Financial Performance Analysis of Syndicate Bank Using Camel Model

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1 Financial Performance Analysis of Syndicate Bank Using Camel Model M. Susmitha V. Mouneswari AITS The Indian banking sector is a backbone of the Indian economy. Indian banking sector widely includes co-operative, commercial, nationalized, private and internationalized banks. In a present study an attempt is made to evaluate the financial performance of the Syndicate bank using CAMEL model. CAMEL model is basically an approach widely used to measure the performance of banking unit in and outside India. CAMEL rating is a supervisory rating system originally developed in the U.S to classify a bank s overall condition. This model measures the performance of financial institution (approximately 8,000 institutions) especially banks, from all the important parameter like Capital Adequacy, Assets Quality, Management Efficiency, Earning Quality and Liquidity and sixth component like market risk added in The study is based on secondary data drawn from the annual reports of Syndicate bank. For the purpose of evaluation, the data of FIVE years are analyzed by calculating various ratios related to CAMEL rating. Statistical tools like average, standard deviation, coefficient of variation and correlation is also calculated. It is found out that overall state of capital adequacy of Syndicate bank was satisfactory. As far as portfolio is concern, the overall state of assets quality was good. The management efficiency was also satisfactory. Overall earning capacity of the bank was good but the overall state of liquidity was not satisfactory. Keywords: Banking, Efficiency, Camel Model, Financial Performance 1. Introduction Bank is a financial Institution of an economy is a multifaceted term. Finance is the life blood of a modern economy. A financial system helps to mobilize the financial surplus of an economy and transfer then two areas of financial deficit. The word Bank can be traced bank to the GERMEN word BANCK and ITALIAN word BANCO which means heap the money. The Indian banking sector comprise of 27 public sector banks, 23 banks operating in private sector and 50 foreign banks. Out of public sector banks 19 are nationalized, 6 are ISBN

2 associated banks, 2 are IDBI and Bharathiya Mahila bank. Out of private sector banks 13 as old private banks and 7 as new private banks. It is observed that the public sector banks have remained unchanged in terms of number over the last decades. In 1980s, CAMEL rating/cel rating system was first introduced by U.S. supervisory authorities as a system of rating for on-site examinations of banking institutions. Under this system, each banking institution subject to on-site examination is evaluated on the basis of five critical dimensions relating to its operations and performance, which are referred to as the component factors. These are Capital, Asset Quality, Management, Earnings, Liquidity and sensitivity used to reflect the financial performance, financial condition and operating soundness of the banking institution. Syndicate was established 1925 in Udupi, the abode of lord Krishna. Components of Bank s Condition that are Assessed 1. Capital adequacy 2. Assets Quality 3. Management capability 4. Earnings capacity 5. Liquidity (asset liability management) 2. Literature Review Kwan and Eisenbeis (1997) observed that Asset Quality is commonly used as a risk indicator for financial institutions, which also determines the reliability of capital ratios. Their study indicated that capitalization affects the operation of financial capitalization affects the operation of financial institution. More the capital, higher is the efficiency. Godlewski (2003) tested the validity of the CAMEL rating typology for bank's default modelisation in emerging markets. He focused explicitly on using a logical model applied to a database of defaulted banks in emerging markets. Said and Saucier (2003) examined the liquidity, solvency and efficiency of Japanese Banks using CAMEL rating methodology, for a representative sample of Japanese banks for the period , they evaluated capital adequacy, assets and management quality, earnings ability and liquidity position. Prasuna (2003) analyzed the performance of Indian banks by adopting the CAMEL Model. The performance of 65 banks was studied for the period The author concluded that the competition was tough and consumers benefited from better services quality, innovative products and better bargains. Sarkar (2005) scrutinized the CAMEL model for regulation and supervision of Islamic ISBN

3 banks by the central banking Bangladesh. The study enabled the regulators and supervisors to get a Sharia benchmark to supervise and inspect Islamic banks and financial institutions from an Islamic perspective. Gupta and Kaur (2008)assessed the performance of 20 old and 10 new Indian Private Sector Banks on the basis of Camel Model for the period of five years i.e., from Sangmi and Nazir (2010) have taken two major banks of north India namely, Punjab national bank and Jammu and Kashmir Bank on the basis of their role and participation in influencing the financial condition of north India. They apply the camels model of these two banks by taking the annual report data from , and found out that both the banks were financially sound and suitable as their capital adequacy, asset quality, management capability and liquidity is concerned. Siva and Natarajan (2011) empirically tested the applicability of CAMEL norms and its consequential impact on the performance of SBI Groups. The study concluded that annual CAMEL scanning helps the commercial bank to diagnose its financial health and alert the bank to take preventive steps for its sustainability. Chaudhry and Singh (2012) analyzed the impact of the financial reforms on the soundness of Indian Banking through its impact on the asset quality. The study identified the key players as risk management, NPA levels, effective cost management and financial inclusion. As pal and Malhotra (2013) measured the financial performance of Indian public sector banks asset by camel model and applying the tests like ANOVA, f test and arithmetic test for the data collected for the year They concluded that the top two performing banks are bank of Baroda and Andhra bank because of high capital adequacy and asset quality and the worst performer is united bank of India because of management inefficiency, low capital adequacy and poor assets and earning quality. Central bank of India is at last position followed by UCO bank and bank of Maharashtra. 3. Research Methodology Objectives of the Study 1. To analyze the financial position and performance of the Syndicate bank using the CAMEL approach. 2. To Compare the Syndicate bank s Performance of 5 years. Period of the Study Data for the last five years, i.e to 2017 are considered for the study. ISBN

4 Sampling Technique Convenience Sampling Technique is adopted for selecting the sample. Research Design The present study is descriptive research study. Descriptive research is a study designed to depict the participants in an accurate way. As the name implies, descriptive research methods are used when the researcher wants to describe specific behavior as it occurs in the environment. There are a variety of descriptive research methods available; once again, the nature of the question that needs to be answered drives which methods is used.case study, defined as an in-depth study of an individual or group of individuals. Sources of Data The secondary data has been used for the study, which is taken from the annual reports of the Syndicate bank. Books, journals, articles, websites are also reviewed for the study. Sampling For conducting this study, Syndicate bank has been selected as sample based on the data availability. Statistical Tools The statistical tools used for the study are enumerated below 1. Standard deviation. 2. Arithmetic mean. 3. Covariance. 4. Tools of Analysis CAMEL Model has been used to analyze the data. 1. Capital Adequacy 1. Capital Adequacy Ratio Capital adequacy ratio = ( ) 2. Debt Equity Ratio Debt Equity Ratio = 3. Total advances to Total Assets Ratio ISBN

5 Total advances to total assets ratio = 4. Government Securities Investments: The government securities investments are those banks kept in the securities for the security purpose in the form of cash, bills, money market instruments etc. 2. Asset quality 1. Net NPA S to Total Assets Ratio Net NPA S to total assets ratio = Net NPA S to total advances Net NPA S to total advances = Total Investments to Total Assets Ratio Total investments to total assets ratio = 4. Percentage Change in NPAs Percentage change in NPAs = ( ) Management capability or Efficiency 1. Total Advances to Total Deposits Ratio Total advances to total deposits ratio = 2. Profit Per Employee Profit per employee = Business Per Employee Business per employee = ( ) 4. Return on Net Worth Return on net worth = Earnings Capacity / Quality 1. Return on Assets Ratio Return on assets ratio = 100 ISBN

6 2. Net profit to Average Assets Net profit to average assets = 3. Spread Ratio Spread ratio = Spread formula= ( ) Percentage Change in Net Profit PCNP= ( ) Liquidity 1. Government Securities To Total Assets Government securities to total assets = 2. Liquid assets to Total Assets Liquid assets to total assets = 100I 3. Liquid assets to Total Deposits Liquid assets to total deposits = Data Analysis And Interpretation Capital Adequacy Capital base of financial institutions facilitates depositors in forming their risk perception about the organization. Also, it is a significant stricture for financial managers to maintain adequate levels of capitalization. Capital adequacy is very useful for a bank to conserve & protect stakeholders confidence and prevent the bank from bankruptcy. Reserve Bank of India prescribes banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 % prescribed in Basel documents. Following ratios has been taken into consideration to judge the capital adequacy of Syndicate bank in AP State. Table 1 Ratio/year Mean SD CV CAR DER ISBN

7 TATAR GSTI Table 1 clearly reveals that average CAR was above the standard norms of 9.00% which is appreciable. Apart from that the CAR remained above 10.00% all through the study period. The average Debt Equity ratio was decreased during the study period. Total Advances to Total Assets Ratio is a measure of a bank s aggressiveness in lending. The average total advances to total assets ratio reveals that the management of Syndicate bank had been effective to convert its deposits into loans and advances which is quite appreciable. Government Securities to Total Investments Ratio measures the amount of risk free assets invested by a bank in government securities as a percentage of the total investments held by the bank. 6. Assets Quality Asset quality determines the healthiness of financial institutions against loss of value in the assets as asset impairment risks the solvency of the financial institutions. The weakening value of assets has a spillover effect, as losses are eventually written-off against capital, which eventually expose the earning capacity of the institution. With this framework, the asset quality is assessed with respect to the level and severity of non-performing assets, adequacy of provisions, distribution of assets etc... Apart from this it also hampers profitability as the provision has to be made on Gross NPAs. So at the end of the day quality of assets jeopardizes the earning capacity of the bank. The following ratios were calculated to judge the assets quality of the Syndicate Bank of AP state. Table 2 Ratio/year Mean SD CV NNPATAR NNPATAD TITAR %Change In NPAs Table 2 indicates that Net NPAs to Total Assets ratio remained at average of 0.18% throughout study period as the amount of net NPAs was increased year by year all through the study period. Net NPAs to Total Advances ratio remained at throughout study period as the amount of net NPAs was 0.18%all through the study period which is constant.% change ISBN

8 in NPAs are increased year to year at 0.049% as it clearly indicates that the management of above syndicate banks is very effective in providing loans to the customers. Total Investment to total assets ratio is a standard measure to know the percentage of total assets locked up in investments. The average total investments to total advances ratio was 0.8%in investment. 7. Management Efficiency Sound management is one of the most important factors behind Performance of any bank. Management efficiency, another indispensable component of the CAMEL framework, means adherence to set norms, knack to plan and be proactive in the dynamic environment, leadership, innovativeness and administrative competence of the bank. The term management efficiency involves the capability of management in generating business and in maximizing profits. To analyze the possible dynamics of management efficiency affecting the financial performance of the banks, the following ratios are calculated in the present study. Table 3 Ratio/year Mean SD CV TATDR PPE BPR RONW Table3shows that Assets turnover ratio indicates the total revenue earned for every rupee of assets that bank owns. Total assets to total depositary ratio is fluctuated in during this periods. Profit per employee ratio indicates the average profit generated per person employed by a bank and also greater fluctuations. This ratio showed fluctuating trend throughout the study period. The amount of net profit increased, while on the other hand the profit per employee ratio is fluctuated to during this period. Business per employee ratio indicates the efficiency of bank in terms of doing business with lesser number of employees. Total business per employee ratio remained changed entire study period. 8. Earning Quality ISBN

9 The quality of earnings represents the sustainability and growth of future earnings, value of a bank s lucrativeness and its competency to maintain quality and earn consistently. Earnings and profitability are examined as against interest rate policies and adequacy of provisioning. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio. It basically determines the profitability of the bank. It also explains the sustainability and growth in earnings in the future. Following ratios were calculated for evaluating the earning quality of banks. Table 4 Ratio/year Mean SD CV ROA SR %change in Net Profit Table 4 clearly reveals that Return on Assets Ratio is a key profitability ratio which measures bank s efficiency in using its assets to generate net income. Return on assets ratio showed fluctuating trend throughout the study period. In the beginning of the study, the ratio decreased. Spread Ratio is expressed as a percentage of total assets. This is a key profitability ratio especially in banking unit which measures bank s core income. Spread ratio registered not stable trend during the entire study period. Percentage change in net profit is being fluctuated throughout the study period. In 2014 is losses are incurred. 9. Liquidity Liquidity is the bank s capacity to meet its short term obligations as well as loan commitments. Liquidity is most important parameter especially in banking sector as banks are considered as liquidity creator in the market. Therefore, if the liquidity management of a bank is not proper, it can adversely affect the performance of the banks. In case of an adequate liquidity position, the institution can obtain sufficient funds, either by increasing liabilities or by converting its assets to cash quickly at a reasonable cost. Following liquidity ratios were taken for the study. Table 5 Ratio/year Mean SD CV ISBN

10 GSTTA LATTA LATTD Table 5 indicates that Government Securities to Total Assets Ratio measures the amount of risk free liquid assets invested by a bank in government securities as a percentage of the total assets held by the bank. Government securities to total assets ratio shows the relatively constant trend for the entire study period. Liquid Assets to Total Assets Ratio also indicates the overall liquidity of the unit by indicating the proportion of liquid assets in total assets. The lowest ratio was found. The amount of liquid assets decreased whereas on the other hand the amounts of total assets increase. Liquid Assets to Total Deposits Ratio measures the liquidity available to the depositors of the bank. This ratio also registered increased trend during the entire study. 10. Conclusion In case of capital adequacy, the banks which are having low ratios want to maintain a high capital and safety assets to minimizing of risk weighted assets. In management capability the least in total advances to total deposits are to convert more number of deposits into earning advances. In asset quality, the NPA s-to-total assets ratio are to be maintain to very small up to zero. In earnings capacity banks having least ROA should use assets in efficient manner to increase earning capability of the bank. In liquidity the banks has to maintain high number of liquidity assets to overcome short term obligations. Here in the present study the syndicate bank capital adequacy is good and asset quality of this bank is increased due to decrease in NPA s. Earning Quality is good. Business per employee ratio is increased year to year because management efficiency is good Liquidity ratios are decreased because increase the liquidity of the syndicate bank. The bank should attract the customers and to provide financial facilities to increase the performance of the bank. 11. References 1. Kwan, S and Eisen be is, RA (1997), Bank risk, capitalization, and operating efficiency. Journal of financial service researchvol.12 (2/3):pg Godlewski (2003) tested the validity of CAMELS rating Indian private sector banks on the basis of camel model, article-33 by KVN Prasad. ISBN

11 3. Said and saucier (2003) used CAMELS rating. The CAMELS model for regulation and supervision of Islamic banks by the central bank.39-related article, July 4, Prasuna DG (2003), performance Snapshot Character financial Analyst, vol. X (11):pg Sarkar, A. (2005), CAMEL Rating System in context of Islamic banking: A proposed S forshariah Framework. Journal of Islamic economics and finance, vol1 (1):pg Gupta and Kumar (2008), A CAMEL Model Analysis of private sector banks in Idea. Journal of Gyan Management, Vol.2 (1):pg Sangmi and Nazir (2010), sci.2010 volume.4(1), Analyzing the commercial banks in India: application of camel model. 8. Siva and Nataraz (2011), CAMEL rating model and consistency of the study period, november Salija R, Sharma S and Dr. Lal R, Impact of Merger on Financial Performance of Bank a case study of HDFC bank, International Journal of Research in Finance and Marketing, Vol. 2, Issue 2, Feb Shar Amir Hussain, Shah Muneer Ali, and Jamali Hajan (Feb 2010), Performance evaluation of pre and post nationalization of the banking sector in Pakistan: An application of CAMEL model, African Journal of Business Management, Vol. 5(3), pp Chaudhary, Sahila and Singh, sultan (2012): impact of reforms on the asset quality in India Banking, international journal of multidisciplinary vol.5 (2):pg ISBN

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