a) Policies and strategies established by the Group to deal with risks related to the developer and real-estate sector
BBVA has teams specializing in the management of the Real Estate Sector risk, given its economic importance and specific technical component. This specialization is not only in the Risk-Acceptance teams, but throughout the handling, commercial, problematic management and legal aspects, and includes the research department (BBVA Research), which helps determine the medium/long-term vision needed to manage this portfolio. Specialization has been increased and the management teams in the areas of recovery and the Real Estate Unit itself have been reinforced.
The portfolio management policies, established to address the risks related to the developer and real-estate sector, aims to accomplish, among others, the following objectives: to avoid concentration in terms of customers, products and regions; to estimate the risk profile for the portfolio; and to anticipate possible worsening of the portfolio.
Specific policies for analysis and admission of new developer risk transactions
In the analysis of new operations, the assessment of the commercial operation in terms of the economic and financial viability of the project has been once of the constant points that have helped ensure the success and transformation of construction land operations for our customers’ developments.
As regards the participation of the Risk Acceptance teams, they have a direct link and participate in the committees of areas such as Recoveries and the Real Estate Unit. This guarantees coordination and exchange of information in all the processes.
The following strategies have been implemented with customers: avoidance of large corporate transactions, which had already reduced their share in the years of greatest market growth; non-participation in the second-home market; commitment to public housing financing; and participation in land operations with a high level of urban development security, giving priority to land open to urban development.
Risk monitoring policies
The base information for analyzing the real estate portfolios is updated monthly. The tools used include the so-called “watch-list”, which is updated monthly with the progress of each client under watch, and the different strategic plans for management of special groups. There are plans that involve an intensification of the review of the portfolio for financing land, while, in the case of ongoing promotions, they are classified for monitoring purposes based on the rate of progress of the projects.
These actions have enabled the Bank to anticipate possible impairment situations, by always keeping an eye on BBVA’s position with each customer (whether or not as first creditor). In this regard, key aspects include management of the risk policy to be followed with each customer, contract review, deadline extension, improved collateral, rate review (repricing) and asset purchase.
Proper management of the relationship with each customer requires knowledge of various aspects such as the identification of the source of payment difficulties, an analysis of the company’s future viability, the updating of the information on the debtor and the guarantors (their current situation and business course, economic-financial information, debt analysis and generation of funds), and the updating of the appraisal of the assets offered as collateral.
BBVA has a classification of debtors in accordance with legislation in force in each country, usually categorizing each one's level of difficulty for each risk.
Based on the information above, a decision is made whether to use the refinancing tool, whose objective is to adjust the structure of the maturity of the debt to the generation of funds and the customer’s payment capacity.
As for the policies relating to risk refinancing with the developer and real-estate sector, they are the same as the general policies used for all of the Group’s risks. In the developer and real estate sector, they are based on clear solvency and viability criteria for projects, with demanding terms for guarantees and legal compliance. The policy on refinancing uses outstanding risk rather than nonperforming assets, with a refinancing tool that standardizes criteria and values up to a total of 19 variables when considering any refinancing operation.
In the case of refinancing, the tools used for enhancing the Bank’s position are: the search for new intervening parties with proven solvency and initial payment to reduce the principal debt or outstanding interest; the improvement of the debt bond in order to facilitate the procedure in the event of default; the provision of new or additional collateral; and making refinancing viable with new conditions (period, rate and repayments), adapted to a credible and sufficiently verified business plan.
Policies applied in the management of real estate assets in Spain
The policy applied for managing these assets depends on the type of real-estate asset, as detailed below.
In the case of completed homes, the final aim is the sale of these homes to private individuals, thus diluting the risk and beginning a new business cycle. Here, the strategy has been to help subrogation (the default rate in this channel of business is notably lower than in any other channel of residential mortgages) and to support our customers’ sales directly, using BBVA’s own channel (BBVA Services and our branches), creating incentives for sale and including sale orders for BBVA that set out sale prices which are notably lower than initial ones. In exceptional case we have even accepted partial haircuts, with the aim of making the sale easier.
In the case of ongoing construction work, our strategy has been to help and promote the completion of the works in order to transfer the investment to completed homes. The whole developer Works in Progress portfolio has been reviewed and classified into different stages with the aim of using different tools to support the strategy. This includes the use of developer accounts-payable financing as a form of payment control, the use of project monitoring supported by the Real Estate Unit itself, and the management of direct suppliers for the works as a complement to the developer's own management.
With respect to land, our presence at advanced stages in land development, wh the vast majority of our risk is urban land, simplifies our management. Urban management and liquidity control to tackle urban planning costs are also subject to special monitoring.
b) Quantitative information on activities in the real-estate market in Spain
As of December 31, 2011 and 2010, exposure to the construction sector and real-estate activities in Spain stood at €25.287 million and €31,708 million, respectively. Of that amount, risk from loans to the construction and real-estate development activities accounted for €14,158 million and €16,608 million, representing 8.1% and 8.9% of loans and advances to customers of the balance of business in Spain (excluding the government and other public agencies) and 2% and 3% of the total assets of the Consolidated Group.
Lending for real estate development according to the purpose of the loans as of December 31, 2011 and 2010 is shown below:
| 2011 Financing allocated to construction and real estate development and its coverage |
Millions of Euros | ||
|---|---|---|---|
| Gross Amount | Drawn Over the Guarantee Value | Provision Coverage | |
| Loans recorded by the Group’s credit institutions (Business in Spain) | 14,158 | 4,846 | 1,441 |
| Of which: Impaired assets | 3,743 | 1,725 | 1,123 |
| Of which: Potential problem assets | 2 052 | 911 | 318 |
| Memorandum item: |
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| Write-offs | 182 |
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| 2010 Financing allocated to construction and real estate development and its coverage |
Millions of Euros | ||
|---|---|---|---|
| Gross amount | Drawn over the guarantee value | Provision coverage | |
| Loans recorded by the Group’s credit institutions (Business in Spain) | 16,608 | 4,869 | 1,224 |
| Of which: Impaired assets | 3,543 | 1,355 | 893 |
| Of which: Potential problem assets | 2,381 | 1,185 | 331 |
| Memorandum item: |
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| Write-offs | 23 |
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| Memorandum item: Consolidated Group Data (carrying amount) |
Millions of Euros | |
|---|---|---|
| 2011 | 2010 | |
| Total loans and advances to customers, excluding the Public Sector (Business in Spain) | 174,467 | 185,361 |
| Total consolidated assets (total business) | 597,688 | 552,738 |
| Impairment losses determined collectively (total business) | 3,027 | 2,698 |
As of December 31, 2011, 29% of the nonperforming assets in this sector are up-to-date on payments, but were classified as non-performing in accordance with the provisions of Appendix IX of Circular 4/2004 of the Bank of Spain. Furthermore, substandard risk amounted to 14.5% of total developer risk.
The drawn over the guarantee value shown in the tables above corresponds to the difference between the gross amount of each loan and the value of the real rights that, if applicable, were received as security, calculated according to Bank of Spain Circular 3/2010, which complements Appendix IX of Bank of Spain Circular 4/2004. This means that additional regulatory corrective factors ranging from 30% to 50%, based on the type of asset, have been applied to the updated appraisal values.
After applying said corrective factors, the excess value above the guarantee value, which represents the amount to be provisioned, amounted to €1,725 and €991 million for nonperforming assets and substandard assets, respectively as of December 31, 2011 (€1,355 million and €1,185 million as of December 31, 2010).
In addition, as of December 31, 2011 and 2010, specific recognized provisions are available, amounting to €1,441 and €1,224 million, respectively.
As of December 31, 2011 and 2010, the updated appraisal values, without the application of said corrective factors, rose to €19,288 and €25,327 million, respectively (an average LTV of 73.4% and 65.5%, respectively) which broadly covers the amount of the debt.
The following is a description of the real estate credit risk based on the types of associated guarantees:
| Credit: Gross amount (Business in Spain) | Millions of Euros | |
|---|---|---|
| 2011 | 2010 | |
| Without secured loan | 988 | 1,259 |
| With secured loan | 13,053 | 15,249 |
| Terminated buildings | 6,930 | 7,403 |
| Homes | 6,431 | 7,018 |
| Other | 499 | 385 |
| Buildings under construction | 2,448 | 3,531 |
| Homes | 2,374 | 3,320 |
| Other | 74 | 211 |
| Land | 3,675 | 4,315 |
| Urbanized land | 2,404 | 2,922 |
| Rest of land | 1,271 | 1,393 |
| With others secured | 117 | 100 |
| Total | 14,158 | 16,608 |
As of December 31, 2011, 66% of loans to developers are guaranteed with buildings (94% are homes), and only 26% by land, of which 65% is urbanized.
The information on the retail mortgage portfolio risk as of December 31, 2011 and 2010 is as follows:
|
|
Millions of Euros | |
|---|---|---|
| Housing-acquisition loans to households (Business in Spain) |
2011 | 2010 |
| With secured loan (gross amount) | 79,043 | 80,027 |
| of which: Impaired loans | 2,371 | 2,324 |
The loan to value (LTV) ratio (resulting from dividing the pending risk at any particular date by the amount of the latest available appraisal) of the above portfolio is as follows:
| 2011 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain) |
Millions of Euros | |||||
|---|---|---|---|---|---|---|
| Total risk over the amount of the last valuation available (Loan To Value-LTV) | ||||||
| Less than or equal to 40% | Over 40% but less than or equal to 60% | Over 60% but less than or equal to 80% | Over 80% but less than or equal to 100% | Over 100% | Total | |
| Gross amount | 12,408 | 19,654 | 32,887 | 12,870 | 1,224 | 79,043 |
| of which: Impaired loans | 276 | 218 | 695 | 922 | 260 | 2,371 |
| 2010 LTV Breakdown of secured loans to households for the purchase of a home (Business in Spain) |
Millions of Euros | |||||
|---|---|---|---|---|---|---|
| Total risk over the amount of the last valuation available (Loan To Value-LTV) | ||||||
| Less than or equal to 40% | Over 40% but less than or equal to 60% | Over 60% but less than or equal to 80% | Over 80% but less than or equal to 100% | Over 100% | Total | |
| Gross amount | 12,092 | 19,037 | 33,342 | 14,399 | 1,157 | 80,027 |
| of which: Impaired loans | 309 | 238 | 672 | 903 | 202 | 2,324 |
Outstanding home mortgage loans as of December 31, 2011 and 2010 had an average LTV of 50% and 51% respectively.
As of December 31, 2011, the Bank also had a balance of €968 million in non-mortgage loans for the purchase of housing (of which €64 million were NPA).
The breakdown of foreclosed, acquired, purchased or exchanged assets from debt from loans relating to business in Spain, as well as the holdings and financing to non-consolidated companies holding such assets is as follows:
| Information about assets received in payment of debts (Business in Spain) |
Millions of Euros | |||||
|---|---|---|---|---|---|---|
| 2011 | 2010 | |||||
| Gross Value |
Provisions | Carrying Amount | Gross Value |
Provisions | Carrying Amount | |
| Real estate assets from loans to the construction and real estate development sectors in Spain. | 5,101 | 1,740 | 3,361 | 3,259 | 1,045 | 2,214 |
| Terminated buildings | 1,709 | 487 | 1,222 | 800 | 202 | 598 |
| Homes | 1,227 | 333 | 894 | 451 | 110 | 341 |
| Other | 482 | 154 | 328 | 349 | 92 | 257 |
| Buildings under construction | 360 | 115 | 245 | 198 | 74 | 124 |
| Homes | 357 | 114 | 243 | 186 | 71 | 115 |
| Other | 3 | 1 | 2 | 12 | 3 | 9 |
| Land | 3,032 | 1,138 | 1,894 | 2,261 | 769 | 1,492 |
| Urbanized land | 1,561 | 570 | 991 | 1,116 | 392 | 724 |
| Rest of land | 1,471 | 568 | 903 | 1,145 | 377 | 768 |
| Real estate assets from mortgage financing for households for the purchase of a home | 1,509 | 401 | 1,108 | 875 | 193 | 682 |
| Rest of foreclosed real estate assets | 403 | 167 | 236 | 204 | 77 | 127 |
| Equity instruments, investments and financing to non-consolidated companies holding said assets | 701 | 287 | 414 | 455 | 287 | 168 |
| Total | 7,714 | 2,595 | 5,119 | 4,793 | 1,602 | 3,191 |
As of December 31, 2011 and 2010, the gross book value of the Group’s real-estate assets from corporate financing of real estate construction and development was €5,101 million and €3,259 million, respectively, with an average coverage ratio of 34% and 32%, respectively.
The gross book value of real-estate assets from mortgage lending to households for home purchase as of December 31, 2011 and 2010, amounted to €1,509 million and €875 million, respectively, with an average coverage ratio of 27% and 22%, respectively.
As of December 31, 2011 and 2010, the gross book value of the BBVA Group’s total real-estate assets (business in Spain), including other real-estate assets received as debt payment, was €7,013 million and €4,338 million, respectively. The coverage ratio was 33% and 30%, respectively.