20-F 1 d20f2020.htm DOCUMENT 20-F  

 

  

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

[  ]        REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

[  ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

OR

[  ]        SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

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)

 

Kingdom of Spain

(Jurisdiction of incorporation or organization)

 

Calle Azul, 4

28050 Madrid

Spain

(Address of principal executive offices)

Jaime Sáenz de Tejada Pulido

Calle Azul, 4

28050 Madrid

Spain

Telephone number +34 91 537 7000

 

(Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)

 

 

 

 

 

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.  

 

 

 

 

Title of Each Class

Trading Symbol

Name of Each Exchange on which Registered

American Depositary Shares, each representing

the right to receive one ordinary share,

par value €0.49 per share

BBVA

New York Stock Exchange

Ordinary shares, par value €0.49 per share

BBVA*

 New York Stock Exchange*

 

 

 

0.875% Fixed Rate Senior Notes due 2023

BBVA 23

New York Stock Exchange

1.125% Fixed Rate Senior Notes due 2025

BBVA 25

New York Stock Exchange

 

 

 

 

*         The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

Title of Each Class

 

 

Name of Each Exchange on which Registered

Non-Step-Up Non-Cumulative Contingent Convertible Perpetual Preferred Tier 1 Securities

 

 

Irish Stock Exchange

Series 9 Non-Step-Up Non-Cumulative Contingent Convertible Perpetual Preferred Tier 1 Securities

 

 

Irish Stock Exchange

 

The number of outstanding shares of each class of stock of the Registrant as of December 31, 2020, was:

Ordinary shares, par value €0.49 per share—6,667,886,580

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [X]

No [  ]

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes [  ]

No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]

No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X]

No [  ]

 

 


 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer [X]

Accelerated filer [  ]

Non-accelerated filer [  ]

Emerging growth company [  ]

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    [  ]

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.     [X]

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP [  ]

International Financial Reporting Standards as Issued by the International Accounting Standards Board [X]

Other [  ]

 

  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 [  ]

Item 18 [  ]   

 

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]

No [X]  

 

 

 

 


 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

TABLE OF CONTENTS

 

 

 

 

 

PAGE

 

PART I

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

7

A.

Director and Senior Management

7

B.

Advisers

7

C.

Auditors

7

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

7

ITEM 3.

KEY INFORMATION

7

A.

Selected Consolidated Financial Data

7

B.

Capitalization and Indebtedness

9

C.

Reasons for the Offer and Use of Proceeds

10

D.

Risk Factors

10

ITEM 4.

INFORMATION ON THE COMPANY

26

A.

History and Development of the Company

26

B.

Business Overview

29

C.

Organizational Structure

63

D.

Property, Plants and Equipment

64

E.

Selected Statistical Information

64

F.

Competition

87

G.

Cybersecurity and Fraud Management

91

ITEM 4A.

UNRESOLVED STAFF COMMENTS

93

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

93

A.

Operating Results

97

B.

Liquidity and Capital Resources

162

C.

Research and Development, Patents and Licenses, etc.

164

D.

Trend Information

164

E.

Off-Balance Sheet Arrangements

165

F.

Tabular Disclosure of Contractual Obligations

165

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

166

A.

Directors and Senior Management

166

B.

Compensation

175

C.

Board Practices

185

D.

Employees

197

E.

Share Ownership

200

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

201

A.

Major Shareholders

201

B.

Related Party Transactions

201

C.

Interests of Experts and Counsel

202

ITEM 8.

FINANCIAL INFORMATION

202

A.

Consolidated Statements and Other Financial Information

202

B.

Significant Changes

203

ITEM 9.

THE OFFER AND LISTING

204

A.

Offer and Listing Details

204

B.

Plan of Distribution

210

C.

Markets

210

D.

Selling Shareholders

210

E.

Dilution

210

F.

Expenses of the Issue

210

 

 

 


 

 

 

 

 

 

PAGE

 

ITEM 10.

ADDITIONAL INFORMATION

210

A.

Share Capital

210

B.

Memorandum and Articles of Association

210

C.

Material Contracts

214

D.

Exchange Controls  

215

E.

Taxation

216

F.

Dividends and Paying Agents

221

G.

Statement by Experts

221

H.

Documents on Display

221

I.

Subsidiary Information

221

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

221

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

221

A.

Debt Securities

221

B.

Warrants and Rights

221

C.

Other Securities

221

D.

American Depositary Shares

222

PART II

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

223

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

223

ITEM 15.

CONTROLS AND PROCEDURES

223

ITEM 16.

[RESERVED]

226

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

226

ITEM 16B.

CODE OF ETHICS

226

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

226

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

227

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

228

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

228

ITEM 16G.

CORPORATE GOVERNANCE

228

ITEM 16H.

MINE SAFETY DISCLOSURE

230

PART III

 

 

ITEM 17.

FINANCIAL STATEMENTS

230

ITEM 18.

FINANCIAL STATEMENTS

230

ITEM 19.

EXHIBITS

231

 

  

 

 


 

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, 2020, 2019 and 2018, 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 4/2017 (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.

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

1 


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual 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 Annual Report, including, without limitation, the information under the items listed below, identifies important factors that could cause such differences:

·          “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”.

Other important factors that could cause actual results to differ materially from those in forward-looking statements include, 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, including any adverse developments, or the perception that such developments may occur, regarding credit quality, public debt sustainability and sovereign ratings, particularly Spain’s, among other factors;

·          political, economic and business conditions in Spain, the European Union (“EU”), Latin America, Turkey, the United States and the other geographies in which we operate;

·          our ability to complete the sale of BBVA USA as planned (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”). Completion of the transaction is dependent on the satisfaction of certain closing conditions, which cannot be assured;

·          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;

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

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

·          the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation affecting 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 distribution or repatriation of dividends, international ownership legislation, interest rate caps and tax policies;

2 


 

·          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 sovereign credit ratings, particularly 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.

3 


 

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 for the years ended December 31, 2020, 2019 and 2018. The Consolidated Financial Statements included in this Annual Report have been prepared in compliance with IFRS-IASB and in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2017.

For a description of our critical accounting policies, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies” and Note 2.2 to our Consolidated Financial Statements

The financial information as of and for the years ended December 31, 2019 and 2018 may differ from previously reported financial information as of such dates and for such periods in our respective annual reports on Form 20-F for certain prior years, as a result of the changes and adjustments referred to below.

Changes in Accounting Policies

IFRS 16 –Leases – COVID-19 modifications

On May 28, 2020, the IASB approved an amendment to IFRS 16 which provides an optional exemption for lessees from assessing whether rent concessions that occur due to COVID-19 (including payment holidays and deferrals of lease payments for a period of time, in each case in connection with payments due on or before June 30, 2020) are lease modifications. For additional information, see Note 2.3 to the Consolidated Financial Statements.

This amendment is effective from June 1, 2020 and has been endorsed by the European Union. The amendment, which has been applied by the Group, has had no significant impact on the Consolidated Financial Statements of the Group.

IAS 12 – “Income Taxes” Amendment

As part of the annual improvements to IFRS standards (2015-2017 cycle), IAS 12 “Income Taxes” was amended for annual reporting periods beginning on or after January 1, 2019. According to the amended standard, an entity shall recognize the income tax consequences of payments of dividends in profit or loss, other comprehensive income or equity, depending on where the entity recognized the originating transaction or event that generated the distributable profits giving rise to the dividend. In accordance with the amended standard, we recorded the income tax consequences of dividends paid for the year ended December 31, 2019 (amounting to €91 million of income) under “Tax expense or income related to profit or loss from continuing operations” in our consolidated income statement within our Consolidated Financial Statements (see Note 19). Such income tax consequences were recorded under “Total equity” in our consolidated balance sheet in previous periods. In order to make the financial information for prior years comparable with the financial information for 2019, the financial information for 2018 was restated retrospectively in this regard. The application of the amended standard resulted in an increase by €76 million in our “Profit attributable to parent company” for 2018 (an increase of 1.4% in the “Profit attributable to parent company” for 2018). The new standard had no significant impact on our consolidated total equity.

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 and 2018 comparable with information as of December 31, 2020, the information as of

4 


 

December 31, 2019 and 2018 has been restated by reclassifying €2,985 million and €2,987 million, respectively,  from “Shareholders’ funds – Retained earnings” and €6 million and €20 million, respectively, from “Shareholders’ funds – Other reserves” to “Accumulated other comprehensive income – Items that may be reclassified to profit or loss – Foreign currency translation” and “Accumulated other comprehensive income (loss) – Items that may be reclassified to profit or loss – Share of other recognized income and expense of investments in joint ventures and associates” as of December 31, 2019 and 2018, respectively.

 

The reclassification has been recorded as “Effect of changes in accounting policies” under the balance as of January 1, 2020 and 2019 in the consolidated statement of changes in equity for the years ended December 31, 2019 and 2018.

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 years ended December 31, 2019 and 2018 comparable with the information for the year ended December 31, 2020, the consolidated income statement for the year ended December 31, 2019 has been restated by recognizing a €78 million reduction in the heading “Interest and other income” and a €78 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” (€80 million reduction in the heading “Interest and other income” and a €80 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” for the year ended December 31, 2018). This reclassification has had no impact on the profit for the years ended December 31, 2019 and 2018 or on the consolidated total equity as of December 31, 2019 and 2018.

Trading derivatives recognition

Information as of December 31, 2020 has been subject to certain balance sheet presentation modifications related to non-significant cross currency swap transactions. In order to make the information as of December 31, 2019 and 2018 comparable with the information as of December 31, 2020, figures as of December 31, 2019 and 2018 have been restated by recognizing a €953 million and a €1,013 million reduction in “Total assets” and “Total liabilities”, respectively.

  

Intra-group reallocations

Following the publication of our consolidated financial statements as of and for the year ended December 31, 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 years ended December 31, 2019 and 2018 comparable with the information as of and for the year ended December 31, 2020, segmental balances as of and for the years ended December 31, 2019 and 2018 have been revised in conformity with these intra-group reallocations.

Agreement for the sale of BBVA USA Bancshares, Inc.

On November 15, 2020, BBVA reached an agreement with The PNC Financial Services Group, Inc. for the sale of 100% of the share capital in its subsidiary BBVA USA Bancshares, Inc., which in turn owns 100% of the share capital in BBVA USA, as well as other companies of the BBVA Group in the United States with activities related to this banking business, for approximately $11.6 billion (€9.7 billion), to be paid in cash. As a result, the assets and liabilities of these companies were reclassified to “Non-current assets and disposal groups classified as held for sale” and “Liabilities included in disposal groups classified as held for sale” in the consolidated balance sheet as of December 31, 2020, respectively. In addition, the profit (loss) of these companies was recognized under “Profit / (loss) from discontinued operations, net” in the consolidated income statement for the year ended December 31, 2020. In accordance with IFRS 5, for comparative purposes the profit (loss) of these companies for the years ended December 31, 2019 and 2018 was also reclassified under the heading “Profit / (loss) from discontinued operations, net”. In addition, in accordance with IFRS 5, and following IFRS 8 “Information by business segments”, information on the United States reportable segment in which the non-current asset (disposal group) is recognized, is provided for the years ended December 31, 2020, 2019 and 2018. For additional information, see Note 21 to our Consolidated Financial Statements.

5 


 

 

Segment information included in Item 4. Information on the Company—Business Overview” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations by Operating Segment”  is being presented under management criteria, pursuant to which the assets, liabilities and profit (loss) of the aforementioned companies held for sale are included in every line item of the balance sheet and income statement of the United States segment (rather than in a single item).

 

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 year. 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 annual report may not compute due to rounding. In addition, information regarding period-to-period changes is based on numbers which have not been rounded.

See “Item 4. Information on the CompanySelected Statistical Information” for information on how the information for BBVA USA has been treated for purposes of calculating the selected financial information contained herein.

 

6 


 

PART I

ITEM 1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A.   Director and Senior Management

Not Applicable.

B.   Advisers

Not Applicable.

C.   Auditors

Not Applicable.

ITEM 2.      OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3. KEY INFORMATION

A. Selected Consolidated Financial Data

The historical financial information set forth below for the years ended December 31, 2020, 2019 and 2018 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. For information concerning the preparation and presentation of such financial information, see “Presentation of Financial Information”.  

7 


 

 

Year Ended December 31,

 

2020

2019

2018

 

(In Millions of Euros, Except Per Share/ADS Data (in Euros))

Consolidated Statement of Income Data

 

 

 

Interest and other income

22,389

27,762

26,954

Interest expense

(7,797)

(11,972)

(11,669)

Net interest income

14,592

15,789

15,285

Fee and commission income

5,980

6,786

6,462

Fee and commission expense

(1,857)

(2,284)

(2,059)

Net gains (losses) on financial assets and liabilities (1)

1,187

705

1,136

Other operating income

492

639

929

Other operating expense

(1,662)

(1,943)

(2,021)

Income on insurance and reinsurance contracts

2,497

2,890

2,949

Expense on insurance and reinsurance contracts

(1,520)

(1,751)

(1,894)

Gross income

20,166

21,522

20,936

Administration costs

(7,799)

(8,769)

(9,020)

Depreciation and amortization

(1,288)

(1,386)

(1,034)

Provisions or reversal of provisions

(746)

(614)

(395)

Impairment or reversal of impairment on financial assets not measured at fair value through profit or loss or net gains by modification

(5,179)

(3,552)

(3,681)

Net operating income

5,153

7,202

6,807

Impairment or reversal of impairment of investments in joint ventures and associates

(190)

(46)

-

Impairment or reversal of impairment on non-financial assets

(153)

(128)

(137)

Gains (losses) on derecognition of non-financial assets and subsidiaries, net

(7)

(5)

80

Negative goodwill recognized in profit or loss

-

-

-

Gains (losses) from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations

444

23

815

Operating profit / (loss) before tax

5,248

7,046

7,565

Tax (expense) or income related to profit or loss from continuing operations

(1,459)

(1,943)

(2,042)

Profit / (loss) from continuing operations

3,789

5,103

5,523

Profit / (loss) from discontinued operations, net

(1,729)

(758)

704

Profit

2,060

4,345

6,227

Profit / (loss) attributable to parent company

1,305

3,512

5,400

Profit attributable to non-controlling interests

756

833

827

Per share/ADS (2) Data

 

 

 

Earnings per share (In Euros)

0.14

0.47

0.75

Diluted earnings (losses) per share from continuing operations (3)

0.40

0.58

0.64

Basic earnings (losses) per share from continuing operations

0.40

0.58

0.64

Dividends declared (In Euros)

0.160

0.260

0.250

Dividends declared (In U.S. dollars)

0.196

0.292

0.286

Number of shares outstanding (at period end)

6,667,886,580

6,667,886,580

6,667,886,580

 

(1)    Comprises the following income statement line items contained in the 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”.

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

(3)  Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period, including the average number of estimated shares to be issued upon the conversion of convertible instruments, excluding the weighted average number of treasury shares during the year (6,655 million, 6,648 million and 6,636 million shares for the years ended December 31, 2020, 2019 and 2018, respectively).

 

 

8 


 

 

As of and for the Year Ended December 31,

 

2020

2019

2018

 

(In Millions of Euros, Except  Percentages)

Consolidated Balance Sheet Data

 

 

 

Total assets

736,176

697,737

675,675

Common stock

3,267

3,267

3,267

Financial assets at amortized cost

367,668

439,162

419,660

Financial liabilities at amortized cost - Customer deposits

342,661

384,219

375,970

Debt certificates

66,311

68,619

63,970

Non-controlling interest

5,471

6,201

5,764

Total equity (net assets)

50,020

54,925

52,874

Consolidated ratios

 

 

 

Net interest margin (1)

2.30%

2.62%

2.58%

Return on average total assets (2)

0.5%

0.8%

0.9%

Return on average shareholders’ funds (3)

6.9%

9.9%

11.7%

Equity to assets ratio (4)

6.8%

7.9%

7.8%

Credit quality data

 

 

 

Loan loss reserve  (5)

12,141

12,427

12,217

Loan loss reserve as a percentage of financial assets at amortized cost

3.30%

2.83%

2.91%

Non-performing asset ratio (NPA ratio) (6) (7)

4.11%

3.79%

3.94%

Impaired loans and advances to customers

14,672

15,954

16,349

Impaired loan commitments and guarantees to customers (7)

767

731

740

 

15,439

16,685

17,089

Loans and advances to customers at amortized cost (8)

323,252

394,763

386,225

Loan commitments and guarantees to customers

52,204

45,952

47,575

 

375,456

440,715

433,800

 

 

(1)  Represents net interest income as a percentage of average total assets.

(2)  Represents profit as a percentage of average total assets. In order to calculate “Return on average total assets” for the year ended December 31, 2020, the net capital gain from the bancassurance transaction with Allianz (€304 million) and the goodwill impairment in the United States cash-generating unit (CGU) (€2,084 million) have been excluded from profit. In order to calculate “Return on average total assets” for the year ended December 31, 2019, the goodwill impairment in the United States CGU (€1,318 million) has been excluded from profit. If such exclusions had not been made, “Return on average total assets” for the years ended December 31, 2020 and 2019 amounted to 0.3% and 0.6%, respectively. For additional information on the bancassurance transaction with Allianz, see “Item 4. Information on the Company—History and Development of the Company—Capital Divestitures—2020—Agreement for the alliance with Allianz, Compañía de Seguros y Reaseguros, S.A.”. For additional information on the goodwill impairment in the United States CGU, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Goodwill in consolidation”. 

(3)  Represents profit for the year as a percentage of average shareholders’ funds for the year. In order to calculate “Return on average shareholders’ funds” for the year ended December 31, 2020, the net capital gain from the bancassurance transaction with Allianz (€304 million) and the goodwill impairment in the United States CGU (€2,084 million) have been excluded from profit. In order to calculate “Return on average shareholders’ funds” for the year ended December 31, 2019, the goodwill impairment in the United States CGU (€1,318 million) has been excluded from profit. If such exclusions had not been made, “Return on average shareholders’ funds” for the years ended December 31, 2020 and 2019 amounted to 2.9% and 7.2%, respectively.

(4)  Represents average total equity (net assets) over average total assets.

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

(6)  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.

(7)  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 be higher for the periods covered, amounting to 3.91%, 3.62% and 3.77% as of December 31, 2020, 2019 and 2018, respectively.

(8)  Includes impaired loans and advances.

 

B.   Capitalization and Indebtedness

Not Applicable.

 

9 


 

C.   Reasons for the Offer and Use of Proceeds

Not Applicable.

D.   Risk Factors

MACROECONOMIC RISKS AND COVID-19 CONSEQUENCES

The COVID-19 pandemic is adversely affecting the Group

The COVID-19 (coronavirus) pandemic has affected, and is expected to continue to adversely affect, the world economy and economic activity and conditions in the countries in which the Group operates, leading many of them to economic recession. Among other challenges, these countries are experiencing widespread increases in unemployment levels and falls in production, while public debt has increased significantly due to support and spending measures implemented by government authorities. In addition, there has been an increase in debt defaults by both companies and individuals, volatility in the financial markets, volatility in exchange rates and falls in the value of assets and investments, all of which have adversely affected the Group’s results in 2020 and are expected to continue affecting the Group’s results in the future.

Furthermore, the Group has been and may be affected by the measures or recommendations adopted by regulatory authorities in the banking sector, including but not limited to, the recent reductions in reference interest rates, the relaxation of prudential requirements, the suspension of dividend payments, the adoption of moratorium measures for bank customers (such as those included in Royal Decree Law 11/2020 in Spain, as well as in the CECA-AEB agreement to which BBVA has adhered and which, among other things, allows loan debtors to extend maturities and defer interest payments) and guarantee by public entities of certain provisions of credit, especially to companies and self-employed individuals, as well as changes in the financial asset purchase programs. As of December 31, 2020, the majority of the amounts that had been deferred pursuant to the mandatory COVID-19 moratoria will be due by the end of the first half of 2021, a period during which economic conditions will likely continue to be challenging.

Since the outbreak of COVID-19, the Group has experienced a decline in its activity. For example, the granting of new loans to individuals has significantly decreased since the beginning of the state of emergency or periods of confinement decreed in certain countries in which the Group operates. In addition, the Group faces various risks, such as an increased risk of deterioration in the value of its assets (including financial instruments valued at fair value, which may suffer significant fluctuations) and of the securities held for liquidity reasons, a possible significant increase in non-performing loans and risk-weighted assets and a negative impact on the Group’s cost of financing and on its access to financing (especially in an environment where credit ratings are affected). As of December 31, 2020, an estimated approximately 9% of the Group’s exposure at default (defined as the amount of risk exposure upon default by counterparties, considering the Group’s loans and advances at amortized cost) related to borrowers in certain industries facing particularly challenging conditions as a result of the COVID 19 pandemic, specifically leisure, real estate developers, non-food retailers, upstream and oilfield services and air and marine transportation.

In addition, in several of the countries in which the Group operates, including Spain, the Group temporarily closed a significant number of its offices and reduced the hours of working with the public, and the teams that provide central services have had to work remotely. While these measures were progressively reversed in most regions, additional restrictions on mobility could be adopted that affect the Group’s operations. The COVID-19 pandemic could also adversely affect the business and operations of third parties that provide critical services to the Group and, in particular, the greater demand and/or reduced availability of certain resources could in some cases make it more difficult for the Group to maintain the required service levels. Furthermore, the increase in remote working has increased the risks related to cybersecurity, as the use of non-corporate networks has increased.

The COVID-19 pandemic has had an adverse effect on the Group’s results for the year ended December 31, 2020 as well as on the Group’s capital base as of December 31, 2020. For information on the impact of the COVID-19 pandemic on the Group, see “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” and Notes 1.5 and 7.2 to our Consolidated Financial Statements.

10 


 

The COVID-19 pandemic has also exacerbated, and is likely to continue to exacerbate, other risks disclosed in this section, including but not limited to risks associated with the credit quality of the Group’s borrowers and counterparties or collateral, any withdrawal of ECB funding (of which the Group has made and continues to make significant use), the Group’s exposure to sovereign debt and rating downgrades, the Group’s ability to comply with its regulatory requirements, including MREL (as defined herein) and other capital requirements, and the deterioration of economic conditions or changes in the institutional environment.

The final magnitude of the impact of the COVID-19 pandemic on the Group’s business, financial condition and results of operations, which is expected to be significant, will depend on future and uncertain events, including the intensity and persistence over time of the consequences arising from the COVID-19 pandemic in the different geographies in which the Group operates.

A deterioration in economic conditions or the institutional environment in the countries where the Group operates could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Group is sensitive to the deterioration of economic conditions or the alteration of the institutional environment of the countries in which it operates, and especially Spain, Mexico, the United States and Turkey, which respectively represented 55.1%, 15.0%, 12.8% and 8.1% of the Group's assets as of December 31, 2020 (52.3%, 15.6%, 12.7% and 9.2% as of December 31, 2019, respectively). Additionally, the Group is exposed to sovereign debt, particularly sovereign debt related to these geographies. Please see “Item 5. Operating and Financial Review and Prospects—Operating Results—Operating Environment” for summarized information on some of the challenges that these countries are currently facing and that, therefore, could significantly affect the Group.

Currently, the world economy is facing several exceptional challenges. In particular, the crisis derived from the COVID-19 pandemic has abruptly and significantly deteriorated the economic conditions of the countries in which the Group operates, leading many of them to an economic recession in 2020. Furthermore, this crisis could lead to a deglobalization of the world economy, produce an increase in protectionism or barriers to immigration, fuel the trade war between the United States and China and result in a general withdrawal of international trade in goods and services, as well as having other effects of long duration that transcend the pandemic itself. Added to this is the uncertainty regarding the United Kingdom’s (the “UK”) exit from the EU (“Brexit”). The long-term effects of Brexit will depend on the relationship between the UK and the EU after its complete exit from the European Single Market, which took place last December 31, 2020. Furthermore, in a scenario as uncertain as the current one, emerging economies (to which the Group is significantly exposed, particularly in the case of Mexico and Turkey) could be particularly vulnerable to a trade war or if there were changes in the financial risk appetite. Likewise, the possible triggering of a disorderly deleveraging process in China would pose a significant risk to these economies.

Thus, the Group faces, among others, the following general risks to the economic and institutional environment in which it operates: a deterioration in economic activity in the countries in which it operates, which could lead to further economic recession in some or all of those countries; more intense deflationary pressures or even deflation; variations in exchange rates; a very low interest rate environment, or even a long period of negative interest rates in some regions where the Group operates; an unfavorable evolution of the real estate market, to which the Group remains significantly exposed; very low oil prices; changes in the institutional environment in the countries in which the Group operates that could lead to sudden and sharp falls in GDP and/or regulatory changes; a growing public deficit that could lead to downgrades in sovereign debt credit ratings and even a possible default or restructuring of such debt; and episodes of volatility in markets, such as those currently being experienced, which could lead the Group to register significant losses.

BUSINESS RISKS

The Group’s businesses are subject to inherent risks concerning borrower and counterparty credit quality, which have affected and are expected to continue to affect the recoverability and value of assets on the Group’s balance sheet

The total maximum credit risk exposure of the Group as of December 31, 2020 was €749,524 million (€809,786 million and €763,082 million as of December 31, 2019 and 2018, respectively). The Group has exposures to many different products, counterparties and obligors and the credit quality of its exposures can have a significant effect on the Group’s earnings. Adverse changes in the credit quality of the Group’s borrowers and counterparties or collateral, or in their behavior or businesses, may reduce the value of the Group’s assets, and materially increase the Group’s write-downs and loss allowances. Credit risk can be affected

11 


 

by a range of factors, including an adverse economic environment, reduced consumer, corporate or government spending, changes in the rating of individual contractual counterparties, their debt levels and the environment in which they operate, increased unemployment, reduced asset values, increased retail or corporate insolvency levels, reduced corporate profits, changes (and the timing, quantum and pace of these changes) in interest rates, counterparty challenges to the interpretation or validity of contractual arrangements or provisions and legal and regulatory developments.

Non-performing or impaired customer loans have been adversely affecting, and are expected to continue to adversely affect, the Group's results given the increasing economic uncertainty. As of December 31, 2020, the Group had a 4.0% NPL ratio (as defined in the Glossary to our Consolidated Financial Statements) compared to 3.8% and 3.9% as of December 31, 2019 and 2018, respectively. Prior to the COVID-19 pandemic, NPL ratios progressively improved due in part to the low interest rates, which improved clients' ability to pay. However, NPLs are expected to significantly increase once payment moratoria schemes adopted by governments are lifted due to the effects of the COVID-19 pandemic.

In addition, it is possible that the current scenario of economic deterioration results in a decrease in the prices of real estate assets in Spain and other countries (in particular, Mexico, Turkey and the United States, given the Group’s exposure to these markets).

As of December 31, 2020, the Group's exposure to the construction and real estate sectors (excluding the mortgage portfolio) in Spain was equivalent to €10,024 million, of which €2,565 million corresponded to loans for construction and development activities in Spain (representing 1.6% of the Group's loans and advances to customers in Spain (excluding the public sector) and 0.3% of the Group's consolidated assets). The Group continues to be exposed to the real estate market, mainly in Spain, due to the fact that many of its loans are secured by real estate assets, due to the significant volume of real estate assets that it maintains on its balance sheet, and due to its shareholding in real estate companies such as Metrovacesa, S.A. and Divarian Propiedad, S.A (“Divarian”). The total real estate exposure (excluding the mortgage portfolio), including developer credit, foreclosed assets and other assets, reflected a coverage ratio of 53% in Spain as of December 31, 2020. A fall in the prices of real estate assets in Spain (or in other countries where the Group has significant real estate exposure such as Mexico) would reduce the value of the shareholdings referred to above, as well as the value of any real estate securing loans granted by the Group and, therefore, in the event of default, the amount of the “expected losses” related to such loans would increase. In addition, it could also have a significant adverse effect on the default rates of the Group's residential mortgage portfolio, the balance of which, as of December 31, 2020, was €103,923 million at a global level (€110,534 million and €111,526 million as of December 31, 2019 and 2018, respectively).

The magnitude, timing and pace of any increase in default rates will be key for the Group. Furthermore, it is possible that the Group has incorrectly assessed the creditworthiness or willingness to pay of its borrowers and counterparties, that it has underestimated the credit risks and potential losses inherent in its credit exposure and that it has made insufficient provisions for such risks in a timely manner. These processes, which have a crucial impact on the Group's results and financial condition, require difficult, subjective and complex calculations, including forecasts of the impact that macroeconomic conditions could have on these borrowers and counterparties. In particular, the processes followed by the Group to estimate losses derived from its exposure to credit risk may prove to be inadequate or insufficient in the current environment of high economic uncertainty, which could affect the adequacy of the provisions for insolvencies provided by the Group. An increase in non-performing or low-quality loans could significantly and adversely affect the Group's business, financial condition and results of operations.

The Group’s business is particularly vulnerable to interest rates

The Group’s results of operations are substantially dependent upon the level of its net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond the Group’s control, including fiscal and monetary policies of governments and central banks, regulation of the financial sector in the markets in which it operates, domestic and international economic and political conditions and other factors. In this sense, the COVID-19 pandemic has triggered a process of cuts in reference interest rates, which, moreover, will likely take time to be raised and, if raised, interest rates will likely increase at a slower rate than previously foreseen. It is possible that changes in market interest rates, which could be negative in some cases, and the ongoing benchmark reform affect the Group’s interest-earning assets differently from the Group’s interest-bearing liabilities. This, in turn, may lead to a reduction in the Group's net interest margin, which could have a significant adverse effect on its results. Moreover, the ongoing benchmark reform exposes the Group to other significant risks, including legal and operational risks.

12 


 

Furthermore, if interest rates were to increase in some or all of our markets, this could reduce the demand for credit and the Group’s ability to generate credit for its clients, as well as contribute to an increase in the default rate.

As a result of the above, the evolution of interest rates could have a material adverse effect on the Group’s business, financial condition or results of operations.

The Group is exposed to risks related to the continued existence of certain reference rates and the transition to alternative reference rates

In recent years, international regulators have been driving a transition from the use of interbank offer rates (“IBORs”), including EURIBOR, LIBOR and EONIA, to alternative risk free rates (“RFRs”). This has resulted in regulatory reform and changes to existing IBORs, with further changes anticipated. These reforms and changes may cause an IBOR to perform differently than it has done in the past or to be discontinued. For example, in 2017, the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021, and EONIA modified its methodology on October 2, 2019 and will likely be discontinued as from January 2022. In November 2019, the determination methodology for EURIBOR was changed to a new hybrid methodology using transaction-based data and other sources of data.

Uncertainty as to the nature and extent of such reforms and changes, and how they might affect financial instruments, may adversely affect the valuation or trading of a broad array of financial instruments that use IBORs, including any EURIBOR, EONIA or LIBOR-based securities, loans, deposits and derivatives that are issued by the Group or otherwise included in the Group’s financial assets and liabilities. Such uncertainty may also affect the availability and cost of hedging instruments and borrowings. The Group is particularly exposed to EURIBOR-based financial instruments.

It is not possible to predict the timing or full effect of the transition to RFRs. As a result of such transition, the Group will be required to adapt or amend documentation for new and the majority of existing financial instruments, and may be subject to disputes (including with customers of the Group) related thereto, either of which could have an adverse effect on the Group’s results of operations. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of certain financial instruments. Such transition could also result in pricing risks arising from how changes to reference rates could impact pricing mechanisms in some instruments, and could have an adverse effect on the value of, return on and trading market for such financial instruments and on the Group’s profitability. In addition, the transition to RFRs will require important operational changes to the Group’s systems and infrastructure as all systems will need to account for the changes in the reference rates.

Any of these factors may have a material adverse effect on the Group’s business, financial condition and results of operations.

The Group faces increasing competition

The markets in which the Group operates are highly competitive and it is expected that this trend will continue in the coming years with the increasing entry of non-bank competitors (some of which have large client portfolios and strong brand recognition) and the emergence of new business models, as indicated by the Financial Stability Board’s report on FinTech and market structure in financial services. Although the Group is making efforts to anticipate these changes, betting on its digital transformation, its competitive position is affected by the regulatory asymmetry that benefits non-bank operators. For example, banking groups are subject to prudential regulations that have implications for most of their businesses, including those in which they compete with non-bank operators that are only subject to regulations specific to the activity they develop or that benefit from loopholes in the regulatory framework. Furthermore, when banking groups carry out financial activities through the use of new technologies, they are generally subject to additional internal governance rules that place such groups at a competitive disadvantage.

13 


 

Moreover, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial investment to modify or adapt existing products and services as the Group continues to increase its mobile and internet banking capabilities. Likewise, the increasing use of these new technologies and mobile banking platforms could have an adverse impact on the Group's investments in facilities, equipment and employees of the branch network. A faster pace of transformation towards mobile and online banking models could require changes in the Group's commercial banking strategy, including the closure or sale of some branches and the restructuring of others, and reductions in employees. These changes could result in significant expenses as the Group reconfigures and transforms its commercial network. Failure to effectively implement such changes efficiently and on a timely basis could have a material adverse impact on the Group's competitive position or otherwise have a material adverse effect on the Group’s business, financial condition or results of operations.

The Group faces risks related to its acquisitions and divestitures

The Group has both acquired and sold various companies and businesses over the past few years. As of the date of this Annual Report, the closing of the sale of BBVA USA remains subject to obtaining the relevant regulatory authorizations. Other recent transactions include the sale of BBVA Paraguay, BBVA Chile and the Cerberus Transaction (as defined herein). For additional information, see “Item 4. Information on the Company—History and Development of the Company—Capital Divestitures”.  

The Group may not complete any ongoing or future transactions in a timely manner, on a cost-effective basis or at all and, if completed, they may not obtain the expected results. In addition, if completed, the Group’s results of operations could be adversely affected by divestiture or acquisition-related charges and contingencies. The Group may be subject to litigation in connection with, or as a result of, divestitures or acquisitions, including claims from terminated employees, customers or third parties. In the case of an acquisition, the Group may be liable for potential or existing litigation and claims related to an acquired business, including because either the Group is not indemnified for such claims or the indemnification is insufficient. Further, in the case of a divestiture, the Group may be required to indemnify the buyer in respect of similar or other matters, including claims against the divested entity or business.

In the case of an acquisition, even though the Group reviews the companies it plans to acquire, it is often not possible for these reviews to be complete in all respects and there may be risks associated with unforeseen events or liabilities relating to the acquired assets or businesses that may not have been revealed or properly assessed during the due diligence processes, resulting in the Group assuming unforeseen liabilities or an acquisition not performing as expected. In addition, acquisitions are inherently risky because of the difficulties of integrating people, operations and technologies that may arise. There can be no assurance that any of the businesses the Group acquires can be successfully integrated or that they will perform well once integrated. Acquisitions may also lead to potential write-downs that adversely affect the Group’s results of operations.

Any of the foregoing may cause the Group to incur significant unexpected expenses, may divert significant resources and management attention from our other business concerns, or may otherwise have a material adverse impact on the Group’s business, financial condition and results of operations.

The Group faces risks derived from its international geographic diversification and its significant presence in emerging countries

The Group is made up of commercial banks, insurance companies and other financial services companies in various countries and its performance as a global business depends on its ability to manage its different businesses under various economic, social and political conditions, facing different normative and regulatory requirements in many of the jurisdictions in which it operates (including, among others, different supervisory regimes and different tax and legal regimes related to the repatriation of funds or the nationalization or expropriation of assets).

In addition, the Group's international operations may expose it to risks and challenges to which its local competitors may not be exposed, such as currency risk, the difficulty of managing or supervising a local entity from abroad, political risks (which could affect only foreign investors) or limitations on the distribution of dividends, thus worsening its position compared to that of local competitors.

14 


 

There can be no guarantee that the Group will be successful in developing and implementing policies and strategies in all of the countries in which it operates, some of which have experienced significant economic, political and social volatility in recent decades. In particular, the Group has significant operations in several emerging countries, such as Mexico and Turkey, and is therefore vulnerable to the deterioration of these economies. Emerging markets are generally affected by the conditions of other commercially or financially related markets and by the evolution of global financial markets in general (they may be affected, for example, by the evolution of interest rates in the United States and the exchange rate of the U.S. dollar), as well as, in some cases, by fluctuations in the prices of commodities. The perception that the risks associated with investing in emerging economies have increased, in general, or in emerging markets where the Group operates, in particular, could reduce capital flows to those economies and adversely affect such economies, and therefore the Group. Moreover, emerging countries are more prone to experience significant changes in inflation and foreign exchange rates, which may have a material impact on the Group’s results of operations, assets (including RWAs (as defined herein)) and liabilities.

The Group's operations in emerging countries are also exposed to heightened political risks, such as changes in governmental policies, expropriation, nationalization, interest rate limits, exchange controls, government restrictions on dividends and adverse tax policies. For example, the repatriation of dividends from BBVA’s Venezuelan and Argentinean subsidiaries is subject to certain restrictions and there is no assurance that further restrictions will not be imposed.  

If the Group failed to adopt effective and timely policies and strategies in response to the risks and challenges it faces in each of the regions where it operates, particularly in emerging countries, the Group’s business, financial condition and results of operations could be materially and adversely affected.

Since the Group’s loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on its financial condition

The Group has historically carried out its lending activity mainly in Spain, which continues to be one of its primary business areas, such that as of December 31, 2020, total risk in financial assets in Spain (calculated as set forth in item (c) of Appendix IX (Additional information on risk concentration) of our Consolidated Financial Statements) amounted to €236,016 million, equivalent to 42% of the Group’s total risk in financial assets. The COVID-19 pandemic has had a significant impact on the Spanish economy and the sovereign fiscal position. Spanish GDP is estimated to have contracted around 11.0% in 2020, as the pandemic and the measures adopted to slow its spread brought about a sharp reduction in economic activity in the first half of the year, which was among the most severe within the Eurozone. The sharp decline in economic activity and measures adopted to support the economy have given rise to concerns about public debt sustainability in the medium and long term. In addition, while increases in unemployment have been limited by the implementation of short-time work schemes (ERTEs), as these measures are withdrawn in 2021, unemployment is expected to rise. Further, while economic recovery is expected to be boosted by the implementation of EU-level initiatives, in particular the financial support linked to the Next Generation EU (NGEU) plan, there are risks as to the capacity of the Spanish economy to absorb the EU funds and translate the support to productive investment. In addition, the Spanish economy is particularly sensitive to economic conditions in the Eurozone, the main export market for Spanish goods and services. The Group’s gross exposure of loans and advances to customers in Spain totaled €195,983 million as of December 31, 2020, representing 61% of the total amount of loans and advances to customers included on the Group’s consolidated balance sheet. Our Spanish business includes extensive operations in Catalonia, which represented 16% of the Group’s assets in Spain as of December 31, 2020 (18% as of December 31, 2019). While social and political tensions have generally declined since 2017, if such tensions were to increase, this could lead to scenarios of uncertainty, volatility in capital markets and a deterioration of economic and financing conditions in Spain.

Given the relevance of the Group’s loan portfolio in Spain, any adverse change affecting economic conditions in Spain could have a material adverse effect on our business, financial condition and results of operations.

15 


 

FINANCIAL RISKS

The Group has a continuous demand for liquidity to finance its activities and the withdrawal of deposits or other sources of liquidity could significantly affect it

Traditionally, one of the Group's main sources of financing has been savings accounts and demand deposits. As of December 31, 2020, the balance of customer deposits represented 70% of the Group's total financial liabilities at amortized cost. However, the volume of wholesale and retail deposits can fluctuate significantly, including as a result of factors beyond the Group's control, such as general economic conditions, changes in economic policy or administrative decisions that diminish their attractiveness as savings instruments (for example, as a consequence of changes in taxation, coverage by guarantee funds for deposits or expropriations) or competition from other savings or investment instruments (including deposits from other banks).

Likewise, changes in interest rates and credit spreads may significantly affect the cost of the Group’s short and long-term wholesale financing. Changes in credit spreads are driven by market factors and are also influenced by the market’s perception of the Group's solvency. As of December 31, 2020, debt securities issued by the Group represented 12.6% of the total financial liabilities at amortized cost of the Group.

In addition, the Group has made and continues to make significant use of public sources of liquidity, such as the European Central Bank's (ECB) extraordinary measures taken in response to the financial crisis since 2008 or those taken in connection with the crisis caused by the COVID-19 pandemic. The ECB announced in December 2020 the new conditions of Targeted Long Term Refinancing Operations (TLTRO) III, increasing the maximum amount that BBVA may receive from €35,000 million to €38,500 million and extending the enhanced conditions in terms of cost one additional year until June 2022. As of December 31, 2020, €35,032 million had been borrowed by BBVA (€7,000 million were drawn down as of each of December 2019 and March 2020, and €21,000 million as of June 2020). BBVA plans to take up an additional €3,500 million in March 2021 to reach its full allotment. However, the conditions of this or other programs could be revised or these programs could be cancelled.

In the event of a withdrawal of deposits or other sources of liquidity, especially if it is sudden or unexpected, the Group may not be able to finance its financial obligations or meet the minimum liquidity requirements that apply to it, and may be forced to incur higher financial costs, liquidate assets and take additional measures to reduce leverage. Furthermore, the Group could be subject to the adoption of early intervention measures or, ultimately, to the adoption of a resolution measure by the Relevant Spanish Resolution Authority (see Item 4. Information on the Company—Business Overview—Supervision and Regulation—Principal Markets—Spain—Recovery and Resolution of Credit Institutions and Investment Firms). Any of the above could have a material adverse effect on the Group’s business, financial condition and results of operations

The Group and some of its subsidiaries depend on their credit ratings and sovereign credit ratings

Rating agencies periodically review the Group's debt credit ratings. Any reduction, effective or anticipated, in any such ratings of the Group, whether below investment grade or otherwise, could limit or impair the Group's access to capital markets and other possible sources of liquidity and increase the Group’s financing cost, and entail the breach or early termination of certain contracts or give rise to additional obligations under those contracts, such as the need to grant additional guarantees. The Group estimates that, if at December 31, 2020 rating agencies had downgraded Banco Bilbao Vizcaya Argentaria, S.A.’s long-term senior debt rating by one notch, it would have had to provide additional guarantees/collateral amounting to €36.3 million under its derivative and other financial contracts. A hypothetical two-notch downgrade would have involved an outlay of €66.8 million in additional guarantees/collateral. Furthermore, if the Group were required to cancel its derivative contracts with some of its counterparties and were unable to replace them, its market risk would worsen. Likewise, a reduction in the credit rating could affect the Group's ability to sell or market some of its products or to participate in certain transactions, and could lead to the loss of customer deposits and make third parties less willing to carry out commercial transactions with the Group (especially those that require a minimum credit rating), having a significant adverse impact on the Group's business, financial condition and results of operations.

16 


 

Furthermore, the Group's credit ratings could be affected by variations in sovereign credit ratings, particularly the rating of Spanish sovereign debt. The Group holds a significant portfolio of debt issued by the Kingdom of Spain, by the Spanish autonomous communities and by other Spanish issuers. As of December 31, 2020, the Group's exposure to the Kingdom of Spain's public debt portfolio was €46,401 million, representing 6% of the consolidated total assets of the Group. Any decrease in the credit rating of the Kingdom of Spain could adversely affect the valuation of the respective debt portfolios held by the Group and lead to a reduction in the Group's credit ratings. Additionally, counterparties to many of the credit agreements signed with the Group could also be affected by a decrease in the credit rating of the Kingdom of Spain, which could limit their ability to attract additional resources or otherwise affect their ability to pay their outstanding obligations to the Group.

As a consequence of the COVID-19 pandemic, some rating agencies have reviewed the Group's credit ratings or trends. Specifically, on June 22, 2020 Fitch announced the modification of BBVA’s senior preferred debt long-term rating to A- with stable outlook from A with Rating Watch Negative. On April 1, 2020, DBRS confirmed BBVA’s long-term rating of A (High) and maintained the outlook as stable. On April 29, 2020 S&P confirmed BBVA's long-term rating of A- and maintained its negative outlook. There may be more ratings actions and changes in BBVA’s credit ratings in the future as a result of the crisis caused by the COVID-19 pandemic, any of which could have a material adverse effect on the Group’s business, financial condition and results of operations.

The Group's ability to pay dividends depends, in part, on the receipt of dividends from its subsidiaries

Some of the Group’s operations are conducted through BBVA’s subsidiaries. As a result, BBVA’s results (and its ability to pay dividends) depend in part on the ability of its subsidiaries to generate earnings and to pay dividends to BBVA. Due, in part, to the Group's decision to follow a 'Multiple Point of Entry' strategy, in accordance with the framework for the resolution of financial entities designed by the Financial Stability Board (FSB), the Group’s subsidiaries are self-sufficient and each subsidiary is responsible for managing its own capital and liquidity. This means that the payment of dividends, distributions and advances by the Group’s subsidiaries to BBVA depends not only on the results of those subsidiaries, but also on the context of their operations and liquidity needs, and may be further limited by legal, regulatory and contractual restrictions. For example, in response to the crisis caused by the COVID-19 pandemic, certain restrictions were adopted that affect the distribution and/or repatriation of dividends of some of the Group's subsidiaries. There is no assurance that these restrictions will not remain in effect or, where lifted, reinstated, or that similar or new restrictions will not be imposed in the future. Furthermore, the Group's right, as a shareholder, to participate in the distribution of assets resulting from the eventual liquidation or any reorganization of its subsidiaries will be effectively subordinated to the rights of the creditors of those subsidiaries, including their commercial creditors.

In addition, the Group (including the Bank) must comply with certain capital requirements, where non-compliance could lead to the imposition of restrictions or prohibitions on making any: (i) distributions relating to common equity tier (“CET1”) capital; (ii) payments related to variable remuneration or discretionary pension benefits; and (iii) distributions linked to additional tier 1 (“AT1”) instruments (collectively, “discretionary payments”). Likewise, the ability of the Bank and its subsidiaries to pay dividends is conditioned by the recommendations and requirements of their respective supervisors, such as those made in response to the COVID-19 pandemic. In this regard, on April 30, 2020, the Bank announced that it had agreed to modify, for the financial year 2020, the Group's shareholder remuneration policy, opting not to pay any amount as a dividend corresponding to the financial year 2020 until the uncertainties generated by the COVID-19 pandemic dissipate and, in any case, not before the close of the 2020 fiscal year. While, on January 29, 2021, in line with the latest recommendation of the ECB, the Bank announced its intention to distribute 0.059 euros per share in respect of 2020 profit and to reinstate during 2021 its dividend policy announced in 2017 once any recommendation is repealed and there are no additional restrictions or limitations, no assurance can be given that further supervisory restrictions or recommendations will not restrict our or our subsidiaries’ ability to distribute dividends in the future (see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”). 

Any dividends of BBVA or any of its subsidiaries may be subject to further regulatory restrictions or recommendations, or current restrictions or recommendations could be in place for a longer or indefinite period.

17 


 

The Group’s earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by asset impairment

Regulatory, business, economic or political changes and other factors could lead to asset impairment. In recent years, severe market events such as the past sovereign debt crisis, rising risk premiums and falls in share market prices, have resulted in the Group recording large write-downs on its credit market exposures. Doubts regarding the asset quality of European banks has also affected their evolution in the market in recent years.

Several ongoing factors could depress the valuation of our assets or otherwise lead to the impairment of such assets (including goodwill and deferred tax assets). This includes the COVID-19 crisis, Brexit, the surge of populist trends in several European countries, increased trade tensions and potential changes in U.S. economic policies implemented by the new U.S. administration, any of which could increase global financial volatility and lead to the reallocation of assets. In addition, uncertainty about China’s growth expectations and its policymaking capability to address certain severe challenges has contributed to the deterioration of the valuation of global assets and further increased volatility in the global financial markets.

In particular, the final impact of the COVID-19 crisis on the valuation of the Group’s assets is still unknown. Since the outbreak of the crisis in the first quarter of 2020, public support measures have been introduced in the countries where the Group operates, most of which have been in the form of public guarantees on new loans to corporates and SMEs and moratoria and payment holidays on certain household loans. Once these measures come to an end, it is possible that the Group will need to record significant loan-loss provisions as a result of the deterioration in the credit quality of our clients, especially SMEs. Any such provisions could have a material adverse effect on the Group’s business, financial condition and results of operations

The Group has a substantial amount of commitments with personnel considered wholly unfunded due to the absence of qualifying plan assets

The Group’s commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Provisions for pensions and similar obligations” in its consolidated balance sheets included in the Consolidated Financial Statements. See Note 24 to the Consolidated Financial Statements.

The Group faces liquidity risk in connection with its ability to make payments on its unfunded commitments with personnel, which it seeks to mitigate, with respect to post-employment benefits, by maintaining insurance contracts which were contracted with insurance companies owned by the Group. The insurance companies have recorded in their balance sheets specific assets (fixed interest deposit and bonds) assigned to the funding of these commitments. The insurance companies also manage derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. The Group seeks to mitigate liquidity risk with respect to early retirements and post-employment welfare benefits through oversight by the Assets and Liabilities Committee (“ALCO”) of the Group. The Group’s ALCO manages a specific asset portfolio to mitigate the liquidity risk resulting from the payments of these commitments. These assets are government and covered bonds which are issued at fixed interest rates with maturities matching the aforementioned commitments. The Group’s ALCO also manages derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. Should BBVA fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on the Group’s business, financial condition and results of operations.

18 


 

LEGAL RISKS

The Group is party to a number of legal and regulatory actions and proceedings

The financial sector faces an environment of increasing regulatory and litigation pressure. The Group is party to government procedures and investigations, such as those carried out by the antitrust authorities which, among other things, have in the past and could in the future result in sanctions, as well as lead to claims by customers and others. The various Group entities are also frequently party to individual or collective judicial proceedings (including class actions) resulting from their activity and operations, as well as arbitration proceedings. For example, in April 2017, the Mexican Federal Economic Competition Commission (Comisión Federal de Competencia Económica) launched an antitrust investigation relating to alleged monopolistic practices of certain financial institutions, including BBVA’s subsidiary BBVA Bancomer, S.A. (“BBVA Mexico”) in connection with transactions in Mexican government bonds. The Mexican Banking and Securities Exchange Commission (Comisión Nacional Bancaria y de Valores) also initiated a separate investigation regarding this matter. These investigations resulted in certain fines, insignificant in amount, being initially imposed, certain of which BBVA Mexico has challenged. In March 2018, BBVA Mexico and certain other affiliates of the Group were named as defendants in a putative class action lawsuit filed in the United States District Court for the Southern District of New York, alleging that the defendant banks and their named subsidiaries engaged in collusion with respect to the purchase and sale of Mexican government bonds. In December 2019, following a decision from the judge assigned to hear the proceedings, plaintiffs withdrew their claims against BBVA Mexico’s affiliates. In November 2020, the judge granted the remaining defendants’ motion to dismiss for lack of personal, which the plaintiffs may appeal. More generally, in recent years, regulators have increased their supervisory focus on consumer protection and corporate behavior, which has resulted in a larger number of regulatory actions.

In Spain and in other jurisdictions where the Group operates, legal and regulatory actions and proceedings against financial institutions, prompted in part by certain recent national and supranational rulings in favor of consumers (with regards to matters such as credit cards and mortgage loans), have increased significantly in recent years and this trend could continue in the future. The legal and regulatory actions and proceedings faced by other financial institutions in relation to these and other matters, especially if such actions or proceedings result in favorable resolutions for the consumer, could also adversely affect the Group.

All of the above may result in a significant increase in operating and compliance costs and/or a reduction in revenues, and it is possible that an adverse outcome in any proceedings (depending on the amount thereof, the penalties imposed or the resulting procedural or management costs for the Group) could materially and adversely affect the Group, including by damaging its reputation.

It is difficult to predict the outcome of legal and regulatory actions and proceedings, both those to which the Group is currently exposed and those that may arise in the future, including actions and proceedings relating to former Group subsidiaries or in respect of which the Group may have indemnification obligations. Any of such outcomes could be significantly adverse to the Group. In addition, a decision in any matter, whether against the Group or against another credit entity facing similar claims as those faced by the Group, could give rise to other claims against the Group. In addition, these actions and proceedings draw resources away from the Group and may require significant attention on the part of the Group's management and employees.

As of December 31, 2020, the Group had €612 million in provisions for the proceedings it is facing (which are included in the line item "Provisions for taxes and other legal contingencies" in the consolidated balance sheet), of which €574 million corresponded to legal contingencies and €38 million corresponded to tax related contingencies. However, the uncertainty arising from these proceedings (including those for which no provisions have been made, either because it is not possible to estimate any such provisions or for other reasons) makes it impossible to guarantee that the possible losses arising from such proceedings will not exceed, where applicable, the amounts that the Group currently has provisioned and, therefore, could affect the Group's consolidated results in a given period.

As a result of the above, legal and regulatory actions and proceedings currently faced by the Group or to which it may become subject in the future or which may otherwise affect the Group, whether individually or in the aggregate, if resolved in whole or in part adversely to the Group's interests, could have a material adverse effect on the Group’s business, financial condition and results of operations.

19 


 

The Spanish judicial authorities are carrying out a criminal investigation relating to possible bribery, revelation of secrets and corruption by the Bank

Spanish judicial authorities are investigating the activities of Centro Exclusivo de Negocios y Transacciones, S.L. (“Cenyt”). Such investigation includes the provision of services by Cenyt to the Bank. On July 29, 2019, the Bank was named as an investigated party (investigado) in a criminal judicial investigation (Preliminary Proceeding No. 96/2017 – Piece No. 9, Central Investigating Court No. 6 of the National High Court) for alleged facts which could constitute bribery, revelation of secrets and corruption. On February 3, 2020, the Bank was notified by the Central Investigating Court No. 6 of the National High Court of the order lifting the secrecy of the proceedings. Certain current and former officers and employees of the Group, as well as former directors, have also been named as investigated parties in connection with this investigation. The Bank has been and continues to be proactively collaborating with the Spanish judicial authorities, including sharing with the courts information obtained in the internal investigation hired by the entity in 2019 to contribute to the clarification of the facts. As at the date of this Annual Report, no formal accusation against the Bank has been made.

This criminal judicial proceeding is in the pre-trial phase. Therefore, it is not possible at this time to predict the scope or duration of such proceeding or any related proceeding or its or their possible outcomes or implications for the Group, including any fines, damages or harm to the Group’s reputation caused thereby.

REGULATORY, TAX AND REPORTING RISKS

The financial services sector is one of the most regulated in the world. The Group is subject to a broad regulatory and supervisory framework, which has increased significantly in the last decade. Regulatory activity in recent years has affected multiple areas, including changes in accounting standards; strict regulation of capital, liquidity and remuneration; bank charges and taxes on financial transactions; regulations affecting mortgages, banking products and consumers and users; recovery and resolution measures; stress tests; prevention of money laundering and terrorist financing; market abuse; conduct in the financial markets; anti-corruption; and requirements as to the periodic publication of information. Governments, regulatory authorities and other institutions continually make proposals to strengthen the resistance of financial institutions to future crises.

Furthermore, the international nature of the Group’s operations means that the Group is subject to a wide and complex range of local and international regulations in these matters, sometimes with overlapping scopes and areas regulated. This complexity, which can be exacerbated by differences and changes in the interpretation or application of these standards by local authorities, makes compliance risk management difficult, requiring highly sophisticated monitoring, qualified personnel and general training of employees.

Any change in the Group's business that is necessary to comply with any particular regulations at any time, especially in Spain, Mexico, Turkey or, pending completion of the sale of BBVA USA, the United States, could lead to a considerable loss of income, limit the Group's ability to identify business opportunities, affect the valuation of its assets, force the Group to increase its prices and, therefore, reduce the demand for its products, impose additional costs on the Group or otherwise adversely affect its business, financial condition and results of operations.

The Group is subject to a broad regulatory and supervisory framework, including resolution regulations, which could have a significant adverse effect on its business, financial condition and results of operations

The Group is subject to a comprehensive regulatory and supervisory framework the complexity and scope of which has increased significantly since the previous financial crisis and which could further increase as a result of the crisis caused by the COVID-19 pandemic. In particular, the banking sector is subject to continuous scrutiny at the political and supervisory levels, and it is foreseeable that in the future there will continue to be political involvement in regulatory and supervisory processes, as well as in the governance of the main financial entities. For this reason, the laws, regulations and policies to which the Group is subject, as well as their interpretation and application, may change at any time. In addition, supervisors and regulators have significant discretion in carrying out their duties, which gives rise to uncertainty regarding the interpretation and implementation of the regulatory framework. Moreover, regulatory fragmentation and the implementation by some countries of more flexible or stricter rules or regulations could also adversely affect the Group's ability to compete with financial institutions that may or may not have to comply with any such rules or regulations, as applicable.

20 


 

Regulatory changes, adopted or proposed, as well as their interpretation or application, have increased and may continue to substantially increase the Group's operating expenses and adversely affect its business model. For example, the imposition of prudential capital standards has limited and could further limit the ability of subsidiaries to distribute capital to the Group, while liquidity standards may require the Group to hold a higher proportion of financial instruments with higher liquidity and lower performance, which can adversely affect its net interest margin. In addition, the Group's regulatory and supervisory authorities may require the Group to increase its loan loss allowances or asset impairments, which could have an adverse effect on its financial condition. It is also possible that governments and regulators impose additional ad hoc regulations or requirements in response to the crisis caused by the COVID-19 pandemic, including the imposition of requirements on credit institutions to provide financing to various entities such as, for example, the Fund for Orderly Bank Restructuring (Fondo de Reestructuración Ordenada Bancaria) (the “FROB”) or the Single Resolution Board (“SRB”). 

Any legislative or regulatory measure and any necessary change in the Group's business operations as a consequence of such measure, as well as any failure to comply with it, could result in a significant loss of income, represent a limitation on the ability of the Group to take advantage of business opportunities and offer certain products and services, affect the value of the Group's assets, force the Group to increase prices (which could reduce the demand for its products), impose additional compliance costs or result in other possible negative effects for the Group.

One of the most significant regulatory changes resulting from the prior financial crisis was the introduction of resolution regulations (which are described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation”). In the event that the Relevant Spanish Resolution Authority (as defined herein) considers that the Group is in a situation where conditions for early intervention or resolution are met, it may adopt the measures provided for in the applicable regulations, including without prior notice. Such determination, or the mere possibility that such determination could be made, could materially and adversely affect the Group's business, financial condition and results of operations, as well as the market price and behavior of certain securities issued by the Group (or their terms, in the event of an exercise of the Spanish Bail-in-Power (as defined herein)).

Increasingly onerous capital and liquidity requirements may have a material adverse effect on the Group’s business, financial condition and results of operations

As described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation”, in its capacity as a Spanish credit institution, the Group is subject to compliance with a “Pillar 1” solvency requirement, a “Pillar 2” solvency requirement and a “combined buffer requirement” at both the individual and consolidated levels. As a result of the latest Supervisory Review and Evaluation Process (“SREP”) carried out by the ECB, and in accordance with the measures implemented by the ECB on March 12, 2020, by means of which banks may partially use AT1 and Tier 2 capital instruments in order to fulfil the “Pillar 2” requirement, BBVA must maintain, at a consolidated level, a CET1 ratio of 8.59% and a total capital ratio of 12.75%. In addition, BBVA must maintain, on an individual level, a CET1 ratio of 7.84% and a total capital ratio of 12.01% As of December 31, 2020, the Group’s phased-in total capital ratio was 16.46% on a consolidated basis and 20.68% on an individual basis, and its CET1 phased-in capital ratio was 12.15% on a consolidated basis and 15.14% on an individual basis.

Additionally, as described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation”, Banco Bilbao Vizcaya Argentaria, S.A., as a Spanish credit institution, must maintain a minimum level of own funds and eligible liabilities (the “MREL requirement”) in relation to total liabilities and own funds. On November 19, 2019, the Bank announced that it had received notification from the Bank of Spain of its MREL, as determined by the SRB. The Bank’s MREL was set at 15.16% of the total liabilities and own funds of the Bank’s resolution group at a sub-consolidated level from January 1, 2021. Likewise, of this MREL, 8.01% of the total liabilities and own funds must be met with subordinated instruments, once the allowance established in the requirement itself has been applied. This MREL is equivalent to 28.50% of the Risk Weighted Assets (“RWAs”) of the Bank’s resolution group, while the subordination requirement included in the MREL is equivalent to 15.05% of the RWAs of the Group’s resolution group, once the corresponding allowance has been applied.

21 


 

The Bank estimates that, following the entry into force of SRM Regulation II (as defined herein) (which, among other matters, establishes the MREL in terms of RWAs and sets forth new transitional periods and deadlines, and which we interpret would be applicable to our MREL requirement), the current structure of shareholders’ funds and admissible liabilities enables the Bank’s compliance with its MREL requirement. However, both the total capital and the MREL requirements are subject to interpretation and change and, therefore, no assurance can be given that our interpretation is the appropriate one or that the Bank and/or the Group will not be subject to more stringent requirements at any future time. Likewise, no assurance can be given that the Bank and/or the Group will be able to fulfil whatever future requirements may be imposed, even if such requirements were to be equal or lower. There can also be no assurances as to the ability of the Bank and/or the Group to comply with any capital target announced to the market at any given time, which could be adversely perceived by investors and/or supervisors, who could interpret that a lack of capital-generating capacity exists or that the capital structure has deteriorated, either of which could adversely affect the market value or behavior of securities issued by the Bank and/or the Group (and, in particular, any eligible liabilities and any capital instruments) and, therefore, lead to the implementation of new recommendations or requirements regarding “Pillar 2” or (should the Relevant Spanish Resolution Authority interpret that obstacles may exist for the viability of the resolution of the Bank and /or the Group), MREL.

If the Bank or the Group failed to comply with its “combined buffer requirement” they would have to calculate the Maximum Distributable Amount (“MDA”) and, until such calculation has been undertaken and reported to the Bank of Spain, the affected entity would not be able to make any discretionary payments. Once the MDA has been calculated and reported, such discretionary payments would be limited to the calculated MDA. Likewise, should the Bank or the Group not meet the applicable capital requirements, additional requirements of “Pillar 2” or, if applicable, MREL could be imposed. Likewise, in accordance with the EU Banking Reforms (as defined below), any failure by the Bank or the Group to comply with its respective “combined buffer requirement” when considered in addition to its MREL could result in the imposition of restrictions or prohibitions on discretionary payments. Additionally, failure to comply with the capital requirements may result in the implementation of early intervention measures or, ultimately, resolution measures by the resolution authorities.

Regulation (EU) 2019/876 of the European Parliament and of the Council, of May 20, 2019 (as amended, replaced or supplemented at any time, “CRR II”) establishes a binding requirement for the leverage ratio effective from June 28, 2021 of 3% of Tier 1 capital (as of December 31, 2020, the phased-in leverage ratio of the Group was 6.68% and fully loaded it was 6.46%). Moreover, the EU Banking Reforms include a leverage ratio buffer for financial institutions of global systemic importance (G-SIBs) to be met with Tier 1 capital. Any failure to comply with this leverage ratio buffer may also result in the need to calculate and report the MDA, and restrictions on discretionary payments. Moreover, CRR II proposes new requirements that capital instruments must meet in order to be considered AT1 or Tier 2 instruments, including certain grandfathering measures until June 28, 2025. Once the grandfathering period in CRR II has elapsed, AT1 and/or Tier 2 instruments which do not comply with the new requirements at such date will no longer be considered as capital instruments. This could give rise to shortfalls in regulatory capital and, ultimately, could result in failure to comply with the applicable minimum regulatory capital requirements, with the aforementioned consequences.

Additionally, the implementation of the ECB expectations regarding prudential provisions for NPLs (published on May 15, 2018) and the ECB’s current review of internal models being used by banks subject to its supervision for the calculation of their RWAs (TRIMs) could result, respectively, in the need to increase provisions for future NPLs and increases in the Group’s capital needs.

Furthermore, the implementation of the Basel III reforms described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation” could result in an increase of the Bank’s and the Group’s total RWAs and, therefore, could also result in a decrease of the Bank’s and the Group’s capital ratios. Likewise, the lack of uniformity in the implementation of the Basel III reforms across jurisdictions in terms of timing and applicable regulations could give rise to inequalities and competition distortions. Moreover, the lack of regulatory coordination, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect an entity with global operations such as the Group and could affect its profitability.

Additionally, should the Total Loss Absorbing Capacity (TLAC) requirements, as described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation”, currently only imposed upon G-SIBs, be applicable upon non-G-SIBs entities or should the Group once again be classified as a G-SIB, additional minimum requirements similar to MREL could in the future be imposed upon the Group.

22 


 

There can be no assurance that the above capital requirements or MREL will not adversely affect the Bank’s or its subsidiaries’ ability to make discretionary payments, or result in the cancellation of such payments (in whole or in part), or require the Bank or such subsidiaries to issue additional securities that qualify as eligible liabilities or regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Group’s business, financial condition and results of operations. Furthermore, an increase in capital requirements could adversely affect the return on equity and other of the Group’s financial results indicators. Moreover, the Bank’s or the Group’s failure to comply with their capital requirements and MREL could have a significant adverse effect on the Group’s business, financial condition and results of operations.

Lastly, the Group must also comply with liquidity and funding ratios. Several elements of the Liquidity Coverage Ratio (“LCR and net stable financing ratio (“NSFR”) (as such ratios are defined in Note 7.5 to our Consolidated Financial Statements), as introduced by national banking regulators and fulfilled by the Group, may require implementing changes in some of its commercial practices, which could expose the Group to additional expenses (including an increase in compliance expenses), affect the profitability of its activities or otherwise lead to a significant adverse effect over the Group’s business, financial condition or results of operations. As of December 31, 2020 and December 31, 2019, the Group's LCR was 149% and 129% respectively. The NSFR was 127% as of December 31, 2020 and 120% as of December 31, 2019. For further information, see Note 7.5 to our Consolidated Financial Statements.

The Group is exposed to tax risks that may adversely affect it

The size, geographic diversity and complexity of the Group and its commercial and financial relationships with both third parties and related parties result in the need to consider, evaluate and interpret a considerable number of tax laws and regulations, as well as any relevant interpretative materials, which in turn involve the use of estimates, the interpretation of indeterminate legal concepts and the determination of appropriate valuations in order to comply with the tax obligations of the Group. In particular, the preparation of the Group's tax returns and the process for establishing tax provisions involve the use of estimates and interpretations of tax laws and regulations, which are complex and subject to review by the tax authorities. Any error or discrepancy with tax authorities in any of the jurisdictions in which the Group operates may give rise to prolonged administrative or judicial proceedings that may have a material adverse effect on the Group’s results of operations.

In addition, governments in different jurisdictions are in the search for new funding sources, and they have recently focused on the financial sector. The Group's presence in various jurisdictions increases its exposure to regulatory and interpretative changes, which could, among other things, lead to (i) an increase in the types of tax to which the Group is subject, including in response to the demands of various political forces at the national and global level, (ii) changes in the calculation of tax bases and exemptions therefrom, such as the proposal in Spain to limit the exemption for dividends and capital gains from domestic and foreign subsidiaries to 95%, which would mean that 5% of the dividends and capital gains obtained by the Group companies in Spain would be subject to, and not exempt from, corporate tax, or (iii) the creation of new taxes, like the common financial transaction tax (“FTT”) in the proposed Tax Directive for the Financial Transactions Tax of the European Commission (which would tax the acquisitions of certain securities, including those issued by the Group) and the Spanish FTT which came into effect in Spain in January 2021, may have adverse effects on the business, financial condition and results of operations of the Group.

The Group is exposed to compliance risks

The Group, due to its role in the economy and the nature of its activities, is singularly exposed to certain compliance risks. In particular, the Group must comply with regulations regarding customer conduct, market conduct, the prevention of money laundering and the financing of terrorist activities, the protection of personal data, the restrictions established by national or international sanctions programs and anti-corruption laws (including the US Foreign Corrupt Practices Act of 1977 and the UK Bribery Act of 2010), the violations of which could lead to very significant penalties. These anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of the Group’s business, the Group directly or indirectly, through third parties, deals with entities whose employees are considered to be government officials. The Group’s activities are also subject to complex customer protection and market integrity regulations.

23 


 

Generally, these regulations require banking entities to, among other measures, use diligence measures to manage compliance risk. Sometimes, banking entities must apply reinforced due diligence measures because they understand that, due to the very nature of the activities they carry out (among others, private banking, money transfer and foreign currency exchange operations), they may present a higher risk of money laundering or terrorist financing.

Although the Group has adopted policies, procedures, systems and other measures to manage compliance risk, it is dependent on its employees and external suppliers for the implementation of these policies, procedures, systems and other measures, and it cannot guarantee that these are sufficient or that the employees (123,174  as of December 31, 2020) or other persons of the Group or its business partners, agents and/or other third parties with a business or professional relationship with BBVA do not circumvent or violate current regulations or BBVA’s ethics and compliance regulations, acts for which such persons or the Group could be held ultimately responsible and/or that could damage the Group's reputation. In particular, acts of misconduct by any employee, and particularly by senior management, could erode trust and confidence and damage the Group’s reputation among existing and potential clients and other stakeholders. Actual or alleged misconduct by Group entities in any number of activities or circumstances, including operations, employment-related offenses such as sexual harassment and discrimination, regulatory compliance, the use and protection of data and systems, and the satisfaction of client expectations, and actions taken by regulators or others in response to such misconduct, could lead to, among other things, sanctions, fines and reputational damage, any of which could have a material adverse effect on the Group’s business, financial condition and results of operations.

Furthermore, the Group may not be able to prevent third parties outside the Group from using the banking network in order to launder money or carry out illegal or inappropriate activities. Further, financial crimes continually evolve and emerging technologies, such as cryptocurrencies and blockchain, could limit the Group's ability to track the movement of funds. Additionally, in adverse economic conditions, it is possible that financial crime attempts will increase significantly.

If there is a breach of the applicable regulations or BBVA’s ethics and compliance regulations or if the competent authorities consider that the Group does not perform the necessary due diligence inherent to its activities, such authorities could impose limitations on the Group's activities, the revocation of its authorizations and licenses, and economic penalties, in addition to having significant consequences for the Group's reputation, which could have a significant adverse impact on the Group's business, financial condition and results of operations. Furthermore, the Group from time to time conducts investigations related to alleged violations of such regulations and BBVA’s ethics and compliance regulations, and any such investigation or any related procedure could be time consuming and costly, and its results difficult to predict.

Finally, in 2020 the COVID-19 outbreak has led in many countries to new specific regulations, mainly focused on consumer protection measures. The difficulties associated with the need to adapt the Group’s systems to these new regulations quickly along with the fact that the majority of BBVA’s employees have been working remotely could pose new compliance risks. Likewise, despite the existing controls in place, the increase in remote account opening driven by the pandemic could increase money laundering risks. Additionally, criminals are continuing to exploit the opportunities created by the pandemic across the globe and increased money laundering risks associated with counterfeiting of medical goods, investment fraud, cyber-crime scams and exploitation of economic stimulus measures put in place by governments. Increased strain on our communications surveillance frameworks could in turn raise our market conduct risk.

BBVA’s financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of its operations and financial position

The preparation of financial statements in compliance with IFRS-IASB requires the use of estimates. It also requires management to exercise judgment in applying relevant accounting policies. The key areas involving a higher degree of judgment or complexity, or areas where assumptions are significant to the consolidated and individual financial statements, include the classification, measurement and impairment of financial assets, particularly where such assets do not have a readily available market price, the assumptions used to quantify certain provisions and for the actuarial calculation of post-employment benefit liabilities and commitments, the useful life and impairment losses of tangible and intangible assets, the valuation of goodwill and purchase price allocation of business combinations, the fair value of certain unlisted financial assets and liabilities, the recoverability of deferred tax assets and the exchange and inflation rates of Venezuela. There is a risk that if the judgment exercised or the estimates or assumptions used subsequently turn out to be incorrect then this could result in significant loss to the Group beyond that anticipated or provided for, which could have an adverse effect on the Group’s business, financial condition and results of operations.

24 


 

Observable market prices are not available for many of the financial assets and liabilities that the Group holds at fair value and a variety of techniques to estimate the fair value are used. Should the valuation of such financial assets or liabilities become observable, for example as a result of sales or trading in comparable assets or liabilities by third parties, this could result in a materially different valuation to the current carrying value in the Group’s financial statements.

The further development of standards and interpretations under IFRS-IASB could also significantly affect the results of operations, financial condition and prospects of the Group.

OPERATIONAL RISKS

Attacks, failures or deficiencies in the Group's procedures, systems and security or those of third parties to which the Group is exposed could have a significant adverse impact on the Group's business, financial condition and results of operations, and could be detrimental for its reputation

The Group's activities depend to a large extent on its ability to process and report effectively and accurately on a high volume of highly complex transactions with numerous and diverse products and services (by their nature, generally ephemeral), in different currencies and subject to different regulatory regimes. Therefore, it relies on highly sophisticated information technology (“IT”) systems for data transmission, processing and storage. However, IT systems are vulnerable to various problems, such as hardware and software malfunctions, computer viruses, hacking, and physical damage to IT centers. BBVA's exposure to these risks has increased significantly in recent years due to the Group's implementation of its ambitious digital strategy. According to data as of December 31, 2020, 63% of the Group’s customers are digital and 59% of customers regularly use their mobile phones to interact with BBVA, and digital sales represent 63.6% of total sales. BBVA already has more than 500,000 customers registered exclusively through digital channels in Spain, of which more than 50% did so via mobile. These digital services, as well as other alternatives that BBVA offers users to become BBVA customers, have become even more important after the COVID-19 outbreak and the ensuing restrictions on mobility in the countries in which the Group operates. Currently, one in three new clients chooses digital channels to start their relationship with BBVA. Any attack, failure or deficiency in the Group's systems could, among other things, lead to the misappropriation of funds of the Group's clients or the Group itself and the unauthorized disclosure, destruction or use of confidential information, as well as preventing the normal operation of the Group, and impair its ability to provide services and carry out its internal management. In addition, any attack, failure or deficiency could result in the loss of customers and business opportunities, damage to computers and systems, violation of regulations regarding data protection and/or other regulations, exposure to litigation, fines, sanctions or interventions, loss of confidence in the Group's security measures, damage to its reputation, reimbursements and compensation, and additional regulatory compliance expenses and could have a significant adverse impact on the Group's business, financial condition and results of operations. Furthermore, it is possible that such attacks, failures or deficiencies will not be detected on time or ever. The Group is likely to be forced to spend significant additional resources to improve its security measures in the future. As cyber-attacks are becoming increasingly sophisticated and difficult to prevent, the Group may not be able to anticipate or prevent all possible vulnerabilities, nor to implement preventive measures that are effective or sufficient.

Customers and other third parties to which the Group is significantly exposed, including the Group's service providers (such as data processing companies to which the Group has outsourced certain services), face similar risks. Any attack, failure or deficiency that may affect such third parties could, among other things, adversely affect the Group's ability to carry out operations or provide services to its clients or result in the unauthorized disclosure, destruction or use of confidential information. Furthermore, the Group may not be aware of such attack, failure or deficiency in time, which could limit its ability to react. Moreover, as a result of the increasing consolidation, interdependence and complexity of financial institutions and technological systems, an attack, failure or deficiency that significantly degrades, eliminates or compromises the systems or data of one or more financial institutions could have a significant impact on its counterparts or other market participants, including the Group.

 

 

 

25 


 

ITEM 4.       INFORMATION ON THE COMPANY

A.    History and Development of the Company

BBVA’s predecessor bank, BBV (Banco Bilbao Vizcaya), was incorporated as a public limited company (a “sociedad anónima” or S.A.) under the Spanish Corporations Law on October 1, 1988. BBVA was formed following the merger of Argentaria into BBV (Banco Bilbao Vizcaya), which was approved by the shareholders of each entity on December 18, 1999 and registered on January 28, 2000. It conducts its business under the commercial name “BBVA”. BBVA is registered with the Commercial Registry of Vizcaya (Spain). It has its registered office at Plaza de San Nicolás 4, Bilbao, Spain, 48005, and operates out of Calle Azul, 4, 28050, Madrid, Spain (Telephone: +34-91-374-6201). BBVA’s agent in the U.S. for U.S. federal securities law purposes is Banco Bilbao Vizcaya Argentaria, S.A. New York Branch (1345 Avenue of the Americas, 44th Floor, New York, New York 10105 (Telephone: +1-212-728-1660)). BBVA is incorporated for an unlimited term.

Capital Expenditures

Our principal investments are financial investments in our subsidiaries and affiliates. There were no significant capital expenditures in the years ended December 31, 2020, 2019 and 2018.

Capital Divestitures

Our principal divestitures are divestitures in our subsidiaries and affiliates. The main divestitures from 2018 to the date of this Annual Report were the following:

2020

Agreement for the sale of BBVA USA Bancshares, Inc.

On November 15, 2020, BBVA reached an agreement with The PNC Financial Services Group, Inc. for the sale of 100% of the share capital in its subsidiary BBVA USA Bancshares, Inc., which in turn owns 100% of the share capital in BBVA USA, as well as other companies of the BBVA Group in the United States with activities related to this banking business, for approximately $11.6 billion (approximately equivalent to €9.7 billion), to be paid in cash (the “USA Sale”).  

The scope of the USA Sale does not include BBVA Securities Inc. (the Group’s broker-dealer in the United States), the Group’s stake in Propel Venture Partners US Fund I, L.P. and BBVA Processing Services, Inc. (together, the “Excluded Business”). Prior to the closing of the USA Sale, the Excluded Business will be transferred by BBVA USA Bancshares, Inc. to entities of the BBVA Group. In addition, BBVA will continue to develop the wholesale business that it currently carries out through its branch in New York. 

It is expected that the USA Sale will result in an increase in BBVA Group’s CET1 (fully loaded) ratio of approximately 294 basis points. In addition, we expect to recognize profit net of taxes of approximately €580 million (based on an exchange rate of $1.20 per euro) for the companies included within the scope of the USA Sale from the date of the agreement through the date on which closing is expected to take place. Of this amount, approximately €300 million has already been recognized in the consolidated statement of income for the year ended December 31, 2020. In addition, of the expected impact on the BBVA Group’s CET1 (fully loaded) ratio, an increase of approximately 9 basis points had already been recognized as of December 31, 2020.

The closing of the USA Sale is subject to obtaining the relevant regulatory authorizations from the competent authorities. It is expected that the closing of the USA Sale may take place in mid-2021.

For additional information, see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”.

Agreement for the alliance with Allianz, Compañía de Seguros y Reaseguros, S.A.

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 business, through BBVA’s branch network in Spain.

26 


 

On December 14, 2020, after obtaining the relevant regulatory approvals from the competent authorities, BBVA Seguros, S.A. de Seguros y Reaseguros (“BBVA Seguros”) transferred to Allianz, Compañía de Seguros y Reaseguros, S.A., 50% of the share capital plus one share in BBVA Allianz Seguros y Reaseguros, S.A. (“BBVA Seguros Generales”). BBVA Seguros received a cash payment of €274 million. Prior to that, BBVA transferred its non-life insurance business in Spain, excluding the health insurance business, to BBVA Seguros Generales. 

 

Allianz, Compañía de Seguros y Reaseguros, S.A. may need to make an additional payment to BBVA of up to €100 million if certain business goals and milestones are met. This transaction has resulted in a profit net of taxes of €304 million and has increased the Group’s CET1 (fully loaded) ratio by 7 basis points as of December 31, 2020.

 

2019

Sale of BBVA Paraguay

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 sale closed on January 22, 2021 and BBVA received approximately $250 million (approximately €210 million) in cash. The transaction resulted in a loss of approximately €9 million net of taxes and is estimated to increase the Group’s CET1 (fully loaded) ratio by approximately 6 basis points in the first quarter of 2021.

2018

Sale of BBVA Chile

On November 28, 2017, BBVA received a binding offer from The Bank of Nova Scotia (“Scotiabank”) for the acquisition of BBVA’s stake in Banco Bilbao Vizcaya Argentaria Chile, S.A. (“BBVA Chile”) as well as in other companies of the Group in Chile with operations that are complementary to the banking business (among them, BBVA Seguros de Vida, S.A.). BBVA owned, directly and indirectly, 68.19% of BBVA Chile’s share capital. On December 5, 2017, BBVA accepted the offer and entered into a sale and purchase agreement. The sale was completed on July 6, 2018.

The consideration received in cash by BBVA in the referred sale amounted to approximately $2,200 million. The transaction resulted in a capital gain, net of taxes, of €633 million, which was recognized in 2018.

Transfer of real estate business and sale of stake in Divarian

On November 29, 2017, BBVA reached an agreement with Promontoria Marina, S.L.U. (“Promontoria”), a company managed by Cerberus Capital Management, L.P. (“Cerberus”), for the creation of a joint venture to which an important part of the real estate business of BBVA in Spain (the “Business”) was transferred.

The Business comprised: (i) foreclosed real estate assets (the “REOs”) held by BBVA as of June 26, 2017, with a gross book value of approximately €13,000 million; and (ii) the necessary assets and employees to manage the Business in an autonomous manner. For purposes of the transaction with Cerberus, the Business was valued at approximately €5,000 million.

On October 10, 2018, after obtaining all the required authorizations, BBVA completed the transfer of the Business (except for part of the agreed REOs, which were contributed in several subsequent transfers, being the last one in May 2020) to Divarian Propiedad, S.A. (“Divarian”) and the sale of an 80% stake in Divarian to Promontoria. Following the closing of the transaction, BBVA retained 20% of the share capital of Divarian.

As of December 31, 2018 and for the year then ended, the transaction did not have a significant impact on the Group’s attributable profit or CET1 (fully loaded).

The above transaction is referred to as the “Cerberus Transaction” in this Annual Report.

27 


 

Sale of BBVA’s stake in Testa

On September 14, 2018, BBVA and other shareholders of Testa Residencial SOCIMI, S.A. (“Testa”) entered into an agreement with Tropic Real Estate Holding, S.L. (a company which is advised and managed by a private equity investment group controlled by Blackstone Group International Partners LLP) pursuant to which BBVA agreed to transfer its 25.24% interest in Testa to Tropic Real Estate Holding, S.L. The sale was completed on December 21, 2018.

The consideration received in cash by BBVA in the sale amounted to €478 million.

Agreement with Voyager Investing UK Limited Partnership (Anfora)

On December 21, 2018, BBVA reached an agreement with Voyager Investing UK Limited Partnership (“Voyager”), an entity managed by Canada Pension Plan Investment Board, for the transfer by us of a portfolio of credit rights which was mainly composed of non-performing and in default mortgage credits.

The transaction was completed during the third quarter of 2019 and resulted in a capital gain, net of taxes, of €138 million and a slightly positive impact on the BBVA Group’s CET1 (fully loaded).

Public Information

The SEC maintains an Internet site (www.sec.gov) that contains reports and other information regarding issuers that file electronically with the SEC, including BBVA. See “Item 10. Additional Information—Documents on Display”. Additional information on the Group is also available on our website at https://shareholdersandinvestors.bbva.com. The information contained on such websites does not form part of this Annual Report.

 

28 


 

B. 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. In 2020, the number of digital and mobile customers and the volume of digital sales continued to increase.

As of December 31, 2020, the structure of the operating segments used by the BBVA Group for management purposes remained the same as in 2019. However, the BBVA Group has reached agreements which may affect the structure of the Group’s operating segments in the future.

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. BBVA’s 20% stake in Divarian is also included in this unit. For more information regarding Divarian, see “—History and Development of the Company—Capital Divestitures—2018”.

For certain relevant information concerning the preparation and presentation of the financial information included in this Annual Report, see “Presentation of Financial Information”. 

 

29 


 

The breakdown of the Group’s total assets by each of BBVA’s operating segments and the Corporate Center as of December 31, 2020, 2019 and 2018 was as follows:

 

As of December 31,

 

2020

2019

2018

 

(In Millions of Euros)

Spain

405,878

364,427

353,923

The United States (1)

93,953

88,529

82,057

Mexico

110,224

109,079

97,432

Turkey

59,585

64,416

66,250

South America

55,435

54,996

54,373

Rest of Eurasia

22,881

23,257

18,845

Subtotal Assets by Operating Segment

747,957

704,703

672,880

Corporate Center and Adjustments (2)

(11,781)

(6,967)

2,796

Total Assets BBVA Group

736,176

697,737

675,675

(1)      €83,257 million as of December 31, 2020 relates to BBVA USA and the other companies falling within the scope of the USA Sale (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”) and is recorded as “Non-current assets and disposal groups classified as held for sale” in the consolidated balance sheet as of December 31, 2020 (see Note 21 to our Consolidated Financial Statements).

(2)      Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments. See “Presentation of Financial Information—Intra-group reallocations”.

 

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 years ended December 31, 2020, 2019 and 2018. Such information is presented under management criteria. For information on the differences between the Group income statement and the income statement calculated in accordance with management operating segment reporting criteria, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations by Operating Segment”. 

 

Profit/(Loss) Attributable to Parent Company

% of Profit/(Loss) Attributable to Parent Company

 

For the Year Ended December 31,

 

2020

2019

2018

2020

2019

2018

 

(In Millions of Euros)

(In Percentage)

Spain

606

1,386

1,400

15

23

24

The United States (1)

429

590

736

11

10

13

Mexico

1,759

2,699

2,367

45

45

41

Turkey

563

506

567

14

8

10

South America

446

721

578

11

12

10

Rest of Eurasia

137

127

96

3

2

2

Subtotal operating segments

3,940

6,029

5,743

100

100

100

Corporate Center

(2,635)

(2,517)

(343)

 

 

 

Profit attributable to parent company

1,305

3,512

5,400

 

 

 

(1)      Includes the results of BBVA USA and the other companies falling within the scope of the USA Sale (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”). 

 

30 


 

The following table sets forth certain summarized information relating to the income of each operating segment and the Corporate Center for the years ended December 31, 2020, 2019 and 2018. Such information is presented under management criteria. For information on the differences between the Group income statement and the income statement calculated in accordance with management operating segment reporting criteria, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations by Operating Segment”. 

 

Operating Segments

 

 

Spain

The United States (1)

Mexico

Turkey

South America

Rest of Eurasia

Corporate Center

Total (2)

 

(In Millions of Euros)

 

2020

 

 

 

 

 

 

 

 

Net interest income

3,553

2,284

5,415

2,783

2,701

214

(149)

16,801

Gross income

5,554

3,152

7,017

3,573

3,225

510

(57)

22,974

Net margin before provisions (3)

2,515

1,281

4,677

2,544

1,853

225

(876)

12,219

Operating profit/(loss) before tax

809

502

2,472

1,522

896

184

(2,810)

3,576

Profit /(loss) attributable to parent company

606

429

1,759

563

446

137

(2,635)

1,305

2019

 

 

 

 

 

 

 

 

Net interest income

3,567

2,395

6,209

2,814

3,196

175

(233)

18,124

Gross income

5,656

3,223

8,029

3,590

3,850

454

(339)

24,463

Net margin before provisions (3)

2,402

1,257

5,384

2,375

2,276

161

(1,294)

12,561

Operating profit/(loss) before tax

1,878

705

3,691

1,341

1,396

163

(2,775)

6,397

Profit /(loss) attributable to parent company

1,386

590

2,699

506

721

127

(2,517)

3,512

2018

 

 

 

 

 

 

 

 

Net interest income

3,618

2,276

5,568

3,135

3,009

175

(269)

17,511

Gross income

5,888

2,989

7,193

3,901

3,701

414

(420)

23,667

Net margin before provisions (3)

2,554

1,129

4,800

2,654

1,992

127

(1,291)

11,965

Operating profit/(loss) before tax

1,840

920

3,269

1,444

1,288

148

(1,329)

7,580

Profit /(loss) attributable to parent company

1,400

736

2,367

567

578

96

(343)

5,400

(1)      Includes the results of BBVA USA and the other companies falling within the scope of the USA Sale (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”). 

(2)      For information on the reconciliation of the income statement of our operating segments and Corporate Center to the consolidated income statement of the Group, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations by Operating Segment”. 

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

31 


 

The following tables set forth information relating to the balance sheet of our operating segments and the Group Corporate Center and adjustments as of December 31, 2020, 2019 and 2018:

 

As of December 31, 2020

 

Spain

The United States (1)

Mexico

Turkey

South America

Rest of Eurasia

Total Operating Segments

Corporate Center and Adjustments (2)

 

(In Millions of Euros)

Total Assets

405,878

93,953

110,224

59,585

55,435

22,881

747,957

(11,781)

Cash, cash balances at central banks and other demand deposits

38,360

17,260

9,159

5,477

7,126

285

77,667

(364)

Financial assets designated at fair value (3)

137,969

6,792

36,360

5,332

7,329

492

194,274

(4,452)

Financial assets at amortized cost

198,173

66,933

59,814

46,705

38,549

21,839

432,014

(1,754)

Loans and advances to customers

167,998

57,983

50,002

37,295

33,615

18,908

365,801

(796)

Of which:

 

 

 

 

 

 

 

 

Residential mortgages

71,530

12,465

9,890

2,349

6,252

1,436

103,923

 

Consumer finance

11,820

4,633

7,025

5,626

6,773

497

36,373

 

Loans

5,859

1,153

1,629

630

974

183

10,427

 

Credit cards

2,087

700

4,682

3,259

2,008

7

12,744

 

Loans to enterprises

61,748

33,975

22,549

24,597

16,392

16,011

175,273

 

Loans to public sector

12,468

4,860

4,670

178

1,319

773

24,267

 

Total Liabilities

395,422

90,317

104,888

57,050

53,283

22,003

722,963

(36,807)

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

73,921

952

23,801

2,336

1,326

46

102,382

(5,746)

Financial liabilities at amortized cost - Customer deposits

206,428

69,923

54,052

39,353

36,874

4,578

411,208

(2,086)

Of which:

 

 

 

 

 

 

 

 

Demand and savings deposits

174,789

61,354

43,460

20,075

25,847

3,481

329,008

 

Time deposits

31,019

8,571

10,315

19,270

11,038

1,097

81,310

 

Total Equity

10,457

3,636

5,336

2,535

2,152

879

24,995

25,025

Assets under management

62,707

-

22,524

3,425

13,722

569

102,947

 

Mutual funds

38,434

-

20,660

1,087

4,687

-

64,869

 

Pension funds

24,273

-

-

2,337

9,035

569

36,215

 

Other placements

-

-

1,863

-

-

-

1,863

 

(1)      Includes the respective amounts for BBVA USA and the other companies falling within the scope of the USA Sale (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”).  

(2)      Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments (see “Presentation of Financial Information—Intra-group reallocations”) and the reclassification of assets and liabilities of BBVA USA and the other companies falling within the scope of the USA Sale to “Non-current assets and disposal groups classified as held for sale” and “Liabilities included in disposal groups classified as held for sale”, respectively, in the consolidated balance sheet of the BBVA Group.  See Note 21 to our Consolidated Financial Statements.

(3)      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”.

 

 

32 


 

 

As of December 31, 2019

 

Spain

The United States (1)

Mexico

Turkey

South America

Rest of Eurasia

Total Operating Segments

Corporate Center and Adjustments (2)

 

(In Millions of Euros)

Total Assets

364,427

88,529

109,079

64,416

54,996

23,257

704,703

(6,967)

Cash, cash balances at central banks and other demand deposits

15,903

8,293

6,489

5,486

8,601

247

45,019

(716)

Financial assets designated at fair value (3)

121,890

7,659

31,402

5,268

6,120

477

172,817

(3,128)

Financial assets at amortized cost

195,260

69,510

66,180

51,285

37,869

22,233

442,336

(3,174)

Loans and advances to customers

167,332

63,162

58,081

40,500

35,701

19,669

384,445

(2,085)

Of which:

 

 

 

 

 

 

 

 

Residential mortgages

73,871

14,160

10,786

2,928

7,168

1,624

110,534

 

Consumer finance

11,390

5,201

8,683

5,603

7,573

453

38,904

 

Loans

5,586

1,213

1,802

635

1,074

195

10,505

 

Credit cards

2,213

883

5,748

3,837

2,239

8

14,929

 

Loans to enterprises

57,194

36,346

24,778

26,552

16,251

16,716

177,836

 

Loans to public sector

13,886

5,373

6,819

107

1,368

667

28,220

 

Total Liabilities

355,198

84,686

104,190

61,744

52,504

22,393

680,714

(37,902)

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

77,731

282

21,784

2,184

1,860

57

103,898

(5,208)

Financial liabilities at amortized cost - Customer deposits

182,370

67,525

55,934

41,335

36,104

4,708

387,976

(3,757)

Of which:

 

 

 

 

 

 

 

 

Demand and savings deposits

150,917

53,001

42,959

15,737

22,682

3,292

288,588

 

Time deposits

31,453

14,527

12,372

25,587

13,441

1,416

98,797

 

Total Equity

9,229

3,843

4,889

2,672

2,492

864

23,989

30,936

Assets under management

66,068

-

24,464

3,906

12,864

500

107,803

 

Mutual funds

41,390

-

21,929

1,460

3,860

-

68,639

 

Pension funds

24,678

-

-

2,446

9,005

500

36,630

 

Other placements

-

-

2,534

-

-

-

2,534

 

(1)      Includes the respective amounts for BBVA USA and the other companies falling within the scope of the USA Sale (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”).  

(2)      Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments (see “Presentation of Financial Information—Intra-group reallocations”). 

(3)      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”.

 

 

33 


 

 

As of December 31, 2018

 

Spain

The United States

Mexico

Turkey

South America

Rest of Eurasia

Total Operating Segments

Corporate Center and  Adjustments (1)

 

(In Millions of Euros)

Total Assets

353,923

82,057

97,432

66,250

54,373

18,845

672,880

2,796

Cash, cash balances at central banks and other demand deposits

28,545

4,835

8,274

7,853

8,987

238

58,732

(536)

Financial assets designated at fair value (2)

106,307

10,481

26,022

5,506

5,634

504

154,454

(2,564)

Financial assets at amortized cost

195,457

63,539

57,709

50,315

36,649

17,809

421,477

(1,818)

Loans and advances to customers

170,427

60,808

51,101

41,478

34,469

16,609

374,893

(867)

Of which:

 

 

 

 

 

 

 

 

Residential mortgages

76,388

13,961

9,197

3,530

6,629

1,821

111,526

 

Consumer finance

9,665

5,353

7,347

5,265

6,900

410

34,940

 

Loans

5,564

1,086

1,766

570

955

212

10,153

 

Credit cards

2,083

720

4,798

3,880

2,058

10

13,549

 

Loans to enterprises

57,306

34,264

22,553

27,657

16,897

13,685

172,362

 

Loans to public sector

15,379

5,400

5,726

95

1,078

414

28,093

 

Total Liabilities

345,215

78,675

93,291

63,721

52,019

18,126

651,046

(28,245)

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

70,020

234

18,028

1,852

1,357

42

91,532

(4,778)

Financial liabilities at amortized cost - Customer deposits

183,413

63,891

50,530

39,905

35,842

4,876

378,456

(2,486)

Of which:

 

 

 

 

 

 

 

 

Demand and savings deposits

142,912

47,031

38,167

12,530

23,195

3,544

267,379

 

Time deposits

40,072

16,857

11,573

27,367

12,817

1,333

110,018

 

Total Equity

8,708

3,383

4,140

2,529

2,355

719

21,834

31,041

Assets under management

62,559

-

20,647

2,894

11,662

388

98,150

 

Mutual funds

39,250

-

17,733

669

3,741

-

61,393

 

Pension funds

23,274

-

-

2,225

7,921

388

33,807

 

Other placements

35

-

2,914

-

-

-

2,949

 

(1)      Includes balance sheet intra-group adjustments between the Corporate Center and the operating segments (see “Presentation of Financial Information—Intra-group reallocations”). 

(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”.

34 


 

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) as well as the Group’s shareholding in the bancassurance joint venture with Allianz, Compañía de Seguros y Reaseguros, S.A. (see “—History and Development of the Company―Capital Divestitures—2020”), the Asset Management unit (which manages Spanish mutual funds and pension funds), lending to real estate developers and foreclosed real estate assets in Spain, 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.

Cash, cash balances at central banks and other demand deposits amounted to €38,360 million as of December 31, 2020 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 light of the COVID-19 pandemic. See “Item 5. Operating and Financial Review and Prospects―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 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 €137,969 million as of December 31, 2020, a 13.2% increase from the €121,890 million recorded as of December 31, 2019, mainly as a result of the increase in trading derivatives recorded under “Financial assets held for trading” due to the positive impact of changes in exchange rates on foreign currency positions and the increase in sovereign debt securities recorded under the “Financial assets at fair value through other comprehensive income”.  

Financial assets at amortized cost of this operating segment as of December 31, 2020 amounted to €198,173 million, a 1.5% increase compared with the €195,260 million recorded as of December 31, 2019. Within this heading, loans and advances to customers amounted to €167,998 million as of December 31, 2020, an increase of 0.4% from the €167,332 million recorded as of December 31, 2019, mainly as a result of the increase in SMEs and corporate banking credit 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, partially offset by the decrease in mortgage loans.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of December 31, 2020 amounted to €73,921 million, a 4.9% decrease compared with the €77,731 million recorded as of December 31, 2019, mainly due to a decrease in deposits from credit institutions, partially offset by the positive impact of changes in exchange rate derivatives on foreign currency positions.

Customer deposits at amortized cost of this operating segment as of December 31, 2020 amounted to €206,428 million, a 13.2% increase compared with the €182,370 million recorded as of December 31, 2019 mainly due to the increase in demand deposits within the retail portfolio, as a result of 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 December 31, 2020 amounted to €62,707 million, a 5.1% 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.

35 


 

This operating segment’s non-performing loan ratio decreased to 4.3% as of December 31, 2020 from 4.4% as of December 31, 2019, mainly as a result of the increase in retail, SMEs and corporate banking credit facilities on the back of the measures implemented by the Spanish government in light of the COVID-19 pandemic, as well as the temporary moratoria and other relief measures adopted to address the effects thereof. This operating segment’s non-performing loan coverage ratio increased to 67% as of December 31, 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. The Group’s activity in the United States is mainly carried out through BBVA USA and other subsidiaries in the United States with activities related to banking activity and which are classified as discontinued operations (see “Item 10. Additional Information—Material Contracts—Sale of BBVA USA to The PNC Financial Services Group”). It also includes Banco Bilbao Vizcaya Argentaria, S.A. New York Branch, the Group’s stake in Propel Venture Partners, the business developed through the Group’s broker-dealer BBVA Securities Inc. and a representative office in Silicon Valley (California).

BBVA USA accounted for 87.5% of this operating segment’s balance sheet as of December 31, 2020. Given the importance of BBVA USA in this segment, most of the comments below refer to BBVA USA.

The U.S. dollar depreciated 8.5% against the euro as of December 31, 2020 compared with December 31, 2019, adversely affecting the business activity of the United States operating segment as of December 31, 2020 expressed in euros. See Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”

Cash, cash balances at central banks and other demand deposits amounted to €17,260 million as of December 31, 2020 compared with the €8,293 million recorded as of December 31, 2019, mainly due to an increase in cash and cash equivalents with the Federal Reserve with a view to reinforcing the Group’s cash position in light of the COVID-19 pandemic, offset in part by the depreciation of the U.S. dollar against the euro. See “Item 5. Operating and Financial Review and Prospects―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 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 December 31, 2020 amounted to €6,792 million, an 11.3% decrease from the €7,659 million recorded as of December 31, 2019, mainly due to the depreciation of the U.S. dollar against the euro and 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 December 31, 2020 amounted to €66,933 million, a 3.7% decrease 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 December 31, 2020 amounted to €57,983 million, an 8.2% decrease compared with the €63,162 million recorded as of December 31, 2019, mainly due to the depreciation of the U.S. dollar against the euro, a reduction in consumer activity, since branches closed for business for part of the year and the decrease in consumer loans. The decrease was partially offset by the growth in loans to enterprises (in local currency) and the growth in residential mortgage loans in the fourth quarter of the year, 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), and increases in the drawing down of credit facilities.

Customer deposits at amortized cost of this operating segment as of December 31, 2020 amounted to €69,923 million, a 3.6% increase compared with the €67,525 million recorded as of December 31, 2019, mainly due to an increase in demand 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, offset in part by the depreciation of the U.S. dollar against the euro

36 


 

The non-performing loan ratio of this operating segment as of December 31, 2020 jumped to 2.1% from 1.1% as of December 31, 2019 mainly as a result of the increase in non-performing loans in the Oil & Gas sector and, to a lesser extent, the Real Estate sector, as a result of the deteriorating economic conditions and adverse sector dynamics. This operating segment’s non-performing loan coverage ratio decreased to 84% as of December 31, 2020, from 101% as of December 31, 2019, mainly due to higher non-performing loans and lower loss allowances. As loans becoming non-performing in 2020 were generally collateralized, provision requirements were lower than the stock.

Mexico

The Mexico operating segment includes the banking and insurance businesses conducted in Mexico by BBVA Mexico. It also includes BBVA Mexico’s branch in Houston.

The Mexican peso depreciated 13.1% against the euro as of December 31, 2020 compared with December 31, 2019, adversely affecting the business activity of the Mexico operating segment as of December 31, 2020 expressed in euros. See Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”

Cash, cash balances at central banks and other demand deposits amounted to €9,159 million as of December 31, 2020 compared with the €6,489 million recorded as of December 31, 2019, mainly due to an increase in cash and cash equivalents held at BANXICO (as defined herein), with a view to reinforcing the Group’s cash position in light of the COVID-19 pandemic, offset in part by the depreciation of the Mexican peso against the euro. See “Item 5. Operating and Financial Review and Prospects―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 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 December 31, 2020 amounted to €36,360 million, a 15.8% increase from the €31,402 million recorded as of December 31, 2019, mainly due to an increase in sovereign debt securities, offset in part by the depreciation of the Mexican peso against the euro.  

Financial assets at amortized cost of this operating segment as of December 31, 2020 amounted to €59,814 million, a 9.6% 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 December 31, 2020 amounted to €50,002 million, a 13.9% 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 corporate loans and retail portfolios (mainly residential mortgages and consumer finance), due to the adverse effect of the COVID-19 pandemic. These effects were partially offset by the partial recovery of mortgage loans in the second half of 2020.

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of December 31, 2020 amounted to €23,801 million, a 9.3% increase compared with the €21,784 million recorded as of December 31, 2019, mainly as a result of increases in government agency debt securities, offset in part by the depreciation of the Mexican peso against the euro. Customer deposits at amortized cost of this operating segment as of December 31, 2020 amounted to €54,052 million, a 3.4% 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.

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Other placements”) as of December 31, 2020 amounted to €22,524 million, a 7.9% 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, partially offset by the shift towards higher profitability investments such as private banking.

37 


 

This operating segment’s non-performing loan ratio increased to 3.3% as of December 31, 2020 from 2.4% as of December 31, 2019, mainly due to the increase in non-performing loans from the retail portfolio during the fourth quarter of 2020, following the lifting of the moratoria measures adopted in response to the COVID-19 pandemic. This operating segment’s non-performing loan coverage ratio decreased to 122% as of December 31, 2020 from 136% as of December 31, 2019.

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 26.7% against the euro as of December 31, 2020 compared to December 31, 2019, adversely affecting the business activity of the Turkey operating segment as of December 31, 2020 expressed in euros. See “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”

Cash, cash balances at central banks and other demand deposits amounted to €5,477 million as of December 31, 2020 compared with the €5,486 million recorded as of December 31, 2019, mainly due to the depreciation of the Turkish lira against the euro. At constant exchange rates, there was an increase in cash, cash balances at central banks and other demand deposits as a result of the increase in cash and cash equivalents held at the Central Bank of the Republic of Turkey, with a view to reinforcing the Group’s cash position in light of the COVID-19 pandemic. See “Item 5. Operating and Financial Review and Prospects―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 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 December 31, 2020 amounted to €5,332 million, a 1.2% 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 against the euro.

Financial assets at amortized cost of this operating segment as of December 31, 2020 amounted to €46,705 million an 8.9% 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 December 31, 2020 amounted to €37,295 million, a 7.9% decrease compared with the €40,500 million recorded as of December 31, 2019, mainly due to the depreciation of the Turkish lira against the euro, offset, in part, by the increase (in local currency) in loans denominated in Turkish lira and increases in the commercial portfolio 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).

Financial liabilities held for trading and designated at fair value through profit or loss of this operating segment as of December 31, 2020 amounted to €2,336 million, a 7.0% increase compared with the €2,184 million recorded as of December 31, 2019, mainly due to 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 December 31, 2020 amounted to €39,353 million, a 4.8% decrease compared with the €41,335 million recorded as of December 31, 2019, mainly due to the depreciation of the Turkish lira against the euro, partially offset by the increase in demand deposits and increasing demand for gold deposits.

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Pension funds”) as of December 31, 2020 amounted to €3,425 million, a 12.3% decrease compared with the €3,906 million as of December 31, 2019, mainly due to the depreciation of the Turkish lira against the euro, partially offset by increases in pension funds (in local currency).

38 


 

The non-performing loan ratio of this operating segment decreased to 6.6% as of December 31, 2020 from 7.0% as of December 31, 2019, as a result of the increase in loans denominated in Turkish lira, increases in the commercial portfolio and in consumer loans (in local currency) and, to a lesser extent, increases in write offs in the fourth quarter of 2020. This operating segment’s non-performing loan coverage ratio increased to 80% as of December 31, 2020 from 75% 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 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.

The sale of BBVA Paraguay closed in January 2021. See “—History and Development of the Company—Capital Divestitures—2019”.

As of December 31, 2020, the Argentine peso, the Colombian peso and the Peruvian sol depreciated against the euro compared to December 31, 2019, by 34.8%, 12.6% and 16.3%, respectively. Changes in exchanges rates have adversely affected the business activity of the South America operating segment as of December 31, 2020 expressed in euros. See “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―Trends in Exchange Rates”.

As of and for the years ended December 31, 2020 and 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”).

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 December 31, 2020 amounted to €7,329 million, a 19.7% increase compared with the €6,120 million recorded as of December 31, 2019, attributable in part to the increase in the fair value of debt securities issued by the Peruvian government held by the segment and increases in purchases of debt securities issued by the Central Bank of the Argentine Republic (BCRA) in Argentina in connection to the COVID-19 pandemic  and held by the segment. The increase was offset in part by the depreciation of the currencies of the main countries where the BBVA Group operates within this operating segment against the euro.

Financial assets at amortized cost of this operating segment as of December 31, 2020 amounted to €38,549 million, a 1.8% 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 December 31, 2020 amounted to €33,615 million, a 5.8% decrease compared with the €35,701 million recorded as of December 31, 2019, mainly as a result of the depreciation of the currencies of the main countries where the BBVA Group operates within this operating segment against the euro, partially offset by the increase in wholesale loans, particularly in Peru (supported by the “Reactiva Plan” adopted in response to the COVID-19 pandemic), the increase in credit cards loans, in particular in Argentina, and increases in the retail portfolio (in each case, in local currency). See “Item 5. Operating and Financial Review and Prospects―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 the region.

Customer deposits at amortized cost of this operating segment as of December 31, 2020 amounted to €36,874 million, a 2.1% 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 their 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, partially offset by the depreciation of the currencies of the main countries where the BBVA Group operates within this operating segment against the euro.

39 


 

Off-balance sheet funds of this operating segment (which includes “Mutual funds” and “Pension funds”) as of December 31, 2020 amounted to €13,722 million, a 6.7% increase compared with the €12,864 million as of December 31, 2019, mainly due to the recovery in mutual funds, after the temporary outflow of resources due to market instability, during the second half of 2020, partially offset by the depreciation of the currencies of the main countries where the BBVA Group operates within this operating segment against the euro.

The non-performing loan ratio of this operating segment as of December 31, 2020 and 2019 stood at 4.4%. The non-performing loan ratio as of December 31, 2020 was positively affected by the temporary moratoria and other relief measures adopted to address the effects of the COVID-19 pandemic. This operating segment’s non-performing loan coverage ratio increased to 110% as of December 31, 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 included 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 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 December 31, 2020 amounted to €492 million, a 3.0% increase compared with the €477 million recorded as of December 31, 2019.

Financial assets at amortized cost of this operating segment as of December 31, 2020 amounted to €21,839 million, a 1.8% decrease 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 December 31, 2020 amounted to €18,908 million, a 3.9% decrease compared with the €19,669 million recorded as of December 31, 2019.

Customer deposits at amortized cost of this operating segment as of December 31, 2020 amounted to €4,578 million, a 2.8% decrease compared with the €4,708 million recorded as of December 31, 2019.

Pension funds in this operating segment as of December 31, 2020 amounted to €569 million, a 13.8% increase compared with the €500 million recorded as of December 31, 2019, mainly due to increased sales of a multi-strategic product launched in 2019.

The non-performing loan ratio of this operating segment as of December 31, 2020 decreased to 1.1% from 1.2% as of December 31, 2019. This operating segment’s non-performing loan coverage ratio increased to 100% as of December 31, 2020, from 98% as of December 31, 2019.

Insurance Activity

The Group has insurance subsidiaries mainly in Spain and Latin America (mostly in Mexico). The main products offered by the insurance subsidiaries are life insurance to cover the risk of death and life-savings insurance. Within life and accident insurance, a distinction is made between freely sold products and those offered to customers who have taken mortgage or consumer loans, which cover the principal of those loans in the event of the customer’s death.

On April 27, 2020, BBVA reached an agreement with Allianz, Compañía de Seguros y Reaseguros, S.A. to create a bancassurance joint venture in order to develop the non-life insurance business in Spain, excluding the health insurance business. On December 14, 2020, once the required authorizations had been obtained, BBVA completed the transaction and announced the transfer to Allianz, Compañía de Seguros y Reaseguros, S.A. of half plus one share of the company BBVA Allianz Seguros y Reaseguros, S.A. (see Note 3 to our Consolidated Financial Statements).

The Group offers, in general, two types of savings products: individual insurance, which seeks to provide the customer with savings for retirement or other events, and collective insurance, which is taken out by employers to cover their commitments to their employees.

40 


 

See Note 23 to our Consolidated Financial Statements for additional information on our insurance activity.

Monetary Policy

The integration of Spain into the European Monetary Union (“EMU”) on January 1, 1999 implied the yielding of monetary policy sovereignty to the Eurosystem. The “Eurosystem” is composed of the ECB and the national central banks of the 19 member countries that form the EMU.

The Eurosystem determines and executes the policy for the single monetary union of the 19 member countries of the EMU. The Eurosystem collaborates with the central banks of member countries to take advantage of the experience of the central banks in each of its national markets. The basic tasks carried out by the Eurosystem include:

·            defining and implementing the single monetary policy of the EMU;

·            conducting foreign exchange operations in accordance with the set exchange policy;

·            lending to national monetary financial institutions in collateralized operations;

·            holding and managing the official foreign reserves of the member states; and

·            promoting the smooth operation of the payment systems.

In addition, the Treaty on the EU (“EU Treaty”) establishes a series of rules designed to safeguard the independence of the system, in its institutional as well as its administrative functions.

Supervision and Regulation

This section discusses the most significant supervision and regulatory matters applicable to us as a bank organized under the laws of Spain, our principal market, and as a result of activities we undertake in the European Union. Further below, this section also includes information regarding supervision and regulatory matters applicable to our operations in Mexico, Turkey and the United States.

The Bank’s “home” supervisor is the European Central Bank (“ECB”) at the European level and the Bank of Spain at the national level, both authorities being part of the Single Supervisory Mechanism (“SSM”). The BBVA Group is also subject to supervision by a wide variety of other local authorities given the Bank’s global presence, which are considered to be “host” supervisors given the Bank’s foreign origin. These include authorities in countries such as the United States, Mexico, Turkey and the whole of BBVA’s footprint in South America.

Following the prior global financial crisis, European politicians took action to stabilize the region’s banking sector, due to a period of turbulence and doubts regarding its sustainability. This action culminated in the launch of the European Banking Union (“EBU”). The EBU can be viewed as a house with different building blocks. The EBU’s foundation includes the single rulebook (the “Single Rulebook”), which was the first step to harmonize banking rules in the European Union and includes landmark pieces of legislation such as the Capital Requirements Regulation, the Capital Requirements Directive and the Bank Recovery and Resolution Directive, among others.

The first pillar of the EBU relates to supervision and includes the SSM, which unified banking supervision in the European Union. This responsibility was placed under the ECB, which follows a strict policy of separation and confidentiality in order to ensure the independence of banking supervision and monetary policy. The SSM works in very close coordination with the national competent authorities (“NCAs”). As a result, the joint supervisory teams (“JSTs”) that are responsible for the daily supervision of the most significant banks (one JST per bank) are composed of employees from the ECB and, in the case of BBVA, from the Bank of Spain. This arrangement enables supervision to be distant enough in order to avoid any potential conflicts of interest, while also benefiting from local expertise on a particular country’s intricacies. In addition, each JST member rotates every three years. Furthermore, the SSM has pushed for more internationally diverse JSTs and teams conducting on-site inspections, including assigning Heads of Mission of a different nationality than the bank’s country of origin and by having some members of the inspection team from a different EU country.

41 


 

The second pillar of the EBU relates to resolution mechanisms and includes the Single Resolution Mechanism (“SRM”), for which a new institution was created, known as the Single Resolution Board (“SRB”). The SRB, located in Brussels, works closely with the National Resolution Authorities (“NRAs”), and, in the case of Spain, the Bank of Spain and the Fund for Orderly Banking Restructuring (“FROB”), to ensure the orderly resolution of failing banks with minimum impact on the real economy, the financial system and the public finances of the participating EU member states and other countries.

The role of the SRB is proactive. Instead of waiting for resolution cases, the SRB focuses on resolution planning and preparation with a forward-looking mindset to avoid the negative impacts of a bank failure on the economy and financial stability of the participating EU member states and other countries. Accordingly, one of the key tasks of the SRB and NRAs is to draft resolution plans for the banks under its remit. These plans are prepared jointly by the SRB and NRAs through internal resolution teams (“IRTs”). The IRTs are composed of staff from the SRB and the NRAs and are headed by coordinators appointed from the SRB’s senior staff.

Banking resolution, previously not prioritized by regulatory authorities, became crucial following the prior financial crisis and the need to inject substantial taxpayer funds into financial institutions. The idea that underlies banking resolution is that a “bail-in” is preferable to a “bail-out”. A “bail-out” occurs when outside investors, such as a government, rescue a bank by injecting money to help make debt payments. In the past, such as during the prior financial crisis, “bail-outs” helped save banks from failing, with taxpayers assuming the risks associated with their inability to make debt payments. On the other hand, a “bail-in” occurs when a bank’s creditors (in addition to its shareholders) are forced to bear some of the burden by having some or all of their debt written off. See “—Principal MarketsSpain—Recovery and Resolution of Credit Institutions and Investment Firms” below.

In order to permit the execution of a bail-in, banks are required to hold on their balance sheet a minimum volume of liabilities that could be bailed-in without operational or legal issues in the event of resolution. This is the rationale behind the minimum requirement for own funds and eligible liabilities (“MREL”).  

Within the framework of the SRM, the Single Resolution Fund (“SRF”) was also developed. This is a fund composed of contributions from credit institutions and certain investment firms in the 19 participating countries within the EBU. The SRF may be used only under specific circumstances in banking resolution, such as to guarantee the assets or liabilities of an institution under resolution or make contributions to a bridge institution or asset management vehicle. The SRF can be used only to ensure the effective application of resolution tools but not to absorb the losses of an institution or for a recapitalization.

The first and second pillars of the EBU are highly interlinked. Prior to entering into a resolution process, a bank must be considered by the SSM as failing or likely to fail, which occurs when there is no other option to restore its viability (such as applying the bank’s recovery plan) within the available time frame.

The third and final pillar of the EBU, which is still under discussion, is the European Deposit Insurance Scheme (“EDIS”). The EDIS would enable the insurance of deposits regardless of the country of origin of the bank, thus creating a fully harmonized banking union. However, there remain political obstacles to the creation of the EDIS which have not yet been resolved. In 2019, a High Level Working Group on EDIS was created and charged with presenting a roadmap to start political negotiations. At the national level, BBVA is currently subject to the Deposit Guarantee Fund of Credit Institutions (“FGD”), which operates under the guidance of the Bank of Spain.

In the aftermath of the prior global financial crisis, important reforms were adopted at the international level, namely the Basel III capital reforms (as defined below), which have been translated into relevant legislation at the European and national level. In May 2019, the European Council adopted a banking package which included new versions of some of the regulations and directives that are part of the Single Rulebook. More concretely, this package included the CRR II, the CRD V Directive, the SRM Regulation II and the BRRD II (each as defined below). This package incorporated some of the most recent internationally-agreed reforms mentioned above, including measures such as a new leverage ratio requirement for all institutions, a revised “Pillar 2” (as described below) framework, additional supervisory powers in the area of money laundering and enhanced MREL subordination rules for global systemically important institutions (“G-SIIs”) and other top-tier banks.

42 


 

As a result of the foregoing, banks in the EBU face increasingly intense supervisory scrutiny. However, the reforms discussed above have resulted in structurally important advances as asset quality, capital and liquidity levels in the European banking sector have greatly improved since they were adopted. Another important component of this progress has been the Supervisory Review and Examination Process (“SREP”). The SREP is an annual exercise that determines a bank’s capital requirements, on a “Pillar 2” basis, as well as the qualitative requirements that the bank must address in the following year. This exercise takes four different elements of a bank into account: (a) business model and profitability, (b) capital, (c) liquidity and (d) governance and risk management.

In addition, any work done during the year related to on-site inspections, deep dives, thematic reviews, internal model investigations and other ad hoc requests (e.g., Brexit-related) feeds into the SREP. The SREP culminates with a supervisory dialogue at the end of the year, where a preliminary review of the bank is presented. In addition, prior to the beginning of each year, the SSM presents a Supervisory Examination Program (“SEP”) which details the inspections, high-level meetings and potential visits to group subsidiaries that are forecasted to occur throughout the year. The process for creating a SEP for each entity begins with defining the SSM’s risk dashboard and the classification of risks according to their probability of occurring and probable magnitude of impact, which then translates into the SSM’s priorities for the following year.

Another important tool that the SSM possesses to supervise large European banking groups is the Supervisory Colleges. For those banks for which the SSM acts as the consolidated “home” supervisor, the SSM together with the relevant NCA organizes an event where all of the banking group’s “host” supervisors are gathered at a roundtable and where they discuss the current state of affairs of the bank in the different relevant jurisdictions. The SRB follows a similar approach, organizing Resolution Colleges with the banking group’s “host” resolution authorities.

The SSM also performs comprehensive assessments, together with the NCAs, over the banks it directly supervises. These are performed either regularly (at periodic intervals) or on an ad hoc basis (e.g., when an EU member state requests to be part of the EBU). These comprehensive assessments include two parts: (a) asset quality reviews of the banks’ exposures and (b) stress testing of the banks’ balance sheets under different scenarios. Furthermore, the European Banking Authority (“EBA”) also organizes and performs an EU-wide stress test in coordination with the ECB. This test, which occurs every two years, does not confer a pass or fail result but instead contributes to determining “Pillar 2” guidance. While “Pillar 2” guidance is a non-binding capital requirement, the EBA nonetheless expects compliance with it. In those years in which there is no EBA stress test, the SSM organizes a more specific stress test concerning a particular topic, such as the impact of interest rate risk on the banking book or liquidity.

Due to the COVID-19 pandemic crisis, the EBA postponed the scheduled 2020 stress test by one year. This was one of the several measures taken by the regulators and supervisors in Europe in order to provide relief for banks at the operational, capital and liquidity levels. The ECB also issued a recommendation stating that banks under its direct supervision should not distribute capital in the form of dividends and share buybacks during 2020, and should refrain from making variable discretionary remuneration payments in order to preserve their capital position and lending capacity. On July 27, 2020, the ECB prolonged this recommendation until January 1, 2021. On December 15, 2020 the ECB issued recommendation ECB/2020/62, repealing its recommendation of July, and recommending that significant credit institutions (which would include the Group) exercise extreme prudence when deciding on or paying out dividends or carrying out share buy-backs aimed at remunerating shareholders. For additional information, see “—Dividends”. 

Given that there was no EU-wide stress test during 2020, the ECB performed a vulnerability assessment in order to assess the early impact of the crisis within the SSM banking sector. This assessment focused on two different economic scenarios, a central scenario (the most likely to materialize according to ECB staff) and a severe scenario. The ECB published its findings at an aggregate level in July 2020 and concluded that the banking sector was generally well capitalized and capable of handling the fallout of the crisis from a solvency perspective; however, it also expressed that if the situation were to worsen, the depletion of bank capital would be material.

43 


 

The macro-prudential aspect of supervision is also increasingly gaining relevance, including through specific thematic reviews undertaken by the SSM on certain portfolios (e.g., real estate or shipping) and the creation of new authorities and review boards. At the European level, these include the European Systemic Risk Board (“ESRB”), which is responsible for monitoring macro-risks at the European level. The ESRB also develops the adverse scenarios to be used in the EU-wide stress test. In addition, in 2019 the Spanish Government created the Macro-prudential Authority Financial Stability Council, which is chaired by the Minister of Economy and Business and vice-chaired by the Governor of the Bank of Spain, and includes the Deputy Governor of the Bank of Spain, who is responsible for banking supervision, among its members.

The foregoing illustrates how much the regulatory and supervisory landscape has changed in the decade following the prior financial crisis, due in large part to the Basel Committee on Banking Supervision (the “Basel Committee”), an international, standard-setting forum, which established important reforms at a global level. Some of these reforms have been adopted in regulations at the European level.

The following is a discussion of certain of these and other regulations that are applicable to BBVA and certain related requirements.

Liquidity Requirements – Minimum Reserve Ratio

The legal framework for the minimum reserve ratio is set out in Regulation (EC) No. 2818/98 of the ECB of December 1, 1998 on the application of minimum reserves (ECB/1998/15). The reserve coefficient for overnight deposits, deposits with agreed maturity or period of notice up to two years, debt certificates with maturity up to two years and money market paper is 1%. There is no required reserve coefficient for deposits with agreed maturity or period of notice over two years, repurchase agreements and debt certificates with maturity over two years.

According to the Delegated Regulation (EU) 2015/61 issued by the European Commission (EC) of October 10, 2014, the liquidity coverage ratio came into force in Europe on October 1, 2015, with an initial 60% minimum requirement, which was progressively increased (phased-in) up to 100% in 2018.

Capital Requirements

In December 2010, the Basel Committee proposed a number of fundamental reforms to the regulatory capital framework for internationally active banks (the “Basel III capital reforms”). The Basel III capital reforms raised the quantity and quality of capital required to be held by a financial institution with an emphasis on Common Equity Tier 1 capital (the “CET1 capital”). 

As a Spanish credit institution, the BBVA Group is subject to Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC, and repealing Directives 2006/48/EC and 2006/49/EC (as amended, replaced or supplemented from time to time, the “CRD IV Directive”), through which the EU began implementing the Basel III capital reforms, with effect from January 1, 2014, with certain requirements being phased in until January 1, 2019. The core regulation regarding the solvency of credit institutions is Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No. 648/2012 (as amended, replaced or supplemented from time to time, the “CRR I” and, together with the CRD IV Directive and any measures implementing the CRD IV Directive or CRR I which may from time to time be applicable in Spain, “CRD IV”), which is complemented by several binding regulatory technical standards, all of which are directly applicable in all EU Member States, without the need for national implementation measures. The implementation of the CRD IV Directive into Spanish law took place through Royal Decree-Law 14/2013, of November 29, Law 10/2014, of June 26, on the organization, supervision and solvency of credit institutions (“Law 10/2014”), Royal Decree 84/2015, of February 13 (“Royal Decree 84/2015”), Bank of Spain Circular 2/2014 of January 31, and Bank of Spain Circular 2/2016, of February 2 (the “Bank of Spain Circular 2/2016”). 

44 


 

On June 7, 2019, the following amendments to CRD IV and Directive 2014/59/EU of the European Parliament and of the Council of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (“BRRD I”) were published:

·                  Directive 2019/878/EU of the European Parliament and of the Council of May 20, 2019 (as amended, replaced or supplemented from time to time, the “CRD V Directive”) amending the CRD IV Directive (the CRD IV Directive as so amended by the CRD V Directive and as amended, replaced or supplemented from time to time, the “CRD Directive”);  

·                  Directive 2019/879/EU of the European Parliament and of the Council of May 20, 2019 (as amended, replaced or supplemented from time to time, “BRRD II”) amending, among other things, BRRD I as regards the loss-absorbing and recapitalization capacity of credit institutions and investment firms (BRRD I as so amended by BRRD II and as amended, replaced or supplemented from time to time, the “BRRD”); 

·                  Regulation (EU) No. 876/2019 of the European Parliament and of the Council of May 20, 2019 (as amended, replaced or supplemented from time to time, “CRR II” and, together with the CRD V Directive, “CRD V”) amending, among other things, CRR I as regards the leverage ratio, the net stable funding ratio, requirements on own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, and reporting and disclosure requirements (CRR I as so amended by CRR II and as amended, superseded or supplemented from time to time, the “CRR”); and

·                  Regulation (EU) No. 877/2019 of the European Parliament and of the Council of May 20, 2019 (as amended, replaced or supplemented from time to time, the “SRM Regulation II”) amending Regulation (EU) No. 806/2014 of the European Parliament and of the Council of July 15, 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund (the “SRM Regulation I”) as regards the loss-absorbing and recapitalization capacity of credit institutions and investment firms (SRM Regulation I as so amended by SRM Regulation II and as amended, replaced or supplemented from time to time, the “SRM Regulation”) (CRD V, together with BRRD II and the SRM Regulation II, the “EU Banking Reforms”).  

The EU Banking Reforms (other than CRR II) are stated to apply from 18 months plus one day after the date of their entry into force on June 27, 2019, save for certain provisions of the CRD V Directive where a two year period is provided for. CRR II is stated to apply from 24 months and one day after the date of its entry into force on June 27, 2019, although certain provisions are stated to enter into force before or after that date, as described therein.

CRD IV, among other things, established a “Pillar 1” minimum capital requirement and increased the level of capital required through the “combined capital buffer requirement” that institutions must comply with from 2016 onwards. The “combined capital buffer requirement” introduced five new capital buffers: (i) the capital conservation buffer, (ii) the G-SIB buffer, (iii) the institution-specific counter-cyclical capital buffer, (iv) the D-SIB buffer and (v) the systemic risk buffer (a buffer to prevent systemic or macroprudential risks). The “combined capital buffer requirement” applies in addition to the minimum “Pillar 1” capital requirements and must be satisfied with CET1 capital.

The G-SIB buffer is applicable to the institutions included in the list of G-SIBs, which is updated annually by the Financial Stability Board (the “FSB”). The Bank was excluded from this list with effect as from January 1, 2017, so, unless otherwise indicated by the Financial Stability Board (or the Bank of Spain) in the future, the Bank will no longer be required to maintain the G-SIB buffer.

The Bank of Spain announced on November 25, 2019 that the Bank continues to be considered a D-SIB and is required to maintain a fully-loaded D-SIB buffer equivalent to a CET1 ratio of 0.75% on a consolidated basis.

In December 2015, the Bank of Spain agreed to set the counter cyclical capital buffer applicable to credit exposures in Spain at 0% from January 1, 2016. This percentage is reviewed quarterly. The Bank of Spain agreed in December 21, 2020 to maintain the counter cyclical capital buffer applicable to credit exposures in Spain at 0% for the fourth quarter of 2020. As of the date of this Annual Report, the counter cyclical capital buffer applicable to the Group stands at 0%.

45 


 

Additionally, Article 104 of the CRD Directive, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No. 1024/2013 of October 15, conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), also contemplates the possibility that the supervisory authorities may require credit institutions to meet capital requirements exceeding the “Pillar 1” minimum capital requirements and the “combined capital buffer requirement” by establishing “Pillar 2” capital requirements (which, with respect to other requirements, are above “Pillar 1” requirements and below the “combined capital buffer requirement”).

Furthermore, the ECB is required, under Regulation (EU) No. 468/2014 of the ECB of April 16, 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the ECB and national competent authorities and with national designated authorities (the “SSM Framework Regulation”), to carry out a SREP for us and the Group at least on an annual basis.

On July 19, 2018, the EBA published its final guidelines intended to further enhance risk management by institutions and the convergence of supervision with respect to the SREP. These guidelines focus on stress testing, particularly to determine “Pillar 2” and the level of interest rate risk.

Likewise, the ECB announced on March 12, 2020 that it will allow banks to partially use AT1 and Tier 2 instruments to meet the Pillar 2 requirement, being this measure introduced by CRD V and initially expected to be implemented in 2021. In particular, the composition of the capital instruments to meet he “Pillar 2” requirement, shall be made up in the form of 56% of CET1 capital and 75% of Tier 1 capital, as a minimum.

Consequently, all additional “Pillar 2” own funds requirements that the ECB may impose on the Bank and/or the Group under the SREP will require the Bank and/or the Group to maintain capital levels higher than the “Pillar 1” minimum capital requirement.

As a result of the most recent SREP carried out by the European Central Bank, and in accordance with the measures implemented by the European Central Bank on March 12, 2020, by means of which banks may partially use AT1 and Tier 2 capital instruments in order to fulfil the “Pillar 2” requirement, BBVA must maintain, a CET1 ratio of 8.59% at the consolidated level and 12.75% at the individual level. The consolidated overall capital requirement includes: i) the minimum capital requirement of Pillar 1 of 8.0%, that must be composed by a 4.5% minimum CET1; ii) the AT1 requirement of Pillar 1 of 1.5%, that must be composed by a minimum CET1 of 0.84%; iii) the capital conservation buffer (2.5% of CET1) and iv) the capital buffer for Other Systemically Important Institutions (O-SIIs) (0.75% of CET1). Likewise, BBVA must maintain, on an individual level, a CET1 ratio of 7.84% and a total capital ratio of 12.00%.

For further information on the countercyclical capital buffer and the total capital requirements applicable to the BBVA Group, see Note 32 to our Consolidated Financial Statements.

In accordance with Article 48 of Law 10/2014, Article 73 of Royal Decree 84/2015 and Rule 24 of Bank of Spain Circular 2/2016, any institution not meeting its “combined capital buffer requirement” is required to calculate its maximum distributable amount (“MDA”) as stipulated in such legislation. Should that requirement not be met and until the MDA has been calculated and communicated to the Bank of Spain, the relevant institution shall not make any: (i) distributions relating to CET1 capital; (ii) payments related to variable remuneration or discretionary pension benefits; and (iii) distributions linked to AT1 instruments (“discretionary payments”), and once the MDA has been calculated and communicated to the Bank of Spain, the discretionary payments will be subject to the limit of the MDA calculated.

Additionally, pursuant to Article 48 of Law 10/2014, the Bank of Spain’s adoption of the measures provided by Articles 68.2.h) and 68.2.i) of Law 10/2014, aimed at strengthening own funds and limiting or prohibiting the distribution of dividends, respectively, will also entail the requirement to determine the MDA and to restrict discretionary payments to such MDA. In accordance with the EU Banking Reforms, the calculation of the MDA and the restrictions described in the preceding paragraph while such calculation is pending, shall also be triggered by a breach of the MREL requirement (see “Item 3. Risk Factors—Regulatory, Tax and Reporting Risks—Increasingly onerous capital and liquidity requirements may have a material adverse effect on the Group’s business, financial condition and results of operations”) or a breach of the minimum leverage ratio requirement.

CRD V also distinguishes between “Pillar 2” capital requirements and “Pillar 2” capital guidance, only the former being regarded as mandatory requirements. Notwithstanding the foregoing, CRD V provides that, besides other measures, supervisory authorities are entitled to impose further “Pillar 2” capital requirements when an institution repeatedly fails to follow the “Pillar 2” capital guidance previously imposed.

46 


 

Additionally, CRD II sets a binding leverage ratio requirement of 3% of Tier 1 capital, in addition to the institution’s own funds requirements and risk-weighted assets (“RWAs”)-based requirements. In particular, any breach of this leverage ratio would entail the need to determine the MDA and the related consequences.

Furthermore, on December 7, 2017 the BCBS announced the end of the Basel III reforms (informally referred to as Basel IV). These reforms include changes to the risk weightings applied to different assets and measures to enhance the sensitivity to risk in those weightings and impose limits on the use of internal ratings-based approaches to ensure a minimum level of conservatism in the use of such approaches and enhance comparability among banks in which such internal ratings-based approaches are used. The review of minimum capital requirements will also limit the regulatory benefit for banks when calculating total RWAs using internal risk models as compared with the standardized approach, with a minimum capital requirement of 50% of RWAs calculated using only the standardized approaches that will be applicable as from January 1, 2022, which is expected to increase to 72.5% as from January 1, 2027.

Moreover, on March 15, 2018, the ECB published its supervisory expectations on prudential provisions for non-performing loans by publishing the Addendum to the ECB’s guide on non-performing loans for credit institutions, issued on March 20, 2017, which clarifies the ECB expectations regarding supervision over the identification, management, measurement and reorganization of non-performing loans, in order to avoid future and excessive accumulation of non-performing loans without coverage in the balance sheets of the credit entities.

The Addendum’s supervisory expectations are applicable to new non-performing loans classified as such as of April 1, 2018. The ECB will evaluate the banks’ practices at least once a year and, from the beginning of 2021, the banks must inform the ECB of any difference between their practices and the prudential provision expectations.

In addition, the ECB has announced that a TRIM is being conducted on the internal models used by banks subject to its supervision to calculate their RWAs, in order to reduce inconsistencies and unjustified variability in these internal models throughout the European Union. Although the full results of the TRIM are not yet known, it could imply a change in the internal models used by banks and, at the same time, increases or decreases in the capital needs of banks, including the Bank.

The BRRD prescribes that banks shall hold a minimum level of own funds and eligible liabilities in relation to total liabilities known as MREL requirement. According to the Commission Delegated Regulation (EU) 2016/1450 of May 23, 2016 (“MREL Delegated Regulation”), the level of own funds and eligible liabilities required under MREL will be set by the resolution authority, in agreement with the competent authority, for each bank (and/or group) based on, among other things, the criteria set forth in Article 45c.1 of the BRRD, including the systemic importance of the institution.

On November 19, 2019, the Bank announced that it had received notification from the Bank of Spain regarding its MREL, as determined by the SRB. The Bank’s MREL has been set at 15.16% of the total liabilities and own funds of the Bank’s resolution group, at a sub-consolidated level from January 1, 2021 (as detailed below). Likewise, of this MREL, 8.01% of the total liabilities and own funds must be met with subordinated instruments (the subordination requirement), once the concession established in the requirement itself has been applied. This MREL is equivalent to 28.50% of the Bank’s RWAs, while the subordination requirement included in the MREL is equivalent to 15.05% in terms of the RWAs, once the corresponding concession has been applied.

The Bank estimates that, following the entry into force of SRM Regulation II (which, among other matters, establishes the MREL in terms of RWAs and sets forth new transitional periods and deadlines, and which we interpret would be applicable to our MREL requirement), the current structure of shareholders’ funds and admissible liabilities enables the Bank’s compliance with its MREL requirement.

As of December 31, 2017 (reference date taken by the SRB), the total liabilities and equity of the Bank’s resolution group amounted to 371,910 million euros, of which the total liabilities and equity of the Bank represented approximately 95%, and the RWAs of the Bank’s resolution group amounted to 197,819 million euros.

If the FROB, the SRM or a Spanish Resolution Authority considers that there may be any obstacles to resolvability by the Bank and/or the Group, a higher MREL could be imposed.

47 


 

The EU Banking Reforms provide that the breach by a bank of its MREL should be addressed by the competent authorities through their powers to address or remove obstacles to resolution, the exercise of their supervisory powers and their power to impose early intervention measures, administrative sanctions and other administrative measures. If there were a deficit in the level of an entity’s eligible own funds and liabilities, and that entity’s own funds were contributing to meeting the “combined capital buffer requirement,” these own funds would automatically be deemed to count toward meeting the MREL of said entity and would cease to count for purposes of meeting the “combined capital buffer requirement”, which could lead the entity to fail to comply with its “combined capital buffer requirement”. This could result in the need to calculate the MDA and the resolution authority would have the power (but not the obligation) to impose restrictions on the making of discretionary payments. Therefore, with the entry into force of the EU Banking Reforms, the Bank will have to fully comply with its “combined capital buffer requirement”, in addition to its MREL, to ensure that it can make discretionary payments.

In addition, in accordance with the EBA guidelines on the assumptions of triggering the use of early intervention measures of May 8, 2015, a significant deterioration in the amount of liabilities and eligible own funds held by an entity in order to comply with Its MREL could place an entity in a situation where the conditions for early intervention are met, which could entail the application of early intervention measures by the competent resolution authority, which in the Spanish case are detailed in Articles 9 and 10 of Law 11/2015, including the intervention or provisional replacement of administrators.

On November 9, 2015, the FSB published its final Principles and Term Sheet (the “TLAC Principles and Term Sheet”), proposing that G-SIBs maintain significant minimum amounts of liabilities that are subordinated (by law, contract or structurally) to certain prior-ranking liabilities, such as guaranteed insured deposits, and forming a new standard for G-SIBs. The TLAC Principles and Term Sheet contain a set of principles on loss-absorbing and recapitalization capacity of G-SIBs in resolution and a term sheet for the implementation of these principles in the form of an internationally agreed standard. The TLAC Principles and Term Sheet require a minimum TLAC requirement to be determined individually for each G-SIB at the greater of (i) 16% of RWAs as of January 1, 2019 and 18% as of January 1, 2022, and (ii) 6% of the Basel III Tier 1 leverage ratio exposure measured as of January 1, 2019, and 6.75% as of January 1, 2022.

Among other amendments, BRRD II introduced the concepts of resolution institution and resolution group. The EU Banking Reforms provide for the amendment of a number of aspects of the MREL framework to align it with the Total Loss-Absorbing Capacity (“TLAC”) standards included in the FSB final TLAC Principles and Term Sheet. To maintain coherence between the MREL rules applicable to G-SIBs and those applicable to non-G-SIBs, the BRRD II introduced a number of changes to the MREL rules applicable to non-G-SIBs. While the EU Banking Reforms propose for minimum harmonized or “Pillar 1” MRELs for G-SIBs, in the case of non-G-SIBs, it is proposed that MRELs will be imposed on a bank-specific basis. For G-SIBs, it is also proposed that a supplementary or “Pillar 2” MRELs may be further imposed on a bank-specific basis. The EU Banking Reforms further provide for the resolution authorities to give guidance to an institution to have own funds and eligible liabilities above the required levels.

Following the application of CRR II, CRR will establish that an institution’s eligible liabilities will consist of its eligible liability items (as defined therein) after a number of mandatory deductions and, in order to be considered as eligible liabilities, it is stipulated, for example, that the instruments must meet the requirements set out in Article 72b of the CRR, which includes the need for those instruments to rank below the liabilities excluded under Article 72.a.2 of the CRR.

To facilitate compliance with this requirement, Directive (EU) 2017/2399 of the European Parliament and of the Council of December 12, 2017 amending BRRD as regards the ranking of unsecured debt instruments in insolvency hierarchy was approved, with the aim to harmonize national laws on insolvency and recovery and resolution of credit institutions and investment firms, by creating a new credit class of “non-preferred” senior debt that should only be bailed-in after junior ranking instruments but before other senior liabilities. In this regard, on June 23, 2017 Royal Decree-Law 11/2017 of June 23 on urgent measures in financial matters introduced into Spanish law the new class of “non-preferred” senior debt.

Notwithstanding the foregoing, CRR II provides for some exemptions which could allow outstanding senior debt instruments to be used to comply with MREL. However, there is uncertainty regarding the final form of the EU Banking Reforms insofar as such eligibility is concerned and how the regulations are to be interpreted and applied. In any event, BRRD II aims to provide greater certainty with respect to eligible liabilities, in order to provide markets with the necessary clarity concerning the eligibility criteria for instruments to be recognized as eligible liabilities for TLAC or MREL purposes.

48 


 

The EU Banking Reforms further include, as part of MREL, a new subordination requirement of eligible instruments for G-SIBs and “top tier” banks (including the Bank) that will be determined according to their systemic importance, involving a minimum “Pillar 1” subordination requirement. This “Pillar 1” subordination requirement must be satisfied with own funds and other eligible MREL instruments (which MREL instruments may not for these purposes be senior debt instruments and only MREL instruments constituting “non-preferred” senior debt under the new insolvency hierarchy introduced into Spain and other subordinated will be eligible for compliance with the subordination requirement). For “top tier” banks such as the Bank, this “Pillar 1” subordination requirement has been determined as the highest of 13.5% of the Bank’s RWAs or alternatively, 5% of its leverage exposure. Resolution authorities may also impose further “Pillar 2” subordination requirements, which would be determined on a case-by-case basis but at a minimum level equal to the lower of 8% of a bank’s total liabilities and own funds and 27% of its RWAs.

Capital Management

Basel Capital Accord - Economic Capital

The Group’s capital management is performed at both the regulatory and economic levels. Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using the BIS Framework rules and the CRR. See Note 32 to our Consolidated Financial Statements.

The aim of our capital management is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, and preferred and subordinated issues of equity and hybrid instruments. Various actions have been taken during the last years in connection with our capital management and in order to comply with various capital requirements applicable to us related to various actions regarding asset sales. In addition, we may make securities issuances or undertake new asset sales in the future, which could involve outright sales of businesses or reductions in interests held by us, which could be material and could be undertaken at less than their respective book values, resulting in material losses thereon, in connection with our capital management and in order to comply with capital requirements or otherwise. The Bank has obtained the Bank of Spain’s approval with respect to its internal model of capital estimation concerning certain portfolios and its operational risk internal model.

From an economic standpoint, capital management seeks to optimize value creation for the Group and its different business units. The Group allocates economic capital (“CER”) commensurate with the risks incurred by each business. This is based on the concept of unexpected loss at a certain level of statistical confidence, depending on the Group’s targets in terms of capital adequacy. The CER calculation combines credit risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk, model risk, business risk, reputational risk and technical risks in the case of insurance companies.

Shareholders’ equity, as calculated under the BIS Framework rules, is an important metric for the Group. For the purpose of allocating capital to operating segments, the Group focuses on both economic and regulatory capital. The purpose is to ensure that the businesses are run considering both the risk-sensitive perspective and the regulation requirement. These are designed to provide an equitable basis for assigning capital and ensure adequate capital management across the Group.

Concentration of Risk

According to the CRR, an institution’s exposure to a client or group of connected clients shall be considered a large exposure where its value is equal to or exceeds 10% of its eligible capital, and such institution shall have sound administrative and accounting procedures and adequate internal control mechanisms for the purposes of identifying, managing, monitoring, reporting and recording all large exposures and subsequent changes to them, in accordance with the CRR. Where so required under the CRR, an institution must make available to the NCAs its 20 largest exposures on a consolidated basis (but excluding certain exposures, if allowed under the CRR). In addition, an institution must also report its 10 largest exposures on a consolidated basis to other institutions as well as its 10 largest exposures on a consolidated basis to unregulated financial entities, as well as any exposure to a client or group of connected clients greater than €300 million (before taking into account the effect of credit risk mitigation measures).

49 


 

The CRR also imposes certain limits to large exposures. In particular, an institution must not incur an exposure, after taking into account the effect of credit risk mitigation measures, to a client or group of connected clients the value of which exceeds 25% of its eligible capital. Where that client is an institution or where a group of connected clients includes one or more institutions, that value must not exceed the higher of 25% of the institution’s eligible capital or €150 million, provided that the sum of exposure values, after taking into account the effect of credit risk mitigation measures, to all connected clients that are not institutions does not exceed 25% of the institution’s eligible capital. Where 25% of an institution’s eligible capital is less than €150 million, the value of the exposure, after taking into account the effect of credit risk mitigation measures, must not exceed a reasonable limit in terms of the institution’s eligible capital. That limit shall be determined by the institution in accordance with the policies and procedures referred to in the CRD IV Directive to address and control concentration risk, provided that this limit shall not exceed 100% of the institution’s eligible capital.

Legal and Other Restricted Reserves

We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Requirements”.

Impairment of Financial Assets

For a discussion of applicable accounting standards related to loss allowances on financial assets and the method for calculating expected credit loss, see Note 2.2.1 to our Consolidated Financial Statements.

Dividends

A bank may generally dedicate all of its net profits and its distributable reserves to the payment of dividends. In no event may dividends be paid from non-distributable reserves. For additional information see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.

Since January 1, 2016, according to CRD IV, those credit entities required to calculate their MDA are subject to restrictions on discretionary payments, which include, among others, dividend payments. See “—Capital Requirements”.

Although banks are not legally required to seek prior approval from the Bank of Spain or the ECB before declaring dividends (distributions of share premium account is subject to prior approval), we inform each of them on a voluntary basis upon the declaration of a dividend. The ECB recommendation dated January 7, 2019 addressed to, among others, significant supervised entities and significant supervised groups, such as BBVA and its Group, recommended that credit institutions establish dividend policies using conservative and prudent assumptions so that, after any such distribution, they are able to satisfy the applicable capital requirements and any other requirements resulting from the SREP.

In accordance with recommendation ECB/2020/19 issued by the ECB on March 27, 2020 on dividend distributions during the COVID-19 pandemic, the Board of Directors of BBVA resolved to modify for the financial year corresponding to 2020 the dividend policy of the Group, announced on February 1, 2017, determining as new policy for 2020 not to pay any dividend amount corresponding to 2020 until the uncertainties caused by COVID-19 disappear and, in any case, never before the end of such fiscal year. On July 27, 2020, the ECB prolonged this recommendation until January 1, 2021 by adopting recommendation ECB/2020/35.

On December 15, 2020 the ECB issued recommendation ECB/2020/62, repealing recommendation ECB/2020/35 and recommending that significant credit institutions exercise extreme prudence when deciding on or paying out dividends or performing share buy-backs aimed at remunerating shareholders. Recommendation ECB/2020/62 circumscribes prudent distributions to results of 2019 and 2020 but excludes distributions regarding 2021 until September 30, 2021, when the ECB will reevaluate the economic situation. BBVA intends to reinstate its dividend policy of the Group announced on February 1, 2017 once the recommendation ECB/2020/62 is repealed and there are no additional restrictions or limitations.

Our Bylaws allow for dividends to be paid in cash or in kind as determined by shareholders’ resolution.

50 


 

Investment Ratio

In the past, the Spanish government used the investment ratio to allocate funds among specific sectors or investments. As part of the liberalization of the Spanish economy, it was gradually reduced to a rate of zero percent as of December 31, 1992. However, the law that established the ratio has not been abolished and the government could re-impose the ratio, subject to applicable EU requirements.

Principal Markets

The following is a summary of certain laws and regulations applicable to BBVA’s operations in Spain, Mexico, Turkey and the United States.

For information on certain measures that the governments of the main countries where the BBVA Group operates have taken to limit the effects of the COVID-19 pandemic (including measures which have affected the BBVA Group’s lending activity and credit risk-taking), as well as on the measures adopted by the BBVA Group to support its customers pursuant to initiatives required or supported by the relevant governments, see “Item 5. Operating and Financial Review and Prospects―Operating Results―Factors Affecting the Comparability of our Results of Operations and Financial Condition―The COVID-19 Pandemic” .

Spain

BBVA’s operations in Spain are subject to European Union-wide and Spanish national regulations. Spain has a broad regulatory framework designed to ensure consumer protection and enhance transparency. Finance and deposits products are subject to both general consumer and product-specific laws which, in certain circumstances, differentiate between consumers and non-consumers.

 

The provision of payment accounts and services in Spain is subject to various regulations, most of which transpose European legislation, such as Directive (EU) 2015/2366 (“PSD 2”) and Directive (EU) 2014/92. Such regulations lay down minimum information requirements for providers of payment accounts and services as well as certain transparency provisions with regard to fees. A significant development in relation to the implementation of PSD2 is a requirement to allow third parties access to accounts to provide account information and payment initiation services, provided they have a customer’s consent.

 

Regarding loans, there are separate regulations applying to consumer loans and residential loans which are, in both cases, mainly derived from European legislation, including Directive (EU) 2008/48 (relating to credit agreements for consumers) and Directive (EU) 2014/17 (relating to credit agreements for residential immovable property). In 2019, Law 5/2019, of March 15, regulating real estate credit agreements (“Law 5/2019”) was passed. It applies to individuals, whether or not they are consumers, and sets limits on default interest, early maturity and early repayment fees, and provides a comprehensive framework of pre-contractual information provisions. Law 5/2019 also requires that a notarial act shall be granted prior to signing a residential credit agreement in which the notary verifies that the bank has fulfilled all of its legal pre-contractual information obligations.

 

The regulatory framework also includes specific regulations designed to protect the most vulnerable customers, such as the requirement for banks to offer basic accounts to customers without access to ordinary bank accounts. Basic accounts may be free of charge or have a maximum monthly cost of three euros. In the area of mortgage lending, there is a code of good practice to be adhered to by entities to make it easier for distressed debtors to refinance their debt, including dation-in-payment as a refinance measure.

 

In 2020, extensive regulation about revolving credit has been approved by Order ETD/699/2020, of July 24, regulating revolving credit and amending Order ECO/697/2004, of March 11, on the Central Risk Information Office, Order EHA/1718/2010, of June 11, regulating and controlling the advertising of banking services and products and Order EHA/2899/2011, of October 28, on transparency and protection of customers of banking services. This new regulation sets out, among others, new provisions on creditworthiness assessment and transparency requirements for revolving credit. In particular, lenders shall assess whether customers could repay amounts equal to at least 25% of the credit on an annual basis. Regarding European cross-border payments, Regulation 2019/518 introduced two amendments to Regulation 924/2009: (i) the extension of the equality of charges principle to non-euro Member States; and (ii) new rules on the transparency of charges regarding currency conversions for payments at the point of sale (“POS”) or at ATM machines, as well as for credit transfers. The main changes introduced by this regulation entered into force in December 2019 and April 2020 and some obligations of information, related to electronic communications, will enter into force in April 2021.

 

51 


 

In relation to payment services, Order ECE/1263/2019 of December 26, on transparency of conditions and information requirements applicable to payment services, entered into force on July 1, 2020. This Order establishes the information requirements applicable to payment transactions and is mandatory for both parties if the customer is a consumer or a micro-enterprise.

 

Additionally, Circular 4/2020, of June 26, of the Bank of Spain on advertising products and banking services came into force on October 15, 2020. This Circular sets out a specific regime for advertising of banking products and services in audiovisual, radio or digital media and social networks. According to Circular 4/2020, a commercial communication policy shall be approved by the management body and internal records of all advertising campaigns shall be kept.

      

CNMV circular 2/2020, of October 28, on the advertising of investment products and services, complemented and developed Order EHA/1717/2010, of June 11, on the regulation and control of advertising of investment services and products, of the Ministry of Economy and Finance.

 

In addition, Spanish Act 7/2020 for the digital transformation of the financial system was adopted. This law regulates the controlled testing environment (“regulatory sandboxes”) that are designed to facilitate the development and implementation of innovative technology in the financial system, while providing supervisory coverage and aiming to respect the principle of non-discrimination.

 

Moreover, Spanish Act 6/2020, regulating certain aspects of electronic trust services, was adopted. This law seeks to adapt Spanish legislation to certain aspects of Regulation (EU) 910/2014 regarding electronic identification and trust services for electronic transactions.

 

In relation to insolvency regulation, Royal Legislative Decree 1/2020 of May 5, approving the revised text of the new Spanish Insolvency Law entered into force on September 1, 2020. Additionally, Royal Decree Law 16/2020 introduced some exceptional and temporary measures as a consequence of the effects of the COVID-19 pandemic. The main changes of this Royal Decree affect refinancing agreements, the extension of the period for requesting –on a voluntary basis- the start of insolvency proceedings, special temporary regime for parties mostly related to an insolvent company, among other temporary changes. Other measures to support solvency were introduced by Royal Decree Law 34/2020 with (i) the extension of the maturity and interest-only periods (carencia) of transactions guaranteed by the ICO (Instituto de Crédito Oficial, a state-owned bank), (ii) the extension, until March 14, 2021, of the suspension of the duty to request the start of insolvency proceedings, (iii) the scope of the measures of inadmissibility to process a declaration of default/noncompliance of a refinancing agreement, or an out-of-court settlement (originally provided for in Article 3 of Law 3/2020) is expanded. This regime, which was originally in force for requests of declarations of default submitted up to October 31, 2020, continues to be in effect on the same terms.

 

Regarding real estate, the Spanish government and the governments of several autonomous regions of Spain have taken measures to improve access to housing by either supporting public housing or protecting mortgage owners and/or home renters. Measures have also been adopted to protect mortgage owners and/or renters of industrial/commercial properties. Some of these measures affect the Bank. At a national level, Decree Law 34/2020, of October 20, on urgent measures to support economic activity in leased business premises was approved with the objective of reducing the onerous nature of contractual obligations under property leases for industrial and/or commercial activities that have been affected by the suspensions and restrictions adopted by the public authorities in response to the COVID-19 pandemic. Measures adopted by autonomous regions include the following:

 

·          In the Autonomous Region of Valencia, Decree Law 6/2020 of June 5, supports public housing by introducing prospective and retrospective rights of first refusal (derechos de tanteo y retracto) of the Generalitat of Valencia in connection with transfers of housing acquired by means of settling mortgage debts (dation-in payment or “dación en pago”), transfer of buildings containing a minimum of five dwellings, transfers of ten or more dwellings and housing acquired in a judicial mortgage foreclosure proceeding.

52 


 

·          In Catalonia, Decree Law 17/2019 of December 23, on urgent measures to improve access to housing was approved, modifying various regulations in the area of housing, affecting owners of empty housing, providing preferential and withdrawal rights in favor of the Generalitat in connection with housing acquired in a foreclosure proceeding or by means of settling mortgage debts (dation-in payment or “dación en pago”) , and establishing the concept of “large house holder”. The main measures are: (i) expropriation of housing for a social purpose, (ii) the requirement to extend lease contracts with low prices to certain vulnerable renters, (iii) the obligation to relocate persons or family units at risk of residential exclusion, (iv) the indexation of rental prices in some cases, and (v) right of first refusal in case of transfer of rented housing. On January 28, 2021, the Spanish Constitutional Court ruled in favor of the annulment of some of these provisions.

·          In Andalusia, Decree-Law 2/2020, of March 9, on the improvement and simplification of the regulation for the promotion of productive activity in Andalusia, introduced changes to the administrative intervention procedures relating to construction activities in order to eliminate certain burdens. In addition, Decree 175/2020, of October 27, regulates the right of information of consumers, borrowers and guarantors in connection with issuances of mortgage bonds,  mortgage transfer certificates, and other means of transferring credit rights over home mortgages. This decree imposes obligations of information to creditors that intend to sell their position on mortgages to third parties.

In the Autonomous Region of Murcia, measures have also been adopted to address the illegal occupation of dwellings (Decree Law 10/2020, of October 8).

The European Union’s sustainability initiatives is expected to impact asset management legislation, with MiFID II (as defined below), the Alternative Investment Fund Managers Directive, the Undertakings for Collective Investment in Transferable Securities Directive and the Revision of the Institutions for Occupational Retirement Provision Directive being amended in order to include environmental, social and governance factors in investment processes, risk management and know-your-clients procedures. In addition, the Taxonomy Regulation, which provides for a general framework for the development of an EU-wide classification system for environmentally sustainable economic activities, has been published, although most of its obligations will not enter into force for the time being. Furthermore, the EBA published its Action Plan on sustainable finance (including a voluntary sensitivity analysis for transition risks in the second half of 2020), and the European Commission presented the European Green Deal, a set of policy initiatives with the overarching aim of making Europe climate neutral in 2050.

Regarding the pension funds sector, Royal Decree 738/2020, of August 4, has completed the implementation in Spain of Directive (EU) 2016/2341. This regulation further develops Royal Decree Law 3/2020, of February 4, which incorporates (a) new governance requirements, (b) new rules on own risk assessment, (c) increased reporting obligations vis-à-vis the clients and (d) enhanced powers for supervisors.

In terms of financial markets legislation, Directive (EU) 2014/65 relating to markets in financial instruments (“MIFID II”) has been fully implemented in Spain. Investor protection legislation is completed by Regulation (EU) 1286/2014 (the “PRIIPs Regulation”) which became applicable on January 1, 2018. The PRIIPs Regulation requires product manufacturers to create and maintain key information documents (“KIDs”) and persons advising or selling packaged retail and insurance-based investment products (“PRIIPs”) to provide retail investors based in the European Economic Area with KIDs to enable those investors to better understand and compare products. Recently, European authorities have issued a consultation paper to obtain feedback from the industry in order to amend the PRIIPs Regulation. Depending on the result of that assessment, entities could be subject to changes in systems and documentation related to PRIIPs.

Similarly, the European Union has started a review of MIFID II focused on the reduction of potential administrative burdens in the context of the provision of financial services. The European co-legislators need to agree on the final text of the amendment and, depending on the result of that agreement, entities could be subject to changes in systems and documentation, but the initial expectation is that potential changes will eliminate certain processes and requirements.

53 


 

The European Union has also been very active in terms of legislation to preserve financial stability. In this regard, the BBVA Group has been subject to initial margin requirements under Regulation (EU) 648/2012, regarding OTC derivatives, central counterparties and trade repositories, since September 2019, as well as similar legislation in other geographies. Consequently, BBVA Group entities classified as financial counterparties are required to post and receive initial margins when dealing with other in-scope entities. Due to the European authorities intention to postpone the entry into force of the obligations for new entities (which would be phased in as suggested by the International Organization of Securities Commissions) only a small number of additional contracts have been negotiated during 2020.

The other main initiative in which both the public and private sectors have been fully involved during the last few years is the interbank offered rates (“IBORs”) reform led by the Financial Stability Board. BBVA has currently set up an internal working group to analyze the potential impact of IBORs reform and actions to be taken in relation thereto. It is expected that changes will need to be made to some legacy contracts (mainly those linked to LIBOR and EONIA) and in certain templates for new agreements. Regarding changes to EURIBOR, at the end of November 2019, the European Money Markets Institute announced that panel banks’ transition to the hybrid model had been completed. The new methodology is not expected to have an impact on existing contracts, as EURIBOR will keep its name unchanged and will still measure the same economic reality (i.e., cost of wholesale funding for the banks of the European Union, Liechtenstein, Iceland, Norway and Switzerland).

In this regard, the European Union is working on an amendment to Regulation 2016/1011 relating to financial benchmarks (“BMR”) which would cover the potential cessation or lack of representativeness of specific benchmarks to mitigate the risk of contract frustration by mandating the application by law of a given fallback. According to the proposed draft, the European Commission may designate a replacement benchmark for a benchmark that will cease to be published where the cessation of that publication may result in significant disruption in the functioning of financial markets in the Union. The replacement benchmark would apply to certain contracts which do not already include a suitable permanent fallback. The proposal to amend the BMR is currently subject to discussions among the European Commission, the European Parliament and the European Council.

Prevention of Money Laundering and Terrorist Financing

Law 10/2010, of April 28 (“Law 10/2010”), has the purpose of safeguarding the integrity of the financial system and other economic sectors by establishing obligations in respect of preventing money laundering and terrorist financing. Credit institutions, including BBVA, are subject to Law 10/2010, which transposes European legislation and establishes applicable due diligence, internal controls and reporting obligations.

It is important to highlight the costs of implementing this regulation, which includes, among other obligations, procedures to know your clients, continuous monitoring of their activity, warning generation, investigation and suspicious activity reports.

Data Protection Regulation

Regulation (EU) 2016/679 of the European Parliament and of the Council of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (“GDPR”) aims to achieve effective protection of personal data by providing natural persons in all EU member states with the same level of legally enforceable rights and obligations regarding personal data and imposing responsibilities on data controllers and processors to ensure consistent monitoring of the processing of personal data. Organic Law 3/2018, of December 5, on the protection of personal data and guarantee of digital rights implemented the GDPR into law in Spain.

For BBVA, the GDPR has affected directly the way we manage internal and external processes. Due to the incremental use of new technologies in almost any process carried out by the Group, where personal data of individuals are usually involved, we had to introduce multiple changes. The GDPR’s accountability requirements to comply with data protection principles and to be able to demonstrate such compliance, has led to an increased uptake of implementing and revising our privacy management processes, from the way in which consent is obtained from the client, to the implementation of processes to put into effect new rights, such as the right to be forgotten or the right to data portability.

54 


GDPR introduces the risk-based approach, including Data Protection Assessments, privacy by design requirements and the legitimate interest balancing test, which have fostered a consistent discipline of assessing risk within the Group. This ensures appropriate risk-based prioritization of mitigations and controls and a more effective data management program based on actual risk.

In terms of security, GDPR obligations and requirements to notify breaches to authorities and individuals under different circumstances meant that BBVA had to review and enhance our existing data security measures and programs and also to update BBVA’s breach response plans and notification procedures, while training staff and management.

Regarding GDPR’s territorial scope, the rule is complex and it has created different interpretations and compliance issues.

Spanish Auditing Law

Law 22/2015, of July 20, on Auditing (“Law 22/2015”), adapted Spain’s internal legislation to the changes incorporated in Directive 2014/56/EU of the European Parliament and of the Council, of April 16, amending Directive 2006/43/EC of the European Parliament and of the Council of May 17, on statutory audits of annual accounts and consolidated accounts, to the extent that they were inconsistent. Together with this Directive, approval was also given to Regulation (EU) 537/2014 of the European Parliament and of the Council, of April 16, on specific requirements regarding statutory audit of public-interest entities. Such Directive and Regulation constitute the fundamental legal regime that should govern audit activity in the European Union. Law 22/2015 regulates general aspects of access to audit practice and the requirements to be followed in that practice, from objectivity and independence, to the organization of auditors and performance of their work, as well as the regime for their oversight and the sanctions available to ensure the efficacy of the regulations.

Recovery and Resolution of Credit Institutions and Investment Firms

The BRRD I (transposed in Spain by Law 11/2015, of June 18, on the recovery and resolution of credit institutions and investment firms (“Law 11/2015”) and Royal Decree 1012/2015, of November 6, on development of law on recovery and resolution of credit entities and investment firms and modification of the Royal Decree on deposit guarantee funds of credit entities (“RD 1012/2015”) and the SRM Regulation were designed to provide the authorities with mechanisms and instruments to intervene sufficiently early and rapidly in failing or likely to fail credit institutions or investment firms (each an “Entity”) in order to ensure the continuity of the Entity’s critical financial and economic functions, while minimizing the impact of its non-feasibility on the economic and financial system. The BRRD further provided that a Member State may only use additional financial stabilization instruments to provide extraordinary public financial support as a last resort, once the resolution instruments (described further below) have been evaluated and used to the fullest extent possible while maintaining financial stability.

In May 2019, the European Commission published the BRRD II, which amended the BRRD I and incorporated, among other changes, the international standards of total loss absorption capacity and recapitalization, with the aim of improving operational execution, strengthening competencies in internal recapitalization and avoiding legal uncertainty. Although the transposition period was established within eighteen months from the date of its entry into force, the approval of the law transposing this directive in Spain is still pending.

In accordance with the provisions of Article 20 of Law 11/2015, an Entity will be considered as failing or likely to fail in any of the following situations: (i) when the Entity significantly fails, or may reasonably be expected to significantly fail in the near future, to comply with the solvency requirements or other requirements necessary to maintain its authorization; (ii) when the Entity’s enforceable liabilities exceed its assets, or it is reasonably foreseeable that they will exceed them in the near future; (iii) when the Entity is unable, or it is reasonably foreseeable that it will not be able, to meet its enforceable obligations in a timely manner; or (iv) when the Entity needs extraordinary public financial support (except in limited circumstances). The decision as to whether the Entity is failing or likely to fail may depend on a number of factors which may be outside of that Entity’s control.

In line with the provisions of the BRRD I, Law 11/2015 contains four resolution tools which may be used individually or in any combination, when the Spanish Resolution Authority considers that (a) an Entity is non-viable or is failing or likely to fail, (b) there is no reasonable prospect of any other measures that would prevent the failure of such Entity within a reasonable period of time, and (c) resolution is necessary or advisable, as opposed to the winding up of the Entity through ordinary insolvency proceedings, for reasons of public interest.

55 


 

The four resolution instruments are (i) the sale of the Entity’s business, which enables the resolution authorities to transfer, under market conditions, all or part of the business of the Entity being resolved; (ii) “bridge institution”, which enables resolution authorities to transfer all or part of the business of the Entity to a “bridge institution” (an entity created for this purpose that is wholly or partially in public control); (iii) asset separation, which enables resolution authorities to transfer certain categories of assets (normally impaired or otherwise problematic) to one or more asset management vehicles to allow them to be managed with a view to maximizing their value through their eventual sale or orderly wind-down (this can be used together with another resolution tool only); and (iv) the Bail-in Tool.

In the event that an Entity is in a resolution situation, the “Bail-in Tool” is understood to mean any write-down, conversion, transfer, modification, or suspension power, existing from time to time, of the Spanish Resolution Authority, under: (i) any law, regulation, rule or requirement applicable from time to time in Spain, relating to the transposition or development of the BRRD (as amended, replaced or supplemented from time to time), including, but not limited to (a) Law 11/2015, (b) RD 1012/2015, and (c) the SRM Regulation, each as amended, replaced or supplemented from time to time; or (ii) any other law, regulation, rule or requirement applicable from time to time in Spain pursuant to which (a) obligations or liabilities of banks, investment firms or other financial institutions or their affiliates can be reduced, cancelled, modified, transferred or converted into shares, other securities, or other obligations of such persons or any other person (or suspended for a temporary period or permanently) or (b) any right in a contract governing such obligations may be deemed to have been exercised. “Relevant Spanish Resolution Authority” means any of the Spanish Fund for the Orderly Restructuring of Banks (Fondo de Restructuración Ordenada Bancaria), the European Single Resolution Mechanism and, as the case may be, according to Law 11/2015, RD 1012/2015 and the SRM Regulation, the Bank of Spain and the Spanish Securities Market Commission (CNMV) or any other entity with the authority to exercise the Spanish Bail-in Power from time to time.

In accordance with the provisions of Article 48 of Law 11/2015 (without prejudice to any exclusions that may be applied by the Spanish Resolution Authority in accordance with Article 43 of Law 11/2015), in the event of any application of the Bail-in Tool, any resulting write-down or conversion by the Spanish Resolution Authority will be carried out so that they affect instruments in the following sequence: (i) CET1 items; (ii) the principal amount of Additional Tier 1 capital instruments; (iii) the principal amount of Tier 2 capital instruments; (iv) the principal amount of other subordinated claims other than Additional Tier 1 capital or Tier 2 capital; and (v) the principal or outstanding amount of the remaining eligible liabilities in the order of the hierarchy of claims in Spanish normal insolvency proceedings (with senior non-preferred claims (créditos ordinarios no preferentes) subject to the Bail-in Tool after any subordinated claims (créditos subordinados) under Article 92 of the Insolvency Law, but before the other senior claims).

In addition to the Bail-in Tool, the BRRD, Law 11/2015 and the SRM Regulation provide for resolution authorities to have the further power to permanently write-down or convert into equity capital instruments of an Entity at the point of non-viability (“Non-Viability Loss Absorption” and, together with the Bail-in Tool, the “Spanish Bail-in Power” ). Any write-down or conversion must follow the same insolvency hierarchy as described below. The point of non-viability of an Entity is the point at which the Spanish Resolution Authority determines that the Entity meets the conditions for resolution or will no longer be viable unless the relevant capital instruments are written down or converted into equity or extraordinary public support is to be provided and without such support the Spanish Resolution Authority determines that the institution would no longer be viable. The point of non-viability of a group is the point at which the group infringes or there are objective elements to support a determination that the group, in the near future, will infringe its consolidated solvency requirements in a way that would justify action by the Spanish Resolution Authority in accordance with article 38.3 of Law 11/2015. Non-Viability Loss Absorption may be imposed prior to or in combination with any exercise of the Bail-in Tool or any other resolution tool or power (where the conditions for resolution referred to above are met).

To the extent that any resulting treatment of a holder of the Bank’s securities pursuant to the exercise of the Bail-in Tool is less favorable than would have been the case under such hierarchy in normal insolvency proceedings, a holder of such affected securities would have a right to compensation though the SRF under the BRRD and the SRM Regulation based on an independent valuation of the institution, in accordance with Article 10 of RD 1012/2015 and the SRM Regulation, together with any other compensation provided for in any applicable banking regulations including, inter alia, compensation in accordance with Article 36.5 of Law 11/2015. However, if the treatment of a creditor following a Non-Viability Loss Absorption is less favorable than it would have been under ordinary insolvency proceedings, it is uncertain whether said creditor would be entitled to the compensation provided for in the BRRD and the SRM Regulation.

56 


 

The SRF was established by Regulation (EU) No 806/2014 (SRM Regulation). Where necessary, the SRF may be used to ensure the efficient application of resolution tools and the exercise of the resolution powers conferred to the SRB by the SRM Regulation.

The SRF is composed of contributions from credit institutions and certain investment firms in the 19 participating Member States within the Banking Union.

SRF will be gradually built up during the first eight years (2016-2023) and shall reach the target level of at least 1% of the amount of covered deposits of all credit institutions within the Banking Union by December 31, 2023.

Within the resolution scheme, the SRF may be used only to the extent necessary to ensure the effective application of the resolution tools, as last resort, in particular:

·          To guarantee the assets or the liabilities of the institution under resolution;

·          To make loans to or to purchase assets of the institution under resolution;

·          To make contributions to a bridge institution and an asset management vehicle;

·          To make a contribution to the institution under resolution in lieu of the write-down or conversion of liabilities of certain creditors under specific conditions;

·          To pay compensation to shareholders or creditors who incurred greater losses than under normal insolvency proceedings.

The Intergovernmental Agreement (“IGA”) acknowledges that situations may exist where the means available in the Single Resolution Fund (Fund) are not sufficient to undertake a particular resolution action, and where the ex-post contributions that should be raised in order to cover the necessary additional amounts are not immediately accessible.

In December 2013, ECOFIN Ministers agreed to put in place a system by which bridge financing would be available as a last resort. The arrangements for the transitional period should be operational by the time the Fund was established.

In this scenario, the Eurogroup decided in 2017 to expand the ESM role to serve as a backstop for the SRF. While the new features of the expanded role for the ESM were agreed by 2019, it was not until late 2020 that the euro area finance ministers agreed to proceed with the reform of the ESM and was later signed by Member States (represented by their ambassadors to the EU) on January 27 (the ratification by national parliaments is pending to come into force). The backstop to the SRF will be operational at the beginning of 2022 (earlier than expected) and will be able to provide support for up to €68 billion (in the form of credit lines). If this financial assistance is requested, the SRF will pay back the ESM loan with funds obtained from banks’ contributions (in a period of three years, with the possibility to extend it to five years).

Mexico

BBVA’s operations in Mexico are highly regulated. The Mexican regulatory framework for financial and banking activities aims to ensure the stability of the financial system and combat money laundering, as well as to provide consumer protection and transparency in the provision of financial services.

The provision of financial and deposit products is mainly regulated in the Banking Law and provisions issued by the National Banking and Securities Commission (“CNBV”) and Banco de México (the Mexican Central Bank) (“BANXICO”), where CNBV issues prudential regulation and BANXICO regulates banking transactions, including financial and deposit products. In addition, the Financial Services Transparency and Regulation Law contains provisions regarding transparency and consumer protection.

The regulatory framework for capital markets includes specific regulations designed to develop the stock market in an equitable, efficient and transparent manner, protect the interests of investors and promote competition, as well as to minimize systemic risk.

57 


 

Regarding asset management, regulation encourages the creation and development of investment companies and promotes the strengthening and the decentralization of the stock market by facilitating the access of small and medium investors. It also establishes the rules for the organization and operation of investment funds, the intermediation of their shares in the stock market, as well as the organization and operation of the people who provide asset management services.

Regulatory activity increased throughout 2020 driven by measures taken to tackle COVID-19’s impact on banking activity. BANXICO issued several rules aimed at promoting the orderly behavior of financial markets, providing markets with liquidity and facilitating the granting of credit by banks with a specific focus on SMEs. Meanwhile, the CNBV issued special accounting standards enabling banks to offer grace periods and avoid considering loans overdue in the context of the pandemic. Later on, the CNBV issued a framework for loan restructuring which provided for beneficial treatment in terms of capital and reserves for banks willing to offer loan-restructuring under certain conditions specified by the regulator.

In December 2020, the Federal Economic Competition Commission published a preliminary opinion on its investigation regarding the card payments’ market identifying four potential barriers to competition that prevent the entry and increase costs for new market participants that hinder innovation and investment and increase merchant acquisition costs. Among other measures, COFECE could order that banks divest at least 51% of their stakes in card payment clearing houses (Prosa and E-Global), and the preliminary opinion recommends that BANXICO and the CNBV eliminate regulatory obstacles and issue regulations to ensure competition. At this stage, stakeholders have 45 working days to present arguments and offer alternative measures to address the Commission’s concerns.

Moreover, there were new developments during 2020 regarding the Mexican Fintech Law, in force since 2018. The law creates and regulates financial technology institutions, which may engage in either crowdfunding or the issue of e-money. Following the law, BANXICO has regulated the recognition and use of virtual assets. The law also introduced a regime of “innovative models for the provision of financial services” that enables financial institutions (including FinTechs), as well as other startups, to offer financial services for the benefit of users in a regulatory sandbox. BANXICO and the CNBV have already published most of the secondary regulation related with the Fintech Law, but the rules to govern the sharing of data are still being developed.

In addition, the President submitted a bill to ban outsourcing. Due to its importance, the negotiation and discussion of the bill have been postponed until February 2021. If approved, BBVA would need to evaluate its personnel hiring schemes and determine if a reorganization of the personnel structure is required.

The Federal Labor Law was recently amended in order to regulate home office. This amendment includes the employer’s obligation to assume employee’s expenses resulting from home office, including payment of telecommunication services and a portion of the electric bill.

Turkey

BBVA’s operations in Turkey are subject to regulation by Turkish national authorities. In general, the rules applicable to products and services that banks in Turkey offer to consumers are more stringent than rules applicable with respect to commercial and corporate banking customers. Besides general consumer protection regulations, there are specific regulations of the Banking Regulation and Supervision Agency (“BRSA”) on banking consumers. In 2020, new laws were introduced authorizing the Central Bank of Turkey (“CBT”) to impose restrictions regarding certain fees and commissions that may be charged to customers, thereby increasing the number of regulators that are focused on consumer protection-related matters in the banking sector.

Apart from fundamental legal rules and pr