In Latin America the main countries continued on the path of gradual recovery.

At the same time, interest rates remained at all-time lows, bringing interest margin under pressure in the banking sector. The stock markets have not completely consolidated their recovery and currency markets are still showing signs of instability after the euro strengthened further against the dollar during this quarter. 

Against this background, the BBVA Group highlights in the third quarter and in the nine months to September 2003 were as follows:

· Net attributable profit for the third quarter was 572 million euros, 17.0% higher than for the same quarter last year. Thus attributable profit for the first nine months of the year rose to 1,739 million euros, bringing year-on-year growth to 5.1%. When compared to growth in the first half of 2003 (0.1%), this confirms the upward trend in 2003. At constant exchange rates the year-on-year increase in third quarter profit was 22.1% and the cumulative figure for the first nine months was 13.4%.

· Return on equity (ROE) in the nine month period to September increased to 19.2%, compared to 17.4% in the same period last year. Return on assets (ROA) also increased to 1.08%.

· The increase in attributable profit was mainly due to the positive development of operating profit. This rose to 1,229 million euros in the third quarter, consolidating Argentina and Brazil by the equity method. In terms of current euros, it exceeded the same quarter in 2002 by 4.1% – the first time this figure has shown a positive evolution in the year. At constant exchange rates, operating profit in the third quarter grew by 11.2%. 

In cumulative terms, operating profit has grown by 10.6% in constant euros (in current euros the decline is now only 4.1%) with growth recorded in all business areas. Year-on-year differences for other earnings figures on the income statement also improved compared to similar figures for the first half.

· Costs remain under control with zero increase in the domestic businesses (Retail Banking, Wholesale Banking and Corporate Activities) while in The Americas increases were kept below the inflation rate. The cost/income ratio again improved to 46.1% in the first nine months of the year, compared to 47.5% in the same period of 2002.  The improvement was shared by all three business areas.

· Items below the line on the income statement did not contribute to profit growth. This was the combined effect of a number of factors: an increase in earnings via the equity method, lower provisions resulting from lower exchange rates, the large provisions made for country-risk in Argentina in 2002, lower capital gains and higher taxes (which rose to more normal levels after last year).

· In the third quarter, the level of activity of Retail Banking in Spain and Portugal continued to improve. This applied to the lending activity as well as to customer funds and therefore had a positive effect on net interest income and net fee income.  Acceptance of the new products launched during the quarter made a significant contribution to the increase in business volume.

Operating profit in the quarter for this business area exceeded the previous quarter and this meant that in the nine-month period to September it grew by 2.2% compared to the same period last year. Consequently other earnings figures are also improving.

· Wholesale and Investment Banking continued the positive trend of previous quarters. The year-on-year increase in the nine months to September was 16.4% on operating profit and 37.0% on attributable profit.

· Taken as a whole, Retail Banking, Wholesale Banking and Corporate Activities (the area that incorporates the results of the Group’s financial management and specifically, management of assets and liabilities, as well as hedging) consolidates the positive trends observed in the different business areas. Thus, in the nine-month period to September, year-on-year growth in operating profit of the ex – America Group rose to 6.6%, while attributable profit rose by 9.3%.

· In The Americas, attributable profit in the third quarter was the highest since the second quarter of 2002 and is growing by 11.7% year-on-year in current euros (26.9% at constant exchange rates). In cumulative terms and at constant exchange rates, operating profit grew by 15.6% and attributable profit by 24.1%.

· In Mexico a decline in interest rates was compensated by the high rate of growth in the more profitable business activities, especially liquid customer funds and lending to individuals, successful price management in customer deposits and continuous improvement in fee income and cost control. Thus, a series of year-on-year increases have been achieved at constant exchange rates in the nine months to September: 13.0% on net interest income, 27.2% on operating profit and 25.0% on attributable profit.

In October the Group increased its holding in Bancomer to 59.42% after acquiring an additional 3.77%.

· The non-performing loan ratio fell once more during the quarter and at 30th September 2003 it stood at 1.46% excluding Argentina and Brazil (1.57% at 30th June 2003 and 1.75% at 30th September 2002). Coverage has now reached 195.6%. Non-performing loans in the domestic sector in Spain stand at 0.75%. This level compares favourably with the banking system as a whole and is 13 basis points lower than the equivalent figure last year.

· The Group’s capital base continues to strengthen. At 30th September 2003 core capital was 6.1%, Tier I was 8.2% and the BIS Ratio was 12.5% (12.0% at 30th June 2003).

* * *

The sale of BBV Brasil to Bradesco means that earnings generated in Brazil are being incorporated in the 2003 figures by the equity method. Due to accounting instability in Argentina during 2002, its results continue to be isolated to provide a more precise picture of the Group’s performance. Therefore the statutory income statement is accompanied by a corresponding proforma statement where income generated in Argentina and Brazil in 2002 and 2003 is included using the equity method. This entails no change in attributable earnings. Unless otherwise indicated, the following remarks refer to the latter financial statement.

Year-on-year comparisons of the Group’s earnings in the region continue to be strongly affected by the depreciation of American currencies against the euro. In terms of average rates over the first nine months of 2002 and 2003 the Mexican peso depreciated by 25.5%, the Venezuelan bolivar by 43.3%, the Chilean peso by 20.2%, the Colombian peso by 29.9% and the U.S. dollar by 16.6%. The above-mentioned proforma statement also contains a column with the variations shown at constant exchange rates in order to isolate this effect.

Income for the period

The upward trend in profit during the present year reflects the BBVA Group’s capacity to generate recurrent earnings. Thus operating profit in the third quarter (1,229 million euros) exceeds the figure for the same quarter in 2002 by 11.2%, at constant exchange rates. Furthermore, this income is also higher (4.1%) in current euros for the first time this year. In the first nine months of the year operating profit came to 3,678 million euros. This was an increase of 10.6% at constant exchange rates and a decline of only 4.1% at current rates (compared to a decline of 7.8% in the first half and a decline of 11.1% in the first quarter).

In Retail Banking in Spain and Portugal, operating profit in the third quarter was 4.4% higher than for the same period in 2002. With this, operating profit in the first nine months of the year grew by 2.2% (1.1% in the first half). Wholesale and Investment Banking continued to grow by 16.4% in the first nine months of the year. In The Americas the increase was 15.6% at constant exchange rates, mainly due to the 27.2% increase in Mexico.

In line with the operating profit figures, all the other earnings figures on the income statement are exhibiting greater year-on-year growth as the year advances. This applies to current exchange rates as well as constant exchange rates.

Net interest income in the third quarter of 1,659 million euros (a year-on-year increase of 5.2% in constant euros) brings the cumulative figure for the year to 5,002 million euros (an increase of 5.0% at constant exchange rates). At current exchange rates the fall of 8.5% is lower than the figure for the first half (an 11.5% fall). In domestic retail business, net interest income grew from 0.7% in the first half to 1.4% in the first nine months of the year. Greater business volume more than compensated for the lower customer spreads. In Mexico it also proved possible to compensate the sharp decline in interest rates by means of an increase in business volume. Therefore net interest income in the nine months to September recorded growth of 13.0% at constant exchange rates (12.0% for the entire Americas Area).

Net fee income of 828 million euros in the third quarter was nearly equal to the same quarter last year in current euros. At constant exchange rates it grew by 8.0%. This meant that growth in the first nine months came to 4.6% (2,383 million euros). Attention is drawn to the positive trend in fee income associated with collection and payment services. This grew by 14.5% due to sharp increases in credit and debit cards. In Retail Banking, fee income in the third quarter was 3.2% higher than the same period of 2002. Commissions from mutual funds once again exceeded the previous quarter, thanks to an increase in assets under management. In The Americas fee income grew by 11.8% in the quarter (at constant exchange rates) and 10.9% for the year-to-date (17.5% in Mexico).

Core revenues in the first nine months of the year came to 7,385 million euros which was 4.9% higher, at constant exchange rates. After taking into account trading income of 448 million euros in the year to September, ordinary revenues rose to 7,833 million euros, an increase of 5.8% over the same period last year. 

Operating costs were kept under control. In the year-to-date they fell by 10.7% in current euros and increased by only 2.3% in constant euros. The aggregate figure for all domestic business shows that expenses have not changed (they declined 1.1% in Retail Banking and by 9.3% in Wholesale Banking). In The Americas, costs rose moderately by 5.2% at constant exchange rates (3.4% in Mexico). This was less than the average inflation rate in the region.

Increased revenues and careful cost control led to new improvements in the cost/income ratio; for the nine months to September the ratio was 46.1% compared to 47.5% for the same period in the previous year. Improvements were recorded in all three business areas: 45.1% in Retail Banking in Spain and Portugal, 30.1% in Wholesale and Investment Banking and 43.5% in The Americas (41.8% in Mexico).

Net income from companies carried by the equity method in the year to September came to 288 million euros. Apart from the better performance of associate companies, the year-on-year comparison is affected by extraordinary adjustments in 2002 (104 million euros related to the final 2001 results of Repsol and BNL, and 209 million euros for amortisation of UMTS licences by Telefonica). In the current year it was also affected (96 million euros following publication of the final 2002 results of companies such as Telefonica and Terra). Net income from Group transactions was 394 million euros in the nine month period to September 2003. This is 13.7% lower than last year. These transactions include capital gains of 343 million euros on the sale of the stake in Crédit Lyonnais in the first half year and the sale of 6% of Gamesa by Corporación IBV with capital gains of 30 million euros in the third quarter.

The Group made provisions of 1,436 million euros in the first nine months of the year, which is a reduction of 11.6% at current exchange rates. Of this figure, 883 million euros were allocated to loan loss provisions. This was 25.0% less than the previous year due to the effect of exchange rates and lower country-risk provisions. At constant exchange rates the decrease is 14.2%. The amortisation of goodwill in this area came to 431 million euros. This was 10.1% higher due to the amortisation of 39 million euros related to the investment in Bradesco. In the nine months to September, corporate income tax increased by 76.7% in year-on-year terms as a consequence of the deductions for devaluation of American currencies in 2002. Lastly, gains on minority interests fell due to the lower cost of preference stock following amortisation of old issues and lower interest rates of the new ones issued in the period.

Therefore, net attributable profit for the Group in the first nine months of 2003 came to 1,739 million euros. This amount is 5.1% higher than the same period last year calculated at current exchange rates, and 13.4% higher at constant exchange rates. Given the neutral effect of the items below operating income on the income statement, the increase in profit is the result of the increase in operating profit. 

The greater year-on-year growth of attributable profit in the nine month period to September compared to the first half (a fall of 0.1% at current exchange rates and a rise of 9.6% at constant exchange rates) was due to the profit in the third quarter (572 million euros) which was considerably higher than the same period in 2002; it was 17.0% higher at current rates and 22.1% higher at constant rates.

Balance sheet and business activity

Year-on-year comparisons of the Group balance sheet and its business activity continue to be affected by the depreciation of American currencies against the euro between 30th September 2002 and 30th September 2003: the Mexican peso depreciated by 21.6%, the Venezuelan bolivar by 22.1%, the Colombian peso by 16.3%, the U.S. dollar by 15.5% and the Peruvian sol by 11.2%. In the case of the Mexican peso and the dollar, the effect is greater than at the end of June 2003 and smaller in the case of other currencies.

Total Group assets were 285 billion euros at 30th September 2003. For the first time this year, total assets are higher (1.6%) than a year previously in current euro terms despite the above-mentioned currency depreciation. Total business volume, represented by the sum of lending and customer funds under management, rose to 442 billion euros and again, for the first time, it is also 2.0% higher than at 30th September 2002, despite the changes in exchange rates and the withdrawal from Brazil. Without Argentina and Brazil and calculated at constant exchange rates, business volume grew by 8.2% compared to 5.1% at 30th June 2003.

Lending comes to 150 billion euros, 2.6% higher than the figure at 30th September 2002 (beating the 0.9% year-on-year increase at 30th June 2003). Without Argentina and Brazil and at constant exchange rates, the increase is 7.6%. Lending to other resident sectors continues to perform well, year-on-year growth accelerated to 10.8% and reached 97 billion euros. The outstanding areas were secured loans which grew by 16.4% (mortgages alone grew by 17.5%) and leasing (up by 29.0%).

The depreciation of currencies on the American continent meant that, in current euros, the growth in lending to non-residents in local terms became a smaller increase during the quarter and, in year-on-year terms, it became a fall of 12.4% (a fall of 15.0% at the end of June). Therefore this lending segment continues to lose importance in the Group’s loan portfolio.

The figure for non-performing loans fell once more in this quarter (by 5.7% compared to 30th June 2003). Together with the increase in lending, this generated a new improvement in asset quality. Thus at 30th September 2003 the non-performing loan ratio (NPL) was 1.96% (2.12% at 30th June 2003). Excluding Argentina and Brazil, this ratio was 1.46% (1.57% at the end of June). The NPL ratio in Retail Banking was 0.91% and in Wholesale Banking it was 1.04%. In The Americas it fell from 4.40% at 30th June 2003 to 4.16% at the end of September due to positive developments in Mexico (which fell from 4.33% to 3.96% at the same dates) and in most of the other countries as well. The coverage ratio now stands at 195.6% (excluding Argentina and Brazil).

Total customer funds under management by the Group rose to 291 billion euros at 30th September 2003. In current euro terms they grew for the first time this year, by 1.7% over 30th September 2002. Excluding Argentina and Brazil and excluding the effect of exchange rates, the year-on-year growth rose to 8.5% (4.9% at 30th June 2003).

Customer funds on the balance sheet grew by 1.1% to 179 billion euros. (Excluding Argentina and Brazil and calculated at constant exchange rates, the figure grew by 7.9%.) Deposits from other resident sectors came to 67 billion euros, a year-on-year increase of 4.3%. This was especially noted in savings accounts (which grew by 14.6%) due to the success of the “Libretón” (savings book) campaigns. The year-on-year change in Public Sector deposits basically reflects the closure of the Law Court account in the first quarter. With regard to non-resident deposits, the increase in local currency resulted in a year-on-year decline of 5.3% in euro terms due to depreciation of the currencies.

Off-balance-sheet funds (mutual funds, pension funds and customers’ portfolios), grew by 2.8%, compared to the figure at 30th September 2002, to 112 billion euros, in current euros. Excluding Argentina and Brazil and at constant exchange rates, these funds grew by 9.4%. In Spain the increase was 7.0%, mainly due to a higher rate of recovery of mutual funds in recent quarters. They have grown by 6.4% in the last twelve months. The success of the new guaranteed funds that were launched this quarter contributed to the improvement: the BBVA 5x5 Extragarantizado Fund and, especially, the BBVA Extra 5 Garantizado Fund, which captured more than 1,200 million euros in September. Pension funds increased their rate of growth to 11.6% year-on-year and managed portfolios grew by 4.5%. In the rest of the world declines eased to 1.4% due to improvements in pension funds. The latter increased by 8.4% in current euros.

Capital base

The capital base of the BBVA Group continues to strengthen. At 30th September 2003 it rose to 21,145 million euros in accordance with the standards of the Bank for International Settlements (BIS). The capital base surplus was 6,258 million euros (5,389 million euros at 30th June 2003).

Core capital at 30th September 2003 came to 10,314 million euros, increasing 2.5% over the 10,060 million euros at 30th June 2003. This increase was greater than risk weighted assets on these dates. Therefore the ratio rose to 6.1% (6.0% in June). After incorporating other basic equity, the Tier I ratio was 8.2% (8.1% in June).

In July, 600 million euros of subordinate debt was issued, which matures in 2013, destined for the European institutional market. This created a significant increase in Tier II which, in combination with the improvement in Tier I, raises the BIS ratio to 12.5% (12.0% at 30th June 2003).

The BBVA Share

Lower geopolitical uncertainty in recent months generally resulted in gradual reductions in equity market volatility. During the third quarter stock market indices in the world’s main business centres performed very differently depending on their growth perspectives: Euro Stoxx 50 (-1.0%), S&P (+2.2%) and Nikkei (+12.5%). During the quarter Spanish banking shares recorded falls that were slightly greater than the Euro Stoxx 50 and the Euro Stoxx Bank (a fall of 0.8%). In the case of the BBVA share, the fall was 3.2%.

Liquidity of BBVA shares increased during the quarter. The average number of shares traded daily grew from 32 million in the second quarter to 33 million in the third quarter. The average daily turnover rose from 279 million euros to 308 million euros in the same period.

With regard to shareholder remuneration and the Bank’s intention to pay dividends similar to 2002, a second gross interim dividend of 0.09 euros per share was paid on 10th October.