camels and pearls application to financial management of commercial banks

National Financial Supervisory Commission published the overall report of financial market in 2013 and forecast of 2014: Bad debts ratio approximates 9%, total banking assets increased 1

Group 10 PRESENTATION

Group members

• Nguyen Anh Thu

• Luu Phuong Linh

• Nguyen Phuong Anh

• Pham Ngoc Mai

• Luong Minh Hien

I International Banking News

1. China has the largest foreign currencies reserve ($ 3.820 billion) in total $11.673,6 billion of the

world

2. Russia closed 4 Ukrainian banks in Crimea because of violation in depositors’ rights

3. In a report published in April 22th, Asian Development Bank urges Asian countries to develop

risk management instruments in order to prevent the economy from natural disasters’ effects

Sources: vnexpress and taichinhdientu.vn

I Domestic Banking News

1. Vietnam International Bank (VIB) continues on carrying out the $ 2.500 billion loan package for

individual consumer loans and microenterprise business loans with preferential interest rates

2. In March 2014, SBV has confirmed the registrations of government-supported housing loans as

stipulated in Circular No 02 11/2013/TT-NHNN for Long Thinh and Hoang Hao projects of social housing

3. National Financial Supervisory Commission published the overall report of financial market in

2013 and forecast of 2014: Bad debts ratio approximates 9%, total banking assets increased 15%

Sources: vnexpress and taichinhdientu.vn

II Measuring and evaluating performance of banks

 Collect financial information, then analyze and evaluate banks’ performance

based on some chosen criteria.

Clarify operation status as well as factors affect them; compare with

others to raise competition

Clarify operation status as well as factors affect them; compare with

others to raise competition

Building targets; finding causes and solutions to improve operation

efficiencyBuilding targets; finding causes and solutions to improve operation

efficiency

Effective Financial Structure

E ffective Financial Structure

Liquidity

L iquidity

Asset Quality

A sset Quality

Rates of Return & Cost

R ates of Return & Cost

Sign of Growth

S ign of Growth

Effective Financial Structure

Help institutions control delinquencies and monitor the ratio of non-earning assets to total

assets

Rate of Return and Costs

Segregates all essential components of net earnings to help calculate investment yields and

evaluate operating expenses.

PEARLS Objective

 Executive management tools : monitoring the performance of credit unions

 Standardized Evaluation Ratios and Formulas : eliminating the diverse criteria to evaluate operation and creates a universal financial language.

 Objective, Comparative Rankings : comparing credit union performance on a national basis.

 Facilitate Supervisory Control : providing the framework for a supervisory unit at the National Federation.

Sentivity to Market Risk

S entivity to Market Risk

Capital Adequacy

Determines how well FLs can manage with unexpected events to their balance sheets

Management Quality

Depends on exposure to specific risks, trends in non – performing loans plus the health and

profitability of bank borrowers

Asset Quality

A key to determine banks performance but is difficult to measure as it is a qualitative factor.

Profitability keeps up the sound health of FLs Problems can be both indicated with too high or low profit

Sensitivity to Market Risk

Liquidity risk threats the solvency of FLs In order to maintain performance, trade off between liquidity and

profitability is necessary

Liquidity

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 provide a meaningful rating

Contains 5 model measurement , help find out the 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.

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 managers in credit unions to assess the degree of satisfaction

among member-clients.

CAMEL in VIET NAM

RATING SYSTEM OF CAMELS

A 80 Not lower than 65% of maximum score

B

One criteria equal from 50% to 65% of max score

60 - 79 Not lower than 50% of maximum score

C

59 One criteria equal from 45% to 50% of max score

50 - 59 Not lower than 45% of maximum score

D

50 One criteria less than 45% of maximum score

A Not lower than 65% of maximum score

B

One criteria equal from 50% to 65% of max score

60 - 79 Not lower than 50% of maximum score

C

One criteria equal from 45% to 50% of max score

50 - 59 Not lower than 45% of maximum score

D

One criteria less than 45% of maximum score

B.2 Chất lượng các khoản mục đầu tư (B.1.1<50% ) 5 pts

Dự phòng giảm giá chứng khoán/ Tổng số dư các khoản đầu tư < 1% - B.3 Cơ cấu tài sản có nội bảng 5 pts

-Tài khoản có sinh lời/ Tổng tài sản nội bảng > 75% 93.68% 91.98%

B.4 Chất lượng các khoản cam kết ngoại bảng

C M anagement 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

5 members in SB

VIETINBANK

 10 members in Board Of Directors

 3 members in SB

C M anagement Quality

b International Auditing – 4 Points

• 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

• Minimum chartered capital required: 3 000 000 000 000 VND

• VCB: 23 174 170 760 000 VND

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