Introduction
CAMELS is a recognized international rating system that bank supervisory authorities use. It is used to rate financial institutions. Here the rating is from 1 to 5 where anything below 2 is considered as bad for the company and rating above 3 is considered good.
Capital Adequacy
It refers to the amount of capital that the banks are required to maintain as per the financial regulator.
Asset Quality
It evaluates the quality of assets/loans that the bank offers.
Management
It determines whether a bank possesses the ability to detect and react to financial stress.
Earnings
It is based upon the financial institutions ability to earn appropriate returns on its assets which the institution to expand, remain in the competition and provide adequate capital.
Liquidity
To meet unexpected withdrawals from depositors, the bank must maintain liquid cash and assets that can be easily converted into cash. It refers to the asset and liability management done by the banks to ensure adequacy of liquidity sources for present and future needs.
Sensitivity
It refers to how market changes affect the banks.
Understanding the CAMELS Through KOTAK BANK’S Example
Capital Adequacy
Data –
FY 16
Consolidate CRAR – 17%
Standalone CRAR – 16.3%
FY 17
Consolidate CRAR – 17.2%
Standalone CRAR – 16.8%
FY 18
Consolidate CRAR – 18.4%
Standalone CRAR – 18.2%
Analysis
The bank keeps its capital position above the minimum capital adequacy approved by the RBI by maintaining a strong capital ratio. This says that the bank is able to identify the various risks and thus keeps a strong capital base to support them. Having a strong capital position helps the bank achieve a competitive advantage. It also provides assurance to the regulators, depositors and shareholders that the bank will be able to absorb the losses.
The consolidated Capital Adequacy Ratio maintained in FY 16 was 17% which marginally increased to 17.2% in FY 17 which further rose to 18.4% in FY 18. Whereas the standalone Capital Adequacy Ratio maintained in FY 16 was 16.3% which marginally increased to 16.8% in FY 17 which further rose to 18.2% in FY 18.
It is well capitalized in excess of the minimum requirement mandated by the RBI. The bank has been able to increase its capital adequacy even while its NPAs have reduced which means it was easily able to absorb the losses.
Having a good capital base, it is easy for the bank to raise further funds if needed.
Conclusion
The bank has been able to increase its CRAR which implies that it will become easy for Kotak Bank to raise further funds if required and also the increased capital adequacy will ensure that unexpected losses will be absorbed.
Assets Quality
Data – ( in ₹ thousands)
FY 16
Advances- 118,66,52,952
GNPA- 2.4%
FY 17
Advances- 136,08,21,288
GNPA- 2.6%
FY 18
Advances-169,71,79,249
GNPA- 2.2%
Analysis
The asset quality is an important criteria for identifying a good bank. Prudent lending and a tight asset base is crucial to ensure the banks consistent and strong performance.
The advances rose by 14% in FY 17 and 24% in FY 18. It can be said that the bank could increase its loans and advances every year.
The GNPA stood at 2.4% in FY 16. This marginally increased to 2.6% in FY 17 which is not alarming considering the high rates of GNPAs recorded by the PSU Banks. It further reduced to 2.2% in FY 18 which is considered very well in a market condition where the NPAs of the banking sector is very high. The bank has efficiently reduced its NPAs which may have been possible by recoveries or either the losses have been absorbed by the capital.
The bank has consistently managed credit default risk effectively.
Conclusion
Kotak bank has started taking a conservative approach while lending and thus is able to reduce its NPAs and maintain a healthy asset quality.
Management Capability
Data – (in ₹ crores)
FY16
No of employees- 31410
Business per employee- 7.51
Profit per employee- 0.07
FY 17
No of employees- 33013
Business per employee- 8.35
Profit per employee- 0.11
FY 18
No of employees- 35717
Profit per employee- 0.12
Business per employee- 9.04
Analysis
Profit per employee is the crucial part for understanding the capability of the management. Higher the profit per employee would ensure more productivity of the bank. More profit can be obtained by having efficient employees in the company. This can be achieved only by giving more salary, bonus and making them satisfied.
The profit for every employee has increased in consecutive year. In FY17 there was an increase of ₹40 lakh profit per employee, it can be said that the bank has knowledgeable and fully trained employees who are working efficiently for the company. In FY18, the profit further increased by ₹10 lakh.
The no. of employees increased by 1603 in FY17 but the profit increased significantly in comparison. Whereas, in FY18, no of employees have increased by 2704 employees but profit per employee only increased by ₹10 lakh which is less in comparison to FY17.
Business per employee informs about the business generated by the employees for the bank. In FY 17 it increased by ₹84 lakhs and in FY 18 by ₹69 lakhs.
Kotak bank has very good planning of how to increase man force with skills and capability which ensures increases in business and profit per employee.
Conclusion
The management ensures that it implements business strategy and internal controls to ensure that the bank performances well.
Earnings Quality
DATA IN CRORE RS.
FY 16
Return on average assets- 1.2%
Net interest margins- 4.3%
Cost to income ratio- 58%
Net interest income- 6900
Other non-interest income-848
FY 17
Return on average assets- 1.7%
Net interest margins- 4.5%
Cost to income ratio-48%
Net interest income- 8126
Other non-interest income -1356
FY 18
Return on average assets- 1.7%
Net interest margins- 4.3%
Cost to income ratio-47%
Net interest income- 9532
Other non-interest income – 1288
Analysis
Return on average assets increased in FY 17 and remained stable in FY 18. It tells how effectively the bank could increase its income in FY 17 by employing its assets efficiently. It further remained at 1.7% in FY 18.
The net interest margin increased from FY 16 to FY 17 which implies that the bank has invested its funds efficiently. This margin further reduced back to 4.3% in FY 18.
The cost to income ratio has decreased every year implying that the income of the bank has increased which is able to absorb the operating cost of the bank. It shows how efficiently the management is working to increase the income and reduce the cost to ensure more earnings to its shareholders.
Net interest income is an important factor for banks. Since this part of the income is generated from the core banking activity, it becomes a critical parameter for reflecting the banks performance. It grew by an approx. 17% in FY 17 and FY 18 which implies a stable growth rate. Even though its NIM decreased in FY 18 compared to FY 17, it was still able to maintain a stable growth rate of 17%.
The other income or the non-interest revenue rose by approx. by 60% in FY 17 which says that the bank’s non-core activities are able to support its core activities. This income reduced marginally in FY 18.
Conclusion
The bank is performing well and is using its assets efficiently in order to ensure stable earnings and continuous growth.
Liquidity
Data – ( in ₹ thousands)
FY 16
Liquidity coverage ratio-
Q1- 67.15%
Q2-64.31%
Q3-67.54%
Q4- 77.75%
Cash in hand- 94,71,930
Balance in current account (RBI and other banks)-6,91,98,924
FY 17
Liquidity coverage ratio-
Q1-77.35%
Q2-77.42%
Q3-84.71%
Q4- 88.66%
Cash in hand- 99,69,738
Balance in current account (RBI and other banks)-7,52,28,743
FY 18
Liquidity coverage ratio-
Q1- 67.15%
Q2-64.31%
Q3-67.54%
Q4- 77.75%
Cash in hand- 1,20,49,839
Balance in current account (RBI and other banks) – 8,65,60,124
Analysis
The bank is required to keep a certain amount of deposits with them in liquid assets so as to meet the unexpected withdrawal demands from the depositors. Kotak bank has maintained a good quantity of cash in hand to ensure that it doesn’t need to borrow in order to meet the cash withdrawal demand of its depositors.
It has further maintained current account balances with the RBI for fulfilling the liquidity norms and has also made deposits with national and foreign banks to ensure more liquidity.
The LCR requirements increase every year by 10%. Thus in FY 16 it was 70%, FY 17- 80% and FY 18- 90%.
The LCR for the three month end on 31st March, 2016 was 77.75% which is above the regulatory limit of 70%. Ratio for the quarter ended 31st March, 2017 was 88.66% which is above the regulatory limit of 80%. The LCR for the quarter ended 31st March, 2018 was 106.48% which is above the regulatory limit of 90%.
Conclusion
Kotak Bank has ensured to maintain a good liquidity position in order to ensure smooth operation of its activities without any discrepancies.
