BANKS RATING IN THE CONTEXT OF THEIR FINANSIAL ACTIVITY USING MODIFIED TAXONOMETRICAL METHOD

Transcription

1 Bory Samorodov Doctor of Science (Economic), Kharkiv Intitute of Banking of the Univerity of Banking of the National Bank of Ukraine (city of Kyiv), Acting Director, Kharkiv, Ukraine BANKS RATING IN THE CONTEXT OF THEIR FINANSIAL ACTIVITY USING MODIFIED TAXONOMETRICAL METHOD Abtract. In the paper the rating of bank i conducted by indicator of reliability with the uing of modified taxonometrical method. The rating i built on the bai of bank reliability methodology, which take into account the global analyi of management, outflow of depoit and current condition of the bank on aignment of long-term credit, and alo analyi of aet and profitability of bank and value of currency contituent of it activity. Keyword: bank, analyi, reliability of bank, rating approach, criteria of reliability, taxonometrical method. Formula: 5; fig.: 1, tabl.: 3, bibl.: 12. JEL Claification: G 01, G 21, G 28, G 33 Introduction. Management of the bank, bank cutomer and, lat but not leat for bank financial development, invetor mut have a clear "picture" on the iue - whether a particular bank i reliable or not - compared with other bank. An important quetion i - where to invet money, becaue nobody depoit money in unreliable bank. Bank financial development aim a a minimum table it development and, a a maximum, effective functioning. The reult of the crii affecting the banking ytem of Ukraine i ditrut of bank, depoitor and invetor carefully ae the ituation, and therefore the tranition from unreliable condition to a group of reliable bank, raiing reliability level are important tak for the banking buine owner and management of bank. Expert, depoitor, hareholder, invetor, etc. hould be able to be acquainted with clear and detailed information on the actual condition of a ingle bank and the propect for it further development. It i poible to realize, with the appropriate mechanim of bank reearch activitie baed on public tatement and conducting bank financial reliability rating [Doyak 2009, Lerner 2010]. Method of rating bank create evaluation ytem, which make clear invetigated bank comparing mechanim according to the et of pecific financial target. The reult of thee method are objective information bae for deciion-making. Literature review and the problem tatement. When chooing a determination method of bank rating in a number of other approache taxonometrical method (Euclidean ditance method) i ued. [Bubenko, Vladimirova 2009; Senchenko 2011; Turylo 2011]. Rating, which are baed on thi method provide a comprehenive aement of bank, allowing to determine the bet of them according to a number of indicator, a et of which, in turn, may vary depending on the pecific tak. Bory Samorodov 25

2 There are a number of method to analyze and ae the reliability of bank, which in mot cae ue a rating approach. One of the lat work devoted to a detailed review of modern method of rating bank of Ukraine are paper of Hordita T.M. [Hordita 2011] Turylo A.M. and Vcherahnya I.S. [Turylo 2011] in which the author alo cite lit and decription of the main approache of the reliability of bank determination. In concluion the author of thee work [Turylo 2011] prefer the rating ytem CAMELS [Analyi of the commercial bank: teach. guide 2001; On the procedure for the determination of rating according to CAMELS rating ytem] and till [Turylo 2011, Hordita 2011] concluded that each of the analyzed method ha certain advantage and diadvantage, but the lack of a ingle unified method of bank reliability analyi i one of the factor that lead to manifetation of information aymmetry criterion. The problem of bank reliability rating, banking management iue and audit, analytical enuring of commercial bank effective functioning, commercial bank financial analyi, method of commercial bank financial tability and reliability determination are alo conidered by uch well-known economit a Belyh L., Vitlinkyy V., Kochetkov A., Kromonov V., Lavruhin O., Lerner Y., Mazaraki A., Moroz A., Rajevki K., Shirinka E. Shmatov O. Sinki J.F. and other. The aim of the tudy i to conduct bank rating on parameter that characterize the reliability of bank uing the modified taxonometrical method to calculate the ranking of bank. Reearch reult. In claical taxonometrical method [Bubenko, Vladimirova 2009; Senchenko 2011; Provetov 2005] the matrix P i ued: p p 1i... p1n P p 1... p i... p n. (1) p b1... p bi... p bn For matrix P financial performance of bank (1) i-th column vector element i a uniform lit of value of i-rate (the number of indice n) for each of the bank b and -th row vector element - a lit of divere value for -th bank (i 1,n ; 1,b ). To compare numerical value with each other, it i neceary to bring them to dimenionle form. It i propoed to implement the indicator by normalization. For numerical value, with which each indicator will be compared, it i convenient to take vector-column norm (each criterion norm) of the invetigated bank: where,i ( 1,b ); P',i p b,i 1 p 2,i, (2) p the numerical value of i-indicator ( i 1,n ) on the -th bank 26 Bory Samorodov

3 n number of indicator conidered; b the number of bank invetigated. Reproduced approach differ from the approach which ue valuation due to counting of tandard deviation [Bubenko, Vladimirova 2009; Senchenko 2011, Provetov 2005]. Another important tep i a proce of "benchmark" bank formation [4, 9]. To form the "benchmark" bank, with which all other will compare, the optimum value of normalized i-th indicator for all bank are determined. Repectively, the maximum or minimum value depending on the direction of the impact on effective ign are elected [Senchenko 2011; Provetov 2005]. The elected optimal value form a matrix-line: max p' max p' max p' Pet i min p' min p' min p',1,i,n,1,i,n, (3) max p',i where determination of the i-th indicator maximum or minimum minp',i normalized value depending on the direction of the impact on effective ign ( 1,b ;i 1,n ). Another change which i propoed to implement, i not to correct optimal value of the i-th normalized indicator on the value of tandard deviation [Senchenko 2011], and for calculation take only value (3), undertanding their content a optimal ("benchmark") value of the i-th normalized indicator that do not require any adjutment. Rating poition of the bank i baed on the relation that repreent the ditance D between the -th bank and "benchmark" bank: b 2,i i. (4) 1 D p' pet Bank rating are determined by (4) the le i D ditance value, the higher i the rating of the bank. However, for eay analyi of bank rating a well a for more adequate detail of the data in graphical form it i propoed to ue the relation that decribe the total rating number R for each of the bank: R 1 D b 1 D 2. (5) In thi cae, the higher i the value of total rating number R, the higher i the rating of the bank. The bank reliability i offered to evaluate and analyze, uing the following criteria, which are propoed to merge into everal group [Samorodov 2011]: The firt criteria group include: Bory Samorodov 27

4 1) К 1 - the outflow of individual К 1,1 and legal entitie К 1,2 depoit from the bank; 2) К 2 - doe the bank lend long-term loan; Let look at the analyi of thee criteria more detail. In conideration of the К 1 criterion the calculation ratio of depoit to total depoit amount hould be taken. Thi will allow more adequately evaluate the ituation when removed depoit of 10 million UAH may comprie for one bank 1% of total depoit, and for another it may be a lo of 90% of depoit. In thi cae, the concluion i obviou - for the econd bank it i a diater. It i propoed for analyi to take the average value of the outflow of depoit throughout the banking ytem (in a particular group, to which the bank i attributed) and in the conidered bank. At thi tage, all bank in which the hare of withdrawn depoit i le than the hare of eized depoit on all bank are offered to extract from among reliable. Moreover, the analyi of individual and legal entitie depoit can be divided. But the criterion К 3 conideration i important becaue the confidence of houehold and buine to a particular bank, and even more o in time of crii, i a very valid reaon to believe that the bank i reliable (but with taking into account the entire complex criteria). The next criteria-limit К 2 enable to etimate how much money ha the bank to lend either legal entitie or individual. Doe the bank lend long-term loan to purchae real etate and/or car etc. Thi i a figure of the bank ufficient liquidity, i.e. in thi cae the bank ha free cah reource. The econd group of criteria include criteria that characterize the financial performance of the following banking activitie: 3) К 3 - capital adequacy; 4) К 4 - the amount of proviion in the loan (aet); 5) К 5 - profitability or unprofitability of the banking tructure; 6) К 6 - monetary component of banking. In analyi of the К 3 indicator the ratio of the value of bank aet to total aet of the bank i analyzed. Thoe bank that do not meet capital adequacy propoed for removal from reliable number. The volume of reerve for the loan (aet) include: reerve for fund impairment in other bank; reerve for loan impairment; reerve for ecuritie impairment in the bank' portfolio; reerve for impairment of ecuritie which are held to maturity; reerve for other financial aet; reerve for other aet [Hordita 2011]. Therefore, on the tage of criterion К 4 analyi everal parameter that mut be evaluated are calculated: - the ratio of reerve a % of total aet of the bank; - return on aet i the ratio of profit (lo) to aet. However, thee figure hould be calculated a the entire banking ytem (in a particular group, to which the bank i attributed), and for the particular bank. Then comparative analyi will help to remove unreliable bank from the given lit conidering К 4 criterion - the amount of reerve in the loan (aet). But when analyzing the bank on the criterion of the value of reerve in the loan (aet) could be a ituation where bank, which were formed the larget reerve are unprofitable bank and a ratio of net income (lo) to the aet of thee bank i much higher than the figure for the banking ytem a a whole. The ame can be een while analyzing bank, which have R value that i cloe to thi value for the banking ytem a a whole. Clearly aid that bank which were formed the minimum reerve are reliable - alo i not correct. In S 28 Bory Samorodov

5 thi ene, the evaluation of the value of bank reerve at reliability analyi allow to exclude unreliable bank. It i propoed to ue indicator of the entire banking ytem a a benchmark indicator (in a particular group, to which the bank attributed). Let analyze К 5 criterion - profitability or unprofitability of the banking tructure. What concluion can be drawn from the analyi of bank profitability in a ytem? The poitive fact i that if even in crii the bank take profit, it indicate that the management of the bank i correct; the hareholder that upport bank are eriou and o on. However, thi method can be ued. The bank' loe mut be compared with the ize of bank aet. If the lo i 5% of the value of aet, it i a bad ign. On the other hand, if the bank i profitable - it doe not mean that it i reliable (ome bank with the interim adminitration are profitable, but the problem of trut them money or not i the problem of the depoitor). Thu, uch a comparion help not to identify reliable bank, but rather to weed out unreliable. A for the monetary component of banking activity (К 6 criterion), the higher the % of foreign exchange in bank loan, the greater i it expoed rik during the devaluation of the hryvnia [Turylo 2011]. On the other hand, the more foreign currency depoit (liabilitie) are in the bank, the more rik it i expoed if the loan are lent in a local currency. Therefore, it can be concluded the following: - if the fund involved and lend in foreign currency - rik of exchange rate fluctuation aumed by the client, borrower; - if the bank attract fund in foreign currency and lend credit in the national currency - the exchange rate rik are aumed by the bank (ince it require hryvnia from cutomer, but mut repay debt in foreign currency); - if the fund involved in the national currency, and loan lent in foreign currency the bank additionally earn on exchange with the devaluation of the national currency (i.e. it receive loan in foreign currency, and repay debt in hryvnia, which by that time ha already depreciated). When analyzing the bank and the banking ytem it i additionally neceary to conider the following criteria: - К 7 - the ratio of loan lent to legal entitie К 7,1 and individual К 7,2 to the volume of total aet of the bank; - К 8 - the ratio of attracted fund from the individual and legal entitie. Methodology for determining reliability rating of bank i propoed to ue in rating of 9 conventional bank. Thee financial tatement of conventional bank were taken from public ource [The tructure of aet, liabilitie, equity, financial reult of the bank of Ukraine]. In Table 1 the data on the amount of invetigated bank capital and aet i preented. Table 1 Capital and aet of bank Bank Name Bank Capital, Bank Aet, Net Profit (Loe), thouand of thouand of thouand of UAH UAH UAH Bank Bank Bank Bank Bory Samorodov 29

6 End of table Bank Bank Bank Bank Bank Total for group of bank Total for bank of Ukraine Source: built by author by the data from [The tructure of aet, liabilitie, equity, financial reult of the bank of Ukraine] Alo, baed on public data of the bank financial tatement [The tructure of aet, liabilitie, equity, financial reult of the bank of Ukraine], criteria К 1 К 8, lited in ummary table 2, are calculated. Table 2 Summary data of criteria К 1 К 8 value Банки Criteria К 1,1 7,02 2,1-3,5 4,81-14,59 2,18 2,29 1,41-1,04 К 1,2-6,43 6,09 15,48 5-0,27 1,26-3,58 4,86-1,38 К К 3 0,9255 1,5961 0,6943 1,3737 1,2958 1,5002 2,6491 1,5877 0,8047 К 4-4,545-1,418-9,356-1,464-45,44-4,581-0,408-3,793-21,79 К 5-1,709 0,922 0,038 0,024-12,36 0,038 0,180 0,063-1,207 К 6-0,052 0,0705-0,08-0,002-0,453-0,019 0,0158 0,0494-0,299 К 7,1 0,9827 0,9773 0,8874 0,7455 0,8092 0,8644 0,9995 0,817 0,4509 К 7,2 0,743 0,8504 0,2681 0,8676 0,6886 0,8077 0,1346 0,8429 0,1045 К 8 0,7249 0,8837 0,7443 0,6756 0,1927 0,9027 0,4854 0,7921 0,9354 Source: Data, which calculated according to author methodology [Samorodov 2011] Baed on the data, preented in ummary table 2 for criteria value, total rating number are calculated (5) (which decribe the bank rating) and ranking chart of tudied bank i built. Table 3 how the value of total rating number and place of the tudied bank in the rating. Figure 1 how a chart of the bank rating. Table 3 Bank in the rating on tha bai of ХХ The value of the total Bank Name rating number R, unit Rating Place 1. Bank Bank Bank Bank Bank Bank Bank Bank Bank Source: calculated by author on the bai of equation (1)-(5) 30 Bory Samorodov

7 Making credit relation require the bank to ae the reliability analyi and not jut it own, but alo the reliability of it partner (mainly borrower, which may include other bank). Special attention i paid to the analyi of the bank-borrower activity becaue their credit relation in modern crii exacerbated and interbank credit i dangerou and riky. Therefore, ome bank create at analytical ervice for the analyi of the balance heet and tatement of other bank. For a viual example, let analyze the reult, which were obtained for the conventional bank "Bank 2. The analyi of the bank "Bank 2 reliability howed that in the rating of bank reliability, the bank i on the firt place with the value of the total rating number R = Figure 1 Bank rating diagram Source: built by author on the bai of equation (5) Comparing bank on the firt and econd place, it hould be noted that the bank' "Bank 2 capital lower almot in 2 time and the bank' aet lower in 2,2 time, but net income higher almot in 17 time (Table 1). Very important i the fact that in comparion with the bank "Bank 9, the bank, which attributed to the firt group according to NBU claification (Table 1 [12]), the bank "Bank 2 i ahead of the firt 6 poition in the ranking of reliability, which cannot fail to tate a high level of bank management in conducting banking activitie. Concluion. Obtained reult make it poible to evaluate the place of "Bank 2 among their competitor - conventional bank of the group. In thi cae the firt place in the rating hould be ued a weighty enough information during the PR campaign that carried out by the bank. Analyzing the performance of the financial activitie, which form reliability criteria of the bank and ued in bank rating according to the methodology, management and/or analytical department of the bank can etimate their value and apply preventive action to upport the current poition in the bank ranking in future period (a minimum) or improve their current poition in the ranking, Bory Samorodov 31

8 depite the fact that the performance of the bank-competitor may be better than a XX. Reference Analyi of the commercial bank: teach. guide. (2001). Ed. Dr. Sc. Science profeor., Dr. Sc. Science profeor. A.M. Geraimovitch. - Zghitomir: Ruta. Bubenko, P. T., & Vladimirova, M. S. (2009). Innovatively region potential evaluation baed on the taxonometrical method. Scientific Information Journal "Buine-Inform", Kharkov: KhNEU, 4(2), Doyak, O. I. (2009). Automated analyi ytem of the company financial condition. Scientific Herald NLTU of Ukraine: Collection of cientific work, Lviv: RIO NLTU Ukraine, vol. 19.3, Hordita, T. M. (2011). Modern method of rating bank in Ukraine: theory and practice information tranparency for invetor cah. Scientific Paper "Economic", 7, Retrieved from znpen/2011_7/23smr.pdf Lerner, Y. I. (2010). Etimation of the finance tability of the banking tructure. Journal of economic of Ukraine, 2, On the procedure for the determination of rating according to CAMELS rating ytem. (n.d.). Approved by the NBU of Provetov, G. I. (2005). Financial management: challenge and olution: training manual. Mokow: Publihing RDL. Samorodov, B. V. (2011). Approache to the commercial bank reliability analyi. Mechanim of development trategy of the national economy - Proceeding of the International Scientific and Practical Internet Conference (20-21 October 2011), Samorodov, B. V. (2011). Analyi of the reliability of the bank in term of comprehenive aement of financial condition. Formation of modern cience - Proceeding of the VII International Scientific Conference (27 September - 5 October 2011). - Tom.1. Economic. - Prague.: Publihing houe "Education and Science", Senchenko, O. (2011). Rating core bank in term of analyzing their financial ecurity on the bai of the takonometric method. Bulletin of the NBU, 1(179), The tructure of aet, liabilitie, equity, financial reult of the bank of Ukraine. (n.d.). Retrieved from http: Turylo, A. M. (2011). Rating ytem of commercial bank financial ituation aeing. KTU Bulletin, vol. 28, Data przełania artykułu do Redakcji: Data akceptacji artykułu przez Redakcję: Bory Samorodov