id_ws_re_mortgage_spain_addenda_tcm238-143168

8/7/2019 ID_WS_RE_Mortgage_Spain_Addenda_tcm238-143168

1/90


2/90

2

Outlook for Real Estate andmortgages in Spain

Jose Luis Escriva -Chief Economist

Xavier Argent Head of Spanish Banking Business


3/90


4/904

Index

The outlook for the real estate market in SpainThe outlook for the real estate market in Spain

The BBVA mortgage business

Annexes

4


5/905

Index

1. The Spanish growth model is not based on housing

2. A more flexible employment market will give support to the

economy

3. Although households debt levels have increased, they have

a solid wealth position

4. The on-going orderly adjustment of the housing market will

have a limited impact on the overall economy.

5


6/906

Economic Research DepartmentThe Spanish housing marketStructurally, Housing has increased its weight converging to the levels of

developed countries

1998-2007 2007

Spain 6.7 7.5Germany 6.2 5.4

Netherlands 5.8 5.8Ireland 9.0 8.5UK 3.1 3.4Australia* 7.0 6.5USA 4.8 4.2

* last data 2005Source: AMECO

Housing: Share in GDP (%)

4

5

6

7

8

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008(p)

2010(p)

4

5

6

7

8

Housing investment(as a % of GDP)


7/907

Economic Research DepartmentThe Spanish housing marketPrincipal Housing stock is becoming comparable to other developed countries.

...because of their tourist component.

However, in Spain, as in other Mediterranean countries, second homes represent animportant part of the housing stock

Housing stock and population

1.000 Hab 1.000 Hab 1.000 Hab Inhabitants Inhabitants

Germany 472.5 434.4 38.1 42.2 38.8

Denmark 469.1 448.3 20.8 51.1 48.8

France 476.9 395.6 81.3 42.9 35.6

Greece 503.5 333.5 169.9 42.8 28.4

Netherlands 415.9 406.9 9.0 40.8 39.9

Italy 458.6 368.7 89.9 40.4 32.4Portugal 489.0 345.8 143.1 40.6 28.7

United Kingdom 433.1 416.2 16.9 36.8 35.4

Spain 509.8 349.4 160.4 47.2 32.3

Mediterranean countries 482.7 356.9 125.8 42.9 31.7

Average 468.1 395.9 72.2 41.8 35.4Source: European Statistics, INE, INSEE, DESTATIS, UK Census, INE (Portugal), and BBVA

Principal

square

meters perHouses per

Principal

Houses per

Other

Housing per

Square

meters per


8/908

Economic Research DepartmentThe Spanish housing marketThe Spanish economy is not just housing

Annex: Changes in the

Spanish Economy during thelast decade.

Gross fixed capital formation

0%

5%

10%

15%

20%

25%

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

(asa%

ofGDP)

0%

5%

10%

15%

20%

25%

Equipment Non-residential construction and civil engineering Dwellings

Deviation from historical weight

+ 1.7 p.p.Dwellings

Otherconstructions

+ 1.0 p.p.

+ 2.6 p.p.Equipment

The Spanish economy has

experienced higher levelsof investment in equipment

than in the housingsector.


9/909

Economic Research DepartmentThe Spanish housing marketMoreover, Construction (ex. Housing) represents more than half the investment

and its outlook performance is better

Budgeting Investments

15,80817,825

4,0445,073

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008

(m

illioneuros)

Ministerio de Fomento Ministerio de Medio Ambiente

Source: Seopan

Investment growth in Construction (ex. Housing)

-5%

0%

5%

10%

15%

20%

Mar

-97

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

(Yoy%)

The Spanish economy faces moderation with the soundest fiscal position for recentdecades with a fiscal surplus of 1.2% of GDP in 2007 and 0.9% in 2008


10/9010

Index



economy





10


11/90

11

Economic Research DepartmentThe Spanish housing marketWomen, immigration and baby-boomers have increased the Spanish laborforce and made it more flexible

Spanish population

38,709 38,804 38,874 38,95039,066 39,144 39,284

39,375 39,475 39,547 39,528 39,617

407 449 537 694

9991,358

1,891

2,453

3,009

3,610

4,226

4,727

35,000

37,000

39,000

41,000

43,000

45,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

spanish double nationality Foreign

Gross household formation projection

0

200,000

400,000

600,000

2006 2007 2008 2009 2010 2011

Residents Immigrants Touristic Households

Annex: Medium termpotential demand

The Potential formation of new Households will remain strong over the next five years.


12/90

12

Economic Research DepartmentThe Spanish housing marketEmployment growth is one of the key factors behind the housing boom

Housing price and employment (96-06)

Austria

Finland

Switzerland

Canada

Portugal

Australia

New Zeland

EMU

Spain

Netherlands

Ireland

UKItaly

France

Germany

Japan

USA

R2

= 0.6-1%

0%

1%

2%

3%

4%

-6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14%

Average housing price growth

Averageemploymentgrowth

Spanish housing market hasexperienced a catching upprocess in line with the

Spanish economy


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13

Economic Research DepartmentLabor MarketHow many jobs will be created?

816

640

484

666 675

1002

774

667

410

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Spain. Net job creation

(thousands)

Source: SEE BBVA

30

154

104121

152

104

186 178

-83

-150

-100

-50

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Construction. Net job creation

(thousands)

Source: SEE BBVA

However, Spanish employment growth will remain being the highest of the developed

countries in the next years.Annex: A more flexiblelabour market


14/90

14

Index



economy





14


15/90

15

Economic Research DepartmentThe Spanish housing marketHouseholds debt levels have converged to the levels of developed countries ..

Households' Debt/Disposable Income

0

40

80

120

160

200

240280

Canada*

Germany

Spain

Fr

ance*

United

Kin

gdom

Italy

USA*

Ireland*

Denm

ark**

Netherlands*

1991 1995 2000 2006

* 2005

Source: OECD

* 2004

Despite the increase indisposable income,

household debts havegrown at a higher pace


16/90

16

Economic Research DepartmentStructural changes of the Spanish economy..due to the structural fall in the financing cost

Interest rates are structurally lower in the Spanish economy

Spanish mortgage rates in real terms

0

2

4

6

8

10

12

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

6 p.p.


0

2

4

6

8

10

12

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

6 p.p.Global interest rate 1,9

Country risk 3,3

Banking competition 0,8

Contributions to the decrease ofmortgage ra tes (p.p.)

There has been a structuralfall in interest rates over

the last 20 years.

This has been more intensein the Spanish Economy

as well as permanent.

Annex: Spanishmortgage market

E i R h D


17/90

17

Economic Research DepartmentThe Spanish housing markethowever, households show a solid wealth position

Household indebtedness over net wealth

0

10

20

30

40

50

60

Australia

Canada

Germany*

Denmark*

Spain*

Finland

France UK

Ireland

Italy*

Japan*

Netherlands

NewZeland

Sweden

EE.UU.

1995 2000 2005

* last data 2004

Source: OECD

The financial turbulencesand the housing market

deceleration caused only amarginal effect on wealth

Spanish householdsshow a moderate ratio of

indebtedness over netwealth

Annex: Households

wealth and income


18/90

18

Index



economy





18

E i R h D t t


19/90

19

Economic Research DepartmentThe Spanish housing marketThe ongoing orderly adjustment

50

70

90

110

130

150

170

190

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

50

70

90

110

130

150

170

190

Housing4Q moving average

Demand: Housing investment (RHS)

Supply: houses under construction

2000=100

Source: INE, M Vivienda y SEE BBVA

2000=100

50

70

90

110

130

150

170

190

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

50

70

90

110

130

150

170

190

Housing4Q moving average

Demand: Housing investment (RHS)

Supply: houses under construction

2000=100

Source: INE, M Vivienda y SEE BBVA

2000=100

Supply has been moreaffected by the financial

turmoil than demand

Economic Research Department


20/90

20

Economic Research DepartmentThe Spanish housing marketHousing demand: a year and a half of moderate slowdown

800000

850000

900000

950000

1000000

Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07

Housing sales

Total, 12 month accumulated

Ministerio

Registradores

Housing Permits(12-month accumulated)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

ene-99

jul-99

ene-00

jul-00

ene-01

jul-01

ene-02

jul-02

ene-03

jul-03

ene-04

jul-04

ene-05

jul-05

ene-06

jul-06

ene-07

jul-07

CTE Corrected

Original

y/y

Data were distorted by the New Building Standards Code (CTE)

The financial turbulences have triggered an earlier development of the expectedadjustment. The stricter financial conditions and the deterioration of confidence have

prompted a deceleration of activity



21/90

21

Economic Research DepartmentThe Spanish housing marketThe gradual deceleration is already on its way

Real Housing price in Spain(Path after each maximum)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

(%Yoy)

Mar-74/Sep-76 Jun-78/Mar-83 Mar-92/Jun-97 Dic-04/Sep-07(quarters)

..and also the smoothest compared to other countries.

deceleration is the smoothest for the last 30 years.

Real house prices deceleration path from

maximum

-5%

0%

5%

10%

15%

20%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17(quarters)

(%yoy)

UK (2004) Australia (2004)Spain (2004) USA (2005)Ireland (2003) Netherlands (1999)



22/90

22

Economic Research DepartmentThe Spanish housing market

European Cities

Housing prices and GDP per head.

0

1,000

2,000

3,000

4,000

5,000

75 100 125 150 175 200

Madrid

Source: Eurostat and local sources Research Department BBVA

Frankfurt.

Rome

Berlin

Lisboa

Paris

London

Milan

HamburgBarna

na

Valencia

Strasbourg

Dublin

Lyon

Marsella

Lille

Note: Eur 25 = 100

/m2

There is not a fundamental overvaluation of housing prices in Spain. Demography, interestrates and income have supported the increase in prices during the last decade.

Catching-up process in prices



23/90

23

Economic Research DepartmentThe Spanish housing marketThe gradual deceleration is already on its way

Projections 2006 2007 2008 2009RESIDENTIAL MARKET

Housing investment 6.4 3.5 0.0 -1.5

911 675 550 550

Housing price 10.4 5.5 1.4 -1.9

Building permits

Housing market deceleration will follow its orderly path and will have a very limitedimpact on the economy. What are the main supports?



24/90

24


Housing Affordability% of Households Income, adjusted from Taxes

0

10

20

30

40

50

60

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-20

-10

0

10

20

30

40

Level

Source: BBVA, Research Dptmnt.

Change

The Spanish housing marketImpact on the economy will be limited :Housing affordability will not deteriorate further

Lower interest rates

Stability in housingprices

Solid gains in income

per capita

Improvement in housingaffordability



25/90

25

Economic Research DepartmentThe Spanish housing marketThe impact on the economy will be limited:

Although housing will not contribute to economic growth, the Spanish economy willgrow close to its potential

Spain, contributions to growth

-1.3

-0.3

0.7

1.7

2.7

3.7

4.7

5.7

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Rest Housing

Source: BBVA Research Dept

On average, the housing

sector has contributed toSpanish growth by 0.5

percentage points in the

period 2001-2006,. This

figure is below the 2.4 pp

for the rest of the

economy

Housing will have a null

contribution in 2007,

moderating slightly from

the 0.3 pp of 2006



26/90

26

Economic Research DepartmentThe Spanish housing marketThe impact on the economy will be limited:new employment levels will remain solid

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007(f)

2008fp)

Employment, contribution

Rest

Construction

Source: BBVA Economic Research Dept

Employment in the

construction sectoraccounts for 13% of the

total

In 2008, employment willgrow a 1.5%, 1,4 pp less

than in 2007, but still farfrom a scenario ofemployment destruction.

Thus, new jobs will be

created in non-construction

sectors



27/90

27

p

Index

The most likely outcome is that the gradual

deceleration of the Spanish Real Estate

sector will continue in the near future

The sector is already in a process of a smooth

slowdown, and their medium term strengths

are significant

The Spanish economy has built importantsupports that will buffer the impact of the

current situation

Index


28/90

28

The outlook for the real estate market in Spain

The BBVA mortgage businessThe BBVA mortgage business

Annexes

28

BBVA mortgage business


29/90

29

Portfolio Structure

17%

83%

Mortgage portfolio structure

Low exposure to developers

% mortgages/ total loans

BBVASpain

AllBanks SavingsBanks SpanishSystem

49%

70%60%

46%* Data as of August 2007.

Overall exposure to mortgage loans is lessthan for the system

46%

85,838 mill 71,040 m

14,798 m

Individuals Developers



30/90

30

PerformanceTotal Mortgage Loans (m)

63,474

13.646

Sept. 06

Indivivual mortgage loans 19.1 14.7

TAM Promotor 31,9 30,1

TAM Total Hipot. 20,9 17,3

55,298

12.682

Sept. 05

71,040

15.774

Sept. 07

Sept. 06 Sept. 07Sept. 05

11,833

Morgage loans to developers 32.7 29.8

75,308

Total mortgage loans 20.9

9,113

64,41114,798

85,838

(YoY %)

Gradual slowdown in individual mortgage loans,

resulting from a conservative approach to risks and pricing



31/90

31

Strategic highlightsMortgage business will continue to be a priority and is a core bundling

product for BBVA

Continued focus on 1st

residence mortgages

Risk policies with proven track record through credit scoring tools

Risk adjusted pricing: adjusting for segment and channel

In a slower market, we will remain selective combining taylored

products with risk adjusted pricing.



32/90

32

DevelopersLoan Breakdown:95% primary residence

95%

5%

ORIGINATION UNITspecialized in REAL ESTATEDEVELOPERS. The businessgenerated is booked withinFinancial Service's accountsACQUISITION CHANNELwhich supplies individualmortgages and new clients tothe Retail Banking unit in Spain

DeveloperMortgages

Moderate exposure to DEVELOPERS:17% of TOTAL MORTGAGE LENDING

8% of TOTAL SPANISH BOOK

This unit generated 17% of individual mortgagerevenues in 3Q07

Contributing 3,419 million individual mortgageloans, 22% of the total loan growth of Spain and

Portugal YTD.

2006 contribution to Retail Banking: 39.430 mortgages, with a total value of 4.185 mm An average of 6.4 products per mortgage.



33/90

33

Developers: market view & BBVA customer baseModeration of housing demand in 2007, while employment creationcontinues to be a supporting factor.

Affordability remains at acceptable levels, despite recent deterioration,

The soft-landing adjustment currently in progress will translate into a

gradual deceleration of activity.

Profile of BBVA developer customer:

Many developers use to be local companies

They have diversified in the recent past:

Products - Markets Businesses

They have improved their solvency and marketing processes



34/90

34

Developers: structureDevelopers / Domestic Lending

16%19%

18%

8%

Loans to DevelopersCAGR (Sep06-Sep 07)

Banks SavingsBanks Banks andSavings Banks

+39.0% +49.1% +44.4%+25.1%

BBVASpain Banks SavingsBanks Banks andSavings BanksBBVASpainLoan selection criteria: individual assessment of risk and feasibility as well as risk and

credit profile of the developer resulting in market share loss



35/90

35

Developers: low risk profileNPL and Coverage ratios (%)

0.080.10

1,640

2Q07 3Q07

NPLs

COVERAGE

1,968

Portfolio highlights

No of active customers: 5,786

40% of lending is located inprovince capitals and inpopulation centres > 100,000

inhabitants

Top 100 customers accountfor just 30.5% of the portfolio

Portfolio concentrated in well established developers in a highly fragmented

sector where 95% are small and locally based



36/90

36

Developers: conclusionsThe market is cooling down with supply and demand coming closer: In

BBVA we are adjusting to the current conditions

BBVA enjoys strong liquidity solvency and position which is a key advantage

in the current market situation:

New scenario and new business opportunities

Maintaining our risk policy standards

We will be selective and look to expand margins

Risk policy based on investing with careful selection of projects and

customers



37/90

37

Branches Developers Real State Agents

New loan production source

70%

13%17%

IndividualsHome mortgage loans

Primary residence Second residence

95%

5%

Focus on primary residenceBBVA network grants a high proportion

of new loans- Data as Sep 2007.



38/90

38

30%

8%

52%

10%

YO UN G S E GM E N T IN M IG R A N T S

H IG H N E T WO R T H M A S S M A R KE T

Segmented product offering:Better risk and pricingDifferentiated commercial approach

HipotecablueBBVA

Hipoteca Universal

Personalizedoffering

Hipoteca Fcil:

Single product with bestattributes

Cross selling::Safe Instalment: hedging of

interest ratesLife insurace: single premiumHome Insurance

Individuals: production structure



39/90

39

Individuals: low risk profile% LENDING BY LTV (avg. 53.3%)

Portfolio highlights

No of loans 890,525

NPL ratio 0.39%

Coverage ratio 275%

AFFOR < 30

65%

AFFOR 30-

40

19%

AFFOR >40

16%

AFFORDABILITY (av 26.3%)Avg. maturity 19 years

Avg. mortgage size 158,420

2007 production

- Datos a Septiembre 2007.LTV calculated on historical appraisals



40/90

40

Individuals: 2008 focusImplementation of RAROC for all mortgage loans

Fostering of products taylored to specific segments

Improvement of the Sales and Production process:

Higher efficiency

Higher sales force resources

Better customer advice

Higher cross-sell for individual mortgage loans

Data as of September 2007

Index


41/90

41

The outlook for the real estate market in Spain

The BBVA mortgage business

AnnexesAnnexes

41

Economic Research DepartmentIndex


42/90

42

Index

Annexes

Structural changes in Spanish economy

Labor Market

Real Estate long-term demand

Households wealth and income

The Spanish mortgage market



43/90

43

Structural changes of the Spanish economyStructural changes in the evolution of the main economic indicators

Annual average in the period 1991-98 2000-07 Change

Real Variables

Growth (% GDP) 2,3 3,6 1,3

Employment (% yoy) 0,8 3,0 2,1

Population (% yoy) 0,3 1,3 1,0Real Wages (% yoy) 1,0 -0,1 -1,1

Financial Variables

Ex post real interest rates

short term 5,4 -0,1 -5,6

long term 5,5 1,2 -4,3

Spread vs. Germany, 10 years interest rates 2,8 0,1 -2,7

Inflation (% yoy CPI) 4,1 3,3 -0,9Saldo pblico (% GDP) -5,3 0,2 5,5

Deuda Pblica (% GDP) 58,4 48,1 -10,3

Housing Market

Households Affordability (*) 34,3 19,7 -14,6

Prices, real growth -0,7 9,0 9,7

Corporate Sector (**)

Profitability own resources (%) 8,3 12,9 4,6

financial leverage (%) -0,1 4,4 4,6

Debt Burden

Divided by Gross Value Added 12,7 10,0 -2,7

Divided by Income 4,9 3,3 -1,6

(**) Bank of Spain, 2005

Source: Bank of Spain, INE y BBVA Economic Research Department

Spain

(*) % of disposable income to pay the monthly payment after taxes and weighted by

wages per households and loan term

GDP and Employment grewbetween 1 and 2 percentage

points in 2000-07

Interest rates and spreadsare affected by the Spanish

nominal stabilization and thechange of the public sector

Households Affordabilityhas improved

Corporates are moreprofitable and their debt

burden is lower



44/90

44

Structural changes of the Spanish economyImpulses to the Spanish economy

The Spanish economy has grown more than that of EMU as a result ofspecific impulses over the expenditure side of the economy ...

EMU Entry

Permanent fall ofinterest rates

Market reforms

Increase ofemployment and

Disposable Income

Increase of Consumptionand Housing investment

Immigration

Lower increase of Wages

... and over the potential production capacity



45/90

45

Structural changes of the Spanish economyThe economy of European integration

International trade openness

Increased FDI flows into and out of Spain

Internationalization

Increased competition

Privatization process

Deregulation

Efficiency gains and growth

Development of financial system and real estate market Physical capital accumulation

Human capital accumulationEducation reform

Cohesion policies (European structural funds) Infrastructure investment



46/90

46

Structural changes of the Spanish economyThe economy of European integration: greater external openness

Spanish Economy, Degree of Openness

(X+M/GDP)

10%

20%

30%

40%

50%

60%

70%

80%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

ECC Entry

European

Single

Market

EMU

Source: INE

Full trade liberalization,progressive mobility ofcapital and adherence to EMU

in 1999.

The degree of external openness has experienced a structural increase since 1980



47/90

47

Structural changes of the Spanish economy

0,0

2,0

4,0

6,0

8,0

10,0

12,0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Foreign Direct Investment (% GDP)

From Spain

To Spain

Source: Bank of Spain, INE and BBVA

The economy of European integration: greater external openness

Large inflow of FDI(automobile, food, retail,banking) initially with evenlarger outflow later (banking,telecom, utilities)

Economic Research DepartmentStructural changes of the Spanish economy


48/90

48

The economy of European integration: increasing competitionElectricity sector

deregulationAccumulated decrease in electricity rates for households exceding 30% (1997-

2005).

Telecomliberalization

Reduction of 40% in international call rates (1997-1999)

Banking competition Mortgage spreads have been reduced towards 0,8% (1993-2005)

Air transportcompetition

Regular air ticket prices have come down 50% (1995).

Liberalization ofprofesional

associations

Rates charged by notaries and property registers have been reduced by 50%(1997)

Labor market New more flexible contracts (1994, 97, 2000-01)


49/90



50/90

50

The economy of European integration: changing financial conditions

There has been a structuralfall in interest rates over

the last 20 years.Spanish mortgage rates in real terms

0

2

4

6

8

10

12

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

6 p.p.


0

2

4

6

8

10

12

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

6 p.p.

This has been more intensein the Spanish Economy

as well as permanent.

Global interest rate 1,9

Country risk 3,3

Banking competition 0,8

Contributions to the decrease ofmortgage ra tes (p.p.)

Interest rates are structurally lower in the Spanish economy



51/90

51

Income earners per household

1,0

1,1

1,2

1,3

1,4

1,5

1,6

1,7

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Female employment rate

16-64

20,00%

25,00%

30,00%

35,00%

40,00%

45,00%

50,00%

55,00%

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Source: INE y SEE-BBVA

Demographic factors: Women at work

Source: INE

The increase in the number of income earners per household has improved housingaffordability



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52

Demographic factors: Immigration. Reducing the labor market rigidityDecomposing growth per capita

Growth decompostion

(immigrants)

-0,1

0

0,1

0,2

0,3

0,4

0,5

0,6

1988-93 1994-98 1999-05

working age population

employment

Source: SEE BBVA

Growth per capita

(annual average)

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

1988-93 1994-98 1999-05

Immigrants

Natives

Productivity

Source: SEE BBVA

The growing weight of immigrants in employment and working age population generates acontribution to growth of 0,4 pp during the period 1999-2005.

Immigrants are increasing activity and employment rates of the Spanish economy.



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53

Research & Development

Corporate R&D expenses (GDP%)

0,2

0,5

0,8

1,1

1,4

1,7

2

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

1998

1999

2000

2001

2002

20

03

20

04

Germany Spain France Italy U. Kingdom

R&D expenses per capita in Spain vs. the four mainEU countries (Germany, Italy, France and United Kingdom)

25

27

29

31

33

35

37

39

41

43

45

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

(%)

Spanish R&D is experiencing a slow catching up process



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54

Businesses: comfortable profits

Non-Financial Corporations: Financial Costs

Coverage

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Net Operating Income/Financial Costs

Source: Bank of Spain

Spanish economy has solidroots, such as the strong

corporate profits

Corporates activities havebecome more global

Corporates situation is structurally healthier



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55

Annexes

Structural changes to the Spanish economy

Labor Market

Real Estate long term demand



Economic Research DepartmentLabor Market


56/90

56

Will the Spanish economy continue to create jobs?

-2

-1

0

1

2

3

4

5

6

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008(f)

-2

-1

0

1

2

3

4

5

6

Source: National Statistics Institute and BBVA Economic Research Dept

Growth

Years in grey were those in which jobs were lost

Forecast

Spain: economic growth

Yes, based on pastexperience

The forecasted scenario does notreach growth thresholds whichinvolve net loss of jobs



57/90

57


0

2

4

6

8

10

12

14

mar-05

ju

n-05

se

p-05

dec-05

mar-06

ju

n-06

se

p-06

To unemployment To other sector

Source: BBVA Economic Research Dept.

In work population. Probability of losing job and changing sector

(%)Yes, because those in work have a lowprobability of becoming unemployed,and there is also inter-sector labour

mobility



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58

Yes, because those in work have a lowprobability of becoming unemployed,and there is also inter-sector labour

mobility

and also in construction

Over 20% of those in employment inthe construction sector who change to

work in a different sector move tobasic industries, and 18% go intowholesale and retail trade andhotels/restaurants

Destination of people in work who change sector, by original sector

1999-2006

0 5 10 15 20 25 30

Agriculture

Food industry

Basic industries

Mach. & equipment

Construction

Wholesale. and

hostelryTransport

Financial intermed.& real estate

Educ. and health

Other services

0 5 10 15 20 25 30

Construction Wholesale Industry

Source: BBVA Economic Research Dept.




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59

How many jobs will be created?

Probability of becoming unemployedconditional on being in work in the previous year

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

2002 2003 2004 2005 2006 2007 2008


The slowing of economic growthforecast for 2008 is starting to bereflected in the slight increase in theprobability of losing a job



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60


IN WORK2008

UNEMPLOYED2007

INACTIVEPOPULATION

2007

UNEMPLOYED2008

NET JOB CREATION (LFS)2008

48.2%

12.8%

91.2%

IN WORKPOPULATION2007

3.4%

5.4% (2.0% , 2.4%)INACTIVE

POPULATION2008 (375,000, 435,000) jobs



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61


816

640

484

666 675

1002

774

667

410

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Net job creation (in thousands)




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62

Construction sector

The slowdown in economic growthforecast for 2008 is beginning to bereflected in the probability of moreintensive, though controlled, job lossesin Construction

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

2002 2003 2004 2005 2006 2007 2008


Construction: Probability of becoming unemployedfor those in work in the previous year



63/90

63

Construction sector

0%

2%

4%

6%

8%

10%

12%

14%

2002 2003 2004 2005 2006 2007 2008

Probability of working in another sectorhaving been employed in construction in the previous year


In addition, a reduction in theprobability of moving to othereconomic sectors is also

forecast



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64

Construction sector

IN WORKPOPULATION

CONSTRUCTION2007

IN WORKCONSTRUCTION

2008

UNEMPLOYED/INACTIVE

2008

IN WORK NOTCONSTRUCTION

2008

UNEMPLOYED/INACTIVE

2007

IN WORK NOTCONSTRUCTION

2007

NET JOB LOSSES INCONSTRUCTION (LFS)

2008

(-0.4%, -0.5%)

(-71,000, -94,000) jobs

2.2%

1.5%

78.3%

12.1%

9.7%



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65

Construction sector

30

154

104121

152

104

186 178

- 83

-150

-100

-50

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008


Construction: Net job creation (in thousands)



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66

Other sectors will take the lead on growth

Employment grow th rate by sector

Weight on

Total 3Q2007

Average2006

Total 100.0% 4.1% 3.3%

Agriculture 4.1% -5.1% -2.4%

Fishing 0.3% -14.2% 3.2%

Mining 0.3% 10.3% -6.2%

Manufactures 15.1% -0.2% -0.6%

Energy 0.5% 11.5% -3.5%

Construction 13.2% 7.9% 7.3%

Commerce 15.5% 3.4% 4.5%

Hostelry 7.5% 8.7% 2.9%Transport 5.8% 3.7% 1.6%

Financial Intermediation 2.5% 3.4% 5.9%

Business Services 9.9% 10.7% 9.6%

General Government 6.1% 2.1% 1.5%

Education 5.1% 1.7% 0.7%

Health 6.2% 4.1% 4.8%

Social Activities 4.1% 3.0% 3.6%Personal Services 3.8% 11.4% 1.7%

Source: INE and BBVA Economic Research Department

Aver. 1Q-3Q 2007

The higher employmentgrowth rates were registeredin the catering business,education, personal services

and particularly in businessservices

The strong evolution ofemployment in businessservices is in line with thedynamism of business

activities

These services will continue creating employment in 2008



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67

The Spanish labor market has already reached low unemployment rates

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

20,0%

22,0%

mar-91

mar-92

mar-93

mar-94

mar-95

mar-96

mar-97

mar-98

mar-99

mar-00

mar-01

mar-02

mar-03

mar-04

mar-05

mar-06

mar-07

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

20,0%

22,0%

Unemployment Rate

Registered and NAIRU

Source: BBVA Economic Research Department

5.0

8.0

11.0

14.0

17.0

20.0

1980

1985

1990

1995

2000

2003

2004

2005

2006

5.0

8.0

11.0

14.0

17.0

20.0Unemployment Rate

Source: BBVA Economic Research Department

Spain

EM U

Nairu

Registered

The Spanish unemploymentrate is at its minimum, belowthe natural levels

Therefore, the rate of creationof new jobs will not be as highas in the last few years

Economic Research DepartmentLabor Marketi l l i i


68/90

68

particularly in some regions

Total Men Women

Total 8,0 6,2 10,5

Andaluca 12,6 9,5 17,3Aragn 4,9 3,8 6,3

Asturias (Principado de) 7,2 5,9 8,9

Balears (Illes) 4,5 3,6 5,6

Canarias 10,7 8,9 13,3

Cantabria 5,6 4,9 6,4

Castilla y Len 7,0 5,1 9,8

Castilla - La Mancha 7,0 4,8 10,5

Catalua 6,8 5,7 8,2Comunitat Valenciana 8,7 6,6 11,7

Extremadura 12,4 8,6 17,9

Galicia 6,7 5,8 7,9

Madrid (Comunidad de) 6,0 4,1 8,3

Murcia (Regin de) 8,2 6,9 10,3

Navarra (Comunidad Foral

de) 4,4 3,0 6,3Pas Vasco 6,1 4,7 7,9

Rioja (La) 5,3 3,9 7,4

Ceuta 20,9 15,9 30,2

Melilla 18,3 11,4 29,6

Unemployment Rate 3Q 2007

Source: National Statistics Institute (INE)

The regions that representtwo thirds of GDP registerunemployment rates belowthe national average

Male unemployment rate is atits minimum, below 5% inAragn, Baleares and Navarra



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69

Annexes


Labor Market




360.000 resident households will create because of natural population


70/90

70

360.000 resident households will create because of natural population

development.

Resident population: New households

Gross flow by age

0

100,000

200,000

300,000

400,000

2006 2007 2008 2009 2010 2011

15-19 20-24 25-30 30-35 Ms de 35

Fuente: BBVA

I i ill i i i i h i S i h l i


71/90

71

Immigrants will go on increasing its weight in Spanish population

Immigrant population forecasts

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

0%

2%

4%

6%

8%

10%

12%14%Population Immigrants as a % of total

Fuente: INE

Immigrants are mainly in the age cohorts that create more households


72/90

72

20 10 0 10 20

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84Men

20 10 0 10 20

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

20 10 0 10 20

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

20 10 0 10 20

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

Women

Fuente: INE

Immigrants

National

Spanish Population piramid (2003)Composition

g y g

Average 1999-2003 Total populat ion Spanish Foreigners

Parti cipation rate (*) 54 53 71

Employment rate (*) 47 47 61

Unemployment rate 13 13 15

Fuente: INE y BBVA(*) respecto a los mayores de 16 aos

Immigrant population will contribute with around 140.000 households


73/90

73

Immigrant population will contribute with around 140.000 households

Spain: Population and householdsForecast 2005-2011

New households Gross Flow

Residents Immigrants Total

2005 354.793 180.000 534.793

2006 356.888 165.000 521.888

2007 359.618 150.000 509.6182008 362.566 135.000 497.566

2009 364.988 120.000 484.988

2010 365.525 115.000 480.525

2011 363.661 110.000 473.661Average

2005-2011 361.148 139.286 500.434

Fuente: BBVA

Household disintegration could not be balanced with household formation


74/90

74

ouse o d d s teg at o cou d ot be ba a ced t ouse o d o at o

One third of disintegratedhouseholds lives in rural areas.

However, rehabilitation willbecome more important over

the years

Household Disintegration process forecast

-300,000

-250,000

-200,000

-150,000

-100,000

-50,000

0

2006 2007 2008 2009 2010 2011

(nmerod

ehogares)

Fuente:BBVA

Moreover touristic investment will be an added factor


75/90

75

Moreover, touristic investment will be an added factor

Second Residences and Tourism

R2 = 0.81

0

50

100

150

200

0 5 10 15 20 25 30 35

International tourism income (% exports)

Secondresidencesper1000

inhabitants

Spain

Greece

Portugal

Italy

EMU

United KingdomNetherl.

Germany

Second Residences and Tourism

R2 = 0.81

0

50

100

150

200

0 5 10 15 20 25 30 35

International tourism income (% exports)

Secondresidencesper1000

inhabitants

Spain

Greece

Portugal

Italy

EMU

United KingdomNetherl.

Germany

Fuente: BBVA

Foreign tourists are increasingly keen to inhabit their own homes


76/90

76

Foreign tourists are increasingly keen to inhabit their own homes

Foreign tourists accomodation preferences

0%

20%

40%

60%

80%

100%

1.997

1.998

1.999

2.000

2.001

2.002

2.003

2.004

2.005

Free house (Owned or friends)

OtherRent

Hotel

13,2% 22,2%

Fuente: IET



77/90

77

Annexes


Labor Market




Economic Research DepartmentHouseholds wealth and incomeAlthough the debt burden has increased over the last few years


78/90

78

g y

Spanish households debt burden

3,6% 3,7% 4,0%5,5%

7,5% 7,2%

8,9% 9,5%10,4%

10,9%

11,2% 11,6%

0%

4%

8%

12%

16%

20%

2003 2004 2005 2006 2007 2008

Interest Principal

Source: BBVA

Since 2007 animprovement is envisaged

due to

Lower interest rates

Stability in housingprices

Solid gains in incomeper capita

Spanish households will continue affording increases of their debt burden

Economic Research DepartmentThe Spanish housing market and households indebtedness has reached high levels


79/90

79

and households indebtedness has reached high levels

H

ouseholds

Indebtedn

ess

Despite the increase of thedisposable income,

household debts havegrown at a higher pace

Households' Debt/Disposable Income

0

40

80

120

160

200

240

280

Canada*

Germany

Spain

France*

United

Kingdom

Italy

USA*

Ireland*

Denmark**

Netherlands*

1991 1995 2000 2006

* 2005

Source: OECD

* 2004

Economic Research DepartmentThe Spanish housing market households show a solid wealth position


80/90

80

p

Househo

ldsWealth

The financial turbulencesand the housing market

deceleration caused only a

marginal effect on wealth

Household indebtedness over net wealth

0

10

20

30

40

50

60

Australia

Canada

Germa

ny*

Denma

rk*

Spain*

Finland

France

UK

Ireland

Italy*

Jap

an*

Netherlands

NewZeland

Sweden

EE.UU.

1995 2000 2005

* last data 2004

Source: OECD

Spanish householdsshow a moderated ratio of

indebtedness over netwealth

Economic Research DepartmentThe Spanish housing market and a solid savings position


81/90

81

g p

HouseholdsSaving

s

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

18,0

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

18,0

Households Savings Rate% of Disposible Household Income

Source: OECD

Spain

United States

Spanish householdssavings are experiencing a

limited moderation.

Their level is still wellabove that of the United

States households

Economic Research DepartmentThe Spanish housing market


82/90

82

Source: Bank of Spain

Debt divided by income and wealth by incomePercentile of indebted households (2002)

0

20

40

60

80

100

120

140

Spain USA Spain USA

Debt / Income Debt / Wealth

Total Less than 20

20 - 40 40 - 60

60 - 80 80 - 90

90 - 100

Percentage of debt for buying a house in the

lower percentiles of income

50

60

70

80

90

Spain United Kingdom* Italy USA* mortgages

In Spain, families with lower income use credits mainly for buying houses, therisk for financial institutions is therefore lower



83/90

83

Annexes


Labor Market

Real Estate log term demand



Economic Research DepartmentThe Spanish mortgage marketFlexible mortgage markets have been more efficient translating financial


84/90

84

improvements to its clients.

BBVA has elaboratedan index measuring

mortgage market

flexibility throughfour factors: (i)

marketcompleteness, (ii)LTV, (iii) average

term and (iv)Mortgage Equity

Withdrawal (MEW)development.

BBVA - MFI and mortgage market depth

R = 0,64350

20

40

60

80

100

120

0 0,2 0,4 0,6 0,8 1

BBVA MFI

M

ortgagetoGDP(2003)

GREFRA IRL

ITA

ALE

BELESP

AUS

HOL

SUE

DIN

RU

POR

Source: BBVA

As can be seen in the chart, the more flexible a mortgage market is, the moredeveloped it becomes.

Economic Research DepartmentThe Spanish mortgage marketThere are important differences between the US and Spanish mortgage markets


85/90

85

1. Product Type

Mortgage lending. Breakdown by segment 1990-2006.

Annual data in thousand million dollars

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2001 2002 2003 2004 2005 2006

Convencional Subprime Alt-A Home Equity FHA/VA

Source: Inside Mortgage

US: Percentage of 60 days Delinquencies in the

first four months of the loan's life

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006

Source: Credit Suisse and LoanPerformance

Subprime lending as it is defined in the US does not exist in Spain:

High-risk loans with rising interest rates granted over a very long term are still relativelyunknown, so that default rates hikes likes those observed in the US have not been

registered in the Spanish economy

Economic Research DepartmentThe Spanish mortgage market


86/90

86

2. Originators

CUSTOMER APIs

MANAGER:COMMERCIAL

BANK

Spain

Securitisation

or otherfunding

CUSTOMER

Mortgageoriginated

Intermediary

Mortgageoriginated

CUSTOMER APIs

MANAGER:COMMERCIAL

BANK

Spain

Securitisation

or otherfunding

CUSTOMER

Mortgageoriginated

Intermediary

Mortgageoriginated

CUSTOMER ORIGINATOR

MANAGER:COMMERCIAL

BANK

US

SecuritisationCUSTOMER

Mortgagesold

Mortgageoriginated

Mortgageoriginated

CUSTOMER ORIGINATOR

MANAGER:COMMERCIAL

BANK

US

SecuritisationCUSTOMER

Mortgagesold

Mortgageoriginated

Mortgageoriginated

In the US, there are a multitude of small

local originators or brokers. Thesesecuritize or sell the mortgage loan onto another agent once it has been

granted.

However, in Spain financial entities, suchas universal banks, are the main playersin this market.

Economic Research DepartmentThe Spanish mortgage market


87/90

87

2. Originators

US: Subprime Loans by Originator, 2005

20%

30%

50%

Banks And Thrifts

Affiliates of Banks,

holding companiens or

Thrifts

Independent MortgageCompanies

Source: E. Gramlich "Subprime Mortgages: America's Latest Boom and Bust"

The entities that register the higher default rate in Spain, Establecimientos Financieros deCrdito are not widespread in the Spanish market, accounting for only the 2% of the

housing credit

Economic Research DepartmentThe Spanish mortgage market2 S iti ti


88/90

88

2. Securitizations

CDO Holders: Riskier Segments

(Not Delta-Adjusted)

HedgeFunds

10%

Insurance

19%

Banks

31%

AssetManagers

22%

Pension

funds

18%

Source: IMF

US: Private Mortgage-Backed Securities

Issuance (thousands of millions $)

0200

400

600

800

1.000

1.200

1.400

2000 2001 2002 2003 2004 2005 2006

Prime Alt-A Subprime Others

Source: Inside Mortgage Finance and OFHEO

The sophistication of the US mortgage securitisation mechanism creates incentives togrant high risk loans

Economic Research DepartmentThe Spanish housing marketCatching-up process in prices


89/90

89

European Cities

Housing prices and GDP per head.

0

1,000

2,000

3,000

4,000

5,000

75 100 125 150 175 200

Madrid

Source: Eurostat and local sources Research Department BBVA

Frankfurt.

Rome

Berlin

Lisboa

Paris

London

Milan

HamburgBarna

na

Valencia

Strasbourg

Dublin

Lyon

Marsella

Lille

Note: Eur 25 = 100

/m2

Economic convergence drove to a catching up in housing prices


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id_ws_re_mortgage_spain_addenda_tcm238-143168

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