BBVA : Implementation of IAS 29 to BBVA Turkey Financial Statements

Implementation of IAS 29 to BBVA Turkey Financial Statements

June 28th, 2022

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Disclaimer

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Background Information on Hyperinflation Accounting

CONTEXT

In a hyperinflationary economy, the currency loses purchasing power.

Hyperinflationary accounting aims to show the Financial Statements in real terms, allowing for a proper comparison with previous periods.

WHEN TO APPLY IT?

According to IAS 29, the need to adopt hyperinflationary accounting is determined by the economic environment. Among others, there is one criteria (necessary but not sufficient) that refers to a higher than 100% cumulative inflation in a 3 year period.

SITUATION IN TURKEY:

As of Feb 2022, cumulative inflation in Turkey during the last 3 years had already surpassed 100%. Audit firms have publicly stated that hyperinflation accounting should be applied in Turkey as of June 30th, 2022. IAS 29 prefers all affected entities to apply it at the same time (previous consensus among stakeholders).

BBVA Group will apply hyperinflationary accounting in Turkey1 in 2Q22 with effects from

Jan 1st, 2022 according to IAS 29 accounting standard.

• BBVA will apply IAS 29 to its Group entities in Turkey. IAS 29 will not apply to the operations outside Turkey, in particular to the financial statements of Garanti Bank in Romania and Garantibank International N.V in the Netherlands.

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Hyperinflation Accounting (HA) main implications

BALANCE SHEET REVALUATION

1st implementation (Jan 1st, 2022): Positive in Equity & Capital (net of tax effect).

• Non-MonetaryAssets (NMA) revaluation from historical value based on accumulated inflation, with the limit of its fair value.
• The value of the inflation linked bonds (CPI linkers) in the Held To Collect portfolio is updated according to the inflation rate by year end 2021 (vs as of Oct'21 previously).

On-goingquarterly revaluation of NMA based on inflation rate in the period, with the limit of its fair value. Positive in Equity & Capital (net of tax effect).

P&L RE-EXPRESSION

Net Monetary Position (NMP) value loss due to the inflation in the period is registered in the P&L ("Other operating income and expenses" heading) with positive adjustment in "Other Comprehensive Income" (OCI). Negative on P&L. Neutral on

Equity and Capital.

CPI linkers accrual based on current period inflation is registered in "Other Operating Income and Expenses" heading (reclassified from NII) as they are considered a protective asset against inflation, partially offsetting the value loss of the NMP.

Re-expression of all P&L headings according to end of period inflation.

Re-expressed P&L is converted into € using the closing exchange rate (vs. average FX previously).

Balance Sheet

NON MONETARY ASSETS

EQUITY

NMP = Net Monetary Position

MONETARY ASSETS	MONETARY
including CPI Linkers	LIABILITIES

Net Monetary Position (NMP) =

Monetary Assets - Monetary Liabilities

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BBVA Turkey hyperinflation accounting impacts as of Mar'22 (pro-forma):

Positive on Book Value, Negative on P&L

		Positive impact on Book Value		Negative impact on P&L from the Net Monetary Position loss
			(neutral on capital), partially offset by CPI linkers revenue
	BBVA Turkey: Book Value (€ Mn)	BBVA Turkey: Net Attributable Profit (€ Mn)

+254 Mn€

Accrual in 1Q22

at 22.8% vs.

previous 8.8%

As of March 31st, 2022:

• Net Monetary Position: ~ 4.7 Bn€

● CPI linkers portfolio: ~ 3.6 Bn€

1. The NMP loss is not tax deductible.

In 2022, earnings contribution from BBVA Turkey is expected to be non material

according to our year end inflation forecast (around 60%)