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At year-end 2005, doubtful risks (including contingent liabilities) stood at €2,382m, 6.0% more than the €2,248m recorded in December 2004. However, if the addition to the group of Hipotecaria Nacional, Laredo National Bancshares and Granahorrar are taken into consideration and also the impact of the American currencies strengthening against the euro, then, the net change in doubtful risks on a like-for-like basis and at constant exchange rates has in fact dropped significantly. While total risk exposure grew 27.3% year on year, reaching €252 billion, this behaviour of doubtful risks brought the group’s NPL ratio down to 0.94% at the end of 2005, as compared with 0.98% at 30-9-05 and 1.13% at 31-12-04. All business areas recorded reductions in their NPL ratios, with lending growing as doubtful risks shrunk (except for a slight increase in The Americas for reasons already explained). Thus, at 31-12-05 the ratio was 0.62% for the Retail Banking Area in Spain and Portugal (0.82% twelve months earlier); 0.18% for Wholesale and Investment Banking (0.30% at 31-12-04) and 2.67% for the Americas Area (3.44% at 31-12-04). The figure for Mexico was 2.34% and for the rest of banks in that region it was 3.26% compared to 2.94% and 4.43%, respectively, one year earlier. Loan loss provisions reached €6,015m on 31-12-05, with a year-on-year growth of 21.8%. This was far higher than the growth in doubtful risks, so that the coverage ratio went up to 252.5%, as against the 219.7% recorded twelve months before. Maximum generic coverage (1.25 alfa), reached at year-end 2004, was maintained through to the end of 2005. All business areas presented increases in their coverage ratios: Retail Banking in Spain and Portugal reaching 315.7% (as compared with 249.1% at 31-12-04), Wholesale and Investment Banking 728.7% (as against 480.2%) and the Americas 183.8% (173.5% one year earlier).
MARKET RISK
In the fourth quarter of 2005, market exposure of the BBVA group, measured by Value-at-Risk (VaR), remained at moderate levels. Average exposure in the quarter was €16.8m, similar to that recorded for the third quarter, with €20.4m of risk at 31-12-05. This was in line with the greater exposure assumed in some Latin-American markets. On average and in comparison with the third quarter, diversification by geographical areas delivered lighter exposure in mature markets, relative to the Latin-American banks within the group which were weighted more heavily. In terms of the type of market risk assumed by the BBVA group, at the end of December interest-rate risk stood out as the predominant factor (including spread exposure, 62% of total exposure, but before allowing for the effect of diversification). This was followed by the risk of volatility associated to optional positions (22%) and stock-market exposure (9%), to the detriment of exchange rate risk (7%).
OPERATIONAL RISK
In 2005, BBVA made significant progress in rolling out its operational risk tools in order to qualify for the advanced management model as defined by Basel convergence criteria. The group has practically completed deployment of the Ev-Ro tool (qualitative control), while further spreading the use of TransVaR (a management tool using chosen indicators) and SIRO (a database of past events entailing operational risk). The SIRO data, together with other information from the external ORX database, enabled BBVA to calculate initial estimates of operational risk capital requirements in line with the advanced models.
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