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UPDATE 4-Spain's BBVA plans $3.2 bln buyback, weighs cost cuts in Spain

* BBVA’s share buyback equivalent to about 2.6 bln euros

* Shares fall after lower than expected lending income

* Q4 net profit 1.32 billion euros, above forecasts

* Reported capital rises by 21 basis points in quarter

* Bank to announce cost-cutting plan in Spain in H1 (Adds new details on potential restructuring plan in Spain)

MADRID, Jan 29 (Reuters) - BBVA plans to buy back around 10% of its shares, worth about 2.6 billion euros ($3.2 billion) following the sale of its U.S. business and is also looking at cutting costs in a new restructuring in its home market Spain.

The country’s second-biggest bank sold its U.S. business for $11.6 billion to PNC in November, and signalled it could use part of the proceeds on a share buyback and dividend payments.

Chief Executive Onur Genc said the bank was planning to announce cost-cutting measures in low-growth regions to cope with the COVID-19 pandemic and a change in customer habits. This would include a potential fast restructuring programme in Spain, starting in the first half of the year.

“We are very committed to exploring different options in low growing geographies, especially in Spain, at the corporate centre,” Genc said. BBVA has around 29,300 employees in Spain out of a total 123,000 globally.

BBVA’s net profit in Spain fell 48% in the fourth quarter against the same quarter of 2019.

The bank said the U.S. sale would put its pro-forma fully loaded core-tier 1 capital ratio, the strictest measure of solvency, at 14.58% at the end-December 2020.

BBVA’s reported capital ratio increased in the fourth quarter by 21 basis points to 11.73%, prompting the bank to increase its capital ratio target to 11.5%-12% from 10.84%-11.34% previously.

Genc told analysts any “availability of excess capital” would not force the bank to automatically undertake an acquisition, which should be based on creating value.

BBVA had been in merger talks with smaller rival Sabadell but these were called off in November after a failure to agree on price.

The bank plans to a pay a gross cash dividend of 0.059 euros per share on 2020 profits and return to its policy of distributing 35-40% of profits to shareholders in 2021, in line with European Central Bank guidance.

BBVA said its planned buyback and dividend policy were both subject to market conditions and regulatory approvals.

BBVA’s shares fell 2.2% as brokers such as Merrill Lynch had been expecting a bigger share buyback of 13%.

Another broker KB&W said BBVA’s planned buyback programme did not dissipate merger options.

Jefferies highlighted a deterioration in asset quality in Mexico, BBVA’s main market, to 3.33% from 2.36% in the fourth quarter of 2019.

Overall, BBVA booked a fourth-quarter net profit of 1.32 billion euros, from a loss in the same period in 2019. Net interest income, earnings from loans minus deposit costs, fell 14.2% to 4.04 billion, slightly below market forecasts of 4.1 billion.

Full-year net profit fell 63% due to provisions to cover the economic fallout from the pandemic, including a 2.08 billion euro goodwill adjustment in the United States.

Banks across Europe are under pressure from rising bad debts and record low interest rates. On Friday, Spain’s Caixabank reported a 19% decline in 2020 net profit.

For 2021, BBVA said it expected its cost of risk, which measures the cost of managing credit risks and potential losses and can indicate future provisions, to remain below 2020 levels. The bank ended the year with a cost of risk of 151 basis points, at the lower end of its 150 and 160 bps guidance for the year.

$1 = 0.8264 euros Reporting by Jesús Aguado, additional reporting by Inti Landauro and Emma Pinedo. Editing by Mark Potter and Jane Merriman

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