Return on equity is important for shareholders
Return on equity, or ROE, is the percentage of return that a shareholder gets. All else remaining constant, a bank with a high ROE is better. However, you should consider that a bank may also increase its ROE by taking higher risks—like disbursing high-risk loans.
As a result, you should be careful when you look at ROE. Banks with a combination high ROE and a low bank efficiency ratio are considered to be the best.
U.S. Bank’s ROE fell in 4Q14
U.S. Bank’s (USB) ROE was 14.4% at the end of 4Q14. This was lower than a ROE of 15.4% at the end of 4Q13. The fall was driven by lower margins on a higher loan base. This was reflected in a decrease in return on assets. Return on assets was 1.50% at the end of 4Q14.
However, this fall wasn’t something unique to U.S. Bank. At the end of 4Q14, the banking sector’s ROE was 8.74%. The sector’s ROE fell throughout 2014. At the end of 4Q13, ROE was 9.78%.
This reflected banks’ lower pricing power. Banks are disbursing newer loans at lower rates. This is because the amount of money in the banking system remains high—after a sustained period of loose monetary policy. U.S. Bank has a combination of a high ROE and a low bank efficiency ratio. It’s considered to be one of the best banks for investors.