This area encompasses the Group’s business in the United States and Puerto Rico. BBVA Compass accounted for approximately 82% of the area’s balance sheet as of December 31, 2011. Given its weight, most of the comments below refer to this business unit. It also covers the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations.
The comparison of the year-on-year financial statements for this area is affected by the change in the exchange rate of the US dollar against the euro. While the fixing rate appreciated, resulting in a positive impact on the balance sheet, the average exchange rate depreciated by 4.7%, which represents a negative exchange-rate effect on earnings. For the most important figures, the percentage change at constant exchange rates is indicated.
The area’s attributed income is affected by a one-off negative impact that took place during the fourth quarter of 2011, due to the adjustment to the value of goodwill in the United States, amounting to €1,011 million net of taxes. Excluding this effect, the attributable profit as of December 31, 2011 amounted to €289 million, up 20.8% (23.2% ce) on the €239 million posted in 2010.
| The United States | Millions of Euros | ||
|---|---|---|---|
| 2011 | 2010 | % Change 2011-2010 |
|
| NET INTEREST INCOME | 1,590 | 1,794 | (11.4) |
| Net fees and commissions | 632 | 651 | (2.9) |
| Net gains (losses) on financial assets and liabilities and net exchange differences | 140 | 156 | (10.6) |
| Other operating income and expenses | (85) | (50) | 70.1 |
| GROSS INCOME | 2,277 | 2,551 | (10.7) |
| Operating expenses | (1,491) | (1,517) | (1.7) |
| Administration costs | (1,321) | (1,318) | 0.3 |
| Personnel expenses | (819) | (753) | 8.8 |
| General and administrative expenses | (502) | (565) | (11.1) |
| Depreciation and amortization | (170) | (199) | (14.8) |
| OPERATING INCOME | 786 | 1,034 | (24.0) |
| Impairment losses on financial assets (net) | (346) | (703) | (50.9) |
| Provisions (net) and other gains (losses) | (1,501) | (22) | n.a. |
| INCOME BEFORE TAX | (1,061) | 309 | n.a. |
| Income tax | 339 | (69) | n.a. |
| NET INCOME | (722) | 239 | n.a. |
| Net income attributed to non-controlling interests | - | - | n.a. |
| NET INCOME ATTRIBUTED TO PARENT COMPANY | (722) | 239 | n.a. |
The changes in the principal headings of the income statement of this business area are:
“Net interest income” in 2011 stood at €1,590 million, down 11.4% (-7.4% ce) on the €1,794 million in 2010, due to the strategies implemented by the unit to reduce the loan portfolio risk. The developer and construction portfolios, which have high interest rates but are also high-risk, have contracted significantly, while mortgage loans and individual loans and lending to the industrial and commercial sector, which are lower-risk and therefore have a narrower spread, grew, but without neglecting customer spread management, which grew in new placements.
The balance of “Net fees and commissions” in 2011 is €632 million, a fall of 2.9% on the €651 million posted in 2010, due to currency depreciation. Excluding this impact, fees and commissions grew by 1.1% despite the coming into effect of restrictive regulations on fees and commissions.
The balance of the “Net gains (losses) on financial assets and liabilities” and “Exchange differences (net)" headings for 2011 is €140 million, down 10.6% compared with €156 million in 2010, as a result of the turmoil in the markets.
The balance of “Other operating income and expenses” for 2011 is €-85 million, compared with €-50 million in 2010, due to greater provisions made to the Federal Deposit Insurance Corporation (FDIC).
As a result of the above, “Gross income” for 2011 is €2,277 million, a decrease of 10.7% (-7% ce) on the €2,551 million in 2010.
The balance of “Operating expenses” for 2011 is €1,491 million, down 1.7% (+2.8% ce) on the €1,517 million recorded in 2010, maintaining a controlled level despite the investments made in both people and technology.
Thus, the “Operating income” for 2011 is €786 million, with a decrease of 24% compared with the €1,034 million posted in 2010 (21.1% decrease at constant exchange rate).
The balance of the “Impairment losses on financial assets (net)” heading in 2011 stood at €346 million, 50.9% down on the €703 million posted in 2010. The gradual improvement in the loan-book mix, with an additional increase in the weight of target portfolios (residential and commercial real estate) has had a clear impact on asset quality in the area, with NPA and coverage ratios improving their levels and the risk premium also falling significantly. The NPA ratio fell by 80 bp, closing in December 2011 at 3.6%. The coverage ratio rose to 73% (61% as of December 2010). The risk premium accumulated in 2011 fell by 76 basis points to 0.93%, compared with the figure for 2010.
The balance of “Provisions expense (net)” and “Other gains (losses)” in 2011 stood at €1,501 million, compared with €22 million in 2010. The value of goodwill in the United States has been adjusted in the fourth quarter of 2011 by €1,444 million (€1,011 million net of taxes). Despite the positive performance of the franchise in 2011, the slower-than-expected economic recovery and low interest rates in the forecast horizon, combined with growing regulatory pressure, all imply a slowdown in expected earnings growth in this area. This goodwill adjustment is of an accounting nature only and does not have any negative consequence on the liquidity or capital adequacy of either the area or the Group.
As a result of the above, "Income before taxes" for 2011 is a €1,061 million loss, compared with €309 million in profits in 2010.
The balance of “Income tax” in 2011 is €339 million in income, compared with expenses of €69 million in 2010.
“Net income attributed to parent company” in 2011 is €722 million in losses, compared with €239 million in profits posted in 2010. Not including the loss from impairment of goodwill in the United States, attributed income totaled €289 million, up 23.2% on the figure for 2010.
| The United States | Millions of Euros | ||
|---|---|---|---|
| 2011 | 2010 | % Change 2011-2010 |
|
| Total Assets | 55,413 | 57,575 | (3.8) |
| Loans and advances to customers | 40,069 | 39,570 | 1.3 |
| Of which: |
|
|
|
| Residential mortgages | 8,487 | 6,762 | 25.5 |
| Consumer finance | 5,503 | 5,647 | (2.6) |
| Loans | 4,961 | 5,168 | (4.0) |
| Credit cards | 541 | 479 | 12.9 |
| Loans to enterprises | 20,681 | 19,585 | 5.6 |
| Total customer funds | 36,664 | 41,354 | (11.3) |
| Current and savings accounts | 27,716 | 25,217 | 9.9 |
| Time deposits | 7,963 | 9,033 | (11.8) |
| Other custumer funds | 986 | 7,104 | (86.1) |
| Off-balance-sheet funds | 6,199 | 5,307 | 16.8 |
| Other off-balance-sheet funds | 6,199 | 5,307 | 16.8 |
| Economic capital allocated | 3,170 | 2,972 | 6.7 |
| Efficiency ratio (%) | 65.5 | 59.5 |
|
| NPA Ratio (%) | 3.6 | 4.4 |
|
| NPA Coverage Ratio (%) | 73 | 61 |
|
| Risk premium (%) | 0.93 | 1.69 |
|
The changes in the principal headings of activity in this area of the business are as follows:
As of December 31, 2011, the balance of loans and advances to customers (gross) stood at €40,069 million, up 1.3% on the €39,570 million as of December 31, 2010. If the change at constant exchange rates is considered, this results in a 1.9% decrease due to the aforementioned strategy focused on reducing higher-risk portfolios. However, it is worth highlighting the selective growth of lending in BBVA Compass, with a change in the portfolio mix towards items of less cyclical risk resulting from a clear focus on customer loyalty, credit quality, promotion of cross-selling and customer profitability. Thus the residential real estate portfolio increased by 24% over the year, and already accounts for 24.4% of the total loan portfolio. Loans to the commercial and industrial sector, which account for 34.8% of the portfolio, grew by 22.9%, while the construction real estate portfolio fell by 32.3%, reducing its weight to 8.1%. This shift towards the commercial and industrial sector and residential real estate market is also helping to diversify the bank’s loan portfolio more uniformly.
As of December 31, 2011, on-balance customer funds amounted to €36,664 million, a fall of 11.3% (-14.1% ce) on the €41,354 million as of December 31, 2010, with an improvement in the structure of the balance sheet, a favorable loan/deposit ratio and improved finance through deposit repositioning. Specifically, high-interest deposits, the most expensive source of financing, fell in BBVA Compass, while non-interest accounts increased.
BBVA Compass progress and commercial strategy
BBVA Compass has achieved a number of milestones in 2011, and made significant progress in other initiatives, including the following:
Continued consolidation of the BBVA franchise in the country.
Progress continues to be made on improving the IT platform, which is being developed according to plan. Worth mentioning is the implementation of the new branch platform, which includes, among others, the new automatic cash system, CRM, for check digitizing, as well as campaign management tools. Another advance is the development of the new banking platform, which includes benefits such as a customer-oriented architecture and real-time processing, contributing to improve the bank’s efficiency. Moreover, the implementation of the loan origination platform for the business segment, which continues according to plan, will improve the risk-acceptance processes. BBVA has also worked to improve the bank’s online bank system. In fact, BBVA has obtained recognition from US Banker and Bank Technology News for its technological achievements so far and for its farsighted approach in this area.
An important effort has been made to create brand awareness in the U.S. As a result, BBVA has been named retail bank of the year in 2011. The bank also reaped great rewards from its relationship with the National Basketball Association (NBA), which includes collaboration with four NBA teams, as well as with two WNBA teams, all of them in key markets for the bank. It is also worth noting that BBVA uses its relationship with the NBA to provide services for the community. An example is that over 700 employees and participants worked as volunteers last year on the Team Works school reconstruction project.
The bank’s customer-centric business model strategy has made progress in building up the loyalty of the customer base and launching innovative products and services. Customer retention and cross-selling are improving as a result of the positive performance of the residential mortgage portfolio, which grows above the sector’s levels, while contributing to improve customer satisfaction and productivity.
BBVA Compass' SME banking unit has expanded in 2011 into new industrial segments, such as the institutional segment and the healthcare sector. This contributes to diversify the bank’s sources of income.
From the point of view of distribution, greater emphasis has been placed on developing alternative banking channels. As a result, BBVA has seen a significant increase in the number of mobile banking users.
The bank’s infrastructure, processes and risk procedures have also been improved.
Finally, BBVA’s presence in the United States has been expanded through the selective search for new talent and the retention of current employees, all with the aim of making BBVA Compass the best place to work. In response to employee requests, the Best Place to Work Journey program has been launched, with a focus on four main areas: Leadership and Management Alignment, Cooperation and Collaboration, Career Growth & Development and the Work-Life Balance.
Listed below are other products and services launched by the units in the area in 2011:
- Commercial Banking has created the Dealer Financial Services, merging different departments in order to meet the global financial needs of car dealers. This initiative aligns the local efforts made in the U.S. with the global efforts of the BBVA Group, strengthening the capabilities of BBVA Compass and expanding the offering of products and services for this segment.
- New Healthcare Receivables Solution: New collection management solution for the healthcare sector. The healthcare industry is a large sector in constant change, characterized by fast growth, complex collection management, high provisions, exhaustive information requirements and strict regulations on privacy. This sector provides a large market for BBVA Compass, for which this service has been launched, enabling the bank to meet its needs in terms of collection and payment management. It is also a service offered on the website that converts EOB (Explanation of Benefits) documents into electronic files, manages payments and collections, organizes the information in an online file compatible with the industry’s regulatory framework (HIPPA) and electronically notifies the customer of the collections and payments made.
- Retail Banking: As in the rest of the units, progress has continued to be made in customer focus, paying special attention to the segments of individual customers, small businesses and SMEs. The unit has played an important role in the commitment to make the most innovative interactive technology available to customers. In 2011, BBVA Compass won more than 630,000 new online customers, with a penetration ratio of 43% (36% at the end of December 2010). This type of customers has shown strong loyalty, as evidenced by the high retention ratio, 87% among active users (95% among those users who are also active users of online bill payment). The development of alternative non-branch channels, such as mobile or online banking, together with customer experience improvement, are two of this unit’s strategic priorities.