Minimal required rate of return for ex-ante profitability calculation of bank medium-sized enterprises clients

Štěpánka Křečková

International Journal of Financial Services Management, 2018, vol. 9, issue 3, 226-241

Abstract: This article summarises and analyses various approaches for determination of minimal rate of return that should be required from provided credit exposures to bank clients in order for a value added for the bank shareholders to be created. The most widely used measurement for the so called ex-ante profitability calculation of bank's clients is currently Risk Adjusted Return on Capital (RAROC), which is then compared to the required rate of return. The article shows, on a hypothetical example, one of the ways of this target return estimation that could be applicable in practice, is its determination through forecast Economic Value Added (EVA). On the sample of medium-sized enterprise clients of a bank operating on the market in the Czech Republic, the article shows that using EVA for ex-ante profitability calculation can be of more informative value than using RAROC.

Keywords: hurdle rate; cost of equity; rate of return; EVA; economic value added; RAROC; risk adjusted return on capital. (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijfsmg:v:9:y:2018:i:3:p:226-241

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