Friday 16 November 2018

Financial Ratio Ranking for the Banking Sector (Part II)


In a previous article, we discussed about CAMELS rating methodology for banks (Read more here).  This week, we shall look at the financial ratios used in CAMELS.

Table 1 shows some selected ratios that fall within CAMELS rating methodology, amongst other:

Category
Financial Ratio
Capital Adequacy
Total Capital Ratio
Asset Quality
Gross Impaired Loan Ratio (GIL)
Management Capabilities
Efficiency Ratio
Earnings Sufficiency
Return On Equity (ROE)
Liquidity Positions
Liquidity Coverage Ratio (LCR)
Sensitivity to Market Risk
Value at Risk (VaR)


Non-CAMELS

Liquidity
Loan to Deposit Ratio (LDR)
Valuation
Price to Book (PB)
Table 1.  Selected Financial Ratios for CAMELS and non-CAMELS rating methodology

The ratios for CAME are readily available in Annual Reports, but the "Liquidity Positions" and "Sensitivity to Market Risk" are not commonly reported in banks’ Annual Reports.  For instance, BASEL III (Read more here) requires banks to report LCR and Net Stable Funding Ratio (NSFR) on monthly basis but they are not disclosed in the Annual Report.  Also, VaR is not published in an annual report as well.  Thus, for common investors to assess the ratios of bank stocks, we replace the “Liquidity Positions” and “Sensitivity to Market Risk” categories with liquidity and valuation ratio such as LDR and PB.

Table 2 and 3 are some real-world examples of the above ratios.  Data are taken from latest Annual Reports of eight commercial banks listed on Bursa Malaysia.  Readers are reminded not to rely solely on the brief financial ratio ranking for investment decision.



Table 2.  Selected Financial Ratios for eight commercial banks listed on Bursa Malaysia

Table 3. Selected Financial Ratios and Ranking for illustration purposes only.  It seems Hong Leong, Alliance and Public Bank stand ahead of other major banks based on the above ranking

Disclosure: The authors may have interest in the stocks of the companies in this article.

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