Solvency

Capital base

The ECB, in its announcement on March 12, 2020, in reaction to COVID-19, has allowed the banks to use additional Tier 1 or Tier 2 capital instruments to meet the Pillar II (P2R) requirements for 2021, which is known as "Pillar 2 tiering." This measure has been reinforced by the relaxation of the Countercyclical Capital Buffer (CCyB) announced by various national macroprudential authorities and by other complementary measures published by the ECB. All of this has resulted in a reduction of 68 basis points in the fully-loaded CET1 requirement for BBVA, with that requirement standing at 8.59%. The reduction in the requirement at the total ratio level is only around 2 basis points, as a result of the lower applicable countercyclical buffer.

As a result, the CET1 capital target was agreed to be modified during the first quarter in accordance with the current situation; which was determined as a management buffer of between 225 and 275 basis points over CET1 requirements. This distance is the one used as a reference for determining the previous CET1 capital target (fully-loaded) of between 11.5% and 12%, so the new target maintains an equivalent distance in terms of CET1.

BBVA's fully-loaded CET1 ratio stood at 11.52% at the end of September 2020, an improvement of +30 basis points compared to the end of the previous quarter. This increases the management buffer over the fully-loaded CET1 requirement (8.59%) to 293 basis points.

The relative stabilization of the financial markets that began during the second quarter, largely resulting from the economic stimulus measures and guarantee programs announced by the various national and supranational authorities, the adoption by the European Parliament and the Council of Regulation 2020/873 (known as "CRR Quick Fix") and the recurrence of the Group's organic capital generation capacity, have allowed for a partial recovery from the shocks to the solvency indicators during the first quarter of the year.

Thus, the growth of the fully-loaded CET1 ratio in the third quarter of 2020 is based on the generation of earnings that, net of the CoCos remuneration, has contributed +29 basis points, over which, the evolution of the markets, in particular the exchange rates and the valuation of the equity portfolios at fair value through other comprehensive income, caused decrease of -11 basis points.

The remaining effects have contributed to the capital adequacy ratio in +12 basis points, among which stand out the reduction in risk-weighted assets (RWAs) accordingly, with the credit evolution and the market volatility during the quarter, also allowing for lower capital requirements in the RWA which are more sensitive to these variables, as those related to market risk regulatory requirements. It is also worth mentioning that the Group has been actively supporting the economy through the different public guarantee schemes provided by various authorities, mitigating significantly the exposure in terms of RWA calculation.

Fully-loaded additional Tier 1 capital (AT1) stood at 2.00% at the end of September 2020, an improvement of +36 basis points compared to the previous quarter. In this respect, in July 2020, the first green CoCo from a financial institution worldwide was issued for an amount of €1,000m, with a coupon of 6% and an option for early amortization in five and a half years, with demand exceeding the initial offer by a factor of three. This issue is included in the capital adequacy ratios for the third quarter with a positive impact on AT1 of 29 basis points, which allows it to fulfill all the requirements at this level, including those coming from the tiering of Pillar 2 and, therefore, to increase the distance to MDA.

The fully-loaded Tier 2 ratio at September 30 stood at 2.51%, an increase of +15 basis points over the previous quarter, incorporating the Tier 2 subordinated debt issuance in the amount of 300 million of pounds sterling in July, over an eleven-year period with an option for early amortization in the sixth year and a 3.104% coupon, thus managing to strengthen the ratio, diversify the investment base and improve the price in comparison to an equivalent issue in euros. This has had a positive impact of 9 basis points, allowing to efficiently cover the capital requirements after the tiering of Pillar 2 also at this level.

The phased-in CET1 ratio stood at 11.99% at the end of September 2020, taking into account the transitory effect of the IFRS 9 standard. AT1 stood at 2.04% and Tier 2 at 2.63%, resulting in a total capital adequacy ratio of 16.66%.

Regarding shareholder remuneration, on April 9, 2020, a cash payment was made for a supplementary dividend for the 2019 financial year for the gross amount of 0.16 euro per share, in line with that approved at the General Shareholders' Meeting on March 13, 2020. This amounted to €1,067m. Thus, the total dividend for the 2019 financial year amounts to 0.26 euro gross per share. This distribution had no impact on the evolution of the capital adequacy ratio since it had already accrued at the end of 2019. On April 30, 2020, the BBVA Group announced to the market the resolution taken by the BBVA Board of Directors to amend, for the 2020 financial year, the Group's shareholder remuneration policy, which was announced by means of a relevant event notification on February 1, 2017. The new policy for 2020 has been established as not to pay any dividend amount corresponding to 2020 until the uncertainties caused by COVID-19 disappear and, under no circumstances, before the end of such fiscal year.

SHAREHOLDER STRUCTURE (30-09-2020)

FULLY-LOADED CAPITAL RATIOS (PERCENTAGE)

CAPITAL BASE (MILLIONS OF EUROS)

Regarding the MREL (Minimum Requirement for own funds and Eligible Liabilities) requirements, BBVA has continued its issuance plan during 2020 by closing two public issues of non-preferred senior debt, one in January 2020 for €1,250m over seven years and a coupon of 0.5%, and another in February 2020 for CHF 160m over six and a half years and a coupon of 0.125%. In May 2020, the first issuance of a COVID-19 social bond by a private financial institution in Europe was completed. This is a five-year senior preferred bond for €1,000m and a coupon of 0.75% Finally, in order to optimize the MREL requirement, in September BBVA issued USD 2,000m in two tranches, with maturities of three and five years, for USD 1,200m and USD 800m and coupons of 0.875% and 1.125% respectively.

The Group estimates the current structure of shareholders' funds and admissible liabilities, together with the proposed plan for issuances and the entry into force of the European Parliament and the European Council of Regulation 2019/877 of May 20 (which, among other matters, establishes MREL in terms of RWAs and new transitory and implementation periods of such request), should enable compliance with the MREL by the date of entry into force of such requirement.

Finally, the Group's leverage ratio maintained a solid position, at 6.4% fully-loaded (6.6% phased-in), which remains the highest among its peer group. These figures⁽¹⁾ include the effect of the temporary exclusion of certain positions with the central bank provided for in the "CRR-Quick fix".

¹ Provisional data.

Ratings

BBVA’s rating remained stable during the third quarter of the year. In June, as a result of the economic uncertainty caused by COVID-19, the rating agency Fitch downgraded by one notch the rating assigned to BBVA’s senior preferred debt to A- with a stable outlook. On April 29, S&P confirmed BBVA’s rating (A-) and its outlook (negative) in a joint action with the rest of the Spanish banks and assigned as well a negative outlook to the majority of the domestic banks. Meanwhile, DBRS confirmed the A (high) rating of BBVA with a stable outlook and on April 1, and Moody’s has maintained unchanged at A3 with a stable outlook between January and September. These ratings, together with their corresponding outlooks, are shown in the following table:

Ratings