Time to return to fundamentals Manuel González Cid, CFO Morgan Stanley, European Financial Conference March 28 th, 202
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Contents 2 From external factors to earnings power Time to return to fundamentals 3 Conclusions 3
Since the beginning of the crisis banks have faced significant challenges Scarce and expensive funding Regulatory changes Increasing capital requirements Deleveraging Sale of core assets Revenue reduction Earnings contraction EPS dilution Lower ROEs Dividend cuts BBVA has been able to adapt quickly and successfully to this changing environment 4
under these extreme circumstances BBVA has proven to be very resilient Operating Income Growth BBVA vs. European Peer Group Aggregate (Change 2006-20, %) 9.5% () (2) ROE BBVA vs. European Peer Group Average () (%, December 20) BBVA 5.2% Peers Aggregate Tangible Book Value Per Share () (Base 00: 2006) BBVA Peers Average 56 0.6% 8.0% Excluding goodwill impairment.2% 06 BBVA Peers Average 2006 2007 2008 2009 200 20 BBVA sought to minimize the potential impact on earnings, profitability and dilution, maintaining dividends and without selling core assets (): Peer Group: BARCL, BNP, CASA, CMZ, CS, DB, HSBC, ISP, LLOYDS, RBS, SAN, SG, UBS and UCI. Figures as of Dec. 20, except for UCI (as of Sept. 20). (2) Excludes UCI. 5
However, rating agencies and analysts continue to associate banking risk with sovereign risk REGULATORY TRENDS Higher and more strict capital requirements (EBA, Basel III, G-SIFI buffer, ) Creation of loss - absorption instruments (CoCos CoCos,, bail-in in debt, ) Living wills IMPACT ON BANKS Full loss absorption by shareholders and debt holders Elimination of implicit sovereign support Equity investors should focus on earnings power and franchise value, which also backs a bank s creditworthiness for debt investors 6
Contents From external factors to earnings power 2 Time to return to fundamentals 3 Conclusions 7
Time to return to fundamentals: BBVA s main levers 2 3 4 Strong dynamism of core revenues in all geographies Investments in the franchise progressively stabilizing Asset quality resilience and absorption of new regulation Strong capital generation and solid liquidity position 8
Time to return to fundamentals Strong dynamism of core revenues in all geographies 9
Core Revenues Dynamism Group: Resilient lending growth with favourable mix change Gross Lending BBVA Group Year-on-year change (%) 4.8% 3.7% Lending (Constant ) 20 vs. 200 change (%) Spain -2% Eurasia 47% Mexico 8% Deleveraging and market share gains Perimeter effect Growth in more profitable portfolios 200 20 South America 27% USA % Strong growth Derisking and selective growth Trends Positive growth and favourable mix change: high growth in emerging markets to offset weaker performance in developed markets 0
Core Revenues Dynamism Group: Recurrent core revenues starting to grow Core revenues () BBVA Group (Constant m) +5.0% +.4% 4,52 4,58 4,234 4,208 4,24 4,38 4,452 4,673 7,48 7,720 Q0 2Q0 3Q0 4Q0 Q 2Q 3Q 4Q 200 20 Trends NII to increase in all geographies and stabilize in Spain Fee Income to return to positive growth in all geographies () Core revenues include: Net interest income and fee income.
Core Revenues Dynamism Spain: Net interest income stabilization due to the reduction of the cost of deposits Core Revenues () ( m) Cost of deposits (households and corporates) New production interest rates (%),746,68,580,542,50,50,432,424 BBVA 2.40 2.43 Spanish Financial System 2.66 2.50 2.47 2.43 2.25 2.5.57.65.88.77 Q0 2Q0 3Q0 4Q0 Q 2Q 3Q 4Q Dec 0 Feb Apr Jun Ago Oct Dec Source: Bank of Spain and internal data Trends Price normalization will be the main driver of net interest income Stabilization of fee income () Core revenues include: Net interest income and fee income. 2
USA: BBVA has successfully performed a business mix transformation Core Revenues Dynamism Lending mix (%) Deposit mix (%) Commercial 4% 49% Time deposits 38% 26% Other loans to individuals 23% 6% Mortgages 4% 26% Transaction Accounts 62% 74% Construction 22% 9% 2008 20 2008 20 Trends Prioritizing non-re commercial & retail mortgages Derisking and asset quality will continue to improve Reduced deposit cost driving customer spread 3
USA: and a business model transformation Core Revenues Dynamism From To BUSINESS MODEL Selling products to people Delivering the right solutions to customers IT PLATFORM Informational silos No real time Manual processes Full customer view Real time Process automation RISK MANAGEMENT Admission and monitoring Proactivity and anticipation Transformation towards BBVA s industrialized customer centric business model on track (about 2/3 completed) 4
USA: Core revenues affected by the run-off from Guaranty portfolios and the new regulatory landscape Core Revenues () (Constant m) Core Revenues Dynamism 596 602 594-4.2% -5.2% 550 55 570 562 2,343 2,222 539 Q0 2Q0 3Q0 4Q0 Q 2Q 3Q 4Q 200 20 REG-E Durbin Trends Profitability will improve reflecting the transformation of the business model and the economic recovery () Core revenues include: Net interest income and fee income. 5
Eurasia: Buoyant activity in all regions Core Revenues Dynamism Citic Core revenues () Quarter-on-quarter (RMB million) +.2 % Garanti Core revenues (2) Quarter-on-quarter (TRY million) +26.8 %,85 3,04 4,04 4,898 6,94 7,50 9,466,968,784,474,854,688,723,753 2,223 Q0 2Q0 3Q0 4Q0 Q 2Q 3Q Q0 2Q0 3Q0 4Q0 Q 2Q 3Q 4Q Source: CNBC public reporting Source: BRSA Consolidated Garanti public reporting. Trends Activity dynamism and growing core banking revenues () Core revenues include: Net interest income and fee income. (2). Core revenues include: Net interest income, income on RR and CPI linkers and net fees & commissions. 6
Mexico: Business dynamism and mix improvement Core Revenues Dynamism Lending mix (%) CAGR 09 0% 09- Deposit mix (%) CAGR 09 5% 09- Mortgages 26% 25% 24% +7% Consumer & C. Cards 2% 2% 24% +9% Non Cost 69% 73% 76% +% Commercial 53% 54% 52% +9% Cost 3% 27% 24% -7% 2009 200 20 2009 200 20 Trends Growth biased to more profitable segments 7
Core Revenues Dynamism Mexico: with a positive impact on revenues Core revenues () (Constant m) +5. %,64,8,93,226,208,237,256,320 +5.4% 4,764 5,02 Q0 2Q0 3Q0 4Q0 Q 2Q 3Q 4Q 200 20 Trends High net interest income growth Impact of new regulation on fees and commissions absorbed in 20 () Core revenues include: Net Interest Income and Fee Income. 8
Mexico: and huge growth opportunities going forward, being the market leader Chile Brazil Colombia Peru Mexico Venezuela Argentina Low banking penetration Domestic credit to private sector (% of GDP, 2009) 30% 24% 23% 22% 4% 54% 98% Under penetrated market (Data per 00,000 inhabitants, 2008) Branches 4 5 2 ATMs 40 56 Mexico Chile 0 Brazil 40 57 Spain (Million) +0 MM 25 +9% Core Revenues Dynamism Banked population +8 MM 35 +7% +2 MM 43 +5% 55 2003 2007 200 205e Source: BBVA Research with WB data Source: McKinsey Source: BBVA Bancomer Trends Opportunities in an under penetrated financial system to be exploited through innovation in the distribution model 9
South America: Diversified leadership in a fast growing region Core Revenues Dynamism 8 Banks 5 AFPs (Pension Funds Managers) 4 Insurance Companies Banks Insurance AFPs Net attributable profit breakdown December, 20 (%) Chile Other countries (*) % 6% 20% Colombia Argentina Bolivia Argentina 3% Chile 9% Colombia Ecuador Peru 4% 8% Pensions & Insurance Panama Paraguay Peru Uruguay Venezuela Total net attributable profit Bn (+6% vs 200) Venezuela * Panama, Paraguay,Uruguay, Bolivia and Ecuador. 20
South America:... leading to higher revenues and profitability Core revenues () (Constant m) Core Revenues Dynamism 777 834 844 88 937,08 +9. %,93,093 3,335 +27.2% 4,24 Q0 2Q0 3Q0 4Q0 Q 2Q 3Q 4Q 200 20 Trends High growth of core revenues and profits () Core revenues include: Net interest income and fee income. 2
Time to return to fundamentals 2 Investments in the franchise progressively stabilizing 22
Investments in the franchise Group: Costs growing to reinforce our competitive position 2 AHEAD IN EFFICIENCY OPPORTUNITIES 20 COST GROWTH Peer BBVA Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 45% 48% 50% 54% 58% 60% 6% 62% Growth in emerging economies Perimeter +4.2% Technology +.6% Growth Peer 8 Peer 9 Peer 0 Peer Peer 2 Peer 3 Peer 4 64% 66% 70% 78% 80% 8% 89% Technological transformation +.3% Recurrent business +3.9% +.0% Trends Costs to remain flat in developed economies and progressively stabilize in emerging economies Peer Group: BARCL, BNP, CASA, CMZ, CS, DB, HSBC, ISP, LLOYDS, RBS, SAN, SG, UBS and UCI. Figures as of Dec. 20, except for UCI (as of Sept. 20). 23
Time to return to fundamentals 3 Asset quality resilience and absorption of new regulation 24
33 Asset Quality Resilience Group: Stable risk indicators for the 8 th quarter running NPAs net balance BBVA Group ( bn) NPA & coverage ratios BBVA Group (%) 5.7 5.5 5.8 6.0 5.9 Coverage ratio 62 6 6 60 4. 4. 4.0 4. NPA ratio 6 4.0 4Q0 Q 2Q 3Q 4Q 4Q0 Q 2Q 3Q 4Q Trends Risk indicators to remain stable at the Group level 25
33 Asset Quality Resilience Spain: RE developers and SMEs represented >60% of NPL formation during the crisis vs. <30% of the book NPL gross entries 2009-20 Breakdown by segment NPL ratio by segment December 20 8% 37% 25% 33% 20% 28% Developers SMEs Consumer 9% 7% 26% 3% 0% 7% 7% 6% 5% Individual mortgages Corporates % 3% Individual mortgages Corporates SMEs Developers Consumer Others % NPL gross entries 09- % of portfolio Trends New entries to marginally increase in 202 driven by SMEs due to a worse than expected economic situation Note: Data from local businesses in Spain, excluding C&IB. 26
33 Asset Quality Resilience Spain: Provisions will peak in 202 due to new RE requirements and SMEs NPL formation NPL and Coverage breakdown () 20 60% Coverage ratio RE Problematic Assets (2) Pre and post new Royal Decree 50% 28% 23% 6.6% 4.7% With collateral Without collateral Dic-20 Coverage New Royal Decree Coverage NPL ratio Coverage ratio Non collateralized NPLs are 00% covered within a year New RE provision requirements (.5 ( Bn after tax) to be absorbed in 202 Trends Coverage to substantially improve () Local business in Spain excluding C&IB. With collateral includes individual mortgages and developer loans and without collateral includes corporates, SMEs and consumer loans. (2) Problematic assets include doubtful and substandard developers loans and foreclosed assets from households and developers. 50% coverage does not include the capital add-on required. 27
33 Asset Quality Resilience Rest of areas: Asset quality evolution reflecting change in mix USA Mexico South America NPA ratio (%) 4.4 3.6 3.2 3.5 2.5 2.2 200 20 200 20 200 20 Coverage ratio (%) 6 73 52 20 30 46 200 20 200 20 200 20 Trends Stable asset quality in all geographies 28
Time to return to fundamentals 4 Strong capital generation and solid liquidity position 29
4 Strong Capital & Liquidity Capital: Substantial capacity to generate capital Core capital ratio BBVA Group (Basel 2.5) (%) +20bp quarterly average.0 0.2 0.3 8.5 0.8-0.2 Dec.0 incl. Garanti Organic generation Conversion pref. shares BIS 2.5 Other Dec. BBVA will comfortably achieve EBA s requirements even after new RE provisions Sustainable dividend policy: 0.42 DPS remains the floor 30
Liquidity: Improving position of the Euro Balance Sheet 4 Strong Capital & Liquidity Lower funding needs Liquidity gap - 24bn since May.0-4bn in 4Q 2 Strategic use of ECB LTRO < 5% total assets 3 Proven access to wholesale markets Lowest redemptions in 202 amongst peer group 4 bn 5 Enough additional collateral to absorb any liquidity shocks Trends Funding costs continue to improve 3
Liquidity: and in all other franchises thanks to BBVA s decentralized liquidity management Independent ratings and liquidity management Market discipline and proper incentives Firewalls between subsidiaries and the parent company Supervision and control by parent company Proven resilience during the crisis BBVA Compass Mexico South America Loan to deposits (Dec-) 95% Loan to deposits (Dec-) 00% Loan to deposits (Dec-) 94% 32
Contents From external factors to earnings power 2 Time to return to fundamentals 3 Conclusions 33
In a loss-absorption world Equity investors should focus on earnings power and franchise value... which also backs a bank s creditworthiness 34
Market attention should turn to the evolution of fundamentals Earnings power and franchise value Resilient and growing core revenues in all geographies Investments in the franchise progressively stabilizing Stable asset quality absorbing the worst year in Spain Capital and liquidity Successfully adapted to the new challenging environment Strong capital and liquidity generation Minimizing impact on profitability and shareholders dilution BBVA continues to improve its earnings potential and franchise value 35
Time to return to fundamentals Manuel González Cid, CFO Morgan Stanley, European Financial Conference March 28 th, 202 36