Which measure indicates how effectively a bank is using shareholders' equity?

Return on equity (ROE) is a key financial metric that measures a bank's profitability in relation to the shareholders' equity. It indicates how effectively a bank is using equity capital to generate profits. ROE is calculated by dividing net income by average shareholders' equity. A higher ROE suggests that the bank is efficient in generating profit from its equity capital, which is crucial for both investors and the bank’s management to assess financial performance and strategic direction.

While other measures such as net interest margin focus on the difference between interest income and interest expenses, and return on assets (ROA) assesses a bank's ability to use its assets to generate earnings, ROE specifically relates to the equity financing of the bank. The capital adequacy ratio measures a bank's capital in relation to its risk-weighted assets, which is important for understanding financial stability but does not directly indicate profitability relative to equity. Therefore, ROE clearly stands out as the appropriate measure that demonstrates how well a bank is utilizing its shareholders’ equity to create value.