Results

 

•

In the first quarter of 2019, the overall growth of recurring income is maintained, with a positive evolution in terms of net interest income in most business areas.

 

•

The trend of containing operating expenses and improving the efficiency ratio compared to the same period of the previous year continues.

•

Higher impairment on financial assets (up 24.4% year-on-year), mainly as a result of the higher reserve requirements due to the impairment of specific portfolios and the updating of the macroeconomic scenarios in the United States and Turkey, were not offset by the lower needs in Spain. Nevertheless, the impairment on financial assets decreased by 24.3% compared to the last quarter of 2018.

 

•

As a result, the net attributable profit was €1,164 million, 9.8% less than in the same period of the previous year.

 

Balance sheet and business activity

 

•

As of March 31, 2019, the number of loans and advances to customers (gross) recorded a 1.8% growth with respect to December 31, 2018, with improved levels of activity in all business areas.

 

•

Within off-balance-sheet funds, good development of investment funds and pension funds in the quarter.

 

Solvency

 

•

Capital position above regulatory requirements, with a fully loaded CET1 ratio at 11.3%, similar to the level at the end of December 2018, which absorbs the 11 basis points impact as a result of the implementation of IFRS 16 on January 1, 2019.

 

 

Risk management

 

•

Although the Non-performing loans showed a slight rebound in the quarter (up 1.2%), the indicators of the main credit-risk metrics remain solid: as of March 31, 2019, the NPL stood at 3.9%, coverage at 74% and the accumulated cost of risk at 1.06%.

 

Digital customers

 

•

The Group’s digital and mobile customer base and digital sales continue to increase in all the geographic areas where BBVA operates with a positive impact on efficiency.

 

Dividends

 

•

On April 10, 2019, there was a gross cash payment of €0.16 per share, corresponding to the supplementary dividend for 2018 that was approved at the General Shareholders’ Meeting held on March 15.

Other matters of interest

 

•

IFRS 16 ‘Leases’ came into effect on January 1, 2019, a standard on leases that introduces a single lessee accounting model and will require lessees to recognize assets and liabilities of all lease contracts. The main impacts on the Group are the recognition of assets by right-of-use and liabilities per lease, amounting to €3,419m and €3,472m, respectively, and the above stated impact in terms of capital, both as of the effective date.

 

•

In 2019, the balance sheets, income statements and ratios of the first three quarters of 2018 have been reexpressed for the Group and the business area of South America to reflect the impacts derived from the hyperinflation in Argentina as a result of the application of IAS 29 on the income and expenses as well as the assets and liabilities, in order to make the financial information of 2019 comparable to the one of 2018. This is due to the impact been registered for the first time in the third quarter 2018, with accounting effects as from January 1, 2018.

 

In the first quarter of 2019, BBVA Group obtained a net attributable profit of €1,164m. This figure represents an increase of 16.2% compared to the one obtained in the last quarter of 2018, although it is 9.8% lower than in the same

quarter in the previous year (-8.1% at constant exchange rates). The good performance of recurring revenue items, particularly net interest income, as well as the evolution of operating expenses growing below gross income stand out.

 

Unless expressly indicated otherwise, to better understand the changes in the main headings of the Group’s income statement, the year-on-year percentage changes provided below refer to constant exchange rates.

Gross income

Gross income increased by 4.3% year-on-year, supported by the positive performance of net interest income.

 

Net interest income registered a growth of 6.7% year-on-year, with increases in all business areas due to lower financing costs, except for Spain and Rest of Eurasia, which are more influenced by the interest rate situation in the Eurozone.

 

On the other hand, cumulative net fees and commissions (up 1.3% year-on-year) also increased, thanks to their adequate diversification.

As a result, the more recurring revenue items (net interest income plus net fees and commissions) increased by 5.5% year-on-year.

 

NTI between January and March 2019 was 8.4% higher than the figure obtained in the same quarter of 2018, supported by one-off transactions and in general by gains deriving from securities portfolio management, particularly in the United States and South America.

Other operating income and expenses decreased by 90.2% year-on-year, mainly as a result of higher levels of inflation. However, the net contribution of the insurance business grew by 10.3% year-on-year.

Operating income

Operating expenses in the first quarter of 2019 registered a growth of 1.1% year-on-year, considerably below the inflation rate recorded in the main countries where BBVA is present (down 1.8% at current exchange rates). The Group continues to apply strict cost discipline in all areas of the Group.

 

As a consequence of this evolution of operating expenses, the efficiency ratio continued to improve and stood at 48.1%, below the level reached at the end of 2018 (49.3%), while operating income registered an increase of 7.4% year-on-year.

 

Provisions and other

Impairment on financial assets not measured at fair value through profit or loss (impairment on financial assets) in the first three months of 2019 decreased by 24.3% compared to the fourth quarter of 2018, while it increased 27.2% compared to the first quarter of the same year. By business areas, there were higher loan-loss provisions in the United States due to the deterioration of some specific customers in the commercial portfolio and some write-offs in consumer, and in Turkey due to the deterioration of wholesale client portfolios. In addition, both countries are also located in geographic areas affected by the update of the macroeconomic outlook. On the contrary, Spain recognized lower loan-loss provisions, and Mexico remained at similar levels compared to the first quarter of last year.

 

Finally, the heading provisions or reversal of provisions (hereinafter, “provisions”) was 52.7% above the figure recognized in the same quarter of 2018.

Results

As a result of the above, the Group’s net attributable profit in the first quarter of 2019 was 8.1% below that obtained in the same period of the previous year, characterized by stable levels of recurring revenue that were negatively impacted by higher loan-loss provisions.

 

By business area, Spain generated net attributable profit of €345m, the United States €127m, Mexico recognized a profit of €627m, Turkey contributed €142m, South America €193m, and Rest of Eurasia €16m.

 

The most relevant aspects of the Group’s balance sheet and business activity as of March 31, 2019 is summarized below:

 

•

Loans and advances to customers (gross) registered a growth of 1.8% in the quarter (up 1.4% at constant exchange rates), in all business areas, especially in Turkey, South America and Rest of Eurasia.

 

•

Non-performing loans continued to decrease year-on-year (down 11.4%), thanks to the positive performance showed, especially in Spain and, to a lesser extent, Rest of Eurasia. However, there was a slight rebound of 1.2% in the quarter due to increases in the United States, Turkey and, to a lesser extent, South America.

•

In terms of customer deposits, time deposits decreased by 3.3% in the quarter (down 12.6% year-on-year), offset by an increase of 2.7% in demand deposits in the quarter (up 10.7% year-on-year), particularly in Spain and, to a lesser extent, the United States.

 

•

Within off-balance sheet funds, both investment funds and pension funds showed a positive trend in this quarter.

 

•

In tangible assets, the balance as of March 31, 2019 is affected by the impact of the implementation of IFRS 16 “Leases”, which entails an increase of 44.0% compared to the end of the previous fiscal year.

 

Loans and advances to customers

(Millions of euros)

 

		31-03-19				D %				31-12-18				31-03-18
Public sector			29,138				2.2				28,504				28,176
Individuals			171,947				0.8				170,501				169,541
Mortgages			111,772				0.2				111,528				112,979
Consumer			36,159				3.5				34,939				33,335
Credit cards			13,644				1.0				13,507				13,263
Other loans			10,371				(1.5	)			10,527				9,963
Business			175,678				2.8				170,872				165,398
Non-performing loans			16,559				1.3				16,348				18,569
Loans and advances to customers (gross)			393,321				1.8				386,225				381,683
Loan-loss provisions			(12,522	)			2.7				(12,199	)			(13,697	)
Loans and advances to customers			380,799				1.8				374,027				367,986

 

Customer funds

(Millions of euros)

 

		31-03-19				D %				31-12-18				31-03-18
Deposits from customers			378,527				0.7				375,970				360,213
Of which current accounts			267,614				2.7				260,573				239,360
Of which time deposits			104,698				(3.3	)			108,313				113,469
Other customer funds			103,227				5.2				98,150				98,900
Mutual funds and investment companies			64,928				5.8				61,393				62,819
Pension funds			35,071				3.7				33,807				33,604
Other off-balance sheet funds			3,228				9.5				2,949				2,477
Total customer funds			481,754				1.6				474,120				459,113

 

Solvency

Capital base

BBVA’s fully-loaded CET1 ratio stood at 11.3% at the end of March 2019. This ratio includes the impact of -11 basis points for the first application of the IFRS 16 standard, which entered into force on January 1, 2019. Excluding this effect, the ratio increased by +12 basis points, supported by the recurring organic capital generation and the positive evolution of the markets.

Risk-weighted assets (RWAs) fully-loaded increased in the quarter by €12,368m, due to the implementation of IFRS 16, the evolution of foreign currencies, mainly the appreciation of the US dollar and the growth of the activity in emerging economies.

 

 

Regarding shareholder remuneration, on April 10, 2019, BBVA paid a final cash dividend of €0.16 per share for the fiscal year 2018, in line with the Group’s dividend policy of maintaining a pay-out ratio of 35-40% of recurring profit. During the first quarter, this final dividend does not have any impact on the solvency ratio of the Group, as it is already incorporated as of December 2018.

The phased-in CET1 ratio stood at 11.6% as of March 31, 2019, taking into account the impact of the IFRS 9 standard. Tier 1 capital stood at 13.1% and Tier 2 at 2.0%, resulting in a total capital ratio of 15.2%.

These levels are above the requirements established by the supervisor in its SREP letter, applicable in 2019. Since March

1, 2019, at consolidated level, this requirement has been established at 9.26% for the CET1 ratio and 12.76% for the total capital ratio. Its variation compared to 2018 is explained by the end of the transitional period for implementation of capital conservation buffers and the capital buffer applicable to Other Systemically Important Institutions, as well as the progression of the countercyclical capital buffer. For its part, the CET1 of Pillar 2 (P2R) requirement remains unchanged at 1.5%.

Finally, the Group’s leverage ratio maintained a solid position, at 6.4% fully-loaded (6.6% phased-in), which is still the highest among its peer group.

Ratings

At present, all agencies assign to BBVA a category “A” rating, with no variation in the first three months of 2019. These ratings are detailed in the following table: Ratings

 

Rating agency

Long term

Short term

Outlook

DBRS

A (high)

R-1 (middle)

Stable

Fitch

A-

F-2

Negative

Moody’s (1)

A3

P-2

Stable

Scope Ratings

A+

S-1+

Stable

Standard & Poor’s

A-

A-2

Negative

 

(1)	Additionally, Moody’s assigns an A2 rating to BBVA’s long term deposits.

 

Credit risk

BBVA Group’s risk metrics show the following evolution in the first quarter of 2019:

 

•

Credit risk increased by 1.2% in the quarter at current exchange rates (up 0.6% at constant exchange rates), with generalized growth in all areas except Turkey, which remains flat, impacted by the exchange rate evolution (up 2.1% at constant rates). The United States, which was positively impacted by the dollar evolution, grew 1.0% at current exchange rates and contracted 0.9% at constant exchange rates.

 

•

Balance of non-performing loans registered a decrease of 11.4% year-on-year, although they increased by 1.2% in the quarter (0.6% in constant terms). Good performance in Spain during the first quarter (down 2.8%) which does not offset the increase of NPLs in other areas, especially the United States and Turkey.

 

•

The NPL ratio stood at 3.9% as of March 31, 2019, stable with respect to the ratio registered at the end of December 2018. However, it decreased by 47 basis points compared to the end of March 2018.

 

•

Loan-loss provisions increased by 2.6% in the quarter (2.4% at constant exchange rates).

•

The NPL coverage ratio stood at 74% at the end of the quarter, an improvement of 97 basis points in the first three months of 2019 and 142 basis points higher than the end of March 2018.

 

•

The accumulated cost of risk as of March 31, 2019 was 1.06%, which is a slight increase of 5 basis points compared to the end of 2018.

 

 

Structural risks

Liquidity and funding

Management of liquidity and funding in BBVA aims 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 financing, always in compliance with current regulatory requirements.

Due to its subsidiary-based management model, BBVA is one of the few major European banks that follows the Multiple Point of Entry (MPE) resolution strategy: the parent company sets the liquidity and risk policies, but the subsidiaries are self-sufficient and responsible for managing their own liquidity (taking deposits or accessing the market with their own rating), without fund transfer or financing occurring between either the parent company and the subsidiaries, or between different subsidiaries. This strategy limits the spread of a liquidity crisis among the Group’s different areas, and ensures that the cost of liquidity and financing is correctly reflected in the price formation process.

The financial soundness of the Group’s banks continues to be based on the funding of lending activity, fundamentally through the use of stable customer funds. During the first quarter of 2019, liquidity conditions remained comfortable across all countries in which the BBVA Group operates:

 

•

In the Eurozone, the liquidity situation remains comfortable, and the credit gap was stable throughout the first quarter.

 

•

In the United States, the liquidity situation is adequate. The credit gap decreased in the quarter, due mainly to the increase in deposits as a result of the deposit growth campaigns launched and seasonal fluctuations in the first quarter of the year.

•

In Mexico, a solid liquidity position has been maintained. The credit gap increased slightly in the first quarter of the year, affected by the seasonal outflow of deposits, while the loan portfolio remained virtually flat in the quarter.

 

•

In Turkey, positive liquidity situation, with an adequate buffer against a possible liquidity stress scenario. The overall credit gap remained virtually flat, with the larger gap in Turkish lira due to the increase in loans being offset by a reduction in the credit gap in foreign currency, due to an increase in deposits.

 

•

In South America, the liquidity situation remains comfortable throughout the region. In Argentina, despite market volatility, the liquidity situation remains adequate.

The BBVA Group’s liquidity coverage ratio (LCR) remained comfortably above 100% throughout the first quarter of 2019, and stood at 127% as of March 31, 2019. All subsidiaries remained comfortably above 100% (Eurozone, 144%; Mexico, 151%; Turkey, 208%; and the United States, 145%). For the calculation of the ratio, it is assumed that there is no transfer of liquidity among subsidiaries; i.e. no kind of excess liquidity levels in foreign subsidiaries are considered in the calculation of the consolidated ratio. When considering these excess liquidity levels, the ratio would stand at 155% (28 percentage points above 127%).

Wholesale financing markets in which the Group operates remained stable, even in the case of Turkey, where the higher volatility at the end of March due to the local elections did not affect its financing.

The main transactions carried out by the entities of the BBVA Group during the first quarter of 2019 were as follows:

 

 

•

BBVA S.A. issued senior non-preferred debt for €1 billion, with a fixed-rate coupon of 1.125% over a five-year period; an issue of preferred securities which may be converted into ordinary BBVA shares (CoCos), registered in the Spanish Securities Market Commission (CNMV) for €1 billion, with an annual coupon of 6.0% and an amortization option from the fifth year; and a Tier 2 subordinated debt issue for €750m, with a maturity period of 10 years, amortization option in the fifth year and a coupon of 2.575%.

 

•

In addition, early amortization options have been implemented for the issue of CoCos for €1.5 billion with a coupon of 7% issued in February 2014, and another for Tier 2 subordinated debt for €1.5 billion with a 3.5% coupon issued in April 2014 and amortized in April 2019.

 

•

In Turkey, Garanti issued a five-year Diversified Payment Rights (DPR) for US$150m.

 

•

Finally, BBVA in Argentina issued negotiable instruments on the local market for an amount equivalent to €33m, while in Chile, Forum issued a bond on the local market for an amount equivalent to €108m.

Foreign exchange

Foreign exchange risk management of BBVA’s long-term investments, principally stemming from its overseas franchises, aims to preserve the Group’s adequacy capital ratios and to ensure the stability of its income statement.

In the first quarter of 2019, the Turkish lira (down 4.5%) and the Argentine peso (down 11.6%) depreciated against the euro, while the Mexican peso (up 3.7%) and the US dollar (up 1.9%) appreciated compared to the end of 2018. BBVA has maintained its policy of actively hedging its main investments in emerging markets, covering on average between 30% and 50% of annual earnings and around 70% of the CET1 capital ratio excess. Based on this policy, the sensitivity of the CET1 ratio to the depreciation of 10% against the euro by the main emerging-market currencies stood at -3 basis points for the Mexican peso and -2 basis points for the Turkish lira. In the case of the US dollar, the sensitivity is approximately +11 basis points to a depreciation of 10% against the euro, as a result of RWAs denominated in US dollars outside the United States. At the end of March 2019, the coverage level for expected earnings in 2019 stood at 75% for Mexico and 30% for Turkey.

Interest rates

The aim of managing interest-rate risk is to maintain sustained growth of net interest income in the short- and medium-term, irrespective of interest rate fluctuations, while controlling the impact on capital through the valuation of the portfolio of financial assets at fair value through profit or loss.

The Group’s banks maintain fixed-income portfolios to manage their balance sheet structure. In the first quarter of 2019, the results of this management were satisfactory, with limited risk strategies maintained in all the Group’s banks.

In Turkey, there was an increase in market volatility prior to the local elections held on March 31, which led the Central Bank of the Republic of Turkey (CBRT) to raise the cost of financing to stabilize the Turkish lira. However, this did not have any impact on the balance sheet structure. In this context, the management of the customer spread was very positive, thanks to the efforts made to reduce the cost of funding, which enabled good net interest income growth in the quarter, despite a lower contribution of inflation-linked bonds compared to previous quarters.

Finally, with regard to the monetary policies pursued by central banks in the main countries where BBVA operates, in the first quarter of 2019, it should be noted that:

 

•

The interest rate of 0% and deposit facility rate of -0.40% were maintained in the Eurozone. The ECB indicated at its meeting in March that it would delay rate increases until at least December 2019, lowering its growth and inflation forecasts for the year. In addition, it announced a new round of liquidity injections (TLDRO III) starting from September.

 

•

In the United States, the Fed decided to pause the normalization process in the face of increased downside risks, mainly due to the weakness of the global economy, and the absence of inflationary pressures, keeping interest rates stable at 2.5% at its March meeting.

 

•

In Mexico, Banxico decided to maintain its monetary policy rate at 8.25%, considering that this position is consistent with meeting its target inflation rate.

 

•

In Turkey, the Central Bank of the Republic of Turkey (CBRT) maintained rates at 24.00% during the first quarter, raising the average cost of financing to 25.50% at the end of March to stabilize the Turkish lira, before returning to 24.00% at the beginning of April.

 

•

In South America, the monetary authorities of Colombia and Peru maintained their respective reference rates during the quarter the same as at the end of 2018, while in Argentina, interest rates rose to 68.16% at the end of the quarter, with the aim of avoiding an increase in the monetary base and halting the rise in inflation.

 

Economic capital

Economic risk capital (ERC) consumption at the end of February 2019, in consolidated terms, stood at €28,722 million, a decrease of 7.9% compared to the end of December 2018 (down 8.4% at constant exchange rates). This decrease is mainly focused on eliminating ERC consumption through goodwill and equity, as this will be considered a deduction of assets used in the calculation of the Group’s solvency.

 

 

The BBVA share

The major stock market indices improved during the first quarter of 2019. In Europe, the Stoxx 50 and Euro Stoxx 50 rose 12.9% and 11.7%, respectively, while in Spain the Ibex 35 index rose 8.2%. Over the same period in the United States, the S&P 500 index rose 13.1%, marking the largest quarterly increase since the third quarter of 2009.

Banking sector performance in particular was also positive in the quarter, although to a lesser extent than the general market indices. Furthermore, the Stoxx European Banks index, which includes the United Kingdom, rose 4.5%, while the Euro Stoxx Banks index for the eurozone rose 7.1%. In the United States, the S&P Regional Banks Select Industry Index grew 9.6% in comparison to the close of the 2018.

On the other hand, the BBVA share performed slightly better than those of the European banking sector and Ibex 35 during the first quarter of 2019, with the share price increasing 9.9% to €5.09 at the close of the quarter.

 

The BBVA share and share performance ratios

 

		31-03-19				31-12-18
Number of shareholders			892,316				902,708
Number of shares issued			6,667,886,580				6,667,886,580
Daily average number of shares traded			23,536,617				35,909,997
Daily average trading (millions of euros)			122				213
Maximum price (euros)			5.55				7.73
Minimum price (euros)			4.51				4.48
Closing price (euros)			5.09				4.64
Book value per share (euros)			7.20				7.12
Tangible book value per share (euros)			5.94				5.86
Market capitalization (millions of euros)			33,960				30,909
Yield (dividend/price; %) (1)			4.9				5.4

 

(1)	Calculated by dividing shareholder remuneration over the last twelve months by the closing price of the period.

Regarding shareholder remuneration, on April 10, 2019 BBVA paid in cash a gross amount of €0.16 per share as a final dividend for the 2018 fiscal year, which represents a 7% increase compared to April 2018. Thus, the total dividend for the 2018 fiscal year amount to €0.26 gross per share, with a payout of 37% of net attributable profit, excluding the gains of the sale of BBVA Chile. BBVA will continue to pay out between 35% and 40% of its yearly earnings in dividends, with 100% cash remuneration.

 

As of March 31, 2019, the number of BBVA shares remained at 6,668 million, held by 892,316 shareholders, of whom 44.73% are Spanish residents and the other 55.27% are non-residents.

Shareholder structure

(31-03-2019)

 

		Shareholders								Shares
Number of shares		Number				%				Number				%
Up to 150			177,281				19.9				12,565,086				0.2
151 to 450			177,739				19.9				48,727,280				0.7
451 to 1800			280,798				31.5				274,676,758				4.1
1,801 to 4,500			134,826				15.1				384,055,358				5.8
4,501 to 9,000			62,727				7.0				395,229,468				5.9
9,001 to 45,000			52,468				5.9				910,481,356				13.7
More than 45,001			6,477				0.7				4,642,151,274				69.6
Total			892,316				100.0				6,667,886,580				100.0

BBVA shares are included on the main stock market indices, including the Ibex 35, Euro Stoxx 50 and Stoxx 50, with a weighting of 7.0%, 1.4% and 0.9% respectively at the close of March 2019. They also form part of several sector indices, including the Euro Stoxx Banks, with a weighting of 8.5%, and the Stoxx Banks, with a weighting of 4.0%.

 

Finally, BBVA maintains a significant presence on a number of international sustainability indices or ESG (Environmental, Social and Governance) indices, which evaluate companies’ performance in these areas. This presence is summarized in the following table:

 

At BBVA we have a differential banking model, that we refer to as responsible banking, based on seeking out a return adjusted to principles, strict legal compliance, best practices and the creation of long-term value for all stakeholders. The four pillars of BBVA’s responsible banking model are as follows:

 

•

Balanced relationships with its customers, based on transparency, clarity and responsibility.

 

•

Sustainable finance to combat climate change, respect human rights and achieve the United Nations Sustainable Development Goals (SDGs).

 

•

Responsible practices with employees, suppliers and other stakeholders.

 

•

Community investment to promote social change and create opportunities for all.

In 2018, BBVA announced its 2025 Pledge. This sets out the Bank’s strategy for climate change and sustainable development, working toward meeting the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. The pledge is an eight-year commitment based on three lines of action:

 

•

To finance: BBVA is pledging to mobilize €100 billion in green and social finance, sustainable infrastructures and agribusiness, social entrepreneurship and financial inclusion.

 

•

To manage the environmental and social risks associated with the Group’s activity in order to minimize its potential direct and indirect negative impacts. BBVA pledges that 70% of energy used by the Group will be renewable by 2025, increasing to 100% in 2030, as well as to reduce CO2 emissions by 68% compared to 2015.

 

•

To engage all stakeholders to collectively promote the financial sector’s contribution to sustainable development.

In 2018, the first year of the Pledge, €11,815m was mobilized for sustainable financing. In the first quarter of 2019, BBVA continued to be very active in sustainable corporate financing, mainly in loans with profit margins linked to the borrower’s performance in terms of ESG (Environmental, Social and Governance) criteria, certified by an independent expert. BBVA was also part of the working group preparing Sustainability Linked Loan Principles (SLLP), the new market standards for this financial instrument, which were published in March.

In terms of mitigating social and environmental risks, in the first quarter of 2019, BBVA updated its sector norms setting out the due diligence to be performed in accordance with four

sectors of special environmental and social impact: mining, energy, infrastructure and agribusiness. These standards provide clear guidance on the procedures to follow when managing customers and transactions in these sectors. As a result of discussions with stakeholders and in order to meet expectations, stricter restrictions have been incorporated:

 

•

In the energy sector, the coal threshold for BBVA customers’ energy mix has been reduced from 40% to 35%.

 

•

Transporting of tar sands has been explicitly added to the list of prohibited activities, as well as to the existing exploration and production activities. BBVA’s exposure in financing projects of exploration, production and transportation of tar sands was zero by the close of the first quarter of 2019, and no projects of this nature are being considered.

 

•

In the energy and agriculture sectors, reference to biofuels as an alternative in the fight against climate change, which appeared in a previous version of the standards, has been removed.

 

•

New restrictions relating to tobacco advertising have been incorporated.

As part of its objective to engage its stakeholders, BBVA continues to participate in various initiatives at the heart of sectoral associations such as the AEB (Asociación Española de Banca — Spanish banking association) or the EBF (European Banking Federation), where the Bank presides over the sustainable finance group and participates in working groups related to this matter, as well as collaborating in consultations on taxonomy, regulation, disclosure and other objectives of the European Commission action plan on sustainable finance.

Regarding responsible practice, BBVA updated its action plan on human rights matters in February 2019, which, combined with the renewed human rights commitment, allows closer monitoring of actions identified during a due diligence process conducted due to the potential special impact on human rights.

In terms of community investment, BBVA allocated €104.5m to social initiatives in 2018, which benefited more than 8 million people. This figure represents approximately 2% of the net attributable profit for that financial year. Through social programs, BBVA acts as an engine of opportunities for people, and seeks to have a positive impact on their lives, with regard to vulnerable people in particular. BBVA’s investment in social programs is channelled through its local banks within the Group, and through its corporate foundations.

 

This section presents and analyzes the most relevant aspects of the Group’s different business areas. Specifically, for each one of them, it shows a summary of the income statement and balance sheet, the business activity figures and the most significant ratios.

In 2019, BBVA Group’s business areas reporting structure of the BBVA Group’s business areas differs from the one presented at the end of the 2018, as a result of the integration of the Non-Core Real Estate business area into Banking Activity in Spain, now reported as “Spain”. In order to make the 2019 information comparable to 2018, the figures for both areas have been reexpressed. BBVA Group’s business areas are summarized below:

 

•

Spain mainly includes the banking and insurance businesses that the Group carries out in Spain.

 

•

The United States includes the Group’s business activity in the country through BBVA Compass group and BBVA’s New York branch.

 

•

Mexico includes the Group’s banking and insurance businesses in this country as well as the activity of BBVA Bancomer’s branch in Houston.

 

•

Turkey reports the activity of Garanti group that is mainly carried out in this country and, to a lesser extent, in Romania and the Netherlands.

 

•

South America basically includes the Group’s banking and insurance businesses in the region.

 

•

Rest of Eurasia includes the banking business activity carried out by the Group in Europe, excluding Spain, and in Asia.

The Corporate Center contains the Group’s holding function, including: the costs of the head offices with a corporate function; management of structural exchange rate positions; some equity instruments issuances to ensure an adequate management of the Group’s global solvency. It also includes portfolios whose management is not linked to customer relationships, such as industrial holdings; certain tax assets and liabilities; funds due to commitments to employees; goodwill and other intangible assets.

The information by business area is based on units at the lowest level and/or companies that comprise the e Group, which are assigned to the different areas according to the main region or company group in which they carry out their activity.

As usual, in the case of the different business areas in America and Turkey, the results of applying constant exchange rates are given as well as the year-on-year variations at current exchange rates.

 

Macro and industry trends

World GDP grew by 3.8% in 2018, despite the slowdown in the second half of the year. In the first quarter of 2019, global growth moderated due to manufacturing and trade weaknesses. However, the service sector and employment remain robust. The cyclical slowdown in the United States and China’s moderation trend have been accompanied by an unexpected slowdown in Europe, affected by global trade tensions and idiosyncratic factors (such as regulatory changes in the automobile sector, protests in France and, mainly, Brexit).

In light of greater cyclical weakness and in the absence of inflationary pressures, main central banks have reacted with more accommodative monetary policies. The United States Federal Reserve (Fed), after raising benchmark interest rates to 2.50% in December, has signaled a pause that is likely to continue until the end of 2019, and will put an end to the reduction in its balance earlier than expected. The European Central Bank, after completing the asset purchase program in December and in the face of weak economic activity, has announced a new round of liquidity auctions, delaying the interest rates increase, which is no longer expected until mid-2020 at the earliest. Furthermore, the Chinese authorities have been adopting fiscal and monetary stimuli following recent signs of weakening activity. Thus, interest rates will remain low for longer in the developed economies, allowing emerging countries to gain room for maneuver. These stimuli are a factor supporting growth, but a moderation on growth rates is expected for the coming quarters.

Spain

The Spanish economy grew by 2.6% in 2018, above the euro area (1.8%). In the first quarter of 2019, growth remains strong due to the good performance of public and private consumption, while exports and investment in machinery and equipment are slowing down. In the coming quarters the economy will grow at a lower pace due to the exhaustion of the fiscal stimulus and the global weakness, while uncertainty about economic policy will continue to have a negative impact on activity.

Regarding the banking sector, the system’s de-leveraging and the improvement of asset quality indicators (NPL of 5.8% in January 2019) continued. Profitability remains under pressure (ROE at the close of 2018 stands at 5.4%) due to the low interest rate environment and lower business volumes. Spanish banks continue to have high levels of solvency and liquidity.

United States

The United States grew 2.9% in 2018, its unemployment rate fell below 4% and the Fed increased rates to 2.50%. Growth is being moderated by increased interest rates, the global slowdown, the exhaustion of the fiscal stimulus and political uncertainty. Some financial indicators show an increase in the risk of recession, but the economy maintains a good growth rate, especially in consumption. The pause in interest rate rises is a supporting factor.

The most recent bank activity figures show that credit and deposits are growing at rates of 5.2% and 3.3% respectively. Delinquencies continued to fall. In the fourth quarter of 2018, the NPL ratio was 1.57%.

Mexico

As of the end of 2018, the economy closed with a rate of growth of 2%. In the first months of 2019, the service sector was resilient and private consumption gave positive signs following the weakness of the fourth quarter of 2018. However, private investment remains weak while the manufacturing sector and exports are moderating. The central bank continues with its restrictive bias; however, good figures for inflation and the exchange rate would allow interest rates to be cut to mitigate the foreseeable slowdown in growth.

The banking system continues to grow in year-on-year terms. With figures as of February 2019, loans and deposits grew by 9.4% and 8.5%, respectively, showing growth in all segments. Delinquencies remain contained (2.11%, compared to 2.20% twelve months earlier) while capital indicators remain at comfortable levels.

Turkey

The economy grew 2.6% in 2018, after registering two consecutive quarters of decline. Consumption and investment registered a sharp contraction, partially offset by external demand. Although activity kept falling at the beginning of the year, it seems to have reached a bottom. Interest rates will remain high until exchange rate pressure is resolved and inflation moderates. The Government has announced a new economic plan, some of the measures include the capitalization of the banking system and the strengthening of the asset quality.

 

As of the end of the first quarter of 2019, the banking system showed high growth rates. Total credit in the system (adjusted for the exchange rate effect) grew 18.1% with growth in all portfolios, driven especially by public banks after the government’s package of measures to support SMEs. The NPL ratio of the system is 4.1%.

Argentina

The economy registered a sharp contraction in 2018 (GDP fell by 2.5%) following the exchange rate crisis and a severe drought. But the end of the first quarter presents signs of a lukewarm recovery in activity, while the IMF has approved an additional US$ 10.8 billion loan after favorably completing the third review of its support program. Inflation remains high and with strong inertia due to the impact of exchange rate depreciation, despite a more contractionary monetary policy. In the financial system, loans and deposits are growing at high rates, with a notable influence of the high inflation. As of January 2019, profitability indicators are very high (ROE: 37% and ROA: 4.2%) and delinquencies remain contained, with a NPL ratio of 3.2%.

Colombia

The Colombian economy grew by 2.6% in 2018. Growth continued in the first quarter of 2019, supported by private consumption and public spending, while investment has not taken off. With weak demand and low inflation (about 3%), the central bank has held interest rates at 4.25% and it is not expected to increase them in the short term. In Colombia, as of January 2019, the system’s total credit grew by 5.9% year-on-year, with a NPL ratio of 4.7%. Since January 2018, total deposits increased 4.7%.

Peru

After growing by 4% in 2018, growth is moderating mainly explained by the primary sector, construction and the recent fall in public investment. The central bank has held interest rates at 2.75%, which implies an expansionary bias for monetary policy. Interest rates are expected to rise in the coming months. The banking system presents moderate year-on-year growth rates in loans and deposits (+9.3% and +5.7% respectively, as of January 2019), with reasonably high profitability levels (ROE: 18.5%, ROA: 2.7%).