6-K 1 d104045d6k.htm 6-K 6-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN ISSUER

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

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March, 2021

Commission file number: 1-10110

 

 

BANCO BILBAO VIZCAYA ARGENTARIA, S.A.

(Exact name of Registrant as specified in its charter)

BANK BILBAO VIZCAYA ARGENTARIA, S.A.

(Translation of Registrant’s name into English)

 

 

Calle Azul 4,

28050 Madrid

Spain

(Address of principal executive offices)

 

 

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

Form 20-F  ☒            Form 40-F  ☐

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

Yes  ☐            No   ☒

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

Yes  ☐            No   ☒

 

 

 


LOGO


BBVA. PILLAR III 2020       P. 1

 

The English language version of this report is a free translation from the original, which was prepared in Spanish. All possible care has been taken, to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or opinion expressed in the original language version of the document in Spanish take precedence over the translation.

 


BBVA. PILLAR III 2020    INDEX    P. 2

 

Index

 

Glossary of Terms

     4  

Index of tables

     7  

Index of Charts

     11  

Executive summary

     12  

Introduction

     13  

Regulatory framework and regulatory developments in 2020

     14  

Contents of the 2020 Prudential Relevance Report

     16  

Composition of Capital

     18  

1.

 

General information requirements

     22  
1.1.   Corporate name and differences between the consolidated group for the purposes of solvency regulations and accounting criteria      23  

1.2.

 

Identification of dependent entities with bank capital below the minimum requirement. Possible impediments to transferring own funds

     27  

1.3.

 

Exemptions from capital requirements at the individual or sub-consolidated level

     27  

2.

 

Own Funds and Capital

     28  

2.1.

 

Characteristics of the eligible capital resources

     29  

2.2.

 

Amount of own funds

     30  

2.3.

 

IFRS 9 and OCI Transitional Arrangements

     33  

2.4.

 

Entity risk profile

     34  

2.5.

 

Breakdown of minimum capital requirements by risk type

     36  

2.6.

 

Procedure used in the capital self-assessment process

     38  

3.

 

Risk

     40  

3.1.

 

General Risk Management and Control Model

     41  

3.2.

 

Credit and Counterparty Risk

     41  

3.3.

 

Market Risk

     103  

3.4.

 

Structural risk

     114  

3.5.

 

Liquidity Risk

     117  

3.6.

 

Operational Risk

     124  


BBVA. PILLAR III 2020    INDEX    P. 3

 

4.

  Leverage ratio      127  

4.1.

  Leverage Ratio definition and composition      128  

4.2.

  Evolution of the ratio      129  

4.3.

  Governance      130  

5.

  Information on remuneration      131  

5.1.

  Information on the decision-making process used to establish the remuneration policy for the Identified Staff      132  

5.2.

  Description of the different types of employees included in the Identified Staff      135  

5.3.

  Key features of the remuneration system      136  

5.4.

  Information on the connection between the remuneration of the Identified Staff and the Group’s performance      140  

5.5.

  Description of the criteria used to take into consideration present and future risk in the remuneration processes      140  

5.6.

  Main parameters and the motivation of any component of possible variable compensation plans and other non-cash advantages      141  

5.7.

  Ratios between fixed and variable remuneration of the Identified Staff      141  

5.8.

  Quantitative information on remuneration of the Identified Staff      142  

6.

  Information on the corporate governance system      146  


BBVA. PILLAR III 2020    GLOSSARY OF TERMS    P. 4

 

Glossary of Terms

 

ACRONYM

  

DESCRIPTION

ALM (Asset - Liability Management)    Mechanism for managing structural balance-sheet risk due to potential imbalances between assets and liabilities due to different types of factors (interest rate, exchange rate, liquidity, etc.)
AMA    Advanced method for calculating the own funds requirements for operational risk
AT1 (Additional Tier 1)    Additional Tier 1 capital consisting of hybrid instruments, mainly CoCos and preferred shares
Basel III    Package of proposals for reform of banking regulation, published as of December 16, 2010 and with a period of gradual implementation
BCBS (Basel Committee on Banking Supervision)    Basel Committee on Banking Supervision. International cooperation forum on banking supervision to increase the quality of banking supervision worldwide
CCyB (Countercyclical Buffer)    Countercyclical buffer, the part of a set of macroprudential instruments designed to help counteract the procyclicality of the financial system
CCF (Credit Conversion Factor)    Credit conversion factor. The ratio between the current available amount of a commitment that could be used and would therefore be outstanding at the time of default, and the current available amount of the commitment
CCP (Central Counterparty Clearing House)    An entity that liaises between counterparties, acting as a buyer when dealing with sellers and as a seller when dealing with buyers
CDS (Credit Default Swap)    Financial derivative between a beneficiary and a guarantor through which the beneficiary pays the guarantor a premium in exchange for receiving protection from possible credit events over a period of time
CET1 (Common Equity Tier 1)    Common Equity Tier 1: the entity’s capital of the highest quality (see paragraph 2.1)
Counterparty Credit Risk    The credit risk corresponding to derivative instruments, repurchase and reverse repurchase transactions, securities or commodities lending or borrowing transactions and deferred settlement transactions
CoCo (Contingent Convertible)    Convertible contingent bond. Hybrid issues with debt and equity elements convertible
Credit Risk    into shares Credit risk is based on the possibility that one party to the financial instrument’s contract will fail to meet its contractual obligations on the grounds of insolvency or inability to pay and will cause a financial loss for the other party
CRM (Credit Risk Mitigation)    Credit Risk Mitigation: a technique used by the institution to reduce the credit risk associated with one or more exposures that the institution still maintains
CRR / CrD IV    Solvency regulation on prudential requirements of credit institutions and investment firms (EU Regulation 575/2013)
CVA (Credit Valuation Adjustment)    Valuation adjustments for counterparty credit risk
DlGD (Downturn loss Given Default)    Severity in a period of stress in the economic cycle
D-SIB (Domestic Systemically Important Bank)    Domestic Systemically Important Bank
EAD (Exposure at default)    Maximum loss at the time of the counterparty entering into default
EBA (European Banking authority)    European Banking Authority. Independent institution responsible for promoting the stability of the financial system, the transparency of financial markets and products and the protection of depositors and investors
EC (Economic Capital)    The amount of capital considered necessary to cover unexpected losses if actual losses are greater than expected losses
ECB (European Central Bank)    Central bank of the countries of the European Union that have the euro as their currency
ECAI (External Credit assessment Institutions)    External Credit Assessment Agency designated by the entity
El (Expected Loss)    The ratio between the amount expected to be lost in an exposure, due to potential non-payment by a counterparty or dilution over a period of one year, and the amount due at the time of non-payment
ERBA (External Rating Base Aproach)    Methodology for estimating RWAs of securitisations from external ratings
Environmental, social and governance (ESG)    Environmental, social and good corporate governance criteria, the main objective of which is to contribute to sustainable development
FRTB (Fundamental Review of the Trading Book)    A set of reforms proposed by the BCBS on the market risk framework, with the aim of improving the design and consistency of market risk capital standards
FsB (financial Stability Board)    Financial Stability Board. An international body that pursues the effectiveness and stability of the international financial system, monitoring it and publishing recommendations
FTD (First to default)    Derivative by which both parties negotiate protection against the first default by any of the entities that form part of the basket
GRM (Global Risk Management)    Global Risk Management
GRMC (Global Risk Management Committee)    Global Risk Management Committee
G-SIBS (Global Systemically Important Banks)    Financial institutions that, because of their large size, market importance and interconnectedness, could cause a serious crisis in the international financial system in the event of economic problems
IAA (Internal Assessment Approach)    Internal evaluation method for the calculation of securitisation exposures in the banking book


BBVA. PILLAR III 2020    GLOSSARY OF TERMS    P. 5

 

ICAAP (Internal Capital Adequacy Assessment Process)    Internal Capital Adequacy Assessment Process
IFRS 9 (International Financial Reporting Standards – Financial Instruments)    International Financial Reporting Standards for Financial Instruments which entered into force on January 1, 2018, replacing IAS 39 in relation to the classification and valuation of financial assets and liabilities, the impairment of financial assets and the accounting of hedges
ILAAP (Internal Liquidity Adequacy Assessment Process)    Internal Liquidity Adequacy Assessment Process
IMA (Internal Model Approach)    Internal model approach for calculating exposure due to market risk
IMM (Internal Model Method)    Internal model method for calculating exposure due to counterparty risk
IRB (Internal Rating-based approach)    Internal model method for calculating exposure due to credit risk, based on internal ratings. This method can be broken down into two types, depending on the estimations set by the Supervisor or the own ones: FIRB (Foundation IRB) and AIRB (Advanced IRB)
IRBA (Internal Risk Base Approach)    Methodology for estimating RWAs of securitisations from internal ratings
IRC (Incremental Risk Capital)    Charge applied to the market risk exposure calculated by the internal method that quantifies the risk not captured by the VaR model, specifically in migration and default events
LCR (Liquidity Coverage Ratio)    Liquidity coverage ratio
LDP (Low Default Portfolios)    Low default portfolios
LGD (Loss Given Default)    Severity or amount to be lost in the event of non-payment
LGD BE (Loss Given Default Best Estimate)    “Actual” loss from default portfolio
Liquidity Risk    Risk of an entity having difficulties in duly meeting its payment commitments, or where, to meet them, it has to resort to funding under burdensome terms which may harm the entity’s image or reputation
LMUS (Liquidity Management Units)    Group entities with financial self-sufficiency created with the aim of preventing and limiting liquidity risk, preventing it from spreading in a crisis that could affect only one or more of these Entities
LR (Leverage Ratio)    Leverage ratio: a measure that relates a company’s indebtedness and assets, calculated as level 1 capital divided by the entity’s total exposure
LRLGD (Long Run Loss Given Default)    Long-term severity (loss given default)
LtSCD (Loan to Stable Customer Deposits)    Ratio that measures the relationship between net credit investment and stable customer resources
Market Risk    Risk due to the possibility that there may be losses in the value of positions held due to movements in the market variables that affect the valuation of financial products and assets in trading activity
MDA (Maximum Distributable Amount)    Trigger by which the ECB restricts the capacity to pay out dividends
MREL (Minimum Required Eligible Liabilities)    Minimum requirement of own funds and eligible liabilities. New requirement faced by European banks, which aims to create a buffer of solvency that absorbs the losses of a financial entity in the event of resolution without jeopardizing taxpayers’ money. The level of this buffer is determined individually for each banking group based on their level of risk and other particular characteristics
MTN (Medium Term Note)    Notes accounted as Issuances designated at fair value through P&L considered equivalent to senior issuances for liquidity
NCAHS    Non-Current Assets Held for Sale
NClHS    Non-Current Liabilities Held for Sale
NSFR    Net Stable Funding Ratio
OE (Original Exposure)    Gross amount that the entity may lose in the event that the counterparty cannot meet its contractual payment obligations, regardless of the effect of guarantees or credit improvements or credit risk mitigation operations
Operational Risk (OR)    BBVA defines operational risk (OR) as risk that may cause losses as a result of human error; inadequate or defective internal processes; inadequate conduct towards customers, in the markets or against the company; failures, interruptions or deficiencies in systems or communications; theft, loss or misuse of information, as well as deterioration of its quality; internal or external fraud including, in all cases, fraud resulting from cyber-attacks; theft or physical damage to assets or persons; legal risks; risks resulting from workforce and occupational health management; and inadequate service provided by suppliers
PD (Probability of Default)    Probability of non-payment by a counterparty over a period of one year
PD-TTC (PD Through the Cycle)    Probability of Default throughout the business cycle
PIT (Point-In-Time)    Approach for calculating provisions under which PD and LGD parameters must be adapted at each moment in time
P2G    Pillar 2 Capital Guidance
P2R    Pillar 2 Capital Requirement
RW (Risk Weight)    Degree of risk applied to exposures (%)
RWAs (Risk-Weighted assets)    Risk exposure of the entity weighted by a percentage derived from the applicable standard (standardised approach) or internal models
SFTs    Securities financing transactions
SREP (Supervisory Review and Evaluation Process)    Supervisory Review and Evaluation Process
Structural Risk    This risk is divided into Structural Interest-Rate Risk (movements in market interest rates that cause changes in an entity’s net interest income and book value) and Structural Exchange-Rate Risk (exposure to variations in exchange rates originating in the Group’s foreign companies and in the provision of funds to foreign branches financed in a different currency from that of the investment)


BBVA. PILLAR III 2020    GLOSSARY OF TERMS    P. 6

 

Synthetic Securitisation    A type of operation where the loan portfolio is not typically transferred to a fund; on the contrary, the credit remains in the balance sheet of the corresponding entity, but this transfers the default risk to a third party. The objective of this type of instrument is the transmission of balance risk and capital release. Normally, the assignment of risk is usually made through a derivative (CDS) or through a financial guarantee
TIER I (Tier One Capital)    Capital built by instruments that are able to absorb losses when the entity is in operation. It consists of CET1 and AT1
TIER II (Tier Two Capital)    Supplementary capital consisting of instruments, mainly subordinated debt, revaluation reserves and hybrid instruments, which will absorb losses when the entity is not viable
TLAC (Total Loss Absorbing Capacity)    Total loss absorption capacity: Regulatory framework approved by the FSB with the aim of ensuring that global systemically important entities (G-SIB) maintain a minimum level of eligible instruments and liabilities to ensure that in resolution procedures, and immediately thereafter, the essential functions of the entity can be maintained without jeopardizing taxpayers’ money or financial stability
Traditional Securitisation    Operation through which an entity is capable of transforming a series of heterogeneous and illiquid financial assets into liquid homogeneous instruments (usually guarantees or bonds) and marketable securities, managing to transfer the risk of the assets in most cases while liquidity is preserved
TRIM (Targeted Review of Internal Models)    Control model implemented by the ECB aimed at reducing inconsistencies and the variability in banks’ internal models used to calculate their risk-weighted assets
Var (Value at Risk)    A risk measurement model that provides a prediction of the maximum loss that the entity’s trading portfolios might experience as a result of market price variations over a given time horizon and for a specific confidence interval


BBVA. PILLAR III 2020    INDEX OF TABLES    P. 7

 

Index of tables

 

Table 1. Capital distribution contrains      19  
Table 2. Geographical breakdown of relevant credit exposures for the calculation of the countercyclical capital buffer      20  
Table 3. CC2 - Reconciliation of regulatory capital to balance sheet      25  
Table 4. EU LI1 - Differences between the accounting and regulatory scopes of consolidation and the mapping of the financial statements categories with regulatory risk categories      26  
Table 5. EU LI2 - Main sources of the differences between regulatory original exposure amounts and carrying values in financial statements      27  
Table 6. Amount of capital (CC1)      31  
Table 7. Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter      33  
Table 8. IFRS 9-FL - Comparison of institutions’ own funds and capital and leverage ratios with and without the application of transitional arrangements for IFRS 9 or analogous ECLs and with and without the application of the transitional treatment of unrealised gains and losses measured at FVTOCI      34  
Table 9. EU OV1 - Overview of RWAs      36  
Table 10. Capital requirements by risk type and exposure class      37  
Table 11. Credit Risk and Counterparty Risk Exposure      43  
Table 12. EU CRB-B - Total and average net amount of exposures (including counterparty credit risk)      45  
Table 13. EU CRB-C - Geographical breakdown of exposures (including counterparty credit risk)      46  
Table 14. EU CRB-D - Concentration of exposures by industry or counterparty types (excluding counterparty credit risk)      48  
Table 15. EU CRB-E - Maturity of exposures (excluding counterparty credit risk)      50  
Table 16. EU CR1 - Performing and non-performing exposures and related provisions      51  
Table 17. EU CQ4 - Credit quality of exposures by geography      53  
Table 18. EU CQ5 - Credit quality of loans and advances by industry or counterparty types      54  
Table 19. EU CQ3 - Credit quality of performing and non-performing exposures by past due days      55  
Table 20. EU CR2-A - Changes in the stock of general and specific credit risk adjustments      56  
Table 21. EU CQ1 - Credit quality of forborne exposures      57  
Table 22. EU CQ7 - Collateral obtained by taking possession and execution processes      57  
Table 23. Information on loans and advances subject to legislative and non-legislative moratoria      58  
Table 24. Breakdown of loans and advances subject to legislative and non-legislative moratoria by residual maturity of moratoria      58  


BBVA. PILLAR III 2020    INDEX OF TABLES    P. 8

 

Table 25. Information on new loans and advances subject to public guarantee schemes introduced in response to the COVID-19 crisis      58  
Table 26. EU CR4 - Standardised approach - credit risk exposure and credit risk mitigation effects      59  
Table 27. Standardised approach: exposure values before application of credit risk mitigation techinques      61  
Table 28. EU CR5 - Standardised approach: exposure values after application of credit      62  
Table 29. RWA flow statements of credit risk exposures under the standardised approach      63  
Table 30. Models authorised by the supervisor for the purpose of their use in the calculation of capital requirements      63  
Table 31. Master Scale of BBVA’s rating      65  
Table 32. EU CR6 - IRB approach - Credit risk exposures by exposure class and PD range      70  
Table 33. Average PD and LGD by category and country      74  
Table 34. EU CR9 - IRB approach - Backtesting of PD per exposure class      75  
Table 35. EU CR8 - RWA flow statements of credit risk and counterparty exposures under the IRB approach      79  
Table 36. EU CR10 (1) - IRB: specialised lending      82  
Table 37. EU CR10 (2) - IRB: equity      82  
Table 38. Positions subject to counterparty credit risk in terms of OE, EAD and RWAs      85  
Table 39. Amounts of counterparty risk in the trading book      86  
Table 40. CCR5-A - Impact of netting and collateral held on exposure values      86  
Table 41. : EU CCR1 - Analysis of CCR exposure by approach      87  
Table 42. EU CCR3 - Standardised approach - CCR exposures by regulatory portfolio and risk      87  
Table 43. EU CCR4 - IRB approach - CCR exposures by portfolio and PD scale      88  
Table 44. EU CCR5-B - Composition of collateral for exposure to Counterparty Credit Risk      90  
Table 45. EU CCR6 - Credit derivatives exposures      90  
Table 46. EU CCR2 - CVA Capital Charge      91  
Table 47. Variaciones en términos de APRs por CVA      91  
Table 48. EU CCR8 - Exposures to CCPs      92  
Table 49. SEC1 - Securitisation exposures in the banking book      95  
Table 50. SEC2 - Securitisation exposures in the trading book      95  
Table 51. SEC4 - Securitisation exposures in the banking book and associated regulatory capital requirements – bank acting as investor      96  
Table 52. SEC3 - Securitisation exposures in the banking book and associated regulatory capital requirements – bank acting as originator or as sponsor      98  
Table 53. Breakdown of securitised balances by type of asset      99  


BBVA. PILLAR III 2020    INDEX OF TABLES    P. 9

 

Table 54. Outstanding balance corresponding to the underlying assets of the Group’s originated securitisations, in which risk transfer criteria are not fulfilled      99  
Table 55. EU CR3 - CRM techniques – overview      101  
Table 56. Breakdown of RWA density by geographical area and approach      102  
Table 57. EU MR1 - Market risk under the standardised approach      103  
Table 58. EU PV1 - Prudent Valuation Adjustments      106  
Table 59. Trading Book. VaR without smoothing by risk factors      107  
Table 60. EU-MR3 - IMA values for trading portfolios      108  
Table 61. EU MR2-A - Market risk under the IMA      108  
Table 62. EU MR2-B - RWA flow statements of market risk exposures under the IMA      109  
Table 63. Trading Book. Impact on earnings in Lehman scenario      109  
Table 64. Trading Book. Stress resampling      110  
Table 65. Breakdown of book value, EAD and RWAs of equity investments and capital instruments      115  
Table 66. Exposure in equity investments and capital instruments      116  
Table 67. Breakdown of RWAs, equity investments and capital instruments by applicable approach      116  
Table 68. Variation in RWAs for Equity Risk      116  
Table 69. Realised profit and loss from sales and settlements of equity investments and capital instruments      117  
Table 70. TValuation adjustments for latent revaluation of equity investments and capital instruments      117  
Table 71. Maturity of wholesale issuances of Balance Euro by nature      118  
Table 72. Maturity of wholesale issuances of BBVA Mexico by nature      118  
Table 73. Maturity of wholesale issuances of BBVA USA by nature      118  
Table 74. Maturity of wholesale issuances of BBVA Garanti by nature      118  
Table 75. Maturity of wholesale issuances of South America by nature      118  
Table 76. EU LIQ1: Liquidity Coverage Ratio disclosure      119  
Table 77. Encumbered assets over total assets      120  
Table 78. Mortgage-covered bonds      121  
Table 79. Public-covered bonds      121  
Table 80. Internationalisation-covered bonds      121  
Table 81. Encumbered and unencumbered Assets      122  
Table 82. Collateral received      122  
Table 83. Sources of encumbrance      123  
Table 84. Regulatory capital for Operational Risk      125  
Table 85. LRSum - Summary reconciliation of accounting assets and exposure corresponding to the Leverage Ratio      129  



BBVA. PILLAR III 2020    INDEX OF CHARTS    P. 11

 

Index of Charts

 

Chart 1. Capital Requirements and capital ratios (phased-in)

     19  

Chart 2. Annual evolution of the CET1 fully loaded ratio

     32  

Chart 3. Distribution of RWAs by risk type eligible on Pillar I

     35  

Chart 4. Distribution of RWAs by exposure category and method

     38  

Chart 5. Distribution of credit risk exposures by geographical areas

     47  

Chart 6. Distribution of EAD by Exposure Category and Method for Credit and Counterparty Risk

     64  

Chart 7. IRB Approach: EAD by obligor category

     74  

Chart 8. IRB Approach: Weighted average PD by EAD

     74  

Chart 9. IRB Approach: Weighted average LGD by EAD

     74  

Chart 10. IRB Approach: RWAs by obligor category

     74  

Chart 11. Comparative analysis of expected loss: retail mortgages

     80  

Chart 12. Comparative analysis of expected loss: consumer finance

     80  

Chart 13. Comparative analysis of expected loss: Credit Cards

     80  

Chart 14. Comparative analysis of expected loss: Automobiles

     80  

Chart 15. Comparative analysis of expected loss: SMEs and Real Estate

     81  

Chart 16. Comparative analysis of expected loss: Mexico Credit Cards

     81  

Chart 17. Comparative analysis of expected loss: Mexico corporates

     81  

Chart 18. Functions performed in the securitisation process and Group’s level of involvement

     93  

Chart 19. Trading book. Trends in VaR without smoothing

     107  

Chart 20. Trading book. Market Risk Model Validation for BBVA S.A. Hypothetical Backtesting (EU MR4)

     112  

Chart 21. Trading book. Market Risk Model Validation for BBVA S.A. Real Backtesting (EU MR4)

     113  

Chart 22. Trading book. Market Risk Model Validation for BBVA Bancomer. Hypothetical Backtesting (EU MR4)

     113  

Chart 23. Trading book. Market Risk Model Validation for BBVA Bancomer. Real Backtesting (EU MR4)

     113  

Chart 24. Operational Risk Management Processes

     124  

Chart 25. Operational Risk Profile of BBVA Group

     125  

Chart 26. Operational Risk by risk and country

     126  

Chart 27. Trends in the leverage ratio

     129  


BBVA. PILLAR III 2020    EXECUTIVE SUMMARY    P. 12

 

Executive summary

 

BBVA’s consolidated phased-in CET1 ratio stood at 12.15% at the close of December 2020, which increased by +17 basis points compared to 2019, mainly due to:

 

    The positive generation of organic results for the Group, which has enabled it to cover the growth of risk-weighted assets (RWAs), and the relative stabilisation of the financial markets that began during the second quarter. This was largely the result of the economic stimulus measures and guarantee programmes announced by various national and supranational authorities, as well as the approval by the European Parliament and the Council of Capital Requirements Regulation 2020/873 (known as the CRR Quick Fix). Here, the positive impact of +19 basis points due to the regulatory change in the deduction of intangible (software) assets stands out.

 

    The effect of transitional adjustments of IFRS9 impact on the solvency indicators, and subsequent changes in response to the COVID-19 pandemic.

 

    A positive impact of +7 basis points at the CET1 level due to the execution of the agreement reached with Allianz to jointly boost the non-life insurance business in Spain.

Additionally, the CET1 capital as of December 2020 includes the effect of the Shareholders’ remuneration of €0.059 gross per share, which amounts to a maximum value of approximately €393m (equivalent to 11 CET1 basis points), calculated based on the ECB’s recommendation.

In fully loaded terms, the CET1 ratio stood at 11.73%, similar to the level recorded by the Group in December 2019 (11.74%).

This ratio does not include the positive impact of the sale of BBVA USA and other companies in the United States, which, according to the current estimate and taking the capital level of December 2020 as a reference, would place the fully-loaded CET1 ratio at 14.58%. This also does not include the effect of the completion of the sale of BBVA Paraguay, which would have an approximate impact of +6 basis points and will be recorded in the first quarter of 2021.

The Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) in the Group has remained well above 100% throughout 2020. At December 31, 2020, these ratios stood at 149% (185% considering the excess liquidity of the subsidiaries) and 127%, respectively. Although these requirements are only established at Group level, this minimum is comfortably exceeded in all subsidiaries.

As for the leverage ratio, as of December 31, 2020, the fully loaded ratio was 6.49%, above the minimum required ratio of 3%, still comparing very favorably with the rest of the Peer Group1. This ratio does not include the impact of the sale of BBVA USA, which, according to the current estimate and taking December 2020 as a reference, would place the leverage ratio at 7.74%

The following sections detail matters relating to the Group’s solvency. These are supplemented by information included in the Group’s Consolidated Financial Statements and Management Report, which also contain the Group’s main activity and profitability indicators.

 

 

1.

The peer group of the Group consists of the following entities: Barclays, BNP Paribas, Crédit Agricole, Commerzbank, Deutsche Bank, HSBC, Intesa Sanpaolo, Lloyds Bank, RBS, Santander, Société Générale, UBS and UniCredit.


BBVA. PILLAR III 2020    INTRODUCTION    P. 13

 

Introduction

 

Regulatory framework and regulatory developments in 2020

     14  

Contents of the 2020 Prudential Relevance Report

     16  

Composition of Capital

     18  


BBVA. PILLAR III 2020    INTRODUCTION    P. 14

 

Regulatory framework and regulatory developments in 2020

 

As a Spanish credit institution, BBVA is subject to Directive 2013/36/EU of the European Parliament and of the Council dated June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (the “CRD IV Directive”) amended by Directive 2019/878/EU (the “CRD V Directive).

The major regulation governing the solvency of credit institutions is (EU) Regulation No. 575/2013 of the European Parliament and of the Council of June 26, 2013, on the prudential requirements for credit institutions and investment firms amending (EU) Regulation No 648/2012 (“CRR” and in conjunction with Directive CRD IV and any implementing measures of CRD IV, “CRD IV”), which is complemented by several binding Regulatory Technical Standards that are directly applicable to all EU member states, without the need to implement national measures. This Regulation has been amended by Regulation 2019/876/EU (“CRR2”) and Regulation 2020/873/EU (“Quick Fix”).

The CRD IV Directive was transposed to Spanish national law by means of the Royal Decree-Law 14/2013, of November 29 (“RD-L 14/2013”), Law 10/2014 of June 26, Royal Decree 84/2015, of February 13 (“RD 84/2015”), Bank of Spain Circular 2/2014 of January 31 and Circular 2/2016 of February 2 (“Bank of Spain Circular 2/2016”). During 2020, the adoption of the amendments proposed by Directive (EU) 2019/878 to the Spanish legal system began through the publication on September 4, 2020 of the proposed amendments to Law 10/2014 as well as RD 84/2015. As of the date of publication of this report, they had not yet been published in the BOE (Boletín Oficial del Estado — Spanish Official Journal).

In the Macroprudential field, Royal Decree 102/2019 was published in March 2019, establishing the Macroprudential Authority of the Financial Stability Board, establishing its legal regime. The aforementioned Royal Decree also develops certain aspects related to the macroprudential tools contained in Royal Decree-Law 22/2018. The draft Bank of Spain Circular on macroprudential tools was open for consultation during February 2021 (this was the Bank of Spain Circular amending Bank of Spain Circular 2/2016, of 2 February, to credit institutions, on supervision and solvency, which completes the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No 575/2013.) This Circular develops measures that the Bank of Spain may decide to put in place, such as a countercyclical buffer for a particular sector, industry limits on exposure concentration, or the establishment of limits and conditions on the granting of loans and other transactions. As of the date of publication of this report, the Circular had not yet been published in the BOE (Boletín Oficial del Estado — Spanish Official Journal).

Regulatory developments in 2020

Major economic disruption caused by the COVID-19 pandemic and the exceptional containment measures have significantly impacted the economy. Businesses have faced disruptions in the supply chain, temporary closures, and reduced demand, while households have faced unemployment and declining incomes. Public authorities at the Union and Member State level have acted proactively to help households and solvent businesses to weather the intense-but-temporary slowdown in economic activity and the consequent shortage of liquidity.

With the aim of mitigating the impact of COVID-19, various bodies have made pronouncements aimed at allowing greater flexibility in terms of implementing accounting and prudential frameworks. Generally speaking, the following initiatives are notable due to their relevance:

 

    In its press release on 12 March in response to COVID-19, the ECB allowed banks to bring forward the use of Additional Tier 1 or Tier 2 capital instruments to partially meet Pillar II requirements (P2R). This measure has been bolstered by the relaxation of the countercyclical capital buffer (CCyB) that has been announced by various national macroprudential authorities, and by other additional measures published by the ECB that have provided institutions with flexibility by allowing them to operate below established P2G levels as well as to use capital and liquidity buffers.

With regard to dividends, 15 December 2020 saw the ban on paying out dividends (in force since 27 March 2020) lifted, albeit under the recommendation of exercising extreme caution and limiting the maximum amount to be distributed. The ECB expects dividends and share buy-backs to remain below 15% of the adjusted cumulated 2019-2020 profit attributable to the parent company, provided that they do not exceed 20 basis points of Common Equity Tier I in the fourth quarter of 2020. This recommendation is effective until 30 September 2021.

 

    The European Banking Authority (EBA) published guidelines on legislative and non-legislative payment moratoria in April 2020. These guidelines set out the criteria that both public and private legislative and non-legislative payment moratoria must meet in order to avoid the exposures subject to these payment deferrals being automatically reclassified as forbearance or defaulted exposures. According to the EBA’s latest communication on 2 December 2020, these guidelines remain applicable until 31 March 2021.
 


BBVA. PILLAR III 2020    INTRODUCTION    P. 15

 

Regarding relevant EBA publications on prudential aspects, the guidelines on structural FX (Guidelines on the treatment of structural foreign exchange under Article 352 (2) of the CRR) that were issued on July 1, 2020, stand out. They apply as of January 1, 2022.

 

    The European Parliament and Council adopted Regulation 2020/873 applicable from 27 June 2020 (known as the “CRR Quick Fix”), which amends both Regulation (EU) 575/2013 (CRR) and Regulation 2019/876 (CRR2). The main amendments included in this Regulation are: the extension of the IFRS 9 transitional treatment (affects phased-in ratios only); the non-deductibility of software from CET1 capital (this entered into force on 23 December 2020 following the publication of Delegated Regulation 2020/2176 in the OJEU); the bringing forward of the application of the SME and infrastructure support factor; the possibility of applying a prudential filter that temporarily neutralises the impact on CET1 capital of variation in the value of sovereign debt instruments classified as fair value through other comprehensive income (FVOCI); the flexibilization of aspects associated with market risk (supplemented by related communications from the EBA); and the temporary exclusion of certain exposures to central banks for leverage ratio purposes (ECB Decision 2020/1306, allowing the exclusion of exposures to central banks from the Eurosystem, entered into force on 26 September 2020). With regard to ongoing regulatory changes also concerning prudential matters, the European Commission’s proposal of 24 July 2020 (pending approval by the European Parliament and Council) on amendments to the securitisation framework (known as the “Securitisation Quick Fix”) is noteworthy.

 

    On 27 March, the Basel Committee announced the deferral by one year (until 1 January 2023) to the implementation date of the Basel III reform (known as Basel IV).

The EBA published two Calls for Advice in 2020 to support the European Commission in its task of releasing a European proposal to implement this Basel III reform:

 

    Submission of additional analysis for the Call for Advice for the purposes of revising the own fund requirements for credit, operational, market and credit valuation adjustment risk: published on 5 March 2020.

 

    Basel III Reforms: Updated Impact Study: published on 15 December 2020.

With regard to public disclosure and supervisory reporting, the main new development is the publication by the EBA on

2 June 2020 of the guidelines setting out the templates to be used to perform the supervisory reporting and disclosure to the market of exposures subject to payment moratoria and public guarantees introduced by Member States in response to the COVID-19 crisis (“Guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis”). With regard to the measures contained in the “CRR Quick Fix,” the EBA published guidelines on 11 August setting out how to report and disclose said measures (“Guidelines on supervisory reporting and disclosure requirements in compliance with the CRR quick fix”

and “Guidelines amending Guidelines EBA/GL/2018/01 on uniform disclosures under Article 473a of Regulation (EU) No 575/2013 (CRR) on the transitional period for mitigating the impact of the introduction of IFRS 9 on own funds to ensure compliance with the CRR quick fix”). Finally, on November 4, 2020, the EBA published the guidelines on the specification and disclosure of systemic importance indicators, which apply from December 16, 2020 and repeal the previous revised guidelines. of February 29, 2016 (EBA/GL/2016/01). These guidelines apply to entities whose leverage ratio exposure measure exceeds €200 billion.

Since approved regulatory developments (e.g. CRR2) are in place but apply further down the line, the EBA is in the process of reviewing current implementing technical standards (ITS) related to supervisory reporting and public disclosure to reflect changes derived from these regulations. In this sense, the EBA made the following pronouncements throughout 2020:

 

1.

DPM 2.10 Framework:

 

    On 4 May 2020, the final document on the benchmarking of internal models for the 2021 exercise (“ITS amending Commission Implementing Regulation (EU) 2016/2070 with regard to benchmarking of internal models”) was published. This document is part of the DPM 2.10 framework and to date its publication in the Official Journal of the European Union (OJEU) is pending.

 

2.

DPM 3.0 Framework:

 

    On 24 June 2020, the final documents in terms of both reporting (“ITS on supervisory reporting requirements for institutions”) and disclosure (“TS on public disclosures by institutions”) were published. These documents implement the changes introduced by both the CRR2 (Regulation 2019/876) and the Regulation on the minimum loss coverage for non-performing exposures (Regulation 2019/630). Their application date is 28 June 2021, although they are yet to be published in the OJEU.

 

    On 3 August 2020, the final document on the reporting and disclosure of MREL and TLAC (“ITS on disclosure and reporting of MREL and TLAC”) was published, which implements the changes introduced by BRRD 2 (Regulation 2019/879). Although it is yet to be published in the OJEU, the application date of the reporting requirements is 30 June 2021, while the application date for disclosure requirements varies between those for the TLAC (once the ITS entries into force) and those for the MREL (1 January 2024 at the earliest).

 

3.

DPM 3.1 Framework:

 

    ITS on specific supervisory reporting requirements for market risk: on 4 May 2020, the final document on reporting requirements for the new alternative standardised approach for market risk (“FRTB-SA”) was published. It proposes delaying its application date by six months until 1 September 2021. This document is yet to be published in the OJEU.

 

 


BBVA. PILLAR III 2020    INTRODUCTION    P. 16

 

The EBA will gradually publish the documents containing the new reporting templates for the new market risk framework, this being the first publication.

 

    ITS amending Commission Implementing Regulation (EU) 2016/2070 with regard to benchmarking of internal models: published on 17 December 2020 and open for consultation until 15 February 2020, it introduces changes for the 2022 exercise on the benchmarking of internal models.

With regard to the Minimum Requirement for Own Funds and Eligible Liabilities (MREL), on 20 May 2020, the Single Resolution Board (SRB) issued its MREL policy for the 2020 resolution planning cycle, which incorporates the criteria set out in BRRD 2/CRR 2 and establishes new transition periods (intermediate target in 2022 and final target in 2024). With regard to the existing binding targets (set out in the 2018 and 2019 resolution cycles), the SRB has clarified that it will adopt a forward-looking approach for banks that may face difficulties meeting those targets.

Sustainable finance: Towards integration in regulation and prudential supervision

Throughout 2020, progress continued towards ensuring that ESG criteria are integrated into the policies of companies—specifically their financial and risk departments—so that these criteria can fully permeate their actions and corporate culture. The pandemic seems to have been an accelerator in this area as well. At the global level, the Financial Stability Board (FSB) published its assessment of financial authorities’ experience in including physical and transitional climate risks as part of their financial stability monitoring. The Task Force on

Climate-related Financial Disclosures (TCFD), created by the FSB, has published a consultation paper to gather feedback on climate-related forward-looking metrics that are useful for financial sector decision-making. The TCFD has also published important documents on sustainability. These include its third status report, which highlights an increase in disclosures by companies in line with TCFD recommendations; guidance on the analysis of climate-related scenarios and on the integration of climate-related risks into existing risk management processes; and guidance on the analysis of climate-related scenarios for non-financial firms.

The EU continues to integrate sustainability into the financial system and to make progress on developing regulations for this purpose. To this end, the European Commission consulted on its renewed sustainable finance strategy, which is expected to be published in early 2021. It has also consulted on a possible initiative on sustainable corporate governance principles. For their part, the Commission, Council and Parliament agreed on a sustainable finance taxonomy using a common classification system applicable from the close of 2021 for adaptation and mitigation objectives. The European supervisory authorities (ESAs) published a consultation paper with a set of standards covering the disclosure of ESG information. The survey is part of EBA’s work to develop a draft Implementing Technical Standard (ITS) on the disclosure of prudential information regarding ESG risks. It will also be used to monitor the short-term expectations specified in the EBA Action Plan on Sustainable Finance. The EBA has also published for consultation a document on the management and supervision of ESG risks, which covers a wide range of topics (definition of ESG risks and factors, quantitative and qualitative indicators). Lastly, the ECB published its final guidelines on its supervisory expectations regarding climate change and environmental risks at the end of the year.

 

 

Contents of the 2020 Prudential Relevance Report

 

Article 13 of the CRR establishes that the parent entities of the European Union are subject, based on their consolidated situation, to the disclosure requirements set by Part Eight of CRR.

This report provides the prudential information of BBVA Consolidated Group as of December 31, 2020 which has been prepared in accordance with the precepts contained in Part Eight of the CRR, complying with the guidelines published by EBA and the applicable technical implementation standards.

In addition, the main EBA guidelines that apply as of December 31, 2020 are highlighted below:

 

    Guidelines on materiality, proprietary information, and confidentiality, and on the frequency of disclosure of information according to Article 432, sections 1 and 2, and Article 433 of Regulation (EU) No. 575/2013 (EBA/ GL/2014/14). These guidelines detail the process and the criteria to be followed regarding the principles of materiality, proprietary information, confidentiality and the right to omit information, and provide guidance for entities to assess the need to publish information more frequently than the annual one. These guidelines were adopted by the Executive Commission of the Bank of Spain in February 2015.

 

    Guidelines on disclosure requirements under Part Eight of Regulation (EU) No. 575/2013 (EBA/GL/2016/11). These guidelines provide guidance in relation to the information that entities must disclose in application of the corresponding articles of the Part Eight and with the presentation of said information. These guidelines were adopted by the Executive Commission of the Bank of Spain in October 2017.
 


BBVA. PILLAR III 2020    INTRODUCTION    P. 17

 

    Guidelines on appropriate remuneration policies under Articles 74, Paragraph 3 and 75, Paragraph 2, of Directive 2013/36/EU and disclosure of information under Article 450 of Regulation (EU) No 575/2013 (EBA/GL/2015/22). These guidelines were adopted by the Executive Commission of the Bank of Spain in July 2016.

 

    Guidelines amending the EBA/GL/2018/01 guidelines regarding the uniform disclosure of information in accordance with article 473 bis of Regulation (EU) No. 575/2013 (CRR) in relation to transitional provisions to mitigate the impact on capital of the introduction of IFRS 9, to ensure compliance with the quick fix carried out in the CRR in response to the COVID-19 pandemic (EBA/ GL/2020/12). These guidelines are applicable from August 11, 2020 until the end of the transitional periods set by articles 468 and 473 bis of the CRR (December 31, 2024 and December 31, 2022, respectively).

Furthermore, with the goal of promoting transparency and as a transition towards the new DPM 3.0 framework defined by the EBA (see 2020 Regulatory Developments), the BBVA Group has decided to bring forward the adaptation of certain templates with standard formats, taking into account the

Implementing Technical Standards published in June 2020 concerning reporting and disclosure of public information (EBA/ITS/2020/04). These Implementing Technical Standards entry into force on 28 June 2021 and to date its publication in the Official Journal of the European Union (OJEU) is pending.

In those Implementing Technical Standards, the EBA, as mandated by the European Commission in Article 434a of the CRR2, implements the changes introduced by this regulation, integrating most of the public disclosure requirements that were issued in various guidelines and ITS published to date into a single document. In addition, these guidelines also aim to unify, as far as possible, the public information with the information reported to the Supervisor through integration in regulatory reporting and, in some cases, have involved simplifying standard templates that may contain similar information, maintaining only those templates that contain more complete and relevant information, such as those referring to the asset quality of exposures. Together with the aforementioned ITS, the EBA has also published a mapping tool for informational purposes. This document maps the quantitative data in most of the standard templates required in Pillar 3 with supervisory reporting, which has been taken into account when preparing the data in those templates that apply as of the date of the report. The table below sets out the principal changes and the legislative provisions on which they are based.

 

 

Table 2019

  

Description

   ITS applicable
on 2019 report
  

Modificación

  

Table 2020

  

ITS applicable
on 2020 report

NPL1    Credit quality of forborne exposures    EBA/GL/2018/10    Renamed    EU CQ1    EBA/ITS/2020/04
NPL3    Credit quality of performing and non-performing exposures by past due days    EBA/GL/2018/10    Renamed    EU CQ3    EBA/ITS/2020/04
NPL4    Performing and non-performing exposures and related provisions    EBA/GL/2018/10    Renamed    EU CR1    EBA/ITS/2020/04
NPL9    Collateral obtainedd obtained by taking possesion and execution processes    EBA/GL/2018/10    Renamed    EU CQ7    EBA/ITS/2020/04
   Credit quality of exposures by geographic region       New template    EU CQ4   
   Credit quality of loans and advances to non-financial corporations by sector of activity       New template    EU CQ5   
EU CR1-A    Credit quality of exposures by exposure class and instrument    EBA/GL/2016/11    Dropped. Requirement covered by EU CR1    EU CR1    Art. 442 g), h) CRR
EU CR1-B    Credit quality of exposures by industry or counterparty type    EBA/GL/2016/11    Dropped. Requirement covered by EU CQ5    EU CQ5    EBA/GL/2018/10
EU CR1-C    Credit quality of exposures by geographic    EBA/GL/2016/11    Dropped. Requirement covered by EU CQ4    EU CQ4    EBA/GL/2018/10


BBVA. PILLAR III 2020    INTRODUCTION    P. 18

 

Annex VI to this report contains the correspondence to the articles of Part Eight of the CRR, which apply on the date of the report, with the different headings of the document (or other public documents) where the required information can be found.

The aforementioned annex, together with the other annexes and the tables of this Report, are included in an editable document in order to facilitate its analysis, following the recommendations of the EBA Guidelines. This document is called “Pillar III 2020 – Tables & Annexes”, which is available in the section of financial reports on the Group’s Shareholders and Investors website.

It must be pointed out that the data published in the Prudential Relevance Report (Pillar 3) was prepared in accordance with internal control processes described in the “Standard for the preparation of periodic public information of Banco Bilbao Vizcaya Argentaria, S.A. and BBVA Group”. These policies ensure that the information disclosed in Pillar 3 is subject to the internal control framework defined by the Group, as well as adequate internal and external revision (by an independent expert), in compliance with the aforementioned Implementing Technical Standards.

 

 

Composition of Capital

 

Regulatory capital requirements

In this regard, Article 92 of the CRR establishes that credit institutions must maintain the following own funds requirements at all times:

 

a.

Common Equity Tier 1 capital ratio of 4.5%, calculated as Common Equity Tier 1 capital expressed as a percentage on the total amount of risk-weighted assets.

 

b.

Tier 1 capital ratio of 6%, calculated as the level of tier capital 1 expressed as a percentage of the total amount of risk-weighted assets.

 

c.

Total capital ratio of 8%, calculated as the total own funds expressed as a percentage of the total amount of risk-weighted assets

Notwithstanding the application of the Pillar 1 requirement, CRD IV allows competent authorities to require credit institutions to maintain a level of own funds higher than the requirements of Pillar 1 to cover types of risk other than those already covered by the Pillar 1 requirement (this power of the competent authority is commonly referred to as “Pillar 2”).

Furthermore, from 2016 and in accordance with CRD IV, credit institutions must comply with the following combined requirement of capital buffers at all times: (i) the capital conservation buffer, (ii) the buffer for global systemically important banks (the “G-SIB” buffer), (iii) the entity-specific countercyclical capital buffer, (iv) the buffer for other systemically important banks (“D-SIB” buffer) and (v) the systemic risk capital buffer. The “combined capital buffer requirement” must be met with Common Equity Tier 1 capital (“CET1”) to cover both minimum capital required by “Pillar 1” and “Pillar 2”.

Both the capital conservation buffer and the G-SIB buffer (where appropriate) will apply to credit institutions as it establishes a percentage greater than 0%.

The buffer for global systemically important banks applies to those institutions on the list of global systemically important banks, which is updated annually by the Financial Stability Board (“FSB”). Considering the fact that BBVA has not appeared on the said list since November 2015 (effective January 1, 2017), the G-SIB buffer does not apply to BBVA.

For more details on the quantitative indicators for assessing global systemically important entities, see “Annex V – G-SIB indicators”.

The Bank of Spain has extensive discretionary powers as regards the countercyclical capital buffer specific to each bank, the buffer for other systemically important financial institutions (which are those institutions considered to be systemically important domestic financial institutions “D-SIB”) and the buffer against systemic risk (to prevent or avoid systemic or macroprudential risk). The European Central Bank (ECB) has the powers to issue recommendations in this respect following the entry into force on November 4, 2014 of the Single Supervisory Mechanism (SSM).

With regard to minimum capital requirements, the ECB, in its announcement on 12 March 2020, has allowed banks to use Additional Tier 1 and Tier 2 capital instruments to comply with the Pillar II (P2R) requirements, which is known as “Pillar 2 tiering.” This measure is reinforced by the relaxation of the Countercyclical Capital Buffer (CCyB) announced by various national macroprudential authorities and by other complementary measures published by the ECB. Furthermore, the BBVA Group received its SREP (Supervisory Review and Evaluation Process) results in December 2020. Through this letter, the ECB informed the Group that, as from 1 January 2021, the Pillar 2 requirement would be maintained at 1.5%, to be distributed according to the aforementioned Pillar 2 tiering. All this has resulted in a lower fully-loaded CET1 requirement of 66 basis points for BBVA, whereby said requirement stands at 8.59% and the requirement at the total ratio level stands at 12.75%.

 


BBVA. PILLAR III 2020    INTRODUCTION    P. 19

 

Then, the consolidated overall capital requirement includes: i) the minimum capital requirement of Common Equity Tier 1 (CET1) of Pillar 1 (4.5%); ii) the capital requirement of Additional Tier 1 (AT1) of Pillar 1 (1.5%); iii) the capital requirement of Tier 2 of Pillar 1 (2%); iv) the CET1 requirement of Pillar 2 (0.84%), v) the capital requirement of Additional Tier 1 (AT1) of Pillar 2 (0.28%); vi) the capital requirement of Tier 2 of Pillar 2 (0.38%); vii) the capital conservation buffer (2.5% of CET1); and viii) the capital buffer for Other Systemically Important Institutions (O-SIIs) (0.75% of CET1).

As of 2021, the BBVA Group has set an objective to maintain a fully-loaded CET1 ratio of between 11.5% and 12.0%, increasing the target distance from the minimum requirement (currently 8.59%) to 291–341 basis points. At the end of financial year 2020, the fully-loaded CET1 ratio falls within this target management range (+314 basis points).

CET1 phased-in ratio reach 12.15% which represents +315 basis points over the mínimum requirement of 8.59%.

 

 

Chart 1. Capital Requirements and capital ratios (phased-in)

 

LOGO

 

The following table shows the CET1 ratio that would trigger restrictions on capital distribution and the capital ratios as of December 2020:

 

 

Table 1. Capital distribution contrains (12-31-2020)

 

     CET1 capital ratio that would trigger
capital distribution constraints (%)
    Current CET 1
capital ratio (%)
 

CET1 Pillar 1

     4.50  

CET1 Pillar 2 (P2R)

     0.84  

Capital conservation buffer

     2.50  

D-SIB buffer

     0.75  

Countercyclical buffer

     0.00  

CET1 phased-in minimum plus Basel III buffers (excluding capital used to meet other minimum regulatory capital)

     8.59     12.15
  

 

 

   

 

 

 

CET1 phased-in minimum plus Basel III buffers (including capital used to meet other minimum regulatory capital)

     N/A       N/A  
  

 

 

   

 

 

 

 

The Group has not made use of CET1 phased-in capital to meet other minimum capital requirements other than the minimum CET1 capital requirement plus combined capital buffer requirements.

The following table shows the distribution by geographic areas of the credit exposure for calculation of the countercyclical capital buffer:

 


BBVA. PILLAR III 2020    INTRODUCTION    P. 20

 

Table 2. Geographical breakdown of relevant credit exposures for the calculation of the countercyclical capital buffer (Million Euros. 12-31-2020)

 

    General credit
exposures(1)
    Trading
book exposure
    Securitisation
exposure
          Own funds requirements                    
    Exposure
value

for SA
    Exposure
value for
IRB
    Sum of long and
short position of
trading book
    Trading book
exposure value for
internal models
    Exposure
value for SA
    Total
exposure
value
    Of which:
General
credit
exposures
    Of which:
Trading
book

exposures
    Of which:
Securitisation
exposures
    Total     Risk
weighted
exposures
    Own funds
requirements
weights
    Countercyclical
capital

buffer rate
 

Geographical breakdown

                         

Bulgary

    34       3       —         —         —         37       3       —         —         3       35       0.01     0.50

Slovakia

    7       187       —         —         —         194       18       —         —         18       219       0.09     1.00

Hong Kong

    21       1,694       0       9       —         1,724       24       0       —         24       303       0.13     1.00

Luxemburg

    148       1,810       21       3       —         1,982       59       0       —         59       743       0.31     0.25

Norway

    3       48       0       0       —         51       2       0       —         2       19       0.01     1.00

Czech Republic

    14       9       —         —         —         23       1       —         —         1       15       0.01     0.50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total countries with countercyclical capital buffer stablished

    227       3,750       21       12       —         4,011       106       1       —         107       1,334       0.55     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Argentina

    5,617       396       490       —         —         6,502       289       0       —         289       3,613       1.50     —    

Colombia

    13,934       680       737       5       —         15,355       730       7       —         738       9,220       3.82     —    

Spain

    29,723       175,782       145       105       1,585       207,339       5,197       5       24       5,226       65,325       27.10     —    

United States

    74,786       18,691       393       163       64       94,097       4,138       9       4       4,151       51,885       21.53     —    

France

    341       8,544       39       23       —         8,947       206       1       —         207       2,589       1.07     —    

Mexico

    34,802       37,954       368       299       —         73,423       3,121       30       —         3,152       39,394       16.34     —    

Peru

    21,648       699       1,103       —         —         23,450       902       17       —         919       11,485       4.76     —    

Portugal

    4,475       574       18       18       —         5,085       270       1       —         271       3,382       1.40     —    

United Kingdom

    700       6,726       101       85       —         7,612       219       1       —         220       2,751       1.14     —    

Turkey

    51,104       556       1,887       —         —         53,547       2,725       3       —         2,728       34,096       14.14     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total countries with a 0% countercyclical buffer or without countercyclical capital buffer (with own funds requirements greater than 1%)

    237,129       250,601       5,281       697       1,649       495,357       17,798       74       27       17,899       223,739       92.82     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other areas

    10,865       29,630       428       360       74       41,356       1,264       14       1       1,278       15,972       6.63     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total countries without countercyclical capital buffer (with own funds requirements less than 1%)

    10,865       29,630       428       360       74       41,356       1,264       14       1       1,278       15,972       6.63     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    248,221       283,982       5,730       1,069       1,723       540,724       19,167       88       28       19,284       241,044       100.00     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) 

Table format adapted to the EBA/ITS/2020/04 version of the standards.

(1) 

Credit exposure excludes exposures to Central Governments or Central Banks, Regional Governments or Local Authorities, Public sector entities, Multilateral Development Banks, International Organisations and Institutions in accordance with art. 140.4 of Directive 2013/36/EU.

 

     Amount  

Total risk exposure amount

     353,273  

Institution specific countercyclical buffer rate(2)

     0.31

Institution specific countercyclical buffer requirement

     11  

 

(2) 

Countercyclical capital buffer calculated as of December 2020 in accordance with Commission Delegated Regulation (EU) 2015/1555.


BBVA. PILLAR III 2020    INTRODUCTION    P. 21

 

The countercyclical capital buffer requirement applicable to the BBVA Group has been reduced by approximately €60 million as compared to December 2019. This is due to the relaxation of the countercyclical capital buffer announced by various national macroprudential authorities, principally in France and the United Kingdom, which went from 0.25% and 1% respectively in December 2019 to 0% in December 2020.

Leverage ratio

In order to provide the financial system with a metric that serves as a backstop to capital levels, irrespective of the credit risk, a measure complementing all the other capital indicators has been incorporated into Basel III and transposed to the solvency regulations. This measure, the leverage ratio, can be used to estimate the percentage of assets and off-balance sheet items financed with Tier 1 capital.

Although the book value of the assets used in this ratio is adjusted to reflect the bank’s current or potential leverage with a given balance sheet position, the leverage ratio is intended to be an objective measure that may be reconciled with the Financial Statements.

As of December 31, 2020, the Group had a leverage fully loaded ratio of 6.49% and a phased-in ratio of 6.69%, above the minimum required ratio of 3% and continuing to compare very favorably with the rest of the peer group. This ratio does not include the impact of the sale of BBVA USA, which, according to the current estimate and taking December 2020 as a reference, would place the leverage ratio at 7.74%.

 


BBVA. PILLAR III 2020    1. GENERAL INFORMATION REQUIREMENTS    P. 22

 

1. General information requirements

 

1.1.

 

Corporate name and differences between the consolidated group for the purposes of solvency regulations and accounting criteria

     23  

1.1.1.

 

Corporate name and scope of application

     23  

1.1.2.

  Differences between the Consolidated Group for the purposes of solvency regulations and accounting criteria      23  

1.1.3.

  Main changes in the Group in the 2020 financial year      24  

1.1.4.

  Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter      25  

1.2.

  Identification of dependent entities with bank capital below the minimum requirement. Possible impediments to transferring own funds      27  

1.3.

 

Exemptions from capital requirements at the individual or sub-consolidated level

     27  


BBVA. PILLAR III 2020    1. GENERAL INFORMATION REQUIREMENTS    P. 23

 

1.1. Corporate name and differences between the consolidated group for the purposes of solvency regulations and accounting criteria

 

1.1.1. Corporate name and scope of application

Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter the “Bank” or “BBVA”) is a private law entity subject to the rules and regulations of the banking entities operating in Spain and carries out its activity through branches and agencies throughout the country and abroad.

The bylaws and other public information are available for consultation at the Bank’s registered office (Plaza San Nicolás, 4, Bilbao) and on its website (www.bbva.com).

Solvency regulations are applicable at a consolidated level for the whole Group.

1.1.2. Differences between the Consolidated Group for the purposes of solvency regulations and accounting criteria

The Consolidated Financial Statements of BBVA Group are presented in accordance with the International Financial Reporting Standards adopted by the European Union (hereinafter referred to as ‘IFRS-EU’) applicable as of December 31, 2020, considering the Bank of Spain Circular

4/2017, and its successive modifications and the other provisions of the financial reporting framework which are applicable and the marking and format requirements stablished by Regulation EU 2019/815 of European Commision.

On the basis of accounting criteria, companies are considered to form part of a consolidated group when the parent entity holds or can hold, directly or indirectly, control of them. An institution is understood to control a subsidiary when it is exposed, or is entitled to, variable returns as a result of its involvement in the subsidiary and has the capacity to influence those returns through the power it exercises over the subsidiary. For control to exist, the following aspects must be fulfilled:

 

a.

Power: An investor has power over a subsidiary when it has current rights that provide it with the capacity to direct its relevant activities, i.e. those that significantly affect the returns of the subsidiary.

b.

Returns: An investor is exposed, or is entitled to variable returns, as a result of its involvement in the subsidiary when the returns obtained by the investor for such involvement may vary based on the economic performance of the subsidiary. Investor returns can be positive only, negative only, or positive and negative at the same time.

 

c.

Relationship between power and returns: An investor has control over a subsidiary when it not only has power over the subsidiary and is exposed, or is entitled to, variable returns for its involvement in the subsidiary, but it also has the capacity to use its power to influence the returns it obtains due to its involvement in the subsidiary.

Therefore, in drawing up the Consolidated Financial Statements of BBVA Group, all dependent companies and consolidating structured entities have been consolidated by applying the full consolidation method.

Associated companies, as well as joint ventures (those over which joint control arrangements are in place), are valued using the equity method.

The list of all the companies forming part of the Group is included in the appendices to the Consolidated Financial Statements of BBVA Group.

For the purposes of solvency regulations, the following subsidiaries form part of the consolidated group, as defined in Article 18 of the CRR:

 

    Credit institutions

 

    Investment firms

 

    Financial Institutions

A financial institution is a company, separate from other institutions (credit institution or investment firm), whose main activity may consist of acquiring holdings or performing one or more of the following activities:

 

    Loans, including in particular consumer finance, credit agreements relating to immovable property, recourse and non-recourse factoring, and financing of commercial transactions (including forfaiting)

 

    Financial leasing

 

    Payment services

 

    Issuing and managing other payment channels (e.g. traveler’s checks and bank checks)

 

    Granting of guarantees and commitments
 


BBVA. PILLAR III 2020    1. GENERAL INFORMATION REQUIREMENTS    P. 24

 

    Trading on their own account or on behalf of customers on any of the following instruments:

 

    Money market instruments (checks, bills, certificates of deposit etc.)

 

    Foreign currency

 

    Financial futures and options

 

    Foreign-exchange or interest-rate instruments

 

    Marketable securities

 

    Participating in the issuance of securities and the provision of corresponding services

 

    Advising companies with regard to capital structure, industrial strategy and related matters, as well as advice and services for mergers and acquisitions of companies

 

    Brokerage in the interbank markets

 

    Managing or advising on equity management

 

    Custody and administration of marketable securities

 

    Issuance of electronic money

This definition includes financial holding companies, mixed financial holding companies, payment institutions and asset management firms, but excludes pure industrial holding companies, insurance companies, insurance holding companies and mixed insurance holding companies.

 

    Auxiliary services companies: A company whose main activity is holding or management of property, management of computing services or any other similar activity of an auxiliary nature with regard to the main activity of one or more institutions (credit institution or investment firm).

Therefore, for the purposes of calculating solvency requirements, and hence the drawing up of this Prudential

Relevance Report, the scope of consolidating entities is different from the scope defined for the purposes of drawing up the Consolidated Financial Statements of BBVA Group.

The effect of the difference between the two regulations is mainly due to:

 

    Withdrawals from the balance made by entities (largely insurance companies regulated by the Solvency II regulatory framework) that are consolidated in the Consolidated Financial Statements of BBVA Group by the full consolidation method and consolidated for the purposes of solvency by applying the equity method.

 

    Entries to the balance contributed mainly by financial entities, consolidated by applying the equity method at the accounting level, but for the purposes of solvency, are proportionally integrated.

The list of entities that use different consolidation methods in their public and regulatory balance sheets is included in table LI3 in Appendix 1 to the file titled, “Excel Tables and Pillar III 2020 Appendices”, which is included with this report and is available in the Shareholders and Investors/Financial Information section of the Group’s website.

1.1.3. Main changes in the Group in the 2020 financial year

In 2020, the BBVA Group underwent two significant divestment operations, which are detailed in Note 3 to the Consolidated Financial Statements. These operations involved the agreement reached with Allianz to jointly boost the non-life insurance business in Spain, which was finalised in December 2020, and the agreement to sell BBVA USA and other subsidiaries in the United States with activities related to the banking business. The closing of this agreement is subject to the receipt of regulatory authorisations from the relevant authorities.

Furthermore, on 22 January 2021, once all required authorisations had been obtained, BBVA completed the sale of its direct and indirect holdings of 100% of the share capital of Banco Bilbao Vizcaya Argentaria Paraguay, S.A. (“BBVA Paraguay”) to Banco GNB Paraguay S.A., part of the Gilinski Group. This sale will have a positive impact on the Group’s fully loaded CET1 ratio of approximately +6 basis points, which will be reflected in the BBVA Group’s capital base for the first quarter of 2021 (see Note 56 to the Group’s Consolidated Financial Statements).

As result of the agreement to sale BBVA USA, as of 31 December 2020 in the Group’s consolidated public balance sheet, all the items on the balance sheet of BBVA USA, have been reclassified to the category of “Non-current assets (liabilities) and disposal groups classified as held for sale”. The same treatment applied in this report for those breakdowns that, in compliance with the respective RTS/ITS of the EBA, are made based on information from the FINREP Statements (indicated in the respective breakdowns).

On the contrary, for the purposes of prudential consolidation and in compliance with article 18 of the CRR, both in the Corep Statements submitted to the Supervisor, and in the disclosures of this report other than those mentioned above, BBVA USA’s assets and liabilities are presented in their respective balance sheet headings.

This also applies to BBVA Paraguay, whose balance sheet items have been reclassified as “Non-current assets (liabilities) and disposal groups held for sale” since 2019, when the sale agreement was reached with Banco GNB Paraguay, S.A.

For more information on the main transactions during the year, see Note 3 of the Consolidated Financial Statements of BBVA Group.

 


BBVA. PILLAR III 2020    1. GENERAL INFORMATION REQUIREMENTS    P. 25

 

1.1.4. Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter

This section includes an exercise in transparency to show the reconciliation process between the book balances reported in the public balance sheet (attached to the Consolidated Financial Statements of BBVA Group) and the book balances

this report uses (regulatory perimeter), revealing the main differences between both perimeters. This comparison is affected by the classification of BBVA USA’s and BBVA Paraguay’s assets and liabilities as “Non-current assets (liabilities) and disposal groups held for sale” in the public balance sheet, while they are classified on the prudential balance sheet under their respective balance sheet headings in accordance with the prudential method of consolidation established by the CRR (see Chapter 1.3).

 

 

Table 3. CC2 - Reconciliation of regulatory capital to balance sheet (Million Euros. 12-31-2020)

 

Public Balance Sheet Headings(1)

   Public Balance
Sheet
     Regulatory
balance sheet
     Referece to
template CC1
 

Cash, cash balances at central banks and other demand deposits

     65,520        77,557     

Financial assets held for trading

     108,257        109,759     

Non-trading financial assets mandatorily at fair value through profit or loss

     5,198        1,619     

Financial assets designated at fair value through profit or loss

     1,117        —       

Financial assets at fair value through accumulated other comprehensive income

     69,440        59,379     

Financial assets at amortised cost

     367,668        424,956     

Derivatives - Hedge accounting

     1,991        1,863     

Fair value changes of the hedged items in portfolio hedges of interest rate risk

     51        51     

Joint ventures and associates

     1,437        4,382     

Insurance and reinsurance assets

     —          —       

Tangible assets

     7,823        8,326     

Intangible assets

     2,345        4,246        g)  

Tax assets

     16,526        16,557     

Of which: deferred tax assets

     15,327        15,353        h)  

Other assets

     2,819        5,932     

Non-current assets and disposal groups classified as held for sale

     85,987        1,223     
  

 

 

    

 

 

    

 

 

 

Total Assets

     736,176        715,850        —    
  

 

 

    

 

 

    

 

 

 

Financial liabilities held for trading

     86,488        86,933     

Financial liabilities designated at fair value through profit or loss

     10,050        4,531     

Financial liabilities at amortised cost

     490,606        561,576        o) p) r)  

Derivatives - Hedge accounting

     2,318        2,157     

Fair value changes of the hedged items in portfolio hedges of interest rate risk

     —          —       

Liabilities under insurance and reinsurance contracts

     —          67     

Provisions

     6,141        5,816     

Tax liabilities

     2,355        1,668     

Of which: deferred tax liabilities

     1,809        1,142     

Other liabilities

     12,753        3,267     

Liabilities included in disposal groups classified as held for sale

     75,446        —       
  

 

 

    

 

 

    

 

 

 

Total liabilities

     686,156        666,015        —    
  

 

 

    

 

 

    

 

 

 

Capital

     3,267        3,267        a)  

Share premium

     23,992        23,992        a)  

Equity instruments issued other than capital

     —          —          b)  

Other equity

     42        42        b)  

Retained earnings

     30,508        29,974        b)  

Revaluation reserves

     —          —          b)  

Other reserves

     (164      275        b)  

Less: treasury shares

     (46      (46      l)  

Profit or loss atributable to owners of the parent

     1,305        1,253        e)  

Less: interim dividend

     —          —          e)  

Accumulated other comprehensive income (loss)

     (14,356      (14,341      c) i) k)  

Minority interests

     5,471        5,417     
  

 

 

    

 

 

    

 

 

 

Total equity

     50,020        49,834        —    
  

 

 

    

 

 

    

 

 

 

Total equity and total liabilities

     736,176        715,850        —    
  

 

 

    

 

 

    

 

 

 

 

(1) 

In the public balance sheet the assets and liabilities of BBVA USA and BBVA Paraguay are classified as “Non current assets held for sale” and “Non current liabilities held for sale”, while in the regulatory balance sheet they are classified under their respective balance sheet headings in accordance with the prudential consolidation established by the CRR (see section 1.1.3).

 

The main differences between the public balance sheet and the regulatory balance sheet, apart from the sales of BBVA USA and BBVA Paraguay, are due to withdrawals from the balance generated by insurance, real estate and financial entities that are consolidated through the application of the equity method for the amount of -21,312 million euros; and balance entries generated by entities that are consolidated using the proportional integration method for an amount of +986 million euros.

The following table also shows the risk to which each of the items on the regulatory balance sheet is exposed:


BBVA. PILLAR III 2020    GENERAL INFORMATION REQUIREMENTS    P. 26

 

Table 4. EU LI1 - Differences between the accounting and regulatory scopes of consolidation and the mapping of the financial statements categories with regulatory risk categories (Million Euros. 12-31-2020)

 

                                 Carrying values of items (1)  
     Carrying
values as
reported in
published
financial
statements(2)
     Proforma
consolidated
accounting
values
including the
United States

and Paraguay(3)
     From which
summarised
consolidated
balance sheet
of US
companies
for sale(4)
     Carrying Values
under scope of
regulatory
consolidation(5)
     Subject
to credit

risk
framework
     Subject to
counterparty

credit risk
framework
     Subject to
the

Securitisation
framework
     Subject
to the
market risk
framework
     Not subject
to capital
requirements or
subject to
deduction

from capital
 

Assets

                          

Cash, cash balances at central banks and other demand deposits

     65,520        77,303        11,368        77,557        77,557        —          —          —          —    

Financial assets held for trading

     108,257        109,078        821        109,759        12,325        74,610        —          109,759        —    

Non-trading financial assets mandatorily at fair value through profit or loss

     5,198        5,211        13        1,619        1,567        —          52        —          —    

Financial assets designated at fair value through profit or loss

     1,117        1,117        —          —          —          —          —          —          —    

Financial assets at fair value through accumulated other comprehensive income

     69,440        74,416        4,974        59,379        58,987        —          364        29        —    

Financial assets at amortised cost

     367,668        430,260        61,558        424,956        418,357        2,120        3,917        —          562  

Derivatives - Hedge accounting

     1,991        2,000        9        1,863        —          1,863        —          —          —    

Fair value changes of the hedged items in portfolio hedges of interest rate risk

     51        51        —          51        —          —          —          —          51  

Joint ventures and associates

     1,436        1,437        —          4,382        4,350        —          —          —          32  

Insurance and reinsurance assets

     306        306        —          —          —          —          —          —          —    

Tangible assets

     7,823        8,629        799        8,326        8,326        —          —          —          —    

Intangible assets

     2,345        4,297        1,949        4,246        753        —          —          —          3,493  

Tax assets(6)

     16,526        16,888        360        16,557        15,079        —          —          —          1,478  

Other assets(7)

     2,512        3,912        1,390        5,932        3,858        —          —          —          2,074  

Non-current assets and disposal groups classified as held for sale(4)

     85,986        1,271        16        1,223        1,223        —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     736,176        736,176        83,257        715,850        602,382        78,593        4,333        109,788        7,690  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

     —          —          —          —          —          —          —          —          —    

Financial liabilities held for trading

     86,487        86,587        98        86,933        —          74,128        —          86,933        —    

Financial liabilities designated at fair value through profit or loss

     10,050        10,050        —          4,531        —          —          —          —          4,531  

Financial liabilities at amortised cost

     490,606        565,085        73,132        561,576        —          11,840        —          —          549,736  

Derivatives - Hedge accounting

     2,318        2,320        2        2,157        —          2,157        —          —          —    

Fair value changes of the hedged items in portfolio hedges of interest rate risk

     —          —          —          —          —          —          —          —          —    

Liabilities under insurance and reinsurance contracts

     9,951        9,951        —          67        —          —          —          —          67  

Provisions

     6,141        6,304        157        5,816        830        —          —          —          4,986  

Tax liabilities(3)

     2,355        2,558        201        1,668        1,142        —          —          —          526  

Other liabilities

     2,802        3,300        493        3,267        —          —          —          —          3,267  

Liabilities included in disposal groups classified as held for sale(4)

     75,446        —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

     686,156        686,156        74,083        666,015        1,973        88,125        —          86,933        563,112  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

For the purpose of the template, when a single item is associated with the capital requirements according to more than one risk framework, it is shown in all the columns corresponding to the capital requirements to which it is associated. As a result, the sum of the values of the columns by type of risk may be greater than the carrying value according to the scope of regulatory consolidation.

(2) 

These headings include BBVA Paraguay’s and USA’s assets and liabilities, reclassified in the epigraphs of Non Current Assets Held For Sale” and “Non Current Liabilities Held For Sale” (see section 1.1.3.).

(3) 

For comparative purposes, this column presents in proforma the Consolidated Balance Sheet of the Group including the companies for sale of the United States and Paraguay (see section 1.1.3.).

(4) 

These headings present the summarised consolidated balance sheet of companies for sale in the United States (see section 1.1.3) and footnote 21 of the Group’s Consolidated Annual Statements.

(5) 

These headings include BBVA USA and BBVA Paraguay’s assets and liabilities under their respective balance sheet headings according to the prudential consolidation established by the CRR (see section 1.1.3.).

(6)

Deferred tax assets that depend on future profitability, which deducted from deferred tax liabilities (Article 38 of CCR) amount to 3,441 million euros and have a risk weight of 250%, accordance to Article 48 of CCR.

(7)

The amount of other assets includes 2,074 million euros corresponding to insurance contracts linked to pensions, are not subject to capital requirements.


BBVA. PILLAR III 2020    1. GENERAL INFORMATION REQUIREMENTS    P. 27

 

A table summarizing the main sources of the differences between the amount of exposure in regulatory terms (EAD)

 

and the book balances according to the Financial Statements is presented below:

 

 

Table 5. EU LI2 - Main sources of the differences between regulatory original exposure amounts and carrying values in financial statements (Million Euros. 12-31-2020)

 

           Items subject to:  
     Total     Credit risk
framework
    Counterparty
credit risk
framework
    Securitisation
framework
    Market risk
framework
 

Asset carrying value amount under scope of regulatory consolidation

     795,096       602,382       78,593       4,333       109,788  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities carrying value amount under scope of regulatory consolidation

     177,031       1,973       88,125       0       86,933  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net amount under regulatory scope of consolidation

     618,065       600,409       (9,532     4,333       22,855  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of off-balance-sheet

     185,203       180,058       5,146       —         —    

Differences in valuation

     —         —         —         —         —    

Differences due to netting agreements (netting, long/short positions) (2)

     96,024       (4,506     100,530       —         —    

Accounting Provisions(1)

     5,395       5,395       —         —         —    

Credit risk mitigation techniques (CRM)

     (27,603     (5,642     (21,891     (70     —    

Credit conversion factors (CCF)

     (115,164     (115,164     —         —         —    

Differences due to risk transfer securitisations

     (2,644     —         —         (2,644     —    

Counterparty credit risk in derivatives (includes the add-on)

     13,873       —         13,873       —         —    

Other

     1,264       (842     2,106       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exposure amounts considered for regulatory purposes

     774,415       659,708       90,231       1,620       22,855  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes provisions for exposures to credit risk under advanced approach that do not reduce the EAD.

(2) 

The balance includes repurchase agreements and derivatives liabilities, the impact of the guarantee adjustment on repurchase agreements and liabilities and the effect of netting.

1.2. Identification of dependent entities with bank capital below the minimum requirement. Possible impediments to transferring own funds

 

As of December 31, 2020, there are no entities in the Group with capital adequacy below the minimum regulatory requirement that apply to it.

The Group operates mainly in Spain, Mexico, the United States, Turkey and South America. The Group’s banking subsidiaries around the world are subject to supervision and regulation (with respect to issues such as compliance with a minimum level of regulatory capital) by a number of regulatory bodies.

The obligation to comply with these capital requirements may affect the capacity of these banking subsidiaries to transfer funds (e.g. via dividends) to the parent company.

In some jurisdictions in which the Group operates, the regulations lay down that dividends may only be paid with the funds available by regulation for this purpose.

 

 

1.3. Exemptions from capital requirements at the individual or sub-consolidated level

 

In accordance with what is set out in the solvency regulations regarding the exemption from capital requirements compliance for Spanish credit institutions belonging to a consolidated group (at individual or sub-consolidated level) established in the aforementioned regulation, the Group obtained exemption from the supervisor on December 30, 2009 for the following companies (this exemption was ratified through ECB decision 1024/2013):

    Banco Industrial de Bilbao, S.A.

 

    Banco Occidental, S.A.

In addition, for Financiero de Crédito de Portugal (BBVA IFIC,

S.A.), the ECB has decided not to apply prudential or liquidity requirements individually.

 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 28

 

2. Own Funds and Capital

 

2.1.

 

Characteristics of the eligible capital resources

     29  

2.2.

 

Amount of own funds

     30  

2.3.

 

IFRS 9 and OCI Transitional Arrangements

     33  

2.4.

 

Entity risk profile

     34  

2.5.

 

Breakdown of minimum capital requirements by risk type

     36  

2.6.

 

Procedure used in the capital self-assessment process

     38  


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 29

 

2.1. Characteristics of the eligible capital resources

 

For the purposes of calculating minimum capital requirements, according to Regulation (EU) 575/2013 and subsequent amendments, which enter into force on June 27, 2019 (CRR), the elements and instruments of Tier 1 capital are defined as the sum of Common Equity Tier 1 capital (CET1) and additional Tier 1 capital (AT1), as defined in Part Two, Title I, Chapters I to III of the CRR, as well as their corresponding deductions, in accordance with Articles 36 and 56, respectively.

Also considered are the elements of Tier 2 capital defined in Part Two of Chapter IV, Section I of the CRR. The deductions defined as such in Section II of the same Chapter are also considered.

The level of Common Equity Tier 1 capital essentially comprises the following elements:

 

a.

Capital and share premium: This includes the elements described in article 26 section 1, and 28 of the CRR and the EBA list referred to in Article 26 Section 3 of the CRR.

 

b.

Accumulated gains: In accordance with Article 26. 1 c), the gains that may be used immediately and with no restriction to cover any risk or losses are included, in the event that they occur.

 

c.

Other accumulated income and other reserves: In accordance with Article 26. 1, d) and e), this item primarily classifies the exchange-rate differences and the valuation adjustments associated with the portfolio of financial assets at fair value with changes to other comprehensive income.

 

d.

Minority interests eligible as CET1: Includes the sum of the Common Equity Tier 1 capital instruments of a subsidiary that arise in the process of its global consolidation and are attributable to natural or legal third persons other than companies included in the consolidation, calculated in accordance with Article 84 et seq. of the CRR.

 

e.

Net profit of the year attributed to the Group: The independently verified profits are included, net of any possible expense or foreseeable dividend previously authorised by the supervisor (following the treatment set out in Article 5 of Decision (EU) 2015/656 of the ECB). As of December 2020, it includes the prudential accrual of 0.059 cents/share as Shareholders remuneration calculated according to the ECB recommendation.

Furthermore, CET1 capital is adjusted mainly through the following deductions:

 

f.

Additional value adjustments: This includes adjustments resulting from the prudent valuation of positions at fair value, as set out in Article 105 of the CRR and taking into account the transitional treatment of the aggregation

  factor (66% vs. 50%) introduced by Delegated Regulation (EU) 2020/866 of 28 May 2020 as a measure to mitigate the impact of the extreme market volatilities caused by COVID-19. This transitional measure is applicable until 31 December 2020.

 

  g.

Intangible assets: These are included net of the corresponding tax liabilities, as set out in Article 36.1 b) and Article 37 of the CRR. It mainly includes goodwill, software and other intangible assets. The amount shall be deducted from the amount of the accounting revaluation of the intangible assets of the subsidiaries derived from the consolidation of the subsidiaries attributable to persons other than the companies included in the consolidation. This includes the positive effect due to the prudent treatment of software following the publication of Delegated Regulation 2020/2176 of 22 December.

 

  h.

Deferred tax assets: It includes deferred tax assets that rely on future profitability and do not rise from temporary differences (net of the corresponding tax liabilities when the conditions established in Article 38.3 of the CRR are met), as per Article 36.1 c) and Article 38 of the CRR, mainly loss carryforwards (LCFs).

 

  i.

Reserves at fair value related to losses or gains from cash flow hedging: Includes value adjustments of cash flow hedging of financial instruments not valued at fair value, including expected cash flows in accordance with Article 33 a) of the CRR.

 

  j.

Negative amounts due to the calculation of the expected losses: The default provision on expected losses in exposure weighted by method based on internal ratings, calculated in accordance with Article 36.1 d) of the CRR, is included.

 

  k.

Profit and loss at fair value: These are derived from the entity’s own credit risk, in accordance with Article 33 b) of the CRR.

 

  l.

Direct, indirect and synthetic holdings of own instruments (treasury stock): Includes the shares and other instruments eligible as capital that are held by any of the Group’s consolidating entities, together with those held by non-consolidating entities belonging to the economic Group, as set out in Article 36.1 f) and Article 42 of the CRR. It mainly includes financing own shares, synthetic treasury stock and own shares.

 

  m.

Securitisation: Any instance of securitisation that receives a risk weighting of 1.250% is included, as set out in Article 36.1 k) ii) of the CRR.

 

  n.

Other regulatory adjustmens: Other CET1 deductions are included according to the CRR, which were not recognised in the above headings, such as losses and gains at fair value arising from the entity’s own credit risk related to derivative liabilities (DVA). It includes also the transitional adjustments of IFRS92.

 

 

 

2.

Since 2018 BBVA Group has applied the transitional treatment of the impacts of IFRS9. Therefore, phased-in capital ratios and leverage ratio are calculated taking into account the transitional provisions as defined by article 473 bis of the CRR and its subsequent amendments made by Regulation 2020/873 of the Parliament and Council of 24 June 2020 in response to the COVID-19 pandemia. The Group also applies paragraph 7a of the aforementioned article in calculating the impact of the transitional treatment on phased in risk-weighted assets.


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 30

 

Other deductions that may be applicable are significant stakes in financial institutions and assets for deferred taxes arising from temporary differences that exceed the 10% limit of the CET1, and the deduction for exceeding the overall 17.65% limit of the CET1 according to Article 48.2 of the CRR. As of December 31, 2020, regarding phased in terms, these stakes are held at levels below the limits indicated, with no deductions to that effect being applicable.

In addition, as of December 31, 2020, the Group do not hold stakes in financial institutions that are excluded from the application of the previously mentioned limits (article 49 of the CRR) and, therefore, the standard template of the EBA INS1 shall not be applicable.

In addition, the Group includes as total eligible additional Tier 1 capital instruments defined in Articles 51, 52, 85, 86 and 484 of the CRR, including the corresponding adjustments, in accordance with Article 472 of the CRR:

 

o.

Capital instruments and share premium eligible as AT1: This item includes the perpetual contingent convertible securities that meet the conditions set out in Articles 51 and 52.1, 53 and 54 of the CRR.

 

p.

Elements referred to in Article 484.4 of the CRR: This section includes preferred securities issued by the Group.

q.

Qualifying Tier 1 capital included in the consolidated additional capital issued by affiliates and held by third parties: Included as additional consolidated Tier 1 capital is the amount of Tier 1 capital from the subsidiaries, calculated in accordance with Article 85 and 86 of the CRR.

Finally, the Group also includes as Tier 2 eligible capital the following elements:

 

r.

Capital instruments and Tier 2 share premiums: Includes funding that, for credit ranking purposes, comes behind all the common creditors. The issues, moreover, have to fulfill a number of conditions, which are laid out in Article 63 of the CRR.

 

s.

Eligible own funds instruments eligible as Tier 2 capital issued by subsidiaries and held by third parties: These instruments are included under Articles 87 and 88 of the CRR.

 

t.

Credit risk adjustments: It includes the surplus resulting from comparing the provisions and expected credit losses related to exposures calculated under IRB approach with the limit of 0.6% of the risk-weighted exposure.

 

u.

Tier 2 Regulatory adjustments: This mainly includes direct and indirect holdings of own Tier 2 capital instruments.

Annex III outlines the main characteristics of capital instruments eligible for inclusion as additional Tier 1 and Tier 2 capital.

 

2.2. Amount of own funds

The amount of total eligible capital, net of deductions, for the different items making up the capital base as of December 31, 2020 and 2019, respectively, is below, in accordance with the requirements for the disclosure of information related to regulatory own funds established by the Commission’s Implementing Regulation (EU) No 1423/2013 of December 20, 2013:

 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 31

 

Table 6. Amount of capital (CC1) (Million Euros)

 

Reference to template CC2(1)

   12-31-2020     12-31-2019  

a) Capital and share premium

     27,259       27,259  

b) Retained earnings

     29,974       29,127  

c) Other accumulated earnings and other reserves

     (14,023     (10,133

d) Minority interests eligible as CET1

     3,656       4,404  

e) Net profit of the year attributed to the Group

     860       1,316  
  

 

 

   

 

 

 

Common Equity Tier 1 Capital before other regulatory adjustments

     47,726       51,974  
  

 

 

   

 

 

 

f) Additional value adjustments

     (233     (302

g) Intangible assets

     (3,455     (6,803

h) Deferred tax assets

     (1,478     (1,420

i) Fair value reserves related to gains o losses on cash flow hedges

     (204     69  

j) Expected losses in equity

     —         —    

k) Profit or losses on liabilities measured at fair value

     21       (24

l) Direct, indirect and synthetic holdings of own instruments

     (366     (484

m) Securitisations tranches at 1250%

     (29     (25

n) Other CET1 regulatory adjustments

     949       667  
  

 

 

   

 

 

 

Total Common Equity Tier 1 regulatory adjustments

     (4,795     (8,321
  

 

 

   

 

 

 

Common Equity Tier 1 (CET1)

     42,931       43,653  
  

 

 

   

 

 

 

o) Equity instruments and AT1 share premium

     6,130       5,280  

p) Elements referred in Article 484(4) of the CRR

     —         120  

q) Qualifying Tier 1 capital included in consolidated AT1 capital issued by subsidiaries and held by third parties

     536       648  

Additional Tier 1 before regulatory adjustments

     6,666       6,048  
  

 

 

   

 

 

 

Total regulatory adjustments of Additional Tier 1

     —         —    
  

 

 

   

 

 

 

Additional Tier 1 (AT1)

     6,666       6,048  
  

 

 

   

 

 

 

Tier 1 (Common Equity Tier 1+Additional Tier 1)

     49,597       49,701  
  

 

 

   

 

 

 

r) Equity instruments and Tier 2 share premiums

     4,540       3,242  

s) Eligible own funds instruments included in consolidated Tier 2 issued by subsidiaries and held by third parties

     3,410       4,512  

-Of which: instruments issued by subsidiaries subject to phase out

     23       516  

t) Credit risk adjustments

     604       631  

Tier 2 before regulatory adjustments

     8,554       8,385  

u) Tier 2 regulatory adjustments

     (6     (82
  

 

 

   

 

 

 

Tier 2

     8,547       8,304  
  

 

 

   

 

 

 

Total Capital (Total capital = Tier 1 + Tier 2)

     58,145       58,005  
  

 

 

   

 

 

 

TOTAL RWA’s

     353,273       364,448  
  

 

 

   

 

 

 

CET 1 (phased-in)

     12.15     11.98

CET 1 (fully loaded)

     11.73     11.74

TIER 1 (phased-in)

     14.04     13.64

TIER 1 (fully loaded)

     13.62     13.37

Total Capital (phased-in)

     16.46     15.92

Total Capital (fully loaded)

     15.91     15.41

 

(*) 

As of December 31, 2020, the diference between phased-in and fully loaded ratios arises from the transitional treatment of certain capital elements, mainly the impact of IFRS9, to which the BBVA Group has voluntarily adhered (in accordance with the article 473 bis of the CRR). See paragraph 2.3 for more information on the transitional impact of IFRS9.

In addition, noted that the Group to date is not applying the transitional treatment of unrealised gains and losses valued at fair value through Other comprehensive Income (hereinafter, unrealised P&L measured at fair value through OCI) as defined in Article 1.6 of that Regulation amending Article 468 of the CRR. Therefore, the Group’s own funds, capital and leverage ratios to date reflect the full impact of the above-mentioned unrealised P&L measured at fair value through OCI.

 

(**) 

In line with the EBA Standards published in June 2020 (EBA/ITS/2020/04) the template has been adapted according to the format established by the EBA in those rows that are applicable to the date of the report, among which is the transitional impact of IFRS9 on CET1, which has been reclassified from the “Common Equity Tier 1 Before Other Regulatory Adjustments” row as an Common Equity Tier 1 regulatory adjustment, within the “Other regulatory adjustments” row. In addition to this change, December 2019 data has been restated to consider the change in accounting policy made by the Group which involves recording the differences generated when translating the restated financial statements of the subsidiaries in hyperinflationary economies into euros as indicated in footnote 1.3 of the Consolidated Financial Statements.

(1) 

References to regulatory balance sheet items (CC2) reflecting the diferent items described.

 

As of December 2020 Common Equity Tier 1 (CET1) phased-in ratio stood at 12.15% which represented an increase of +17 basis points with respect to 2019. The difference is mainly explained by:

 

    The positive BBVA’s organic profit generation which has made possible to cover the (in constant euros) of risk weighted assets (RWA) and the relative stabilisation of the financial markets during the second half of the year, largely motivated by the measures to stimulate the economy and the announced guaranteed programs by the different national and supranational authorities and the approval
  by the Parliament and the European Council of regulation 2020/873 (known as CRR quick fix). In this regard, the modification in the software deduction had a positive impact of +19 basis points.

 

    The effect of the transitional adjustments of IFRS9 in the solvency ratios and subsequent modifications in response to the COVID-19 pandemic.

 

    The execution of the agreement reached with Allianz to jointly develop the non-life insurance business in Spain, excluding the health insurance line had an impact of +7 basis points in CET1 ratio.
 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 32

 

In addition, CET1 capital as of December 2020 includes the effect of the Shareholders remuneration accrued by 0.059 euros gross per share , which rises to a maximum amount of approximately 393 million euros (equivalent to 11 bps of CET1), calculated taking into account the ECB recommendation. (For more information see note 4 of the Consolidated Financial Statements of BBVA Group).

In terms of fully loaded, CET1 ratio stood at 11.73%, which remains at a similar level compared to December 2019 (11.74%).

Phased-in Additional Tier 1 (AT1) capital stood at 1.89% at the end of December 2020, an improvement of +23 basis points compared to the previous year. In this respect, a green CoCo was issued in July 2020 for €1,000 million, with a 6% coupon and an early repayment option from five and a half years. Moreover, a CoCo of €1,500 million (6.75% coupon) was amortised in February, on the first date of the early amortisation option; in January 2021, the early amortisation options were implemented for two preferential issuances, issued by BBVA International Preferred and Caixa Sabadell Preferents for 31 million pounds sterling and €90 million respectively; and finally, for a third preferential issuance issued by Caixa Terrassa Societat de Participacions Preferents, the bondholders’ meeting has approved its early amortisation on 29 January 2021 (versus the early amortisation option date of 10 August 2021). As of 31 December 2020, these issuances do not form part of the Group’s capital adequacy ratios.

The phased-in Tier 2 ratio at 31 December 2020 stood at 2.42%, an increase of +14 basis points over the previous year. Two Tier 2 issuances were issued in 2020: An issuance of €1,000 million in January, with a maturity of 10 years and a repayment option from the fifth year, with a coupon of 1%; and another issuance of 300 million pounds sterling in July, with a maturity of 11 years and with an early repayment option from the sixth year, with a coupon of 3.104%.

Regarding the MREL (Minimum Requirement for own funds and Eligible Liabilities) requirements, BBVA has continued its issuance plan during 2020 by closing two public issuances of non-preferred senior debt, one in January 2020 for €1,250 million with a maturity of seven years and a coupon of 0.5%, and another in February 2020 for CHF 160 million with a maturity of six and a half years and a coupon of 0.125%. In May 2020, the first issuance of a COVID-19 social bond by a

private financial institution in Europe was completed. This is a five-year senior preferred bond, for €1,000 million and a coupon of 0.75%. Finally, in order to optimize the MREL requirement, in September BBVA issued preferred senior debt of USD 2,000 million in two tranches, with maturities of three and five years, for USD 1,200 million and USD 800 million and coupons of 0.875% and 1.125% respectively.

The Group estimates that, following the entry into force of Regulation (EU) No. 2019/877 of the European Parliament and of the Council of May 20 (which, among other matters, establishes the MREL in terms of RWAs and new periods for said requirement’s transition and implementation), the current structure of shareholders’ funds and admissible liabilities enables compliance with the MREL.

Chart 2. Annual evolution of the CET1 fully loaded ratio

 

LOGO

 

(1) 

Includes mainly RWAs evolution in constant Euros, frontloading of regulatory impacts (-25 bps), impact of the new treatment of software (+19 bps) and impact from the Joint Venture with Allianz (+7 bps).

The characteristics of the main capital instruments are shown in Annex III, available on the Group’s website, in accordance with Commission Implementing Regulation (EU) No 1423/2013 of December 20, 2013.

The process of reconciliation between accounting own funds and regulatory own funds is shown below. Based on the shareholders’ equity reported in the Consolidated Financial Statements of BBVA Group and applying the deductions and adjustments shown in the table below, we arrive at the regulatory capital figure eligible for solvency purposes:

 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 33

 

Table 7. Reconciliation of the Public Balance Sheet from the accounting perimeter to the regulatory perimeter (Million Euros)

 

Eligible capital own funds

   12-31-2020      12-31-2019  

Capital

     3,267        3,267  

Share premium

     23,992        23,992  

Retained earnings, revaluation reserves and other reserves

     30,344        29,269  

Other equity

     42        56  

Less: Treasury shares

     (46      (62

Attributable to the parent company

     1,305        3,512  

Attributable dividend

     —          (1,084
  

 

 

    

 

 

 

Total equity

     58,904        58,950  
  

 

 

    

 

 

 

Accumulated other comprehensive income (Loss)

     (14,356      (10,226

Non-controlling interest

     5,472        6,201  
  

 

 

    

 

 

 

Shareholders`equity

     50,020        54,925  

Goodwill and other intangible assets

     (3,455      (6,803

Direct and synthetic treasury shares

     (320      (422
  

 

 

    

 

 

 

Deductions

     (3,775      (7,225

Differences from solvency and accounting level

     (186      (215
  

 

 

    

 

 

 

Equity not eligible at solvency level

     (186      (215
  

 

 

    

 

 

 

Other adjustments and deductions(2)

     (3,128      (3,832
  

 

 

    

 

 

 

Common Equity Tier 1 (CET 1)

     42,931        43,653  
  

 

 

    

 

 

 

Additional Tier 1 before Regulatory Adjustments

     6,666        6,048  
  

 

 

    

 

 

 

Total regulatory adjustments of additional Tier 1

     —          —    
  

 

 

    

 

 

 

Tier 1

     49,597        49,701  
  

 

 

    

 

 

 

Tier 2

     8,548        8,304  
  

 

 

    

 

 

 

Total Capital (Tier 1 + Tier 2)

     58,145        58,005  
  

 

 

    

 

 

 

TOTAL Minimum capital required(1)

     45,042        46,540  
  

 

 

    

 

 

 

 

(1) 

Calculated over minimum total capital applicable for each period.

(2) 

Other adjustments and deductions includes the amount of minority interest not eligible as capital, amount of dividends not distributed and other deductions and filters set by the CRR. Additionally, it includes a prudential accrual corresponding to 0.059 euros gross shareholder remuneration based on the current recommendation of the ECB.

2.3. IFRS 9 and OCI Transitional Arrangements

The table below shows a comparison of institutions’ own funds and capital and leverage ratios with and without the application of the transitional treatment of IFRS9 impact, and with and without the application of the transitional treatment in accordance with Article 468 of the CRR, according to the standard format set by EBA guidelines (EBA/GL/2018/01).

Since 2018 BBVA Group has applied the transitional treatment of IFRS9 impact. Therefore, phased-in capital ratios and leverage ratio are calculated taking into account the transitional provisions as defined by article 473 bis of the CRR and its subsequent amendments made by Regulation 2020/873 of the Parliament and Council of 24 June 2020 in response to the COVID-19 pandemia. The Group also applies paragraph 7a of the aforementioned article in calculating the impact of the transitional treatment on phased in risk-weighted assets.

In addition, as of the date of the report, the Group is not applying the transitional treatment of unrealised gains and losses measured at fair value through other comprehensive income (hereinafter, unrealised gains and losses measured at FVTOCI) outlined in Article 1, Paragraph 6 of the aforementioned regulation amending Article 468 of the CRR. Therefore, the Group’s own funds, and its capital adequacy and leverage ratios, reflect to date the full impact of the aforementioned unrealised gains and losses measured at FVTOCI.

In addition, the own funds and capital adequacy ratios without the application of the transitional treatment of IFRS 9 and unrealised gains and losses measured at FVTOCI do include the impact of applying other transitional regulatory adjustments.

 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 34

 

Table 8. IFRS 9-FL - Comparison of institutions’ own funds and capital and leverage ratios with and without the application of transitional arrangements for IFRS 9 or analogous ECLs and with and without the application of the transitional treatment of unrealised gains and losses measured at FVTOCI

 

Own funds

   12-31-2020     09-30-2020     06-30-2020     03-30-2020     12-31-2019  

CET1 Capital

     42,931       41,231       42,119       40,854       43,653  

CET1 Capital without IFRS9 transitional arrangement or similar ECL

     41,333       39,640       40,734       39,902       42,844  

CET1 Capital without FVOCI transitional arrangement

          

Tier 1 Capital (T1)

     49,597       48,248       48,186       46,974       49,701  

Tier 1 Capital (T1) without IFRS9 transitional arrangement or similar ECL

     48,000       46,657       46,802       46,022       48,892  

Tier 1 Capital (T1) without FVOCI transitional arrangement

          

Total Capital

     58,145       57,305       57,531       56,731       58,005  

Total Capital without IFRS9 transitional arrangement or similar ECL

     56,544       55,712       56,146       55,779       57,196  

Total Capital without FVOCI transitional arrangement

          

Risk-weighted assets

     —         —         —         —         —    

Total Risk-weighted assets

     353,273       343,923       362,050       368,666       364,448  

Total Risk-weighted assets without IFRS9 transitional arrangement or similar ECL

     352,679       344,215       362,388       368,839       364,943  

Capital ratio

     —         —         —         —         —    

CET1 Capital (as a percentage of total exposure to risk)

     12.15     11.99     11.63     11.08     11.98

CET1 Capital (as a percentage of total exposure to risk) without IFRS9 transitional arrangement or similar ECL

     11.72     11.52     11.24     10.82     11.74

CET1 Capital (as a percentage of total exposure to risk) without FVOCI transitional arrangement

          

Tier 1 Capital (T1) (as a percentage of total exposure to risk)

     14.04     14.03     13.31     12.74     13.64

Tier 1 Capital (T1) (as a percentage of total exposure to risk) without IFRS9 transitional arrangement or similar ECL

     13.61     13.55     12.91     12.48     13.40

Tier 1 Capital (T1) (as a percentage of total exposure to risk) without FVOCI transitional arrangement

          

Total Capital (as a percentage of total exposure to risk)

     16.46     16.66     15.89     15.39     15.92

Total Capital (as a percentage of total exposure to risk) without IFRS9 transitional arrangement or similar ECL

     16.04     16.19     15.49     15.12     15.67

Total Capital (as a percentage of total exposure to risk) without FVOCI transitional arrangement

          

Leverage Ratio

     —         —         —         —         —    

Total exposure related to leverage ratio

     741,095       722,221       775,915       749,989       731,087  

Leverage Ratio

     6.69     6.68     6.21     6.26     6.80

Leverage ratio without IFRS9 transitional arrangements or similar ECL

     6.46     6.47     6.03     6.15     6.70

Leverage ratio without FVOCI transitional arrangements

          

2.4. Entity risk profile

 

The BBVA Group has a general risk management and control model (hereinafter, the “Model”) that is appropriate for its business model, its organisation, the countries where it operates and its corporate governance system. This model allows the Group to carry out its activity within the risk management and control strategy and policy defined by the corporate bodies of BBVA and to adapt itself to a changing economic and regulatory environment, facing this management at a global level and aligned to the circumstances at all times. The Model establishes a suitable risk management system related to the risk profile and strategy of the entity.

The types of risk inherent in the business that make up the risk profile of the Group are as follows:

 

    Credit risk and dilution: Credit risk arises from the probability that one party to a financial instrument will fail to meet its contractual obligations for reasons of insolvency or inability to pay and cause a financial loss for the other party. This includes counterparty risk, issuer risk, liquidation risk and country risk.
    Counterparty risk: The credit risk corresponding to derivative instruments, repurchase and reverse repurchase transactions, securities or commodities lending or borrowing transactions and deferred settlement transactions.

 

    Credit Valuation Adjustment Risk (CVA): Its aim is to reflect the impact on the fair value of the counterparty’s credit risk, resulting from OTC derivative instruments which are not recognised credit derivatives for the purpose of reducing the amount of credit risk weighted exposure.

 

    Market risk: Market risk originates in the possibility that there may be losses in the value of positions held due to movements in the market variables that affect the valuation of financial products and assets in the trading book. This includes risk with respect to the position in debt and equity instruments, exchange rate risk and commodity risk.

 

    Operational risk: a risk that may cause losses as a result of human error; inadequate or defective internal processes; inadequate conduct towards customers, in the markets or against the company; failures, interruptions or deficiencies in systems or communications; theft, loss or misuse of
 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 35

 

 

information, as well as deterioration of its quality; internal or external fraud including, in all cases, fraud resulting from cyber-attacks; theft or physical damage to assets or persons; legal risks; risks resulting from workforce and occupational health management; and inadequate service provided by suppliers. This definition includes legal risk, but excludes strategic and/or business risk and reputational risk.

 

    Structural risk: This is divided into structural interest-rate risk (movements in market interest rates that cause changes in an entity’s net interest income and book value) and structural exchange-rate risk (exposure to variations in exchange rates originating in the Group’s foreign companies and in the provision of funds to foreign branches financed in a different currency from that of the investment).
    Liquidity risk: Risk of an entity having difficulties in duly meeting its payment commitments, or where, to meet them, it has to resort to funding under burdensome terms which may harm the Group’s image or reputation.

 

    Reputational risk: Considered to be the potential loss in earnings as a result of events that may negatively affect the perception of the Group’s different stakeholders.

The chart below shows the total risk-weighted assets broken down by type of risk (where credit risk encompasses counterparty risk) as of December 31, 2020 and December 31, 2019:

 

 

Chart 3. Distribution of RWAs by risk type eligible on Pillar 3

 

LOGO

 

(*)

Credit Risk includes CVA adjustment risk


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 36

 

2.5. Breakdown of minimum capital requirements by risk type

 

This section provides an overview of risk-weighted assets and the minimum capital requirements established by Article 92 of the CRR.

The following table shows the total capital requirements broken down by risk type as of December 31, 2020 and December 31, 2019:

 

 

Table 9. EU OV1 - Overview of RWAs (Million Euros)

 

     RWA(1)      Minimum Capital
Requirements(2)(3)
 
     12-31-2020      09-30-2020      12-31-2019      12-31-2020  

Credit Risk (excluding CCR)

     277,644        269,409        286,159        22,212  
  

 

 

    

 

 

    

 

 

    

 

 

 

Of which the standardised approach(4)

     176,056        175,783        190,603        14,085  

Of which the foundation IRB (FIRB) approach(6)

     4,263        4,458        4,606        341  

Of which the advanced IRB (AIRB) approach(7)

     94,882        86,655        88,191        7,591  

Of which equity IRB under the simple risk-weighted approach(5)

     2,444        2,513        2,758        195  

Counterparty credit risk (CCR)

     9,284        9,557        8,289        743  
  

 

 

    

 

 

    

 

 

    

 

 

 

Of which mark to market

     7,710        8,107        6,716        617  

Of which original exposure

     —          —          —          —    

Of which the standardised approach

     —          —          —          —    

Of which the Internal model method (IMM)

     —          —          —          —    

Of which risk exposure amount for contributions to the default fund of a CCP

     89        60        44        7  

Of which CVA

     1,485        1,389        1,529        119  

Settlement Risk

     1        —          —          0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securitisation exposures in the banking book(8) (after the cap)

     347        368        924        28  
  

 

 

    

 

 

    

 

 

    

 

 

 

Of which internal assessment approach (SEC-IRBA)

     143        157        —          11  

Of which standardised approach (SEC-SA)

     —          —          —          —    

Of which external assessment approach (SEC-ERBA)

     204        210        —          16  

Market Risk

     14,773        16,377        16,066        1,182  
  

 

 

    

 

 

    

 

 

    

 

 

 

Of which the standardised approach (SA)

     6,397        6,232        6,991        512  

Of which IMA approach

     8,376        10,145        9,075        670  

Operational Risk

     35,656        34,379        37,877        2,853  
  

 

 

    

 

 

    

 

 

    

 

 

 

Of which basic indicator approach

     883        637        805        71  

Of which the standardised approach

     34,773        12,783        15,250        2,782  

Of which IRB approach

     —          20,959        21,822        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts below the thresholds for deduction (subject to 250% risk weight)

     15,566        13,834        15,134        1,245  
  

 

 

    

 

 

    

 

 

    

 

 

 

Floor Adjustment

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     353,273        343,923        364,448        28,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Risk-weighted assets for the transitional period (phased-in).

(2) 

Calculated on the minimum total capital requirements of 8% (Article 92 of the CRR).

(3) 

Under CET 1 requirements (8.59%) after the supervisory evaluation process (SREP), the requirements amount to EUR 30,346 million euros. Under Total Capital requirements (12.75%), the requirements amount to EUR 45,042 million euros.

(4) 

Deferred tax assets arising from temporary differences, which are not deducted from eligible own funds (subject to a risk weighting of 250%) are excluded, in accordance with Article 48.4 oh the CRR. This amount is 7,423, 6,548 and 7,279 million euros as of December 31, 2020, Septembre 30, 2020 and December 31, 2019, respectively.

(5) 

Includes equity, calculated under the simple risk-weighted approach and internal model approach, but excluding significant investments in financial sector entities and insurers that are not deducted from eligible own funds (subject to a risk weighting of 250%), in accordance with Article 48.4 CRR. This amount is 8,143, 7,286 and 7,855 as December 31, 2020, September 30, 2020 and December 31, 2019, respectively.

(6) 

Exposures clasisified in the FIRB approach correspond to specialised lending exposures. The Group has chosen to use the slotting criteria, in line with article 153.5 of the CRR.

(7) 

It includes the frontloading to partially cover the regulatory impacts derived from Targeted Review of Internal Models (TRIM) and other regulatory/supervisory impacts.

(8) 

As of December 31, 2019, the approaches applied to calculate the RWA of securitisations corresponded to the standard and IRB, which were later replaced by the approaches of the new securitisation framework defined in EU Regulation 2017/2401. As of December 31, 2020, the applicable approaches for the Group correspond to SEC-ERBA and SEC-IRBA.

 

Throughout 2020, RWAs have decreased by approximately €12.3 billion compared to December 2019 in aggregate terms, mainly affected by the widespread depreciation of currencies, mainly the Turkish lira and the Mexican peso. Excluding the currency effect, RWAs increased by approximately €18 billion, mainly due to:

 

    Organic growth in activity characterised by the various relief measures in the form of temporary payment deferrals for customers due to the pandemic, as well as the granting of loans backed by public guarantees or collateral; and the incorporation of regulatory and supervisory impacts.
    The frontloading of €7.4 billion (equivalent to 25 CET1 basis points) which will partially cover the regulatory and supervisory impacts expected for 2021.

Furthermore, as indicated in Section 3.6 of this report, in December 2020, BBVA reverted to using advanced models to calculate operational risk capital requirements at the

 


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 37

 

consolidated level in geographical areas for which this method was previously used (Spain and Mexico), following authorisation from the European Central Bank’s Governing Council on 18 December 2020. At the Group level, this reversal does not significantly impact capital requirement figures nor RWAs for operational risk.

The respective sections of the report explain in more detail the evolution of RWAs by type of risk.

The following is a breakdown of risk-weighted assets and capital requirements broken down by risk type and exposure categories as of December 31, 2020 and December 31, 2019:

 

 

Table 10. Capital requirements by risk type and exposure class (Million Euros)

 

     Capital requirements(2)      RWA’s(1)  

Exposure Class and risk type

   12-31-2020      12-31-2019      12-31-2020      12-31-2019  

Credit Risk

     14,926        16,014        186,576        200,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

Central governments or central banks

     2,347        2,375        29,343        29,685  

Regional governments or local authorities

     185        132        2,317        1,644  

Public sector entities

     61        63        768        790  

Multilateral development banks

     1        1        7        11  

International organisations

     —          —          —          —    

Institutions

     626        429        7,827        5,366  

Corporates

     6,226        6,999        77,822        87,486  

Retail

     2,749        3,079        34,362        38,493  

Secured by mortgages on immovable property

     1,022        1,199        12,769        14,983  

Exposures in default

     358        305        4,480        3,808  

Exposures associated with particularly high risk

     381        411        4,758        5,136  

Covered bonds

     —          —          —          —    

Claims on institutions and corporates with a short-term credit assesment

     0        0        1        1  

Collective investments undertakings

     0        1        3        8  

Other exposures

     970        1,021        12,120        12,767  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total credit risk by Standardised approach

     14,926        16,019        186,576        200,237  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Risk

     6,938        7,125        86,729        89,061  
  

 

 

    

 

 

    

 

 

    

 

 

 

Central governments or central banks

     68        54        849        673  

Institutions

     567        532        7,084        6,646  

Corporates

     4,826        4,769        60,324        59,615  

Of which: SMEs

     916        998        11,452        12,478  

Of which: Specialised lending

     393        433        4,912        5,407  

Of which: Others

     3,517        3,338        43,960        41,730  

Retail

     1,478        1,770        18,471        22,128  

Of which: Secured by mortgages on immovable property

     586        712        7,319        8,904  

Of which: Qualifying revolving

     479        589        5,987        7,365  

Of which: Other SMEs

     103        131        1,289        1,636  

Of which: Other Non-SMEs

     310        338        3,876        4,223  

Equity

     1,163        1,293        14,532        16,167  
  

 

 

    

 

 

    

 

 

    

 

 

 

Simple risk weight approach

     146        185        1,831        2,309  

Exposures in sufficiently diversified portfolios (RW 190%)

     89        86        1,114        1,070  

Exchange traded exposures (RW 290%)

     34        67        425        841  

Others (RW 370%)

     23        32        291        399  

PD/LGD approach

     316        444        3,945        5,554  

Internal models approach

     49        36        613        449  

Exposures subject to a 250% risk weight

     651        628        8,144        7,854  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total credit risk by IRB approach

     8,101        8,487        101,261        106,091  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total contributions to the default fund of a CCP

     7        3        89        44  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securitisation exposures

     28        74        347        924  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total credit risk

     23,062        24,510        288,273        306,372  
  

 

 

    

 

 

    

 

 

    

 

 

 

Settlement risk

     0        —          1        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Standardised approach:

     275        272        3,431        3,395  

Of which: Price Risk by fixed income exposures

     155        197        1,943        2,461  

Of which: Price Risk by Securitisation exposures

     0        2        4        21  

Of which: Price Risk by correlation

     97        51        1,210        641  

Of which: Price Risk by stocks and shares

     21        20        264        248  

Of which: Commodities Risk

     1        2        10        24  

IRB: Market Risk

     670        726        8,376        9,075  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading book risk

     945        998        11,807        12,470  
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreing exchange risk (standardised approach)

     237        288        2,966        3,596  
  

 

 

    

 

 

    

 

 

    

 

 

 

CVA risk

     119        122        1,485        1,529  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operational risk

     2,853        3,030        35,656        37,877  
  

 

 

    

 

 

    

 

 

    

 

 

 

Others(3)

     1,047        208        13,084        2,605  
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital requirements

     28,262        29,156        353,273        364,448  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Risk-weighted assets for the transitional period (phased-in).

(2) 

Calculated on the minimum total capital requirements of 8% (Article 92 of the CRR).

(3) 

As of report date, it includes the frontloading to partially cover the regulatory impacts derived from Targeted Review of Internal Models (TRIM) and other regulatory/supervisory impacts.


BBVA. PILLAR III 2020    2. OWN FUNDS AND CAPITAL    P. 38

 

A breakdown of RWAs distribution by method each exposure category is below:

 

 

Chart 4. Distribution of RWAs by exposure category and method

 

LOGO

 

(*) 

Excluding securitisation and equity subject to credit risk.

(1) 

Table 30 of the report details the models and portfolios authorised by the supervisor for use in the calculation of capital requirements.

 

2.6. Procedure used in the capital self-assessment process

The Group carries out the internal capital assessment process in accordance with the Capital Requirements Directive 2013/36/EU and guidelines on the supervisory review and evaluation process (SREP) published by the European Banking Authority. In accordance with Article 108 of the Capital Requirements Directive (2013/36/EU), the Group complies with the obligations set out in Article 73 thereof on a consolidated basis. Furthermore, the document is structured on the basis of the ECB’s guidance on the internal capital adequacy assessment process (ICAAP) of November 2018.

Within the framework of the internal capital assessment process, the Group assesses and quantifies all risk that could significantly affect its capital position and draws a conclusion on the capital adequacy from a holistic medium-term perspective.

The Group applies a proportionate approach that aims to ensure the entity’s survival and continued compliance with all legal and internal requirements. In addition to regulatory and accounting perspectives, the Group bases its capital adequacy position analysis on a sound internal approach in which its capital position is assessed under an economic vision, which includes quantifying capital needs for risk covered in Pillar 1 of Basel and the needs due to risk not covered by Pillar 1.

The following are some of the points assessed in the internal capital assessment process:

 

    Business and strategy model, describing both the changes planned by the bank in the current business model and its underlying activities such as the relationship between the business strategy and internal capital assessment process.
    Internal governance, risk management and the control framework, reviewing the processes and mechanisms that ensure that the bank has a sound and integrated framework for managing present and future material risk.

 

    Risk appetite framework, describing the correspondence between this framework and the bank’s business strategy and model.

 

    Identification and assessment of risk (including credit, operational, market, liquidity and other structural risk) and quantification of the capital necessary to cover them, with a quantitative reconciliation between the Pillar 1 and Pillar 2 approaches.

 

    Planning capital under baseline and stress scenarios, projecting the capital base of the Group, the parent and its main subsidiaries over the next three years and analyzing capital sufficiency in accordance with the regulatory requirements and the internal objectives set out by the entity for the close of the period, also dealing with the planned capital actions.

This internal capital assessment process concludes with submission to the supervisor of an annual report on the process. The report plays a key role in the review and evaluation methodology applied by the Single Supervisory Mechanism, and is an important element for determining capital requirements under Pillar 2.

 


BBVA. PILLAR III 2020    3. RISK    P. 39

 

3. Risk

 

3.1.  

General Risk Management and Control Model

     44  
3.2.  

Credit and Counterparty Risk

     44  
3.2.1.  

Scope and nature of the Credit Risk measurement and reporting systems for capital framework purposes

     44  
3.2.2.  

Definitions and accounting methodologies

     45  
3.2.3.  

Information on credit risk

     45  
3.2.4.  

Information on the standardised approach

     62  
3.2.5.  

Information on the IRB approach

     66  
3.2.6.  

Information on counterparty credit risk

     86  
3.2.7.  

Information on securitisation

     95  
3.2.8.  

Hedging and risk reduction policies. Supervision strategies and processes

     102  
3.2.9.  

Information on credit risk mitigation techniques

     102  
3.2.10.  

RWA density by geographic areas

     104  
3.3.  

Market Risk

     106  
3.3.1.  

Scope and nature of the market risk measurement and reporting systems

     106  
3.3.2.  

Differences in the trading book under accounting and prudential regulation

     106  
3.3.3.  

Standardised approach

     106  
3.3.4.  

Internal models

     107  
3.4.  

Structural risk

     117  
3.4.1.  

Structural interest rate risk

     117  
3.4.2.  

Structural exchange rate risk

     118  
3.4.3.  

Structural equity risk

     118  
3.5.  

Liquidity Risk

     120  
3.5.1.  

Liquidity and funding prospects

     120  
3.5.2.  

LCR disclosure

     121  
3.5.3.  

Net Stable Funding Ratio

     123  
3.5.4.  

Encumbered assets in funding operations

     123  


BBVA. PILLAR III 2020    3. RISK    P. 40

 

3.6.  

Operational Risk

     127  
3.6.1.  

Methods used for calculating capital

     127  
3.6.2.  

The Group’s Operational Risk Profile

     128  


BBVA. PILLAR III 2020    3. RISK    P. 41

 

3.1. General Risk Management and Control Model

 

The BBVA Group has a general risk management and control model (hereinafter, the ‘Model’) that is appropriate for its business model, its organisation, the countries where it operates and its corporate governance system. This model allows the Group to carry out its activity within the risk management and control strategy and policy defined by the corporate bodies of BBVA and to adapt itself to a changing economic and regulatory environment, facing this management at a global level and aligned to the circumstances at all times.

The Model, for which the Group’s Chief Risk Officer (CRO) is responsible, must be updated or reviewed at least annually. The Model, which is fully applied in the Group, comprises the following basic elements:

    Governance and organisation

 

    Risk Appetite Framework

 

    Assessment, monitoring and reporting

 

    Infrastructure

The Group promotes the development of a risk culture that ensures a consistent application of the Model in the Group, and that guarantees that the risks function is understood and internalised at all levels of the organisation. These elements are described in the “Risk Management” section of the Management Report accompanying the Consolidated Financial Statements of BBVA Group.

 

 

3.2. Credit and Counterparty Risk

 

3.2.1. Scope and nature of the Credit Risk measurement and reporting systems for capital framework purposes

Credit risk is based on the likelihood that one party to the financial instrument’s contract will fail to meet its contractual obligations on the grounds of insolvency or inability to pay and will cause a financial loss for the other party.

It is the Group’s most important risk and includes counterparty risk, issuer risk, settlement risk and country risk management.

The Group has a risk strategy determined by the Board of Directors of the parent company, which establishes the Group’s Risk Appetite statement, the core metrics and statements and by type of risk metrics in which this materializes, as well as the General Risk Management and Control Model.

The Risks and Compliance Committee assists the Board of Directors in a variety of risk control and monitoring areas, complementing these functions with the submission to the Board of proposals on the Group’s strategy, control and risk management. In addition, the CRC proposes, in a manner consistent with the Risk Appetite Framework of the Group approved by the Board of Directors, the management and control policies of the different risks of the Group.

The Risks and Compliance Committee, Executive Committee and the Board itself conduct proper monitoring of the implementation of the Group’s risk strategy and risk profile.

 

Based on the risk strategy determined by the Board of Directors, the Global Risk Management Committee approves the management limits structure that articulates the Risk Appetite Framework for the different geographies, types of risks, classes of assets and portfolios, including the proposed Asset Allocation management limits with the determined level of disaggregation. The limits are established annually, at maximum levels of exposure by type of portfolio.

The Asset Allocation limits for portfolios, businesses and risks are defined taking into account the established metrics in terms of exposure, economic capital and mix of portfolios, and are geared to maximizing the Group’s generation of recurring economic earnings, subject to the framework of restrictions resulting from the definition of the target risk profile.

The Corporate Risk Area establishes risk concentration thresholds: individual, per portfolio and sector, and geographical. These thresholds are established in terms of EAD and Herfindahl indices in order to limit the impact on capital consumption.

The Business Areas work in line with the global vision and defined metrics, optimizing each of the portfolios for which they are responsible in terms of risk/return, within the Group’s limits and policies.

The existing gaps with respect to the target portfolio are identified at global level and transmitted to the Business Areas, establishing plans at global and local level to adapt the risk to the predefined target profile and taking into account the future expected performance of the portfolios.

 


BBVA. PILLAR III 2020    3. RISK    P. 42

 

For managing risk and capital, BBVA quantifies its credit risk using two main metrics: expected loss (“EL”) and economic capital (“EC”). The expected loss reflects the average value of the losses and is viewed as a business cost. However, economic capital is the amount of capital considered necessary to cover unexpected losses if actual losses are greater than expected losses.

These risk metrics are combined with information on profitability in value-based management, thus integrating the profitability-risk binomial into decision-making, from the definition of business strategy to the approval of individual loans, price setting, assessment of non-performing loan portfolios, incentives to areas in the Group, etc.

There are three essential parameters in the process of calculating the EL and EC measurements: the probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), mainly based on the estimate of credit conversion factors (“CCF”). They are generally estimated using historical information available on the systems and are assigned to operations and customers according to their particular characteristics.

In this context, the rating and scoring tools assess the risk in each customer/transaction according to their credit quality by assigning them a score, which is used to assign risk metrics together with other additional information: transaction seniority, loan to value ratio, customer segment, etc.

Section 3.2.5.1 of this Document details the definitions, approaches and data used by the Group to determine the regulatory capital requirements for estimating the parameters of probability of default (PD), loss given default (LGD) and exposure at default (EAD).

3.2.2. Definitions and accounting methodologies

The “expected losses” impairment model is applied to financial assets valued at amortised cost, to debt instruments valued at fair value with changes in other accumulated comprehensive income, to financial guarantee contracts and other commitments. All financial instruments valued at fair value through profit or loss are excluded from the impairment model.

For more information about the accounting impairment model, and other accounting definitions (according to Article 442 of CRR), refer to Note 2.2.1 of the Consolidated Financial Statements of BBVA Group.

 

3.2.3. Information on credit risk

3.2.3.1. Exposure to credit risk

According to Article 5 of the CRR, with respect to the regulatory capital requirements for credit risk, exposure is understood to be any asset item and all items included in the Group’s off-balance sheet accounts involving credit risk and not deducted from the Group’s bank capital. Accordingly, mainly loan and advances to customers are included, with their corresponding undrawn balances, letters of credit and guarantees, debt securities and capital instruments, cash and balances with central banks and credit institutions, repurchase and reverse repurchase agreements, financial derivatives and intangible assets.

The credit risk exposure specified in the following sections of this document is broken down into credit risk according to the standardised approach (Section 3.2.4), credit risk according to the advanced approach (Section 3.2.5), counterparty credit risk (Section 3.2.6), securitisation credit risk (Section 3.2.7) and structural equity risk (Section 3.4).

In addition to the exposure at default and the risk-weighted assets, the table below shows the original exposure, the exposure net of provisions and the exposure after conversion factors under the standardised and advanced approaches as of December 31, 2020 and December 31, 2019 (including counterparty credit risk):

 


BBVA. PILLAR III 2020    3. RISK    P. 43

 

Table 11. Credit Risk and Counterparty Risk Exposure (Million Euros. 12-31-2020)

 

Exposure Class

  Original
Exposure(1) 
    Provisions(2)      Net
exposure of
provisions(3) 
    On-balance
exposure after
credit risk
mitigation
techniques(4a) 
    Off-balance
exposure

after
credit risk
mitigation
techniques(4b) 
    Exposure in
the
adjusted
value(5)
    EAD(6)     RWA’s(7)      RWA
density
(8=(7)/(6))
 

Central governments or central banks

    177,273       (120     177,153       204,373       9,038       213,411       207,083       29,392       14

Regional governments or local authorities

    19,740       (28     19,712       6,881       851       7,732       7,207       2,317       32

Public sector entities

    1,926       (1     1,925       1,678       242       1,920       1,835       768       42

Multilateral development banks

    271       —         271       303       38       341       303       7       2

International organisations

    —         —         —         —         —         —         —         —         0

Institutions

    35,589       (41     35,548       15,386       13,541       28,927       17,047       7,827       46

Corporates

    106,523       (1,507     105,016       64,598       30,885       95,483       79,985       77,822       97

Retail

    82,631       (1,815     80,816       46,040       25,794       71,833       49,019       34,362       70

Secured by mortgages on immovable property

    35,013       (324     34,690       34,433       216       34,649       34,614       12,769       37

Exposures in default

    8,392       (4,309     4,083       3,847       170       4,017       3,959       4,480       113

Exposures associated with particularly high risk

    4,122       (544     3,578       3,035       419       3,454       3,172       4,758       150

Covered bonds

    —         —         —         —         —         —         —         —         —    

Claims on institutions and corporates with a short-term credit assesment

    1       —         1       1       —         1       1       1       88

Collective investments undertakings

    8       —         8       —         5       5       3       3       100

Other exposures

    20,030       —         20,030       19,964       675       20,638       20,389       12,071       59
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total standardised approach

    491,521       (8,691     482,830       400,539       81,872       482,412       424,616       186,576       44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Central governments or central banks

    13,333       (7       14,233       193       14,427       14,328       849       6

Institutions

    112,423       (33       91,252       5,813       97,065       94,455       7,084       8

Corporates

    162,314       (2,335       82,250       69,516       151,767       115,181       60,324       52

Corporates (SMEs)

    23,254       (1,028       14,156       4,019       18,175       15,734       11,452       73

Corporates: Specialised lending

    6,407       (23       5,790       616       6,407       6,136       4,912       80

Corporates: Others

    132,653       (1,285       62,304       64,881       127,185       93,312       43,960       47

Retail

    115,544       (3,020       91,886       21,425       113,310       95,236       18,471       19

Of which: secured by immovable property

    76,070       (1,129       71,737       4,308       76,045       71,824       7,319       10

Of which: Qualifying revolving

    22,516       (734       6,222       16,293       22,516       9,035       5,987       66

Of which: Others

    16,959       (1,157       13,926       823       14,749       14,377       5,165       36

Retail: Other SMEs

    5,768       (296       2,765       813       3,578       3,211       1,289       40

Retail: Other Non-SMEs

    11,191       (862       11,161       10       11,171       11,166       3,876       35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total IRB approach

    403,615       (5,395     —         279,622       96,946       376,568       319,200       86,729       27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit risk dilution and delivery

    895,135       (14,086     482,830       680,161       178,819       858,980       743,816       273,304       37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total positions in securitisation(7)

    1,723       —         —         1,649       —         1,649       1,649       347       21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

    6,123       —         6,123       6,123       —         6,123       6,123       14,532       237
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Simple risk weight approach

    812         812       812       —         812       812       1,831       226

Exposures in sufficiently diversified portfolios (RW 190%)

    586         586       586       —         586       586       1,114       190

Exchange traded exposures (RW 290%)

    147         147       147       —         147       147       425       290

Others (RW 370%)

    79         79       79       —         79       79       291       370

PD/LGD approach

    1,869         1,869       1,869       —         1,869       1,869       3,945       211

Internal models approach

    185         185       185       —         185       185       613       331

Exposures subject to a 250% risk weight

    3,257         3,257       3,257       —         3,257       3,257       8,144       250
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit risk

    902,981       (14,086     488,953       687,934       178,819       866,753       751,588       288,184       38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Gross exposure value before credit risk mitigation techniques and CCF, excluding contributions to the default fund for a CCP.

(2) 

Includes provisions and impairment of financial assets and contingent risk and commitments.

(3) 

Standardised Approach exposures are adjusted by credit risk adjustments. The original equity exposure is shown net of impairment.

(4a)(4b) 

Eligible credit risk mitigation techniques are included, either on-balance sheet or off-balance sheet, according to Chapter 4 of CRR. In the case of securitisation exposure, unfunded credit protection is included.

(5) 

It corresponds to the exposure value adjusted by eligible credit risk mitigation techniques.

(6) 

Exposure at default, calculated as (4a)+((4b)*CCF).

(7) 

This row includes the SEC-SA, SEC-ERBA and SEC-IRBA methods. The exposure of securitisations with a risk weight of 1,250% which are deducted from own funds is included (€29 million).


BBVA. PILLAR III 2020    3. RISK    P. 44

 

Credit Risk and Counterparty Risk Exposure (Million Euros. 12-31-2019)

 

                         On-balance      Off-balance                              
                         exposure      exposure                              
                         after      after      Exposure in                       
                  Net      credit risk      credit risk      the                    Densidad  
     Original            exposure of      mitigation      mitigation      adjusted                    APR  

Exposure Class

   Exposure(1)      Provisions(2)     provisions(3)      techniques(4a)      techniques(4b)      value(5)      EAD(6)      RWA’s(7)       (8=(7)/(6))   

Central governments or central banks

     130,050        (128     129,922        148,210        5,624        153,834        148,863        29,685        20

Regional governments or local authorities

     10,665        (23     10,642        6,830        1,049        7,879        7,101        1,644        23

Public sector entities

     1,764        (2     1,763        1,643        227        1,870        1,779        790        44

Multilateral development banks

     167        (0     167        210        38        247        210        11        5

International organisations

     0        —         0        0        0        0        0        —          —    

Institutions

     36,102        (32     36,070        12,270        13,202        25,472        13,333        5,366        40

Corporates

     112,830        (1,106     111,723        72,768        32,558        105,327        89,826        87,486        97

Retail

     89,038        (1,781     87,257        52,116        30,403        82,519        54,871        38,493        70

Secured by mortgages on immovable property

     39,867        (229     39,638        39,423        164        39,587        39,561        14,983        38

Exposures in default

     8,276        (4,673     3,603        3,198        328        3,526        3,423        3,808        111

Exposures associated with particularly high risk

     4,472        (509     3,962        3,317        419        3,736        3,424        5,136        150

Covered bonds

     —          —         —          —          —          —          —          —          —    

Claims on institutions and corporates with a short-term credit assesment

     1        (0     1        1        —          1        1        1        96

Collective investments undertakings

     22        (0     22        6        4        10        8        8        100

Other exposures

     21,063        (45     21,018        25,346        825        26,172        25,843        12,767        49

Securitisation exposures

     3,953        —         3,953        134        —          134        134        61        45
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total standardised approach

     458,271        (8,529     449,742        365,472        84,841        450,313        388,379        200,237        52
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Central governments or central banks

     11,018        (5        13,172        656        13,829        13,498        673        5

Institutions

     115,854        (39        93,188        5,521        98,708        96,262        6,646        7

Corporates

     156,624        (2,356        86,917        66,987        153,903        119,106        59,615        50

Corporates (SMEs)

     23,121        (1,029        17,135        4,588        21,723        18,979        12,478        66

Corporates: Specialised lending

     7,310        (62        6,639        671        7,310        6,986        5,407        77

Corporates: Others

     126,192        (1,266        63,142        61,728        124,870        93,140        41,730        45

Retail

     118,897        (2,467        96,129        22,696        118,825        100,020        22,128        22

Of which: secured by immovable property

     78,379        (941        73,978        4,376        78,353        74,139        8,904        12

Of which: Qualifying revolving

     24,618        (646        7,190        17,428        24,618        10,430        7,365        71

Of which: Others

     15,901        (880        14,961        893        15,854        15,452        5,859        38

Retail: Other SMEs

     4,444        (268        3,524        878        4,401        4,006        1,636        41

Retail: Other Non-SMEs

     11,456        (611        11,438        15        11,453        11,445        4,223        37

Securitisation exposures

     2,794        —            2,714        —          2,714        2,714        856        32
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total IRB approach

     405,188        (4,867     —          292,120        95,860        387,979        331,600        89,917        27
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit risk dilution and delivery

     863,459        (13,396     449,742        657,592        180,701        838,293        719,979        290,153        40
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity

     7,124        —         7,124        7,124        —          7,124        7,124        16,167        227
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Simple risk weight approach

     961          961        961        —          961        961        2,309        240

Exposures in sufficiently diversified portfolios

     563          563        563        —          563        563        1,070        190

Exchange traded exposures

     290          290        290        —          290        290        841        290

Others

     108          108        108        —          108        108        399        370

PD/LGD approach

     2,883          2,883        2,883        —          2,883        2,883        5,554        193

Internal models approach

     138          138        138        —          138        138        449        324

Exposures subject to a 250% risk weight

     3,142          3,142        3,142        —          3,142        3,142        7,854        250
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit risk

     870,583        (13,396     456,867        664,716        180,701        845,417        727,103        306,321        42
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Gross exposure value before credit risk mitigation techniques and CCF, excluding contributions to the default fund for a CCP.

(2) 

Includes provisions and impairment of financial assets and contingent risk and commitments.

(3) 

Standardised Approach exposures are adjusted by credit risk adjustments. The original equity exposure is shown net of impairment.

(4a)(4b) 

Eligible credit risk mitigation techniques are included, either on-balance sheet or off-balance sheet, according to Chapter 4 of CRR. In the case of securitisation exposure, unfunded credit protection is included.

(5) 

It corresponds to the exposure value adjusted by eligible credit risk mitigation techniques.

(6)