Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA)
Q4 2012 Earnings Call
February 01, 2013 3:30 am ET
Ángel Cano Fernández - President, Chief Operating Officer, Director, Member of Executive Committee and Member of Global Asset Allocation Committee
Manuel González Cid - Chief Financial Officer and Head of Finance Division
A very good morning to everyone, and welcome to this webcast in which we'll be presenting the results of the BBVA Group for 2012. The presentation will be given by Ángel Cano, who's President and COO. And then we'll have a Q&A session immediately after the presentation, with the participation of Manuel González Cid, who's our CFO. As always, any questions that can't be covered due to lack of time during the webcast will be dealt with by the Investor Relations team during the rest of the day. Ángel, you have the go.
Ángel Cano Fernández
Good morning, and welcome to this presentation results for the BBVA group corresponding to the financial year 2012. Now that was a year that we can all agree was a very difficult, very tough year. We went through possibly the worst moments of the crisis of sovereign debt. We shouldn't forget that around about July, the risk premium for Spain was over 630 basis points. And at the end of the year, we saw that there was a lot of uncertainty regarding the fiscal stability of the United States as they face their fiscal cliff, and here in Spain, we had to make a lot of changes to the tax regime, which had an impact of over 4 percentage points on the fiscal deficit, and a lot of work was done to restructure the entire financial system.
Meanwhile, in the emerging economies, especially those where we are operating, have seen very sound growth in economic terms, and they've been growing at a much faster pace than the developed countries. In this environment, BBVA, as has happened in previous quarters, has once again been able to confirm its strength, which is based on diversification and it's very reliable business model. We've made a lot of progress in relevant issues like capital, liquidity, where we've managed to cover high requirements for capital, as well as provisioning the real estate's exposure throughout 2012. We've also been able to maintain our policy of dividend payout.
So now let's have a look to see how BBVA has managed what we considered to be the 4 key drivers to this financial industry. The first key point is our capacity to generate revenue to absorb the high requirements for provisioning that we've had to set aside this year in 2012, especially for real estate exposure. We've generated total revenues of EUR 22.4 billion in gross operating income. And operating income that's net is EUR 11.7 billion, which has grown over 13% year-on-year.
Later on, we'll be seeing that this is the highest growth on this line that you can see throughout our peer group. With respect to risks, there we have them under control. They are evolving as expected on the basis of the announcements we've been making over the year. We've got an NPA ratio for the entire group of 5.1%. This 5.1% already incorporates 5 decimal points with the incorporation of Unnim in the third quarter of the year. And it compares very positively with the performance of this ratio in our peer group, taking into account that this includes the negative performance of the NPA ratio in Spain as a whole. And if -- they say a lot of our business is here in Spain, but the difference in Spain is still 400 basis points below that of our competitors.
In solvency, we boosted our capital ratios very clearly, maintaining our payout policy. We've generated 45 basis points of core capital over the year, reaching 10.8% core capital ratio for the year, and we have managed to pay out a dividend of EUR 1.3 billion, and we have to add to that about another EUR 1 billion corresponding to the scrip dividend.
And finally, in terms of the fourth driver, liquidity. The group has shown very sound financial fundamentals everywhere where the group is operating, but especially on the euro balance sheet which has been the focus of attention throughout the year. We've seen an improvement of EUR 23 billion during the year on our balance sheet. If it hadn't been for the incorporated Unnim, it would have been even more, EUR 28 billion in fact. Maybe it's important to point out that all of this is being run according to our strategy, taking advantage of opportunities in Spain whilst divesting assets that the group considers to be noncore.
Let's now move on to the different items in the P&L, in the income statement, starting with interest rates income. And we can see that right at the very top of the income statement, we can see growth quarter-by-quarter. We've seen over 12% growth and over the year as a whole, there's been about 15% growth in net interest income. It's very resilient growth then over all the countries where we're operating. This then trickles down into gross income, which, quarter-on-quarter, over the entire year, has grown near to 10%. The total for the 2 years has grown year-on-year nearly 13%. And if we look at the -- if we take out the more volatile lines like net trading income and dividends, we've also got a growth of over 12%. So that means that an important part of this performance of revenues comes directly from fee income. When we compare ourselves against our peer growth -- group, perhaps the best news that we are able to give, showing what high-quality results we're getting, is to look at where we stand in the ranking tables, both for total growth of profits and in terms of profitability as a ratio, we are head and shoulders above our international competitors. This is due, as we've seen over the last few quarters, to our diversification over emerging and developed markets. The emerging markets have take advantage of opportunities to grow by banking the under and unbanked with growth of over 14% in their economies, with a weight of 56% on balance sheet. Whilst in the developed companies -- countries, it's a matter of taking advantage of opportunities as they come up.
If we then add our cost performance to the revenues, you can see that gross income is growing well with costs not growing too much. Gross income is up 12.1%; total costs, however, growing only 10.8%. It's interesting however to stop a minute and see what's behind this growth figures. First of all, there's an impact of the change in the perimeter for the consolidated accounts, that's 2.8%, which really covers the incorporation of our investment in Turkey and guarantee which has got 1 more quarter in 2012, plus the incorporation of 2 quarters of Unnim.
And the exchange rate has also had an impact, especially at the end of the year, so that has a further impact of 3 percentage points, and then we have to see the performance of the underlying issues, 5 points come from the emerging countries, where investment has been made in costs, whilst in the developed countries we are seeing costs actually dropping. With investments being made to take advantage of organic growth opportunities in Latin America above all in the emerging countries. Whilst in the developed countries, we are obviously working to curtail costs both in the United States and in Spain. We are cutting back the total costs. So with costs growing below gross income, that means that we have a positive cost income ratio. And in that ratio, we're in a very privileged ranking on the lead table, 20 percentage points below the average as you can see in the presentation, and this is precisely what leads us to be able to grow our total operating income by over 13%. And our recurring operating income, taking out the volatility of the financial transactions, the NTI and dividends is actually growing over 15%.
In terms of provisioning, the advantage when you have very stable, very resilient operating income is that you are better able to set aside provisionings, EUR 9.5 billion this year for loan-loss and real estate provisioning. That is linked to the real estate-related activities on the balance sheet in Spain, whilst EUR 5.1 billion is for the loan book of the entire group. This level of operating income, however, means we're quite comfortable provisioning 1.2x the volume of provisioning required. So excluding the real estate provisioning, then operating income has been 2.2x, 2.4x above the provisioning requirements we've had each year over the last 3 years. And so that means our income statement gives us a net attributable profit of EUR 1.6 billion, underpinned by that EUR 11.7 billion that we get in operating income and the performance of the other items on the statement, especially the growth that we're seeing of over 13%. Best performance of the entire peer group then.
When we look at our risk management, as I said, they are well under control and they're evolving as expected and as reported over the year. We've got 5.1% in our NPA ratio for the group as a whole, and once again, we include the 5 decimal points we get from incorporating, nearly 3 billion that is, of nonperforming assets from Unnim, and in terms of coverage ratio, that's gone up to 72%
come in as it is. It's EUR 23 billion. And so far in 2013, we've already issued over EUR 3 billion. And as to the amount returned to the European Central Bank on our LTROs with the first window, which matured at the end of January, we had returned 2/3 from the first auction that was EUR 8 billion. And our outlook between this window of opportunity and the next one which will be in February is that we will have returned 1/2 of the entire amount that we took over the 2 windows. So very sound fundamentals, strong earning performance, good cost structure, giving us gross income growing over 12.8%, and recurring operation income at over 15%. And in general, our strategy of diversification gives us a balanced distribution of business. And then in structural terms, our capital's improving 10.8% under Basel 2.5, and over 9% under the EBA standards. In liquidity, taking advantage of all windows to issue whenever possible onto the market, so liquidity gap has narrowed very significantly, whilst risks are well under control, evolving in line with expectations as we saw before. So all of these has meant that we've been able to maintain our payout policy that you all know.
So let's move on to the different business units now, starting with Spain. The basic characteristics of Spain will be first of all, managing our market share. We've generated over 110 basis points in the market share in loans and over 180 in customer deposits. So if you look at the year as a whole, because this is up to November as we can see in this slide, we have to add another 10 basis points to each of these. So we're seeing how customer deposits, for instance, have gained almost 200 basis points for the year as a whole. The second main driver obviously, is price management. Throughout the year, we've been managing our liability signs. We're about 50 basis points below our peers and we're also managing our assets which shows for the year as a whole, despite the enormous pressure throughout the year, on both sides of the bulk [ph] , we've improved by 5 basis points, which is the customer spreads down to 1.93. Obviously, this has enabled us to grow our net interest income, which trickles down to the gross income which has grown by 7.2%. We can see the impact here arising from Unnim here, but if we take Unnim out of this, for the months it's been included in 2012, the gross income would grow by 5%. Costs are up by 1.1%, and this is impacted, of course, by the incorporation of Unnim, without which they would have fallen by over 3%. So this performance in terms of the operating income gives us a year-on-year growth in operating income Spain of over 12% to almost EUR 4 billion in operating income, and our cost income ratio has improved as well.
If we look of the NPA now, what we've seen in the group trickles down to Spain as well, which is the main contributor to the NPAs in the group. It's up to 6.9%, the NPA. Here, the 5 percentage points of the group, which is now 9 points here, so the performance in NPAs is 6%, if we include the Unnim, but in the coverage ratio, has grown by 23 percentage points throughout the year to 67%. What is important is to understand the performance of the NPA throughout the year. We started the year with 4.8% NPAs, and it's true that this is where -- there's been a significant deleveraging in business here. And this impact on the denominator is 6 percentage points of the whole year, and 7 percentage points come from the increase in NPAs, and 8 percentage points come from the incorporation of Unnim which would give us the 6.9% of NPA at the end of the year. In any event, I would repeat, that we have outperformed our peers here in Spain with a ratio that is over 400 basis points better than the average of our peer group and which gives us an income statement if we take out the effect of the real estate of EUR 1.1 billion. And once again, this is based having met all our requirements for provisioning, for real estate provisioning, and after generating almost EUR 4 billion in operating income.
If we look at the rest of Europe and Asia now, i.e. Eurasia, which includes the Portuguese franchise, plus all the other wholesale businesses in Europe and Asia, and the gross income has grown by almost 13% year-on-year. The best news here is, maybe, the dynamism of the retail business and the deleveraging that we're seeing in the wholesale business of both in Europe and in Asia. And another leading point is that Turkey is the driving force of the growth in the region, and we're going to see this increasingly -- this has -- gives us EUR 950 million in profits, and this is also based on over EUR 1.4 billion in operating income which is a growth of 9%.
Mexico now. The third region we're going to talk about now, the basic features here -- we have growth in business, lending is up around 10% based on the growth in consumer goods and small companies, basically the SMEs. Our customer deposits have grown by 8.4%. Customer funds have grown by 8.4%, and this is due to an improvement in a mix between noncost and costed funds, so the net interest income is growing by nearly 8%, and the trend is positive year-on-year. The gross income, once we take out the trading operations, is less than last year as a consequence of a sale of portfolios in Mexico. This has grown by 5.8%. So the recurring gross income, if we take out the effect of the trading operation, grows at the same rate as the net interest income, the operating income, which is also impacted by the lower net trading income, has grown by 3.6%.
If we look at risks now, the coverage ratio is growing and throughout the year, this has been stabilized around 113%, 115% of coverage. And the NPA ratio by the end of the year was 3.8% because of less entries and the sales of doubtful things in the market. The risk premium is stable at around 3.5% throughout the year, so there are no surprises there. So Mexico is giving us over EUR 1.8 billion to the income statement of the group, which is a growth of 4%. And once again, as in Spain, this is based on the EUR 3.6 billion that the Mexican franchise contributes in operating income to the group.
South America now. This is the most dynamic of the regions still in any actem [ph] both on the loans and the customer funds. Loans increased as we can see here by 18%, although it's true that this growth is clearly higher in the retail side if we compare this with the wholesale side, because of the enormous pressure on prices because of the excess liquidity in the region, the recent funds on the balance, this is growing by 27%. So as I said at the beginning of the presentation when I talked about liquidity management, the liquidity throughout the areas we operate in is very, very stable, at very sound levels. This trickles down to the net interest income which is growing by over 20%, and the gross income by over 25%, and the operating income is growing by around 26% year-on-year. And what's even better, is that there's a positive trend month-on-month, which consolidates the performance here. If we look at efficiency now, obviously, there's a significant drop in the cost income ratio to 43%, and if we look at the risk ratios here, we can see that the best data we have in all of the group, there's a 2.1% in NPA and a coverage ratio the highest in the group of 146%. But what's even more percent, as what I said before, if we look at the revenue side, there's a sustained growth quarter-after-quarter. This leads us to an income statement which gives us EUR 1.347 billion to our income statement, which is 24% growth throughout the -- all the different geographies. And as in other geographies, as I said before, this is basically based on the performance of revenues and the growth in operating income over the 26%, contributing over EUR 3 billion to the operating income of the group. And then finally, the United States, we're seeing the same performance as we've seen throughout the year with selective growth in loans, with a lot of invoicing, both monthly and quarterly of over 10% in lending. So these are the 2 lines, that are new businesses, this -- this comes from Compass business activity. And if we look on the customer fund side, we have sufficient liquidity here, and what we're really seeing is a selective improvement in the mix of our customer funds, the same as in Mexico and South America, between funds that cost us and the free funds that we have, which means that local business is growing by over 6% on all lines. But if we factor in the accounting effects of the one-offs from buying guarantee in the United States this -- accounts for the 4% drop in all lines. The important thing here is to remember that we're talking about interest rates of 0.25%. So it's very difficult to grow the spreads as we're seeing from all the American banks from their presentations. The 2 main points here is good asset quality and cost management, which have fallen by -- in the fifth quarter consecutively and the cost of risk for provisioning. So our risk premium for the year as a whole is 0.2%. The NPA ratio has fallen to 2.4%, and the coverage ratio for our NPAs has gone up to 17 percentage points to 19%. So this is a franchise that has been transformed radically, basically in the last 3 years. We've totally changed the balance sheet from the -- both of point of the portfolio with selected growth in the line so we consider to be most profitable and that would tie us to our customers, whilst at the same time, we've substantially reduced our figure to the exposure to real estate in the United States. Despite the low interest rates that I've mentioned, all the lines of the income statement should be -- proven to be highly stable and we're expecting a raise in interest rates because the balance sheet is facing raising interest costs.
The costs are well under control. They're falling year-on-year and despite the enormous investments we're making to change our technology platform in the United States. This -- the platform will be completed within a couple of months because it's almost finished now, and then we'll be able to seize opportunities based on the platform, which sets us apart from our peers over in the United States.
And finally, as I say, we're managing to grow selectively on the customer deposit side, while maintaining strong liquidity, which means that the results or the earnings in the United States, bring in EUR 4.75 billion, which is a growth of around 40%, like-with-like. Obviously, the comparison here is affected by the -- real is a good win last year but if we take this one-off out, we're talking about growth of around 40% in our profits. And once again, the operating income is over EUR 800 million. And finally, the CIB, Corporate Investment Banking, is a crosscutting one in all regions, and this has performed unevenly from a strategic point of view.
There's been enormous deleveraging in the developed markets, over 16% fall in lending. And the gross margin is resistant throughout the geography due to the diversification, which is very similar to what we're seeing in the retail markets. And finally, we have also seized the opportunity of the customer franchise, where over 86% of the revenues come from our customer franchise. This gives us a contribution of over EUR 1 billion to the group, and the growth here is absolutely flat, despite the fact that this is the most volatile area facing the most complex environment, and of course, this is heavily leveraged on an operating income of over EUR 1.8 billion, which is over 12% growth. And I would repeat, this is due to the customer franchise and because of the enormous diversification that we have in this franchise.
So in summary for the whole presentation, it's been a very difficult year, a complex year. We've witnessed tensions in a debt market with risk premiums reaching enormous peaks, with fiscal pressure in Spain leading to significant impacts in reducing the fiscal deficits in Spain. We're talking about during a recession, a slowdown in the economy. We've started restructuring the financial system and this is just about resolved, so we no longer have to face real estate provisioning in the future. We're consolidating in the emerging markets, this economic growth that we've been seeing throughout 2012, which is clearly growing faster than the developed world.
If we look forward now to 2013, our priorities will be in the emerging markets. We need to maintain the dynamism that we saw in 2012 where we'll continue to invest in the geographies where you are seeing the greatest opportunities for organic growth. And for the developed markets, we will continue to work to reduce the risk premium in the developed countries as a whole where we operate and we will focus on return to profitability. Our strategy will be closing the sales of our pensions business in Latin America. These assets are -- the nonstrategic assets -- we closed this in Mexico, Colombia and Chile last night or early this morning. And we'll also seize opportunities to continue to reinforce our footprint and our core businesses. So strategy is going to focus on profitability, especially in this phase of growing BBVA. Thank you very much. The EPS, sorry. And now we'll move on to the Q&A.
We can start the Q&A session. As always, I'll try to group the questions together to save time and be able to answer as many questions as possible. So we'll start with the capital. Mario Lodos from Banco de Sabadell, David Vaamonde from Fidentis, Paco Riquel from N+1 and Rohith Chandra from Barclays, all asked about updating the impact of Basel III. "Has there been any kind of improvement because of the deleveraging or sale of assets? Paco Riquel most specifically says there has been a fall of EUR 500 million during the quarter, despite the Unnim preferential swap. So what are the prospects of organic generation of revenue for Basel III for 2013? So how are we going with Basel III at the end of 2012 to face 2013?" Paco Riquel says that "The core capital has fallen by EUR 500 million in the quarter, despite the preference swap in Unnim."
The impact that Paco's referring to here is exclusively due to the exchange rate between quarters, between the third and the fourth quarter. The exchange rate impact over the year was positive but in the final quarter, there was a negative exchange rate impact on our core capital, which obviously, is offset because of the effects that, that has on the risk-weighted assets. And then regarding Basel III, well, there, we have announced our vision to the market, talking about our fully-loaded ratios at all times. And we're sure that our Basel III fully-loaded ratio will be about 9% for the end of 2013. And as Ángel said, we have disclosed the sale of the pension business in Chile and although there are some transactions yet to be signed off, that's EUR 1.6 billion in capital gains, which will have to be recorded to the income statement in 2013. So that means that we are above expectations with respect to the optimization of the income statement. 50 basis points more core capital from the 3 transactions. Moreover, in organic generation of capital there, we are maintaining our vision; 15, 20 basis points added each quarter in rather more normal situation with respect to the provisions we are required to set aside in Spain. Of course, we continue to be conservative, and we think that this level of organic capital generation with our dividend payout policy is quite comfortable to maintain. And regarding financing and liquidity, Rohith Chandra from Barclays asks about the outlook for wholesale issues during 2013 and what relative prices we'd be thinking about? And above all, "What kind of tenors -- what kind of maturity dates would we have for such wholesale funded in 2013?"
Without actually going into any detail or irrespective of that, but seriously now, for 2013, there are EUR 17 billion in maturities that we've planned and there will be an additional reduction in lending because of this deleveraging trend that we've seen in the balance sheet, certainly, during the first half of 2013, which means there'll be no need to go to the markets to raise more capital in any significant amounts, although we will make strategic adjustments to the weight between short and long terms. Basically that's what we have planned for 2013.
As Ángel has said, the generation of liquidity that we're seeing on the euro balance because of the deleveraging and also because of the good performance of customer funds wouldn't make it necessary to raise funds in the capital market to renew these maturities that are on the wholesale side. However, we will continue to go to the markets to maintain the right financing structures. There are 2 major operations that we did at the beginning of the year where the objective has been to lengthen the term of our loans, to try to reduce the spreads as much as possible. And we've got prices that compare very, very well with our peers. And of course, with -- compare very well with the sovereign debt. So that's the idea that we have for the year as a whole.
Okay, carrying on with financing and liquidity. Mario Lodos from Banco Sabadell, Rohith Chandra from Barclays and Alejandro Andrade from Kepler, ask about the performance of the LTRO funds.
I think this question has been answered by the COO in his presentation. In the first window of December 20 -- we're going to reduce 2/3, and maybe in the first quarter, we will return 1/2 of what we have borrowed.
On the dividend side, Carlo Digrandi from HSBC asks about, "What plan do we have for our dividend payout for 2013. Is it going to be in scrip or in cash? And maybe, you can give us your forecast of 2014 along the same line." Mario Lodos from the Banco Sabadell says the same thing. "Are we considering the possibility of going back to a cash payout in 2013 or 2014?"
Well, with the information we have to date and according to the existent-- although, there is the -- a lot of uncertainties still about capital requirements, in 2013, we want to maintain our current payout policy, which is well known by everyone with respect to how we deliver it and when we pay it. But obviously, we will have to see what actually happens in 2013 when we will have more granular information with regard to the lookout for 2014, too. And from 2014, we could have more of the dividend paid out in cash.
Paco Riquel from N+1 asked for information on refinancing and restructuring of loans here in Spain according to the requirements of the potential new circular to be issued by the Bank of Spain. And Andrea Filtri to come to an end with this bit on capital, asks about the difference between core capital in the holding company and on the consolidated accounts.
Refinancing, first of all. In the report that we're going to publish shortly, this goes into all sorts of detail -- is quite complete about all the refinancing. But maybe, what is important to highlight is that all the refinancing for us are a management tool to make -- to overcome transitional financial difficulties to make this feasible. And it's a fundamental management tool that we use in this environment, basically, here in Spain, and is also a form of maintaining our relations with customers because our vision of the relations is a long-term one. To give you further insight into this, most of the refinancing in the groups are here in Spain. 50% of them are classed as substandard, and therefore, do have provisionings. The entire portfolio is under special surveillance, and our -- the policies we have established for issues of this and looking at refinancing in very complex of moments when the crisis has really hit in 2008, '09 and '10, I think that our coverage ratio are very good for these operations. Over 80% of all the loans have been refinances are meeting their payment obligations with total normality.
The question about core capital, the group's core capital.
Manuel González Cid
With regards to this question about the core capital, in Basel 2.5, as we said in the presentation, the group has 10.8% capital approximately. Now the holding is 11.5%. So the capital ratio for Basel 2.5 of the holding is higher than for the group. EBA is 11.2%. So it's higher than the consolidation ratios.
Moving on to Spain now. David Vaamonde from Fidentiis is asking for information about our, the expected impact on net interest income due to the Bank of Spain's recommendations on putting ceilings for remunerating customer funds and on the same lines, Paco Riquel of N+1, says, "What's our position of the competition with regard to customer deposits, with regards to the new regulations of the Bank of Spain by capping what we can pay?" And Rohith Chandra from Barclays, asks for information about our expectation for the price of customer funds in Spain for 2013, as a whole. And along the same lines, Frederic Teschner from Natixis, Andrea Filtri from Mediobanca asked about the same issue, "What do we think will be the impact of the new regulations on placing a cap on remunerating customer funds imposed by the Bank of Spain throughout 2013?"
Ángel Cano Fernández
Maybe first of all, I should try to make something really clear. What has the real change been? What's happened was the Bank of Spain was worried about the impairment of the margins of all the financial entities, including those that have got public money injected into them, thinking that, that could have additional negative impacts on their solvency. So this measure was mainly targeted at avoiding further impairment to the solvency of these institutions because they were paying above market prices in order to bring in deposits, which obviously was bad for their margins and therefore, bad for their overall solvency. That was the main reason for the Bank of Spain putting out this regulation. But they haven't established any mandatory cap, rather they put out indications, on the basis of which, we could start to analyze the potential impact on the margins of the institution. So we're talking about macro prudential supervision under Basel II standards, focusing on how we manage the prices on the customer funds. So there are no caps and there are definitely no mandatory requirements. But so far in 2013, we have seen a clear alignment of nearly all the entities and with respect to us in January, what we've seen in the first few weeks of the year has been a reduction in the cost of our deposits of 80 basis points. What are we expecting to see in the year, as a whole? Well, the impact of a normal year, if we look at what happened at the end of 2012, would lead us to expect about EUR 300 million, EUR 350 million impact on the net interest income over the year as a whole, which would mean that we can have a price impact as people renew deposits. So we are not expecting to see this positive effect completely booked to 2013, but rather, it will continue to be extended into 2014. But in the first part of the year, we can -- we'll see lower prices than in 2012, so the comparison won't begin to give us a positive impact until the second part of the year when the comparison will be clearer.
Okay, then. In terms of credit quality in, asset quality in Spain from HSBC, we have a comment about Slide 25, which talks about the possibility of an increase in 2013 on, in our market share in the loan market in Spain. And so he asks, "In a few years, would that mean that we'd also see an increase in nonperforming assets, or would this growth only be coming in because of Unnim? Is it just Catalonia, or is it all of Spain?" Antonio Ramirez from KBW asks about the outlook that we have for increasing provisions against real estate exposure during 2013. Several banks are looking into the possibility of Oliver Wyman's worst case scenario coming into being materialized. So do we think this adverse scenario should be used in 2013 according to Oliver Wyman? "So what's the cost of risk for Spain in 2013? And when do we expect this to normalize?" Paco Riquel asking about asset quality, also asks "How much provisioning would have to be set aside for real estate exposure and other kinds of exposure to risk in Spain in 2013?" As does David Vaamonde and Theresa [ph] asks about asset quality, asking if we expect to see growth in real estate provisions in 2013, will they go on in 2014? Or are we going to be more or less aggressive in sales in order to avoid having to have so much provisioning. So it's all about asset quality, and it tends to focus on Spain with these 5 questions.
Ángel Cano Fernández
Let's see if I've got that all of these. The first part, as we were saying, that we've grown our market share in Spain on the loan side in 2012. Most of these 113 basis points -- 103, 104 of these come from Unnim joining us. But in any event, I think the important thing here is not the fact that we're going to grow our loan in 2013 too much but rather, we're going to do this in line with our internal strategy of asset location, which is rolled out throughout the group. So the different geographies will grow depending on the expectations for economic growth in the different sectors. So the growth in lending that we see in some particular sectors in 2013 here in Spain will be selective. The drivers of this will be SMEs, the medium-sized companies that are generating these enormous amounts of exports over the last 3 years because don't forget that exports here in Spain over the last 3 years have grown by something like 20%, which has gained market share, while the France, Italy, Germany, their market share is falling worldwide. But Spain has not only maintained its market share, it's even managed to grow it slightly. So within the management of our asset location by sectors, we're growing in the sectors where we're seeing clear performance in economic growth. And this means that as growth is based on this policy which in turn, is based on expected lost -- losses based on average statistics based on the historical, this means that we have no plans, we are not forecasting any further deterioration in the NPA ratio for this reason. The next question basically, you're talking about real estate provisions for 2013, as a whole. We've just finished 2012 with provisions for developer risk, i.e. the risk that is classed as a lend of 83% coverage and the specific provisions that we have for substandards and downfall and the general provisions for this risk, we have a coverage of 83%. As for real estate assets, then this coverage ratio is around 50% for all our business in Spain. This means that in 2013, we have no expectations for additional real estate provisioning. This is compatible with our asset sale strategy which can vary. In 2012, for instance, quarter-after-quarter, we've grown the sale significantly and we've closed the year with sales of around 20,000 -- 12,000 units, sorry. But we've not only sold 12,000 units in 2012, but we also look at the acceleration in sales in the course of the year. Over the last 18 months, we've organized and concentrated the group's resources, we've taken on over 100 specialists to manage and control the developments that we have in order to liquidize the nonliquid assets, and here, I'm talking about the developable land, or urban plots of land, and this is why we're now seeing this accelerated growth through 2012, and we think that we will continue to see this through 2013, but we're not putting any limits on the price, depending -- the market prices over the coming quarters will determine whether there are going to be any additional losses. There might be, not so much in provisions, but for the portfolio as a whole, but depending on the sales that we have made and depending on the regions. Because don't forget, that although since the beginning of the slowdown, or the peak of real estate prices, prices have fallen by over 30% in real terms since that moment. And over the next 2 years, we might see additional falls of between 10% and 15%, but with the information we have, we think this is enough. But we certainly wouldn't rule out any losses in additional sales in the next 2 years, as a consequence of this. Our objective is to continue managing this portfolio properly. We have no -- there's no pressure on us. We have the infrastructure and the internal structures that are working flat out to sell everything that we need to at the right rate, but our objective is to generate the greatest possible value, or the least value destruction, if you want to look at it in different terms. Not just a lending risk for 2013 with regard to provisioning in Spain, I think the performance is stable, it's been very similar to what we saw in 2012. If we take out the real estate issues that I've mentioned, there may be a slight rise. But I would repeat, it is a slight rise, it's not significant growth, and this is due to the increase in NPAs because of the SMEs. And I think that covers everything, doesn't it? The risk premium for 2013, I think is going to be around 1.2%, which is very similar to what we saw in 2012. So maybe, a reduction coming down to normal levels of 1% or 0.9%. This is something we might see maybe from the beginning of 2014.
So moving on now to M&A strategy. Rohith Chandra from Barclays has a question as to whether we have any plans to sell any further assets, or is there any plans to list any of our subsidiaries. Francisco Riquel from N+1, ask whether we'll be willing to buy a savings bank from the FROB without any Asset Protection Scheme, and Andrea Filtri from Mediobanca asks about the rationale for offer for Catalonia bank. AFPs now, pension business, Frederic Teschner from Natixis, has a question about the impact on revenues of selling the 2 transactions in Mexico and Chile of our pension business. "What impact will the sale have?" And Antonio Ramirez from KBW
Ángel Cano Fernández
Okay. Manolo, I will leave the final question about Eurasia to you and maybe you can give us a contribution on the U.S. and Mexico, especially with regard to interest rate mix, sensitivity. There's no obligation in Mexico, there's no obligation to make an IPO with regard to regulating the hybrids. And I think it's as simple as that. We have a capital ratio of over 15%, which is way higher than the capital requirements. So from a capital point of view, there's no pressure of any kind, apart from the internal regulations of the country. Mexican drivers for 2013. First of all, we're going to see how the business grows, we're talking about low double-digit growth here. This is what we're going to see I think in 2013, I don't think we'll see any improvement in spreads. We're also forecasting spreads that are going be very similar to 2012. So the first one is going to be the increase in business volumes, because don't forget, the market share that we have in Mexico and when we talk about this in Mexico, we're talking about business. But if we talk about the market share -- to make this easier, the sustained market share over time with regard to the top 6 banks in the country, which as you know, they have over 80% of the banks, the banking business. We're always talking about 30% and even in profits, and we're talking about 33%, 34%, depending on which quarter we're talking about. So if we're looking at -- there are returns and a performance in relation to our peers, I think this is very positive performance. The second basic driver is how we change -- how business is done in Mexico. Strategically, every few years, we change our management; we've done that in Mexico and Spain this year and every time we make a change in our managers, we do a strategic review of the organization. In the case of Mexico at the beginning of the year, we have changed part of the executive committee. It's not people that come from Mexico group but different divisions, and we've organized our distribution network in a very similar way to what we have in Spain. The retail and private banking, and local and SMEs are integrated in 7 regions, as we have here in Spain, and from the beginning of the SMEs [ph] -- this should give us cost synergies. At the same time, we're investing as we did in 2012, which means that costs have grown slightly more than revenues but we're investing in transfers in the branch of networks, our network of branches. So we think that the operating income is going to be more stable in the first half of the year, and we'll see growth in the second half of 2013, so we'll start to see double-digit growth in the bottom line as of 2014. So from a strategic point of view, we're going to focus on the customer experience in Mexico, especially through placing the priority on multi-channel business, not just in the branch network, but of all the devices that we make available is also in the mix, and we think that's in the second half of the year, we're going to see revenues really starting to grow, and we're going to see the positive effect of cost management because of the change that we're rolling out.
In recent months, month after month, we're seeing this positive creep up in the main lines revenue streams, and I think we're going to continue to see this throughout 2013. The United States now, Manolo, maybe you would like to take this, we're talking about the impact of -- on profit when we get back to normal interest rates.
Manuel González Cid
In the United States, we're talking about interest rates of all around 0, which is a very difficult for the retail business to generate margins. And if we look forward, we think that the growth in business volumes that we're seeing in Compass, if we're talking about business banking, together with the change of mix on both the loans and the customer funds side where we are growing, moving towards more profitable lending and also cheaper customer funds although, in the current context, this is not so important. But this has enabled us to offset the low interest rates. Having said that, the sensitivity of the U.S. balance to increase in interest rates is very high. Just to give you an idea, an increase of 100 basis points in the curve in the United States would improve our net interest income by over 7%. And this sensitivity is even greater in our favor with the dynamism of the increase in interest. So with normal interest rates we would substantially increase our current profits in the United States. Having said that, as Angel said in his presentation, it's important to realize that United States is profitable in comparable terms, if we're talking about return on assets and we're well up there with our peer groups. And I think with the effort we've made in investing in technology, this is something where we're going to start to see improvements in like-for-like profitability figures in the years to come. Eurasia, the deterioration that we saw in the NPA and provisioning is a one-off business, because we have reviewed the portfolios in Eurasia because of the situation we saw there. And this has brought -- has highlighted the NPAs and has increased provisions in the quarter. Two final blocks of questions now.
First of all, coming back to the capital issue, Andrea Filtri from Mediobanca and Antonio Ramirez of KBW, "Is the Basel III will -- will this penalize BBVA because of the investment they have in some institutions that it doesn't actually manage." They're talking more specifically about our holding in CITIC. So the question is, "Do we have any plans to reduce the impact on core capital of our holding in CITIC?" And then concerning our M&A strategy with regard to guarantee, "What are our plans for guarantee? Are we going to increase our holding in guarantee in the next few years?" And to finish this, Ignacio Sanz from UBS, says that "On a strategic level, maybe the improvements in the earnings in the United States could lead us to consider to promote the U.S. franchise with -- by listing it. Have we considered listing it, an IPO for Compass?" And the second question, Andrea Filtri from Mediobanca, "What's our midterm strategy for guarantee? Is there any possibility in the next few years of seeing an increase in our holding in guarantee?" So 2 questions. One, concerning Basel III and the impact of CITIC. Okay.
Ángel Cano Fernández
Okay. First of all, China, that's a question that tends to always come up in this forum with you. The advantage we have is that we have the kind of capital levels we've got. We comply with the capital requirements at all times, and we aspire to reach levels similar to what we've got now even under Basel III once it's fully loaded because of the divestments we are doing and our active management of risk-weighted assets at all times, which will continue in the future. Consequently, management, if the Chinese holding isn't subject to any pressure. We're aware of its impact on our capital but also, we're aware of the strategic nature of this investment, which is and will continue to be an investment in the region, which is going to grow most in the world in the foreseeable future. So we don't think there's any tension there. Our investment is rolling out. We are not in a hurry at all. What we want to do is to continue to maintain our capital ratios above the required level, so that we can have the same kind of comfort buffers that we've got now. As for Turkey, there the question's quite simple. We've got an agreement with our partner in the investment, and under that agreement, we've already paid the control premium, and we've now got a 5-year period in which this agreement will be enforced. And during this time, we can see what the best moment would be to take over the control as established in the agreement we've signed with our partner there. At the moment, there's really not much more to say about any additional increases. We've got what's established by the agreement and now, it's a matter of looking at the timing, when we will come to the final decision. But our relationship with our partner in Turkey is magnificent. It's even better than we'd hoped for at the beginning, very positive synergies. The incorporation of Turkish members onto governing bodies in the group are increasingly frequent as well. So it's all a matter of time. In the U.S., it's true that we are seeing very stable growth quarter-on-quarter as they contribute more and more to the group, and we are totally aware that we have an infrastructure that would enable us to have a much bigger market share than we currently have in the United States. But we are all aware of what our inorganic growth strategy is. We have a franchise which competitors recognize is improving all the time, and so it's a matter of whether we want to take up any opportunities that may arise over the next few quarters or years, but we have no hurry. There's no pressure on us to rush through any transactions in the United States at all.
And then the final question has to do with Spain. Jaime Becerril from JPMorgan asks why real estate assets continue to go up in Spain, and whether the retail funding price that we expect to see in 2013 is going to go up and down, and if we are going to see asset portfolios being sold off in 2013. Sergio Castillo [ph] from La Caixa asks about our position in public debt, in Spain, and what's on our balance sheet, and what kind of impact could it have on our ALCO margins? And he asks about the use we're making of the credit facilities from the European Central Bank. Are we depositing or are we doing something else with it? Carlo Digrandi asks about the outlook we have with respect to foreclosed assets during 2013. "Are they going to go up, remain stable?" And then final question, is about the performance of asset quality in Spain, for SMEs, for small and medium-sized enterprises, and retail mortgages.
Ángel Cano Fernández
First of all, the cost of financing deposits is a question that we've gone into in great detail to Jaime Becerril. So I am not going to repeat that. The sale of assets, why has there been an increase? Basically, because we can follow the complete perimeter, we're talking about the outstanding risk, and we'll see how this goes. And in 2012, the sum of these 2 parts of the assets, both the risks or the loans that we have on the balance sheet and also the foreclosed, has been reduced by EUR 1 billion. And our objective or the figure that we're holding [ph] is real estate as a whole. This is something I said before. We have the installed power to sell these assets in an optimum form, and this is running flat out, this department, and it works on the 2 lines. So our objective is a reduction of EUR 1 billion in the course of the year, irrespective of this enormous increase in sales quarter-after-quarter that we've seen in 2012. And I think this is something we will continue to see in 2013 when the objectives that we've set for the unit are very demanding objectives, but not so much from the point of view of reducing the volume of exposure at any price, but rather to do this in an optimum way to generate the most value possible. This is not something that's automatic, and it's not exclusively associated to selling at any price and as fast as possible, but to sell properly and sell well. Debt and LTRO, I'll leave this to Manolo.
Manuel González Cid
Debt, first of all. Our portfolios should remain stable, there's been no significant variations in them. In managing our assets and liabilities for the -- and we have EUR 26 billion in the portfolio in Spanish debt, sovereign debt, and this portfolio has remained almost stable. There's been a slight variation over the quarter, because of the entry of bonus, the FLA bonds. This is the regional financing by the treasury. So these are treasury bonds that are associated with a reduced, a reduction in the loans to regions. Obviously, this portfolio will have a positive effect on margins in 2013 as it has had on 2012, and it will probably improve because this is a portfolio that's been managing in a market that is very complex, and it's being actively managed. Using our liquidity that we've returned to the ECB, or that we're accumulating to return to the ECB by the end of February, at the moment, if you remember, the use of ECB -- we've used the ECB to create an additional liquidity buffer to face any complexities in the financial markets. So we haven't used this for trading but rather, to improve our financial structure by substituting secure short-term financing for LTROs with secure financing in the midterm. As we have moved into a more stable market situation, we placed the surplus liquidity in deposits and marginally, we've lent repos to the market. So the LTRO, in the end, generates a positive effect for us, because the cost of the LTRO was greater than the return that we were getting from those funds, given the retribution and the facility of the deposits. And I think this answers your question.
Ángel Cano Fernández
And just to answer the final question, the NPA balance for 2013, you asked about NPL. We ended up with 8.7% NPA ratio for SMEs in 2012, which is a fall of around 10% year-on-year. Unnim brought in -- so basically, the BBVA perimeter, the previous one but there's been a reduction in our exposure by 10%, and the NPA has increased to 8.7% in the year, as a whole, which is approximately 3 percentage points since the beginning of the year. Looking forward in our outlook for 2013, I said before that the risk premium lending for 2013, if we take out the real estate business, is going to be in line or slightly above what we've seen in 2012. I repeat, taking out the real estate world so it's going to be -- this is going to come from the performance we're going to see in the NPA in SMEs in 2013. Even if the deterioration were similar to what we saw in 2012, we'll be able to increase our additional provisions by about EUR 200 million in the worst possible scenario. But there's a general stability in NPAs, and all lines in the developer was covered with the provisions we've made in 2012. And in SMEs, there might be an additional deterioration between now and the end of 2013, which is our best outlook with a marginal increase that's not going to be very significant to the provisions that we've made in 2012. And foreclosures, this is something I also said before. In foreclosures, I think we'll see how the risk on the balance sheet will be moved on the one hand to the real estate asset on the balance sheet, and on the other hand, on the sales that we're making from the books to the market. So our objective continues to be, as a whole, this will be reduced, and it's true that a transfer from lines or loans to foreclosed assets. But don't forget that we're talking about our coverage on the loan book, that's due to -- are 83% because of the provisioning that we've done in 2012. So we have sufficient cover to sell these assets this year.
Fine. That was the final question. So I just like to thank you for coming along to this webcast. And I would remind you that any questions that have not been answered will be answered today by Investor Relations. Thank you very much. I'd like to thank all of you for coming along to this presentation. And as Tomas has said, the Investor Relations department is available to you to -- for any further information you would like. Thank you very much.
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