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Evaluating and Interpreting Banking Indicators. Keshab Bahadur K.C. Bank Supervision Department Nepal Rastra Bank. Supervision Models. On-site Supervision CAMELS Off-site Supervision CAELS C = Capital A = Assets Quality M = Management

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evaluating and interpreting banking indicators

Evaluating and Interpreting Banking Indicators

Keshab Bahadur K.C.

Bank Supervision Department

Nepal Rastra Bank

supervision models
Supervision Models

On-site Supervision CAMELS

Off-site Supervision CAELS

C = Capital

A = Assets Quality

M = Management

E = Earnings

L = Liquidity

S = Sensitivity to Market Risk

evaluation factors for capital
Evaluation factors for Capital
  • Volume of poor quality of assets
  • Bank’s capital growth experience and future prospects
  • Ability to address emerging needs for additional capital
  • Risk exposures
  • Balance sheet composition
  • Quality and strength of earnings, earnings retention and reasonableness of dividend distribution
  • Ability of management to address emerging needs of capital
  • Comparison with the regulatory requirement and industry norms
capital ratios
Capital Ratios
  • Core Capital / Risk Weighted Assets
  • Total Capital / Risk Weighted Assets
  • Total Loans to a single Sector / Total Loans
  • Total Loans to a single sector / Core Capital
  • Fund Based Loans to a Single Borrower or Group of Related Borrowers / Core Capital
  • Non-Fund Based Facilities to a Single Borrower or Group or Group of Related Borrowers / Core Capital
  • Actual Provisioning / Required Provisioning
  • Net Earnings / Core Capital
prompt corrective action pca
PromptCorrectiveAction (PCA)

Trigger points for PCA

evaluation factors for assets quality
Evaluation factors for Assets Quality
  • Level, severity, trend of problem, restructured and non performing loans
  • Adequacy of underwriting standards, soundness of credit administration practices and risk management
  • Adequacy of provisioning
  • Trend of off-balance sheet transactions Credit Risk
  • Diversification and quality of the loan and investment portfolios
  • Diversification or concentration in sectors or borrowers
  • Adequacy of loan and investment policies, procedures and practices
  • Recovery trend of problem assets (Bad Loan)
  • Adequacy of internal controls and management information system
assets quality ratios
Assets Quality Ratios
  • Past Due Loans (Non performing Loan)/ Total Loans
  • Past Due Loans to Total Loans / Industry Av of Past Due Loans to Total Loans
  • Provisioning for Substandard Loans / Total Substandard Loans
  • Provisioning for Doubtful Loans/Total Doubtful Loans
  • Provisioning for Loss Loans / Total Loss Loans
  • Total Loans to a Single Sector / Core Capital
  • Fund Based Loans to a Single Borrower or Group of Related Borrowers / Core Capital
  • Non Fund Based Loans to a Single Borrower or Group of Related Borrowers / Core Capital
  • Bank\'s investment in shares and securities of a company / Core Capital
evaluation factors for management
Evaluation factors for Management
  • Ability of the board and management
  • Level and quality of oversight and support of all activities by the Board of Directors and management.
  • Educational background of staff, experience in banking, rate of employee transfer between departments, employee turnover, staff moral and harmony between management and staff.
  • Adequacy of audit and internal controls
  • Compliance with laws and regulations
  • Accuracy, timeliness and effectiveness of MIS and risk monitoring systems
evaluation factors for earnings
Evaluation factors for Earnings
  • Level of earnings, including trends and stability
  • Quality and source of earnings
  • Adequacy of budgeting systems,forecasting processes and MIS
  • Adequacy of provisioning
  • Ability to contribute to capital through retained earnings
earning ratios
Earning Ratios
  • Net Income (after tax) / Annual Average of end-of-month Assets
  • Net Income (after tax) / Core Capital
  • Net Spread: (Interest earned/ Interest earning assets ) – (Interest paid/ Interest bearing Liabilities)
  • Net Interest Margin: (Interest Income – Interest Expense )/ (Annual Average of end-of month Total Assets)
  • Total Operating Income / Annual Av. Of end-of-month Total Assets
  • Total Operating Expenses / Annual Av. Of end-of-month Total Assets
earning ratios1
Earning Ratios
  • Net Operating Income / Annual Av. Of end-of-month Total Assets
  • Total Operating Expenses / Total Operating Income
  • Interest on Deposits / Total Expenses
  • Interest on Borrowings / Total Expenses
  • Total Interest Expenses / Total Operating Income
  • Interest Income on Loans / Total Operating Income
  • Staff expenses / Total Expenses
  • Staff Expenses / Total Operation Income
evaluation factors for liquidity
Evaluation factors for Liquidity
  • Volatility, type, concentration and trend of deposits
  • Availability of assets readily convertible into cash
  • Access to money markets or other ready sources of fund
  • Trend and stability of deposits
  • Capability of the management to manage liquidity risk
liquidity ratios
Liquidity Ratios
  • Total Liquid Assets / Total Deposit
  • Net Liquid Assets/Total Deposit
  • Total Loan / Total Local Currency Deposit
  • Total Loan / Total Local Currency Deposit and Core Capital
  • Current Assets / Short Term Liabilities (with in 90 days)
  • Quarterly Gap (Maturity Mismatch) / Cash in Vault & NRB Balance
  • Quarterly Gap (Maturity Mismatch) / Core Capital
  • Tendency of Inter Bank Loan
evaluation factors for sensitivity to market risk
Evaluation factors for Sensitivity to Market Risk
  • Sensitivity of the bank’s earning or economic value of capital to adverse changes in interest rates, foreign exchange rates, equity prices
  • Ability of the management to manage the market risk
sensitivity to market risk ratios
Sensitivity to Market Risk Ratios
  • Interest Rate Risk: First Quarter Gap (A/L maturity mismatch)/Av. Quarterly Earnings
  • Interest Rate Risk: Second Quarter Gap (A/L maturity mismatch)/Average Quarterly Earnings:
  • Exchange Rate Risk: Net Foreign Exchange Position / Core Capital
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