3.4.1. Scope and nature of the structural risk in the equity portfolio measurement and reporting systems
The BBVA Group’s exposure to structural risk in the equity portfolio basically results from the holdings in industrial and financial companies, with medium/long-term investment horizons. It includes the holdings consolidated in the Group, although their variations in value have no immediate effect on equity in this case.
This exposure is mitigated through net short positions held in derivatives on their underlying assets, which are used to limit portfolio sensitivity to potential falls in prices.
The GRM corporate area acts as an independent unit that is responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets.
It also monitors the level of compliance with the limits set, according to the Risk Appetite and as authorized by the Executive Committee. It reports on these levels regularly to the Global Risk Management Committee (GRMC), the Board’s Risk Committee and the Executive Committee, particularly in the case of overruns of the limits set.
The mechanisms of risk control and limitation hinge on the key aspects of exposure, earnings and economic capital. The structural equity risk management metrics designed by GRM according to the corporate model contribute to effective risk monitoring by estimating the sensitivity figures and the capital necessary to cover possible unexpected losses due to the variations in the value of the companies making up the Group’s equity portfolio, at a confidence level that corresponds to the institution’s target rating, and taking into account the liquidity of the positions and the statistical performance of the assets under consideration.
To carry out a more in-depth analysis, stress tests and sensitivity analyses are carried out from time to time against different simulated scenarios, using both past crisis situations and forecasts by BBVA Research as the base.
On a monthly basis, backtesting is carried out on the risk measurement model used.
3.4.2. Differentiation between portfolios held for sale and those held for strategic purposes
3.4.2.1. Portfolios held for sale
The portfolio held for sale is reflected in accounting terms by the entry entitled available-for-sale assets. In the case of capital instruments, this portfolio will include the capital instruments of institutions that are not strategic, which are not classified as the Group’s subsidiaries, associates, or jointly controlled businesses, and that have not been included in the fair value through profit or loss category.
3.4.2.2. Portfolios held for strategic purposes
The portfolio held for strategic purposes is included for accounting purposes under the heading of available-for-sale financial assets. An investment in capital instruments is considered strategic when it has been made with the intent of setting up or maintaining a long-term operating relationship with the subsidiary, although there is no significant influence on it, if at least one of the following situations is in place:
- Representation on the Board of Directors or equivalent management body in the subsidiary.
- Participation in the policy setting process, including those related to dividends and other payouts.
- The existence of significant transactions between the investing institution and the subsidiary.
- The exchange of senior management staff.
- The supply of expert information of an essential nature.
3.4.3. Accounting policies and instrument valuation
The financial instruments contained in the available-for-sale financial assets portfolio are valued at their fair value both in their initial entry and on subsequent valuations.
Said changes are recorded in equity unless objective evidence exists that the fall in value is due to asset impairment where the amounts recorded will be written-off from equity and they will be taken directly to the income statement.
The fair value is the price that would be received for selling an asset or paid for transferring a liability in an orderly transaction between market participants. It is therefore a market-based measurement, and not specific to each entity.
The fair value is reached without making any deduction in transaction costs that might be incurred due to sale or disposal by other means.
In the initial entry, the best evidence of fair value is the listing price on an active market. When these prices are not available, recent transactions on the same instrument will be consulted or the valuation will be made using mathematical measurement models that are sufficiently tried and trusted by the international financial community. In subsequent valuations, fair value will be obtained by one of the following methods:
- Prices quoted on active markets for the same instrument, i.e., without modification or reorganizing in any way.
- Prices quoted on active markets for similar instruments or other valuation techniques in which all the meaningful inputs are used based on directly or indirectly observable market data.
- Valuation techniques in which some meaningful input is not based on observable market data.
When it is not possible to reliably estimate a capital instrument’s fair value, it will be valued at its cost.
3.4.4. Value of equity investments and capital instruments
The accompanying table shows the book value, exposure and RWAs of portfolios held for Value of equity investments and capital instruments:
Table 53. Breakdown of book value, EAD and RWAs of equity investments and capital instruments
2015
(Million euros)
|
|
Equity investments and capital instruments (1) | ||
|---|---|---|---|
|
|
Book value | EAD | RWAs |
| AFS (2) | 4,470 | 4,470 | 7,353 |
| Permanent Investment (3) | 5,154 | 4,948 | 12,170 |
| Total | 9,624 | 9,418 | 19,522 |
2014
(Million euros)
|
|
Equity investments and capital instruments (1) | ||
|---|---|---|---|
|
|
Book value | EAD | RWAs |
| AFS (2) | 7,102 | 6,633 | 11,099 |
| Permanent Investment (3) | 4,234 | 4,063 | 10,764 |
| Total | 11,335 | 10,696 | 21,863 |
Of the total Permanent Investment Portfolio, there is only a listing price for the company Brunara, for the amount of 54 and 52 million euros as of December 31, 2015 and 2014, respectively.
3.4.5. Exposure in equity investments and capital instruments
The accompanying table shows the types, nature and amounts of the original exposures in equity investments listed or unlisted on a stock market, with an item differentiating sufficiently diversified portfolios and other unlisted instruments:
Table 54. Exposure in equity investments and capital instruments
2015
(Million euros)
| Item | Type of Exposure (1) | |
|---|---|---|
|
|
Non-derivatives | Derivatives |
| Exchange-traded instruments | 4,151 | 214 |
| Non-exchange traded instruments | 4,944 | 109 |
| Included in sufficiently diversified portfolios | 4,944 | 109 |
| Other instruments |
|
|
| Total | 9,095 | 323 |
2014
(Million euros)
| Item | Type of Exposure (1) | |
|---|---|---|
|
|
Non-derivatives | Derivatives |
| Exchange-traded instruments | 6,154 | 314 |
| Non-exchange traded instruments | 4,114 | 115 |
| Included in sufficiently diversified portfolios | 4,114 | 115 |
| Other instruments | - | - |
| Total | 10,267 | 429 |
Table 55. Realized profit and loss from sales and settlements of equity investments and capital instruments
(Million euros)
|
|
2015 | 2014 | ||||
|---|---|---|---|---|---|---|
|
|
Losses | Gains | Net | Losses | Gains | Net |
| AFS | 20 | 91 | 72 | 10 | 165 | 155 |
| Permanent Investment | 2,222 | 23 | –2,199 | – | 27 | 28 |
In 2015, the realized losses correspond basically to the valuation at fair value of the stake held in the Garanti Group due to the change of the method of consolidation.
Lastly, the trend and main changes in capital use are described for the positions subject to Equity Credit Risk as of December 31, 2015 and 2014:
- Asset size: Arising from the revaluation of holdings (primarily BBVA Seguros).
- Acquisitions and disposals: Affected mainly by the different sales of BBVA
Group’s stake in CNCB and partially offset by the acquisition of Catalunya Banc.
Table 56.Valuation adjustments for latent revaluation of equity investments and capital instruments
2015
(Million euros)
|
|
Valuation adjustments for latent revaluation |
|---|---|
|
|
AFS |
| Balance Dec 2014 | 866 |
| Transactions | –839 |
| Balance Dec 2015 | 27 |
Table 57. Breakdown of RWAs, equity investments and capital instruments by applicable approach
(Million euros)
|
|
RWA’s | |||
|---|---|---|---|---|
| Concept | Internal Models | Simple method | PD/LGD method | Total |
| 31/12/2014 | 1,613 | 9,838 | 10,413 | 21,863 |
| 31/12/2015 | 1,299 | 11,993 | 6,230 | 19,522 |
Table 58.Variation in RWAs for Equity Risk
(Million euros)
| Equity Risk | ||
|---|---|---|
| RWA’s Dec 14 |
|
21,863 |
| Effects | Asset size | 2,300 |
| Acquisitions and disposals | –4,905 | |
| Foreign exchange movements | 432 | |
| Other | –168 | |
| RWA’s Dec 15 |
|
19,522 |