to Account 118 are jointly referred to as the "Business Contribution". 

(ii)The subsequent sale of 80% of the shares of Newco by BBVA to Promontoria, once the Capital Increase is recorded with the Mercantile Registry (hereinafter, the "Closing").  

The Joint Venture Agreement is binding on the parties and closing of the transaction is subject to the fulfilment of certain conditions, some of them concerning the transaction as a whole (hereinafter, the "General Conditions Precedent"), and others applying only to certain REOs (hereinafter, the "Particular Conditions Precedent"). 

The General Conditions Precedent to which the Transaction as a whole is subject are the following:

(i)The granting of express or tacit authorization by the European Commission in accordance with the Regulation (CE) no. 139/2004 or, in case referral is made by virtue of such regulation, by the Spanish National Commission of Markets and Competition (Comisión Nacional de los Mercados y la Competencia).

(ii)The granting of express authorization by the Spanish Ministry of Economy, Industry and Competition (Ministerio de Economía, Industria y Competencia de España).

The General Conditions Precedent must be fulfilled within an initial term of six months as from November 28, 2017, with the possibility of extending such initial term for an additional six-month period under certain circumstances.

The Particular Conditions Precedent to which the contribution of certain REOs to Newco is subject, as the case may be, are the following:

(i)Failure by the Public Administration to exercise the preferential acquisition right over the REOs located in Catalonia.

(ii)Approval by the relevant third party to compensate BBVA for the economic loss in relation to certain REOs which were subject to an asset protection scheme.

(iii) Authorization, if applicable, by the Public Administration of the transfer of the REOs subject to a special public protection scheme (viviendas de protección pública). 

(iv) Approval by the relevant managers of the transfer of the REOs owned by securitization funds (the "Securitized REOs"). 

Additionally, the parties agreed that, as a general rule, and unless otherwise agreed, REOs will be contributed to Newco only if they are recorded in the Land Registry in favor of BBVA. For these purposes, the parties have agreed on a procedure to review the registration status of the REOs.

In case that, with respect to a REO, any of the Particular Conditions Precedent to which it may be subject to are not fulfilled by the time of the Capital Increase, such REO will be contributed to Newco at the time that the Contribution to Account 118 takes place, provided that the relevant Particular Condition Precedent is fulfilled by December 31, 2018, except for the Securitized REOs, whose deadline for compliance with the condition will be the Closing date.

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In addition, as a general rule REOs that are not recorded in the Land Registry in favor of BBVA may be contributed to Newco only if they are registered within 18 months as from the Closing date.

BBVA must continue managing the Spun-off Business until the Closing (and regarding the REOs contributed to account 118 until the fulfilment of the Particular Conditions Precedent) in the ordinary course of business consistent with the practices carried out during the last 12 months. The parties have also agreed on a notarial review procedure to be carried out prior to the Capital Increase with the aim of setting out the final perimeter of the Spun-off Business which will be subject to contribution.

The parties agreed to calculate the price for the shares representing 80% of Newco taking into consideration a valuation for the Spun-off Business of €4,963,539,086.12 as of June 26, 2017. Assuming that all REOs on June 26, 2017 will be contributed to Newco, the sale price for 80% of the shares to Promontoria would amount to approximately €4,000 million without taking into account other adjustments.

The purchase price of the shares representing 80% of Newco (hereinafter, the "Purchase Price") is subject to certain adjustments foreseen under the Joint Venture Agreement (including, among others, adjustments related to sales of REOs carried out since June 26, 2017, any failure to contribute REOs resulting from the failure to fulfill a Particular Condition Precedent and the net business income since November 30, 2017 of the actually contributed Spun-off Business).

The Joint Venture Agreement governs the granting by BBVA of certain representation and warranties in favor of Promontoria in relation to the Joint Venture Agreement, its assets and the REOs.

Finally, the Joint Venture Agreement provides for the execution on the Closing date of the following agreements (among others):

(i)A loan agreement by virtue of which BBVA will grant a loan to Promontoria Holding 208 B.V., a Dutch entity and the sole shareholder of Promontoria, for the payment of 20% of the Purchase Price. The loan will not accrue interest, is configured as a bullet loan, and will be due two years as from the Closing date. The loan will be guaranteed on a joint and several basis by two investment funds managed by Cerberus.

(ii)A shareholders’ agreement for Newco to be entered into between BBVA and Promontoria, as the shareholders of the same, in which the rights and obligations of the parties are regulated. The shareholders’ agreement will provide, in particular, for the following:

a.Newco will be primarily managed by Promontoria and BBVA will have no representation in the board of directors.

b.BBVA will have certain veto rights at the general shareholders’ meeting over material decisions.

c.A lock-up period of two years will be established for Promontoria and BBVA, as well as the prohibition to sell shares in Newco to competitors of BBVA. In addition, drag-along, first refusal and the tag-along rights will be granted (the first two in favor of Promontoria and the third one in favor of BBVA).

d.Promontoria will grant to BBVA an option to require Promontoria to acquire BBVA’s stake in the share capital of Newco, which may be exercised within 12 months from the third anniversary of the Closing date.

e.BBVA will have certain additional protections and rights under the shareholders’ agreement in case of breach by the borrower of the loan agreement discussed above and/or in case of breach by Promontoria of its payment obligations if the above put option is exercised.

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(iii) A services agreement to be entered into between BBVA and Haya Real Estate, S.L.U. (“Haya”), a company managed by Cerberus, by virtue of which Haya will provide exclusive management services for most of the real estate portfolio held by BBVA in Spain not contributed to Newco (and for real estate assets in Spain that come into BBVA’s possession after June 26, 2017) for a term of 10 years as from the Closing date.

(iv) A transition services agreement to be entered into between BBVA and Newco by virtue of which BBVA will provide support services for a transitional term which varies depending on the particular service.

 A share sale and purchase agreement by virtue of which BBVA will sell to Promontoria 80% of the share capital of the Joint Venture.

D.      Exchange Controls

In 1991, Spain adopted the EU Standards for free movement of capital and services. As a result, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation as to amount, subject to applicable taxes. See “—Taxation”.  

Pursuant to Spanish Law 18/1992 on Foreign Investments and Royal Decree 664/1999 on the Applicable rules to Foreign Investments, foreign investors may freely invest in shares of Spanish companies except in the case of certain strategic industries.

Notwithstanding this, Royal Decree 664/1999 and Law 19/2003, on exchange controls and foreign transactions, require notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Competitiveness for administrative statistical and economical purposes. Shares in listed Spanish companies acquired or held by foreign investors must be reported to the Spanish Registry of Foreign Investments by the depositary bank or relevant Iberclear member. When a foreign investor acquires shares that are subject to the reporting requirements of the CNMV regarding significant stakes, notice must be given directly by the foreign investor to the relevant authorities.

Moreover, investments by foreigners domiciled in enumerated tax haven jurisdictions, under Royal Decree 1080/1991, are subject to special reporting requirements.

In certain circumstances and following a specific procedure, the Council of Ministers may agree to suspend the application of Royal Decree 664/1999, if the investments, due to their nature, form or condition, affect or may potentially affect activities relating to the exercise of public powers, national security or public health. Law 19/2003 authorizes the Spanish Government to take measures to impose specific limits or prohibitions, related to third countries, when such measures have been previously approved by the European Union or by an international organization to which Spain is member. Should such regimes be suspended, the affected investor shall obtain prior administrative authorization.

Restrictions on Acquisitions of Shares

Pursuant to Spanish Law 10/2014, any individual or corporation, acting alone or in concert with others, intending to directly or indirectly acquire a significant holding in a Spanish financial institution (as defined in article 16 of the aforementioned Law 10/2014) or to directly or indirectly increase its holding in one in such a way that either the percentage of voting rights or of capital owned were equal to or exceed 20%, 30% or 50%, or by virtue of the acquisition, might take control over the financial institution, must first notify the Bank of Spain.

For the purpose of this Law, a significant participation is considered 10% of the outstanding share capital of a financial institution or a lower percentage if such holding allows for the exercise of a significant influence.

The Bank of Spain will be responsible for evaluating the proposed transaction, in accordance with the terms established by Royal Decree 84/2015, of February 13 (as stated in Article 25.1 of said Royal Decree 84/2015) in order to guarantee the sound and prudent operation on the target financial institution. The Bank of Spain will submit a proposition before the European Central Bank, which will be in charge of deciding upon the proposed transaction in the term of 60 working days after the date on which the notification was received.

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Any acquisition without such prior notification, or before the period established in the Royal Decree 84/2015 has elapsed or against the objection of the Bank of Spain, will produce the following results:

-      the acquired shares will have no voting rights;

-      if considered appropriate, the target bank may be taken over or its directors replaced; and

-      the sanctions established in Title IV of Law 10/2014.

Regarding the transparency of listed companies, such matter is mainly regulated in Spain in Royal Decree 4/2015, of October 23, approving the restated text of the Securities Market Act. The transparency requirements set out in such Act are further developed by Royal Decree 1362/2007 developing the Securities Market Act on transparency requirement for issuers of listed securities, which stipulates among other matters a communication threshold of 3% for significant stakes and extends the disclosure obligations to the acquisition or transfer of financial instruments that grant rights to acquire shares with voting rights. For more information see “Item 9. The Offer and Listing—Offer and Listing Details — Reporting Requirements”. 

Tender Offers

The Spanish legal regime concerning takeover bids, which reflects the related EU regulation (mainly Directive 2004/25/EC), is set forth in Royal Decree 4/2015, of October 23, approving the restated text of the Securities Market Act, and Royal Decree 1066/2007, of July 29, on takeover bids.

E.Taxation

Spanish Tax Considerations

The following is a summary of the material Spanish tax consequences to U.S. Residents (as defined below) of the acquisition, ownership and disposition of BBVA’s ADSs or ordinary shares as of the date of the filing of this Annual Report. This summary does not address all tax considerations that may be relevant to all categories of potential purchasers, some of whom (such as life insurance companies, tax-exempt entities, dealers in securities or financial institutions) may be subject to special rules. In particular, the summary deals only with the U.S. Holders (as defined below) that will hold ADSs or ordinary shares as capital assets and who do not at any time own individually, and are not treated as owning, 25% or more of BBVA’s shares, including ADSs.

As used in this particular section, the following terms have the following meanings:

(1) “U.S. Holder” means a beneficial owner of BBVA’s ADSs or ordinary shares that is for U.S. federal income tax purposes:

·a citizen or an individual resident of the United States,

·a corporation or other entity treated as a corporation, created or organized under the laws of the United States, any state therein or the District of Columbia, or

·an estate or trust the income of which is subject to U.S. federal income tax without regard to its source.

(2) “Treaty” means the Convention between the United States and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a related Protocol.

(3) “U.S. Resident” means a U.S. Holder that is a resident of the United States for the purposes of the Treaty and entitled to the benefits of the Treaty, whose holding is not effectively connected with (1) a permanent establishment in Spain through which such holder carries on or has carried on business, or (2) a fixed base in Spain from which such holder performs or has performed independent personal services.

Holders of ADSs or ordinary shares should consult their tax advisors, particularly as to the applicability of any tax treaty. The statements regarding Spanish tax laws set out below are based on interpretations of those laws in force as of the date of this Annual Report. Such statements also assume that each obligation in the Deposit Agreement and any related agreement will be performed in full accordance with the terms of those agreements.

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Taxation of Dividends

Under Spanish law, cash dividends paid by BBVA to a holder of ordinary shares or ADSs who is not resident in Spain for tax purposes and does not operate through a permanent establishment in Spain, are subject to Spanish Non-Resident Income Tax, withheld at source at a 19% tax rate. For these purposes, upon distribution of the dividend, BBVA or its paying agent will withhold an amount equal to the tax due according to the rules set forth above (applying a withholding tax rate of 19%), transferring the resulting net amount to the depositary.

However, under the Treaty, if you are a U.S. Resident, you are entitled to a reduced withholding tax rate of 15%. To benefit from the Treaty-reduced rate of 15%, if you are a U.S. Resident, you must provide to BBVA through our paying agent depositary, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S. Internal Revenue Service (“IRS”) stating that, to the best knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty and entitled to its benefits.

If the paying agent depositary provides timely evidence (i.e., by means of the IRS certificate) of your right to apply the Treaty-reduced rate it will immediately receive the surplus amount withheld, which will be credited to you. The IRS certificate is valid for a period of one year from issuance.

To help shareholders obtain such certificates, BBVA has set up an online procedure to make this as easy as possible.

If the certificate referred to in the above paragraph is not provided to us through our paying agent depositary within said term, you may afterwards obtain a refund of the amount withheld in excess of the rate provided for in the Treaty.

Spanish Refund Procedure

According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Resident, you are required to file:

•     the corresponding Spanish tax form,

•     the certificate referred to in the preceding section, and

•     evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you.

The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities, but not before February 1, of the following year.

U.S. Residents are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.

U.S. Holders should consult their tax advisors regarding the availability of, and the procedures to be followed in connection with, this exemption.

Taxation of Rights

Distribution of preemptive rights to subscribe for new shares made with respect to your shares in BBVA will not be treated as income under Spanish law and, therefore, will not be subject to Spanish Non-Resident Income Tax. The exercise of such preemptive rights is not considered a taxable event under Spanish law and thus is not subject to Spanish tax. Capital gains derived from the disposition of preemptive rights received by U.S. Residents are generally

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not taxed in Spain provided that certain conditions are met (see “—Taxation of Capital Gains” below). 

Taxation of Capital Gains

Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish-source income and, therefore, are taxable in Spain. For Spanish tax purposes, gain recognized by you, if you are a U.S. Resident, from the sale of BBVA’s ADSs or ordinary shares will be treated as capital gains. Spanish Non-Resident Income Tax is currently levied at a 19% tax rate, on capital gains recognized by persons who are not residents of Spain for tax purposes, who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation and who do not operate through a fixed base or a permanent establishment in Spain.

Notwithstanding the discussion above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is resident in a country that has entered into a treaty for the avoidance of double taxation with an “exchange of information” clause (the Treaty contains such a clause) will be exempt from taxation in Spain. Additionally, capital gains realized by non-residents of Spain who are entitled to the benefit of an applicable treaty for the avoidance of double taxation will, in the majority of cases, not be taxed in Spain (since most tax treaties provide for taxation only in the taxpayer’s country of residence). If you are a U.S. Resident, under the Treaty, capital gains arising from the disposition of ordinary shares or ADSs will not be taxed in Spain. You will be required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities a certificate of residence in the United States from the IRS (discussed above in “—Taxation of Dividends”), together with the corresponding Spanish tax form.

Spanish Inheritance and Gift Taxes

Transfers of BBVA’s shares or ADSs upon death or by gift to individuals are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987), if the transferee is a resident in Spain for tax purposes, or if BBVA’s shares or ADSs are located in Spain, regardless of the residence of the transferee. In this regard, the Spanish tax authorities may argue that all shares of a Spanish corporation and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate for individuals, after applying all relevant factors, ranges between approximately 7.65% and 81.6% under Spanish Law 29/1987. After determining the tax rate, some multipliers, that range from 1.0 to 2.4, are applied in order to assess the tax due. Those multipliers take into account the preexisting wealth of the inheritor / donee, and the kinship with the deceased / donor.

Corporations that are non-residents of Spain that receive BBVA’s shares or ADSs as a gift are subject to Spanish Non-Resident Income Tax at a 19% tax rate on the fair market value of such ordinary shares or ADSs as a capital gain tax. If the donee is a U.S. resident corporation, the exclusions available under the Treaty described in “—Taxation of Capital Gains” above will be applicable.

Spanish Transfer Tax

Transfers of BBVA’s ordinary shares or ADSs will be exempt from Transfer Tax (Impuesto sobre Transmisiones Patrimoniales) or Value-Added Tax. Additionally, no stamp duty will be levied on such transfers.

U.S. Tax Considerations

The following summary describes material U.S. federal income tax consequences of the ownership and disposition of ADSs or ordinary shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold the securities. The summary applies only to U.S. Holders that are eligible for the benefits of the Treaty (in each case, as defined under “Spanish Tax Considerations” above) and that hold ADSs or ordinary shares as capital assets for tax purposes and does not address all of the tax consequences, including the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), known as the Medicare contribution tax, and tax consequences that may be relevant to holders subject to special rules, such as:

•    certain financial institutions;

•    dealers or traders in securities who use a mark-to-market method of accounting;

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•   persons holding ADSs or ordinary shares as part of a hedging transaction, straddle, wash sale, conversion   transaction or integrated transaction or persons entering into a constructive sale with respect to the ADSs or ordinary shares;

•     persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;

•     persons liable for the alternative minimum tax;

•     tax-exempt entities;

•     partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

•   persons holding ADSs or ordinary shares in connection with a trade or business conducted outside of the                     United States;

•   persons who acquired our ADSs or ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation; or

•     persons who own or are deemed to own 10% or more of our stock, by vote or value.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding ADSs or ordinary shares and partners in such partnerships should consult their tax advisors as to the particular U.S. federal income tax consequences of holding and disposing of the ADSs or ordinary shares.

The summary is based upon the tax laws of the United States, including the Code, the Treaty, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. In addition, the summary is based in part on representations by the depositary and assumes that each obligation provided for in or otherwise contemplated by BBVA’s deposit agreement and any other related document will be performed in accordance with its terms. Prospective purchasers of the ADSs or ordinary shares are urged to consult their tax advisors as to the U.S., Spanish or other tax consequences of the ownership and disposition of ADSs or ordinary shares in their particular circumstances, including the effect of any U.S. state or local tax laws.

In general, for United States federal income tax purposes, a U.S. Holder who owns ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders, as described below. Accordingly, the analysis of the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by future actions that may be taken by such parties.

This discussion assumes that BBVA is not, and will not become, a passive foreign investment company (“PFIC”) (as discussed below).

Taxation of Distributions

Distributions, before reduction for any Spanish income tax withheld by BBVA or its paying agent, made with respect to ADSs or ordinary shares (other than certain pro rata distributions of ordinary shares or rights to subscribe for ordinary shares of BBVA’s capital stock) will be includible in the income of a U.S. Holder as ordinary income, to the extent paid out of BBVA’s current or accumulated earnings and profits as determined in accordance with U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of such dividends will generally be treated as foreign-source dividend income and will not be eligible for the “dividends-received deduction” generally allowed to U.S. corporations under the Code. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid

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to certain non-corporate U.S. Holders of ADSs will be taxable as “qualified dividend income” and therefore will be taxable at favorable rates applicable to long-term capital gains. U.S. Holders should consult their own tax advisors to determine the availability of these favorable rates in their particular circumstances.

The amount of dividend income will equal the U.S. dollar value of the euro received, calculated by reference to the exchange rate in effect on the date of receipt (which, for U.S. Holders of ADSs, will be the date such distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any euro received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

A scrip dividend (such as a dividend distributed in the form of either cash or ordinary shares at the election of the U.S. Holder under the “Dividend Option” program, described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends—Scrip Dividend”) will be taxed in the same manner as a distribution of cash, regardless of whether a U.S. Holder elects to receive the dividend in shares rather than cash. If the U.S. Holder elects to receive the dividend in shares, the U.S. Holder will be treated as having received a distribution equal to the U.S. dollar fair market value of the shares on the date of distribution. The U.S. Holder’s tax basis in such shares received will be equal to the U.S. dollar fair market value of the shares on the date of distribution and the holding period for such shares will begin on the day following the distribution.

Subject to applicable limitations that vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability for Spanish income taxes withheld by BBVA or its paying agent at a rate not exceeding the rate the U.S. Holder is entitled to under the Treaty. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against the U.S. Holder’s U.S. federal income tax liability. See “Spanish Tax Considerations–Taxation of Dividends” for a discussion of how to obtain the Treaty rate. The rules governing foreign tax credits are complex and, therefore, U.S. Holders should consult their tax advisors regarding the availability of foreign tax credits in their particular circumstances. Instead of claiming a credit, the U.S. Holder may, at its election, deduct such Spanish taxes in computing its U.S. federal taxable income. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.

Sale or Other Disposition of ADSs or Shares

For U.S. federal income tax purposes, gain or loss realized by a U.S. Holder on the sale or other disposition of ADSs or ordinary shares will be capital gain or loss in an amount equal to the difference between the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Such gain or loss will be long-term capital gain or loss if the U.S. Holder held the ordinary shares or ADSs for more than one year at the time of disposition. Gain or loss, if any, will generally be U.S. source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.

Passive Foreign Investment Company Rules

Based upon certain proposed Treasury regulations which are proposed to be effective for taxable years beginning after December 31, 1994 (“Proposed Regulations”), we believe that we were not a PFIC for U.S. federal income tax purposes for our 2017 taxable year. However, since our PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, less than 25% owned equity investments) from time to time and since there is no guarantee that the Proposed Regulations will be adopted in their current form and because the manner of the application of the Proposed Regulations is not entirely clear, there can be no assurance that we will not be considered a PFIC for any taxable year.

If we were treated as a PFIC for any taxable year during which a U.S. Holder held ADSs or ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of an ADS or an ordinary share would be allocated ratably over the U.S. Holder’s holding period for the ADS or the ordinary share. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as applicable for that taxable year, and an interest charge would be imposed on the amount of tax allocated to such taxable year. The same treatment would apply to any distribution

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received by a U.S. Holder on its ordinary shares or ADSs to the extent that such distribution exceeds 125% of the average of the annual distributions on the ordinary shares or ADSs received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or the prior taxable year, the favorable tax rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. Certain elections may be available (including a mark-to-market election) that may provide alternative tax treatments. U.S. Holders should consult their tax advisors regarding whether we are or were a PFIC, the potential application of the PFIC rules to their ownership and disposition of ordinary shares or ADSs, whether any of these elections for alternative treatment would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances. If we were a PFIC for any taxable year during which a U.S. Holder owned our shares, the U.S. Holder would generally be required to file IRS Form 8621 with their annual U.S. federal income tax returns, subject to certain exceptions.

Information Reporting and Backup Withholding

Information returns may be filed with the IRS in connection with payments of dividends on, and the proceeds from a sale or other disposition of, ADSs or ordinary shares. A U.S. Holder may be subject to U.S. backup withholding on these payments if the U.S. Holder fails to provide its taxpayer identification number to the paying agent and comply with certain certification procedures or otherwise establish an exemption from backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

Certain U.S. Holders who are individuals or specified entities may be required to report information relating to securities of non-U.S. companies, or non-U.S. accounts through which they are held. U.S. Holders should consult their tax advisors regarding the effect, if any, of these rules on their ownership or disposition of ordinary shares or ADSs.

F.      Dividends and Paying Agents

Not Applicable.

G.      Statement by Experts

Not Applicable.

H.     Documents on Display

We are subject to the information requirements of the Exchange Act, except that as a foreign private issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by BBVA with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which BBVA’s ADSs are listed. In addition, the SEC maintains a web site that contains information filed or furnished electronically with the SEC, which can be accessed over the internet at http://www.sec.gov.

I.       Subsidiary Information

Not Applicable.

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ITEM 11.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Trading Portfolio Activities

Market risk originates as a result of movements in the market variables that impact the valuation of traded financial products and assets. The main risks can be classified as follows:

·Interest rate risk: This arises as a result of exposure to movements in the different interest-rate curves involved in trading. Although the typical products that generate sensitivity to the movements in interest rates are money-market products (deposits, interest-rate futures, call money swaps, etc.) and traditional interest-rate derivatives (swaps and interest-rate options such as caps, floors, swaptions, etc.), practically all the financial products are exposed to interest-rate movements due to the effect that such movements have on the valuation of the financial discount.

·Equity risk: This arises as a result of movements in share prices. This risk is generated in spot positions in shares or any derivative products whose underlying asset is a share or an equity index. Dividend risk is a sub-risk of equity risk, arising as an input for any equity option. Its variation may affect the valuation of positions and it is therefore a factor that generates risk on the books.

·Exchange rate risk: This is caused by movements in the exchange rates of the different currencies in which a position is held. As in the case of equity risk, this risk is generated in spot currency positions, and in any derivative product whose underlying asset is an exchange rate. In addition, the quanto effect (operations where the underlying asset and the instrument itself are denominated in different currencies) means that in certain transactions in which the underlying asset is not a currency, an exchange-rate risk is generated that has to be measured and monitored.

·Credit-spread risk: Credit spread is an indicator of an issuer’s credit quality. Spread risk occurs due to variations in the levels of spread of both corporate and government issues, and affects positions in bonds and credit derivatives.

·Volatility risk: This occurs as a result of changes in the levels of implied price volatility of the different market instruments on which derivatives are traded. This risk, unlike the others, is exclusively a component of trading in derivatives and is defined as a first-order convexity risk that is generated in all possible underlying assets in which there are products with options that require a volatility input for their valuation.

We believe the metrics developed to control and monitor market risk in the BBVA Group are aligned with best practices in the market, and they are implemented consistently across all the local market risk units.

Measurement procedures are established in terms of the possible impact of negative market conditions on the trading portfolio of the Group’s Global Markets units, both under ordinary circumstances and in situations of heightened risk factors.

The standard metric used to measure market risk is Value at Risk (“VaR”), which indicates the maximum loss that may occur in the portfolios at a given confidence level (99%) and time horizon (one day). This statistic value is widely used in the market and has the advantage of summing up in a single metric the risks inherent to trading activity, taking into account how they are related and providing a prediction of the loss that the trading book could sustain as a result of fluctuations in equity prices, interest rates, foreign exchange rates and commodity prices. The market risk analysis considers various risks, such as credit spread, basis risk, volatility and correlation risk.

Headings of the balance sheet subject to VaR measurement

Most of the headings on the Group’s consolidated balance sheet subject to market risk are positions whose main metric for measuring their market risk is VaR. This table shows the amount of accounting lines of the consolidated balance sheet as of December 31, 2017 in which there is a market risk in trading activity subject to a VaR measurement:

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	Main market risk metrics
	VaR	Other metrics (*)
	(In Millions of Euros)
Assets subject to market risk
Financial assets held for trading	59,008	441
Available for sale financial assets	5,661	24,083
Of which: Equity instruments	-	2,404
Hedging derivatives	829	1,397
Liabilities subject to market risk
Financial liabilities held for trading	42,468	2,526
Hedging derivatives	1,157	638

(*) Includes mainly assets and liabilities managed by ALCO.

Although the table above provides information on the financial positions subject to market risk, such information is provided for information purposes only and does not reflect how market  risk in trading activity is managed.

With respect to the risk measurement models used by the BBVA Group, the Bank of Spain has authorized the use of the internal model to determine bank capital requirements deriving from risk positions on the Banco Bilbao Vizcaya Argentaria S.A. and BBVA Bancomer trading book, which jointly accounted for around 70% and 66% of the Group’s trading-book market risk as of December 31, 2017 and 2016, respectively. For the rest of the geographical areas (mainly South America subsidiaries, Garanti and BBVA Compass), bank capital for the risk positions in the trading book is calculated using the standard model.

The current management structure includes the monitoring of market-risk limits, consisting of a scheme of limits based on VaR, economic capital (based on VaR measurements) and VaR sub-limits, as well as stop-loss limits for each of the Group’s business units.

The model used estimates VaR in accordance with the “historical simulation” methodology, which involves estimating losses and gains that would have taken place in the current portfolio if the changes in market conditions that took place over a specific period of time in the past were repeated. Based on this information, it infers the maximum expected loss of the current portfolio within a given confidence level. This model has the advantage of reflecting precisely the historical distribution of the market variables and not assuming any specific distribution of probability. The historical period used in this model is two years. The historical simulation method is used in Banco Bilbao Vizcaya Argentaria, S.A., BBVA Bancomer, Banco Bilbao Vizcaya Argentaria Chile, BBVA Colombia, S.A., Compass and Garanti.

VaR figures are estimated following two methodologies:

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·VaR without smoothing, which awards equal weight to the daily information for the previous two years. This is currently the official methodology for measuring market risks for the purpose of monitoring compliance with risk limits.

·VaR  with smoothing, which gives a greater weight to more recent market information. This metric supplements the previous one.

In the case of South America subsidiaries (except BBVA Chile and BBVA Colombia where historical VaR sensitivity is used), a parametric methodology is used to measure risk in terms of VaR.

At the same time, and following the guidelines established by the Spanish and European authorities, BBVA incorporates metrics in addition to VaR with the aim of meeting the Bank of Spain’s regulatory requirements with respect to the calculation of bank capital for the trading book. Specifically, the new measures incorporated in the Group since December 2011 (stipulated by Basel 2.5) are:

·VaR: In regulatory terms, the stressed VaR charge is added to the VaR charge, and the sum of these two (VaR and stressed VaR) is calculated. This quantifies the losses associated with the movements of the risk factors inherent to market operations (including interest rates, exchange rates, equity risk and credit spread). Both VaR and stressed VaR are rescaled by a regulatory multiplier set at three and by the square root of ten to calculate the capital charge.

·Specific Risk: Incremental Risk Capital (“IRC”) Quantification of the risks of default and downgrading of the credit ratings of the bond and credit derivative positions in the portfolio. The IRC charge is exclusively applied in entities in respect of which the internal market risk model is used (i.e., Banco Bilbao Vizcaya Argentaria, S.A. and BBVA Bancomer). The IRC charge is determined based on the associated losses (calculated at 99.9% confidence level over a one year horizon under the hypothesis of constant risk) due to the rating change and/or default of the issuer with respect to an asset. In addition, the price risk is included in sovereign positions for the specified items.

·Specific Risk: Securitization and correlation portfolios. Capital charges for securitizations and correlation portfolios are assessed based on the potential losses associated with the rating level of a specific credit structure. They are calculated by the standard method. The scope of the correlation portfolios refers to the First To Default (FTD)-type market operation and/or tranches of market CDOs and only for positions with an active market and hedging capacity.

Validity tests are performed regularly on the risk measurement models used by the Group. They estimate the maximum loss that could have been incurred in the assessed positions with a certain level of probability (backtesting), as well as measurements of the impact of extreme market events on risk positions (stress testing). As an additional control measure, backtesting is conducted at trading desk level in order to enable more specific monitoring of the validity of the measurement models.

Market risk in 2017

The Group’s market risk remains at low levels compared with the risk aggregates managed by BBVA, particularly in terms of credit risk. This is due to the nature of the business. During the year ended December 31, 2017 the average VaR was €27 million, below the average figure of 2016, with a high on January 11, 2017 of €34 million. The evolution in the BBVA Group’s market risk during 2017, measured as VaR without smoothing  with a 99% confidence level and a one-day horizon (shown in millions of euros) was as follows:

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By type of market risk assumed by the Group’s trading portfolio, the main risk factor for the Group continued to be that linked to interest rates, with a weight of 48% of the total at December 31, 2017 (this figure includes the spread risk). The relative weight has decreased compared with the close of 2016 (58%). Exchange-rate risk accounted for 14%, increasing its proportion with respect to December 31, 2016 (13%), Equity, volatility and correlation risk also increased, with a weight of 38% at the close of 2017 (compared to 29% at the close of 2016).

The VaR average in 2017, 2016 and 2015 was €27 million, €29 million and €24 million, respectively. The total VaR figures for 2017, 2016 and 2015 can be broken down as follows:

Risk	December 31, 2017	December 31, 2016	December 31, 2015
	(In Millions of Euros)
At December 31
Interest/Spread risk	23	29	21
Currency risk	7	7	9
Stock-market risk	4	2	3
Vega/Correlation risk	14	12	11
Diversification effect(*)	(26)	(24)	(20)
For period	22	26	24
VaR average in the period	27	29	24
VaR max in the period	34	38	30
VaR min in the period	22	23	21

(*)     The diversification effect is the difference between the sum of the average individual risk factors and the total VaR figure that includes the implied correlation between all the variables and scenarios used in the measurement.

Validation of the internal market risk model

The internal market risk model is validated on a regular basis by backtesting in both Banco Bilbao Vizcaya Argentaria, S.A. and BBVA Bancomer. The aim of backtesting is to validate the quality and precision of the internal market risk model used by the BBVA Group to estimate the maximum daily loss of a portfolio, at a 99% level of confidence and a 250-day time horizon, by comparing the Group’s results and the risk measurements generated by

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the internal market risk model. These tests showed that the internal market risk model of both Banco Bilbao Vizcaya Argentaria, S.A. and BBVA Bancomer is adequate and precise.

Two types of backtesting have been carried out during 2017, 2016 and 2015:

“Hypothetical” backtesting: the daily VaR is compared with the results obtained, not taking into account the intraday results or the changes in the portfolio positions. This validates the appropriateness of the market risk metrics for the end-of-day position.

“Real” backtesting: the daily VaR is compared with the total results, including intraday transactions, but discounting the possible minimum charges or fees involved. This type of backtesting includes the intraday risk in portfolios.

In addition, each of these two types of backtesting was carried out at a risk factor or business type level, thus making a deeper comparison of the results with respect to risk measurements.

In 2017, we carried out the backtesting of the internal VaR calculation model, comparing the daily results obtained with the risk level estimated by the internal VaR calculation model. At the end of the year the comparison showed the internal VaR calculation model was working correctly, within the “green” zone (0-4 exceptions), thus validating the internal VaR calculation model, as has occurred each year since the internal market risk model was approved for the Group.

Stress test analysis

A number of stress tests are carried out on the BBVA Group’s trading portfolios. First, global and local historical scenarios are used that replicate the behavior of an extreme past event, such as for example the collapse of Lehman Brothers or the “Tequilazo” crisis. These stress tests are complemented with simulated scenarios, where the aim is to generate scenarios that have a significant impact on the different portfolios, but without being anchored to any specific historical scenario. Finally, for some portfolios or positions, fixed stress tests are also carried out that have a significant impact on the market variables affecting these positions. 

Historical scenarios

The historical benchmark stress scenario for the BBVA Group is Lehman Brothers, whose sudden collapse in September 2008 led to a significant impact on the behavior of financial markets at a global level. The following are the most relevant effects of this historical scenario: 

·Credit shock: reflected mainly in the increase of credit spreads and downgrades in credit ratings.

·Increased volatility in most of the financial markets (giving rise to a great deal of variation in the prices of different assets (currency, equity, debt).

·Liquidity shock in the financial systems, reflected by a major movement in interbank curves, particularly in the shortest sections of the euro and dollar curves.

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Simulated scenarios

Unlike the historical scenarios, which are fixed and therefore not suited to the composition of the risk portfolio at all times, the scenario used for the exercises of economic stress is based on a resampling methodology. This methodology is based on the use of dynamic scenarios that are recalculated periodically depending on the main risks affecting the trading portfolios. On a data window wide enough to collect different periods of stress (data are taken from January 1, 2008 until the date of the assessment), a simulation is performed by resampling of historic observations, generating a distribution of losses and gains that serve to analyze the most extreme of births in the selected historical window. The advantage of this resampling methodology is that the period of stress is not predetermined, but depends on the portfolio maintained at each time, and making a large number of simulations (10,000 simulations) allows a greater richness of information for the analysis of expected shortfall than what is available in the scenarios included in the calculation of VaR.

The main features of this approach are: a) the generated simulations respect the correlation structure of the data, b) there is flexibility in the inclusion of new risk factors and c) it allows the introduction of a lot of variability in the simulations (desirable for considering extreme events).

Structural Risk — Non-Trading Activities

Structural interest-rate risk

The structural interest-rate risk (“SIRR”) is related to the potential impact that variations in market interest rates have on an entity’s net interest income and equity. In order to measure SIRR, BBVA takes into account the main sources that generate this risk: repricing risk, yield curve risk, option risk and basis risk, which are analyzed from two complementary points of view: net interest income (short term) and economic value (long term).

ALCO monitors the interest-rate risk metrics and the Finance department carries out the management proposals for the structural balance sheet. The management objective is to ensure the stability of net interest income and book value in the face of changes in market interest rates, while respecting the internal solvency and other limits in the different balance sheets and for BBVA Group as a whole, and complying with current and future regulatory requirements.

BBVA’s structural interest-rate risk management control and monitoring is based on a set of metrics and tools aimed at enabling the entity’s risk profile to be monitored correctly. A wide range of scenarios are measured on a regular basis, including sensitivities to parallel movements in the event of different shocks, changes in slope and curve, as well as delayed movements. Other probabilistic metrics based on statistical scenario-simulating methods are also assessed, such as earnings at risk (“EaR”) and economic capital (“EC”), which are defined as the maximum adverse deviations in net interest income and economic value, respectively, for a given confidence level and time horizon. Impact thresholds are established on these management metrics both in terms of deviations in net interest income and in terms of the impact on economic value. The process is carried out separately for each currency to which the Group is exposed, and the diversification effect between currencies and business units is considered after this.

In order to evaluate its effectiveness, the model is subjected to regular internal validation, which includes backtesting. In addition, the banking book’s interest-rate risk exposures are subjected to different stress tests in order to reveal balance sheet vulnerabilities under extreme scenarios. This testing includes an analysis of adverse macroeconomic scenarios designed specifically by BBVA Research, together with a wide range of potential scenarios that aim to identify interest-rate environments that are particularly damaging for the entity. This is done by generating extreme scenarios of a breakthrough in interest rate levels and historical correlations, giving rise to sudden changes in the slopes and even to inverted curves.

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The model is necessarily underpinned by an elaborate set of hypotheses that aim to reproduce the behavior of the balance sheet as closely as possible to reality. Especially relevant among these assumptions are those related to the behavior of “accounts with no explicit maturity”, for which stability and remuneration assumptions are established, consistent with an adequate segmentation by type of product and customer, and prepayment estimates (implicit optionality). The hypotheses are reviewed and adapted, at least on an annual basis, to signs of changes in behavior, kept properly documented and reviewed on a regular basis in the internal validation processes.

The impacts on the metrics are assessed both from a point of view of economic value (gone concern) and from the perspective of net interest income, for which a dynamic model (going concern) consistent with the corporate assumptions of earnings forecasts is used.

The table below shows the estimated impact on net interest income and economic value as of December 31, 2017, for the next succeeding year, of the main entities in the BBVA Group in 2017 of 100 basis points increases/decreases in interest rates (certain information within this table is provisional. Its distribution should not be significantly affected):

	Impact on Net Interest Income (*)		Impact on Economic Value(**)
	100 Basis-Point Increase	100 Basis-Point Decrease	100 Basis-Point Increase	100 Basis-Point Decrease
Europe (***)	+ (10% - 15%)	- (5% - 10%)	+ (0% - 5%)	- (0% - 5%)
USA	+ (5% - 10%)	- (5% - 10%)	- (0% - 5%)	- (0% - 5%)
Mexico	+ (0% - 5%)	- (0% - 5%)	- (0% - 5%)	+ (0% - 5%)
Turkey	- (0% - 5%)	+ (0% - 5%)	- (0% - 5%)	+ (0% - 5%)
South America	+ (0% - 5%)	- (0% - 5%)	- (0% - 5%)	+ (0% - 5%)
BBVA Group	+ (0% - 5%)	- (0% - 5%)	+ (0% - 5%)	- (0% - 5%)

(*)     Percentual impact of “1 year” net interest income forecast for each unit.

(**)   Percentual impact of core capital for each unit.

(***) In Europe downward movement allowed until more negative level than current rates.

In 2017 in Europe monetary policy has remained expansionary, maintaining rates at 0%. In the United States the rising rate cycle initiated by the Federal Reserve in 2015 has been intensified. In Mexico and Turkey, the upward cycle has continued supported by the weak currencies and inflation prospects. In South America, monetary policy has been expansive, with rate declines in most of the economies where the Group operates, with the exception of Argentina, where rates increased during 2017.

The BBVA Group maintains, overall in its Balance Sheet Management Units (“BSMUs”), a positive sensitivity in its net interest income to an increase in interest rates. Higher relative net interest income sensitivities are observed in mature markets, particularly Europe, where however, the negative sensitivity in its net interest income to a decrease in interest rates is limited by the limited scope of a downward path in interest rates. The Group maintains a moderate risk profile, according to its target risk, through effective management of its balance sheet structural risk.

Structural exchange-rate risk

In the BBVA Group, structural exchange-rate risk arises from the consolidation of holdings in subsidiaries with functional currencies other than the euro. Its management is centralized in order to optimize the joint handling of permanent foreign currency exposures, taking into account the diversification.

The corporate Assets and Liabilities Management unit, through ALCO, designs and executes hedging strategies with the main purpose of controlling the potential negative effect of exchange-rate fluctuations on capital ratios and on the equivalent value in euros of the foreign-currency earnings of the Group’s subsidiaries, considering transactions according to market expectations and their cost.

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The risk monitoring metrics included in the framework of limits are integrated into management and supplemented with additional assessment indicators. At corporate level they are based on probabilistic metrics that measure the maximum deviation in the Group’s capital, CET1 ratio, and net attributable profit. The probabilistic metrics make it possible to estimate the joint impact of exposure to different currencies taking into account the different variability in exchange rates and their correlations.

The suitability of these risk assessment metrics is reviewed on a regular basis through backtesting exercises. The final element of structural exchange-rate risk control is the analysis of scenarios and stress with the aim of identifying in advance possible threats to future compliance with the risk appetite levels set, so that any necessary preventive management actions can be taken. The scenarios are based both on historical situations simulated by the risk model and on the risk scenarios provided by BBVA Research.

2017 has been characterized by the depreciation against the euro of the main currencies of the geographies where the Group operates. Based on the period-end exchange rates, the U.S. dollar depreciated by 12.1%, the Mexican peso by 8.0% and the Turkish lira by 18.5% year-on-year.

The Group’s structural exchange-rate risk exposure level has remained fairly stable since the end of 2016.  The hedging policy intends to keep low levels of sensitivity to movements in the exchange rates of emerging currencies against the euro and focuses on the Mexican peso and the Turkish lira. The risk mitigation level in the Bank’s capital ratio due to the book value of BBVA Group’s holdings in foreign emerging market currencies stood at around 70% and, as of the end of 2017, CET1 ratio sensitivity to the appreciation of 1% in the euro exchange rate for each currency was as follows: U.S. dollar +1.2 bps; Mexican peso -0.1 bps; Turkish lira -0.1 bps; other currencies -0.3 bps. Hedging of emerging-currency denominated earnings in 2017 increased to 61%, concentrated in the Mexican peso and the Turkish lira.

Structural equity risk

The BBVA Group’s exposure to structural equity risk stems mainly from investments in industrial and financial companies with medium- and long-term investment horizons. This exposure is mitigated through net short positions held in derivatives of their underlying assets, used to limit portfolio sensitivity to potential falls in prices.

Structural management of equity portfolios is the responsibility of the Group’s units specializing in this area. Their activity is subject to the corporate risk management policies for equity positions in the equity portfolio. The aim is to ensure that they are handled consistently with BBVA’s business model and appropriately to its risk tolerance level, thus enabling long-term business sustainability.

The Group’s risk management systems also make it possible to anticipate possible negative impacts and take appropriate measures to prevent damage being caused to the entity. The risk control and limitation mechanisms are focused on the exposure, annual operating performance and economic capital estimated for each portfolio. Economic capital is estimated in accordance with a corporate model based on Monte Carlo simulations, taking into account the statistical performance of asset prices and the diversification existing among the different exposures.

Stress tests and analyses of sensitivity to different simulated scenarios are carried out periodically to analyze the risk profile in more depth. They are based on both past crisis situations and forecasts made by BBVA Research. This aims to check that the risks are limited and that the tolerance levels set by the Group are not at risk.

Backtesting is carried out on a regular basis on the risk measurement model used.

With regards to the equity markets, world indexes closed 2017 with significant increases supported by a positive macro environment. However, the European indexes, and especially the Spanish index, have lagged despite their positive performance. In the case of the IBEX (+7% in the year), the index have been partly penalized in the second half of the year by the political tensions in Catalonia.

Structural equity risk, measured in terms of economic capital, has decreased in the period mainly due to the sale of stakes in CNCB and other companies. The aggregate sensitivity of the BBVA Group’s consolidated equity to a 1% fall in the price of shares of the companies making up the equity portfolio remained at around -€32 million as of December 31, 2017 (-€38 million as of December 31, 2016). This estimate takes into account the exposure in shares valued at market prices, or if not applicable, at fair value (excluding the positions in the Treasury Area portfolios) and the net delta-equivalent positions in derivatives on the same underlyings.

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See Note 7 of the Consolidated Financial Statements for additional information on risks faced by BBVA.

ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.Debt Securities

Not Applicable.

B.Warrants and Rights

Not Applicable.

C.Other Securities

Not Applicable.

D. American Depositary Shares

Our ADSs are listed on the New York Stock Exchange under the symbol “BBVA”. The Bank of New York Mellon is the depositary (the “Depositary”) issuing ADSs pursuant to an amended and restated deposit agreement dated June 29, 2007 among BBVA, the Depositary and the holders from time to time of ADSs (the “Deposit Agreement”). Each ADS represents the right to receive one share. The table below sets forth the fees payable, either directly or indirectly, by a holder of ADSs as of the date of this Annual Report.

Category	Depositary Actions	Associated Fee / By Whom Paid
(a) Depositing or substituting the underlying shares	Issuance of ADSs	Up to $5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)
(b) Receiving or distributing dividends	Distribution of cash dividends or other cash distributions; distribution of share dividends or other free share distributions; distribution of securities other than ADSs or rights to purchase additional ADSs	Not applicable
(c) Selling or exercising rights	Distribution or sale of securities	Not applicable
(d) Withdrawing an underlying security	Acceptance of ADSs surrendered for withdrawal of deposited securities	Up to $5.00 for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)
(e) Transferring, splitting or grouping receipts	Transfers, combining or grouping of depositary receipts	Not applicable
(f) General depositary services, particularly those charged on an annual basis	Other services performed by the Depositary in administering the ADSs	Not applicable
(g) Expenses of the Depositary	Expenses incurred on behalf of holders in connection with ·stock transfer or other taxes (including Spanish income taxes) and other governmental charges; ·cable, telex and facsimile transmission and delivery charges incurred at request of holder of ADS or person depositing shares for the issuance of ADSs; ·transfer, brokerage or registration fees for the registration of shares or other deposited securities on the share register and applicable to transfers of shares or other deposited securities to or from the name of the custodian; ·reasonable and customary expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars	Expenses payable by holders of ADSs or persons depositing shares for the issuance of ADSs; expenses payable in connection with the conversion of foreign currency into U.S. dollars are payable out of such foreign currency

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The Depositary may remit to us all or a portion of the Depositary fees charged for the reimbursement of certain of the expenses we incur in respect of the ADS program established pursuant to the Deposit Agreement upon such terms and conditions as we may agree from time to time. In the year ended December 31, 2017, the Depositary reimbursed us $549.96 thousand with respect to certain fees and expenses. The table below sets forth the types of expenses that the Depositary has agreed to reimburse and the amounts reimbursed in 2017.

Category of Expenses	Amount Reimbursed in the Year Ended December 31, 2017
	(In Thousands of Dollars)
NYSE Listing Fees…………………………………………………………………......	225.18
Investor Relations Marketing………………………………………………………......	132.56
Professional Services…………………………………………………………………...	24.50
Annual General Shareholders’ Meeting Expenses…………………………………......	139.56
Other……………………………………………………………………………………	28.16

PART II

ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not Applicable.

ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not Applicable.

ITEM 15.CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of December 31, 2017, BBVA, under the supervision and with the participation of BBVA’s management, including our Group Executive Chairman, Chief Executive Officer and Head of Accounting & Supervisors, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

Based upon their evaluation, BBVA’s Group Executive Chairman, Chief Executive Officer and Head of Accounting & Supervisors concluded that BBVA’s disclosure controls and procedures are effective at a reasonable assurance level in ensuring that information relating to BBVA, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is  (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and

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communicated to the management, including principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

The management of BBVA is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. BBVA’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of BBVA;

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of BBVA’s management and directors; and

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of BBVA’s management, including our Group Executive Chairman, Chief Executive Officer and Head of Accounting & Supervisors, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our management concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.

Changes in Internal Control Over Financial Reporting

There has been no change in BBVA’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

Our internal control over financial reporting as of December 31, 2017 has been audited by KPMG Auditores S.L., an independent registered public accounting firm, as stated in their report which follows below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Banco Bilbao Vizcaya Argentaria, S.A.:

Opinion on Internal Control Over Financial Reporting

We have audited the internal control over financial reporting of Banco Bilbao Vizcaya Argentaria, S.A. and subsidiaries (“BBVA Group”) as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, BBVA Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of BBVA Group as of December 31, 2017, the related consolidated statements of income, recognized income and expenses, changes in equity, and cash flows for the year

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then ended, and the related notes (collectively, the consolidated financial statements), and our report dated April 5, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

BBVA Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on BBVA Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to BBVA Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 /s/  KPMG Auditores, S.L.

 Madrid, Spain

April 5, 2018

ITEM 16.       [RESERVED]

ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT

The charter for our Audit and Compliance Committee provides that the members of the Audit and Compliance Committee, and particularly its Chairman, shall be appointed with regard to their knowledge and background in accounting, auditing and risk management, and we have determined that Mr. José Miguel Andrés Torrecillas, the Chairman of the Audit and Compliance Committee has such experience and knowledge and is an “audit committee financial expert” as such term is defined by the regulations of the Securities and Exchange Commission issued

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pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Andrés is independent within the meaning of the New York Stock Exchange listing standards.

In addition, we believe that the remaining members of the Audit and Compliance Committee have an understanding of applicable generally accepted accounting principles, experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our Consolidated Financial Statements, an understanding of internal controls over financial reporting, and an understanding of audit committee functions. Our Audit and Compliance Committee has experience overseeing and assessing the performance of BBVA and its consolidated subsidiaries and our external auditors with respect to the preparation, auditing and evaluation of our Consolidated Financial Statements.

ITEM 16B.CODE OF ETHICS

The BBVA Group Code of Conduct, which was updated by the Board of Directors on May 28, 2015, applies to all companies and persons which form part of the BBVA Group. This Code sets out the standards of behavior that should be adhered to so that the Group’s conduct towards its customers, colleagues and the society be consistent with BBVA’s values. The BBVA Group Code of Conduct can be found on BBVA’s website at www.bbva.com.

ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table provides information on the aggregate fees paid and payable by our principal accountants (KPMG Auditores S.L. with respect to 2017 and Deloitte, S.L. with respect to 2016) and its worldwide affiliates, by type of service rendered for the periods indicated.

	Year ended December 31,
Services Rendered	2017	2016
	(In Millions of Euros)
Audit Fees(1)…………………………………………………………………………………...	23.3	26.5
Audit-Related Fees(2)……………………………………………………………………………………...	6.1	3.4
Tax Fees(3)…………………………………………………………………………………….	-	0.3
All Other Fees(4)………………………………………………………………………………	0.2	1.0
Total……………………………………………………………………………………	29.6	31.2

(1)       Aggregate fees paid and payable for each of the last two fiscal years for professional services rendered by our principal accountants and  its worldwide affiliates for the audit of BBVA’s annual financial statements or services that are normally provided by our principal accountants  and  its worldwide affiliates in connection with statutory and regulatory filings or engagements for those fiscal years.

(2)       Aggregate fees paid and payable in each of the last two fiscal years for assurance and related services by our principal accountants  and  its worldwide affiliates that are reasonably related to the performance of the audit or review of BBVA’s financial statements and are not reported under (1) above.

(3)       Aggregate fees paid and payable in each of the last two fiscal years for professional services rendered by our principal accountants and  its worldwide affiliates for tax compliance, tax advice, and tax planning.

218

(4)       Aggregate fees paid and payable in each of the last two fiscal years for products and services provided by our principal accountants and  its worldwide affiliates other than the services reported in (1), (2) and (3) above. Services in this category consisted primarily of consultancy and implementation of new regulation.

The Audit and Compliance Committee’s Pre-Approval Policies and Procedures

In order to assist in ensuring the independence of our external auditor, the regulations of our Audit and Compliance Committee provides that our external auditor is generally prohibited from providing us with non-audit services, other than under the specific circumstance described below. For this reason, our Audit and Compliance Committee has developed a pre-approval policy regarding the contracting of BBVA’s external auditor, or any affiliate of the external auditor, for professional services. The professional services covered by such policy include audit and non-audit services provided to BBVA or any of its subsidiaries reflected in agreements dated on or after May 6, 2003.

The pre-approval policy is as follows:

1.The hiring of BBVA’s external auditor or any of its affiliates is prohibited, unless there is no other firm available to provide the needed services at a comparable cost and that could deliver a similar level of quality.

2.In the event that there is no other firm available to provide needed services at a comparable cost and delivering a similar level of quality, the external auditor (or any of its affiliates) may be hired to perform such services, but only with the pre-approval of the Audit and Compliance Committee.

3.The Chairman of the Audit and Compliance Committee has been delegated the authority to approve the hiring of BBVA’s external auditor (or any of its affiliates). In such an event, however, the Chairman would be required to inform the Audit and Compliance Committee of such decision at the Committee’s next meeting.

 4. The hiring of the external auditor for any of BBVA’s subsidiaries must also be pre-approved by the Audit and Compliance Committee.

ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable.

ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

2017	Total Number of Ordinary Shares Purchased	Average Price Paid per Share (or Unit) in Euros	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31	23,141,360	6.33	—	—
February 1 to February 28	35,876,048	6.17	—	—
March 1 to March 31	29,555,745	7.09	—	—
April 1 to April 30	20,845,217	7.23	—	—
May 1 to May 31	24,170,342	7.34	—	—
June 1 to June 30	18,070,349	7.32	—	—
July 1 to July 31	17,449,403	7.58	—	—
August 1 to August 31	12,145,400	7.50	—	—
September 1 to September 30	10,262,907	7.33	—	—
October 1 to October 31	25,395,239	7.30	—	—
November 1 to November 30	12,535,907	7.21	—	—
December 1 to December 31	8,617,380	7.24	—	—
Total	238,065,297	7.03	—	—

219

During 2017, we sold a total of 231,956,502 shares for an average price of €6.99 per share.

ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G.         CORPORATE GOVERNANCE

Compliance with NYSE Listing Standards on Corporate Governance

On November 4, 2003, the SEC approved rules proposed by the New York Stock Exchange (the “NYSE”) intended to strengthen corporate governance standards for listed companies. In compliance therewith, the following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the NYSE listing standards.

Independence of the Directors on the Board of Directors and Board Committees

Under the NYSE corporate governance rules, (i) a majority of a U.S. company’s board of directors must be composed of independent directors, (ii) all members of the audit committee must be independent and (iii) all U.S. companies listed on the NYSE must have a compensation committee and a nominations committee and all members of such committees must be independent. In each case, the independence of directors must be established pursuant to highly detailed rules promulgated by the NYSE and, in the case of the audit committee, the NYSE and the SEC.

Spanish Corporate Enterprises Act sets out a definition of what constitutes independence for the purpose of board or committee membership. Such definition is in line with the definition provided by our Board Regulations.

In addition, pursuant to the Spanish Corporate Enterprises Act, listed companies shall have, at least, an audit committee and an appointments and remuneration committee. This Law also establishes that such committees (i) shall be composed exclusively by non-executive directors, (ii) shall have a majority of independent directors (in the case of the audit committee) or at least two of their members shall be independent directors (in the case of the appointments and remuneration committee) and (iii) they shall be chaired by an independent director.

Likewise, Law 10/2014, which completes the transposition of CRD IV into Spanish legislation, includes rules on corporate governance, among others, as regards board committees and their membership, establishing that the remuneration committee, the appointments committee and risk committee shall be composed of non-executive directors and at least one third of their members shall be independent and, in any event, the Chairman of these committees shall also be an independent director.

Moreover, pursuant to the Good Governance Code for Listed Companies of the CNMV, which includes non-binding recommendations applicable to listed companies in Spain, under the comply or explain principle: (i) independent directors must represent, at least, half of the total board members; (ii) the majority of the members of the audit committee and the appointments and remuneration committee must be independent; and (iii) companies

220

with high market capitalization must have two separate committees, an appointments committee and a remuneration committee.

Pursuant to article 1 of our Board Regulations, BBVA considers that independent directors are non-executive directors appointed for their personal and professional background who can perform their duties without being constrained by their relations with the Company or its Group, its significant shareholders or its executives. Directors cannot be deemed independent if they:

a)   have been employees or executive directors in Group companies, unless three or five years have elapsed, respectively since they ceased as employees or executive directors, as the case may be;

b)    receive from the Company or its Group entities, any amount or benefit for an item other than remuneration for their directorship, except where the sum is insignificant and expect further for dividends or pension supplements that a director may receive due to a former professional or employment relationship, provided these are unconditional and, consequently, the company paying them may not at its own discretion, suspend, amend or revoke their accrual unless there has been a breach of duty;

c)   are partners of the external auditor or in charge of the audit report or have been so in the last three years, whether the audit in question was carried out on the Company or any other Group entity;

d)   are executive directors or senior managers of another company in which a Company’s executive director or senior manager is an external director;

e)   maintain any significant business relationship with the Company or with any Group company or have done so over the last year, either in their own name or as a significant shareholder, director or senior manager of a company that maintains or has maintained such a relationship. Business relationship here means any relationship as supplier of goods or services, including financial goods or services, and as advisor or consultant;

f)   are significant shareholders, executive directors or senior managers of any entity that receives, or has received over the last three years, donations from the Company or its Group. Those persons who are merely trustees in a foundation receiving donations shall not be deemed to be included under this letter;

g)   are spouses, or spousal equivalents or related up to second degree of kinship to an executive director or senior manager of the Company;

h)   have not been proposed by the Appointments Committee for appointment or renewal;

i)   have held a directorship for a continuous period of more than 12 years; or

j)   are related to any significant shareholder or shareholder represented on the Board of Directors under any of the circumstances described under letters (a), (e), (f) or (g) above. In the event of kinship relationships mentioned in letter (g), the limitation will apply not only with respect to the shareholder, but also with respect to their proprietary directors in the company in which the shareholder holds an interest.

Directors who hold shares in the Bank may be considered independent provided they comply with the above conditions and their shareholding is not legally considered to be significant.

As of the date of this Annual Report, our Board of Directors has a large number of non-executive directors and eight (subject to what is indicated in Item 6.A above) out of the 15 members of our Board, as established by our annual general shareholders’ meeting, are independent under the definition of independence described above, which is in line with the definition provided by the Spanish Corporate Enterprises Act.

In addition, our Audit and Compliance Committee is composed exclusively of independent directors, who are not members of the Bank’s Executive Committee and the Committee chairman has experience in accounting, auditing and risk management, in accordance with the specific regulations of the Audit and Compliance Committee.

221

Our Risk Committee is composed exclusively of non-executive directors, and also, in accordance with the Corporate Enterprises Act and with corporate governance non-binding recommendations, our Board of Directors has two separate committees: an Appointments Committee and a Remuneration Committee, which are composed exclusively of non-executive directors.

Separate Meetings for Independent Directors

In accordance with the NYSE corporate governance rules, independent directors must meet periodically outside of the presence of the executive directors. Under Spanish law, this requirement is not contemplated as such. We note, however, that our non-executive directors meet periodically outside the presence of our executive directors every time a Committee with oversight functions meets, since these Committees are comprised solely of non- executive directors. Furthermore, the Board of Directors has appointed a Lead Director with powers to coordinate and meet with the non-executive directors, among other faculties conferred by the law and in Article 5 ter of our Board of Directors Regulations. In addition, our independent directors meet outside the presence of our executive directors as often as they deem fit, and usually prior to meetings of the Board of Directors or its Committees.

Code of Ethics

The NYSE listing standards require U.S. companies to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. For information with respect to BBVA’s code of business conduct and ethics see “Item 16 B. Code of Ethics”.

ITEM 16H.MINE SAFETY DISCLOSURE

Not Applicable.

PART III

ITEM 17.FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this Item.

ITEM 18.FINANCIAL STATEMENTS

Please see pages F-1 through F-269.

ITEM 19 EXHIBITS  

Exhibit Number	Description
1.1		Amended and Restated Bylaws (Estatutos) of the Registrant (English translation).
8.1		Consolidated Companies Composing Registrant (see Appendix I to IX to our Consolidated Financial Statements included herein).
10.1		Amended and Restated Shareholders’  Agreement entered into between the Company Doğuş  Holding A.Ş., Doğuş  Nakliyat ve Ticaret, A.Ş. and Doğuş  Araştırma Geliştirme ve Müşavirlik Hizmetleri A.Ş. on November 19, 2014.(*)
10.2		Information on Compensation Plans (**)
12.1		Section 302 Group Executive Chairman Certification.
12.2		Section 302 Chief Executive Officer Certification.
12.3		Section 302 Head of Global Accounting and Information Management Certification.
13.1		Section 906 Certification.
15.1		Consent of Independent Registered Public Accounting Firm.
15.2		Consent of Independent Registered Public Accounting Firm.
101		Interactive Data File
(*) Incorporated by reference to BBVA’s Annual Report on Form 20-F for the year ended December 31, 2014. Confidential treatment was requested with respect to certain portions of this agreement. Confidential portions were redacted and separately submitted to the SEC. (**) Incorporated by reference to BBVA’s report on Form 6-K submitted on February 15, 2018 (SEC Accession No. 0001193125-18-047126). We will furnish to the Commission, upon request, copies of any unfiled instruments that define the rights of holders of our long-term debt.

222

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and had duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized.

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.
By:	/s/ RICARDO GOMEZ BARREDO
Name:	RICARDO GOMEZ BARREDO
Title:	Global Head of Accounting and Supervisors

Date: April 5, 2018

223

Consolidated financial statements and auditor’s report for the year 2017

Contents

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated balance sheets	F-3
Consolidated income statements	F-6
Consolidated statements of recognized income and expenses	F-7
Consolidated statements of changes in equity	F-8
Consolidated statements of cash flows	F-11

NOTES TO THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS

1.	Introduction, basis for the presentation of the consolidated financial statements, internal control of financial information and other information.	F-12
2.	Principles of consolidation, accounting policies and measurement bases applied and recent IFRS pronouncements	F-15
3.	BBVA Group	F-47
4.	Shareholder remuneration system	F-51
5.	Earnings per share	F-53
6.	Operating segment reporting	F-54
7.	Risk management	F-57
8.	Fair value	F-111
9.	Cash and cash balances at central banks and other demands deposits and Financial liabilities measured at amortized cost	F-125
10.	Financial assets and liabilities held for trading	F-126
11.	Financial assets and liabilities designated at fair value through profit or loss	F-129
12.	Available-for-sale financial assets	F-129
13.	Loans and receivables	F-136
14.	Held-to-maturity investments	F-139
15.	Hedging derivatives and fair value changes of the hedged items in portfolio hedges of interest rate risk	F-141
16.	Investments in joint ventures and associates	F-145
17.	Tangible assets	F-146
18.	Intangible assets	F-150
19.	Tax assets and liabilities	F-155
20.	Other assets and liabilities	F-159
21.	Non-current assets and disposal groups held for sale	F-161
22.	Financial liabilities at amortized cost	F-163
23.	Liabilities under insurance and reinsurance contracts	F-168
24.	Provisions	F-170
25.	Post-employment and other employee benefit commitments	F-172
26.	Common stock	F-180
27.	Share premium	F-183
28.	Retained earnings, revaluation reserves and other reserves	F-184
29.	Treasury shares	F-186
30.	Accumulated other comprehensive income (loss)	F-187
31.	Non-controlling interests	F-187
32.	Capital base and capital management	F-188
33.	Commitments and guarantees given	F-191
34.	Other contingent assets and liabilities	F-192
35.	Purchase and sale commitments and future payment obligations	F-192
36.	Transactions on behalf of third parties	F-193
37.	Interest income and expense	F-194
38.	Dividend income	F-197
39.	Share of profit or loss of entities accounted for using the equity method	F-197
40.	Fee and commission income and expenses	F-197
41.	Gains (losses) on financial assets and liabilities (net) and Exchange Differences	F-198
42.	Other operating income and expenses	F-199
43.	Income and expense from insurance and reinsurance contracts	F-199
44.	Administration costs	F-200
45.	Depreciation and amortization	F-204
46.	Provisions or reversal of provisions	F-204
47.	Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss	F-205
48.	Impairment or reversal of impairment on non-financial assets	F-205
49.	Gains (losses) on derecognition of non financial assets and subsidiaries, net	F-205
50.	Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	F-206
51.	Consolidated statements of cash flows	F-206
52.	Accountant fees and services	F-207
53.	Related-party transactions	F-208
54.	Remuneration and other benefits received by the Board of Directors and members of the Bank’s Senior Management	F-210
55.	Other information	F-217
56.	Subsequent events	F-218
	APPENDICES APPENDIX I Additional information on consolidated subsidiaries and consolidated structured entities composing the BBVA Group	F-220
	APPENDIX II Additional information on investments in joint ventures and associates in the BBVA Group	F-229
	APPENDIX III Changes and notification of participations in the BBVA Group in 2017	F-230
	APPENDIX IV Fully consolidated subsidiaries with more than 10% owned by non-Group shareholders as of December 31, 2017	F-235
	APPENDIX V BBVA Group’s structured entities. Securitization funds	F-236
	APPENDIX VI Details of the outstanding subordinated debt and preferred securities issued by the Bank or entities in the Group consolidated as of December 31, 2017, 2016 and 2015.	F-237
	APPENDIX VII Consolidated balance sheets held in foreign currency as of December 31, 2017, 2016 and 2015.	F-241
	APPENDIX VIII Quantitative information on refinancing and restructuring operations and other requirement under Bank of Spain Circular 6/2012	F-242
	APPENDIX IX Additional information on Risk Concentration	F-258

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

Banco Bilbao Vizcaya Argentaria, S.A.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Banco Bilbao Vizcaya Argentaria, S.A. and subsidiaries (“BBVA Group”) as of December 31, 2017, the related consolidated statements of income, recognized income and expenses, changes in equity, and cash flows for the year then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of BBVA Group as of December 31, 2017, and the results of its operations and its cash flows for the year then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), BBVA Group’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 5, 2018 expressed an unqualified opinion on the effectiveness of BBVA Group’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of BBVA Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to BBVA Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

 /s/  KPMG Auditores, S.L.

We have served as BBVA Group’s auditor since 2017.

Madrid, Spain

April 5, 2018

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Banco Bilbao Vizcaya Argentaria, S.A.:

We have audited the accompanying consolidated balance sheets of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (the “Company”) and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group (the “Group” - Note 3) as of December 31, 2016 and 2015, and the related consolidated income statements, statements of recognized income and expenses, statements of changes in equity and statements of cash flows for each of the two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Group’s Directors. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with the International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS – IASB”).

 /s/  DELOITTE, S.L.

Madrid, Spain

March 31, 2017

F-2

Consolidated balance sheets as of December 31, 2017, 2016 and 2015

ASSETS (Millions of Euros)
	Notes	2017	2016	2015
CASH, CASH BALANCES AT CENTRAL BANKS AND OTHER DEMAND DEPOSITS	9	42,680	40,039	29,282
FINANCIAL ASSETS HELD FOR TRADING	10	64,695	74,950	78,326
Derivatives		35,265	42,955	40,902
Equity instruments		6,801	4,675	4,534
Debt securities		22,573	27,166	32,825
Loans and advances to central banks		-	-	-
Loans and advances to credit institutions		-	-	-
Loans and advances to customers		56	154	65
FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS	11	2,709	2,062	2,311
Equity instruments		1,888	1,920	2,075
Debt securities		174	142	173
Loans and advances to central banks		-	-	-
Loans and advances to credit institutions		-	-	62
Loans and advances to customers		648	-	-
AVAILABLE-FOR-SALE FINANCIAL ASSETS	12	69,476	79,221	113,426
Equity instruments		3,224	4,641	5,116
Debt securities		66,251	74,580	108,310
LOANS AND RECEIVABLES	13	431,521	465,977	471,828
Debt securities		10,339	11,209	10,516
Loans and advances to central banks		7,300	8,894	17,830
Loans and advances to credit institutions		26,261	31,373	29,317
Loans and advances to customers		387,621	414,500	414,165
HELD-TO-MATURITY INVESTMENTS	14	13,754	17,696	-
HEDGING DERIVATIVES	15	2,485	2,833	3,538
FAIR VALUE CHANGES OF THE HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK	15	(25)	17	45
JOINT VENTURES, ASSOCIATES AND UNCONSOLIDATED SUBSIDIARIES	16	1,588	765	879
Joint ventures		256	229	243
Associates		1,332	536	636
INSURANCE AND REINSURANCE ASSETS	23	421	447	511
TANGIBLE ASSETS	17	7,191	8,941	9,944
Property, plants and equipment		6,996	8,250	8,477
For own use		6,581	7,519	8,021
Other assets leased out under an operating lease		415	732	456
Investment properties		195	691	1,467
INTANGIBLE ASSETS	18	8,464	9,786	10,052
Goodwill		6,062	6,937	6,915
Other intangible assets		2,402	2,849	3,137
TAX ASSETS	19	16,888	18,245	17,779
Current		2,163	1,853	1,901
Deferred		14,725	16,391	15,878
OTHER ASSETS	20	4,359	7,274	8,565
Insurance contracts linked to pensions		-	-	-
Inventories		229	3,298	4,303
Other		4,130	3,976	4,263
NON-CURRENT ASSETS AND DISPOSAL GROUPS HELD FOR SALE	21	23,853	3,603	3,369
TOTAL ASSETS		690,059	731,856	749,855

The accompanying Notes 1 to 56 are an integral part of the consolidated financial statements.

F-3

Consolidated balance sheets as of December 31, 2017, 2016 and 2015

LIABILITIES AND EQUITY (Millions of Euros)
	Notes	2017	2016	2015
FINANCIAL LIABILITIES HELD FOR TRADING	10	46,182	54,675	55,202
Trading derivatives		36,169	43,118	42,149
Short positions		10,013	11,556	13,053
Deposits from central banks		-	-	-
Deposits from credit institutions		-	-	-
Customer deposits		-	-	-
Debt certificates		-	-	-
Other financial liabilities		-	-	-
FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS	11	2,222	2,338	2,649
Deposits from central banks		-	-	-
Deposits from credit institutions		-	-	-
Customer deposits		-	-	-
Debt certificates		-	-	-
Other financial liabilities		2,222	2,338	2,649
Of which: Subordinated liabilities		-	-	-
FINANCIAL LIABILITIES AT AMORTIZED COST	22	543,713	589,210	606,113
Deposits from central banks		37,054	34,740	40,087
Deposits from credit institutions		54,516	63,501	68,543
Customer Deposits		376,379	401,465	403,362
Debt certificates		63,915	76,375	81,980
Other financial liabilities		11,850	13,129	12,141
Of which: Subordinated liabilities		17,316	17,230	16,109
HEDGING DERIVATIVES	15	2,880	2,347	2,726
FAIR VALUE CHANGES OF THE HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK	15	(7)	-	358
LIABILITIES UNDER INSURANCE AND REINSURANCE CONTRACTS	23	9,223	9,139	9,407
PROVISIONS	24	7,477	9,071	8,852
Provisions for pensions and similar obligations	25	5,407	6,025	6,299
Other long term employee benefits		67	69	68
Provisions for taxes and other legal contingencies		756	418	616
Provisions for contingent risks and commitments		578	950	714
Other provisions		669	1,609	1,155
TAX LIABILITIES	19	3,298	4,668	4,656
Current		1,114	1,276	1,238
Deferred		2,184	3,392	3,418
OTHER LIABILITIES	20	4,550	4,979	4,610
LIABILITIES INCLUDED IN DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE		17,197	-	-
TOTAL LIABILITIES		636,736	676,428	694,573

The accompanying Notes 1 to 56 are an integral part of the consolidated financial statements.

F-4

Consolidated balance sheets as of December 31, 2017, 2016 and 2015

LIABILITIES AND EQUITY (Continued) (Millions of Euros)
	Notes	2017	2016	2015
SHAREHOLDERS’ FUNDS		55,136	52,821	50,639
Capital	26	3,267	3,218	3,120
Paid up capital		3,267	3,218	3,120
Unpaid capital which has been called up		-	-	-
Share premium	27	23,992	23,992	23,992
Equity instruments issued other than capital		-	-	-
Other equity instruments		54	54	35
Retained earnings	28	25,474	23,688	22,588
Revaluation reserves	28	12	20	22
Other reserves	28	(44)	(67)	(98)
Reserves or accumulated losses of investments in subsidiaries, joint ventures and associates		(44)	(67)	(98)
Other		-	-	-
Less: Treasury shares	29	(96)	(48)	(309)
Profit or loss attributable to owners of the parent		3,519	3,475	2,642
Less: Interim dividends	4	(1,043)	(1,510)	(1,352)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)	30	(8,792)	(5,458)	(3,349)
Items that will not be reclassified to profit or loss		(1,183)	(1,095)	(859)
Actuarial gains or (-) losses on defined benefit pension plans		(1,183)	(1,095)	(859)
Non-current assets and disposal groups classified as held for sale		-	-	-
Share of other recognized income and expense of investments in subsidiaries, joint ventures and associates		-	-	-
Other adjustments		-	-	-
Items that may be reclassified to profit or loss		(7,609)	(4,363)	(2,490)
Hedge of net investments in foreign operations [effective portion]		1	(118)	(274)
Foreign currency translation		(9,159)	(5,185)	(3,905)
Cash flow hedges [effective portion]		(34)	16	(49)
Available-for-sale financial assets		1,641	947	1,674
Non-current assets and disposal groups classified as held for sale		(26)	-	-
Share of other recognized income and expense of investments in subsidiaries, joint ventures and associates		(31)	(23)	64
MINORITY INTERESTS (NON-CONTROLLING INTEREST)	31	6,979	8,064	7,992
Valuation adjustments		(3,378)	(2,246)	(1,333)
Other		10,358	10,310	9,325
TOTAL EQUITY		53,323	55,428	55,282
TOTAL EQUITY AND TOTAL LIABILITIES		690,059	731,856	749,855
MEMORANDUM  ITEM (OFF-BALANCE SHEET EXPOSURES)  (Millions of Euros)
	Notes	2017	2016	2015
Guarantees given	33	47,671	50,540	49,876
Contingent commitments	33	108,881	117,573	135,733

The accompanying Notes 1 to 56 are an integral part of the consolidated financial statements.

F-5

Consolidated income statements for the years ended December 31, 2017, 2016 and 2015

CONSOLIDATED INCOME STATEMENTS (Millions of Euros)
	Notes	2017	2016	2015
Interest income	37.1	29,296	27,708	24,783
Interest expense	37.2	(11,537)	(10,648)	(8,761)
NET INTEREST INCOME	6	17,758	17,059	16,022
Dividend income	38	334	467	415
Share of profit or loss of entities accounted for using the equity method	39	4	25	174
Fee and commission income	40	7,150	6,804	6,340
Fee and commission expense	40	(2,229)	(2,086)	(1,729)
Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net	41	985	1,375	1,055
Gains (losses) on financial assets and liabilities held for trading, net	41	218	248	(409)
Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net	41	(56)	114	126
Gains (losses) from hedge accounting, net	41	(209)	(76)	93
Exchange differences, net	41	1,030	472	1,165
Other operating income	42	1,439	1,272	1,315
Other operating expense	42	(2,223)	(2,128)	(2,285)
Income from insurance and reinsurance contracts	43	3,342	3,652	3,678
Expense from insurance and reinsurance contracts	43	(2,272)	(2,545)	(2,599)
GROSS INCOME	6	25,270	24,653	23,362
Administration costs	44	(11,112)	(11,366)	(10,836)
Personnel expenses	44.1	(6,571)	(6,722)	(6,273)
Other administrative expenses	44.2	(4,541)	(4,644)	(4,563)
Depreciation and amortization	45	(1,387)	(1,426)	(1,272)
Provisions or reversal of provisions	46	(745)	(1,186)	(731)
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss	47	(4,803)	(3,801)	(4,272)
Financial assets measured at cost		-	-	-
Available- for-sale financial assets		(1,127)	(202)	(23)
Loans and receivables		(3,677)	(3,597)	(4,248)
Held to maturity investments		1	(1)	-
NET OPERATING INCOME		7,222	6,874	6,251
Impairment or reversal of impairment of investments in subsidiaries, joint ventures and associates		-	-	-
Impairment or reversal of impairment on non-financial assets	48	(364)	(521)	(273)
Tangible assets		(42)	(143)	(60)
Intangible assets		(16)	(3)	(4)
Other assets		(306)	(375)	(209)
Gains (losses) on derecognition of non financial assets and subsidiaries, net	49	47	70	(2,135)
Negative goodwill recognized in profit or loss	18	-	-	26
Profit (loss) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations	50	26	(31)	734
OPERATING PROFIT BEFORE TAX	6	6,931	6,392	4,603
Tax expense or income related to profit or loss from continuing operations	19	(2,169)	(1,699)	(1,274)
PROFIT FROM CONTINUING OPERATIONS		4,762	4,693	3,328
Profit from discontinued operations, net		-	-	-
PROFIT		4,762	4,693	3,328
Attributable to minority interest [non-controlling interest]	31	1,243	1,218	686
Attributable to owners of the parent	6	3,519	3,475	2,642
	Notes	2017	2016	2015
EARNINGS PER SHARE  (Euros)	5	0.48	0.49	0.37
Basic earnings per share from continued operations		0.48	0.49	0.37
Diluted earnings per share from continued operations		0.48	0.49	0.37
Basic earnings per share from discontinued operations		-	-	-
Diluted earnings per share from discontinued operations		-	-	-

The accompanying Notes 1 to 56 are an integral part of the consolidated financial statements.

F-6

Consolidated statementsof recognized income and expenses for the years ended December 31, 2017, 2016 and 2015

CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSES (MILLIONS OF EUROS)
	2017	2016	2015
PROFIT RECOGNIZED IN INCOME STATEMENT	4,762	4,693	3,328
OTHER RECOGNIZED INCOME (EXPENSES)	(4,467)	(3,022)	(4,280)
ITEMS NOT SUBJECT TO RECLASSIFICATION TO INCOME STATEMENT	(91)	(240)	(74)
Actuarial gains and losses from defined benefit pension plans	(96)	(303)	(135)
Non-current assets available for sale	-	-	-
Entities under the equity method of accounting	-	-	8
Income tax related to items not subject to reclassification to income statement	5	63	53
ITEMS SUBJECT TO RECLASSIFICATION TO INCOME STATEMENT	(4,376)	(2,782)	(4,206)
Hedge of net investments in foreign operations [effective portion]	80	166	88
Valuation gains or (losses) taken to equity	112	166	88
Transferred to profit or loss	-	-	-
Other reclassifications	(32)	-	-
Foreign currency translation	(5,110)	(2,167)	(2,911)
Valuation gains or (losses) taken to equity	(5,119)	(2,120)	(3,154)
Transferred to profit or loss	(22)	(47)	243
Other reclassifications	31	-	-
Cash flow hedges [effective portion]	(67)	80	4
Valuation gains or (losses) taken to equity	(122)	134	47
Transferred to profit or loss	55	(54)	(43)
Transferred to initial carrying amount of hedged items	-	-	-
Other reclassifications	-	-	-
Available-for-sale financial assets	719	(694)	(3,196)
Valuation gains or (losses) taken to equity	384	438	(1,341)
Transferred to profit or loss	347	(1,248)	(1,855)
Other reclassifications	(12)	116	-
Non-current assets held for sale	(20)	-	-
Valuation gains or (losses) taken to equity	-	-	-
Transferred to profit or loss	-	-	-
Other reclassifications	(20)	-	-
Entities accounted for using the equity method	(13)	(89)	861
Income tax	35	(78)	948
TOTAL RECOGNIZED INCOME/EXPENSES	295	1,671	(952)
Attributable to minority interest [non-controlling interests]	110	305	(594)
Attributable to the parent company	185	1,366	(358)

The accompanying Notes 1 to 56 are an integral part of the consolidated financial statements.

F-7

Consolidated statements of changes in equity for the years ended December 31, 2017, 2016 and 2015

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (MILLIONS OF EUROS)
	Capital (Note 26)	Share Premium (Note 27)	Equity instruments issued other than capital	Other Equity	Retained earnings (Note 28)	Revaluation reserves  (Note 28)	Other reserves (Note 28)	(-) Treasury shares (Note 29)	Profit or loss attributable to owners of the parent	Interim dividends (Note 4)	Accumulated other comprehensive income  (Note 30)	Non-controlling interest		Total
2017												Valuation adjustments (Note 31)	Other (Note 31)
Balances as of January 1, 2017	3,218	23,992	-	54	23,688	20	(67)	(48)	3,475	(1,510)	(5,458)	(2,246)	10,310	55,428
Total income/expense recognized	-	-	-	-	-	-	-	-	3,519	-	(3,334)	(1,133)	1,243	295
Other changes in equity	50	-	-	-	1,786	(8)	24	(48)	(3,475)	467	-	-	(1,195)	(2,400)
Issuances of common shares	50	-	-	-	(50)	-	-	-	-	-	-	-	-	-
Issuances of preferred shares	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Issuance of other equity instruments	-	-	-	-	-	-	-	-	-	-	-	-	-	-
Settlement or maturity of other equity instruments issued	-	-	-	-