ROE of the banking industry in the EU Q1 2024, by country
In the first quarter of 2024, Cyprus and Romania's banking sectors led Europe in return on equity (ROE), both achieving 22.2 percent. Lithuania, Latvia, and Hungary followed closely, with ROEs exceeding 20 percent. Conversely, France and Liechtenstein recorded the lowest ROEs, at 6.3 and 5.8 percent, respectively. While ROE is a key measure of banking sector efficiency, reflecting how effectively a bank uses shareholders' equity to generate profits, other equally important indicators must also be considered to gain a comprehensive view of a bank's performance.
Return on assets
Return on assets (ROA) evaluates how efficiently a company's management generates earnings from its assets and serves as a vital indicator of a bank's profitability. The European Central Bank (ECB) has repeatedly flagged low profitability as a significant risk to the financial stability of the Euro area, warning that prolonged periods of underperformance can hinder economic growth. Conversely, sustained periods of higher-than-average profitability can signal potential trouble, as demonstrated during the run-up to the financial crisis. To mitigate such risks, the European Banking Authority (EBA) requires banks to report on key metrics, ensuring transparency and early detection of potential vulnerabilities.
Cost-to-income ratio
The cost-to-income ratio is a crucial financial metric for assessing a bank's profitability. It compares the cost of running operations to a bank's operating income, providing insight into how efficiently a bank is managing its resources. A lower cost-to-income ratio indicates greater profitability and operational efficiency, while a higher ratio suggests that the bank's operating expenses are excessively high relative to its income.