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DARIEN’s Criteria
Of all the ratios as above, Darien report considers six main ratios namely “Equity to Assets”, “Operating profit to Loans and investments”, “Net profit to Average assets”, “Net profit to Average equity” , “Cost to Income “ and “Equity and Customers’ Deposits to Assets” as the best indicators of the banks’ performance. Equity to Assets ratio shows how well a bank can absorb large and unexpected balance sheet losses. This ratio has been computed on un-weighted basis as has been the practice of financial community in the wake international financial crisis. Operating profit to loans and investments ratio indicates a bank’s capability to absorb losses in respect of loans and valuation of securities without having to declare reduction in the value of equity. Net profit to average assets ratio shows how well a bank’s assets are utilized to generate income. Net profit to average equity ratio shows a bank’s capacity in regard to internal generation of capital.
The unweighted computation of this ratio prevents a bank to receive a high overall rating by virtue of large amount of equity. Cost to income ratio indicates the efficient manner in which a bank’s controls its operating expenses. Equity and customers’ deposits to assets ratio indicates a bank’s own “funding strength” rather than relying on sourcing of funds from the market (market funding). There is an argument that medium term funding from strategic stakeholders is as good as funding through short term deposits. It is countered by the Darien report on the basis of no large scale “retail-based runs” on the gulf based banks. The six selective ratios emphasize on profitability of the banks based on which they are ranked. This is the right approach since it is the profitability as an indicator of banks capacity to generate sustained earnings in the long run which is beneficial for both the banks and their shareholders. Out of the banks now being evaluated, Qatar National Bank and National Bank of Kuwait were among the top 20 banks 14th rank, 20th rank respectively in terms of best performance as of 2010. The biggest ten banks ranked in terms of equity included National Bank of Kuwait, Qatar National Bank, Riyad Bank , First Gulf Bank in the Darien report for the previous three years of 2008 to 2010(Cunnigham).
CAMELS Rating
The Uniform Financial Institutions rating system (UFIRS) has assigned a composite rating comprising of six criteria namely Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk collectively known as “CAMELS” rating. Capital adequacy is evaluated on the basis of volume of risk assets, volume of marginal and inferior quality assets, bank’s growth history, future plans and prospects, and the capacity of management besides comparing them with the banks peer group, earnings retention, dividend policies, access to capital markets and other sources of financial assistance. Asset Quality is measured on the basis of adversely classified assets, non-accrual and reduced rate assets, adequacy of the allowance for loan losses, and management’s evidence based capacity to administer and collect problem credits. Concentration of credits, trends in asset quality, volume of out-of-territory loans, level and severity of other real estate held by the bank and the underwriting standards of the bank. Management is evaluated on the basis of technical competence, leadership, administrative ability, compliance with regulatory and statutory requirements, and adequacy of compliance there on, internal policies and controls and succession plans in the management.
Quality of internal controls, operating procedures and policies regarding lending, investment and operating policies are also taken into account. Lastly, evaluation of management also looks into the composition, experience, abilities and involvement of officers, directors and shareholders. Earnings are evaluated in relation to their ability to absorb losses and protect capital besides peer comparisons, quality , composition of net income , the stability of interest-sensitive funds, bank’s dividend payout ratio, rate of growth retained earnings and adequacy of capital. Liquidity is judged by volatility of deposits, borrowings’ frequency and levels, use of brokered deposits, and availability of assets that are readily convertible into cash. Besides, structure of bank’s liabilities, access to monetary markets and similar readily available sources of funds are taken into account with respect to bank’s liquidity.
The Sensitivity to Market Risk such as changes in interest rates, foreign exchange rates, commodity prices, equity prices is also an important criterion to evaluate the adverse impact or otherwise of a bank’s earnings or economic capital. A CAMELS rating “Composite 1” indicates a bank’s sound condition in all aspects. “Composite 2” indicates that bank’s position is fundamentally sound, but there are certain aspects of modest weakness which can be rectified in the normal course of business. “Composite 3” indicates a bank’s financial, operational or compliance weakness ranging from moderately severe to unsatisfactory. “Composite 4” indicates a bank’s excessive level of serious financial weaknesses or a combination of unsatisfactory conditions. “composite 5 “indicates an extremely high immediate or near term probability of failure of a bank (FDIC), (Saunders and Cornett 363). The following pages will examine mainly CAMELS rating for capital adequacy for all banks together to start with and then the selected banks individually as per the respective agencies’ reports concerning other factors of CAMEL ratings.
Capital Adequacy
National Commercial Bank of Saudi Arabia Capital Adequacy (CAR) requirements have been prescribed by the Saudi Arabian Monetary Agency (SAMA) which requires bank to hold minimum level of the regulatory capital and maintain a ratio of total eligible capital to the risk-weighted asset at or above the agreed minimum 8 %. As per the annual reports of the bank for the years 2012 and 2013, the capital adequacy ratios are 16.5 % and 16.2 % respectively which is well above the minimum 8 % (NCB 77). National Bank of Kuwait’s (NBK) CAR is 17.3 % for the year 2013(NBK 7). NBK which was established in 1952 has been rated the highest among the regional banks by the leading agencies. and is one of the world’s 50 safest banks. Riyad Bank of Saudi Arabia, controlled by SAMA has reported a capital adequacy ratio of 17.1 for 2013 and 17.7 % for 2012(RBS). Qatar National Bank (QNB)’s CA is 15.6 % for the year 2013 which is well above the requirement of 10 % by the Central Bank of Qatar and 8 % by the Basel Committee. The ratio for the year 2012 was 21 % (QNB 39). The CAR of the First Gulf Bank, UAE is 17.5 %. UAE Central Bank’s requirement is that the CAR should not at any time be less than the Basel committee requirement which is 8 %. The previous years’ ratios were only higher at 21 to 23 % (FGB 58).
National Commercial Bank, Saudi Arabia
The bank is rated with ‘AA-’ with a “stable outlook” by virtue of its high liquid assets, sustained cost control and improved “asset quality”. However, the rating has been limited by NCB’s increased cost structure that is more than average, reducing “capital ratios” and high levels of lendings and funds concentration. The same factors are responsible for bank’s Long Term Foreign Currency Rating as “AA-“ and Short Term Currency Rating as “A1+. With the major percentage of government ownership, the bank can receive support from the Government in any unlikely events. The NCB leads all other banks of Saudi Arabia in terms of liquidity as it has posted the industry’s highest performance indicators. Loan growth has improved because of the Bank’s liberal policies in the recent years. However, non performing loans (NPL) have also increased as a result. NCB has made sufficient cushions for its NPL segment and in the year 2012 it has been fully covered by provisioning losses in respect of its outstanding loans. By the end of 2012, NCB had nearly 3000000 customers spread across its 299 branches with 1,800 ATMs and other outlets (AMEInfo.com).
National Bank of Kuwait, Kuwait (NBK)
Latest rating by the S & P for the bank is “stable” and the “long-term credit rating” is A+ which is the highest in the Middle East. Moody has rated the bank with “stable outlook”. It is credited with reporting of good quality metrics although there has been a marked increase in the amount of NPLs in the year 2012. Thus, NPLs to gross loans ratio increased from 1.6 % in 2011 to 2.8 % in 2012. However, it is far below the industry the industry average of 5.3 %. The Bank’s provision loan loss remained high at 152 %. It is reported that the NBK’s credit strengths are moderately affected by volume of problem loans and the corresponding pressure on the bottom-line earnings since the bank’s provisioning levels have since increased in 2013 statements. Although the NBK’s risk management is satisfactory, its loan concentration on limited parties continue to undermine the banks overall ratings (Moody’s). Moody’s opinion is that the ratings could be improved if NBK “were able to (1) materially enhance its regional franchise enhance cross-border synergies, while controlling host country risks; and (2) reduce balance sheet concentrations, while maintaining strong asset quality and capitalization metrics”. (Moody’s 1). Moody’s defend the evaluation of the bank based on its “dominant franchise and robust financial fundamentals” (Moody’s 1).
NBK has been the country’s biggest banking company thirty percent stake in the “consolidated system assets”. The bank’s size puts it at a pivotal place to seize loan demands in comparison with the local players. The bank has also been a leading player in the retail banking sector with challenges only from Islamic lenders especially Kuwait Finance House which the NBK is countering by the acquisitioning Boubyan bank recently in the year two thousand twelve.. Moody’s has also considered the NBK’s sustained overcoming the competition at home besides comparable performance indicators of global players. NBK’s pre-provision income to average weighted assets ratio was 4.8 % for the year 2012 as against 4 % for domestic banks and global average of 2.6 % of similarly rated banks. The bank’s high gains are due to its business in the retail segment. and efficient operations i.e cost to income ratio which accounted 28.9 %. The bank’s loss-absorption arrangements and internal capital generation help maintain its income generating capacity. Its capital adequacy ratio (Tier 1) was 16.4 % for the year 2012 in spite of the resulting decline as a result of taking over Boubyan Bank. Its good asset quality is maintained despite the increasing volume of non-performing loans. In 2012. Its NPLs to gross loans ratio rose to 2.8 % in 2012 from 1.6 % in 2011 which is however below the industry average of 5.3 % with the loan loss provision at 152 % (Moody’s).
Riyad Bank, Saudi Arabia
The bank has been rated A+/A- with stable outlook for the year 2012. The rating by the S & P is the highest awarded by S & P of all the rating awarded to banks in the Kingdom of Saudi Arabia. This is evident of the bank’s robust performance and bank’s strong financial position. Bank’s high capital adequacy and high levels of liquidity is reflected in the ratings of the credit rating agency. Strong asset quality and conservative risk appetite along with prudent risk management and lending portfolio have also contributed the rating by the agency. Flitch rating agency has rated the bank with A+ for long term obligations and F1 for short term obligations with s Stable future outlook. It has been given AA- for long term obligations and A+ for short term obligation by the Capital Intelligence (ArabNews).
Qatar National Bank. (QNB)
The bank has been rated by capital intelligence as follows. Foreign Currency, Long-term AA-, Short term A1+, Financial strength AA-, Support rating 1, and outlook “stable”.. Moody’s rating for Bank Deposits Long Term, Aa3, Short Term A1+, Financial strength C-, Outlook, Stable. Standard and Poor for Bank Credits and Deposits, Long Term A+, Short-Term A-1, and Outlook “Stable”.(QNB). QNB was established in 1964 with 50 % investment from the Government’s Investment Authority and 50 % from Private sector. The bank is the biggest in the “Middle East and North Africa region” and accounts for forty five percent of the country’s banking sector assets. The bank has been rated the Bank of the highest strength at the international level for the year two thousand twelve. QNB has furthered cross border growth with the purchase of Egypt’s 2nd biggest institution “QNB ALAHLI.” It has also acquired stakes in various financial institutions Hosing Bank for Trade and Finance, Jordan, Commercial Bank International, UAE, Bank of Commerce and Development, Libya and Al Jazeera Finance Company, Doha. With a new subsidiary in India, China, the QNB group is present in 26 countries with 13, 700 employees spread across 590 locations and 1250 ATM locations.
QNB group has been rated A+ by S & P, Aa3 by Moody’s, A+ by Flitch and AA- by Capital Intelligence (QNB). S & P has rated A+ for long term and A- for short term and with a stable outlook. S& P justifies “we believe there is a “very high” likelihood of extraordinary support from the government of Qatar if QNB were in financial distress because we classify QNB as a government-related entity (GRE). This potential support provides a three-notch uplift above the SACP; therefore the long-term rating on QNB remains at ‘A+’.”(Gulfbankers.com).Further ratings by S & P are Business position (+1), Capital and Earnings Strong (+1), Risk Position Adequate (0), Funding and Liquidity Average and Adequate (0), Support +2, GRE Support 0, Group Support 0, Sovereign Support +2. QNB’s strengths are “leading domestic franchise, Strong capitalization and efficiency, High Systemic importance in Qatar and 50 % ownership by the Qatri Government. Their weaknesses are rapid growth of balance sheets assets, increased cross border funding, Geographic concentration in a wealthy but small domestic market. “Standard & Poor’s Ratings Services’ outlook on Qatar-based Qatar National Bank (QNB) is stable, reflecting our view that the bank’s key strengths, including its dominant commercial position, strong capital and earnings, and shareholding structure will remain relatively unchanged, despite potential pressure from a strong increase in balance-sheet assets.
Given its dominance in the public sector and large size relative to peers–a key advantage in financing large government-related entity projects–we expect QNB to capture a large part of the significant lending growth anticipated in the Qatar economy. We would lower the ratings on the bank if we were to take a negative rating action on the State of Qatar (AA/Stable/A-1+).We would also consider taking a negative rating action if fast growth in lending were to result in a material deterioration in asset quality or capitalization, or if geographic expansion risks were to materialize and increase the bank’s risk profile, owing to our view of the bank’s aggressive acquisition plan. Also, the ratings could come under pressure following significant deterioration in QNB’s funding profile, which has become increasingly skewed toward external funding. We see very limited potential for a positive rating action on the bank in the foreseeable future, given our view of the banking system in Qatar illustrated by our ‘bbb’ anchor for the bank. Also, given our criteria for factoring in government support, a limited improvement of the bank’s stand-alone credit profile (SACP) or an upgrade of Qatar by one notch would not trigger a positive rating action on QNB” (Reuters 1).
First Gulf Bank (FGB), UAE
Flitch has rated FGB Long Term Issuer Default rating at “A+” with a stable outlook and its Viabilty Rating has been upgraded to “bbb”. Asset quality indicators will remain sound. NPL ratio has improved to 3.3 % by 2012 end. The NPL includes Dubai Holdings currently undergoing restructuring. Core capital ratio increased to 18 % at the end of 2012. FGB was started in late 1970s as the country’s 4th biggest institution with ten percent stake in the market exclusive of lending segment. Abu-Dhabi royal family holds 67 % of the shares and balance is widely held. “The rating actions are as follows: Long-term IDR affirmed at ‘A+’, Stable Outlook, Short-term IDR affirmed at ‘F1’, Viability Rating upgraded to ‘bbb’ from ‘bbb-‘, Support Rating affirmed at ‘1’, Support Rating Floor affirmed at ‘A+’,” (Reuters).
Works Cited
AMEInfo.Com. n.d. Capital Intelligence affirms ratings of The National Commercial Bank.n.d. Web.
ArabNews. 2012 Riyad Bank’s high credit rating affirmed by Standard & Poor’s. Web.
Cunnigham, Andrew.2010, Gulf Commercial Bank Rankings 2010. Web.
FDIC. “DOS Manual of Examination Policies.” 2005. Print.
FGB. “Annual Report.” 2013. Print.
Gulfbankers.Com. S&P affirms Qatar National Bank’s ratings at ‘A+/A-1’; Outlook Stable. 2013. Web.
Moody’s. Moody’s affirms National Bank of Kuwait’s Aa3/Prime-1 ratings; outlook stable. 2013. Web.
NBK. Annual Report . 2013. Web
NCB. Annual Report. 2013. Print.
QNB. About QNB Group. n.d. Web.
QNB. n.d. Annual Report. 2013. Print.
QNB. QNB Rating. n.d. Web.
RBS. Annual Report. 2013. Print.
Reuters. RPT-Fitch Affirms First Gulf Bank at ‘A+’; Outlook Stable; Upgrades VR to ‘bbb‘. Web.
Reuters 2012 TEXT-S&P summary: Qatar National Bank. 2013. Web.
S&P. Ratings Direct :Top 100 Rated Banks: S&P Capital Ratios And Rating Implications. 2013. Web.
Saunders, Anthony and Marcia Millon Cornett. Financial Markets and Institutions. New York: The McGraw-Hill Companies Inc, 2007. Print.
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