Banco Bilbao Vizcaya Argentaria announced that it is reducing its 15% stake in China CITIC Bank to 9.9% in order to increase its Basel III capital ratio. Because it will be below 10%, the CITIC stake will no longer be considered a “significant” investment, which alters the accounting methodology.
The accounting will change from the equity method to available for sale, which requires marking to market. BBVA will take a EUR 2.8 billion loss on the revaluation in the fourth quarter. This loss consists of EUR 1.6 billion of goodwill and the remainder from the decline in the stock price since purchase.
BBVA is making this change to bolster its capital ratios. Under Basel III, goodwill and the book value of investments are deducted directly from core capital. The net effect of this transaction is that there is EUR 2.4 billion fewer deductions from core capital, thereby increasing core capital by that amount. Management expects that this transaction will put the bank well above a 9% core capital ratio in 2013, measured using full Basel III implementation.
The transaction also eliminates the exclusivity agreement that BBVA has with CITIC to operate in China. This opens the door for BBVA to open a fully operational branch in China, as well as pursue other business relationships.