DBRS Confirms Banco Bilbao Vizcaya Argentaria, S.A. Senior Debt at A; Stable trend

DBRS Ratings Limited (DBRS) has today confirmed Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group)’s Issuer, Deposit and Senior Debt ratings at A with a Stable trend. The Short-Term Instruments rating is also confirmed at R-1 (low) with a Stable trend. DBRS has also maintained BBVA’s Intrinsic Assessment (IA) at A following a detailed review of the Bank’s performance and outlook. The Long Term Critical Obligations rating was confirmed at A (high) and the Short Term Critical Obligations rating was confirmed at R-1 (middle), both with Stable Trend. The Subordinated Debt remains at A (low) Under Review with Negative implications (see: “DBRS Places Certain Sub Debt of 27 European Banking Groups Under Review With Negative Implications”). Please see a full list of ratings at the end of this press release.

The confirmation of the ratings reflects BBVA’s operating resiliency in all geographies despite increased global geopolitical uncertainty and regulation and amid the persistent low interest rate environment in its home market of Spain. The Stable trend reflects DBRS’s view that BBVA’s international and domestic franchise strength should continue to provide the Group with a solid base for generating resilient earnings and sustaining the continued generation of organic capital. In particular, DBRS considers that improving Spanish operations should help to offset any potential volatility arising from exposure in Turkey and Mexico. BBVA’s ratings also reflect the Group’s robust liquidity and funding position, track record of operating resiliency and good management. Reflecting the benefits of that international diversification, the Group’s Senior Debt rating remains positioned one notch above the Spanish sovereign rating (A (low), Stable Trend).

DBRS views the Group’s franchise as strong as reflected in the international diversification and leading positions in Spain, Mexico and Turkey and growing presence in South America and the U.S. BBVA’s highly diversified business model has continued to sustain the Group’s earnings leading, in 2016, to the strongest results since 2010. This was primarily driven by the strong reduction in loan loss provisions in Spain, and resilient performance of its international businesses. 2016 results included the first full year of full consolidation of Turkiye Garanti Bankasi (Garanti) which added EUR 1.5 billion of net income in 2016. Revenue growth in BBVA’s emerging markets continued to offset the continuing pressure in Spain of low interest rates on core revenues. Results in 2016 were also negatively impacted by provisions to cover the expected costs of full retroactivity on interest rate floors on mortgages. Efficiency levels, have remained strong at Group level despite the Bank’s expansionary strategy in emerging markets and high investment in technology, with a cost-to-income ratio of around 52% in 2016.

Asset quality has continued to benefit from improved economic conditions in the Group’s main markets, especially in Spain where non-performing loans (NPLs) have been on a downward trend throughout 2016. The NPL ratio in Spain (including banking and real estate businesses) was 8.0% at end-2016, improved YoY, and, below the average for the Spanish banking system of 9.2%. At end-2016, according to DBRS’s calculation, the Group's NPLs accounted for 5.3% of total gross loans down from 5.9% at end-2015 and the non-performing assets (NPA) ratio was 8.6% down from 9.2% at end-2015. DBRS sees that whilst asset quality continues to improve, it remains weaker than international peers.

DBRS views BBVA as maintaining a solid liquidity and funding position. The Group’s net loans to deposit ratio (LTD, ex repos and covered bonds included in deposits) has remained at a good level at 106.3% at end-2016 despite strong loan growth in certain geographies thanks to strong deposit growth in all geographies except for Venezuela. 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 138.6 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. The Group also participated in the new ECB programme of Targeted Longer-Term Refinancing Operations (TLTRO II) for a total amount EUR 23.7 billion which should provide additional support to NII going forward.

BBVA has continued to strengthen its capital base through retained earnings and risk-weighted asset reduction; the Group also completed the issue of EUR 1 billion of Additional Tier 1 (AT1) instruments in 2016 and EUR 1 billion of Tier 2 instruments in 1Q17. Capitalisation levels are in excess of regulatory minimums with reported CET1 phased-in ratio of 12.2% and total fully loaded CET1 ratio of 10.9% at end-2016. However DBRS sees they remain at the lower end of its similarly rated peers. However, the Group reported a strong leverage ratio of 6.5% at end-2016.

RATING DRIVERS:

Positive rating pressure to the Issuer rating would likely require an improvement in the position of the Spanish sovereign combined with continued resiliency of the Group’s fundamentals, including an improvement in core domestic profitability and normalised levels of non-performing assets (NPAs).

Negative rating pressure to the Issuer rating 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.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria: Critical Obligations Rating Criteria (February 2017), Support Assessments for Banks and Banking Organisations (March 2017) and Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company disclosures, Bank of Spain and the European Central Bank. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets Authority (“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 – Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman – Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: November 23, 2009
Most Recent Rating Update: April 13, 2016

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