CAMELS Rating

It is a global bank-rating system in which bank

supervisory authorities rate institutions according to six
factors. It helps the supervisory authority to identify
banks that are in need of attention. These are
• Capital Adequacy
• Asset quality
• Management efficiency
• Earnings quality
• Liquidity
• Sensitivity to market risk
 Capital Adequacy
• It evaluates bank’s capital and its ability to cover
depositors from potential losses that a bank might
incur. It measures capital ability to cover major
financial risks (like default risk, market risk, foreign
exchange risk, interest rate risk etc.). It is measured by
Tier 1 Capital + Tier 2 Capital

Risk Weighted Assets

CAR is currently set at 12.5% in Pakistan. For Microfinance

Banks, it is 15%.
 Tier 1 Capital
Tier 1 Capital Includes
• Paid up Capital
• Reserves/Retained Earnings

Tier 2 Capital Includes but not limited to

• Subordinated Loans
• Hybrid Securities (Convertible bonds and
warrants/rights)
• Revaluation of Fixed Assets
 Risk Weighted Assets
• Calculated by multiplying dollar or rupee
amount of each asset on the balance sheet
with the allotted weight and then adding them
up.
 Asset Quality
• Ascertains the quality of investments, loans and advances and
their volatility with respect to different types of risks.
• Are investments diversified?
• How many loans and advances are backed up by collateral
• Quality and market value of collateral.
• Market value of invested TFCs
• Credit Rating of companies, instruments where investments
have been made
• Non performing loans / Total loans and advances
• Ratio of risk free investments in total loans, advances and
investments.
 Management Efficiency
• It ascertains quality of top level management
in terms of professionalism, acumen,
oversight, ensuring compliance with banking
regulations, ability to react and adapt to
changes in economic environment and etc.
• Efficiency Ratio. Given by
Non Mark up Expense / Total Revenue
• Advances to Deposits Ratio
 Earnings Quality
• Level of Operating income compared to non
operating income.
• Interest based revenue / Non interest based
revenue
• Return on Assets
• Return on Equity
• Earnings per Share
• Dividend Pay out Ratio
 Liquidity
• How readily can investments be converted
into cash?
• Short term investments to long term
investments
• Ratio of Government Bonds and Treasury Bills
to total investments.
• Ratio of marketable securities to total
advances, loans and investments
 Sensitivity to Market Risk
• How well the institution can hold up to
changing market environment and market
risk.
• Again diversification brings this risk down.
 CAMELS Rating
• Ratings are never made public. They are used by supervisory authorities like
central bank or top management to ascertain the quality and risk factor of the
concerned financial institution.
• Rating is assigned from 1 to 5 with
• A scale of 1 implies that a bank is sound and complies with risk management
practices.
• A scale of 2 means that an institution is financially sound with moderate
weaknesses present.
• A scale of 3 suggests that the institution shows a supervisory concern in
several dimensions.
• A scale of 4 indicates that an institution has unsound practices, thus is unsafe
due to serious financial problems.
• A rating of 5 shows that an institution is fundamentally unsound with
inadequate risk management practices.