In the first quarter, Spain’s Grupo BBVA reported profits of EUR 1,734 million, largely driven by gains of about EUR 823 million on disposals. Impairment losses fell 51% sequentially to EUR 1,376 million on the non-recurrence of special provisions in the trailing quarter, but the benefit of this was largely offset by a 7% sequential drop in net interest income, to EUR 3,623 million, as the cost of funding BBVA’s euro balance sheet rose. Impairment in Spain continued to be a headwind to earnings.

Loan loss provisions grew 38% year-over-year to EUR 618 million and nonperforming loans increased 30 basis points sequentially to 4.3% of loans (excluding non-core real estate, of which 46.6% is non-performing). Provisions in Spain cover only 62% of non-performing loans, so we expect loan losses to remain high for some time. Results from Mexico were better and show positive momentum. Net income from continuing operations grew 5% year-over-year as revenues increased 8.2% and total assets grew 12.9%. We plan to maintain our fair value and moat rating.

We expect BBVA’s core earnings to show improvement in 2013, but provisions for loan losses will place a heavy burden on the bank’s bottom line. In spite of Mexico’s and South America’s contribution to operating earnings (about half of the total), we think overall ROE will hardly exceed 10% in the coming quarters. With BBVA’s stock and cash dividend policy, we think the firm’s capital will keep expanding–albeit at a very modest pace. As of November 30, 2013, BBVA’s Core capital ratio stood at 11.2%, up 40 basis points from year-end.