Business areas

This section presents and analyzes the most relevant aspects of the Group’s different business areas. Specifically, it shows a summary of the income statement and balance sheet, the business activity figures and the most significant ratios in each of them.

In 2017 the reporting structure of BBVA Group’s business areas remains basically the same as in 2016:

• Banking activity in Spain includes, as in previous years, the Retail Network in Spain, Corporate and Business Banking (CBB), Corporate & Investment Banking (CIB), BBVA Seguros and Asset Management units in Spain. It also includes the portfolios, finance and structural interest-rate positions of the euro balance sheet.
• Non Core Real Estate covers specialist management in Spain of loans to developers in difficulties and real-estate assets mainly coming from foreclosed assets, originated from both, residential mortgages, as well as loans to developers. New loan production to developers or loans to those that are not in difficulties are managed by Banking activity in Spain.
• The United States includes the Group’s business activity in the country through the BBVA Compass group and the BBVA New York branch.
• Turkey includes the activity of the Garanti Group. On March 22nd 2017 BBVA completed the acquisition of a 9.95% additional stake in Garanti. Thus, BBVA’s total stake in the said entity at present amounts to 49.85%.
• Mexico basically includes all the banking, real-estate and insurance businesses carried out by the Group in the country.
• South America basically includes BBVA’s banking and insurance businesses in the region.
• The rest of Eurasia includes business activity in the rest of Europe and Asia, i.e. the Group’s retail and wholesale businesses in the area.

In addition to the above, all the areas include a remainder made up basically of other businesses and a supplement that includes deletions and allocations not assigned to the units making up the above areas.

Lastly, the Corporate Center is an aggregate that contains the rest of the items that have not been allocated to the business areas, as it corresponds to the Group’s holding function. It includes: the costs of the head offices that have a corporate function; management of structural exchangerate positions; specific issues of equity instruments to ensure adequate management of the Group’s global solvency; portfolios and their corresponding results, whose management is not linked to customer relations, such as industrial holdings; certain tax assets and liabilities; funds due to commitments with employees; goodwill and other intangibles.

In addition to this geographical breakdown, supplementary information is provided for all the wholesale businesses carried out by BBVA, i.e. Corporate & Investment Banking (CIB), in all the geographical areas where it operates. This aggregate business is considered relevant to better understand the Group because of the characteristics of the customers served, the type of products offered and the risks assumed.

Lastly, as usual, in the case of the Americas, Turkey and CIB areas, the results of applying constant exchange rates are given in addition to the year-on-year variations at current exchange rates.

The information by areas is based on units at the lowest level and/or companies making up the Group, which are assigned to the different areas according to the geographical area in which they carry out their activity.

Major income statement items by business area (Million euros)

Gross income ⁽¹⁾, operating income ⁽¹⁾ and net attributable profit breakdown ⁽¹⁾ (Percentage. 1Q 2017)

⁽¹⁾ Excludes the Corporate Center.

⁽²⁾ Includes the areas Banking activity in Spain and Non Core Real Estate.

Major balance sheet items and risk-weighted assets by business area (Million euros)

Once the composition of each business area has been defined, certainmanagement criteria are applied, of which the following are particularly important:

• Risk adjusted return. Calculation of risk adjusted return per transaction, customer, product, segment, unit and/or business area is sustained on ERC, which is based on the concept of unexpected loss at a specific confidence level, depending on the Group’s capital adequacy targets. The calculation of the ERC combines credit risk, market risk, structural balance-sheet risk, equity positions, operational risk, fixed-asset risk and technical risks in the case of insurance companies. These calculations are carried out using internal models that have been defined following the guidelines and requirements established under the Basel III capital accord.
• Internal transfer prices. BBVA Group has a transfer prices system whose general principles apply in the Bank’s different entities, business areas and units.
• Allocation of operating expenses. Both direct and indirect costs are allocated to the business areas, except where there is no clearly defined relationship with the businesses, i.e. when they are of a clearly corporate or institutional nature for the Group as a whole.
• Cross-selling. In some cases, adjustments are required to eliminate shadow accounting entries that are registered in the earnings of two or more units as a result of crossselling incentives.

Interest rates (Quarterly averages. Percentage)

Exchange rates (Expressed in currency/euro)

Banking activity in Spain

Highlights

• Lending continues its downward trend.
• Recovery in income from fees and commissions and excellent NTI.
• Positive trend in operating expenses.
• Accounting for restructuring costs to improve efficiency.
• Stability in risk indicators.

Business activity ⁽¹⁾
(Year-on-year change. Data as of 31-03-2017)

⁽¹⁾ Excluding repos.

Net interest income/ATA
(Percentage)

Operating income (Million euros)

Net attributable profit (Million euros)

Breakdown of performing loans under management ⁽¹⁾
(31-03-2017)

Breakdown of customer funds under management ⁽¹⁾
(31-03-2017)

⁽¹⁾ Excluding repos.

⁽¹⁾ Excluding repos.

Macro and industry trends

The Spanish economy grew by 0.7% in the fourth quarter of 2016, maintaining steady output growth. The economy registered average annual GDP growth of 3.2% in 2016. Domestic demand remains robust.

The Spanish financial system continues with household and company deleveraging, albeit at a slower pace than in previous years. Total domestic private-sector lending fell by 4.1% in year-on-year terms, according to data to February 2017. However, new lending to households and SMEs remains on an upward trend since January 2014. New retail lending increased by 9.3% in year-on-year terms (according to March 2017 data). The total amount of new lending rose by 3.1% over the same period, despite a 5.7% decline in new lending to large companies. Asset quality indicators in the system continue to improve. The sector NPL ratio stood at 9.1% in February, 0.98 percentage points below the previous year, on the back of a significant reduction is non-performing loans (down 13.2% year-on-year). Nonetheless, system profitability declined in 2016, mainly because of the increase in provisions in the fourth quarter, partly linked to the CJEU ruling on mortgage floor clauses. Thus, the sector ROE closed 2016 at 2.7%. The liquidity position of Spanish institutions is good. The funding gap (difference between loans and deposits) is currently at an all-time low. Finally, March 2017 data show that banks increased their recourse to ECB liquidity by 12% over the last twelve months, taking advantage of the final TLRO (targeted longer-term refinancing operations) auctions.

Activity

Lending (performing customer loans under management) has remained on a downward path. It has fallen by 3.3% in year-on-year terms and 1.1% on a quarterly basis, closely related to the reduction in the residential mortgage and public-sector portfolios. However, it is worth highlighting the positive performance of new loan production, which registered year-on-year growth of 13.6% for companies and 30.7% for consumer lending (with final back-book balance at 31-Mar-2017 up 18.4% over the last twelve months and 4.8% over the last three months).

In terms of asset quality, net additions to NPLs declined again. Together with a reduction in lending, this has pushed the NPL ratio down to 5.8% at 31-Mar-2017 (up 2 basis points in the last quarter and down 63 basis points in the last twelve months). The coverage ratio closed the quarter at 53%.

Customer deposits under management declined by 2.0% year-on-year and by 1.4% over the last quarter. The reduction in time deposits (down 22.4% and 9.4% respectively) was the main driver, given that current and savings accounts performed strongly (up 28.3% and 5.9% respectively).

Finally, off-balance sheet funds grew by 8.4% year-on-year and by 2.4% on a quarterly basis, with a notable increase in mutual funds (up 12.5% and 4.3% respectively).

Result

The key highlights of the income statement in the area in the first quarter of 2017 are as follows:

• 2.4% year-on-year decline in cumulative net interest income to March 2017 as a result of lower loan volumes, and sales of wholesale portfolios. However, the latter has had a positive impact on the area’s NTI.
• Income from fees and commissions recovered between January and March, thanks to the positive contribution from wholesale businesses. This represents a modest decline of 1.4% relative to the same period of 2016, after a very strong performance during the first quarter of last year.
• The contribution from NTI was greater than in the same period in 2016, largely due to the strong performance of the Global Markets unit.
• The other income/expenses heading registered a 2.4% year-on-year decline. Income from insurance activity was a highlight within this category. While registering a slight 2.5% year-on-year decline, the insurance business performed strongly during the first quarter of 2017 (up 18.7% compared with the last quarter of 2016), thanks to the positive performance of insurance underwriting margins, which are very closely linked to strong increases in new policies in the quarter and the low claims ratio.
• Therefore, the area’s gross income posted a positive performance (up 7.4%).
• Operating expenses declined by 3.6% over the last three months and by 4.0% year-on-year. This decline is linked to synergies arising from the integration of CX and the implementation of efficiency plans in the last quarter of 2016 (around 130 branches were closed in February).
• Consequently, both the area’s efficiency ratio and operating income registered clear improvements.
• Impairment losses on financial assets declined by 36.0% year-on-year as a result of reduced provisioning requirements. The cost of risk in the area closed the quarter at 0.38%.
• Finally, the provisions (net) and other gains (losses) heading increased significantly, mainly due to €148m of restructuring costs.

Overall, net attributable profit generated by banking activity in Spain in the first quarter of 2017 was €375m, representing a year-on-year increase of 54.2%.

Financial statements and relevant business indicators (Million euros and percentage)

Income statement	1Q17	∆%	1Q16
Net interest income	935	(2.4)	959
Net fees and commissions	382	(1.4)	388
Net trading income	224	193.2	77
Other income/expenses	134	(2.4)	138
of which Insurance activities (1)	108	(2.5)	110
Gross income	1,676	7.4	1,561
Operating expenses	(856)	(4.0)	(891)
Personnel expenses	(479)	(3.2)	(495)
Other administrative expenses	(297)	(6.5)	(318)
Depreciation	(80)	0.6	(79)
Operating income	821	22.6	669
Impairment on financial assets (net)	(165)	(36.0)	(258)
Provisions (net) and other gains (losses)	(128)	127.1	(56)
Profit/(loss) before tax	528	48.7	355
Income tax	(152)	37.0	(111)
Profit/(loss) for the year	376	54.0	244
Non-controlling interests	(1)	(11.1)	(1)
Net attributable profit	375	54.2	243

• ⁽¹⁾ Includes premiums received net of estimated technical insurance reserves.

Balance sheets	31-03-17	∆%	31-12-16
Cash, cash balances at central banks and other demand deposits	3,794	(69.0)	12,230
Financial assets	95,503	(4.9)	100,394
Loans and receivables	206,865	(3.6)	214,497
of which Loans and advances to customers	179,050	(1.2)	181,137
Inter-area positions	6,725	44.4	4,658
Tangible assets	1,426	(0.7)	1,435
Other assets	3,074	16.8	2,632
Total assets/liabilities and equity	317,386	(5.5)	335,847
Financial liabilities held for trading and designated at fair value through profit or loss	37,584	(7.2)	40,490
Deposits from central banks and credit institutions	58,484	(11.4)	66,029
Deposits from customers	176,810	(2.1)	180,544
Debt certificates	34,589	(9.7)	38,322
Inter-area positions	-	-	-
Other liabilities	671	(45.0)	1,220
Economic capital allocated	9,247	0.1	9,242

Relevant business indicators	31-03-17	∆%	31-12-16
Loans and advances to customers (gross) (1)	178,638	(1.1)	180,595
Non-performing loans and guarantees given	11,726	(0.8)	11,819
Customer deposits under management (1)	172,244	(1.4)	174,679
Off-balance sheet funds (2)	57,492	2.4	56,147
Risk-weighted assets	110,739	(2.2)	113,194
Efficiency ratio (%)	51.0		55.8
NPL ratio (%)	5.8		5.8
NPL coverage ratio (%)	53		53
Cost of risk (%)	0.38		0.32

• ⁽¹⁾ Excluding repos.
• ⁽²⁾ Includes mutual funds, pension funds and other off-balance sheet funds.

Non Core Real Estate

Highlights

• The positive trend in data from the Spanish real-estate sector continues.
• New strategy in the area, focused on growing sales and reducing stock, while aiming to preserve the economic value of the assets.
• Decline in net exposure and NPLs.

Industry trends

2016 was a positive year for the real-estate sector with sales growth pushing up house prices and construction activity.

According to the latest available information from the General Council of Spanish Notaries, nearly 460,000 homes were sold in 2016, amounting to a 13.9% year-on-year increase. 2017 has begun with renewed impetus in house sales. Transactions rose by 13.9% year-on-year in the first two months of the year.

According to the latest data published by the National Institute for Statistics (INE), the price of homes rose by 4.5% year-on-year in the fourth quarter of 2016. This growth is somewhat higher than in the previous quarter (4.0%) and may be a sign of a reversion of the moderate trend started from the second quarter of 2016.

The mortgage market retains momentum, thanks to increased sales against a backdrop of low financing costs, with interest rates remaining at record low levels, albeit with some signs of moderation in the last part of 2016. The volume of new residential mortgage loans granted to families in 2016 grew by 5.0% in year-on-year terms, or 17.4% if all transactions whose conditions were renegotiated are excluded. New lending in the first two months of 2017 has increased by 8.1%.

Slightly over 64,000 housing permits were granted for construction activity in 2016, representing a year-on-year increase of 28.9%. This now marks three consecutive years of growth in residential construction.

Activity

BBVA continues with its strategy of reducing its exposure to the real-estate sector in Spain, both in the developer segment (lending to real-estate developers plus foreclosed assets derived from those loans) and in other real-estate assets. As of 31-Mar-2017, the net exposure stood at €9,293m, a fall of 9.0% from December 2016, driven primarily by wholesale transactions during the last quarter.

During the first three months of 2017, on top of steady growth in standard retail sales there were two notable sales of wholesale real-estate assets portfolios: the sale of a portfolio of service-sector rental properties with a gross value of around €300m; and the sale of around 3,400 residential properties with a gross value of around €362m. Overall, 10,884 units were sold during the quarter at a sales price of €860m. This represents a significant increase on the same period of last year both in the number of units and sales price. These figures include outflows of around 1,500 rental homes contributed for the participated company, Testa Residencial. The policies and commercial plans established for each asset type will continue in 2017 with the aim of accelerating sales and reducing the stock, with specific actions targeted at the product which has spent the longest time on the Bank’s balance sheet. Work will also be carried out to increase the pace of reduction of stock through the sale or contribution of packages of assets to participated real-estate companies or through commercial agreements with developers. The different initiatives under consideration are analyzed on a case-by-case basis, with the goal of preserving the economic value of the assets.

In terms of total real-estate exposure, including outstanding loans to developers, foreclosed assets and other assets, the coverage ratio was 56% at the close of the first quarter of 2017, an improvement of one percentage point on 31-Dec-2016.

Non-performing loans have fallen again in the first quarter, with limited new additions of NPLs over the period and a coverage ratio of 53%.

Real-estate developer loans
(Million euros)

Coverage of real-estate exposure (Million of euros as of 31-03-17)

Result

This business area posted a cumulative loss in the first quarter of 2017 of €109m, compared with a loss of €113m in the same period last year. A positive aspect worth highlighting is the reduction in provisioning needs for impairment losses on financial assets. Results for this quarter also reflect the loss on the sale of 3,400 foreclosed residential properties. These types of wholesale transactions increase the pace of reduction in the Group’s real-estate exposure, albeit incurring a larger discount than on retail sales. In addition, the area generated lower net interest income due to the transfer of part of the outstanding portfolio to banking activity in Spain in the second and fourth quarters of 2016.

Financial statements (Million euros)

The United States

Highlights

• Lending continues to focus on selective and profitable growth.
• Positive trend in more liquid funds and good management of their cost.
• Good performance in more recurring revenues.
• Containment of operating expenses and of the impairment of financial assets.
• Improved risk indicators.

Business activity ⁽¹⁾
(Year-on-year change at constant exchange rate. Data as of 31-03-2017)

⁽¹⁾ Excluding repos.

Net interest income/ATA
(Percentage. Constant exchange rate)

Operating income
(Million euros at constant exchange rate)

⁽¹⁾ At current exchange rate: +25,1%.

Net attributable profit
(Million euros at constant exchange rate)

⁽¹⁾ At current exchange rate: +173,9%.

Breakdown of performing loans under management ⁽¹⁾
(31-03-2017)

Breakdown of customer funds under management ⁽¹⁾
(31-03-2017)

Macro and industry trends

U.S. GDP grew by just under 3% in annualized terms in the second half of 2016, after a relatively weak first half of the year (growth at around an annualized average of 1%), but progress has been at dual speed, with strong consumption offset by practically stagnant investment. Despite the support provided by employment growth and easy credit, the expansion of private consumption will probably slow, as rising prices and deleveraging will have an impact on household spending. The outlook for investment is slightly more optimistic, supported by improved expectations, stable oil prices and sustained growth in housing supply, although its rate of increase is expected to be very moderate.

With regard to the currency market, the trend in dollar gains against the euro in the last quarter of 2016 was broken at the start of the year, and has reversed slightly since that point. In fact, the dollar has lost 1.4% in the quarter, partly reflecting the Fed’s statement on gradualism in its monetary policy normalization process, and partly due to the slightly improved situation in Europe.

The financial system continues in good shape overall despite the environment of low interest rates. With data as of the close of 2016, the system’s NPL ratio stands at 2.07%, with a slight upturn on the figure for the third quarter of last year (2.05%). Despite this, the NPL ratio is still at a very positive level. With regard to lending, according to the latest available information as of February 2017 it has remained practically stable over the last twelve months. The total volume has fallen back 0.4% in year-on-year terms, with a decline of 1.3% in commercial loans and growth of 1.7% in residential home loans and 4.9% in consumer finance. The trend for total deposits in the system continues upward, with year-on-year growth of 2.3% as of February 2017.

Activity

All the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at current exchange rate, can be seen in the attached tables of financial statements and relevant and business indicators.

Lending activity (performing loans and advances under management) continues the trend to moderation which began in the second half of 2015. The trend is supported by the area’s selective growth strategy in the most profitable portfolios and segments that represent more efficient capital consumption. As a result, this heading has fallen 4.4% year-on-year and declined 1.4% over the quarter. By portfolios, growth is basically focused on business lending (up 1.3% in the quarter), in some segments of loans to companies (specifically on real estate developer mortgages, mortgage collateralized loans and cards), and loans to the public sector (up 4.9% in the last three months).

With regard to asset quality, the main indicators improved over the quarter. The NPL ratio closed at 1.3%, a decline of 17 basis points compared with the close of 2016. The coverage ratio also improved to 107% (94% as of 31-Dec-2016).

Customer deposits under management have declined slightly (down 3.4% year-on-year and 0.7% in the quarter), strongly influenced by the reduction of time deposits (-24.1% and -12.9% respectively), stemming from the implementation of measures by the area to manage their cost. On the contrary, current and savings accounts maintain their positive trend and increased by 3.2% year-on-year and 2.7% over the quarter.

Result

The United States generated a cumulative net attributable profit income through March 2017 of €134m, much higher than that of the same period of the previous year. The most relevant aspects of the area’s income statement are as follows:

• Net interest income continues to perform positively, with a cumulative figure through March rising by 8.2% over the last twelve months. This is due to the combined result of the measures adopted by BBVA Compass to improve loan yields and reduce the cost of deposits, as well as the Fed’s interest-rate hikes.
• Income from fees and commissions has increased year-on-year by 15.5%, basically due to the positive trend in deposit and asset management fees, as well as those generated by the corporate and investment banking business.
• Reduction of 31.2% in NTI compared to the amount of the same period of the previous year. The good performance of the Global Markets unit in the quarter was not enough to offset the capital gains on portfolio sales done in the first quarter of 2016. However, this heading grew 32.5% compared to the previous quarter.
• Operating expenses were flat, showing a decline of 0.9%. Worth of note is the reduction in personnel costs, which offsets the increase in general expenses.
• Lastly, impairment losses on financial assets were significantly down compared to the first quarter of 2016 (down 23.9%) when extraordinary provisions were allocated in response to the rating downgrade of some companies operating in the energy (exploration & production) and metals & mining (basic materials) sectors. As a result, the cumulative cost of risk as of 31-Mar-2017 stood at 0.49%, a significant decline compared to the same period of 2016.

Financial statements and relevant business indicators
(Million euros and percentage)

México

Highlights

• Good year-on-year performance of lending, despite moderate economic activity.
• Expenses continue to increase below gross income and net attributable profit is growing year-on-year at double-digit rates.
• Asset quality resilience. Better than expected cost of risk.

Business activity ⁽¹⁾
(Year-on-year change at constant exchange rate. Data as of 31-03-2017)

⁽¹⁾ Excluding repos.

Net interest income/ATA
(Percentage. Constant exchange rate)

Operating income
(Million euros at constant exchange rate)

Net attributable profit
(Million euros at constant exchange rate)

Breakdown of performing loans under management ⁽¹⁾
(31-03-2017)

Breakdown of customer funds under management ⁽¹⁾
(31-03-2017)

Macro and industry trends

GDP grew by 2.1% in Mexico in 2016, slightly below the trend registered in recent years. Stronger growth in the second half of the year helped compensate the slowdown in the first six months, primarily driven by an upturn in exports linked to the U.S. economic recovery.

The significant depreciation of the Mexican peso in 2016 has reversed since mid-January 2017, thanks to moderation from the United States with respect to future trade policy and, to a lesser degree, the hedging program implemented by Banxico. Exchange rate developments, together with an easing of the increase in inflation, could allow Banxico to soften the path of interest rate hikes relative to 2016.

The Mexican financial system maintains very comfortable capital adequacy and asset quality indicators. The capital adequacy ratio stood at 14.9% at the close of 2016, while the NPL ratio declined to 2.2% to January 2017, according to data released by the National Securities Banking Commission (CNBV). Nominal year-on-year growth in the loan portfolio in January was similar to growth rates registered during the previous year (up 11.6%). All portfolios contributed to this good performance. Traditional bank deposits (demand and time) rose 11.3% year-on-year in nominal terms, according to CNBV data to January 2017, with both components performing similarly.

Activity

All rates of change given below, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

BBVA in Mexico continued registering good growth in its lending (performing customer loans under management) in the first quarter of 2017, despite the slowdown in economic activity over the period. The portfolio grew 9.8% year-on-year and by 0.3% quarter-on-quarter. As a result, BBVA Bancomer retains its leadership, with a market share for its current portfolio of 23.5% (according to local information from the CNBV for the close of February 2017).

At the end of March, the weight of the retail portfolio is slightly greater than the wholesale portfolio (51% and 49% respectively). The latter grew by 10.4% year-on-year, although it declined 1.3% over the quarter (explained by developments in the dollar portfolio, which was affected by peso appreciation in recent months). Business loans performed particularly well, including loans to corporate clients and mid-sized companies, which rose 11.5% in the last year (down 0.8% in the first quarter of 2017), excluding developer loans. Meanwhile lending to housing developers remains on a positive trend since last year, with an increase of 24.5% year-on-year (down 0.2% on a quarterly basis).

The retail portfolio registered 9.2% year-on-year growth and 1.8% quarterly growth, primarily driven by SME and auto lending, which rose by 17.2% and 23.5% respectively in the last twelve months (7.7% and 4.7% respectively in the quarter). Meanwhile, credit cards sustained single digit year-on-year growth (up 3.3%), but declined 3.1% over the quarter. Nonetheless, new production up to March 2017 increased by 10.4% year-on-year. The balance of the housing portfolio was affected by the ageing effect, and grew by 7.4% over the last twelve months and 2.3% quarter on quarter, despite new residential mortgage lending performing positively (up 5.1% year-on-year).

Lending growth has been accompanied by stable asset quality indicators. The NPL and coverage ratios closed March at 2.3% and 128% respectively.

Total customer funds (customer deposits under management, mutual funds, pension funds and other offbalance sheet funds) posted year-on-year growth of 6.8% (up 0.9% in the first quarter of the year). All products performed positively: current and savings accounts were up 10.9% year-on-year (up 1.8% on the previous quarter), and time deposits grew by 6.4% (down 0.3% over the quarter). BBVA in Mexico has a profitable funding mix with low-cost items accounting for over 80% of total customer deposits under management. Mutual funds registered year-on-year growth of 3.6%, and 0.3% quarter-on-quarter.

Result

The highlights of the income statement for Mexico for the first quarter of 2017 are summarized below:

Overall, BBVA in Mexico posted a net attributable profit in the first three months of the year of €536m, a year-on-year increase of 19.2%.

Financial statements and relevant business indicators (Million euros and percentage)

Turkey

Highlights

• Activity continues strong, despite uncertainties in the environment.
• Very positive behavior of more recurring revenues.
• Stable asset quality indicators.

Business activity ⁽¹⁾
(Year-on-year change at constant exchange rate. Data as of 31-03-2017)

⁽¹⁾ Excluding repos.

Net interest income/ATA
(Percentage. Constant exchange rate)

Operating income
(Million euros at constant exchange rate)

Net attributable profit
(Million euros at constant exchange rate)

Breakdown of performing loans under management ⁽¹⁾
(31-03-2017)

⁽¹⁾ Excluding repos.

Breakdown of customer funds under management ⁽¹⁾
(31-03-2017)

⁽¹⁾ Excluding repos.

Macro and industry trends

After a decline of more than 1% in the third quarter of 2016, Turkey’s economic growth in the fourth quarter of 2016 bounced back to 3.5% in annualized terms, boosted by macroprudential measures and increased fiscal stimuli. As a result, GDP grew on average by just under 3% in 2016. Inflation this year has continued to increase to more than 11% in March 2017, largely due to the base effect of food prices and significant depreciation of the Turkish lira in the second half of 2016. Inflation could rise further in April-May before moderating in the summer, although rates will still be high.

The CBRT has been tightening monetary policy since the end of last year. At its meeting in March it once more raised the liquidity window interest rate by 75 basis points, following the hike of 100 basis points at the start of the year, to 11.75%, while maintaining other interest rates constant. So far this year, the CBRT has raised the average funding rate by 320 basis points to 11.50% as of April 5. Moreover, its latest statement has announced that this stance would be maintained until inflationary pressure is significantly reduced. This tougher monetary policy, combined with the improvement in the global financial markets, has helped contain downward pressure on the Turkish lira. However, geopolitical uncertainty still weighs on the currency’s movements, and could continue to do so in the future.

The Turkish financial sector is maintaining the trend shown in recent quarters. The year-on-year rise in lending, adjusted for the effect of the depreciation of the Turkish lira, was 14% through March 2017, supported by commercial lending. Deposit gathering in the first quarter of 2017 has maintained the strength shown last year, with a 10% year-on-year growth, also according to March data, adjusted for the exchange-rate impact. Of particular note is the growth in Turkish lira deposits (up 15% year-on-year), which contrasts with the fall of 2.3% in foreign-currency deposits. The NPL ratio in the system remains at 3.2%, according to the latest available information as of March 2017.

Activity

In March 2017, BBVA completed the acquisition of an additional 9.95% stake in the share capital of Garanti, making BBVA’s total stake in this entity 49.85%, which has continued to be incorporated into the Group’s financial statements by the full integration method.

Unless expressly stated otherwise, all the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate. These rates, together with changes at current exchange rate, can be seen in the attached tables of financial statements and relevant and business indicators.

The area’s lending activity (performing loans and advances under management) performed well, with an increase of 5.1% over the quarter (up 19.6% year-on-year). This growth is strongly focused on loans in Turkish lira, which have grown in Garanti Bank above the figure of the sector as a whole, while loans in foreign currency have continued to decline. All segments had a positive contribution. Worth of note are corporate loans (which include the so called business banking loans) that increased their quarterly rate of growth thanks to the extension of the Credit Guarantee Funds scheme (state guaranteed loans). In addition, the positive trend continues in general purpose loans, basically consumer finance for the retail segment, and in the mortgage portfolio. In contrast, auto loans have contracted in the first three months of 2017. With these figures, Garanti maintains its leading position in most of the lending segments.

Asset quality indicators remain stable, despite the political uncertainty and the volatile exchange rate over the first three months of 2017. The NPL ratio closed the quarter at 2.6% and far below the average in the banking sector (3.2%). The coverage ratio closed March at 128% (124% at the close of 2016).

With respect to customer funds, customer deposits continue to be the main source of funding for the area (around 55% of total liabilities), with an increase over the last three months of 3.9% and 14.8% year-on-year (customer deposits under management). There has been a shift of funds over the quarter from Turkish lira in Garanti Bank to foreign currency, given the high level of demand in the latter. As a result, deposits in Turkish lira have declined in the quarter and foreign-currency deposits have grown. By category, there was a good performance in sight accounts, which grew by 6.5% year-to-date. Their total weight as a proportion of customer deposits under management increased to 26.4%.

Result

The trend in the area for the first quarter of 2017 was very positive, with a cumulative net attributable profit of €160m, which represents a rise of 45.7% in year-on-year terms. The most significant aspects of Turkey’s income statement are as follows:

• Positive performance of net interest income, which was up 27.0% on the figure for the same period in 2016 (+2.0% against the figure for the fourth quarter of 2016), thanks to the increased volume of activity and customer spreads.
• Increase in income from fees and commissions (up 14.6% year-on-year and 22.3% in the last three months), despite the fact that the suspension on fees for the maintenance and administration of accounts in the retail segment enforced by the Turkish State Council remains in force. Such rise is the result of a good diversification of these revenues.
• Lower negative contribution of NTI compared to the previous quarter, due basically to a lower depreciation of the Turkish lira in the period.
• Strict cost control explains why operating expenses have fallen 6.4% with respect to the fourth quarter of 2016 (up 11.5% year-on-year as a consequence of the negative impact of the exchange rate on costs denominated in foreign currency and higher inflation levels). As a consequence, the efficiency ratio as of March 2017 has improved to 39.8%.
• Finally, there has been an increase in the impairment losses on financial assets (up 20.7% year-on-year), which is in line with the increase in activity in the same period (up 19.6%). As a result, the cost of risk in the area closed the quarter at 0.85%.

Financial statements and relevant business indicators (Million euros and percentage)

South America

Highlights

• Growth continues to slow in lending activity, in line with the seasonal nature of the period and the current macroeconomic environment.
• Positive trend of more recurring revenues.
• Expenses conditioned by the high inflation in some countries.
• The macroeconomic environment continues to influence the behavior of the risk indicators.

Business activity ⁽¹⁾
(Year-on-year change at constant exchange rate. Data as of 31-03-2017)

⁽¹⁾ Excluding repos.

Net interest income/ATA
(Percentage. Constant exchange rate)

Operating income
(Million euros at constant exchange rate)

⁽¹⁾At current exchange rate: +9.3%.

Net attributable profit
(Million euros at constant exchange rate)

⁽¹⁾ At current exchange rate: +1.6%.

Breakdown of performing loans under management ⁽¹⁾
(31-03-2017)

⁽¹⁾ Excluding repos.

Breakdown of customer funds under management ⁽¹⁾
(31-03-2017)

⁽¹⁾ Excluding repos.

Macro and industry trends

South America has been going through a period of cyclical weakness since 2014, leading in the last two years to a contraction of economic growth. Lower foreign demand for commodities, which has negatively impacted prices and, most recently, political factors in a number of countries, have affected the confidence of agents and thus consumption and investment, albeit to significantly varying degrees in each country; there has been a difference between the more positive performance of Andean countries and more negative developments in Atlantic countries. However, the outlook is positive, as starting in 2017 South America will once more return to the path of recovery. Expectations on the sustainability of growth in China and the positive trend demonstrated by global growth will have a positive, though moderate, impact on the price of oil and other commodities. Added to this factor is the reduction in market volatility, following the elections in the United States, so a capital inflows can be expected to continue, boosted by the search for returns.

This situation of weak economic growth and moderate inflation has led most central banks (except for Colombia) to adopt slightly more accommodative monetary policies. and this is expected to continue for the rest of the year. Exchange rates in the region have all gained against the euro over the last year, except for the Venezuelan bolivar.

As regards the financial system within BBVA’s regional footprint, key profitability and capital adequacy indicators are high, while NPL ratios remain in check in aggregate terms (with some differences between the countries). In addition, there has been sustained growth in lending and deposits.

Activity

All the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at the current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

The balance of lending (performing loans and advances to customers under management) is similar to the close of December 2016 (down 0.6%), affected by the seasonal factors, weak economic growth in the region, and changes in the portfolios denominated in U.S. dollars (impacted by the depreciation of the dollar against some local currencies). By segments, the individual customer segment has been strong (above all consumer finance), offsetting the moderation in the corporate and public sectors. By country, the biggest growth was in Argentina (up 5.0%) and Chile (up 2.5%). The year-on-year rise in the region has moderated to 6.1% with respect to the figure at the close of 2016. It is supported by the credit card and consumer portfolios, both with double-digit growth.

In terms of asset quality, the macroeconomic situation continues to shape the NPL and coverage ratios, which closed the quarter at 3.3% and 96% respectively.

On the liabilities side, customer funds have grown over the quarter to 3.4% (up 12.0% year-on-year). This trend is explained by the good performance of all line items, particularly time deposits (up 2.2% in the quarter and 16.2% year-on-year) and off-balance sheet funds (up 8.6% and 19.9% over the quarter and year-on-year, respectively). By country, there has been a positive trend in Argentina (up 10.6% over the quarter and 61.2% year-on-year) and to a lesser extent Colombia (up 7.4% and 8.5% respectively) and Paraguay (up 3.3% and 3.5%, respectively).

Result

In the first quarter of the year, South America posted a net attributable profit of €185m, down 8.7% year-on-year on the figure for the first quarter of 2016. The most relevant aspects of the year-on-year changes in the income statement in the area are:

By country, net interest income in Argentina has posted moderate growth due to the surplus cash resulting from extra cash in the system. Income from fees and commissions has performed very well and NTI has moderated after the effect of the end of the “exchange clamp” in the first quarter of 2016. Expenses have been affected by high inflation and increased provisions linked to the performance of the retail business. In Chilethe positive trend in gross income and the fall in expenses have easily offset the increase in the nominal tax rate. In Colombia gross income performed well, thanks to the good performance of net interest income and income from fees and commissions, although mitigated by the increased provisions mentioned above. In Peru there was an increase in income from fees and commissions and higher NTI, together with tighter control over expenses.

Financial statements and relevant business indicators (Million euros and percentage)

South America. Data per country (Million euros)

Rest of Eurasia

Highlights

• The loan book continues its upward path begun in the fourth quarter of 2016.
• Reduction in the balance of deposits.
• Significant progress in earnings, supported by the good performance of the Global Markets unit and reduction in costs.

Macro and industry trends

The economy of the Eurozone grew at a quarterly rate of 0.4% in the second half of 2016, supported by the strength of domestic demand. However, the uncertainty generated by some events that will occur in 2017 (the start of Brexit negotiations and presidential elections in France and Germany) make it difficult to think that growth will pick up significantly over the coming quarters. The domestic support for growth is still in place and economic policies continue to foster recovery. In this context, fiscal policy will be expansive in the area as a whole in 2017, while the European Central Bank (ECB) remains committed to maintaining an accommodative monetary policy until there are clear indications that the movement of inflation toward its target is clearly sustainable.

Activity and result

This business area basically includes the etail and wholesale business carried out by the Group in Europe (excluding Spain) and Asia.

The area’s loan book (performing loans to customers under management) increased in the first quarter of 2017 by 3.8% on the figure at the close of 2016. In the first three months of the year activity in the branches in Europe has grown by 5.5%. In Asia it fell by 2.9%, though there was an increase of 3.8% year-on-year.

With respect to the main credit risk indicators, there has been a slight upturn in the NPL ratio since December 2016, closing March at 2.8% (compared with 2.7% in December), while the coverage ratio closed at 75% (84% as of 31-Mar-2016).

Customer deposits under management have fallen by 9.3% over the quarter, in both branches in Europe (down 11.0%) and Asia (down 2.6%).

With respect to earnings, gross income has increased significantly (up 9.3% on the fourth quarter of 2016 and 23.8% compared to the first quarter of 2016), mainly due to the better results from the Global Markets unit, supported by both the distribution franchise and leverage. There has been an outstanding performance by trading activity, particularly in the category of equity, thanks to positive management of volatility. In addition, operating expenses continue to moderate (down 5.6% year-on-year), due mainly to personnel expenses being kept in check. Finally, there were no relevant changes over the quarter in impairment losses on financial assets, so this geographical area has contributed €40m to net attributable profit in the first quarter of 2017, 145.7% more than in the same period in 2016.

Financial statements and relevant business indicators (Million euros. Percentage)

Corporate Center

The Corporate Center basically includes: the costs of the head offices that have a corporate function; management of structural exchange-rate positions; specific issues of equity instruments to ensure adequate management of the Group’s global solvency; portfolios and their corresponding earnings, whose management is not linked to customer relations, such as industrial holdings; certain tax assets and liabilities; funds due to commitments with employees; goodwill and other intangibles. The highlights of its income statement for the first quarter of 2017 are summarized below:

• Greater contribution of NTI than in the same period of the previous year, and than in the fourth quarter of 2016. This is mainly due to the registration of capital gains of €204m before tax (€174m after tax) from the sale on the market of 1.7% of CNCB.
• Containment of operating expenses, which declined 7.7% year-on-year.

Overall, the Corporate Center posted a negative cumulative result of €122m, which compares with a loss of €290m in the first quarter of 2016.

Financial statements (Million euros. Percentage)