Juan Asúa General Manager Banking in Spain Anticipating the new environment
Index Excellent positioning: Customers and Products New environment, New opportunities Strategic Drivers: Innovation and Transformation Conclusions 3
Our excellent positioning is the result of foresight and discipline in implementing STRATEGIC PLANS Customers Products Transformation Innovation POSITIONING EARNINGS 4
Implementation of strategic plans has reflected in fast earnings growth... Net Interest Income (YoY ) 14.4% 9.3% 5.0% Operating Profit (YoY) 11.5% 14.3% 20.6% 2005/04 2006/05 9M07/06 2005/04 2006/05 9M07/06 ROE 30.3% 30.5% 37.0% Cost/income ratio 42.8% 41.2% 37.5% 2005 2006 9M07 2005 2006 9M07... the result of strategic anticipation 5
... anticipation by leveraging on... 1 2 3 4 5 Buoyant business activity Higher cross-selling Good price management Cost control Asset quality Selective and diversified Value-added products While gaining market share Compatible with growth projects Based on RAROC 6
1 Vigorous business activity, selective and diversified... Business Volume m Breakdown of Ordinary Revenues 9M07 +14.5% +14.2% 260.941 227.970 199.598 +14.3% 284.524 Trading Other Income 5,4% Insurance 3,8% 6,9% Fee income 25,5% 1 Deposits 17,3% 2 Consumer 6,9% 3 Mortgages 9,5% 2004 2005 2006 9M07 8,6% 16,1% 4 Small Businesses CBB Progressive adjustment of growth levers Ordinary Revenues 9M07 4,943m 7
1 Buoyant business activity 1 Time Deposits Accelerating: 9M07/06 39% APR Retail Time Deposits: market share (banks and saving banks) Time Deposits: average spread 8.35% 6.89% 7.48% 0.68% 0.70% 0.57% Dec 05 Dec 06 Sept 07 9M05 9M06 9M07 Innovative products: Extra Deposit, Multideposit, Triple 7, Double 5.5, etc. Improving spreads 8
1 Buoyant business activity 2 Consumer Finance Strategic growth lever Consumer Finance: market share 12.43% 14.05% 14.32% Consumer Finance: average spread 4.64% 4.80% Dec 05 Dec 06 Aug 07 1 9M06 9M07 1 Sept. data not availabe New products: PIDE, Crédito Fácil, etc, account for > 50% of total production 9
1 Buoyant business activity 3 Mortgage Business Selective commercial policy Individuals Market share - 102 bp Developers Market share - 172 bp 12.25 % 11.23% 7.13% 5.41% 2004 Aug.07 Primary residence: 95%(1) NPL Ratio: 0.39% Average LTV: 53.3% Hipoteca Universal, Hipoteca Fácil, Hipoteca Bienestar, Cuota Segura 2004 Jun.07 Primary residence: 95% NPL Ratio: 0.08% The top 100 customers account for 30.5% of the portfolio Selective commercial policy: controlled growth and low risk * Sept. 07 data not available (1) Home mortgage loans 10
1 Buoyant business activity 4 CBB Increasing leadership Penetration of SME segment Business Volume (APR) Operating Profit (APR) 38% 32% 11.5% 15.9% 13.1% 21.7% BBVA 2 nd 9M06 9M07 9M06 9M07 Excellent business growth with NPLs at low levels leading to outstanding results 11
2 Cross-selling: Top supplier of high added-value products -ings Confirming Factoring Leasing Mkt Sh. % 32.5 25.5 23.6 1 st 1 st 1 st Derivatives Distribution growth APR 9M07/06 348% 254% 52% Earnings Operations No. of customers Leader for third year running in derivative rankings 1 Insurance Term Life: mkt share 16.9% ASSUR- ANCE Mortgage - Life Mortgage- Household 45% 70% Consumer - Life 73% 1 st 1 Risk España Magazine 12
3 Good price management... Customer spread (%) BBVA networks Net Interest Income / Average Total Assets (%) BBVA networks Peers 2,95 3,03 3,08 2.15 2.14 2.11 2.10 2.14 2.17 2.19 2,56 2,61 2,69 2,74 1.68 1.59 1.59 1.58 1.66 1.68 1.67 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07... outperforming our competitors 13
4 Cost control... Revenues and Expenses BBVA (base 100) Cost growth: BBVA v Peers (%) 120 118 Revenues Expenses BBVA Peers 116 114 8.2 112 110 108 106 104 NEW NETWORK MODEL 4.4 5.5 5.0 5.3 2.8 102 100 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 05/04 06/05 9M07/9M06 Costs are decreasing in real terms 14
4 1) Blue-Net Project (2006) FROM:... with more efficient structures: TO: Retail SMEs 13 7+4+4 Retail SMEs 7 7 COMPREHENSIVE BUSINESS UNITS PURE COMMERCIAL UNITS Intermediate structure expenses 15% 2) Network expansion plan finalised: +160 branches (+4.4%) Total Spanish System Jun.07 9.23% 11.73% 250 bp Average break-even in 15 months % branches % business ΔTotal expenses Networks in Spain: + 0.1% 15
0.69 5 NPL ratio (%) 0.54 0.55 BBVA Sector 0.84 0.65 Asset quality Loan-loss provisions ( m) 3,600 16% Specific Provisions Generic Provisions 2004 2005 2006 9M07 Sector Aug 07 Management of credit risk competitive advantage 84% Sep 07 Coverage Ratio 9M07 RAROC 263%... constantly focused on effective recovery process 16 16
Customer-centric business model... New Customers 606 +16% 701 Cross-sell ratio 4.3 4.7 9M06 Individuals (Thousands) Recall Level 9M07 Dec 05 Sep 07 Products per customer Service Quality / Satisfaction BBVA Spain Complaint ratio (banks) 2 nd 3 rd 41.4% 37.1% 28.9% Individuals Peer 3 Peer 2 Peer 3 Peer 4 Peer 1 * Source: Bank of Spain... focused on strategic segments 17 17
Index Excellent positioning: Customers and Products New environment, New opportunities Strategic Drivers: Innovation and Transformation Conclusions 18
Spain is still growing faster than the EMU average although the economic scenario has changed... GDP Growth (%) Spain EMU 3.8 2.5 2.8 2.0 2007 2008 Forecast of gross household formation 618,873 609,317 Residents Immigrants Non residents Employment growth (%) 3.4 1.3 Spain EMU 2.1 1.1 2007 2008 2007 2008 Estimated net job creation 2008 435,000 19
... we are well-placed to capitalise on opportunities in the new situation by... Building on our strengths LIQUIDITY SOLVENCY 1 2 3 Re-pricing of assets Increased customer acquisition / share of wallet Strong focus in onbalance sheet deposits Goal: increase market share of activity and revenues 20
Index Excellent positioning: Customers and Products New environment, New opportunities Strategic Drivers: Innovation and Transformation Conclusions 21
Strategic Drivers CUSTOMER DIFFERENTIATION TECHNOLOGY Innovation Transformation NEW ORGANISATION - February 2007 - BANKING IN SPAIN INNOVATION and BUSINESS DEVELOPMENT NETWORKS TRANSFORMATION and PRODUCTIVITY Generating sustainable competitive advantages 22
Banking in Spain BANKING IN SPAIN INNOVATION AND BUSINESS DEVELOPMENT NETWORKS TRANSFORMATION & PRODUCTIVITY CHANNELS NEW BUSINESS MODELS 5 1 MASS MARKET 2 3 4 AFFLUENT SMALL BUSINESSES CBB YOUNG PEOPLE IMMIGRANTS SENIORS... MASS MARKET AFFLUENT SMALL BUSINESSES CBB PERSONALISED SERVICE MARKETING PRODUCTIVITY OPERATIONAL EFFICIENCY CUSTOMER SERVICING Making innovative solutions accessible to all customer segments 23
1 CHANNELS NEW BUSINESS MODELS MASS MARKET YOUNG PEOPLE IMMIGRANTS SENIORS... AFFLUENT SMALL BUSINESSES CBB Mass Market: from Marketing Intelligence to Customer Insight AMBITION Getting a better knowledge not only of needs but behaviors OPPORTUNITY Marketing tailored to customer s profile Phase I: Model Start-up - 128 campaigns - 182 micro-segments - 1.800.000 customer contacts Phase II: Model extension Transactions Mass customers Marginal customers Risk of defection New customers, etc Operating margin High-Value Customers Value Customers GOALS +100,000 customers retained / year + 0.25 products per customer 24
1 CHANNELS NEW BUSINESS MODELS MASS MARKET YOUNG PEOPLE IMMIGRANTS SENIORS... AFFLUENT SMALL BUSINESSES CBB Mass Market: segments YOUNG PEOPLE SEGMENT IMMIGRANTS The Blue Program DUAL RESPONSE: Dinero Express - BBVA Youth segment acquisition New members of Blue BBVA x 2.2 135,000 295,000 Total Active Customers (by no.) 421,000 +57% 660,000 Jan-Sep 06 Jan-Sep 07 Dec 05 Sep 07 % mortgage production via Blue BBVA 22% 32% Money Transfers Mkt. share (Banks & Saving Banks) 10,6% 21,5% Dec 06 Sep 07 Dec 05 Jun 07 GOALS 1 million young customers acquisition GOALS 500,000 immigrant customers acquisition 25
YOUNG PEOPLE IMMIGRANTS SENIORS 2... Affluent Segment: advisory and CHANNELS NEW BUSINESS MODELS MASS MARKET: AFFLUENT SMALL BUSINESSES CBB specialised customer service AMBITION To spread our Private Banking Model levering in our branch network OPPORTUNITY in the last 5 years the Affluent Market has grown by 200,000 people Only 20% of the segment receives especialized coverage BBVA s brand is well-placed New Distribution Model Excellent Growth CUSTOMERS (JAN 06 SEP 07) + 27 % ADVISORY GOALS AND INCENTIVES SALES FORCE RELATIONSHIP MODEL MATRIX STRUCTURE Growth engines 35-50 Plan COMMUNICATION VALUE PROPOSITION 1st bank ranked 1 MARKET SHARE 20% 1 IFRS 2007 26
3 CHANNELS NEW BUSINESS MODELS MASS MARKET: YOUNG PEOPLE IMMIGRANTS SENIORS... AFFLUENT SMALL BUSINESSES CBB Small Businesses Segment: high returns, penetration and bundling AMBITION Achieving a clear leadership in the segment (like in CBB) Excellent Positioning 1.- First or second provider in every sub-segment 2.- Strong growth (OCT 06 07): Ordinary Revenues: + 16% Derivatives Coverage: > 400% OPPORTUNITY 1.- Differential growth segment for the next few years 2.- BBVA growth potential 38% 19% 1 2 3 Levers Focus on transactional banking services POS Number 1st ranked Global Solutions or bundling Small businesses/ Small retailers BBVAnet Office 1st bank ranked 2 Professionals Self-employed people High value products and risk approach Small Businesses Nominal Market Share 2 AQmetrix 2007 SME S Customized derivatives and insurances Small Businesses PIDE 27
4 CHANNEL S NEW BUSINESS MODELS MASS MARKET YOUNG PEOPLE IMMIGRANTS SENIORS... AFFLUENT SMALL BUSINESSES CBB CBB Segment: to broaden leadership AMBITION To broaden the leadership and extend the franchise towards investment banking, advisory and non-financial services 1 2 Levers RISK MANAGEMENT GEOGRAPHICAL COVERAGE THE FRANCHISE Nominal mkt share 1st provider s mkt. share SME s 1 38% 1 13% 3 CROSS-SELLING: PRODUCT SPECIALISTS ON THE GROUND Excellent performance Mid-caps 1 72% 1 28% Products per customer 5,54 Large Companies 1 93% 1 53% 5,26 Institutions 1 53% 1 12% Dec 06 Sep 07 28
5 CHANNELS NEW BUSINESS MODELS MASS MARKET YOUTH SEGMENT IMMIGRANTS SENIORS... AFFLUENT SMALL BUSINESSES CBB... expanding the relationship beyond financial needs AMBITION Maximise the customer relationship 3 SMES 1 2 INDIVIDUALS Services: leisure, household, health, vehicles, shopping, etc. FROM: TO: On-line help: accounting, services INFORMATION Recording deposits and payments Sequential account entries RECOMMENDATION Cash Management Customer s financial planning and recommendations Franchises. Pioneer platform for Human Resources services Mobility solutions (mobile devices) Expert guidance + customized finance GOAL: Operating Profit up 10% in 2010 29
Banking in Spain BANKING IN SPAIN RESOURCES EMPLOYED IN THE BRANCH NETWORK 2007 2010 TRANSFORMATION AND PRODUCTIVITY COMMERCIAL STAFF 65% SERVICING 35% 50% Sales 50% Operations COMMERCIAL STAFF 75% SERVICING 25% 70% Sales 30% Operations 1 2 3 COMMERCIAL PRODUCTIVITY OPERATIONAL EFFICIENCY CUSTOMER SERVICING We are developing new ways of doing things 30 30
1 COMMERCIAL PRODUCTIVITY OPERATIONAL OPERATIONAL EFFICIENCY EFFICIENCY CUSTOMER CUSTOMER SERVICING SERVICING Commercial Productivity 1 Simplifying sales operations 2 Processes reengineering / new software applications New tools / infrastructure AVERAGE PROCESSING TIME Δ 33% 1. Guidance Advisory Automation Affluent and Mass Affluent 1 2 Proprietary Tool 3 3. Follow-up INCREASE IN CORE REVENUES Customer served + 35% 2. Solutions Customer advised 3 Sales Force 1 Remuneration aligned to performance 2 3 62% of staff with higher education Specialised sales force 4 Improvements in productivity *No. of products sold per manager per month pp 34.5 +16.2% 40.1 +22.4% 49.1 2005 2006 2007e 31
2 COMMERCIAL COMMERCIAL PRODUCTIVITY PRODUCTIVITY OPERATIONAL EFFICIENCY CUSTOMER CUSTOMER SERVICING SERVICING Operational efficiency Traditional Model Centralisation Outsourcing Up to February 2006 November 2007 2010 Localized Partially delocalized Delocalized Vertical Across Outsourcing No specialisation Specialised New functionalities 51% cost reduction Reduced operational risk Improved service quality Potential generator of new revenues 32
3 COMMERCIAL COMMERCIAL PRODUCTIVITY PRODUCTIVITY OPERATIONAL OPERATIONAL EFFICIENCY EFFICIENCY CUSTOMER SERVICING Servicing 1 2 Migration 4,500 new ATMs 2007 Transactions (*) 2010 55% 75% Providing all servicing transactions (including pay-in) Full deployment: 2006-2010 % Automation Cash withdrawals (67.5% of Servicing) 2007 76% 2010 87% Servicing Automatic channels Deposits and cash payments (24% of Servicing) 6.5% 50% 3 Branch 1 Optimization 4 Tellers devoted to servicing FROM Various lowcomplexity branches 2007 2010 TO Retail banking centre Δ 30% 2 1 Non automatic servicing 33 33
Contents Excellent positioning: Customers and Products New environment, New opportunities Strategic Drivers: Innovation and Transformation Conclusions 34
Banking in Spain : Key Drivers 1 Solid Growth of Earnings 2 Liquidity and Solvency 3 Innovation 4 5 Transformation New Distribution Models 6 High Credit Quality 35
... which provide a platform for attaining the following goals Clients and business targets by 2010 1 million new young customers 500,000 new immigrant customers 10% increase in operating profit coming from non-financial products and services Net attributable profit 2008-09: >15% CAGR 36