Nguyn Minh Cng Mai Th Mai Nguyn Mai Phng Nguyn Th Phng Thanh

Brief news CAMELS ratings system

Overview CAMELS in Vietnam
CAMELS or CAMEL Rating Vietcombank

PEARLS ratings system

Overview What PEARLS differs from CAMELS

PEARLS in Vietnam
Rating Vietcombank

Some issues of applying CAMELS and PEARLS in Vietnam

Presenter: Ms. Mai

NEWS (5/8/2013) 1 2 3 4 5 Agribank lowers interest rate to 5% for a term of 1 month lowest level in the market. Vietinbank lowers interest rate to 7%/1 year. Vietcombank suddenly increases price of USD to 21.000 VND. Bank has spent 408 trillion VND on paying lending rate and deposit rate. More than 95% of banks are not expected to increase credit for security.

Presenters: Ms. Thanh and Ms. Phuong

What is CAMELS ?
The CAMEL ratings system is a method of evaluating the health of financial institutions by the National Credit Union Administration(NCUA). The rating is based upon six critical elements of banks and other financial institutions operations. (C) Capital adequacy (A) Asset quality (M)Management quality (E) Earnings quality (L) Liquidity (S) Sensitivity to market risk
Each element is assigned a numerical rating based on five key components: Composite 1-5 (strongest performance to unsafe performance)
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 Capital adequacy: is measured by the ratio of capital to risk weighted assets. Asset quality : asset represents all the assets of the bank, current and fixed, loan portfolio, investments and real estate owned as well as offbalance-sheet transactions. Management quality: qualification of Board of Directors. Earning quality: all income from operations, non-traditional sources, extraordinary items. Liquidity: cash maintained by the banks and balances with central bank, to total asset ratio is an indicator of banks liquidity. Sensitivity to market risk: the degree to which changes of market can adversely affect earnings or capital.
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 Regulators from State Bank of Vietnam use CAMELS to supervisory and monitor other credit unions. Managers use CAMELS to forecast potential problem and give solutions. Partners use CAMELS to evaluate financial situation of credit unions they are working with. Investors use CAMELS to analyze and identify the health of credit unions for well investing.

All follow by Decision 06/2008 by State bank of Vietnam

Criteria in CAMEL system

Criteria Capital Asset Management Earning Liquidity No Sensitivity Score -3 -> 15 0 -> 35 0 -> 15 0 -> 20 0 -> 15 NOT in Vietnam

Score assigned for each category in Vietnam

Classification of overall performance of commercial banks Type A B C Required total score > 80 60 - 79 50 - 59 Requirement in each category Not lower than 65% of maximum Not lower than 50% of maximum Not lower than 45% of maximum

< 50

Hello, Im a CAMEL!

Source

Ratings Instruction: Requirement Max score Minus if do not reach requirement

Charter capital > legal capital (>3000 b)

Capital Adequacy Ratio (CAR) > 9% ROE > 17% Total Score

5
5 5 15

-5
-4 14% - 17% : -2 <14%: -5

Ratings of VCB

2012 Charter Capital (> 3,000 billion) CAR (> 9%) 23,000 15%

2011 19, 000 11%

ROE (>17%)
Band score

12.8% (-5 pts)

10/15

16.9% (-2 pts)

13/15

Ratings instruction
Requirement Max score Minus if do not reach requirement

NPL/total Loan > 3%

25

3-5%: -13 5-10%: -19 >10%: -25

65-75%: -2 50-65%: -3 <50%: -5

Structure of on-balance 5 sheets assets > 75% (asset in balance sheet/ total asset) Quality of guarantee over balance sheets asset < 3 % Total score 5 0 - 35

Ratings of VCB

2012
NPL ratio 2.4%

2011
2%

2012

2011

Structure of on-balance sheets assets

87.3%

89.7%

Ratings of VCB
2012 NPL ratio < 3% Structure of on-balance sheets assets > 75% Quality of guarantee over balance sheets asset < 3 % Band score 2.4% (25 pts) 89.7% (5 pts) 5 pts 2011 2% (25 pts) 87.3% (5 pts) 5 pts

35/35

35/35

Ratings instruction
Requirement Minus (If do not meet requirement -3

1/Having an adequate number of members of the Board of Directors and Supervisory Board

2/Fully issuing, standardizing and observing internal regulations -3 3/The internal inspection and auditing system corresponds to the bank size and operates efficiently 4/Members of the Board of Directors, are competent, unified, responsible 5/Observing the State Banks regulations on shareholders, shares and stocks Maximum score: 15 points, minimum score: 0 point
-4 -3 -2

Ratings for VCB

Requirement
Maximum score is 15 1/adequate number of members of the BOD 2/Fully issuing, standardizing and observing internal regulations 3/The internal inspection and auditing system corresponds to the bank size and operates efficiently 4/ BODs are competent, unified, responsible
0 -1 -1 0 0 -1 -1 0 0 13/15

Minus 2011 2012

5/Observing the State Banks regulations on shareholders, 0 shares and stocks Band score
13/15

Ratings instruction
Requirement Max score Point

1/The ratio of pre-tax income to equity

15

>=17%: 15 < 17%: 13 < 10%: 10 < 5%: 5 < 0%: 0

>=8%: 3 <8%: 2 <2%: 1 >=30%: 2 <30%: 1 <14%:0

2a/The ratio of income generated from services to total income

2b/The ratio of net income 2 generated from services to pre-tax income

Ratings of VCB

Requirement 1/The ratio of pre-tax income to equity attains

2012 13.87% (10pt)

2011 19.89% (15pt)

Ratings of VCB
Requirement 2a/The ratio of income generated from services to total income 2012 9.19% (3 point) 2011 10.15% (3 point)

Requirement
2b/The ratio of net income generated from services to pre-tax income

2012
27.09% (1 point)

2011
26.5% (1 point)

 Ratings of VCB
Requirement 1/The ratio of pre-tax income to equity attains 2a/The ratio of income generated from services to total income 2b/The ratio of net income generated from services to pre-tax income Total 2012 10 pts 3 pts 1 pt 14 pts 2011 15 pts 3 pts 1 pt 19 pts

Ratings instruction Requirement Max score Point _ Failing once: -5 _ Failing >1: -12 Liquid assets/current 12 liabilities

Ratio of short-term funds to long-term loans

_ No violation: 3 _ Violation once: -2 _ Violation >1: -3

Ratings of VCB

Requirements

2012

2011

Benchm ark

1/A joint-stock commercial bank assuring a liquidity ratio in accordance with the State Banks regulations (= liquid assets/total liabilities)

17.4% (12pt)

19.27% (12pt)

15%

Ratings of VCB
Requirements 2/Maximum ratio of short-term funds and long-term loans 2012 2011 Benchma rk 30%

Not calculate due to: - Not have information to calculate - The amount score of this criteria is quite small when comparing with overall

Ratings of VCB
Requirements 1. liquid assets/total liabilities 2012 12pt 2011 12pt

2/Maximum ratio of short-term funds to medium and ong-term loans

Total

3pt
15pt

3pt
15t

2011

2012 10 35 13 14 15 87 A

Requirement > 65% of 15 > 65% of 35 > 65% of 15 > 65% of 20 > 65% of 15 > 80

Capital adequacy Asset quality Management capacity Earnings Liquidity

Total Type

13 35 13 19 15 95 A

Presenter: Ms. Mai and Mr. Cuong

PEARLS stands for: Protection Effective financial structure Asset quality Rate of returns and costs Liquidity Signs of Growth

Created in the late 1980s

By World Council of Credit Unions

A set of 44 financial ratios and quantitative indicators, used to evaluate

Banks Credit Unions and other Savings Institutions

 Managers use PEARLS as a management tool to identify potential problems Board of Directors use PEARLS to monitor managements progress toward financial targets

Regulators use PEARLS as a supervisory tool to supervise performance of savings institutions

PEARLS uses strictly quantitative indicators

PEARLS evaluates the financial structure of the balance sheet

PEARLS measures growth rates

I love PEARLS!

 P Protection The primary goal is to ensure that the financial institution provides depositors a safe place to save their money.

P - Protection 1. Loan Losses Allowances / Delinq. >12 Mo.

Goals (Excellence) 100% 35%

Most important indicators of protection

2. Net Loan Loss Allowances / World Council Allowance Required for Delinq. 1-12 Mo. 3. Complete Loan Charge-off of Delinq. > 12 Mo.

Yes

4. Annual Loan Charge-offs / Average Loan Portfolio

5. Accum. Charge-offs Recovered / Accum. Charge-offs 6. Solvency (Net Value of Assets/Total Shares & Deposits)

Minimized
> 75%

111%

Ratings of VCB
2011 1. Loan Losses Allowances / Delinq. >12 Mo. 226.98% 2012 Benchmark 100% 364.65%
Nm 2012 Nm 2011

 E Effective financial structure Ratios measure assets, liabilities and capital, and their associated targets constitute an ideal structure for banks

E - Effective Financial Structure

Goals (Excellence)

1. Net Loans / Total Assets 2. Liquid Investments / Total Assets

3. Financial Investments / Total Assets 4. Non-financial Investments / Total Assets 5. Savings Deposits / Total Assets

70-80% 16%
2% 0% 70-80%

6. External Credit / Total Assets

7. Member Share Capital / Total Assets 8. Institutional Capital / Total Assets 9. Net Institutional Capital / Total Assets

0-5%
20% 10% 10%

Ratings of VCB
2011 1. Net Loans / Total Assets 55.65% 2012 56.91% Benchmark 70-80%

5. Savings Deposits / Total Assets

42.25%

51.66%

70-80%

Nm 2012

Nm 2011

 A Asset quality The indicators measure the impact of assets which do not generate income such as delinquent loans, and non-productive assets

A - Asset Quality

Goals (Excellence)

1. Total Loan Delinquency / Gross Loan Portfolio 2. Non-earning Assets / Total Assets 3. Net Zero Cost Funds / Non-earning Assets

5%

5% 200%

Ratings of VCB
2011 1. Total Loan Delinquency / Gross Loan Portfolio 16.74% 2012 16.32% Benchmark 5%

Nm 2012

Nm 2011

Ratings of VCB
2011 2. Non-earning Assets / Total Assets 2.90% 2012 2.97% Benchmark 5%

Nm 2012

Nm 2011

 R Rates of Returns and Costs

Monitoring the return earned on each type of asset (use of funds) and the cost of each type of liability (source of funds).

R - Rates of Return and Costs 1. Net Loan Income / Average Net Loan Portfolio

Goals (Excellence) Entrepreneurial Rate Market Rates Market Rates

Income ratios

2. Liquid Inv. Income / Avg. Liquid Investments 3. Fin. Investment Income / Avg. Fin. Investments

4. Non-fin. Inv. Income / Avg. Non-fin. Investments

5. Fin. Costs: Savings Deposits / Avg. Savings Deposits Cost ratios 6. Fin. Costs: External Credit / Avg. External Credit 7. Fin. Costs: Member Shares / Avg. Member Shares 8. Gross Margin / Average Assets
Operating Cost ratios

R1
Market Rates > Inflation Market Rates Market Rates, > R5 E9=10% 5% P1=100%, P2=35%

9. Operating Expenses / Average Assets 10. Provisions for Risk Assets / Average Assets

11. Other Income or Expense / Average Assets

12. Net Income / Average Assets (ROA)

Minimized
E9=10%

Ratings of VCB
2011
1. Net Loan Income / Average Net Loan Portfolio 17.77%

2012
14.43%

Benchmark
Entrepreneurial Rate (12.14%)

Nm 2012

Nm 2011

Nm 2010

171.241.318

2011
5. Fin. Costs: Savings Deposits / Avg. Savings Deposits 12.61%

2012
9.71%

Benchmark
Market Rates > Inflation (12.3%, 10.5% 18.5%, 6.8%) Depends on P1=100%, P2=35%
Nm 2011 Nm 2010

10. Provisions for Risk Assets / Average Assets

1.03%

0.85%

Nm 2012

151.132.566 307.621.338

2011
9. Operating Expenses / Average Assets 12. Net Income / Average Assets (ROA) 0.20%

2012 0.22% 1.13%

Benchmark 5% E9=10%

1.25%

Nm 2012

Nm 2011

Nm 2010

307.621.338

 L Liquidity

Managing liquidity is an essential component of administering a savings institution.

L - Liquidity

Goals (Excellence)

1. Liquid Assets - ST Payables / Total Deposits

15-20%

2. Liquidity Reserves / Total Savings Deposits

10%

3. Non-earning Liquid Assets / Total Assets

< 1%

Ratings of VCB
2011 2. Liquidity Reserves / Total Savings Deposits 2012 Benchmark 10% 39.23% 30.31%

Nm 2012

Nm 2011

Chnh lch tin gi cc TCTD khc v tin gi ca cc TCTD khc ti VCB

43,545,226

49,097,067

Ratings of VCB
2011 3. Non-earning Liquid Assets / Total Assets 3.25% 2012 2.63% Benchmark < 1%

Nm 2012

Nm 2011

Ratings of VCB

PEARLS analysis of VCB

S Signs of Growth Reflecting member-client appropriateness of product financial strength. satisfaction, offerings and

PEARLS analysis of VCB

S - Signs of Growth (Annualized Rates) 1. Net Loans Assets side 2. Liquid Investments 3. Financial Investments 4. Non-financial Investments 5. Savings Deposits 6. External Credit 7. Member Shares Goals (Excellence) E1=70-80% E2 16% E3 2% E4=0% E5=70-80% E6=0-5% E7 20%

8. Institutional Capital
9. Net Institutional Capital
Liabilities side

E8 10%
E9 10% 15% > Inflation + 10%

10. Membership 11. Total Assets

Ratings of VCB
2011 1. Net loan 19.18% 2012 15.57% Benchmark Depends on E1=70-80% Depends on E5=70-80% > Inflation + 10% (28.5%, 16.8%)
Nm 2010
171.241.318
151.132.566 307.621.338

5. Savings deposits

9.81%

15.82%

11. Total assets

19.21%

13.02%

Nm 2012

Nm 2011

Protection: Good Effective financial structure: Good Asset quality: Normal (Problem in delinquency) Liquidity: Normal (Too many non-earning liquid assets)

Signs of Growth: Normal - Bad

CAMELS

Qualitative criteria The omitted S

PEARLS

No specific score Inappropriate categories for banks No specific benchmarks for some criteria

 Qualitative indicators are very difficult to evaluate

No information in the annual reports What is Fully issuing, standardizing and observing internal regulations?

S element is omitted in Vietnam

No standard to assess this category Not overall overview of every issues.

 Quantify the qualitative criteria (How to evaluate Management capacity) Full disclosure of information in the financial reports

Create standard requirement for financial reports to include management assessment

 No overall band-score assigned to each category of evaluation (CAMELS does) Difficult to evaluate the overall performance of banks Some categories in PEARLS cant be applied to banks (Because they are for credit unions only) Can not comprehensively assess banks performance Some categories in PEARLS have no specific benchmark to evaluate => Hard to arrive at final overall evaluation of banks

 Assign score for each of the categories (like CAMELS) In evaluating a bank, some adjustment should be made

Provide specific benchmark in EVERY categories