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48
Rothschild & Co | Annual Report 2017
Results for the 2017 financial year
1.3 Alternative performance measures (“APM”) – Article 223-1 of the AMF’s
General Regulation
To enhance the presentation of its operating performance, Rothschild & Co uses the following alternative performance measures to communicate the
Group’s financial results. A commentary on some of these alternative performance measures can be found on pages 24 to 43 in the business review
Section of the annual report.
Alternative
Performance
Measures
Definition
Reason for use
Reference to the
data in this report
Net income – Group
share excluding
exceptionals
Net income attributable to equity holders excluding exceptional items.
To measure Net result – Group share of
Rothschild & Co excluding exceptional
items of a significant amount.
Please refer to
Section 1.1 above
and page 6
Message from
Management Board
EPS excluding
exceptionals
EPS excluding exceptional items.
To measure Earnings per share excluding
exceptional items of a significant amount.
Please refer to
Section 1.1 above
Adjusted
compensation
ratio
Ratio between adjusted staff costs divided by consolidated Net Banking
Income of Rothschild & Co. Adjusted staff costs represent:
1. staff costs accounted in the income statement (which include the effects
of accounting for deferred bonuses over the period in which they are earned
as opposed to the “awarded” basis);
2. to which must be added the amount of profit share paid to the French partners;
3. from which must be deducted redundancy costs, revaluation of share-based
employee liabilities and business acquisition costs treated as employee
compensation under IFRS;
– which gives Total staff costs in calculating the basic compensation ratio;
4. from which the investment costs related to the recruitment of senior bankers
in the United States must be deducted;
5. the amount of adjusted staff costs is restated by the exchange rate effect
to offset the exchange rate fluctuations from one year to the next
–
which gives the adjusted staff costs for compensation ratio.
To measure the proportion of Net Banking
Income granted to all employees.
Key indicator for competitor listed
investment banks.
Rothschild & Co calculates this ratio
with adjustments to give the fairest and
closest calculation to the one used by
other comparable listed companies.
Please refer to
the comments
to 1.2.2.1 above
and page 6
Message from
Management Board
Return on
Tangible Equity
(“ROTE”) excluding
exceptional items
Ratio between Net income – Group share excluding exceptional items and
average tangible equity Group share over the period.
Tangible equity corresponds to total equity Group share less intangible
assets and goodwill.
Average tangible equity over the period equal to the average between
tangible equity as at 31 December 2017 and 31 December 2016.
To measure the overall profitability of
Rothschild & Co excluding exceptional
items on the equity capital in the business.
Please refer
to Section 1.1
above and page 6
Message from
Management Board
Business
Operating
Margin
Each business Operating Margin is calculated by dividing Profit before
tax relative to revenue, business by business.
It excludes exceptional items.
To measure businesses’ profitability.
Please refer to the
comments pages
25, 31 and 38
Return on
Risk Adjusted
Capital
(“RORAC”)
for Merchant
Banking
Ratio of an adjusted profit before tax divided by an internal measure of risk
adjusted capital deployed in the Merchant Banking business on a rolling three
years’ basis.
The estimated amount of capital and debt which management believes would
be reasonable to fund the Group’s investments in Merchant Banking products
is consistent with its cautious approach to risk management. Based on the
mix of its investment portfolio as of the reporting dates, management believes
that this “risk-adjusted capital” (“RAC”) amounts to c.70% of the Group’s
investments net asset value and that the remainder could be funded by debt.
This percentage broadly represents the weighted average of 80% for equity
exposures, 50% for junior credit exposures, 40% for CLO exposures in vertical
strips and 33% for senior credit exposures.
To calculate the RORAC, Rothschild Merchant Banking (RMB) profit before tax
is adjusted by a notional 2.5% cost of debt, computed as per the above (i.e. 30%
of the Group’s investments NAV), divided by the RAC.
Disclosed RORAC is calculated on a three-year rolling period average to account
for the inevitable volatility in the financial results of the business, primarily
relating to investment income and carried interest recognition.
To measure the performance of the
Rothschild Merchant Banking business.
Please refer to the
comments page 38