Camels Ratings & Key

performance Indicators (KPIs) for

banks

 Regulators, analysts and investors have to

periodically assess the financial condition f each
bank. Banks are rated on various parameters,
based on financial and non-financial performance.
One of the popularly used assessments goes by the
acronym CAMELS, where each letter refers to a
specific category of performance.
C Capital adequacy: this indicates the banks
capacity to maintain capital commensurate with the
nature and extent of all types of risks, as also the
ability of the banks managers to identify, measure,
monitor and control these risks.

 A-Asset quality: this measure reflects the

mangnitude of credit risk prevailing in the
bank due to its composition and quality of
loans, advances, investments and offbalance sheet activities.
M-management quality: signaling the ability
of the board of directors and senior
managers to identify, measure, monitor and
control risks associated with banking, this
qualitative measure uses risk management
policies and processes as indicators of
sound mgt.

 E-Earnings: this indicator shows not only the

amount of and the trend in earnings, but also
analyses the robustness of expected earnings
growth in future.
L-Liquidity: this measure takes into account the
adequacy of the banks current and potential
sources of liquidity, including the strength of its
funds mgt. practices.
S-Sensitivity to Mkt. risk: this is a recent addition
to the ratings parameters, and reflects the degree
to which changes in interest rates, exchange
rates, commodity prices and equity prices can
affect earnings and hence the banks capital

Capital adequacy

Size of the bank

Volume of inferior quality assets
Quality of capital
Retained earnings
Access to capital markets
Non-ledger assets and sound values not
shown on books (real property at nominal
values, charge-offs with firm recovery
values, tax adjustments)

Asset quality
Volume of classifications
Special mention loans-ratios and trends
Level, trend and comparison of nonaccrual and renegotiated loans
Volume of concentrations.
Volume and character of insider
transactions

Management factors/Quality
Technical competence, leadership of middle and senior
management
Compliance with banking laws and regulations
Adequacy and compliance with internal policies
Tendencies towards self-dealing
Ability to plan and respond to changing circumstances
Demonstrated willingness to serve the legitimate credit
needs of the community
Adequacy of directors.
Existence and adequacy of qualified staff and
programmes

Earnings
Return on assets compared to peer grup
averages and banks own trends
Material components, and income and
expenses-compare to peers and banks
own trends
Adequacy of provisions for loan losses
Quality of earnings
Divined payout ratio in relation to the
adequacy of bank capital

Liquidity
Adequacy of liquidity sources compared to present and
future needs
Availability of assets readily convertible to cash without
undue loss
Access to money markets
Level of diversification of funding sources (on and off
balance sheet)
Degree of reliance on short-term volatile sources of
funds
Trend and stability of deposits
Ability to securities and sell certain pools of assets
Mgt. competence to identify, measure, monitor and
control liquidity position

Sensitivity to Market risk

Sensitivity of the financial institutions net earnings or the
economic value of its capital to changes in interest rates
under various scenarios and stress environments
Volume composition an volatility of any foreign exchange
or other trading positions taken by the financial institution
Actual or potential volatility f earnings or capital because
of any changes in market valuation of trading portfolios
or financial instruments.
Ability of management to identify, measure, monitor and
control interest rate risk as well as price and foreign
exchange risk where applicable and material to an
institution.

 Internationally, and in India, these ratings

are used by regulators to determine the
supervision policies for individual banks.
Ratings are assigned for each component
in addition to the overall rating of a banks
financial condition. The ratings are
assigned on a scale from 1 to 5. banks with
ratings of 1 or 2 considered to present few,
if any, supervisory concerns, while banks
with ratings of 3,4 or 5 present moderate to
extreme degree of supervisory concern.

 These are typically used for peer

comparison and benchmarking regulatory
reporting, and shareholder reporting
purposes. Some banks have also linked
these parameters to the individual
performance review process and
compensation of its employees.
Domestic banks are rated on the CAMELS
model while foreign banks are rated on the
CACS model (capital adequacy, assets
quality , compliance and systems).

Some alternative Models for Bank

Financial Statement Analysis
1. Measures based on total operating
revenue:
2. Stock market-based performance
measures
3. Customer-centric performance
measures

 1. Measures Based on TOR:

In using total assets as the denominator for
calculating performance measures, we have
ignored the fact that off-balance sheet itemscontingent liabilities-have the potential of turning
into unsolicited assets for bank. Further, they
have the potential to generate substantial income
for banks. The performance measures may be
calculated using total operating revenue as
denominator rather than total assets. Here, total
operating revenue represents both interest and
non-interest income. However, non-recurring
revenues such as securities gains or losses
are to be excluded in computing total operating
revenue.

 2.Stock Mkt. based Performance measures:

Investors are less concerned about historical ratios such
as ROE or ROA, since these indictors don no convey the
extent of cash flows to investors in the form of dividends
and stock market prices. Thus, over the period in question,
investors cn assess how profitable their investment in the
bank was through this simple ratio.
Market return to stockholders ={[P(t)-P(t-1)]+D}/P(t-1)
Where , P(t) is the stock price at the end of the period
P(t-1), is the stock price at the beginning of the period
D is the cash dividend paid plus reinvestment income
during the period
EPS=Net income after taxes/No of outstanding shares
Price to earnings PE ratio= Stock price/EPS
Price to book value=Stock price/book value per shareMkt.
Value of equity (MVE)=Mkt value of assets Mkt value of
liabilities, or stock price x no. of outstanding share

 Customer centric performance measures:

Looking beyond financial measures, banks use
indicators such as market share, customer
profitability, customer retention, customer
satisfaction, as well as internal productivity
indicators such as business per employee and
employee satisfaction.
Many banks also measure profitability in terms of
business segments (e.g., corporate, retail),
customer segments (SMEs, personal segments,
corporate and institutional borrowers) by types of
depositors, or by delivery system (ATMs, branch,
internet banking).