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 the corporate 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 accounting criteria
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, as well as its successive amendments.
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.
On the basis of accounting criteria, 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 and consolidated for the purposes of Solvency by applying the equity method. The details of these companies are available in Annexes I and II to these documents, mainly the companies BBVA Seguros and Pensiones Bancomer.
- The entry of the balance from institutions (mainly financial) that are not consolidated at the accounting level but for purposes of solvency. The detail on these companies is contained in Annex IV of this document and has significantly decreased in the present year by the acquisition of 14.89% in Garanti, a company that has become to consolidate at the accounting and solvency levels.
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), revealing the main differences between both scopes.
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 | 43,467 | (1) | 20 | 43,486 |
| Trading Book | 78,326 | (913) | 2,358 | 79,771 |
| Asset at fair value through P/L (FVTPL) | 2,311 | (2,249) | - | 62 |
| AFS financial assets | 113,426 | (20,024) | 25 | 93,427 |
| Loans and receivables | 457,644 | (1,462) | 1,968 | 458,150 |
| Held-to-maturity investments | - | - | - | - |
| Adjustments to financial assets for portfolio hedges | 45 | - | - | 45 |
| Hedging derivatives | 3,538 | (118) | - | 3,420 |
| Non-current assets held for sale | 3,369 | (26) | (37) | 3,306 |
| Investments | 879 | 4,433 | (202) | 5,110 |
| Other | 47,073 | (2,182) | 1,510 | 46,401 |
| Total Assets | 750,078 | (22,542) | 5,642 | 733,178 |
Below is a table summarizing the main sources of the differences between the amount of exposure in regulatory terms (Exposure) and the book balances according to the Financial Statements:
Table 3. Main sources of the differences between original exposure and the book balance 31/12/2015
(Millions of euros)
|
|
|
Amount subject to: | |||
|---|---|---|---|---|---|
|
|
Total | Credit risk framework | Securitization framework | Counterparty credit risk framework | Market risk framework |
| Amount corresponding to the asset's book balance in the regulatory consolidation scope | 733,178 | 628,365 | 5,269 | 63,142 | 36,402 |
| Amount corresponding to the liability's book value in the regulatory consolidation scope (Repo) | 35,143 | - | - | 35,143 |
|
| Total net amount in the regulatory consolidation scope | 132,725 | 187,863 | (917) | (17,820) | (36,402) |
| Amount of off-balance-sheet losses (risks and contingent commitments) | 184,951 | 184,951 | - | - | - |
| Counterparty risk in derivatives (includes the add-on) | 31,731 | - | - | 31,731 | - |
| Accounting provisions* | 16,615 | 16,615 | - | - | - |
| Non-eligibility of the Trading Book | (79,771) | - | - | (43,369) | (36,402) |
| Non-eligibility of the balances corresponding to accounting hedges (derivatives) | (3,420) | - | - | (3,420) | - |
| Non-eligibility of the balances corresponding to accounting hedges (adjustments for micro-hedging/portfolio hedges) | (1,365) | (1,365) | - | - | - |
| Non-eligibility of tax assets | (7,217) | (7,217) | - | - | - |
| Non-eligibility of other financial assets (mainly balances of guarantees provided in cash) | (5,766) | (5,766) | - | - | - |
| Non-eligibility of accounts without loan book risk (premiums, transaction costs) | (481) | (481) | - | - | - |
| Non-eligibility of underlying assets of securitizations | (917) | - | (917) | - | - |
| Other (1) | (1,635) | 1,126 | - | (2,762) | - |
| Amount of exposures for regulatory purposes excluding deductions from the capital base | 901,047 | 816,228 | 4,352 | 80,465 | - |
| Non-eligibility of intangible assets | (10,037) | (10,037) |
|
|
|
| Non-eligibility of insurance contracts linked to pensions | (2,151) | (2,151) |
|
|
|
| Amount of exposures for regulatory purposes | 888,859 | 804,040 | 4,352 | 80,465 | - |
This shows the headings of the Public Balance Sheet by EO, EAD and RWAs, 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 RWAs
31/12/2015
(Millions of euros)
| Public Balance Sheet Headings | Credit risk | ||
|---|---|---|---|
| Original exposure |
EAD | RWAs | |
| CASH AND BALANCES AT CENTRAL BANKS | 43,489 | 43,514 | 9,106 |
| TRADING BOOK | 31,731 | 28,948 | 9,534 |
| FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS | 62 | 62 | 38 |
| AVAILABLE-FOR-SALE FINANCIAL ASSETS | 93,342 | 93,065 | 24,238 |
| LOANS AND RECEIVABLES | 650,550 | 521,081 | 257,506 |
| NON-CURRENT ASSETS HELD FOR SALE | 3,309 | 3,309 | 3,262 |
| INVESTMENTS | 4,856 | 4,856 | 11,808 |
| TANGIBLE ASSETS | 9,292 | 9,292 | 9,143 |
| OTHER ASSETS | 7,549 | 7,549 | 5,673 |
| TAX ASSETS | 9,536 | 9,536 | 16,565 |
| ASSETS SOLD UNDER REPURCHASE AGREEMENTS | 35,143 | 26,652 | 618 |
| TOTAL ASSETS + LIABILITIES | 888,859 | 747,865 | 347,491 |
1.1.4. Main changes in the Group's scope of consolidation in 2015
As detailed in Note 3 of the Group’s Annual Consolidated Financial Statements, during fiscal year 2015 the Group took over control of the Garanti Group (third quarter) and the acquisition of the Catalunya Banc Group (during the second quarter), these transactions affected the comparative against the previous year in all items of the consolidated balance and consolidated earnings.
Investments
Acquisition of an additional 14.89% in Garanti
On November 19, 2014, the Group concluded a new agreement with Dogus Holding S.A., Ferit Faik Sahenk, Dianne Sahenk and Defne Sahenk (hereinafter “Dogus”) on matters including the acquisition of 62,538,000,000 additional shares in Garanti (equivalent to 14.89% of the entity’s share capital) for a total maximum payment of 8.90 Turkish lira per lot (Garanti trades in lots of 100 shares each).
The same agreement included the stipulation that if Dogus was paid a dividend against 2014 earnings, the amount would be deducted from the amount payable by BBVA. As of April 27, 2015, Dogus received the divided paid to Garanti shareholders of 0.135 Turkish lira per lot.
The Group concluded the purchase on July 27, 2015; once all the necessary regulatory authorizations had been obtained. Following the acquisition of the new shares, the Group’s stake in Garanti stands at 39.9%.
The total price actually paid by BBVA is 8.765 Turkish lira per share (approximately 5,481 million Turkish lira or €1,857 million, applying an exchange rate of 2.9571 Turkish lira to the euro).
In accordance with the IFRS-EU, as a result of the coming into effect of the new agreement, BBVA Group valued the 25.01% stake held previously in Garanti (currently considered as a joint venture and appraised by the equity method) at fair value and consolidate the financial statements of Garanti into the BBVA Group’s consolidated financial statements starting on the date of effective control.
The aforementioned valuation at fair value has had a non-recurring negative impact on the “Gains (losses) on derecognized assets not classified as non-current assets held for sale” (See Note 48 of the Group’s Annual Consolidated Financial Statements) of the BBVA Group’s consolidated income statements for 2015, resulting in a negative net impact on the “Net income attributed to parent company” heading on the consolidated income statement of BBVA Group for 2015 of approximately €1,840 million. The recognition of this accounting impact has not entailed any additional cash divestment for BBVA. Most of this impact consisted of conversion differences due to the depreciation of the Turkish lira against the euro in the period from the initial acquisition by BBVA of 25.01% of Garanti to the takeover. These conversion differences were already registered practically in full as valuation adjustments, lowering BBVA Group’s consolidated equity on that date.
The aforementioned agreements with the Dogus group include an arrangement for the management of the bank and the appointment of most of the members of its Board of Directors by the BBVA Group (7 out of 10). The 39.9% holding in Garanti was consolidated in the BBVA Group because of the cited management agreements.
As of December 31, 2015, Garanti contributed to the consolidated Group with a volume of assets of approximately €90,000 million, of which approximately €55,000 million correspond to “Loans and advances to customers”, and a volume of “Financial liabilities at amortized cost” of approximately €75,000 million.
Garanti’s contribution to the consolidated income statement corresponding to 2015 without considering the valuation at fair value of the holding on the aforementioned date of effective control was €371 million.
The amount contributed by Garanti to the net attributable profit of the Group if said business combination had been made at the beginning of 2015, would be €539 million, excluding the aforementioned valuation at fair value.
While these consolidated annual financial statements were drawn up, the calculation had not concluded to determine, in accordance with IFRS-3, the existence or not of goodwill related to this acquisition, though the Group expects no significant changes in the asset and liability appraisals related to this acquisition.
The Group’s estimate as of December 31, 2015, according to the acquisition method, which compares the fair values assigned to the acquired assets and assumed liabilities of Garanti, together with the identified intangible assets, and the payment in cash made by the Group as consideration for the operation, generated a difference of €622 million, which is entered in the chapter “Intangible Assets – Goodwill” in the consolidated balance as of December 31, 2015 (attached hereto), though, as mentioned above, this estimate is merely temporary. In accordance with IFRS-3, the term to complete the necessary adjustments on the initial acquisition calculation is one year.
Acquisition of Catalunya Banc
On July 21, 2014, the Governing Board of the Fund for Orderly Bank Restructuring (FROB) awarded BBVA, under a competitive bid process, the acquisition of Catalunya Banc, S.A. (“Catalunya Banc”).
On April 24, 2015, after securing the mandatory regulatory authorizations from the competent authorities, the purchase of 1,947,166,809 shares of Catalunya Banc, S.A. (representing approximately 98.4% of its share capital) was formalized at a price of approximately €1,165 million.
As of December 31, 2015, Catalunya Banc contributed to the consolidated Group with a volume of assets of approximately €40,000 million, of which approximately €19,000 million correspond to “Loans and advances to customers”, and a volume of “Financial liabilities at amortized cost” of approximately €36,000 million.
The amount contributed by Catalunya Banc to the consolidated profit of the Group if said business combination had been made at the beginning of 2015 is not representative.
As of December 31, 2015, according to the acquisition method, the comparison between the fair values assigned at the time of the purchase to the assets and liabilities acquired from Catalunya Banc, together with the identified intangible assets, and the payment in cash made by the Group to FROB as consideration for the operation, generated a difference of €26 million, which is entered in the chapter “Negative goodwill” of the Consolidated Income Statement for 2015. In accordance with IFRS-3, the term to complete the necessary adjustments on the initial acquisition calculation is one year (See Note 18.1 of the Group’s Annual Consolidated Financial Statements).
Divestments
Partial sale of China CITIC Bank Corporation Limited (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 signed a number of agreements, according to which the CNCB shares would be transferred to a third party and the final economic beneficiary of the ownership of these shares shall be Xinhu Zhongbao Co. Ltd. (Xinhu).
On March 12, 2015, after securing the mandatory regulatory authorizations from the competent authorities, the purchase was formalized.
The sale price paid by UBS was HKD 5.73 per share, and the total amount was HKD 13,136 million, equivalent to €1,555 million (calculated at the exchange rate of EUR/HK$= 8.45 valid at the close of the operation).
In addition to the 4.9% and until completing 6.34%, different in-market sales were made during 2015. The total impact of said sales on the BBVA Group’s consolidated financial statements is of a net gain of around €705 million. The gross tax gain entered under “Gains (losses) on non-current assets held- for-sale not classified as discontinued transactions” of the attached Consolidated Income Statement for 2015 (See Note 49 of the Group’s Annual Consolidated Financial Statements).
As of December, 31 2015, the book value of the stake held in CNCB rose to €910 million, equivalent to a stake of 3.26%, which is entered in the chapter “Available-for-sale financial asset” of the consolidated balance on said date.
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 was set at HKD 8,162 million.
On August 27, 2015 the sale of said stake was completed with no significant impact on the consolidated earnings of the Group.