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Angus Macgyver:

gregoriusss:

Hi Com,

One question regarding evaluation of bank profitability and growth came to my find.
Maybe some FIG people around here could answer that.

1) What measure is more approproate, ROE or ROA? I would say both are fine. Does it make sense to average both to get the "average profitability" that is for interest of both? (ROA+ROE)/2

2) Bank growth is usually measured with asset growth. Could one also argue, that Net Interest Income growth is used as proxy for growth, since Net Interest Income directly results from the asset size?

Thanks a lot in advance,
Gregor

1) ... no. These are both important considerations when trying to value a bank (along with P/E), but you can't really derive any useful information from an average of the two figures.

2) Yes, NII growth can be looked at as a proxy for growth in Total Assets, and could even arguably be considered a better evaluation metric (no point in having a gazillion dollars in assets if you're generating fuck all from the money you have tucked away).

Just to expand on this a little. NIM is probably the best measure of a bank's profitability (in pure terms of interest income). Also, due to most banks turning to other revenue sources (fees, servicing, etc), net revenue growth (nii + non-interest income, pre-provision) is another measure of bank profits.

For banks, also look at P/BV and P/TBV (tangible book value).

And at OP, regarding your last question, I think you're over thinking it a bit but leverage definitely plays a large part in how ROA and ROE are correlated. If you can find the leverage, you could conceivable calculate what ROE is by just using ROA.