CAMELS Approach

1. Camels approach:
The CAMELS approachis a kind of ratio analysis for banks. Anyone with
knowledge of ratio analysis for banks will quickly identify which ratios each of the
elements of CAMELS looks at. CAMELS is an acronym and stands for:
 (C)apital adequacy
 (A)ssets
 (M)anagement Capability
 (E)arnings
 (L)iquidity (also called asset liability management)
 (S)ensitivity (sensitivity to market risk, especially interest rate risk)
Capital adequacy:
 The statutory minimum reserves of capital which a bank or other financial
institution must have available.
 Capital adequacy ratios are a measure of the amount of a bank's capital
expressed as a percentage of its risk weighted credit exposures.
The ratios used to evaluate capital adequacy are represented as:
Capital Adequacy Ratio
Equity to Total Assets
(Equity - Permanent Assets)to Total Assets
Net On Balance Sheet Position to Equity
Net On and Off Balance Sheet Position to Equity
AssetQuality
The quality of assets is an important parameter to examine the degree of financial
strength. The maintenance of asset quality is a fundamental feature of banking.
Some of the important asset quality ratios are adopted for analyzing the data.
Financial Assets (net) / Total Assets
Total Loans and Receivables / Total Assets
Total Loans and Receivables / Total Deposits
Non-performing Loans NPLs (net) / Total Loans and Receivables
Fixed Assets / Total Assets

2. ManagementQuality
Management efficiency is another vital essential of the CAMEL model that
guarantee the survival and growth of a bank. It is the management which sets vision
and goals for the organization and ensures that it achieves them.
The ratios accustomed evaluate management efficiency are represented as:
Profit per Employee
Business per Employee
Personnel Expenses / Other Operating Expenses
Total Assets / Total Deposit
Funds Borrowed / Total Assets
Earning Quality
Earnings quality reflects quality of a bank’s profitability and its ability to earn
consistently. It basically determines the profitability of bank and explains its
sustainability and growth in earnings in future. The following ratios explain the
quality of income generation.
Net Profit (Losses)/ Total Assets
Net Profit (Losses)/ Equity
Earnings (Losses)Before Taxes and Interests / Total Assets
Net Interest Income After Specific Provisions / Total Assets
Non-interest Income (net) / Total Assets
Liquidity Quality
For a bank, liquidity is a crucial aspect which represents its ability to meet its
financial obligations. It is utmost important for a bank to maintain correct level of
liquidity, which will otherwise lead to declined earnings. A high liquidity ratio
indicates that the bank is more affluent.
An adequate liquidity position means a situation, where organization can obtain
sufficient liquid funds, either by increasing liabilities or by converting its assets
quickly into cash.
Liquid Assets / Total Assets
Liquid Assets / Short-term Liabilities
Liquid Assets / Total Deposit
Sensitivity

3. The measurement of this aspect is quite complex and still evolving. Sensitivity to
the market was mainly added to capture the impact of abrupt and unexpected shifts
in interest rates. With time, this has been expanded further. Today, sensitivity to the
market looks at exposure to market-based price changes (e.g. equities, commodities,
FX) as well as credit concentrations in particular types oflending (e.g. energy sector
lending, medical lending, credit card lending,…)
Summary:
It is a very comprehensive method to assess in a risk-based way individual banks.
It is commonly used by banking supervisors as well as rating agencies.