DBRS Initiates Coverage of BBVA – Issuer & Senior Debt at AA; Trend Stable

DBRS has today initiated coverage of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group). DBRS has assigned a rating of AA to BBVA’s Issuer & Senior Debt and a Short-Term rating of R-1 (high). These are new ratings based on public information. The trend on all ratings is Stable. The ratings reflect the Group’s strong credit fundamentals and intrinsic strength. As the second-largest banking group in Spain, the ratings also incorporate DBRS’s expectation of some form of timely systemic support for BBVA in the event of a highly stressed scenario. The Stable trend reflects DBRS’s current assessment of the strength of the Group’s internationally diversified franchise and its ability to generate solid recurring earnings that are enabling BBVA to cope with the rapid economic slowdown in the Group’s major markets and the sustained disruptions in the global financial markets.

BBVA’s intrinsic assessment at AA (low) reflects the Group’s strong credit fundamentals. This assessment incorporates both the Group’s strong position in its domestic market and its remarkable success in building up its international retail banking franchises. As the second largest universal bank in Spain, the Group has a powerful domestic franchise that generates substantial earnings and is the cornerstone of the Group. By focusing predominantly on consumers, small businesses and middle market customers (SMEs), the Group has leveraged its product, delivery and marketing capabilities to generate strong revenue growth. Leveraging its domestic retail banking strengths, BBVA has developed an extensive international banking organization that is contributing consistent earnings from its leading position in its well-established banking operations in Mexico, significant retail banking franchises in many Latin American countries and, more recently, its expansion in the United States. Adding not only strong diversified earnings, but also significant growth opportunities, these franchises are well-positioned in faster growing markets and contributing over 40% of BBVA’s earnings.

With a relatively high net interest margin (NIM), recurring non-interest income, a low expense ratio, the Group has a solid underpinning for its resilient recurring earnings. Indicative of its franchise skills, the Group has successfully maintained its NIM in a difficult environment. It benefits from various sources of recurring non-interest income from insurance, asset management and other activities. Its success in achieving increased efficiency and positive operating leverage is an important component of its resilient earnings. While impacted by deteriorating economies, BBVA’s resilient earnings have enabled it to absorb the elevated cost of credit. Largely avoiding many of the areas that became disrupted in this crisis, the Group’s credit metrics have also generally performed better than industry averages, indicating the strength of the Group’s risk management processes. This assessment also takes into account the Group’s solid funding, liquidity, and capitalization.

DBRS assigned a Stable trend to BBVA’s rating to reflect the Group’s earnings generating ability and other resources to absorb the rising credit costs of the economic deterioration and the ability to cope with more severe conditions than currently anticipated. The trend also reflects the Group’s continued efforts to strengthen its capitalization and replenish its generic reserves. The Group is better positioned than many large institutions to weather this economic down cycle, helped by the Banco de España’s provisioning policy which required the Group to build up generic provisions to be used in a down cycle such as this one. DBRS’s assessment considers the potential stress that BBVA’s franchises in Latin America could face given the greater uncertainties of operating in emerging markets, even as they generate strong earnings. Growing diversity across these countries is also reducing the risk of contagious adverse events across the region, which poses the major risk. Nevertheless, BBVA’s key markets of Spain, Mexico, South America and the U.S. remain exposed to sustained economic weakness. There remains a potential for the environment to deteriorate, rather than improve, and severe stress in the financial markets to reappear. Accordingly, the Group’s ratings could come under negative pressure if credit performance deteriorates more extensively than under current expectations or significant losses emerge that adversely impact BBVA’s capitalization or its franchise.

Support Assessment (SA)
As the second-largest universal bank in Spain, DBRS views BBVA as systemically important. Therefore, the ratings also incorporate DBRS’s expectation of some form of timely systemic support for the Group in the event of a highly stressed scenario. The expectation of systemic support for the Spanish banking system has been confirmed by the actions of the Spanish government, most recently with the Fondo de Reestructuración Ordenada Bancaria (FROB) or Fund for Orderly Bank Restructuring framework. This timely systemic support in case of need underpins an SA2 Support Assessment. The bank’s AA rating is consequently positioned one notch above its intrinsic assessment of AA (low).

Note:
All figures are in EUR dollars unless otherwise noted.

This rating is based on public information.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.