Camels vs Pearls

Group 10

Nguyễn Minh CườngMai Thị Mai

Nguyễn Mai PhươngNguyễn Thị Phương Thanh

CAMELS and PEARLS: application to financial management of

commercial banks

Contents Brief news CAMELS ratings system

Overview CAMELS in Vietnam

CAMELS or CAMEL Rating Vietcombank

PEARLS ratings system Overview What PEARLS differs from CAMELSPEARLS in Vietnam

Rating Vietcombank

Some issues of applying CAMELS and PEARLS in Vietnam

Brief news

Presenter: Ms. Mai

Brief newsNEWS (5/8/2013)

1 Agribank lowers interest rate to 5% for a term of 1 month – lowest level in the market.

2 Vietinbank lowers interest rate to 7%/1 year.

3 Vietcombank suddenly increases price of USD to 21.000 VND.

4 Bank has spent 408 trillion VND on paying lending rate and deposit rate.

5 More than 95% of banks are not expected to increase credit for security.

CAMELS RATINGS SYSTEM

Presenters: Ms. Thanh and Ms. Phuong

6

OVERVIEW OF CAMELS RATING SYSTEM

What is CAMELS ?

The CAMEL ratings system is a method of evaluating the health of financial institutions by the National Credit Union Administration(NCUA).

The rating is based upon six critical elements of banks’ and other financial institution’s operations.(C) Capital adequacy(A) Asset quality(M)Management quality(E) Earnings quality(L) Liquidity(S) Sensitivity to market risk

Each element is assigned a numerical rating based on five key components: Composite 1-5 (strongest performance to unsafe performance)

7

OVERVIEW OF CAMELS RATING SYSTEM

Capital adequacy: is measured by the ratio of capital to risk weighted assets.

Asset quality : asset represents all the assets of the bank, current and fixed, loan portfolio, investments and real estate owned as well as off-balance-sheet transactions.

Management quality: qualification of Board of Directors. Earning quality: all income from operations, non-traditional sources,

extraordinary items. Liquidity: cash maintained by the banks and balances with central bank,

to total asset ratio is an indicator of bank’s liquidity. Sensitivity to market risk: the degree to which changes of market can

adversely affect earnings or capital.

WHO USE CAMELS?Regulators from State Bank of Vietnam use

CAMELS to supervisory and monitor other credit unions.

Managers use CAMELS to forecast potential problem and give solutions.

Partners use CAMELS to evaluate financial situation of credit unions they are working with.

Investors use CAMELS to analyze and identify the health of credit unions for well investing.

CAMELS IN VIETNAM

All follow by Decision 06/2008 by State bank of Vietnam

CAMELS IN VIETNAM

Criteria Score

Capital -3 -> 15

Asset 0 -> 35

Management 0 -> 15

Earning 0 -> 20

Liquidity 0 -> 15

No Sensitivity NOT in Vietnam

Score assigned for each category in Vietnam

Criteria in CAMEL system

CAMELS IN VIETNAM

Type Required total score Requirement in each category

A > 80 Not lower than 65% of maximum

B 60 - 79 Not lower than 50% of maximum

C 50 - 59 Not lower than 45% of maximum

D < 50

Classification of overall performance of commercial banks

CAMELS analysis of VCB

Source

Hello, I’m a CAMEL!


Requirement Max score Minus if do not reach requirement

Charter capital > legal capital (>3000 b)

5 -5

Capital Adequacy Ratio (CAR) > 9%

5 -4

ROE > 17% 5 14% - 17% : -2<14%: -5

Total Score 15

Ratings Instruction:

Capital adequacy

2012 2011

Charter Capital (> 3,000 billion) 23,000 19, 000

CAR (> 9%) 15% 11%

ROE (>17%) 12.8%(-5 pts)

16.9%(-2 pts)

Band score 10/15 13/15

Capital adequacy

Ratings of VCB


Requirement Max score Minus if do not reach requirement

NPL/total Loan > 3% 25 3-5%: -135-10%: -19>10%: -25

Structure of on-balance sheet’s assets > 75% (asset in balance sheet/ total asset)

5 65-75%: -250-65%: -3<50%: -5

Quality of guarantee over balance sheet’s asset < 3 %

5

Total score 0 - 35

Asset qualityRatings instruction


2012 2011

NPL ratio 2.4% 2%

2012 2011Structure of on-balance sheet’s assets 87.3% 89.7%

Ratings of VCB Asset qualityCAMELS analysis of VCB

2012 2011

NPL ratio < 3% 2.4% (25 pts) 2% (25 pts)

Structure of on-balance sheet’s assets > 75%

89.7% (5 pts) 87.3% (5 pts)

Quality of guarantee over balance sheet’s asset < 3 %

5 pts 5 pts


Asset qualityRatings of VCB


Maximum score: 15 points, minimum score: 0 point

Requirement Minus (If do not meet requirement

1/Having an adequate number of members of the Board of Directors and Supervisory Board

-3

2/Fully issuing, standardizing and observing internal regulations -3

3/The internal inspection and auditing system corresponds to the bank size and operates efficiently

-4

4/Members of the Board of Directors, are competent, unified, responsible

-3

5/Observing the State Banks regulations on shareholders, shares and stocks

-2

Management capacityRatings instruction


Requirement Minus

2011 2012

Maximum score is 15

1/adequate number of members of the BOD 0 0

2/Fully issuing, standardizing and observing internal regulations

-1 -1

3/The internal inspection and auditing system corresponds to the bank size and operates efficiently

-1 -1

4/ BODs are competent, unified, responsible 0 0

5/Observing the State Banks regulations on shareholders, shares and stocks

0 0


Management capacityRatings for VCB


EarningsRatings instructionRequirement Max score Point

1/The ratio of pre-tax income to equity

15 >=17%: 15< 17%: 13< 10%: 10< 5%: 5< 0%: 0

2a/The ratio of income generated from services to total income

3 >=8%: 3<8%: 2<2%: 1

2b/The ratio of net income generated from services to pre-tax income

2 >=30%: 2<30%: 1<14%:0



Requirement 2012 20111/The ratio of pre-tax income to equity attains 13.87% (10pt) 19.89% (15pt)

EarningsRatings of VCB


Requirement 2012 20112a/The ratio of income generated from services to total income

9.19% (3 point)

10.15% (3 point)

Requirement 2012 20112b/The ratio of net income generated from services to pre-tax income

27.09%(1 point)

26.5%(1 point)

EarningsRatings of VCB

Requirement 2012 2011

1/The ratio of pre-tax income to equity attains 10 pts 15 pts

2a/The ratio of income generated from services to total income

3 pts 3 pts

2b/The ratio of net income generated from services to pre-tax income

1 pt 1 pt

Total 14 pts 19 pts


• Ratings of VCBEarnings

CAMELS analysis of VCBLiquidity

Ratings instructionRequirement Max score Point

Liquid assets/current liabilities

12 _ Failing once: -5_ Failing >1: -12

Ratio of short-term funds to long-term loans

3 _ No violation: 3_ Violation once: -2_ Violation >1: -3


Requirements 2012 2011 Benchmark

1/A joint-stock commercial bank assuring a liquidity ratio in accordance with the State Banks regulations (= liquid assets/total liabilities)

17.4%(12pt)

19.27%(12pt)

15%

LiquidityRatings of VCB

Requirements 2012 2011 Benchmark

2/Maximum ratio of short-term funds and long-term loans

30%

Ratings of VCB Liquidity

Not calculate due to:- Not have information to calculate- The amount score of this criteria is quite small when

comparing with overall


Liquidity

Ratings of VCB

Requirements 2012 2011

1. liquid assets/total liabilities 12pt 12pt

2/Maximum ratio of short-term funds to medium and ong-term loans

3pt 3pt

Total 15pt 15t


2011 2012 Requirement

Capital adequacy 13 10 > 65% of 15

Asset quality 35 35 > 65% of 35

Management capacity 13 13 > 65% of 15

Earnings 19 14 > 65% of 20

Liquidity 15 15 > 65% of 15

Total 95 87 > 80

Type A A

CAMELS analysis of VCBOverall evaluation

PEARLS RATINGS SYSTEM

Presenter: Ms. Mai and Mr. Cuong

What is PEARLS?

PEARLS stands for:ProtectionEffective financial structureAsset qualityRate of returns and costsLiquiditySigns of Growth

What is PEARLS?

Created in the late 1980s

By World Council of Credit Unions

A set of 44 financial ratios and quantitative indicators, used to evaluate • Banks• Credit Unions and other Savings Institutions

Who uses PEARLS?

• Managers use PEARLS as a management tool to identify potential problems

• Board of Directors use PEARLS to monitor management’s progress toward financial targets

• Regulators use PEARLS as a supervisory tool to supervise performance of savings institutions

What PEARLS differs from CAMELS?

I love PEARLS!

PEARLS uses strictly quantitative indicators

PEARLS evaluates the financial structure of the balance sheet

PEARLS measures growth rates

PEARLS ANALYSIS OF VCB

P – ProtectionThe primary goal is to ensure that the financial institution provides depositors a safe place to save their money.


P - Protection Goals (Excellence)

1. Loan Losses Allowances / Delinq. >12 Mo.

100%

2. Net Loan Loss Allowances / World Council Allowance Required for Delinq. 1-12 Mo.

35%

3. Complete Loan Charge-off of Delinq. > 12 Mo.

Yes

4. Annual Loan Charge-offs / Average Loan Portfolio

Minimized

5. Accum. Charge-offs Recovered / Accum. Charge-offs

> 75%

6. Solvency (Net Value of Assets/Total Shares & Deposits)

≥ 111%

Most important indicators

of protection

2011 2012 Benchmark1. Loan Losses Allowances / Delinq. >12 Mo. 226.98% 364.65%

100%

ProtectionRatings of VCB


Năm 2012 Năm 2011


E – Effective financial structureRatios measure assets, liabilities and capital, and their associated targets constitute an ideal structure for banks

PEARLS ANALYSIS OF VCBE - Effective Financial Structure Goals

(Excellence)1. Net Loans / Total Assets 70-80%2. Liquid Investments / Total Assets ≤ 16%3. Financial Investments / Total Assets ≤ 2%4. Non-financial Investments / Total Assets

0%

5. Savings Deposits / Total Assets 70-80%6. External Credit / Total Assets 0-5%7. Member Share Capital / Total Assets ≤ 20%8. Institutional Capital / Total Assets ≥ 10%9. Net Institutional Capital / Total Assets ≥ 10%

2011 2012 Benchmark

1. Net Loans / Total Assets

55.65% 56.91% 70-80%

5. Savings Deposits / Total Assets

42.25% 51.66% 70-80%

Effective financial structureRatings of VCB


Năm 2012 Năm 2011


A – Asset qualityThe indicators measure the impact of assets which do not generate income such as delinquent loans, and non-productive assets

PEARLS ANALYSIS OF VCBA - Asset Quality Goals

(Excellence)

1. Total Loan Delinquency / Gross Loan Portfolio

≤ 5%

2. Non-earning Assets / Total Assets ≤ 5%

3. Net Zero Cost Funds / Non-earning Assets

≥ 200%

Asset quality2011 2012 Benchmark

1. Total Loan Delinquency / Gross Loan Portfolio

16.74% 16.32% ≤ 5%

Ratings of VCB


Năm 2012 Năm 2011

2011 2012 Benchmark2. Non-earning Assets / Total Assets

2.90% 2.97% ≤ 5%

Asset qualityRatings of VCB


Năm 2012 Năm 2011


R – Rates of Returns and Costs

Monitoring the return earned on each type of asset (use of funds) and the cost of each type of liability (source of funds).

PEARLS ANALYSIS OF VCBR - Rates of Return and Costs Goals (Excellence)

1. Net Loan Income / Average Net Loan Portfolio Entrepreneurial Rate2. Liquid Inv. Income / Avg. Liquid Investments Market Rates3. Fin. Investment Income / Avg. Fin. Investments Market Rates4. Non-fin. Inv. Income / Avg. Non-fin. Investments

≥ R1

5. Fin. Costs: Savings Deposits / Avg. Savings Deposits

Market Rates > Inflation

6. Fin. Costs: External Credit / Avg. External Credit

Market Rates

7. Fin. Costs: Member Shares / Avg. Member Shares

Market Rates, > R5

8. Gross Margin / Average Assets Ê9=10%9. Operating Expenses / Average Assets ≤ 5%10. Provisions for Risk Assets / Average Assets ˆP1=100%, ˆP2=35%11. Other Income or Expense / Average Assets Minimized12. Net Income / Average Assets (ROA) Ê9=10%

Income ratios

Cost ratios

OperatingCost ratios

Rate of returns and costs

2011 2012 Benchmark

1. Net Loan Income / Average Net Loan Portfolio

17.77% 14.43% Entrepreneurial Rate(12.14%)

171.241.318

Ratings of VCB

Năm 2012 Năm 2011 Năm 2010


2011 2012 Benchmark

5. Fin. Costs: Savings Deposits / Avg. Savings Deposits

12.61% 9.71% Market Rates > Inflation(12.3%, 10.5%18.5%, 6.8%)

10. Provisions for Risk Assets / Average Assets

1.03% 0.85% Depends onˆP1=100%, ˆP2=35%

Rate of returns and costs

307.621.338

151.132.566

Năm 2012 Năm 2011 Năm 2010


Rate of returns and costs2011 2012 Benchmark

9. Operating Expenses / Average Assets

0.20% 0.22% ≤ 5%

12. Net Income / Average Assets (ROA)

1.25% 1.13% Ê9=10%

307.621.338

Năm 2012 Năm 2011 Năm 2010



L – Liquidity

Managing liquidity is an essential component of administering a savings institution.


L - Liquidity Goals (Excellence)

1. Liquid Assets - ST Payables / Total Deposits

15-20%

2. Liquidity Reserves / Total Savings Deposits

10%

3. Non-earning Liquid Assets / Total Assets

< 1%

Liquidity2011 2012 Benchmark

2. Liquidity Reserves / Total Savings Deposits

39.23% 30.31% 10%

Ratings of VCB

43,545,226 49,097,067Chênh lệch tiền gửi ở các TCTD khác và tiền gửi của các TCTD khác tại VCB


Năm 2012 Năm 2011

Liquidity

2011 2012 Benchmark

3. Non-earning Liquid Assets / Total Assets

3.25% 2.63% < 1%

Ratings of VCB


Năm 2012 Năm 2011

LiquidityRatings of VCB


PEARLS analysis of VCB

S – Signs of Growth

Reflecting member-client satisfaction, appropriateness of product offerings and financial strength.

PEARLS analysis of VCBS - Signs of Growth (Annualized Rates)

Goals (Excellence)

1. Net Loans Ê1=70-80%2. Liquid Investments Ê2 ≤ 16%3. Financial Investments Ê3 ≤ 2%4. Non-financial Investments Ê4=0%5. Savings Deposits Ê5=70-80%6. External Credit Ê6=0-5%7. Member Shares Ê7 ≤ 20%

8. Institutional Capital Ê8 ≥ 10%

9. Net Institutional Capital Ê9 ≥ 10%

10. Membership ≥ 15%11. Total Assets > Inflation + 10%

Assets side

Liabilities side

2011 2012 Benchmark1. Net loan 19.18% 15.57% Depends

onÊ1=70-80%

5. Savings deposits 9.81% 15.82% Depends onÊ5=70-80%

11. Total assets 19.21% 13.02% > Inflation + 10%(28.5%, 16.8%)

171.241.318

151.132.566

307.621.338

Signs of growthRatings of VCB

Năm 2012 Năm 2011 Năm 2010


PEARLS ANALYSIS OF VCBOVERALL EVALUATION

Protection: Good

Effective financial structure: Good

Asset quality: Normal (Problem in delinquency)

Liquidity: Normal (Too many non-earning liquid assets)

Signs of Growth: Normal - Bad

Issues of CAMELS and PEARLS when applying in Vietnam

CAMELS• Qualitative criteria• The omitted “S”

PEARLS

• No specific score• Inappropriate categories for banks• No specific benchmarks for some criteria

Issues with CAMEL

Qualitative indicators are very difficult to evaluateNo information in the annual reportsWhat is “Fully issuing, standardizing and observing

internal regulations”?

“S” element is omitted in VietnamNo standard to assess this categoryNot overall overview of every issues.

Suggestions

Quantify the qualitative criteria (How to evaluate Management capacity)

Full disclosure of information in the financial reports

Create standard requirement for financial reports to include management assessment

Issues with PEARLS No overall band-score assigned to each category of evaluation

(CAMELS does)Þ Difficult to evaluate the overall performance of banks

Some categories in PEARLS can’t be applied to banks (Because they are for credit unions only)

Þ Can not comprehensively assess bank’s performance

Some categories in PEARLS have no specific benchmark to evaluate

=> Hard to arrive at final overall evaluation of banks

Suggestions

Assign score for each of the categories (like CAMELS)

In evaluating a bank, some adjustment should be made

Provide specific benchmark in EVERY categories

Thank you for your attention!

Q & A

Documents

Camels vs Pearls