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Analyzing bank performance – linking RoE, RoA and RAROC: U.S. commercial banks 1992–2014

Author

Listed:
  • Klaassen, Pieter

    (UBS)

  • van Eeghen, Idzard

    (Royal Bank of Scotland N.V.)

Abstract

We introduce a new performance scheme for banks, inspired by the Du Pont scheme for corporates, which clarifies the relationship between return on equity (RoE), risk- adjusted return on capital (RAROC) and return on assets (RoA). The scheme highlights how common financial ratios risk factors influence the development of RoA, RAROC and RoE. The scheme can be applied by managers, analysts and regulators to analyze the performance of an individual bank, as well as the performance of the banking sector as a whole. In addition, it can be used by bank managers to set coherent targets for various key financial ratios that tend to be managed separately within a bank, to achieve a target RoE, RAROC and RoA. We illustrate our performance scheme by applying it to analyze the main drivers behind the development of the performance of the U.S. commercial banking sector during the past 23 years.

Suggested Citation

  • Klaassen, Pieter & van Eeghen, Idzard, 2015. "Analyzing bank performance – linking RoE, RoA and RAROC: U.S. commercial banks 1992–2014," Journal of Financial Perspectives, EY Global FS Institute, vol. 3(2), pages 103-111.
    • Handle: RePEc:ris:jofipe:0076
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    Cited by:

    1. Abayomi Oredegbe, 2021. "Cost Efficiency Determinants: Evidence from the Canadian Banking Industry," International Journal of Business and Management, Canadian Center of Science and Education, vol. 15(1), pages 1-86, July.

    More about this item

    Keywords

    Banking; RoE; RAROC; RoA;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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