4.2. Information on credit risks

4.2.1. Exposure to credit risk

Pursuant to Rule Thirteen in the Solvency Circular concerning the capital requirements for credit risk, exposure is understood to be any asset item and all items included in the Group’s memorandum accounts involving credit risk and not deducted from the Group’s eligible capital. Accordingly, inclusion is made mainly of customer lending items, with their corresponding undrawn balances, letters of credit and guarantees, debt securities and capital instruments, cash and deposits in central banks and credit institutions, assets purchased or sold under a repurchase agreement (asset and liability repos), financial derivatives and fixed assets.

Below is a presentation of the balance of the original exposure and the allowances under the advanced measurement and standardized approaches as of December 31, 2013 and 2012. In accordance with section one of Rule Twenty-eight of the Solvency Circular, only the exposure net of allowances is presented for those exposures calculated under the standardized approach.

Table 10. Exposure to credit risk

2013

(Millions of euros)

				Exposure after applying conversion factors
Category of exposure	Original exposure (1)	Provisions (2)	Exposure net of provisions (3)	On-balance-sheet exposure after mitigation techniques	Off-balance-sheet exposure after mitigation techniques	Fully adjusted value of the exposure	Average CCF	EAD
Central governments and central banks	93,548	–47	93,502	87,386	5,664	93,050	41%	89,724
Regional governments and local authorities	9,195	0	9,195	6,500	347	6,847	47%	6,663
Public-sector institutions and other public entities	4,486	0	4,486	3,511	1,318	4,829	36%	3,980
Multilateral development banks	50	0	50	50	0	50	0%	50
International organizations	8	0	8	8	0	8	1%	8
Institutions	20,702	–12	20,690	10,606	9,728	20,334	42%	14,713
SMEs	93,305	–806	92,499	55,710	31,152	86,862	36%	66,969
Retail	60,395	–67	60,328	41,141	16,205	57,346	14%	43,372
Collateralized with real-estate property	51,916	–115	51,801	49,670	795	50,465	48%	50,050
Default status	14,836	–4,163	10,674	8,657	71	8,728	25%	8,675
High risk	1,133	–16	1,118	877	53	930	1%	878
Guaranteed bonds	911	0	911	911	0	911	0%	911
Short-term to institutions and corporates	663	0	663	663	0	663	0%	663
Collective Investment Institutions	816	0	816	253	8	261	100%	261
Other exposures	22,210	–98	22,112	26,860	735	27,595	38%	27,139
TOTAL STANDARDIZED APPROACH	374,175	–5,323	368,852	292,804	66,075	358,879		314,055
Central governments and central banks	1,581	–2	–	2,707	808	3,515	50%	3,115
Institutions	89,458	–76	–	80,993	8,161	89,155	56%	85,558
SMEs	114,333	–6,717	–	63,196	49,507	112,703	53%	89,644
Retail	96,037	–1,566	–	84,850	11,186	96,036	26%	86,750
Of which: Secured by real estate collateral	72,829	–676	–	72,446	383	72,829	6%	72,470
Of which: Qualifying revolving retail	17,160	–532	–	6,544	10,616	17,160	26%	9,273
Of which: Other retail assets	6,048	–357	–	5,860	187	6,047	56%	5,006
TOTAL ADVANCED MEASUREMENT APPROACH	301,409	–8,362	368,852	231,746	69,662	301,407		265,066
TOTAL CREDIT RISK DILUTION AND DELIVERY	675,584	–13,685	4,783	524,550	135,737	660,287		579,122
Securitized positions	5,730	–66	4,783	5,692	0	5,692	0%	5,619
Standardized Approach	4,820	–37	–	4,783	–	4,783	0%	4,710
Advanced Measurement Approach	910	–28	–	910	–	910	0%	910
Equity	8,818	–128	–	8,443	–	8,443	0%	8,818
Simple Method	830	–63	–	830	–	830	0%	830
Non-trading equity instruments in sufficiently diversified portfolios	620	–59	–	620	–	620	0%	620
Exchange-traded equity instruments	209	–5	–	209	–	209	0%	209
PD/LGD Method	7,613	0	373,635	7,613	–	7,613	0%	7,613
Internal Models	375	–65	93,502	0	–	0	0%	375
TOTAL CREDIT RISK	690,132	–13,878	9,195	538,685	135,737	674,422		593,559

(1) Gross exposure prior to the application of risk mitigation techniques. (2) It includes provisions for the Impairment of assets (financial and non-financial) and other valuation adjustments, with the exception of the generic provision included in the capital base as more Additional Capital, as per Rule Eight in the Solvency Circular. (3) Exposures are adjusted solely by provisions in the case of exposures by the standardized approach.

2012

(Millions of euros)

				Exposure after applying conversion factors
Category of exposure	Original exposure (1)	Provisions (2)	Exposure net of provisions (3)	On-balance-sheet exposure after mitigation techniques	Off-balance-sheet exposure after mitigation techniques	Fully adjusted value of the exposure	Average CCF	EAD
Central governments and central banks	108,378	–193	108,185	101,155	3,197	104,352	73%	100,299
Regional governments and local authorities	9,361	0	9,361	6,775	255	7,030	43%	6,884
Public-sector institutions and other public entities	3,096	–1	3,095	2,990	1,365	4,355	40%	3,539
Multilateral development banks	187	0	187	67	133	200	12%	83
International organizations	34	0	34	34	0	34	1%	34
Institutions	18,855	–12	18,843	12,799	5,937	18,736	16%	13,761
SMEs	98,219	–1,686	96,533	56,930	33,486	90,417	31%	67,341
Retail	55,783	–195	55,589	38,875	13,778	52,653	11%	40,345
Collateralized with real-estate property	54,193	–169	54,024	51,164	45	51,209	23%	51,174
Default status	11,489	–2,581	8,908	8,014	55	8,069	61%	8,048
High risk	1,596	–73	1,523	1,327	37	1,364	22%	1,335
Guaranteed bonds	503	0	503	503	0	503	0%	503
Short-term to institutions and corporates	656	0	656	645	0	645	0%	645
Collective Investment Institutions	53	0	53	24	28	52	100%	52
Other exposures	23,081	–7	23,074	27,350	489	27,838	31%	27,502
TOTAL STANDARDIZED APPROACH	385,483	–4,916	380,567	305,457	58,804	364,261		321,544
Central governments and central banks	1,092	–2	–	1,947	859	2,805	1	2,382
Institutions	77,129	–53	–	71,686	5,882	77,568	60%	75,187
SMEs	133,851	–6,284	–	75,084	56,583	131,668	55%	106,014
Retail	94,022	–1,501	–	83,895	10,159	94,054	27%	86,653
Of which: Secured by real estate collateral	70,970	–445	–	70,590	380	70,970	10%	70,630
Of which: Qualifying revolving retail	16,415	–622	–	6,742	9,674	16,415	28%	9,427
Of which: Other retail assets	6,636	–434	–	6,563	105	6,668	32%	6,596
TOTAL ADVANCED MEASUREMENT APPROACH	306,095	–7,841	0	232,611	73,483	306,095		270,237
TOTAL CREDIT RISK DILUTION AND DELIVERY	691,577	–12,757	380,567	538,069	132,287	670,356		591,781
Securitized positions	9,409	–177	–	9,361	0	9,361	0%	9,277
Standardized Approach	6,685	–47	6,637	6,637	–	6,637	0%	6,553
Advanced Measurement Approach	2,724	–130	–	2,724	–	2,724	0%	2,724
Equity	6,234	–225	–	5,744	–	5,744	0%	6,234
Simple Method	947	–66	–	947	–	947	0%	947
Non-trading equity instruments in sufficiently diversified portfolios	694	–64	–	694	–	694	0%	694
Exchange-traded equity instruments	253	–2	–	253	–	253	0%	253
PD/LGD Method	4,798	0	–	4,798	–	4,798	0%	4,798
Internal Models	489	–159	–	0	–	0	0%	489
TOTAL CREDIT RISK	707,220	–13,160	387,204	553,174	132,287	685,462		607,292

(1) Gross exposure prior to the application of risk mitigation techniques. (2) It includes provisions for the Impairment of assets (financial and non-financial) and other valuation adjustments, with the exception of the generic provision included in the capital base as more Additional Capital, as per Rule Eight in the Solvency Circular. (3) Exposures are adjusted solely by provisions in the case of exposures by the standardized approach.

4.2.2. Average value of the exposures throughout 2013 and 2012

The table below shows the average value of exposure to credit risk in 2013 and 2012 for both the advanced measurement and standardized approaches for each one of the exposure categories:

Table 11. Average value of the exposures throughout 2012 and 2013

(Millions of euros)

	Original average exposure for the period
Category of exposure	2013	2012
Central governments and central banks	97,465	107,063
Regional governments and local authorities	9,900	9,034
Public-sector institutions and other public entities	3,728	2,967
Multilateral development banks	79	82
International organizations	15	396
Institutions	22,879	19,396
SMEs	95,588	96,500
Retail	57,316	55,665
Collateralized with real-estate property	53,552	49,547
Default status	13,454	9,978
High risk	1,435	1,749
Guaranteed bonds	775	361
Short-term to institutions and corporates	734	757
Collective Investment Institutions	243	140
Other exposures	23,228	21,852
TOTAL STANDARDIZED APPROACH	380,388	375,485
Central governments and central banks	1,367	1,515
Institutions	83,660	91,627
SMEs	120,542	143,931
Retail	97,614	92,077
Of which: Secured by real estate collateral	73,971	70,933
Of which: Qualifying revolving retail	17,404	15,119
Of which: Other retail assets	6,240	6,024
TOTAL ADVANCED MEASUREMENT APPROACH	303,183	329,149
TOTAL CREDIT RISK DILUTION AND DELIVERY (5)	683,571	704,633
Securitized positions	6,630	9,073
Of which: Standardized approach	5,692	6,603
Of which: Advanced Measurement Approach	938	2,469
Equity	7,344	6,069
Of which: Simple Method	874	1,068
Equity instruments in sufficiently diversified portfolios	646	649
Exchange Traded equity instruments	228	419
Of which: PD/LGD Method	5,979	4,526
Of which: Internal Models	491	475
TOTAL CREDIT RISK	697,545	719,776

4.2.3. Distribution by geographical area

The following chart shows the distribution by geographical area of the original exposure based on the obligor’s country. The breakdown includes exposure under the standardized and advanced measurement approaches, without including positions in securitizations or equity.

Table 12. Distribution by geographical area of exposure to credit risk
2013

(Millions of euros)

	Original exposure by geographical area
Category of exposure	Total	Europe	Mexico	U.S.	South America	Rest of the world
Central governments and central banks	93,548	59,983	12,015	3,436	18,062	52
Regional governments and local	9,195	1,657	6,142	1,113	190	93
authorities	4,486	1,792	0	323	2,371	0
Public-sector institutions and other public	50	0	0	0	50	0
entities	8	8	0	0	0	0
Multilateral development banks	20,702	12,460	2,686	1,992	3,431	133
International organizations	93,305	11,920	19,465	41,147	20,198	575
Institutions	60,395	20,602	7,524	7,130	25,129	9
SMEs	51,916	16,986	10,531	12,714	11,677	9
Retail	14,836	12,090	1,408	420	915	2
Collateralized with real-estate property	1,133	810	79	86	111	47
Default status	911	0	911	0	0	0
High risk	663	196	0	3	464	0
Guaranteed bonds	816	804	0	6	5	0
Short-term to institutions and corporates	22,210	7,645	7,230	1,778	5,557	0
Collective Investment Institutions	4,820	253	70	4,498	0	0
TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH	378,995	147,206	68,062	74,646	88,160	921
Central governments and central banks	1,581	116	2	591	480	392
Institutions	89,458	84,704	431	2,126	196	2,003
SMEs	114,333	99,961	816	6,933	2,154	4,470
Retail	96,037	82,453	13,428	18	39	99
Securitized positions	910	898	0	0	0	12
TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH	302,319	268,131	14,676	9,668	2,869	6,975
TOTAL CREDIT RISK DILUTION AND DELIVERY	681,314	415,337	82,739	84,313	91,029	7,896

Note: Positions in equity are not included.

The next table shows the distribution by geographical area of the book balances of the allowances for financial and non-financial asset losses and for contingent liabilities.

Table 13. Distribution by geographical area of the book balances of the non-performing and impaired exposures of financial assets and contingent liabilities
2013

(Millions of euros)

	Total	Europe	Mexico	U.S.	South America	Rest of the world
Non-performing and impaired exposures	25,977	23,648	1,297	342	680	11

Note: Accounting balances solvency perimeter excluding equity positions.

The next table shows the distribution by geographical area of the book balances of the allowances for financial asset losses and for contingent liabilities.

Table 14. Distribution by geographical area of the book balances of the value adjustments for impairment of financial assets and contingent liabilities
2013

(Millions of euros)

	Total	Europe	Mexico	U.S.	South America	Rest of the world
Value adjustments and provisions	15,914	12,213	1,606	597	1,489	9

Note: Accounting balances solvency perimeter excluding equity positions.

4.2.4. Distribution by sector

Below is the distribution by economic sector (standardized and advanced measurement approaches) of the original exposure, excluding positions in equity.

Table 15. Distribution by sector of exposure to credit risk
2013

(Millions of euros)

	Original exposure by sector
Category of exposure	Total	Credit institutions, insurance and brokerage	Public sector	Agriculture	Industry	Construction	Commercial	Individuals	Other sectors
Central governments and central banks	93,548		13.73%
Regional governments and local authorities	9,195		1.35%
Public-sector institutions and other public entities	4,486		0.66%
Multilateral development banks	50	0.00%	0.01%
International organizations	8	3.04%	0.00%
Institutions	20,702	0.47%	0.03%
SMEs	93,305	0.00%	13.73%	0.57%	1.81%	0.91%	6.38%		3.52%
Retail	60,395	0.07%		0.15%	0.37%	0.22%	1.17%	5.65%	1.24%
Collateralized with real-estate property	51,916	0.01%		0.03%	0.10%	0.11%	0.23%	5.05%	2.09%
Default status	14,836	0.07%	0.01%	0.03%	0.16%	0.18%	0.19%	0.80%	0.74%
High risk	1,133	0.00%	0.00%	0.00%	0.01%	0.01%	0.02%	0.03%	0.09%
Guaranteed bonds	911	0.13%
Short-term to institutions and corporates	663	0.03%		0.01%					0.03%
Collective Investment Institutions	816	0.12%
Other exposures	22,210	0.22%	0.00%	0.00%					2.69%
Securitized positions	4,820	0.05%	0.55%
TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH	378,995	4.21%	16.34%	0.80%					10.40%
Central governments and central banks	1,581		0.23%
Institutions	89,458	8.95%	4.17%						0.02%
SMEs	114,333	1.58%	0.05%	0.08%	5.70%				5.66%
Retail	96,037	0.01%		0.00%	0.02%				0.03%
Securitized positions	910	0.13%
TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH	302,319	10.67%	4.45%	0.09%	5.72%	1.70%	2.02%	14.02%	5.71%
TOTAL CREDIT RISK	681,314	14.88%	20.79%	0.88%	8.23%	3.17%	10.17%	25.77%	16.11%

Note: Positions in equity are not included.

The following table shows the distribution by counterparty of the book balances of the nonperforming and impaired exposures of financial assets and contingent liabilities.

Table 16. Distribution by sector of the book balances of the non-performing and impaired exposures of financial assets and contingent liabilities
2013

(Millions of euros)

	Total	Credit institutions, insurance and brokerage	Public sector	SMEs	Retail	Other sectors
Non-performing and impaired exposures	25,977	0.91%	1.05%	59.69%	30.61%	7.73%

Note: Accounting balances solvency perimeter excluding equity positions.

The next table shows the distribution by counterparty of the book balances of allowances for financial asset losses and for contingent exposures:

Table 17. Distribution by sector of the book balances of the value adjustments for Impairment of financial assets and contingent liabilities
2013

(Millions of euros)

	Total	Credit institutions, insurance and brokerage	Public sector	SMEs	Retail	Other sectors
Value adjustments and provisions	15,914	1.99%	1.98%	60.55%	25.78%	9.71%

Note: Accounting balances solvency perimeter excluding equity positions.

4.2.5. Distribution by residual maturity

The following table shows the distribution of original exposure by residual maturity, broken down by category of exposure under the standardized and advanced measurement approaches, excluding positions in equity:

Table 18. Distribution by residual maturity of exposure to credit risk
2013

(Millions of euros)

		Original exposure by geographical area
Category of exposure	Total	Less than 1 year	Between 1 and 5 years	Over 5 years
Central governments and central banks	93,548	51,537	27,839	14,172
Regional governments and local authorities	9,195	2,617	1,241	5,337
Public-sector institutions and other public entities	4,486	1,916	1,765	805
Multilateral development banks	50	50	0	0
International organizations	8	0	8	0
Institutions	20,702	12,030	5,481	3,191
SMEs	93,305	30,388	37,122	25,795
Retail	60,395	25,034	22,522	12,839
Collateralized with real-estate property	51,916	3,189	6,686	42,041
Default status	14,836	1,078	13,758	0
High risk	1,133	250	459	424
Guaranteed bonds	911	0	911	0
Short-term to institutions and corporates	663	535	50	78
Collective Investment Institutions	816	810	0	6
Other exposures	22,210	13,361	769	8,080
Securitized positions	4,820	5	143	4,671
TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH	378,995	142,802	118,754	117,440
Central governments and central banks	1,581	309	279	994
Institutions	89,458	54,088	17,393	17,978
SMEs	114,333	51,103	35,848	27,381
Retail	96,037	14,876	3,944	77,217
Securitized positions	910	277	434	199
TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH	302,319	120,653	57,897	123,769
TOTAL CREDIT RISK DILUTION AND DELIVERY	681,314	263,454	176,651	241,209

Note: Positions in equity are not included.

4.2.6. Value adjustments for impairment losses and allowances for contingent risks and commitments

The following table presents the movement recorded in the years 2013 and 2012 in the value adjustments for allowances and impairment losses of financial assets on the balance sheet and for contingent risks and commitments, including country risk, generic and specific funds.

Table 19. Value adjustments for impairment losses and allowances for contingent risks and commitments
2013

(Millions of euros)

Item	Value adjustments and provisions	Provisions for contingent liabilities and commitments	Total
BALANCE AT START OF YEAR	14,801	341	15,142
Increase in impairment charged to income	11,054	96	11,150
Decrease in impairment credited to income	–4,921	–52	–4,973
Institutions acquired by the Group during the year	0	0	0
Institutions disposed of during the year	–30	–1	–31
Transfers to written-off loans	–3,838	0	–3,838
Exchange differences and others	–1,518	–18	–1,535
BALANCE AT END OF YEAR	15,548	367	15,914
Of which:
For impaired portfolio	12,987	202	13,190
For current non-impaired portfolio	2,560	165	2,725

Note: Solvency perimeter.

2012

(Millions of euros)

Item	Value adjustments and provisions	Provisions for contingent liabilities and commitments	Total
BALANCE AT START OF YEAR	10,039	291	10,330
Increase in impairment charged to income	10,643	105	10,747
Decrease in impairment credited to income	–2,333	–44	–2,377
Institutions acquired by the Group during the year	2,067	5	2,072
Institutions disposed of during the year	0	0	0
Transfers to written-off loans	–4,143	0	–4,143
Exchange differences and others	–1,471	–16	–1,487
BALANCE AT END OF YEAR	14,801	341	15,142
Of which:
For impaired portfolio	9,889	166	10,055
For current non-impaired portfolio	4,912	175	5,087

4.2.7. Total impairment losses for the period

The following table shows details of impairment losses and allowances on financial assets and contingent risks and commitments, as well as derecognition of losses recognized previously in asset write-offs recorded directly in the income statement in 2013 and 2012.

Table 20. Impairment losses for the period

(Millions of euros)

ITEMS	2013	2012
Financial assets	5,628	7,980
Of which:
Recovery of written-off assets	362	337
Contingent exposure and commitments (recoveries)	44	61
TOTAL IMPAIRMENT LOSSES	5,672	8,041

Note: Solvency perimeter.