Structured approach to analysis

• Defining CAMELS within the context of overall bank analysis

Types of financial institution

The aim of this section is to consider the different types of financial institution, key products and how the business of banking is reflected in the financial statements.

• Key activities and products of financial institutions: credit products, trading and investing, services and funding
• Business models and key drivers of performance
• Relating the business to the balance sheet and income statement: differences between balance sheets of different types of bank and non-bank financial institution
• Major balance sheet and income statement components
• Exercise: building a balance sheet for banks and non-bank financial institutions

Asset quality
The aim of this section is to consider the asset quality of a bank and use key ratios to understand a bank’s business risk.

• Statement logic and accounting: types of credit risk, on and off balance sheet, accounting for problem impaired loans
• Loan quality: portfolio analysis, impaired/problem loans (past due, non-accrual and restructured loans)
• Reserve adequacy: provisioning levels, allowance, charge offs and recoveries
• Local and international benchmarks for key ratios and performance indicators
• Trading and investments: securities and derivatives portfolios
• Exercise: problem loan definitions
• Exercise: matching asset quality ratios

Sensitivity to market risk
The aim of this section is to introduce market risk and the concept of value at risk.

• Statement logic and accounting: valuation techniques for investments and derivatives – fair value through income statement, available for sale, held to maturity; SFAS 157 disclosures
• Risk in the securities and derivatives portfolios
• Value at risk and other measures of market risk: advantages and disadvantages
• Illustration case study: market risk disclosure

Earnings
The aim of this section is to look at earning streams for banks and use key ratios to understand the costs and income dynamics of banks.

• Statement logic and accounting: types of income and expense, impact of earnings accrual and asset impairment policies, core and non-core earnings
• Key drivers of earnings: net interest margin, fees and commissions, trading
• Ratios to measure quality and diversity of income, cost control, provision burden
• Local and international benchmarks for key performance indicators
• Exercise: matching earnings ratios
• Illustration case study: performance risk ratio analysis

Liquidity and funding

The aim of this section is to consider the funding sources available to banks, the key drivers of liquidity and use key ratios to understand liquidity and funding at banks.

• Statement logic and accounting: funding sources, on and off balance sheet treatment for securitisation
• Funding stability and different sources: deposits, commercial paper, repos, inter-bank lines, senior and subordinated bonds, common and preferred stock
• Key drivers of liquidity: volatility of liabilities, quality and liquidity of assets, contingency funding needs
• Local and international benchmarks for key liquidity and performance indicators
• Exercise: matching liquidity rates

Capital adequacy

The aim of this section is to appreciate the various types of capital and use key ratios to assess the adequacy of a bank’s capital.

• Statement logic and accounting: types of capital, reported book equity, adjusted common equity and hybrid capital
• Key drivers of capital: earnings, asset valuation, capital raising
• International and local capital regulation: Basel I and II; Basel III changes
• Risk weighted assets: Basel I vs. Basel II approach
• Key ratios: Tier I and total capital ratios, leverage, core capital and other measures
• Local and international benchmarks for key performance indicators
• Exercise: financial statement analysis
• Illustration case study: assessing financial risk