DBRS Morningstar Confirms BBVA’s Issuer Ratings at A (high)/R-1 (middle); Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the Group), including the Long-Term Issuer Rating at A (high) and the Short-Term Issuer Rating at R-1 (middle). The trend on these ratings is Stable. The Group’s Intrinsic Assessment (IA) was maintained at A (high), one notch above the rating of the Kingdom of Spain (rated “A” with Stable Trend), reflecting the benefits of its international diversification. The Support Assessment was maintained at SA3. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings reflects DBRS Morningstar’s view that BBVA has continued to leverage its diversified international franchise to report solid earnings generation which, combined with positive operating jaws and a contained cost of risk enabled the Group to report its highest results ever in 2022. BBVA’s ratings continue to be underpinned by a strong funding and liquidity profile, backed by its large and stable deposit base and substantial liquidity buffers. We also continue to take into account the Group’s sound capital position, with solid buffers over regulatory requirements.

In DBRS Morningstar’s view, BBVA’s asset quality is now at normalised levels and has not shown any sign of deterioration at this point. However, DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults, although we view BBVA’s high coverage ratios and tightened origination standards as key mitigating factors.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require an improvement in the rating of the Kingdom of Spain, combined with a continuation of improved profitability, as well as maintaining solid performance in the international businesses and the current risk profile.

A downgrade would occur from a downgrade of the sovereign rating of the Kingdom of Spain. It would also arise from a rapid deterioration in BBVA’s risk profile. In particular, a significant deterioration in the Group’s major international businesses, namely Mexico or/and Turkey, and reduction in the benefit from its geographical diversification would lead to a downgrade of BBVA’s ratings.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong/Good

DBRS Morningstar views the Group’s franchise as strong, reflected in its major franchise in Spain and its international diversification, with leading positions in Mexico and Turkey and a growing but still small presence in South America. BBVA’s diversified business model has continued to underpin the Group’s earnings profile in recent years and help manage challenges in certain geographies. In 2022, BBVA increased its participation in Turkiye Garanti Bankasi, A.S. (Garanti) to 85.97% from 49.85% for a total consideration of TRY 22.8 billion.

Earnings Combined Building Block (BB) Assessment: Strong/Good

BBVA posted a new record profit in 2022 with a net attributable profit of EUR 6.6 billion, up 39% at constant euros from last year. Excluding exceptional items, including the acquisition of offices in Spain from Merlin in 2022 and the results from the US operations sold to PNC as well as the net cost related to the restructuring process in 2021, net results were still up 32% YoY at constant euros. Results were driven by strong revenue growth, boosted by higher core revenues against a backdrop of rising interest rates and higher volumes. This was partially offset by higher operating expenses, driven by higher activity levels and inflation and slightly higher cost of risk in Spain, Mexico, and Turkey, resulting from the current environment. Profits generated outside of BBVA's home market represented around 75% of net attributable profit (excluding corporate centre) in 2022 with Bancomer (Mexico) accounting for around 50% of BBVA’s total net attributable income, Spain 23 %, and Turkey 7%.

Risk Combined Building Block (BB) Assessment: Strong/Good

DBRS Morningstar views the Group’s credit risk profile as reflecting its relatively conservative approach, effective risk policies, retail banking focus, and diversified geographic franchise. NPLs were EUR 14.5 billion at end-2022 (down from EUR 15.4 billion in 2021), which resulted in an NPL ratio, as calculated by DBRS Morningstar, of 3.4% at end-2022. BBVA’s NPL coverage ratio (as calculated by DBRS Morningstar) was 79.3% at end-2022 which compares favourably with Spanish and European peers. DBRS Morningstar expects geopolitical tensions, rising interest rates and high inflation to lead to a rise in defaults across BBVA’s footprint. However, we view BBVA’s strong earnings generation capacity to be a key mitigating factor, providing the Group with some flexibility to absorb any potential deterioration in asset quality.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good

DBRS Morningstar views BBVA as maintaining a solid funding position. At end-2022, customer deposits represented around 73% of total funding, with a large proportion of them being secured retail deposits. On top of this, DBRS Morningstar views the funding base as stable considering BBVA’s leading positions in the countries where the Bank operates,. The Group’s net LTD ratio, as calculated by DBRS Morningstar, was 99.4% at end-2022, fairly stable from end-2021. BBVA’s liquidity position is also strong with a Liquidity Coverage Ratio (LCR) of 159% (or 201% including the excess liquidity in subsidiaries outside the Eurozone) and a Net Stable Funding Ratio (NSFR) of 135% at end-2022.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good

BBVA further strengthened its capital base through retained earnings and the Group continues to operate with capital ratios well above minimum regulatory requirements. BBVA reported a fully loaded Common Equity Tier 1 (CET 1) ratio of 12.6% at end-2022, fairly similar to 12.8% last year. The fully loaded total capital ratio stood at 15.9% at end-2022 compared to 17.0% at end-2021. The Group also reported at end-2022 phased-in CET1 and total capital ratios of 12.7% and 16.0% which continue to provide a comfortable buffer over 2023 SREP requirements of around 390 bps for CET1 and 310 bps for total capital.

Since the sale of its U.S. operations and the substantial proceeds from the transaction, BBVA has gradually increased the emphasis on redistribution, increasing its pay-out ratio and executing sizable share buy-backs programmes. In 2022, the Bank has proposed a pay-out of EUR 3.0 billion, bringing the pay-out ratio to 47% via distribution of a cash dividend as well as a EUR 422 million share buy-back programme. With an MREL ratio position of 26.45% of RWAs, BBVA is already compliant with its current MREL requirements.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/411959

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022)

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022) in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, BBVA Q4 2022 Earnings Presentation, BBVA Q4 2022 Press Release, BBVA Q4 2022 Report, BBVA Q4 2022 Debt Presentation and BBVA 2022 Annual Accounts. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/411960

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Arnaud Journois, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: November 23, 2009
Last Rating Date: March 29, 2022

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