This project is designed to improve your ability to analyze a particular bank’s performance. The emphasis should be to explore your bank from a regulator’s point of view. In that respect you should address the six CAMELS components and try to identify any “red flags” that could indicate potential problems in your bank. The Excel file under the name of “Bank Financial Analysis” should be used to capture the financial data for your bank and to show the associated financial ratios. You should be able to find all your data in your bank’s Uniform Bank Performance Report (UBPR) which is available at www.ffiec.gov. The six CAMELS components are: Capital adequacy; Asset quality; Management quality; Earnings record; Liquidity position; and Sensitivity to market risk. Following is a more detailed listing of the items that you need to address:
Focus only on the following sections of the CAMELS:
- Asset Quality
The assessment of asset quality involves much more than simply calculating past due and adverse classification ratios. In addition to assessing trends in classified assets, delinquent loans, and credit concentrations, the asset quality component takes into account management’s ability to underwrite and administer credits in a prudent and sound manner. In that respect, the regulators will examine a bank’s loan policies, loan portfolios and the adequacy of the allowance for loan and lease losses
The UBPR is a good starting point to begin extracting asset quality information. It is a very useful tool for identifying trends or outlying performance issues relative to a group of similar banks. Examiners use the UBPR to plan for examinations by identifying areas with potential credit exposure. Nonetheless, the UPBR will only take you so far in painting a picture of asset quality.
Several financial ratios relating to asset quality are available in the UBPR. These ratios provide detail on balance sheet composition, off-balance sheet commitments, delinquencies, charge-offs, and portfolio mix. Four ratios to focus on when assessing asset quality include:
- Asset Growth Rate – This ratio details the change in total assets over the past 12 months.
- Non-current Loans and Leases to Gross Loans and Leases – This ratio reflects the percentage of loans that are 90 days or more past due, or are no longer accruing interest.
- Net Losses to Average Total Loans and Leases – This ratio presents the level of net losses, on an annualized basis, as a percentage of the total portfolio. It takes into consideration any recoveries on prior period losses.
- Loan and Lease Allowance to Total Loans – This ratio measures the allowance available to absorb loan losses relative to total loans outstanding.
In relation to these ratios, answer the following questions:
- – Asset Growth Rate – What is the rate of asset growth and how would you characterize this growth?
- – What category dominated asset growth?
- – Non-current Loans to Gross Loans – How would you characterize the level of
- – Net Losses to Average Total Loans – What has the trend been?
- – Loan and Lease Allowance to Total Loans and Leases – What conclusions can you draw
about the adequacy of the allowance?
Of course, UBPR analysis is a starting point. You should also review your textbook which discusses the various bank assets in more detail.