January-December 2012

Asset/Liability Management

The Assets and Liabilities Management unit is responsible for 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 recurring 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 fourth quarter of 2012, long-term wholesale financial markets in Europe improved their mood substantially as a result of the measures adopted by the ECB at its meeting on September 6, which have led to a significant reduction in risk premiums in peripheral countries. In this environment, BBVA has successfully completed two senior debt deals in Europe for a total of €2,500m, one senior debt deal in the US market for €2,000m and one mortgage-covered bond deal for €2,000m, all with a very significant demand. This demonstrates how BBVA is able to access the markets under very successful conditions in terms of price and amount. Short-term finance in Europe has also performed very well, with significant growth in the amounts gathered.

The environment outside Europe has also been very constructive. BBVA has strengthened its liquidity position in all the jurisdictions in which the Group operates. BBVA Compass has been particularly outstanding in this respect, with significant growth in customer deposits.

To sum up, BBVA’s proactive policy in its liquidity management, the growth in customer funds in all geographical areas, its proven ability to access the market in difficult environments, its retail business model, its lower volume of debt redemptions compared to its peers and the relatively small size of its balance sheet, all give it a comparative advantage against its European peers. Moreover, the increased proportion of retail deposits on the liability side of the balance sheet in all the geographical areas continues to strengthen the Group’s 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.

In October, BBVA paid its traditional second dividend through the remuneration scheme known as the “Dividend Option”, which offers shareholders a wider range of remuneration alternatives for their shares. Owners of 79.4% of the free allocation rights opted to receive new shares. As a result, the number of ordinary BBVA shares issued in the capital increase was 66,741,405, thus generating 13 basis points of core capital for the bank.

Additionally, two liability management operations have been closed in the fourth quarter of 2012, as anticipated in the previous quarter’s report. First, there was the tender offer to repurchase 15 issues of preferred securities and subordinated bonds distributed through Unnim’s retail network (T1, UT2 and LT2) at 95% of their nominal value for €490m, in exchange for the Bank’s treasury stock. Thus, BBVA has offered a solution to Unnim customers and provided them with liquidity and profitability (some of these instruments paid no coupon). In addition, the deal has protected the interests of BBVA shareholders, since this exchange is not dilutive. The Group’s offer was accepted by 99.3% of the preferred securities and 82.0% of the subordinated bonds. In exchange, they received 64,229,358 ordinary BBVA shares from its treasury stock.

Second, the Bank has repurchased LT2 subordinated debt under an unmodified Dutch auction procedure. The operation has provided capital gains of €194m, apart from improving the quality of its capital and having a limited impact on liquidity. These two operations have generated capital for BBVA thanks to active and efficient liability management.

In conclusion, the current levels of capitalization enable the Bank to fulfill 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 adequacy ratios and ensure the stability of its income statement.

In the fourth quarter of 2012, as was the case during the year as a whole, 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. The impact of variations in exchange rates has been negative in the fourth quarter, both on the income statement and on capital adequacy ratios, but positive over the last 12 months. For 2013, 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 adequacy 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 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 and FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings).