Eligible Own Funds and minimum Requirements

BBVA Group’s regulatory capital tiers

Article 92 of the CRR establishes that credit institutions must maintain the following own funds requirements at all times:

• a) Common Equity Tier 1 capital ratio of 4.5%, calculated as Common Equity Tier 1 capital expressed as a percentage on the total amount of risk-weighted assets.
• b) Tier 1 capital ratio of 6%, calculated as the level of tier capital 1 expressed as a percentage of the total amount of risk-weighted assets.
• c) Total capital ratio of 8%, calculated as the total own funds expressed as a percentage of the total amount of risk-weighted assets.

Notwithstanding the application of the Pillar 1 requirement, CRD IV allows competent authorities to require credit institutions to maintain a level of own funds higher than the requirements of Pillar 1 to cover types of risk other than those already covered by the Pillar 1 requirement (this power of the competent authority is commonly referred to as "Pillar 2").

Furthermore, from 2016 and in accordance with CRD IV, credit institutions must comply with the following combined requirement of capital buffers at all times: (i) the capital conservation buffer, (ii) the buffer for global systemically important banks (the "G-SIB" buffer), (iii) the entity-specific countercyclical capital buffer, (iv) the buffer for other systemically important banks ("D-SIB" buffer) and (v) the systemic risk capital buffer. The “combined capital buffer requirement” must be met with Common Equity Tier 1 capital (“CET1”) to cover both minimum capital required by “Pillar 1” and “Pillar 2".

Both the capital conservation buffer and the G-SIB buffer (where appropriate) will apply to credit institutions as it establishes a percentage greater than 0%.

The buffer for global systemically important banks applies to those institutions on the list of global systemically important banks, which is updated annually by the Financial Stability Board (“FSB”). Considering the fact that BBVA does not appear on that list, as at the report date, the G-SIB buffer does not apply to BBVA. Detailed information on each of the quantitative indicators that form part of the evaluation process is available on the BBVA Group's website.

The Bank of Spain has extensive discretionary powers as regards the countercyclical capital buffer specific to each bank, the buffer for other systemically important financial institutions (which are those institutions considered to be systemically important domestic financial institutions “D-SIB”) and the buffer against systemic risk (to prevent or avoid systemic or macroprudential risk). The European Central Bank (ECB) has the powers to issue recommendations in this respect following the entry into force on November 4, 2014 of the Single Supervisory Mechanism (SSM).

With regard to minimum capital requirements, following the latest decision of the SREP (Supervisory Review and Evaluation Process), which comes into force as of January 1, 2023, the ECB has notified the Group of maintaining the Pillar 2 requirement at 1.71 Therefore, BBVA must maintain a CET1 capital ratio of 8.75% and a total capital ratio of 13.00% at a consolidated level.

Thus, the consolidated overall capital requirement includes: i) the minimum capital requirement of Common Equity Tier 1 (CET1) of Pillar 1 (4.5%); ii) the capital requirement of Additional Tier 1 (AT1) of Pillar 1 (1.5%); iii) the capital requirement of Tier 2 of Pillar 1 (2%); iv) the CET1 requirement of Pillar 2 (0.96%), v) the capital requirement of Additional Tier 1 (AT1) of Pillar 2 (0.32%); vi) the capital requirement of Tier 2 of Pillar 2 (0.43%); vii) the capital conservation buffer (2.5% of CET1); viii) the capital buffer for Other Systemically Important Institutions (O-SIIs) (0.75% of CET1); and ix) the countercyclical buffer (CCyB) (0.04% of CET1).

The BBVA Group has set the objective of maintaining a fully-loaded CET1 ratio at a consolidated level between 11.5% and 12.0%. At the end of the financial year 2022, the fully-loaded CET1 ratio was above this target management range.

CET1 phased-in ratio reach 12.68% which represents +405 basis points over the minimum requirement of 8.63%.

Capital requirements and capital ratios (Phased-in)

⁽¹⁾ The AT1 requirement is 1.78%, and Tier2, 2.38%.

⁽²⁾ The countercyclical capital buffer as of December 31, 2022 amounts to 0.04%.

The following table shows the CET1 ratio that would trigger restrictions on capital distribution capacity and the capital ratios as of December 2022:

Capital distribution constraints

Eligible Own Funds

For the purposes of calculating minimum capital requirements, according to Regulation (EU) 575/2013 and subsequent amendments, which are applicable as of the report date, the elements and instruments of Tier 1 capital are defined as the sum of Common Equity Tier 1 capital (CET1) and additional Tier 1 capital (AT1), as defined in Part Two, Title I, Chapters I to III of the CRR, as well as their corresponding deductions, in accordance with Articles 36 and 56, respectively.

Also considered are the elements of Tier 2 capital defined in Part Two, Title I of Chapter IV, Section I of the CRR. The deductions defined as such in Section II of the same Chapter are also considered.

The amount of total eligible capital, net of deductions, for the different items making up the capital base as of December 31, 2022 and 2021, respectively, is below, in accordance with the requirements for the disclosure of information related to regulatory own funds established by the Implementing Technical Standards (EBA/ ITS/2020/04) (Implementing Regulation 2021/637 of March 15, 2021):

Amount of capital (EU CC1) (Million euros)

• ^(*) As of 31 December 2022, the difference between the phased-in and fully loaded ratios arises from the transitional treatment of certain elements of capital, mainly the impact of IFRS 9, to which the BBVA Group has voluntarily adhered (in accordance with article 473a of the CRR). See table 11 for more information on the transitional impact of IFRS 9.
  In addition, noted that the Group to date is not applying the transitional treatment of unrealised gains and losses valued at fair value through Other comprehensive Income (hereinafter, unrealised P&L measured at fair value through OCI) as defined in Article 1.6 of that Regulation amending Article 468 of the CRR. Therefore, the Group’s own funds, capital and leverage ratios to date reflect the full impact of the above-mentioned unrealised P&L measured at fair value through OCI.
• ⁽¹⁾ References to regulatory balance sheet (EU CC2) where these items are included.
• ⁽²⁾ As of December 31, 2022, the total shareholder remuneration for 2022 is deducted from CET1, so that "Net profit of the year attributable to the Group" includes the amount of cash remuneration (€2,593 million) and "Other CET1 regulatory adjustments" includes the deduction of €422 million corresponding to the execution of a program to repurchase BBVA shares, approved by the Board of Directors on January 31, 2023 and subject to obtaining the corresponding regulatory authorizations.

The CET1 fully-loaded ratio of the BBVA Group (hereinafter, the Group) stood at 12.61% at the end of December 2022, which allows maintaining a large management buffer over the Group's CET1 requirement (8.63%) and over the Group's target management range established between 11.5-12% of CET1. The phased-in CET1 ratio was 12.68%, the difference between the two ratios is explained by the effect of the transitional adjustments of the IFRS9 impacts on solvency indicators.

These ratios incorporate the effects of the corporate transactions carried out during the year, with a combined impact of -38 basis points on the Group's CET1. These transactions are the agreement reached with Neon Payments Limited in the first quarter of 2022, the voluntary takeover bid for Garanti BBVA and the acquisition from Merlin of 100% of Tree Inversiones Inmobiliarias Socimi, S.A. in the second quarter of 2022. Excluding these elements, the CET1 fully loaded ratio has increased by 24 basis points, mainly explained by: the generation of earnings in the year (+214 basis points) which, net of shareholder remuneration and payment of CoCos coupons (Contingent Convertible ) has generated a positive contribution of +106 basis points. On the other hand, the growth of risk-weighted assets (RWAs) in constant has subtracted -101 basis points, reflecting the organic growth of the activity. Finally, the other elements that make up CET1 had a positive contribution of +19 basis points; these include market effects, minority interests, regulatory impacts and the compensation in equity of the negative effect on results due to the loss in value of the net monetary position in hyperinflationary economies.

Additional Tier 1 (AT1) fully-loaded capital stood at 1.54% at the end of December 2022 (1.54% phased-in), 34 basis points lower than in 2021, which includes the €500 million reduction effect from the early redemption of a CoCos issue dating back to 2017.

The Tier 2 fully-loaded ratio stood at 1.79% (1.76% phased-in) which represents a reduction of -58 basis points compared to 2021, mainly explained by the effect of increased RWAs during the year and the lower computability of internal credit model provisions.

As a consequence of the foregoing, the fully-loaded total capital ratio stands at 15.94 % as of December 2022, while the total phased-in ratio is 15.98 % as of the same date.

Following the latest SREP (Supervisory Review and Evaluation Process) decision, the ECB has informed the Group that with effect from January 1, 2023, it must maintain at consolidated level a total capital ratio of 13.00% and a CET1 capital ratio of 8.75%, which include a Pillar 2 requirement at consolidated level of 1.71% (a minimum of 0.96% must be satisfied with CET1). Regarding this total capital requirement, 0.21% (0.12% to be met by CET1) corresponds to the ECB's prudential provisioning expectations. Prudential provisions, as of January 1, 2023, will no longer be treated as a deduction in CET1 with a positive effect of 19 basis points on the December 2022 close, which would be equivalent to a pro-forma ratio of 12.80%.

The evolution of fully loaded CET1 ratio during the year 2022 is below:

Annual evolution of the CET1 fully loaded ratio

⁽¹⁾ Includes, among others, minority interests, market related impacts, regulatory impacts and the credit in OCIs that offsets the debit in P&L due to the hyperinflation accounting.

⁽²⁾ Includes the reversal of the NPL backstop deduction (+19 bps) in January 2023. From that time the SREP Requirement is 8.72% for BBVA Group.

The process of reconciliation between accounting own funds and regulatory own funds is shown below. Based on the shareholders’ equity reported in the Consolidated Financial Statements of BBVA Group and applying the deductions and adjustments shown in the table below, reaching to the regulatory capital figure eligible for solvency purposes:

Article 468 of the CRR. Therefore, the Group's own funds, and its capital adequacy and leverage ratios, reflect to date the full impact of the aforementioned unrealised gains and losses measured at FVTOCI.

Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter (Million Euros)

• ⁽¹⁾ Calculated over minimum total capital applicable for each period.
• ⁽²⁾ Other adjustments and deductions include, among others, the adjustment related to the amount of minority interest not eligible as capital, the amount of the treasury shares repurchase up to the maximum limit authorised by the ECB to BBVA Group and the amount of dividends not yet distributed.

The table below shows a comparison of institutions' own funds and capital and leverage ratios with and without the application of the transitional treatment of IFRS9 impact, and with and without the application of the transitional treatment in accordance with Article 468 of the CRR, according to the standard format set by EBA guidelines (EBA/GL/2018/01).

Since 2018 BBVA Group has applied the transitional treatment of IFRS9 impact. Therefore, phased-in capital ratios and leverage ratio are calculated taking into account the transitional provisions as defined by article 473a of the CRR and its subsequent amendments made by Regulation 2020/873 of the Parliament and Council of 24 June 2020 in response to the COVID-19 pandemia. The Group also applies paragraph 7a of the aforementioned article in calculating the impact of the transitional treatment on phased in risk-weighted assets.

In addition, as of the end of December 2022, the Group is not applying the transitional treatment of unrealised gains and losses measured at fair value through other comprehensive income (hereinafter, unrealised gains and losses measured at FVTOCI) outlined in Article 1, Paragraph 6 of the aforementioned regulation amending.

IFRS 9-FL - Comparison of institutions’ own funds and capital and leverage ratios with and without the application of transitional arrangements for IFRS 9 or analogous ECLs and with and without the application of the temporary treatment of gains and losses measured at Fair Value through OCI (Million euros)

Own Funds requirements by risk type

The BBVA Group has a general risk management and control model (hereinafter, the “Model”) that is appropriate for its business model, its organisation, the countries where it operates and its corporate governance system. This model allows the Group to carry out its activity within the risk management and control strategy and policy defined by the corporate bodies of BBVA and to adapt itself to a changing economic and regulatory environment, facing this management at a global level and aligned to the circumstances at all times. The Model establishes a suitable risk management system related to the risk profile and strategy of the entity.

Total risk-weighted assets are shown below, broken down by type of risk (where credit risk includes counterparty risk) as of December 31, 2022 and December 31, 2021:

DISTRIBUTION OF RWAs BY RISK TYPE ELIGIBLE ON PILLAR 1

⁽¹⁾ Credit Risk includes Risk for CVA adjustment and the prudential advance for the impacts of the TRIM and other regulatory/supervisory impacts.

The following table shows the total capital requirements broken down by risk type as of quarter-end from December 31, 2021 to December 31, 2022:

EU OV1 - OVERVIEW OF RWAs (MILLION EUROS)

	RWEAs (1)					Minimum Capital Requirements (2)(3)
	12-31-2022	09-30-2022	06-30-2022	03-31-2022	12-31-2021	12-31-2022
Credit risk (excluding CCR)(4)(5)	285,362	278,942	270,369	257,856	247,299	22,829
Of which the standardised approach (6)	143,612	150,696	144,373	135,061	129,741	11,489
Of which the Foundation IRB (F-IRB) approach	—	—	—	—	—	—
Of which: slotting approach	5,177	5,541	4,928	4,718	4,498	414
Of which equity IRB under the simple risk-weighted approach (7)	2,570	2,600	2,307	2,418	2,442	206
Of which the Advanced IRB (A-IRB) approach (8)	102,547	104,095	102,013	100,760	97,614	8,204
Counterparty credit risk - CCR	11,232	13,436	11,646	11,115	13,870	899
Of which the standardised approach (8)	6,725	8,908	8,023	7,791	9,661	538
Of which internal model method (IMM)	—	—	—	—	—	—
Of which exposures to a CCP (9)	702	551	223	154	156	56
Of which credit valuation adjustment - CVA	1,741	2,461	2,072	1,932	2,518	139
Of which other CCR	2,063	1,516	1,328	1,238	1,535	165
Settlement risk	—	—	—	—	—	—
Securitisation exposures in the non-trading book (after the cap)(10)	455	326	364	296	325	36
Of which internal assessment approach (SEC-IRBA)	438	271	345	274	300	35
Of which external assessment approach (SEC-ERBA)	17	17	20	22	25	1
Of which standardised approach (SEC-SA)	—	37	—	—	—	—
Of which 1250%/ deduction (10)	—	—	—	—	—	—
Market Risk	12,969	15,568	15,751	14,867	14,712	1,037
Of which the standardised approach (SA)	4,716	5,439	5,884	5,580	4,445	377
Of which IMA	8,252	10,129	9,866	9,287	10,267	660
Large exposures	—	—	—	—	—	—
Operational risk	27,049	33,407	32,742	32,227	31,589	2,164
Of which basic indicator approach	946	690	699	719	748	76
Of which standardised approach	26,103	32,717	32,043	31,508	30,841	2,088
Of which advanced measurement approach	—	—	—	—	—	—
Amounts below the thresholds for deduction (subject to 250% risk weight) (11)	16,268	16,319	15,827	15,442	15,112	1,301
Total	337,066	341,678	330,871	316,361	307,795	26,965

• ⁽¹⁾ Risk-weighted assets according to the phased-in period.
• ⁽²⁾ Considering the minimum total capital requirement of 8% (Article 92 of the CRR).
• ⁽³⁾ Under the total capital requirement ratio after the supervisory review process (SREP), the total capital requirement ratio amounts to 12.79% (€43,111 million as of the reporting date).
• ⁽⁴⁾ Including amounts below the deduction thresholds subject to 250% weighting (DTAs rise to €8,472 million and significant investments in financial sector entities and insurance companies amounting to €7,796 million).
• ⁽⁵⁾ Excluding deferred tax assets arising from temporary differences subject to 250% risk weighting in accordance with Article 48.4 CRR. This amount is €8,472 million as of december 31, 2022.
• ⁽⁶⁾ It only includes equity exposures under the simple method of IRB approach.
• ⁽⁷⁾ It only includes credit risk exposures under the advanced internal ratings-based approach (AIRB).
• ⁽⁸⁾ It only includes SA-CCR for derivatives.
• ⁽⁹⁾ This row includes the total RWAs corresponding to exposures with central counterparties (CCPs), both qualified and non-qualified, among which are also the initial margins.
• ⁽¹⁰⁾ The BBVA Group deducts from capital those securitisations meeting the deduction requirements, so it does not apply a weight of 1,250% to these exposures. In this row, the value of €11 million that would result from applying this weight to the exposures deducted is not included.
• ⁽¹¹⁾ The information in this row is disclosed for information purposes only, as the amount included here is also included in row 1, where institutions are requested to disclose information on credit risk. As a consequence, this row should not be taken into account when calculating the total indicated at the bottom of the table.

During 2022, risk-weighted assets grew by approximately €30 billion euros, mainly due to the dynamism of lending activity throughout the Group. Of particular note were Turkey and South America, where the Group applies standardised approach. The above growth is partly reduced by the evolution of counterparty credit risk, as well as market risk, in line with the lower volatility observed. Finally, the Group recorded a net impact of supervisory effects and model updates in the calculation of operational risk of approximately €8.2 billion, which had an impact on the Group's CET1 ratio of approximately -30 basis points.

The evolution of RWAs by type of risk is explained in more detail in the respective sections of the report.

The following table is a breakdown of risk-weighted assets and capital requirements broken down by risk type and exposure categories as of December 31, 2022, September 30, 2022 and December 31, 2021:

Capital requirements by risk type and exposure class (Million Euros)

	Capital requirements(2)			RWA's(1)
Exposure Class and risk type	12-31-2022	9-30-2022	12-31-2021	12-31-2022	9-30-2022	12-31-2021
Credit Risk	11,779	12,366	10,853	147,240	154,576	135,660
Central governments or central banks	2,500	2,556	2,521	31,254	31,948	31,511
Regional governments or local authorities	107	96	95	1,335	1,194	1,189
Public sector entities	80	73	70	1,002	917	876
Multilateral development banks	—	—	—	6	6	6
International organisations	—	—	—	—	—	—
Institutions	393	544	566	4,916	6,805	7,073
Corporates	3,660	3,935	3,177	45,746	49,185	39,710
Retail	2,910	2,901	2,282	36,379	36,262	28,520
Secured by mortgages on immovable property	790	827	691	9,871	10,332	8,637
Exposures in default	215	233	280	2,691	2,913	3,495
Exposures associated with particularly high risk	225	241	292	2,809	3,007	3,654
Covered bonds	—	—	—	—	—	—
Claims on institutions and corporates with a short-term credit assessment	—	2	—	—	24	—
Collective investments undertakings	—	—	—	1	1	1
Equity exposures	—	—	—	—	—	—
Other exposures	898	959	879	11,230	11,982	10,987
Total credit risk by standardised approach	11,779	12,366	10,853	147,240	154,576	135,660
Credit Risk	9,075	9,316	8,599	113,432	116,453	107,492
Central governments or central banks	88	101	79	1,105	1,266	983
Institutions	587	662	578	7,336	8,278	7,228
Corporates	6,441	6,631	6,044	80,508	82,892	75,554
Of which: SMEs	1,032	1,058	1,202	12,896	13,224	15,023
Of which: Specialised lending	424	454	414	5,306	5,677	5,173
Of which: Others	4,985	5,119	4,429	62,307	63,991	55,359
Retail	1,959	1,921	1,898	24,483	24,017	23,727
Of which: Secured by mortgages on immovable property (SME)	86	87	108	1,078	1,091	1,346
Of which: Secured by mortgages on immovable property (non SME)	713	711	774	8,916	8,888	9,681
Of which: Qualifying revolving	709	696	523	8,868	8,699	6,541
Of which: Other SMEs	93	90	122	1,158	1,120	1,520
Of which: Other Non-SMEs	357	337	371	4,463	4,218	4,639
Equity	1,048	1,053	1,059	13,097	13,160	13,235
Simple risk weight approach	206	208	195	2,570	2,600	2,442
Exposures in sufficiently diversified portfolios (RW 190%)	120	117	108	1,500	1,465	1,351
Exchange traded exposures (RW 290%)	44	49	56	551	612	702
Others (RW 370%)	42	42	31	519	523	389
PD/LGD approach	180	180	205	2,250	2,248	2,559
Internal models approach	38	23	35	481	289	433
Exposures subject to a 250% risk weight	624	642	624	7,796	8,022	7,800
Total credit risk by IRB approach	10,122	10,369	9,658	126,529	129,612	120,727
Total contributions to the default fund of a CCP	12	22	4	154	279	54
Securitisation exposures	36	26	26	455	326	325
Total credit risk	21,950	22,783	20,541	274,378	284,793	256,766
Settlement risk	—	—	—	—	—	—
Standardised approach:	377	435	191	4,716	5,439	4,445
Of which: Fixed income price risk	167	189	113	2,088	2,358	1,971
Of which: Equity market risk	1	2	1	16	21	11
Of which: Price risk in CIUs	18	21	44	230	261	341
Of which: Foreign exchange	191	218	28	2,383	2,731	2,059
Of which: Commodities risk	—	5	5	—	68	63
IMA: Market Risk	660	810	821	8,252	10,129	10,267
Total trading book risk	1,037	1,245	1,012	12,969	15,568	14,712
CVA risk	139	197	201	1,741	2,461	2,518
Operational risk	2,164	2,673	2,527	27,049	33,407	31,589
Others (3)	1,674	436	177	20,929	5,450	2,211
Capital requirements	26,965	27,334	24,624	337,066	341,678	307,795

⁽¹⁾ Risk-weighted assets for the transitional period (phased-in).

⁽²⁾ Calculated on the minimum total capital requirements of 8% (Article 92 of the CRR).

⁽³⁾ This line includes capital consumptions that the Group incorporates to reflect a more conservative treatment of certain elements in accordance with article 3 CRR.

For more details, see section 3 of the report.