“outlook for real estate and · the outlook for the real estate market in spain the bbva mortgage...

2

“Outlook for Real Estate and

mortgages in Spain”

Jose Luis Escriva - Chief Economist

Xavier Argenté – Head of Spanish Banking Business

3

Disclaimer

This document is only provided for information purposes and does not constitute, nor must it be interpreted as, an offer to sellor exchange or acquire, or an invitation for offers to buy securities issued by any of the aforementioned companies. Any decision to buy or invest in securities in relation to a specific issue must be made solely and exclusively on the basis of the information set out in the pertinent prospectus filed by the company in relation to such specific issue. Nobody who becomes aware of the information contained in this report must regard it as definitive, because it is subject to changes and modifications.

This document contains or may contain forward looking statements (in the usual meaning and within the meaning of the US Private Securities Litigation Act of 1995) regarding intentions, expectations or projections of BBVA or of its management on thedate thereof, that refer to miscellaneous aspects, including projections about the future earnings of the business. The statements contained herein are based on our current projections, although the said earnings may be substantially modified in the future by certain risks, uncertainty and others factors relevant that may cause the results or final decisions to differ from such intentions, projections or estimates. These factors include, without limitation, (1) the market situation, macroeconomic factors, regulatory, political or government guidelines, (2) domestic and international stock market movements, exchange rates and interest rates, (3) competitive pressures, (4) technological changes, (5) alterations in the financial situation, creditworthiness or solvency of our customers, debtors or counterparts. These factors could condition and result in actual events differing from the information and intentions stated, projected or forecast in this document and other past or future documents. BBVA does not undertake to publicly revise the contents of this or any other document, either if the events are not exactly as described herein, or if such events lead to changes in the stated strategies and intentions.

The contents of this statement must be taken into account by any persons or entities that may have to make decisions or prepare or disseminate opinions about securities issued by BBVA and, in particular, by the analysts who handle this document. This document may contain summarised information or information that has not been audited, and its recipients are invited to consult the documentation and public information filed by BBVA with stock market supervisory bodies, in particular, the prospectuses and periodical information filed with the Spanish Securities Exchange Commission (CNMV) and the Annual Report on form 20-F and information on form 6-K that are disclosed to the US Securities and Exchange Commission.

Distribution of this document in other jurisdictions may be prohibited, and recipients into whose possession this document comes shall be solely responsible for informing themselves about, and observing any such restrictions. By accepting this document you agree to be bound by the foregoing Restrictions.

4

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

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

Economic Research DepartmentThe Spanish housing market

Structurally, Housing has increased its weight converging to the levels of developed countries

1998-2007 2007Spain 6.7 7.5Germany 6.2 5.4Netherlands 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


Principal 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 an important part of the housing stock…

Housing stock and population

1.000 Hab 1.000 Hab 1.000 Hab Inhabitants InhabitantsGermany 472.5 434.4 38.1 42.2 38.8Denmark 469.1 448.3 20.8 51.1 48.8France 476.9 395.6 81.3 42.9 35.6Greece 503.5 333.5 169.9 42.8 28.4Netherlands 415.9 406.9 9.0 40.8 39.9Italy 458.6 368.7 89.9 40.4 32.4Portugal 489.0 345.8 143.1 40.6 28.7United Kingdom 433.1 416.2 16.9 36.8 35.4Spain 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 perOther

Housing perSquare

meters per

8


The Spanish economy is not just housing

Annex: Changes in the Spanish Economy during the

last 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

(as

a %

of G

DP)

0%

5%

10%

15%

20%

25%

Equipment Non-residential construction and civil engineering Dwellings

Deviation from historical weight

+ 1.7 p.p.Dwellings

Other constructions

+ 1.0 p.p.

+ 2.6 p.p.Equipment

The Spanish economy has experienced higher levels of investment in equipment

…

… than in the housing sector.

9


Moreover, 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

illio

n eu

ros)

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 recent decades with a fiscal surplus of 1.2% of GDP in 2007 and 0.9% in 2008

10

Index



economy





10

11

Economic Research Department

The Spanish housing market

Women, immigration and baby-boomers have increased the Spanish labor force and made it more flexible

Spanish population

38,709 38,804 38,874 38,950 39,066 39,144 39,284 39,375 39,475 39,547 39,528 39,617

407 449 537 694999

1,3581,891

2,4533,009

3,6104,226

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 2011Residents Immigrants Touristic Households

Annex: Medium term potential demand

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

12


Employment growth is one of the key factors behind the housing boom

Housing price and employment (96-06)

Austria

Finland

Switzerland

Canada

Portugal

AustraliaNew 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

Aver

age

empl

oym

ent g

row

thSpanish housing market has experienced a catching up

process in line with the Spanish economy

13


Labor Market

How 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 flexible

labour market

14

Index



economy





14

15



Households debt levels have converged to the levels of developed countries ..

Households' Debt/Disposable Income

0

40

80

120

160

200

240

280

Can

ada*

Ger

man

y

Spa

in

Fran

ce*

Uni

ted

Kin

gdom Ita

ly

US

A*

Irela

nd*

Den

mar

k**

Net

herla

nds*

1991 1995 2000 2006

* 2005

Source: OECD

* 2004

Despite the increase in disposable income,

household debts have grown at a higher pace

16


Structural 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 1,9Country risk 3,3Banking competition 0,8

Contributions to the decrease of mortgage rates (p.p.)

There has been a structural fall in interest rates over

the last 20 years.

This has been more intense in the Spanish Economy…

… as well as permanent.

Annex: Spanish mortgage market

17



…however, households show a solid wealth position

Household indebtedness over net wealth

0

10

20

30

40

50

60

Aus

tralia

Can

ada

Ger

man

y*

Den

mar

k*

Spa

in*

Finl

and

Fran

ce UK

Irela

nd

Italy

*

Japa

n*

Net

herla

nds

New

Zel

and

Sw

eden

EE

.UU

.

1995 2000 2005

* last data 2004Source: OECD

The financial turbulences and the housing market

deceleration caused only a marginal effect on wealth…

… Spanish households show a moderate ratio of

indebtedness over net wealth

Annex: Households´wealth and income

18

Index



economy





18

19



The 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, Mº 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, Mº Vivienda y SEE BBVA

2000=100

Supply has been more affected by the financial

turmoil than demand

20



Housing 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 salesTotal, 12 month accumulated

Ministerio

Registradores

Housing Permits(12-month accumulated)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

ene-

99

jul-9

9

ene-

00

jul-0

0

ene-

01

jul-0

1

ene-

02

jul-0

2

ene-

03

jul-0

3

ene-

04

jul-0

4

ene-

05

jul-0

5

ene-

06

jul-0

6

ene-

07

jul-0

7

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 expected adjustment. The stricter financial conditions and the deterioration of confidence have

prompted a deceleration of activity

21



The 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

(% Y

oy)

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)

(% y

oy)

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

22



European CitiesHousing 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, interest rates and income have supported the increase in prices during the last decade.

Catching-up process in prices

23



The 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 limited impact on the economy. What are the main supports?

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 housing prices

Solid gains in income per capita

Improvement in housing affordability

25



The impact on the economy will be limited:Although housing will not contribute to economic growth, the Spanish economy will

grow 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 to

Spanish 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



The 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)

2008

fp)

Employment, contribution

Rest

Construction

Source: BBVA Economic Research Dept

Employment in the construction sector

accounts for 13% of the total

In 2008, employment will grow a 1.5%, 1,4 pp less than in 2007, but still far

from a scenario of employment destruction.

Thus, new jobs will be created in non-construction

sectors

27


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 important supports that will buffer the impact of the current situation

28

Index

The outlook for the real estate market in Spain

The BBVA mortgage businessThe BBVA mortgage business

Annexes

28

29

BBVA mortgage business Portfolio Structure

17%

83%

Mortgage portfolio structure

Low exposure to developers

% mortgages/ total loans

BBVA

Spain

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

BBVA mortgage business Performance

Total Mortgage Loans (€m)

63,474

13.646

Sept. 06

Indivivual mortgage loans 19.1 14.7 11.9 TAM Promotor 31,9 30,1 30,3 24,4TAM Total Hipot. 20,9 17,3 15,4 14,6

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 25.1

75,308

Total mortgage loans 20.9 16.9 14.0

9,113

64,41114,798

85,838

(YoY %)

Gradual slowdown in individual mortgage loans, resulting from a conservative approach to risks and pricing

31

BBVA mortgage business Strategic highlights

Mortgage 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 tayloredproducts with risk adjusted pricing.

32

BBVA mortgage business Developers

Loan Breakdown: 95% primary residence

95%

5%

ORIGINATION UNIT specialized in REAL ESTATE DEVELOPERS. The business generated is booked within Financial Service's accounts

ACQUISITION CHANNEL which supplies individual mortgages and new clients to the Retail Banking unit in Spain

Developer Mortgages

Moderate exposure to DEVELOPERS:17% of TOTAL MORTGAGE LENDING

8% of TOTAL SPANISH BOOK This unit generated 17% of individual mortgage

revenues in 3Q07

Contributing €3,419 million individual mortgage loans, 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

BBVA mortgage business Developers: market view & BBVA customer base

Moderation of housing demand in 2007, while employment creation continues 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

BBVA mortgage business Developers: structure

Developer’s / Domestic Lending

16%19%

18%

8%

Loans to Developers

CAGR (Sep06-Sep 07)

Banks Savings Banks

Banks and Savings Banks

+39.0%+49.1% +44.4%

+25.1%

BBVASpain Banks

Savings Banks

Banks and Savings Banks

BBVASpain

Loan selection criteria: individual assessment of risk and feasibility as well as risk and credit profile of the developer resulting in market share loss

35

BBVA mortgage business Developers: low risk profile

NPL and Coverage ratios (%)

0.080.10

1,640

2Q07 3Q07

NPLs

COVERAGE1,968

Portfolio highlights

No of active customers: 5,786

40% of lending is located in province capitals and in population centres > 100,000 inhabitants

Top 100 customers account for just 30.5% of the portfolio

Portfolio concentrated in well established developers in a highly fragmentedsector where 95% are small and locally based

36

BBVA mortgage business Developers: conclusions

The 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 andcustomers

37

Branches Developers Real State Agents

New loan production source

70%

13%

17%

BBVA mortgage business Individuals

Home 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

30%

8%

52%

10%

YOUN G S EGM EN T IN M IGR A N TSHIGH N ET WOR TH M A S S M A R KET

Segmented product offering:Better risk and pricingDifferentiated commercial approach

Hipoteca blueBBVA

Hipoteca Universal

Personalizedoffering

Hipoteca Fácil:Single product with best

attributes

Cross selling::Safe Instalment: hedging of

interest ratesLife insurace: single premiumHome Insurance

BBVA mortgage business Individuals: production structure

39

BBVA mortgage business 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 < 3065%

AFFOR 30-40

19%

AFFOR >4016%

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

BBVA mortgage business Individuals: 2008 focus

Implementation of RAROC for all mortgage loans

Fostering of products taylored to specific segments

Improvement of the Sales and Production process:Higher efficiencyHigher sales force resourcesBetter customer advice

Higher cross-sell for individual mortgage loans

Data as of September 2007

41

Index

The outlook for the real estate market in Spain

The BBVA mortgage business

AnnexesAnnexes

41

42

Economic Research DepartmentIndex

Annexes

• Structural changes in Spanish economy• Labor Market• Real Estate long-term demand• Households´ wealth and income• The Spanish mortgage market

43



Structural changes in the evolution of the main economic indicators

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

Real VariablesGrowth (% GDP) 2,3 3,6 1,3Employment (% yoy) 0,8 3,0 2,1Population (% yoy) 0,3 1,3 1,0Real Wages (% yoy) 1,0 -0,1 -1,1

Financial VariablesEx post real interest rates

short term 5,4 -0,1 -5,6long term 5,5 1,2 -4,3

Spread vs. Germany, 10 years interest rates 2,8 0,1 -2,7Inflation (% yoy CPI) 4,1 3,3 -0,9Saldo público (% GDP) -5,3 0,2 5,5Deuda Pública (% GDP) 58,4 48,1 -10,3

Housing MarketHouseholds´ Affordability (*) 34,3 19,7 -14,6Prices, real growth -0,7 9,0 9,7

Corporate Sector (**)Profitability

own resources (%) 8,3 12,9 4,6financial leverage (%) -0,1 4,4 4,6

Debt BurdenDivided 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 grew between 1 and 2 percentage

points in 2000-07

Interest rates and spreads are affected by the Spanish

nominal stabilization and the change of the public sector

Households’ Affordability has improved

Corporates are more profitable and their debt

burden is lower

44



Impulses to the Spanish economy

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

EMU Entry

Permanent fall of interest rates

Market reforms

Increase of employment and

Disposable Income

Increase of Consumption and Housing investment

Immigration

Lower increase of Wages

... and over the potential production capacity

45



The economy of European integrationInternational 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



The 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 of capital and adherence to EMU in 1999.

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

47



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 even larger outflow later (banking, telecom, utilities)

48



The economy of European integration: increasing competition

Electricity sector deregulation

Accumulated decrease in electricity rates for households exceding 30% (1997-2005).

Telecom liberalization 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



The economy of European integration: structural funds

Public Capital stock and Capital Transfers

0,0

0,5

1,0

1,5

2,0

2,5

3,0

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

GD

P %

40

50

60

70

80

90

100

Convergence (E

U = 100)

Public capital per head (right)

EU Capital Transfers received (left)

Public investment, financed to a large extent via

European Funds, has allowed the public capital

stock to reach 90% of the EU average (40% in 1986).

The change experienced by the public capital per head can be considered structural

50



The economy of European integration: changing financial conditions

There has been a structural fall 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 intense in the Spanish Economy…

… as well as permanent.

Global interest rate 1,9Country risk 3,3Banking competition 0,8

Contributions to the decrease of mortgage rates (p.p.)

Interest rates are structurally lower in the Spanish economy

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 housing affordability

52



Demographic factors: Immigration. Reducing the labor market rigidity

Decomposing growth per capita

Growth decompostion(immigrants)

-0,10

0,10,20,30,40,50,6

1988-93 1994-98 1999-05

working age populationemployment

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

ImmigrantsNatives

Productivity

Source: SEE BBVA

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

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

53



Research & Development

Corporate R&D expenses (GDP%)

0,2

0,5

0,8

1,1

1,4

1,7

2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Germany Spain France Italy U. Kingdom

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

2527293133353739414345

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

(%)

Spanish R&D is experiencing a slow catching up process

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

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Net Operating Income/Financial Costs

Source: Bank of Spain

Spanish economy has solid roots, such as the strong

corporate profits

Corporates’ activities have become more global

Corporates’ situation is structurally healthier

55


Annexes

• Structural changes to the Spanish economy• Labor Market• Real Estate long term demand• Households´ wealth and income• The Spanish mortgage market

56


Labor Market

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 past experience …

The forecasted scenario does not reach growth thresholds which involve net loss of jobs

57


Labor Market


0

2

4

6

8

10

12

14

mar

-05

jun-

05

sep-

05

dec-

05

mar

-06

jun-

06

sep-

06

To unemployment To other sectorSource: BBVA Economic Research Dept.

In work population. Probability of losing job and changing sector(%)

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

58


Labor Market

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

… and also in construction

Over 20% of those in employment in the construction sector who change to work in a different sector move to basic industries, and 18% go into wholesale and retail trade and hotels/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 estateEduc. and health

Other services

0 5 10 15 20 25 30

Construction Wholesale Industry

Source: BBVA Economic Research Dept.


59


Labor Market


Probability of becoming unemployed conditional 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 growth forecast for 2008 is starting to be reflected in the slight increase in the probability of losing a job

60


Labor Market


IN WORK2008

UNEMPLOYED 2007

INACTIVE POPULATION

2007

UNEMPLOYED2008

NET JOB CREATION (LFS) 2008

48.2%

12.8%

91.2%

IN WORK POPULATION

2007

3.4%

5.4% (2.0% , 2.4%)INACTIVE POPULATION

2008 (375,000, 435,000) jobs

61


Labor Market


816

640

484

666 675

1002

774667

410

0

200

400

600

800

1000

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Net job creation (in thousands)


62


Labor Market

Construction sector

The slowdown in economic growth forecast for 2008 is beginning to be reflected in the probability of more intensive, though controlled, job losses in 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


Labor Market

Construction sector

0%

2%

4%

6%

8%

10%

12%

14%

2002 2003 2004 2005 2006 2007 2008

Probability of working in another sector having been employed in construction in the previous year


In addition, a reduction in the probability of moving to other economic sectors is also forecast

64


Labor Market

Construction sector

IN WORK POPULATION

CONSTRUCTION 2007

IN WORK CONSTRUCTION

2008

UNEMPLOYED /INACTIVE

2008

IN WORK NOT CONSTRUCTION

2008

UNEMPLOYED /INACTIVE

2007

IN WORK NOT CONSTRUCTION

2007

NET JOB LOSSES IN CONSTRUCTION (LFS)

2008

(-0.4%, -0.5%)

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

2.2%

1.5%

78.3%

12.1%

9.7%

65


Labor Market

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 2008Source: BBVA Economic Research Dept

Construction: Net job creation (in thousands)

66


Labor Market

Other sectors will take the lead on growthEmployment growth rate by sector

Weight onTotal 3Q2007

Average 2006

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 employment growth rates were registered in the catering business, education, personal services and particularly in business services

The strong evolution of employment in business services is in line with the dynamism of business activities

These services will continue creating employment in 2008

67


Labor Market

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 RateRegistered 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

EMU

Nairu

Registered

The Spanish unemployment rate is at its minimum, below the ‘natural’ levels

Therefore, the rate of creation of new jobs will not be as high as in the last few years

68


Labor Market

… particularly in some regions

Total Men Women

Total 8,0 6,2 10,5Andalucía 12,6 9,5 17,3Aragón 4,9 3,8 6,3Asturias (Principado de) 7,2 5,9 8,9Balears (Illes) 4,5 3,6 5,6Canarias 10,7 8,9 13,3Cantabria 5,6 4,9 6,4Castilla y León 7,0 5,1 9,8Castilla - La Mancha 7,0 4,8 10,5Cataluña 6,8 5,7 8,2Comunitat Valenciana 8,7 6,6 11,7Extremadura 12,4 8,6 17,9Galicia 6,7 5,8 7,9Madrid (Comunidad de) 6,0 4,1 8,3Murcia (Región de) 8,2 6,9 10,3Navarra (Comunidad Foral de) 4,4 3,0 6,3País Vasco 6,1 4,7 7,9Rioja (La) 5,3 3,9 7,4Ceuta 20,9 15,9 30,2Melilla 18,3 11,4 29,6

Unemployment Rate 3Q 2007

Source: National Statistics Institute (INE)

The regions that represent two thirds of GDP register unemployment rates below the national average

Male unemployment rate is at its minimum, below 5% inAragón, Baleares and Navarra

69


Annexes

• Structural changes of the Spanish economy• Labor Market• Real Estate long term demand• Households´ wealth and income• The Spanish mortgage market

70

360.000 resident households will create because of natural population development.

Resident population: New householdsGross 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 Más de 35Fuente: BBVA

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

72

20 10 0 10 200-4

10-14 20-2430-3440-4450-5460-6470-7480-84

Men

20 10 0 10 200-4

10-14 20-2430-3440-4450-5460-6470-7480-84

20 10 0 10 200-4

10-14 20-2430-3440-4450-5460-6470-7480-84

20 10 0 10 200-4

10-14 20-2430-3440-4450-5460-6470-7480-84

Women

Fuente: INE

Immigrants

National

Spanish Population piramid (2003)Composition

Immigrants are mainly in the age cohorts that create more households

Average 1999-2003 Total population Spanish ForeignersParticipation rate (*) 54 53 71Employment rate (*) 47 47 61Unemployment rate 13 13 15Fuente: INE y BBVA(*) respecto a los mayores de 16 años

73

Immigrant population will contribute with around 140.000 households

Spain: Population and householdsForecast 2005-2011

New households Gross FlowResidents Immigrants Total

2005 354.793 180.000 534.7932006 356.888 165.000 521.8882007 359.618 150.000 509.6182008 362.566 135.000 497.5662009 364.988 120.000 484.9882010 365.525 115.000 480.5252011 363.661 110.000 473.661

Average2005-2011 361.148 139.286 500.434Fuente: BBVA

74

Household disintegration could not be balanced with household formation

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

(núm

ero

de h

ogar

es)

Fuente: BBVA

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 35International tourism income (% exports)

Seco

nd re

side

nces

per

100

0 in

habi

tant

s

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 35International tourism income (% exports)

Seco

nd re

side

nces

per

100

0 in

habi

tant

s

Spain

Greece

Portugal

Italy

EMU

United KingdomNetherl.

Germany

Fuente: BBVA

76

Foreign tourists are increasingly keen to inhabit their own homes

Foreign tourists accomodation preferences

0%

20%

40%

60%

80%

100%

1.99

7

1.99

8

1.99

9

2.00

0

2.00

1

2.00

2

2.00

3

2.00

4

2.00

5

Free house (Owned or friends)OtherRentHotel

13,2% 22,2%

Fuente: IET

77


Annexes

• Structural changes of the Spanish economy• Labor Market• Real Estate long term demand• Households´ wealth and income• The Spanish mortgage market

78


Households´ wealth and income

Although the debt burden has increased over the last few years…

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 an improvement is envisaged due to

Lower interest rates

Stability in housing prices

Solid gains in income per capita

Spanish households will continue affording increases of their debt burden

79



… and households´ indebtedness has reached high levels …

Hou

seho

lds’

Inde

bted

ness

Despite the increase of the disposable income,

household debts have grown at a higher pace

Households' Debt/Disposable Income

0

40

80

120

160

200

240

280

Can

ada*

Ger

man

y

Spa

in

Fran

ce*

Uni

ted

Kin

gdom Ita

ly

US

A*

Irela

nd*

Den

mar

k**

Net

herla

nds*

1991 1995 2000 2006

* 2005

Source: OECD

* 2004

80



… households show a solid wealth position

Hou

seho

lds’

Wea

lth

The financial turbulences and the housing market

deceleration caused only a marginal effect on wealth…

Household indebtedness over net wealth

0

10

20

30

40

50

60

Aus

tralia

Can

ada

Ger

man

y*

Den

mar

k*

Spa

in*

Finl

and

Fran

ce UK

Irela

nd

Italy

*

Japa

n*

Net

herla

nds

New

Zel

and

Sw

eden

EE

.UU

.

1995 2000 2005

* last data 2004Source: OECD

… Spanish households show a moderated ratio of

indebtedness over net wealth

81



… and a solid savings position

Hou

seho

lds’

Sav

ings

-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 households savings are experiencing a

limited moderation.

Their level is still well above that of the United

States households

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 thelower 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, the risk for financial institutions is therefore lower

83


Annexes

• Structural changes of the Spanish economy• Labor Market• Real Estate log term demand• Households´ wealth and income• The Spanish mortgage market

84


The Spanish mortgage marketFlexible mortgage markets have been more efficient translating financial

improvements to its clients.

BBVA has elaborated an index measuring

mortgage market flexibility through

four factors: (i) market

completeness, (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

Mor

tgag

e to

GD

P (2

003)

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 more developed it becomes.

85


The Spanish mortgage marketThere are important differences between the US and Spanish mortgage markets

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 relatively

unknown, so that default rates hikes likes those observed in the US have not been registered in the Spanish economy

86


The Spanish mortgage market

2. Originators

CUSTOMER APIs

MANAGER: COMMERCIAL

BANK

Spain

Securitisationor otherfunding

CUSTOMER

Mortgageoriginated

Intermediary

Mortgageoriginated

CUSTOMER APIs

MANAGER: COMMERCIAL

BANK

Spain

Securitisationor 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. These

securitize or sell the mortgage loan on to another agent once it has been

granted.

However, in Spain financial entities, such as universal banks, are the main players

in this market.

87



2. Originators

US: Subprime Loans by Originator, 2005

20%

30%

50%

Banks And Thrifts

Affiliates of Banks,holding companiens orThriftsIndependent MortgageCompanies

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

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

housing credit

88



2. Securitizations

CDO Holders: Riskier Segments (Not Delta-Adjusted)

HedgeFunds10%

Insurance19%

Banks31%

AssetManagers

22%

Pensionfunds18%

Source: IMF

US: Private Mortgage-Backed Securities Issuance (thousands of millions $)

0

200

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 to grant high risk loans

89



Catching-up process in prices

European CitiesHousing 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

“outlook for real estate and · the outlook for the real estate market in spain the bbva mortgage...

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