Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea and Subsidiaries (Consolidated Group)

Transcription

1 Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea and Subsidiaries (Consolidated Group) Consolidated Financial Statements for the year ended 31 December 2010, and Directors Report, together with Independent Auditors Report Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain and of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 2 and 60). In the event of a discrepancy, the Spanish-language version prevails.

2 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 2 and 60). In the event of a discrepancy, the Spanishlanguage version prevails. Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea and Subsidiaries (Consolidated Group) Notes to the Consolidated Financial Statements for the Year Ended 31 December Description of the Institution and Transfer of assets and liabilities from CajaSur 1.1. Description of the Institution Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea ( Bilbao Bizkaia Kutxa or the Parent ) is a not-for-profit entity classified as a General Popular Savings Bank and, as such, must allocate the net surplus for each year to carry out the welfare projects provided for in its specific objects, to set up reserves to improve the security of the funds managed by it and to fund its own development. Its registered office is at Gran Vía, 30-32, Bilbao. The Parent operates through 407 branches, 174 of which are located outside the province of Bizkaia. Bilbao Bizkaia Kutxa is the entity resulting from the merger between Caja de Ahorros y Monte de Piedad Municipal de Bilbao and Caja de Ahorros Vizcaína, which was formalised on 16 February The Entity is the Parent of a group of investees composing the Bilbao Bizkaia Kutxa Group ( the Group ). Therefore, the Parent is required to prepare, in addition to its own separate financial statements, which are also subject to statutory audit, consolidated financial statements for the Group which include the corresponding investments in subsidiaries and jointly controlled entities and the investments in associates. The entities in the Group engage in various activities, as disclosed in Appendices I and II. At 31 December 2010, the Parent s total assets, equity and profit for the year represented 98.11%, 88.31% and 89.96%, respectively, of the related Group figures (31 December 2009: 97.03%, 83.90% and 92.34%, respectively). Set forth below are the condensed separate balance sheets, separate income statements, separate statements of changes in equity and separate statements of cash flows of the Parent for the years ended 31 December 2010 and 2009, prepared in accordance with the accounting principles and rules and measurement bases established by Bank of Spain Circular 4/2004 and subsequent amendments thereto (see Note 2-a):

3 a) Condensed separate balances at 31 December 2010 and 2009: Cash and balances with central banks 208, ,430 Financial assets held for trading 210, ,290 Available-for-sale financial assets 1,823,521 1,669,630 Loans and receivables 22,307,649 22,143,743 Hedging derivatives 215, ,373 Non-current assets held for sale 14,029 3,498 Investments 3,068,292 3,127,932 Tangible assets 495, ,108 Intangible assets - 4,368 Tax assets 199, ,476 Other assets 18,532 21,924 Total assets 28,562,015 28,920,772 Financial liabilities held for trading 105, ,421 Financial liabilities at amortised cost 24,406,728 24,728,272 Hedging derivatives 16,052 10,843 Provisions 240, ,933 Tax liabilities 70,486 84,297 Welfare fund 154, ,829 Other liabilities 55,754 56,791 Total liabilities 25,048,756 25,461,386 Own funds: 3,163,155 3,011,195 Capital or endowment fund Reserves 2,931,215 2,744,637 Net profit for the year 231, ,540 Valuation adjustments 350, ,191 Total equity 3,513,259 3,459,386 Total liabilities and equity 28,562,015 28,920,772 Contingent liabilities 1,520,211 2,948,240 Contingent commitments 4,698,467 4,212,443 2

4 b) Condensed separate income statements for the years ended 31 December 2010 and 2009: Interest and similar income 547, ,332 Interest expense and similar charges (244,175) (429,578) Net interest income 303, ,754 Income from equity instruments 175, ,524 Fee and commission income 152, ,778 Fee and commission expense (17,332) (16,335) Gains/losses on financial assets and liabilities (net) 57,908 77,716 Exchange differences (net) 36,648 (5,440) Other operating income 12,827 11,544 Other operating expenses (14,244) (7,525) Gross income 707, ,016 Administrative expenses (282,586) (298,369) Depreciation and amortisation charge (26,265) (25,040) Provisions (net) 7,743 (38,881) Impairment losses on financial assets (net) (129,319) (161,486) Profit from operations 276, ,240 Impairment losses on other assets (net) (38,610) (17,132) Gains/losses on disposal of assets not classified as noncurrent assets held for sale 13,640 5,940 Gains/losses on non-current assets held for sale not classified as discontinued operations (30,880) - Profit before tax 220, ,048 Income tax 11,030 2,492 Profit for the year from continuing operations 231, ,540 Net profit for the year 231, ,540 3

5 c.1) Separate statements of changes in equity - Condensed separate statements of recognised income and expense for the years ended 31 December 2010 and 2009: Net profit for the year 231, ,540 Other recognised income and expense: (98,087) (25,127) Available-for-sale financial assets Revaluation gains/(losses) (69,012) 25,736 Amounts transferred to income statement (50,815) (63,758) (119,827) (38,022) Cash flow hedges - - Hedges of net investments in foreign operations - - Exchange differences - - Non-current assets held for sale - - Actuarial gains/(losses) on pension plans - - Other recognised income and expense - - Income tax 21,740 12,895 Total income and expense for the year 133, ,413 c.2) Separate statements of changes in equity - Condensed separate statements of changes in total equity for the years ended 31 December 2010 and 2009: Endowment Fund Reserves Own Funds Profit for the Year Total Own Funds Valuation Adjustments Total Equity Ending balance at 31/12/ ,744, ,540 3,011, ,191 3,459,386 Adjustments Adjusted beginning balance 18 2,744, ,540 3,011, ,191 3,459,386 Total recognised income and expense , ,922 (98,087) 133,835 Other changes - 186,578 (266,540) (79,962) - (79,962) Ending balance at 31/12/ ,931, ,922 3,163, ,104 3,513,259 4

6 Endowment Fund Reserves Own Funds Profit for the Year Total Own Funds Valuation Adjustments Total Equity Ending balance at 31/12/ ,531, ,880 2,835, ,318 3,309,137 Adjustments Adjusted beginning balance 18 2,531, ,880 2,835, ,318 3,309,137 Total recognised income and expense , ,540 (25,127) 241,413 Other changes - 212,716 (303,880) (91,164) - (91,164) Ending balance at 31/12/ ,744, ,540 3,011, ,191 3,459,386 d) Condensed separate statements of cash flows for the years ended 31 December 2010 and 2009: Cash flows from operating activities: Net profit for the year 231, ,540 Adjustments made to obtain the cash flows from operating activities 139, ,510 Net increase/decrease in operating assets (649,773) 351,914 Net increase/decrease in operating liabilities (329,275) (138,174) Income tax recovered/paid (162) (2,768) (607,616) 712,022 Cash flows from investing activities: Payments (22,536) (296,237) Proceeds 20,686 7,173 (1,850) (289,064) Cash flows from financing activities: Payments - - Proceeds - - Effect of foreign exchange rate changes - - Net increase/decrease in cash and cash equivalents (609,466) 422,958 Cash and cash equivalents at beginning of year 977, ,394 Cash and cash equivalents at end of year 367, ,352 Set forth below are the most significant changes in the scope of consolidation in 2010 and The less significant changes in the scope of consolidation are included in Note 27. 5

7 In September 2010, after receiving the appropriate authorisation from the Ministry of Economy and Finance, the Group incorporated BBK Bank CajaSur, S.A.U., with an initial capital of EUR 18,050 thousand (18,050 shares of EUR 1,000 par value each), which is paid in full. The aforementioned company was registered at the Bank of Spain Registry of Banks and Bankers in October Its company object is to perform all kinds of activities, transactions and services specific to the banking business in general. On 1 January 2011, this company received the transfer of CajaSur s business as a result of the transfer en bloc of the aforementioned company s assets and liabilities described below in Note 1.2, and it changed its name to BBK Bank CajaSur, S.A. (Sole-Shareholder Company). On the same date the Group subscribed to and paid up a EUR 800,000 thousand capital increase at BBK Bank CajaSur, S.A.U. (see Note 13). In 2008 the Group acquired 33.39% of Neinor, S.A., formerly a related company of Bilbao Bizkaia Kutxa, taking its shareholding in the company to 83.35%. Accordingly, Neinor, S.A. became classified as a Group company. In 2009 the Group acquired the remaining share capital of Neinor, S.A. and, therefore, at 31 December 2009 it owned all the share capital of this company (see Notes 14.x and 27). In December 2007 the Caja entered into an agreement to acquire 60% of the share capital of the Fineco Group, which was formalised in The agreement included various options that could give rise to a subsequent increase in the Caja s ownership interest in that group. In 2009 the Group acquired 60% of the share capital of the Fineco Group for EUR 36,929 thousand (see Notes 14.x and 27) Intervention of CajaSur by the Bank of Spain and transfer of assets and liabilities to BBK Bank CajaSur, S.A (Sole-Shareholder Company) (formerly BBK Bank, S.A.U.) (subsidiary of Bilbao Bizkaia Kutxa). On 21 May 2010, the Bank of Spain s Executive Committee, pursuant to Law 26/1988 on discipline and intervention of credit institutions, and Article 7 of Royal Decree-Law 9/2009, of 26 June, on bank restructuring and strengthening of the capital of credit institutions (RDL 9/2009), resolved to appoint the Fund for Orderly Bank Restructuring (FROB) as provisional administrator of Caja de Ahorros y Monte de Piedad de Córdoba (CajaSur). In addition to the administration of CajaSur and its Group, the FROB approved several Financial Rescue Aid measures. On 4 June 2010, the Fund for Orderly Bank Restructuring (FROB) launched a tender process aimed at restructuring CajaSur through a transfer en bloc of its assets and liabilities or an equivalent procedure. This process culminated on 15 July 2010, when the FROB Steering Committee formulated the Restructuring Plan for CajaSur and its Group, which envisages the transfer of all of its assets and liabilities to a subsidiary of Bilbao Bizkaia Kutxa. The Restructuring Plan was submitted for the approval or non-opposition of various authorities which had been obtained by year-end. On 16 July 2010, in order to formalise the tender process, the Protocol of Financial Support Measures for the Restructuring of CajaSur through the Transfer En Bloc of its Assets and Liabilities was entered into by CajaSur, as the Beneficiary Entity, Bilbao Bizkaia Kutxa, as the Transferee, and the Fund for Orderly Bank Restructuring. The purpose of the Protocol is to establish the following financial support measures, called Financial Support Measures under the provisions of Article 7 of Royal Decree Law 9/2009: - The grant by the Fund for Orderly Bank Restructuring to the Beneficiary Entity of an Asset Protection Scheme ( APS ) for a maximum of EUR 392,000,000 on a specific set of assets, in order to cover the losses arising from certain risks included in CajaSur s business. The APS came into force on the date on which the transfer became effective, although it will have retroactive effect from 31 May 2010 and a duration of five years from that date. The Assets Guaranteed by the APS are those classified under the headings Non-Current Assets Held for Sale, Group Companies and Inventories, as well as the credit risk exposure to the Construction, Wholesale and Retail Trade and Repairs and Real Estate, Renting and Business Activities sectors, pursuant to Bank of 6

8 Spain Circular 4/2004. Under the APS the FROB guarantees 90% of the potential losses on the guaranteed assets, with the Beneficiary Entity assuming the remaining 10%. This protection scheme bears an annual fee of 0.1% calculated on the average drawable balance. - The grant of an APS loan for an amount equal to the APS amount, which will be disbursed following the date on which the APS comes into force, the limit of which will be the amount of the APS and which will mature at three months from the maturity date of the APS. The loan will be repaid gradually through the partial repayment of the amount that the FROB would have had to pay to the Beneficiary Entity in payment of the APS, after deducting the amount that the Beneficiary Entity would have had to pay to the FROB, in accordance with the established settlement mechanism. During its term the loan will bear interest payable to the FROB equal to 1- year Euribor plus 0.50%. In addition, notwithstanding the grant of this loan, the Beneficiary Entity will continue to be obliged to pay the FROB the fee indicated in the preceding paragraph, although in this case it will be calculated on the average amount of the APS loan outstanding. The General Assembly of Bilbao Bizkaia Kutxa approved the en bloc transfer on 24 September After all the conditions relating to the transfer had been met, on 29 December 2010 the related en bloc transfer public deed was executed and registered at the Mercantile Registry of Córdoba, thereby becoming effective, in accordance with the terms thereof and of the en bloc transfer plan, on 1 January The main terms under which the en bloc transfer of assets and liabilities was carried out are summarised below: - The transfer of the business was carried out through the transfer en bloc of assets and liabilities by way of universal succession, taking the form of a structural transaction which resulted in the extinguishment of the transferor (CajaSur) at the same time as the transfer takes place, in accordance with Article 81 of Law 3/2009, of 3 April, on structural modifications of companies formed under the Spanish Commercial Code. The transfer was performed under the special tax neutrality regime provided for in Chapter VIII of Title VII of the Consolidated Spanish Corporation Tax Law approved by Legislative Royal Decree 4/2004, of 5 March. - The transferee and therefore acquirer of the business of CajaSur will be BBK Bank CajaSur, S.A.U., whose sole shareholder is Bilbao Bizkaia Kutxa. - The approved Financial Rescue Aid did not form part of the transfer. - The parties agreed that, since CajaSur has an equity deficit, the price of the transfer should be one euro which was paid by BBK Bank CajaSur, S.A.U. upon execution of the deed of transferor the business. On 29 December 2010, an agreement was entered into between BBK Bank CajaSur, S.A.U. and Fundación CajaSur whereby BBK Bank CajaSur would donate to Fundación CajaSur, as from the effective date of the transfer en bloc of assets and liabilities, all of its assets, rights and obligations assigned to CajaSur s welfare projects. It was also agreed that the employees of BBK Bank CajaSur, S.A. who were assigned to Welfare Project activities would become employees of Fundación CajaSur. 2. Basis of presentation of the consolidated financial statements a) Basis of presentation The consolidated financial statements were prepared from the Group entities accounting records in accordance with EU-IFRSs and taking into account Bank of Spain Circular 4/2004, of 22 December, and subsequent amendments thereto, implementing and adapting for Spanish credit institutions the IFRSs 7

9 adopted by the European Union and, accordingly, they present fairly the Group s consolidated equity and consolidated financial position at 31 December 2010 and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows for the year then ended. All obligatory accounting principles and standards and measurement bases with a significant effect on the consolidated financial statements were applied in their preparation. The principal accounting policies and measurement bases applied in preparing these consolidated financial statements are summarised in Note 14. The information in these consolidated financial statements is the responsibility of the directors of the Group s Parent. The Group s consolidated financial statements for 2010 were authorised for issue by the Parent s directors at the Board meeting held on 17 February They have not yet been approved by the General Assembly, but are expected to be approved by it without any material changes. These consolidated financial statements are presented in thousands of euros, unless stated otherwise. b) Basis of consolidation The Group was defined in accordance with International Financial Reporting Standards (IFRSs) adopted by the European Union. Investees include subsidiaries, jointly controlled entities and associates. Inclusions and changes in the scope of consolidation are detailed in Notes 1 and 27. Subsidiaries are defined as investees that, together with the Parent, constitute a decision-making unit, i.e. entities over which the Parent has, directly or indirectly through other investees, the capacity to exercise control. Control is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly through other investees more than half of the voting power of the investee. Control is defined as the power to govern the financial and operating policies of an investee so as to obtain benefits from its activities and it can be exercised even if the aforementioned percentage of ownership is not held. Appendix I contains relevant information on the investments in subsidiaries at 31 December 2010 and The financial statements of the subsidiaries were consolidated using the full consolidation method. Accordingly, all material balances and transactions between consolidated entities were eliminated on consolidation. Also, the share of third parties of the Group s equity is presented under Non-Controlling Interests in the consolidated balance sheet and their share of the profit for the year is presented under Profit Attributable to Non-Controlling Interests in the consolidated income statement. The results of entities acquired by the Group during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of entities disposed of by the Group during the year are included in the consolidated income statement from the beginning of the year to the date of disposal. Jointly controlled entities are defined as joint ventures and investees that are not subsidiaries but which are jointly controlled by the Group and by one or more entities not related to the Group. A joint venture is a contractual arrangement whereby two or more entities or venturers undertake operations or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the venturers, provided that these operations or assets are not integrated in financial structures other than those of the venturers. The financial statements of the jointly controlled entities were proportionately consolidated and, therefore, the aggregation of all the balances and transactions and the resulting eliminations were made in proportion to the Group s ownership interest in these entities. 8

10 Appendix II contains relevant information on the investments in jointly controlled entities at 31 December 2010 and Associates are investees over which the Group exercises significant influence. Significant influence is, in general but not exclusively, exercised when the Parent holds, directly or indirectly through other investees, 20% or more of the voting power of the investee. On consolidation, investments in associates were accounted for using the equity method, i.e. at the Group s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group s interest in the associate. If as a result of losses incurred by an associate its equity was negative, the investment would be presented in the Group s consolidated balance sheet with a zero value, unless the Group is obliged to give it financial support. Appendix II contains relevant information on the investments in associates at 31 December 2010 and Since the accounting policies and measurement bases used in preparing the Group s consolidated financial statements for 2010 and 2009 may differ from those used by certain subsidiaries, jointly controlled entities and associates, the required adjustments and reclassifications were, if material, made on consolidation to unify such policies and bases. c) Adoption of new standards and interpretations issued Effective standards and interpretations in 2010 In 2010 new accounting standards came into force and were therefore taken into account when preparing the Group s consolidated financial statements for 2010: - Revision of IFRS 3, Business Combinations and Amendments to IAS 27, Consolidated and Separate Financial Statements. The revised IFRS 3 and the amendments to IAS 27 give rise to very significant changes in several matters relating to accounting for business combinations, which, in general, place greater emphasis on the use of fair value. The most significant changes include the accounting treatment of acquisition costs, which must be expensed, as opposed to the current accounting treatment of recognising them as an increase in the cost of the business combination; in step acquisitions the acquirer must remeasure its investment at fair value on the date that control is obtained; and there is an option to measure at fair value the non-controlling interests of the acquiree, as opposed to the single current treatment of measuring them as the proportionate share of the fair value of the net assets acquired. Since the standard will be applied prospectively, the directors do not expect any significant modifications to arise in connection with the business combinations performed prior to 1 January Amendment to IAS 39, Eligible Hedged Items. The aim of this amendment is to clarify two specific hedge accounting issues: (a) identifying inflation as a hedged risk, and (b) when purchased options can be designated as hedging instruments. Under the amendment, inflation can only be identified as a hedged risk if it is a contractually specified portion of the cash flows to be hedged. Only the intrinsic value and not the time value of an option may be designated as a hedging instrument. This standard was applied in accordance with its transitional provision in 2010 and it did not have a material effect on the consolidated financial statements. 9

11 The other standards, amendments and interpretations that entered into force in 2010 (amendments to IFRS 2, Share-based Payment, IFRIC 12, Service Concession Arrangements, IFRIC 15, Agreements for the Construction of Real Estate, IFRIC 16, Hedges of a Net Investment in a Foreign Operation, IFRIC 17, Distributions of Non-cash Assets to Owners, and IFRIC 18, Transfers of Assets from Customers) did not have any impact on the Group s consolidated financial statements either. Standards and interpretations issued but not yet in force At the date of preparation of these financial statements, the most significant standards and interpretations that had been published by the IASB but which had not yet come into force, either because their effective date is subsequent to the date of the consolidated financial statements or because they had not yet been adopted by the European Union, was as follows: Standards, amendments and interpretations Obligatory Application in the Year Beginning On or After Approved for use in the EU: Amendments to IAS 32 Classification of Rights Issues 1 February 2010 IFRIC 19 Extinguishing financial liabilities with equity 1 July 2010 instruments Amendments to IFRIC 14 Prepayments of a minimum funding requirement 1 January 2011 Revision of IAS 24 Related party disclosures 1 January 2011 Not yet approved for use in the EU (1): IFRS 9 Financial instruments: classification and measurement 1 January Improvements to IFRSs Non-urgent amendments to IFRSs Various (mainly 1 January 2011) (1) Standards and interpretations not adopted by the European Union at the date of preparation of these consolidated financial statements. The entry into force of these standards might have a significant impact on the financial statements of future years in the following cases: IFRS 9, Financial instruments: classification and measurement (published in November 2009 and October 2010). IFRS 9 will in the future replace the current part of IAS 39 relating to classification and measurement. There are very significant differences with respect to the current standard, in relation to financial assets, including the approval of a new classification model based on only two categories, namely instruments measured at amortised cost and those measured at fair value, the disappearance of the current held-to-maturity investments and available-for-sale financial assets categories, impairment analysis only for assets measured at amortised cost and the non-separation of embedded derivatives in financial asset contracts. In relation to financial liabilities, the classification categories proposed by IFRS 9 are similar to those currently contained in IAS 39. At the reporting date, the future impacts of the adoption of this standard had not yet been analysed. IFRIC 19, Extinguishing financial liabilities with equity instruments: This interpretation addresses the accounting by a debtor when all or part of a financial liability is extinguished through the issue of equity 10

12 instruments to the creditor. The interpretation does not apply to transactions in situations where the counterparties in question are shareholders or related parties, acting in their capacity as such, or where extinguishing the financial liability by issuing equity instruments is in accordance with the original terms of the financial liability. Otherwise, the equity instruments issued are measured at fair value at the date the liability is extinguished and any difference between this value and the carrying amount of the liability is recognised in profit or loss. This interpretation will not give rise to a change in the Group s accounting policies since in similar transactions in the past it applied accounting policies that are in line with the new Interpretation. The directors estimated the potential impact of the future application of the other standards and consider that their entry into force will not have a material effect on the consolidated financial statements. d) Information relating to 2009 As required by IAS 1, the information relating to 2009 contained in these notes to the consolidated financial statements is presented with the information relating to 2010 for comparison purposes only and, accordingly, it is not part of the Group s statutory consolidated financial statements for Changes and errors in accounting policies and estimates In these consolidated financial statements estimates were occasionally made by the executives of the Parent and of the investees and ratified by the directors, in order to measure certain of the assets, liabilities, income, expenses and obligations. These estimates relate to the following: The impairment losses on certain assets (see Note 14.h). The actuarial assumptions used in the calculation of the post-employment benefit liabilities and obligations and other long-term benefits (see Note 14.o). The useful life of the tangible and intangible assets (see Notes 14.q and 14.r). The fair value of certain unquoted assets (see Note 14.e). The expected cost of and changes in provisions and contingent liabilities (see Note 14.s). Since these estimates were made on the basis of the best information available at the reporting date on the items analysed, future events might make it necessary to change these estimates (upwards or downwards) in coming years. Changes in accounting estimates would be applied prospectively, recognising the effects of the change in estimates in the related consolidated income statements. With regard to the impairment losses on certain financial instruments and on the assets acquired in settlement of debts, it is important to note the entry into force of Bank of Spain Circular 3/2010, of 29 June, on 30 September The aforementioned Circular introduced an amendment to Bank of Spain Circular 4/2004 and subsequent amendments thereto relating to the allowances or provisions for these impairment losses to be recognised and to the allowances or provisions for the impairment losses on the assets acquired in settlement of debts to be recognised by Spanish credit institutions. The Bank of Spain amended and updated certain parameters established in Annex IX of the aforementioned Circular to adapt them to the experience and information of the Spanish banking sector as a whole in response to the conditions arising from the financial and economic crisis in recent years. 11

13 a) Changes in accounting policies There were no changes in accounting policies with respect to the consolidated balance sheet at 1 January 2009 affecting the consolidated financial statements for 2010 and 2009, other than those arising from the standards in force described in Note 2.c. b) Errors and changes in accounting estimates No corrections of material errors relating to prior years were made in 2010 and 2009 and there were no changes in accounting estimates affecting those years or which might have an impact on future years. 4. Allocation of net profit for the year The proposed allocation of the net profit of Bilbao Bizkaia Kutxa for 2010 that the Board of Directors of the Parent will submit for approval at the General Assembly is as follows: Thousands of Euros 2010 Allocation to: Voluntary reserves 162,345 Welfare fund 69,577 Allocated profit 231,922 Net profit for the year 231,922 The profits or losses of the subsidiaries composing the Group will be allocated as approved at their respective Annual General Meetings. 5. Business segment reporting a) Business segments The Group engages mainly in Retail Banking and there are no other salient business lines requiring disclosure and detailed information on their operations, as if each line of business were an autonomous business and had its own separate equity. b) Geographical segments Similarly, there are no significant geographical differences in the area in which the Group operates (Bizkaia and the rest of Spain) that would require segmented reporting by geographical area. 12

14 6. Minimum ratios Capital management objectives, policies and processes Bank of Spain Circular 3/2008, of 22 May, applicable to credit institutions, on the calculation and control of minimum capital requirement, and subsequent amendments thereto, regulates the minimum capital requirements for Spanish credit institutions -both as stand-alone entities and as consolidated groups- and the criteria for calculating them, as well as the various internal capital adequacy assessment processes they should have in place and the public information they should disclose to the market. This Circular implements, for credit institutions, the legislation on capital and consolidated supervision of financial institutions, which was contained in Law 36/2007, of 16 November, amending Law 13/1985, of 25 May, on the investment ratios, capital and reporting requirements of financial intermediaries, and other financial regulations, and which also includes Royal Decree 216/2008, of 15 February, on the capital of financial institutions. Bank of Spain Circular 3/2008 represents the adaptation of Spanish legislation to Directive 2006/48/EC of the European Parliament and of the Council, of 14 June 2006, and Directive 2006/49/EC of the European Parliament and of the Council, of 14 June 2006, in line with the principles of the New Capital Accord of the Basel Committee on Banking Supervision ( Basel II ). In the international arena, a process is under way to design a new capital framework known as Basel III, which is expected to come into force at the beginning of Its main objective is to increase and enhance the quality of the capital held by entities in order to cover the possible losses arising from their business performance. Other important new features relating to Basel III are the inclusion of specific liquidity ratios and a leverage ratio. In Spain, Bank of Spain Circular 3/2008, of 22 May, establishes the elements that should be classified as capital for the purpose of compliance with the minimum capital requirements set forth therein. Under this Circular, capital is classified into Tier 1, Tier 2 and Tier 3 capital; it differs from the capital calculated in accordance with EU- IFRSs, since the Circular considers certain items as capital and establishes certain mandatory deductions from capital which are not envisaged under EU-IFRSs. Also, the consolidation and measurement bases to be applied to investees for the purpose of calculating the Group s minimum capital requirements differ, pursuant to current regulations, from those used in the preparation of these consolidated financial statements, which also gives rise to differences in the calculation of capital under Bank of Spain regulations and EU-IFRSs. Bank of Spain Circular 9/2010 was also approved in 2010, the main purpose of which is to clarify and explain certain aspects of Circular 3/2008. The Group s management of its capital, as far as conceptual definitions are concerned, is in keeping with Bank of Spain Circular 3/2008. Accordingly, the Group considers eligible capital to be that specified in Rule Eight of Bank of Spain Circular 3/2008. The minimum capital requirements established by Bank of Spain Circular 3/2008 are calculated by reference to the Group s exposure to credit and dilution risk (on the basis of the assets, obligations and other memorandum items that present these risks, having regard to their amounts, characteristics, counterparties, guarantees, etc.), to counterparty risk and position and settlement risk in the trading book, to foreign exchange and gold position risk (on the basis of the overall net foreign currency position and net gold position), and to operational risk. Additionally, the Group is subject to compliance with the risk concentration limits and the requirements concerning internal corporate governance, internal capital adequacy assessment, interest rate risk measurement and disclosure of public information to the market established in Bank of Spain Circular 3/2008. With a view to ensuring that the aforementioned objectives are met, the Group performs an integrated management of these risks in accordance with the policies outlined above. In addition to strict compliance with current solvency regulations, the Group has a capital policy in place that is a fundamental feature of its risk management policy. Accordingly, it considers that the Group s risk profile depends 13

15 on striking a balance between its capital base, the risks assumed in the course of its business and the infrastructure set up to manage these risks. As a result of the importance the Group lends to its capital policy, its solvency position is exceptionally high compared to other entities in the industry, and is mainly composed of core capital. The Group s desire to maintain a level of solvency significantly above the legally enforceable minimum is evidenced by the adoption of a capital target for this purpose. Putting this policy into practice involves two different types of action: firstly, managing eligible capital and its various sources of funding and secondly, including the level of use of capital as a consideration in the qualifying criteria for different types of risk. The implementation of this policy is overseen by monitoring the Entity s solvency position on an ongoing basis and by forecasting future trends in the position using a base scenario that includes the assumptions most likely to be met over the next three years, and various stress scenarios designed to evaluate the Group s financial capacity to overcome extremely adverse situations of different kinds. Accordingly, the Entity considers capital and the capital requirements established by the aforementioned regulations as a cornerstone of its Group management activity, affecting, inter alia, investment decisions and transaction viability analyses, the strategy relating to profit distribution by the subsidiaries and issuances by the Entity and the Group. Following is a detail, classified into Tier 1 and Tier 2 capital, of the Group s capital at 31 December 2010 and 2009, calculated in accordance with Bank of Spain Circular 3/2008, of 22 May, which, as indicated above, coincides with the concept of capital for management purposes at consolidated level: 14

16 Tier 1 capital Endowment fund Eligible reserves 3,231,659 2,950,100 of which: Non-controlling interests 28,518 27,397 Eligible profit for the year 188, ,578 Other 2,000 2,000 Intangible assets - (67,447) Allocation to Tier 1 capital of 50% of other deductions (30,995) (72,827) 3,202,682 2,811,844 Tier 2 capital Valuation adjustments for valuation of available-for-sale securities 168, ,501 Asset revaluation reserves 78,514 79,320 General coverage related to exposures under the standardised approach 135, ,122 Non-controlling interests relating to non-voting shares 1,569 1,569 Welfare fund 59,468 65,807 Subordinated debt 524, ,290 Allocation to Tier 2 capital of 50% of other deductions (30,995) (72,828) 936,441 1,449,781 Total Group capital 4,139,123 4,261,625 At 31 December 2010 and 2009, and throughout these years, the Group s eligible capital exceeded the minimum required under the regulations in force at those dates by EUR 2,600,967 thousand and EUR 2,725,475 thousand, respectively. At 31 December 2010, the capital ratio was 21.5% (31 December 2009: 22.2%) and the Tier 1 ratio was 16.7% (31 December 2009: 14.6%). In January 2011 the Ministry of Economy and Finance published its project for preparing the Plan for Strengthening the Financial Sector which aims, inter alia, to establish certain minimum requirements for core capital, in advance of those established by Basel III, to be met before autumn At the date of preparation of these consolidated financial statements, this plan had yet to pass through the corresponding implementing legislation. However, at 31 December 2010, the BBK Group s core capital ratio was 16.8% and its Tier 1 capital ratio was 16.7% (including the assets and liabilities of CajaSur (see Notes 1.2 and 13), these ratios would be 10.3% and 10.7%, respectively), exceeding the foreseeable minimum requirements. Minimum reserve ratio Monetary Circular 1/1998, of 29 September, which came into force on 1 January 1999, repealed the ten-year cash ratio and replaced it with the minimum reserve ratio (which requires minimum balances to be held at the Bank of Spain). At 31 December 2010 and 2009, and throughout 2010 and 2009, the Group entities met the minimum reserve ratio required by the applicable Spanish legislation. 15

17 The cash amount that the Group held in the Bank of Spain account for these purposes amounted to EUR 77,602 thousand at 31 December 2010 (31 December 2009: EUR 388,296 thousand). However, the requirement on the various Group companies subject to this ratio to maintain the balance required by applicable regulations to meet the aforementioned minimum reserve ratio is calculated on the average daily ending balance held by each Group company in this account over the maintenance period. 7. Remuneration of directors and senior executives of the Parent a) Remuneration of directors The remuneration relating to attendance fees and per diems received by the Board members, solely in their capacity as directors of the Parent, amounted to EUR thousand in 2010 (2009: EUR thousand). Appendix III to these notes contains an itemised detail of this remuneration. The remuneration received by the Parent s directors acting on behalf of the Parent at the Board of Directors Meetings of Group investees amounted to EUR 1 thousand in b) Remuneration of senior executives of the Parent For the purpose of preparing these consolidated financial statements, at 31 December 2010 senior executives included 16 people, comprising the members of the Chairman s Committee and the Business Committee. A member of the Board of Directors who represents the employees is also deemed to be a senior executive for this purpose. The following table shows the remuneration earned by the senior executives of the Parent: Short-term remuneration 3,594 3,602 Post-employment benefits ,960 4, Agency agreements The Entity has no agency agreements nor has it granted any powers to other entities or individuals for them to act vis-á-vis customers on its behalf. 9. Investments in the share capital of credit institutions As required by Article 20 of Royal Decree 1245/1995, of 14 July, the Group did not hold any ownership interests of more than 5% in the share capital or voting power of Spanish or foreign credit institutions at 31 December Environmental impact The Group s global operations are governed, inter alia, by laws on environmental protection (environmental laws) and on worker safety and health (occupational safety laws). The Group considers that it substantially complies with these laws and that it has procedures in place designed to encourage and ensure compliance therewith. 16

18 The Group has adopted the appropriate measures relating to environmental protection and improvement and the minimisation, where appropriate, of the environmental impact and complies with current legislation in this respect. In 2010 and 2009, the Group did not deem it necessary to recognise any provision for environmental risks and charges as, in the opinion of the Parent s Board of Directors, there are no contingencies in this connection that might have a significant effect on these financial statements. 11. Deposit Guarantee Fund The Parent participates in the Deposit Guarantee Fund. The contributions made by the Group to the Deposit Guarantee Fund amounted to EUR 12,343 thousand in 2010 (2009: EUR 5,069 thousand) and the related expense was recognised under Other Operating Expenses in the accompanying consolidated income statements (see Note 50). 12. Audit fees In 2010 and 2009, the fees for audit and other services provided by the auditor of the Group s consolidated financial statements, Deloitte, S.L., and by companies belonging to the Deloitte network, and the fees for services billed by the auditors of the separate financial statements of the companies included in the scope of consolidation and by the companies related to these auditors, were as follows: Services Provided by the Financial Auditors and Related Companies Audit services Other attest services 2 - Total audit and related services Tax advisory services 6 2 Other services 985 1,047 Total professional services 991 1,049 At 31 December 2010 and 2009, no subsidiary had been audited by any audit firm other than the firm auditing the Group s consolidated financial statements. 17

19 13. Events after the reporting period Transfer of CajaSur s assets and liabilities to BBK Bank, S.A.U. (see Note 1.2) As described in Note 1.2., at its meeting of 15 July 2010, the Governing Committee of the Fund for Orderly Bank Restructuring ( FROB ), as part of the orderly restructuring process of Caja de Ahorros y Monte de Piedad de Córdoba ( CajaSur ), prepared the CajaSur restructuring plan, which envisaged the transfer en bloc of CajaSur s assets and liabilities to BBK Bank CajaSur, S.A.U. (hereinafter the Bank ), a newly-created subsidiary of Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea. The public deed relating to the aforementioned transfer en bloc of assets and liabilities was registered in the Córdoba Mercantile Register on 1 January 2011, which constitutes the effective date of the aforementioned transfer. On the same date, Bilbao Bizkaia Kutxa made a contribution to the capital of BBK Bank CajaSur, S.A.U. of EUR 800,000 thousand. On 11 January 2011, the amount of the APS liquidity loan granted by the FROB (see Note 1.2), which amounted to EUR 392,000 thousand, was received. The excess of the acquisition price over the net fair value of CajaSur s assets, liabilities and contingent liabilities at 1 January 2001 will be recognised as goodwill with a negative value of EUR 205,501 thousand (the transfer price paid being EUR 1). At the transfer date, the fair value of loans and receivables, which represent most of the transferred assets, amounted to EUR 12,008,788 thousand and their contractual value was EUR 13,088,053 thousand. The best estimate at the transfer date of the contractual flows not expected to be received amounted to EUR 1,079,265 thousand. Following is a detail of the fair value of CajaSur s assets, liabilities and contingent liabilities at the transfer date, in thousands of euros: Fair Value ASSETS Available-for-sale financial assets 2,127,247 Loans and receivables 12,008,788 Non-current assets held for sale 417,327 Investments 27,560 Other assets 2,332,844 TOTAL ASSETS 16,913,766 LIABILITIES Financial liabilities at amortised cost 16,085,451 Provisions 548,187 Other liabilities 485,629 TOTAL LIABILITIES 17,119,267 NET VALUE (205,501) The State Aid Procedure for the Restructuring of CajaSur approved by the European Commission establishes as a necessary condition for receiving the promised aid (see Note 1.2) that CajaSur must undertake a restructuring 18

20 process involving the reduction of the installed capacity and, accordingly, the adjustment of operating costs to ensure the viability of the business plan. The agreement relating to the workforce of the financial business was formalised at the beginning of January 2011 with the signing thereof by BBK Bank CajaSur, S.A.U. and all of the Entity s trade union representatives. The aim of the agreement is to be able to undertake the workforce adjustments required to make the Entity viable and meet the requirements of the State Aid Procedure mentioned above. This agreement affects the workforce of the financial business and will be implemented using various measures to adapt the workforce: termination programmes, temporary layoff measures, reduced working hours and geographical mobility. A maximum of 668 employees may be involved in these measures. Certain commitments have been assumed as a result of the restructuring plan. Estimates have been made, on the basis of the information available at the date of preparation of these consolidated financial statements, on these commitments which include, inter alia, the reduction of excess personnel mentioned in the preceding paragraph, the restructuring of the installed capacity of BBK Bank CajaSur S.A.U., the cancellation of in-force contracts, the commitments assumed in the welfare projects and other contingencies. Consequently, a provision amounting to EUR 260,928 thousand was recognised for these commitments at separate and consolidated level. The costs associated with the transaction recognised in CajaSur s 2010 income statement were not material. If the effective date of the transfer of assets and liabilities had been 1 January 2010, the pro forma consolidated net interest income and the pro forma consolidated gross income would have been EUR 253,054 thousand and EUR 312,020 thousand higher, respectively, than the amounts reflected in the BBK Group s 2010 consolidated income statement. However, the pro forma consolidated profit before tax and the pro forma consolidated profit for 2010 would not have differed significantly from those reflected in the 2010 consolidated income statement since Group management considers that the adjustments required to reflect the fair values of the assets and liabilities acquired would not have been recognised in the pro forma income statement. 14. Accounting policies and measurement bases The principal accounting policies and measurement bases applied in preparing these consolidated financial statements were as follows: a) Going concern principle The consolidated financial statements were prepared on the assumption that the Group entities will continue as going concerns in the foreseeable future. Therefore, the application of the accounting policies is not aimed at determining the value of consolidated equity with a view to its full or partial transfer or the amount that would result in the event of liquidation. b) Accrual basis of accounting These consolidated financial statements, except the consolidated statements of cash flows, where appropriate, were prepared on the basis of the actual flow of the related goods and services, regardless of the payment or collection date. c) Other general principles The consolidated financial statements were prepared on a historical cost basis, adjusted by the revaluation of land and buildings made on 1 January 2004, as discussed in Note 14.q, and available-for-sale financial assets and financial assets and liabilities (including derivatives) measured at fair value. 19