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 Stable Trend), reflecting the benefits of its international diversification. 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 reflects DBRS Morningstar’s view that BBVA has continued to leverage on its diversified international franchise, which has supported the Bank’s performance in the challenging environment following the COVID-19 outbreak and should continue to be a key driver of the ratings, supporting the generation of organic capital.

In addition, the ratings continue to be underpinned by the strong funding and liquidity profile, backed by its large and stable deposit base and substantial liquidity buffers. We also continue to take into account the Group’s sound capital position, with solid buffers over regulatory requirements. We view the latter as key to absorb the potential fallout from COVID-19.

Nevertheless, we also incorporate the asset quality challenges that BBVA may face in 2021. BBVA has managed in recent years to reduce its legacy exposures, mainly through large disposals of NPLs and foreclosed assets and the Group now demonstrates normalised asset quality metrics at Group level compared to European peers. However, we consider the state guaranteed loans and loan moratoria are limiting past-due situations, and preventing the deterioration of traditional asset quality metrics and expect new NPLs to materialise in 2021 with the end of the support measures. However, we also acknowledge that the Group has not experienced signs of asset quality deterioration yet, despite an increase in the proportion of Stage 2 loans.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require an improvement of the rating of the Kingdom of Spain, combined with a continuation of improved profitability in Spain, as well as maintaining solid performance in its international businesses and their current risk profile.

Conversely, a downgrade would occur from a downgrade of the sovereign rating of the Kingdom of Spain. It could also arise from a sharp deterioration in BBVA’s risk profile. In particular, a significant simultaneous deterioration in the Group’s major international businesses 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 major franchise in Spain and its strong international diversification, with leading positions in Mexico and Turkey and a growing presence in South America. BBVA’s highly diversified business model has continued to sustain the Group’s earnings in recent years and help manage challenges in certain geographies. In November 2020, BBVA announced the sale of its U.S. subsidiary to PNC Financial Services. This will result in a loss of revenues, whilst substantially strengthening capital ratios.

Results in 2020 were again negatively impacted by a EUR 2.1 billion goodwill impairment in the U.S. as in 2019 where it amounted to EUR 1.3 billion. However, the 2020 results were supported by the EUR 304 million capital gain from the joint-venture with Allianz in Spain for the distribution of insurance products. As a result, BBVA reported net attributable income of EUR 1.3 billion in 2020 compared to EUR 3.5 billion in 2019. Excluding these impacts, net results were down 36.1% year-on-year (YoY) in 2020 or 27.2% at constant exchange rates. Results were impacted by the higher cost of risk due to COVID-19, despite core revenue growth at constant exchange rates and cost reductions. This affected virtually all of BBVA’s geographies, which nonetheless remained profitable. Profits generated outside of BBVA's home market totalled 85% of net attributable profit (excluding corporate centre) in 2020. Bancomer in Mexico accounted for around 45% of BBVA’s total net attributable income in 2020, Spain for 15% and Turkey for 14% of total.

Whilst asset quality has not shown any sign of deterioration so far, we expect NPLs to materialise once all moratoria schemes expire. The NPL ratio was 4.0% at end-2020, in line with the European average. NPLs remained fairly stable at EUR 16.7 billion at end-2020. DBRS Morningstar considers BBVA’s coverage ratios of 81.5% at end-2020 (as calculated by DBRS Morningstar) for NPLs as comparing favourably with domestic peers.

DBRS Morningstar views BBVA as maintaining a solid liquidity and funding position. At end-2020, customer deposits represented 72% of total funding as calculated by DBRS Morningstar. BBVA’s liquidity position is also solid in DBRS Morningstar’s view, with cumulated counterbalancing capacity of EUR 166 billion at end-2020 and LCR and NSFR ratios well above the regulatory requirements, at 149% (or 185% including the excess liquidity in subsidiaries outside the Eurozone) and 127% respectively at end-2020.

BBVA has continued to strengthen its capital base through retained earnings and the Group’s ratios are well above minimum regulatory requirements. At end-2020, BBVA reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 11.73%, stable YoY, as organic capital generation offset risk-weighted asset growth. Proforma of the sale of the U.S. operations, the end-2020 fully loaded CET1 ratio would stand at 14.58%. This continues to provide the Group with a comfortable buffer over the Overall Capital Requirement (OCR) for CET1 (phased-in) ratio which is 8.59%. DBRS Morningstar also understands that BBVA is already compliant with its MREL requirements of 28.5% of risk-weighted assets.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020)- https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Company Documents, BBVA 2020 Presentation, BBVA 2020 Press Release, BBVA 4Q 2020 Report, BBVA 2020 Annual Accounts 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/376092

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

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: April 1, 2020

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