Managing in an uncertain interest rate environment GOLDMAN SACHS Banking Conference Montecarlo, 10 th June 2004
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Index Managing in a low interest rate environment in Spain Positioning for the new scenario The BBVA Bancomer case Conclusions 3
Interest rates in the Eurozone have been on a downward path for the last years Euribor 3 months Spanish Bankig System : Net interest margin (%) 2.25 6 2.20 5 2.15 4 2.10 3 2.05 2 2.00 1 1.95 0 2000 2001 2002 2003 1.90 2000 2001 2002 2003 4 Affecting negatively the net interest margins of the Spanish banks
What has BBVA done to offset the negative impact of low interest rates? 1. Increasing commercial activity and careful pricing policies 2. Management of interest rate risks 3. Improving fees 4. Cost control We have focussed on: 5. Credit quality improvements 5
1 Retail Banking: a marketing offensive......driven by innovation and anticipation June 03 Mortgage solutions July 03 Solutions for SMEs September 03 Fondo Extra 5 November 03 Pension solutions January 04 Easy Mortgage Feb Mar 04 Óptimo and Rentas Funds 6 April 04 Credit card Tarjeta diez
... that is contributing to boosting business activity Year-on-year growth Average balances Lending 15,9% Total customer funds deposits + funds 10,5% 12,1% 12,9% 13,7% 5,1% 6,9% 7,4% 10,8% 1,0% Mar.03 Jun.03 Sep.03 Dec.03 Mar.04 Mar.03 Jun.03 Sep.03 Dec.03 ene-04 7
...with three pillars of the improvement 1. A steady mortgage demand Individuals+21%, developers+17% 1Q04: record quarter in new mortgage production (5.1 Bn, +48%) 2. Accelerating volumes from SMEs +17% increase in SME s +19% increase in small businesses 3. Increase in off-balance sheet funds 8 +19% increase in mutual funds Gaining market share Data corresponds to 1Q04 yoy change
In Wholesale Banking, selective recovery in lending y-o-y change % growth by business unit Average balances 1,5% 3,6% Mar-03 Dec-03 Mar-04 Global corporate -12.7-9.6-1.9 Domestic -6.8-7.7 +4.3 International -22.4-11.9-12.7-3,4% -2,3% Institutional +2.5 +9.3 +10.2 TOTAL -6.3 +1.5 +3.6-6,4% Mar.03 Jun.03 Sep.03 dic-03 Mar.04 9
Careful pricing allows for a satisfactory evolution of net interet margins 3.37 Net Interest Margin (Retail Banking) Vs. Euribor 3 months (%) 3.35 3.21 3.10 N.I.M. Retail banking 3.06 2.72 Euribor 3 months 2.39 2.17 2.18 2.09 1.06 1.10 0.98 1.04 1.13 N.I.M. Wholesale Bk. 1Q03 2Q03 3Q03 4Q03 1Q04...despite interest rates at record lows 10
2 Active management of interest rate risks The ALCO maintains a portfolio of government securities Target: To offset the negative effect on the Group s N.I.I. of a fall in interest rates The size of the portfolio was 24 bn as of March 2004. Short duration: : 1.8 years (2.6 years beginning 2003) 65% of latent capital gains are locked in Additionally,, 8 bn IRS to hedge the spread 3-12 month Euribor 11
3 Strong focus in fee generation, driven by asset management Domestic Businesses (1) Net fee income ( million) 394 399 +8.6% 410 426 428 Mar.03 Jun.03 Sep.03 Dec.03(2) Mar.04 12 (1) Retail and Wholesale&Investment Bankimg in Spain (2) Excluding preferred fees (as extraordinary in December 2003)
4 Cost control in both Retail and Wholesale businesses Total expenses ( million) 586 Retail Banking 567 566 Wholesale&Investment Banking 84 73 75 13 Mar.02 Mar.03 Mar.04 Mar.02 Mar.03 Mar.04
5... with better asset quality than the Spanish Banking System 1.1 1.0 0.9 0.8 0.7 NPL ratio (%) (Domestic Sector) 14 0.6 0.5 Banks Saving Banks BBVA Spanish businesses mar-02 jun-02 sep-02 dec-02 mar-03 jun-03 sep-03 dec-03 mar-04 Improvements in risk management techniques Increase in less risky assets (mortgages)
As a result, healthy growth in operating profit of domestic businesses... Current million 1Q03 1Q04 Chg. % Net interest income 897 985 9.9 Core revenues 1,274 1,383 8.6 Ordinary revenues 1,402 1,493 6.5 Operating Profit 606 696 15.0 15
Index Managing in a low interest rate environment in Spain Positioning for the new scenario The BBVA Bancomer case Conclusions 16
What has changed in the macro environment recently? 1.- Higher GDP growth and higher interest rates expectations Strong growth recovery in 1Q04 Faster shift towards neutral monetary policies USA: 3m interest rates discounted by futures Euro: 3m interest rates discounted by futures 2.75 2.75 2.50 2.50 2.50 2.50 2.40 2.40 2.25 Current 2.25 2.30 Current 2.30 2.00 2.00 2.20 2.20 17 1.75 1.50 1.25 1.00 may-04 jun-04 jul-04 ago-04 sep-04 1 month ago oct-04 nov-04 dic-04 1.75 1.50 1.25 1.00 2.10 2.00 1.90 1.80 may-04 jun-04 jul-04 ago-04 sep-04 1 month ago oct-04 nov-04 dic-04 2.10 2.00 1.90 1.80
What has changed in the macro environment recently? 2.- Higher oil prices Price of Brent oil and gold Cyclical increase in demand and lower inventories 450 400 350 300 250 Brent (left) gold 45 40 35 30 25 20 15 10 5 200 0 1997 1998 1999 2000 2001 2002 2003 2004 18 Geopolitical risks and speculative positions Adds further pressure to the oil price and becomes the main source of uncertainty
Financial scenarios to year end 2004 Geopolitical risk is diluted, as in previous occassions Price of oil falls Economies continue to grow, albeit more moderately (end of positive temporary effects) Geopolitical risk is maintained or intensifies further The price of oil remains high Confidence levels decrease and economic activity adjusts downwards 19 Geopolitical risk thus becomes the catalyst for a series of pending adjustments
With rates at a trough, higher economic activity will likely lead to moderate increases in interest rates 12 Month interest rates 10 year interest rates 2,9 2,7 2,5 2,3 2,1 1,9 1,7 5,0 4,8 4,5 4,3 4,0 3,8 3,5 3,3 3,0 Dec.04E Nov.04E Oct.04E Sep.04E Aug.04E Jul.04E Jun.04E May.04 Apr.04 Mar.04 Feb.04 Jan.04 Dec.03 Dec.04E Nov.04E Oct.04E Sep.04E Aug.04E Jul.04E Jun.04E May.04 Apr.04 Mar.04 Feb.04 Jan.04 Dec.03 20 Source: BBVA Economic Research department
In this scenario, BBVA is well placed given the structure of its assets... Retail banking loans structure Residential mortgages, 51% 0.4 0.3 0.2 Yield curve 12M-3M Euribor 0.1 0.0-0.1-0.2-0.3 ene-03 abr-03 jul-03 oct-03 ene-04 abr-04 Current steepening of the 3-12m slope enhances profitability of mortgage book 21
... and its liabilities Retail Bk. deposits structure Deposit spread * (%) Demand deposits, 60% 2.5 2.0 1.5 1.0 0.5 0.0 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 Liquid deposits: spread stabilisation 22 * Euribor 1m cost of customer funds
Index Managing in a low interest rate environment in Spain Positioning for the new scenario The BBVA Bancomer case Conclusions 23
Mexico: a sizeable economy GDP (BN USD) 650 637 GDP per capita (US$) 5.994 403 4.712 3.045 2.759 1.823 Spain Mexico Emerging Eur G10 (1) MEX CHI VEN BRA COL 24... with with similar population (approx. 100 mn.) Emerg. Eur. G10: Group of 10 emerging countries in Eastern Europe, with 100 M inhabitants: Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia.
...entering a growth phase GDP Growth (1) (% y-o-y y y change) 4.0 3.8 0.9 1.3-0.3 2001 2002 2003 2004e 2005e 25 Source: BBVA Economic Research department
Despite lower rates, BBVA Bancomer has succeeded in defending the net interest margin... 9.7 Average TIIE 28 days (%) N.I.M. (%) 6.7 5.1 5.8 5.9 6.6 4.9 5.0 4.7 4.8 4.7 1Q03 2Q03 3Q03 4Q03 1Q04 April- May04 26
... growing its customer deposit base, while also improving the mix y-o-y change % growth by product Average balances 7,2% 9,0% 10,1% Mar-03 Dec-03 Mar-04 Sight a/cs +13.0 +18.1 +16.8 4,0% 4,7% Term deposits +14.7 +9.6-6.5 Mutual funds -6.9 +5.8 +23.7 TOTAL (*) +4.0 +9.0 +10.1 * Including repos Mar.03 Jun.03 Sep.03 Dec-03 Mar.04 27...with strong support from sight and savings accounts and funds
... and expansion of lending with focus in the most profitable segments March 2003 March 2004 Legacy portfolio 26% Manageable lending 74 % +15% Yoy growth Legacy portfolio 22% Manageable lending 78 % Commercial&Government +12% Consumer&Cards +31% 28 Mortgages +10%
Thus BBVA Bancomer has shown a significant increase in net interest income Net interest income (constant million) +7.9% 441 409 406 415 378 1Q03 2Q03 3Q03 4Q03 1Q04 29
In this context special emphasis in fees and gains in efficiency Fee income / costs (%) Cost / income ratio 87,3% 92,3% 41,4% 39,5% 30 1Q03 1Q04 1Q03 1Q04
... achieving the highest operating profit of recent quarters Operating Profit Constant million +18.9% 383 322 335 1Q03 4Q03 1Q04 31
BBVA Bancomer: a deposit rich franchise 348 bn MXN Time Deposits (50%) 176 bn MXN Customer Deposits 65.5% Demand Deposits (50%) Loans 34.5% 32 Deposits Loans Contribution to NII Well positioned for higher interest rates
... and the trend in interest rates has already changed 7,0 Cetes 28 days: 2004 evolution 6,5 6,0 5,5 5,0 4,5 33 2-1-04 13-1-04 22-1-04 2-2-04 12-2-04 23-2-04 3-3-04 12-3-04 23-3-04 1-4-04 14-4-04 23-4-04 4-5-04 13-5-04
Index Managing in a low interest rate environment in Spain Positioning for the new scenario The BBVA Bancomer case Conclusions 34
We are creating a very solid Group High Profitablity ROE 20.3% Highly productive Efficiency 46.0% Controlled risks NPL Ratio Coverage 1.23% 209.8% 35 Solvency BIS Ratio 12.1% Rating...and growth in EPS of 25.1% AA- / Aa2
Conclusions BBVA has successfully implemented commercial and interest rate risk policies with good results, despite low interest rates Cost control and credit quality have also made a significant contribution The Group will benefit from the current steepening of the yield curve 36 On course to deliver a good evolution of results
Managing in an uncertain interest rate environment GOLDMAN SACHS Banking Conference Montecarlo, 10 th June 2004