Information by area represents a basic tool in the management of the BBVA Group’s various businesses. This chapter discusses the most important data on activity and earnings of the Group’s five business areas together with those of their main units, and of Corporate Activities. Specifically, it includes the income statement, the balance sheet and a set of relevant management indicators: the loan book, deposits, off-balance sheet funds, ROE, efficiency, non-performing loans and coverage. The areas, and their composition, are as follows:
- Spain and Portugal: the Retail Banking network in Spain, including the segments of private individual customers, private banking/wealth management and small business in the domestic market; Corporate and Business Banking, which handles the needs of the SMEs, corporations, government and developers in the domestic market; and all other units, among which are Consumer Finance, BBVA Seguros and BBVA Portugal.
- Wholesale Banking & Asset Management, composed of: Corporate and Investment Banking, which includes the dealings of offices in Europe, Asia and New York with large corporations and companies; Global Markets, responsible for the business of markets and distribution in the same geographical areas; Asset Management, which includes the management of mutual funds and pension funds in Spain; Industrial and Real Estate Holdings, which deals with the development of long-term business projects and the private equity business developed through Valanza S.C.R.; and Asia, with the holding in the CITIC Group. Wholesale Banking & Asset Management is also present in the above businesses in both Mexico and South America, but its activity and results are included in those business areas for the purposes of this report.
- Mexico: includes the banking, pensions and insurance businesses in the country.
- The United States: includes the banking and insurance businesses in the United States, as well as those in the associate state of Puerto Rico.
- South America: includes the banking, pensions and insurance businesses in South America.
As well as the units mentioned, all the areas also have allocations of other businesses and shadow accounts that include eliminations and other items not assigned to the units.
Finally, the area of Corporate Activities performs management functions for the Group as a whole, essentially management of structural interest and FX risks of euro denominated balance sheet, as well as liquidity and capital management functions. The management of balance sheet structural risks in currencies other than the Euro is recorded in the corresponding business areas. It also includes the Industrial and Financial Holdings unit and the Group’s non-international real estate businesses.
In 2009, BBVA maintained the criteria applied in 2008 in terms of the composition of the different business areas, with some insignificant changes. They thus do not affect the Group’s reporting and have practically no impact on the figures of the different business areas and units. Even so, both the 2008 and 2007 data have been reworked to include these small variations, to ensure accurate comparisons over the years. As usual in the case of the Latin American units, both constant exchange rates and year-on-year current exchange variation rates have been applied.
The Group compiles reporting information on as disaggregated a level as possible, and all data relating to the businesses these units manage is recorded in full. These basic units are then aggregated in accordance with the organizational structure established by the Group at higher level units and, finally, the business segments themselves. Similarly, all the legal entities making up the Group are also assigned to the different units according to their activity.
Once the composition of each business area has been defined, certain management criteria are applied, of which the following are particularly important:
- Capital: capital is allocated to each business according to economic risk capital (ERC) criteria. This is based on the concept of unexpected loss at a specific confidence level, depending on the Group’s capital adequacy targets. These targets have two levels: the first is core equity, which determines the capital allocated. This amount is used as a basis for calculating the return generated on the equity in each business (ROE). The second lvel is total capital, which determines the additional allocation in terms of subordinate debt and preferred securities. The calculation of the ERC combines credit risk, market risk, structural balance-sheet risk, equity holdings, operational risk, fixed assets and technical risks in the case of insurance companies. These calculations are carried out using internal models that have been defined following the guidelines and requirements established under the Basel II capital accord, with economic criteria prevailing over regulatory ones.
ERC is risk-sensitive and thus linked to the management policies of the businesses themselves. It standardizes capital allocation between them in accordance with the risks incurred and makes it easier to compare profitability across units. In other words, it is calculated in a way that is standard and integrated for all kinds of risks and for each transaction, balance or risk position, allowing its risk-adjusted return to be assessed and an aggregate to be calculated for the profitability by client, product, segment, unit or business area. - Internal transfer prices: the calculation of the net interest income of each business is performed using rates adjusted for the maturities and rate reset clauses of the various assets and liabilities making up each unit’s balance sheet. Earnings are distributed across revenue-generating and distribution units (e.g., in asset management products) at market prices.
- Assignment of operating costs: both direct and indirect costs are assigned to the business areas, except where there is no clearly defined relationship with the businesses, i.e. when they are of a clearly corporate or institutional nature for the Group as a whole.
- Cross-selling: in some cases, consolidation adjustments are required to eliminate shadow accounting entries in the results of one or more units as result of cross-selling incentives.