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 six months ended June 30, 2020

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 office)

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

 

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):

 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

 

This Form 6-K is incorporated by reference into BBVA’s Registration Statement on Form F-3 (File No. 333-232333) filed with the Securities and Exchange Commission.

 

CERTAIN TERMS AND CONVENTIONS

The terms below are used as follows throughout this report:

·          “BBVA”, the “Bank”, the “Company”, the “Group”, the “BBVA Group” or first person personal pronouns, such as “we”, “us”, or “our”, mean Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.

·          “BBVA Mexico” means Grupo Financiero BBVA Bancomer, S.A. de C.V. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

·          “BBVA USA” means BBVA USA Bancshares, Inc. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

·          “Consolidated Financial Statements”  means our audited consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017, prepared in compliance with the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”) and in accordance with the International Financial Reporting Standards adopted by the European Union (“EU-IFRS”) required to be applied under the Bank of Spain’s Circular 4/2004 and Circular 4/2017 (each as defined herein).

·          “Garanti BBVA” means Türkiye Garanti Bankası A.Ş., and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.

·          “Latin America” refers to Mexico and the countries in which we operate in South America and Central America.

·          “Unaudited Condensed Interim Consolidated Financial Statements” means our unaudited condensed interim consolidated financial statements as of June 30, 2020 and December 31, 2019 and for the six months ended June 30, 2020 and June 30, 2019 prepared in accordance with International Accounting Standard 34 (IAS 34) as issued by the IASB and adopted by the European Union (“EU”). 

·          “2019 Form 20-F” means our Annual Report on Form 20-F for the year ended December 31, 2019 filed with the SEC on February 28, 2020.

 

In this report, “$”, “U.S. dollars”, and “dollars” refer to United States Dollars and “€” and “euro” refer to Euro.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include words such as “believe”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and similar expressions or variations on such expressions and includes statements regarding future growth rates. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information in this interim report on Form 6-K, including, without limitation, the information under the items listed below, identifies important factors that could cause such differences:

·          4B. “Business Overview”,

·          4E. “Selected Statistical Information”, and

·          5. “Operating and Financial Review and Prospects”.

Other important factors that could cause actual results to differ materially from those in forward-looking statements include the factors identified in “Item 3. Key Information—Risk Factors”,  “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk” in our 2019 Form 20-F, and the following, among others:

·          the impact of the coronavirus (COVID-19) pandemic and the measures adopted by governments and the private sector in connection therewith on our business and the economy;

·          political, economic and business conditions in Spain, the EU, Latin America, Turkey, the United States and the other geographies in which we operate;

·          our ability to comply with various legal and regulatory regimes and the impact of changes in applicable laws and regulations, including increased capital, liquidity and provision requirements and taxation, and steps taken towards achieving an EU fiscal and banking union and an EU capital markets union;

·          the monetary, interest rate and other policies of central banks, and the trade, economic and other policies of governments, in the EU, Spain, the United States, Mexico, Turkey and elsewhere;

·          changes or volatility in interest rates, foreign exchange rates (including the euro to U.S. dollar exchange rate), asset prices, equity markets, commodity prices, inflation or deflation;

·          the political, economic and regulatory impacts related to the United Kingdom’s withdrawal from the EU and the future relationship between the United Kingdom and the EU;

·          adjustments in the real estate markets in the geographies in which we operate, in particular in Spain, Mexico, the United States and Turkey;

·          the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation of us or our competitors, and our ability to implement technological advances;

·          changes in consumer spending and savings habits, including changes in government policies which may influence spending, saving and investment decisions;

·          adverse developments in emerging countries, in particular Latin America and Turkey, including unfavorable political and economic developments, social instability and changes in governmental policies, including expropriation, nationalization, exchange controls or other limitations on the repatriation of dividends, international ownership legislation, interest rate caps and tax policies;

·          our ability to continue to access sources of liquidity and funding, including public sources of liquidity such as the funding provided by the European Central Bank (“ECB”) through the extraordinary measures adopted in connection with the COVID-19 pandemic, and our ability to receive dividends and other funds from our subsidiaries;

·          our ability to hedge certain risks economically;

·          downgrades in our credit ratings or in Spain’s credit ratings;

·          the success of our acquisitions, divestitures, mergers, joint ventures and strategic alliances;

·          our ability to make payments on certain substantial unfunded amounts relating to commitments with personnel;

·          the performance of our international operations and our ability to manage such operations;

·          weaknesses or failures in our Group’s internal or outsourced processes, systems (including information technology systems) and security;

·          weaknesses or failures of our anti-money laundering or anti-terrorism programs, or of our internal policies, procedures, systems and other mitigating measures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations;

·          security breaches, including cyber-attacks and identity theft;

·          the outcome of legal and regulatory actions and proceedings, both those to which the Group is currently exposed and any others which may arise in the future, including actions and proceedings related to former subsidiaries of the Group or in respect of which the Group may have indemnification obligations;

·          actions that are incompatible with our ethics and compliance standards, and our failure to timely detect or remedy any such actions;

·          uncertainty surrounding the integrity and continued existence of reference rates and the transition away from the Euro Interbank Offered Rate (EURIBOR), Euro OverNight Index Average (EONIA) and London Inter-bank Offered Rate (LIBOR) to new reference rates;

·          our success in managing the risks involved in the foregoing, which depends, among other things, on our ability to anticipate events that are not captured by the statistical models we use; and

·          force majeure and other events beyond our control.

Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

 

PRESENTATION OF FINANCIAL INFORMATION

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with EU-IFRS. The Bank of Spain issued Circular 4/2017 of November 27, 2017 (“Circular 4/2017”), which replaced Circular 4/2004 of December 22, 2004, on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) for financial statements relating to periods ended January 1, 2018 or thereafter.

There are no differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2017 and IFRS-IASB as of the dates and for the periods presented. The Unaudited Condensed Interim Consolidated Financial Statements included in this report on Form 6-K are in compliance with IAS 34 as issued by the IASB, and adopted by the EU and required to be applied under the Bank of Spain’s Circular 4/2017.

For a description of our critical accounting policies, see Note 2 to our Unaudited Condensed Interim Consolidated Financial Statements, “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies”, “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies” in our 2019 Form 20-F and Note 2.2.1 to our Consolidated Financial Statements.

The financial information as of December 31, 2019 included herein and in the Unaudited Condensed Interim Consolidated Financial Statements may differ from previously reported financial information as of such date in our previously filed reports, including the 2019 Form 20-F, as a result of the modifications referred to below under “—Hyperinflationary economies”.

The financial information for the six months ended June 30, 2019 included herein and in the Unaudited Condensed Interim Consolidated Financial Statements may differ from previously reported financial information for such period in our previously filed reports, as a result of the modifications referred to below under “—IFRS 9 – Collection of interest on impaired financial assets”.  

Hyperinflationary economies

Considering the interpretation issued by the International Financial Reporting Interpretations Committee (IFRIC) in its “IFRIC Update” of March 2020 on IAS 29 “Financial information in hyperinflationary economies”, the Group made an accounting policy change which involves recording the differences generated when translating the restated financial statements of the subsidiaries in hyperinflationary economies into euros in the line item “Accumulated other comprehensive income – Items that may be reclassified to profit or loss – Foreign currency translation” of our consolidated balance sheet. In order to make the information as of December 31, 2019 comparable with information as of June 30, 2020, the former has been restated by reclassifying €2,985 million from “Shareholders’ funds – Retained earnings” and €6 million from “Shareholders’ funds – Other reserves” to “Accumulated other comprehensive income – Items that may be reclassified to profit or loss – Foreign currency translation”.

The reclassification has been recorded as “Effect of changes in accounting policies” under the balance as of January 1, 2019 in the consolidated statement of changes in equity for the six-month period ended June 30, 2019.

IFRS 9 – Collection of interest on impaired financial assets

As a consequence of the application of the interpretation issued by the IFRIC in its “IFRIC Update” of March 2019 regarding the collection of interest on impaired financial assets under IFRS 9, such collections are presented since 2020 as reductions in credit-related write-offs whereas previously they were included as interest income. In order to make the information for the six months ended June 30, 2019 comparable with the information for the six months ended June 30, 2020, the unaudited condensed interim consolidated income statement for the six months ended June 30, 2019 has been restated by recognizing a €45 million reduction in the heading “Interest and other income” and a €45 million increase in the heading “Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss or net gains by modification”. This reclassification has had no impact on the profit for the period for the six months ended June 30, 2019 or on the consolidated total equity as of June 30, 2019.

 

 

Intra-group reallocations

Following the publication of our unaudited condensed interim consolidated financial statements as of and for the six months ended June 30, 2019, certain balance sheet intra-group adjustments between the Corporate Center and the operating segments were reallocated to the corresponding operating segments. In addition, certain expenses related to global projects and activities were reallocated between the Corporate Center and the corresponding operating segments. In order to make the information as of and for the six months ended June 30, 2019 comparable with the information as of and for the six months ended June 30, 2020, figures as of and for the six months ended June 30, 2019 have been revised in conformity with these intra-group reallocations.

 

Statistical and Financial Information

The following principles should be noted in reviewing the statistical and financial information contained herein:

·          Average balances, when used, are based on the beginning and the month-end balances during each six-month period. We do not believe that such monthly averages present trends that are materially different from those that would be presented by daily averages.

·          Unless otherwise stated, any reference to loans refers to both loans and advances.

·          Financial information with respect to segments or subsidiaries may not reflect consolidation adjustments.

·          Certain numerical information in this interim report on Form 6-K may not compute due to rounding. In addition, information regarding period-to-period changes is based on numbers which have not been rounded.

·          Information has not been annualized except where explicitly stated.

 

3A. SELECTED INTERIM CONSOLIDATED FINANCIAL DATA

The historical financial information set forth below has been extracted from, and should be read together with, the Unaudited Condensed Interim Consolidated Financial Statements included herein.

For information concerning the preparation and presentation of the financial information contained herein, see “Presentation of Financial Information”.

(1)   Restated. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”.

(2)  Comprises the following income statement line items contained in the Unaudited Condensed Interim Consolidated Financial Statements: “Gains (losses) on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities held for trading, net”, “Gains (losses) on non-trading financial assets mandatorily at fair value through profit or loss, net”, “Gains (losses) on financial assets and liabilities designated at fair value through profit or loss, net” and “Gains (losses) from hedge accounting, net”.

(3)  Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.

(4)  Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period, including the average estimated number of shares to be issued upon conversion of other securities, excluding the weighted average number of treasury shares during the period (6,668 million shares for the six months ended June 30, 2020 and June 30, 2019).

(5)  Not meaningful.  

(1)  Represents net interest income as a percentage of average total assets. In order to calculate “Net interest margin” for the six months ended June 30, 2020 and June 30, 2019, respectively, net interest income is annualized by multiplying the net interest income for the period by two.

(2)  Restated. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”.

(3)  Represents average total equity over average total assets.

(4)  Represents loss allowance on loans and advances at amortized cost. 

(5)  Represents the sum of impaired loans and advances to customers and impaired loan commitments and guarantees to customers divided by the sum of loans and advances to customers and loan commitments and guarantees to customers.

(6)  We include loan commitments and guarantees to customers in the calculation of our non-performing asset ratio (NPA ratio). We believe that impaired loan commitments and guarantees to customers should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with loan commitments and guarantees to customers (consisting mainly of financial guarantees provided to third parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If impaired loan commitments and guarantees to customers were not included in the calculation of our NPA ratio, such ratio would generally be lower for the periods covered, amounting to 3.52% as of June 30, 2020, 3.62% as of December 31, 2019 and 3.68% as of June 30, 2019.

(7)  Includes impaired loans and advances.

4B. Business Overview

The BBVA Group is a customer-centric global financial services group founded in 1857. Internationally diversified and with strengths in the traditional banking businesses of retail banking, asset management and wholesale banking, the Group is committed to offering a compelling digital proposition focused on customer experience.

For this purpose, the Group is focused on increasingly offering products online and through mobile channels, improving the functionality of its digital offerings and refining the customer experience. During the six months ended June 30, 2020, the number of digital and mobile customers and the volume of digital sales continued to increase.

In 2019, the Group adopted a common global brand through the unification of the BBVA brand as part of its efforts to offer a unique value proposition and a homogeneous customer experience in the countries in which the Group operates.

Operating Segments

Set forth below are the Group’s current six operating segments:

•       Spain;

•       The United States;

•       Mexico;

•       Turkey;

•       South America; and

•       Rest of Eurasia.

In addition to the operating segments referred to above, the Group has a Corporate Center which includes those items that have not been allocated to an operating segment. It includes the Group’s general management functions, including costs from central units that have a strictly corporate function; management of structural exchange rate positions carried out by the Financial Planning unit; specific issues of capital instruments to ensure adequate management of the Group’s overall capital position; certain proprietary portfolios; certain tax assets and liabilities; certain provisions related to commitments with employees; and goodwill and other intangibles.

The breakdown of the Group’s total assets by each of BBVA’s operating segments and the Corporate Center as of June 30, 2020 and December 31, 2019 was as follows:

(1)  Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments.

The following table sets forth information relating to the profit (loss) attributable to parent company for each of BBVA’s operating segments and the Corporate Center for the six months ended June 30, 2020 and June 30, 2019: 

The following table sets forth certain summarized information relating to the income of each operating segment and the Corporate Center for the six months ended June 30, 2020 and June 30, 2019:

(1)   “Net margin before provisions” is calculated as “Gross income” less “Administration costs” and “Depreciation and amortization”.

(2)   Restated. See “Presentation of Financial Information —IFRS 9 – Collection of interest on impaired financial assets”.

The following tables set forth information relating to the balance sheet of the operating segments and the Corporate Center and adjustments as of June 30, 2020 and December 31, 2019:

(1)   Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments.

(2)   Financial assets designated at fair value includes: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”.

(1)   Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments.

(2)   Financial assets designated at fair value includes: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”.

Spain

This operating segment includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Center. The primary business units included in this operating segment are:

·          Spanish Retail Network: including individual customers, private banking, small companies and businesses in the domestic market;

·          Corporate and Business Banking: which manages small and medium sized enterprises (“SMEs”), companies and corporations, and public institutions;

·          Corporate and Investment Banking: responsible for business with large corporations and multinational groups and the trading floor and distribution business in Spain; and

·          Other units: which includes the insurance business unit in Spain (BBVA Seguros), the Asset Management unit (which manages Spanish mutual funds and pension funds), lending to real estate developers and foreclosed real estate assets in Spain (including assets from the previous Non-Core Real Estate operating segment), as well as certain proprietary portfolios and certain funding and structural interest-rate positions of the euro balance sheet which are not included in the Corporate Center. On April 27, 2020, BBVA reached an agreement with Allianz, Compañía de Seguros y Reaseguros, S.A. to create a bancassurance joint venture in Spain including a long-term exclusive distribution agreement for the sale of non-life insurance products, excluding the health insurance line, through BBVA’s banking network in Spain. BBVA will transfer its non-life insurance business in Spain, excluding the health insurance line, to the new joint venture. Excluding a variable part of the price to be paid by Allianz (which may amount to up to €100 million related to achieving specific business goals and certain milestones), it is expected that the transaction will generate a profit net of taxes amounting to approximately €300 million, and that the positive impact on the fully loaded CET1 capital ratio of the BBVA Group will be approximately 7 basis points. The closing of the transaction is subject to obtaining the relevant regulatory approvals from the competent authorities.

Cash, cash balances at central banks and other demand deposits amounted to €32,199 million as of June 30, 2020, a 102.5% increase compared with the €15,903 million recorded as of December 31, 2019, mainly due to an increase in cash held at the Bank of Spain, with a view to reinforcing the Group’s cash position in face of the COVID-19 pandemic. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic”. 

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) amounted to €147,143 million as of June 30, 2020, a 19.8% increase from the €122,844 million recorded as of December 31, 2019, mainly as a result of the increase in derivatives due to the positive impact of changes in exchange rates on foreign currency positions recorded under “Financial assets held for trading” and, to a lesser extent, the increase in the volume of reverse repurchase agreements with credit institutions recorded under “Financial assets held for trading”.

Financial assets at amortized cost of this operating segment as of June 30, 2020 amounted to 203,500 million, a 4.2% increase compared with the €195,260 million recorded as of December 31, 2019. Within this heading, loans and advances to customers amounted to €172,026 million as of June 30, 2020, an increase of 2.8% from the €167,332 million recorded as of December 31, 2019, mainly as a result of the increase in retail and corporate banking credit facilities on the back of the measures implemented by the Spanish government in light of the COVID-19 pandemic, and increased drawdowns under credit facilities especially in the first quarter. This increase was partially offset by the decrease in mortgage loans, which were greatly affected by the coronavirus outbreak. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic on the Group.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of June 30, 2020 amounted to €97,430 million, a 23.8% increase compared with the €78,684 million recorded as of December 31, 2019, mainly as a result of the increase in repurchase agreements with credit institutions.

Customer deposits at amortized cost of this operating segment as of June 30, 2020 amounted to €195,676 million, a 7.3% increase compared with the €182,370 million recorded as of December 31, 2019 mainly as a result of the increase in demand deposits, due mainly to the shift from consumption to savings due to the COVID-19 pandemic.

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Pension funds”) as of June 30, 2020 amounted to €60,974 million, a 7.7% decrease compared with the €66,068 million as of December 31, 2019, mainly due to the increased volatility and decline in market prices during the period and the resulting shift towards deposits.

This operating segment’s non-performing loan ratio decreased to 4.3% as of June 30, 2020 from 4.4% as of December 31, 2019, as a result mainly of the increase in wholesale customer credit facilities toward the end of the first quarter and the increase in retail and corporate banking credit facilities on the back of the measures implemented by the Spanish government in light of the COVID-19 pandemic in the second quarter. This operating segment’s non-performing loan coverage ratio increased to 66% as of June 30, 2020 from 60% as of December 31, 2019, as a result mainly of higher loss allowances made in response to the COVID-19 pandemic.

The United States

This operating segment includes the Group’s business in the United States. BBVA USA accounted for 88.8% of this operating segment’s balance sheet as of June 30, 2020. Given the importance of BBVA USA in this segment, most of the comments below refer to BBVA USA. This operating segment also includes the assets and liabilities of the BBVA branch in New York, which specializes in transactions with large corporations.

The U.S. dollar appreciated 0.3% against the euro as of June 30, 2020 compared with December 31, 2019, positively affecting the business activity of the United States operating segment as of June 30, 2020 expressed in euros. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”. 

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of June 30, 2020 amounted to €6,955 million, a 9.2% decrease from the €7,659 million recorded as of December 31, 2019, mainly due to a fall in the volume of U.S. Treasury and other U.S. government agencies securities and mortgage-backed securities.

Financial assets at amortized cost of this operating segment as of June 30, 2020 amounted to €76,800 million, a 10.5% increase compared with the €69,510 million recorded as of December 31, 2019. Within this heading, loans and advances to customers of this operating segment as of June 30, 2020 amounted to €68,668 million, a 8.7% increase compared with the €63,162 million recorded as of December 31, 2019, mainly due to the growth of the commercial portfolio and corporate banking on the back of measures implemented by the U.S. government in light of the COVID-19 pandemic, including the Paycheck Protection Program (“PPP”) and the business loan program established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (which provides economic assistance to American workers, families and businesses, and aims to preserve jobs), with increases in the drawing down of credit facilities, partially offset by the decrease in consumer loans. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results ―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic on the Group.

Customer deposits at amortized cost of this operating segment as of June 30, 2020 amounted to €75,649 million, a 12.0% increase compared with the €67,525 million recorded as of December 31, 2019, mainly due to an increase in deposits following the implementation of the PPP, as part of the funds that have been provided to customers under such program have been invested as deposits.

This operating segment’s non-performing loan ratio stood at 1.1% as of June 30, 2020 and as of December 31, 2019. The increased commercial and corporate banking activity toward the end of the first quarter (as a result of the increase in the availability of credit facilities) was followed by an increase in non-performing loans in the second quarter. This operating segment’s non-performing loan coverage ratio increased to 133% as of June 30, 2020, from 101% as of December 31, 2019, mainly due to higher loss allowances made in response to the COVID-19 pandemic and, to a lesser extent, certain specific clients.

Mexico

The Mexico operating segment includes the banking and insurance businesses conducted in Mexico by BBVA Mexico. Since 2018, it also includes BBVA Mexico’s branch in Houston (which was previously part of our United States segment).

The Mexican peso depreciated 18.2% against the euro as of June 30, 2020 compared with December 31, 2019, negatively affecting the business activity of the Mexico operating segment as of June 30, 2020 expressed in euros. See “I tem 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of June 30, 2020 amounted to €33,941 million, a 8.1% increase from the €31,402 million recorded as of December 31, 2019, mainly as a result of the increase in the volume of reverse repurchase agreements with financial institutions within the trading portfolio, partially offset by the depreciation of the Mexican peso against the euro.

Financial assets at amortized cost of this operating segment as of June 30, 2020 amounted to €58,418 million, an 11.7% decrease compared with the €66,180 million recorded as of December 31, 2019. Within this heading, loans and advances to customers of this operating segment as of June 30, 2020 amounted to €49,440 million, a 14.9% decrease compared with the €58,081 million recorded as of December 31, 2019, mainly as a result of the depreciation of the Mexican peso against the euro and the decrease in consumer loans, which were adversely affected by the coronavirus outbreak, partially offset by the positive performance of wholesale loans. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic on the Group.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of June 30, 2020 amounted to €24,494 million, a 12.4% increase compared with the €21,784 million recorded as of December 31, 2019, mainly as a result of the increase in the volume of repurchase agreements, partially offset by the depreciation of the Mexican peso against the euro.

Customer deposits at amortized cost of this operating segment as of June 30, 2020 amounted to €50,398 million, a 9.9% decrease compared with the €55,934 million recorded as of December 31, 2019, primarily due to the depreciation of the Mexican peso against the euro, partially offset by the increase in demand deposits.

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Other placements”) as of June 30, 2020 amounted to €21,271 million, a 13.0% decrease compared with the €24,464 million as of December 31, 2019, mainly as a result of the depreciation of the Mexican peso against the euro.

This operating segment’s non-performing loan ratio decreased to 2.2% as of June 30, 2020 from 2.4% as of December 31, 2019 due mainly to the moratoriums and deferrals plans adopted in connection with the COVID-19 pandemic, which limited the amount of new entries, and higher recoveries. This operating segment’s non-performing loan coverage ratio increased to 165% as of June 30, 2020 from 136% as of December 31, 2019, mainly due to higher loss allowances made in response to the COVID-19 pandemic.

Turkey

This operating segment comprises the activities carried out by Garanti BBVA as an integrated financial services group operating in every segment of the banking sector in Turkey, including corporate, commercial, SME, payment systems, retail, private and investment banking, together with its subsidiaries in pension and life insurance, leasing, factoring, brokerage and asset management, as well as its international subsidiaries in the Netherlands and Romania.

The Turkish lira depreciated 12.9% against the euro as of June 30, 2020 compared to December 31, 2019, negatively affecting the business activity of the Turkey operating segment as of June 30, 2020 expressed in euros. See “I tem 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

Financial assets designated at fair value of this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of June 30, 2020 amounted to €5,712 million, a 8.4% increase from the €5,268 million recorded as of December 31, 2019, mainly as a result of the increase in Turkish lira-denominated corporate banking loans as a result of the recently launched CGF-Credit Guarantee Fund, which is intended to support SMEs and entrepreneurs and pursuant to which loans are provided with Turkish Treasury-backed credit guarantees, partially offset by the depreciation of the Turkish lira. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic on the Group.

Financial assets at amortized cost of this operating segment as of June 30, 2020 amounted to €50,079 million a 2.4% decrease compared with the €51,285 million recorded as of December 31, 2019. Within this heading, loans and advances to customers of this operating segment as of June 30, 2020 amounted to €41,196 million, a 1.7% increase compared with the €40,500 million recorded as of December 31, 2019, mainly due to the increase in loans denominated in Turkish lira and in consumer loans (supported by the General Purpose Loans program adopted by the Turkish government, which intends to mitigate the effects of the COVID-19 pandemic), partially offset by the depreciation of the Turkish lira. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic on the Group.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of June 30, 2020 amounted to €2,249 million, a 3.0% increase compared with the €2,184 million recorded as of December 31, 2019, mainly as a result of the increase in derivatives within the trading portfolio, partially offset by the depreciation of the Turkish lira.

Customer deposits at amortized cost of this operating segment as of June 30, 2020 amounted to €40,132 million, a 2.9% decrease compared with the €41,335 million recorded as of December 31, 2019.

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Pension funds”) as of June 30, 2020 amounted to €4,212 million, a 7.8% increase compared with the €3,906 million as of December 31, 2019, mainly due to an increase in mutual funds, driven mainly by the decrease in interest rates, which led customers to seek higher returns through investments in market funds.

The non-performing loan ratio of this operating segment stood at 7.0% as of June 30, 2020 and as of December 31, 2019. This operating segment’s non-performing loan coverage ratio increased to 82% as of June 30, 2020 from 75% as of December 31, 2019, due mainly to higher loss allowances made in response to the COVID-19 pandemic and, to a lesser extent, certain specific clients in the commercial portfolio.

South America

The South America operating segment includes the Group’s banking and insurance businesses in the region.

The main business units included in the South America operating segment are:

·          Retail and Corporate Banking: includes banks in Argentina, Colombia, Peru, Uruguay and Venezuela.

·          Insurance: includes insurance businesses in Argentina, Colombia and Venezuela.

As of June 30, 2020, the Argentine peso, the Colombian peso and the Peruvian sol depreciated against the euro compared to December 31, 2019, by 14.6%, 12.5% and 5.7%, respectively. Overall, changes in exchanges rates have negatively affected the business activity of the South America operating segment as of June 30, 2020 expressed in euros. See “I tem 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition ―Trends in Exchange Rates”.

As of June 30, 2020 and December 31, 2019 the Argentine and Venezuelan economies were considered to be hyperinflationary as defined by IAS 29 (see “Presentation of Financial Information—Changes in Accounting Policies—Hyperinflationary economies” in our 2019 Form 20-F).

On August 7, 2019, BBVA reached an agreement with Banco GNB Paraguay, S.A., an affiliate of Grupo Financiero Gilinski, for the sale of our wholly-owned subsidiary Banco Bilbao Vizcaya Argentaria Paraguay, S.A. (“BBVA Paraguay”). The consideration for the acquisition of BBVA Paraguay’s shares amounts to approximately $270 million in the aggregate. The abovementioned consideration is subject to certain adjustments for matters between the signing and closing dates of the transaction.  It is expected that the transaction will result in a capital gain, net of taxes, of approximately €20 million and in a positive impact on the BBVA Group’s Common Equity Tier 1 (fully loaded) of approximately 6 basis points. The closing of the transaction is subject to obtaining the relevant regulatory authorizations from the competent authorities.

Financial assets designated at fair value for this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of June 30, 2020 amounted to €8,250 million, a 34.8% increase compared with the €6,120 million recorded as of December 31, 2019, attributable in part to the positive evolution of loans to enterprises. 

Financial assets at amortized cost of this operating segment as of June 30, 2020 amounted to €38,742 million, a 2.3% increase compared with the €37,869 million recorded as of December 31, 2019. Within this heading, loans and advances to customers of this operating segment as of June 30, 2020 amounted to €35,336 million, a 1.0% decrease compared with the €35,701 million recorded as of December 31, 2019, mainly as a result of the depreciation of the Argentine peso, the Colombian peso and the Peruvian sol, partially offset by the increase in wholesale loans, particularly in Peru and the increase in drawdowns in business credit lines in the first quarter. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic in these regions.

Customer deposits at amortized cost of this operating segment as of June 30, 2020 amounted to €39,357 million, a 9.0% increase compared with the €36,104 million recorded as of December 31, 2019, mainly as a result of increases in demand deposits due to the measures established by the respective central banks in the region in order to inject liquidity into the economies (as part of the funds provided thereunder have been invested as deposits), and the shift from consumption to savings due to the COVID-19 pandemic. 

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Pension funds”) as of June 30, 2020 amounted to €13,838 million, a 7.6% increase compared with the €12,864 million as of December 31, 2019, mainly due to the recovery in mutual funds by period end after the temporary outflow of resources due to market instability during the six months ended June 30, 2020.

The non-performing loan ratio of this operating segment as of June 30, 2020 increased to 4.5% compared with 4.4% as of December 31, 2019, as a result mainly of the increase in non-performing loans in Peru and Chile due mainly to the decreased recovery activity due to the COVID-19 pandemic, partially offset by limited entries as a result of the moratoriums and deferrals plans. This operating segment’s non-performing loan coverage ratio increased to 108% as of June 30, 2020, from 100% as of December 31, 2019, mainly due to an increase in the balance of provisions in Colombia and Peru in response to the COVID-19 pandemic.

Rest of Eurasia

This operating segment includes the retail and wholesale banking businesses carried out by the Group in Europe and Asia, except for those businesses comprised in our Spain and Turkey operating segments. In particular, the Group’s activity in Europe is carried out through banks and financial institutions in Switzerland, Italy, Germany and Finland and branches in Germany, Belgium, France, Italy, Portugal and the United Kingdom. The Group’s activity in Asia is carried out through branches (in Taipei, Tokyo, Hong Kong, Singapore and Shanghai) and representative offices (in Beijing, Seoul, Mumbai, Abu Dhabi and Jakarta).

Financial assets designated at fair value for this operating segment (which includes the following portfolios: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at fair value through other comprehensive income”) as of June 30, 2020 amounted to €500 million, a 4.6% increase compared with the €477 million recorded as of December 31, 2019.

Financial assets at amortized cost of this operating segment as of June 30, 2020 amounted to €25,688 million, a 15.5% increase compared with the €22,233 million recorded as of December 31, 2019. Within this heading, loans and advances to customers of this operating segment as of June 30, 2020 amounted to €22,524 million, a 14.5% increase compared with the €19,669 million recorded as of December 31, 2019, mainly as a result of increased corporate and investment banking business in the rest of Europe. See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” for certain information on the impact of the COVID-19 pandemic on the Group.

Customer deposits at amortized cost of this operating segment as of June 30, 2020 amounted to €4,567 million, a 3.0% decrease compared with the €4,708 million recorded as of December 31, 2019.

Pension funds in this operating segment as of June 30, 2020 amounted to €518 million, a 3.5% increase compared with the €500 million recorded as of December 31, 2019.

The non-performing loan ratio of this segment as of June 30, 2020 decreased to 0.8% from 1.2% as of December 31, 2019, mainly due to the increase in the availability of credit facilities toward the end of the first quarter and the decrease in corporate and investment banking non-performing loans. This operating segment’s non-performing loan coverage ratio increased to 126% as of June 30, 2020, from 98% as of December 31, 2019.

4E. Selected Statistical Information

The following is a presentation of selected statistical information for the periods indicated. Where required under Industry Guide 3, we have provided such selected statistical information separately for our domestic and foreign activities, pursuant to our determination, where applicable, that our foreign operations are significant according to Rule 9-05 of Regulation S-X. The allocation of assets and liabilities is based on the domicile of the Group entity at which the relevant asset or liability is accounted for. Domestic balances are those of Group entities domiciled in Spain, which reflect our domestic activities, and international balances are those of the Group entities domiciled outside of Spain, which reflect our foreign activities.

Certain financial information as of and for the six months ended June 30, 2019 has been restated for comparability purposes. See “Presentation of Financial Information”. 

Interest income figures, when used, do not include interest income on non-accruing loans to the extent that cash payments have been received, as a result of the IFRIC interpretation on IFRS 9 “Collection of interest on impaired financial assets”. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”. Loan fees are included in the computation of interest revenue. Interest income figures include “other income”, which amounted to €214 million and €143 million for the six months ended June 30, 2020 and 2019, respectively. For additional information on “interest and other income” see Note 32 to our Unaudited Condensed Interim Consolidated Financial Statements.

Average Balances and Rates

The tables below set forth selected statistical information on our average balance sheets, which are based on the beginning and month-end balances in each period. We do not believe that monthly averages present trends materially different from those that would be presented by daily averages.

(1)   Restated. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”. 

(2)   Rates have been presented on a non-taxable equivalent basis.

(3)  Includes “Derivatives - Hedge accounting”, “Fair value changes of the hedged items in portfolio hedges of interest rate risk”, “Joint ventures and associates”, “Insurance and reinsurance assets”, “Tangible assets”, “Intangible assets”, “Tax assets”, “Other assets” and “Non-current assets and disposal groups classified as held for sale”.

(4)   Foreign activity represented 39.81% of the total average assets for the six months ended June 30, 2020 and 46.09% for the six months ended June 30, 2019.

(1)   Rates have been presented on a non-taxable equivalent basis.

(2)   Includes “Financial liabilities held for trading”, “Derivatives - Hedge accounting”, “Fair value changes of the hedged items in portfolio hedges of interest rate risk”, “Liabilities under insurance and reinsurance contracts”, “Provisions”, “Tax liabilities”, “Other liabilities”, “Liabilities included in disposal groups classified as held for sale”.

(3)  Foreign activity represented 37.63% of the total average liabilities for the six months ended June 30, 2020 and 47.94% for the six months ended June 30, 2019.

 

 

Changes in Net Interest Income-Volume and Rate Analysis

The following tables allocate changes in our net interest income between changes in volume and changes in rate for the six months ended June 30, 2020 compared with the six months ended June 30, 2019 and the six months ended June 30, 2019 compared with the six months ended June 30, 2018. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following tables are interest payments on loans which are made in a period other than the period in which they are due.

(1)  2019 information has been restated. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”.

(2)  The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.

(3)  The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

 

 

(1)   Restated. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”. 

(2)  The volume effect is calculated as the result of the average interest rate of the earlier period multiplied by the difference between the average balances of both periods.

(3)  The rate effect is calculated as the result of the average balance of the earlier period multiplied by the difference between the average interest rates of both periods.

 

 

Interest Earning Assets—Margin and Spread

The following table analyzes the levels of our average earning assets and illustrates the comparative gross and net yields and spread obtained for each of the periods indicated.

(1)    Restated. See “Presentation of Financial Information—IFRS 9 – Collection of interest on impaired financial assets”. 

(2)   “Gross yield” represents total interest income divided by average interest earning assets.

(3)   “Net yield” represents total interest income divided by total average assets.

(4)   “Net interest margin” represents net interest income as percentage of average interest earning assets.

(5)   Spread is the difference between “Gross yield” and the “Average effective rate paid on interest-bearing liabilities”.

ASSETS

Interest-Bearing Deposits in Other Banks

As of June 30, 2020, interbank deposits (excluding deposits with central banks) represented 5.3% of our total assets. Of such interbank deposits, 15.2% were held outside of Spain and 84.8% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. However, such deposits are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.

Securities Portfolio

As of June 30, 2020, our total securities portfolio (consisting of investment securities and loans and advances) was carried on our consolidated balance sheet at a carrying amount (equivalent to its market or appraised value as of such date) of €140,138 million, representing 18.6% of our total assets. €36,397 million, or 26.0%, of our securities portfolio consisted of Spanish Treasury bonds and Treasury bills. The average yield during the six months ended June 30, 2020 on the investment securities that BBVA held was 2.2%, compared with an average yield of approximately 3.5% earned on loans and advances during the six months ended June 30, 2020. See Notes 9 and 12 to our Unaudited Condensed Interim Consolidated Financial Statements for additional information.

The first table in Note 12.3 to our Unaudited Condensed Interim Consolidated Financial Statements sets forth the fair value and the amortized cost of our debt securities recorded under “Financial assets at fair value through other comprehensive income” as of June 30, 2020 and December 31, 2019.

This information is not provided for debt securities recorded under “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss” and “Financial assets designated at fair value through profit or loss” since the amortized costs and fair values of these items are the same. See Note 7 to our Unaudited Condensed Interim Consolidated Financial Statements.

The second table in Note 12.3 to our Unaudited Condensed Interim Consolidated Financial Statements shows the fair value of debt securities recorded, as of June 30, 2020 and December 31, 2019, under “Financial assets at fair value through other comprehensive income” by rating categories defined by external rating agencies.

The table in Note 12.2 to our Unaudited Condensed Interim Consolidated Financial Statements sets forth the fair value and the amortized cost of our equity instruments recorded under “Financial assets at fair value through other comprehensive income” as of June 30, 2020 and December 31, 2019.

Readers are directed to the tables and Notes referred to above for information regarding our securities portfolio.

For a discussion of our investments in joint ventures and associates, see Note 15 to our Unaudited Condensed Interim Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to our Consolidated Financial Statements.

Loans and Advances

See “Item 5. Operating and Financial Review and Prospects―5A. Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” and Note 6.2 to our Unaudited Condensed Interim Consolidated Financial Statements for information on how the Group’s loan activity has been affected by the COVID-19 pandemic.

Loans and Advances to Credit Institutions and Central Banks

As of June 30, 2020, our total loans and advances to credit institutions and central banks amounted to €45,194 million, or 6.0% of total assets, of which total loans and advances to credit institutions and central banks at amortized cost amounted to €19,651 million, or 2.6% of total assets. Net of our loss allowance, total loans and advances to credit institutions and central banks at amortized cost amounted to €19,615 million as of June 30, 2020, or 2.6% of total assets.

Loans and Advances to Customers

As of June 30, 2020, our total loans and advances to customers amounted to €413,498 million, or 54.9% of total assets. Net of our loss allowance, total loans and advances to customers amounted to €399,946 million as of June 30, 2020, or 53.1% of our total assets. As of June 30, 2020 our total loans and advances to customers in Spain amounted to €170,585 million. Our total loans and advances to customers outside Spain amounted to €242,913 million as of June 30, 2020.

Loans by Geographic Area

The following table shows our net loans and advances to customers as of the dates indicated:

(1)  Includes loans and advances to customers included in the following headings: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at amortized cost”, net of loss allowances.

Loans by Type of Customer

The following table shows our net loans and advances to customers at each of the dates indicated. The classification by type of customer is based principally on regulatory authority requirements in the country where the branch office that issued the loan is located:

(1)  Includes mortgage loans to households for the acquisition of housing.

(2)  Includes loans and advances to customers included in the following headings: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at amortized cost”, net of loss allowances.

The following table sets forth a breakdown, by currency, of our net loans and advances to customers as of June 30, 2020, December 31, 2019 and June 30, 2019:

(1)  Includes loans and advances to customers included in the following headings: “Financial assets held for trading”, “Non-trading financial assets mandatorily at fair value through profit or loss”, “Financial assets designated at fair value through profit or loss” and “Financial assets at amortized cost”, net of loss allowances.