DBRS: BBVA Net Income recovery in 2013; results impacted by conditions in Spain

Summary:
•Net Income in 2013 increased 33% year-on year (YoY) driven mainly by a reduction in provisions and capital gains from financial operations
•Mexican and Latin America (LatAm) business units were the main contributors to profits with Turkey evolving positively; the economic environment in Spain still affects bottom-line profitability
•Sound solvency position achieved through organic capital generation
•DBRS rates BBVA at “A” with a Negative trend

Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or Group) reported a profit of EUR 2.2 billion for 2013, a 33% increase from 2012. This improvement was driven mainly by a reduction in loan loss provisions and some gains from financial operations. Net Interest Income (NII) in 2013 was down modestly (3.4% YoY), but would have increased, if exchange rate impacts were excluded. Performance was weaker in Spain, where the cost of risk and the pressure on margins are still a concern. Additionally, a Spanish court ruling on floor clauses in the mortgage book impacted NII negatively by EUR 425 million. We see, however, some stabilization in the Group’s recurring earnings, particularly since 2Q13, with a favourable evolution in the cost of funding and consequent margin improvement.

LatAm, in particular Mexico where BBVA is a market leader, continues to drive an increase in loans and deposits which has helped to support the Group’s NII. The risk indicators are improving in LatAm, both in terms of non-performing loans (NPL) ratios and coverage levels. In the US, the Group has shown solid growth, although in an environment of low interest rates with margins still under pressure, but risk indicators improved. EuroAsia, led by Turkey, also contributed favourably to the Group’s results and has been steadily increasing its contribution in terms of attributable profit, although this could change if Turkey’s economic situation deteriorates.

The Group’s performance in 2013 continues to demonstrate the importance of its strong international franchise with its balanced mix between mature and emerging economies. Latin America and EuroAsia contributed 60% of the Gross Operating Income of the Group in 2013, an increase of 16.1 percentage points (ppts) from 2012. On the other hand, at 40% of Gross Operating Income, the contribution from developed markets decreased by 7 ppts.

Asset quality deterioration in Spain remains a concern; the NPL ratio reached 10.3% at 4Q13, driven by the reclassification of restructured loans and the deleveraging process. On a positive note, NPL entries in 4Q13 have declined from previous quarters. LatAm and USA, where asset quality is improving, offset the negative impact of Spain.

The Group continues to show a sound liquidity profile with the deleveraging process and the continued deposit growth, particularly in Mexico and Spain, contributing to further improvement in the gap between customer lending and customer deposits by EUR 33 billion in 2013, as compared to 2012. That allowed BBVA to repay most of its ECB LTRO funding in 2013. The loan-to-deposit ratio for the Group was 108% at 4Q13.

DBRS Ratings Limited (DBRS) considers the capitalization of the Group as solid. The Core Capital ratio was 11.6%, having improved 82bps over 2013 through organic capital generation. The Group’s fully loaded Basel III Core Capital ratio was 9.8%, providing a cushion above the minimum regulatory requirements, and the leverage ratio according to CRDIV was 5.6%

DBRS rates BBVA Senior Unsecured Long-term debt and deposits at “A” with a Negative trend. The rating is one notch above the rating of the Spanish Sovereign of A (low) Negative trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]