Comparative Analysis on Financial Performance of Sunrise Bank and Prime Bank Under CAMEL Framework

Presented by: Arjun Niroula

Background
Financial sector is the backbone of a countrys economy More than 70% of Total Assets of Nepalese Financial Institutions is held by Banks. Innovation, Deregulation and Globalization has made banking sector riskier and more complex. CAMEL framework has been used to analyze the health of financial institutions.

Objectives of the Study

To analyze Capital Adequacy, Liquidity Position of SUNRISE and PRIME and compare with regulatory requirements. To analyze comparative quality of assets in terms of NPL of these banks. To evaluate the level, trend and stability of SUNRISEs earning and compare it with PRIME.

Components of CAMEL
Capital Adequacy Core Capital Adequacy ratio Tier 1&2 to Total Risk Weighted Assets Debt Equity Ratio Advances to Assets Government Securities to Total Investment Asset Quality Assets Composition NPL ratio Net NPA to Net Advances Total Investment to Total Assets

 Management Effeciency Total Advances to Total Deposits Return on Net Worth Business per Employee Profit per Employee Earning Quality ROA Operating Profit to Average Working Fund Spread to Total Assets Net Profit to Average Assets Interest & Non Interest Income to Total income

 Liquidity Ratio
Liquid Assets to Total Assets Government Securities to Total Assets Liquid Assets to Demand Deposits Liquid Assets to Total Deposits Approved Securities to Total Assets

Findings of the Study

Findings
Proportion of Core capital is high on total capital fund as compared to that of supplementary capital. This means both banks have focused more on permanent source of capital in their overall capital fund to mitigate the risks of their risky assets. Both banks Sunrise and Prime are able to maintain minimum capital fund requirement as prescribed by NRB. Sunrise Bank increased its Capital fund in 2009/10 after falling short of minimum capital requirement in 2008/09 of 10% of its risk weighted assets. NPL of both banks were found to be in increasing trend with SUNRISE Bank having greater proportion of NPL than that of PRIME Bank. This shows efficient credit management and recovery efforts are required for both the banks. Both Banks has maintained good level of Advances to Deposits providing leverage for their institutions. PRIME Bank's utilized more of its Deposits in the form of Loans and Advances than that of SUNRISE. On an average, SUNRISE Bank had 80.33% of Advances to Deposits while that of PRIME had 82.15%.

The Mean Return on Net Worth of SUNRISE was 6.43%. This ratio is fluctuating. It shows inefficiency of management and average earning quality of the institution. The average Return on Net worth of PRIME is 14.97% which is higher than that of SUNRISE but has declining trend. The mean ratio of Net Interest Margin to Total Assets is found to be low for both banks. This is due to continually decreasing spread for both banks as depicted from appendix. Interest Income as for all banks, has been the major source of income for both the banks. It was found that average interest income out of total income of SUNRISE was 91.58% while that of PRIME was 91.46% whereas average non-interest income of SUNRISE and PRIME was 8.42% and 8.54% respectively. It is found that SUNRISE Bank had more liquidity than that of PRIME Bank. PRIME Bank had lower liquidity than that of SUNRISE, as its Advances to Deposits was found to be more than its contemporary bank.

Recommendations

Recommendation
It is found that both banks have maintained the minimum requirement capital fund requirement of NRB. Yet it is recommended that both banks should increase the space between the minimum threshold of 10% capital fund of risk weighted assets to secure its depositors and investors. Higher Advances to Assets of SUNRISE Bank is not enough to say that it has efficiency in fund utilization. This better side is neutralized by higher and increasing trend of NPA. So, SUNRISE should focus more on qualitative deployment of its funds. Although PRIME Bank has lower proportion on non-performing loans to total loans and advances during the study period, the bank requires checking this tendency before they are ultimately written-off from the books of accounts. Return on net worth of sunrise bank has a fluctuating trend and is lower than that of its contemporary competitor. So, it needs to work hard by decreasing its operational cost. It is also due to increasing operational expenses of sunrise bank and greater amount of loan being default year by year.

Net interest margin of sunrise bank is seen to be less than 4% in most of the years. That is to say it is generating funds by providing higher interest rate to its depositors. Confidence of customers thus needs to be built up in the context of large number of commercial banks in Nepal. As it is a young bank in the industry, it needs to provide more awareness in the financial market to attract more funds. Although spread of sunrise bank seems to be on a higher side, this might be due to greater interest charged on its loan customers. As a general rule higher the risk, higher the returns. Sunrise loan and advances seem to be concentrated on those customers who are bound to pay higher interest as they don't get loan facility form big banks. So, management team should try to scrutinize the credit information from other big and contemporary banks. Profitability base of sunrise bank is always lower than that of prime bank. As both banks were established during same period, profitability of sunrise however, has always shown ups and downs revealing inconsistency in performance. Therefore it is suggested for SUNRISE to reduce its operational cost which has been increasing rapidly in recent years. Efficiency in materials and stationery handling should be prime focus to reduce the overall cost.

Both the banks are suggested to invest more on small and medium level clients more, viewing the present scenario of Nepalese market, whereby large projects and business house are running on loss due to political instability. So, greater investment on those sectors poses credit risk to banks portfolio if those big investment do not yield good return. The banks should adapt themselves quickly to the changing norms of NRB to safeguard itself from the risk from the external environment.

Thanking You!