20-F 1 d510945d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

 

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

OR

 

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

For the fiscal year ended December 31, 2012

OR

 

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

For the transition period from                      to                     

OR

 

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

Date of event requiring this shell company report

Commission file number: 1-10110

 

 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

 

 

Kingdom of Spain

(Jurisdiction of incorporation or organization)

Plaza de San Nicolás, 4

48005 Bilbao

Spain

(Address of principal executive offices)

Eduardo Ávila Zaragoza

Paseo de la Castellana, 81

28046 Madrid

Spain

Telephone number +34 91 537 7000

Fax number +34 91 537 6766

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

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

 

Title of Each Class

 

Name of Each Exchange on which Registered

American Depositary Shares, each representing

the right to receive one ordinary share,

par value €0.49 per share

  New York Stock Exchange
Ordinary shares, par value €0.49 per share   New York Stock Exchange*

Guarantee of Non-Cumulative Guaranteed

Preferred Securities, Series C, liquidation preference $1,000 each, of BBVA International Preferred, S.A. Unipersonal

  New York Stock Exchange**
Guarantee of Guaranteed Fixed Rate Senior Notes due 2014 of BBVA U.S. Senior, S.A. Unipersonal   New York Stock Exchange***
Guarantee of Guaranteed Floating Rate Senior Notes due 2014 of BBVA U.S. Senior, S.A. Unipersonal   New York Stock Exchange****
Guarantee of Guaranteed Fixed Rate Senior Notes due 2015 of BBVA U.S. Senior, S.A. Unipersonal   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.
** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-Cumulative Guaranteed Preferred Securities of BBVA International Preferred, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).
*** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Guaranteed Fixed Rate Senior Notes of BBVA U.S. Senior, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).
**** The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Guaranteed Floating Rate Senior Notes of BBVA U.S. Senior, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).

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.

None

The number of outstanding shares of each class of stock of the Registrant as of December 31, 2012, was:

Ordinary shares, par value €0.49 per share—5,448,849,545

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x Yes  ¨ 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  x No

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.  x Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ¨ Yes  ¨ No

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

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

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

 

U.S. GAAP  ¨

    

International Financial Reporting Standards as Issued

by the International Accounting Standards Board  x

   Other  ¨

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

Item 17  ¨                 Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No

 

 

 

 


Table of Contents

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

 

         PAGE  
PART I     
ITEM 1.  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     5   
ITEM 2.  

OFFER STATISTICS AND EXPECTED TIMETABLE

     5   
ITEM 3.  

KEY INFORMATION

     5   
A.  

Selected Consolidated Financial Data

     5   
B.  

Capitalization and Indebtedness

     8   
C.  

Reasons for the Offer and Use of Proceeds

     8   
D.  

Risk Factors

     8   
ITEM 4.  

INFORMATION ON THE COMPANY

     21   
A.  

History and Development of the Company

     21   
B.  

Business Overview

     24   
C.  

Organizational Structure

     46   
D.  

Property, Plants and Equipment

     46   
E.  

Selected Statistical Information

     46   
F.  

Competition

     66   
ITEM 4A.  

UNRESOLVED STAFF COMMENTS

     67   
ITEM 5.  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     67   
A.  

Operating Results

     75   
B.  

Liquidity and Capital Resources

     108   
C.  

Research and Development, Patents and Licenses, etc.

     112   
D.  

Trend Information

     112   
E.  

Off-Balance Sheet Arrangements

     114   
F.  

Tabular Disclosure of Contractual Obligations

     115   
ITEM 6.  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     116   
A.  

Directors and Senior Management

     116   
B.  

Compensation

     122   
C.  

Board Practices

     126   
D.  

Employees

     131   
E.  

Share Ownership

     135   
ITEM 7.  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     135   
A.  

Major Shareholders

     135   
B.  

Related Party Transactions

     135   
C.  

Interests of Experts and Counsel

     136   
ITEM 8.  

FINANCIAL INFORMATION

     137   
A.  

Consolidated Statements and Other Financial Information

     137   
B.  

Significant Changes

     138   
ITEM 9.  

THE OFFER AND LISTING

     138   
A.  

Offer and Listing Details

     138   
B.  

Plan of Distribution

     145   
C.  

Markets

     145   
D.  

Selling Shareholders

     145   
E.  

Dilution

     145   
F.  

Expenses of the Issue

     145   
ITEM 10.  

ADDITIONAL INFORMATION

     145   
A.  

Share Capital

     145   
B.  

Memorandum and Articles of Association

     145   
C.  

Material Contracts

     148   
D.  

Exchange Controls

     148   


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         PAGE  
E.  

Taxation

     149   
F.  

Dividends and Paying Agents

     155   
G.  

Statement by Experts

     155   
H.  

Documents on Display

     155   
I.  

Subsidiary Information

     156   
ITEM 11.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     156   
ITEM 12.  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     183   
A.  

Debt Securities

     183   
B.  

Warrants and Rights

     183   
C.  

Other Securities

     183   
D.  

American Depositary Shares

     183   
PART II     
ITEM 13.  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     185   
ITEM 14.  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     185   
ITEM 15.  

CONTROLS AND PROCEDURES

     185   
ITEM 16.  

[RESERVED]

     187   
ITEM 16A.  

AUDIT COMMITTEE FINANCIAL EXPERT

     187   
ITEM 16B.  

CODE OF ETHICS

     187   
ITEM 16C.  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     188   
ITEM 16D.  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     189   
ITEM 16E.  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     189   
ITEM 16F.  

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     189   
ITEM 16G.  

CORPORATE GOVERNANCE

     190   
ITEM 16H.  

MINE SAFETY DISCLOSURE

     192   
PART III     
ITEM 17.  

FINANCIAL STATEMENTS

     192   
ITEM 18.  

FINANCIAL STATEMENTS

     192   
ITEM 19.  

EXHIBITS

     192   

 

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CERTAIN TERMS AND CONVENTIONS

The terms below are used as follows throughout this report:

 

   

BBVA”, “Bank”, the “Company”, the “Group” or the “BBVA Group” means Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

 

   

BBVA Bancomer” means Bancomer S.A. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

 

   

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

 

   

Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2012, 2011 and 2010 prepared in accordance with the International Financial Reporting Standards adopted by the European Union (“EU-IFRS”) required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

 

   

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

First person personal pronouns used in this report, such as “we”, “us”, or “our”, mean BBVA.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include words such as “believe”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and similar expressions or variations on such expressions. 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:

 

   

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

 

   

changes in applicable laws and regulations, including increased capital and provision requirements;

 

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

 

   

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

 

   

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

 

   

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

 

   

our ability to hedge certain risks economically;

 

   

downgrades in our credit ratings, including as a result of a decline in the Kingdom of Spain’s credit ratings;

 

   

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

 

   

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

 

   

force majeure and other events beyond our control.

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

PRESENTATION OF FINANCIAL INFORMATION

Accounting Principles

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

Differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB are not material for the three years ended December 31, 2012. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB.

As mentioned in “Item 4. Information on the Company History and Development of the Company—Capital Divestitures—2013” and Note 3 to the Consolidated Financial Statements, the Group announced its decision to conduct a study on strategic alternatives for its pension business in Latin America. The alternatives considered in this process include the total or partial sale of the businesses of the Pension Fund Administrators (AFP) in Chile, Colombia and Peru, and the Retirement Fund Administrator (Afore) in Mexico. For that reason on-balance figures for our companies related to the pension businesses in Latin America, have been reclassified under the headings “Non-current assets held for sale” and “Liabilities associated with non-current assets held for sale” of the

 

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consolidated balance sheet as of December 31, 2012, and the revenues and expenses of these companies for 2012 have been reclassified under the heading “Profit from discontinued operations” in the accompanying consolidated income statement. In accordance with IFRS 5, and in order to present financial information for all periods on a consistent basis, we have reclassified the revenues and expenses from these companies under the heading “Profit from discontinued operations” in the consolidated income statement for 2011 and 2010. This reclassifications has had no impact on our “Profit”.

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.

 

   

The book value of BBVA’s ordinary shares held by its consolidated subsidiaries has been deducted from equity.

 

   

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

 

   

Interest income figures include interest income on non-accruing loans to the extent that cash payments have been received in the period in which they are due.

 

   

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

 

   

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

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

ITEM 3. KEY INFORMATION

A. Selected Consolidated Financial Data

The historical financial information set forth below for the years ended December 31, 2012, 2011 and 2010 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited financial statements for 2009 and 2008 are not included in this document, and they instead can be found in the respective annual reports on Form 20-F for certain prior years previously filed by us. In annual reports on Form 20-F for years prior to 2011, the financial statements for 2008 were prepared under EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, and thus were presented on a non-comparable basis.

 

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

 

     Year Ended December 31,  
     2012     2011(*)     2010(*)     2009(*)     2008(*)  
     (In Millions of Euros, Except Per Share/ADS Data (In Euros))  

Consolidated Statement of Income Data

          

Interest and similar income

     26,262        24,180        21,130        23,773        30,403   

Interest and similar expenses

     (11,140     (11,028     (7,814     (9,893     (18,717

Net interest income

     15,122        13,152        13,316        13,880        11,685   

Dividend income

     390        562        529        443        447   

Share of profit or loss of entities accounted for using the equity method

     727        595        331        118        291   

Fee and commission income

     5,574        5,075        4,864        4,841        5,057   

Fee and commission expenses

     (1,221     (1,044     (831     (790     (868

Net gains(losses) on financial assets and liabilities

     1,645        1,117        1,372        821        1,374   

Net exchange differences

     122        364        455        651        232   

Other operating income

     4,812        4,244        3,537        3,395        3,554   

Other operating expenses

     (4,730     (4,037     (3,240     (3,145     (3,085

Administration costs

     (9,768     (8,898     (8,007     (7,486     (7,588

Depreciation and amortization

     (1,018     (839     (754     (690     (694

Provisions (net)

     (651     (509     (475     (446     (1,416

Impairment losses on financial assets (net)

     (7,980     (4,226     (4,718     (5,473     (4,098

Impairment losses on other assets (net)

     (1,123     (1,885     (489     (1,619     (45

Gains (losses) on derecognized assets not classified as non-current asset held for sale

     4        46        41        20        72   

Negative goodwill

     376        —          1        99        —     

Gains (losses) in non-current assets held for sale not classified as discontinued operations

     (622     (271     127        859        748   

Operating profit before tax

     1,659        3,446        6,059        5,478        5,669   

Income tax

     275        (206     (1,345     (1,085     (1,193

Profit from continuing operations

     1,934        3,240        4,714        4,394        4,476   

Profit from discontinued operations (net)

     393        245        281        201        99   

Profit

     2,327        3,485        4,995        4,595        4,575   

Profit attributable to parent company

     1,676        3,004        4,606        4,210        4,210   

Profit attributable to non-controlling interests

     651        481        389        385        365   

Per share/ADS(1) Data

          

Numbers of shares outstanding (at period end)

     5,448,849,545        4,903,207,003        4,490,908,285        3,747,969,121        3,747,969,121   

Income attributable to parent company(2)

     0.32        0.62        1.10        1.02        1.21   

Dividends declared

     0.200        0.200        0.270        0.420        0.501   

 

(*) Revenues and expenses of our pension business in Latin America have been reclassified for comparative purposes. See “Presentation of Financial Information—Accounting Principles.”
(1) Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.
(2) 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 November 2010, April 2011, October 2011, April 2012 and October 2012, and excluding the weighted average number of treasury shares during the period (5,464 million, 4,945 million, 4,264 million, 4,133 million and 4,134 million shares in 2012, 2011, 2010, 2009 and 2008, respectively). With respect to the years ended December 31, 2012, 2011 and 2010, see Note 5 to the Consolidated Financial Statements.

 

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     As of and for Year Ended December 31,  
     2012     2011     2010     2009     2008  
     (In Millions of Euros, Except Percentages)  

Consolidated balance sheet data

          

Total assets

     637,785        597,688        552,738        535,065        542,650   

Common stock

     2,670        2,403        2,201        1,837        1,837   

Loans and receivables (net)

     383,410        381,076        364,707        346,117        369,494   

Customer deposits

     292,716        282,173        275,789        254,183        255,236   

Debt certificates and subordinated liabilities

     99,043        97,349        102,599        117,817        121,144   

Non-controlling interest

     2,372        1,893        1,556        1,463        1,049   

Total equity

     43,802        40,058        37,475        30,763        26,705   

Consolidated ratios

          

Profitability ratios:

          

Net interest margin(1)

     2.66     2.3     2.4     2.6     2.3

Return on average total assets(2)

     0.4     0.6     0.9     0.8     0.9

Return on average equity(3)

     4.0     8.0     15.8     16.0     15.5

Credit quality data

          

Loan loss reserve(4)

     14,534        9,470        9,473        8,805        7,505   

Loan loss reserve as a percentage of total loans and receivables (net)

     3.79     2.5     2.6     2.5     2.0

Non-performing asset ratio (NPA ratio)(5)

     5.1     4.0     4.1     4.3     2.3

Impaired loans and advances to customers

     20,287        15,647        15,361        15,197        8,437   

Impaired contingent liabilities to customers(6)

     317        219        324        405        131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     20,604        15,866        15,685        15,602        8,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and advances to customers

     367,415        361,310        348,253        332,162        342,682   

Contingent liabilities to customers

     39,407        39,398        35,816        32,614        35,952   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     406,822        400,709        384,069        364,776        378,635   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents net interest income as a percentage of average total assets.
(2) Represents profit as a percentage of average total assets.
(3) Represents profit attributable to parent company as a percentage of average equity.
(4) Includes impairment losses of loans and receivables to credit institutions, loans and advance to customers and debt securities see Note 13 to the Consolidated Financial Statements.
(5) Represents the sum of impaired loans and advances to customers and impaired contingent liabilities to customers divided by the sum of loans and advances to customers and contingent liabilities to customers.
(6) We include contingent liabilities in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired contingent liabilities should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with contingent liabilities (consisting mainly of financial guarantees provided to third-parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If impaired contingent liabilities were not included in the calculation of our NPA ratio, such ratio would generally be higher for the periods covered, amounting to approximately 5.6%, 4.3%, 4.4%, 4.6% and 2.5% as of December 31, 2012, 2011, 2010, 2009 and 2008, respectively.

Exchange Rates

Spain’s currency is the euro. Unless otherwise indicated, the amounts that have been converted to euro in this Annual Report have been done so at the corresponding exchange rate published by the European Central Bank (“ECB”) on December 31 of the relevant year.

 

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

 

Year ended December 31

   Average(1)  

2008

     1.4695   

2009

     1.3955   

2010

     1.3216   

2011

     1.4002   

2012

     1.2908   

2013 (through March, 22, 2013)

     1.3220   

 

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

 

Month ended

   High      Low  

September 30, 2012

     1.3142         1.2566   

October 31, 2012

     1.3133         1.2876   

November 30, 2012

     1.3010         1.2715   

December 31, 2012

     1.3260         1.2930   

January 31, 2013

     1.3584         1.3047   

February 28, 2013

     1.3692         1.3054   

March 31, 2013 (through March 22, 2013)

     1.3098         1.2888   

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on March 22, 2013, was $1.2996.

As of December 31, 2012, approximately 39% of our assets and approximately 38% of our liabilities were denominated in currencies other than euro. See Note 2.2.16 to our Consolidated Financial Statements.

For a discussion of our foreign currency exposure, please see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk Management—Market Risk in Non-Trading Activities in 2012—Structural Exchange Rate Risk”.

B. Capitalization and Indebtedness

Not Applicable.

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Risks Relating to Us and Our Business

We are subject to substantial regulation, and regulatory and governmental oversight. Adverse regulatory developments or changes in government policy could have a material adverse effect on our business, results of operations and financial condition.

The financial services industry is among the most highly regulated industries in the world. Our operations are subject to ongoing regulation and associated regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in Spain, the European Union, the United States and the other markets where we operate. This is particularly the case in the current market environment, which is witnessing increased levels of government and regulatory intervention in the banking sector which we expect to continue for the foreseeable future. The regulations which most significantly affect us, or which could most significantly affect us in the future, include regulations relating to capital and provisions requirements, which have become increasingly stricter in the past two years, steps taking towards achieving a fiscal and banking union in the European Union and regulatory reforms in the United States. These risks are discussed in further detail below.

 

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In addition, we are subject to substantial regulation relating to other matters such as liquidity. We cannot predict if increased liquidity standards, if implemented, could require us to maintain a greater proportion of our assets in highly-liquid but lower-yielding financial instruments, which would negatively affect our net interest margin. We are also subject to other regulations, such as those related to anti-money laundering, privacy protection and transparency and fairness in customer relations.

Adverse regulatory developments or changes in government policy relating to any of the foregoing or other matters could have a material adverse effect on our business, results of operations and financial condition. Furthermore, regulatory fragmentation, with some countries implementing new and more stringent standards or regulation, could adversely affect our ability to compete with financial institutions based in other jurisdictions which do not need to comply with such new standards or regulation.

Capital requirements

Increasingly onerous capital requirements constitute one of our main regulatory concerns. See “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements.”

As a Spanish financial institution, we are subject to the Bank of Spain Circular 3/2008 (“Circular 3/2008”), of May 22, on the calculation and control of minimum capital requirements, as amended by Bank of Spain Circular 4/2011 (“Circular 4/2011”), which implements Capital Requirement Directive III (“CRD III”). In addition, the Royal Decree-Law 24/2012 of August 31, 2012 established a new minimum requirement in terms of core capital on risk-weighted assets which is more restrictive than the one set out in Circular 3/2008, and that must be greater than 9%. This Royal Decree-Law came into force in 2013.

In addition, following an evaluation of the capital levels of 71 financial institutions throughout Europe (including BBVA) based on data available as of September 30, 2011, the European Banking Authority (“EBA”) issued a recommendation pursuant to which, on an exceptional and temporary basis, financial institutions based in the EU should reach a new minimum Core Tier 1 ratio (9%) by June 30, 2012. This recommendation is still in place.

Moreover, we will be subject to the new Basel III capital standards, which will be phased in until January 1, 2019. Despite the Basel III framework setting minimum transnational levels of regulatory capital and a measured phase-in, many national authorities have started a race to the top for capital by gold-plating both requirements and the associated interpretation calendars. In particular, while the European transposition of these standards will be done through the Capital Requirements Directive (“CRD IV”) that is expected to be approved in 2013 and to come into force during 2014, the Spanish Government anticipated certain requirements of Basel III in 2011 with the Royal Decree-Law 2/2011, of February 18, which was superseded by Royal Decree-Law 24/2012, by imposing stricter capital requirements. Additionally, the Mexican government introduced the Basel III capital standards in 2012 and the Basel III transposition in the United States is pending to be clarified. This lack of uniformity may lead to an uneven playing field and to competition distortions. Moreover, regulatory fragmentation, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect a bank with global operations such as BBVA and could undermine our profitability.

There can be no assurance that the implementation of these new standards will not adversely affect our ability to pay dividends, or require us 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 our business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect our return on equity and other financial performance indicators.

 

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Provision requirements

Royal Decree-Law 2/2012, of February 3, and Royal Decree-Law 18/2012, of May 11 increased coverage requirements (which had to be met by December 31, 2012) for performing and non-performing real estate assets and required an additional capital buffer. Subsequently, requisites of both RD-L were included in Law 8/2012 of October 30, 2012 (“Law 8/2012”). There can be no assurance that additional provision requirements will not be adopted by the authorities of the jurisdictions where we operate (including Spanish authorities).

Steps taken towards achieving an EU fiscal and banking union

In June 2012, a number of agreements were reached to reinforce the monetary union, including the definition of a broad roadmap towards a single banking and fiscal union.

While support for a banking union in Europe is strong and significant advances will be done in terms of the development of a single-rule book through the CRD IV, there is ongoing debate on the extent and pace of integration. It has been decided that the European Central Bank (“ECB”) will play a key role in supervision; although a consensus on how to dovetail its central position with the role of national supervisors has not yet been agreed. Other issues are still open, such as the representation and voting power of non-eurozone countries, the accountability of the ECB to European institutions as part of the single supervision mechanism, the final status of the European Banking Authority, the development of a new bank resolution regimen and the creation of a common deposit-guarantee scheme.

European leaders have also supported the reinforcement of the fiscal union but continue negotiating how to achieve it.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its future capacity as our main supervisory authority may have a material impact on our business, financial condition and results of operations.

Regulatory reforms initiated in the United States

Our operations may also be affected by other regulatory reforms in response to the financial crisis, including measures such as those concerning systemic financial institutions and the enactment in the United States in July 2010 of the Dodd-Frank Act. See “Item 4. Information on the Company—Business Overview—The United States—U.S. Regulation—Dodd-Frank Act.” Among other changes, beginning five years after enactment of the Dodd-Frank Act, the Federal Reserve Board will apply minimum capital requirements to U.S. intermediate bank holding company subsidiaries of non-U.S. banks. Section 619 of the Dodd-Frank Act, also known as the Volcker Rule, is a key component of this effort. The Volcker Rule prohibits banking entities, which benefit from federal insurance on customer deposits or access to the discount window, from engaging in proprietary trading and from investing in or sponsoring hedge funds and private equity funds, subject to certain exceptions. In addition, in December 2012 the Fed published new draft regulation on Foreign Banking Organizations, covering issues such as solvency, liquidity, supervision and crisis management. Although there remains uncertainty as to how regulatory implementation of this law will occur, various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices, and could expose us to additional costs (including increased compliance costs). These changes may also cause us to invest significant management attention and resources to make any necessary changes.

 

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Memorandum of Understanding on the Spanish Financial Sector

On June 25, 2012, the Spanish government formally requested the European Union financial aid to recapitalize certain Spanish financial institutions. The details and conditions of the related Memorandum of Understanding on Financial-Sector Policy reached (“MoU”) were announced on July 20, 2012. The MoU establishes a series of conditions to be met by all Spanish financial institutions, including those that have no capital deficits. Such conditions include the compliance with the EBA’s Core Tier 1 ratio of 9%, early intervention and resolution measures including burden sharing measures from hybrid capital holders and subordinated debt holders in banks receiving public capital, and new financial reporting requirements on capital, liquidity and loan portfolio quality. The Spanish government implemented the agreements reached in the MoU through Royal-Decree Law 24/2012, of August 31, which was later replaced by Law 9/2012, of November 14, on restructuring and resolution of credit entities. See “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Law 9/2012 of November 14, on Restructuring and Resolution of Credit Entities.” As of the date of this Annual Report, we cannot predict the impact that the conditions set forth in the MoU or the implementing regulation may have on our business, financial condition or results of operations.

Withdrawals of deposits or other sources of liquidity may make it more difficult or costly for us to fund our business on favorable terms or cause us to take other actions.

Historically, one of our principal sources of funds has been savings and demand deposits. As of December 31, 2012, 2011 and 2010, time deposits represented 26%, 27%, and 29% of our total funding respectively. Large-denomination time deposits may, under some circumstances, such as during periods of significant interest rate-based competition for these types of deposits, be a less stable source of deposits than savings and demand deposits. The level of wholesale and retail deposits may also fluctuate due to other factors outside the Group’s control, such as a loss of confidence (including as a result of political initiatives, including bail-in and/or confiscation and/or taxation of creditors’ funds, in connection with the Eurozone crisis, as seen recently in Cyprus). Moreover, we cannot assure you 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 we operate, we will be able to maintain our current levels of funding without incurring higher funding costs or having to liquidate certain of our assets. In addition, if public sources of liquidity, such as the ECB extraordinary measures adopted in response to the financial crisis since 2008, are removed from the market, we cannot assure you that we will be able to continue funding our business or, if so, maintain our current levels of funding without incurring higher funding costs or having to liquidate certain of our assets or taking additional deleverage measures.

Our earnings and financial condition have been, and our future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions.

Financial markets continue to be subject to significant stress conditions, where steep falls in perceived or actual asset values have been accompanied by a severe reduction in market liquidity, especially during 2012. In dislocated markets, hedging and other risk management strategies may not be as effective as they are in normal market conditions due in part to the decreasing credit quality of hedge counterparties. Severe market events have resulted in us recording large write-downs on our credit market exposures in recent years. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

We face increasing competition in our business lines.

The markets in which we operate are highly competitive and we believe that this trend will continue. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which we must now compete, some of which have recently received public capital from the European Stability Mechanism (the “ESM”).

 

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We also face competition from non-bank competitors, such as: payment platforms; ecommerce businesses; department stores (for some credit products); automotive finance corporations; leasing companies; factoring companies; mutual funds; pension funds; insurance companies; and public debt (as a result of the high yields which are being currently offered as a consequence of the sovereign debt crisis, there is a crowding out effect in the financial markets).

We cannot assure you that this competition will not adversely affect our business, financial condition, cash flows and results of operations.

Our business is particularly vulnerable to volatility in interest rates.

Our results of operations are substantially dependent upon the level of our 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 our control, including fiscal and monetary policies of governments and central banks, regulation of the financial sectors in the markets in which we operate, domestic and international economic and political conditions and other factors. Changes in market interest rates can affect the interest rates that we receive on our interest-earning assets differently than the rates that we pay for our interest-bearing liabilities. This may, in turn, result in a reduction of the net interest income we receive, which could have a material adverse effect on our results of operations.

In addition, the high proportion of loans referenced to variable interest rates (approximately 70% of our loan to customer portfolio as of December 31, 2012) makes debt service on such loans more vulnerable to changes in interest rates. In addition, a rise in interest rates could reduce the demand for credit and our ability to generate credit for our 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 impact on our business, financial condition or results of operations.

We have a substantial amount of commitments with personnel considered wholly unfunded due to the absence of qualifying plan assets.

Our commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Funds for Pensions and Similar Obligations” in the accompanying consolidated balance sheets. These amounts include “Post-employment benefits”, “Early Retirements” and “Post-employment welfare benefits”, which amounted to €2,728 million, €2,758 million and €310 million, respectively, as of December 31, 2012, €2,429 million, €2,904 million and €244 million, respectively, as of December 31, 2011 and €2,497 million, €3,106 million and €377 million, respectively, as of December 31, 2010. These amounts are considered wholly unfunded due to the absence of qualifying plan assets.

We face liquidity risk in connection with our ability to make payments on these unfunded amounts which we seek to mitigate, with respect to “Post-employment benefits”, by maintaining insurance contracts which were contracted with insurance companies owned by the Group (see Note 26 to our Consolidated Financial Statements). 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. We seek 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 regarding 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 we fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.

 

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Risks Relating to Spain and Europe

Continuing economic tensions in the European Union and Spain, including as a result of the ongoing European sovereign debt crisis, could have a material adverse effect on our business, financial condition and results of operations.

The continuing crisis in worldwide financial and credit markets has led to a global economic slowdown in recent years, with many economies around the world showing significant signs of weakness or slow growth. In Europe, uncertainty regarding the budget deficits and solvency of several countries, together with the risk of contagion to other more stable countries, has further exacerbated the global economic crisis. In addition, the risk of default on the sovereign debt of certain EU countries and the impact this would have on the Eurozone countries, including the potential risk that one or more countries may leave the Eurozone—either voluntarily or involuntarily—has raised concerns about the ongoing viability of the euro currency and the European Monetary Union (the “EMU”). These concerns have been further exacerbated by the rise of Euro-skepticism in certain EU countries, including countries that decided not to enter the EMU such as the United Kingdom. These and other concerns could lead to the re-introduction of individual currencies in one or more EU Member States. The exit of one or more EU Member States from the EMU could materially adversely affect the European and global economy, cause a redenomination of financial instruments or other contractual obligations from the euro to a different currency and substantially disrupt capital, interbank, banking and other markets, among other effects, any of which could have a material adverse effect on our business, results of operations, financial condition and prospects. In addition, tensions among Member States of the EU, and growing Euro-skepticism in certain EU countries, could pose additional difficulties in the EU’s ability to react to the ongoing economic crisis.

The Spanish economy contracted during 2012 and the Bank of Spain has predicted the recession to continue in 2013. Spain continues to be one of the focal points of the continuing sovereign debt crisis and concerns surrounding the ability of the Spanish government to service its debt or the health of the Spanish banking sector could lead, and/or the prospect of the continued contraction of the Spanish economy could lead, Spanish leaders to consider requesting financial assistance from the European authorities. Any such financial assistance could impose austerity measures and other restrictions on the Spanish government, including enhanced requirements directed toward Spanish banking institutions, which could make it difficult for Spain to generate revenues and raise additional concerns regarding its ability to service its sovereign debt. Any such restrictions, including additional capital requirements applicable to Spanish banking institutions, could also materially affect our financial condition. Furthermore, any such austerity measures could adversely affect the Spanish economy and reduce the capacity of our borrowers to repay loans we have made to them, increasing our non-performing loans.

Economic conditions remain uncertain in Spain and the European Union and may deteriorate in the future, which could adversely affect the cost and availability of funding for Spanish and European banks, including us, adversely affect the quality of our loan portfolio, require us to take impairments on our exposures to the sovereign debt of one or more countries in the eurozone or otherwise adversely affect our business, financial condition and results of operations.

We are dependent on our credit ratings and any reduction in our or the Kingdom of Spain’s credit ratings could materially and adversely affect our business, financial condition and results of operations.

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

 

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Since we are a Spanish company with substantial operations in Spain, our credit ratings may be adversely affected by the assessment by rating agencies of the creditworthiness of the Kingdom of Spain. Moody’s, Fitch, Standard & Poor’s and DBRS have downgraded Spain’s sovereign debt rating since May 2012. In May 2012, DBRS was the first rating agency to downgrade the debt rating of both, the Kingdom of Spain to AH from AAL and the large Spanish banks. Following DBRS’ rating action, Moody’s and Fitch downgraded Spain’s sovereign debt rating in June 2012 to Baa3 from A3 and to BBB from A, respectively. In June 2012, following their respective downgrade of the Kingdom of Spain, Moody’s and Fitch downgraded all of the large Spanish banks, including us. In August 2012, DBRS further downgraded the rating of Spain’s sovereign debt to AL from AH and the rating of the large Spanish banks. Standard & Poor’s announced in October 2012 that it had lowered its long-term sovereign credit rating on the Kingdom of Spain to BBB- from BBB+ and the short-term sovereign credit rating to A-3 from A-2, with a negative outlook on the long-term rating. In October 2012, following its downgrade of the Kingdom of Spain, Standard & Poor’s downgraded all of the large Spanish banks, including us. Any further decline in the Kingdom of Spain’s sovereign credit ratings could, in turn, result in a further decline in our credit ratings.

In addition, we hold a substantial amount of securities issued by the Kingdom of Spain, autonomous communities within Spain and other Spanish issuers. Any decline in the Kingdom of Spain’s credit ratings could also adversely affect the value of the Kingdom of Spain’s and other Spanish issuers’ respective securities held by us in our various portfolios or otherwise materially adversely affect our business, financial condition and results of operations. Furthermore, the counterparties to many of our loan agreements could be similarly affected by any decline in the Kingdom of Spain’s credit rating, which could limit their ability to raise additional capital or otherwise adversely affect their ability to repay their outstanding commitments to us and, in turn, materially and adversely affect our business, financial condition and results of operations.

Since our loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on our financial condition.

We have historically developed our lending business in Spain, which continues to be our main place of business. As of December 31, 2012, business activity in Spain accounted for 57% of our loan portfolio. See “Item 4. Information on the Company—Selected Statistical Information—ASSETS—Loans and Advances to Customers—Loans by Geographic Area.”

After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted by 3.7% and 0.3% in 2009 and in 2010, respectively, grew by 0.4% in 2011 and contracted by 1.4% in 2012. Our Economic Research Department (“BBVA Research”) estimates that the Spanish economy will contract by 1.1% in 2013. As a result of this expected contraction, it is expected that economic conditions and unemployment in Spain will continue to deteriorate.

In addition, GDP forecasts for the Spanish economy could be further revised downwards if measures adopted in response to the economic crisis are not as effective as expected or if public deficit figures force the government to implement additional restrictive measures. In addition to the tightening of fiscal policies in order to correct its economic imbalances, Spain has seen confidence erode because of the weaker economic activity and, above all, a deterioration in employment in 2012, which is expected to continue in 2013.

The effects of the financial crisis have been particularly pronounced in Spain given Spain’s heightened need for foreign financing as reflected by its high public deficit. Real or perceived difficulties in making the payments associated with this deficit can further damage Spain’s economic situation and increase the costs of financing its public deficit. The aforementioned may be exacerbated by the following:

 

   

The Spanish economy is particularly sensitive to economic conditions in the rest of the Euro area, the primary market for Spanish goods and services exports.

 

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Spanish domestic demand in 2012 was heavily impacted by fiscal policy both directly, through the progressive contraction of public sector demand (as a result, among other reasons, of tighter fiscal targets), and indirectly, through the impact of the fiscal policy reforms on the consumption and investment decisions of private parties (as a result, for example, of the increases in various taxes, including income tax and value added tax (VAT), and the elimination of certain tax benefits (including tax benefits on the purchase of a home)).

 

   

Despite the adoption of a labor market reform in early February 2012 which was intended to slow the amount of jobs lost in 2012, unemployment continued to increase in 2012 and is expected to remain above 25% during 2013.

 

   

In 2013, the continued deterioration of the labor market may trigger a decline in the wage component of a household’s gross disposable income. Furthermore, the increase of fiscal pressures due to the country’s effort to meet the public deficit targets set for 2013 will continue to reduce the non-wage component of disposable income, despite the possible increase in the volume of unemployment benefits. Higher personal income taxes are also expected to have a negative effect. Households’ nominal disposable income remained constant in 2011, is estimated to have fallen by 3.3 % in 2012 and 1.5% in 2013.

 

   

Net financial wealth is not expected to recover during 2013 as a result of the real estate sector adjustments and we expect these adjustments to continue for the coming years.

 

   

Investment in residential real estate contracted by approximately 6.7% and 8.0 % in 2011 and 2012, respectively, and is expected to contract by 8.3% in 2013. Demand for real estate decreased in 2012, primarily as a result of the high unemployment rates, the elimination of tax benefits on the purchase of a home and the rise in the personal income tax.

Our loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy since 2009. Our total impaired loans to customers in Spain amounted to €15,152 million, €11,043 million and €10,954 million as of December 31, 2012, 2011 and 2010, respectively, principally due to the deterioration in the macroeconomic environment. Our total impaired loans to customers in Spain as a percentage of total loans and receivables to customers in Spain were 7.3%, 5.5% and 5.2% as of December 31, 2012, 2011 and 2010, respectively. Our loan loss reserves to customers in Spain as a percentage of impaired loans to customers is Spain as of December 31, 2012, 2011 and 2010 were 64%, 43% and 45%, respectively.

Given the concentration of our loan portfolio in Spain, any adverse changes affecting the Spanish economy are likely to have a significant adverse impact on our loan portfolio and, as a result, on our business, financial condition and results of operations.

Exposure to the Spanish real estate market makes us vulnerable to developments in this market.

In the years prior to 2008, population increase, economic growth, declines in unemployment rates and increases in levels of household disposable income, together with the low interest rates within the EU, led to an increase in demand for mortgage loans in Spain. This increased demand and the widespread availability of mortgage loans affected housing prices, which rose significantly. After this buoyant period, demand began to adjust in mid-2006. Since the last quarter of 2008, the supply of new homes has been adjusting sharply downward in the residential market in Spain, but a significant excess of unsold homes still exists in the market. Spanish real estate prices continued to decline during 2012 in light of deteriorating economic conditions. It is expected that housing demand will remain weak and housing transactions will continue decreasing in 2013.

We have substantial exposure to the Spanish real estate market and the continuing deterioration of Spanish real estate prices could materially and adversely affect our business, financial condition and results of operations. We are exposed to the Spanish real estate market due to the fact that Spanish real estate assets secure many of our outstanding loans and due to the significant amount of Spanish real estate assets held on our balance sheet, including real estate received in lieu of payment for certain underlying loans. Furthermore, we have restructured certain of the loans we have made relating to real estate and the capacity of such borrowers to repay such restructured loans may be materially adversely affected by declining real estate prices. Residential real estate mortgages to individuals

 

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represented 23.8%, 21.9% and 23.1% of our domestic loan portfolio as of December 31, 2012, 2011 and 2010, respectively. Our loans for the development of real estate and housing construction in Spain amounted to €15,358 million as of December 31, 2012, and represented 7% of our gross domestic lending as of December 31, 2012. Our non-performing real estate loans represented 44.4% of our real estate portfolio as of such date.

If Spanish real estate prices continue to decline or if changes currently debated in the Spanish Congress related to mortgage regulation favoring borrowers or if future changes in the simplified mortgage enforcement proceedings provided for under Spanish law lead to substantial changes in the current guarantee system of mortgage, our business may be materially adversely affected, which could materially and adversely affect our financial condition and results of operations.

Highly-indebted households and corporations could endanger our asset quality and future revenues.

Spanish households and businesses have reached, in recent years, a high level of indebtedness, which represents increased risk for the Spanish banking system. In addition, the high proportion of loans referenced to variable interest rates (approximately 70% of our loan portfolio as of December 31, 2012) makes debt service on such loans more vulnerable to changes in interest rates than in the past. 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 our loan portfolio and, as a result, on our financial condition and results of operations. Moreover, the increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt, decreasing the number of new products we may otherwise be able to sell them and limiting our ability to attract new customers in Spain satisfying our credit standards, which could have an adverse effect on our ability to achieve our growth plans.

Risks Relating to Latin America

Events in Mexico could adversely affect our operations.

We are substantially dependent on our Mexican operations, with approximately €1,821 million, €1,711 million, and €1,683 million of the profit attributable to parent company in 2012, 2011 and 2010, respectively, being generated in Mexico. We face several types of risks in Mexico which could adversely affect our banking operations in Mexico or the Group as a whole. Given the internationalization of the financial crisis, the Mexican economy has felt the effects of the global financial crisis and the adjustment process that was underway. While the Mexican economy is expected to grow in 2013, there are economic risks due to a possible lower demand from the U.S. In the second half of 2012, signs of weakness in external demand have been observed, among which a slowdown in manufactured exports and a decline in remittance flows to Mexico are particularly significant. In addition, growing social disruptions in Mexico could adversely affect growth.

As of December 31, 2012, 2011 and 2010, our mortgage loan portfolio delinquency rates in Mexico were 6.4%, 4.1% and 3.3%, respectively, and our consumer loan portfolio delinquency rates were 3.3%, 2.5% and 2.9%, respectively. The default rate is evolving in line with the increase in the activity of our subsidiary, the risk premium has stabilized around 3.49%. If there is an increase in unemployment rates (currently 5% from 5.2% in 2011), which could arise if there is a more pronounced or prolonged slowdown in Europe or the United States, it is likely that such rates will further increase.

In addition, inflation was 4.1% year-on-year in December 2012, exceeding the target set by the Mexican Central Bank. Any tightening of the monetary policy, including to address upward inflationary pressures, could make it more difficult for customers of our mortgage and consumer loan products in Mexico to service their debts, which could have a material adverse effect on the business, financial condition, cash flows and results of operations of our Mexican subsidiary or the Group as a whole. Additionally, if the approval of certain structural reforms is delayed, this could make it more difficult to reach potential growth rates in the Mexican economy. Among the reforms currently debated there is a fiscal reform (to extend social security across the whole population, an increase in value added tax and a decrease of non-wage labor cost) and an energy reform (to increase investment in the sector) Finally, growing social tensions in Mexico, including as a result of drug-related corruption and escalating violence, could weigh on the economic outlook, which could increase economic uncertainty and capital outflows.

 

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According to the mandate of the Law for Transparent and Ordered Financial Services in place (last modified in 2010), the Mexican National Commission for the Protection and Defense of Financial Services Users (Comisión Nacional para la Defensa de los Usuarios de los Servicios Financieros or “Condusef”) has continued to request that banks send for revision several of its service contracts (e.g., credit cards, insurance, etc.), in order to check that they comply the dispositions on transparency and clarity for protecting financial service users. Condusef still does not have systematic ways to evaluate and grade service contracts, and this reflects on a substantial variation in grades from one year to the next and no clear instructions for adequating such contracts. Therefore, the Law Committee of the Banking Association (ABM) is coordinating a working group to propose improvements in the process. In addition, Condusef has asked banks to formulate new procedures so that beneficiaries of deposit accounts can collect the funds in the case of the death of the account owner.

The Money Laundering Law (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita) will become effective in July 2013. The Ministry of Finance (Secretaría de Hacienda y Crédito Público) and a special analysis unit within the Federal Attorney’s Office (Unidad Especializada en Análisis Financiero en Contra de la Delincuencia Organizada, de la Procuraduría General de la República) are in charge of this process. The Law specifies more severe penalties for non compliance and more information requirements for some transactions. However, authorities are working on evaluating the impact of the law before it comes into force.

Any of these risks or other adverse developments in laws, regulations, public policies or otherwise in Mexico may adversely affect the business, financial condition, operating results and cash flows of our Mexican subsidiary or the Group as a whole.

Our Latin American subsidiaries’ growth, asset quality and profitability may be affected by volatile macroeconomic conditions, including significant inflation and government default on public debt, in the Latin American countries where they operate.

The Latin American countries in which we operate have experienced significant economic volatility in recent decades, characterized by recessions, foreign exchange crises and significant inflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Negative and fluctuating economic conditions, such as a changing interest rate environment, also affect our profitability by causing lending margins to decrease and leading to decreased demand for higher-margin products and services. In addition, significant inflation can negatively affect our results of operations as was the case in the year ended December 31, 2009, when as a result of the characterization of Venezuela as a hyperinflationary economy, we recorded a €90 million decrease in our profit attributable to parent company.

Many of the main challenges for the region relate to the evolution of external factors, including the crisis in Europe or the fiscal adjustment measures in the U.S., and the increasing use of macroprudential measures to control global liquidity, which could deter financial flows to enter in Latin American countries. In addition, inflationary pressure and inflation forecasts have worsened in most countries in the region (with inflation in some countries exceeding the relevant central banks’ targets) due to the strength of economic activity and increased food prices. Price overheating is leaving Latin America economies more vulnerable to an adverse external shock since the more important role of exports in their GDP is making them more dependent on the maintenance of high terms of trade. Moreover, uncertainty on the evolution of the global economy conjunction with upward pressure from domestic demand will like make most central banks in the region to remain on hold, leaving interest rates unchanged. Therefore monetary policy is less likely to act as and stabilizer in case of domestic overheating.

In addition, negative and fluctuating economic conditions in some Latin American countries could result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is generally high in several Latin American countries in which we operate.

While we seek to mitigate these risks through what we believe to be conservative risk policies, no assurance can be given that our Latin American subsidiaries’ growth, asset quality and profitability will not be further affected by volatile macroeconomic conditions in the Latin American countries in which we operate.

 

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Latin American economies can be directly and negatively affected by adverse developments in other countries.

Financial and securities markets in Latin American countries in which we operate are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. The region’s growth has decelerated in 2012, registering a growth rate of 3%, in particular due to the economic slowdown of Brazil. Negative developments in the economy or securities markets in one country, particularly in the U.S. or in Europe under current circumstances, may have a negative impact on emerging market economies. We believe that the main global risk for Latin America countries is currently posed by the possible deterioration of the European crisis, which would especially affect countries with less capacity to access international markets to cushion the fall in commodity prices and with less room to use counter-cyclical policies. Any such developments may adversely affect the business, financial condition, operating results and cash flows of our subsidiaries in Latin America. These economies are also vulnerable to conditions in global financial markets and especially to commodities price fluctuations and these vulnerabilities usually reflect adversely in financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. For example, at the beginning of the financial crisis these economies were hit by a simultaneous drop in commodity export prices, a collapse in demand for non-commodity exports and a sudden halting of foreign bank loans. Even though most of these countries withstood the triple shock rather well, with limited damage to their financial sectors, non-performing loan ratios rose and bank deposits and loans contracted. These trends are been corrected in the last few quarters in most countries. As a global economic recovery remains fragile, there are risks of a relapse. If the global financial crisis continues and, in particular, if the effects on the Chinese, European and U.S. economies intensify, the business, financial condition, operating results and cash flows of our subsidiaries in Latin America are likely to be materially adversely affected.

We are exposed to foreign exchange and, in some instances, political risks as well as other risks in the Latin American countries in which we operate, which could cause an adverse impact on our business, financial condition, results of operations.

We operate commercial banks and insurance and private pension companies in various Latin American countries and our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We are confronted with different legal and regulatory requirements in many of the jurisdictions in which we operate. These include, but are not limited to, different tax regimes and laws relating to the repatriation of funds or nationalization or expropriation of assets. Our international operations may also expose us to risks and challenges which our local competitors may not be required to face, such as exchange rate risk, difficulty in managing a local entity from abroad, and political risk which may be particular to foreign investors, or the distribution of dividends. For example, in October 2012, Argentina sharply raised its excess-capital requirements from 30% to 75% of minimum capital before banks (including our subsidiary BBVA Banco Francés, S.A.) can distribute dividends. As a result, BBVA Banco Francés, S.A. will not make a dividend payment with respect to 2012. Furthermore, while most Latin American currencies to which we are exposed appreciated during 2012, this trend could be reversed. For example, in February 2013, the Venezuelan government decided to devaluate the Venezuelan bolivars fuerte for the fifth time in nine years by approximately 32% (from 4.30 to 6.30 per U.S. dollar), which undermined the dividends of our Venezuelan subsidiary awaiting repatriation.

Our presence in Latin American markets also requires us to respond to rapid changes in market conditions in these countries. We cannot assure you that we will continue to succeed in developing and implementing policies and strategies that are effective in each country in which we operate or that any of the foregoing factors will not have a material adverse effect on our business, financial condition and results of operations.

Regulatory changes in Latin America that are beyond our control may have a material effect on our business, financial condition, results of operations and cash flows.

A number of banking regulations designed to maintain the safety and soundness of banks and limit their exposure to risk are applicable in certain Latin American countries in which we operate. Local regulations differ in a number of material respects from equivalent regulations in Spain and the United States.

Changes in regulations that are beyond our control may have a material effect on our business and operations, particularly in Venezuela and Argentina. In addition, since some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. No assurance can be given that laws or regulations will be enforced or interpreted in a manner that will not have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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Risks Relating to the United States

Adverse economic conditions in the United States may have a material effect on our business, financial condition, results of operations and cash flows.

As a result of the business of our subsidiaries in the United States we are vulnerable to developments in this market, particularly the real estate market. During the summer of 2007, the difficulties experienced by the subprime mortgage market triggered a real estate and financial crisis, which had significant effects on the real economy and resulted in significant volatility and uncertainty in markets and economies around the world. The recovery is still weak, as the economy is growing at low rates and unemployment is persistently high. The recent economic growth estimates for the U.S., showing that economic recovery is slower than expected, and growing regulatory pressure in the U.S. financial sector resulted in a write down of goodwill related to our acquisition of BBVA Compass in the aggregate amount of €1,444 million as of December 31, 2011. See Note 20 to our Consolidated Financial Statements. Similar or worsening economic conditions in the United States could have a material adverse effect on the business, financial condition, results of operations and cash flows of our subsidiary BBVA Compass, or the Group as a whole, and could require us to provide BBVA Compass with additional capital.

Risks Relating to Other Countries

Our strategic growth in Asia exposes us to increased regulatory, economic and geopolitical risk relating to emerging markets in the region, particularly in China.

Pursuant to certain transactions completed in the past few years (see Note 17 to our Consolidated Financial Statements), as of December 31, 2012, our ownership interests in members of the CITIC Group, a Chinese banking group, were a 29.7% stake in CITIC International Financial Holdings Ltd (“CIFH”) and a 15% stake in China CITIC Bank Corporation Limited (“CNCB”). CIFH is a banking entity headquartered in Hong Kong and CNCB is a banking entity headquartered in China.

As a result of our expansion into Asia, we are exposed to increased risks relating to emerging markets in the region, particularly in China. The Chinese government has exercised, and continues to exercise, significant influence over the Chinese economy. Chinese governmental actions, including changes in laws or regulations or in the interpretation of existing laws or regulations, concerning the economy and state-owned enterprises, or otherwise affecting our activity, could have a significant effect on Chinese private sector entities in general, and on CIFH or CNCB in particular. Chinese authorities have implemented a series of monetary tightening and macro prudential policies to slow credit growth and to contain rises in real estate prices. These could undermine profitability in the banking sector generally and CIFH’s and CNCB’s respective profitability in particular. Our business in China may also be affected by the increased credit quality risks resulting from the increase in local government debt and financial stresses in smaller companies as their access to various forms of non-bank credit is tightened.

In addition, while we believe long term prospects in both China and Hong Kong are positive, particularly for the consumer finance market, near term risks are present from the impact of a slowdown in global growth, which could result in tighter financing conditions and could pose risks to credit quality. China’s GDP growth has moderated following efforts to avert overheating and steer the economy towards a soft landing. China’s growth momentum continued to slow more than expected in 2012 due to external pressures and lags in the effect of policy stimulus put in place in 2012. While domestic demand and production remain strong, there is an increased probability of a hard landing as a result of the uncertainties concerning the global environment, exacerbated by a rise in domestic financial fragilities.

Any of these developments could have a material adverse effect on our investments in Asia or the business, financial condition, results of operations and cash flows of the Group.

 

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Since Garanti operates primarily in Turkey, economic, political and other developments in Turkey may have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.

In 2011, we acquired a 25.01% interest in Türkiye Garanti Bankası A.Ş. (“Garanti”). Most of Garanti’s operations are conducted, and most of its customers are located, in Turkey. Accordingly, Garanti’s ability to recover on loans, its liquidity and financial condition and its results of operations are substantially dependent upon the economic, political and other conditions prevailing in or that otherwise affect Turkey. For instance, if the Turkish economy is adversely affected by, among other factors, a reduction in the level of economic activity, continuing inflationary pressures, devaluation or depreciation of the Turkish Lira, a natural disaster or an increase in domestic interest rates, then a greater portion of Garanti’s customers may not be able to repay loans when due or meet their other debt service requirements to Garanti, which would increase Garanti’s past due loan portfolio and could materially reduce its net income and capital levels.

After growing by approximately 8.5% in 2011, the Turkish economy is expected to grow by 2.6% in 2012 and by 4.4% in 2013. In addition, inflation increased by 8.9% in 2012 on average and is expected to further increase by 5.3% in 2013. Furthermore, Turkey’s recent credit boom led to the rapid widening of its current account deficit, which reached a multi-year high of 9.9% of GDP in 2011 and is expected to amount to 6.5% by the end of 2012. Despite Turkey’s increased political and economic stability in recent years, the recent rating upgrade by Fitch in November 2012 and the implementation of institutional reforms to conform to international standards, Turkey is an emerging market and it is subject to greater risks than more developed markets. Financial turmoil in any emerging market could negatively affect other emerging markets, including Turkey, or the global economy in general. Moreover, financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets, and may reduce liquidity to companies located in the affected markets. An increase in the perceived risks associated with investing in emerging economies in general, or Turkey in particular (including as a result of a deterioration in the EU accession process), could dampen capital flows to Turkey and adversely affect the Turkish economy.

In addition, actions taken by the Turkish government could adversely affect Garanti’s business and prospects. For example, currency restrictions and other restraints on transfer of funds may be imposed by the Turkish government, Turkish government regulation or administrative polices may change unexpectedly or otherwise negatively affect Garanti, the Turkish government may increase its participation in the economy, including through nationalizations of assets, or the Turkish government may impose burdensome taxes or tariffs. The occurrence of any or all of the above risks could have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti. Moreover, political uncertainty or instability within Turkey and in some of its neighboring countries (including as a result of the ongoing civil war in Syria) has historically been one of the potential risks associated with investments in Turkish companies.

Furthermore, a significant majority of Garanti’s total securities portfolio is invested in securities issued by the Turkish government. In addition to any direct losses that Garanti might incur, a default, or the perception of increased risk of default, by the Turkish government in making payments on its securities or the possible downgrade in Turkey’s credit rating would likely have a significant negative impact on the value of the government securities held in Garanti’s securities portfolio and the Turkish banking system generally and make such government securities difficult to sell, and may have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.

Any of the risks referred to above could have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.

We have entered into a shareholders’ agreement with Doğuş Holding A.Ş. in connection with the Garanti acquisition.

We have entered into a shareholders’ agreement with Doğuş Holding A.Ş. (“Doğuş”) in connection with the Garanti acquisition. Pursuant to the shareholders’ agreement, we and Doğuş have agreed to manage Garanti through the appointment of board members and senior management. Doğuş is one of the largest Turkish conglomerates and has business interests in the financial services, construction, tourism and automotive sectors. Any financial reversal, negative publicity or other adverse circumstance relating to Doğuş could adversely affect Garanti or BBVA. Furthermore, we must successfully cooperate with Doğuş in order to manage Garanti and grow its business. It is possible that we and Doğuş will be unable to agree on the management or operational strategies to be followed by Garanti, which could adversely affect Garanti’s business, financial condition and results of operations and the value of our investment and lead to our failure to achieve the expected benefits from the Garanti acquisition.

 

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Other Risks

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

Publicly available information about public companies in Spain is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States. In addition, although we are subject to the periodic reporting requirements of the United States Securities Exchange Act of 1934 (the “Exchange Act”), the periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Finally, we maintain our financial accounts and records and prepare our financial statements in conformity EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB, which differs in certain respects from U.S. GAAP, the financial reporting standard to which many investors in the United States may be more accustomed.

Weaknesses or failures in our internal processes, systems and security could materially adversely affect our results of operations, financial condition or prospects, and could result in reputational damage.

Operational risks, through inadequate or failed internal processes, systems (including financial reporting and risk monitoring processes) or security, or from people-related or external events, including the risk of fraud and other criminal acts carried out against us, are present in our businesses. Our 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 our results, reporting of such results, and on the ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of our systems could disrupt our business, result in the disclosure of confidential information and create significant financial and legal exposure for us. Although we devote significant resources to maintain and regularly update our processes and systems that are designed to protect the security of our systems, software, networks and other technology assets, there is no assurance that all of our security measures will provide absolute security. Any damage to our reputation (including to customer confidence) arising from actual or perceived inadequacies, weaknesses or failures in our systems, processes or security could have a material adverse effect on our results of operations, financial condition or prospects.

Compliance with anti-money laundering and anti-terrorism financing rules involves significant cost and effort.

We are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although we believe that our current policies and procedures are sufficient to comply with applicable rules and regulations, we cannot guarantee that our group-wide anti-money laundering and anti-terrorism financing policies and procedures completely prevent situations of money laundering or terrorism financing. Any of such events may have severe consequences, including sanctions, fines and notably reputational consequences, which could have a material adverse effect on our financial condition and results of operations.

 

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

BBVA’s predecessor bank, BBV, was incorporated as a limited liability 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, 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 Paseo de la Castellana, 81, 28046, Madrid, Spain telephone number +34-91-374-6201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Emiliano Salcines (1345 Avenue of Americas, 44th Floor New York, NY 10105, telephone number +1-212-728-2405). 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 2010 to the date of this Annual Report were the following:

 

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2013

Acquisition of Unnim Vida. On February 4, 2013, Unnim Banc, S.A. reached an agreement with Aegon Spain Holding B.V. to acquire its 50% stake in Unnim Vida, S.A. de Seguros y Reaseguros (“Unnim Vida”). As a result BBVA Group’s total holding in the share capital of Unnim Vida is 100%.

2012

Acquisition of Unnim. On March 7, 2012, the Management Commission of the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria or “FROB”) accepted BBVA’s offer to acquire Unnim Banc, S.A. (“Unnim”). The FROB, the Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos or “FGD”) and BBVA entered into a purchase agreement, by virtue of which BBVA acquired 100% of the shares of Unnim for a purchase price of €1.

In addition, BBVA, the FGD, the FROB and Unnim signed a Protocol of Financial Measures for the restructuring of Unnim, which regulates the Asset Protection Scheme through which the FGD will be responsible for 80% of the losses incurred by a predetermined asset portfolio of Unnim for a period of 10 years following the transaction.

On July 27, 2012, following the completion of the transaction, BBVA became the holder of 100% of the capital of Unnim.

As of December 31, 2012, Unnim’s assets amounted to €24,756 million, of which €15,932 million corresponded to Loans and advances to customers. Customer deposits amounted to €11,083 million as of such date.

Pursuant to the acquisition method of accounting, as of December 31, 2012, we recorded the difference between the fair values assigned to the assets acquired and the liabilities assumed from Unnim, on one hand, and the cash payment made to the FROB in consideration of the transaction on the other hand, which totaled €376 million, under the heading “Negative goodwill in business combinations” in our consolidated income statement for the year 2012. As of the date of preparation of our Consolidated Financial Statements, this amount is provisional, since IFRS 3 grants a period of one year to make a definitive determination on this negative consolidation difference; however, the Group does not expect any significant changes in the valuations of the assets and liabilities related to this acquisition. See Note 20.1 to our Consolidated Financial Statements for additional information.

2011

Acquisition of a capital holding in the Turkish bank Garanti. On March 22, 2011, through the execution of the agreements signed in November 2010 with the Doğuş group and having obtained the corresponding authorizations, BBVA completed the acquisition of a 24.89% holding of the share capital of Türkiye Garanti Bankası A.Ş. (“Garanti”). Subsequently, an additional 0.12% holding was acquired through the stock exchanges, increasing the BBVA Group’s total holding in the share capital of Garanti to 25.01% as of December 31, 2011. The total amount spent on these acquisitions totaled $5,876 million (approximately €4,408 million).

The agreements with the Doğuş group include an arrangement for the joint management of the bank and the appointment of some of the members of its Board of Directors by the BBVA Group. BBVA also has a perpetual option to purchase an additional 1% of Garanti, which will become exercisable on March 22, 2016. Considering its current shareholding structure, if the BBVA Group were to exercise this option, it would have effective control of Garanti. For additional information, see Note 3 to the Consolidated Financial Statements.

Purchase of Credit Uruguay Banco. On January 18, 2011, after obtaining the corresponding authorizations, the purchase of Credit Uruguay Banco was completed for approximately €78 million, generating goodwill for an insignificant amount.

Capital increase in CNCB. BBVA participated in the capital increase carried out by China CITIC Bank Corporation Limited (“CNCB”) in 2011, in order to maintain its stake in CNCB (15%), with a payment of €425 million.

 

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2010

On April 1, 2010, after obtaining the corresponding authorizations, the purchase of an additional 4.93% of CNCB’s capital was finalized for €1,197 million. As of December 31, 2010, BBVA had a 29.68% holding in CIFH and a 15% holding in CNCB.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2010 to the date of this Annual Report were the following:

2013

On May 24, 2012, we announced our decision to conduct a study on strategic alternatives for our pension business in Latin America. The alternatives considered in this process include the total or partial sale of the businesses of the Pension Fund Administrators (AFP) in Chile, Colombia and Peru, and the Retirement Fund Administrator (Afore) in Mexico. For additional information, see Note 3 to the Consolidated Financial Statements.

On December 24, 2012, we reached an agreement with Sociedad Administradora de Fondos de Pensiones y Cesantías Porvenir, S.A., a subsidiary of Grupo Aval Acciones y Valores, S.A., for the sale to the former of the total stake that we hold directly or indirectly in the Colombian company BBVA Horizonte Sociedad Administradora de Fondos de Pensiones y Cesantías S.A. (“Horizonte”). The closing of the transaction is subject to obtaining the required Colombian regulatory authorizations. The base purchase price agreed upon is $ 530 million (COP 941,731 million), subject to certain adjustments. It is anticipated that the closing of the transaction will take place in the first half of 2013 and that the capital gain net of taxes arising from the transaction will amount to approximately € 265 million.

On January 9, 2013, after having obtained the necessary approvals, we announced that we had completed the sale of our stake in the Mexican company Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. to Afore XXI Banorte, S.A. de C.V. The purchase price agreed upon was $1,735 million. The capital gain (net of taxes) arising from this transaction amounted to approximately €800 million.

On February 1, 2013, we reached an agreement (the “Agreement”) with MetLife, Inc., for the sale of our stake in the Chilean pension fund manager Administradora de Fondos de Pensiones Provida S.A. (“AFP Provida”), representing 64.3% of the share capital of AFP Provida.

Pursuant to the terms of the Agreement and subject to the satisfaction of the conditions set forth therein:

 

   

MetLife, Inc. has agreed to cause one or more of its wholly-owned affiliates to commence, both in the Republic of Chile and in the United States of America, a tender offer in cash (the “Tender Offer”) for 100% of the issued and outstanding shares of AFP Provida; and

 

   

BBVA has agreed to transfer the entirety of its 64.3% interest in AFP Provida to such affiliates of MetLife, Inc. either (i) directly through the Tender Offer, or (ii) partially directly through the Tender Offer and partially indirectly through the sale to MetLife, Inc. of a newly incorporated BBVA affiliate in Chile. In this case, BBVA shall be paid the same price that it would be paid by the transfer of the shares of AFP Provida through the Tender Offer.

The purchase price set forth in the Agreement for a 100% interest in AFP Provida, $2 billion, shall be supplemented by a fixed amount for each day having elapsed between the date of the most recent month-end balance sheet of AFP Provida available prior to the commencement of the Tender Offer and the date of publication of the Tender Offer’s results (as determined pursuant to the Agreement). In addition to the purchase price, the Agreement permits AFP Provida, subject to the prior approval of AFP Provida’s governing bodies, to make certain dividends prior to the commencement of the Tender Offer.

 

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The commencement of the Tender Offer and the subsequent closing of the transaction are subject, among other conditions, to receipt of regulatory approvals both in Chile and Ecuador. It is anticipated that the closing of the transaction will take place in the second half of 2013 and that the capital gain net of taxes arising from the transaction will amount to approximately €500 million.

2012

In June 2012, BBVA reached an agreement to sell its business in Puerto Rico to Oriental Financial Group Inc. The sale price was $500 million (approximately €385 million at the exchange rate on the date of the transaction). Gross capital losses from this sale amounted to approximately €15 million (taking into account the exchange rate at the time of the transaction and the earnings of the sold companies up to the closing of the transaction, on December 18, 2012).

2011 and 2010

During 2011 and 2010, BBVA sold its participation in certain non-strategic associates and also concluded the liquidation and merger of several issuers, financial services and real estate affiliates.

B. Business Overview

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

Operating Segments

The main change in the reporting structure of the BBVA Group’s operating segments in 2012 relates to the transfer of the assets and liabilities of a branch located in Houston from our Mexico operating segment to our United States operating segment. This was done to reflect the increasingly geographical orientation of the Group’s reporting structure. Despite this change and other insignificant changes, the composition of the operating segments in 2012 has remained very similar to their composition in 2011. Nevertheless, operating segment data relating to 2011 and 2010 contained in this Annual Report has been presented on a uniform basis consistent with our organizational structure in 2012 to ensure like-for-like comparisons.

Set forth below are our five operating segments. As indicated above, the composition of our operating segments in 2012 is very similar to last year’s:

 

   

Spain

 

   

Eurasia

 

   

Mexico

 

   

South America

 

   

United States

In addition to these operating segments, we continue to have a separate “Corporate Activities” segment. This segment handles our general management functions, which mainly consist of structural positions for interest rates associated with the euro balance sheet and exchange rates, together with liquidity management and shareholders’ funds. This segment also books the costs from central units that have a strictly corporate function and makes allocations to corporate and miscellaneous provisions, such as early retirement and others of a corporate nature. It also includes the Industrial and Financial Holdings Unit and the Group’s Spanish real estate business.

 

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The breakdown of the BBVA Group’s total assets by operating segments as of December 31, 2012, 2011 and 2010 is as follows:

 

     As of December 31,  
Total Assets by Operating Segment    2012      2011      2010  
     (In Millions of Euros)  

Spain

     317,151         311,987         299,186   

Eurasia

     48,282         53,354         45,980   

Mexico

     82,432         72,488         73,321   

South America

     78,419         63,444         51,671   

United States

     53,850         57,207         59,173   
  

 

 

    

 

 

    

 

 

 

Subtotal Assets by Operating Segments

     580,134         558,480         529,331   
  

 

 

    

 

 

    

 

 

 

Corporate Activities

     57,652         39,208         23,407   
  

 

 

    

 

 

    

 

 

 

Total Assets BBVA Group

     637,786         597,688         552,738   
  

 

 

    

 

 

    

 

 

 

The following table sets forth information relating the profit attributable to parent company by each of our operating segments for the years ended December 31, 2012, 2011 and 2010.

 

     Profit/(Loss) Attributable to
Parent Company
    % of Profit/(Loss) Attributable to
Parent Company
 
     For the Year Ended December 31,  
     2012(1)     2011(2)     2010     2012(1)     2011(2)     2010  
     (In Millions of Euros)     (In Percentage)  

Spain

     (1,267     1,352        2,210        (38.1     30.7        39.3   

Eurasia

     950        1,031        575        28.6        23.4        10.2   

Mexico(*)

     1,821        1,711        1,683        54.8        38.8        30.0   

South America(*)

     1,347        1,007        889        40.5        22.8        15.8   

United States

     475        (691     260        14.3        (15.7     4.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Operating Segments

     3,326        4,410        5,617        100.0        100.0        100.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate Activities

     (1,649     (1,405     (1,011      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit attributable to the BBVA Group

     1,677        3,004        4,606         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Profit/(Loss) attributable to parent company for the year ended December 31, 2012 has been affected by the significant loan-loss provisions made to reflect the steady impairment of our real estate portfolios in Spain.
(2) Profit/(Loss) attributable to parent company for the year ended December 31, 2011 has been affected by the goodwill impairment in the U.S. and the acquisition of Garanti, which have affected, respectively, the contribution of the United States and Eurasia operating segments.
(*) Information of our pension business for 2011 and 2010 has been reclassified for comparative purposes. See “Presentation of Financial Information—Accounting Principles.”

 

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The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2012, 2011 and 2010:

 

            Operating Segments        
     BBVA
Group
     Spain     Eurasia      Mexico(*)      South
America(*)
     United
States
    Corporate
Activities
 
     (In Millions of Euros)  

2012

                  

Net interest income

     15,122         4,836        847         4,164         4,291         1,682        (697

Operating profit / (loss) before tax

     1,659         (1,841     1,054         2,225         2,240         667        (2,686
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Profit

     1,676         (1,267     950         1,821         1,347         475        (1,649
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

2011

                  

Net interest income

     13,152         4,391        802         3,776         3,161         1,635        (614

Operating profit / (loss) before tax

     3,446         1,897        1,176         2,146         1,671         (1,020     (2,425
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Profit

     3,004         1,352        1,031         1,711         1,007         (691     (1,405
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

2010

                  

Net interest income

     13,316         4,898        333         3,648         2,494         1,825        117   

Operating profit / (loss) before tax

     6,059         3,127        660         2,137         1,424         336        (1,625
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Profit

     4,606         2,210        575         1,683         889         260        (1,011
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(*) Information of our pension business for 2011 and 2010 has been reclassified for comparative purposes. See “Presentation of Financial Information—Accounting Principles.”

Given the business model of the BBVA Group, the economic capital allocated to our operating segments is mainly determined by the credit risk arising from loans and advances to customers. Accordingly, changes in the amounts of allocated economic capital to each operating segment are mainly related to the evolution of such portfolios. A brief explanation of changes in the amounts of allocated economic capital to each operating segment is included in the segmental discussions that follow.

Spain

The operating segment of Spain includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Activities area. The main business units included in this operating segment are:

 

   

Spanish Retail Network: including the segments of individual customers, private banking, small companies and businesses in the domestic market.

 

   

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

 

   

Corporate and Investment Banking (C&IB): responsible for business with large corporations and multinationals.

 

   

Other units: which include the insurance business unit in Spain (BBVA Seguros), and the Asset Management unit, which manages Spanish mutual fund and pension funds.

The following table sets forth information relating to the activity of this operating segment for the years ended December 31, 2012, 2011 and 2010:

 

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     As of December 31,  
     2012      2011      2010  
     (In Millions of Euros)  

Total Assets

     317,151         311,987         299,186   

Loans and advances to customers

     210,982         214,277         218,620   

Of which:

        

Residential mortgages

     84,886         77,167         78,936   

Consumer finance

     7,663         8,077         8,106   

Loans

     6,043         6,500         6,453   

Credit cards

     1,620         1,577         1,653   

Loans to enterprises

     56,335         70,867         71,045   

Loans to public sector

     24,937         25,006         23,198   

Total customer deposits

     129,640         109,421         106,073   

Current and savings accounts

     45,325         41,613         41,471   

Time deposits

     61,055         48,447         48,116   

Other customer funds

     23,260         19,361         16,486   

Off-balance sheet funds

     52,735         51,159         53,559   

Mutual funds

     19,937         20,357         23,393   

Pension funds

     18,313         17,224         16,811   

Other placements

     14,486         13,578         13,355   

Economic capital allocated

     12,110         10,558         10,100   

As of December 31, 2012, the balance of loans and advances to customers was €210,982 million, a 1.5% decrease from the €214,277 million recorded as of December 31, 2011, as a result of the deleveraging process and weak consumption. The general trend has been a weak turnover, with the most notable decreases recorded in the segment of higher-risk businesses and corporations, and in consumer loans.

As of December 31, 2012, our outstanding payment protection insurance policies amounted to €39 billion and insured approximately 19% of our total loans and advances to customers in Spain as of such date. Substantially all of our payment protection insurance products provide consumer or mortgage payment protection in the case of loss of life or disability (while approximately 5.5% of these products provide protection in the case of unemployment or a work-related illness). These insurance products are granted by our insurance subsidiary to borrowers within our own consumer and mortgage portfolio. Upon the occurrence of the insured event, our insurance subsidiary pays the entire outstanding principal amount, together with any accrued interest, of the related loan. Since the risk remains within the Group, we do not consider our payment protection insurance products when determining the appropriate amount of allowance for loan losses on the related loans. We account for these products as insurance contracts.

As of December 31, 2012, total on-balance and off-balance sheet customer deposits and funds, including mutual funds, pension funds and customer portfolios, were €182,375 million, a 13.6% increase from the €160,580 million posted as of December 31, 2011.

Customer deposits were €129,640 million as of December 31, 2012 compared to €109,421 as of December 31, 2011, an increase of 18.5%, mainly due to the high percentage of renewals of time deposits during the period and, to a lesser extent, the integration of Unnim in 2012.

Mutual fund assets under management were €19,937 million as of December 31, 2012, a 2.1% decrease from the €20,357 million recorded as of December 31, 2011 as a result of a reduction in the assets under management due to turmoil in the markets.

As of December 31, 2012, our outstanding guaranteed mutual fund products amounted to €11,423 million (approximately 59.8% of our outstanding mutual fund products in Spain as of such date). Our guaranteed fund products relate mainly to mutual funds in respect of which the return of principal (rather than the yield) is guaranteed by means of a deposit and a derivative contract entered into by us, both of which are recognized on our balance sheet. We account for these products as deposits or derivative contracts.

 

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Pension fund assets under management were €18,313 million as of December 31, 2012, a 6.3% increase from the €17,224 million recorded as of December 31, 2011, as a result of the positive management of renewals and new accounts.

The economic capital allocated was €12,110 million as of December 31, 2012, a 14.7% increase from the €10,558 million recorded as of December 31, 2011. This increase was mainly related to the incorporation of Unnim, the recalibration of our internal model in mid 2012 based on backtesting results and the increased market risk resulting from the application of capital requirements currently applicable to BBVA.

Eurasia

This operating segment covers the Group’s activity in Europe (excluding Spain) and Asia. Accordingly, it includes BBVA Portugal, Consumer Finance Italy and Portugal, the retail business of branches in Paris, London and Brussels, and the retail and wholesale activity carried out within the various regions comprised in this business segment. It also includes the Group’s interest in Türkiye Garanti Bankası A.Ş (“Garanti”), which is proportionally consolidated, and its equity-accounting holdings in China CITIC Bank Corporation Limited (“CNCB”) and CITIC International Financial Holding Ltd. (“CIFH”).

The importance of this segment is increasing both in terms of earnings and our balance sheet and, as the rest of the franchises, it has evolved positively and increased the Group’s diversification and growth capacity. The positive contribution of Garanti starting in March 2011 and the increase in earnings from CNCB are worth mentioning in this regard.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2012, 2011 and 2010:

 

     As of December 31,  
     2012      2011      2010  
     (In Millions of Euros)  

Total Assets

     48,282         53,354         45,980   

Loans and advances to customers

     30,228         34,740         23,909   

Of which:

        

Residential mortgages

     4,291         4,025         2,961   

Consumer finance

     4,281         3,421         913   

Loans

     3,069         2,400         903   

Credit cards

     1,212         1,021         10   

Loans to enterprises

     19,804         25,851         11,534   

Loans to public sector

     102         107         113   

Total customer deposits

     16,484         21,142         20,788   

Current and savings accounts

     3,098         3,162         1,358   

Time deposits

     9,576         10,012         2,380   

Other customer funds

     3,810         7,968         17,050   

Off-balance sheet funds

     1,195         1,036         566   

Mutual funds

     587         562         194   

Pension funds

     608         474         372   

Economic capital allocated

     4,607         4,245         2,546   

 

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As of December 31, 2012, the loans and advances to customers was €30,228 million, a 13.0% decrease from the €34,740 million recorded as of December 31, 2011, mainly due to the reduced loan portfolio with wholesale clients, due to the deleveraging process under way in Europe as a result of difficult economic conditions.

As of December 31, 2012 customer deposits were €16,484 million, a 22% decrease from the €21,142 million as of December 31, 2011. While Turkey performed well, wholesale deposits in the Paris, London and Brussels branches fell as a result mainly of the difficult economic conditions in the Eurozone, which have resulted in wholesale financial markets being affected by the high volatility of the risk premiums of certain EU peripheral countries (and, correspondingly, wholesale deposit flight from banks incorporated in such countries, including BBVA) and by the successive downgrades of sovereign ratings, which have also had an impact on the ratings of the financial institutions located in such countries.

The economic capital allocated was €4,607 million as of December 31, 2012, an 8.5% increase from the €4,245 million recorded as of December 31, 2011. This increase was mainly attributable to the increase in credit activity in Turkey and the increase in the value of our stake in CNCB, which increased our equity risk.

Mexico

The Mexico operating segment comprises the banking, pension and insurance businesses conducted in Mexico by the BBVA Bancomer financial group. The business units included in the Mexico area are:

 

   

Retail and Corporate banking, and

 

   

Pensions and Insurance. On January 9, 2013, after having obtained the necessary approvals, we completed the sale of our stake in Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. (“Afore Bancomer”).

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2012, 2011 and 2010:

 

     As of December 31,  
     2012      2011      2010  
     (In Millions of Euros)  

Total Assets

     82,432         72,488         73,321   

Loans and advances to customers

     38,937         34,084         34,754   

Of which:

        

Residential mortgages

     9,399         8,854         9,538   

Consumer finance

     9,675         8,129         7,162   

Loans

     4,311         3,643         2,907   

Credit cards

     5,364         4,486         4,256   

Loans to enterprises

     12,494         11,435         12,372   

Loans to public sector

     3,590         2,871         2,957   

Total customer deposits

     34,071         31,097         32,054   

Current and savings accounts

     23,707         21,129         20,963   

Time deposits

     7,157         6,792         7,770   

Other customer funds

     3,207         3,177         3,322   

Off-balance sheet funds

     40,805         35,317         34,895   

Mutual funds

     17,492         15,612         15,341   

Pension funds

     16,390         13,132         12,781   

Other placements

     6,922         6,572         6,773   

Economic capital allocated

     4,991         4,236         3,290   

 

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As of December 31, 2012, the balance of loans and advances to customers was €38,937 million, a 14.2% increase from the €34,084 million as of December 31, 2011 which was attributable in part to the year-on-year appreciation of the Mexican peso against the euro as of December 31, 2012.

As of December 31, 2012, customer deposits were €34,071 million, a 9.6% increase from the €31,097 million recorded as of December 31, 2011, which was attributable to the year-on-year appreciation of the Mexican peso against the euro as of December 31, 2012 and increased retail network activity. The retail portfolio increased by 9.6% whereas the wholesale portfolio increased by 7.4% year-on-year.

Mutual fund assets under management were €17,492 million as of December 31, 2012, a 12.0% increase from the €15,612 million recorded as of December 31, 2011.

Pension fund assets under management were €16,390 million as of December 31, 2012, a 24.8% increase from the €13,132 million recorded as of December 31, 2011 due to the positive performance of Afore Bancomer. On January 9, 2013, after having obtained the necessary approvals, we completed the sale of our stake in Afore Bancomer. See “—History and Development of the Company—Capital Divestures—2013”.

The economic capital allocated was €4,991 million as of December 31, 2012, a 17.82% increase from the €4,236 million recorded as of December 31, 2011. This increase was mainly attributable to the recalibration of our internal model in mid 2012 based on backtesting results and lending growth.

South America

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

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

 

   

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

 

   

Pension businesses: includes pension businesses in Bolivia, Chile, Colombia, Ecuador and Peru. As of the date of this Annual Report, we have entered into agreements to sell our stakes in the Colombian company BBVA Horizonte Sociedad Administradora de Fondos de Pensiones y Cesantías S.A. (“Horizonte”) and in the Chilean pension fund manager Administradora de Fondos de Pensiones Provida S.A. (“AFP Provida”), respectively.

 

   

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

 

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The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2012, 2011 and 2010:

 

     As of December 31,  
     2012      2011      2010  
     (In Millions of Euros)  

Total Assets

     78,419         63,444         51,671   

Loans and advances to customers

     48,721         40,219         31,512   

Of which:

        

Residential mortgages

     8,653         7,047         5,851   

Consumer finance

     12,888         9,888         6,608   

Loans

     9,564         7,454         5,029   

Credit cards

     3,325         2,434         1,579   

Loans to enterprises

     16,896         17,492         14,569   

Loans to public sector

     623         763         681   

Total customer deposits

     56,937         45,279         35,963   

Current and savings accounts

     34,352         26,131         19,341   

Time deposits

     17,107         15,094         12,958   

Other customer funds

     5,478         4,054         3,664   

Off-balance sheet funds

     57,820         50,855         51,744   

Mutual funds

     3,355         3,037         2,944   

Pension funds

     54,465         47,818         48,800   

Economic capital allocated

     3,275         2,912         2,423   

As of December 31, 2012, the loans and advances to customers were €48,721 million, a 21.1% increase from the €40,219 million recorded as of December 31, 2011. All countries in this operating segment have seen growth, with significant increases in the retail segment (where loans and advances to customers grew by 38.6% year-on-year), consumer loans and credit cards. In Venezuela, loans and advances to customers grew by almost 50% year-on-year principally as a result of increased consumer finance activity.

As of December 31, 2012, customer deposits were €56,937 million, a 25.7% increase from the €45,279 million recorded as of December 31, 2011. In 2012, there has been strong growth in lower-cost transactional items (such as checking and savings accounts), which have increased by 30.6%. In Venezuela, customer deposits grew by over 50% year-on-year.

As of December 31, 2012, off-balance sheet funds were €57,820 million, a 13.7% increase from the €50,855 million recorded as of December 31, 2011 principally due to the increase in assets of our pension funds. As indicated above, as of the date of this Annual Report, we have entered into agreements to sell our stakes in Horizonte and AFP Provida. We expect the sales of Horizonte and AFP Provida to close during the first and second half of 2013, respectively. See “—History and Development of the Company—Capital Divestitures—2013.”

The economic capital allocated was €3,275 million as of December 31, 2012, a 12.5% increase from the €2,912 million recorded as of December 31, 2011. This increase was principally the result of the general and strong lending growth in all the countries in the region and the appreciation of the currencies in the region against the euro.

United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 95% of the area’s balance sheet as of December 31, 2012. Given its weight, most of the comments below refer to BBVA Compass. This operating segment also covers the assets and liabilities of the BBVA office in

 

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New York, which specializes in transactions with large corporations. Until December 2012, this operating segment also encompassed the Group’s business in Puerto Rico. In December 2012, the Group closed the sale of its business in Puerto Rico to Oriental Financial Group Inc. See “—History and Development of the Company—Capital Divestitures—2012.”

The business units included in the United States operating segment are:

 

   

BBVA Compass Banking Group, and

 

   

Other units: Bancomer Transfers Services (“BTS”).

 

     As of December 31,  
     2012      2011      2010  
     (In Millions of Euros)  

Total Assets

     53,850         57,207         59,173   

Loans and advances to customers

     36,892         41,819         41,127   

Of which:

        

Residential Mortgages

     9,107         8,487         6,762   

Consumer Finance

     4,406         5,399         5,551   

Loans

     3,926         4,949         5,151   

Credit cards

     480         450         400   

Loans to enterprises

     19,199         21,450         17,213   

Loans to public sector

     1,961         1,979         1,339   

Total Customer deposits

     37,721         37,137         41,702   

Current and savings accounts

     29,060         27,716         25,216   

Time deposits

     7,885         8,569         9,596   

Other customer funds

     775         852         6,890   

Economic capital allocated

     2,638         3,379         2,827   

As of December 31, 2012, loans and advances to customers were €36,892 million, an 11.8% decrease from the €41,819 million recorded as of December 31, 2011, principally due to the sale of our business in Puerto Rico and, to a lesser extent, due to the fall in real estate construction in the United States. If loans and advances to customers contributed by our Puerto Rico business were disregarded both as of December 31, 2012 and December 31, 2011 in order to ensure like-for-like comparisons, loans and advances to customers would have decreased by 4.9%. In 2012 we continued to aim for the selective growth of lending in BBVA Compass, with a change in the portfolio mix towards items with less cyclical risk such as loans to the commercial and industrial sector (which increased by 24.5% year-on-year) and reducing higher risk portfolios such as construction real estate loans (which decreased by 48.2% year-on-year principally as a result of the sale of certain loan portfolios).

As of December 31, 2012, customer deposits were €37,721 million, a 1.6% increase from €37,137 million as of December 31, 2011. If deposits contributed by our Puerto Rico business were disregarded both as of December 31, 2012 and December 31, 2011 in order to ensure like-for-like comparisons, customer deposits would have increased by 7.2%. In 2012, demand deposits grew by 12.3% and accounted for 29.1% of the customer deposits in BBVA Compass as of December 31, 2012.

The economic capital allocated was €2,638 million as of December 31, 2012, a 21.9% decrease from the €3,379 million recorded as of December 31, 2011, principally due to the sale of our business in Puerto Rico.

 

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Insurance Activity

See Note 18 to our Consolidated Financial Statements for information on our insurance activity.

Monetary Policy

The integration of Spain into the European Monetary Union (“EMU”) on January 1, 1999 implied the yielding of monetary policy sovereignty to the Eurosystem. The “Eurosystem” is composed of the ECB and the national central banks of the 17 member countries that form the EMU.

The Eurosystem determines and executes the policy for the single monetary union of the 17 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 European Union (“EU Treaty”) establishes a series of rules designed to safeguard the independence of the system, in its institutional as well as in its administrative functions.

Supervision and Regulation

The Spanish government traditionally has been closely involved with the Spanish banking system, both as a direct participant through its ownership of ICO and as a regulator retaining an important role in the regulation and supervision of financial institutions.

The Bank of Spain

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

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

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

 

   

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

 

   

conducting currency exchange operations consistent with the provisions of Article 111 of the EU Treaty, and holding and managing the Member States’ official currency reserves;

 

   

promoting the sound working of payment systems in the euro area; and

 

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issuing legal tender banknotes.

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

 

   

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

 

   

supervising the solvency and behavior of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility, in accordance with the provisions in force;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

exercising all other powers attributed to it by legislation.

Subject to the rules and regulations issued by the Ministry of Economy, the Bank of Spain has the following supervisory powers over Spanish banks:

 

   

conducting periodic inspections of Spanish banks to evaluate a bank’s compliance with current regulations including the preparation of financial statements, account structure and credit policies;

 

   

advising a bank’s board of directors and management on its dividend policy;

 

   

undertaking extraordinary inspections of banks; and

 

   

collaborating with other regulatory entities to impose penalties for infringement or violation of applicable regulations.

Deposit Guarantee Fund of Credit Institutions

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

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

The FGD is funded by annual contributions from member banks. The rate of our contributions in 2011 was 0.06% of the year-end amount of bank deposits to which the guarantee extended and 0.06% over the 5% of the securities held on our clients’ behalf. Pursuant to Royal Decree-Law 19/2011, the rate of our contributions is equal to 0.2% of the year-end amount of bank deposits to which the guarantee extends and 0.2% over 5% of the securities held on our clients’ behalf as of December 31.

 

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In addition, pursuant to Royal Decree-Law 771/2011, during 2011 an additional contribution was made in connection with deposits the remuneration of which exceeded the level established by the Bank of Spain in its Circular 3/2011, of June 30. This contribution was repealed in 2012 pursuant to Royal Decree-Law 24/2012, of August 31.

As of December 31, 2011, all of the Spanish banks belonging to the BBVA Group were members of the FGD and thus obligated to make annual contributions to it.

Investment Guarantee Fund

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

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

Liquidity Ratio

In an effort to implement European Union monetary policy, effective January 1, 1999, the ECB and the national central banks of the member states of the EMU adopted a regulation that requires banks to deposit an amount equal to two percent of their qualifying liabilities, as defined by the regulation, with the central bank of their home country. These deposits will earn an interest rate equal to the average interest rate of the European System of Central Banks (“ESCB”). Qualifying liabilities for this purpose include:

 

   

deposits;

 

   

debt securities issued; and

 

   

monetary market instruments.

Furthermore, the liquidity ratio is set at 0% instead of 2% for those qualifying liabilities that have a maturity over two years and are sold under repurchase agreements.

Investment Ratio

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

Fund for Orderly Bank Restructuring

The crisis that has affected the financial markets since 2007 obliged the Spanish authorities to create the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria or “FROB”) by Decree-Law 9/2009, of June 26. Its purpose is to help the restructuring processes undertaken by credit institutions and strengthen their capital positions subject to certain conditions. The FROB will support the restructuring strategy of those institutions that require assistance, in three distinct stages:

 

   

search for a private solution by the credit institution itself;

 

   

adopt measures to tackle any weaknesses that may affect the viability of credit institutions; and

 

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initiate a restructuring process in which the Fund itself has to intervene directly.

The FROB has to act in what is an absolutely exceptional situation that is closely linked to the development of the financial crisis. In order to comply with its objectives, FROB will be funded jointly from the Spanish national budget and the FGD. The FROB will be able to raise funds on securities markets through the issue of debt securities, lending and engaging in any other debt transaction necessary to fulfill its objects.

Capital Requirements

Bank of Spain Circular 3/2008 (“Circular 3/2008”), of May 22, on the calculation and control of minimum capital requirements, regulates the minimum capital requirements for Spanish credit institutions, on an individual and consolidated group basis, and sets forth how to calculate capital meeting such requirements, as well as the various internal capital adequacy assessment processes credit institutions should have in place and the information they should disclose to the market.

Circular 3/2008 is the final implementation, for credit institutions, of the legislation on capital and consolidated supervision of financial institutions, which was contained in Law 36/2007, of November 16, amending Law 13/1985, of May 25, on the investment ratios, capital and reporting requirements of financial intermediaries, and other financial regulations, which also includes Royal Decree 216/2008, of February 15, on the capital of financial institutions. Circular 3/2008 also conforms Spanish legislation to Directive 2006/48/EC of the European Parliament and of the Council, of June 14, 2006, and Directive 2006/49/EC of the European Parliament and of the Council, of June 14, 2006. The minimum capital requirements for credit institutions and their consolidated groups were thoroughly revised in both EC directives based on the Capital Accord adopted by the Basel Committee on Banking Supervision (“Basel II”).

The minimum capital requirements established by Circular 3/2008 are calculated on the basis of the Group’s exposure (i) to credit risk and dilution risk (on the basis of the assets, obligations and contingent exposures and commitments that present these risks, depending on their amounts, characteristics, counterparties, guarantees, etc.); (ii) to counterparty risk and position and settlement risk in the trading book; (iii) to foreign exchange risk (on the basis of the overall net foreign currency position); and (iv) to operational risk. Additionally, the Group is subject to compliance with the risk concentration limits established in Circular 3/2008 and with the requirements related to corporate governance, internal capital adequacy assessment, measurement of interest rate risk and certain additional public disclosure obligations set forth therein. With a view to ensuring compliance with the aforementioned objectives, the Group performs integrated management of these risks, in accordance with its internal policies. See Note 7 to the Consolidated Financial Statements.

As of December 31, 2012, 2011 and 2010, the eligible capital of the Group exceeded the minimum required under the regulations then in force. See Note 33 to the Consolidated Financial Statements.

Under Basel II calculation of the minimum regulatory capital requirements under the standards, referred to as “Pillar 1”, is supplemented with an internal capital adequacy assessment and supervisory review process, referred to as “Pillar 2”. The Group’s internal capital adequacy assessment process is based on the internal model for the quantification of the economic capital required on the basis of the Group’s overall risk profile. Finally, Basel II standards establish, through what is referred to as “Pillar 3”, strict transparency requirements regarding the information on risks to be disclosed to the market.

Circular 3/2008 was modified by Circular 9/2010, of December 22, and Circular 4/2011, of November 30, in order to proceed with the implementation in Spain of the changes to the solvency framework approved at a European level and known as CRD II (Directive 2009/27/EC, of April 7, Directive 2009/89/EC of July 27 and Directive 2009/111/EC, of September 16) and CRD III (Directive 2010/76/EU, of November 24).

The main changes considered in these directives are:

 

   

European harmonization of large exposures limits: a bank will be restricted in lending beyond a certain limit (25% of regulatory capital) to any one party.

 

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Obligation to establish and maintain, for categories of staff whose professional activities have a material impact on the risk profile of a bank, remuneration policies and practices that are consistent with effective risk management.

 

   

Improved quality of banks’ capital: additional loss absorbency criteria for hybrid capital instruments have been introduced, anticipating Basel III recommendations.

 

   

Improved liquidity risk management: for banking groups that operate in multiple countries, their liquidity risk management – i.e., how they fund their operations on a day-to-day basis – will also be discussed and coordinated within ‘colleges of supervisors’.

 

   

Improved risk management for securitized products: rules on securitized debt – the repayment of which depends on the performance of a dedicated pool of loans – have been tightened. Firms that re-package loans into tradable securities will be required to retain some risk exposure to these securities, while firms that invest in the securities will be allowed to make their decisions only after conducting comprehensive due diligence. If they fail to do so, they will be subject to capital penalties.

 

   

Strengthened capital requirements have been introduced to cover risks in the trading book and related to re-securitizations.

As part of a wider plan of the Spanish Government for the strengthening of the financial sector, the Royal Decree-Law 2/2011, of February 18 (“RD-L 2/2011”), established new stricter minimum capital requirements for Spanish credit institutions, with a new capital requirement (“capital principal”) for all credit institutions of a minimum of 8%. This ratio will be 10% for those institutions that are not listed on an stock exchange, which have a small presence of private investors, and are dependent upon wholesale funding markets for over 20% of their assets, since they have more limited access to the capital markets. Entities with capital shortages were forced to implement a strategy for closing any detected capital gap in 2011, with the FROB acting as a backstop, in the event of a failure to cover the capital needs through the market.

The entry into force of RD-L 2/2011 opened up a new stage in the process of restructuring and strengthening of the Spanish savings banks. The focus was on recapitalizing institutions that need more capital and encouraging savings banks to merge or to transfer their financial activity to a bank to ease their access to capital markets and wholesale funding. These restructuring and recapitalization processes should ease compliance with Basel III, even if some differences exist between the RD-L 2/2011 and the Basel III capital standards.

RD-L 2/2011’s “capital principal” is largely composed of the same items as those considered in the Basel III accord, that is, capital instruments, share premiums, reserves and minority interests. In addition, losses, intangibles and negative value adjustments are deducted in both definitions. The differences between the definitions set forth in RD-L 2/2011 and Basel III relate to the treatment of some deductions, such as investments in financial institutions.

As shown below, we fulfilled the minimum capital requirements as required by RD-L 2/2011 as of December 31, 2012 and December 31, 2011:

 

     Basel II
Capital Ratio
    RD-L 2/2011
“Capital Principal” ratio
 

Minimum required

     8     8

December 2012

     13.0     10.5

December 2011

     12.9     9.7

Our estimated capital ratios and its related components are non-GAAP financial measures. We believe these metrics provide useful information to investors and others by measuring our progress against regulatory capital standards. For additional information on how these ratios were calculated, please see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital.”

 

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Capital Management

Basel Capital Accord—Basel II—Economic Capital

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

Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and Bank of Spain criteria. See Note 33 to the Consolidated Financial Statements.

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

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

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

The Group allocates economic capital (“CER”) commensurate with the risks incurred by each business. This is based on the concept of unexpected loss at a certain level of statistical confidence, depending on the Group’s targets in terms of capital adequacy. These targets are applied at two levels: the first is core equity, which determines the allocated capital. The Group uses this amount as a basis for calculating the return generated on the equity (“ROE”) in each business. The second level is total capital, which determines the additional allocation in terms of subordinated debt and preference shares. The CER calculation combines lending risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk and fixed asset and technical risks in the case of insurance companies.

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

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

Concentration of Risk

The Bank of Spain regulates the concentration of risk. Since January 1, 1999, any exposure to a person or group exceeding 10% of a group’s or bank’s regulatory capital has been deemed a concentration. The total amount of exposure represented by all of such concentrations may not exceed 800% of regulatory capital. Exposure to a single person or group may not exceed 25% (20% in the case of non-consolidated companies of the economic group) of a bank’s or group’s regulatory 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”.

Allowance for Loan Losses

For a discussion of allowances for loan losses and country risk, see Note 2.2.1 to the Consolidated Financial Statements.

Regulation of the Disclosure of Fees and Interest Rates

Interest rates on most kinds of loans and deposits are not subject to a maximum limit. Banks must publish their preferential rates, rates applied on overdrafts, and fees and commissions charged in connection with banking transactions. Banking clients must be provided with written disclosure adequate to permit customers to ascertain transaction costs. The foregoing regulations are enforced by the Bank of Spain in response to bank client complaints.

 

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

Employee Pension Plans

Under the relevant collective labor agreements, BBVA and some of its subsidiaries provide supplemental pension payments to certain active and retired employees and their beneficiaries. These payments supplement social security benefits from the Spanish state. See Note 2.2.12 and Note 26 to the Consolidated Financial Statements.

Dividends

If a bank meets the Bank of Spain’s minimum capital requirements described above under “—Capital Requirements”, it may dedicate all of its net profits to the payment of dividends, although, in practice, banks consult with the Bank of Spain before declaring a dividend. Compliance with such requirements notwithstanding, the Bank of Spain may advise a bank against the payment of dividends on grounds of prudence. In no event may dividends be paid from non-distributable reserves. Banks which fail to comply with the capital adequacy ratio by more than 20% are required to devote all of their net profits to increasing their capital ratios. Banks which fail to meet the required ratio by 20% or less must obtain prior approval of the Bank of Spain to distribute any dividends and must devote at least 50% of net profits to increasing their capital ratios. In addition, banks, and their directors and executive officers that do not comply with the liquidity and investment ratios and capital adequacy requirements may be subject to fines or other sanctions. Compliance with the Bank of Spain’s capital requirements is determined on both a consolidated and individual basis. Our Spanish subsidiaries are in compliance with these capital adequacy requirements on both a consolidated and individual basis. If a bank has no net profits, the board of directors may propose at the general meeting of the stockholders that a dividend be declared out of retained earnings.

The Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of profit attributable to parent company from the beginning of the corresponding fiscal year. No interim dividend may be declared when a bank does not meet the minimum capital requirements and, according to the recommendations of the Bank of Spain, interim dividends may not be declared until the Bank of Spain has sufficient knowledge with respect to the year’s profits. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain had asked that banks consult with it on a voluntary basis before declaring interim dividends. It should be noted that the Bank of Spain recommended in 2008 to Spanish banks general moderation on the distribution of dividends, to increase their voluntary reserves in order to strengthen their financial situation and to distribute any dividends in treasury stock.

Our bylaws allow for dividends to be paid in cash or in kind as determined by shareholder resolution.

Scrip Dividend

As in 2011, during 2012, a scrip dividend scheme called “Dividendo Opción” was successfully implemented as approved by the annual general meeting of shareholders held on March 16, 2012. In line with the 2012 “Dividendo Opción” scheme, the BBVA annual general meeting of shareholders held on March 15, 2013, passed two resolutions adopting two different free-of-charge capital increases for the implementation of a new “Dividendo Opción” scheme for this year.

Upon the execution of each such free-of-charge capital increase, BBVA shareholders will have the option to receive all or part of their remuneration in newly issued free-of-charge shares or in cash. For additional information on the “Dividendo Opción” scheme, including its tax implications, see “Item 10. Additional Information—Taxation—Spanish Tax Considerations—Taxation of Dividends—Scrip Dividend”.

The “Dividendo Opción” is implemented as an alternative remuneration scheme for BBVA shareholders with the aim to provide BBVA shareholders with a flexible option to receive newly issued free-of-charge shares of the Bank, without thereby altering BBVA’s cash remuneration policy, in line with the current trend that is being put into practice by other entities in the domestic and international markets.

 

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Shareholders may have the “Dividendo Opción” available to them on two different dates, coinciding with the dates on which dividends have been historically paid out. However, it should be noted that each capital increase is independent of the other, so that one may be executed on a different date than the other and either one, or both of them, may even not be implemented.

Limitations on Types of Business

Spanish banks are subject to certain limitations on the types of businesses in which they may engage directly, but they are subject to few limitations on the types of businesses in which they may engage indirectly.

Mortgage Legislation

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

Royal Decree 716/2009, of April 24, implements several aspects of Law 2/1981, of March 25. The most significant aspects implemented by Royal Decree 716/2009 are, among others, (i) the modification on the loan-to-value ratio requirement intending to improve the quality of Spanish mortgage-backed securities; (ii) the elimination of many of the administrative requirements for the issuance of covered bonds and mortgage bonds; and (iii) the implementation of a special accounting record of the loans and credit facilities used to back issuances of covered bonds and mortgage-backed bonds.

Increasing social pressure for the reform of mortgage legislation in Spain has resulted in recent changes to such legislation (which are described below) and may result in further changes to such legislation in the future.

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

Such measures include the following:

 

   

the moderation of interest rates charged on mortgage arrears;

 

   

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

 

   

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

 

   

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

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

Mutual Fund Regulation

Mutual funds in Spain are regulated by the Ministry of the Economy (Dirección General del Tesoro y Política Financiera del Ministerio de Economía) and by the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores or “CNMV”). All mutual funds and mutual fund management companies are required to be registered with the CNMV. Spanish mutual funds may be subject to investment limits with respect to single sectors or companies and overall portfolio diversification minimums. In addition, periodic reports including a review of the fund’s performance and any material events affecting the fund are required to be distributed to the fund’s investors and filed with the CNMV.

 

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Spanish Corporate Enterprises Act

The consolidated text of the Corporate Enterprises Act adopted under Legislative Royal Decree 1/2010, of July 2, repealed the former Companies Act, adopted under Legislative Royal Decree 1564/1989, of December 22. This royal legislative decree has consolidated the legislation for joint stock companies (“sociedades anónimas”) and limited liability companies (“sociedades de responsabilidad limitada”) in a single text, bringing together the contents of the two aforementioned acts, as well as a part of the Securities Exchange Act. The consolidated text also includes the articles of the Commercial Code that address limited partnerships, a derivative corporate device that is barely used in practice. Law 25/2011, of August 1, partially amended the Corporate Enterprises Act and incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies.

Spanish Auditing Law

Law 12/2010, of June 30, amended Law 19/1988, of July 12, on Accounts Audit, Law 24/1988, of July 28, on Securities Exchanges and the consolidated text of the former Companies Act adopted by Legislative Royal Decree 1564/1989, of December 22 (currently, the Corporate Enterprises Act), for its adaptation to EU regulations. This law transposed Directive EU/2006/43 which regulates aspects, among others, related to: authorization and registry of auditors and auditing companies, confidentiality and professional secrecy which the auditors may observe, rules on independency and liability as well as certain rules on the composition and functions of the auditing committee. The Royal Decree 1/2011, of July 1, approved the consolidated text of the Accounts Audit Law 12/2010 and repealed Law 19/1988, of July 12.

Law 9/2012 of November 14, on Restructuring and Resolution of Credit Entities

Law 9/2012, of November 14, 2012, on restructuring and resolution of credit entities, sets up a comprehensive framework to deal with financial institutions in stressed situations. Depending on the financial entity’s situation, three types of measures can be applied: early intervention (for mild difficulties), restructuring measures (for temporary troubles, able to be coped with by means of public financial support) and orderly resolution (for non-viable institutions). Law 9/2012 also grants the Fund for Orderly Bank Restructuring (FROB) the power to implement these measures and provides for the creation of an Asset Management Company which will allow the removal from the balance sheet of state aided banks of certain problematic assets in order to ease their viability. The FROB is entitled to commit the entities receiving state aids to transfer those problematic assets.

Law 9/2012 also establishes the burden sharing regime between the public sector and the private stakeholders, defining the mechanism by means of which the owners of hybrid capital instruments could be forced to bear part of the losses of a troubled institution. This burden sharing could be done through exchanges of hybrid capital instruments into capital instruments, direct or conditioned cash repurchases, or reduction and anticipated amortization of the nominal value of the relevant instruments.

U.S. Regulation

Banking Regulation

BBVA is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As such, BBVA is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Among other things, the Group’s direct and indirect activities and investments in the United States are limited to banking activities and certain non-banking activities that are “closely related to banking,” as determined by the Federal Reserve, and certain other activities permitted under the BHC Act. BBVA also is required to obtain the prior approval of the Federal Reserve before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting stock of any U.S. bank or bank holding company.

A bank holding company is required to act as a source of financial strength for its U.S. bank subsidiaries. Among other things, this source of strength obligation may result in a requirement for BBVA, as controlling shareholder, to inject capital into its U.S. bank subsidiary.

The Group’s U.S. bank subsidiary and BBVA’s U.S. branch are also subject to supervision and regulation by a variety of other U.S. regulatory agencies. In addition to supervision by the Federal Reserve, BBVA’s New York branch is licensed and supervised by the New York State Department of Financial Services. Each of BBVA USA Bancshares, Inc., a direct subsidiary of BBVA, and its wholly-owned subsidiary, BBVA Compass Bancshares, Inc. (“BBVA Compass”), an indirect subsidiary of BBVA, is considered a bank holding company within the meaning of the BHC Act and is subject to supervision and regulation by the Federal Reserve. Compass Bank is an Alabama state-chartered bank, is a member of the Federal Reserve System, and has branches in Alabama, Arizona, California,

 

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

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

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

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

Regulation of Other U.S. Entities

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

The activities of the Group’s U.S. investment adviser affiliates are regulated and supervised by the SEC.

In addition, the Group’s U.S. insurance agency affiliate is subject to regulation and supervision by various U.S. state insurance regulatory authorities.

Dodd-Frank Act

In July 2010, the United States enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which provides a broad framework for significant regulatory changes that extends to almost every area of U.S. financial regulation. The Dodd-Frank Act addresses, among other issues, systemic risk oversight, bank capital standards, the resolution of failing systemically significant U.S. financial institutions, over-the-counter derivatives, restrictions on the ability of banking entities to engage in proprietary trading activities and invest in hedge funds and private equity funds (known as the “Volcker Rule”), consumer and investor protection, hedge fund registration, municipal advisor registration and regulation, securitization, investment advisor registration and regulation and the role of credit-rating agencies. Compass Bank has registered with the SEC and the Municipal Securities Rulemaking Board as a municipal advisor pursuant to the Dodd-Frank Act’s municipal advisor registration requirements.

 

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U.S. regulators are implementing many provisions of the Dodd-Frank Act through detailed rulemaking, and the implementation process will likely continue for several more years. Once fully implemented, the Dodd-Frank Act and related rules are expected to result in additional costs and impose certain limitations and restrictions affecting the conduct of our businesses, although uncertainty remains about the final details, impact and timing of many provisions.

Among other changes, the Dodd-Frank Act requires that the Federal banking agencies, including the Federal Reserve, establish minimum leverage and risk-based capital requirements applicable to insured depository institutions, bank and thrift holding companies and systemically important non-bank financial companies. These minimum requirements must be not less than the generally applicable risk-based capital and leverage capital requirements, and not quantitatively lower than the requirements in effect for insured depository institutions as of the date of enactment of the Dodd-Frank Act. In response to these requirements, the Federal banking agencies have adopted a rule effectively establishing a permanent capital floor for covered institutions equal to the risk-based capital requirements under the banking agencies’ Basel I capital adequacy guidelines. In June 2012, the Federal banking agencies proposed a broad revision of the regulatory capital rules applicable to U.S. banks and bank holding companies. The new rules, which are intended to implement the Basel III capital standards and comply with the Dodd-Frank Act’s minimum risk-based capital requirements, will be phased in over a multi-year period and, once fully implemented, will generally require higher amounts of capital to be held against risk weighted assets. In November 2012, the implementation of these rules, which was originally planned to begin in January 2013, was delayed, and the Federal banking agencies are continuing their work towards developing final versions of the rules.

The Dodd-Frank Act also provides Federal banking agencies with tools to impose greater capital, leverage and liquidity requirements and other enhanced prudential standards, particularly for financial institutions that pose significant systemic risk and bank holding companies with greater than $50 billion in assets. The Federal Reserve has proposed two different sets of rules pursuant to its enhanced prudential standards authority under the Dodd-Frank Act. The first set of rules is applicable to U.S.-based bank holding companies with consolidated assets in excess of $50 billion, and it provides for additional capital and leverage requirements, additional liquidity requirements, limits on single counterparty exposure, risk management and risk committee requirements, more stringent stress testing requirements, and various mandatory remediation actions under certain circumstances. The second set of rules, proposed in December 2012, is directly applicable to foreign bank holding companies such as BBVA.

Under the prudential standards rules proposed in December 2012, most large foreign bank holding companies would be required to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would hold all of a foreign bank holding company’s U.S. bank and nonbank subsidiaries, although a foreign bank holding company subject to the IHC requirement could request permission from the Federal Reserve to establish multiple IHCs or use an alternative organizational structure, and the proposed rules permit the Federal Reserve to apply the IHC requirements in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single foreign bank holding company. An IHC would be subject to U.S. capital, liquidity and other enhanced prudential standards on a consolidated basis, and the Federal Reserve would have the authority to examine any IHC and any subsidiary of an IHC. Although U.S. branches and agencies of foreign banks would not be required to be held beneath an IHC, branches and agencies would be subject to liquidity, single counterparty credit limits, and, in certain circumstances, asset maintenance requirements. The rules include a proposed effective date of July 1, 2015. The Federal Reserve is currently accepting comments on the proposed rules.

Under capital plan and stress test rules adopted by the Federal Reserve, BBVA USA Bancshares, Inc. is required to conduct periodic stress tests and submit an annual capital plan to the Federal Reserve for review, which must, among other things, include a description of planned capital actions and demonstrate the company’s ability to maintain minimum capital above existing minimum capital ratios and above a Tier 1 common equity-to-total risk-weighted asset ratio of 5% under both expected and stressed conditions over a minimum nine-quarter planning horizon. BBVA USA Bancshares, Inc. submitted its most recent annual capital plan on January 7, 2013.

The Dodd-Frank Act’s Volcker Rule also limits the ability of banking entities, except solely outside the United States in the case of non-U.S. banking entities, to sponsor or invest in private equity or hedge funds and to engage in certain types of proprietary trading unrelated to serving clients. U.S. regulators have proposed rules implementing the statute, but final rules have not yet been issued. The Dodd-Frank Act also changes the FDIC deposit insurance

 

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assessment framework (the amounts paid by FDIC-insured institutions into the deposit insurance fund of the FDIC), primarily by basing assessments on an FDIC-insured institution’s total assets less tangible equity rather than on U.S. domestic deposits, which is expected to shift a greater portion of the aggregate assessments to large banks (such as Compass Bank).

Under the so-called swap “push-out” provisions of the Dodd-Frank Act, the derivatives activities of U.S. banks (such as Compass Bank) and U.S. branch offices of foreign banks (such as BBVA’s New York branch) will be restricted, necessitating changes to how we conduct our derivatives activities. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants will be required to register with the SEC, the U.S. Commodity Futures Trading Commission, or both, and will become subject to additional requirements relating to capital, margin, business conduct, and recordkeeping, among others.

There are various qualitative and quantitative restrictions on the extent to which BBVA and its non-bank subsidiaries can borrow or otherwise obtain credit from their U.S. banking affiliates or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities, must be secured by designated amounts of specified collateral and are subject to quantitative limitations. These restrictions also apply to certain transactions of our New York Branch with our U.S. broker-dealer affiliates and certain of our other affiliates. Since July 2012, the Dodd-Frank Act has broadened these restrictions to subject credit exposure arising from derivative transactions, securities borrowing and lending transactions, as well as repurchase/reverse repurchase agreements to the above-mentioned collateral and quantitative limitations.

New consumer protection regulations that may be adopted by the Consumer Financial Protection Bureau, established under the Dodd-Frank Act, could affect the nature of the activities which a bank with over $10 billion in assets (including Compass Bank) may conduct, and may impose restrictions and limitations on the conduct of such activities.

Furthermore, the Dodd-Frank Act requires the SEC to cause issuers with listed securities, which may include foreign private issuers such as BBVA, to establish a “clawback” policy to recoup previously awarded employee compensation in the event of an accounting restatement. The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions in the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

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

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

The following activities are set forth below as required by Section 13(r) of the Exchange Act. These activities have also been reported to the relevant Spanish authorities where required.

Legacy contractual obligations related to counter indemnities. Before 2007, we issued certain counter indemnities to our non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, four of which remained outstanding as of January 1, 2012 (three as of December 31, 2012). Estimated gross revenue for 2012 from these counter indemnities, which includes fees and/or commissions, did not exceed €9,000 and was entirely derived from payments made by our non-Iranian customers in Europe. We do not allocate direct costs to fees and commissions and therefore have not disclosed a separate profits measure. In addition, in accordance with Council Regulation (EU) No 267/2012 of March 23, payments of any amounts due to Bank Melli under these counter indemnities have been blocked. We are committed to terminating these business relationships as soon as contractually possible and we do not intend to enter into new business relationships involving Bank Melli.

 

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Letters of credit. During 2012, we had credit exposure to Bank Mellat, Bank Tejarat and Bank Sepah arising from a total of four letters of credit issued by such Iranian banks (one by Bank Mellat, two by Bank Tejarat and one by Bank Sepah) to our non-Iranian clients in Europe. These letters of credit, all of which were granted before 2004, were used to secure our loans to our clients in order to finance certain Iran-related activities. These loans were supported by the Spanish export credit agency (CESCE). Three of these loans related to our clients’ exportation of goods to Iran (consisting of medical supplies, electrical equipment, air conditioning equipment and port infrastructures). The remaining loan, which matured in 2012, was granted to an Spanish customer in connection with its provision of engineering services and supply of equipment for the construction of a petrochemical plant in Iran.

As of December 31, 2012, only one of the letters of credit referred to above (issued by Bank Sepah) remained outstanding. Estimated gross revenue for 2012 from the loans underlying these letters of credit, which includes fees and/or commissions, did not exceed € 250,000. We do not allocate direct costs to fees and commissions and therefore have not disclosed a separate profits measure. Payments of any amounts due by Bank Mellat, Bank Tejarat or Bank Sepah in 2012 under these letters of credit were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. We are committed to terminating the outstanding business relationship with Bank Sepah as soon as contractually possible and we do not intend to enter into new business relationships involving Bank Mellat, Bank Tejarat or Bank Sepah.

Bank Accounts. In 2012, we maintained one account (which was closed in March 2013) for a company that produces farm vehicles and tractors. and a number of accounts for certain of its employees (some of whom have the Iranian nationality). We believe that 51% of the share capital of such company is controlled by an Iranian company in which the Iranian Government might have an interest. Estimated gross revenue for 2012 from these accounts, which includes fees and/or commissions, did not exceed €5,000. We do not allocate direct costs to fees and commissions and therefore have not disclosed a separate profits measure. We are committed to terminating our business relationships with the employees of this company as soon as contractually possible and we do not intend to enter into new business relationships involving this company or its employees.

Iranian embassy-related activity. We maintain bank accounts in Spain for three employees of the Iranian embassy in Spain. In addition, we maintain bank accounts in Venezuela for seven employees of the Iranian embassy in Venezuela and have provided one employee with an insurance against theft at ATMs which will expire on November 6, 2013. Estimated gross revenue for 2012 from embassy-related activity, which includes fees and/or commissions, did not exceed €2,000. We do not allocate direct costs to fees and commissions and therefore have not disclosed a separate profits measure. We are committed to terminating these business relationships as soon as legally possible.

Activity related to U.S. Executive Order 13,224. Until January 2, 2012 we maintained two deposit accounts and three credit cards in Colombia for one individual designated by the U.S. under Executive Order 13,224 on December 29, 2011. On January 2, 2012 such deposit accounts and credit cards were closed and cancelled, respectively. Estimated gross revenue in 2012 for the activity referred to above, which includes fees and/or commissions, was nil.

Correspondent relationship with the Central Bank of Iran. Until September 11, 2012, we maintained a correspondent relationship with the Central Bank of Iran in connection with non-U.S. dollar payments made in connection with certain transactions described above. There were no transactions with the Central Bank of Iran during 2012. Accordingly, there was no related gross revenue or net profits recognized in 2012. On September 11, 2012, we terminated our correspondent relationship with the Central Bank of Iran.

 

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C. Organizational Structure

As of December 31, 2012, the BBVA Group was made up of 320 fully consolidated and 29 proportionately consolidated companies, as well as 102 companies consolidated using the equity method.

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

Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2012.

 

     Country of
Incorporation
   Activity    BBVA
Voting
Power
     BBVA
Ownership
     Total Assets  
               (in Percentages)      (In Millions
of Euros)
 

BBVA BANCOMER, S.A. DE C.V.

   Mexico    Bank      100.00         99.97         75,845   

COMPASS BANK

   United States    Bank      100.00         100.00         56,622   

UNNIM BANC, S.A.

   Spain    Bank      100.00         100.00         28,044   

BANCO PROVINCIAL S.A. – BANCO UNIVERSAL

   Venezuela    Bank      55.60         55.60         19,977   

BANCO CONTINENTAL, S.A.

   Peru    Bank      46.12         46.12         14,762   

BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.

   Chile    Bank      68.18         68.18         14,742   

BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS

   Spain    Insurance      99.95         99.95         14,117   

BBVA COLOMBIA, S.A.

   Colombia    Bank      95.43         95.43         13,099   

BBVA BANCO FRANCES, S.A.

   Argentina    Bank      75.99         75.99         6,816   

BANCO BILBAO VIZCAYA ARGENTARIA (PORTUGAL), S.A.

   Portugal    Bank      100.00         100.00         6,203   

PENSIONES BANCOMER, S.A. DE C.V.

   Mexico    Insurance      100.00         100.00         3,276   

SEGUROS BANCOMER, S.A. DE C.V.

   Mexico    Insurance      100.00         99.98         2,969   

BANCO BILBAO VIZCAYA ARGENTARIA (PANAMA), S.A.

   Panama    Bank      98.92         98.92         1,609   

BBVA SUIZA, S.A. (BBVA SWITZERLAND)

   Switzerland    Bank      100.00         100.00         1,355   

UNO-E BANK, S.A.

   Spain    Bank      100.00         100.00         1,312   

BBVA PARAGUAY, S.A.

   Paraguay    Bank      100.00         100.00         1,252   

D. Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,518 branch offices in Spain and, principally through our various affiliates, 4,460 branch offices abroad as of December 31, 2012. As of December 31, 2012, approximately 84% of our branches in Spain and 54% of our branches abroad were rented from third parties pursuant to short-term leases that may be renewed by mutual agreement.

BBVA, through a real estate company of the Group, is constructing its new corporate headquarters at a development area in the north of Madrid (Spain). As of December 31, 2012, the accumulated investment for this project amounted to € 612 million.

E. Selected Statistical Information

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

 

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Average Balances and Rates

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

 

     Average Balance Sheet—Assets and Interest from Earning Assets  
     Year Ended December 31, 2012     Year Ended December 31, 2011     Year Ended December 31, 2010  
     Average
Balance
     Interest      Average
Yield(1)
    Average
Balance
     Interest      Average
Yield(1)
    Average
Balance
     Interest      Average
Yield(1)
 
     (In Millions of Euros, Except Percentages)  

Assets

                        

Cash and balances with central banks

     26,148         259         0.99     21,245         250         1.18     21,342         239         1.12

Debt securities, equity instruments and derivatives

     167,080         4,793         2.87     141,780         4,238         2.99     145,993         3,939         2.70

Loans and receivables

     385,215         21,008         5.45     368,312         19,485         5.29     358,582         16,797         4.68

Loans and advances to credit institutions

     26,500         475         1.79     26,390         632         2.39     25,561         497         1.95

Loans and advances to customers

     358,716         20,533         5.72     341,922         18,846         5.51     333,023         16,296         4.89

In Euros(2)

     217,378         7,267         3.34     219,887         7,479         3.40     219,857         7,023         3.19

In other currencies(3)

     141,337         13,266         9.39     122,034         11,367         9.31     113,167         9,273         8.19

Other financial income

     —           —           —          —           —           —          —           —           —     

Non-earning assets

     45,470         202         0.44     37,241         214         0.57     32,895         158         0.48
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total average assets

     623,912         26,263         4.21     568,579         24,180         4.25     558,814         21,130         3.78
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Rates have been presented on a non-taxable equivalent basis.
(2) Amounts reflected in euro correspond to predominantly domestic activities.
(3) Amounts reflected in other currencies correspond to predominantly foreign activities.

 

     Average Balance Sheet—Liabilities and Interest Paid on Interest Bearing Liabilities  
     Year Ended December 31, 2012     Year Ended December 31, 2011     Year Ended December 31, 2010  
     Average
Balance
     Interest      Average
Yield(1)
    Average
Balance
     Interest      Average
Yield(1)
    Average
Balance
     Interest      Average
Yield(1)
 
     (In Millions of Euros, Except Percentages)  

Liabilities

                        

Deposits from central banks and credit institutions

     107,917         2,307         2.14     77,382         2,037         2.63     80,177         1,515         1.89

Customer deposits

     283,211         5,207         1.84     276,683         5,644         2.04     259,330         3,551         1.37

In Euros(2)

     146,833         1,963         1.34     153,514         2,419         1.58     121,956         1,246         1.02

In other currencies(3)

     136,377         3,244         2.38     123,169         3,225         2.62     137,374         2,304         1.68

Debt certificates and subordinated liabilities

     104,117         2,818         2.71     109,860         2,613         2.38     119,684         2,126         1.95

Other financial costs

     —           —           —          —           —           —          —           —           —     

Non-interest-bearing liabilities

     85,834         808         0.94     65,980         734         1.11     66,541         622         0.94

Stockholders’ equity

     42,833         —           —          38,674         —           —          33,079         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total average liabilities

     623,912         11,140         1.79     568,579         11,028         1.94     558,807         7,814         1.40
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Rates have been presented on a non-taxable equivalent basis.
(2) Amounts reflected in euro correspond to predominantly domestic activities.
(3) Amounts reflected in other currencies correspond to predominantly foreign activities.

 

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Changes in Net Interest Income—Volume and Rate Analysis

The following table allocates changes in our net interest income between changes in volume and changes in rate for 2012 compared to 2011, and 2011 compared to 2010. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following table are interest payments on loans which are made in a period other than the period during which they are due. Loan fees were included in the computation of interest income.

 

     2012/2011  
     Increase (Decrease) Due to Changes in  
     Volume(1)     Rate(1)(2)     Net Change  
     (In Millions of Euros)  

Interest income

      

Cash and balances with central banks

     58        (48     9   

Securities portfolio and derivatives

     756        (202     555   

Loans and advances to credit institutions

     3        (159     (157

Loans and advances to customers

     926        762        1,687   

In Euros

     (85     (126     (212

In other currencies

     1,798        101        1,899   

Other assets

     47        (59     (12
  

 

 

   

 

 

   

 

 

 

Total income

     2,353        (270     2,083   
  

 

 

   

 

 

   

 

 

 

Interest expense

      

Deposits from central banks and credit institutions

     804        (534     270   

Customer deposits

     133        (569     (436

In Euros

     (105     (351     (456

In other currencies

     346        (326     20   

Debt certificates and subordinated liabilities

     (137     342        206   

Other liabilities

     221        (147     73   
  

 

 

   

 

 

   

 

 

 

Total expense

     1,073        (960     113   
  

 

 

   

 

 

   

 

 

 

Net interest income

     1,280        690        1,970   
  

 

 

   

 

 

   

 

 

 

 

(1) Variances caused by changes in both volume and rate have been allocated proportionally to volume and rate.
(2) Rates have been presented on a non-taxable equivalent basis.

 

     2011/2010  
     Increase (Decrease) Due to Changes in  
     Volume(1)     Rate(1)(2)     Net Change  
     (In Millions of Euros)  

Interest income

      

Cash and balances with central banks

     (1     12        11   

Securities portfolio and derivatives

     (114     413        299   

Loans and advances to credit institutions

     16        118        135   

Loans and advances to customers

     435        2,114        2,549   

In Euros

     1        455        456   

In other currencies

     727        1,367        2,094   

Other assets

     21        35        56   
  

 

 

   

 

 

   

 

 

 

Total income

     369        2,681        3,050   
  

 

 

   

 

 

   

 

 

 

Interest expense

      

Deposits from central banks and credit institutions

     (53     575        522   

Customer deposits

     238        1,855        2,093   

In Euros

     323        850        1,173   

In other currencies

     (238     1,159        920   

Debt certificates and subordinated liabilities

     (175     661        487   

Other liabilities

     (5     117        112   
  

 

 

   

 

 

   

 

 

 

Total expense

     137        3,077        3,214   
  

 

 

   

 

 

   

 

 

 

Net interest income

     232        (396     (164
  

 

 

   

 

 

   

 

 

 

 

(1) Variances caused by changes in both volume and rate have been allocated proportionally to volume and rate.
(2) Rates have been presented on a non-taxable equivalent basis.

 

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Interest Earning Assets—Margin and Spread

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

 

     December 31,  
     2012     2011     2010  
     (In Millions of Euro, except Percentages)  

Average interest earning assets

     578,443        531,337        525,919   

Gross yield(1)

     4.5     4.6     4.0

Net yield(2)

     4.2     4.3     3.8

Net interest margin(3)

     2.6     2.5     2.5

Average effective rate paid on all interest-bearing liabilities

     2.2     2.4     1.7

Spread(4)

     2.3     2.2     2.3

 

(1) Gross yield represents total interest income divided by average interest earning assets.
(2) Net yield represents total interest income divided by total average assets.
(3) Net interest margin represents net interest income as percentage of average interest earning assets.
(4) Spread is the difference between gross yield and the average cost of interest-bearing liabilities.

ASSETS

Interest-Bearing Deposits in Other Banks

As of December 31, 2012, interbank deposits represented 3.81% of our assets. Of such interbank deposits, 34.63% were held outside of Spain and 65.37% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. Such deposits, however, are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.

Securities Portfolio

As of December 31, 2012, our securities were carried on our consolidated balance sheet at a carrying amount of €112,894 million, representing 17.7% of our assets. €36,048 million, or 31.9%, of our securities consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2012 on investment securities that BBVA held was 4.3%, compared to an average yield of approximately 5.5% earned on loans and receivables during 2012. The market or appraised value of our total securities portfolio as of December 31, 2012, was €112,592 million. See Notes 10, 12 and 14 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 17 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.

 

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The following tables analyze the carrying amount and market value of debt securities as of December 31, 2012, December 31, 2011 and December 31, 2010, respectively. Trading portfolio is not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.

 

     As of December 31, 2012  
     Amortized
cost
     Fair
Value(1)
     Unrealized
Gains
     Unrealized
Losses
 
     (In Millions of Euros)  

DEBT SECURITIES—

           

AVAILABLE FOR SALE PORTFOLIO

           

Domestic

     35,043         34,451         388         (980
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agency debt securities

     25,439         24,822         243         (860

Other debt securities

     9,604         9,629         145         (120

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     7,888         7,900         71         (59

Issued by other institutions

     1,716         1,729         74         (61
  

 

 

    

 

 

    

 

 

    

 

 

 

International

     32,012         33,092         1,732         (652
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     8,251         9,214         964         (1

Mexican Government and other government agency debt securities

     7,251         8,086         835         —     

Other debt securities

     1,000         1,128         129         (1

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     334         389         56         (1

Issued by other institutions

     666         739         73         —     

United States

     6,944         7,045         189         (88

U.S. Treasury and other U.S. government agencies debt securities

     228         228         1         (1

States and political subdivisions

     486         497         20         (9

Other debt securities

     6,230         6,320         168         (78

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     151         155         11         (7

Issued by other institutions

     6,079         6,165         157         (71

Other countries

     16,817         16,833         579         (563

Securities of other foreign Governments

     9,285         9,229         321         (377

Other debt securities

     7,532         7,604         258         (186

Issued by central banks

     1,161         1,162         2         (1

Issued by credit institutions

     4,663         4,772         210         (101

Issued by other institutions

     1,708         1,670         46         (84
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     67,055         67,543         2,120         (1,632
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           

Domestic

     7,278         6,849         4         (433
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agency debt securities

     6,469         6,065         2         (406

Other debt securities

     809         784         2         (27

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     250         249         2         (3

Issued by other institutions

     559         535         —           (24
  

 

 

    

 

 

    

 

 

    

 

 

 

International

     2,884         3,011         127         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities of other foreign Governments

     2,741         2,862         121         —     

Other debt securities

     143         149         6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY PORTFOLIO

     10,162         9,860         131         (433
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

     77,217         77,403         2,251         (2,065
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

50


Table of Contents
     As of December 31, 2011  
     Amortized
cost
     Fair
Value(1)
     Unrealized
Gains
     Unrealized
Losses
 
     (In Millions of Euros)  

DEBT SECURITIES—

           

AVAILABLE FOR SALE PORTFOLIO

           

Domestic

     25,023         23,522         183         (1,684

Spanish Government and other government agency debt securities

     20,597         19,271         58         (1,384

Other debt securities

     4,426         4,251         125         (300

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     3,307         3,140         80         (247

Issued by other institutions

     1,119         1,111         45         (53

International

     29,573         29,392         1,038         (1,219

Mexico

     4,815         4,991         176         —     

Mexican Government and other government agency debt securities

     4,742         4,906         164         —     

Other debt securities

     73         85         12         —     

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     59         70         11         —     

Issued by other institutions

     14         15         1         —     

United States

     7,355         7,363         243         (235

U.S. Treasury and other U.S. government agencies debt securities

     487         483         8         (12

States and political subdivisions

     509         537         28         —     

Other debt securities

     6,359         6,343         207         (223

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     631         617         22         (36

Issued by other institutions

     5,728         5,726         185         (187

Other countries

     17,403         17,038         619         (984

Securities of other foreign Governments

     11,617         11,296         345         (666

Other debt securities

     5,786         5,742         274         (318

Issued by central banks

     849         855         6         —     

Issued by credit institutions

     3,080         2,998         184         (266

Issued by other institutions

     1,857         1,889         84         (52
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     54,596         52,914         1,221         (2,903
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           

Domestic

     7,373         6,848         1         (526

Spanish Government and other government agency debt securities

     6,520         6,060         1         (461

Other debt securities

     853         788         —           (65

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     255         244         —           (11

Issued by other institutions

     598         544         —           (54

International

     3,582         3,342         12         (252

Securities of other foreign Governments

     3,376         3,149         9         (236

Other debt securities

     206         193         3         (16
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY PORTFOLIO

     10,955         10,190         13         (778
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

     65,551         63,104         1,234         (3,681
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

51


Table of Contents
     As of December 31, 2010  
     Amortized
cost
     Fair
Value(1)
     Unrealized
Gains
     Unrealized
Losses
 
     (In Millions of Euros)  

DEBT SECURITIES

           

AVAILABLE FOR SALE PORTFOLIO

           

Domestic

     21,929         20,566         107         (1,470

Spanish Government and other government agency debt securities

     16,543         15,337         58         (1,264

Other debt securities

     5,386         5,229         49         (206

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     4,222         4,090         24         (156

Issued by other institutions

     1,164         1,139         25         (50

International

     30,109         30,309         1,080         (880

Mexico

     9,653         10,106         470         (17

Mexican Government and other government agency debt securities

     8,990         9,417         441         (14

Other debt securities

     663         689         29         (3

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     553         579         28         (2

Issued by other institutions

     110         110         1         (1

United States

     6,850         6,832         216         (234

U.S. Treasury and other U.S. government agencies debt securities

     580         578         6         (8

States and political subdivisions

     187         193         7         (1

Other debt securities

     6,083         6,061         203         (225

Issued by central banks

     —           —           —           —     

Issued by credit institutions

     2,981         2,873