31. Capital base, capital management and liquidity management
As of December 31, 2015, 2014 and 2013, equity is calculated in accordance with 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 fulfill the risk concentration limits established in said regulation and the internal Corporate Governance obligations.
The European Central Bank (ECB) has notified its decision with respect to the prudential capital requirements applicable to BBVA following the supervisory review and evaluation process (SREP). This decision requires BBVA to maintain a phased-in common Tier 1 (CET1) capital ratio of 9.5%, at both individual and consolidated level. The decision establishes that the required CET1 ratio of 9.5% includes:
- the minimum CET1 ratio required by Pillar 1; for these purposes Pillar 1 corresponds to the minimum CET1 ratio required by Article 92(1)(a) of Regulation (EU) No. 575/2013.
- the ratio required by Pillar 2 corresponds to the CET1 ratio required in excess of the minimum CET1 ratio, in accordance with Article 16(2)(a) of Regulation (EU) No. 1024/2013; and
- the capital conservation buffer which will be required starting on January 1, 2016 by Article 44 of Act 10/2014 and its implementing regulations.
In addition, in 2016 an additional capital requirement of 0.25% will be applied to BBVA Group, as a globally systemically important bank (G-SIB). The total minimum requirements of phased-in CET1 in 2016 at the consolidated level is 9.75%.
As BBVA will be excluded from the list of global systemically important banks as of January 1, 2017, this excess capital will not be applicable from that date. However, the Bank of Spain has decided that BBVA is included on the list of Other Systemically Important Institutions (OSII), so BBVA will instead need a capital buffer applicable to this concept, which requires the maintenance of common CET1 elements equal to 0.5% at the consolidated level. There will be a phased period of implementation lasting four years, with the level of 0.5% to be in place by 2019.
The Group’s bank capital in accordance with the aforementioned applicable regulation, considering entities scope required by the above regulation, as of December 31, 2015, 2014 and 2013 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 | 2015 (*) | 2014 | 2013 |
| Common Equity Tier 1 Capital | 48,539 | 41,831 | 35,825 |
| Common Stock | 3,120 | 3,024 | 2,835 |
| Parent company reserves | 44,824 | 42,406 | 41,371 |
| Reserves in consolidated companies | (2,617) | (1,204) | (3,380) |
| Non-controlling interests | 7,143 | 1,885 | 2,069 |
| Deductions and others | (5,387) | (6,151) | (8,534) |
| Attributed net income (less dividends) | 1,456 | 1,871 | 1,464 |
| Aditional Tier 1 Capital | - | - | 2,119 |
| Capital instruments eligible and perpetual securities eventually convertible | 5,302 | 4,205 | 2,905 |
| Deductions and others | (5,302) | (4,205) | (786) |
| Total Tier 1 Capital | 48,539 | 41,831 | 37,944 |
| Tier 2 Capital | 11,646 | 11,046 | 4,515 |
| Other deductions | - | - | (786) |
| Total Own Funds | 60,185 | 52,877 | 41,673 |
| Total Minimum equity required (**) | 38,125 | 28,065 | 25,871 |
The changes in 2015 are affected by the corporate operations executed over the year (see Note 3). In addition, the changes in the Tier 1 capital level in the above table are basically due to the cumulative earnings through December, net of dividends, the contribution of non-controlling interests in Garanti Bank and the issue of additional Tier 1 capital executed in the year. This increase is partially offset by the scaled increase planned by the regulation (up to 40% in 2015).
The Tier 2 capital is increased by the changes in the instruments issued by eligible subsidiaries and the loss of eligibility due to the effect of the greater temporary adjustments.
The increase in the minimum capital requirements is due mainly to the determination of new prudential capital requirements applicable to BBVA, as mentioned above.
A reconciliation of total equity and regulatory capital is provides below:
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|
Millions of euros |
|---|---|
| Eligible capital resources | Reconciliation of total equity with regulatory capital December 2015 |
| Total Equity | 50,640 |
| Capital | 3,120 |
| Share premium | 23,992 |
| Reserves | 22,512 |
| Other equity instruments | 35 |
| Own shares in portfolio | (309) |
| Attributable net income | 2,642 |
| Attributable dividend | (1,352) |
| Shareholders´ equity (Public Balance sheet) | 55,440 |
| Valuation adjustments | (3,349) |
| Non-controlling interests | 8,149 |
| Shares and other eligible preferred securities | 5,302 |
| Deductions | (4,411) |
| Goodwill and other and other intangible assets | (3,901) |
| Funding Treasury stock | (95) |
| Funding own shares | (415) |
| Equity not eligible at solvency level | (806) |
| Valuation adjustments not elegible as basic capital | (766) |
| Capital gains from the Available-for-sale debt instruments portfolio | (774) |
| Capital gains from the Available-for-sale equity portfolio | 8 |
| Differences from solvency and accounting level | (40) |
| Other adjustments and deductions | (1,684) |
| Tier 1 (before deductions) | 53,841 |
| (-) Deductions Tier 1 | (5,302) |
| Tier 1 | 48,539 |
A reconciliation of the balance sheet to the accounting regulatory perimeter (provisional data) as of December 31, 2015 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 | 43,467 | (1) | 20 | 43,486 |
| Financial assets held for trading | 78,326 | (913) | 2,358 | 79,771 |
| Other financial assets designated at fair value through profit or loss | 2,311 | (2,249) | - | 62 |
| Available for sale financial assets | 113,426 | (20,024) | 25 | 93,427 |
| Loans and receivables | 457,644 | (1,462) | 1,968 | 458,150 |
| Held to maturity investments | - | - | - | - |
| Fair value changes of the hedged items in portfolio hedges of interest rate risk | 45 | - | - | 45 |
| Hedging derivatives | 3,538 | (118) | - | 3,420 |
| Non-current assets held for sale | 3,369 | (26) | (37) | 3,306 |
| Investments in entities accounted for using the equity method | 879 | 4,324 | (114) | 5,089 |
| Other | 47,073 | (2,182) | 1,510 | 46,401 |
| Total assets | 750,078 | (22,651) | 5,730 | 733,157 |
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).