The Assets and Liabilities Management unit is responsible for actively managing structural interest-rate and foreign-exchange positions, as well as the Group’s overall liquidity and shareholders’ funds.
Liquidity management helps to finance the recurrent growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of finance. A core principle in the BBVA Group’s liquidity management continues to be to encourage the financial independence of its subsidiaries in America. This aims to ensure that the cost of liquidity is correctly reflected in price formation and that there is sustainable growth in the lending business.
In the second quarter of 2012, long-term wholesale financial markets in Europe were affected by the extreme volatility of the sovereign risk premium, and remained closed for practically the whole period. Short-term finance performed better, although it was conditioned by the rating actions affecting BBVA and the whole financial system in Europe. These downgrades have led to a reduction in the balances of operations with large corporations, though this has been partly offset by the Group’s stronger retail liquidity position thanks to its customer-centric approach. In contrast, BBVA has remained active in the wholesale funding markets in America.
To sum up, BBVA’s proactive policy in its liquidity management, its retail business model, its lower volume of debt redemptions compared to its peers and its relatively small volume of assets give it a comparative advantage against its European competitors. Moreover, the increased proportion of retail deposits on the liability side of the balance sheet in all the geographical areas continues to allow the Group to strengthen its liquidity position and to improve its financing structure.
The Bank’s capital management has a twofold aim: to maintain levels of capitalization appropriate to the business targets in all the countries in which it operates and, at the same time, to maximize return on shareholders’ funds through the efficient allocation of capital to the various units, good management of the balance sheet and proportionate use of the various instruments that comprise the Group’s equity: common stock, preferred shares and subordinated debt.
On June 30, 2012 BBVA carried out a mandatory partial conversion of the outstanding convertible bonds through a reduction of 50% of its nominal value. In order to carry out this conversion, BBVA issued 239 million new shares (4.6% of the Group’s total shares), thus improving the quality of its capital in the quarter. Also in the second quarter BBVA repurchased €638m of securitization bonds and generated €250m of capital gains, which were used to strengthen the Group’s provisions. In conclusion, the current levels of capitalization ensure the Bank’s compliance with all of its capital objectives.
Foreign-exchange risk management of BBVA’s long-term investments, basically stemming from its franchises in the Americas, aims to preserve the Group’s capital ratios and ensure the stability of its income statement. In the second quarter of the year, BBVA maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area, with aggregate hedging of close to 50%. In addition to this corporate-level hedging, dollar positions are held at a local level by some of the subsidiary banks. The foreign-exchange risk of the earnings expected in the Americas for 2012 is also strictly managed.
In the second quarter, the impact of variations in exchange rates has been positive, both on the income statement and on capital adequacy ratios. For 2012 as a whole, the same prudent and proactive policy will be pursued in managing the Group’s foreign-exchange risk from the standpoint of its effect on capital ratios and on the income statement.
The unit also actively manages the structural interest-rate exposure on the Group’s balance sheet. This aims to maintain a steady growth in net interest income in the short and medium term, regardless of interest-rate fluctuations.
In the first half of 2012, the results of this management have been very satisfactory, with extremely limited risk strategies in Europe, the United States and Mexico. These strategies are managed both with hedging derivatives (caps, floors, swaps, FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings).