FIG (Banks & Insurance)
A bank earns a 1.0% return on assets and runs assets at 10x equity. What is its ROE, and why do bank analysts think in ROA terms at all?
Model answer
ROE = ROA × (assets/equity) = 1.0% × 10 = 10%. Analysts decompose this way because leverage is regulated and broadly similar across banks, so ROA isolates true operating profitability of the asset…
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