financial statements 2014

5. Liquidity and Group solvency

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5.1 Liquidity and finance prospects

Liquidity and finance management of the BBVA Group’s balance sheet helps to fund the recurrent growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of finance. A core principle in the BBVA Group’s liquidity and finance management is the financial independence of its banking subsidiaries. This aims to ensure that the cost of liquidity is correctly reflected in price formation and that there is sustainable growth in the lending business.

Short and long-term wholesale financial markets performed well in 2014, thanks to the decisive action taken by the European Central Bank (cuts in interest rates, the launch of the 4-year Targeted Long-Term Refinancing Operations, the Covered Bond/ABS purchase program, etc.), continued progress in the integration of Europe and banking union, and the improved perception of risk in European countries. In addition, the expectations that the European Central Bank will finally implement a large-scale sovereign debt purchase program (Quantitative Easing) in 2015 also had a very positive effect on the markets.

In the end, the ECB's Asset Quality Review and the stress tests conducted by the EBA had a limited impact on the market, despite the fact that 25 banks failed the tests.

BBVA Group's balance sheet continued to generate liquidity in 2014, thanks to the good performance of customer funds, which have maintained an upward trend and offset the increase in lending.

In 2014, BBVA's euro balance sheet continued its deleveraging process in an environment of low demand for credit and stable customer funds. As regards wholesale funding, it was not necessary to renew all the medium and long-term funding maturities, and there was less need to resort to the funding offered by the ECB through its auctions.

Outside Europe, the situation has also been positive across BBVA's footprint, enabling the Bank to strengthen its liquidity position in all the regions where it is present. The financial soundness of banks is based on the funding of their lending activity, basically through customer funds. Fund gathering has been remarkable in Mexico throughout the year, providing a strong liquidity position and keeping the commercial gap in check. In the case of BBVA Compass, excess liquidity has been the dominant trend in 2014, despite the demands of lending activity. In South America, growth in lending has been accompanied by a favorable performance in customer funds. They made a positive contribution in terms of liquidity for all the Group subsidiaries, which show comfortable levels in local liquidity ratios. This situation has also been helped by the issues in both the domestic and international markets in the various regions, with a combined volume of more than €1 billion.

BBVA completed the entire funding program for 2014 before July. It is worth noting that the market continues to offer very favorable conditions for all types of debt and capital products.

Various traded instruments have been issued in 2014: €1 billion in 5-year senior bonds; €1 billion in 10-year covered mortgage bonds; €1.5 billion in contingent convertible securities (eligible as Additional Tier 1 or AT1 capital); and €1.5 billion in subordinated debt (eligible as Tier 2 or T2 capital). These last two issues were also designed to add to the capital buffers of 1.5% of AT1 and 2% of T2, as allowed by the capital requirements directive (CRD-IV).

The cost of funding was lower in 2014 than in 2013, due mainly to the general narrowing of spreads and very low interest rates.

As regards the regulatory environment in Europe, compliance with the Liquidity Coverage Ratio (LCR), which BBVA has maintained at levels above 100% in recent quarters, will become mandatory in October 2015. In both Mexico and the U.S., the LCR ratio has been adapted to local regulations in 2014. This will be binding for BBVA Bancomer in 2015 and for BBVA Compass in 2016.

The following is a breakdown of maturities of wholesale issues (balance sheet in Euros) by the nature of the issues:

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Maturity of wholesale issues Millions of Euros
2015 2016 2017 After 2017 Total
Senior debt 6,273 3,377 393 4,245 14,288
Mortgage-covered bonds 4,279 4,928 7,074 10,210 26,491
Public covered bonds - - 526 500 1,026
Regulatory equity instruments (*) 1,027 208 70 6,322 7,627
Other long term financial instruments - 151 250 860 1,261
Total 11,579 8,664 8,313 22,137 50,693
(*) The regulatory equity instruments are classified in this table by their terms according to their contractual maturity.

In addition, within the framework of the policy implemented in recent years to strengthen its net worth position, the BBVA Group will at all times adopt the decisions it deems advisable to maintain a high degree of capital solvency. Specifically, the AGMs held on March 11, 2011 and March 16, 2012 authorized the issue of fixed-income securities and convertible bonds, as detailed in Note 26 to the accompanying consolidated financial statements.

5.2 BBVA Group solvency and capital ratios

The BBVA Group’s solvency and capital ratios information in accordance with the applicable rules in 2014 is detailed on the Note 31 of the consolidated financial statements.

5.2.1 Comprehensive assessment of banks

As mentioned above, the ECB and the EBA are carrying out a comprehensive assessment of the 128 most significant European credit institutions before the Single Supervisory Mechanism (SSM) takes on its functions for overseeing European credit institutions starting on November 4, 2014.

The objective of this assessment is to provide transparency about the solvency of the European banking system, adopting measures such as any additional capital needs of any of the entities in the event that the results of this assessment showed in that way.

On October 26, 2014, the results of the comprehensive assessment conducted by the ECB and EBA were released. This assessment consisted, principally, of an asset quality review (AQR) and one stress test. The main objective was to quantify potential capital shortfalls of each entity before the entry of the Single Supervisory Mechanism (SSM) in which the major European banks begin to be directly supervised by the ECB.

Concerning BBVA Group, the results expressed that BBVA would reach as of December 2016 a level of 9.0% CET1 on the adverse scenario and a 10.6% on the base scenario, much higher than the minimum required of 5.5% and 8.0% respectively). Additionally, BBVA is one of the few banks of its European peer group whose fully loaded CET 1 in 2016 on the adverse scenario is over 8.0% (8.2%). These results meant passing the tests for a difference of 13,223 million of euros in the adverse scenario. Definitively, the Group demonstrated, once again, its high solvency. Also evidenced that is well positioned to deal with the new industry environment in Europe.

5.3 Contractual obligations and Off- Balance Sheet transactions

The BBVA Group’s risk information and contingent liabilities is described in Note 32 of the accompanying consolidated financial statements. The information about purchase and sale commitments and future payment obligations is described in Note 34 of the accompanying consolidated financial statements.