What does the "return on equity" (ROE) indicate for a bank?

The "return on equity" (ROE) measures the amount of profit a bank generates with the money that shareholders have invested, reflected as a percentage of shareholders' equity. This metric is crucial for evaluating how effectively management is using equity financing to generate profits. A higher ROE indicates that the bank is more efficient at converting the equity into profits, which is a key indicator for investors assessing the profitability and financial health of the institution.

In this context, ROE focuses specifically on the returns earned on the equity that shareholders hold in the bank, making it an essential tool for both management and investors to understand the direct impact of their investment on overall profitability. Understanding ROE helps stakeholders analyze how well their capital is being utilized compared to other investment opportunities in the market.