Grupo Financiero BBVA Bancomer’s Mission Statement > Build trust by expanding and enhancing customer service with transparency and integrity, constantly offering top-quality products and services > Provide our employees with the ideal working conditions to help them develop their full potential > Remain solvent and offer attractive returns to our shareholders > Foster social well-being as a result of our business activities
to move forward is to grow
Message from the Chairman of the Board of Directors > 2 Brief from the Chief Executive Officer > 4 Business Units: Retail Banking > 16 Middle-Market and Government Banking > 20 Corporate and Investment Banking > 24 Asset management > 28 Global Markets and Distribution > 29 NonBanking Businesses > 30 Central and Staff Areas > 31 Management Discussion and Analysis > 36 Relevant Events > 39 Social Responsibility > 40 BBVA > 42 Boards of Directors > 46 Steering Committee > 48 Regional Boards > 49 2004 Financial Statements > 50
2004 Annual Report
Grupo Financiero BBVA Bancomer’s Mission Statement > Build trust by expanding and enhancing customer service with transparency and integrity, constantly offering top-quality products and services > Provide our employees with the ideal working conditions to help them develop their full potential > Remain solvent and offer attractive returns to our shareholders > Foster social well-being as a result of our business activities
to move forward is to grow
Message from the Chairman of the Board of Directors > 2 Brief from the Chief Executive Officer > 4 Business Units: Retail Banking > 16 Middle-Market and Government Banking > 20 Corporate and Investment Banking > 24 Asset management > 28 Global Markets and Distribution > 29 NonBanking Businesses > 30 Central and Staff Areas > 31 Management Discussion and Analysis > 36 Relevant Events > 39 Social Responsibility > 40 BBVA > 42 Boards of Directors > 46 Steering Committee > 48 Regional Boards > 49 2004 Financial Statements > 50
2004 Annual Report
introduction
1
Grupo Financiero BBVA Bancomer (BBVA Bancomer or the Group) is a financial institution with significant presence in the banking, pension fund, mutual fund, bancassurance, and money transfer businesses in Mexico. Core activities are conducted through the Group's main banking subsidiary, BBVA Bancomer (Bancomer or the Bank)—a nationwide leader in terms of assets, deposits, loans, and number of branches—pursuant to a business model consisting of distribution networks segmented by type of client, strict risk management, and long-term growth and profitability goals. The Group strives to provide a better future for its clients by offering them mutually beneficial relationships, proactive service, advisory, and global solutions. The Group is a controlling affiliate of Banco Bilbao Vizcaya Argentaria (BBVA), one of the leading financial groups in Europe.
moving forward.
Nationwide Leadership BBVA Bancomer l Others l
Total Assets
Performing Loans excluding Fobaproa
Demand and Time Deposits
Corporate Structure Grupo Financiero BBVA Bancomer, S.A. de C.V.
Investor Relations
% 26.5% 73.5%
24.4% 75.6%
28.3%
COMPANY
EQUITY STAKE
BBVA Bancomer, S.A. (Bancomer)
71.7%
99.9
Yvonne Ochoa Rosellini Ildefonso Buendía Pérez Telephone (52 55) 5621 5875 Telephone (52 55) 5621 5679 Fax (52 55) 5621 6161 ext. 17119
[email protected] www.bancomer.com
ACTIVITY
Banking institution with two major subsidiaries:
Administradora de Fondos para el Retiro Branches
Automated Teller Machines (ATMs)
21.4%
Assets in Mutual Funds
20.2%
19.3%
75.0
Pension fund management
100.0
Valley Bank and money transfer services
75.0
Insurance product development
Bancomer, S.A. de C.V. (Afore Bancomer) Bancomer Financial Holdings (BFH) Seguros BBVA Bancomer, S.A. de C.V. (Seguros Bancomer)
78.6%
79.8%
and marketing through the Bank’s
Middle-Market Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2389
Bancassurance – Accrued Premiums
Pension Fund Assets under Management
31.6%
20.4%
Annuity product development
DESIGN: SIGNI / PHOTOGRAPHY: HÉCTOR A. HERRERA / PRINTING: PANORAMA
99.9
(Pensiones Bancomer)
and marketing
Casa de Bolsa BBVA Bancomer, S.A. de C.V.
99.9
(Casa de Bolsa Bancomer)
Brokerage and investment banking services
BBVA Bancomer Servicios, S.A. (Bancomer Servicios)
99.9
Banking institution specializing in trust and appraisal services,
79.4%
68.4%
Figures as of December 2004. Sources: National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV), Mexican Banking Association (Asociación de Bancos de México or ABM), National Retirement Savings Commission (Comisión Nacional del Sistema de Ahorro para el Retiro or CONSAR), Mexican Insurance Association (Asociación Mexicana de Instituciones de Seguros or AMIS), and Mexican Brokers Association (Asociación Mexicana de Intermediarios Bursátiles or AMIB)
among others.
79.6%
BBVA Bancomer Gestión, S.A. de C.V. (Bancomer Gestión) 99.9
Mutual fund and asset management
Preventis, S.A. de C.V.
Health insurance services
75.0
Company Highlights
%
Total assets (millions of pesos) Performing loans excluding Fobaproa (millions of pesos) Demand and time deposits (millions of pesos) Branches Automated teller machines (ATMs)
AMOUNT
SHARE
RANKING
2,100,210
555,644
26.5
1
862,371
210,117
24.4
1
1,415,618
400,932
28.3
1
7,797
1,671
21.4
1
20,256
4,084
20.2
3
393,909
75,989
19.3
1
Accumulated reserves for annuities (millions of pesos)
56,411
11,609
20.6
1
Accrued bancassurance premiums (millions of pesos)
10,435
3,299
31.6
1
477,850
97,645
20.4
2
Pension fund assets under management (millions of pesos)
Private Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2355 Casa de Bolsa Bancomer Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2888 y 5201 2916
This Annual Report contains certain forward-looking statements and data relating to BBVA Bancomer, its subsidiaries and other offices, which are based on the views and assumptions of its management, as well as information that is currently available to the Group. Such statements reflect the Group’s current viewpoint regarding future events. These estimates, however, are subject to risks, unforeseen events, and assumptions. Many factors could cause actual Company results, financial goals, loan portfolio growth, availability of funds, performance, or achievements to differ materially from any of these forecasts. Certain data is difficult or impossible to predict accurately and much beyond the Company’s control. Therefore, there can be no assurance that the forwardlooking statements included herein will occur as predicted.
NON-BANKING BUSINESSES Assets in mutual funds (millions of pesos)
Government Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2434 y 5201 2435
Forward-Looking Information May Prove To Be Inaccurate
MARKET BANKING BUSINESS
DEPOSITS First place in 30 states l Second place in 2 states l
Afore Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4096
80.7%
Pensiones Bancomer, S.A. de C.V.
20.6%
Corporate Headquarters Centro Bancomer Av. Universidad 1200 Col. Xoco 03339, Mexico City Tel. (52 55) 5621 3434
Corporate and Investment Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2319 y 5201 2320
branch network
Annuities – Accumulated Reserves
Office Directory
Figures as of December 2004. Sources: CNBV, ABM, CONSAR, AMIS, and AMIB
Results expressed in forward-looking statements that are subject to change may include, without limitation, changes in general, economic, political, government, business, and financial conditions, whether globally and/or in the countries in which the Group does business, as well as changes in interest rates, inflation, exchange rates, and business strategy. Should any of the variables beyond the Group’s control change or should underlying assumptions prove to be incorrect, actual results may vary materially from those described herein. The Group neither intends nor assumes any obligation to update these forward-looking statements. The information contained herein should not be used to make any business or investment decisions whatsoever.
Fiduciary Av. Universidad 1200 Col. Xoco 03339, Mexico City Tel. (52 55) 5621 0954 Pensiones Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4096 Seguros Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4166 Bancomer Mutual Fund Management Montes Urales 620, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2000 Hipotecaria Nacional Liverpool 88 Col. Juárez 06600, Mexico City Tel. (52 55) 1103-7600
Nationwide Leadership BBVA Bancomer l Others l
Total Assets
Performing Loans excluding Fobaproa
Demand and Time Deposits
Corporate Structure Grupo Financiero BBVA Bancomer, S.A. de C.V.
Investor Relations
% 26.5% 73.5%
24.4% 75.6%
28.3%
COMPANY
EQUITY STAKE
BBVA Bancomer, S.A. (Bancomer)
71.7%
99.9
Yvonne Ochoa Rosellini Ildefonso Buendía Pérez Telephone (52 55) 5621 5875 Telephone (52 55) 5621 5679 Fax (52 55) 5621 6161 ext. 17119
[email protected] www.bancomer.com
ACTIVITY
Banking institution with two major subsidiaries:
Administradora de Fondos para el Retiro Branches
Automated Teller Machines (ATMs)
21.4%
Assets in Mutual Funds
20.2%
19.3%
75.0
Pension fund management
100.0
Valley Bank and money transfer services
75.0
Insurance product development
Bancomer, S.A. de C.V. (Afore Bancomer) Bancomer Financial Holdings (BFH) Seguros BBVA Bancomer, S.A. de C.V. (Seguros Bancomer)
78.6%
79.8%
and marketing through the Bank’s
Middle-Market Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2389
Bancassurance – Accrued Premiums
Pension Fund Assets under Management
31.6%
20.4%
Annuity product development
DESIGN: SIGNI / PHOTOGRAPHY: HÉCTOR A. HERRERA / PRINTING: PANORAMA
99.9
(Pensiones Bancomer)
and marketing
Casa de Bolsa BBVA Bancomer, S.A. de C.V.
99.9
(Casa de Bolsa Bancomer)
Brokerage and investment banking services
BBVA Bancomer Servicios, S.A. (Bancomer Servicios)
99.9
Banking institution specializing in trust and appraisal services,
79.4%
68.4%
Figures as of December 2004. Sources: National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV), Mexican Banking Association (Asociación de Bancos de México or ABM), National Retirement Savings Commission (Comisión Nacional del Sistema de Ahorro para el Retiro or CONSAR), Mexican Insurance Association (Asociación Mexicana de Instituciones de Seguros or AMIS), and Mexican Brokers Association (Asociación Mexicana de Intermediarios Bursátiles or AMIB)
among others.
79.6%
BBVA Bancomer Gestión, S.A. de C.V. (Bancomer Gestión) 99.9
Mutual fund and asset management
Preventis, S.A. de C.V.
Health insurance services
75.0
Company Highlights
%
Total assets (millions of pesos) Performing loans excluding Fobaproa (millions of pesos) Demand and time deposits (millions of pesos) Branches Automated teller machines (ATMs)
AMOUNT
SHARE
RANKING
2,100,210
555,644
26.5
1
862,371
210,117
24.4
1
1,415,618
400,932
28.3
1
7,797
1,671
21.4
1
20,256
4,084
20.2
3
393,909
75,989
19.3
1
Accumulated reserves for annuities (millions of pesos)
56,411
11,609
20.6
1
Accrued bancassurance premiums (millions of pesos)
10,435
3,299
31.6
1
477,850
97,645
20.4
2
Pension fund assets under management (millions of pesos)
Private Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2355 Casa de Bolsa Bancomer Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2888 y 5201 2916
This Annual Report contains certain forward-looking statements and data relating to BBVA Bancomer, its subsidiaries and other offices, which are based on the views and assumptions of its management, as well as information that is currently available to the Group. Such statements reflect the Group’s current viewpoint regarding future events. These estimates, however, are subject to risks, unforeseen events, and assumptions. Many factors could cause actual Company results, financial goals, loan portfolio growth, availability of funds, performance, or achievements to differ materially from any of these forecasts. Certain data is difficult or impossible to predict accurately and much beyond the Company’s control. Therefore, there can be no assurance that the forwardlooking statements included herein will occur as predicted.
NON-BANKING BUSINESSES Assets in mutual funds (millions of pesos)
Government Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2434 y 5201 2435
Forward-Looking Information May Prove To Be Inaccurate
MARKET BANKING BUSINESS
DEPOSITS First place in 30 states l Second place in 2 states l
Afore Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4096
80.7%
Pensiones Bancomer, S.A. de C.V.
20.6%
Corporate Headquarters Centro Bancomer Av. Universidad 1200 Col. Xoco 03339, Mexico City Tel. (52 55) 5621 3434
Corporate and Investment Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2319 y 5201 2320
branch network
Annuities – Accumulated Reserves
Office Directory
Figures as of December 2004. Sources: CNBV, ABM, CONSAR, AMIS, and AMIB
Results expressed in forward-looking statements that are subject to change may include, without limitation, changes in general, economic, political, government, business, and financial conditions, whether globally and/or in the countries in which the Group does business, as well as changes in interest rates, inflation, exchange rates, and business strategy. Should any of the variables beyond the Group’s control change or should underlying assumptions prove to be incorrect, actual results may vary materially from those described herein. The Group neither intends nor assumes any obligation to update these forward-looking statements. The information contained herein should not be used to make any business or investment decisions whatsoever.
Fiduciary Av. Universidad 1200 Col. Xoco 03339, Mexico City Tel. (52 55) 5621 0954 Pensiones Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4096 Seguros Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4166 Bancomer Mutual Fund Management Montes Urales 620, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2000 Hipotecaria Nacional Liverpool 88 Col. Juárez 06600, Mexico City Tel. (52 55) 1103-7600
2
2004 annual report
Message from the Chairman of the Board of Directors
To our shareholders: Héctor Rangel Domene, Chairman of the Board of Directors
It is with deep satisfaction that I address you for the first time as Chairman of the Board of Directors of BBVA Bancomer, especially since 2004 has been a year of such accomplishments for our Institution, meriting heartfelt congratulations to our colleagues, who worked unrelentingly on meeting our goals, and very deservedly, to our talented senior management team led by Jaime Guardiola.
message from the chairman
The future of the Mexican banking sector is truly promising and, at Bancomer, we are intent on fulfilling our responsibility of financing Mexico's development to the best of our ability…
During the year—and for the first time since the crisis of 1995—the Mexican banking system grew at a fast pace across all loan categories, with middle-market, mortgage, and consumer loans rising 17%, 25%, and 42%, respectively. As a result, overall lending increased by 25% in real terms for the system as a whole during 2004. Within this context of substantial progress in lending activity, Bancomer exceeded all expectations, outperforming the market with increases of 20% in middle-market loans, 34% in mortgage loans and 55% in consumer loans. In short, 2004 was a year in which BBVA Bancomer reaffirmed its financial strength, improved its presence throughout many regions, expanded its product offerings, and maintained its market leadership. A particularly relevant event regarding our growth strategy in the mortgage market was the acquisition of Hipotecaria Nacional, the largest Limited Purpose Financial Institution (Sociedad Financiera de Objeto Limitado or Sofol) in Mexico. This transaction represents a renewed effort to participate more actively in mortgage financing for Mexican families. We are confident that the favorable macroeconomic conditions prevailing in 2004 will continue as such in
2005, perhaps even strengthened by higher domestic demand and a likely expansion in exports. This could translate into an attractive growth environment, allowing us to achieve strong results once again within all of the segments in which we participate. Notwithstanding the economy's positive overall performance, Mexico needs a pick-up in pace to be in a position to offer more growth opportunities for its citizens, something that not only requires further progress towards stability, but also a more efficient, dynamic, and flexible economy. This is why the stillpending structural reforms, specifically those relating to energy, taxes, and employment, are crucial to ignite stronger economic growth. The future of the Mexican banking sector is truly promising and, at Bancomer, we are intent on fulfilling our responsibility of financing Mexico's development to the best of our ability, offering added and improved products and services to our clients on a day-to-day basis.
Héctor Rangel Domene Chairman of the Board of Directors
3
4
2004 annual report
Brief from the Chief Executive Officer
Dear clients, colleagues and shareholders: Jaime Guardiola Romojaro, Chief Executive Officer
When I addressed you at the closing of 2003, after having set ambitious goals and budgets, I anticipated that by the end of 2004, we would surely be congratulating ourselves for having met our goals once again. I am pleased to report that, even though competition intensified enormously, 2004 was not only a year of conclusive growth for BBVA Bancomer, but also a year full of accomplishments and one of consolidation of our commercial strategy.
brief from the CEO
We have steadfastly increased business volumes, evidencing the competitive advantage of our segmented channel mix and steady improvements in productivity.
By continuing to move forward along the road we had mapped out since BBVA Bancomer was created in June 2000, we have reached targeted milestones. During the first 30 months, we increased the bank's profitability, with savings of around 800 million US dollars. Over the following twelve months, we implemented a distinctively unique business model, which has allowed us to gain in-depth knowledge on our clients' preferences, and consequently, adapt our products and services to better accommodate their needs. At the same time, our relationship with each and every one of our clients has grown more profitable, because we want them to be certain and clear about our offerings, and we also need them to certify our service. Lastly, the past twelve months are proof of BBVA Bancomer's strengthened commercial muscle. We have become more efficient by focusing on our clients, managing risk as a value-building tool, and executing a unified technological project. In 2004, our efforts concentrated on reinforcing the courses of action implemented in 2003, such as improving recurrent income, growing the most profitable loan and deposit segments, and continuing with risk assessment and control. Also during this year, we took concrete steps to deepen financial services and focus on underserved business segments. Recurrent income (net interest income before monetary result, plus fees, minus expenses) ended the year at 19,531 million pesos, growing 20% mainly as a result of 21% and 12% increases in net interest income in pesos from loans and deposits, respectively.
Driven by a more aggressive credit approval strategy implemented in 2003, commercial activity skyrocketed, with the resulting rise in expenses. However, thanks to income growth rates of almost four times the expense growth rate, the efficiency ratio improved by 50 basis points in 2004, ending at a historical low of 52.2%. In 2004, bank and mutual fund deposits grew 8% and 5%, respectively, for an increase of over 30,000 million pesos in client assets. Growth in performing loans excluding UDI trusts and Fobaproa notes showed a definite change in trend, with over 42,000 million pesos broken down as follows: 42% in middle-market loans, 36% in consumer loans, 13% in state industry loans, and 9% in mortgage loans. We have steadfastly increased business volumes, evidencing the competitive advantage of our segmented channel mix and steady improvements in productivity. In 2004, we issued 1.5 million credit cards, 1.3 million payroll cards, close to 10 thousand Business Cards (Tarjetas Negocios), almost 460 thousand payroll loans, over 39 thousand car loans, and more than 6 thousand mortgage loans. These figures represent an average increase of around 80% in business during the year. Meticulous market niche segmentation has allowed us to build a closer banking relationship with low-income clients through the issuance of over 100 thousand Frozen Cards (Tarjetas Congeladas) featuring fixed monthly payments. In addition, the car financing strategy that was recently launched by our Finanzia division helped us compete successfully against other financial intermediaries.
5
6
2004 annual report
Despite the expansion in loans, past-due loans contracted 32% in 2004, leading to an all-time low past-due loan ratio of 2.2%. Our Group also stands out in other segments besides Retail Banking; proof of this is that BBVA Bancomer maintained its leading position in debt issuance in the Mexican market for the fourth year in a row (source: Dealogic), with 42 Investment Banking transactions in which Bancomer participated with over 1,898 million US dollars. We are also leaders in businesses such as pension and mutual funds, with over 97,500 million pesos and close to 76,000 million pesos under management, respectively; accrued bancassurance premiums, with around 3,300 million pesos; and money remittances, with over 6,500 million US dollars transferred during the year. Furthermore, four unique, high-impact transactions took place during 2004. First, BBVA raised its strategic bet on Mexico, successfully completing the public tender offer for 100% of BBVA Bancomer's equity, injecting 4,100 million US dollars and substantiating confidence in the long-term growth potential of our business. Second, an agreement was finally reached with the Deposit Insurance Agency (Instituto de Protección al
Ahorro Bancario or IPAB) for the final exchange of Fobaproa notes—the last major pending issue from the banking crisis of 1995—precisely during the year that marked a turnaround in the banking system's growth trend. This agreement translated into a gross cost of around 3,300 million pesos, leading to a 14% decline in net income to 6,959 million pesos. Excluding this extraordinary expense, however, net income would have totaled 9,168 million pesos, growing 14% above 2003 levels. Third, as a result of the accumulated strength of the bank's equity base, we were comfortably able to apply the new loan portfolio rating standards issued by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV), reinforcing the company's financial profile with 7,169 million pesos and, at the same time, maintaining a capitalization ratio of 13.7% with 12.4% Tier I capital, which leaves us more than enough room to continue with our ambitious lending growth plans. Finally, in early 2005, we finalized the acquisition of Hipotecaria Nacional, the largest Sofol in Mexico. This investment will double our mortgage loan portfolio and enable us to participate more actively in all segments of this market. Ours was the first bank to grow inorganically via the inclusion of a Sofol, which we view as a strategic addition to our business portfolio and a vehicle to heighten our ability to penetrate the strong growth-potential, middle- and low-income housing segments.
brief from the CEO
During 2004, Bancomer's banking business grew and became more profitable by providing the financing needed to boost the country's productive plant and internal demand.
As regards changes in structure, in 2004 we created the Innovation and Development department (i+D), which focuses on developing payment systems as well as products and services leveraged on both technology and telecommunications. The Treasury and Markets division was also boosted, changing the model to emphasize direct business with clients. During 2004, Bancomer's banking business grew and became more profitable by providing the financing needed to boost the country's productive plant and internal demand. This contribution to economic growth merited us LatinFinance magazine's award as “The Best Bank of Latin America in 2004". The biggest challenge for 2005 will be to achieve stronger growth in loans than in deposits for the first time in our history, continuing to exhibit strong commercial activity and leadership across all business segments, striving to create further synergies, working as a team, focusing on clients, and innovating on a continual basis. We are improving daily in the performance of our banking activities and we will continue to make progress in this direction going forward. A great number of people have chosen our Group as the best option to manage their assets and finance their growth. The Group's shareholders have entrusted us with their investments and we are a part of a society
that values the reputation of our company and the BBVA Bancomer brand, one that expects us to conduct ourselves in an exemplary manner. Internally, we are a group of professionals who trust our co-workers for the fulfillment of our day-to-day work duties. All of the above implies the necessity of responding to huge commitments, which we have met to the fullest. I thank each and every one of our interest groups for their contribution to making 2004 yet another year of consolidation and sustained growth.
Bancomer ...moving forward
Jaime Guardiola Romojaro Chief Executive Officer
7
8
2004 annual report
the birth of a remarkable
Institution BBVA Bancomer, the largest financial group in Mexico, was created in June 2000 from the merger of three different banking institutions. Since its inception, a critical course of action was set, firstly to resize the Organization, then to make it more efficient and refocus its business model and, finally, to achieve sustainable growth.
to move forward is to grow
9
10
2004 annual report
the first
steps towards the
client
Up to the year 2002, BBVA Bancomer cut expenses by 30%, positioning itself as the most efficient Financial Institution in Mexico. In addition, the business model was refocused towards clients, who became the key driving force in efforts to custom-design products and services to accommodate their needs, thus creating market niche-specific distribution networks.
Business Model Corporate and Investment Banking 11 offices
Private Banking 52 offices
Retail Banking 1,661 offices
Central Areas Products Remote Channels Operations Risk Management
Middle-Market and Government 77 middle-market offices 35 government offices
1,836 offices distributed throughout 1,671 branches.
Small Companies 216 specialized executives
to move forward is to grow
11
2004 annual report
building the
foundation for
consistent
growth
In 2003, the focus was on establishing the foundations for consistent growth by concentrating on recurrent income, that is, on attaining higher income from the core loan and deposit intermediation business, without foregoing faster-paced growth in income than in expenses. Progress in Recurrent Earnings millions of nominal pesos
20,000
19,531
Additionally, a new segment-specialized sales
15,000
expedite credit approvals to finance individual 9,786
10,000
and corporate client growth, thus boosting the Mexican economy.
5,000
12,033
only to respond to customer needs, but also to
15,490
force was created and is now better trained, not
6,664
12
2000
2001
2002
2003
2004
to move forward is to grow
13
2004 annual report
a clear
strategy for continued
growth
In Mexico, loan penetration levels are still low; therefore, Bancomer is in an ideal position to take advantage of competitive edges such as size and customer service, in order to become an important player in the country's future growth.
Mexico still has a lot of room to grow and Bancomer will play a stellar role in the evolution of financial services penetration and bankarization, as evidenced by astounding business volume growth achieved in 2004.
Loan Penetration in Mexico Total Loans (% of GDP)
52.3%
60
16.1%
16.0%
15.4%
17.5%
15.8%
15
25.5%
21.2%
30
30.4%
37.2%
45
46.1%
14
94 95 96 97 98 99 00 01 02 03 04 Source: Bank of Mexico (Banco de México)
to move forward is to grow
15
13323 BANCOMER ING B SAL
16
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5:11 PM
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2004 annual report
Business Units Retail Banking The management model allows for extraordinary growth rates... One year following the consolidation of processes and segmentation, Retail Banking recorded solid growth in most business lines during 2004. Growth is leveraged on both an enormous client base of over 10 million and a commercial management model that has led to increasing productivity gains. Improvements in products per client and service have been key to enhancing customer loyalty, reason why Retail Banking has continued to boost cross sales and direct debiting services (payment of bills through an automatic charge to a deposit or credit card account). In 2004, the number of products per client was 2.1, as compared to 1.5 in 2002. Furthermore, almost 330 thousand additional bill payments are now directly debited.
specific promises regarding customer service, which has added value and is helping to build long-lasting customer relationships. This program is set to grow on a permanent basis via the incorporation of new guarantees. The program currently consists of three essential guarantees: • Claims guarantee for all products: Bancomer always responds by the promised date or reimburses the claimed amount to the client's account. • Credit card security guarantee: All Bancomer credit cards protect the client from fraud due to theft, loss, cloning and online transactions. • Debit and credit card alert guarantee: Whenever a charge of over 1,000 pesos is made to a debit or credit card, Bancomer immediately sends an alert to the client's cellular phone at no extra charge.
Branch teller segmentation by type of client (accountholder, preferred, and user), coupled with improvements in operating processes across all channels, have been some of the steps that the Bank has been implementing to increase customer service. This has led to a better perception on the part of clients, who currently rate Bancomer's service with a grade of 8.5 (in a scale of 1 to 10), up from 8.3 in 2003, according to a survey conducted by Pearson, a market research firm.
Improved service and efficiency given distribution channel optimization... The branch network's alternate channels provide clients with easy and convenient access to Bancomer's products. Bancomer.com is the most dynamic channel, with over 18 million transactions per month, 52% more than last year, which represent around 16% of the total number of transactions across all channels. Bancomer.com's capabilities allowed the Bank to attract 109 thousand clients in 2004 for a total of 984 thousand customers, 12% more than in 2003.
Permanent commitment to improve customer service... The Bancomer Guarantees (Garantías Bancomer) program launched in 2004 is a public, long-term commitment that Bancomer has made to keep
Another important service channel is Telephone Banking (Línea Bancomer), with close to 850 customer service stations. On average, this channel receives over 3.5 million phone calls per month, with a hang-up rate of 3%, outper-
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forming international standards. Although its features mainly encourage inquiry transactions, almost 20% of all transactions performed through this channel are financial in nature. With close to 250 customer service stations, Línea Bancomer also serves as an important collection channel. Systems that allocate accounts receivable as a function of risk and state-of-the-art dialing technology support the performance of this task, allowing the Bank to foresee potential problems in high-risk account recovery. For their part, automated teller machines (ATMs) record the highest utilization volume among all channels, with 36% of total transactions. Approximately 40.5 million transactions on average per month are made through the ATM network, 60% of which are financial. Active point-of-sale terminals ended the year at a total of over 35 thousand, almost 3 thousand more than at year-end 2003. During 2004, transaction volumes at point-of-sale terminals rose 20% as compared to 2003. Direct debiting is one of the mechanisms that provides the most benefits to the system as a whole. For clients, it means minimized transaction costs and added convenience; for merchants, it means greater efficiency in collection efforts; for banks, it represents increased transactional efficiency, with its consequent positive impact on customer service levels. Bancomer intends to continue to lead the industry's direct debiting efforts, expanding not only the number of affiliated merchants, which currently total 547, but also the number of direct debiting transactions, which stand at a monthly average of 633 thousand.
Changes in Retail Banking Transaction Mix Bank Tellers
26.4%
23.1%
21.8%
38.5%
38.2%
36.3%
35.1%
38.7%
41.9%
2002
2003
2004
ATMS
Remote Channels
Product differentiation allows for deposit base growth... Traditional deposits grew by a real 7% in 2004, showing strong performance across all product lines. Demand deposits rose by a real 4%, while time plus mutual fund deposits increased 10% in real terms. Standing out among deposit products is Libretón, a market-leading savings account, which has secured an extensive client base by giving away attractive prizes. Fifteen Days of Savings (La Quincena del Ahorro) is a campaign in which Libretón rewards savings by giving out gifts to clients depositing a minimum amount of 4,500 pesos. The second time around, this campaign beat its own record, giving away more than 400 thousand gifts in 12 days, in exchange for an additional combined amount of around 2,000 million pesos in client savings. Libretón clearly stands out from the competition, with a share of more than 50% of the market, according to deposit figures published by the Mexican Banking Association (Asociación de Bancos de México or ABM).
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Bank financing products for businesses have traditionally failed to offer different kinds of products to accommodate differences in company size. At BBVA Bancomer, these differences were taken into account and the rules were changed to simplify procedures and create new products aimed at small businesses. The new Business Card (Tarjeta Negocios) is a vehicle that has helped a great number of small businesses gain first-time access to bank financing. By getting to know and building strong relationships with these clients, BBVA Bancomer is able to abridge the process and make funds more readily available to them.
Performance in Business Cards 2000
200
Number of new accounts
Dec 04
Oct 04
Nov 04
50
Sep 04
500
Jul 04
100
Aug 04
1000
Jun 04
150
Apr 04
1500
May 04
Finanzia had a strong year in terms of credit card issuance. In 2004, this division, together with its business partners, launched fixed-payment credit cards, substantially broadening its target market. At present, two out of every three credit cards issued by Bancomer are originated by Finanzia.
The Frozen Card is a completely new line of business. It is a revolving credit card with fixed monthly payments that targets the currently underserved segment of the population with monthly income ranging between 4 and 6 thousand pesos. Thanks to its simplicity and ease of use, this product attracts a large number of clients, issuing more than 115 thousand Frozen Cards during the year.
Mar 04
A year of growth in loans.... This was a year of substantial growth across all product lines. Over 1.5 million credit cards were issued, while the credit card inventory rose above 5 million, with billing increasing 21% versus 2003 to a total of over 75 billion pesos for the full year. Strong activity in this segment translated into 63% growth in portfolio balances to 20 billion pesos, mainly due to Finanzia's successful strategy and the launching of the Frozen Card (Tarjeta Congelada).
Banking the unbanked
Jan 04
The launching of the Triple Fund (Fondo Triple) in 2004 was an outstanding event in the mutual fund market. Its three main features, namely: 1) fully guaranteed initial investment; 2) guaranteed minimum return; and, 3) possibility of earning additional yields, allowed this product to exceed all expectations. Only 75 days after it was first launched, this product already had over 32 thousand clients with assets totaling more than 3,700 million pesos—an unprecedented accomplishment for a Mexican fund— in addition to reaching a record number of clients for a Mexican fund. The experience gained with this product was used for the launching of Triple Fund 2 (Fondo Triple 2) and Triple Fund 3 (Fondo Triple 3), which allowed for client base growth to a total of around 70 thousand clients, with global assets amounting to 6,588 million pesos.
Feb 04
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Besides using it as a regular credit card, clients may make use of their line of credit via immediate deposit of funds to their checking account through Bancomer.com. This innovating product also has the invaluable support of an 80 million-peso insurance fund granted by the Ministry of Economy, which is jointly boosting this credit program in benefit of over 20 thousand businesses. The success of Bancomer's Business Card is reflected in the number of cards issued, which rose from 1,200 in December 2003 to almost 10 thousand at the end of 2004. Other consumer loans, excluding credit cards, also had an outstanding year, with a nearly two-fold increase in portfolio balances to a total of over 14,000 million pesos, representing 83% growth versus 2003. At the end of 2004, close to 9 million people received their payroll through Bancomer. These clients could also obtain a loan for an amount of up to four months of their salary, at a 36month term and the most attractive payment plans in the market. This product's simplicity and extensive client base are competitive advantages that are not only difficult to match, but have also translated into outstanding performance during the year, with the approval of more than 450 thousand Payroll Loans (Creditón Nómina) representing an improvement of over 40% in sales productivity. With credit extension volumes on the rise, this product has already netted a total of one million payrolllinked borrowers since its launching in 2001.
Credit Cards and Other Consumer Loans
Also in 2004, Finanzia implemented the Car Sales Service (Servicio de Venta de Automóviles or SEVA). By simply making a telephone call referred from the branch network, clients are able to get a car loan under the best terms and conditions to buy an automobile at any of over 500 affiliated car dealers across the country. Since SEVA's launching less than 12 months ago, car loan approvals have grown from little over one thousand units to more than 5 thousand units per month. As a result, market share in bank financed automobile purchases rose from 7% in December 2003 to 22% in December 2004, according to figures published by the independent firm JATO. In addition, the total number of car loans grew to approximately 40 thousand, more than double the figure posted in 2003. Mortgage loans more than quadrupled as compared to 2003, with the new mortgage balance increasing by 3,819 million pesos. This was due mainly to the execution of agreements with the National Workers' Housing Fund Institute (Instituto del Fondo Nacional de Vivienda para los Trabajadores or Infonavit) regarding Support (Apoyo) and Co-Financing (Cofinanciamiento) products, benefiting over 6,300 families. As such, the Retail Banking loan portfolio grew 20% versus 2003 to 79,803 million pesos. For Retail Banking, 2004 was yet another year of growth, supported by efforts to take advantage of its competitive edge and build on the most profitable business segments.
Performance in Payroll Loans
millions of nominal pesos
average new loans issued per month 40,000
Dec 03 Mar 04
Credit Cards
23,771
37,998
30,000
Jun 04 Sep 04
14,602
26,326
11,354
9,313
18,792 8,213
17,706 7,549
7,500
21,281
22,500
15,000
26,519
30,000
20,000
10,000
Dec 04
Other Consumer Loans
17,775
7,972 2001
2002
2003
2004
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Risk management is a key competitive strength... Bancomer has the most advanced, segment- and product-specific risk control models, allowing for efficient credit risk management across all loan portfolios. Client credit behavior patterns are permanently monitored and collection processes are anticipated and adjusted accordingly. As a result, Retail Banking past-due loans dropped by 215 million pesos or 15% in 2004, a remarkable accomplishment within an environment of fastpaced growth in lending. Stronger presence in the Hispanic market of Southern California... In 2004, the Group welcomed a new member, Valley Bank. This bank was founded in 1969 and currently has 6 offices in the vicinity of Los Angeles, California. This acquisition marked the onset of a synergycreating process with Bancomer Transfer Services (BTS), an affiliate that leads the remittances market with share of over 43% of total electronic money transfers from the US to Mexico in 2004, according to data disclosed by the Central Bank (Banco de México). Following the inclusion of Valley Bank, a stronger BTS is now well on its way to offering the Californian Hispanic market—more than 10 million Mexicans—traditional banking products, aside from existing services such as money transfers, check cashing, calling cards, and money orders, which combined will enable BTS to better serve this segment.
Middle-Market and Government Banking The promise to improve service strengthens customer relationships... In 2004, the Middle-Market and Government Banking strategy aimed to exploit its competitive advantages and position clients as the core element of its business endeavors. Loan distribution capabilities, specialized advisory services for both the private and public sectors, and the wide array of products and services developed and perfected since 2002, positioned this department as market leader within its respective segments. Strategies have focused on improving customer service, offering a wider variety of products and continuing with sales force specialization efforts. For purposes of developing the skills that the human resources team required to put these strategies to practice, an ambitious training program was implemented, covering five different topics: • Certification in loans, specializing in middlemarket and government clients • Specialized product training targeting both segments • Selling techniques for the sales force • Knowledge and skills development program for administrative employees or office heads • Management program for senior officers These action steps reinforced one of the major competitive advantages: Sales force specialization in knowledge and products designed for the middle-market and government segments. Other skill development programs included those aimed at providing adequate risk management support and control.
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Middle-Market and Government Banking is comprised by a network of 112 offices across 54 cities specializing in servicing middle-market and public sector clients, and a sales force of 515 people who are knowledgeable in catering to more than 34,000 of these clients.
Efforts to provide integral solutions are recognized as the most comprehensive in the market... The offering of diverse complementary products tailored to each individual case helped build closer customer relationships, driving higher product linking and customer satisfaction levels. Surveys conducted by the independent company Brain reflect a positive trend across all service and preference indicators. Among overall service perception survey results, the most noteworthy were a 10% increase in the number of very satisfied clients (scores between 9 and 10, out of ten) and a 20% decline in clients with lower satisfaction levels (scores under 7) in 2004. From 2002 to date, the number of very satisfied clients has risen 58%. Deposit growth, mainly in mutual funds... The volume of client assets under management grew 20% in 2004. The most significant increases were seen in mutual funds and money market, the former as a result of a greater number of investment alternatives available to companies and government agencies, and the latter thanks to a strategy developed during the year to better serve the more sophisticated investment needs of clients with higher account balances. As compared to 2003, total assets grew by 17,754 million pesos to end at 104,984 million pesos. Specialized loan management–a key competitive edge... The onset of Mexico's economic growth cycle, coupled with strategies implemented since 2002 aimed at transforming the Middle-Market and Government Banking department into a specialized loan distribution network, have resulted in outstanding growth in middle-market lending activity and volumes.
Nominal Increase by Type of Deposit 2004 versus 2003
Nominal Growth in Middle-Market Credit Approvals as compared to the previous year
60
60 56%
45
40%
45
36% 30 15%
20%
17%
30 21% 15
15
9% Demand Deposits
Term Deposits
Mutual Funds
Money Market
Global
2002
2003
2004
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Network activity, as measured by the number of credit applications, increased 22% compared to 2003. The number of new borrowers in 2004 accounted for 50% of total borrowers. New loans rose by over 12,800 million pesos or 56% from 2003 to 2004, ending at a total of 50,713 million pesos. Furthermore, strong efforts were made during the year to improve the credit approval process. Each person's capabilities were rigorously assessed and a divisional credit approval area was created, employing highly experienced and technically skilled people. As a result, certain functions were decentralized to divisional and branch offices, thus drawing the credit decision and formalization process nearer to clients, hastening loan availability and improving response times throughout the entire credit approval process. As of year-end 2004, 40% of credit transactions were decided at divisional management offices, representing 4% of the total number of loans extended. The above measures went hand in hand with strong promotional campaigns for the Liquidity Financing (Crédito Líquido) and Supplier Financing (Crediproveedores) products, both of which may currently be processed online, providing clients with immediate availability of funds through their lines of credit. In 2004, 22% made use of their lines of credit via Internet.
Heightened commercial activity allowed for considerable market share gains... The greatest financing opportunities arose within the most dynamic economic sectors, such as construction, housing, services, hotels, and retail. As such, middle-market loans gained 250 basis points in market share during the year, according to figures published by the Mexican Banking Association (Asociación de Bancos de México or ABM). This represented more than double the market's growth in traditional loans, representing a 29% increase and a strong lead over major competitors. The implementation of strictly methodological credit approval and creditworthiness monitoring processes allowed for quality growth in the middle-market and government loan portfolio, as evidenced by a decline in past-due loans to 278 million pesos in 2004, helping the past-due loan ratio drop from 1.9% in 2003 to 0.8% in 2004. Migration from physical to electronic transactions... Throughout 2004, efforts to migrate physical transactions to electronic channels continued by strengthening, perfecting, and expanding the array of products and services that may be transacted through electronic means. At the same time, sales force activities geared towards promoting the use of online channels were strongly boosted.
The results of credit processing surveys performed by Brain showed a 19% improvement with respect to the highest satisfaction levels (scores between 9 and 10, out of ten), which means that 72% of clients are completely satisfied with Bancomer's credit approval process.
Market Share
Nominal Growth in Middle-Market Banking Credit Supply by Sector 2004 versus 2003
16
2003
2004
200 174%
12.4%
12
150 9.8% 8 100 76%
71%
50
4.6% 4.8%
4 2.8%
49% Loans Construction Services
Hotels
1.8% 4% Mutual Funds
Retail
Source: ABM
Total Deposits
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As a result of increased efforts to promote direct debiting, 150 of a total of over 300 major affiliated merchants are now actively operating through this channel. Also, a group of specialists is currently in place across the network to support direct debiting client affiliation. The above was coupled with an intense campaign consisting of visits to clients and network offices to train the staff and increase the use of online banking services through a nationwide specialized force. These combined initiatives produced extremely satisfactory results, with transaction mix improving to 61%/39% for electronic and bank teller transactions, respectively, in 2004. As such, the number of transactions performed through electronic channels amounted to more than 16 million during the year, up 18% as compared to 2003. The number of electronic payroll clients rose 23% during 2004, while electronic payroll disbursement transactions grew by more than 9 million from 2003 to 2004, up 23%, with more than 2 million affiliated employees. In contrast, physical transactions were down by around 1 million or 2% during 2004, as increased electronic activity prevented 1.4 million transactions per month from reaching branch tellers. This translated into significant improvements in branch teller service, as well as substantial time and cost savings.
Middle-Market and Government Banking Past-Due Loans millions of nominal pesos 600
450
451
300
278
150
2003
2004
Servicing the most dynamic sectors and building a road towards the future... In 2004, management of BBVA Bancomer's developer clients was transferred to the MiddleMarket and Government Banking department, concentrating resources from other areas of the bank. Also, this area implemented a more agile credit approval process for these clients, and improved coordination in joint activities performed with the office network that services them. Middle-Market and Government Banking clearly took advantage of Mexico's economic resurgence to improve and grow customer business.
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Corporate and Investment Banking Building solutions creates value for customers and grows the business... To service the financial needs of major corporations in Mexico, the Corporate and Investment Banking division continued to follow the strategic guide of Building Solutions (Construyendo Soluciones) for clients during 2004, aimed to add value to their business growth process and partaking in around 14% of overall financial transactions performed during the year, worth 13,833 million US dollars (approximately 154,930 million pesos). This area's added focus on solutions has allowed Bancomer to build better, long-lasting relationships with corporate clients. As a result, 9 out of 10 corporations in Mexico are presently doing business with Bancomer, according to data from the independent firm Brain, quoting the following as Bancomer's major competitive advantages: Range of products and services, personal attention and attitude of service, product knowledge, response to inquiries, ability to keep promises, and assistance and promptness in credit approvals. Closer relationships and communication with clients... With the Senior Banker position created in April 2004, corporate clients are now serviced by specialists who conduct detailed analysis to better identify their specific needs, share their expectations, and assist them in major expansion, growth and efficiency projects, as well as other programs associated with the client's strategic course, thereby delivering the tools they need to attain their goals.
Although Senior Bankers deliver solutions to the client's same financing, investment, and treasury management needs, they are different from account executives in that they also provide support in the implementation of strategic projects, while account executives act as the customer service contact for the client's day to day operations. In 2004, the number of Senior Bankers was 6 assigned to 76 major clients, all of whom have shown an extremely positive response to this new differentiated customer service scheme. Building financing solutions... Corporate and Investment Banking remains as the leader in the origination, structuring and distribution of syndicated loans and bond issues, and continues to be an active agent in the search for private equity, financial advisory services, equity offerings, and project financing. The competitive advantages of Bancomer's Investment Banking division include an effective sales force, state-of-the-art technology to deal in the equity and bond markets via the Internet, its position as leader of the peso syndicated loan market since 2000, and a department specializing in the secondary corporate bond market.
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Standing out as an example of the Investment Banking division's leadership in 2004 is a significant transaction with Petróleos Mexicanos (Pemex) entailing a successful 15-year, zero coupon bond issuance worth 1,416 million UDIs (approximately 5,000 million pesos) in the Mexican market. To exemplify efforts to innovate, Investment Banking, jointly with the National Workers' Housing Fund Institute (Instituto del Fondo Nacional de Vivienda para los Trabajadores or Infonavit), issued the first two Housing Certificate securitization issues using Low-Income Housing Certificates (Certificados de Vivienda de Interés Social or CEDEVIs) for a total of 1,952 million pesos. As broker, Bancomer led the only equity issue in the Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV) in 2004, a 2,388 million-peso stock placement for the construction company URBI. Finally, Investment Banking participated with the beverage conglomerate Fomento Económico Mexicano (Femsa) in the repurchase of shares from its former major partner, by designing a financial package including two stock market certificate issues for a total amount of 2,500 million pesos. Building solutions for strategic projects... The Project Finance area includes a local team of specialists backed by a group of experts from BBVA's European and US Project Finance departments, to deliver solutions to clients to help them carry out large-scale projects for their continued growth.
Continued innovation and quality service allowed Investment Banking to once again lead in debt issuance during 2004.
As such, in 2004, this division acted as lead arranger in structuring the 617 million-dollar financing scheme for El Cajón—the largest hydroelectric project in Mexico in the last 10 years— to build the second dam in its kind worldwide. Also worth noting was the structuring and financing of Comex' 250 million-dollar acquisition of a large US and Canadian paint manufacturer, helping Comex become a major player in the NAFTA leagues. Additionally, Investment Banking participated together with BBVA in Spain as advisor and arranger for the 6,628 million-peso financing package to build a 142-km highway that will connect the states of Mexico, Puebla, Morelos,
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and Eastern Mexico City. This project is known as the Eastern Mexico City Highway System (Sistema Carretero de Oriente del Distrito Federal), which will serve as an alternate route to redirect traffic of 10,000 vehicles per day. Building cash management solutions... Bancomer has pioneered the new generation of efficient treasury cash management solutions, giving corporate clients the opportunity to increase the productivity of their business, clients, and suppliers, by using checking, collection, payment, electronic banking, and e-Commerce products and services. Cash management services are also offered to US clients or their subsidiaries in Mexico and vice versa. One example was the electronic collection service designed for Pemex, allowing its gas distribution clients to make payments in different ways and through various means. As of year-end 2004, Bancomer had 73% share of the company's total billing, worth 66,000 million pesos.
Bancomer Leads the Peso Bond Business According to Dealogic Major bond issuers in Mexico Place
Issuer
$ (Nominal Value)
Transactions Mkt. share (%)
1
BBVA Bancomer
1,898
19
23.9
2
Competitor 1
1,640
3
Competitor 2
828
21 9
20.6 10.4
4
Competitor 3
727
10
9.2
5
Competitor 4
598
6
7.5
Other Competitors
2,258
n.d.
Total
7,949
6
Figures in millions of US dollars
28.4 100.0
Another important project was developed with Cementos Mexicanos (Cemex), which participated in a pilot test to implement the Immediate Business Concentration Account (Concentración Inmediata Empresarial or CIE)—an electronic service that no longer necessitates the use of physical deposit slips. This project also spearheaded an initiative to eliminate the use of deposit slips at branches, bringing about substantial savings. Also noteworthy was the implementation of a collection system for Grupo Telefónica—a mobile telephone company with over 400 thousand contract clients—which allows for immediate and automatic crediting of payments to the company's own collection systems. Corporate and Investment Banking business grows with the inclusion of Institutional Banking... The Financial Institutions sector became part of Corporate and Investment Banking in February 2004, as an action step to create added synergies between large corporate clients and investors and financial sector clients, thereby giving birth to the Institutional Banking division.
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Institutional Banking's main competitive strengths include its leading market position as settling bank for brokerage firms with the Security Deposit Institute (Instituto para el Depósito de Valores or Indeval); almost exclusive bank for currency exchange houses; main bank for mutual fund managers, card issuers and insurance companies; and, strong market presence, with over 15 years of recognition as an institution that specializes in servicing this sector. Following the inclusion of the Financial Sector into Corporate and Investment Banking, deposits amounted to 24,319 million pesos as of December 2004, representing 5% of total deposits for Bancomer. For their part, performing loans excluding UDI trusts and Fobaproa notes totaled 68,896 million pesos at year-end 2004, accounting for 37% of Bancomer's total loans and 8% of total loans for the entire Mexican financial system, based on data published by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV). In addition, Corporate and Investment Banking's past-due loan ratio ended at 0%—a historical milestone.
More importantly, commission and fee income as a percentage of total income grew to 52%, as compared to 42% in year-end 2003, reaching RAR (internal measurement of risk-adjusted return on equity) of 34% in 2004 vs. 21% for the previous year. Corporate and Investment Banking client recurrence is the best indicator of the recognition and trust that large Mexican corporations have placed in Bancomer's ability to continue to provide the best solutions to their financing, investment, and transactional needs. Proof of this is contained in an independent survey conducted by Brain indicating that 7 out of every 10 of Bancomer's corporate clients would not switch Bancomer for another bank.
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Asset Management By offering innovating products to accommodate each customer's unique investment needs, Asset Management Bancomer was consolidated as the most important portfolio management unit in Mexico during 2004, with total assets under management rising to 266,820 million pesos, up 13% as compared to last year. Of total assets, 46% correspond to Bancomer's retirement savings fund (Afore), pension fund (Pensiones), and insurance company (Seguros); 28% to mutual funds; and, 26% to institutional and private clients, and trusts. Standing out among Asset Management Bancomer's business units is the mutual fund management division, the market leader in 2004 with a total of 75,988 million pesos in assets under management for a 19% market share. This newfound leadership was largely due to product innovation, specifically the launching of the Triple Fund (Fondo Triple), which attracted assets totaling 6,588 million pesos during the year, setting a new historical record in the number of clients for Mexican funds.
Targeting high-net-worth clients, Fondos Bancomer launched the first family of five Diversified Funds (Fondos Diversificados) in 2004, which offer a mix of investments in several different markets according to the investor's profile and life cycle. As regards affiliated company portfolio management, Bancomer’s Basic Pension Fund (Siefore Básica Bancomer) came in second place in the market with a 7.2% annualized yield in 2004, up from the historical third-place position maintained since its creation. Finally, assets in private banking high-net-worth individuals portfolio management grew 34% in 2004, more than 10,000 million pesos which, combined with company, social welfare, and fiduciary portfolios, rose 15% during the year to a total of 66,525 million pesos. In February 2004, the Afore, Seguros and Pensiones Bancomer portfolio investment process obtained ISO 9000-2000 certification, while in July, the National Retirement Savings Commission (Comisión Nacional del Sistema de Ahorro para el Retiro or CONSAR) granted permission to deal in financial futures through the Mexican Derivatives Market (Mercado Mexicano de Derivados or MEXDER), helping Bancomer become one of the major market players during the second half of the year. Asset Management Bancomer has grown substantially in assets under management, while offering clients the most profitable investment alternatives by maintaining the lead in product innovation and market trading.
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Global Markets and Distribution Clients as the core business element... Aiming to provide clients with substantially higher value-added products and services, major changes were made to both the technological platform and operating structure during 2004. More specifically, this was achieved through derivative products that deliver solutions by replacing customers’ unwanted market risks for others that are better suited to their nature and needs. Further, the foundations of a new work culture were built, aiming to transform an operationoriented focus into activities centering on clients, efficiency, and strong profitability. This will be achieved via movements in internal distribution unit structures, supported by market-specific specialists working in line with an integral customer service concept. Consequently, clients have become the core business element and the entire structure is now poised to service them. Going forward, stronger emphasis will be placed in recurrent income derived from long-term customer relationships and high value-added solutions. The leading position in the exchange market was consolidated during 2004. In addition, this division maintained a significant lead in the fixed-income market as a market maker. During the year, Bancomer remained among the top three positions in the Mexican Derivatives Market (Mercado Mexicano de Derivados or MEXDER) contracts, coming in first place in US dollar futures.
Actively working to find new solutions for our clients
Similarly, Casa de Bolsa Bancomer's equity market trading came in above 168,900 million pesos in 2004, accounting for 15% of total market volume, based on information made available by the Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV). With this share, Bancomer came in second place among all market players.
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Non-Banking Businesses Afore Bancomer As of year-end 2004, Afore Bancomer's assets under management totaled 97,645 million pesos, 9% above 2003 levels, the second largest retirement savings fund with 20% market share, according to figures from the National Retirement Savings Commission (Comisión Nacional del Sistema de Ahorro para el Retiro or CONSAR). Afore Bancomer also came in second place in terms of yield, which ended at 7.2% for the full year of 2004, compared to market averages. Historical cumulative yield stood at 16.9% as of the year's closing. Growth was the result not only of added efficiency in commercial activities on the part of the sales force, but also of an increase in headcount, from 700 in 2003, to 1,300 at the end of 2004. Also, market share in client transfers grew from 10% to 13% during the same period.
Seguros Strong commercial activity thanks to new product launchings... During 2004, Seguros Bancomer saw 10% growth in premiums, which totaled 3,532 million pesos at the end of the year, largely as a result of innovative product launchings targeting new market niches: • Sure Goal's (MetaSegura) launching was consolidated this year. This product is a medium- to long-term savings plan in US dollars that includes a life insurance policy with an insured amount equal to the targeted savings amount. Sure Goal contributed with
Contribution to Group Net Earnings
Car Insurance for Tourists (AutoSeguro Turista) was added to the array of products sold via Internet in July.
12,698 insurance policies in 2004, with aggregate premiums totaling 131 million pesos. • A new individual life insurance policy sold through telemarketing was launched in February. It provides support coverage as of the first cancer diagnosis, and it also covers funeral expenses regardless of the cause of death, with a total of 6,838 policies issued during the year. • Personal Accident Insurance (Respaldo Seguro contra Accidentes Personales) was launched in April. This insurance product covers organ losses and funeral expenses in case of accidental death, and optionally offers daily hospital expense coverage in case of accidents requiring hospitalization. As in the previous case, this is also a telemarketed product, with the total number of policies ending the year at 6,767.
Afore-Assets under Management millions of pesos as of December 2004 100,000
97,645 89,755
23.9%
75,000
50,000 76.1%
25,000
Banking Business Non-Banking Business
2003
2004
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central and staff areas
Central and Staff Areas • Car Insurance for Tourists (AutoSeguro Turista) was added to the array of products sold through the Internet in July. This is a thirdparty liability accident insurance policy for foreign cars traveling across Mexico. Another product called Express Car Insurance (AutoSeguro Express) being sold in OXXO convenience stores located in Monterrey, Chihuahua, and Querétaro, is a 90-day, third-party liability insurance for resident automobiles.
Annuities The annuities market remained restricted throughout 2004 due to the lower number of clients receiving pensions from the Mexican Social Security Institute (Instituto Mexicano del Seguro Social or IMSS), the government entity in charge of providing pension resources. Nonetheless, accumulated reserves for annuities managed at Pensiones Bancomer totaled 11,609 million pesos, for a leading 21% market share, according to figures published by the Mexican Insurance Association (Asociación Mexicana de Instituciones de Seguros or AMIS). Pensiones Bancomer also outperformed other sector players in number of clients, with market share at 23%.
Insurance Premiums sold through the Network millions of nominal pesos 3000
2250
2,456 2,181
1500
750
2003
2004
Risk Management and Workout Advancing towards the consolidation of an integral risk management approach... During 2004, Risk Management continued to focus on designing and developing new tools to grade credit origination and backup for individuals. Big steps were taken towards the consolidation of the Institution's integral risk management approach, both by updating risk models, methodologies, and measurements—particularly in the case of credit—and by launching the Risk-Adjusted Return Project (Proyecto RAR). On the credit front, efforts focused on reevaluating and implementing individual credit origination scores, which strongly supported business unit growth strategies by establishing different criteria for each market segment and expanding the profile of potential markets to develop businesses. To complement adequate differentiation in credit origination, new rating models were implemented to rate the behavior of existing clients. Regarding the measurement of company risks, new internal rating models called ’’Ratings’’ were implemented to assess client risks in the mid-sized company to large corporation segments. Among other things, these models will allow for financial result-based risk analysis pursuant to a scheme that is comparable to that of external rating agencies.
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2004 annual report
Risk-adjusted return as the main goal... All Risk Management efforts are geared towards achieving alignment with BBVA's corporate guidelines, also known as the RAR Project, which seeks to establish the foundations required to comply with the three pillars of the Advanced Approach of Basel II.
y Riesgos or NPTyR), by defining and configuring market parameters, validation of positions, and valuations and methodologies, and also by integrating systems that perform functions such as transaction registry and valuation, liquidity risk assessment, and administration of market parameters, credit risks and security guarantees.
At present, the first stage of this project, consisting of the construction of an information interface containing historical non-compliance and severity records, has already been completed. This project will continue to advance up to the implementation of engines that will be used to calculate expected loan and economic capital losses and measure risk-adjusted profitability.
These systems provide Bancomer's Treasury with competitive advantages such as the ability to perform online market risk sensitivity measurements, control credit risks in real time, measure liquidity risks on a daily basis, determine exotic product risks, and apply corporate methodologies and criteria.
Aiding healthy business growth... Bank portfolio growth was strongly supported by reducing credit approval response times and transferring certain admission decisions to the network. As a part of further efforts to reduce client response times, the Risk Control and Regulation department instrumented the Agreement Plan (Plan Con Trato), which helped reach record appraisal activity levels and allowed for nearly complete decentralization of credit operations to the office network. Proactively making progress in market risk assessment... Risk Management played a crucial role in 2004 in the development of the New Treasury and Risk Platform (Nueva Plataforma de Tesorería
Special non-earning asset sales programs pick up pace... With respect to non-earning assets, new special sales programs were designed and executed to more quickly dispose of repossessed assets. As a result, 1,003 properties were sold for a combined amount of 318 million pesos in 2004. Progress is being made in credit recovery policies to improve the Balance Sheet's risk profile... Quick credit recovery strategies implemented during 2004 translated into a 2,170 millionpeso or 32% decline in past-due loans as compared to last year. Effective past-due loan recovery management caused the past-due loan ratio to end the year at an all-time record low of 2.2%.
Past-Due Loans millions of pesos as of December 2004 8,000
6,000
4,000 Total Mortgages
2,000
Consumer 2003
2004
Commercial plus financial entities
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central and staff areas
Systems and Operations Supporting the business... During 2004, the Systems and Operations area continued to support business growth by implementing new applications and solutions, such as the Bancomer Guarantees (Garantías Bancomer) program. Through this program, the Institution guarantees a response to all inquiries within a certain period of time, or otherwise, the claimed amount is refunded. This service is directly provided by the Central Operations Office, which responded to more than 99% of total inquires on time and was able to reduce the annual number received. Another concept that was put into service in 2004 was immediate debit card deposits at bank branches, with a unique scheme for high-networth and private clients. Account statement distribution processes were also enhanced, establishing different delivery times for the Private, Corporate, and Middle-Market and Government segments. Standing out among other business initiatives, Middle-Market Banking clients now have online access to working capital through Liquidity Financing (Crédito Líquido), with the own clients setting the term, knowing the interest rate and payment form at the time of withdrawal without having to meet with an account executive. Also, an Electronic Interbank Payment System (Sistema de Pagos Electrónicos Interbancarios) to transfer any amount of money is now in place, replacing the former system known as Extended Use Electronic Payment System (Sistema de Pagos Electrónicos de Uso Avanzado or SPEUA). The current system has increased processing capabilities and allows clients to
perform transactions in real time using encrypted secure digital communication certificates. For the loan recovery process, the Systems and Operations department uses automated control systems to follow up and monitor risks. A significant accomplishment in 2004 was the elimination of deposit and withdrawal slips at bank branches. By minimizing wait times, simplifying processes, and assigning tellers the duty of entering transaction data, customer service was enhanced. This change also had a positive impact on printing times, paper and inventory expenses, and clarification response times.
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2004 annual report
Human Resources Aiming to fortify the Group's commitment with its employees, during 2004, efforts expended on the Human Resources front focused on three major factors: Strengthening the Group's corporate culture, the BBVA Bancomer People Project (Proyecto Gente BBVA Bancomer), and reinforcing the concept of a customer-oriented staff. As regards corporate culture, several different training courses and campaigns were conducted to materialize the Group's vision of working to provide people with a better future. This vision is based on seven fundamental principles: • Clients as the center of our business • Activities geared towards creating value for our shareholders • The team as the main value-creating vehicle • Management style as a generator of enthusiasm • Ethics as well as personal and professional integrity as a way to understand and carry out our activities • Innovation as a catapult for progress • Social corporate responsibility as a commitment with development
Lastly, the entire staff's customer orientation was reinforced, in line with the corporate premise of viewing clients as the center of our business, thus creating a culture of service and driving better communication among all areas of the organization. As regards the specific training requirements of each area, the number of staff training hours totaled 991,943 in 2004, that is, 54,609 hours more than in 2003. Training included strategic and specialized business courses, such as Mortgage Loan Specialization, as well as Marketing and Advertising courses. The overall objective, however, has been to help the staff develop skills and acquire knowledge conducive to strengthening Bancomer's unique directing approach, supported by Director and Leader Development programs, which aim to produce Bancomer's own leadership style.
For its part, the BBVA Bancomer People Project launched in 2004 seeks to strengthen the mutual commitment between the organization and its employees, striving to help Bancomer to be perceived as the best place to work. More than 15 associated initiatives were implemented during the year, such as leadership programs, recognition programs for outstanding employees, quality of life enhancement programs, and employee talent development programs. Helping Bancomer to be perceived as the best place to work
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central and staff areas
Auditing A revision plan aligned with Group objectives and challenges was put to practice in 2004. This plan takes customer requirements into account and has driven the attainment of more demanding productivity levels, based on the adequate coordination of tasks assigned to different auditing units; the assessment and correct allocation of risks to each auditable unit or process to ensure that those with the highest inherent or residual risk are analyzed in detail; and, the proper use of information tools to conduct audits and centralized risk analysis. More than 600 on-site audits were performed during 2004, covering business units and central areas of each of the Group's entities. One of the main issues addressed through these auditing procedures was money laundering prevention, seeking the application of permanent controls on the part of each of the Group's departments, assessing whether such controls are in place and, if so, whether they are effective, at more than 450 branches, as well as business units and entities of the Group. As regards compliance with the Code of Conduct, new channels were implemented this year to encourage the staff to report any form of noncompliance identified across the entire organization. The Remote Auditing Project (Auditoría a Distancia) was also put into service, focusing on the identification and centralized analysis of alerts regarding day-to-day operations in the Bank's network. Systematic data retrieval performed on a daily, weekly, and monthly basis and the analysis of such data through the BBVA Audit system, resulted in over 9,000 alerts
regarding operational, credit, and reputation risks during 2004, allowing for the application of early corrective actions to mitigate their effects. Also beginning in 2004 was the SOX Corporate Project (Proyecto Corporativo SOX) in Mexico, which essentially aims to consolidate an internal control model consistent with both the highest standards and the provisions of the US SarbanesOxley Act of July 2002, whereby organizations are required to assume added corporate responsibility regarding their internal control systems. Internal controls need to be designed so as to provide reasonable assurance regarding the effectiveness and efficacy of operations, reliability of financial information, and compliance with applicable laws and regulations. This project reflects the efforts made by the Bank to consolidate a unique culture of risk management and a common vision at the Group level.
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2004 annual report
Management Discussion and Analysis During 2004, the unremitting focus on business volume growth allowed for a 3,750 million-peso increase in net interest income before monetary result and a 556 million-peso increase in fee and commission income. Growth in loans and deposits, however, was partly achieved thanks to large-scale promotional and advertising campaigns, which translated into additional expenses totaling 1,109 million pesos during the year. Efforts to achieve faster-paced growth in income as compared to expenses led to a substantial 19.6% increase in recurrent income (net interest income before monetary result, plus fees, minus expenses), from 16,334 million pesos in 2003, to 19,531 million pesos in 2004.
Net Interest Income In 2004, net interest income before monetary result rose 17.1% vs. 2003 to 25,684 million pesos, due to several factors combined: Higher credit contribution to interest income during a portfolio expansion period; adequate deposit management, which in turn led to an enhanced, lower-cost mix; and, the 5.8% or 39-basis point hike in the average benchmark Interbank Equilibrium Interest Rate (TIIE). Performing loans excluding UDI trusts grew 31.3% in 2004, driven mainly by consumer loans, which were up 55.3% to 41,149 million pesos. Commercial loans in pesos increased 35.9% to 49,608 million pesos, largely as a result of stronger emphasis placed on mid-sized companies.
Government loans closed the year at a total of 37,291 million pesos, up 39.8% versus 2003, strongly influenced by the transfer of trusts in UDIs to pesos following loan renegotiations with state and municipal governments. Mortgage loans increased by 34.3% to close 2004 at 14,968 million pesos. On the other hand, branch deposits were up 7.1% to 30,494 million pesos in 2004, mainly attributable to an 18,961 million-peso or 11.4% increase in term deposits. Furthermore, total cost of funding in pesos as a percentage of TIIE dropped 40 basis points to 38.5% in 2004, from 38.9% in 2003, as demand deposits totaling 197,471 million pesos accounted for 43.0% of total deposits. Branch term deposits amounted to 185,774 million pesos as of December 2004, representing 40.5% of total branch network deposits, while mutual fund deposits accounting for 16.5% of total branch deposits, ended the year at 75,989 million pesos. As of year-end 2004, net interest income before monetary result as a percentage of interest-earning assets represented 70.9% of TIIE, up from 70.6% posted as of 2003.
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MD&A
Loan-Loss Provisions
Trading Income
The total loan-loss provisioning charge in 2004 was 2,196 million pesos, coming in 45.8% below the 4,049 million-peso charge recorded in 2003. As a consequence, loan-loss provisions as a percentage of average total loans excluding Fobaproa dropped, from 2.2% in 2003, to 1.1% in 2004.
Trading losses amounted to 18 million pesos in 2004, due to the combined effect of security trading losses of 750 million pesos and foreign exchange trading gains of 732 million pesos.
Net Fee and Commission Income Net fee and commission income totaled 14,809 million pesos in 2004, up by 556 million pesos or 3.9% as compared to 2003. The main source of growth under this line item was the total of 1.5 million new credit cards issued, as compared to 933 thousand for the previous year. Credit and debit card fees grew 18.4% in 2004 to 3,704 million pesos. Also contributing to higher fee and commission income was an 11.8% increase versus 2003 in the number of transactions, to a total of 1,341 million as of 2004. Despite high productivity in fee and commission income, which represented 70.6% of expenses in 2004, net interest income remains the strongest contributor to total income. In 2003, fee and commission income accounted for 39.4% of total income (net interest income plus fees and commissions), dropping to 36.6% in 2004.
Non-Interest Expense As increased commercial activity led to higher operating expenses, total expenses rose 5.6% above 2003 levels to 20,962 million pesos in 2004, due mainly to 9.9% higher administrative and operating expense. Nonetheless, the efficiency ratio improved by 50 basis points, shifting from 52.7% in 2003 to 52.2% in 2004.
Other Income Statement Line Items Extraordinary losses of 2,136 million pesos (nominal value) were recorded during the third quarter of 2004, as a result of a note exchange agreement with the Deposit Insurance Agency (Instituto para la Protección al Ahorro Bancario or IPAB). For further details, please refer to the “Relevant Events” section of this report. Furthermore, as a consequence of Income Tax Law amendments and pursuant to Generally Accepted Accounting Principles and deferred tax recovery projections, company management adjusted the deferred tax balance to account for tax rates that will be in effect at the time of their likely recovery. As a result, a 1,335 million-peso adjustment was recorded in the fourth quarter of 2004 under the deferred income tax line item.
37
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2004 annual report
Credit Risk Ratings
Net Income
INTERNATIONAL SCALE
Net income totaled 6,959 million pesos in 2004, dropping 13.8% as compared to last year, largely attributable to the recognition of the extraordinary effects described in the previous section.
S&P
FITCH FC
FC
LC
MOODY´S LC
FC
Long Term
Capitalization
AAA
AAA
Aaa
The change in the equity base observed in 2004 was due to new loan portfolio rating provisions applicable to credit institutions issued by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV) in August 2004. These provisions include changes in the valuation of allowances for loan losses and reserves for repossessed asset holdings.
AA+
AA+
Aa1
AA
AA
Aa2
AA-
AA-
Aa3
A+
A+
A1
A
A
A2
A-
A-
A3
BBB+
BBB+
Baa1
The implementation of the aforementioned provisions had a 7,169 million-peso effect under the result of retained earnings line item. Consequently, Tier I capital and total capital stood at 12.4% and 13.7%, respectively, as of December 31, 2004, compared to 14.2% and 16.4%, respectively, in 2003.
BBB
BBB
Baa2
BBB-
BBB-
Baa3
A-1
F1
P1
A-2
F2
P2
A-3
F3
P3
Short Term
NATIONAL SCALE Long Term
mxAAA
AAA(mex)
Aaa.mx
F1+(mex)
MX-1
Short Term
mxA-1+
Bancomer
Mexico
FC – Foreign Currency LC – Local Currency
LC
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relevant events
Relevant Events Public Tender Offer by Grupo BBVA On February 2, 2004, Grupo BBVA, S.A., made an offer to purchase shares representing approximately 40.6% of Grupo Financiero BBVA Bancomer, S.A. de C.V.’s (GFBB) capital stock not held as of such date, at a price of 12 pesos per share. Grupo BBVA also announced its intention to delist GFBB from the Mexican Stock Exchange (Bolsa Mexicana de Valores or BMV). On March 17, 2004, the Mexican Stock Exchange announced that it would delist GFBB from the Mexican Stock Exchange Index (Índice de Precios y Cotizaciones or IPC) once the tender offer concluded. On March 22, 2004, BBVA informed that the final number of tendered shares amounted to 3,660,295,210 or 39.46% of GFBB’s capital stock. With the acquisition of such shares, BBVA's equity stake in GFBB increased to approximately 98.88%.
Exchange of Fobaproa Notes As BBVA Bancomer chose to terminate the agreements entered into with the Bank Savings Protection Fund (Fondo Bancario de Protección al Ahorro or Fobaproa), on July 12, 2004, BBVA Bancomer and the Deposit Insurance Agency (Instituto para la Protección al Ahorro Bancario or IPAB) entered into agreements associated with the new Capitalization and Loan Purchase Program (Programa de Capitalización y Compra de Cartera or PCCC), which set forth the new value of the IPAB's payment obligations to cover the rights to collect PCCC loans. As a part of these new agreements, BBVA Bancomer agreed to purchase "related-party" loans from Fobaproa, which caused the recognition of a nominal 2,136 million-peso loss in July 2004 under the "Discontinued operations, extraordinary items and changes in accounting standards, net" income statement line item.
39
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2004 annual report
Social
responsibility This was a year of challenges, goals, and hard work, as the corporate social responsibility arm of Grupo BBVA Bancomer faced society and directed capabilities, efforts, talent, and monetary resources to support social causes in benefit of Mexican families. A noteworthy fact is that, for the fourth consecutive year, Bancomer received the "Socially Responsible Company" award from the Mexican Philantropic Society (Centro Mexicano para la Filantropía, A.C.). Bancomer in education... Acknowledging that education is one of the most important means for Mexico's economic development, Bancomer carried out important tasks across all educational segments during 2004. At the middle school level, 1,650 sixth-grade boys and girls, ages 12 to 14, received scholarships for having won the Children's Knowledge Olympics (Olimpiada del Conocimiento Infantil), organized by the Ministry of Public Education (Secretaría de Educación Pública or SEP). With this scholarship, these children receive monthly financial support throughout their three years of junior high school. It is worth noting that 40% of these students come from the rural and indigenous sectors of Mexico. Through its Foundation, Bancomer also provides financial aid to 180 high school students attending the high schools of the Monterrey Institute of Technology (Instituto Tecnológico de Monterrey or ITESM) nationwide system, covering 33% of their tuition during their three years of high school. Also, 120 scholarships were granted to college students with a grade point average of 9 or above (on a scale of 1 to 10). In this case, Bancomer pays for 67% of their tuition. Courses and workshops given during 2004 included adult alphabetization, open elementary and junior high education, computers, sewing, arts and crafts, carpentry and varnishing, electricity and English classes for 2,800 adults in 24 educational centers located in several cities across the country. This was accomplished with the help of 285 volunteers and Grupo BBVA Bancomer retirees.
Bancomer in society... To help care for the health of Mexican students, a substance abuse prevention program was completed and will be applied at public elementary schools with the active participation of the Ministry of Public Education and the BBVA Bancomer Foundation. An environmental education program was developed to protect, conserve, and reforest 1,850 acres of woods located south of Mexico City. More than 146,000 elementary school students have been involved in this project. To boost cultural activities, several artists belonging to the fields of visual arts, photography, performing arts, dance, and theatre received support during the year. The Group also participated in national and international art exhibits, most notably in an exhibit called Master Works of the BBVA Collection, Spanish Paintings of the Fifteenth to Twentieth Centuries (Obras Maestras de la Colección BBVA, Pintura Española de los Siglos XV al XX), to which BBVA lent more than 40 pieces of its private collection for their first-time viewing outside of Spain. This exhibit traveled through Mexico, Chile, Peru, Colombia, Venezuela, and Puerto Rico. This visual arts exhibit encompassed five centuries of Spanish art, including notable painters such as Murillo, Goya, Sorolla, Zuluaga, Tápies, Saura, and Arroyo. Over 50 thousand people went to see this exhibit at the San Carlos National Museum in Mexico City. The Tenth Contemporary Art Hall – Weapons and Tools (X Salón de Arte Contemporáneo Armas y Herramientas) was inaugurated in November 2004 at Mexico City's Modern Art Museum. The inaugural ceremony was honored to receive the Chairman of the Board of Directors of BBVA, Mr. Francisco González, and the Chairwoman of the National Culture and Arts Council (Consejo Nacional para la Cultura y las Artes), Ms. Sari Bermúdez.
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social responsibility
41
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> Relevant Data of BBVA (Consolidated figures)
Dec. 31, 2004
%
Dec. 31, 2003
311.072
8,3
287.150
Credit over clients (gross)
174.615
13,9
153.271
Client assets on balance
199.485
9,1
182.831
Other client assets under management
124.499
10,1
113.075
Total client assets under management
323.984
9,5
295.905
15.556
25,4
12.410
7.069
4,9
6.741
Basic margin
10.448
4,4
10.004
Ordinary margin
11.053
3,7
10.656
Business margin
5.440
11,1
4.895
Net Group income
2.802
25,8
2.227
BALANCE SHEET (millions of euros) Total assets
Equity (1) INCOME STATEMENT (millions of euros) Net interest income
RELEVANT RATIOS (%) Business margin/average total assets
1,79
1,75
ROE (Attributed income/average proprietary funds)
20,0
18,4
ROA (Net income/average total assets)
1,05
1,04
RORWA (Net income/average risk-weighted assets)
1,79
1,74
Efficiency ratio
44,9
47,2
Past-due ratio
0,95
1,37
Coverage ratio
247,2
184,9
12,5
12,7
Core capital
6,0
6,2
TIER I
8,1
8,5
CAPITAL RATIOS (BIS NOMINATIVE) (%) Total
OTHER RELEVANT DATA Number of employees • Spain • America
(2)
• Rest of the world Number of offices • Spain • America
(2)
• Rest of the world
84.117
86.197
30.765
31.095
51.370
53.100
1.982
2.002
6.848
6.924
3.375
3.371
3.293
3.353
180
200
(1) After applying full year results. (2) Includes banking activities and pension fund asset management for BBVA in all Latin American countries in which BBVA is present.
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informe anual 2003
43
BBVA
“Full-year 2004 results prove that BBVA's profitable growth strategy has been right on track” The year 2004 has been a superb year for BBVA. The Group recorded net income of 2.802 million euros, growing by a record high of 25,8% versus last year. These results came on the back of continual improvements in efficiency, more dynamic activities, and an enhanced risk profile, which combined have helped build a strong foundation for the future. The results of 2004, coupled with the exceptional outlook for 2005, have allowed for substantially higher shareholder returns. As such, at the General Stockholders' Meeting, the Board of Directors proposed a dividend distribution of 0,442 euros per share for 2004, 15,1% above last year's levels and the highest figure ever paid out by the Group.
What is truly important, however, is that 2004 results evidence the success of the Group's consistent, profitable-growth-oriented strategy launched in 2002. Since early 2002, the Group has worked on two major fronts to implement this strategy. Firstly, the Group's structure has undergone a far-reaching and profound transformation. On one hand, BBVA has an advanced and demanding Corporate Governance system in place, based on solid ethical principles and aligned with the highest national and international standards and recommendations. BBVA's Corporate Governance places particular emphasis on guaranteeing strict compliance with each and every commitment, and on protecting and looking out for the interests of its shareholders.
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“The Corporate Governance model guarantees 2004 GRUPO BBVA equal safeguarding of the legitimate rights of all shareholders” “The trust that clients have placed in BBVA, the efforts expended by employees, and the support of shareholders will all drive further improvements in BBVA's 2005 results” To such end, the Group has chosen to include a strong majority of independent members—at least 2 out of every 3—in the Board of Directors. Furthermore, critical committees, such as the Auditing and Compliance Committee and the Appointments Committee, are exclusively formed by independent members. As opposed to other Corporate Governance models, in which certain members represent high, albeit minority equity stakes and are also able to perform other relevant economic or financial activities, BBVA's model is much better at guaranteeing the absence of conflicts of interest and the equal safeguarding of the legitimate rights of all shareholders, whether big or small. Furthermore, this model is more effective for the continual improvement of the Group and more appropriate for the present open and competitive global environment. Along with Corporate Governance, Corporate Culture has been renovated to ensure compliance with strict ethical and integrity principles in all endeavors, focus activities on clients, and more decisively promote innovation. For the past three years, a simpler, more agile, and more flexible management structure has been shaped. This structure is now closer to the business and provides the three major business units with additional autonomy to design and apply ambitious, profitable and growth-oriented strategic plans. Finally, the Group's top-level management team has been expanded and debureaucratized to give the heads of the bank added autonomy and greater career advancement opportunities; in short, to retain and rein-
force BBVA's existing talents and attract new ones. The second line of work has consisted of strengthening the Group. Since 2003, productivity levels, which were already among the highest in the sector, have continually trended upward. In 2004, the efficiency ratio improved by 2,3 points to 44,9%. Such improvements in efficiency have tenaciously driven Group profitability. In 2004, profitability of BBVA's proprietary funds rose to 20%, coming in 1,6 points above 2003 levels. Despite increased profitability, however, risk levels have been steady, solvency indicators have remained high (6% in core capital and a BIS ratio of 12,5%), and credit portfolio quality has even improved. The pastdue ratio has dropped down to half of what it was in 2002, to end at less than 1%, while the coverage ratio has risen by around 80 points to 247%. And most importantly for the medium- and long-term horizon: A profound change in business mix has taken place over the past few years, whereby an increasingly higher portion of equity is being assigned to core businesses (Retail Banking in Spain and Portugal, Wholesale Banking and the Americas). Within the sphere of business conducted in the Americas, there has been a clear increase in the weight of lower-relative-risk countries such as the United States, Mexico, and Chile. As a result, the Group has improved its risk profile, as reflected in ratings similar to those recorded by the best private financial entities in the world. When this strategy was announced, the year 2004 was set as the landmark year in which results would begin
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BBVA 2004
to be clearly noticeable in terms of profitable growth. And although signs of this positive impact were already present in 2003, it was not until 2004 that results gave conclusive proof of this. In 2004, BBVA has picked up the pace in both Spain and the Americas. In Spain, retail business growth rates have risen almost 50%, with funding and loans increasing around 10% and 20%, respectively. In the Americas, growth has been decisively spectacular, with explosive 14% and 26% increases in funding and investments, essentially driven by Bancomer, confirming the Group's strategic bet on Mexico. Along with the expansion of existing businesses, future profitable growth capabilities via inorganic operations are being reinforced; operations that do not seek to grow for the sake of size, but rather intend to create value in the short and long terms for the Group's shareholders, in line with the Group's strategy. With these operations, BBVA intends to take advantage of its standing and capabilities to penetrate new markets or reinforce its position in high-growth-potential segments. In this sense, BBVA invested 4.300 million euros in Mexico and the United States during 2004. Acquisitions included a 40% interest in BBVA Bancomer, the largest financial group in Mexico and the largest private group in Latin America, and Hipotecaria Nacional, the largest entity of its kind in Mexico, which resulted in a 26% share of the market and will allow for the full exploitation of the housing financing business' huge growth potential. In the United States, the Group acquired banks in California (Valley Bank) and Texas (Laredo Nacional Bancshares), in what is now the beginning of strong expansion plans in the US, leveraging the strong penetration of the Hispanic population—the largest minority in the US, consisting of 40 million people showing accelerated demographic and economic progress. In short, 2004 has been a year in which BBVA has reinforced its leading position among the largest European financial groups in terms of efficiency, profitability, and risk management. Furthermore, BBVA has taken giant steps in its strategy, reaffirming its profitable, sustained growth prospects.
The market is recognizing these accomplishments: In 2004, BBVA's shares rallied 19,2%, outperforming not only all international benchmark indexes, but also its peers and competitors in Europe. As such, total profitability for shareholders, including dividends, ended at 22,9% for the full year of 2004. In 2005, BBVA will continue to make progress in this strategy across all lines of business. Retail Banking in Spain and Portugal is launching a new network expansion program focusing on recently urbanized zones inhabited by a younger population, while dedicating substantial efforts to the huge growth potential in the middle-market segment, which it clearly leads. As regards Wholesale Banking, 2005 will be the year of expansion in the customer franchise model across Latin America, reinforcing activities such as project financing, which are key to opening up new markets, most notably Asian ones. For its part, the Americas will focus on expanding credit, particularly in Mexico, with decidedly ambitious goals in consumer and mortgage loans. The year 2005 is going to be a key year in building franchise in the United States, a region of the utmost importance for the future. In 2004, BBVA has proven its ability to grow more, and more profitably. But it does not intend to settle for that; in a profoundly changing environment such as the present one, continual improvement is a must. Therefore, BBVA bets on innovation as the road to leadership. For such purpose, BBVA has designed a Strategic Innovation Plan to be developed over the next three years. BBVA is stronger than ever, a strength that stems from solid foundations of efficiency, profitability, and superb risk management, along with clear strategic paths that allow the Group to create increased value for its shareholders and step up in the ladder of the European and global financial industry. The trust that clients have placed in BBVA, the efforts expended by employees and the support of shareholders will all drive further improvements in BBVA's 2005 results, both on a quantitative and qualitative basis. BBVA intends to take new steps towards the goal of becoming one of the very few benchmark entities of the 21st- century global financial industry.
46
2004 annual report
Boards of Directors Grupo Financiero BBVA Bancomer, S.A. de C.V.
Proprietary Members
Alternate Members
Héctor Rangel Domene
Arturo Manuel Fernández Pérez
Chairman
Francisco José Calderón Rojas
Jaime Guardiola Romojaro
Sergio Ciklik Sneider*
Vice-Chairman
Eva Garza Lagüera de Fernández Eduardo Ángel Elizondo Lozano
Alberto Bailleres González
Juan Carlos Garza Garza
José Fernando Calderón Ayala
Luis Robles Miaja
José Fernando De Almansa y Moreno-Barreda *
Andrés Alejandro Aymes Blanchet
José Antonio Fernández Carbajal
Manuel Francisco Arce Rincón *
Bárbara Garza Lagüera Gonda
Eduardo Arbizu Lostao
José Guillermo Alfonso Garza Valdés
Maximino José Michel González
José Ignacio Goirigolzarri Tellaeche
Raúl Santoro de Mattos Almeida
Francisco González Rodríguez
Alberto Sánchez Palazuelos*
Ricardo Guajardo Touché *
Mariana Garza Lagüera de Treviño
Max Michel Suberville
Eduardo Sitt Cherem *
Vitalino Manuel Nafría Aznar Antonio Ortega Parra* Gonzalo Terreros Ceballos*
Secretary Luis Robles Miaja
Secretary Proterm José Fernando Pío Díaz Castañares
Examiner José Manuel Canal Hernando
Alternate Examiner * Independent members
Ernesto González Dávila
boards of directors
BBVA Bancomer, S.A., and BBVA Bancomer Servicios, S.A.
Proprietary Members
Alternate Members
Héctor Rangel Domene
Arturo Manuel Fernández Pérez
Chairman
Sergio Ciklik Sneider*
Jaime Guardiola Romojaro
José Fernando Calderón Ayala
Vice-Chairman
Eva Garza Lagüera de Fernández Francisco José Calderón Rojas
Alberto Bailleres González
Luis Robles Miaja
José Fernando De Almansa y Moreno-Barreda*
Andrés Alejandro Aymes Blanchet
Eduardo Ángel Elizondo Lozano
Alberto Sánchez Palazuelos*
José Antonio Fernández Carbajal
Eduardo Arbizu Lostao
Bárbara Garza Lagüera Gonda
Manuel Francisco Arce Rincón*
José Ignacio Goirigolzarri Tellaeche
Maximino José Michel González
Francisco González Rodríguez
Raúl Santoro de Mattos Almeida
Ricardo Guajardo Touché*
Mariana Garza Lagüera de Treviño
José Ramón Guerediaga Mendiola*
José Guillermo Alfonso Garza Valdés
Max Michel Suberville
Eduardo Sitt Cherem*
Vitalino Manuel Nafría Aznar Julio Serrano Segovia Gonzalo Terreros Ceballos*
Secretary Luis Robles Miaja
Secretary Proterm José Fernando Pío Díaz Castañares
Examiner José Manuel Canal Hernando
Alternate Examiner * Independent members
Ernesto González Dávila
47
48
2004 annual report
Steering Committee
Jaime Guardiola Romojaro
Vice-Chairman of the Board and Chief Executive Officer Oscar Cabrera Izquierdo
Gerardo Vargas Ateca
General Director Finance and Comptrollership
General Director Global Markets and Distribution
José Fernando Díaz Castañares
Anthony McCarthy Sandland
General Director Legal Counsel
General Director Corporate and Investment Banking
Tomás Ehrenberg Aldford
Alfredo Castillo Triguero
General Director Middle-Market and Government Banking
General Director Auditing
Ignacio Deschamps González
Manuel Sánchez Rodríguez
General Director Retail Banking
General Director Risk Management and Workout
Alfredo Francisco Gisholt Orozco
Leandro Vela Sánchez
General Director Human Resources
General Director Systems and Operations
regional boards
Regional Boards Chairmen
Acapulco
Michoacán
Mario Martínez Morán
Gregorio Gómez Alonso
Aguascalientes
Monterrey
Rogelio López López
Eduardo A. Elizondo Lozano
Baja California Norte
Nayarit
Rodrigo Valle Hernández
José Octavio Menchaca Díaz del Guante
Colima
Oaxaca
Carlos de la Madrid Virgen
Vladimiro Cué Bolaños
Cuernavaca
Pachuca
Justo Javier Ezquer García
Vito Alessio Aguirre Chávez
Chiapas
Peninsular
Martha Noemí Zapata Pérez
Fernando Ponce García
Chihuahua
Puebla
Rómulo Escobar Valdéz
José Antonio González Fernández
Gulf
Querétaro
Benito Argüello Garza
Augusto Larrondo Arcaute
Guadalajara
San Luis Potosí
Ignacio Aranguren Castiello
José Martín Alba Martín
Guanajuato
Sinaloa
José de Jesús Martínez Herrera
José Enrique Rodarte Salazar
Jalisco
Sonora
José Martínez Ramírez
José Díaz Laso
La Laguna
Tabasco
Ramón Iriarte Maisterrena
David Gustavo Gutiérrez Ruiz
Metropolitan North (Mexico City)
Toluca
Jorge Barbará Zetina
Carlos Alejandro Monroy Carrillo
Metropolitan South (Mexico City)
Veracruz
Oscar Uribe de la Sierra
Manuel Collado Tassinari
49
to move forward
financial statements
is to grow
2004
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financial statements
GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Independent Auditors’ Report
To the Board of Directors and Stockholders’ Grupo Financiero BBVA Bancomer, S.A. de C.V. and Subsidiaries
We have audited the accompanying consolidated balance sheets of GRUPO FINANCIERO BBVA BANCOMER, S.A. de C.V. AND ITS CONSOLIDATED SUBSIDIARIES (the “Financial Group”) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity and changes in financial position for the years then ended, all expressed in thousands of Mexican pesos of purchasing power of December 31, 2004. These financial statements are the responsibility of the Financial Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they are prepared in conformity with the accounting rules applicable to the Financial Group. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Notes 2 and 4, the operations of the Financial Group and its requirements with regard to financial information are regulated by the National Banking and Securities Commission (the “Commission”), which issues accounting circulars, as well as general and specific rulings that regulate the recording of transactions. Note 5 describes the significant differences between the accounting practices prescribed by the Commission and accounting principles generally accepted in Mexico, commonly applied in the preparation of financial statements for other types of unregulated entities in Mexico. As explained in Note 4, on December 1, 2004, the “General regulations applicable to the methodology for classification of the loan portfolio of credit institutions” issued by the Commission, went into effect, which revised the methodologies for determining the allowance for loan losses and the allowance for holding repossessed assets. The effect from application of these Regulations in the consolidated credit institutions was $7,169,491 thousands of Mexican pesos and was recognized in stockholders’ equity in the account denominated “Result of prior years”, in accordance with these Regulations. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Grupo Financiero BBVA Bancomer, S.A. de C.V. and its consolidated subsidiaries as of December 31, 2004 and 2003, and the results of their operations, changes in their stockholders’ equity and changes in their financial position for the years then ended in conformity with the accounting rules prescribed by the Commission. The accompanying consolidated financial statements have been translated into English for the convenience of users.
Galaz, Yamazaki, Ruiz Urquiza, S. C. A member firm of Deloitte Touche Tohmatsu
CPC Jorge Tapia del Barrio January 31, 2005
51
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annual report 2004
GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets AT DECEMBER 31, 2004 AND 2003 (IN THOUSANDS OF MEXICAN PESOS OF PURCHASING POWER OF DECEMBER 31, 2004)
ASSETS
2004
Cash and due from banks
$
96,648,867
2003 $
74,550,796
SECURITIES: Trading For sale Held to maturity Transactions with securities and derivatives: Debtor balances in repurchase and resale agreements Derivatives Unassigned securities to be settled
73,367,217 9,610,828 36,607,545 119,585,590
83,477,335 2,730,603 43,967,422 130,175,360
40,302 10,646,663 10,686,965
76,274 6,498,268 682 6,575,224
79,816,992 9,904,960 41,148,739 37,729,337 41,510,930 80,372,999 290,483,957
66,747,557 7,773,502 26,500,184 38,842,281 40,644,476 84,261,515 264,769,515
398,611 1,515 1,168,385 3,052,691 4,621,202
1,346,608 1,599 1,404,665 4,037,512 302 6,790,686
295,105,159
271,560,201
PERFORMING LOANS: Commercial Financial entities Consumer Mortgage Government entities Fobaproa or IPAB notes Total performing loans
NON-PERFORMING LOANS: Commercial Financial entities Consumer Mortgage Government entities Total non-performing loans Total loans Allowance for loan losses Total loans, net Receivables, sundry debtors and prepayments, net Repossessed assets, net Property, furniture and equipment, net Equity investments Deferred taxes
(12,308,930)
(9,959,168)
282,796,229
261,601,033
8,026,143
10,731,331
1,209,768
2,746,683
14,765,606
15,429,006
9,073,351
4,543,180
17,196,285
23,503,421
4,835,178 1,501,062 6,336,240
5,084,800 1,384,991 6,469,791
OTHER ASSETS: Goodwill Deferred charges and other intangible assets $
Total assets
566,325,044
$
536,325,825
MEMORANDA TRANSACTIONS ON BEHALF OF THIRD PARTIES CUSTOMER CURRENT ACCOUNTS: $
Customer cash balances Customer transaction settlements Customer premiums
15,600 4,533,843 3 4,549,446
$
3,237 888,499 98 891,834
CUSTOMER SECURITIES: Held in custody Securities and notes held in guarantee
202,346,533 28,766 202,375,299
163,778,715 305,848 164,084,563
370,417 2,691 4,202 68,948,827 69,326,137
1,001,048 5,498 4,038 29,851,512 30,862,096
TRANSACTIONS ON BEHALF OF CUSTOMERS: Repurchase and resale agreements Securities on loan (lending party) Purchase transactions (option price) Investment banking transactions on behalf of third parties, net Total on behalf of third parties
$
276,250,882
$
195,838,493
These balance sheets, consolidated with those of the financial entities and other companies forming part of the Financial Group and which can be consolidated, were prepared according to Accounting Principles applicable to Financial Group Holding Companies issued by the National Banking and Securities Commission according to Article 30 of the Law of Financial Institutions, of general and compulsory observance, consistently applied, reflecting the operations conducted by the holding company and the financial entities and the other companies forming part of the Financial Group and which can be consolidated, as of the dates stated above, which were carried out and valued according to sound practices and applicable legal and administrative dispositions. These consolidated balance sheets were approved by the Board of Directors under the responsibility of the signatories. Jaime Guardiola Romojaro Chief Executive Officer
Oscar Cabrera Izquierdo General Director, Finance and Comptrollership
The accompanying notes are an integral part of these consolidated balance sheets
Alfredo Castillo Triguero General Director, Auditing
Luis Ignacio de la Luz Dávalos Director, Corporate Accounting
ACCO
RANDA
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financial statements
LIABILITIES
2004
2003
DEPOSITS: Demand deposits Time deposits
$
197,470,908 201,947,734 399,418,642
$
189,626,563 191,215,064 380,841,627
INTERBANK LOANS AND LOANS FROM OTHER ENTITIES: Payable on demand Short-term Long-term
14,748,740 40,247,268 14,821,450 69,817,458
13,019,906 33,369,620 13,545,687 59,935,213
178,841 1,165,557 11,116,022 12,460,420
426,800 952,028 7,204,997 193 8,584,018
452,370 11,030,610 11,482,980
573,597 9,627,508 10,201,105
2,507,470
5,622,647
TRANSACTIONS WITH SECURITIES AND DERIVATIVES: Creditor balances in repurchase and resale agreements Deliverable securities in lending securities transactions Derivatives Unassigned securities to be settled Other payables: Income taxes and employee profit sharing Accrued liabilities and other Subordinated debt Deferred credits
35,982
40,944
495,722,952
465,225,554
8,505,700 34,950,105
8,311,265 36,578,536
Capital reserves Result of prior years Unrealized losses on for sale securities Results from holding non-monetary assets Net income
250,512 13,415,997 416,619 6,958,947
6,782,883 7,299,011 (566,972) (1,839,125) 8,070,660
Majority stockholders’ equity Minority interest in consolidated subsidiaries Minority interest in capital notes
64,497,880 529,462 5,574,750
64,636,258 539,149 5,924,864
Total liabilities
STOCKHOLDERS’ EQUITY SUBSCRIBED CAPITAL: Paid-in capital Share premium
EARNED CAPITAL:
Total liabilities and stockholders’ equity
71,100,271
70,602,092
Total stockholders’ equity $
566,325,044
$
536,325,825
$
1,122 1,542,881 14,203,575 418,075,208 154,231,138 15,259,249 27,447 592,443 603,933,063
$
26,214 2,677,801 12,389,613 400,554,537 58,184,299 39,199,640 195,111 521,204 513,748,419
ACCOUNTS FINANCIAL GROUP’S OWN TRANSACTIONS CONTROL ACCOUNTS: Guarantees given Other contingent obligations Irrevocable lines of credit granted Assets in trust or under mandate Assets in custody or under administration Amounts committed to Fobaproa or IPAB transactions Securities delivered in custody Government securities in custody
REPURCHASE AND RESALE AGREEMENTS Securities receivable from resale transactions Less- Resale creditors Repurchase debtors Less- Securities deliverable on repurchase transactions Total Financial Group’s own transactions
$
119,004,040 (119,106,145) (102,105)
144,352,968 (144,650,782) (297,814)
43,397,590 (43,434,024) (36,434)
83,814,149 (83,866,861) (52,712)
603,794,524
$
2004 Historical paid-in capital Shares delivered in custody
$
1,020,427 18,021,962,908
513,397,893
2003 $
1,020,427 17,963,462,908
53
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annual report 2004
THIS PAGE WAS INTENTIONALLY LEFT BLANK
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financial statements
GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Income FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (IN THOUSANDS OF MEXICAN PESOS OF PURCHASING POWER OF DECEMBER 31, 2004)
2003
2004 Interest income Interest expense Monetary (loss) gain, net Net interest income
$
53,101,604 (27,417,669) (349,749) 25,334,186
$
52,019,188 (30,085,386) 185,837 22,119,639
Provision for loan losses Net interest income after provision for loan losses
(2,195,956) 23,138,230
(4,048,589) 18,071,050
Commission and fee income Commission and fee expense Trading (loss) income, net Operating revenue
17,643,579 (2,834,571) (18,118) 37,929,120
16,744,093 (2,491,071) 1,317,971 33,642,043
Non-interest expense Operating income
(20,962,269) 16,966,851
(19,851,448) 13,790,595
957,512 (1,836,650) (1,042,502)
1,126,681 (2,560,898) (817,713)
15,045,211
11,538,665
(573,980)
(680,115)
(5,498,831)
(2,824,028)
8,972,400
8,034,522
361,525
285,738
9,333,925
8,320,260
(2,152,057)
-
7,181,868
8,320,260
(222,921)
(249,600)
Other income Other expense Monetary loss Income before income taxes and employee profit sharing Current income taxes and employee profit sharing Deferred income taxes and employee profit sharing Income before share in net income of unconsolidated subsidiaries and affiliates Share in net income of unconsolidated subsidiaries and affiliates Income from continuing operations Discontinued operations, extraordinary items and changes in accounting policies, net Net income before minority interest Minority interest Net income
$
6,958,947
$
8,070,660
These income statements, consolidated with those of the financial entities and other companies forming part of the financial group and which can be consolidated, were prepared according to Accounting Principles applicable to Financial Group Holding Companies issued by the National Banking and Securities Commission according to Article 30 of the Law of Financial Institutions, of general and compulsory observance, consistently applied, reflecting all of the revenues and expenses derived from the operations conducted by the holding company and the financial entities and other companies forming part of the Financial Group and which can be consolidated as of the dates stated above, which were carried out and valued according to sound practices and applicable legal and administrative dispositions. These consolidated income statements were approved by the Board of Directors under the responsibility of the signatories. Jaime Guardiola Romojaro Chief Executive Officer
Oscar Cabrera Izquierdo General Director, Finance and Comptrollership
The accompanying notes are an integral part of these consolidated statements.
Alfredo Castillo Triguero General Director, Auditing
Luis Ignacio de la Luz Dávalos Director, Corporate Accounting
55
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annual report 2004
GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (IN THOUSANDS OF MEXICAN PESOS OF PURCHASING POWER OF DECEMBER 31, 2004)
SUBSCRIBED CAPITAL
Balances at December 31, 2002
UN LO F SE
PAID-IN CAPITAL
SHARE PREMIUM
CAPITAL RESERVES
$ 3,147,331
$ 70,579,772
$ 8,271,227
5,163,934 -
(2,918,405) (31,082,831) -
(1,488,344) -
2,918,405 2,657,677 7,299,011
-
-
-
-
5,163,934
(34,001,236)
(1,488,344)
12,875,093
-
-
-
-
-
-
-
31,335
-
-
-
31,335
(
8,311,265
36,578,536
6,782,883
7,299,011
(
-
-
-
(446,583)
8,311,265
36,578,536
6,782,883
6,852,428
194,435 -
(1,628,431) -
(301,967) -
(553,080) 8,070,660
-
-
(6,230,404)
6,230,404
-
-
-
-
194,435
(1,628,431)
(6,532,371)
13,747,984
-
-
-
-
-
-
-
(7,169,491)
RESULT OF PRIOR YEARS
$
(5,607,417)
$
(
MOVEMENTS DUE TO STOCKHOLDERS’ DECISIONS-
Amortization of the result of prior years Capitalization of restatement Transfer of 2002 net income Dividends paid by Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. Total COMPREHENSIVE INCOME MOVEMENTS-
Net income for the year Restatement of capital notes Result from holding non-monetary assets Unrealized loss on for sale securities Reclassification of the translation adjustments of foreign subsidiaries Total Balances at December 31, 2003 Adjustment in prior years’ results Balances at January 1, 2004
(
(
MOVEMENTS DUE TO STOCKHOLDERS’ DECISIONS-
Capitalization of restatement Transfer of 2003 net income Transfer of unrealized losses on for sale securities to the results from holding non-monetary assets Cancellation of the reserve for repurchase of shares Dividends paid by Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. Total COMPREHENSIVE INCOME MOVEMENTS-
Net income for the year Restatement of capital notes Result from holding non-monetary assets Unrealized gain on for sale securities Application of new regulations for portfolio and repossessed assets classification Application of the modifications for the determination of the reserve for current risks in the life insurance business of Seguros BBVA Bancomer, S.A. de C.V. Total Balances at December 31, 2004
-
-
-
(14,924)
-
-
-
(7,184,415)
$ 8,505,700
$ 34,950,105
250,512
$ 13,415,997
$
These statements of changes in stockholders’ equity, consolidated with those of the financial entities and other companies forming part of the Financial Group and which can be consolidated , were prepared according to Accounting Principles applicable to Financial Group Holding Companies issued by the National Banking and Securities Commission according to Article 30 of the Law of Financial Institutions, of general and compulsory observance, consistently applied, reflecting all of the movements in equity accounts derived from the operations, conducted by the holding company and the Financial entities and other companies that form part of the Financial Group and which can be consolidated, as of the dates stated above, which were carried out and valued according to sound practices and applicable legal and administrative dispositions. These consolidated statements of changes in stockholders’ equity were approved by the Board of Directors under the responsibility of signatories. Jaime Guardiola Romojaro Chief Executive Officer
Oscar Cabrera Izquierdo General Director, Finance and Comptrollership
The accompanying notes are an integral part of these consolidated financial statements.
Alfredo Castillo Triguero General Director, Auditing
Luis Ignacio de la Luz Dávalos Director, Corporate Accounting
$
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financial statements
EARNED CAPITAL UNREALIZED LOSSES ON FOR SALE SECURITIES
17)
$
DEFICIT ON EQUITY RESTATEMENT
RESULTS FROM HOLDING NON-MONETARY ASSETS
NET INCOME
31,335
$ (23,797,390)
$(2,957,517)
$ 7,299,011
CUMULATIVE TRANSLATION ADJUSTMENTS
(383,120)
$
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
$
MINORITY INTEREST IN CAPITAL NOTES
TOTAL STOCKHOLDERS’ EQUITY
523,431
$ 5,719,546
$ 62,826,209
05 77 11
-
-
23,797,390 -
952,174 -
(7,299,011)
-
-
-
-
-
-
-
-
-
(233,859)
-
(233,859)
93
-
-
23,797,390
952,174
(7,299,011)
(233,859)
-
(233,859)
-
(183,852)
-
-
166,218 -
8,070,660 -
249,600 (23) -
205,318 -
8,320,260 205,318 166,195 (183,852)
35
-
(31,335)
-
-
-
-
-
-
35
(183,852)
(31,335)
-
166,218
8,070,660
249,577
205,318
8,507,921
11
(566,972)
-
-
(1,839,125)
8,070,660
539,149
5,924,864
71,100,271
83)
-
-
-
-
-
-
-
(446,583)
28
(566,972)
-
-
(1,839,125)
8,070,660
539,149
5,924,864
70,653,688
80) 60
-
-
-
2,289,043 -
(8,070,660)
-
-
-
04
408,581 -
-
-
(408,581) -
-
-
-
-
-
-
-
-
-
-
(232,573)
-
(232,573)
84
408,581
-
-
1,880,462
(8,070,660)
(232,573)
-
(232,573)
-
158,391
-
-
375,282 -
6,958,947 -
222,921 (35) -
(350,114) -
7,181,868 (350,114) 375,247 158,391
91)
-
-
-
-
-
-
-
(7,169,491)
24)
-
-
-
-
-
-
-
(14,924)
15)
158,391
-
-
375,282
6,958,947
222,886
(350,114)
180,977
416,619
$ 6,958,947
529,462
$ 5,574,750
$ 70,602,092
97
$
-
$
-
$
-
$
$
57
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GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Changes in Financial Position FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (IN THOUSANDS OF MEXICAN PESOS OF PURCHASING POWER OF DECEMBER 31, 2004)
2003
2004 OPERATING ACTIVITIES:
Income from continuing operations Add (less)- Charges (credits) to income, not affecting cashFair value results Provision for loan losses Depreciation and amortization Deferred taxes Provision for accrued liabilities Share in net income of unconsolidated subsidiaries and affiliates
$
9,333,925
$
8,320,260
(780,172) 2,195,956 1,870,246 5,498,831 971,434 (361,525) 18,728,695
593,814 4,048,589 1,707,157 2,824,028 467,460 (285,738) 17,675,570
18,577,015 (31,567,789) 11,834,452 310,944 9,882,245 27,765,562
34,421,958 (8,013,956) (60,226,487) (370,932) 14,735,823 (1,778,024)
(3,115,177)
(112,089)
(232,573) (118,416) (350,114) (3,816,280)
(233,858) 95,082 205,318 (45,547)
(1,374,233) (3,897,333) 335,779 3,084,576
(504,709) (351,786) 822,489 (1,750,266)
(1,851,211)
(1,784,272)
Net increase (decrease) in cash and due from banks
22,098,071
(3,607,843)
Cash and due from banks at beginning of year
74,550,796
78,158,639
Changes in operating-related itemsIncrease in deposits Increase in loan portfolio Decrease (increase) in treasury (financial instruments) Decrease (increase) in trading derivatives Increase in interbank loans and other loans Net resources provided by (used in) operating activities FINANCING ACTIVITIES:
Subordinated debt Cash dividends paid by Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. (minority interest) Stockholders’ equity Restatement of capital notes of BBVA Bancomer, S.A. Net resources used in financing activities INVESTING ACTIVITIES:
Additions to property, furniture and equipment, net of retirements Increase in equity investments Decrease in repossessed assets, net Other assets, other liabilities, deferred charges and credits, net Net resources used in investing activities
Cash and due from banks at end of year
$
96,648,867
$
74,550,796
These statements of changes in financial position, consolidated with those of the financial entities and other companies forming part of the Financial Group and which can be consolidated, were prepared according to Accounting Principles applicable to Financial Group Holding Companies issued by the National Banking and Securities Commission according to Article 30 of the Law of Financial Institutions, of general and compulsory observance, consistently applied, reflecting all of the sources and applications of resources derived from the operations conducted by the holding company and the financial entities and other companies forming part of the Financial Group and which can be consolidated as of the dates stated above, which were carried out and valued according to sound practices and applicable legal and administrative dispositions. These consolidated statements of changes in financial position were approved by the Board of Directors under the responsibility of the signatories. Jaime Guardiola Romojaro Chief Executive Officer
Oscar Cabrera Izquierdo General Director, Finance and Comptrollership
The accompanying notes are an integral part of these consolidated financial statements.
Alfredo Castillo Triguero General Director, Auditing
Luis Ignacio de la Luz Dávalos Director, Corporate Accounting
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GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V. AND SUBSIDIARIES
Notes to the consolidated financial statements FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 (IN THOUSANDS OF MEXICAN PESOS OF PURCHASING POWER OF DECEMBER 31, 2004)
1. EXPLANATION ADDED FOR TRANSLATION INTO ENGLISH The accompanying consolidated financial statements have been translated into English from the original statements prepared in Spanish for use outside of Mexico. The accounting rules of Grupo Financiero BBVA Bancomer, S.A. de C.V. and its consolidated subsidiaries (the “Financial Group”) used in preparing the accompanying financial statements conform with the financial reporting requirements prescribed by the Mexican National Banking and Securities Commission (the “Commission”) but do not conform with accounting principles generally accepted in Mexico and may differ in certain significant respects from the accounting principles generally accepted in the country of use. 2. INCORPORATION AND CORPORATE PURPOSE The Financial Group has been authorized by the Mexican Treasury Department (“SHCP”) to be incorporated and operate as a financial group under the terms established by the Mexican Financial Group Law, subject to the monitoring by the Commission. Its operations consist of rendering full service banking, acting as intermediary in the stock market, and acquiring and managing shares issued by insurance, pension and bonding entities, leasing and financial factoring companies, investment funds, and by any other types of financial associations or entities, or by entities determined by SHCP, based on the Financial Group Law. The transactions of the Mexican Financial Group are regulated by the Commission, the Mexican Credit Institutions Law, the Mexican Securities Exchange Law, and general rules issued by Banco de México. The unconsolidated subsidiaries are regulated, depending on their activity, by the Commission, the Mexican National Insurance and Bonding Commission, and other applicable laws. By law, the Financial Group has unlimited liability for the obligations and losses of each of its subsidiaries. The Commission, as regulator of financial groups, is empowered to review the financial information of the Financial Group, and can request changes thereto. The main regulatory provisions require credit institutions to maintain a minimum capital ratio in relation to the credit and market risks of their operations, comply with certain limits with respect to deposit acceptance, debentures and other kinds of funding, which may be denominated in foreign currency, and establish minimum limits for paid in capital and capital reserves, with which the Financial Group complies satisfactorily. Acquisition of Hipotecaria Nacional, S.A. de C.V., Limited Purpose Financial Company - On September 15, 2004, the Financial Group executed two purchase and sale agreements for 100% of the shares of Hipotecaria Nacional, S.A. de C.V., Limited Purpose Financial Company (Hipotecaria). The transaction was performed through the contribution of shares held by the stockholders of Hipotecaria and for the deposit of U.S.$ 375 million cash, to two trusts. Such trusts were intended to guarantee compliance with the conditions established in the purchase-sale contracts. Subsequent to compliance with such conditions, on January 7, 2005, the transaction was formalized when the shares of Hipotecaria were delivered to the Financial Group and the respective payment was made to the sellers. At December 31, 2004, payment of the aforementioned shares to the trusts is presented as fiduciary duties under the “Equity investments” heading. 3. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS Consolidation of financial statements - The accompanying consolidated financial statements include the financial statements of the Financial Group and those of its subsidiaries that operate in the financial sector. Equity investments in mutual funds, insurance and bonding companies and pension funds are valued according to the equity method, in conformity with accounting criteria prescribed by the Commission. All significant intercompany balances and transactions have been eliminated in consolidation. As of December 31, 2004, the subsidiaries consolidated with the Financial Group are the following: – – – – – –
BBVA Bancomer, S.A., Institución de Banca Múltiple and Subsidiaries BBVA Bancomer Servicios, S.A., Institución de Banca Múltiple Casa de Bolsa BBVA Bancomer, S.A. de C.V. and Subsidiaries GFB Servicios, S.A. de C.V. and Subsidiaries BBVA Bancomer Servicios Administrativos, S.A. de C.V. BBVA Bancomer Gestión, S.A. de C.V.
The Financial Group holds 99.99% of the equity of these subsidiaries.
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As the transactions performed by the foreign subsidiaries of BBVA Bancomer, S.A. Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer (BBVA Bancomer) are considered as part of the latter, conversion effects are recorded in results of the year. The capital notes issued by the subsidiary of BBVA Bancomer, Bancomer Capital Trust I, established for the exclusive purposes of issuing these instruments, are presented as part of the minority interest in accordance with the accounting criteria established by the Commission. Condensed financial information of the Financial Group’s principal unconsolidated subsidiaries is as follows: OWNERSHIP %
ASSETS
LIABILITIES
STOCKHOLDERS’ EQUITY
Seguros BBVA Bancomer, S.A. de C.V.
75.01
$ 4,943,095
$ 3,532,228
$ 1,410,867
$
559,391
Pensiones Bancomer, S.A. de C.V.
99.99
$ 15,507,836
$ 14,584,909
$
$
234,610
COMPANY
NET INCOME
922,927
Comprehensive income- This item is comprised of the net income for the year plus any transactions that according to specific regulations are presented directly in stockholders’ equity, such as the restatement of capital notes, the result from holding non-monetary assets, the unrealized gain or loss on for sale securities and in 2004, the effect derived from applying the new regulations for portfolio classification, detailed in Note 4. Reclassification of financial statements- The 2003 financial statements have been reclassified in insignificant amounts to conform with the 2004 presentation. 4. SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Financial Group, which are in conformity with the accounting rules prescribed by the Commission, require that management make certain estimates and use certain assumptions to determine the valuation of some of the items included in the financial statements and make the required disclosures to be included therein. While the estimates and assumptions used may differ from their final effect, management believes that they were adequate under the circumstances. In the absence of a specific accounting criteria from the Commission or Generally Accepted Accounting Principles (PCGA) issued by the Mexican Institute of Public Accountants (IMCP), the following must be applied in a supplementary manner and in this same order: International Accounting Standards and Accounting Principles Generally Accepted in the US (US GAAP). The principal accounting practices followed by the Financial Group are as follows: Application of new regulations for portfolio classification - On August 20, 2004, the Commission issued the “General regulations applicable to the methodology for classification of the loan portfolio of credit institutions”, which went into effect on December 1, 2004. Such Regulations establish, among other issues, the updating of the valuation method for the allowance for loan losses in the commercial portfolio, and those of states and municipalities, mortgages and consumer loans and the allowance for holding repossessed assets. The new methodology is explained further below in this Note. In accordance with Temporary Section VI of these Regulations, the credit institutions elected to recognize in stockholders’ equity the initial cumulative financial effect derived from the first application of the Regulations in the year in which such application takes place. Consequently, the Financial Group recorded the respective effect of $7,169,491 under the heading of “Result of prior years”, which is comprised as follows: AMOUNT
ITEM
Individual commercial portfolio Parametric commercial portfolio Consumer portfolio Mortgage portfolio Government entities (States and Municipalities) Net effect on the allowance for loan losses Repossessed assets Net total effect
$
$
249,916 68,990 114,308 (6,172,586) (229,138) (5,968,510) (1,200,981) (7,169,491)
a) b) c) d) e) f)
a) In the individual commercial portfolio the allowance percentages were modified for the B1 and C1 degrees of risk; the allowance percentage for B1 decreased and increased for C1. Due to the portfolio composition, this modification generated a release of allowances. b) The previous regulations considered that the portfolio below 700,000 UDIS should be classified parametrically, while the new regulations increased this limit to 900,000 UDIS. c) Under the previous methodology, the allowance was determined by considering only default in terms of monthly payments. The new regulations assign different allowance percentages for weekly, half monthly or monthly periods which report default. Due to the billing periods of the portfolio, this modification generated a release of allowances.
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d) The effect on the mortgage portfolio is composed as follows: ITEM
AMOUNT
“Final Aid” Program Rentals General application of the new methodology
$
(5,769,790) (297,234) (105,562)
Total effect
$
(6,172,586)
d1) d2) d3)
d1) Refers to the allowance to recognize the total support expected to be granted to borrowers under this Program. d2) Refers to the allowance to recognize the expected loss at the time of the repossess of the Housing Units Belonging to the Program and Agreement on Additional Benefits to Housing Loan Debtors -Scheme of Minimum Payments Equivalent to Rentals. d3) Refers to the net effect derived from application of the new methodology. e) The new methodology considers that the allowance for States and Municipalities must be determined taking as reference the base classifications assigned thereto by one of the rating agencies authorized by the Commission. f) Refers to the application of the present percentages indicated in the Regulations, which are based on the aging of the repossessed assets, the net effect was $1,032,176 and $168,805 in BBVA Bancomer and BBVA Bancomer Servicios, respectively. If the effect of the application of these regulations had been recognized in the income statement, the Financial Group’s financial statements for the year ended December 31, 2004, would have shown a loss of $1,278,811 and no effect on the assets, liabilities and stockholders’ equity shown in the balance sheet. Recognition of the effects of the inflation in the financial statements- The accompanying financial statements have been restated to reflect the effects of inflation in accordance with the guidelines established by the Commission. These guidelines require the restatement of all comparative financial statements to Mexican pesos of constant purchasing power as of the date of the latest balance sheet presented. Therefore, the accompanying consolidated financial statements are presented in Mexican pesos of constant purchasing power of December 31, 2004. The effects of inflation recognized in the financial statements are the following: – Balance sheet: Real estate was restated using an index derived from the Unit of Investment (UDI) value, considering the values determined by independent appraisers as the basis for restatement. Furniture and equipment were restated using an index derived from the UDI value, from the date of acquisition through yearend. Repossessed assets are considered monetary assets, and therefore, their carrying value is not restated for inflation, but rather, forms part of the basis for calculating monetary gain or loss. Equity investments are valued considering the equity method as a specific cost, and the difference between the restated balance at the beginning of the period, based on the restatement factor derived from the UDI value, and the increase or decrease according to the equity method is shown as a gain or loss from holding non-monetary assets. Subscribed capital, earned capital and other non-monetary items are restated using an index derived from the UDI value from the date of contribution or generation. Subscribed capital and earned capital amounts are restated taking January 1992 as the base for restatement. – Income statement: Revenues and expenses associated with a monetary item (cash, securities, loan portfolio, funding, etc.) and those derived from current transactions (commissions and fees and administrative and promotion expenses) are restated from the month in which they arise through yearend, using UDI-derived factors. Depreciation of non-monetary assets is determined based on their restated carrying value considering the useful lives determined by independent appraisers. Costs and expenses associated with other non-monetary items are restated through yearend based on the restatement of the non-monetary asset that is being consumed or sold. The gain or loss from monetary position represents the purchasing power loss or gain, in real terms, of the value of monetary assets and liabilities resulting from inflation. – Statement of changes in financial position: The statement of changes in financial position presents the changes in constant Mexican pesos, according to the financial position at prior yearend, restated to Mexican pesos as of the latest year presented.
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Cash and due from banks- Cash and due from banks are recorded at nominal value, except for silver and gold coins, which are stated at their fair value at each period-end. Available foreign funds are valued at the exchange rate published at yearend by Banco de México. Securities– Trading securities: Trading securities are those securities in which the Financial Group invests to take advantage of short-term market fluctuations. These securities are stated at fair value, which is determined by a price supplier in conformity with the following guidelines: Debt instruments– By applying market values. – If market value cannot be obtained through reliable means, or is not representative, the market prices of instruments with similar characteristics will be used as reference, or fair value will be calculated based on formal valuation techniques. – When fair value of the securities cannot be determined, they are recorded at the latest fair value determined, or at acquisition cost, recognizing accrued interest and, if any, those reserves necessary to recognize any impairment. Stock investments– By applying market values. – If market value cannot be obtained through reliable means, or is not representative, fair value will be determined according to the equity method referred to in Bulletin B-8, “Consolidated and Combined Financial Statements and Valuation of Long-Term Investments in Shares”, issued by the IMCP or exceptionally, based on acquisition cost adjusted using the UDI index. – When fair value of shares cannot be determined, they should be recorded at the latest fair value determined, or at acquisition cost, which should be adjusted to net realizable value. Gains or losses resulting from valuation are recognized in the statement of income. – Securities available for sale: Securities available for sale are debt instruments and equity securities acquired with an intention other than obtaining gains from trading them on the market or holding them to maturity. These securities are valued in the same way as trading securities, recognizing the adjustments derived from their valuation in stockholders’ equity, net of the related monetary gain or loss. The monetary gain or loss generated by the acquisition cost of these securities is recorded in the statement of income. – Securities held to maturity: Securities held to maturity are represented by debt securities whose payments can be determined and whose maturities are over 90 days, acquired with the intention of holding them until maturity. They are initially recorded at acquisition cost. Accrued interest is recorded in the statement of income using the straight-line method. If there is sufficient evidence that a security presents a high credit risk and/or that the estimated value may be impaired, book value is adjusted to net realizable value, determined according to formal valuation techniques, through the results of the year. Certain security reclassifications from one line item to another require the Commission’s approval. Repurchase transactions- This item represents the temporary purchase or sale of certain financial instruments in exchange for an established premium with the obligation to resell or repurchase the underlying securities. When the Financial Group acts as reselling party, the net position balance represents the difference between the fair value of the underlying securities (asset position), that represents securities receivable under the transaction valued in conformance with valuation criteria for trading securities, and the present value of the price at maturity (liability position). When the Financial Group acts as repurchasing party, the net position balance represents the difference between the present value of the price at maturity (asset position) and the fair value of the deliverable securities under the transaction (liability position) valued as mentioned in the preceding paragraph. The debit or credit balance resulting from the repurchase and resale transactions is presented as an asset or liability on the balance sheet as part of the securities and derivative transactions. In September 2004, Circular Telefax 1/2003 was issued by Banco de México, modifying the scheme established for repurchase transactions. As part of the modifications, it has been established that for those repurchase transactions established at more than three business days, there should be a regime of guarantees to mitigate the market and counterpart risk. The guarantees received for repurchase transactions without transfer of title are recognized in memoranda accounts and the guarantees granted are considered as restricted assets.
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Derivative financial instruments- The Financial Group carries out two different types of transactions: – Hedging of an open risk position. Consists of the purchase or sale of derivative financial instruments to reduce the risk of a transaction or group of transactions. – Trading. Consists of the position assumed by the Financial Group as market participant, for purposes other than hedging risk positions. In hedging transactions, the compensation of asset and liability positions and the deferred debit or credit of the derivative are presented together with the underlying item being hedged. In trading transactions those amounts are presented as assets or liabilities in the balance sheet, as applicable. The Financial Group’s policies and standards require that for purposes of entering into derivative transactions, both trading parties must belong to the Financial System and have Banco de México authorization to carry out this type of transaction, classifying and, if applicable, determining risk exposure lines. Prior to carrying out these transactions, corporate customers must be granted a credit line authorized by the Credit Risk Committee or provide readily realizable guarantees through the pertinent bond contracts. Transactions involving mid-sized and small businesses, as well as individuals, are carried out through readily realizable guarantees established in bond contracts. The assets and/or liabilities arising from transactions with derivative financial instruments are recognized or cancelled in the financial statements on the date the transaction is carried out, regardless of the date of settlement or delivery of the asset. – Forward and futures contracts: The balance derived from trading transactions represents the difference between the fair value of the contract and the contracted forward price. Asset and liability positions are offset individually; if a debit balance results, it is presented in assets under the heading of “Transactions with securities and derivatives”, while any credit balance is presented in liabilities under the same heading. – Options: In the case of trading transactions, options are stated at fair value and presented as an asset or liability under “Transactions with securities and derivatives”. Options are stated at fair value, reflecting the difference between the price at fair value and historical amount of the premium in the income statement. – Swaps: The balance derived from trading transactions represents the difference between the fair value of the swap asset and liability. The balance is presented as an asset or liability under “Transactions with securities and derivatives”. – Credit derivatives: For credit derivative instruments where an exchange of flows is agreed, derivatives will be valued based on the fair value of the receivable rights (asset position) and the deliverable flows (liability position). A debit balance is presented as an asset under “Transactions with securities and derivatives”, and a credit balance is presented as a liability in the same caption. Lending securities - The lending securities represent the transfer of their ownership from the lender to the borrower; as payment, the former receives a premium, together with the right to receive such securities upon expiration of the respective contract. At the date of the securities loan contract, the Financial Group records the entry of securities at fair value, together with the monetary liability position representing the obligation to either return the securities or pay their value to the lender. Such securities are classified as trading securities. The premium is recorded as a deferred charge, and the respective account payable or cash disbursement is recognized. The guaranty agreed upon contracting the lending securities is recorded as a restricted asset. Prioritized transactions - Prioritized transactions are used to recognize the monetary asset or liability position for instruments receivable or payable, and a monetary liability or asset position for the agreed settlement commitment or right. Monetary asset or liability positions representing instruments receivable or payable are valued at their fair value, affecting the result of the year. Monetary asset or liability positions representing an agreed settlement right or commitment are maintained at their face value. Assets or liabilities derived from instruments receivable or payable from prioritized transactions are shown on the balance sheet net of any assets and liabilities created to receive or pay such prioritized transactions. Monetary asset and liability positions are individually offset in these transactions. The resulting debit or credit balance is shown as an asset or liability within the caption “Transactions with securities and derivatives”. Loss sharing with Fondo Bancario de Protección al Ahorro (FOBAPROA) - BBVA Bancomer has established reserves equal to 100% of the loss sharing with Fobaproa and only recognizes 75% of the portion of the interest receivable on the Fobaproa promissory notes. These reserves are presented under the heading “Fobaproa or IPAB notes”.
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Loan portfolio - The balances in the loan portfolio represent the amounts disbursed to borrowers, less repayments made to date, plus accrued but unpaid interest. The allowance for loan losses is presented as a deduction from the total loan balance. The outstanding balance of past-due loans is recorded as non-performing as follows: – Loans with a single payment of principal and interest at maturity are considered past due 30 calendar days after the date of maturity. – Loans with a single payment of principal at maturity and with scheduled interest payments are considered past due 30 calendar days after principal becomes past due and 90 calendar days after interest becomes past due. – The loans whose payment of principal and interest had been agreed to in scheduled payments are considered past due 90 days after the first installment is due. – In the case of revolving credit granted, loans are considered past due when payment has not been received for two normal billing periods. – Customer bank accounts showing overdrafts are reported as non-performing loans at the time the overdraft occurs. Interest is recognized in income when it is accrued. However, the accrual of interest is suspended when loans become nonperforming. Commissions for granting loans are recognized as income when collected Restructured non-performing loans are not considered as performing until the collection of three consecutive monthly payments without delay, or the collection of one installment when the amortization covers periods in excess of 60 days. Renewed loans where the debtor does not pay accrued interest on time, or does not pay at least 25% of the original loan amount, are considered non-performing until proof of timely payment. Interest accrued during the period in which the loan was considered non-performing is recognized as income at the time collected. Allowance for loan losses– Commercial loan portfolio: Pursuant to that set forth in “General regulations applicable to the methodology for classification of the loan portfolio of credit institutions”, published on August 20, 2004 (the “Regulations”), credit institutions will individually classify the commercial loan portfolio for the credits or group of credits owed by the same debtor, whose balance equals or exceeds an amount equivalent to 900,000 UDIS at the classification date. The remainder is classified parametrically based on the number of months elapsed as of the first default. The portfolio owed by the Federal Government or with an express federal guarantee is exempted. For loans granted to States, Municipalities and decentralized organizations, BBVA Bancomer has decided to apply the regulatory methodologies established in the regulations, which require application of the base classifications assigned by the rating agencies (Fitch, MOODY’s and S&P) authorized by the Commission (this classification must not be more than 24 months old) to evaluate the loan risk. Municipalities with a personal express guarantee from the government of their States may be classified with the degree of risk applicable to the State providing such guarantee. Finally, it is established that security interest on property must be evaluated with the same regulatory mechanism applied to any secured loans, and that when there is no Federal Participation, the level of risk must be increased by two degrees. In the year 2001 BBVA Bancomer certified the internal classification scheme for Debtor Risk, Bancomer Risk Classification (CRB) before the Commission to comply with the requirements for classification of risk and the creation of allowances for loan losses. Bearing in mind the third Temporary Article of the Regulations, BBVA Bancomer recertifies its internal methodology by applying it to specific portfolio segments. On December 1, 2004, the Commission renewed the authorization of such internal methodology for a period of two years as of that date. The classification methodology internally developed by BBVA Bancomer (Calificación de Riesgo Bancomer - Bancomer Risk Classification (“CRB”)) is used to determine a client’s creditworthiness through the weighted result of the grades based on five risk criteria, which include: performance, historical payment capacity, indebtedness capacity, projected payment capacity and macroeconomic conditions. These criteria represent the valuation of the client’s profile, the financial position of the company and the economic status of the industry which are measured through the grading of various quantitative and qualitative credit risk factors, weighted through the application of a single algorithm and fixed weighting parameters. The design of this algorithm and its associated weighting factors are the result of statistical and econometric analyses applied to historical data for several years. The internal classification system presents different levels of risk, which identify credits on a level of acceptable risk, credits under observation and credits of unacceptable risk or in default. The risks included in the CRB model are summarized in the following list:
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LEVEL
1. 2. 3. 4. 5. 6. 7. 8.
Exceptional High Good Adequate Potential weakness Actual weakness Critical weakness Loss
The comparability of the CRB with Regulatory Risk Classification is based upon an analysis of equivalency of default probabilities between the CRB and the Debtor’s Risk Classification according to the Commission, and is as follows:
CRB
COMMISSION’S CLASSIFICATION EQUIVALENT
1 2 3 4 4 5 5 6 6 7 8
A1 A1 A2 B1 B2 B3 C1 C1 C2 D E
PAYMENT EXPERIENCE
Non-payment Non-payment Non-payment Non-payment Non-payment Non-payment
for for for for for for
less than 30 days 30 days or more less than 30 days 30 days or more less than 30 days 30 days or more
Once the borrower’s rating is determined according to this procedure, each loan is initially classified based on the borrower’s rating. Based on the value of the respective collateral, BBVA Bancomer determines the portion of the loan balance covered by the discounted value of collateral and the portion of the exposed balance. The rating assigned to the covered portion can be modified based on collateral quality. Also, the exposed portion will maintain the initial loan rating provided that it is between A1 and C1 or it must be set at risk level E, if the initial loan rating is C2, D or E. Furthermore, the Regulations establish various criteria to determine the value of collateral based on the case in which it can be converted to cash. The allowances for the losses from the commercial loan portfolio created by BBVA Bancomer as a result of the individual classification of each loan, will be classified in accordance with the following percentages: PROBABILITY OF DEFAULT
0.00% 0.51% 1.00% 5.00% 10.00% 20.00% 40.00% 60.00% 90.00%
to to to to to to to to to
0.50% 0.99% 04.99% 09.99% 19.99% 39.99% 59.99% 89.99% 100.00%
RISK LEVEL
A1 A2 B1 B2 B3 C1 C2 D E
BBVA Bancomer records the respective allowance for loan losses on a monthly basis, applying the results of the classification performed quarterly to the balance of the loans as of the last day of each month. – Mortgage portfolio: The allowance for loan losses on the mortgage portfolio is determined by applying specific percentages to the unpaid balance of the debtor, net of Supports (the amount of Final Aid support or ADE owed by BBVA Bancomer was 100% provisioned as a result of the initial application of the Regulations), stratifying the total amount of the portfolio based on the number of monthly installments that report default of payments that are due and payable at the classification date.
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For each stratum, the allowances for loan losses will be determined by applying specific percentages based on the following items: –
Probability of default: the allowance percentages for this item range from between 1% to 90% up to four months in default, depending on the type of mortgage portfolio, and from between 95% to 100 % for five months in default or more.
–
Severity of loss: the allowance percentages for this item are 35% for loans up to six months in default, 70% for between seven and 47 months in default and 100% for 48 months in default or more.
– Consumer portfolio: The allowance for loan losses on the consumer portfolio is determined by applying specific percentages based on the number of billing periods that report payment default at the classification date, bearing in mind that the billing periods may be weekly, half monthly or monthly. The allowances for loan losses on the consumer and mortgage portfolios established by BBVA Bancomer as the result of classifying the loans will be based on the following percentages: RISK LEVEL
A B C D E
PERCENTAGE OF ALLOWANCE FOR LOAN LOSSES
0 1 20 60 90
to to to to to
0.99% 19.99% 59.99% 89.99% 100%
Ordinary interest accrued but not collected on non-performing loans is considered non-performing, and an allowance equivalent to such interest amount is recorded. Other receivables and payables- Balances of sundry debtors that are not settled within the 60 or 90 days following their initial recognition (the number of days depend on whether balances are identified or not) are written off against the income statement, regardless of the recovery possibilities. The debit and credit balances of the transaction settling accounts represent currency and security purchases and sales recorded on the date of transaction, with a 48-hour term for settlement. Repossessed assets or assets received as payment in kind - Repossessed assets or assets received as payment in kind are recorded at the lower of net realizable value or cost. Cost is the value approved by the court at the time of foreclosure. With respect to assets received as payment in kind, cost is represented by the price agreed upon between the parties. When the book value of a loan is higher than the value of repossessed assets, the difference is recorded against the allowance for loan losses at the time of foreclosure. When the book value of the loan is lower than the value of the repossessed asset, the value of the latter is adjusted to the book value of the loan. The carrying value is only adjusted when there is evidence that the net realizable value is less than the book value. The impairment adjustments are reflected in earnings for the period. In accordance with the “General regulations applicable to the methodology for the classification of the loan portfolio of credit institutions”, the mechanism to follow in determining the allowance for holding repossessed assets or assets received as payment in kind, is as follows: ALLOWANCE FOR PERSONAL PROPERTY TIME ELAPSED AS OF THE REPOSSESS OR PAYMENT IN KIND (MONTHS)
Up to 6 More than 6 and up to 12 More than 12 and up to 18 More than 18 and up to 24 More than 24 and up to 30 More than 30
ALLOWANCE PERCENTAGE
0% 10% 20% 45% 60% 100%
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ALLOWANCE FOR REAL ESTATE PROPERTY TIME ELAPSED AS OF THE REPOSSESS OR PAYMENT IN KIND (MONTHS)
More More More More More More More
Up to 12 than 12 and up than 24 and up than 30 and up than 36 and up than 42 and up than 48 and up than 54 and up More than 60
to to to to to to to
24 30 36 42 48 54 60
ALLOWANCE PERCENTAGE
0% 10% 15% 25% 30% 35% 40% 50% 100%
Property, furniture and equipment - This item is recorded at acquisition cost restated in accordance with the restatement criteria previously mentioned in this note. Depreciation is determined based on the restatement carrying value of the assets using the straight-line method as of the month following the acquisition date. The annual depreciation rates are as follows: RATE
Real estate Computer equipment Furniture and equipment Vehicles Machinery and equipment
2.5% 25% 10% 25% 10%
Equity investments - This item represents investments in non-consolidated subsidiaries and affiliates. Investments in non-consolidated subsidiaries and affiliates are valued using the equity method based on the book value of their latest available financial statements. Income tax, asset tax and employee profit-sharing - The provisions for income tax (ISR) and employee profit-sharing (PTU) are recorded in results of the year in which they are incurred, and the deferred effects on income tax of temporary differences between the book and tax values of assets and liabilities are recorded as deferred tax assets and/or liabilities, including the benefit of any tax loss carryforwards. The effect of all the items above is presented net in the balance sheet within the caption “Deferred taxes”. Recoverable asset tax paid is recorded as an advance payment of income tax and is presented in the balance sheet within the caption “Receivables, sundry debtors and prepayments, net”. Goodwill - Goodwill resulting from acquisitions made by the Financial Group reflects the excess of cost over the restated net book value of the subsidiary acquired. Such goodwill is being amortized over a 20-year period. The amounts amortized during 2004 and 2003 were $303,677 and $303,676, respectively. Labor liabilities - Under Mexican Labor Law, the Financial Group is liable for indemnity payments and seniority premiums to employees terminated under certain circumstances. The Financial Group recognizes its liability for seniority premiums, pensions, and post-retirement payments as they accrue, in accordance with the provisions of Bulletin D-3, “Employee Benefits”, of PCGA. Under Bulletin D-3, the liability is based on actuarial calculations utilizing the projected unit credit method and real interest rates. Accordingly, the liability is being accrued, which at present value will cover the obligation from benefits projected to the estimated retirement date of the Financial Group’s employees. Indemnity payments are charged to results in the period in which they are made. Costs generated from reductions in personnel are considered in the corresponding liability for the year. Foreign currency transactions- Foreign currency transactions are recorded at the exchange rate effective at the transaction date. Assets and liabilities denominated in foreign currency are adjusted at the period exchange rate published by Banco de México. Exchange fluctuations related to these assets and liabilities are charged to the income statement.
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5. PRINCIPAL DIFFERENCES COMPARED TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN MEXICO The consolidated financial statements have been prepared in accordance with the accounting rules established by the Commission which, in the following instances, differ from PCGA commonly applied in the preparation of financial statements for other types of unregulated entities: – The consolidated financial statements include only subsidiaries that operate in the financial sector or those subsidiaries that provide auxiliary or complementary services. PCGA requires consolidation of all majority-owned or otherwise controlled subsidiaries. – Up to 2003, PCGA established that the valuation of securities available for sale should be recognized in results of the year, not in stockholders’ equity. In 2004 PCGA were adapted to reflect the accounting practice of the Commission. – Repurchase and reverse repurchase agreements are recognized as purchase-sale transactions or the temporary transfer of underlying securities, and are valued based on the fair value of the underlying securities. Under PCGA these transactions are considered as financing, and the premium earned must be accrued by the straight-line method. – Commission income received by the Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. (the Afore), a subsidiary of BBVA Bancomer, is recorded in the income statement when collected, not when earned. – The minority interest in capital notes is shown as part of stockholders’ equity. In conformity with PCGA, these instruments must be presented as a long-term liability. – The effect from the application of the new regulation for the classification of the loan portfolio and repossessed assets was recognized in stockholders’ equity under the heading of “Result of prior years”. In accordance with PCGA, this effect should be recognized in the result for the year. This effect includes the 100% discounts to which BBVA Bancomer is subject in accordance with the debtor support programs, which up to 2003 were recognized at that time the debtor received the respective discount. 6. CASH AND DUE FROM BANKS At December 31, 2004 and 2003, cash and due from banks consisted of the following: 2004
Cash Banks Other quick funds
$
2003
11,936,925 77,437,579 7,274,363 96,648,867
$
$
12,075,707 61,937,245 537,844 74,550,796
$
Banks include deposits in domestic and foreign banks in Mexican pesos and U.S. dollars, translated at the exchange rate published by Banco de México of $11.1495 and $11.2372 Mexican pesos per U.S. dollar for 2004 and 2003, respectively, and are as follows: U.S. DOLLARS (IN MEXICAN PESOS)
MEXICAN PESOS
2004
Call Money granted Deposits with foreign credit institutions Domestic banks Banco de México
2003
$
-
$
161,855 54,469,248 54,631,103
$
2,819,007
62 15,687 46,315,770 $ 49,150,526
2004
$
TOTAL
2003
- $
2004
-
12,347,121 22,595,407 170,935 420,384 40,134 19,214 $ 22,806,476 $ 12,786,719
$
2003
-
22,595,407 332,790 54,509,382 $ 77,437,579
$
2,819,007
12,347,183 436,071 46,334,984 $ 61,937,245
On August 29, 2002, Circular-Telefax 30/2002 of Banco de México went into effect, terminating the statutory monetary deposits established in Banco de México based on the regulations in effect at that date, whose purpose is to regulate the excess liquidity expected for the money market. It also established a new statutory monetary deposit of $150,000,000 for all credit institutions, for an indefinite period, with interest payable every 28 days, which started to accrue as of September 26, 2002 the date of the first deposit. At December 31, 2004 and 2003, the statutory monetary deposits of BBVA Bancomer are $54,257,225 and $45,180,275, respectively, and are presented in the “Banco de México” balance.
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7. SECURITIES At December 31, 2004 and 2003, financial instruments were as follows: a. Trading2004 INSTRUMENT
Government bonds CETES Note with interest payable at maturity BONDES Certificates of deposit Equity securities Commercial paper Investment funds Bank acceptances Sovereign debt eurobonds UDIBONOS Eurobonds (development banks) Other Total
ACQUISITION COST
$ 35,608,554 17,262,229 8,513,354 5,103,581 4,201,282 1,095,890 779,724 586,117 4,002 127 $ 73,154,860
ACCRUED INTEREST
$
$
2003
INCREASE (DECREASE) DUE TO VALUATION
80,405 $ 3,245 16 90,966 17,858 1,123 1,441 3 195,057 $
11,803 275 (238) 1,185 (7,921) 12,196 17,300
BOOK VALUE
BOOK VALUE
$ 35,700,762 17,265,749 8,513,132 5,195,732 4,211,219 1,108,086 780,847 587,558 4,002 130 $ 73,367,217
$ 35,945,731 9,109,934 10,114,107 5,281,453 1,456,122 185,394 3,506,095 1,296,286 14,548,995 1,728,756 188,710 115,752 $ 83,477,335
During 2004 and 2003, the net increase and decrease in fair value recognized in the income statement was $8,040 and $38,835, respectively. At December 31, 2004, the remaining scheduled maturities of the above instruments, based on the acquisition cost, were as follows: WITHIN 1 MONTH
INSTRUMENT
Government bonds CETES Note with interest payable at maturity BONDES Certificates of deposit Equity securities Commercial paper Investment funds Bank acceptances Sovereign debt eurobonds Total
$
2,216,714 317,987 7,975,878 402,710 2,787,375 767,333 22,299 4,002 $ 14,494,298
BETWEEN 1 AND 3 MONTHS
$
$
OVER 3 MONTHS
- $ 33,391,840 7,591,003 9,353,239 537,476 93,896 4,606,975 1,030,617 383,290 1,628 10,763 127 8,717,144 $ 48,283,710
NO FIXED TERM
$
$
1,095,890 563,818 1,659,708
TOTAL
$ 35,608,554 17,262,229 8,513,354 5,103,581 4,201,282 1,095,890 779,724 586,117 4,002 127 $ 73,154,860
b. For sale2004 INSTRUMENT
Bonds Equity securities Share certificate Sovereign debt eurobonds U.S. Treasury securities Debentures Total
ACQUISITION COST
$
$
5,820,307 2,003,059 1,040,289 616,652 90,311 48,168 9,618,786
ACCRUED INTEREST
$
$
2003
INCREASE (DECREASE) DUE TO VALUATION
1,367 $ 19,896 22,415 678 44,356 $
78,036 (116,431) (37,879) 26,262 (2,302) (52,314)
BOOK VALUE
$
$
5,899,710 1,886,628 1,022,306 665,329 90,311 46,544 9,610,828
BOOK VALUE
$
$
1,491,331 1,190,932 24,884 23,456 2,730,603
During 2004 and 2003, the Financial Group established reserves for the impairment of some equity securities of $17,286 and $308,248, respectively, which were charged against the results for the year. On June 24, 2004, the Commission, through official letter number 601-II-6138, authorized the transfer of certain debt instruments classified under the heading of Trading securities to the category of Securities available for sale. Such position was sold except for the eurobond sovereign debt position.
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At December 31, 2004, the remaining schedule maturities of the above instruments, based on acquisition cost, were as follows: WITHIN 1 MONTH
INSTRUMENT
Bonds Equity securities Share certificate Sovereign debt eurobonds U.S. Treasury securities Debentures Total
$
$
66,897 35,165 102,062
BETWEEN 1 AND 3 MONTHS
$
OVER 3 MONTHS
- $ 23,414 23,414 $
$
NO FIXED TERM
5,820,307 1,040,289 616,652 13,003 7,490,251
$
$
TOTAL
2,003,059 2,003,059
$
$
5,820,307 2,003,059 1,040,289 616,652 90,311 48,168 9,618,786
c. Held to maturityThe following securities have medium -and long-term maturities: 2004 ACQUISITION COST
INSTRUMENT
Sovereign debt eurobonds Government bonds- Mortgage debtor support programs Government bonds- State and Municipalities debtor support program Participation certificates U.S. Treasury securities Government bonds- Productive plant UDI programs Government bonds- Agricultural and fishing Certificates of deposit Total
2003
ACCRUED INTEREST
BOOK VALUE
BOOK VALUE\
$ 26,185,651 $ 8,282,390
958,335 -
$ 27,143,986 8,282,390
$ 29,130,825 11,387,782
985,603 167,242 28,123 $ 35,649,009 $
15 186 958,536
985,603 167,257 28,309 $ 36,607,545
1,467,531 245,677 24,297 1,665,703 45,310 297 $ 43,967,422
For the years ended December 31, 2004 and 2003, the yields related to the overall held to maturity portfolio amounted to $4,936,171 and $4,870,465, respectively, which amounts were recognized in earnings. 8. TRANSACTIONS WITH SECURITIES AND DERIVATIVES At December 31, 2004 and 2003, securities and derivative transactions were as follows: a. Debit and credit balances under repurchase transactionsAs reselling party: 2004 ASSET SIDE
INSTRUMENT
RECEIVABLE SECURITIES
LIABILITY SIDE PAYABLES UNDER RESALE AGREEMENTS
2003 ASSET SIDE DEBIT BALANCE
CREDIT BALANCE
RECEIVABLE SECURITIES
LIABILITY SIDE PAYABLES UNDER RESALE AGREEMENTS
DEBIT BALANCE
CREDIT BALANCE
Government securities$ 56,995,279 $ 57,095,327 $ 24,874 IPAB bonds Fixed rate bonds 18,794,803 18,795,666 255 CETES 16,493,919 16,493,725 248 Banco de México monetary 13,847,877 13,838,284 9,623 regulation bonds BONDES 7,488,278 7,500,067 3,200 1,058 3,132,115 3,132,891 UDIBONOS PIC’s 961 961 116,754,008 116,856,145 39,258
$ 124,922 $ 55,638,046 $ 1,118 9,959,362 54 15,433,935 30 14,989 282 141,395
26,255,894 20,862,285 3,977,902 132,127,424
55,752,293 10,127,435 15,434,027
$
26,239,114 20,894,600 3,977,274 132,424,743
20,868 $ 2,895 1,165
135,115 170,968 1,257
17,563 5,856 1,345 49,692
783 38,171 717 347,011
211 49,903 $
698 8 347,717
Bank securitiesNote with interest payable at maturity Nominal bonds Total
2,250,032 2,250,000 60 $ 119,004,040 $ 119,106,145 $ 39,318
28 11,517,001 11,517,488 708,543 708,551 $ 141,423 $ 144,352,968 $ 144,650,782
$
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As repurchasing party: 2004 LIABILITY SIDE
INSTRUMENT
PAYABLE SECURITIES
ASSET SIDE RECEIVABLE UNDER REPURCHASE AGREEMENTS
2003 LIABILITY SIDE
DEBIT BALANCE
CREDIT BALANCE
PAYABLE SECURITIES
ASSET SIDE RECEIVABLE UNDER REPURCHASE AGREEMENTS
DEBIT BALANCE
CREDIT BALANCE
Government securitiesIPAB bonds $ 18,818,006 $ 18,793,784 $ Banco de México monetary regulation bonds 13,829,087 13,817,504 BONDES 4,946,713 4,945,803 CETES 2,088,733 2,088,646 Fixed rate bonds 251,088 251,129 UDIBONOS 39,933,627 39,896,866
44
$
141 297 116 48 646
24,266 $ 29,227,954 $
29,194,086
11,724 1,207 203 7 37,407
33,889,849 7,307,597 6,512,801 1,550,540 410,855 78,899,596
33,867,551 7,311,589 6,514,396 1,548,628 410,276 78,846,526
11 37,418 $
4,967,265 83,866,861 $
4,967,623 83,814,149
$
9,950 $
43,818
4,890 8,236 2,263 563 25,902
27,188 4,244 668 2,475 579 78,972
469 26,371 $
111 79,083
Bank securitiesNote with interest payable at maturity Total
3,500,397 $ 43,434,024
3,500,724 $ 43,397,590
338 984
$
$
$
The resale and repurchase agreements in which the Financial Group is the reselling and repurchasing party agreed to terms of between 3 and 182 days. b. Derivatives - The chart below shows the derivative instrument transactions entered into by the Financial Group at December 31, 2004 and 2003. The currency position generated by these derivative instruments must be added to the position in the balance sheet in order to obtain the final position amount analyzed in Note 26. Trading: 2004 TRANSACTION
Futures long position Futures short position Forward contracts long position Forward contracts short position Options purchased Options sold Swaps
BALANCE
NOMINAL AMOUNT ASSET LIABILITY
$
$
22,472,787 108,969,376 109,967,742 90,172,303 34,484 154,617,713 486,234,405
$
$
DEBTOR
22,472,787 108,969,376 111,969,382 87,431,636 475,498 155,385,085 486,703,764
CREDITOR
$
68,762 2,823,144 34,484 7,720,273 $ 10,646,663
$
2,152,021 858 475,498 8,487,645 $ 11,116,022
2003 NOMINAL AMOUNT LIABILITY ASSET
TRANSACTION
Futures long position Futures short position Forward contracts long position Forward contracts short position Options purchased Options sold Swaps
$
$
55,155,780 360,599,291 816,661 512,228 29,138 97,302,973 514,416,071
$
$
55,155,780 360,599,291 836,118 502,198 88,618 97,940,795 515,122,800
BALANCE CREDITOR
DEBTOR
$
$
176 5,474 29,138 6,463,480 6,498,268
$
$
14,210 867 88,618 7,101,302 7,204,997
71
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Hedging: 2004 NOMINAL AMOUNT ASSET LIABILITY
TRANSACTION
Options purchased Swaps
$
113,774 20,322,430 20,436,204
$
$ $
BALANCE DEBTOR
26,127,934 26,127,934
$
CREDITOR
113,774 113,774
$
$ $
5,805,504 5,805,504
2003 NOMINAL AMOUNT ASSET LIABILITY
TRANSACTION
Forward contracts long position Forward contracts short position Options purchased Swaps
$
61,766,324 91,122,681 113,803 21,509,534 174,512,342
$
$
$
BALANCE DEBTOR
62,216,026 90,382,616 28,361,909 180,960,551
$
740,065 113,803 853,868
$
CREDITOR
$
$
449,702 6,852,375 7,302,077
b1. Futures and forward contracts- At December 31, 2004, the Financial Group had entered into U.S. dollar futures transactions on the Mexican Derivatives Market (“MexDer”) and recognized losses totaling $60,339 for the year ended December 31, 2004. At December 31, 2004, futures and forwards transactions were as follows: Trading: SALES TRANSACTION
Futures
Forwards
UNDERLYING
U.S. Dollars TIIE CETES IPC M10 bond Mexican pesos Equity securities
U.S. Dollars Interest rates Equity securities
RECEIVABLE
$
2,367,293 105,165,004 1,299,949 128,835 8,295
PURCHASES CONTRACT VALUE
$
CONTRACT VALUE
2,367,293 $ 5,690,548 105,165,004 14,384,392 1,299,949 2,000,643 128,835 71,204 95,000 231,000 8,295 -
BOOK BALANCE
DELIVERABLE
$
5,690,548 14,384,392 2,000,643 71,204 95,000 231,000 -
$
-
$ 108,969,376
$ 108,969,376 $ 22,472,787
$ 22,472,787
$
-
$ 90,172,303 $ 90,172,303
$ 87,431,636 $ 67,601,214 42,361,474 5,054 $ 87,431,636 $ 109,967,742
$ 69,597,305 42,368,100 3,977 $ 111,969,382
$
744,576 (6,626) 1,077 739,027
$
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b2. Options and warrants- At December 31, 2004, option and warrant transactions were as follows: Trading: TYPE OF TRANSACTION
Purchases
REFERENCE AMOUNT
UNDERLYING
Options
U.S. Dollars IPC
1,170,809 9,730
Warrants
Dow Jones IPC
10,324 212
PREMIUM COLLECTED/PAID
$
$ Sales
Options
U.S. Dollars Interest rates IPC
Warrants
Dow Jones IPC
6,129,906 5,053,550 444,129
$
185,604 168,835 $
53,120 851 53,971 10,135 210 10,345 64,316 101,879 47,693 6,827 156,399 185,604 168,835 354,439 510,838
FAIR VALUE
$
$ $
$
22,839 1,207 24,046 10,191 247 10,438 34,484 75,698 13,891 6,064 95,653 183,219 196,626 379,845 475,498
Hedging: TYPE OF TRANSACTION
Purchases
UNDERLYING
REFERENCE AMOUNT
Interest rates
75,726
PREMIUM COLLECTED/ PAID
$
75,726
FAIR VALUE
$
113,774
b3. Swaps- At December 31, 2004, swap transactions were as follows: Trading:
UNDERLYING
Currency
CURRENCY
CONTRACT VALUE RECEIVABLE
Mexican pesos U.S. Dollars UDI Euro Yen
$ 21,263,226 41,036,192 1,830,939 906,401
CONTRACT VALUE DELIVERABLE
RECEIVABLE
$ 31,491,919 $ 22,225,571 22,765,697 44,802,666 9,702,088 1,860,175 379,083 906,401 935,258 69,823,670
DELIVERABLE
NET POSITION
$ 33,124,619 26,794,648 9,854,264 456,655 935,258 71,165,444
$ (10,899,048) 18,008,018 (7,994,089) (456,655) (1,341,774)
80,596,158 3,622,824 84,218,982 659 $ 155,385,085
414,017 159,886 573,903 499 (767,372)
CONTRACT VALUE
Interest rates
Mexican pesos U.S. Dollars
$ 387,601,578 18,806,339
81,010,175 3,782,710 84,792,885 8,042 1,158 $ 154,617,713
Equity securities
Mexican pesos
$
$
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The Financial Group entered into nominal interest rate swaps in Mexican pesos with various institutions, agreed to at rates ranging from 6.11% to 15.85% annually. At December 31, 2004, the reference amount of swaps was $387,601,578. Hedging:
UNDERLYING
Currency
CONTRACT VALUE RECEIVABLE
CURRENCY
Mexican pesos U.S. Dollars Euro Yen
$ 19,994,635 210,375 -
CONTRACT VALUE DELIVERABLE
$
RECEIVABLE
- $ 20,059,375 19,862,384 211,503 1,141,480 88,713 20,270,878
NET POSITION
DELIVERABLE
$
24,701,332 1,272,603 88,826 26,062,761
$ 20,059,375 (24,489,829) (1,272,603) (88,826) (5,791,883)
55,360 9,813 65,173 $ 26,127,934
(4,216) (9,405) (13,621) (5,805,504)
CONTRACT VALUE
Interest rates
Mexican pesos UDI
$ 30,990,000 87,026
51,144 408 51,552 $ 20,322,430
$
The Financial Group entered into nominal interest rate swaps in Mexican pesos with various institutions, agreed to at rates ranging from 7.38% to 10.37% annually. At December 31, 2004, the reference amount of swaps was $30,990,000. 9. LOAN PORTFOLIO Loans granted classified by type of loan at December 31, 2004 and 2003, were as follows: PERFORMING PORTFOLIO
2004
Commercial loansDenominated in Mexican pesos$ Commercial Rediscounted portfolio Lease portfolio Denominated in U.S. dollarsCommercial Rediscounted portfolio Lease portfolio Total commercial loans Financial entities ConsumerCredit card Other consumer loans Mortgage Government entities Fobaproa or IPAB loans
NON-PERFORMING PORTFOLIO
2003
2004
44,520,553 $ 4,274,289 826,866
32,557,215 $ 3,383,561 654,849
170,136 $ 75,794 2,329
27,805,187 1,792,567 597,530 79,816,992
27,956,664 1,215,946 979,322 66,747,557
121,831 7,503 21,018 398,611
9,904,960
7,773,502
1,515
26,523,616 18,671,082 869,870 14,625,123 7,829,102 298,515 37,729,337 38,842,281 3,052,691 41,510,930 40,644,476 80,372,999 84,261,515 $ 290,483,957 $ 264,769,515 $ 4,621,202 $
2003
517,250 $ 85,309 3,653
TOTAL
2004
2003
44,690,689 $ 4,350,083 829,195
33,074,465 3,468,870 658,502
696,771 20,121 23,504 1,346,608
27,927,018 1,800,070 618,548 80,215,603
28,653,435 1,236,067 1,002,826 68,094,165
1,599
9,906,475
7,775,101
1,036,157 27,393,486 19,707,239 368,508 14,923,638 8,197,610 4,037,512 40,782,028 42,879,793 302 41,510,930 40,644,778 80,372,999 84,261,515 6,790,686 $ 295,105,159 $ 271,560,201
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Interest income and commissions classified by type of loan were as follows: 2004 TYPE OF LOAN
INTEREST
Commercial loansDenominated in Mexican pesosCommercial Rediscounted portfolio Lease portfolio
$
Denominated in U.S. dollarsCommercial Rediscounted portfolio Total commercial loans Financial entities ConsumerCredit card Other consumer loans Mortgage Government entities Fobaproa or IPAB loans
2003
COMMISSIONS
TOTAL
3,464,604 $ 270,143 91,788
344,250 3,198
1,232,862 65,016 5,124,413
490 347,938
1,233,352 65,016 5,472,351
1,386,852 74,524 5,514,527
302,685
608
303,293
24,553
78,683 222,248 38,625 688,102
6,534,246 2,175,586 3,081,823 2,202,852 5,660,503 $ 25,430,654
5,410,907 1,452,423 2,924,613 1,739,939 5,680,976 $ 22,747,938
2004
2003
CONCENTRATION PERCENTAGE
AMOUNT
CONCENTRATION PERCENTAGE
6,534,246 2,096,903 2,859,575 2,164,227 5,660,503 $ 24,742,552 $
$
3,808,854 270,143 94,986
TOTAL
$
3,717,145 264,542 71,464
At December 31, 2004 and 2003, loans classified by economic sectors were as follows:
AMOUNT
Foreign sector (non- Mexican entities) Private sector (companies and individuals) Financial Credit cards and consumer Mortgage Federal government loans Fobaproa or IPAB loans Other past-due loans
$
$
694,635 79,922,618 9,501,940 42,317,124 40,782,028 41,510,930 80,372,999 2,885 295,105,159
0.24% 27.08% 3.22% 14.34% 13.82% 14.07% 27.23% 0.00% 100.00%
$
$
1,083,180 67,066,568 7,718,379 27,904,849 42,879,793 40,644,778 84,261,515 1,139 271,560,201
0.40% 24.70% 2.84% 10.28% 15.79% 14.96% 31.03% 0.00% 100.00%
Related-party loans - At December 31, 2004 and 2003, loans granted to related parties amounted to $17,592,579 and $13,221,866, respectively. The amount of related party loans at December 31, 2004 and 2003 includes $8,157,531 and $6,480,057, respectively, in letters of credit, which are recorded in memoranda accounts. Credit support program - BBVA Bancomer has adhered to the following credit support programs established by the Federal Government and the Mexican Bankers’ Association, A.C.: – Debtors Credit Support Mortgage Program and Debtors Credit Benefits Agreement for Mortgage. – Financial Support Program for the Agriculture and Fishing Sector (FINAPE). – Benefits Program for Business Loan Debtor. – Agreement of Financial Support and Development for Micro, Small and Medium-Size Firms (FOPYME). – Additional Benefits Program for Mortgage Debtors-Credits for FOVI type housing. Also, during 1998 the Federal Government and the banks disseminated a new and definitive debtors support plan called “Final Aid”, which as of 1999 replaces the calculation of the benefits granted in support programs for Housing Loan Debtors. Such support plan was substituted for FOPYME and FINAPE in 1999 and 2000, and as of 2001 continued applying the benefits established in the original support programs. The “Final Aid” Program for mortgage borrowers defines the discounts on the outstanding balance of loans recorded at November 30, 1998, without considering interest in arrears. Regarding FOPYME and FINAPE credit programs, the discounts are applied on the payments and the discount percentage is determined according to the balance of the loan recorded at July 31, 1996
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The amount of discounts is recognized by the Federal Government and BBVA Bancomer at different percentages, the part recognized by the Federal Government is recorded as an account receivable, which generates interest at the CETES-91 day rate carried to a 28-day curve, capitalized monthly, the percentage absorbed by BBVA Bancomer is applied to the allowance for loan losses. At December 31, 2004, the balance of the discounts payable by the Federal Government is $1,603,133, which will be settled together with its respective capitalization of interest at the beginning of June 2005. Based on the application of the “General regulations applicable to the methodology for classification of loan portfolio of credit institutions”, BBVA Bancomer reserved all of the discounts it must absorb under the “Final Aid” Program, for the amount of $6,067,024. Due to the results from the audits of the support programs, during 2003 the Federal Government confirmed compliance by BBVA Bancomer with the regulations applicable for the recovery of the conditioned support relative to various programs. For this reason, in May 2004 BBVA Bancomer received from the Federal Government payments relative to the benefits due from the latter, the “Housing” and “FOVI” support programs in the amount of $1,823,451 and in October 2004 the payments related to “FOPYME” and “FINAPE” in the amount of $17,726. Credit granting policies and procedures- BBVA Bancomer’s Credit Manual regulates the granting, control and recovery of loans. This manual was authorized by the Board of Directors and outlines the parameters to be followed by officers involved in the credit process, which are based on the Credit Institutions Law, the conservative credit rules established by the Commission and sound banking practices. Credit authorization under the Board of directors’ responsibility is centralized in empowered committees and officers. In the credit management function the general process from promotion to recovery is defined, specifying, by business unit, the policies, procedures and responsibilities of the officers involved, as well as the tools to be used in each step of the process. The credit process is based on a thorough analysis of credit applications, in order to determine the comprehensive risk of each debtor. For most loans, debtors must at least have an alternate repayment source. Consumer loans, mortgage loans and loans to small and micro-sized companies are subject to automated evaluation and follow-up mechanisms that have been implemented, based on certain standard factors which, under the bank’s criteria, are used to make decisions, and allow greater efficiency in the handling of high volumes of loan applications. 10. UDI-DENOMINATED RESTRUCTURED LOANS At December 31, 2004 and 2003, the overall UDI-denominated restructured loan portfolio was comprised as follows: 2003
2004 DESCRIPTION
Performing loans Performing interest Non-performing loans Accrued interest on non-performing loans Total
STATES AND MUNICIPALITIES
$
$
MORTGAGES
2,614,559 $ 22,693,127 $ 2,701 67,889 1,752,631 33,385 2,617,260 $ 24,547,032 $
FARMING AND FISHING
14,358 $ 11 14,369 $
TOTAL
25,322,044 $ 70,601 1,752,631 33,385 27,178,661 $
TOTAL
39,721,742 144,996 2,191,837 71,543 42,130,118
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11. TRANSACTIONS WITH FOBAPROA - IPAB Following the economic crisis in Mexico that arose in December 1994, BBVA Bancomer participated in government support programs under which BBVA Bancomer transferred loan portfolio cash flows to Fobaproa during 1995 and 1996. In return for the loans transferred to Fobaproa - IPAB, BBVA Bancomer received promissory notes issued by Fobaproa, which at December 31, 2004 and 2003 consisted of: MEXICAN PESOS
2004
DESCRIPTION
Bancomer portfolio transactionsTranches I and II Promex promissory note Cash flows deliverable to Fobaproa Allowance for decrease in value of promissory note
$
BBV-México portfolio transactionsFobaproa I Fobaproa II Arrendadora Atlas Cash flows deliverable to Fobaproa Allowance for decrease in value of promissory note Total under loan portfolio
$
67,900,059 27,795,880
2003
$
U.S. DOLLARS (IN MEXICAN PESOS)
2004
TOTAL
2003
2004
85,832,061 $ 28,189,639
- $ -
1,577,129 -
(619,178)
(14,233,793)
-
(25,704,024) 69,372,737
(26,916,349) 72,871,558
4,489,523 11,430,832 325,130
$
2003
67,900,059 $ 27,795,880
87,409,190 28,189,639
(2,083,861)
(619,178)
(16,317,654)
-
(506,732)
(25,704,024) 69,372,737
(26,916,349) 72,364,826
4,994,526 14,097,848 438,857
-
-
4,489,523 11,430,832 325,130
4,994,526 14,097,848 438,857
(1,755,777)
(4,128,615)
-
-
(1,755,777)
(4,128,615)
(3,489,446) 11,000,262 80,372,999 $
(3,505,927) 11,896,689 84,768,247 $
- $
(3,489,446) 11,000,262 80,372,999 $
(3,505,927) 11,896,689 84,261,515
(506,732) $
Promissory notes issued by Fobaproa executed during 1995 and 1996 have an effective term of ten years, bearing interest at rates referenced to the CETES and LIBOR, depending on the transaction applicable to Mexican peso and U.S. dollar transactions, respectively. Some of the transactions of the portfolio sold to Fobaproa establish that BBVA Bancomer will share collection risks on portfolio cash flows equivalent to 25% of the value of the collection rights at maturity. Any gains on such portfolio will be assigned to BBVA Bancomer. On February 25, 1998, the Commission established the accounting treatment for the recognition of an allowance for loan losses for the loan portfolio under this process. BBVA Bancomer fully reserved 25% of the loss shared with Fobaproa; which was applied against stockholders’ equity in 2000. Since that time, BBVA Bancomer only records the revenue from 75% of the value of the promissory notes, thus keeping covered 100% of the risk of BBVA Bancomer and the incentives program. The amount of obligations with a shared risk payable by the Bank Savings Protection Institute (IPAB) is $49,734,803 after collections and allowances. Such amount refers to the previous promissory notes payable by Fobaproa derived from the sale of portfolios known as “Tranches I and II” from Bancomer and “Fobaproa II” and “Arrendadora Atlas”, from BBVMéxico. Promissory notes derived from the financial strengthening program of PROMEX bear interest at the 91-day TIIE rate and will mature in 2008. BBVA Bancomer elected to terminate the contracts executed with Fobaproa, for which reason, on July 12, 2004, it executed the contracts related to the New Capitalization and Portfolio Purchase Program (PCCC) with the IPAB, which establish the new values of the payment obligations of the IPAB, which would cover the collection rights of the portfolio subject matter of the PCCC. As part of the agreements, BBVA Bancomer agreed to acquire from the Fobaproa the loans identified as “related”, for which reason in July 2004 it recognized a loss of $2,136,468 (nominal value) in the income statement under the heading of “Discontinued operations, extraordinary items and changes in accounting policies, net”.
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The balances of the loan portfolio whose cash flows were transferred to Fobaproa - IPAB and the respective allowance for loan losses were as follows: 2004
Loan portfolio Securities portfolio Repossessed assets Allowance for loan losses Total
$
$
2003
10,221,672 801 716,130 (6,821,093) 4,117,510
$
$
14,334,570 24,281 1,665,106 (7,901,657) 8,122,300
12. ALLOWANCE FOR LOAN LOSSES The following table presents the results of basic loan ratings made for the purpose of recording the loan loss allowance based on the requirements discussed in Note 4: 2004 RISK CATEGORY
A B C D E Subtotal Loans exempt from classification Allowance as of December 31
TOTAL LOANS
$
$
159,110,330 42,605,963 10,355,208 2,995,795 1,903,878 216,971,174 124,196,903 341,168,077
2003 ALLOWANCE
$
$
898,122 3,185,465 4,116,953 2,216,419 1,891,971 12,308,930 12,308,930
TOTAL LOANS
$
$
150,335,011 15,145,735 3,981,978 4,225,646 1,470,885 175,159,255 160,127,631 335,286,886
ALLOWANCE
$
$
1,984,206 1,886,888 1,555,646 2,998,766 1,533,662 9,959,168 9,959,168
The total loans portfolio balance used for classification purposes includes amounts related to the irrevocable lines of credit granted, letters of credit and guarantees given, which are recorded in memoranda accounts. The allowance for loan losses at December 31, 2004 was determined based on the balances at that date. The allowance for loan losses includes 100% of past-due interest at December 31, 2004 and 2003. At December 31, 2004 and 2003, the allowance for loan losses represented 266.36% and 146.66 %, respectively, of the non-performing loan portfolio. Loans and allowance shown above include loans granted in foreign currency, converted into Mexican pesos using the exchange rate in effect at December 31, 2004. In conformity with the regulations established, BBVA Bancomer did not record any allowance for the loan portfolio of the UDI trusts for States and Municipalities. Based on agreements between the Commission and credit institutions the distressed commercial portfolio has been defined as that which has a D and E risk classification. Based on such definition, the distressed commercial portfolio is $989,265 and $946,030 for 2004 and 2003, respectively. Changes in the allowance for loan losses- Below is an analysis of the allowance for loan losses: 2004
Balance at beginning of year Provision charged to income statement Applications and write-offs for the period Provision charged to results of prior year Transfer of allowances, IPAB exchange Exchange effect Balance at end of year
$
$
9,959,168 2,195,956 (6,770,860) 5,968,510 304,714 651,442 12,308,930
2003
$
$
13,535,284 4,048,589 (8,253,004) 628,299 9,959,168
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13. RECEIVABLE, SUNDRY DEBTORS AND PREPAYMENTS, NET The balance of other accounts receivable at December 31, 2004 and 2003 consists of the following: 2004
ITEM
Loans to officers and employees Prepaid expenses Debtors from transaction settlement Sundry debtors Other
$
Less- Allowance $
3,633,885 1,506,708 1,428,391 1,231,292 401,645 8,201,921 (175,778) 8,026,143
2003
$
$
3,376,538 1,553,447 4,090,059 1,406,701 395,428 10,822,173 (90,842) 10,731,331
14. REPOSSESSED ASSETS, NET Repossessed assets at December 31, 2004 and 2003 were as follows: 2004
ITEM
Construction Securities Land Other
$
Less- Allowance for holding repossessed assets $
1,659,421 1,029,582 722,486 19,412 3,430,901 (2,221,133) 1,209,768
2003
$
$
2,017,146 153,554 1,028,344 8,517 3,207,561 (460,878) 2,746,683
15. PROPERTY, FURNITURE AND EQUIPMENT, NET Property, furniture and equipment at December 31, 2004 and 2003 is as follows: 2004
ITEM
Furniture and equipment Office space Installation costs
$
Less- Accumulated depreciation and amortization $
15,553,347 12,771,181 4,478,406 32,802,934 (18,037,328) 14,765,606
2003
$
$
15,168,418 12,933,973 4,140,937 32,243,328 (16,814,322) 15,429,006
16. EQUITY INVESTMENTS Investments in non-consolidated subsidiaries and affiliates that were valued using the equity method were as follows: OWNERSHIP PERCENTAGE
75.01% 1.61% 99.99% Various 49.80% 11.81% Various 55.00%
Hipotecaria Nacional (fiduciary duties) Seguros BBVA Bancomer, S.A. de C.V. Siefore Bancomer Real, S.A. de C.V. Pensiones Bancomer, S.A. de C.V. Others Onexa, S.A. de C.V. Servicio Panamericano de Protección, S.A. de C.V. Sociedades de Inversión Grupo Constructor RAM, S.A. de C.V. Total
2003
2004
ITEM
$
$
4,339,175 1,058,291 1,003,930 922,888 881,381 534,698 239,988 93,000 9,073,351
$
$
956,232 924,893 760,301 812,390 565,050 307,127 84,749 132,438 4,543,180
Investments in equity securities of associated companies at December 31, 2004 and 2003 were determined in some cases based on unaudited financial information, and then adjusted, in the event of differences, upon disposition thereof.
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17. DEFERRED TAXES The Financial Group has recognized net deferred income taxes and employee profit sharing resulting from temporary differences between the book and tax bases of assets and liabilities and tax loss carry forwards at December 31, 2004 and 2003, of $17,196,285 and $23,503,421, respectively, as follows: 2004 TEMPORARY DIFFERENCE
ITEM
2003
DEFERRED EMPLOYEE INCOME TAX PROFIT SHARING
DEFERRED EMPLOYEE INCOME TAX PROFIT SHARING
TEMPORARY DIFFERENCE
Temporary differences: assets Allowance for loan losses (nondeductible portion) Tax loss carry forwards Fair value adjustment of investments Deducted repossessed assets Other assets Loss on sale of shares Allowance for debtors and creditors Total assets
$
31,349,204 $ 21,930,591
10,032,706 $ 2,177,558 $ 29,294,570 7,078,990 34,689,977
$
9,927,024 $ 11,261,451
2,180,168 -
230,379 1,344,670 1,492,989 244,252
76,025 443,741 496,595 80,603
(1,537) -
3,541,209 1,436,549 1,560,940 574,925
1,204,011 488,429 537,106 195,474
(26,955) -
122,752 56,714,837
40,508 18,249,168
2,176,021
58,551 71,156,721
19,907 23,633,402
2,153,213
3,177,927 853,903 4,031,830 52,683,007 $
1,048,716 331,277 3,444,528 276,099 4,029 802,429 1,324,815 335,306 4,246,957 (1,568,783) 15,355,570 $ 1,840,715 $ 66,909,764
1,171,140 261,688 1,432,828 (490,774) 21,709,800 $
355,343 4,249 359,592 1,793,621
Temporary differences: liabilities Fixed assets Other liabilities Total liabilities Tax rate reduction adjustment Net deferred asset $
$
Based on the tax projections prepared by management, it is expected that the deferred tax asset arising from tax loss carryforwards and allowance for loan losses will be recovered before their expiration dates, between 2003 and 2008. As explained in Note 24, as of January 1, 2005, article 10 and the Second Temporary Article of the Income Tax Law (ISR) were amended to establish the gradual reduction of the income tax (ISR) rate from 30% in 2005, to 29% in 2006 and 28% as of 2007. According to provisions under Bulletin D-4, “Accounting for income and asset taxes and employee profit sharing” of PCGA, based on the projections prepared in connection with the recovery of deferred taxes, management adjusted the balance of deferred taxes considering the rates expected to be in effect when the tax amounts were recovered. The effect of this adjustment amounted to $1,426,162 and was reflected in the results of the year within the caption “Deferred income taxes”. 18. GOODWILL At December 31, 2004 and 2003 goodwill was as follows: 2004 ITEM
Banca Promex Afore Bancomer Seguros BBVA Bancomer Pensiones Bancomer Other Valley Bank
GOODWILL
$
$
ACCUMULATED AMORTIZATION
3,130,059 $ 1,986,573 718,521 161,678 76,692 54,055 6,127,578 $
2003 NET
678,180 $ 2,451,879 $ 405,592 1,580,981 150,374 568,147 33,010 128,668 51,448 25,244 54,055 1,292,400 $ 4,835,178 $
GOODWILL
ACCUMULATED AMORTIZATION
3,130,059 $ 1,986,573 718,521 161,678 76,692 6,073,523 $
522,338 $ 306,264 114,449 24,925 20,747 988,723 $
NET
2,607,721 1,680,309 604,072 136,753 55,945 5,084,800
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19. DEPOSITS Liquidity requirements- The “Investment regime for foreign currency transactions and conditions to meet during the term of the transactions in such currency”, designed by Banco de México, establishes the procedures to calculate the liquidity requirements on the foreign currency denominated liabilities for credit institutions. Based on the above procedure, in 2004 and 2003, BBVA Bancomer was subject to liquidity requirements of U.S.$1,378,239 (thousands) and U.S.$36,809 (thousands), respectively, and maintained investments in liquid assets of U.S.$1,773,419 (thousands) and U.S.$1,030,742 (thousands), reflecting liquidity excesses of U.S.$395,180 (thousands) and U.S.$993,933 (thousands), respectively. Deposits consisted of the following: 2004
2003
Demand deposits$
Demand deposits Saving deposits
Time depositsTime deposits
197,181,969 288,939
$
22,732,009
Notes with interest payable at maturity Total
$
179,215,725 399,418,642
189,483,891 142,672
14,632,424 $
176,582,640 380,841,627
20. INTERBANK LOANS AND LOANS FROM OTHER ENTITIES At December 31, 2004 and 2003 interbank loans consisted of the following: MEXICAN PESOS
2004
ITEM
Bank loans Loans from other entities Total
$ $
39,349,735 $ 8,174,440 47,524,175 $
2003
U.S. DOLLARS IN MEXICAN PESOS
2004
42,900,130 $ 20,371,126 $ 7,759,699 1,922,157 50,659,829 $ 22,293,283 $
TOTAL
2003
2004
8,060,027 $ 1,215,357 9,275,384 $
2003
59,720,861 $ 10,096,597 69,817,458 $
50,960,157 8,975,056 59,935,213
Interbank loans and loans from other entities denominated in foreign currencies were contracted by the Financial Group with terms ranging from 3 days to 18.50 years and annual rates ranging between 1.37% and 7.89%. Such loans are contracted with over 30 foreign financial institutions, with no significant concentration in any of them. 21. LABOR LIABILITIES The Financial Group has a liability from labor obligations that, in the case of BBVA Bancomer, BBVA Bancomer Gestión Sociedad Operadora de Sociedades de Inversión Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer Servicios Administrativos, S.A. de C.V., is derived from the pension plan. Such liability will be used to cover pensions and seniority premiums at the date of retirement. In the case of Desitel Tecnología y Sistemas, S.A. de C.V., Casa de Bolsa BBVA Bancomer, S.A. de C.V., Servicios Externos de Apoyo Empresarial, S.A. de C.V. and Servicios Corporativos Bancomer, S.A. de C.V., such obligations are related to seniority premiums. Aside from the aforementioned liabilities, BBVA Bancomer, BBVA Bancomer Servicios Administrativos, S.A. de C.V. and Servicios Externos de Apoyo Empresarial, S.A. de C.V. also have post retirement obligations derived from the payment of integral medical services to pensioners and their economic dependents. The amount of such labor liabilities is determined based on the calculations performed by independent actuaries using the projected unit credit method, and in conformity with the methodology established in Bulletin D-3 of PCGA. Except for Desitel Tecnología y Sistemas, S.A. de C.V. and Servicios Corporativos Bancomer, S.A. de C.V., the aforementioned entities manage their pension plan assets through irrevocable trusts. Pension plan and seniority premium At December 31, 2004 and 2003, the liability relative to the personnel of the Financial Group was as follows: 2004
ITEM
Accumulated benefit obligation Plan assets Excess of plan assets in seniority premium Current net liability derived from employee pensions
$
$
5,880,237 (5,041,537) 1,018 839,718
2003
$
$
5,455,112 (4,846,966) 1,823 609,969
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For the years ended December 31, 2004 and 2003, the net cost was as follows: 2004
ITEM
Service cost Financial cost Amortization of past services Amortization of transition liability Unrecognized experience and assumptions differences Actual return on plan assets Net cost for the period
$
Reduction and discharge of obligations
2003
$
$
161,809 350,743 70,596 1,835 773 (254,434) 331,322
$
177,010 323,800 49,776 2,151 278 (235,333) 317,682
$
4,018
$
4,585
The real interest rates utilized in the actuarial calculations were: ITEM
Actual return on plan assets Interest rate Salary increase rate Rate of increase in medical services
2004
2003
5.00% 5.00% 1.00% 3.00%
5.50% 5.50% 1.50% 2.00%
2004
2003
Information on obligations from projected and vested benefits is presented below: ITEM
Projected benefit obligation Plan assets
$
6,415,585 (5,041,537)
$
5,803,502 (4,846,966)
Unrecognized items: Unrecognized experience and assumption differences Past services Transition liability Net pension liability Obligations from vested benefits
$
(462,937) (901,655) (9,228) 228
$
(348,523) (595,697) (11,109) 1,207
$
3,444,395
$
3,070,514
Indemnity payments are charged to the income statement in the period in which they are made. Post retirement obligations – Integral medical services For the years ended December 31, 2004 and 2003, the liability relative to the post retirement obligations was as follows: 2004
ITEM
Accrued obligation for post retirement benefits Plan assets
$
3,245,936 (626,646)
2003
$
2,390,007 (423,127)
Unrecognized items: Transition liability Unrecognized experience and differences in assumptions Net projected asset Payments
$
(2,325,111) (295,989) (1,810)
$
(1,819,542) (148,282) (944)
$
(67,082)
$
(60,239)
The transition liability amortization period is 20 years. For the years ended December 31, 2004 and 2003, the net cost was as follows: 2004
ITEM
Service cost Financial cost Actual return on plan assets Amortization of transition liability Net cost of the period
$
$
50,070 129,006 (21,290) 100,759 258,545
2003
$
$
44,781 116,016 (10,220) 101,190 251,767
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Pension plan “Fixed Contribution” Also, BBVA Bancomer, Casa de Bolsa BBVA Bancomer, S.A. de C.V. and BBVA Bancomer Servicios Administrativos, S.A. de C.V. have an established pension plan denominated “Fixed Contribution”, to which defined contributions are made based on payroll percentage. Over the long term this plan will replace the defined benefits plan, which generates the previous liability. Currently 12,956 employees from BBVA Bancomer, 56 employees from Casa de Bolsa BBVA Bancomer, S.A. de C.V. and 46 employees from BBVA Bancomer Servicios Administrativos, S.A. de C.V. participate in this plan. Apart from the defined benefit monthly retirement pension, benefits will be paid in the event of voluntary retirement, death, or total or permanent disability, through fixed contributions to employees’ individual fund. At December 31, 2004 and 2003, the assets of the plan of BBVA Bancomer and its obligations are $680,367 and $620,252, the assets of the plan of Casa de Bolsa BBVA Bancomer, S.A. de C.V. and its obligations are $12,075 and $17,283, and the assets of the plan of BBVA Bancomer Servicios Administrativos, S.A. de C.V. and its obligations are $4,249 and $456, respectively, which, given the characteristics of the plan, are not reflected in the balance sheet. 22. SUBORDINATED DEBT 2004
ITEM
2003
Subordinated debenturesBancomer 98 subordinated debt, at the average of Interbank Equilibrium Interest Rates (TIIE), payable every 28 days and maturing on September 28, 2006.
$
2,500,000
$
2,636,272
Subordinated debt, totaling U.S.$100 million, issued in December 1995, at a floating rate of 4 percentage points over 3-month LIBOR, with interest payable quarterly and with principal which were amortized upon their expiration on June 21, 2004.
-
1,184,973
Subordinated debt, totaling U.S.$10 million, issued on May 24, 1996, at a floating rate of 3.50 percentage points over 3-month LIBOR, with interest payable quarterly beginning on the issue date, and with principal which were amortized upon their expiration on May 28, 2004.
-
118,497
Subordinated debt, totaling U.S.$115 million, issued on May 15, 1996, at a floating rate of 3.50 percentage points over 3-month LIBOR, with interest payable quarterly beginning on the issue date, and with principal which were amortized upon their expiration on May 15, 2004.
-
1,362,719
Subordinated debt, totaling U.S.$125 million, issued in March 1996, at a floating rate of 4 percentage points over 3-month LIBOR, with interest payable quarterly and with principal which were amortized upon their expiration on March 29, 2004.
-
308,385
7,470
11,801
Accrued interest payable. Total
$
2,507,470
$
5,622,647
The debt issuance costs related to these issues are amortized using the straight-line method over the life of the debt. 23. TRANSACTIONS AND BALANCES WITH NON-CONSOLIDATED SUBSIDIARIES AND AFFILIATES Balances and transactions with non-consolidated subsidiaries and affiliated companies were not significant and were the result of normal activities.
83
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24. INCOME AND ASSET TAXES, EMPLOYEE PROFIT SHARING AND RESTRICTIONS ON EARNINGS Income and asset tax regulations - The Financial Group and its subsidiaries are subject to income taxes and asset taxes. Income taxes are determined taking into consideration certain taxable and deductible effects of inflation, such as depreciation calculated on restated asset values, which permits the deduction of current costs, and taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the inflationary component. The corporate rate is 33% and in conformity with the tax regulation amendments approved by Congress, in 2005 the corporate rate will be 30%, 29% in 2006 and 28% in 2007. Notwithstanding, asset tax (“IMPAC”) is incurred at the 1.8% rate on the net average of assets not subject to brokerage (at restated values) and certain liabilities, and is only paid to the extent that it exceeds ISR of the year. Any payment made is recoverable to the extent by which ISR exceeds IMPAC during the subsequent ten fiscal years. In fiscal 2004, such amount was $80,883, as shown under the “Receivables, sundry debtors and prepayments, net” heading. Taxable income - The principal items affecting the determination of taxable income or loss of the Financial Group and its subsidiaries were the annual adjustment for inflation, the deduction of allowances for loan losses without exceeding 2.5% of the average loan portfolio, the valuation of derivative financial instruments and the book loss on sale of shares. Tax loss carryforwards and recoverable IMPAC- At december 31, 2004, the Financial Group and its consolidated subsidiaries had tax loss carryforwards that will be amortized in the future for income tax purposes and are indexed for inflation through the year they are utilized, and were as follows: RESTATED AMOUNT OF TAX LOSS CARRYFORWARDS
YEAR
1995 1996 1997 1998 1999 2000 2001 2002 2004
$
$
EXPIRATION DATE
406,284 1,183,149 8,315,448 6,524,959 4,640 3,502,523 5,438 1,729,411 258,739 21,930,591
2005 2006 2007 2008 2009 2010 2011 2012 2014
Furthermore, there are recoverable IMPAC of $515,910 at December 31, 2004, whose expiration date is between the years 2009 and 2014. Employee profit sharing – The Financial Group and its consolidated subsidiaries determine the employee profit sharing based on the guidelines established in Mexico’s Constitution. 25. STOCKHOLDERS’ EQUITY Capital stock- The capital stock of the Financial Group at December 31, 2004 and 2003, was as follows: NUMBER OF SHARES AT PAR VALUE OF $0.11 EACH SHARE
2003
2004
Series “B” Series “F” Total
AUTHORIZED
UNSUBSCRIBED
4,605,999,999 4,794,000,001
(60,462,657) (62,930,521)
9,400,000,000
(123,393,178)
PAID-IN
AUTHORIZED
UNSUBSCRIBED
PAID-IN
4,545,537,342 4,731,069,480
4,605,999,999 4,794,000,001
(60,462,657) (62,930,521)
4,545,537,342 4,731,069,480
9,276,606,822
9,400,000,000
(123,393,178)
9,276,606,822
CAPITAL STOCK
2004 AUTHORIZED
Series “B” Series “F”
2003
UNSUBSCRIBED
$
506,660 527,340
$
(6,651) (6,922)
$
1,034,000
$
(13,573)
PAID-IN
$
Capitalization of restatement Restatement to Mexican pesos of December 31, 2004 $
AUTHORIZED
UNSUBSCRIBED
500,009 520,418
$
506,660 527,340
$
(6,651) (6,922)
1,020,427
$
1,034,000
$
(13,573)
5,358,369 2,126,904 8,505,700
PAID-IN
$
500,009 520,418 1,020,427
$
5,163,934 2,126,904 8,311,265
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On April 22, 2004 at the General Ordinary Stockholders’ Meeting it was agreed to reorder certain Financial Group stockholders’ equity items by incorporating the net effect derived from restating the following stockholders’ equity headings into the amount of restated common stock: share premium, capital reserves and the result of prior years. At the meeting it was also agreed to incorporate to the restated historical amount of common stock the following historical and restated stockholders’ equity headings: deficit on equity restatement and the results from holding nonmonetary assets. The net effect of the common stock increase was $194,435. These adjustments did not have any equity effect, as they were only reclassified between stockholders’ equity accounts. The common stock of the Financial Group at December 31, 2004 is $1,034,000 (nominal value) and consists of 9,400,000,000 Series “F” and “B” nominative shares at par value of $0.11 each share, of which 9,276,606,822 shares are fully subscribed and paid in, with 4,171,045,738 shares of fixed capital and 5,105,561,084 of variable capital. 123,393,178 unsubscribed shares are held in the treasury of the Financial Group. Series “F” shares must represent at least 51% of the Financial Group’s capital and may only be acquired directly or indirectly by a foreign financial institution and sold with the prior authorization of the SHCP, subject to compliance with the regulations contained in the Financial Group’s Law. Series “B” shares, which may represent up to 49% of the Financial Group’s capital, will be of unlimited subscription and will be governed by the provisions of the Financial Group’s Law for this series of shares. Restrictions on income – Stockholders’ equity, except for restated amounts of paid-in capital and tax retained earnings, will incur ISR on dividends payable by the Financial Group at the current rate, at the time of distribution. The tax paid on such distribution can be credited against ISR of the year and the respective provisional payments during the year in which tax is paid on dividends and the next two years. The annual net income of the Financial Group is subject to the legal requirement that 5% thereof be transferred to a legal reserve each year until the reserve equals 20% of outstanding capital stock. This reserve may not be distributed to stockholders during the existence of the Financial Group, except in the form of a stock dividend. Issuance of capital notes- On February 9, 2001, BBVA Bancomer issued capitalization instruments (capital notes) for U.S.$500 million placed through a global offering, with an annual yield of 10.5% over a 10-year term. BBVA Bancomer has reserved the right to early redeem the capital notes beginning in the fifth year from their issuance date. This issue was listed on the Luxembourg Stock Exchange and offered through a global offering according to Rule 144 A of the US Securities Exchange Act to qualified US institutional investors, and under Regulation “S” of this Act to non-US investors. The issuance of these notes is contemplated in the capitalization rules issued by the SHCP and significantly contribute to the strengthening of BBVA Bancomer’s capitalization base. In conformity with the capital notes offering memorandum, payment of yields may be suspended if the capitalization index of BBVA Bancomer falls below the minimum required by the authorities or by any other regulation. Capitalization index- The regulations establish requirements for specific net capital levels, as a percentage of risk assets, for both market and credit purposes. However, in order to determine net capital, deferred taxes represents a maximum of 20% of Tier 1 capital. At December 31, 2004, the combined capitalization index of BBVA Bancomer and BBVA Bancomer Servicios represented 13.69% of total risk (market and credit) and 19.65% of credit risk, which are 5.69 and 11.65 percentage points above the respective minimum requirements. The net combined capital of the credit institutions, divided into Tier 1 and Tier 2 capital, is detailed as follows (the amounts shown in this note may differ in presentation from the basic financial statements): Basic capital: ITEM
Stockholders’ equity Capital notes Deductions of investments in shares of financial entities Deductions of investments in shares of non-financial entities Deductions of deferred taxes Organization expenses, other intangible assets Total
AMOUNT
$
$
52,417,517 4,862,455 (4,291,615) (2,435,546) (8,718,976) (2,821,753) 39,012,082
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Complementary capital: ITEM
AMOUNT
Subordinated debt and capital notes Allowance for loan losses Total
$ $
1,712,295 2,401,082 4,113,377
The main characteristics of debt and capital notes were as follows: APPRAISED AMOUNT
ITEM
Non Convertible- debt considered as complementary capital: Bancomer-98 Eligible capital notes
$ $
2,500,000 5,574,750 8,074,750
MATURITY DATE
CALCULATION
28/09/2006 16/02/2011
40% 13%
WEIGHTED AMOUNT
$
1,000,000 712,295 1,712,295
Assets at risk are as follows: Assets subject to market risk: ITEM
Transactions in Mexican pesos with a nominal rate Transactions in Mexican pesos with real rate or rate denominated in UDI Interest rate transactions in foreign currency with a nominal rate Positions in UDIS and Mexican pesos with yield referred to NCPI Positions in currencies with yield indexed to exchange rates Positions in shares or with yield indexed to the price of a share, group of shares, or stock exchange index Total market risk
RISK-WEIGHTED POSITIONS
$
$
78,545,153 3,557,537 10,073,888 27,261 981,195 2,252,815 95,437,849
CAPITAL REQUIREMENTS
$
$
6,283,612 284,603 805,911 2,181 78,496 180,225 7,635,028
Assets subject to credit risk: ITEM
Group II (weighted at 20%) Group III (weighted at 100%) Total credit risk
RISK-WEIGHTED ASSETS
$ $
16,887,353 202,610,588 219,497,941
CAPITAL REQUIREMENTS
$ $
1,350,988 16,208,847 17,559,835
Adjustment in prior years’ results – BBVA Bancomer canceled payments of software licenses which had been amortized over five years, against the result of prior years, because these licenses had an effective duration of one year. The amount of this cancellation was $446,583, equivalent to the unredeemed amount as of December 31, 2003, with 2004 software licenses recognized in the result for the year. This movement is shown in the statement of changes in stockholders’ equity, by adjusting the balances as of December 31, 2003, because the adjustment was recorded for accounting purposes in 2004, and the 2002 initial balances were not adjusted as required by PCGA. The effect of this adjustment on the results from the respective years is not material. 26. POSITION IN FOREIGN CURRENCY At December 31, 2004 and 2003, the exchange rate determined by Banco de México and used by the Financial Group to value its assets and liabilities in foreign currency (translated to U.S. dollars) was $11.1495 and $11.2372 per U.S. dollar, respectively. The balances of foreign currency assets and liabilities as of those dates were as follows: THOUNSANDS OF U.S. DOLLARS
2004
Net (liability) asset position in Mexican pesos
2003
25,138,024 (25,183,308) (45,284)
Assets Liabilities Net (liability) asset position in U.S. dollars $
(504,894)
17,765,039 (17,705,671) 59,368 $
667,130
At January 31, 2005, the unaudited net liability position was similar to that at yearend, and the exchange rate at such date was $11.2141 per U.S. dollar.
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27. UDI POSITION At December 31, 2004 and 2003, the Financial Group had UDI-denominated assets and liabilities translated into Mexican pesos, considering the prevailing conversion rate of $3.534716 and $3.352003 per UDI, respectively, as follows: THOUSANDS OF UDIS
Assets Liabilities Net (liability) asset position in UDI Mexican peso equivalent (thousands)
$
2004
2003
1,372,722 (2,323,530) (950,808)
2,318,609 (1,706,406) 612,203
(3,360,836)
$
2,052,106
At January 31, 2005, the unaudited UDI position was similar to that at yearend, and the conversion rate was equivalent to Ps. 3.534105 Mexican pesos per UDI. 28. NET INCOME PER SHARE Net income per share is the result of dividing net income by the weighted average number of shares of the Financial Group outstanding during the year. At December 31, 2004 and 2003, the results of the above are as follows: 2004 ITEM
Net income
NET INCOME
$
2003
NUMBER OF SHARES
6,958,947 9,276,606,822
INCOME PER SHARE
$
0.75016
INCOME PER SHARE
$
0.87000
29. PREVENTIVE AND SAVING PROTECTION MECHANISM During 2004 and 2003, contributions made by BBVA Bancomer to IPAB were $1,670,915 and $1,622,545, respectively. In December 1998, the Federal Congress approved a law through which Fobaproa would be gradually phased out from January 1, 1999 through June 1999, and IPAB was created and assumed the assets and obligations of Fobaproa as a result of the strengthening of credit institutions. Pursuant to Temporary Article Five of the Law for the Protection of Bank Savings, on July 18, 1999 the IPAB issued the general rules for operation of the PCCC, which were applied to the institutions that elected to terminate the contracts signed with the Fobaproa in order to subsequently execute the contracts of the New Program with the IPAB. Pursuant to the foregoing, on July 12, 2004, BBVA Bancomer executed the New Program Contract with the IPAB under which it assumed the obligation to allow the IPAB to perform the audits related to the Performance, Existence, Legality and Identity of Subject Matter regarding the credits generating positive resources for the IPAB. The aforementioned audits will conclude in the second-quarter of 2005 and the results will be recognized in the respective year.
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30. SEGMENT INFORMATION The Financial Group participates in different activities of the financial system, including full service banking, stock market intermediation, foreign remittances transfers, financial services, management of mutual funds, management of pension funds, etc. In order to analyze the financial information by segments, the table below shows revenues obtained during 2004 and 2003 (in millions of Mexican pesos): 2004
ITEM
TOTAL
Interest income and expense, net $ Monetary loss, net Net interest income Provision for loan losses Net interest income (loss) after provisions for loan losses Commissions and fees, net Trading (loss) income, net Operating revenue (loss) Non-interest expense Operating income Other income Other expense Monetary loss Earnings before income taxes and employee profit sharing Current income tax and employee profit sharing Deferred income tax and employee profit sharing Income before share in net income of non-consolidated subsidiaries and affiliates Share in net income of non-consolidated subsidiaries and affiliates Income from continuing operations Discontinued operations, extraordinary items and changes in accounting policies, net Net income before minority interest Minority interest Net income
COMMERCIAL BANK
$
TOTAL REVENUE BY SEGMENT CORPORATE BROKERAGE AND HOUSE AND GOVERNMENT TREASURY INVESTMENT BANKING TRANSACTIONS FUNDS
25,684 $ (350) 25,334 (2,196)
17,245 $ 17,245 (1,062)
5,066 $ 5,066 (133)
2,877 $ 2,877 -
12 $ 12 -
23,138 14,809 (18) 37,929 $ (20,962) 16,967 958 (1,837) (1,043)
16,183 8,572 291 25,046
4,933 2,130 44 7,107
2,877 (82) (395) 2,400 $
12 595 46 653 $
15,045 (574) (5,499)
8,972
362 9,334
(2,152) 7,182 (223) 6,959
$
$
RETIREMENT SAVING FUNDS
FOREIGN REMITTANCES TRANSFER
35 $ (33) 2 -
2 2,505 2,507
$
OTHERS
18 $ 18 -
431 (317) 114 (1,001)
18 814 61 893 $
(887) 275 (65) (677)
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2003
ITEM
Interest income and expense, net Monetary gain (loss), net Net interest income (loss) Provision for loan losses Net interest income (loss) after provisions for loan losses Commissions and fees, net Trading income (loss), net
TOTAL REVENUE BY SEGMENT CORPORATE AND BROKERAGE HOUSE COMMERCIAL GOVERNMENT TREASURY AND INVESTMENT BANK BANKING TRANSACTIONS FUNDS
TOTAL
$
21,934 $ 186 22,120 (4,049)
14,384 $ 14,384 (870)
4,100 $ 4,100 (692)
3,613 $ 3,613 -
(49) $ (49) -
18,071 14,253 1,318
13,514 7,259 294
3,408 2,698 45
3,613 14 1,020
(49) 758 147
(1) 2,578 -
4,647 $
856 $
2,577
Operating revenue (loss)
33,642
Non-interest expense Operating income Other income Other expense Monetary loss Earnings before income taxes and employee profit sharing Current income tax and employee profit sharing Deferred income tax and employee profit sharing Income before share in net income of nonconsolidated subsidiaries and affiliates Share in net income of non-consolidated subsidiaries and affiliates Net income before minority interest Minority interest
(19,851) 13,791 1,127 (2,561) (818)
Net income
RETIREMENT SAVING FUNDS
$
21,067
$
6,151
$
FOREIGN REMITTANCES TRANSFER
21 $ (22) (1) -
$
- $ -
OTHERS
(135) 208 73 (2,487)
718 38
(2,414) 228 (226)
756 $
(2,412)
11,539 (680) (2,824)
8,035
286 8,321 (250) $
8,071
Other segments contain those related to management of the portfolio assigned to recovery, the mortgage portfolio of UDI Trusts, and to the management of the cash flow participation plan.
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31. RISK MANAGEMENT Considering the Commission’s regulatory requirements relative to the disclosure of the policies and procedures established by credit institutions for comprehensive risk management below are the measures implemented by management for this purpose, as well as the respective quantitative information: The “Conservative Rules on Comprehensive Risk Management”, defined in Circular 1423 issued by the Commission, were implemented through the recognition of basic rules for efficient risk management, evaluating risks as quantifiable (credit, market and liquidity) and non-quantifiable (operational and legal), so the basic identification, measurement, monitoring, limitation, control and disclosure processes are satisfied. By the same token, the regulatory agencies of insurance, pension institutions and the retirement fund administrator have issued regulations in this regard. Following is a summary of the activities performed by BBVA Bancomer, principal subsidiary: – Participation of the governing bodies: The Board of Directors is responsible for establishing the objectives of risk exposure and fixing capital related limits, as well as authorizing the policies and procedures manuals related to risks. The Risk Committee is responsible for monitoring the position and compliance with the risk limits to which BBVA Bancomer is exposed, and for ensuring adherence to Board of Directors’ resolutions. – Policies and procedures: Risk manuals with standard contents, including strategy, organization and operating, technological and methodological frameworks, and regulatory processes. Specific manual for legal risks, including related methodologies. Defined and limited third-party responsibilities, risk training programs and communication of policies and procedures. – Strategic decision making: Independence of the Comprehensive Risk Management Unit. Interaction of this unit with operating committees. Establishment of monitoring processes and daily and monthly reports. Limits structure in terms of economic capital for each business unit and type of risk. Establishment, by the Risk Committee, of the authorization process for new products and/or services involving risk for BBVA Bancomer. – Tools and analyses: Continuous measurement of credit, market and liquidity risks under consistent methodologies and parameters. Indicators of diversification levels (correlations). Establishment of periodic analyses of sensitivity, testing under extreme conditions and review and improvement of models. Install monitoring and operational and legal risk control methodologies in conformity with international standards. Risk integration by defining capital requirements to absorb them. – Information: Periodic reports to the Risk Committee, Board of Directors, risk taking units, finance and senior management. – Technological platform: Comprehensive review of all source and calculation systems for risk quantification, projects for the improvement, quality and sufficiency of data and automation. – Audit and comptrollership: Participation of internal audit regarding compliance with Circular 1423 and implementation of compliance plans by type and area of risk. Performance of audits in compliance with Circular 1423 by a firm of independent experts, concluding that risk measurement models, systems, methodologies, assumptions, parameters and procedures comply with their functionality based on the characteristics of the risk operations, instruments, portfolios and exposures of BBVA Bancomer. BBVA Bancomer believes that at this date it fully complies with the provisions of Circular 1423, while projects continue to improve measurements and limitations, automation of processes and methodological refinements.
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Methodological framework For risk purposes, the BBVA Bancomer’s balance sheet is envisioned as follows: – Market risk: Operations and investment portfolios- Investments in trading securities and securities available for sale, ledger of repurchase transactions and related derivative transactions. Structural balance sheet- Other assets, including securities held to maturity and derivatives for the management of interest rate risk. – Credit risk: Companies and corporate- Traditional loan portfolio, including small and medium companies, and exposures from investments in issues, and counterparts in derivative financial instruments. Retail/consumer loans- Credit cards, financing plans and mortgage portfolio. With respect to the risk market measurement process and the operations and investment portfolios, the daily measurement of market risk is done through statistical techniques of the Value at Risk (VaR), the core measurement. As an example, VaR consists of the following: a. To define the sensitive level in the valuation of positions facing changes in prices, rates or indexes. b. To estimate the “reasonably” expected change for a determined timeframe in such prices, rates or indexes, considering the level under which such factors can move as a whole. c. To revalue the portfolio under such expected changes as a whole and determine the potential “maximum” loss in terms of value. The VaR has been set based on the consideration that, in a day’s transactions, losses will not exceed the calculated amount of 99% of the times. This confidence level has been increased from the 97.5% formerly used, to reflect a more conservative risk management policy. Regarding the structural market risk of interest rates, the balance sheet is categorized, in accordance with the estimated lives of each line item. Hence, the portfolio is valued under current conditions and its sensitivity to rate increases or decreases is determined. Likewise, financial margin sensitivity to changes interest rates is also calculated. Regarding the liquidity risk of the balance sheet, the circuits, reports, management authority levels, and contingency plans were defined and approved by the Risk Committee with respect to the management of treasury short-term liquidity, and to the management of the liquidity risk in the balance sheet under the Comprehensive Risk Management Unit. Exposure is measured based on the expected loss component resulting from intrinsic operating factors such as product type, term and amount. The Exposure of BBVA Bancomer is quantified based on two addends according to the following formula: Exposure = Market Value + Potential Risk The first factor –Market Value– incorporates the difference between original commitments and present market values (marking to market). This market value can be positive. In the event of noncompliance involving the offsetting entry, the resulting loss must replace the daily price; otherwise, if a negative market value arises, the offsetting entry is at risk. The second amount added –Potential Risk– results from estimating the maximum market value increase at a certain level of reliability due to subsequent price variations during the residual term and until transaction maturity. This term is known as an add-on.
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Quantitative information – Operation and investment portfolio: VAR 1 DAY (UNAUDITED) AVERAGE FOURTH DECEMBER 31, QUARTER
2004
PORTFOLIO
Interest rate Variable income Foreign exchange Weighted
$ $ $ $
139,773 7,419 6,472 140,769
2004
$ $ $ $
152,667 5,803 11,114 152,717
32. CONTINGENCIES At December 31, 2004 and 2003, BBVA Bancomer is subject to various legal proceedings and claims. However, in the opinion of its legal counsel, the claims lack foundation, and even if the resolutions are unfavorable, they will not have a material adverse effect on its financial position or results of operations. BBVA Bancomer has established reserves totaling $99,852 in connection with such contingencies. 33. COMMITMENTS BBVA’s agency in London entered into a purchase option transaction of UDIBONOS with Mitsubishi Bank of Tokyo (“MBT”) up to an amount equivalent to 1,220 million UDIS. According to the terms of the agreement, in the event of nonpayment of the principal or the respective interest by the Mexican government and if such noncompliance exceeds 30 days or a payment moratorium is declared, BBVA Bancomer is committed to repurchase the aforementioned securities, and thus assume the risk inherent in this transaction.
Nationwide Leadership BBVA Bancomer l Others l
Total Assets
Performing Loans excluding Fobaproa
Demand and Time Deposits
Corporate Structure Grupo Financiero BBVA Bancomer, S.A. de C.V.
Investor Relations
% 26.5% 73.5%
24.4% 75.6%
28.3%
COMPANY
EQUITY STAKE
BBVA Bancomer, S.A. (Bancomer)
71.7%
99.9
Yvonne Ochoa Rosellini Ildefonso Buendía Pérez Telephone (52 55) 5621 5875 Telephone (52 55) 5621 5679 Fax (52 55) 5621 6161 ext. 17119
[email protected] www.bancomer.com
ACTIVITY
Banking institution with two major subsidiaries:
Administradora de Fondos para el Retiro Branches
Automated Teller Machines (ATMs)
21.4%
Assets in Mutual Funds
20.2%
19.3%
75.0
Pension fund management
100.0
Valley Bank and money transfer services
75.0
Insurance product development
Bancomer, S.A. de C.V. (Afore Bancomer) Bancomer Financial Holdings (BFH) Seguros BBVA Bancomer, S.A. de C.V. (Seguros Bancomer)
78.6%
79.8%
and marketing through the Bank’s
Middle-Market Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2389
Bancassurance – Accrued Premiums
Pension Fund Assets under Management
31.6%
20.4%
Annuity product development
DESIGN: SIGNI / PHOTOGRAPHY: HÉCTOR A. HERRERA / PRINTING: PANORAMA
99.9
(Pensiones Bancomer)
and marketing
Casa de Bolsa BBVA Bancomer, S.A. de C.V.
99.9
(Casa de Bolsa Bancomer)
Brokerage and investment banking services
BBVA Bancomer Servicios, S.A. (Bancomer Servicios)
99.9
Banking institution specializing in trust and appraisal services,
79.4%
68.4%
Figures as of December 2004. Sources: National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV), Mexican Banking Association (Asociación de Bancos de México or ABM), National Retirement Savings Commission (Comisión Nacional del Sistema de Ahorro para el Retiro or CONSAR), Mexican Insurance Association (Asociación Mexicana de Instituciones de Seguros or AMIS), and Mexican Brokers Association (Asociación Mexicana de Intermediarios Bursátiles or AMIB)
among others.
79.6%
BBVA Bancomer Gestión, S.A. de C.V. (Bancomer Gestión) 99.9
Mutual fund and asset management
Preventis, S.A. de C.V.
Health insurance services
75.0
Company Highlights
%
Total assets (millions of pesos) Performing loans excluding Fobaproa (millions of pesos) Demand and time deposits (millions of pesos) Branches Automated teller machines (ATMs)
AMOUNT
SHARE
RANKING
2,100,210
555,644
26.5
1
862,371
210,117
24.4
1
1,415,618
400,932
28.3
1
7,797
1,671
21.4
1
20,256
4,084
20.2
3
393,909
75,989
19.3
1
Accumulated reserves for annuities (millions of pesos)
56,411
11,609
20.6
1
Accrued bancassurance premiums (millions of pesos)
10,435
3,299
31.6
1
477,850
97,645
20.4
2
Pension fund assets under management (millions of pesos)
Private Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2355 Casa de Bolsa Bancomer Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2888 y 5201 2916
This Annual Report contains certain forward-looking statements and data relating to BBVA Bancomer, its subsidiaries and other offices, which are based on the views and assumptions of its management, as well as information that is currently available to the Group. Such statements reflect the Group’s current viewpoint regarding future events. These estimates, however, are subject to risks, unforeseen events, and assumptions. Many factors could cause actual Company results, financial goals, loan portfolio growth, availability of funds, performance, or achievements to differ materially from any of these forecasts. Certain data is difficult or impossible to predict accurately and much beyond the Company’s control. Therefore, there can be no assurance that the forwardlooking statements included herein will occur as predicted.
NON-BANKING BUSINESSES Assets in mutual funds (millions of pesos)
Government Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, México, D.F. Tel. (52 55) 5201 2434 y 5201 2435
Forward-Looking Information May Prove To Be Inaccurate
MARKET BANKING BUSINESS
DEPOSITS First place in 30 states l Second place in 2 states l
Afore Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4096
80.7%
Pensiones Bancomer, S.A. de C.V.
20.6%
Corporate Headquarters Centro Bancomer Av. Universidad 1200 Col. Xoco 03339, Mexico City Tel. (52 55) 5621 3434
Corporate and Investment Banking Montes Urales 620, 3rd. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2319 y 5201 2320
branch network
Annuities – Accumulated Reserves
Office Directory
Figures as of December 2004. Sources: CNBV, ABM, CONSAR, AMIS, and AMIB
Results expressed in forward-looking statements that are subject to change may include, without limitation, changes in general, economic, political, government, business, and financial conditions, whether globally and/or in the countries in which the Group does business, as well as changes in interest rates, inflation, exchange rates, and business strategy. Should any of the variables beyond the Group’s control change or should underlying assumptions prove to be incorrect, actual results may vary materially from those described herein. The Group neither intends nor assumes any obligation to update these forward-looking statements. The information contained herein should not be used to make any business or investment decisions whatsoever.
Fiduciary Av. Universidad 1200 Col. Xoco 03339, Mexico City Tel. (52 55) 5621 0954 Pensiones Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4096 Seguros Bancomer Montes Urales 424, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 9171 4166 Bancomer Mutual Fund Management Montes Urales 620, 1st. floor Col. Lomas de Chapultepec 11000, Mexico City Tel. (52 55) 5201 2000 Hipotecaria Nacional Liverpool 88 Col. Juárez 06600, Mexico City Tel. (52 55) 1103-7600
Grupo Financiero BBVA Bancomer’s Mission Statement > Build trust by expanding and enhancing customer service with transparency and integrity, constantly offering top-quality products and services > Provide our employees with the ideal working conditions to help them develop their full potential > Remain solvent and offer attractive returns to our shareholders > Foster social well-being as a result of our business activities
to move forward is to grow
Message from the Chairman of the Board of Directors > 2 Brief from the Chief Executive Officer > 4 Business Units: Retail Banking > 16 Middle-Market and Government Banking > 20 Corporate and Investment Banking > 24 Asset management > 28 Global Markets and Distribution > 29 NonBanking Businesses > 30 Central and Staff Areas > 31 Management Discussion and Analysis > 36 Relevant Events > 39 Social Responsibility > 40 BBVA > 42 Boards of Directors > 46 Steering Committee > 48 Regional Boards > 49 2004 Financial Statements > 50
2004 Annual Report