Return On Equity (ROE)

Useful Profitability Formulas for Banks and Other

Financial-Service Companies

A bank ROA is projected to be= 1%

Need Assets= 10 $ for 1 $
Capital to achieve= 10 $

𝑅𝑂𝐸=𝑅𝑂𝐴 × (𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡)/(𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)

ROE= 10 %

For example, suppose a bank’s Report of Condition and Report of

Income show the following figures:

Net income= 1 $ million

Pretax net operating income= 1.3 $ million
Total operating revenue= 39.3 $ million
Total Assests = 122 $ million
Total equity capital= 7.3 $ million

Its ROE must be

ROE= 13.70 %

annual dividend of 4.00 $ per share on its stock

expected to grow 5%
bank's perceived level of risk 10%

Can you estimate the current value of the bank's stock?

Po = D1 / (r – g) = $4 / (0.10 – 0.05) = $80.

Po= 80 $

net income for the current year is 51 mil

 its assets total 1144 mil
liabilities amount to 926 mil

ROE= 23.39%
Problem 4 Happy Merchants National Bank
Income and Expense Statement (Report of Income)
Interest and fees on loans 44
Interest and dividends on securities 6
Total interest income 50

Interest paid on deposits 32

Interest on nondeposit borrowings 6
Total interest expense 38

Net interest income $12

Provision for loan losses 1
Noninterest income and fees 16
Noninterest expenses:
Salaries and employee benefits ###
Overhead expenses 5
Other noninterest expenses 2
Total noninterest expenses 17
Net noninterest income

Pretax operating income 10

Securities gains (or losses) 2
Pretax net operating income 12
Taxes 2
Net operating income 10
Net extraordinary income -1
Net income 9
Happy Merchants National Bank
Report of Condition
Assets Liabilities
Cash and deposits due from banks $100 Demand deposits $190
Investment securities 150 Savings deposits 180
Federal funds sold 10 Time deposits 470
Net loans 670 Federal funds purchased 60
(Allowance for loan losses = 25) Total liabilities 900
(Unearned income on loans = 5) Equity capital
Plant and equipment 50 Common stock 20
Surplus 25
Total assets 980 Retained earnings 35
Total Capital 80
Total Earnings Assets 830 Interest-bearing deposits 650

11.25%

0.92%

1.22%

-0.10%
1.12%