Alternative Performance Measures (APMs)

BBVA presents its results in accordance with the International Financial Reporting Standards (EU-IFRS). However, it also considers that some Alternative Performance Measures (APMs) provide useful additional financial information that should be taken into account when evaluating performance. These APMs are also used when making financial, operational and planning decisions within the Entity. The Group firmly believes that they give a true and fair view of its financial information. These APMs are generally used in the financial sector as indicators for monitoring the assets, liabilities and economic and financial situation of entities.

BBVA Group's APMs are given below. They are presented in accordance with the European Securities and Markets Authority (ESMA) guidelines, published on October 5, 2015 (ESMA/2015/1415en). These guidelines are aimed at promoting the usefulness and transparency of APMs included in prospectuses or regulated information in order to protect investors in the European Union. In accordance with the indications given in the guidelines, BBVA Group's APMs:

• Include clear and readable definitions of the APMs (paragraphs 21-25).
• Disclose the reconciliations to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period, separately identifying and explaining the material reconciling items (paragraphs 26-32).
• Are standard measures generally used in the financial industry, so their use provides comparability in the analysis of performance between issuers (paragraphs 33-34).
• Do not have greater preponderance than measures directly stemming from financial statements (paragraphs 35-36).
• Are accompanied by comparatives for previous periods (paragraphs 37-40).
• Are consistent over time (paragraphs 41-44).

Constant exchange rates

When comparing two dates or periods in this management report, the impact of changes in the exchange rates against the euro of the currencies of the countries in which BBVA operates is sometimes excluded, assuming that exchange rates remain constant. This is done for the amounts in the income statement by using the average exchange rate against the euro in the most recent period for each currency of the geographies where the Group operates, and applying it to both periods; for amounts in the balance sheet and activity, the closing exchange rates in the most recent period are used.

Book value per share

The book value per share determines the value of a company on its books for each share held.  It is calculated as follows:

Explanation of the formula: The figures for both ‘’shareholders' funds’’ and ‘’accumulated other comprehensive income’’ are taken from the balance sheet. Shareholders' funds are adjusted to take into account the execution of the "dividend-option" at the closing dates on which it was agreed to deliver this type of dividend prior to the publication of the Group´s results. The denominator includes the final number of outstanding shares excluding own shares (treasury shares). The denominator is also adjusted to include the capital increase resulting from the execution of the "dividend options" explained above. Both the numerator and the denominator take into account period-end balances.

Relevance of its use: It shows the company's book value for each share issued. It is a generally used ratio, not only in the banking sector but also in others.

Book value per share

Tangible book value per share

The tangible book value per share determines the value of the company on its books for each share held by shareholders in the event of liquidation.

Explanation of the formula: The figures for "shareholders' funds", "accumulated other comprehensive income" and "intangible assets" are all taken from the balance sheet. Shareholders’ funds are adjusted to take into account the execution of the “dividend-option” at the closing dates on which it was agreed to deliver this type of dividend before publication. The denominator includes the final number of shares outstanding excluding own shares (treasury shares). The denominator is also adjusted to include the result of the capital increase resulting from the execution of the “dividend options” explained above. Both the numerator and the denominator take into account specific balances.

Relevance of its use: It shows the company's book value for each share issued, after deducting intangible assets. It is a generally used ratio, not only in the banking sector but also in others.

Tangible book value per share

Dividend yield

This is the remuneration given to the shareholders in the last twelve calendar months, divided by the closing price for the period. It is calculated as follows:

Explanation of the formula: The remuneration per share takes into account the gross amounts per share paid out over the last twelve months, both in cash and through the flexible remuneration system called "dividend option".

Relevance of its use: This ratio is generally used by analysts, shareholders and investors for companies that are traded on the stock market. It compares the dividend paid out by a company every year with its market price at a specific date.

Dividend yield

Non-performing loan (NPL) ratio

This is the ratio between the risks classified for accounting purposes as non-performing loans and the total credit risk balance for customers and contingent risks. It is calculated as follows:

Explanation of the formula: ‘’Non-performing loans’’ include those related to loans and advances to customers (gross) and those related to contingent risk, excluding the non-performing loans of credit institutions and securities. ‘’Total credit risk’’ includes both pending and contingent risk.  Their calculation is based on the headings in the first table on page 14 of this report.

Relevance of its use: This is one of the main indicators used in the banking sector to monitor the current situation and changes in credit risk quality, and specifically the relationship between risks classified in the accounts as non-performing loans and the total balance of credit risk, with respect to customers and contingent liabilities.

Change of criteria, due to IFRS 9, which entered into force on January 1, 2018, certain wholesale customer repos that until December 31, 2017 were presented in the total credit risk have not been taken into account in the calculation of this metric.

Non-Performing Loans (NPLs) ratio

NPL coverage ratio

This ratio reflects the degree to which the impairment of non-performing loans has been covered in the accounts via loan-loss provisions. It is calculated as follows:

Explanation of the formula: ‘’Non-performing loans’’ include those related to lending activity and those related to contingent risk, excluding non-performing loans from credit institutions and securities. ‘’Provisions’’ are loan-loss provisions, for both customer loans and contingent risk.  Their calculation is based on the headings in the first table on page 14 of this report.

Relevance of its use: This is one of the main indicators used in the banking sector to monitor the situation and changes in the quality of credit risk, reflecting the degree to which the impairment of non-performing loans has been covered in the accounts via loan-loss provisions.

NPL coverage ratio

Cost of risk

This ratio indicates the current situation and changes in credit-risk quality through the annual cost in terms of impairment losses (accounting loan-loss provisions, included in the “impairment on financial assets not measured at fair value through profit or loss” line) of each unit of loans and advances to customers (gross). It is calculated as follows:

Explanation of the formula: ‘’Annualized loan-loss provisions’’ are calculated by accumulating and annualizing the loan-loss provisions of each month of the period under analysis, to standardize the comparison between different periods. For example, loan-loss provisions for six months (180 days)are divided by 180 to obtain daily loan-loss provisions and multiplied by 365 to obtain the annualized figure. This calculation uses the calendar days of the period under consideration.

‘’Loans and advances to customers (gross)’’ refers to the portfolio of financial assets at amortized cost of the Group’s consolidated balance sheet. The average of loans and advances to customers (gross) is calculated by using the average of the period-end balances of each month of the period analyzed plus the previous month.

Relevance of its use: This is one of the main indicators used in the banking sector to monitor the situation and changes in the quality of credit risk through the cost over the year.  

Cost of risk

Efficiency ratio

This measures the percentage of gross income consumed by an entity's operating expenses. It is calculated as follows:

Explanation of the formula: Both ‘’operating expenses’’ and ‘’gross income’’ are taken from the Group’s consolidated income statement. Operating expenses are the sum of the administration costs (personnel expenses plus other administrative expenses) plus depreciation. Gross income is the sum of net interest income, net fees and commissions, net trading income dividend income, share of profit or loss of entities accounted for using the equity method, and other operating income and expenses. For a more detailed calculation of this ratio, the table on page 7 of this report should be consulted, whose figures are at current exchange rates, and also the graphs on page 8, one of them with calculations with figures at current exchange rates and another with the data at constant exchange rates.

Relevance of its use: This ratio is generally used in the banking sector. It is also a ratio linked to one of the Group's six Strategic Priorities.

Efficiency ratio

ROE

The ROE (return on equity) ratio measures the return obtained on an entity's shareholders' funds plus accumulated other comprehensive income. It is calculated as follows:

Explanation of the formula: ‘’Annualized net attributable profit’’ is taken directly from the Group’s consolidated income statement. If the metric is presented on a date before the close of the fiscal year, the numerator must be annualized. If extraordinary items (results from corporate operations) are included in the net attributable profit for the months covered, they are eliminated from the figure before it is annualized, and then added to the metric once it has been annualized.

‘’Average shareholders' funds’’ are the weighted moving average of the shareholders' funds at the end of each month of the period analyzed, adjusted to take into account the execution of the "dividend-option" at the closing dates on which it was agreed to deliver this type of dividend prior to the publication of the Group´s results.

‘’Average accumulated other comprehensive income’’ is the moving weighted average of accumulated other comprehensive income, which is part of the equity on the Entity's balance sheet  and is calculated in the same way as average  shareholders’ funds (above).

Relevance of its use: This ratio is very commonly used not only in the banking sector but also in other sectors to measure the return obtained on shareholders' funds.

Change of criteria: As of 2018, accumulated other comprehensive income has been included in the denominator to align with the usual practice of the sector and to be more consistent with the calculation of the tangible book value per share explained above.

ROE

ROTE

The ROTE (return on tangible equity) ratio measures the return on an entity's shareholders' funds, plus accumulated other comprehensive income, and excluding intangible assets.  It is calculated as follows:

Explanation of the formula: The numerator (annualized net attributable profit) and the items in the denominator ‘’average intangible assets’’ and ‘’average accumulated other comprehensive income’’ are the same items and are calculated in the same way as explained for ROE.

‘’Average intangible assets’’ are the intangible assets on the balance sheet, including goodwill and other intangible assets. The average balance is calculated in the same way as explained for shareholders' funds in ROE.

Relevance of its use: This metric is generally used not only in the banking sector but also in other sectors to measure the return obtained on shareholders' funds, not including intangible assets.

Change of criteria: As of 2018, the accumulated other comprehensive income has been included in the denominator to align it with the usual practice of the sector and with the calculation of the tangible book value per share explained above.

ROTE

ROA

The ROA (return on assets) ratio measures the return obtained on an entity's assets. It is calculated as follows:

Explanation of the formula: ‘’Annualized profit for the year’’ is taken directly from the Group’s consolidated income statement. If the metric is presented on a date before the close of the fiscal year, the numerator must be annualized. If extraordinary items (results from corporate operations) are included in the net attributable profit for the months covered, they are eliminated from the figure before it is annualized and then added to the metric once it has been annualized.

‘’Average total assets’’ are taken from the Group’s consolidated balance sheet. The average balance is calculated in the same way as explained for shareholders' funds in ROE.

Relevance of its use: This ratio is generally used not only in the banking sector but also in other sectors to measure the return obtained on assets.

ROA

RORWA

The RORWA (return on risk-weighted assets) ratio measures the accounting return obtained on average risk-weighted assets. It is calculated as follows:

Explanation of the formula: ‘’Annualized profit for the year’’ is the same figure as explained for ROA.

‘’Average risk-weighted assets’’(RWA) is the moving weighted average of the risk-weighted assets at the end of each month of the period under analysis and  is calculated in the same way as explained for shareholders' funds in ROE.

Relevance of its use: This ratio is generally used in the banking sector to measure the return obtained on RWA.

RORWA

Other customer funds

This includes off-balance sheet funds (mutual funds, pension funds and other off-balance sheet funds) and customer portfolios.

Explanation of the formula: It is the period-end sum on a given date of the mutual funds, pension funds, other off-balance sheet funds and customer portfolios; as displayed in the table on page 15 of this report.

Relevance of its use: This metric is generally used in the banking sector, as apart from on-balance sheet funds, financial institutions manage other types of customer funds, such as mutual funds, pension funds, other off-balance sheet funds, customer portfolios, etc.

Other customer funds (Million euros)