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CAMELS Rating System inBangladesh: An OverviewDuring an on-site bank exam, supervisors gather private information, such as...
∗ Capital Adequacy Ratio (CAR)                             Capital     •   Formula: CAR =              .                  ...
• Formula: Loan loss provision/average performing assets     • Purpose: Indicates provisioning requirements on loan portfo...
b)          DuPont           Formula:                     NetIncome     Sales           TotalAsset               ROE =    ...
• Purpose: Can be mitigated only by being hedged.     • Definition: The risk inherent to the entire market or entire marke...
In 1979, the bank regulatory agencies created the Uniform Financial Institutions Rating System(UFIRS). Under the original ...
CAMEL Rating of National Bank Ltd.1. Capital Adequacy: A measure of a Bank’s capital. It is expressed as a percentage of a...
EarningsPerShare( EPS )                  No.OfEmployees   That indicates that management performs efficiently than the pre...
Comparing the result, we can say that NBL maintain a good cash reserve and statutory reserve.The academic literature effec...
14. www.accountingformanagement.com15. www.valuebasedmanagement.net16. www.usbrn.com17. http://financial-dictionary.com18....
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Camels Rating -about & of National Bank Ltd.


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  1. 1. CAMELS Rating System inBangladesh: An OverviewDuring an on-site bank exam, supervisors gather private information, such as details on problemloans, with which to evaluate a banks financial condition and to monitor its compliance withlaws and regulatory policies. A key product of such an exam is a supervisory rating of the banksoverall condition, commonly referred to as a CAMELS rating.CAMELS Rating System:CAMELS is an international bank-rating system with which bank supervisory authorities rateinstitutions according to six factors. The six areas examined are represented by the acronym"CAMELS."The six factors examined are as follows: C - Capital Adequacy A - Asset Quality M - Management Efficiency E - Earnings Record L - Liquidity Position S - Sensitivity to Market RiskSoundness of a bank measured on a scale of 1 (strongest) to 5 (weakest). Bank examiners(trained and employed by the countrys central bank) award these ratings on the basis of theadequacy and quality of a banks Capital, Assets (loans and investments), Management,Earnings, Liquidity, and Sensitivity (to systemic-risk). Banks with a rating of 1 are consideredmost stable; banks with a rating of 2 or 3 are considered average, and those with rating of 4 or 5are considered below average, and are closely monitored to ensure their viability. These ratingsare disclosed only to the banks management and not to other banks or the general public.CAMELS rating is an advanced version of the older “MACRO rating”.Banking Sector of Bangladesh and CAMELS Rating:A total of 48 scheduled commercial banks including 9 foreign banks have been operatingbusiness in Bangladesh through 6,562 Branches. Out of total business 56.5% handled by privatecommercial banks (PCBs) and rest 43.5% dealt by nationalized commercial banks (NCBs).The total operations of every bank were assessed according to six fixed criteria [As thesensitivity of market risk added in July 01, 2006 in Bangladesh banking sector, there is no data(published) available. Before that time the total operations of every bank were assessedaccording to five fixed criteria – CAMEL].1. Capital Adequacy:Capital adequacy focuses on the total position of bank capital and protects the depositors fromthe potential shocks of losses that a bank might incur. It helps absorbing major financial risks(like credit risk, market risk, foreign exchange risk, interest rate risk and risk involved in off-balance sheet operations). It is measured by following ratios:- 9
  2. 2. ∗ Capital Adequacy Ratio (CAR) Capital • Formula: CAR = . Risk Where risk can either be weighted assets ( ) or the respective national regulators T + T2 minimum total capital requirement. If using risk weighted assets, CAR = 1 . aIt should be 10%, a common requirement for regulators conforming to the Basel Accords. Twotypes of capital are measured: tier one capital (T1 above), which can absorb losses without abank being required to cease trading, and tier two capital (T2 above), which can absorb losses inthe event of a winding-up and so provides a lesser degree of protection to depositors. • Purpose: To determine the capacity of the bank in terms of meeting the time liabilities and other risk such as credit risk, operational risk, etc. • Definition: Also called Capital to Risk (Weighted) Assets Ratio (CRAR) is a ratio of a banks capital to its risk. ∗ Capital to Assets Ratio • Formula: Capital/Total performing assets • Purpose: Shows overall capital sufficiency • Definition: Capital - net worth (Assets-Liabilities). Includes equity or equity equivalent instruments including retained earnings and subordinated debt. Does not include donations and grants ∗ Debt to Asset Ratio • Formula: Total liabilities/Total performing assets • Purpose: Indicates provisioning requirements on loan portfolio for current period. • Definition: Loan loss provision - allocation in current period to the loan loss reserve.Banks in Bangladesh have to maintain a minimum CAR of not less than 9.0 percent of their risk-weighted assets (with at least 4.5 percent in core capital) or Taka 1.0 billion whichever is higher.It is also the coverage of financial debacles like loan loss, share market loss, foreign currencydealing loss, interest rate fluctuation loss and the protection for off balance sheet affairs hit. Atpresent, capital adequacy requirement of the banking sector in Bangladesh is based on Basel-Iaccord. Bangladesh has decided in principle to adopt the new capital adequacy frameworkfinalized by the Basel Committee on Banking Supervision (BCBS) known as Basel-II.2. Asset Quality:A total of 60.7% assets of banking sector were used as loans and advances. The highconcentration of loans and advances indicates vulnerability of assets to credit risk, especiallysince the portion of non-performing assets is significant. A huge infected loan portfolio has beenthe major predicament of banks particularly of the state owned banks. In the total assets theshare of loans and advances is followed by the investment in government bills and bondscovering 11.0 percent. ∗ Loan Loss Provision Ratio 9
  3. 3. • Formula: Loan loss provision/average performing assets • Purpose: Indicates provisioning requirements on loan portfolio for current period • Definition: Loan Loss Provision - Allocation in current period to the loan loss reserve. ∗ Portfolio in Arrears • Formula: Balance of loans in arrears/value of loans outstanding • Purpose: Measures amount of default in portfolio • Definition: Arrears - past due; typically calculated in the basis of the loan advance. ∗ Loan Loss Ratio • Formula: Amount written off/Average loans outstanding • Purpose: Indicates extent of uncollectible loans over the last period. Any loan more than one year past due will be automatically considered uncollectible. • Definition: Amount written off - a loss recognized on a loan in a period. ∗ Reserve Ratio • Formula: Loan loss reserve/Value of loans outstanding • Purpose: Indicates adequacy of reserves in relation to portfolio. • Definition: Loan loss reserve - reserve maintained to cover potential loan losses.3. Management Efficiency:Management efficiency is the most important pre-requisite for the strength and growth of anyfinancial institution. Since indicators of management quality are primarily specific to individualinstitution, these cannot be easily aggregated across the sector. In addition, it is difficult to drawany conclusion regarding management soundness on the basis of monetary indicators, ascharacteristics of a good management are rather qualitative in nature. Management efficiencyjudged on the basis of the ratio of total expenditure to income, operational expenses and totalexpenses, per head employee income & expenditure and interest rate spread.4. Earnings Record:Strong earnings and profitability profile of a bank reflect its ability to support present and futureoperations. More specifically, this determines the capacity to absorb losses by building anadequate capital base, finance its expansion and pay adequate dividends to its shareholders.Although there are various measures of earning and profitability, the best and widely usedindicator is return on assets (ROA), which is supplemented by return on equity (ROE), earningsper share (EPS) and net interest margin (NIM). ∗ Return on Asset (ROA) NetIncome • Formula: ROA = TotalAssets • Purpose: Gives an idea about how efficient management is at using its assets to generate earnings. • Definition: Also referred to as “Return on Investment” is an indicator of how profitable a company is relative to its total assets. ∗ Return on Equity (ROE) • Formula: a) Traditional: ROE = Net Profit After Taxes ÷ Stockholders Equity 9
  4. 4. b) DuPont Formula: NetIncome Sales TotalAsset ROE = × × Sales TotalAsset AverageStockholderEquity • Purpose: Measures a corporations profitability by revealing how much profit a company generates with the money shareholders has invested. • Definition: Also called “Return on Net worth”( RONW) , the amount of net income returned as a percentage of shareholders equity. ∗ Earnings Per Share (EPS) • Formula: EPS=Net Earnings/ Number of Outstanding Shares. • Purpose: When compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. • Definition: Are the earnings returned on the initial investment amout. ∗ Net Interest Margin (NIM) • Formula: Net Interest Margin = Net Interest income/ Earning Assets. • Purpose: Helps a company determine whether or not it has made wise investment decisions. • Definition: A measure of the difference between interest income generated by banks or other financial institutions by their lending and interest paid on borrowings and is similar to net interest spread.5. Liquidity Position:Commercial banks deposits are at present subject to a statutory liquidity ratio (SLR) of 18percent inclusive of average 5 percent (at least 4 percent) cash reserve requirement (CRR) on bi-weekly basis. The CRR is to be kept with the Bangladesh Bank and the remainder as qualifyingsecure assets under the SLR, either in cash or in government securities. SLR for the banksoperating under the Islamic Shariah is 10 percent and the specialized banks are exempt frommaintaining the SLR. Liquidity indicators measured as percentage of demand and time liabilities(excluding inter-bank items) of the banks indicate that all the banks had excess liquidity. ∗ Statutory Liquidity Ratio (SLR) • Formula: SLR Rate = Total Demand/Time Liabilities × 100%. • Purpose: Restricts the bank’s leverage in pumping more money into the economy. • Definition: The amount which a bank has to maintain in the form of cash, gold or unencumbered approved securities.6. Sensitivity to Market Risk:It reflects the degree to which changes in interest rates, foreign exchange rates, commodityprices, or equity prices can adversely affect a financial institution’s earnings or economic capitaland is measured by systematic/ portfolio/ market risk. ∗ Systematic Risk(beta) Cov( Ri , Rm ) • Formula: β i = Var ( Rm ) 9
  5. 5. • Purpose: Can be mitigated only by being hedged. • Definition: The risk inherent to the entire market or entire market segmentAn Overview of Bangladesh PerspectivePresently Bangladesh Bank is employing Early Warning System (EWS) of supervision toaddress the difficulties faced by the banks in any of the areas of CAMELS. Any bank found tohave faced difficulty in any areas of operation, is brought under Early Warning category andmonitored very closely to help improve its performance.Last CAMELS rating of different commercial banks in Bangladesh was done in 2008 based onthe performance of 2007 and local banks first, then foreign banks, which is shown as followsthough of a table:- CAMELS Rating of Banks in Bangladesh Strong or A- Satisfactory or Fair or C- Marginal or Unsatisfacto Class Banks B-Class Banks Class Banks D-Class Banks ry or E- Class Banks Prime Bank Ltd. Standard Bank First Security Sonali Bank Ltd. Bangladesh Shahajalal Limited. Bank Janata Bank Commerce Bank Islami Bank Exim Bank Ltd. IFIC Bank Ltd. Oriental Bank Limited Mercantile Bank AB Bank Bangladesh Shilpa Ltd. Commercial NCC Bank United Bank Bank of Ceylon BASIC Bank Commercial Bank Bangladesh Krishi State Bank of Pubali Bank Al-Arafah Islami Bank India Southeast Bank Bank Rajshahi Krishi Standard Mutual Trust Bank Bangladesh Shilpa Unnyan Bank Chartered Bank Limited Rin Sangstha Citi NA Dutch-Bangla Agrani Bank Bank Ltd. Premier Bank Rupali Bank The Trust Bank Ltd. Bank Asia Jamuna Bank BRAC Bank One Bank Dhaka Bank Eastern Bank Islamic Bank Bangladesh Ltd. Uttara Bank National Bank The City Bank Social Investment Bank Habib Bank National Bank of Pakistan Bank Alfalah Woori Bank HSBC Table 1: CAMELS Rating of Commercial Banks of Bangladesh in 2008.History: 9
  6. 6. In 1979, the bank regulatory agencies created the Uniform Financial Institutions Rating System(UFIRS). Under the original UFIRS a bank was assigned ratings based on performance in fiveareas: the adequacy of Capital, the quality of Assets, the capability of Management, the qualityand level of Earnings and the adequacy of Liquidity.The UFIRS was revised at year-end 1996 and CAMEL became CAMELS with the addition of acomponent grade for the Sensitivity of the bank to market risk (that is, the degree to whichchanges in market prices such as interest rates adversely affect a financial institution).Significance of CAMELS Rating: CAMELS Ratings in the Supervisory Monitoring of Banks:Several academic studies have examined whether and to what extent private supervisoryinformation is useful in the supervisory monitoring of banks. With respect to predicting bankfailure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even aftercontrolling for a wide range of publicly available information about the condition andperformance of banks. Cole and Gunther (1998) examine a similar question and find thatalthough CAMEL ratings contain useful information, it decays quickly. For the period between1988 and 1992, they find that a statistical model using publicly available financial data is abetter indicator of bank failure than CAMEL ratings that are more than two quarters old. Hirtleand Lopez (1999) find that, conditional on current public information, the private supervisoryinformation contained in past CAMEL ratings provides further insight into bank currentconditions, as summarized by current CAMEL ratings. The overall conclusion drawn fromacademic studies is that private supervisory information, as summarized by CAMELS ratings, isclearly useful in the supervisory monitoring of bank conditions. CAMELS Ratings in the Public Monitoring of Banks:The direct public beneficiaries of private supervisory information, such as that contained inCAMELS ratings, would be depositors and holders of banks securities. Small depositors areprotected from possible bank default by FDIC insurance, which probably explains the finding byGilbert and Vaughn (1998) that the public announcement of supervisory enforcement actions,such as prohibitions on paying dividends, did not cause deposit runoffs or dramatic increases inthe rates paid on deposits at the affected banks. Jordan, et al., (1999) find that uninsured depositsat banks that are subjects of publicly announced enforcement actions, such as cease-and-desistorders, decline during the quarter after the announcement.Limitations of CAMELS Rating:Analysts have raised a number of questions about bank ratings. Federal Reserve economistsfound that CAMELS ratings were better able to forecast bank distress than statistical monitoringregimes, but only when the CAMELS rating was "fresh" (assigned within the last six months).However, the release of the CAMELS rating is controversial because of its potential costs. Forexample, public release could alter the dynamics under which supervisors produce the ratings. Inparticular, release could make bankers more sensitive to their ratings and thus make theexamination process more contentious and less open to forthright sharing of information.The potential response to public release from depositors and bankers could also lead to a changein the behavior in the examiners who assign the ratings. As such, the release of the rating couldhave the perverse effect of reducing the new information they contain. The existing difficulty inweighting the often intangible cost and benefit of public release suggests that any policy changewould involve contentious debate and require additional research. 9
  7. 7. CAMEL Rating of National Bank Ltd.1. Capital Adequacy: A measure of a Bank’s capital. It is expressed as a percentage of a bank’s risk exposures. This ratio is used to protect depositors and promote the stability and efficiency. Year 2007 2008 Required 10% 10% Actual 13.11% 13.24%2. Asset Quality: Asset management is related to the left hand side of the bank balance sheet. We can measure the asset quality by classifying different types of loans and advances. We can divide it the following two ways: A. Unclassified B. Classified Percentage of Unclassified & classified are shown in the following table: Year 2007 2008 Unclassified 95.47% 94.50% Classified 4.53% 5.50% From the above table we can see that unclassified portion of total loan & advances is much higher than the classified portion, which indicate that NBL in a good position to recover its loans & advances in2008.3. Management Quality: Management quality is a qualitative measure but we can also measure it by using some quantitative measure. That are: Re turnOnEquity ( ROE ) Year 2007 Year 2008 No.OfEmployees 8.46 1.0368 Management performs poorly compare to 2007. Year 2007 Year 2008 .0242 .0296 9
  8. 8. EarningsPerShare( EPS ) No.OfEmployees That indicates that management performs efficiently than the previous year. NetIncome No.OfEmployees Year 2007 Year 2008 452360.39 554415.23 Management performs efficiently than previous year.4. Earning Capacity: Earnings and high profitability is the good sign of a bank’s present and future strength. Earnings calculated on the basis of return of asset (ROA), return of equity (ROE) and earnings per share (EPS). Year 2007 2008 ROA .23154 .28337 ROE 2.40% 2.36% EPS 66.11 81.03 NetIncome ROA = TotalAssets NetIncome ROE = CommonEquity Re tainedEarnings EPS = CommonStockOutstanding The return on equity is increasing compare to 2007. Return on assets is decreasing than the previous year and earnings per share is increasing position also.5. Liquidity: Liquidity can be measured through: A. Cash Reserve Requirement (CRR) B. Statutory Liquidity Ratio (SLR) Year 2007 2008 CRR 5.12% 5.03% SLR 20.40% 20.34% 9
  9. 9. Comparing the result, we can say that NBL maintain a good cash reserve and statutory reserve.The academic literature effectively shows that CAMELS ratings, as summary measures of theprivate supervisory information gathered during on-site bank exams, do contain informationuseful to both the supervisory and public monitoring of commercial banks. Such disclosurecould benefit supervisors by improving the pricing of bank securities and increasing theefficiency of the market discipline brought to bear on banks. As argued by Flannery (1998),market assessments of bank conditions compare favorably with supervisory assessments andcould improve with access to supervisory information. However, although supervisors couldbenefit from such improved public monitoring of banks, the costs to the current form ofsupervisory monitoring must also be considered. For example, if CAMELS ratings were madepublic, the current information-sharing relationship between examiners and bankers couldchange in a way that adversely affects supervisory monitoring. Further research and debate onthis question is currently needed. ------------------------Bibliography : 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 9
  10. 10. 14. www.accountingformanagement.com15. www.valuebasedmanagement.net16. www.usbrn.com17. http://financial-dictionary.com18. http://ecyclopedia.thefreedictionary.com19. www.gdrc.org21. www.highbeam.com22. www.reportbd.com23. Eugene F. Bringham and Louis C. Gapenski, Intermediate Financial Management, 5 th Edition.24. Peter S. Rose, Commercial Bank Management, McGraw Hill. 9