It seems strange that HDFC bank has roe of 18% and ROCE of 95%. Can anyone explain why?
Its due to the leveraged nature of bank operations, coupled with deposits and also because ROE, ROCE are highly misleading / inappropriate for lending institutions. A bank like HDFC has a huge CASA base, coupled with high short term borrowings, and overall leverage of 7X+. Leverage leads to misleading ROE (ROA is preferred) and ROCE is inappropriate to use, since the latter considers EBIT / Capital employed. EBIT is an incorrect metric for banks, and should be replaced by NIM. Also capital employed has little meaning in case of banks, since all cash is fungible. It would be better to understand the bank’s liability risk profile through a metric like ALM mismatch, for example. Hope that helps.
Thanks for the information
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