1.1.1. Corporate name and scope of application
Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter, "the Bank" or "BBVA") is a private-law entity subject to the rules and regulations governing banking institutions operating in Spain.
The Bylaws and other public information about the Bank are available for consultation at its registered address (Plaza San Nicolás, 4 Bilbao) and on its official website: www.bbva.com.
The Solvency Regulations are applicable at the consolidated level for the whole Group.
1.1.2. Differences in the consolidable group for the purposes of the Solvency Regulations and the Accounting Circular
The Group’s consolidated financial statements are drawn up in accordance with what is laid down in the International Financial Reporting Standards adopted by the European Union (hereinafter, “EU-IFRS”).
The EU-IFRS were adapted to the sector of Spanish credit institutions by Bank of Spain Circular 4/2004 of December 22 (hereinafter the Accounting Circular), as well as its successive modifications.
Bank of Spain Circulars 5/2013 of October 30, 2013 on public and restricted financial reporting rules and 5/2011 of November 30, 2011 on financial statement models also apply.
For the purposes of the Accounting Circular, companies are considered to form part of a consolidated group when the controlling institution holds or can hold, directly or indirectly, control of them. An institution is understood to control another entity when it is exposed, or is entitled to variable returns as a result of its involvement in the subsidiary and has the capacity to influence those returns through the power it exercises on the subsidiary. For such control to exist, the following aspects must be fulfilled:
- a) Power: An investor has power over a subsidiary when it has current rights that provide it with the capacity to direct its relevant activities, i.e. those that significantly affect the returns of the subsidiary;
- b) Returns: An investor is exposed, or is entitled to variable returns as a result of its involvement in the subsidiary when the returns obtained by the investor for such involvement may vary based on the economic performance of the subsidiary. Investor returns may be positive only, negative only or both positive and negative.
- c) Relationship between power and returns: An investor has control over a subsidiary when it not only has power over the subsidiary and is exposed, or is entitled to variable returns for its involvement in the subsidiary, but also has the capacity to use its power to influence the returns it obtains due to its involvement in the subsidiary.
Therefore, in drawing up the Group’s consolidated Financial Statements, all dependent companies and consolidated structured entities have been consolidated by applying the full consolidation method.
Jointly-controlled entities, as well as joint ventures (those over which joint control arrangements are in place), are valued using the equity method.
The list of all the companies forming part of the BBVA Group is included in the appendices to the Group's Annual Consolidated Financial Statements.
For the purposes of the Solvency Regulations, as set out in Spanish Law 36/2007, heading two, section 3.4, the consolidated group comprises the following subsidiaries:
- Credit institutions.
- Investment services companies.
- Open-end funds.
- Companies managing mutual funds, together with companies managing pension funds, whose sole purpose is the administration and management of the aforementioned funds.
- Companies managing mortgage securitization funds and asset securitization funds.
- Venture capital companies and venture capital fund managers.
- Institutions whose main activity is holding shares or investments, unless they are mixed-portfolio financial corporations supervised at the financial conglomerate level.
Likewise, the special-purpose entities whose main activity implies a prolongation of the business of any of the institutions included in the consolidation, or includes the rendering of back-office services to these, will also form part of the consolidated group.
However, according to the provisions of this law, insurance entities and some service firms do not form part of consolidated groups of credit institutions.
Therefore, for the purposes of calculating solvency requirements, and hence the drawing up of this Information of Prudential Relevance, the scope of consolidated institutions is different from the scope defined for the purposes of drawing up the Group’s Financial Statements.
The effect of the difference between the two regulations is basically due to:
- The difference between the balance contributed by entities (largely real-estate, insurance and service companies) that are consolidated in the Group’s Financial Statements by the full consolidation method, but are consolidated for the purposes of Solvency by applying the equity method. The details of these companies are available in Annexes I and II of these documents; mainly the companies BBVA Seguros and the Bancomer pension company.
- The entry of the balance from institutions (mainly financial) that are not consolidated at the accounting level but for purposes of solvency. Details of these companies are available in Annex IV of this document (the biggest balance is that contributed by Garanti).
1.1.3. Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter
This section includes an exercise in transparency aimed at offering a clear view of the process of reconciliation between the book balances reported in the Public Balance Sheet (attached to the Group's Annual Consolidated Financial Statements) and the book balances this report uses (regulatory scope).
TABLE 2: Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter
(Millions of euros)
| Public Balance Sheet Headings | Public Balance Sheet | Insurance companies and real-estate finance companies (1) | Jointly-controlled entities and other adjustments (2) | Regulatory balance sheet |
|---|---|---|---|---|
| Cash and Balances at Central Banks | 31,430 | (1) | 2,480 | 33,909 |
| Trading Book | 83,258 | (1,008) | 2,327 | 84,577 |
| Asset at fair value through P/L (FVTPL) | 2,761 | (2,189) | 18 | 590 |
| AFS financial assets | 94,875 | (18,394) | 3,875 | 80,356 |
| Loans and receivables | 372,375 | (859) | 17,959 | 389,475 |
| Held-to-maturity investments | - | - | 0 | 0 |
| Adjustments to financial assets for portfolio hedges | 121 | - | - | 121 |
| Hedging derivatives | 2,551 | (169) | 15 | 2,396 |
| Non-current assets held for sale | 3,793 | (19) | 99 | 3,873 |
| Investments | 4,509 | 3,615 | (3,891) | 4,233 |
| Other | 36,270 | (1,807) | 3,580 | 38,043 |
| Total Assets | 631,942 | -20,830 | 26,460 | 637,572 |
(1) Balances corresponding to the companies not consolidated for solvency purposes (see Annex)
(2) Corresponds to the balances contributed by Garanti, developers and other intra-group removals
Below is a table summarizing the main sources of the differences between the amount of exposure in regulatory terms and the book balances according to the Financial Statements:
TABLE 3: Main sources of the differences between original exposure and the book balance
(Millions of euros)
| Amount corresponding to the asset's book balance in the regulatory consolidation scope | 637,572 |
|---|---|
| Amount corresponding to the liability's book value in the regulatory consolidation scope (Repo) | 44,965 |
| Total net amount in the regulatory consolidation scope | 72,967 |
| Amount of off-balance-sheet losses (risks and contingent commitments) | 147,423 |
| Counterparty risk in derivatives (includes the add-on) | 26,605 |
| Accounting provisions* | 13,572 |
| Non-eligibility of the Trading Book | -84,577 |
| Non-eligibility of the balances corresponding to accounting hedges (derivatives) | -2,396 |
| Non-eligibility of the balances corresponding to accounting hedges (adjustments for micro-hedging/portfolio hedges) | -1,781 |
| Non-eligibility of intangible assets | -8,853 |
| Non-eligibility of insurance contracts linked to pensions | -2,189 |
| Non-eligibility of tax assets | -6,585 |
| Non-eligibility of other financial assets (mainly balances of guarantees provided in cash) | -6,229 |
| Non-eligibility of accounts without loan book risk (premiums, transaction costs) | -377 |
| Non-eligibility of underlying assets of securitizations | -993 |
| Other (1) | -653 |
| Amount of exposures for regulatory purposes | 755,503 |
This shows the headings of the Public Balance Sheet by EO, EAD and APRs, which are the risk concepts on which this document is based.
TABLE 4: Opening of the headings of the Public Balance Sheet for EO, EAD and APRs
(Millions of euros)
| Public Balance Sheet Headings | Credit risk | ||
|---|---|---|---|
| Original exposure | EAD | RWAs | |
| 1. CASH AND BALANCES AT CENTRAL BANKS | 33,914 | 33,914 | 12,662 |
| 2. TRADING BOOK | 26,605 | 26,159 | 8,580 |
| 3. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS | 590 | 590 | 358 |
| 4. AVAILABLE-FOR-SALE FINANCIAL ASSETS | 78,957 | 78,536 | 21,376 |
| 5. LOANS AND RECEIVABLES | 543,766 | 444,272 | 217,112 |
| 9. NON-CURRENT ASSETS HELD FOR SALE | 2,961 | 2,961 | 3,238 |
| 12. INVESTMENTS | 4,061 | 4,061 | 9,697 |
| 13. TANGIBLE ASSETS | 7,618 | 7,618 | 7,450 |
| 16. OTHER ASSETS | 7,202 | 7,202 | 5,523 |
| 17. TAX ASSETS | 4,866 | 4,866 | 9,011 |
| 3. ASSETS SOLD UNDER REPURCHASE AGREEMENTS | 44,965 | 42,946 | 917 |
| TOTAL ASSETS + LIABILITIES | 755,503 | 653,124 | 295,925 |
1.1.4. Main changes in the Group's scope of consolidation in 2014
Ongoing operations
1.1.4.1. Agreement for the acquisition of an additional 14.9% in Garanti
On November 19, 2014 the Group concluded a new agreement with Dogus Holding A.S., Ferit Faik Sahenk, Dianne Sahenk and Defne Sahenk (hereinafter "Dogus") for the acquisition of 62,538,000,000 shares in Garanti for a maximum total payment of 8.90 Turkish lira per share, equivalent to a maximum total of around 5,566 million Turkish lira.
The effective acquisition and entry into force of the new agreement are subject to obtaining the pertinent regulatory authorizations from the Turkish, Spanish and European authorities, and from any other countries as necessary. Following the acquisition of the new shares, the Group's stake in Garanti will be 39.9%.
In accordance with the IFRS-EU, as a result of the entry into force of the new agreement, BBVA Group will value the stake in Garanti (currently registered as a joint venture by the equity method) at fair value and consolidate Garanti into the BBVA Group's consolidated Financial Statements starting on the date of effective control (which is expected in 2015), subject to obtaining the regulatory authorizations mentioned above.
The estimate of the impact on the Group's consolidated Financial Statements is a non-recurring negative impact on the net attributable profit of around €1.5 billion, most of it resulting from conversion differences due to the depreciation of the Turkish lira against the euro since the initial acquisition. These conversion differences are already registered as valuation adjustments, which lower the BBVA Group's capital. The recognition of this accounting impact will not mean any additional cash divestment for BBVA. The final impact must be calculated on the date of effective acquisition of the shares and may vary due to questions such as changes in the TL/EUR exchange rate, the earnings generated by the Garanti group, etc.
1.1.4.2. Award of Catalunya Banc
On July 21, 2014, the Governing Board of the Fund for Orderly Bank Restructuring (FROB) awarded BBVA the acquisition of Catalunya Banc, S.A., hereinafter "Catalunya Banc", under a competitive bid process.
As a result, a share purchase/sale contract was concluded between FROB and BBVA by which FROB will sell BBVA up to 100% of the shares in Catalunya Banc for up to €1,187 million.
This price will be reduced by €267 million if before the closing date of the operation the FROB and Catalunya Banc have not obtained confirmation from the tax authorities regarding the expected application of the regime governing deferred tax assets (introduced by Royal Decree-Law 14/2013) to certain losses generated in the consolidated Financial Statements of Catalunya Banc in 2013, which originated in the transfer of assets to Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A. (SAREB).
The execution of the purchase/sale is subject to a number of questions, among them obtaining the corresponding administrative authorizations and approvals, and the final closure of the operation announced by Catalunya Banc to the market on July 17, 2014, by which Catalunya Banc will transfer to an asset securitization fund a portfolio of loans with a nominal value of €6,392 million.
1.1.4.3. Agreement for the partial sale of CNCB
On January 23, 2015, the BBVA Group announced it had signed an agreement to sell 4.9% of the share capital of China CITIC Bank Corporation Limited (CNCB) to UBS AG, London Branch (UBS); which, in turn has signed a number of agreements (the "Operations"), according to which the CNCB shares shall be transferred to a third party and the final economic beneficiary of the ownership of these shares shall be Xinhu Zhongbao Co. Ltd. (Xinhu).
The sale price to be paid by UBS is HKD 5.73 per share, and the total amount will be HKD 13,136 million, equivalent to €1,460 million (calculated at the exchange rate of HKD/EUR = 8.9957, current at the close of January 15, 2015).
The agreement between UBS and BBVA will be executed on completion of the legal and corporate requirements needed to carry out the Operations related to Xinhu.
As of December 31, 2014, the stake in CNCB is registered under the heading "Available-for-Sale Financial Assets."
The agreement is expected to be closed in the first quarter of 2015. The estimated impact on BBVA Group's consolidated Financial Statements is of a net gain of around €400 million.
1.1.4.4. Agreement for the sale of the stake in Citic International Financial Holdings Limited (CIFH)
On December 23, 2014, the Group signed an agreement to sell its 29.68% stake in Citic International Financial Holdings Limited (CIFH), the unlisted subsidiary of CNCB headquartered in Hong Kong, to China CITIC Bank Corporation Limited. The sale price of this stake is HKD 8,162 million. The execution of the agreement is subject to obtaining the pertinent authorizations. The estimated impact on Group's consolidated Financial Statements is of a negative effect on earnings of approximately €25 million.