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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Return on equity (ROE)

Let us first introduce the income statement of e-Bank. The income statement of a company shows the change in the wealth of shareholders (the equity) over a specific period of time.

Income statement ($ million), 2006
 Interest income90Interest earned on loans and bonds
Interest expenses–70Interest paid on deposits
 Net interest margin20 
+Non-interest income30Such as commissions from services (for example, credit card fees) or trading revenue
 Gross revenue50 
Provisions for bad debt–10Provisions for losses on loans
Operating expenses–22Non-interest expenses such as wages
 Profit before tax18and computers
Corporate tax (40%)– 7.2 
 Profit after tax10.8 

The balance sheet of e-Bank is similar to the one presented in Stage 1.

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