Question

Bank A and Bank B have the same net income, equity multiplier (EM) and profit margin (PM). However, Bank A has a higher ROA than Bank B. Which of the following statements is most correct?

Group of answer choicesBank A has lower financial risk than Bank B

Both banks have the same asset utilisation, but Bank A has a lower ROE than Bank B.

Bank A has lower leverage than Bank B

Both banks have the same asset utilisation, but Bank A has a higher ROE (return on equity) than Bank B.

Bank A has higher asset utilisation (AU) and ROE (return on equity) than Bank B.

Answer 1

Correct option is

Bank A has higher asset utilisation (AU) and ROE (return on equity) than Bank B.

We analyze the options as follows

1) False since both banks have the same EM implying same financial risk.

2) False since Bank A has higher ROA.

3) False since both banks have the same EM implying same leverage.

4) False since Bank A has higher ROA.

5) TRUE

Bank A has higher ROA implying better asset utilization. ROE= ROA*EM. Since Bank A has higher ROA, ROE will also be higher.