Banks on CAMEL
Rating of commercial banks based on the Q4 results for FY 2006-07
The New Business Age has come up with ranking of Nepali commercial banks for second consecutive quarter. The assessment is made by using some parameters set under the famous CAMEL model with minor modifications to suit the information availability. The reason for selecting CAMEL model is its simplicity that makes it easy to compare the wide range of banks in Nepal. CAMEL stands for Capital Adequacy, Asset Quality, Management, Earning Quality and Liquidity. Though it is now-a-days made CAMELS by adding ‘S’ which stands for Sensitivity to market risk, we have not ventured into ‘S’ due to information constraints.
Capital Adequacy:
Capital Adequacy reflects the overall financial condition of the banks and also the ability of the management to meet the need for additional capital. It reflects the leverage the bank has to take the advantage of lucrative investment opportunities that may come up in future as well as to withstand unexpected adversity. We have compared the capital adequacy based on the following two parameters:
Capital Adequacy |
S.N. |
Bank |
CAR in % |
Rank |
D/E Ratio |
Rank |
Group Average |
1 |
NIBL |
12.3 |
9 |
13 |
6 |
7.5 |
2 |
NABIL |
14.6 |
4 |
9 |
2 |
3 |
3 |
SCB |
18.5 |
1 |
11 |
4 |
2.5 |
4 |
Himalayan |
12.9 |
6 |
12 |
5 |
5.5 |
5 |
EBL |
11.4 |
11 |
15 |
7 |
9 |
6 |
BOK |
13.5 |
5 |
12 |
5 |
5 |
7 |
Bangladesh |
-9.8 |
13 |
- |
8 |
10.5 |
8 |
NIC |
12.4 |
8 |
11 |
4 |
6 |
9 |
Lumbini |
-7.2 |
12 |
- |
8 |
10 |
10 |
Laxmi |
12.5 |
7 |
9 |
2 |
4.5 |
11 |
Machha |
12.4 |
8 |
10 |
3 |
5.5 |
12 |
Kumari |
11.4 |
11 |
10 |
3 |
7 |
13 |
Siddhartha |
12.2 |
10 |
9 |
2 |
6 |
14 |
SBI |
14.8 |
3 |
12 |
5 |
4 |
15 |
Global |
16 |
2 |
6 |
1 |
1.5 |
16 |
Nepal Bank |
-38.9 |
14 |
- |
8 |
11 |
|
According to Nepal Rastra Bank’s guidelines, banks in Nepal should have a CAR of 11 %. It is arrived by divining Tier I and Tier II capital by risk weighted assets. The higher the CAR, the stronger the bank. However, a high capital adequacy, in excess to statutory requirement, also means its inability to invest its resources, possibly limiting its future earnings.
Debt-Equity (D/E) Ratio:
It is arrived by dividing the total borrowing and deposits by the net-worth, which includes equity capital, reserves and surplus. It shows leverage of the bank. Lesser the debt-equity ratio, stronger the bank. Banks with negative net worth have been assigned zero score.
Asset Quality:
The prime reason behind measuring the asset quality is to ascertain the component of non-performing assets as a percentage of total asset/ loan and advances. In addition, we have analyzed the ratio of loan loss provision to non performing loan. It reflects the safety margin for the bank against NPL. Higher the ratio, better for the bank. Naturally, a new bank (Global) has come up on the top rank on this criteria as its loans have not matured enough to be categorised bad or good
Asset Quality |
S.N. |
Bank |
NPL/Total Loan |
Rank |
LLP/NPL |
Rank |
Group Average |
1 |
NIBL |
1.8% |
8 |
138.2% |
8 |
8 |
2 |
NABIL |
1.1% |
6 |
199.8% |
5 |
5.5 |
3 |
SCB |
1.8% |
8 |
145.9% |
7 |
7.5 |
4 |
Himalayan |
3.5% |
10 |
120.7% |
11 |
10.5 |
5 |
EBL |
0.8% |
5 |
100.0% |
15 |
10 |
6 |
BOK |
2.2% |
9 |
133.0% |
9 |
9 |
7 |
Bangladesh |
38.2% |
14 |
94.5% |
16 |
15 |
8 |
NIC |
1.1% |
6 |
185.1% |
6 |
6 |
9 |
Lumbini |
19.9% |
13 |
108.3% |
14 |
13.5 |
10 |
Laxmi |
0.4% |
3 |
399.0% |
3 |
3 |
11 |
Machha |
1.4% |
7 |
115.0% |
12 |
9.5 |
12 |
Kumari |
0.7% |
4 |
201.3% |
4 |
4 |
13 |
Siddhartha |
0.3% |
2 |
461.0% |
2 |
2 |
14 |
SBI |
4.6% |
11 |
128.4% |
10 |
10.5 |
15 |
Global |
0.0% |
1 |
0.0% |
1 |
1 |
16 |
Nepal Bank |
15.2% |
12 |
114.0% |
13 |
12.5 |
|
TI= Total Investment LLP= Loan Loss Provision TA= Total Asset
Management:
It involves a subjective analysis for measuring the efficiency of the management. To measure the efficiency of the management in an objective way, we have used only two parameters: return on net worth (RONW) and profit per employee of the bank. Other parameters are not used due to information constraint.
Management |
S.N. |
Bank |
RONW |
Rank |
Profit/ Employee |
Rank |
Group Average |
1 |
NIBL |
26.69% |
3 |
996,139 |
6 |
4.5 |
2 |
NABIL |
26.78% |
2 |
1,606,557 |
3 |
2.5 |
3 |
SCB |
28.28% |
1 |
1,971,510 |
1 |
1 |
4 |
Himalayan |
19.88% |
7 |
889,655 |
8 |
7.5 |
5 |
EBL |
24.04% |
6 |
763,959 |
12 |
9 |
6 |
BOK |
24.66% |
5 |
818,452 |
9 |
7 |
7 |
Bangladesh |
- |
13 |
1,002,551 |
5 |
9 |
8 |
NIC |
17.94% |
8 |
923,077 |
7 |
7.5 |
9 |
Lumbini |
- |
13 |
1,649,635 |
2 |
7.5 |
10 |
Laxmi |
7.58% |
11 |
352,941 |
13 |
12 |
11 |
Machha |
5.86% |
12 |
247,863 |
14 |
13 |
12 |
Kumari |
16.88% |
9 |
813,953 |
11 |
10 |
13 |
Siddhartha |
12.24% |
10 |
816,667 |
10 |
10 |
14 |
SBI |
24.81% |
4 |
1,351,648 |
4 |
4 |
15 |
Global |
- |
13 |
- |
16 |
14.5 |
16 |
Nepal Bank |
- |
13 |
142,857 |
15 |
14 |
|
RONW:
It is the measure of the profitability of the bank. Higher the RONW better the performance of the bank. Newest bank and banks with negative net worth are assigned no score, hence they are ranked the lowest (13) on this parameter. As the banks increase their paid up capital as required by the central bank, their RONW is likely to deteriorate if they fail to utilise all of the increased capital to earn more income.
Profit per Employee:
This measures the overall efficiency of the bank’s staff. Higher the ratio, higher the efficiency of the staff or, for that matter, of the management.
The information about number of employees was collected over the telephone.
Earning Quality:
In this section, we try to assess the quality of income in terms of income generated by core banking activity. Therefore, we have compared the ratio of interest income to the total income. Due to this reason, banks (such as Standard Chartered Nepal and Nabil) have been ranked lower due to their high ratio of non-interest income, such as from fees, though it is not a bad signal in itself. In addition, we have also compared the percentage change in net profit to rank the bank. This again has gone against the old banks that already had a very high base of profits previous year.
Earning |
S.N. |
Bank |
% change in Net Profit |
Rank |
II/TI |
Rank |
Group Average |
1 |
NIBL |
47.13% |
8 |
0.816 |
12 |
10 |
2 |
NABIL |
7.93% |
12 |
0.780 |
15 |
13.5 |
3 |
SCB |
5.06% |
13 |
0.717 |
16 |
14.5 |
4 |
Himalayan |
12.78% |
11 |
0.824 |
10 |
10.5 |
5 |
EBL |
29.07% |
10 |
0.841 |
8 |
9 |
6 |
BOK |
35.82% |
9 |
0.807 |
13 |
11 |
7 |
Bangladesh |
121.85% |
2 |
0.802 |
14 |
8 |
8 |
NIC |
73.44% |
4 |
0.874 |
6 |
5 |
9 |
Lumbini |
128.02% |
1 |
0.840 |
9 |
5 |
10 |
Laxmi |
70.44% |
5 |
0.895 |
3 |
4 |
11 |
Machha |
-56.77% |
15 |
0.863 |
7 |
11 |
12 |
Kumari |
69.15% |
6 |
0.912 |
1 |
3.5 |
13 |
Siddhartha |
50.31% |
7 |
0.901 |
2 |
4.5 |
14 |
SBI |
109.96% |
3 |
0.882 |
5 |
4 |
15 |
Global |
0.00% |
16 |
0.817 |
11 |
13.5 |
16 |
Nepal Bank |
-42.62% |
14 |
0.886 |
4 |
9 |
|
II = interest income TI= Total Income
Liquidity:
The main objective behind this parameter is to assess the ability of a bank to meet the demand from the deposit holders in a particular time. We have assigned the higher rank for the banks with higher liquidity ratio.
Liquidity has been compared based on the two parameters namely:Liquid Asset/ Total Deposit and Liquid Asset/Total Asset.
Liquidity |
Sr.No. |
Bank |
LA/ TD |
Rank |
LA/TA |
Rank |
Group Avarege |
1 |
NIBL |
0.114 |
11 |
0.099 |
10 |
10.5 |
2 |
NABIL |
0.084 |
15 |
0.071 |
15 |
15 |
3 |
SCB |
0.162 |
3 |
0.137 |
3 |
3 |
4 |
Himalayan |
0.109 |
12 |
0.093 |
12 |
12 |
5 |
EBL |
0.139 |
6 |
0.120 |
5 |
5.5 |
6 |
BOK |
0.127 |
8 |
0.104 |
9 |
8.5 |
7 |
Bangladesh |
0.126 |
9 |
0.118 |
6 |
7.5 |
8 |
NIC |
0.086 |
14 |
0.074 |
14 |
14 |
9 |
Lumbini |
0.138 |
7 |
0.115 |
8 |
7.5 |
10 |
Laxmi |
0.063 |
16 |
0.055 |
16 |
16 |
11 |
Machha |
0.209 |
1 |
0.182 |
1 |
1 |
12 |
Kumari |
0.099 |
13 |
0.087 |
13 |
13 |
13 |
Siddhartha |
0.119 |
10 |
0.097 |
11 |
10.5 |
14 |
SBI |
0.153 |
5 |
0.116 |
7 |
6 |
15 |
Global |
0.156 |
4 |
0.132 |
4 |
4 |
16 |
Nepal Bank |
0.185 |
2 |
0.169 |
2 |
2 |
|
Ranking Based on Composite Average |
S.N. |
Bank |
Capital Adequacy |
Asset Quality |
Management |
Earning |
Liquidity |
Composite |
Rank Average |
1 |
NIBL |
7.5 |
8 |
4.5 |
10 |
10.5 |
8.1 |
8 |
2 |
NABIL |
3 |
5.5 |
2.5 |
13.5 |
15 |
7.9 |
6 |
3 |
SCB |
2.5 |
7.5 |
1 |
14.5 |
3 |
5.7 |
1 |
4 |
Himalayan |
5.5 |
10.5 |
7.5 |
10.5 |
12 |
9.2 |
11 |
5 |
EBL |
9 |
10 |
9 |
9 |
5.5 |
8.5 |
9 |
6 |
BOK |
5 |
9 |
7 |
11 |
8.5 |
8.1 |
8 |
7 |
Bangladesh |
10.5 |
15 |
9 |
8 |
7.5 |
10 |
13 |
8 |
NIC |
6 |
6 |
7.5 |
5 |
14 |
7.7 |
5 |
9 |
Lumbini |
10 |
13.5 |
7.5 |
5 |
7.5 |
8.7 |
10 |
10 |
Laxmi |
4.5 |
3 |
12 |
4 |
16 |
7.9 |
6 |
11 |
Machha |
5.5 |
9.5 |
13 |
11 |
1 |
8 |
7 |
12 |
Kumari |
7 |
4 |
10 |
3.5 |
13 |
7.5 |
4 |
13 |
Siddhartha |
6 |
2 |
10 |
4.5 |
10.5 |
6.6 |
2 |
14 |
SBI |
4 |
10.5 |
4 |
4 |
6 |
5.7 |
1 |
15 |
Global |
1.5 |
1 |
14.5 |
13.5 |
4 |
6.9 |
3 |
16 |
Nepal Bank |
11 |
12.5 |
14 |
9 |
2 |
9.7 |
12 |
|
Data Source: Company reports published in newspapers
Assumptions:
* Two parameters from each category are considered.
**Group Average Rank has been derived by taking the average of each parameters.
*** Composite Average has been derived by taking the average of each group.
**** Overall ranking has been assigned based on the Composite Average.
***** In each parameters least rank has been assigned to the banks having no figure or non-comparable figures.
CAMEL & Central Bank
CAMEL model is used also by the central banks across countries to monitor the banks. And same is the practice followed by Nepal Rastra Bank. The central bank assigns a score of between 1 and 5 to the banks. A bank with a score of 1 or 2 is considered to present few, if any, supervisory concerns, while banks with ratings of 3,4 or 5 present moderate to extreme degree of supervisory concerns. But our ranking here is not based on such score but on the comparative standing on each parameter between the different banks.
However, the details of the central bank’s evaluation are seldom made public as is the practice also in other countries. Therefore, CAMEL rating of banks by central bank are known only to the top officials of bank while this insider information has all the risks of being used for trading on the stock of the bank. Therefore, our effort is to estimate this insider information and make it public. The rush to bring it out by New Business Age despite the limitations of the methodology used is because research findings (e.g. O.J. Hirtle and J.A. Lopez, 1993) have indicated that current CAMEL rating based on past information remain useful only for coming few quarters, i.e. their usefulness dissipates as the time passes by.
However, as we lack access to a number of information that the central bank has, the rating made by us may be different from what the central bank has made.
All the figures are based on the financial results for the fourth quarter of the fiscal year 2006-07 published by respective banks in the newspapers. Therefore, the banks that have not published the results (or we could not find them) are excluded from the ranking.
