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Ranking Selected Public Sector Banks in India based on the Camel Rating Methodology

von Rajveer Rawlin (Autor) Mausam Singh (Autor) Dr. Ramaswamy Shanmugam (Autor)

Forschungsarbeit 2017 11 Seiten

BWL - Bank, Börse, Versicherung

Leseprobe

Inhaltsverzeichnis

Abstract

Introduction

Literature review

Methodology

Results

Discussion and Analysis

Conclusion

Limitations

References

Abstract

The CAMEL rating is a well established technique to compare the performance of banks and financial institutions. We compare a sample of five public sector banks in India, ranking them via the CAMEL rating. Of the banks chosen for the study SBI ranked first in capital adequacy, asset quality and earnings quality. IDBI ranked first in management efficiency while BOB ranked first in liquidity. The bank with the best overall CAMEL rank proved to be SBI. By providing a basis of comparison for different banks the CAMEL rating can yield valuable insight to several stake holders of banks such as bank management, investors and regulators.

Keywords: CAMEL rating, banks, capital adequacy, asset quality, management efficiency, earnings quality, liquidity.

Introduction

Indian banking stocks are surging yet again. This has happened in the event of the recent Non Performing Asset (NPA) problems that have plagued the banking sector and that aren’t going away any time soon. The government controlled public banks have suffered far more than their private counterparts in this regard. With the recent demonetization embarked by the government and adoption of international banking norms such as Basel 3 banking margins could come under further pressure. Given the utmost importance of the banking sector to the economy it would prove useful to rate and review some of India’s largest banks. This study seeks to understand and compare some of India’s largest public sector banks via the well-known CAMEL rating system.

The CAMEL rating system is an internationally recognized rating system that regulatory authorities use in order to rate and rank financial institutions according to five factors represented by the acronym "CAMEL". These are Capital Adequacy, Asset Quality, Management, Earnings and Liquidity. Each financial institution is assigned a score based on these measures.An overall ranking based on CAMEL parameters is developed. This can help us compare different banks or other financial institutions.

Several studies have illustrated the use of the CAMEL rating as a comparison tool. Sangmi and Nazir, 2010 used the Camel rating to study the performance of a few banks in India. Misra and Aspal, 2013 compared State Bank of India and its associate banks via the CAMEL rating. Aspal and Malhotra, 2013 and Lakhtaria, 2013 have studied the financial performance of selected Indian public sector banks through the CAMEL rating model. Kumar et al, 2012 examined the performance of the top twelve highest market capitalized public and private banks in India with the help of camel rating approach.

In our study we focus on a few selected public sector banks and attempt to arrive at a ranking methodology for these banks based on the CAMEL approach. In addition we also rank the share price performance of these banks and try to gage the relevance of CAMEL parameters in share price performance.

Literature review

Sangmi and Nazir, 2010 examined the CAMEL ratings of Punjab national bank and Jammu and Kashmir Bankin India from 2001 to 2005. They found out that both the banks were financially sound as per the CAMEL framework. Misra and Aspal, 2013 compared State Bank of India and its associate banks through the CAMEL rating methodology. He found that State Bank of India had significantly lower CAMEL ratings than its smaller associate banks.

Aspal and Malhotra, 2013 studied the financial performance of selected midsized Indian public sector banks with theCAMEL rating model from 2007 to 2011. They found that bank of Baroda and Andhra bank had the highest CAMEL ratings. Lakhtaria, 2013 studied the top three largest public sector banks namelyState Bank of India (SBI),Bank of Baroda and Punjab National Bank (PNB) using the CAMEL model. He found that the Bank of Baroda had the highest CAMEL rank followed by PNB and SBI.

Kumar et al., 2012 studied the performance of the top 12 Indian private and public banks by market capitalization through the CAMEL rating approach between 2000 and 2011. They found that that private sector banks fared much better than their public counterparts. Jha and Hui, 2012 similarly found that private sector banks outperformed their public counterparts among a cross section of Nepalese commercial banks. Kaur (2010) studied public and private sector banks operating in India via the CAMEL approach over a seven year period from 2001 to 2007. Andhra Bank and State Bank of Patiala ranked as the best public sector bank while Jammu and Kashmir Bank was the best private sector bank.

Methodology

We focus on developing a ranking methodology for a sample of public sector banks based on the CAMEL parameters. The five CAMEL parameters are as follows:

C – Capital Adequacy
A – Asset Quality
M – Management Efficiency
E – Earnings quality
L – Liquidity

Capital adequacy is a measure of how adequately capitalized a bank is in its ability to absorb any losses and meeting customer obligations. Two measures of capital adequacy considered in this study are:

1) The Capital Adequacy Ratio and
2) The Debt to Equity Ratio

Asset quality is a measure of the bank’s financial health. Improving asset quality is often marked by strong financial performance. Two measures of asset quality considered in this study are:

1) The % Net Non Performing Assets to Total Advances
2) The % Total Investments to Total Assets

Management efficiency measures how capable top management is in managing its operations and getting the most out of its work force. Two measures of asset quality considered in this study are:

1) Total Advances to Total Deposits
2) Business per Employee

Earnings quality looks at how profitable the bank is and its ability to deliver superior returns on its asset base deployed. Two measures of earnings quality considered in this study are:

1) %Operating Profit to Working Funds
2) % Change in Net Profit

Liquidity looks at how well the firm manages and generates its cash to overcome any asset liability mismatches in the near term. Two measures of liquidity considered in this study are:

1) % Liquid funds to total deposits
2) % Liquid funds to total assets

The trend in each of the above parameters is observed over a five year period from the financial year ending March 2012 to financial year ending March 2016. Ranking is done for each of these parameters in the most recent year i.e. the financial year ending March 2016. The average rank for each category is determined. An overall CAMEL rank is developed based on average rank of each of the above parameters and is used to rate the banks. Data on all banks is obtained from the Capitaline database (www.capitaline.com). The following five banks are chosen for the study based on their asset base and market capitalization:

1) State Bank of India (SBI)
2) Bank of Baroda (BOB)
3) Punjab National Bank (PNB)
4) IDBI Bank (IDBI)
5) Bank of India (BOI)

Results

Table 1: Some key bank metrics (Billion Rupees)

Abbildung in dieser Leseprobe nicht enthalten

Source: moneycontrol.com as on 21/4/17

Table 2: Ranking as per the Capital Adequacy Ratio

Abbildung in dieser Leseprobe nicht enthalten

Table 2 shows the capital adequacy ratio of the five banks studied. The ratios for all banks except IDBI have improved over the last 3 years. SBI has the highest capital adequacy ratio for the most recent year studied and is ranked 1. IDBI has the lowest capital adequacy ratio for the most recent year studied and is ranked 5.

Table 3: Ranking as per the Debt to Equity Ratio

Abbildung in dieser Leseprobe nicht enthalten

Table 2 shows the debt to equity ratio of the five banks studied. The ratios for SBI and IDBI have improved over the last 5 years while PNB and BOI have seen deterioration. IDBI has the lowest debt to equity ratio for the most recent year studied and is ranked 1. BOI has the highest debt to equity ratio for the most recent year studied and is ranked 5.

Table 4: Ranking as per the % Net NPA to Net Advances

Abbildung in dieser Leseprobe nicht enthalten

Table 4 shows the %NPA of the five banks studied. The ratios for all banks have deteriorated over the last 5 years. SBI has the lowest %NPA for the most recent year studied and is ranked 1. PNB has the highest %NPA for the most recent year studied and is ranked 5.

Table 5: Ranking as per the %Total Investment to Total Assets

Abbildung in dieser Leseprobe nicht enthalten

Table 5 shows the % total investment to total asset ratio of the five banks studied. The ratios for all banks except IDBI have deteriorated or remained unchanged over the last 5 years. IDBI has the highest % total investment to total asset ratio for the most recent year studied and is ranked 1. BOB has the lowest % total investment to total asset ratio for the most recent year studied and is ranked 5.

Table 6: Ranking as per the %Advances to Deposits

Abbildung in dieser Leseprobe nicht enthalten

Table 6 shows the % advances to deposit ratio of the five banks studied. The ratios for all banks except SBI have deteriorated or remained unchanged over the last 5 years. SBI has the highest % advances to deposit ratio for the most recent year studied and is ranked 1. BOB has the lowest % advances to deposit ratio for the most recent year studied and is ranked 5.

Table 7: Ranking as per Business per Employee (10M Rupees)

Abbildung in dieser Leseprobe nicht enthalten

Table 7 shows the business per employee ratio of the five banks studied. The ratios for all banks have improved over the last 5 years. IDBI has the highest business per employee ratio for the most recent year studied and is ranked 1. PNB has the lowest business per employee ratio for the most recent year studied and is ranked 5.

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Details

Seiten
11
Jahr
2017
ISBN (eBook)
9783668458390
ISBN (Buch)
9783668458406
Dateigröße
513 KB
Sprache
Englisch
Katalognummer
v367088
Note
1
Schlagworte
CAMEL rating banks capital adequacy asset quality management efficiency earnings quality liquidity

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Titel: Ranking Selected Public Sector Banks in India based on the Camel Rating Methodology