A STUDY ON CAMEL ANALYSIS OF JOINT VENTURE BANK

(With the Reference of Everest Bank Limited.)

A project Work Report

Submitted by:

SUSHANT TAMANG
TU Reg. No. 7-2-723-160-2019
Herald International College

Submitted to:
Research department
Tribhuvan University
Kathmandu

In the Partial of Fulfillment on the Requirement for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Bashundhara, Kathmandu
October 2023
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1.1 Background of the studies

The CAMEL model is a technique that may be used to evaluate performance in the
banking sector and predict future trends and relative risk. It is very effective, efficient,
and accurate. Calculating CAMEL ratios enables one to concentrate on financial
success. Capital adequacy, Asset quality, Management, Earning and Liquidity and
Sensitivity are all initials for the CAMEL. In this study, some significant ratios are
selected and computed to assess bank performance. Data for this study was collected
from an Iranian bank's yearly financial reports. Then, the data is compared to the ratios
and reports of other banks. Undoubtedly, the patterns in calculations and pertinent data
highlight key issues for managers, and the CAMEL rating can be a useful tool for
managing, controlling, and making decisions from a management accounting
perspective .This study makes use of the CAMEL methodology, which considers capital
adequacy, asset quality, management efficiency, earning quality, and liquidity.
Measurement of public listed banks' performance as well as performance comparison are
the study's goals. According to those definitions, CAMEL analysis is a technique for
measuring risk that uses the annual report's scale descriptions of assets and liabilities in
the banking industry to estimate the amount of financial distress that will occur in the
past, present, or future in order to increase profitability for internal and external
management in making decisions about the performance of the banking industry. The
primary goal of the CAMEL system is to identify issues that banks themselves are
having. It also aims to compare the performance of various banks and evaluate
empirically whether CAMEL rules can be applied and what effect it has on the
performance of SBI Groups. The study came to the conclusion that annual CAMEL
scanning aids commercial banks in assessing their financial health and notifies them
when they need to take preventive action to ensure their sustainability. One of the
industries in India with the highest growth is the banking sector. The banking industry is
getting increasingly complex. Analyzing the Indian banking industry is a difficult task.
When separating reputable banks from poor ones, there are numerous considerations that
must be made. To assess the performance of the banking industry, researchers have
selected the CAMEL model, which evaluates a bank's performance based on each
significant factor, including capital sufficiency, asset quality, managerial effectiveness,
earning quality, and liquidity. Following decision-making, the model research has
selected nationalized banks. Each parameter is given equal weights based on the
significance of the study. According to those definitions, CAMEL analysis is a
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technique for measuring risk that uses the annual report's scale descriptions of assets and
liabilities in the banking industry to estimate the amount of financial distress that will
occur in the past, present, or future in order to increase profitability for internal and
external management in making decisions about the performance of the banking
industry. Financial performance takes into account all aspects of the business, including
capital, liquidity, and profitability, risk, and management soundness. One of the best
tools for evaluating the financial performance of banks is the CAMEL rating system. In
general, the CAMEL rating system is a quantitative method that is popular throughout
many nations. A bank's overall financial soundness and the caliber of its management
are evaluated using current financial ratios. For instance, as part of the CAMEL system,
bank regulators utilize financial ratios to assess a bank's performance. The market power
model and efficiency structure model were used in the first research on banks'
performance, which were published in the late 1980s and early 1990s. Evaluation of
banks' profitability and financial soundness has increased in more complex analytical
models with the emergence of numerous data analytical techniques. The CAMEL
framework has been the most popular method in recent years for evaluating the financial
stability of financial institutions. The CAMEL model is a technique that may be used to
evaluate performance in the banking industry and to predict the future and relative risk.
It is very effective, efficient, and accurate. The CAMEL model, which contains five
performance characteristics including capital adequacy, asset quality, management
quality, earnings, and liquidity, was used in the study for data analysis, leaving out just
the sensitivity component. It is believed that factors such as bank management, earnings,
and liquidity should be considered when evaluating the financial performance of banks.
As a result, the CAMEL research provides the foundation for evaluating the
effectiveness of firm management when it comes to risk management.

1.2 Profile of Everest Bank

Everest Bank Limited (EBL), established in 1994, stands as a beacon of trust and
efficiency in the Nepalese banking landscape, serving over 13 lakh customers with
professionalism and dedication. With a storied history of contributing to the nation's
corporate, agricultural, and industrial development, EBL has emerged as one of Nepal's
leading banks. Its joint venture partnership with Punjab National Bank (PNB), India's
pioneering Swadeshi Bank founded in 1895, brings a wealth of experience to the table,
with nine bank mergers under its belt. EBL's accolades in 2021-22 include recognition
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as the Best MSME Bank (PSU) by ASSOCHAM, the Best Data Quality Improvement
Award among public sector banks by TransUnion CIBIL, and the prestigious Global
Banking & Finance Award in the "Initiative Core Amalgamation" category in
collaboration with Infosys. Notably, EBL secured the top position among peer banks in
the Agriculture Infrastructure Fund (AIF) campaign initiated by the Ministry of
Agriculture and Farmers Welfare. With an extensive network comprising 39,167
delivery channels, including 10,098 domestic branches, two international branches in
Gift City, Ahmedabad, and Dubai, 13,350 ATMs, and 15,719 Business Correspondents,
EBL ensures convenient access for its customers nationwide. The bank's global presence
extends to subsidiaries in London and Bhutan, namely PNB International Ltd. and Druk
PNB Bank Ltd., alongside representative offices in Myanmar and Bangladesh. In
partnership with PNB, holding a 20% equity stake, EBL receives top-notch management
support through a Technical Service Agreement. Leveraging its ABBS system, EBL
offers customer-friendly services that enable operational transactions from any branch,
reinforcing its commitment to delivering efficient banking services anytime, anywhere.

1.3 Objective of the Studies

The national and international economy has undergone through drastic changes over
decade and abruptly since last five year. The threads impose by Nepalese economy, have
made it imperative to search for opportunities in order to curb hindrances to the
economic development. Because of the importance and the relevance of bank on shaping
the economic it has become to review the banking industry and its business strategies.
In the line with the statement of problem, the main objective of this study is to analyze
the financial condition of Everest and following are the objectives on specific terms;
 To compare capital adequacy with reference to regulatory minimum capital
Requirement
 To analyze quality of asset and determined how efficiently the loans are disbursed
and managed.
 To find out the efficiency of management of the bank
 To evaluate earnings of the bank in terms of capital and assets.
 To determine the liquidity position of the bank

1.4 Rationale of study

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In addition to the goal of information acquisition, research itself advances the body of
literature. The importance of this study is primarily in the identification of troubled or
declining financial institutions as well as the classification of institutions with
weaknesses in specific component areas. Additionally, it helps in tracking trends in
safety and soundness and evaluating the overall health and soundness of the financial
sector. The study is very helpful to the concerned parties listed below.
To the management: Management is always interested in learning about the bank's
financial stability. This study will be useful in examining the numerous factors that
contribute to their bank's performance being better or worse than those of other joint
venture banks. The management will be aware of any weaknesses and holes so that they
can be filled in the future.
To the shareholders: Shareholders also want to know whether their funds are is safe
hands or not. How their funds are utilizing and what extent they are gaining. The
outcome of this study will help them to identify the productivity of their scare sources.

To others: Others refers to all interested parties, excluding management and

shareholders, including creditors, competitors, merchant bankers, depositors, and
investors. This study will enable them to understand the positions of the banks and make
judgments about whether or not to deposit, finance, and invest. Additionally, decision-
makers who formulate policies involving joint venture banks, such as the governing
authority, government and tax officials, the security exchange board, and the Nepal
stock market, can also gain from or be informed. Students and scholars may find this
research to be valuable.

1.5 Review of Literature

In terms of recovery, managerial effectiveness, asset quality, earning quality, and

internal control system to regulate the degree of risk and the financial sustainability of
commercial banks, there has been a significant improvement over the prior supervisory
system for the banking sector. By assessing and evaluating the performance and
financial soundness activities of the bank using the CAMEL (capital adequacy, asset
quality, earnings and liquidity) rating criterion, the regulators have strengthened bank
oversight. In terms of frequency, check, spread out, and concentration, the CAMEL
supervisory criterion in the banking industry is a substantial and notable improvement
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over the preceding criterions. The banking industry has undergone a paradigm shift
throughout this time, making it necessary to evaluate operations' success.

1.5.1Conceptual review

Camel rating system is an international bank-according to five factoring system with

which bank supervisory authority rates

C= Capital Adequacy

A= Asset Quality

M= Management Quality

E= Earnings quality

L= liquidity

Figure 1. Conceptual framework of CAMEL

Capital Adequacy
How well financial institutions (FIs) can respond to shocks to their balance sheets
ultimately depends on capital sufficiency. As a result, it monitors capital adequacy ratios
that apply risk weightings to the institution's assets in order to account for the three most
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significant financial risks: foreign currency, credit, and interest rate risks. Bank capital is
separated into Tier I and Tier II in order to determine capital adequacy. Capital is
primary capital and Tier II capital is supplemental capital.

Core capital; Core capital of a bank includes paid up equity , share premium,
nonredeemable preference shares, general reserve and accumulated profit and loss.
However, where the amount of goodwill exists, the same shall be deducted for the
purpose of calculation of the core capital.

Supplementary capital; General loan, general loan loss provision, exchange fluctuation
reserve, hybrid capital instruments, unsecured subordinated term debt, and other free
reserves not designated for a particular use are all included in supplemental capital

Asset quality
Credit risk is one of the factors that affect the health of an individual FI. The extent of
the credit risk depends on the quality of assets held by an individual FI. The quality of
assets held by an FI depends on exposure to specific risks, trends in non-performing
loans, and the health and profitability of bank borrowers especially the corporate. Asset
quality covers an institutional loan's quality which reflects the earnings of the institution.
Assessing asset quality involves rating investment risk factors that the company may
face and comparing them to the company's capital earnings.

Management efficiency
the management caliber of a bank displays its sound management. When the
management keeps costs under control and boosts productivity, which leads to increased
profits, it is referred to as excellent management or competent management and serves
as a safety for running the bank in a smooth and acceptable manner. Total cost to total
income ratio is used in this instance to measure this indicator. Management assessment
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determines whether an institution is able to properly react to financial stress.

Earnings quality
Earning is an important parameter to measure the financial performance of an
organization. Earning quality mainly measures the profitability and productivity of the
bank, explains the growth and sustainability of future earnings capacity. In the same
way, bank depends on its earning to perform the activities like funding dividends, 25
maintaining adequate capital levels, providing for opportunities for investment for bank
to grow, strategies for engaging in new activities and maintaining the competitive
outlook. Here two ratios are used to determining the profitability of banks i.e., return on
asset and return on equity. An institution's ability to create appropriate returns for
expand, retains competitiveness, and capital is a key factor in rating its continued
viability. Examiners determine this by assessing the company's growth, stability,
valuation allowances, net interest margin, net worth level and the quality of the
company's existing assets.

Liquidity
The credit to deposit ratio (CDR) is a crucial instrument for assessing a bank's liquidity
since it calculates the proportion of funds that a bank has used for credit compared to the
total amount of deposits it has collected. The bank is more efficient at using the money it
has acquired the higher the CDR. Examiners consider a company's dependency on short-
term fluctuating financial resources, interest rate risk sensitivity, availability of assets
that can be rapidly converted to cash, and technical proficiency in ALM when
determining its liquidity.

1.5.2 Review of previous studies

(Shrestha R., 2019) used the CAMEL model of two joint venture banks, SBI Bank
Limited and Everest Bank Limited, to conduct his thesis on the financial performance
analysis of commercial banks. The study's main goal is to use the CAMEL framework to
examine the financial performance of Nepal SBI Bank Ltd. and Everest Bank Ltd. The
study was started with the following precise goals in consideration:
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Major findings:

• To examine comparative analysis of the capital adequacy of the selected banks.

• To assess comparative assets quality of the both banks.
• To analyze comparative management efficiency of the both banks.
• To evaluate comparative earnings performance of the both banks.
• To find out comparative liquidity position of the selected banks.

1.5.2.1Review of journals and articles

The goal of theoretical review is to establish existing theories and their relationships
with one another as well as to identify any research gaps. This study of theory rather
than application leads to the formation of new hypotheses that demand further study.

The capital buffering theory

According to the buffer theory of capital, which was proposed by Jokipi and Miline in
2011, a bank that is close to meeting the statutory minimum capital ratio may be
motivated to increase capital and lower risk in order to avoid paying the fines that would
result from failing to meet the criteria. Banks like to keep a reserve of extra capital on
hand to lessen the chance that they will fall short of the regulatory minimums,
particularly if their capital adequacy ratio is very variable. Through loans and advances,
shareholders' funds, total assets, and client deposits, the study assessed capital
sufficiency standards. While profit after tax and earnings per share were used to evaluate
bank performance. Banks like to keep a reserve of extra capital on hand to lessen the
chance that they will fall short of the regulatory minimums, particularly if their capital
adequacy ratio is very variable. With loans and advances, shareholders money, total
assets, and client deposits, the study assessed capital adequacy standards. While profit
after tax and earnings per share were used to evaluate bank performance Government of
Nigeria. The empirical finding of this study demonstrates that deposits OLS estimating
techniques were used in the study, which showed that capital adequacy standards have a
big impact on bank performance. When analyzing the financial situation, capital
adequacy is crucial. List of Nigerian banks that accept deposits. Function of adequate
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capital in varied ways, such as by providing a route for losses that present income cannot
pay. It increases the public's and regulatory authorities' confidence in the depositors.
Government of Nigeria. The empirical finding of this study demonstrates that deposits.
OLS estimating techniques were used in the study, which showed that capital adequacy
standards have a big impact on bank performance. When analyzing the financial
situation, capital adequacy is essential

1.5.3 Research gap

Through financial statements and financial calculations, the CAMEL model determined
the performance level of financial organizations. Because camel models are more
commonly employed in other nations than Nepal, including the United States, the United
Kingdom, India, and African nations, the study mostly used literature by foreign authors.
As a result, the performance, management, and risk of banks are evaluated and studied in
this thesis. In order to clarify the measurement dispute, the current literature on the
connection between CAMEL ratios and bank performance is reviewed in this thesis using
exploratory and descriptive techniques. Recent papers are not included in the research
because they are not found in any sources. In summary, the study is accessible to people
who are interested in the subject. Therefore, the purpose of this thesis is to investigate
international publications to support our local writers. • There was a fluctuating trend in
the ratio of past-due loans to total loans during the study period. Over the course of the
research period, the bank's total loan increased.

• The research reveals that EBL has maintained its provision for substandard loans at 25%
for the past six years, as required by Nepal Rastra Bank. No changes have been made to
the provision.
• The research reveals that EBL has maintained its provision for dubious loans at 50% for
the past six years, as required by Nepal Rastra Bank.
• The research demonstrates that EBL has maintained its provision for lost loans at 100%
over the last six years in accordance with Nepal Rastra Bank's guidelines. No changes
have been made to the provision. By dividing loan and advance amounts by total asset
quantities, the loan and advance to total assets ratio has been calculated. This percentage
assists in determining whether or not the banks have correctly utilized the total working
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fund. The EBL ratio varied over the course of the study; in the fiscal year 2013/14, it
ranged from 66.01% to 67.53%.

• Over the course of four years, the ratio of EBL's net income after taxes to total assets has
decreased from a minimum of 1.52 percent in 2015–16 to a maximum of 1.78 percent in
2017–18.

1.6Research Methodology

The basic objective of the study is to analyze and evaluate the financial health of
commercial bank namely Everest Bank Ltd comprehensively. This chapter includes
research design, justification for the selection of study unit, nature and source of data,
methods of data collection, data analysis tools and limitation of methodology.

1.6.1 Research design

Identifying the research problem is the responsibility of research design. In other terms, a
research design is the design of characteristics for data collection and analysis that seeks to
balance procedural economy with relevance to the study goal. In actuality, the conceptual
framework for doing the research is the research design. This research study's general goal
is to explore and assess the financial performance of Nepal's joint venture banks, and in
order to do so, both descriptive and analytical research designs have been used. The
study's main objective is to investigate the relationships between the many factors that
affect the sampled banks' financial decisions. The goal of research design is to gain
answers to research questions and to manage variance. It includes the plan, structure, and
strategy of the investigation. A research is the description of techniques and steps for
gathering the required data. What information is to be gathered from which sources by
using which methods is specified by the project's overall operational procedures?

1.6.2 Nature and Sources of data

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The research is primarily based on secondary data. The bank's annual reports are the
primary sources of information considered in the study. For regulatory purposes, data
that was not already included in the bank's annual reports was gathered through NRB
reports and guidelines. The required data for the study was also collected through library
research study, Internet, homepage, related links, 29 Directives of NRB 2020, Annual
report of Everest bank limited, Published articles and journals from various researchers
and lecturers.

1.6.3Population and Sample

There are altogether 20 commercial banks as the population of the study. Everest bank
Limited is taken as a sample for the study. This research work four years annual report
have been taken of respective banks which are published by bank after audit to general
public in the form of annual report. It covers the fiscal year of 2015 to 2019. Data were
collected from the samples by visiting different investment banks, which are convenient
and ask the investors there to give their responses.

1.6.4 Statistical tools

Statistical tools are technique used to research data and analyze and draw meaningful
conclusions. In this study statistical tools such as mean, standard deviation and co-efficient
of variation have been used.

1.7. Limitation of the studies

This studies is about the financial analysis of joint venture bank under CAMEL with the
reference to Everest bank. Every research has its own limitations, which are as follows:
 The studies is based on secondary data published by Everest bank only.
 The studies covers only five-year periods, i.e. from the fiscal year 2016/ 17 to
2020/21
 The studies focus on financial analysis is the studies unit in the frame work on six
component of CAMELS analysis
 Only few finical and statistical tools are used for analysis.
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1.8. Report structure

This studies has organized into the following three chapters:

CHAPTER I: INTRODUCTION
The first chapters deals with the subject matters consisting background of the study,
profile of sample bank, objectives of the study, rationales of the studies, review of
literature which focus the review of available literature in the field of studies being
conducted, research methodology which describe the research mythology used to
conduct the present research, limitation of the studies and chapter scheme of the study.

CHAPTER II: RESULT AND ANALYSIS

The second chapter is consult with the presentation and analysis of data and also
contains major finding of the study.

CHAPTER III: SUMMERY AND CONCLUSION

The final chapter includes the summery and conclusion of the finding of the studies
which deals about the crucial theme of the study.
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REFRENCES
Karol K. Marek (2007). 23 July. Evaluation of the risk management theory using a wide
range of empirical data.18, 1-31.
(2011) December. Kouser, R., Muhammad, A., Mehvish, & Azeem. CAMEL analysis for
Islamic and Western Banks: Pakistani Comparative Study.
1(10), 55-64.
A. Mikes, R. Kaplan, and others (2013). Toward a theory of corporate risk based on
contingencies. 14, 13-063.
Ridderström, J., Persson, H. (2014). Firm leverage and the theory of trade-offs. 13(1),
1-25.
R. Ab-Rahim, N. Kardin, A.-C. Ee-Ling, & A. A. Dee (2018). Performance of ASEAN
public listed banks according to CAMEL study. 24(1), 1-10.
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