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PEARLS in Vietnam
Rating Vietcombank
NEWS (5/8/2013) 1 2 3 4 5 Agribank lowers interest rate to 5% for a term of 1 month lowest level in the market. Vietinbank lowers interest rate to 7%/1 year. Vietcombank suddenly increases price of USD to 21.000 VND. Bank has spent 408 trillion VND on paying lending rate and deposit rate. More than 95% of banks are not expected to increase credit for security.
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 institutions 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)
6
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 offbalance-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 banks liquidity. Sensitivity to market risk: the degree to which changes of market can adversely affect earnings or capital.
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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.
Classification of overall performance of commercial banks Type A B C Required total score > 80 60 - 79 50 - 59 Requirement in each category Not lower than 65% of maximum Not lower than 50% of maximum Not lower than 45% of maximum
< 50
Hello, Im a CAMEL!
Source
5
5 5 15
-5
-4 14% - 17% : -2 <14%: -5
Ratings of VCB
2012 Charter Capital (> 3,000 billion) CAR (> 9%) 23,000 15%
ROE (>17%)
Band score
Ratings instruction
Requirement Max score Minus if do not reach requirement
25
Structure of on-balance 5 sheets assets > 75% (asset in balance sheet/ total asset) Quality of guarantee over balance sheets asset < 3 % Total score 5 0 - 35
Ratings of VCB
2012
NPL ratio 2.4%
2011
2%
2012
2011
87.3%
89.7%
Ratings of VCB
2012 NPL ratio < 3% Structure of on-balance sheets assets > 75% Quality of guarantee over balance sheets asset < 3 % Band score 2.4% (25 pts) 89.7% (5 pts) 5 pts 2011 2% (25 pts) 87.3% (5 pts) 5 pts
35/35
35/35
Ratings instruction
Requirement Minus (If do not meet requirement -3
1/Having an adequate number of members of the Board of Directors and Supervisory Board
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/Members of the Board of Directors, are competent, unified, responsible 5/Observing the State Banks regulations on shareholders, shares and stocks Maximum score: 15 points, minimum score: 0 point
-4 -3 -2
5/Observing the State Banks regulations on shareholders, 0 shares and stocks Band score
13/15
Ratings instruction
Requirement Max score Point
15
Ratings of VCB
Ratings of VCB
Requirement 2a/The ratio of income generated from services to total income 2012 9.19% (3 point) 2011 10.15% (3 point)
Requirement
2b/The ratio of net income generated from services to pre-tax income
2012
27.09% (1 point)
2011
26.5% (1 point)
Ratings of VCB
Requirement 1/The ratio of pre-tax income to equity attains 2a/The ratio of income generated from services to total income 2b/The ratio of net income generated from services to pre-tax income Total 2012 10 pts 3 pts 1 pt 14 pts 2011 15 pts 3 pts 1 pt 19 pts
Ratings instruction Requirement Max score Point _ Failing once: -5 _ Failing >1: -12 Liquid assets/current 12 liabilities
Ratings of VCB
Requirements
2012
2011
Benchm ark
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%
Ratings of VCB
Requirements 2/Maximum ratio of short-term funds and long-term loans 2012 2011 Benchma rk 30%
Not calculate due to: - Not have information to calculate - The amount score of this criteria is quite small when comparing with overall
Ratings of VCB
Requirements 1. liquid assets/total liabilities 2012 12pt 2011 12pt
3pt
15pt
3pt
15t
2011
2012 10 35 13 14 15 87 A
Requirement > 65% of 15 > 65% of 35 > 65% of 15 > 65% of 20 > 65% of 15 > 80
13 35 13 19 15 95 A
PEARLS stands for: Protection Effective financial structure Asset quality Rate of returns and costs Liquidity Signs of Growth
Managers use PEARLS as a management tool to identify potential problems Board of Directors use PEARLS to monitor managements progress toward financial targets
I love PEARLS!
P Protection The primary goal is to ensure that the financial institution provides depositors a safe place to save their money.
2. Net Loan Loss Allowances / World Council Allowance Required for Delinq. 1-12 Mo. 3. Complete Loan Charge-off of Delinq. > 12 Mo.
Yes
Minimized
> 75%
111%
Ratings of VCB
2011 1. Loan Losses Allowances / Delinq. >12 Mo. 226.98% 2012 Benchmark 100% 364.65%
Nm 2012 Nm 2011
E Effective financial structure Ratios measure assets, liabilities and capital, and their associated targets constitute an ideal structure for banks
Goals (Excellence)
70-80% 16%
2% 0% 70-80%
0-5%
20% 10% 10%
Ratings of VCB
2011 1. Net Loans / Total Assets 55.65% 2012 56.91% Benchmark 70-80%
42.25%
51.66%
70-80%
Nm 2012
Nm 2011
A Asset quality The indicators measure the impact of assets which do not generate income such as delinquent loans, and non-productive assets
A - Asset Quality
Goals (Excellence)
1. Total Loan Delinquency / Gross Loan Portfolio 2. Non-earning Assets / Total Assets 3. Net Zero Cost Funds / Non-earning Assets
5%
5% 200%
Ratings of VCB
2011 1. Total Loan Delinquency / Gross Loan Portfolio 16.74% 2012 16.32% Benchmark 5%
Nm 2012
Nm 2011
Ratings of VCB
2011 2. Non-earning Assets / Total Assets 2.90% 2012 2.97% Benchmark 5%
Nm 2012
Nm 2011
R - Rates of Return and Costs 1. Net Loan Income / Average Net Loan Portfolio
Income ratios
2. Liquid Inv. Income / Avg. Liquid Investments 3. Fin. Investment Income / Avg. Fin. Investments
R1
Market Rates > Inflation Market Rates Market Rates, > R5 E9=10% 5% P1=100%, P2=35%
9. Operating Expenses / Average Assets 10. Provisions for Risk Assets / Average Assets
Minimized
E9=10%
Ratings of VCB
2011
1. Net Loan Income / Average Net Loan Portfolio 17.77%
2012
14.43%
Benchmark
Entrepreneurial Rate (12.14%)
Nm 2012
Nm 2011
Nm 2010
171.241.318
2011
5. Fin. Costs: Savings Deposits / Avg. Savings Deposits 12.61%
2012
9.71%
Benchmark
Market Rates > Inflation (12.3%, 10.5% 18.5%, 6.8%) Depends on P1=100%, P2=35%
Nm 2011 Nm 2010
1.03%
0.85%
Nm 2012
151.132.566 307.621.338
2011
9. Operating Expenses / Average Assets 12. Net Income / Average Assets (ROA) 0.20%
Benchmark 5% E9=10%
1.25%
Nm 2012
Nm 2011
Nm 2010
307.621.338
L Liquidity
L - Liquidity
Goals (Excellence)
15-20%
10%
< 1%
Ratings of VCB
2011 2. Liquidity Reserves / Total Savings Deposits 2012 Benchmark 10% 39.23% 30.31%
Nm 2012
Nm 2011
43,545,226
49,097,067
Ratings of VCB
2011 3. Non-earning Liquid Assets / Total Assets 3.25% 2012 2.63% Benchmark < 1%
Nm 2012
Nm 2011
Ratings of VCB
8. Institutional Capital
9. Net Institutional Capital
Liabilities side
E8 10%
E9 10% 15% > Inflation + 10%
Ratings of VCB
2011 1. Net loan 19.18% 2012 15.57% Benchmark Depends on E1=70-80% Depends on E5=70-80% > Inflation + 10% (28.5%, 16.8%)
Nm 2010
171.241.318
151.132.566 307.621.338
5. Savings deposits
9.81%
15.82%
19.21%
13.02%
Nm 2012
Nm 2011
Protection: Good Effective financial structure: Good Asset quality: Normal (Problem in delinquency) Liquidity: Normal (Too many non-earning liquid assets)
CAMELS
PEARLS
No specific score Inappropriate categories for banks No specific benchmarks for some criteria
Quantify the qualitative criteria (How to evaluate Management capacity) Full disclosure of information in the financial reports
No overall band-score assigned to each category of evaluation (CAMELS does) Difficult to evaluate the overall performance of banks Some categories in PEARLS cant be applied to banks (Because they are for credit unions only) Can not comprehensively assess banks performance Some categories in PEARLS have no specific benchmark to evaluate => Hard to arrive at final overall evaluation of banks
Assign score for each of the categories (like CAMELS) In evaluating a bank, some adjustment should be made