This area includes the Group’s business in the United States. In 2012 there was a change that affects this business area and Mexico, namely the transfer to the United States of the assets and liabilities of a branch located in Houston that previously has been assigned to the Mexico area (BBVA Bancomer). This was done to reflect the geographical nature of the Group’s reporting structure.
Within the United States Area, BBVA Compass accounts for 95% of the volume of business and 81% of earnings in the area. It also includes the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations, and since 2012 the aforementioned BBVA Bancomer office in Houston. This area also included the Group’s business in Puerto Rico, which was sold in 2012. (Note 3 to the Consolidated Financial Statements)
Industry Trends
In the United States, the health of the banking system is continuing to recover, and there are now fewer institutions facing problems. Most banks saw improvement in their earnings, risk quality, capital and liquidity.
The main reason for better earnings is the improvement in asset quality, which has had a positive impact on loan-loss provisions, as it has freed up loan-loss reserves. However, revenue growth has been limited due to the current environment of low interest rates and a relatively flat curve. This has put strong pressure on net interest income in the sector.
In lending, the corporate and industrial sectors continued to perform well, despite the uncertainty regarding fiscal policy. Lending conditions are likely to remain strict in 2013, particularly for residential loans, in light of the high financial burden of households.
The main asset quality indicators have shown a positive trend and widespread improvement. Despite this, the NPA ratio in the residential portfolio rose slightly in the third quarter of 2012.
Deposits remained solid throughout the year, due to the lack of high-yielding investment alternatives and the recent uncertainty regarding the fiscal cliff.
Activity and Earnings
The year-on-year comparison of this area’s financial statements is affected by the appreciation of the US dollar exchange rate against the euro, which has generated a positive impact on the income statement, since the average exchange rate appreciated by 8.3%, while the fixing price at the close of the year shows a 1.9% depreciation, with only a limited impact on the balance sheet. For the most important figures, the percentage change at constant exchange rates is indicated.
The United States ended the year with a net attributable profit of €475 million, significantly higher than the previous year, when it included the net goodwill impairment. The better figures are a result of continued improvement in asset quality, together with restrictions on operating expenses.
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| The United States | Millions of Euros | ||
|---|---|---|---|
| 2012 | 2011 | % Change 2012-2011 |
|
| NET INTEREST INCOME | 1,682 | 1,635 | 2.8 |
| Net fees and commissions | 603 | 633 | (4.8) |
| Net gains (losses) on financial assets and liabilities and net exchange differences | 160 | 140 | 14.5 |
| Other operating income and expenses | (49) | (84) | (41.8) |
| GROSS INCOME | 2,395 | 2,324 | 3.1 |
| Operating expenses | (1,583) | (1,497) | 5.8 |
| Administration costs | (1,396) | (1,327) | 5.2 |
| Personnel expenses | (875) | (820) | 6.7 |
| General and administrative expenses | (521) | (507) | 2.8 |
| Depreciation and amortization | (188) | (170) | 10.4 |
| OPERATING INCOME | 812 | 827 | (1.8) |
| Impairment losses on financial assets (net) | (90) | (346) | (73.8) |
| Provisions (net) and other gains (losses) | (54) | (1,501) | n.a. |
| INCOME BEFORE TAX | 667 | (1,020) | n.s. |
| Income tax | (192) | 329 | n.s. |
| INCOME FROM CONTINUING TRANSACTIONS | 475 | (691) | n.s. |
| Income from discontinued transactions (net) | - | - | n.s. |
| NET INCOME | 475 | (691) | n.s. |
| Net income attributed to non-controlling interests | - | - | n.s. |
| NET INCOME ATTRIBUTED TO PARENT COMPANY | 475 | (691) | n.s. |
The changes in the main headings of the income statement of this business area are:
“Net interest income” for 2012 amounted to €1,682 million, up 2.8% due to the appreciation of the dollar. Excluding this effect, this heading is down 4.7% year-on-year due to the current environment of low interest rates and very flat curves, together with the run-off of the Guaranty portfolio. The falling costs of deposits and improved activity did not offset the negative figures mentioned above.
Regulatory pressures have had a negative impact on the heading “Net fees and commissions”, whose balance is down 4.8% (11.1% at constant exchange rates) to €603 million as of December 31, 2012, compared with €633 million at the close of 2011. BBVA Compass has implemented several measures aimed at mitigating the adverse effects of the new regulatory environment (Durbin), which has been reflected, for instance, in the positive performance of service fees from new residential mortgage loans.
The balance under the headings ”Net gains (losses) on financial assets and liabilities” and “Exchange differences (net)” for 2012 has been €160 million, up 14.5% on the €140 million posted in 2011.
The balance of “Other operating income and expenses” for 2012 was a negative €49 million, down 41.8% on the negative €84 million in 2011, due to the decreased contribution made to the Federal Deposit Insurance Corporation (FDIC).
As a result, “Gross income” stood at €2,395 million as of December 31, 2012. Although this figure is up 3.1% on the €2,324 million posted in 2011, excluding the impact of exchange rates there was a fall of 4.2%.
In “Operating expenses”, the area has managed its costs efficiently, with a balance of €1,583 million in 2012, down 1.7%. However, including the impact of the exchange rate, this heading is up 5.8% on the €1,497 million posted in 2011. This decline is due largely to the streamlining of operating circuits following the implementation of the technological platform in all BBVA Compass branches.
Thus, “Operating income” for 2012 is €812 million, with a decrease of 1.8% (8.6% at constant exchange rates) compared with the €827 million posted in 2011.
The balance of “Impairment losses on financial assets (net)” heading in 2012 stood at €90 million, 73.8% down on the €346 million posted in 2011. The gradual improvement in the loan-book mix, with an additional increase in the weight of target portfolios (residential real estate and commercial), 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 110 basis points over the year, closing in December 2012 at 2.4%. The coverage ratio rose to 90% (73% as of December 2011). The risk premium accumulated in 2012 fell by 66 basis points to 0.23%, compared with the figure for 2011.
The balance of “Provisions expense (net)” and “Other gains (losses)” in 2012 totaled €54 million, while in 2011 the negative balance amounted to €1,501 million, as a result of registering €1,444 million, net of tax, corresponding to the provisions made for the impairment of goodwill in the United States.
As a result of the above, “Income before tax” for 2012 is €667 million, compared with a €1,020 million loss in 2011.
The balance of “Income tax” in 2012 is €192 million in income, compared with income of €329 million in 2011.
As a result, “Net income attributed to parent company” as of December 31, 2012 amounted to €475 million, which compares very favorably with the €691 million in losses posted in 2011.
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| The United States | Millions of Euros | ||
|---|---|---|---|
| 2012 | 2011 | % Change 2012-2011 |
|
| Total Assets | 53,850 | 53,090 | 1.4 |
| Loans and advances to customers | 36,892 | 38,775 | (4.9) |
| Total customer funds | 37,721 | 35,187 | 7.2 |
| Economic capital allocated | 2,638 | 3,379 | (21.9) |
| Efficiency ratio (%) | 66.1 | 64.4 |
|
| NPA Ratio (%) | 2.4 | 3.5 |
|
| NPA Coverage Ratio (%) | 90 | 73 |
|
| Risk premium (%) | 0.23 | 0.89 |
|
In order to compare the main headings of activity of this business area, the balance sheet figures held by BBVA Puerto Rico as of December 2011 have been eliminated.
As of December 31, 2012, the loans and advances to customers (gross) balance amounted to €36,892 million, down 4.9% (3% at constant exchange rates) against the end of the previous year. It is worth highlighting the selective growth of the loan book in BBVA Compass, with a change in the portfolio mix toward items of less cyclical risk resulting from a clear focus on customer loyalty, asset quality, promotion of cross-selling and customer profitability. The residential real estate portfolio increased by ) 19% over the year. Also noteworthy is the increase in commercial and industrial loans, which were up 24.5%, while the construction real estate portfolio fell 48.2%.
The quality of the loan portfolio has improved significantly, with the NPA ratio decreasing by 110 basis points to 2.4%.
As of December 31, 2012, the balance of on-balance-sheet customer funds totaled €37,721 million, up 7.2% (9.3% at constant exchange rates)on the €35,187 million posted as of December 31, 2011. Demand deposits, the least costly funds, have grown significantly (12.3%) and account for 29.1% of customer deposits in BBVA Compass.
Products and Services
The most important new development in terms of products and services launched by United States in 2012 has been the implementation of the technological platform in all BBVA Compass branches in the 7 states where it operates. This complex conversion process has been carried out seamlessly, in accordance with the initial schedule, and has been excellently received by employees and customers. Its obvious advantages will be to improve the service provided through differentiated, efficient, faster and customer-centric processes.
Continuing with the strategy to boost customer loyalty, the Retail Banking unit has launched products and services which include differentiation in prices, financial advisory services, discounts in certain services, and also specialized customer service departments (greater personalization, faster and with an extended timetable).
In liability products, in the second quarter of 2012 BBVA Compass launched a campaign to attract money-market accounts, leading to many new accounts being opened and an increase in customer deposits during the year.