DBRS Comments on BBVA’s 2Q12 Results – Senior at A (high), Under Review Negative

DBRS, Inc. (DBRS) has today commented on the 2Q12 results of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group). DBRS rates the Group’s Issuer & Senior Debt at A (high) and Short-Term Instruments at R-1 (middle). All ratings currently are Under Review with Negative Implications where they were placed on 24 May 2012 following DBRS’s similar rating action on the Kingdom of Spain. The Group reported net attributable profit of EUR 505 million in 2Q12, down significantly from the prior quarter due to extraordinary provisions of EUR 742 million related to new provisioning requirements in Spain. The Group reported net attributable profit of EUR 1.0 billion in 1Q12 and EUR 1.2 billion in 2Q11.

DBRS views the challenging environment as continuing to pressure the ratings of BBVA, as the Spanish economy remains weak and the real estate sector is still fragile. Uncertainties over Spain’s property values and its banking sector stability have contributed to ongoing financial weakness in Spain. While BBVA’s consolidated credit costs have remained largely flat over the previous 5 quarters, impairments approximately doubled in 2Q12, driven by deterioration in Spain. BBVA has booked extraordinary provisioning in 2011 and 2012, driven by new requirements in Spain, of which approximately 30% have already been provided for. DBRS views BBVA as benefitting from its internationally diversified franchise, as earnings generation in international subsidiaries is helping to offset the elevated credit costs and earnings pressure in the Group’s domestic market. Adding to the headwinds, access to market funding has been pressured by heightened market concerns with the adequacy of liquidity and capitalisation of financial institutions, as well as the position of the Spanish sovereign. DBRS notes that a negative action on the sovereign rating would likely impact the ratings of BBVA (Kingdom of Spain is rated at A (high), Under Review with Negative Implications by DBRS).

BBVA generated gross income (net revenues) of EUR 6.0 billion in 2Q12, an improvement of 9% quarter-over-quarter (QoQ) and 15% year-over-year (YoY). Increased net revenues were driven by BBVA’s international activities, including Mexico and South America, helping to overcome the pressures on the Group in Spain. BBVA has been able to sustain profitability by improving its customer spread by 20 basis points (bps) YoY, as the Group has increased its spreads on loans and reduced its funding costs. In particular, the Group has been able to lower its deposit costs as it has benefited from a flight to quality in retail deposits within the Spanish market, which has helped to offset the decline in institutional deposits. In 2Q12, the Group increased its operating income, or income before provisions and taxes (IBPT), to EUR 3.3 billion, up by 22% YoY, as BBVA grew both net interest income and noninterest income, as well as controlled expenses. These actions have resulted in a low cost/income ratio of 46.2% in 1H12, resulting in a greater share of revenues passing through to the bottom line.

In BBVA’s home market of Spain, which generated 28% of the Group’s operating net revenues (excluding Corporate Activities) in 2Q12, conditions remain challenging. In Spain, BBVA generated net attributable profit of EUR 254 million in 2Q12. This compares to net profits of EUR 313 million in 1Q12, EUR 230 million in 4Q11 and EUR 413 million in 2Q11. Profitability has declined significantly in Spain from the pre-crisis pace of approximately EUR 600 million per quarter in 2007 with increased provisioning creating most of the earnings pressure. Inclusive of the Bank of Spain’s new provisioning requirements, bottom line results in Spain were negative EUR 449 million in 2Q12. The Group continues to focus on deleveraging, particularly through a reduction of loans to real estate developers. While BBVA’s nonperforming asset (NPA) ratio in Spain remains elevated at 5.1%, DBRS views the Group’s loan performance as better than Spanish peers.

Helping to maintain BBVA’s overall revenues, the Group generated gross income of EUR 1.3 billion, or 21% of operating net revenues (ex-Corp. Activities) in 2Q12 in Mexico. As the largest bank in Mexico, BBVA continues to grow its market share organically through both loan and deposit growth. Mexico also demonstrated stability in credit trends. In South America, which includes activities in Argentina, Chile, Colombia, Peru and Venezuela, the Group continues to generate strong net revenues through continued growth in net interest income. BBVA generated gross income of EUR 1.4 billion in 2Q12, or 24% of operating net revenues (ex-Corp. Activities) in South America. While credit costs are trending upward, impairments represent a modest 17% of IBPT.

Also contributing to international earnings are the Group’s franchises in Eurasia, which generated gross income of EUR 562 million, or 9% of operating net revenues, and the U.S., which generated gross income of EUR 628 million, or 11% of operating net revenues, in 1Q12. Profits in Eurasia, which include activities in Europe (ex-Spain) and Asia, were driven by strong volumes and growth, coupled with expense control. Credit costs remain subdued in Eurasia. In the U.S., the Group continues to selectively grow its loan book, while focusing on improving its funding mix. DBRS views the Group’s success in the U.S. as a long-term challenge for BBVA to achieve the same success as elsewhere in the Americas.

Asset quality trends for the Group overall continue to display signs of stabilization, with the NPA ratio of 4.0% have held largely flat since late-2010. Driving the ratio is the Group’s exposure to Spain (discussed above) and Mexico (NPA ratio: 4.0%). Importantly, the Group is seeing some asset quality improvements in the U.S. and Eurasia. BBVA continues to position itself to successfully weather the extended economic crisis. The Group has bolstered its levels of generic and specific provisions (EUR 10.8 billion at 2Q12) to cover expected future losses. BBVA has been able to access the wholesale markets through debt issuance in local markets, such as in Mexico. The Group also continues to bolster its capital levels, reaching a 10.8% core capital ratio based on Basel II standards and exceeding the 9% core capital requirement of the EBA.

Notes:
All figures in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: William Schwartz
Initial Rating Date: 23 November 2009
Most Recent Rating Update: 24 May 2012

For additional information on this rating, please refer to the linking document under Related Research.