CAMELS Final Report

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A REPORT

ON

CAMELS APPROACH AND THE
EVALUATION OF THE PERFORMANCE
OF BANKS

By
ABHEEK GUPTA (10bsphh010005)
ANIMESH SINHA (10BSPHH010087)
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ANISH GUPTA (10BSPHH010092)
NEELAM MANDOWARA. (10BSPHH010444)
NITESH K.(10BSPHH010487)
IBS HYDERABAD

A REPORT
ON
CAMELS APPROACH AND THE
EVALUATION OF THE PERFORMANCE
OF BANKS
By
ABHEEK GUPTA (10BSPHH010005)
ANIMESH SINHA (10BSPHH010087)
ANISH GUPTA (10BSPHH010092)
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NEELAM MANDOWARA. (10BSPHH010444)
NITESH K. (10BSPHH010487)
A report submitted as a part of
The Banking Management Module of The MBA program of
IBS Hyderabad

Submitted to: Dr. K Siva Reddy, Faculty IBS Hyderabad
Date of Final Report Submission: September 12, 2011
Section: BM - F
INDEX
Sr.No Topic
Page
Number
1.
Introduction to The CAMELS
Framework
04
2. Methodology 06
3. Model Construction 08
4.
Calculations, Composite Ratings and
Analysis
22
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6. Annexure 31
7. References 36

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Introduction to The CAMELS Framework
There have been numerous banking reforms over the past couple of decades. All these have
resulted in a much more enhanced form of banking regulation and supervision, though the results
are not as they are expected to be, but over a period of time, they will be, as the implementation
will start yielding results.
The purpose of The CAMELS framework is to assess a Banks over all condition and to identify
its strengths and weaknesses. Covering the entire spectrum from financial, operational to
managerial aspects of the banks business.
During an on-site bank examination, supervisors gather private information, such as details on
difficult 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.
The acronym "CAMELS" refers to the five components of a bank's condition that are assessed:
Capital adequacy, Asset quality, Management Quality, Earnings Quality, and Liquidity. A
sixth component, a bank's Sensitivity to Market Risk was added in 1997; hence the acronym
was changed to CAMELS.
CAMELS is primarily a ratio-based model for evaluating the performance of banks.
Rating System
Each bank is assigned a uniform composite rating based on six parameters. It is a standardized
procedure providing an assessment of the quality of the bank based on standard criteria.
When assigning a composite rating, some components may be given more weight than others
depending on the situation at the bank. Composite ratings may include factors that have a
significant bearing on overall condition and soundness.

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Rating Provisions
Each element of the composite rating scale is assigned a numerical rating based on certain key
components identified. These key components are mostly quantitative financial metrics that
gauge the performance of the bank in terms of the element they represent. For example, under
The Capital Adequacy Parameter a number of key quantitative performance metrics will be
identified and a rating on the Capital Adequacy Parameter alone will be derived from the
performance of the bank in these parameters. This process will be repeated for all six parameters
and based on the individual parameter ratings and the weight assigned to each parameter based
on the peculiar risk characteristics of the bank an overall composite rating will be assigned to the
bank.

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METHODOLOGY
As a group we believe that we cannot do justice to this project by mere reading of research
papers and available text on the CAMELS framework. Also, as students of finance it was our
ardent desire to be creative and involve some numbers in our project to make it an interesting,
value adding and creative experience for us. Our methodology for this project combines theory
with practical application. We have attempted to immediately apply what we have learned from
the study of the theoretical accounts of our project topic. Details of our project methodology are
as follows:
1. Basic Understanding and Explanation of the concept
We have gained a basic understanding of the concept through reading various published
and non published sources on the topic. This has enabled us to obtain a firm grasp on the
concepts related to the project. This enables us to better see and experience the link
between practical application and theory.

2. Actual Application of Theory and Concepts Assimilated through Independently
Rating Banks
We have made an attempt to apply our newly gained understanding about this framework
by identifying and ranking three banks based on this framework.

3. Creation of our own Model to rate banks in accordance with The CAMELS
Framework
We have created our own model to enable us to rank banks based on the CAMELS rating
framework. As a part of this endeavor not only have we identified key performance
indicators for each of the six parameters in the framework but we have also identified an
acceptable range for these parameters based on certain benchmarks that have been
calculated using historical industry data. In order to set a benchmark for performance
across the spectrum of areas being analyzed in the project we have calculated these
matrices for five top banks of the country. These calculated values have been used to
create a range set for each and every ratio/performance metric in the analysis. Ratings for
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each parameter have been assigned based on these range sets and overall composite
ratings have been computed based on these ratings.

4. Individual, Parameter Level and Overall Composite Ratings
We have rated each and every metric used in the analysis. On the basis of these ratings
we have rated each parameter of the framework. This gives us six parameter level ratings
for each bank analyzed. On the basis of these ratings we have computed the overall
composite rating for a bank based on the ratings on each parameter and the weights
assigned to each parameter.

5. Assignment of weights to every one of the six parameters
We understand that each and every parameter is important in terms of the soundness of a
banking institution but we also understand that some parameters are far more critical in
terms of due diligence to be observed than others. In other words we feel that the margin
to err is miniscule in certain parameters whereas it is relatively higher in certain other
parameters. Keeping this principle in mind we have assigned different weights to each of
the six parameters. These weights affect the effect any given parameter will have on the
overall composite score of a bank.

6. Focus on Interpretation of Results
Being students of finance, we understand that numbers have to be used for analytical
purposes. That is numbers presented in isolation have little meaning. Therefore, we have
laid more focus on interpretation and analysis of the results we have obtained rather than
on plain number crunching.

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MODEL CONSTRUCTION
As stated earlier we needed a benchmark to base our range values for each performance metric.
We have created this benchmark by calculating the performance metrics identified for five top
banks of the country. In order to minimize biases and ensure consistency of data and
calculations, we have calculated all these matrices for three years for all the banks. However, the
final figure used in the analysis is an average of the values for three years for each metric. The
five top banks identified are as follows:
1. State Bank of India Limited
2. Canara Bank Limited
3. Kotak Mahindra Bank Ltd
4. ICICI Bank Ltd
5. Axis Bank Ltd
However, it must be noted that the above five banks have been used to create range values for
each and every metric identified and the banks that have been rated are a separate set of three
banks which are as follows:
1. Punjab National Bank Ltd
2. Bank of Baroda Ltd
3. HDFC bank Ltd
On the basis of the range values created from the analysis of the initial set of top five banks of
the country and the resulting model we have rated the above three banks on the basis of the
CAMELS framework.
Next, in this section we describe in detail the rationale used for assessing a bank in the context of
each and every parameter and the matrices used to do the same. We will now describe each
parameter separately in the coming sections of the report. In general each parameter has been
rated keeping in mind the following key components:

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Rating of 1 - Strong performance, sound management, no cause for supervisory concern
Rating of 2 - Fundamentally sound, compliance with regulations, stable, limited
supervisory needs
Rating of 3 - Weaknesses in one or more components, unsatisfactory practices, weak
performance but limited concern for failure
Rating of 4 - Serious financial and managerial deficiencies and unsound practices. Need
close supervision and remedial action
Rating of 5- Extremely unsafe practices and conditions, deficiencies beyond
management control. Failure is highly probable and outside financial assistance needed

DETAILED VIEW OF PARAMETER WISE MODEL CONSTRUCTION
Parameter 1: CAPITAL ADEQUACY
The rating for this parameter has been conducted keeping in mind the following factors:
The Capital Adequacy Ratio
The amount of leverage being utilized by the bank
The quantum of assets being given out as advances
The Quantum of Government securities in the Total Investments of the Bank
The quantum of NPAs relative to total capital
The rate at which dividends are being distributed to shareholders
Nature and volume of problem assets in relation to total capital and adequacy of LLR and
other reserves
Asset and capital growth experience and prospects
Earnings performance and distribution of dividends
Capital requirements and compliance with regulatory requirements
Ability of management to deal with above factors
Based on the above points the following ratios have been used to assess this parameter:
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1. Capital Adequacy Ratio
2. Debt to Equity Ratio
3. Advances to Assets Ratio
4. Government Securities to Total Investments Ratio
5. NPA to Total Capital Ratio
6. Asset/Capital Growth Ratio
7. Percentage Growth in PAT
8. Dividend Distribution Rate
Rating 1 in this Parameter represents:
Capital levels and ratios exceed all regulatory requirements
Strong earnings performance
Well managed and controlled growth
Competent management able to analyze the risks associated with the activities in determining
appropriate capital levels
Reasonable dividends and ability to raise new capital
Low volume of problem assets
Rating 2 is characterized by similar criteria as 1, but experiences weaknesses is one or
more of the factors. For example:
Capital and solvency ratios exceed regulatory requirements, but Problem assets are
relatively high
Management inability to maintain sufficient capital to support risks
The bank complies with capital adequacy and solvency regulatory requirements, but has
major weaknesses in in one or more factors:
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High level of problem assets in excess of 25% of total capital
Bank fails to comply with regulatory regulations
Poor earnings
Inability to raise new capital to meet regulatory requirements and correct deficiencies
It requires regulatory oversight to ensure management and shareholders address the
issues of concern
The bank is experiencing severe problems resulting in inadequate capital to support risks
associated with the business and operations:
High level of problems generating losses in all area of activities
Problem loans in excess of 50% of total capital
Insufficient capital
Non compliance with regulatory requirements
Management needs to take immediate action to correct deficiencies to avoid going into
bankruptcy
The Bank is insolvent:
Strong regulatory oversight is needed to mitigate the loss to depositors and creditors
Very slight possibility that actions from management will prevent the demise of the bank
Only shareholders may be able to prevent the failure
Parameter 2: 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.
The following considerations have been accounted for while designing metrics for this parameter
and computing the parameter rating:

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Volume of problem of all assets
Ability of management to administer all the assets of the bank and to collect problem
loans
Growth of loans volume in relation to the banks capacity
The Quantum of NPAs in terms of advances and total income
Based on the above points the following ratios have been used to assess this parameter:
1. Gross NPA to Net Advances
2. NPA to Total Income
3. Percentage of Growth Rate of Loans
Rating 1 in this Parameter represents
Ratio of troubled assets to capital is less than 2% or 3%
Past due and extended loans kept under control by a specific unit, in accordance with the
law
Concentrations of credits and loans to insiders provide minimal risk
Efficient loan portfolio management, close monitoring of problem loans
Adequate Loan Loss Reserves in accordance with CBIs regulations
Non credit assets pose no loss threat
Banks that display similar characteristics as 1, but are experiencing non significant
weaknesses, and the management is able to address these issues without close regulatory
oversight.
Problem assets do not exceed 10 % of total capital, but:The bank is experiencing negative
trends in the level of overdue and prolonged credits and of LLR
There are weaknesses in the management underwriting standards and control procedures
Loans to insider pose some regulatory concern, but can be easily corrected
Return on non credit assets is low and they display more than normal risk without posing
a threat of loss
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The bank displays weaknesses in one or more of the 2 factors. Regulatory oversight is
required to ensure that management is able to address the problems. Other characteristics
are:
Bank is experiencing high level of past due and rescheduled credits
Inadequate LLR
Poor underwriting standards
Policies and procedures are not properly implemented
Inappropriate loans to insiders
Non credit assets display abnormal risks and may pose a threat of loss
A bank with severe problems resulting in inadequate capital to support risks associated
with the bank business and operations.
High volume of loss making loans, and;Level of problem credits continues to increase
and could result in insolvency
Doubtful and loss credits exceed LLR and pose a threat to capital
Non-credit assets pose major threat of loss of capital and may result in banks insolvency
Lack of proper policies and procedures
A high level of problem assets credit and non-credit, that impairs the capital or results in a
negative capital.
Problem assets to capital ratio above 50%
Slight possibility that management actions can improve the quality of the bank
Strong regulatory oversight is needed to prevent further capital erosion and protect
depositors and creditors

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Parameter 3 : MANAGEMENT QUALITY
Management includes all key managers and the Board of Directors. Management is the most
important element for a successful operation of a bank. The following considerations have been
accounted for while designing metrics for this parameter and computing the parameter rating:
Quality of the monitoring and support of the activities by the board and management and
their ability to understand and respond to the risks associated with these activities in the
present environment and to plan for the future
Financial performance of the bank with regards to the other CAMELS ratings
Overall performance of the bank and its risk profile
Based on the above points, the following metrics have been used to measure Quality of
Management:
1. Total Advances to Total Deposits Ratio
2. Number of Board Meetings in a Year
3. Financial Performance based on other metrics
A strong and committed management showing:
A thorough understanding of the risks associated with the banks activities
A strong financial performance in all areas
Appropriate understanding and response to changing economy
Strong cooperation and interaction between the Board of Directors and the management
and successful delegation of authority
That the bank has the general characteristics of Rating 1 but possesses some deficiencies in
rating factors, that can be easily corrected without regulatory supervision. Careful consideration
should be given to the financial condition of the financial condition of the bank.

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Major weaknesses in one or more of the rating factors. It needs regulatory supervision to
ensure that management and Board takes corrective actions. Among the problems are:
Disregard for regulatory requirements
Poor assessment of risks and planning
Inappropriate reactions to economic adversities and corrective actions
Poor financial performance
Major weaknesses in several areas.
Strong regulatory action is needed
Board of Directors should consider replacing or strengthen management due to:
(a) Insider abuse
(b) Disregard for regulatory requirements
(c) Lack of proper policies
(d) Damaging actions
Poor financial performance may lead to insolvency
A requirement for immediate and strong supervisory actions and is characterized by:
The Bank displaying strong weaknesses in all areas
Poor financial performance
Insolvency being very likely
Consider replacing management
Board of directors to consider receivership

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Parameter 4 : EARNINGS QUALITY
Earnings include all income from operations, non-traditional sources, extraordinary items. The
following factors have been considered while evaluating this parameter:
Sufficient earnings to cover potential losses, provide adequate capital and pay reasonable
dividends
Composition of net income. Volume and stability of the components
Level of expenses in relation to operations
Non traditional or operational sources
In context of the above points, the following ratios have been used to analyze and evaluate this
metric:
1. Spread to PAT
2. PAT to Average Assets
3. Interest Income to Total Income
4. No Interest Income to Total Income
5. Percentage of Earnings set aside for Dividend Payment and Reserves
6. Total Expense to Operating Income Ratio
7. Adequacy of Provisions covered earlier
Sufficient income to meet reserve requirements, provide capital growth and pay
reasonable dividends to shareholders
Positive trends in major income and expenses categories
Minimal reliance on extraordinary items and non traditional sources of income
That the bank generates sufficient income to meet reserve requirements, provide capital
growth and pay dividends. Nevertheless there may be some negative trends such as:
Relying somehow on non traditional income
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Need to improve budget, planning and control process
Management should be able to deal with the problems without regulatory supervision.
That the bank has major weaknesses in several of the rating factors.
Regulatory supervision is needed to ensure management takes appropriate measures to
improve earnings performance
Insufficient earnings retention may impair capital position
That the bank is experiencing severe earnings problems. Net profit may be positive, but
insufficient to maintain adequate reserves and capital growth
Strong regulatory supervision is needed to prevent loss of capital
Management must take immediate action to improve income and reduce expenses
Certain activities may have to be suspended
Corrective action is needed to prevent losses developing into insolvency
That the bank is experiencing major losses that may lead to insolvency. Immediate action is
needed and strong regulatory supervision is required from CBI

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Parameter 5 : LIQUIDITY
Liquidity refers to the ability to generate cash or turn quickly, short term assets into cash. The
following factors have been considered while rating this parameter:
Sources and volume of liquid funds available to meet short term obligations
Interest rates and maturities of assets and liabilities
Diversification of funding sources
Reliance on inter-bank market for short term funding
Based on the above factors, the following metrics have been incorporated in this section:
1. Liquid Assets to Total Assets
2. Govt. Securities to Total Assets
3. Liquid Assets to Demand Deposits
4. Liquid Assets to Total Deposits
5. Liquid Funds to Total Income
Management having a thorough understanding of the banks balance sheet and is
characterized by:
Sufficient liquid assets to meet loan demand and unexpected deposit reduction
Little reliance on inter-bank market
Strong and sophisticated planning, control and monitoring
A bank that has the same basic characteristics as a 1 Rated bank but is experiencing
some weaknesses in one or more of the rating factors. These weaknesses can be corrected
promptly. For example:

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Bank meets its liquidity requirements, but management lacks proper expertise for
planning, control and monitoring
Bank experienced liquidity problems. Management reacted appropriately but failed to
take action to prevent a recurring risk
Management is unaware of negative trends
Management did not address liquidity problems
A bank that has major weaknesses in several factors such as:
Regulatory supervision is usually required to assure management is taking care of the
problems
Poor liquidity management resulting in frequent liquidity concerns
Management needs to address negative trends immediately to prevent a crisis in daily
obligations
A bank that is experiencing severe liquidity problems such as:
Requires immediate attention and regulatory control
Actions must be taken to strengthen liquidity position to meet current obligations
Management must engage in extensive planning to deal with the situation
A bank that requires outside financial assistance to meet current liquidity requirements to
prevent failure due to the inability to meet creditors and depositors needs.

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Parameter 6 : SENSITIVITY TO MARKET RISKS
The following factors have been considered to evaluate this parameter:
Sensitivity to adverse changes in interest rates, foreign exchange rates, commodity prices,
fixed assets, Nature of the operations of the bank etc
Changes in the value of the fixed assets of the bank
Ability of management to identify, measure and control the market risks given the bank
exposure to these risks
Based on the above factors, the following metrics have been used to assess this parameter:
1. Growth in Fixed Assets
2. Fixed Assets to Revenue Ratio

Assignment of Weights to Metrics in Parameter Ratings
For simplicity and in view of the fact that this being a purely academic study, the list of matrices
used to assess each parameter is not comprehensive but contains only the most critical ratios we
have assigned equal weights to every metric to compute the parameter ratings.
Assignment of Weights to Parameters in Composite Ratings
We have designed the following Weights Structure for the Composite Ratings:
Parameter
Weight
Assigned
Capital Adequacy 25%
Asset Quality 20%
Management Quality 10%
Earnings Quality 20%
Liquidity 20%
Sensitivity to Market Risk 5%

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We believe that Capital Adequacy is one of the most critical aspects of the banking business
due to the very nature of a banks operations. Therefore, we believe that no matter what happens,
this parameter should always remain robust. Thereby, we have assigned a weight of 25% to
the Capital Adequacy Parameter.
Quality of Assets of a bank is also a very critical parameter to gauge the health of a bank. As
recent banking bubbles have shown if the quality of assets is compromised then the bank is not
robust no matter what the volume of those assets. In view of this we have assigned the
Parameter Assets Quality a weight of 20%.
Management Quality is also a critical factor responsible for the success of a bank but we believe
robust banks attract good talent and the good talent ensures that the bank remains robust making
this like a cycle. Therefore we believe that a weight of 10% is appropriate for the Parameter
Management Quality.
Earnings Quality like Asset Quality is very important because it is essential to bear in mind the
source of the earnings of a bank. A robust banking institution will have a high proportion of
income from its core operations and will have less reliance on non operational and non
traditional sources of income. In view of the importance of the quality of earnings we have
assigned a weight of 20% to the parameter Earnings Quality
Another important parameter which is again linked to the nature of operations of a bank, the
Liquidity Parameter is extremely important for the bank and for this reason we have assigned
to it a weight of 20%.
The Sensitivity to Market Risk is a relatively new parameter that has been added and is
relatively more difficult to gauge and assess. Therefore, we have assigned a weight of 5% to
this parameter.

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Calculations, Composite Ratings and Analysis
As per our constructed model, we have calculated the identified metrics for each and every
parameter for the top five banks identified in the model, We have calculated these values for
three years from 2008 to 2010 and have based our model ranges on the average of these values.
The following table shows the average values for all identified metrics in the model based on the
values for the top five banks identified. For further details on this calculation please refer
attached spreadsheets.
Head
Average
Value
CAPITAL ADEQUACY
Capital Adequacy Ratio ( %) 15.27
Debt to Equity Ratio 1.43
Advances to Assets Ratio 0.57
Government securities to total investment ratio 1.13
NPA to Total Capital Ratio 2.67
Asset/Capital Growth(%) 16.28
Growth in NPAT(%) 37.79
Dividend Distribution Rate(%) 65.60
ASSET QUALITY
Gross NPA/ net advances 0.01
Quantum of Non Performing Assets/total income 0.07
Growth Rate of Loans(%) 21.74
MANAGEMENT QUALITY
Total advances to total deposits 0.82
Number of Board Meetings in a Year 5.27
Financial Performance based on other metrics NA
EARNINGS QUALITY
Spread / NPAT 2.62
Net profit to avg assets 0.01
Interest income to total income 0.82
Non- Interest income to total income 0.19
Percentage of Earnings set aside for dividend payment and reserves 0.09
total Expense to Operating Income Ratio 1.08
Adequacy of Provisions as covered initially 9.61
LIQUIDITY
Liquid assets to total assets 0.26
Govt. securities to total assets 0.22
Liquid assets to demand deposits 2.84
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Liquid assets to total deposits 0.36
Quantum of Liquid Funds for Short Term Obligations/ total income 3.04
SENSITIVITY TO MARKET RISK
Growth in fixed assets 3.4
Fixed assets/ revenue (%) 9.41

On the basis of the above values and our collective understanding of every individual metric we
have created the following range values for rating every individual metric on a scale of 1 to 5.
For complete details of the model ranges please refer to Annexure 1

Composite Ratings
On the basis of our constructed model and the range values derived from the same, we have rated
the three banks stated in the section on Model Construction and the results are as follows:
Head Value Rating
CAPITAL ADEQUACY
Capital adequecy ratio in % 12.84 3
Debt to equity ratio 1.07 1
advances to asset ratio 0.62 1
government securities to total investment ratio 0.84 1
NPA to Total Capital Ratio 2.32 1
Asset/Capital Growth(%) 22% 1
Growth in NPAT(%) 37% 1
Dividend Distribution Rate(%) 183.33 1
Capital Rating 1.25
Weighted Value 0.31
ASSET QUALITY
gross NPA/ net advances 0.46% 1
Quantum of Non Performing Assets/total income 1% 1
Growth Rate of Loans(%) 25% 1
Asset Rating 1
Weighted Value 0.20
MANAGEMENT QUALITY
Total advances to total deposits 73% 4
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Number of Board Meetings in a Year 4.67 1
Financial Performance based on other metrics NA 1
Management Quality 2.06
Weighted Value 0.21
EARNINGS QUALITY
Spread / NPAT 2.36 2
Net profit to avg assets 0.01 2
Interest income to total income 0.28 5
Non- Interest income to total income 72% 5
Percentage of Earnings set aside for dividend payment and reserves 5% 4
total Expense to Operating Income Ratio 1.00 1
Adequacy of Provisions as covered initially 3
Earnings Quality 3
Weighted Value 0.63
LIQUIDITY
Liquid assets to total assets 0.09 5
Govt. securities to total assets 0.22 2
Liquid assets to demand deposits 1.06 4
Liquid assets to total deposits 0.10 4
Quantum of Liquid Funds for Short Term Obligations/ total income 0.33 5
Liquidity 4
Weighted Value 0.80
growth in fixed assets 46% 1
fixed assets/ revenue (%) 4% 5
Sensitivity to Market Risk 3
Weighted Value 0.15
Overall Rating 2.30

Head Value Rating
CAPITAL ADEQUACY
Asset/Capital Growth(%) 25 1
Growth in NPAT(%) 44 1
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Dividend Distribution Rate(%) 107 1
Capital Rating 1.25
Weighted Value 0.31
ASSET QUALITY
Growth Rate of Loans(%) 28 1
Asset Rating 1
Weighted Value 0.20
MANAGEMENT QUALITY
Weighted Value 0.21
EARNINGS QUALITY
Interest income to total income 84% 2
Percentage of Earnings set aside for dividend payment and reserves 0.13 4
Earnings Quality 2
Weighted Value 0.40
LIQUIDITY
Liquidity 1.4
Weighted Value 0.28
growth in fixed assets 39 1
fixed assets/ revenue (%) 14% 1
Weighted Value 0.05
Overall Rating 1.45

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3. HDFC Bank Ltd
Head Value Rating
CAPITAL ADEQUACY
Asset/Capital Growth(%) 16.02 1
Growth in NPAT(%) 37.28 1
Dividend Distribution Rate(%) 101.67 1
Capital Rating 1.5
Weighted Value 0.38
ASSET QUALITY
Growth Rate of Loans(%) 39 1
Asset Rating 2.666667
Weighted Value 0.53
MANAGEMENT QUALITY
Weighted Value 0.26
EARNINGS QUALITY
Interest income to total income 81% 2
Percentage of Earnings set aside for dividend payment and reserves 0.08 2
Earnings Quality 2
Weighted Value 0.37
LIQUIDITY
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Liquidity 2.6
Weighted Value 0.52
growth in fixed assets 30 1
fixed assets/ revenue (%) 9.54% 1
Weighted Value 0.05
Overall Rating 2.11

Analysis of Composite Ratings
Punjab National Bank Ltd
Head Rating
Capital Adequacy 1.25
Asset Quality 1
Earnings Quality 3
Liquidity 4
OVERALL COMPOSITE 2.30

Overall Assessment: The bank is fundamentally sound. Barring Liquidity no component
is rated higher than 3 and the bank is in substantial compliance with laws and regulations.
Only moderate weaknesses are present and are well within the capabilities of the board of
directors and managements capability and willingness to correct. The bank is stable and
can withstand most economic downturns. Overall risk management practices are
satisfactory and there are not material supervisory concerns.
Parameter Wise Assessment: The following is the parameter wise assessment for this
bank:
Capital Adequacy Satisfactory, No change required
Asset Quality Satisfactory, No Change Required
Management Quality Fair, Improvement in Advances to Deposit Ratio Required.
From the initial analysis presented it is evident that the fall in this rating is only because
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of a relatively lower Advances to Deposit Ratio. The bank should be more aggressive
in lending. However, overall no cause for concern on this parameter as well
Liquidity Poor, Improvement required. As is evident from the initial analysis all four
ratios related to liquid assets are adverse for the bank. Therefore, it is evident that the
bank should improve its liquidity position by holding more of its funds in liquid assets.
When compared to the averages of the top banks it is evident that the banks liquidity
position is drastically weaker as compared to the top banks. This comparison is made
in the following table:
Ratio PNB Value
Top Banks
Average
Liquid assets to total assets 0.09 0.26
Liquid assets to demand deposits 1.06 2.84
Liquid assets to total deposits 0.10 0.36
Quantum of Liquid Funds for Short Term Obligations/ total income 0.33 3.04

Sensitivity to Market Risk Fair, Improvements in Fixed Assets/Revenue Ratio
required. The bank should aim at expansion which will entail acquisition of Fixed
Assets and will help the bank diversify and mitigate its risks. A lower value for this
ration may show an inadequate expansion program.
Conclusion: The bank is fundamentally sound. It should focusing on improving its
liquidity position by holding a higher percentage of its funds in liquid assets.
Bank of Baroda Ltd
Head Rating
Asset Quality 1
Earnings Quality 2
Liquidity 1.4

Overall Assessment: The bank is sound in all aspects and seems to be in substantial
compliance of rules and regulations. Any weaknesses can be handled routinely by the
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board of directors and management. The bank is considered stable, well managed and
capable of withstanding all but the most severe economic downturns. Risk management
practices are strong and minimal supervisory oversight is required to ensure the
continuation and validation of the banks fundamental soundness. The bank gives no
cause for concern.
Conclusion: The bank is fundamentally sound and gives no cause for concern.

3. HDFC Bank Ltd
HDFC Bank Ltd
Head Rating
Asset Quality 2.67
Earnings Quality 2
Liquidity 2.6

Overall Assessment: The bank is fundamentally sound. Only moderate weaknesses are
present and are well within the capabilities of the board of directors and managements
capability and willingness to correct. In this case, these weaknesses seem to be present in
the Asset Quality, Management Quality and Liquidity Parameters. However, overall the
bank is stable and can withstand most economic downturns. Overall risk management
practices are satisfactory and there are not material supervisory concerns.
Parameter Wise Assessment: The following is the parameter wise assessment for this
bank:
Capital Adequacy Satisfactory, No corrective action is warranted
Asset Quality Fair, improvements are possible. As is observable from the initial
analysis, the bank has a slightly higher proportion of Non performing Assets as compared
to the benchmark of the average figure for the top five banks. The bank should focus on
reducing the proportion of NPAs in its loan basket. This entails a stronger and more
stringent credit appraisal system and more follow up to recover loans that have started to
31 | P a g e

default. The following table brings out the differences in the NPA related matrices of
HDFC Bank and of the benchmark banks.
Ratio
HDFC
Value
Top Banks
Average
Gross NPA/Net Advances 1.59% 1.11%
NPA/Total Income 9% 6.64%

Management Quality Fair, Improvements are possible. The fall in rating for this
parameter is due to a relatively lower Advances to Total Deposits Ratio. The bank should
be more aggressive in lending. However, given the already high NPA proportion care
must be taken to prevent dilution of credit standards in a bid to increase Advances.
Earnings Quality Satisfactory, No improvements required
Liquidity Fair, Improvements are possible. The bank needs to only slightly improve
its liquidity position which will improve its liquidity ratios thereby improving its rating
in this parameter.
Sensitivity to Market Risk Satisfactory, No change required
Conclusion: The bank is fundamentally sound. It should focusing on improving its
liquidity position by holding a higher percentage of its funds in liquid assets, be a more
aggressive lender and focus on strengthening its credit control systems in order to reduce
NPAs.

32 | P a g e

ANNEXURES
Annexure 1: Ranges derived from Constructed Model for individual metrics used for
Parameter Assessment
Parameter CAPITAL ADEQUACY
Metric
Advances to Asset
Ratio
Average of Top
Banks 0.573
Ratings Range
1 0.50 0.70
2 0.45 0.50
3 0.40 0.45
4 0.30 0.40
5 Below 0.30

Metric
NPA to Total Capital
Ratio
Average of Top
Banks
2.67
Ratings Range
1 Below 2.75
2 2.75 2.80
3 2.80 2.90
4 2.90 3.00
5 Above 3.00

Metric Growth in NPAT(%)
Average of Top
Banks
37.787
Ratings Range
1 Above 33%
2 30- 33%
3 25 - 30%
4 20 - 25%
5 Below 20%
Metric
Gov. Securities/Total
investment
Average of Top
Banks 1.1282
Ratings Range
1 Above 0.70
2 0.65 0.70
3 0.55 0.65
4 0.4 0.55
5 Below 0.4
Metric
Asset/Capital
Growth(%)
Average of Top
Banks
16.277
Ratings Range
1 Above 15%
2 14.5 - 15%
3 14 - 14.5%
4 13- 14%
5 Below 13%
Metric
Dividend Distribution
Rate(%)
Average of Top
Banks
65.6
Ratings Range
1 Above 60%
2 50 - 60%
3 35 - 50%
4 30 - 35%
5 Below 30%
33 | P a g e

Parameter Asset Quality
Metric
Gross NPA/ Net
Advances
Average of Top
Banks
0.0111
Ratings Range
1 Below 1.5%
2 1 - 1.5%
3 1.5 - 2%
4 2 - 3%
5 Above 3%

Metric
Non Performing
Assets/Total Income
Average of Top
Banks
0.066
Ratings Range
1 Less than 7%
2 7 - 8%
3 8 - 9%
4 9 - 10%
5 Over 10%
Metric Growth Rate of Loans(%)
Average of Top
Banks
21.738
Ratings Range
1 Above20%
2 19 - 20%
3 18 - 19%
4 16 - 18%
5 Below 15%
34 | P a g e

Parameter - Management Quality
Metric
Total advances/Total
Deposits
Average of Top
Banks
0.8175
Ratings Range
1 Above 80%
2 78 - 80%
3 76 - 78%
4 70 - 76%
5 Below 70%

Parameter Earnings Quality
Metric Spread / NPAT
Average of
Top Banks
2.616
Ratings Range
1 Above 4
2 3.5-4
3 2-3.5
4 1.5-2
5 Below 1.5

Metric
Number of Board
Meetings in a Year
Average of Top
Banks
5.267
Ratings Range
1 more than 4
2 exactly 4
3 -
4 -
5 less than 4
Metric
Net profit to Average
Assets
Average of Top
Banks
0.012
Ratings Range
1 Above 0.01
2 0.009-0.01
3 0.008-0.009
4 0.007-0.008
5 Below 0.007
Metric
Non- Interest
Income to Total
Income
Average of
Top Banks
0.1851
Ratings Range
1 Less than 18%
2 18 - 19%
3 19 - 20%
4 20 - 25%
5 More than 25%
Metric
Interest Income to
Total Income
Average
of Top
Banks
0.817
Ratings Range
1 Above 0.85
2 0.85-0.75
3 0.75-0.65
4 0.65-0.55
5 Below 0.55
35 | P a g e

Metric
Percentage of Earnings set
aside for Dividend
Payment and Reserves
Average of
Top Banks
0.09
Ratings Range
1 9 - 10%
2 8- 9%
3 7-8%
4 5 - 7%
5 Below 5%

Parameter Liquidity
Metric
Liquid assets to Total
Assets
Average of Top
Banks
0.26
Ratings Range
1 Above 0.32
2 0.24-0.32
3 0.18-0.24
4 0.12-0.18
5 0.06-0.12

Metric
Total Expense to
Operating Income Ratio
Average of Top
Banks
1.084
Ratings Range
1 Below 1.09
2 1.14-1.09
3 1.19-1.14
4 1.24-1.19
5 Above 1.24
Metric
Govt. securities to
Total Assets
Average of Top
Banks
0.220
Ratings Range
1 Above 0.25
2 0.20-0.25
3 0.15-0.20
4 0.10-0.15
5 Below 0.10
Metric
Liquid Assets to
Demand Deposits
Average of Top
Banks
2.840
Ratings Range
1 Above 3.2
2 2.4-3.2
3 1.6-2.4
4 0.8-1.6
5 Below 0.8
Metric
Liquid Assets to Total
Deposits
Average of Top
Banks
0.3600
Ratings Range
1 above 0.36
2 0.26-0.36
3 0.10-0.26
4 0.06-0.10
5 Below 0.06
36 | P a g e

Parameter Liquidity

Metric
Liquid Funds for Short Term
Obligations/ Total Income
Average of Top
Banks
3.04
Ratings Range
1 3 to 4
2 2.5 -3
3 2 2.5
4 2 to 1
5 Less than 1

Parameter Sensitivity to Market Risk
Metric Growth in Fixed Assets
Average of Top
Banks 3.4000
Ratings Range
1 above 3.5
2 2.5-3.5
3 0.5-2.5
4 (2.5) - 0.5
5 below (2.5)

Metric Fixed Assets/ Revenue (%)
Average of Top Banks 9.410
Ratings Range
1 above 9.5
2 8.5-9.5
3 7.5-8.5
4 6.5-7.5
5 below 6.5

37 | P a g e

REFERENCES

1. www.scribd.com
2. www.wikipedia.com
3. www.investopedia.com
4. www.capitalineplus.com
5. www.gpandhra.blogspot.com/best_banks
6. www.allbankingsolutions.com/camel.htm
7. www.fedpartnership.gov
8. Banking Management IUP
9. NCUA letter to credit unions
10. www.eurojournals.com
11. USAID CAMELS Ratings
12. CAMELS Analysis of the Indian banking industry by Mihir Dash
13. The Extent of Disclosure in Annual Reports of Banking Companies

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