LENDING RISK

The quality of the group’s loan portfolio continued to improve in the second quarter. The level of non-performing loans at 30-Jun-05 fell to 1.01% compared to 1.06% at 31-Mar-05 and 1.32% at 30-Jun-04. This improvement is the result of the increase in lending mentioned in the section on Business Activity and the 6.1% decrease in non-performing loans over the last 12 months. In a like for like comparison (ie, without Hipotecaria Nacional and Laredo Nacional Bancshares) the decrease would be 9%.

Coverage funds rose 9.3% year-on-year bringing the coverage ratio to 240.5%, compared to 228.1% at 31-Mar-05 and 206.5% at 30-Jun-04. Generic reserve coverage reached its maximum level (1.25µ) at the end of 2004 and continues at this level at 30-Jun-05.

The positive trend continues in all the group’s business areas, which recorded year-on-year declines in non-performing loans (NPLs) despite the higher total exposure. Thus the NPL ratio fell to 0.67% in the Retail Banking Area in Spain and Portugal (0.88% at 30-Jun-04); it was 0.26% in the Wholesale and Investment Banking Area (0.34% a year ago) and 2.79% in the Americas Area (4.18% at June 2004). In the latter area the ratio was 2.38% in Mexico and 3.55% for other group banks in the region (these figures were 3.81% and 5.21%, respectively in June 2004).

MARKET RISK

Market risk, measured by Value-at-Risk (VaR), continued at moderate levels and tended to decline in the second quarter. The average weighted use of the authorised limits at the end of June was 27%. Average risk in the quarter was €19.9m (€16m at 30-Jun-05). Both figures were lower than those of the first quarter.

In the distribution of risk by geographic area the relative importance of market risk in the Latin-American banks declined on lower exposure at BBVA Bancomer. Of the average amount in the second quarter, Europe and the USA account for 71.8% and the group’s Latin-American banks account for 28.2% (Mexico 21.5%).

The main factor in the group’s market risk at 30-Jun-05 was interest rates (including spread-related risk). Excluding the effect of diversification, they account for 45%. This factor is followed by volatility risk associated with option positions (vega risk) with 25%,  stock-market or equity risk (17%), exchange-rate risk (9%) and correlation risk (4%).

OPERATIONAL RISK

In the second quarter the group continued to implement operational risk tools. There are two goals. The first is to manage operational risk efficiently and the other is to qualify for the Basel Advanced Models. These would allow precise calculation of the economic capital needed to cover this class of risk. Implementation of Ev-Ro, the group’s qualitative management tool, reached 90% by the end of the quarter. Furthermore the SIRO database of operational risk events now has three complete years of information for the whole group and therefore meets the regulators’ minimum requirements for the Basel advanced models.