DBRS Comments on BBVA’s 3Q12 Results – Senior at A, Negative Trend

DBRS, Inc. (DBRS) has today commented on the 3Q12 results of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group). DBRS rates the Group’s Issuer & Senior Debt at A and Short-Term Instruments at R-1 (low). The trend on all long-term ratings is Negative; the trend on all short-term ratings is Stable. The Group reported net attributable profit of EUR 146 million in 3Q12, down from EUR 505 million in 2Q12 and significantly down from EUR 1,005 million in 1Q12. This decline was primarily due to extraordinary provisions of about EUR 2,127 million in 3Q12 and EUR 742 million in 2Q12 related to new provisioning requirements in Spain.

In 3Q12, BBVA completed the acquisition of Unnim, S.A. (Unnim) and, therefore, Unnim’s results have been consolidated from the date of closing (27 July 2012). With about EUR 29 billion in assets at 4Q11, Unnim reported EUR 178 million in net interest income, and a net loss of EUR 469 million as a result of EUR 518 million provisions to restructure its balance sheet.

Underlying results continued to demonstrate BBVA’s intrinsic strengths, but one-off items drove the net decrease of EUR 825 million in 3Q12, as BBVA recorded additional impairment of assets related to the real estate sector in Spain, as well as Unnim’s badwill. Excluding these one-time items, BBVA reported net attributable profit of EUR 971 million in 3Q12, comparable to EUR 1.2 billion in 2Q12 and EUR 978 million in 3Q11. In 3Q12, the Group’s operating income, or income before provisions and taxes (IBPT), was EUR 2.9 billion, up 22% year-over-year (YoY) but down 14% quarter-over-quarter (QoQ), as operating costs increased and non-interest income generation weakened. The Group maintained a low cost/income ratio of 47.4% in 9M12, improved from 48.5% in 9M11, resulting in a greater share of revenues passing through to the bottom line.

International activities were relatively resilient, supporting the Group’s overall results. BBVA generated gross income (net revenues) of EUR 5.7 billion in 3Q12, a decrease of 4.6% QoQ and an improvement 18.8% YoY driven by growth in net interest income and to a lesser extent the acquisition of Unnim. 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 10 basis points (bps) YoY, as the Group has reduced its funding costs.

In BBVA’s home market of Spain, which generated 30% of the Group’s IBPT (excluding Corporate Activities) in 3Q12, conditions remain challenging. In Spain, BBVA generated net attributable profit (adjusted) of EUR 281 million in 3Q12 vs. EUR 255 million in 2Q12, which is a comparable pace to EUR 230 million in 4Q11 and EUR 300 million in 3Q11. Excluding one-off items, profitability stabilised in Spain. Including the Bank of Spain’s new provisioning requirements, however, bottom line results in Spain were negative in 3Q12 as in 2Q12 (EUR -312 million in 3Q12 and EUR -449 million in 2Q12, vs. EUR 229 million in 1Q12). The Group continues to focus on deleveraging, particularly through a reduction of loans to real estate developers. BBVA’s nonperforming asset (NPA) ratio in Spain deteriorated to 6.5%, as it was negatively impacted by the integration of Unnim (NPA ratio of 5.7% excluding Unnim at 3Q12, vs. 5.1% at 2Q12). But, part of the increase is mitigated by an Asset Protection Scheme covering 80% of real losses on these added assets. DBRS views the Group’s loan performance as better than Spanish peers.

Revenue growth in Mexico and South America helped to maintain BBVA’s overall revenues. Mexico generated operating income of EUR 964 million in 3Q12, up from EUR 889 million in 2Q12 and EUR 841 million in 3Q11. Mexico contributed 29% of the Group’s operating income in 3Q12 (ex-Corp. Activities). Even though it is the largest bank in Mexico, BBVA continues to grow its market share organically with 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 operating income of EUR 842 million in 3Q12 up from EUR 809 million in 2Q12 and EUR 572 million in 3Q11. In 3Q12, South America represented 25% of the Group’s operating income (ex-Corp. Activities). While credit costs are trending upward, impairments represent a modest 21% of IBPT in 3Q12.

Also contributing to international earnings are the Group’s franchises in Eurasia and the U.S. Accounting for 10% of the Group’s total, Eurasia generated operating income of EUR 321 million in 3Q12, down from EUR 366 million in 2Q12 and EUR 331 million in 3Q11. Profits in Eurasia, which include activities in Europe (ex-Spain), Turkey and Asia, were affected by reduced activity in Europe, but the Group reported good performance in Turkey and China, where it continues to register growth in volumes, albeit with some increase in expenses as it invests in these areas. Credit costs remain subdued in Eurasia. Representing 6% of the Group’s total, the U.S. generated operating income of EUR 191 million in 3Q12, down from EUR 228 million in 2Q12 and EUR 196 million in 3Q11. Here 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 deteriorated slightly, after having displayed signs of stabilization since late-2010. The Non-Performing Assets (NPA) ratio rose to 4.8% from 4.0% in the previous quarter, partly reflecting the Unnim integration. Driving the ratio is the Group’s exposure to Spain, now at 6.5%, or 5.7% excluding Unnim. Mexico is also up with its NPA ratio at 4.1%, up from 4.0% in 2Q12 and 3.7% in 3Q11. Importantly, however, the Group continues to see some asset quality stabilisation in South America as well as sustained improvement in the U.S. (2.7% at 3Q12, down from 2.8% at 2Q12 and 3.8% at 3Q11). In Eurasia, asset quality is still at a low level with NPA ratio at 1.7%, albeit up from 1.5% in 3Q11 due to a denominator effect.

BBVA continues to position itself to successfully weather the extended economic crisis. The Group has bolstered its levels of generic and specific provisions (EUR 13.6 billion in 3Q12) to cover expected future losses. BBVA completed several issues of senior debt in Europe and other placements in the Americas (Mexico and Peru among others). Besides having no capital shortfall under the latest stress tests (Oliver Wyman), the Group reached a 10.8% core capital ratio based on Basel II standards in 3Q12, and exceeded the 9% core capital requirement of the EBA as well.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All 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 commentary was disclosed to the issuer and no amendments were made following the disclosure.

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

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 23 November 2009
Most Recent Rating Update: 10 August 2012

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