20-F 1 d708519d20f.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, 2013

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)

Ricardo Gómez Barredo

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, 2013, was:

Ordinary shares, par value €0.49 per share—5,785,954,443

 

 

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

Yes  x            No   ¨

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

Yes  ¨            No   x

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

Yes  x            No   ¨

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

Yes  ¨            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  ¨            No   x

 

 

 


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   

A.

 

Directors and Senior Management

     5   

B.

 

Advisers

     5   

C.

 

Auditors

     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

     24   

A.

 

History and Development of the Company

     24   

B.

 

Business Overview

     27   

C.

 

Organizational Structure

     50   

D.

 

Property, Plants and Equipment

     51   

E.

 

Selected Statistical Information

     51   

F.

 

Competition

     71   

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

     73   

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     73   

A.

 

Operating Results

     79   

B.

 

Liquidity and Capital Resources

     116   

C.

 

Research and Development, Patents and Licenses, etc.

     120   

D.

 

Trend Information

     120   

E.

 

Off-Balance Sheet Arrangements

     123   

F.

 

Tabular Disclosure of Contractual Obligations

     123   

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     123   

A.

 

Directors and Senior Management

     124   

B.

 

Compensation

     130   

C.

 

Board Practices

     134   

D.

 

Employees

     140   

E.

 

Share Ownership

     143   

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     143   

A.

 

Major Shareholders

     143   

B.

 

Related Party Transactions

     144   

C.

 

Interests of Experts and Counsel

     145   

ITEM 8.

 

FINANCIAL INFORMATION

     145   

A.

 

Consolidated Statements and Other Financial Information

     145   

B.

 

Significant Changes

     146   

ITEM 9.

 

THE OFFER AND LISTING

     146   

A.

 

Offer and Listing Details

     146   

B.

 

Plan of Distribution

     153   

C.

 

Markets

     153   

D.

 

Selling Shareholders

     153   

E.

 

Dilution

     153   

F.

 

Expenses of the Issue

     153   

ITEM 10.

 

ADDITIONAL INFORMATION

     153   

A.

 

Share Capital

     153   

B.

 

Memorandum and Articles of Association

     154   


Table of Contents
         PAGE  

C.

 

Material Contracts

     156   

D.

 

Exchange Controls

     156   

E.

 

Taxation

     158   

F.

 

Dividends and Paying Agents

     164   

G.

 

Statement by Experts

     164   

H.

 

Documents on Display

     164   

I.

 

Subsidiary Information

     164   

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     164   

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     173   

A.

 

Debt Securities

     173   

B.

 

Warrants and Rights

     173   

C.

 

Other Securities

     173   

D.

 

American Depositary Shares

     173   

PART II

    

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     175   

ITEM 14.

 

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

     175   

ITEM 15.

 

CONTROLS AND PROCEDURES

     175   

ITEM 16.

 

[RESERVED]

     177   

ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

     177   

ITEM 16B.

 

CODE OF ETHICS

     177   

ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     178   

ITEM 16D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     179   

ITEM 16E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     179   

ITEM 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     179   

ITEM 16G.

 

CORPORATE GOVERNANCE

     180   

ITEM 16H.

 

MINE SAFETY DISCLOSURE

     182   

PART III

    

ITEM 17.

 

FINANCIAL STATEMENTS

     182   

ITEM 18.

 

FINANCIAL STATEMENTS

     182   

ITEM 19.

 

EXHIBITS

     182   

 

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

 

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

 

    Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2013, 2012 and 2011 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, unless otherwise indicated or the context otherwise requires.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

 

    “Item 3. Key Information—Risk Factors”;

 

    “Item 4. Information on the Company”;

 

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

 

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

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

 

    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;

 

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

 

    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, 2013. 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.

The financial information as of and for the years ended December 31, 2012, 2011, 2010 and 2009 may differ from previously reported financial information as of such dates and for such periods in our respective annual reports for certain prior years, mainly as a result of the implementation of changes in the accounting standards set out in IFRS 10 and 11 that came into force in 2013.

 

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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 advances.

 

    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, 2013, 2012 and 2011 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited financial statements for 2010 and 2009 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.

 

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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,  
     2013     2012     2011     2010     2009  
     (In Millions of Euros, Except Per Share/ADS Data (In Euros))  

Consolidated Statement of Income Data

          

Interest and similar income

     23,512        24,815        23,229        21,130        23,773   

Interest and similar expenses

     (9,612     (10,341     (10,505     (7,814     (9,893

Net interest income

     13,900        14,474        12,724        13,316        13,880   

Dividend income

     235        390        562        529        443   

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

     694        1,039        787        331        118   

Fee and commission income

     5,478        5,290        4,874        4,864        4,841   

Fee and commission expenses

     (1,228     (1,134     (980     (831     (790

Net gains (losses) on financial assets and liabilities

     1,608        1,636        1,070        1,372        821   

Net exchange differences

     903        69        410        455        651   

Other operating income

     4,995        4,765        4,212        3,537        3,395   

Other operating expenses

     (5,627     (4,705     (4,019     (3,240     (3,145

Administration costs

     (9,701     (9,396     (8,634     (8,007     (7,486

Depreciation and amortization

     (1,095     (978     (810     (754     (690

Provisions (net)

     (609     (641     (503     (475     (446

Impairment losses on financial assets (net)

     (5,612     (7,859     (4,185     (4,718     (5,473

Impairment losses on other assets (net)

     (467     (1,123     (1,883     (489     (1,619

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

     (1,915     3        44        41        20   

Negative goodwill

     —          376        —          1        99   

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

     (399     (624     (271     127        859   

Operating profit before tax

     1,160        1,582        3,398        6,059        5,478   

Income tax

     (46     352        (158     (1,345     (1,085

Profit from continuing operations

     1,114        1,934        3,240        4,714        4,394   

Profit from discontinued operations (net) (3)

     1,866        393        245        281        201   

Profit

     2,981        2,327        3,485        4,995        4,595   

Profit attributable to parent company

     2,228        1,676        3,004        4,606        4,210   

Profit attributable to non-controlling interests

     753        651        481        389        385   

Per share/ADS (1) Data

          

Numbers of shares outstanding (at period end)

     5,785,954,443        5,448,849,545        4,903,207,003        4,490,908,285        3,747,969,121   

Profit attributable to parent company (2)

     0.40        0.32        0.62        1.10        1.02   

Dividends declared

     0.100        0.200        0.200        0.270        0.420   

 

(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, October 2012, April 2013 and October 2013, and excluding the weighted average number of treasury shares during the period (5,692 million, 5,622 million, 5,093 million, 4,388 million and 4,259 million shares in 2013, 2012, 2011, 2010 and 2009, respectively). With respect to the years ended December 31, 2013, 2012 and 2011, see Note 5 to the Consolidated Financial Statements.
(3) For 2013, includes the capital gains from the sale of Afore Bancomer in Mexico and the South America pension fund administrators, as well as the earnings posted by these companies up to the date of these sales.

 

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     As of and for Year Ended December 31,  
     2013     2012     2011     2010     2009  
     (In Millions of Euros, Except Percentages)  

Consolidated Balance Sheet Data

          

Total assets

     582,575        621,072        582,838        552,738        535,065   

Common stock

     2,835        2,670        2,403        2,201        1,837   

Loans and receivables (net)

     350,945        371,347        369,916        364,707        346,117   

Customer deposits

     300,490        282,795        272,402        275,789        254,183   

Debt certificates and subordinated liabilities

     74,676        98,070        96,427        102,599        117,817   

Non-controlling interest

     2,371        2,372        1,893        1,556        1,463   

Total equity

     44,850        43,802        40,058        37,475        30,763   

Consolidated ratios

          

Profitability ratios:

          

Net interest margin (1)

     2.32     2.38     2.29     2.38     2.56

Return on average total assets (2)

     0.5     0.4     0.6     0.9     0.9

Return on average equity (3)

     5.0     4.0     8.0     15.8     16.0

Credit quality data

          

Loan loss reserve (4)

     14,995        14,159        9,139        9,473        8,805   

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

     4.27     3.81     2.47     2.60     2.54

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

     6.9     5.1     4.0     4.1     4.3

Impaired loans and advances to customers

     25,445        19,960        15,416        15,361        15,197   

Impaired contingent liabilities to customers (6)

     410        312        217        324        405   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     25,855        20,272        15,633        15,685        15,602   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and advances to customers

     338,557        356,278        351,634        348,253        332,162   

Contingent liabilities to customers

     36,183        36,891        37,126        35,816        32,614   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     374,740        393,169        388,760        384,069        364,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, excluding “Non-controlling interest”.
(4) Represents impairment losses of loans and receivables to credit institutions, loans and advances 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 7.5%, 5.6%, 4.4%, 4.4% and 4.6% as of December 31, 2013, 2012, 2011, 2010 and 2009, 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.

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

 

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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)  

2009

     1.3955   

2010

     1.3216   

2011

     1.4002   

2012

     1.2908   

2013

     1.3303   

2014 (through April, 25, 2014)

     1.3728   

 

(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, 2013

     1.3537         1.3120   

October 31, 2013

     1.3810         1.3490   

November 30, 2013

     1.3606         1.3357   

December 31, 2013

     1.3816         1.3552   

January 31, 2014

     1.3682         1.3500   

February 28, 2014

     1.3806         1.3507   

March 31, 2014

     1.3927         1.3731   

April 30, 2014 (through April 25, 2014)

     1.3898         1.3704   

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on April 25, 2014, was $1.3838.

As of December 31, 2013, approximately 40% of our assets and approximately 40% 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 Portfolio in 2013—Structural Risk Structural Currency 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

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

The financial services industry is among the most highly regulated industries in the world. The Bank’s 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 it operates. This is particularly the case in the current market environment, which is witnessing increased

 

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levels of government and regulatory intervention in the banking sector which the Bank expects to continue for the foreseeable future. As a result, we may further be subject to an increasing incidence or amount of liability or regulatory sanctions and may be required to make greater expenditures and devote additional resources to address potential liability.

The regulations which most significantly affect the Bank, or which could most significantly affect the Bank in the future, include regulations relating to capital and provisions requirements, which have become increasingly more strict in the past three years, steps taken 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.

In addition, the Bank is subject to substantial regulation relating to other matters such as liquidity. The Bank considers that future liquidity standards could require maintaining a greater proportion of its assets in highly-liquid but lower-yielding financial instruments, which would negatively affect the Bank’s net interest margin.

The Bank is also subject to other regulations, such as those related to anti-money laundering, privacy protection and transparency and fairness in customer relations.

Moreover, the Bank’s regulators, as part of their supervisory function, periodically review the Bank’s allowance for loan losses. Such regulators may require the Bank to increase its allowance for loan losses or to recognize further losses. Any such additional provisions for loan losses, as required by these regulatory agencies, whose views may differ from those of the Bank’s management, could have an adverse effect on the Bank’s earnings and financial condition.

Recent Spanish regulatory developments include (i) Royal Decree-Law 2/2012, of February 3 and Law 8/2012 of October 30, which increased coverage requirements to be met by December 31, 2012 for performing and non-performing real estate assets, (ii) Law 9/2012, of November 14 (“Law 9/2012”) which established a new regime on restructuring and resolution of credit institutions and a statutory loss absorbency regime applicable within the framework of restructuring and resolution processes, which was based on the June 2012 draft of the proposed EU Recovery and Resolution Directive (“RRD”), and (iii) Royal Decree-Law 14/2013, of November 29 (“RD-L 14/2013”) which partially incorporated Capital Requirements Directive IV (“CRD IV”) into Spanish law. In addition, on February 5, 2014 a new Bank of Spain Circular 2/2014, of January 31, was published. By means of this new circular, the Bank of Spain has made certain regulatory determinations under the Capital Requirements Regulation (which is directly applicable in EU member states, without the need to be implemented by national laws) (“CRR”) pursuant to the delegation contained in RD-L 14/2013 including, among other things, certain rules concerning the applicable transitional regime on capital requirements and the treatment of deductions and. establishes a 4.5% common equity tier 1 requirement and a 6% tier 1 capital requirement.

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

Capital requirements

Increasingly onerous capital requirements constitute one of the Bank’s main regulatory concerns.

As a Spanish financial institution, Banco Bilbao Vizcaya Argentaria, S.A. is subject to CRD IV, through which the European Union has implemented the Basel III capital standards and which are in the process of being phased in until January 1, 2019. The CRR entered into force on January 1, 2014 and the CRD IV Directive has already been partially implemented in Spain as of January 1, 2014 by RD-L 14/2013. RD-L 14/2013 has repealed, with effect from January 1, 2014, any Spanish regulatory provisions that may be incompatible with CRR.

Despite the CRD IV/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 implementation calendars.

 

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For example, in the last three years the Bank of Spain and the European Banking Authority (the “EBA”) have imposed new capital requirements in advance of the entering into force of CRD IV. These measures have included Bank of Spain Circular 3/2008 (“Circular 3/2008”) of May 22, on the calculation and control of minimum capital requirements, which was amended by Bank of Spain Circular 4/2011 (“Circular 4/2011”) and which implemented Capital Requirements Directive III in Spain. In addition, some of the requirements of Basel III were already implemented by the Spanish Government in 2011 with Royal Decree-Law 2/2011 (“RD-L 2/2011”) of February 18 (as amended by Law 9/2012) which established a new minimum requirement in terms of capital on risk-weighted assets (“Capital Principal”) and required such capital to be greater than 9% from January 1, 2013. RD-L 14/2013 repealed, with effect from January 1, 2014, Title I of Royal Decree-Law 2/2011, which imposed the minimum Capital Principal requirement with respect to credit institutions. Despite such repeal, the Bank of Spain has been given powers to prohibit or restrict, until December 31, 2014, any distributions of Tier 1 Capital by credit institutions (including the Bank) which would have been comprised in the minimum Capital Principal requirements stipulated in RD-L 2/2011, provided such distributions, in aggregate terms, imply not fulfilling by up to 20% of the minimum Capital Principal legally required as at December 31, 2013, the Capital Principal requirement on a temporary basis and any credit institution making any such distribution would further risk non-compliance with additional capital requirements that could be imposed by the Bank of Spain.

Furthermore, following an evaluation of the capital levels of 71 financial institutions throughout Europe (including the Bank) based on data available as of September 30, 2011, the EBA issued a recommendation on December 8, 2011 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 has been replaced by the EBA recommendation of July 22, 2013 on the preservation of Core Tier 1 capital during the transition to CRD IV implementation. This new recommendation provides for the maintenance of a nominal floor of capital denominated in the relevant reporting currency of Core Tier 1 capital corresponding to the amount of capital needed as at June 30, 2012 to meet the requirements of the above recommendation of December 8, 2011. Competent authorities may waive this requirement for institutions which maintain a minimum of 7% of common equity Tier 1 capital under CRD IV rules applied after the transitional period.

Finally, in order to complete the implementation of CRD IV initiated by RD-L 14/2013, the Spanish Ministry of Economy and Competitiveness has prepared and recently published a draft of a new comprehensive law on the supervision and solvency of financial institutions.

Additionally, the Mexican government introduced the Basel III capital standards in 2012 and the Basel III transposition in the United States will be effective in 2015. 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 the Bank and could undermine its profitability.

At its meeting of January 12, 2014, the oversight body of the Basel Committee endorsed the definition of the leverage ratio set forth in CRD IV, to promote consistent disclosure, starting on January 1, 2015. There will be a mandatory minimum capital requirement on January 1, 2018, with an initial minimum leverage ratio of 3% that can be raised after calibration.

There can be no assurance that the implementation of these new standards or recommendations will not adversely affect the Bank’s ability to pay dividends, or require it to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Bank’s business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect the Bank’s return on equity and other financial performance indicators.

Tax treatment of deferred tax assets following the implementation of CRD IV

In addition to introducing new capital requirements, CRD IV provides that the deferred tax assets (“DTAs”) of a financial institution must be deducted from its regulatory capital (specifically from its core capital or CET1 Capital) for prudential reasons, as there is generally no guarantee that DTAs will retain their value in the event of the institution facing difficulties.

 

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This new deduction introduced by CRD IV has a significant impact on Spanish banks due to the particularly restrictive nature of certain aspects of Spanish tax law. For example, in some EU countries when a bank reports a loss the tax authorities refund a portion of taxes paid in previous years but in Spain the bank must earn profits in subsequent years in order for this set-off to take place. Additionally, Spanish tax law does not recognize as tax-deductible certain amounts recorded as costs in the accounts of a bank, unlike the tax legislation of other EU countries.

Due to these differences and the greater impact of the requirements of CRD IV with respect to DTAs, the Spanish regulator implemented certain amendments to the Spanish Law on Corporate Income Tax (Royal Decree Law 4/2004 of March 5, as amended) through RD-L 14/2013. This provides for certain DTAs to be treated as a direct claim against the tax authorities if a Spanish bank is unable to reverse those temporary differences within 18 years or if it is liquidated, becomes insolvent or incurs accounting losses. This amendment will allow a Spanish bank not to deduct such DTAs from its regulatory capital.

However, there can be no assurance that the tax amendments implemented by RD-L 14/2013 will not be challenged by the European Commission, that the final interpretation of these amendments will not change (as further clarifying regulation is expected during 2014) and that Spanish banks will ultimately be allowed to maintain certain DTAs as regulatory capital. If this regulation is challenged, this may negatively affect the Bank’s regulatory capital and therefore its ability to pay dividends or require it 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 a material adverse effect on the Bank’s business, financial condition and results of operations.

Contributions for assisting in the restructuring of the Spanish banking sector

Royal Decree-Law 6/2013 of March 22, on protection for holders of certain savings and investment products and other financial measures, included a requirement for banks, including the Bank, to make an exceptional one-off contribution to the Deposit Guarantee Fund (Fondo de Garantía de Depósitos) in addition to the annual contribution to be made by member institutions, equal to €3.00 per each €1,000 of deposits held as of December 31, 2012. The purpose of such contribution was for the Deposit Guarantee Fund to be able to purchase at market prices the unlisted shares of certain Spanish financial institutions involved in restructuring or resolution processes under Law 9/2012 (none of which are part of the Group). There can be no assurance that additional funding requirements will not be imposed by the Spanish authorities for assisting in the restructuring of the Spanish banking sector.

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 exists and significant advances have been made in terms of the development of a single-rule book through CRD IV, there is ongoing debate on the extent and pace of integration. On September 13, 2012, the European Parliament approved a proposal for the creation of the Single Supervisory Mechanism, so that 128 of the largest EU banks (including the Bank) will come under the ECB’s direct oversight from November 2014. Other issues include 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 EBA, the development of a new bank resolution regime and the creation of a common deposit-guarantee scheme. In particular, the RRD and the Deposit Guarantee Schemes Directive were submitted to the European Parliament in June 2013. An agreement on the RRD was reached in the February 2014 ECOFIN. The final approval of the RRD is expected by April-May 2014. The RRD is expected to enter into force in 2015, but the bail-in tool will only be operational from 2016. The final regulation on direct recapitalization of banks by the European Stability Mechanism (ESM) is still pending. European leaders have also supported the reinforcement of the fiscal union but continue negotiating on how to achieve it.

Prior to the ECB assuming the supervision of European banks (including the Bank), the ECB is conducting, with the help of national supervisors, external advisors, consultants and other appraisers, a comprehensive assessment consisting of three elements: (i) a supervisory risk assessment, which will assess the main risks on the balance sheet including liquidity, funding and leverage; (ii) an asset quality review, which will focus on credit and

 

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market risks; and (iii) a stress test to examine the need to strengthen capital or take other corrective measures which could affect the Group’s business, financial condition and results of operations. It is expected that the results of this comprehensive agreement will be released at the end of 2014.

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

In addition, on January 29, 2014, the European Commission released its proposal on the structural reforms of the European banking sector that will impose new constraints on the structure of European banks. The proposal aims at ensuring the harmonization between the divergent national initiatives in Europe, and includes a prohibition of proprietary trading such as in the US Volcker Rule and a mechanism to require the separation of trading activities including market making such as in the UK Banking Reform.

Regulatory reforms initiated in the United States

The Bank’s 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. In July 2013, U.S. federal bank regulators issued final rules implementing many elements of the Basel III framework and other U.S. capital reforms. In December 2013, the Federal Reserve, the OCC, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule, as required by the Dodd-Frank Act. The Volcker Rule prohibits an insured depository institution, its affiliates and any company that controls an insured depository institution from engaging in proprietary trading and from investing in or sponsoring certain covered funds, such as hedge funds and private equity funds, in each case subject to certain limited exceptions. The final rules also impose significant compliance and reporting obligations.

In February 2014, the Federal Reserve approved a final rule to enhance its supervision and regulation of the U.S. operations of foreign banking organizations (“FBOs”) such as BBVA. Under this rule, FBOs with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies (“Large FBOs”), such as BBVA, will be required to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that will hold all of the Large FBO’s U.S. bank and nonbank subsidiaries, such as Compass Bank and BBVA Compass. The IHC will be subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. Under the final rule, a Large FBO that is subject to the IHC requirement may request permission from the Federal Reserve to establish multiple IHCs or use an alternative organizational structure. The final rule also permits the Federal Reserve to apply the IHC requirement in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single Large FBO. Although U.S. branches and agencies of Large FBOs will not be required to be held beneath an IHC, such branches and agencies will be subject to liquidity, and, in certain circumstances, asset maintenance requirements. Large FBOs generally will be required to form IHCs and comply with enhanced prudential standards beginning July 1, 2016, although an IHC’s compliance with applicable U.S. leverage ratio requirements is generally delayed until January 1, 2018, and certain enhanced prudential standards will apply to BBVA’s top-tier U.S. bank holding company, BBVA Compass, beginning January 1, 2015. The Federal Reserve has stated that it will issue, at a later date, final rules to implement certain other enhanced prudential standards under the Dodd-Frank Act for large bank holding companies and Large FBOs, including single counterparty credit limits and an early remediation framework. The rule does not constitute any significant additional burden for FBOs that already organized their main US subsidiaries through a BHC structure such as BBVA. Indeed, those FBOs would have anyway been subject to US prudential standards.

In addition, the Federal Reserve and other U.S. regulators issued for public comment in October 2013 a proposed rule that would introduce a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The proposed liquidity coverage ratio is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The Federal Reserve has also stated that it intends, through future rulemakings, to apply the Basel III liquidity coverage ratio and net stable funding ratio to the U.S. operations of some or all large FBOs.

 

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Although there remains uncertainty as to how regulatory implementation of these laws will occur, various elements of the new laws may cause changes that impact the profitability of the Bank’s business activities and require that it changes certain of its business practices, and could expose the Bank to additional costs (including increased compliance costs). These changes may also cause the Bank to invest significant management attention and resources to make any necessary changes.

Taxation of the financial sector

On February 14, 2013 the European Commission published its proposal for a Council Directive implementing a common financial transaction tax, which was intended to take effect on January 1, 2014 but negotiations are still ongoing. The proposed Directive aims to ensure that the financial sector makes a fair and substantial contribution to covering the costs of the recent crisis and creating a level playing field with other sectors from a taxation point of view. In Spain, legislation passed in March 2013 imposed extraordinary levies on deposits (see “—Contributions for assisting in the restructuring of the Spanish banking sector”) but the final terms of this tax are expected to be adopted in 2014, along with other tax reforms. It is expected that the Spanish Government will set a tax on outstanding deposits to be paid annually by banks, which will subsequently be distributed to regional authorities. There can be no assurance that additional national or transnational bank levies or financial transaction taxes will not be adopted by the authorities of the jurisdictions where the Bank operates. Any such additional levies and taxes could have a material adverse effect on the Bank’s business, financial condition, results of operations and prospects.

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

Historically, one of the Group’s principal sources of funds has been savings and demand deposits. Large-denomination time deposits may, under some circumstances, such as during periods of significant interest rate-based competition for these types of deposits, be a less stable source of deposits than savings and demand deposits. The level of wholesale and retail deposits may also fluctuate due to other factors outside the Group’s control, such as a loss of confidence (including as a result of political initiatives, including bail-in and/or confiscation and/or taxation of creditors’ funds) or competition from investment funds or other products. The expected introduction of national taxes on outstanding deposits could be negative for the market in Spain. Moreover, there can be no assurance that, in the event of a sudden or unexpected withdrawal of deposits or shortage of funds in the banking systems or money markets in which the Group operates, the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets. In addition, if public sources of liquidity, such as the ECB extraordinary measures adopted in response to the financial crisis since 2008, are removed from the market, there can be no assurance that the Group will be able to maintain its current levels of funding without incurring higher funding costs or having to liquidate certain of its assets or taking additional deleverage measures.

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

Financial markets, among other matters, reflect the perception of risk, economic conditions and economic policies in their present and short to mid-term future outlooks. Especially in 2012, negative growth expectations and lack of confidence that policy changes would solve problems led to steep falls in asset values and a severe reduction in market liquidity. Additionally, in dislocated markets, hedging and other risk management strategies may not be as effective as they are in more normal market conditions due in part to the decreasing credit quality of hedge counterparties. Severe market events such as the sovereign debt crisis, rising risk premiums and falls in share market prices, have resulted in the Group recording large write-downs on its credit market exposures in recent years. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

 

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The Group faces increasing competition in its business lines

The markets in which the Group operates are highly competitive and the Group believes that this trend will continue. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which the Group must now compete, some of which have recently received public capital from the European Stability Mechanism. Foreign competitors or funds may consider acquiring the institutions who have received such public capital in future auctions, such as occurred with respect to Novagalicia Banco, which was acquired by Banesco, a Venezuelan bank.

The Group also faces 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 have recently been offered as a consequence of the sovereign debt crisis, there has been a crowding out effect in the financial markets).

There can be no assurance that this competition will not adversely affect the Group’s business, financial condition, cash flows and results of operations.

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

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

In addition, the high proportion of loans referenced to variable interest rates makes debt service on such loans more vulnerable to changes in interest rates. In addition, a rise in interest rates could reduce the demand for credit and the Group’s ability to generate credit for its clients, as well as contribute to an increase in the credit default rate. As a result of these and the above factors, significant changes or volatility in interest rates could have a material adverse impact on the Group’s business, financial condition or results of operations.

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

The Group’s commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Funds for Pensions and Similar Obligations” in its consolidated balance sheets included in the Consolidated Financial Statements. These amounts, which comprise “Post-employment benefits”, “Early retirements” and “Post-employment welfare benefits”, are considered wholly unfunded due to the absence of qualifying plan assets.

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

 

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We may face risks related to our acquisitions and divestitures

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

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

We are party to lawsuits, tax claims and other legal proceedings

Due to the nature of our business, we and our subsidiaries are involved in litigation, arbitration and regulatory proceedings in jurisdictions around the world, the financial outcome of which is unpredictable. An adverse outcome or settlement in these proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, cash flows, results of operations and reputation. In addition, responding to the demands of litigation may divert management’s time and attention and financial resources. While we believe that we have provisioned such risks appropriately based on the opinions and advice of our legal advisors and in accordance with applicable accounting rules, it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to us, could exceed the amount of provisions made for such risks. See “Item 8. Financial information—Consolidated Statements and Other Financial Information—Legal proceedings” and Note 25 to the Consolidated Financial Statements for additional information on our legal, regulatory and arbitration proceedings.

Risks Relating to Spain and Europe

Economic conditions in the European Union and Spain could have a material adverse effect on our business, financial condition and results of operations

The crisis in worldwide financial and credit markets led to a global economic slowdown in recent years, with many economies around the world showing significant signs of weakness or slow growth. While there has been a significant reduction in risk premiums in Europe since the second half of 2012 and economic growth has resumed positive figures since the second quarter of 2013, the possibility of future deterioration of the economic scenario exists. Any such deterioration could adversely affect the cost and availability of funding for Spanish and European banks, including us, and 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.

The probability of country defaults or rupture of the Eurozone has decreased significantly since 2012. However, if one or more EU Member States were to exit from the European Monetary Union (“EMU”), this 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 the Group’s business, results of operations, financial condition and cash flows. In addition, tensions among Member States of the EU, and Euro-skepticism in certain EU countries, could pose additional difficulties in the EU’s ability to react to an economic crisis.

 

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In addition, the risk of low inflation (inflation continues to be positive but well below the 2% growth rate of harmonized indices of consumer prices) or deflation (i.e., a continued period with negative rates of inflation) in the Eurozone cannot be completely ruled out. If economic conditions in the European Union and Spain deteriorate as a result, this could have a material adverse effect on our business, financial condition and results of operations.

Additionally, certain upcoming events such as the European Parliamentary elections, could have an adverse impact on the progress that has been made in establishing a European banking union and strengthening the monetary union of the Eurozone or could otherwise cause instability in the Eurozone.

The Bank is dependent on its credit ratings and any reduction of its or the Kingdom of Spain’s credit ratings could materially and adversely affect the Group’s business, financial condition and results of operations

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

Since the Bank has substantial operations in Spain, its credit ratings may be adversely affected by the assessment by rating agencies of the creditworthiness of the Kingdom of Spain. Any decline in the Kingdom of Spain’s sovereign credit ratings could result in a decline in the Bank’s credit ratings.

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

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

The Group has historically developed its lending business in Spain, which continues to be its main place of business. The Group’s loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy since 2009. While the last quarter of 2013 showed signs of a slowdown of such deterioration pattern, given the concentration of the Group’s loan portfolio in Spain, any adverse changes affecting the Spanish economy are likely to have a significant adverse impact on the Group’s business financial condition and results of operations.

After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted in the period 2009-10 and 2012-13. The GDP is growing again since the second half of 2013 and the Bank’s Economic Research Department (“BBVA Research”) estimates that the Spanish economy will maintain this positive trend in the years to come based on the improvement of the foreign demand and the measures adopted by the authorities in response to the economic crisis, including the structural reforms to foster competitiveness and productivity and the measures to reduce the public deficit. However, in the case that foreign demand is lower than expected and/or the measures and

 

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reforms do not contribute to enhancing competitiveness and productivity, the estimated positive scenario for the Spanish economy could be revised downwards. It is worth noting that the effects of the financial crisis were particularly pronounced in Spain given the country’s heightened need for foreign financing as reflected by its high current account and 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 circumstances referred to below:

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. Also, the interruption of the incoming recovery in the Eurozone might have a deep impact on Spanish economy growth.

Lastly, a change in the current recovery of the labor market might be very worrisome since it would affect households’ gross disposable income.

Exposure to the Spanish real estate market makes the Group 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 low interest rates within the EU, led to an increase in the 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. Housing demand has remained weak and housing transactions continued to decrease during 2013 but are expected to stabilize in 2014.

The Group has substantial exposure to the Spanish real estate market and the continuing deterioration of Spanish real estate prices could materially and adversely affect its business, financial condition and results of operations. The Group is exposed to the Spanish real estate market due to the fact that Spanish real estate assets secure many of its outstanding loans and due to the significant amount of Spanish real estate assets held on its balance sheet, including real estate received in lieu of payment for certain underlying loans. Furthermore, the Group has restructured certain of the loans it has made relating to real estate and the capacity of the borrowers to repay those restructured loans may be materially adversely affected by declining real estate prices.

If Spanish real estate prices fail to recover, the Group’s business may be materially adversely affected, which could materially and adversely affect its financial condition and results of operations.

Highly-indebted households and corporations could endanger the Group’s 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 makes debt service on such loans more vulnerable to upward movements in interest rates. Highly indebted households and businesses are less likely to be able to service debt obligations as a result of adverse economic events, which could have an adverse effect on the Group’s loan portfolio and, as a result, on its financial condition and results of operations. Moreover, the increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt, decreasing the number of new products the Group may otherwise be able to sell them and limiting the Group’s ability to attract new customers in Spain satisfying its credit standards, which could have an adverse effect on the Group’s ability to achieve its growth plans.

Risks Relating to Latin America

Events in Mexico could adversely affect the Group’s operations

The Mexican operations are relevant to the Group. The Group faces several types of risks in Mexico which could adversely affect its banking operations in Mexico or the Group as a whole. Despite signs of recovery following Mexico’s recession in 2009, economic conditions remain uncertain in Mexico. In addition, drug-related violence remains as a significant challenge for Mexico.

 

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The Mexican economy grew by 1.2% in 2013 and is expected to grow by 3.4% in 2014. However, part of 2013 was characterized by a more acute downturn than originally forecasted due to the considerable slowdown in the industrial sector, partially driven by the weak private demand and also a contraction in public demand. The slowdown in the rate of job creation and the contribution of salaries to disposable income in real terms have been significant factors underlying the downturn in domestic demand. Another fact to consider is the low foreign-currency inflows from remittances, which continue to decline.

Delinquency rates on loans have increased in the past three years. If there is an increase in unemployment rates (which were 4.9% in 2013, 5.0% in 2012 and 5.2% in 2011 and are expected to be 4.6% in 2014), as a result for example of a more pronounced or prolonged slowdown in Europe or the United States, such rates may increase.

In addition, average inflation was 3.8% in 2013, 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 the Group’s 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 the Bank’s Mexican subsidiary or the Group as a whole.

In addition, the Bank’s operations are subject to regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in Mexico. On January 9, 2014, certain financial reforms which had been proposed in May 2013, were adopted. Such measures address the following matters (i) the establishment of a new mandate for development banks, (ii) the promotion of competition to reduce interest rates, (iii) the creation of incentives for banks to give more credit and (iv) the strengthening of the banking system.

Moreover, 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) (“Condusef”) has continued to request that banks submit several of their service contracts to revision by the Condusef (for example, contracts relating to credit cards and insurance), in order to check that they comply with the relevant transparency and clarity requirements. Condusef 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. The Law Committee of the Banking Association (ABM) is coordinating the creation of a working group that is expected 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. We may have to incur compliance costs in connection with any new measures adopted by Condusef.

Furthermore, the Anti-Money Laundering Law (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita) became effective in July 2013. The Law establishes more severe penalties for non-compliance and sets forth enhanced information requirements for some transactions.

Any of the risks referred to above or risks that may result from 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 the Bank’s Mexican subsidiary or the Group as a whole.

The Bank’s 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 the Group operates 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 the Group lends. Negative and fluctuating economic conditions, such as a changing interest rate environment, also affect the Group’s profitability by causing lending margins to decrease and leading to decreased demand for higher-margin products and services. In addition, significant inflation (such as inflation recently experienced by Venezuela and Argentina) and local currency devaluations (such as in Venezuela and Argentina) can negatively affect the Group’s results of operations.

 

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The start of the withdrawal of monetary stimuli by the Federal Reserve in the U.S., and the slowing of economic activity in several emerging markets led to an increase in volatility in the international financial markets in recent years. Latin America, like other emerging markets, has been one of the hardest hit in this new environment, particularly as Latin America benefited significantly from the increase in liquidity and the expansion in demand by countries such as China in recent years.

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 macro-prudential measures to control global liquidity, which could deter financial flows to enter in Latin American countries. In addition, inflationary pressure in some countries in the region (with inflation in some countries exceeding the relevant central banks’ targets) has led to different approaches from central banks when dealing with turbulence in the financial markets. Price overheating could leave 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 and lower global liquidity will likely contribute to a slight depreciation in exchange rates in most countries. This would result in monetary policy being less likely to act as a stabilizer in case of domestic overheating. The region needs to promote reforms to increase productivity and to consolidate growth in the long term, as the sustainable growth of per capita income cannot be based only on capital accumulation and employment growth.

In addition, negative and fluctuating economic conditions in some Latin American countries could result in government defaults on public debt. This could affect the Group 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 the Group operates.

While the Group seeks to mitigate these risks through what it believes to be conservative risk policies, no assurance can be given that its Latin American subsidiaries’ growth, asset quality and profitability will not be further affected by volatile macroeconomic conditions in the Latin American countries in which it operates.

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 the Group operates are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. The region’s growth decelerated in 2012 and 2013, registering a growth rate of 2.1% (considering Argentina, Brazil, Chile, Colombia, Peru and Venezuela), in particular due to the economic slowdown of Brazil and Argentina, and was 2.6% in 2013. The region is expected to grow by 2.4% in 2014. The international financial outlook for Latin America has become less benign in recent months. Latin America, together with other emerging markets, has been one of the hardest hit regions by the economic crisis, with capital outflows, increases in sovereign spreads, stock market falls and devaluations in exchange rates. There has also been an adjustment in the prices of some of the most important export commodities during 2013. In addition, the outlook for foreign balances in Latin America worsened in 2013 due to the above mentioned correction in raw material prices and weak foreign demand.

Negative developments in the economy or securities markets in one country or area, particularly in the U.S., China or in Europe under current circumstances, may have a negative impact on emerging market economies. Among the main global risks for Latin American countries are those currently posed by the effects of the withdrawal of monetary stimuli or tapering in the U.S. by the Federal Reserve and the lower foreign demand of commodities mainly from Asian countries. Any such developments may adversely affect the business, financial condition, operating results and cash flows of BBVA’s 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, with limited damage

 

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to their financial sectors, non-performing loan ratios rose and bank deposits and loans contracted. These trends have been corrected in recent months 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 BBVA’s subsidiaries in Latin America are likely to be materially adversely affected.

The Group is exposed to foreign exchange and, in some instances, political risks as well as other risks in the Latin American countries in which it operates, which could cause an adverse impact on its business, financial condition and results of operations

The Group operates commercial banks and insurance and other financial services companies in various Latin American countries and its overall success as a global business depends, in part, upon its ability to succeed in differing economic, social and political conditions. The Group is confronted with different legal and regulatory requirements in many of the jurisdictions in which it operates. These include, but are not limited to, different tax regimes and laws relating to the repatriation of funds or nationalization or expropriation of assets. The Group’s international operations may also expose it to risks and challenges which its local competitors may not be required to face, such as exchange rate risk, difficulty in managing a local entity from abroad, and political risk which may be particular to foreign investors, or the distribution of dividends. For instance, the repatriation of dividends paid and the payments of dividends by our Venezuelan and Argentinean subsidiaries need to be approved in advance by the relevant local authorities. Market outlook for the withdrawal of monetary stimuli or tapering in the U.S., together with the risk of an increased slowdown in China, triggered widespread devaluation in exchange rates in the region in 2013.

The Group’s presence in Latin American markets also requires it to respond to rapid changes in market conditions in these countries. There can be no assurance that the Group will succeed in developing and implementing policies and strategies that are effective in each country in which it operates or that any of the foregoing factors will not have a material adverse effect on its business, financial condition and results of operations.

Regulatory changes in Latin America that are beyond the Group’s control may have a material effect on its 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 the Group operates. Local regulations differ in a number of material respects from equivalent regulations in Spain and the United States.

Changes in regulations may have a material effect on its 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 the Group’s business, financial condition, results of operations and cash flows.

Risks Relating to the United States

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

As a result of the business of the Bank’s subsidiaries in the United States, the Group is vulnerable to developments in this market, particularly the real estate market. The recent crisis had a significant effect 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 U.S. economy registered a 1.9% growth rate for 2013, down from 2.8% in 2012. A 2.5% growth rate is expected for 2014. 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 the Bank’s subsidiary BBVA Compass, or the Group as a whole, and could require the Bank to provide BBVA Compass with additional capital.

 

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A further reduction in expansive monetary policies (“tapering”) could increase exchange rate volatility

In order to stimulate their economies, countries such as the United States and Japan are currently carrying out expansive monetary policies. A reduction of this stimulus (“tapering”), such as that being implemented by the United States, could potentially increase exchange rate volatility. The change of direction in U.S. monetary policy has had a global impact. The emerging economies are being subjected to capital outflows and currency depreciation, intensified in some cases by domestic events that have increased uncertainty regarding the management of their respective local economic policies. There continues to be a differentiation between economies depending on their fundamentals: higher external deficits and more dependence on short-term and foreign-currency funding are associated with greater vulnerability to capital outflows and currency depreciation. The monetary tightening being introduced by some of these countries to control currency depreciation and inflation expectations may have a negative impact on growth. This might especially impact emerging economies such as Asia, Latin America and Turkey, which would negatively affect the business, financial condition, operating results and cash flows of the Bank’s subsidiaries in such regions.

Risks Relating to Other Countries

The Group’s business in Asia exposes it to regulatory, economic and geopolitical risk relating to emerging markets in the region, particularly in China

BBVA’s ownership interest in members of the CITIC Group, a Chinese banking group, are a 29.7% stake in CITIC International Financial Holdings Ltd (“CIFH”) and a 9.9% 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 the Group’s expansion into Asia, it is 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 the Group’s 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. The Group’s 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 the Group believes 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. For 2013, China registered a 7.7% growth in GDP and 7.6% growth is expected for 2014. While there was uncertainty at the beginning of 2013 regarding the sustainability of its growth and the possibility of a hard landing, the economy recovered in the second half of 2013, although some of the more recent data on confidence and expectations of manufacturing activity are once again below market expectations.

In addition, fundamental changes in China’s economic policy have been announced. At the third plenum of the Chinese Communist Party, the authorities reiterated their commitment to maintaining high rates of growth, while at the same time proposing measures that will strengthen the role of the market in allocating resources and a rebalancing of the Chinese economy from a model of investment and exports towards increasing household consumption. These measures have high execution risks. For example, the rapid growth of credit is being reflected in liquidity tensions in the interbank market which are particularly affecting the shadow banking sector and a continuation of these tensions could have adverse effects on the stability of the system.

Any of these developments could have a material adverse effect on the Group’s investments in China and Hong Kong 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 the Bank’s investment in Garanti

In 2011, the Bank 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 2.4% in 2012 and 3.9% in 2013, the Turkish economy is expected to grow at a slower pace in 2014. In addition, inflation was 8.7% in 2012 and 7.6% in 2013, and may increase in 2014. The recent civil developments and political situation in Turkey as well as the interest rate increases to address the depreciation of the Turkish lira could adversely affect economic growth. The political crisis deepened in December 2013 and may continue. 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, 5.9% in 2012 and around 7.4% in 2013. Turkey is an emerging market and it is subject to greater risks than more developed markets, as witnessed by the recent civil developments, which may also have an adverse effect on the financial sector. 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, 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 the Bank’s 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 the Bank’s 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 the Bank’s investment in Garanti.

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

The Bank entered into a shareholders’ agreement with Doğuş Holding A.Ş. (Doğuş)¸ in connection with the Garanti acquisition. Pursuant to the shareholders’ agreement, the Bank and Doğuş have agreed to manage Garanti through the appointment of board members and senior management. Doğuş is one of the largest Turkish

 

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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 the Bank. Furthermore, the Bank must successfully cooperate with Doğuş in order to manage Garanti and grow its business. It is possible that the Bank 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 the Bank’s investment and lead to the Bank’s failure to achieve the expected benefits from the Garanti acquisition.

Other Risks

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

Operational risks, through inadequate or failed internal processes, systems (including financial reporting and risk monitoring processes) or security, or from people-related or external events, including the risk of fraud and other criminal acts carried out against Group companies, are present in the Group’s businesses. These businesses are dependent on processing and reporting accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Any weakness in these internal processes, systems or security could have an adverse effect on the Group’s results, the reporting of such results, and on the ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of the Group’s systems could disrupt its business, result in the disclosure of confidential information and create significant financial and legal exposure for the Group. Although the Group devotes significant resources to maintain and regularly update its processes and systems that are designed to protect the security of its systems, software, networks and other technology assets, there is no assurance that all of its security measures will provide absolute security. Any damage to the Group’s reputation (including to customer confidence) arising from actual or perceived inadequacies, weaknesses or failures in its systems, processes or security could have a material adverse effect on its results of operations, financial condition or prospects.

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

Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned. Furthermore, failure to protect financial industry operations from cyber-attacks could result in the loss or compromise of customer data or other sensitive information. These threats are increasingly sophisticated and there can be no assurance that banks will be able to prevent all breaches and other attacks on its IT systems. In addition to costs that may be incurred as a result of any failure of IT systems, banks could face fines from bank regulators if it fails to comply with applicable banking or reporting regulations.

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

Group companies are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although the Group believes that its current policies and procedures are sufficient to comply with applicable rules and regulations, it cannot guarantee that its 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 the Group’s financial condition and results of operations.

 

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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 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.

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 Banco Bilbao Vizcaya Argentaria, S.A., New York Branch (1345 Avenue of the Americas, New York, New York 10105 (Telephone: 212-728-1660)). BBVA is incorporated for an unlimited term.

Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. The main capital expenditures from 2011 to the date of this Annual Report were the following:

2013

Acquisition of Unnim Vida. On February 1, 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.

 

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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 €4,140 million at the exchange rate on the date of the transaction).

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.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2011 to the date of this Annual Report were the following:

2013

Sale of BBVA Panama

On July 20, 2013, BBVA announced that it had reached an agreement with Leasing Bogotá S.A., Panamá, a subsidiary of Grupo Aval Acciones y Valores, S.A., for the sale of BBVA’s direct and indirect ownership interest (98.92%) in Banco Bilbao Vizcaya Argentaria (Panamá), S.A. (“BBVA Panamá”). On December 19, 2013, after having obtained the necessary approvals, BBVA completed the sale.

The total consideration that BBVA received pursuant to this sale amounted to approximately $645 million. BBVA received part of the consideration through the distribution of dividends from BBVA Panamá prior to the closing of the transaction amounting to $140 million (such amount reduced the purchase price to be paid to BBVA on closing).

After deducting such distribution of dividends the capital gain for BBVA, gross of taxes, amounted to approximately €230 million which was recognized under the heading “Gains (losses) in non-current assets held for sale not classified as discontinued operations” in the consolidated income statement in 2013. See Note 52.1 to our Consolidated Financial Statements for additional information.

Sale of pension businesses in Latin America

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 included 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.

 

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On October 2, 2013, with the sale of AFP Provida (as defined below), BBVA finalized this process. Below is a description of each of the transactions that have been carried out during this process:

Sale of AFP Provida (Chile)

On February 1, 2013, BBVA reached an agreement with MetLife, Inc., for the sale of the 64.3% stake that BBVA held direct and indirectly in the Chilean Pension Fund manager Administradora de Fondos de Pensiones Provida S.A. (“AFP Provida”).

On October 2, 2013, BBVA completed the sale. The total amount in cash received by BBVA was approximately $1,540 million, taking into account the purchase price amounting to roughly $1,310 million as well as the dividends paid by AFP Provida since February 1, 2013 amounting to roughly $230 million. The gain on disposal, attributable to the parent company net of taxes, amounted to approximately €500 million which was recognized under the heading “Profit from discontinued operations (net)” in the consolidated income statement in 2013. See Note 52.2 to our Consolidated Financial Statements for additional information.

Sale of BBVA AFP Horizonte S.A. (Peru)

On April 23, 2013, BBVA sold its wholly-owned Peruvian subsidiary AFP Horizonte S.A. to AFP Integra S.A. and Profuturo AFP, S.A. who have each acquired 50% of AFP Horizonte, S.A. The total consideration paid for such shares was approximately $544 million. This consideration consisted in a cash payment of approximately $516 million and the distribution of a dividend prior to the closing of approximately $28 million.

The gain on disposal, attributable to parent company net of taxes, amounted to approximately €206 million at the moment of the sale and such gain was recognized under the heading “Profit from discontinued operations (net)” in the consolidated income statement in 2013. See Note 52.2 to our Consolidated Financial Statements for additional information.

Sale of BBVA AFP Horizonte S.A. (Colombia)

On December 24, 2012, BBVA 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 BBVA held directly or indirectly in the Colombian company BBVA Horizonte Sociedad Administradora de Fondos de Pensiones y Cesantías S.A.

On April 18, 2013, after having obtained the necessary approvals, BBVA completed the sale. The adjusted total price was $541.4 million. The gain on disposal, attributable to parent company net of taxes, amounted to approximately €255 million at the moment of the sale, and was recognized under the heading “Profit from discontinued operations (net)” in the consolidated income statement in 2013. See Note 52.2 to our Consolidated Financial Statements for additional information.

Sale of Afore Bancomer (Mexico)

On November 27, 2012, BBVA reached an agreement to sell to Afore XXI Banorte, S.A. de C.V. its entire stake directly or indirectly held in the Mexican subsidiary Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. Once the corresponding authorization was obtained from the competent authorities, the sale was closed on January 9, 2013.

The total sale price was $1,735 million (approximately €1,327 million). The gain on disposal, attributable to parent company net of taxes, was approximately €771 million. See Note 52.2 to our Consolidated Financial Statements for additional information.

New agreement with CITIC Group

As of October 17, 2013, BBVA reached a new agreement with the CITIC Group which contemplated the sale of BBVA’s 5.1% stake in China CITIC Bank Corporation Limited (CNCB) to CITIC Limited for an amount of approximately €944 million. After this sale, the stake of BBVA in CNCB was reduced to 9.9%.

 

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BBVA and the CITIC Group also agreed to adapt their strategic cooperation agreement to the new circumstances by removing the exclusivity obligations that affected the activities of BBVA in China and agreeing to negotiate new areas of cooperation among both banks.

As a result of the changes referred to above, the Company began accounting for its investment in CNCB as an “Available-for-sale financial asset” as of October 1, 2013. See Note 12 to our Consolidated Financial Statements for additional information.

The change in the accounting criteria and the sale referred to above resulted in a loss attributable to the BBVA Group at the time of the sale of approximately €2,600 million which was recognized under the heading “Gains (losses) on derecognized assets not classified as non-current assets held for sale” in the consolidated income statement in 2013. See Note 51 to our Consolidated Financial Statements for additional information.

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). See Note 51 to our Consolidated Financial Statements for additional information.

2011

During 2011, 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 changes in the reporting structure of the Group’s operating segments in 2013 are as follows:

 

    As a result of the increasingly geographical orientation of the Group’s reporting structure, certain portfolios, finance and structural euro balance sheet positions managed by the Assets and Liabilities Committee (ALCO) that were previously reported under the Corporate Center (formerly, Corporate Activities) are now part of the Spain segment (described below) of the Group.

 

    Due to the particularities of their management, the assets and results pertaining to the real estate business in Spain are now presented under a separate segment: Real Estate Activity in Spain. This new segment includes lending to real estate developers (which was previously included in the Spain segment) and foreclosed real estate assets (which were previously included in the Corporate Center segment).

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

 

    Spain

 

    Real Estate Activity in Spain

 

    Eurasia

 

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    Mexico

 

    South America

 

    United States

For comparison purposes, the Group’s 2012 and 2011 financial information by operating segment has been restated to reflect the Group’s current reporting structure.

In addition to the operating segments referred to above, the Group has a Corporate Center which includes those items that have not been allocated to an operating segment. It includes the Group’s general management functions, including: costs from central units that have a strictly corporate function; management of structural exchange rate positions carried out by the Financial Planning unit; specific issues of capital instruments to ensure adequate management of the Group’s overall capital position; proprietary portfolios such as industrial holdings and their corresponding results; certain tax assets and liabilities; provisions related to commitments with pensioners; and goodwill and other intangibles. It also comprises the following items (i) with respect to 2013, the earnings from the sale of the pension businesses in Mexico, Colombia, Peru and Chile and also the earnings of these businesses until their sale; the capital gain from the sale of BBVA Panama; and the impact of the reduction of the stake in CNCB (which led to the repricing at market value of BBVA’s stake in CNCB, as well as the impact of the equity-adjusted earnings from CNCB, excluding dividends), (ii) with respect to 2012, the badwill generated by the Unnim acquisition, the capital gain from the sale of BBVA Puerto Rico, the earnings from the pension business in Latin America, and the equity-adjusted earnings from CNCB (excluding dividends), and (iii) with respect to 2011, the results from the pension business in Latin America and the equity-adjusted earnings from CNCB (excluding dividends).

Set forth below is financial information for each of the Group’s current operating segments as of and for the years ended December 31, 2013, 2012 and 2011.

The breakdown of the Group’s total assets by operating segments as of December 31, 2013, 2012 and 2011 is as follows:

 

     As of December 31,  
Total Assets by Operating Segment    2013     2012     2011  
     (In Millions of Euros)  

Spain

     315,561        345,362        323,249   

Real Estate Activity in Spain

     20,563        21,923        22,558   

Eurasia (*)

     41,223        48,324        53,439   

Mexico

     82,171        81,723        72,156   

South America

     78,141        77,474        62,651   

United States

     53,042        53,892        53,090   
  

 

 

   

 

 

   

 

 

 

Subtotal Assets by Operating Segments

     590,700        628,698        587,143   
  

 

 

   

 

 

   

 

 

 

Corporate Center and other adjustments (**)

     (8,125     (7,626     (4,305
  

 

 

   

 

 

   

 

 

 

Total Assets BBVA Group

     582,575        621,072        582,838   
  

 

 

   

 

 

   

 

 

 

 

(*) The information is presented under management criteria, pursuant to which Garanti’s information has been proportionally integrated based on our 25.01% interest in Garanti.
(**) Other adjustments include adjustments made to account for the fact that, in our Consolidated Financial Statements, Garanti is accounted for using the equity method rather than using the management criteria referred above. For more information see “Item 5. Operating and Financial Review and Prospects”.

 

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The following table sets forth information relating to the profit attributable to the parent company by each of BBVA’s operating segments for the years ended December 31, 2013, 2012 and 2011:

 

     Profit/(Loss)
Attributable to Parent
Company
    % of Profit/(Loss)
Attributable to Parent
Company
 
     For the Year Ended December 31,  
     2013     2012     2011     2013     2012     2011  
     (In Millions of Euros)     (In Percentage)  

Spain

     583        1,162        1,075        18.1        136.2        40.5   

Real Estate Activity in Spain

     (1,254     (4,044     (809     (38.9     (474.1     (30.5

Eurasia

     454        404        563        14.1        47.4        21.2   

Mexico

     1,805        1,689        1,638        55.9        198.0        61.7   

South America

     1,249        1,199        898        38.7        140.6        33.8   

United States

     390        443        (713     12.1        51.9        (26.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Operating Segments

     3,227        853        2,654        100.0        100.0        100.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate Center

     (999     823        351         
  

 

 

   

 

 

   

 

 

       

Profit attributable to Parent Company

     2,228        1,676        3,004         
  

 

 

   

 

 

   

 

 

       

The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2013, 2012 and 2011 and reconciles the income statement of the various operating segments to the consolidated income statement of the Group:

 

     Operating Segments                           
     Spain      Real
Estate
Activity
in Spain
    Eurasia(*)      Mexico      South
America
     United
States
    Corporate
Center
    Total      Adjustments
(**)
    BBVA
Group
 
     (In Millions of Euros)  

2013

                         

Net interest income

     3,830         (3     911         4,484         4,703         1,407        (719     14,613         (713     13,900   

Operating profit/(loss) before tax

     222         (1,840     593         2,362         2,387         534        (1,507     2,750         (1,590     1,160   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Profit

     583         (1,254     454         1,805         1,249         390        (999     2,228         —          2,228   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

2012

                         

Net interest income

     4,748         (20     851         4,178         4,288         1,551        (473     15,122         (648     14,474   

Operating profit/(loss) before tax

     1,652         (5,705     508         2,229         2,271         619        (826     749         833        1,582   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Profit

     1,162         (4,044     404         1,689         1,199         443        823        1,676         —          1,676   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

2011

                         

Net interest income

     4,248         104        806         3,782         3,159         1,518        (465     13,152         (428     12,724   

Operating profit/(loss) before tax

     1,515         (1,216     722         2,153         1,677         (1,053     (852     2,946         452        3,398   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Profit

     1,075         (809     563         1,638         898         (713     351        3,004         —          3,004   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(*) The information is presented under management criteria, pursuant to which Garanti’s information has been proportionally integrated based on our 25.01% interest in Garanti.
(**) Other adjustments include adjustments made to account for the fact that, in our Consolidated Financial Statements, Garanti is accounted for using the equity method rather than using the management criteria referred above. For more information see “Item 5. Operating and Financial Review and Prospects”.

 

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Spain

The Spain operating segment includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Center area and Real Estate Activity in Spain. 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 multinational groups and the trading floor and distribution business in Spain; and

 

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

In addition, it includes certain portfolios, finance and structural euro balance sheet positions as described above.

The following table sets forth information relating to the activity of this operating segment for the years ended December 31, 2013, 2012 and 2011:

 

     As of December 31,  
     2013      2012      2011  
     (In Millions of Euros)  

Total Assets

     315,561         345,362         323,249   

Loans and advances to customers

     178,081         193,101         194,147   

Of which:

        

Residential mortgages

     77,575         84,602         76,900   

Consumer finance

     6,703         7,663         8,077   

Loans

     4,962         6,043         6,500   

Credit cards

     1,741         1,620         1,577   

Loans to enterprises

     36,969         47,635         55,349   

Loans to public sector

     21,694         24,772         25,092   

Customer deposits under management (*)

     147,782         133,802         109,160   

Current and savings accounts

     53,380         47,449         44,044   

Time deposits

     74,435         62,587         44,719   

Other customer funds

     19,967         23,765         20,397   

Off-balance sheet funds

     42,911         40,134         43,048   

Mutual funds

     22,298         19,116         19,598   

Pension funds

     20,428         18,577         17,224   

Other placements

     185         2,441         6,227   

 

(*) Excluding repos.

Loans and advances to customers of this operating segment as of December 31, 2013 amounted to €178,081 million, a 7.8% decrease from the €193,101 million recorded as of December 31, 2012, mainly as a result of lower lending activity due to the deteriorated economic situation in Spain.

 

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Customer deposits under management of this operating segment as of December 31, 2013 amounted to €147,782 million, a 10.4% increase from the €133,802 million recorded as of December 31, 2012, as a result of the growth of time deposits (18.9% year-on-year), due to the boosting of the multichannel business and a higher than 80% deposits renewal rate every month of 2013 despite the declining interest rates.

Mutual funds of this operating segment as of December 31, 2013 amounted to €22,298 million, a 16.6% increase from the €19,116 million recorded as of December 31, 2012, due to the boosting of the commercial strategy during the second half of the year and improving market trends.

Pension funds of this operating segment as of December 31, 2013 amounted to €20,428 million, a 10.0% increase from the €18,577 million recorded as of December 31, 2012, as a result of the higher level of newly signed individual pension plans when compared to 2012.

This operating segment’s non-performing assets ratio increased to 6.4% as of December 31, 2013, from 4.1% as of December 31, 2012, mainly due to the declining lending volumes and the deterioration of refinanced loans. This operating segment non-performing assets coverage ratio decreased to 41% as of December 31, 2013, from 48% as of December 31, 2012.

Real Estate Activity in Spain

This operating segment has been set up with the aim of providing specialized and structured management of the real estate assets accumulated by the Group as a result of the economic crisis in Spain. It includes primarily lending to real estate developers (which was previously included in the Spain segment) and foreclosed real estate assets (which were previously included in the Corporate Center).

The exposure, including loans and advances to customers and foreclosed assets, to the real estate sector in Spain is declining. As of December 31, 2013, the balance stood at €14,570 million, 6.5% lower than as of December 31, 2012. In 2013 there was an increase in the balance of non-performing developer loans, primarily with respect to refinanced loans. Within the exposure to the Spanish real estate sector, property securing mortgage loans to private individuals has increased year-on-year by 14.6%.

As of December 31, 2013, the segment’s coverage of non-performing and potential problem loans was 51% and overall coverage of real estate exposure was 45%. In the latter part of 2013, sales of owned real estate assets picked up pace and 21,383 units were sold during 2013.

Eurasia

This operating segment covers the retail and wholesale banking businesses of the Group in the rest of Europe and Asia. It also includes BBVA’s stakes in the Turkish bank Garanti and the Chinese banks CNCB and CIFH. Following management criteria, assets and liabilities corresponding to our 25.01% stake in Garanti are included in every balance sheet line.

 

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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, 2013, 2012 and 2011:

 

     As of December 31,  
     2013      2012      2011  
     (In Millions of Euros)  

Total Assets

     41,223         48,324         53,439   

Loans and advances to customers

     28,397         30,228         34,740   

Of which:

        

Residential mortgages

     4,156         4,291         4,203   

Consumer finance

     3,983         4,262         3,729   

Loans

     2,743         3,051         2,767   

Credit cards

     1,240         1,211         962   

Loans to enterprises

     18,361         19,777         25,056   

Loans to public sector

     251         102         107   

Customer deposits under management (*)

     16,475         16,484         20,384   

Current and savings accounts

     3,148         3,098         2,773   

Time deposits

     9,009         9,576         9,679   

Other customer funds

     4,318         3,810         7,933   

Off-balance sheet funds

     1,966         2,016         1,729   

Mutual funds

     1,332         1,408         1,255   

Pension funds

     634         608         474   

 

(*) Excluding repos.

Loans and advances to customers of this operating segment as of December 31, 2013 amounted to €28,397 million, a 6.1% decrease from the €30,228 million recorded as of December 31, 2012, as a result of the deleveraging of the wholesale business and the negative impact of the Turkish lira exchange rate.

Customer deposits under management of this operating segment as of December 31, 2013 amounted to €16,475 million, a 0.1% decrease from the €16,484 million recorded as of December 31, 2012, as a result of lower time deposit volumes.

Mutual funds of this operating segment as of December 31, 2013 amounted to €1,332 million, a 5.4% decrease from the €1,408 million recorded as of December 31, 2012, due to a decline of mutual funds in Turkey which more than offset the growth in Portugal.

Pension funds of this operating segment as of December 31, 2013 amounted to €634 million, a 4.3% increase from the €608 million recorded as of December 31, 2012, mainly as a result of increases in Turkey and Portugal.

This operating segment’s non-performing assets ratio increased to 3.4% as of December 31, 2013 from 2.8% as of December 31, 2012, mainly as a result of a lower volume of loans and advances to customers and an increase in non-performing loans, as a result of the consolidation of prudent risk management policy by BBVA (wholesale business and Portugal). This operating segment non-performing assets coverage ratio was 87% as of December 31, 2012 and 2013.

 

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Mexico

The Mexico operating segment comprises the banking and insurance businesses conducted in Mexico by the BBVA Bancomer financial group. The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2013, 2012 and 2011:

 

     As of December 31,  
     2013      2012      2011  
     (In Millions of Euros)  

Total Assets

     82,171         81,723         72,156   

Loans and advances to customers

     40,129         39,052         34,450   

Of which:

        

Residential mortgages

     8,985         9,399         8,854   

Consumer finance

     10,096         9,785         8,220   

Loans

     4,748         4,421         3,734   

Credit cards

     5,348         5,364         4,486   

Loans to enterprises

     13,975         12,512         10,938   

Loans to public sector

     3,594         3,590         3,313   

Customer deposits under management (*)

     34,726         34,071         37,130   

Current and savings accounts

     24,498         23,707         21,103   

Time deposits

     6,409         7,157         7,398   

Other customer funds

     3,819         3,207         2,629   

Off-balance sheet funds

     19,680         19,896         17,623   

Mutual funds

     16,896         17,492         15,612   

Other placements

     2,784         2,404         2,011   

 

(*) Excluding repos.

Loans and advances to customers of this operating segment as of December 31, 2013 amounted to €40,129 million, a 2.8% increase from the €39,052 million recorded as of December 31, 2012, mainly due to the increase in financing to medium-sized enterprises.

Customer deposits under management of this operating segment as of December 31, 2013 amounted to €34,726 million, a 1.9% increase from the €34,071 million recorded as of December 31, 2012, mainly as a result of the increase in customer deposits in U.S. dollars in Mexico.

Mutual funds of this operating segment as of December 31, 2013 amounted to €16,896 million, a 3.4% decrease from the €17,492 million recorded as of December 31, 2012, mainly as a result of a decrease in fixed-income products.

This operating segment’s non-performing assets ratio decreased to 3.6% as of December 31, 2013, from 3.7% as of December 31, 2012. This operating segment non-performing assets coverage ratio decreased to 110% as of December 31, 2013, from 114% as of December 31, 2012. Both changes are mainly as a result of the increase in loans and advances to customers.

 

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South America

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

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

 

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

 

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

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2013, 2012 and 2011:

 

     As of December 31,  
     2013      2012      2011  
     (In Millions of Euros)  

Total Assets

     78,141         77,474         62,651   

Loans and advances to customers

     48,470         48,721         40,213   

Of which:

        

Residential mortgages

     8,533         8,627         7,018   

Consumer finance

     13,112         13,033         9,849   

Loans

     9,441         9,570         7,352   

Credit cards

     3,670         3,463         2,496   

Loans to enterprises

     18,565         17,529         15,912   

Loans to public sector

     601         625         766   

Customer deposits under management (*)

     58,881         56,933         44,890   

Current and savings accounts

     37,639         34,339         26,120   

Time deposits

     15,869         17,107         15,094   

Other customer funds

     5,374         5,487         3,676   

Off-balance sheet funds

     6,552         6,436         5,698   

Mutual funds

     2,952         3,355         3,037   

Pension funds

     3,600         3,081         2,661   

 

(*) Excluding repos.

Loans and advances to customers of this operating segment as of December 31, 2013 amounted to €48,470 million, a 0.5% decrease from the €48,721 million recorded as of December 31, 2012, mainly due to the negative effect of exchange rate movements which offset the increased activity in credit cards, customer finance and, to a lesser extent, mortgage lending.

Customer deposits under management of this operating segment as of December 31, 2013 amounted to €58,881 million, a 3.4% increase from the €56,933 million recorded as of December 31, 2012, mainly due to an increase in the balance of current and saving accounts, which was partially offset by the negative effect of exchange rate movements.

Mutual funds of this operating segment as of December 31, 2013 amounted to €2,952 million, a 12.0% decrease from the €3,355 million recorded as of December 31, 2012, mainly as a result of the positive performance in Peru and Chile.

 

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Pension funds of this operating segment as of December 31, 2013 amounted to €3,600 million, a 16.8% increase from the €3,081 million recorded as of December 31, 2012, mainly as a result of the increased volumes in Bolivia.

This operating segment’s non-performing assets ratio was 2.1% as of December 31, 2012 and 2013. This operating segment non-performing assets coverage ratio decreased to 141% as of December 31, 2013, from 146% as of December 31, 2012.

United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 95 per cent of the area’s balance sheet as of December 31, 2013. 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 New York, which specializes in transactions with large corporations.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2013, 2012 and 2011:

 

     As of December 31,  
     2013      2012      2011  
     (In Millions of Euros)  

Total Assets

     53,042         53,892         53,090   

Loans and advances to customers

     38,067         36,892         38,775   

Of which:

        

Residential mortgages

     9,591         9,109         7,787   

Consumer finance

     4,464         4,422         4,584   

Loans

     3,984         3,942         4,134   

Credit cards

     481         480         450   

Loans to enterprises

     19,427         19,292         20,926   

Loans to public sector

     2,772         1,961         1,533   

Customer deposits under management (*)

     38,448         37,721         35,127   

Current and savings accounts

     29,800         29,060         26,458   

Time deposits

     7,300         7,885         7,269   

Other customer funds

     1,348         775         1,399   

 

(*) Excluding repos.

Loans and advances to customers of this operating segment as of December 31, 2013 amounted to €38,067 million, a 3.2% increase from the €36,892 million recorded as of December 31, 2012, as a result of growth in all of the segment’s portfolios.

Customer deposits under management of this operating segment as of December 31, 2013 amounted to €38,448 million, a 1.9% increase from the €37,721 million recorded as of December 31, 2012, mainly due to an increase in the balance of current and saving accounts.

This operating segment’s non-performing assets ratio decreased to 1.2% as of December 31, 2013, from 2.4% as of December 31, 2012. This operating segment non-performing assets coverage ratio increased to 138% as of December 31, 2013, from 90% as of December 31, 2012. Both changes are mainly as a result of the decrease in impaired loans and advances to customers due to improvements in credit quality and increases in repayments.

Insurance Activity

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

 

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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

 

    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;

 

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    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.

It is expected that the European Central Bank (ECB) will assume its new banking supervision responsibilities in the autumn of 2014. Under the new supervision system, the ECB will directly supervise significant credit institutions (including the Bank). It will work closely with the national competent authorities to supervise all other credit institutions under the overall oversight of the ECB. The ECB may decide at any time to take responsibility for a less-significant credit institution.

Deposit Guarantee Fund of Credit Institutions

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

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

The FGD is funded by annual contributions from member banks. Pursuant to Royal Decree-Law 19/2011, the current rate of our annual 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.

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.

 

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Finally, Royal Decree-Law 6/2013 established a special contribution of 0.3% of the deposits held as of December 31, 2012. The first tranche of such contribution, amounting to two fifths of it, had to be disbursed within the first 20 working days of 2014, subject to the deductions allowed by Royal Decree-Law 6/2013. The second tranche, for the remaining 60% of the special contribution, will have to be disbursed from 2014 onwards within a maximum of seven years, in accordance with the payment schedule set by the FGD’s Management Committee.

As of December 31, 2013, 2012 and 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;

 

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

 

    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.

Law 9/2012, of November 14 (see “—Law 9/2012 of November 14, on Restructuring and Resolution of Credit Entities”) grants the FROB the power to implement early intervention measures (for mild difficulties), restructuring measures (for temporary troubles, able to be coped with by means of public financial support) and orderly resolution measures (for non-viable institutions). It also provides for the creation of an Asset Management Company intended to purchase certain problematic assets from state aided banks in order to ease their viability. The FROB is entitled to require entities receiving state aids to transfer those problematic assets.

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, 2013, 2012 and 2011, 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.

 

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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.

 

    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 a new stricter minimum capital requirement for Spanish credit institutions of a minimum of 8%. This ratio was 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.

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.

Pursuant to the Memorandum of Understanding agreed by Spain and the Eurogroup in July 2012, from January 2013, Law 9/2012 replaced the minimum capital requirements of 8% and 10% referred to above with a single minimum requirement of 9%. The criteria for calculating the ratio was also modified to make it similar to the criteria that was used for purposes of carrying out the EU Capital Exercise (EBA/REC/2011/1).

As of December 31 2013, the “Capital Principal” ratio of the BBVA Group (as calculated in accordance with Law 9/2012 exceeded the minimum requirements in €7,000 millions approximately.

As shown below, we fulfilled the minimum capital requirements as required by Law 9/2012 as of December 31, 2013 and December 31, 2012:

 

     Basel II Capital Ratio     Law 9/2012 “Capital Principal”
ratio
 

Minimum required

     8     9

December 2013

     14.9     11.2

December 2012

     13.0     10.5

 

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The minimum Capital Principal requirements established by RD-L 2/2011, were derogated by Royal Decree-Law 14/2013, of November 29 with effect as of January 1, 2014.

For additional information on how these ratios were calculated, please see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital.”

On July 17, 2013, the CRD IV package, which transposes (through the adoption of a Regulation and a Directive) the new global standards on bank capital (the Basel III agreement) into EU law, entered into force.

The new framework divides the current CRD (Capital Requirements Directive) into two legislative instruments: a directive governing the access to deposit-taking activities and a regulation establishing the prudential requirements institutions need to comply with.

While Member States will have to transpose the directive into national law, the CRR is directly applicable, without a need to be implemented by national laws.

These new rules, which are in effect since January 1, 2014 tackle some of the vulnerabilities shown by the banking institutions during the crisis. They set stronger prudential requirements for banks, requiring them to keep sufficient capital reserves and liquidity. In addition, a leverage ratio back stop mechanism is being defined in order to limit the growth of the total balance sheet as compared to available own funds.

This new framework is intended to make EU banks more solid and to strengthen their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business.

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

 

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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”.

Impairment on Financial Assets

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.

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

A bank may dedicate all of its net profits and its distributable reserves to the payment of dividends. In no event may dividends be paid from non-distributable reserves.

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 2013 and 2014 to Spanish banks to limit cash dividend payouts up to 25% of their consolidated earnings.

 

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Going forward, BBVA intends to substitute progressively the current shareholder pay-out policy with a policy to pay the full amount of the dividends in cash and in line with the performance of the Group earnings, with the final aim of having an annual pay-out of between 35% and 40% of the profits obtained in each financial year, depending on market circumstances and the applicable regulatory framework.

Effective since January 1, 2014, new banking regulation (Basel III, transposed into European Law under the CRD IV Directive) has affected the restrictions to dividend payments that may be applicable in the following years, in circumstances where solvency requirements are not fulfilled. Financial entities will be required to hold a combined buffer requirement above the minimum capital requirements in order to be able to distribute freely their distributable results. This mechanism will not be in force until 2016 and will not be fully applicable until 2019.

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

Scrip Dividend

As in 2011 and 2012, during 2013, a scrip dividend scheme called “Dividend Option” was successfully approved by the annual general meeting of shareholders held on March 15, 2013. The BBVA annual general meeting of shareholders held on March 14, 2014 passed four resolutions adopting four different free-of-charge capital increases for the implementation of a new “Dividend Option” scheme. These resolutions will allow the Board of Directors to implement, depending on the situation on the markets, the regulatory framework, the earnings obtained and possible recommendations on dividend payouts, the Dividend Option during a period of one year since the approval of such resolutions.

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

The “Dividend Option” 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, whilst maintaining the possibility to choose to receive the entire remuneration in cash, in line with the current trend that is being put into practice by other entities in the domestic and international markets.

Shareholders may have the “Dividend Option” available to them on different dates. 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.

BBVA’s Board of Directors, at its March 26, 2014 meeting, approved the execution of a capital increase on the terms approved by the annual general meeting of shareholders held on March 14, 2014 in connection with the implementation of the “Dividend Option”. The number of new shares issued as a consequence of the execution of the capital increase was 101,214,267.

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

 

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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, which 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.

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.

 

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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”). BBVA’s direct and indirect activities and investments in the United States are limited to banking activities and certain non-banking activities that are “closely related to banking,” as determined by the Federal Reserve, and certain other activities permitted under the BHC Act. BBVA also is required to obtain the prior approval of the Federal Reserve before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting securities of any U.S. bank or bank holding company.

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

BBVA’s U.S. bank subsidiary, Compass Bank (“Compass Bank”), 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. Compass Bank is an Alabama state-chartered bank, is a member of the Federal Reserve System, and has branches in Alabama, Arizona, California, 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 the 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”).

On May 14, 2013, BBVA Compass Bancshares, Inc., the Company’s former mid-tier U.S. bank holding company, was merged into BBVA USA Bancshares, Inc., the Company’s top-tier U.S. bank holding company. Subsequent to the merger, the surviving entity’s name was changed to BBVA Compass Bancshares, Inc. (“BBVA Compass”). Compass Bank is a direct subsidiary of BBVA Compass. BBVA Compass is a bank holding company within the meaning of the BHC Act and is subject to supervision and regulation by the Federal Reserve.

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.

 

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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

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

The activities of 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 certain private equity funds, hedge funds and other covered 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.

On March 31, 2013 BBVA registered as a “swap dealer” (as defined in the Commodity Exchange Act and the regulations promulgated thereunder (the “CEA”)) under Title VII of the Dodd-Frank Act. This registration subjects BBVA to regulation and supervision by the U.S. Commodity Futures Trading Commission (the “CFTC”). BBVA’s world-wide swap activities are also subject to regulations adopted by the European Commission pursuant to the European Market Infrastructure Regulation (“EMIR”) and the EU’s Markets in Financial Instruments Directive (“MiFID”) and other European regulations and directives. The CFTC will deem BBVA to have complied with certain Dodd-Frank Act Title VII provisions for which, subject to certain conditions, the CFTC has found certain corresponding European provisions to be essentially identical or comparable, provided BBVA complies with such European provisions, as applicable.

 

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Currently BBVA is not considering registration as a “security-based swap dealer” with the SEC.

Compass Bank (and other entities of the Group) may register as a swap dealer if required by its swap activities or if it is determined to be beneficial to its business.

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. As it is 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 July 2013, the Federal banking agencies issued the U.S. Basel III final rule implementing the Basel III capital framework for U.S. banks and bank holding companies and also implementing certain provisions of the Dodd-Frank Act. Certain aspects of the final rule, such as the new minimum capital ratios and the revised methodology for calculating risk-weighted assets, will become effective on January 1, 2015 for BBVA Compass and Compass Bank. Other aspects of the final rule, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015. 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. To be considered “well capitalized,” BBVA on a consolidated basis, BBVA Compass and Compass Bank are required to maintain a Tier 1 risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. BBVA Compass is also required to maintain a leverage ratio of at least 5% in order to be “well capitalized.” Under the U.S. Basel III final rule, Compass Bank will be required to maintain the following in order to meet the “well capitalized” test: a common equity tier 1 capital to risk-weighted assets ratio of at least 6.5%, a total risk-based capital ratio of at least 10% and a tier 1 risk-based capital ratio of at least 8%, and a leverage ratio of at least 5%.

The Federal Reserve approved a final rule in February 2014 to enhance its supervision and regulation of the U.S. operations of Large FBOs such as BBVA. Under the Federal Reserve’s rule, Large FBOs with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies, such as BBVA, will be required to create a separately capitalized top-tier U.S. intermediate holding company that will hold all of the Large FBOs’ U.S. bank and nonbank subsidiaries, such as Compass Bank and BBVA Compass. An intermediate holding company will be subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. Under the final rule, a Large FBO that is subject to the IHC requirement may request permission from the Federal Reserve to establish multiple IHCs or use an alternative organizational structure. The final rule also permits the Federal Reserve to apply the IHC requirement in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single Large FBO. Although U.S. branches and agencies of Large FBOs will not be required to be held beneath an IHC, such branches and agencies will be subject to liquidity, and, in certain circumstances, asset maintenance requirements. Large FBOs generally will be required to establish IHCs and comply with the enhanced prudential standards beginning July 1, 2016. An IHC’s compliance with applicable U.S. leverage ratio requirements is generally delayed until January 1, 2018. FBOs that have $50 billion or more in non-branch/agency U.S. assets as of June 30, 2014, such as BBVA, will be required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the intermediate holding company requirement. As a bank holding company, BBVA Compass will be required to comply with the enhanced prudential standards applicable under the final rule to top-tier U.S.-based bank holding companies beginning on January 1, 2015 and until BBVA forms or designates an IHC and the IHC becomes subject to corresponding enhanced prudential standards. The Federal Reserve has stated that it will issue, at a later date, final

 

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rules to implement certain other enhanced prudential standards under the Dodd-Frank Act for large bank holding companies and Large FBOs, including single counterparty credit limits and an early remediation framework. Under the early remediation framework, the Federal Reserve would implement prescribed regulations and penalties against the FBO and its U.S. operations and certain of its officers and directors, if the FBO and/or its U.S. operations do not meet certain requirements, and would authorize the termination of U.S. operations under certain circumstances. The February 2014 final rule could affect BBVA’s U.S. operations.

In addition, the Federal Reserve and other U.S. regulators issued for public comment in October 2013 a proposed rule that would introduce a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The proposed liquidity coverage ratio is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The Federal Reserve has also stated that it intends, through future rulemakings, to apply the Basel III liquidity coverage ratio and net stable funding ratio to the U.S. operations of some or all Large FBOs.

Under capital plan and stress test rules adopted by the Federal Reserve, BBVA Compass 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 Compass has submitted annual capital plans in January 2012 and January 2013. Beginning in 2014, BBVA Compass will participate in the Comprehensive Capital Analysis and Review (“CCAR”) program and will submit a CCAR plan in January 2015. Based on a qualitative and quantitative assessment, including a supervisory stress test conducted as part of the CCAR process, the Federal Reserve Board will either object to a large U.S. bank holding company’s capital plan, in whole or in part, or provide a notice of non-objection to the company by March 31 of a calendar year for plans submitted by the January submission date. If the Federal Reserve Board objects to a capital plan, the bank holding company may not make any capital distribution other than those with respect to which the Federal Reserve Board has indicated its non-objection.

In addition, the Dodd-Frank Act and implementing rules issued by the Federal Reserve Board impose stress test requirements on both BBVA Compass and Compass Bank. BBVA Compass began conducting semi-annual company-run stress tests in October 2013 and is subject to an annual supervisory stress test conducted by the Federal Reserve Board.

On December 10, 2013, U.S. regulators issued final rules to implement the Dodd-Frank Act’s Volcker Rule. The Volcker Rule limits the ability of banking entities to sponsor or invest in certain covered funds and to engage in certain types of proprietary trading unrelated to serving clients subject to certain exclusions and exemptions. The final rules also limit the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final rules contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained. The final rules extended the deadline for financial institutions, including BBVA and its subsidiaries, to conform to the Volcker Rule, and implement a compliance program, until July 2015 (with the possibility of two one-year extensions under certain circumstances). As it was finally approved in mid-December 2013, BBVA continues to assess the impact of the Volcker Rule to its business operations. Further implementation efforts may be necessary based on subsequent regulatory interpretations, guidelines or examinations.

The Dodd-Frank Act also changes the FDIC deposit insurance 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).

The so-called “push-out” provision, Section 716 of the Dodd-Frank Act, prohibits U.S. federal assistance to be provided to any swaps entity, including any swap dealer, with respect to certain types of swaps, subject to certain exceptions. The swap activities of BBVA’s New York branch already conformed to the requirements of this provision, as there were no swaps subject to push-out in the New York branch books. Should Compass Bank

 

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become a swap dealer, it will need to restrict its swap activities to conform to the Dodd-Frank Act “push-out” provision. 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 affiliate BSI and to Compass Bank with its non-banking 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.

The Durbin Amendment to the Dodd-Frank Act required the Federal Reserve to establish a cap on the rate merchants pay banks for electronic clearing of debit transactions (i.e., the interchange rate). The Federal Reserve issued final rules, effective October 1, 2011, for establishing standards, including a cap, for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule established standards for assessing whether debit card interchange fees received by debit card issuers were reasonable and proportional to the costs incurred by issuers for electronic debit transactions. The interchange fee allowed by the rule reduced the average interchange fee by approximately 50%.

In July 2013, a decision by a Washington D.C. District Court judge invalidated the Federal Reserve’s interchange rule, ruling that the new lower interchange fees had been inappropriately set too high by the Federal Reserve. The Federal Reserve has appealed the decision and a stay on the rule is in effect. It is not possible to predict the outcome of this litigation and how the Federal Reserve, if required to do so, would revise the interchange rule.

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, the Exchange Act and the Investment Advisers Act of 1940.

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

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

Legacy contractual obligations related to counter indemnities. Before 2007, BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, three of which remained outstanding during 2013. Estimated gross revenue for 2013 from these counter indemnities, which includes fees and/or commissions, did not exceed $9,000 and was entirely derived from payments made by BBVA Group’s non-Iranian customers in Europe. BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. In addition, in accordance with Council Regulation (EU) Nr. 267/2012 of March 23, payments of any amounts due to Bank Melli under these counter indemnities have been blocked. BBVA Group is committed to terminating these business relationships as soon as contractually possible and does not intend to enter into new business relationships involving Bank Melli.

 

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Letters of credit. During 2013, BBVA Group had credit exposure to Bank Sepah arising from a letter of credit issued by such Iranian Bank Sepah to a non-Iranian client of BBVA Group in Europe. This letter of credit, which was granted before 2004, was used to secure a loan granted by BBVA Group to a client in order to finance certain Iran-related activities. This loan was supported by the Spanish export credit agency (CESCE). The loan related to the client’s’ exportation of goods to Iran (consisting of goods relating to a pelletizing plant for iron concentration and equipment). Estimated gross revenue for 2013 from this loan, which includes fees and/or commissions, did not exceed $12,000. Payments of any amounts due by Bank Sepah in 2013 under this letter of credit referred to above were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. In addition, during 2013, BBVA Group received an indemnity payment from CESCE (which totaled approximately $7 million) in connection with a letter of credit which had been granted by Bank Mellat before 2004 and which matured in 2012. The loan underlying this letter of credit was granted by BBVA Group to a Spanish customer in connection with its provision of engineering services and supply of equipment for the construction of a petrochemical plant in Iran. This loan was supported by CESCE. BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure in connection with the two letters of credit referred to above.

BBVA Group is committed to terminating the outstanding business relationship with Bank Sepah as soon as contractually possible and does not intend to enter into new business relationships involving Bank Sepah or Bank Mellat.

Bank accounts. In 2013, BBVA Group 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). BBVA Group believes 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 2013 from these accounts, which includes fees and/or commissions, did not exceed $6,100. BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure. BBVA Group is committed to terminating its business relationships with the employees of this company as soon as contractually possible and does not intend to enter into new business relationships involving this company or its employees.

Iranian embassy-related activity. BBVA Group maintains bank accounts in Spain for three employees of the Iranian embassy in Spain. In addition, BBVA Group maintains bank accounts in Venezuela for seven employees of the Iranian embassy in Venezuela. Moreover, prior to 2013, BBVA Group provided one employee of the Iranian embassy in Venezuela with an insurance against theft at ATMs which expired on November 6, 2013. Estimated gross revenue for 2013 from embassy-related activity, which includes fees and/or commissions, did not exceed $1,100. BBVA Group does not allocate direct costs to fees and commissions and therefore have not disclosed a separate profits measure. BBVA Group is committed to terminating these business relationships as soon as legally possible.

 

C. Organizational Structure

As of December 31, 2013, the BBVA Group was made up of 301 consolidated entities and 127 entities accounted for 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, Peru, Portugal, Spain, Switzerland, United Kingdom, United States of America, Uruguay and Venezuela. In addition, BBVA has an active presence in Asia.

 

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Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2013.

 

     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         75,330   

COMPASS BANK

   United States    Bank      100.00         100.00         56,106   

BANCO PROVINCIAL S.A. - BANCO UNIVERSAL

   Venezuela    Bank      55.21         55.21         22,932   

BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS

   Spain    Insurance      99.95         99.95         16,243   

BANCO CONTINENTAL, S.A.

   Peru    Bank      46.12         46.12         14,804   

BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.

   Chile    Bank      68.18         68.18         13,903   

BBVA COLOMBIA, S.A.

   Colombia    Bank      95.43         95.43         13,114   

BBVA BANCO FRANCES, S.A.

   Argentina    Bank      75.96         75.96         6,349   

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

   Portugal    Bank      100.00         100.00         5,471   

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

   Mexico    Insurance      100.00         100.00         3,576   

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

   Mexico    Insurance      100.00         99.97         3,050   

BANCO BILBAO VIZCAYA ARGENTARIA URUGUAY, S.A.

   Uruguay    Bank      100.00         100.00         2,133   

BBVA SUIZA, S.A. (BBVA SWITZERLAND)

   Switzerland    Bank      100.00         100.00         1,356   

UNO-E BANK, S.A.

   Spain    Bank      100.00         100.00         1,329   

BBVA PARAGUAY, S.A.

   Paraguay    Bank      100.00         100.00         1,322   

 

D. Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,230 branch offices in Spain and, principally through our various affiliates, 4,282 branch offices abroad as of December 31, 2013. As of December 31, 2013, approximately 76% of our branches in Spain and 55% 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, 2013, the accumulated investment for this project amounted to € 686 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.

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, 2013     Year Ended December 31, 2012     Year Ended December 31, 2011  
     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

     26,463         262         0.99     24,574         259         1.05     19,991         250         1.25

Debt securities, equity instruments and derivatives

     166,013         4,385         2.64     164,435         4,414         2.68     139,644         3,969         2.84

Loans and receivables

     361,246         18,736         5.19     372,458         19,939         5.35     360,107         18,796         5.22

Loans and advances to credit institutions

     25,998         411         1.58     25,122         442         1.76     25,209         606         2.40

Loans and advances to customers

     335,248         18,325         5.47     347,336         19,497         5.61     334,898         18,190         5.43

In Euros (2)

     204,124         5,835         2.86     217,533         7,267         3.34     219,864         7,479         3.40

In other currencies (3)

     131,125         12,489         9.52     129,802         12,230         9.42     115,034         10,712         9.31

Other financial income

     —           —             —           —             —           —        

Non-earning assets

     45,982         128         0.28     46,613         203         0.44     37,074         214         0.58
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total average assets

     599,705         23,512         3.92     608,081         24,815         4.08     556,816         23,229         4.17
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(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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     Average Balance Sheet - Liabilities and Interest Paid on Interest Bearing Liabilities  
     Year Ended December 31, 2013     Year Ended December 31, 2012     Year Ended December 31, 2011  
     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

     86,600         1,551         1.79     104,231         2,089         2.00     74,027         1,881         2.54

Customer deposits

     290,105         4,366         1.51     271,828         4,531         1.67     269,842         5,176         1.92

In Euros (2)

     153,634         1,734         1.13     146,996         1,828         1.24     153,773         2,295         1.49

In other currencies (3)

     136,470         2,632         1.93     124,832         2,703         2.16     116,069         2,881         2.48

Debt certificates and subordinated liabilities

     94,130         2,812         2.99     102,563         2,783         2.71     108,735         2,590         2.38

Other financial costs

     —           —           —          —           —           —          —           —           —     

Non-interest-bearing liabilities

     82,257         883         1.07     86,627         938         1.08     65,515         858         1.31

Stockholders’ equity

     46,614         —           —          42,832         —           —          38,696         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total average liabilities

     599,705         9,612         1.60     608,081         10,341         1.70     556,816         10,505         1.89
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(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.

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 2013 compared to 2012, and 2012 compared to 2011. 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.

 

     2013 / 2012  
     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

     20        (16     4   

Securities portfolio and derivatives

     42        (71     (29

Loans and advances to credit institutions

     15        (46     (31

Loans and advances to customers

     (679     (494     (1,173

In Euros

     (448     (984     (1,432

In other currencies

     125        135        259   

Other assets

     (3     (72     (75
  

 

 

   

 

 

   

 

 

 

Total income

     (342     (961     (1,303
  

 

 

   

 

 

   

 

 

 

Interest expense

      

Deposits from central banks and credit institutions

     (353     (185     (538

Customer deposits

     305        (469     (164

In Euros

     83        (176     (94

In other currencies

     252        (323     (71

Debt certificates and subordinated liabilities

     (229     257        28   

Other liabilities

     (47     (7     (55
  

 

 

   

 

 

   

 

 

 

Total expense

     (142     (586     (729
  

 

 

   

 

 

   

 

 

 

Net interest income

     (200     (375     (575
  

 

 

   

 

 

   

 

 

 

 

(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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     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

     57        (48     9   

Securities portfolio and derivatives

     705        (260     445   

Loans and advances to credit institutions

     (2     (162     (164

Loans and advances to customers

     676        631        1,307   

In euro

     (79     (133     (212

In other currencies

     1,375        143        1,519   

Other assets

     55        (66     (11
  

 

 

   

 

 

   

 

 

 

Total income

     2,139        (552     1,586   
  

 

 

   

 

 

   

 

 

 

Interest expense

      

Deposits from central banks and credit institutions

     768        (560     208   

Customer deposits

     38        (683     (645

In euro

     (101     (366     (467

In other currencies

     217        (396     (178

Debt certificates and subordinated liabilities

     (147     341        194   

Other liabilities

     277        (197     79   
  

 

 

   

 

 

   

 

 

 

Total expense

     967        (1,131     (164
  

 

 

   

 

 

   

 

 

 

Net interest income

     1,172        579        1,750   
  

 

 

   

 

 

   

 

 

 

 

(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,  
     2013     2012     2011  
     (In Millions of Euro, except Percentages)  

Average interest earning assets

     553,722        561,468        519,742   

Gross yield (1)

     4.2     4.4     4.5

Net yield (2)

     3.9     4.1     4.2

Net interest margin (3)

     2.5     2.6     2.4

Average effective rate paid on all interest-bearing liabilities

     2.0     2.2     2.3

Spread (4)

     2.2     2.3     2.1

 

(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, 2013, interbank deposits represented 3.66% of our assets. Of such interbank deposits, 24.75% were held outside of Spain and 75.25% 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, 2013, our securities were carried on our consolidated balance sheet at a carrying amount of €112,248 million, representing 19.3% of our assets. €36,630 million, or 32.6%, of our securities consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2013 on investment securities that BBVA held was 3.6%, compared to an average yield of approximately 5.2% earned on loans and receivables during 2013. The market or appraised value of our total securities portfolio as of December 31, 2013, was €112,248 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 fair value of debt securities as of December 31, 2013, December 31, 2012 and December 31, 2011, respectively. The trading portfolio is not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.

 

     As of December 31, 2013  
     Amortized
cost
     Fair Value (1)      Unrealized
Gains
     Unrealized
Losses
 
     (In Millions of Euros)  

DEBT SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic -

     39,224         40,116         1,008         (115
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     30,688         31,379         781         (90

Other debt securities

     8,536         8,738         227         (25

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     5,907         6,027         124         (4

Issued by other institutions

     2,629         2,711         103         (21
  

 

 

    

 

 

    

 

 

    

 

 

 

International -

     31,323         31,690         956         (589
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     10,433         10,583         328         (178

Mexican Government and other government agencies debt securities

     9,028         9,150         281         (160

Other debt securities

     1,404         1,433         47         (19

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     84         93         11         (2

Issued by other institutions

     1,320         1,340         36         (16

The United States

     5,962         5,937         58         (82

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

     171         170         3         (4

States and political subdivisions debt securities

     884         885         8         (7

Other debt securities

     4,907         4,881         46         (72

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     234         233         2         (2

Issued by other institutions

     4,674         4,648         44         (70

Other countries

     14,928         15,170         570         (329

Other foreign governments and other government agencies debt securities

     7,128         7,199         333         (261

Other debt securities

     7,801         7,971         237         (67

Issued by Central Banks

     1,209         1,208         9         (10

Issued by credit institutions

     4,042         4,166         175         (51

Issued by other institutions

     2,550         2,597         54         (6
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     70,547         71,806         1,964         (704
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic -

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

International -

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY PORTFOLIO

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

     70,547         71,806         1,964         (704
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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Table of Contents
     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 -

     34,955         34,366         388         (977
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     25,375         24,761         243         (857

Other debt securities

     9,580         9,605         145         (120

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     7,868         7,880         71         (59

Issued by other institutions

     1,712         1,725         74         (61
  

 

 

    

 

 

    

 

 

    

 

 

 

International -

     28,211         29,182         1,620         (649
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     8,230         9,191         962         (1

Mexican Government and other government agencies debt securities

     7,233         8,066         833         —     

Other debt securities

     997         1,125         129         (1

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     333         388         56         (1

Issued by other institutions

     664         737         73         —     

The United States

     6,927         7,028         189         (88

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

     228         228         1         (1

States and political subdivisions debt securities

     485         496         20         (9

Other debt securities

     6,214         6,304         168         (78

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     150         154         11         (7

Issued by other institutions

     6,064         6,150         157         (71

Other countries

     13,054         12,963         469         (560

Other foreign governments and other government agencies debt securities

     5,557         5,395         212         (374

Other debt securities

     7,497         7,568         257         (186

Issued by Central Banks

     1,158         1,159         2         (1

Issued by credit institutions

     4,642         4,750         209         (101

Issued by other institutions

     1,697         1,659         46         (84
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     63,166         63,548         2,008         (1,626
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic -

     7,278         6,849         4         (433
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     6,469         6,065         2         (406

Other domestic 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         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign government and other government agency debt securities

     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

     73,328         73,408         2,139         (2,059
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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     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 -

     24,943         23,447         183         (1,679
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     20,531         19,209         58         (1,380

Other debt securities

     4,412         4,238         125         (299

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     3,297         3,130         80         (247

Issued by other institutions

     1,115         1,108         45         (52
  

 

 

    

 

 

    

 

 

    

 

 

 

International -

     26,084         25,969         1,039         (1,154
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     4,799         4,974         175         —     

Mexican Government and other government agencies debt securities

     4,727         4,890         163         —     

Other debt securities

     72         84         12         —     

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     59         70         11         —     

Issued by other institutions

     14         15         1         —     

The United States

     7,332         7,339         242         (235

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

     486         482         8         (12

States and political subdivisions debt securities

     507         535         28         —     

Other debt securities

     6,339         6,322         206         (223

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     629         615         22         (36

Issued by other institutions

     5,710         5,708         184         (186

Other countries

     13,953         13,656         622         (919

Other foreign governments and other government agencies debt securities

     8,235         7,977         344         (602

Other debt securities

     5,718         5,679         278         (317

Issued by Central Banks

     843         852         10         (0

Issued by credit institutions

     3,067         2,986         184         (265

Issued by other institutions

     1,808         1,841         84         (51
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     51,027         49,416         1,222         (2,833
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic -

     7,373         6,848         1         (526
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     6,520         6,060         1         (461

Other domestic 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
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign government and other government agency debt securities

     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

     61,982         59,606         1,235         (3,611
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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As of December 31, 2013 the carrying amount of the debt securities classified within the available for sale portfolio by rating categories defined by external rating agencies, were as follows:

 

     As of December 31, 2013  
     Debt Securities Available for Sale  
     Carrying Amount
(In Millions of
Euros)
     %  

AAA

     847         1.2

AA+

     4,927         6.9

AA

     198         0.3

AA-

     748         1.0

A+

     554         0.8

A

     8,463         11.8

A-

     4,588         6.4

BBB+

     7,203         10.0

BBB

     29,660         41.3

BBB-

     9,152         12.7

BB+ or below

     3,548         4.9

Without rating

     1,918         2.7
  

 

 

    

 

 

 

TOTAL

     71,806         100.0

The following tables analyze the carrying amount and fair value of our ownership of equity securities as of December 31, 2013, 2012 and 2011, respectively. See Note 10 to the Consolidated Financial Statements.

 

     As of December 31, 2013  
     Amortized cost      Fair Value (1)      Unrealized Gains      Unrealized Losses  
     (In Millions of Euros)  

EQUITY SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           

Domestic -

     3,331         3,337         54         (47

Equity listed

     3,270         3,277         54         (46

Equity unlisted

     61         60         —           (1

International -

     2,584         2,629         55         (10

United States -

     471         471         —           —     

Equity listed

     16         16         —           —     

Equity unlisted

     455         455         —           —     

Other countries -

     2,113         2,158         55         (10

Equity listed

     2,014         2,051         46         (9

Equity unlisted

     99         107         9         (1
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     5,915         5,966         109         (57
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY SECURITIES

     5,915         5,966         109         (57
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENT SECURITIES

     76,462         77,772         2,073         (761
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

EQUITY SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           

Domestic -

     3,378         3,118         124         (384

Equity listed

     3,301         3,043         122         (380

Equity unlisted

     77         75         2         (4

International -

     862         834         16         (44

United States -

     506         503         1         (4

Equity listed

     32         29         1         (4

Equity unlisted

     474         474         —           —     

Other countries -

     356         331         15         (40

Equity listed

     262         230         8         (40

Equity unlisted

     94         101         7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     4,240         3,952         140         (428
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY SECURITIES

     4,240         3,952         140         (428
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENT SECURITIES

     77,568         77,360         2,279         (2,487
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

EQUITY SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           

Domestic -

     3,838         4,304         468         (2

Equity listed

     3,803         4,269         468         (2

Equity unlisted

     35         35         —           —     

International -

     993         920         18         (91

United States -

     600         590         2         (12

Equity listed

     41         29         —           (12

Equity unlisted

     559         561         2         —     

Other countries -

     393         330         16         (79

Equity listed

     318         244         5         (79

Equity unlisted

     75         86         11         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     4,832         5,225         486         (93
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY SECURITIES

     4,832         5,225         486         (93
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENT SECURITIES

     66,813         64,830         1,721         (3,704
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Table of Contents

The following table analyzes the maturities of our debt investment and fixed income securities, excluding trading portfolio, by type and geographical area as of December 31, 2013.

 

     Maturity at One
Year or Less
     Maturity After
One Year to Five
Years
     Maturity After
Five Years to 10
Years
     Maturity After 10
Years
     Total  
     Amount      Yield
%
 (1)
     Amount      Yield
%
 (1)
     Amount      Yield
%
 (1)
     Amount      Yield
%
 (1)
     Amount  
     (Millions of Euros, Except Percentages)  

DEBT SECURITIES

                          

AVAILABLE-FOR-SALE PORTFOLIO

                          

Domestic

                          

Spanish government and other government agencies debt securities

     983         4.02         16,484         3.65         6,326         4.42         7,585         5.08         31,379   

Other debt securities

     2,645         3.74         5,173         3.87         542         3.33         377         5.58         8,738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

     3,629         3.81         21,657         3.71         6,868         4.28         7,962         5.12         40,116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International

                          

Mexico

     2,401         5.31         4,243         4.36         588         4.06         3,351         0.77         10,583   

Mexican Government and other government agencies debt securities

     2,141         5.31         3,758         4.23         335         5.03         2,915         0.04         9,150   

Other debt securities

     260         5.30         485         5.28         253         2.94         436         3.06         1,433   

United States

     334         2.15         3,446         2.15         1,642         2.58         515         4.41         5,937   

U.S. Treasury and other government agencies debt securities

     77         2.63         83         0.37         10         2.16         —           —           170   

States and political subdivisions debt securities

     58         2.01         223         2.93         485         2.42         119         1.69         885   

Other debt securities

     199         1.99         3,140         2.15         1,147         2.68         395         5.25         4,881   

Other countries

     3,328         2.91         6,551         4.78         2,787         9.21         2,504         5.88         15,170   

Securities of foreign governments (2)

     727         4.52         3,612         5.58         1,638         12.00         1,223         6.39         7,199   

Other debt securities of other countries

     2,601         2.62         2,939         3.78         1,149         4.84         1,281         5.32         7,971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International

     6,063         3.94         14,240         3.98         5,017         6.42         6,370         2.88         31,690   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE-FOR-SALE

     9,692         3.88         35,897         3.81         11,885         5.16         14,332         4.08         71,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD-TO-MATURITY PORTFOLIO

                          

Domestic

                          

Spanish government

     —           —           —           —           —           —           —           —           —     

 

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     Maturity at One
Year or Less
     Maturity After
One Year to Five
Years
     Maturity After
Five Years to 10
Years
     Maturity After 10
Years
     Total  
     Amount      Yield
%
(1)
     Amount      Yield
%
(1)
     Amount      Yield
%
(1)
     Amount      Yield
%
(1)
     Amount  

Other debt securities

                          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD-TO-MATURITY

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

     9,692         3.88         35,897         3.81         11,885         5.16         14,332         4.08         71,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Rates have been presented on a non-taxable equivalent basis.
(2) Securities of other foreign Governments mainly include investments made by our subsidiaries in securities issued by the Governments of the countries where they operate.

Loans and Advances to Credit Institutions

As of December 31, 2013, our total loans and advances to credit institutions amounted to €22,792 million, or 3.9% of total assets. Net of our valuation adjustments, loans and advances to credit institutions amounted to €22,862 million as of December 31, 2013, or 3.9% of our total assets.

Loans and Advances to Customers

As of December 31, 2013, our total loans and advances amounted to €336,758 million, or 57.8% of total assets. Net of our valuation adjustments, loans and advances amounted to €323,607 million as of December 31, 2013, or 55.6% of our total assets. As of December 31, 2013 our loans in Spain amounted to €187,400 million. Our foreign loans amounted to €149,358 million as of December 31, 2013. For a discussion of certain mandatory ratios relating to our loan portfolio, see “—Business Overview—Supervision and Regulation—Liquidity Ratio” and “—Business Overview— Supervision and Regulation—Investment Ratio”.

Loans by Geographic Area

The following table analyzes, by domicile of the customer, our net loans and advances as of December 31, 2013, 2012 and 2011:

 

     As of December 31,  
     2013     2012     2011  
     (In Millions of Euros)  

Domestic

     187,400        205,216        203,459   

Foreign

      

Western Europe

     17,519        19,979        22,392   

Latin America

     92,223        90,588        79,262   

United States

     36,047        36,040        39,384   

Other

     3,569        3,151        5,742   

Total foreign

     149,358        149,757        146,780   
  

 

 

   

 

 

   

 

 

 

Total loans and advances

     336,758        354,973        350,239   

Valuation adjustments

     (13,151     (12,810     (7,696
  

 

 

   

 

 

   

 

 

 

Total net lending

     323,607        342,163        342,543   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Loans by Type of Customer

The following table analyzes by domicile and type of customer our net loans and advances for each of the years indicated. The analyses by type of customer are based principally on the requirements of the regulatory authorities in each country.

 

     As of December 31,  
     2013     2012     2011  
     (In Millions of Euros)  

Domestic

      

Government

     22,166        25,408        25,372   

Agriculture

     1,275        1,402        1,566   

Industrial

     13,774        16,240        16,710   

Real estate and construction

     25,323        30,319        30,022   

Commercial and financial

     15,534        17,021        22,367   

Loans to individuals (1)

     90,364        94,991        87,420   

Other

     18,964        19,836        20,002   
  

 

 

   

 

 

   

 

 

 

Total domestic

     187,400        205,216        203,458   
  

 

 

   

 

 

   

 

 

 

Foreign

      

Government

     10,234        9,509        9,569   

Agriculture

     3,707        3,337        3,131   

Industrial

     14,905        14,491        18,124   

Real estate and construction

     15,163        16,904        19,396   

Commercial and financial

     31,635        34,891        32,369   

Loans to individuals

     59,527        56,252        50,018   

Other

     14,187        14,373        14,173   
  

 

 

   

 

 

   

 

 

 

Total foreign

     149,358        149,757        146,780   
  

 

 

   

 

 

   

 

 

 

Total loans and advances

     336,758        354,973        350,239   
  

 

 

   

 

 

   

 

 

 

Valuation adjustments

     (13,151     (12,810     (7,696
  

 

 

   

 

 

   

 

 

 

Total net lending

     323,607        342,163        342,543   
  

 

 

   

 

 

   

 

 

 

 

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

The following table sets forth a breakdown, by currency, of our net loan portfolio for 2013, 2012 and 2011.

 

     As of December 31,  
     2013      2012      2011  
     (In Millions of Euros)  

In euros

     190,090         211,346         215,500   

In other currencies

     133,517         130,817         127,043   
  

 

 

    

 

 

    

 

 

 

Total net lending

     323,607         342,163         342,543   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2013, loans by BBVA and its subsidiaries to associates and jointly controlled companies amounted to €792 million, compared to €820 million as of December 31, 2012. Loans outstanding to the Spanish government and its agencies amounted to €22,166 million, or 6.6% of our total loans and advances as of December 31, 2013, compared to €25,407 million, or 7.2% of our total loans and advances as of December 31, 2012. None of our loans to companies controlled by the Spanish government are guaranteed by the government and, accordingly, we apply normal credit criteria in extending credit to such entities. Moreover, we carefully monitor such loans because governmental policies necessarily affect such borrowers.

 

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Table of Contents

Diversification in our loan portfolio is our principal means of reducing the risk of loan losses. We also carefully monitor our loans to borrowers in sectors or countries experiencing liquidity problems. Our exposure to our five largest borrowers as of December 31, 2013, excluding government-related loans, amounted to €18,122 million or approximately 5.4% of our total outstanding loans and advances. As of December 31, 2013 there did not exist any concentration of loans exceeding 10% of our total outstanding loans and advances, other than by category as disclosed in the chart above.

Maturity and Interest Sensitivity

The following table sets forth an analysis by maturity of our total loans and advances by domicile of the office that issued the loan and type of customer as of December 31, 2013. The determination of maturities is based on contract terms.

 

     Maturity         
     Due in One
Year or Less
     Due After One
Year Through
Five Years
     Due After Five
Years
     Total  
     (In Millions of Euros)  

Domestic

           

Government

     10,995         6,988         4,183         22,166   

Agriculture

     605         426         244         1,275   

Industrial

     10,911         2,036         827         13,774   

Real estate and construction

     11,880         7,808         5,635         25,323   

Commercial and financial

     10,237         2,123         3,174         15,