When it comes to evaluating the performance of Australian banks and financial institutions, Return on Average Equity (ROAE) is a headline act. As regulatory changes and shifting market conditions reshape the industry in 2025, ROAE stands out as a crucial barometer for both investors and analysts keen to understand how effectively a bank is converting shareholder equity into profits. But what exactly is ROAE, and why has it taken centre stage in the current financial climate?
ROAE measures a company’s profitability relative to the average equity held by its shareholders over a given period, usually a year. Unlike the more commonly cited Return on Equity (ROE), which considers equity at a single point in time, ROAE smooths out fluctuations by using the average equity at the start and end of the period. This is particularly relevant for banks, where capital levels can shift dramatically due to regulatory changes, capital raisings, or dividend payments.
In 2025, with APRA’s updated capital adequacy requirements kicking in, banks are managing their equity bases more actively than ever. This makes ROAE the preferred metric for comparing profitability across periods and between institutions.
With the Reserve Bank of Australia maintaining a cautious interest rate stance amid global uncertainty, banks have been pressed to find new ways to boost profitability without overextending their risk profiles. This has led to a renewed focus on ROAE as a measure of management performance and capital efficiency.
For example, in their 2025 interim results, Commonwealth Bank reported a ROAE of 13.8%, up from 12.5% in 2024. This improvement was attributed to:
Meanwhile, Westpac flagged a dip in ROAE (down to 10.9%) due to increased provisioning for mortgage stress in Victoria and New South Wales, highlighting how macroeconomic factors and regulatory changes can quickly impact this ratio.
ROAE benchmarks have shifted in recent years. Before the COVID-19 pandemic, double-digit ROAE was standard for the big four banks. However, increased regulatory capital requirements and subdued loan growth compressed returns. In 2025, analysts consider a ROAE of 10–13% healthy for major Australian banks, with regional banks typically running slightly lower due to less diversified revenue streams.
Key drivers affecting ROAE this year include:
Investors should compare ROAE across similar institutions and monitor trends over multiple periods, rather than focusing on a single year’s figure. A rising ROAE often signals improving management efficiency, while a sharp decline could point to operational challenges or deteriorating asset quality.
While ROAE is a powerful tool, it shouldn’t be used in isolation. Smart investors pair ROAE with other metrics like Net Interest Margin (NIM), Cost-to-Income Ratio, and Non-Performing Loan Ratio to build a holistic view of a bank’s health. It’s also important to dig into the factors behind a high or low ROAE—sometimes a high ratio is driven by excessive leverage, which can increase risk.
In 2025’s environment, where regulatory scrutiny is high and capital is precious, banks with consistently strong and stable ROAE numbers are likely to remain investor favourites. However, surprises can and do happen. For instance, a sudden spike in loan defaults or a regulatory penalty can erode equity and distort ROAE overnight.