Semester 1 2019 CORPFIN 2501: ROE Comparison of Two Banks (2007-2013)

This report analyzes the Return on Equity (ROE) of Bank of America and Royal Bank of Scotland from 2007 to 2013, covering the Global Financial Crisis and the European Sovereign Debt Crisis. The analysis reveals a decreasing ROE for Bank of America from 2007 to 2011, with some improvement in 2012 and 2013, but still below 2007 levels. In contrast, Royal Bank of Scotland exhibited poor financial performance, with negative ROE in most years, except for 2007. The report attributes the changes in ROE to the organizations' profitability, with Bank of America generating decreasing profits and Royal Bank of Scotland failing to generate profits. References include Khadafi, Heikal, and Ummah (2014), Hunjra et al. (2014), and Robinson et al. (2015). This assignment was for CORPFIN 2501 Financial Institutions Management II, a small group discovery experience, Semester 1, 2019.

Return on equity can be defined as one of the most important key indicator for a business
organizations profitability in a particular accounting period. Return on equity is the profits
generated by a business organization with the help of comparing the net profit generated by
the organization on total equity at the end of the accounting period (Khadafi, Heikal and
Ummah, 2014). In simple words that can be shared that this ratio helps in identifying profits
attributable to equity shareholders at the end of the accounting period. It is important to that
overall return on equity of an organization is increases over the period of time as it will help
in attracting more investors which is important for long term growth and development.
Change in ROE over the sample period
Bank of America
After conducting an analysis of the past 7 years it can be identified that return on equity of
Bank of America has been decreasing from 2007 to 2011. ROE has improved in the year
2012 and 2013 as compared to previous financial years but still overall return on equity is
lower as compared to the year 2007. ROE in 2007 was 10.0 8% which has decreased to 4.9%
in 2013 (Khadafi, Heikal and Ummah, 2014). It can be said that the overall profitability of
the organization is becoming stable in the last two financial years but still overall
performance has decreased as compared to initial years of operation.
Royal Bank of Scotland
After analysing return on equity of Royal Bank of Scotland, it can be said that the financial
performance of this organization is very poor as compared to Bank of America. Management
of the organization has not been able to generate profit in any of the financial years under
consideration except for the year 2007 where the overall return on equity was 48.3%.
Management has recorded maximum loss in the year 2008 where ROE was 42.9% and in the
following year’s management of the organization continue to encourage losses and generate a
negative return on equity. In the year 2013 total return on equity is -14% which is the poorest
financial performance of the company in the last 5 financial years (Hunjra et. al, 2014).
On an overall analysis, it can be said that financial performance of both the organization has
not been very effective in the period under consideration but it can be said that profitability of
Royal Bank of Scotland is much poor as compared to Bank of America.
Reason of change in ROE
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After exam meaning of financial data provided for both of these organizations, it can be said
that the profitability of these organizations is the primary reason that return on equity is
decreasing constantly. In the case of Bank of America, management is able to generate profit
but it is decreasing on a constant basis as compared to total equity. On the other hand
management of Royal Bank of Scotland is not able to generate any profit from operating
business operations which is the reason for a negative return on equity in the last six financial
years (Robinson et.al, 2015).
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References
Khadafi, M., Heikal, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA),
return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current
ratio (CR), against corporate profit growth in automotive in Indonesia Stock
Exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12).
Hunjra, A.I., Ijaz, M., Chani, D., Irfan, M. and Mustafa, U., 2014. Impact of Dividend Policy,
Earning per Share, Return on Equity, Profit after Tax on Stock Prices. Hunjra, AI, Ijaz, M. S,
Chani, MI, Hassan, S. and Mustafa, U.(2014). Impact of Dividend Policy, Earning per Share,
Return on Equity, Profit after Tax on Stock Prices. International Journal of Economics and
Empirical Research, 2(3), pp.109-115.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
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