Analysing Financial Strength of Public and Private Sector
Banks: A CAMEL Approach
Dr.
Sneha S. Shukla
Associate
Professor
Abstract
Monitoring
and supervision of banks has become very important due to significant Non-performing
Assets and bank failures from the 1980s till now.
Continuous Performance evaluation of the banking sector is therefore important
to ensure financial stability of an economy. In the light of the world-wide banking
crisis in recent years, CAMEL approach is a useful tool to examine the safety
and soundness of banks. It also highlights the risks being faced by banks and
help mitigate the potential risks which may lead to bank failures. In the
present study, an attempt is made to evaluate the performance & financial
soundness of selected various public & private sector banks using CAMEL
approach.
Keywords: Performance Evaluation, CAMEL Model, Public Banks, Private Banks and
Ranking Method
Introduction
The
economic development and financial growth of a country is critically dependent on
the financial strength of its banks. The Indian banking
sector has been the backbone of the Indian economy over the past few decades,
helping it survive various national and worldwide economic shocks and
meltdowns. It has transformed itself into one of the healthiest performers in
the world banking industry seeing tremendous competitiveness, growth,
efficiency, profitability and stability, especially in the recent years. The
main goal of banks today is to maintain stability and make sure they are impervious
to external shocks while at the same time being internally sound and sensible.
In the light of the banking crisis in recent years worldwide, CAMEL (capital
adequacy, asset quality, management quality, earnings and liquidity) is a
useful tool to examine the safety and soundness of banks, and help mitigate the
potential risks which may lead to bank failures.
This
study is an attempt to evaluate the performance & financial soundness of
various public & private sector banks using CAMEL approach.
Review of Literature
Banking
sector has played a crucial role in the development of the Indian economy.
Various scholars have made several studies on the performance of banking sector
in India using CAMEL model. Some of the important studies reviewed for present
paper are as under:
Prasuna
(2003), analyzed the performance of Indian
banks by adopting the CAMEL Model. The performance of 65 banks was studied for
the period 2003-04. The author concluded that the competition was tough and
consumers benefited from better services quality, innovative products and
better bargains.
Wirnker
and Tanko (2006)evaluated the adequacy of CAMEL
approach in capturing the overall performance of a bank. The study concluded
that no one factor in CAMEL suffices to depict the overall performance of a
bank. The best ratio for capital adequacy was found to be the ratio of
shareholder's fund to total risk weighted assets.
Uppal
and Kaur (2007), analysed the efficiency of all
the bank groups in the post banking sector reforms era i.e.. 1999-2000 to
2004-05. The paper concluded that the efficiency of all the bank groups
increased in the second post banking sector reforms period but these banking
sector reforms were more beneficial for new private sector banks and foreign
banks.
Hugar
S.S. and Vaz N.H. (2008), evaluated the customer
orientation in 5 public sector banks 3 new private sector and 3 foreign banks
are selected. The study concluded that new private sector banks had more ATMs
as on March 2006 followed by SBI where 77.5% branches were fully computerized
and 18.2% were partially computerized. Business per employee and profits per
employee was higher in foreign banks where SBI had received more number of
complaints followed by ICICI. The study also suggested adopting CRM by public sector
banks to stand strong in competitive environment.
Rao
N. and Tiwari S. (2009), studied the
efficiency of 5 public sector banks selected on the basis of deposits size in
2005. The study concluded that all employee efficiency factors had insignificant
influence on deposits, assets and advances, from branch efficiency, only
operating profits per branch and from operating efficiency, cost of deposits
had significant and positive impact. Liquidity influencing factors and ultimate
profit factors do not influence deposits, assets and advances significantly
although all profit factors had negative effect. The study also suggested some
measures to improve efficiency.
Sangmi
and Nazir (2010) analysed the performance of
biggest nationalised bank (PNB) and biggest private sector bank (J&K Bank)
using the CAMEL model for the period from 2001-2005. The study exhibited that
the position of both the banks under study was sound and satisfactory in case
of capital adequacy, asset quality, management capability and liquidity.
In
light of the reviewed literature, it can be seen that several attempts have
been made to analyse the performance of the banks in India. The present study is
another attempt in this direction.
Research Methodology
The
study was analytical in nature and based on secondary data covering a period
from2010-13. Thedata was collected from the annual reports of following public
& private sector banks.
Public
Banks:
1)
Bank of Baroda
2)
IDBI Bank
3) PNB
Bank
Private
Banks:
1)
Axis Bank
2)
ICICI Bank
3)
HDFC Bank
The
performance of the banks was measured through different ratios of CAMEL model
(Table 1).
Table
1: CAMEL Ratios
Sr. No.
|
CAMEL
Parameters
|
Ratios
used in the present study
|
1
|
C
|
Capital
Risk Adequacy Ratio
Debt
Equity Ratio
Total
Advances to Total Assets Ratio
|
2
|
A
|
Gross NPA
Ratio
Net NPA
Ratio
Total
Investment to Total Assets Ratio
|
3
|
M
|
Total
Assets to Total Deposits Ratio
Asset
Turnover Ratio
Net Profit
Margin Ratio
|
4
|
E
|
Dividend
Payout Ratio
Return on
Assets Ratio
Interest
Income to Total Income Ratio
|
5
|
L
|
Credit
Deposit Ratio
|
All
the banks were first individually ranked based on the sub-parameters of each
parameter. The sum of these ranks was then taken to arrive at the group average
of individual banks for each parameter. Finally the composite rankings for the
banks were arrived at after computing the average of these group averages.
Banks were ranked in the ascending/descending order based on the individual
sub-parameter.
The
CAMEL parameters are discussed below:
Capital
Adequacy Ratio: Capital adequacy ratios
("CAR") are a measure of the amount of a bank's core capital
expressed as a percentage of its risk-weighted assets.
Capital
adequacy ratio is defined as:
CAR
= (Tier 1 Capital + Tier 2 Capital) / Risk weighted Assets
TIER
1 CAPITAL - (paid up capital + statutory reserves + disclosed free reserves) -
(equity investments in subsidiary + intangible assets + current and brought
forward losses)
TIER
2 CAPITAL – i. Undisclosed Reserves, ii. General Loss reserves, iii. hybrid
debt capital instruments and subordinated debts where risk can either be
weighted assets (a) or the respective national regulator's minimum total
capital requirement. If using risk weighted assets,
CAR
= [ ( T1 + T2 ) / a ] 10% percent threshold varies from bank to bank (10%
in this case, a common requirement for regulators conforming to the Basel
accords) is set by the national banking regulator of different countries.
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.
Asset
Quality:It is a measure to account for the extent
of Non-Performing Asset in the portfolios of the banks and the extent of damage
this particular asset class can have on the financial performance.
Management
Quality: The management dimension in CAMEL
analysis has assumed unprecedented significance. This measure captures the
possible effect of management efficiency on the financial performance of the
banks.
Earnings
Quality: Banks depend on their quality of earnings
for performing activities like funding dividends, maintaining adequate capital
levels, finding new opportunities for bank to grow, entering new geographic and
product markets and maintaining the competitive outlook.
Apart
from the sources of earning, the following dimensions also have significant impact
on the financial performance of the banks. i. Level, trend, and stability of
earnings, ii. Quality and sources of earnings. iii. Ability to augment capital
through retained earnings. iv. Exposure to market risks. v. Provisions for loan
losses
Liquidity:
Liquidity management in banks has assumed critical importance due to
competitive pressures and the easy flow of foreign capital in the domestic
markets. The liquidity crisis in the banks can adversely impact the financial
performance of the banks. Inability of the banks to manage its short term
liquidity liabilities and loan commitments can adversely impact the performance
of the banks by substantially increasing its cost of fund and over exposure to
unrated asset categories. The cash flow from principal and interest payments
could vary due to the types of loans on the balance sheet impacting the
liquidity position.
The
selected banks have been ranked on the basis of the values of the ratios.The banks
with higher average value of the ratios are ranked higher. The bank with best
ratio is given rank one and so on up to rank six with an interval of one. In
case of tie the average rank is assigned to the banks. All the ratios having
higher value get higher rank except the ratios relating to Asset Quality
Position which gets the rank in reverse order i.e. the bank with highest average
gets lowest rank.
Results & Discussion
The ranks of selected banks through different ratios using CAMEL
rating methodology were calculated. The various ratios measuring capital
adequacy of selected banks and the ranks assigned to them are presented in
Table 2.
Table 2: Camel Ratings (2010-13): Capital Adequacy
Bank
|
CAR (%)
|
D/E (times)
|
TAdv/TAst (%)
|
Group
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Axis Bank
|
14.44
|
3
|
1.40
|
4
|
58.65
|
4
|
3.67
|
4
|
HDFC Bank
|
16.50
|
2
|
0.76
|
1
|
58.46
|
5
|
2.67
|
1.5
|
IDBI Bank
|
13.78
|
5
|
3.13
|
6
|
61.70
|
3
|
4.67
|
6
|
ICICI Bank
|
18.91
|
1
|
2.16
|
5
|
53.63
|
6
|
4.00
|
5
|
PNB Bank
|
12.59
|
6
|
1.34
|
3
|
64.19
|
1
|
3.33
|
3
|
BOB Bank
|
14.16
|
4
|
0.92
|
2
|
62.68
|
2
|
2.67
|
1.5
|
It is clear that all banks have maintained higher CAR
than the prescribed level. It is found that ICICI Bank secured the top position
with highest average CAR of 18.91 followed by HDFC Bank (16.50), Axis Bank (14.44).
PNB bank was at the bottom most position with a least average CAR of 12.59. In
terms of Debt equity ratio HDFC bank is at the top position with least average
of 0.76 followed by BOB (0.92) and PNB Bank (1.34). In case of Total Advances
to Total Assets, PNB Bank was at the first position with highest average of 64.19
followed by BOB (62.68) and IDBI Bank (61.70). ICICI Bank was at the bottom
most position with least average of 53.63.
On the basis of group averages of three sub-parameters of capital
adequacy HDFC Bank & BOB was at the top position with group average of 2.67,
followed by PNB Bank (3.33) and Axis Bank (3.67). IDBI Bank stood at the last
position due to its poor performance in CAR and D/E.
Table
3 presents the various ratios representing asset quality position of selected banks
and the ranks assigned to them.
Table 3: Camel Ratings (2010-13): Asset Quality
Position
Bank
|
Gross NPA Ratio (%)
|
Net NPA Ratio (%)
|
TI/TA (%)
|
Group
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Axis Bank
|
1.52
|
2
|
0.31
|
2
|
31.90
|
5
|
3.00
|
3
|
HDFC Bank
|
1.04
|
1
|
0.19
|
1
|
27.43
|
3
|
1.67
|
1
|
IDBI Bank
|
2.51
|
4
|
1.42
|
5
|
28.70
|
4
|
4.33
|
4.5
|
ICICI Bank
|
3.82
|
6
|
0.87
|
4
|
32.57
|
6
|
5.33
|
6
|
PNB Bank
|
3.00
|
5
|
1.57
|
6
|
26.35
|
2
|
4.33
|
4.5
|
BOB Bank
|
1.78
|
3
|
0.72
|
3
|
20.22
|
1
|
2.33
|
2
|
HDFC Bank was at the top position
with an average Gross NPA ratio of 1.04, followed by Axis Bank (1.52),BOB (1.78).
ICICI was at the last position with an average of 3.82. In case of Net NPA
ratio, it’s again HDFC Bank was at the top position with a least average of
0.19 followed by Axis Bank (0.31), BOB (0.72). In terms of TI/TA, BOB was at
the first position with an average of 20.22 followed by PNB (26.35), HDFC bank
(27.43). ICICI Bank was at the last position with highest average of 32.57.
On the basis of group averages of sub-parameters
of assets quality, the HDFC Bank was at the top position with group average
1.67, followed by the BOB (2.33), Axis Bank (3.00). ICICI Bank occupies the
last position.
The various ratios representing management quality of selected banks
and their ranks are depicted in Table 4.
Table 4: Camel Ratings (2010-13): Management Quality
Bank
|
TA/TD (%)
|
Asset Turnover Ratio (%)
|
Net Profit Margin Ratio (%)
|
Group
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Axis Bank
|
76.78
|
5
|
9.22
|
2
|
15.98
|
3
|
3.33
|
3
|
HDFC Bank
|
78.94
|
3
|
9.62
|
1
|
16.04
|
2
|
2.00
|
1.5
|
IDBI Bank
|
86.41
|
2
|
8.56
|
5
|
7.53
|
6
|
4.33
|
5
|
ICICI Bank
|
98.14
|
1
|
8.57
|
4
|
16.24
|
1
|
2.00
|
1.5
|
PNB Bank
|
77.87
|
4
|
8.86
|
3
|
12.27
|
5
|
4.00
|
4
|
BOB Bank
|
72.93
|
6
|
7.13
|
6
|
14.62
|
4
|
5.33
|
6
|
ICICI was at the top most position
with an average TA/TD of 98.14 followed by IDBI (86.41), HDFC Bank (78.94). In
terms of asset turnover ratio HDFC secured the top position with 9.62 followed
by Axis Bank (9.22), PNB Bank (8.86). At the front of net profit margin ratio,
ICICI was at the first place with an average 16.24, followed by HDFC Bank
(16.04), Axis Bank (15.98). IDBI Bank was at the bottom.
On the basis of group averages of
sub-parameters, HDFC Bank & ICICI Bank were at the top position with group
average 2, followed by Axis (3.33), PNB (4). BOB was positioned
at last due to its poor performance in TA/TD and Asset Turnover Ratio.
Table 5 presents the earning quality positions
of sample banks in terms of dividend pay-out ratio, return on assets ratio and
interest income to total income ratio.
Table 5: Camel Ratings (2010-13): Earnings Quality
Bank
|
Dividend Pay-out Ratio (%)
|
Return on Assets Ratio (%)
|
II/TI Ratio (%)
|
Group
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Avg
|
Rank
|
Axis Bank
|
19.00
|
6
|
1.69
|
1
|
79.13
|
6
|
4.33
|
6
|
HDFC Bank
|
22.73
|
3
|
1.54
|
2
|
82.31
|
4
|
3.00
|
2
|
IDBI Bank
|
24.98
|
2
|
0.64
|
6
|
89.97
|
1
|
3.00
|
2
|
ICICI Bank
|
33.11
|
1
|
1.38
|
3
|
81.37
|
5
|
3.00
|
2
|
PNB Bank
|
19.85
|
4
|
1.18
|
4
|
89.57
|
3
|
3.67
|
4
|
BOB Bank
|
19.21
|
5
|
1.04
|
5
|
89.64
|
2
|
4.00
|
5
|
The ICICI Bank was ranked highest in
case of Dividend Pay-out Ratio with an average of 33.11 followed by IDBI Bank
(24.98), HDFC Bank (22.73). Axis Bank was at the bottom most position with
least average of 19. I n case of Return on Assets Ratio,Axis Bank was at the
first position with an average of 1.69, followed by HDFC Bank (1.54). IDBI Bank
was at the last place. In case of II/TI ratio, IDBI Bank
stood at the top place.
On the basis of group averages, HDFC Bank, IDBI
Bank & ICICI Bank were at the top position with group average (3) followed
by Punjab National Bank (3.67). Axis Bank performed poorly in Dividend Pay-out
Ratio & II/TI Ratio and stood at last place.
Table
6 presents liquidity position based on credit deposit ratio of sample banks.
Table 6: Camel Ratings (2010-13): Liquidity
Bank
|
Credit Deposit Ratio (%)
|
Avg
|
Rank
|
Axis Bank
|
76.78%
|
6
|
HDFC Bank
|
78.94%
|
4
|
IDBI Bank
|
86.51%
|
2
|
ICICI Bank
|
98.14%
|
1
|
PNB Bank
|
77.87%
|
5
|
BOB Bank
|
85.22%
|
3
|
ICICI Bank stood at the top position with average 98.14 followed by IDBI
Bank (86.51), BOB (85.22). Axis Bank was placed at last.
CAMELS: Overall Ranking
Table
7 shows the overall ranking for each parameter of CAMEL Model.
Table-7:
Composite ranking: Overall Performance
Bank
|
C
|
A
|
M
|
E
|
L
|
Avg
|
Rank
|
Axis Bank
|
3.67
|
3.00
|
3.33
|
4.33
|
6
|
4.07
|
5.5
|
HDFC Bank
|
2.67
|
1.67
|
2.00
|
3.00
|
4
|
2.67
|
1
|
IDBI Bank
|
4.67
|
4.33
|
4.33
|
3.00
|
2
|
3.67
|
4
|
ICICI Bank
|
4.00
|
5.33
|
2.00
|
3.00
|
1
|
3.07
|
2
|
PNB Bank
|
3.33
|
4.33
|
4.00
|
3.67
|
5
|
4.07
|
5.5
|
BOB Bank
|
2.67
|
2.33
|
5.33
|
4.00
|
3
|
3.47
|
3
|
It is clear from table 7 that HDFC bank is ranked at top position
with composite average of 2.67, followed by ICICI (3.07), BOB (3.47), Axis Bank
and PNB were at the bottom most position.
Conclusion
In the process of evaluation of performance of various banks,
our study concluded that, different banks have obtained different performances
with respect to CAMEL ratios. Our study also concluded the following:
·
The HDFC Bank & BOB stood at top position in
terms of capital adequacy.
·
In terms of asset quality, the HDFC Bank was at
top most position.
·
In context of management quality, HDFC Bank
& ICICI Bank positioned at first.
·
In terms of earnings quality, HDFC Bank, ICICI
Bank & IDBI Bank obtained the top position.
·
The ICICI Bank was ranked top in liquidity
criterion.
·
The overall performance table shows that, HDFC Bank
is ranked first followed by ICICI Bank & Bank of Baroda.
Most of these banks, including HDFC, ICICI, IDBI, lie in
a similar rank region. However, these banks’ assets etc. vary a great deal and
they cannot be judged solely based on the absolute values of the CAMEL ratios.
Looking at the trend, we can say that private banks are growing at a faster
pace than public sector banks.
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