Using economic value added in ex-ante profitability calculation of bank´s medium-sized clients

Abstract

This article deals with the calculation of bank´s medium-sized enterprises clients´ ex-ante profitability and the possibility to use Economic Value Added (EVA) tools in such calculation instead of, currently in bank sector, widely used measure of Risk Adjusted Return on Capital (RAROC). Using a sample of medium-sized enterprises clients to whom a credit exposure was approved in one of the banks operating on the bank´s market within a country belonging to the European Union, the expected profitability of these clients was compared by using firstly RAROC and then compared the results to the profitability calculation using EVA tool on the same set of data. Although both measures (RAROC and EVA) are based on the same initial variables, the results of profitability measure show different outcomes in terms of clients´ profitability level and thus their contribution to the total clients´ portfolio profitability. Using EVA tool instead of RAROC measurement thus could help bank´s relationship managers and branch managers focus on those clients creating larger value added than others.