The CAMELS rating system is an international bank rating system used by bank supervisory authorities to rate institutions according to six key factors: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Regulators assign ratings of 1 to 5 for each factor and an overall composite rating, with 1-2 considered fundamentally sound, 3 requiring corrective action, and 4-5 considered problems. The ratings are used to evaluate financial health, identify banks needing attention, and classify banks as successful, satisfactory, needing work, or unsatisfactory.
The CAMELS rating system is an international bank rating system used by bank supervisory authorities to rate institutions according to six key factors: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Regulators assign ratings of 1 to 5 for each factor and an overall composite rating, with 1-2 considered fundamentally sound, 3 requiring corrective action, and 4-5 considered problems. The ratings are used to evaluate financial health, identify banks needing attention, and classify banks as successful, satisfactory, needing work, or unsatisfactory.
The CAMELS rating system is an international bank rating system used by bank supervisory authorities to rate institutions according to six key factors: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Regulators assign ratings of 1 to 5 for each factor and an overall composite rating, with 1-2 considered fundamentally sound, 3 requiring corrective action, and 4-5 considered problems. The ratings are used to evaluate financial health, identify banks needing attention, and classify banks as successful, satisfactory, needing work, or unsatisfactory.
The CAMELS rating system is an international bank rating system used by bank supervisory authorities to rate institutions according to six key factors: Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk. Regulators assign ratings of 1 to 5 for each factor and an overall composite rating, with 1-2 considered fundamentally sound, 3 requiring corrective action, and 4-5 considered problems. The ratings are used to evaluate financial health, identify banks needing attention, and classify banks as successful, satisfactory, needing work, or unsatisfactory.
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CAMELS Rating System
It is an international bank-rating system with which bank supervisory authorities rate institutions according to six factors. It helps the supervisory authority to identify banks which are in need of attention. i. Capital Adequacy: It focuses on the total position of bank capital and protects the depositors from the potential shocks of losses that a bank might incur. It helps to absorb major financial risks (like credit risk, market risk, foreign exchange risk, interest rate risk and risk involved in off-balance sheet operations etc.).
ii. Assets Quality: Many factors are considered when rating asset quality e.g. consideration must be put into whether or not a portfolio is appropriately diversified, what regulations or rules have been put into place to limit credit risks and how efficiently operations are being performed.
iii. Management Efficiency : It is judged on the basis of the ratio of total expenditure to income, operational expenses and total expenses, per head employee income & expenditure and interest rate spread.
iv. Earnings: Strong earnings and profitability profile of a bank reflect its ability to support present and future operations. More specifically, this determines the capacity to absorb losses by building an adequate capital base, finance its expansion and pay adequate dividends to its shareholders.
v. Liquidity: Commercial banks deposits are at present subject to a statutory liquidity ratio (SLR) of 18 percent 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 qualifying secure assets under the SLR, either in cash or in government securities. SLR for the banks operating under the Islamic Shariah is 10 percent and the specialized banks are exempt from maintaining the SLR.
vi. Sensitivity to Market Risk :
It reflects the response of the Banks earnings or economic capital to the changes in interest rates, foreign exchange rates, commodity prices, or equity prices. CAMELS Ratings
• Regulators assign a rating of 1 (best) to 5 (worst) in each of the six
categories and an overall composite rating • 1 or 2 indicates a fundamentally sound bank • 3 indicates that a bank shows some underlying weakness that should be corrected • 4 or 5 indicates a problem bank CAMELS • Capital Adequacy • Measures bank’s ability to maintain capital commensurate with the bank’s risk • Asset Quality • Reflects the amount of credit risk with the loan and investment portfolios • Management Quality • Reflects management’s ability to identify, measure, monitor, and control risks • Earnings • Reflects the quantity, trend, and quality of earnings • Liquidity • Reflects the sources of liquidity and funds management practices • Sensitivity to market risk • Reflects the degree to which changes in market prices and rates adversely affect earnings and capital Composite CAMEL rating
• An overall composite CAMEL rating, also ranging from one(1) to
five(5), is then developed from this evaluation. As a whole, the CAMEL rating, which is determined after an on-site examination, provides a means to categorize banks based on their overall health, financial status, and management. CAMEL = 1 an institution that is basically sound in every respect. 4
CAMEL = 2 an institution that is fundamentally sound but has
modest weaknesses.
CAMEL = 3 an institution with financial, operational, or compliance
weaknesses that give cause for supervisory concern.
CAMEL = 4 an institution with serious financial weaknesses that
could impair future viability.
CAMEL = 5 an institution with critical financial weaknesses that
render the probability of failure extremely high in the near term. Bank classification (CAMELS criteria)
a)Successful work; b)Satisfactory work; c)Good work; d)Work on the edge; e)Unsatisfactory work. Objective of the Study
► To understand the financial performance of the sample banks.
► To describe the CAMELS model of ranking, banking institutions, so as to analyze the
comparative of various banks.
► To analyze the banks performance through CAMEL model.
► Give suggestion to improvement financial problem of the selected bank.
CAMELS Frameworks 1. Capital Adequacies Leverage: This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. The following ratios measure capital adequacy: • Capital Risk Adequacy Ratio ► CRAR = (Capital) / (Total Risk Weighted Credit Exposure) •Debt Equity Ratio: ►Esteemed DER = (Borrowings) / (Share Capital + reserves)
• Total Advance to Total Asset Ratio
► Esteemed TAR = (Total Advances) / (Total Asset) • Government Securities to Total Investments ► Esteemed GSTI = (Government Securities) / (Total Investment) 2. Asset Quality • Non-Performing Assets (NPA) Net NPA ratio: ► Net NPA/ Total Loan Gross NPA ratio: ► Gross NPA/ Total Loan 3. Management Quality ► Governance ► Human Resources ► Information Technology System, and ► Strategic planning and budgeting Total Advance to Total Deposit Ratio: ► Total Advance/ Total Deposit Business per Employee: ► Total Income / No. of Employees Profit per Employee: ► Profit after Tax / No. of Employees
4. Earning & Profitability
► Adjusted return on equity ► Operational Efficiency ► Adjusted Return on Assets ► Interest rate policy Dividend Payout Ratio: ► Dividend / Net profit Return on Asset (ROA): ► Net Profit / Total Asset Operating Profit by Average Working Fund: ►Operating Profit / Average Working Fund Net Profit to Average Asset: ► Net Profit / Average Assets Interest Income to Total Income: ► Interest Income / Total Income Other Income to Total Income: ► Other Income / Total Income 5. Liquidity ►Liability structure ►Availability of funds to meet credit demand ►Cash flow projections ►Productivity of other current assets Liquidity Asset to Total Asset: ► Liquidity Asset / Total Asset
Government Securities to Total Asset: ► Government Securities / Total Asset
Approved Securities to Total Asset: ► Approved Securities/ Total Asset Liquidity Asset to Demand Deposit: ► Liquidity Asset / demand Deposit
6. Sensitivity to Market Risk
It refers to the risk that changes in market conditions could adversely impact earnings and/or capital. Market Risk encompasses exposures associated with changes in interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this module. The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Sensitivity analysis reflects institution’s exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk).
