What it is
Shareholders have put money into the bank: share capital plus the profits they left inside as reserves. Return on equity asks what that money earned this year.
ROE = net profit ÷ equity. If equity is Rs 50 arba and profit Rs 7.5 arba, ROE is 15%.
It is the best single measure of how well a bank uses its owners' money. But a bank can push ROE up by holding less capital, which also makes it riskier. So read ROE together with the capital adequacy ratio.
Book value per share grows at roughly ROE minus the dividend payout, so ROE also tells you how fast the bank is compounding.
How it is calculated
ROE (%) = Net profit (annualised) ÷ Average total equity × 100. Some filers use closing equity.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's return on equity was 11.76% for FY 2082/83: net profit of Rs 790.58 crore on equity of about Rs 7,190.66 crore.
What good looks like
Higher is better, judged against peers and against the bank's own history. An ROE above the deposit rate means shareholders are being paid for their risk. A sharp rise with a falling capital ratio is leverage, not skill.
Watch out
- Quarterly ROE is annualised; Q1 × 4 is a projection.
- A one-off gain inflates ROE for a year.
- After a merger or rights issue, equity jumps and ROE drops mechanically.
- A high ROE with low capital adequacy is a warning, not a virtue.
In Nepal
ROE is reported in NRB's quarterly ratio schedule. Because NRB forces banks to hold large non-distributable reserves (general and regulatory), Nepali bank equity is 'thicker' than the dividend-paying part; ROE on total equity therefore understates the return on freely distributable capital.
Questions
Compare with the sector median and with what a fixed deposit pays. Also check capital adequacy: a very high ROE on thin capital is risky.
More equity in the denominator. The new money takes time to be lent out and earn, so ROE dips first.