Banking
Return on equity (ROE)
Net income as a share of shareholders' equity.
Facts checked against sources onWhat does Return on equity (ROE) mean?
Return on equity is net income divided by average shareholders' equity. It shows how much profit the owners earn on the money they have in the business, and it is the headline profit measure for banks and insurers. Example: net income of 12 on equity of 100 is an ROE of 12 percent. Compare it with the cost of equity, the return shareholders expect: an ROE below that means the business is not earning its keep. ROE can be pushed up by adding debt, which also adds risk, so read it next to the capital ratio.
Where does it come up in case interview prep?
- Return on capital against its cost: ROIC and WACC in plain wordsLesson in Reading a business through its numbers: the three statements, cash and value
- Reading a real results release: Inditex, FY2025Lesson in Reading a business through its numbers: the three statements, cash and value
- How a bank works and makes moneyLesson in Retail and commercial banking
- Bank unit economics: is a loan worth making?Lesson in Retail and commercial banking
- Banking: players, trends, regulation, and how to crack the casesLesson in Retail and commercial banking
Related terms
- Return on investment (ROI)The gain from an investment relative to its cost.
- Net incomeProfit after every cost, including interest and tax.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- CET1 capital ratio (and risk-weighted assets)A bank's highest-quality capital as a share of its risk-weighted assets.
- Net interest margin (NIM)What a bank earns on its loans and investments after paying for its funding, as a share of those assets.
- Cost-to-income ratioOperating costs as a share of operating income. Lower means a more efficient bank.
- Cost of riskLoan loss charges as a share of loans, usually quoted in basis points.
- Non-performing loan (NPL) ratioThe share of a bank's loans that borrowers have stopped paying.
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