7. BBVA Group solvency and capital ratios

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The Group capital base Millions of Euros
2011 2010 % Change
Stockholders' funds 40,952 36,689 11.6
Adjustments (10,221) (8,592) 19.0
Mandatory convertible bonds 3,430 2,000 71.5
CORE CAPITAL 34,161 30,097 13.5
Preferred securities 1,759 5,164 (65.9)
Adjustments (1,759) (2,239) (21.4)
CAPITAL (TIER I) 34,161 33,023 3.4
Subordinated debt and other 11,258 12,140 (7.3)
Deductions (2,649) (2,239) 18.4
CAPITAL BASE (TIER I + TIER II) (a) 42,770 42,924 (0.4)
Minimum capital requirement (BIS II Regulations) 26,462 25,066 5.6
CAPITAL SURPLUS 16,308 17,858 (8.7)
RISK WEIGHTED ASSETS (b) 330,771 313,327 5.6

BIS RATIO (a)/(b)
12.9% 13.7%
CORE CAPITAL 10.3% 9.6%  
TIER I 10.3% 10.5%  
TIER II 2.6% 3.2%  

The BBVA Group’s capital base, calculated in accordance with the rules defined in the Basel II capital accord, stood at €42,770 million as of December 31, 2011, with a very slight reduction of 0.4% compared with the figure as of December 31, 2010.

Risk-weighted assets (RWA) increased by 5.6% over the period to €330,771 million as of December 31, 2011 (€313,327 million as of December 31, 2010), due mainly to the entry of RWA from Garanti and to the growth of lending in Mexico and South America. The tighter requirements set out by Basel 2.5 (increased RWA for market risk when including stressed VAR) came into effect in the fourth quarter of 2011. This has been offset by a lower operational risk requirement due to the elimination of the capital floor in the advanced models (this floor was established in December 2009 when the internal operational risk models for Spain and Mexico came into effect).

The minimal capital requirements (8% of RWA) amounted to €26,462 million as of December 31, 2011. Thus the excess capital resources over and above the 8% of the risk-weighted assets required by the regulations stood at €16,308 million. Therefore, the Group has 61.6% of capital above the minimum required levels.

The quality of the capital base has improved substantially. Thus, core capital amounted to €34,161 million as of December 31, 2011, €4,064 million more than the figure posted as of December 31, 2010. This increase is mainly due to the exchange of preferred securities for mandatory convertible bonds, which are 100% eligible as core capital, for the amount of €3,430 million, completed at the end of the year. The additional increase is basically due to the organic generation of capital explained by the recurrence of income and by the current “Dividend Option” dividend policy (see Note 4 of the Financial Statements).

Core capital amounted to 10.3% of risk-weighted assets, compared with 9.6% as of December 31, 2010, an increase of 0.7 percentage points.

Early conversion of all the mandatory convertible subordinate bonds issued in September 2009 for the amount of €2,000 million and distributed among the Bank’s customers has been completed in the first half of 2011. The final result is the issue of 273,190,927 new shares, which began to be traded on July 19, 2011. It is important to note that this conversion did not affect the calculation of the Group's capital base, as these convertible bonds had already been considered as core capital from the date on which they had effectively been subscribed and paid-up.

Tier I capital stood at €34,161 million as of December 31, 2011. This amounts to 10.3% of risk-weighted assets, 0.2 percentage points down on the figure for December 31, 2010, due to the higher increase in RWA. Preferred securities account for 5.1% of Tier I capital.

Other eligible capital (Tier II) mainly consists of subordinated debt, latent capital gains and excess generic provisions up to the limit set forth in regulations. As of December 31, 2011, Tier II capital stood at €8,609 million, i.e., 2.6% of risk-weighted assets, down 0.6 percentage points due to amortization of a subordinated debt issue.

By aggregating Tier I and Tier II capital, as of December 31, 2011, the BIS total capital ratio is 12.9%, 0.8 percentage points down on the figure of 13.7% as of December 31, 2010.

  • Stress test and new recommendations on minimum capital levels

In the first half of 2011, 91 of the main European financial institutions underwent stress tests coordinated by the European Banking Authority (EBA) in cooperation with the European Central Bank (ECB), the European Commission and the European Systemic Risk Board (ESRB).

The results of these stress tests, released on July 15, 2011, showed that the BBVA Group is one of the European institutions that best maintained its solvency levels, even in the most adverse scenario anticipated at the time, which incorporated the impact of a possible sovereign risk crisis and a substantial reduction in the valuation of the real estate assets.

On October 26, 2011, the EBA, in cooperation with the competent national authorities, announced the conducting of a study on the capital levels of 71 financial institutions throughout Europe based on data available as of September 30, 2011.

As a result of this study and in order to restore market confidence in the European financial system, the EBA issued the recommendation of reaching, as of June 30, 2012, a new minimum capital level in the ratio known as Core Tier 1 (“CT1”), on an exceptional and temporary basis, in order to address, among other issues, the current situation of the sovereign risk crisis in Europe. This new recommended level is temporary in nature; as such, the EBA has announced its intention to lift it once confidence in the European financial markets is restored.

Based on the information released on December 8, 2011, the BBVA Group would need to increase its capital base by €6,329 million in order to reach this minimum level set for the CT1 ratio as of June 30, 2012. Of this amount, €2,313 million correspond to the temporary increase in the capital base for exposure to the aforementioned sovereign risk.

On January 20, 2012, the BBVA Group submitted to the Bank of Spain a specific action plan following the recommendations of the EBA that will enable it to reach the minimum level set for the CT1 ratio at the end of June 2012. This plan is being examined by the Bank of Spain jointly with the EBA.

The measures already taken under this plan include the issue of convertible subordinated debentures completed on December 30, 2011 (see Note 23.4 of the consolidated Financial Statements). This action, together with organic generation of capital and other additional measures envisaged in the plan, will enable the BBVA Group to comply with the recommendations issued by the EBA without having to apply for government aid. As of December 31, 2011, 84% of the recommended capital base increase had been reached.