Handbook of Asset and Liability Management: From models to optimal return strategies

25

Links Between ALM and Financial Analysis

Mieux vaut ami en place qu'argent en bourse.

Regulatory constraints introduced the notion of economic capital. Economic value and shareholder value are linked; consequently, imposing constraints on economic value has an impact on the income followed by financial analysts.

There is a direct link between ALM and the financial analysis of the company. Indeed, in the past, many ALM teams belonged to Financial Departments before moving into Risk Management or Treasury Departments.

ALM improvement came with the idea that the company performance could be affected by bad market movements. The link between ALM and financial analysis will be described through:

• a brief summary of the financial analysis key indicators;
• an introduction to economic value concepts;
• an introduction to capital allocation and to debt/capital concepts.

25.1 PERFORMANCE INDICATORS IN THE COMPANY

25.1.1 ROE, RONE and ROEC

Financial analysts focus mainly on performance indicators such as:

• Company ROE (Return on Equity) based on the Net income (Group share, e.g. before minority interests) divided by the average equity (Group share).
• Branches RONE (Return on Normalized Equity) based on the net income (before taxes) divided by the normalized equity.
• Branches Income contribution computed with Equity set to 0.
• Branches Income contribution computed with Normalized Equity.
• Branches CVA (Cash Value Added): net income (before taxes) less Normalized Equity costs (computed as ...