Heavy Provisions Hit BBVA’s 2012 Results

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In the fourth quarter, Spain’s Grupo BBVA barely broke even, earning EUR 19 million ($25 million). Full-year earnings came in at EUR 1.7 billion ($2.3 billion), or EUR 0.32 per share ($0.43 per ADR), yielding an ROE of 4%, half of that in 2011. 2012′s earnings were marred by government mandated real estate provisions.

Even though BBVA’s 2012 core earnings (pretax, preprovision income) increased at a healthy clip, provisions for loan losses more than offset revenue growth. Spain’s banks were required to set aside extraordinary provisions against real estate assets. For BBVA, the toll was EUR 2.5 billion and with that, the bank complied with its quota. Overall, nonperforming loans ended the year at 5.1% of the portfolio (compared to 4.8% in September), mostly fueled by a hike in Spanish dud loans. Spanish NPLs closed the year at 6.9% of the total, up from 6.5% in the third quarter.

NPL coverage (allowance for loan losses / NPLs) of 72% is barely adequate, and BBVA will want to keep this ratio from going down, which is why provisions for loan losses will run at an annualized run rate of approximately 1.4% of loans in the near term.

BBVA’s core earnings will maintain a favourable trend, but provisions for loan losses will place a heavy burden on the bank’s bottom line. In spite of Mexico’s and South America’s contribution to operating earnings (about half of the total), we think overall ROE will hardly exceed 10% in the coming quarters. With BBVA’s stock and cash dividend policy, the firm’s capital will keep expanding –albeit at a very modest pace.

As of Dec. 31, 2012, BBVA’s Core capital ratio stood at 10.8%, unchanged from September and 50 basis points above 2011′s figure. In addition, the bank’s tangible common equity ratio, as we calculate it, ended 2012 at 5.2%, up roughly 10 and 20 basis points compared to the trailing and year-ago quarters.

 

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