DBRS Confirms BBVA Ratings – Issuer & Senior Debt at “A”; Negative Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Banco Bilbao Vizcaya Argentaria S.A. (BBVA or the Group). The Issuer & Senior Debt rating is confirmed at “A” and the Short-Term Instruments rating at R-1 (low). The trend on the long-term rating remains Negative; the trend on the short-term rating remains Stable.

At the same time, BBVA’s intrinsic assessment (IA) has been confirmed at “A”. Reflecting the view that BBVA is a systemically important banking organization (SIB), DBRS maintains its SA-2 support assessment which indicates an expectation of timely systemic support in case of need. However, with the current rating for the Spanish sovereign below the “A” intrinsic assessment for BBVA, there is currently no uplift to the Group’s ratings.

Supporting BBVA’s “A” rating level is the Group’s strong international franchise that has largely offset the systemic risks and challenging environment in Spain. The international diversification of BBVA’s franchise, with its balance between mature and emerging markets, coupled with strong management that contributes to operational efficiency, provides the Group with a solid base for generating resilient earnings and sustains the continued generation of organic capital. The Group’s “A” rating is positioned one-notch above DBRS’s rating of the Spanish sovereign due to the benefits of geographic diversification and the resilient performance of its businesses. Despite the recent economic improvement in the domestic economy, the Negative trend reflects both the asset quality and revenue challenges that the Bank still faces in Spain.

The Group’s franchise strength and earnings power are vital to withstand the challenges that are still being felt in its domestic market. In Spain, BBVA continues to operate in a difficult environment, with a high unemployment rate and deteriorating asset quality, which is likely to continue to drive provisioning requirements and put pressure on profitability. Nevertheless, despite the still elevated credit provisions that reflect both credit deterioration and regulatory requirements, BBVA continues to generate enough Income before Profit and Tax (IBPT) to absorb these provisions and strengthen capitalisation. As of December 2013, approximately 25% of IBPT (excluding Corporate Center) was generated in Spain, 33% from Mexico, 28% from South America and 8.5% from Eurasia, with a smaller contribution from the U.S. BBVA generated consolidated net attributable profit of EUR 2.23 billion in 2013, EUR 1.68 billion in 2012, and EUR 3 billion in 2011.

Demonstrating its ability to adjust to a sustained difficult operating environment, BBVA continues to maintain a high level of operating income (or gross margin). Gross margin increased slightly by 2.6%, excluding the exchange rate impacts, to EUR 21.40 billion in 2013. Net Interest Income (NII) was down 3.4% YoY, but would have increased, if exchange rate impacts were excluded. Performance was weaker in Spain, where despite the recent signs of recovery, the cost of risk and the pressure on margins are still a concern. Also in Spain, a court ruling on floor clauses in the mortgage book has impacted NII negatively since May 2013. On the other hand, efficiency levels, although showing some deterioration because of the Bank’s expansionary strategy in emerging markets and high investment in technology, continued to be adequate with a cost-to-income ratio of 57.6% in 2013.

Asset quality deterioration continues to impact the Group´s bottom-line profitability. In 2013, provisions for doubtful loans decreased by 27.6% but still absorbed a sizable 56.6% of IBPT. The Group bolstered its levels of generic and specific provisions (EUR 15.71 billion in 2013) to comply with regulatory requirements and cover expected future losses. Overall credit problems remain elevated with a non performing asset ratio of 6.8% at the end of 2013, up from 5.1% a year earlier. Driving this ratio is the Bank’s exposure to its domestic market, with a non-performing loan ratio of over 14% for Spanish small- and medium-sized enterprises (SMEs), 6.10% for residential mortgages, and 55.5% for real estate exposure. These metrics have been affected by the deleveraging process that BBVA is undertaking and the reclassification of restructured performing (around 48% of retail mortgage loans reclassified are performing assets) loans into non-performing loans, following the recommendation of Bank of Spain.

DBRS views BBVA as maintaining a solid liquidity and funding position. Given the slowdown in economic growth, BBVA has deleveraged its balance sheet in mature markets while continuing to focus on growth in emerging markets. By selectively deleveraging, the Group has improved its liquidity profile reflected in its net credit to customer deposit ratio improving to 109% at 2013, down from 124% at year-end 2012. DBRS also notes that the Group enjoys strong access to wholesale markets through debt issuance at the Group level and by its subsidiaries in local markets. BBVA maintains a liquidity buffer of EUR 79.7 billion of unencumbered assets which provides a cushion for the refinancing of wholesale funding maturities, which DBRS considers to be adequate given the stability of deposits at BBVA. Due to its improved liquidity position, the Group managed to repay EUR 20 billion of its LTRO during 2013.

BBVA has continued to strengthen its capital base through earnings retention; the Bank also completed the issue of Additional Tier 1 (AT1) instruments in 2Q13 and 1Q14, and Tier 2 instruments in 2Q14. Capitalization levels are in excess of regulatory minimums with reported core capital ratio of 11.6% (Basel 2.5 criteria), 9.8% (Basel III fully loaded) and 10.8% (Basel III phase-in) at December 2013. The Bank also reported a leverage ratio of 5.8% as of February 2014. In addition, as of April 2014, BBVA has capital and loss absorption instruments over total liabilities ratio of 10.8%, anticipating the bail-in banking resolution measures.

While the economic environment in Spain remains complex, DBRS maintains its view that BBVA’s broad diversity in earnings should help to cope with this level of uncertainty. Negative pressure on ratings could be driven by further deterioration in BBVA’s home market of Spain and the impact of sustained market stress within the Eurozone. Additionally, lower earnings prospects in its international subsidiaries would likely put negative pressure on BBVA’s ratings, as this would reduce the benefit of the Group’s international diversification. A significant improvement in the domestic Spanish economy and an improvement in the credit quality of the Bank’s domestic lending could lead to upward pressure on the ratings.

Concurrently a Deposit rating of “A” with a Negative trend has been assigned to BBVA, which is consistent with the existing Issuer & Senior Debt rating.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology applicable is: the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. The rating methodologies and criteria used in the analysis of this transaction can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents, Bank of Spain and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.
DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Rui Croca
Rating Committee Chair: Alan G. Reid
Initial Rating Date: November 23, 2009
Most Recent Rating Update: August 10, 2012

For additional information on this rating, please refer to the linking document located at: http://www.dbrs.com/research/236983/banks-and-banking-organisations-linking-document.pdf

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.