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6. Bases and methodology for business segment reporting

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Business segment reporting represents a basic tool in the oversight and management of the BBVA Group’s various activities. The Group compiles reporting information on as disaggregated a level as possible, and all data relating to the businesses these units manage is recognized in full. These disaggregated units are then amalgamated in accordance with the organizational structure preordained by the Group management into higher level units and, ultimately, the business segments themselves. Similarly, all the incorporated entities making up the BBVA Group are also assigned to the different business segments according to the geographical areas where they carry out their activity.

Once the composition of each of the business areas in the BBVA Group has been defined, certain management criteria are applied, noteworthy among which are the following:

  • Capital base: Capital is allocated to each business based on capital at risk (CaR) criteria, in turn predicated on unexpected loss at a specific confidence level, determined as a function of the Group’s target capital ratio.

This target solvency level is set on two different scales: strict capital (which conditions the capital provision that is the basis for calculating the return on equity in each business) the second level is total capital (which determines the additional allocation in terms of subordinated debt and preferred securities). The calculation of the CaR combines credit risk, market risk, structural risk associated with the balance sheet, equity positions, operational risk, fixed assets risks and technical risks in the case of insurance companies. Internal models were used that have been defined following the guidelines and requirements established under the Basel II Capital Accord, with economic criteria prevailing over regulatory ones.

Due to its sensitivity to risk, CaR is an element linked to management policies of the different Group businesses. It makes the capital allocation between them objective and standard, in accordance with the risks incurred, and makes it easier to compare the profitability of the different businesses. In addition, as the CaR is calculated in a way that is standard and integrated for all kinds of risks and for each operation, balance or risk position, the risk-adjusted return can be determined for each business and an aggregate calculated for the return by customer, product, segment, unit or business area.

  • Internal transfer prices: The calculation of the net interest income of each business is performed by applying the internal transfer rates to both the asset and liability entries. These rates are made up by a market rate (based on the review period for the transaction) and a liquidity premium.

In 2010, the liquidity squeeze in domestic and international financial markets made access to financing by Spanish credit institutions more expensive. BBVA was no exception to the rising cost. As a result, since January 2011 and retroactively for 2010 data, the liquidity premium allocated to the business areas through the reference internal rate system has been modified upwards so that it better reflects the situation of the financial markets. The allocation of profits across business generation and distribution units (e.g., in asset management products) is performed at market prices.

  • Allocation of operating expenses: Both direct and indirect expenses are allocated to the business areas, except for those items for which there is no clearly defined or close link with the businesses, as they represent corporate or institutional expenses incurred on behalf of the overall Group.
  • Cross-selling: On certain occasions, adjustments are made to eliminate overlap accounted for in the results of two or more units as result of cross-selling focus.
Description of the BBVA Group’s business segments

Following the acquisition of the stake in the Turkish bank Garanti and its consolidation, started on March 2011, into the accompanying financial statements of the Group, BBVA is beginning to have a relevant presence, in terms of both the balance sheet and income, in Europe and Asia. Furthermore, since the start of the international financial crisis, the importance of geographical location of businesses in order to obtain a better perception of the risks and a better estimate for future growth capacity has been made evident. Finally, new regulations recommend local management of structural risks as a way of avoiding possible contagion between the financial systems of different countries. As a result of the above, in 2011 the Group's businesses have been restructured into the following business areas:

  • Spain: This includes:
    • Retail Network, including the segments of individual customers, private banking, small companies and businesses in the domestic market.
    • Corporate and Business Banking (CBB), which manages the SME, companies and corporations, public institutions and developer segments.
    • Corporate and Investment Banking (C&IB), responsible for business with large corporations and multinationals.
    • Global Markets (GM), which covers treasury and distribution activities on the Spanish market.
    • Other units, including BBVA Seguros and Asset Management (AM), which manages Spanish mutual fund and pension funds.
  • Eurasia: This groups together the activity carried out in the rest of Europe and Asia and that in 2010 reported under Spain and Portugal (BBVA Portugal, Consumer Finance Italy and Portugal and the retail business of the branches in Paris, London and Brussels), or under Wholesale Banking & Asset Management (WB&AM). Corporate and Investment Banking, Markets, CNCB and CIFH. It also includes the holding in Garanti.
  • Mexico: Includes the banking, pensions and insurance businesses in the country.
  • United States: Includes the BBVA Group’s business in the United States and in the Commonwealth of Puerto Rico.
  • South America: Includes the banking, pensions and insurance businesses in South America.

Finally, the Corporate Activities segment covers all those that are not imputed to the business segments. Basically, it records costs from head offices with a strictly corporate function and makes allocations to corporate and miscellaneous provisions, such as early retirement. It also includes the Financial Management unit, which performs management functions for the Group as a whole, essentially management of asset and liability positions in euro-denominated interest rates and in exchange rates, as well as liquidity and capital management functions, the Industrial and Financial Holdings unit and the Group’s non-international real-estate businesses. The management of structural interest-rate risks in currencies other than the euro is located in the corresponding business areas.

The breakdown of the BBVA Group’s total assets by business segments as of December 31, 2011, 2010 and 2009 is as follows:

Total Assets by Business Areas Millions of Euros
2011 2010 2009
Spain 309,912 297,642 294,843
Eurasia 53,398 45,975 48,402
Mexico 74,283 75,152 62,855
South America 63,444 51,671 44,378
The United States 55,413 57,575 77,676
Subtotal Assets by Busines areas 556,450 528,015 528,154
Corporate Activities 41,238 24,723 6,911
Total Assets BBVA Group 597,688 552,738 535,065

The net income and main data in the consolidated income statements for 2011, 2010 and 2009 by business segment is as follows.

Main Results by Bussiness Segments Millions of Euros
Bussiness Areas
BBVA Group Spain Eurasia Mexico South America United States Corporate Activities
2011






Net interest income 13,160 4,399 801 3,827 3,164 1,590 (621)
Gross income 20,566 6,357 1,952 5,550 4,457 2,277 (27)
Net operating income (*) 10,615 3,556 1,307 3,539 2,415 786 (987)
Income before tax 3,770 1,914 1,170 2,299 1,877 (1,061) (2,430)
Net income 3,004 1,363 1,027 1,741 1,007 (722) (1,413)
2010






Net interest income 13,320 4,878 345 3,688 2,495 1,794 121
Gross income 20,910 7,055 1,080 5,496 3,797 2,551 932
Net operating income (*) 11,942 4,240 785 3,597 2,129 1,034 158
Income before tax 6,422 3,160 675 2,281 1,670 309 (1,673)
Net income 4,606 2,255 588 1,707 889 239 (1,072)
2009






Net interest income 13,882 5,571 387 3,307 2,566 1,679 372
Gross income 20,666 7,875 953 4,870 3,637 2,412 919
Net operating income (*) 12,307 5,031 675 3,316 2,058 1,047 180
Income before tax 5,735 3,890 611 1,770 1,575 (1,428) (683)
Net income 4,210 2,801 473 1,357 780 (950) (251)
(*) Gross Income less Adminsitrative Cost and Amortization

The accompanying Management Report (see Chapter 5) presents the income statement in more detail, as well as the main figures in the balance sheet by business segment (both by geographical areas and business or product), and also indicates the capital assigned, basic ratios and an analysis of the activity of each area in 2011.

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