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1. Introduction
The banking sector occupies a very important position in the country's economy, acting as an
intermediary to all industries, ranging from agriculture, construction, textile, manufacturing, and
so on. The banking industry thus contributes directly to national income and its overall growth
(Dash & Das, 2009) and although the banking sector is the backbone of any economy and this
gains more importance for a country (Chandani et al., 2014). As the banking sector has a major
impact on the economy as a whole, evaluation, analysis, and monitoring of its performance is
very important (Dash & Das, 2009). Overall, financial markets are defined as a system which
brings economic actors together that need funds and have overmuch sources. In this structure, it
is necessary for the third parties called as financial intermediates to reduce the risks and to
provide effective fund transfer (Dincer et al, 2011)
Bank is very old institution that is contributing toward the development of any economy and it's
treated as an important service industry in modern world. Nowdays the function of bank is not
limited to within the same geographical limit of any country. It is an important source of
financing for most businesses. The common assumption, which underpins much of the financial
performance research and discussions, is that increasing financial performance will lead to
improved functions and activities of the organizations (Nimalathasan, 2008)
Simply stated much of the current bank performance literature describes the objective of
financial organizations as that of earning acceptable returns and minimizing the risks taken to
earn this return (Hempel et al., 1996).
Generally, the financial performance of banks and other financial institutions has been measured
using a combination of financial ratios analysis, benchmarking, measuring performance against
budget or a mix of these methodologies (Avkiran, 1995).
Bank performance is one of the vital issues for the healthy functioning of economy. Although
the measures evaluating bank performance are ample in amounts (Oztorul, 2011). In order to
ensure a healthy, solid and stable banking sector, the banks must be analyzed and evaluated in a
way that will allow the smooth correction and removal of the potential vulnerabilities (Roman &
Sargu, 2013) because bank play crucial role in the economic life of the nation (Dincer et al,
2011) and bank have a prominent role in the financial and business environment (Doumpos &
Zopounidis, 2010). Even if banks seem to create no new wealth, the transactions such as
borrowing and lending actually expedite the process of production, distribution, exchange and
consumption of wealth (Dincer et al, 2011).
In order to evaluate banks’ overall financial condition, This system relies on various financial ratios obtained from
CAMELS supervisory rating system is built and introduced periodic reports of the entities under their jurisdiction. The
first in USA for onside monitoring. Now, it is used both on- ratios are also aggregated into performance indices based on
site and off-site monitoring purposes (Kaya, 2001). various weighting or scoring schemes. The aggregation of the
The central banks that are responsible for supervising the ratios can be a complicated process involving subjective
banks in each country use rating system to assess the judgment. The changing economic conditions have made such
soundness of the banks (Doumpos & Zopounidis, 2010). Due aggregations even more difficult, increasing the need for a
to lack of sufficient historical data about bank defaults, bank more reliable way to express a bank's financial condition (Kao
rating system are usually based on empirical assessment & Liu, 2004).
techniques (Sahajwala & Van den bergh, 2000). Creadit By concentrating on the top line and bottom line, banks across
agencies, auditors and bank regulators have traditionally the board have improved their profit while reducing their
relied on the CAMELS model (Pasiouras et al., 2006) operational costs and more number of banks has improved
Actually the most effective way to enforce financial rules and their financial performance by using the concept of mergers
regulations in the financial supervisory system is to conduct and acquisitions. CAMEL rating is used by most banks across
financial examinations (Kao & Liu, 2004). The most popular the world as a performance evaluation technique (Raiyani,
approach is based on the CAMELS framework, which involes 2010)
the consideration of six major factors (Doumpos & Elizabeth and Ellot (2004) indicated that all financial
Zopounidis, 2010). The CAMEL acronym stands for Capital performance measure as interest margin, return on assets, and
adequacy, Asset quality, Management, Earning and Liquidity. capital adequacy are positively correlated with customer
Regulators created an additional measure, Sensitivity, to service quality. To assess the performance of the bank is
evaluate market risk associated with changing interest rates necessary to report the financial reports usually consists of a
and other factors (H. Hays et al., 2009), especially in the balance sheet, income statement, cash flow statement,
financial crisis (Kandrac, 2014). statement of changes in equity and notes to the financial
CAMELS rating are calculated in order to show financial statement (Salhuteru & Wattimena, 2015). Some data from
performance of the banks in different respects (Oztorul, financial ratios are often compared to CAMELS in correctly
2011). This system is a natural object of analysis, as it is not identifying or predicting crisis events but sometimes, the
only a widespread supervisory tool, but also one of the few relevant factors behind future failures or rating downgrades
generally accepted quantifiers of the otherwise soft notion of are satisfactorily captured by judiciously constructed risk-
bank safety (Derviz & Podpiera, 2008). CAMELS ratio model sensitive summary statistics of conventional balance sheet
is very suitable and accurate to be used as a performance data (Derviz & Podpiera, 2008).
evaluator banking industries and to predict the failure rate
(Salhuteru & Wattimena, 2015).
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International Journal of Multidisciplinary Research and Development
Private Banks
The relationship
between interest
Hays, F. H., De Efficiency Ratios and rate sensitive
Salaries and benefits to
Lurgio, S. A., & Community Bank 2009 Capital to assets - ROA Liquidity ratio assets and
average assets
Gilbert, A. H. Performance liabilities
sensitive to
interest rate/ GDP
Operating profit to
CAR/ Debt to average working
Applicability of CAMELS capital/ Debt to Non-current receivables to total Total debt to total capital/ margin to total
Liquid assets to total
Rating for Supervisory assets/ receivables/Noncurrent debt to deposits/Per capita profit assets/Net profit to
Soni, R. 2012 deposits/Securities to -
Regulation of the Indian Investment assets/Investments to assets/percent per employee/ROE/ assets/Interest income
assets
Banking securities to changes in non-current receivables Earnings per employee to total income/Non-
assets interest income to total
income
Financial ratios and the Total capital to Operating costs to Net income to total Liquid assets to total Assets to assets of
Gunsel, N. probabilistic prediction of 2007 assets/Loans to Loan to assets assets/Interest expense to assets/Interest income deposits/ Deposits to the banking
bank failure in North Cyprus assets total deposits to assets total loans system
Banking sector's performance
Iqbal, M. J. in Bangladesh-An application 2012 CAR NPL -
of selected CAMELS ratio
Net loans to (deposits
Camels and performance and short-term
Rozzani, N., & evaluation of banks in financing)/Short-term
2013 Earning to assets NPL Staff costs to assets ROA/ROE Risk sharia
Rahman, R. A. Malaysia: conventional liquid assets to
versus Islamic deposits and
financing
Operating profit to
(Gross noncurrent receivables, net Investment to assets/ Loans Securities to
Dash, M., & Das, A CAMELS Analysis of the average working
2009 CAR of non-current receivables, net of to deposits/Per capita investment/Securities EBTA
A. Indian Banking Industry capital/ Net profit to
noncurrent receivables) to loans revenue /per capita income to assets
assets/ROE
Rate margin/ cost of Receivables from
assets minus interest other banks divided
CAR/Equity to
Loan loss reserve to gross loans/ income divided by by debt to other
Comparative Performance assets/ Net Noncurrent loans to
Loan loss provisions to net interest average assets/ other banks/ Assets to The risk of
Evaluation of Selected capital to equity/Non operational
Venkatesh, D., & revenue/ loan loss reserve to operating income to loans/ Net loans to interest rate/
Commercial Banks in 2014 facilities/Capital items to net income/Equity
Suresh, C. impaired loans /Net charge offs to assets/ ROA/Equity short-term deposits/ exchange rate
Kingdom of Bahrain Using to short-term to asset/Operating profit to
average gross loans/ impaired loans ratio of operating Net loans to total risk/ risk stocks
CAMELS Method.Chithra funding/ Capital total risk weighted asset
to equity expenses to operating deposits/ Cash to
to debt
income/ Noninterest short-term deposits/
expenses to assets Cash to deposits
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International Journal of Multidisciplinary Research and Development
3. Research methodology Capital (C) The first variable group is the indicators of
3.1. Research type capital and relevant indicators those present capital, the
The type of this study is applied in terms of aim to find the ratio of capital to assets and show organization strengths.
relation between bank's performance and any cluster of Asset Quality (A) Asset quality ratios are one of the
CAMELS ratios. It is Cross-correlation to define relative main risks that banks face. As loans have the highest
indicators of CAMELS for bank. default risk, an increasing number of non-performing
loans shows a deterioration of asset quality.
3.2. Research Variables Management Quality (M) As management is a
3.2.1. Dependent variable qualitative issue, such as the ability for risk taking, it is
Performance can be shown with some ratios and tools. Banks usually difficult to measure the quality of management.
need to find a system to evaluate performance. One of ratio The management quality of a bank can be measured by
that can be useful and practical to evaluate and decide is some important ratios those are used in CAMELS model.
Tobin’s Q ratio (Vafeas & Theodorou, 1998 and Rostami, Earning Ability (E) Earning is the most important
2015). In this study, performance of bank is dependent performance measurement of banks. The ratios of earning
variable which is presented with Tobin’s Q ratio. This ratio is and relative financial ratios are calculated in this study.
calculated by the sum of market value and book value debts to Liquidity (L) Liquidity risk measures an institution’s
book value assets. This ratio is devised by James Tobin of ability to meet unanticipated funds that are claimed by
Yale University (Mehrani et al., 2013 and Sadeghi et al., depositors. Liquidity ratios are expected to be both
2009) positively and negatively related to the likelihood of
failure those are set in model.
3.2.2. Independent variable Sensitivity (S) Sensitivity ratios those are related to risk
In this study, six categories of ratios according to CAMELS and covering power of organization that are defined and
categories are applied and summarized to define CAMELS calculated to finalize bank's performance model because
model in each group of ratios. Those categories as Gunsel, N., risk indicators is very important and highlighted in
(2005) & Nimalathasan, B., (2008) & Peterson, (2006) and CAMELS model.
Sarker (2005) pointed, are: In figure 1, CAMELS model is shown to clarify six
categories.
In each category, 5 indicators are chosen and analyzed in performance model based on CAMELS framework as
CAMELS model to find best model for forecasting future independent variables are defined as follow in table 2.
trend and destination. All ratios those are used in bank's
Earnings
PF Loan income/Loans
PD Deposit cost/Deposit
PP Loan income/Deposit cost
OI Cost/Income
INTA (Investment/Total assets)
Liquidity
VTC Current liquidity/Deposits
OTA Security/Total assets
VD Current liquidity/(Demand deposits)
LI Liquidity/Assets
NPL Doubtful debts/Loans
Sensitivity and
1.00
0.90
0.80
0.70
0.60
0.50
0.40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
3.5.2. Estimation of model of distribution of residual sentences and also the skewness and
According to extracted results, the model of "Bank kurtosis of model are probed final model of "Bank
Performance" based on Q-Tobin indicator as it is noticed, is Performance".
estimated. In the model as dependent variable equal to some
coefficient multiple independent variables plus a fix amount. 3.5.4. Autocorrelation test
This model is finalized at bank based on information in 2005 - Autocorrelation test (Breusch-Godfrey Serial Correlation LM
2014. This model can predict the relationship between Test) is shown the Prob (F-statistic) is more than 0.05 and this
CAMELS's categories and Tobin’s Q ratio in bank. This is point is reviewed there is not autocorrelation from higher than
clear that Prob (F-statistic) is less than 0.05, so, this model is one in the finalized model of "Bank Performance".
accepted and there is a logical relationship between dependent
and independent variables and also, all coefficients are 3.5.5. Heteroskedasticity Test
significant. According to results, R-squared amount is shown One of important hypothesis test is Heteroskedasticity Test for
that estimation can explain variables well and the changes of finding homogeneity of variance. If there is not the same
independent variable were presented with independent variance in terms of disruption will be accrued the anisotropy
variables completely. If the model considers degree of of variance in model. In this model the results of
freedom, Adjusted R-squared is close to one and is logical. Heteroskedasticity Test based on Breusch-Pagan-Godfrey are
Amount of these R-squared and Adjusted R-squared show that shown that the Prob (F-statistic) is more than 0.05 and this
the specified model makes the certainty properly for deciding point probe that the model does not have problem with
and other analyses. Durbin-Watson statistic is suitable to variance.
distinguish autocorrelation disturbance components in The estimation of model, Normality test, Autocorrelation test
regression model. and Heteroskedasticity test of each category are calculated as
follows:
3.5.3. Normality test
According to normality test result, Jarque–Bera test and
probability more than 0.05, it is concluded that the normality
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International Journal of Multidisciplinary Research and Development
a. Capital ratios
a. 1. Estimation of model
a. 3. Normality test
4
Series: Residuals
Sample 1 10
Observations 10
3
Mean -4.81e-15
Median 0.010512
Maximum 0.055918
2 Minimum -0.107875
Std. Dev. 0.049932
Skewness -1.049445
Kurtosis 3.271278
1
Jarque-Bera 1.866220
Probability 0.393328
0
-0.10 -0.05 -0.00 0.05
a. 5. Heteroskedasticity (Breusch-Pagan-Godfrey)
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International Journal of Multidisciplinary Research and Development
b. 3. Normality test
3
Series: Residuals
Sample 1 10
Observations 10
2 Mean 6.85e-17
Median -0.000180
Maximum 0.006509
Minimum -0.005243
Std. Dev. 0.003976
1 Skewness 0.302808
Kurtosis 1.923817
Jarque-Bera 0.635392
Probability 0.727824
0
-0.005 0.000 0.005
b. 5. Heteroskedasticity (Breusch-Pagan-Godfrey)
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International Journal of Multidisciplinary Research and Development
c. 3. Normality test
4
Series: Residuals
Sample 1 10
Observations 10
3
Mean -3.96e-16
Median -0.007024
Maximum 0.042743
2 Minimum -0.026361
Std. Dev. 0.023819
Skewness 0.732857
Kurtosis 2.251778
1
Jarque-Bera 1.128397
Probability 0.568816
0
-0.02 0.00 0.02 0.04
c. 5. Heteroskedasticity (Breusch-Pagan-Godfrey)
d. Earnings ratios
d. 1. Estimation of model
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International Journal of Multidisciplinary Research and Development
d. 3. Normality test
3
Series: Residuals
Sample 1 10
Observations 10
2 Mean 1.30e-16
Median 0.000121
Maximum 0.025889
Minimum -0.027098
Std. Dev. 0.017150
1 Skewness 0.012329
Kurtosis 2.124357
Jarque-Bera 0.319733
Probability 0.852258
0
-0.03 -0.02 -0.01 0.00 0.01 0.02 0.03
d. 5. Heteroskedasticity (Breusch-Pagan-Godfrey)
d. Liquidity ratios
e. 1. Estimation of model
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International Journal of Multidisciplinary Research and Development
e. 3. Normality test
5
Series: Residuals
Sample 1 10
4 Observations 10
Mean 2.10e-16
3 Median -0.011588
Maximum 0.100038
Minimum -0.049582
2 Std. Dev. 0.042978
Skewness 1.228166
Kurtosis 3.950491
1
Jarque-Bera 2.890415
Probability 0.235697
0
-0.05 0.00 0.05 0.10
e. 5. Heteroskedasticity (Breusch-Pagan-Godfrey)
f. Risk ratios
f. 1. Estimation of model
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International Journal of Multidisciplinary Research and Development
f. 3. Normality test
5
Series: Residuals
Sample 1 10
4 Observations 10
Mean 1.46e-16
3 Median -0.005367
Maximum 0.045883
Minimum -0.035226
2 Std. Dev. 0.025704
Skewness 0.447411
Kurtosis 2.183548
1
Jarque-Bera 0.611375
Probability 0.736617
0
-0.050 -0.025 0.000 0.025 0.050
f. 5. Heteroskedasticity (Breusch-Pagan-Godfrey)
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