Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of February, 2018

Commission file number: 1-10110

 

 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

 

 

Calle Azul 4,

28050 Madrid

Spain

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F   ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes  ☐            No  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes  ☐            No  ☒

 

 

 


Table of Contents

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Table of Contents

2017

Contents

 

BBVA Group highlights

     3  

Group information

     4  

Relevant events

     4  

Results

     5  

Balance sheet and business activity

     11  

Solvency

     13  

Risk management

     15  

The BBVA share

     18  

Responsible banking

     20  

Business areas

     21  

Banking activity in Spain

     24  

Non Core Real Estate

     27  

The United States

     29  

Mexico

     32  

Turkey

     35  

South America

     38  

Rest of Eurasia

     41  

Corporate Center

     43  

Other information: Corporate & Investment Banking

     44  


Table of Contents

 

2017

 

  

BBVA GROUP HIGHLIGHTS

 

  

P.3

 

 

BBVA Group highlights

BBVA Group highlights

(Consolidated figures)

 

     31-12-17      D%     31-12-16      31-12-15  

Balance sheet (million euros)

          

Total assets

     690,059        (5.7     731,856        749,855  
  

 

 

    

 

 

   

 

 

    

 

 

 

Loans and advances to customers (gross)

     400,369        (7.0     430,474        432,855  

Deposits from customers

     376,379        (6.2     401,465        403,362  

Other customer funds

     134,906        2.1       132,092        131,822  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total customer funds

     511,285        (4.2     533,557        535,184  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total equity

     53,323        (3.8     55,428        55,282  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income statement (million euros)

          

Net interest income

     17,758        4.1       17,059        16,426  

Gross income

     25,270        2.5       24,653        23,680  

Operating income

     12,770        7.7       11,862        11,363  

Protit/(loss) before tax

     6,931        8.4       6,392        5,879  

Net attributable profit

     3,519        1.3       3,475        2,642  

The BBVA share and share performance ratios

          

Number of shares (millions)

     6,668        1.5       6,567        6,367  

Share price (euros)

     7.11        10.9       6.41        6.74  

Earning per share (euros) (1)

     0.48        (0.7     0.49        0.37  

Book value per share (euros)

     6.96        (3.6     7.22        7.47  

Tangible book value per share (euros)

     5.69        (0.6     5.73        5.88  

Market capitalization (million euros)

     47,422        12.6       42,118        42,905  

Yield (dividend/price; %)

     4.2          5.8        5.5  

Significant ratios (%)

          

ROE (net attributable profit/average shareholders’ funds) (2)

     6.4          6.7        5.2  

ROTE (net attributable profit/average shareholders’ funds excluding intangible assets) (2)

     7.7          8.2        6.4  

ROA (profit or loss for the year/average total assets)

     0.68          0.64        0.46  

RORWA (profit or loss for the year/average risk-weighted assets)

     1.27          1.19        0.87  

Efficiency ratio

     49.5          51.9        52.0  

Cost of risk

     0.87          0.84        1.06  

NPL ratio

     4.4          4.9        5.4  

NPL coverage ratio

     65          70        74  

Capital adequacy ratios (%)

          

CET1 fully-loaded

     11.1          10.9        10.3  

CET1 phase-in (3)

     11.7          12.2        12.1  

Tier 1 phase-in (3)

     13.0          12.9        12.1  
  

 

 

      

 

 

    

 

 

 

Total ratio phase-in (3)

     15.4          15.1        15.0  
  

 

 

      

 

 

    

 

 

 

Other information

          

Number of shareholders

     891,453        (4.7     935,284        934,244  

Number of employees

     131,856        (2.2     134,792        137,968  

Number of branches

     8,271        (4.5     8,660        9,145  

Number of ATMs

     31,688        1.8       31,120        30,616  

 

(1) Adjusted by additional Tier 1 instrument remuneration.
(2) The ROE and ROTE ratios include in the denominator the Group’s average shareholders’ funds, but do not take into account the caption within total equity named “Accumulated other comprehensive income” with an average balance of -€1,139m in 2015, -€4,492m in 2016 and -€7,015 in 2017.
(3) The capital ratios are calculated under CRD IV from Basel III regulation, applying a 80% phase-in for 2017 and a 60% for 2016.


Table of Contents

 

2017    GROUP INFORMATION    P. 4

Group information

Relevant events

Results (pages 5-10)

 

 

 

  Generalized sustained growth in more recurrent sources of revenue in practically all geographic areas.

 

  Operating expenses remain under control, leading to an improvement in the efficiency ratio in comparison with 2016.

 

  Impairment losses on financial assets has been influenced by the recognition of impairment losses of €1,123m from BBVA’s stake in Telefónica, S.A.

 

  As a result, the net attributable profit was €3,519m. Without taking into account the impacts of the impairment losses in Telefónica in 2017 and the so-called “mortgage floor clauses” in 2016, the net attributable profit was up year-on-year by 19.7%.

Balance sheet and business activity (pages 11-12)

 

 

 

  The year-on-year comparison of the Group’s balance sheet and business activity has been affected by the operations underway (sales of BBVA Chile and the real-estate business in Spain), which as of 31-Dec-2017 were reclassified as non-current assets and liabilities held for sale. Without taking into account the said reclassification (figures in comparable terms with respect to previous periods):

 

    Loans and advances to customers (gross) continue to increase in emerging geographies but decline in Spain. There has been a slight recovery in the United States since the second half of 2017.

 

    Non-performing loans continue to improve favorably.

 

    Deposits from customers have performed particularly well in the more liquid and lower-cost items.

 

    There was an increase in off-balance-sheet funds, mainly in mutual funds.

Solvency (page 13-14)

 

 

 

  The capital position is above regulatory requirements and in line with the target established for the fully-loaded CET1 of 11%. The recognition of the impairment losses from Telefónica mentioned above does not negatively affect the Group’s solvency, as they are deducted from both equity and CET1.

Risk management (pages 15-16)

 

 

 

  Good performance of the main credit risk metrics: as of 31-Dec-2017, the NPL ratio closed at 4.4%, the NPL coverage ratio at 65% and the cumulative cost of risk at 0.87%.

Transformation

 

 

 

  The Group’s digital and mobile customer base and digital sales continue to increase in all the geographic areas where BBVA operates.

Other matters of interest

 

 

 

  It is expected to be proposed for the consideration of the competent governing bodies a cash payment in a gross amount of euro 0.15 per share to be paid in April as final dividend for 2017.

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Table of Contents

 

2017    GROUP INFORMATION    P. 5

Results

 

BBVA Group’s net attributable profit for 2017 was €3,519m. It was affected by the negative impact of the recognition of impairment losses from its stake in Telefónica, S.A. as a result of the changes in the share price of the latter.

The Group thus generated a net attributable profit excluding the negative effect of these impairment losses of €4,642m. This represents growth of 33.6% on the net attributable profit in 2016 (up 19.7% excluding the charges for the so-called

“mortgage floor clauses” in 2016). Once more, there was a notably good performance of more recurring revenue and containment of operating expenses.

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 given below refer to constant exchange rates.

 

 

 

Consolidated income statement: quarterly evolution

(Million euros)

 

     2017     2016  
     4Q     3Q     2Q     1Q     4Q     3Q     2Q     1Q  

Net interest income

     4,557       4,399       4,481       4,322       4,385       4,310       4,213       4,152  

Net fees and commissions

     1,215       1,249       1,233       1,223       1,161       1,207       1,189       1,161  

Net trading income

     552       347       378       691       379       577       819       357  

Dividend income

     86       35       169       43       131       35       257       45  

Share of profit loss of entities accounted for using the equity method

     5       6       (2     (5     7       17       (6     7  

Other operating income and expenses

     (54     154       77       108       159       52       (26     66  

Gross income

     6,362       6,189       6,336       6,383       6,222       6,198       6,445       5,788  

Operating expenses

     (3,114     (3,075     (3,175     (3,137     (3,243     (3,216     (3,159     (3,174

Personnel expenses

     (1,640     (1,607     (1,677     (1,647     (1,698     (1,700     (1,655     (1,669

Other administrative expenses

     (1,143     (1,123     (1,139     (1,136     (1,180     (1,144     (1,158     (1,161

Depreciation

     (331     (344     (359     (354     (365     (372     (345     (344

Operating income

     3,248       3,115       3,161       3,246       2,980       2,982       3,287       2,614  

Impairment on financial assets (net)

     (1,885     (976     (997     (945     (687     (1,004     (1,077     (1,033

Provisions (net)

     (180     (201     (193     (170     (723     (201     (81     (181

Other gains (losses)

     (267     44       (3     (66     (284     (61     (75     (62

Profit/(loss) before tax

     916       1,982       1,969       2,065       1,285       1,716       2,053       1,338  

Income tax

     (499     (550     (546     (573     (314     (465     (557     (362

Profit/(loss) for the year

     417       1,431       1,422       1,492       971       1,251       1,496       976  

Non-controlling interests

     (347     (288     (315     (293     (293     (286     (373     (266

Net attributable profit

     70       1,143       1,107       1,199       678       965       1,123       709  

Net attributable profit excluding results from corporate operations

     70       1,143       1,107       1,199       678       965       1,123       709  

Earning per share (euros) (1)

     (0.00     0.16       0.16       0.17       0.09       0.13       0.16       0.10  

Net attributable profit without Telefónica and “mortgage floor

     1,192       1,143       1,107       1,199       1,082       965       1,123       709  

clauses” impacts (2)

                

 

(1) Adjusted by additional Tier 1 instrument remuneration.
(2) Excluding the impacts from the impairment losses from Telefónica in 2017 and the so-called “mortgage floor clauses” in 2016.


Table of Contents

 

2017    GROUP INFORMATION    P. 6

 

 

Consolidated income statement

(Million euros)

 

     2017      D%      D% at constant
exchange rates
     2016  

Net interest income

     17,758        4.1        10.6        17,059  

Net fees and commissions

     4,921        4.3        9.4        4,718  

Net trading income

     1,968        (7.7      (6.0      2,132  

Dividend income

     334        (28.5      (28.3      467  

Share of profit loss of entities accounted for using the equity method

     4        (86.2      (86.5      25  

Other operating income and expenses

     285        13.4        2.8        252  

Gross income

     25,270        2.5        7.9        24,653  

Operating expenses

     (12,500      (2.3      2.2        (12,791

Personnel expenses

     (6,571      (2.2      1.9        (6,722

Other administrative expenses

     (4,541      (2.2      2.7        (4,644

Depreciation

     (1,387      (2.7      1.8        (1,426

Operating income

     12,770        7.7        14.1        11,862  

Impairment on financial assets (net)

     (4,803      26.3        32.0        (3,801

Provisions (net)

     (745      (37.2      (37.8      (1,186

Other gains (losses)

     (292      (39.5      (40.1      (482

Profit/(loss) before tax

     6,931        8.4        18.1        6,392  

Income tax

     (2,169      27.7        39.7        (1,699

Profit/(loss) for the year

     4,762        1.5        10.4        4,693  

Non-controlling interests

     (1,243      2.0        19.1        (1,218

Net attributable profit

     3,519        1.3        7.6        3,475  

Net attributable profit excluding results from corporate operations

     3,519        1.3        7.6        3,475  

Earning per share (euros) (1)

     0.48              0.49  

Net attributable profit without Telefónica and “mortgage floor clauses” impacts (2)

     4,642        19.7        26.3        3,879  

 

(1) Adjusted by additional Tier 1 instrument remuneration.
(2) Excluding the impacts from the impairment losses from Telefónica in 2017 and the so-called “mortgage floor clauses” in 2016.

 

Gross income

Cumulative gross income grew by 7.9% year-on-year, once more strongly supported by the positive performance of the more recurring items.

Net interest income continued to grow, rising significantly in the fourth quarter by 8.4% and a cumulative 10.6% year-on-year. This positive trend was once again driven by

growth in activity, above all in emerging economies, and good management of customer spreads. By business areas there was a positive performance in Turkey (up 20.6%), South America (up 15.1%), the United States (up 13.0%) and Mexico (up 9.5%). In Spain, although this line item grew in the fourth quarter, there was a slight decline in the figure for the year as a whole as a result of lower loan volumes and sales of wholesale portfolios.

 

 

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Table of Contents

 

2017

 

  

GROUP INFORMATION

 

  

P. 7

 

Cumulative net fees and commissions performed very well in all the Group’s areas (up 9.4% year-on-year), strongly reflecting their appropriate diversification. The quarterly figure was also good (up 1.1% in the last three months).

As a result, more recurring revenue items (net interest income plus net fees and commissions) increased by 10.3% year-on-year (6.8% over the last three months).

 

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Growth in NTI slowed in comparison with 2016 figures. This is basically due to lower sales of ALCO portfolios during this year.

The dividend income heading mainly includes income from the Group’s stake in the Telefónica group. The year-on-year decline of 28.3% in this figure can be explained by the reduction in the dividend paid by Telefónica, as well as the inclusion of dividends from China Citic Bank (CNCB) in the second quarter of 2016.

Finally, other operating income and expenses increased by 2.8% in year-on-year terms. It should be noted that the net contribution of the insurance business remained flat (up

0.1%) due mainly to the high level of claim ratios as a result of the natural disasters occurred in Mexico.

Operating income

Operating expenses were kept in check to a year-on-year increase of 2.2%. The above is due to the cost discipline implemented in all areas of the Group through efficiency plans that are now yielding results, and the materialization of some synergies (mainly resulting from the integration of Catalunya Banc - CX -). By business areas there were notable reductions in Spain and the Rest of Eurasia. In the rest of the geographic areas (Mexico, Turkey, the United States and South America), the year-on-year rise in costs was below or in line with the local average inflation.

 

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As a result of the above, the efficiency ratio closed at 49.5%, below the figure of 51.9% in the previous year, and cumulative operating income rose by 14.1% over the last twelve months.

 


Table of Contents

 

2017    GROUP INFORMATION    P. 8

 

 

Breakdown of operating expenses and efficiency calculation

(Million euros)

 

     2017      D%      2016  

Personnel expenses

     6,571        (2.2      6,722  

Wages and salaries

     5,163        (2.0      5,267  

Employee welfare expenses

     911        (2.9      938  

Training expenses and other

     497        (3.7      516  

Other administrative expenses

     4,541        (2.2      4,644  

Property, fixtures and materials

     1,033        (4.3      1,080  

IT

     1,018        5.2        968  

Communications

     269        (8.6      294  

Advertising and publicity

     352        (11.4      398  

Corporate expenses

     110        5.8        104  

Other expenses

     1,301        (4.8      1,367  

Levies and taxes

     456        5.5        433  

Administration costs

     11,112        (2.2      11,366  

Depreciation

     1,387        (2.7      1,426  

Operating expenses

     12,500        (2.3      12,791  

Gross income

     25,270        2.5        24,653  

Efficiency ratio (operating expenses/gross income; %)

     49.5           51.9  

 

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Table of Contents

 

2017    GROUP INFORMATION    P. 9

 

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Provisions and other

Impairment losses on financial assets of the year included the impairment losses of €1,123m from BBVA Group’s stake from Telefónica, S.A, as a result of the evolution of the price of the latter and in compliance with the requirements of the accounting standard IAS 39. Excluding this impact, this figure is 1.2% higher than the one for 2016. By business areas, the most significant was a reduction in Banking activity in Spain due to lower loan-loss provisioning needs. In contrast, there was an increase in the United States due to the inclusion of provisions allocated as a result of the estimated negative effect of the natural disasters in the third quarter and higher loan-loss provisioning related to consumer portfolio. Turkey, Mexico and South America also saw an increase, largely linked to the increase in lending activity, and to a lesser extent, the impact of increased needs for insolvency provisions associated with some wholesale customers in the case of South America.

As a result of the above the cumulative cost of risk in 2017 (0.87%) was barely three basis points above the figure in 2016 (0.84%).

The fall of 38.5% in provisions (net) and other gains (losses) can be explained by the inclusion in the fourth

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quarter of 2016 of a charge of €577m (€404m after tax) to cover the contingency linked to the decision of the Court of

Justice of the European Union (CJEU) on “mortgage floor clauses.” This item includes items such as provisions for contingent liabilities, contributions to pension funds, the provision needs for property and foreclosed assets and restructuring costs.

Results

As a result, the Group’s net attributable profit in 2017 was €3,519m, a year-on-year rise of 7.6%; not including the impairment Telefónica losses in 2017 and the aforementioned charge related to the so-called “mortgage floor clauses” in 2016, there was a rise of 26.3%. It is important to note that since March 2017 this figure has included the additional stake of 9.95% in the capital of Garanti, which has led to a positive impact of around €150m due to a reduction in the non-controlling interests heading.

By business area, banking activity in Spain generated a profit of €1,381m, Non-Core Real Estate generated a loss of €501m, the United States contributed a profit of €511m, Mexico

€2,162m, Turkey €826m, South America €861m and the Rest of Eurasia €125m.

 


Table of Contents

 

2017    GROUP INFORMATION    P. 10

 

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Table of Contents

 

2017    GROUP INFORMATION    P. 11

Balance sheet and business activity

 

The year-on-year comparison of the Group’s balance sheet and business activity have been affected by the operations currently underway (the sales of BBVA Chile and the real-estate business in Spain), which as of December 31, 2017 were reclassified as non-current assets and liabilities held for sale (in the accompanying balance sheet, under the headings of other assets and other liabilities, respectively). Without taking into account the said reclassification (figures in comparable terms with respect to previous periods), the most significant items are shown below:

 

  Geographic disparity of loans and advances to customers (gross). Lending increased in the emerging economies,
   

while Spain continued to deleverage. The United States registered a slight increase in lending during the second half of the year, resulting in the year-on-year loan balance closing at very similar levels.

 

  Non-performing loans declined again, thanks to an improvement in Spain and the United States.

 

  In deposits from customers, there was another notable increase across the board in lower-cost items such as current and savings accounts, and a decline in time deposits.

 

  Off-balance-sheet funds continued to perform well in all items (mutual funds, pension funds and other customer funds).
 

 

 

Consolidated balance sheet

(Million euros)

 

     31-12-17     D%     31-12-16     30-09-17  

Cash, cash balances at central banks and other demand deposits

     42,680       6.6       40,039       36,023  

Financial assets held for trading

     64,695       (13.7     74,950       65,670  

Other financial assets designated at fair value through profit or loss

     2,709       31.4       2,062       2,848  

Available-for-sale financial assets

     69,476       (12.3     79,221       74,599  

Loans and receivables

     431,521       (7.4     465,977       449,564  

Loans and advances to central banks and credit institutions

     33,561       (16.7     40,268       36,556  

Loans and advances to customers

     387,621       (6.5     414,500       401,734  

Debt securities

     10,339       (7.8     11,209       11,275  

Held-to-maturity investments

     13,754       (22.3     17,696       14,010  

Investments in subsidiaries, joint ventures and associates

     1,588       107.5       765       1,584  

Tangible assets

     7,191       (19.6     8,941       7,963  

Intangible assets

     8,464       (13.5     9,786       8,743  

Other assets

     47,981       48.0       32,418       29,793  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     690,059       (5.7     731,856       690,797  
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading

     46,182       (15.5     54,675       45,352  

Other financial liabilities designated at fair value through profit or loss

     2,222       (5.0     2,338       2,372  

Financial liabilities at amortized cost

     543,713       (7.7     589,210       559,289  

Deposits from central banks and credit institutions

     91,570       (6.8     98,241       84,927  

Deposits from customers

     376,379       (6.2     401,465       392,865  

Debt certificates

     63,915       (16.3     76,375       69,285  

Other financial liabilities

     11,850       (9.7     13,129       12,212  

Liabilities under insurance contracts

     9,223       0.9       9,139       9,665  

Other liabilities

     35,395       68.0       21,066       19,720  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     636,736       (5.9     676,428       636,397  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interests

     6,979       (13.5     8,064       7,069  

Accumulated other comprehensive income

     (8,792     61.1       (5,458     (7,956

Shareholders’ funds

     55,136       4.4       52,821       55,287  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     53,323       (3.8     55,428       54,400  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

     690,059       (5.7     731,856       690,797  

Memorandum item:

        

Collateral given

     47,671       (5.7     50,540       45,489  


Table of Contents

 

2017

 

  

GROUP INFORMATION

 

  

P. 12

 

LOGO

 

LOGO

Loans and advances to customers

(Million euros)

 

    31-12-17     D%     31-12-16     30-09-17  

Public administration

    25,671       (6.7     27,506       25,828  

Individuals

    159,781       (7.4     172,476       169,245  

Residential mortgages

    109,563       (10.5     122,439       117,273  

Consumer

    36,235       3.0       35,195       37,556  

Credit cards

    13,982       (5.8     14,842       14,416  

Business

    175,168       (7.7     189,733       184,199  

Business retail

    19,692       (19.1     24,343       20,185  

Other business

    155,476       (6.0     165,391       164,014  

Other loans

    20,358       14.1       17,844       16,745  

Non-performing loans

    19,390       (15.4     22,915       20,222  

Loans and advances to customers (gross)

    400,369       (7.0     430,474       416,240  

Loan-loss provisions

    (12,748     (20.2     (15,974     (14,506

Loans and advances to customers

    387,621       (6.5     414,500       401,734  

 

 

Customer funds

(Million euros)

 

    31-12-17     D%     31-12-16     30-09-17  

Deposits from customers

    376,379       (6.2     401,465       392,865  

Current accounts

    245,249       5.9       231,638       242,566  

Time deposits

    110,320       (23.6     144,407       127,897  

Assets sold under repurchase agreement

    8,119       (26.6     11,056       10,442  

Other deposits

    12,692       (11.6     14,364       11,959  

Other customer funds

    134,906       2.1       132,092       137,724  

Mutual funds and investment companies

    60,939       10.7       55,037       60,868  

Pension funds

    33,985       1.7       33,418       33,615  

Other off-balance sheet funds

    3,081       8.8       2,831       3,293  

Customer portfolios

    36,901       (9.6     40,805       39,948  

Total customer funds

    511,285       (4.2     533,557       530,589  
 


Table of Contents

 

2017    GROUP INFORMATION    P. 13

Solvency

 

Capital base

The BBVA Group’s fully-loaded CET1 ratio stood at 11.1% at the end of December 2017, in line with the target of 11%. This ratio has increased by 18 basis points since the end of 2016, leveraged on organic earning generation and reduction of RWA capital consumption.

During 2017, the capital ratio was affected by the acquisition of an additional 9.95% stake in Garanti and the sale of CNCB. These transactions have had a combined negative effect on the ratio of 13 basis points. In addition, the Group also recognized losses of €1,123m in 2017 as a result of the impairment losses from its stake in Telefónica. However, this impact does not affect the capital base, as these losses are deducted from the Group’s capital.

RWAs declined year-on-year, largely due to the depreciation of currencies against the euro (in particular, the Turkish lira and U.S. dollar).

BBVA S.A. carried out two capital issuances classified as additional tier 1 (AT1) capital (contingent convertible), for €500m and USD 1 billion, respectively (the latter in the U.S. market, with a prospectus registered with the SEC and not yet

calculated in the Group’s Tier 1 as of 31-Dec-2017). As Tier 2 level, BBVA S.A. issued subordinated debt during the year for a total of approximately €1.5 billion; and in Turkey, Garanti issued USD 750m.

Finally, with respect to capital distribution, the last “dividend-option” program was completed in April, with holders of 83.28% of rights choosing to receive new shares. On October 10, an interim dividend for 2017 was distributed at €0.09 per share.

 

LOGO

 

 

 

Capital base (1, 2)

(Million euros)

 

     CRD IV phased-in (1)      CRD IV fully-loaded  
     31-12-17  (3)
     31-12-16      30-09-17      31-12-17  (3)
     31-12-16      30-09-17  

Common Equity Tier 1 (CET 1)

     42,337        47,370        43,393        40,058        42,398        40,899  

Tier 1

     46,977        50,083        47,983        46,313        48,459        47,138  

Tier 2

     8,798        8,810        9,237        8,624        8,739        8,953  

Total Capital (Tier 1 + Tier 2)

     55,775        58,893        57,219        54,937        57,198        56,091  

Risk-weighted assets

     361,686        388,951        365,314        361,686        388,951        365,314  

CET1 (%)

     11.7        12.2        11.9        11.1        10.9        11.2  

Tier 1 (%)

     13.0        12.9        13.1        12.8        12.5        12.9  

Tier 2 (%)

     2.5        2.3        2.5        2.5        2.2        2.4  

Total capital ratio (%)

     15.5        15.1        15.7        15.3        14.7        15.4  

 

(1) The capital ratios are calculated under CRD IV from Basel III regulation, applying a 80% phase-in for 2017 and a 60% for 2016.
(2) As of 31-12-2017 it includes update of the calculation on Structural FX RWA, pending confirmation by ECB. Additionally, it includes the AT2 issuance by Garanti, pending approval by ECB for the purpose of computability in the Group’s ratio.
(3) Preliminary data.


Table of Contents

 

2017

 

  

GROUP INFORMATION

 

  

P. 14

 

As of 31-Dec-2017 the CET1 phased-in capital ratio stood at 11.7%, the Tier 1 ratio at 13.0% (13.3% taking into account the AT1 issuance of USD 1 billion on the U.S. market in the fourth quarter of 2017) and the Tier 2 ratio of 2.5%, resulting in a total capital ratio of 15.5% (15.8% taking into account the AT1 issuance mentioned above). These levels are above the requirements established by the regulator in its SREP letter and the systemic buffers applicable to BBVA Group for 2017 (7.625% for the phased-in CET1 ratio and 11.125% for the total capital ratio). Starting on January 1, 2018, the requirement has been established at 8.438% for the phased-in CET1 ratio and 11.938% for the total capital ratio. The change with respect to 2017 is due to the progressive implementation of the capital conservation buffers and the buffer related to other systemically important banks. The regulatory requirement for 2018 in fully-loaded terms remains unchanged (CET1 of 9.25% and total ratio of 12.75%) compared with the previous year.

Finally, the Group maintains a sound leverage ratio: 6.6% under fully-loaded criteria (6.7% phased-in), which continues to be the highest in its peer group.

Ratings

In 2017, Standard & Poor’s (S&P) raised its outlook for BBVA to positive from stable as a result of a similar improvement in Spain’s sovereign rating outlook, with both ratings being maintained at BBB+. Scope Ratings raised BBVA’s long-term rating one notch from A to A+, and the short-term rating from S-1 to S-1+, both with a stable outlook. The rest of the credit rating agencies did not change either BBVA’s rating or its outlook in 2017.

 

 

Ratings

 

Rating agency

   Long term      Short term      Outlook  
DBRS      A        R-1 (low)        Stable  
Fitch      A-        F-2        Stable  
Moody’s (1)      Baa1        P-2        Stable  
Scope Ratings      A+        S-1+        Stable  
Standard & Poor’s      BBB+        A-2        Positive  

 

(1) Additionally, Moody’s assigns an A3 rating to BBVA’s long-term deposits.
 


Table of Contents

 

2017    GROUP INFORMATION    P. 15

Risk management

 

Credit risk

BBVA Group’s risk metrics have continued to perform positively throughout the year:

 

  Credit risk remained flat in the last quarter, with a cumulative decline of 4.0% since the end of 2016 (up 2.0% both in the quarter and over the year at constant exchange rates). The deleveraging process continued in Spain. At constant exchange rates in year-on-year terms, Turkey and Mexico grew by 4.3% and 6.9% respectively, South America 9.5% (Argentina by 67.9%, Chile and Colombia around 10%) and the United States remained practically stable (up 0.4%).

 

  Non-performing loans maintained their downward trend, falling by 2.1% over the quarter and 13.2% relative to December 2016. At constant exchange rates, the figures were down 0.8% over the quarter and down 10.5% in annual terms. Good performance in Spain and the United States and increases mainly in Turkey and South America, due to the deterioration of some wholesale customers.

 

  The Group’s NPL ratio improved again (down 9 basis points over the last three months and 47 basis points compared with the close of 2016) to 4.4% as of 31-Dec-2017, driven by the decline in non-performing loans.
  Provisions also declined, both in the last three months and over the year (down 11.5% and 19.6%, respectively). At constant exchange rates, the rates of variation were down 9.2% and 15.2% since September 2017 and December 2016, respectively.

 

  As a result, the NPL coverage ratio closed at 65%.

 

  Finally, the cumulative cost of risk as of December 2017 was 0.87%, showing stable progress in 2017 and closing three basis points above the cumulative figure for 2016
  (0.84%).

 

LOGO

 

 

 

Credit risks (1)

(Million euros)

 

     31-12-17  (2)      30-09-17      30-06-17      31-03-17      31-12-16  

Non-performing loans and contingent liabilities

     20,492        20,932        22,422        23,236        23,595  

Credit risks

     461,303        461,794        471,548        480,517        480,720  

Provisions

     13,319        15,042        15,878        16,385        16,573  

NPL ratio (%)

     4.4        4.5        4.8        4.8        4.9  

NPL coverage ratio (%)

     65        72        71        71        70  

 

(1) Include gross loans and advances to customers plus guarantees given.
(2) Figures without considering the reclassification of non-current assets held for sale.

 

 

Non-performing loans evolution

(Million euros)

 

     4Q 17 (1)     3Q 17     2Q 17     1Q 17     4Q 16  

Beginning balance

     20,932       22,422       23,236       23,595       24,253  

Additions

     3,757       2,268       2,525       2,490       3,000  

Recoveries

     (2,142     (2,001     (1,930     (1,698     (2,141

Net variation

     1,616       267       595       792       859  

Write-offs

     (1,980     (1,575     (1,070     (1,132     (1,403

Exchange rate differences and other

     (75     (181     (340     (18     (115

Period-end balance

     20,492       20,932       22,422       23,236       23,595  

Memorandum item:

          

Non-performing loans

     19,753       20,222       21,730       22,572       22,915  

Non-performing contingent liabilities

     739       710       691       664       680  

 

(1) Figures without considering the reclassification of non-current assets held for sale. Temporary data.    


Table of Contents

 

2017    GROUP INFORMATION    P. 16

 

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 finance, always in compliance with current regulatory requirements.

A core principle in BBVA’s management of the Group’s liquidity and funding is the financial independence of its banking subsidiaries abroad. This principle prevents the propagation of a liquidity crisis among the Group’s different areas and ensures that the cost of liquidity is correctly reflected in the price formation process.

In 2017 liquidity and funding conditions remained comfortable across BBVA Group’s global footprint:

 

  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.

 

  In the Eurozone, the liquidity situation is comfortable and the credit gap has narrowed on the balance sheet thanks to the positive behavior of customer liabilities.

 

  In Mexico, the liquidity position is sound, despite market volatility. Deposits have shown a very positive trend over the year, leading to a considerable narrowing of the credit gap.

 

  In the United States, the credit gap has widened because of the area’s deliberate strategy to control the cost of deposits. It is worth noting that in the first quarter of 2017 Standard & Poors (S&P) upgraded its outlook for BBVA Compass’ rating (BBB+) from negative to stable.

 

  The liquidity situation in Turkey is comfortable, boosted by a maintenance of good market conditions, with a slight increase in the credit gap as a result of the growth of lending spurred by the government’s Credit Guarantee Fund (CGF) program.

 

  In South America, the liquidity situation remains comfortable, allowing a reduction of the growth of wholesale deposits to match growth in lending activity.

 

  In the fourth quarter of 2017, BBVA S.A. carried out an issuance of additional Tier 1 in the American market for USD 1 billion, with the prospectus registered with the SEC.
  In total, BBVA S.A. issued €7.1 billion in 2017, of which €5.8 billion were on the wholesale funding markets, using the formats of senior debt (€2.5 billion), Tier 2 (€1 billion), senior non-preferred (€1.5 billion) and Tier 1 (USD 1 billion). It also closed a number of private issuance transactions of senior non-preferred securities for a total of €290m, Tier 2 securities for about €500m and additional Tier 1 for €500m.

 

  The long-term wholesale funding markets have remained stable in the other geographical areas where the Group operates.

 

  In Mexico, BBVA Bancomer has carried out two local senior debt issuances for a total of MXN 7 billion, with maturities of three and five years.

 

  In the United States, BBVA Compass returned to the markets in the second quarter with a five-year senior debt issue of USD 750m.

 

  In Turkey, Garanti’s securities issuances have continued to strengthen its balance-sheet structure over the whole year. Worth noting are the following issuances: senior debt of USD 500m, subordinated debt of USD 750m, collateralized bonds for a total of 1,680m liras, securitizations for USD 685m, and renewal of syndicated loans with a new two-year tranche.

 

  In South America, BBVA Chile has also made a number of senior debt issuances with maturities ranging from four to ten years on the local market for an equivalent of €505m. BBVA Continental in Peru has also issued €182m on the local market through a number of issues with a maturity of three years; and in Argentina, BBVA Francés has issued a total of €49m in two-year and three-year bonds, as well as making a capital increase of €400m.

 

  Short-term funding has continued to perform positively, in a context marked by a high level of liquidity.

 

  BBVA Group’s liquidity coverage ratio (LCR) has remained comfortably above 100% throughout 2017, without including liquidity transfers between subsidiaries; in other words, no kind of excess liquidity levels in the subsidiaries abroad is considered in the calculation of the consolidated ratio. As of 31 December 2017, the LCR stood at 128%. Although this requirement is only established at Group level, the minimum level is easily exceeded in all the subsidiaries (Eurozone, 151%; Mexico, 148%; Turkey, 134%; and the United States, 144% 1).
 

 

 

1: Compass LCR calculated according to local regulation (Fed Modified LCR).


Table of Contents

 

2017    GROUP INFORMATION    P. 17

 

Foreign exchange

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

The year 2017 was notable for the depreciation against the euro of the main currencies in which the Group operates: the U.S. dollar down 12.1%, the Mexican peso down 8.0% and the Turkish lira down 18.5%. In this context, BBVA has maintained its policy of actively hedging its main investments in emerging countries, covering on average between 30% and 50% of earnings expected for the fiscal year and around 70% of the excess CET1 capital ratio (which is not naturally covered by the ratio itself). In accordance with this policy, the sensitivity of the CET1 ratio to a depreciation of 10% of the main emerging currencies (Mexican peso or Turkish lira) against the euro remains at around one negative basis point for each of these currencies, and the coverage level of the expected earnings for 2018 in these two countries is around 50% in Mexico and 40% in Turkey.

Interest rates

The aim of managing interest-rate risk is to maintain a sustained growth of net interest income in the short and medium term, irrespective of interest-rate fluctuations, while controlling the impact on the capital adequacy ratio through the valuation of the portfolio of available-for-sale assets.

The Group’s banks have fixed-income portfolios to manage the balance-sheet structure. In 2017, the results of this management have been satisfactory, with limited risk strategies in all the Group’s banks.

Finally, the following is worth noting with respect to the monetary policies pursued by the different central banks of the main geographical areas where BBVA operates:

 

  No relevant changes in the Eurozone, where rates remain at 0% and the deposit facility rate at -0.40%.

 

  In the United States the upward trend in interest rates continues, with three hikes in 2017 to 1.50%.
  In Mexico, Banxico made five interest-rate hikes during the year, leaving the monetary policy level at 7.25%.

 

  In Turkey, the period has been marked by the Central

 

  Bank’s (CBRT’s) interest-rate hikes, which have increased the average funding rate to 12.75%.

 

  In South America, the monetary authorities have continued their expansive policies, lowering rates in Peru (100 basis points), Colombia (275 basis points) and Chile (100 basis points). In Argentina, where inflation has resisted falling, there has been an increase of 400 basis points in the interest rate.

Economic capital

Consumption of economic risk capital (ERC) at the close of December 2017 stood at €34,401m in consolidated terms, which is equivalent to a decline of 1.7% with respect to the September figure. At constant exchange rates, the variation was up 1.1%, located in: credit risk, due to an increase in activity (higher activity in Turkey and South America); trading risk; focused in Spain and Mexico; and operational risk, due to the annual update of the model. This was partially offset by a fall in the equity investment valuation, due to the decline in Telefónica’s stock price; structural risk, explained by the increased hedges on the Turkish lira and Mexican peso; fixed assets; and rate interest, especially focused in Mexico.

 

LOGO

 


Table of Contents

 

2017    GROUP INFORMATION    P. 18

The BBVA share

 

Global economic growth held steady at around 1% quarter-on-quarter in the first nine months of 2017, and latest available indicators suggest that this momentum continued into the final part of the year. Confidence data continues to improve, accompanied by a recovery in world trade and the industrial sector, while private consumption remains robust in developed countries. This positive trend reflects improved economic performance in all regions: in contrast to other post-financial crisis periods, there has been a global synchronous recovery.

With respect to the main stock-market indices, in Europe the Stoxx 50 and Euro Stoxx 50 closed the year with gains of 5.6% and 6.5% respectively. In Spain the Ibex 35 fell back slightly over the last three months by 3.3%, but its cumulative performance for the year has remained positive, recording a gain of 7.4%. In the United States, the S&P 500 index performed very positively during the year, with a gain of 19.4% since December 2016.

The banking sector in Europe has also performed positively in 2017. The European bank index Stoxx Banks, which includes British banks, gained 8.1%, while the Eurozone bank index, the Euro Stoxx Banks, was up 10.9% in the same period. In the

United States the S&P Regional Banks index gained 6.0% over the year compared to the closing data as of the end of 2016.

The BBVA share closed 2017 at €7.11, a cumulative gain of 10.9% since December 2016. This represents a relatively better performance than the European banking sector and the Ibex 35.

 

LOGO

 

The BBVA share and share performance ratios

 

     31-12-17      31-12-16  

Number of shareholders

     891,453        935,284  

Number of shares issued

     6,667,886,580        6,566,615,242  

Daily average number of shares traded

     35,820,623        47,180,855  

Daily average trading (million euros)

     252        272  

Maximum price (euros)

     7.93        6.88  

Minimum price (euros)

     5.92        4.50  

Closing price (euros)

     7.11        6.41  

Book value per share (euros)

     6.96        7.22  

Tangible book value per share (euros)

     5.69        5.73  

Market capitalization (million euros)

     47,422        42,118  

Yield (dividend/price; %) (1)

     4.2        5.8  

 

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

In the Significant Event published on February 1, 2017, BBVA announced its intention of modifying its shareholder remuneration policy to one of a fully cash payment. This policy will be formed each year of an interim dividend (which is expected to be paid in October) and a final dividend (which will be paid out upon completion of the final year and following approval of the application of the result, foreseeably in April).

These payouts will be subject to appropriate approval by the corresponding governing bodies. It is expected to be proposed for the consideration of the competent governing bodies a cash payment in a gross amount of euro 0.15 per share to be paid in April as final dividend for 2017.

 

LOGO

As of December 31, 2017, the number of BBVA shares was still 6,668 million and the number of shareholders was 891,453. Investors resident in Spain holded 43.44% of share capital, while non-resident shareholders holded the remaining 56.56%.

 


Table of Contents

 

2017    GROUP INFORMATION    P. 19

 

 

Shareholder structure

(31-12-2017)

 

     Shareholders      Shares  

Number of shares

   Number      %      Number      %  

Up to 150

     184,797        20.7        13,171,010        0.2  

151 to 450

     182,854        20.5        49,996,632        0.7  

451 to 1800

     279,883        31.4        272,309,651        4.1  

1,801 to 4,500

     128,005        14.4        364,876,715        5.5  

4,501 to 9,000

     59,585        6.7        375,424,611        5.6  

9,001 to 45,000

     49,938        5.6        869,649,638        13.0  

More than 45,001

     6,391        0.7        4,722,458,323        70.8  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     891,453        100.0        6,667,886,580        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

BBVA shares are listed on the main stock market indices, such as the Ibex 35, Euro Stoxx 50 and Stoxx 50, with a weighting of 8.9%, 2.0% and 1.3% respectively. They are also listed on several sector indices, including the Euro Stoxx

Banks, with a weighting of 8.7%, and the Stoxx Banks, with a weighting of 4.3%.

Finally, BBVA maintains a significant presence on a number of international sustainability indices or ESG (environmental, social and governance) indices, which evaluate the performance of companies in this area, as summarized in the table below.

 

Sustainability indices on which BBVA is listed as of 31-12-2017 (1)

 

LOGO

 

(1) The inclusion of BBVA in any MSCI index, and the use of MSCI logos, trademarks, service marks or index names herein donot constitute a sponsorship, endorsement or promotion of BBVA by MSCI or any of its affiliates. The MSCI indices are the exclusive property of MSCI. MSCI and MSCI index names and logos are trademarks or service marks of MSCI or its affiliates.
 


Table of Contents

 

2017    GROUP INFORMATION    P. 20

Responsible banking

 

For Spanish companies, the implementation of corporate social responsibility plans is of crucial importance when designing their strategies. The year 2017 has been good in terms of regulation, but there is still much progress to be made.

BBVA Group has a differential banking model 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:

1. Creation of lasting and more balanced relationships with customers

… Through transparent, clear and responsible communication and financial education in the solutions that we offer. BBVA is developing and collaborating with numerous programs, many of which are designed for young people.

2. Full integration of how we do business

… Through responsible business policies, a reputational risk model, and a people-centric culture throughout the

Organization.

3. Promotion of responsible and sustainable growth

… Through financial inclusion, sustainable finance, support for SMEs and responsible investment.

4. Investment in the community

… With priority for financial education initiatives for society, entrepreneurship, knowledge and other social causes that are relevant from a local point of view.

It is worth noting that BBVA forms part of the group of 14 banks that have committed to the United Nations environmental program for financial institutions (UNEP-FI), by which they work to implement the recommendations on financial information related to climate change published in July by the Task Force on Climate-Related Disclosure and promoted by the Financial Stability Board within the G-20 framework. The goal of these recommendations is to contribute to a more sustainable financial system in which investment and finance decisions involve a longer-term vision and incorporate environmental and social factors. The information published by companies is key in this respect. BBVA’s new strategy on climate change will mean a firm commitment to the Paris Agreement on the climate and will be aligned with actions on a global level to make possible a transition to a low-carbon economy. The Group is firmly committed to the fight against global warming and to making a contribution to the UN Sustainable Development Goals.

Moreover, as a leading entity in green finance, BBVA has the capacity and knowledge to provide its customers with quality advice on sustainable finance solutions through both bonds and loans, and it is also playing a key role in the development of this market. The Bank was the most active Spanish bookrunner in the green bond market in 2016 and is now a leading player in the green loan market, having closed a number of key transactions at global level in 2017.

 


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2017    BUSINESS AREAS    P. 21

Business areas

 

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

In 2017 the reporting structure of BBVA Group’s business areas remained basically the same as in 2016. It is worth noting that BBVA announced the signing of two agreements, one for the sale of BBVA Chile to The Bank of Nova Scotia (Scotiabank) and another for the creation of a joint venture to which BBVA’s real-estate business in Spain will be transferred for the subsequent sale of 80% of the company created to a subsidiary of Cerberus Capital Management, L.P. (Cerberus). For the purpose of the explanations given in this report, the figures for Non Core Real Estate and South America are shown on a comparable basis with previous periods, even though within the Group the operations underway that are mentioned above have been reclassified as non-current assets and liabilities held for sale. The Group’s business areas are summarized below:

 

  Banking activity in Spain includes, as in previous years, the Retail Network in Spain, Corporate and Business Banking (CBB), Corporate & Investment Banking (CIB), BBVA Seguros and Asset Management units in Spain. It also includes the portfolios, finance and structural interest-rate positions of the euro balance sheet.

 

  Non Core Real Estate covers specialist management in Spain of loans to developers in difficulties and real-estate assets mainly coming from foreclosed assets, originated from both, residential mortgages, as well as loans to developers. New loan production to developers or loans that are not in difficulties are managed by Banking activity in Spain.

 

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

 

  Mexico basically includes all the banking and insurance businesses carried out by the Group in the country.

 

  Turkey includes the activity of the Garanti group.
  South America basically includes BBVA’s banking and insurance businesses in the region.

 

  The rest of Eurasia includes business activity in the rest of Europe and Asia, i.e. the Group’s retail and wholesale businesses in the area.

In addition to the above, all the areas include a remainder made up basically of other businesses and a supplement that includes deletions and allocations not assigned to the units making up the above areas.

Lastly, the Corporate Center is an aggregate that contains the rest of the items that have not been allocated to the business areas, as it corresponds to the Group’s holding function. It includes: the costs of the head offices that have a corporate function; management of structural exchange-rate positions; specific issues of equity instruments to ensure adequate management of the Group’s global solvency; portfolios and their corresponding results, whose management is not linked to customer relations, such as industrial holdings; certain tax assets and liabilities; funds due to commitments with employees; goodwill and other intangibles.

In addition to this geographical breakdown, supplementary information is provided for all the wholesale businesses carried out by BBVA, i.e. Corporate & Investment Banking (CIB), in the geographical areas where it operates. This aggregate business is considered relevant to better understand the Group because of the characteristics of the customers served, the type of products offered and the risks assumed.

Lastly, as usual, in the case of the Americas, Turkey and CIB areas, the results of applying constant exchange rates are given in addition to the year-on-year variations at current exchange rates.

The information by areas is based on units at the lowest level and/or companies making up the Group, which are assigned to the different areas according to the main geographical area in which they carry out their activity.

 


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2017    BUSINESS AREAS    P. 22

 

 

Major income statement items by business area

(Million euros)

 

            Business areas         
     BBVA Group       Banking
activity
in Spain
     Non Core
Real-estate
    The
United
States
     Mexico      Turkey       South
America
     Rest of
Eurasia
     S Business
areas
     Corporate
Center
 

2017

                            

Net interest income

     17,758        3,738        71       2,158        5,437        3,331        3,200        180        18,115        (357

Gross income

     25,270        6,180        (17     2,919        7,080        4,115        4,451        468        25,196        73  

Operating income

     12,770        2,802        (132     1,061        4,635        2,612        2,444        160        13,580        (811

Profit/(loss) before tax

     6,931        1,866        (673     784        2,948        2,147        1,691        177        8,940        (2,009

Net attributable profit

     3,519        1,381        (501     511        2,162        826        861        125        5,363        (1,844

2016

                            

Net interest income

     17,059        3,877        60       1,953        5,126        3,404        2,930        166        17,514        (455

Gross income

     24,653        6,416        (6     2,706        6,766        4,257        4,054        491        24,684        (31

Operating income

     11,862        2,837        (130     863        4,371        2,519        2,160        149        12,769        (907

Profit/(loss) before tax

     6,392        1,268        (743     612        2,678        1,906        1,552        203        7,475        (1,084

Net attributable profit

     3,475        905        (595     459        1,980        599        771        151        4,269        (794

 

LOGO

 

(1) Excludes the Corporate Center.
(2) Includes the areas Banking activity in Spain and Non Core Real Estate.

 

 

Major balance sheet items and risk-weighted assets by business area

(Million euros)

 

          Business areas              
    BBVA Group      Banking
activity
in Spain
    Non Core
Real-estate
    The
United
States
    Mexico     Turkey      South
America
    Rest of
Eurasia
    S Business
areas
    Corporate
Center
    NCA&L
variation (1)
 

31-12-17

                     

Loans and advances to customers

    387,621       183,172       3,521       54,406       45,080       51,378       48,272       14,864       400,693       —         (13,072

Deposits from customers

    376,379       177,763       13       61,357       49,414       44,691       45,666       6,700       385,604       —         (9,225

Off-balance sheet funds

    98,005       62,054       4       —         19,472       3,902       12,197       376       98,005       —      

Total assets/liabilities and equity

    690,059       319,417       9,714       80,493       89,344       78,694       74,636       17,265       669,562       20,496    

Risk-weighted assets

    361,686       111,825       9,691       58,682       43,715       62,768       55,665       12,916       355,260       6,426    

31-12-16

                     

Loans and advances to customers

    414,500       181,137       5,946       61,159       46,474       55,612       48,718       15,325       414,370       130    

Deposits from customers

    401,465       180,544       24       65,760       50,571       47,244       47,927       9,396       401,465       —      

Off-balance sheet funds

    91,287       56,147       8       —         19,111       3,753       11,902       366       91,287       —      

Total assets/liabilities and equity

    731,856       335,847       13,713       88,902       93,318       84,866       77,918       19,106       713,670       18,186    

Risk-weighted assets

    388,951       113,194       10,870       65,492       47,863       70,337       57,443       15,637       380,836       8,115    

 

(1) Non-current assets and liabilities held for sale (NCA&L) from the BBVA Chile and real estate operations.


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2017

 

  

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P. 23

 

Once the composition of each business area has been defined, certain management criteria are applied, of which the following are particularly important:

 

  Risk adjusted return. Calculation of risk adjusted return per transaction, customer, product, segment, unit and/or business area is sustained on ERC, which is based on the concept of unexpected loss at a specific confidence level, depending on the Group’s capital adequacy targets. The calculation of the ERC combines credit risk, market risk, structural balance-sheet risk, equity positions, operational risk, fixed-asset risk and technical risks in the case of insurance companies. These calculations are carried out using internal models that have been defined following the guidelines and requirements established under the Basel III capital accord.
  Internal transfer prices. BBVA Group has a transfer prices system whose general principles apply in the Bank’s different entities, business areas and units.

 

  Allocation of operating expenses. Both direct and indirect costs are allocated to the business areas, except where there is no clearly defined relationship with the businesses, i.e. when they are of a clearly corporate or institutional nature for the Group as a whole.

 

  Cross-selling. In some cases, adjustments are required to eliminate shadow accounting entries that are registered in the earnings of two or more units as a result of cross-selling incentives.
 

 

 

Interest rates

(Quarterly averages. Percentage)

 

     2017     2016  
     4Q     3Q     2Q     1Q     4Q     3Q     2Q     1Q  

Official ECB rate

     0.00       0.00       0.00       0.00       0.00       0.00       0.00       0.04  

Euribor 3 months

     (0.33     (0.33     (0.33     (0.33     (0.31     (0.30     (0.26     (0.19

Euribor 1 year

     (0.19     (0.16     (0.13     (0.10     (0.07     (0.05     (0.02     0.01  

USA Federal rates

     1.30       1.25       1.05       0.80       0.55       0.50       0.50       0.50  

TIIE (Mexico)

     7.42       7.37       7.04       6.41       5.45       4.60       4.08       3.80  

CBRT (Turkey)

     12.17       11.97       11.80       10.10       7.98       7.99       8.50       8.98  

 

 

Exchange rates

(Expressed in currency/euro)

 

     Year-end exchange rates     Average exchange rates  
            D% on     D% on            D% on  
     31-12-17      31-12-16     30-09-17     2017      2016  

Mexican peso

     23.6614        (8.0     (9.3     21.3297        (3.1

U.S. dollar

     1.1993        (12.1     (1.6     1.1296        (2.0

Argentine peso

     22.5830        (26.6     (8.2     18.7375        (12.8

Chilean peso

     738.01        (4.7     1.9       732.60        2.2  

Colombian peso

     3,584.23        (11.7     (3.1     3,333.33        1.4  

Peruvian sol

     3.8813        (9.0     (0.7     3.6813        1.4  

Venezuelan bolivar

     18,181.82        (89.6     (66.7     18,181.82        (89.6

Turkish lira

     4.5464        (18.5     (7.6     4.1213        (18.9


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2017    BUSINESS AREAS    P. 24

 

Banking activity in Spain

 

     
                 
    Highlights        
   

 

•  

 

 

Deleveraging and increase in more liquid resources and off-balance-sheet continue.

       
   

 

 

 

Good performance of net fees and commissions.

       
   

 

 

 

Reduction of operating expenses.

       
   

 

 

 

Solid asset-quality indicators.

       
                 

 

LOGO


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2017

 

  

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P. 25

 

Macro and industry trends

According to the latest information from the National Institute of Statistics (INE, according to the acronym in Spanish), the Spanish economy once more registered quarterly growth of

0.8% in the third quarter of 2017, maintaining relative stability over the year, thanks to stronger domestic demand. The most recent indicators point to slight moderation in the final part of the year, in a context of greater uncertainty, although the factors underlying growth continue in place and still suggest a solid growth in GDP. There is still a positive inertia in the data on activity and employment, as well as a more favorable global environment, while monetary policy continues expansive. As a result, GDP growth in the Spanish economy could be more than 3% 2017 as a whole.

Regarding the Spanish banking system, data from the Bank of Spain show that the total volume of private-sector lending

(families and companies) continued its declining trend over the year (down 1.8% in the last twelve months through November 2017). However, since August there have been signs of a slight upturn in the total volume of credit in the economy, although it is still too weak to consider confirm that there has been a turning point. The cumulative volume of new lending through November 2017 showed year-on-year growth of 5.5%, with a rise in all portfolios (up 8.1% in the case of new lending to households and SMEs, which has risen consistently for 47 consecutive months). Non-performing loans in the sector continue to improve. As of November 2017, the NPL ratio was down until 8.1%, more than one percentage point below the previous year’s figure, despite the year-on-year fall in the lending volume. This improvement is therefore due to the reduction of the volume of non-performing assets in the system (down 13.9% in the last twelve months to November 2017 and down 48% compared to the the maximum figure reached as of December 2013). The system’s liquidity position continues to be comfortable. The funding gap

(difference between the volume of loans and total deposits) fell to €129 billion, 5% of the total balance sheet of the system.

Activity

As of 31-Dec-2017, lending (performing loans under management) were down by 1.1% compared to the figure in December 2016 (up 0.6% over the quarter). This was primarily driven by a reduction in the mortgage (down 5.3% over the last twelve months and down 1.2% over the quarter) and the public sector portfolios (down 12.7% and 5.1% respectively). In contrast, commercial loans (up 6.4% since the close of 2016 and up 2.7% in the quarter), small businesses loans (up 2.7% and 2.6%, respectively), and consumer finance (up 46.0% and 13.8% respectively), have performed well, driven by the good performance of new loan

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

  2017     D%     2016  

Net interest income

    3,738       (3.6     3,877  

Net fees and commissions

    1,561       5.7       1,477  

Net trading income

    555       (29.4     786  

Other income/expenses

    327       17.9       277  

of which insurance activities (1)

    438       9.6       400  

Gross income

    6,180       (3.7     6,416  

Operating expenses

    (3,378     (5.6     (3,579

Personnel expenses

    (1,916     (4.2     (2,000

Other administrative expenses

    (1,150     (8.1     (1,251

Depreciation

    (313     (4.4     (327

Operating income

    2,802       (1.3     2,837  

Impairment on financial assets (net)

    (567     (25.7     (763

Provisions (net) and other gains (losses)

    (369     (54.3     (807

Profit/(loss) before tax

    1,866       47.2       1,268  

Income tax

    (482     33.9       (360

Profit/(loss) for the year

    1,384       52.5       908  

Non-controlling interests

    (3     (3.6     (3

Net attributable profit

    1,381       52.7       905  

 

(1) Includes premiums received net of estimated technical insurance reserves.    

 

Balance sheets

  31-12-17     D%     31-12-16  

Cash, cash balances at central banks and other demand deposits

    13,463       10.1       12,230  

Financial assets

    88,131       (12.2     100,394  

Loans and receivables

    213,037       (0.7     214,497  

of which loans and advances to customers

    183,172       1.1       181,137  

Inter-area positions

    1,501       (67.8     4,658  

Tangible assets

    877       (38.9     1,435  

Other assets

    2,409       (8.5     2,632  

Total assets/liabilities and equity

    319,417       (4.9     335,847  

Financial liabilities held for trading and designated at fair value through profit or loss

    36,817       (9.1     40,490  

Deposits from central banks and credit institutions

    62,226       (5.8     66,029  

Deposits from customers

    177,763       (1.5     180,544  

Debt certificates

    33,301       (13.1     38,322  

Inter-area positions

    —         —         —    

Other liabilities

    391       (68.0     1,220  

Economic capital allocated

    8,920       (3.5     9,242  

 

Relevant business indicators

   31-12-17      D%     31-12-16  

Loans and advances to customers
(gross) (1)

     177,764        (1.6     180,595  

Non-performing loans and contingent liabilities

     10,833        (8.3     11,819  

Customer deposits under management (1)

     173,283        (0.9     174,809  

Off-balance-sheet funds (2)

     62,054        10.5       56,147  

Risk-weighted assets

     111,825        (1.2     113,194  

Efficiency ratio (%)

     54.7          55.8  

NPL ratio (%)

     5.2          5.8  

NPL coverage ratio (%)

     50          53  

Cost of risk (%)

     0.31          0.32  

 

(1) Excluding repos.    
(2) Includes mutual funds, pension funds and other off-balance-sheet funds.    
 


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2017

 

  

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P. 26

 

production with cumulative year-on-year growth rates of 10.4% for businesses (including small businesses up to large corporations) and of 34.7% in consumer finance. It is worth noting that in 2017 there was a transfer of the outstanding portfolio of performing loans to developers for an amount exceeding €1bn from Non Core Real-Estate to Banking

Activity in Spain.

Regarding asset quality, there was a further decline in NPLs balance. This decline has had a positive impact on the NPL ratio, which fell by 8 basis points over the last three months to

5.2%. The NPL coverage ratio stood at 50%.

Customer deposits under management were slightly reduced (down 0.9%) compared to the figure as of December 2016. By products, there was a further decline in time deposits (down 32.7% year-on-year and down 16.9% in the quarter), once again partially offset by an increase in current and savings accounts (up 20.2% and 6.3% respectively) and off-balance-sheet funds. The latter have continued their positive trend, with a year-on-year growth of 10.5% and 3.3% over the quarter. This performance was largely the result of increases in mutual funds (up 16.4% and 4.7%, respectively), and to a lesser extent, an increase in pension funds (up 2.4% and 1.3%, respectively).

Results

The key aspects of the income statement in the area are:

 

  Fourth quarter net interest income was up 2.1% on the figure for the previous quarter. However, the 3.6% year-on-year cumulative decline in this item is the result of lower loan volumes and sales of wholesale portfolios.

 

  Good performance of net fees and commissions, thanks mainly to the positive contribution from wholesale businesses and the increase of those coming from mutual funds. They have increased by 5.7% compared to the figure at the end of 2016.

 

  Smaller contribution from NTI relative to the figure for 2016, strongly affected by capital gains (€138m before tax) from the VISA deal in the second quarter of the previous year.
  Year-on-year increase of 17.9% in other income/expenses. Under this category it is worth highlighting the performance of the insurance activity, whose net result (included in this heading) grew by 9.6%, strongly linked to the increase in new policies contracting during the period and the low claims ratio.

 

  As a result, gross income declined by 3.7% year-on-year, mainly due to a smaller volume of lending, sales of wholesale portfolios and the NTI generated in the 2016 VISA deal.

 

  Very positive trend in operating expenses, which declined by 5.6% on the same period of 2016 (down 0.8% in the last quarter). This reduction was again linked to the synergies related to the integration of CX and the ongoing implementation of efficiency plans.

 

  As a result, the efficiency ratio closed the year at 54.7% (55.8% in 2016) and operating income was barely 1.3% below the figure registered in the previous year.

 

  Impairment losses on financial assets have declined 25.7% year-on-year as a result of lower loan-loss provisioning needs. The area’s cumulative cost of risk continues improving, standing at 0.31% as of 31-Dec-2017.

 

  Finally, the provisions (net) and other gains (losses) heading fell year-on-year by 54.3%, basically because in the fourth quarter of 2016 there was a charge of €577m before taxes (€404m after taxes) to cover the contingency of future claims by customers linked to the decision of the CJEU on “mortgage floor clauses” in consumer mortgage loans. This item also includes the costs resulting from the restructuring process involved.

As a result, the net attributable profit generated by Banking Activity in Spain in 2017 stood at €1,381m, a year-on-year increase of 52.7%, strongly influenced by the positive performance in the year of net fees and commissions, operating expenses and loan-loss provisions. Moreover, the figures for 2016 were influenced by the charge to cover the contingency for the aforementioned “mortgage floor clauses”. Excluding this charge, the year-on-year profit of the area would grow by 5.5%.

 


Table of Contents

 

2017

 

  

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P. 27

 

Non Core Real Estate

 

     
                 
    Highlights        
   

 

•  

 

 

Positive trend in Spanish real-estate sector figures continues.

       
   

 

 

 

Agreement with Cerberus for the transfer of real-estate assets to a new company and subsequent sale of 80% of this company to Cerberus.

       
   

 

 

 

Further decline in net exposure, NPLs and losses.

       
                 

 

Industry trends

The real-estate market remains on an upward path. According to the latest available information from the Quarterly National Accounting for the third quarter of 2017, investment in housing increased by 0.7% over the previous quarter.

The most recent data from the General Council of Spanish Notaries (CIEN) shows that 432,500 homes were sold in Spain during the first ten months of 2017, a year-on-year increase of 16.4%. This trend reflects the growth of the economy and its capacity to generate employment, against a backdrop of low interest rates that is boosting new lending for home purchases. In addition, household confidence in the future of the economy has remained relatively high.

Growth of demand in a context of declining housing stock once more resulted in an increase in prices in the third quarter of 2017: According to data from the INE for the close of the third quarter, housing prices increased by 6.6% in year-on-year terms, one percentage point more than in the previous quarter. This is also the biggest rate of growth since the series was created in the first quarter of 2007.

 

LOGO

Monetary policy has continued to maintain the cost of finance at relatively low levels, which has encouraged people to take out mortgage loans. The 12-month Euribor hit a new low in December (-0.190%). New residential mortgage lending, without stripping out refinancing, increased by 16.4% year-on-year in the first eleven months of the year, according to data from the Bank of Spain. Taking into account refinancing, new lending increased 1.7% in the same period.

Finally, construction activity is still responding to the positive impetus from demand. According to data from the Ministry of Public Works, nearly 68,100 new housing construction permits were approved from January to October 2017, up 28.0% on the figure from the same period in 2016.

 

 

Coverage of real-estate exposure

(Million euros as of 31-12-2017)

 

    Gross
Value
    Provisions     Net
exposure
    %
Coverage
 

Real-estate developer loans (1)

    3,146       1,428       1,718       45  

Performing

    530       15       515       3  

Finished properties

    462       12       449       3  

Construction in progress

    11       0       11       2  

Land

    44       2       41       5  

Without collateral and other

    13       1       13       6  

NPL

    2,616       1,412       1,203       54  

Finished properties

    1,285       588       697       46  

Construction in progress

    38       14       23       38  

Land

    1,056       658       398       62  

Without collateral and other

    237       152       85       64  

Foreclosed assets

    11,686       7,359       4,327       63  

Finished properties

    7,100       3,938       3,162       55  

Construction in progress

    541       359       182       66  

Land

    4,045       3,062       983       76  

Other real-estate
assets (2)

    981       609       371       62  

Real-estate exposure

    15,813       9,396       6,416       59  
 

 

(1) Compared to Bank of Spain’s Transparency scope (Circular 5/2011 dated November 30), real-estate developer loans do not include €2.1 Bn (December 2017) mainly related to developer performing loans transferred to the Banking activity in Spain area.
(2) Other real-estate assets not originated from foreclosures.


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Activity

BBVA has taken another highly significant step forward in its strategy of reducing real-estate exposure. In the fourth quarter of 2017, BBVA reached an agreement with a subsidiary of Cerberus to create a joint venture to which part of BBVA’s real-estate business in Spain will be transferred. The business includes: (i) foreclosed real-estate assets, as described in the Significant Event published on November 29, 2017, for a gross value of approximately €13 billion (based on their situation as of June 26, 2017); and (ii) the assets and employees needed to manage the activity in an autonomous manner. In executing this agreement, BBVA will transfer the business to a single company, and at the closing date of the transaction, it will sell 80% of the shares in the said company to Cerberus.

For the purpose of this agreement, the business has been valued at approximately €5 billion, so the sale of 80% of the shares would amount to €4 billion. The final price paid will be determined by the volume of assets actually provided, which may vary depending on factors such as sales between the reference date of June 26, 2017 and the closing date of the transaction and compliance with the normal conditions for transactions of this type. At the close of the transaction, which is expected to take place in the second half of 2018, and once the volume of assets actually transferred is known, its final impact will be determined both in the net attributable profit and in the Group’s capital ratios.

From the point of view of loans to developers, it is worth noting that in 2017, the outstanding performing portfolio was transferred from Non Core Real Estate to Banking Activity in Spain for an amount exceeding €1bn.

Thus, as of 31-Dec-2017, the net exposure to the real-estate sector of €6,416m was down by 37.2% in year-on-year terms, due basically to the wholesale operations carried out over the year. These figures include all the assets in the Cerberus agreement, which will not mean a reduction in exposure until the transaction has been completed.

With respect to sales, 25,816 units were sold in 2017 for a total sale price of €2,121m. This represents a significant increase on 2016, both in the number of units and price.

Total real-estate exposure, including loans to developers, foreclosed and other assets, was reflected in a coverage ratio of 59% at the end of December 2017. The coverage ratio of foreclosed assets rose to 63%, a relatively high percentage given the proportion of these assets on the balance sheet.

Non-performing loans fell again, thanks to a low volume of net additions to NPL over the period and the sale of a non-performing loan portfolio in the third quarter. The NPL coverage ratio closed 31-Dec-2017 at 56%.

Results

This business area posted a cumulative loss of €501m in 2017, compared with the loss of €595m in 2016. This illustrates a decline in losses, together with a very significant reduction in real-estate exposure.

 

 

Financial statements

(Million euros)

 

Income statement

  2017     D%     2016  

Net interest income

    71       19.5       60  

Net fees and commissions

    3       (50.7     6  

Net trading income

    0       n.s.       (3

Other income/expenses

    (91     33.2       (68

Gross income

    (17     157.8       (6

Operating expenses

    (115     (7.1     (124

Personnel expenses

    (63     (4.5     (66

Other administrative expenses

    (34     11.3       (31

Depreciation

    (18     (33.8     (27

Operating income

    (132     1.2       (130

Impairment on financial assets (net)

    (138     0.4       (138

Provisions (net) and other gains (losses)

    (403     (15.2     (475

Profit/(loss) before tax

    (673     (9.4     (743

Income tax

    170       15.4       148  

Profit/(loss) for the year

    (502     (15.6     (595

Non-controlling interests

    1       n.s.       (0

Net attributable profit

    (501     (15,8     (595

Balance sheet

  31-12-17     D%     31-12-16  

Cash, cash balances at central banks and other demand deposits

    12       30.3       9  

Financial assets

    1,200       108.9       575  

Loans and receivables

    3,521       (40.8     5,946  

of which loans and advances to customers

    3,521       (40.8     5,946  

Inter-area positions

    —         —         —    

Tangible assets

    0       —         464  

Other assets

    4,981       (25.9     6,719  

Total assets/liabilities and equity

    9,714       (29.2     13,713  

Financial liabilities held for trading and designated at fair value through profit or loss

    —         —         —    

Deposits from central banks and credit institutions

    —         —         —    

Deposits from customers

    13       (47.6     24  

Debt certificates

    785       (5.8     834  

Inter-area positions

    5,775       (39.3     9,520  

Other liabilities

    (0     (62.7     (0

Economic capital allocated

    3,141       (5.8     3,335  

Memorandum item:

     

Risk-weighted assets

    9,691       (10.8     10,870  
 


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2017

 

  

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The United States

 

     
                 
    Highlights        
   

 

•  

 

 

Lending remained stable over the year.

       
   

 

 

 

Increase in deposits from customers.

       
   

 

 

 

Positive performance of net interest income and net fees and commissions.

       
   

 

 

 

Solid risk indicators.

       
   

 

 

 

Higher income tax charge due to the tax reform approved at the end of 2017.

       
                 

 

LOGO


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2017

 

  

BUSINESS AREAS

 

  

P. 30

 

Macro and industry trends

According to the latest information from the Bureau of Economic Analysis (BEA), U.S. GDP grew again by over 3% in the third quarter of 2017 in annualized terms, consolidating the recovery after significant moderation at the end of 2016. The strength of the economy has benefited from a number of factors: The increased price of oil and the depreciation of the dollar boosted investment, while rising global demand favored the growth of exports. Consumer spending grew at a relatively stable and robust rate, despite the slowdown in the improvement of the labor market, an increase in inflation and slightly tougher financial conditions. The most recent indicators suggest economic activity slowed in the last quarter of the year, although this is temporary, following the end of the reconstruction work in the wake of the hurricanes. In all, the GDP may have closed the year with an increase of more than 2% in 2017, with a more balanced growth supported by both consumption and investment.

With regard to the currency market, the dollar’s significant depreciation against the euro since the second quarter of 2017 was consolidated in the second half of the year, which recorded a year-on-year depreciation of 12.1%. This trend reflected on the one hand the progressive manner in which the Fed is carrying out the process of normalizing its monetary policy; and on the other, an economic performance in Europe that was somewhat better than expected, with the ECB announcing a gradual withdrawal of stimuli.

The U.S. banking system is in a very strong position. According to the latest available data from the Fed through November 2017, the total volume of bank credit in the system increased by 5.3% over the last twelve months. Growth of 2.6% recorded in the portfolios of lending to the real-estate sector (including residential mortgage loans) and 9.8% in consumer finance offset the 1.9% reduction in commercial lending. Non-performing loans in the system remained under control, with an NPL ratio of 1.82% at the close of 2017. Deposits were stable, with only a slight fall of 0.3%

(November data).

Activity

All the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

Following the increase in the third quarter of 2017, lending activity (performing loans under management) in the area grew again by 1.0% in the last quarter of the year. As a result, the balance of lending as of 31-Dec-2017 was practically the same as of the close of 2016 (down 0.1%). By portfolio, the

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

  2017     D%     D(1)     2016  

Net interest income

    2,158       10.5       13.0       1,953  

Net fees and commissions

    647       1.5       4.1       638  

Net trading income

    111       (22.2     (19.6     142  

Other income/expenses

    2       n.s.       n.s.       (27

Gross income

    2,919       7.9       10.5       2,706  

Operating expenses

    (1,858     0.8       3.2       (1,843

Personnel expenses

    (1,067     (0.5     1.8       (1,073

Other administrative expenses

    (604     4.2       6.7       (580

Depreciation

    (187     (1.9     0.2       (190

Operating income

    1,061       22.9       26.1       863  

Impairment on financial assets (net)

    (241     8.9       10.8       (221

Provisions (net) and other gains (losses)

    (36     19.2       23.1       (30

Profit/(loss) before tax

    784       28.2       31.8       612  

Income tax

    (273     78.6       83.0       (153

Profit/(loss) for the year

    511       11.3       14.6       459  

Non-controlling interests

    —         —         —         —    

Net attributable profit

    511       11.3       14.6       459  

Balance sheets

  31-12-17     D%     D(1)
    31-12-16  

Cash, cash balances at central banks and other demand deposits

    11,089       39.3       58.4       7,963  

Financial assets

    11,154       (23.5     (13.0     14,581  

Loans and receivables

    55,419       (12.0     0.1       62,962  

of which loans and advances to customers

    54,406       (11.0     1.2       61,159  

Inter-area positions

    —         —         —         —    

Tangible assets

    658       (16.3     (4.8     787  

Other assets

    2,172       (16.7     (5.3     2,609  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

    80,493       (9.5     3.0       88,902  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

    139       (95.2     (94.5     2,901  

Deposits from central banks and credit institutions

    3,663       5.5       20.0       3,473  

Deposits from customers

    61,357       (6.7     6.2       65,760  

Debt certificates

    2,017       (17.5     (6.2     2,446  

Inter-area positions

    4,965       1.9       15.9       4,875  

Other liabilities

    5,560       (8.4     4.2       6,068  

Economic capital allocated

    2,791       (17.4     (6.0     3,379  

Relevant business indicators

  31-12-17     D%     D(1)
    31-12-16  

Loans and advances to customers (gross) (2)

    55,122       (11.1     1.2       62,000  

Non-performing loans and contingent liabilities

    696       (28.6     (18.8     976  

Customer deposits under management (2)

    56,547       (10.5     1.8       63,195  

Off-balance-sheet funds (3)

    —         —         —         —    

Risk-weighted assets

    58,682       (10.4     1.9       65,492  

Efficiency ratio (%)

    63.7           68.1  

NPL ratio (%)

    1.2           1.5  

NPL coverage ratio (%)

    104           94  

Cost of risk (%)

    0.42           0.37  

 

(1) Figures at constant exchange rate.
(2) Excluding repos.
(3) Includes mutual funds, pension funds and other off-balance-sheet funds.
 


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growth was mainly focused on consumer finance and credit cards (up 3.5% in the quarter and 5.0% year-on-year), a portfolio with greater spread and thus more profitable; commercial loans (up 3.7% and 1.5% respectively) and the public sector (up 12.6% and 27.1% respectively).

With respect to asset quality, risk indicators in the area continued to be sound. The NPL ratio closed the year at 1.2% and the NPL coverage ratio at 104%.

Customer deposits under management increased both over the last twelve months (up 1.8%) and in the quarter (up

6.5%), thanks to the good performance of the more liquid lower-cost funds, such as current and savings accounts (up 3.4% year-on-year and 4.4% quarter-on-quarter). Time deposits grew significantly in the quarter (up 13.8%), although in year-on-year terms they fell by 5.6%.

Results

The United States generated a cumulative net attributable profit in 2017 of €511m, 14.6% up on the previous year, primarily due to the good performance of the more recurring revenue items. The most relevant aspects of the area’s income statement are as follows:

 

  Net interest income continued to perform positively, with a cumulative figure rising by 13.0% in year-on-year terms. This was due to the combined result of the strategic measures adopted by BBVA Compass to improve loan yields and reduce the cost of liabilities (deposits and wholesale funding), as well as the Fed’s interest-rate hikes (December 2016, March and June 2017).
  Income from fees and commissions increased by 4.1%. There was an outstanding performance in practically all items, notably those from account maintenance, asset management and retail investment banking (securities transactions, annuity sales, structured notes and life insurance).

 

  Reduction of 19.6% in NTI compared with the figure for the previous year. The positive performance of the Global Markets unit, particularly early in the year, has not been sufficient to offset the capital gains from portfolio sales in 2016.

 

  Increase of 3.2% in operating expenses, focused above all on administration costs. Within this item, general expenses showed an increase in costs related to IT, consulting and marketing.

 

  Impairment losses on financial assets increased by 10.8% on the previous year, due partly to the inclusion of provisions allocated as a result of the estimated negative impact of the natural disasters in the third quarter and higher loan-loss provisioning related to consumer portfolio. Despite the above, the cumulative cost of risk as of 31-Dec-2017 was 0.42%, three basis points below the cumulative figure as of 30-Sep-2017 (0.37% in 2016).

 

  Finally, income tax included a charge of €78m in the fourth quarter of 2017 as a result of the tax reform approved at the end of the year, which reduced the corporate tax rate from 35% to 21%, and as a result the value of deferred tax assets. However, the lower tax rate in 2018 should have a positive impact on earnings in the area.
 


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2017

 

  

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Mexico

 

     
                 
    Highlights        
   

 

•  

 

 

Good performance in activity.

       
   

 

 

 

Positive trend in gross income.

       
   

 

 

 

Costs continue to increase below gross income, and double-digit year-on-year growth in net attributable profit.

       
   

 

 

 

Stable asset quality indicators.

       
                 

 

LOGO


Table of Contents

 

2017    BUSINESS AREAS    P. 33

Macro and industry trends

Following the slowdown of activity in Mexico in the first half of 2017, the negative impact of natural phenomena led to a 0.3% quarterly decline in the third quarter. The adverse effect was noted in more sluggish consumption, also affected by increased inflation, and the decline in oil production and construction. However, this fall should be temporary and improve steadily with the boost from consumption of goods and services to help the victims of the disasters. As a result, GDP growth could have moderated to around 2% in 2017 as a whole, mainly supported by private consumption. However, investment was affected by the increased uncertainty linked to the negotiations of the trade agreement with the United States.

The significant depreciation of the peso in the first half of 2017 affected the behavior of inflation over the year, which remained high and reached rates of around 6.5% in recent months. In this context, Banxico increased interest rates by 150 basis points to 7.25%. Despite the uncertainty and volatility, the depreciation of the peso has been checked, so this effect on inflation began to decline in recent months.

The Mexican banking system has sustained excellent capital adequacy and asset quality levels over recent years. According to data released by the National Securities Banking Commission (CNBV, according to its acronym in Spanish), the capital adequacy ratio rose slightly to 15.73% in the third quarter. All the banks in the system registered ratios well above minimum requirements. The data on activity remained as strong as in previous quarters, with year-on-year growth in total lending of 8.9% and the total volume of deposits of 10.0%, as of November 2017. By portfolios, commercial loans grew by 12.2%, consumer finance by 8.5% and residential mortgage loans by 8.7%. Non-performing loans remained under control, with an NPL ratio of 2.2%, slightly below the November 2016 figure. The NPL coverage ratio remained relatively stable over the last twelve months, at 155%. Demand deposits grew by 8.6% to November 2017 in year-on-year terms, while time deposits increased by 19.4%.

Activity

All rates of change given below, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

BBVA’s lending (performing loans under management) in Mexico increased by 5.5% since December 2016 and 0.9% over the fourth quarter. As a result, BBVA Bancomer has retained its leadership position, with a market share for its performing portfolio of 23.0% (according to the latest local information from the CNBV as of November 2017).

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

  2017     D%     D(1)     2016  

Net interest income

    5,437       6.1       9.5       5,126  

Net fees and commissions

    1,217       5.9       9.3       1,149  

Net trading income

    249       12.3       15.9       222  

Other income/expenses

    177       (34.4     (32.2     270  

Gross income

    7,080       4.6       8.0       6,766  

Operating expenses

    (2,445     2.1       5.3       (2,396

Personnel expenses

    (1,051     0.3       3.5       (1,048

Other administrative expenses

    (1,138     3.3       6.7       (1,101

Depreciation

    (256     3.8       7.2       (247

Operating income

    4,635       6.0       9.5       4,371  

Impairment on financial assets (net)

    (1,652     1.6       4.9       (1,626

Provisions (net) and other gains (losses)

    (35     (47.8     (46.2     (67

Profit/(loss) before tax

    2,948       10.1       13.6       2,678  

Income tax

    (786     12.8       16.4       (697

Profit/(loss) for the year

    2,162       9.2       12.7       1,981  

Non-controlling interests

    (0     (42.5     (40.6     (1

Net attributable profit

    2,162       9.2       12.7       1,980  

Balance sheets

  31-12-17     D%     D(1)     31-12-16  

Cash, cash balances at central banks and other demand deposits

    4,882       (6.0     2.2       5,192  

Financial assets

    28,541       (8.7     (0.8     31,273  

Loans and receivables

    46,977       (2.1     6.4       47,997  

of which loans and advances to customers

    45,080       (3.0     5.4       46,474  

Tangible assets

    1,749       (10.6     (2.8     1,957  

Other assets

    7,195       4.3       13.3       6,900  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

    89,344       (4.3     4.1       93,318  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

    9,405       (5.6     2.6       9,961  

Deposits from central banks and credit institutions

    5,769       (2.6     5.9       5,923  

Deposits from customers

    49,414       (2.3     6.2       50,571  

Debt certificates

    7,312       (15.1     (7.7     8,611  

Other liabilities

    13,642       (2.1     6.3       13,941  

Economic capital allocated

    3,802       (11.8     (4.2     4,311  

Relevant business indicators

  31-12-17     D%     D(1)     31-12-16  

Loans and advances to customers (gross) (2)

    46,463       (2.9     5.5       47,865  

Non-performing loans and contingent liabilities

    1,124       (2.5     6.0       1,152  

Customer deposits under management (2)

    43,179       2.8       11.8       41,989  

Off-balance-sheet funds (3)

    19,472       1.9       10.7       19,111  

Risk-weighted assets

    43,715       (8.7     (0.7     47,863  

Efficiency ratio (%)

    34.5           35.4  

NPL ratio (%)

    2.3           2.3  

NPL coverage ratio (%)

    123           127  

Cost of risk (%)

    3.30           3.40  

 

(1) Figures at constant exchange rate.
(2) Excluding repos.
(3) Includes mutual funds, pension funds and other off-balance-sheet funds.
 


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The weight of the retail and wholesale portfolios was practically equal at the end of December (51% and 49% respectively). Wholesale lending was up 5.0% on December 2016 and 0.8% over the quarter. Within the wholesale portfolio, business loans (including loans to corporate clients and mid-sized companies, not including developer mortgage loans) grew by 8.7% on the close of 2016. Lending to housing developers continued the positive trend that began in the previous quarter, with year-on-year growth of 4.6%.

The retail portfolio registered growth of 6.0% over the last twelve months and 1.0% in the last quarter, buoyed by lending to SMEs and auto loans, which rose by 9.0% and 11.4% respectively in year-on-year terms. Meanwhile, credit cards increased by 2.6% over the year, with new production during this period of 8.3%. The mortgage portfolio continued to show the effect of early maturities on the overall amount, which increased year-on-year by 6.4% as of 31-Dec-2017.

This lending growth has been accompanied by stable asset quality indicators. The NPL and NPL coverage ratios closed the year at 2.3% and 123% respectively.

Total customer funds (customer deposits under management, mutual funds, and other off-balance-sheet funds) posted year-on-year growth of 11.4% (up 1.3% in the fourth quarter). All items continued to perform positively: current and savings accounts rose 11.5% year-on-year (up 1.5% on the previous quarter), and time deposits grew by

13.1% (up 0.4% over the quarter). BBVA in Mexico has a profitable funding mix, with low-cost items continuing to account for over 81% of total customer deposits under management. Finally, there was also an increase in mutual funds of 9.3% year-on-year and 1.0% over the quarter.

 

Results

The highlights of Mexico’s income statement for 2017 are as follows:

 

  Positive performance of net interest income, with a year-on-year increase of 9.5%, driven primarily by greater activity volumes and favorable customer spreads.

 

  Good performance of net fees and commissions, with growth of 9.3% over the last twelve months. They remained strongly influenced by an increased volume of transactions with credit card customers and fees from online and investment banking. Strong growth in NTI (up 15.9% year-on-year), thanks to a very good performance from the Global Markets unit, basically in the first half of the year.

 

  In other income/expenses the comparison with last year is unfavorable (down 32.2% year-on-year), mainly due to insurance activity, as a result of a higher claims rate derived from the natural disasters that took place during the year.

 

  Operating expenses continued to grow at a controlled pace (up 5.3% year-on-year), below both the area’s gross income growth of 8.0% and the country’s inflation rate. As a result, the efficiency ratio stood at 34.5%.

 

  Year-on-year growth in impairment losses on financial assets (up 4.9%) was below that registered by lending (up 5.5%). As a result, the cumulative cost of risk in the area was 3.30%, six basis points below the cumulative figure through September and ten basis points less than that in 2016.

Overall, BBVA in Mexico posted a net attributable profit for the year of €2,162m, a year-on-year increase of 12.7%.

 


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P. 35

 

Turkey

 

     
                 
    Highlights        
   

 

•  

 

 

Solid growth in activity.

       
   

 

 

 

Very positive growth in more recurring revenue items.

       
   

 

 

 

Operating expenses increase below the level of inflation and the rate of increase in gross income.

       
   

 

 

 

Risk indicators affected by more additions to NPL from certain wholesale loans that are practically fully provisioned.

       
                 

 

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2017

 

  

BUSINESS AREAS

 

  

P. 36

 

Macro and industry trends

According to the most recent figures from the Turkish Statistical Institute, year-on year economic growth rose to 11.1% in the third quarter of 2017. Government stimuli appear to be leveraging growth via private consumption, which is increasing household confidence, and by encouraging investment through access to credit facilities fostered by the Credit Guarantee Fund (CGF). BBVA Research has therefore revised its economic growth forecast up to 7% in 2017.

Annual inflation remained high, closing December at 11.9%, after reaching 13% in November, thanks to favorable base effects. The reduction was due to a significant upturn a year ago. Solid domestic demand and the exchange-rate effect increased core inflation to 12.3% at the end of 2017.

In this context of high inflation the CBRT kept its monetary policy tight. Since the end of last year, there has been an increase of around 450 basis points in the average funding rate, from 8.31% to 12.75%, (just over 75 basis points in the fourth quarter). The risk appetite in global financial markets will continue to have a key effect on the exchange rate.

The Turkish financial sector has showed signs of strength in 2017, thanks to access to the credit facilities fostered by the government-sponsored CGF program. Although the year-on-year growth rate in total lending (adjusted for the effect of the depreciation of the lira) stood at 20.5% at the end of December (compared to 20.4% as of September), the rate moderated in the second half of the year. Commercial loans ended the year with a higher growth rate than consumer loans, which is good for financial stability. Deposits from customers also maintained their strength, with year-on-year growth in December (adjusted for the effect of the depreciation of the lira) of 12.0%. Foreign-currency deposits grew by 15.3%, mainly due to the comparison with the very low figure at the same period last year, and Turkish lira deposits increased 12.6%. Lastly, the NPL ratio in the sector improved in 2017, closing the year at 2.9% (3.2% at the close of 2016).

Activity

In March 2017, BBVA completed the acquisition of an additional 9.95% stake in the share capital of Garanti, increasing BBVA’s total stake in this entity to 49.85%. Garanti continues to be incorporated into the Group’s financial statements by the full integration method.

Unless expressly stated otherwise, all the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate. These rates, together with changes at current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

  2017     D%     D(1)     2016  

Net interest income

    3,331       (2.1     20.6       3,404  

Net fees and commissions

    703       (3.9     18.5       731  

Net trading income

    14       (81.2     (76.8     77  

Other income/expenses

    67       46.5       80.6       46  

Gross income

    4,115       (3.3     19.2       4,257  

Operating expenses

    (1,503     (13.5     6.6       (1,738

Personnel expenses

    (799     (10.1     10.8       (889

Other administrative expenses

    (526     (17.2     2.1       (635

Depreciation

    (178     (16.7     2.7       (214

Operating income

    2,612       3.7       27.8       2,519  

Impairment on financial assets (net)

    (453     (13.0     7.3       (520

Provisions (net) and other gains (losses)

    (12     (87.2     (84.2     (93

Profit/(loss) before tax

    2,147       12.7       38.9       1,906  

Income tax

    (426     9.2       34.7       (390

Profit/(loss) for the year

    1,720       13.5       40.0       1,515  

Non-controlling interests

    (895     (2.4     20.4       (917

Net attributable profit

    826       37.9       70.0       599  

Balance sheets

  31-12-17     D%     D(1)     31-12-16  

Cash, cash balances at central banks and other demand deposits

    4,036       48.2       81.7       2,724  

Financial assets

    11,819       (13.5     6.0       13,670  

Loans and receivables

    59,683       (7.9     12.9       64,814  

of which loans and advances to customers

    51,378       (7.6     13.3       55,612  

Tangible assets

    1,344       (6.0     15.3       1,430  

Other assets

    1,812       (18.7     (0.3     2,229  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

    78,694       (7.3     13.7       84,866  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

    648       (35.8     (21.3     1,009  

Deposits from central banks and credit institutions

    11,195       (17.0     1.8       13,490  

Deposits from customers

    44,691       (5.4     16.0       47,244  

Debt certificates

    8,346       5.5       29.4       7,907  

Other liabilities

    11,321       (12.1     7.7       12,887  

Economic capital allocated

    2,493       7.0       31.3       2,330  

Relevant business indicators

  31-12-17     D%     D(1)     31-12-16  

Loans and advances to customers (gross) (2)

    53,445       (7.8     13.1       57,941  

Non-performing loans and contingent liabilities

    2,553       28.8       58.0       1,982  

Customer deposits under management (2)

    44,499       (6.3     14.9       47,489  

Off-balance-sheet funds (3)

    3,902       4.0       27.5       3,753  

Risk-weighted assets

    62,768       (10.8     9.4       70,337  

Efficiency ratio (%)

    36.5           40.8  

NPL ratio (%)

    3.9           2.7  

NPL coverage ratio (%)

    85           124  

Cost of risk (%)

    0.82           0.87  

 

(1) Figures at constant exchange rate.    
(2) Excluding repos.    
(3) Includes mutual funds, pension funds and other off-balance-sheet funds.    
 


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The growth of lending activity (performing loans under management) in the area rose to 13.9% in year-on-year terms, mainly driven by Turkish lira loans. By segments, business banking loans performed very favorably throughout the year, thanks to the aforementioned CGF program launched at the start of the year. General purpose loans also performed well. In mortgages, Garanti gained market share among private banks thanks to using alternative sale channels effectively and providing flexible payment plan options. Garanti also performed positively, above the average of its private-sector peers, in auto loans, and strengthened its leading position in the credit card segment, thanks to the increase in both commercial and consumer credit cards.

In terms of asset quality, the NPL ratio rose to 3.9% as a result of increased additions to NPLs from certain wholesale loans, although they were practically fully provisioned (with hardly any impact on results). The NPL coverage ratio closed at 85%.

Customer deposits remained the main source of funding for the balance sheet in the area, and grew by 14.9% in 2017

(up 4.6% in the last quarter). Both, Turkish lira and foreign currency deposits grew in year-on-year terms, with current and savings accounts performing well and continuing to support growth in net interest income growth: they have almost zero cost and represent 26% of total customer deposits in Garanti.

Results

Turkey generated a cumulative net attributable profit of €826m in 2017, up 70.0% compared with the figure in 2016. The most significant aspects of the year-on-year changes in the income statement were as follows:

  Positive performance of net interest income (up 20.6%). This positive trend is a result of increased in activity, good management of customer spreads (despite the increase in cost of funding) and higher income from inflation-linked bonds (CPI linkers).

 

  Income from fees and commissions increased 18.5% year-on-year, thanks to good diversification (payment systems, money transfers, loans, insurance and brokerage). This positive performance has been achieved despite the lower generation of fees from account maintenance due to the suspension of charges in the retail segment implemented by the Turkish Council of State as of January, 2016, and the high revenues generated in 2016 by the Miles & Smiles program.

 

  Reduction of NTI (down 76.8%), mainly due to the higher base of comparison due to the capital gains generated in the first half of 2016 from the VISA deal.

 

  Overall, gross income was up 19.2% in 2017.

 

  Operating expenses increased by 6.6%, below both the inflation rate and the year-on-year growth rate in gross income, thanks to strict cost discipline. As a result, the efficiency ratio declined to 36.5% (40.8% in 2016).

 

  Impairment losses on financial assets rose by 7.3% year-on-year, less than the rise in lending activity. As a result, the cumulative cost of risk of the area closed 2017 at 0.82%, below the level of 2016 (0.87%).

 

  Finally, BBVA Group’s additional stake of 9.95% in the capital of Garanti had a positive effect on reducing the non-controlling interest heading by approximately €150m.
 


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2017

 

  

BUSINESS AREAS

 

  

P. 38

 

South America

 

     
                 
    Highlights        
   
    •     Activity continues to grow at a good pace.        
   
      More recurring revenue items performing very well.        
   
      Expenses grow below gross income.        
   
      Stable risk indicators.        
                 

 

LOGO


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2017

 

  

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Macro and industry trends

The economies of South America consolidated their recovery in 2017, though the pace of growth was still moderate. The external environment improved due to rising global demand and commodity prices, and this was accompanied by a gradual increase in confidence among agents in the region. At the same time, the buoyant financial markets have stimulated capital flows into the emerging economies. The result has been a strong export sector, growth in investment and early signs of an improvement in consumption.

In most countries in the region, inflation moderated in 2017 as a result of relatively stable exchange rates and weak domestic demand. Against this backdrop of low inflationary pressure and very moderate growth, the central banks continued to apply expansive monetary policies (except in Argentina).

Regarding the banking systems within BBVA’s regional footprint, the macroeconomic backdrop and reduced levels of banking penetration in these countries in aggregate terms

(obviously with differences between countries) led to strong results in terms of the main indicators of profitability and solvency, while non-performing loans remained under control. In addition, there has been sustained growth in lending and deposits.

Activity

All the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at the current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

Growth in lending (performing loans under management) accelerated in the last quarter of the year, and closed 9.7% above the figure at the end of December 2016 and 4.5% up on the close of September. By segments, the strong performance of the individual customer segment (particularly consumer finance, credit cards and, to a lesser extent, mortgages) outpaced growth in the commercial and public sector (wholesale portfolio). By country, the fastest growth continued to be in Argentina (up 65.8% year-on-year), Colombia (up 8.5%) and Chile (up 6.7%).

With respect to credit quality, there was a slight improvement in the NPL ratio over the quarter, closing the year at 3.4%. The NPL coverage ratio ended the year at 89%.

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

  2017     D%     D%  (1)     2016  

Net interest income

    3,200       9.2       15.1       2,930  

Net fees and commissions

    713       12.4       17.9       634  

Net trading income

    480       3.4       6.2       464  

Other income/expenses

    59       135.6       (18.9     25  

Gross income

    4,451       9.8       13.9       4,054  

Operating expenses

    (2,008     6.0       12.4       (1,894

Personnel expenses

    (1,035     5.4       10.6       (982

Other administrative expenses

    (851     5.0       12.1       (811

Depreciation

    (121     20.8       32.8       (100

Operating income

    2,444       13.1       15.1       2,160  

Impairment on financial assets (net)

    (650     23.6       26.1       (526

Provisions (net) and other gains (losses)

    (103     26.2       (12.9     (82

Profit/(loss) before tax

    1,691       8.9       13.5       1,552  

Income tax

    (486     (0.3     10.1       (487

Profit/(loss) for the year

    1,205       13.1       15.0       1,065  

Non-controlling interests

    (345     17.0       17.6       (294

Net attributable profit

    861       11.6       14.0       771  

Balance sheets

  31-12-17     D%     D% (1)     31-12-16  

Cash, cash balances at central banks and other demand deposits

    9,039       (14.6     5.2       10,586  

Financial assets

    11,742       9.3       20.5       10,739  

Loans and receivables

    51,207       (5.3     6.4       54,057  

of which loans and advances to customers

    48,272       (0.9     11.2       48,718  

Tangible assets

    725       (10.1     13.5       807  

Other assets

    1,923       11.2       25.1       1,729  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

    74,636       (4.2     8.7       77,918  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

    2,823       9.2       16.0       2,585  

Deposits from central banks and credit institutions

    7,552       13.5       23.7       6,656  

Deposits from customers

    45,666       (4.7     10.0       47,927  

Debt certificates

    7,209       (3.2     4.0       7,447  

Other liabilities

    8,505       (19.8     (9.0     10,600  

Economic capital allocated

    2,881       6.6       23.5       2,703  

Relevant business indicators

  31-12-17     D%     D% (1)     31-12-16  

Loans and advances to customers (gross) (2)

    49,845       (0.9     11.2       50,316  

Non-performing loans and contingent liabilities

    1,884       15.1       26.8       1,637  

Customer deposits under management (3)

    45,676       (5.5     9.0       48,334  

Off-balance-sheet funds (3)

    12,197       2.5       16.6       11,902  

Risk-weighted assets

    55,665       (3.1     11.5       57,443  

Efficiency ratio (%)

    45.1           46.7  

NPL ratio (%)

    3.4           2.9  

NPL coverage ratio (%)

    89           103  

Cost of risk (%)

    1.32           1.15  

 

(1) Figures at constant exchange rates.    
(2) Excluding repos.    
(3) Includes mutual funds, pension funds and other off-balance-sheet funds.    
 


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2017

 

  

BUSINESS AREAS

 

  

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Total customer funds ended 2017 with quarterly growth of 5.2% and year-on-year growth of 10.5%. The trend over the year is explained by the good performance of transactional funds (up 16.3% since December 2016) and off-balance-sheet funds (up 16.6%). By countries, the trend was particularly positive in Argentina (up 37.3% on December 2016) and Colombia (up 12.9%).

Results

South America posted a cumulative net attributable profit of €861m in 2017, a year-on-year increase of 14.0%. The key aspects of the income statement in this area were:

 

  Gross income grew by 13.9%, thanks to the capacity to generate recurring revenues in the area. Net interest income outpaced growth in the loan book (up 15.1%), on the back of greater volumes and effective price management, while income from fees and commissions rose by 17.9%. The contribution from NTI was also positive, favored by improved results from foreign-currency operations.

 

  Operating expenses increased by less than gross income (up 12.4%) due to cost controls implemented in all the countries. In fact, they also increased below or in line with the average inflation in most of the countries.

 

  Impairment losses on financial assets moderated their year-on-year growth with respect to the previous quarter, with a cumulative increase of 26.1%. This heading is affected by the impact of provisions associated with
  one particular customer. However, the slowdown allowed the cumulative cost of risk to reach 1.32% at the close of December, below the third quarter of 2017 (1.51%).

By country, recurring revenues performed very well in Argentina, with notable growth in both net interest income and the excellent performance of net fees and commissions, which contributed to a growth in gross income of 25.0%. However, expenses remained affected by high inflation. In July, BBVA Francés carried out a USD 400m share capital increase to finance the bank’s organic growth, given the country’s good economic outlook. The transaction has resulted in a higher charge under the non-controlling interests heading. As a result, net attributable profit increased by 19.1% year-on-year. In Chile, positive trend in gross income (net interest income up thanks to favorable figures in lending and effective management of customer spreads) and strict control of growth in expenses comfortably offset the rise in loan-loss provisioning and the increase in the nominal tax rate. Accordingly, the country recorded a rise of 27.0% in net attributable profit relative to 2016. In Colombia, gross income performed strongly, thanks to positive figures from net interest income (due to both activity and spreads) and net fees and commissions, albeit mitigated by lower NTI (the same period of 2016 included capital gains from the disposal of equity holdings) and an increase in loan-loss provisioning. As a result, net attributable profit was 8.5% lower than in 2016. In Peru, net attributable profit grew by 6.0% when compared to the figure for the previous year. The good NTI performance, strict control of expenses and a reduction of loan-loss provisions were partly mitigated by moderate growth in recurring revenues.

 

 

 

South America. Data per country

(Million euros)

 

     Operating income      Net attributable profit  

Country

   2017      D%      D(1)      2016      2017      D%     D(1)     2016  

Argentina

     522        3.5        18.8        504        219        3.8       19.1       211  

Chile

     421        19.5        17.0        352        188        29.8       27.0       145  

Colombia

     644        20.6        19.0        534        206        (7.3     (8.5     222  

Peru

     726        4.1        2.6        698        180        7.5       6.0       167  

Other countries (2)

     131        82.8        77.0        72        68        161.1       135.1       26  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     2,444        13.1        15.1        2,160        861        11.6       14.0       771  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Figures at constant exchange rates.
(2) Venezuela, Paraguay, Uruguay and Bolivia. Additionally, it includes eliminations and other charges.

 

 

South America. Relevant business indicators per country

(Million euros)

 

     Argentina      Chile      Colombia      Peru  
     31-12-17      31-12-16      31-12-17      31-12-16      31-12-17      31-12-16      31-12-17      31-12-16  

Loans and advances to customers (gross) (1, 2)

     5,856        3,392        15,067        14,028        12,475        11,240        13,309        13,247  

Deposits from customers

     45        36        420        404        672        455        645        649  

Customer deposits under management (1, 3)

     6,779        5,046        9,687        9,619        12,288        11,222        12,019        12,186  

Off-balance sheet funds (1, 4)

     1,253        805        1,295        1,428        1,118        655        1,581        1,385  

Risk-weighted assets

     9,364        8,717        14,300        14,300        12,249        12,185        14,750        17,400  

Efficiency ratio (%)

     56.1        53.8        45.2        49.1        36.0        38.9        35.6        35.8  

NPL ratio (%)

     0.8        0.8        2.6        2.6        5.3        3.5        3.8        3.4  

NPL coverage ratio (%)

     198        391        60        66        88        105        100        106  

Cost of risk (%)

     0.61        1.48        0.76        0.74        2.59        1.34        1.13        1.31  

 

(1) Figures at constant exchange rates.
(2) Excluding repos.
(3) Excluding repos and including specific marketable debt securities.
(4) Includes mutual funds, pension funds and other off-balance-sheet funds.


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2017

 

  

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P. 41

 

Rest of Eurasia

 

     
                 
    Highlights        
   

 

•  

 

 

Positive trend in lending in Europe.

       
   

 

 

 

Trend in deposits strongly influenced by the negative interest-rate environment.

       
   

 

 

 

Earnings down due to lower revenues, despite the good performance of expenses and loan-loss provisions.

       
   

 

 

 

Good performance of asset quality indicators.

       
                 

 

Macro and industry trends

The Eurozone economy continued to post solid growth in 2017. In accordance with information from Eurostat, GDP in the region grew at a relatively stable rate of around 0.6% in the first three quarters of the year. The most recent indicators suggest that this growth was maintained in the final part of the year. The improving labor market and increased confidence, alongside favorable financing conditions, underpinned momentum in consumption and investment. The latter factors were also boosted by increased global demand and the impact of growth in exports, which were not greatly affected by the appreciation of the euro over the year. As a result, the economy could have grown by around 2.4% overall in 2017. Despite the solid growth of domestic demand, inflation continued to moderate, below the ECB target, and the core component was relatively stable at around 1.1%. In this context, the ECB remains cautious and will continue to apply an accommodative monetary policy, steadily reducing asset purchases starting in January 2018 but extending the program at least until September.

Activity and results

This business area basically includes the Group’s retail and wholesale business in Europe (excluding Spain) and Asia.

The loan book (performing loans under management) in the area fell year-on-year by 2.7% at the close of 2017. In the rest of Europe there was growth of 1.6%, which did not offset the reduction in Asia of 19.1%.

Regarding the main credit risk indicators, the NPL ratio closed at 2.4% in December (2.6% in September 2017, and 2.7% in December 2016) and the NPL coverage ratio closed at

74% (85% as of 30-Sep-2017 and 84% as of 31-Dec-2016).

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

   2017     D%     2016  

Net interest income

     180       8.7       166  

Net fees and commissions

     164       (15.2     194  

Net trading income

     123       40.4       87  

Other income/expenses

     1       (97.3     45  

Gross income

     468       (4.8     491  

Operating expenses

     (308     (9.9     (342

Personnel expenses

     (156     (13.5     (181

Other administrative expenses

     (141     (5.5     (149

Depreciation

     (11     (10.4     (12

Operating income

     160       7.0       149  

Impairment on financial assets (net)

     23       (24.3     30  

Provisions (net) and other gains (losses)

     (6     n.s.       23  

Profit/(loss) before tax

     177       (12.9     203  

Income tax

     (52     0.3       (52

Profit/(loss) for the year

     125       (17.4     151  

Non-controlling interests

     —         —         —    

Net attributable profit

     125       (17.4     151  

Balance sheets

   31-12-17     D%     31-12-16  

Cash, cash balances at central banks and other demand deposits

     877       (34.4     1,337  

Financial assets

     990       (44.6     1,787  

Loans and receivables

     15,009       (3.6     15,574  

of which loans and advances to customers

     14,864       (3.0     15,325  

Inter-area positions

     —         —         —    

Tangible assets

     36       (6.3     38  

Other assets

     352       (4.6     369  
  

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

     17,265       (9.6     19,106  
  

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

     45       (33.4     67  

Deposits from central banks and credit institutions

     2,364       (11.5     2,670  

Deposits from customers

     6,700       (28.7     9,396  

Debt certificates

     354       12.4       315  

Inter-area positions

     5,643       17.0       4,822  

Other liabilities

     1,246       116.0       577  

Economic capital allocated

     913       (27.5     1,259  

Relevant business indicators

   31-12-17     D%     31-12-16  

Loans and advances to customers (gross) (1)

     15,261       (3.6     15,835  

Non-performing loans and contingent liabilities

     556       (12.1     633  

Customer deposits under management (1)

     6,660       (28.6     9,322  

Off-balance-sheet funds (2)

     376       2.7       366  

Risk-weighted assets

     12,916       (17.4     15,637  

Efficiency ratio (%)

     65.9         69.6  

NPL ratio (%)

     2.4         2.7  

NPL coverage ratio (%)

     74         84  

Cost of risk (%)

     (0.16       (0.22

 

(1) Excluding repos.    
(2) Includes mutual funds, pension funds and other off-balance-sheet funds.    
 


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Customer deposits under management were still strongly influenced by the environment of negative interest rates. With data as of December 2017 they fell by 28.6% year-on-year (down 15.6% in Europe and down 79.3% in Asia).

Regarding earnings, gross income declined 4.8% year-on-year, with the figures differing from geographic area: Rest of Europe showed growth of 12.1%, while Asia posted a

 

decline of 62.3%, mainly due to the payment of the CNCB dividend in 2016. Operating expenses continue to moderate (down 9.9% year-on-year), mainly due to control of all cost items (personnel, other administrative expenses and depreciation). Finally, there was also a decline in impairment losses on financial assets, as a result of which this geography contributed a cumulative net attributable profit in 2017 of €125m, 17.4% less than in 2016.

 


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Corporate Center

The Corporate Center basically includes the costs of the head offices that have a corporate function; management of structural exchange-rate positions; specific issues of equity instruments to ensure adequate management of the Group’s global solvency; portfolios and their corresponding results, whose management is not linked to customer relations, such as industrial holdings; certain tax assets and liabilities; funds due to commitments with employees; goodwill and other intangibles.

The Corporate Center’s income statement has been influenced by the recognition of the impairment losses of €1,123m from BBVA’s stake from Telefónica, S.A.

 

  Greater contribution from NTI than last year, mainly due to the recording of €228m in pre-tax capital gains from the sale of the stake in CNCB (€204m in the first quarter for the sale of 1.7% and €24m in the third quarter for the disposal of the remaining 0.34%). In 2016 there was also a sale of 0.75% in the third quarter with lower capital gains.

 

  Reduction in the other income/expenses heading (down 54.5% year-on-year), mainly impacted by the cut in the dividend paid by Telefónica.

 

  Moderation of operating expenses, which remained at similar levels to those of 2016 (up 0.9% year-on-year).

As a result, the Corporate Center had a net attributable loss of €1,844m, which compares with a loss of €794m in 2016. Excluding the effect of the impairment losses in Telefónica, the net attributable loss was €722m.

 

Financial statements

(Million euros. Percentage)

 

Income statement

  2017     D%     2016  

Net interest income

    (357     (21.6     (455

Net fees and commissions

    (86     (21.2     (110

Net trading income

    436       22.2       357  

Other income/expenses

    80       (54.5     177  

Gross income

    73       n.s.       (31

Operating expenses

    (884     0.9       (876

Personnel expenses

    (484     0.3       (483

Other administrative expenses

    (97     12.7       (86

Depreciation

    (303     (1.3     (307

Operating income

    (811     (10.6     (907

Impairment on financial assets (net)

    (1,125     n.s.       (37

Provisions (net) and other gains (losses)

    (73     (47.3     (139

Profit/(loss) before tax

    (2,009     85.4       (1,084

Income tax

    166       (43.3     293  

Profit/(loss) for the year

    (1,843     133.1       (791

Non-controlling interests

    (1     (60.0     (3

Net attributable profit

    (1,844     132.3       (794

Balance sheets

  31-12-17     D%     31-12-16  

Cash, cash balances at central banks and other demand deposits

    5       n.s.       (2

Financial assets

    2,520       50.4       1,675  

Loans and receivables

    —         —         130  

of which loans and advances to customers

    —         —         130  

Inter-area positions

    (1,501     (67.8     (4,658

Tangible assets

    1,893       (6.4     2,023  

Other assets

    17,579       (7.6     19,017  
 

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

    20,496       12.7       18,186  
 

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

    —         —         —    

Deposits from central banks and credit institutions

    —         —         —    

Deposits from customers

    —         —         —    

Debt certificates

    8,772       (16.4     10,493  

Inter-area positions

    (16,384     (14.7     (19,217

Other liabilities

    443       (83.4     2,666  

Economic capital allocated

    (24,941     (6.1     (26,559

Shareholder’s funds

    52,606       3.5       50,803  
 


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2017

 

  

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P. 44

 

Other information: Corporate & Investment Banking

 

                 
    Highlights        
   
    •     Decline in lending volume, and slight increase in deposits.        
   
      Positive trend in earnings, strongly supported by stable revenues, cost control and restriction on loan-loss provisions.        
   
      Positive trend in risk indicators.        
                 

 

LOGO


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2017

 

  

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Financial market trends

The last quarter of the year was marked by new steps in the process of normalizing monetary policies in the United States and the Eurozone, approval of the tax reform in the United States, and improved global activity figures. The Fed began to reduce its balance sheet in October and resumed interest-rate hikes in December. In Europe, the ECB announced the extension of the asset purchase program until September 2018, but starting in January it will reduce the level of monthly purchases by half (€30 billion). To prevent sharp movements on the financial markets, the central banks have made it clear that the exit will be very gradual. Long-term interest rates have thus remained anchored at low levels for most of the fourth quarter of 2017, above all in Europe. In the United States, the slope of the curve has leveled off significantly, due to the rise in two-year bond yields, which are beginning to adapt to expectations of further rises, while the ten-year yield has barely increased.

The dollar was not able to capitalize fully on the approval of the tax reform in the United States and the rise in short-term rates. In contrast, the euro began to reflect the withdrawal of monetary stimulus. Emerging currencies depreciated due to global factors, which combined with idiosyncratic factors in the case of the Mexican peso and the Turkish lira.

The stock market in the United States continued to hit new highs, buoyed by the effects of the tax reform and low long-term interest rates. In contrast, the European stock markets closed the quarter with a slight fall, after hitting a new high in October. In the case of Spain, the crisis in Catalonia has had a moderate impact on the markets. Spain’s country risk premium has stabilized at around 114 basis points, although it reached a spread of 130 at the time of greatest uncertainty.

Activity

All the comments below on rates of change, for both activity and earnings, will be given at constant exchange rate, unless expressly stated otherwise. These rates, together with changes at the current exchange rate, can be seen in the attached tables of financial statements and relevant business indicators.

The market context remains unchanged, with margins squeezed and surplus liquidity. Lending (performing loans under management) fell year-on-year by 5.3%. Performance has varied by geographic area: outstanding growth in the

Mexico, Argentina, Chile and Colombia; and a decline in Spain, the Rest of Eurasia, the United States and Peru.

With respect to asset quality, the trend in risk indicators was positive. The NPL ratio stood at 0.7% as of December 2017, a decline in comparison to the 1.0% as of December 2016.

The NPL coverage ratio improved to 103%, up from the figure recorded at the close of December 2016 (79%).

 

Financial statements and relevant business indicators

(Million euros. Percentage)

 

Income statement

   2017     D%     D(1)     2016  

Net interest income

     1,092       (17.0     (15.0     1,315  

Net fees and commissions

     675       5.5       7.7       640  

Net trading income

     793       20.2       22.2       660  

Other income/expenses

     112       (3.8     (5.3     117  

Gross income

     2,672       (2.2     (0.3     2,731  

Operating expenses

     (992     (3.7     (2.2     (1,031

Personnel expenses

     (495     (6.7     (5.5     (530

Other administrative expenses

     (390     (2.7     (0.6     (401

Depreciation

     (108     7.9       8.7       (100

Operating income

     1,680       (1.2     0.9       1,701  

Impairment on financial assets (net)

     (93     (59.9     (59.6     (231

Provisions (net) and other gains (losses)

     (42     (35.0     (34.4     (65

Profit/(loss) before tax

     1,545       10.0       12.8       1,405  

Income tax

     (424     4.4       7.0       (406

Profit/(loss) for the year

     1,121       12.2       15.1       999  

Non-controlling interests

     (120     7.8       10.3       (112

Net attributable profit

     1,001       12.8       15.7       888  

Balance sheets

   31-12-17     D%     D(1)     31-12-16  

Cash, cash balances at central banks and other demand deposits

     4,193       61.3       79.0       2,600  

Financial assets

     72,804       (11.9     (10.0     82,666  

Loans and receivables

     85,061       (3.3     0.6       87,988  

of which loans and advances to customers

     59,376       (1.7     3.3       60,428  

Inter-area positions

     —         —         —         —    

Tangible assets

     26       (26.1     (20.3     35  

Other assets

     2,078       (16.6     (13.8     2,492  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets/liabilities and equity

     164,161       (6.6     (3.6     175,781  
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities held for trading and designated at fair value through profit or loss

     49,059       (10.5     (9.4     54,785  

Deposits from central banks and credit institutions

     45,400       3.9       6.2       43,705  

Deposits from customers

     41,989       (6.3     (2.4     44,836  

Debt certificates

     523       (8.9     (7.6     574  

Inter-area positions

     19,687       (17.8     (10.8     23,957  

Other liabilities

     3,743       (2.8     0.4       3,850  

Economic capital allocated

     3,760       (7.7     (3.0     4,074  

Relevant business indicators

   31-12-17     D%     D(1)     31-12-16  

Loans and advances to customers (gross) (2)

     49,219       (10.8     (5.7     55,160  

Non-performing loans and contingent liabilities

     582       (27.9     (23.0     808  

Customer deposits under management (2)

     36,729       (2.4     2.3       37,616  

Off-balance-sheet funds (3)

     1,357       17.3       34.1       1,157  

Efficiency ratio (%)

     37.1           37.7  

NPL ratio (%)

     0.7           1.0  

NPL coverage ratio (%)

     103           79  

Cost of risk (%)

     0.16           0.12  

 

(1) Figures at constant exchange rates.    
(2) Excluding repos.    
(3) Includes mutual funds, pension funds and other off-balance-sheet funds.    
 


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Customer funds increased by 3.2% since December 2016. The increases in the United States, Mexico, Argentina and

Colombia offset the fall in Spain, the Rest of Eurasia and Chile.

Results

CIB registered a net attributable profit of €1,001m in 2017, up 15.7% on 2016. This was mainly due to stable revenues, contained expenses and a lower level of loan-loss provisions.

The highlights of the income statement are summarized below:

 

  Slight year-on-year decline of 0.3% in gross income. The fall in net interest income (which was due to lower lending volumes than in 2016, as customer spreads performed positively) was offset thanks to the earnings from management of market volatility, above all in the first quarter of 2017, and the good performance of income from fees and commissions (up 7.7%), basically in Spain.

The corporate finance business in 2017 was characterized by a high level of activity and a significant marketing effort, which has resulted in BBVA winning numerous mandates, strengthening its market position in this business.

The Equity Capital Markets (ECM) unit was very active in the primary equity market throughout the year, with numerous market operations such as block trades and major IPOs, in which BBVA played a key role.

In mergers and acquisitions (M&A), the close of the year demonstrated the consolidation of the growth that began in Spain in 2015, driven by an improving economic situation, greater investment by foreign funds and an improved corporate financial situation. The number of operations in 2017 grew significantly (up 6% on 2016), giving rise to a large volume of both domestic and foreign investment. In particular, the market was very active, especially in the infrastructure and energy sector, despite uncertainties in the short and medium term.

BBVA also continued to demonstrate its leading position in green finance, as one of the most active financial institutions in the green bond and green loan markets. BBVA believes and is committed to this growing financing market, so it is opening up the range of “green and sustainable” financing products for its customers (bonds, loans, credit facilities, project finance, etc.).

 

  Cumulative operating expenses declined by 2.2% compared to the same period in 2016. The keys to this figure continued to be a slowdown in the growth of personnel and discretionary expenses, and the increase in costs associated with the investment plan in technology.

 

  Lastly, it is worth noting the lower impairment losses on financial assets with respect to 2016 (when there were increased provisions arising from the downgrades in the ratings of some oil & gas companies in the United States, above all during the first three months of the year).
 


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Banco Bilbao Vizcaya Argentaria, S.A.
Date: February 1, 2018     By:  

/s/ María Angeles Peláez Morón

    Name:   María Angeles Peláez Morón
    Title:   Authorized representative