The first quarter of 2014 marked the start of a new cycle of growth for BBVA’s operating results. Net income from ongoing operations rose 18.7% over the first quarter of 2013, to €744 million. Net attributable profit came to €624 million, which was 64% less than the same period a year earlier due to corporate operations that were booked in the first three months of 2013.
BBVA President and COO Ángel Cano said, “These results underline the strength of our business model. On one hand they confirm that asset quality continues to improve in Spain and, on the other, they highlight the consistency of recurring income. As for our strategy, the priority is to accelerate the Group’s transformation into a digital business model to provide an improved experience to our clients, regardless of the channel they use, with new services and applications.”
The year-over-year comparison of quarterly earnings is affected by factors such as the absence of corporate operations in the first part of the current year and the negative impact of exchange rates against the euro. Nonetheless steady generation of revenues, costs control and lower provisioning helped to configure a solid income statement.
In yet another quarter BBVA generated a high level of income. From January to March and without taking FX fluctuations into account, net interest income plus fee income rose 6.7% to €4.38 billion, compared to the same period last year. Gross income increased 5.0% to €5.05 billion at constant exchange rates. In consolidated terms developed markets accounted for 45% of gross income and emerging economies 55%.
In constant terms, the cost-containment policy kept increases down to 4%, a figure lower than the rise in gross income or the average inflation in the regions where BBVA operates. This explains how operating income increased 6.0% at constant exchange rates to €2.44 billion. As a result BBVA was once again the most profitable bank with a ratio of operating income over average total assets of 1.65%, more than double the average of its competitors (0.70%).
The improvement in asset quality helped considerably to reduce loan-loss and real estate provisions to €1.24 billion compared to the average quarterly charge of €1.66 billion in 2013 and €2.36 billion in 2012.
2014 1Q BBVA Results Report
At the end of March the Group's NPA ratio stood at 4.6% excluding real estate activity, with a coverage of 59%. New entries to NPL status also continued to fall (down 25% year-over-year) and the risk premium improved 18 basis points during the same period, without taking into account real estate business. The total NPA ratio for the BBVA Group was 6.6%. This is 18 basis points less than last December and the first decline since 2011. Coverage stood at 60%. The combined NPA ratio for banking and real estate business in Spain fell to 10.0% versus 10.3% in December, helped by a decline in non-performing loans of €610 million.
The strength of BBVA’s capital was reflected in Basel III core capital ratio: 10.8% (phased-in) and 9.9% (fully loaded). These figures are well above the minimum required by new regulations (4% and 7%, respectively). Furthermore the bank made two issues to reinforce and optimize its capital base under the new CRD IV rules (Capital Requirements Directive). These were a €1.5 billion issue of contingent convertible securities, eligible as additional Tier I, and the second was a €1.5 billion subordinated bond issue, eligible as Tier II.
In terms of business, gross lending increased 1.6% during the quarter at constant exchange rates. South America, Mexico and the United States reported substantial advances in this area. In Eurasia the volume of lending to wholesale customers was stable although Garanti’s loan portfolio grew at a slightly slower pace. Spain saw a slowdown in the deleveraging process affecting the balance of total credit and the franchise managed to obtain increases in the flow of new operations in some segments. Customer deposits showed a positive evolution in all regions.
In the first quarter BBVA also attained two significant milestones, the creation of a new business area, Digital Banking, and the acquisition of Simple. The new division’s priorities are to accelerate the Group’s transformation and boost the development of new digital businesses.
Digital Banking is responsible for all commercial offerings, the multi-channel strategy, the distribution model and the design of commercial and operational processes. Simple is a U.S.-based company that has created a new standard in digital banking. The acquisition is part of BBVA’s strategy to lead the technology-driven change that is transforming the financial services industry.
As for results divided by business area banking activity in Spain improved earnings, supported by the start of the economic recovery. The customer spread improved, entries to NPL status declined and there was an emerging demand for credit. The total volume of lending however continued to fall (down 8.4% year-over-year). Conversely, customer funds increased 12.8%. The NPA and coverage ratios remained unchanged from the previous quarter (6.4% and 41%, respectively).
The risk premium fell 31 basis points to 1.04%. Gross entries to NPL status dropped 34% year-over-year. The area reported net attributable profit of €386 million. This was 33.3% less than last year but up 178.4% if the capital gains in March 2013, generated by a re-insurance operation of the individual life-risk portfolio, are excluded. Furthermore the earnings from banking activity offset the real estate business results.
2014 1Q BBVA Results Presentation
The real estate activity in Spain also reflected the improvement in the market context. Net exposure to this sector (around €14.2 billion) has fallen 21% since its peak in 2011. The NPA ratio declined 127 basis points in the quarter to 54.2% BBVA sold more than 3,000 units during the quarter at discounts close to the net book value. Including operations carried out on behalf of third parties the total of sales was close to 5,000 units. The net attributable result of this area was -€231 million, a notable improvement on previous periods.
In the following paragraphs the percentage variations refer to constant exchange rates. This provides a better reflection of business developments in these areas.
In the United States lending increased 14.7% and customer funds rose 4.4%. The higher level of business is apparent on the income statement. All margins are growing. Credit quality continued to improve significantly and the franchise earned €105 million (up 16.1%). Moreover the Federal Reserve approved BBVA Compass’ capital plan without objections.
In Eurasia, Garanti demonstrated it is the top bank in Turkey with solid earnings in a complex environment that squeezed margins. The macroeconomic perspectives look better in the mid-term and the local financial sector still offers a big potential. The area earned €105 million (up 3.1%).
BBVA Bancomer, the top bank in Mexico, continued to enjoy buoyant business with lending up 10.4% and customer funds up 12.2%. This was reflected by all margins. Risk indicators remained stable. The Mexican franchise achieved net attributable profit of €453 million in the first quarter (up 14.7%).
South America saw once again the highest rate of growth. Both lending and customer funds rose more than 25%. Repeating the pattern of recent years the region reported double digit growth at all levels of its income statement. This business area earned €244 million (up 16%).