2Q09
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 six months of 2009, these
adjustments increased €270m the earnings, mainly
due to the adjustment for unrealised capital gains.
Adjusted profit thus stood at €3,069m.
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
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.
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 €2,671m in the first six
months 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 (€22,118m at
30-6-09) 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. Although it
was €1,843m for the semester, the recurrent
economic profit stood at €1,684m, 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 28.0%, while its recurrent RARoC was
29.3%.
1H09
Δ%
2,799 (10.0) 3,108
270 n.m. (1,714)
3,069 120.2 1,394
22,118 15.9 19,085
28.0 14.7
29.3 34.0
1,226 24.3 986
1,843 n.m. 408
1,684 (15.1) 1,984
1H08
25
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