Information by area represents a basic tool in the management of the BBVA Group’s various businesses. In this section we discuss the more significant aspects of the activities and earnings of the Group’s five business areas, along with those of the main units within each, plus Corporate Activities. Specifically, it includes the income statement, the balance sheet and a set of relevant management indicators, among them: the loan book, deposits, off-balance sheet funds, efficiency, non-performing assets and coverage.
In 2010, certain changes were made in the criteria applied in 2009 in terms of the composition of some of the different business areas. These changes affected:
- The United States and WB&AM: in order to give a global view of the Group’s business in the United States, we decided to include the New York office, formerly in WB&AM, in the United States area. This change is consistent with BBVA’s current method of reporting its business areas.
- South America. The adjustment for the hyperinflation has been included in 2010 in the accounting statements for Banco Provincial (Venezuela); this will also be carried out for the 2009 statements to make them comparable. At year-end 2009 (the first time that the Venezuelan economy was classified as hyperinflationary for accounting purposes), said impact was included under Corporate Activities to facilitate the comparison with 2008 and in order to not distort the quarterly figures of 2009.
Likewise, a modification has been made in the allocation of certain costs from the corporate headquarters to the business areas that affect rent expenses and sales of IT services, though to a lesser extent. This has meant that the data for 2009 and 2008 have been reworked to ensure that the different years are comparable.
The configuration of the business areas and their composition are as follows:
- Spain and Portugal, which includes: the Retail Banking network in Spain, including the segments of private individual customers, private banking and small business and retail banking in the domestic market; Corporate and Business Banking, which handles the needs of the SMEs, corporations, government and developers in the domestic market; and all other units, among which are Consumer Finance, BBVA Seguros and BBVA Portugal.
- Mexico: includes the banking, pensions and insurance businesses in the country.
- The United States: encompasses the Group’s business in the United States and in the Commonwealth of Puerto Rico.
- South America: includes the banking, pensions and insurance businesses in South America.
- WB&AM, composed of: Corporate and Investment Banking (including the activities of the European and Asian offices with large corporate customers); global markets (trading floor business and distribution in Europe and Asia); asset management (mutual and pension funds in Spain); the Group’s own long maturing equity portfolios and private equity activities (Valanza S.C.R.); and Asia (through the Group’s holding in the CITIC group). Wholesale Banking & Asset Management (WB&AM) is also present in the described businesses in Mexico, South America and the United States, but its activity and results are included in these business areas for the purposes of this report.
As well as the units indicated, all the areas also have allocations of other businesses that include eliminations and other items not assigned to the units.
Finally, the aggregate of Corporate Activities includes the rest of items that are not allocated to the business areas. These are basically the cost of the headquarters’ various units, certain allocations to provisions such as early retirements and those other of corporate nature. It also includes the Asset/Liability Management unit, which performs management functions for the Group as a whole, essentially management of asset and liability positions in euro-denominated interest rates and in exchange rates, as well as liquidity and capital management functions. The management of asset and liability interest rate risk in currencies other than the euro is recorded in the corresponding business areas. It also includes the Industrial and Financial Holdings unit and the Group’s non-international real estate businesses.
Furthermore, as usual in the case of the Americas units, both constant exchange rates and year-on-year current exchange variation rates have been applied.
The Group compiles reporting information on a level as disaggregated as possible, and all data relating to the businesses these units manage is recorded in full. These basic units are then aggregated in accordance with the organizational structure established by the Group at higher level units and, finally, the business areas themselves. Similarly, all the companies making up the Group are also assigned to the different units according to their activity.
Once the composition of each business area has been defined, certain management criteria are applied, of which the following are particularly important:
- Capital: Capital is allocated to each business according to economic risk capital (ERC) criteria. This is based on the concept of unexpected loss at a specific confidence level, depending on the Group’s capital adequacy targets. These targets have two levels: the first is core equity, which determines the capital allocated. This amount is used as a basis for calculating the return generated on the equity in each business (ROE). The second level is total capital, which determines the additional allocation in terms of subordinate debt and preferred securities. The calculation of the ERC combines credit risk, market risk, structural balance-sheet risk, equity positions, operational risk and fixed asset and technical risks in the case of insurance companies. These calculations are carried out using internal models that have been defined following the guidelines and requirements established under the Basel II capital accord, with economic criteria prevailing over regulatory ones.
ERC is risk-sensitive and thus linked to the management policies of the businesses themselves. It standardizes capital allocation among them in accordance with the risks incurred and makes it easier to compare profitability across units. In other words, it is calculated in a way that is standard and integrated for all kinds of risks and for each operation, balance or risk position, allowing its risk-adjusted return to be assessed and to calculate by aggregation the profitability by client, product, segment, unit or business area.
- Internal transfer prices: the calculation of the net interest income of each business is performed using rates adjusted for the maturities and rate reset clauses of the various assets and liabilities making up each unit’s balance sheet. Earnings are distributed across revenue-generating and distribution units (e.g., in asset management products) at market prices.
- Assignment of operating expenses: both direct and indirect costs are assigned to the business areas, except where there is no clearly defined relationship with the businesses, i.e. when they are of a clearly corporate or institutional nature for the Group as a whole. In this regard, we should note that the primary change in criteria during 2010 related to the assignment of costs refers to the allocation of rent expenses in Spain and Portugal. This was formerly carried out based on a percentage over the book value of the real estate property and based on the area occupied. As of 2010, this allocation will be carried out at market value.
- Cross-selling: in some cases, consolidation adjustments are required to eliminate shadow accounting entries in the results of two or more units as a result of cross-selling incentives.