TOP CONTRIBUTORS

David Hu

Ann H. Heffron

www.zacks.com

Banco Bilbao Vizcaya Argentaria, S.A. (or BBVA), one of Spain's oldest banks, is a large diversified financial services firm with total assets of €537 billion (US $772 billion).^[1] The group's main source of income is interest on loans provided, and in 2008, the group had a total net income of €11.686 billion, up 21.4% from €9.628 billion in 2007.^[2] Although the group extends its operations to over 32 countries, its main focus is its Spain and Portugal business segment, which contributed to 52% of net income in 2009.^[3][4]

The group's primary source of funds is its customer deposit base, accounting for €255.236 billion out of €450.605 billion total deposits.^[5] The group's principal investments are financial, either in subsidiaries and affiliates.^[6] New developments include the completion of the merger between Banco Bilbao Vizcaya Argentaria's banking subsidiaries in Texas into one entity known as BBVA Compass on September 7, 2007 and the increase in stake ownership in CITIC International Financial Holdings Limited in Hong Kong up to 30% and in China Citic Bank up to 15% in the past year.^[7][8]

Company Overview

BBVA was formed through the January 2000 merger of Banco Bilbao Vizcaya and Argentaria.^[9][10][11] The merger combined the strengths of Vizcaya's retail and private banking operations centered in cities and industrial centers with Argentaria's lower risk businesses, including public sector lending, mortgages, and asset management, centered in rural areas.

Based in Spain, BBVA has expanded into various other countries to become a diversified international financial group, and has accordingly divided its organizational structure into six business areas: Spain and Portugal; Global Businesses (Wholesale Banking and Asset Management); Mexico; the United States; South America; and Corporate Activities.^[12] The group focuses on the traditional banking businesses of retail banking, asset management, private banking and wholesale banking.^[13]

Business and Financial Metrics

Segment Contribution to Net Income of Banco Bilbao Vizcaya Argentaria in 2008.^[3]

Balances as of December 31, 2008 of principal sources of Banco Bilbao Vizcaya Argentaria's funds.^[5]

Business Segments

On January 1, 2008, Banco Bilbao Vizcaya Argentaria's organizational structure was officially modified to be divided into six areas: Spain and Portugal; Global Businesses (also named Wholesale Banking and Asset Management); Mexico; the United States; South America; and Corporate Activities.^[13]

Spain and Portugal (52% of Net Income in 2008)^[3]

The Spain and Portugal business segment provides banking services and consumer finance to private individuals and businesses in the region.

Business units in this segment include:^[17]

• Spanish retail network (services financial and non-financial needs of individual customers, high net worth individuals and small businesses in the Spanish market)
• Corporate and business banking (deals with small and medium enterprises, large companies, and institutions in the Spanish market)
• Consumer finance (manages online banking, consumer finance, credit cards and leasing plans)
• European insurance (manages insurance businesses in Spain and Portugal)
• BBVA Portugal (manages banking business in Portugal)
• Dinero Express (manages immigrant segment in Spain)

In 2008, the Spain and Portugal segment's contribution to net income was €2.625 billion, up 10.2% from €2.381 billion in 2007.^[3] The group attributed this increase to the reduction in tax rate in Spain from 32.5% in 2007 to 30% in 2008.^[18]

Global Businesses (15% of Net Income in 2008)^[3]

The Global Businesses segment, also known as Wholesale Banking and Asset Management, provides services to large international companies and investment banking, capital markets and treasury management services to clients.

Business units in this segment include:^[19]

• Corporate and investment banking (manages corporate and investment banking products such as corporate finance, structured finance, syndicated loans and debt capital markets, and provides trade finance and transaction services)
• Global markets (manages market products which are placed through trading rooms in Europe, Asia and the Americas)
• Asset management (Manages products such as traditional asset management, alternative asset management and Valanza, Banco Bilbao Vizcaya Argentaria's private equity unit)
• Industrial and real estate holdings (manages portfolio of industrial holdings and real estate projects)
• Asia (represents its stake ownership in CITIC International Financial Holdings Limited in Hong Kong and China Citic Bank, and other investments in China that exceed €2 billion)

In 2008, the Global Businesses segment's contribution to net income was €754 million, down 15.9% from €896 million in 2007.^[3] The group attributed this decrease to the increase in impairment on financial assets arising from provisions associated with the sharp rise in lending and specific loan loss provisions made by the Global Markets unit.^[20]

Mexico (39% of Net Income in 2008)^[3]

Business units in this segment include:^[21]

• Banking businesses (includes retail banking through its subsidiary, Bancomer, asset management, and investment banking)
• Pensions and insurance (operates in pensions business through Afore Bancomer, in insurance through Seguros Bancomer, in annuities through Pensiones Bancomer and in health through Preventis)

In 2008, the Mexico segment's contribution to net income was €1.938 billion, up 3.0% from €1.880 billion in 2007.^[3]

The United States (4% of Net Income in 2008)^[3]

Business units in this segment include:^[22]

• BBVA Compass banking group (the entity resulting from the merger of Banco Bilbao Vizcaya Argentaria's four subsidiary banks in the sunbelt region, Compass Bancshares, Texas State Bank, State National Bank and Laredo National Bank^[7])
• Other units: BBVA Puerto Rico, BTS and BBVA Bancomer USA

In 2008, the United States segment's contribution to net income was €211 million, up 3.9% from €203 million in 2007.^[3] The group attributed this increase to the appreciation in the dollar against the euro in 2008.^[22]

South America (14% of Net Income in 2008)^[3]

Business units in this segment include:^[23]

• Banking businesses (BBVA Banco Francés covers Argentina, BBVA Chile covers Chile, BBVA Colombia covers Colombia, BBVA Panama covers Panama, BBVA Paraguay covers Paraguay, BBVA Banco Continental de Perú covers Peru, BBVA Uruguay covers Uruguay and BBVA Banco Provincial de Venezuela covers Venezuala)
• Pensions businesses (in Argentina, Bolivia, Chile, Colombia, Ecuador, Peru and Dominican Republic)
• Insurance businesses (in Argentina, Chile, Colombia, Dominican Republic and Venezuela)

In 2008, the South America segment's contribution to net income was €727 million, up 16.7% from €623 million in 2007.^[3] The group attributed this increase to higher generic provisioning, which led to more loan-loss provisions, and the decrease of the non-performing loan ratio from 2.14% in 2007 to 2.12% in 2008.^[24]

Corporate Activities (-25% of Net Income in 2008)^[3]

This area handles the Banco Bilbao Vizcaya Argentaria's general management functions. Business units in this segment include:^[25]

• Financial Planning, carried out by the Asset-Liability Committee (manages interest- and exchange-rate structure, overall liquidity and shareholders’ funds)
• Holdings in Industrial and Financial Companies (manages the investment portfolio in companies operating in the telecommunications, media, electricity, oil, gas and finance sectors)

In 2008, the Corporate Activities segment's contribution to net income was a loss of €1.235 billion, compared with €142 million in 2007.^[3] The group attributed this increase in loss to the increase in provisions for extraordinary early retirements in Spain, from €100 million in 2007 to €727 million in 2008, and lower gains in sales of stakes in 2008 compared to 2007.^[26]

Key Trends and Forces

Risk factors affecting Banco Bilbao Vizcaya Argentaria's trading portfolio in 2008.^[27]

Business activities in Spain account for 61.4% of the company's loan portfolio

Having originated in Spain, Banco Bilbao Vizcaya Argentaria's lending business continues to conduct a majority of its business in Spain. The loan portfolio has been affected adversely by Spain's economic deterioration. The International Monetary Fund (IMF) estimates Spanish gross domestic product to have dropped 4% in 2009, and predicts a further contraction of 0.8% in 2010.^[28] Additionally, the Spanish economy's heightened need for foreign financing, observed in its high current account deficit, is likely to result in further damage if it faces difficulty in making payments. Due to Spain's economic deterioration, substandard loans to customers in Spain increased, from €1.590 billion as of December 31, 2007, to €5.700 billion as of December 31, 2008.^[29]

The company is particularly vulnerable to volatility in interest rates

With 69% of its loan portfolio consisting of variable interest rate loans maturing in more than one year, Banco Bilbao Vizcaya Argentaria's net interest income is highly sensitive to factors beyond its control such as deregulation of the financial sectors, monetary policies, domestic and international economic and political conditions.^[30] Slow economic growth and declining investment reduce the levels of deposits and adversely affects the company's profitability by decreasing lending margins which also lead to decreased demand for higher-margin products.^[31] In Spain, deregulation of interest rates on deposits has led to increased competition for large demand deposits, which as a result has encouraged the promotion of interest-bearing demand deposit accounts and mutual funds. This has caused a large shift of deposits into mutual funds, although in the past years, due to the financial crisis and weaker mutual fund performance, there has been a reverse shift of mutual funds into deposits. Mutual fund assets under management grew 3.5% from 2005 to 2006, but decreased 6.1% from 2006 to 2007, and dropped 29.8% from 2007 to 2008, while deposits in the banking sector have increased by 16% from 2006 to 2007, and 17% from 2007 to 2008.^[32]

The company is exposed to certain risks that its local competitors may not be required to face

Banco Bilbao Vizcaya Argentaria holds a presence in 32 countries, having launched an expansion plan over the United States and Asia.^[4] Due to its international operations, the company faces obstacles including exchange rate risk, higher difficulty of managing a local entity from abroad, different tax regimes and regulations on repatriation of funds or nationalization of assets.^[33] To address the economic downturn, legislators of many countries have attempted to stabilize financial markets with fiscal stimulus programs, monetary policy expansion, institutional bailouts and providing liquidity to credit markets. Despite good intentions, these initiatives may unintentionally affect Banco Bilbao Vizcaya Argentaria or the global financial system by altering competition or creating uncertainty in the markets. On the occasion that these undertakings fail to stabilize financial markets, Banco Bilbao Vizcaya Argentaria could be adversely affected.

Competition

Banco Bilbao Vizcaya Argentaria faces strong competition within most areas of operations. Due to the aforementioned deregulation of interest rates on deposits in Spain which has led to increased competition for large demand deposits, savings banks and money market mutual funds have become strong competitors for savings deposits, which are a large portion of the deposit base.^[32] Insurance companies, savings banks, credit cooperatives and other financial services firms are expanding the services they offer to customers, and thus compete for various other retail banking services. The onset of on-line banks in Spain has further increased competition in customer funds.^[34] Foreign banks also have a strong presence in Spain. As of December 31, 2008, approximately 127 foreign banks, of which 80 were branches, operated in Spain and several foreign banks have acquired small and medium-sized Spanish banks.

With its acquisition of Laredo National Bank in 2005 and Texas Regional Bancshares and State National Bancshares in 2006, BBVA group became the fourth largest bank in Texas, following Bank of America, J P Morgan Chase and Wells Fargo.^[40]

References

1. ↑ 3Q09 Report Pg. 2
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} BBV 20-F 2009 Item 3 Pg. 8
3. ↑ ^{3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13} BBV 20-F 2009 Item 4 Pg. 22
4. ↑ ^{4.0 4.1} Grupo BBVA - International Presence
5. ↑ ^{5.0 5.1} BBV 20-F 2009 Item 5 Pg. 96
6. ↑ BBV 20-F 2009 Item 4 Pg. 19
7. ↑ ^{7.0 7.1} BBVA Press Release September 6, 2007
8. ↑ WSJ BBVA Raises Citic Bank Stake 12042009
9. ↑ Grupo BBVA - History: The Creation of BBVA
10. ↑ Grupo BBVA - History: Expansion
11. ↑ Grupo BBVA - History: Commencement
12. ↑ Grupo BBVA - Business Areas of the BBVA Group
13. ↑ ^{13.0 13.1} BBV 20-F 2009 Item 4 Pg. 21
14. ↑ Moody's Ratings Report 07 2009
15. ↑ Fitch Ratings Report 08 2009
16. ↑ S&P Ratings Report 03 2009
17. ↑ BBV 20-F 2009 Item 4 Pg. 23
18. ↑ BBV 20-F 2009 Item 5 Pg. 78
19. ↑ BBV 20-F 2009 Item 4 Pg. 25
20. ↑ BBV 20-F 2009 Item 5 Pg. 80
21. ↑ BBV 20-F 2009 Item 4 Pg. 26
22. ↑ ^{22.0 22.1} BBV 20-F 2009 Item 4 Pg. 28
23. ↑ BBV 20-F 2009 Item 4 Pg. 29
24. ↑ BBV 20-F 2009 Item 5 Pg. 84
25. ↑ BBV 20-F 2009 Item 4 Pg. 31
26. ↑ BBV 20-F 2009 Item 5 Pg. 86
27. ↑ BBV 20-F 2009 Item 11 Pg. 139
28. ↑ Empeora pronosticos economia espanola FMI empeora sus pronósticos de la economía española
29. ↑ BBV 20-F 2009 Item 3 Pg. 13
30. ↑ BBV 20-F 2009 Item 3 Pg. 15
31. ↑ BBV 20-F 2009 Item 3 Pg. 16
32. ↑ ^{32.0 32.1} BBV 20-F 2009 Item 4 Pg. 59
33. ↑ BBV 20-F 2009 Item 3 Pg. 17
34. ↑ Strategic implications for the development of on-line banking in Spain
35. ↑ Santander Key Data 1Q 2009
36. ↑ La Caixa Group 2008 Financial Report Pg. 40
37. ↑ Grupo Banco Popular Annual Report 2008 Pg. 5
38. ↑ Banco Sabadell Annual Report 2008 Pg. 29
39. ↑ Santander Annual Report 2008 Pg. 2
40. ↑ ^{40.0 40.1 40.2 40.3} First National Bankshares Investor Relations