BBVXF Banco Bilbao Vizcaya Argentari (PK)

Group information

Relevant events

Results

Balance sheet and business activity

Solvency

Risk management

Transformation

Dividends

Other matters of interest

In the first half of 2019, BBVA Group generated a net attributable profit of €2,442m, a decrease of 3.7% compared to the same period of 2018 (down 3.3% at constant exchange rates), while it showed an increase of 9.8% compared to the first quarter of the year. The strong performance in recurring

revenue items, especially that of net interest income, along with the positive impact on the impairment on financial assets due to the sale of non-performing and written-off loans explain the improvement when compared to the first quarter of 2019.

Unless expressly indicated otherwise, to better understand the changes in the main headings of the Group’s income statement, the year-on-year percentage changes provided below refer to constant exchange rates and the quarterly changes are for the quarter ending with respect to the previous quarter.

Gross income

Gross income grew 3.3% year-on-year, supported by the strong performance of the net interest income and, to a lesser extent, the growth of net fees and commissions.

Net interest income increased 7.1% year-on-year and 4.0% quarter-on-quarter. This is explained by a higher activity during the first half of the year in Spain, Mexico, Turkey, South America and the Rest of Eurasia.

Net fees and commissions in the first half of 2019 grew 1.4% year-on-year, driven by an adequate diversification. Net fees and commissions increased by 4.2% in the second quarter.

As a result, the more recurring revenue items (net interest income plus net fees and commissions) increased by 5.8% year-on-year (up 4.0% compared to the previous quarter).

The positive contribution of NTI moderated in the first half of 2019 compared to the same period in 2018, mainly explained by a lower contribution from Corporate & Investment Banking (CIB), which was partially offset by capital gains coming from the sale of Prisma Medios de Pago, S.A. in Argentina.

Other operating income and expenses recorded a negative balance as a result of BBVA’s annual contribution in Spain to the Single Resolution Fund (SRF) of €144m made in the second quarter (€124m in the same period of 2018), and the negative impact from the inflation in Argentina. However, the net contribution of the insurance business grew by 10.4% year-on-year.

Operating income

Operating expenses in the first half of 2019 increased 1.2% year-on-year, (down 0.4% at current exchange rates), with a variation below the inflation recorded in most of the countries where BBVA operates, highlighting the cost reduction in Spain.

The efficiency ratio stood at 49.0% in the first half of the year, improving as a result of the lower growth in expenses compared to the increase in gross income, and it was slightly below the level reached in the 2018 financial year (49.3%). Operating income grew 5.4% year-on-year.

Provisions and other

Impairment on financial assets not measured at fair value through profit or loss ( impairment on financial assets) in the second quarter of 2019 stood at €753m, one of the lowest quarterly figures in the last five years (down 25.6% in the quarter). In the first half of 2019, impairment on financial assets increased by 12.9% compared to the same period of 2018. By business area, the United States recorded higher loan-loss provisions for specific customers in the commercial portfolio and increased write-offs in consumer loans. In the case of Mexico and Turkey higher loan-loss provisions are explained by the deterioration of specific customer portfolios and by d the update of their macroeconomic scenarios. On the other hand Spain registered a positive amount due to the lower loan-loss provisioning needs mainly due to, the positive effect of the sale of non-performing and written-off portfolios especially mortgage loans during the second quarter of 2019.

Provisions or reversal of provisions ( provisions ) increased by 45.0% compared to the same period of 2018, which incorporated the gains for certain sales of holdings carried out in Mexico, Turkey and the former Non Core Real Estate business area.

Results

As a result of the above, the Group’s net attributable profit in the first half of 2019 was 3.3% lower than in the same period last year (down 3.7% at current exchange rates), featured by higher levels of recurring revenues but negatively impacted by lower net trading income and by higher loan-loss provisions.

By business areas , during the first six months of the year Spain generated a net attributable profit of €734m, the United States contributed €297m, Mexico registered €1,287m of profit, Turkey contributed €282m, South America €404m and the Rest of Eurasia €55m.

The most relevant aspects of the Group’s balance sheet and business activity as of June 30, 2019 are summarized below:

Solvency

Capital base

BBVA’s fully loaded CET1 ratio stood at 11.5% as of the end of June 2019, increasing by 17 basis points in the first half of the year, supported by recurring organic capital generation and strong market performance.

Risk-weighted assets (RWAs) increased by more than €11,700m in the first half of the year, as a result of activity growth mainly in emerging markets, the incorporation of regulatory impacts of (IFRS 16 implementation and TRIM - Targeted Review of Internal Models) worth approximately €7,300m (-24 basis points in the CET1 ratio), and a decrease of approximately €1,500m in RWAs (+5 basis points in the CET1 ratio) due to the recognition by the European Commission of Argentina as an equivalent country for the purposes of supervisory and regulatory requirements ¹ .

In terms of capital issuances , BBVA S.A. conducted two public capital issuances: the issuance of preferred securities that may be converted into ordinary BBVA shares (CoCos), registered with the Spanish Securities Market Commission (CNMV) for an amount of €1,000m, at an annual coupon of 6.0% and with an amortization option after five years of being issued; ; and an issuance of Tier 2 subordinated debt for an amount of €750m,

with a 10-year maturity and an amortization option in the fifth year and a coupon of 2.575% ² . In the first half of 2019, the Group continued its funding program to meet the MREL (minimum requirement for own funds and eligible liabilities) requirement published in May 2018, by closing two public issuances of senior non-preferred debt for a total amount of €2,000m, one of them of €1,000m in the form of a green bond.

Additionally, the early amortization options on three issuances were exercised: one of CoCos, for €1,500m with a 7% coupon issued in February 2014; another issuance of Tier 2 subordinated debt, for €1,500m with a coupon of 3.5% issued in April 2014 and amortized in April 2019; and another Tier 2 security issued in June 2009 by Caixa d’Estalvis de Sabadell with an outstanding nominal amount of €4,878,000, amortized in June 2019.

Regarding shareholder remuneration , on April 10, 2019, BBVA paid a supplementary gross cash dividend for the financial year 2018 of €0.16 per share, in line with the Group’s dividend policy of maintaining a pay-out ratio of 35-40% of recurring profit. This supplementary dividend does not have any impact on the Group’s solvency ratio during the first half of the year, as it was already incorporated on December 2018.

The phased-in CET1 ratio stood at 11.8% as of June 30, 2019, taking into account the effect of IFRS 9. Tier 1 stood at

13.6% and Tier 2 at 2.2%, resulting in a total capital ratio of 15.8%.

These levels are above the requirements established by the supervisor in its SREP letter (Supervisory Review and Evaluation Process), applicable in 2019. Since March 1, 2019, at the consolidated level, this requirement has been established at 9.26% for the CET1 ratio and 12.76% for the total capital ratio. Its variation compared to 2018 is explained by the end of the transitional period for the implementation of the capital conservation buffer and the capital buffer applicable to Other Systemically Important Institutions, as well as the progression of the countercyclical capital buffer. For its part, the CET1 Pillar 2 requirement (P2R) remains unchanged at 1.5%.

Finally, the Group’s maintained a solid leverage ratio of 6.6% fully - loaded (6.7% phased-in), the highest among its peer group.

Ratings

During the first six months of the year, Moody’s, S&P, DBRS and Scope confirmed BBVA’s senior preferred debt (A3, A-, A (high) and A+, respectively) rating. Fitch increased this rating by a notch in July 2019, considering that BBVA’s loss-absorbing capital buffers (such as senior non-preferred debt) are sufficient to materially reduce the risk of default. In these actions, the agencies highlighted the Group’s diversification and self-sufficient franchise model, with subsidiaries responsible for managing their own liquidity. These ratings, together with their outlook, are detailed in the table below:

Credit risk

During the first half of 2019, BBVA Group’s risk metrics performed well:

Structural risks

Liquidity and funding

Management of liquidity and funding at BBVA aims to finance the recurring growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of financing, always in compliance with current regulatory requirements.

Due to its subsidiary-based management model, BBVA is one of the few major European banks that follows the Multiple Point of Entry (MPE) resolution strategy : the parent company sets the liquidity and risk policies, but the subsidiaries are self-sufficient and responsible for managing their own liquidity (taking deposits or accessing the market with their own rating), without fund transfers or financing occurring between either the parent company and the subsidiaries, or between different subsidiaries. This strategy limits the spread of a liquidity crisis among the Group’s different areas, and ensures that the cost of liquidity and financing is correctly reflected in the price formation process.

The financial soundness of the BBVA Group’s banks continues to be based on the funding of lending activity, fundamentally through the use of stable customer funds. During the first half of 2019 , liquidity conditions remained comfortable across all countries in which the BBVA Group operates:

The BBVA Group’s liquidity coverage ratio (LCR) remained comfortably above 100% during the first half of 2019, and stood at 132% as of June 30, 2019. It comfortably exceeded 100% in all subsidiaries (eurozone 155%, Mexico 147%, the United States 144% and Turkey 187%). For the calculation of the ratio, it is assumed that there is no transfer of liquidity among subsidiaries; i.e. no kind of excess liquidity levels in foreign subsidiaries are considered in the calculation of the consolidated ratio. When considering these excess liquidity levels, the BBVA Group’s LCR would stand at 163% (31 percentage points above 132%).

The Net Stable Funding Ratio (NSFR), defined as the ratio between the amount of stable funding available and the amount of stable funding required, is one of the Basel Committee’s essential reforms, and requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities. This ratio should be at least 100% at all times. BBVA Group’s, NSFR ratio, calculated according to Basel requirements, remained above 100% throughout the first half of 2019 and stood at 121% as of June 30, 2019. It comfortably exceeded 100% in all subsidiaries (eurozone 116%, Mexico 131%, United States 111% and Turkey 151%).

The wholesale financing markets in which the Group operates remained stable.

The main transactions carried out by entities of the BBVA Group in the first half of 2019 were:

Foreign exchange

Foreign exchange risk management of BBVA’s long-term investments, principally stemming from its overseas franchises, aims to preserve the Group’s capital adequacy ratios and ensure the stability of its income statement.

In the first half of 2019 , the Turkish lira (down 7.7%) and the Argentine peso (down 11.2%) depreciated against the euro, while the Mexican peso (up 3.1%) and the US dollar (up 0.6%) appreciated compared to rates at the end of 2018. BBVA has maintained its policy of actively hedging its main investments in emerging markets, covering on average between 30% and 50% of annual earnings and around 70% of the CET1 capital ratio excess. Based on this policy, the sensitivity of the CET1 ratio to a depreciation of 10% against the euro of the main emerging-market currencies stood at -3 basis points for the Mexican peso and -2 basis points for the Turkish lira. In the case of the US dollar, the sensitivity to a depreciation of 10% against the euro is approximately +11 basis points, as a result of RWAs denominated in US dollars outside the United States. The coverage level for expected earnings for 2019 is currently 75% for Mexico and Turkey.

Interest rate

The aim of managing interest rate risk is to maintain sustained growth of net interest income in the short- and medium-term, irrespective of interest rate fluctuations, while controlling the impact on capital through the valuation of the portfolio of financial assets at fair value through profit or loss.

Regarding the monetary policies pursued by central banks in the main countries where BBVA operates, in the first half of 2019 it should be noted that:

The Group’s banks maintain fixed-income portfolios to manage their balance sheet structure. During the first half of 2019, the results of this management were satisfactory, with limited risk strategies maintained in all the Group’s banks.

Economic risk capital (ERC) consumption reached €28,829m at the end of May 2019 in consolidated terms, equivalent to an increase of 0.4% compared to the end of February 2019 (up

2.1% at constant exchange rates). This increase was primarily due to credit risk, in line with higher exposure in the different portfolios and geographic areas.

The BBVA share

The main stock market indexes performed strongly during the first half of 2019. In Europe, increases in the first quarter of the year were expanded on, with the Stoxx 50 and Euro Stoxx 50 rising 15.2% and 15.7%, respectively. In Spain, the rise of the Ibex 35 during the same period was more moderate at 7.7%, with a decline in the second quarter partially offsetting the increase during the first three months of the year. In the United States, the S&P 500 Index rose 17.3% in the first half of the year, maintaining in the second quarter the positive trend initiated in the first quarter.

The performance of European banking sector indexes remained positive during the first half of 2019, although to a lesser extent than general market indexes, having been hindered by declines during the second quarter of the year. The Stoxx Europe 600 Banks index, which includes banks in the United Kingdom, rose 0.9% during the first half of 2019, and the Euro Stoxx Banks index for the eurozone rose 1.3%, while in the United States, the S&P Regional Banks Select Industry Index built on gains made during the first quarter, rising by 14.4% compared to the close of the 2018 financial year.

For its part, the BBVA share outperformed the European banking sector during the first half of the year, with the share price increasing by 6.1% and closing June 2019 at €4.92.

Regarding shareholder remuneration in 2019 , in line with the policy announced in the Relevant Event released on

February 1, 2017, BBVA plans to distribute between 35% and 40% of annual earnings in dividends. This shareholder

remuneration policy, will consist of two cash payments that are expected to be made in October of this year and in April

2020, all subject to the appropriate approvals by the relevant governing bodies.

As of June 30, 2019, the number of BBVA shares remained at 6.668 billion, held by 888,559 shareholders , of which

43.55% are Spanish residents and the remaining 56.45% are non-residents.

BBVA shares are included on the main stock market indexes, including the Ibex 35, Euro Stoxx 50 and Stoxx 50, with a weighting of 6.9%, 1.3% and 0.9%, respectively, as of the close of June 2019. They also form part of several sector indexes, including the Euro Stoxx Banks index, with a weighting of 8.7%, and the Stoxx Europe 600 Banks index, with a weighting of 4.0%.

Finally, BBVA maintains a significant presence on a number of international sustainability indexes or Environmental, Social and Governance (ESG) indexes, which evaluate companies’ performance in these areas. This presence is summarized in the following table:

At BBVA we have a differential banking model that we refer to as responsible banking, based on seeking out the profitability adjusted to principles, strict legal compliance, best practices and the creation of long-term value for all stakeholders. The four pillars of BBVA’s responsible banking model are as follows:

In 2018, BBVA announced its 2025 Pledge . This sets out the Bank’s strategy for climate change and sustainable development, working toward meeting the United Nations Sustainable Development Goals (SDGs) and the Paris Agreement on climate change. The pledge is an eight-year commitment based on three lines of action:

The figure for sustainable finance mobilized in the first half of 2019 amounts to €10,000m (up 50% year-on-year) which, added to €11,815m of 2018, represents a cumulative amount of approximately €22,000m mobilized since the launch of the Pledge.

In the second quarter of 2019, BBVA published the first monitoring report on its first green bond as part of its commitment to issue sustainable bonds. With this issuance, as noted in the report, BBVA contributed to reducing the carbon footprint by 274,609 tons of CO ₂ in 2018 from the date of issue in May of that year, and by another 106,529 tons estimated in

2019, and s generated 558 gigawatt/hour of renewable energy. The Bank allocated €1,000m obtained from wholesale markets to finance renewable energy and sustainable transportation projects. In addition, BBVA issued its second green bond in June, also on a senior non-preferred bond, with a maturity of seven years and an amount of €1,000m. The operation was very well received by investors.

In the retail business BBVA launched in Spain a new green line of loan worth €20m for all customers wishing to purchase electric or hybrid cars. This new product seeks to respond to growing demand from society, which is increasingly aware of the fight against climate change.

As part of its objective to engage its stakeholders, BBVA continues to participate in different initiatives within sector associations such as the Spanish Banking Association (Asociación Española de Banca, AEB) and the European Banking Federation (EBF), where the Bank chairs the sustainable finance group as well as in working groups related to this issue, also collaborating in consultations on taxonomy, regulation, disclosure and other objectives of the European Commission Sustainable Finance Action Plan.

Within the framework of community investment , education for society has an important weight. Thus, BBVA in Mexico decided to double the contribution it makes to the Foundation from 2019, allocating more than MXN 1,000m (€46m at the average exchange rate of the first half of the year) which, added to the voluntary contributions of the community, will have more than MXN1,500m per year, significantly increasing the number of education grants awarded.

For its part, the Learning Together educational project, BBVA aims to lead and promote conversation about education in the 21st century, bearing in mind that education is the great opportunity to improve people’s lives. The project, which was born in January 2018 with a transforming vocation and which aims to create opportunities in more than 3 million homes and its educational community,is being followed by more than one million people in social networks (Facebook, Twitter, Instagram and YouTube), with about 400 million views of its inspiring content, and with more than 24,700 teachers and parents being trained in the online courses it offers. .

In addition,, in June 2019, the BBVA Foundation held a ceremony in Bilbao to award the Frontiers of Knowledge prizes , worth 400,000 euros in each of its eight categories. In this eleventh edition of the awards, focused on achieving a greater commitment to sustainability of the planet, twelve new researchers were added to recognize contributions on subjects ranging from sea level rise to discovery of the microbiome.

Finally, BBVA develops entrepreneurship programs and initiatives that benefited 2.2 million people in 2018. These programs especially target entrepreneurs who are in vulnerable circumstances and those whose projects will have a positive impact on society or the environment. With them, BBVA seeks to foster social change and create opportunities for all. Among the global initiatives related to entrepreneurship, the following stand out:

This section presents and analyzes the most relevant aspects of the Group’s different business areas. Specifically, for each one of them, it shows a summary of the income statement and balance sheet, the business activity figures and the most significant ratios.

In 2019, BBVA Group’s business areas reporting structure of the BBVA Group’s business areas differs from the one presented at the end of 2018, as a result of the integration of the Non-Core Real Estate business area into Banking Activity in Spain, now reported as “Spain”. In order to make the 2019 information comparable to 2018, the figures for both areas have been reexpressed.

In the second quarter of the year, the Group carried out the unification of the BBVA brand in the countries in which it operates, discontinuing the local brand names in Argentina (Francés), the United States (Compass), Mexico (Bancomer), and Peru (Continental). The franchise in Turkey has been renamed Garanti BBVA.

BBVA Group’s business areas are summarized below:

The Corporate Center exercises centralized Group functions, including: the costs of the head offices with a corporate function; management of structural exchange rate positions; some equity instruments issuances to ensure an adequate management of the Group’s global solvency. It also includes portfolios whose management is not linked to customer relationships, such as industrial holdings; certain tax assets and liabilities; funds due to commitments to employees; goodwill and other intangible assets.

In addition to these geographical breakdowns, supplementary information is provided for the wholesale business carried out by BBVA, i.e. Corporate & Investment Banking (CIB), in the countries where it operates. This business is relevant to have a broader understanding of the Group’s activity and results due to the important features of the type of customers served, products offered and risks assumed.

The information by business area is based on units at the lowest level and/or companies that comprise the Group, which are assigned to the different areas according to the main region or company group in which they carry out their activity.

As usual, in the case of the different business areas in America and Turkey and in CIB, the results of applying constant exchange rates are given as well as the year-on-year variations at current exchange rates.