31. Capital base and capital management
Capital base
Up to December 31, 2013, Bank of Spain Circular 3/2008 of May 22 on determination and control of minimum capital base, regulated capital requirements for Spanish financial institutions, both individual and consolidated entities.
On June 27, 2013 the European Union Official Bulletin published a new regulation on capital requirements (CRDIV) that came into effect on January 1, 2014 and made up of:
- Directive 2013/36/UE, of June 26 of the European Parliament on access to credit institution and investment firm activities and on prudential supervision credit institutions and investment firms. This regulation modifies Directive 2002/87/CE and revokes directives 2006/48/CE and 2006/49/CE; and
- Regulation (UE) Nº UE 575/2013 of June 26 of the European Parliament on prudential requirements on credit institutions and investment firms. This regulation modifies regulation (UE) Nº 648/2012
These directives require the adoption by a national law while the regulation is effective directly.
In Spain, Royal Decree Law 14/2013 of November 29, on urgent measures to adapt Spanish Law to the European Union regulation on supervision and solvency of financial institutions, partially adapted the European regulation (Directive 2013/36/UE) to Spanish Law and allowed Bank of Spain, through its fifth clause, to exercise the use of options available to domestic regulating authorities in regulation UE 575/2013.
This regulation came into effect on January 1, 2014. From this date on, any clauses from the previous regulation (Circular 3/2008 of Bank of Spain) that oppose the new European regulation were revoked. Additionally, on February 5, 2014, Bank of Spain Circular 2/2014 of January 31 was published so that, in accordance with Regulation Nº 575/2013 that grants domestic authorities certain capacities, Bank of Spain could make use of some of the permanent regulatory options of said regulation.
Also, Law 10/2014, of June 26, of organization, supervision and solvency of credit institutions, has continued with the adaptation of CRD-IV to the legal Spanish regulatory framework.
All of the above represents the current regulation on minimum capital base requirements for Spanish credit institutions –both as individual entities and as consolidated groups– and how to calculate them, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market.
The minimum capital base requirements established by the current regulation are calculated according to the Group’s exposure to credit and dilution risk, counterparty and liquidity risk relating to the trading portfolio, exchange-rate risk and operational risk. In addition, the Group must fulfil the risk concentration limits established in said regulation and the internal Corporate Governance obligations.
The Group’s bank capital in accordance with the aforementioned applicable regulation, considering entities scope required by the above regulation, as of December 31, 2014, 2013 and 2012 is shown below: (please note that the information for the latter period has been adapted to the new presentation format for comparison purposes):
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|
Millions of Euros | ||
|---|---|---|---|
| Capital Base | 2014 (*) | 2013 | 2012 |
| Common Equity Tier 1 Capital | 41,937 | 35,825 | 33,757 |
| Common Stock | 3,024 | 2,835 | 2,670 |
| Parent company reserves | 42,406 | 41,371 | 38,149 |
| Reserves in consolidated companies | (1,204) | (3,380) | 1,042 |
| Non-controlling interests | 1,992 | 2,069 | 2,025 |
| Convertible securities | - | - | 1,238 |
| Deductions (Goodwill and others) | (6,152) | (8,534) | (11,702) |
| Attributed net income (less dividends) | 1,871 | 1,464 | 335 |
| Additional Tier 1 Capital | - | 2,119 | - |
| Preferred securities and contingent convertible securities | 4,205 | 2,905 | 1,836 |
| Deductions and others | (4,205) | (786) | (1,836) |
| Tier 1 Capital | 41,937 | 37,944 | 33,757 |
| Tier 2 Capital | 11,046 | 4,515 | 4,461 |
| Other deductions | - | (786) | (2,636) |
| Total Equity | 52,983 | 41,673 | 35,582 |
| Minimum equity required | 28,047 | 25,871 | 36,858 |
The comparison of the amounts as of December 31, 2014 with respect to the amounts as of December 31, 2013 is affected by the differences between the existing regulations on both periods.
Changes during the year 2014 in the amount of Tier 1 capital in the table above are mainly due to the accumulated profit net dividends until December, the capital increase mentioned in Note 25 and also reissuing contingent convertible perpetual securities (see Note 21.4). This increase was partially offset by new deductions that entered into force on January 1, 2014 mainly equity adjustment for prudent valuation, certain indirect or synthetic positions of treasury shares, interests in significant financial institutions, deferred tax assets and the lowest computability of certain elements (minority interests, preferred shares).
The Tier 2 capital increase is mainly due to movements in other subordinated liabilities (see Note 21.4).
With regard to minimum capital requirements, the increase is mainly due to the different criteria applied with regard to computing requirements according to CRR (new requirements such as adjustments for Credit Valuation Adjustment (CVA) for deferred tax assets or significant stakes in financial institutions in the amount not deducted, etc.) and increased activity in the Group's units, mainly outside Europe.
A reconciliation of net equity and regulatory capital is provides below:
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|
Millions of Euros |
|---|---|
| Eligible capital resources | Reconciliation of shareholders' equity with regulatory capital |
| Capital | 3,024 |
| Share premium | 23,992 |
| Reserves | 20,936 |
| Other equity instruments | 67 |
| Own shares in portfolio | (350) |
| Attributable net income | 2,618 |
| Attributable dividend | (841) |
| Shareholders' equity (Public Balance sheet) | 49,446 |
| Valuation adjustments | (348) |
| Non-controlling interests | 2,511 |
| Total Equity (Public Balance sheet) | 51,609 |
| Shares and other eligible preferred securities | 4,205 |
| Goodwill and other and other intangible assets | (1,748) |
| Funding treasury stock | (124) |
| Deductions | (1,872) |
| Valuation adjustments not eligible as basic capital | (3,567) |
| Capital gains from the Available for sale fixed-income portfolio | (2,713) |
| Capital gains from the Available-for-sale equity portfolio | (854) |
| Valuation adjustments not eligible as basic capital (non-controlling interests) | (14) |
| Other deductions | (126) |
| Equity not eligible at solvency level | (3,707) |
| Other adjustments | (1,308) |
| Tier 1 (before deductions) | 48,927 |
| (-) Deductions 50% Tier 1 | (6,990) |
| Tier 1 | 41,937 |
The amounts of goodwill and intangible assets that are deducted are calculated based on the timelines for implementation for this deduction which, in 2014 according to the CRR, was 20% in common equity Tier 1 capital. The same happens with the rest of deductions.
The valuation adjustments of available for sale instruments are not taken into account, also based on the timelines for implementation, although in this case, since it is the first year of implementation, the percentage is zero.
Finally, Tier 1 deductions mainly relate to goodwill and intangible assets not deducted from common equity Tier 1 capital (the remaining 80%).
A reconciliation of the balance sheet to the accounting regulatory perimeter (provisional data) as of December 31, 2014 is provided below:
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|
Millions of Euros | |||
|---|---|---|---|---|
| Public balance sheet headings | Public balance sheet |
Insurance companies and real estate companies | Jointly-controlled entities and other adjustments | Regulatory balance sheet |
| Cash and balances with central banks | 31,430 | (1) | 2,480 | 33,909 |
| Financial assets held for trading | 83,258 | (1,008) | 2,327 | 84,577 |
| Other financial assets designated at fair value through profit or loss | 2,761 | (2,189) | 18 | 590 |
| Available for sale financial assets | 94,875 | (18,394) | 3,875 | 80,356 |
| Loans and receivables | 372,375 | (859) | 17,959 | 389,475 |
| Held to maturity investments | - | - | - | - |
| Fair value changes of the hedged items in portfolio hedges of interest rate risk | 121 | - | - | 121 |
| Hedging derivatives | 2,551 | (169) | 15 | 2,396 |
| Non-current assets held for sale | 3,793 | (19) | 99 | 3,873 |
| Investments in entities accounted for using the equity method | 4,509 | 3,615 | (3,891) | 4,233 |
| Other | 36,270 | (1,807) | 3,580 | 38,043 |
| Total assets | 631,942 | (20,830) | 26,460 | 637,572 |
Capital management
Capital management in the BBVA Group has a twofold aim:
- Maintain a level of capitalization according to the business objectives in all countries in which it operates and, simultaneously,
- Maximize the return on shareholders’ funds through the efficient allocation of capital to the different units, a good management of the balance sheet and appropriate use of the various instruments forming the basis of the Group’s equity: shares, preferred securities and subordinate debt.
This capital management is carried out determining the capital base and the solvency ratios established by the prudential and minimum capital requirements also have to be met for the entities subject to prudential supervision in each country.
The current regulation allows each entity to apply its own internal ratings-based (IRB) approach to risk assessment and capital management, subject to Bank of Spain approval. The BBVA Group carries out an integrated management of these risks in accordance with its internal policies and its internal capital estimation model has received the Bank of Spain’s approval for certain portfolios (see Note 7).
Comprehensive assessment of banks
On October 26, 2014 the results of the comprehensive evaluation ("Comprehensive Assessment") by the ECB along with EBA were published. This examination consisted mainly of a comprehensive review of the quality of assets (Asset Quality Review or AQR, for short) and a resistance exercise (stress test). The goal is to quantify the potential capital shortfall of each entity prior to the entry into operation of the SSM, in which the main European banks will begin to be directly supervised by the ECB. This assessment has had no impact on the consolidated financial statements of the Group.