3Q09
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 nine months of 2009,
these adjustments increased €845m the earnings,
mainly due to the adjustment for unrealised capital
gains (the adjustment was negative in the same period
of 2008). Adjusted profit thus stood at €5,024m.
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
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.
Group’s management performance. They are obtained
by excluding the earnings of units impacted by changes
in capital gains on portfolio investments; and with
respect to expected losses, including the loss adjusted to
cycle. Such recurrent adjusted profit stood at €3,924m
in the first nine months of 2009.
From the adjusted profit a subtraction is made which
comes from multiplying the average economic risk
capital or ERC for the period (€22,051m at 30-9-09)
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. It amounted to
€3,176m for the first nine months, and the recurrent
economic profit stood at €2,431m, once more
reflecting the degree to which BBVA’s profits exceed the
cost of capital employed.
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 30.5%, while its recurrent RARoC was 28.6%.
Jan.-Sep. 09
Δ%
4,179 (7.2) 4,501
845 n.m. (2,176)
5,024 116.2 2,324
22,051 14.8 19,201
30.5 16.2
28.6 33.2
1,848 23.7 1,494
3,176 282.5 830
2,431 (16.0) 2,894
Jan.-Sep. 08
27
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