The Spanish economy is in the midst of a far-reaching adjustment process of its activity and employment, a process which in the most likely scenario will extend to the first half of 2013 and will reduce GDP by 1.3%, in 2012 and by 1.1% in 2013. In 2012, the Government has implemented a broad agenda of structural reforms focused mainly on making the economy more competitive. Some of the most important reforms are as follows:
- A labor reform to make the job market more flexible and stimulate the growth of the most dynamic companies and sectors.
- An unprecedented fiscal adjustment to enable the deficit to be reduced to 3% of GDP in 2014.
- Public administrations’ suppliers payment mechanism which has meant a liquidity injection into the Spanish productive system.
- Lastly, financial system restructuring aimed at reestablishing and reinforcing its soundness.
In this context, Spanish financial institutions have carried out their banking activity in a context of necessary credit deleveraging (more pronounced in the business segment), low credit demand, liquidity tensions in the wholesale funding markets and impairment in asset quality.
As far as the Spanish financial system is concerned, the most important step is to complete the restructuring process which is being carried out. In 2012, as was explained in the BBVA Positioning and Environment section of the Executive Summary chapter, significant progress has been made in restructuring the financial system, with the implementation of major reforms. The most relevant reforms and the results achieved are outlined below:
- The coming into force of Royal Decree Laws 2/2012 and 18/2012 has meant the coverage of the total real-estate portfolio stands at 45% (74% for the problematic portfolio).
- In June, a top-down analysis of the Spanish financial system was conducted, in which capital requirements for the sector were established at between €51,000m and €62,000m under the most adverse scenario.
- On July 20, the Government requested external financial assistance in order to recapitalize the Spanish banking sector. This financial aid, set out in a Memorandum of Understanding (MoU), was established at up to €100,000m.
- First, the MoU covered the requirement of determining each bank’s capital requirements through an analysis of the asset quality on its balance sheet, and also carrying out stress tests in the event of a hypothetical extremely adverse macroeconomic environment. In September, the bottom-up exercise was carried out by Oliver Wyman. The study again showed the disparity within the Spanish financial system, with a core of strong banks while vulnerability is limited to a specific part of the industry.
- Second, it included the form of recapitalizing, restructuring or, as the case may be, winding up weak banks in an orderly way, on the basis of the plans established to address the capital deficits detected in previous tests. Last November, the European Commission approved the restructuring plans of the four Spanish banks taken into administration. According to the Commission, all four will need an injection of €37,000m in public funds. The bank taking most of the public aid is Bankia, which requires 49% of the total. In exchange, the Commission has required on a 60% reduction of their existing assets as of December 2010, to be carried out by 2017. The banks included initially in Group 3 have managed to meet their capital needs independently. December 20 saw the approval of the recapitalization plans of the banks included in Group 2. The capital they will receive as a whole is estimated at €1,865m. As in the case of the banks taken into administration, they will have to reduce the assets on their balance sheets as of December 31, 2010 by between 25% and 40% (depending on the bank) by 2017.
- Third, the creation of the Asset Management Company (SAREB), which would take over the State aided banks’ impaired assets. SAREB was set up on November 28, and the transfer of toxic assets by the nationalized banks was completed on December 31. Specifically, it has received €36,695m from BFA Bankia, Catalunya Banc, NCG Banco and Banco de Valencia, which in exchange have received senior debt issued by SAREB and guaranteed by the government. The transfer of assets for Group 2 took place on February 28 and required a new capital increase and the issue of subordinated debt, subscribed by the current shareholders and by new ones who joined.
In short, the restructuring process will enable a reduction of the installed capacity in the industry and lead to a financial system with fewer but solvent, healthy and more efficient banks.
Lastly, with regard to BBVA, it is worth noting:
- The top-down analysis carried out in June revealed that BBVA is one of the few Spanish banks that does not need additional capital under any stress scenario.
- The bottom-up stress test carried out by Oliver Wyman confirmed that BBVA will not need any additional capital, even in the most adverse macroeconomic scenario, thanks to the recurrence and soundness of its business model. It clearly shows the strength of the Group’s model in situations of extreme difficulty.
- On July 27, BBVA completed the acquisition of 100% of the capital stock of Unnim Banc, S.A. It contributes a loan book of €18 billion, 25% of which is regulated by an asset protection scheme (EPA), and includes customer funds of around €11 billion. This operation has great strategic meaning for the Bank, because it completes the franchise in Catalonia, where the market share is lower than the natural share in Spain. It will also add value once the BBVA business model is implemented. Lastly, it is a transaction with limited risks, given that 80% of the losses derived from exposure to the developer sector and to real-estate assets are covered through an asset protection scheme. The consolidation of Unnim continued in the fourth quarter of 2012 with significant progress being made:
- An agreement has been reached with the labor unions on the closing of branches and staff reductions. The agreement, which establishes a reduction of 600 employees through early retirement, mutually agreed leaves of absence, voluntary termination of employment contracts or resignations, has been favorably received. As of the close of December 2012, the total number of employees who had left the bank was 618.
- The offer to exchange Unnim preferred shares for BBVA shares has been very well received: 99.3% of the holders have opted for this advantageous offer, as it provides them with immediate liquidity through BBVA shares.
- An agreement was signed with the Unnim Social Project area to sponsor those projects which are in line with BBVA’s philosophy.