BANKING SECTOR'S PERFORMANCE IN

BANGLADESH-
AN APPLICATION OF SELECTED CAMELS RATIO

Submitted by:
Mohammad Jahid Iqbal

Examination Committee:
Dr. Sundor Vankatesh (Chairperson)
Dr. Juthathip Jongwanich (Co-chair)
Dr. Yousre Badir (Member)

1
 Agenda of the Presentation.

Objectives of the Study.

Methodology of the Study.
CAMELS evolution and Rating interpretation.
Banking Sector in Bangladesh.
Scenario of types of Banks in Bangladesh Based on Different
ratios.
Cross country comparison based on different ratios.
Correlation between some ratios with interest income.
Correlation between different ratios with GDP contribution by
Financial Intermediaries.
Conclusion and Recommendation.
2
 Objectives of the Study

To study the category wise performance of all scheduled banks

operating in Bangladesh on the basis of selected CAMELS
ratio.
To compare the performance of Banking sector in Bangladesh
with some selected developed and emerging countries on the
basis of selected CAMELS ratio.
To analyze how the fluctuation of different ratios affects the net
interest income of banks.
To analysis the co-relation between different ratios with GDP
contribution by financial intermediaries.

3
 Research Methodology

Secondary time series data is used.

Data sources are Bangladesh Bank, Central Bank of different
countries, World Bank etc.
For trend analysis, different figures like Scatter chart, Line
graph, Pie-Chart etc. have been used.
Correlation is used to find out the effect of different ratios on
GDP by Financial intermediaries.

4
 Evolution of CAMELS rating system.

US Federal Reserve System implemented The Uniform Financial

Institutions Rating System (UFIRS) in 1979 in the US banking
institutions which was renamed as CAMEL later on. In 1995 a
new components ‘Sensitivity’ was added to incorporate market
risk.

BB introduced CAMEL Rating System in 1993. New components

‘Sensitivity to market risk’ was added and BB implemented
CAMELS in 2006.

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 CAMELS rating system: C – Capital Adequacy, A – Asset
Quality, M – Management (Efficiency), E – Earning (Capacity),
L – Liquidity (Management), S – Sensitivity to Market Risks

Rating “1”= strong performance.

Rating“2”= above average performance that adequately
provides for the safe and sound operations of the banking
company.
Rating “3”= performance that is flawed to some degree.
Rating “4”= unsatisfactory performance. If left unchecked,
such performance could threaten the solvency of the
banking company.
Rating “5”= very unsatisfactory performance, in need of
immediate remedial attention for the sake of the banking
company’s survival.

6
 Banking sector’s Assets-Deposits scenario
in BD

% of Industry Deposits Bank types 2010 (June)

FCBs, ( billion Taka)
6.10% SCBs,
28.10% No. of No. of Total Deposits
Banks branches Assets
SCBs 4 3394 1272.64 952.72

PCBs, DFIs, 4.90%

DFIs 4 1366 291.37 177.90
60.90% PCBs 30 2427 2539.27 1967.78

FCBs 9 59 308.70 230.68

% of Industry Assets Total 47 7246 4411.98 3329.08

FCBs, 6.60% SCBs, 28.50% Source: BB Annual Report (2010)

Per branch assets and deposits of PCBs is
much higher that of SCBs and DFIs but
lower than FCBs.
DFIs, 6.10% PCBs dominating banking industry in
PCBs, 58.80% Bangladesh.
7
 Capital to Risk Weighted Assets Ratio (CRAR) by types of
Banks. Percent(%)

CRAR of Types of Banks

30
28.1
25 26
22.9 24.2 24
21.4 22.7 22.7
20
Percentage (% )

15
11.4 12.1
11.6
10 9.7 10.5 10.3 9.8 10.6
9.6 10.1
8.4
7.7 9.1
8.7 9.1 7.9 9
7.5
6.9 6.7 6.9
5 4.3 5.6
4.1 4.1
0 1.1 0.4
-0.4
-52001 2002 2003 2004 2005 2006 2007-5.5 2008-5.3 2009 2010
-7.5 -6.7
-10
SCBs DFIs PCBs FCBs Total
Source: BB Annual Report (2002-2010)
• Increase trend of CRAR among all types of Banks.
• DFIs shows the negative CRAR due to the adjustment of huge loss.
• Industry CRAR is in down turn in 2005 due to the loss adjustment by SCBs and DFIs.
• SCBs shows a significant increase after 2006 in CRAR due to the increase of capital by
creating goodwill which has to be adjusted within 10 years during the corporatization of
three SCBs.
8
 CRAR of Some Developed and Emerging Economy.
Percent (%)

Capital to Risk Weighted Assets Ratio(CRAR)

25

20
P ercentag e(% )

15

10

0
2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5

Bangladesh USA France UK Japan

India Russia Malaysia China Brazil

Source: BB, RBI, et. Al. (2011)

9 CRAR is still low in BD compared to other countries due to small capital base.
 NPLs to total loans ratios by types of banks
Percent (%)
NPL to Total Loan Ratio

60
56.1
Percen tag e (% )

50 47.4
40 42.9
33.7 34.9 33.7
30 28 29 29.9
28.6
25.3 22.9 25.4
25.5 25.9 24.2
20 22.1 21.4 21.4
16.4 17.6 15.7
12.4 13.6 13.2 13.2 10.8
10 8.5 9.2 7.3
2.6 2.7 5.6 5.5 5 4.4 3.9
2.3 33.2
0 1.5 1.3 0.8 1.4 1.9
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
SCBs DFIs PCBs FCBs Total
Source: BB Annual Report (2002-2010)
• DFIs & SCBs NPL ratio is very high. During 1980s SCBs and DFIs served the
government purpose other than commercial purpose. They are reluctant to write-off
historical bad debts (BB,2007).
• Poor loan Appraisal, inadequate follow up and weak supervision also responsible for
high NPL in SCBs and DFIs.
• PCBs succeeded in reducing NPL ratio due to proper loan management. Supervision
of central Bank is also a part of this success.
• In FCBs, there is a slight increasing trend in NPL ratio after 2006.
• Industry NPL ratio shows a declining trend because of mature management,
supervisory control and regulations and sound management system.
10
 NPL to total Loan Ratio of Some Developed and
Emerging Economy. Percent (%)

NPL to Total Loan Ratio

30

25
Percentage (%)

20

15

10

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh USA France UK Japan

India Russia Malaysia China Brazil

Source: World Development Indicators, WB, (2011).

Due to economic recession, NPL ratio increases among all developed countries but the shock is not
so sever among the emerging economy. Initially, Bangladeshi banks suffered from high NPL ratio
11 but there is a clear sign of improvement.
 Expenditure-Income Ratio (EIR) by Types of Banks
Percent (%)
Expenditure-Incom e Ratio (EIR)

120
100
Percentage (%)

80
60
40
20
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
SCBs DFIs PCBs FCBs Total

Source: BB Annual Report (2002-2010).

SCBs and DFIs shows high EIR due to interest suspense and high operating expenses for huge
manpower. Most of the time, DFIs incure losses.
Internal control system, mature management contributes to lower the EIR in PCBs.
FCBs operation is basically based on big cities and their operating cost is low for which they
have low EIR.
Industry EIR is in declining trend due to the success of market leader PCBs success.
12
 Expenditure-Income Ratio (EIR) of Developed and
Emerging Economy Percent (%)

Expenditure to Income Ratio (EIR)

100

80
Percentage (% )

60

40

20

0
2001 2002 2003 2004 2005 2006 2007 2008 2009

Bangladesh USA France UK Japan

India Russia Malaysia China Brazil
Source: BB, RBI, et. Al. (2007).
.Malaysian banks achieved lowest EIR among all other nations.
EIR is too high in Bangladesh. High EIR reflects operational inefficiency .
13
 ROA & ROE by types of banks.
Percent(%)

ROA by types of Banks ROE by types of Banks

3.5 50
3
2.5 0
P e r c e n ta g e (% )

P e r c e n ta g e (% )
2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-50
1.5
1
-100
0.5
0 -150
-0.52001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-1 -200
SCBs DFIs PCBs FCBs Total SCBs DFIs PCBs FCBs Total

Source: BB Annual Report (2002-2010).

In 2006 and 2007, ROA is zero in SCBs due to huge provision shortfall. But the situation improved
later on. After incorporatization of 3 SCBs, ROE increases sharply in SCBs.
DFIs incur loss most of the time for which ROA was negative. The reasons for loss are huge
operating expenses and loan loss provision. In 2009, one of the DFIs incur huge loss for which
ROE is exceptionally huge negative.
Low NPL ratio and low operating cost aids to increase ROA & ROE in PCBs and FCBs.
Industry ROA & ROE shows a consistent increase over the period due to high return and low
operating cost by mostly PCBs and FCBs.
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 ROA & ROE of Developed and Emerging Economy.
Percent (%)

Return on Assets (ROA) Return on Equity (ROE)

4 80
3.5
60
3

P e rc e n ta g e (% )
P e r c e n ta g e (% )

2.5 40
2
1.5 20
1
0
0.5
2001 2002 2003 2004 2005 2006 2007 2008 2009
0 -20
-0.52001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-1 -40
Bangladesh USA France UK Japan Bangladesh USA France UK Japan
India Russia Malaysia China Brazil India Russia Malaysia China Brazil

Source: World Development Indicators, WB, (2011), BB, RBI.

ROA is more in Bangladesh than other countries. So, profitability of Bangladeshi banks is
15 better. ROE in Bangladeshi banks is almost similar to other countries.
 Interest Rate Spread of Different Economy
Percent (%)

Interest rate sread

50.00

40.00
Percentage (%)

30.00

20.00

10.00

0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh France Japan Russia Malaysia China Brazil

Source: World Development Indicators, WB, (2011).

In Japan, interest rate spread is below 2% whereas in Brazil, interest rate spread is exceptionally
high.
16 Interest rate spread is much higher in Bangladesh which impedes investments.
 Excess Liquidity by Types of Banks.

Percent (%)

Bank June,
Types 2002 2003 2004 2005 2006 2007 2008 2009 2010
SCBs 7.3 8.4 6.8 2 2.1 6.9 14.9 17.6 17.9
DFIs 6.9 5.8 4.7 6.2 3.8 5.6 4.9 7.1 13.8
PCBs 8.5 9.8 8.8 5.1 5.6 6.4 4.7 5.3 5.2
FCBs 21.8 21.9 21.9 23.6 16.4 11.2 13.3 21.8 17.7
Total 8.7 9.9 8.7 5.3 5.1 6.9 8.4 9 8.8
Source: BB Annual Report (2002-2010).
SCBs are the call money market dominator for their excess liquidity for the last 3years.
DFIs are exempted to maintain 18% SLR but have to maintain 5% CRR of their demand
and time liabilities. For this reason, DFIs has excess liquidity.
Among PCBs, seven are operating as Islami banks. They have to maintain only 10%
SLR of their demand and time liabilities.
FCBs maintain high liquidity historically.
Industry experienced a fluctuation of excess liquidity over the period.
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 Liquid Asset of Developed and Emerging Economy.
Percent (%)

Liquidity Ratio

45.0
40.0
35.0
Percentage (%)

30.0
25.0
20.0
15.0
10.0
5.0
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh USA France Japan Russia Malaysia Brazil

Source: World Development Indicators, WB, (2011).

Here, liquid assets means deposits with the monetary authority.
Among the developed economy, liquid assets is much lower than emerging
economy.
In Bangladesh, liquid assts is near 10% over the period.
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 CAMEL (2002-2005) & CAMELS (2006-2009) rating of all Banks
in Bangladesh

Rating 2002 2003 2004 2005 2006 2007 2008 2009

1 or Strong 9 15 12 13 3 6 2 3
2 or
Satisfactory 21 11 15 16 31 29 28 32
3 or Fair 7 11 10 8 7 5 10 7
4 or Marginal 10 10 8 6 5 6 4 4
5 or
Unsatisfactory 2 2 4 5 2 2 4 1

Total 49 49 49 48 48 48 48 48
Source: BB annual report (2002-2007).
Rating 1 or strong achiever banks were more upto 2005 but it decreased sharply after
the implementation of revised CAMELS rating system.
Rating 4 and 5 are brought under Early Warning Systems for close monitoring.
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 Correlation between CRAR and Interest income
(2002-2009).

Correlation Between CRAR and Net Interest Income

0.700
PCBs, 0.622 Total, 0.646
0.600

0.500
0.400
FCBs, 0.367
0.300
0.200 SCBs, 0.219

0.100 DFIs, 0.096

0.000

Correlation

Increased capital base facilitates more lending and it contributes higher

income. So, theoretically there should have a positive correlation.
From the analysis, a positive correlation is found but it varies across types of
banks.
DFIs and SCBs has got an insignificant correlation whereas PCBs has the
20 significant correlation.
 Correlation between NPL ratio and Interest
income (2002-2009).

Correlation Between NPL to Loans and Net Interest Income

0.000
-0.100 0 1 2 3 4 5 6
-0.200
FCBs, -0.259
-0.300
-0.400 DFIs, -0.403
-0.500 Correlation
-0.600
-0.700 SCBs, -0.685
PCBs, -0.765
-0.800
Total, -0.863
-0.900
-1.000

If NPL ratio decreases then no interest suspense and increase interest income.
Theoretically there should have a negative correlation between NPL ratio and
interest income.
From the analysis, it has been found negative correlation among these two factors.
FCBs is insignificantly correlated as its NPL ratio increases during the last few years.
21
 Correlation between Industry's Different Ratios and
GDP contribution by Financial intermediaries (2002-
2009).

Correlation between Different Ratios and GDP Contribution by F.I.

1.50

1.00 ROA, 0.98 ROE, 0.94

CRAR, 0.65
0.50

0.00
0 1 2 3 4 5 6 7 8
-0.50 Interest Spread, -
NPL to Loans, -0.87 Exp-Income Ratio, - 0.69 Liquidity, -0.75
-1.00 0.91

-1.50

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 Correlation between Industry's Different Ratios and
GDP contribution by Financial intermediaries (2002-
2009).

CRAR is positively correlated with GDP as high capital base facilitates

productive investments which contributes to GDP. In the analysis, we
also find a positive significant correlation between CRAR of banking
industry and GDP contribution by financial intermediaries. So, it can be
said that high capital base contributes to GDP.
Theoretically if NPL ratio decreases then GDP should be increased. It is
found in the analysis that NPL ratio is significantly correlated with GDP
contribution by Financial intermediaries.
EIR is negatively correlated with GDP contribution by Financial
intermediaries. ROA and ROE should be positively correlated with the
GDP which is also found in the analysis.
On the other hand, interest spread and liquidity are negatively correlated.
Decrease in liquidity and interest spread means more utilization of fund at
a lower cost.
So, it can be said that theoretical assumption has been proved in the analysis
and the result is significant.

23
 Conclusion and Recommendation

DFIs has been found more vulnerable compared to the rest of

three categories.
Performance of banking sector in Bangladesh is still far behind
than that of some developed and emerging economy.
Significant correlation between CRAR and NPL ratio with
interest income in some cases whereas less significant in other
cases.
Correlation between some CAMELS ratios of the industry and
GDP contribution by financial intermediaries is also found
identical with the assumption.
The performance of SCBs and DFIs needs to be improved.

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 THANK YOU

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