In today’s competitive banking landscape, return on equity (ROE) is one of the most important metrics of a bank’s success. ROE demonstrates how effectively a bank generates profits from its shareholders’ investments. It signals to investors that the company is distributing capital wisely, operating efficiently and is a disciplined lender and deposit source. It’s calculated by dividing net income by shareholders’ equity.

Achieving a consistent ROE requires clear and repeatable strategies. Following are a few options to consider.

Among our clients, the highest-performing banks are the ones able to make quick decisions—thereby delivering strong speed-to-market—because of highly streamlined processes. Doing so delivers enhanced value to the end client both quickly and at a low cost. Improving efficiencies should contribute to increased revenue and ROE.  

Strategies can include:

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  Investing in technology. Artificial intelligence (AI) can deliver efficiencies in several areas, such as sales call analysis, vendor invoice review and validation, and fraud prevention. It can also help enhance your customer’s digital banking experience. To get started, establish an AI task force to identify which processes can benefit from current AI tools.

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  Forming strategic partnerships with correspondent banks or fintechs. This allows you to expand your reach without the added costs of investing in in-house expertise or maintaining a physical presence in new markets.

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  Converting nonearning assets to earning assets, such as excess vault cash and nonutilized equipment, helps ensure that your assets are being used productively. 
  

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  Exploring expansion into niche markets such as accounts receivable factoring, marine vessel floorplan financing and vendor lease programs. This can differentiate your brand in the market and lead to higher margins.

This strategy goes beyond simply raising prices. It involves reviewing your pricing models and product mix, as well as reducing waste. An effective method is to use analytics to see which products are unprofitable and review the pricing, promotional strategy, customer/sales support, delivery, and sales cycle. From there, you can decide whether to continue to offer the product or to focus your resources elsewhere.

Along with improving product margins, high-return projects—such as new product development, expanding into new markets or making new acquisitions—can boost profitability. The key is to look for opportunities that will generate more than they cost. In addition, communicating your growth strategies to investors strengthens trust which can be just as valuable as the investment itself.

This could include generating fee-based income, such as through treasury management and wealth management solutions. Another option is creating lending or deposit niches in underserved markets that set your institution apart from the competition.

Developing an ROE strategy can seem like a daunting task. That’s why it should start with creating a culture that’s focused on delivering ROE in every process. When senior leadership makes it clear that everyone has a role to play, it creates a culture of accountability in which decisions both large and small are made with ROE mind. The high-performing banks in our portfolio hold regular strategic meetings with senior managers to determine if goals are consistently met and promote accountability. It’s also important to recognize and reward efforts to improve ROE because it helps encourage employees to make changes that improve efficiency and the customer experience.

Regular monitoring—whether semi-annually or annually—is crucial for ensuring that your ROE is meeting your internal target, as well as remaining competitive with your industry peers. Finally, make sure your ROE efforts are also aligned with improving the customer experience. A Net Promoter Score (NPS) survey, for example, will allow you to compare results before and after implementing your ROE strategy, as well as identify areas for improvement.

ROE will always be a critical metric for banks. That’s why it’s important to embed it into the fabric of all your decisions.