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

DBRS Ratings GmbH (Morningstar DBRS) 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 CREDIT RATING CONSIDERATIONS
The confirmation of the ratings reflects Morningstar DBRS’s view that BBVA has continued to leverage its diversified international franchise to report solid earnings generation as demonstrated in the 2023 results, as well as a sustained ability to generate capital. 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.

Morningstar DBRS sees BBVA’s profitability as peaking in the current interest rate cycle, as we expect Net Interest Income (NII) growth to slow down as a result of higher deposit costs in many of BBVA’s markets. In addition, Morningstar DBRS expects that BBVA´s asset quality will deteriorate during coming quarters given the challenging economic environment, characterised by tighter financial conditions and weaker economic dynamics in most of their regions. In particular, Morningstar DBRS are closely monitoring the evolution of BBVA´s developing markets exposures. However, Morningstar DBRS views BBVA’s strong earnings generation capacity to be a key mitigating factor, providing the Group with flexibility to absorb any potential deterioration in asset quality.

BBVA’s IA is positioned one-notch above Morningstar DBRS’s rating of the Kingdom of Spain, reflecting the Group’s strong franchise with a high degree of international diversification and its ability to generate solid and consistent earnings.

CREDIT 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 and improvement in the risk profile.

A downgrade would occur from a downgrade of the sovereign rating of the Kingdom of Spain. It would also arise from a rapid deterioration in BBVA’s risk profile. In particular, a significant deterioration in the Group’s major international businesses, namely Mexico or/and Turkey, and reduction in the benefit from its geographical diversification would lead to a downgrade of BBVA’s ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views the Group’s franchise as strong, as reflected in its major franchise in Spain and its international diversification, with leading positions in Mexico and Turkey and a growing business in South America. BBVA’s diversified business model has continued to underpin the Group’s earnings profile in recent years and help manage challenges in certain other geographies. With around 72 million customers worldwide and around EUR 776 billion of assets as of end-2023, BBVA is one of the largest Spanish banking groups by consolidated assets.

Earnings Combined Building Block (BB) Assessment: Strong
BBVA posted their highest results ever in 2023 with a net attributable profit of EUR 8.0 billion, up 26% from last year and up 40% (at constant euros). Excluding exceptional items, the acquisition of offices in Spain from Merlin in 2022, net results were still up 22% YOY and 35% (at constant euros). Results were driven by strong revenue growth, boosted by higher core revenues against a backdrop of higher interest rates. This was partially offset by higher operating expenses, driven by higher activity levels and inflation and a higher cost of risk in Mexico and South America, resulting from the current environment, albeit slightly offset by lower provisioning needs in Turkey. Profits generated outside of BBVA's home market represented around 71% of net attributable profit (excluding corporate centre) in 2023 with Bancomer (Mexico) accounting for around 55% of BBVA’s total net attributable income, Spain 29 %, and Turkey 5%.

Risk Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views the Group’s credit risk profile as reflecting its relatively conservative approach, effective risk policies, retail banking focus, and diversified geographic franchise. BBVA´s asset quality ratios have been resilient against the uncertain economic backdrop, initially from COVID-19, but more recently due to the conflict in Ukraine, inflation, the energy crisis, and higher interest rates. Whilst they remain solid, Morningstar DBRS notes some early indicators of credit deterioration. Non-Performing Loans (NPLs) were EUR 15.3 billion at end-2023 (up from EUR 14.5 billion in 2022). On top of this, Stage 2 loans (exposures whose credit risk has significantly increased) increased to 9.1% up from 8.7% at end-2022. Nevertheless, Morningstar DBRS note that despite these elements, the end-2023 NPL ratio as calculated by Morningstar DBRS, has remained stable YOY at 3.4%. The Group’s NPL coverage ratio (as calculated by Morningstar DBRS) remained very high at 76.9% at end-2023, which compares favourably with Spanish and European peers.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views BBVA as maintaining a solid funding position. BBVA’s customer deposit base benefits from the strength of the Group’s core operating franchise and represents the largest source of funding for the Group, accounting for 71% of total funding compared to 73% of total funding at end-2022 as calculated by Morningstar DBRS. On top of this, Morningstar DBRS views the funding base as stable considering BBVA’s leading positions in the countries where the Bank operates. The Group’s net LTD ratio as calculated by Morningstar DBRS was 86.2% at end-2023 compared with 84.5% at end-2022. BBVA’s liquidity position is also solid in our view with a Liquidity Coverage Ratio (LCR) of 149% (or 193% including the excess liquidity in subsidiaries outside the Eurozone) and a Net Stable Funding Ratio (NSFR) of 131% at end-2023.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
BBVA’s capitalisation levels ratios remain somewhat at the higher end of their global peer group, and the Group continues to operate with capital ratios well above minimum regulatory requirements. BBVA reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 12.7% at end-2023, in line with its end-2022 ratio of 12.6%. The fully loaded total capital ratio stood at 16.6% at end-2023 compared to 15.9% at end-2022. These ratios continue to provide a comfortable buffer over SREP requirements for 2024 of 9.09% for CET1 (including the Pillar 2 requirement of 1.68%) and 13.25% for the total capital ratio.

BBVA has gradually increased placed the emphasis on capital redistribution, increasing its payout ratio and executing sizable share buy-backs programmes, two of which in 2023 for a total EUR 1.4 billion. Still, the Group continues to operate with a large management buffer over its own target for CET1 of 11.5-12.0%. From January 1, 2024, BBVA must comply with an MREL requirement as communicated by the Bank of Spain in June 2023 of 22.11%, considering the exposures subject to the calculation of the countercyclical buffer as of September 2023. At end-2023, BBVA’s MREL ratio was 26.36% of RWAs, of which 21.84% met with subordinated instruments, therefore already complying with the requirement.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/430110/.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Credit rating actions on the Kingdom of Spain are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Kingdom of Spain are discussed separately at https://dbrs.morningstar.com/issuers/15664
There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

The Social factor impacts BBVA as the ESG factors for the Kingdom of Spain are passed-through to BBVA given the Bank's credit ratings or trend would move along with the credit ratings or trend of the Sovereign (see credit rating drivers).

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (22 June 2023) https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, BBVA Q4 2023 Earnings Presentation, BBVA Q4 2023 Press Release, BBVA Q4 2023 Report, BBVA Q4 2023 Debt Presentation, BBVA 2023 Annual Accounts. Morningstar DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://dbrs.morningstar.com/research/430113/.

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

Lead Analyst: Arnaud Journois, Vice President, Credit Ratings - European Financial Institution Ratings
Rating Committee Chair: William Schwartz, Senior Vice President - Global Fundamental Ratings, Credit Practices
Initial Rating Date: November 23, 2009
Last Rating Date: March 28, 2023

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com