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FIGCovered Bonds

Crisis Talk — with BBVA Treasury


BBVA is expected to take advantage of recent changes to Pillar 2 requirements with a greater proportion of senior preferred issuance but it has a modest need for subordinated issuance. The Spanish national champion also plans to make use of its Targeted Longer-Term Refinancing Operation (TLTRO) allotment from the ECB, which has been substantially increased.

How has your funding changed since March 1?

BBVA Treasury: We issued three deals during the months of January and February which meant we were in a very strong position going into the crisis. In the second week of January we issued a €1.25bn senior non-preferred and that same week we tapped the market for a €1bn Tier 2 transaction. 

Then in February we tapped the market for the first time in Swiss francs for a Sfr160m senior non-preferred. In March the markets were disrupted so we stayed away. Then more recently in April and May the market improved, but it still felt like it was important to tap the market on the right day, and compared to January’s levels, the cost of funding still looked expensive.

In our 2020 funding plan we outlined two main changes as a result of changes to Pillar 2 requirements. Our expected funding in additional tier one (AT1) increased from 1.5% to 1.78% and for tier two, the funding threshold grew from 2.0% to 2.38%. For tier two, we are currently aligned as we reported a fully loaded figure of 2.4%, and in terms of AT1 we reported 1.63% on a fully loaded basis which means we are missing 15bp, which equates to about €600m of further issuance.

Bearing in mind the next call option on our AT1s is April 2021 we think it’s probably better to wait for better conditions to pre-finance that call option. We may reinforce our tier two ratio as we also need to consider our different global subsidiaries. Historically we’ve always tended to hold a tier two buffer of between 15bp and 30bp above the threshold. All in all, we feel that our hybrid capital buckets are largely fulfilled and very manageable.  

In terms of senior preferred we issued a deal back in 2016 which lost MREL [minimum requirements for own funds and liabilities]  eligibility in January as it entered the last year of its life. So it was in our interest to refinance that with a new senior preferred, which we did on May 27 with a €1bn five year that was also the first Covid-19 senior preferred transaction in the FIG sector.

We are combining senior preferred and non-preferred more than we had in the past. Last November we received our MREL requirement from the Single Resolution Board which, for the first time, included a minimum subordination requirement which can be partly made up with senior preferred. And, when you consider the big difference between senior preferred and non-preferred spreads, preferred issuance has become much more interesting.

BBVA is a Domestically Systemically Important Bank (D-Sib), which means our MREL requirement is calculated based on our European business, which is the single point of entry, and this means our MREL requirement is very manageable. 

So following out Covid-19 deal, there will be at least two further senior preferred and/or non-preferred transactions, plus a potential refinancing of our AT1, plus a potential reinforcement of out tier two ratio.

How helpful were the improved terms in the TLTRO?

They were welcomed by all the banks as they have provided a secure and abundant source of liquidity that, for example, was not initially available in the 2012 crisis. BBVA has built a very sound liquidity position in the last few years, but we decided to take full advantage of the facility and we plan to participate up to our full allotment which has moved from €21bn, which we had available in the third round of the TLTRO, to €35bn.

In reality we already took part in a couple of TLTRO windows — in December 2019 and March 2020 — when we took €7bn on each occasion. In June we plan to take the difference, which is €21bn. The ECB’s decision to broaden the pool of eligible collateral was very positive and it probably played an important role in the recent evolution of spreads. The market is now reflecting this big improvement in the banking sector’s access to cheap liquidity and we believe that the total take up in June window could be well over €1tr with net new money likely to be something around €400bn which will of course help boost lending activity.

Other than central bank funding, do you anticipate a change in the mix of the instruments that make up your market funding?

Over the past three years, since August 2017’s inaugural senior non preferred deal, we’ve been quite active in the non-preferred market. We thought it was a good idea to begin funding with the most subordinated senior instrument to meet our regulatory requirement, and this cost of funding improved in line with our rating upgrades into single-A territory with S&P and Moody’s in April and May 2018. Then, following changes to our Pillar 2 requirements, we realised it would be more efficient to balance our senior non-preferred with more senior preferred.

How has your balance sheet changed since the crisis started?

Loan activity has been intense and in terms of credit provisioning this was reflected in our first quarter results. BBVA made a conscious effort to front load with provisioning of €1.4bn in the first quarter which, along with recurrent impairments of €1.1bn, brings total impairments to €2.5bn. The idea here was to anticipate what is likely to happen. We expect part of this will unwind over the rest of the year and early next year in line with the economic recovery, but the trouble is we don’t fully know how the recovery will unfold as there is a possibility of a second round of Covid-19 infection.

What does this means in terms of risk-weighted asset (RWA) growth?

We expected RWA growth due to loans being granted for commercial activity and an increase in corporate drawdowns, which took place in the first quarter. Our first priority is to contain this RWA growth which is why we front-loaded provisioning. We believe that the negative impact has already been taken into account and is reflected by the 90bp decrease in our CET1 ratio from 11.74% in December 2019 to 10.84% March 2020, this ratio is still comfortably above our new CET1 requirement of 8.59%. We don’t expect a massive increase in RWA over the rest of the year and we also expect to be in the market later in the year to reinforce our capital position potentially with tier two and AT1 issuance.  

Do you have any visibility on how deferred loan payments and non-performing loans are likely to evolve?

Not yet as it’s very difficult to see how credit will evolve. We are a retail-orientated bank which means we know most of our clients’ businesses.

What have national regulators and supervisors done to help alleviate these potential problems? 

The Instituto de Credito Oficial (Ico — a Spanish state-owned development bank) lines are very helpful and the conditions for granting the loan are very clear. A great part of that risk is guaranteed by state. In terms of the Ico lines, the state guarantee covered 60%-80% of the risk of the loan. In terms of profitability and risk safety it a very interesting product as it’s not only helping the economy but, as a bank, we are also benefitting from the guarantee. This is very retail oriented business which is our natural territory.

The ECB and other supervisors have been very clear with their initiatives to relax regulatory ratios, lower capital buffers and delay the recognition of deferred loan payments which has translated into a real intention to continue lending into the economy.

Do you expect to issue more AT1 and tier two following the changes to Pillar 2 requirements?

In terms of AT1 we are talking about an additional amount of €600m which is manageable and in terms of tier two we would like to reinforce the ratio a little. 

Have there been any major challenges while from working from home? 

Something like 98% of the central headquarters workforce has been working from home and that includes the Treasury desk as well and there’s been no material disruption. It’s been very easy for us to have access to all functionality and be connected in the same way that we’d had when we were working in the office.

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