Return On Equity Case Study
Return on Equity ((ROE)
Return on equity(ROE) refers to he amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. The numbers in ROE reflects the effective employment of the shareholder's fund.
There are different perspectives and concepts that are used to measure the performance of the commercial banks. Some prefer the use of profitability ratios like Net Interest Margin(NIM), …show more content…
It measures the amount of a bank’s capital relative to the amount of its risk weighted credit exposures. Capital adequacy is used to determine whether a bank has enough capital to support the risk on its balance sheet i.e. it is used to mitigate bank solvency problem. A bank with a strong capital adequacy is also able to absorb possible loan losses and thus avoids bank run, insolvency and failure. Higher capital reduces bank risk and creates a buffer against losses, it makes funding with non-insured debt less information sensitive (Admati et al., 2010). Capital level is also used by most regulators to restrict credit …show more content…
Various empirical studies conducted has been able to confirm the positive relationship between CAR and profitability of the bank. Demirguc-Kunt and Huizingz (1999) have showed support for positive relationship between the capital ratio and financial performance. According to the research conducted by Thilo Pausch and Peter Welzel(2002), they found that capital adequacy regulation induces a risk neutral bank to behave as if it were risk averse. Furthermore it was shown that because of this effect of capital adequacy regulation there exists an incentive for banks to engage in active risk
Return on equity(ROE) refers to he amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors. The numbers in ROE reflects the effective employment of the shareholder's fund.
There are different perspectives and concepts that are used to measure the performance of the commercial banks. Some prefer the use of profitability ratios like Net Interest Margin(NIM), …show more content…
It measures the amount of a bank’s capital relative to the amount of its risk weighted credit exposures. Capital adequacy is used to determine whether a bank has enough capital to support the risk on its balance sheet i.e. it is used to mitigate bank solvency problem. A bank with a strong capital adequacy is also able to absorb possible loan losses and thus avoids bank run, insolvency and failure. Higher capital reduces bank risk and creates a buffer against losses, it makes funding with non-insured debt less information sensitive (Admati et al., 2010). Capital level is also used by most regulators to restrict credit …show more content…
Various empirical studies conducted has been able to confirm the positive relationship between CAR and profitability of the bank. Demirguc-Kunt and Huizingz (1999) have showed support for positive relationship between the capital ratio and financial performance. According to the research conducted by Thilo Pausch and Peter Welzel(2002), they found that capital adequacy regulation induces a risk neutral bank to behave as if it were risk averse. Furthermore it was shown that because of this effect of capital adequacy regulation there exists an incentive for banks to engage in active risk