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The characteristic features of 2005 were the sustained growth of the main business indicators and the area's earnings. The strong level of business activity together with a pricing policy suited to low interest rates, the development of new business lines and appropriate cost control, led to a 13.1% increase in operating profit and an improvement in the cost/income ratio including depreciation (which fell 2 points to 43.3%). The increase in operating profit boosted net attributable profit by 13.1% to €1,614m. ROE rose to 32.1% during the year. The positive figures on the upper part of the income statement were mainly generated by net interest income. This rose 5.6% to €3,182m, reflecting a sustained increase in banking business related to private individuals, SMEs and small businesses. This activity was also aided by action taken to defend spreads and customer funds in a highly competitive environment. Lending by the area at 31-Dec-05 came to €128 billion. It grew 20.1% in the year, supported by increases of 22.9% in market mortgages (21.1% in residential and 32.7% in developer finance) as well as a 22.5% rise in SMEs and small businesses and 8.5% in consumer finance. Total funds under management by the area (deposits, mutual and pension funds, and other brokered products) grew 10.0% during the year to €126.9 billion. All types performed well although the biggest increases were in stable deposits. Term deposits increased 20.2% (financial insurance products 30.1%), mutual funds rose 10.1% and pensions 12.2%. In addition, transactional deposits increased 5.1%. Higher business activity was also responsible for growth in net fee income which rose 8.5% to €1,602m. Fees on banking services increased 12.1% (€922m) and on mutual and pension funds rose 3.9% (€680m). Furthermore, the development and distribution of insurance products contributed €309m (up 20.3%). Higher net interest income, fees and insurance boosted core revenues 7.2% to €5,094m. In addition, distribution of cash management products in the SME and retailer segment lifted net trading income to €108m. This figure is nearly twice that of 2004. Thus ordinary revenues climbed 8.3% to €5,203m. Costs (personnel, overheads, amortisation and depreciation, net of recoveries) were up only 2.8%, which is less than half the increase in ordinary revenues, despite adding 161 offices to the branch network. Consequently the cost/income ratio, including depreciation improved 2.3 points to 43.3% (45.6% in 2004). The area’s operating profit in 2005 climbed 13.1% to €2,923m. The loan loss provisions of €476m and their increase of 16.3% are mainly due to generic provisioning. They remained at maximum level during the year but increase in accordance with the level of lending activity. However, specific provisions remain low as a consequence of the improvement in asset quality. Despite the increase in lending activity, non-performing loans declined 8.1% in the last 12 months. The non-performing loan ratio fell to 0.62%, compared to 0.82% at 31-Dec-04. Coverage increased to 315.7% (249.1% at the end of 2004).
FINANCIAL SERVICES
Personal, commercial and special financial services make up about 90% of the area’s total earnings. Operating profit in the year came to €2,611m, a rise of 12.5% over 2004. Net attributable profit was €1,422m (up 12.4%). Lending and funds under management came to €123 billion and €109 billion, respectively, following increases of 20.0% and 9.8%. Personal Financial Services In the private individual segment, personalisation of services advanced through products that are more adapted to customers’ needs and helped by greater guidance. These developments helped to improve the range of products (lending and savings), re-focus marketing campaigns, reinforce the role of branches and continue the development of alternative channels, pushing a higher use of internet banking and establishing the mobile phone as a new channel for electronic banking. The commercial banking network increased the average number of products sold per agent by more than 33.9%. The wider range in the catalogue of products (increased flexibility depending on the level of bundling) has pushed the growth in lending over €76 billion (up 18.7%). The value of mortgages sold in 2005 increased 22.8% to €24.6 billion, €15.6 billion of which was residential. Moreover, Banca Hipotecaria, a unit that specialises in financing real estate projects, increased its loan portfolio 31.1%, financing more than 48,000 dwellings. New consumer finance operations concluded by the area in 2005 rose 17.4% over the previous year. Regarding fund-gathering activities, this area conducted a new Quincena savings campaign, entailing nearly 500,000 gifts and gathering €1.3 billion. It also launched Cuentas Claras Internacional and extended this service to immigrants, adding to other offersalready in place for this segment (remittances, consumer loans, etc). In terms of stable funds, the area also marketed term deposits (Plus Creciente and Preferente), the managed fund portfolios and the Protección pension plans. For the whole year, total gathering of all types of term deposits came to €5,340m, which was 16.9% higher than 2004. In payment channels, the enhanced potential for using cards to make payments, the launch of the cards BBVA Visa Diez and BBVA Diez Fácil helped retail sales to increase 12% over the preceding year. Alternative banking channels continued to develop strongly. The prescription unit increased sales in the consumer, mortgage and small business markets as well as from brokerage through agents, by 22% to €5,494m. In respect of alternative channels, BBVAnet, the electronic banking service, the number of transactions handled during the year jumped 54.8% to nearly 134m. Commercial Financial Services During the year this unit chalked up considerable improvements in volume and earnings, consolidating its model for servicing small and medium enterprises, professional practices, the self-employed, retailers and farmers. The marketing focus for these customer types entails massive distribution of standard products and periodic segment-oriented campaigns to improve the personalised approach. This unit works through the network of 213 SME branches plus another 1,724 branches in the commercial network with more the 3,000 specialists that handle retailers, the self-employed and the farming community. Lending by this unit increased 22% during the year to more than €44 billion. All business lines contributed to this success, including increases of 14% in leasing, 23% in factoring, 26% in renting and 11% in confirming. Customer funds also recorded gains. Mutual fund assets under management (BBVA Cash and BBVA Corto Plus Empresas) nearly tripled to €1,292m. These funds are marketed to SMEs to help them optimise working capital. Insurance sales also increased sharply with written premiums rising to €17m. Lastly, in a move to develop new lines of revenue, the unit significantly increased distribution of cash management products through its two networks. This consolidated recurrent earnings of more than €100m from trading income, which are double those of 2004. Special Financial Services Business growth at this unit led to increases of 24.5% in ordinary revenues and 24.9% in operating profit (which came to €96m). Together with lower provisioning requirements, this boosted net attributable profit 87.2% to €50m. The loan portfolio grew 23.3% to €3.4 billion as a result of the increase in turnover, which rose 18% to €3.1 billion. By type, car loans increased 17.8% to €1.15 billion, equipment loans advanced 18.2% to €471m (including equipment renting), car renting rose 11.8% to €233m and consumer finance handled through Uno-e increased 19% to €1.06 billion (20.9% via cards). Customer funds came to €1.41 billion, a year-on-year increase of 27.1%, following the success of the Depósito 8 campaign, which was launched in the last quarter and has tripled term deposits. The increase in funds was also aided by various new marketing efforts in mutual funds, which grew 46.6%. ASSET MANAGEMENT AND PRIVATE BANKING By year-end the volume of funds under management by this unit (ie, assets in mutual and pension funds plus funds administered by the private banking units) came to €73.1 billion. This was 12.3% higher than a year earlier. The 9.2% increase in net fee income was the determining factor behind the 12.2% rise in operating profit. Net attributable profit rose 6.1% over 2004 to €118m. Total funds under management in mutual funds in Spain increased to €44.5 billion after net gathering of €1,960m during the year. This means that BBVA’s fund manager (BBVA Gestión) is once again the biggest contributor to the system. In the fourth quarter the new product, Carteras Gestionadas, grew significantly. Since its launch in March it has attracted 24,171 customers with total assets of €1,379m. Furthermore, assets in real estate funds surged 60.5% to €1,833m in the year. The total assets of mutual funds managed by BBVA now comes to €46.3 billion, an increase of 9.8%. Pension business in Spain, in which BBVA is the clear leader, lifted assets 11.8% year-on-year to €15.1 billion. Of this amount, €8.4 billion represents private plans. They increased 14.7% on continuing popularity of Planes Protección for the second year. Group and other pension plans accounted for €6.7 billion (up 8.3%). In the Spanish private banking business, BBVA managed total assets of €15.9 billion, which was 17.8% higher than at the end of 2004. Of this amount, €9.3 billion (up 26%) is managed by BBVA Patrimonios together with both general and personalised advice. The personal banking unit provides personal advice to 25,957 customers in the upper-middle market segment. It managed €8.8 billion in assets (up 12% over 31-Dec-04). Some €6.7 billion of this is handled directly and the rest is handled through BBVA Patrimonios. The added value created by this service was complemented in 2005 by a wide range of funds from the principal international fund managers. EUROPEAN INSURANCE This unit consists of various separate insurance companies that provide direct insurance, reinsurance and insurance brokering in Spain and Portugal. They mainly market a wide range of products to different types of customer (private individuals, SMEs, retailers, professional practices and the self-employed) through various parts of the area’s network although they use external channels for group insurance. In 2005 the unit issued premiums for €1,981m, an increase of 21.1%. BBVA Seguros is an insurance unit that handles life, household, multiple risk and construction policies. Total net premiums issued in 2005 came to €1,823m, a year-on-year increase of 21.2%. This breaks down as follows: a rise of 62.6% in loan repayment protection policies bringing the total to €228m in premiums; 15.7% in guaranteed income (€846m); 17.4% in household policies (€123m) and 24.6% in group welfare insurance. This unit continues to lead in life insurance via the bancassurance sector and its technical reserves rose 8.4% to €9,742m. Apart from its own policies, the unit brokered premiums of €158m with a year-on-year increase of 19.9%. The fourth quarter included the launch of Seguros Personales BBVA as part of the group's process of innovation and development in the personalisation of products and services. This new range of life policies replaces a number of older products with a modular approach. Pricing is transparent and customers can customise policies to fit their particular needs. They can choose the cover and there is an option associated with a 25% no-claims bonus. BBVA PORTUGAL This unit completed its 2003-2005 master plan, with significant growth in terms of volume and profit. It achieved gains in market share in the priority areas such as the real estate sector, SMEs and mutual funds. Customer loans rose 17.2% (40.2% in mortgages). Customer funds were up 21.9% while mutual funds rose 31.4%. In terms of earnings, the 27.2% rise in net fee income and control of operating expenses (up 2.3%) boosted operating profit 40.2% to €25m. Helped by lower provisions, net attributable profit thus came to €10m, against €5m in 2004.
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