20-F 1 d893415d20f.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, 2014

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)

Paseo de La Castellana, 81

28046, Madrid

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 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.).

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, 2014, was:

Ordinary shares, par value €0.49 per share—6,171,338,995

 

 

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

     6   

A.

 

Directors and Senior Management

     6   

B.

 

Advisers

     6   

C.

 

Auditors

     6   

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

     6   

ITEM 3.

 

KEY INFORMATION

     7   

A.

 

Selected Consolidated Financial Data

     7   

B.

 

Capitalization and Indebtedness

     11   

C.

 

Reasons for the Offer and Use of Proceeds

     11   

D.

 

Risk Factors

     12   

ITEM 4.

 

INFORMATION ON THE COMPANY

     28   

A.

 

History and Development of the Company

     28   

B.

 

Business Overview

     33   

C.

 

Organizational Structure

     60   

D.

 

Property, Plants and Equipment

     60   

E.

 

Selected Statistical Information

     60   

F.

 

Competition

     81   

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

     82   

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     82   

A.

 

Operating Results

     89   

B.

 

Liquidity and Capital Resources

     128   

C.

 

Research and Development, Patents and Licenses, etc.

     133   

D.

 

Trend Information

     133   

E.

 

Off-Balance Sheet Arrangements

     135   

F.

 

Tabular Disclosure of Contractual Obligations

     135   

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     136   

A.

 

Directors and Senior Management

     136   

B.

 

Compensation

     143   

C.

 

Board Practices

     148   

D.

 

Employees

     154   

E.

 

Share Ownership

     158   

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     158   

A.

 

Major Shareholders

     158   

B.

 

Related Party Transactions

     159   

C.

 

Interests of Experts and Counsel

     160   

ITEM 8.

 

FINANCIAL INFORMATION

     160   

A.

 

Consolidated Statements and Other Financial Information

     160   

B.

 

Significant Changes

     161   

ITEM 9.

 

THE OFFER AND LISTING

     161   

A.

 

Offer and Listing Details

     161   

B.

 

Plan of Distribution

     168   

C.

 

Markets

     168   

D.

 

Selling Shareholders

     168   

E.

 

Dilution

     168   

F.

 

Expenses of the Issue

     169   

ITEM 10.

 

ADDITIONAL INFORMATION

     169   

A.

 

Share Capital

     169   

B.

 

Memorandum and Articles of Association

     169   


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         PAGE  

C.

 

Material Contracts

     172   

D.

 

Exchange Controls

     173   

E.

 

Taxation

     174   

F.

 

Dividends and Paying Agents

     180   

G.

 

Statement by Experts

     180   

H.

 

Documents on Display

     180   

I.

 

Subsidiary Information

     180   

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     181   

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     188   

A.

 

Debt Securities

     188   

B.

 

Warrants and Rights

     188   

C.

 

Other Securities

     188   

D.

 

American Depositary Shares

     189   

PART II

    

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     191   

ITEM 14.

 

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

     191   

ITEM 15.

 

CONTROLS AND PROCEDURES

     191   

ITEM 16.

 

[RESERVED]

     193   

ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

     193   

ITEM 16B.

 

CODE OF ETHICS

     193   

ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     194   

ITEM 16D.

 

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     195   

ITEM 16E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     195   

ITEM 16F.

 

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     195   

ITEM 16G.

 

CORPORATE GOVERNANCE

     195   

ITEM 16H.

 

MINE SAFETY DISCLOSURE

     198   

PART III

    

ITEM 17.

 

FINANCIAL STATEMENTS

     198   

ITEM 18.

 

FINANCIAL STATEMENTS

     198   

ITEM 19.

 

EXHIBITS

     199   

 

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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, 2014, 2013 and 2012 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 and taxation, and steps taken towards achieving an EU fiscal and banking union;

 

    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;

 

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

 

    our ability to hedge certain risks economically;

 

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

 

    the success of our acquisitions (including the acquisition of an additional stake in Türkiye Garanti Bankası A.Ş.), divestitures, mergers and strategic alliances;

 

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

 

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

 

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

 

    our success in managing the risks involved in the foregoing, which depends, among other things, on our ability to anticipate events that 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.

 

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PRESENTATION OF FINANCIAL INFORMATION

Accounting Principles

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

Differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB are not material for the years ended December 31, 2014, 2013 and 2012. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB.

The financial information as of and for the years ended December 31, 2012, 2011 and 2010 may differ from previously reported financial information as of such dates and for such periods in our respective annual reports on Form 20-F for certain prior years, 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. In addition, the financial information as of and for the years ended December 31, 2013, 2012, 2011 and 2010 may differ from previously reported financial information as of such date and for such period in our respective annual reports on Form 20-F for certain prior years, as a result of adoption of IFRIC interpretation 21 “Levies”.

IFRIC interpretation 21 “Levies” and restatement of 2013, 2012, 2011 and 2010 financial information

In May 2013, the IFRS Interpretations Committee issued IFRIC 21 (Levies) to provide guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) and those where the timing and amount of the levy is certain (for more information see Note 2.3 to our Consolidated Financial Statements on recent IFRS pronouncements). As adopted by the EU, IFRIC 21 is effective for annual periods commencing on or after January 1, 2014 and is applied retrospectively, with early application permitted. The implementation of IFRIC 21 resulted in a change in our accounting policy with respect to contributions made by us mainly to the Spanish Deposit Guarantee Fund.

In our Consolidated Financial Statements, the comparative financial information as of and for the years ended December 31, 2013 and 2012 was restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21. See Note 1.3 to our Consolidated Financial Statements and “Item 3. Key Information—Selected Consolidated Financial Data—Restatement of 2013, 2012, 2011 and 2010 financial information” for additional information on the effects of this restatement. Moreover, the comparative financial information as of and for the years ended December 31, 2011 and 2010 included in this Annual Report has been restated to give effect to IFRIC 21. Therefore, such information is presented on comparable basis with the financial information as of December 31, 2014, 2013 and 2012 and for each of the years then ended included in this Annual Report. As a result of these restatements, the financial information included in this Annual Report as of and for the years ended December 31, 2013, 2012, 2011 and 2010 differs from that reported in our annual reports on Form 20-F for prior years.

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.

 

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    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.

 

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ITEM 3. KEY INFORMATION

 

A. Selected Consolidated Financial Data

The historical financial information set forth below for the years ended December 31, 2014, 2013 and 2012 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited financial statements for 2011 and 2010 are not included in this document, and they instead are derived from the respective annual reports on Form 20-F for certain prior years previously filed by us with retrospective adjustments made for the application of certain changes in accounting principles.

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

 

     Year Ended December 31,  
     2014     2013(1)     2012 (1)     2011 (1)     2010 (1)  
     (In Millions of Euros, Except Per Share/ADS Data (In Euros))  

Consolidated Statement of Income Data

          

Interest and similar income

     22,838        23,512        24,815        23,229        21,130   

Interest and similar expenses

     (8,456     (9,612     (10,341     (10,505     (7,814

Net interest income

     14,382        13,900        14,474        12,724        13,316   

Dividend income

     531        235        390        562        529   

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

     343        694        1,039        787        331   

Fee and commission income

     5,530        5,478        5,290        4,874        4,864   

Fee and commission expenses

     (1,356     (1,228     (1,134     (980     (831

Net gains(losses) on financial assets and liabilities

     1,435        1,608        1,636        1,070        1,372   

Net exchange differences

     699        903        69        410        455   

Other operating income

     4,581        4,995        4,765        4,212        3,537   

Other operating expenses

     (5,420     (5,833     (4,705     (4,019     (3,240

Gross income

     20,725        20,752        21,824        19,640        20,333   

Administration costs

     (9,414     (9,701     (9,396     (8,634     (8,007

Depreciation and amortization

     (1,145     (1,095     (978     (810     (754

Provisions (net)

     (1,142     (609     (641     (503     (475

Impairment losses on financial assets (net)

     (4,340     (5,612     (7,859     (4,185     (4,718

Net operating income

     4,684        3,735        2,950        5,508        6,379   

Impairment losses on other assets (net)

     (297     (467     (1,123     (1,883     (489

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

     46        (1,915     3        44        41   

Negative goodwill

     —          —          376        —          1   

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

     (453     (399     (624     (271     127   

Operating profit before tax

     3,980        954        1,582        3,398        6,059   

Income tax

     (898     16        352        (158     (1,345

Profit from continuing operations

     3,082        970        1,934        3,240        4,714   

Profit from discontinued operations (net) (2)

     —          1,866        393        245        281   

Profit

     3,082        2,836        2,327        3,485        4,995   

Profit attributable to parent company

     2,618        2,084        1,676        3,004        4,606   

Profit attributable to non-controlling interests

     464        753        651        481        389   

Per share/ADS (3) Data

          

Number of shares outstanding (at period end)

     6,171,338,995        5,785,954,443        5,448,849,545        4,903,207,003        4,490,908,285   

Profit attributable to parent company (4)

     0.44        0.36        0.30        0.62        1.10   

Dividends declared

     0.080        0.100        0.200        0.200        0.270   

 

(1) Restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies). See “—Restatement of 2013, 2012, 2011 and 2010 financial information” below.

 

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(2) For 2013, 2012, 2011 and 2010, includes the capital gains from the sale of Afore Bancomer in Mexico and the South America pension fund administrators, as well as the earnings recorded by these companies up to the date of these sales.
(3) Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.
(4) 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, October 2013, April 2014, October 2014 and December 2014, and excluding the weighted average number of treasury shares during the period (5,905 million, 5,815 million, 5,829 million, 5,093 million and 4,388 million shares in 2014, 2013, 2012, 2011 and 2010, respectively). With respect to the years ended December 31, 2014, 2013 and 2012, see Note 5 to the Consolidated Financial Statements.

 

     As of and for Year Ended December 31,  
     2014     2013 (1)     2012 (1)     2011 (1)     2010 (1)  
     (In Millions of Euros, Except Percentages)  

Consolidated Balance Sheet Data

          

Total assets

     631,942        582,697        621,132        582,899        552,753   

Common stock

     3,024        2,835        2,670        2,403        2,201   

Loans and receivables (net)

     372,375        350,945        371,347        369,916        364,707   

Customer deposits

     319,060        300,490        282,795        272,402        275,789   

Debt certificates and subordinated liabilities

     72,191        74,676        98,070        96,427        102,599   

Non-controlling interest

     2,511        2,371        2,372        1,893        1,556   

Total equity

     51,609        44,565        43,661        39,917        37,439   

Consolidated ratios

          

Profitability ratios:

          

Net interest margin (2)

     2.40     2.32     2.38     2.29     2.38

Return on average total assets (3)

     0.5     0.5     0.4     0.6     0.9

Return on average total equity (4)

     5.8     4.7     4.1     8.0     15.8

Credit quality data

          

Loan loss reserve (5)

     14,277        14,996        14,159        9,139        9,473   

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

     3.83     4.27     3.81     2.47     2.60

Non-performing asset ratio (NPA ratio) (6)

     5.98     6.95     5.1     4.0     4.1

Impaired loans and advances to customers

     22,703        25,445        19,960        15,416        15,361   

Impaired contingent liabilities to customers (7)

     413        410        312        217        324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  23,116      25,855      20,272      15,633      15,685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and advances to customers

  352,901      338,557      356,278      351,634      348,253   

Contingent liabilities to customers

  36,970      36,183      36,891      37,126      35,816   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  389,871      374,740      393,169      388,760      384,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Information has been restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies). See “—Restatement of 2013, 2012, 2011 and 2010 financial information” below.
(2) Represents net interest income as a percentage of average total assets.
(3) Represents profit as a percentage of average total assets.
(4) Represents profit attributable to parent company as a percentage of average equity, excluding “Non-controlling interest”.
(5) Represents impairment losses on loans and receivables to credit institutions, loans and advances to customers and debt securities. See Note 13 to the Consolidated Financial Statements.
(6) Represents the sum of impaired loans and advances to customers and impaired contingent liabilities to customers divided by the sum of loans and advances to customers and contingent liabilities to customers.
(7) We include contingent liabilities in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired contingent liabilities should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with contingent liabilities (consisting mainly of financial guarantees provided to third-parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If impaired contingent liabilities were not included in the calculation of our NPA ratio, such ratio would generally be higher for the periods covered, amounting to approximately 6.4%, 7.5%, 5.6%, 4.4% and 4.4% as of December 31, 2014, 2013, 2012, 2011 and 2010, respectively.

 

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Restatement of 2013, 2012, 2011 and 2010 financial information

The tables set forth below reflect the impact of the implementation of the new accounting interpretation set out in IFRIC 21 (Levies) on our consolidated income statement for the year ended December 31, 2013 and on our consolidated balance sheets as of December 31, 2013, 2012, 2011 and 2010, respectively. The retroactive implementation of IFRIC 21 had no impact on our consolidated income statement for the years ended December 31, 2012, 2011 and 2010. For more information see Note 1.3 and Annex IX to the Consolidated Financial Statements and “Presentation of Financial Information—IFRIC interpretation 21 “Levies” and restatement of 2013, 2012, 2011 and 2010 financial information”.

Income statement for the year ended December 31, 2013

 

     2013
As restated
     Impact of
restatement
     2013
Before restatement
 
     (Millions of Euros)  

Other operating expenses

     (5,833      (206      (5,627

Rest of other operating expenses

     (2,507      (206      (2,301

Net operating income

     3,735         (206      3,941   

Income tax

     16         62         (46

Profit from continuing operations

     970         (144      1,114   

Profit

     2,836         (144      2,981   

Profit attributable to parent company

     2,084         (144      2,228   

Balance sheet as of December 31, 2013

 

     December 31,
2013
As restated
     Impact of
restatement
     December 31,
2013
Before restatement
 
     (Millions of Euros)  

Tax assets

     11,704         122         11,582   

Deferred

     9,202         122         9,080   

Total assets

     582,697         122         582,575   

Financial liabilities at amortized cost

     464,549         407         464,141   

Other financial liabilities

     6,067         408         5,659   

Total liabilities

     538,133         407         537,725   

Stockholders’ funds

     46,025         (285      46,310   

Reserves

     19,767         (141      19,908   

Accumulated reserves (losses)

     19,317         (141      19,458   

Income attributed to the parent company

     2,084         (144      2,228   

Total equity

     44,565         (285      44,850   

Total liabilities and equity

     582,697         122         582,575   

 

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Balance sheet as of December 31, 2012

 

     December 31,
2012
As restated
     Impact of
restatement
     December 31,
2012
Before restatement
 
     (Millions of Euros)  

Tax assets

     11,710         61         11,650   

Deferred

     9,859         61         9,799   

Total assets

     621,132         61         621,072   

Financial liabilities at amortized cost

     490,807         202         490,605   

Other financial liabilities

     7,792         202         7,590   

Total liabilities

     577,472         202         577,270   

Stockholders’ funds

     43,473         (141      43,614   

Reserves

     19,531         (141      19,672   

Accumulated reserves (losses)

     18,580         (141      18,721   

Total equity

     43,661         (141      43,802   

Total liabilities and equity

     621,132         61         621,072   

Balance sheet as of December 31, 2011

 

     2011
As restated
     Impact of
restatement
     2011
Before restatement
 
     (Millions of Euros)  

Tax assets

     7,788         61         7,727   

Deferred

     6,328         61         6,267   

Total assets

     582,899         61         582,838   

Financial liabilities at amortized cost

     465,919         202         465,717   

Other financial liabilities

     7,612         202         7,410   

Total liabilities

     542,982         202         542,780   

Reserves

     17,799         (141      17,940   

Accumulated reserves (losses)

     17,439         (141      17,580   

Total equity

     39,917         (141      40,058   

Total liabilities and equity

     582,899         61         582,838   

Balance sheet as of December 31, 2010

 

     2010
As restated
     Impact of
restatement
     2010
Before restatement
 
     (Millions of Euros)  

Tax assets

     6,664         15         6,649   

Deferred

     5,551         15         5,536   

Total assets

     552,753         15         552,738   

Financial liabilities at amortized cost

     453,215         51         453,164   

Other financial liabilities

     6,647         51         6,596   

Total liabilities

     515,314         51         515,263   

Reserves

     14,324         (36      14,360   

Accumulated reserves (losses)

     14,269         (36      14,305   

Total equity

     37,439         (36      37,475   

Total liabilities and equity

     552,753         15         552,738   

 

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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 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)  

2010

     1.3216   

2011

     1.4002   

2012

     1.2908   

2013

     1.3303   

2014

     1.3210   

2015 (through April 10, 2015)

     1.0957   

 

(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, 2014

     1.3136         1.2628   

October 31, 2014

     1.2812         1.2517   

November 30, 2014

     1.2554         1.2394   

December 31, 2014

     1.2504         1.2101   

January 31, 2015

     1.2015         1.1279   

February 28, 2015

     1.1462         1.1197   

March 31, 2015

     1.1212         1.0524   

April 30, 2015 (through April 10, 2015)

     1.1008         1.0598   

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on April 10, 2015, was $ 1.0598.

As of December 31, 2014, approximately 43% of our assets and approximately 43% 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 2014—Structural Risk Structural Currency Risk”.

 

B. Capitalization and Indebtedness

Not Applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

 

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D. Risk Factors

Macroeconomic Risks

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

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

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

 

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

 

    deflation, mainly in Europe, or significant inflation, such as the significant inflation recently experienced by Venezuela and Argentina;

 

    changes in foreign exchange rates, such as the recent local currency devaluations in Venezuela and Argentina, as they result in changes in the reported earnings of the Group’s subsidiaries outside the Eurozone, and their assets, including their risk-weighted assets, and liabilities;

 

    a lower interest rate environment, which could lead to decreased lending margins and lower returns on assets; or a higher interest rate environment, including as a result of an increase in interest rates by the Federal Reserve, which could affect consumer debt affordability and corporate profitability;

 

    any further tightening of monetary policies, including to address upward inflationary pressures in Latin America, which could endanger a still tepid and fragile economic recovery and make it more difficult for customers of the Group’s mortgage and consumer loan products to service their debts;

 

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

 

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

 

    lower oil prices, which could particularly affect producing areas, such us Venezuela, Mexico, Texas or Colombia, to which we are materially exposed;

 

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

 

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

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

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

Since BBVA’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. After rapid economic growth until 2007, Spanish GDP contracted in the period 2009-10 and 2012-13. The effects of the financial crisis were particularly pronounced in Spain given its heightened need for foreign financing as reflected by its high current account deficit, resulting from the gap between domestic investment and savings, and its public deficit. While the current account imbalance has now been corrected (with GDP growth of 1.4% in 2014) and the public deficit is diminishing, real or perceived difficulties in servicing public or private debt could increase Spain’s financing costs. In addition, unemployment levels continue to be high and a change in the current recovery of the labor market would adversely affect households’ gross disposable income.

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

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

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

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

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

 

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Emerging markets are generally subject to greater risks than more developed markets. For example, there is typically a greater risk of loss from unfavorable political and economic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies. In addition, these emerging markets are affected by conditions in global financial markets and some are particularly affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. As a global economic recovery remains fragile, there are risks of a deterioration. If the global economic conditions deteriorate, the business, financial condition, operating results and cash flows of BBVA’s subsidiaries in emerging economies, mainly in Latin America and Turkey, may be materially adversely affected.

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

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

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

Severe market events such as the past sovereign debt crisis, rising risk premiums and falls in share market prices, have resulted in the Group recording large write-downs on its credit market exposures in recent years. In particular, 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 in 2012 and 2013, and a moderated recovery in 2014. Additionally, in dislocated markets, hedging and other risk management strategies may not be as effective as they are in more normal market conditions due in part to the decreasing credit quality of hedge counterparties. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

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

The Group has substantial exposure to the real estate market, mainly in Spain, Mexico and the Unites States. The Group is exposed to the real estate market due to the fact that real estate assets secure many of its outstanding loans and due to the significant amount of real estate assets held on its balance sheet (mainly in Spain). Any deterioration of real estate prices could materially and adversely affect the Group’s business, financial condition and results of operations.

Legal, Regulatory and Compliance Risks

BBVA 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. In response to the global financial crisis and the European sovereign debt crisis, governments, regulatory authorities and others have made and continue to make proposals to reform the regulatory framework for the financial services industry to enhance its resilience against future crises. Legislation has already been enacted and regulations issued in response to some of these proposals. The regulatory framework for financial institutions is likely to undergo further significant change. This creates significant uncertainty for BBVA and the financial industry in general. The wide range of recent actions or current proposals includes, among other things, provisions for more stringent regulatory capital and liquidity standards, restrictions on compensation practices, special bank levies and financial transaction

 

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taxes, recovery and resolution powers to intervene in a crisis including “bail-in” of creditors, separation of certain businesses from deposit taking, stress testing and capital planning regimes, heightened reporting requirements, new TLAC (as defined below) requirements and reforms of derivatives, other financial instruments, investment products and market infrastructures.

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

Furthermore, regulatory authorities have substantial discretion in how to regulate banks, and this discretion, and the means available to the regulators, have been steadily increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions such as BBVA that are deemed to be systemically important.

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

Any required changes to BBVA’s business operations resulting from the legislation and regulations applicable to such business could result in significant loss of revenue, limit BBVA’s ability to pursue business opportunities in which BBVA might otherwise consider engaging, affect the value of assets that BBVA holds, require BBVA to increase its prices and therefore reduce demand for its products, impose additional costs on BBVA or otherwise adversely affect BBVA’s businesses. For example, BBVA is subject to substantial regulation relating to liquidity. Future liquidity standards could require it to maintain a greater proportion of its assets in highly-liquid but lower-yielding financial instruments, which would negatively affect its net interest margin. Moreover, BBVA’s regulators, as part of their supervisory function, periodically review BBVA’s allowance for loan losses. Such regulators may require BBVA 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 BBVA’s management, could have an adverse effect on BBVA’s earnings and financial condition.

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

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

CRD IV requirements

As a Spanish financial institution, BBVA is subject to the Directive 2013/36/EU, of June 26, of the European Parliament on access to credit institution and investment firm activities and an prudential supervision of credit institutions and investment firms that replaced Directives 2006/48 and 2006/49 (“CRD IV”), through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. The core regulation regarding the solvency of credit entities is Regulation (UE) No. UE 575/2013 of June 26, of the European Parliament on prudential requirements on credit institutions and investment firms (the “CRR”), which is complemented by several binding technical standards, all of which are directly applicable in all EU member states, without the need for national implementation measures. The implementation of CRD IV into Spanish law has largely taken place through

 

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Royal Decree-Law 14/2013 of November 29 (“RD-L 14/2013”), Law 10/2014, of June 26, on organization, supervision and solvency of credit institutions (“Law 10/2014”) and Royal Decree 84/2015, of February 13 (“RD 84/2015”), and Bank of Spain Circular 2/2014, of January 31. However, further regulatory developments in this area remain pending as at the date hereof.

The new regulatory regime has, among other things, increased the level of capital required by means of a “combined buffer requirement” that entities must comply with from 2016 onwards.

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

Accordingly, Banco Bilbao Vizcaya Argentaria, S.A. and the Group are subject to the Single Supervisory Mechanism (the “SSM”) and the ECB is required to carry out assessments under CRD IV at least on an annual basis. Therefore, there can be no assurance that these assessments carried out by the ECB may result in the imposition of additional own funds requirements on Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group pursuant to this “Pillar 2” framework.

Any additional own funds requirement that may be imposed on Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group by the ECB pursuant to this assessment would require Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group to hold capital levels above the minimum “Pillar 1” capital requirements. There can be no assurance that the total capital requirements (“Pillar 1” plus “Pillar 2” plus “combined buffer requirement”) imposed on Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group may not be higher than the levels of capital available at any relevant point in time.

Any failure by Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group to maintain its “Pillar 1” minimum regulatory capital ratios, any “Pillar 2” additional own funds requirements and/or any “combined buffer requirement” could result in administrative actions or sanctions, which, in turn, may have a material adverse effect on the Group’s results of operations. In particular, any failure to maintain any additional capital requirements pursuant to the “Pillar 2” framework or any other capital requirements to which Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group is or becomes subject (including the “combined buffer requirement”), may result in the imposition of restrictions on “discretionary payments” by BBVA, including dividend payments.

In this regard, according to Law 10/2014, for those entities not meeting the “combined buffer requirement” or the “Pillar 2” capital requirements described above or where a restriction upon “discretionary payments” has been imposed pursuant to Article 68 of Law 10/2014, distributions relating to CET1 capital, variable remuneration or discretionary pension revenues and distributions relating to additional Tier 1 capital may be subject to restrictions until the Maximum Distributable Amount (i.e., the firm’s distributable profits, calculated in accordance with the formula provided for in CRD IV, multiplied by a factor dependent on how far short of the requirement the Tier 1 common equity falls) has been calculated and communicated to the Bank of Spain (and thereafter subject to such Maximum Distributable Amount). The criteria for the calculation of the Maximum Distributable Amount in respect of any such “discretionary payments” have been specified in the regulation developing Law 10/2014 and RD-L 84/2015.

Finally, any failure by Banco Bilbao Vizcaya Argentaria, S.A. and/or the Group to comply with its regulatory capital requirements could also result in the imposition of further “Pillar 2” requirements and early intervention by resolution authorities pursuant to the Directive 2014/59/EU of May 15 establishing a framework for the recovery and resolution of credit institutions and investment firms (the “BRRD”).

In addition to the above, the EBA published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of the supervisory review and evaluation process (SREP). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional own

 

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funds requirements to be implemented by January 1, 2016. Under these guidelines, national supervisors should set a composition requirement for the additional own funds requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital. The guidelines also contemplate that national supervisors should not set additional own funds requirements in respect of risks which are already covered by the “combined buffer requirement” and/or additional macro-prudential requirements; and, accordingly, the above “combined buffer requirement” is in addition to the minimum own funds requirement and to the additional own funds requirement.

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, if European authorities so decide.

TLAC

On November 10, 2014 the Financial Stability Board (the “FSB”) published a consultative document (the “Consultative Document”) containing certain policy proposals to enhance the loss absorbing capacity of global systemically important banks (“G-SIBs”), such as BBVA. The policy proposals included in the Consultative Document consist of an elaboration of the principles on loss absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet setting out a proposal for the implementation of these proposals in the form of an internationally agreed standard on total loss absorbency capacity (“TLAC”) for G-SIBs. The consultation period ended on February 2, 2015.

Once finalized, these proposals will form a new minimum TLAC standard for G-SIBs. If implemented as contemplated, the TLAC requirement may create additional minimum capital requirements for BBVA and could require BBVA to maintain an additional minimum TLAC ratio of (i) BBVA’s regulatory capital plus certain types of debt capital instruments and other eligible liabilities that can be written down or converted into equity during resolution to (ii) BBVA’s risk-weighted assets.

However, the final proposed TLAC amount has not been agreed within the FSB and is the subject of a quantitative impact study, expected to be completed in 2015.

The TLAC requirements may apply on a common minimum “Pillar 1” basis, and home and host resolution authorities may specify additional “Pillar 2” TLAC requirements on an individual institution basis. TLAC requirements may further be imposed in addition to the minimum “Pillar 1” capital requirements under CRD IV and the requirement for own funds and eligible liabilities (“MREL”) pursuant to the BRRD once implemented in Spain. Any failure by an institution to meet the applicable minimum “Pillar 1” and “Pillar 2” TLAC requirements may be treated in the same manner as a failure to meet minimum regulatory capital requirements, where resolution authorities must ensure that they intervene and place an institution into resolution sufficiently early if it is deemed to be failing or likely to fail and there is no reasonable prospect of recovery.

While it is possible that TLAC requirements will be implemented by means of MREL, that is not yet certain. The conditions required of TLAC eligible instruments (other than own funds) and those required of eligible liabilities for MREL purposes under the BRRD are different and there can be no assurance that it will be possible for BBVA to issue instruments which simultaneously satisfy both requirements. Markets have not yet been established for such instruments (other than own funds instruments) and there can be no assurance that such markets will develop or that, if they do, BBVA will be able to issue sufficient TLAC and MREL eligible liabilities to meet its requirements. That may limit the quantity of BBVA’s CET1 capital which is available to meet its “combined buffer requirement” and may, therefore, limit BBVA’s ability to make “discretionary payments”.

There can be no assurance as to the relationship between the above “combined buffer requirement” and “Pillar 2” additional own funds requirements, the TLAC requirement, MREL and the restrictions on “discretionary payments” discussed above. There can also be no assurance as to how and when effect will be given to the above guidelines of the EBA in Spain, including as to the consequences for an institution of its capital levels falling below those necessary to meet these requirements.

 

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BBVA’s business, financial condition and results of operations may be adversely affected if BBVA is not allowed to maintain certain deferred tax assets as regulatory capital.

In addition to introducing new capital requirements, CRD IV provides that deferred tax assets (“DTAs”) that rely on the future profitability of a financial institution must be deducted from its regulatory capital (specifically 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.

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 impact of the requirements of CRD IV on 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, which also provided for a transitional regime for DTAs generated before January 1, 2014. These amendments enable certain DTAs to be treated as a direct claim against the tax authorities if a Spanish bank is unable to reverse the relevant differences within 18 years or if it is liquidated, becomes insolvent or incurs accounting losses. This will, therefore, allow a Spanish bank not to deduct such DTAs from its regulatory capital. The transitional regime provides for a period in which only a percentage (which increases yearly) of the applicable DTAs will have to be deducted. This transitional regime has also been included in Law 27/2014.

There can be no assurance that the tax amendments implemented by RD-L 14/2013 and Law 27/2014 will not be challenged by the European Commission, that the final interpretation of these amendments will not change and that Spanish banks will ultimately be allowed to maintain certain DTAs as regulatory capital. If this regulation is challenged, this may negatively affect BBVA’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 BBVA’s business, financial condition and results of operations.

The full consolidation of Garanti in the consolidated financial statements of the Group may result in increased capital requirements.

On November 19, 2014, we entered into agreements for the acquisition from Doğuş Holding A.Ş. and Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, respectively, of 62,538,000,000 shares of Türkiye Garanti Bankası A.Ş. (“Garanti”) in the aggregate (see “Item 10. Additional Information—Material Contracts”). The acquisition is conditional on obtaining all necessary regulatory consents from the relevant Turkish, Spanish, European Union and, if applicable, other jurisdictions’ regulatory authorities and is expected to be completed in 2015. Following completion of this acquisition, BBVA will fully consolidate Garanti in the consolidated financial statements of the Group. The consolidation of Garanti will result in a significant increase in BBVA’s risk-weighted assets, reflecting the greater risk profile of Garanti’s asset base, and it may result in an incremental increase in the capital requirements imposed on the Group by the Banking Regulation and Supervision Agency (BRSA) in Turkey and/or the ECB through the SSM.

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

On February 14, 2013 the European Commission published its proposal for a Council Directive implementing enhanced cooperation in the area of a financial transaction tax (“FTT”), 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. A joint statement issued in May 2014 by ten of the eleven participating Member States indicated an intention to implement the FTT progressively, such that it would initially apply to shares and certain derivatives, with this initial implementation occurring by January 1, 2016.

 

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Royal Decree-Law 8/2014, of July 4, introduced a 0.03% tax on bank deposits in Spain. This tax is payable annually by Spanish banks. There can be no assurance that additional national or transnational bank levies or financial transaction taxes will not be adopted by the authorities of the jurisdictions where BBVA operates.

Furthermore, 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 BBVA, 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.

In addition, BBVA may need to make contributions to the EU Single Resolution Fund and will have to pay supervisory fees to the SSM. See “—Regulatory developments related to the EU fiscal and banking union may have a material adverse effect on BBVA’s business, financial condition and results of operations.”

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

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

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

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

The SSM is expected to assist in making the banking sector more transparent, unified and safer. In accordance with the SSM Regulation, the ECB fully assumed its new supervisory responsibilities within the SSM, in particular the direct supervision of the largest European banks (including BBVA), on November 4, 2014. In preparation for this step, between November 2013 and October 2014 the ECB conducted, together with national supervisors, a comprehensive assessment of the largest banks, which together hold more than 80% of the Eurozone banking assets. The exercise consisted of three elements: (i) a supervisory risk assessment, which assessed the main balance sheet risks including liquidity, funding and leverage; (ii) an asset quality review, which focused on credit and market risks; and (iii) a stress test to examine the need to strengthen capital or take other corrective measures.

The SSM represents a significant change in the approach to bank supervision at a European and global level, even if it is not expected to result in any radical change in bank supervisory practices in the short term. The SSM will result in the direct supervision of the largest financial institutions, among them BBVA, and indirect supervision of around 3,500 financial institutions. The new supervisor will be one of the largest in the world in terms of assets under supervision. In the coming years, the SSM is expected to work to establish a new supervisory culture importing best practices from the 19 supervisory authorities that will be part of the SSM. Several steps have already been taken in this regard such as the recent publication of the Supervisory Guidelines and the creation of the SSM Framework Regulation. In addition, this new body will represent an extra cost for the financial institutions that will fund it through payment of supervisory fees.

 

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The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost. Regulation (EU) No. 806/2014 of the European Parliament and the Council of the European Union (the “SRM Regulation”), which was passed on July 15, and took legal effect from January 1, 2015, establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and a Single Resolution Fund. The new Single Resolution Board started operating from January 1, 2015 but it will not fully assume its resolution powers until January 1, 2016. From that date onwards the Single Resolution Fund will also be in place, funded by contributions from European banks in accordance with the methodology approved by the Council of the European Union. The Single Resolution Fund is intended to reach a total amount of €55 billion by 2024 and to be used as a separate backstop only after an 8% bail-in of a bank’s liabilities has been applied to cover capital shortfalls (in line with the BRRD).

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

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as BBVA’s main supervisory authority may have a material effect on BBVA’s business, financial condition and results of operations. In particular, the BRRD and Directive 2014/49/EU on deposit guarantee schemes were published in the Official Journal of the EU on June 12, 2014. The BRRD was required to be implemented on or before January 1, 2015, although the bail-in tool will not apply until January 1, 2016, except where a bail-out is required during 2015. In this case, a minimum 8% bail-in of a bank’s liabilities (including senior debt and uncovered deposits) will be required as a precondition for access to any direct recapitalization by the European Stability Mechanism (“ESM”), as agreed by the Eurozone members in December 2014.

The process for the implementation of the BRRD in Spain started on December 1, 2014, with the publication of the draft of the proposed law (anteproyecto de ley) on the restructuring and resolution of credit institutions and investment firms (the “BRRD Draft Implementation Law”) for public consultation by the Spanish Ministry of Economy and Finance. Following such consultation and the submission of a revised BRRD Draft Implementation Law to the report of the State Council (Consejo de Estado), the Spanish government approved the submission of a new version of the BRRD Draft Implementation Law, now drafted as a bill of law (proyecto de ley), to the Spanish parliament on March 13, 2015.

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. It includes a prohibition on proprietary trading similar to that contained in Section 619 of the Dodd-Frank Act (also known as the Volcker Rule) and a mechanism to potentially require the separation of trading activities (including market making), such as in the Financial Services (Banking Reform) Act 2013, complex securitizations and risky derivatives.

BBVA cannot assure that regulatory developments related to the EU fiscal and banking union, and initiatives undertaken at a EU level, will not have a material adverse effect on BBVA’s business, financial condition and results of operations.

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

Group companies are subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules can put a significant financial burden on banks and other financial institutions and pose significant technical problems. Although the Group believes that its current policies and procedures are sufficient to comply with applicable rules and regulations, it cannot guarantee that its anti-money laundering and anti-terrorism financing policies and procedures will not be circumvented or otherwise not be sufficient to prevent all money laundering or terrorism

 

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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.

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

BBVA’s operations are subject to regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in the various regions where it operates. Regulations in certain jurisdictions where BBVA operates differ in a number of material respects from equivalent regulations in Spain. Changes in regulations may have a material effect on the Group’s business and operations, particularly in Mexico, the United States, Venezuela, Argentina and Turkey.

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

Set forth below is additional information on certain recent regulatory developments in Mexico and the United States, the Group’s most significant jurisdictions by assets outside Spain which are relevant to the Group.

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. The Group will have to adapt to the new requirements and to the new competition framework and it might not be successful in doing so.

In addition, 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 for 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. BBVA 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.

United States

BBVA’s operations may be affected by 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

 

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elements of the Basel III framework and other U.S. capital reforms. In December 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission 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 U.S. $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 Compass Bancshares. 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 have applied to BBVA’s top-tier U.S. bank holding company, Compass Bancshares, since January 1, 2015. The rule does not constitute any significant additional burden for FBOs that already organized their main U.S. subsidiaries through bank holding company structures such as BBVA. Indeed, those FBOs would have anyway been subject to U.S. prudential standards. FBOs that have $50 billion or more in non-branch/agency U.S. assets as of June 30, 2014, such as BBVA, were required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the intermediate holding company requirement. BBVA submitted its implementation plan in December 2014, in which it indicated its intention to designate Compass Bancshares as its IHC. 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.

In September 2014, the federal banking regulators adopted a final rule implementing in the United States the liquidity coverage ratio (“LCR”), the quantitative liquidity standards developed by the Basel Committee. The LCR was developed to ensure that covered banking organizations have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The rule introduces a version of the LCR applicable to certain large bank holding companies such as Compass Bancshares. This version differs in certain respects from the Basel Committee’s version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions and a shorter phase-in schedule beginning on January 1, 2015 and ending on January 1, 2017. The federal banking regulators have not yet proposed rules to implement in the United States the net stable funding ratio (“NSFR”), additional quantitative liquidity standards developed by the Basel Committee. The NSFR has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities. The Basel Committee contemplates that the NSFR, including any revisions, will be implemented by member countries, including the United States, as a minimum standard by January 1, 2018. Various elements of the LCR and the NSFR, if and when it is implemented by the U.S. banking regulators, may cause changes that affect the profitability of BBVA’s business activities and require that it changes certain of its business practices, and could expose BBVA to additional costs (including increased compliance costs). These changes may also cause BBVA to invest significant management attention and resources to make any necessary changes.

Liquidity and Financial Risks

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

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

BBVA’s profitability or solvency could be adversely affected if access to liquidity and funding is constrained or made more expensive for a prolonged period of time. Under extreme and unforeseen circumstances, such as the

 

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

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

Historically, one of BBVA’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 BBVA’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 recent introduction of a national tax on outstanding deposits could be negative for BBVA’s activities in Spain. Moreover, there can be no assurance that, in the event of a sudden or unexpected withdrawal of deposits or shortage of funds in the banking systems or money markets in which BBVA operates, BBVA 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 businesses are subject to inherent risks concerning borrower and counterparty credit quality which have affected and are expected to continue to affect the recoverability and value of assets on the Group’s balance sheet.

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

Non-performing or low credit quality loans have in the past and can continue to negatively affect BBVA’s results of operations. BBVA cannot assure that it will be able to effectively control the level of the impaired loans in its total loan portfolio. At present, default rates are partly cushioned by low rates of interest which have improved customer affordability, but the risk remains of increased default rates as interest rates start to rise. The timing quantum and pace of any rise is a key risk factor. All new lending is dependent on the Group’s assessment of each customer’s ability to pay, and there is an inherent risk that the Group has incorrectly assessed the credit quality or willingness of borrowers to pay, possibly as a result of incomplete or inaccurate disclosure by those borrowers or as a result of the inherent uncertainty that is involved in the exercise of constructing models to estimate the true risk of lending to counterparties. The Group estimates and establishes reserves for credit risks and potential credit losses inherent in its credit exposure. This process, which is critical to the Group’s results and financial condition, requires

 

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difficult, subjective and complex judgments, including forecasts of how macro-economic conditions might impair the ability of borrowers to repay their loans. As is the case with any such assessments, there is always a risk that the Group will fail to adequately identify the relevant factors or that it will fail to estimate accurately the effect of these identified factors, which could have a material adverse effect on the Group’s business, financial condition or results of operations.

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

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

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

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

The Group’s commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Provisions for pensions and similar obligations” in BBVA’s consolidated balance sheets included in the Consolidated Financial Statements. For more information please see Note 24 of our Consolidated Financial Statements.

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 resulting from the payments of these commitments. These assets are government and covered bonds which are issued at fixed interest rates with maturities matching the aforementioned commitments. The Group’s ALCO also manages derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. Should BBVA fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on the Group’s business, financial condition, cash flows and results of operations.

BBVA is dependent on its credit ratings and any reduction of its credit ratings could materially and adversely affect the Group’s business, financial condition and results of operations.

BBVA is rated by various credit rating agencies. BBVA’s credit ratings are an assessment by rating agencies of its ability to pay its obligations when due. Any actual or anticipated decline in BBVA’s credit ratings to below investment grade or otherwise may increase the cost of and decrease the Group’s ability to finance itself in the capital markets, secured funding markets (by affecting its ability to replace downgraded assets with better rated ones), 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

 

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of operations. Furthermore, any decline in BBVA’s credit ratings to below investment grade or otherwise could breach certain agreements or trigger additional obligations under such agreements, such as a requirement to post additional collateral, which could materially adversely affect the Group’s business, financial condition and results of operations.

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

In recent years, households and businesses have reached a high level of indebtedness, particularly in Spain, which 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 satisfying its credit standards, which could have an adverse effect on the Group’s ability to achieve its growth plans.

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

Some of the Group’s operations are conducted through its financial services subsidiaries. As a result, BBVA’s ability to pay dividends, to the extent BBVA decides to do so, depends in part on the ability of the Group’s subsidiaries to generate earnings and to pay dividends to BBVA. Payment of dividends, distributions and advances by the Group’s subsidiaries will be contingent upon their earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. For instance, the repatriation of dividends from the Group’s Venezuelan and Argentinean subsidiaries have been subject to certain restrictions and there is no assurance that further restrictions will not be imposed. Additionally, BBVA’s right to receive any assets of any of the Group’s subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of such subsidiaries’ creditors, including trade creditors.

Business and Industry Risks

The Group faces increasing competition in its business lines.

The markets in which the Group operates are highly competitive and this trend will likely continue. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which the Group must now compete.

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

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 faces risks related to its acquisitions and divestitures.

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

 

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

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

Due to the nature of the Group’s business, BBVA and its 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 the Group believes that it has provisioned such risks appropriately based on the opinions and advice of its 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 the Group, 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 23 to BBVA’s Consolidated Financial Statements for additional information on the Group’s legal, regulatory and arbitration proceedings.

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

The Group operates commercial banks and insurance and other financial services companies in various countries and its overall success as a global business depends upon its ability to succeed in differing economic, social and political conditions. The Group is particularly sensitive to developments in Mexico, the United States, Venezuela and Argentina, which represented 15%, 11%, 3% and 1% of the Group’s assets in 2014, respectively. In addition, following completion of the acquisition of an additional 14.89% stake in Garanti (see “Item 10. Additional Information—Material Contracts”), we will also be significantly exposed to developments in Turkey.

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

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

 

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BBVA is party to a shareholders’ agreement with Doğuş Holding A. Ş., among other shareholders, in connection with Garanti which may affect BBVA’s ability to achieve the expected benefits from its interest in Garanti.

In 2011, BBVA entered into a shareholders’ agreement with Doğuş Holding A.Ş., Doğuş Nakliyat ve Ticaret A.Ş. and Doğuş Araştırma Geliştirme ve Müşavirlik Hizmetleri A.Ş. (the “Doğuş Group”)¸ in connection with the acquisition of its initial 24.89% interest in Garanti (the “current SHA”). On November 19, 2014, BBVA and the Doğuş Group entered into an agreement that amends and restates the current SHA and which will come into force upon completion of BBVA’s proposed acquisition of the additional 14.89% interest in Garanti (the “amended and restated SHA”). Under the current SHA, certain decisions affecting the day-to-day management of Garanti require the consent of both BBVA and the Doğuş Group. Accordingly, under the current SHA BBVA must cooperate with the Doğuş Group in order to manage Garanti and grow its business. While the amended and restated SHA allows BBVA to appoint the Chairman of Garanti’s board of directors, the majority of its members and Garanti’s CEO, it provides that certain reserved matters must be implemented or approved (either at a meeting of the shareholders or of the board of directors) only with the consent of each party. For example, for so long as the Doğuş Group owns shares representing over 9.95% of the share capital of Garanti, the disposal or discontinuance of, or material changes to, any line of business or business entity within the Garanti group that has a value in excess of 25% of the Garanti group’s total net assets in one financial year, will require the Doğuş Group’s consent. If BBVA and the Doğuş Group are unable to agree on such reserved matters, Garanti’s business, financial condition and results of operations may be adversely affected and BBVA may fail to achieve the expected benefits from its interest in Garanti. In addition, due to BBVA’s and Garanti’s association with the Doğuş Group, which is one of the largest Turkish conglomerates and has business interests in the financial services, construction, tourism and automotive sectors, any financial reversal, negative publicity or other adverse circumstance relating to the Doğuş Group could adversely affect Garanti or BBVA.

Financial and Risk Reporting

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 business, financial condition and results of operations.

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

Banks and their activities are increasingly dependent on highly sophisticated information technology (“IT”) systems. IT systems are vulnerable to a number of problems, such as software or hardware malfunctions, computer viruses, hacking and physical damage to vital IT centers. IT systems need regular upgrading and banks, including BBVA, 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

 

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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, including BBVA, could face fines from bank regulators if they fail to comply with applicable banking or reporting regulations.

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

Publicly available information about public companies in Spain is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States. In addition, although BBVA is subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Finally, BBVA maintains its financial accounts and records and prepares its financial statements in 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.

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

The preparation of financial statements in accordance with IFRS requires the use of estimates. It also requires management to exercise judgment in applying relevant accounting policies. The key areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated and individual financial statements, include credit impairment charges for amortized cost assets, impairment and valuation of available-for-sale investments, calculation of income and deferred tax, fair value of financial instruments, valuation of goodwill and intangible assets, valuation of provisions and accounting for pensions and post-retirement benefits. There is a risk that if the judgment exercised or the estimates or assumptions used subsequently turn out to be incorrect then this could result in significant loss to the Group, beyond that anticipated or provided for, which could have an adverse effect on the Group’s business, financial condition and results of operations.

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

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

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.

 

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Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. The main capital expenditures from 2012 to the date of this Annual Report were the following:

2014

New agreement for the acquisition of an additional 14.9% of Garanti

On November 19, 2014 we entered into agreements with Doğuş Holding A.Ş. and Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, respectively, for the acquisition of 62,538,000,000 shares of Garanti in the aggregate for a maximum total consideration of 8.90 Turkish liras per batch of 100 shares (amounting to a total maximum amount of approximately 5,566 million Turkish liras or €1,988 million, based on the closing exchange rate as of November 13, 2014 of TL/€ = 2.7995). Completion of the acquisition is conditional on obtaining all necessary regulatory consents from the relevant Turkish, Spanish, European Union and, if applicable, other jurisdictions’ regulatory authorities. After the acquisition of the new shares, our stake in Garanti will be 39.9%.

In accordance with IFRS, upon the completion of the acquisition referred to above, we will have to value our stake in Garanti (which is currently classified as a joint venture accounted for using the equity method) at fair value and fully consolidate Garanti in our consolidated financial statements as from the date of the actual acquisition of control, which is expected to occur during 2015, subject to obtaining the abovementioned regulatory consents.

The date of announcement of the agreement the estimated negative impact in the attributable profit of the consolidated financial statements of the BBVA Group was approximately €1,500 million. According to the last public information regarding December 2014, the estimated impact was approximately €1,250 million, basically being affected by the exchange rate differences as a result of the depreciation of the Turkish lira against euro since the initial acquisition. These exchange rate differences are already recognized as Other Comprehensive Income deducting the stock shareholder’s equity of the BBVA Group. Such accounting impact does not translate into any additional cash outflow from BBVA.

From the date of the last public information as of December 2014 to the most recent date of completion of these consolidated financial statements, significant volatility has occurred; therefore the estimated negative impact in the attributable profit of the consolidated financial statements of the BBVA Group could change.

Catalunya Banc competitive auction

On July 21, 2014, the Management Commission of the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria or “FROB”) accepted BBVA’s bid in the competitive auction for the acquisition of Catalunya Banc, S.A. (“Catalunya Banc”). As a consequence, BBVA entered into a sale and purchase agreement with the FROB, by virtue of which the FROB will sell up to 100% of the shares of Catalunya Banc to BBVA for a price of up to €1,187 million (depending on certain adjustments relating to minority shareholders in Catalunya Banc).

The price will be reduced in an amount equal to €267 million if, prior to the effective closing of the transaction, the FROB and Catalunya Banc do not obtain a confirmation from the Spanish tax authorities regarding the application of the deferred tax assets regime (set forth in RD-L 14/2013) to some losses recorded in Catalunya Banc’s consolidated financial statements for 2013, which were originated as a consequence of the transfer of assets by Catalunya Banc to the Management Company for Assets Arising from the Banking Sector Restructuring (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria or “SAREB”).

The closing of the sale and purchase transaction is subject to various conditions, such as obtaining the relevant administrative authorizations and approvals and the closing of the transfer by Catalunya Banc of a loan portfolio with a nominal value of €6,392 million to an asset securitization fund, as announced by Catalunya Banc to the market on July 17, 2014.

 

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Purchase of Simple

On March 17, 2014, the Group acquired 100% of Simple Finance Technology Corp. (“Simple”) for a price of $117 million (approximately €84 million).

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 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.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2012 to the date of this Annual Report were the following:

2014

Agreement to sell CNCB

On January 23, 2015, we signed an agreement to sell a 4.9% stake in China CITIC Bank Corporation Limited (“CNCB”) to UBS AG, London Branch (“UBS”), which in turn entered into transactions pursuant to which such stake was transferred to Xinhu Zhongbao Co., Ltd.

The closing took place on March 12, 2015. The sale price to UBS was HK$5.73 per share, amounting to a total of HK$13,136 million (approximately €1,555 million) and the estimated impact on our consolidated financial statements was a net capital gain of approximately €520 million.

As of December 31, 2014, our participation in CNCB was recognized under the heading “Non-Current assets available for sale.” See Note 12 to our Consolidated Financial Statements.

Agreement to sell the participation in Citic International Financial Holding (CIFH)

On December 23, 2014, we signed an agreement to sell our 29.68% stake in Citic International Financial Holdings Limited (“CIFH”) to CNCB. CIFH is a non-listed subsidiary of CNCB domiciled in Hong Kong. The sale price is HK$8,162 million. The closing of the agreement is subject to obtaining the relevant regulatory approvals. The estimated negative impact on the attributable profit of the consolidated financial statements of the BBVA Group will be approximately €25 million.

 

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As of December 31, 2014, this participation was recognized under the heading “Non-Current assets held for sale” under the heading “Investments in entities accounted for using the equity method –Associates” (see Note 16 to our Consolidated Financial Statements).

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 49.1 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.

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 49.2 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.

 

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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 49.2 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 49.2 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 49.2 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%.

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 48 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 48 to our Consolidated Financial Statements for additional information.

 

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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

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

 

    Banking Activity in Spain

 

    Real Estate Activity in Spain

 

    Eurasia

 

    Mexico

 

    South America

 

    United States

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).

The information presented below for the years ended December 31, 2013 and 2012 reflects certain minor reclassifications made in 2014 among our operating segments; consequently such information differs slightly from the segmental information reported in our prior annual reports on Form 20-F.

 

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The breakdown of the Group’s total assets by operating segments as of December 31, 2014, 2013 and 2012 is as follows:

 

     As of December 31,  
Total Assets by Operating Segment    2014      2013 (1)      2012 (1)  
     (In Millions of Euros)  

Banking Activity in Spain

     318,353         314,902         345,521   

Real Estate Activity in Spain

     17,934         20,582         22,112   

Eurasia (2)

     44,667         41,223         48,324   

Mexico

     93,731         81,801         82,722   

South America

     84,364         77,874         75,877   

United States

     69,261         53,046         53,880   
  

 

 

    

 

 

    

 

 

 

Subtotal Assets by Operating Segments

  628,310      589,428      628,436   
  

 

 

    

 

 

    

 

 

 

Corporate Center and other adjustments (3)

  3,632      (6,732   (7,304
  

 

 

    

 

 

    

 

 

 

Total Assets BBVA Group

  631,942      582,697      621,132   
  

 

 

    

 

 

    

 

 

 

 

(1) Reflects certain restatements relating to, among others, the reclassification of our business in Panama (sold in 2013) to the Corporate Center.
(2) The information is presented under management criteria, pursuant to which Garanti information has been proportionally consolidated based on our 25.01% interest in Garanti.
(3) 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 to above. For more information, see “Item 5. Operating and Financial Review and Prospects”.

The following table sets forth information relating to the profit by each of BBVA’s operating segments and Corporate Center for the years ended December 31, 2014, 2013 and 2012:

 

     Profit/(Loss)
Attributable to Parent
Company
    % of Profit/(Loss)
Attributable to Parent
Company
 
     For the Year Ended December 31,  
     2014     2013 (1)     2012 (1)     2014     2013 (1)     2012 (1)  
     (In Millions of Euros)     (In Percentage)  

Banking Activity in Spain

     1,028        589        1,186        25.3        18.4        143.7   

Real Estate Activity in Spain

     (876     (1,252     (4,068     (21.6     (39.1     (492.8

Eurasia (2)

     565        449        404        13.9        14.0        48.9   

Mexico

     1,915        1,802        1,687        47.1        56.3        204.3   

South America

     1,001        1,224        1,172        24.6        38.2        142.0   

United States

     428        390        445        10.5        12.2        53.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Operating Segments

  4,062      3,201      826      100.0      100.0      100.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate Center

  (1,444   (1,117   850   
  

 

 

   

 

 

   

 

 

       

Profit

  2,618      2,084      1,676   
  

 

 

   

 

 

   

 

 

       

 

(1) Reflects certain restatements relating to, among others, the reclassification of our business in Panama (sold in 2013) to the Corporate Center.
(2) The information is presented under management criteria, pursuant to which Garanti information has been proportionally consolidated based on our 25.01% interest in Garanti.

 

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The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2014, 2013 and 2012 and reconciles the income statement of the various operating segments to the consolidated income statement of the Group:

 

     Operating Segments                           
     Banking
Activity
in Spain
     Real
Estate
Activity
in Spain
    Eurasia(1)      Mexico      South
America
     United
States
     Corporate
Center
    Total     Adjustments
(2)
    BBVA
Group
 
     (In Millions of Euros)  

2014

                         

Net interest income

     3,830         (38     924         4,910         4,699         1,443         (651     15,116        (734     14,382   

Gross income

     6,622         (132     1,680         6,522         5,191         2,137         (664     21,357        (632     20,725   

Net margin before provisions

     3,777         (291     942         4,115         2,875         640         (1,653     10,406        (240     10,166   

Operating profit /(loss) before tax

     1,463         (1,225     713         2,519         1,951         561         (1,920     4,063        (83     3,980   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit

  1,028      (876   565      1,915      1,001      428      (1,444   2,618      —        2,618   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2013

Net interest income

  3,838      (3   909      4,478      4,660      1,402      (671   14,613      (713   13,900   

Gross income

  6,103      (38   1,717      6,194      5,583      2,047      (416   21,191      (439   20,752   

Net margin before provisions

  3,088      (188   981      3,865      3,208      618      (1,584   9,990      (34   9,956   

Operating profit /(loss) before tax

  230      (1,838   586      2,358      2,354      534      (1,680   2,544      (1,589   954   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit

  589      (1,252   449      1,802      1,224      390      (1,117   2,084      —        2,084   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

2012

Net interest income

  4,729      (21   851      4,174      4,236      1,550      (397   15,122      (648   14,474   

Gross income

  6,659      (79   1,665      5,751      5,308      2,198      391      (68   21,892      21,824   

Net margin before provisions

  3,776      (209   886      3,590      3,023      722      (681   344      11,106      11,450   

Operating profit /(loss) before tax

  1,651      (5,705   508      2,223      2,234      620      (783   749      833      1,582   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit

  1,186      (4,068   404      1,687      1,172      445      850      1,676      —        1,676   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The information is presented under management criteria, pursuant to which Garanti information has been proportionally integrated based on our 25.01% interest in Garanti.
(2) 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.

 

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Banking Activity in Spain

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

 

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

 

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

 

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

 

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

In addition, it includes certain loans and advances portfolios, finance and structural euro balance sheet positions.

The following table sets forth information relating to the activity of this operating segment as of December 31, 2014, 2013 and 2012:

 

     As of December 31,  
     2014      2013      2012  
     (In Millions of Euros)  

Total Assets

     318,353         314,902         345,521   

Loans and advances to customers

     174,197         178,283         193,311   

Of which:

        

Residential mortgages

     74,508         77,575         84,602   

Consumer finance

     5,270         6,703         7,663   

Loans

     3,946         4,962         6,043   

Credit cards

     1,324         1,741         1,620   

Loans to enterprises

     37,224         37,181         45,148   

Loans to public sector

     22,833         21,694         24,770   

Customer deposits

     154,261         157,124         146,008   

Of which:

        

Current and savings accounts

     58,645         53,408         47,512   

Time deposits

     62,203         74,451         62,598   

Other customer funds

     17,799         8,436         9,593   

Assets under management

     50,749         42,933         40,156   

Mutual funds

     28,695         22,298         19,116   

Pension funds

     21,880         20,428         18,577   

Other placements

     174         206         2,463   

Loans and advances to customers of this operating segment as of December 31, 2014 amounted to €174,197 million, a 2.3% decrease from the €178,283 million recorded as of December 31, 2013, mainly as a result of the maturities of our loan portfolio which were not offset by the higher lending activity in the period.

 

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Customer deposits of this operating segment as of December 31, 2014 amounted to €154,261 million, a 1.8% decrease from the €157,124 million recorded as of December 31, 2013, mainly due to the lower remuneration of time deposits that has led to a shift of funds to demand deposits and mutual funds.

Mutual funds of this operating segment as of December 31, 2014 amounted to €28,695 million, a 28.7% increase from the €22,298 million recorded as of December 31, 2013. Pension funds of this operating segment as of December 31, 2014 amounted to €21,880 million, a 7.1% increase from the €20,428 million recorded as of December 31, 2013. These increases were mainly the result of the active marketing of a diversified portfolio of mutual and pension funds to certain customer segments in an environment of low interest rates.

This operating segment’s non-performing asset ratio decreased to 6.0% as of December 31, 2014, from 6.4% as of December 31, 2013, mainly due to lower net additions to non-performing assets. This operating segment’s non-performing assets coverage ratio increased to 45% as of December 31, 2014, from 41% as of December 31, 2013.

Real Estate Activity in Spain

This operating segment was set up with the aim of providing specialized and structured management of the real estate assets accumulated by the Group as a result of the economic crisis in Spain. It includes primarily lending to real estate developers and foreclosed real estate assets.

The exposure, including loans and advances to customers and foreclosed assets, to the real estate sector in Spain is declining. As of December 31, 2014, the balance stood at €12,545 million, 13.9% lower than as of December 31, 2013. Non-performing assets of this segment have continued to decline and as of December 31, 2014 were 16.1% lower than as of December 31, 2013. The coverage of non-performing and potential problem loans of this segment increased to 54% as of December 31, 2014, compared with 48% of the total amount of real-estate assets in this operating segment.

The number of real estate assets sold in 2014 was 1.5% lower than in 2013, although real estate assets sold in 2014 had a higher gross value and average price, resulting in a greater reduction in our total exposure to the real estate sector.

 

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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 stake in the Turkish bank Garanti. Following management criteria, assets and liabilities corresponding to our 25.01% stake in Garanti are included in every balance sheet line.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2014, 2013 and 2012:

 

     As of December 31,  
     2014      2013      2012  
     (In Millions of Euros)  

Total Assets

     44,667         41,223         48,324   

Loans and advances to customers

     29,430         28,397         30,228   

Of which:

        

Residential mortgages

     4,193         4,156         4,291   

Consumer finance

     4,143         3,983         4,262   

Loans

     2,877         2,743         3,051   

Credit cards

     1,266         1,240         1,212   

Loans to enterprises

     18,860         18,348         19,550   

Loans to public sector

     234         251         102   

Customer deposits

     22,671         17,634         17,470   

Of which:

        

Current and savings accounts

     3,637         3,148         3,098   

Time deposits

     10,170         9,009         9,576   

Other customer funds

     7,145         4,305         3,795   

Assets under management

     2,401         1,966         2,016   

Mutual funds

     1,549         1,332         1,408   

Pension funds

     852         634         608   

Loans and advances to customers of this operating segment as of December 31, 2014 amounted to €29,430 million, a 3.6% increase from the €28,397 million recorded as of December 31, 2013, as a result of the evolution of the Garanti portfolios, particularly loans denominated in Turkish lira, with a positive trend of consumer portfolios.

Customer deposits of this operating segment as of December 31, 2014 amounted to €22,671 million, a 28.6% increase from the €17,634 million recorded as of December 31, 2013, as a result of increased volume in foreign currency deposits of Garanti.

Mutual funds of this operating segment as of December 31, 2014 amounted to €1,549 million, a 16.3% increase from the €1,332 million recorded as of December 31, 2013, due to an increase of mutual funds in Luxembourg.

Pension funds of this operating segment as of December 31, 2014 amounted to €852 million, a 34.4% increase from the €634 million recorded as of December 31, 2013, mainly as a result of increases in Turkey and Portugal.

 

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This operating segment’s non-performing asset ratio decreased to 3.3% as of December 31, 2014 from 3.4% as of December 31, 2013. This operating segment non-performing assets coverage ratio increased to 92% as of December 31, 2014 from 87% as of December 31, 2013.

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, 2014, 2013 and 2012:

 

     As of December 31,  
     2014      2013      2012  
     (In Millions of Euros)  

Total Assets

     93,731         81,801         82,722   

Loans and advances to customers

     46,798         40,668         39,060   

Of which:

        

Residential mortgages

     9,272         8,985         9,399   

Consumer finance

     10,902         10,096         9,785   

Loans

     5,686         4,748         4,421   

Credit cards

     5,216         5,348         5,364   

Loans to enterprises

     16,706         13,867         12,493   

Loans to public sector

     4,295         3,594         3,590   

Customer deposits

     45,937         42,452         35,792   

Of which:

        

Current and savings accounts

     27,795         24,489         23,707   

Time deposits

     7,382         6,409         7,157   

Other customer funds

     3,914         3,819         3,207   

Assets under management

     22,094         19,673         19,896   

Mutual funds

     18,691         16,896         17,492   

Other placements

     3,403         2,777         2,404   

Loans and advances to customers of this operating segment as of December 31, 2014 amounted to €46,798 million, a 15.1% increase from the €40,668 million recorded as of December 31, 2013, mainly due to the increase in financing to medium-sized enterprises and consumer loans.

Customer deposits of this operating segment as of December 31, 2014 amounted to €45,937 million, a 8.2% increase from the €42,452 million recorded as of December 31, 2013, mainly as a result of the increase in demand deposits.

Mutual funds of this operating segment as of December 31, 2014 amounted to €18,691 million, a 10.6% increase from the €16,896 million recorded as of December 31, 2013 mainly as a result of an improvement in corporate banking which was boosted by a marketing campaign.

This operating segment’s non-performing asset ratio decreased to 2.9% as of December 31, 2014, from 3.6% as of December 31, 2013. This operating segment non-performing assets coverage ratio increased to 114% as of December 31, 2014, from 110% as of December 31, 2013.

 

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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, 2014, 2013 and 2012:

 

     As of December 31,  
     2014      2013      2012  
     (In Millions of Euros)  

Total Assets

     84,364         77,874         75,877   

Loans and advances to customers

     52,920         48,466         47,601   

Of which:

        

Residential mortgages

     9,621         8,533         8,464   

Consumer finance

     13,575         13,112         12,598   

Loans

     9,336         9,441         9,231   

Credit cards

     4,239         3,670         3,366   

Loans to enterprises

     20,831         18,565         18,851   

Loans to public sector

     650         601         615   

Customer deposits

     56,370         55,167         52,759   

Of which:

        

Current and savings accounts

     37,006         37,639         33,901   

Time deposits

     17,686         15,869         16,440   

Other customer funds

     7,301         5,374         5,467   

Assets under management

     8,480         6,552         5,698   

Mutual funds

     3,848         2,952         3,355   

Pension funds

     4,632         3,600         3,083   

Loans and advances to customers of this operating segment as of December 31, 2014 amounted to €52,920 million, a 9.2% increase from the €48,466 million recorded as of December 31, 2013, mainly due to increased activity, particularly in small business finance and lending to corporates.

Customer deposits of this operating segment as of December 31, 2014 amounted to €56,370 million, a 2.2% increase from the €55,167 million recorded as of December 31, 2013, mainly due to an increase in the balance of current and saving accounts in Venezuela and in time deposits in Chile and Colombia.

Mutual funds of this operating segment as of December 31, 2014 amounted to €3,848 million, a 30.3% increase from the €2,952 million recorded as of December 31, 2013, mainly as a result of the positive performance in Argentina, Chile and Peru.

 

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Pension funds of this operating segment as of December 31, 2014 amounted to €4,632 million, a 28.7% increase from the €3,600 million recorded as of December 31, 2013, mainly as a result of the increased volumes in Bolivia.

This operating segment’s non-performing asset ratio was 2.1% as of December 31, 2014 and 2013. This operating segment non-performing assets coverage ratio decreased to 138% as of December 31, 2014, from 141% as of December 31, 2013.

United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 94% of the area’s balance sheet as of December 31, 2014. 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, 2014, 2013 and 2012:

 

     As of December 31,  
     2014      2013      2012  
     (In Millions of Euros)  

Total Assets

     69,261         53,046         53,880   

Loans and advances to customers

     49,667         38,067         36,885   

Of which:

        

Residential mortgages

     11,876         9,591         9,176   

Consumer finance

     5,812         4,464         4,422   

Loans

     5,291         3,984         3,942   

Credit cards

     522         481         480   

Loans to enterprises

     25,202         19,427         19,292   

Loans to public sector

     3,706         2,772         1,961   

Customer deposits

     51,394         39,844         39,132   

Of which:

        

Current and savings accounts

     38,438         29,800         29,060   

Time deposits

     8,853         7,300         7,885   

Other customer funds

     2,803         1,348         775   

Loans and advances to customers of this operating segment as of December 31, 2014 amounted to €49,667 million, a 30.5% increase from the €38,067 million recorded as of December 31, 2013, as a result of growth in all of the segment’s portfolios.

Customer deposits of this operating segment as of December 31, 2014 amounted to €51,394 million, a 29.0% increase from the €39,844 million recorded as of December 31, 2013, mainly due to an increase in the balance of current and saving accounts as a result of the campaigns designed to attract deposits.

This operating segment’s non-performing asset ratio decreased to 0.9% as of December 31, 2014, from 1.2% as of December 31, 2013, as a result of a decrease in non-performing loans and a growth of loans and advances to customers. This operating segment non-performing assets coverage ratio increased to 167% as of December 31, 2014, from 134% as of December 31, 2013, as a result of the decrease in non-performing assets.

 

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Insurance Activity

See Note 22 to our Consolidated Financial Statements for information on our insurance activity.

Monetary Policy

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

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

 

    defining and implementing the single monetary policy of the EMU;

 

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

 

    lending to national monetary financial institutions in collateralized operations;

 

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

 

    promoting the smooth operation of the payment systems.

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

Supervision and Regulation

Since September 2012, significant progress has been made toward the establishment of a European banking union. Banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the Single Supervisory Mechanism (the “SSM”) and the Single Resolution Mechanism (“SRM”).

Pursuant to Article 127(6) of the Treaty on the Functioning of the European Union and Council Regulation (EC) No. 1023/2013 conferring specific tasks on the European Central Bank (“ECB”) concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), the ECB is responsible for specific tasks concerning the prudential supervision of credit institutions established in participating Member States. Since 2014, it carries out these supervisory tasks within the SSM framework, composed of the ECB and the relevant national authorities. The ECB is responsible for the effective and consistent functioning of the SSM, with a view to carrying out effective banking supervision, contributing to the safety and soundness of the banking system and the stability of the financial system.

Its main aims are to:

 

    ensure the safety and soundness of the European banking system;

 

    increase financial integration and stability; and

 

    ensure consistent supervision.

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

It has the authority to:

 

    conduct supervisory reviews, on-site inspections and investigations;

 

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    grant or withdraw banking licenses;

 

    assess banks’ acquisitions and disposals of qualifying holdings;

 

    ensure compliance with EU prudential rules; and

 

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

In addition, since November 2014, it assumed the direct supervision of the 123 significant banks of the participating countries, including Banco Bilbao Vizcaya Argentaria, S.A. These banks hold almost 82% of banking assets in the Eurozone. Ongoing supervision of the significant banks is carried out by Joint Supervisory Teams (“JSTs”). Each significant bank has a dedicated JST, comprising staff of the ECB and the relevant national supervisors (in our case, the Bank of Spain).

The criteria for determining whether a bank is considered significant (and therefore whether it falls under the ECB’s direct supervision) are set out in the SSM Regulation and the Regulation (EU) No. 468/2014 of the European Central Bank of April 16, 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (the “SSM Framework Regulation”). To qualify as significant, a bank must fulfill at least one of these criteria:

 

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

 

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

 

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

 

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

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

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

Bank of Spain

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

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

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

 

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

 

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

 

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

 

    issuing legal tender banknotes.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    exercising all other powers attributed to it by legislation.

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

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

 

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

 

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

 

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

 

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

 

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

 

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

Deposit Guarantee Fund of Credit Institutions

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

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

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

As of December 31, 2014, 2013 and 2012 all of the Spanish banks belonging to the BBVA Group were members of the FGD and were thus obligated to make annual contributions to it.

Investment Guarantee Fund

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

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

Liquidity Requirements—Minimum Reserve Ratio

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

 

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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

As a result of the crisis that affected the financial markets since 2007, the Spanish authorities created the 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 supports the restructuring strategy of those institutions that require assistance, in three distinct stages:

 

    search for a private solution by the credit institution itself;

 

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

 

    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 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.

In order to comply with its objectives, the FROB is funded by the Spanish national budget. The FROB is able to raise funds in capital markets through the issuance of debt securities as well as by lending and engaging in any other debt transaction necessary to fulfill its objectives. However, this structure of funding will be significantly modified once the BRRD Draft Implementation Law (as defined below) comes into force. Credit institutions will be required to fund the national resolution funds. In addition, from January 1, 2016, the SRM will assume its resolution powers.

Capital Requirements

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

The Basel III accords were transposed into EU law by the enactment of Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (“CRD IV”), which implements the Basel III capital standards over a phase-in period until January 1, 2019, and the Regulation 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation 648/2012 (“CRR”), subject to a number of transitional provisions and clarifications. A number of the requirements introduced under CRD IV have been and continue to be further supplemented through the Regulatory and Implementing Technical Standards produced by the European Banking Authority (EBA) and to be adopted by the European Commission which are not yet all finalized. The EU rules deviate from the Basel III rules in certain aspects, and provide national flexibility to apply more stringent prudential requirements than set out in the Basel framework.

 

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As a Spanish financial institution, we are subject to the CRD IV and the CRR. The CRR has been applicable since January 1, 2014 and the CRD IV has been largely implemented in Spain by Royal Decree-Law 14/2013, of November 29 (the “RD-L 14/2013”), Law 10/2014, of June 26, on organization, supervision and solvency of credit institutions (“Law 10/2014”) and Royal Decree 84/2015, of February 13 (“RD 84/2015”). In addition to RD-L 14/2013, Law 10/2014 and RD 84/2015, the Bank of Spain approved on January 31, 2014 its new Circular 2/2014, which repeals its previous Circular 7/2012 and makes certain regulatory determinations permitted under CRR pursuant to the delegation contained in RD-L 14/2013, including relevant rules concerning the applicable transitional regime on capital requirements and treatment of deductions.

Under CRD IV and CRR, the Group is required, on a consolidated basis, to hold a minimum amount of regulatory capital of 8% of risk-weighted assets of which at least 4.5% must be CET1 capital and at least 6% must be tier 1 capital (together, the “Pillar 1 requirements”).

In addition, the ECB requires certain financial institutions, including BBVA, to comply with extra capital requirements above the Pillar 1 requirements that may be material and which vary on a case-by-case basis to cover risks they believe are not covered or insufficiently covered by the Pillar 1 requirements (the “Pillar 2 requirements”).

CRD IV also introduces five new capital buffers that are in addition to the Pillar 1 and Pillar 2 requirements and are to be met with CET1 capital: (i) the capital conservation buffer, (ii) the institution-specific counter-cyclical buffer, (iii) the global systemically important institutions buffer, (iv) the other systemically important institutions buffer and (v) the systemic risk buffer. Some or all of these buffers may be applicable to us as determined by the ECB.

The combination of the capital conservation buffer, the institution-specific counter-cyclical capital buffer and the higher of (depending on the institution), the systemic risk buffer, the global systemically important institutions buffer and the other systemically important institution buffer, in each case (as applicable to the institution) is referred to as the “combined buffer requirement”.

In addition, under the provisions of the CRR, which took effect from January 1, 2014, deferred tax assets that rely on future profitability (for example, deferred tax assets related to trade losses) and do not arise from temporary differences must be deducted in full from CET1 capital. Other deferred tax assets which rely on future profitability and arise from temporary differences are subject to a threshold test and only the amount in excess of the threshold is deducted from CET1 capital. The regulatory treatment of such deferred tax assets is dependent on there being no adverse changes to regulatory requirements.

Under Article 141 (Restrictions on distribution) of the CRD IV, member states of the EU must require that institutions that fail to meet the “combined buffer requirement” will be subject to restricted “discretionary payments” (which are defined broadly by CRD IV as payments relating to CET1 (dividends), variable remuneration and payments on additional tier 1 instruments). The restrictions will be scaled according to the extent of the breach of the “combined buffer requirement” and calculated as a percentage of the profits of the institution since the last distribution of profits or “discretionary payment”. Such calculation will result in a “maximum distributable amount” (or “MDA”) in each relevant period. As an example, the scaling is such that in the bottom quartile of the “combined buffer requirement”, no “discretionary distributions” will be permitted to be paid. In the event of a breach of the combined buffer requirement, we will be required to calculate our MDA, and as a consequence it may be necessary for us to reduce discretionary payments.

Moreover, global systemically important banks (GSIBs) such as BBVA will be subject to an additional CET1 capital requirement, depending on a bank’s systemic importance. The FSB list of GSIBs is updated annually, based on new data and changes to methodology. In addition, regulatory proposals relating to domestically systemically important banks (DSIBs) continue to be progressed and could impact the level of CET1 that is required to be held by us.

 

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In addition to the capital requirements under CRD IV, Directive 2014/59/EU of May 15 establishing a framework for the recovery and resolution of credit institutions and investment firms (“BRRD”) introduces requirements for banks to maintain at all times a sufficient aggregate amount of own funds and “eligible liabilities” (that is, liabilities that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities (“MREL”). The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of their risk or the composition of their sources of funding. The Spanish government is in the process of transposing the BRRD’s provisions into law and MREL requirements will need to be implemented by 2016. The EBA will issue regulatory technical standards specifying the assessment criteria that resolution authorities should use to determine the minimum requirement for own funds and eligible liabilities for individual firms (a draft of such regulatory technical standards was published on November 28, 2014 for public consultation). While such standards are expected be compatible with the proposed term sheet published by the FSB on total loss absorbing capacity (“TLAC”) requirements for GSIBs, there remains a degree of uncertainty as to the extent to which MREL and TLAC requirements may differ.

Building on changes made to requirements in relation to the quality and aggregate quantity of capital that banks must hold, the Basel Committee and other agencies are increasingly focused on changes that will increase, or re-calibrate, measures of risk-weighted assets as the key measure of the different categories of risk in the denominator of the risk-based capital ratio. There is no current global consensus regarding the key objectives of this further evolution of the international capital framework. One extreme position advocated by some regulators would materially deemphasize the role of a risk-based capital ratio. A more broadly held opinion among regulators seeks to retain the ratio but also reform it, in particular by addressing perceived excessive complexity and variability between banks and banking systems. In particular, the Basel Committee on Banking Supervision published a consultation paper in December 2014, in which it recommended reduced reliance on external credit ratings when assessing risk-weighted assets and to replace such ratings with certain risk drivers based on the particular type of exposure of each asset. While they are at different stages of maturity, a number of initiatives across risk types and business lines are in progress that will impact risk-weighted assets at their conclusion. While the quantum of impacts is uncertain owing to lack of clarity of definition of the changes and the timing of their introduction, the likelihood of an impact resulting from each initiative is high and such impacts could result in higher levels of risk-weighted assets.

In addition, in December 2010 the Basel Committee also published its global quantitative liquidity framework, comprising the Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) metrics, seeking to (i) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (ii) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The Basel III liquidity standards are being implemented within the EU through the CRD IV. The LCR has been subsequently revised by the Basel Committee in January 2013 and in January 2014 the Basel Committee published amendments to the LCR and technical revisions to the NSFR ratio, confirming that it remains the intention that the latter ratio, including any future revisions, will become a minimum standard by January 1, 2018. Also, in January 2014, the Basel Committee proposed uniform disclosure standards related to the LCR and issued a new modification to the ratio, which should be adopted by banks from October 1, 2015.

Capital Management

Basel Capital Accord—Economic Capital

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

Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and Bank of Spain criteria. See Note 31 to the Consolidated Financial Statements.

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

 

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

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

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

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

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

Concentration of Risk

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

Legal and Other Restricted Reserves

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

Impairment on Financial Assets

For a discussion of provisions 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

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.

 

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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 24 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.

Effective since January 1, 2014, new banking regulation (Basel III, implemented in the European Union, among others, through the CRD IV and the CRR) has affected the restrictions to dividend payments that may be applicable in the following years, in circumstances where solvency requirements are not fulfilled. Credit entities will be required to hold a combined buffer requirement above their capital requirements in order to be able to freely distribute their distributable results. See Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements. 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, 2012 and 2013, during 2014, a scrip dividend scheme called “Dividend Option” was successfully approved by the annual general meeting of shareholders held on March 14, 2014. The BBVA annual general meeting of shareholders held on March 13, 2015 passed four resolutions adopting four different free-of-charge capital increases for the implementation during 2015 of the “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, at their own free choice, to receive their remuneration in newly issued ordinary 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 all or part of their remuneration in newly issued ordinary shares of the Bank, whilst always maintaining the possibility to choose to receive the entire remuneration in cash.

Shareholders may have the “Dividend Option” available to them on different dates. However, it should be noted that each capital increase approved by the annual shareholders’ general meeting held on March 13, 2015, 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 25, 2015 meeting, approved the execution of a capital increase on the terms approved by the annual general meeting of shareholders held on March 13, 2015 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 80,314,074.

 

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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, implemented several aspects of Law 2/1981, of March 25. The most significant aspect implemented by Royal Decree 716/2009 was the modification on the loan-to-value ratio requirement intending to improve the quality of Spanish mortgage-backed securities.

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

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

Such measures include the following:

 

    the moderation of interest rates charged on mortgage arrears;

 

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

 

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

 

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

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

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

 

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

 

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

 

    limitation of the interest rates applied for delay or arrears;

 

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

 

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

 

    modification of the out-of-court notarial procedure.

 

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

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

The most recent development regarding mortgage legislation in Spain is the approval by the Spanish government of Royal Decree-Law 1/2015 of February 27 on the “second chance” mechanism. The Royal Decree, although already in force, needs to be passed as law by Parliament, which is expected to take place through the emergency procedure in the next few days. During this process, amendments may be made to the current text. The main purpose of the Royal Decree is to regulate the “second chance” mechanism. This allows an individual who has been declared bankrupt to be discharged of outstanding obligations as long as he or she fulfills certain requirements: (i) the bankruptcy proceedings must have concluded, (ii) the debtor must have acted in good faith, the Royal Decree being restrictive as to when a debtor is considered to have acted in good faith, and (iii) the bankruptcy judge has to approve the terms of the discharge (and may revoke his or her approval under certain circumstances upon request of any creditor in the following five years). Discharge from mortgage obligations would only apply to the outstanding debts after the foreclosure, as long as such debts are considered ordinary or subordinate according to the Spanish Insolvency Law. Co-debtors and guarantors, if any, would remain liable.

Mutual Fund Regulation

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

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.

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

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

Spanish Auditing Law

Law 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 effectively 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 and subordinated debt could be forced to bear part of the losses of a troubled institution. This burden sharing could be done through exchanges of these instruments into capital instruments, direct or conditioned cash repurchases, or reduction and anticipated amortization of the nominal value of the relevant instruments.

Law 9/2012 will be partially derogated by the transposition of the BRRD into the Spanish law.

The process for the implementation of the BRRD in Spain started on December 1, 2014, with the publication of the draft of the proposed law (anteproyecto de ley) on the restructuring and resolution of credit institutions and investment firms (the “BRRD Draft Implementation Law”) for public consultation by the Spanish Ministry of Economy and Competitiveness. Following such consultation and the submission of a revised BRRD Draft Implementation Law to the report of the State Council (Consejo de Estado), the Spanish government approved the submission of a new version of the BRRD Draft Implementation Law, now drafted as a bill of law (proyecto de ley), to the Spanish parliament on March 13, 2015.

The BRRD was required to be implemented on or before January 1, 2015, although the bail-in tool will not apply until January 1, 2016, except where a bail-out is required during 2015. The BRRD aims to equip authorities with common tools and powers to tackle bank crises at the earliest possible moment and avoid costs to taxpayers. The set of measures provided for in the BRRD includes preparatory and preventive measures, the attribution of powers to the supervising authorities enabling them to act in advance and that are triggered whenever a financial institution does not comply or it is likely that it will not comply with the regulatory requirements to which it is subject, as well as resolution instruments and powers to be used when a financial institution does not comply or is likely to fail.

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.

 

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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 examined 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 examination 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. (“Compass Bancshares”). Compass Bank is a direct subsidiary of Compass Bancshares. Compass Bancshares 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.

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 BBVA’s U.S. investment adviser affiliates are regulated and supervised by the SEC.

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

 

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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.

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.

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.

Among other changes, the Dodd-Frank Act provides for an extensive framework for the regulation of over-the-counter (“OTC”) derivatives by the CFTC and the SEC, including mandatory clearing, exchange trading and public and regulatory transaction reporting of certain OTC derivatives, as well as rules regarding the registration of swap dealers and major swap participants, and related capital, margin, business conduct, record keeping and other requirements applicable to such entities. The CFTC has completed many of the most significant rulemakings, which came into effect in 2013 and 2014.

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.

Because BBVA is a non-U.S. swap dealer, the CFTC generally limits its direct regulation of BBVA with respect to swaps with U.S. persons and certain affiliates of U.S. persons. However, the CFTC is considering whether to apply regulatory transaction reporting to all swaps entered into by a non-U.S. swap dealer and instead rely on transaction reporting under comparable EU rules.

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.

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, became effective on

 

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January 1, 2015 for Compass Bancshares 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, are being phased in over several years as of 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, Compass Bancshares 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%. Compass Bancshares 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 foreign banking organizations (“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 (“IHC”) that will hold all of the Large FBOs’ U.S. bank and nonbank subsidiaries, such as Compass Bank and Compass Bancshares. 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. In addition, the Federal Reserve has adopted liquidity risk management, stress testing and liquidity buffer requirements as part of the enhanced prudential standards applicable to the U.S. operations of Large FBOs such as BBVA. Compass Bancshares and the Compass Bank are part of BBVA’s U.S. operations.

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, were required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the intermediate holding company requirement. BBVA submitted its implementation plan in December 2014, in which it indicated its intention to designate Compass Bancshares as its IHC. Compass Bancshares, which BBVA established in 2007, already serves as holding company for BBVA’s U.S. subsidiaries, and, as a U.S.-based bank holding company with more than $50 billion in assets, is required to comply with the enhanced prudential standards applicable under the final rule for top-tier U.S.-based bank holding companies that began on January 1, 2015 and, once BBVA designates it as its IHC, it will become subject to corresponding enhanced prudential standards. 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. 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.

In September 2014, the federal banking regulators adopted a final rule implementing in the United States the liquidity coverage ratio (“LCR”), the quantitative liquidity standards developed by the Basel Committee. The LCR was developed to ensure that covered banking organizations have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The rule introduces a version of the LCR applicable to certain large bank holding companies such as Compass Bancshares. This version differs in certain respects from the Basel Committee’s version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions and a shorter phase-in schedule beginning on January 1, 2015 and ending on January 1, 2017.

 

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The federal banking regulators have not yet proposed rules to implement in the United States the net stable funding ratio (“NSFR”), additional quantitative liquidity standards developed by the Basel Committee. The NSFR has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities. The Basel Committee contemplates that the NSFR, including any revisions, will be implemented as a minimum standard by January 1, 2018.

Under capital plan and stress test rules adopted by the Federal Reserve, Compass Bancshares 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. Compass Bancshares submitted annual capital plans in January 2012 and January 2013. Beginning in 2014, Compass Bancshares has participated in the Comprehensive Capital Analysis and Review (“CCAR”) program and submitted 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 either objects to a large U.S. bank holding company’s capital plan, in whole or in part, or provides 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 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 has indicated its non-objection. On March 11, 2015, the Federal Reserve released the results of the 2015 CCAR process, which showed that the Federal Reserve had no objection to the Compass Bancshares’ capital plans.

In addition, the Dodd-Frank Act and implementing rules issued by the Federal Reserve impose stress test requirements on both Compass Bancshares and Compass Bank. Compass Bancshares 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 (“Dodd-Frank Act Stress Test”). On March 5, 2015, the Federal Reserve released the results of the 2015 Dodd-Frank Act Stress Test, which showed that the Compass Bancshares surpassed the minimum capital requirements for all periods covered in the hypothetical severely adverse scenario defined by the Federal Reserve.

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, to July 2015. On December 18, 2014, the Federal Reserve granted banking entities until July 2016 to bring their ownership and sponsorship of covered funds entered into prior to 2014 into compliance with the Volcker Rule, and indicated that it intends to further extend the compliance period for these funds through July 2017. BBVA continues to assess the impact of the Volcker Rule to its business operations.

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 have always conformed to the requirements of Section 716. Pursuant to an amendment of the law enacted in December 2014, only certain structured finance swaps are now subject to section 716, as there are no swaps subject to push-out in the New York branch books. Should Compass Bank become a swap dealer, it will need to restrict its swap activities to conform to the Dodd-Frank Act “push-out”

 

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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 between BBVA’s U.S. broker-dealer affiliate BSI and BBVA’s U.S. banking units (such as BBVA’s New York Branch and Compass Bank), as well as between Compass Bank and 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 March 2014 the U.S. Court of Appeals for the District of Columbia upheld the validity of the Federal Reserve’s rule, and in January 2015 the U.S. Supreme Court denied a petition for certiorari to reconsider the appellate court’s decision.

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 requirement, we have requested relevant information from our affiliates globally.

 

    Legacy contractual obligations related to counter indemnities. Before 2007, the BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, three of which remained outstanding during 2014. Estimated gross revenue for 2014 from these counter indemnities, which includes fees and/or commissions, did not exceed $8,700 and was entirely derived from payments made by the BBVA Group’s non-Iranian customers in Europe. The 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, 2012, payments of any amounts due to Bank Melli under these counter indemnities were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. The BBVA Group is committed to terminating 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 2014, the BBVA Group had credit exposure to Bank Sepah arising from a letter of credit issued by Bank Sepah to a non-Iranian client of the BBVA Group in Europe. This letter of credit, which was granted before 2004, was used to secure a loan granted by the 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 2014 from this loan, which includes fees and/or commissions, did not exceed $17,800. Payments of amounts due by Bank Sepah in 2014 under this letter of credit were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure in connection with the letter of credit referred to above.

The 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.

 

    Bank Accounts. Until May 2014, the BBVA Group maintained a number of accounts for certain employees (some of whom are of Iranian nationality) of a company that produces farm vehicles and tractors. The 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. The accounts for these employees were closed in May 2014. In addition, the BBVA Group maintained one account for the Iranian National Airlines—Iran Air, which was closed in June 2014. Estimated gross revenue for 2014 from these accounts, which includes fees and/or commissions, did not exceed $120. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure.

 

    Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for three employees of the Iranian embassy in Spain. All three employees are Spanish citizens, and one of them has retired. Estimated gross revenue for 2014 from this embassy-related activity, which includes fees and/or commissions, did not exceed $2,500.

In addition, the BBVA Group maintained three accounts denominated in euros and Mexican pesos for the Iranian embassy in Mexico and three accounts denominated in Mexican pesos for an employee and that employee’s family, all of which were closed in July 2014. Estimated gross revenues for 2014 from this embassy-related activity, which include fees and/or commissions, did not exceed $200. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profits measure for the embassy-related activities referred to above. The BBVA Group is committed to terminating these business relationships as soon as legally possible.

 

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C. Organizational Structure

As of December 31, 2014, the BBVA Group was made up of 299 consolidated entities and 116 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.

Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2014.

 

Subsidiary

  

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         85,940   

COMPASS BANK

   United States    Bank      100.00         100.00         70,583   

BANCO PROVINCIAL S.A. - BANCO UNIVERSAL

   Venezuela    Bank      55.21         55.21         21,157   

BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS

   Spain    Insurance      99.95         99.95         18,113   

BANCO CONTINENTAL, S.A.

   Peru    Bank      46.12         46.12         17,542   

BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.

   Chile    Bank      68.18         68.18         16,275   

BBVA COLOMBIA, S.A.

   Colombia    Bank      95.43         95.43         14,592   

BBVA BANCO FRANCES, S.A.

   Argentina    Bank      75.96         75.96         6,927   

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

   Portugal    Bank      52.20         47.80         5,203   

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

   Mexico    Insurance      100.00         100.00         4,583   

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

   Mexico    Insurance      100.00         99.97         4,119   

BANCO DEPOSITARIO BBVA, S.A.

   Spain    Bank      100.00         100.00         2,709   

BANCO BILBAO VIZCAYA ARGENTARIA URUGUAY, S.A.

   Uruguay    Bank      100.00         100.00         2,603   

BBVA BANCO DE FINANCIACION S.A.

   Spain    Bank      100.00         100.00         2,159   

BBVA VIDA, S.A. DE SEGUROS Y REASEGUROS

   Spain    Insurance      100.00         100.00         2,151   

 

(*) Figures under local financial statements

 

D. Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,112 branch offices in Spain and, principally through our various affiliates, 4,259 branch offices abroad as of December 31, 2014. As of December 31, 2014, approximately 84% of our branches in Spain and 54% of our branches abroad were rented from third parties pursuant to short-term leases that may be renewed by mutual agreement.

BBVA, through a real estate company of the Group, is constructing its new corporate headquarters at a development area in the north of Madrid (Spain). As of December 31, 2014, the accumulated investment for this project amounted to €797 million.

 

E. Selected Statistical Information

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

 

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Average Balances and Rates

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

 

     Average Balance Sheet - Assets and Interest from Earning Assets  
     Year Ended December 31, 2014     Year Ended December 31, 2013     Year Ended December 31, 2012  
     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

     25,049         132         0.53     26,463         262         0.99     24,574         259         1.05

Debt securities, equity instruments and derivatives

     176,497         4,505         2.55     166,013         4,385         2.64     164,435         4,414         2.68

Loans and receivables

     352,911         18,041         5.11     361,246         18,736         5.19     372,458         19,939         5.35

Loans and advances to credit institutions

     24,727         238         0.96     25,998         411         1.58     25,122         442         1.76

Loans and advances to customers

     328,183         17,803         5.42     335,248         18,325         5.47     347,336         19,497         5.61

In euros (2)

     186,965         4,843         2.59     204,124         5,835         2.86     217,533         7,267         3.34

In other currencies (3)

     141,218         12,960         9.18     131,125         12,489         9.52     129,802         12,230         9.42

Other financial income

     —           —             —           —             —           —        

Non-earning assets

     45,951         159         0.35     45,982         128         0.28     46,613         203         0.44
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total average assets

  600,407      22,838      3.80   599,705      23,512      3.92   608,081      24,815      4.08
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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

 

     Average Balance Sheet - Liabilities and Interest Paid on Interest Bearing Liabilities  
     Year Ended December 31, 2014     Year Ended December 31, 2013     Year Ended December 31, 2012  
     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

     81,860         1,292         1.58     86,600         1,551         1.79     104,231         2,089         2.00

Customer deposits

     307,482         4,555         1.48     290,105         4,366         1.51     271,828         4,531         1.67

In euros (2)

     160,930         1,945         1.21     153,634         1,734         1.13     146,996         1,828         1.24

In other currencies (3)

     146,552         2,610         1.72     136,470         2,632         1.93     124,832         2,703         2.16

Debt certificates and subordinated liabilities

     80,355         1,611         2.00     94,130         2,812         2.99     102,563         2,783         2.71

Other financial costs

     —           —           —          —           —           —          —           —           —     

Non-interest-bearing liabilities

     83,620         998         1.19     82,257         883         1.07     86,627         938         1.08

Stockholders’ equity

     47,091         —           —          46,614         —           —          42,832         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total average liabilities

  600,407      8,456      1.41   599,705      9,612      1.60   608,081      10,341      1.70
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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

 

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Changes in Net Interest Income-Volume and Rate Analysis

The following tables allocate changes in our net interest income between changes in volume and changes in rate for 2014 compared to 2013, and 2013 compared to 2012. 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.

 

     2014 / 2013  
     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

     (14      (116      (130

Securities portfolio and derivatives

     277         (157      120   

Loans and advances to credit institutions

     (20      (153      (173

Loans and advances to customers

     (386      (135      (521

In euros

     (491      (502      (992

In other currencies

     961         (490      471   

Other assets

     —           31         31   
        

 

 

 

Total income

  (674
        

 

 

 

Interest expense

Deposits from central banks and credit institutions

  (85   (174   (259

Customer deposits

  262      (73   189   

In euros

  82      129      211   

In other currencies

  194      (216   (22

Debt certificates and subordinated liabilities

  (411   (789   (1,201

Other liabilities

  15      100      115   
        

 

 

 

Total expense

  (1,156
        

 

 

 

Net interest income

  482   
        

 

 

 

 

(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.

 

     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

  (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

  (729
        

 

 

 

Net interest income

  (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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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,  
     2014     2013     2012  
     (In Millions of Euro, except Percentages)  

Average interest earning assets

     554,457        553,722        561,468   

Gross yield (1)

     4.1     4.2     4.4

Net yield (2)

     3.8     3.9     4.1

Net interest margin (3)

     2.6     2.5     2.6

Average effective rate paid on all interest-bearing liabilities

     1.8     2.0     2.2

Spread (4)

     2.3     2.2     2.3

 

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

ASSETS

Interest-Bearing Deposits in Other Banks

As of December 31, 2014, interbank deposits (excluding deposits with central banks) represented 4.0% of our assets. Of such interbank deposits, 18.8% were held outside of Spain and 81.24% 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, 2014, our securities were carried on our consolidated balance sheet at a carrying amount of €133,904 million, representing 21.2% of our assets. €43,012 million, or 32.1%, of our securities consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2014 on investment securities that BBVA held was 3.3%, compared to an average yield of approximately 5.1% earned on loans and receivables during 2014. The market or appraised value of our total securities portfolio as of December 31, 2014, was €133,904 million. See Notes 10 and 12 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 16 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.

 

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The following tables analyze the carrying amount and fair value of debt securities as of December 31, 2014, December 31, 2013 and December 31, 2012, 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, 2014  
     Amortized
cost
     Fair Value (1)      Unrealized
Gains
     Unrealized
Losses
 
     (In Millions of Euros)  

DEBT SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic -

  40,337      42,802      2,542      (77
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

  34,445      36,680      2,290      (55

Other debt securities

  5,892      6,122      252      (22

Issued by Central Banks

  —        —        —        —     

Issued by credit institutions

  3,567      3,716      162      (13

Issued by other institutions

  2,325      2,406      90      (9
  

 

 

    

 

 

    

 

 

    

 

 

 

International -

  43,657      44,806      1,639      (490
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

  12,662      13,060      493      (96

Mexican Government and other government agencies debt securities

  10,629      11,012      459      (76

Other debt securities

  2,034      2,048      34      (20

Issued by Central Banks

  —        —        —        —     

Issued by credit institutions

  141      142      3      (3

Issued by other institutions

  1,892      1,906      31      (17

The United States

  10,289      10,307      102      (83

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

  1,539      1,542      6      (3

States and political subdivisions debt securities

  2,672      2,689      22      (5

Other debt securities

  6,078      6,076      73      (76

Issued by Central Banks

  —        —        —        —     

Issued by credit institutions

  24      24      —        —     

Issued by other institutions

  6,054      6,052      73      (76

Other countries

  20,705      21,439      1,044      (310

Other foreign governments and other government agencies debt securities

  10,355      10,966      715      (104

Other debt securities

  10,350      10,473      329      (206

Issued by Central Banks

  1,540      1,540      10      (9

Issued by credit institutions

  3,352      3,471      175      (55

Issued by other institutions

  5,459      5,461      143      (141
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

  83,994      87,608      4,181      (566)   
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic -

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

International -

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY PORTFOLIO

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

  83,994      87,608      4,181      (566 ) 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Table of Contents
     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 prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

 

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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 prices at the end of the period. Fair values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.

 

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Table of Contents

As of December 31, 2014 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, 2014  
     Debt Securities Available for Sale  
     Carrying Amount
(In Millions of
Euros)
     %  

AAA

     1,459         1.7

AA+

     7,620         8.7

AA

     329         0.4

AA-

     1,059         1.2

A+

     597         0.7

A

     2,223         2.5

A-

     13,606         15.5

BBB+

     9,980         11.4

BBB

     41,283         47.1

BBB-

     2,568         2.9

BB+ or below

     3,942         4.5

Without rating

     2,942         3.4
  

 

 

    

 

 

 

TOTAL

  87,608      100.0

The following tables analyze the carrying amount and fair value of our ownership of equity securities as of December 31, 2014, 2013 and 2012, respectively. See Note 10 to the Consolidated Financial Statements.

 

    As of December 31, 2014  
    Amortized
cost
    Fair Value (1)     Unrealized
Gains
    Unrealized
Losses
 
    (In Millions of Euros)  

EQUITY SECURITIES -

       

AVAILABLE FOR SALE PORTFOLIO

       

Domestic -

    3,177        3,199        93        (71 ) 

Equity listed

    3,129        3,150        92        (71

Equity unlisted

    48        49        1        —     

International -

    2,842        4,069        1,263        (36 ) 

United States -

    540        558        18        —     

Equity listed

    54        56        2        —     

Equity unlisted

    486        502        16        —     

Other countries -

    2,302        3,511        1,245        (36 ) 

Equity listed

    2,172        3,372        1,233        (33

Equity unlisted

    130        139        12        (3
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

  6,019      7,268      1,356      (107 ) 
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL EQUITY SECURITIES

  6,019      7,268      1,356      (107 ) 
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENT SECURITIES

  90,013      94,876      5,537      (673 ) 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents
     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 prices at the end of the year. Fair values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.

 

     As of December 31, 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.

 

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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, 2014.

 

     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

     1,252         3.47         11,893         3.73         16,273         4.09         7,262         5.23         36,680   

Other debt securities

     1,688         3.39         3,231         3.70         798         3.48         404         4.73         6,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

  2,940      3.42      15,124      3.72      17,072      4.05      7,666      5.19      42,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International

Mexico

  1,300      4.33      4,501      5.59      3,198      5.36      4,061      3.98      13,060   

Mexican Government and other government agencies debt securities

  739      4.24      4,003      5.66      2,619      5.41      3,650      3.82      11,012   

Other debt securities

  561      4.45      498      5.07      578      5.13      411      4.63      2,048   

United States

  711      4.71      3,758      2.60      4,974      2.08      865      3.71      10,307   

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

  460      5.95      408      6.17      675      6.19      —        —        1,542   

States and political subdivisions debt securities

  65      0.67      1,115      2.14      1,422      1.05      86      2.00      2,689   

Other debt securities

  186      2.89      2,235      2.16      2,877      1.60      779      3.90      6,076   

Other countries

  3,529      8.95      9,689      4.13      5,293      5.67      2,928      5.32      21,439   

Securities of foreign governments (2)

  956      4.55      5,552      4.19      2,852      6.50      1,607      5.27      10,966   

Other debt securities of other countries

  2,573      10.32      4,137      4.04      2,441      4.70      1,322      5.38      10,473   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International

  5,539      7.12      17,948      4.19      13,464      4.27      7,855      4.42      44,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE-FOR-SALE

  8,480      5.71      33,072      3.97      30,536      4.15      15,520      4.79      87,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

HELD-TO-MATURITY PORTFOLIO

Domestic

Spanish government

  —        —        —        —        —        —        —        —        —     

Other debt securities

  —        —        —        —        —        —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

  —        —        —        —        —        —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total International

  —        —        —        —        —        —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD-TO-MATURITY

  —        —        —        —        —        —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

  8,480      5.71      33,072      3.97      30,536      4.15      15,520      4.79      87,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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Loans and Advances to Credit Institutions

As of December 31, 2014, our total loans and advances to credit institutions amounted to €26,975 million, or 4.3% of total assets. Net of our valuation adjustments, loans and advances to credit institutions amounted to €27,059 million as of December 31, 2014, or 4.3% of our total assets.

Loans and Advances to Customers

As of December 31, 2014, our total loans and advances amounted to €350,822 million, or 55.5% of total assets. Net of our valuation adjustments, loans and advances amounted to €338,657 million as of December 31, 2014, or 53.6% of our total assets. As of December 31, 2014 our loans in Spain amounted to €178,735 million. Our foreign loans amounted to €172,088 million as of December 31, 2014. 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, 2014, 2013 and 2012:

 

     As of December 31,  
     2014      2013      2012  
     (In Millions of Euros)  

Domestic

     178,735         187,400         205,216   

Foreign

  

Western Europe

     18,274         17,519         19,979   

Latin America

     102,678