Analyzing Bank Performance — Linking RoE, RoA and RAROC: U.S. Commercial Banks: 1992-2014

26 Pages Posted: 7 Dec 2017

Date Written: July 1, 2015

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 and van Eeghen, Idzard, Analyzing Bank Performance — Linking RoE, RoA and RAROC: U.S. Commercial Banks: 1992-2014 (July 1, 2015). Journal of Financial Perspectives, Vol. 3, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=3083577

Pieter Klaassen (Contact Author)

UBS AG ( email )

Postfach
Zurich, 8076
Switzerland

Idzard Van Eeghen

Royal Bank of Scotland (RBS) ( email )

135 Bishopsgate
London, EC2M 3UR
United Kingdom

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