Financial Distress Prediction in Commercial Banks

QUESTION ONE 

Financial Distress Prediction in commercial banks has become a major concern especially with the global adoption of the concepts of too-big-to-fail, domestic systemically important bank (D-SIB) and global systemically important bank. A number of models have been adopted globally to evaluate financial distress .This includes CAMELS, RGEC model (Risk profile, GCG, Earnings, Capital) and Bankometer Model.

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Bankometer Techniques was developed by IMF in 2002, and also accepted worldwide to measure the performance of commercial banks.

Required: using the Bankometer Techniques, evaluate the performance of the following commercial banks in the year 2018.                 

The Bankometer S-score is given by adding the value of Capital to Assets Ratio (CAR), Capital Adequacy (CA), Equity to total Assets (EA), Non-performing loans to loans ratio (NPL), Cost to income ratio (CI) and Loans to assets ratio (LA) for each bank. The model used to calculate the value in the Bankometer Model has been determined as: S-Score = (CA) + (EA)+(CAR)+(NPL)(CI)+(LA)

 

: ≤ 65%           CI        LA                               (2 X 10 Marks=20 Marks)

	CAR	CA	EA	NPL	CI	LA	Solvency Score
Banks’ Names
BANK A	0.1617	0.042	0.1622	0.0003	0.4012	0.438	1.2054
BANK B	0.2064	0.134	0.1721	0.0022	0.4348	1.207	2.1565
BANK C	0.1446	0.118	0.2674	0.0046	0.7659	0.5728	1.8733
BANK D	0.2521	0.043	0.158	0.0003	0.4957	0.2428	1.1919
BANK E	0.2386	0.102	0.1383	0.0017	0.5344	0.2499	1.2649
BANK F	0.1852	0.069	0.1439	0.0005	0.5713	0.0389	1.0088
BANK G	0.2333	0.094	0.5342	0.0156	0.5402	0.1435	1.5608
BANK I	0.172	0.089	0.1297	0.0009	0.3928	0.2831	1.0675
BANK J	0.1539	0.029	0.0646	0.0005	0.6661	0.2688	1.1829
BANK K	0.1305	0.039	0.0913	0.0088	0.7334	0.3476	1.3506

QUESTION TWO

Growth Group holding, a commercial bank operating in Kenya, had the following financial statements for the year 2017 to 2020. Using CAMEL, determine the performance trend and recommend the appropriate action.                                                                          (20 Mark)

	2017	2018	2019	2020
	Millions  Ksh	Millions Ksh	Millions Ksh	Millions Ksh
Core capital	800	900	1,200	1,875
Gross Non-perfoming loan portfolio	567	800	679	560
Total risk weighted assets	12,000	16,750	23,875	35,845
Supplementary capital	600	700	678	875
Loan loss provisions	286	389	240	209
Total loans	8,765	9,787	17,890	27,879
Total deposits	7, 859	9,567	13,789	17,679
Net liquid assets	2,345	3,569	4,009	5,435
Earnings before interest and tax	2543	3456	4341	4678

 

		Performance trend using Using CAMEL (%)
		2017	2018	2019	2020
Capital adequacy	𝐶𝐴𝑅 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑇𝑀𝑅 𝑥 100%	12%	10%	8%	8%
Asset quality	𝑁𝑃𝐹 = 𝐶𝑟𝑒𝑑𝑖𝑡(Loan loss provisions)/𝑇𝑜𝑡𝑎𝑙 𝐶𝑟𝑒𝑑𝑖𝑡 𝑥 100%	3%	4%	1%	1%
Management.	𝐹𝐷𝑅 = 𝐿𝑜𝑎𝑛 𝑇ℎ𝑖𝑟𝑑 𝑃𝑎𝑟𝑡𝑦 𝑥 100%	11%	11%	6%	4%
Earnings	𝑅𝑂𝐴 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝐵𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑥 100%	31%	26%	28%	40%
Liquidity management.	Quick ratio = (marketable securities +equivalent of cash + accounts receivable) / current liabilities.	27%	36%	22%	19%
		The performance trend presented using CAMEL shows that Growth Group holdings have been improving there earning  since the year 2017 to 2020. However, it should focus on improving the liquidity of the capital

	Performance trend using CAMEL (%)
	2017	2018	2019	2020
Capital adequacy	12%	10%	8%	8%
Asset quality	3%	4%	1%	1%
Management.	11%	11%	6%	4%
Earnings	31%	26%	28%	40%
Liquidity management.	20%	21%	17%	15%
	The performance trend presented using CAMEL model shows that Growth Group holdings have been improving there earning since the year 2017 to 2020. However, it should focus on improving the liquidity of the capital

 

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