Profitability and Risk Decomposition Analysis of Large International Bank

Abstract

This study investigates the financial performance of JPMorgan Chase & Co. by applying a pyramid-structured Return on Equity (ROE) decomposition framework grounded in the CAMEL model. The methodology combines static deviation and dynamic variance decomposition to assess the contribution of multiple financial indicators to profitability and risk across the 2018–2023 period. Ratios are classified into CAMEL dimensions—capital adequacy, asset quality, management, earnings, and liquidity—to reflect their strategic roles in bank operations. Among the indicators, the ratio of earnings before tax from principal operations to operating income (EBTp/OI) emerges as the most influential driver of both ROE level and volatility. This ratio captures the bank’s core business profitability and reflects its operational efficiency. Dynamic analysis shows that over 85% of ROE variance stems from earnings-related metrics, confirming the central role of operational income in shaping performance risk. Conversely, liquidity and capital adequacy indicators contribute to ROE stability, acting as buffers under financial stress. The combined methodological approach demonstrates the diagnostic strength of ROE decomposition when structured under CAMEL. It offers practical insights for bank managers, regulators, and stakeholders in identifying performance concentration and managing risk exposure.