Profitability
Return on Tangible Common Equity
Also known as ROTCE
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.
How is ROTCE calculated?
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 does ROTCE matter?
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 do you interpret ROTCE?
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.
What is a good ROTCE?
| Range | Label | Interpretation |
|---|---|---|
| ≥ 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
Frequently asked
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
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