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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


Capital adequacy

CapitalAdequacy



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