28
4Q09
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 2009, these adjustments increased
€580m the earnings, mainly due to the adjustment for
unrealised capital gains (the adjustment was negative in
2008). Adjusted profit thus stood at €4,790m.
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
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.
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 €4,626m
for 2009.
From the adjusted profit a subtraction is made which
comes from multiplying the average economic risk
capital or ERC for the period (€22,065m at 31-12-09)
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
€2,314m for the whole of 2009, and the recurrent
economic profit stood at €2,620m, 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 21.7%, while its recurrent RARoC was 25.1%.
2009
Δ%
4,210 (16.1) 5,020
580 n.m. (3,241)
4,790 169.4 1,778
22,065 11.8 19,735
21.7 9.0
25.1 29.9
2,476 20.6 2,053
2,314 n.m. (275)
2,620 (23.0) 3,402
2008
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