camels and pearls application to financial management of commercial banks

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Measuring and evaluating performance of banks  Collect nancial informaon, then analyze and evaluate banks’ performance based on some chosen criteria. )!+,!  )!+,!  $,-$$# . $,-$$# . III. PEARLS • Is a nancial performance monitoring system that consists of a set of a nancial ratios of indicators that help standardize terminology between institutions. • Oer management guidance for credit unions and other savings institutions Protecon Protecon Eecve Financial Structure Eecve Financial Structure Liquidity Liquidity Asset Quality Asset Quality Rates of Return & Cost Rates of Return & Cost Sign of Growth Sign of Growth Protecon Ensure that the credit union provides depositors a safe place to save their money Asset Quality Measure assets, liabilies and capital, and recommends an “ideal” structure for credit unions. Eecve Financial Structure Help instuons control delinquencies and monitor the rao of non-earning assets to total assets Rate of Return and Costs Segregates all essenal components of net earnings to help calculate investment yields and evaluate operang expenses. Signs of Growth The maintenance of adequate liquidity reserves is essenal to sound, nancial management Liquidity Links growth of assets to protability and other key areas by evaluang the strength of the system as a whole PEARLS Objective  Execuve management tools: monitoring the performance of credit unions  Standardized Evaluaon Raos and Formulas: eliminang the diverse criteria to evaluate operaon and creates a universal nancial language.  Objecve, Comparave Rankings: comparing credit union performance on a naonal basis.  Facilitate Supervisory Control: providing the framework for a supervisory unit at the Naonal Federaon. [...]... How do Pearls and Camels Differ Pearls uses quantitative indicators while Camels use both quantitative and qualitative indicators Pearls provides an objective evaluation of financial performance Pearls evaluates the financial structure of the balance sheet because it has a direct impact on efficiency and profitability Pearls considers growth rates, which directly affects financial structure and helps... Sensitivity to Market Risk The sensitivity level to changes in risks inherent in dealing with interest rate, foreign currencies, financial assets and commodity prices CAMELS Objective The purpose of CAMELS ratings is to determine a bank’s overall condition and to identify its strength and weakness It’s a standardized method which allows the assessment of the banks quality according to standard criteria to. .. health and profitability of bank borrowers Management Quality A key to determine banks performance but is difficult to measure as it is a qualitative factor Earnings Profitability keeps up the sound health of FLs Problems can be both indicated with too high or low profit Liquidity Liquidity risk threats the solvency of FLs In order to maintain performance, trade off between liquidity and profitability... shortcomings more quickly  The indicators of CAMELS link closely together and help provide a wide view on connected events affecting banks performance Moreover, these indicators also have many applications  Provide a score system of 1 to 5 which help accurately assess the extent of problems  Help predict bankruptcy in banking system, somehow help pre-empt the risk of a global financial crisis DISADVANTAGES... C Management Quality a Corporate Governance – 3 Points • Sufficient quantity of members in Board of Directors and Supervisory Board (Article 109, 2005 Enterprise Law: 5 to 11 in BOD, 3 to 5 in SB) • Fully issued, standardized internal regulations VIETCOMBANK  9 members in BOD (before 2014 VIETINBANK  10 members in Board Of Directors shareholders’ meeting)  3 members in SB  5 members in SB C Management. .. Internal auditing is directly under SB Comply with size and scale of banks, effective work, continuously control bank’s activities and risks c Legal Compliance – 6 Points • • Strong internal unity Members of BOD, BOM and SB obey laws and regulations of State Bank, appropriately perform duties and authorities in managing and controlling the bank d Regulations of State Bank about chartered capital – 2 Points... points Liquidity: -6 15 points RATING SYSTEM OF CAMELS TYPE SCORE (100) A 80 CRITERIA FOR EACH CRITERA Not lower than 65% of maximum score One criteria equal from 50% to 65% of max score B 60 - 79 59 Not lower than 50% of maximum score One criteria equal from 45% to 50% of max score C 50 - 59 50 D Not lower than 45% of maximum score One criteria less than 45% of maximum score A A Capital Adequacy p p...IV CAMELS CAMELS is an international bank-rating system where bank supervisory authorities rate institutions according to 6 factors: Capital Adequacy Earnings Asset Quality Liquidity Management Quality Sentivity to Market Risk Capital Adequacy Determines how well FLs can manage with unexpected events to their balance sheets Asset Quality Depends on exposure to specific risks, trends... heavily on the subjective opinions of the analyst Moreover, the final outcome may vary between banks and can easily changes over time  CAMEL analysis requires a team of qualified analysts who have enough capacity Developing countries like Viet Nam may have difficulties in finding such qualified employees  Due to the confidentiality of banking system, the information used for CAMELS might be misleading information... structure and helps managers in credit unions to assess the degree of satisfaction among member-clients CAMEL in VIET NAM Decision 400/2004-QĐ-NHNN Assessment of Financial Institutions by using CAMEL: Capital Adequacy, Asset Quality, Management Quality, Earnings, Liquidity Decision 06/2008-QĐ-NHNN CAMEL scoring system:      Capital: Asset: -2 0 15 points 35 points Management: 0 15 points Earnings: 0 20 . unions. Eecve Financial Structure Help instuons control delinquencies and monitor the rao of non-earning assets to total assets Rate of Return and Costs Segregates all essenal components of net. management Liquidity Links growth of assets to protability and other key areas by evaluang the strength of the system as a whole PEARLS Objective  Execuve management tools: monitoring the performance of credit. -' CAMELS Objective  The purpose of CAMELS rangs is to determine a bank’s overall condion and to idenfy its strength and weakness.  It’s a standardized method which allows the assessment of