This area has always combined the results of two units: Financial Planning and Holdings in Industrial & Financial Companies. It also books the costs from central units that have a strictly corporate function and makes allocations to corporate and miscellaneous provisions, such as early retirement and others of a corporate nature. In 2009 it also incorporated the newly created Real-Estate Management unit, which brings together the entire Group’s non-international real-estate business. Also, in order to prevent misrepresentations in the comparatives for South America, the effect of re-statement of the income statement due to Venezuelan hyperinflation has been included.
The net interest income of Corporate Activities in 2009 had a major positive contribution to the Group, at a total of €516 million, compared with –€1,061 million in 2008. This performance was fundamentally based on the correct management of the euro balance sheet and the positive contribution of interest rate hedges. There was also a high net trading income, which increased 10.8% in the year. Both items more than compensated for the negative effect of the accounting for hyperinflation in Venezuela. As a result, the gross income was €940 million in 2009 (–€481 million in 2008), thus absorbing nearly all the operating costs for the year. Thus operating income was €8 million, comparing very favorably with the €1,269 million the previous year.
In contrast, impairment losses on certain financial assets consumed €172 million. Regarding provisions and other gains (losses), a further €743 million is deducted due to the use of criteria of maximum prudence in the valuation of foreclosed or acquired assets and those from the real estate fund, on which updated appraisals were applied. As a result, the net attributable profit of this area in 2009 was –€333 million. The sum is much less negative than the €1,193 million the previous year, even excluding the one-off transactions for 2008 (€799 million).
Financial planning 2009
The Financial Planning unit administers the Group’s structural interest and exchange-rate positions as well as its overall liquidity and shareholders’ funds through the Assets and Liabilities Committee (ALCO).
Managing structural liquidity helps to fund recurrent growth in the banking business at suitable costs and maturities, using a wide range of instruments that provide access to several alternative sources of finance. A core principle in the BBVA Group’s liquidity management has long been to encourage the financial independence of its subsidiaries in the Americas. This aims to ensure that the cost of liquidity is correctly reflected in price formation. During 2009, thanks to the decisive role of the central banks, liquidity conditions on interbank markets improved significantly, with a large reduction in the Euribor Overnight Index Swap (OIS) spread. The medium-term markets also saw marked improvements after the announcement that central banks would buy covered bonds and that there would be public guarantee programmes for banks’ issues. In the case of BBVA, the positive movement of the business liquidity gap throughout 2009 enabled it to keep a low profile on the long-term funding markets. The Group’s liquidity position remained sound, due to the weight of retail customer deposits within the balance sheet structure and the ample collateral available as a second source of liquidity. For 2010, BBVA’s current and potential sources of liquidity easily surpass expected drainage, enabling it to remain in this comfortable position.
The Group’s capital management pursues two key goals: Firstly, maintaining capital levels appropriate to the Group’s business targets in all the countries where it operates. And secondly, at the same time maximizing returns on shareholder funds through efficient capital allocation to the different units, active management of the balance sheet and proportionate use of the different instruments that comprise the Group’s equity (shares, preferred securities and subordinate debt). In September 2009, the bank made a €2,000m five-year mandatory convertible bond issue. This provides additional flexibility and headroom in capital management. The transaction also allows BBVA to anticipate the possibility of future capital regulations becoming stricter.
BBVA manages the exchange-rate exposure on its long-term investments (basically stemming from its franchises in the Americas) to preserve its capital ratios and bring stability to the Group’s income statement while controlling impacts on reserves and the cost of this risk management. In 2009, BBVA maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area. Its aggregate hedging was close to 50%. Apart from corporate-level hedging, some subsidiary banks hold dollar positions at local level. Additionally, the Group hedges its exchange-rate exposure on expected 2009 and 2010 earnings from the Americas. During 2009, this hedging has mitigated the impact of American currencies’ depreciation against the euro. In 2010, the same policy of prudence and anticipation will be pursued in managing the Group’s exchange-rate exposure.
The unit also actively manages the structural interest-rate exposure on the Group’s balance sheet. This keeps the performance of short and medium-term net interest income more uniform by cutting out interest-rate fluctuations. During 2009, the outcome of this management has been highly satisfactory. Hedging has been maintained against a less positive economic scenario in Europe for 2009-2010, while the risk on the Group’s USA and Mexico balance sheets remains within comfort parameters. These strategies are managed both with hedging derivatives (caps, floors, swaps, FRA’s, etc) and with balance sheet instruments (mainly government bonds with highest credit and liquidity ratings). As 2009 ended, the Group had asset portfolios denominated in euros, US dollars and Mexican pesos.
Holdings in industrial and financial companies
This unit manages its portfolio of shares in companies operating in the telecommunications, media, electricity, oil & gas and finance sectors. Like Financial Planning, this unit reports to the Group’s Finance Department.
BBVA manages this portfolio with strict requirements regarding its risk control procedures, economic capital consumption and return on investment, diversifying investments over different sectors. It also applies dynamic management techniques to holdings through monetization and coverage strategies. In 2009, it invested €353m and divested €594m.
On December 31, 2009, the market value of the Holdings in Industrial & Financial Companies portfolio was €4,698m, with unrealised capital gains of €1,542m.
During the year, management of the industrial and financial holdings generated €247m in dividends and €107m in net trading income. The net attributable profit was €287m.
Real estate management
Given the current economic scenario and forecasts as to how it may develop, BBVA has set up a Real Estate Management unit to apply specialized management to real-estate assets from foreclosures, asset-for-debt swaps, purchases of distressed assets and the assets in the BBVA Propiedad real estate fund.