1. CAMELS Rating System in
Bangladesh: An Overview
During an on-site bank exam, supervisors gather private information, such as details on problem
loans, with which to evaluate a bank's financial condition and to monitor its compliance with
laws and regulatory policies. A key product of such an exam is a supervisory rating of the bank's
overall condition, commonly referred to as a CAMELS rating.
CAMELS Rating System:
CAMELS is an international bank-rating system with which bank supervisory authorities rate
institutions 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 Risk
Soundness of a bank measured on a scale of 1 (strongest) to 5 (weakest). Bank examiners
(trained and employed by the country's central bank) award these ratings on the basis of the
adequacy and quality of a bank's Capital, Assets (loans and investments), Management,
Earnings, Liquidity, and Sensitivity (to systemic-risk). Banks with a rating of 1 are considered
most stable; banks with a rating of 2 or 3 are considered average, and those with rating of 4 or 5
are considered below average, and are closely monitored to ensure their viability. These ratings
are disclosed only to the bank's 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 operating
business in Bangladesh through 6,562 Branches. Out of total business 56.5% handled by private
commercial 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 the
sensitivity 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 assessed
according to five fixed criteria – CAMEL].
1. Capital Adequacy:
Capital adequacy 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 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:-
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2. ∗ Capital Adequacy Ratio (CAR)
Capital
• Formula: CAR = .
Risk
Where risk can either be weighted assets ( ) or the respective national regulator's
T + T2
minimum total capital requirement. If using risk weighted assets, CAR = 1 .
a
It should be 10%, a common requirement for regulators conforming to the Basel Accords. Two
types of capital are measured: tier one capital (T1 above), which can absorb losses without a
bank being required to cease trading, and tier two capital (T2 above), which can absorb losses in
the 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
bank's 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 currency
dealing loss, interest rate fluctuation loss and the protection for off balance sheet affairs hit. At
present, capital adequacy requirement of the banking sector in Bangladesh is based on Basel-I
accord. Bangladesh has decided in principle to adopt the new capital adequacy framework
finalized 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 high
concentration of loans and advances indicates vulnerability of assets to credit risk, especially
since the portion of non-performing assets is significant. A huge infected loan portfolio has been
the major predicament of banks particularly of the state owned banks. In the total assets the
share of loans and advances is followed by the investment in government bills and bonds
covering 11.0 percent.
∗ Loan Loss Provision Ratio
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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 any
financial institution. Since indicators of management quality are primarily specific to individual
institution, these cannot be easily aggregated across the sector. In addition, it is difficult to draw
any conclusion regarding management soundness on the basis of monetary indicators, as
characteristics of a good management are rather qualitative in nature. Management efficiency
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.
4. Earnings Record:
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.
Although there are various measures of earning and profitability, the best and widely used
indicator is return on assets (ROA), which is supplemented by return on equity (ROE), earnings
per 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
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4. b) DuPont Formula:
NetIncome Sales TotalAsset
ROE = × ×
Sales TotalAsset AverageStockholderEquity
• Purpose: Measures a corporation's 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 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. 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, commodity
prices, or equity prices can adversely affect a financial institution’s earnings or economic capital
and is measured by systematic/ portfolio/ market risk.
∗ Systematic Risk(beta)
Cov( Ri , Rm )
• Formula: β i =
Var ( Rm )
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5. • Purpose: Can be mitigated only by being hedged.
• Definition: The risk inherent to the entire market or entire market segment
An Overview of Bangladesh Perspective
Presently Bangladesh Bank is employing Early Warning System (EWS) of supervision to
address the difficulties faced by the banks in any of the areas of CAMELS. Any bank found to
have faced difficulty in any areas of operation, is brought under Early Warning category and
monitored very closely to help improve its performance.
Last CAMELS rating of different commercial banks in Bangladesh was done in 2008 based on
the performance of 2007 and local banks first, then foreign banks, which is shown as follows
though 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:
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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 five
areas: the adequacy of Capital, the quality of Assets, the capability of Management, the quality
and level of Earnings and the adequacy of Liquidity.
The UFIRS was revised at year-end 1996 and CAMEL became CAMELS with the addition of a
component grade for the Sensitivity of the bank to market risk (that is, the degree to which
changes 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 supervisory
information is useful in the supervisory monitoring of banks. With respect to predicting bank
failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after
controlling for a wide range of publicly available information about the condition and
performance of banks. Cole and Gunther (1998) examine a similar question and find that
although CAMEL ratings contain useful information, it decays quickly. For the period between
1988 and 1992, they find that a statistical model using publicly available financial data is a
better indicator of bank failure than CAMEL ratings that are more than two quarters old. Hirtle
and Lopez (1999) find that, conditional on current public information, the private supervisory
information contained in past CAMEL ratings provides further insight into bank current
conditions, as summarized by current CAMEL ratings. The overall conclusion drawn from
academic studies is that private supervisory information, as summarized by CAMELS ratings, is
clearly 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 in
CAMELS ratings, would be depositors and holders of banks' securities. Small depositors are
protected from possible bank default by FDIC insurance, which probably explains the finding by
Gilbert 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 in
the rates paid on deposits at the affected banks. Jordan, et al., (1999) find that uninsured deposits
at banks that are subjects of publicly announced enforcement actions, such as cease-and-desist
orders, decline during the quarter after the announcement.
Limitations of CAMELS Rating:
Analysts have raised a number of questions about bank ratings. Federal Reserve economists
found that CAMELS ratings were better able to forecast bank distress than statistical monitoring
regimes, 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. For
example, public release could alter the dynamics under which supervisors produce the ratings. In
particular, release could make bankers more sensitive to their ratings and thus make the
examination 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 change
in the behavior in the examiners who assign the ratings. As such, the release of the rating could
have the perverse effect of reducing the new information they contain. The existing difficulty in
weighting the often intangible cost and benefit of public release suggests that any policy change
would involve contentious debate and require additional research.
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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
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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%
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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 the
private supervisory information gathered during on-site bank exams, do contain information
useful to both the supervisory and public monitoring of commercial banks. Such disclosure
could benefit supervisors by improving the pricing of bank securities and increasing the
efficiency of the market discipline brought to bear on banks. As argued by Flannery (1998),
market assessments of bank conditions compare favorably with supervisory assessments and
could improve with access to supervisory information. However, although supervisors could
benefit from such improved public monitoring of banks, the costs to the current form of
supervisory monitoring must also be considered. For example, if CAMELS ratings were made
public, the current information-sharing relationship between examiners and bankers could
change in a way that adversely affects supervisory monitoring. Further research and debate on
this question is currently needed.
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