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Friday, September 19, 2003
Zosa: ‘Camels’ and banks
By Elbert Zosa
BIZ VANTAGE
RATING. What would camels have to do with banks? Obviously camels here do not refer to those desert dromedaries. “Camels” here refers to the mnemonic that rating agencies and academics use for the approach used in rating banks.
Banks are rated by credit rating agencies since their own principal business of financial intermedition is to borrow from a wide-ranging set of depositors and large institutional lenders such as other large banks and insurance companies and in turn lend money at a spread to other borrowers.
Recently some Philippine banks have turned to the international capital markets to bolster their overall capital with tier 2 capital to comply with the capital adequacy requirement of the Bangko Sentral. Some large lenders require a rating from international rating agencies such as Standard and Poors or Moody’s or Fitch before they even consider lending to these banks.
C in Camels refers to Capital Adequacy. Strength of capital indicates the buffer the banks have to address regular and unexpected problems. It also shows that the bank can continue to grow since capital adequacy is essentially a ratio of unimpaired capital divided by total adjusted assets. (Certain assets are applied factors that are based on their risk.)
A stands for Asset Quality. Directly this refers to the ratio of past due loans over total loans; and on the foreclosed assets of the banks, often termed ropoa (real and other properties owned or acquired). In general, it also refers to the quality of the credit process of the banks from its policies, to the lending process, to the foreclosure and sale of assets.
M stands for Management. This is generally subjective, but rating agencies determine if management has the proper training, policies and procedures, experience and skills. It is, therefore, important that the president of the bank and the senior officers that interact with the rating agency are able to manifest the strengths of the bank and how they are addressing concerns.
E stands for Earnings. Profits are a measure of the success the bank has achieved in its operations as well as its ability to improve its capital base.
L stands for Liquidity. Banks must at all times have a level of liquidity to meet even the most unexpected and surprising demands from its customers.
S stands for Sensitivity to Risk. Banks are managers of all kinds of risk, from market, liquidity, credit, interest, to foreign exchange, operations etc. Most, if not all, banks have senior officers focused on ensuring that the bank is measuring all its risk and has sufficient policies and procedures in place in treasury and other critical departments.
After examining the financials and interviewing the relevant people, rating agencies then give a grade to the bank.
Working with rating agencies used to be one of the principal responsibilities of Corporate Planning where I worked and was a source of satisfaction to Corplan’s officers during those years when our bank had the highest rating in the Philippines, which we shared with another bank then.
(Elbert welcomes comments at elzosa@yahoo.com.)
(September 19, 2003 issue)
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