Evaluating and Interpreting Banking Indicators

1. Evaluating and Interpreting Banking Indicators Keshab Bahadur K.C. Bank Supervision Department Nepal Rastra Bank

2. 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

3. C = Capital

4. 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

5. 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

6. CapitalAdequacy

7. Calculation Formula

8. PromptCorrectiveAction (PCA) Trigger points for PCA

9. A = Assets Quality

10. 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

11. 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

12. M = Management

13. 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

14. E = Earning

15. 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

16. 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

17. 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

18. L = Liquidity

19. 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

20. 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

21. S = Sensitivity to Market Risk

22. 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

23. 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

24. Thank you