CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institution according to six factors represented by its acronym:
C- Capital Adequacy Ratio (CAR)
A- Assets quality measured by Non-performing assets/loan (NPL)
M- Quality of management is a subjective factor and requires deep analysis. However for the purpose of this study we have used spread rate and cost of fund.
E- Earnings is measured by Net Profit, Earning per share (EPS) and Diluted EPS.
L- Liquidity is measured by credit to core capital cum credit (CCD) ratio
Nepal Rastra Bank (NRB) has also been using CAMELS rating to evaluate strength, weakness and position of banks. Therefore, it is wise for the investor to analyze their investment decision according to CAMELS rating.
Generally, the bank with high share prices are evidenced by adequate CCD, low base rate, low cost of fund, higher interest spread, less NPA and consequently more profit (high CAMELS rating). In fact it should be.
Among 28 commercial banks, RBB has the highest score on the CAMEL analysis; however, since its shares are not traded in public, we have ignored the correlation between CAMEL scores and its share price. From the data it can be seen that Nabil bank stands at the top with highest CAMEL rating and thus the highest market price. But Nepal Bank Limited, despite being the next high scorer in CAMEL analysis, has lower share price than other banks. This indicates that Nepal Bank is heavily underpriced.
Similarly CAMELS rating shows that investment bank gains higher rating than Himalayan Bank. In contrast the price of Himalayan Bank is higher. Therefore, either Nepal investment bank is underpriced or Himalayan Bank is overpriced. Next NIC Asia, who has been gaining fame on aggressive deposit and loan expansion has also gained higher CAMELS rating. However, its market price does not match with CAMELS rating and seems that it is underpriced in the market.
Likewise, NMB bank is overpriced as you can see that its CAMELS rating is negative. Other than these instances, the other banks' CAMELS rating and prevalent market price seems to be in consistency.
For reference the share prices of 2nd July 2019 was taken. CAMELS rating was calculated on the basis of last four quarterly report of banks. A positive point was given to those banks whose performance was better than the average and the banks who outperformed in the minimum requirement criteria. For example, if the CAR of any bank happens to be 12.34 %, then that bank has been assigned the score of +1.34. Similarly, if the industry average NPA is 2.34 % and the particular bank’s NPA happens to be 4.15%, then that bank will get a score of - 1.81. Likewise, a particular bank’s NPA happens to be 0.79%, then that bank will get a score of +1.55. As a result, higher the CAMELS rating, better the bank and share price.
(Disclaimer: The CAMELS indicator also uses a lot of other indicators which haven't been used in the study due to limitations. The readers are advised to carry their Due diligence before making an investment decision and not rely on this analysis alone.)