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 its diversified international franchise to report solid earnings generation which, combined with cost control and lower cost of risk enabled the Group to report strong results in 2021. BBVA’s ratings continue to be underpinned by a 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.

BBVA has managed in recent years to reduce its legacy exposures and now demonstrates normalised asset quality metrics, which the Group maintained in 2021, as credit deterioration stemming from the COVID-19 pandemic has been very limited so far. The ratings also consider the impact the Russian invasion of the Ukraine could have on the macroeconomic outlook as we expect supply chains, energy prices, inflation and interest rates to be affected. Nevertheless, we also note that BBVA’s direct exposure to Russia and the Ukraine is very limited.

RATING DRIVERS

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

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

Franchise Combined Building Block (BB) Assessment: Strong/Good
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 underpin the Group’s earnings profile in recent years and help manage challenges in certain geographies. Since 2021, BBVA has retreated from the U.S. through the sale of its subsidiary to PNC Financial Services. Whilst this has resulted in a loss of revenues, it has strengthened the capital ratios.

Earnings Combined Building Block (BB) Assessment: Good
BBVA reported its highest results in 2021, with a net attributable profit of EUR 4.7 billion, up from a net attributable profit of EUR 1.3 billion in 2020. However, this was influenced by the results from the US operations sold to PNC in 2021 and 2020, the net cost related to the restructuring process in 2021 and the net capital gains from the agreement with Allianz in 2020. Excluding these items, net results grew twofold to EUR 5.1 billion at constant exchange rates. Results were driven by lower cost of risk and lower expenses that compensated for pressure on revenues. Profits generated outside of BBVA's home market represented around 70% of net attributable profit (excluding corporate centre) in 2021. Bancomer in Mexico accounted for around 50% of BBVA’s total net attributable income in 2021, Spain 30 % and Turkey 15%.

Risk Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views the Group’s credit risk profile as reflecting its relatively conservative approach, effective risk policies, retail banking focus and diversified geographic franchise. The NPL ratio was 4.1% at end-2021, in line with the European average. NPLs were EUR 15.4 billion at end-2021. DBRS Morningstar considers BBVA’s NPL coverage ratio of 74.7% at end-2021 (as calculated by DBRS Morningstar) as comparing favourably with domestic peers. Whilst the unprecedented measures put in place by the domestic and European authorities have delayed the formation of NPLs following the COVID-19 pandemic, uncertainty remains regarding the full effect of the pandemic on asset quality. In addition, the macroeconomic outlook is more uncertain following Russia’s invasion of Ukraine, although we note that BBVA has almost no direct exposure to Russia or Ukraine.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views BBVA as maintaining a solid liquidity and funding position. At end-2021, customer deposits represented around 70% of total funding. BBVA had cumulated counterbalancing liquidity capacity of EUR 169.5 billion at end-2021 and LCR and NSFR ratios well above the regulatory requirements, at 165% (or 213% including the excess liquidity in subsidiaries outside the Eurozone) and 135% respectively at end-2021.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
BBVA has continued to strengthen its capital base through retained earnings and the Group’s ratios are well above minimum regulatory requirements. BBVA reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 12.8% at end-2021, up from 11.7% last year as the sale of the U.S. operations and organic capital generation offset the resumption of dividend distribution. This continues to provide the Group with a comfortable buffer over the Overall Capital Requirement (OCR) for CET1 (phased-in) ratio which is 8.6%. BBVA resumed its dividend distribution policy with a 40 to 50% payout for the year 2021 as ECB restrictions on distribution to shareholders were completely lifted in September 2021. On top of this, the Group proceeded with a EUR 3.5 billion share buyback programme, one of the largest in Europe. The fully loaded total capital ratio stood at 17.0% at end-2021 compared to 15.9% at end-2020. DBRS Morningstar also notes that with MREL ratios of 28.34% of RWAs and 11.35% of Leverage Ratio Exposure (LRE), BBVA is already compliant with its MREL requirements for 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/394562

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.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/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 (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, BBVA Q4 2021 Earnings Presentation, BBVA Q4 2021 Press Release, BBVA Q4 2021 Report, BBVA Q4 2021 Debt Presentation and BBVA 2021 Annual Accounts. 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/394561

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

Lead Analyst: Arnaud Journois, Vice President - European Financial Institutions
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: November 23, 2009
Last Rating Date: March 31, 2021

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