The area of Spain includes the Retail Network, with the segments made up of individual customers, private banking and small companies and businesses in the domestic market; Corporate and Business Banking (CBB), which handles the needs of SMEs, corporations and government in the country; Corporate and Investment Banking (CIB), which includes business with large corporations and multinational groups and the liquidity asset management and distribution business in the domestic market; and other units, among them BBVA Seguros and Asset Management (management of mutual and pension funds in Spain). Starting in 2013, it also includes the portfolios, financing and structural interest-rate positions of the euro balance sheet.
Industry Trends
In the latter part of 2013, the Spanish economy began to emerge from a long period of recession. This still incipient recovery is underpinned by the positive performance in exports, and a less contractionary domestic demand. This has had a positive impact on market confidence. As a result, there has been no major financial tension, sovereign risk premiums have fallen significantly and the economy has opened up to international financial flows. Even so, the recovery is still modest, particularly in terms of unemployment, which remains at over 25% of the active population.
As far as the financial system is concerned, the process of restructuring and reorganization of the weakest part of the sector has continued steadily. In late 2013 it was confirmed that the financial assistance program agreed with the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) (known as the Troika) would be concluding. In November, the IMF and the European Commission each published the fourth monitoring report on the restructuring of the financial sector, highlighting the progress made in banks' recapitalization and restructuring and the efforts made in supervising and monitoring the system.
Lastly, the deleveraging process continues in the financial industry, although there has been an improvement in lending in Spain in recent months, driven by the corporate portfolio. However, the outstanding balance of lending continues to decline, which has a negative impact on the sector's NPA ratio. At the end of October 2013 it stood at 13% for the system as a whole.
Earnings and Activity
Earnings in the area have been significantly affected in 2013 by four exceptional factors. First, the elimination of the so-called “floor clauses” for mortgage loans granted to consumers. Second, the temporary increase in loan-loss provisions for refinanced loans. Third, the accounting of the exceptional contribution to the Deposit Guarantee Fund in order to comply with Royal Decree 6/2013. And finally, the capital gains generated from the operation on the individual life and accident insurance portfolio.
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| Spain | Millions of Euros | ||
|---|---|---|---|
| 2013 | 2012 | % Change | |
| NET INTEREST INCOME | 3,830 | 4,748 | (19.3) |
| Net fees and commissions | 1,376 | 1,342 | 2.5 |
| Net gains (losses) on financial assets and liabilities and net exchange differences | 807 | 256 | 215.2 |
| Other operating income and expenses | 82 | 318 | (74.2) |
| GROSS INCOME | 6,095 | 6,665 | (8.5) |
| Operating expenses | (3,014) | (2,887) | 4.4 |
| Administration costs | (2,903) | (2,788) | 4.1 |
| Personnel expenses | (1,851) | (1,795) | 3.1 |
| General and administrative expenses | (1,052) | (993) | 5.9 |
| Depreciation and amortization | (111) | (99) | 12.2 |
| OPERATING INCOME | 3,081 | 3,778 | (18.4) |
| Impairment losses on financial assets (net) | (2,577) | (1,853) | 39.1 |
| Provisions (net) and other gains (losses) | (282) | (273) | 3.3 |
| OPERATING PROFIT/ (LOSS) BEFORE TAX | 222 | 1,652 | (86.5) |
| Income tax | (60) | (487) | (87.8) |
| PROFIT FROM CONTINUING TRANSACTIONS | 163 | 1,165 | (86.0) |
| Profit from discontinued transactions (net) | 440 | - | n.m. |
| PROFIT | 603 | 1,165 | (48.3) |
| Profit attributable to non-controlling interests | (20) | (3) | n.m. |
| PROFIT ATTRIBUTABLE TO PARENT COMPANY | 583 | 1,162 | (49.8) |
The changes in the principal headings of the income statement of this business area are:
“Net interest income” in 2013 stood at €3,830 million, down 19.3% on the €4,748 million registered in 2012. Apart from the elimination of the mortgage floors, this decline is due to reduced lending activity and the current environment of low rates and, consequently, narrow spreads. However, a clear improvement has been seen in the last quarter of the year thanks to good price management in new asset operations and, particularly, in the renewal of liability operations.
The balance of “Net fees and commissions” amounted to €1,376 million, up 2.5% on 2012, due basically to the greater contribution from fees and commissions from mutual and pension funds, as well as those from the activity with customers in wholesale banking transactions.
In 2013, “Net gains (losses) on financial assets and liabilities” and “Exchange differences (net)" totaled €807 million, a significant improvement on the €256 million reported in 2012. This increase is due to the favorable performance of the Markets unit, together with good risk management.
The balance under the heading “Other operating income and expenses” totaled €82 million, down 74.2% on the €318 million registered in 2012, due to the decreased contribution from “Dividends” and, particularly, the decline under the heading “Other charges” as a result of the exceptional contribution to the Deposit Guarantee Fund in the fourth quarter.
As a result, “Gross income” in 2013 stood at €6,095 million, down 8.5% on the €6,665 million registered in the previous year.
“Operating expenses” in 2013 totaled €3,014 million, up 4.4% on the figure for 2012, the year of incorporation of Unnim (at the end of July). This small increase confirms that operating expenses are being kept in check.
As a result, “Operating income” in 2013 stood at €3,081 million, down 18.4% on the €3,778 million posted in 2012.
In 2013, the balance under the heading “Impairment losses on financial assets (net)” stood at €2,577 million, up 39.1% on the €1,853 million in the previous year, due basically to the additional loan-loss provisions for refinanced loans.
The balance of “Provisions expense (net)” and “Other gains (losses)” in 2013 is a negative €282 million, a higher figure than the negative €273 million posted in 2012, due to greater provisions for early retirement.
Because of the significant loan-loss provisions, “Income before tax” in 2013 is €222 million, compared with €1,652 million in 2012.
The balance of “Income tax” in 2013 is €60 million, compared with €487 million in the previous year.
The balance under the heading “Earnings from corporate operations”, at €440 million, includes the capital gain from the aforementioned operation on the insurance portfolio completed in the first quarter of the year.
As a result, “Net income attributed to parent company” at the close of 2013 totaled €583 million, compared with €1,162 million in 2012.
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| Spain | Millions of Euros | ||
|---|---|---|---|
| 2013 | 2012 | % Change | |
| Total Assets | 315,561 | 345,362 | (8.6) |
| Loans and advances to customers | 178,081 | 193,101 | (7.8) |
| Customer deposits under management (*) | 147,782 | 133,802 | 10.4 |
| Mutual funds | 22,298 | 19,116 | 16.6 |
| Pension funds | 20,428 | 18,577 | 10.0 |
| Economic capital allocated | 9,592 | 12,027 | (20.2) |
| Efficiency ratio (%) | 49.5 | 43.3 |
|
| NPA Ratio (%) | 6.4 | 4.1 |
|
| NPA Coverage Ratio (%) | 41 | 48 |
|
| Risk premium (%) | 1.36 | 0.95 |
|
The changes in the main headings of activity in this business area are as follows:
As of December 31, 2013, gross lending to customers stood at €178,081 million, down 7.8% on the €193,101 million posted as of December 31, 2012, as a result of the aforementioned deleveraging process still underway in the country's economy.
The asset quality of BBVA's portfolio in Spain has been adversely affected, basically by reduced lending activity. As a result, the NPA ratio has risen, closing 2013 at 6.4%, compared with 4.1% in 2012. However, this ratio is lower than the sector average. The coverage ratio declined over 2013 and stands at 41%.
Customer deposits totaled €147,782 million as of December 31, 2013, up 10.4% on December 2012. This good performance is due to the appropriate commercial policy applied in the area and the high capillarity of the Bank's network, as well as the boost to multi-channel banking, which has enabled BBVA to cope with a very demanding business in terms of maturities, achieving deposit renewal rates of over 80% month after month.
As regards off-balance-sheet funds, mutual funds, with a balance of €22,293 million as of December 31, 2013, are up 16.6% over the year, while pension funds, at €20,428 million at the close of 2013, increased by 10% on December 31, 2012. This improvement is due to the fact that in an environment of very low rates, BBVA is actively marketing a diversified catalog of mutual funds among those customers with the right investor profile. Thanks to this, the Bank continues to maintain its position as the number one manager in both mutual and pension funds in Spain, with market shares of 16.4% in mutual funds (according to the latest information available as of November) and 20.4% in pensions (according to data published by Inverco in September).