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If the bank manager finds that the bank’s ROE is too high compared to other banks,...

If the bank manager finds that the bank’s ROE is too high compared to other banks, what does this may point to and what should the manager do to solve the problem(s)?

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Answer #1

ROE = Net Income/Shareholders' Equity

ROE indicates that profitability of a bank. It indicates how much return the bank is able to produce on shareholder's equity. Usually a high ROE implies that a firm/bank is doing well compared to other banks.

However, a high ROE may not always be indicative of good performance by a firm. ROE can be high in the case where the bank has reduced the shareholder's equity while the profit levels may not have even increased!
ROE can also be high even when the firm is under huge debt. That is, it could be earning lots of profit due to projects that could have been financed by debt. The manager must take cognizance of these matters and try to resolve them by either reducing its debt levels.

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