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

Pieter Klaassen and Idzard van Eeghen
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Pieter Klaassen: UBS
Idzard van Eeghen: Royal Bank of Scotland N.V.

Journal of Financial Perspectives, 2015, vol. 3, issue 2, 103-111

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.

Keywords: Banking; RoE; RAROC; RoA (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofipe:0076

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