CAMELS Approach is one of the useful approaches for analyzing financial position of a financial institution. It is widely used for evaluating the risks that are associated with the different operations of a bank (Das and Sy, 2012: Said, 2003). The approach helps assists the banks to evaluate its creditworthiness. In this section of the paper the financial position of Royal Bank of Scotland (RBS) is analysed by applying CAMELS approach.
The factors of CAMEL approach are analysed with respect to RBS data that are obtained from its Annual Report over the 5 years (2008-2012).
RBS has to ensure that their depositors do not lose their confidence on the bank which may lead to bankruptcy (Saunders and Marcia, 2004). The following ratios are calculated to evaluate the capital adequacy of RBS (Refer to Appendix 1 for the calculation of ratios) (Bhayani, 2006)
The ratio helps RBS in identifying the reasonable level of loss that it can absorb due to the operational loses. It also examines its capacity to meet the losses (FDIC, 2007: Prasuna, 2003).
Figure 1: Capital Adequacy Ratio
(Source: Author’s creation)
From the above figure it is evident that the CAR of RBS has been fluctuating over the years. The highest CAR has been 15% (in 2008 and 2012). The capital resources of RBS comprise Tier 1 and Tier 2. Thus, it can be inferred that 15% of capital (Tiers) of RBS is needed for protecting its risk weighted assets in 2012 ( Hilbers, Krueger and Moretti, 2000).
The debt equity ratio identifies the degree of leverage of RBS. The ratio helps in identifying how much cash is financed through debt and equity (Black, 2004).
Debt ratio = Total liabilities/ Shareholder’s equity
The table below highlights the debt equity ratio of RBS:
|
2012 |
2011 |
2010 |
2009 |
2008 |
Debt-equity ratio |
16.32% |
18.10% |
21.5% |
18.97% |
22.91% |
Figure 2: Debt Ratio
(Source: Author’s creation)
From the above figure it can analysed that the debt equity ratio of the bank has decreased over the years from 2008 to 2012. It can be noticed that RBS has been aggressive in 2008 regarding financing. However, the decrease in the debt equity ratio reflects the fact that RBS has become more conservative in financing its capital through debt (Grier, 2007).
The asset quality is a vital factor for gauging the strength of a bank (Pastory and Mutaju, 2013). The main aim is to ensure the component of non-performing asset as percentage of total asset (Refer to Appendix 2 for the calculation of ratios).
The ratio gauges the efficiency of the bank for assessing its credit risk and debt recovery (Wagner and Knaup, 2008). NNPA refers to the loans that are about to become default once the borrower fails to make the interest payment (Godlewski, 2003).
NNPA to Total assets = NNPA/ Total asset
The table below elaborates the NNPA to total assets of RBS:
|
2012 |
2011 |
2010 |
2009 |
2008 |
NNPA to total assets |
0.009 |
-0.008 |
0.007 |
0.012 |
0.0002 |
Figure 3: NNPA to Total assets
(Source: Author’s creation)
From the above figure it is evident that the net performing asset has decreased over the year which means the numbers of customers who are not able to pay the interest have decreased. This reflects the fact that RBS has been performing well over the 5 years (Hoshi, Kashyap. and Scharfstein, 2009).
The ratio indicates the extent of deployment of the assets in investment against advances (Koch and MacDonald, 2009: Royal Bank of Scotland, 2014a).
The table below highlights the TI/TA value of RBS:
|
2012 |
2011 |
2010 |
2009 |
2008 |
Total investment to total assets |
5.37 |
8.03 |
8.37 |
8.88 |
7.61 |
Figure 4: TI/TA
(Source: Author’s creation)
From the above figure it is evident that the bank has concentrated in investing their assets over the years so that they can earn profitable return out of it. However, according to the graph, the total investment has reduced over the years. The decrease in total assets may be predicted as the increase in liabilities for the bank over the years.
The ratios to measure the management efficiency of RBS are elaborated below (Refer to Appendix 3 for the calculation of ratios).
The ratio helps to measure the efficiency or capability of the management of RBS in converting the deposits that are available to the bank in to higher earnings (Sharma, 2008).
The table below highlights the Total advances to total deposits value of RBS (Royal Bank of Scotland, 2014b):
|
2012 |
2011 |
2010 |
2009 |
2008 |
Total advances to total deposit |
0.803 |
0.842 |
0.824 |
0.732 |
0.770 |
Figure 5: Total advances to total deposits
(Source: Author’s creation)
The above figure elaborates that the management has efficient enough to convert the deposit in to higher earning since the above mentioned ratio has increased over the years. The increase in the ratio indicates that RBS has grown its cash deposits by increasing the numbers of depositors (Gupta, 2008).
The ratio indicates the surplus earned by the employees of RBS.
PPE = Profit after Tax (PAT)/ Number of employees
Figure 6: PPE
(Source: Author’s creation)
From the figure above it is evident that the company is encountering loss for the last five years and thus it can be inferred that the number of employees have decreased over the period which lead to less productive operation; and thus the loss increased for the same.
