Profitability
Return on Average Equity
Also known as ROE / ROAE
Return on Average Equity measures net income against the bank's average shareholders' equity. It is the most-watched profitability metric for equity investors — the rate of return earned on the shareholders' invested capital.
Formula
Average total equity is the average of beginning- and end-of-period shareholders' equity. Some calculations use ROACE (Return on Average Common Equity), which excludes preferred stock from the denominator.
Why it matters
ROE is the bank's compensation to common shareholders. It's directly comparable to other investments — a bank earning 12% ROE returns roughly twice as much per dollar of equity as a bank earning 6% ROE. Combined with the cost of capital, ROE drives whether the bank trades above or below tangible book value.
How to interpret
Most healthy US community banks report ROE between 8% and 15%. Above 15% is excellent. Below 6% means the bank is likely destroying value relative to its cost of equity (typically estimated at 8–10% for community banks).
Thresholds
| Range | Label | Interpretation |
|---|---|---|
| ≥ 13% | Strong | Likely exceeding cost of equity. |
| 9–13% | Normal | Typical for healthy community banks. |
| 5–9% | Watch | Near or below cost of equity. |
| < 5% | Concern | Destroying shareholder value. |
Worked example
Frequently asked
Why is ROE typically ~10× ROA at most banks?
Because banks operate with roughly 10% equity/assets — every $1 of equity supports ~$10 of assets. ROE = ROA / (equity/assets), so 1.1% ROA × 10 = 11% ROE for the typical bank capital structure.
Can ROE be manipulated through buybacks?
Yes — repurchasing shares reduces equity and mechanically increases ROE without changing net income. This is why analysts watch ROE alongside earnings-per-share trends and tangible book value per share growth, not in isolation.
Sources
- FFIEC Call Report Schedule RI
- FFIEC Call Report Schedule RC
See Return on Average Equity across 4,336 US banks
BankRegReports ranks every FDIC-insured institution by return on average equity, refreshed each quarter as new FFIEC filings land.