1Q09
Economic profit and risk adjusted return on economic capital
The figures for economic profit and risk-adjusted return
on capital (RAROC) form part of the fundamental
metrics that BBVA needs for a correct implementation
of its value-based management system.
Calculations are based on the adjusted profit, which is
obtained by making adjustments to the net attributable
profit: substituting generic provisions with an
allocation based on expected losses; accounting the
changes in unrealised capital gains on the holding
portfolios; applying the difference between all the
accounting positions of Global Markets and their
market value; and reflecting changes in the total net-
asset value due to exchange-rate variations on holdings
in Group companies. In the first quarter of 2009, these
adjustments subtracted €453m from earnings, mainly
due to the adjustment for expected loss. Adjusted
profit thus stood at €784m.
The medium- and long-term performance of these
calculations is very useful for determining the intrinsic
value of a business. However, in the short term they
can be hit by market volatility. That is why recurrent
data becomes so relevant. As these mainly come from
customer business, the metrics genuinely reflect the
Group’s management performance. They are obtained
by excluding the earnings of units impacted by changes
Economic profit and risk adjusted return on economic capital
(Million euros)
NET ATTRIBUTABLE PROFIT
Adjustments
ADJUSTED NET ATTRIBUTABLE PROFIT (A)
Average economic risk capital (ERC) (B)
RISK-ADJUSTED RETURN ON ECONOMIC CAPITAL (RAROC) = (A)/(B) * 100 (1)
RECURRENT RAROC (%) (1)
ERC x cost of capital (C)
ECONOMIC PROFIT (EP) = (A) - (C)
RECURRENT ECONOMIC PROFIT
(1) Percentage annualized.
in capital gains on portfolio investments; and with
respect to expected losses, including the loss adjusted
to cycle. Such recurrent adjusted profit stood at
€1,255m in the first quarter of 2009.
Then, from the adjusted profit a subtraction is made
which comes from multiplying the average economic
risk capital or ERC for the period (€22,409m in the
first quarter) by the percentage cost of capital. The
cost of capital is different for each of the Group’s
business areas and units. Based on information
extracted from the analysts’ consensus, it is equivalent
to the rate of return the market is demanding on
investment capital.
The economic profit is thus calculated. Although it
was €170m for the quarter, the recurrent economic
profit stood at €758m, once more reflecting the degree
to which BBVA’s profits exceed the cost of capital
employed. This difference is the BBVA shareholders’
economic return.
The RARoC figure measures the return earned by the
business, adjusted to risks borne. Comparing the
adjusted profit against the average economic risk capital
(ERC) for the period gives the BBVA Group a RARoC
of 14.2%, while its recurrent RARoC was 27.1%.
1Q09
Δ%
1,238 (36.6) 1,951
(453) (72.3) (1,637)
784 149.4 315
22,409 18.2 18,961
14.2 6.7
27.1 32.4
614 25.5 489
170 n.m. (175)
758 (17.3) 917
1Q08
25
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