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

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

For the fiscal year ended December 31, 2019

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

For the transition period from ___ to ___

[ ] 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)

Jaime Sáenz de Tejada Pulido

Calle Azul, 4

28050 Madrid

Spain

Telephone number +34 91 537 7000

(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	Trading Symbol	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	BBVA	New York Stock Exchange
Ordinary shares, par value €0.49 per share	BBVA*	New York Stock Exchange*

3.000% Fixed Rate Senior Notes due 2020	BBVA/20A	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-Up Non-Cumulative Contingent Convertible Perpetual Preferred Tier 1 Securities			Irish Stock Exchange
Series 9 Non-Step-Up 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, 2019, 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 every Interactive Data File required to be submitted 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 such files).

Yes [X]

No [ ]

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 the other geographies in which we operate;

· our ability to comply with various legal and regulatory regimes and the impact of changes in applicable laws and regulations, including increased capital, liquidity and provision requirements and taxation, and steps taken towards achieving an EU fiscal and banking union and an EU capital markets 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;

· the political, economic and regulatory impacts related to the United Kingdom’s withdrawal from the European Union and the future relationship between the United Kingdom and the European Union;

· adjustments in the real estate markets in the geographies in which we operate, in particular in Spain, Mexico, the United States and Turkey;

· the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation for us and our competitors, and our ability to implement technological advances;

· 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, exchange controls or other limitations to the repatriation of dividends, international ownership legislation, interest rate caps and tax policies;

· our ability to continue to access sources of liquidity and funding and to receive dividends and other funds from our subsidiaries;

· 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;

PRESENTATION OF FINANCIAL INFORMATION

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 4/2017 of November 27, 2017 (“Circular 4/2017”), which replaced Circular 4/2004 of December 22, 2004, on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) for financial statements relating to periods ended January 1, 2018 or thereafter.

There are no differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and Circular 4/2017 and IFRS-IASB for the years ended December 31, 2019, 2018 and 2017. The Consolidated Financial Statements included in this Annual Report have been prepared in compliance with IFRS-IASB and in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and Circular 4/2017.

For a description of our critical accounting policies, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies” and Note 2.2 to our Consolidated Financial Statements.

The financial information as of and for the years ended December 31, 2018, 2017, 2016 and 2015 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 of the changes in accounting policies and operating segments referred to below (see “―Changes in Accounting Policies” and “―Changes in Operating Segments”) and certain retrospective adjustments made in prior years.

Changes in Accounting Policies

Application of IFRS 16

On January 1, 2019, IFRS 16 replaced IAS 17 “Leases”. The new standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases. The standard provides two exceptions that can be applied in the case of short-term contracts and those in which the underlying assets have low value. BBVA has applied both exceptions. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset, which is recorded under the headings “Tangible assets - Property, plant and equipment” and “Tangible assets – Investment properties” in our consolidated balance sheets within our Consolidated Financial Statements (see Note 17), and a lease liability representing its obligation to make lease payments, which is recorded under the heading “Financial liabilities at amortized cost – Other financial liabilities” in our consolidated balance sheets within our Consolidated Financial Statements (see Note 22.5). For the consolidated income statement within our Consolidated Financial Statements, the amortization of the right to use asset is recorded under the heading “Depreciation and amortization – Tangible assets” (see Note 45) and the financial cost associated with the lease liability is recorded under the heading “Interest expense – Financial liabilities at amortized cost” (see Note 37.2).

With regard to lessor accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor will continue to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

As allowed by IFRS 16, consolidated financial information as of December 31, 2018 and 2017 and for the years then ended included in our Consolidated Financial Statements has not been restated retrospectively in this regard. For additional information, see Notes 2.2.19 and 2.3 to our Consolidated Financial Statements.

See “Item 5. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition—Application of IFRS 16”.

IAS 12 – “Income Taxes” Amendment

As part of the annual improvements to IFRS standards (2015-2017 cycle), IAS 12 “Income Taxes” was amended for annual reporting periods beginning on or after January 1, 2019. According to the amended standard, an entity shall recognize the income tax consequences of payments of dividends in profit or loss, other comprehensive income or equity, depending on where the entity recognized the originating transaction or event that generated the distributable profits giving rise to the dividend. In accordance with the amended standard, we recorded the income tax consequences of dividends paid for the year ended December 31, 2019 (amounting to €91 million of income) under “Tax expense or income related to profit or loss from continuing operations” in our consolidated income statement within our Consolidated Financial Statements (see Note 19). Such income tax consequences were recorded under “Total equity” in our consolidated balance sheet in previous periods. In order to make the financial information for prior years comparable with the financial information for 2019, the financial information for 2018 and 2017 has been restated retrospectively in this regard. The application of the amended standard resulted in an increase by €76 million and a decrease by €5 million, respectively, in our “Profit attributable to parent company” for 2018 and 2017, respectively (an increase of 1.4% and a decrease of 0.1% in the “Profit attributable to parent company” for 2018 and 2017, respectively). The new standard has had no significant impact on our consolidated total equity.

Hyperinflationary economies

In late 2018, the Group made a change with respect to the accounting policies for hyperinflationary economies in accordance with IAS 29 “Financial information in hyperinflationary economies”.

In addition, in the third quarter of 2018, Argentina, which is part of the South America segment, was considered to be a hyperinflationary country for the first time, and we applied hyperinflation accounting in respect thereof with effect from January 1, 2018.

For additional information, see Notes 2.2.16 and 2.2.20 to our Consolidated Financial Statements.

Changes in Operating Segments

During 2019, we changed the reporting structure of the BBVA Group’s operating segments as a result of the integration of the Non-Core Real Estate business area into Banking Activity in Spain, which was renamed “Spain”. Additionally, certain balance sheet intra-group adjustments between the Corporate Center and the operating segments were reallocated to the corresponding operating segments. In addition, certain expenses related to global projects and activities have been reallocated between the Corporate Center and the corresponding operating segments. In order to make the information as of and for the years ended December 31, 2018 and 2017 comparable with the information as of and for the year ended December 31, 2019, as required by IFRS 8 “Information by business segments”, figures as of and for the years ended December 31, 2018 and 2017 were recast in conformity with the new segment reporting structure.

For additional information on our current segments, see “Item 4. Business Overview―Operating Segments” and Note 6 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.

· 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.

	Year Ended December 31,
	2019	2018	2017	2016	2015
	(In Millions of Euros, Except Per Share/ADS Data (in Euros))
Consolidated Statement of Income Data
Interest and other income	31,061	29,831	29,296	27,708	24,783
Interest expense	(12,859)	(12,239)	(11,537)	(10,648)	(8,761)
Net interest income	18,202	17,591	17,758	17,059	16,022
Dividend income	162	157	334	467	415
Share of profit or loss of entities accounted for using the equity method	(42)	(7)	4	25	174
Fee and commission income	7,522	7,132	7,150	6,804	6,340
Fee and commission expense	(2,489)	(2,253)	(2,229)	(2,086)	(1,729)
Net gains (losses) on financial assets and liabilities (1)	798	1,234	938	1,661	865
Exchange differences, net	586	(9)	1,030	472	1,165
Other operating income	671	949	1,439	1,272	1,315
Other operating expense	(2,006)	(2,101)	(2,223)	(2,128)	(2,285)
Income on insurance and reinsurance contracts	2,890	2,949	3,342	3,652	3,678
Expense on insurance and reinsurance contracts	(1,751)	(1,894)	(2,272)	(2,545)	(2,599)
Gross income	24,542	23,747	25,270	24,653	23,362
Administration costs	(10,303)	(10,494)	(11,112)	(11,366)	(10,836)
Depreciation and amortization	(1,599)	(1,208)	(1,387)	(1,426)	(1,272)
Provisions or reversal of provisions	(617)	(373)	(745)	(1,186)	(731)
Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss or net gains by modification	(4,151)	(3,981)	(4,803)	(3,801)	(4,272)
Net operating income	7,872	7,691	7,222	6,874	6,251
Impairment or reversal of impairment of investments in joint ventures and associates	(46)	-	-	-	-
Impairment or reversal of impairment on non-financial assets	(1,447)	(138)	(364)	(521)	(273)
Gains (losses) on derecognition of non-financial assets and subsidiaries, net	(3)	78	47	70	(2,135)
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	21	815	26	(31)	734
Operating profit before tax	6,398	8,446	6,931	6,392	4,603
Tax (expense) or income related to profit or loss from continuing operations	(2,053)	(2,219)	(2,174)	(1,699)	(1,274)
Profit from continuing operations	4,345	6,227	4,757	4,693	3,328
Profit from discontinued operations, net	-	-	-	-	-
Profit	4,345	6,227	4,757	4,693	3,328
Profit attributable to parent company	3,512	5,400	3,514	3,475	2,642
Profit attributable to non-controlling interests	833	827	1,243	1,218	686
Per share/ADS(2) Data
Profit from continuing operations	0.65	0.93	0.71	0.71	0.52
Diluted profit attributable to parent company (3)	0.47	0.75	0.46	0.49	0.37
Basic profit attributable to parent company	0.47	0.75	0.46	0.49	0.37
Dividends declared (In Euros)	0.260	0.250	0.170	0.160	0.160
Dividends declared (In U.S. dollars)	0.292	0.286	0.204	0.169	0.174
Number of shares outstanding (at period end)	6,667,886,580	6,667,886,580	6,667,886,580	6,566,615,242	6,366,680,118

(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 held for trading, net”, “Gains (losses) on non-trading financial assets mandatorily at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net” and “Gains (losses) from hedge accounting, net”.

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

(3) 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 2016, October 2016 and April 2017, excluding the weighted average number of treasury shares during the year (6,668 million, 6,668 million, 6,642 million, 6,468 million and 6,290 million shares for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively).

	As of and for the Year Ended December 31,
	2019	2018	2017	2016	2015
	(In Millions of Euros, Except Percentages)
Consolidated Balance Sheet Data	0
Total assets	698,690	676,689	690,059	731,856	749,855
Net assets	54,925	52,874	53,323	55,428	55,282
Common stock	3,267	3,267	3,267	3,218	3,120
Financial assets at amortized cost (1)	439,162	419,660	445,275	483,672	471,828
Financial liabilities at amortized cost - Customer deposits	384,219	375,970	376,379	401,465	403,362
Debt certificates	68,619	63,970	63,915	76,375	81,980
Non-controlling interest	6,201	5,764	6,979	8,064	7,992
Total equity	54,925	52,874	53,323	55,428	55,282
Consolidated ratios
Profitability ratios:
Net interest margin (2)	2.62%	2.59%	2.52%	2.32%	2.27%
Return on average total assets (3)	0.6%	0.9%	0.7%	0.6%	0.5%
Return on average shareholders’ funds (4)	6.3%	10.2%	6.7%	6.7%	5.3%
Credit quality data
Loan loss reserve (5)	12,427	12,217	12,784	16,016	18,742
Loan loss reserve as a percentage of financial assets at amortized cost (1)	2.83%	2.91%	2.87%	3.31%	3.97%
Non-performing asset ratio (NPA ratio) (6)	3.79%	3.94%	4.49%	4.90%	5.37%
Impaired loans and advances to customers	15,954	16,349	19,390	22,915	25,333
Impaired loan commitments and guarantees to customers (7)	731	740	739	680	664
	16,684	17,089	20,130	23,595	25,997
Loans and advances to customers at amortized cost (8)	394,763	386,225	401,074	430,629	432,921
Loan commitments and guarantees to customers	45,952	47,575	47,671	50,540	49,876
	440,714	433,800	448,745	481,169	482,797

(1) With respect to 2015, consists exclusively of assets recorded under “Loans and receivables” as of December 31, 2015 in the consolidated financial statements included in the annual report on Form 20-F for such year, following IAS 39 (see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Financial instruments”). Financial information for 2017 included in the Consolidated Financial Statements, and financial information for 2016 included in the consolidated financial statements for the year ended December 31, 2018, was prepared in accordance with the accounting policies and valuation criteria applicable under IAS 39, subject to certain modifications in order to improve its comparability with financial information for subsequent periods. For additional information on such modifications, see “Presentation of Financial Information—Application of IFRS 9” in our annual report on Form 20-F for the year ended December 31, 2018.

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

(3) Represents profit attributable to parent company 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.

(5) Represents loss allowance on loans and advances at amortized cost.

(6) Represents the sum of impaired loans and advances to customers and impaired loan commitments and guarantees to customers divided by the sum of loans and advances to customers and loan commitments and guarantees to customers.

(7) We include loan commitments and guarantees to customers in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired loan commitments and guarantees to customers 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 loan commitments and guarantees to customers (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 loan commitments and guarantees to customers were not included in the calculation of our NPA ratio, such ratio would generally be lower for the periods covered, amounting to 3.62%, 3.77%, 4.32%, 4.76% and 5.25% as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

(8) Includes impaired loans and advances.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

BUSINESS RISKS

Inherent Business Risks

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 loss allowances. Credit risk can be affected by a range of factors, including an adverse economic environment, reduced consumer, corporate 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 household 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.

The total maximum credit risk exposure (calculated as set forth in Note 7.1.2 to the Consolidated Financial Statements) was €809,786 million, €763,082 million and €763,165 million as of December 31, 2019, 2018 and 2017, respectively. Total non-performing or impaired financial assets and contingent risk (calculated as set forth in Note 7.1.5 to the Consolidated Financial Statements) amounted to €16,770 million, €17,134 million and €20,590 million as of December 31, 2019, 2018 and 2017, respectively. The Group had a 3.79% non-performing asset ratio (calculated as indicated herein) as of December 31, 2019, compared to 3.94% and 4.49% as of December 31, 2018 and 2017, respectively. The Group’s non-performing loan coverage ratio was 77% as of December 31, 2019, compared to 73% and 65% as of December 31, 2018 and 2017, respectively.

Non-performing or low credit quality loans have in the past and can continue to negatively affect the Group’s results of operations. The Group 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 there is a risk of increased default rates if interest rates start to rise. The timing, quantum and pace of any default rate rise are key risk factors. 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, including 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 based on its classifications and estimates of possible changes in credit quality. 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. There is a risk in making such assessments 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.

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, any 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 plans.

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 from their effect on 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 the Group’s loans referenced to variable interest rates makes borrowers’ capacity to repay such loans more vulnerable to changes in interest rates and the profitability of the loans more vulnerable to interest rate decreases. Loans and advances to customers maturing in more than one year and bearing floating interest rates made up 59%, 62% and 62% of such transactions as of December 31, 2019, 2018 and 2017, respectively. See Note 14.3 to the Consolidated Financial Statements. In addition, a rise in interest rates could reduce the demand for credit 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. See Note 7.3.1 to the Consolidated Financial Statements for further information.

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 whose impact is unforeseeable. In addition, the trend towards consolidation in the banking industry has created larger, well-capitalized banks with which the Group must now compete.

The Group also faces competition from non-bank competitors, such as BigTech firms, financial-technology (or “Fintech”) companies, payment platforms, e-commerce businesses, large department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, mutual funds, pension funds, insurance companies and –with respect to its deposits- public and corporate debt securities. According to the Financial Stability Board (“FSB”), non-bank financial intermediaries managed assets totaling $184.3 trillion as of December 2017 and are experiencing growth exceeding that of the commercial banking business. BigTech firms are already engaged in a wide range of financial activities. This is particularly the case in China, where BigTech firms have market capitalizations comparable to those of the world’s largest financial groups, and offer a wide range of financial services through subsidiaries. BigTech firms have also been expanding their provision of financial service in other emerging markets, notably in South East Asia, East Africa and Latin America. Such firms have achieved scale in financial services very rapidly, in part due to the large customer bases and high degree of brand recognition associated with their existing core technology businesses. Despite its recent growth, total credit extended by BigTech firms accounts for a small proportion of overall credit. Still, competition from non-bank competitors may significantly increase in the future.

In recent 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 those listed above. However, as of the date of this Annual Report, there is an uneven playing field between banks and 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 V Directive limits the ratio between the variable and fixed salary that financial institutions can pay to certain staff members identified as risk takers. This places banking groups such as the Group at a competitive disadvantage for attracting and retaining digital talent and for retaining the founders and management teams of acquired companies.

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 banks and non-bank players arise since banks, as regulated entities, often face obstacles to engage in unregulated activities.

The Group’s future success depends, 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 or delivering these products and services to its customers, which would adversely affect the Group’s business, financial condition and results of operations.

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 affected.

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, one of its main objectives being 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.

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

The Group is significantly exposed to the real estate market, particularly in Spain. The Group’s exposure to the construction and real estate industries in Spain amounted to €9,943 million, €11,045 million and €11,981 million as of December 31, 2019, 2018 and 2017, respectively, of which €2,649 million, €3,183 million and €5,224 million, respectively, related to construction and real estate development loans in Spain (representing 1.4%, 1.7% and 2.9%, respectively, of the Group’s loans and advances to customers in Spain (excluding loans and advances to the public sector) and 0.4%, 0.5% and 0.8%, respectively, of the Group’s consolidated assets, as of such dates). The Group is exposed to the real estate market due to the fact that real estate assets secure many of its outstanding loans, it holds a significant amount of real estate assets on its balance sheet, principally as a result of foreclosures, and it holds stakes in real estate companies such as Metrovacesa, S.A. and Divarian Propiedad, S.A. Total real estate exposure in Spain, including development loans, foreclosed assets and other real estate-related assets had a coverage ratio of 52% as of December 31, 2019 (55% as of December 31, 2018). For additional information, see item (b) of Appendix IX (Additional information on risk concentration) of our Consolidated Financial Statements.

While the demand for homes and real estate loans has been on the rise in recent years, growth in the sector seems to be stagnating. Any deterioration of real estate prices could have a material adverse effect on the Group’s business, financial condition and results of operations. For example, a decline in prices for real estate assets in Spain would reduce the value of the real estate portfolio that serves to secure its real estate loans and credit and, consequently, any defaults would increase the amount of expected losses relating to those loans and credit facilities.

The Group faces risks related to its acquisitions and divestitures

The Group has both acquired and sold various companies and businesses over the past few years. As of the date of this Annual Report, the closing of the sale of BBVA Paraguay remains subject to obtaining the relevant regulatory authorizations. Other recent transactions include the sale of BBVA Chile and the Cerberus Transaction (as defined herein). For additional information, see “Item 4. Information on the Company—History and Development of the Company—Capital Divestitures”.

The Group’s mergers and acquisitions activity (M&A) involves divestitures from certain businesses and the strengthening of other business areas through acquisitions. The Group may not complete these transactions in a timely manner, on a cost-effective basis or at all and, if completed, they may not obtain the expected results. In addition, if completed, the Group’s results of operations could be negatively affected by divestiture or acquisition-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, divestitures or acquisitions, including claims from terminated employees, customers or third parties, and the Group may be liable for potential or existing litigation and claims related to an acquired business, including because either the Group is not indemnified for such claims or the indemnification is insufficient. Further, in the case of a divestiture, the Group may be required to indemnify the buyer in respect of certain matters, including claims against the divested entity or business.

In the case of acquisitions, even though the Group reviews the companies it plans to acquire, it is often not possible for these reviews to be complete in all respects and, consequently, there may be risks associated with unforeseen events or liabilities relating to the acquired assets or businesses that may not have been revealed during the due diligence processes, resulting in the Group needing to assume unforeseen liabilities or an acquisition not performing as expected. In addition, acquisitions 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 that adversely affect the Group’s results of operations.

Any of the foregoing may cause the Group to incur significant unexpected expenses, may divert significant resources and management attention from our other business concerns, or may otherwise have a material adverse impact on the Group’s business, financial condition and results of operations.

Risks Deriving from our Geographic Distribution

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

The Group operates commercial banks and insurance and other financial services companies in many countries and its overall success as a global business depends on its ability to succeed in differing economic, social and political conditions and in environments of differing legislative and regulatory requirements (including, among others, laws and regulations regarding the repatriation of funds or the nationalization or expropriation of assets). The Group is particularly sensitive to developments in Mexico, the United States, Turkey and Argentina, which represented 15.6%, 12.7%, 9.2% and 1.0% of the Group’s assets as of December 31, 2019, respectively (14.3%, 12.1%, 9.8% and 1.2% of the Group’s assets as of December 31, 2018, respectively).

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

· weak economic growth or recession in the countries where it operates, poor employment growth and structural challenges constraining 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 the recoverability of the Group’s retail loans, resulting in increased loan loss allowances and asset impairments;

· declines in inflation or even deflation, primarily in Europe, or very high inflation rates, such as in Venezuela and Argentina and, to a lesser extent, Turkey;

· changes in foreign exchange rates resulting in changes in the reported earnings of the Group’s subsidiaries, particularly in Venezuela and Argentina, together with the relevant impact on profits, assets (including risk-weighted assets) and liabilities;

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

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

· substantially lower oil prices, which could particularly affect producing areas, such as Venezuela, Mexico, Texas or Colombia, to which the Group is materially exposed or, conversely, substantially higher oil prices, which could have a negative impact on disposable income levels in net oil consuming areas, such as Spain or Turkey, to which the Group is also materially exposed;

· the impact of the coronavirus disease (COVID-19), which may adversely affect, among other matters, factory output, supply chains, travel and tourism, investor confidence and consumer spending;

· changes in the institutional or political environment in the countries where the Group operates, which could evolve into sudden and intense economic downturns and/or regulatory changes; for example, the potential exit by an EU Member State from the European Monetary Union, which could materially adversely affect the European and global economies, 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; and

· a government default on, or restructuring of, sovereign debt, which could affect the Group primarily in two ways: directly, through portfolio losses (the Group’s exposure to government debt relates mainly to Spain, Mexico, the United States and Turkey, which together amounted to €116,006 million, equivalent to 16.6% of the Group’s consolidated total assets, as of December 31, 2019); and indirectly, through instabilities that a default on, or restructuring of, sovereign 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 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 risks that the Group faces in emerging market economies such as Latin America and Turkey, see “—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 deterioration of economic conditions or the institutional environment 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 or otherwise adversely affect the Group’s business, financial condition and results of operations.

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’s international operations 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. There is no guarantee that the Group will be successful in developing and implementing policies and strategies in each country in which it operates, some of which have experienced significant financial, political and social volatility in recent decades.

As of December 31, 2019, approximately 48.1% of the Group’s assets and approximately 41.9% of its liabilities were denominated in currencies other than the euro. See Note 7.3.2 to the Consolidated Financial Statements for information on our hedging policy for exchange rate risk and Appendix VII thereof for additional information on our exposure to such risk.

The Group is particularly sensitive to developments in Mexico, Turkey and Argentina, which represented 15.6%, 12.7%, 9.2% and 1.0% of the Group’s assets as of December 31, 2019, respectively (14.3%, 9.8% and 1.2% of the Group’s assets as of December 31, 2018, respectively).

Certain risks affecting emerging markets and, in particular, Mexico, are discussed in greater detail below.

Emerging Markets

Emerging markets are generally subject to greater risk than more developed markets.

Emerging markets are affected by conditions in other related markets and in global financial markets generally (such as U.S. interest rates and the U.S. dollar exchange rate) 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. Despite recent global economic growth, there are increasing risks of deterioration that might be triggered by a full-scale trade war, geopolitical events or changes in financial risk appetite, including as a result of a disordered deleveraging process in China or a sudden and unexpected downward growth adjustment in the United States. If global financial conditions deteriorate, the business, financial condition and results of operations of the Bank’s subsidiaries in emerging economies, especially in Latin America and Turkey, could be materially adversely affected.

Moreover, a financial crisis in a particular emerging market could adversely affect other emerging markets that are commercially or financially related and could impact the global economy. Financial turmoil in a particular emerging market tends to adversely affect exchange rates, 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 markets where the Group operates in particular, could dampen capital flows to such economies and adversely affect such economies.

Argentina, where the Bank operates through BBVA Argentina, and Turkey, where the Bank operates through Garanti BBVA, have recently experienced significant exchange rate volatility (for example, the Argentine peso lost a significant portion of its value against the U.S. dollar during the course of 2018 and 2019), rapidly-increasing interest rates and deteriorating economic conditions, adversely affecting our operations in those countries and the value of the related assets and liabilities when translated into euros. Hyperinflation in Argentina had a negative impact of €224 million on profit attributable to parent company for the year ended December 31, 2019 (€266 million for the year ended December 31, 2018). In addition, the Group’s activities in 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. Moreover, the repatriation of dividends from BBVA’s Venezuelan and Argentinean subsidiaries are subject to certain restrictions and there is no assurance that further restrictions will not be imposed.

Mexico

The Group may be affected by currency fluctuations, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico.

Economic conditions in Mexico are highly correlated with economic conditions in the United States due to the physical proximity and the high degree of economic activity between the two countries generally, including the trade historically facilitated by NAFTA. As a result, economic, political and regulatory conditions in the United States or in U.S. laws and policies governing foreign trade, immigration and foreign relations can have an impact on economic conditions in Mexico. Because the Mexican economy is heavily influenced by the U.S. economy, the termination of NAFTA and/or any development affecting the United States-Mexico-Canada Agreement (the “USMCA”) may adversely affect economic conditions in Mexico. As of the date of this Annual Report, USMCA still needs to be approved by the legislature of Canada. As such, uncertainty continues as to whether USMCA will be ratified in its current form, or at all.

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions could have a significant impact on Mexican private sector entities in general, as well as on market conditions and prices. See “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Mexico” for information on certain recent changes to the financial sector regulation.

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.

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 carried out its lending activity mainly in Spain, which continues to be one of its primary business areas, such that as of December 31, 2019, total risk in financial instruments in Spain (calculated as set forth in item (c) of Appendix IX (Additional information on risk concentration) of our Consolidated Financial Statements) amounted to €229,564 million, equivalent to 37% of the Group’s total risk in financial instruments. After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted in the 2009-2010 and 2012-2013 periods. 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 each of 2015 and 2016, falling to 2.9%, 2.4% and 2.0% in 2017, 2018 and 2019, respectively, and unemployment decreased to 13.8% in 2019 from 15.3% in 2018. GDP growth is expected to remain around 2.0% in the coming years, although there are drivers of uncertainty abroad (for example, the possibility of a sudden halt to global growth, and the medium- to long-term consequences of the United Kingdom’s exit from the European Union) and in Spain (for example, the adoption of economic policies that deteriorate household and corporate confidence in the economy and/or financing costs) that could alter that trend, restricting employment growth and reducing levels of disposable income for households and companies. In addition, the Spanish economy is particularly sensitive to economic conditions in the Eurozone, the main export market for Spanish goods and services. The Group’s loans and advances to customers in Spain totaled €197,058 million as of December 31, 2019, representing 50% of the total amount of loans and advances to customers included on the Group’s consolidated balance sheet. Our Spanish business includes extensive operations in Catalonia, which represented 18% of the Group’s assets in Spain as of December 31, 2019 (18% as of December 31, 2018). While social and political tensions have generally declined in recent months, if such tensions were to increase, this could lead to scenarios of uncertainty, volatility in capital markets and a deterioration of economic and financing conditions in Spain.

Given the relevance of the Group’s loan portfolio in Spain, any adverse change affecting economic conditions in Spain could have a material adverse effect on our business, financial condition and results of operations.

We may be adversely affected by the United Kingdom’s planned exit from the European Union

The United Kingdom’s exit from the European Union on January 31, 2020 (“Brexit”) has affected and could continue to adversely affect European and/or worldwide economic and market conditions and could continue to contribute to instability in the global financial markets. The long-term effects of Brexit will depend on the future relationship between the United Kingdom and the European Union, including whether the two maintain close commercial ties after the United Kingdom exits the European Single Market, which is currently scheduled to occur on December 31, 2020.

The Group currently has a branch and 120 employees (as of December 31, 2019) in the United Kingdom, and engages in significant cross-border transactions with the United Kingdom, primarily with banks and other financial institutions. The Group held U.K. sovereign debt totaling €43 million as of December 31, 2019 and it currently holds a 39.02% interest in Atom Bank plc, a U.K. digital bank. In addition to the effects on the economy and European and global financial markets, the implementation of Brexit could harm or otherwise limit our capacity to carry out commercial transactions in the United Kingdom or in any other location. In addition, we expect that Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replicate or replace. If the United Kingdom were to significantly alter its regulations affecting the banking industry, we could face significant new costs and compliance difficulties as it may be time-consuming and expensive for us to alter our internal operations in order to comply with new regulations. In addition, we may face challenges in the recruitment and mobility of employees as well as adverse effects from fluctuations in the value of the pound sterling that may directly or indirectly affect the value of any assets of the Group, including those assets, and their respective risk-weighted assets, denominated in such currency. Moreover, it is possible that Brexit may cause an economic slowdown, or even a recession, in the United Kingdom as well as in the European Union, including in Spain. Due to the ongoing political uncertainty as regards the United Kingdom’s future relationship with the European Union, the precise impact on the business of the Group is difficult to determine. Any of the above or other effects of Brexit could have a material adverse effect on the Group’s business, financial condition and results of operations.

FINANCIAL RISKS

See also “—Business Risks—Inherent Business Risks—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” and “—Business Risks—Inherent Business Risks—The Group’s business is particularly vulnerable to volatility in interest rates”.

Liquidity Risks

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, cause the Group to take other actions or even lead to an exercise of the Spanish Bail-in Power

Historically, one of the Group’s principal sources of funds has been savings and demand deposits. Customer deposits represented approximately 74% of the BBVA Group’s total financial liabilities at amortized cost as of December 31, 2019, compared with 74% and 69% at December 31, 2018 and 2017, respectively. See Note 22 to the Consolidated Financial Statements.

Long-term 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 actions, such as an exercise of the Spanish Bail-in Power (as defined below), expropriation or taxation of creditors’ funds) or competition from investment funds or other products. 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. In that case, the Bank could be subject to early intervention or, ultimately, resolution measures implemented by the Spanish Resolution Authority in accordance with 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”) including, but not limited to, an exercise of the Spanish Bail-in Power (including a Non-Viability Loss Absorption (as defined below)). See “—Legal, Regulatory, Tax and Reporting Risks—Regulatory Risks—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 in 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 the Spanish Resolution Authority pursuant to Law 11/2015 (including, but not limited to, the exercise of the Spanish Bail-in Power (including a Non-Viability Loss Absorption)).

“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 defined herein), including, but not limited to (a) Law 11/2015, (b) RD 1012/2015 (as defined herein); and (c) the SRM Regulation (as defined herein), 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.

“Non-Viability Loss Absorption” means the power of the Spanish Resolution Authority to permanently write-down or convert capital instruments into equity at the point of non-viability of an institution.

“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 (including a Non-Viability Loss Absorption) from time to time.

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 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.

The Group’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 fulfil 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 Group (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.

Other Financial Risks

The Bank and certain of its subsidiaries depend on their credit ratings and those assigned to Spanish sovereign debt. Any decline in these credit ratings could increase the cost of financing or require contracts to be terminated or obligate the Bank to provide additional guarantees under such contracts, which could adversely affect the Group’s business, financial condition and results of operations

The banking business carried out by the Group involves obtaining financing from various sources. Credit ratings are essential to carrying out the banking business since the ability to obtain financing and its price depends in part on such ratings, as well as on other factors including market conditions and the interest rate environment.

The Bank and certain of its subsidiaries are rated by various credit rating agencies. The credit ratings assigned to the Bank and such subsidiaries are an assessment by rating agencies of their ability to pay their obligations when due, affecting the cost of financing and other conditions.

Rating agencies regularly review the Group’s long-term debt ratings based on several factors including financial solvency and other circumstances that affect the financial sector in general. There is no assurance that the Group’s current ratings or outlook will be maintained, and any actual or planned reduction in such ratings or outlook, whether to below investment grade or any other level, could increase the Group’s financing cost and limit or deteriorate the Group’s ability to access the capital markets, secured financing markets (affecting its capacity to replace its impaired assets with other assets bearing better ratings) or inter-bank markets through wholesale deposits, or even lead to a failure to comply with certain contracts or generate additional obligations under those contracts, such as the need to grant additional guarantees, due to the fact that credit ratings are used in some contracts to activate non-compliance and early termination clauses or serve as a basis for demanding additional guarantees if they fall below certain levels.

If the Group is required to cancel contracts due to a ratings reduction leading to early termination, it may not be able to replace them on similar terms or at all, which could have a material adverse impact on its business, financial condition and results of operations.

A ratings reduction could also have an adverse effect on the Group’s reputation or on its ability to sell or market some of its products or participate in certain transactions, and could cause a loss of customer deposits or lead to third parties being less willing to carry out commercial transactions with the Group, especially transactions requiring a minimum rating for investment, which could have a material adverse effect on the Group’s business, financial condition and results of operations.

Moreover, the Group’s ratings may be affected by a decline in the rating for Spanish sovereign debt, including because the Group holds a substantial amount of securities issued by the Kingdom of Spain, autonomous communities within Spain and other Spanish issuers. The Group’s exposure as of December 31, 2019 to Spanish sovereign debt was €50,905 million, representing 7% of the Group’s total consolidated assets (compared to €48,473 million and €51,410 million, representing 7% and 7% of the Group’s total consolidated assets as of December 31, 2018 and 2017, respectively). Any decline in the Kingdom of Spain’s credit ratings could adversely affect the value of the respective debt portfolios held by the Group 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.

BBVA depends in part upon dividends and other funds from subsidiaries, which payment could be beyond BBVA’s control

Some of the Group’s operations are conducted through BBVA’s subsidiaries. As a result, BBVA’s results (and its ability to pay dividends) depend in part on the ability of its subsidiaries to generate earnings and to pay dividends to BBVA. However, as a result in part of the Group’s decision to follow a multiple-point-of-entry resolution strategy (as part of the framework for the resolution of financial entities designed by the Financial Stability Board (FSB)), BBVA’s subsidiaries are required to manage their own liquidity autonomously (obtaining deposits or accessing markets using their own rating) and their payment of dividends, distributions and advances will depend on their earnings and liquidity and the overall state of their business, among other considerations, subject to any legal, regulatory and contractual restrictions.

Additionally, the Bank’s right to receive any assets of any of its 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 “—Regulatory Risks—Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations”).

The Group is exposed to risks related to the continued existence of certain reference rates and the transition to alternative reference rates

In recent years, international regulators are driving a transition from the use of interbank offer rates (“IBORs”), including EURIBOR, LIBOR and EONIA, to alternative risk free rates (“RFRs”). This has resulted in regulatory reform and changes to existing IBORs, with further changes anticipated. These reforms and changes may cause an IBOR to perform differently than it has done in the past or to be discontinued. For example, in 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021, and EONIA modified its methodology on October 2, 2019 and will likely be discontinued as from January 2022. In November 2019, the determination methodology for EURIBOR was changed to a new hybrid methodology using transaction-based data and other sources of data.

Uncertainty as to the nature and extent of such reforms and changes, and how they might affect financial instruments, may adversely affect the valuation or trading of a broad array of financial instruments that use IBORs, including any EURIBOR, EONIA or LIBOR-based securities, loans, deposits and derivatives that are issued by the Group or otherwise included in the Group’s financial assets and liabilities. Such uncertainty may also affect the availability and cost of hedging instruments and borrowings. The Group is particularly exposed to EURIBOR-based financial instruments.

It is not possible to predict the timing or full effect of the transition to RFRs. As a result of such transition, the Group will be required to adapt or amend documentation for new and the majority of existing financial instruments, and may be subject to disputes (including with customers of the Group) related thereto, either of which could have an adverse effect on the Group’s results of operations. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of certain financial instruments. Such transition could also result in pricing risks arising from how changes to reference rates could impact pricing mechanisms in some instruments, and could have an adverse effect on the value of, return on and trading market for such financial instruments and on the Group’s profitability. In addition, the transition to RFRs will require important operational changes to the Group’s systems and infrastructure as all systems will need to account for the changes in the reference rates.

Any of these factors may have a material adverse effect 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 asset impairment

Regulatory, business, economic or political changes and other factors could lead to asset impairment. 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 or otherwise lead to the impairment of such assets (including goodwill and deferred tax assets). Recent and ongoing political processes such as Brexit, the surge of populist trends in several European countries, health-related crisis, increased trade tensions 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 regarding the asset quality of European banks also affected their evolution in the market in recent years. In addition, uncertainty about China’s growth expectations and its policymaking capability to address certain severe challenges has contributed to the 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. In addition, the Group may be required to derecognize deferred tax assets if it believes it is unable to use them over the period for which the deferred tax assets remain deductible.

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. See Note 24 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.

LEGAL, REGULATORY, TAX AND REPORTING RISKS

Legal Risks

The Group is party to a number of legal and regulatory actions and proceedings

BBVA and its subsidiaries are involved in a number of legal and regulatory actions and proceedings, including legal claims and proceedings, civil and criminal regulatory proceedings, governmental investigations and proceedings, tax proceedings and other proceedings, in jurisdictions around the world, the final outcome of which is unpredictable, including in the case of legal proceedings where 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 or investigation.

Legal and regulatory actions and proceedings against financial institutions have been on the rise in Spain and other jurisdictions where the Group operates over the last decade, fueled in part by certain recent consumer-friendly rulings. In certain instances, these rulings were the result of appeals made to national or supranational courts (such as the European Court of Justice). Legal and regulatory actions and proceedings faced by the Group include legal proceedings brought by clients before Spanish and European courts in relation to mortgage loan agreements in which the claimants argue that certain provisions of such agreements should be declared null and void (including provisions concerning fees and other expenses, early termination and the use of certain interest rate indexes in mortgage loans). The application of certain interest rates and other conditions in certain credit card contracts is also being challenged in the Spanish courts. Legal and regulatory actions and proceedings currently faced by other financial institutions regarding these and other matters, especially if such actions or proceedings result in consumer-friendly rulings, could also adversely affect the Group.

On December 14, 2017, the Spanish Supreme Court issued judgment 669/2017 regarding consumer mortgage loans linked to the interest rate index known as IRPH (the average rate for mortgage loans with a term exceeding three years for the acquisition of free-market homes granted by credit institutions in Spain), which was calculated by the Bank of Spain and published in the Official State Journal, which ruling confirmed that the mere referencing of a mortgage loan to the IRPH did not imply a lack of transparency.

A request for a preliminary ruling was subsequently made to the European Court of Justice, which questioned the judgment adopted by the Spanish Supreme Court. On September 10, 2019, the Attorney General of the European Court of Justice issued a report in which he concluded that Bankia, S.A. (the Spanish bank that is a party to this proceeding) complied with the transparency requirement imposed by applicable European legislation. The Attorney General also stated that national judges are responsible for assessing compliance with applicable transparency obligations in each particular case. However, the conclusions reached by the Attorney General in his report are not binding on the European Court of Justice, which is still to rule on the matter. If the European Court of Justice were to adopt a ruling contrary to the Group’s interests, the Group’s results could be materially adversely affected. The precise impact of such a ruling would depend on (i) the Court’s decision regarding which interest rate should be applied to consumer mortgage loans linked to IRPH, and (ii) whether the judgment would be applied retroactively. It is currently expected that the European Court of Justice will issue a ruling in this matter in March 2020.

The Group is also involved in antitrust proceedings and investigations in certain countries which could, among other things, give rise to sanctions or lead to lawsuits from clients or other persons. For example, in April 2017, the Mexican Federal Economic Competition Commission (Comisión Federal de Competencia Económica or the “COFECE”) launched an antitrust investigation relating to alleged monopolistic practices of certain financial institutions, including BBVA’s subsidiary BBVA Bancomer, S.A. (“BBVA Mexico”) in connection with transactions in Mexican government bonds. The Mexican Banking and Securities Exchange Commission (Comisión Nacional Bancaria y de Valores) also initiated a separate investigation regarding this matter, which resulted in certain fines, insignificant in amount, being initially imposed, which BBVA Mexico has challenged. In March 2018, BBVA Mexico and certain other affiliates of the Group were named as defendants in a putative class action lawsuit filed in the United States District Court for the Southern District of New York, alleging that the defendant banks and their named subsidiaries engaged in collusion with respect to the purchase and sale of Mexican government bonds. The judge assigned to hear these proceedings dismissed plaintiffs’ claims in their entirety but permitted plaintiffs to file an amended complaint, which the defendants have again moved to dismiss.

The outcome of legal and regulatory actions and proceedings, both those to which the Group is currently exposed and any others which may arise in the future, including actions and proceedings related to former subsidiaries of the Group or in respect of which the Group may have indemnification obligations, is difficult to predict. However, in connection with such matters the Group may incur significant expense, regardless of the ultimate outcome, and any such matters could expose the Group to any of the following outcomes: substantial monetary damages, settlements and/or fines; remediation of affected customers and clients; other penalties and injunctive relief; additional litigation; criminal prosecution in certain circumstances; regulatory restrictions on the Group’s business operations including the withdrawal of authorizations; changes in business practices; increased regulatory compliance requirements; the suspension of operations; public reprimands; the loss of significant assets or business; a negative effect on the Group’s reputation; loss of confidence by investors, counterparties, customers, clients, supervisors and other stakeholders; risk of credit rating agency downgrades; a potential negative impact on the availability and cost of funding and liquidity; and the dismissal or resignation of key individuals. There is also a risk that the outcome of any legal or regulatory actions or proceedings in which the Group is involved may give rise to changes in laws or regulations as part of a wider response by relevant lawmakers and regulators. A decision in any matter, either against the Group or another financial institution facing similar claims, could lead to further claims against the Group. In addition, responding to the demands of litigation may divert management’s time and attention and the Group’s financial resources. Moreover, where provisions have already been taken in connection with an action or proceeding, such provisions could prove to be inadequate.

As a result of the above, legal and regulatory actions and proceedings currently faced by the Group or to which it may become subject in the future or otherwise affected by, individually or in the aggregate, if resolved in whole or in part contrary to the Group’s interests, could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Spanish judicial authorities are carrying out a criminal investigation relating to possible bribery, revelation of secrets and corruption by the Bank

Spanish judicial authorities are investigating the activities of Centro Exclusivo de Negocios y Transacciones, S.L. (“Cenyt”). Such investigation includes the provision of services by Cenyt to the Bank. On July 29, 2019, the Bank was named as an investigated party (investigado) in a criminal judicial investigation (Preliminary Proceeding No. 96/2017 – Piece No. 9, Central Investigating Court No. 6 of the National High Court) for alleged facts which could represent the crimes of bribery, revelation of secrets and corruption. As at the date of this Annual Report, no formal accusation against the Bank has been made. Certain current and former officers and employees of the Group, as well as former directors of the Bank, have also been named as investigated parties in connection with this investigation. The Bank has been and continues to be proactively collaborating with the Spanish judicial authorities, including sharing with the courts information from its on-going forensic investigation regarding its relationship with Cenyt. The Bank has also testified before the judge and prosecutors at the request of the Central Investigating Court No. 6 of the National High Court.

On February 3, 2020, the Bank was notified by the Central Investigating Court No. 6 of the National High Court of the order lifting the secrecy of the proceedings.

This criminal judicial proceeding is at a preliminary stage. Therefore, it is not possible at this time to predict the scope or duration of such proceeding or any related proceeding or its or their possible outcomes or implications for the Group, including any fines, damages or harm to the Group’s reputation caused thereby.

Regulatory Risks

The Group is subject to substantial regulation and regulatory and governmental oversight. Changes in the regulatory framework, including the different local regulations applicable to the Group, 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 as a consequence of some of these proposals. Other proposals are still being developed.

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, legislation regarding mortgages and banking products, consumer and user regulations, 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, legislation on the prevention of money laundering and the financing of terrorism, market abuse and integrity legislation, regulations regarding conduct with financial market customers, anti-corruption legislation, heightened reporting requirements and reforms of derivatives, other financial instruments, investment products and market infrastructures. In addition, the European supervisory and regulatory framework has changed and intensified, following the creation of the Single Supervisory Mechanism and the SRM.

The specific effects of these new regulations are often uncertain given their early stage of elaboration or implementation. In addition, while some of these new laws and regulations have already entered into force, the manner in which they will be applied to the operations of financial institutions is still evolving. The discretion that regulators and supervisors have when regulating and supervising banks also generates uncertainty.

Moreover, local legislation in certain jurisdictions where the Group operates differs in a number of material respects from equivalent regulations in Spain or the United States and may, for example, establish different capital requirements, prohibit the Bank from engaging in certain activities or require specific authorization for those activities, which may give rise to higher compliance costs. See “—Business Risks—Risks Deriving from our Geographic Distribution—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”.

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, and increase the Group’s compliance costs.

Any required changes to the Group’s business operations resulting from the legislation and regulations applicable to such business, in particular in Spain, Mexico, the United States or Turkey, 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, require the Group to increase its prices and therefore reduce demand for its products, impose additional costs on the Group or otherwise adversely affect its business, financial condition and results of operations.

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

In its capacity as a Spanish credit institution, the Bank is subject to compliance with a “Pillar 1” solvency requirement, a “Pillar 2” solvency requirement and a “combined capital buffer requirement” at both the individual and consolidated level. For additional information, see “Item 4. Information on the Company—Business Overview—Supervision and Regulation”.

As a result of the latest Supervisory Review and Evaluation Process (“SREP”) carried out by the European Central Bank (“ECB”), the Bank is required to maintain, from January 1, 2020 on a consolidated basis, a common equity tier 1 capital ratio (“CET1”) of 9.27% and a total capital ratio of 12.77%. This total capital requirement on a consolidated basis includes: (i) a Pillar 1 requirement of 8% that should be fulfilled by a minimum of 4.5 p.p. of CET1; (ii) a Pillar 2 requirement of 1.5 p.p. of CET1 (the same as that imposed in the previous SREP decision); (iii) a Capital Conservation buffer of 2.5 p.p. of CET1; (iv) an Other Systemic Important Institution buffer (“D-SIBs”) of 0.75 p.p. of CET1; and (v) a Countercyclical Capital buffer 0.02 p.p. of CET1. Additionally, the Bank is required to maintain, from January 1, 2020, on an individual basis, a CET1 capital ratio of 8.53% and a total capital ratio of 12.03%.

As of December 31, 2019, the Bank’s phased-in total capital ratio was 15.92% on a consolidated basis and 20.81% on an individual basis (15.71% and 22.07%, respectively, as of December 31, 2018), and its CET1 phased-in capital ratio was 11.98% on a consolidated basis and 16.42% on an individual basis (11.58% and 17.45%, respectively, as of December 31, 2018).

While such ratios exceed the applicable regulatory requirements described above, 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.

Should the Bank or the Group fail to comply with its “combined capital buffer requirement”, it would have to calculate its Maximum Distributable Amount (“MDA”) and, until such calculation was done and reported to the Bank of Spain, the affected entity would not be able to make any distributions relating to additional tier 1 instruments (“Discretionary Payments”). Once the MDA was calculated and reported, any Discretionary Payments would be limited to the calculated MDA.

In addition, if the Bank or the Group fails to comply with the applicable capital requirements, additional “Pillar 2” requirements could be imposed and early action measures could be adopted or, ultimately, resolution measures could be implemented by the resolution authorities in accordance with Law 11/2015 which, together with RD 1012/2015 (as defined herein), transposes Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (“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.

Moreover, CRR II (as defined herein) has established a binding leveraging ratio requirement of 3% of tier 1 capital. Any failure to comply with this leveraging ratio would also result in the need to calculate and report the MDA and the same restrictions on Discretionary Payments.

Additionally, the CRR II proposes new requirements that capital instruments must meet in order to be considered AT1 or Tier 2 instruments, including some grandfathering measures until June 28, 2025. Once CRR II has been transposed and the grandfathering period has elapsed, AT1 and/or Tier 2 instruments that do not comply with the new requirements at that date will no longer be computed as capital instruments. This could give rise to shortfalls in regulatory capital and, ultimately, a failure to comply with the applicable regulatory minimum capital requirements, with the aforementioned consequences.

On February 1, 2019, the Bank announced its CET1 fully-loaded capital ratio target (on a consolidated basis) to be in the range between 11.5% and 12.0%. No assurance can be given that the Bank will maintain this target or meet it in the future. Any failure by the Bank to maintain a consolidated CET1 capital ratio in line with its CET1 capital target, or any change in such target, could be negatively perceived by investors and/or regulators, who may interpret that the Bank lacks capacity to generate capital or that its capital position has deteriorated, any of which could adversely affect the market price or value or trading behavior of any securities issued by the Bank (and, in particular, any of its capital instruments) and ultimately lead to the imposition of further “Pillar 2” guidance or requirements.

On March 15, 2018 the ECB published its supervisory expectations regarding prudential provisions for non-performing loans (“NPLs”) as an addendum (“Addendum”) to the ECB guidance on NPLs for credit institutions published on March 20, 2017, where the ECB’s supervisory expectations with respect to the identification, management, measurement and write-off of NPLs were clarified with the aim of avoiding an excessive build-up of non-covered aged NPLs on banks’ balance sheets.

The supervisory expectations set out in the Addendum are applicable to new NPLs classified as such starting on April 1, 2018. The ECB will assess bank practices at least once per year and, from 2021, banks must inform the ECB of any difference between their practices and the prudential provision expectations. The implementation of such expectations may affect the minimum coverage levels required for new defaulted loans and, if applicable, the amounts of provisions relating to NPLs exposures.

The ECB has also announced that it is conducting a targeted review of the internal models (“TRIM”) being used by banks subject to its supervision for their internal ratings-based approaches in applying risk weightings to assets with a view to harmonizing such approaches throughout the European Union. Even though the results of the TRIM are not yet known, if they require changes to the internal models used by banks, including BBVA, this could in turn give rise to increases or decreases in the banks’ capital needs.

On December 7, 2017 the Basel Committee on Banking Supervision (“BCBS”) announced the completion of the Basel III reforms (informally referred to as Basel IV). These reforms include changes to the risk weightings applied to different assets and measures to enhance risk sensitivity, as well as to impose limits on the use of internal ratings-based approaches to ensure a minimum level of conservatism in the use of such ratings-based approaches and provide for greater comparability across banks where such internal ratings-based approaches are used. Revised capital floor requirements will also limit the regulatory capital benefit for banks in calculating total risk-weighted assets (“RWAs”) using internal risk models as compared to the standardized approach, with a minimum capital requirement of 50% of RWAs calculated using only the standardized approaches applying from January 1, 2022 and increasing to 72.5% from January 1, 2027, which could in turn imply a decrease in the capital ratios of the Bank and the Group. To the extent the Basel III reforms result in an increase in the Bank’s total RWAs, they could also result in a corresponding decrease in the Bank’s capital ratios.

The lack of uniformity in the implementation of the Basel III reforms across jurisdictions in terms of timing and applicable regulations could give rise to inequalities and 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 an entity with global operations such as the Group and could affect its profitability.

There can be no assurance that the above capital requirements will not adversely affect the Bank’s ability to make 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, an increase in capital requirements could negatively affect the return on equity (“ROE”) and other banking financial result 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 measures and authorities established by the BRRD, Law 11/2015 and RD 1012/2015 (especially the Spanish Bail-in Power, including a Non-Viability Loss Absorption), affect the manner in which credit institutions and investment firms are managed and, under certain circumstances, creditor rights.

In the event that the Spanish Resolution Authority 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 institution; and (iii) a resolution action is in the public interest, the Spanish Resolution Authority may apply, individually or on a combined basis, the following four resolution instruments: (a) the sale of all or part of the institution’s business, (b) its transfer to a bridge entity (which could limit its capacity to satisfy its payment obligations), (c) the transfer of certain asset categories for management by one or more management entities and (d) the application of the Spanish Bail-in Power.

The Spanish Resolution Authority could also adopt a Non-Viability Loss Absorption measure in the event that it determines that the entity complies with the conditions for resolution and that it would become non-viable unless some or all of the capital instruments are redeemed or converted into shares or other equity instruments.

As part of the application of the Spanish Bail in Power (including a Non-Viability Loss Absorption), unsecured debt securities, subordinated instruments and shares (among other securities) issued by the Bank, could be subject to a full or partial write-down and/or conversion into equity or other securities or obligations. There is no assurance that the mere existence of these powers or any suggestion of their exercise, even if the likelihood of such exercise is remote, will not affect the price and trading behavior of such securities issued by the Bank.

Therefore, as a result of the application of the Spanish Bail-in Power (including a Non-Viability Loss Absorption), the owners of those securities could lose all or part of their investment, and their rights under those securities could be adversely affected, or these securities could be substituted for by other securities with less advantageous terms. Such exercise could also involve modifications to, or the disapplication of, provisions in the terms and conditions of such securities including alteration of the principal amount or any interest payable thereon, the maturity date or any other dates on which payments may be due, as well as the suspension of payments for a certain period. The Spanish Resolution Authority may exercise any of the foregoing measures without prior warning to the owners of the affected securities. Further, their application is unpredictable and may depend on a series of factors that may be outside of the Bank’s control. Accordingly, the owners of any affected securities may not be able to anticipate the application of the Spanish Bail-in Power and/or a Non-Viability Loss Absorption.

In the event that the treatment of a holder of the Bank’s affected securities resulting from the application of the Spanish Bail-in Power (other than a Non-Viability Loss Absorption) is less favorable than would have been the case in an ordinary insolvency proceeding, the affected creditor would be able to seek compensation in accordance with the BRRD and the SRM Regulation, subject to the limitations and deadlines established in applicable legislation. However, there is uncertainty with respect to the amounts that could be collected and the payment date. Moreover, there are uncertainties as to whether an affected holder would be entitled to compensation under the BRRD and the SRM Regulation after the implementation of a Non-Viability Loss Absorption.

For further information, see “Item 4. Information on the Company—Business Overview—Supervision and Regulation”.

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

As a Spanish credit institution, the Bank must maintain a minimum level of eligible liabilities and own funds compared to its total liabilities and own funds (the minimum requirement for own funds and eligible liabilities or “MREL”).

On November 19, 2019, the Bank announced that it had received a communication from the Bank of Spain regarding its MREL, as determined by the Single Resolution Board (“SRB”), that has been calculated taking into account the financial and supervisory information as of December 31, 2017. In accordance with such communication, the Bank has to reach, by January 1, 2021, an MREL equal to 15.16% on a sub-consolidated level (as described below). Within this MREL, an amount equal to 8.01% of the total liabilities and own funds must be met with subordinated instruments, once the allowance established in such requirement is applied. This MREL is equal to 28.50% of RWAs, while the subordination requirement included in the MREL is equal to 15.05% of RWAs, once the corresponding allowance has been applied.

Pursuant to the Group’s multiple point of entry resolution strategy, as established by the SRB, the Bank’s resolution group on a sub-consolidated level consists of the Bank and its subsidiaries that belong to the European resolution group. As of December 31, 2017, the total liabilities and own funds of the resolution group amounted to €371,910 million, representing the Bank more than 95% of such amount. The RWAs of the resolution group amounted to €197,819 million at that date.

According to the Bank’s estimates, the current own funds and eligible liabilities structure of our resolution group meets the MREL and subordination requirement. However, such requirements are subject to change and no assurance can be given that the Bank will not be subject to more stringent requirements in the future. If the Spanish Resolution Authority believes that there could be any impediments to the resolution of the Bank and/or the Group, more stringent requirements could be imposed.

The EU Banking Reforms (as defined herein) provide that a bank’s failure to comply with its MREL or its subordination requirement should 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 and their power to impose early intervention measures, administrative penalties and other administrative measures. If there is any shortfall in an institution’s level of eligible liabilities and own funds, and the own funds of such institution are otherwise contributing to the “combined buffer requirement”, those own funds will automatically be used instead to meet that institution’s MREL or subordination requirement and will no longer count towards its “combined buffer requirement”, which may lead the institution to fail to meet its “combined buffer requirement”. This would require such institution to calculate its MDA, and the relevant resolution authority would be able (but not obligated to) impose restrictions 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”). As a result of the above, upon the entry into force of the EU Banking Reforms on June 27, 2019, the Bank must fully comply with its “combined buffer requirement” in addition to its MREL and subordination requirement in order to make sure that it is able to make Discretionary Payments.

In addition, under the European Banking Authority (“EBA”) guidelines on triggers for use of early intervention measures dated 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 MREL may put an institution in a situation where conditions for early intervention are met, which may result in the application by the competent resolution authority of early intervention measures.

Moreover, if Total Loss-Absorbing Capacity (“TLAC”) requirements (which are currently only applicable to entities that are considered to be of global systemic importance (G-SIBs)) were to be extended to non-G-SIBs, or if the Bank was to be classified as a G-SIB, further requirements similar to MREL could be imposed on the Bank in the future.

Any failure or perceived failure by the Bank and/or the Group to comply with its MREL and the subordination requirement may have a material adverse effect on the Bank’s business, financial condition and results of operations and could result in the imposition of restrictions or prohibitions on Discretionary Payments. There can also be no assurance as to the manner in which the “Pillar 2” additional own funds requirements, the “combined buffer requirement” and the MREL and subordination requirement (once in effect) will be jointly implemented in Spain, or if the combined effect of these requirements will restrict our ability to make any Discretionary Payments.

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 be applied have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The LCR has been progressively implemented since 2015 in accordance with the CRR, with banks having had to fully comply with such ratio since January 1, 2018. As of December 31, 2019, the Group’s LCR was 129%.

The BCBS has also put forward a net stable funding ratio (“NSFR”), which has a time horizon of one year. This ratio 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. Although the BCBS contemplated that EU Member States had to implement such ratio by January 1, 2018, with no phase-in, the NSFR has not yet been adopted. The EU Banking Reforms propose the introduction of a harmonized binding requirement for the NSFR across the European Union.

Various elements of the LCR and the NSFR, and how they are implemented by national banking regulators, may lead to changes to certain business practices, which could expose the Bank to additional costs (including increased compliance costs) or otherwise affect the profitability of the business, which could 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.

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

Spanish credit institutions, including BBVA, are required to make at least one annual ordinary contribution to the National Resolution Fund (Fondo de Resolución Nacional) (“FRN”), payable on request of the FROB. The total amount of contributions by all Spanish banking entities must equal at least 1% of the aggregate amount of all deposits guaranteed by the Credit Entities Deposit Guarantee Fund (Fondo de Garantía de Depósitos de Entidades de Crédito) (“FGD”) by December 31, 2024. The contributions are adjusted to the risk profile of each institution in accordance with the criteria set out in the relevant regulation. Moreover, the FROB may decide to collect additional contributions. Furthermore, Law 11/2015 establishes an additional contribution that seeks to provide financing to the FROB in its capacity as the Spanish Resolution Authority. This contribution amounts to 2.5% of the aforementioned annual ordinary contribution to the FRN. Finally, since 2016, the Bank is required to make contributions directly to the Single Resolution Fund.

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

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

We report our results and financial position in compliance with IFRS-IASB and in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2017, which replaced the Bank of Spain’s Circular 4/2004 for financial statements relating to periods ended January 1, 2018 and thereafter. Changes to IFRS or interpretations thereof may cause our future reported results and financial position to differ from current expectations or historical results, 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. For further information about developments in financial accounting and reporting standards, see Note 2.3 to our Consolidated Financial Statements (“Recent IFRS pronouncements”).

Tax Risks

Increased taxation and other burdens 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 (the “EU 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 implemented, apply to certain dealings in securities issued by the Group or other issuers (including secondary market transactions) in certain circumstances.

Under the Commission’s Proposal, the EU 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 would be considered to be “established” in a participating Member State in a broad variety of circumstances, including: (i) by carrying out transactions with a person established in a participating Member State or (ii) when the financial instrument involved in the transaction has been issued in a participating Member State.

However, the Commission’s 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.

While the final outcome of the Commission’s Proposal continues to be uncertain, in February 2020 a financial transaction tax was announced in Spain which is based in part on the Commission’s Proposal (the “Spanish FTT”). The Spanish FTT rate is proposed to be 0.2%, to be charged on acquisitions of shares in Spanish companies, regardless of the tax residence of the participants in such transactions, provided that such companies are listed and their respective market capitalization is above €1,000 million. Trades of the Bank’s shares would be subject to the Spanish FTT. If the directive for the implementation of the EU FTT is approved, the Spanish FTT would have to be adapted to the content of the directive. The EU FTT could impose a higher tax rate than that currently proposed in the Spanish FTT bill.

There can be no assurance that additional financial transaction taxes will not be adopted by the authorities of the jurisdictions where the Bank operates and, if introduced, certain financial instrument transactions may be subject to higher expenses.

Any levies or taxes imposed on the Bank’s securities or activities or otherwise affecting the Bank pursuant to the foregoing or otherwise could have a material adverse effect on the Bank’s business, financial condition and results of operations.

Reporting Risks

BBVA’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 compliance 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 the classification, measurement and impairment of financial assets, particularly where such assets do not have a readily available market price, 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 and inflation rates 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. See “—Legal Risks—Regulatory Risks—Our financial results, regulatory capital and ratios may be negatively affected by changes to accounting standards”.

INTERNAL CONTROL RISKS

Compliance Risks

The Group is exposed to compliance risks which may have a material adverse effect on the Group’s business, financial condition and results of operations, and may damage the Group’s reputation

As part of its business, the Group offers and markets banking and investment products and services to its customers and actively operates in financial markets on its own behalf and on behalf of its customers in the various jurisdictions in which it operates. As a result of the nature of its operations and the fact that the Group operates in many different jurisdictions around the world, the Group must comply with a wide array of laws, rules and regulations, many of which have different scopes and implications. Legal fragmentation may be further exacerbated by how such laws, rules and regulations are implemented by the relevant local supervising authorities. This fragmentation makes compliance risk management particularly complex, as compliance programs must address the different legal requirements facing the Group.

Compliance risk relates to the fact that the Group must comply with many different laws, rules and regulations. For example, the Group is subject to laws, rules and regulations regarding money laundering and the financing of terrorism. The Group must also abide by applicable sanctions programs. The most relevant sanctions programs are those administered by the United Nations, the European Union and the United States (including sanctions imposed by the Office of Foreign Assets Control under the U.S. Treasury Department). In addition, the Group’s operations are subject to various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 and the UK Bribery Act of 2010. These 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 directly or indirectly, through third parties, deal with entities whose employees are considered to be government officials. The Group’s activities are also subject to complex customer protection and market integrity regulations.

The Group has compliance programs intended to mitigate the Group’s compliance risk. However, the Group cannot provide assurance that the controls established within the Group to ensure compliance with these laws, rules and regulations will not be circumvented or that they will otherwise be sufficient to prevent their violation. A violation of the applicable laws, rules and regulations could lead to material consequences, including 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, any of which could have a material adverse effect on the Group’s business, results of operations and financial condition.

Further, compliance with these laws, rules and regulations can represent a material financial burden for the Group and raise important technical problems. Further, the Group engages in investigations relating to potential violations of these laws, rules and regulations from time to time and any such investigations or any related proceedings could be time-consuming and costly and their outcomes difficult to predict.

Moreover, some of our management, employees and/or persons doing business with us may engage in activities that are incompatible with our ethics and compliance standards. Although we have adopted measures designed to identify, monitor and mitigate such actions, and remediate them when we become aware of them, we are subject to the risk that such persons may engage in fraudulent activity, corruption or bribery, circumvent or override our internal controls and procedures or misappropriate or manipulate our assets for their personal or business advantage to our detriment.

Our business, including relationships with third parties, is guided by ethical principles. We have adopted a Code of Conduct, applicable to all companies and persons which form part of the Group, and a number of internal policies designed to guide our management and employees and reinforce our values and rules for ethical behavior and professional conduct. However, we are unable to ensure that all of our management and employees, more than 125,000 people, or persons doing business with us comply at all times with our ethical principles. Acts of misconduct by any employee, and particularly by senior management, could erode trust and confidence and damage the Group’s reputation among existing and potential clients and other stakeholders. Actual or alleged misconduct by Group entities in any number of activities or circumstances, including operations, employment-related offenses such as sexual harassment and discrimination, regulatory compliance, the use and protection of data and systems, and the satisfaction of client expectations, and actions taken by regulators or others in response to such misconduct, could lead to, among other things, sanctions, fines and reputational damage, any of which could have a material adverse effect on the Group’s business, financial condition and results of operations.

IT Risks

Weaknesses or failures in the Group’s internal or outsourced processes, systems and security could materially adversely affect its business, financial condition and results of operations 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 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 Group faces security risks, including denial of service attacks, hacking, social engineering attacks targeting its partners 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 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 and the measures implemented by the Group may not be sufficient. 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 criminal groups, 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 the Group’s 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 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 financial industry is increasingly dependent on information technology systems, which may fail, may not be adequate for required tasks or may no longer be available

Our 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 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 impact and significant 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, including the Group. Distributed denial of service attacks are designed to saturate the targeted 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 Group 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.

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

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: +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: +1-212-728-1660)). 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 2017 to the date of this Annual Report were the following:

2019

In 2019 there were no significant capital expenditures.

2018

In 2018 there were no significant capital expenditures.

2017

Acquisition of an additional 9.95% of Garanti BBVA

On March 22, 2017, we acquired 41,790,000,000 shares (in the aggregate) of Garanti BBVA (amounting to 9.95% of the total issued share capital of Garanti BBVA) 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 per share (approximately 3,322 million Turkish liras or €859 million in the aggregate).

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and affiliates. The main capital divestitures from 2017 to the date of this Annual Report were the following:

2019

Sale of BBVA Paraguay

On August 7, 2019, BBVA reached an agreement with Banco GNB Paraguay, S.A., an affiliate of Grupo Financiero Gilinski, for the sale of our wholly-owned subsidiary Banco Bilbao Vizcaya Argentaria Paraguay, S.A. (“BBVA Paraguay”).

The consideration for the acquisition of BBVA Paraguay’s shares amounts to approximately $270 million in the aggregate. The abovementioned consideration is subject to certain adjustments for matters between the signing and closing dates of the transaction.

It is expected that the transaction will result in a capital gain, net of taxes, of approximately €40 million and in a positive impact on the BBVA Group’s Common Equity Tier 1 (fully loaded) of approximately 6 basis points. The closing of the transaction is expected to take place during the first quarter of 2020, after obtaining the relevant regulatory authorizations from the competent authorities.

2018

Sale of BBVA Chile

On November 28, 2017, BBVA received a binding offer from The Bank of Nova Scotia (“Scotiabank”) for the acquisition of BBVA’s stake in Banco Bilbao Vizcaya Argentaria Chile, S.A. (“BBVA Chile”) as well as in other companies of the Group in Chile with operations that are complementary to the banking business (among them, BBVA Seguros de Vida, S.A.). BBVA owned, directly and indirectly, 68.19% of BBVA Chile’s share capital. On December 5, 2017, BBVA accepted the offer and entered into a sale and purchase agreement. The sale was completed on July 6, 2018.

The consideration received in cash by BBVA in the referred sale amounted to approximately $2,200 million. The transaction resulted in a capital gain, net of taxes, of €633 million, which was recognized in 2018.

Transfer of real estate business and sale of stake in Divarian

On November 29, 2017, BBVA reached an agreement with Promontoria Marina, S.L.U. (“Promontoria”), a company managed by Cerberus Capital Management, L.P. (“Cerberus”), for the creation of a joint venture to which an important part of the real estate business of BBVA in Spain (the “Business”) was transferred.

The Business comprised: (i) foreclosed real estate assets (the “REOs”) held by BBVA as of June 26, 2017, with a gross book value of approximately €13,000 million; and (ii) the necessary assets and employees to manage the Business in an autonomous manner. For purposes of the transaction with Cerberus, the Business was valued at approximately €5,000 million.

On October 10, 2018, after obtaining all the required authorizations, BBVA completed the transfer of the Business (except for part of the agreed REOs, as further explained below) to Divarian Propiedad, S.A. (“Divarian”) and the sale of an 80% stake in Divarian to Promontoria. Following the closing of the transaction, BBVA retained 20% of the share capital of Divarian.

Although the BBVA Group has agreed to contribute all of the Business to Divarian, the effective transfer of several REOs remains subject to the fulfilment of certain conditions precedent. The final price payable by Promontoria will be adjusted depending on the volume of REOs ultimately contributed to Divarian. For additional information see “Item 10. Additional Information—Material Contracts—Joint Venture Agreement with Cerberus”.

As of December 31, 2018 and for the year then ended, the transaction did not have a significant impact on the Group’s attributable profit or Common Equity Tier 1 (fully loaded).

The above transaction is referred to as the “Cerberus Transaction” in this Annual Report.

Sale of BBVA’s stake in Testa

On September 14, 2018, BBVA and other shareholders of Testa Residencial SOCIMI, S.A. (“Testa”) entered into an agreement with Tropic Real Estate Holding, S.L. (a company which is advised and managed by a private equity investment group controlled by Blackstone Group International Partners LLP) pursuant to which BBVA agreed to transfer its 25.24% interest in Testa to Tropic Real Estate Holding, S.L. The sale was completed on December 21, 2018.

The consideration received in cash by BBVA in the sale amounted to €478 million.

Agreement with Voyager Investing UK Limited Partnership (Anfora)

On December 21, 2018, BBVA reached an agreement with Voyager Investing UK Limited Partnership (“Voyager”), an entity managed by Canada Pension Plan Investment Board, for the transfer by us of a portfolio of credit rights which was mainly composed of non-performing and in default mortgage credits.

The transaction was completed during the third quarter of 2019 and resulted in a capital gain, net of taxes, of €138 million and a slightly positive impact on the BBVA Group’s Common Equity Tier 1 (fully loaded).

2017

In 2017 there were no significant capital divestitures.

Public Information

The SEC maintains an Internet site (www.sec.gov) that contains reports and other information regarding issuers that file electronically with the SEC, including BBVA. See “Item 10. Additional Information—Documents on Display”. Additional information on the Group is also available on our website at https://shareholdersandinvestors.bbva.com. The information contained on such websites does not form part of this Annual Report.

B. Business Overview

The BBVA Group is a customer-centric global financial services group founded in 1857. Internationally diversified and with strengths in the traditional banking businesses of retail banking, asset management and wholesale banking, the Group is committed to offering a compelling digital proposition focused on customer experience.

For this purpose, the Group is focused on increasingly offering products online and through mobile channels, improving the functionality of its digital offerings and refining the customer experience. In 2019, the number of digital and mobile customers and the volume of digital sales continued to increase.

In 2019, the Group adopted a common global brand through the unification of the BBVA brand as part of its efforts to offer a unique value proposition and a homogeneous customer experience in the countries in which the Group operates.

Operating Segments

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

• Spain;

• The United States;

• Mexico;

• Turkey;

• South America; and

• Rest of Eurasia.

The breakdown of the Group’s total assets by each of BBVA’s operating segments and the Corporate Center as of December 31, 2019, 2018 and 2017 was as follows:

	As of December 31,
	2019	2018	2017
	(In Millions of Euros)
Spain	365,374	354,901	350,520
The United States	88,529	82,057	75,775
Mexico	109,079	97,432	90,214
Turkey	64,416	66,250	78,789
South America	54,996	54,373	75,320
Rest of Eurasia	23,248	18,834	17,265
Subtotal Assets by Operating Segment	705,641	673,848	687,884
Corporate Center and Adjustments (1)	(6,951)	2,841	2,175
Total Assets BBVA Group	698,690	676,689	690,059

(1) Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments. See “Presentation of Financial Information—Changes in Operating Segments”.

The following table sets forth information relating to the profit (loss) attributable to parent company for each of BBVA’s operating segments and the Corporate Center for the years ended December 31, 2019, 2018 and 2017:

	Profit/(Loss) Attributable to Parent Company			% of Profit/(Loss) Attributable to Parent Company
	For the Year Ended December 31,
	2019	2018	2017	2019	2018	2017
	(In Millions of Euros)			(In Percentage)
Spain	1,386	1,400	877	23	24	16
The United States	590	736	486	10	13	9
Mexico	2,699	2,367	2,170	45	41	41
Turkey	506	567	823	8	10	15
South America	721	578	847	12	10	16
Rest of Eurasia	127	96	128	2	2	2
Subtotal operating segments	6,029	5,743	5,331	100	100	100
Corporate Center	(2,517)	(343)	(1,817)
Profit attributable to parent company	3,512	5,400	3,514

The following table sets forth certain summarized information relating to the income of each operating segment and the Corporate Center for the years ended December 31, 2019, 2018 and 2017:

	Operating Segments
	Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia	Corporate Center	Total
	(In Millions of Euros)
2019
Net interest income	3,645	2,395	6,209	2,814	3,196	175	(233)	18,202
Gross income	5,734	3,223	8,029	3,590	3,850	454	(339)	24,542
Net margin before provisions(1)	2,480	1,257	5,384	2,375	2,276	161	(1,294)	12,639
Operating profit/(loss) before tax	1,878	705	3,691	1,341	1,396	163	(2,775)	6,398
Profit attributable to parent company	1,386	590	2,699	506	721	127	(2,517)	3,512
2018
Net interest income	3,698	2,276	5,568	3,135	3,009	175	(269)	17,591
Gross income	5,968	2,989	7,193	3,901	3,701	414	(420)	23,747
Net margin before provisions(1)	2,634	1,129	4,800	2,654	1,992	127	(1,291)	12,045
Operating profit/(loss) before tax (2)	1,840	920	3,269	1,444	1,288	148	(1,329)	7,580
Profit attributable to parent company	1,400	736	2,367	567	578	96	(343)	5,400
2017
Net interest income	3,810	2,119	5,476	3,331	3,200	180	(357)	17,758
Gross income	6,162	2,876	7,122	4,115	4,451	468	74	25,270
Net margin before provisions(1)	2,665	1,026	4,646	2,608	2,424	164	(764)	12,770
Operating profit/(loss) before tax	1,189	749	2,960	2,143	1,671	181	(1,962)	6,931
Profit attributable to parent company	877	486	2,170	823	847	128	(1,817)	3,514

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

(2) The information relating to our Corporate Center has been presented under management criteria pursuant to which “Operating profit/ (loss) before tax” for 2018 excludes the capital gain from the sale of our stake in BBVA Chile. For additional information on this adjustment, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations by Operating Segment”.

The following tables set forth information relating to the balance sheet of our operating segments and the Group Corporate Center and adjustments as of December 31, 2019 and 2018 and information relating to the balance sheet of our operating segments as of December 31, 2017:

	As of December 31, 2019
	Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia	Total Operating Segments	Corporate Center and Adjustments (1)
	(In Millions of Euros)
Total Assets	365,374	88,529	109,079	64,416	54,996	23,248	705,641	(6,951)
Cash, cash balances at central banks and other demand deposits	15,903	8,293	6,489	5,486	8,601	247	45,019	(716)
Financial assets designated at fair value (2)	122,844	7,659	31,402	5,268	6,120	477	173,770	(3,128)
Financial assets at amortized cost	195,269	69,510	66,180	51,285	37,869	22,224	442,336	(3,174)
Loans and advances to customers	167,341	63,162	58,081	40,500	35,701	19,660	384,445	(2,085)
Of which:
Residential mortgages	73,871	14,160	10,786	2,928	7,168	1,624	110,536
Consumer finance	11,390	5,201	8,683	5,603	7,573	453	38,904
Loans	5,586	1,263	1,802	635	1,024	195	10,505
Credit cards	2,213	883	5,748	3,837	2,239	8	14,928
Loans to enterprises	57,203	36,361	24,780	26,552	16,226	16,706	177,828
Loans to public sector	13,886	5,374	6,819	107	1,368	667	28,221
Total Liabilities	356,069	84,127	101,545	61,678	52,287	22,299	678,005	(34,240)
Financial liabilities held for trading and designated at fair value through profit or loss	78,684	282	21,784	2,184	1,860	57	104,851	(5,208)
Financial liabilities at amortized cost - Customer deposits	182,370	67,525	55,934	41,335	36,104	4,708	387,976	(3,757)
Of which:
Demand and savings deposits	150,917	46,338	43,015	15,737	22,615	3,292	281,914
Time deposits	31,453	14,527	12,395	25,587	13,439	1,416	98,817
Total Equity	9,305	4,402	7,533	2,738	2,709	949	27,636	27,289
Assets under management	66,068	-	24,464	3,906	12,864	500	107,803
Mutual funds	41,390	-	21,929	1,460	3,860	-	68,639
Pension funds	24,678	-	-	2,446	9,005	500	36,630
Other placements	-	-	2,534	-	-	-	2,534

(1) Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments. See “Presentation of Financial Information—Changes in Operating Segments”.

(2) Financial assets designated at fair value includes: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”.

	As of December 31, 2018
	Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia	Total Operating Segments	Corporate Center and Adjustments (1)
	(In Millions of Euros)
Total Assets	354,901	82,057	97,432	66,250	54,373	18,834	673,848	2,841
Cash, cash balances at central banks and other demand deposits	28,545	4,835	8,274	7,853	8,987	238	58,732	(536)
Financial assets designated at fair value (2)	107,320	10,481	26,022	5,506	5,634	504	155,467	(2,564)
Financial assets at amortized cost	195,467	63,539	57,709	50,315	36,649	17,799	421,477	(1,818)
Loans and advances to customers	170,438	60,808	51,101	41,478	34,469	16,598	374,893	(867)
Of which:
Residential mortgages	76,390	13,961	9,197	3,530	6,629	1,821	111,529
Consumer finance	9,665	5,353	7,347	5,265	6,900	410	34,940
Loans	5,562	1,086	1,766	570	955	212	10,151
Credit cards	2,083	720	4,798	3,880	2,058	10	13,549
Loans to enterprises	57,317	34,264	22,553	27,657	16,897	13,685	172,373
Loans to public sector	15,379	5,400	5,726	95	1,078	414	28,093
Total Liabilities	345,592	77,976	90,961	63,657	52,683	18,052	648,921	(25,106)
Financial liabilities held for trading and designated at fair value through profit or loss	71,033	234	18,028	1,852	1,357	42	92,545	(4,778)
Financial liabilities at amortized cost - Customer deposits	183,414	63,891	50,530	39,905	35,842	4,876	378,456	(2,486)
Of which:
Demand and savings deposits	142,912	41,213	38,167	12,530	22,959	3,544	261,324
Time deposits	40,072	16,856	11,593	27,367	12,829	1,333	110,051
Total Equity	9,309	4,082	6,471	2,593	1,690	782	24,927	27,947
Assets under management	62,559	-	20,647	2,894	11,662	388	98,150
Mutual funds	39,250	-	17,733	669	3,741	-	61,393
Pension funds	23,274	-	-	2,225	7,921	388	33,807
Other placements	35	-	2,914	-	-	-	2,949

(1) Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments. See “Presentation of Financial Information—Changes in Operating Segments”.

	As of December 31, 2017
	Spain	The United States	Mexico	Turkey	South America	Rest of Eurasia	Total Operating Segments
	(In Millions of Euros)
Total Assets	350,520	75,775	90,214	78,789	75,320	17,265	687,884
Cash, cash balances at central banks and other demand deposits	13,636	7,138	8,833	4,036	9,039	877	43,561
Financial assets designated at fair value (1)	86,912	11,068	28,458	6,419	11,627	991	145,474
Financial assets at amortized cost	230,228	54,705	47,691	65,083	51,207	15,533	464,447
Loans and advances to customers	187,884	53,718	45,768	51,378	48,272	15,388	402,408
Of which:
Residential mortgages	77,449	13,298	8,081	5,147	11,681	2,112	117,768
Consumer finance	9,642	4,432	10,820	11,185	10,474	297	46,850
Loans	7,752	3,894	6,422	6,760	7,760	282	32,871
Credit cards	1,890	538	4,397	4,425	2,715	15	13,979
Loans to enterprises	50,878	30,261	20,977	34,371	23,567	11,801	171,855
Loans to public sector	18,562	4,999	5,262	148	1,114	511	30,596
Total Liabilities	338,612	72,653	86,700	70,348	70,569	16,330	655,211
Financial liabilities held for trading and designated at fair value through profit or loss	43,793	139	9,405	648	2,823	45	56,852
Financial liabilities at amortized cost - Customer deposits	180,840	60,806	49,964	44,691	45,705	6,700	388,707
Of which:
Demand and savings deposits	126,801	44,039	34,855	14,240	25,871	4,279	250,084
Time deposits	48,014	16,762	10,237	30,300	20,099	2,416	127,828
Total Equity	11,909	3,123	3,515	8,441	4,751	935	32,673
Assets under management	62,018	-	19,472	3,902	12,197	376	97,965
Mutual funds	37,996	-	16,430	1,265	5,248	-	60,939
Pension funds	24,023	-	-	2,637	6,949	376	33,985
Other placements	-	-	3,041	-	-	-	3,041

(1) Financial assets designated at fair value includes: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”.

Spain

This operating segment includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Center. The primary 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: which manages small and medium sized enterprises (“SMEs”), companies and corporations, public institutions and developer segments;

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

· Other units: which includes the insurance business unit in Spain (BBVA Seguros), the Asset Management unit (which manages Spanish mutual funds and pension funds), lending to real estate developers and foreclosed real estate assets in Spain (including assets from the previous Non-Core Real Estate operating segment), as well as certain proprietary portfolios and certain funding and structural interest-rate positions of the euro balance sheet which are not included in the Corporate Center.

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) amounted to €122,844 million as of December 31, 2019, a 14.5% increase from the €107,320 million recorded as of December 31, 2018, mainly as a result of the increase in the volume of reverse repurchase agreements with credit institutions recorded under “Financial assets held for trading” and, to a lesser extent, the increase in derivatives recorded under “Financial assets held for trading”.

Financial assets at amortized cost of this operating segment as of December 31, 2019 amounted to €195,269 million, a 0.1% decrease compared with the €195,467 million recorded as of December 31, 2018. Within this heading, loans and advances to customers amounted to €167,341 million as of December 31, 2019, a decrease of 1.8% from the €170,438 million recorded as of December 31, 2018, mainly as a result of the decrease in residential mortgage loans and, to a lesser extent, the decrease in loans to the public sector, partially offset by an increase in consumer loans.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of December 31, 2019 amounted to €78,684 million, a 10.8% increase compared with the €71,033 million recorded as of December 31, 2018, mainly as a result of the increase in repurchase agreements with credit institutions.

Customer deposits at amortized cost of this operating segment as of December 31, 2019 amounted to €182,370 million, a 0.6% decrease compared with the €183,414 million recorded as of December 31, 2018 mainly as a result of the decrease in time deposits due to the decreases in interest rates.

Mutual funds of this operating segment as of December 31, 2019 amounted to €41,390 million, a 5.5% increase from the €39,250 million recorded as of December 31, 2018, mainly due to new contributions by our customers.

Pension funds of this operating segment as of December 31, 2019 amounted to €24,678 million, a 6.0% increase compared with the €23,274 million recorded as of December 31, 2018, mainly due to new contributions by our customers.

This operating segment’s non-performing loan ratio decreased to 4.4% as of December 31, 2019 from 5.1% as of December 31, 2018, mainly due to a 14.3% decrease in the balance of non-performing loans in the period (€8,635 million as of December 31, 2019 and €10,073 million as of December 31, 2018). This change was mainly explained by the sale of non-performing mortgage loans and write-offs in 2019. This operating segment’s non-performing loan coverage ratio increased to 60% as of December 31, 2019 from 57% as of December 31, 2018.

The United States

This operating segment includes the Group’s business in the United States. BBVA USA accounted for 89.7% of this operating segment’s balance sheet as of December 31, 2019. Given the importance of BBVA USA in this segment, most of the comments below refer to BBVA USA. This operating segment also includes the assets and liabilities of the BBVA branch in New York, which specializes in transactions with large corporations.

The U.S. dollar appreciated 1.9% against the euro as of December 31, 2019 compared with December 31, 2018, positively affecting the business activity of the United States operating segment as of December 31, 2019 expressed in euros. See “Item 5. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of December 31, 2019 amounted to €7,659 million, a 26.9% decrease from the €10,481 million recorded as of December 31, 2018, mainly due to a decrease in the volume of U.S. Treasury and other U.S. government securities and in mortgage-backed securities due to the lower interest rates offered by such securities.

Financial assets at amortized cost of this operating segment as of December 31, 2019 amounted to €69,510 million, a 9.4% increase compared with the €63,539 million recorded as of December 31, 2018. Within this heading, loans and advances to customers of this operating segment as of December 31, 2019 amounted to €63,162 million, a 3.9% increase compared with the €60,808 million recorded as of December 31, 2018, mainly due to an increase in loans to non-financial entities.

Customer deposits at amortized cost of this operating segment as of December 31, 2019 amounted to €67,525 million, a 5.7% increase compared with the €63,891 million recorded as of December 31, 2018, mainly due to an increase in demand deposits, partially offset by a decrease in time deposits due to the lower interest rates offered to customers.

The non-performing loan ratio of this operating segment as of December 31, 2019 decreased to 1.1% from 1.3% as of December 31, 2018, mainly due to the decrease in the non-performing loan portfolio. This operating segment’s non-performing loan coverage ratio increased to 101% as of December 31, 2019, from 85% as of December 31, 2018, as a result of higher loss allowances and the decrease in non-performing loans, in particular, in the commercial, financial and agricultural portfolios.

Mexico

The Mexico operating segment includes the banking and insurance businesses conducted in Mexico by BBVA Mexico. Since 2018, it also includes BBVA Mexico’s branch in Houston (which was previously part of our United States segment).

The financial information for 2017 relating to such segments included in the Consolidated Financial Statements and in this Annual Report has been revised in order to improve its comparability with financial information for subsequent periods.

The Mexican peso appreciated 6.0% against the euro as of December 31, 2019 compared with December 31, 2018, positively affecting the business activity of the Mexico operating segment as of December 31, 2019 expressed in euros. See “Item 5. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of December 31, 2019 amounted to €31,402 million, a 20.7% increase from the €26,022 million recorded as of December 31, 2018, mainly as a result of the increase in the volume of reverse repurchase agreements with financial institutions within the trading portfolio, the increase in debt securities recorded under “Financial assets held for trading”, the transfer of certain loans from the amortized cost portfolio and the appreciation of the Mexican peso against the euro.

Financial assets at amortized cost of this operating segment as of December 31, 2019 amounted to €66,180 million, a 14.7% increase compared with the €57,709 million recorded as of December 31, 2018. Within this heading, loans and advances to customers of this operating segment as of December 31, 2019 amounted to €58,081 million, a 13.7% increase compared with the €51,101 million recorded as of December 31, 2018, mainly due to the increase in the volume of wholesale loans and loans to non-financial entities and households and the appreciation of the Mexican peso against the euro, partially offset by the transfer of certain loans to the trading portfolio.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of December 31, 2019 amounted to €21,784 million, a 20.8% increase compared with the €18,028 million recorded as of December 31, 2018, mainly as a result of the increase in the volume of repurchase agreements and, to a lesser extent, the appreciation of the Mexican peso against the euro.

Customer deposits at amortized cost of this operating segment as of December 31, 2019 amounted to €55,934 million, a 10.7% increase compared with the €50,530 million recorded as of December 31, 2018, primarily due to the increase in demand deposits for households and, to a lesser extent, the increase in wholesale deposits, being the latter positively affected by the appreciation of the Mexican peso against the euro.

Mutual funds of this operating segment as of December 31, 2019 amounted to €21,929 million, a 23.7% increase compared with the €17,733 million recorded as of December 31, 2018, primarily due to the promotion of a wide range of investment products and the appreciation of the Mexican peso against the euro.

This operating segment’s non-performing loan ratio increased to 2.4% as of December 31, 2019 from 2.1% as of December 31, 2018, mainly due to the operation of the contagion rules for retail exposures (‘pulling effect’), as well as to the change in the accounting criteria for the recognition of non-performing loans (from three past-due installments to 90 days past-due). As a consequence, this operating segment’s non-performing loan coverage ratio decreased to 136% as of December 31, 2019 from 154% as of December 31, 2018.

Turkey

This operating segment comprises the activities carried out by Garanti BBVA as an integrated financial services group operating in every segment of the banking sector, including corporate, commercial, SME, payment systems, retail, private and investment banking, together with its subsidiaries in pension and life insurance, leasing, factoring, brokerage and asset management, as well as its international subsidiaries in the Netherlands and Romania.

The Turkish lira depreciated 9.4% against the euro as of December 31, 2019 compared to December 31, 2018, negatively affecting the business activity of the Turkey operating segment as of December 31, 2019 expressed in euros. See “Item 5. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of December 31, 2019 amounted to €5,268 million, a 4.3% decrease from the €5,506 million recorded as of December 31, 2018, mainly as a result of the depreciation of the Turkish lira. At constant exchange rates, there was an increase in financial assets designated at fair value as a result of the increase in debt securities denominated in euros with central governments.

Financial assets at amortized cost of this operating segment as of December 31, 2019 amounted to €51,285 million a 1.9% increase compared with the €50,315 million recorded as of December 31, 2018. Within this heading, loans and advances to customers of this operating segment as of December 31, 2019 amounted to €40,500 million, a 2.4% decrease compared with the €41,478 million recorded as of December 31, 2018, mainly due to the depreciation of the Turkish lira, partially offset by the increase in the volume of Turkish-lira denominated loans, in particular commercial loans supported by the Credit Guarantee Fund, consumer loans and credit cards.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of December 31, 2019 amounted to €2,184 million, a 17.9% increase compared with the €1,852 million recorded as of December 31, 2018, mainly as a result of the increase in debt securities within the trading portfolio, which more than offset the effect of the depreciation of the Turkish lira.

Customer deposits at amortized cost of this operating segment as of December 31, 2019 amounted to €41,335 million, a 3.6% increase compared with the €39,905 million recorded as of December 31, 2018, mainly due to the increase in demand deposits in both Turkish lira and foreign currencies, partially offset by the depreciation of the Turkish lira.

Mutual funds in this operating segment as of December 31, 2019 amounted to €1,460 million compared with the €669 million recorded as of December 31, 2018, mainly due to the growth in money market related funds, which more than offset the effect of the depreciation of the Turkish lira.

Pension funds in this operating segment as of December 31, 2019 amounted to €2,446 million, a 10.0% increase compared with the €2,225 million recorded as of December 31, 2018, mainly due to the favorable market dynamics, where the rapid decrease in interest rates has forced returns from funds to be higher than those from deposits, partially offset by the depreciation of the Turkish lira.

The non-performing loan ratio of this operating segment as of December 31, 2019 was 7.0% compared with 5.3% as of December 31, 2018 mainly as a result of an increase in non-performing loans. This operating segment’s non-performing loan coverage ratio decreased to 75% as of December 31, 2019 from 81% as of December 31, 2018, mainly due to the increase in the balance of non-performing loans as of December 31, 2019 compared to the balance recorded as of December 31, 2018.

South America

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

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

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

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

As of December 31, 2019, the Argentine peso depreciated 35.7% against the euro compared to December 31, 2018, while the Colombian peso and the Peruvian sol appreciated against the euro, compared to December 31, 2018, by 1.7% and 3.8%, respectively. Overall, changes in exchanges rates have negatively affected the business activity of the South America operating segment as of December 31, 2019 expressed in euros. See “Item 5. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

As of and for the years ended December 31, 2019 and 2018, the Argentine and Venezuelan economies were considered to be hyperinflationary as defined by IAS 29 (see “Presentation of Financial Information—Changes in Accounting Policies— Hyperinflationary economies”).

Financial assets designated at fair value for this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of December 31, 2019 amounted to €6,120 million, a 8.6% increase compared with the €5,634 million recorded as of December 31, 2018, mainly due to the increase in debt securities issued by central banks and the central governments in Argentina and Peru, partially offset by the depreciation of the Argentine peso against the euro.

Financial assets at amortized cost of this operating segment as of December 31, 2019 amounted to €37,869 million, a 3.3% increase compared with the €36,649 million recorded as of December 31, 2018. Within this heading, loans and advances to customers of this operating segment as of December 31, 2019 amounted to €35,701 million, a 3.6% increase compared with the €34,469 million recorded as of December 31, 2018, mainly as a result of the increase in consumer, mortgage and credit cards loans in Colombia and Peru, partially offset by the depreciation of the Argentine peso.

Customer deposits at amortized cost of this operating segment as of December 31, 2019 amounted to €36,104 million, a 0.7% decrease compared with the €35,842 million recorded as of December 31, 2018, mainly as a result of the depreciation of the Argentine peso.

Mutual funds in this operating segment as of December 31, 2019 amounted to €3,860 million, a 3.2% increase compared with the €3,741 million recorded as of December 31, 2018, mainly due to the favorable market dynamics, which positively affected the performance of institutional banking and Corporate & Investment Banking (C&IB), especially in Colombia and Peru, partially offset by the depreciation of the Argentine peso against the euro.

Pension funds in this operating segment as of December 31, 2019 amounted to €9,005 million, a 13.7% increase compared with the €7,921 million recorded as of December 31, 2018, mainly as a result of an increase in pension funds in Bolivia, where contributions to pension funds are mandatory.

The non-performing loan ratio of this operating segment as of December 31, 2019 increased to 4.4% compared with 4.3% as of December 31, 2018. This operating segment’s non-performing loan coverage ratio increased to 100% as of December 31, 2019, from 97% as of December 31, 2018, mainly due to a 9.3% increase in the balance of provisions in Peru and Argentina as of December 31, 2019 compared to the balance recorded as of December 31, 2018.

Rest of Eurasia

This operating segment includes the retail and wholesale banking businesses carried out by the Group in Europe and Asia, except for those businesses comprised in our Spain and Turkey operating segments. In particular, The Group’s activity in Europe is carried out through banks and financial institutions in Switzerland, Italy, Germany and Finland and branches in Germany, Belgium, France, Italy, Portugal and the United Kingdom. The Group’s activity in Asia is carried out through branches (in Taipei, Tokyo, Hong Kong, Singapore and Shanghai) and representative offices (in Beijing, Seoul, Mumbai, Abu Dhabi and Jakarta).

Financial assets designated at fair value for this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of December 31, 2019 amounted to €477 million, a 5.2% decrease compared with the €504 million recorded as of December 31, 2018, mainly due to the decrease in debt securities within the fair value through other comprehensive income portfolio in C&IB Asia.

Financial assets at amortized cost of this operating segment as of December 31, 2019 amounted to €22,224 million, a 24.9% increase compared with the €17,799 million recorded as of December 31, 2018. Within this heading, loans and advances to customers of this operating segment as of December 31, 2019 amounted to €19,660 million, an 18.4% increase compared with the €16,598 million recorded as of December 31, 2018, mainly as a result of an increase in enterprise loans and the growth in the corporate and investment banking business in Asia.

Customer deposits at amortized cost of this operating segment as of December 31, 2019 amounted to €4,708 million, a 3.5% decrease compared with the €4,876 million recorded as of December 31, 2018, mainly due to the negative interest rate environment in Europe which has led certain investors to withdraw certain deposits.

Pension funds in this operating segment as of December 31, 2019 amounted to €500 million, a 29.1% increase compared with the €388 million recorded as of December 31, 2018, mainly due to the offering of a new multi-strategic product.

The non-performing loan ratio of this operating segment as of December 31, 2019 was 1.2% compared with 1.7% as of December 31, 2018. This operating segment’s non-performing loan coverage ratio increased to 98% as of December 31, 2019, from 83% as of December 31, 2018.

Insurance Activity

The Group has insurance subsidiaries mainly in Spain and Latin America (mostly in Mexico). The main products offered by the insurance subsidiaries are life insurance to cover the risk of death and life-savings insurance. Within life and accident insurance, a distinction is made between freely sold products and those offered to customers who have taken mortgage or consumer loans, which cover the principal of those loans in the event of the customer’s death.

The Group offers, in general, two types of savings products: individual insurance, which seeks to provide the customer with savings for retirement or other events, and collective insurance, which is taken out by employers to cover their commitments to their employees.

See Note 23 to our Consolidated Financial Statements for additional 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

This section discusses the most significant supervision and regulatory matters applicable to us as a bank organized under the laws of Spain, our principal market, and as a result of activities we undertake in the European Union. Further below, this section also includes information regarding supervision and regulatory matters applicable to our operations in Mexico, Turkey and the United States.

The Bank’s “home” supervisor is the European Central Bank (“ECB”), including the Single Supervisory Mechanism (“SSM”) at the European level and the Bank of Spain at the national level. The BBVA Group is also subject to supervision by a wide variety of other local authorities given the Bank’s global presence, which are considered to be “host” supervisors given the Bank’s foreign origin. These include authorities in countries such as the United States, Mexico, Turkey and the whole of BBVA’s footprint in South America.

Following the global financial crisis, European politicians took action to stabilize the region’s banking sector, due to a period of turbulence and doubts regarding its sustainability. This action culminated in the launch of the European Banking Union (“EBU”). The EBU can be viewed as a house with different building blocks. The EBU’s foundation includes the single rulebook (the “Single Rulebook”), which was the first step to harmonize banking rules in the European Union and includes landmark pieces of legislation such as the Capital Requirements Regulation, the Capital Requirements Directive and the Bank Recovery and Resolution Directive, among others.

The first pillar of the EBU relates to supervision and includes the SSM, which unified banking supervision in the European Union. This responsibility was placed under the ECB, which follows a strict policy of separation and confidentiality in order to ensure the independence of banking supervision and monetary policy. The SSM works in very close coordination with the national competent authorities (“NCAs”). As a result, the joint supervisory teams (“JSTs”) that are responsible for the daily supervision of the most significant banks (one JST per bank) are composed of employees from the ECB and, in the case of BBVA, from the Bank of Spain. This arrangement enables supervision to be distant enough in order to avoid any potential conflicts of interest, while also benefiting from local expertise on a particular country’s intricacies. In addition, each JST member rotates every three years. Furthermore, the SSM has pushed for more internationally diverse JSTs and teams conducting on-site inspections, including assigning Heads of Mission of a different nationality than the bank’s country of origin and by having some members of the inspection team from a different EU country.

The second pillar of the EBU relates to resolution mechanisms and includes the Single Resolution Mechanism (“SRM”), for which a new institution was created, known as the Single Resolution Board (“SRB”). The SRB, located in Brussels, works closely with the National Resolution Authorities (“NRAs”), and, in the case of Spain, the Bank of Spain and the Fund for Orderly Banking Restructuring (“FROB”), to ensure the orderly resolution of failing banks with minimum impact on the real economy, the financial system and the public finances of the participating EU member states and other countries.

The role of the SRB is proactive. Instead of waiting for resolution cases, the SRB focuses on resolution planning and preparation with a forward-looking mindset to avoid the negative impacts of a bank failure on the economy and financial stability of the participating EU member states and other countries. Accordingly, one of the key tasks of the SRB and NRAs is to draft resolution plans for the banks under its remit. These plans are prepared jointly by the SRB and NRAs through internal resolution teams (“IRTs”). The IRTs are composed of staff from the SRB and the NRAs and are headed by coordinators appointed from the SRB’s senior staff.

Banking resolution, previously not prioritized by regulatory authorities, became crucial following the financial crisis and the need to inject substantial taxpayer funds into financial institutions. The idea that underlies banking resolution is that a “bail-in” is preferable to a “bail-out”. A “bail-out” occurs when outside investors, such as a government, rescue a bank by injecting money to help make debt payments. In the past, such as during the financial crisis, “bail-outs” helped save banks from failing, with taxpayers assuming the risks associated with their inability to make debt payments. On the other hand, a “bail-in” occurs when a bank’s creditors (in addition to its shareholders) are forced to bear some of the burden by having some or all of their debt written off. See “—Spain— Recovery and Resolution of Credit Institutions and Investment Firms” below.

In order to permit the execution of a bail-in, banks are required to hold on their balance sheet a minimum volume of liabilities that could be bailed-in without operational or legal issues in the event of resolution. This is the rationale behind the minimum requirement for own funds and eligible liabilities (“MREL”).

Within the framework of the SRM, the Single Resolution Fund (“SRF”) was also developed. This is a fund composed of contributions from credit institutions and certain investment firms in the 19 participating countries within the EBU. The SRF may be used only under specific circumstances in banking resolution, such as to guarantee the assets or liabilities of an institution under resolution or make contributions to a bridge institution or asset management vehicle. The SRF can be used only to ensure the effective application of resolution tools but not to absorb the losses of an institution or for a recapitalization.

The first and second pillars of the EBU are highly interlinked. Prior to entering into a resolution process, a bank must be considered by the SSM as failing or likely to fail, which occurs when there is no other option to restore its viability (such as applying the bank’s recovery plan) within the available time frame.

The third and final pillar of the EBU, which is still under discussion, is the European Deposit Insurance Scheme (“EDIS”). The EDIS would enable the insurance of deposits regardless of the country of origin of the bank, thus creating a fully harmonized banking union. However, there remain political obstacles to the creation of the EDIS which have not yet been resolved. In 2019, a High Level Working Group on EDIS was created and charged with presenting a roadmap to start political negotiations. At the national level, BBVA is currently subject to the Deposit Guarantee Fund of Credit Institutions (“FGD”), which operates under the guidance of the Bank of Spain.

In the aftermath of the global financial crisis, important reforms were adopted at the international level, namely the Basel III capital reforms (as defined below), which have been translated into relevant legislation at the European and national level. In May 2019, the European Council adopted a banking package which included new versions of some of the regulations and directives that are part of the Single Rulebook. More concretely, this package included the CRR II, the CRD V Directive, the SRM Regulation II and the BRRD II (each as defined below). This package incorporated some of the most recent internationally-agreed reforms mentioned above, including measures such as a new leverage ratio requirement for all institutions, a revised “Pillar 2” (as described below) framework, additional supervisory powers in the area of money laundering and enhanced MREL subordination rules for global systemically important institutions (“G-SIIs”) and other top-tier banks.

As a result of the foregoing, banks in the EBU face increasingly intense supervisory scrutiny. However, the reforms discussed above have resulted in structurally important advances as asset quality, capital and liquidity levels in the European banking sector have greatly improved since they were adopted. Another important component of this progress has been the Supervisory Review and Examination Process (“SREP”). The SREP is an annual exercise that determines a bank’s capital requirements, on a “Pillar 2” basis, as well as the qualitative requirements that the bank must address in the following year. This exercise takes four different elements of a bank into account: (a) business model and profitability, (b) capital, (c) liquidity and (d) governance and risk management.

In addition, any work done during the year related to on-site inspections, deep dives, thematic reviews, internal model investigations and other ad hoc requests (e.g., Brexit-related) feeds into the SREP. The SREP culminates with a supervisory dialogue at the end of the year, where a preliminary review of the bank is presented. In addition, prior to the beginning of each year, the SSM presents a Supervisory Examination Program (“SEP”) which details the inspections, high-level meetings and potential visits to group subsidiaries that are forecasted to occur throughout the year. The process for creating a SEP for each entity begins with defining the SSM’s risk dashboard and the classification of risks according to their probability of occurring and probable magnitude of impact, which then translates into the SSM’s priorities for the following year.

Another important tool that the SSM possesses to supervise large European banking groups is the Supervisory Colleges. For those banks for which the SSM acts as the consolidated “home” supervisor, the SSM together with the relevant NCA organizes an event where all of the banking group’s “host” supervisors are gathered at a roundtable and where they discuss the current state of affairs of the bank in the different relevant jurisdictions. The SRB follows a similar approach, organizing Resolution Colleges with the banking group’s “host” resolution authorities.

The SSM also performs comprehensive assessments, together with the NCAs, over the banks it directly supervises. These are performed either regularly (at periodic intervals) or on an ad hoc basis (e.g., when an EU member state requests to be part of the EBU). These comprehensive assessments include two parts: (a) asset quality reviews of the banks’ exposures and (b) stress testing of the banks’ balance sheets under different scenarios. Furthermore, the European Banking Authority (“EBA”) also organizes and performs an EU-wide stress test in coordination with the ECB. This test, which occurs every two years, does not confer a pass or fail result but instead contributes to determining “Pillar 2” guidance. While “Pillar 2” guidance is a non-binding capital requirement, the EBA nonetheless expects compliance with it. In those years in which there is no EBA stress test, the SSM organizes a more specific stress test concerning a particular topic, such as the impact of interest rate risk on the banking book or liquidity.

The macro-prudential aspect of supervision is also increasingly gaining relevance, including through specific thematic reviews undertaken by the SSM on certain portfolios (e.g., real estate or shipping) and the creation of new authorities and review boards. At the European level, these include the European Systemic Risk Board (“ESRB”), which is responsible for monitoring macro-risks at the European level. The ESRB also develops the adverse scenarios to be used in the EU-wide stress test. In addition, in 2019 the Spanish Government created the Macro-prudential Authority Financial Stability Council, which is chaired by the Minister of Economy and Business and vice-chaired by the Governor of the Bank of Spain, and includes the Deputy Governor of the Bank of Spain, who is responsible for banking supervision, among its members.

The foregoing illustrates how much the regulatory and supervisory landscape has changed in the decade following the financial crisis, due in large part to the Basel Committee on Banking Supervision (the “Basel Committee”), an international, standard-setting forum, which established important reforms at a global level. Some of these reforms have been adopted in regulations at the European level.

The following is a discussion of certain of these and other regulations that are applicable to BBVA and certain related requirements.

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 certificates with maturity up to two years and money market paper is 1%. There is no required reserve coefficient for deposits with agreed maturity or period of notice over two years, repurchase agreements and debt certificates with maturity over two years.

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

Capital Requirements

In December 2010, 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, the BBVA Group 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 (the “CRD IV Directive”), through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014. 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 (CRR I and, together with the CRD IV Directive and any measures implementing the CRD IV Directive or CRR I 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 the CRD IV Directive into Spanish law took place through Royal Decree-Law 14/2013, of November 26, 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 (“Royal Decree 84/2015”), Bank of Spain Circular 2/2014 of January 31, and Bank of Spain Circular 2/2016, of February 2.

On June 7, 2019, the following amendments to CRD IV and Directive 2014/59/EU of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (“BRRD I”) were published:

· Directive 2019/878/EU of the European Parliament and of the European Council of May 20, 2019 (as amended, replaced or supplemented from time to time, the “CRD V Directive”) amending the CRD IV Directive (the CRD IV Directive as so amended by the CRD V Directive and as amended, replaced or supplemented from time to time, the “CRD Directive”);

· Directive 2019/879/EU of the European Parliament and of the European Council of May 20, 2019 (as amended, replaced or supplemented from time to time, “BRRD II”) amending, among other things, BRRD I as regards the loss-absorbing and recapitalization capacity of credit institutions and investment firms (BRRD I as so amended by BRRD II and as amended, replaced or supplemented from time to time, the “BRRD”);

· Regulation (EU) No. 876/2019 of the European Parliament and of the Council of May 20, 2019 (as amended, replaced or supplemented from time to time, “CRR II” and, together with the CRD V Directive, “CRD V”) amending, among other things, CRR I as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, and reporting and disclosure requirements (CRR I as so amended by CRR II and as amended, replaced or supplemented from time to time, the “CRR”); and

· Regulation (EU) No. 877/2019 of the European Parliament and of the Council of May 20, 2019 (as amended, replaced or supplemented from time to time, the “SRM Regulation II”) amending 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 (the “SRM Regulation I”) as regards the loss-absorbing and recapitalization capacity of credit institutions and investment firms (SRM Regulation I as so amended by SRM Regulation II and as amended, replaced or supplemented from time to time, the “SRM Regulation”) (CRD V, together with BRRD II and the SRM Regulation II, the “EU Banking Reforms” ).

The EU Banking Reforms (other than CRR II) are stated to apply from 18 months plus one day after the date of their entry into force on June 27, 2019, other than in the case of certain provisions of the CRD V Directive where a two year period is provided for. CRR II is stated to apply from 24 months plus one day after the date of its entry into force on June 27, 2019, although certain provisions are stated to enter into force in a phased-in manner as further described therein.

CRD IV, among other things, 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 capital buffer requirement” that entities must comply with from 2016 onwards. The “combined capital buffer requirement” introduced five new capital buffers: (a) the capital conservation buffer, (b) the G-SIB buffer, (c) the institution-specific countercyclical buffer, (d) the D-SIB buffer, and (e) 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 capital buffer requirement”. This “combined capital buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and is required to be satisfied with CET1 capital.

The G-SIB buffer is applicable to the institutions included in the list of G-SIBs, which is updated annually by the Financial Stability Board. The Bank was excluded from this list with effect as from January 1, 2017. Accordingly, unless otherwise indicated by the Financial Stability Board (or the Bank of Spain) in the future, the Bank will no longer be required to maintain the G-SIB buffer.

The Bank of Spain announced on November 25, 2019 that the Bank continues to be considered a D-SIB and is required to maintain a fully-loaded D-SIB buffer equivalent to a CET1 capital ratio of 0.75% on a consolidated basis.

In December 2015, the Bank of Spain agreed to set the counter cyclical capital buffer applicable to credit exposures in Spain at 0% from January 1, 2016. This percentage is reviewed quarterly. In December 2019, the Bank of Spain agreed to maintain the counter cyclical capital buffer applicable to credit exposures in Spain at 0% for the final quarter of 2019. As of the date of this Annual Report, the counter cyclical capital buffer applicable to the Group stands at 0.01% due to certain exposures of the Group in other jurisdictions. Additionally, Article 104 of the CRD 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 further “Pillar 2” capital requirements (above “Pillar 1” requirements and below the combined buffer 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 (although, under the EU Banking Reforms, it is proposed that further “Pillar 2” capital requirements should be used to address micro-prudential considerations only).

Furthermore, the ECB is required, under 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 SREP for us and the Group at least on an annual basis.

In addition to the above, 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 the EBA SREP Guidelines 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. In accordance with these guidelines, national supervisors should set the composition of the capital instruments required to comply with the “Pillar 2” requirement, so that at least 56% of the “Pillar 2” requirement is covered with CET1 capital and at least 75% with Tier 1 capital, as has also been provided in CRD V. The EBA SREP Guidelines and CRD V also contemplate that national supervisors should not set additional own funds requirements in respect of risks which are already covered by the “combined capital buffer requirement” and/or additional macro-prudential requirements. On July 19, 2018, the EBA published its final guidelines aimed at further enhancing institutions’ risk management and supervisory convergence in respect of SREP. These guidelines focus on stress testing, particularly its use in setting “Pillar 2” capital guidance and the level of interest rate risk.

For further information on the countercyclical capital buffer, the result of the most recent SREP and the total capital requirements applicable to the BBVA Group, see Note 32 to our Consolidated Financial Statements.

Additionally, in 2019, the Bank has achieved its CET1 fully-loaded capital target, consisting of a CET1 ratio within the range between 11.5% and 12% on a consolidated basis. No assurance can be given that such target will not change in the future. See “Cautionary Statement Regarding Forward-Looking Statements”. Any failure by us to maintain a consolidated CET1 capital ratio in line with our CET1 fully-loaded capital target could adversely affect the market price or value or trading behavior of any securities issued by us (and, in particular, any of our capital instruments) and ultimately lead to the imposition of further “Pillar 2” guidance or requirements. In addition, there can be no assurance that the total capital requirements imposed on us and/or the Group from time to time may not be higher than the levels of capital available at such point in time, and 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 us and/or the Group.

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”), competent authorities should ensure that the CET1 capital to be taken into account in determining the CET1 capital available to meet the “combined capital buffer requirement” is limited to the amount of CET1 capital not used to meet the Bank’s “Pillar 1” and, where applicable, “Pillar 2” own funds requirements. Furthermore, CRD V introduces certain amendments in order to clarify the hierarchy or order of priority of own funds and eligible liabilities among the “Pillar 1” minimum solvency requirements, the “Pillar 2” additional own funds solvency requirements, the MREL requirements and the “combined capital buffer requirement” (referred to as the “stacking order”).

In accordance with Article 48 of Law 10/2014, Article 73 of Royal Decree 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any institution not meeting its “combined capital buffer requirement” is required to calculate its maximum distributable amount (“MDA”) as stipulated in such legislation. Should that requirement not be met and until the MDA has been calculated and communicated to the Bank of Spain, the relevant institution shall not make any: (i) distributions relating to CET1 capital; (ii) payments related to variable remuneration or discretionary pension benefits; and (iii) distributions linked to AT1 instruments (“discretionary payments”), and once the MDA has been calculated and communicated to the Bank of Spain, the discretionary payments will be subject to the limit of the MDA calculated.

Additionally, pursuant to Article 48 of Law 10/2014, the Bank of Spain’s adoption of the measures provided by Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds and limiting or prohibiting the distribution of dividends, respectively, will also entail the requirement to determine the MDA and to restrict discretionary payments to such MDA. In accordance with the EU Banking Reforms, the calculation of the MDA and the related restrictions, including those applicable while such calculation is pending, which are described in the preceding paragraph, shall also be triggered by a failure to meet the MREL or the minimum leverage ratio requirement.

On July 1, 2016, the EBA published additional information explaining how supervisors should use the results of the 2016 EU-wide stress test for SREP assessments. 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. CRD V also makes a distinction between “Pillar 2” capital requirements and “Pillar 2” capital guidance, with only the former being mandatory requirements. Notwithstanding the foregoing, CRD V provides that, in addition to certain other measures, supervisory authorities are entitled to impose further “Pillar 2” capital requirements where an institution repeatedly fails to follow the “Pillar 2” capital guidance previously imposed.

At its meeting of January 12, 2014, the oversight body of the Basel Committee 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, CRR II sets 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. In particular, any breach of this leverage ratio could also result in a requirement to determine the MDA and restrict discretionary payments to such MDA, as well as trigger the restrictions referred to above while such calculation is pending.

Furthermore, on December 7, 2017 the BCBS announced the completion of the Basel III reforms (informally referred to as Basel IV). These reforms include changes to the risk weightings applied to different assets and measures to enhance risk sensitivity, as well as to impose limits on the use of internal ratings-based approaches to ensure a minimum level of conservatism in the use of such ratings-based approaches and provide for greater comparability across banks where such internal ratings-based approaches are used. Revised capital floor requirements will also limit the regulatory capital benefit for banks in calculating total risk-weighted assets (“RWAs”) using internal risk models as compared to the standardized approach, with a minimum capital requirement of 50% of RWAs calculated using only the standardized approaches applying from January 1, 2022 and increasing to 72.5% from January 1, 2027.

Additionally, BRRD prescribes that an institution 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, in agreement with the competent authority, for each bank (and/or group) based on, among other things, the criteria set forth in Article 45c.1 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.

On November 9, 2015, the FSB published its final 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 RWAs 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.

Among other amendments, BRRD II introduces the concepts of resolution institution and resolution group. The EU Banking Reforms provide for the amendment of a number of aspects of the MREL framework to align it with the Total Loss-Absorbing Capacity (“TLAC”) standards included in the FSB final TLAC Principles and Term Sheet. To maintain coherence between the MREL rules applicable to G-SIBs and those applicable to non-G-SIBs, the BRRD II also provides for a number of changes to the MREL rules applicable to non-G-SIBs. While the EU Banking Reforms provide for minimum harmonized or “Pillar 1” MRELs for G-SIBs, in the case of non-G-SIBs, they provide that MRELs will be imposed on a bank-specific basis. For G-SIBs, the EU Banking Reforms provide 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.

Following the application of CRR II, CRR will establish that an institution’s eligible liabilities will consist of its eligible liability items (as defined therein) after a number of mandatory deductions and, in order to be considered as eligible liabilities, it is stipulated, for example, that the instruments must meet the requirements set out in Article 72b of the CRR, which includes the need for those instruments to rank below the liabilities excluded under Article 72.a.2 of the CRR.

Notwithstanding the foregoing, CRR II provides for some exemptions which could allow outstanding senior debt instruments to be used to comply with MREL. However, there is uncertainty insofar as such eligibility is concerned and how the regulations and exemptions provided for in the EU Banking Reforms are to be interpreted and applied. In any event, BRRD II aims to provide greater certainty with respect to eligible liabilities, in order to provide markets with the necessary clarity concerning the eligibility criteria for instruments to be recognized as eligible liabilities for TLAC or MREL purposes.

As outlined in the final report submitted by the EBA on December 14, 2016 on the implementation and design of the MREL framework which contains a number of recommendations to amend the current MREL framework, the EBA’s recommendation is that an institution will not be able to use the same CET1 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 MREL and will no longer count towards its combined buffer requirement. Accordingly, this could trigger a limit on discretionary payments.

The EU Banking Reforms further include, as part of MREL, a new subordination requirement of eligible instruments for G-SIBs and “top tier” banks (including us) that will be determined according to their systemic importance, involving a minimum “Pillar 1” subordination requirement. This “Pillar 1” subordination requirement must be satisfied with own funds and other eligible MREL instruments (which MREL instruments may not for these purposes be senior debt instruments and only MREL instruments constituting “non-preferred” senior debt will be eligible for compliance with the subordination requirement). For “top tier” banks such as us, this “Pillar 1” subordination requirement has been determined as the highest of 13.5% of the Bank’s risk weighted assets (“RWAs”) or alternatively, 5% of its leverage exposure. Resolution authorities may also impose further “Pillar 2” subordination requirements, which would be determined on a case-by-case basis but at a minimum level equal to the lower of 8% of a bank’s total liabilities and own funds and 27% of its RWAs.

For information on the notifications from the Bank of Spain regarding our MREL, as determined by the SRB, see Note 32 to our Consolidated Financial Statements.

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 the BIS Framework rules and the CRR. See Note 32 to our Consolidated Financial Statements.

The aim of our capital management 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. Various actions have been taken during the last years in connection with our capital management and in order to comply with various capital requirements applicable to us related to various actions regarding asset sales. In addition, we may make securities issuances or undertake new 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. The Bank has obtained the Bank of Spain’s approval with respect to its internal model of capital estimation concerning certain portfolios and its operational risk internal model.

From an economic standpoint, capital management seeks to optimize value creation for the Group and 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 credit risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk, model risk, business risk, reputational risk and technical risks in the case of insurance companies.

Shareholders’ equity, as calculated under the BIS Framework rules, is an important metric for the Group. For the purpose of allocating capital to operating segments, the Group focuses on both economic and regulatory capital. The purpose is to ensure that the businesses are run considering both the risk-sensitive perspective and the regulation requirement. These are designed to provide an equitable basis for assigning capital and ensure adequate capital management across the Group.

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 so required under the CRR, an institution must make available to the NCAs its 20 largest exposures on a consolidated basis (but excluding certain exposures, if allowed under the CRR). In addition, an institution must also report its 10 largest exposures on a consolidated basis to other 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 must 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 must 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, must 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 the CRD IV Directive to address and control concentration risk, provided that 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 of Financial Assets

For a discussion of applicable accounting standards related to loss allowances on financial assets and the method for calculating expected credit loss, see Note 2.2.1 to our 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 each of them on a voluntary basis upon the declaration of an interim dividend. The ECB recommendation dated January 7, 2019 addressed to, among others, significant supervised entities and significant supervised groups, such as BBVA and its Group, recommends that credit institutions 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 SREP.

Since January 1, 2016, according to CRD IV, those credit entities required to calculate their MDA are 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.

Investment Ratio

In the past, the Spanish 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.

Principal Markets

The following is a summary of certain laws and regulations applicable to BBVA’s operations in Spain, Mexico, Turkey and the United States.

Spain

BBVA’s operations in Spain are subject to European Union-wide and Spanish national regulations. Spain has a broad regulatory framework designed to ensure consumer protection and enhance transparency. Finance and deposits products are subject to both general consumer and product-specific laws which, in certain circumstances, differentiate between consumers and non-consumers.

The provision of payment accounts and services in Spain is subject to various regulations, most of which transpose European legislation, such as Directive (EU) 2015/2366 (“PSD 2”) and Directive (EU) 2014/92. Such regulations lay down minimum information requirements for providers of payment accounts and services as well as certain transparency provisions with regard to fees. A significant development in relation to the implementation of PSD2 is a requirement to allow third parties access to accounts to provide account information and payment initiation services, provided they have a customer’s consent.

Regarding loans, there are separate regulations applying to consumer loans and residential loans which are, in both cases, mainly derived from European legislation, including Directive (EU) 2008/48 (relating to credit agreements for consumers) and Directive (EU) 2014/17 (relating to credit agreements for residential immovable property). Recently approved Law 5/2019 , of March 15, regulating real estate credit agreements (“Law 5/2019”), applies to individuals, whether or not they are consumers, and sets limits on default interest, early maturity and early repayment fees, and provides a comprehensive framework of pre-contractual information provisions. Law 5/2019 also requires that a notarial act shall be granted prior to signing a residential credit agreement in which the notary verifies that the bank has fulfilled all of its legal pre-contractual information obligations.

The regulatory framework also includes specific regulations designed to protect the most vulnerable customers, such as the requirement for banks to offer basic accounts to customers without access to ordinary bank accounts. Basic accounts may be free of charge or have a maximum monthly cost of three euros. In the area of mortgage lending, there is a code of good practice to be adhered to by entities to make it easier for distressed debtors to refinance their debt, including dation-in-payment as a refinance measure.

The European Union’s sustainability initiatives will also impact asset management legislation, with MiFID II (as defined below), the Alternative Investment Fund Managers Directive, the Undertakings for Collective Investment in Transferable Securities Directive and the Revision of the Institutions for Occupational Retirement Provision Directive being amended in order to include environmental, social and governance factors in investment processes, risk management and know-your-clients procedures. In addition, the European Council and the Parliament reached a political agreement on the Taxonomy Regulation, which provides for a general framework for the development of an EU-wide classification system for environmentally sustainable economic activities. Furthermore, the EBA published its Action Plan on sustainable finance (including a voluntary sensitivity analysis for transition risks in the second half of 2020), and the European Commission presented the European Green Deal, a set of policy initiatives with the overarching aim of making Europe climate neutral in 2050.


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ITEM 10.	ADDITIONAL INFORMATION	211
A.	Share Capital	211
B.	Memorandum and Articles of Association	211
C.	Material Contracts	214
D.	Exchange Controls	215
E.	Taxation	216
F.	Dividends and Paying Agents	221
G.	Statement by Experts	221
H.	Documents on Display	221
I.	Subsidiary Information	221
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	221
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	221
A.	Debt Securities	221
B.	Warrants and Rights	221
C.	Other Securities	221
D.	American Depositary Shares	222
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	223
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	223
ITEM 15.	CONTROLS AND PROCEDURES	223
ITEM 16.	[RESERVED]	226
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	226
ITEM 16B.	CODE OF ETHICS	226
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	226
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	227
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	228
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	228
ITEM 16G.	CORPORATE GOVERNANCE	228
ITEM 16H.	MINE SAFETY DISCLOSURE	230
PART III
ITEM 17.	FINANCIAL STATEMENTS	230
ITEM 18.	FINANCIAL STATEMENTS	230
ITEM 19.	EXHIBITS	231

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. Director and Senior Management

B. Advisers

C. Auditors

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

ITEM 3. KEY INFORMATION

B. Capitalization and Indebtedness

C. Reasons for the Offer and Use of Proceeds

D. Risk Factors

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

B. Business Overview


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PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	6
A.	Directors and Senior Management	6
B.	Advisers	6
C.	Auditors	6
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	6
ITEM 3.	KEY INFORMATION	6
A.	Selected Consolidated Financial Data	6
B.	Capitalization and Indebtedness	8
C.	Reasons for the Offer and Use of Proceeds	8
D.	Risk Factors	9
ITEM 4.	INFORMATION ON THE COMPANY	32
A.	History and Development of the Company	32
B.	Business Overview	34
C.	Organizational Structure	64
D.	Property, Plants and Equipment	65
E.	Selected Statistical Information	65
F.	Competition	89
G.	Cybersecurity and Fraud Management	92
ITEM 4A.	UNRESOLVED STAFF COMMENTS	93
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	94
A.	Operating Results	98
B.	Liquidity and Capital Resources	160
C.	Research and Development, Patents and Licenses, etc.	162
D.	Trend Information	163
E.	Off-Balance Sheet Arrangements	164
F.	Tabular Disclosure of Contractual Obligations	165
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	166
A.	Directors and Senior Management	166
B.	Compensation	174
C.	Board Practices	184
D.	Employees	197
E.	Share Ownership	201
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	202
A.	Major Shareholders	202
B.	Related Party Transactions	202
C.	Interests of Experts and Counsel	203
ITEM 8.	FINANCIAL INFORMATION	203
A.	Consolidated Statements and Other Financial Information	203
B.	Significant Changes	204
ITEM 9.	THE OFFER AND LISTING	204
A.	Offer and Listing Details	204
B.	Plan of Distribution	211
C.	Markets	211
D.	Selling Shareholders	211
E.	Dilution	211
F.	Expenses of the Issue	211