20-F 1 d169565d20f.htm 20-F 20-F
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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, 2015

OR

 

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

For the transition period from                      to                     

OR

 

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

Date of event requiring this shell company report

Commission file number: 1-10110

 

 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

 

 

Kingdom of Spain

(Jurisdiction of incorporation or organization)

Calle Azul, 4

28050 Madrid

Spain

(Address of principal executive offices)

Ricardo Gómez Barredo

Calle Azul, 4

28050 Madrid

Spain

Telephone number +34 91 537 7000

Fax number +34 91 537 6766

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

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

 

Title of Each Class

 

Name of Each Exchange on which Registered

American Depositary Shares, each representing

the right to receive one ordinary share,

par value €0.49 per share

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

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**
3.000% Fixed Rate Senior Notes due 2020   New York Stock Exchange

 

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

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, 2015, was:

Ordinary shares, par value €0.49 per share—6,366,680,118

 

 

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

 

 

 


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BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

 

         PAGE  

PART I

    

ITEM 1.

  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS      7   

A.

  Directors and Senior Management      7   

B.

  Advisers      7   

C.

  Auditors      7   

ITEM 2.

  OFFER STATISTICS AND EXPECTED TIMETABLE      7   

ITEM 3.

  KEY INFORMATION      8   

A.

  Selected Consolidated Financial Data      8   

B.

  Capitalization and Indebtedness      11   

C.

  Reasons for the Offer and Use of Proceeds      11   

D.

  Risk Factors      11   

ITEM 4.

  INFORMATION ON THE COMPANY      32   

A.

  History and Development of the Company      32   

B.

  Business Overview      37   

C.

  Organizational Structure      65   

D.

  Property, Plants and Equipment      66   

E.

  Selected Statistical Information      66   

F.

  Competition      86   

G.

  Cybersecurity and Fraud Management      88   

ITEM 4A.

  UNRESOLVED STAFF COMMENTS      89   

ITEM 5.

  OPERATING AND FINANCIAL REVIEW AND PROSPECTS      89   

A.

  Operating Results      95   

B.

  Liquidity and Capital Resources      141   

C.

  Research and Development, Patents and Licenses, etc.      145   

D.

  Trend Information      146   

E.

  Off-Balance Sheet Arrangements      148   

F.

  Tabular Disclosure of Contractual Obligations      149   

ITEM 6.

  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES      149   

A.

  Directors and Senior Management      150   

B.

  Compensation      158   

C.

  Board Practices      163   

D.

  Employees      171   

E.

  Share Ownership      174   

ITEM 7.

  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS      175   

A.

  Major Shareholders      175   

B.

  Related Party Transactions      175   

C.

  Interests of Experts and Counsel      177   

ITEM 8.

  FINANCIAL INFORMATION      177   

A.

  Consolidated Statements and Other Financial Information      177   

B.

  Significant Changes      178   

ITEM 9.

  THE OFFER AND LISTING      178   

A.

  Offer and Listing Details      178   

B.

  Plan of Distribution      186   

C.

  Markets      186   

D.

  Selling Shareholders      186   

E.

  Dilution      186   

F.

  Expenses of the Issue      186   

ITEM 10.

  ADDITIONAL INFORMATION      186   

A.

  Share Capital          186   


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         PAGE  

B.

  Memorandum and Articles of Association      186   

C.

  Material Contracts      189   

D.

  Exchange Controls      190   

E.

  Taxation      191   

F.

  Dividends and Paying Agents      197   

G.

  Statement by Experts      197   

H.

  Documents on Display      197   

I.

  Subsidiary Information      198   

ITEM 11.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      198   

ITEM 12.

  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      206   

A.

  Debt Securities      206   

B.

  Warrants and Rights      206   

C.

  Other Securities      206   

D.

  American Depositary Shares      206   

PART II

    

ITEM 13.

  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES      208   

ITEM 14.

  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS      208   

ITEM 15.

  CONTROLS AND PROCEDURES      208   

ITEM 16.

  [RESERVED]      210   

ITEM 16A.

  AUDIT COMMITTEE FINANCIAL EXPERT      210   

ITEM 16B.

  CODE OF ETHICS      210   

ITEM 16C.

  PRINCIPAL ACCOUNTANT FEES AND SERVICES      211   

ITEM 16D.

  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES      212   

ITEM 16E.

  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS      212   

ITEM 16F.

  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT      212   

ITEM 16G.

  CORPORATE GOVERNANCE      213   

ITEM 16H.

  MINE SAFETY DISCLOSURE      215   

PART III

    

ITEM 17.

  FINANCIAL STATEMENTS      215   

ITEM 18.

  FINANCIAL STATEMENTS      215   

ITEM 19.

  EXHIBITS      216   

 

 

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CERTAIN TERMS AND CONVENTIONS

The terms below are used as follows throughout this report:

 

    BBVA”, the “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, 2015, 2014 and 2013 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, Turkey, 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 the EU, Spain, the United States, Mexico, Turkey and elsewhere;

 

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

 

    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 spending, saving and investment decisions;

 

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

 

    our ability to hedge certain risks economically;

 

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

 

    the success of our acquisitions (including the recent acquisition of an additional stake in Türkiye Garanti Bankası A.Ş. and the acquisition of Catalunya Banc, S.A.) 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 are not captured by the statistical models we use; and

 

    force majeure and other events beyond our control.

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

 

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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, 2015, 2014 and 2013. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB.

The financial information as of and for the years ended December 31, 2012 and 2011 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, 2014, 2013, 2012 and 2011 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 the retrospective revisions referred to below.

Retrospective Revisions

Reclassifications of certain operating expenses

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

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 and 2013 has been retrospectively revised to reflect the reclassification of these expenses. This reclassification of expenses did not affect the Group’s consolidated income statements.

Changes in operating segments

On July 27, 2015, we acquired 62,538,000,000 shares (in the aggregate) of the Turkish bank Türkiye Garanti Bankası A.Ş. (“Garanti”) from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, under certain agreements entered into on November 19, 2014. Following this acquisition, we hold 39.90% of Garanti’s share capital and fully consolidate Garanti’s results in our consolidated financial statements as we determined we were able to control such entity.

This acquisition resulted in certain changes in our operating segments. In particular, since January 1, 2015, our former Eurasia segment has been broken down into the following two segments: Turkey, which consists of our stake in Garanti (25.01% until July 27, 2015 and 39.90% since July 27, 2015), and Rest of Eurasia, which includes the retail and wholesale businesses carried out in Europe and Asia, other than in Spain and Turkey.

In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 and 2013 has been retrospectively revised to reflect our current reporting structure. This revision did not affect the Group’s consolidated income statements.

 

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Statistical and Financial Information

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

 

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

 

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

 

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

 

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

Venezuela

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

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

 

    Until January 1, 2014, we used the CADIVI exchange rate (named after the acronym, in Spanish, of the Foreign Exchange Administration Commission, currently the National Center for Foreign Trade or CENCOEX). As of December 31, 2013 the exchange rate was 8.68 Venezuelan bolivars per euro. For purposes of preparing our consolidated financial statements as of and for the year ended December 31, 2013 we used the CADIVI exchange rate.

 

    In 2014 the Venezuelan government approved a new exchange rate system referred to as the “foreign-currency system”, in which the exchange rate against the U.S. dollar was determined in an auction which was open to both individuals and companies, resulting in an exchange rate that fluctuated from auction to auction and was published on the website of the Complementary Currency Administration System (SICAD I). Subsequently, in July 2014, the Venezuelan government established a new type of auction called SICAD II only applicable to certain types of transactions and not applicable to credit institutions. As of December 31, 2014 the applicable exchange rate (SICAD I) was 14.71 Venezuelan bolivars per euro. For purposes of preparing our consolidated financial statements as of and for the year ended December 31, 2014 we used the SICAD I exchange rate.

 

    On February 10, 2015, the Venezuelan government announced the cancellation of SICAD II and its combination with SICAD I in order to create a new SICAD and the creation of a new foreign-currency system called SIMADI. The Group used the SIMADI exchange rate starting in March 2015 for purpose of the Group’s interim financial statements. The SIMADI exchange rate increased rapidly until approximately 218 Venezuelan bolivars per euro and stabilized during the second half of 2015 reaching 216.3 Venezuelan bolivars per euro as of December 31, 2015. However, as explained below, we have not used this exchange rate to prepare the Group’s Consolidated Financial Statements.

 

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    Our Board of Directors considered that the use of the SIMADI exchange rate as of December 31, 2015 for preparing the Group’s Consolidated Financial Statements would not lead to an accurate picture of the consolidated financial statements of the Group or the financial position of the Group subsidiaries in Venezuela. Consequently, the Group used an alternative conversion exchange rate of 469.5 Venezuelan bolivars per euro for the conversion of the financial statements of the Group’s subsidiaries in Venezuela as of and for the year ended December 31, 2015. This alternative exchange rate has been calculated by the Research Service of the Group taking into account the estimated evolution of inflation in Venezuela in 2015 (170%) (see Note 2.2.20 to the Consolidated Financial Statements).

The use of the SIMADI exchange rate instead of the alternative exchange rate referred to above as of December 31, 2015 would have had a positive impact on the Group’s equity of €122 million attributable to the Group and €86 million to non-controlling interests, representing less than 1% of total equity. See Note 2.2.16 to the Consolidated Financial Statements. Further, the application of the SIMADI exchange rate instead of the alternative exchange rate as of December 31, 2015 would have resulted in an increase in total assets of less than 0.25% of the consolidated total assets of the Group as of December 31, 2015 and a non-significant positive impact on the consolidated profit of the Group for the year ended December 31, 2015.

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

A. Director and Senior Management

Not Applicable.

 

B. Advisers

Not Applicable.

 

C. Auditors

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

 

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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, 2015, 2014 and 2013 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. The audited consolidated financial statements for 2012 and 2011 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,  
     2015     2014     2013 (1)     2012 (1)     2011 (1)  
     (In Millions of Euros, Except Per Share/ADS Data)  

Consolidated Statement of Income Data

          

Interest and similar income

     24,783        22,838        23,512        24,815        23,229   

Interest and similar expenses

     (8,761     (8,456     (9,612     (10,341     (10,505

Net interest income

     16,022        14,382        13,900        14,474        12,724   

Dividend income

     415        531        235        390        562   

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

     174        343        694        1,039        787   

Fee and commission income

     6,340        5,530        5,478        5,290        4,874   

Fee and commission expenses

     (1,729     (1,356     (1,228     (1,134     (980

Net gains(losses) on financial assets and liabilities

     865        1,435        1,608        1,636        1,070   

Net exchange differences

     1,165        699        903        69        410   

Other operating income

     4,993        4,581        4,995        4,765        4,212   

Other operating expenses

     (4,883     (5,420     (5,833     (4,705     (4,019

Gross income

     23,362        20,725        20,752        21,824        19,640   

Administration costs

     (10,836     (9,414     (9,701     (9,396     (8,634

Depreciation and amortization

     (1,272     (1,145     (1,095     (978     (810

Provisions (net)

     (731     (1,142     (609     (641     (503

Impairment losses on financial assets (net)

     (4,272     (4,340     (5,612     (7,859     (4,185

Net operating income

     6,251        4,684        3,735        2,950        5,508   

Impairment losses on other assets (net)

     (273     (297     (467     (1,123     (1,883

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

     (2,135     46        (1,915     3        44   

Negative goodwill

     26        —          —          376        —     

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

     734        (453     (399     (624     (271

Operating profit before tax

     4,603        3,980        954        1,582        3,398   

Income tax

     (1,274     (898     16        352        (158

Profit from continuing operations

     3,328        3,082        970        1,934        3,240   

Profit from discontinued operations (net) (2)

     —          —          1,866        393        245   

Profit

     3,328        3,082        2,836        2,327        3,485   

Profit attributable to parent company

     2,642        2,618        2,084        1,676        3,004   

Profit attributable to non-controlling interests

     686        464        753        651        481   

Per share/ADS(3) Data

          

Profit from continuing operations

     3,328        3,082        970        1,934        3,240   

Diluted profit attributable to parent company (4)

     0.39        0.41        0.04        0.30        0.62   

Basic profit attributable to parent company

     0.39        0.41        0.04        0.30        0.62   

Dividends declared (In Euros)

     0.160        0.080        0.100        0.200        0.200   

Dividends declared (In U.S. dollars)

     0.174        0.097        0.138        0.264        0.259   

Number of shares outstanding (at period end)

     6,366,680,118        6,171,338,995        5,785,954,443        5,448,849,545        4,903,207,003   

 

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(1) Restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).
(2) For 2013, 2012, and 2011, 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 April 2011, October 2011, April 2012, October 2012, April 2013, October 2013, April 2014, October 2014, December 2014, April 2015, October 2015 and December 2015, and excluding the weighted average number of treasury shares during the period (6,290 million, 5,905 million, 5,597 million, 5,829 million and 5,093 million shares in 2015, 2014, 2013, 2012 and 2011 , respectively). With respect to the years ended December 31, 2015, 2014 and 2013, see Note 5 to the Consolidated Financial Statements.

 

     As of and for Year Ended December 31,  
     2015     2014     2013 (1)     2012 (1)     2011 (1)  
     (In Millions of Euros, Except Percentages)  

Consolidated Balance Sheet Data

          

Total assets

     750,078        631,942        582,697        621,132        582,899   

Net assets

     55,439        51,609        44,565        43,802        40,058   

Common stock

     3,120        3,024        2,835        2,670        2,403   

Loans and receivables (net)

     457,644        372,375        350,945        371,347        369,916   

Customer deposits

     403,069        319,060        300,490        282,795        272,402   

Debt certificates and subordinated liabilities

     82,274        72,191        74,676        98,070        96,427   

Non-controlling interest

     8,149        2,511        2,371        2,372        1,893   

Total equity

     55,439        51,609        44,565        43,802        40,058   

Consolidated ratios

          

Profitability ratios:

          

Net interest margin(2)

     2.27     2.40     2.32     2.38     2.29

Return on average total assets(3)

     0.5     0.5     0.5     0.4     0.6

Return on average total equity (4)

     5.3     5.6     5.0     4.1     8.0

Credit quality data

          

Loan loss reserve (5)

     18,752        14,278        14,995        14,159        9,139   

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

     4.10 %(8)      3.83     4.27     3.81     2.47

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

     5.39 %(9)      5.98     6.95     5.06     3.96

Impaired loans and advances to customers

     25,333        22,703        25,445        19,960        15,416   

Impaired contingent liabilities to customers (7)

     664        413        410        312        217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     25,997        23,116        25,855        20,272        15,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and advances to customers

     432,856        352,901        338,557        356,278        351,634   

Contingent liabilities to customers

     49,876        33,741        33,543        36,891        37,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     482,732        386,642        372,100        393,169        388,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Information has been restated for comparative purposes as a result of the application at December 31, 2014 of IFRIC 21 (Levies).
(2) Represents net interest income as a percentage of average total assets.
(3) Represents profit as a percentage of average total assets.
(4) Represents profit attributable to parent company as a percentage of average equity (monthly average equity), excluding “Non-controlling interest”.

 

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(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 5.9%, 6.4%, 7.5%, 5.6% and 4.4% as of December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(8) 2.66% calculated considering the net value of the loans of Garanti and Catalunya Banc as of December 31, 2015.
(9) 4.18% calculated considering the net value of the loans of Garanti and Catalunya Banc as of December 31, 2015.

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)  

2011

     1.4002   

2012

     1.2908   

2013

     1.3303   

2014

     1.3210   

2015

     1.1032   

2016 (through March 31, 2016)

     1.1030   

 

(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, 2015

     1.1358         1.1104   

October 31, 2015

     1.1437         1.0963   

November 30, 2015

     1.1026         1.0562   

December 31, 2015

     1.1025         1.0573   

January 31, 2016

     1.0964         1.0743   

February 29, 2016

     1.1362         1.0868   

March 31, 2016

     1.1390         1.0845   

The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on March 31, 2016, was $1.1390.

As of December 31, 2015, approximately 47% of our assets and approximately 46% 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 Note 7.4.2 to our Consolidated Financial Statements (“Market Risk—Structural Exchange Rate Risk”) and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.

 

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B. Capitalization and Indebtedness

Not Applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not Applicable.

 

D. Risk Factors

Macroeconomic Risks

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

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 and levels of deposits and profitability and 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, even a prolonged period of negative interest rates in some areas where the Bank operates, which could lead to decreased lending margins and lower returns on assets; 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, the United States and Turkey, 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;

 

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

 

    uncertainties arising from the results of election processes in the different geographies in which the Bank operates, such as Spain and the Spanish region of Catalonia, which may ultimately result in changes in laws, regulations and policies;

 

    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;

 

    uncertainty surrounding the referendum to be held in the United Kingdom (“UK”) on June 23, 2016,which may result in the UK leaving the EU; and

 

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

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

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

The Group has historically developed its lending business in Spain, which continues to be its main place of business. The Group’s loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy since 2009. After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) contracted in the period 2009-10 and 2012-13. The effects of the financial crisis were particularly pronounced in Spain given its heightened need for foreign financing as reflected by its high current account deficit, resulting from the gap between domestic investment and savings, and its public deficit. While the current account imbalance has now been corrected (with GDP growth of 3.2% in 2015) 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.

 

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

Since the Bank is a Spanish company with substantial operations in Spain, its credit ratings may be adversely affected by the assessment by rating agencies of the creditworthiness of the Kingdom of Spain. As a result, any decline in the Kingdom of Spain’s sovereign credit ratings could result in a decline in the Bank’s credit ratings.

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

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

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

Emerging markets are generally subject to greater risks than more developed markets. For example, there is typically a greater risk of loss from unfavorable political and economic developments, social and geopolitical instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policies. 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 deterioration. If the global economic conditions deteriorate, the business, financial condition, operating results and cash flows of the Bank’s subsidiaries in emerging economies, mainly in Latin America and Turkey, may be materially adversely affected.

Furthermore, financial turmoil in any particular emerging market could negatively affect other emerging markets or the global economy in general. Financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets, and may reduce liquidity to companies located in the affected markets. An increase in the perceived risks associated with investing in emerging economies in general, or the emerging market economies 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 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, followed by a moderated recovery in 2014 and the first half of 2015. In the second half of 2015 and the beginning of 2016, however the uncertainty about China’s growth expectations and its policymaking capability to address certain severe future challenges resulted in sudden and intense deterioration of the valuation of global assets and further increased volatility in the global financial markets. Additionally, in dislocated markets, hedging and other risk management strategies may not be as effective as they are in more normal market conditions due in part to the decreasing credit quality of hedge counterparties. Any deterioration in economic and financial market conditions could lead to further impairment charges and write-downs.

 

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

The Group has substantial exposure to the real estate market, mainly in Spain, Mexico and the United States. The Group is exposed to the real estate market due to the fact that real estate assets secure many of its outstanding loans and due to the significant amount of real estate assets held on its balance sheet (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

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

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

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

 

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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 the Bank that are deemed to be systemically important.

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

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

 

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

As a Spanish credit institution, the Bank is subject to Directive 2013/36/EU, of June 26, of the European Parliament on access to credit institution and investment firm activities and on prudential supervision of credit institutions and investment firms (the “CRD IV Directive”) that replaced Directives 2006/48 and 2006/49 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 (EU) No. 575/2013 of June 26, of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms (the “CRR” and together with the CRD IV Directive and any CRD IV implementing measures, “CRD IV”), which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU member states, without the need for national implementation measures. The implementation of CRD IV Directive into Spanish law has taken place through Royal Decree-Law 14/2013 of November 29 (“RD-L 14/2013”), Law 10/2014, of June 26, on regulation, supervision and solvency of credit institutions (“Law 10/2014”), Royal Decree 84/2015 of February 13 (“RD 84/2015”), Bank of Spain Circular 2/2014 of January 31 and Bank of Spain Circular 2/2016 of February 2 (the “Bank of Spain Circular 2/2016”).

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

The capital conservation buffer and the G-SIB buffer where applicable are mandatory for credit institutions.

The global systemically important institutions buffer applies to those institutions included in the list of global systemically important banks (“G-SIBs”), which is updated annually by the Financial Stability Board (the “FSB”). The Bank has been excluded from this list with effect from January 1, 2017 and so, unless otherwise indicated by the FSB (or the Bank of Spain) in the future, it will only be required to maintain the G-SIB buffer for year 2016.

The Bank of Spain has greater discretion in relation to the institution-specific countercyclical buffer, the buffer for other systemically important institutions (those institutions deemed to be of local systemic importance, domestic systematically important banks or “D-SIB”) and the systemic risk buffer (a buffer to prevent systemic or macro prudential risks). With the entry into force of the Single Supervisory Mechanism (the “SSM”) on November 4, 2014, the ECB also has the ability to provide certain recommendations in this respect.

The Bank of Spain agreed in December 2015 to set the institution-specific countercyclical buffer applicable to credit exposures in Spain at 0% from January 1, 2016. The percentages will be revised each quarter and, accordingly, the Bank of Spain agreed in March 2016 to maintain the countercyclical capital buffer at 0% for the second quarter of 2016.

Moreover, Article 104 of the CRD IV Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No 1024/2013 of October 15 conferring specific tasks on 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” “Pillar 1” requirements under CRD IV or to address macro-prudential considerations.

In accordance with the SSM Regulation, the ECB has fully assumed its new supervisory responsibilities of the Bank and the Group within the SSM. The ECB is required under the SSM Regulation to carry out a supervisory review and evaluation process (the “SREP”) at least on an annual basis.

In addition to the above, the European Banking Authority (the “EBA”) published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of the SREP (the “EBA SREP Guidelines”). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional “Pillar 2” own funds requirements to be implemented by January 1, 2016. Under these guidelines, national supervisors should set a composition requirement for the “Pillar 2” requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital. 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.

 

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

As a result of the most recent SREP carried out by the ECB in 2015, the Bank has been informed by the ECB that it is required to maintain a CET1 phased-in capital ratio of 9.5% (both on a consolidated and individual basis). This CET1 capital ratio of 9.5% includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%), (ii) the additional own funds requirement under “Pillar 2” and (iii) the capital conservation buffer (0.625% phased-in and 2.5% fully loaded).

Further, we are required to maintain during 2016 a G-SIB buffer of 0.25% on a consolidated basis. Therefore, our minimum CET1 phased-in capital requirement for 2016 will be 9.75% on a consolidated basis.

Following the Bank’s exclusion from the G-SIB list of the FSB effective on January 1, 2017, the G-SIB buffer will, unless otherwise indicated by the FSB or the Bank of Spain in the upcoming annual reviews, no longer apply to the Bank from this date. However, the Bank of Spain has communicated to the Bank that it will be considered a D-SIB.

The D-SIB buffer imposes on the Bank an additional CET1 capital requirement of 0.5% on a consolidated basis, which will be phased-in from January 1, 2016 to January 1, 2019. However, in accordance with the criteria set out by the ECB, the Bank will not be required to maintain the D-SIB buffer during 2016 because the requirements for the G-SIB buffer (which will continue to apply to the Bank during 2016) exceed those of the D-SIB buffer. The Bank will be required instead to maintain a D-SIB buffer as of January 1, 2017. Some or all of the other buffers may also apply to the Bank and/or the Group from time to time as determined by the Bank of Spain.

As of December 31, 2015, BBVA’s CET1 phased-in capital ratio was 12.1% on a consolidated basis and 17.8% on an individual basis. Such ratios exceed the applicable regulatory requirements described above, but there can be no assurance that the total capital requirements (“Pillar 1” plus “Pillar 2” plus “combined buffer requirement”) imposed on the Bank and/or the Group from time to time may not be higher than the levels of capital available at such point in time. There can also be no assurance as to the result of any future SREP carried out by the ECB and whether this will impose any further “Pillar 2” additional own funds requirements on the Bank and/or the Group.

Any failure by the Bank and/or the Group to maintain its “Pillar 1” minimum regulatory capital ratios, any “Pillar 2” additional own funds requirements and/or any “combined buffer requirement” could result in 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 the Bank and/or the Group is or becomes subject (including the “combined buffer requirement”), may result in the imposition of restrictions or prohibitions on “discretionary payments” by the Bank as discussed below.

According to Article 48 of Law 10/2014, Article 73 of RD 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, an entity not meeting its “combined buffer requirement” is required to determine its “Maximum Distributable Amount” as described therein. Until the Maximum Distributable Amount has been calculated and communicated to the Bank of Spain, the relevant entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to Additional Tier 1 instruments (“discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such Maximum Distributable Amount. Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict discretionary payments to such Maximum Distributable Amount.

 

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As set out in the “Opinion of the European Banking Authority on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions” published on December 16, 2015 (the “December 2015 EBA Opinion”), in the EBA’s opinion competent authorities should ensure that the CET1 capital to be taken into account in determining the CET1 capital available to meet the “combined buffer requirement” for the purposes of the Maximum Distributable Amount calculation is limited to the amount not used to meet the “Pillar 1” and “Pillar 2” own funds requirements of the institution. In addition, the December 2015 EBA Opinion advises the European Commission (i) to review Article 141 of the CRD IV Directive with a view to avoiding differing interpretations of Article 141(6) and ensure greater consistency between the maximum distributable amount framework and the capital stacking order described in the opinion and in the EBA SREP Guidelines by which the “Pillar 1” and “Pillar 2” capital requirements represent the minimum capital to be preserved at all times by an institution and it is only the CET1 capital of that institution not used to meet its “Pillar 1” and “Pillar 2” requirements that is then available to meet the “combined buffer requirement” of the institution and (ii) to review the prohibition on distributions in all circumstances where an institution fails to meet the “combined buffer requirement” and no profits are made in any given year, notably insofar as it relates to Additional Tier 1 instruments. There can be no assurance as to how and when binding effect will be given to the December 2015 EBA Opinion in Spain, including as to the consequences for an institution of its capital levels falling below those necessary to meet these requirements.

The ECB has also set out in its recommendation of December 17, 2015 on dividend distribution policies that credit institutions should establish dividend policies using conservative and prudent assumptions in order, after any distribution, to satisfy the applicable capital requirements.

Any failure by the Bank and/or the Group to comply with its regulatory capital requirements could also result in the imposition of further “Pillar 2” requirements and the adoption of any early intervention or, ultimately, resolution measures by resolution authorities pursuant to Law 11/2015 of June 18 on the Recovery and Resolution of Credit Institutions and Investment Firms (Ley 11/2015 de 18 de junio de recuperación y resolución de entidades de crédito y empresas de servicios de inversión) (“Law 11/2015”), which, together with Royal Decree 1012/2015 of November 6 (“RD 1012/2015”) has implemented Directive 2014/59/EU of May 15 establishing a framework for the recovery and resolution of credit institutions and investment firms (the “BRRD”) into Spanish law. See “Bail-in and write-down powers under the BRRD may adversely affect our business and the value of any securities we may issue” below.

At its meeting of January 12, 2014, the oversight body of the Basel Committee endorsed the definition of the leverage ratio set forth in CRD IV, to promote consistent disclosure, which applied from 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.

Basel III implementation differs across jurisdictions in terms of timing and applicable rules. For example, the Mexican government introduced the Basel III capital standards in 2012 whereas Basel III became effective in the United States on January 1, 2015 for credit institutions with total consolidated assets of less than $250 billion. This lack of uniformity among rules may lead to an uneven playing field and to competition distortions. Moreover, the lack of regulatory coordination, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect a bank with global operations such as the Bank and could undermine its profitability.

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

 

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

The BRRD (which has been implemented in Spain through Law 11/2015 and RD 1012/2015) is designed to provide authorities with a credible set of tools to intervene sufficiently early and quickly in unsound or failing credit institutions or investment firms (each an “institution”) so as to ensure the continuity of the institution’s critical financial and economic functions, while minimizing the impact of an institution’s failure on the economy and financial system.

In accordance with Article 20 of Law 11/2015, an institution will be considered as failing or likely to fail in any of the following circumstances: (i) it is, or is likely in the near future to be, in significant breach of its solvency or any other requirements necessary for maintaining its authorization; (ii) its assets are, or are likely in the near future to be, less than its liabilities; (iii) it is, or is likely in the near future to be, unable to pay its debts as they fall due; or (iv) it requires extraordinary public financial support (except in limited circumstances). The determination that an institution is no longer viable may depend on a number of factors which may be outside of that institution’s control.

As provided in the BRRD, Law 11/2015 contains four resolution tools and powers which may be used alone or in combination where the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria) (the “FROB”), the Single Resolution Mechanism (“SRM”) or, as the case may be and according to Law 11/2015, the Bank of Spain or the Spanish Securities Market Commission or any other entity with the authority to exercise any such tools and powers from time to time (each, a “Relevant Spanish Resolution Authority”) as appropriate, considers that (a) an institution is failing or likely to fail, (b) there is no reasonable prospect that any alternative private sector measures would prevent the failure of such institution within a reasonable timeframe, and (c) a resolution action is in the public interest. The four resolution tools are: (i) sale of business—which enables resolution authorities to direct the sale of the institution or the whole or part of its business on commercial terms; (ii) bridge institution—which enables resolution authorities to transfer all or part of the business of the institution to a “bridge institution” (an entity created for this purpose that is wholly or partially in public control); (iii) asset separation—which enables resolution authorities to transfer impaired or problem assets to one or more publicly-owned asset management vehicles to allow them to be managed with a view to maximizing their value through eventual sale or orderly wind-down (this can be used together with another resolution tool only); and (iv) bail-in—by which the Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power (as defined below). This includes the ability of the Relevant Spanish Resolution Authority to write down and/or to convert into equity or other securities or obligations (which equity, securities and obligations could also be subject to any future application of the Spanish Bail-in Power) certain unsecured debt claims and subordinated obligations, including capital instruments.

The “Spanish Bail-in Power” is any write-down, conversion, transfer, modification, or suspension power existing from time to time under, and exercised in compliance with any laws, regulations, rules or requirements in effect in Spain, relating to the transposition of the BRRD, as amended from time to time, including, but not limited to (i) Law 11/2015, as amended from time to time, (ii) RD 1012/2015, as amended from time to time, (iii) Regulation (EU) No. 806/2014 of the European Parliament and the Council of the EU (the “SRM Regulation”),, as amended from time to time, and (iv) any other instruments, rules or standards made in connection with either (i), (ii) or (iii), pursuant to which any obligation of an institution can be reduced, cancelled, modified, or converted into shares, other securities, or other obligations of such institution or any other person (or suspended for a temporary period).

In accordance with Article 48 of Law 11/2015 (and subject to any exclusions that may be applied by the Relevant Spanish Resolution Authority under Article 43 of Law 11/2015), in the case of any application of the Spanish Bail-in Power, the sequence of any resulting write-down or conversion by the Relevant Spanish Resolution Authority shall be in the following order: (i) CET1 instruments; (ii) Additional Tier 1 instruments; (iii) Tier 2 instruments; (iv) other subordinated claims that do not qualify as Additional Tier 1 capital or Tier 2 capital; and (v) the eligible senior claims prescribed in Article 41 of Law 11/2015.

 

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

The powers set out in the BRRD as implemented through Law 11/2015 and RD 1012/2015 impact how credit institutions and investment firms are managed as well as, in certain circumstances, the rights of creditors. Pursuant to Law 11/2015 holders of unsecured debt securities, subordinated obligations and shares issued by us may be subject to, among other things, a write-down and/or conversion into equity or other securities or obligations on any application of the Spanish Bail-in Power and in the case of capital instruments may also be subject to any Non-Viability Loss Absorption. The exercise of any such powers (or any of the other resolution powers and tools) may result in such holders of such securities losing some or all of their investment or otherwise having their rights under such securities adversely affected, including by becoming holders of further subordinated instruments. Moreover, the exercise of the Spanish Bail-in Power with respect to such securities or the taking by an authority of any other action, or any suggestion that the exercise or taking of any such action may happen, could materially adversely affect the rights of holders of such securities, the market price or value or trading behavior of our securities and/or the ability of the Bank to satisfy its obligations under any such securities.

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

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

In addition, the EBA’s preparation of certain regulatory technical standards and the implementation of technical standards to be adopted by the European Commission and of certain other guidelines is pending. These events could be potentially relevant in determining when or how a Relevant Spanish Resolution Authority may exercise the Spanish Bail-in Power and impose Non-Viability Loss Absorption. The pending events include the approval of guidelines for the treatment of shareholders in scenarios of bail-in, write-down or conversion of capital instruments, and the approval of guidelines on the rate of conversion of debt to equity or other securities or obligations in any bail-in scenario. No assurance can be given that, once adopted, these guidelines will not be detrimental to the rights under, and the value of unsecured debt securities, subordinated obligations and shares issued by us.

 

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

On November 19, 2014, the Bank entered into agreements for the acquisition from Doğuş Holding A.Ş., Ferit Faik Şahenk, Dianne Şahenk and Defne Şahenk, respectively, of 62,538,000,000 shares of Garanti in the aggregate (see “Item 10. Additional InformationMaterial Contracts”). The acquisition was conditional on obtaining all necessary regulatory consents from the relevant Turkish, Spanish, EU and, if applicable, other jurisdictions’ regulatory authorities and was completed in July 2015. Following completion of this acquisition, the Bank fully consolidated Garanti in the consolidated financial statements of the Group. The consolidation of Garanti may result in an incremental increase in the capital requirements imposed on the Group by the ECB through the SSM.

Any failure by the Bank and/or the Group to comply with its minimum requirement for own funds and eligible liabilities (MREL) could have a material adverse effect on BBVA’s business, financial condition and results of operations

The BRRD prescribes that banks shall hold a minimum level of capital and eligible liabilities in relation to total liabilities (known as MREL). On July 3, 2015 the EBA published the final draft technical standards on the criteria for determining MREL (the “Draft MREL Technical Standards”). The level of capital and eligible liabilities required under MREL will be set by the resolution authority for each bank (and/or group) based on certain criteria including systemic importance. Eligible liabilities may be senior or subordinated, provided, among other requirements, that they have a remaining maturity of at least one year and, if governed by a non-EU law, they must be able to be written down or converted under that law (including through contractual provisions).

The MREL requirement came into force on January 1, 2016. However, the EBA has recognized the impact which this requirement may have on banks’ funding structures and costs. Therefore, it has proposed a long phase-in period of up to 48 months (four years) until 2020.

On November 9, 2015 the FSB published its final Total Loss-Absorbing Capacity (“TLAC”) Principles and Term Sheet, proposing that G-SIBs maintain significant minimum amounts of liabilities that are subordinated (by law, contract or structurally) to certain prior ranking liabilities, such as guaranteed insured deposits, and which forms a new standard for G-SIBs. The TLAC Principles and Term Sheet contains a set of principles on loss absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet for the implementation of these principles in the form of an internationally agreed standard. The FSB will undertake a review of the technical implementation of the TLAC Principles and Term Sheet by the end of 2019. The TLAC Principles and Term Sheet requires a minimum TLAC requirement to be determined individually for each G-SIB at the greater of (a) 16 per cent. of risk weighted assets as of January 1, 2019 and 18 per cent. as of January 1, 2022, and (b) 6 per cent. of the Basel III Tier 1 leverage ratio requirement as of January 1, 2019, and 6.75 per cent. as of January 1, 2022. As of the date of this annual report, the Bank is not classified as a G-SIB by the FSB. However, if the Bank were to be so classified in the future or if TLAC requirements are adopted and implemented in Spain, and extended to non G-SIBs through the imposition of similar MREL requirements, then this could create additional minimum capital requirements for the Bank.

In this regard, the EBA will submit a report to the European Commission by October 21, 2016, which reviews the application of MREL and seeks to bring its implementation closer to that of the TLAC requirement that was published by the FSB in November 2015 and that applies to G-SIBs. On the basis of this report the European Commission may, if appropriate, submit by December 31, 2016 to the European Parliament and the Council a legislative proposal on the harmonized application of MREL, with the possibility of introducing more than one harmonized minimum MREL, and to make any appropriate adjustments to the parameters of this requirement.

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

 

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The Draft MREL Technical Standards do not provide details on the implications of a failure by an institution to comply with its MREL requirement. However, if the approach set out by the FSB in the TLAC Principles and Term Sheet is adopted in respect of MREL, then a failure by an institution to comply with MREL would be treated in the same manner as a failure to meet minimum regulatory capital requirements. See “– Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations” for further information.

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

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

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

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

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

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

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 the Bank operates.

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

In 2015, Law 11/2015 and RD 1012/2015 established a requirement for Spanish credit institutions, including the Bank, to make at least an annual ordinary contribution to the National Resolution Fund (Fondo de Resolución Nacional) payable on request of the FROB in addition to the annual contribution to be made to the Deposit Guarantee Fund (Fondo de Garantía de Depósitos de Entidades de Crédito) by member institutions. The total amount of contributions to be made to the National Resolution Fund by all Spanish banking entities must equal, at least, one per cent of the aggregate amount of all deposits guaranteed by the Deposit Guarantee Fund by December 31, 2024. The contribution will be adjusted to the risk profile of each institution in accordance with the criteria set out in RD 1012/2015. The FROB may, in addition, collect extraordinary contributions.

 

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

In addition, the Bank may need to make contributions to the EU Single Resolution Fund (the “Fund”), once the National Resolution Fund has been integrated into it, 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 the Bank’s business, financial condition and results of operations.”

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

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

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

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

The SSM is intended 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 the Bank), on November 4, 2014.

The SSM represents a significant change in the approach to bank supervision at a European and global level, even if it is not expected to result in any radical change in bank supervisory practices in the short term. The SSM has resulted in the direct supervision by the ECB of the largest financial institutions, including the Bank, and indirect supervision of around 3,500 financial institutions. The new supervisor is 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 form part of the SSM. Several steps have already been taken in this regard such as the publication of the Supervisory Guidelines and the creation of the SSM Framework Regulation. In addition, the SSM represents an extra cost for the financial institutions that fund it through payment of supervisory fees.

The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost. The SRM Regulation, which was passed on July 15, 2014, 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 the Fund. The new Single Resolution Board (the “SRB”) started operating on January 1, 2015 and fully assumed its resolution powers on January 1, 2016. The Fund has also been in place since January 1, 2016, funded by contributions from European banks in accordance with the methodology approved by the Council of the EU. The 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.

 

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Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as the Bank’s main supervisory authority may have a material effect on the Bank’s business, financial condition and results of operations. In particular, the BRRD and Directive 2014/49/EU of the European Parliament and the Council of April 16, 2014 on deposit guarantee schemes were published in the Official Journal of the EU on June 12, 2014. The BRRD was implemented into Spanish law through Law 11/2015 and RD 1012/2015.

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.

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

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

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

We are exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.

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

Although we have internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that our employees, directors, officers, partners, agents and service providers will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-corruption laws and

 

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sanctions regulations could lead to financial penalties being imposed on us, limits being placed on our activities, our authorizations and licenses being revoked, damage to our reputation and other consequences that could have a material adverse effect on our business, results of operations and financial condition. Further, litigations or investigations relating to alleged or suspected violations of anti-corruption laws and sanctions regulations could be costly.

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

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

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

Liquidity and Financial Risks

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

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

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

 

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

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

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

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

The liquidity coverage ratio (“LCR”) is a quantitative liquidity standard developed by the Basel Committee on Banking Supervision (“BCBS”) to ensure that those banking organizations to which this standard is to apply have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. The final standard was announced in January 2013 by the BCBS and, since January 2015, is being phased-in until 2019. Currently the banks to which this standard applies must comply with a minimum LCR requirement of 60% and gradually increase the ratio by 10 percentage points per year to reach 100% by January 2019.

The BCBS’s net stable funding ratio (“NSFR”) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their on- and off-balance sheet activities that reduces the likelihood that disruptions to a bank’s regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure. The BCBS contemplates that the NSFR, including any revisions, will be implemented by member countries as a minimum standard by January 1, 2018, with no phase-in scheduled.

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

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

 

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

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

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

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

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

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

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

 

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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 the Bank fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on the Group’s business, financial condition, cash flows and results of operations.

The Bank 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

The Bank is rated by various credit rating agencies. The Bank’s credit ratings are an assessment by rating agencies of its ability to pay its obligations when due. Any actual or anticipated decline in the Bank’s credit ratings to below investment grade or otherwise may increase the cost of and decrease the 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 of operations. Furthermore, any decline in the Bank’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 has created increased risk in the Spanish banking system. In addition, the high proportion of loans referenced to variable interest rates makes (i) debt service on such loans more vulnerable to upward movements in interest rates and (ii) the profitability of the loans more vulnerable to interest rate decreases. Highly indebted households and businesses are less likely to be able to service debt obligations as a result of adverse economic events, which could have an adverse effect on the Group’s loan portfolio and, as a result, on its financial condition and results of operations. Moreover, the increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt, reducing the number of new products the Group may otherwise be able to sell to them and limiting the Group’s ability to attract new customers who satisfy its credit standards, which could have an adverse effect on the Group’s ability to achieve its growth plans.

 

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

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

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, e-commerce businesses, department stores (for some credit products), automotive finance corporations, leasing companies, factoring companies, mutual funds, pension funds, insurance companies, and public debt.

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.

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, the Bank and its subsidiaries are involved in litigation, arbitration and regulatory proceedings in jurisdictions around the world (including proceedings on the potential retroactivity of compensation payable to customers regarding certain mortgages clauses), the financial outcome of which is

 

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unpredictable, particularly where the claimants seek unspecified or undeterminable damages, or where the cases argue novel legal theories, involve a large number of parties or are at early stages of discovery. An adverse outcome or settlement in these proceedings could result in significant costs and may have a material adverse effect on the Group’s business, financial condition, cash flows, results of operations and reputation.

In addition, responding to the demands of litigation may divert management’s time and attention and financial resources. While the Group 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 the Bank’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, Turkey and Argentina, which represented 13.26%, 11.53%, 11.87% and 1.03% of the Group’s assets as at December 31, 2015, respectively.

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

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 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.

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

On November 1, 2010, the Bank 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 “Dogus Group”)¸ in connection with the acquisition of its initial interest in Garanti (the “original SHA”). On November 19, 2014, the Bank and the Dogus Group entered into an agreement that amends and restates the original SHA and which came into force upon completion of the Bank’s acquisition of an additional 14.89% interest in Garanti (the “amended and restated SHA”).

 

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The amended and restated SHA allows the Bank to appoint the Chairman of Garanti’s board of directors, the majority of its members and Garanti’s CEO, but 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 Dogus 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 Dogus Group’s consent.

If the Bank and the Dogus Group are unable to agree on such reserved matters, Garanti’s business, financial condition and results of operations may be adversely affected and the Bank may fail to achieve the expected benefits from its interest in Garanti. In addition, due to the Bank’s and Garanti’s association with the Dogus Group, which is one of the largest Turkish conglomerates with business interests in the financial services, construction, tourism and automotive sectors, any financial reversal, negative publicity or other adverse circumstance relating to the Dogus Group could adversely affect Garanti or the Bank.

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 by Group employees or against Group companies, are present in the Group’s businesses. These businesses are dependent on processing and reporting accurately and efficiently a high volume of complex transactions across numerous and diverse products and services, in different currencies and subject to a number of different legal and regulatory regimes. Any weakness in these internal processes, systems or security could have an adverse effect on the Group’s results, the reporting of such results, and on the ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of the Group’s systems could disrupt its business, result in the disclosure of confidential information and create significant financial and legal exposure for the Group. Although the Group devotes significant resources to maintain and regularly update its processes and systems that are designed to protect the security of its systems, software, networks and other technology assets, there is no assurance that all of its security measures will provide absolute security. 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 the Bank, may not be able to implement necessary upgrades on a timely basis or upgrades may fail to function as planned. Furthermore, failure to protect financial industry operations from cyber-attacks could result in the loss or compromise of customer data or other sensitive information. These threats are increasingly sophisticated and there can be no assurance that banks will be able to prevent all breaches and other attacks on its IT systems. In addition to costs that may be incurred as a result of any failure of IT systems, banks, including the Bank, could face fines from bank regulators if they fail to comply with applicable banking or reporting regulations.

 

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

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

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

The preparation of financial statements in accordance with IFRS-IASB requires the use of estimates. It also requires management to exercise judgment in applying relevant accounting policies. The key areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated and individual financial statements, include 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-IASB could also significantly affect the results of operations, financial 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 Calle Azul, 4, 28050, Madrid, Spain telephone number +34-91-374-6201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Banco Bilbao Vizcaya Argentaria, S.A. New York Branch (1345 Avenue of the Americas, 44th Floor, New York, New York 10105 (Telephone: 212-728-1660)). BBVA is incorporated for an unlimited term.

 

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Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. The main capital expenditures from 2013 to the date of this Annual Report were the following:

2015

Acquisition of an additional 14.89% of Garanti

On November 19, 2014, the Group signed a new agreement with Dogus to, among other terms, acquire 62,538,000,000 additional shares of Garanti (equivalent to 14.89% of the capital of this entity) for a maximum total consideration of 8.90 Turkish lira (“TL”) per batch (Garanti traded in batches of 100 shares each).

The same agreement stated that if the payment of dividends for the year 2014 was executed by Dogus before the closing of the acquisition, that amount would be deducted from the amount payable by BBVA. On April 27, 2015, Dogus received the amount of the dividend paid to shareholders of Garanti, which amounted to 0.135 TL per batch.

On July 27, 2015, after obtaining all the required regulatory approvals, the Group materialized said participation increase after the acquisition of these shares. The Group’s current interest in Garanti is 39.90%.

The total price effectively paid by BBVA amounted to 8.765 TL per batch (amounting to approximately TL 5,481 million and €1,857 million applying a 2.9571 TL/EUR exchange rate).

The agreements with the Dogus group include an agreement for the management of Garanti and the appointment by the BBVA Group of the majority of the members of its board of directors (seven out of ten). The 39.90% stake in Garanti is consolidated in the BBVA Group, because of these management agreements. In accordance with the IFRS-IASB accounting rules, and as a consequence of the agreements reached, the BBVA Group shall, at the date of effective control, measure at fair value its previously acquired stake of 25.01% in Garanti (classified as a joint venture accounted for using the equity method) and shall consolidate Garanti in the consolidated financial statements of the BBVA Group beginning on the above-mentioned effective control date.

Measuring the above-mentioned stake in Garanti at fair value resulted in a negative impact in “Gains (Losses) on derecognized assets not classified as non-current assets held for sale” in the consolidated income statement of the BBVA Group for the year ended December 31, 2015, which resulted, in turn, in a net negative impact in the “Profit attributable to parent company” of the BBVA Group in 2015 amounting to €1,840 million. Such accounting impact did not translate into any additional cash outflow from BBVA. Most of this impact is generated by the exchange rate differences due to the depreciation of the TL against Euro since the initial acquisition by BBVA of the 25.01% stake in Garanti Bank up to the date of effective control. As of December 31, 2015, these exchange rate differences were already registered as Other Comprehensive Income deducting the stock shareholder’s equity of the BBVA Group.

As of December 31, 2015, Garanti has total assets of approximately €90 billion, of which approximately €55 billion were loans to customers, and a volume of customer deposits of approximately €75 billion. The contribution of Garanti to the 2015 consolidated income statement was €371 million regardless of the impact of the measuring of the above mentioned stake in Garanti at fair value. See Note 6 to our Consolidated Financial Statements for additional information.

If the business combination with Garanti had become effective on January 1, 2015, Garanti would have contributed €539 million to the consolidated income statement for the year ended December 31, 2015, regardless the above mentioned stake in Garanti at fair value.

According to the acquisition method, which compares the fair values assigned to the assets acquired and the liabilities assumed by the Bank from Garanti with the overall purchase price paid the Bank, the Group provisionally estimated that the acquisition of Garanti generated a goodwill of €622 million as of December 31, 2015, which was registered under the heading “Intangible assets – Goodwill” in the consolidated balance sheet as of December 31, 2015. According to the IFRS 3, there is a period, not to exceed one year from the acquisition date, to retrospectively

 

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adjust the provisional amounts recognized at the acquisition date for new facts and circumstances not in existence on such date that would have affected the calculation of the initial acquisition price. See Note 18.1 to our Consolidated Financial Statements for additional information.

Acquisition of Catalunya Banc

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

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

As of December 31, 2015, Catalunya Banc had assets of approximately €40 billion, of which approximately €19 billion corresponded to loans and advances to customers. Customer deposits amounted to approximately €36 billion as of such date.

According to the purchase method, the comparison between the fair values assigned to the assets acquired and the liabilities assumed from Catalunya Banc as of December 31, 2015, and the cash payment made to the FROB in consideration of the transaction generated a difference of €26 million, which was registered under the heading “Negative Goodwill in business combinations” in the consolidated income statement for the year ended December 31, 2015. According to the IFRS 3, there is a period, not to exceed one year from the acquisition date, to retrospectively adjust the provisional amounts recognized at the acquisition date for new facts and circumstances not in existence on such date that would have affected the calculation of the initial acquisition price. See Note 18.1 to our Consolidated Financial Statements for additional information.

2014

In 2014 there were no additional significant capital expenditures.

2013

Acquisition of Unnim Vida

On February 1, 2013, Unnim Banc, S.A. (which was subsequently merged into BBVA), reached an agreement with Aegon Spain Holding B.V. to acquire 50% of Unnim Vida, Inc. Insurance and Reinsurance (“Unnim Vida”) for a price of €352 million. Following this acquisition, the BBVA Group owned 100% of Unnim Vida.

Capital Divestitures

Our principal divestitures are financial divestitures in our subsidiaries and in affiliates. The main capital divestitures from 2013 to the date of this Annual Report were the following:

2015

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

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

 

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Partial sale of China CITIC Bank Corporation Limited (CNCB)

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

In addition to the sale of this 4.9% stake, the BBVA Group made various sales of CNCB shares in the market during 2015. In total, a participation of 6.34% in CNCB was sold during 2015. The impact of these sales on the Consolidated Financial Statements of the BBVA Group was a gain, net of taxes, of approximately €705 million in 2015. This gain, gross of taxes, was recognized under “Gains (losses) in non-current assets available for sale not classified as discontinued operations” in the consolidated income statement for 2015. See Note 49 to our Consolidated Financial Statements for additional information.

As of December 31, 2015, BBVA holds a 3.26% interest in CNCB (valued at €910 million). This participation is recognized under the heading “Available for sale financial assets” in our balance sheet as of December 31, 2015.

2014

In 2014 there were no significant capital divestitures.

2013

Sale of BBVA Panama

On July 20, 2013, BBVA announced that it had reached an agreement with the entity 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, $505 million as sale price and $140 million as distribution of dividends by BBVA Panamá from June 1, 2013.

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) on non-current assets held for sale not classified as discontinued operations” in the consolidated income statement in 2013. See Note 49 to our Consolidated Financial Statements for additional information.

Sale of pension businesses in Latin America

On May 24, 2012 BBVA announced its decision to conduct a study on strategic alternatives for its 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.

On October 2, 2013, with the sale of Administradora de Fondos de Pensiones AFP Provida S.A. (“AFP Provida”), BBVA finalized the process. Below is a description of each of the operations that have been carried out during this process:

 

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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 AFP Provida.

On October 2, 2013, BBVA completed the sale. The total amount in cash received by BBVA was approximately $1,540 million U.S. dollars, 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 to our Consolidated Financial Statements for additional information.

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

On April 23, 2013, BBVA sold a wholly owned Peruvian subsidiary “AFP Horizonte SA” to “AFP Integra SA” and “Profuturo AFP, SA” who have each acquired 50% of said company.

The total consideration paid for the shares is approximately $544 million. This consideration is composed by a price of approximately $516 million and a dividend distributed prior to the closing of approximately $28 million.

The gain on disposal, attributable to parent company net of taxes, amounted to approximately €206 million at the moment of the sale and such gain was recognized under the heading “Profit from discontinued operations (Net)” in the consolidated income statement in 2013. See Note 49 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 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 had been obtained from the competent authorities, the sale was closed on January 9, 2013, at which point the BBVA Group no longer had control over the subsidiary sold.

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, and was recognized under the heading “Profit from discontinued operations (Net)” in the consolidated income statement in 2013. See Note 49 to our Consolidated Financial Statements for additional information.

Agreement with CITIC Group

As of October 21, 2013, BBVA reached an agreement with the Citic group that included, among other matters, the sale by BBVA of a 5.1% stake in CNCB to Citic Limited for an amount of approximately €944 million. After this sale, the stake of BBVA in CNCB was reduced to 9.9%.

 

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In accordance with IFRS 11, this sale led to a change in the accounting criteria applicable to BBVA’s participation in CNCB, to a financial participation recognized under the heading “Available-for-sale financial assets”. See Notes 12 and 16 to our Consolidated Financial Statements for additional information.

This 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.

 

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 seven operating segments:

 

    Banking Activity in Spain

 

    Real Estate Activity in Spain

 

    Turkey

 

    Rest of 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 holdings in some of Spain’s leading companies and their corresponding results; certain tax assets and liabilities; provisions related to commitments with pensioners; and goodwill and other intangibles. It also comprises the following items (i) with respect to 2015, the capital gains resulting from the various sale transactions of an aggregate 6.34% stake in CNCB: the effect of the valuation at fair value of the 25.01% initial stake held by BBVA in Garanti, the impact of the sale of BBVA’s 29.68% stake in CIFH and the negative goodwill generated from the acquisition of Catalunya Banc and (ii) with respect to 2013, the earnings resulting from the sale of the pension businesses in Mexico, Colombia, Peru and Chile and also the results of these businesses until their sale; the capital gain from the sale of BBVA Panamá; and the impact associated with 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 equity-adjusted results from CNCB, excluding dividends).

The information presented below as of and for the years ended December 31, 2014 and 2013 has been recast to reflect our current operating segments (see Note 6 to the Consolidated Financial Statements). In addition, the information presented below as of and for the year ended December 31, 2013 reflects certain minor reclassifications made in 2014 among our operating segments, including as a result of the reclassification of our business in Panama (sold in 2013) to the Corporate Center.

 

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The breakdown of the Group’s total assets by operating segments as of December 31, 2015, 2014 and 2013 is as follows:

 

     As of December 31,  
     2015      2014      2013 (1)  
     (In Millions of Euros)  

Banking Activity in Spain

     339,643         318,446         314,956   

Real Estate Activity in Spain

     17,310         17,365         19,975   

Turkey (2)

     89,003         22,342         19,453   

Rest of Eurasia

     23,626         22,325         21,771   

Mexico

     99,472         93,731         81,801   

South America

     70,661         84,364         77,874   

United States

     86,454         69,261         53,046   
  

 

 

    

 

 

    

 

 

 

Subtotal Assets by Operating Segments

     726,170         627,834         588,876   
  

 

 

    

 

 

    

 

 

 

Corporate Center and other adjustments (3)

     23,908         4,108         (6,179
  

 

 

    

 

 

    

 

 

 

Total Assets BBVA Group

     750,078         631,942         582,697   
  

 

 

    

 

 

    

 

 

 

 

(1) Reflects certain restatements relating to, among others, the reclassification of the Group’s business in Panama (sold in 2013) to the Corporate Center.
(2) The information as of December 31, 2014 and 2013 is presented under management criteria, pursuant to which Garanti’s assets and liabilities have been proportionally integrated based on our 25.01% interest in Garanti as of such dates. See Note 3 to the Consolidated Financial Statements.
(3) As of December 31, 2014 and 2013, other adjustments include adjustments made to account for the fact that, in the Consolidated Financial Statements, Garanti was previously accounted for using the equity method until the acquisition of an additional 14.89% rather than using the management criteria referred to above. As of December 31, 2015, there were some adjustments related to the ALCO management between the Corporate Center and the operating segments.

The following table sets forth information relating to the profit (loss) attributable to parent company by each of BBVA’s operating segments and Corporate Center for the years ended December 31, 2015, 2014 and 2013:

 

     Profit/(Loss)
Attributable to Parent
Company
    % of Profit/(Loss) Attributable
to Parent Company
 
     For the Year Ended December 31,  
     2015     2014(1)     2013 (1)(3)     2015     2014(1)     2013 (1)(3)  
     (In Millions of Euros)     (In Percentage)  

Banking Activity in Spain

     1,046        858        428        23.1        22.2        14.2   

Real Estate Activity in Spain

     (492     (901     (1,268     (10.9     (23.3     (41.9

Turkey (2)

     371        310        264        8.2        8.0        8.7   

Rest of Eurasia

     76        255        185        1.7        6.6        6.1   

Mexico

     2,090        1,915        1,802        46.1        49.5        59.6   

South America

     905        1,001        1,224        20.0        25.9        40.5   

United States

     537        428        390        11.9        11.1        12.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal Operating Segments

     4,533        3,867        3,025        100.00        100.00        100.00   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate Center

     (1,891     (1,249     (941      
  

 

 

   

 

 

   

 

 

       

Profit Attributable to Parent Company

     2,642        2,618        2,084         
  

 

 

   

 

 

   

 

 

       

 

(1) In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain reporting business area. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain business area during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 and 2013 has been retrospectively revised to reflect the reclassification of these expenses.
(2) The information for the years ended December 31, 2014 and 2013 and with respect to 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.

 

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(3) Reflects certain restatements relating to, among others, the reclassification of the Group’s business in Panama (sold in 2013) to the Corporate Center.

The following table sets forth information relating to the income of each operating segment for the years ended December 31, 2015, 2014 and 2013 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
    Turkey (1)     Rest of
Eurasia
    Mexico     South
America
    United
States
    Corporate
Center
    Total     Adjustments
(2) (4)
    BBVA
Group
 
    (In Millions of Euros)  

2015

                     

Net interest income

    4,000        66        2,194        183        5,393        3,202        1,811        (424     16,426        (404     16,022   

Gross income

    6,804        (16     2,434        473        7,069        4,477        2,652        (212     23,680        (318     23,362   

Net margin before provisions (3)

    3,302        (150     1,273        121        4,456        2,498        846        (982     11,363        (109     11,254   

Operating profit /(loss) before tax

    1,492        (713     853        111        2,769        1,814        705        (1,152     5,879        (1,276     4,603   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit

    1,046        (492     371        76        2,090        905        537        (1,891     2,642        —          2,642   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2014

                     

Net interest income

    3,830        (38     735        189        4,910        4,699        1,443        (651     15,116        (734     14,382   

Gross income

    6,621        (220     944        736        6,522        5,191        2,137        (575     21,357        (632     20,725   

Net margin before provisions (3)

    3,534        (373     550        393        4,115        2,875        640        (1,328     10,406        (240     10,166   

Operating profit /(loss) before tax

    1,220        (1,287     392        320        2,519        1,951        561        (1,615     4,063        (82     3,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit

    858        (901     310        255        1,915        1,001        428        (1,249     2,618        —          2,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2013

                     

Net interest income

    3,838        4        713        195        4,478        4,660        1,402        (678     14,613        (713     13,900   

Gross income

    6,103        (111     929        788        6,194        5,583        2,047        (343     21,191        (439     20,752   

Net margin before provisions (3)

    2,860        (253     522        459        3,865        3,208        618        (1,290     9,990        (34     9,956   

Operating profit /(loss) before tax

    1        (1,868     339        248        2,358        2,354        534        (1,421     2,544        (1,590     954   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit

    428        (1,268     264        185        1,802        1,224        390        (941     2,084        —          2,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The information for the years ended December 31, 2014 and 2013 and with respect to 2015, until July 2015, is presented under management criteria, pursuant to which Garanti’s results have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition of an additional 14.89% stake in Garanti was completed and we started consolidating 100% of the Garanti group. See Note 3 to the Consolidated Financial Statements.
(2) Other adjustments include adjustments made to account for the fact that, until July 2015, in the Consolidated Financial Statements Garanti was accounted for using the equity method rather than using the management criteria referred to above.
(3) “Net margin before provisions” is calculated as “Gross income” less “Administration costs” and “Depreciation and amortization”.

 

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(4) In the fourth quarter of 2015, certain operating expenses related to technology were reclassified from the Corporate Center to the Banking Activity in Spain reporting business area. This reclassification was a consequence of the reassignment of technology-related management competences, resources and responsibilities from the Corporate Center to the Banking Activity in Spain business area during 2015. In our Consolidated Financial Statements and throughout this Annual Report, the comparative financial information by operating segment for 2014 and 2013 has been retrospectively revised to reflect the reclassification of these expenses.

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, Banking Activity in Spain 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, 2015, 2014 and 2013:

 

     As of December 31,  
     2015      2014      2013  
     (In Millions of Euros)  

Total Assets

     339,643         318,446         314,956   

Loans and advances to customers

     192,068         174,201         178,288   

Of which:

        

Residential mortgages

     85,002         74,508         77,575   

Consumer finance

     6,145         5,270         6,703   

Loans

     4,499         3,946         4,962   

Credit cards

     1,646         1,324         1,741   

Loans to enterprises

     43,763         37,224         37,181   

Loans to public sector

     20,975         22,833         21,694   

Customer deposits

     185,314         154,261         157,124   

Of which:

        

Current and savings accounts

     81,061         61,434         56,194   

Time deposits

     78,403         70,521         80,234   

Other customer funds

     14,906         9,207         8,198   

Assets under management

     56,690         51,702         43,651   

Of which:

        

Mutual funds

     33,670         29,649         23,018   

Pension funds

     22,897         21,879         20,427   

Other placements

     123         174         206   

 

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Loans and advances to customers in this operating segment as of December 31, 2015 amounted to €192,068 million, a 10.3% increase from the €174,201 million recorded as of December 31, 2014, mainly as a result of the acquisition of Catalunya Banc on April 24, 2015.

Customer deposits in this operating segment as of December 31, 2015 amounted to €185,314 million, a 20.1% increase from the €154,261 million recorded as of December 31, 2014, mainly due to the acquisition of Catalunya Banc and the positive performance of current and saving accounts.

Mutual funds in this operating segment as of December 31, 2015 amounted to €33,670 million, a 13.6 % increase from the €29,649 million recorded as of December 31, 2014 mainly as a result of the transfer of customer deposits to mutual funds. Pension funds in this operating segment as of December 31, 2015 amounted to €22,897 million, a 4.7% increase from the €21,879 million recorded as of December 31, 2014.

This operating segment’s non-performing asset ratio increased to 6.6% as of December 31, 2015, from 6.0% as of December 31, 2014, mainly due to the acquisition of Catalunya Banc. This operating segment’s non-performing assets coverage ratio increased to 59% as of December 31, 2015, from 45% as of December 31, 2014.

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 Group’s exposure, including loans and advances to customers and foreclosed assets, to the real estate sector in Spain is declining. As of December 31, 2015, the balance stood at €12,394 million, 1.2% lower than as of December 31, 2014. Non-performing assets of this segment have continued to decline and as of December 31, 2015 were 8.5% lower than as of December 31, 2014. The coverage of non-performing and potential problem loans of this segment increased to 63.4% as of December 31, 2015, compared with 62.8% of the total amount of real-estate assets in this operating segment.

The number of real estate assets sold amounted to 21,082 units in 2015, 9% lower than in 2014.

Turkey

This operating segment reflects BBVA’s stake in the Turkish bank Garanti. Following management criteria, assets and liabilities have been proportionally integrated based on our 25.01% interest in Garanti until July 2015, when the acquisition discussed above was completed and we began to fully consolidate the Garanti group (100%).

 

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The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2015, 2014 and 2013:

 

     As of December 31,  
     2015      2014      2013  
     (In Millions of Euros)  

Total Assets

     89,003         22,342         19,453   

Loans and advances to customers

     57,768         13,635         11,554   

Of which:

        

Residential mortgages

     6,215         1,413         1,204   

Consumer finance

     14,156         3,653         3,204   

Loans

     9,010         2,402         1,976   

Credit cards

     5,146         1,252         1,228   

Loans to enterprises

     31,918         7,442         6,380   

Loans to public sector

     —           —           —     

Customer deposits

     47,148         11,626         9,704   

Of which:

        

Current and savings accounts

     9,697         2,151         1,726   

Time deposits

     33,695         7,860         6,889   

Other customer funds

     —           —           —     

Assets under management

     3,620         882         730   

Of which:

        

Mutual funds

     1,243         344         373   

Pension funds

     2,378         538         357   

During 2015, the TL depreciated against the euro in average terms (from 2.9064 TL/€ in 2014 to 3.0246 TL/€ in 2015). Also, there was a year-on-year depreciation of the TL as of December 31, 2015 (from 2.8320 TL/€ as of December 31, 2014 to 3.1765 TL/€ as of December 31, 2015). The effect of these changes in exchange rates was negative for both the year-on-year comparison of the Group’s income statement and the year-on-year comparison of the Group’s balance sheet .

The year-on-year variations in the line items discussed below were all mainly due to the first time full consolidation of the Garanti group in 2015.

Loans and advances to customers in this operating segment as of December 31, 2015 increased to €57,768 million from the €13,635 million recorded as of December 31, 2014.

Customer deposits in this operating segment as of December 31, 2015 increased to €47,148 million from the €11,626 million recorded as of December 31, 2014.

Mutual funds in this operating segment as of December 31, 2015 increased to €1,243 million from the €344 million recorded as of December 31, 2014.

Pension funds in this operating segment as of December 31, 2015 increased to €2,378 million from the €538 million recorded as of December 31, 2014.

This operating segment’s non-performing asset ratio was 2.8% as of December 31, 2015 and 2014. This operating segment’s non-performing assets coverage ratio increased to 129.3% as of December 31, 2015 from 115.1% as of December 31, 2014.

    Rest of Eurasia

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

 

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The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2015, 2014 and 2013:

 

     As of December 31,  
     2015      2014      2013  
     (In Millions of Euros)  

Total Assets

     23,626         22,325         21,771   

Loans and advances to customers

     16,143         15,795         16,843   

Of which:

        

Residential mortgages

     2,614         2,779         2,952   

Consumer finance

     322         490         779   

Loans

     305         475         767   

Credit cards

     17         15         12   

Loans to enterprises

     12,619         11,119         11,598   

Loans to public sector

     216         234         251   

Customer deposits

     15,210         11,045         7,931   

Of which:

        

Current and savings accounts

     5,188         3,224         2,659   

Time deposits

     9,319         7,341         4,704   

Other customer funds

     609         376         463   

Assets under management

     331         466         408   

Of which:

        

Mutual funds

     —           152         132   

Pension funds

     331         314         276   

Loans and advances to customers in this operating segment as of December 31, 2015 amounted to €16,143 million, a 2.2% increase from the €15,795 million recorded as of December 31, 2014, mainly as a result of the stronger activity in Asia.

Customer deposits in this operating segment as of December 31, 2015 amounted to €15,210 million, a 37.7% increase from the €11,045 million recorded as of December 31, 2014, mainly as a result of increased deposits in Europe.

Mutual funds in this operating segment as of December 31, 2015 were nil compared to the €152 million recorded as of December 31, 2014, due mainly to the decrease of these funds in Portugal (mutual funds have been progressively transferred from Portugal to the Asset Management unit within our Banking Activity in Spain segment).

Pension funds in this operating segment as of December 31, 2015 amounted to €331 million, a 5.4% increase from the €314 million recorded as of December 31, 2014, mainly as a result of increases in Portugal.

This operating segment’s non-performing asset ratio decreased to 2.6% as of December 31, 2015 from 3.7% as of December 31, 2014. This operating segment non-performing assets coverage ratio increased to 96% as of December 31, 2015 from 80% as of December 31, 2014.

Mexico

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

 

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The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2015, 2014 and 2013:

 

     As of December 31,  
     2015      2014      2013  
     (In Millions of Euros)  

Total Assets

     99,472         93,731         81,801   

Loans and advances to customers

     49,048         46,798         40,668   

Of which:

        

Residential mortgages

     9,099         9,272         8,985   

Consumer finance

     11,588         10,902         10,096   

Loans

     6,550         5,686         4,748   

Credit cards

     5,038         5,216         5,348   

Loans to enterprises

     18,162         16,707         13,881   

Loans to public sector

     4,197         4,295         3,594   

Customer deposits

     49,539         45,937         42,452   

Of which:

        

Current and savings accounts

     32,168         28,014         24,672   

Time deposits

     7,049         6,426         5,611   

Other customer funds

     5,724         6,537         6,164   

Assets under management

     21,557         22,094         19,673   

Of which:

        

Mutual funds

     17,894         18,691         16,896   

Other placements

     3,663         3,403         2,777   

The Mexican peso slightly depreciated against the euro as of December 31, 2015 compared with December 31, 2014, negatively affecting the business activity of the Mexico operating segment as of December 31, 2015 expressed in euro. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting the Comparability of our Results of Operations and Financial Condition.”

Loans and advances to customers in this operating segment as of December 31, 2015 amounted to €49,048 million, a 4.8% increase from the €46,798 million recorded as of December 31, 2014, mainly due to a significant increase in the retail portfolio, especially boosted by lending to SMEs and, in to lesser extent, by consumer finance and credit cards.

Customer deposits in this operating segment as of December 31, 2015 amounted to €49,539 million, a 7.8% increase from the €45,937 million recorded as of December 31, 2014, mainly as a result of the positive performance of both current and saving accounts and time deposits.

Mutual funds in this operating segment as of December 31, 2015 amounted to €17,894 million, a 4.3% decrease from the €18,691 million recorded as of December 31, 2014.

This operating segment’s non-performing asset ratio decreased to 2.6% as of December 31, 2015, from 2.9% as of December 31, 2014. This operating segment non-performing assets coverage ratio increased to 120% as of December 31, 2015, from 114% as of December 31, 2014.

 

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South America

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

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

 

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

 

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

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2015, 2014 and 2013:

 

     As of December 31,  
     2015      2014      2013  
     (In Millions of Euros)  

Total Assets

     70,661         84,364         77,874   

Loans and advances to customers

     44,970         52,920         48,466   

Of which:

        

Residential mortgages

     9,810         9,622         8,534   

Consumer finance

     9,278         13,575         13,112   

Loans

     6,774         9,336         9,441   

Credit cards

     2,504         4,239         3,670   

Loans to enterprises

     19,896         20,846         18,606   

Loans to public sector

     630         650         601   

Customer deposits

     41,998         56,370         55,167   

Of which:

        

Current and savings accounts

     21,011         35,268         35,091   

Time deposits

     16,990         16,340         15,018   

Other customer funds

     4,031         5,012         4,744   

Assets under management

     9,729         8,480         6,552   

Of which:

        

Mutual funds

     3,793         3,848         2,952   

Pension funds

     5,936         4,632         3,600   

The period-end exchange rate against the euro of the currencies of the countries in which BBVA operates in South America decreased, on average, in 2015, compared with December 2014, negatively affecting the business activity in South America. The depreciation of the Venezuelan bolivar as of December 31, 2015 was particularly significant. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting the Comparability of our Results of Operations and Financial Condition.”

Loans and advances to customers in this operating segment as of December 31, 2015 amounted to €44,970 million, a 15.0% decrease from the €52,920 million recorded as of December 31, 2014, mainly due to the significant depreciation of the Venezuelan bolivar. Excluding the impact of loans and advances to customers in Venezuela, there was an increased activity, particularly in consumer loans, credit cards and corporate lending.

 

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Customer deposits in this operating segment as of December 31, 2015 amounted to €41,998 million, a 25.5% decrease from the €56,370 million recorded as of December 31, 2014, mainly due to the significant depreciation of the Venezuelan bolivar. Excluding the impact of customer deposits in Venezuela, there was a positive growth of our products, in particular current and saving accounts.

Mutual funds in this operating segment as of December 31, 2015 amounted to €3,793 million, a 1.4% decrease from the €3,848 million recorded as of December 31, 2014, mainly due to the significant depreciation of the Venezuelan bolivar, which was partially offset by a positive performance in Argentina, Chile and Peru.

Pension funds in this operating segment as of December 31, 2015 amounted to €5,936 million, a 28.2% increase from the €4,632 million recorded as of December 31, 2014, mainly as a result of the increased volumes in Bolivia and the appreciation of the Bolivian currency.

This operating segment’s non-performing asset ratio increased to 2.3% as of December 31, 2015, from 2.1% as of December 31, 2014 . This operating segment non-performing assets coverage ratio decreased to 123% as of December 31, 2015, from 138% as of December 31, 2014.

United States

This operating segment encompasses the Group’s business in the United States. BBVA Compass accounted for approximately 91% of the operating segment’s balance sheet as of December 31, 2015. Given its size in this segment, most of the comments below refer to BBVA Compass. This operating segment also includes the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations.

The following table sets forth information relating to the business activity of this operating segment for the years ended December 31, 2015, 2014 and 2013:

 

     As of December 31,  
     2015      2014      2013  
     (In Millions of Euros)  

Total Assets

     86,454         69,261         53,046   

Loans and advances to customers

     60,599         49,667         38,067   

Of which:

        

Residential mortgages

     13,182         11,876         9,591   

Consumer finance

     7,364         5,812         4,464   

Loans

     6,784         5,291         3,984   

Credit cards

     580         522         481   

Loans to enterprises

     31,882         25,202         19,427   

Loans to public sector

     4,442         3,706         2,772   

Customer deposits

     63,715         51,394         39,844   

Of which:

        

Current and savings accounts

     45,717         38,863         30,212   

Time deposits

     14,456         11,231         8,231   

The U.S. dollar appreciated against the euro as of December 30, 2015 compared with December 31, 2014, positively affecting the business activity of the United States operating segment as of June 30, 2015 expressed in euro. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting the Comparability of our Results of Operations and Financial Condition.”

 

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Loans and advances to customers in this operating segment as of December 31, 2015 amounted to €60,599 million, a 22.0 % increase from the €49,667 million recorded as of December 31, 2014, due to an increased focus on lending to companies instead of individuals.

Customer deposits in this operating segment as of December 31, 2015 amounted to €63,715 million, a 24.0 % increase from the €51,394 million recorded as of December 31, 2014, mainly due to an increase in the balance of current and saving accounts and time deposits as a result of the campaigns designed to attract deposits.

This operating segment’s non-performing asset ratio was 0.9% as of December 31, 2015 and 2014. This operating segment non-performing assets coverage ratio decreased to 151% as of December 31, 2015, from 167% as of December 31, 2014, as a result of the significant write-offs made to non-performing assets related to the oil & gas sector due, in turn, to decreasing oil prices.

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

Supervision and Regulation

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

Pursuant to Article 127(6) of the Treaty on the Functioning of the EU and the SSM 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.

 

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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;

 

    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 SSM 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 (the “ESM”) or the European Financial Stability Facility.

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

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

 

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Bank of Spain

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

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

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

 

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

 

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

 

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

 

    issuing legal tender banknotes.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    exercising all other powers attributed to it by legislation.

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

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

 

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

 

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

 

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

 

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

 

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

 

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

Single Resolution Fund

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

The Fund is set up to be used in resolution procedures where the SRB considers it necessary to ensure the effective application of the resolution tools. The Fund must have adequate financial resources to allow for an effective functioning of the resolution framework and by allowing the SRB to intervene, where necessary, to achieve an effective application of the resolution tools and to protect financial stability without recourse to taxpayers’ money.

The SRB must calculate the annual contributions to the Fund on the basis of a single target level established as 1% of the amount of covered deposits of all authorized credit institutions in all participating Member States. The SRB must ensure that the available financial means of the Fund reach, at least, this target level by the end of 2024. The annual contribution to the Fund by each bank is based on a flat contribution determined on the basis of such bank’s liabilities excluding own funds and covered deposits and a risk-adjusted contribution depending on the risk profile of that bank.

During 2015, as a transitional period, the contribution to the Fund was fixed at a national level.

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.

 

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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, 2015, 2014 and 2013 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.

Investment Ratio

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

Capital Requirements

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

The Basel III capital reforms were transposed into EU law by the enactment of the CRD IV Directive, which implements the Basel III capital standards over a phase-in period until January 1, 2019, and the CRR (the CRR together with the CRD IV Directive and any other implementing measures then in force, “CRD IV”), 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 capital reforms in certain aspects, and provide national flexibility to apply more stringent prudential requirements than those set out in the Basel III framework.

 

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As a Spanish credit institution, we are subject to the CRD IV Directive and the CRR. The CRR has been directly applicable since January 1, 2014 and the CRD IV Directive’s implementation into Spanish law been effected through RD-L 14/2013, Law 10/2014, RD 84/2015, Bank of Spain Circular 2/2014 and Bank of Spain Circular 2/2016.

Under CRD IV, we are required (both on a consolidated and individual basis) to hold a minimum “Pillar 1” capital requirement (which includes a CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6% and a total capital ratio of 8% of risk-weighted assets).

CRD IV also contemplates that in addition to the minimum “Pillar 1” capital requirement, supervisory authorities may impose, as a result of the SREP conducted by them, further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum own funds “Pillar 1” capital requirement under CRD IV or to address macro-prudential considerations.

Moreover, according to CRD IV, entities must comply from 2016 onwards with the “combined buffer requirement”, which consists of five new capital buffers: (i) the capital conservation buffer, (ii) the G-SIB buffer, (iii) the institution-specific countercyclical buffer, (iv) the D-SIB buffer and (v) the systemic risk buffer.

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

As a result of the most recent SREP carried out by the ECB in 2015, we have been informed by the ECB that we are required to maintain a CET1 phased-in capital ratio of 9.5% (both on a consolidated and individual basis). This CET1 capital ratio of 9.5% includes (i) the minimum CET1 capital ratio required under “Pillar 1” (4.5%), (ii) the additional own funds requirement under “Pillar 2” and (iii) the capital conservation buffer (0.625% phased-in and 2.5% fully loaded).

Further we are required during 2016 to maintain a G-SIB buffer of 0.25% on a consolidated basis as we were included on the 2015 list of G-SIBs. Therefore, our minimum CET1 phased-in capital requirement for 2016 will be 9.75% on a consolidated basis.

However, the Bank has been excluded from the 2016 G-SIBs list (this list is updated annually by the FSB) with effect from January 1, 2017 and so, unless otherwise indicated by the FSB or the Bank of Spain in the future, we will only be required to maintain this G-SIB buffer for 2016.

Notwithstanding the foregoing, the Bank of Spain has communicated to us that we are also considered a D-SIB. The D-SIB buffer imposes on us a CET1 capital requirement of 0.5% on a consolidated basis, which will be phased-in from January 1, 2016 to January 1, 2019. However, as previously explained, we will not be required to maintain the D-SIB buffer during 2016 due to the fact that the requirements for the G-SIB buffer applicable to us for 2016 exceed those of the D-SIB buffer. We will be required instead to maintain a D-SIB buffer as of January 1, 2017.

According to CRD IV, and to the national implementation measures adopted in Spain, those entities not meeting the “combined buffer requirement” must calculate the Maximum Distributable Amount (the “MDA”). Until the MDA has been calculated and communicated to the Bank of Spain, any such entity will be subject to restrictions on (i) distributions relating to CET1 capital, (ii) payments in respect of variable remuneration or discretionary pension revenues and (iii) distributions relating to additional tier 1 capital (the “discretionary payments”) and, thereafter, any such discretionary payments by that entity will be subject to such MDA. Furthermore, as set forth in Article 48 of Law 10/2014, the adoption by the Bank of Spain of the measures prescribed in Articles 68.2.h) and 68.2.i) of Law 10/2014 aimed at strengthening own funds or limiting or prohibiting the distribution of dividends respectively will also restrict the discretionary payments to such Maximum Distributable Amount. 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. See “Item 3.D. Risk Factors–Legal, Regulatory and Compliance Risks–Increasingly onerous capital requirements may have a material adverse effect on the Bank’s business, financial condition and results of operations” for additional information.

 

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In addition to the capital requirements under CRD IV, the 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”). See “Item 3.D. Risk Factors–Legal, Regulatory and Compliance Risks–Any failure by the Bank and/or the Group to comply with its minimum requirements for own funds and eligible liabilities (MREL) could have a material adverse effect on BBVA’s business, financial condition and results of operations” for additional information.

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. See “Item 3.D. Risk Factors–Legal, Regulatory and Compliance Risks–Implementation of internationally accepted liquidity ratios might require changes in business practices that affect the profitability of the Bank’s business activities” for additional information.

Capital Management

Basel Capital Accord—Economic Capital

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

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

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

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

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

 

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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.

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

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 ECB recommendation dated December 17, 2015 addressed to, among others, significant supervised entities and significant supervised groups, such as BBVA and its Group, recommends credit institutions to establish dividend policies using conservative and prudent assumptions so that, after any such distribution, they are able to satisfy the applicable capital requirements.

 

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

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

Scrip Dividend

As in 2011, 2012, 2013 and 2014, during 2015, a scrip dividend scheme called “Dividend Option” was approved by the annual general meeting of shareholders held on March 13, 2015. The BBVA annual general meeting of shareholders held on March 11, 2016 passed four resolutions adopting four different capital increases to be charged to voluntary reserves for the implementation of the “Dividend Option” shareholders’ remuneration scheme during the following year. These resolutions will allow the Board of Directors to implement, depending on the situation of BBVA, the situation of the markets, the regulatory framework and the recommendations regarding dividends that may be adopted, or any other measures that may be adopted within the regulatory framework applicable to BBVA, the “Dividend Option” during a period of one year since the approval of such resolutions.

Upon the execution of each such capital increase to be charged to voluntary reserves, 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 11, 2016, is independent from the others, so that they may be executed on different dates or may not even be executed, in light of the Bank’s needs and the corporate interest.

BBVA’s Board of Directors, at its March 11, 2016 meeting, approved the execution of one of the capital increases approved by the annual general meeting of shareholders held on March 11, 2016 in connection with the implementation of the “Dividend Option” on the terms provided therein. The maximum number of new ordinary shares that may be issued as a consequence of the execution of the capital increase is 138,406,089 which is expected to became effective on April 27, 2016.

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.

 

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Mortgage Legislation

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

Royal Decree 716/2009, of April 24, implemented several aspects of Law 2/1981, 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.

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

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

 

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The 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.

Law 25/2015, of July 28, on the “second chance” mechanism, superseded Royal Decree Law 1/2015 and introduced certain changes to its content, including the introduction of a fee protection account for insolvency managers, limits on the remuneration of insolvency managers and the introduction of greater flexibility to a number of elements of the “second chance” mechanism.

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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On July 21, 2015 Law 22/2015 on Accounts Audit was published in the Spanish Official Gazette. This law amended Law 12/2010 of June 30 in certain respects, including with respect to the requirements applicable to audit firms. Some provisions of this Law are already in force, while the remainder will become effective on June 17, 2016.

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

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

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

One new aspect involves the regulation of internal recapitalization as a resolution instrument conceived as a “bail-in” arrangement (the absorption of losses by the shareholders and by the creditors of an institution under resolution).

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

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

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

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

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

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

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

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

 

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

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

U.S. Regulation

Banking Regulation

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

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

BBVA’s U.S. bank subsidiary, Compass Bank (“Compass Bank”), and BBVA’s New York 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, which is licensed under the laws of the State of Texas and supervised by the Texas Department of Banking and the Federal Reserve.

Bancomer Transfer Services, Inc., a non-banking affiliate of BBVA and a direct subsidiary of BBVA Bancomer USA, Inc., is licensed as a money transmitter by the State of California Department of 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.

 

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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.

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 have implemented 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 U.S. Commodity Futures Trading Commission (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.

 

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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 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 will be applying certain transaction-level requirements when BBVA’s swap dealing activity involves the arrangement, negotiation, or execution by U.S. located personnel and is considering whether to apply regulatory transaction reporting to all swaps entered into by a non-U.S. swap dealer or instead rely on transaction reporting under comparable EU rules. In August 2015, the CFTC staff extended no-action relief for the applicability of most transaction-level requirements until at least September 30, 2016.

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

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

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 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.

 

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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 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. As part of the implementation of enhanced prudential standards under the Dodd-Frank Act, the Federal Reserve proposed on March 4, 2016 a rule implementing single-counterparty credit limits for large bank holding companies and Large FBOs with respect to their combined U.S. operations. The proposed rule would apply both to Compass Bancshares and to the combined U.S. operations of BBVA with different levels of stringency. Compass Bancshares’ credit exposure to any single counterparty would be limited to 25 percent of its capital stock and surplus, while BBVA’s credit exposure to most counterparties with respect to only its combined U.S. operations would be limited to 25 percent of its Tier 1 capital or 15 percent of Tier 1 capital for counterparties that are G-SIBs and certain other large financial institutions. The proposed rule would also require Compass Bancshares and BBVA to aggregate exposure between counterparties that are economically interdependent or in the presence of certain control relationships.

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 that began on January 1, 2015 and runs until 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 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.

 

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bank holding company’s capital plan, in whole or in part, or provides a notice of non-objection to the company. 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. Under the 2016 CCAR process, capital plans are due by April 5, 2016. The Federal Reserve will announce results of the 2016 CCAR process by June 30, 2016.

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. The Federal Reserve will announce the results of the 2016 Dodd-Frank Act Stress Test by June 30, 2016.

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 hedge funds, private equity funds, and commodity pools (“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 covered 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. 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), and by increasing the statutorily required minimum reserve ratio from 1.15 percent to 1.35 percent. On March 15, 2016, the FDIC finalized a rule imposing assessment surcharges on banks with $10 billion or more in total assets (such as Compass Bank) until the deposit insurance fund’s reserve ratio reaches 1.35 percent. The surcharges may begin as early as July 1, 2016.

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. Pursuant to an amendment of the law enacted in December 2014, only certain structured finance swaps are subject to section 716. The swap activities of BBVA’s New York branch have always conformed to the requirements of Section 716. Should Compass Bank become a swap dealer, it will need to restrict its swap activities to conform to the Dodd-Frank Act “push-out” provision.

Since July 2012, the Dodd-Frank Act broadened the application of Sections 23A and 23B of Federal Reserve Act, which will, in the future, be reflected in the Federal Reserve’s implementation of such sections via Regulation W (“Reg W”). Reg W places various restrictions, including qualitative and quantitative restrictions, on BBVA and its non-bank subsidiaries with regard to borrowing or otherwise obtaining credit from their U.S. banking affiliates or engaging in certain other transactions involving those subsidiaries, and requires these transactions be on terms that would ordinarily be offered to unaffiliated entities, be secured by designated amounts of specified collateral, and be subject to quantitative limitations. Dodd-Frank’s broadening of Sections 23A and 23B of the Federal Reserve Act applies the restrictions arising from credit exposure to derivative transactions, securities borrowing and lending transactions, as well as repurchase/reverse repurchase agreements to the above-mentioned collateral and 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.

 

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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 “claw back” 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

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

The BBVA Group has not knowingly engaged in activities, transactions or dealings required to be disclosed pursuant to Section 13(r) of the Exchange Act.

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

Legacy contractual obligations related to counter indemnities. Before 2007, the BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, three of which remained outstanding during the year ended December 31, 2015. For the year ended December 31, 2015 no payments or revenues (including fees and/or commissions) have been recorded in connection with these counter indemnities. In accordance with Council Regulation (EU) Nr. 267/2012 of March 23, 2012, any payments of amounts due to Bank Melli under these counter indemnities will be 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.

Letter of credit. During the year ended December 31, 2015, 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). Interest charged by the BBVA Group in the year ended December 31, 2015 in connection with this letter of credit totaled $15,536.03. This amount was initially blocked, pending release

 

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upon authorization by the relevant Spanish authorities. Before year end, the release of $2,844.52 was authorized by the relevant Spanish authorities. Accordingly, for the year ended December 31, 2015, gross revenues (including fees and/or commissions) recorded in connection with this letter of credit totaled $2,844.52. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. The BBVA Group is committed to terminating 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.

Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for two employees of the Iranian embassy in Spain (the bank accounts of one additional employee were closed on March 20, 2015). The two employees are Spanish citizens and one of them has retired. Estimated gross revenues for the year ended December 31, 2015 from embassy-related activity, which include fees and/or commissions, did not exceed $1,093.60. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. The BBVA Group is committed to terminating these business relationships as soon as legally possible.

 

C. Organizational Structure

As of December 31, 2015, the BBVA Group was composed of 373 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, Turkey, United Kingdom, United States of America, Uruguay and Venezuela. In addition, BBVA has an active presence in Asia.

Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2015.

 

Subsidiary

  

Country of
Incorporation

  

Activity

  

BBVA
Voting
Power

   

BBVA
Ownership

    

Total Assets (1)

 
               (In Percentages)      (In Millions of
Euros)
 

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

   Mexico    Bank      100.00        99.97         91,872   

COMPASS BANK

   United States    Bank      100.00        100.00         84,759   

TURKIYE GARANTI BANKASI A.S

   Turkey    Bank      49.90 (2)      39.90         79,236   

CATALUNYA BANC, S.A.

   Spain    Bank      98.95        98.95         45,283   

BBVA CONTINENTAL, S.A.

   Peru    Bank      92.24 (3)      46.12         21,793   

BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS

   Spain    Insurance      99.95        99.95         17,279   

BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.

   Chile    Bank      68.18        68.18         17,071   

BBVA COLOMBIA, S.A.

   Colombia    Bank      95.47        95.47         14,681   

BBVA BANCO FRANCES, S.A.

   Argentina    Bank      75.95        75.95         7,614   

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

   Portugal    Bank      100.00        100.00         4,823   

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

   Mexico    Insurance      100.00        100.00         4,291   

BANCO DEPOSITARIO BBVA, S.A.

   Spain    Bank      100.00        100.00         4,254   

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

   Mexico    Insurance      100.00        99.97         3,630   

BANCO BILBAO VIZCAYA ARGENTARIA URUGUAY, S.A.

   Uruguay    Bank      100.00        100.00         2,997   

 

(1) Figures under local financial statements.
(2) This figure is calculated by adding BBVA’s stake of 39.90% in Garanti and Dogus’ stake of 10.0002%. As a result of the shareholders’ agreement entered into between BBVA and Dogus, Garanti is consolidated within the BBVA Group.
(3) This figure represents the interest of Holding Continental S.A., which owns 92.24% of the capital stock of BBVA Continental. Each of BBVA and Inversiones Breca S.A. owns 50.00% of the capital stock of Holding Continental S.A. As a result of the shareholders’ agreement entered into between BBVA and Inversiones Breca S.A., BBVA Continental is consolidated within the BBVA Group.

 

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D. Property, Plants and Equipment

We own and rent a substantial network of properties in Spain and abroad, including 3,811 branch offices in Spain and, principally through our various affiliates, 5,334 branch offices abroad as of December 31, 2015. As of December 31, 2015, approximately 68% of our branches in Spain and 58% of our branches abroad (without including those branches relating to the Garanti group) 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, 2015, the accumulated investment for this project amounted to €951 million.

Also, BBVA Bancomer is building its new corporate headquarters in Mexico D.F. As of December 31, 2015, the accumulated investment for this project amounted to €856 million.

 

E. Selected Statistical Information

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

Average Balances and Rates

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

 

     Average Balance Sheet - Assets and Interest from Earning Assets  
     Year Ended December 31, 2015     Year Ended December 31, 2014     Year Ended December 31, 2013  
     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

     32,206         140         0.43     25,049         132        0.53     26,463         262        0.99

Debt securities, equity instruments and derivatives

     202,335         4,673         2.31     176,497         4,505        2.55     166,013         4,385        2.64

Domestic

     136,612         1,947         1.43     125,941         2,182        1.73     119,020         2,193        1.84

Foreign

     65,723         2,726         4.15     50,556         2,323        4.60     46,994         2,193        4.67

Loans and receivables

     412,636         19,744         4.78     352,911         18,041        5.11     361,246         18,736        5.19

Loans and advances to credit institutions

     30,511         273         0.89     24,727         238        0.96     25,998         411        1.58

Loans and advances to customers

     382,125         19,471         5.10     328,183         17,803        5.42     335,248         18,325        5.47

In euros

     196,987         4,301         2.18     186,965         4,843        2.59     204,124         5,835        2.86

Domestic

     192,508         4,285         2.23     186,271         4,844        2.60     197,817         5,835        2.95

Foreign

     4,479         16         0.37     695         (1     (0.08 )%      4,726         (164     (3.46 )% 

In other currency

     185,139         15,170         8.19     141,218         12,960        9.18     131,125         12,489        9.52

Domestic

     14,923         284         1.91     12,112         263        2.17     5,355         (60     (1.12 )% 

Foreign

     170,216         14,886         8.75     129,106         12,697        9.83     131,115         2,692        2.05

Non-earning assets

     58,381         226         0.39     45,951         159        0.35     45,982         128        0.28
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total average assets (2)

     705,559         24,783         3.51     600,407         22,838        3.80     599,705         23,512        3.92
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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(1) Rates have been presented on a non-taxable equivalent basis.
(2) Foreign activity represents the 41.86% of the total average assets for the year ended December 31, 2015.

 

     Average Balance Sheet - Liabilities and Interest Paid on Interest Bearing Liabilities  
     Year Ended December 31, 2015     Year Ended December 31, 2014     Year Ended December 31,
2013
 
     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

     99,289         1,559        1.57     81,860         1,292        1.58     86,600         1,551        1.79

Customer deposits

     365,965         4,390        1.20     307,482         4,555        1.48     290,105         4,366        1.51

In euros

     187,677         1,024        0.55     160,930         1,945        1.21     153,634         1,734        1.13

Domestic

     182,330         1,015        0.56     159,973         1,725        1.08     148,908         1,898        1.27

Foreign

     5,346         9        0.17     957         220        23.02     4,726         (164     (3.46 )% 

In other currency

     178,289         3,366        1.89     146,552         2,610        1.78     136,470         2,632        1.93

Domestic

     9,529         (53     (0.56 )%      6,973         (41     (0.59 )%      5,355         (60     (1.12 )% 

Foreign

     168,759         3,419        2.03     139,579         2,651        1.90     131,115         2,692        2.05

Debt certificates and subordinated liabilities

     89,956         1,875        2.08     80,355         1,611        2.00     94,130         2,812        2.99

Non-interest-bearing liabilities

     96,049         936        0.97     83,620         998        1.19     82,257         883        1.07

Stockholders’ equity

     54,300         —          —          47,091         —          —          46,614         —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total average liabilities (2)

     705,559         8,761        1.24     600,407         8,456        1.41     599,705         9,612        1.60
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Rates have been presented on a non-taxable equivalent basis.
(2) Foreign activity represents the 41.86% of the total average liabilities for the year ended December 31, 2015.

Changes in Net Interest Income-Volume and Rate Analysis

The following tables allocate changes in our net interest income between changes in volume and changes in rate for 2015 compared with 2014, and 2014 compared with 2013. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following table are interest payments on loans which are made in a period other than the period in which they are due. Loan fees were included in the computation of interest income.

 

     2015 / 2014  
     Increase (Decrease) Due to Changes in  
     Volume (1)      Rate (2)      Net Change  
     (In Millions of Euros)  

Interest income

        

Cash and balances with central banks

     35         (27 )       8   

Securities portfolio and derivatives

     882         (714 )       168   

Loans and advances to credit institutions

     88         (53 )       35   

Loans and advances to customers

     4,263         (2,595 )       1,668   

In euros

     159         (701      (542

Domestic

     162         (721 )       (559 ) 

Foreign

     (3 )       20         17   

In other currencies

     4,104         (1,894      2,210   

Domestic

     61         (40 )       21   

 

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Foreign

     4,043         (1,854 )       2,189   

Other assets

     29         38         67   
        

 

 

 

Total income

           1,945   
        

 

 

 

Interest expense

        

Deposits from central banks and credit institutions

     411         (144 )       267   

Customer deposits

     937         (1,102 )       (165 ) 

Domestic

     251         (973 )       (722

Foreign

     686         (129 )       557   

Debt certificates and subordinated liabilities

     129         (408 )       (279 ) 

Other liabilities

     191         (252      (62
        

 

 

 

Total expense

           305   
        

 

 

 

Net interest income

           1,640   
        

 

 

 

 

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

 

     2014 / 2013  
     Increase (Decrease) Due to Changes in  
     Volume (1)      Rate (2)      Net Change  
     (In Millions of Euros)  

Interest income

        

Cash and balances with central banks

     (9 )       (121 )       (130 ) 

Securities portfolio and derivatives

     294         (174 )       120   

Loans and advances to credit institutions

     (80 )       (93 )       (173 ) 

Loans and advances to customers

     657         (1,178 )       (521 ) 

In euros

     (341      (652      (992

Domestic

     (341 )       (651 )       (992 ) 

Foreign

     (0 )       (1 )       (1 ) 

In other currencies

     997         (526      471   

Domestic

     10         (8 )       2   

Foreign

     987         (518 )       469   

Other assets

     (10 )       41         31   

Total income

           (674 ) 
        

 

 

 

Interest expense

        

Deposits from central banks and credit institutions

     (112 )       (147 )       (259 ) 

Customer deposits

     238         (50 )       189   

Domestic

     151         (305 )       (154

Foreign

     87         255         343   

Debt certificates and subordinated liabilities

     (405 )       (795 )       (1,201 ) 

Other liabilities

     27         88         115   

Total expense

           1,156   
        

 

 

 

Net interest income

           482   
        

 

 

 

 

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

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.

 

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     December 31,  
     2015     2014     2013  
     (In Millions of Euro, except Percentages)  

Average interest earning assets

     647,177        554,457        553,722   

Gross yield(1)

     3.8     4.1     4.2

Net yield(2)

     3.5     3.8     3.9

Net interest margin (3)

     2.5     2.6     2.5

Average effective rate paid on all interest-bearing liabilities

     1.6     1.8     2.0

Spread(4)

     2.3     2.3     2.2

 

(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, 2015, interbank deposits (excluding deposits with central banks) represented 3.9% of our total assets. Of such interbank deposits, 36.5% were held outside of Spain and 63.5% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. However, such deposits are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.

Securities Portfolio

As of December 31, 2015, our total securities portfolio (consisting of investment securities and loans and receivables) was carried on our consolidated balance sheet at a carrying amount (equivalent to its market or appraised value as of such date) of €150,850 million, representing 20.1% of our total assets. €48,218 million, or 32.0%, of our securities portfolio consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2015 on the investment securities that BBVA held was 4.0%, compared with an average yield of approximately 4.8% earned on loans and advances during 2015. See Notes 10 and 12 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 16 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.

The following tables analyze the carrying amount and fair value of debt securities as of December 31, 2015, December 31, 2014 and December 31, 2013, 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.

 

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     As of December 31, 2015  
     Amortized
cost
     Fair Value (1)      Unrealized
Gains
     Unrealized
Losses
 
     (In Millions of Euros)  

DEBT SECURITIES -

           

AVAILABLE FOR SALE PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic-

     43,500         45,668         2,221         (53
  

 

 

    

 

 

    

 

 

    

 

 

 

Spanish Government and other government agencies debt securities

     38,763         40,799         2,078         (41

Other debt securities

     4,737         4,869         144         (11

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     2,702         2,795         94         —     

Issued by other institutions

     2,035         2,074         50         (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     62,734         62,641         1,132         (1,226
  

 

 

    

 

 

    

 

 

    

 

 

 

Mexico

     12,627         12,465         73         (235

Mexican Government and other government agencies debt securities

     10,284         10,193         70         (160

Other debt securities

     2,343         2,272         4         (75

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     260         254         1         (7

Issued by other institutions

     2,084         2,019         3         (68

The United States

     13,890         13,717         63         (236

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

     2,188         2,177         4         (15

States and political subdivisions debt securities

     4,629         4,612         9         (26

Other debt securities

     7,073         6,927         50         (195

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     71         75         5         (1

Issued by other institutions

     7,002         6,852         45         (194

Turkey

     13,414         13,265         116         (265

Turkey Government and other government agency debt securities

     11,801         11,682         111         (231

Other debt securities

     1,613         1,584         4         (34

Issued by Central Banks

     —           —           —           —     

Issued by credit institutions

     1,452         1,425         3         (30

Issued by other institutions

     162         159         1         (4

Other countries

     22,803         23,194         881         (490

Other foreign governments and other government agencies debt securities

     9,778         10,356         653         (76

Other debt securities

     13,025         12,838         227         (414

Issued by Central Banks

     2,277         2,273         —           (4

Issued by credit institutions

     3,468         3,488         108         (88

Issued by other institutions

     7,280         7,077         119         (322
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

     106,234         108,310         3,354         (1,278)   
  

 

 

    

 

 

    

 

 

    

 

 

 

HELD TO MATURITY PORTFOLIO

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic-

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY PORTFOLIO

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL DEBT SECURITIES

     106,234         108,310         3,354         (1,278
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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  
     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
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     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-

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     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-

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign-

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015 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, 2015  
     Debt Securities Available for Sale  
     Carrying Amount
(In Millions of
Euros)
     %  

AAA

     1,842         1.7

AA+

     10,372         9.6

AA

     990         0.9

AA-

     938         0.9

A+

     1,686         1.6

A

     994         0.9

A-

     4,826         4.5

BBB+

     51,885         47.9

BBB

     23,728         21.9

BBB-

     5,621         5.2

BB+ or below

     2,639         2.4

Without rating

     2,789         2.6
  

 

 

    

 

 

 

TOTAL

     108,310         100

The following tables analyze the carrying amount and fair value of our ownership of equity securities as of December 31, 2015, 2014 and 2013, respectively. See Note 10 to the Consolidated Financial Statements.

 

    As of December 31, 2015  
    Amortized
cost
    Fair Value (1)     Unrealized
Gains
    Unrealized
Losses
 
    (In Millions of Euros)  

EQUITY SECURITIES -

       

AVAILABLE FOR SALE PORTFOLIO

       

Domestic-

    3,476        2,939        22        (559

Equity listed

    3,402        2,862        17        (558

Equity unlisted

    74        78        5        (1

Foreign-

    1,728        2,177        501        (51

United States-

    590        616        26        —     

Equity listed

    41        62        21        —     

Equity unlisted

    549        554        5        —     

Other countries-

    1,138        1,561        475        (51

Equity listed

    986        1,313        371        (44

Equity unlisted

    152        248        103        (7
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL AVAILABLE FOR SALE PORTFOLIO

    5,204        5,116        522        (610
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL EQUITY SECURITIES

    5,204        5,116        522        (610
 

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL INVESTMENT SECURITIES

    111,438        113,426        3,876        (1,888
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Table of Contents
     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         —     

Foreign-

     2,842         4,069         1,263         (36

The 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.

 

     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

Foreign-

     2,584         2,629         55         (10

The 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         5,968         109         (57
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL EQUITY SECURITIES

     5,915         5,968         109         (57
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENT SECURITIES

     76,462         77,772         2,073         (761
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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Table of Contents

The following table analyzes the maturities of our debt investment and fixed income securities, excluding trading portfolio, by type and geographical area as of December 31, 2015.

 

     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

     5,934         3.48         13,039         3.98         15,737         3.28         6,089         4.93         40,799   

Other debt securities

     1,764         3.12         1,362         3.49         1,290         3.58         453         3.64         4,869   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Domestic

     7,698         3.40         14,401         3.91         17,028         3.31         6,542         4.83         45,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Foreign

                    

Mexico

     235         4.93         4,744         5.83         3,806         3.57         3,680         7.45         12,465   

Mexican Government and other government agencies debt securities

     85         2.77         3,814         6.17         3,043         3.57         3,250         7.67         10,193   

Other debt securities

     151         6.15         929         4.46         763         3.59         430         6.39         2,272   

The United States

     464         0.60         2,516         2.95         2,660         2.99         8,076         1.68         13,717   

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

     376         0.04         1,280         1.56         521         1.53         —           —           2,177   

States and political subdivisions debt securities

     2         6.03         7         6.35         23         1.39         4,581         1.60         4,612   

Other debt securities

     86         3.35         1,230         4.44         2,117         3.38         3,495         1.81         6,927   

Turkey

     1,329         10.02         4,683         9.66         6,247         10.81         1,006         7.93         13,265   

Turkish Government and other government agencies debt securities

     1,301         10.00         3,698         10.00         5,676         11.00         1,006         7.93         11,682   

Other debt securities

     28         11.30         985         7.00         571         6.00         —           —           1,584   

Other countries

     3,680         9.30         9,980         4.38         5,005         4.28         4,530         3.87         23,194   

Securities of foreign governments (2)

     297         4.10         5,103         3.63         1,563         3.75         3,392         3.73         10,356   

Other debt securities of other countries

     3,383         9.52         4,877         5.19         3,442         4.53         1,137         4.37         12,838