DBRS Comments on BBVA’s 4Q12 Results – Senior at A, Negative Trend

DBRS, Inc. (DBRS) has today commented on the 4Q12 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 marginal net attributable profit of EUR 20 million in 4Q12, down from EUR 146 million in 3Q12 and above EUR -139 million in 4Q11. For the full year 2012, the Group reported net attributable profit of EUR 1.6 billion in 2012, down from EUR 3.0 billion in 2011. Net income in 2012 was negatively impacted by significant net loan-loss provisions of EUR 9.5 billion, or 81.7% of income before provisions and taxes (IBPT), largely related to new provisioning requirements in Spain. DBRS notes that BBVA has now covered 100% of the Bank of Spain’s new provisioning requirements for the Group.

Underlying results continued to demonstrate BBVA’s intrinsic strengths. In 4Q12, the Group’s operating income, or income before provisions and taxes (IBPT), was EUR 3.0 billion, up 8.4% year-over-year (YoY) and 9.6% quarter-over-quarter (QoQ), as both net interest income and non-interest income generation improved in all geographical areas. At the same time, the Group maintained a low cost/income ratio of 48.1% in 2012, relatively flat from 48.6% in 2011, resulting in a greater share of revenues passing through to the bottom line.

International activities were resilient, supporting the Group’s overall results. BBVA generated gross income (net revenues) of EUR 5.9 billion in 4Q12, an increase of 6.6% QoQ and an improvement of 9.1% YoY driven by growth in net interest income and to a lesser extent the acquisition of Unnim (integrated from 3Q12). Increased net revenues were driven by BBVA’s international activities, including Mexico, South America, and Eurasia helping to overcome the recent pressures on the Group in Spain.

In BBVA’s home market of Spain, which generated 33% of the Group’s IBPT (excluding Corporate Activities) in 4Q12, conditions remain challenging. The Group is having some success in sustaining this contribution, which helped to offset the added burden of the increased provisioning requirements. IBPT in Spain was resilient, posting EUR 995 million in 4Q12, a similar level to EUR 1,008 million in 3Q12, EUR 1,018 million in 2Q12 and EUR 946 million in 1Q12. Including the Bank of Spain’s new provisioning requirements, however, bottom line results in Spain were negative again in 4Q12 with negative net attributable profit of EUR -735 million, following EUR -312 million in 3Q12. For the year, BBVA demonstrated the resiliency of its franchise in Spain with EUR 4.0 billion in IBPT, up 12% over 2011. But, increased provisioning was the major driver for the EUR 2.6 billion decline in its net attributable profit in Spain to a loss of EUR -1.3 billion in 2012. The Group continues to focus on deleveraging, particularly through various actions to reduce exposure to real estate developers. BBVA’s nonperforming asset (NPA) ratio in Spain was elevated at 6.9%, although well below the average of 11.4% for the Spanish banking sector, and partly mitigated by the Asset Protection Scheme agreed at the acquisition of Unnim covering 80% of real losses on these added assets.

Revenue growth in Mexico and South America helped to maintain BBVA’s overall revenues. Mexico generated operating income of EUR 936 million in 4Q12, up from EUR 901 million in 3Q12 and EUR 887 million in 4Q11. Mexico contributed 31% of the Group’s operating income in 4Q12 (ex-Corp. Activities). Even though BBVA is the largest bank in Mexico, it reports that it 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 818 million in 4Q12 up from EUR 739 million in 3Q12 and EUR 646 million in 4Q11. In 4Q12, South America represented 27% of the Group’s operating income (ex-Corp. Activities). While credit costs are trending upward, impairments represent a modest 23% of IBPT in 4Q12.

The Group’s franchises in Eurasia and the U.S. are also contributing to the growth in its international earnings, accounting for 13% of the Group’s total, Eurasia generated operating income of EUR 384 million in 4Q12, up from EUR 321 million in 3Q12 and closer to EUR 420 million in 4Q11. Profits in Eurasia, which include activities in Europe (ex-Spain), are driven by increased contribution of Turkey. Credit costs remain subdued in Eurasia. Representing 6% of the Group’s total, the U.S. generated operating income of EUR 180 million in 4Q12, flat from EUR 186 million in 3Q12 and EUR 186 million in 4Q11. 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.

Overall asset quality trends for the Group deteriorated only slightly, after having displayed signs of stabilization since late-2010. The Non-Performing Assets (NPA) ratio rose to 5.1% from 4.8% in the previous quarter and 4.0% at 4Q11, partly reflecting the Unnim integration (5pbs). Driving the ratio is the Group’s exposure to Spain, now at 6.9%, up from 6.5% at 3Q12 (excluding Unnim, 5.7% at 3Q12 and 4.8% at 4Q11). Importantly, however, the Group continues to see some asset quality stabilisation in Mexico and South America, as well as continued improvement in the U.S. (3.4% at 4Q12, flat from 2.4% at 3Q12, down from 3.5% at 4Q11). In Eurasia, asset quality is still at a low level with NPA ratio at 2.8% at 4Q12 vs. 1.7% at 3Q12, an increase mainly driven by lower volume of lending.

BBVA continues to position itself to successfully weather the extended economic crisis. The Group has bolstered its levels of generic and specific provisions (EUR 14.5 billion in 4Q12) to cover expected future losses translating into 50% coverage ratio for real-estate assets for the Group in Spain. Demonstrating its access to the markets, BBVA recently issued, EUR 1 billion in 10-year covered bonds and EUR 1.5 billion in 5-year senior bonds issued. Besides having no capital shortfall under the Oliver Wyman stress tests, the Group reached a 10.8% core capital ratio based on Basel II standards at 4Q12.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]