BANCO BILBAO VIZCAYA ARGENTARIA, S.A. BBVA's 2023 Performance: A Detailed Look for Investors

Curious about how one of Europe's leading banks performed last year? This summary dives into BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (BBVA)'s financial results for the fiscal year ended December 31, 2023, based on their latest 20-F filing. We've cut through the jargon to give you a clear picture of BBVA's financial health, strategic direction, and what lies ahead.

Key Highlights of 2023:

• Strong Profit Growth: BBVA reported a robust net attributable profit of €8.01 billion, marking a 22% increase year-over-year. Solid revenue growth and effective cost management drove this performance.
• Revenue Surge: Net interest income (NII) grew significantly, primarily benefiting from higher interest rates across key markets. This contributed to a 19% rise in total operating income, reaching €27.8 billion.
• Regional Strength: Mexico continued as a powerhouse, delivering exceptional results, while Spain showed solid recovery. Despite currency depreciation challenges, the local business in Turkey demonstrated resilience.
• Capital Strength: The Group maintained a strong Common Equity Tier 1 (CET1) ratio of 12.6%, well above regulatory requirements, supporting future growth and shareholder returns.
• Digital Leadership: Continued investment in digital transformation yielded tangible results, with digital sales accounting for over 70% of total unit sales by year-end.

Business Overview (What BBVA Does):

BBVA operates as a diversified financial group, offering a full range of services including retail banking, wholesale banking, asset management, and insurance. Its operations are strategically segmented across key geographies:

• Spain: The domestic market saw a healthy rebound. Net interest income (NII) grew by 30% due to rising interest rates and increased lending activity, particularly in mortgages and corporate loans. Net profit in Spain reached €2.75 billion.
• Mexico: This region drove growth, with net profit soaring by 35% to €5.32 billion. Strong loan growth, robust fee income, and a favorable interest rate environment were key contributors.
• Turkey (Garanti BBVA): Despite significant currency devaluation (the Lira depreciated by approximately 37% against the Euro), the local business demonstrated strong operational performance. Net profit, adjusted for hyperinflation accounting, was €1.05 billion, reflecting strong customer acquisition and effective risk management.
• South America: This region delivered consistent performance, with net profit growing by 15% to €1.28 billion. Diversified portfolios and economic recovery in countries like Colombia and Peru supported this growth.

Financial Performance (Revenue, Profit, Year-over-Year Changes):

BBVA delivered strong financial results in 2023. Net attributable profit increased by 22% year-over-year, reaching €8.01 billion. This strong growth primarily stemmed from a 19% rise in total operating income to €27.8 billion, largely driven by significant growth in Net Interest Income (NII) across key markets, which benefited from higher interest rates. An improved efficiency ratio of 46.5% (down from 47.8% in 2022) reflects effective cost management. Regional contributions were substantial, with Mexico leading profit growth at 35%, followed by a strong rebound in Spain, and consistent performance from South America.

Risk Factors (Key Risks):

BBVA's 20-F filing highlights several key risks that could impact its operations and financial performance:

• Macroeconomic Volatility: Global economic slowdowns, persistent inflation, and interest rate fluctuations could impact loan demand, asset quality, and overall profitability.
• Geopolitical Risks: Ongoing geopolitical tensions, particularly affecting regions like Turkey, could lead to further currency depreciation, economic instability, or disruptions to business operations.
• Regulatory Changes: Evolving banking regulations, including capital requirements, consumer protection laws, and environmental regulations, could impact profitability, operational costs, and business models.
• Cybersecurity: The increasing sophistication of cyber threats poses a continuous risk to data security, operational integrity, and customer trust. BBVA continues to invest heavily in cybersecurity measures.
• Competition: Intense competition from traditional banks, challenger banks, fintechs, and big tech companies requires continuous innovation and investment to maintain market share and profitability.
• Climate Change and ESG Risks: Physical and transition risks related to climate change, as well as broader environmental, social, and governance (ESG) factors, could impact asset values, credit quality, and reputation.

Management Discussion (MD&A Highlights):

Management emphasized the strong performance, driven by strategic execution and favorable market conditions in key regions. The significant growth in net attributable profit and total operating income stemmed from effective capital allocation, digital transformation initiatives, and a focus on profitable growth. The improved efficiency ratio highlights management's commitment to cost control. A strategic focus on digital leadership, sustainability, and profitable growth in high-potential markets like Mexico is central to the bank's strategy for navigating the evolving financial landscape and delivering shareholder value. Management also highlighted the business model's resilience in challenging environments, such as Turkey, through effective risk management and local operational strength.

Financial Health (Debt, Cash, Liquidity):

BBVA's financial position remains robust:

• Capital: Its fully-loaded Common Equity Tier 1 (CET1) ratio, a key measure of financial strength, stood at a robust 12.6% as of December 31, 2023. This is well above regulatory requirements, providing ample buffer against economic shocks and supporting strategic initiatives.
• Asset Quality: The non-performing loan (NPL) ratio slightly improved to 3.4% (from 3.6% in 2022), reflecting prudent risk management and generally stable economic environments in core markets. Coverage for non-performing loans (NPLs) remained a comfortable 78%.
• Liquidity: The Group maintained a strong liquidity coverage ratio (LCR) of 165%, significantly exceeding the 100% regulatory minimum. This ensures ample short-term funding and resilience against market disruptions.
• Funding Structure: The bank's funding structure is diversified, primarily relying on customer deposits, a stable and cost-effective funding source. Wholesale funding also complements deposit funding and helps manage liquidity.

Future Outlook (Guidance, Strategy):

BBVA's management expresses cautious optimism for 2024, projecting continued revenue growth, albeit at a more moderate pace, as interest rates stabilize. Management anticipates sustained strong performance in Mexico and a resilient contribution from Spain. The bank remains committed to its shareholder remuneration policy, targeting a payout ratio of 40-50% of net attributable profit, combining cash dividends and share buybacks. The bank will continue to focus on driving digital sales, expanding sustainable finance, and maintaining a strong capital position to navigate potential headwinds and capitalize on growth opportunities. Management expects to leverage its digital capabilities to enhance customer experience and operational efficiency, while integrating ESG factors across its business.

Competitive Position:

BBVA maintains a strong competitive position in its core markets, particularly in Spain and Mexico. It benefits from a well-established brand, extensive branch networks, and a growing digital presence. The bank's significant investments in digital transformation positioned it as a leader in digital banking, enabling it to enhance customer experience, improve operational efficiency, and expand its reach. Its diversified business model, spanning retail, wholesale, asset management, and insurance, provides resilience and allows it to cater to a broad customer base. The Group's robust capital base and prudent risk management further support its competitive ability against both traditional financial institutions and emerging fintech players.