DBRS Morningstar Confirms BBVA’s Issuer Ratings at A (high)/R-1 (middle); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group), including the Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at R-1 (middle). The trend on these ratings is stable. The Group’s intrinsic assessment (IA) was maintained at A (high), one notch above the rating of the Kingdom of Spain (rated “A” with Positive Trend), reflecting the benefits of its international diversification. Concurrently, DBRS Morningstar confirmed the ratings on the Long-Term and Short-Term Critical Obligations ratings (COR) at AA (low) and R-1 (middle) respectively, and changed the trend from Stable to Positive on both ratings. The support assessment was maintained at SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings takes into account DBRS Morningstar’s view that BBVA’s diversified international franchise strength continues to support the Group’s generation of organic capital. In particular, the Group’s strong presence in Spain, the U.S. and Mexico has continued to drive revenues and offset more challenging situations in the Group’s other geographies, such as Turkey and Argentina. DBRS Morningstar continues to consider the Group’s robust liquidity and funding position as an important element underpinning the ratings. In addition, the confirmation of the ratings reflects the further improvement in 2019 of the Group’s asset quality, which is now in line with the European average. However, we will continue to monitor the developing situation and potential negative impact of the coronavirus (COVID-19) outbreak on revenues, profits and asset quality, whilst taking into account the significant relief measures being taken by governments and regulators which could mitigate some of these effects.

The change of the Trend on the Long-Term and Short-Term COR to Positive from Stable follows DBRS Morningstar’ confirmation of the Kingdom of Spain’s Long-Term Foreign and Local Currency rating at “A” with a Positive Trend. COR ratings can be up to two notches higher than the sovereign rating.

RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require an improvement of the rating of the Kingdom of Spain combined with continued improvement in core domestic profitability and capital position, as well as maintaining solid performance in its international businesses.

A downgrade of the Long-Term Issuer Rating could arise from a deterioration in the sovereign rating of the Kingdom of Spain. It could also arise from a sharp deterioration in BBVA’s risk profile as a result of the global pandemic of coronavirus (COVID-19). In particular, a significant simultaneous deterioration in several of the Group’s international businesses as a result of the current challenging operating environment could lead to a downgrade of BBVA’s ratings, as this would reduce the benefit of the Group’s geographical diversification.

RATING RATIONALE
DBRS Morningstar views the Group’s franchise as strong, as reflected in its leading franchise position in Spain and its strong international diversification, with leading positions in Mexico and Turkey and a growing presence in the U.S and South America.. BBVA’s highly diversified business model has continued to sustain the Group’s earnings and help manage headwinds in certain geographies.

Results in 2019 were negatively impacted by a EUR 1.32 billion goodwill impairment in the U.S. whilst 2018 results were positively impacted by the capital gains from the sale of BBVA Chile. As a result, BBVA reported net attributable income of EUR 3.5 billion in 2019, down 35.0% year-on-year (YoY). Excluding these impacts, net results were up 2.7% YoY in 2019 or 2.0% at constant exchange rates. Despite the very low interest rate environment in Europe and the continued deleveraging in Spain, NII increased 5.6% YoY in 2019 at constant exchange rates, helped by lending volume growth in emerging markets, especially in Mexico and South America. Fees and commissions were up 4.2% YoY in 2019 at constant exchange rates, driven by good growth in every division, especially in Spain and Turkey. Efficiency levels have remained strong at Group level despite high investment in technology and digitalisation. In 2019, the Group’s cost-to-income ratio was 48.5%, improved from 49.3% in 2018 and comparing favourably with many of its European peers. Loan loss provisions were up 4.3% YoY in 2019, mainly related to higher provisions in the U.S. subsidiary.

Asset quality continued to benefit in 2019 from improved economic conditions in the Group’s main markets, except Turkey. Following the transfer of the Group’s foreclosed assets to Cerberus in 4Q 2018, DBRS Morningstar views BBVA’s asset quality as more normalised with a non-performing assets (NPA) ratio of 3.8% at end-2019, which is more in line with the European average. This compares with a NPA ratio of 5.2% at end-2018 (which still included the Group’s foreclosed assets). Nevertheless, this is expected to deteriorate in 2020, as at many other banks, following the global economic shutdown due to coronavirus.

DBRS Morningstar views BBVA as maintaining a solid liquidity and funding position. The Group’s net loans to deposit ratio has remained broadly stable at around 100% at end-2019 despite strong loan growth in certain geographies. In addition, BBVA had a liquid assets pool of around EUR 145 billion at end-2019 (including cash), which provides robust coverage of its total wholesale debt maturities.

BBVA has continued to strengthen its capital base through retained earnings and is conformably above minimum regulatory requirements. At end-2019, BBVA reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 11.74%, up 40 bps from the end-2018 CET fully loaded compared to a SREP requirement of 9.27%. DBRS Morningstar also understands that BBVA is already compliant with its MREL requirements of 28.5% of risk-weighted assets and 15.16% of total liabilities and own funds (TLOF) by January 1, 2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Banco Bilbao Vizcaya Argentaria, S.A. are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

The sources of information used for this rating include Company Documents, BBVA 2019 Presentation, BBVA 2019 Press Release, BBVA 4Q 2019 Report, BBVA 2019 Annual Accounts, European Banking Authority 1H 2019 Risk Dashboard and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/359114

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President – Global Financial Institutions
Rating Committee Chair: Ross Abercromby, Managing Director– Global Financial Institutions
Initial Rating Date: November 23, 2009
Last Rating Date: March 29, 2019

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