DBRS Confirms BBVA Long-Term Ratings at A, Trend now Positive

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group), including its Issuer & Senior Debt rating of A, Subordinated Debt rating at A (low) and Short-Term Instruments rating of R-1 (low). The trend on all ratings has been changed to Positive from Stable. BBVA’s intrinsic assessment (IA) was maintained at “A” and the support assessment remained SA3.

The change in trend to Positive on BBVA’s ratings primarily reflects consistent improving fundamentals, including core profitability and asset quality in Spain, the Group’s core market. The Positive trend also considers that given the Group’s franchise strength in Spain, the Group will continue to benefit from the ongoing economic recovery in Spain. The international diversification of BBVA’s franchise, with its balance between mature and emerging markets, coupled with a much improved domestic environment, provides the Group with a solid base to continue supporting the generation of organic capital. BBVA’s ratings also reflect the Group’s robust liquidity and funding position, good management and adequate capitalisation.

DBRS notes that the banking environment in Spain remains challenged by the low interest rate environment, strong competition for customers and generally low demand for credit. However, DBRS considers that BBVA is well-positioned domestically to further benefit from a pickup in volumes and business as the economy continues to grow. This, together with sound and consistent international performance, will continue to provide the Group with resilient recurrent earnings capacity to cope with tougher regulatory requirements.

Positive rating pressure in the short to medium-term would likely be linked to continued improvement in the position of the Spanish sovereign combined with ongoing improvement in the Group’s fundamentals, including core domestic profitability and normalised levels of non-performing assets (NPAs). The Group’s Issuer & Senior Debt rating remains positioned one notch above the Spanish sovereign rating, due to the Group’s fundamental strengths which include the benefits of solid international diversification. However, any future increase in the Spanish sovereign rating (currently “A (low)”, Positive trend), beyond the A rating level, would likely lead to the rating of BBVA converging with the Spanish sovereign rating.

Negative pressure, although unlikely in the short to medium term, could arise if there is any indication of a sharp deterioration in BBVA’s risk profile together with weakening profitability and capitalisation. A material deterioration in the Group’s international business contributions and risk profile would likely put downward pressure on BBVA’s ratings as well, as this would reduce the benefit of the Group’s geographical diversification.

BBVA’s Issuer & Senior Debt rating of A is currently positioned one-notch above DBRS’s rating of the Spanish sovereign reflecting DBRS’s view that the Group benefits from geographical diversification outside of Spain and a resilient international franchise. Despite an improved domestic performance, international activities contributed around 81% of the Group’s net attributable profit (excluding the corporate centre) in 9M15, which in DBRS’s view evidences the Group’s strong franchise across its core international markets.

The Group’s net attributable profit was down 11.4% year-on-year (YoY) and at constant exchange rates to EUR 1.7 billion largely as a result of a non-cash one-off negative impact of EUR 1.8 billion due to the re-valuation at fair value of the 25.01% stake already owned by BBVA in Turkiye Garanti Bankasi, A.S. (Garanti). The re-valuation was carried out on 1st July 2015 when BBVA started fully consolidating Garanti. BBVA has now management control in the Turkish bank with a total stake of 39.9%.

BBVA’s core operating profitability however, continued to demonstrate strong resiliency across all markets as well as meaningful improvements in its domestic market. BBVA’s core banking revenues benefited from higher lending volumes in most geographies except in Spain, where the Group continues to deleverage, albeit at a slower pace. Domestic operations substantially improved, largely helped by lower loan loss provisions, to contribute 19% to the Group’s net income in 9M15 (excluding the corporate center), up from 6% in 9M14.

Excluding the effects of the integration of Catalunya Banc and Garanti, the Group continued to manage down its stock of non-performing loans (NPLs), primarily in Spain. BBVA has reduced its NPLs by EUR 3.2 billion since 3Q14 (excluding the increased perimeter). DBRS notes the domestic NPL ratio remained below the average for the Spanish banking sector at end-September 2015. The Group’s non-performing assets (NPA) ratio, as calculated by DBRS, was 9.3% over customer gross loans and foreclosed assets at end-September 2015, improved from 9.8%% at end-2014 and 11% at end-2013. DBRS however, still considers it as relatively weak compared to larger international peers.

Given BBVA’s diversified risk profile, durable franchise and ability to generate capital, DBRS considers BBVA’s capitalization as adequate. The Group reported a fully loaded Common Equity Tier 1 (CET1) capital ratio of 9.8% at end-September 2015, down from 10.4% at end-2014, particularly affected by the integrations of Catalunya Banc and Garanti. However, DBRS views BBVA’s capitalisation as supported by the Group’s resilient franchise and consistent ability to generate capital through retained earnings, and expects the Group to maintain sound capitalisation, benefitting from further profitability improvements across all markets, particularly in Spain.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, the European Central Bank, European Banking Authority, 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: Maria Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: November 23, 2009
Most Recent Rating Update: February 10, 2015

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom
Registered in England and Wales: No. 7139960

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