Analyse Performance of Commercial Banks

FACE – Alternative to CAMELS


CAMELS is a common model used by financial analysts and rating agency. CAMELS:

  • Capital Adequacy
  • Asset Quality
  • Management
  • Earnings
  • Liquidity
  • Sensitivity

Unfortunately, some of information are not available or hardly accessible for retail investors. For instance,

  • Retail investors are unlikely able to analyse sensitivity to market risk because this involves VaR (value at risk) of trading products and investment products offered and involved by banks.
  • We may be able to assess governance and behaviours of senior management of banks by reading news, attending Annual General Manager or use Stewardship Rating offered by Morningstar. We won’t be given chances like those big funds to have closer relationship with the senior management.

Therefore, I tailored the CAMELS model for retail investors: FACE.

Below are the key considerations when I modified the CAMELS model to become the FACE model:

  • How much are its Loans and Deposits growing by? Composition?
    • We have to look at how much loans and deposits of a bank are growing by and what are taking up those loans and deposits, such as, industry, geography, etc…
  • What are its Interest Income on Loans and Interest Expense on Deposits? What’s the spread between the average rates?
    • All else been equal, higher spread better. These rates do tend to move with the overall interest rates and the economy, but there are certainly individual differences at specific banks as well.
  • What if the bank’s Loans go bad? How much capital backs up those loans? How much does the bank expect to lose?
    • With a normal company, customers could accept products or services and then end up not paying, but it’s not particularly common. If It does happen, companies will set aside some reserves to cover this type of issue.
    • Banks just expect in the course of their business, some people are not going to able to repay them, and so some of the loans are going to go bad. As a result, they have to set aside capital to back up those loans. And they also have to figure out how much they actually expect to lose in the future. Because if they don’t know this, they’re not going to be able to set aside enough capital to back up these loans.
  • How does the bank increase their revenue streams? Higher fees and commissions? Or higher trading activities?
  • How Liquid are the bank’s Assets and Liabilities? Can it get money on short notice to cover mass withdrawals / other disasters?
    • In case of any kind of disasters, a bank cannot approach everyone it has lent money to, and ask them to pay back the money. Therefore, banks must have some amount of liquid assets on hand or other types of liquid funding to handle these types of scenarios.
  • How much in Dividends is the bank issuing? Payout ratio? Growth?

Click to view examples of analysis commercial banks: Malayan Banking Berhad (MAYBANK) and Public Bank Berhad (PBBANK).

Funding and Liquidity

  • Core Metric: Loans/Customer Deposits (%)
  • Complementary Metric: Customer Deposits/Total Funding (%)
  • Other ratios

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