What it is
Equity is the owners' stake. It is total assets minus total liabilities, or share capital plus reserves; both give the same answer.
It is the cushion that absorbs losses before depositors are hurt. The thicker it is relative to risky assets, the safer the bank. That is what capital adequacy measures.
Two everyday ratios use it. Book value per share = equity ÷ shares. Return on equity = net profit ÷ equity.
How it is calculated
Total equity = Share capital + Reserves and surplus = Total assets − Total liabilities.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's total equity was Rs 7,190.66 crore at the end of FY 2082/83 Q4. Over its 27,05,69,970 ordinary shares that is a book value of about Rs 247.28 per share. Net profit of Rs 790.58 crore on that equity is a return on equity of 11.76%.
NABIL's share capital includes Rs 500.00 crore of preference shares, so per-share figures here use its 27,05,69,970 ordinary shares, as the filing does.
What good looks like
Growing steadily through retained profit. Equity to total assets of a few percent is normal for a bank; the regulatory test is capital fund to risk-weighted assets, not this raw ratio.
Watch out
- Equity is book value, not market value. The share price can be far above or below book value per share.
- Equity includes locked reserves; it is not what shareholders could be paid.
- After a merger, equity jumps without any new profit.
In Nepal
NRB's capital adequacy framework starts from equity but adjusts it (deducting goodwill, deferred tax assets and some investments) to arrive at 'capital fund'. So equity on the balance sheet and NRB's capital fund are close but not equal.
Questions
No. Equity is the accounting value. Market value is share price × shares, which depends on what investors expect.
Banks work with depositors' money. A cushion of several percent, measured against risk, is what regulators require.