---
title: "Return on Tangible Common Equity: definition, formula, and thresholds"
description: "Return on tangible common equity (ROTCE) is a bank's annual net income available to common shareholders divided by its average tangible common equity. It shows the return on the equity that would remain if goodwill and other intangible assets were written off."
canonical_url: https://www.bankregreports.com/glossary/return-on-tangible-common-equity/
source: BankRegReports
category: "Profitability"
units: "%"
schedule: "Schedules RI and RC"
---

# Return on Tangible Common Equity

> Return on tangible common equity (ROTCE) is a bank's annual net income available to common shareholders divided by its average tangible common equity. It shows the return on the equity that would remain if goodwill and other intangible assets were written off.

## Formula

```
ROTCE = Net Income Available to Common Shareholders / Average Tangible Common Equity
```

Net income available to common shareholders is net income less preferred dividends, annualized when it covers less than a year. Tangible common equity (TCE) is common equity less goodwill and other intangible assets; many analysts add back mortgage servicing rights, so check which definition a bank uses before comparing. Averaging the equity over the period keeps a large buyback or acquisition late in the year from distorting the ratio.

## Why it matters

ROE counts goodwill as equity, so a bank that grew by acquisition can show a low ROE on a large, partly intangible capital base. ROTCE removes that intangible layer and compares earnings with the capital that can absorb losses, which makes acquisitive and organically grown banks comparable. It is the return measure most large bank holding companies report to investors and set targets against.

## How to read it

ROTCE is always at or above ROE for a profitable bank with intangible assets, and the gap widens with the share of goodwill on the balance sheet. A bank with little goodwill shows almost the same figure on both measures. Read ROTCE against the bank's cost of equity: earning below it over several years means the franchise is not covering what shareholders require. The bands below are analyst conventions, not regulatory lines.

## Thresholds

| Range | Reading | What it means |
|---|---|---|
| ≥ 15% | Strong | Comfortably above a typical cost of equity. |
| 10–15% | Adequate | Around a typical cost of equity. |
| 5–10% | Weak | Earning below what shareholders usually require. |
| < 5% | Concern | Little return on the loss-absorbing equity base. |


## Worked example

An illustrative bank earns $24 million of net income available to common shareholders over a year. Its average common equity is $250 million, of which $50 million is goodwill and other intangible assets, so average tangible common equity is $200 million. ROTCE = $24 million / $200 million = 12.0%. The same earnings over the full $250 million of common equity give an ROE of 9.6%, so the intangible assets account for the 2.4 point gap.

## Questions

### What is the difference between ROTCE and ROE?

ROE divides net income by total equity, including goodwill and other intangible assets. ROTCE divides net income available to common shareholders by tangible common equity, which excludes them. For a bank with no intangible assets the two are nearly identical; for a bank built by acquisition ROTCE runs well above ROE.

### Is ROTCE a GAAP measure?

No. ROTCE is a non-GAAP measure assembled from GAAP figures, and banks that report it reconcile it to the nearest GAAP measure in their earnings releases. It is not a line item on the call report and has to be computed.

### Why do banks with large goodwill balances emphasize ROTCE?

Because goodwill from past acquisitions inflates the equity base and depresses ROE. ROTCE shows the return on the capital the bank actually operates with, which is why acquisitive banks lead their investor materials with it.

## Sources

- [FFIEC Call Report Schedule RC (goodwill and other intangible assets) and Schedule RI (net income)](https://www.ffiec.gov/sites/default/files/data/reporting-forms/FFIEC031_FFIEC041_202606_i.pdf) (PDF)

## Related metrics

- [Tangible Common Equity](https://www.bankregreports.com/glossary/tangible-common-equity/): Tangible common equity (TCE) is a bank's total equity minus preferred stock, goodwill and other intangible assets. It is the common shareholders' capital that would remain if the intangible assets were written off, and the measure analysts use to compare banks that grew by acquisition with banks that did not.
- [Return on Equity](https://www.bankregreports.com/glossary/roe/): Return on equity (ROE) is a bank's annualized net income divided by its average shareholders' equity, expressed as a percentage. It is the return the bank earns on the capital its owners have invested.
- [Tangible Common Equity / Tangible Assets](https://www.bankregreports.com/glossary/tce-ta/): TCE/TA measures common shareholders' equity excluding goodwill and intangibles, divided by total assets excluding the same. It is the purest measure of a bank's capital cushion to common shareholders and is not subject to risk-weighting choices.
- [Return on Assets](https://www.bankregreports.com/glossary/roa/): Return on assets (ROA) is a bank's annualized net income divided by its average total assets, expressed as a percentage. It shows how much profit the bank earns on each dollar of its balance sheet, whatever its size or capital structure.
- [Tangible Book Value](https://www.bankregreports.com/glossary/tangible-book-value/): Tangible book value (TBV) is a bank's common shareholders' equity minus goodwill and other intangible assets. It is the book value of the common equity once the assets that cannot be sold separately are taken out. Divided by common shares outstanding, it gives tangible book value per share.

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