Stress levels in liquidity and sovereign risk reached a high in the third quarter of 2011, particularly in the euro area. As a result, most of the European banking sector has seen some major sources of funding reduced. This in turn has increased the use of the liquidity facilities provided by the central banks. This situation has given rise to doubts in the markets about certain business models with a high level of leverage. Other factors worth highlighting have been the loss of value in numerous assets as a result of increased funding costs and the prevailing uncertainty. In particular, there were significant falls in the equity and public and private debt markets and a low level of business activity, above all that most closely related to the wholesale business. Against this background of loss of confidence, the Group has once more demonstrated over the quarter that its business model is sound, particularly in terms of its liquidity position and generation of earnings.
In terms of liquidity, BBVA has a privileged position with respect to most of its competitors, in the following aspects:
- The smallest balance sheet within its peer group, at €584 billion.
- A highly customer-centric retail model, with a very solid deposit base, as shown by the fact that BBVA is the bank with the biggest customer deposit/total asset ratio within the peer group, at 48.3% at the close of September 2011.
- A wholesale banking business based on a strong relationship with its customers and characterized by low leverage levels. BBVA is recovering competitiveness in an environment in which other banks have announced significant deleveraging plans.
- In addition, the Group has always been proactive in its management of long-term wholesale finance, and used conservatively the “windows of opportunity” offered by the markets. In fact, in June BBVA already had its financing needs fully covered for 2011; and the coming years it has the lowest level of long-term funding maturities of any bank in its peer group. It should also be pointed out that these maturities are not concentrated in any specific period.
- It is worth noting that under the BBVA management model each banking subsidiary or group must be self-sufficient in its sources of funding within its respective geographical area.
- Finally, it must be pointed out that BBVA does not depend on the US market for short-term market funding (one of the key subjects this quarter), and it has only used it in the past when appropriate as a cheap source.
The most important point with respect to generation of earnings over the period is the continued growth of the most recurring income, i.e. gross income excluding dividends or NTI:
- There was no contribution from net trading income (NTI) over the quarter, which characterizes the profile of the account. The slightly negative NTI (–€25m) can be explained by the low level of activity in Wholesale Banking and the fall in asset prices over the period.
- Gross income for the quarter was €4,627m. The fall compared with €5,162m in the previous quarter is the result of the performance of NTI mentioned above and the dividend paid in May from the stake in Telefónica. Excluding dividends and NTI, the gross recurring income generated by BBVA between July and September was €4,602m, up 0.8% quarter-on-quarter. This gives a figure of €15,052m year to date and €13,656m (about 91%) excluding NTI or dividends.
- Operating expenses amounted to €2,461m for the quarter, slightly below the figure for the second quarter. The efficiency ratio was 48.5% at the close of September, one of the best among the Bank’s European peers.
- Impairment losses on financial assets, together with allocation to provisions and other gains (losses), remain at a similar level to the previous quarter.
- Between July and September 2011, the Group obtained a net attributable profit of €804m. This figure does not include the dividends from Telefónica (which are paid in the second and fourth quarter of each yea
The Group has maintained its main risk indicators stable for yet another quarter (the seventh since December 2009). The NPA ratio closed 30-Sep-2011 at 4.1% and the coverage ratio at 60%.
With respect to solvency, BBVA continues to have an excellent capital position. At the close of September the core ratio was 9.1%, supported by the generation of earnings and the implementation of the “Dividend Option.”
All the business areas have contributed positively to the Group’s results. The most significant aspects for each of them are detailed below:
- The businesses in Spain show weak lending activity as a result of the (necessary and positive) deleveraging process being undertaken in the economy. It is important to highlight that the liquidity gap in the area is continuing to improve: on the one hand, through the restriction on lending; and on the other hand, due to the positive performance of deposits, as can be seen from the high rate of customer renewals of term deposits written a year ago, despite their being at a significantly lower interest rate. As a result, the quarterly net interest income still shows strong resilience (€1,096m compared with the €1,102m in the second quarter). The quarterly fall of 13.6% in gross income (€4,900m year to date) can be explained by the economic situation, the low level of activity in Wholesale Banking, and the decline in asset prices in general, with a major impact on NTI. The area’s net attributable profit year to date stands at €1,162m. The NPA and coverage ratios remain stable, at 4.9% and 42% respectively as of 30-Sep-2011. The IPOs in July by CaixaBank, Bankia and Banca Cívica, combined with recent interventions in some savings banks, have begun to clear up uncertainty in terms of the restructuring of the banking sector.
- Of particular note in Eurasia is the contribution of the Chinese bank CNCB and the payment made by BBVA for its capital increase. Two factors have influenced the decision to undertake this operation: on the one hand, the need for it, due to the great strength of banking activity; and on the other hand, the wishes of the Chinese supervisor to maintain a highly solvent partner such as BBVA with the same stake as before the operation. The net attributable profit for the quarter is €257m, up on the figure of €251m the previous quarter. The year to date figure is €705m.
- Mexico continues to post sustained quality growth in business activity, above all in consumer finance, credit cards and customer funds, within a highly competitive financial system and interest rates at all-time lows. Net interest income has improved its year-on-year rate of growth (up 6.0% at constant exchange rates), while loan-loss provisions remain stable and the net attributable profit year to date is €1,275m (up 2.9% at constant exchange rates). It is important to highlight that BBVA Bancomer is the most profitable bank within its peer group, with a ratio of net interest income over ATA of 5.9%.
- South America continues to perform well, in both business activity (lending up 30.7% year-on-year and on-balance-sheet customer funds up 27.4%) and earnings. Gross income is up 19.0% over the last 12 months. This fact, combined with outstanding management of asset quality, has enabled the bank to continue to finance expansion projects and to show high rates of growth in net attributable profit which reached €754m year to date, up 11.2%.
- The United States is continuing with its process of changing its loan-book mix. In the third quarter of 2011, the favorable outcome in the new production of target portfolios of lending has offset the reduction in loans to the developer sector. This explains the quarter-on-quarter growth of 1.6% in gross customer lending in the area. The focus in customer funds continues to be on those of lower cost. The most important aspect in earnings continues to be the improvement in the cost of risk. The net attributable profit in the area year to date is €218m (up 1.5% year-on-year).
Finally, it is important to mention that a dividend of €0.10 per share was paid out in October 2011 under the Dividend Option scheme. The percentage of shareholders who have opted to receive new BBVA shares was over 91%, thus once more confirming the popularity of this new remuneration program.