RELEVANT ASPECTS

The financial information provided in this report follows the criteria established in Circular 4/2004 of the Bank of Spain and the international financial reporting standards (IFRS) approved by the European Union. The figures for 2004 have been prepared using the same criteria and are directly comparable. Therefore they are different to those published in 2004.

The figures in this quarterly report have not been audited and thus may change in the future. For these reasons there are a few non-significant differences in this report compared to the first implementation of the new criteria in the last quarter. They are mainly due to the classification of the holding in Iberia Airlines as Available for Sale (accounted by the equity method in 2004), to the revised value of derivatives in Mexico and to adjustments in the insurance activity. After these adjustments the group’s net attributable profit in 2004 comes to €2,923m (previously €2,912m) and operating profit was €5,501m (€5,439m). For the same reasons there are variations in net equity. At 31-Dec-04 it was €13.84 billion (previously reported as €13.95 billion). 

This report incorporates all the above changes, which affect the income statement (a new quarterly series is attached), the balance sheet, shareholders’ equity and the corresponding reconciliations.

The most relevant aspects of the BBVA group’s financial developments and strategy in the first half of 2005 are summarised below:

· The United States unit incorporated Laredo National Bancshares in May. At 30-Jun-05 this bank contributed €1.57 billion in customer loans and €2.54 billion in deposits. Operating profit was €9m and net attributable profit €5m. As part of its Asian expansion strategy the group opened a branch in Tokyo and a representative office in Shanghai during the quarter.

· In the second quarter of 2005 the BBVA group obtained net attributable profit of €998m. This is the highest amount ever achieved by the group in a single quarter and is 21.8% more than the same period last year. As a result, profit in the first half came to €1.81 billion (a year-on-year increase of 20.1%), earnings per share increased 18.7% and ROE rose to 35.6%.

· Driven by higher revenues, operating profit in the half-year grew faster at 17.7% (15.0% in the first quarter) and came to €3.2 billion. This positive performance was the determining factor behind the higher profit.

· Net interest income rose 11.1% (6.8% in the first quarter) and 11.7% if dividends are excluded. The upward trend is the result of notable increases in business activity in Spain and the Americas, and interest spreads that were more favourable than in previous periods.

· Net fee income and insurance income rose 10.5% with increases that were higher than the previous quarter in all business areas. Net trading income grew 20.9%. As a result, ordinary revenues grew 11.8% in the first half, compared to 8.4% in the first quarter. Net sales of non-financial activities also performed well.

· Operating costs including amortisation increased 7.2%. On a comparable basis (ie, excluding Laredo National Bancshares, Hipotecaria Nacional and Valley Bank) the increase was 5%.

· The cost/income ratio improved to 43.4% in the first half compared to 44.7% in the same period last year. Including amortisation, the ratio is 46.7% and the year-on-year improvement is 2.1 percentage points.

· The sharp increase in customer lending and lower non-performing loans (NPLs) resulted in a further improvement in the NPL ratio to 1.01% at the end of June (1.32% at 30-Jun-04). At the same time coverage rose to 240.5% (206.5% a year earlier).

· At 30-Jun-05 the group’s capital base remained sound with BIS ratio at 12.2% and core capital of 5.8% (without Laredo it would have stood at 6.1%).

· On 11th July a first interim dividend of €0.115 per share was paid against 2005 results. This is an increase of 15% over the first interim dividend paid in 2004.

· In the Retail Banking Area in Spain and Portugal, lending and customer funds grew faster compared to March. Lending grew 20.5% (with a growing contribution of SMEs) and customer funds increased 10.7%. This led to a 7.5% increase in ordinary revenues (6.1% in the first quarter). In year-on-year terms, operating profit grew 13.1% and net attributable profit grew 12.5% to €793m.

· In the Wholesale and Investment Banking Area overall operating profit grew 17% and 20.5% in wholesale banking alone (corporate and institutional customers). As loan provisioning requirements were lower than last year, net attributable profit increased 29.1% to €280m.

· The Americas Area maintained the high rate of growth of recent quarters and the main items on the income statement grew faster year-on-year. Net interest income rose 25%, operating profit increased 27.7% and net attributable profit grew 62.7% to €823m. In a like-for-like comparison based on the same units, operating profit grew 22.9% and attributable profit 56.3%.

· Mexico recorded strong growth in the more profitable business lines (consumer finance and credit cards in terms of lending, and transactional accounts in terms of customer funds). Thus net interest income grew 34.4% in the first half. Following the increase in net fee income and especially in net trading income in the second quarter, cumulative operating profit to June grew 38.9%. Net profit increased 55.7%, or 47.1% excluding Hipotecaria Nacional.

ECONOMIC ENVIRONMENT

The economic indicators in the second quarter of 2005 show that the growth noted in the first quarter continues. On the other hand, the oil price, which hit new highs at the end of June, continues to be an uncertain factor for the future. In the USA, in a context of sustained growth, the Federal Reserve twice raised interest rates, bringing them to 3.25% at 30-Jun-05. At the same time, long-term rates, which rose in the first quarter, fell back below 4% for 10 years. This flattening of the interest rate curve was also noted in the euro zone. In a context of growth that is lower than potential (with Spain as one of the most dynamic countries), the ECB held the official rate at 2%. There were significant declines in any period longer than three months. The one-year rate was close to 2% and the ten-year rate 3%.

Although economic activity in Latin America remains strong, growth has slowed compared to the sharp rise in 2004. Together with lower inflation this helped to contain the interest rate hikes of previous quarters. Thus in Mexico the TIIE has remained around 10% – the level set at the end of March. In any event it is higher than the average for the first quarter (9.4%) and higher than the second quarter of 2004 (6.73%).

In the second quarter, the euro depreciated 7.2% against the dollar due to the difference in interest rates and to the results in France and the Netherlands of the referendum on the European constitution. It declined even further against the main Latin-American currencies. At 30-Jun-05 it had depreciated against the main Latin-American currencies compared to June 2004, except for the Venezuelan bolivar. Therefore the effect of exchange rates on the year-on-year comparisons on the group's balance sheet was positive for the first time in recent years. However the impact on the income statement continues to be negative (although less than in previous quarters). This is because a year-on-year comparison of average exchange rates in the first half shows depreciations against the euro of 3.6% in the Mexican peso, 14.7% in the bolivar, 4.6% in the Argentine peso and 4.5% in the US dollar. (The Colombian peso and the Peruvian sol appreciated 9.9% and 1.8%, respectively.)

OFFER FOR BNL

In March, BBVA announced it was publicly filing a bid to acquire all the ordinary shares of Banca Nazionale del Lavoro that BBVA did not already own. It offered one newly issued ordinary BBVA share for each five ordinary shares in BNL.

On 8th April, the BNL board of directors approved BBVA’s public share-swap offer, with a unanimous vote of all members attending. It deemed the offer to be positive and advantageous.

On 13th April, the CONSOB declared its “Nulla osta” to the publication of the prospectus providing information regarding the content of the offer. On 27th April the European Union Commission reported its favourable resolution, understanding the transaction to be compatible with the European common market. Meanwhile, on 13th May, the Bank of Italy authorised BBVA to hold over 50% of BNL’s share capital.

As planned, once due clearance had been obtained, the BBVA board of directors called an Extraordinary General Meeting of Shareholders. This was held on 14th June and approved the increase of shareholders equity to cover the share swap through an issue of up to 531,132,133 new ordinary shares, waiving current shareholders’ pre-emptive subscription rights.

With these arrangements in place, the period for taking up the public offer opened on 20th June and ended on 22nd July.

At the end of June, at BBVA’s behest, the Bank of Italy gave an interpretation of its authorisation to BBVA. It considered that this was not conditional on BBVA acquiring over 50% of the stock, such that BBVA is authorised to acquire a holding equal to or less than 50% as long as this allows it to exercise effective control. This must be verified by the Bank of Italy in the light of actual uptake of the offer.  With respect to this interpretation, BBVA has asked the Bank of Italy to recognise that any holding of over 30% would give it control over BNL. Thus, on 16th June, BBVA presented an application to the Bank of Italy to acquire a holding of up to 30% of the BNL share capital under the public offer.

On 15th July 2005, the Bank of Italy informed BBVA that, if at the end of the offering period, BBVA considered that with a holding of 50% or less of the BNL share capital, it could exercise control over BNL, then the Banking Supervisory Authorities would verify the possibility of effective exercise of such control as a function of the outcome of the public offer. Bank of Italy has not indicated exactly how long it would take to get such verification. However, it did state that “the demand for a rapid resolution of the verification procedures will be taken into account”. Meanwhile, the Bank of Italy authorised BBVA to acquire a holding of not more than 30% of BNL’s ordinary stock through the current offer. 

On 22nd July 2005, BBVA informed the markets of its analysis of the situation created after Unipol’s announcement of 18th July 2005 by which Unipol disclosed several shareholder agreements giving them control of over 46.95% of BNL share capital. Thus, it was foreseeable that BBVA’s offer would not be accepted by a number of shareholders representing a percentage that would allow BBVA to reach a stake over 50% in BNL, a condition precedent of the offer detailed in the prospectus. In such circumstances, BBVA informed its partners in the shareholder pact of BNL and to the markets its intention not to acquire the BNL shares that would adhere to the offer if such shares would not allow BBVA to reach a stake over 50% in BNL.