ROAA is determined by operational risk in addition to previously mentioned financial risks.
The last model, ALL, measures how successful a bank is in maintaining its risks at some specific levels in order to maximize all its outputs (NIM, ROAA, and ROAE) simultaneously (see Table 3).
Interestingly, the correlation of operational risk with ROAA (87%, p = 0) and ROAE (96%, p = 0) and correlation of leverage with ROAE (57%, p = 0) are comparatively high, which supports construction of different models.
ROAA is defined as net income (this includes both net interest income and income from noninterest-related activities or net operational income) over average assets.
As is well known, ROAE is a function of ROAA and leverage multiplier.
The profitability indicators like NIM, ROAA, and ROAE may be affected by interest rate and foreign exchange rate fluctuations.
In the ROAA model (Table 7), additionally, operational risk is included as an input, and on the output side, ROAA is used instead of NIM.
The ROAE model shows a similar structure to the ROAA model (Table 8).
The average NIM, ROAA, ROAE, and ALL risk efficiencies, which are 0.52, 0.64, 0.72, and 0.76, respectively, indicate a substantial level of inefficiency.