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Note 32 - Capital base and Capital management | 12 Months Ended
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Dec. 31, 2019
Capital Base And Capital Management |
Information Whether Entity Complied with Any Externally Imposed Capital Requirement | 32. Capital base and capital management 32.1 Capital base As of December 31, 2019, 2018 and 2017, equity is calculated in accordance to the applicable regulation of each year on minimum capital base requirements for Spanish credit institutions –both as individual entities and as consolidated group– and how to calculate them, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to t he market. The minimum capital base requirements established by the current regulation are calculated according to the Group’s exposure to credit and dilution risk, counterparty and liquidity risk relating to the trading portfolio, exchange-rate risk and o perational risk. In addition, the Group must fulfill the risk concentration limits established in said regulation and the internal corporate governance obligations. With regard to BBVA, after the supervisory review and evaluation process (“SREP”) carried o ut by the ECB, the Group has received the communication to maintain, from January 1, 2020 on a consolidated basis, a CET1 capital ratio of 9.27% and a total capital ratio of 12.77%. This total capital requirement at consolidated level includes: i) a Pillar 1 requirement of 8% that should be fulfilled by a minimum of 4.5% of CET1; ii) a Pillar 2 requirement of 1.5% of CET1 that remains at the same level as the one included in the previous SREP decision; iii) a Capital Conservation buffer of 2.5% of CET1; iv) the Other Systemic Important Institution buffer (OSII) of 0.75% of CET1; and v) the Countercyclical Capital buffer 0.02% of CET1. The ECB Pillar 2 requirement remains at the same level as the one established in the last SREP decision, being the sole diffe rence the evolution of the Countercyclical Capital buffer of 0.01% approximately. A reconciliation of the main figures between the accounting and regulatory own funds as of December 31, 2019, 2018 and 2017 is shown below:
Eligible capital resources (Millions of Euros)
| Notes | 2019 | 2018 | 2017
Capital | 26 | 3,267 | 3,267 | 3,267
Share premium | 27 | 23,992 | 23,992 | 23,992
Retained earnings, revaluation reserves and other reserves | 28 | 26,277 | 23,021 | 23,724
Other equity instruments, net |  | 56 | 50 | 54
Treasury shares | 29 | (62) | (296) | (96)
Attributable to the parent company | 6 | 3,512 | 5,400 | 3,514
Attributable dividend |  | (1,084) | (1,109) | (1,172)
Total equity |  | 55,958 | 54,326 | 53,283
Accumulated other comprehensive income | 30 | (7,235) | (7,215) | (6,939)
Non-controlling interest | 31 | 6,201 | 5,764 | 6,979
Shareholders' equity |  | 54,925 | 52,874 | 53,323
Goodwill and other intangible assets |  | (6,803) | (8,199) | (6,627)
Direct and synthetic treasury shares |  | (422) | (135) | (182)
Deductions |  | (7,225) | (8,334) | (6,809)
Temporary CET 1 adjustments |  | - | - | (273)
Capital gains from the Available-for-sale debt instruments portfolio |  | - | - | (256)
Capital gains from the Available-for-sale equity portfolio |  | - | - | (17)
Differences from solvency and accounting level |  | (215) | (176) | (189)
Equity not eligible at solvency level |  | (215) | (176) | (462)
Other adjustments and deductions (1) |  | (3,832) | (4,049) | (3,711)
Common Equity Tier 1 (CET 1) |  | 43,653 | 40,313 | 42,341
Additional Tier 1 before Regulatory Adjustments |  | 6,048 | 5,634 | 6,296
Total Regulatory Adjustments of Additional Tier 1 |  | - | - | (1,657)
Tier 1 |  | 49,701 | 45,947 | 46,980
Tier 2 |  | 8,304 | 8,756 | 8,798
Total Capital (Total Capital=Tier 1 + Tier 2) |  | 58,005 | 54,703 | 55,778
Total Minimum equity required |  | 46,540 | 41,576 | 40,370
(1) Other adjustments and deductions includes the amount of minority interest not eligible as capital, amount of dividends not distributed and other deductions and filters set by the CRR. The Group’s bank capital in accordance with the aforementioned applicable regu lation as of December 31, 2019, 2018 and 2017 is shown below:
Amount of capital CC1 (Millions of Euros)
| 2019 | 2018 | 2017
Capital and share premium | 27,259 | 27,259 | 27,259
Retained earnings and equity instruments | 26,960 | 23,773 | 23,791
Other accumulated income and other reserves | (7,157) | (7,143) | (6,863)
Minority interests | 4,404 | 3,809 | 5,446
Net interim attributable profit | 1,316 | 3,188 | 1,302
Ordinary Tier 1 (CET 1) before other reglamentary adjustments | 52,783 | 50,887 | 50,935
Goodwill and intangible assets | (6,803) | (8,199) | (6,627)
Direct and indirect holdings in equity | (484) | (432) | (278)
Deferred tax assets | (1,420) | (1,260) | (755)
Other deductions and filters | (423) | (682) | (933)
Total common equity Tier 1 reglamentary adjustments | (9,130) | (10,573) | (8,594)
Common equity TIER 1 (CET1) | 43,653 | 40,313 | 42,341
Equity instruments and share premium classified as liabilities | 5,400 | 5,005 | 5,893
Qualifying Tier 1 capital included in consolidated AT1 capital issued by subsidiaries and held by third parties | 648 | 629 | 403
Additional Tier 1 (CET 1) before regulatory adjustments | 6,048 | 5,634 | 6,296
Temporary CET 1 adjustments | - | - | (1,657)
Total regulatory adjustments of additional equity l Tier 1 | - | - | (1,657)
Additional equity Tier 1 (AT1) | 6,048 | 5,634 | 4,639
Tier 1 (Common equity TIER 1+ additional TIER 1) | 49,701 | 45,947 | 46,980
Equity instruments and share premium accounted as Tier 2 | 3,064 | 3,768 | 1,759
Eligible equity instruments | 4,690 | 4,409 | 6,438
Credit risk adjustments | 550 | 579 | 601
Tier 2 before regulatory adjustments | 8,304 | 8,756 | 8,798
Tier 2 | 8,304 | 8,756 | 8,798
Total capital (Total capital=Tier 1 + Tier 2) | 58,005 | 54,703 | 55,778
Total RWA's | 364,448 | 348,264 | 362,875
CET 1 (phased-in) | 12.0% | 11.6% | 11.7%
Tier 1 (phased-in) | 13.6% | 13.2% | 12.9%
Total capital (phased-in) | 15.9% | 15.7% | 15.4%
As of December 2019 Common Equity Tier 1 (CET1) phased-in ratio(1) stood at 11.98%, including the impact of IFRS 16 standard’s implementation that entered into force on Ja nuary 1, 2019 (-11 basis points). Compared to December 2018, the ratio increased by +40 basis points supported by the profit generation, net of dividend payments and remuneration of contingent convertible capital instruments (CoCos), notwithstanding the mo derate growth of risk-weighted assets. In addition, the impairment of the goodwill in the United States CGU recognized by the Group amounting to €1,318 million has had no impact on the regulatory own funds (see Note 18.1). Risk-weighted assets (RWAs) increased by approximately €16,100 million in 2019 as a result of activity growth, mainly in emerging markets, and the impact of regulatory changes (the application of IFRS 16 and TRIM - Targeted Review of Internal Models) for approximately €7,600 million (with an impact on the CET1 ratio of -25 basis points. It should be noted that during the second quarter of 2019, the recognition by the European Commission of Argentina as a country whose supervis ory and regulatory requirements(2) are considered equivalen t had a positive effect on the evolution of the RWAs. The Additional tier 1 capital (AT1) phased-in ratio stood at 1.66% as of December 31, 2019. In this regard, BBVA S.A. carried out an issue of €1,000 million CoCos, registered at the Spanish Securities M arket Commission (CNMV) and another issue of the same type of instruments, registered in the Securities and Exchange Commission (hereinafter, SEC) for USD 1,000 million. On the other hand, in February 2020 the CoCos issuance of € 1,500 million issued in Fe bruary 2015 will be amortized. As of December 31, 2019, it is no longer included in the capital ratios. Finally, in terms of issues eligible as Tier 2 capital, BBVA S.A. issu ed € 750 million of subordinated debt and carried out the early redemption of two subordinated-debt issues; one for €1,500 million redeemed in April 2019, and another issued in June 2009 by Caixa d'Estalvis de Sabadell with an outstanding nominal amount of €4.9 million and redeemed in June 2019. With regard to the subsidiaries of the Gr oup, BBVA Mexico carried out a Tier 2 issuance of USD 750 million and partially repurchased two subordinated debt issuances ($250 million due in 2020 and $500 million due in 2021). Meanwhile, Garanti BBVA issued another Tier 2 issuance of TRY 253 million. All of this, together with the evolution of the remaining elements eligible as Tier 2 capital, set the Tier 2 phased in ratio at 2.28% as of December 31, 2019. In addition, during the beginning of 2020, two subordinated debts were issued, BBVA, S.A. issued €1,000 million, and Garanti BBVA issued 750 million of Turkish Liras. These issuances will be included in the capital ratios for the first quarter of 2020 with an estimated impact of approximately +28 basis points on the T2 capital ratio. These levels are above the requirements established by the supervisor in its SREP letter applicable in 2019, also above the appli cable requirements from January 1, 2020. In November 2019, BBVA received a new communication from the Bank of Spain regarding its minimum requirement for own funds and eligible liabilities (MREL), as determined by the Single Resolution Board, that was calculated taking into account the financial and supervisory information as of December 31, 2017. In accordance with such communication, BBVA has to reach, by January 1, 2021, an amount of own funds and eligible liabilities equal to 15.16% of the total liabilities and own funds of its resolution group, on sub-consolidated basis (the MREL requirement). Within this MREL, an amount equal to 8.01% o f the total liabilities and own funds shall be met with subordinated instruments (the subordination requirement), once the relevant allowance is applied. This MREL requirement is equal to 28.50% in terms of risk-weighted assets (RWAs), while the subordinat ion requirement included in the MREL requirement is equal to 15.05% in terms of RWAs, once the relevant allowance has been applied. In order to comply with this requirement, BBVA has continued its issuance program during 2019 by closing three senior non-pr eferred debt issuances, for a total of € 3,000 million, of which one consists in green bonds (€ 1,000 million). In addition, BBVA issued €1,000 million of senior preferred debt. The Group estimates that the current own funds and eligible liabilities struct ure of the resolution group meets the MREL requirement, as well as the new subordination requirement. (1) This CET1 phased-in ratio includes the impact of the initial implementation of IFRS 9. In this context, the European Commission and Parliament have established temporary arrangements, which implementation is voluntary, which seek to phase-in the impact of IFRS 9 on capital ratios. BBVA has informed the supervisory board of its adherence to these arrangements. (2) On April 1, 2019, the Official Journ al of the European Union published Commission Implementing Decision (EU) 2019/536, which includes Argentina within the list of third countries and territories whose supervisory and regulatory requirements are considered equivalent for the purposes of the t reatment of exposures in accordance with Regulation (EU) No. 575/2013. 32.2 Leverage ratio The leverage ratio (LR) is a regulatory measure complementing capital designed to guarantee the soundness and financial strength of instit utions in terms of indebtedness. This measurement can be used to estimate the percentage of the assets and off-balance sheet arrangements financed with Tier 1 capital, the carrying amount of the assets used in this ratio is adjusted to reflect the bank’s current or potential leverage with a given balance-sheet position (Leverage ratio exposure). Breakdown of capital base as of December 31, 2019, 2018 and 2017, calculated according to CCR, is as follows:
Capital Base
|  | 2019 | 2018 | 2017
Tier 1 (millions of euros) (a) |  | 49,701 | 45,947 | 46,980
Exposure (millions of euros) (b) |  | 731,087 | 705,299 | 709,758
Leverage ratio (a)/(b) (percentage) |  | 6.80% | 6.51% | 6.62%
32.3 Capital management Capi tal management in the BBVA Group has a twofold aim: Maintain a level of capitalization according to the business objectives in all countries in which it operates and, simultaneously, Maximize the return on shareholders’ funds through the efficient allocati on of capital to the different units, a good management of the balance sheet and appropriate use of the various instruments forming the basis of the Group’s equity: shares, preferred securities and subordinated debt. This capital management is carried out determining the capital base and the solvency ratios established by the prudential and minimum capital requirements also have to be met for the entities subject to prudential supervision in each country. The current regulation allows each entity to apply i ts own internal ratings-based (IRB) approach to risk assessment and capital management, subject to Bank of Spain approval. The BBVA Group carries out an integrated management of these risks in accordance with its internal policies and its internal capital estimation model has received the Bank of Spain’s approval for certain portfolios (see Note 7).

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