Exposure Management: case study BBVA part 1: profit & income '2018

Banks play a crucial role in the fight against climate change and in achieving the United Nations Sustainable Development Goals thanks to their unique position in mobilizing capital through investments, loans, issuance and advisory functions. They have effective measures in place to help tackle these challenges: firstly, providing innovative solutions to help customers transition to a low-carbon economy and driving sustainable finance; and secondly, systematically incorporating social and environmental risk into their decision-making processes.

Sustainable finance products are instruments that channel funds to finance customer transactions in sectors such as renewable energy, energy efficiency, waste management and water treatment, as well as access to social goods and services, including housing, education, health and employment.

BBVA strives to mobilize the necessary capital to curb climate change and achieve the Sustainable Development Goals. To this end, it has pledged to mobilize € 100 billion in sustainable financing between 2018 and 2025.

BBVA’s excellent results in 2018 are a good example of our successful strategy, despite the volatility in some of the countries within our footprint, namely Turkey and Argentina. Our net attributable profit reached €5,324 million in 2018, a 51% increase over 2017 (or 7% in comparable terms) - an achievement driven by recurring revenues, cost containment, and the capital gains from the sale of BBVA Chile. The book value per share increased 10.1% and the return on tangible equity stood at 14.1%, positioning BBVA as a leader in profitability in the financial sector. The Group’s fully loaded consolidated total ratio ended the year at 11.34%, 26 basis points above December 2017.

BBVA Group’s net attributable profit in 2018 was €5,324 million, representing a 51.3% increase versus 2017 (7% increase on a more comparable basis). The net attributable profit was impacted by the capital gains realized from the 2018 sale of BBVA Chile and the 2017 impairment of the Group’s stake in Telefónica.

Tangible book value per share plus dividends increased by 10.1% over the year, despite the depreciations in the Turkish lira and the Argentine peso. This increase is accompanied by peer leading double-digit returns in both return on tangible equity and return on equity, which were 14.1% and 11.6% respectively.

note is the trend in recurring revenue, 10.4% growth in the year in constant Euros (without accounting for the impact of the exchange rate) and discipline in cost control, which grew by just 2.5%, well below the average inflation of our footprint. This trend was repeated consistently across our geographies. Because of this, the efficiency ratio of the Group has improved by 89 basis points to 49.3%, despite the negative accounting impact the hyperinflation adjustment in Argentina had on gross income.

The strength of the Group’s risk indicators must also be highlighted, with the NPL ratio improving significantly, ending 2018 at 3.9%, down 61 basis points compared to 2017. The NPL coverage ratio improved 812 basis points over the year to 73%. The Group’s cost of risk remained low at 1%.

The resilience of BBVA capital position from a solvency standpoint is also worth to mention. The fully loaded total consolidated ratio was 11.34% in 2018, an increase of 26 basis points over the year. This has been achieved, despite the impact of market trends, particularly the depreciation of some currencies and the first implementation of the IFRS 9 standard. Banking activity in Spain: Net attributable profit grew 10.8% to €1,522 million driven by fees, significant costs reduction and lower impairments. In terms of asset quality, we saw a significant declining trend in NPL ratio and the cost of risk, which were 4.6% and 0.21% respectively.

In Non-Core Real Estate, the significant reduction of net real estate exposure stands out, as a result of the October close of the sale of BBVA’s real estate business in Spain to Cerberus, as well as other portfolio sales during the year. Net losses were significantly reduced to €78 million.

In the United States, net attributable profit was €735 million, 56.9% higher than 2017 in real terms, primarily supported by the favourable performance of net interest income.

In Mexico, net attributable profit for the region was €2,384 million, representing a year-over-year increase of 16.1% in real terms, supported by the net interest income and efficiency improvement. Risk indicators were strong, with all ratios showing improvements. In Turkey, the bank again demonstrated its capacity to generate high pre-provision profit that can absorb increases in provisions derived from deterioration of macroeconomic conditions. Net attributable profit was at €569 million, representing a year-over-year decrease of 4.5% in real terms.

South America generated a net attributable profit of €591 million in 2018, which represents a year-over-year change of -16.5% mainly due to the accounting impact of hyperinflation in Argentina (-€266 million) and the change in the business unit composition derived from the sale of BBVA Chile, which closed in July 2018.

Credit to private sector in Spain

CREDIT TO THE RESIDENT PRIVATE SECTOR

Business in Spain

Total credit continued falling to stand at €1,159 billion in June 2019 (1,485 bn in 2014), although a slight pick-up in the past quarter had the effect of moderating its year-on-year rate of fall. New lending held steady in the past twelve months, which meant that its year-on-year change also moderated.

Optimize capital allocation.

The objective of this priority is to improve the profitability and sustainability of the business while simplifying and focusing it on the most relevant activities. Throughout 2018, efforts continued to promote the correct allocation of capital and this is allowing the Group to continue improving in terms of solvency. Thus, the fully loaded Consolidate total capital ratio stood at 11,3% at the close of 2018 from 11.1% at the end of the year, up 26 basis points (0.26%) at the close of 2017.

Regarding shareholder remuneration, on October 10th BBVA paid a cash dividend with a gross amount of €0.10 per share against the 2018 fiscal year account. In addition, on April 10, 2018, BBVA paid a final dividend against the 2017 fiscal year account for an amount of €0.15 gross per share, also in cash. Both dividends are consistent with the Group’s shareholder remuneration policy, which consists of maintaining a pay-out ratio of 35-40% of recurring profit.

As of December 31, 2018, the fully phased-in loaded target stood at 11.34%, taking into account the impact of the initial implementation of IFRS 9. Tier 1 capital stood at 6.4% and Tier 2 at 2.5% resulting in a total capital ratio of 12.18. These levels are above the requirements established by the regulator and the systemic buffers applicable in 2018 for BBVA Group. Since January 1, 2018, the requirement has been established at 8.438% for the phased-in CET1 ratio and 11.938% for the total capital ratio. The change with respect to 2017 is due to the steady implementation of the capital conservation buffers and the capital buffer applicable to other systemically important banks. The regulatory requirement for 2018 in fully loaded terms remained unchanged (CET1 of 9.25% and total ratio of 12.75%) compared with the previous year.

Finally, the Group’s leverage ratio maintained a solid position, at 6.4% fully loaded (6.5% phased-in), which is still the highest of its peer group.

Credit risk decreased by 3.6% throughout 2018 or -0.4% isolating the impact of the sale of BBVA Chile (-1.8% and +1.3%, respectively, at constant exchange rates), mainly due to lower activity in Non-Core Real Estate and contraction in Turkey and South America due to the exchange rates evolution. During the fourth quarter credit risk increased by +1.3% (+0.6% at constant exchange rates).

Most stock-market indices showed a downward trend during 2018. In Europe, the Stoxx 50 and the Euro Stoxx 50 fell by 13.1% and 14.3%, respectively. On the other hand, in Spain, the Ibex 35 lost 15.0% over the same period. Finally, in the United States the S&P 500 index fell 6.2% in the last twelve months, mainly due to the decline in the last quarter (down 14.0%).

CAPITAL AND RISK WEIGHTED ASSETS Consolidated data

Between June 2018 and June 2019, the total consolidated ratio increased by 36 bp to stand at 12.2%, while the Tier 1 and total capital ratios increased by similar magnitudes. Risk weighted assets grew by 1.1% over the same period.

The two largest institutions in the Spanish banking system were mainly responsible for the improvement in the total ratio. Over the past year, more institutions increased their total consolidated ratio than reduced it, although the difference is not large. As regards the composition of the Tier 1, capital and reserves account for more than 90% of the eligible items. The increase in reserves, explains most of the increase in solvency. Minority interests represent 6%, while transitional adjustments, as a consequence of the practical implementation of the CRR/CRD IV, have a weight of only 2%.

Notwithstanding these developments, in June 2019 Spanish institutions had, on average, higher levels of solvency relative to other European countries. A Europe-wide comparison of two solvency measures, the Tier 1 ratio and the leverage ratio, based on the latest data published by the EBA. Spanish institutions have a Tier 1 ratio almost 3 pp above the European average, and above the regulatory minimum requirement. As regards the leverage ratio, Spain was above the largest European peers.

Source: BBVA Financial results 2017-2019