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 2011, 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 62). In the event of a discrepancy, the Spanish-language version prevails.

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4 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 62). In the event of a discrepancy, the Spanish-language version prevails. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA AND SUBSIDIARIES (CONSOLIDATED GROUP) CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2011 AND 2010 () ASSETS (*) LIABILITIES (*) Cash and balances with central banks (Note 21) 508, ,891 Financial liabilities held for trading (Note 22)- 106,917 83,270 Trading derivatives 106,917 83,270 Financial assets held for trading (Note 22)- 209, ,504 Debt instruments 105, ,216 Other financial liabilities at fair value through profit or loss - - Other equity instruments - - Trading derivatives 103,759 84,288 Financial liabilities at amortised cost (Note 33)- 37,636,222 24,346,532 Memorandum item: Loaned or advanced as collateral (Note 41) - - Deposits from central banks 2,000,485 1,200,102 Deposits from credit institutions 2,104, ,826 Other financial assets at fair value through profit or loss (Note 23) 2,928 - Customer deposits 29,162,607 18,927,967 Debt instruments 2,928 - Marketable debt securities 3,319,755 2,447,389 Subordinated liabilities 584, ,192 Available-for-sale financial assets (Note 24)- 4,599,591 4,799,410 Other financial liabilities 464, ,056 Debt instruments 1,997,092 1,666,933 Other equity instruments 2,602,499 3,132,477 Changes in the fair value of hedged items in portfolio hedges of interest rate risk - - Memorandum item: Loaned or advanced as collateral (Note 41) 944,478 1,453,210 Hedging derivatives (Note 26) 21,293 38,056 Loans and receivables (Note 25)- 32,432,815 21,890,127 Loans and advances to credit institutions 533, ,957 Liabilities associated with non-current assets held for sale - - Loans and advances to customers 31,899,805 21,601,170 Memorandum item: Loaned or advanced as collateral (Note 41) 819, ,721 Liabilities under insurance contracts - - Held-to-maturity investments - - Provisions (Note 34)- 480, ,250 Provisions for pensions and similar obligations 181,992 93,358 Changes in the fair value of hedged items in portfolio hedges of interest rate risk - - Provisions for taxes and other legal contingencies 1,519 - Provisions for contingent liabilities and commitments 76,642 22,189 Hedging derivatives (Note 26) 495, ,728 Other provisions 220,709 45,703 Non-current assets held for sale (Note 27) 713,852 14,029 Tax liabilities (Note 31)- 271, ,561 Current 20,113 22,941 Investments (Note 28)- 482, ,447 Deferred 251, ,620 Associates 482, ,447 Welfare fund (Note 35) 142, ,361 Insurance contracts linked to pensions 89,780 - Other liabilities (Note 32) 77,270 59,147 Reinsurance assets - - TOTAL LIABILITIES 38,736,299 25,133,177 Tangible assets (Note 29)- 822, ,015 Property, plant and equipment- 732, ,897 EQUITY For own use 626, ,618 Leased out under an operating lease Own funds (Note 36)- 3,522,479 3,381,009 Assigned to welfare projects 104, ,835 Endowment fund Investment property- 90,214 66,118 Registered Memorandum item: Acquired under a finance lease - - Reserves 3,302,311 3,123,193 Accumulated reserves (losses) 3,217,291 3,018,971 Intangible assets (Note 30)- 303,369 - Reserves (losses) of entities accounted for using the equity method 85, ,222 Goodwill 301,457 - Profit for the year attributable to the Parent 220, ,798 Other intangible assets 1,912 - Tax assets (Note 31)- 1,062, ,313 Valuation adjustments (Note 37)- 275, ,896 Current 46,273 27,252 Available-for-sale financial assets 273, ,855 Deferred 1,015, ,061 Cash flow hedges 53 (15,843) Exchange differences 2 - Other assets (Note 32)- 847, ,065 Entities accounted for using the equity method 1,213 33,884 Inventories 818, ,241 Other 29,407 16,824 Non-controlling interests (Note 38)- 35,909 31,447 Valuation adjustments (1) (26) Other 35,910 31,473 TOTAL EQUITY 3,833,588 3,978,352 TOTAL ASSETS 42,569,887 29,111,529 TOTAL LIABILITIES AND EQUITY 42,569,887 29,111,529 MEMORANDUM ITEMS Contingent liabilities (Note 41) 1,606,308 1,350,836 Contingent commitments (Note 42) 4,620,911 4,264,515 The accompanying Notes 1 to 62 and Appendices I to III are an integral part of the consolidated balance sheet at 31 December (*) Presented for comparison purposes only.

5 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 62). In the event of a discrepancy, the Spanish-language version prevails. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA AND SUBSIDIARIES (CONSOLIDATED GROUP) CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 () (Debit) Credit (*) INTEREST AND SIMILAR INCOME (Note 43) 1,129, ,868 INTEREST EXPENSE AND SIMILAR CHARGES (Note 44) (627,455) (243,620) REFUNDABLE RETURN ON EQUITY - - NET INTEREST INCOME 502, ,248 INCOME FROM EQUITY INSTRUMENTS (Note 45) 138, ,907 SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD (Note 36) 29,116 30,297 FEE AND COMMISSION INCOME (Note 46) 233, ,468 FEE AND COMMISSION EXPENSE (Note 47) (25,691) (19,097) GAINS/(LOSSES) ON FINANCIAL ASSETS AND LIABLITIES (Net) (Note 48): 39,420 63,944 Held for trading (Note 22) (10,975) (35,642) Other financial assets at fair value through profit or loss Financial instruments not measured at fair value through profit or loss 52,186 99,586 Other (2,001) - EXCHANGE DIFFERENCES (Net) (Note 49) 18,137 36,647 OTHER OPERATING INCOME (Note 50): 223,375 64,553 Income from insurance and reinsurance contracts issued 48,824 - Sales and income from the provision of non-financial services 147,950 44,344 Other 26,601 20,209 OTHER OPERATING EXPENSES: (193,231) (63,125) Expenses of insurance and reinsurance contracts (Note 50) (45,895) - Changes in inventories (Note 51) (114,472) (47,526) Other (Note 51) (32,864) (15,599) GROSS INCOME 965, ,842 ADMINISTRATIVE EXPENSES: (492,649) (295,335) Staff costs (Note 52) (350,550) (207,037) Other general administrative expenses (Note 53) (142,099) (88,298) DEPRECIATION AND AMORTISATION CHARGE (Note 54) (33,028) (27,448) PROVISIONS (Net) (Note 55) (1,974) 6,777 IMPAIRMENT LOSSES ON FINANCIAL ASSETS (Net) (Note 56): (178,789) (151,198) Loans and receivables (Note 25) (160,401) (112,826) Other financial instruments not measured at fair value through profit or loss (Note 24) (18,388) (38,372) PROFIT FROM OPERATIONS 258, ,638 IMPAIRMENT LOSSES ON OTHER ASSETS (Net) (Note 56): (56,927) (75,893) Goodwill and other intangible assets (31) (63,069) Other assets (56,896) (12,824) GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE (Note 57) 10,640 13,830 GAINS FROM BARGAIN PURCHASES ARISING IN BUSINESS COMBINATIONS - - GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS (Note 58) (416) (30,880) PROFIT BEFORE TAX 212, ,695 INCOME TAX (Note 39) 13,926 28,662 MANDATORY TRANSFER TO WELFARE FUND - - PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS 226, ,357 PROFIT/(LOSS) FROM DISCONTINUED OPERATIONS (Net) - - CONSOLIDATED PROFIT FOR THE YEAR 226, ,357 PROFIT ATTRIBUTABLE TO THE PARENT 220, ,798 PROFIT ATTRIBUTABLE TO NON-CONTROLLING INTERESTS (Note 59) 6,032 4,559 The accompanying Notes 1 to 62 and Appendices I to III are an integral part of the consolidated income statement for (*) Presented for comparison purposes only.

6 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 62). In the event of a discrepancy, the Spanish-language version prevails. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA AND SUBSIDIARIES (CONSOLIDATED GROUP) CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 () (*) Consolidated profit for the year 226, ,357 Other recognised income and expense (290,696) (327,824) Available-for-sale financial assets- (380,449) (523,168) Revaluation gains (losses) (331,563) (475,093) Amounts transferred to income statement (48,886) (48,075) Other reclassifications - - Cash flow hedges- 22,078 73,288 Revaluation gains (losses) 22,078 73,288 Amounts transferred to income statement - - Amounts transferred to initial carrying amount of hedged items - - Other reclassifications - - Hedges of net investments in foreign operations- - - Revaluation gains (losses) - - Amounts transferred to income statement - - Other reclassifications - - Exchange differences- 3 - Revaluation gains (losses) 3 - Amounts transferred to income statement - - Other reclassifications - - Entities accounted for using the equity method- (32,199) (3,910) Revaluation gains (losses) (32,199) (3,910) Amounts transferred to income statement - - Other reclassifications - - Non-current assets held for sale- - - Revaluation gains (losses) - - Amounts transferred to income statement - - Other reclassifications - - Actuarial gains (losses) on pension plans - - Other recognised income and expense - - Income tax 99, ,966 TOTAL RECOGNISED INCOME AND EXPENSE (64,514) (65,467) Attributable to the Parent (70,546) (70,026) Attributable to non-controlling interests 6,032 4,559 The accompanying Notes 1 to 62 and Appendices I to III are an integral part of the consolidated statement of recognised income and expense for the year ended 31 December (*) Presented for comparison purposes only.

7 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 62). In the event of a discrepancy, the Spanish-language version prevails. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA AND SUBSIDIARIES (CONSOLIDATED GROUP) CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 () Endowment Fund Share Premium Accumulated Reserves (Losses) Reserves Reserves (Losses) of Entities Accounted for Using the Equity Method Equity Attributable to the Parent Own Funds Other Equity Instruments Less: Treasury Shares Profit for the Year Attributable to the Parent Less: Dividends and Remuneration Total Own Funds Valuation Adjustments Total Ending balance at 31 December _ - 3,018,971_ 104,222_ ,798-3,381, ,896 3,946,905 31,447_ 3,978,352_ Adjustments due to changes in accounting policies Adjustments due to errors Adjusted beginning balance 18_ - 3,018,971_ 104,222_ ,798-3,381, ,896 3,946,905 31,447_ 3,978,352_ Total recognised income and expense , ,150 (290,696) (70,546) 6,032_ (64,514)_ Transfers between equity items ,910_ (23,689)_ - - (188,221) Increases (decreases) due to business combinations Discretionary transfer to welfare fund (69,577) - (69,577) - (69,577) - (69,577)_ Other increases (decreases) in equity - - (13,590) 4, (9,103) - (9,103) (1,570)_ (10,673)_ Other changes in equity ,320_ (19,202)_ - - (257,798) - (78,680) - (78,680) (1,570)_ (80,250)_ Ending balance at 31 December _ - 3,217,291_ 85,020_ ,150-3,522, ,200 3,797,679 35,909_ 3,833,588_ Non- Controlling Interests Total Equity Reserves Equity Attributable to the Parent (*) Own Funds Endowment Fund Share Premium Accumulated Reserves (Losses) Reserves (Losses) of Entities Accounted for Using the Equity Method Other Equity Instruments Less: Treasury Shares Profit for the Year Attributable to the Parent Less: Dividends and Remuneration Total Own Equity Valuation Adjustments Total Ending balance at 31 December _ - 2,828,870_ 81,868_ ,661_ - 3,199,417_ 893,720_ 4,093,137_ 30,305_ 4,123,442_ Adjustments due to changes in accounting policies Adjustments due to errors Adjusted beginning balance 18_ - 2,828,870_ 81,868_ ,661_ - 3,199,417_ 893,720_ 4,093,137_ 30,305_ 4,123,442_ Total recognised income and expense ,798_ - 257,798_ (327,824)_ (70,026)_ 4,559_ (65,467)_ Transfers between equity items ,345_ 22,354_ - - (208,699)_ Increases (decreases) due to business combinations (5)_ (5)_ Discretionary transfer to welfare fund (79,962)_ - (79,962)_ - (79,962)_ - (79,962)_ Other increases (decreases) in equity - - 3, ,756-3,756 (3,412)_ 344_ Other changes in equity ,101_ 22,354_ - - (288,661)_ - (76,206)_ - (76,206)_ (3,417)_ (79,623)_ Ending balance at 31 December _ - 3,018,971_ 104,222_ ,798_ - 3,381,009_ 565,896_ 3,946,905_ 31,447_ 3,978,352_ Non- Controlling Interests (*) Total Equity (*) The accompanying Notes 1 to 62 and Appendices I to III are an integral part of the consolidated statement of changes in total equity for the year ended 31 December (*) Presented for comparison purposes only.

8 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 62). In the event of a discrepancy, the Spanish-language version prevails. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA AND SUBSIDIARIES (CONSOLIDATED GROUP) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 () (*) A) CASH FLOWS FROM OPERATING ACTIVITIES 483,361 (556,982) Consolidated profit for the year 226, ,357 Adjustments made to obtain the cash flows from operating activities Depreciation and amortisation charge 33,028 27,448 Other adjustments 130, , , ,021 Net increase/decrease in operating assets: Financial assets held for trading (31,035) (70,943) Other financial assets at fair value through profit or loss 2,987 - Available-for-sale financial assets 1,779,031 (277,158) Loans and receivables 1,210,311 (245,234) Other operating assets (208,784) (88,909) 2,752,510 (682,244) Net increase/decrease in operating liabilities: Financial liabilities held for trading 17,783 5,141 Other financial liabilities at fair value through profit or loss - - Financial liabilities at amortised cost (2,360,986) (175,920) Other operating liabilities (315,271) (127,175) (2,658,474) (297,954) Income tax recovered/paid - (162) B) CASH FLOWS FROM INVESTING ACTIVITIES 159,437 (31,749) Payments Tangible assets (36,139) (17,179) Intangible assets (1,210) (2,492) Investments (6,292) (35,995) Other business units - - Non-current assets held for sale and associated liabilities - - Held-to-maturity investments - - Other payments related to investing activities - - (43,641) (55,666) Proceeds Tangible assets 27,841 21,518 Intangible assets Investments 12,261 1,079 Other business units 66,612 - Non-current assets held for sale and associated liabilities 84,976 1,320 Held-to-maturity investments 11,064 - Other proceeds related to investing activities ,078 23,917 The accompanying Notes 1 to 62 and Appendices I to III are an integral part of the consolidated statement of cash flows for (*) Presented for comparison purposes only.

9 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 62). In the event of a discrepancy, the Spanish-language version prevails. BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA AND SUBSIDIARIES (CONSOLIDATED GROUP) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2011 AND 2010 () (*) C) CASH FLOWS FROM FINANCING ACTIVITIES (450,000) - Payments Dividends - - Subordinated liabilities - - Redemption of own equity instruments - - Acquisition of own equity instruments - - Other payments related to financing activities (450,000) - (450,000) - Proceeds Subordinated liabilities - - Issuance of own equity instruments - - Disposal of own equity instruments - - Other proceeds related to financing activities D) EFFECT OF FOREIGN EXCHANGE RATE CHANGES - - E) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C+D) 192,798 (588,731) F) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 580, ,625 G) CASH AND CASH EQUIVALENTS AT END OF YEAR 773, ,894 MEMORANDUM ITEMS: COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR Cash 169, ,143 Cash equivalents at central banks 338,977 77,748 Other financial assets 264, ,003 Less: Bank overdrafts refundable on demand - - Total cash and cash equivalents at end of year 773, ,894 The accompanying Notes 1 to 62 and Appendices I to III are an integral part of the consolidated statement of cash flows for (*) Presented for comparison purposes only.

10 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 62). 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 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 Group operates through 791 branches, 590 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 2011, the Parent s total assets, equity and profit for the year represented 67.86%, 95.03% and 90.36%, respectively, of the related Group figures (31 December 2010: 98.11%, 88.31% and 89.96%, 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 2011 and 2010, 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):

11 a) Condensed separate balance sheets at 31 December 2011 and 2010: Cash and balances with central banks 304, ,883 Financial assets held for trading 195, ,508 Available-for-sale financial assets 1,123,595 1,823,521 Loans and receivables 22,411,776 22,307,649 Hedging derivatives 271, ,728 Non-current assets held for sale 37,775 14,029 Investments 3,834,033 3,068,292 Tangible assets 492, ,647 Intangible assets - - Tax assets 196, ,226 Other assets 21,940 18,532 Total assets 28,888,480 28,562,015 Financial liabilities held for trading 100, ,273 Financial liabilities at amortised cost 24,604,436 24,406,728 Hedging derivatives 9,677 16,052 Provisions 251, ,102 Tax liabilities 77,830 70,486 Welfare fund 142, ,361 Other liabilities 59,200 55,754 Total liabilities 25,245,542 25,048,756 Own funds: 3,292,510 3,163,155 Capital or endowment fund Reserves 3,093,560 2,931,215 Net profit for the year 198, ,922 Valuation adjustments 350, ,104 Total equity 3,642,938 3,513,259 Total liabilities and equity 28,888,480 28,562,015 Contingent liabilities 1,362,148 1,520,211 Contingent commitments 4,780,794 4,698,467 2

12 b) Condensed separate income statements for the years ended 31 December 2011 and 2010: Interest and similar income 629, ,298 Interest expense and similar charges (348,518) (244,175) Net interest income 280, ,123 Income from equity instruments 144, ,739 Fee and commission income 155, ,500 Fee and commission expense (17,701) (17,332) Gains/(losses) on financial assets and liabilities (net) 8,086 57,908 Exchange differences (net) 17,882 36,648 Other operating income 12,314 12,827 Other operating expenses (16,138) (14,244) Gross income 586, ,169 Administrative expenses (283,286) (282,586) Depreciation and amortisation charge (19,248) (26,265) Provisions (net) (18,613) 7,743 Impairment losses on financial assets (net) (77,935) (129,319) Profit from operations 187, ,742 Impairment losses on other assets (net) (446) (38,610) Gains/(losses) on disposal of assets not classified as noncurrent assets held for sale 9,250 13,640 Gains/(losses) on non-current assets held for sale not classified as discontinued operations 158 (30,880) Profit before tax 196, ,892 Income tax 2,829 11,030 Profit for the year from continuing operations 198, ,922 Net profit for the year 198, ,922 3

13 c.1) Separate statements of changes in equity Condensed separate statements of recognised income and expense for the years ended 31 December 2011 and 2010: Net Profit for the year 198, ,922 Other recognised income and expense: 324 (98,087) Available-for-sale financial assets Revaluation gains/(losses) 23,740 (69,012) Amounts transferred to income statement (16,765) (50,815) 6,975 (119,827) 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 (6,651) 21,740 Total income and expense for the year 199, ,835 c.2) Separate statements of changes in equity Condensed separate statements of changes in total equity for the years ended 31 December 2011 and 2010: Endowment Fund Own Funds Net profit for Reserves the Year Total Own Funds Valuation Adjustments Total Equity Ending balance at 31/12/ ,931, ,922 3,163, ,104 3,513,259 Adjustments Adjusted beginning balance 18 2,931, ,922 3,163, ,104 3,513,259 Total recognised income and expense , , ,256 Other changes - 162,345 (231,922) (69,577) - (69,577) Ending balance at 31/12/ ,093, ,932 3,292, ,428 3,642,938 4

14 Endowment Fund Own Funds Net profit for Reserves 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 d) Condensed separate statements of cash flows for the years ended 31 December 2011 and 2010: Cash flows from operating activities: Net profit for the year 198, ,922 Adjustments made to obtain the cash flows from operating activities 105, ,672 Net increase/decrease in operating assets 568,249 (649,773) Net increase/decrease in operating liabilities 101,294 (329,275) Income tax recovered/paid - (162) 974,458 (607,616) Cash flows from investing activities: Payments (848,052) (22,536) Proceeds 74,790 20,686 (773,262) (1,850) Cash flows from financing activities: Payments - - Proceeds Effect of foreign exchange rate changes - - Net increase/decrease in cash and cash equivalents 201,196 (609,466) Cash and cash equivalents at beginning of year 367, ,352 Cash and cash equivalents at end of year 569, ,886 5

15 1.2. Most significant changes in the scope of consolidation Set forth below are the most significant changes in the scope of consolidation in 2011 and Intervention of CajaSur by the Bank of Spain and transfer of assets and liabilities to BBK Bank CajaSur, S.A. (Sole-Shareholder Company) 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 envisaged the transfer of all of their assets and liabilities to a subsidiary of BBK. The Restructuring Plan was submitted for the approval or non-opposition of various authorities which had been obtained by 2010 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, BBK, 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 thousand 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 it will have 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 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 would 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. 6

16 The General Assembly of BBK 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 transfer en bloc 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 was BBK Bank CajaSur, S.A.U., whose sole shareholder is BBK. - 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. 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, BBK Bank Cajasur, S.A.U. received the APS liquidity loan of EUR 392,000 thousand granted by the FROB. At the date of preparation of these consolidated financial statements for 2011, the APS loan, amounting to EUR 5,122 thousand, was recognised under Financial Liabilities at Amortised Cost Other Financial Liabilities in the accompanying consolidated balance, had an outstanding balance of EUR 5,122 thousand. Current legislation stipulates a period of one year from the completion of the transfer en bloc of assets and liabilities for the final accounting for the business combination. Accordingly, in 2011 the Group reviewed, analysed and updated the fair values of the acquired assets and liabilities. As the final result of this process, the consolidated financial statements at 31 December 2011 include the fair value of both the acquired assets and liabilities and of the goodwill associated with the business combination. Since the transfer price paid was EUR 1, the excess of the acquisition price over the definitive net fair value of CajaSur s assets, liabilities and contingent liabilities at 1 January 2001 was recognised as goodwill amounting to 7

17 EUR 301,457 thousand. This goodwill reflects mainly the franchise value of CajaSur s customers in Andalusia. This goodwill was deemed non-deductible for tax purposes. At the transfer date, the fair value of loans and receivables, which represented 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 324,557 Investments 27,560 Other assets 2,297,965 TOTAL ASSETS 16,786,117 LIABILITIES Financial liabilities at amortised cost 16,085,451 Provisions 554,087 Other liabilities 448,036 TOTAL LIABILITIES 17,087,574 NET VALUE (301,457) The State Aid Procedure for the Restructuring of CajaSur approved by the European Commission established as a necessary condition for receiving the promised aid that CajaSur must undertake a restructuring process involving the reduction of the installed capacity and, accordingly, an 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 Bank s trade union representatives. The aim of the agreement is to be able to undertake the workforce adjustments required to make the Bank 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. At 31 December 2011, 510 employees had availed themselves of these measures. In 2011 four agreements were entered into by the workers' representatives of the subsidiaries of BBK Bank CajaSur, S.A.U. and the representatives of the entity regarding the employees engaged in the non-financial business. As a result of these agreements, the employment relationship of 59 employees (of a maximum of 72) was terminated within the framework of the restructuring, reduction of productive capacity and orderly liquidation of the aforementioned subsidiaries. 8

18 Also, in relation to the workforce of Fundación CajaSur, an agreement was executed in 2011 terminating the employment relationship with 57 employees (of a maximum of 57) within the framework of the restructuring, reduction of productive capacity and orderly liquidation of Fundación CajaSur. As a result of the envisaged restructuring plan, a series of obligations were undertaken, including, inter alia, the reduction of the excess staffing discussed in the preceding paragraphs, the restructuring of the installed capacity of BBK Bank CajaSur S.A.U., the termination of agreements then in force, the welfare project commitments assumed and other contingencies. Accordingly, at 2010 year-end a provision of EUR 260,928 thousand was recognised for the obligations acquired at the former CajaSur at individual and consolidated level, pursuant to the information available at that date. At 31 December 2011, certain amounts of this provision had been used, leaving an unused balance of EUR 116,466 thousand in connection with payments yet to be made in relation to the aforementioned obligations. All the references in these consolidated financial statements to transactions, balances or obligations prior to 31 December 2010 refer to matters arranged by the former CajaSur and must be understood within the framework of the transfer en bloc of assets and liabilities to BBK Bank CajaSur, S.A. (Sole-Shareholder Company). Other changes in the scope of consolidation The other changes in the scope of the Group's consolidation in 2011 and 2010 were as follows: - As part of the corporate restructuring arising as a result of the transfer en bloc of assets and liabilities to BBK Bank CajaSur, S.A. (Sole-Shareholder Company) (see this note), on 30 March, CajaSur Entidad de Seguros y Reaseguros, S.A. ( CajaSur Seguros ) (an entity majority-owned by the Group through its subsidiary Grupo de Empresas CajaSur, S.A.U.), Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. and Biharko Aseguradora Compañía de Seguros y Reaseguros, S.A. ( Biharko Vida and Biharko Aseguradora, respectively) (both Group investees) prepared a plan for the transfer en bloc of the assets and liabilities of CajaSur Seguros to Biharko Vida and Biharko Aseguradora. This plan provides for Biharko Vida and Biharko Aseguradora to receive the assets and liabilities of CajaSur Seguros by universal succession in exchange for the consideration of the net amount of the tax returns of EUR 62,784 thousand to be assumed by CajaSur Seguros, which will be paid in full directly to the shareholders of CajaSur Seguros, and will give rise to the dissolution without liquidation of CajaSur Seguros and, simultaneously, the transfer en bloc of its assets and liabilities, once all the conditions precedent stipulated in the transfer plan have been met. At the respective Annual General Meetings held on 17 June 2011, the shareholders of CajaSur Seguros, Biharko Vida and Biharko Aseguradora approved the transfer plan. At the date of preparation of these consolidated financial statements the aforementioned transfer plan had received the requisite authorisation from the Spanish National Competition Commission (CNC), the Directorate-General of Insurance and Pension Funds and the Ministry of Economy and Finance, and, accordingly, the transaction was completed. This transaction did not have a material effect on these consolidated financial statements. - On 31 March 2011, the directors of Comerciantes Reunidos del Sur, S.A., Establecimiento Financiero de Crédito ( Creusa ), a BBK Group company, resolved to propose to the shareholders at the company's Annual General Meeting that the company be liquidated and dissolved. At the Annual General Meeting held on 9 May 2011, the shareholders of Creusa ratified the proposal for the company to be liquidated and dissolved. The Parent (the majority shareholder through Grupo de Empresas CajaSur, S.A.U.) offered to purchase all the non-controlling interests in Creusa with the intention of transferring all of Creusa's assets and liabilities to BBK Bank CajaSur, S.A. (Sole-Shareholder Company) for their carrying amount. At the date 9

19 of preparation of these consolidated financial statements, all of Creusa's assets and liabilities had been transferred to BBK Bank CajaSur, S.A. (Sole-Shareholder Company). This transaction did not have a material effect on these consolidated financial statements. - At the Universal Annual General Meeting of Grupo de Comunicación del Sur, S.L. held on 14 April 2011, the sole shareholder, Grupo de Empresas Cajasur, S.A.U., resolved to dissolve the company without liquidation. Subsequently, on 27 December 2011, the Group resolved to liquidate the company. This transaction did not have a material effect on these consolidated financial statements. - On 19 April 2011, the Group sold its 99.93% holding in Tienda de Calidad, S.A., which did not have a material effect on these consolidated financial statements. - In June 2011, after receiving the appropriate authorisation from the Ministry of Economy and Finance, the Group incorporated Banco Bilbao Bizkaia Kutxa, S.A.U. (currently Kutxabank, S.A.), with an initial capital of EUR 18,050 thousand (18,050 shares of EUR 1,000 par value each), which was paid in full. Its company object is to perform all kinds of activities, transactions and services specific to the banking business in general (see Note 1.3). - Through its investee Grupo de Empresas CajaSur, S.A.U., the Group had a 16.50% holding in the share capital of Banco Europeo de Finanzas, S.A. As a result of the transfer en bloc of assets and liabilities described elsewhere in this Note, pursuant to the bylaws of Banco Europeo de Finanzas, S.A., Grupo de Empresas CajaSur, S.A.U. did not meet the requirement of being an investee of an Andalusia savings bank. On 9 May 2011, the shareholders of Banco Europeo de Finanzas, S.A. resolved to reduce share capital by retiring all the shares of Grupo de Empresas CajaSur, S.A.U. and returning the contributions made by the Group investee. The value of the contributions to be returned was EUR 20,400 thousand. On 13 October 2011, the amendment of the bylaws of Banco Europeo de Finanzas, S.A. and the capital reduction for the aforementioned amount was executed in a public deed, after receiving the requisite authorisation from the Directorate General of the Treasury and Financial Policy. This transaction did not have a material effect on these consolidated financial statements. - On 30 June 2011, the Group investee Grupo de Empresas CajaSur, S.A.U. reduced capital by EUR 105,745 thousand in order to restore the balance between share capital and equity diminished by prior years' losses. This transaction did not have a material effect on these consolidated financial statements. - On 22 September 2011, the Group incorporated Tejares Activos Singulares, S.L.U. with a share capital of EUR 3 thousand, divided into 3 thousand shares of EUR 1 par value each. On 4 and 25 November 2011, the sole shareholder of Tejares Activos Singulares, S.L.U. increased capital twice, by EUR 10,000 thousand and EUR 35,000 thousand, respectively. Subsequently, on 30 December 2011, the Group increased the share capital of this company through the contribution of two land lots located in Córdoba for a total of EUR 26,316 thousand. - On 14 October 2011, the new sole shareholder of Inmobiliaria GEC Quermes, S.A.U. decided to change the company's name to the current one, namely CajaSur Inmobiliaria, S.A. (Sole-Shareholder Company). On 10 November 2011, the sole shareholder of CajaSur Inmobiliaria, S.A. (Sole-Shareholder Company) increased capital by EUR 10,000 thousand, which was fully subscribed and paid. - On 21 October 2011, the sole shareholder of Marketing Quality Management Sur, S.L. decided to change the company's name to the current one, namely Markemos, S.L.U. - On 20 December 2011, the resolutions to dissolve and liquidate GPS Pedregalejo, S.L. and GPS Alahurin Málaga, S.L., adopted by the sole shareholder at the respective Universal Annual General 10

20 Meetings held on 30 November 2011, were executed in public deeds. These transactions did not have a material effect on these consolidated financial statements. - 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 in this note, 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 an EUR 800,000 thousand capital increase at BBK Bank CajaSur, S.A.U Creation of Institutional Protection Scheme (SIP) by Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea, Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián - Gipuzkoa eta Donostiako Aurrezki Kutxa and Caja de Ahorros de Vitoria y Álava - Araba eta Gasteizko Aurrezki Kutxa On 14 June 2011, Banco Bilbao Bizkaia Kutxa, S.A. was incorporated in a public deed, as a private-law entity subject to the rules and regulations applicable to banks operating in Spain. Its initial capital was set at EUR 18,050,000 and paid in full, the sole shareholder being Bilbao Bizkaia Kutxa. On 22 December 2011, the company resolutions by which the Bank changed its former name, Banco Bilbao Bizkaia Kutxa, S.A., to Kutxabank, S.A. ( the Bank or Kutxabank ) were registered in the Bizkaia Mercantile Register. On 30 June 2011, the Boards of Directors of BBK, Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián ( Kutxa ), Caja de Ahorros de Vitoria y Álava ( Caja Vital ) and the Bank approved the integration agreement for the formation of a contractual consolidable group of credit institutions (Institutional Protection Scheme ("SIP")), the head of which would be the Bank, and which would also comprise BBK, Kutxa and Caja Vital (referred to collectively as the Savings Banks ). This integration agreement governed the elements configuring the new group, the group's and the Bank's governance, and the group's stability mechanisms. Also, the Boards of Directors of the Savings Banks and the Bank (the latter as the beneficiary) approved, pursuant to Title III and Additional Provision Three of Law 3/2009, of 3 April, on structural modifications of companies formed under the Spanish Commercial Code, the corresponding spin-off plans under which all the assets associated with the financial activity of BBK, Kutxa and Caja Vital would be contributed to the Bank, and the Savings Banks would carry on their objects as credit institutions indirectly through the Bank. The purpose of the spin-off is the transfer en bloc by universal succession of the items composing the economic unit consisting of the spun-off assets and liabilities, which are all the assets and liabilities of the respective Savings Banks, except for the excluded assets and liabilities not directly linked to the Savings Banks' financial activities (including BBK's ownership interest in the Bank), which are identified in the respective spin-off plans. The Bank, as the beneficiary of the spin-off, would be subrogated to all the rights, actions, obligations, liability and charges on the spun-off assets. Also, the Bank would take on the human and material resources currently involved in the operation of the spun-off businesses of the respective Savings Banks. 11

21 In exchange for the spun-off assets and liabilities, the Bank would increase share capital by a total of EUR 1,981,950 thousand, represented by 1,981,950 registered shares of EUR 1,000 par value each, plus a share premium, so that each Savings Bank would receive newly issued shares of the Bank for a value equal to the value of the assets and liabilities spun off by each Savings Bank. The shares issued would be registered shares, like the outstanding shares, and all of them would belong to the same class and carry the same rights as those existing at the time, and the ownership structure would be as shown below. After the capital increase, each Savings Bank's ownership interest in the Bank would be as follows: % of Ownership Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea 57% Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián 32% Caja de Ahorros de Vitoria y Álava 11% For the purposes of Article 31.7 of Law 3/2009, of 3 April, on structural modifications of companies formed under the Spanish Commercial Code, the spin-off of the Savings Banks' businesses and the contribution thereof to the Bank and, consequently, the SIP, will become effective when the spin-off is registered in the Mercantile Register. These spin-off plans were subject to the approval of the General Assemblies of the Savings Banks and the sole shareholder of the Bank, and to the requisite administrative authorisations. On 16 and 23 September 2011, the General Assemblies of BBK and Caja Vital, and the General Assembly of Kutxa and the sole shareholder of the Bank, respectively, approved the spin-off plan for each Savings Bank to the Bank, as drafted and executed by the Board of Directors of each entity, and, consequently, the spin-off of the financial business of each Savings Bank to the Bank. The general assemblies and the sole shareholder also approved the integration agreement for the formation of a contractual consolidable group of credit institutions headed by the Bank, executed on 30 June The general assemblies and the sole shareholder also approved the amendment of the Savings Banks' bylaws as required to include therein the basic conditions for exercising the financial activity indirectly through the Bank. On 15 September 2011, the Boards of Directors of the Savings Banks and the Bank approved, subject to the approval of the General Assemblies of the Savings Banks and the sole shareholder of the Bank, the amendment of certain terms of the integration agreement for the formation of a contractual consolidable group of credit institutions executed on 30 June This amendment was formalised in a novation agreement modifying the integration agreement signed by all the parties on 23 September On 20 October 2011, the General Assemblies of BBK, Kutxa and Caja Vital, and the sole shareholder of the Bank approved the aforementioned agreement. Once the relevant administrative authorisations had been obtained, on 22 December 2011, BBK, Kutxa and Caja Vital, together with the Bank, executed the related public deeds of the spin-off of the Savings Banks' financial businesses and the contribution thereof to Kutxabank, S.A. These public deeds were registered in the Bizkaia Mercantile Register on 1 January The registration of the spin-offs fulfilled the last of the conditions precedent for the integration agreement entered into by the Savings Banks to come into force. Consequently, on 1 January 2012, the integration agreement constituting an Institutional Protection Scheme whereby the Savings Banks approved the indirect exercise of their activity and span off their financial businesses to the Bank became effective, and the three Savings Banks were integrated into a new consolidable group of credit institutions the parent of which is Kutxabank, S.A. 12

22 At 1 January 2012, the identifiable assets and liabilities assumed were recognised in Kutxabank's balance sheet as follows: The spun-off assets and liabilities of BBK, as the acquirer for the purposes of the application of the standard on business combinations, at their carrying amount in the consolidated financial statements of the BBK Group at that date. The spun-off assets and liabilities of Kutxa and Caja Vital, as the acquirees for the purposes of the application of the standard on business combinations, at their fair value at that date. The main assumptions and methods used in estimating the fair value of the spun-off assets and liabilities of Kutxa and Caja Vital were as follows: The debt instruments classified as Loans and Receivables were initially segmented into homogenous portfolios, taking into account the type of instrument and the sector to which each borrower belongs. The fair value of each asset portfolio was estimated using generally accepted statistical valuation techniques based on homogeneous variables for each group obtained from historical databases checked and modified, where appropriate, against current market conditions. In any case, case-by-case analyses were also conducted in order to determine the fair value of financial assets of material amounts or whose borrowers belong to certain sectors considered problematic. The fair value of debt instruments recognised under Held-to-Maturity Investments in the consolidated balance which are listed on deep active markets, was determined by reference to their quoted price. Unquoted debt instruments or debt instruments which are not traded in an active market, whose fair value was estimated using other valuation techniques, were not material. The fair value of property assets recognised under Non-Current Assets Held for Sale, Tangible Assets - Investment Property and Other Assets Inventories was estimated on the basis of appraisals undertaken by appraisal companies registered in the Official Register of the Bank of Spain, less estimated costs to sell, as required by Bank of Spain Circular 3/

23 Following is a detail of the carrying amounts of the three Savings Banks's assets, liabilities and contingent liabilities at the transfer date, in thousands of euros: Carrying Amount of Spun-off Assets and Liabilities - BBK Group Fair Value of Spun-off Assets and Liabilities - Kutxa Group Fair Value of Spun-off Assets and Liabilities - Vital Group Reclassifications (*) Balance Sheet of the Kutxabank Group at 1 January 2012 ASSETS Available-for-sale financial assets 4,599, , , ,291 7,056,803 Loans and receivables 32,432,815 15,094,096 6,293,050-53,819,961 Non-current assets held for sale 713, ,727 35,465-1,006,044 Investments 482, ,290 53,932 (211,179) 889,245 Other assets 4,232,525 2,710, ,713 (671,316) 6,932,231 TOTAL ASSETS 42,460,985 19,365,982 7,947,521 (70,204) 69,704,284 LIABILITIES Financial liabilities at amortised cost 37,739,944 17,944,438 7,427,595 (70,204) 63,041,773 Provisions 480, ,576 33, ,113 Other liabilities 476, ,425 70, ,484 TOTAL LIABILITIES 38,697,757 18,203,439 7,531,378 (70,204) 64,362,370 SPUN-OFF ASSETS AND LIABILITIES 3,763,228 1,162, ,143-5,341,914 (*) The integration gave rise to certain reclassifications between Held-to-Maturity Investments, Available-for-Sale Financial Assets and Investments. Also, certain eliminations were made as a result of intragroup positions. At the integration date, the fair value of Kutxa's and Vital's loans and receivables, which represent most of the transferred assets, amounted to EUR 21,387,146 thousand and their contractual value was EUR 22,242,137 thousand. The best estimate at the spin-off date of the contractual flows not expected to be received amounted to EUR 854,991 thousand. The detail of the equity of Kutxabank at 1 January 2012, after including the Savings Banks' businesses, is as follows: Thousands of Euros Share capital 2,000,000 Share premium 3,432,939 Integration reserves (403,663) SHAREHOLDERS' EQUITY 5,029,276 Valuation adjustments 275,200 Non-controlling interests 37,438 EQUITY 5,341,914 The Parent considered as the value of the consideration received in the business combination the fair value of the assets and liabilities received for each Savings Bank. Based on the estimates made, the fair value of the consideration does not differ significantly from the fair value of the spun-off assets and liabilities and, accordingly, this business combination did not give rise to goodwill. 14

24 With the main objective of ensuring that the financial statements present fairly its equity, financial position and results, taking into consideration that no accounting treatment is specifically defined in either Bank of Spain Circular 4/2004 or in any other applicable Spanish or international accounting legislation, the Parent resolved to apply the accounting treatment described below, at 1 January 2012, once the requirements set forth in Rule Eight of Bank of Spain Circular 4/2004 had been met: - Each Savings Bank's holding is recognised at the value of the savings bank's interest in the equity of Kutxabank detailed above. - The difference between the aforementioned interest and the carrying amount of the assets and liabilities contributed by each Savings Bank is recognised in reserves. Following is a pro forma consolidated income statement for 2011 assuming that the transaction was effective on 1 January 2011: Thousands of Euros 2011 Net interest income 813,344 Income from equity instruments 157,335 Share of results of entities accounted for using the equity method 73,673 Net fee and commission income 365,055 Gains/losses on financial assets and liabilities and Exchange differences (net) 85,755 Other operating income and expenses (net) 59,570 Gross income 1,554,732 Administrative expenses (834,248) Depreciation and amortisation charge (90,928) Provisions and impairment losses on financial assets (390,690) Profit from operations 238,866 Impairment losses on other assets (net) (92,282) Other gains (losses) 88,757 Loss before tax 235,341 Income tax 15,934 Profit/Loss from continuing operations 251,275 Profit/Loss from discontinued operations - Consolidated profit/loss for the year 251,275 Profit/Loss attributable to the Parent 245,154 Profit/Loss attributable to non-controlling interests 6,121 The balances shown in the foregoing pro forma consolidated income statement were estimated by aggregating the related line items shown in the consolidated financial statements prepared by the three Savings Banks in 2011, net of the effects of the intra-group transactions that would have been performed had consolidated 15

25 financial statements been prepared from 1 January Consequently, the foregoing pro forma consolidated income statement does not include the effects, if any, that might have arisen had the valuation adjustments of the assets and liabilities contributed by Kutxa and Caja Vital been contributed at the beginning of 2011, or the effects of the resulting changes in the scope of consolidation. The costs associated with the transaction recognised in the three entities 2011 income statements were not material. On 15 September 2011, the three Savings Banks entered into an agreement with the workers main trade union representatives in which various memorandums of understanding were signed regarding labour matters applicable to the workforce resulting from the integration. As a result of this agreement, after the spin-off of the Savings Banks' businesses became effective, the Bank assumed a series of obligations the maximum cost of which was estimated to amount to EUR 90,248 thousand, based on the information available at the date of preparation of these consolidated financial statements. Current legislation stipulates that a business combination must be recognised definitively within a period of one year from the completion date. Accordingly, if the need to adjust any of the initially calculated amounts were to arise in 2012, such adjustments would be recognised pursuant to IFRS 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 adopted by the European Union and, accordingly, they present fairly the Group s consolidated equity and consolidated financial position at 31 December 2011 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 2011 were authorised for issue by the Parent s directors at the Board meeting held on 24 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 28. 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 16

26 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 2011 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. Appendix II contains relevant information on the investments in jointly controlled entities at 31 December 2011 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 were 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 2011 and Since the accounting policies and measurement bases used in preparing the Group s consolidated financial statements for 2011 and 2010 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. 17

27 c) Adoption of new standards and interpretations issued Standards and interpretations applicable in 2011 In 2011 new accounting standards came into force and were therefore taken into account when preparing the Group s consolidated financial statements for 2011: - Amendment to IAS 32, Financial Instruments: Presentation - Classification of Rights Issues. This amendment relates to the classification of foreign currency denominated rights issues (rights, options or warrants). Pursuant to this amendment, when these rights are offered to all owners and are to acquire a fixed number of shares in exchange for a fixed amount, they are equity instruments, irrespective of the currency in which that fixed amount is denominated and provided that other specific requirements of the standard are fulfilled. The application of IAS 32 did not have a material effect on the consolidated financial statements for Revision of IAS 24, Related Party Disclosures The revised IAS 24 provides a partial exemption from certain disclosure requirements when the transactions are between government-related entities (or entities related to an equivalent government institution) and revises the scope applicable to the disclosure requirements through the inclusion in the definition of related party of certain relationships between joint ventures and associates of the same entity which were not explicit in the previous version of the standard. The entry into force of this revision did not result in any change in the related parties currently defined by the Group. - Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement. One unforeseen consequence of IFRIC 14 was that, in certain circumstances entities could not recognise a voluntary of minimum funding prepayment to a pension plan as an asset. The amendments to this IFRIC address this issue and are applicable only in specific cases in which an entity is required to pay minimum funding requirement contributions and makes a prepayment in this connection. In these cases, the economic benefit relating to the prepayment may be treated as an asset. The application of IFRIC 14 did not have a material effect on the consolidated financial statements for 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 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 shares 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 did not give rise to a change in the Group s accounting policies since this year the Group did not perform any transactions of this type. 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 18

28 subsequent to the date of the consolidated financial statements or because they had not yet been adopted by the European Union, were as follows: Standards, amendments and interpretations Obligatory Application in the Years Beginning On or After Approved for use in the EU: Amendments to IFRS 7 Financial Instruments: Disclosures- Transfers of Financial Assets 1 July 2011 Not yet approved for use in the EU (1): IFRS 9 Financial Instruments: Classification and Measurement 1 January 2015 Amendments to IAS 12 Income Taxes - Deferred Taxes Arising from Investment Property 1 January 2012 IFRS 10 Consolidated Financial Statements 1 January 2013 IFRS 11 Joint Arrangements 1 January 2013 IFRS 12 Disclosure of Interests in Other Entities 1 January 2013 IFRS 13 Fair Value Measurement 1 January 2013 IAS 27 (Revised) Separate Financial Statements 1 January 2013 IAS 28 (Revised) Investments in Associates and Joint Ventures 1 January 2013 Amendments to IAS 1 Presentation of Items of Other Comprehensive Income 1 July 2012 Amendments to IAS 19 Employee Benefits 1 January 2013 Amendments to IFRS 9 and IFRS 7 Mandatory Effective Date of IFRS 9 and Transition Disclosures - Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities 1 January 2014 Amendments to IFRS 7 Offsetting Financial Assets and Financial Liabilities 1 January 2013 IFRIC Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine 1 January 2013 (1) Standards and interpretations not yet adopted by the European Union at the date of formal preparation of these consolidated financial statements. 19

29 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 analyses 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 and, therefore, there should not be any very significant differences, except, in the case of the fair value option for financial liabilities, for the requirement to recognise changes in fair value attributable to own credit risk as a component of equity. At the reporting date, the future impacts of the adoption of this standard had not yet been analysed. Amendments to IFRS 7 - Financial Instruments: Disclosures- Transfers of Financial Assets: reinforces the disclosure requirements applicable to transfers of financial assets, including both those in which the assets are not derecognised and, principally, those in which the assets qualify for derecognition but the entity has a continuing involvement in them. In the case of the latter, for which there are a greater number of new disclosure requirements, it will be necessary, for example, to disclose information on the entity s maximum exposure to loss from its continuing involvement, the cash outflows that would be required to repurchase derecognised assets with a maturity analysis, the cumulative income and expenses from the continuing involvement and in general more qualitative information on the transaction that gave rise to the derecognition of the financial asset (description, nature of the continuing involvement, risks to which the entity continues to be exposed, etc.). Accordingly, its entry into force will foreseeably give rise to an increase in the disclosures that the Group has been making in its consolidated financial statements. IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IAS 27 (Revised), Separate Financial Statements and IAS 28 (Revised), Investments in Associates and Joint Ventures: IFRS 10 amends the current definition of control. The new definition of control sets out the following three elements of control: power over the investee; exposure, or rights, to variable returns from involvement with the investee; and the ability to use power over the investee to affect the amount of the investor s returns. IFRS 11, Joint Arrangements supersedes IAS 31. The fundamental change introduced by IFRS 11 with respect to the current standard is the elimination of the option of proportionate consolidation for jointly controlled entities, which will begin to be accounted for using the equity method. This new standard will not have a material effect on the Group s consolidated financial statements, since the proportionately consolidated jointly controlled entities do not represent a material amount in the consolidated balance and consolidated income statement (see Note 28). IAS 27 and IAS 28 are revised in conjunction with the issue of the aforementioned new IFRSs. In the case of the Group, they will not have any impacts other than those discussed above. 20

30 Lastly, IFRS 12 represents a single standard presenting the disclosure requirements for interests in other entities (whether these be subsidiaries, associates, joint arrangements or other interests) and includes new disclosure requirements. Accordingly, its entry into force will foreseeably give rise to an increase in the disclosures that the Group has been making, i.e., those currently required for interests in other entities and other investment vehicles. IFRS 13, Fair Value Measurement: the purpose of this IFRS is to set out in a single standard a framework for measuring the fair value of assets or liabilities when other standards require that the fair value measurement model be used. IFRS 13 changes the current definition of fair value and introduces new factors to be taken into account; it also extends the disclosure requirements in this area. The Group has analysed the potential impacts that would result from the new definition of fair value on the measurement of its consolidated balance items and it will foreseeably not give rise to any changes in the assumptions methods and calculations currently used. Amendments to IAS 1, Presentation of Items of Other Comprehensive Income: these amendments consist basically of the requirement to present in the income and expenses in OCI items that will be recycled to profit or loss in subsequent periods separately from those that will not be recycled. At the reporting date, the future impact of the adoption of this standard had still not been analysed. Amendments to IAS 19, Employee Benefits: the main changes introduced by these amendments to IAS 19 will affect the accounting treatment of defined benefit plans since the corridor is eliminated under which companies are currently permitted to opt for deferred recognition of a given portion of actuarial gains and losses. When the amendments come into effect, all actuarial gains and losses must be recognised immediately in other comprehensive income. The amendments also include significant changes in the presentation of cost components in the statement of comprehensive income, which will be aggregated and presented in a different way. The entry into force of these amendments will have a clear impact on the Group, because its accounting policy has been to apply the corridor (see Note 14.o) and, therefore, defer a given portion of actuarial gains and losses on defined benefit plans. The entry into force of the amendments will mean that the gains or losses deferred using the corridor approach must be recognised in the statement of comprehensive income. Amendments to IAS 32 - Financial Instruments: Presentation - Offsetting Financial Assets and Liabilities and IFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Liabilities: the amendments to IAS 32 introduce a series of additional clarifications in the application guidance on the standard's requirements to be able to offset financial assets and liabilities presented on the balance sheet. IAS 32 already stated that in order to offset a financial asset and a financial liability, an entity must have a currently enforceable legal right to set off the recognised amounts. The amended application guidance states, inter alia, that in order to meet the criterion, the right of set-off must not be contingent on a future event, and must be legally enforceable in the normal course of business, the event of default and the event of insolvency or bankruptcy of the entity and all of the counterparties. The parallel amendments to IFRS 7 introduce a specific section of new disclosure requirements for all recognised financial instruments that are set off, and also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS

31 The entry into force of these amendments should not give rise to a change in accounting policies because the analysis the Group conducts regarding whether or not to set off certain financial assets and liabilities is in line with the clarifications included in the standard. However, the parallel amendments in the standard on disclosure of financial instruments will foreseeably give rise to an increase in the disclosures that the Group has been making, which are the disclosures required for this type of situation. 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 2010 As required by IAS 1, the information relating to 2010 contained in these notes to the consolidated financial statements is presented with the information relating to 2011 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. On 19 February 2011, Royal Decree-Law 2/2011, to strengthen the financial system, was published in the Spanish Official State Gazette (BOE). It provides for the stringent early application of the new Basel III international capital standards. It immediately established a minimum ratio of principal capital to risk-weighted assets, basically following the definition established by Basel III which must be met by This minimum core capital ratio was set at 8%, and 10% for financial institutions that have not issued equity securities representing at least 20% of their share capital to third parties and which in addition have a wholesale funding ratio of more than 20%. As an advance of the fledgling new regulatory framework, in 2011 the Bank of Spain approved Circular 4/2011 amending Circular 3/2008 and introducing, inter alia, new developments regarding the computability of hybrid equity instruments, the treatment of securitisations, the counterparty risk associated with derivatives transactions and the establishment of new disclosure requirements regarding the Savings Banks's remuneration or liquidity position. 22

32 With regard to the public and confidential financial reporting rules and financial statement formats, it is important to note the entry into force of Bank of Spain Circular 5/2011, of 30 November, on 1 December Bank of Spain Circular 5/2011 amended Circular 4/2004 and successive amendments thereto and addresses firstly the information that stand-alone credit entities and their consolidated groups must include in the notes to their financial statements. Circular 5/2011 then establishes the confidential information that stand-alone credit entities and their consolidated groups must send to the Bank of Spain, and for this purpose amends the currently existing formats of the confidential returns and, where appropriate, introduces new returns. Lastly, Circular 5/2011 includes certain additional information in the special accounting registers for mortgage activity created by Bank of Spain Circular 3/2008, of 26 November, amending the aforementioned Circular 4/2004, the importance of which must be remembered since the information in the special registers includes, inter alia, the information corresponding to the special register referred to in Article 21 of Royal Decree 716/2009, of 24 April, implementing certain provisions of Mortgage Market Law 2/1981, of 25 March, and other mortgage and financial system regulations. a) Changes in accounting policies There were no changes in accounting policies with respect to the consolidated balance sheet at 01 January 2010 affecting the consolidated financial statements for 2011 and 2010, 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 2011 and 2010 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 for 2011 of the Parent that its Board of Directors will submit for approval at the General Assembly is as follows: Thousands of Euros 2011 Allocation to: To voluntary reserves 139,252 Welfare fund 59,680 Allocated profit 198,932 Net profit for the year 198,932 The profits or losses of the subsidiaries composing the Group will be allocated as approved at their respective Annual General Meetings. 23

33 5. Business segment reporting a) Basis of segmentation Segmentation is based on the various business lines of the BBK Group, in accordance with its organisational structure at 2011 year-end. The following business segments are distinguished, taking into account mainly the subgroup providing the information: BBK subgroup. BBK Bank CajaSur subgroup. The BBK subgroup includes the business carried on by BBK and its subsidiaries (except those that belong to the BBK Bank CajaSur subgroup), which is carried out through the BBK branch network and covers business with individual customers, SMEs and developers. The range of products and services provided includes mortgage loans, consumer loans, financing for businesses and developers, demand and time savings products, guarantees, debit and credit cards, etc., and the corporate ownership interests (Grupo de Empresas CajaSur, S.A.U.). The BBK Bank CajaSur subgroup includes the business carried on by BBK Bank CajaSur and its subsidiaries, which is carried out through the BBK Bank CajaSur branch network and covers business with individual customers, SMEs and developers. The range of products and services provided includes mortgage loans, consumer loans, financing for businesses and developers, demand and time savings products, guarantees, debit and credit cards, etc., as well as insurance activities (CajaSur Entidad de Seguros y Reaseguros, S.A. (see Note 1.2)) and the corporate ownership interests (Grupo de Empresas CajaSur, S.A.U.). b) Basis and methodology for business segment reporting The business segments' balance and income statements are prepared by aggregating the figures of the operating units assigned to the business segments. Direct and indirect expenses are allocated to the business segments in which they arise. Lastly, the operating balances of each business segment do not include the elimination of intra-group transactions affecting various segments, since these are considered to be an integral part of the activity, and management of each business. Accordingly, the intra-group eliminations arising on consolidation were allocated to the two segments, as appropriate. 24

34 c) Business segment reporting The following table shows the business segment information required by current regulations: BBK Subgroup BBK Bank CajaSur Subgroup Total Group Net interest income 316, , , , ,248 Income from equity instruments 137, , , ,907 Share of results of entities accounted for using the equity method 29,842 30,297 (726) - 29,116 30,297 Net fee and commission income 149, ,371 58, , ,371 Gains/losses on financial assets and liabilities 38,917 63, ,420 63,944 Exchange differences (net) 17,881 36, ,137 36,647 Other operating income 37,185 64, , ,375 64,553 Other operating expenses (40,067) (63,125) (153,164) - (193,231) (63,125) Gross income 687, , , , ,842 Staff costs (206,785) (207,037) (143,765) - (350,550) (207,037) Other general administrative expenses (86,913) (88,298) (55,186) - (142,099) (88,298) Depreciation and amortisation charge (20,224) (27,448) (12,804) - (33,028) (27,448) Provisions (net) (5,118) 6,777 3,144 - (1,974) 6,777 Impairment losses on financial assets (108,265) (151,198) (70,524) - (178,789) (151,198) Profit from operations 260, ,638 (1,536) - 258, ,638 Impairment losses on other assets (60,463) (75,893) 3,536 - (56,927) (75,893) Other income and expenses 8,397 (17,050) 1,827-10,224 (17,050) Profit before tax 208, ,695 3, , ,695 Consolidated balance- Assets Loans and advances to customers 21,597,020 21,601,170 10,302,785-31,899,805 21,601,170 Investment securities (*) 4,039,455 5,375,073 1,151,179-5,190,634 5,375,073 Liabilities Customer funds 18,123,296 18,927,967 11,039,311-29,162,607 18,927,967 (*) Including balances of Debt Instruments, Other Equity Instruments and Investments. The Group carries on its business activity mainly in Spain, through a network of 791 branches, of which 231 are located in Bizkaia, 168 in Córdoba and 392 in the rest of Spain. The geographical distribution of the Group's financial assets and loans and receivables is detailed in Notes 22 to 25 to these consolidated financial statements. Substantially all the Group's income is generated in Spain. 25

35 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 is the implementation, for credit institutions, of 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. It represents the adaptation to Spanish legislation to Community Directive 2006/48/EC and Directive 2006/49/EC in line with the principles adopted in the New Capital Accord of the Basel Committee on Banking Supervision ( Basel II ). In December 2010, the aforementioned Basel committee published a new capital accord, known as Basel III, which is expected to come into force at the beginning of Its main objective is to increase and strengthen the quality of the capital that credit institutions must have in order to cover any potential losses arising in the course of their business. In July 2011 the European Union published the related draft regulations, the definitive content of which had not been approved at the date of preparation of these financial statements. Other significant developments in Basel III include the introduction of specific liquidity ratios and a leverage ratio. As an advance of the fledgling new regulatory framework, in 2011 the Bank of Spain approved Circular 4/2011 amending Circular 3/2008 and introducing, inter alia, new developments regarding the computability of hybrid equity instruments, the treatment of securitisations, the counterparty risk associated with derivatives transactions and the establishment of new disclosure requirements regarding the Savings Banks's remuneration or liquidity position. 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 Chapter Three 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 bear 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. As part of this policy, the Group has defined certain capital adequacy targets which, combined with the risk it assumes in the performance of its business and the infrastructure to manage and control that risk, enable the target risk profile to be determined. 26

36 As a result of the importance the Group lends to its capital policy, its solvency position is considerably higher than that of other entities in the industry, and is mainly composed of core capital. 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 Group 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. Following is a detail of the Group s capital at 31 December 2011 and 2010, calculated in accordance with Bank of Spain Circular 3/2008, of 22 May: Tier 1 capital Endowment fund Eligible reserves 3,382,797 3,231,659 of which: Non-controlling interests 25,367 28,518 Eligible profit for the year 160, ,221 Other 151,800 2,000 Intangible assets (251,817) - Allocation to Tier 1 capital of 50% of other deductions (34,164) (30,995) 3,248,634 3,202,682 Tier 2 capital Valuation adjustments for valuation of available-for-sale securities 177, ,144 Asset revaluation reserves 77,435 78,514 General coverage related to exposures under the standardised approach 200, ,363 Non-controlling interests relating to non-voting shares 1,569 1,569 Welfare fund 40,041 59,468 Subordinated debt 335, ,378 Allocation to Tier 2 capital of 50% of other deductions (34,164) (30,995) 797, ,441 Total Group capital 4,046,559 4,139,123 At 31 December 2011 and 2010, the Group s eligible capital exceeded the minimum required under the regulations in force at those dates by EUR 1,779,764 thousand and EUR 2,600,967 thousand, respectively. At 31 December 2011, the capital ratio was 14.3% and the Tier 1 ratio was 11.5%. Royal Decree-Law 2/2011, for strengthening the financial system, was published on 18 February 2011, and aimed, inter alia, to define an additional capital adequacy indicator, the required principal capital ratio, on the basis of which new capital adequacy requirements were established to be met before October At 31 December 2011, the BBK Group's required principal capital ratio stood at 12.1% (at 1 January 2011, after including the assets and liabilities of CajaSur (see Note 1.2), it stood at 12.3%, exceeding the 10% requirement). 27

37 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 2011 and 2010, and throughout 2011 and 2010, the Group entities met the minimum reserve ratio required by the applicable Spanish legislation. The cash amount that the Group held in the Bank of Spain account for these purposes amounted to EUR 264,007 thousand at 31 December 2011 (31 December 2010: EUR 77,602 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 holding period. On 21 December 2011, Regulation 1358/2011 of the European Central Bank, of 14 December, amending Regulation 1745/2003 on the application of minimum reserves, was published in the Official Journal of the European Union. The amendment reduced minimum reserve ratio to be held by the institutions subject thereto from the current 2% to 1% from the maintenance period starting on 18 January 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 2011 (2010: EUR thousand). Appendix III to these notes contains an itemised detail of this remuneration and of that of the Chairman of the Board of Directors for the discharge of his executive duties. b) Remuneration of Senior Executives of the Parent For the purpose of preparing these consolidated financial statements, at 31 December 2011 Senior Executives included 17 people (31 December 2010: 16), 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: Remuneration 4,029 3,804 Post-employment benefits ,388 4,170 Of the total remuneration earned in 2011, EUR 3,819 thousand (2010: EUR 3,594 thousand) relates to shortterm remuneration, and the remainder relates to the long-term remuneration earned in the year. In addition to the amounts shown in the foregoing table, a special voluntary incentive payable in a lump sum amounting to EUR thousand was paid in

38 c) Detail of Directors' investments in companies with similar activities Pursuant to Article 229 of the Spanish Limited Liability Companies Law, amending Article 127 ter of the Consolidated Spanish Public Limited Liability Companies Law, introduced by Law 26/2003, of 17 July, it is indicated that, at 31 December 2011, neither the members of the Board of Directors nor persons related to them as defined in Article 231 of the Consolidated Spanish Limited Liability Companies Law held significant ownership interests in the share capital of companies engaging in an activity that is identical, similar or complementary to the activity that constitutes the Parent s object. Subsequent to 1 January 2012, a member of the Board of Directors was terminated, and another director was designated in his place. The Board of Directors has 17 members. Also, as provided for by the aforementioned Law, disclosure must be made of the activities performed by the various members of the Board of Directors, as independent professionals or as employees, that are identical, similar or complementary to the activity that constitutes the company object of the Parent. At 31 December 2011, no directors performed activities that were identical, similar or complementary to the activity that constitutes the company object of the Parent, and, accordingly, only the names of the Directors of the Parent at the date these consolidated financial statements were authorised for issue are disclosed: Director Full Name From To Mario Fernández Pelaz (*) (**) (**) Jose María Iruarrizaga Artaraz (**) (**) Ángel Lobera Revilla (**) (**) Joseba Koldo Alzaga Muruaga (**) (**) Iñaki Azkuna Urreta (**) (**) Amaia del Campo Berasategi (**) (**) Julen Eguiluz Olano (**) (**) Alaitz Etxeandia Arteaga (**) (**) Miren Josune Iglesias Mariñelarena (**) (**) Aitziber Irigoras Albeardi (**) (**) Aitor Landa Zarraga (**) (**) Alberto Lozano Ibarra (**) (**) Ainhoa Pieló Muguruza (**) (**) Ainara San Román Bordegarai (**) (**) Manuel Tejada Lambarri (**) (**) Jon Iñaki Zabalia Lezamiz - 27/01/12 Roberto Zárate Amigorena (**) (**) Zigor Pascual Zelaia 28/01/12 - (*) The Directors listed in the foregoing table who held positions or discharged functions at companies belonging to the BBK Group at 31 December 2011 now hold positions or discharge functions at the same companies in the Kutxabank Group, as a result of the completion of the spin-off transaction described in Note 1.3. (**) Members of the Board of Directors in 2011 until the date of authorisation for issue of these consolidated financial statements. 29

39 8. 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, following is the information relating to the Group's ownership interests of more than 5% in the share capital or voting power of Spanish or foreign credit institutions at 31 December 2011, in addition to those detailed in Appendices I and II: Ownership Interest 2011 Spanish Confederation of Savings Banks (CECA) 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. 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 2011 and 2010, 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 Both the Parent and BBK Bank CajaSur, S.A.U. belong to the Deposit Guarantee Fund. The contributions made by the Group to the Deposit Guarantee Fund amounted to EUR 20,691 thousand in 2011 (2010: EUR 12,343 thousand) and the related expense was recognised under Other Operating Expenses in the accompanying consolidated income statements (see Note 51). The regulations for the Spanish deposit guarantee system were substantially modified in The publication of Royal Decree-Law 16/2011, of 14 October, and Royal Decree-Law 19/2011, of 2 December, completed the reforms required in order to adapt this system to the new conditions in the banking industry. The new system achieves two primary objectives: - Unifying the three previously existing deposit guarantee funds into a single deposit guarantee fund for credit institutions, which retains the functions and features of the three funds which it replaces. - Updating and strengthening the system's second function, also known as resolution function: fostering credit institutions capital adequacy and operations in order to ensure flexible operation of the new unified fund. 30

40 As a result, from the date of publication of the aforementioned Royal Decrees, credit institutions will cease to belong to the Deposit Guarantee Fund for Savings Banks to become members of the new Deposit Guarantee Fund for Credit Institutions. The new regulations expressly repeal the Ministerial Orders which, pursuant to legislation then in force, established optional ad hoc reductions to the contributions to be made by credit institutions and stipulate an actual contribution of 2 per mil, with a ceiling on the contributions of 3 per mil of guaranteed deposits. Also, Royal Decree 771/2011, published on 4 June 2011, amending, inter alia, Royal Decree 2606/1996, on deposit guarantee funds for credit institutions, introduced a new system involving additional contributions to these funds tied to interest on deposits. In this connection, Bank of Spain Circular 3/2011, of 30 June, which implemented the above system of additional contributions to the deposit guarantee funds, requires additional contributions (payable quarterly) to be made by entities arranging time deposits or paying interest on demand deposits which bear interest at rates in excess of certain levels, according to the term of the deposit or whether it is a time deposit. This Circular, which came into force on 4 July 2011, applies to time deposits arranged on or after 15 July 2011 which bear interest at rates exceeding the interest rates published by the Bank of Spain, and to interest payments made on or after 14 October 2011, on the balances of demand deposits the interest rate on which also exceeds the related rates. 12. Audit fees In 2011 and 2010, 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 39 2 Total audit and related services Tax advisory services 68 6 Other services Total other professional services At 31 December 2011 and 2010, no subsidiary incurring significant audit fees had been audited by any audit firm other than the firm auditing the Group s consolidated financial statements. 31

41 13. Events after the reporting period On 1 January 2012, the public deeds instrumenting the spin-offs of the financial businesses of Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea, Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián- Gipuzkoa eta Donostiako Aurrezki Kutxa and Caja de Ahorros de Vitoria y Álava-Araba eta Gasteizko Aurrezki Kutxa, respectively, to Kutxabank, S.A., were registered in the Bizkaia Mercantile Register (see Note 1.3). Royal Decree-Law 2/2012 on the clean-up of the financial sector was approved on 3 February The Royal Decree-Law envisages a review of the parameters for estimating provisioning needs and an increase in capital requirements to cover positions held by financial institutions relating to the financing of developer loans and assets received in payment of debts. The requirements mentioned in the following paragraphs must be attained by 31 December The central focus of the clean-up of balances is a new scheme for the coverage of all financing to developers and assets foreclosed or received in payment of debts related to the property industry. This scheme takes the form of an estimate of the specific impairment of these assets following certain set parameters on exposure to developers classified as doubtful or substandard or assets foreclosed or received in payment of debts, and the inclusion of coverage of 7% of the outstanding balance of the loans of this type classified as standard risk at 31 December The Royal Decree-Law also obliges financial institutions to hold more capital than that required by Royal Decree Law 2/2011, of 18 February, for the strengthening the financial system. At the date of preparation of these consolidated financial statements, the regulators had not yet published the legislation implementing the recognition for accounting purposes of Royal Decree-Law 2/2012, and, accordingly, the Kutxabank Group made an estimate based on the information available. Pursuant to the Royal Decree-Law, institutions must present their strategies for duly complying with the new clean-up requirements to the Bank of Spain by 31 March The Kutxabank Group will present the Group's compliance plan and the plans of the stand-alone entities affected by this legislation. At 1 January 2012, the date on which the Kutxabank Group commenced operations, the Group had provisions that fulfilled the requirements laid down by Royal Decree-Law 2/2012 and, accordingly, the Group does not envisage any additional provisioning needs or material effect on its 2012 earnings. In addition, the requirements for principal capital, estimated at EUR 650 million, are covered by recognised provisions and by the Group's capital surplus. 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. 32

42 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 transfer en bloc of assets and liabilities performed by the Group company BBK Bank CajaSur, S.A. (Sole-Shareholder Company) on 1 January 2011 (see Note 1.2), which involved valuing all the assets and liabilities of the former CajaSur at fair value. The preparation of consolidated financial statements requires the use of certain accounting estimates. It also requires management to make judgments in the application of the Group s accounting policies. These estimates may affect the amount of assets and liabilities, the contingent asset and liability disclosures at the reporting date and the amount of income and expenses during the reporting period. Although these estimates are based on management s best knowledge of the current and foreseeable circumstances, the final results might differ from these estimates. d) Financial derivatives Financial derivatives are instruments which, in addition to providing a profit or loss, may permit the offset, under certain conditions, of all or a portion of the credit and/or market risks associated with balances and transactions, using interest rates, certain indices, equity prices, cross-currency exchange rates or other similar benchmarks as underlyings. The Group uses financial derivatives traded on organised markets or traded bilaterally with the counterparty outside organised markets (OTC). Financial derivatives are used for the purpose of trading with customers who request these instruments, of managing the risks of the Group s own positions (hedging derivatives) or of obtaining gains from changes in the prices of these derivatives. Any financial derivative not qualifying for hedge accounting is treated for accounting purposes as a trading derivative. A derivative qualifies for hedge accounting if the following conditions are met: 1. The financial derivative hedges the exposure to changes in the fair value of assets and liabilities due to fluctuations in interest rates, exchange rates and/or securities prices (fair value hedge); the exposure to changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge); or the exposure of a net investment in a foreign operation (hedge of a net investment in a foreign operation). 2. The financial derivative is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that the hedge is prospectively effective (i.e. effective at the time of arrangement of the hedge under normal conditions) and retrospectively effective (i.e. there is sufficient evidence that the hedge will be actually effective during the whole life of the hedged item or position). The analysis performed by the Group to ascertain the effectiveness of the hedge is based on various calculations included in the Group s risk monitoring computer applications. These applications keep record, on a systematic and daily basis, of the calculations made to value the hedged items and the hedging instruments. The resulting data, in conjunction with the particular characteristics of these items, enable historical calculations of values and sensitivity analyses to be performed. These estimates serve as the basis of the effectiveness tests of fair value and cash flow hedges. Recording this information enables the Group to re-perform all the analyses at the required frequency and at any given date. 33

43 3. There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Group s management of own risks. Hedges can be applied to individual items or balances or to portfolios of financial assets and liabilities. In the latter case, the group of financial assets or liabilities to be hedged must share a common risk exposure, which is deemed to occur when the sensitivity of the individual hedged items to changes in the risk being hedged is similar. The hedging policies are part of the Group s global risk management strategy and hedges are arranged as a result of decisions made by the Parent s Asset-Liability Committee, mainly on the basis of micro-hedges arising from: 1. The management of the Group s on-balance-sheet interest rate risk exposure, and 2. The mitigation of undesired risks arising from the Group s operations. In general, the hedge is designed at the very moment the risk arises to achieve an effective (partial or full) hedge of the related risk on the basis of the analysis of the sensitivity of the known flows or changes in value of the hedged items to changes in the risk factors (mainly interest rates). As a result, derivative instruments are traded on organised or OTC markets to offset the effects of changes in market conditions on the fair values and cash flows of the hedged items. The Group used fair value and cash flow hedges. The fair value hedges are instrumented in interest rate or security swaps arranged with financial institutions, the purpose of which is to hedge the exposure to changes in fair value, attributable to the risk being hedged, of certain asset and liability transactions. The cash flow hedges are instrumented in put and call options and forward purchase and sale agreements, the purpose of which is to hedge the changes in cash flows of highly probable future transactions. Financial derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as Financial Assets/Liabilities Held for Trading or as Other Financial Assets/Liabilities at Fair Value through Profit or Loss. The financial derivative measurement bases are described in Note 14-e (Financial assets). e) Financial assets Financial assets are classified in the consolidated balance sheet as follows: 1. Cash and Balances with Central Banks, which comprises cash balances and balances with the Bank of Spain and other central banks. 2. Financial Assets Held for Trading, which includes financial assets acquired for the purpose of selling them in the near term, financial assets which are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking and derivative instruments not designated as hedging instruments. 3. Other Financial Assets at Fair Value through Profit or Loss, which includes financial assets not held for trading that are hybrid financial assets and are measured entirely at fair value, and financial assets which are managed jointly with liabilities under insurance contracts measured at fair value, with derivative financial instruments whose purpose and effect is to significantly reduce exposure to variations in fair 34

44 value, or with financial liabilities and derivatives whose purpose is to significantly reduce overall exposure to interest rate risk. At 31 December 2011, financial assets amounted to EUR 2,928 thousand (31 December 2010: EUR 0). 4. Available-for-Sale Financial Assets, which includes debt instruments not classified as held-to-maturity investments, as other financial assets at fair value through profit or loss, as loans and receivables or as financial assets held for trading, and equity instruments issued by entities other than associates, provided that such instruments have not been classified as held for trading or as other financial assets at fair value through profit or loss. 5. Loans and Receivables, which includes financial assets that are not quoted in an active market, that do not have to be measured at fair value and that have fixed or determinable cash flows in which the Group will recover all of its investment, other than losses because of credit deterioration. This category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers, the deposits placed with other institutions, whatever the legal instrument, unquoted debt securities and the debt incurred by the purchasers of goods, or the users of services, constituting part of the Group s business. 6. Held-to-Maturity Investments, which includes debt instruments with fixed maturity and with fixed cash flows that the Group has decided to hold to maturity because it has, basically, the financial capacity to do so or because it has the related financing. At 31 December 2011, the Group had not recognised any assets of this kind. 7. Hedging Derivatives, which includes the financial derivatives acquired or issued by the Group which qualify for hedge accounting. 8. Non-Current Assets Held for Sale, which includes the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal ( discontinued operations ) whose sale in their present condition is highly likely to be completed within one year from the reporting date. Therefore, the carrying amount of these financial items will foreseeably be recovered through the proceeds from their disposal. There are other non-current assets held for sale of a non-financial nature whose accounting treatment is described in Note 14-t. 9. Insurance Contracts Linked to Pensions, which includes the reimbursement rights claimable from insurers relating to part or all of the expenditure required to settle a defined benefit obligation when the insurance policies do not qualify as a plan asset. In 2011 no assets were reclassified among Financial Assets Held for Trading, Other Financial Assets at Fair Value through Profit or Loss, Available-for-Sale Financial Assets or Held-to-Maturity Investments. A regular way purchase or sale of financial assets, defined as one in which the parties reciprocal obligations must be discharged within a time frame established by regulation or convention in the marketplace and that may not be settled net, such as stock market and forward currency purchase and sale contracts, is recognised on the date from which the rewards, risks, rights and duties attaching to all owners are for the purchaser, which, depending on the type of financial asset purchased or sold, may be the trade date or the settlement or delivery date. In particular, transactions performed in the spot currency market are recognised on the settlement date, and equity and debt instruments traded in Spanish secondary securities markets are recognised on the trade date and the settlement date, respectively. In general, financial assets are initially recognised at acquisition cost and are subsequently measured at each period-end as follows: 35

45 1. Financial assets are measured at fair value except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner, and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments. The fair value of a financial asset on a given date is taken to be the amount for which it could be transferred between knowledgeable, willing parties in an arm s length transaction. The best evidence of the fair value is the quoted price on an organised, transparent and deep market. If there is no market price for a given financial asset, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of commonly used valuation techniques. The Bank also takes into account the specific features of the financial asset to be measured and, particularly, the various types of risk associated with it. However, the inherent limitations of the valuation techniques used and the possible inaccuracies of the assumptions made under these techniques may result in a fair value of a financial asset which does not exactly coincide with the price at which the asset could be bought or sold at the date of measurement. The fair value of financial derivatives quoted in an active market is their daily quoted price and if, for exceptional reasons, the quoted price at a given date cannot be determined, these financial derivatives are measured using methods similar to those used to measure OTC derivatives. The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement ( present value or theoretical close ) using valuation techniques accepted in the financial markets ( Net Present Value (NPV), option pricing models, etc.). 2. Loans and receivables and held-to-maturity investments are measured at amortised cost using the effective interest method. Amortised cost is understood to be the acquisition cost of a financial asset adjusted by the principal repayments and the amortisation taken to the income statement, using the effective interest method, less any reductions for impairment recognised directly as a deduction from the carrying amount of the asset or through a valuation allowance. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognised. The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to its total estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date adjusted by the fees that, because of their nature, can be equated with a rate of interest. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date. 3. Equity instruments of other entities whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss. At 31 December 2011, the impact of the use of assumptions other than those employed in measuring financial instruments using internal models was not material. As a general rule, changes in the carrying amount of financial assets are recognised in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, which are recognised under Interest and Similar Income, and those arising for other reasons, 36

46 which are recognised at their net amount under Gains/Losses on Financial Assets and Liabilities (Net) in the consolidated income statement. However, changes in the carrying amount of instruments included under Available-for-Sale Financial Assets are recognised temporarily in consolidated equity under Valuation Adjustments, unless they relate to exchange differences on monetary financial assets. Amounts included under Valuation Adjustments remain in consolidated equity until the asset giving rise to them is derecognised or impairment losses are recognised on that asset, at which time they are recognised in the consolidated income statement. Exchange differences on securities included in these portfolios denominated in currencies other than the euro are recognised as explained in Note 14-i. Any impairment losses on these securities are recognised as explained in Note 14-h. In the case of financial assets designated as hedged items or qualifying for hedge accounting, gains and losses are recognised as follows: 1. In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognised directly in the consolidated income statement. 2. In cash flow hedges and hedges of a net investment in a foreign operation, the ineffective portion of the gains or losses on the hedging instruments is recognised directly in the consolidated income statement. 3. In cash flow hedges and hedges of a net investment in a foreign operation, the gains or losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognised temporarily in consolidated equity under Valuation Adjustments. The gains or losses on the hedging instrument are not recognised in income until the gains or losses on the hedged item are recognised in the consolidated income statement or until the date of maturity of the hedged item. f) Financial liabilities Financial liabilities are classified in the consolidated balance sheet as follows: 1. Financial Liabilities Held for Trading, which includes financial liabilities issued for the purpose of repurchasing them in the near term, financial liabilities that are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of shortterm profit taking, derivatives not designated as hedging instruments, and financial liabilities arising from the outright sale of financial assets acquired under resale agreements or borrowed. 2. Other Financial Liabilities at Fair Value through Profit or Loss, which includes the financial liabilities not held for trading that are hybrid financial instruments and contain an embedded derivative whose fair value cannot be reliably measured. At 31 December 2011, the Group did not have any financial liabilities of this kind. 3. Financial Liabilities at Amortised Cost, which includes, irrespective of their instrumentation and maturity, the financial liabilities not included under any other item in the consolidated balance sheet which arise from the ordinary borrowing activities carried on by financial institutions. 4. Hedging Derivatives, which includes the financial derivatives acquired or issued by the Group which qualify for hedge accounting. 37

47 5. Liabilities Associated with Non-Current Assets Held for Sale, which includes the balances payable arising from the non-current assets held for sale. At 31 December 2011, the Group did not have any financial liabilities of this kind. Financial liabilities are measured at amortised cost, as defined for financial assets in Note 14.e, except as follows: 1. Financial liabilities included under Financial Liabilities Held for Trading and Other Financial Liabilities at Fair Value through Profit or Loss are measured at fair value as defined for financial assets in Note 14.e. Financial liabilities hedged in fair value hedges are adjusted and the changes in fair value related to the risk being hedged are recognised. 2. Financial derivatives that have as their underlying equity instruments whose fair value cannot be determined in a sufficiently objective manner and are settled by delivery of those instruments are measured at cost. As a general rule, changes in the carrying amount of financial liabilities are recognised in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, which are recognised under Interest Expense and Similar Charges, and those arising for other reasons, which are recognised at their net amount under Gains/Losses on Financial Assets and Liabilities (Net) in the consolidated income statement. In the case of financial liabilities designated as hedged items or qualifying for hedge accounting, gains and losses are recognised as described for financial assets in Note 14.e. g) Transfer and derecognition of financial instruments Transfers of financial instruments are accounted for taking into account the extent to which the risks and rewards associated with the transferred financial instruments are transferred to third parties, as follows: 1. If the Group transfers substantially all the risks and rewards to third parties, the transferred financial instrument is derecognised and any rights or obligations retained or created in the transfer are recognised simultaneously. 2. If the Group retains substantially all the risks and rewards associated with the transferred financial instrument, the transferred financial instrument is not derecognised and continues to be measured by the same criteria as those used before the transfer. However, the associated financial liability is recognised for an amount equal to the consideration received, and this liability is subsequently measured at amortised cost. The income from the transferred financial asset not derecognised and any expense incurred on the new financial liability are also recognised. 3. If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset, the following distinction is made: a. If the Group does not retain control of the transferred financial instrument, the instrument is derecognised and any rights or obligations retained or created in the transfer are recognised. b. If the Group retains control of the transferred financial instrument, it continues to recognise it for an amount equal to its exposure to changes in value and recognises a financial liability associated with the transferred financial asset. The carrying amount of the transferred asset and the associated liability 38

48 is the amortised cost of the rights and obligations retained, if the transferred asset is measured at amortised cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value. Accordingly, financial assets are only derecognised when the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognised when the obligations they generate have been extinguished or when they are acquired, albeit with the intention either to cancel them or to resell them. However, in accordance with International Financial Reporting Standards as adopted by the European Union, the Group did not recognise, unless they had to be recognised as a result of a subsequent transaction or event, the financial assets and liabilities relating to transactions performed before 1 January 2004, other than derivative instruments, derecognised as a result of the formerly applicable accounting standards. Specifically, at 31 December 2011 the Group held securitised assets amounting to EUR 26,870 thousand (31 December 2010: EUR 19,823 thousand) which were derecognised before 1 January 2004 as a result of the formerly applicable accounting standards (see Note 25). h) Impairment of financial assets The carrying amount of a financial asset is generally adjusted with a charge to the consolidated income statement when there is objective evidence that an impairment loss has occurred. This evidence exists: 1. In the case of debt instruments, i.e. loans and debt securities, after their initial recognition a single event or the combined effect of several events causes an adverse impact on their future cash flows. 2. In the case of equity instruments, when, as a result of an event or the combined effect of several events after initial recognition, their carrying amount cannot be recovered. In the case of debt instruments carried at amortised cost, the amount of the impairment losses incurred is equal to the negative difference between their carrying amount and the present value of their estimated future cash flows. For quoted debt instruments, market value may be used instead of the present value of future cash flows, provided that it is sufficiently deep for it to be considered as representative of the amount that would be recovered by the Group. The estimated future cash flows of debt instruments are all the amounts (principal and interest) that the Group considers will flow to it over the remaining life of the instrument. Its estimate takes into account all relevant information available on the reporting date about the likelihood of collecting the contractual cash flows in the future. The future cash flows of a collateralised instrument are estimated by taking into account the flows that would result from foreclosure less costs for obtaining and subsequently selling the collateral, whether or not foreclosure is probable. The discount rate used to calculate the present value of estimated future cash flows is the instrument s original effective interest rate, if its contractual rate is fixed, or the effective interest rate at the reporting date determined under the contract, if it is variable. Debt instruments, contingent liabilities and contingent commitments, regardless of the holder, instrumentation or guarantee, are reviewed so as to determine the credit risk to which the Group is exposed and to consider whether an impairment allowance is required. In the preparation of the consolidated financial statements, the Group classifies its transactions on the basis of credit risk and assesses separately the insolvency risk allocable to the customer and the country risk to which these transactions are exposed. 39

49 Objective evidence of impairment is determined individually for all debt instruments that are individually significant, and individually or collectively for the groups of debt instruments which are not individually significant. When a specific instrument cannot be included in any group of assets with similar credit risk characteristics, it is analysed solely on an individual basis to determine whether it is impaired and, if so, to estimate the impairment loss. Debt instruments not measured at fair value through profit or loss, contingent liabilities and contingent commitments are classified, on the basis of the insolvency risk attributable to the customer or to the transaction, into the following risk categories: standard, substandard, doubtful due to customer arrears, doubtful for reasons other than customer arrears and write-off. For debt instruments not classified as standard risk, the specific impairment allowances are estimated, based on the past experience of the Group and the industry, taking into account the age of the past-due amounts, the guarantees provided and the financial situation of the customer and, where appropriate, of the guarantors. This estimate is generally made using default schedules prepared on the basis of the Group s experience and the information available to it on the industry. The extension or refinancing of transactions whose repayment is problematic does not interrupt the aging considered for the purpose of calculating impairment, unless there is reasonable certainty that the customer will be able to settle its debt in the envisaged period or new effective collateral is provided. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated is not material with respect to the consolidated financial statements taken as a whole. Substandard debt instruments are instruments which, without qualifying individually for classification as doubtful, show weaknesses that may entail the Group assuming losses. The necessary allowances are recognised to cover these losses, which are defined as the difference between the amount recognised in assets for these instruments and the present value of the cash flows expected to be received. Similarly, debt instruments not measured at fair value through profit or loss and contingent liabilities, irrespective of the customer are reviewed to determine their credit risk due to country risk. Country risk is defined as the risk that is associated with customers resident in a given country due to circumstances other than normal commercial risk. In addition to the specific impairment allowances mentioned above, the Group recognises a collective allowance for impairment losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities classified as standard risk. This collective allowance is calculated taking into account the historical impairment experience and other circumstances which are known at the time of assessment, and relates to the inherent losses incurred at the reporting date, calculated using statistical methods, that have not been allocated to specific transactions. The Group does not have sufficient historical and statistical experience in this connection and, to this end, it has used the parameters defined by the Bank of Spain based on its own experience and the information available to it on the industry. These parameters establish the method and amount to be used to cover the inherent impairment losses on debt instruments and contingent liabilities classified as standard risk, which are revised periodically based on the trend in the aforementioned data. Under this method for determining the allowance for inherent impairment losses on debt instruments, certain percentages are applied to the debt instruments not measured at fair value through profit or loss and to the contingent liabilities classified as standard risk. These percentages vary on the basis of the classification of the debt instruments into the following standard risk subcategories: negligible risk, low risk, medium-low risk, medium risk, medium-high risk and high risk. The carrying amount of debt instruments carried at amortised cost is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognised impairment losses is recognised in the consolidated income statement for the period in which the impairment is reversed or reduced. When the recovery of any recognised amount is 40

50 considered unlikely, the amount is written off, without prejudice to any actions that the Group may initiate to seek collection until its contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause. Interest accrual on the basis of the contractual terms is suspended for all debt instruments individually classified as impaired and for all those for which impairment losses have been collectively calculated because they have amounts more than three months past due. The amount of the impairment losses incurred on debt instruments and equity instruments included under Available-for-Sale Financial Assets is the positive difference between their acquisition cost, net of any principal repayment or amortisation, and their fair value. When there is objective evidence that the decline in fair value is due to impairment, the unrealised losses recognised directly in consolidated equity under Valuation Adjustments are recognised immediately in the consolidated income statement. If all or part of the impairment losses are subsequently reversed, the reversed amount is recognised, for debt instruments, in the consolidated income statement for the period in which the reversal occurred and, for equity instruments, in consolidated equity under Valuation Adjustments. In the case of debt instruments and equity instruments classified under Non-Current Assets Held for Sale, losses previously recognised in consolidated equity are considered to be realised and are recognised in the consolidated income statement on the date they are so classified. The amount of the impairment losses on equity instruments measured at cost is the difference between their carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities. Impairment losses are recognised in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the financial asset and the amount of the losses cannot be reversed subsequently, except in the case of sale of the asset. i) Foreign currency transactions The Group s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency. The detail of the equivalent euro value of the total foreign currency assets and liabilities held by the Group at 31 December 2011 and 2010 is as follows: Assets Liabilities Assets Liabilities US dollar 55, , , ,688 Pound sterling 18,922 6,815 6,290 2,894 Japanese yen 97,919 1,089 93, Swiss franc 27, , Mexican peso 15,584 7,253 17,558 7,702 Other currencies 375 1, , , , , ,469 41

51 The equivalent euro value of the foreign currency assets and liabilities held by the Group at 31 December 2011 and 2010, classified by type, is as follows: Assets Liabilities Assets Liabilities Financial liabilities held for trading ,999 1,970 Loans and receivables/financial liabilities at amortised cost 214, , , ,996 Hedging derivatives - 7,253-7,503 Other 1, , , , ,469 Upon initial recognition, balances receivable and payable denominated in foreign currencies are translated to the functional currency using the spot exchange rate at the recognition date, which is defined as the exchange rate for immediate delivery. Subsequent to initial recognition, foreign currency balances are translated to the functional currency as follows: 1. Monetary assets and liabilities are translated at the closing rate, defined as the average spot exchange rate at the reporting date. 2. Non-monetary items measured at historical cost are translated at the exchange rate at the date of acquisition. 3. Non-monetary items measured at fair value are translated at the exchange rate at the date when the fair value was determined. 4. Income and expenses are translated at the exchange rate at the transaction date. An average exchange rate is used for all the transactions carried out in the period, unless there have been significant exchange rate fluctuations. Depreciation and amortisation is translated at the exchange rate applied to the related asset. The exchange differences arising on the translation of balances receivable and payable denominated in foreign currencies are generally recognised in the consolidated income statement. j) Recognition of income and expenses Interest income, interest expenses and similar items are generally recognised on an accrual basis using the effective interest method (see Note 14-e). Dividends received from other entities are recognised as income when the right to receive them arises. Fees and commissions paid or received for financial services, however denoted contractually, are classified in the following categories, which determine their recognition in the income statement: 1. Financial fees and commissions, which are those that are an integral part of the effective cost or yield of a financial transaction and are recognised in the consolidated income statement over the expected life of the financing as an adjustment to the effective yield or cost of the transaction. These fees and commissions are recognised under Interest and Similar Income in the consolidated income statement. These include most notably origination fees and commissions on means of payment deferrals, on credit 42

52 limit overruns and on overdrafts on deposits taken. The fees and commissions earned in 2011 and 2010 were as follows: Origination fees 16,754 6,654 Means of payment deferral commissions 4,755 3,662 Other fees and commissions 5,684 1,940 27,193 12, Non-financial fees and commissions, which are those deriving from the provision of services and may arise from a service provided over a period of time or from a service provided in a single act (see Notes 46 and 47). They are generally recognised in the consolidated income statement using the following criteria: 1. Those relating to financial assets and liabilities measured at fair value through profit or loss are recognised when collected or paid. 2. Those arising from transactions or services that are performed over a period of time are recognised over the life of these transactions or services. 3. Those relating to a transaction or service performed in a single act are recognised when the single act is carried out. Non-finance income and expenses are recognised for accounting purposes on an accrual basis. Deferred collections and payments are recognised for accounting purposes at the amount resulting from discounting the expected cash flows at market rates. k) Offsetting Asset and liability balances are reported in the consolidated balance sheet at their net amount when they arise from transactions in which a contractual or legal right of set-off exists and the Group intends to settle them on a net basis, or to realise the asset and settle the liability simultaneously. l) Financial guarantees Financial guarantees are defined as contracts whereby the Group undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees and irrevocable documentary credits issued or confirmed by the Group. Guarantees are recognised under Financial Liabilities at Amortised Cost Other Financial Liabilities at their fair value which, on initial recognition and in the absence of evidence to the contrary, is the present value of the cash flows to be received, and, simultaneously, the present value of the future cash flows receivable is recognised in assets under Loans and Receivables using an interest rate similar to that of the financial assets granted by the Entity with a similar term and risk. Subsequent to initial recognition, the value of contracts recognised under Loans and Receivables is discounted by recording the differences in the income statement as finance income and the fair value of guarantees recognised under Financial Liabilities at Amortised Cost is allocated to the income statement as fee and commission income on a straight-line basis over the expected life of the guarantee. 43

53 Financial guarantees are classified on the basis of the insolvency risk attributable to the customer or to the transaction and, if appropriate, the Group considers whether provisions for these guarantees should be made, using criteria similar to those described in Note 14-h for debt instruments carried at amortised cost. The provisions made for financial guarantees are recorded under Provisions - Provisions for Contingent Liabilities and Commitments on the liability side of the consolidated balance sheet (see Note 34). The additions to these provisions and the provisions reversed are recognised under Provisions (Net) in the consolidated income statement. If a provision is required for these financial guarantees, the unearned commissions recorded under Financial Liabilities at Amortised Cost Other Financial Liabilities on the liability side of the consolidated balance sheet are reclassified to the appropriate provision. m) Leases Lease agreements are presented in the consolidated financial statements on the basis of the economic substance of the transaction, regardless of its legal form, and are classified from inception as finance or operating leases. 1. A lease is classified as a finance lease when it transfers substantially all the risks and rewards incidental to ownership of the leased asset. When the Group acts as the lessor of an asset, the sum of the present value of the lease payments receivable from the lessee and the guaranteed residual value (which is generally the exercise price of the lessee s purchase option at the end of the lease term) is recognised as lending to third parties and is therefore included under Loans and Receivables in the consolidated balance sheet based on the type of lessee. When the Group acts as the lessee, it presents the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognises a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use. The finance income and finance charges arising under finance lease agreements are credited and debited, respectively, to Interest and Similar Income and Interest Expense and Similar Charges, respectively, in the consolidated income statement so as to produce a constant rate of return over the lease term. 2. Leases other than finance leases are classified as operating leases. When the Group acts as the lessor, it presents the acquisition cost of the leased assets under Tangible Assets. The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use, and income from operating leases is recognised in the consolidated income statement on a straight-line basis. When the Group acts as the lessee, lease expenses, including any incentives granted by the lessor, are charged to Other General Administrative Expenses in the consolidated income statement on a straightline basis. 44

54 n) Assets and investment and pension funds managed by the Group Assets owned by third parties and managed by the Group are not presented on the face of the consolidated balance sheet. Management fees are included under Fee and Commission Income in the consolidated income statement (see Note 46). Information on third-party assets managed by the Group at 31 December 2011 and 2010 is disclosed in Note 61. Investment and pension funds managed by the consolidated entities are not presented on the face of the consolidated balance sheet since the related assets are owned by third parties. The fees earned during the year for services provided to these funds by Group companies (asset management, portfolio custody and other services) are recognised under Fee and Commission Income in the consolidated income statement (see Note 46). o) Staff costs and post-employment benefits o.1) Post-employment benefits Post-employment benefits are employee compensation that is payable after completion of employment. All post-employment benefits, including those covered by internal or external pension funds, are classified as defined contribution plans when the Group pays predetermined contributions into a separate entity and will have no legal or effective obligation to pay further contributions if the separate entity cannot pay the employee benefits relating to the services rendered in the current and prior periods. Post-employment obligations other than a defined contribution plan are classified as a defined benefit plan. The Group recognises under Provisions - Provisions for Pensions and Similar Obligations on the liability side of the consolidated balance sheet (or under Other Assets on the asset side, based on whether the resulting difference is negative or positive, and provided that the conditions for recognition stipulated in IAS 19 are met) the present value of the defined benefit pension obligations, net, as explained below, of the fair value of the assets qualifying as plan assets ; of the actuarial gains or losses disclosed on measurement of these obligations after 1 January 2004 and deferred using the corridor approach; and of the past service cost whose recognition has been deferred over time as explained below. An asset is only recognised as a result of the right to reimbursement from a plan or to a reduction in future contributions to the plan, provided that this right is unconditional, i.e. it is not conditional on the occurrence or non-occurrence of future events that are beyond the Group s control. Plan assets are defined as those that are related to certain defined benefit obligations that will be used directly to settle these obligations, and that meet the following conditions: they are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group; they are only available to pay or fund post-employment benefits for employees; and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan or of the entity to current and former employees, or they are returned to reimburse the employee benefits already paid by the Group. If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse part or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognises its right to reimbursement, which, in all other respects, is treated as a plan asset, on the asset side of the consolidated balance sheet under Insurance Contracts Linked to Pensions. The past service cost -which arises from changes to existing post-employment benefits or from the introduction of new benefits- is recognised on a straight-line basis over the period from the time at which the new obligations arise to the date on which the employee has an irrevocable right to receive the new benefits. 45

55 Post-employment benefits are recognised in the consolidated income statement as follows: 1. The current service cost, i.e. the increase in the present value of the obligations resulting from employee service in the current period, under Staff Costs. 2. Interest cost, i.e. the increase during the year in the present value of the obligations as a result of the passage of time, under Interest Expense and Similar Charges. When obligations are presented on the liability side of the balance sheet, net of the plan assets, the cost of the liabilities recognised in the consolidated income statement will be that relating exclusively to the aforementioned obligations. 3. The expected return on plan assets, less any plan administration costs and any applicable taxes, under Interest and Similar Income. 4. The actuarial gains and losses calculated using the corridor approach, under Provisions (Net). The Group uses the corridor approach provided for in IAS 19 to recognise the actuarial gains or losses which may arise in the valuation of its employee pension obligations. Accordingly, the Group only recognises the actuarial gains or losses arising in the valuation of the obligations if the net cumulative actuarial gains or losses not recognised at the beginning of the accounting period exceed the higher of 10% of the fair value of the plan assets at the end of the immediately preceding period and 10% of the present value of the defined benefit obligation also at the end of the immediately preceding period. The amount of the net cumulative actuarial gains or losses exceeding the higher of the two limits mentioned above is recognised in the consolidated income statement on a straight-line basis over five years. Actuarial gains or losses are recognised separately for each defined benefit plan. Obligations assumed by Bilbao Bizkaia Kutxa Under the collective labour agreements in force and the agreements reached with its employees, Bilbao Bizkaia Kutxa has undertaken to supplement the social security benefits accruing to employees retired at 31 July 1996 and, from that date, to the beneficiaries of disability benefits and of widows and orphans benefits in the event of death of current employees. Additionally, for obligations to current employees at 31 July 1996 and to employees who joined the Entity subsequent to that date, the Parent has set up different defined contribution systems. In order to externalise its obligations in this connection, in 1990 the Parent fostered the formation of Voluntary Community Welfare Entities (EPSVs), governed by Law 25/1983, of 27 October, of the Basque Parliament and by Decree 87/1984, of 20 February, of the Basque Government, so that these entities would settle the employee benefit obligations in the future. The Parent contributed to these EPSVs the internal funds set up in connection with the benefit obligations to employees resident in the Basque Country Autonomous Community. These contributions became vested rights of each serving employee at 31 July 1996, and this allocation of funds was approved under the Collective Agreement entered into by the workers of the Parent on 15 October The benefit obligations to current and retired employees not resident in the Basque Country Autonomous Community were externalised on 30 December In 2002 the Parent, pursuant to Royal Decree 1588/1999, completed the externalisation of its pension and similar obligations, except with regard to the internal provision, as indicated in Note 34, and filed with the Bank of Spain the application to the Ministry of Economy and Finance for the required authorisation to keep the internal provision. From that date, the new benefit obligations to employees and/or executive directors of the Parent were externalised to EPSVs or insurance policies were taken out to insure the related contingent obligations. 46

56 Additionally, the Parent has assumed certain commitments to its employees, relating to remuneration in kind of various types, which will be settled on completion of their employment period. These commitments are covered by internal provisions which are presented under Provisions - Provisions for Pensions and Similar Obligations (see Note 34) in the consolidated balance sheets. The detail of the present value of the Parent s post-employment benefit obligations and of the funding status of these obligations is as follows: Obligations: To current employees and early retirees 27,300 26,597 To retired employees 244, , , ,506 Funding: Internal provisions (Note 34) 35,413 33,441 Assets assigned to the funding of obligations 247, , , ,479 At 31 December 2011 and 2010, actuarial studies on the funding of post-employment benefit obligations were performed using the projected unit credit method and considering that the estimated retirement age of each employee is the earliest at which the employee is entitled to retire. The main actuarial assumptions used in the calculations were as follows: Discount rate 4% 4% Mortality tables PER 2000 PER 2000 Disability tables EVK M/F 90 EVK M/F 90 Annual pension increase rate 2% 2% Annual salary increase rate 2% 2% Cumulative annual CPI growth 2% 2% The detail of the fair value of the assets assigned to the funding of post-employment benefits at 31 December 2011 and 2010 is as follows: Assets of EPSVs, including unrealised gains on the assets of Gauzatu (Note 34) 247, ,038 47

57 Following is a detail of the fair value of the main types of assets composing the plan assets included in the foregoing table at 31 December 2011 and 2010: Shares Debt instruments 246, ,775 Other assets , ,038 The annual return on the assets assigned to the funding of post-employment benefits in 2011 ranged from 0.08% to 7.22% (2010: 1.25% to 7.24%). The expected annual return on these assets for 2012 ranges from 0.50% to 7.22%. The value of certain aggregates related to defined benefit post-employment obligations at 31 December 2011, together with the same aggregates for the last four years, for comparison purposes, are as follows: Present value of the defined benefit obligations 271, , , , ,361 Funding 282, , , , ,144 Surplus / (Deficit) 10,991 8,973 24,962 17,701 6,783 The surplus or deficit shown in the table above relates to the unrecognised actuarial gains and losses and, additionally in 2011, 2010, 2009 and 2008, to the solvency margin of Gauzatu EPSV, which amounted to EUR 8,639 thousand at 31 December 2011 (31 December 2010: EUR 8,893 thousand) (see Note 34). The aforementioned solvency margin was not recognised as an asset since the Group considers that it is unlikely to obtain repayments from the EPSV or reductions of future cash flows. Actuarial gains and losses are those arising from differences between the previous actuarial assumptions and what has actually occurred and those arising from changes in the actuarial assumptions used. The actuarial gains and losses have not been recognised since the Group opted to defer them using a corridor approach; accordingly, only unrecognised actuarial gains or losses at the end of the prior year exceeding certain statutory limits are recognised as income or expense for each year. In 2011 and 2010 no amount was recognised in this connection in the consolidated income statements, since the stipulated limits were not exceeded. Obligations assumed by BBK Bank CajaSur, S.A.U. (wholly-owned subsidiary of BBK) BBK Bank CajaSur, S.A.U. has undertaken to supplement the public social security system post-employment benefits accruing to certain employees and to their beneficiary right holders according to the Specifications Agreement for the Pension Plan for CajaSur Employees of 30 November 2005, which remains in force after the transfer en bloc of assets and liabilities (see Note 1.2). Defined contribution plans By virtue of the agreement entered into by the former CajaSur and its employees on 20 October 2000, which remains in force after the transfer en bloc of assets and liabilities (see Note 1.2), BBK Bank CajaSur, S.A.U. 48

58 has made contributions to an external occupational pension fund managed, until 30 June 2011, by CajaSur Entidad de Seguros y Reaseguros, S.A. to cover its commitments under the applicable defined contribution system. From 30 June 2011 to 31 December 2011, this plan was managed by Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A., after the transfer en bloc of assets and liabilities of CajaSur Entidad de Seguros y Reaseguros, S.A. to Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. and Biharko Aseguradora Compañía de Seguros y Reaseguros, S.A. (see Note 1.2). The contributions to the pension plan in 2011 under the agreements entered into with employees amounted to EUR 4,767 thousand, and this amount is recognised under Staff Costs in the consolidated income statement (see Note 52). At 31 December 2011, there were no outstanding accrued pension plan contributions. Post-employment defined benefit plans a.- Pension obligations to retired employees In 2000 the former CajaSur externalised its vested pension obligations to retired employees by taking out an insurance policy with CajaSur Entidad de Seguros y Reaseguros, S.A., which remains in force after the transfer en bloc of assets and liabilities (see Note 1.2). From 30 June 2011 to 31 December 2011, this plan was managed by Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. (see Note 1.2). b.- Pension obligations to current employees For the current employees not covered by the external occupational pension fund, in 2000 the former CajaSur took out an insurance policy with Caser, Compañía de Seguros y Reaseguros, S.A., which remains in force after the transfer en bloc of assets and liabilities (see Note 1.2). 49

59 Following is a detail, at 31 December 2011, of the present value of the post-employment benefit obligations of BBK Bank CajaSur, S.A.U., showing the funding status of these obligations, the fair value of the plan and non-plan assets funding them and the present value of the obligations not recognised in the consolidated balance sheet at that date, pursuant to Bank of Spain Circular 4/2004, by balance sheet heading under which they are recognised, where appropriate, at that date: 2011 (*) 2010 Present value of the obligations- Obligations funded by plan assets- To current employees To retired employees 62,499-62,911 - Fair value of assets assigned to obligations covered by insurance policies taken out with non-group entities 6,513 - Fair value of assets assigned to obligations covered by insurance policies taken out with Group entities - Insurance contracts linked to pensions (**) 56,398 - Provisions for pensions and similar obligations 56,398 - (*) Arising from the transfer en bloc of assets and liabilities (see Note 1.2) (**) From 30 June 2011 to 31 December 2011, taken out with Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A., after the transfer en bloc of assets and liabilities of CajaSur Entidad de Seguros y Reaseguros, S.A. to Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. and Biharko Aseguradora Compañía de Seguros y Reaseguros, S.A. (see Notes 1.2 and 1.3). The present value of the obligations covered by insurance policies taken out with Group entities was determined by qualified actuaries using the following actuarial techniques: The present value of the vested pension obligations is calculated using the prospective method which involves calculating the current actuarial value of all future benefits payable to beneficiaries in accordance with the conditions applicable to the obligations assumed by the Institution. The actuarial capitalisation system was applied on an individual basis. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows: Actuarial Assumptions Discount rate 4% - Mortality tables PERMF-2000P - Annual pension increase rate 2% - Annual salary increase rate 2% - The estimated retirement age of each employee is 65 for employees who do not have the possibility of taking early retirement. 50

60 The present value of the obligations covered by insurance policies taken out with non-group companies was determined by qualified actuaries using the following actuarial techniques: The interest rate applied to the insured benefits of each policy was the guaranteed rate. The actuarial capitalisation system was applied on an individual basis. The estimated retirement age of each employee is 65. The following assumptions were used: Actuarial Assumptions Mortality tables PERMF-2000P - Nominal adjustable pension increase rate 1% - Nominal adjustable salary increase rate 2% - Nominal maximum contribution base increase rate 1% - Following is a detail of the fair value of the main types of assets composing the aforementioned plan at 31 December 2011 and 2010: Debt instruments 62,911-62,911 - The value of certain aggregates related to defined benefit post-employment obligations at 31 December 2011, together with the same aggregates for the last four years, for comparison purposes, are as follows: Present value of the defined benefit obligations (*) 62,911 64,179 66,132 70,090 70,413 Funding (*) 62,911 64,179 66,132 70,090 70,413 Surplus / (Deficit) (*) Arising from the transfer en bloc of assets and liabilities (see Note 1.2) The annual return on the assets assigned to the funding of post-employment benefits in 2011 ranged from 2.42% to 6.00%. The expected annual return on these assets for 2012 ranges from 2.24% to 6.00%. o.2) Other long-term employee benefits Obligations assumed by Bilbao Bizkaia Kutxa The Group has obligations arising from agreements which may be classified as other long-term benefits. As a result, the Group has recognised provisions to cover these obligations (see Note 34). 51

61 Death and disability The cost of the Group s obligations in the event of death or disability of current employees was quantified by an independent actuary. This cost, which was externalised to EPSVs, amounted to EUR 5,381 thousand in 2011 (2010: EUR 4,504 thousand). Early retirements The Group s early retirement benefit obligations to certain of its employees are accounted for, as applicable, using the same criteria as those explained above for defined benefit obligations, except that all the past service cost and the actuarial gains or losses are recognised as soon as the employee takes early retirement. These provisions, amounting to EUR 9,131 thousand at 31 December 2011 (31 December 2010: EUR 17,063 thousand), are included under Provisions - Provisions for Pensions and Similar Obligations (see Note 34) in the consolidated balance sheets. Other long-term obligations In addition to the supplementary pension obligations which were externalised, as described in the preceding section, the Group set up certain provisions to cater for possible benefit obligations to current employees. These provisions, amounting to EUR 43,061 thousand at 31 December 2011 (31 December 2010: EUR 42,853 thousand), are included under Provisions - Provisions for Pensions and Similar Obligations (see Note 34) in the consolidated balance sheets. These obligations are accounted for, as applicable, using the same criteria as those explained above for defined benefit obligations, except that all the past service cost and the actuarial gains or losses are recognised as soon as they arise. Obligations assumed by BBK Bank CajaSur, S.A.U. (a wholly-owned subsidiary of BBK) Early retirements In 2000, the former CajaSur offered certain employees the possibility of retiring before reaching the age stipulated in the collective agreement in force. For this purpose, the former CajaSur took out an insurance policy with CajaSur Entidad de Seguros y Reaseguros, S.A. to cover certain financial commitments to these employees from the date of early retirement until their death. This insurance policy remained in force after the transfer en bloc of assets and liabilities described in Note 1.2. At 31 December 2011, this plan was managed by Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. (see Note 1.2). The Group recognised the present value of these obligations, which amounted to EUR 33,382 thousand under Provisions - Provisions for Pensions and Similar Obligations on the liability side of the consolidated balance sheet. The amount accrued in connection with this insurance policy in 2011, which is recognised under Staff Costs in the consolidated income statement, was EUR 601 thousand. Additionally, the Group has insured its other early retirement commitments to employees through the arrangement or renewal of insurance policies with Caser, Seguros y Reaseguros, S.A. These commitments totalled EUR 1,949 thousand at 31 December The following actuarial assumptions were used to calculate the amount of the policy: PERM/F-2000P mortality tables; a discount rate based on the return on the plan assets; and a policy rate of increase in salaries of 2%, reviewable each year based on the CPI. 52

62 In 2011 an insurance policy was taken out with the insurance company Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. in order to fulfil the obligations under the labour agreement of 11 January 2011 with respect to the contributions to the pension plan to cover the retirement benefits of the early retirees covered by this policy, a premium of EUR 3,780 thousand was paid and recognised under Provisions - Other Provisions in the accompanying consolidated balance sheet at 31 December Early retirement commitments until the date of effective retirement are treated for accounting purposes, where applicable, using the same criteria as those described above for defined benefit post-employment obligations, except that all the past service cost and the actuarial gains and/or losses are recognised as soon as they arise. Death and disability The Group's commitments for death or disability of current employees, which are covered by insurance policies taken out with Caser, are recognised in the consolidated income statement for the amount of the related insurance policy premiums accrued in each year. The amount accrued in connection with these insurance policies in 2011, which is recognised under Staff Costs in the consolidated income statement, was EUR 1,056 thousand (see Note 52). Long-service bonuses Long-service bonus commitments are accounted for, where applicable, using the same criteria as those described above for defined benefit post-employment obligations, except that all the past service cost and the actuarial gains and/or losses are recognised as soon as they arise. At 31 December 2011, the provision recognised in this connection amounted to EUR 4,606 thousand, and this amount was recognised under Provisions - Provisions for Pensions and Similar Obligations in the consolidated balance sheet. Other obligations On 12 November 2004, the Board of Directors of the former CajaSur approved the implementation at the Caja of a partial retirement scheme linked to replacement contracts. The related labour agreement, which was entered into by CajaSur and its workers' representatives on 21 January 2005, stipulated, inter alia, an 85% reduction of the working day and consequently a reduction of the remuneration to be paid by the former CajaSur. The agreement guarantees that participating employees will receive at least 87% of their actual fixed salaries; the total amount received, which will include their social security pension entitlement, the remuneration relating to the portion of the working day worked and the supplement to be paid by CajaSur, cannot exceed 100% of their actual fixed salaries. In order to ensure that the guaranteed salary falls within the lower and upper thresholds, the replacement supplement will be increased or decreased by the required percentage. Also, social security contributions will continue to be paid for all contingencies. On 9 November 2007, the initial agreement was renewed until 31 December A total of 54 employees qualified for inclusion in the scheme. The scheme was finally taken up by 53 employees. The provision recognised in this connection under Provisions Other Provisions in the accompanying consolidated balance sheet amounted to EUR 5,543 thousand at 31 December Following is a detail, at 31 December 2011 and 2010, of the present value of the Group's other postemployment benefit obligations, showing the funding status of these obligations, the fair value of the plan and non-plan assets funding them and the present value of the obligations not recognised in the consolidated 53

63 balance sheets at those dates, pursuant to Bank of Spain Circular 4/2004, by balance sheet heading under which they are recognised, where appropriate, at those dates: 2011 (*) 2010 Present value of obligations Defined benefit early retirement obligations 35,332 - Defined benefit loyalty bonus obligations 4,606 - Defined benefit replacement contract obligations (**) 5,543-45,481 - Fair value of assets assigned to obligations covered by insurance policies taken out with non-group entities 1,949 - Fair value of assets assigned to obligations covered by insurance policies taken out with Group entities Insurance contracts linked to pensions (***) 33,382 - "Provisions - Provisions for pensions and similar obligations" in the consolidated balance sheet (Note 34) 37,989 - Provisions - Other provisions 5,543 - (*) Arising from the transfer en bloc of assets and liabilities (see Note 1.2). (**) Included under Provisions - Other Provisions in the accompanying consolidated balance sheet. (***) From 30 June 2011 to 31 December 2011, taken out with Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A., after the transfer en bloc of assets and liabilities of CajaSur Entidad de Seguros y Reaseguros, S.A. to Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. and Biharko Aseguradora Compañía de Seguros y Reaseguros, S.A. (see Notes 1.2 and 1.3). The present value of the obligations and the fair value of the assets included in the table above were determined by qualified actuaries using the following actuarial techniques for insurance policies taken out with Group entities: The present value of the vested pension obligations is calculated using the prospective method which involves calculating the current actuarial value of all future benefits payable to beneficiaries in accordance with the conditions applicable to the obligations assumed by the Institution. The actuarial capitalisation system was applied on an individual basis. 54

64 Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows: Actuarial Assumptions Discount rate 4% - Mortality tables PERMF P - Annual pension increase rate 2% - Annual salary increase rate 2% - The estimated retirement age of each employee is that determined in the collective labour agreement, except for employees who can take early retirement. The present value of the obligations covered by insurance policies taken out with non-group companies was determined by qualified actuaries using the following actuarial techniques: The interest rate applied to the insured benefits of each policy was the guaranteed rate, except in the case of benefits related to loyalty bonuses, to which an interest rate of 3.07% was applied. The valuation method used to calculate loyalty bonuses was the projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately. The actuarial capitalisation system was applied on an individual basis. The estimated retirement age of each employee is 65. The following assumptions were used: Actuarial Assumptions Mortality tables PERMF-2000P - Nominal adjustable pension increase rate 1% - Nominal adjustable salary increase rate 2% - Nominal maximum contribution base increase rate 1% - Following is a detail of the fair value of the main types of assets composing the plan assets included in the foregoing table at 31 December 2011 and 2010: Debt instruments 33,382-33,382-55

65 The value of certain aggregates related to other long-term benefits at 31 December 2011, together with the same aggregates for the last four years, for comparison purposes, are as follows: 2011 (*) Present value of the defined benefit obligations 45,481 51,690 57,690 57,334 66,077 Funding 35,332 36,049 36,803 37,361 38,351 Surplus / (Deficit) (10,149) (15,641) (20,887) (19,973) (27,726) (*) Arising from the transfer en bloc of assets and liabilities (see Note 1.2) The annual return on the assets assigned to the funding of post-employment benefits in 2011 ranged from 0.00% to 6.00%. The expected annual return on these assets for 2012 ranges from 0.00% to 6.00%. o.3) Termination benefits Under current legislation, the Group is required to pay termination benefits to employees terminated without just cause. As regards senior executive employment contracts, the amount of the agreed termination benefits is charged to the consolidated income statement when the decision to terminate the contract is taken and notified to the person concerned. The State Aid Procedure for the Restructuring of CajaSur approved by the European Commission established as a necessary condition for receiving the promised aid (see Note 1.2) that CajaSur must undertake a restructuring process involving the reduction of the installed capacity and, accordingly, the adjustment of operating costs to ensure the viability of the business plan. As stated in Note 1.2, 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 Bank s trade union representatives. The aim of the agreement is to be able to undertake the workforce adjustments required to make the Bank 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. At 31 December 2011, 510 employees had availed themselves of these measures (see Note 1.2). In 2011 four agreements were entered into by the workers' representatives of the subsidiaries of BBK Bank CajaSur, S.A.U and the representatives of the company regarding the employees of BBK Bank CajaSur, S.A.U engaged in the non-financial business. As a result of these agreements, the employment relationship of 59 employees (of a maximum of 72) was terminated within the framework of the restructuring, reduction of productive capacity and orderly liquidation of the aforementioned subsidiaries. p) Income tax Income tax is deemed to be an expense and is recognised under Income Tax in the consolidated income statement, except when it results from a transaction recognised directly in consolidated equity, in which case the income tax is recognised directly in consolidated equity, or from a business combination in which the deferred tax is recognised as one of its assets or liabilities. 56

66 The income tax expense is determined on the basis of the tax payable on the taxable profit for the year after taking account of any changes in that year due to temporary differences and to tax credit and tax loss carryforwards. The taxable profit for the year may differ from the consolidated net profit for the year reported in the consolidated income statement because it excludes the revenue and expense items which are taxable or deductible in different years and also excludes items that will never be taxable or deductible. Deferred tax assets and liabilities are taxes expected to be recoverable or payable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases. Deferred tax assets and liabilities are accounted for in the consolidated balance sheet and are measured by applying to the related temporary difference or tax credit the tax rate that is expected to apply in the period when the asset is realised or the liability is settled. A deferred tax asset, such as prepaid tax, a tax credit carryforward and a tax loss carryforward, is recognised whenever it is probable that the Group will obtain sufficient future taxable profit against which the deferred tax asset can be utilised. It is considered probable that the Group will obtain sufficient taxable profit in the future in the following cases, among others: 1. There are deferred tax liabilities settleable in the same year that the deferred tax asset is realised, or in a subsequent year in which the existing tax loss or that resulting from the deferred tax asset can be offset. 2. The tax losses result from identifiable causes which are unlikely to recur. Deferred tax liabilities are always recognised except when they arise from the initial recognition of goodwill. Furthermore, a deferred tax liability is not recognised if it arises from the initial recognition of an asset or liability, other than a business combination, that at the time of recognition affects neither accounting profit nor taxable profit. Deferred tax assets and liabilities are not recognised if they arise from the initial recognition of an asset or liability (other than in a business combination) that at the time of recognition affects neither accounting profit nor taxable profit. The deferred tax assets and liabilities recognised are reassessed at each reporting date in order to ascertain whether they still exist, and the appropriate adjustments are made. In 2011, as a result of the transfer en bloc of assets and liabilities (see Note 1.2), the Group recognised deferred tax assets arising from tax loss carryforwards generated at the former CajaSur in 2009 and q) Tangible assets Property, plant and equipment for own use, which relates to tangible assets which are intended to be held for continuing use by the Group and tangible assets acquired under finance leases, are measured at acquisition cost less the related accumulated depreciation and any impairment losses (carrying amount higher than recoverable amount). The acquisition cost of certain unrestricted items of the Parent s property, plant and equipment for own use (basically property, plant and equipment for own use acquired prior to 2001 and not assigned to welfare projects) includes their fair value at 1 January 2004, which was determined on the basis of appraisals performed by independent experts. Depreciation is systematically calculated using the straight-line method by applying the years of estimated useful life of the various items to the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand is deemed to have an indefinite life and, therefore, is not depreciated. The Parent's period tangible asset depreciation charge is recognised in the consolidated income statement 57

67 and is calculated on the basis of the following average years of estimated useful life of the various classes of assets: Years of Estimated Useful Life Property for own use 50 IT equipment 4 Furniture, fixtures and other 6 The Group assesses at each reporting date whether there is any internal or external indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the Group reduces the carrying amount of the asset to its recoverable amount and adjusts future depreciation charges in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be reestimated). Also, if there is an indication of a recovery in the value of a tangible asset, the Group recognises the reversal of the impairment loss recognised in prior periods and adjusts the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognised in prior years. This reduction of the carrying amount of property, plant and equipment for own use and the related reversal are recognised, if necessary, with a charge or credit, respectively, to Impairment Losses on Other Assets (Net) - Other Assets in the consolidated income statement. The Group reviews the estimated useful lives of the items of property, plant and equipment for own use at least at the end of each reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognised in the consolidated income statement in future years on the basis of the new useful lives. Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognised in the consolidated income statement for the period in which they are incurred. Tangible assets that require more than twelve months to get ready for use include as part of their acquisition or production cost the borrowing costs which have been incurred before the assets are ready for use and which have been charged by the supplier or relate to loans or other types of borrowings directly attributable to their acquisition, production or construction. Capitalisation of borrowing costs is suspended, if appropriate, during periods in which the development of the assets is interrupted, and ceases when substantially all the activities necessary to prepare the asset for its intended use are complete. Tangible assets assigned to welfare projects are presented and measured as indicated in this note for other tangible assets. They are also depreciated by the straight-line method on the basis of the years of useful life detailed above, although the depreciation expense is charged to Welfare Project Maintenance Expenses, as a deduction from Welfare Fund in the consolidated balance sheets. Investment property under Tangible Assets reflects the net values of the land, buildings and other structures held by the Group either to earn rentals or for capital appreciation. The criteria used to recognise the acquisition cost of investment property, to calculate its depreciation and the related estimated useful lives and to recognise any impairment losses thereon are consistent with those described above in relation to property, plant and equipment for own use. 58

68 r) Intangible assets Intangible assets are identifiable non-monetary assets without physical substance. Intangible assets are deemed to be identifiable when they are separable from other assets because they can be sold, rented or disposed of individually or when they arise from a contractual or other legal right. An intangible asset is recognised when, in addition to meeting the aforementioned definition, the Group considers it probable that economic benefits will be generated from this asset and its cost can be estimated reliably. Intangible assets are recognised initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortisation and any accumulated impairment losses. Goodwill represents a payment made by the Group in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognised and is only recognised when it has been acquired for consideration in a business combination. Any excess of the cost of the investments in subsidiaries, jointly controlled entities and associates over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows: 1. If it is attributable to specific assets and liabilities of the entities acquired, by increasing the value of the assets or reducing the value of the liabilities whose market values were higher or lower, respectively, than the carrying amounts at which they had been recognised in their balance sheets and whose accounting treatment was similar to that of the same assets or liabilities, respectively, of the Group. 2. If it is attributable to specific intangible assets, by recognising it explicitly in the consolidated balance sheet provided that the fair value of these assets at the date of acquisition can be measured reliably. 3. The remaining unallocable amount is recognised as goodwill, which is allocated to one or more specific cash-generating units. Goodwill is measured at acquisition cost. At the end of each reporting period, the Group reviews goodwill for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and if there is any impairment, the goodwill is written down with a charge to Impairment Losses on Other Assets (Net) Goodwill and Other Intangible Assets in the consolidated income statement. An impairment loss recognised for goodwill cannot be reversed in a subsequent period. For the purposes of performing the impairment test, the carrying amount of the cash-generating unit is compared with its recoverable amount. Recoverable amount is calculated as the sum of a static valuation and a dynamic valuation. The static valuation quantifies the entity's value based on its equity position and existing gains and losses while the dynamic valuation quantifies the discounted value of the Group s estimated cash flow projections for a projection period of five years (until 2016) plus a calculation of the residual value using a perpetuity growth rate. The variables on which these projections are based are a reduction in the asset and liability margins in the banking industry and the distribution of a portion of earnings to strengthen capital adequacy levels. A sustainable growth rate of around 2% is used in order to extrapolate cash flows to perpetuity. The discount rate used to discount cash flows is the cost of capital allocated to the cashgenerating unit, which is around 10%, and is composed of a risk-free rate plus a premium that reflects the inherent risks of the business unit assessed. Any deficiency of the cost of investments in subsidiaries, jointly controlled entities and associates below the related underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows: 59

69 1. If the gain on the bargain purchase is attributable to specific assets and liabilities of the entities acquired, by increasing the value of the liabilities or reducing the value of the assets whose market values were higher or lower, respectively, than the carrying amounts at which they had been recognised in their balance sheets and whose accounting treatment was similar to that of the same assets or liabilities, respectively, of the Group. 2. The remaining unallocable amount is recognised under Gains on Bargain Purchases Arising on Business Combinations in the consolidated income statement for the year in which the share capital is acquired. Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group- or a finite useful life. Intangible assets with indefinite useful lives are not amortised, but rather at the end of each reporting period the Group reviews the remaining useful lives of the assets. Intangible assets with finite useful lives are amortised over those useful lives, which range from two to five years, using methods similar to those used to depreciate tangible assets. In both cases the Group recognises any impairment loss on the carrying amount of these assets with a charge to the consolidated income statement. The criteria used to recognise the impairment losses on these assets and, where applicable, the reversal of impairment losses recognised in prior years are similar to those used for tangible assets. s) Provisions and contingent liabilities Provisions are present obligations of the Group arising from past events whose nature at the reporting date is clearly specified but whose amount or timing is uncertain and that the Group expects to settle on maturity through an outflow of resources embodying economic benefits. These obligations may arise from: 1. A legal or contractual requirement. 2. An implicit or tacit obligation arising from valid expectations created by the Group on the part of third parties that it will discharge certain responsibilities. Such expectations are created when the Group publicly accepts responsibilities, or derive from a pattern of past practice or from published business policies. 3. Virtual certainty as to the future course of regulation in particular respects, especially proposed new legislation that the Group cannot avoid. Contingent liabilities are possible obligations of the Group that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the Group. Contingent liabilities include the present obligations of the Group when it is not probable that an outflow of resources embodying economic benefits will be required to settle them or when, in extremely rare cases, their amount cannot be measured with sufficient reliability. Provisions and contingent liabilities are classified as probable when the event is more likely than not to occur; as possible when it is more likely than not that the event will not occur; and as remote when it is extremely unlikely that the event will occur. The Group s consolidated financial statements include all the material provisions and contingent liabilities with respect to which it is considered that it is more likely than not that the obligation will have to be settled. Contingent liabilities classified as possible are not recognised in the consolidated financial statements, but rather are disclosed unless the possibility of an outflow of resources embodying economic benefits is considered to be remote. 60

70 Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year. Provisions are used to cater for the specific obligations for which they were recognised. Provisions are fully or partially reversed when such obligations cease to exist or are reduced (see Note 34). The additions to and release of provisions considered necessary pursuant to the foregoing criteria are recognised with a charge or credit, respectively, to Provisions (Net) in the consolidated income statement (see Note 55). t) Non-current assets held for sale and Liabilities associated with non-current assets held for sale Non-Current Assets Held for Sale in the consolidated balance sheet includes the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations) whose sale in their present condition is highly likely to be completed within one year from the reporting date. Non-current assets held for sale also include investments in jointly controlled entities or associates meeting the aforementioned requirements. Property or other non-current assets received by the Group as total or partial settlement of its debtors payment obligations to it are deemed to be non-current assets held for sale, unless the Group has decided to make continuing use of these assets. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeably be recovered through the proceeds from their disposal rather than from continuing use. The acquisition cost of foreclosed assets is the carrying amount of the financial assets settled through foreclosure. Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors' payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to classify these assets, on the basis of their nature and intended use, as property, plant and equipment for own use, investment property or inventories. In 2011 the Group decided to recognise uniformly at consolidated level certain assets received in full or partial satisfaction of payment obligations under Non-Current Assets Held for Sale in the accompanying consolidated balance sheet. In this connection, at 31 December 2011 the Group reclassified assets amounting to EUR 390,766 thousand (gross) and impairment losses amounting to EUR 121,688 thousand (see Notes 27 and 32) which had been recognised under Other Assets - Inventories to Non-Current Assets Held for Sale in the accompanying consolidated balance sheet. Liabilities Associated with Non-Current Assets Held for Sale includes the balances payable associated with disposal groups and with discontinued operations. In general, non-current assets classified as held for sale are measured at the lower of their carrying amount calculated as at the classification date and their fair value less estimated costs to sell. Tangible and intangible assets that are depreciable and amortisable by nature are not depreciated or amortised during the time they remain classified as non-current assets held for sale. Foreclosed assets that remain on the balance sheet for a period longer than initially envisaged for their sale are analysed individually in order to recognise any impairment that may arise subsequent to their acquisition. In addition to the reasonable offers received during the period with respect to the offered sale price, the analysis takes into consideration any difficulties in finding a buyer and, in the case of tangible assets, any physical deterioration that might reduce their value. 61

71 If the carrying amount of the assets exceeds their fair value less costs to sell, the Group adjusts the carrying amount of the assets by the amount of the excess with a charge to Gains (Losses) on Non-Current Assets Held for Sale Not Classified as Discontinued Operations in the consolidated income statement. If the fair value of such assets subsequently increases, the Group reverses the losses previously recognised and increases the carrying amount of the assets without exceeding the carrying amount prior to the impairment, with a credit to Gains (Losses) on Non-Current Assets Held for Sale Not Classified as Discontinued Operations in the consolidated income statement. The gains or losses arising on "Non-Current Assets Held for Sale" are presented under Gains (Losses) on Non-Current Assets Held for Sale Not Classified as Discontinued Operations in the consolidated income statement. u) Inventories Inventories are non-financial assets held for sale in the ordinary course of business, in the process of production, construction or development for such sale, or to be consumed in the production process or in the rendering of services. Consequently, inventories include the land and other property held for sale in the Group s property development activity. Inventories are measured at the lower of cost and net realisable value. Cost comprises all the costs of purchase, costs of conversion and other direct and indirect costs incurred in bringing the inventories to their present location and condition and the borrowing costs that are directly attributable to them, provided they require more than one year to be sold, taking into account the criteria described above for capitalising borrowing costs of property, plant and equipment for own use. Net realisable value is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale. The cost of inventories that are not ordinarily interchangeable and of goods or services produced and segregated for specific projects is determined by identifying their individual costs, and the cost of other inventories is assigned by using the weighted average cost formula. The amount of any write-downs of inventories, such as those due to damage, obsolescence or reduction of the selling price, to net realisable value and other losses are recognised as an expense in the consolidated income statement for the year in which the impairment or loss occurs. Subsequent reversals are recognised in the consolidated income statement for the year in which they occur. Any write-downs of the carrying amount of inventories to net realisable value and any subsequent reversals are recognised under Impairment Losses on Other Assets (Net) - Other Assets in the consolidated income statement. Income from sales is recognised under Other Operating Income Sales and Income from the Provision of Non-Financial Services when the significant risks and rewards inherent to ownership of the asset have been transferred to the buyer, the management of the asset is discontinued and the effective control of the asset is no longer retained. The carrying amount of inventories is derecognised and recognised as an expense in the consolidated income statement for the period in which the related revenue from their sale is recognised. This expense is included under Other Operating Expenses Changes in Inventories in the consolidated income statement. The assets acquired by the Group through foreclosure, which are deemed to be the assets received by the Group from its borrowers or other debtors as total or partial satisfaction of financial assets representing receivables from them, regardless of how they were acquired, and which, on the basis of their nature and intended purpose, are classified as inventories by the Group, are initially recognised at acquisition cost, which is taken to be the carrying amount of the debts giving rise to them, calculated in accordance with the regulations applicable to the Group. Subsequently, the foreclosed assets are adjusted for any impairment 62

72 losses thereon, estimated in accordance with the general calculation methods indicated above in relation to inventories. v) Welfare fund The welfare fund is recognised under Welfare Fund in the consolidated balance sheet. Transfers to the welfare fund are recorded as an appropriation of the net profit of the Parent. Welfare project expenses are presented in the consolidated balance sheet as deductions from the welfare fund and in no case may they be recognised in the consolidated income statement. Tangible assets and liabilities assigned to welfare projects are presented in separate line items in the consolidated balance sheet. The amount of the welfare projects conducted through the Parent s own business activities is accounted for by reducing the welfare fund and recognising, simultaneously, an item of income in the consolidated income statement based on normal market conditions ( arm s length basis ) for activities of this kind. w) Insurance transactions In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit the amounts of premiums to income when the related insurance policies are issued and charge to income the cost of claims on settlement thereof. Insurance entities are therefore required to accrue at periodend the unearned revenues credited to their income statements and the accrued costs not charged to income. The most significant accruals recorded by the consolidated entities in relation to direct insurance contracts arranged by them are included in the following technical provisions: - Provision for unearned premiums, which reflects the gross premium written in a year allocable to future years, less the loading for contingencies. - Provision for unexpired risks, which supplements the provision for unearned premiums by the amount by which that provision is not sufficient to reflect the assessed risks and expenses to be covered in the policy period not elapsed at the reporting date. - Provision for claims outstanding, which reflects the estimated obligations outstanding arising from claims incurred prior to the reporting date -both unsettled or unpaid claims and claims not yet reported-, less payments made on account, taking into consideration the internal and external claim settlement expenses and, where appropriate, any additional provisions required for variances in assessments of claims involving long handling periods. - Life insurance provision: in life insurance policies whose coverage period is one year or less, the provision for unearned premiums reflects the gross premium received in the year which is allocable to future years. If this provision is insufficient, a supplemental provision is calculated for unexpired risks which covers the assessed risks and expenses expected to arise in the policy period not elapsed at the reporting date. - In life insurance policies whose coverage period is more than one year, the mathematical provision is calculated as the difference between the present actuarial value of the future obligations of the consolidated entities operating in this line of insurance and those of the 63

73 policyholder or the insured, taking as a basis for calculation the inventory premium accrued during the year (i.e. pure premium plus a loading for administrative expenses per the technical bases). - Provision for life insurance policies where the investment risk is borne by the policyholders: this provision is determined on the basis of the assets specifically assigned to determine the value of the rights. - Provision for bonuses and rebates: this provision includes the amount of the bonuses accruing to policyholders, insureds or beneficiaries and the premiums to be returned to policyholders or insureds, based on the behaviour of the risk insured, to the extent that such amounts have not been individually assigned to each of them. Elimination of accounting mismatches In insurance transactions that are financially immunised, i.e. whose surrender value is linked to the value of specifically assigned assets, and which are expected to share in the profits generated by an associated asset portfolio, or in the case of insurance transactions in which the insurer assumes the investment risk or similar risks, insurance companies have symmetrically recognised, through equity or voluntary reserves, changes in the fair value of assets classified under Available-for-Sale Financial Assets" and Other Financial Assets at Fair Value Through Profit or Loss. The balancing entry for such changes is the provision for life insurance, whenever required by the private insurance regulations and other applicable regulations, and a liability item (with a positive or negative balance) for the portion not recognised as a life insurance provision, which is presented in the Other Liabilities caption on the liability side of the consolidated balance sheet. The technical provisions for reinsurance assumed are determined using criteria similar to those applied for direct insurance and are generally calculated on the basis of the information provided by the cedants. The technical provisions for direct insurance and reinsurance assumed were recognised in the consolidated balance sheet under "Liabilities under Insurance Contracts" until completion of the transfer en bloc of assets and liabilities of CajaSur Entidad de Seguros y Reaseguros, S.A. to Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. and Biharko Aseguradora Compañía de Seguros y Reaseguros, S.A. (see Note 1.2). The technical provisions for reinsurance ceded -which are calculated on the basis of the reinsurance contracts entered into and by applying the same criteria as those used for direct insurance- were presented in the consolidated balance sheet under Reinsurance Assets (see Note 1.2). The deposit component of the life insurance policies linked to investment funds is included under Other Financial Liabilities at Fair Value through Profit or Loss - Other Financial Liabilities when the financial assets to which they are linked are also measured at fair value through profit or loss. The guarantees or guarantee agreements in which the Group undertakes to compensate an obligee in the event of non-compliance with a specific obligation other than a payment obligation by a particular debtor of the obligee, such as deposits given to ensure participation in auctions or competitions, surety bonds, irrevocable promises to provide surety and guarantee letters which are claimable by law, are considered, for the purpose of preparing these consolidated financial statements, to be insurance contracts. When the Group provides the guarantees or sureties indicated in the preceding paragraph, it recognises them under Liabilities under Insurance Contracts in the consolidated balance sheet at fair value plus the related transaction costs, which, unless there is evidence to the contrary, is the same as the value of the premiums received plus, if applicable, the present value of cash flows to be received for the guarantee or surety provided, and an asset is recognised simultaneously for the present value of the cash flows to be received. 64

74 Subsequently, the present value of the fees or premiums to be received is discounted, and the differences are recognised under Fee and Commission Income in the consolidated income statement; and the value of the amounts initially recognised in liabilities is allocated on a straight-line basis to the consolidated income statement (or, if applicable, using another method which must be indicated). In the event that, in accordance with IAS 37, a provision is required for the surety which exceeds the liability recognised, the provision is recognised using criteria similar to those described for the recognition of impairment of financial assets and the amount recorded is reclassified as an integral part of the aforementioned provision. Plan assets are defined as those that are related to certain defined benefit obligations that will be used directly to settle these obligations, and that meet the following conditions: they are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group; they are only available to pay or fund post-employment benefits for employees; and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan or of the entity to current and former employees, or they are returned to reimburse the employee benefits already paid by the Group. For these purposes, within the framework of the spin-off of assets and liabilities described in Note 1.2, Biharko Vida y Pensiones Compañía de Seguros y Reaseguros, S.A. was considered to be a related party. x) Business combinations A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities. Business combinations performed on or after 1 January 2004 whereby the Group obtains control over an entity or economic unit are recognised for accounting purposes as follows: The Group measures the cost of the business combination, defined as the fair value of the assets given, the liabilities incurred and the equity instruments issued, if any, by the acquirer. The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognised by the acquiree, are estimated and recognised in the consolidated balance sheet. Any difference between the net fair value of the assets, liabilities and contingent liabilities of the acquired entity or business and the cost of the business combination is recognised as discussed in Note 14.r. When shares of a given entity are purchased in stages, until as a result of one such purchase the Group obtains control over the investee ( successive purchases or step acquisitions ), the following criteria are applied: The cost of the business combination is the aggregate cost of the individual transactions. For each of the share purchase transactions performed until control over the acquiree is obtained, goodwill or a gain on a bargain purchase is calculated separately using the criteria described earlier in this Note. Any difference between the fair value of the asset and liability items of the acquiree on each of the successive purchase dates and their fair value on the date that control is obtained over the acquiree is recognised as a revaluation of those items under Reserves in consolidated equity. 65

75 Transfer of CajaSur s assets and liabilities to BBK Bank, S.A. (Sole-Shareholder Company) (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. (Sole-Shareholder Company), a newlycreated subsidiary of BBK. y) Consolidated statement of changes in equity The consolidated statement of changes in equity presented in these consolidated financial statements shows the total changes in consolidated equity in the year. This information is in turn presented in two statements: the consolidated statement of recognised income and expense and the consolidated statement of changes in total equity. The main characteristics of the information contained in the two parts of the statement are explained below: Consolidated statement of recognised income and expense As indicated above, in accordance with the options provided for by IAS 1, the Group opted to present two separate statements, i.e. a first statement displaying the components of consolidated profit or loss ( consolidated income statement ) and a second statement which, beginning with consolidated profit or loss for the year, discloses the components of other comprehensive income for the year ( consolidated statement of recognised income and expense ), as it is called in Bank of Spain Circular 4/2004. The consolidated statement of recognised income and expense presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognised in the consolidated income statement for the year and the other income and expenses recognised, in accordance with current regulations, directly in consolidated equity. Accordingly, this statement presents: a) Consolidated profit for the year. b) The net amount of the income and expenses recognised temporarily in consolidated equity under Valuation Adjustments. c) The net amount of the income and expenses recognised definitively in consolidated equity. d) The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associates or jointly controlled entities accounted for using the equity method, which are presented net. e) Total consolidated recognised income and expense, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests. The amount of the income and expenses relating to entities accounted for using the equity method recognised directly in equity is presented in this statement, irrespective of the nature of the related items, under Entities Accounted for Using the Equity Method. The changes in income and expenses recognised in equity under Valuation Adjustments are broken down as follows: 66

76 a) Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognised directly in consolidated equity. The amounts recognised in this line item in the year remain there, even if in the same year they are transferred to the consolidated income statement, to the initial carrying amount of other assets or liabilities, or are reclassified to another line item. b) Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognised in consolidated equity, albeit in the same year, which are recognised in the consolidated income statement. c) Amount transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognised in consolidated equity, albeit in the same year, which are recognised in the initial carrying amount of the assets or liabilities as a result of cash flow hedges. d) Other reclassifications: includes the amount of the transfers made in the year between valuation adjustment items in accordance with current regulations. The amounts of these items are presented gross and, except as indicated above for the items relating to valuation adjustments of entities accounted for using the equity method, the related tax effect is recognised under Income Tax in this statement. Consolidated statement of changes in equity The consolidated statement of changes in equity (which in these financial statements is called Statement of changes in total equity in accordance with the terminology used by Bank of Spain Circular 4/2004) presents all the changes in consolidated equity, including those arising from changes in accounting policies and from the correction of errors. Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated equity items, and the changes are grouped together on the basis of their nature into the following items: a) Adjustments due to changes in accounting policies and to errors: include the changes in consolidated equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements due to changes in accounting policies or to the correction of errors. b) Income and expense recognised in the year: includes, in aggregate form, the total of the aforementioned items recognised in the consolidated statement of recognised income and expense. c) Other changes in equity: includes the remaining items recognised in equity, including, inter alia, increases and decreases in the endowment fund, allocation of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in consolidated equity. z) Consolidated statement of cash flows The following terms are used in the consolidated statements of cash flows with the meanings specified: 1. Cash flows: inflows and outflows of cash and cash equivalents (including reciprocal accounts at credit institutions), which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value. 2. Operating activities: the principal revenue-producing activities of the Group and other activities that are not investing or financing activities. Operating activities also include interest paid on any financing received, even if this financing is considered to be financing activity. Activities performed with the various financial 67

77 instrument categories detailed in Notes 14.e and 14.f above are classified, for the purposes of this statement, as operating activities, except for held-to-maturity investments, subordinated financial liabilities and investments in equity instruments classified as available for sale which are strategic investments. For these purposes, a strategic investment is that made with the intention of establishing or maintaining a long-term operating relationship with the investee, since, among other things, one of the circumstances of permanence or relatedness prevail, even though a significant influence does not exist. 3. Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. 4. Financing activities: activities that result in changes in the size and composition of the consolidated equity and liabilities that are not operating activities. For the purposes of preparing the consolidated statement of cash flows, cash and cash equivalents were considered to be short-term, highly liquid investments that are subject to an insignificant risk of changes in value. Accordingly, the Group classified the following financial assets and liabilities as cash and cash equivalents: Cash owned by the Group, which is recognised under Cash and Balances with Central Banks in the consolidated balance sheet. The cash owned by the Group at 31 December 2011 amounted to EUR 508,379 thousand (31 December 2010: EUR 208,891 thousand). Net balances receivable on demand from credit institutions, other than balances with central banks. Balances receivable on demand from credit institutions other than central banks are recognised, among others, under Loans and Receivables - Loans and Advances to Credit Institutions in the consolidated balance sheet, and amounted to EUR 264,931 thousand at 31 December 2011 (31 December 2010: EUR 159,003 thousand). 15. Customer Care Service In accordance with the stipulations of Article 8 of Ministry of Economy Order ECO/734/2004 on Customer Care Departments and Services and Customer Ombudsmen of Financial Institutions, the Bilbao Bizkaia Kutxa Group published its Customer Ombudsmen Regulations, which were filed with the Basque Government and approved by it on 5 January In conformity with Article 17 of the aforementioned Order, the Group prepared the Annual Report on the Customer Care Service, which is summarised below. Following the transfer en bloc of CajaSur's assets and liabilities to BBK Bank CajaSur, S.A. (Sole-Shareholder Company) (see Note 1.2), a resolution was passed at the Executive Committee meeting of Bilbao Bizkaia Kutxa of 5 May 2011 to integrate the Customer Care Service of BBK Bank CajaSur, S.A. (Sole-Shareholder Company) in that of BBK. Quantitative summary of the claims and complaints filed with the Service. 3,520 claims relating to the BBK Group were filed with the Customer Care Service in 2011, of which 3,461 were admitted for consideration (2010: 1,090 claims, of which 1,085 were admitted for consideration). The average handling period was 33 calendar days (2010: 24 days). 2,070 complaints were received by the Customer Care Service in 2011, all of which were responded to in writing within an average of 30 days (2010: 1,307 complaints, responded to within an average of 25 days). 68

78 The detail, by type, of the claims and complaints filed is as follows: Quality, ex-ante dissatisfaction with the service (information and advisory) 2.11% 5.38% Quality, ex-post dissatisfaction with the service (lack of diligence) 14.67% 15.77% Fees and expenses 17.28% 19.40% Discrepancy in account entries 41.93% 31.79% Interest 2.88% 1.00% Other contractual conditions/documentation 5.08% 2.75% Data protection 0.23% 0.25% Insurance policies, claims 0.84% 2.88% Other 14.98% 20.78% % % Performance of the Service and improvement measures adopted to meet customer needs. BBK s Customer Care Service receives, analyses, handles and responds to all the cases of dissatisfaction expressed by customers, in conformity with certain performance procedures which comply with the requirements of the aforementioned Order ECO/734/2004 and Customer Ombudsmen Regulations. Each month, the Quality and Customer Care Service manager submits to the Business Committee for monitoring and control a detailed summary, in the form of a balanced scorecard, of the data relating to the Service, its performance and the main reasons for customer dissatisfaction. The actions taken to improve customer service quality in all respects are communicated to the Areas concerned and the related follow-up work is performed in conjunction with them. 16. Credit risk Credit risk is defined as the possibility of the Group incurring a financial loss stemming from the failure of third parties to meet their contractual obligations to the Group due to insolvency or other reasons. This category includes counterparty risk, which is linked to treasury operations and is generally assumed with other financial institutions, and country risk, which relates to defaults arising from specific circumstances which relate to the country and/or currency of the borrower and are beyond the borrower's control and creditworthiness. The ultimate responsibility for credit risk at the Parent lies with its senior executive bodies, i.e. the Executive Committee and the Board of Directors, which are responsible for approving large transactions and the policies and criteria to be applied. These bodies receive proposals from the Lending Committee, which comprises the General Manager of Banking Business, Deputy General Manager of Risk Approval, Deputy General Manager of Control and Planning and General Manager of Wholesale Banking. The design and implementation of credit risk policies and procedures are the responsibility of the Risk Control area, within the Control and Planning Department, and the Risk Monitoring and Policy area, within the Banking Business Department. 69

79 The management and monitoring systems established to assess, mitigate and reduce credit risk are generally based on the procedures set forth below and on prudent policies relating to risk diversification, the reduction of the risk concentration to a single counterparty, and the acceptance of guarantees. Loan analysis and approval In order to optimise business opportunities with each customer and guarantee an adequate degree of security, responsibility for loan approval and risk monitoring is shared between the business manager and the risk analyst, thus permitting, through efficient communication, an integrated view of each customer's situation and a coordinated management of risk. All customer and branch managers have different levels of powers assigned to them on a personal basis, based on the type of customer, type of risk and guarantee. These powers are defined by risk limits which, in turn, vary on the basis of the guarantees and of the reports issued by the various scoring models in place; with an overall limit by customer. If transactions exceed the powers assigned to each business and branch manager, they are analysed by the central risk approval area, which either approves the transactions, as appropriate on the basis of its powers, or instead conveys the related proposals to higher authority for authorisation: i.e. to General Management and, following review by the Lending Committee to the Executive Committee/Board of Directors. As an essential resource in credit risk management, the Group seeks to ensure that financial assets acquired or arranged by the Group have collateral and other types of credit enhancement in addition to the borrower s personal guarantee. Based on the particular characteristics of the transactions, the Group's risk analysis and acceptance policies establish the collateral or credit enhancements required for the transactions, in addition to the borrower s personal guarantee, before they can be authorised. The collateral is valued on the basis of the nature of the collateral received. Generally, collateral in the form of real estate is valued at its appraisal value, calculated by independent entities in accordance with Bank of Spain regulations at the transaction date. The collateral in the form of securities listed in active markets is measured at the market price, adjusted by a percentage to cover possible fluctuations in the market value that might jeopardise the risk cover; guarantees and similar collateral are measured at the amount guaranteed in the related transactions; credit derivatives and similar transactions used as credit risk hedges are measured, for the purposes of determining the level of cover, at their nominal value, which is equal to the hedged risk; lastly, collateral in the form of pledged deposits is measured at the value of the deposits and, where they are denominated in a foreign currency, they are translated at the exchange rate at each measurement date. Instrumentation Transaction instrumentation and legal support procedures are specialised so that they can respond to the various customer segments through a process encompassing customised risk management and advisory services for large transactions, and another process, involving the preparation and supervision of various model agreements for the arrangement of standard transactions, which is decentralised across the network. Risk monitoring and policies The business manager monitors operations through direct contact with customers and the management of daily operations and the alerts generated automatically by the monitoring system implemented at the Entity. Risk analysts also have access to customer and centre monitoring through the automatic alert system in place. Risk monitoring procedures enable the Group to perform both an individual control by customer, customer group and large exposures, and a general control by sector on the basis of the different alert signals. 70

80 A major component of this process is the credit risk monitoring and policy unit, which participates in the development, implementation and validation of rating models, and designs and implements the automatic monitoring systems. Also, the business monitoring unit was strengthened. This unit uses specialised managers to manage risk exposure to customers under special monitoring. The BBK Group has a specialised unit for the monitoring of risk associated with the property industry which controls and assesses the smooth progress of the property projects it finances in order to anticipate any problems concerning their execution. Loan recovery The establishment of efficient management procedures for loans outstanding facilitates the management of past-due loans by making it possible to adopt a proactive approach based on the early identification of loans with a tendency to become delinquent loans and the transfer thereof to recovery management specialists who determine the types of recovery procedures that should be applied. Information systems provide daily information on the individual and global situation of managed risks, supported by various indicators and alerts that facilitate efficient management. The Recovery Unit has managers who specialise in monitoring and supporting the recovery management function decentralised in branches, which includes pre-delinquency measures, support from specialised external companies and lawyers specialising in the recovery of delinquent loans in court. Policies and procedures relating to mortgage market activities With respect to the mortgage market, as required by Mortgage Market Law 2/1981, amended by Law 41/2008, Royal Decree 716/2009 and Bank of Spain Circular 7/2010, the Parent has the required controls in place, as part of its processes, in order to guarantee compliance with the statutory requirements in the various mortgage loan acceptance, instrumentation, monitoring and control phases. The Parent's directors are responsible for compliance with the approved policies and procedures relating to the mortgage market. Inter alia, these procedures place particular emphasis on the following points: - A viability analysis must be performed for any authorised or proposed transactions, together with the related guarantees. The file for all transactions must contain the documentation and information required to support the transaction and, particularly, to assess the customer s ability to pay (evidence of recurring income for individuals and income statements in the case of companies) and the guarantees relating to the transaction (statement of assets for individuals, balance sheets for companies and up-to-date appraisals in mortgage transactions). - Loan approval powers are delegated taking into consideration the relationship between the loan amount and the appraisal value of the mortgaged property, together with all the additional collateral that might exist to secure the transaction. The policies establish the maximum lending limits on the basis of the Loan-to-Value (LTV) ratio applicable to transactions, by type of collateral. The Group only authorises appraisals performed by the leading valuers within the area of operations of its branch network. The main valuers used are Servicios Vascos de Tasaciones, S.A. and Tasaciones Inmobiliarias, S.A. 71

81 Counterparty risk With respect to treasury activities, the Parent has exposure limits per counterparty which avoid a high level of concentration vis-à-vis any single financial institution. In the case of derivative instruments, the limit used is calculated on the basis of both the value of present claims (positive replacement value) and a measure of the potential risk that might arise from the favourable performance of this replacement value in the future. The Group uses netting and collateral arrangements entered into with counterparties as a risk mitigation policy in this connection. At 31 December 2011, the deposits received and delivered as collateral amounted to EUR 369,375 thousand and EUR 135,618 thousand, respectively (31 December 2010: EUR 188,102 thousand and EUR 51,350 thousand, respectively). These amounts are recognised under Financial Liabilities at Amortised Cost Deposits from Credit Institutions and Loans and Receivables Deposits from Credit Institutions, respectively, in the consolidated balance sheets. The lines of action described relate to new developments aimed at aligning the Parent s risk processes with the guidelines arising from the New Basel Capital Accord. Accordingly, the Parent is committed to a continuous improvement of the design and implementation of the tools and procedures for a more efficient treatment of customer credit risk in all its processes, which will guarantee certain standards in the quality of service and rigour in the criteria used, with the ultimate aim of preserving the Parent's solvency and contributing value thereto. The Internal Control Area, through the Internal Audit Department, checks effective compliance with the aforementioned management policies and procedures and assesses the adequacy and efficiency of the management and control activities of each functional and executive unit. To this end, it performs periodic audits of the centres related to credit risk, which include the analysis of loan recoverability and of the appropriate loan classification for accounting purposes. The information obtained from these audits is sent to the related executive bodies and to the Parent's Control Committee, which has assumed the functions of the Audit Committee. At 31 December 2011 and 2010, more than 99% of the loans and receivables outstanding were with counterparties resident in Spain. The information on the guarantees and collateral associated with customer loan transactions is included in Note 25. Following is the detail of the Group s credit risk exposure, including both debt instruments and contingent liabilities, classified in accordance with the levels defined in Bank of Spain Circular 4/2004 relating to the calculation of the collective allowance for credit risk impairment: Level of Exposure Negligible risk 3,793,315 3,821,252 Low risk 15,293,941 10,052,317 Medium-low risk 7,829,463 5,664,613 Medium risk 6,068,315 4,506,965 Medium-high risk 745, ,419 High risk 126, ,222 33,856,987 24,597,788 Following is a detail, for each type of financial instrument loaned to customers, of the credit risk exposure covered by the main collateral and other credit enhancements held by the Group at 31 December 2011 and 2010: 72

82 At 31 December 2011: Property Mortgage Guarantee Secured by Cash Deposits Other Collateral Guaranteed by Financial Institutions Guaranteed by Other Entities Total Loans and advances to customers 23,710,867 53, ,166 21,525 1,738,857 25,667,642 At 31 December 2010: Property Mortgage Guarantee Secured by Cash Deposits Other Collateral Guaranteed by Financial Institutions Guaranteed by Other Entities Total Loans and advances to customers 15,933,366 49, ,967 82,781 1,616,213 17,837,701 The Parent has been implementing various models and tools to support the assessment and management of credit risk exposure to customers. Since most of these assets relate to lending to individuals and SMEs, only a small portion of the loan portfolio has obtained external ratings, all of which are high. The following table details the loans and advances to customers, without considering valuation adjustments, based on the credit ratings granted by the various recognised external rating agencies (using the standard nomenclature of Standard & Poor's and Fitch): Thousands of Euros % Thousands of Euros % Investment grade AAA to AA- 857, , A+ to A- 299, , BBB+ to BBB- 409, , Non Investment Grade Below BBB- 21, , Unrated 32,277, ,625, Total 33,865, ,237, The Group performs sensitivity analyses to estimate the effects of potential changes in the non-performing loans ratio, both on an overall basis from the study of loans and receivables segments, and on an individual basis from the study of individual economic groups or customers. Following is the carrying amount, classified by type of financial instrument, of the financial assets at 31 December 2011, the conditions of which were renegotiated. The Group considers that, considering the related conditions and collateral supporting them, a portion of these instruments would not have ultimately matured or become totally or partially impaired. 73

83 2011 Loans and advances to customers 77,437 Following is a detail of the fair value of the collateral and credit enhancements received on renegotiated assets at 31 December 2011: Mortgage Guarantees Cash Collateral Personal Guarantees Total Loans and advances to customers 55, ,960 77,437 In 2011 the Group did not receive any guarantees to ensure the collection of financial assets additional to those mentioned in the two foregoing tables, or enforce any guarantees other than the dations in payment made in 2011 recognised under Non-Current Assets Held for Sale in the accompanying consolidated balance sheet. 17. Liquidity risk Liquidity risk, in its most significant version, structural risk, is the possibility that, because of the maturity gap between its assets and liabilities, the Group will be unable to meet its payment commitments at a reasonable cost or will not have a stable funding structure to support its business plans for the future. The Parent's senior executive bodies have ultimate responsibility for liquidity risk, as for all other risks, although it is directly managed by the Asset-Liability Committee (ALCO). Liquidity risk management involves close monitoring of maturity gaps on the Group's balance sheet, the analysis of the foreseeable future trend, the inclusion of the liquidity factor in the corporate decision-making process, the use of financial markets to complete a stable funding base, and the provision of liquidity channels to be used immediately in unforeseen extreme scenarios. The Management Control Department is responsible for assessing the Parent's future liquidity needs and, to this end, it has specific tools enabling it to prepare the current liquidity gap and to estimate its future trend. This foreseeable trend is analysed by performing various simulation tests which require the definition of assumptions relating to the various possible macroeconomic scenarios, customers' economic behaviour and the Group's investment policy. The Markets Area is responsible for seeking stable sources of external funding for the Group in the financial markets at a reasonable cost to offset the disintermediation process followed by customers in their investment decisions and the growth in their demand for financing. The launch of the various note, mortgage-backed bond ( cédula hipotecaria ) and subordinated debt issues is illustrative of this policy. Also, the Parent endeavours to maintain additional sources of funding (institutional and other) to be used in extremely adverse liquidity scenarios, so that all its payment commitments can be met, even in these circumstances. Each year management of the Parent defines its strategy for the issue of wholesale financing, based on the Parent s liquidity needs forecasts, and, in particular, for mortgage-market issues such as mortgage-backed bonds 74

84 or mortgage securitisations. The ALCO monitors the liquidity margins on a fortnightly basis. The volume and type of assets used in these transactions are determined based on the performance of the outstanding balances of the Parent s loans and receivables and on market conditions. The Board of Directors of the Parent is responsible for authorising all mortgage-backed bond issues, loan and mortgage credit securitisations, guaranteed issues, equity portfolio transfers, and balance sheet and commercial gap rationalisation. The Parent monitors on a monthly basis, amongst other controls, the total volume of the mortgage-backed bonds in issue and of the remaining eligible collateral. In recent years, as part of the numerous regulatory amendment projects currently in progress, the European Banking Authority (EBA) and the Basel Committee on Banking Supervision published several consultative documents including those relating to the maintenance of liquidity buffers and survival periods, which were embodied in the document published in December 2011, "Basel III: International framework for liquidity risk measurement, standards and monitoring". In July 2011 the European Union published the related regulatory texts, the definitive content of which had not been approved at the date of preparation of these financial statements. As an advance of the new regulatory framework, in December 2011 the Bank of Spain approved Circular 4/2011 amending Circular 3/2008 and introducing, inter alia, new developments regarding the establishment of new policies, procedures and controls and new disclosure requirements regarding the entities' liquidity. The Group is currently adapting to the new regulatory standards. The detail of the Group's assets and liabilities, by term to maturity (i.e. the period remaining from the balance sheet date to the contractual maturity date), is as follows: Net Net Assets Liabilities Liquidity Assets Liabilities Liquidity Gap Gap Less than 1 month 4,035,325 5,168,725 (1,133,400) 4,536,221 3,821, ,512 1 to 3 months 834,659 1,797,103 (962,444) 649,818 1,267,796 (617,978) 3 months to 1 year 3,362,206 7,760,236 (4,398,030) 3,166,543 2,954, ,443 1 to 5 years 10,133,841 16,765,070 (6,631,229) 7,138,086 13,943,215 (6,805,129) More than 5 years 19,762,869 5,680,548 14,082,321 11,983,423 2,080,656 9,902,767 38,128,900 37,171, ,218 27,474,091 24,067,476 3,406,615 75

85 The terms to maturity of the liabilities shown in the foregoing table include the maturities of the fixed-term deposits disregarding renewal assumptions. Also, the assumptions used to classify the other liabilities and asset transactions with no maturity or with undetermined maturity were as follows: Assets Cash and balances with the Bank of Spain Balances with other credit institutions Credit cards - Public and private sector Equities and valuation adjustments to equities Investments Other accounts with no maturity Liabilities Ordinary deposits - Public sector Average accumulated balance for the year Other Interest-bearing deposits - Public sector Interest-bearing deposits - Private sector Interest-bearing deposits - Other banks Less than 1 month Less than 1 month Less than 1 month Less than 1 month Less than 1 month From 1 to 5 years From 1 to 5 years Less than 1 month Less than 1 month From 1 to 5 years Less than 1 month "Investments" on the asset side of the consolidated balance sheet was classified under "Less than 1 month" because it was considered that the Group entities invested in liquid securities at 31 December 2011 and Accordingly, the table showing the analysis of the Group's assets and liabilities by term to maturity should not be interpreted as an exact reflection of the Group s liquidity position in each of the periods included. Following is the detail of the items under which the amounts shown in the foregoing table are recognised: Assets Liabilities Assets Liabilities Cash and balances with central banks/deposits from central banks 508,379 2,000, ,891 1,200,102 Loans and advances to credit institutions/deposits from credit institutions 533,010 2,104, , ,826 Loans and advances to customers/customer deposits 31,899,805 29,162,607 21,601,170 18,927,967 Debt instruments: Financial assets held for trading 105, ,216 - Available-for-sale financial assets 1,997,092-1,666,933 - Equity instruments Financial assets held for trading Available-for-sale financial assets 2,602,499-3,132,477 - Investments 482, ,447 - Marketable debt securities - 3,319,755-2,447,389 Subordinated liabilities - 584, ,192 38,128,900 37,171,682 27,474,091 24,067,476 76

86 18. Interest rate and foreign currency risks As intermediaries between parties offering and requesting funding, financial institutions bridge the gap between the conditions required by each party in terms of maturity, repricing method, embedded options, currency and other features. In so doing, financial institutions are exposed to possible losses resulting from the effect that an adverse market trend might have on their open positions. Either interest rate risk or foreign currency risk arises, depending on the risk factor causing the losses. As is the case with liquidity risk, interest rate and foreign currency risks are directly managed by the Asset- Liability Committee, although the Parent's senior executive bodies are ultimately responsible for these risks and they receive periodic information thereon and set the general guidelines. Foreign currency risk is the potential loss arising from adverse fluctuations in the exchanges rates of the various currencies in which the Group operates. The Group systematically hedges its open currency positions related to customer transactions and, therefore, its exposure to foreign currency risk is scant. With respect to interest rate risk, the Management Control Department is equipped with specific tools to prepare the repricing gap, which represents an initial approach to this risk. However, in view of the growing complexity of the financial instruments on the face of the balance sheets of financial institutions, the Parent uses simulation techniques aimed at estimating the impact of various hypothetical scenarios on the Group's net interest income and valuation techniques to estimate the impact on equity. Hedges are used when the Parent's exposure to interest rate risk is not deemed to be acceptable either due to its magnitude or because its trend is contrary to the expected market performance. In order to maintain the desired levels of interest risk exposure, the Parent enters into interest rate swaps for hedging against changes in the fair value of certain assets and liabilities, which include the bonds issued by the Entity and the investments in book-entry government debt. Additionally, as part of the general policies and procedures for structural interest rate and liquidity risk hedges, the Parent takes into consideration the expected cash flows from the eligible portfolio and the future transactions it plans to perform. The table below shows the static gap of items sensitive to interest rates, classified by repricing date, which represents an initial approach to the Group's exposure at 31 December 2011 to the risk of changes in interest rates (at 31 December 2010, the static gap analysis of the items sensitive to interest rates relates to the Parent): 77

87 On- Balance- Sheet Balances Less than 1 Month 1 to 3 Months 3 Months to 1 Year Millions of Euros to 2 Years 2 to 3 Years 3 to 4 Years 4 to 5 Years More than 5 Years Sensitive assets: Cash 1, Loans and advances to customers 31,900 3,496 7,385 16, , Investment securities 5, , ,129 4,671 7,488 17, , Sensitive liabilities: Bank financing 4,105 1, ,872-3 Borrowed funds 33,067 4,051 7,395 10,082 1,737 4,544 4, ,172 5,520 7,687 10,192 1,951 4,688 6, GAP for the period (849) (199) 7,196 (1,548) 2,298 (6,575) % of total assets (1.99%) (0.47%) 16.90% (3.64%) 5.40% (15.45%) 1.29% 0.19% Cumulative GAP (849) (1,048) 6,148 4,600 6, % of total assets (1.99%) (2.46%) 14.44% 10.80% 16.20% 0.75% 2.04% 2.23% On- Balance- Sheet Balances Less than 1 Month 1 to 3 Months 3 Months to 1 Year Millions of Euros to 2 Years 2 to 3 Years 3 to 4 Years 4 to 5 Years More than 5 Years Sensitive assets: Cash Loans and advances to customers 21,700 3,984 4,546 12, Investment securities 4, , ,512 4,653 4,721 13, , Sensitive liabilities: Bank financing 2,185 1, Borrowed funds 21,984 4,241 4,008 4,240 1,514 7, ,169 5,757 4,296 4,240 1,514 7, GAP for the period (1,104) 425 8,911 (1,104) (3,781) (10) (40) 46 % of total assets (3.87%) 1.49% 31.20% (3.87%) (13.24%) (0.04%) (0.14%) 0.16% Cumulative GAP (1,104) (679) 8,232 7,128 3,347 3,337 3,297 3,343 % of total assets (3.87%) (2.38%) 28.82% 24.96% 11.72% 11.68% 11.54% 11.70% For the purpose of preparing the foregoing tables, Cash was deemed to include Cash and Balances with Central Banks and Loans and Receivables Loans and Advances to Credit Institutions ; Bank Financing was 78

88 deemed to include Financial Liabilities at Amortised Cost - Deposits from Central Banks and Financial Liabilities at Amortised Cost - Deposits from Credit Institutions ; Borrowed Funds was deemed to include Financial Liabilities at Amortised Cost Customer Deposits, Financial Liabilities at Amortised Cost Marketable Debt Securities and Financial Liabilities at Amortised Cost Subordinated Liabilities ; and Investment Securities was deemed to include Available-for-Sale Financial Assets, Investments and Financial Assets Held for Trading Debt Instruments in the separate balance sheet of the Parent. The criteria used to classify transactions with no maturity or with undetermined maturity were as follows: Assets Cash and balances with the Bank of Spain Balances with other credit institutions Credit cards - Public and private sector Equity securities Valuation adjustments Other accounts with no maturity Liabilities Deposits from credit institutions Ordinary demand deposits - Private sector Interest-bearing deposits - Private sector Ordinary demand deposits Public sector Other deposits - Public sector Other deposits At 1 month Less than 1 month Less than 1 month From 2 to 3 years Less than 1 month Less than 1 month for the ending balance less the average accumulated balance; 2 to 3 years for the average accumulated balance. Less than 1 month From 2 to 3 years 1 month to 3 years depending on the nature of the product Less than 1 month for the ending balance less the average accumulated balance; 2 to 3 years for the average accumulated balance. Less than 1 month Less than 1 month for the ending balance less the average accumulated balance; 2 to 3 years for the average accumulated balance. At 2011 and 2010 year-end, the sensitivity of net interest income on the Parent s commercial activities to horizontal shifts in the yield curve of 100 bp and 50 bp, based on a time horizon of one year and a scenario of a stable balance sheet, was as follows: Sensitivity analysis at 31 December 2011: Net Interest Income Effect on Valuation Adjustments of Equity Variations in Euribor: 100-basis-point increase (5,054) 111, basis-point increase (7,504) 55, basis-point fall 22,150 (54,622) 79

89 Sensitivity analysis at 31 December 2010: Net Interest Income Effect on Valuation Adjustments of Equity Variations in Euribor: 100-basis-point increase (1,311) (39,554) 50-basis-point increase (643) (20,677) 50-basis-point fall (619) 22, Other risks Market risks Market risks relate to the possibility of incurring losses on own portfolios as a result of an adverse trend in monetary, bond, equities, derivatives or other markets. This risk is present in all the Parent's portfolios, although its impact on net profit and equity may vary based on the accounting treatment applicable in each case. Market risk management seeks to limit the Group's exposure to the aforementioned losses and to optimise the ratio between the level of risk assumed and the expected return, in keeping with the guidelines established by the Parent's senior executive bodies. In accordance with the aforementioned guidelines, the Asset-Liability Committee is responsible for managing market risk. Close control of market risk requires the implementation of operating procedures in keeping with the regulatory trends arising from the New Capital Accord and with the best practices generally accepted by the market. These procedures include matters such as segregation of functions, information control, definition of objectives, operating limits and other security-related matters. In addition to procedural matters, market risk control is supported by quantitative tools that provide standardised risk measures. The model used is based on value at risk (VaR), which is calculated using historical simulation and parametric methodologies arising from the variance - covariance matrix. The reference VaR is calculated with a historical simulation model, although VaR is also calculated with a parametric model for comparison purposes. The VaR model used is intended to estimate, with a confidence interval of 99%, the maximum potential loss that might arise from a portfolio or group of portfolios over a given time horizon. The time horizon is one day for trading operations. The validation, or backtesting, of the VaR model employed consists of comparing the percentage of actual exceptions with the confidence interval used. An exception arises when the actual loss on a portfolio for a given time horizon exceeds the VaR calculated at the beginning of that time horizon. The time horizons used for the validation, or backtesting, are one and ten days. The methodology described above is supplemented with stress tests which simulate the behaviour of the aforementioned portfolios in extremely adverse scenarios. The systematic stress scenarios used are in line with the recommendations of the Derivatives Policy Group Committee made in 1995 in the Framework for Voluntary Oversight working paper. This document introduces a series of recommendations which make it possible to forecast the behaviour of the value of the portfolio in the event of certain extreme behaviours 80

90 grouped by risk factor. In addition to these recommended scenarios, stress testing exercises are performed based on historic scenarios with exceptionally unfavourable effects for the portfolios being analysed. To manage market risk the Parent uses tools that ensure effective control of market risk at all times, in line with best market practices. The Parent has no net market risk positions of a structural nature in trading derivatives, since it closes out all its positions in derivatives with customers, either through bank counterparties or through opposite-direction derivatives arranged in organised markets. However, under certain circumstances small net market risk positions in trading derivatives are taken for which a special risk analysis is performed. In 2011 the average daily VaR of the trading portfolio, calculated using the parametric model, based on a one-day time horizon and with a confidence level of 99% amounted to EUR 91 thousand (2010: EUR 167 thousand). The Group's exposure to structural equity price risk derives mainly from investments in industrial and financial companies with medium- to long-term investment horizons. The exposure to market risk (measured as the fair value of the equity instruments held by the Group) amounted to EUR 2,393,714 thousand at 31 December 2011 (31 December 2010: EUR 3,132,477 thousand). The Group opted to use the historical simulation model to calculate overall VaR, and, accordingly, the average ten-day VaR of the investment portfolio, using a 99% confidence level, was EUR 212,052 thousand. However, for year-on-year comparison purposes, the average ten-day VaR, calculated using the parametric method, with a 99% confidence level, was EUR 237,766 thousand (31 December 2010: EUR 153,359 thousand) Operational risk Operational risk is defined as the risk of loss resulting from failed, erroneous or inadequate internal processes, people and systems or from external events. This definition includes legal risk, but excludes reputational and strategic risk. The BBK Group uses a methodology and IT tools developed specifically for managing operational risk, and has personnel devoted exclusively to this task, the Operational Risk Unit, as well as a broad network of professionals responsible for managing this risk throughout the organisation. The operational risk management system consists essentially of the following processes: 1. Qualitative Internal Assessment Process 2. Loss recognition and risk indicator data collection processes 3. Analysis processes and mitigation action proposals 4. Business Continuity Planning The BBK Group's operational risk regulatory capital calculated at 31 December 2011 amounted to EUR 132,094 thousand. 20. Risk concentrations The Group closely monitors its risk concentration for each possible category: counterparty, sector, product, geographical area, etc. 81

91 At 31 December 2011, around 72% of the Group's credit risk arose from the individuals business (31 December 2010: 76%), which guarantees a high degree of capillarity in its portfolio. The risk exposure to financial institutions is subject to very strict limits, compliance with which is checked on an ongoing basis. Additionally, there are netting and collateral agreements with the most significant counterparties (see Note 16) and, therefore, credit risks arising from the Parent's treasury operations are limited to a minimum. The risk concentration of the Group s industrial investment portfolio is managed as indicated in Note 24. As required by Bank of Spain Circular 5/2011 in relation to information on transparency, Note 61 includes a detail of the information relating to financing granted to the construction and property development industries, financing granted for home purchases, assets acquired to settle debts and financing requirements and strategies. 21. Cash and balances with central banks The detail of Cash and Balances with Central Banks in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Cash 169, ,143 Balances with the Bank of Spain 338,730 77,602 Valuation adjustments , , Financial assets and liabilities held for trading The detail of Financial Assets Held for Trading and Financial Liabilities Held for Trading in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Assets Liabilities Debt instruments 105, , Trading derivatives 103,759 84, ,917 83, , , ,917 83,270 82

92 The effect of the changes in the fair value of the financial assets and liabilities held for trading on the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows (see Note 48): Debt instruments 1,789 (1,971) Other equity instruments 328 (366) Trading derivatives (13,092) (33,305) Net gain /(loss) (10,975) (35,642) Securities whose fair value is estimated based on their market price 2,117 (2,337) Securities whose fair value is estimated based on valuation techniques (13,092) (33,305) Net gain /(loss) (10,975) (35,642) The detail, by currency and maturity, of Financial Assets Held for Trading and Financial Liabilities Held for Trading in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Assets Liabilities By currency: Euros 208, , ,989 81,300 US dollar 932 1, , , , ,917 83,270 By maturity: Less than 1 month 4,149 3,764 6,019 6,037 From 1 to 3 months 9,630 1,689 2,798 1,793 From 3 months to 1 year 16,716 13,050 9,874 2,831 From 1 to 5 years 57,848 96,580 31,425 43,121 More than 5 years 121,329 73,421 56,801 29, , , ,917 83,270 83

93 a) Credit risk The detail of risk concentration, by geographical location, counterparty and type of instrument, showing the carrying amounts at 31 December 2011 and 2010, is as follows: Thousands of Euros % Thousands of Euros % By geographical location: Spain 194, , Other European Union countries 15, , Rest of Europe , , By counterparty: Spain 12, Credit institutions 45, , Other resident sectors 151, , Other non-resident sectors , , By type of instrument: Listed debentures and bonds 105, , OTC derivatives 103, , , , The detail, by credit ratings assigned by external rating agencies, of Financial Assets Held for Trading is as follows: Thousands of Euros % Thousands of Euros % Risk rated AAA 14, , Risk rated AA+ 2, , Risk rated AA , Risk rated AA- 21, , Risk rated A+ 12, , Risk rated A 60, , Risk rated A- 11, , Risk rated BBB 3, , Risk rated BB 2, Unrated 80, , , ,

94 b) Debt instruments The detail of Debt Instruments on the asset side of the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Debentures and bonds issued by foreign entities 2,482 2,496 Debentures and bonds issued by Spanish entities 103, , , ,216 85

95 c) Trading derivatives The detail of Trading Derivatives on the asset and liability sides of the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Fair Value Assets Liabilities Assets Liabilities Notional Fair Notional Fair Notional Fair Amount Value Amount Value Amount Value Notional Amount Unmatured foreign currency purchases and sales: Purchases of foreign currencies against euros 6, , , , ,576 Purchases of foreign currencies against foreign currencies Sales of foreign currencies against euros ,175 7, ,708 3, ,729 5, ,512 Sales of foreign currencies against foreign currencies Financial asset purchases and sales: Purchases - 350, Sales , Securities and interest rate futures: Bought , , ,670 Sold , ,670 1,305 50,355 Securities options: Bought 6, , , , Written - - 6,598 2,238, ,426 1,548,222 Interest rate options: Bought 2, , ,084 83, Written - - 6, , ,631 69,663 Foreign currency options: Bought , , Written , ,044 Other transactions: Securities swaps 8, ,634 8, ,722 17, ,054 17, ,275 Interest rate swaps (IRSs) 73, ,908 71, ,512 45, ,743 43, ,984 Cross-currency swaps (CCSs) 1, ,526 1, ,525 1,393 79,618 2, ,031 Other risk transactions 2, ,273 2, ,257 5, ,992 4, , ,759 3,595, ,917 5,348,903 84,288 2,280,131 83,270 3,495,543 The amount of the changes in 2011 and 2010 in the fair value of the trading derivatives attributable to changes in credit risk (other than the changes in market conditions giving rise to market risk) and the accumulated amount thereof at 31 December 2011 were not material. The notional and/or contractual amounts of the trading derivative contracts entered into do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. 86

96 The differences between the value of the trading derivatives sold to and purchased from customers and the trading derivatives purchased from and sold to counterparties, in which there is a margin for the Group, are not material. The market value of the derivatives embedded in structured deposits marketed by the Group at 31 December 2011 amounted to EUR 6,448 thousand and EUR 15,698 thousand. These amounts are recognised under Financial Assets Held for Trading Trading Derivatives" and "Financial Liabilities Held for Trading Trading Derivatives", respectively, in the consolidated balance sheet at that date (31 December 2010: EUR 1,115 thousand and EUR 27,117 thousand, respectively). 23. Other financial assets and liabilities at fair value through profit or loss The detail, by geographical location of risk, counterparty and type of instrument, of the financial assets included in this category at 31 December 2011 and 2010 is as follows: By type: Debt instruments 2,928-2,928 - Valuation adjustments - - 2,928 - By geographical location: Other European Union countries 2,928-2,928 - Valuation adjustments - - 2,928 - By counterparty: Credit institutions 2,928 - Other non-resident sectors - - Valuation adjustments - - 2,928 - By type of instrument: Other financial instruments 2,928-2,928 - Valuation adjustments - - 2,928 - The debt instruments classified in this portfolio did not earn interest in The carrying amount shown in the foregoing table represents the Group's maximum level of credit risk exposure in relation to the financial instruments included therein. 87

97 The fair value of all the financial assets included in this category is determined on the basis of internal valuation techniques. At 31 December 2011, the Group had not pledged any fixed-income securities in this portfolio in order to qualify for European Central Bank financing. 24. Available-for-sale financial assets The detail of Available-for-Sale Financial Assets in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Debt instruments: Spanish government debt securities- Treasury bills 29, ,039 Other book-entry debt securities 1,143, ,674 1,173,026 1,587,713 Issued by credit institutions- Residents 133,817 84,250 Non-residents 6,389 - Other fixed-income securities- Issued by other resident sectors 682,286 15,351 Issued by other non-resident sectors 5, ,082 99,601 Valuation adjustments- Impairment losses (6,220) (148) Other valuation adjustments 2,204 (20,233) (4,016) (20,381) 1,997,092 1,666,933 Other equity instruments: Shares of Spanish companies 2,677,132 3,191,295 Shares of foreign companies 1,787 3 Investment fund units and shares (*) 36,740 23,205 2,715,659 3,214,503 Impairment losses (113,160) (82,026) 2,602,499 3,132,477 4,599,591 4,799,410 (*) At 31 December 2011, EUR 10,828 thousand related to investment funds managed by the Group (31 December 2010: EUR 14,615 thousand). At 31 December 2011, Debt Instruments - Valuation Adjustments included the changes in fair value recognised in income amounting to a positive amount of EUR 2,204 thousand of fixed-income securities attributable to interest rate risk, for which a fair value hedge was designated as described in Note 26 (31 December 2010: a negative amount of EUR 20,233 thousand). On 5 September 2008, the former CajaSur (see Note 1.2) acquired an ownership interest in Coinversiones 2008, S.L. for EUR 133 thousand, which represented 2.19% of the share capital of this company. Furthermore, the 88

98 former CajaSur held under "Loans and Receivables" in the accompanying consolidated balance sheet a subordinated loan granted to the aforementioned company for EUR 11,758 thousand, subject to the successful outcome of the ownership interests already acquired or on which there was a purchase commitment on the part of Coinversiones 2008, S.L. At 31 December 2010, the former CajaSur had written off the full amount of this loan, since it considered the recovery of the portfolio of securities by Coinversiones 2008, S.L. to be remote. It had also recognised a loss of EUR 133 thousand on the securities portfolio of Coinversiones 2008, S.L. under "Valuation Adjustments - Available-for-Sale Assets" in the accompanying consolidated balance. On 30 June 2011, the Group, together with other entities, resolved to withdraw its investment in Coinversiones 2008, S.L. by reducing its share capital. This was performed on 27 July 2011 through the signing of an action protocol whereby the subordinated loan granted to the aforementioned company was cancelled in full. Also, as an essential condition for withdrawing its investment in Coinversiones 2008, S.L., the Group acquired financial assets for a nominal amount of EUR 50,401 thousand. These assets were classified as Available-for-Sale Financial Assets. Subsequently, taking into consideration the transaction as part of the withdrawal of its investment in Coinversiones 2008, S.L. as a whole, the Group recognised an impairment loss of EUR 12,250 thousand, for which it used the impairment of the aforementioned subordinated loans, thus giving rise to a net loss on the transaction of EUR 492 thousand, which was recognised under "Gains (Losses) on Disposal of Assets Not Classified as Non-Current Assets Held for Sale" in the accompanying consolidated income statement. In 2011 securities amounting to EUR 13,500 thousand were repaid and securities amounting to EUR 5,675 thousand were sold with related impairment losses of EUR 3,136 thousand. Lastly, at 31 December 2011, an amount of EUR 22,112 thousand relating to financial assets associated with the aforementioned transaction was recognised in the consolidated balance under "Available-for-Sale Financial Assets". In turn, negative valuation adjustments relating to these assets, amounting to EUR 1,650 thousand, were recognised under "Available-for- Sale Financial Assets - Valuation Adjustments". 89

99 The detail, by currency, maturity and listing status, of Available-for-Sale Financial Assets in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: By currency: Euros 4,599,494 4,799,410 US dollar 97-4,599,591 4,799,410 By maturity: Within 3 months 50, ,666 3 months to 1 year 446, ,464 1 to 5 years 884, ,719 More than 5 years 618, ,465 Undetermined maturity 2,716,415 3,214,503 Valuation adjustments (117,176) (102,407) 4,599,591 4,799,410 By listing status: Listed- Debt instruments 1,984,475 1,651,582 Other equity instruments 1,810,756 2,347,623 3,795,231 3,999,205 Unlisted- Debt instruments 12,617 15,351 Other equity instruments 791, , , ,205 4,599,591 4,799,410 Other Equity Instruments" at 31 December 2011 included EUR 99,946 thousand (31 December 2010: EUR 90,769 thousand) relating to equity interests whose fair value could not be estimated reliably since the related securities were not traded in an active market and there was no record of recent transactions. These equity interests are measured at acquisition cost adjusted, where appropriate, by any related impairment loss. Note 37 includes a detail of "Valuation Adjustments" at 31 December 2011 and 2010 arising from changes in the fair value of the items included in "Available-for-Sale Financial Assets". In 2006 the Group acquired 22,213,218 shares of Iberdrola, S.A. for EUR 799,451 thousand. In order to comply with the risk concentration limits stipulated by the relevant legislation, at 31 December 2011 and 2010 the Group had transferred the risk relating to a portion of the investment through call and put options and forward purchases and sales on the related shares. In 2006 the Group acquired 6.96% of Europistas, C.E., S.A. and subsequently increased its total ownership interest in this company to 26.97%. The Group entered into an agreement with the eventual majority shareholder of Europistas, C.E., S.A. that provided for the merger of this company and Itinere Infraestructuras, S.A. and the continued stock market listing of the post-merger company. Under the aforementioned agreement, a pre-emption right was granted to the majority shareholder and a put option was acquired, exercisable at different times provided that certain milestones in the process were achieved. In 2007 the aforementioned merger took place 90

100 and, consequently, the Group s ownership interest in the post-merger company amounted to 5.34% and was reclassified to available-for-sale financial assets. In 2008 the aforementioned option was exercised and the amount payable was converted into shares of Itinere Infraestructuras, S.A. at EUR 3.96 per share. A right of pledge on the resulting shares was granted to the Group until they were delivered in Taking into account the shares received on exercise of the options, the Group s ownership interest in Itinere Infraestructuras, S.A. was 12.81% at 31 December In 2008 the majority shareholder of Itinere Infraestructuras, S.A. entered into a memorandum of understanding with another company to prepare and accept a takeover bid for Itinere Infraestructuras, S.A. at EUR 3.96 per share, subject to the condition precedent that the competent authorities approve the transaction and that other necessary authorisations be obtained from third parties. The Group agreed to accept the takeover bid for a minimum of 3.48% and a maximum of 4.52% of the share capital of Itinere Infraestructuras, S.A. and in 2009 it accepted the bid at the aforementioned minimum percentage of shares. Also, in 2009 the Group made a non-monetary contribution to Arecibo Servicios y Gestiones, S.L. of 5.09% of Itinere Infraestructuras, S.A. in exchange for an ownership interest of 28.72% in the share capital of Arecibo Servicios y Gestiones, S.L., thereby increasing the Group s stake in this company to 31.25% at 31 December Also, the Group sold 4.32% of the share capital of Itinere Infraestructuras, S.A. to Arecibo Servicios y Gestiones, S.L.; the sale was financed by the Group through the grant of a deferred payment of EUR 51,141 thousand. The Group's investment in Itinere Infraestructuras, S.A. at 31 December 2011 amounted to EUR 267,991 thousand (31 December 2010: EUR 267,991 thousand). The interest earned on this financing in 2011 amounted to EUR 16,191 thousand (31 December 2010: EUR 20,093 thousand). As indicated in Note 14-g, in view of the characteristics of the aforementioned non-monetary contribution and of the deferred payment sale, substantially all the risks and rewards associated with the shares were retained and, therefore, no gain or loss was recognised and the investment held in Arecibo Servicios y Gestiones, S.L. and the deferred payment continued to be recognised under Available-for-Sale Financial Assets in the consolidated balance at 31 December 2011 and Agreements regulating a possible joint sale of the shares of Arecibo Servicios y Gestiones, S.L. and Itinere Infraestructuras, S.A. were entered into between the Group and the other shareholders of these companies, and may entail certain restrictions on the transferability of these investments by the Group. On 11 November 2010, the Group accepted a takeover bid launched by Banco Sabadell, S.A. on Banco Guipuzcoano, S.A. involving an exchange ratio of five shares of Banco Sabadell, S.A. plus five bonds that are mandatorily convertible after the third year (at a ratio of one share per bond, with an initial nominal value of EUR 5 each, which earn interest at 7.75%) for every eight shares of Banco Guipuzcoano, S.A. At that date the Group owned 21,966,451 shares of Banco Guipuzcoano, S.A., representing an ownership interest of 14.47%, and on acceptance of the aforementioned takeover, it received 13,729,031 shares of Banco Sabadell, S.A. and 13,729,031 convertible bonds in exchange for its shares, thereby achieving an ownership interest of 1.08% in the share capital of Banco Sabadell, S.A. The bonds received will be mandatorily converted by 2013 at the latest, and may be exchanged early if so desired by Banco Sabadell, S.A. at any of the established quarterly settlement dates, and annually by the Group, at a ratio of one share for each bond. The fair value of the bonds received at the transaction date amounted to EUR 53,885 thousand, while the fair value of the shares received amounted to EUR 45,683 thousand. As a result, and given that through this transaction the Group transferred substantially all the risks and rewards associated with the shares of Banco Guipuzcoano, S.A. held in its portfolio, a gain of EUR 6,589 thousand was recognised under Gains (Losses) on Financial Assets and Liabilities in the 2010 income statement (see Note 48). The average annual interest rate on debt instruments was 2.98% in 2011 (2010: 4.18%). 91

101 a) Credit risk The detail of the risk concentration, by geographical location, of Available-for-Sale Financial Assets Debt Instruments is as follows: Thousands of Euros % Thousands of Euros % Spain 1,985, ,666, Other European Union countries 11, Non-EU countries ,997, ,666, The detail, by credit ratings assigned by external rating agencies, at each year end is as follows: Thousands of Euros % Thousands of Euros % Risk rated AAA 13, Risk rated AA+ 1, Risk rated AA 652, ,613, Risk rated AA- 1,195, Risk rated A+ 9, Risk rated A 101, , Risk rated A- 3, Risk rated BBB+ 5, Risk rated BBB 4, Risk rated BBB- 1, Risk rated lower than BBB- 4, Unrated 3, ,997, ,666, b) Impairment losses The detail of Impairment Losses on Financial Assets (Net) - Loans and Receivables in the consolidated income statements for the years ended 31 December 2011 and 2010 relating to available-for-sale financial assets is as follows (see Note 56): 92

102 Debt instruments (4,892) (37) Other equity instruments 31,414 38,409 26,522 38,372 Impairment losses charged to income Collectively assessed (4,612) (37) Individually assessed 31,134 38,409 26,522 38,372 The changes in 2011 and 2010 in Available-for-Sale Financial Assets Impairment Losses were as follows: Beginning balance 82,174 43,802 Transfer en bloc of assets and liabilities (Note 1.2) 10,684 - Net impairment losses recognised/ (reversed) charged/(credited) to income (Note 56) 26,522 38,372 Disposals ,380 82, Loans and receivables The detail of Loans and Receivables in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Loans and advances to credit institutions 533, ,957 Loans and advances to customers 31,899,805 21,601,170 32,432,815 21,890,127 At 31 December 2011, the Group had pledged debt instruments for a nominal amount of EUR 819,098 thousand (31 December 2010: EUR 822,721 thousand). 93

103 The detail, by currency and maturity, of Loans and Receivables in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: By currency: Euros 32,218,369 21,634,076 US dollar 54, ,928 Pound sterling 18,440 6,112 Japanese yen 97,907 93,170 Swiss franc 27,852 28,520 Mexican peso 15,584 17,508 Other ,432,815 21,890,127 By maturity: Less than 3 months 1,456,570 1,200,654 3 months to 1 year 3,066,806 2,471,822 1 to 5 years 8,293,597 6,410,670 More than 5 years 17,482,242 11,102,061 Undetermined and unclassified maturity 4,099,397 1,341,169 Valuation adjustments (1,965,797) (636,249) 32,432,815 21,890,127 The balance of Valuation Adjustments in the foregoing table includes impairment losses, accrued interest, unearned commissions and adjustments for micro-hedge transactions. The annual interest rate on loans and advances to credit institutions ranged from 0.21% to 1.75% in 2011 (2010: from 0.10% to 0.50%). The fair value of "Loans and Receivables" is included in Note 40. a) Loans and advances to customers The detail of Loans and Receivables Loans and Advances to Customers at 31 December 2011 and 2010 is as follows: 94

104 By loan type and status: Commercial credit 239, ,381 Mortgage loans 23,710,867 15,933,366 Loans with other collateral 196, ,341 Other term loans 5,658,153 4,295,442 Finance leases 137, ,300 Receivable on demand and other 677, ,422 Doubtful assets 3,033, ,875 Other financial assets: Unsettled financial transactions 1, Fees and commissions for financial guarantees 5,319 3,091 Unsettled coupons 128, ,067 Other 76,465 35, , ,363 Valuation adjustments: Impairment losses (1,953,791) (629,359) Other valuation adjustments (12,303) (6,961) (1,966,094) (636,320) 31,899,805 21,601,170 By borrower sector: State public sector 1,025, ,540 Other resident sectors: Households 21,905,287 15,099,166 Professionals 2,918,440 2,141,322 SMEs 1,870,224 1,350,763 Other 3,887,299 1,983,790 Other non-resident sectors 293, ,589 31,899,805 21,601,170 By geographical area: Spain 31,614,817 21,407,581 Other European Union countries 189, ,388 Rest of the world 95,171 80,201 31,899,805 21,601,170 By interest rate: Fixed rate 4,305,289 3,255,546 Floating rate tied to Euribor 24,062,858 16,323,245 Floating rate tied to CECA 31,185 19,794 Floating rate tied to IRPH (mortgage benchmark rate) 1,639, ,710 Other 1,860,658 1,037,875 31,899,805 21,601,170 95

105 The detail, by type of collateral received, of secured loans and advances to customers classified as standard is as follows: Mortgage loans Secured by mortgages on completed homes with an outstanding LTV of less than 80%: 17,733,970 12,645,737 Of which: included in asset securitisation programmes 3,032,638 3,240,181 Other mortgage guarantees 5,976,897 3,287,629 23,710,867 15,933,366 Loans with other collateral (Note 16) Cash collateral 53,227 49,374 With securities as collateral 136, ,486 Other collateral 6, , ,341 The average effective interest rate on the debt instruments classified in this portfolio at 31 December 2011 was 2.91% (31 December 2010: 2.20%). The Group performed securitisation transactions and other transfers of assets, the detail at 31 December 2011 and 2010 being as follows: Assets derecognised: Mortgage assets securitised through mortgage bonds 26,870 19,823 26,870 19,823 Memorandum item: Derecognised before 1 January ,870 19,823 Assets recognised on the face of the consolidated balance sheet: Mortgage assets securitised through mortgage-backed certificates 3,032,638 3,240,181 3,059,508 3,260,004 In 2000 and 1999 the Parent launched two asset securitisation programmes through the issuance of bonds for a face value of EUR 15,025 thousand and of mortgage participation certificates for a face value of EUR 150,253 thousand. The 2000 issue was transferred to the management company Ahorro y Titulización, Sociedad Gestora de Fondos de Titulización, S.A., which subscribed it on behalf of AyT 3 Fondo de titulización PYME-ICO, and the 1999 issue was transferred to Titulización de Activos, Sociedad Gestora de Fondos de Titulización, S.A., which subscribed it on behalf of TDA8, Fondo de Titulización Hipotecaria. The Group granted to these securitisation SPVs subordinated loans whose balances were zero and EUR 27 thousand, respectively, at 31 December 2011 (31 December 2010: zero and EUR 34 thousand, respectively). The securitised assets were removed from the consolidated balance sheet and this criterion was maintained at 31 December 2011 and 2010 in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards. 96

106 In 2002 the former CajaSur (see Note 1.2), together with other participating financial institutions, carried out an asset securitisation transaction, involving assets that were derecognised from the related balance sheet line items, for a nominal amount of EUR 71,683 thousand, by creating the special-purpose vehicle AyT 7, Promociones Inmobiliarias I, Fondo de Titulización de Activos, which is governed by Royal Decree 926/1988 and other applicable legislation. The SPV is registered at the Spanish National Securities Market Commission (CNMV) under number 3,852 and is managed by Ahorro y Titulización, Sociedad Gestora de Fondos de Titulización, S.A., under an internal management contract entered into by the management company and the financial institutions on 19 June The SPV's liabilities consist of an asset-backed bond issue of a single series of 3,198 securities tied to 6-month Euribor plus 0.30%. At 31 December 2011, the balances of the outstanding loans and subordinated loans relating to this programme amounted to EUR 10,967 thousand and EUR 2,813 thousand, respectively. This issue was not launched through a public offering and its average term to maturity was 24 years at 31 December In 2008 and previous years the Parent launched several mortgage loan securitisation programmes through the issuance of mortgage-backed certificates. These asset transfers do not meet the requirements of Bank of Spain Circular 4/2004 for derecognition of the related assets because the Caja retains the risks and rewards associated with ownership of the assets, having granted to the SPVs subordinated financing which absorbs substantially all the expected losses on the securitised assets. The nominal values, outstanding balances and subordinated loans relating to each of the mortgage loan securitisation programmes are as follows: Outstanding Balance Subordinated Loans Nominal Value SPV Subscribing to the Issue ,000, , ,438 14,152 14,264 AyT Colaterales Global Hipotecario BBK II FTA ,500,000 1,141,304 1,209,541 16,556 16,651 AyT Colaterales Global Hipotecario BBK I FTA ,000, , , AyT Hipotecario BBK II FTA ,000, , , AyT Hipotecario BBK I FTA 4,500,000 3,032,638 3,240,181 30,708 30,979 In addition, in 2011 the Parent granted two credit accounts to these SPVs amounting to EUR 45,500 thousand. At 31 December 2011, the balance of these credit accounts was EUR 45,500 thousand. None of the above issues were launched through public offerings and their average terms to maturity were 21.59, 23.50, and years, respectively, at 31 December

107 At 31 December 2011 and 2010, the Group had finance lease contracts with customers for tangible assets including buildings, furniture, vehicles and IT equipment, which are recognised as discussed in Note 14-m. The residual value of these lease contracts, which relates to the amount of the last lease payment, is secured by the leased asset. At 31 December 2011 and 2010, the breakdown of the lease payments receivable from lessees during the lease term was as follows: Lease payments outstanding 111, ,050 Residual value 25,769 21,250 Unaccrued interest 26,174 17,141 Unaccrued VAT 34,163 29,148 b) Impairment losses The detail of Impairment Losses on Financial Assets (Net) - Loans and Receivables in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows (see Note 56): Impairment losses charged to income: Individually assessed 365, ,281 Collectively assessed 24,970 2,138 Impairment losses reversed with a credit to income (241,712) (10,751) Recovery of written-off assets (9,399) (1,138) Direct write-offs 20, , ,826 98

108 The detail of Loans and Receivables - Impairment Losses at 31 December 2011 and 2010 is as follows: By type of allowance: Specific allowance 1,569, ,662 General allowance 383, ,449 Allowance for country risk 1,169 1,250 1,953, ,361 By method of assessment: Individually 1,569, ,662 Collectively 384, ,699 1,953, ,361 By geographical area: Spain 1,561, ,313 Rest of the world 8,764 5,599 Collectively 383, ,449 1,953, ,361 By type of asset covered: Loans and advances to credit institutions 2 2 Loans and advances to customers 1,953, ,359 1,953, ,361 By counterparty: Credit institutions 2 2 Other resident sectors 1,942, ,343 Other non-resident sectors 11,722 8,016 1,953, ,361 At 31 December 2011 and 2010, the Group s general allowance stood at the legally-stipulated maximum level (125% of inherent losses). At 31 December 2011, the Group had recorded a specific allowance of EUR 241,141 thousand (31 December 2010: EUR 112,933 thousand) to cover the credit risk of lending transactions mainly to the property development sector, which were classified as substandard. In accordance with the Protocol of Financial Support Measures for the Restructuring of CajaSur through the Transfer En Bloc of its Assets and Liabilities entered into by CajaSur, as the Beneficiary Entity, BBK, as the Transferee, and the FROB, on 16 July 2010 (see Note 1.2), the FROB granted to the Beneficiary Entity an Asset Protection Scheme (APS) for a maximum amount of EUR 392,000 thousand on a specific set of assets in order to cover the losses arising from certain risks included in the business (see Note 1.2). 99

109 At the date of authorisation for issue of these financial statements, as indicated in Note 1.2, this scheme had been partially repaid and there was an outstanding balance of EUR 5,122 thousand that was recognised under "Loans and Receivables - Loans and Advances to Customers" in the accompanying consolidated balance. The changes in 2011 and 2010 in Loans and Receivables - Impairment Losses were as follows: Allowance Specific General for Country Allowance Allowance Risk Total Balance at beginning of , ,591 1, ,473 Net impairment losses charged to income 122,281 2, ,419 Reversal of impairment losses recognised in prior years (67) (10,243) (441) (10,751) Assets written off against allowances (14,959) - - (14,959) Transfers to other provisions (Note 34) 3, ,850 Transfers (14,006) 14, Other (23,857) (23,671) Balance at end of , ,449 1, ,361 Transfer en bloc of assets and liabilities (Note 1.2) 1,334, ,878-1,455,245 Net impairment losses charged to income 365,556 24, ,526 Reversal of impairment losses recognised in prior years (212,533) (29,046) (133) (241,712) Assets written off against allowances (278,210) - - (278,210) Transfers (Notes 27 and 34) (10,702) - - (10,702) Other 15,310 (5,929) (96) 9,285 Balance at end of ,569, ,174 1,169 1,953,793 At 31 December 2011, the Group recognised EUR 20,986 thousand relating to credit losses written off, and this amount was added to the balance of Impairment Losses on Financial Assets (Net) Loans and Receivables in the consolidated income statement (31 December 2010: EUR 296 thousand) (see Note 56). The cumulative finance income not recognised in the consolidated income statements arising from impaired financial assets amounted to EUR 316,546 thousand at 31 December 2011 (31 December 2010: EUR 69,179 thousand). 100

110 The detail of the carrying amount of impaired assets, without deducting the impairment losses, is as follows: By counterparty: Public sector 13,621 - Other resident sectors 2,997, ,746 Other non-resident sectors 22,895 11,129 3,033, ,875 By type of instrument: Commercial credit 28,690 7,034 Loans 2,829, ,399 Finance leases 30,197 2,048 Credit accounts 105,256 32,558 Guarantees 21,352 1,672 Factoring transactions Other 18,271 4,646 3,033, ,875 The detail, by type of guarantee and age of impaired amounts, of impaired assets without deducting the impairment losses, is as follows: Unsecured transactions: Within 6 months 180,564 42,825 More than 6 months and less than 9 months 30,948 5,747 More than 9 months and less than 12 months 43,951 4,931 More than 12 months 357, ,400 Transactions secured by mortgages on completed housing units: Within 6 months 79,151 30,737 More than 6 months and less than 9 months 42,984 15,200 More than 9 months and less than 12 months 32,174 12,657 More than 12 months 293, ,583 Transactions secured by other mortgages: Within 6 months 363,235 27,683 More than 6 months and less than 9 months 163,863 11,146 More than 9 months and less than 12 months 204,454 15,358 More than 12 months 1,215,470 91,053 Other transactions - unclassified 25,673 6,555 3,033, ,

111 The detail of the carrying amount of matured financial assets not impaired is as follows: By counterparty: Public sector 10,067 1,583 Resident sector 162,007 70,061 Non-resident sector Credit institutions ,346 71,664 By type of instrument: Loans and advances to customers 172,239 71,664 Loans and advances to credit institutions ,346 71,664 The detail, by age of oldest past-due amount, of the carrying amount of matured financial assets not impaired is as follows: Less than 1 month 75,028 53,889 1 to 2 months 7,020 11,989 2 to 3 months 90,298 5, ,346 71,664 The detail at 31 December 2011 and 2010 of loans and receivables written off because their recovery was considered to be remote is as follows: Loans and advances to customers 580, ,

112 The changes in impaired financial assets written off because their recovery was considered to be remote were as follows: Beginning balance 128, ,411 Transfer en bloc of assets and liabilities (Note 1.2) 272,760 - Additions: Due to remote recovery 322,282 27, ,282 27,863 Recoveries: Due to cash collection (9,399) (1,138) Due to foreclosure (56,111) (975) (65,510) (2,113) Write-offs: Due to forgiveness (3,679) (624) Due to other causes (74,382) (11,885) (78,061) (12,509) Ending balance 580, , Hedging derivatives (assets and liabilities) The detail of Hedging Derivatives on the asset and liability sides of the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Assets Liabilities Micro-hedges Fair value hedges 495, ,728 21,293 16,052 Cash flow hedges , , ,728 21,293 38,

113 The detail, by currency and maturity, of Hedging Derivatives on the asset and liability sides of the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Assets Liabilities By currency: Euros 495, ,728 14,040 30,553 Mexican peso - - 7,253 7, , ,728 21,293 38,056 By maturity: Less than 1 year 14,556 10,647-22,004 1 to 5 years 286, , ,549 More than 5 years 194,599 69,951 21,112 7, , ,728 21,293 38,056 The detail, by type of transaction, of Hedging Derivatives on the asset and liability sides of the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Notional Amount Fair Value Notional Amount Fair Value Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Fair value hedges Other exchange rate transactions Swaps - 10,714-7,253-11,786-7,503 Other interest rate transactions Swaps 6,760, , ,590 2,423 4,023, , ,728 8,549 Other risk transactions Swaps 50,000 50,000 9,565 11, ,810, , ,155 21,293 4,023, , ,728 16,052 Cash flow hedges Other securities transactions Share options Bought - 480, , Written - 660, ,870-2,684 Forward share purchases and sales ,562-19,320-1,140, ,157,932-22,004 6,810,725 1,476, ,155 21,293 4,023,157 1,640, ,728 38,056 Fair value hedges The swaps outstanding at 31 December 2011 are intended to hedge the interest rate risk (other interest rate transactions), the interest rate and exchange rate risk (other exchange rate transactions) and the interest rate and other risks (other risk transactions) affecting the changes in the fair value of certain mortgage-backed bond issues, other marketable debt securities and a hybrid security recognised under Financial Liabilities at Amortised Cost in the consolidated balance sheet with a face value of EUR 6,380,224 thousand (31 December 2010: EUR 3,788,456 thousand - see Note 33) and of customer loans recognised under Loans and Receivables - Loans and Advances to Customers for EUR 391,216 thousand (31 December 2010: EUR 392,287 thousand - see Note 25) 104

114 and various government bonds recognised under Available-for-Sale Financial Assets Debt Instruments amounting to EUR 325,000 thousand (31 December 2010: EUR 325,000 thousand - see Note 24). The notional amount of certain types of financial instruments provides a basis for comparison with instruments recognised on the face of the consolidated balance sheet, but does not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, it does not reflect the Group s exposure to credit risk or price risk. Derivative instruments become favourable (assets) or unfavourable (liabilities) instruments as a result of the fluctuations in market interest rates, exchange rates or quoted share prices. The amount recognised in income in 2011 on the hedging instruments and the hedged item attributable to the hedged risk was a gain of EUR 283,915 thousand and a loss of EUR 285,916 thousand (2010: EUR 68,453 thousand for both items) (see Note 48). At 31 December 2011, there were certain embedded derivatives designated to hedge a structured bond whose fair value amounted to EUR 11,617 thousand. Cash flow hedges The cash flow hedges outstanding at 31 December 2011 are intended to hedge the changes in quoted prices affecting the expected cash flows of future purchases and sales of financial assets (equity instruments). The hedge is instrumented through bought and written options, the initial net premium of which is zero, and through forward purchases and sales of equity instruments. EUR 53 thousand, net of the related tax effect, were recognised under "Valuation Adjustments" in consolidated equity in 2011 (31 December 2010: EUR 15,843 thousand see Note 37) and no amount was transferred in the year from this line item to the consolidated income statement. The detail of the estimated terms, from 31 December 2011, within which it is expected that the amounts recognised in consolidated equity under Valuation Adjustments Cash Flow Hedges at that date will be recognised in future consolidated income statements is as follows: Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Debit balances (losses) (*) (*) Considering the related tax effect Also, set forth below is an estimate at 31 December 2011 of the amount of the future collections and payments hedged by cash flow hedges, classified by the term, starting from the aforementioned date, in which the collections and payments are expected to be made: Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Proceeds 563,000 95, The Group periodically measures the effectiveness of its hedges by verifying that the results of the prospective and retrospective tests are within the range established by current regulations (80%-125%). 105

115 27. Non-current assets held for sale and Liabilities associated with non-current assets held for sale The detail of Non-Current Assets Held for Sale and Liabilities Associated with Non-Current Assets Held for Sale in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Tangible assets Property, plant and equipment for own use 26,709 - Investment property Foreclosed assets Residential assets 466,147 9,678 Rural property in use and completed multi-purpose commercial and industrial premises 76,178 1,843 Land parcels, building lots and other property assets 446,426 3, ,751 15,386 Other 10-1,015,507 15,349 Impairment losses (301,655) (1,357) 713,852 14,029 At 31 December 2011 and 2010, there were no liabilities associated with non-current assets held for sale. The Group performed various dations in payment of debts in At 31 December 2011 and 2010, all noncurrent assets held for sale were measured at the lower of their carrying amount at the classification date and their fair value less estimated costs to sell. The fair value of these items was determined on the basis of appraisals conducted by independent experts and pursuant to specific industry regulations issued by the Bank of Spain. At 31 December 2011, the fair value of the items classified in this category did not differ significantly from their carrying amount. In 2011, and in previous years, as a result of the transfer en bloc of assets and liabilities (see Note 1.2), BBK Bank CajaSur, S.A. (Sole-Shareholder Company) sold non-current assets held for sale and disposal groups and provided financing to the buyers for the agreed selling price. At 31 December 2011, the uncollected amount of the loans granted by BBK CajaSur, S.A. (Sole-Shareholder Company) for the financing of this type of transaction was EUR 16,122 thousand. The average financing in transactions of this kind outstanding at 31 December 2011 was approximately 94% of the selling price of the assets. At 31 December 2011, BBK Bank CajaSur, S.A. (Sole-Shareholder Company) had accounts payable of EUR 54 thousand for the deferred sale of properties. Also, since the sale is not reasonably certain, BBK Bank CajaSur, S.A. (Sole-Shareholder Company) did not recognise the positive difference between the selling price and the carrying amount of these assets on the date of their sale. These unrecognised gains, which are taken to the consolidated income statement in proportion to the recovery of the amount financed, totalled EUR 34 thousand at 31 December 2011 and are recognised under Provisions - Other Provisions in the consolidated balances at that date. 106

116 The changes in 2011 and 2010 in Non-Current Assets Held for Sale, disregarding impairment losses, were as follows: Beginning balance 15,386 3,498 Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) 458,377 - Additions 230,997 13,208 Disposals (101,499) (1,320) Transfers (Notes 14-t, 29 and 32) 412,246 - Ending balance 1,015,507 15,386 The changes in 2011 and 2010 in Non-Current Assets Held for Sale Impairment Losses were as follows: Beginning balance 1,357 - Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) 133,820 - Net impairment losses charged to profit or loss (Note 58) ,880 Disposals (16,587) - Transfers (Notes 14-t, 25, 29 and 32) 146,090 (29,523) Amounts used (196) - Other changes 36,755 - Ending balance 301,655 1, Investments The detail of Investments in the consolidated balances at 31 December 2011 and 2010 is as follows: Associates: Unlisted 482, , , ,

117 In 2010, given the economic situation and following the principle of utmost prudence, the Group wrote off the goodwill recorded at that date against Impairment Losses on Other Assets (Net) - Goodwill and Other Intangible Assets in the accompanying consolidated income statement (see Note 56). The changes in 2011 and 2010 in Investments were as follows: Beginning balance 471, ,159 Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) 27,560 - Acquisitions 6,292 35,995 Share of results (Note 36) 29,116 30,297 Transfers 1, Share of revaluation gains/losses (Note 37) (32,671) (3,910) Impairment losses - (31,596) Sales (1,190) - Dividends received (5,580) (3,419) Other (14,492) (2,067) Ending balance 482, ,447 At 31 December 2011, the total assets, equity and losses recognised in the consolidated balance and consolidated income statement relating to jointly controlled entities amounted to EUR 55,944 thousand, EUR 15 thousand and EUR 2,626 thousand, respectively (31 December 2010: EUR 20,724 thousand, EUR (31) thousand and EUR 3,665 thousand, respectively). 108

118 In compliance with Article 86 of the Spanish Public Limited Liability Companies Law and Article 53 of Securities Market Law 24/1988, following is a detail of the acquisitions and disposals of equity investments in associates: Percentage of Ownership Investee Line of Business Percentage Acquired/Sold in the Year Percentage at Year-End Date of Notification/ Transaction Acquisitions in 2011: Sociedad Promotora Bilbao Gas hub, S.L. Gas development (*) /03/11 Norapex, S.A. Property development /06/11 Orubide, S.A. Land operation (**) /06/11 Promega Residencial, S.L. Real estate (**) /11/11 Biharko Aseguradora, S.A. General insurance (**) /11/11 Biharko, Vida y Pensiones, Cía de Seguros y Reaseguros, S.A. Insurance (**) /11/11 Euskaltel, S.A. Telecommunications (***) /12/11 Sales in 2011: Alokabide, S.A. Leasing /04/11 Servatas, S.A. Servicios Vascos de Appraisals /06/11 Tasaciones Sociedad Promotora Bilbao Gas hub, S.L. Gas development /06/11 Banco Europeo de Finanzas, S.A. (****) Banking /10/11 Petronor Biocarburantes, S.A. Biofuels /12/11 Luzaro, S.P.E., S.A. Participating loans /12/11 (*) Incorporation of the Company. (**) Disbursement made on unpaid shares. (***) Bonus share issue which did not change the percentage of ownership. (****) Includes the investment held by Banco Europeo de Finanzas, S.A. in Alestis Aerospace, S.A. At 31 December 2011 and 2010, litigation was in progress against certain investees arising from the ordinary course of their operations. The Group's legal advisers and directors consider that the outcome of this litigation will not have a material effect on the financial statements for the years in which they are settled. Appendix II includes the remaining information on the investments in associates at 31 December 2011 and

119 29. Tangible assets The detail of Tangible Assets in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Property, plant and equipment For own use: IT equipment and related fixtures 20,304 9,341 Furniture, vehicles and other fixtures 53,460 20,756 Buildings 562, ,965 Assets under construction 7,804 4,905 Other 1, Impairment losses on property, plant and equipment for own use (18,487) - 626, ,618 Leased out under an operating lease Assigned to welfare projects (Note 35): Furniture and fixtures 12,242 11,230 Property 92,684 93, , ,835 Investment property: Buildings 115,561 71,040 Rural land, land lots and buildable land 10,371 4,500 Impairment losses on investment property (35,718) (9,422) 90,214 66,118 The changes in 2011 and 2010 in Tangible Assets were as follows: 822, ,

120 Gross Property, Leased Out Plant and Under an Assigned Equipment Operating to Welfare Investment for Own Use Lease Projects Property Total Balance at 1 January ,544 5, , ,249 1,143,951 Additions 9, , ,179 Disposals (1,163) - - (8,976) (10,139) Transfers and other (96) (81) Balance at 31 December ,708 5, ,678 92,117 1,150,910 Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) 495,308 5,450-52, ,647 Additions 27, , ,139 Disposals (32,081) - (3,579) (3,940) (39,600) Transfers (Note 27) (12,863) - 44 (8,664) (21,483) Other changes (14,173) ,173 - Balance at 31 December ,328,918 10, , ,642 1,679,613 Accumulated depreciation Balance at 1 January 2010 (500,884) (4,656) (79,194) (17,114) (601,848) Charge for the year (Note 54) (19,194) (307) (3,649) (997) (24,147) Transfers and other Disposals ,534 2,522 Balance at 31 December 2010 (519,090) (4,963) (82,843) (16,577) (623,473) Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) (149,979) (3,042) - (5,353) (158,374) Charge for the year (Note 54) (29,338) (651) (5,413) (1,712) (37,114) Disposals 15, ,704 17,717 Transfers (Note 27) Other changes (1,184) (1,914) (43) 1,227 (1,914) Balance at 31 December 2011 (683,617) (10,570) (88,258) (20,710) (803,155) Impairment losses Balance at 1 January (9,247) (9,247) Charge for the year (Note 56) (175) (175) Other Balance at 31 December (9,422) (9,422) Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) (17,846) (2,368) - (28,186) (48,400) Charge for the year (Note 56) (53) - - (1,225) (1,278) Recoveries (Note 56) Transfers (Note 27) 4, ,183 5,525 Other changes (4,956) 2,368-1,229 (1,359) Balance at 31 December 2011 (18,487) - - (35,718) (54,205) Net: Balance at 31 December , ,835 66, ,015 Balance at 31 December , ,926 90, ,

121 The detail of Property, Plant and Equipment - For Own Use in the consolidated balances at 31 December 2011 and 2010 is as follows: Accumulated Impairment Gross Depreciation Losses Net At 31 December 2011 IT equipment and related fixtures 250,387 (230,083) - 20,304 Furniture, vehicles and other fixtures 352,102 (298,642) - 53,460 Buildings 715,718 (153,425) (18,487) 543,806 Assets under construction 7, ,804 Other 2,907 (1,467) - 1,440 1,328,918 (683,617) (18,487) 626,814 At 31 December 2010 IT equipment and related fixtures 193,201 (183,860) - 9,341 Furniture, vehicles and other fixtures 245,095 (224,339) - 20,756 Buildings 421,856 (110,891) - 310,965 Assets under construction 4, ,905 Other ,708 (519,090) - 346,618 In 2011 the Group did not classify as for own use any of the items of property, plant and equipment acquired through foreclosure. In 1996 the Parent revalued its properties, except for those arising from loan foreclosures, pursuant to Bizkaia Regulation 6/1996, of 21 November, by applying the maximum coefficients authorised by the aforementioned Regulation, up to the limit of their market value, which was calculated on the basis of available appraisals. The effect of the revaluation was to increase the 2011 depreciation charge by EUR 260 thousand (2010: EUR 261 thousand). The net surplus arising on the revaluation of assets assigned to welfare projects, amounting to EUR 11,960 thousand, was credited to Welfare Fund. The fair value of property, plant and equipment for own use is included in Note 40. The gross amount of fully depreciated property, plant and equipment which was in use at 31 December 2011 was approximately EUR 521,269 thousand (31 December 2010: approximately EUR 432,338 thousand). 112

122 The detail of Investment Property in the consolidated balances at 31 December 2011 and 2010 is as follows: At 31 December 2011 Accumulated Impairment Gross Depreciation Losses Net Buildings 136,271 (20,710) (35,718) 79,843 Rural land, land lots and buildable land 10, , ,642 (20,710) (35,718) 90,214 At 31 December 2010 Buildings 87,617 (16,577) (9,422) 61,618 Rural land, land lots and buildable land 4, ,500 92,117 (16,577) (9,422) 66,118 The fair value of investment property is included in Note 40. The rental income earned by the Group from its investment property amounted to EUR 3,961 thousand in 2011 (2010: EUR 3,409 thousand) (see Note 50). The operating expenses of all kinds relating to such investment property amounted to EUR 1,738 thousand in 2011 (31 December 2010: EUR 1,673 thousand) (see Note 51). In 2011 and 2010 no tangible assets were sold to associates. At 31 December 2011 and 2010, the Group did not have any significant commitments relating to its tangible assets. 30. Intangible assets The detail of Intangible Assets in the consolidated balances at 31 December 2011 and 2010 is as follows: Goodwill (Note 1.2) 301,457 - Other intangible assets 1, ,369 - In 2010, given the economic situation and following the principle of utmost prudence, the Group decided to writeoff the goodwill recorded at that date against Impairment Losses on Other Assets (Net) - Goodwill and Other Intangible Assets in the accompanying consolidated income statement (see Note 56). 113

123 The detail of Other Intangible Assets in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: With finite useful life Computer software in progress - 1,387 Completed computer software 9,431 6,305 Other intangible assets 2, Total gross amount 12,294 7,742 Accumulated amortisation (10,382) (7,742) Total carrying amount 1,912 - The changes in "Other Intangible Assets" in 2011 and 2010 were as follows: Thousands of Euros Gross: Balance at 1 January ,250 Additions 2,492 Disposals - Balance at 31 December ,742 Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) 4,689 Additions 1,210 Disposals (1,346) Balance at 31 December ,295 Accumulated amortisation: Balance at 1 January 2010 (792) Charge for the year (Note 54) (6,950) Disposals - Balance at 31 December 2010 (7,742) Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) (2,336) Charge for the year (Note 54) (1,327) Disposals 1,022 Balance at 31 December 2011 (10,383) Net: Balance at 31 December Balance at 31 December ,912 In 2010, following the principle of prudence, the Group applied accelerated amortisation to intangible assets amounting to EUR 5,681 thousand due to the system changes to be implemented as a result of the change in the Group s scope of consolidation from January 2011 described in Notes 1.2, 1.3 and 14.x. 114

124 31. Tax assets and liabilities The detail of Tax Assets and Tax Liabilities in the consolidated balances at 31 December 2011 and 2010 is as follows: Assets Liabilities Current taxes 46,273 27,252 20,113 22,941 Deferred taxes Pension obligations 28,033 27, Impairment of investments 95,660 8, Impairment losses due to doubtful debts 90,479 6, Other specific allowances 111,207 36, Deferred income (fees and commissions) 4,035 1, Revaluation of non-current assets 5,241 8,000 68,745 46,120 Impairment of non-current assets 12, Excessive depreciation and amortisation 1,071 1, Deferred payment interest - - 4,117 - Goodwill - - 3,397 - Tax loss carryforwards 481, Unused tax credits 140, , Financial instrument valuation adjustments 44,041 14, , ,467 Other 1,192 2,194 28, ,015, , , ,620 1,062, , , ,561 In 2011 and 2010 certain differences arose as a result of the different recognition criteria for accounting and tax purposes. These differences were recognised as deferred tax assets and liabilities in calculating and recognising the related income tax. 115

125 The changes in 2011 and 2010 in the balances of deferred tax assets and liabilities were as follows: Assets Liabilities Beginning balance 234, , , ,594 Additions Transfer en bloc of assets and liabilities (Note 1.2) 760,407-52,165 - Adjustment of income tax for previous year Impairment of investments Goodwill - - 1,699 - Deferred collection interest - - 2,261 - Revaluation of non-current assets Other Other specific allowances Recognition of tax credits - 8, Pension obligations 1,830 2, Impairment of investments 13,899 8, Impairment losses due to doubtful debts 9,633 6, Other specific allowances 3,584 3, Revaluation of non-current assets - 8,000-3,573 Excessive depreciation and amortisation 17 1, Deferred collection interest - - 1,856 - Goodwill - - 1,698 - Other 1, Tax loss carryforwards 201, Recognition of tax credits 100, , Financial instrument valuation adjustments 37,724 24,781 2,223 - Consolidation adjustments Other ,808 - Recognition of tax loss carryforwards 64, Recognition of tax credits Financial instrument valuation adjustments - - 2,425 - Amounts used Adjustment of income tax for previous year Pension obligations (66) Other specific allowances (4,298) Tax credits used (4,033) Pension obligations (3,651) (3,403) - - Eliminations from the consolidated tax group due to impairment of investments (13,593) Impairment losses due to doubtful doubts (93,736) Other specific allowances (52,548) Deferred income (fees and commissions) (611) (107)

126 Assets Liabilities Revaluation of non-current assets (147) - (3,144) (423) Impairment of non-current assets (12,215) Excessive depreciation and amortisation (547) Other (10,752) (30) - (1) Tax credits used (90,174) (92,050) - - Inclusion of consolidation eliminations (46,560) Financial instrument valuation adjustments (12,919) (36,926) - (138,126) Consolidation adjustments Impairment losses due to doubtful doubts (2,554) Revaluation of property, plant and equipment (8,000) (14,004) Other (21,659) Eliminations not yet reversed (36,048) Financial instrument valuation adjustments - - (79,103) - Ending balance 1,015, , , ,620 As a result of the transfer en bloc of assets and liabilities described in Note 1.2, deferred tax assets and liabilities were recognised for the tax effect of updating the fair values of the assets and liabilities acquired. In addition, deferred tax assets arising in prior years were recognised because the Board of Directors considered that, based on their best estimate of the Group's future earnings, it is probable that these assets will be recovered. The detail of the tax assets and liabilities transferred as a result of the en bloc transfer is as follows: Assets Liabilities Deferred taxes Pension obligations 2,708 - Impairment of investments 86,531 - Impairment losses due to doubtful debts 171,084 - Other provisions 127,614 - Deferred income (fees and commissions) 2,816 - Revaluation of non-current assets 5,388 39,771 Impairment of non-current assets 25,055 - Excessive depreciation and amortisation 96 - Other 30,101 12,394 Tax loss carryforwards 215,589 - Tax credit carryforwards 6,169 - Financial instrument valuation adjustments 4,648 - Eliminations not yet reversed 82,608 - Balance of the transfer en bloc of assets and liabilities 760,407 52,165 Note 39 includes details on the tax matters affecting the Group. 117

127 32. Other assets and Other liabilities The detail of Other Assets in the consolidated balances at 31 December 2011 and 2010 is as follows: Inventories: Amortised cost 1,204, ,045 Impairment losses (Note 27) (386,389) (136,804) 818, ,241 Other: Transactions in transit 1, Other 27,807 16,184 29,407 16, , ,065 The detail of Inventories in the consolidated balances at 31 December 2011 and 2010 is as follows: Inventories arising from subrogations or purchases to settle loans granted 394, ,774 Property developments 809, ,680 Other ,204, ,045 Impairment losses (386,389) (136,804) 818, ,241 At 31 December 2011 and 2010, the inventories in the foregoing table comprised mainly property developments. The fair value of inventories at 31 December 2011 amounted to EUR 958,751 thousand (31 December 2010: EUR 652,426 thousand). The fair value of the inventories was calculated as follows: - The fair value of inventories arising from subrogations or purchases to settle loans granted was obtained from appraisals (updated in 2010) conducted pursuant to Ministerial Order ECO/805/2003 by valuers authorised by the Bank of Spain. - The fair value of the other property developments was obtained either by using the method indicated above or on the basis of internal appraisals performed by the Group s real estate companies. 118

128 The changes in 2011 and 2010 in the impairment losses on inventories, which include the adjustments required to reduce their cost to net realisable value, were as follows: Beginning balance 136,804 84,440 Transfer en bloc of assets and liabilities (Notes 1.2 and 14-x) 338,388 - Impairment losses recognised/reversed (Note 56) 51,907 12,608 Transfers (Note 27) (121,688) 29,523 Other changes (19,022) 10,233 Ending balance 386, ,804 The detail of Other Liabilities in the consolidated balances at 31 December 2011 and 2010 is as follows: Accrued expenses and deferred income 68,624 53,813 Other liabilities 8,646 5,334 77,270 59,147 Disclosures on the payment periods to suppliers. Additional provision three. Duty of disclosure of Law 15/2010 of 5 July. At 31 December 2011 and 2010, the Group did not have any significant amounts payable to creditors for which the aggregate deferral period exceeds the statutory payment period stipulated by Law 3/2004, of 29 December: Payments Made and Amounts Payable Amount % Amount % Within the statutory maximum payment period (*) 491, , Other 7, Total 498, , Weighted average days past due Deferred payments that exceed the statutory maximum period at the balance sheet date (*) The maximum payment period is, in each case, that which relates to the good or service received by the Company in accordance with Law 3/2004, of 29 December, establishing measures to combat late payment in commercial transactions. 119

129 33. Financial liabilities at amortised cost The detail of Financial Liabilities at Amortised Cost in the consolidated balances at 31 December 2011 and 2010 is as follows: Deposits from central banks 2,000,485 1,200,102 Deposits from credit institutions 2,104, ,826 Customer deposits 29,162,607 18,927,967 Marketable debt securities 3,319,755 2,447,389 Subordinated liabilities 584, ,192 Other financial liabilities 464, ,056 37,636,222 24,346,532 The detail, by currency and maturity, of Financial Liabilities at Amortised Cost in the consolidated balances at 31 December 2011 and 2010 is as follows: By currency: Euros 37,507,720 24,228,536 US dollar 118, ,718 Pound sterling 6,812 2,894 Japanese yen 1, Swiss franc Mexican peso Other 1,594 1,301 37,636,222 24,346,532 By maturity: On demand 12,730,662 8,137,365 Less than 1 month 4,248,657 2,987,234 1 to 3 months 1,555,524 1,282,127 3 months to 1 year 5,226,536 2,914,854 1 to 5 years 11,522,346 6,190,012 More than 5 years 1,594,674 2,103,626 Undetermined and unclassified maturity ,086 Valuation adjustments 757, ,228 37,636,222 24,346,532 The fair value of "Financial Liabilities at Amortised Cost" is included in Note

130 The detail of Deposits from Central Banks in the consolidated balances at 31 December 2011 and 2010 is as follows: Repurchase agreements (Note 41) 400,003 1,200,002 Deposits taken (Note 41) 1,600,000 - Valuation adjustments ,000,485 1,200,102 The average annual interest rate on Deposits from Central Banks was 1.22% in 2011 (2010: 1.01%). The detail of Deposits from Credit Institutions in the consolidated balances at 31 December 2011 and 2010 is as follows: Time deposits 1,688, ,979 Repurchase agreements (Note 41) 145,077 - Other accounts 263, ,062 Valuation adjustments 7, ,104, ,826 The average annual interest rate on Deposits from Credit Institutions was 1.10% in 2011 (2010: 0.53%). 121

131 At 31 December 2011 and 2010, Deposits from Credit Institutions Time Deposits included issues of single registered mortgage-backed bonds subscribed by the European Investment Bank (EIB), the characteristics of which are as follows: Principal Amount Interest Rate Maturity Issue 08/03/04 Lower of: - 3-month Euribor +0.13% - EIB rate 15/03/13 (**) Issue 04/05/07 (*) 10/05/15 (***) 100, , , , , ,000 (*) Until 10/05/11: 3-month Euribor 0.049% and, after that date, 3-month Euribor plus a spread to be set by the EIB for transactions with the same characteristics as the bond. (**) Carry the possibility of early redemption by the holder from 15/06/04 or by the issuer at a coupon payment date. (***) Carry the possibility of early redemption by the holder from 10/11/07 or by the issuer at a coupon payment date. There are no replacement assets or derivatives related to these issues. On 24 April 2007, Raiffeisen Bank International AG ( RBI ) granted the former CajaSur a loan of EUR 100,000 thousand which matures on 24 April 2012 and bears a floating interest rate tied to 6-month Euribor plus 0.21%. The terms and conditions of this loan prevent CajaSur from unwinding its position on this loan without the authorisation of RBI. As a result of the transfer en bloc of assets and liabilities (see Note 1.2), on 22 December 2010, BBK Bank CajaSur S.A.U. was subrogated to the position of CajaSur on this loan with the approval of RBI. Also, on 23 December 2010, BBK provided a bank guarantee of EUR 100,000 thousand to RBI as security for the fulfilment of the payment obligations of BBK Bank CajaSur, S.A.U. as transferee of all the assets and liabilities of CajaSur. 122

132 The detail of Customer Deposits in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: State public sector 1,223,553 1,655,516 Other resident sectors: Demand deposits: Current accounts 3,555,314 2,271,251 Savings accounts 6,368,597 4,290,984 Other 57,496 32,442 9,981,407 6,594,677 Time deposits: Fixed-term deposits 14,542,520 7,186,057 Home-purchase savings accounts 219, ,867 Hybrid financial liabilities 1,263,559 1,064,092 16,025,085 8,479,016 Repurchase agreements (Note 41) 1,166,621 1,794,717 Valuation adjustments 618, ,183 27,791,665 17,180,593 Non-resident public sector Other non-resident sectors 147,283 91,725 29,162,607 18,927,967 The detail, by product, of the average annual interest rates on Customer Deposits in 2011 and 2010 is as follows: Average Interest Rate (%) Current accounts Ordinary deposits Interest-bearing demand deposits Short-term deposits Long-term deposits

133 At 31 December 2011, Time Deposits Fixed-Term Deposits included several issues of single mortgagebacked bonds totalling EUR 5,174 million (31 December 2010: EUR 2,400 million), which were subscribed by securitisation SPVs. The main characteristics of these issues are as follows: Subscriber Final Redemption Interest Rate AyT Cédulas Cajas IV 13/03/ % 150, ,000 AyT Cédulas Cajas V- Series A 04/12/ % 48,387 48,387 AyT Cédulas Cajas V- Series B 04/12/ % 101, ,613 AyT Cédulas Cajas VI 07/04/ % 300, ,000 AyT Cédulas Cajas VIII- Series A 18/11/ % 219, ,512 AyT Cédulas Cajas VIII- Series B 18/11/ % 80,488 80,488 AyT Cédulas Cajas Global- Series I 14/12/12 3-month Euribor +0.05% 111, ,111 AyT Cédulas Cajas Global- Series II 14/03/ % 111, ,111 AyT Cédulas Cajas Global- Series III 14/12/ % 77,778 77,778 AyT Cédulas Cajas Global- Series V 14/03/ % - 300,000 AyT Cédulas Cajas Global- Series IX 25/10/ % 200, ,000 AyT Cédulas Cajas Global- Series XI 20/12/ % 400, ,000 AyT Cédulas Cajas Global- Series XII 21/03/ % 300, ,000 AyT Cédulas Cajas III, F.T.A. 26/06/ % 160,000 - AyT 10 Financiación Inversiones, F.T.A. 10/09/14 1-year Euribor +0.12% 14,000 - AyT Cédulas Cajas IV, F.T.A. 13/03/ % 200,000 - AyT Cédulas Cajas VI, F.T.A. 07/04/ % 100,000 - AyT Cédulas Cajas VIII, F.T.A. (Tranche A) 18/11/ % 219,512 - AyT Cédulas Cajas VIII, F.T.A. (Tranche B) 18/11/ % 80,488 - AyT Cédulas Cajas IX (Tranche A) 31/03/ % 141,667 - AyT Cédulas Cajas IX (Tranche B) 31/03/ % 58,333 - AyT Cédulas Cajas X (Tranche A) 28/06/15 3-month Euribor +0.08% 146,154 - AyT Cédulas Cajas X (Tranche B) 28/06/ % 153,846 - AyT Cédulas Cajas Global, F.T.A. Series I 12/12/12 3-month Euribor +0.06% 111,111 - AyT Cédulas Cajas Global, F.T.A. Series II 12/03/ % 111,111 - AyT Cédulas Cajas Global, F.T.A. Series III 12/12/ % 77,778 - AyT Cédulas Cajas Global, F.T.A. Series IV 20/02/18 3-month Euribor ,000 - AyT Cédulas Cajas Global, F.T.A. Series II extension 14/03/ % 300,000 - F.T.A. PITCH 20/07/ % 300,000 - AyT Cédulas Cajas XI, F.T.A. 25/11/12 3-month Euribor +0.11% 250,000 - AyT Cédulas Cajas Global, F.T.A. Series XIX 21/10/13 3-month Eur +0.91% 200,000 - AyT Cédulas Cajas Global, F.T.A. Series XX 22/11/15 3-month Eur +1.21% 150,000 - AyT Cédulas Territoriales Cajas IV, F.T.A. 07/04/12 Fixed: 3.51% 100,000 - Total 5,174,000 2,400,

134 In 2011 reimbursements were made amounting to EUR 800,234 thousand in relation to the issues arising in the transfer en bloc of assets and liabilities (see Note 1.2) which matured in Although there are no replacement assets or derivatives related to these issues, hedge accounting was applied to certain of them, with a principal amount of EUR 3,811,124 thousand at 31 December 2011 (31 December 2010: EUR 2,317,656 thousand) (see Note 26). At 31 December 2011, Other Resident Sectors - Valuation Adjustments included a negative amount of EUR 336,674 thousand (31 December 2010: a negative amount of EUR 121,311 thousand) relating to changes in the fair value of mortgage-backed bonds recognised in profit or loss, attributable to interest rate risk, to which fair value hedge accounting was applied as described in Note 26. The detail, by currency and maturity, of Customer Deposits in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: By currency: Euros 29,051,213 18,843,024 US dollar 101,963 80,410 Pound sterling 6,733 2,887 Japanese yen 1, Swiss franc Other 1,543 1,296 29,162,607 18,927,967 By maturity: On demand 12,122,857 7,977,371 Less than 1 month 2,836,138 1,431,421 1 to 3 months 1,445,399 1,218,902 3 months to 1 year 4,957,832 2,713,100 1 to 5 years 6,018,222 4,000,221 More than 5 years 1,162,504 1,271,953 Undetermined maturity Valuation adjustments 619, ,999 29,162,607 18,927,

135 The detail of Marketable Debt Securities in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Notes and bills 2, ,896 Hybrid securities 36,758 - Mortgage-backed securities 2,788,079 1,788,038 Other non-convertible securities 1,415, ,713 Treasury shares (1,050,000) - Valuation adjustments 127,396 33,742 3,319,755 2,447,389 At 31 December 2011, Notes and Bills included EUR 2,395 thousand relating to notes issued by the Group under the 2011 BBK Empréstitos Note Issuance Programme. The maximum amount of the issue is EUR 3,000,000 thousand and the term thereof is 12 months from May The notes were issued at a discount and have a face value of EUR 1,000. At 31 December 2010, Notes and Bills included EUR 130,695 thousand relating to notes issued by the Group under the 2010 BBK Empréstitos Note Issuance Programme. The maximum amount of the issue was EUR 3,000,000 thousand and the term thereof was 12 months from May At 31 December 2011, the balance of "Notes and Bills" relating to this programme was zero. The notes were issued at a discount and have a face value of EUR 1,000. At 31 December 2010, Notes and Bills included EUR 25,201 thousand relating to notes issued by the Group under the 2009 BBK Empréstitos Note Issuance Programme. The maximum amount of the issue was EUR 3,000,000 thousand and the term thereof was 12 months from May At 31 December 2011, the balance of "Notes and Bills" relating to this programme was zero. The notes were issued at a discount and have a face value of EUR 1,000. All the notes mentioned in the preceding paragraphs are jointly and severally and irrevocably guaranteed by the Parent and are admitted to trading on the Spanish fixed-income market (AIAF). The detail, by residual maturity, of the notes and of the interest rates at each year-end is as follows: Up to 1 Month Within 3 Months 3 Months to 1 Year 1 to 5 Years Total Interest Rate At 31 December 2011 BBK Empréstitos notes ,899 2, %-3.10% At 31 December 2010 BBK Empréstitos notes 21,268 83,834 50, , %-1.87% 126

136 At 31 December 2011 and 2010, Mortgage-Backed Securities included the amount relating to the following issues launched by the Parent which were listed on the AIAF market and whose principal characteristics are summarised below: Issue No. of Securities Unit Face Value Final Redemption (*) Interest Rate BBK mortgage-backed bonds, 29 December ,000 29/12/ % - 70,730 BBK mortgage-backed bonds, 17 February ,000 17/02/ % 42,308 42,376 BBK mortgage-backed bonds, 29 September 2009 (*******) 11, ,000 29/09/ % 1,095, ,932 BBK mortgage-backed bonds, 22 December ,000 15/10/ % 50,000 50,000 BBK mortgage-backed bonds, 11 March ,000 27/03/ % 50,000 50,000 BBK mortgage-backed bonds, 27 May , ,000 30/09/ % 100, ,000 BBK mortgage-backed bonds, 23 July , ,000 23/07/15 (***) (**) - 100,000 BBK mortgage-backed bonds, 5 August , ,000 05/11/12 (***) (****) - 100,000 BBK mortgage-backed bonds, 31 August ,000 05/09/ % - 75,000 BBK mortgage-backed bonds, 8 October , ,000 08/10/18 (******) 200, ,000 BBK mortgage-backed bonds, 26 October , ,000 26/10/15 (******) 100,000 - BBK mortgage-backed bonds, 3 November , ,000 03/11/15 (******) 100,000 - Total 20,879 1,738,080 1,788,038 (*) BBK may redeem early, at par, through a reduction in the face value, the amount, if any, by which the issue exceeds the mortgage-backed bond issue limits established at any time by the applicable legislation. (**) The interest rate will be six-month Euribor plus an increasing spread in each six-month period of between 30 and 190 basis points. (***) There is an early redemption option for the subscriber at the end of each six-month period from the issue date. (****) The interest rate will be three-month Euribor plus an increasing spread in each three-month period of between 20 and 180 basis points. (*****) The interest rate will be three-month Euribor plus a 200-basis point spread. (******) The interest rate will be six-month Euribor plus an increasing spread in each six-month period of between 100 and 250 basis points. (*******) On 31 March 2011, Bilbao Bizkaia Kutxa mortgage-backed bonds with a nominal value of EUR 100 million were issued, which were merged with the issue of 29 September

137 There are no replacement assets or derivatives related to these issues. Certain issues were the subject of hedge accounting (see Note 26) for a nominal amount of EUR 1,100,000 thousand (31 December 2010: EUR 1,000,000 thousand). On 4 May 2010 and 11 May 2010, the former CajaSur (see Note 1.2) launched two mortgage-backed bond issues, which are governed by Mortgage Market Law 2/1981, of 25 March and the related implementing provisions, for principal amounts of EUR 375,000 thousand and EUR 75,000 thousand, respectively. As required by this legislation, the issues are backed by a sufficient amount of mortgage loans meeting the legal requirements for this purpose. On 15 September and 24 November 2009, the former CajaSur (see Note 1.2) launched two mortgage-backed bond issues, which are governed by Mortgage Market Law 2/1981, of 25 March and the related implementing provisions, for principal amounts of EUR 400,000 thousand and EUR 200,000 thousand, respectively. As required by the aforementioned law, the issues are backed by a sufficient amount of mortgage loans meeting the legal requirements for this purpose. The related mortgage-backed bonds issued by the former CajaSur (see Note 1.2) in 2010 and 2009 were acquired by the Parent with the aim of using them as collateral to increase the available liquidity of the credit facility held with the European Central Bank. The amount of the mortgage-backed bonds acquired by the Parent is recognised as a debit balance under "Marketable Debt Securities" in the consolidated balance sheet as a reduction in the amount of the issued mortgage bonds. As a result of the transfer en bloc of assets and liabilities (see Note 1.2), the Group has hybrid securities and other non-convertible securities. With regard to the hybrid securities, on 15 March 2007, the former CajaSur launched an issue of ordinary bonds for a total principal amount of EUR 50,000 thousand maturing on 15 March The return on the securities is calculated using a fixed annual interest rate of 1.5%. In addition, depending on the date of the last coupon payment, an inflation coupon will be paid which will be calculated according to the cumulative inflation in Spain over the life of the issue. With regard to the other non-convertible securities, the first issue of non-convertible Spanish government-backed bonds was launched on 23 June 2009, comprising 5,600 bonds with a face value of EUR 50,000 each, maturing on 18 June The return on the securities is calculated by applying a fixed interest rate of 2.48% plus 0.647%. The second issue of non-convertible Spanish government-backed bonds was launched on 9 July 2009, comprising 4,000 bonds with a face value of EUR 50,000 each, maturing on 9 July The return on the securities is calculated by applying a fixed interest rate of 2.32% plus 0.85%. With regard to other non-convertible securities, on 26 January 2006, CajaSur Finance, S.A. (a company domiciled in Spain) took part, together with other companies, in the launch of the Cajas Españolas de Ahorros Multi-Cajas Programme for the possible issue of EUR 3,000,000 thousand in euro-denominated medium-term debentures guaranteed, among others, by Caja de Ahorros y Monte de Piedad de Córdoba - CajaSur. At 31 December 2007, this company had launched two issues of floating rate bonds under this programme maturing in June 2011 and June 2009, respectively. The first issue, launched on 15 June 2006, consisted of listed bonds for a total principal amount of EUR 450,000 thousand, and matured on 15 June This issue bore interest at a floating rate tied to 3-month Euribor plus 0.15%. This issue was guaranteed by the Group. 128

138 At 31 December 2011, Marketable Debt Securities - Valuation Adjustments included a positive amount of EUR 1,976 thousand relating to changes in the fair value of other non-convertible securities that were recognised in profit or loss, attributable to interest rate risk, to which fair value hedge accounting was applied as described in Note 26. Also, other non-convertible securities, totalling EUR 1,419,100 thousand at 31 December 2011 (31 December 2010: EUR 470,800 thousand), were hedged. At 31 December 2011, Marketable Debt Securities - Valuation Adjustments included a negative amount of EUR 40,643 thousand (31 December 2010: a negative amount of EUR 23,523 thousand) relating to changes in the fair value of mortgage-backed bonds recognised in profit or loss, a negative amount of EUR 32,669 thousand (31 December 2010: a positive amount of EUR 9,505 thousand) relating to changes in the fair value of nonconvertible bonds, and a negative amount of EUR 6,351 thousand relating to changes in the fair value of hybrid bonds, attributable to interest rate risk, to which fair value hedge accounting was applied as described in Note 26. Mortgage-market securities As an issuer of mortgage-backed bonds, the Parent presents below certain relevant information on all the mortgage-backed bond issues mentioned earlier in this Note, the disclosure of which in the financial statements is obligatory under current mortgage-market legislation: 1. Information on the coverage and privileges for the holders of the mortgage-backed securities issued by the Group. The Parent and the wholly-owned subsidiary BBK Bank CajaSur, S.A. (Sole-Shareholder Company) are the only Group companies that issue mortgage-backed bonds. These mortgage-backed bonds are securities, the principal and interest of which are specially secured (there being no need for registration in the Property Register) by mortgages on all the mortgage-backed bonds that are registered in the above companies' name, without prejudice to their unlimited liability. The mortgage-backed bonds include the holder s financial claim on these companies, secured as indicated in the preceding paragraphs, and may be enforced to claim payment from the issuer after maturity. The holders of these securities have the status of special preferential creditors vis-à-vis all other creditors (established in Article of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the issuer s favour. All holders of these bonds, irrespective of their date of issue, have equal priority of claim with regard to the loans and credits securing them. In the event of insolvency, the holders of mortgage-backed bonds will enjoy the special privilege established in Article of Insolvency Law 22/2003, of 9 July. Without prejudice to the foregoing, in accordance with Article of Insolvency Law 22/2003, of 9 July, during the insolvency proceedings the payments relating to the repayment of the principal and interest of the mortgaged-backed bonds issued and outstanding at the date of the insolvency filing will be settled, as preferred claims, up to the amount of the income received by the insolvent party from the mortgage loans and credits. If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments described in the preceding paragraph, the insolvency managers must obtain financing to meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be subrogated to the position of the bond-holders. 129

139 In the event that the measure indicated in Article of Insolvency Law 22/2003, of 9 July, were to be adopted, the payments to all holders of the mortgage-backed bonds issued would be made on a pro-rata basis, irrespective of the issue dates of the bonds. 2. Information on issues of mortgage-market securities The principal amount of the mortgage-market securities issued by the Group and outstanding at 31 December 2011 and 2010 is as follows: Mortgage-backed bonds not issued in a public offering Term to maturity of less than 3 years 4,225,933 1,297,398 Term to maturity of between 3 and 5 years 2,160,043 1,769,512 Term to maturity of between 5 and 10 years 1,420,922 1,293,212 Term to maturity of more than 10 years 309,402 77,778 8,116,300 4,437,900 As detailed in Note 17, the Group has policies and procedures in place for the management of its liquidity, and specifically in relation to its mortgage-market activities. 3. Information relating to the issue of mortgage-backed bonds The face value of all mortgage loans and credits, including those eligible in accordance with the provisions of the applicable legislation for the purposes of calculating the mortgage-backed bond issue limits, is as follows: Face value of the outstanding mortgage loan portfolio 24,279,330 13,687,552 Face value of the outstanding mortgage loans that would be eligible disregarding the limits for their calculation established in Article 12 of Royal Decree 716/2009, of 24 April (*) 16,071,265 8,874,164 Value of the total amount of the outstanding mortgage loans that are eligible, based on the criteria stipulated in Article 12 of Royal Decree 716/2009, of 24 April 15,893,335 8,773,

140 In addition, set forth below is certain information on all the outstanding mortgage loans and credits and on those that are eligible in accordance with the limits for their calculation established by Article 12 of Royal Decree 716/2009, of 24 April: Total Loan Portfolio Total Eligible Total Loan Loan Portfolio Portfolio Total Eligible Loan Portfolio By currency: Euros 24,154,905 15,833,258 13,565,827 8,708,781 Japanese yen 96,090 40,529 92,554 44,326 Swiss franc 27,601 19,061 28,428 19,971 US dollar Pound sterling ,279,330 15,893,335 13,687,552 8,773,578 By payment status: Performing 21,939,853 15,748,070 13,429,010 8,704,921 Non-performing 2,339, , ,542 68,657 24,279,330 15,893,335 13,687,552 8,773,578 By average term to maturity: Less than 10 years 3,234,908 1,822,487 1,534, , to 20 years 6,455,202 4,613,119 2,769,425 2,073, to 30 years 9,818,517 6,397,094 5,769,481 3,686,293 More than 30 years 4,770,703 3,060,635 3,613,829 2,097,056 24,279,330 15,893,335 13,687,552 8,773,578 By interest rate formula: Fixed 94,296 50, ,285 79,641 Floating 24,185,034 15,842,841 13,523,267 8,693,937 24,279,330 15,893,335 13,687,552 8,773,578 By purpose of transactions: Business activity - Property development (*) 3,281, ,202 1,157,585 - Business activity - Other 2,616,238 1,467, , ,142 Household financing 17,528,490 13,562,767 11,133,164 7,935,635 Other 852, , , ,801 24,279,330 15,893,335 13,687,552 8,773,578 By guarantee of transactions: Completed buildings-residential (**) 16,692,836 12,121,604 9,572,746 6,384,661 Completed buildings-commercial 2,298,181 1,158, , ,370 Completed buildings-other 741, , , ,032 Buildings under construction-housing units (**) 2,017,492 1,486,938 1,922,842 1,618,296 Buildings under construction-commercial 198,715 94,170 98,743 60,565 Buildings under construction-other 627,144 3, ,253 4,985 Land- developed land 424,382 98, ,141 61,942 Land-other 1,279, , , ,727 24,279,330 15,893,335 13,687,552 8,773,

141 (*) In accordance with the accounting principle of prudence, the Parent did not include loans and credits to property developers under Eligible Loan Portfolio in the two foregoing tables. At 31 December 2011, the potentially eligible amount relating to lending of this kind would be approximately EUR 368,886 thousand (31 December 2010: EUR 360,013 thousand). (**) Of which EUR 1,008,761 thousand and EUR 741,226 thousand of the total mortgage loans and credits and loans and credits that are eligible for the purposes of Royal Decree 716/2009, respectively, are collateralised by state-sponsored housing units (2010: EUR 559,001 thousand and EUR 343,683 thousand, respectively). The face value of all the outstanding mortgage loans and credits that are ineligible because they do not comply with the LTV limits established in Article 5.1 of Royal Decree 716/2009, but which meet the other requirements for eligible loans set forth in Article 4 of the aforementioned Royal Decree, was EUR 6,373,684 thousand at 31 December 2011 (31 December 2010: EUR 2,878,293 thousand). In accordance with the principle of prudence referred to in the preceding table, whereby developer loans and credits are not included in the potentially eligible portfolio, it is hereby stated that the drawable amounts (amounts committed but not drawn down) of the outstanding mortgage loan portfolio at 31 December 2011 were EUR 131,645 thousand and were scantly material at 31 December The detail of the eligible mortgage loans and credits securing the Group s mortgage-backed bond issues at 31 December 2011 and 2010, based on the LTV ratio (outstanding principal of the loans and credits divided by the latest fair value of the guarantees securing them), is as follows: Home mortgages: Transactions with LTV of less than 40% 2,964,168 1,797,115 Transactions with LTV of between 40% and 60% 4,560,394 2,634,950 Transactions with LTV of between 60% and 80% 6,375,870 3,570,892 13,900,432 8,002,957 Other assets received as collateral: Transactions with LTV of less than 40% 985, ,231 Transactions with LTV of between 40% and 60% 1,057, ,393 Transactions with LTV of more than 60% 28,876 15,997 2,071, ,621 15,971,650 8,773,578 The detail of the eligible and non-eligible mortgage loans and credits eliminated from the portfolio between 1 January 2011 and 31 December 2011, with an indication of the percentages relating to the eliminations due to termination at maturity, early termination, creditor subrogation or other circumstances is as follows: Non-Eligible Portfolio Eligible Portfolio Amount Percentage Amount Percentage Termination at maturity 4, , Early termination 265, , Other circumstances 457, , , ,

142 The detail of the eligible and non-eligible mortgage loans and credits added to the portfolio between 1 January 2011 and 31 December 2011, with an indication of the percentages relating to the additions due to originated transactions, creditor subrogation, or other circumstances is as follows: Non-Eligible Portfolio Eligible Portfolio Amount Percentage Amount Percentage Originated transactions 288, , Subrogations from other entities 7, , Other circumstances 40, , , ,032, Information relating to mortgage transfer certificates At 31 December 2011 and 2010, the only mortgage transfer certificates ( certificados de transmisión hipotecaria ) held by the Group were those issued by the Parent relating to the securitisation programmes described in Note 25 to these consolidated financial statements. The difference between the amounts disclosed in that Note relating to the principal amounts and outstanding balances of the issues launched under those securitisation programmes and the mortgage loans and credits backing them is not material. The changes in 2011 and 2010 in Marketable Debt Securities were as follows: Beginning balance 2,447,389 2,862,349 Transfer en bloc of assets and liabilities (Note 1.2) 968,990 - Issues 770,205 2,412,395 Redemptions (983,277) (2,890,484) Accrued interest 116,448 63,129 Ending balance 3,319,755 2,447,389 The interest accrued on the Group s marketable debt securities amounted to EUR 116,448 thousand in 2011 (2010: EUR 63,129 thousand) (see Note 44). The detail of Subordinated Liabilities in the consolidated balances at 31 December 2011 and 2010 is as follows: Subordinated marketable debt securities: Non-convertible 393, ,590 Subordinated deposits 188,264 - Valuation adjustments 2, , ,

143 Under the authorisation granted by the General Assemblies on 11 March and 21 October 2005, in 2006 and 2005 the Board of Directors of the Parent approved two subordinated debenture issues, each with a principal amount of EUR 500 million, consisting of 5,000 bonds of EUR 100,000 face value each. These debentures were issued by the Parent on 28 September 2005 (this first issue having been used in the exchange mentioned above) and 1 March 2006 and mature on 28 September 2015 and 1 March 2016, respectively, although the issuer may redeem them early after five years from the date of issue. If this right is not exercised, the coupon will be increased by 0.50% annually through the date of final redemption. These issues bear floating interest tied to 3- month Euribor and the average interest rate applied in 2011 was 2.12% and 1.95%, respectively (2010: 1.17% and 1.06%, respectively). These subordinated debentures are admitted to trading on the AIAF organised secondary market. In 2010, after obtaining authorisation from the Bank of Spain, the Parent offered to exchange the subordinated debenture issue of 28 September 2005 for newly-issued non-convertible Bilbao Bizkaia Kutxa bonds. The principal amount of the subordinated debentures whose subscribers accepted the exchange offer was EUR 470,800 thousand, equal to the principal amount of the non-convertible bonds issued, which are quoted on the AIAF market, bear interest of 4.38% and will be redeemed on 28 September This exchange transaction did not give rise to any gain or loss for the Parent in These non-convertible bonds are recognised under "Marketable Debt Securities - Other Non-Convertible Securities" on the liability side of the consolidated balance sheet. In 2011, after obtaining authorisation from the Bank of Spain, the Parent offered to exchange the subordinated debenture issue of 1 March 2006 for newly-issued non-convertible Bilbao Bizkaia Kutxa bonds. The principal amount of the subordinated debentures whose subscribers accepted the exchange offer was EUR 468,300 thousand, equal to the principal amount of the non-convertible bonds issued, which are quoted on the AIAF market, bear interest of 4.40% and will be redeemed on 1 March This exchange transaction did not give rise to any gain or loss for the Parent in These non-convertible bonds are recognised under "Marketable Debt Securities - Other Non-Convertible Securities" on the liability side of the consolidated balance. Subordinated Liabilities also includes the issue of 20 preference shares of EUR 100 thousand par value each, launched on 12 September 2007 by BBKGE, E.F.C., S.A. These preference shares entitle their holders to receive a return calculated on the basis of 3-month Euribor plus 0.30%, with a minimum of 3.5% and a maximum of 6% per annum. The average interest rate applied in 2011 was 3.50% (2010: 3.50%). The preference shares are perpetual, although they may be redeemed in full or in part at the discretion of the issuer, subject to prior authorisation from the Bank of Spain, at any time after the tenth year from their disbursement date. The holders of the preference shares are entitled to receive a redemption price equal to their par value plus any accrued interest outstanding at the date of redemption. The preference shares do not carry any voting rights. 134

144 The detail of the subordinated debt issues composing the balance of Subordinated Liabilities in the consolidated balance sheet at 31 December 2011, which arose as a result of the transfer en bloc of assets and liabilities (see Note 1.2) is as follows: Nominal Redemption Interest Maturity Value Value Rate (*) Date First subordinated debt issue 60,000 60,000 3% 01/12/13 Third subordinated debt issue 61,300 61,300 3-month Eur +0.94% 11/03/15 Fourth subordinated debt issue 50,000 50,000 6-month Eur +2% 21/12/17 Fifth subordinated debt issue 165, ,000 6-month Eur +4.5% 28/11/18 Single issue 40,000 40,000 3-month Eur +0.86% 17/11/16 Single issue: CajaSur Sociedad de Participaciones Preferentes 150, ,000 4% (**) Balance at 31 December , ,300 (*) Interest rate prevailing at 31 December (**) The preference shares are issued for an indefinite term. The 4% interest rate will remain in effect until 30 June In 2003 the Board of Directors of the former CajaSur approved an issue of subordinated liabilities maturing on 1 December This subordinated debt issue was launched for a principal amount of EUR 60,000 thousand and bears a floating interest rate tied to 3-month Euribor plus 0.20% and a minimum interest rate of 3% until December On 1 January, BBK Bank CajaSur, S.A.U., on the basis of the agreements regarding the transfer en bloc of assets and liabilities (see Note 1.2) was subrogated to all the assets, rights and obligations of the former CajaSur. For the purposes of payment priority, these liabilities rank junior to all general creditors of the Company. In 2005 the Board of Directors of the former CajaSur approved an issue of subordinated liabilities maturing on 11 March This subordinated debt issue was launched for a principal amount of EUR 75,000 thousand and bears a floating interest rate tied to 3-month Euribor plus 0.44%. From the fifth year from the date of issue the spread is increased to 0.94%, pursuant to the terms and conditions of the prospectus. On 1 January, BBK Bank CajaSur, S.A.U., on the basis of the agreements regarding the transfer en bloc of assets and liabilities (see Note 1.2) was subrogated to all the assets, rights and obligations of the former CajaSur. For the purposes of payment priority, these liabilities rank junior to all general creditors of the Company. On 1 August 2011, the Company made a repayment of EUR 13,700 thousand and, accordingly, at 31 December 2011, the registered nominal value amounted to EUR 61,300 thousand. In 2006 the Board of Directors of the former CajaSur approved an issue of subordinated liabilities maturing on 21 December This subordinated debt issue was launched for a principal amount of EUR 50,000 thousand and bears a floating interest rate tied to 6-month Euribor plus 2%. This issue is subordinated and, for the purposes of payment priority, it ranks junior to all general creditors of the Company. From the fifth year from the date of issue the spread is increased to 2.5%, pursuant to the terms and conditions of the prospectus. On 1 January, BBK Bank CajaSur, S.A.U., on the basis of the agreements regarding the transfer en bloc of assets and liabilities (see Note 1.2) was subrogated to all the assets, rights and obligations of the former CajaSur. At its meeting of 31 October 2008, the Board of Directors of the former CajaSur approved an issue of subordinated liabilities maturing on 17 November This subordinated debt issue was launched for a principal amount of EUR 40,000 thousand and bears a floating interest rate tied to 3-month Euribor plus 0.36%. On 1 January, BBK Bank CajaSur, S.A.U., on the basis of the agreements regarding the transfer en bloc of 135

145 assets and liabilities (see Note 1.2) was subrogated to all the assets, rights and obligations of the former CajaSur. From the fifth year from the date of issue the spread is increased to 0.86%, pursuant to the terms and conditions of the prospectus. For the purposes of payment priority, these liabilities rank junior to all general creditors of the Company. At the Board meeting held on 31 October 2008, the directors of the former CajaSur approved an issue of subordinated liabilities to be launched on 28 November 2008, maturing on 28 November This subordinated debt issue was launched for a principal amount of EUR 165,000 thousand and bears a floating interest rate tied to 6-month Euribor plus 4.5%. From the fifth year, the spread will be increased to 6%. On 1 January, BBK Bank CajaSur, S.A.U., on the basis of the agreements regarding the transfer en bloc of assets and liabilities (see Note 1.2) was subrogated to all the assets, rights and obligations of the former CajaSur. For the purposes of payment priority, these liabilities rank junior to all general creditors of the Company. This category includes preference shares issued by Cajasur Sociedad de Participaciones Preferentes, S.A. (Sole-Shareholder Company), a Group company. The Institution guarantees payment of the accrued unpaid dividends on these preference shares under certain conditions. These dividends were 5.87% of each share (EUR 600) until 30 December 2002 and Euribor plus 0.25% thereafter. The full amount of this issue has been deposited at the Institution. The preference shares are jointly and severally and irrevocably guaranteed by the Institution and rank, for credit seniority purposes, above any equity units it may issue; on an equal footing with the obligations assumed by the Institution with respect to other preference share issues of any of its subsidiaries; and below all the Institution's general and subordinated creditors. From 1 July 2009 to 30 June 2011, the Parent guaranteed, subject to the remuneration terms and conditions stipulated in the preference share issue prospectus, remuneration equal to the greater of: - 3-month Euribor plus 0.25%. - Fixed interest of 3.50%. At its meeting of 15 June 2011, the Executive Committee of BBK Bank CajaSur, S.A.U. resolved to extend and improve the minimum profitability threshold until that date with regard to the preference shares, provided that the remuneration terms and conditions stipulated in the prospectus are met. Accordingly, the remuneration of the issue from 1 July 2011 until 30 June 2012 will be the higher of: - 3-month Euribor plus 0.25%. - Fixed interest of 4%. According to the terms and conditions of the preference share issue prospectus, holders of Series A preference shares will not be entitled to receive preference dividends. Consequently, the Group will not declare these dividends, insofar as the annual dividends - both paid and unpaid - exceed the previous years' distributable profits, as defined in the issue prospectus. Nor shall they be entitled to receive such dividends in the event of non-compliance with the minimum computable equity ratios established by applicable regulations or if the deficit exceeds 20% of the stipulated minimum equity level; in this case, all consolidated group entities must assign all their profits or net surpluses to reserves. If the equity deficit is less than the stated 20%, the dividend payment must be previously authorised by the Bank of Spain, which shall determine the portion of profits assignable to reserves. All the subordinated liabilities are admitted to trading on the AIAF organised secondary market. The issues included under Subordinated Liabilities are subordinated and, for the purposes of payment priority, they rank junior to all general creditors of the issuers. 136

146 The interest accrued on the Group s subordinated liabilities amounted to EUR 18,494 thousand in 2011 (2010: EUR 9,716 thousand) (see Note 44). 34. Provisions The detail of Provisions in the consolidated balance sheets at 31 December 2011 and 2010 is as follows: Provisions for pensions and similar obligations: Provisions for pensions under Royal Decree 1588/ ,543 9,295 Other provisions for pensions 120,449 84, ,992 93,358 Provisions for taxes and other legal contingencies 1,519 - Provisions for contingent liabilities and commitments: Provisions for contingent liabilities 72,652 19,115 Provisions for contingent commitments 3,990 3,074 76,642 22,189 Other provisions 220,709 45, , ,

147 The changes in Provisions in 2011 and 2010 were as follows: Pensions and Similar Obligations Tax Provisions Contingent Liabilities and Commitments Other Provisions Total Balance at beginning of ,203-28,764 66, ,746 Additions charged to income- Staff costs 2, ,647 Interest expense and similar charges (Note 44) 3, ,747 Net period provisions (Note 55) 2,778 - (2,725) (6,850) (6,797) Amounts used- Pension payments (1,496) (1,496) Payments for pre-retirements (6,214) (6,214) Other payments (4,273) - - (1,583) (5,856) Transfers (Notes 25 and 32) - - (3,850) (11,549) (15,399) Other changes (34) - - (1,094) (1,128) Balance at end of ,358-22,189 45, ,250 Transfer en bloc of assets and liabilities (Notes 1.2 and 14.x) 96,796 1,485 56, , ,087 Additions charged to income- Staff costs 2, ,844 Interest expense and similar charges (Note 44) 3, ,777 Net period provisions (Note 55) ,979 4,168 13,188 Reversal of provisions with a credit to income (Note 55) (456) (3) (10,755) - (11,214) Amounts used- Pension payments (1,349) (1,349) Payments for pre-retirements (6,366) (6,366) Other payments (4,453) - (387) (126,399) (131,239) Transfers (Note 25) (8,175) (8,175) Other changes (2,163) (94,162) (95,941) Balance at end of ,992 1,519 76, , ,862 The purpose of the balance of "Other Provisions in the foregoing table is to cover possible contingencies, liabilities and other specific circumstances to which the Group is exposed in its ordinary business activity. At the end of 2011 certain litigation and claims were in progress against the consolidated entities arising from the ordinary course of their operations. In particular, in 2007 the Board of the Spanish National Competition Commission (Comisión Nacional de Defensa de la Competencia) issued a decision imposing a penalty of EUR 7,000 thousand on the Parent on the grounds that it had conducted itself in a manner restrictive of competition prohibited by the Competition Law, consisting of a non-competition clause between the Parent and other financial institutions and of the coordination of competitive behaviour vis-à-vis third parties. The Parent filed an appeal for judicial review against this decision, requesting it be stayed. In 2009 the Spanish National Appellate Court handed down a decision reducing this penalty to EUR 3,500 thousand, which was appealed against by the Parent. The Group s legal advisers and directors consider that the outcome of litigation and claims will not have a material effect on the financial statements for the years in which they are settled, since the possible economic impacts of the penalty are recognised under Other Provisions in the foregoing table at 31 December

148 Bilbao Bizkaia Kutxa, as the acquirer through its subsidiary BBK Bank CajaSur, S.A.U. of the assets and liabilities of CajaSur, after execution of the Project for the Transfer en Bloc of the Assets and Liabilities of CajaSur to BBK Bank CajaSur, S.A.U." and fulfilment of the conditions precedent envisaged therein, undertook, even though it was under no legal obligation to do so, to pay an amount equal to such remuneration as might have accrued on 30 September 2010 and 30 December 2010 on the preference shares issued by CajaSur Sociedad de Participaciones Preferentes, S.A. At 31 December 2010, the obligations assumed in this regard had been recognised under Other Provisions in the foregoing table. This payment was made on 3 January 2011, once the transfer en bloc of assets and liabilities was complete (see Notes 1.2 and 14.x). The detail of Provisions for Pensions and Similar Obligations in the consolidated balances at 31 December 2011 and 2010 is as follows: Post-employment benefit obligations: Vested 70,012 13,268 Current and pre-retired employees 21,799 20,173 91,811 33,441 Early retirement benefit obligations 42,514 17,063 Other obligations 47,667 42, ,992 93,358 Post-employment benefit obligations Obligations acquired by Bilbao Bizkaia Kutxa As discussed in Note 14.o, at 31 December 2011 and 2010 the Parent had transferred its employee pension obligations to EPSVs formed for this purpose. The obligations to the beneficiaries of the defined benefit plan employees who retired prior to 31 July 1996 and to the beneficiaries of disability benefits and of widows' and orphans' benefits in the event of death of current employees, are funded by Gauzatu EPSV, and the obligations to the beneficiaries of the defined contribution plan current employees and employees who retired after 31 July 1996 are funded by Hazia EPSV witnessed the entry into force of Decree 92/2007 of the Basque Government regulating certain activities of EPSVs, which established the obligation to use certain actuarial assumptions and the need, in the case of EPSVs that cover biometric risks, to record solvency margins additional to the technical provisions, the minimum amount of which will be 4% of these provisions. The net assets of Gauzatu EPSV amounted to EUR 242,279 thousand at 31 December 2011 (31 December 2010: EUR 247,320 thousand), considering the unrealised gains on its assets and including the aforementioned solvency margin, which amounted to EUR 8,639 thousand at 31 December 2011 (31 December 2010: EUR 8,893 thousand). The present value of the accrued obligations to the beneficiaries of the defined benefit plan (548 participants) amounted to EUR 226,330 thousand at 31 December 2011 (31 December 2010: EUR 234,184 thousand). The present value of the obligations in the event of death or disability of current employees amounted to EUR 5,381 thousand at 31 December 2011 (31 December 2010: EUR 4,504 thousand). 139

149 Following is a reconciliation of the present value at the beginning and end of 2011 and 2010 of the defined benefit obligations covered by Gauzatu EPSV: Thousands of Euros Balance at 1 January ,272 Current service cost 3,909 Interest cost 9,610 Actuarial (gains) and losses (1,092) Benefits paid (18,515) Past service cost - Balance at 31 December ,184 Current service cost 4,504 Interest cost 9,367 Actuarial (gains) and losses (3,252) Benefits paid (18,473) Balance at 31 December ,330 Following is a reconciliation of the fair value of the assets of Gauzatu EPSV at the beginning and end of 2011 and 2010: Thousands of Euros Fair value at 1 January ,626 Expected return on plan assets 10,073 Actuarial gains and (losses) (14,685) Contributions made by plan participants 1,821 Benefits paid (18,515) Fair value at 31 December ,320 Expected return on plan assets 12,341 Actuarial gains and (losses) (1,697) Contributions made by plan participants 2,781 Benefits paid (18,466) Fair value at 31 December ,279 In 2002, pursuant to Royal Decree 1588/1999, the Parent completed the externalisation of its pension and similar obligations, except as discussed in the following paragraph. At 31 December 2011 and 2010, the Parent continued to recognise as an internal provision the retirement gift obligations to current employees who joined the Parent prior to the entry into force of Royal Decree 1588/1999, for which the required authorisation was obtained from the Ministry of Economy and Finance via the Bank of Spain. In 2003, as a result of the amendments to the collective agreement of the Parent, the group of employees who joined the Parent after 17 May 1988 relinquished their retirement gift in exchange for larger future supplementary contributions to Hazia EPSV. The present value of the retirement gift obligations to current employees entitled to this benefit amounted to EUR 9,276 thousand at 31 December 2011 (31 December 2010: EUR 9,295 thousand). 140

150 These obligations were estimated on the basis of calculations made by actuaries using the projected unit credit method and other actuarial assumptions, as discussed in Note 14.o. Additionally, the Parent recognised a provision to cover sundry post-employment welfare benefit obligations (medical insurance and other financial assistance) to employees reaching retirement age. The present value of these obligations amounted to EUR 26,137 thousand at 31 December 2011 (31 December 2010: EUR 24,146 thousand) and was estimated on the basis of calculations made by actuaries using the projected unit credit method and other actuarial assumptions, as discussed in Note 14.o. The impact of a one-percentage-point increase or decrease in health-care costs would not be material with respect to these consolidated financial statements. The detail of the present value of post-employment benefit obligations measured using the criteria established by International Financial Reporting Standards is contained in Note 14.o. Early retirement benefit obligations From 2001 to 2011 the Parent recorded a series of provisions to cover the estimated cost of early retirement plans for 471 employees, none of which relate to 2011 and 12 to In 2011 EUR 534 thousand were recognised in the consolidated income statement in connection with these obligations (2010: 4,010 EUR thousand). The present value of the obligations described in the preceding paragraphs which were payable at 31 December 2011 amounted to EUR 9,131 thousand (31 December 2010: EUR 17,063 thousand). Obligations assumed by BBK Bank CajaSur, S.A.U., a wholly-owned subsidiary of BBK Post-employment benefit obligations Defined benefit plans As indicated in Note 14.o, at 31 December 2011, BBK Bank CajaSur, S.A.U. had transferred to external pension funds, through insurance policies, the post-employment benefit obligations to its employees. The changes between the beginning and ending balances of the defined benefit obligations relating to postemployment benefits for current and former employees of BBK Bank CajaSur, S.A.U. are summarised as follows: 141

151 Thousands of Euros Beginning balance at 20 September Current service cost - Interest cost - Actuarial (gains) and losses - Benefits paid - Past service cost - Balance at 1 January Transfer en bloc of assets and liabilities (Notes 1.2 and 14.x) 64,179 Current service cost 614 Interest cost 2,547 Actuarial (gains) and losses 361 Benefits paid (4,790) Past service cost - Balance at 31 December ,911 The changes between the beginning and ending balances of the assets assigned to the defined benefit obligations relating to the post-employment benefits for current and former employees of BBK Bank CajaSur, S.A.U. were as follows: Thousands of Euros Fair value at 1 January Expected return on plan assets - Actuarial gains and (losses) - Contributions made by plan participants - Benefits paid - Fair value at 1 January Transfer en bloc of assets and liabilities (Notes 1.2 and 14.x) 64,179 Expected return on plan assets 2,548 Actuarial gains and (losses) 185 Contributions made by plan participants 789 Benefits paid (4,790) Fair value at 31 December ,911 All of the Group's post-employment obligations are covered under Spanish pension plans. Other long-term employee benefits As indicated in Note 14.o, at 31 December 2011, BBK Bank CajaSur, S.A.U. had acquired obligations, such as long-term benefit obligations, to cover pre-retirement benefit, loyalty bonus and hand-over contract benefits. 142

152 The changes between the beginning and ending balances of the defined benefit obligations relating to other longterm benefits for employees of BBK Bank CajaSur, S.A.U. are summarised as follows: Thousands of Euros Beginning balance at 20 September Current service cost - Interest cost - Actuarial (gains) and losses - Benefits paid - Past service cost - Balance at 1 January Transfer en bloc of assets and liabilities (Notes 1.2 and 14.x) 51,691 Current service cost 459 Interest cost 1,582 Actuarial (gains) and losses (595) Benefits paid (7,656) Past service cost - Balance at 31 December ,481 The changes between the beginning and ending balances of the assets assigned to other long-term benefit obligations relating to the post-employment benefits for current and former employees of BBK Bank CajaSur, S.A.U. were as follows: Thousands of Euros Fair value at 1 January Expected return on plan assets - Actuarial gains and (losses) - Contributions made by plan participants - Benefits paid - Fair value at 1 January 2011 (transfer of assets and liabilities) - Transfer en bloc of assets and liabilities (Notes 1.2 and 14.x) 36,049 Expected return on plan assets 1,430 Actuarial gains and (losses) 28 Contributions made by plan participants 6 Benefits paid (2,181) Fair value at 31 December ,

153 35. Welfare fund The detail of Welfare Fund in the consolidated balances at 31 December 2011 and 2010 is as follows: Welfare fund Amounts recognised: Assigned to tangible assets (Note 29) 104, ,835 Committed period expenses 69,577 77,401 Maintenance expenses for current year (67,959) (76,801) Uncommitted amount 4,496 3, , ,421 Other liabilities 31,224 44, , ,361 The changes in Welfare Fund in 2011 and 2010 were as follows: Beginning balance 154, ,828 Transfer charged to prior year's net profit 69,577 79,962 Maintenance expenses for the year (67,959) (76,801) Transfers and other liabilities (13,715) (5,628) Ending balance 142, , Own funds The detail of Own Funds in the consolidated balances at 31 December 2011 and 2010 is as follows: Capital or endowment fund Reserves 3,302,311 3,123,193 Profit for the year attributable to the Group 220, ,798 3,522,479 3,381,

154 At 31 December 2011 and 2010, the ownership interests of 10% or more in the capital of BBK Group subsidiaries held by non-group entities, either directly or through their subsidiaries, were as follows: % of Ownership Gabinete Egia, S.A.: Caja de Ahorros de Vitoria y Álava BBKGE Kredit E.F.C., S.A.: General Electric Capital Bank, S.A. (*) General Electric Capital Corporation (*) Ciencia Tecnología e Innovación, S.L.: Computación Innovación y Desarrollo, S.L Corporación Empresarial de la Universidad de Córdoba, S.A Parking Zoco Córdoba, S.L.: Deza Calidad, S.A Compañía Cordobesa de Renta Inmobiliaria, S.A (*) Percentages calculated on the basis of the total share capital of BBKGE, E.F.C., S.A. Taking into account only the shares with voting rights, these percentages would be 39% and 10%. Also, two individuals hold ownership interests of more than 10% in the Fineco Group, representing a total of 24.46% of its capital. The detail of Reserves in the consolidated balances at 31 December 2011 and 2010 is as follows: Accumulated reserves (losses): Revaluation reserves- Parent 77,435 78,514 Reserves (losses) attributable to the Parent- Voluntary reserves 3,100,451 2,864,424 Reserves (losses) attributable to subsidiaries 39,390 76,066 Reserves (losses) attributable to jointly controlled entities 15 (31) Reserves (losses) of entities accounted for using the equity method- Associates 85, , , ,255 3,302,311 3,123,193 Reserves (Losses) Attributable to the Parent includes the reserve for productive investments which amounted to EUR 135,650 thousand at 31 December 2011 and Article 39 of Bizkaia Corporation Tax Regulation 3/1996, of 26 June, provides for the possibility of deducting from the net tax charge 10% of the amounts transferred to a special reserve called Reserve for Productive Investments. This reserve must be invested in the actual acquisition of new tangible fixed assets within two years from the end of the year in which profits are transferred to the reserve. The full amount of the reserve had been invested at 31 December 2011 and These assets must be assigned to the development of the Parent s operations and must remain in service for five years or for their useful life, if shorter. They cannot be transferred, leased or assigned to third parties. This account is treated as reserves for all purposes. After a period of five years from the investment of this reserve, it 145

155 can be used to offset book losses. At 31 December 2011, the amount of the reserve for which the aforementioned five-year period had not yet elapsed was EUR 17,000 thousand (31 December 2010: EUR 26,400 thousand). At 31 December 2011 and 2010, Revaluation Reserves related to the revaluation reserve arising from the measurement of property, plant and equipment for own use at fair value at 1 January 2004, as described in Note 14-q. The revaluation amounts are transferred to other reserves to the extent that the related assets are derecognised due to depreciation, impairment or disposal, in the proportion corresponding to the revaluation. The detail, by entity, of Reserves (Losses) Attributable to Subsidiaries at 31 December 2011 and 2010 is as follows: Kartera 4, S.A. 1,727 3,703 BBKGE Kredit, E.F.C., S.A. 1, BBK Gestión, S.A., S.G.I.I.C. 1,507 1,556 Gesfinor Administración, S.A Kartera 1, S.L. 22,622 21,508 ARCA, du Pays Basque - 1,331 Gabinete Egia, S.A. 1,554 1,561 Neinor, S.A. 31,773 40,242 Neinor Inversiones, S.A.U. (2,555) 868 Neinor Ibérica Inversiones, S.A.U. (395) - BBK Empréstitos, S.A.U Kartera 2, S.L. 8,910 3,524 Parque de Economía Social BBK Solidarioa Parkea, S.L. (12) (10) Fineco Sociedad de Valores, S.A. (10,618) 1,134 Fineco, S.G.I.I.C., S.A.U. (17,834) (660) Fineco Previsión, E.G.F.P., S.A.U. (18) 1 Fineco Patrimonios, S.G.I.I.C., S.A.U. (6) - BBK Bank CajaSur, S.A.U Grupo de Empresas CajaSur, S.A.U ,390 76,

156 The detail of Reserves (Losses) Attributable to Jointly Controlled Entities at 31 December 2011 and 2010 is as follows: Harri 1, S.L. - (232) Informática de Euskadi, S.L. - 2,330 Mecano del Mediterráneo, S.L. - (1,946) Matikanet, S.L Cromion IT, S.L Telekutxa, S.L Promega Residencial, S.L. - (500) 15 (31) 147

157 The detail of Reserves (Losses) of Entities Accounted for Using the Equity Method at 31 December 2011 and 2010 is as follows: Biharko Aseguradora, S.A. 2,501 1,922 Talde Promoción y Desarrollo, S.C.R., S.A. (9,292) (9,739) Biharko Vida y Pensiones, S.A. 16,088 14,051 Luzaro, S.P.E., S.A. 3,260 3,004 Euskaltel, S.A. 29,078 35,349 Ingeteam Corporación, S.A. 58,154 65,083 Servatas, S.A. Servicios Vascos de Tasaciones Besaide, S.C. 6 6 Norbolsa Sociedad de Valores y Bolsa, S.A. 1, Servicios Vizcaínos de Cobro, S.A Baserri, S.L. (11) (11) Túneles de Artxanda, Conces. Dip. Foral Bizkaia, S.A. (6,202) (929) Orubide, S.A. (380) (1,143) Alokabide, S.A. - (1,363) Talde Gestión, S.G.E.C.R, S.A. 1,820 1,807 Aguas de Bilbao, S.A. (2,286) (2,286) Uragua, S.A. (1) - Mediasal, S.A. (5) (44) Ikei, S.A AC Infraestructuras 2, SCR, S.A. (4,449) (1,396) Fiuna, S.A. (1,215) (1,543) Alquiler de Metros, A.I.E Petronor Biocarburantes, S.A. - 1 Ekarpen, S.A. (6) (134) Promega Residencial, S.L. (1,937) - Mecano del Mediterráneo, S.L. (2,341) - Harri 1, S.L. (72) - Grupo Informática de Euskadi Torre Iberdrola A.I.E. (5) 271 San Mamés Barria, S.L. (16) (2) 85, ,

158 The detail, by entity, of the contribution to the profit attributable to the Group at 31 December 2011 and 2010 is as follows: Parent 52,691 90,103 Subsidiaries: Kartera 4, S.A BBK Gestión, S.A. S.G.I.I.C. 2,600 2,441 Gesfinor Administración, S.A ,002 Kartera 1, S.L. 157, ,196 ARCA, du Pays Basque - (399) Gabinete Egia, S.A Neinor, S.A. (31,800) (14,017) Neinor Inversiones, S.A.U. (862) (27) Neinor Ibérica Inversiones, S.A.U. (512) (359) Neinor Inmuebles, S.A.U. (17) - BBKGE Kredit, E.F.C., S.A. 5,361 3,715 Kartera 2, S.L. 273 (18,157) BBK Empréstitos, S.A.U Parque de Economía Social BBK Solidarioa, S.L. (92) (1) Fineco Sociedad de Valores, S.A. 8 (12,655) Fineco, S.G.I.I.C., S.A.U. 817 (17,173) Fineco Previsión, E.G.F.P., S.A.U. 3 (19) Fineco Patrimonios, S.G.I.I.C., S.A.U. (95) (8) BBK Bank CajaSur, S.A.U. 11,121 - Grupo de Empresas CajaSur, S.A. 33,006 - Cajasur Finance, S.A.U Cajasur Participaciones Preferentes, S.A.U Fundación Convisur, Constructora de Viviendas CAM de Córdoba (199) - Comerciantes Reunidos del Sur, S.A., E.F.C. (CREUSA) (5,459) - Asesoría y Consultoría, S.A.U. (ACONSA) (113) - Ciencia, Tecnología e Innovación, S.L. (616) - Markemos, S.L.U. (33) - Tejares Activos Singulares, S.L.U. (745) - Agencia de Viajes Sur 92, S.A.U. (242) - Cajasur Inmobiliaria, S.A.U. (1,362) - Datasur Servicios Tecnológicos, S.A. (778) - Silene Activos Inmobiliarios S.A.U. (18,250) - Sermansur S.A.U. (2,479) - Promotora Inmobiliaria Prienesur, S.A.U. (6,100) - Tirsur, S.A.U Ñ XXI Perchel Málaga, S.L.U GPS Mairena del Soto, S.L.U. (2,705) - Grupo Inmobiliario Cañada XXI, S.L.U. (500) - Columba 2010, S.L.U. (2) - Parking Zoco Córdoba, S.L , ,

159 Jointly controlled entities: Informática de Euskadi, S.L. - 1,124 Matikanet, S.L. - 1 Cromion IT, S.L Harri 1, S.L Mecano del Mediterráneo, S.L. - (3,649) Telekutxa, S.L. - (1) Promega Residencial, S.L. - (1,437) Centros Residenciales Sanyres Sur, S.L.U Sanyres Sur, S.L. (2,006) - Unión Sanyres, S.L. (23) - Sanyres y Residencias 21, S.A.U. (436) - Sanyres Margarentenof Sur, S.L.U. (124) - Sanyres European Care I, S.L.U. (339) - Alzambra Sanyres, S.L.U. (2) - Promar 21, S.L.U Atención Integral a la Dependencia, S.L.U. (16) - (2,626) (3,665) Associates: Servatas, S.A. Servicios Vascos de Tasaciones Biharko Aseguradora, S.A. 3,318 3,062 Besaide, S.A. 1 2 Norbolsa Sociedad de Valores y Bolsa, S.A Talde Capital, F.C.R Biharko Vida y Pensiones, S.A. 5,259 3,236 Luzaro, S.P.E., S.A Servicios Vizcaínos de Cobros, S.A. (16) 34 Euskaltel, S.A. 12,170 10,460 Ingeteam Corporación, S.A. 10,953 17,674 Túneles de Artxanda, S.A. 200 (5,366) Orubide, S.A. (338) 708 Alokabide, S.A Talde Gestión, S.G.E.C.A Aguas de Bilbao, S.A. (7) (7) Mediasal, S.A Ikei, S.A. (33) 31 A.C. Infraestructuras 2 SCR, S.A. (62) (3,053) Fiuna, S.A Torre Iberdrola, A.I.E. (482) (154) Alquiler de Metros, A.I.E. (4) (12) 150

160 Petronor Biocarburantes, S.A. - 1 Ekarpen, S.A. (2,413) 132 San Mamés Barria, S.L. (6) (13) Harri 1, S.L. (11) - Grupo Informática de Euskadi Mecano del Mediterráneo, S.L. (316) - Promega Residencial, S.L. (111) - Sociedad Promotora Bilbao Gas hub, S.L. (1) - Diario Córdoba, S.A. 1 - Iniciativas de Publicaciones e Impresión, S.L Plastienvase, S.L Rofisur 2003, S.L. (3) - Altia Proyectos y Desarrollo, S.A. (496) - Diario Jaén, S.A. (79) - Ñ XXI Selwo Estepona, S.L. (356) - Gestora del Nuevo Polígono Industrial, S.A. (61) - Corporación Industrial Córdoba Este, S.A Corporación Industrial Córdoba Norte, S.A. 2 - Corporación Industrial Córdoba Sur, S.A Corporación Industrial Córdoba Oeste, S.A. 2 - Corporación Industrial Córdoba Sureste, S.A. 4 - Universal Lease Iberia Properties, S.L. (72) - Auxiliar de Gestión Patrimonial, S.A Ecourbe Gestión, S.L. 2 - Aurea Sur Fotovoltaica, S.L Ibérico de Bellota, S.A Aparcamientos Gran Capitán, A.I.E Córdoba Language Centre, S.L Iniciativas Desarrollos Industriales de Jaén, S.A. (2) - Sociedad de Gestión e Inversión en Infraestructuras Turísticas de Córdoba, S.A. (4) - Campos de Córdoba, S.A Andalucía Económica, S.A. (6) - Equipamientos Urbanos del Sur, S.L. 1 - Vitalia Ándalus, S.L. (1) - M-Capital, S.A. (347) - Norapex, S.A. (330) - 29,116 30, , ,

161 37. Valuation adjustments The detail of Valuation Adjustments in the consolidated balances at 31 December 2011 and 2010 is as follows: Available-for-sale financial assets: Debt instruments (25,212) (21,441) Equity instruments 299, , , ,855 Cash flow hedges (Note 26) 53 (15,843) Exchange differences 2 - Entities accounted for using the equity method 1,213 33, , ,896 The amounts transferred from Valuation Adjustments to consolidated profit or loss at 31 December 2011, disregarding the related tax effect, were EUR 3,368 thousand relating to reversals of impairment losses and EUR 45,518 thousand relating to gains on disposals (31 December 2010: EUR 35,518 thousand and EUR 83,593 thousand, respectively). 152

162 The detail, by entity, of the amount included in Valuation Adjustments in consolidated equity at 31 December 2011 and 2010 is as follows: Parent 357, ,045 Subsidiaries: Kartera 1, S.A. (74,766) 179,006 Fineco Sociedad de Valores, S.A. (5) 1 Fineco, S.G.I.I.C., S.A.U. 3 (40) BBK Bank CajaSur, S.A.U. (14,261) - Grupo de Empresas CajaSur, S.A.U. 5,070 - (83,959) 178,967 Associates: Norbolsa Sociedad de Valores y Bolsa, S.A. 3,118 3,324 Biharko Vida y Pensiones, S.A. (560) (764) Biharko Aseguradora, S.A. (2,216) (376) Euskaltel, S.A. - 31,106 Talde Capital, F.C.R Ingeteam Corporación, S.A. (34) 215 AC Infraestructuras 2, S.C.R., S.A Aguas y Gestión de Servicios Ambientales (190) - 1,213 33, , ,896 The balance of Available-for-Sale Financial Assets relates to the net changes in fair value of these financial instruments which must be classified in consolidated equity. When the financial assets are sold, these changes are recognised in the consolidated income statement. 38. Non-controlling interests The detail of Non-Controlling Interests in the consolidated balances at 31 December 2011 and 2010 is as follows: Gabinete Egia, S.A. 1,327 1,360 BBKGE Kredit, E.F.C., S.A. 27,053 24,953 Fineco Group 5,699 5,134 Ciencia, Tecnología e Innovación, S.L. (34) - Datasur Servicios Tecnológicos, S.A Parking Zoco Córdoba, S.L. 1,832 - Comerciantes Reunidos del Sur, S.A., E.F.C. 8-35,909 31,

163 39. Tax matters In 2011 the Parent, and the subsidiaries that met the requirements of Bizkaia Corporation Tax Regulation 3/1996, of 26 June, applied the special tax consolidation regime, and formed tax group 00510BSC pursuant to a resolution issued by the Head of the Local Tax and Register Control Service of the Department of Finance of the Bizkaia Provincial Government. In 2011 this tax Group comprised the following entities: Parent Bilbao Bizkaia Kutxa Subsidiaries: Kartera 4, S.A. BBK Gestión, S.A., S.G.I.I.C. Gesfinor Administración, S.A. Kartera 1, S.L. Neinor, S.A. Neinor Inversiones, S.A.U. Telekutxa, S.L. Kartera 2, S.L. BBK Empréstitos, S.A.U. Banco Bilbao Bizkaia Kutxa, S.A.U. Neinor Inmuebles, S.A.U. Parque de Economía Social BBK Solidarioa, S.L. The legislation applicable in the province of Bizkaia for the settlement of 2011 income tax is Bizkaia Corporation Tax Regulation 3/1996, of 26 June, as amended by Bizkaia Regulation 6/2007, of 27 March 2007, currently in force, which establishes, among other measures, a standard tax rate of 28%, although various appeals filed in this respect are still pending. On 11 September 2008, the Court of Justice of the European Union handed down a decision on the requests for a preliminary ruling filed by the Basque Country High Court in orders dated September In view of the decision of the Court of Justice of the European Union, in December 2008 the Basque Country High Court dismissed various appeals filed against the Bizkaia Corporation Tax Regulation. However, an appeal against the High Court s decision has been lodged with the Supreme Court. The Directors of the Parent and of the other entities subject to provincial legislation calculated the income tax for 2011 and for the years open for review pursuant to the provincial legislation in force at each year-end, since they considered that the final outcome of the various court proceedings and appeals filed in this connection will not have a significant impact on the consolidated financial statements taken as a whole. On 1 January 2011, the transfer en bloc of assets and liabilities (see Note 1.2) led to the dissolution of consolidated tax Group 193/05, headed by the former CajaSur. Pursuant to Article 81 of the Consolidated Spanish Corporation Tax Law, approved by Legislative Royal Decree 4/2004, of 5 March, the tax losses generated by the tax group which were available for offset were taken over by the companies included in the tax Group, in the proportion they had contributed to the formation thereof. Similarly, the tax group's unused tax credits were taken over by the companies in the tax Group in the proportion they had contributed to the formation thereof. 154

164 A new consolidated tax Group was formed in 2011, headed by BBK Bank CajaSur, S.A. (Sole-Shareholder Company), as Parent, and made up of the following companies: Parent BBK Bank CajaSur, S.A.U. Subsidiaries: Cajasur Inmobiliaria, S.A.U. Tejares Activos Singulares S.L.U. Cajasur Finance, S.A.U. Cajasur Sociedad de Participaciones Preferentes, S.A.U. Grupo de Empresas Cajasur, S.A.U. GPS Mairena del Soto, S.L.U. GPS Pedregalejo S.L. (*) GPS Alhaurín Málaga, S.L. (*) Grupo Inmobiliario Cañada XXI, S.L.U. Ñ XXI Perchel Málaga, S.L.U. Columba 2010, S.L.U. Tirsur, S.A.U. Promotora Inmobiliaria Prienesur, S.A.U. Sermansur, S.A.U. Silene Activos Inmobiliarios, S.A.U. Grupo de Comunicación del Sur, S.L. (*) Datasur Servicios Tecnológicos, S.A. Asesoría y Consultoría, S.A.U. (ACONSA) Comerciantes Reunidos del Sur, S.A., E.F.C. (CREUSA) Agencia de Viajes Sur 92, S.A.U. Cajasur Entidad Seguros y Reaseguros, S.A. (**) Coseguros Servicio de Administración, S.A. (**) Coseguros Sur Operador de Banca-Seguros Vinculado, S.A. (**) (*) Liquidated in (**) Sold in 2011 (Note 1.2). This tax Group is subject to general Spanish tax legislation and, in particular, to the Consolidated Spanish Corporation Tax Law, approved by Legislative Royal Decree 4/2004, of 5 March, and, therefore, it is subject to a tax rate of 30%. The companies which form part of a consolidated tax group are jointly and severally liable to pay the tax debts. The other subsidiaries file individual income tax returns pursuant to the tax legislation applicable to them and subsequent years for income tax and the last four years for the other main taxes and tax obligations applicable under current tax legislation are open for review by the tax authorities, since the related statute-oflimitations periods have not elapsed. 155

165 At the end of 2011, the tax authorities commenced a tax audit of income tax, VAT, withholdings from salary income and withholdings from income from movable capital for 2008, 2009 and 2010 of the former CajaSur, Grupo de Empresas CajaSur, S.A.U., Silene Activos Inmobiliarios, S.A.U. and Promotora Inmobiliaria Prienesur, S.A.U. The tax audit under way and the varying interpretations which can be made of the tax legislation applicable to the operations carried out by the aforementioned entities could give rise to contingent tax liabilities. However, the Parent's Board of Directors consider that the tax liability which might result from the aforementioned contingent liabilities would not materially affect these consolidated financial statements. The detail of Income Tax in the consolidated income statements for 2011 and 2010 is as follows: Deferred income tax expense 9,469 (28,318) Current income tax expense (23,395) (344) Total income tax expense/(benefit) recognised in the consolidated income statement (13,926) (28,662) The reconciliation of the accounting profit for 2011 and 2010 to the current income tax expense (benefit) is as follows: Accounting profit 212, ,695 Tax at the rate of each Group company 58,669 65,435 Permanent differences (28%) (16,809) (23,351) Temporary differences 205,351 (3,198) Offset of tax losses (95,360) - Tax credits used (90,174) (92,050) Effect of difference in tax rate (*) (763) - Effects of consolidation and other (72,679) 52,820 Current income tax expense (11,002) (344) Adjustment of income tax for previous year (12,393) - Total current income tax expense/(benefit) (23,395) (344) (*) In relation to companies subject to a tax rate of 30% The permanent differences in 2011 arose as a result of the following: 2011 Permanent Differences Tax Effect Transfer to welfare fund (60,000) (16,800) Other (33) (9) Total permanent differences (60,033) (16,809) 156

166 In 2010 the consolidated tax group headed by the Parent availed itself of the tax exemption for reinvestment of extraordinary income provided for in Article 22 of Bizkaia Corporation Tax Regulation 3/1996, of 26 June. The gain to which the exemption for reinvestment was applied amounted to EUR 11,806 thousand. The commitment to reinvest the proceeds from the sale was honoured in full through investments in non-current financial assets in Additionally, in 2008 the Parent and certain subsidiaries ultimately availed themselves of the tax exemption for reinvestment of extraordinary income provided for in Article 22 of Bizkaia Corporation Tax Regulation 3/1996, of 26 June. The total amount of the gain to which this tax benefit was applied was EUR 45,445 thousand. The commitment to reinvest the proceeds from the sale was honoured in full. The temporary differences arose as a result of the following: 2011 Temporary Differences Tax Effect Pension obligations (6,511) (1,821) Impairment of investments 46,402 13,899 Impairment losses due to doubtful debts (278,050) (84,103) Other specific allowances (162,361) (48,964) Deferred income (fees and commissions) (2,062) (611) Revaluation of non-current assets 10,091 2,997 Impairment of non-current assets (40,717) (12,215) Excessive depreciation and amortisation (1,898) (530) Goodwill (6,066) (1,698) Deferred payment interest (6,627) (1,856) Other (36,013) (10,296) Total temporary differences (483,812) (145,198) Eliminations on consolidation for tax purposes Impairment of investments (45,309) (13,593) Inclusion of eliminations on consolidation for tax purposes Impairment of investments (155,201) (46,560) Total temporary differences due to eliminations on consolidation for tax purposes (200,510) (60,153) 157

167 The detail of the deferred income tax expense, which relates to the changes in deferred tax assets and liabilities (see Note 31) recognised in consolidated profit or loss, is as follows: Temporary differences 205,351 (3,198) Recognition of tax losses (201,750) - Recognition of tax credits (100,549) (103,287) Tax credits used 90,174 92,050 Effects of consolidation and other 4,215 (4,630) Deferred income tax expense (2,559) (19,065) Adjustment of income tax for previous year 12,028 (9,253) Total deferred income tax expense/(income) 9,469 (28,318) The income tax expense recognised in 2011 resulting from the adjustment of the 2010 income tax arose mainly from the amount of tax credits taken in the tax return ultimately filed for 2010 over and above the amount foreseen in the income tax estimate, and from the inclusion of certain adjustments to accounting profit having the nature of temporary differences, as detailed in Note 31. The reduction in the income tax expense recognised in 2010 resulting from the adjustment of the 2009 income tax was due mainly to the capitalisation of unused tax credits of the Parent and certain subsidiaries, which arose in 2009, to the higher amount of double taxation tax credits taken in the tax return ultimately filed for 2009 than that foreseen in the income tax estimate, and to the inclusion of certain adjustments to accounting profit having the nature of temporary differences, as detailed in Note 31. Unused tax credit and tax loss carryforwards The tax Group headed by the Parent had unused tax credits at 31 December As a result of the dissolution of consolidated tax group 193/05, headed by the former CajaSur, the unused tax losses and tax credits generated in 2008, 2009 and 2010 were allocated to the companies that formed part of the tax group. Insofar as these tax losses and tax credits arose before the tax group headed by BBK Bank CajaSur, S.A. (Sole-Shareholder Company) filed consolidated tax returns, they may only be deducted from the tax group's gross tax charge up to the limit that would have been applicable to the companies in the tax group under the individual tax regime. Also, certain tax losses and tax credits generated by subsidiaries under the individual tax regime have not yet been offset. The Group did not recognise all the tax loss and tax credit carryforwards, but only those which are considered to be recoverable within a reasonable period, pursuant to current tax legislation and based on the best estimate of the future profits of the companies in the tax Group. 158

168 Accordingly, the Group recognised the following tax loss carryforwards at 31 December 2011, using, pursuant to the applicable tax legislation, the tax rate applicable to the taxpayer which generated them: Tax Loss Tax Effect Fineco Patrimonios, S.G.I.I.C., S.A. (28%) Tax losses arising in BBK Bank CajaSur, S.A.U. Tax Group (30%) Tax losses arising in , ,063 BBK Bank CajaSur, S.A. (Sole-Shareholder Company) (30%) Tax losses arising in ,869 57,561 Tax losses arising in , ,265 Grupo de Empresas CajaSur, S.A. (Sole-Shareholder Company) (30%) Tax losses arising in ,065 3,020 Tax losses arising in ,321 11,796 Tax losses arising in ,824 5,947 Total 1,605, ,716 The Group reported the following unused tax credits at 31 December 2011 and 2010: Unused Tax Credits at 31/12/10 En bloc transfer (Note 1.2) Generated Used Unused Tax Credits at 31/12/11 Dividend double taxation (*) 80,973 4,703 90,395 (94,207) 81,864 Reserves for productive investments 4, ,200 Other tax credits 42,160 1,466 10,627-54, ,333 6, ,022 (94,207) 140,317 (*) In 2011 the Parent received EUR 133,288 thousand of dividends from companies in the consolidated tax group. Under the general income tax regime, these dividends give rise to a double taxation tax credit for the full amount of the gross tax payable on the amount of the dividends. However, since the Group is now taxed under the special tax consolidation regime, these dividends will be eliminated for the purposes of calculating the consolidated taxable profit. Unused Tax Credits at 31/12/09 Generated Used Unused Tax Credits at 31/12/10 Dividend double taxation (*) 72, ,367 (94,766) 80,973 Reserves for productive investments 4, ,200 Other tax credits 31,009 11,151-42, , ,518 (94,766) 127,333 (*) In 2010 the Parent received EUR 161,689 thousand of dividends from companies in the consolidated tax group. Under the general income tax regime, these dividends give rise to a double taxation tax credit for the full amount of the gross tax payable on the amount of the dividends. However, since the Group is now taxed under the special tax consolidation regime, these dividends are eliminated for the purposes of calculating the consolidated taxable profit. 159

169 The tax credits were reported, pursuant to the applicable tax regulations, at the tax rate applicable to the taxpayer which generated them, either Bizkaia tax legislation or general Spanish tax legislation. The aforementioned amounts are included under Tax Assets in the consolidated balance sheets at 31 December 2011 and 2010, since it is considered that they will be used in tax periods ending in subsequent years (see Note 31). Following is a detail of the tax losses and tax credits generated in prior years by certain subsidiaries subject to general Spanish tax legislation, in respect of which the Group has not recognised any deferred tax assets: Tax Loss Tax Effect Promotora Inmobiliaria Prienesur, S.A.U. (30%) Tax losses arising in ,508 8,852 Tax losses arising in ,382 10,315 Tax losses arising in ,471 8,541 Tax losses arising in ,279 9,984 Silene Activos Inmobiliarios, S.A.U. (30%) Tax losses arising in ,769 11,031 Tax losses arising in ,358 5,807 Tax losses arising in ,627 9,188 Sermansur, S.A.U. (30%) Tax losses arising in ,990 2,697 Tax losses arising in , Tax losses arising in Other companies (30%) Tax losses arising in Tax losses arising in Tax losses arising in , Tax losses arising in ,342 1,302 Tax losses arising in , Total tax loss carryforwards 233,331 69,999 Thousands of Euros Year Generated Other companies Other tax credits to 2011 In general, the tax losses generated by entities subject to the general Spanish tax legislation in force may be offset in the tax periods ending within 15 years immediately following the year in which the tax losses were generated, pursuant to the Consolidated Spanish Corporation Tax Law, approved by Legislative Royal Decree 4/2004, of 5 March. 160

170 However, Royal Decree-Law 9/2011, of 19 August, on measures for improving the quality and cohesion of the Spanish national health system, contributing to fiscal consolidation and raising the maximum amount of the Spanish government guarantees for 2011, introduced a number of changes to the amounts and periods allowed for offsetting tax losses. Accordingly, only for tax periods beginning in 2011, 2012 and 2013, companies with revenue of EUR 20 million or more, but less than EUR 60 million, may only offset 75% of taxable profit before offset of tax losses. This percentage is reduced to 50% for entities with revenue of EUR 60 million or more. Also, effective for periods beginning on or after 1 January 2012, the offsetting period is extended to 18 years. The tax credits generated pursuant to general Spanish tax legislation may be used in the tax periods remaining until expiry of the term allowed for this purpose. The tax credits generated pursuant to Bizkaia tax legislation may be used without any time limits. In 2011, 2010, 2009 and 2008, consolidated tax group 193/05, headed by the former CajaSur availed itself of the reinvestment tax credit established in Article 42 of the Consolidated Spanish Corporation Tax Law, approved by Legislative Royal Decree 4/2004, of 5 March. The taxable profit on which the tax credit was taken amounted to EUR 75 thousand, EUR 1,048 thousand, EUR 2,140 thousand and EUR 1,803 thousand, respectively, and at the end of those years the consolidated tax group had reinvested all the gains obtained on the disposal of the related non-current assets. Asset revaluation adjustments The former CajaSur revalued, effective from 1 January 2004, certain items of property, plant and equipment for own use and availed itself of the option provided for in Transitional Provision One of Bank of Spain Circular 4/2004. The revaluation totalled EUR 91,830 thousand. Other significant tax information The transfer en bloc of assets and liabilities described in Note 1.2 above qualified for the special tax regime provided for in Title VII, Chapter VIII of the Consolidated Spanish Corporation Tax Law approved by Legislative Royal Decree 4/2004, of 5 March. Under this regime, the financial statements of the acquirer must include the following disclosures: a) Year in which the transferor acquired the depreciable and amortisable assets transferred. b) The most recent balance closed by the transferor. c) A list of the assets acquired which are recognised in the accounting records with a value that differs from the carrying amount per the books of the transferor prior to performing the transaction, disclosing both values and the related accumulated depreciation or amortisation and impairment losses recognised in the accounting records of both entities. d) A list of the tax benefits taken by the transferor, with respect to which the entity must comply with certain requirements in accordance with tax legislation. The above disclosures were included in the notes to the separate financial statements of BBK Bank CajaSur, S.A. (Sole-Shareholder Company) for Fair value of on-balance- assets and liabilities As indicated in Notes 14-e and 14-f, the Group's financial assets are carried at fair value in the consolidated balance sheet, except for loans and receivables, held-to-maturity investments, investments in associates and equity instruments whose market values cannot be measured reliably. Also, the Group's financial liabilities are carried at fair value in the consolidated balance sheet, except for financial liabilities at amortised cost. 161

171 The method for determining the fair value of financial assets and liabilities carried at fair value and other relevant information in this respect are disclosed in Note 14. The tables below present the fair value of the Group's financial instruments at 31 December 2011 and 2010, broken down, by class of financial asset and liability, into the following levels: LEVEL 1: financial instruments whose fair value was determined by reference to their quoted price in active markets, without making any change to these assets. LEVEL 2: financial instruments whose fair value was estimated by reference to quoted prices on organised markets for similar instruments or using other valuation techniques in which all the significant inputs are based on directly or indirectly observable market data. LEVEL 3: instruments whose fair value was estimated by using valuation techniques in which one or another significant input is not based on observable market data. The data used in fair value calculations were obtained by the Group's external market data service, which offers, for each type of risk, the most liquid data obtained from official agencies, organised markets, brokers, market contributors or independent data suppliers such as Bloomberg or Reuters. In very specific cases data provided by counterparties or private entities are used, although the amount of the assets valued using these data was scantly material at 31 December 2011 and At 31 December 2011: Carrying Amount Fair Value Level 1 Level 2 Level 3 Total Assets- Cash and balances with central banks 508, , ,379 Financial assets held for trading 209, ,020 79,524 17, ,672 Other financial assets at fair value through profit or loss 2,928-2,928-2,928 Available-for-sale financial assets 4,599,591 3,549, , ,611 4,499,645 Loans and receivables 32,432, ,841,066 33,841,066 Hedging derivatives 495, , ,155 38,248,540 4,171,163 1,327,877 34,057,805 39,556,845 Liabilities- Financial liabilities held for trading 106,917 7,982 74,686 24, ,917 Financial liabilities at amortised cost 37,636,222-3,906,858 33,944,075 37,850,933 Hedging derivatives 21,293-21,293-21,293 37,764,432 7,982 4,002,837 33,968,324 37,979,

172 At 31 December 2010: Carrying Amount Fair Value Level 1 Level 2 Level 3 Total Assets- Cash and balances with central banks 208, , ,891 Financial assets held for trading 188, ,892 79, ,504 Available-for-sale financial assets 4,799,410 4,016, ,796 4,708,641 Loans and receivables 21,890, ,945,917 22,945,917 Hedging derivatives 215, , ,728 27,302,660 4,334, ,340 23,637,713 28,267,681 Liabilities- Financial liabilities held for trading 83,270 5,624 77,646-83,270 Financial liabilities at amortised cost 24,346,532-2,735,867 19,812,661 22,548,528 Hedging derivatives 38,056-38,056-38,056 24,467,858 5,624 2,851,569 19,812,661 22,669,854 The table below shows the amounts recognised in the consolidated income statements for the years ended 31 December 2011 and 2010 in respect of changes in the fair value (relating to unrealised gains and losses) of the Group's financial instruments that remained on the consolidated balance sheets at those dates: Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets- Cash and balances with central banks Financial assets held for trading - 29,601 (22,643) 6,958 - (10,786) 5,883 (4,903) Other financial assets at fair value through profit or loss - (61) - (61) Available-for-sale financial assets Loans and receivables (5,501) (5,501) Hedging derivatives - 121, ,327-72,504-72, ,867 (22,643) 128,224-61, ,100 Liabilities- Financial liabilities held for trading - (23,461) (32,622) (56,083) - (9,877) (62,095) (71,972) Financial liabilities at amortised cost (34,641) (34,641) Hedging derivatives - 164, ,589 (4.051) (4.051) 141,128 (32,622) 108,506 - (13,928) (96,736) (110,664) The valuation technique used to calculate the fair value of Loans and Receivables and Financial Liabilities at Amortised Cost was based on discounting the estimated or estimable future cash flows, taking into account the contractual maturity dates and interest repricing dates, calculated using the Euribor and IRS curves for the various terms. 163

173 The Group recognised certain equity instruments at cost in the consolidated balance sheet because it was unable to reliably estimate their fair value at 31 December The balance of these equity instruments amounted to EUR 99,946 thousand at 31 December 2011 (31 December 2010: EUR 90,769 thousand). At 31 December 2011, Level 3 contained a detail which, in the case of the trading derivatives, includes products for the valuation of which volatilities not directly observable in market data must be obtained. Following is a detail, by category, of the fair value of certain of the Group's tangible assets at 31 December 2011 and 2010, together with their corresponding carrying amounts at those dates: Carrying Amount Fair Carrying Value Amount Fair Value Tangible assets (Note 29)- Property, plant and equipment for own use 543, , , ,930 Investment property 79, ,400 61, , , , , ,096 The fair value of tangible assets was calculated using appraisals performed by independent experts and internal valuations based on market benchmarks (Servatas, S.A., Tinsa, Artasa, T&C, S.A., Galtier FISA and VTH, S.A.). The fair value of the other financial assets and liabilities is similar to the amounts at which they are recognised in the respective consolidated balance sheets at 31 December 2011 and 2010, except for equity instruments whose fair value could not be estimated reliably. 41. Contingent liabilities Contingent Liabilities relates to the amounts that would be payable by the Group on behalf of third parties as a result of the commitments assumed by it in the course of its ordinary business, if the parties who are originally liable to pay failed to do so. The detail of this item at 31 December 2011 and 2010 is as follows: Financial guarantees classified as standard: Bank guarantees and other indemnities provided 1,480,875 1,335,290 Irrevocable documentary credits 14,869 11,815 Other contingent liabilities 57,843-1,553,587 1,347,105 Doubtful financial guarantees: Bank guarantees and other indemnities provided 52,721 3,731 1,606,308 1,350,836 A significant portion of the financial guarantees will expire without any payment obligation materialising for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered to be an actual future need for financing or liquidity to be provided by the Group to third parties. 164

174 Income from guarantee instruments is recognised under Fee and Commission Income and Interest and Similar Income (for the amount relating to the discounted value of the fees and commissions) in the consolidated income statements for 2011 and 2010 and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee. The provisions made to cater for the financial guarantees provided, which were calculated using criteria similar to those applied in the calculation of the impairment of financial assets measured at amortised cost, were recognised under Provisions - Provisions for Contingent Liabilities and Commitments in the consolidated balance sheet (see Note 34). The detail of the Group s assets loaned or advanced as collateral at 31 December 2011 and 2010 is as follows: Available-for-sale financial assets 944,478 1,453,210 Loans and receivables 819, ,721 1,763,576 2,275,931 Additionally, securitised assets not derecognised (see Notes 14-g and 25) and notes issued by the Parent loaned or advanced as collateral amounted to EUR 6,868,713 thousand at 31 December 2011 (31 December 2010: EUR 1,823,545 thousand). The detail of repurchase agreements and assets earmarked for own obligations is as follows: Repurchase agreements (Note 33) 3,311,918 2,994,965 Assets earmarked for own obligations 5,320,371 1,104,511 8,632,289 4,099,

175 42. Contingent commitments The detail of Contingent Commitments at 31 December 2011 and 2010 is as follows: Drawable by third parties: By credit institutions 94,897 8,972 By the public sector 792, ,283 By other resident sectors 2,961,760 3,092,997 By non-residents 18,541 50,671 3,867,906 3,517,923 Financial asset forward purchase commitments 13,950 33,075 Securities subscribed but not paid 1,868 10,029 Other contingent commitments 737, , , ,592 4,620,911 4,264, Interest and similar income The detail of Interest and Similar Income in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Balances with central banks 5,036 2,822 Loans and advances to credit institutions 7,909 1,756 Loans and advances to customers 962, ,990 Debt instruments 122,307 50,127 Doubtful assets 23,444 9,793 Rectification of income as a result of hedging transactions (1,485) (1,018) Other interest 10,252 2,398 1,129, ,

176 The distribution, by geographical area, of the Group s branch offices at 31 December 2011 and 2010 is as follows: Bizkaia Córdoba Expansion network Interest expense and similar charges The detail of Interest Expense and Similar Charges in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Deposits from central banks 26,919 6,876 Deposits from credit institutions 56,872 8,708 Customer deposits 516, ,638 Marketable debt securities (Note 33) 116,448 63,129 Subordinated liabilities (Note 33) 18,494 9,716 Rectification of costs as a result of hedging transactions (122,531) (83,504) Interest cost of pension provisions (Note 34) 3,777 3,747 Other interest 10,745 2, , , Income from equity instruments The detail of Income from Equity Instruments in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Shares 138, , , ,

177 46. Fee and commission income The detail of Fee and Commission Income in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Contingent liabilities 10,594 6,311 Contingent commitments 2,458 2,088 Foreign currency and banknote exchange Collection and payment services 87,289 51,343 Securities services: Underwriting and placement of securities Purchase and sale of securities 1,509 1,207 Management and custody 14,735 14,143 Asset management 43,135 42,730 59,641 58,212 Marketing of non-banking financial products: Insurance 39,290 22,482 Other 3,116 2,548 42,406 25,030 Other fees and commissions 31,084 23, , , Fee and commission expense The detail of Fee and Commission Expense in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Fees and commissions assigned to other correspondents: Collection and return of bills and notes 1,593 1,232 Off-balance-sheet items Other items 9,809 6,777 11,519 8,009 Fee and commission expenses on securities transactions 1, Other fees and commissions 12,618 10,188 25,691 19,

178 48. Gains/losses on financial assets and liabilities (net) The detail of Gains/Losses on Financial Assets and Liabilities (Net) in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Financial assets/liabilities held for trading (Note 22) (10,975) (35,642) Available-for-sale financial assets 56, ,686 Loans and receivables (4,279) (4,100) Other instruments at fair value through profit or loss Hedging derivatives (Note 26) (2,001) - 39,420 63,944 Gains 732, ,579 Losses (693,490) (331,635) 39,420 63,944 Net gains (losses) from valuation adjustments (13,093) (33,304) Net gains on disposals 58, ,349 Net losses from other items (6,280) (4,101) 39,420 63,944 Net gains (losses) from debt instruments (903) 2,530 Net gains from equity instruments 55,416 94,718 Net gains (losses) from derivative instruments (15,093) (33,304) 39,420 63, Exchange differences (net) The detail of Exchange Differences (Net) in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Intermediation and adjustment of on-balance-sheet positions 17,726 36,731 Other 411 (84) 18,137 36,647 Gains 357, ,179 Losses (339,387) (306,532) 18,137 36,

179 50. Other operating income a) Income from insurance and reinsurance contracts and Other operating expenses - Expenses of insurance contracts These consolidated income statement items include the contribution from the Group's consolidated insurance and reinsurance companies (see Note Biharko-CajaSur Seguros transaction) to the Group's gross income in The detail of these items in the consolidated income statements for 2011 is as follows: Life Non-Life Total Life Non-Life Total Income Premiums: Direct insurance 35,439 4,444 39, Reinsurance assumed Reinsurance premiums ceded (424) (113) (537) Reinsurance commission income Finance income: Real estate investments Financial investments 8, , Other ,809 5,015 48, Expenses Benefits paid and other Insurance-related expenses: Direct insurance 30,627 2,079 32, Reinsurance assumed Reinsurance ceded (72) (648) (720) Net provisions for insurance contract liabilities: Uncollected premiums Unearned premiums and unexpired risks 302 1,507 1, Provision for claims outstanding (1,335) 159 (1,176) Life insurance 6,663-6, Life insurance policies in which the investment risk is borne by the Policyholders (125) - (125) Bonuses and rebates Other Finance expense 1, , Administrative expenses , Acquisition expenses 1,874 1,250 3, ,015 4,880 45, , ,

180 b) Sales and income from the provision of non-financial services The detail of Other Operating Income - Sales and Income from the Provision of Non-Financial Services in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Geriatric services 15,891 - Property development 125,430 44,344 Other 6, ,950 44,344 c) Other The detail of Other Operating Incomes - Other in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Income from investment property (Note 29) 3,961 3,409 Income from operating leases 1,050 - Financial fees and commissions offsetting direct costs 5,767 3,435 Other income 15,823 13,365 26,601 20, Other operating expenses The detail of Other Operating Expenses - Changes in Inventories in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Property development 114,472 47, ,472 47,

181 The detail of Other Operating Expenses - Other in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Operating expenses of investment property (Note 29) 1,738 1,673 Contribution to Deposit Guarantee Fund (Note 11) 20,691 12,343 Other 10,435 1,583 32,864 15, Staff costs The detail of Staff Costs in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Salaries and bonuses of current personnel 266, ,975 Social security costs 54,899 28,695 Transfers to internal defined benefit plans 5,004 2,891 Transfers to external defined contribution plans 9,092 4,014 Termination benefits 3, Training expenses 2,233 2,110 Other staff costs 9,240 7, , ,037 Following is a detail of other remuneration consisting of the delivery of fully or partially subsidised goods or services depending on the conditions agreed upon between the Group and its employees: Medical and life insurance 3,809 2,424 Study grants 1,373 1,322 Other ,686 4,

182 Additionally, remuneration is provided to employees in the form of the provision of services inherent to the business activity of credit institutions, the detail being as follows: Interest Market Interest Market Received Interest Difference Received Interest Difference Low-interest loans and credit facilities 5,089 8,399 3,310 2,339 4,300 1,961 The average number of employees at the Group in 2011 and 2010, by professional category, gender and location, was as follows: Men Women Total Men Women Total Senior executives Supervisors and other line personnel , ,202 Clerical/commercial staff 1,955 1,769 3, ,766 Other personnel ,900 2,821 5,721 1,584 1,415 2,999 Parent 1,244 1,146 2,390 1,263 1,144 2,407 Spanish credit institutions 1,450 1,084 2, Other Spanish subsidiaries ,900 2,821 5,721 1,584 1,415 2,999 At 31 December 2011 and 2010, the number of employees by gender did not differ significantly from the average number of employees presented in the table above. At 31 December 2011, the Board of Directors of the Parent was composed of 12 men and 6 women (31 December 2010: 11 men and 6 women). 173

183 53. Other general administrative expenses The detail of Other General Administrative Expenses in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Property, fixtures and supplies: Rent 10,610 5,086 Maintenance of fixed assets 12,506 7,824 Lighting, water and heating 6,511 3,362 Printed forms and office supplies 2,912 1,609 32,539 17,881 Information technology 33,407 21,073 Levies and taxes other than income tax 8,556 3,915 Other expenses: Communications 16,987 7,426 Advertising and publicity 14,558 10,867 Legal expenses 1, Technical reports 4,247 2,355 Surveillance and cash courier services 5,646 3,527 Insurance premiums 1, Governing and supervisory bodies 1,691 1,456 Entertainment and staff travel expenses 2,802 1,744 Association membership fees 1,733 1,237 Outsourced administrative services 5,168 2,344 Other 12,146 13,131 67,597 45, ,099 88, Depreciation and amortisation charge The detail of Depreciation and Amortisation Charge in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Tangible assets (Note 29): Property, plant and equipment for own use 29,338 19,194 Investment property 1, Other assets leased out under an operating lease ,701 20,498 Intangible assets (Note 30) 1,327 6,950 33,028 27,

184 55. Provisions (net) The detail of Provisions (Net) in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Provisions for pensions and similar obligations: Internal pension provisions (Note 34) (456) 2,778 External pension funds 4 20 (452) 2,798 Provisions for taxes and other legal contingencies (Note 34) 34 - Provisions for contingent liabilities and commitments (Note 34): For contingent liabilities (2,693) 528 For contingent commitments 917 (3,253) (1,776) (2,725) Other provisions (Note 34) 4,168 (6,850) 1,974 (6,777) 56. Impairment losses on financial assets (net) and Impairment losses on other assets (net) The detail of these items in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Impairment losses on financial assets (net) Loans and receivables (Note 25) 160, ,826 Available-for-sale financial assets (Note 24) 26,522 38,372 Other assets (8,134) - 178, ,198 Impairment losses on other assets (net) Investments 4,419 - Tangible assets (Note 29): Property, plant and equipment for own use 27 - Investment property Other assets 51,928 12,649 56,896 12,824 Intangible assets (Notes 28 and 30) 31 63,069 56,927 75,

185 57. Gains (losses) on disposal of assets not classified as non-current assets held for sale The detail of this item in the consolidated income statements for the years ended 31 December 2011 and 2010 is as follows: Gains Gains on disposal of tangible assets 9,403 15,819 Gains on disposal of investments 3,842 - Other items: 2,500-15,745 15,819 Losses Losses on disposal of tangible assets (3,630) (1,989) Losses on disposal of investments (66) - Other losses (1,409) - (5,105) (1,989) 10,640 13, Gains (losses) on non-current assets held for sale not classified as discontinued operations The detail of this item in the consolidated income statements for 2011 and 2010 is as follows: Gains (losses) on non-current assets held for sale (Note 27) (416) (30,880) Other - - (416) (30,880) 59. Profit attributable to non-controlling interests The balance of Profit Attributable to Non-Controlling Interests in the consolidated income statement for the year ended 31 December 2011, which corresponds to the share of non-controlling interests in the profit of the subsidiaries, amounted to EUR 6,032 thousand (relating to Gabinete Egia, S.A., BBKGE Kredit, E.F.C., S.A., the Fineco Group, Parking Zoco Córdoba, S.L., Ciencia, Tecnología e Innovación, S.L., Datasur Servicios Tecnológicos, S.A. and Comerciantes Reunidos del Sur, S.A., E.F.C.) (31 December 2010: EUR 4,559 thousand). 176

186 60. Related party transactions All significant balances between the Parent and its subsidiaries and jointly controlled entities at 31 December 2011 and 2010 and the effect of inter-company transactions during the years then ended were eliminated on consolidation. The detail of the Group's most significant balances with associates at 31 December 2011 and 2010, of the effect of the transactions performed with them, and of the significant balances and transactions with individuals related to the Group because they were members of the Parent's governing and management bodies in the years then ended is as follows: Related Related Associates Individuals Associates Individuals Asset positions: Loans and credit facilities 237,226 4, ,807 3,368 Other financial assets Other assets ,687 4, ,740 3,368 Liability positions: Deposits taken and other creditor balances 204,983 3, ,602 2,088 Other liabilities / obligations ,464 3, ,829 2,088 Income statement: Debit- Interest expense and similar charges 2, , Fee and commission expense Other operating expenses 16,349-7,733 - Impairment losses 866-8,105-20, , Credit- Interest and similar income 10, , Income from equity securities 13,897-9,272 - Fee and commission income 20,877-24,933 - Operating income 653-1,903-46, , Memorandum items: Guarantees and documentary credits 51,633-41,281 - Contingent commitments 43,785-46,648 - Financial derivatives 1,897-2,060-97,315-89,

187 61. Other disclosures The detail of the Group s off-balance-sheet customer funds at 31 December 2011 and 2010 is as follows: Managed by the Group: Investment companies and funds 3,093,600 3,190,178 Pension funds 2,362,304 2,094,825 Customer portfolios 520, ,965 5,976,186 5,710,968 Marketed but not managed by the Group 558, ,327 6,534,575 6,043,295 In 2011 and 2010 the Group provided the following investment services for the account of third parties: Securities market brokerage Purchases 37,860,521 55,016,908 Sales 37,451,067 57,258,170 75,311, ,275,078 Custody of financial instruments owned by third parties 9,233,427 9,734,914 Management of exposure to the property development sector The most noteworthy measures contained in the policies and strategies established by the Group in order to manage its exposure to the construction and property development sector and to cater for the problematic assets of this sector are as follows: - To maintain and, if possible, heighten the traditionally stringent control of the drawdowns against credit facilities provided for property development, as well as the monitoring of the marketing and sale of these facilities. - To strengthen the team specialising in the management of customers with exposure of this kind, with a view to obtaining effective results in the recovery of credit transactions and/or in the enhancement of the collateral securing them. - In view of the increase in non-performing loans in the Spanish financial system, in 2011 the Group created the Impaired Asset Management Unit, focusing specifically on the area of refinancing and restructuring credit risk transactions and on managing foreclosed property assets. To this end it has a specialised team of non-performing loan managers. 178

188 Exposure to the real estate sector In compliance with the Bank of Spain disclosure requirement, set forth below is certain confidential information on the BBK Group's exposure to the construction and property development sector; this information is not consistent with the public financial information contained in these notes to the consolidated financial statements: 2011 Gross Amount Excess Over Collateral Value Specific Allowances (*) Credit 3,322,521 1,105, ,927 Of which: doubtful 1,689, , ,248 Of which: substandard 661,836 93, , Gross Amount Excess Over Collateral Value Specific Allowances Credit 842, , ,713 Of which: doubtful 119,149 60,217 60,641 Of which: substandard 290,022 23, ,

189 The detail, by type of guarantee, of the information included in the foregoing table is as follows: Credit: Credit: Gross Amount Gross Amount Without mortgage guarantee 258,106 8,244 With mortgage guarantee Completed buildings Residential 1,133, ,825 Other 507,117 24,296 1,640, ,121 Buildings under construction Residential 486, ,482 Other 74,138 27, , ,444 Land Developed land 818, ,706 Other land 44, , ,706 3,064, ,271 3,322, ,515 Also, the information on the general allowance and the amount of assets written off at 31 December 2011 and 2010 is as follows: Gross Amount Total general allowance 407, ,638 Written-off assets 139,329 3,813 The maximum exposure to the credit risk relating to "Loans and Advances to Customers" is as follows: Carrying Amount Loans and advances to customers, excluding public sector - confidential balance 31,280,850 20,920,826 Total consolidated assets - confidential balance 42,474,544 29,099,

190 Also, following is certain information on the BBK Group's retail mortgage portfolio: Gross Amount Of which: Doubtful Gross Amount Of which: Doubtful Home purchase loans Without mortgage guarantee 243,251 6, ,845 2,003 With mortgage guarantee 18,652, ,248 13,171, ,529 18,895, ,640 13,339, ,532 LTV Ranges 40% 40% - 60% 60% - 80% 80% - 100% > 100% 2011 Gross amount 2,376,216 4,023,890 6,823,111 3,727,744 1,701,548 Of which: doubtful 15,931 45, ,939 86, ,434 LTV Ranges 50% 50% - 80% 80% - 100% >100% 2010 Gross amount 2,585,163 5,923,458 3,472,835 1,189,768 Of which: doubtful 10,974 47,639 72, ,

191 Also, following is certain information on the BBK Group's foreclosed properties portfolio: Carrying Amount Of which: Coverage Carrying Amount Of which: Coverage Property assets from financing provided to construction and property development companies 641, ,576 94,060 40,335 Completed buildings Residential 196,959 65, Other 48,643 6, ,602 72, Buildings under construction Residential 48,887 16, Other ,996 16, Land Developed land 207, ,604 94,030 40,309 Other land 139, , , ,543 94,030 40,309 Property assets from home purchase mortgage loans to households 127,398 49,768 9,556 8,423 Other foreclosed property assets 54,222 13,732 1,746 1,539 Equity instruments of, ownership interests in and financing provided to non-consolidated companies holding these assets 101,565 82, ,922 75, , , , ,

192 Funding structure The detail of the maturities of wholesale issues to be met by the Group at 31 December 2011 and 2010 is as follows: > 2015 Mortgage bonds ( bonos hipotecarios ) and mortgagebacked bonds ( cédulas hipotecarias ) 674, ,388 1,953,025 2,940,368 Territorial bonds Senior debt ,858 State-guaranteed issues - 480, Subordinated debt, preference shares and convertible debt 214, ,000-2,000 Other short-term financial instruments Other medium- and long-term financial instruments Securitisation issues sold to third parties ,758 Commercial paper 336,221 2, Total maturities wholesale issues 1,225,044 1,295,388 1,953,025 3,928, > 2013 Mortgage bonds ( bonos hipotecarios ) and mortgagebacked 645, , ,387 3,040,502 bonds ( cédulas hipotecarias ) Territorial bonds Senior debt ,800 State-guaranteed issues Subordinated debt, preference shares and convertible debt ,300 Other short-term financial instruments Other medium- and long-term financial instruments Securitisation issues sold to third parties Commercial paper 151, Total maturities wholesale issues 796, , ,387 4,042,

193 The detail of the available liquid assets and the issue capacity of the BBK Group at 31 December 2011 and 2010 is as follows: Millions of Euros Liquid assets (nominal value) 4,582 4,821 Liquid assets (market value and ECB haircut ) 3,698 3,760 Of which: Central government debt securities Liquid assets available (including ECB haircut ) 1,915 1,450 Quoted equity securities (including ECB haircut ) 756 2,020 State-guaranteed issues - available capacity 2,096 1,795 Issue capacity for mortgage-backed bonds ( cédulas hipotecarias ) 4,590 2,581 Issue capacity for territorial bonds Total issue capacity 7,728 6,696 Total 9,643 8, Explanation added for translation to English These consolidated financial statements are presented on the basis of the regulatory financial reporting framework applicable to the Group (see Note 2.a). Certain accounting practices applied by the Group that conform with that regulatory framework may not conform with other generally accepted accounting principles and rules. 184

194 Appendix I Consolidated subsidiaries composing the Bilbao Bizkaia Kutxa Group at 31 December 2011 Percentage of Ownership at 31/12/11 Shares Held by the Group at 31/12/11 Equity at 31/12/11 Carrying Amount at 31/12/11 (Direct and Indirect) Name Line of Business Direct Indirect Total Number of Shares Par Value (Euros) Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Gesfinor Administración, S.A. Administrative services , ,514 (a) Kartera 4, S.A. Asset holding company ,515, ,168 10, ,196 9,196 BBK Gestión, S.A. Sdad. Gestora de Instituciones de Inversión Colectiva Management of collective investment undertakings , ,319 9,231 2,600 7,675 7,675 Kartera 1, S.L. Holding of shares ,089, ,965,969 2,450,596 67,660 2,523,728 2,523,728 Gabinete Egia, S.A. Correduría Insurance brokerage de Seguros , ,658 2, BBK Empréstitos, S.A.U. Financial services , ,611, BBKGE Kredit E.F.C., S.A. Credit finance establishment (****) ,600, ,355 42,104 10,941 19,600 19,600 Kartera 2, S.L. Holding of shares ,288, ,964 81,701 6,242 78,760 78,760 Neinor, S.A. Real estate ,138, , ,157 (27,293) 189, ,698 Neinor Inversiones, S.A.U. Holding of property assets ,381 21,890 (6,106) 24,446 15,785 Parque de Economía Social BBK Solidarioa Parkea, S.L. Promotion of social economy activities , (9) (92) 3 3 Fineco Sociedad de Valores, S.A. Broker-dealer , ,653 42, ,929 6,599 Fineco Sdad. Gestora de Instituciones de Inversión Colectiva, S.A.U. Fineco Previsión Entidad Gestora de Fondos de Pensiones, S.A.U. Fineco Patrimonios Sdad. Gestora de Instituciones de Inversión Colectiva, S.A. Management of collective investment undertakings , ,418 5,738 1,374 35,455 35,455 Pension fund management , Management of collective investment undertakings , ,151 1,187 (159) 1,200 1,200 BBK Bank CajaSur, S.A.U. Banking ,050 1, ,421, ,119 3, , ,050 Neinor Inmuebles, S.A.U. Holding of property assets ,548 3,998 (15) 1, Neinor Ibérica Inversiones, S.A.U. Holding of property assets ,234 22,642 (4,474) 23,000 18,167 Banco Bilbao Bizkaia Kutxa, S.A.U. Banking ,050 1, ,050 18,050-18,050 18,050 CajaSur Sociedad de Participaciones Securities issuance Preferentes, S.A.U , , Datasur Servicios Tecnológicos, S.A. Data processing ,500 1, ,115 1,749 (797) 1, Comerciantes Reunidos del Sur, S.A., Credit finance establishment E.F.C. (***) ,828 13, ,214 7,668 (5,480) 14,190 - Asesoría y Consultoría, S.A.U. IT services , , (113) 1,074 - Grupo de Empresas CajaSur, S.A.U. Holding company ,000,000 10, ,494 (43,466) 48,322 18,670 CajaSur Finance, S.A.U. Securities issuance ,

195 Appendix I Consolidated subsidiaries composing the Bilbao Bizkaia Kutxa Group at 31 December 2011 (cont.) Percentage of Ownership at 31/12/11 Shares Held by the Group at 31/12/11 Equity at 31/12/11 Carrying Amount at 31/12/11 (Direct and Indirect) Name Line of Business Direct Indirect Total Number of Shares Par Value (Euros) Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Fundación Constructora de Viviendas Convisur E.B.C. Housing construction foundation ,021 17,829 (199) - - Markemos, S.L.U. Provision of marketing services to third parties (33) CajaSur Inmobiliaria, S.A.U. Property development ,960,102 10, ,346 11,180 (1,919) 10,560 10,560 Agencia de Viajes Sur 92, S.A.U. Travel agent , (242) 1,008 - Ciencia, Tecnología e Innovación, S.L.(***) Information technology and training (880) Silene Activos Inmobiliarios, S.A.U. Property development ,600,000 11, ,395 (104,241) (29,328) 17,864 - Sermansur, S.A.U. Property development ,910,102 33, ,977 21,783 (3,542) 30,880 19,304 Promotora Inmobiliaria Prienesur, S.A.U. Residential development ,250 80, ,112 (109,568) (18,208) 124,467 - Tirsur, S.A.U. Property development ,353,976 2, ,300 (5,412) (21) 1,588 - Columba 2010, S.L.U. Advisory and management in relation to meat and vegetable agrifood and food products , (2) Grupo Inmobiliario Cañada XXI, S.L.U. Property development ,903,010 1, ,667 (10,277) (1,043) 1,996 - Ñ XXI Perchel Málaga, S.L.U. Property development ,337 2, ,372 (11,024) 618 2,148 - G.P.S. Mairena del Soto, S.L.U. Property development ,285 5, ,450 (17,468) (4,336) 2 - Parking Zoco Córdoba, S.L. Car park management ,232 2, ,285 4, ,340 2,340 Tejares Activos Singulares, S.L.U. Property development ,319,973 71, ,132 71,320 (1,064) 71,320 71,320 (*) Net profit or loss for the year less interim dividend. (**) Disregarding the adjustments to be made for consistency with the criteria of Bank of Spain Circular 4/2004. (***) In liquidation. (****) 51% of the voting power. (a) Share capital: 39% paid in. 2

196 Appendix I Consolidated subsidiaries composing the Bilbao Bizkaia Kutxa Group at 31 December 2010 Percentage of Ownership at 31/12/10 Shares Held by the Group at 31/12/10 Equity at 31/12/10 Carrying Amount at 31/12/10 (Direct and Indirect) Name Line of Business Direct Indirect Total Number of Shares Par Value (Euros) Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Gesfinor Administración, S.A. Administrative services , ,252 (a) 666 1, Kartera 4, S.A. (****) Asset holding company ,515, ,117 10,289 3,798 9,196 9,196 BBK Gestión, S.A. Sdad. Gestora de Instituciones de Inversión Colectiva Management of collective investment undertakings , ,311 9,231 2,509 7,675 7,675 Kartera 1, S.L. Holding of shares ,089, ,993,369 2,704,368 36,351 2,508,728 2,508,728 Arca du Pays Basque, S.A. (*****) In liquidation ,500, ,942 8, ,384 7,384 Gabinete Egia, S.A. Correduría de Seguros Insurance brokerage , ,104 2, BBK Empréstitos, S.A.U. Financial services , , BBKGE Kredit E.F.C., S.A. Credit finance establishment (***) ,600, ,554 41,345 7,583 19,600 19,600 Kartera 2, S.L. Holding of shares ,288, ,719 81, ,760 78,760 Neinor, S.A. Real estate ,138, , ,742 (12,784) 189, ,698 Neinor Inversiones, S.A. Holding of property assets ,607 4,314 3,419 3,446 3,446 Parque de Economía Social BBK Solidarioa Parkea, S.L. Promotion of social economy activities , (7) (1) 3 3 Fineco Sociedad de Valores, S.A. Broker-dealer , ,800 40,883 1,784 36,929 6,599 Fineco Sdad. Gestora de Instituciones de Inversión Colectiva, S.A.U. Fineco Previsión Entidad Gestora de Fondos de Pensiones, S.A.U. Fineco Patrimonios Sdad. Gestora de Instituciones de Inversión Colectiva, S.A. Management of collective investment undertakings , ,129 4,329 1,336 35,455 35,455 Pension fund management , Management of collective investment undertakings , ,192 1,200 (13) 1,200 1,200 BBK Bank CajaSur, S.A.U. Banking ,050 1, ,050 18,050-18,050 18,050 Neinor Ibérica Inversiones, S.A.U. Holding of property assets ,040 5,000 (359) 5,000 5,000 (*) Net profit or loss for the year less interim dividend. (**) Disregarding the adjustments to be made for consistency with the criteria of Bank of Spain Circular 4/2004. (***) 51% of the voting power. (****) Formerly known as Adefisa Leasing E.F.C., S.A. (*****) Formerly known as Arca Banque du Pays Basque, S.A. (a) Share capital: 39% paid in. 3

197 Appendix II Investments in jointly controlled entities and associates Jointly controlled entities consolidated by the proportionate consolidation method at 31 December 2011 Percentage of Ownership at 31/12/11 Equity at 31/12/11 Carrying Amount at 31/12/11 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Telekutxa, S.L. Holding of shares Alzambra Sanyres, S.L.U. Care services for the elderly (72) (5) Promar 21, S.L.U. Care services for the elderly ,565 5, ,646 1,748 Centros Residenciales Sanyres Sur, S.L.U. Care services for the elderly ,971 68, ,371 23,534 Sanyres Sur, S.L. Care services for the elderly ,584 (30,040) (6,015) 10,751 2,759 Sanyres Margaretenhof Sur, S.L.U. Care services for the elderly (2,748) (371) Unión Sanyres, S.L Care services for the elderly ,922 95,877 (69) 45,371 - Sanidad y Residencias 21, S.A.U. Care services for the elderly ,932 (26,037) (1,305) 6,280 1,184 Sanyres European Care I, S.L.U. Care services for the elderly (1,598) (1,015) Atención Integral a la Dependencia, S.L.U. Care services for the elderly (43) (94) 25 - (*) Net profit or loss for the year less interim dividend. (**) Disregarding the adjustments to be made for consistency with the criteria of Bank of Spain Circular 4/2004.

198 Appendix II Associates accounted for using the equity method at 31 December 2011 Percentage of Ownership at 31/12/11 Equity at 31/12/10 Carrying Amount at 31/12/11 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Unlisted: Norbolsa Sociedad de Valores y Bolsa, S.A. Broker-dealer ,182 22,101 1,452 6,524 6,524 Serinor Sociedad Civil IT services , Besaide, S.C. Information systems Biharko Aseguradora, S.A. General insurance ,685 9,727 1,619 4,508 4,508 Biharko, Vida y Pensiones Cía de Seguros y Reaseguros, S.A. Insurance ,554 63,217 3,085 21,036 21,036 Euskaltel, S.A. Telecommunications ,091, ,555 7, , ,462 Luzaro, S.P.E., S.A. Participating loans ,653 15, Talde Promoción y Desarrollo S.C.R., S.A. Venture capital ,515 36, ,396 9,396 Talde Gestión, S.G.E.C.R, S.A. Venture capital ,623 5, Servicios Vizcaínos de Cobro, S.A. Collection management (a) Ingeteam Corporación, S.A. Installation engineering and development , ,083 54,283 27,375 27,375 Túneles de Artxanda, Conces. Dip. Foral Bizkaia, S.A. Construction and operation of the Artxanda tunnel ,105 1, , Orubide, S.A. Land operation ,697 (b) (738) 1,638 1, Aguas de Bilbao, S.A. Water service ,309 2,352 (28) 2,293 - Ikei, S.A. Financial research ,453 1, Gesfir Servicios de Back-Office, S.L. Administrative services , Mediasal, S.A. Advertising ,067 2, Uragua, S.A. (***) Water service AC Infraestructuras 2, SCR, S.A. Venture capital ,588 16,892 (1,642) 9,900 5,464 Baserri, S.L. Dormant

199 Appendix II Associates accounted for using the equity method at 31 December 2011 (cont.) Percentage of Ownership at 31/12/11 Equity at 31/12/10 Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Carrying Amount at 31/12/11 (Direct and Indirect) Profit or Loss) Net Profit (**) (Loss) (*) Gross Net Fiuna, S.A. Real estate ,903 7, ,287 1,744 Alquiler de Metros, A.I.E. Rental of trains ,677 1,265 (9) Ekarpen, S.A. Business development ,439 59, ,000 25,581 Torre Iberdrola A.I.E. Real estate construction and development , ,885 (310) 79,870 79,870 San Mamés Barria, S.L. Real estate ,646 30,821 (193) 2,002 2,002 Cromion IT Outsourcing Services for Business, S.L. IT services , Harri 1, S.L. Real estate ,673 2,468 (11) 1,792 1,792 Informática de Euskadi, S.L. IT services ,718 2,677 2, Matikanet, S.L. IT services Mecano del Mediterráneo, S.L. Real estate ,064 3,621 (626) 2,657 - Promega Residencial, S.L. Real estate ,573 3,705 (330) 2, Sociedad Promotora Bilbao Gas hub, S.L. (****) Promotion of gas Ñ XXI Selwo Estepona, S.L. (***) Property development ,677 (1,499) (4,616) Auxiliar de Gestión Patrimonial, S.A. Customer debt collection Altia Proyectos y Desarrollos, S.A. Property development ,752 4,942 (11) 2,117 - Promotora Inmobiliaria Sarasur, S.A. Residential development ,326 2, ,690 - Gestora del Nuevo Polígono industrial, S.A. Development of industrial parks ,215 9, ,490 2,490 Ecourbe Gestión, S.L. Development of all types of land , Gabialsur 2006, S.L. Property development ,761 6, Rofisur 2003, S.L. Property development ,275 2, Desarrollos Urbanísticos Veneciola, S.A. Real estate ,243 (22,567) (63,641) 12,000-3

200 Appendix II Associates accounted for using the equity method at 31 December 2011 (cont.) Percentage of Ownership at 31/12/11 Equity at 31/12/10 Carrying Amount at 31/12/11 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Aurea Sur Fotovoltaica, S.L. Development, management, installation and operation of solar PV plants ,120 3, ,527 1,527 Ibérico de Bellota, S.A. Salting and drying of hams and sausages ,282 2,194 (262) Aparcamientos Gran Capitán, A.I.E. Operation of public car park , Corporación Industrial Córdoba Oeste, S.A. Development of industrial parks ,450 1, Corporación Industrial Córdoba Sur, S.A. Development of industrial parks ,010 1, Corporación Industrial Córdoba Este, S.A. Development of industrial parks ,253 4, ,411 1,411 Corporación Industrial Córdoba Norte, S.A. Development of industrial parks ,407 2, Plastienvase, S.L. Manufacture of plastic containers ,986 15,806 1,958 3,833 3,645 Promoción Residencial Vega del Carrascal, S.L. Sociedad de gestión e Inversión en Infraestructuras Turísticas de Córdoba, S.A. Technical architecture and urban development service Business related to the tourism industry (21) Agua y Gestión Servicios Ambientales, S.A. Water collection, treatment and distribution ,356 20, ,071 - Córdoba Language Centre, S.L. Academic language teaching

201 Appendix II Associates accounted for using the equity method at 31 December 2011 (cont.) Percentage of Ownership at 31/12/11 Equity at 31/12/10 Carrying Amount at 31/12/11 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Iniciativas Desarrollos Industriales de Jaén, S.A. Development of industrial parks ,549 1,239 (14) Iniciativas Subbéticas, S.A. (***) Administration of European Regional Development Funds (ERDF) Corporación Industrial Córdoba Sureste, S.A. Development of industrial parks ,215 1, Campos de Córdoba, S.A. Restaurants ,692 3, , Equipamientos Urbanos del Sur, S.L. Advertising vehicles ,198 1,140 (58) Andalucía Económica, S.A. Financial press , (60) Diario Córdoba, S.A. General press ,494 4,369 (74) Diario de Jaén, S.A. General press ,327 1,190 (340) 45 - Iniciativas de Publicaciones e Impresión, S.L. Printing of daily newspapers and other publications ,729 18,224 1,613 1,236 1,236 Universal Lease Iberia Properties, S.L. Development, purchase and sale (48) Vitalia Andalus, S.L. Care services in residences for the elderly ,823 6,001 (1) M Capital, S.A. Accountancy, bookkeeping, audit and tax advisory services ,842 9, ,444 - Norapex, S.A. Property development ,670 (3,454) 2, (*) Net profit or loss for the year less interim dividend. (**) Disregarding the adjustments to be made for consistency with the criteria of Bank of Spain Circular 4/2004. (***) In liquidation. (****) Company formed in (a) Share capital: 60% paid in. (b) Share capital: 25% paid in. 5

202 Appendix II Jointly controlled entities proportionately consolidated at 31 December 2010 Percentage of Ownership at 31/12/10 Equity at 31/12/10 Carrying Amount at 31/12/10 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Matikanet, S.L. IT services Cromion IT Outsourcing Services for IT services Business, S.L , Informática de Euskadi, S.L. IT services ,718 2,677 2, Harri 1, S.L. Real estate ,673 2,468 (11) 1,792 1,792 Mecano del Mediterráneo, S.L. Real estate ,064 3,621 (626) 2,657 - Promega Residencial, S.L. Real estate ,573 3,705 (330) 1,937 - Telekutxa, S.L. Holding of shares (*) Net profit or loss for the year less interim dividend. (**) Disregarding the adjustments to be made for consistency with the criteria of Bank of Spain Circular 4/

203 Appendix II Associates accounted for using the equity method at 31 December 2010 Percentage of Ownership at 31/12/10 Equity at 31/12/09 Carrying Amount at 31/12/10 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Unlisted: Servatas, S.A. Servicios Vascos de Tasaciones Appraisals , Norbolsa Sociedad de Valores y Bolsa, S.A. Broker-dealer ,115 24,706 2,483 6,524 6,524 Serinor Sociedad Civil IT services , Besaide, S.C. Information systems Biharko Aseguradora, S.A. General insurance ,392 (a) 9,564 1,896 3,306 3,306 Biharko, Vida y Pensiones Cía de Seguros y Reaseguros, S.A. Insurance ,126 (b) ,666 16,528 16,528 Euskaltel, S.A. Telecommunications ,112, ,087 26, , ,250 Luzaro, S.P.E., S.A. Participating loans ,660 14, Talde Promoción y Desarrollo S.C.R., S.A. Venture capital ,709 40,487 5,636 9,396 9,396 Talde Gestión, S.G.E.C.R, S.A. Venture capital ,533 5, Servicios Vizcaínos de Cobro, S.A. Collection management (c) Ingeteam Corporación, S.A. Installation engineering and development , ,184 47,879 27,375 27,375 Túneles de Artxanda, Conces. Dip. Foral Bizkaia, S.A Construction and operation of the Artxanda tunnel ,376 34,082 (1,093) 6,

204 Appendix II Associates accounted for using the equity method at 31 December 2010 (cont.) Percentage of Ownership at 31/12/10 Equity at 31/12/09 Carrying Amount at 31/12/10 (Direct and Indirect) Name Line of Business Direct Indirect Total Assets (**) Equity (Excluding Profit or Loss) (**) Net Profit (Loss) (*) Gross Net Orubide, S.A. Land operation ,253 (d) (590) (148) Alokabide, S.A. Leasing ,251 (d) Aguas de Bilbao, S.A. Water service ,336 2,352 (29) 2,293 - Ikei, S.A. Financial research ,940 1, Gesfir Servicios de Back-Office, S.L. Administrative services , Mediasal, S.A. Advertising ,767 2, Uragua, S.A. (***) Water service AC Infraestructuras 2, SCR, S.A. Venture capital ,601 18,810 (4,393) 9,900 5,464 Baserri, S.L. Dormant Fiuna, S.A. Real estate ,379 8,112 (206) 3,287 1,744 Alquiler de Metros, A.I.E. Rental of trains ,332 1,407 (142) Petronor Biocarburantes, S.A. Biofuels Ekarpen, S.A. Business development ,723 59, ,000 30,000 Torre Iberdrola A.I.E. Real estate construction and development , , ,870 79,870 San Mamés Barria, S.L. Real estate ,964 2,967 (6) 2,002 2,002 (*) Net profit or loss for the year less interim dividend. (**) Disregarding the adjustments to be made for consistency with the criteria of Bank of Spain Circular 4/2004. (***) In liquidation. (a) Share capital: 73% paid in. (b) Share capital: 79% paid in. (c) Share capital: 60% paid in. (d) Share capital: 25% paid in. 8

205 Appendix III Directors' remuneration in their capacity as directors Joseba Koldo Alzaga Muruaga Iñaki Azkuna Urreta Amaia del Campo Berasategi Julen Eguiluz Olano Amaia Eiguren Arza Joseba Escribano Etxebarria Alaitz Etxeandia Arteaga Miren Josune Iglesias Mariñelarena Aitziber Irigoras Alberdi José María Iruarrizaga Artaraz Aitor Landa Zarraga Begoña Larrea Larrondo Angel Lobera Revilla Ekain Loizaga Iruretagoiena Alberto Lozano Ibarra Ainhoa Pielo Muguruza Francisco Javier Ruiz Eleizalde Isabel Sánchez Robles Ainara San Román Bordegarai Manuel Tejada Lambarri Pedro María Usategui Martínez Jon Iñaki Zabalia Lezamiz Roberto Zarate Amigorena Remuneration of directors with executive functions Directors Mario Fernández Pelaz (*) (*) Chairman of the Board of Directors (Executive Chairman).

206 Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea and Subsidiaries (Consolidated Group) Directors' Report for 2011 (Consolidated Group) 1. ECONOMIC BACKGROUND In the international economic scenario, the vicious circle of sovereign risk, banking risk and weak economic growth increased the tension in European financial markets from summer 2011 onwards, made it more difficult for the banking industry to obtain funding in the wholesale markets and led to a review of the credit quality of public-sector bonds and financial institutions in a considerable number of EMU countries. Also, in 2011 the global economic situation deteriorated as a consequence of a combination of factors that significantly altered expectations of recovery, namely the escalation in commodity prices, the tsunami in Japan, widespread austerity programmes and increased uncertainty and volatility in European debt markets. Although the rescue programmes and European summits did not manage to definitively stabilise the debt markets, they did lay the foundations for a new fiscal compact with rules and penalties, improvements in governance and the institutional development of crisis resolution mechanisms. The latest decisions taken by the ECB show an expansionary trend in monetary policy following confirmation of the absence of inflationary risk: interest rates were reduced twice, to 1%; additional unconventional measures were approved, including the extension to three years of the period in which banks can receive funds from the ECB, more flexibility regarding collateral and a reduction in the mandatory minimum reserve ratio to 1%; and the ECB also continued with its programme to purchase government debt. In addition, the governments most severely affected by the instability presented supplementary fiscal adjustment measures. In 2011, the intensification of the sovereign debt crisis and its interaction with the financial system had an intense impact on the Spanish economy, leading to a deterioration in borrowing conditions and damaging confidence. Also, throughout 2011, the recovery initiated in 2010 weakened at the same rate as it did in most of the advanced countries, and positive GDP growth of 0.7% was obtained, which was far below initial expectations, after negative growth in each of the preceding two years. Lower investment in construction and the fall in public sector consumption explain the weakness in domestic demand, while net foreign demand mitigated the impact of lower domestic spending levels on business activity. On the supply side, the value added provided by all branches of production, except construction, saw an acrossthe-board slowdown in the second half of the year. In the construction industry, the decline was sharper in the non-residential segment, reflecting the impact of budgetary austerity on the performance of civil engineering work, while the decline was less pronounced in the residential housing sector, where excess capacity has fallen considerably after four years of adjustments. Against this backdrop, unemployment, far from stabilising, reached record highs for recent years, with 22.9% of the active population out of work. The rate of job losses intensified after the summer. As a logical consequence of the general economic slowdown, inflation fell sharply in the last few months of the year.

207 In this context, the behaviour of the various institutional sectors was an additional stage on the process of deleveraging the private sector. As regards households, consumption stagnated in 2011, saving fell to pre-crisis levels and the decline in residential loans intensified. In the business segment, the deterioration of the economic outlook, the weakness of foreign orders and the difficult borrowing conditions adversely affected lending. The public sector ended the year with a deficit of around 8%, higher than the 6% expected, due especially to the expansionary action of certain autonomous community governments. Foreign trade performed well, due to exports and tourism, while imports remained weak, and the current account deficit decreased significantly. Growth in the Basque economy continued its slowdown in the fourth quarter of 2011 and ended the year as a whole with estimated GDP growth of 0.6%, one tenth of a percentage point lower than the Spanish average, because of the negative growth posted by industry, construction and economic activity dependent on public authorities. Consequently, employment fell in 2011, leading to the highest unemployment rate for a decade. Economic expectations for 2012 point to a dip into recession in the first few months of the year, while increased stability and slight growth in economic activity are forecast for the second half. 2. BUSINESS PERFORMANCE Despite the challenging economic environment, the BBK Group s sound business management enabled it to achieve strong results that will maintain it in a solid equity position going forward. Income statement The BBK Group s consolidated profit amounted to EUR 220,150 thousand in 2011, and CajaSur made a positive contribution of EUR 2,861 thousand. These earnings, which are down by 14.6%, reflect the application of a policy of the utmost prudence in the recognition of general provisions, which increased considerably compared to the year-ago period. Ordinary charges for asset impairment fell significantly due to the positive performance of nonperforming loans. BBK's main margins -excluding CajaSur- were generally above the market average in a time of across-the-board falls in net interest income due to the trend in interest rates. The adequate management of the balance sheet structure and the absence of "land" in the mortgage portfolio contributed towards this better performance in comparative terms, despite the general narrowing of margins in the financial system. BBK's customer margin fell by only 0.3%. The economic situation was mirrored more faithfully in BBK's gross income which, burdened by the sharp fall in dividends and slower growth in financial transactions, retreated by 13.4% saw the continuation of the trend of the last few years with regard to the containment of administration expenses. Particularly noteworthy was the sound performance in costs: BBK's operating expenses -excluding CajaSur- fell by 0.6% to reach their lowest figure in the last five years. The major restructuring undertaken at CajaSur meant that, at Group level, operating expenses decreased by 7.5% with respect to 2010 in like-for-like terms. BBK's efficiency ratio, which stood at 54.45%, compares favourably with that for the financial industry taken as a whole. BBK continued to employ the utmost prudence with regard to credit risk coverage, as shown by its specific provisions, which by far exceeded those required by regulations, and its general allowances, which remained at 125%, the maximum level permitted by law. In this connection, the tests conducted by the EBA once again confirmed the prudence of BBK's provisioning policy since, in the most adverse scenario designed by the EBA, the BBK Group was the institution with the second highest coverage of expected losses. 2

208 Balance sheet Following the inclusion of BBK Bank CajaSur, total assets of the BBK Group amount to more than EUR 42,500 million, three quarters of which relate, on the asset side, to loans and receivables and, on the liability side, to customer funds. Business volume stood at EUR 69,620 million. Customer funds under management totalled EUR 37,932 million. As in 2010, the performance of the wholesale and capital markets had a significant impact on customer funds; thus, in like-for-like terms, they were down by 6.1%, with a drastic fall in the number of promissory notes sold and reduced repo activity. By contrast, the customer funds of BBK's Retail Business Networks -excluding CajaSur- increased by 3.9%, with notable growth in time deposits (8.2%) and in pension plans (4.8%). Growth was also reported in terms of the net assets of the Group's welfare benefit products, with a 3.6% increase in Baskepensiones and an outstanding 18.9% rise in BBK pension plans. In a period marked by a plummeting housing mortgage market, BBK's total lending -excluding CajaSur- dipped by 0.2% to EUR 21,407 million. This lending related largely to financing channelled through the Retail Business Networks, whose lending was up 0.9% due, to a large extent, to the organisation's strategic approach to its customers and the competitive range of products. Particularly noteworthy was the 1.1% increase in mortgage loans in a dwindling market, which bolstered BBK's leading position in Bizkaia, where its share of mortgage loans arranged in 2011 was close to 40%. The BBK Group s equity stood at EUR 3,834 million, as a result of which it continues to be one of the most highly capitalised entities in the financial system. BBK's capital ratios continue to rank among the best in the system. Its core tier 1 ratio stands at 10.9%, its principal capital ratio at 12.1% and its total capital ratio at 14.3%, by far exceeding the minimum requirements of both the European authorities and the Spanish government. This leadership in terms of capital adequacy was further evidenced in the stress tests conducted on 91 entities across Europe, in which the BBK Group was placed among the best-performing banks. BBK has available-for-sale financial assets totalling EUR 4,600 million, including most notably its investment portfolio, its investees being positioned mainly in the energy and communications industries. This portfolio is the result of BBK's commitment to the industrial and social fabric of its surrounding area. Although in general these are strategic investments which the Group clearly intends to hold in the long term, the portfolio is continuously being restructured, at all times with a view to achieving overall profitability levels in keeping with a controlled market exposure. At year-end, the gains on the equity portfolio amounted to EUR 415 million. 3. COMMERCIAL ACTIVITY BBK's commercial activity in 2011 sought to gear the network's resources towards providing a personalised customer service, since the core business strategy focused more on the "customer" perspective than on a "product-based" view. BBK's business model is founded on the provision of individually tailored customer care, to which end it has the most important team of managers in Bizkaia. The resources available to the Network - personnel, branch offices and IT tools- are combined to provide a more personalised, specialised and segmented response to individual customer profiles. The implementation of modi operandi such as previously arranged appointments has resulted in improved personal service, as reflected by the levels of satisfaction expressed by, for example, Personal Banking customers. In fact, 90% of Personal Banking customers would recommend this service, since they consider that it matches or even betters the service provided by other entities with a more deep-rooted tradition in the segment. Through this business model the BBK Group has continued to harness the potential of its commercial causes, a set of targets with which the entire network is aligned. Following their introduction in 2010, progress was made throughout 2011 in improving the efficiency of the cause structure, which has evolved after the timeframe for these targets was extended from two months to one year. 3

209 The development of multichannel operations has also proved to be of fundamental importance in improving customer relations. Certain transactions have been referred to BBK internet and telephone banking and to the ATM network, thus enabling the teams of commercial managers to provide a more personalised, higher-quality service. The launch of the new website was one of the landmark achievements in 2011, since it was designed to further enhance interaction between BBK and its customers. The savings products of the BBK Group performed well both in Bizkaia and in its areas of expansion. BBK opted to remain on the sidelines in the interest rate war, and the value added of its offering consisted of designing tailor-made" solutions for its customers, i.e. products based on diversification, the combination of maturities and an analysis of investment and taxation prospects. This approach is perhaps most clearly observable in the Personal Banking segment, and the delegated portfolios provide the best example. In 2011 the success model of BBK Personal Banking was extended or strengthened in other regions, such as Madrid, Cantabria and Valencia. Despite the severe contraction of the mortgage market, the BBK Group performed positively in lending and continued to gain market share in Bizkaia, where one in every two mortgage loans is provided by BBK. With 1.1% growth in the balance of mortgages in the Bizkaia retail network, most of the loans were granted to young firsttime homebuyers under 35 years of age. With the aim of reactivating consumption, BBK, through its consumer loan subsidiary BBKGE, raised the number of customers qualifying for the pre-arranged credit facility. 4. RISK MANAGEMENT Maintaining an appropriate risk profile is a key element in the BBK Group's management, since it ultimately represents the greatest guarantee of the continuity of BBK's business activities over time and, therefore, of its contribution to society. The suitability of this risk profile is shaped by maintaining a permanent balance between three elements: the level of risk exposure assumed, the technical and organisational capacity for adequate risk control and management and the accredited level of capital. This last-mentioned element ultimately determines the Group s financial capacity to absorb the unexpected losses that might arise as a result of some of the risks inherent to the activities performed. Two of these three elements are included in the capital ratio, which measures the relationship between capital and the assumed risks, which are weighted based on various relevant features. According to this indicator, the BBK Group has always ranked among the leading entities in the Spanish financial system, and it ended 2011 with a capital ratio of 14.3% and a core capital ratio of 10.9%. Furthermore, the financial soundness of the BBK Group was once again certified in July 2011 when the European Banking Authority (EBA) subjected the main European financial institutions to stress tests designed to evaluate their financial capacity in the face of especially adverse macroeconomic scenarios. The results of these tests demonstrated that, after taking general allowances into account, the BBK Group would maintain a Tier 1 capital ratio of 11.1% under the most severe of the financial scenarios analysed, which placed it in eleventh place out of the total of 91 entities tested, and second in the Spanish financial system. With regard to the second element, risk management infrastructure, BBK has achieved major technical and organisational improvements in recent years in its control frameworks for the various types of risk. These improvements were made in line with the methodological progress of the financial industry and with the regulatory guidelines that entered into force. 4

210 The current economic and financial crisis is putting to the test the adequacy of the various control frameworks implemented by the entities, with an unexpectedly high level of severity. In this regard, the BBK Group has not been unaffected by the fall-out of the highly adverse situation currently taking place worldwide. However, the performance of BBK's main risk indicators compares very favourably with industry averages, thereby evidencing the highly appropriate nature of the human and technical resources assigned to risk management. Against an international and domestic backdrop in which a large number of financial institutions have gone bankrupt or have required major external capital injections, the Caja continues to present very acceptable returns, albeit somewhat lower than in the previous stage of the economic cycle, and its solvency level has remained comfortably above the current regulatory requirement. Credit risks (credit, counterparty, concentration and country) Despite the fact that the main economic activity indicators in Spain continued to perform poorly in 2011, the Caja s non-performing loans ratio increased only slightly, from 2.50% to 2.85%, widening the gap with respect to the financial industry average, which closed 2011 with a non-performing loans ratio that more than doubled that of BBK. At consolidated level, after including the assets of BBK Bank CajaSur, the Group's non-performing loans ratio fell from 9.03% at January 2011 to 8.85% at year-end, which confirms BBK's prudent policy for the recognition of doubtful transactions. As regards the accounting policy for credit risk provisioning, the Group continued to apply criteria of maximum prudence, enabling it to comply with the rules on provisioning (Bank of Spain Circular 3/2010) whilst maintaining its countercyclical credit loss allowances at the legal maximum of 125% of inherent loss. As a result, the overall coverage ratio stood at 65.4%. Similarly, the allowances for foreclosed assets stood at 36.4%, well above the industry average. These allowances, together with those contributed by the other savings banks participating in Kutxabank, have enabled the new financial group to meet, since its inception (1 January 2012), the financial write-down requirements established by Royal Decree-Law 2/2012, and the Group does not expect its results for 2012 to be impacted in this connection. Financial risks (liquidity, market, interest rate and foreign currency) The structure of assets and liabilities held by the Caja performed strongly in the face of the transformation experienced by the financial markets as a result of the global crisis. Despite the liquidity pressures in the market, the BBK Group continues to succeed in maintaining a comfortable structural liquidity position, thanks to a solid retail customer financing base, its high working capital, a wholesale financing structure with diversified maturities and a considerable stock of liquid assets. As regards interest rate risk, in 2011 the monetary authorities of the euro zone continued to apply an interest rate policy that benefitted the financial viability of the indebted economic players, and with them, economic activity, which had an adverse effect on the margins of financial institutions. The BBK Group managed the maturity and repricing structure of its assets and liabilities in order to minimise the impact of the aforementioned policy on its margins. With respect to the market risk inherent to the investments in equity securities, it should be noted that the 13.1% slump in the IBEX-35 in 2011 did not prevent the Group from obtaining significant net income related to this type of asset, in terms of both dividends and gains. Operational risk Throughout 2011 the BBK Group continued to work on the design and implementation of an operational risk control framework to enable it to apply standard methodologies to risks of a very diverse nature. With regard to the materialisation of operational losses, none of any particular relevance occurred in 2011, while the total amount of the loss events registered in the year remained at immaterial levels for the Group s income statement, in line with the experience since this information has been gathered. 5

211 Other risks (reputational, strategic, pensions, etc.) In 2011 the Group did not suffer any impact of note from the other types of risk that it manages over and above those risks inherent to the integration of the assets and liabilities of CajaSur, which took place in 2011, and the integration of BBK, Kutxa and Caja Vital, which will form part of the Kutxabank Group from WELFARE FUND Today, with a net budget of EUR 73 million in 2011, BBK's Welfare Fund continues to be endowed with one of the largest "social dividends" of all savings banks in Spain and the most significant when viewed in relation to its size. Since 2000 the Welfare Fund has invested more than EUR 865 million in social projects, making it the leading private not-for-profit institution in Bizkaia. Consequently, and because it is a major player in the social action system, BBK has its own vision of the current crisis and of the way to overcome it and to progress towards a balanced society that shows solidarity vis-à-vis the most vulnerable but which is also competitive, innovative and knowledge-based. As had been advanced to the governing bodies, the priority in 2011 was once again to create quality jobs through apprenticeship support, paid scholarship and social financing programmes. In an environment characterised by restricted access to credit, BBK Fundazioa granted soft loans totalling more than EUR 19.7 million, earmarked mostly for the start-up, consolidation or expansion of economic activity fostered by welfare institutions and entrepreneurs. These programmes made it possible to create a total of 191 new jobs, including most notably those related to business initiatives launched by young people, representing a significant increase with respect to previous years. Another of the Fund's priorities was the scholarship programmes designed to facilitate the access of young people to the labour market. In 2011 the Welfare Fund provided a total of 580 scholarships for work experience at companies through an extensive programme that currently has a success rate of more than 52% in terms of persons hired with an employment contract. Furthermore, as a complementary measure, 425 young persons benefitted from the training grant schemes offered by BBK to complete their studies abroad. These schemes were completed by a series of new scholarships that BBK Fundazioa has begun to promote in fields such as postgraduate training, artistic creation and research. In this regard, the merger of the foundations BBK Solidarioa, BBK Gaztelanbidean and Fundación BBK, announced in March 2011, has made it possible to concentrate all their efforts in a single, more agile and efficient structure, enabling stakeholders to clearly appreciate BBK's contribution to society in this connection. The Welfare Fund has always been unequivocally committed to the principles of solidarity, inclusion, ethics and sustainability. One of BBK's hallmark activities has been to facilitate the active and supportive integration of all people, embarking upon projects aimed at assisting the social inclusion of socially vulnerable groups. Amid the current climate of crisis, it launched the tenth edition of the Welfare Project Support Programme, with a 5% increase in its funding, bringing BBK's total allocation over the ten programmes to EUR 57.5 million. This programme, which enables BBK to extend the reach of its social activities to encompass substantially all the welfare institutions in Bizkaia, has made it possible to launch 2,746 projects of major social impact was also a year in which the Welfare Fund made a significant effort in the housing area, through the acquisition and free transfer to Viviendas Municipales de Bilbao of 40 housing units to be used in a social rental scheme. Similarly, in the field of culture, the activities performed through Mediateca de Alhóndiga Bilbao and the cooperation projects with various museums and cultural institutions in Bizkaia have rounded off the already broad range of programmes conducted at a venue that is destined to become one of Bilbao's cultural landmarks: the Sala BBK. 6

212 6. RESEARCH AND DEVELOPMENT The BBK Group maintained a policy of capitalising on technological resources, which led to improved efficiency and enhanced process rationalisation. Software was developed to provide cost savings, improve the quality of the service provided to customers and meet new technological and functional renewal needs. The Group continued to train its workforce and to adapt it to the new business requirements and to the need for ongoing professional development. To facilitate this process, a training development strategy focusing on continuous learning, professional development and the harnessing of the advantages of new technologies was implemented. 7. INTEGRATION IN KUTXABANK On 30 June 2011, the Boards of Directors of Bilbao Bizkaia Kutxa, Aurrezki Kutxa eta Bahitetxea - BBK -, Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián-Gipuzkoa eta Donostiako Aurrezki Kutxa - Kutxa - and Caja de Ahorros de Vitoria y Álava-Araba eta Gasteizko Aurrezki Kutxa - Caja Vital - entered into an integration agreement for the formation of a consolidable group of credit institutions on a contractual basis, pursuant to Article 8.3.d) of Law 13/1985, of 25 May, on investment ratios, capital and reporting requirements of financial intermediaries. This group would be headed by the bank called Kutxabank, and the three Savings Banks would carry on their financial activity indirectly. At the same time, the Boards resolved to approve both the indirect pursuit by the Caja of its own object, pursuant to Royal Decree-Law 11/2010, of 9 July, on governing bodies and other aspects of the legal regime of savings banks, and the plan for the spin-off of the Savings Banks' financial business to Kutxabank. The three Savings Banks undertook to contribute their assets and liabilities (except those relating to their Welfare Funds) to Kutxabank for the performance of their financial activity, although they retained their legal status and the assets, liabilities and activities relating to their Welfare Funds. On 1 January 2012, once all the legal procedures had been performed and the relevant authorisations had been obtained, the public deeds instrumenting the spin-off of the respective financial businesses of BBK, Kutxa and Caja Vital to Kutxabank, S.A. (formerly Banco Bilbao Bizkaia Kutxa, S.A.) were registered at the Bizkaia Mercantile Registry. Since that date, BBK has formed part, together with Kutxa and Caja Vital, of a new consolidable group of credit institutions the parent of which is called Kutxabank, S.A., and has exercised its object as a credit institution indirectly through the latter. Kutxabank was incorporated as a bank with a network of more than 1,250 branches, a market share of around 40% in its home territories, a workforce of more than 7,500 employees, assets totalling close to EUR 75,000 million and a core capital ratio of 12% at 2011 year-end. This integration has further strengthened the robust, successful local banking model of three of the best savings banks in the Spanish financial system -a model centred on the retail business, with a major social component-, based on their high solvency levels, their low exposure to property risk and their excellent liquidity position. The new institution was launched after conducting an extremely prudent valuation of its assets and liabilities and, unlike most other integration processes, without resorting to government aid. In 2012 Kutxabank will culminate an integration process that has been decades in the making and whose cultural compatibility was already reflected in the existence of shared support companies for the parafinancial business (insurance, securities brokers, etc.) and even in the sharing of certain IT systems. Moreover, the success of the integration plan is well-assured thanks to the labour agreement reached with the majority of the trades union representatives and the consensus attained in the governing bodies. 7

213 8. EVENTS AFTER THE REPORTING PERIOD Note 13 contains a detail of the events that occurred between 1 January 2012 and the date of authorisation for issue of these consolidated financial statements. 9. ANNUAL CORPORATE GOVERNANCE REPORT 8

214 ANNEX I CORPORATE GOVERNANCE ANNUAL REPORT SAVINGS BANKS ISSUER IDENTIFICATION DATA FINANCIAL YEAR 2011 TAX IDENTIFICATION CODE G Registered Name BILBAO BIZKAIA KUTXA, AURREZKI KUTXA ETA BAHITETXEA GRAN VÍA, BILBAO BIZKAIA SPAIN Page 1

215 MODEL OF CORPORATE GOVERNANCE ANNUAL REPORT FOR SAVINGS BANKS WHICH ISSUE SECURITIES LISTED ON OFFICIAL STOCK MARKETS In order to understand the form and fill it in, read the instructions given at the end of this report. A STRUCTURE AND FUNCTIONING OF THE GOVERNING BODIES A.1. GENERAL ASSEMBLY A.1.1. Identify the members of the General Assembly and state the group each of the General Directors belongs to: See Addenda A Provide details of the makeup of the General Assembly based on the groups the Directors belong to: Group they belong to Number of % of the total General Directors MUNICIPAL CORPORATIONS DEPOSITORS FOUNDING PERSONS OR ORGANISATIONS EMPLOYEES Total A Explain in detail the functions of the General Assembly. Without prejudice to its general power to act as the supreme body of the BILBAO BIZKAIA KUTXA, the General Assembly is especially responsible for the following functions: a. The appointment of and severance with the Members of the Board of Directors and the Members of the Controlling Committee for just reasons. b. Severance with the General Directors on condition that there is a just reason. c. Approving and modifying the Articles of Association of the Institution and the General Regulations which are required for the application of the Articles of Association. d. Agreeing to the winding up and liquidation of the Savings Bank or its merger with other financial institutions. e. The yearly definition of the general lines of the plan of action of the Savings Bank, so that these can serve as a basis for the work of the Board of Directors and the Controlling Committee. f. The possible approval of the management of the Board of Directors, the Annual Report, The Annual Balance Sheet and the Profit & Loss Account, as well as their application to the objectives of the Savings Bank. g. The creation and winding up of social welfare work activities, as well as the approval of their annual budgets and the management and liquidation of these. Page 2

216 h. Approving the issue of shares in accordance with the conditions legally established, as well as the remuneration to be assigned to these. i. The confirmation of the appointment of the General Manager on the proposal of the Board of Directors. j. Any other matters which might be presented to it for consideration by the bodies empowered to do so, or those matters which are stipulated by Law. A State whether there are Regulations of the General Assembly. If so, give a description of their content: YES NO See Addenda A.1.5. State the rules of the system for the election, appointment, acceptance and revocation of the post of General Director. ELECTION AND APPOINTMENT The General Directors who represent the two founding Corporations will be designated directly by these Corporations. For this purpose, each of them will designate half of the General Directors of this group, taking into account what is set out in Article 18 of the Articles of Association. The General Directors representing the depositors and an equal number of their substitutes will be elected from among the depositors by delegates. A number of Delegates equivalent to the result of multiplying the number of General Directors to be elected by 20 will be designated, and this will be done through a public draw carried out before a Notary Public, in accordance with the procedure laid down in the Procedures Regulations for Designating the Members of the Governing Bodies from among the Organisation s depositors who comply with the requisites stipulated in Article 26 of the Articles of Association. The depositors cannot be included in the lists of persons eligible to be voted more than once, regardless of the number of accounts they hold. The Board of Directors will attribute a number of General Directors to each Autonomous Community where the Savings Bank has operating offices open in accordance with the legally established procedures. The General Directors representing the Municipal Corporations in whose towns there are offices of the Savings Bank will be appointed directly by these Corporations through an agreement made at a plenary municipal meeting. Page 3

217 Nevertheless, the local Corporations which are also founders of other Savings Banks which operate totally or partially in the same area of action as the BILBAO BIZKAIA KUTXA cannot appoint representatives in this Savings Bank. The election of these General Directors will be made based on a list of those municipalities in which the BILBAO BIZKAIA KUTXA has offices open to the public and the electoral process will be carried out in accordance with the Procedures Regulations for Designating the Members of the Governing Bodies. Holding the post of General Director will not necessarily entail being resident in the municipality the Director represents. The Board of Directors will attribute a number of General Directors to each Autonomous Community where the Savings Bank has operating offices open in accordance with the legally established procedures. The General Directors representing the staff of the BILBAO BIZKAIA KUTXA will be elected through the proportional system by the legal representatives of the employees, and efforts will be made to ensure that all the professional categories are represented. The candidates must have worked on the staff of the Savings Bank for at least three years. Exceptionally, the employees can access the General Assembly through the group of representatives of the Municipal Corporations, in a proportion which is less than 50% of the Directors representing the staff, and in no case it is possible for them to access in representation of the founding organisations or the depositors. The proposal for an exceptional designation must be submitted through the Controlling Committee, together with a reasoned report which justifies the exceptionality, to the Treasury and Public Administration Department of the Basque Government which will evaluate whether there are possible justifying reasons for this designation. The General Directors representing the staff will have the same guarantees as those set out in Article 68-C of the Workers Statute for the legal representatives of the employees. The General Directors will be appointed for a period of four years, and can be re-elected for other periods of equal length if they continue to comply with the requisites which are set out in Article 26 of the Articles of Association and this is in accordance with the stipulations in the legislation in force and with the Procedures Regulations for Designating the Members of the Governing Bodies. The renovation of the General Directors will be addressed by halves, respecting the proportionality of the representations which make up the General Assembly laid down in Article 20 of the Articles of Association. In order to do this, the renovation will be Page 4

218 carried out every two years. The renovation will be done through the process stipulated in the Procedures Regulations for Designating the Governing Bodies. In the event that a General Director is relieved of or severed from his post before he finishes his mandate, he will be replaced by the corresponding substitute. For this reason, the same number of substitutes as holders will be designated. The vacancies which occur must be covered within a maximum period of one month, counting from the date of the severance. The new Directors designated in this way will be appointed for the rest of the period of the mandate and their posts will cease on the date which would have corresponded to those substituted. In order to be a Delegate and a General Director, it will be necessary to comply with the conditions concerning legal capacity and the other conditions established by Law, as well as the following requisites: a. Be a natural person as set out in Law. b. Be of age and not be incapacitated. c. Be a depositor at the time of the acceptance of the post in the event of being elected in representation of the depositors of the Savings Bank. d. Be up to date as regards compliance with the obligations which might have been contracted with the Savings Bank either by themselves or in representation of other persons or organisations. e. Not be affected by the prohibitions regulated in Article 27 of the Articles of Association. f. In order to be elected as a Delegate or as a General Director in direct representation of the depositors, in addition to the above requisites, the person must have been a depositor of the Savings Bank for more than two years, at the time of the draw. Moreover, it will be necessary to accredit that the person was a depositor on the last day of the month previous to the commencement of the electoral process with an average half yearly balance in accounts of not less than 600, which will be checked one month before the date of commencement of the electoral process, depending on the latest data officially published on the variation in the consumer price indexes in the preceding period, in accordance with the stipulations of the Procedures Regulations for Designating the Members of the Governing Bodies. The Board of Directors will duly determine the limits mentioned. With regard to the cases of multiple ownership or when the deposits are divided, the stipulations of the Procedures Regulations for Designating the Members of the Governing Bodies will apply. On electing General Directors, the Delegates will endeavour Page 5

219 that the persons who are the most capacitated, due to their experience and knowledge, to assume the functions they are attributed are designated for the posts. Those who are bankrupt and under temporary receivership and not discharged, those sentenced to penalties which involve the disqualification to exercise public posts and those who have been sanctioned due to serious infringements which have similar effects are incapacitated to hold the post of Delegate or General Director. The following hold posts are incompatible with the posts of Delegate or General Director: a. The Chairmen, Members of the Board, Administrators, Directors, Managers, Assessors, or similar posts in other financial establishments or institutions of any kind, or in corporations or organisations which might advocate, sustain or guarantee institutions or credit or financial establishments, or the persons at the service of the State or the Autonomous Community Administration whose functions are directly related to the activities of Savings Banks. b. Those who are linked to the Savings Bank or to companies which are partly owned by the Savings Bank in a percentage which is greater than 20%, through remunerated work, service, supply or work contracts. The incompatibility will be maintained while this relationship is maintained and for a further two years, counting from the termination of this relationship except for the employment relationship of the employees of the Savings Bank. c. Those who, in their own name or in representation of other persons or organisations: - Hold expired payable debt of any kind as regards the BILBAO BIZKAIA KUTXA. - Those who, during the time they hold the post of General Director, have failed to comply with the obligations contracted with the Savings Bank as regards credits or loans or have failed to pay debts of any kind to the Financial institution. d. In any of the other cases stipulated in Law. In the event of a person who incurs any of the cases set out in paragraphs a. and c. being designated, the designation will be valid and the person elected can accept the designation if, within the fifteen working days following the designation, he renounces the posts which give rise to the incompatibility or he regularises the debits he has with the BILBAO BIZKAIA KUTXA. The General Directors will cease to hold their posts in the following cases: a. Due to the termination of the period of time they were designated Page 6

220 for. b. Due to resignation. c. Due to their deaths. d. Due to the loss of the requisites which conditioned their eligibility. e. Due to incurring any of the reasons for disqualification or incompatibility. f. Due to illness which renders them incapable to hold the post. g. By a severance agreement adopted for a just reason by the General Assembly. For these purposes, it will be understood that a just reason exists when the General Director publicly damages the credit, reputation or activity of the Savings Bank by his public or private acts. ACCEPTANCE OF THE POST All the General Directors must subscribe to the document of acceptance of the post which will be delivered to them by the General Secretary of the Institution before the Constituent General Assembly. In addition, as regards the General Directors representing the Depositors, in accordance with the stipulations of Section 39-4 of Decree 240/2003, of October 14, of the Savings Banks of the Autonomous Community of the Basque Country, the express acceptance of the candidates must be stated on the candidacies presented for election. REVOCATION OF THE GENERAL DIRECTORS In accordance with the stipulations of Section 41-3 of Act 3/1991 of the Savings Banks of the Autonomous Community of the Basque Country, the appointment of Directors will be irrevocable except when cases of incompatibility arise or any of the requisites required for designation are lost or a severance agreement is adopted by the General Assembly if there is a just reason. A State the regulations related to the constitution and the attendance quorum at the General Assembly. The meetings of the General Assembly can be Ordinary or Extraordinary. The Ordinary Assemblies will be held twice a year within each calendar half year. The Extraordinary Assemblies will be held as many times as they are expressly convened, but the only matter which can be dealt with is the reason why they have been called. The convening of the Ordinary General Assembly will be carried out by the Board of Directors and will be published in the Official Gazette of Vizcaya, the Official Gazette of the Basque Country, the Official Gazette of the Mercantile Registry and in the Page 7

221 newspapers with most coverage in Vizcaya at least 15 calendar days in advance. The convening will state the date, place, time and Agenda of the meeting, at the first and at the second call. In order to be validly constituted, the General Assembly will require the attendance of the majority of its members at the first call. The constitution of the meeting at the second call will be valid regardless of the number of persons attending. There will be a period of at least 30 minutes between the first and the second call. Representation by another Director or by a natural person or body corporate will not be admitted. In order to adopt agreements referring to sections c., d. and h. of article 29 of the Articles of Associations, the majority of the members will be required to attend regardless of whether it is the first or the second call. A Explain the regime for adopting agreements at the General Assembly. The agreements of the General Assembly will be adopted by a simple majority of the votes of those attending, except for the cases in Sections c., d., h., j., k., and l. of Article 29 of the Articles of Association, in which it will be necessary to have at least the favourable vote of two thirds of those attending. Each General Director will have the right to one vote and the person presiding the meeting will have a casting vote in the event that he has the right to vote. The General Assembly will be presided by the Chairman of the Savings Bank or, where appropriate, by the Deputy Chairman, and in his absence by the oldest Member of the Board of Directors present. The Secretary of the Board of Directors will act as Secretary and, in his absence, the Secretary will be the youngest Member of the Board of Directors. The agreements validly adopted bind all the General Directors, including those who disagree and those who are absent, as well as the BILBAO BIZKAIA KUTXA. The agreements of the Assembly must be recorded in minutes which will be signed by the Chairman and the Secretary of the Assembly. The minutes can be approved at the end of the meeting by the Assembly or by the Chairman and two Supervisors designated by the Assembly within a maximum period of 15 days. The agreements will have executive effect as from the date of approval of the minutes, and will be sent to the Chairman of the Controlling Committee. The certificates accrediting the agreements adopted by the General Assembly will be issued by the Secretary of the General Assembly or by the General Secretary of the Savings Bank, or the person who acts in his place, with the approval of the Page 8

222 Chairman or the Deputy Chairman. Fifteen days before the General Assembly to be held in the first half year, the Annual Report, which will include the detailed progress of the Savings Bank during the past financial year, with the Annual Balance Sheet, the Profit & Loss Account and the Proposal for the allocation of profits attached will be deposited at the registered offices of the Savings Bank at the disposal of the General Directors. The Members of the Board of Directors who are not General Directors will attend the General Assemblies with the right to speak but not to vote. The Appointees of the Controlling Committee who are not General Directors will also attend the General Assemblies with the right to speak but not to vote. A Explain the rules regarding the convening of the meetings of the General Assembly and specify the cases in which the General Directors can request that the General Assembly be convened. The Ordinary General Assembly will be convened by the Board of Directors and this will be published in the Official Gazette of Vizcaya, in the Official Gazette of the Basque Country, in the Official Gazette of the Mercantile Registry and in the newspapers with the widest readership in Vizcaya, at least 15 calendar days in advance. The convening will state the date, place, time and Agenda of the meeting for the first and for the second call. The Extraordinary General Assembly will be convened and held in the same way as the Ordinary Assemblies. A State the data on the attendance at the General Assemblies held during the financial year: Attendance data Date of General Assembly % physically present % vote by post Total A Provide a detailed list of the agreements adopted at the General Assemblies during the financial year. I.- Ordinary General Assembly held on Approve Annual Report, Annual Balance and Profit and Loss Account as well as the Executive Committee Management Report and the Distribution of Profit and Loss of the 2010 fiscal year. Page 9

223 2.- To approve the Management and Settlement of the Social Welfare Work Budget for 2010 and the Budgets for 2011, as well as five new social projects: (I) Centre for cognitive stimulation for Alzheimer s sufferers in collaboration with the Bizkaia Provincial Council; (II) business incubator for new technology enterprises, in collaboration with the Sestao town council; (III) new social and general interest facilities in collaboration with the Busturia town council; (IV) creation of a Haurgune and a Txikigune in collaboration with the Bilbao City Council; and (V) 2011 beaches campaign in collaboration with the Bizkaia Provincial Council. 3.- Authorize the Board of Directors to carry out, within the execution of the 2011 budget, any new project or activity that is not included in it, provided that the cost of the new project or activity does not exceed 10% of the budget (D. 240/2003 of the Basque Government, The Treasury Department and Public Administrations). 4.- Approval of the appointment of external auditors for the BBK Group. II.- Extraordinary General Assembly, held on To approve the project to segregate bbk in favour of Banco Bilbao Bizkaia Kutxa, S.A.U. 2.- To approve the integration contract signed on 30 June 2011 by: (I) Bilbao Bizkaia Kutxa (bbk); (II) Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián (Kutxa) and (III) Caja de Ahorros de Vitoria y Álava (Caja Vital). 3.- To approve the modification of articles 1, 2, 3, 6, 9, 12, 22, 23, 24, 26, 27, 29, 31, 39, 43, 53 and 63 of the Entity s articles of association. 4.-To agree to adhere to the regime for consolidation of Corporate Income Tax set forth in Chapter IX of Section VIII of Provincial Regulation 3/1996 dated 26 June on Corporate Income Tax in the Bizkaia Historical Territory in the terms established in article 77 and the fifteenth additional provision of the said regulation. III.- Ordinary General Meeting held on 20 October To approve bbk s General Lines of Social Action for To approve the modified novation of the Integration Contract signed on 30 June 2011 by: (I) bbk; (II) Kutxa; and (III) Caja Vital. A Identify the information which is supplied to the General Directors for the meetings of the General Assembly. Explain the systems laid down in order to access such information. INFORMATION - All the documentation concerning the points on the Agenda which will be submitted for the approval of the General Page 10

224 Assembly. - Half Yearly Report of the Controlling Committee. - Annual Report on Corporate Governance (Ordinary General Assembly in the first half year of each financial year). SYSTEMS a) The relevant documentation is sent together with the convening at least 15 calendar days in advance of the date for holding the General Assembly. b) The relevant documentation is placed at the disposal of the General Directors at least 15 days in advance of the meeting in question at the General Secretariat of the Institution. A Provide details of the internal systems laid down in order to check compliance with the agreements adopted at the General Assembly. Among the powers of the Board of Directors is the power to execute the agreements of the Assembly and have them executed. In addition, the minutes of the Assembly are placed at the disposal of the Chairman of the Controlling Committee and the Controlling Committee, the delegate of the General Assembly as regards the supervision and surveillance of the Board of Directors and the Executive Committee, is informed. A State the address and how to access the content of Corporate Governance in your web site. Under the heading "Information for Investors". Page 11

225 A.2. Board of Directors A.2.1. Fill in the following chart with the data on the Members of the Board: Name Post on the Board Group they belong to MR. MARIO FERNÁNDEZ PELAZ CHAIRMAN MUNICIPAL CORPORATIONS MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ DEPUTY CHAIRMAN FOUNDING PERSONS OR ORGANISATIONS MR. ÁNGEL LOBERA REVILLA BOARD SECRETARY DEPOSITORS MR. JOSEBA KOLDO ALZAGA MURUAGA MEMBER FOUNDING PERSONS OR ORGANISATIONS MEMBER FOUNDING PERSONS OR MR. IÑAKI AZKUNA URRETA ORGANISATIONS MS. AMAIA DEL CAMPO BERASATEGI MEMBER DEPOSITORS MR. JULEN EGUILUZ OLANO MEMBER DEPOSITORS MS. ALAITZ ETXEANDIA ARTEAGA MEMBER MUNICIPAL CORPORATIONS MS. MIREN JOSUNE IGLESIAS MEMBER EMPLOYEES MARIÑELARENA MS. AITZIBER IRIGORAS ALBERDI MEMBER MUNICIPAL CORPORATIONS MR. AITOR LANDA ZARRAGA MEMBER DEPOSITORS MR. ALBERTO LOZANO IBARRA MEMBER DEPOSITORS MS. AINHOA PIELÓ MUGURUZA MEMBER DEPOSITORS MS. AINARA SAN ROMÁN BORDEGARAI MEMBER MUNICIPAL CORPORATIONS MR. MANUEL TEJADA LAMBARRI MEMBER MUNICIPAL CORPORATIONS MR. JON IÑAKI ZABALIA LEZAMIZ MEMBER DEPOSITORS MR. ROBERTO ZARATE AMIGORENA MEMBER DEPOSITORS Total Number 17 List the composition of the Board of Directors based on the groups the Members belong to: Group they belong to Number of Members of the Board % of the total MUNICIPAL CORPORATIONS DEPOSITORS FOUNDING PERSONS OR ORGANISATIONS EMPLOYEES Total State the severances which have taken place as regards the Board of Directors during the period: Name Date of Leaving Page 12

226 Identify any Members of the Board who are not General Directors: MR. MARIO FERNÁNDEZ PELAZ MR. JON IÑAKI ZABALIA LEZAMIZ MR. JULEN EGUILUZ OLANO Name A.2.2. Briefly describe the functions of the Board of Directors, distinguishing between those which are proper to the Board and those which have been delegated to it by the General Assembly: Functions proper to the Board 1. The Board of Directors will be the representative of the Savings Bank as regards all the matters related to achieving its objectives, as well as the business and trading done by the Financial institution. On exercising its powers, it will be governed by the stipulations in the Articles of Association and Regulations, as well as in the agreements of the General Assembly, and, as a description, the Board has the following functions inter alia: 1.- To attend to the true observance of the Articles of Association and the Procedures Regulations for Designating the Members of the Governing Bodies. To interpret the Articles of Association and Regulations, as well as making up the omissions, especially as concerns the objectives and the purpose of the activities of the Savings Bank, and, if necessary, will notify the General Assembly of the agreements adopted. To execute the agreements of the General Assembly and of the Board and have them executed. 2.- To represent the Savings Bank before the Authorities or other Bodies of the State, the Autonomous Communities, the Historical Territories, the Province, the Municipalities, State related Organisations, Trade Unions, public law corporations, companies and private persons, and before the ordinary and special Courts and Tribunals, exercising the actions, exceptions, rights, claims and appeals of all kinds which correspond to it, and desist from these when it considers this to be advisable. 3.- To designate the Members who have to form the Executive Committee together with the Chairman, taking into account the statutory regulations regarding its composition. 4.- To agree to the convening of the Ordinary or Extraordinary General Assembly within the time and in the form set out in the Articles of Association and to establish the Agenda. 5.- To designate the Management as established in the Articles of Association and arrange changes, if required, in the form and in the Page 13

227 cases determined by the Articles of Association. 6.- To determine and modify the internal structure and administrative organisation of the Institution and create and suppress Branches and Agencies; to determine the geographical and functional expansion policy. 7.- To approve and modify the staff: to create and suppress posts, establish their powers and attributions and state salaries and emoluments, as well as drafting and approving the Regulations of the Internal Regime. 8.- To appoint, suspend, sanction, sever and reward the personnel of the Institution. 9.- To contract the provision of professional, technical or other services of a temporary or circumstantial nature by natural persons or bodies corporate To regulate and agree to the operations of the Savings Bank, determining their conditions, rates and interest insofar as these depend on it To appoint any commissions and arrange for the reports it considers to be advisable in order to best study specific matters within its competence To adopt any resolutions required for the defence and conservation of the Institution, its goods and rights at all times and in all circumstances To determine the general conditions of discounts, loans and deposits in guarantee, as well as approving the risk operations it considers to be advisable and resolving the questions which might arise regarding the activity of the Savings Bank To adopt any agreements and authorise and execute all kinds of acts and contracts related to the operations of the Savings Bank, in accordance with the legal provisions in force, and possibly commit the guarantees of any kind when this is considered to be advisable To encourage and protect saving with prizes or other suitable measures which might contribute to this end To decide, determine, carry out and attend to the investment of borrowed funds and equity To acquire, own, transfer, mortgage and encumber all kinds of real estate, property rights of any kind and, with regard to this real estate and the property rights, carry out any acts and make any civil, commercial and administrative contracts, without exception, including those for the constitution, modification and cancellation of mortgages and other property rights, as well as the assignment, sale-purchase and transfer of assets and/or liabilities of the Savings Bank. Page 14

228 18.- To acquire, transfer, exchange, convey, encumber, subscribe to and offer all kinds of moveable estate, securities, shares, debentures, formulate public offerings for the sale or acquisition of securities, as well as participations in all kinds of companies or firms To constitute usufructs, leaseholds, active and passive easements and any other rights of a property nature over moveable estate and real estate in the conditions which it considers to be most advantageous for the Savings Bank. To lease all kinds of goods and rights and to assign their use and possession under any entitlement or legal formality. To constitute, modify and extinguish all kinds of rights of a property nature To make all kinds of contracts and agreements permitted by Law, settle and be bound by arbitration in Law and in equity To accept inheritances, donations or legacies, and be able to avail itself of the benefit of inventory as regards inheritances To give and receive money as loans or credits with personal, mortgages, pledges or bank bond guarantees or guarantees of any other kind and any other operations which refer to financial and banking services To authorise guarantees which guarantee third parties with regard to other persons, organisations or public or private bodies, as well as constituting other guarantees in favour of the Savings Bank or of third parties To open current and loan accounts in the name of the Savings Bank in official or private banks, including the Bank of Spain, dispose of the funds and cancel the accounts To authorise the granting of powers for the execution of the operations listed in the previous sections and, in particular, of the instruments, policies, public and private documents of any kind which might be required, with the specific clauses of the contracts referred to and the others which are deemed to be pertinent. The authorisation by the certification of its agreements or the granting of notary powers may fall individually or jointly and severally to any Member of the Board, the General Manager and any other employee of the Savings Bank designated for this purpose To examine and approve the accounts and adopt the advisable resolutions To constitute and take part in the constitution of companies, associations, foundations, bodies or other organisations of any legal nature, contributing the capital which might be necessary and appointing representatives on their respective Governing Bodies Any others not listed above which are a consequence of the exercise of the management and administration functions of the Savings Bank which are the competence of the Board of Directors. Page 15

229 29.- To delegate the powers considered to be advisable to the Executive Committee, to the Chairman or Deputy Chairman, or where appropriate to the General Manager or to any other person, regardless of whether he is an employee or not, except for those powers related to the presentation of proposals to the General Assembly or powers which might have been delegated to the Board, except in the event that it is expressly authorised To present the proposals expressly stipulated in these Articles of Association or any others required for the good governance and administration of the Savings Bank to the General Assembly To submit the Annual Report, the Annual Balance Sheet, the Profit & Loss Account and the Proposal for the Allocation of Earnings to the objectives of the Savings Bank to the General Assembly for their possible approval Without prejudice to the legal and statutory obligations attributed to the General Assembly in the event that the Entity indirectly exercises its activity as a credit entity, the Board of Directors, by virtue of the fact that it is responsible for the financial administration and management of the Entity for the fulfilment of its objectives, shall be responsible for approving the agreements adopted by the Entity with regard to its participation in the Bank To raise before the Assembly (i) the winding up and liquidation of the Entity, (ii) merger with other entities, (iii) integration with other Saving Bank(s) in order to set up an institutional protection system, (iv) decision to develop the Entity s own activity through a credit entity, and (v) the transformation of the Entity into a special foundation To promote, direct, manage and administer the Social Welfare Work, as well as proposing the work of this nature which will have to be created or wound up to the General Assembly for approval, together with the budgets for the existing work, in accordance with criteria which take into account economic reasonableness and the maximum service to be given to the general interests of the territorial environment in which the Savings Bank carries out its activity The others which are a consequence of the Articles of Association, validly adopted agreements or the legislation in force The appointment of external auditors on the proposal of the Controlling Committee To propose to the Bank s General Board, if any, the Directors to be designated to the Entity as shareholders thereof. 2. The Board of Directors can act as a body or delegate Page 16

230 functions to an Executive Committee in order to comply with the functions it is entrusted except for those functions which cannot be delegated, without prejudice to the stipulations of article 46 et seq. Functions delegated by the General Assembly The issue of public loans for a period of 5 years up to a global limit of TWELVE THOUSAND AND FIVE HUNDRED MILLION EUROS ( 12,500,000,000). State the functions of the Board of Directors which cannot be delegated: Those related to the submittal of proposals to the General Assembly or when the powers are specially delegated to the Board unless express authorisation is given (Section 49-2, Act 3/1991 on Savings Banks with Registered Addresses in the Basque Country - Article Articles of Association) A.2.3. Provide details of the functions assigned statutorily to the Members of the Board of Directors. CHAIRMAN 1. The Chairman of the BILBAO BIZKAIA KUTXA, who will assume the Chairmanship of the General Assembly, of the Board of Directors and of the Executive Committee will be the supreme representative of the Savings Bank at all the acts in which the Savings Bank intervenes. 2. His attributions will be the following: a. To convene and preside the meetings of the Bodies whose chairmanship he holds, to propose the Agenda, direct the debates and approve the minutes. b. To sign on behalf of the Savings Bank and execute the agreements of the Board unless these agreements state otherwise. c. To take care that the legal provisions which bind or affect the Savings Banks are complied with, as well as the precepts of these Articles of Association and their Regulations. d. To comply with the agreements of the Governing Bodies and have these complied with. e. To approve the certifications of the agreements of the Bodies he presides. f. To authorise the minutes and the powers of attorney which affect the regime of the operations of the Savings Bank. g. Exceptionally, he can decide on the questions which might arise due to unexpected cases and inform the Board of Directors, insofar as this is possible, and the Executive Committee at the next meeting. h. To inform the General Assembly, the Board of Directors and the Executive Committee and submit either orally or in writing the operations proposals, motions and projects he considers to be advisable for the proper functioning of Page 17

231 the Savings Bank to them. To submit the Annual Report, the Balance Sheet, the Profit & Loss Account and the Proposal for the Allocation of Earnings to the Board of Directors to be examined and, where appropriate, be submitted to the General Assembly. In addition, to submit the proposal of the general lines of the policy of the Institution to the Board of Directors in order to achieve the objectives and goals set out in these Articles of Association and in the agreements of the General Assembly. i. To exercise the administrative, economic-administrative, contentious-administrative, corporate, fiscal, civil and criminal, judicial and extra-judicial actions which are the competence of the Savings Bank and represent the Savings Bank when it is sued, as well as settling or desisting from these and submitting them to arbitration in law or equity. j. The other attributions proper to the post and those which may be expressly delegated by the Board of Directors. DEPUTY CHAIRMAN The Deputy Chairman who will assume the Deputy Chairmanship of the General Assembly, of the Board of Directors and of the Executive Committee will have identical powers to those laid down for the Chairman in article 60 and related articles. He will act in subordination to the Chairman. The Deputy Chairman will substitute the Chairman in cases of absence, illness or any other circumstance which make it impossible for the Chairman to carry out his duties. Page 18

232 A.2.4. State the powers delegated to the Members of the Board and the General Manager if there are any: Members of the Board Name Brief Description MR. MARIO FERNÁNDEZ PELAZ POWER OF ATTORNEY WITH THE BROADEST POWERS A.2.5. State the rules of the system of election, appointment, acceptance, re-election, evaluation, severance and revocation of the Members of the Board. Provide details of the competent bodies, the steps to be taken and the criteria to be used in each procedure. ELECTION AND APPOINTMENT In accordance with what is established in the legislation in force, the Board of Directors will be made up of seventeen Members: three representing the founding corporations; eight in representation of the depositors; five from the Municipal Corporations, where there are offices of the Savings Bank, and one in representation of the staff. In the event of severance or removal of a Member before his mandate ends, he will be replaced during the rest of the period by the corresponding substitute. For this purpose, the same number of substitutes will be appointed as Members for each representation group by the same procedure as for the Members. All the Members of the Board of Directors will be designated by the General Assembly subject to the following rules: 1. The appointment of the Members representing the two founding Corporations will be made on the basis of half of the number for each of these Corporations, on the proposal of the General Directors of that group and from among these. In the event that the number of persons to be designated by both Corporations is an odd number, each one of them will designate an equal number of representatives and the one who is to cover the vacancy will be designated by the consensus of both. If this is not achieved, the designation will be by rotation for equal periods of time, and lots will be drawn to decide the Corporation which will make the first designation. 2. The General Assembly will appoint the Members representing the depositors from among their number. A number of General Directors of this group which cannot be less than the result of dividing the total number by ten can propose candidates to represent the depositors. 3. The appointment of the Members representing the Municipal Corporations where the Savings Bank has offices will be made on the proposal of the General Directors representing these Corporations and from among these. A number of General Directors representing this group which Page 19

233 cannot be less than the tenth part of the total of the group can propose candidates to represent these Corporations. 4. The appointment of Members representing the employees will be made on the proposal of the General Directors of this group and from among these. 5. Notwithstanding what has been agreed in numbers 2 and 3 on the previous designation as General Directors of those nominated as Members of the Board, up to a maximum of two Directors for each one of the groups can be designated as Members of the Board when these persons are not General Directors but comply with the requisites concerning capacity and adequate technical preparation, as well as the other requisites included in the legislation in force. 6. At the election of the Members of the Board of Directors, the groups which constitute this will endeavour to designate as holders and substitutes those persons who, due to their knowledge and experience are most suited to carrying out their functions as Members of the Board. The acceptance of the candidates must be stated beside each candidacy. In addition, at the first Board Meeting held after the election by the General Assembly, the Members of the Board accept their posts and state that they are not involved in any incompatibilities which might prevent them from carrying out their work. The post of Member of the Board of Directors will be held for four years, without prejudice to the possibility of re-election for further periods of four years in accordance with the legislation in force, and on condition that the same conditions, requisites and formalities are complied with as regards the appointment. SEVERANCE The Members of the Board of Directors will cease to hold their posts in the following cases: a. Due to the termination of the period of time they were designated for. b. Due to resignation. c. Due to death. d. Due to the loss of any of the requisites which conditioned their eligibility. e. Due to incurring any of the reasons for disqualification or incompatibility. f. Due to illness which seriously incapacitates them as regards the exercise of the post. g. Due to a severance agreement made by the General Page 20

234 Assembly for a just reason. For this purpose, a just cause will be considered to exist when the General Director damages the credit, reputation or activity of the Savings Bank due to his public or private conduct. h. Due to incurring the disqualifications or incompatibilities stipulated in the Articles of Association. i. In the case of Members appointed in representation of the staff, this may be due to their having retired or having left the staff for any reason. REVOCATION In accordance with the stipulations in Clause 4 of Section 48 of Act 3/1991, on Savings Banks of the Autonomous Community of the Basque Country, the appointment of the Members of the Board of Directors will be irrevocable except when cases of incompatibility arise or any of the requisites required for designation are lost or a severance agreement is adopted by the General Assembly if there is a just reason. A just reason will be deemed to exist when the Member of the Board of Directors fails to comply with the duties inherent to his post or damages the prestige, reputation or activity of the Savings Bank with his public or private conduct. A.2.6. Are reinforced majorities, other than the legal ones, required for any type of decision? YES NO Explain the system for adopting agreements at the meetings of the Board of Directors, and state at least the minimum attendance quorum and the types of majorities required to adopt agreements: Adoption of agreements Description of the agreement Quorum Type of Majority ALL TYPES OF AGREEMENTS (SIMPLE MAJORITY) SIMPLE A.2.7. Explain the internal systems established in order to control compliance with the agreements adopted at the Meetings of the Board. The agreements of the Board are sent by the General Secretary to the Departments affected. Internal Audit checks compliance with these. Page 21

235 A.2.8. State whether there are regulations of the Board of Directors. If so, describe their content: YES NO See Addenda A.2.9. Explain the rules concerning the convening of the Meetings of the Board. The Board of Directors will meet when convened to do so by its Chairman as many times as is necessary for the progress of the Savings Bank and, at least, every two months. Other meetings can also be convened: a. On condition that the Chairman considers them to be advisable. b. When the Chairman is requested to call a Meeting by, at least, a third of the Members of the Board or by the Executive Committee. c. When the Controlling Committee requests an extraordinary call for a meeting of the Assembly. The Meetings must be convened at least 48 hours in advance by written notification sent to each Member. In the event of an urgency, in the opinion of the Chairman, the call will be valid regardless of the form and the period of time on condition that this is duly accredited. At the Meetings, no matters can be dealt with other than those for which it was convened. However, if the Members present unanimously agree, this limitation will not apply. If all the Members are present and unanimously agree to hold a Meeting, the limitations established will not apply. Each Member can be represented at the Meetings of the Board by another Member of the Board; representation will be granted in writing and for each Meeting. The Members can also express their opinions to the Board in those cases when they cannot attend through a written document sent for this purpose. A State the cases in which the Members of the Board can request the convening of the Meetings of the Board. When this is requested by, at least, a third of its Members or by an agreement of the Executive Committee. A State the number of Meetings held by the Board of Directors during the financial year. Also state the times that the Board has met and the Meeting was not attended by the Chairman. Number of Meetings of the Board 15 Number of Meetings of the Board not attended by the Chairman 0 Page 22

236 A Identify the information which is provided to the Members of the Board for the Meetings of the Board of Directors. Explain the systems laid down in order to access this information. The minutes of the previous Meeting and the documentation on the points on the Agenda of each Meeting. The General Secretary places the documentation mentioned in the previous paragraph at the disposal of the Members of the Board on the day of the Meeting before it being held. A Identify the Chairman and the Executive Deputy Chairman or Chairmen and the General Manager and similar: Name MR. MARIO FERNÁNDEZ PELAZ MR. IGNACIO SÁNCHEZ-ASIAÍN SANZ MR. JUAN MARÍA SÁENZ DE BURUAGA RENOBALES MR. FERNANDO IRIGOYEN ZUAZOLA MS. ALICIA VIVANCO GONZÁLEZ Post CHAIRMAN GENERAL MANAGER GENERAL MANAGER GENERAL MANAGER GENERAL MANAGER A Explain whether there are specific requirements other than those related to the Members of the Board in order to be appointed as Chairman of the Board. YES NO Description of the requirements A State whether the Chairman of the Board has a casting vote. YES NO Matters where a casting vote can be used Any matter which is the competence of the Board. A State whether the individual and consolidated annual accounts which are presented to the Board for formulation have been previously certified: YES NO Page 23

237 Identify the person or persons who has or have certified the individual and consolidated annual accounts of the organisation for formulation by the Board. Name Post A.2.17.State whether there are mechanisms established by the Board of Directors in order to prevent the individual and consolidated accounts formulated by it from being submitted to the General Assembly with reservations in the Auditors Report YES NO Explanation of the Mechanisms A Explain the measures adopted so that the information disclosed to the stock markets is transmitted fairly and symmetrically. A State and explain the mechanisms, if any, established by the Savings Bank in order to preserve the independence of the auditor, the financial analysts, the investment banks and the agencies which classify credit risk. YES NO Explanation of the Mechanisms The Controlling Committee of the Bilbao Bizkaia Kutxa has assumed the functions attributed by Act 62/2003 (Spanish Official Gazette of 30/12) to the Audit Committee and among these is the function stipulated in the eighteenth additional provision of Act 24/1988, of July 24, on the Securities Market, which, transcribed literally, states: "To be in contact with the External Auditors in order to receive information on those questions which might put the independence of these Auditors at risk and any other question related to the execution process of the audit of the accounts, as well as the other notifications stipulated in the legislation on the audit of accounts and in the technical rules on audit". A State whether the auditing firm carries out other work for the Savings Bank and/or its Group other than the work of auditing, if so, declare the fees received for this work and the percentage this involves with regard to the fees invoiced to the Savings Bank and/or its Group. YES Amounts for work other than auditing (thousands of Euros) Amount for work other than auditing/total amount invoiced by the auditing firm (as %) NO Savings Bank Group Total , Page 24

238 A State the number of years which the current auditing firm has uninterruptedly carried out the audit of the annual accounts of the Savings Bank and/or the Group. Also state the percentage which the number of years audited by the current auditing firm represents as regards the total number of years in which the annual accounts have been audited: Savings Bank Number of uninterrupted years 6 6 Group Savings Bank Group Number of years audited by the current auditing firm 6 6 Number of years the company has been audited (as %) A Is there an Executive Committee? If so, state its members: YES NO EXECUTIVE COMMITTEE Name MR. MARIO FERNÁNDEZ PELAZ MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ MR. ÁNGEL LOBERA REVILLA MR. JOSEBA KOLDO ALZAGA MURUAGA MR. IÑAKI AZKUNA URRETA MS. ALAITZ ETXEANDIA ARTEAGA MS. MIREN JOSUNE IGLESIAS MARIÑELARENA MS. AITZIBER IRIGORAS ALBERDI MR. JON IÑAKI ZABALIA LEZAMIZ Post CHAIRMAN DEPUTY CHAIRMAN SECRETARY MEMBER MEMBER MEMBER MEMBER MEMBER MEMBER A State the delegated and statutory functions carried out by the Executive Committee. The Executive Committee is the permanent Body for the management and administration of the areas of the Savings Bank entrusted to it, it acts by delegation of the Board of Directors and is accountable to the Board. All the groups which make up the Board of Directors must be represented on the Executive Committee. The powers of the Executive Committee are all those delegated to it by the Board of Directors and the following specific functions which are proper to it: a. To approve and modify the staff of employees; to create and suppress posts; to establish their powers and attributions and state their salaries and emoluments, in accordance with what is required and permitted by the progress of the situation of the Savings Bank. b. To appoint, suspend and sanction the employees of all kinds. c. To contract the supply of professional, technical or other kinds of services of a temporary or circumstantial nature by natural person or body corporate. Page 25

239 d. To adopt any resolutions required for the defence and conservation of the Savings Bank, its assets and rights. e. To adopt any agreements and authorise and execute all kinds of acts and contracts related to the debt operations of the Savings Bank in accordance with the legal provisions in force and where appropriate commit the guarantees of any kind considered to be advisable. f. To decide, determine, carry out and control the investments of borrowed funds and equity. g. To buy, sell, exchange, assign and transfer moveable estate and real estate, as well as all kinds of rights for the price and in the conditions it deems to be advisable. h. To constitute usufructs, leaseholds, active and passive easements and any other rights of a property nature over moveable estate and real estate in the conditions which it considers to be most advantageous for the Savings Bank. i. To approve the loans and credits with personal, mortgage, pledge or bank bond guarantees or guarantees of any other kind. j. To authorise guarantees which guarantee the Institution or third parties as regards other persons, organisations or public or private bodies. k. To open current and loan accounts in the name of the Savings Bank in an Official or Private Bank, including the Bank of Spain, dispose of their funds and cancel them. l. To manage and administer all the social welfare work, with all the powers which the Board has, except for the proposals made to the Assembly regarding the creation and winding up of social welfare work and the approval of budgets. m. To make all kinds of contracts and agreements permitted by Law, settle and be bound by arbitration in Law and in equity. To rent out all kinds of goods or rights, as well as assign their use and position under any entitlement or judicial formality. To constitute, modify and extinguish all kinds of rights of a property nature. n. To accept inheritances, donations or legacies, and be able to avail itself of the benefit of inventory as regards inheritances. o. To authorise the granting of powers for the execution of the operations conferred on the Executive Committee. p. To take part in the constitution of companies, associations, bodies or other organisations of any legal nature, and contribute the capital which might be necessary and appoint their governing bodies. q. To approve the monthly accounts of the Savings Bank. r. To sign all kinds of agreements with public or private organisations and bodies of the Central Administration of the Autonomous Community of the Basque Country and others as regards all the questions which refer to commercial trading operations. s. Any others which are a consequence of the exercise of the management and administration functions of the Savings Bank which are the competence of the Board and which are attributed to it by the Board. t. To resolve the urgent matters and notify the Board of Directors of those which, due to their importance, require that the Board know and attend to. u. The powers of disposal included in sections f., g., h., i., j. and k. Page 26

240 will be exercised within the limits stated by the Board of Directors and can be delegated to one or several members of the Executive Committee, to the General Manager and to other employees of the Savings Bank with the limitations and conditions considered to be advisable. A In the event that there is an Executive Committee, explain the level of delegation and autonomy it has in the exercise of its functions to adopt agreements on the administration and management of the company. Every four years, the Board of Directors delegates the powers which statutorily correspond to the Board to the Executive Committee except for those which cannot be delegated. A State whether the composition of the Executive Committee reflects the participation in the Board of the Members based on the groups they represent. Y E S NO If not, explain the composition of the Executive Committee A Is there an Audit Committee or have its functions been assumed by the Controlling Committee? In the former case, state its members: AUDIT COMMITTEE Name Post A Describe the possible support functions carried out by the Audit Committee for the Board of Directors. A State the members of the Salaries Commission: SALARIES COMMISSION Name MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ MR. ÁNGEL LOBERA REVILLA CHAIRMAN MEMBER Post Page 27

241 A Describe the support functions carried out by the Salaries Commission for the Board of Directors. The function of the Salaries Commission consists of informing the Board of Directors concerning the general remuneration and incentives policy for the Members of the Board and the Management. A State the members of the Investments Commission: INVESTMENTS COMMISSION Name MR. MARIO FERNÁNDEZ PELAZ MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ MR. ÁNGEL LOBERA REVILLA CHAIRMAN MEMBER MEMBER Post A Describe the support functions carried out by the Investments Commission for the Board of Directors. The function of the Investments Commission consists of informing the Board of Directors on the investments and divestments of a strategic and stable nature which are made by the Savings Bank, either directly or through organisations in the same Group, as well as informing on the financial feasibility of the aforementioned investments and their suitability as regards the budgets and strategic plans of the Savings Bank. Strategic is understood to be the acquisition or sale of any significant holding in any listed company or the participation in company projects involving a presence in the company management or in its governing bodies. For the purposes of the stipulations of this article, all those organisations and/or companies which constitute a decision unit insofar as BBK directly or indirectly holds or can hold their control will be deemed to belong to the Group. In any case, unity of decision will be presumed to exist when any of the following occur: a. It holds the majority of the voting rights of the controlled organisation. b. It has the power to appoint or dismiss the majority of the Members of the administrative bodies. c. By virtue of agreements made with other associates, it can dispose of the majority of the voting rights. d. When at least half plus one of the Members of the Board of the controlled company are Members of the Board or Senior Managers of the BBK or of another organisation controlled by the BBK. Page 28

242 For the purposes of what is stipulated above, the rights held by the BBK through other controlled organisations or through persons who act on behalf of the BBK or on behalf of other organisations controlled by the BBK and those it can dispose of through an agreement with any other person will be added to the rights held by the BBK. For the purposes of what is stipulated in this article, the acquisition or sale of any significant holding in any listed company or the participation in company projects involving a presence in the company management or in its governing bodies will be understood as strategic. The Chairman of the Board of Directors can submit those investments which do not have the requirements stipulated in the previous paragraph but are considered to be strategic for the Savings Bank to the Commission. Each year the Investments Commission will send the Board of Directors a report which will include, at least, a summary of the investments of a strategic and stable nature which have been made by the Savings Bank, as well as the list and sense of the reports issued. A State whether there are regulations for the Commissions of the Board, the place where these can be consulted, and the modifications which have been made during the financial year. In turn, state whether any annual reports on the activities of each commission have been drafted voluntarily. At the Board Meeting held on 27 May 2004, the Board of Directors of Bilbao Bizkaia Kutxa approved the Regulations for (I) the Remunerations Committee and (II) the Investments modified by the Board of Directors at its meeting held on 27 June The Regulations can be consulted at the Bank s General Secretary s Office, located in Gran Vía 30-32, 2 nd floor (Bilbao). Page 29

243 A Is there a specific body or bodies which has or have been assigned the competence to decide on the acquisition of company shares? If so, state these bodies: YES NO Body or bodies which has or have been assigned the competence to decide on the acquisition of company shares Board of Directors Remarks THE BOARD OF DIRECTORS OR THE EXECUTIVE COMMITTEE BY DELEGATION OF THE BOARD ARE THE BODIES COMPETENT TO APPROVE THE ACQUISITION OF COMPANY SHARES, WITHOUT PREJUDICE TO THE FACT THAT, PREVIOUS TO THE ADOPTION OF THE RELEVANT AGREEMENTS, THE PERTINENT ANALYSES AND STUDIES ARE MADE BY THE COMMITTEES AND AREAS LISTED IN POINT A A State the procedural or information requirements which might be stipulated in order to make agreements which involve acquisition of company shares. Previous to the analysis and possible approval by the Board of Directors, the Management Committee analyses each operation and takes the decision to pass these to the Board of Directors. Additionally, the Investments Commission informs the Board of Directors on the investments listed in section A A State the number of meetings which have been held during the financial year by the following bodies: Number of meetings of the Salaries Commission 4 Number of meetings of the Investments Commission 9 Number of meetings of the Executive Committee or Delegate 31 Page 30

244 A.2.36.State the delegated or support bodies created by the Savings Bank: ETHICS COMMITTEE Name MR. AITOR LANDA ZARRAGA MS. MANFRED NOLTE ARAMBURU MS. ARANTZA GANDARIASBEITIA UGALDE MS. SOL AGUIRRE ARANA MR. RAFAEL IBARGUEN GONZÁLEZ CHAIRMAN Post DEPUTY CHAIRMAN SECRETARY MEMBER MEMBER MS. CARMEN ORIOL LÓPEZ-MONTENEGRO MEMBER MR. JUAN IBARRETXE KARETXE MS. ROSA GIL ELORDUY MR. IÑIGO ABASOLO ALCANTUD MS. AINARA SAN ROMÁN BORDEGARAI MR. VICTOR MANUEL URRUTIA ABAIGAR MS. MIREN JOSUNE IGLESIAS MARIÑELARENA MR. JON JOSEBA MANCISIDOR SOLABERRIETA MEMBER MEMBER MEMBER MEMBER MEMBER MEMBER MEMBER List the regulations concerning the system for the election, appointment, acceptance and revocation of posts on each of the bodies and state the functions of these bodies. The Ethics Committee is composed of 13 members. Six are appointed by the BILBAO BIZKAIA KUTXA, and four of these will be members of the Governing Bodies and the other two will be the Assistant General Manager of the Social Welfare Work Area and the person who holds the post of Coordinator of the BBK SOLIDARIOA FUNDAZIOA. The remaining seven members will be elected through a secret ballot of delegates from the persons who present themselves as candidates. The function consists of the recommendation of new activities and purposes for the social-interest and social welfare work investments, as well as applying the ethical filter criteria as an essential mechanism for using the ethical doctrine of financial instruments. The representatives of the BILBAO BIZKAIA KUTXA accept the posts at the first meeting of the Commission and the external representatives at the presentation of their candidacies and at the first meeting of the Committee. Page 31

245 A.3. Controlling Committee A.3.1. Complete the following chart on the members of the Controlling Committee: MR. JOSEBA ANDONI AURRECOECHEA VERGARA CONTROLLING COMMITTEE Name Post Group he represents MR. JOSÉ ANTONIO TARAMONA CAMPO CHAIRMAN DEPUTY CHAIRMAN FOUNDING PERSONS OR ORGANISATIONS FOUNDING PERSONS OR ORGANISATIONS MR. FERNANDO LANDA BEITIA SECRETARY DEPOSITORS MS. NEREA LARREA ZARATE MEMBER MUNICIPAL CORPORATIONS MR. DAVID LATXAGA MEMBER MUNICIPAL CORPORATIONS UGARTEMENDIA MS. ANA MARÍA URIBE ZUGADI MEMBER DEPOSITORS MR. FRANCISCO JAVIER RUIZ ELIZALDE MR. JESUS MIRENA ABAUNZA MARTÍNEZ MEMBER MEMBER EMPLOYEES DEPOSITORS Number of members 8 Group they belong to Number of appointees % of the total MUNICIPAL CORPORATIONS DEPOSITORS FOUNDING PERSONS OR ORGANISATIONS EMPLOYEES Total Page 32

246 A.3.2. Has the Controlling Committee assumed the function of the Audit Committee? Y E S NO List the functions of the Controlling Committee: Functions The Controlling Committee is the body delegated by the Assembly to supervise and monitor the Board of Directors and the Executive Committee and its purpose is to ensure that its management is carried out with the maximum efficacy and precision, within the general lines of action stated by the General Assembly and the guidelines from the financial regulations, and, within the scope of its powers, it can collect any records and information it considers to be necessary from the bodies supervised. Besides the generic functions of supervising and monitoring the Board of Directors and the Executive Committee, the Controlling Committee will also have the following specific functions: 1. The analysis of the economic and financial management of the Savings Bank, and it will provide the Treasury and Finance Department of the Basque Government and the General Assembly with information on this analysis at least every half year. The report which will be submitted at least every half year to the Treasury and Finance Department of the Basque Government must, of necessity, contain the following: a. An analysis of the management of the Board of Directors and of the Executive Committee, with a statement on its adaptation to the legislation in force, the Articles of Association of the Savings Bank and the guidelines and resolutions issued by the General Assembly. b. An analysis of the following matters: - The economic and financial management of the Savings Bank. - The general policy concerning assets and liabilities operations. - The management of human resources. The evolution of the staff as regards numbers and costs. - The management of the Social Welfare Work in compliance with its budgets and the adaptation of the expenses and investments. - The general policy on risk and its liability cover. - Compliance with accounting standards, stating the modifications which might be made. - Any other data it considers to be relevant. c. Checking the reports received on the external audit. 2. Proposing the appointment of external auditors to the Board of Directors and studying the reports and recommendations of these. Contacting the external auditors in order to receive information on those questions which might place the independence of these auditors at risk and any other questions related to the process for auditing the accounts, as well as those other communications stipulated in the legislation on the auditing of accounts and in the technical regulations on auditing. 3. Supervising the work of the internal supervision and control teams, as well as the internal audit. 4. Checking the Balance Sheet, the Profit & Loss Account and the proposal for the allocation of profit, and providing the Assembly with any relevant information. 5. Submit the report on its management to the Assembly, with its opinion on the management of the bodies subjected to supervision. 6. Request the Chairman to convene an extraordinary General Assembly in the cases stipulated in the legislation in force and in the Articles of Association. 7. Inform the Treasury and Finance Department of the Basque Government and the General Assembly of the budgets and the allocations to the Social Welfare Work, as well as controlling compliance with these. 8. Constitute itself in an Electoral Committee and control the electoral processes and the processes for the designation of the members of the Governing Bodies, and be the first one to resolve any electoral disputes or claims. 9. Propose the suspension of the effectiveness of the agreements of the bodies subject to supervision to the Treasury and Finance Department of the Basque Government when it considers that they infringe the provisions in force or unjustly or seriously affect the assets situation, the earnings or the credit of the Savings Bank, its depositors or clients and in all the cases established in legislation or in the Articles of Association. 10. Notify the Treasury and Finance Department of the Basque Government of the agreements on the appointment or removal of the General Manager. 11. Any other function which might be assigned to it by the legislation in force or might be attributed to it by the Articles of Association, by mandate of the General Assembly or of the competent authority. Page 33

247 A.3.3. Describe the rules for the organisation and functioning of the Controlling Committee, as well as the responsibilities attributed to it. The Controlling Committee will be composed of eight members, two in representation of the Founding Corporations, three in representation of the depositors, one from the staff and two in representation of the Municipal Corporations where there are offices of the Savings Bank. The Controlling Committee cannot have members in common with the bodies which it supervises and controls. The Treasury and Public Administration of the Basque Government can designate an additional representative who will attend the meetings with the right to speak but with no voting rights. The General Manager or the General Managers or the person designated by these with the authorisation of the Controlling Committee will attend the meetings with the right to speak but with no voting rights, and the General Secretary or the acting General Secretary can also attend with the right to speak but with no voting rights unless he is requested to do so, and any other person, whether he is an employee of the Savings Bank or not, who is requested to attend. The Controlling Committee will appoint the Chairman, who will have a casting vote, a Deputy Chairman and a Secretary from among its members. In the absence of the Chairman and the Deputy Chairman, these will be substituted by the oldest appointee, and in the absence of the Secretary, the youngest appointee will carry out his work. The Controlling Committee will hold ordinary meetings convened by the Chairman, at least, once every two months. Extraordinary meetings can be convened on condition that the Chairman considers this to be advisable or three appointees or a representative of the Basque Government request that one be held. The Controlling Committee can deliberate on the matters within its competence on condition that, at least, the majority of the members with voting rights are present at the start of the meeting. The decisions or agreements of the Controlling Committee will be adopted by an absolute majority. The meetings must be convened, at least, 48 hours in advance, by written notification sent to each member and this will include the Agenda. At the extraordinary meetings, the call will be valid regardless of its form and the period of time on condition that this is duly accredited. At the extraordinary meetings, no matters can be dealt with other than the matters they are expressly convened to deal with. However, if the appointees present unanimously agree, this limitation will not apply. If all the appointees are present and unanimously agree to hold a Meeting, the limitations Page 34

248 established will not apply. Voting will be open except when half the appointees present request that it be secret. The agreements made by the Controlling Committee will be recorded in minutes which will be signed by the Chairman and the Secretary. In accordance with the stipulations of Section 27.3 of Decree 240/2003, of October 14, on Savings Banks in the Autonomous Community of the Basque Country, the Controlling Committee must be constituted as an Electoral Committee for all the electoral processes of the Governing Bodies of the Bilbao Bizkaia Kutxa. It will be constituted at a meeting held for this purpose which will mark the commencement of the election process and the designation of the members of the Governing Bodies. The Electoral Committee is responsible for supervising that the stages of the procedure are carried out with due diligence so that the periods set out in the electoral schedule are complied with due diligence, as well as supervising compliance with the legislation on electoral processes. A.3.4. Explain the system created so that the Controlling Committee can know the agreements adopted by the administration bodies in order to carry out its tax and veto functions. The Controlling Committee checks all the minutes of the Meetings of the Board of Directors and the Executive Committee, and can request any information it considers advisable to know. A.3.5. State the number of meetings which the Controlling Committee has held during the financial year. Number of meetings of the Controlling Committee 15 A.3.6. Identify the information which is provided to the appointees for the meetings of the Controlling Committee. Explain the systems laid down in order to access this information. At all the meetings held by the Controlling Committee, the minutes of the meetings held by the Board of Directors and the Executive Committee since the last meeting of the Controlling Committee are placed at its disposal. All the economic information and the information on the social welfare work of the Savings Bank are also placed at the disposal of the members of the Controlling Committee, as well as any other information requested by it. The Internal Control Manager periodically informs on the progress of the activities carried out by the Department. The documentary information is provided through the General Secretary of the Institution. Page 35

249 A.3.7. Explain the rules of the system for the election, appointment, acceptance and revocation of the members of the Controlling Committee. ELECTION - APPOINTMENT The holder appointees and the substitutes of the Controlling Committee will be designated by the General Assembly except for the representative of the Treasury Department and Public Administration of the Basque Government. Each representation group will propose the corresponding members to be appointed and the same number of substitutes. The candidacies must contain a number of holder candidates equal to the appointees who have to be elected and an equal number of substitutes and these will be submitted to the Electoral Committee by the person who heads the list five days in advance of the date the meeting of the General Assembly is to be held. The acceptance of the candidates must be stated together with the candidacy, as well as his declaration that he does not form part of any other candidacy and that he knows and complies with all the legal requisites required to accede to the election of appointees. The members of the Controlling Committee, both holders and substitutes, are appointed by the General Assembly in accordance with the procedure explained above. ACCEPTANCE Each candidacy must record the acceptance of the candidates. Moreover, at the first meeting held after the General Assembly which designates them, the appointees accept their posts and state that they have not incurred incompatibilities which might prevent them from occupying the posts. REVOCATION As General Directors, the appointees are affected by the stipulations in Section 41.3 of Act 3/1991 on Savings Banks in the Autonomous Community of the Basque Country, which determines that the appointment of Directors will be irrevocable, except exclusively when cases of incompatibility arise or any of the requisites required for designation are lost or a severance agreement is adopted by the General Assembly if there is a just reason. A just reason will be deemed to exist when the Member of the General Director fails to comply with the duties inherent to his post or damages the prestige, reputation or activity of the Savings Bank due to his public or private conduct. Page 36

250 A.3.8. Explain the internal systems established for the control of compliance with the agreements adopted by the Controlling Committee. The General Secretary conveys the agreements adopted to the body or area affected and subsequently the Internal Control function verifies compliance. A.3.9. Explain the rules for convening the meetings of the Controlling Committee. The Controlling Committee will hold ordinary meetings convened by the Chairman, at least, once every two months. Extraordinary meetings can be convened on condition that the Chairman considers this to be advisable or three members or the representative of the Basque Government request that one be held. The meetings must be convened, at least, 48 hours in advance, by written notification sent to each member and this will include the agenda. At the extraordinary meetings, the call will be valid regardless of its form and the period of time on condition that this is duly accredited. A Determine the cases in which the members can request the convening of the meetings of the Controlling Committee in order to deal with matters deemed to be advisable. When they are requested by at least three members. A Explain the system for adopting agreements at the meetings of the Controlling Committee, and state, at least, the rules regarding the constitution and the quorum of attendance: Adoption of agreements Description of the agreement Quorum Type of Majority THE CONTROLLING COMMITTEE CAN DELIBERATE ON THE MATTERS WITHIN ITS COMPETENCE ON CONDITION THAT, AT THE COMMENCEMENT OF THE MEETING, AT LEAST THE MAJORITY OF ITS MEMBERS WITH VOTING RIGHTS ARE PRESENT. THE DECISIONS OR AGREEMENTS OF THE BOARD WILL BE TAKEN BY AN ABSOLUTE MAJORITY ABSOLUTE Page 37

251 B CREDIT, SURETY BOND OR GUARANTEE OPERATIONS B.1. List the credit, surety bond or guarantee operations made directly or indirectly or through endowed, ascribed or part-owned organisations in favour of the Members of the Board of Directors, family members in the first degree or with companies or organisations which they control in accordance with Section 4 of Act 24/1988, of July 28, on the Stock Market. State the conditions of these operations including the financial ones. Name of the Member of the Board of Directors MS. MIREN JOSUNE IGLESIAS MARIÑALARENA Registered name of the Savings Bank or the endowed, ascribed or partowned organisation BILBAO BIZKAIA KUTXA Nature of the operation EXTENSION EMPLOYEE CREDIT ACCOUNT Amount (thousands of Euros) Conditions 18 PERIOD: 20 YEARS INITIAL INTEREST 2.291% -EURIBOR 1 YEAR BOE NOVEMBER EXTENSION EMPLOYEE CREDIT ACCOUNT FROM 30,000 EUROS TO 48,000 EUROS. COLLECTIVE WORKERS AGREEMENT CONDITIONS. B.2. Provide details of the credit, surety bond or guarantee operations made directly, indirectly or through endowed, ascribed or partowned organisations in favour of Controlling Committee, family members in the first degree or with companies or organisations which they control in accordance with Section 4 of Act 24/1988, of July 28, on the Stock Market. State the conditions of these operations including the financial ones. Name of the Member Registered name of the Savings Bank or the endowed, ascribed or partowned organisation Nature of the operation Amount (thousands of Euros) Conditions MS. ANA MARÍA URIBE ZUGADI BBKGE KREDIT, E.F.C., S.A. PERSONAL LOAN 12 PERIOD: 5 YEARS - INITIAL INTEREST: 10.14% - PERSONAL LOAN. MS. ANA MARÍA URIBE ZUGADI MS. NEREA LARREA ZARATE BBKGE KREDIT, E.F.C., S.A. BILBAO BIZKAIA KUTXA PERSONAL LOAN MORTGAGE LOAN 6 PERIOD: 5 YEARS - INITIAL INTEREST: 12.39% - PERSONAL LOAN. 350 TERM 28 YEARS INITIAL INTEREST 2.74% - EURIBOR 1 YEAR BOE PREVIOUS MONTH BASE SPREAD= NETWORK. SPREAD AGREED. Page 38

252 B.3. Provide details of the credit, surety bond or guarantee operations made directly or indirectly or through endowed, ascribed or partowned organisations in favour of the political groups which are represented in the local corporations and Autonomous Community legislative assemblies which have participated in the electoral process of the Savings Bank. Name of the Political Group PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA PARTIDO NACIONALISTA VASCO - EUSKO ALDERDI JELTZALEA Registered name of the Savings Bank or the endowed, ascribed or partowned organisation BILBAO BIZKAIA KUTXA BILBAO BIZKAIA KUTXA BILBAO BIZKAIA KUTXA BILBAO BIZKAIA KUTXA BILBAO BIZKAIA KUTXA BILBAO BIZKAIA KUTXA BILBAO BIZKAIA KUTXA Nature of the operation PERSONAL GUARANTEE PERSONAL GUARANTEE PERSONAL GUARANTEE PERSONAL GUARANTEE PERSONAL GUARANTEE RENEWAL PERSONAL CREDIT ACCOUNT RENEWAL PERSONAL CREDIT ACCOUNT Amount (thousands of Euros) Conditions 13 PERIOD: NON- DEFINED OPENING COMMISSION 0.50% AND FURTHER QUARTERLY RISK COMMISSION OF 0.50% 30 PERIOD: NON- DEFINED OPENING COMMISSION 0.50% AND FURTHER QUARTERLY RISK COMMISSION OF 0.50% 17 PERIOD: NON- DEFINED OPENING COMMISSION 0.50% AND FURTHER QUARTERLY RISK COMMISSION OF 0.50% 34 PERIOD: NON- DEFINED OPENING COMMISSION 0.50% AND FURTHER QUARTERLY RISK COMMISSION OF 0.50% 38 PERIOD: NON- DEFINED OPENING COMMISSION 0.50% AND FURTHER QUARTERLY RISK COMMISSION OF 0.50% 1,500 PERIOD: 1 YEAR INITIAL INTEREST 3.114% - EURIBOR 3 MONTHS 2 DAYS BEFORE PLUS 2% SPREAD 900 PERIOD: 18 MONTHS INITIAL INTEREST 4.108% - EURIBOR 1 YEAR 2 DAYS BEFORE PLUS 2% SPREAD B.4. State the current situation of the credits given to political groups which are represented on the local corporations and Autonomous Community legislative assemblies which have participated in the electoral process of the Savings Bank. The situation at 31 December 2011 of loans to political groups represented in local corporations and which took part in the Entity s last electoral process is as follows: Page 39

253 Eusko Alkartasuna: Of total balances drawn down, 930 thousand euros correspond to a mortgage loan and 230 thousand euros correspond to personal loans. At the said date, all obligations are paid and up to date. Ezker Batua-Berdeak: Of total balances drawn down, 1,044 thousand euros correspond to mortgage loans. At the said date, all obligations are paid and up to date. Partido Nacionalista Vasco-Eusko Alderdi Jeltzalea: Of total balances drawn down, 9,117 thousand euros correspond to mortgage loans, 2,002 thousand euros correspond to personal loans and 228 thousand euros are guarantee principals. At the said date, all obligations are paid and up to date except for three mortgage loans for which a total of 564 euros remained overdue and has since been settled at the date of this report. Partido Socialista de Euskadi-Euskadiko Ezkerra PSOE: Of the total of account balance, EUR 1,517 thousand are loans with mortgage guarantee, EUR 28 thousand credits with personal guarantee and 4 thousand euros is the principal of a guarantee. On the said date all the operations are up to date with their obligations. C Provide details of the credit operations with public institutions, including territorial organisations, which have designated General Directors: Name of the public institution: DIPUTACIÓN FORAL DE BIZKAIA (BIZKAIA PROVINCIAL COUNCIL) Nature of the operation Amount (thousands of Euros) PERSONAL CREDIT ACCOUNT 78,500 PERSONAL LOAN 50,000 Names of the General Directors designated MR. JOSEBA KOLDO ALZAGA MURUAGA MR. ASIER ATUTXA ZALDUEGI MR. JOSEBA ANDONI AURRECOECHEA VERGARA MR. JON ANDONI BAÑALES REGULEZ MR. ANDONI BUSQUET ELORRIETA MS. MARTA DE LA PEÑA IZAGUIRRE MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ MR. JON LOIZAGA CAYERO MR. JAVIER MIRANDA GARATE MR. JOSÉ IGNACIO MURO PALACIO Name of the public institution: AYUNTAMIENTO DE MUNDAKA (MUNDAKA TOWN HALL) Nature of the operation Amount (thousands of Euros) CREDIT ACCOUNT 600 Name of the General Directors designated MR. ASIER MADARIETA JUARISTI Page 40

254 D LINKED OPERATIONS AND INTRAGROUP OPERATIONS D.1. Provide details of the significant operations carried out by the Organisation with the Members of the Board of Directors: Name Nature of the operation Amount (thousands of Euros) D.2 Provide details of the significant operations carried out by the Organisation with the Members of the Controlling Committee: Name Nature of the operation Amount (thousands of Euros) D.3. Provide details of the significant operations carried out by the Organisation with its management staff: Name Nature of the operation Amount (thousands of Euros) D.4. Provide details of the significant operations carried out by the organisation with Directors and Managers of companies and organisations of the Group which the Organisation forms part of: Name Registered name of the organisation of the Group Nature of the operation Amount (thousands of Euros) Page 41

255 D.5. Provide details of any intragroup operations which might be significant: Registered name of the organisation of the Group Brief description of the operation Amount (thousands of Euros) KARTERA 2, S.L. RENEWAL CREDIT ACCOUNT 25,000 GRUPO NEINOR SUBROGATION IN LOANS, 9,530 CREDITS AND OTHER OPERATIONS OF BORROWERS OF THE ORIGINAL BBK BANK CAJASUR, S.A. CAPITAL INCREASE 800,000 KARTERA 1, S.L. RENEWAL CREDIT ACCOUNT 245,000 KUTXABANK, S.A. CONSTITUTION OF THE COMPANY 18,050 TEJARES ACTIVOS SINGULARES CAJA SUR INMOBILIARIA SUBROGATION IN LOANS, CREDITS AND OTHER OPERATIONS OF BORROWERS OF THE ORIGINAL SUBROGATION IN LOANS, CREDITS AND OTHER OPERATIONS OF BORROWERS OF THE ORIGINAL 62,680 12,566 E STRUCTURE OF THE GROUP BUSINESS E.1. Describe the structure of the Group business, specifying the role played by each one of the organisations within the set of services provided to customers. Structure of the business of the Group Nature of the main economic activities and businesses: Financial resources administration. The main mission of the Savings Bank is to administer financial products and services that suitably cover all potential customer demands in terms of quality and price. BBK maintains a market share of 36% of its bank deposits in the Basque province of Bizkaia, its original operating area, which means it is the first financial body in the territory in this concept. The number of clients currently interacting with the Savings Bank exceeds 1,080,000, with a penetration share of around 70% in the historic Bizkaia region. With regard to savings products commercialized by BBK, 2011 has been notable due to the increase in Demand Savings, while Investment Funds and wholesale Term Deposits have been affected due to the negative conditions of the markets and the liquidity of the system. Credit Investments. The main destination for resources captured by the Savings Bank is the funding for its clients by means of credit, especially for home buying (65% of the total). In the business sector, the Savings Bank s investments are preferably aimed at the small and medium sized enterprises that make up most of the economic fabric of Bizkaia. Furthermore, the Savings Bank has a major participation in the funding of large corporations under suitable conditions for profit-risk. The Savings Bank s investments are subject to rigorous risk controls, as can be seen in the evolution of its amount of nonperforming loans and the level of investment coverage. Financial Services Provision. BBK is a specialist in the distribution of all kinds of financial products and services. Among the former, for example, besides traditional deposit and loan contracts, others marketed include the funds mentioned above, debit and credit cards, a wide range of insurance, and so on. Of note among the more innovative financial services are: the BBKnet Portal, BBKnet personal services, BBKnet enpresak and the E-commerce virtual point of sale. Financial Markets. The financial position of the Savings Bank is completed by placing its surpluses in various national and international financial markets, including the money markets, Fixed Income, Variable Income and derivatives, as well as gaining further liquidity in financial markets to fund new investments. All investments undertaken are done so within a framework of proportionality between expected profit and assumed risk. Therefore, the Savings Bank has adopted organisational and control systems for risk that guarantee balanced management of its market position. Participation in the real economy. The BBK s Variable Income investment portfolio includes a series of strategic participations that respond to diversification criteria. Page 42

256 BBK s participation in the energy and telecommunication sectors is particularly important. Among the most significant participations, the following are worthy of note: Iberdrola (5.3%), Petronor (14.0%), Euskaltel (35.2%), Neinor (100.0%), Grupo Fineco (60.0%), Enagas (5.0%) and CLH (5% acquired in 2010). Branch Network. The Savings Bank s commercial network in December, 2011 was made up of 395 branches, of which 5 Companies are Enterprise offices, one is for public bodies and the rest household banking. Although the Savings Bank s main market is in the historical territory of Bizkaia, the expansion undertaken beyond its traditional borders is particularly relevant. At the end of 2011, the Savings Bank had 164 offices outside Bizkaia. Other distribution channels. In addition to the branch network, the Savings Bank has made intense development in other distribution channels. The number of automatic teller machines comes to 817, and the number of active cards on 31 st December, 2011 was 931,304. Means and resources ended with a workforce of 2,390 people belonging to Financial Activity. A breakdown by age and sex can be seen in the BBK Annual Report. Social Investment. Social action is an essential part of the identity and objectives of the Savings Bank. These are developed along three basic lines: firstly, all the social assistance services provided through an extensive network of Social Works; secondly, the promotion of youth employment through BBK Gazte Lanbidean Fundazioa, which, in collaboration with other public and private institutions, develops an ongoing effort in job creation and youth placement in productive processes; and finally, culture promotion, which is basically channelled though several grants and sponsorships from the BBK Cultural Foundation. Furthermore, in 2003 the Fundación BBK Solidarioa was set up to offer funding to people who do not have access to usual funding channels by channelling solidarity savings. In 2011, the total figure for expenditure and investment by the Savings Bank in its social activity came to 73,459 thousand euros. The BBK s activity is complemented by several subsidiaries that make up the financial group. These companies enlarge the range of products and services available to clients with a more specialised approach. Below is a list of those that have a close relationship with services provided to clients: Services provided to customers Name of the organisation of the Group BBK BANK CAJASUR, S.A. Role it plays within the combined services provided Financial institution Name of the organisation of the Group BBK GESTIÓN, S.A. SGIIC Role it plays within the combined services provided Manager of collective investment entity. It currently manages 44 investment funds. Name of the organisation of the Group BBKGE KREDIT E.F.C., S.A. (BBK HOLDING: 49%) Role it plays within the combined services provided Financial credit establishment whose social objective is the concession of personal and consumer loans. Name of the organisation of the Group GESFINOR ADMINISTRACIÓN, S.A. Role it plays within the combined services provided Its administers companies and provides advice concerning administrative and accounting matters. It administers the assets of four voluntary pension and insurance societies (EPSV s) Page 43

257 KARTERA 1, S.L Name of the organisation of the Group Role it plays within the combined services provided Its mission is the acquisition, holding, use, administration and trading of securities, real estate and company shares, carried out on its own account and, with the exception of intermediation, excluding the activities which are the subject of the legislation on collective investment institutions and the stock market. KARTERA 2, S.L. Name of the organisation of the Group Role it plays within the combined services provided In its role of business promotion company (BPC), it helps the business fabric in its environment mainly through equity participation. Name of the organisation of the Group KARTERA 4, S.A. (before ADEFISA LEASING - E.F.C., S.A.) Role it plays within the combined services provided Its mission is the acquisition, possession, use, management and trading, property and shares provided by self, with the exception of intermediation, excluding activities under the laws of the Securities Market and IIC's. Name of the organisation of the Group GABINETE EGIA, S.A. (BBK HOLDING: 60%) Role it plays within the combined services provided Its mission is insurance brokering; it can produce, manage and propose the contracting of all kinds of insurance. BBK is the main intermediary agent of the company. Name of the organisation of the Group BBK EMPRÉSTITOS, S.A. Role it plays within the combined services provided Issuer of company promissory notes. GRUPO NEINOR Name of the organisation of the Group Role it plays within the combined services provided Its registered activity is the promotion of residential and industrial real estate. Name of the organisation of the Group FINECO SOCIEDAD DE VALORES, S.A. (DIRECT SHARE BBK: 60%) Role it plays within the combined services provided Its social objective is the carrying out of the activities that the Stock Market Law and specifically the R.D.217/2008 configure as pertaining to investment services companies such as: the reception, transmission and execution of orders from third parties, the negotiation on its own behalf, portfolio management with arrangement of mandates conferred by investors, mediation in the placement of issues and public stock offers and the insuring of the subscription of issues and public stock offers. Name of the organisation of the Group GIIC FINECO S.G.I.I.C., S.A.U. (INDIRECT SHARE BBK: 60%) Role it plays within the combined services provided Manager of collective investment institutions. It currently manages 23 investment funds, 21 SICAVs and 1 Pension Fund. Page 44

258 Name of the organisation of the Group FINECO PREVISIÓN EGFP, S.A.U. (INDIRECT SHARE BBK: 60%) Role it plays within the combined services provided Pension Fund Management. It currently manages 1 Pension Fund. Name of the organisation of the Group FINECO PATRIMONIOS SGIIC, SAU (INDIRECT SHARE BBK: 60%) Role it plays within the combined services provided Management of collective investment institutions. Currently manages 7 SICAVs Name of the organisation of the Group PARQUE DE ECONOMÍA SOCIAL BBK SOLIDARIOA, S.L. Role it plays within the combined services provided Its registered activity is the promotion of a business park for social economy enterprises. Name of the organisation of the Group NORBOLSA SOCIEDAD DE VALORES, S.A. ( BBK HOLDING: 45%) Role it plays within the combined services provided Its aim is to carry out the activities that the Stock Market Law and especially R.D. 217/2008 configure as belonging to investment service companies such as: the reception, transmission and execution of orders of third parties, negotiation on its own behalf, portfolio management with arrangement of mandates conferred by investors, mediation in the placement of issues and public stock offers and the insuring of the subscription of issues and public stock offers. Name of the organisation of the Group BIHARKO ASEGURADORA, COMPAÑÍA DE SEGUROS Y REASEGUROS, S.A. (BBK HOLDING: 50%) Role it plays within the combined services provided Its mission is the execution of insurance and reinsurance in all branches of the insurance business except life insurance, including reinsurance activity in the branches in which it operates in direct insurance. The BBK network of branches is the direct banking channel for its insurance activities Name of the organisation of the Group BIHARKO VIDA Y PENSIONES CÍA DE SEGUROS Y REASEGUROS, S.A. (BBK HOLDING: 50%) Role it plays within the combined services provided Its mission is the execution of operations in any life and capitalisation insurance and reinsurance modality, including the operations involving the management of collective retirement funds. It also manages pension funds in its capacity as a managing organisation. The main system of distribution of the business by the banking channel through the branches of its shareholders. Name of the organisation of the Group BANCO BILBAO BIZKAIA KUTXA, S.A. (KUTXABANK, S.A.) Role it plays within the combined services provided Financial institution (Inactive in 2011) Page 45

259 E.2. State the geographical distribution of the network of branches: Autonomous Community Number of Branches Basque Country 236 Madrid 63 Valencia 32 Andalusia 26 Cantabria 12 Aragon 8 La Rioja 5 Castile La Mancha 5 Murcia 3 Navarra 4 Catalonia 1 Total 395 E.3. Identify the members of the governing bodies who assume administration or management posts in organisations which form part of the Group of the Savings Bank: Name of the member of the governing body Registered name of the organisation of the Group MR.ANGEL LOBERA REVILLA BBK EMPRÉSTITOS, S.A. CHAIRMAN OF THE BOARD. MR. JOSEBA KOLDO ALZAGA MURUAGA BBK EMPRÉSTITOS, S.A. MEMBER OF THE BOARD. MR. IÑAKI AZKUNA URRETA BBK EMPRÉSTITOS, S.A. MEMBER OF THE BOARD. MS. ALAITZ ETXEANDIA ARTEAGA BBK EMPRÉSTITOS, S.A. MEMBER OF THE BOARD. MS. MIREN JOSUNE IGLESIAS MARIÑELARENA BBK EMPRÉSTITOS, S.A. MEMBER OF THE BOARD. MS. AITZIBER IRIGORAS ALBERDI BBK EMPRÉSTITOS, S.A. MEMBER OF THE BOARD. MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ BBK EMPRÉSTITOS, S.A. MEMBER OF THE BOARD. MR. JON IÑAKI ZABALIA LEZAMIZ BBK EMPRÉSTITOS, S.A. Post MEMBER OF THE BOARD. MR. MARIO FERNANDEZ PELAZ KARTERA 1, S.L. CHAIRMAN OF THE BOARD. MR. JOSEBA KOLDO ALZAGA MURUAGA KARTERA 1, S.L. MEMBER OF THE BOARD. MR. IÑAKI AZKUNA URRETA KARTERA 1, S.L. MEMBER OF THE BOARD. MS. ALAITZ ETXEANDIA ARTEAGA MS. MIREN JOSUNE IGLESIAS MARIÑELARENA KARTERA 1, S.L. KARTERA 1, S.L. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MS. AITZIBER IRIGORAS ALBERDI KARTERA 1, S.L. MEMBER OF THE BOARD. MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ MR. ÁNGEL LOBERA REVILLA MR. JON IÑAKI ZABALIA LEZAMIZ KARTERA 1, S.L. KARTERA 1, S.L. KARTERA 1, S.L. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. Page 46

260 MR. MARIO FERNANDEZ PELAZ MR. JOSEBA KOLDO ALZAGA MURUAGA MR. IÑAKI AZKUNA URRETA MS. ALAITZ ETXEANDIA ARTEAGA MS. MIREN JOSUNE IGLESIAS MARIÑELARENA MS. AITZIBER IRIGORAS ALBERDI MR. JOSÉ MARÍA IRUARRIZAGA ARTARAZ MR. ÁNGEL LOBERA REVILLA MR. JON IÑAKI ZABALIA LEZAMIZ KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. KARTERA 2, S.L. CHAIRMAN OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. MEMBER OF THE BOARD. F RISK CONTROL SYSTEMS F.1. State the risk control systems related to the activities carried out by the Organisation. The BBK has risk control systems suited to the activities and business in which it operates and the risk profile to be assumed. There is a specific delimitation of the main types of risk managed and each one receives a different treatment. In general terms, all the risk control frameworks in place respond to general guidelines relating to the risk management cycle: -Identification of the main sources of risk and classification within a standardized typology. -Assignation of risk management responsibilities to the different levels. -Establishment of policies and objectives. -Evaluation and measurement of the importance of the different types of risks. -Implementation of management procedures and methodologies (admission, follow up, transfer and mitigation, recovery) -Elaboration and dissemination of the relevant information: regulations reporting and management. -Documentation and formalisation of control frameworks. As a result of the publication of the New Basel Capital Accord in 2004, know as Basel II, and of the entering into force of Bank of Spain Circular 3/2008, a process has been undertaken to adapt the risk management infrastructure of credit entities to the new regulatory requirements. In recent years a number of different regulatory projects have been developed aimed at strengthening the national and international financial system. In this regard, in December 2010 the Basel Committee published a new Capital Accord, known as the Basel III, which is expected to enter into force at the beginning of 2013 and the fundamental aim of which is to increase and enhance the quality of capital held by credit institutions in order to deal with potential losses deriving from their activity. In June 2011 the European Union published the drafts of the corresponding regulatory standards, the final content of which has not been approved to date. Page 47

261 Another key new feature of Basel III is the definition of specific liquidity rates and a leveraging rate. As a preview of the emerging new regulatory standards, during the year Banco de España has approved Circular 4/2011, which amends Circular 3/2008, introducing new features relating to, among other matters, the computability of hybrid capital instruments, the treatment of securitisations and counterparty risk in derivatives transactions and also establishing new reporting requirements regarding remunerations policy and the cash flow situation of institutions. During recent fiscal years, BBK has introduced important novelties in its risk management framework, with regards its internal governance as well as the methodology employed with the aim of adapting its management to the new abovementioned regulations, as well as to the best practices commonly accepted in the business. A brief summary of the main control frameworks implemented in the Entity is provided hereinafter. Credit and counterparty risk In general terms, the management and control systems established to evaluate, mitigate or reduce this type of risk are based on the procedures which are explained below, as well as on prudent policies for the diversification and reduction of concentration on counterparts and the acceptance of guarantees. Analysis and admission process: With the aim of optimizing the combination profitability-risk derived from the relation with each client, the responsibility on risk admission and its later follow-up is shared between business managers and risk analysts, which facilitates the perception of an integral vision of each commercial relationship. Business network managers have a level of personal attributions which are different according to the type of client, risk and guarantee, with a global limit per client. Operations that exceed the functions of branch office management are analyzed by the central Risk departments, where they can be authorized within their attributions or, if it applies, be presented to the Risk Committee for their possible processing at the following levels: General Management, and Executive Commission/ Executive Board. Additionally, the Company has acquired and/or internally developed various scoring and rating tools aimed at the assessment of operations. These tools have reached several degrees of integration in the processes of admission of credit risks. Instrumentation: Treatment of scoring processes and legal support of operations varies depending on whether they are operations with a high degree of standardisation, in which case management is decentralised, or one-off operations, which are dealt with by a specialised central service. Monitoring and Control From business networks, an operational follow-up is carried out that arises from the direct contact with the client and the management of its Page 48

262 daily operations, while the risk analysis departments carry out a more systematic follow up with the help of automatic alerts systems. Risk monitoring systems make it possible to automatically control clients or groups of clients and major risks on an individualised basis, and to undertake a general control by sector based on the different warning signals. Recoveries The establishment of efficient live risk management procedures also permits advantages to be obtained as regards the management of due risks as it makes it possible to have a proactive policy due to the early identification of the cases with a tendency to fall into non-performing loans and their transfer to specialists in recovery management, who determine the types of recovery procedures which should be applied. In addition to the information systems what provide daily information on the individualised and global risk situations, the Entity has developed and implemented a specific recovery management tool, making it possible to join in a single report financial information on the operations and details on the management carried out. The Recovery Unit has agents specialised in monitoring and backup given to the decentralised recovery management in the branches, which include pre-non-performing loans, backup by external specialised companies and attorneys specialised in contentious recovery management. Country Risk This is the credit risk deriving from the likelihood of default caused by direct actions or governments or events linked to the economic policy or political situation of a country. It appears when there is a possible incapacity of a debtor to address his payment obligations in currencies as regards external creditors as the country does not permit access to the currency, or it cannot be transferred or due to the inefficacy of legal actions against the borrower due to reasons of sovereignty. Country risk is a component of credit risk which is incorporated into transnational credit operations. It should be pointed out that the Entity s exposure to this type of risk is minimal. Market Risk Market risk is measured by using methodologies based on the concept of Value at Risk, which allows the uniform measurement of the risks present in the different types of operations in the financial markets to be obtained. The Value at Risk provides an estimate of the maximum potential loss that can result from a position due to an adverse movement of one of the risk factors that has an influence on its estimate. This estimate is expressed in monetary terms and refers to a specific date along a specified time line. Market risk is monitored periodically, by reporting to the control bodies as regards the existing risk levels and compliance with the limits established for each unit. This makes it possible to observe changes in risk levels due to variations in the prices of the financial products and in their volatility. Risk control is complemented with specific simulations and with scenarios Page 49

263 involving extreme market situations (stress testing). The reliability of the Value at Risk methodology used is tested through back-testing techniques, by which a check can be made that the Value at Risk estimations are within the confidence level considered. Structural interest rate risk The management of structural interest rate risk calls for a detailed analysis of the financial exposure of the BBK Group to adverse movements in interest rate curves, including not only the identification and measurement of these risks, but also the proposal of commercial alternatives or coverage designed to attain business objectives in line with the market and balance sheet situation. To achieve this, when interest rate variations arise, BBK performs financial margin sensitivity analyses. In general terms, the techniques which are used to mitigate this risk are based on the contracting of fixed income instruments and financial derivatives as cover for interest rates. In order to measure this risk, several methodologies are used, such as the analysis of the sensitivity of the financial margin over the period of one year with regard to variations in the rates through the interest rate. The ALM is therefore studied, as this lists the volumes of assets and liabilities grouped by their maturity or depreciation periods, depending on whether they are fixed or variable rate instruments, respectively. This analysis makes it possible to estimate the theoretical effect of the variation in the rates of interest as regards the financial margin of the entity in the hypothesis that all the rates vary to the same extent and in a sustained fashion. In addition, the effect of several movements of the rates for different periods is simulated, that is, changes in the slope of the curve. Using simulation techniques, probabilities are assigned for each scenario in order to find out, as near as possible, the effect of possible movements of the interest rates. The qualified decision-making body responsible for structural interest rate risk is the Assets and Liabilities Committee (COAP). Liquidity Risk. Liquidity risk is defined as the possibility of the Group incurring in losses of value as a result of being unable, at any time, to meet its payment commitments to third parties due to a temporary imbalance between immediately realisable assets and current liabilities, and having to bear different costs as a result. This risk can occur as a consequence of the appearance of financial or systems crises, of an eventual deterioration of the markets perception of the Entity s credit quality, or due to an excessive concentration of liabilities falling due. Liquidity risk is associated to the capacity of the BBK to finance the commitments acquired, at reasonable market prices, as well as to carry out its business plans with stable financial sources. The monitoring of liquidity is carried out with independent criteria, differentiating the control functions from those of management. The BBK carries out periodical monitoring of the evolution of the liquid assets and maintains a diversified portfolio of these. Annual forecasts are also carried out in order to anticipate future needs. Page 50

264 At the same time, an analysis is made of the liquidity ALM, analysing the foreseeable differences between inflows and outflows of funds in the short and medium term. In order to mitigate this risk, a determined policy of diversification of the sources of liquidity is followed by accessing the wholesale financial markets through programs for the issue of fixed income securities and securitisation. For these purposes, the BBK Group maintains issues of promissory notes and mortgage bonds and boosts and develops new means of financing, such as the asset-backed securities, which provide additional instruments to facilitate the management of the risk of liquidity within the global limit of indebtedness approved by the General Assembly. Operational Risk The BBK assumes the definition which the Basel Banking Supervision Committee gives regarding operational risk, considering it as the risk of incurring loss as a result of: human error, inadequate or defective internal processes and failure in the systems, or as a result of external reasons. Although its management corresponds to all areas of the Entity, a few years ago a specific unit was set up to take charge of its secondary control. This unit is intended to determine the methodology and design the tools that enable the Entity to identify, control and mitigate sources of risk, irrespective of whether losses have been incurred or not, giving rise to a management framework based on: - A qualitative self-evaluation process of the risk. - Indicators of real and potential losses. - A database of operational losses which have occurred. - Plans of action to be executed. That is, the aim is to have available the methodology and the tools which make it possible to identify the risks by endeavouring to detect them in advance, measure them, monitor them and propose specific actions to mitigate and/or cover them. At the same time, the detailed analysis of the losses which have really occurred due to these types of risks will allow an improvement of the cost/ benefit analysis when deciding on investments with a view to improving the management and control of processes and, even, the optimisation of the contracting of damage and liabilities insurance through the use of a historical database of effective losses due to operational risk. In addition to a unit for secondary control, the operational risk control framework also has the collaboration of a network of coordinators spread throughout the Organisation who, within the area of the different administrative and business processes under their responsibility, undertake the appropriate groundwork. Risk to Reputation The control of risk to reputation has been focused from three areas of action which the BBK considers to be determining: a) Preventing our network of branches from being used to launder money from criminal activity or to finance terrorism. The BBK Group acknowledges the importance of the fight against money laundering, which affects essential aspects of the social life and credibility of the financial system Page 51

265 itself. Strict compliance with legality and the scrupulous respect for ethical principles are the primary objectives as regards the prevention of the use of the products and services of the BBK Group for illicit ends. The Savings Bank has made outstanding efforts to assign human resources and invest in material resources in order to align the BBK Group with the best practice in the financial sector, in this field. The creation of new work teams, the design of specific control procedures, the development of specialised computer applications, and the training given to the staff permits it to comply properly with its social commitment. To this end, the BBK has the following: - An Internal Control and Communication Body, which directs and supervises the policy on the prevention of operations or events related to money laundering and the financing of terrorism, and is responsible for notifying the supervisory authority of suspicious operations. - The Unit for the Prevention of Money laundering, which acts in accordance with the guidelines laid down by the Internal Control Body. It is specialised in the detection, analysis and monitoring of suspicious operations. - A computerised procedure for the massive, automated tracking of operations, which sends warnings for analysis by the specialised unit. - Persons Responsible for Prevention at Branches, Centres, and Affiliates, who are in charge of supervising compliance with legislation and the internal rules on the prevention of money laundering. - A continual staff training method, which permits the integration and application of the internal rules and procedures of the Group in this regard. b) Measures intended to ensure compliance with the diverse regulations the activity of the BBK Group is subject to: The Control Area is present in the processes for generating products in order to check whether they are in accordance with the norms regulating their activity, especially as regards transparency and the protection of the clientele, the markets and personal data. c) Measures intended to verify that conduct is in accordance with the principles established by our Code of Conduct and to encourage its development through the adoption of criteria and procedures which are integrated into the in-house norms of work. The operations in the securities markets made by employees, Directors and others are to be declared systematically and controlled by the Management. Transfer of Assets and Liabilities of Caja de Ahorros y Monte de Piedad de Córdoba: On 21 May 2010, in accordance with Law 26/1988 on discipline and intervention of credit institutions and article 7 of Royal Decree 9/2009 of 26 June on bank restructuring and credit institution equity reinforcement, the Banco de España Executive Committee agreed to the substitution of the Caja s Administrators and from then up to 31 December 2010 the Caja was administrated by the Fund for Orderly Bank Restructuring (FROB). On 4 June 2010 the Fund for Orderly Bank Restructuring (FROB) promoted Page 52

266 a competitive process with several credit institutions which concluded on 15 July 2010, wherein its Governing Commission drew up a Restructuring Plan for CajaSur and its Group entailing the transfer of all of its assets and liabilities to a subsidiary of Bilbao Bizkaia Kutxa (BBK Bank CajaSur, S.A.U.). On 1 January 2011 BBK Bank CajaSur, S.A.U. subrogated all the rights and obligations of CajaSur. During 2011 the Group has developed and begun to implement a plan to adapt all the Group s methodologies, policies and procedures to those of BBK Bank CajaSur, S.A.U. Integration of an IPS for BBK, Kutxa and Caja Vital. On 30 June 2011 the Boards of Directors of BBK, Caja de Ahorros y Monte de Piedad de Gipuzkoa y San Sebastián (hereinafter Kutxa ), Caja de Ahorros de Vitoria y Álava (hereinafter Caja Vital ), and Kutxabank, S.A. (hereinafter the Bank ), approved the integration contract for the incorporation of a contract-based consolidated group of credit institutions (Institutional Protection System, or IPS), the leading entity of which shall be the Bank and which will also encompass BBK, Kutxa and Caja Vital (hereinafter jointly referred to as the Savings Banks ). Once the operation was approved by the general assemblies on 22 December 2011, the Savings Banks and the Bank issued the corresponding deeds of segregation of the financial businesses of the savings banks and their contribution to Kutxabank, S.A. These deeds have been registered in the Bizkaia Companies Register on 1 January At present a project is underway to standardise and adapt the methodologies, policies and procedures of the new Group to the new requirements. F.2. Provide details of the risks covered by the system, together with the justification of the adaptation of the risk control systems adopted to the profile of the Bank, taking into account the structure of equity. Details of the risk management principles adopted by the entity are set forth below, including those aspects that have been considered fundamental for the determination of their risk profile. 1.The Entity considers that maintaining an appropriate risk profile constitutes a key element of its business model, on the basis of its social responsibility, since ultimately this is the best guarantee of continuity for its activities and, therefore, of its contribution to society. 2. The suitability of a risk profile is determined by a coherent relationship between the magnitude and complexity of the risk exposure, the technical capacity available for its proper control and management, and the level of own funds credited. The Entity is committed to permanently keeping a balance relationship between the three elements. 3. The ultimate responsibility regarding risk management in the Entity corresponds to its highest governing bodies and, more specifically to its Board of Directors. Page 53

267 4. The Board of Directors must establish the principles and policies that set out the lines of action to be followed by the Entity in the management of its global risk profile, including guidelines for capital planning. Moreover, when necessary, specific policies will be approved for the most relevant types of risk. In any event, the principles and policies adopted shall be revised and updated periodically. 5. Due to the variety and heterogeneity of the risks that the Entity could be exposed to, the Board of Directors must delimit the different areas into which it divides its management as accurately as possible. This delimitation shall combine the adoption of an official definition for each risk type by selecting its boundaries of action (individual, consolidated, etc.), in such a way that all the types of risk shall be allocated to a specific management area. 6. All of the delimited management areas shall consider the risk as a possibility that the Entity incur, for the reasons set forth in each category, a loss of value. Therefore, it is necessary to deal not only with the more or less explicit losses from an accounting point of view, but also with ultimate situations of loss of profit, and possible drops in the actual value of the Entity s different assets, regardless of their accounting impact. 7. The Board of Directors must provide the Entity with an organisational structure that is sufficient in terms of risk management, so that the responsibility that falls on each area of management is allocated transparently and accompanied by sufficient technical and human resources to undertake the functions assigned. In this point, special attention should be paid to avoiding conflicts of interest deriving from the coexistence in one single unit of business functions and control functions of the risks deriving from same. 8. With regards the adequacy of the means destined to risk control, the Company must not take on new activities or initiatives that involve risks that it cannot identify, measure and/or manage. 9. The Entity should make sure that remuneration policy doesn t contain incentives mechanisms which, due to its design or importance, could commit strict implementation of risk corporative judgments by its personnel. 10. The Board of Directors must be permanently informed of the Entity s situation with respect to the exposure, nature and control framework of all the risks to which it is exposed, keeping in each case a level of awareness proportional to the relevance of the risk in question. To do so, it must form part of a regular reporting circuit that guarantees access to relevant quality information on a systematic basis. 11. For some risk management areas, the Board of Directors can delegate part of its functions to certain qualified decision-making bodies that, in virtue of their level of specialisation and availability, can perform the delegated functions with greater effectiveness. The composition, attributions and running of this body must be perfectly specified by the Board of Directors. 12. The control frameworks implemented by the Entity for the management of each type of risk should be sufficiently documented and formalised, both in terms of principles and policies, as well as procedures and operations. 13. The control points implemented by the Company for the management of each type of risk must be sufficiently documented and executed, from a principles and political point of view as well as procedure and operations. 14. In light of the information available on the magnitude of the risks borne, on the one hand, and the management capacity of the control frameworks Page 54

268 in place, on the other, the Entity shall determine its global risk profile by establishing a capital policy, which shall determine the excess of own funds that it wishes to maintain with respect to the regulatory requirements, as well as the mechanisms available to guarantee the forecast levels of solvency. This policy shall be drawn up in a series of corporate solvency objectives and a formal planning of the Entity s solvency situation, which shall include exercised to evaluate the financial soundness of the Entity in the face of eventual crisis scenarios. 15. The Entity should have contingency plans establishing the actions to be taken in the event that certain eventualities arise affecting critical elements of its activity. 16. The Entity must verify the effective compliance with the policies drawn up and the procedures set forth, as well as the soundness of the tools used and the quality of the information handled by means the regular independent auditing of the control frameworks in place, within the parameters set by the principle of proportionality. F.3. In the event that any of the risks which affect the Savings Bank and/or its Group have materialised, state the circumstances which led to these and whether the control systems set up functioned. The global financial crisis has caused an overall decline in the credit ratings of credit institution risks. However, in the specific case of BBK, the increase in the non-performing loans ratio has been moderate, reaching 2.85% at the end of Subsequent to the integration of the CajaSur business, this rate has levelled off at 8.85%. Nevertheless, the Group has one of the highest non-performing loans coverage ratios in the Spanish financial system. The slight increase in non-performing loans in BBK demonstrates its adaptation to credit risk management in a period in which control policies and systems are really being put to the test. This conclusion refers to situations of bankruptcy and resource to state aids that have been needed by top level international companies and the average delinquency rates registered in the Spanish financial system, which are around double of those registered in BBK. This impression has been reinforced by the slight relative weight reached by the portfolio in assets adjudicated, as well as by the strict criteria followed in the accounts classification of delinquency and in the allocation of credit. The rigorous application of the said criteria has affected the income statement of the BBK Group, the attributed profit of which has registered a decrease around 15%. With regards the market risk, during 2011 the national stock market was severely affected by the uncertainties of the sovereign risk of certain countries, among which is Spain. However, the effect on the BBK Group was not significant, due to its policy of permanent investment in non-cyclic sectors, and with its policy of developing the industrial fabric of its natural markets. This policy has permitted BBK to maintain the recurrence of its accounting profits linked to the timely rotation of its long term variable yield strategic investment portfolio. The operational risk has been having a very discreet effect on the overall results of the Group. As a conclusion and in general, we can state that the qualitative and quantitative management tools have functioned correctly and have not been compromised nor the profitability or solvency of the Group. Page 55

269 F.4.State whether there is a commission or another governing body in charge of establishing and supervising these control mechanisms and list their functions. BOARD OF DIRECTORS Name of the body responsible Functions of the body responsible This is the body delegated by the general assembly which is entrusted with the financial administration and management of the organisation and is, therefore, responsible for the establishment of the general guidelines on the organisational distribution of the functions of risk management and control, as well as determining the main strategic lines in this regard. EXECUTIVE COMMITTEE Name of the body responsible Functions of the body responsible This is the permanent body for the management and administration of the Savings bank and it acts as a delegation of the Executive Board, to which it is responsible. Name of the body responsible CONTROLLING COMMITTEE Functions of the body responsible This is the permanent body delegated by the assembly for the supervision and monitoring of the Board of Directors and the Executive Committee. Its objective is to take care that their management is carried out with the maximum efficacy and precision, within the general lines of action laid down by the general assembly and the guidelines from financial legislation. Besides the generic function of supervising and monitoring mentioned above, the controlling committee has the following specific functions as regards risk or the risk control units: - The analysis of the economic and financial management of the organisation; it will provide the treasury and finance department of the Basque government and the general assembly, halfyearly, with information on this analysis. - The analysis of the adaptation to the legislation in force, to the by-laws and to the guidelines of the general assembly, with a special analysis of the following matters: the economic and financial management of the savings bank, the general policy on risk and its cover, monitoring of the supervision and internal control teams and the internal auditing teams - Proposing the appointment of external auditors to the board of directors and studying the reports and recommendations of these auditors. Contacting the external auditors in order to receive whatever information is required on any issues. PRESIDENCY COMMITTEE Name of the body responsible Functions of the body responsible This is the maximum body within the scope of the management team of the Company. It is formed by the President of the Savings Bank, together with those responsible for the four general directorates and of the area of General Secretariat and Legal Counseling. It accepts delegated responsibility in matters of risks that do not have a specific committee: global risk, reputation risk, strategic risk and pension risk. RISK COMMITTEE Name of the body responsible Functions of the body responsible This is the body responsible for revising and analyzing the risk proposals that will later pass to the Executive Commission or the Executive Board, as well as establishing and validating the policies and criteria to be followed when taking on credit risks. It takes on the delegated responsibility of the following risk types: credit risk, counterpart risk, concentration risk and country risk. Page 56

270 Name of the body responsible ASSETS AND LIABILITIES COMMITTEE Functions of the body responsible It is the body which supports the weight of the financial policy of the Savings Bank. It takes on the delegated responsibility of the following risk types: liquidity risk, market risk, structural risk of interest rate and structural risk of exchange rate. Name of the body responsible OPERATIONAL RISK COMMITTEE Functions of the body responsible This specialized body takes care of operational risk management in the Group, ensuring that the policies laid down by the Board of Directors are effectively implemented and carrying out a follow up on the level of risk involved and the activities carried out for its identification, mediation and control. Name of the body responsible REGULATIONS COMPLIANCE COMMITTEE Functions of the body responsible This special body takes on the responsibility of the risk of regulations compliance in the Group (excluding the part related to the prevention of money laundering), ensuring that the policies laid down by the Board of Directors are effectively implemented and carrying out a follow up on the level of risk involved and the activities carried out for its identification, mediation and control. Name of the body responsible INTERNAL CONTROL BODY Functions of the body responsible This body has been created with the aim of providing a response to the existing regulation demands with relation to the prevention of money laundering operations within the Group. F.5. Identification and description of the processes for complying with the regulations which affect the Savings Bank and/or its Group. There are multiple financial, stock market, accounting, fiscal, employment, environmental and legislative regulations as well as ethical rules which the BBK implements through its organisational structure and the separation of functions as regards the proper procedures and resources in order to ensure compliance with the regulations which affect it. Ensuring that BBK s operations comply with the regulations is a fundamental part of risk control as described above in points F.1 and F.2. Page 57

271 G ANNUAL REPORT DRAFTED BY THE INVESTMENTS COMMISSION OF THE SAVINGS BANK REFERRED TO IN SECTION 20 TER OF ACT 31/1985, OF AUGUST 2, ON THE REGULATION OF THE BASIC RULES OF THE GOVERNING BODIES OF SAVINGS BANKS. G.1. Fill in the following chart on the acquisitions or sales of significant holdings in listed companies made by the Savings Bank during the financial year, either directly or through organisations in its own Group. Amount (thousands of Euros) Investment or divestment Date of execution of the operation Organisation which is the subject of the investment or divestment Direct and indirect holding of the Savings Bank after the operation Date of issue of the report and pronouncement of the Investments Commission on the financial feasibility and adequacy of the budgets and strategic plans of the organisation G.2. Fill in the following chart on the investments and divestments in company projects involving a presence in the company management or in its governing bodies made by the Savings Bank during the financial year, either directly or through organisations in its own Group. Amount (thousands of Euros) Investment or divestment Date of execution of the operation Organisation which is the subject of the investment or divestment Direct and indirect holding of the Savings Bank after the operation Date of issue of the report and pronouncement of the Investments Commission on the financial feasibility and adequacy of the budgets and strategic plans of the organisation 800,000 Investment BBK BANK CAJASUR, S.A FAVOURABLE REPORT 21 Investment PROMEGA RESIDENCIAL, S.L FAVOURABLE REPORT 882 Investment TALDE CAPITAL II, F.C.R FAVOURABLE REPORT 2 Investment SOCIEDAD PROMOTORA BILBAO GAS HUB, S.L FAVOURABLE REPORT 75 Investment ISDABE, S.A FAVOURABLE REPORT 3 Investment SOCIEDAD ESPAÑOLA DE SISTEMAS DE PAGO, S.A. 21,782 Divestment ARCERLORMITTAL SESTAO, S.A FAVOURABLE REPORT FAVOURABLE REPORT 55,438 Divestment IBERDROLA, S.A FAVOURABLE REPORT Page 58

272 1,040 Divestment ALOKABIDE, S.A FAVOURABLE REPORT 258 Investment TALDE CAPITAL II, F.C.R FAVOURABLE REPORT 49 Investment PROMEGA RESIDENCIAL, S.L FAVOURABLE REPORT 1,600 Investment AZORA EUROPA II, S.A FAVOURABLE REPORT 2,700 Investment LAZORA II, S.A FAVOURABLE REPORT 203,311 Divestment IBERDROLA, S.A FAVOURABLE REPORT 40 Investment TALDE CAPITAL II, F.C.R FAVOURABLE REPORT 49 Investment PROMEGA RESIDENCIAL, S.L FAVOURABLE REPORT 564 Investment TALDE CAPITAL II, F.C.R FAVOURABLE REPORT 18,050 Investment BANCO BBK, S.A FAVOURABLE REPORT 1 Divestment SOCIEDAD PROMOTORA BILBAO GAS HUB, S.L FAVOURABLE REPORT 490 Investment ORUBIDE, S.A FAVOURABLE REPORT 1,050 Investment LAZORA II, S.A FAVOURABLE REPORT 210 Investment MONDRAGÓN EMPRESARIAL SPE, S.A. 11 Investment PROMEGA RESIDENCIAL, S.L. 11 Investment PROMEGA RESIDENCIAL, S.L. 4,508 Investment BIHARKO VIDA Y PENSIONES CIA DE SEGUROS Y REASEGUROS, S.A. 1,202 Investment BIHARKO ASEGURADORA CIA DE SEGUROS Y REASEGUROS, S.A FAVOURABLE REPORT FAVOURABLE REPORT FAVOURABLE REPORT FAVOURABLE REPORT FAVOURABLE REPORT 2,035 Divestment SERVATAS, S.A FAVOURABLE REPORT 827 Divestment LUZARO ESTABLECIMIENTO FINANCIERO DE CRÉDITO, S.A FAVOURABLE REPORT G.3. Provide details of the number of reports issued by the Investments Commission during the financial year. Number of reports issued 9 Page 59

273 G.4. State the date of approval of the Annual Report of the Investments Commission. Date of report H REMUNERATION RECEIVED H.1. State in aggregate terms the remuneration received by the key management staff and by the Members of the Board of Directors in their capacity as Directors: Remuneration Amount (thousands of euros) Salaries and other similar remuneration 4,161 Obligations contracted as regards pensions or the payment of 359 premiums for life insurance H.2. Fill in the following charts with the attendance expenses in aggregate terms, as well as similar remuneration: a) Board of Directors: Remuneration Amount (thousands of euros) Attendance expenses and other similar remuneration 123 b) Controlling Committee: Remuneration Amount (thousands of euros) Attendance expenses and other similar remuneration 32 c) Salaries Commission: Remuneration Amount (thousands of euros) Attendance expenses and other similar remuneration 0 d) Investments Commission: Remuneration Amount (thousands of euros) Attendance expenses and other similar remuneration 0 Page 60

274 H.3. State the remuneration received in aggregate terms by the Members of the Governing Bodies and the Directors representing the Savings Bank in listed companies or in other organisations in which it has significant presence or representation: Remuneration received (thousands of euros) 0 H.4. Identify the guarantee or protection clauses for cases of dismissal, resignation or retirement as regards the key management staff and the Members of the Board of Directors in their capacity as Directors in aggregate terms if these clauses exist in your Group or Savings Bank. State whether these contracts must be communicated or approved by the bodies of the Savings Bank or your Group: Number of beneficiaries Body which authorises the clauses Board of Directors General Assembly Is the General Meeting informed of these clauses? YES NO I SHARES I.1. If possible, fill in the following chart on the shares of the Savings Bank: Date of last modification Total number (thousands of euros) Number of shares In the event that there are different types of shares, state this in the following chart: Type Number of shares Nominal amount per unit I.2. Provide details of the direct or indirect holders of shares who represent a percentage which is equal or greater than 2% of the total number of shares of your organisation outstanding at the close of the financial year, excluding the Members of the Board: Name or registered name of the shareholder Number of direct shares Number of indirect shares (*) Total % of the total number (*) Through: Name or registered name of the direct shareholder Number of direct shares Total % of the total number Total: Page 61

275 State the most relevant movements in the structure of the number of shares which occurred during the financial year: Name or registered name of the shareholder Date of operation Description of the operation I.3. Fill in the following charts on the Members of the Board of Directors who hold shares in the Savings Bank: Name Number of direct shares Number of indirect shares (*) Total % of the total number (*) Through: Name or registered name of the direct shareholder Number of direct shares Total: Total % of the total number of shares in the hands of the Board of Directors I.4. Fill in the following charts on the treasury stock of the Savings Bank: On the date the financial year closed: Number of direct shares Number of indirect shares % of the total number of shares (*) Through: Registered name of the direct shareholder Number of direct shares Total: Earnings obtained in the financial year for treasury stock operations (in thousands of euros) 0 Page 62

276 I.5. Explain the conditions and the period(s) for the authorization(s) of the Assembly given to the Board of Directors so that it can carry out the acquisitions or transfers of own shares described in the previous section. J LEVEL OF MONITORING OF THE RECOMMENDATIONS ON GOOD GOVERNANCE On the date this report is drawn up, if there are no generally accepted recommendations on good governance which take into account the legal nature of the Savings Banks, describe the practices of corporate governance which the organisation has to comply with by legal obligation and the additional practices which the Savings Bank has imposed on itself. In the event that, on the date of the drawing up of this report, there are generally accepted recommendations regarding good governance which take into account the legal nature of the Savings Banks, state the level to which the organisation complies with the existing recommendations on corporate governance, or that these recommendations have not been assumed. In the event of failing to comply with any of these, explain the recommendations, rules, practices or criteria applied by the Organisation. Despite the fact that, until the date of the drafting of this Annual Report, there are no generally accepted recommendations for good governance which take the legal nature of the Savings Banks into account, some time ago, the BILBAO BIZKAIA KUTXA established the actions regarding transparency and good corporate governance which are described below in accordance with the following legislative information: Section 3 of Royal Decree 629/1993, of May 3 (currently repealed by Royal Decree 217/2008, of 15 February), on the Regulations for Acting on the Securities Market, determines that all the organisations referred to in Section 1 of these Regulations, among which are the Savings Banks, must draw up Internal Regulations of Conduct which must be complied with and will regulate the actions of its administration, employee and representative bodies. Furthermore, Additional Provision four of Act 44/2002, of November 22, lays down the obligation that the Savings Banks issuing securities as well as other subjects must send the National Commission of the Stock Market the Internal Regulations of Conduct, which incorporate the content of Sections 82, 83 and 83 bis, of the Securities Market Act (Act 24/1988, of July 28) besides the stipulations contained in the implementation rules which develop the aforementioned Act 44/2002. Section 47 of the aforementioned Act 44/2002, of November 22, on Measures for the Reform of the Financial System, lays down the creation of the Audit Committee, and explains its competences. Section 98 of Act 62/2003, of December 30, establishes that, as regards the Savings Banks which issue securities admitted on the official secondary securities markets, the functions of the Audit Committee can be assumed by the Controlling Committee. Page 63

277 Section 29 of the aforementioned Act 44/2002 establishes the obligation for Savings Banks and other organisations to have a Customer Attention Department or Service responsible for attending to and resolving complaints and claims. Order ECO/734/2004, of March 11, on the Customer Departments and Services and the Ombudsman of financial institutions regulates the requirements and procedures which the Customer Attention Departments and Services must comply with. Law 26/2003 of 17 July in its 2nd additional provision (currently repealed by Royal Decree 11/2010 of 9 July) establishes the obligation for the Savings Banks which issue securities which are negotiable on official markets to annually publish a Corporate Governance Report, whose minimum content is developed in this additional provision. This Annual Corporate Governance Report will be sent to the National Stock Market Commission. Through Circular 2/2005 of April 21, the National Stock Market Commission making use of the authorisation granted by the Ministry of Economic Affairs establishes that the Annual Corporate Governance Report of the Savings Banks obliged to comply with this obligation will follow the model attached as Annex I to the Circular as regards content and structure. In Chapter II of this Circular it also provides a breakdown of the minimum obligatory and discretional content of the web sites of Savings Banks. Royal Decree 11/2010 added a 4th Section to Law 31/1985 of 2 August on basic regulations pertaining to the Governing Bodies of Savings Banks (LORCA), by virtue of which Savings Banks are required to issue annual Corporate Governance Reports with the minimum content established in article 31bis of LORCA. Act 26/2003, of July 17, modifies Act 31/1985, of August 2, on the regulation of the basic rules for the governing bodies of Savings Banks, and introduces Sections 20 bis and 20 ter. Section 20 bis determines that the Board of Directors of Savings Banks must constitute a Salaries Commission whose function will be to inform on the general salaries and incentives policy for the posts on the Board and for the management staff. Section 20 ter. obliges the Board of Directors of Savings Banks to constitute an Investments Commission whose function will be to propose to and inform the Board as regards the investments and divestments of a strategic and stable nature made by the Savings Banks. Royal Decree 11/2010 added a further article, 27bis, to Law 31/1985 (LORCA), ratifying the obligation of Savings Banks to set up a Remunerations and Appointments Committee or, if applicable, two separate committees for remunerations and appointments, respectively. ACTIONS OF THE BILBAO BIZKAIA KUTXA At a meeting held on April 22, 1993, the Board of Directors unanimously approved the "Rules of Conduct of the Members of the Governing Bodies and the Management Team of the Bilbao Bizkaia Kutxa", which, literally transcribed, state the following: - While carrying out their functions, all the Members of the Governing Bodies will act for the exclusive benefit of the interests of the BILBAO BIZKAIA KUTXA, within the framework of the social function of the Savings Page 64

278 Bank, and these interests will prevail over all others. - The exercise of these functions will be carried out with the strictest respect for the legal and administrative regulations laid down. - All the Members of the Governing Bodies, as well as the Managers who attend the meetings of the Board of Directors, the Executive Committee and the Controlling Committee will maintain absolute secrecy as regards the deliberations and agreements which these might adopt, without prejudice to the obligations to inform the competent Public Administrations as stated in Article 13 of the Articles of Association. This obligation will remain in force even after their appointments have ceased. Any transgression of this obligation will be deemed to be a serious infringement, and will constitute incompatibility as regards holding the post of General Director, without prejudice to the responsibilities of any other kind which might be required. - The Members of the Governing Bodies and the Managers will refrain from commenting on or disclosing confidential information on the BILBAO BIZKAIA KUTXA or on any of its clients. Confidential information will be deemed to be the information which the general public does not have access to. In order to comply with the stipulations of Royal Decree 629/1993, at a meeting held on November 25, 1993, the Board of Directors unanimously approved the "Internal Regulations on Conduct of the Bilbao Bizkaia Kutxa", which regulates the actions of its Directors, employees and representatives on the Securities Markets. Subsequently, the Board of Directors, in a meeting held 23 October, 2008, unanimously agreed to become a party to the Internal Regulations on Conduct in the Area of the Securities Markets, drawn up by the Spanish Confederation of Savings Banks and to notify the National Commission of the Stock Market of this. Action which supposes the adaptation of the Internal Regulation to the regulatory requirements stemming from Law 44/2002, of 22 November, the reform measures of the Financial System, especially concerning: (i) privileged information, (ii) relevant information and (iii) Market abuse. In relation to the stipulations of Section 47 of Act 44/2002, of November 22, and in order to comply with its content, at a meeting held on April 3, 2003, the Executive Committee of the BBK, by delegation of the Board of Directors, agreed to attribute the powers of the Audit Committee, which are listed in additional Provision 18 of Act 24/1988, of July 28, on the Stock Market, to the Controlling Committee. These functions were also conferred on the Controlling Committee statutorily in the modification of the Articles of Association agreed to by the General Assembly of the BBK, at a meeting held on December 13, 2003 and approved by a resolution of the Under-Minister of Treasury and Finance of the Basque Government on January 9, By delegation of the Board of Directors, at a meeting held on July 15, 2004, the Executive Committee of the BBK adopted, inter alia, the agreement to approve the Procedures Regulations for the Customer Attention Service for the BBK Group, composed of the Savings Bank itself, Adefisa Leasing EFC and BBK Gestión, the company managing the Collective Investment Institutions. These regulations were approved by a resolution of January 5, 2005 of the Under-Minister of Treasury and Finance of the Basque Government. Page 65

279 In order to comply with the stipulations in Circular 2/2005, of April 21, of the National Stock Market Commission (Spanish Official Gazette 29/04/2005), BBK drafted this Annual Report on Corporate Governance. This Annual Report on Corporate Governance will be published as an outstanding event on the BBK web site. Finally, it should be mentioned that, in order to comply with the stipulations in Act 26/2003, at a meeting held on May 27, 2004, the BBK Board of Directors agreed to constitute the (I) Investments Commission and (II) the Salaries Commission and to approve the Regulations for their functioning. K OTHER INFORMATION OF INTEREST If you consider that there is a relevant principle or aspect related to the practices of Corporate Governance applied by your organisation which has not been addressed by this Report, comment and explain its content. 1.- Integration of BBK into a contract-based consolidated group of credit institutions On 30 June 2011 the Board of Directors of BBK approved the integration contract for the incorporation of a contract-based consolidated group of credit institutions, the leading entity of which shall be KUTXABANK, S.A. The consolidated group also comprises BBK, Caja de Ahorros y Monte de Piedad de Guipuzcoa- Gipuzkoa eta Donostiako Aurrezki Kutxa (KUTXA) and Caja de Ahorros de Vitoria y Álava- Araba eta Gasteizko Aurrezki Kutxa (VITAL). The Extraordinary General Assembly held on 16 September 2011 approved: (i) the BBK segregation project in favour of the now KUTXABANK, S.A. and (ii) the integration contract signed on 30 June 2011 by BBK, KUTXA and VITAL. The Ordinary General Assembly held on 20 October 2011 agreed to approve the modifying novation of the integration contract signed on 30 June 2011, to which the previous paragraphs refer. On 1 January 2012, having fulfilled all the legal requirements and obtained all the necessary authorisations the public deeds were registered in the Bizkaia Companies Register defining the segregation of the financial businesses of: (i) BBK; (II) Kutxa and (iii) Vital. Thus, since 1 January 2012, BBK has been integrated as a consolidated group of credit institutions, the parent entity of which is Kutxabank, S.A. and now performs its activity as a credit institution through Kutxabank, S.A. Closely related to the above, the Board of Directors of BBK, at its meeting held on 29 December 2011, agreed to dismiss the following Managing Directors from their posts as such, taking legal effect from 1 January 2012: (i) Mr. Ignacio Sánchez- Asiaín Sanz; (ii) Mr. Fernando Irigoyen Zuazola and (iii) Ms. Alicia Vivanco González. 2.- Clarification to section A.1.2. Breakdown of the General Assembly based on members groups The Managing Director in representation of the staff, Mr. Guzmán Ruiz Garro, and his substitute, resigned from their respective posts in October Hence, at 31 December 2011 the staff of BBK have six Managing Directors as opposed to the seven legally corresponding to said social interest. Page 66

280 3.- Clarification of the section A.2.4 General Direction: The four General Directors, related in the section A.2.13 ( D. Ignacio Sánchez-Asiain Sanz; D. Juan María Sáenz de Buruaga Renobales, D. Fernando Irigoyen Zuazola and Dª Alicia Vivanco González) have broad powers delegated in the public deed of power of attorney, limited quantitatively in order to carry out acts of disposition, administration and encumbrance. The clarification made in point 1 above should also be taken into account regarding the termination of three Managing Directors. 4.- Clarification of the section A.3. Control Commission: In accordance with what is laid down in article 51-2 of Law 3/1991, of 8 th November on Savings Banks in the Autonomous Community of Euskadi, the Ministry of the Treasury and Public Administrations of the Basque Government may designate an additional representative. Currently, the representative of the Basque Government is D. Miguel Bengoechea Romero. 5.- Clarification of the section A.3.5. In 2011, the Control Commission held 15 meetings, of which 2 were held in its condition as Electoral Commission. 6.- Notes E.1, E.2 and G of this Annual Corporate Governance Report correspond to the parent Entity and its subsidiaries, with the exception of the BBK Bank CajaSur subgroup, which issues its own Annual Corporate Governance Report, which can be consulted on their website or via the CNMV. This Annual Report on Corporate Governance was approved by the Board of Directors of the Company at its meeting held on State the Members of the Board who have voted against or who have abstained from approving this report. Abstention / vote against Name of the Member of the Board Page 67

281 ADDENDA TO ANNEX I A.1. GENERAL ASSEMBLY A.1.1. GENERAL DIRECTORS GENERAL DIRECTORS Name of the General Director Group he belongs to Date of appointment MS. MARTA AJURIA ARRIBAS FOUNDING PERSONS OR ORGANISATIONS MR. JOSEBA KOLDO ALZAGA MURUAGA FOUNDING PERSONS OR ORGANISATIONS MR. JOAQUIN ARRIOLA PALOMARES FOUNDING PERSONS OR ORGANISATIONS MR. JULIO ARRIOLA PALOMARES FOUNDING PERSONS OR ORGANISATIONS MR. ASIER ATUTXA ZALDUEGI FOUNDING PERSONS OR ORGANISATIONS MR. JOSEBA ANDONI AURREKOETXEA FOUNDING PERSONS VERGARA OR ORGANISATIONS MR. IÑAKI AZKUNA URRETA FOUNDING PERSONS OR ORGANISATIONS MR. JON ANDONI BAÑALES REGULEZ FOUNDING PERSONS OR ORGANISATIONS MR. RICARDO BARKALA ZUMELZU FOUNDING PERSONS OR ORGANISATIONS MR. ANDONI BUSQUET ELORRIETA FOUNDING PERSONS OR ORGANISATIONS MS.MARTA DE LA PEÑA IZAGUIRRE FOUNDING PERSONS OR ORGANISATIONS MR. JOSE MARIA IRUARRIZAGA ARTARAZ FOUNDING PERSONS OR ORGANISATIONS MR. JON LOIZAGA CAYERO FOUNDING PERSONS OR ORGANISATIONS MR. EDUARDO MARIA MAIZ OLAZABALAGA FOUNDING PERSONS OR ORGANISATIONS MR. JAVIER MIRANDA GARATE FOUNDING PERSONS OR ORGANISATIONS MR. JOSE IGNACIO MURO PALACIO FOUNDING PERSONS OR ORGANISATIONS MR. XABIER ORUBE ETXEBESTE FOUNDING PERSONS OR ORGANISATIONS MR. ISABEL SANCHEZ ROBLES FOUNDING PERSONS OR ORGANISATIONS MR. JOSE ANTONIO TARAMONA CAMPO FOUNDING PERSONS OR ORGANISATIONS MR. CARLOS URGOITI REMENTERIA FOUNDING PERSONS OR ORGANISATIONS MR. JESÚS MIRENA ABAUNZA MARTÍNEZ DEPOSITORS MR. IÑIGO ABERASTURI LARRUZEA DEPOSITORS MR. JAVIER ALBERDI IBARBARRIAGA DEPOSITORS MR. PEDRO ALVARADO MADRAZO DEPOSITORS MR. NESTOR ALVAREZ BRAVO DEPOSITORS MS. PILAR ARDANZA URIBARREN DEPOSITORS MR. TOMAS ARRIBAS GREGORIO DEPOSITORS MR. IKER ARRINDA LETONA DEPOSITORS MS. MARÍA ISABEL BADIA URRESTARAZU DEPOSITORS MR. FRANCISCO BERJÓN AYUSO DEPOSITORS MS. AMAIA DEL CAMPO BERASATEGI DEPOSITORS MR. JESUS FERNANDEZ GARCÍA DEPOSITORS MS. MARÍA DEL CAMINO GONZÁLEZ DEPOSITORS CISNEROS MR. KOLDO IMANOL ITURBE MENDILIBAR DEPOSITORS Page 68

282 MR. AITOR ITURRIAGA ZUGAZARTAZA DEPOSITORS MR. FERNANDO LANDA BEITIA DEPOSITORS MR. KARMELO LANDA MENDIBE DEPOSITORS MR. AITOR LANDA ZARRAGA DEPOSITORS MR. ANGEL LOBERA REVILLA DEPOSITORS MR. ALBERTO LOZANO IBARRA DEPOSITORS MR. JOSE ANTONIO LOZANO MURGA DEPOSITORS MS. EMILIA MÁLAGA PÉREZ DEPOSITORS MR. JOSÉ ÁNGEL MARTÍN LARRETA DEPOSITORS MR. ALFREDO JOSÉ MELÉNDEZ DEPOSITORS ASTONDOA MR. JOSU MONTALBÁN GOICOECHEA DEPOSITORS MR. JUAN ISIDRO OTERMIN ERASO DEPOSITORS MS. JONE PARIZA VIDAL DEPOSITORS MR. ZIGOR PASCUAL ZELAIA DEPOSITORS MS. MARÍA CELINA PEREDA RIGUERA DEPOSITORS MS. AINHOA PIELÓ MUGURUZA DEPOSITORS MR. JOSÉ JAVIER PUJANA SANTXOIERTO DEPOSITORS MR. ARMANDO REYES ARREBOLA DEPOSITORS MRS.MARIA VISTORIA RIOL ROJO DEPOSITORS MR. JESÚS MARÍA RODRÍGUEZ ORRANTIA DEPOSITORS MR. KOLDO RUIZ DE MUNAIN MARCAIDA DEPOSITORS MR. JON ANDONI SÁENZ BLANCO DEPOSITORS MS. ANA MARÍA URIBE ZUGADI DEPOSITORS MS. ARANTZA URKAREGI ETXEPARE DEPOSITORS MR. VICTOR URRUTIA ABAIGAR DEPOSITORS MR. JOSE LUIS YUGUERO GÓNZALEZ DEPOSITORS MR. ROBERTO ZARATE AMIGORENA DEPOSITORS MR. JOSEBA MIRENA ZORRILLA IBAÑEZ DEPOSITORS MR. IÑAKI URIONAGUENA ORTIZ DE DEPOSITORS ZARATE MR. AITOR AMUTIO ARANCETA MUNICIPAL CORPORATIONS MR. ENEKO ARRUEBARRENA ELIZONDO MUNICIPAL CORPORATIONS MR. JOSE MARÍA CAZALIS EIGUREN MUNICIPAL CORPORATIONS MS. LOLY DE JUAN DE MIGUEL MUNICIPAL CORPORATIONS MS. LOURDES DE LA PUENTE BRINGAS MUNICIPAL CORPORATIONS MR. JOSEBA ESCRIBANO ETXEBARRIA MUNICIPAL CORPORATIONS MS. ALAITZ ETXEANDIA ARTEAGA MUNICIPAL CORPORATIONS MS. AITZIBER IRIGORAS ALBERDI MUNICIPAL CORPORATIONS MR. RICARDO ITUARTE AZPIAZU MUNICIPAL CORPORATIONS MR. LEANDRO KAPETILLO LARRINAGA MUNICIPAL CORPORATIONS MS. NEREA LARREA ZARATE MUNICIPAL CORPORATIONS MR. DAVID LATXAGA URGARTEMENDIA MUNICIPAL CORPORATIONS MR. XABIER LEGARRETA GABILONDO MUNICIPAL CORPORATIONS MR. PEDRO LOBATO FLORES MUNICIPAL CORPORATIONS MR. ASIER MADARIETA JUARISTI MUNICIPAL CORPORATIONS MR. JOSÉ LUIS MARCOS MERINO MUNICIPAL CORPORATIONS MS. AMAIA MARTÍNEZ RAMOS MUNICIPAL CORPORATIONS MS. YOLANDA OTAZUA OSANTE MUNICIPAL CORPORATIONS MR. GONZALO RIANCHO OCEJO MUNICIPAL CORPORATIONS MR. ANTONIO JULIAN RODRIGUEZ ESQUERDO MUNICIPAL CORPORATIONS MS. AINARA SAN ROMÁN BORDEGARAI MUNICIPAL CORPORATIONS MR. ANTONIO SERRANO CHAMIZO MUNICIPAL CORPORATIONS MR. MANUEL TEJEDA LAMBARRI MUNICIPAL CORPORATIONS MR. MIKEL TORRES LORENZO MUNICIPAL CORPORATIONS MS. MARÍA ÁNGELES ZARRAGA MAIRAL MUNICIPAL CORPORATIONS MS. MARÍA JOSÉ ALDAMA ALCOCEBA MUNICIPAL CORPORATIONS MR. FRANCISCO JAVIER CUÉLLAR CUADRA MUNICIPAL CORPORATIONS MS. NAIARA IBARZABAL ARRASATE MUNICIPAL CORPORATIONS MR. IMANOL LANDA JAUREGI MUNICIPAL CORPORATIONS MR. JOSU URRUTIA VICARIO MUNICIPAL CORPORATIONS MR. AITOR VICANDI ABOITIZ EMPLOYEES MR. ALEX FERNÁNDEZ GONZÁLEZ EMPLOYEES MR. ELOY GARCÍA OLIVEROS EMPLOYEES Page 69

283 MS. MIREN JOSUNE IGLESIAS EMPLOYEES MARIÑELARENA MS. MARÍA DEL MAR MACHO RUBIO EMPLOYEES MR. FRANCISCO JAVIER RUIZ ELIZALDE EMPLOYEES EMPTY EMPLOYEES A In the event that there are Regulations for the Assembly, describe their content: Description A.2. Board of Directors A.2.8. In the event that there are Regulations for the Board of Directors, describe their content. Page 70

284 INTERNAL CONTROL FINANCIAL REPORTING SYSTEM BILBAO BIZKAIA KUTXA 2011 Registered Name: BILBAO BIZKAIA KUTXA (Tax Code G ) Gran Vía Bilbao