Mba_(Finance_&_Marketing)

CAMELS Model Of Submitted to Professor Puneet Dublish By: Aditya Rao Ashish Chatrath Group No. 11 Introduction: The Industrial Development Bank of India Limited commonly known by its acronym IDBI is one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized IDBI as "other public sector bank”. It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently the tenth largest development bank in the world. Some of the institutions built by IDBI are The National Stock Exchange of India (NSE), The National Securities Depository Services Ltd. (NSDL) and the Stock Holding Corporation of India (SHCIL) Recent Developments: To meet emerging challenges and to keep up with reforms in financial sector, IDBI has taken steps to reshape its role from a development finance institution to a commercial institution. With the Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the status of a limited company viz. "Industrial Development Bank of India Limited" (IDBIL). Subsequently, the Central Government notified October 1, 2004 as the 'Appointed Date' and RBI issued the requisite notification on September 30, 2004 incorporating IDBI Ltd. as a 'scheduled bank' under the RBI Act, 1934. Consequently, IDBI, the erstwhile Development Financial Institution of the country, formally entered the portals of banking business as IDBIL from October 1, 2004, over and above the business currently being transacted. As of July, 2006 the employees association of the IFCI have sought its merger with the IDBI. CAMELS Model: Regulators, analysts and investors have to periodically assess the financial condition of each bank. This is done by the CAMELS Model where in the Banks are rated on various parameters, based on financial and non-financial performance. Bank supervisory authorities assign each bank a score on a scale of one (best) to five (worst) for each factor. If a bank has an average score less than two it is considered to be a high-quality institution, while banks with scores greater than three are considered to be less-than-satisfactory establishments. The system helps the supervisory authority identify banks that are in need of attention. CAMELS is an acronym, where each letter refers to a specific category of performance. • C - Capital Adequacy - Capital adequacy ratio - Debt-Equity Ratio - Advances to Assets - G-Secs to Total Investments • A - Asset Quality - Gross NPAs to Net Advances - Net NPAs to Net Advances - Total Investments to Total Assets - Percentage change in Net NPAs - Net NPAs to Total Assets • M- Management - Profit per Branch - Total Advances to Total Deposits - Business per Employee - Profit per Employee • E- Earning Quality - Operating Profits to Average Working Funds - Percentage Growth in Net Profits - Spread - Net Profit to Average Assets - Interest Income to Total Income - Non-Interest Income to Total Income • L- Liquidity - Liquid Assets to Total Assets - G-Secs to Total Assets - Liquid Assets to Demand Deposits - Liquid Assets to Total Deposits • S – Sensitivity to market risk - Measured by Beta # Here are the Financial Statements of IDBI Bank Ltd. for 4 years ending 31st March 2008. Balance Sheet (Rs in Crs) Year SOURCES OF FUNDS : Capital Reserves Total Deposits Borrowings Other Liabilities & Provisions TOTAL LIABILITIES APPLICATION OF FUNDS : Cash & Balances with RBI Balances with Banks & money at Call Investments Advances Fixed Assets Other Assets Miscellaneous Expenditure not written off TOTAL ASSETS Contingent Liability Bills for collection Mar 08 724.76 8,095.50 72,997.98 38,612.56 10,436.67 130,867.47 6,694.83 2,063.94 32,802.93 82,212.69 2,765.98 4,327.10 0 130,867.47 101,180.23 2,831.77 Mar 07 724.35 7,575.11 43,354.04 42,404.38 9,908.01 103,965.89 5,406.47 1,504.62 25,675.31 62,470.82 2,778.37 6,130.30 0 103,965.89 108,509.88 2,405.15 Mar 06 723.79 5,647.39 26,000.92 47,530.20 8,718.83 88,621.13 2,680.09 2,682.69 25,350.53 52,739.07 810.9 4,357.85 0 88,621.13 76,991.84 1,519.44 Mar 05 721.78 5,204.50 15,102.64 50,005.54 10,395.83 81,430.29 2,375.89 3,277.27 25,054.69 45,413.57 889.42 4,419.45 0 81,430.29 60,046.07 1,207.57 Profit & Loss Account (Rs in Crs) Year INCOME : Interest Earned Other Income Total II. Expenditure Interest expended Payments to/Provisions for Employees Operating Expenses & Administrative Expenses Depreciation Other Expenses, Provisions & Contingencies Provision for Tax Deferred Tax Total III. Profit & Loss Reported Net Profit Extraordinary Items Adjusted Net Profit Prior Year Adjustments Profit brought forward IV. Appropriations Transfer to Statutory Reserve Transfer to Other Reserves Trans. to Government /Proposed Dividend Balance carried forward to Balance Sheet Equity Dividend % Earnings Per Share-Unit Curr Book Value-Unit Curr Mar 08 8,020.84 1,779.46 9,800.30 7,364.41 384.61 264.29 83.5 881.03 87.5 0 9,065.34 729.46 0.72 728.74 0 1,314.90 183 1,673.10 167.22 21.04 20 9.76 93.8 Mar 07 6,345.42 1,058.14 7,403.56 5,687.49 282.9 199.78 121.99 429.05 26 22.79 6,770.00 630.31 165.84 464.47 0 1,030.71 158 61 127.12 1,314.90 15 8.45 86.08 Mar 06 5,380.72 1,280.45 6,661.17 5,000.82 318.51 171.99 143.55 437.95 60 -46.94 6,085.88 560.89 5.7 555.19 0 787.45 140.22 53.5 123.91 1,030.71 15 7.54 88.03 Mar 05 2,655.72 673.23 3,328.95 2,467.87 157.55 83.76 84.02 247.27 -18.78 0 3,021.69 307.26 12.77 294.49 152.53 726.38 77 260 61.72 787.45 7.5 8.3 82.11 Capital Adequacy It indicates the bank’s capacity to maintain capital commensurate with the nature of and extent of all types of risks, as also the ability of the bank’s management to identify, measure, monitor and control these risks. a) Capital Adequacy Ratio: The Capital is almost stagnant in all the years but the Risk associated with Assets is increasing, hence the fall in the ratio. It is a worrying sign for the bank as it might result in future NPAs. 2008 11.95% 2007 13.73% 2006 14.8% 2005 15.51% b) Debt Equity Ratio: It depicts the Capital structure of the organization; we see that the firm has consciously reduced its overall Debt portion in its total funds. 2008 4.37 2007 5.11 2006 7.46 2005 8.43 c) Advances to Assets: It shows the ratio of Advances in the Total Assets. The ratio is rising annually which shows that the bank is performing its basic operation of lending advances very efficiently and improving its business every year, hence a positive sign. 2008 0.62 2007 0.60 2006 0.59 2005 0.55 d) Govt. Securities to Total Investments: It shows the ratio of money invested in Govt. securities in totality. Heavy investment in Govt. Securities denotes Soundness and Safe financial position of the bank. The figures show an increasing trend and are very healthy. 2008 0.71 2007 0.63 2006 0.64 2005 0.59 So, overall the Capital Adequacy is satisfactory despite a falling adequacy ratio as the other ratios make up for it and reflect a sound position of the bank. Asset Quality A review or evaluation assessing the credit risk associated with a particular asset. These assets usually require interest payments - such as a loans and investment portfolios. How effective management is in controlling and monitoring credit risk can also have an affect on the what kind of credit rating is given. A review or evaluation assessing the credit risk associated with a particular asset. These assets usually require interest payments - such as a loans and investment portfolios. How effective management is in controlling and monitoring credit risk can also have an affect on the what kind of credit rating is given. Many factors are considered when rating asset quality. For example, consideration must be put into whether or not a portfolio is appropriately diversified, what regulations or rules have been put in to place to limit credit risks and how efficiently operations are being utilized. Typically, a rating of one shows that asset quality is good and there is very little credit risk, while a rating of five can signify that there are major asset quality problems and issues that need to be managed. a) Gross NPAs to Net Advances: 2008 1.9% 2007 1.97% 2006 2.11% 2005 2.6% b) Net NPAs to Net Advances: 2008 1.3% 2007 1.15% 2006 1.01% 2005 1.74% These above two ratios measure the portion of bank’s assets in the form of advances that have gone bad, where the recipient has defaulted and not been paying full or any part of the payment he’s required to pay, or it can be simply investments gone bad. The figures are manageable and the first ratio declines all the while showing that the bank is tightening its screws to keep the NPAs under check. c) Total Investments to Total Assets: A higher ratio affects profitability adversely; a lower ratio means the bank has nothing to guard against in case of future liabilities. This bank shows a respectable amount of investments to avoid risks and over the years has slightly lowered its ratio by 6%. 2008 0.25 2007 0.25 2006 0.29 2005 0.31 d) Percentage change in Net NPAs: The figure is rising in the last two years and so have the assets that guard against it so there is nothing to worry about. NNPAs declined in 2006 which shows good loan policy adopted by the bank applying the KYC rule. 2008 28.25% 2007 28.20% 2006 -33.50% 2005 3.8% e) Net NPAs to Total Assets: This shows the ratio of NNPAs to the Total Assets, the bank can recover NPAs by selling its assets. The figures are manageable. 2008 0.83% 2007 0.69% 2006 0.63% 2005 1.04% So, we analyze that the Asset Quality is decent; there is nothing to worry about for the Investors although we feel that there is scope for Improvement. The bank should revise work harder to ensure that its assets are safe and healthy. Management Quality It signals the ability of the Board of Directors and Senior Managers to identify, measure, monitor and control risks associated with banking, this qualitative measure uses risk management policies and processes as indicators of sound management. a) Total Advances to Total Assets: It shows the ratio of Advances in the Total Assets. The ratio is rising annually which shows that the bank is performing its basic operation of lending advances very efficiently and improving its business every year, hence a positive sign. 2008 0.62 2007 0.60 2006 0.59 2005 0.55 b) Business per Employee: A measure of the total business brought in each employee on an average. Higher the better. The figures show a mixed trend. 2008 18.09 2007 13.87 2006 17.18 2005 13.5 c) Profit per Employee: Profit generated by each employee on an average. It shows a mixed trend. 2008 0.09 2007 0.08 2006 0.12 2005 0.07 So, overall we can say that the Management Quality is Good for this bank as its generating good business at an increasing rate with employees being efficient and earning profits constantly at a steady rate. Earning Quality This indicator shows not only the amount of and the trend in earnings, but also analyzes the robustness of expected earnings growth in future. a) Operating Profits to Average Working Funds: 2008 0.93 2007 0.84 2006 1.01 2005 1.27 b) Percentage Growth in Net Profits: It shows the improvement in bank’s overall profitability. The bank stuttered in 2005 but pulled drastically in 2006 and the profits grew at a nearby constant rate in the last 2 years. 2008 15.71% c) Spread: 2007 12.30% 2006 82.73% 2005 -33.97% It shows the cushion it can create out of its basic business of lending advances and accepting deposits. The bank has done reasonably good barring a slight fall in the last year. 2008 0.55% 2007 0.68% 2006 0.44% 2005 0.25% d) Net Profit to Average Assets: This shows the returns generated by the bank’s total assets. The figures are healthy and depict good management of funds and good quality of assets. 2008 0.62% 2007 0.65% 2006 0.65% 2005 0.42% e) Interest Income to Total Funds: Bank’s basic means of earning is by advancing loans, so how much out of the total earnings is this amount is reflected by this ratio. Higher the better. 2008 0.57 2007 0.69 2006 0.45 2005 0.52 f) Non-Interest Income to Total Funds: 2008 2007 2006 1.54 1.11 1.51 2005 1.85 Liquidity It takes into account the adequacy of the bank’s current and potential sources of liquidity, including the strength of its funds management practices. a) Liquid Assets to Total Assets: This ratio shows the liquid assets in proportion to the total assets.This ratio shows the banks ability to meet immediate cash requirements of customers.A high ratio also shows idleness of funds.The banks has maintained a constant liquid assets to total assets for the last four years. 2008 0.067 2007 0.066 2006 0.061 2005 0.069 b) G-Secs to Total Assets: This ratio shows the proportion of government securities to total assets.A high proportion of government securities shows safe investments and the ability to settle debts during a crisis.The bank has maintained a constant level of this ratio. 2008 0.18 2007 0.15 2006 0.18 2005 0.18 c) Liquid Assets to Demand Deposits: This ratio shows the ability to tackle a liquidity crisis. It shows the banks ability to meet the cash demands of its depositors. We can see a slight downward trend in this ratio in the past 4 years. 2008 1.21 2007 0.99 2006 1.03 2005 1.45 d) Liquid Assets to Total Deposits: 2008 0.12 2007 0.16 2006 0.21 2005 0.37 Hence, The liquidity ratios of the bank show that the overall the liquidity of the bank is good due to a high G-Secs to Total Assets Ratio and Liquid Assets to Demand Deposits ratio even though the banks needs to improve on its Liquid Assets to Total Deposits ratio. Sensitivity to Market Risk It’s a recent addition to the ratings parameters and reflects the degree to which changes in interest rates, exchange rates, commodity prices and equity prices can affect earnings and hence the bank’s capital. Beta 1, depicts that changes in the firm are more than the changes in the market. Highly Sensitive.