Applying the CAMELS Performance Evaluation Approach for Emirates

NBD Bank

Ali Elcheikh Mohammed

Abu Dhabi University, Email: 1065137@students.adu.ac.ae

Supervised by:

Professor Haitham Nobanee

Abstract

The CAMELS approach of bank analysis has widely been applied to understand and
acknowledge the position of various commercial banks. The UAE region is not an exception
given that since the inception of the CAMELS approach analysis it has been applied successfully
to help banks improve on their financial positions. In this report, we applied the CAMELS
approach to Emirates NBD bank to assess its performances in the sector. The company does well
in the management of its resources, its equity has considerably grown over the years signifying
that the management is using the bank's resources to bring out the best in its profits. Thus, the
bank has a stable and strong financial position. However, it is worth noting that the bank is not
doing that well in terms of its liabilities given that it has borrowed a lot of money out, putting it
at a tricky position of facing a possible bankruptcy in the future. The Emirates NBD bank stands
out as a bank that the investors can put their faith in, once it streamlines its financial management
that points that over the past 10-year period the bank has not been doing that well. However, it
has massively improved its operations.

Introduction

The Emirates NBD was initiated in 1963 in 2007, the bank pursued a merger this adopting its
current name which has significantly strengthened its financial position in the market. The bank
has since grown significant in the UAE banking sector, giving lots of banks competition.
Although, it has struggled against most established banks within the UAE the bank is one of the
largest banks within the region. It has a wide asset and capital base thanks to a few its customers;
it has proved over time that it can offer leading loans in the sector. Despite the oil fluctuating
prices in the UAE, the bank has remained steadily strong over several years signifying that it
actually is improving in its operations. [ CITATION Who \l 1033 ]

The banks operating expenses has significantly increased over the last 10 years, this is an
indication that the bank is operating well in the industry. Its expenses on staff has also
significantly increased to show that it employs more staff members due to its increased
operations and wide range of services in UAE region. The equity of the company has also
significantly increased to donate its active participation in the sector. Through the regulation by
the central bank of UAE the bank has managed to remain afloat thus offering its best services to
its customers. The stocks of the bank are also performing well in the market to signify growth.

In this research paper we are going to apply CAMELS approach to outline some of the
weaknesses and strength of the bank. The CAMELS approach helps both analysts and bank
managers in understanding fully the position of their banks. CAMELS Approach applies various
ratios that investigate various aspects of the bank such as its management of its operations, its
return on assets, its customer satisfaction, its financial position and its risks and liabilities.
[ CITATION Bre \l 1033 ] The CAMELS approach applies all mechanisms available to ensure that
all the company assets and liabilities are comprehensively evaluated to bring the best in the
industry. [ CITATION Kob \l 1033 ] It is thus important for any manger or analyst within a financial
institution to ensure that he takes appropriate actions in identifying the strengths of the company
and giving the investors the right information. [ CITATION Ann \l 1033 ]

Emirates NBD bank is not an exception, it must undergo the right procedures in
evaluating its financial position to inspire courage and growth among its investors and
stockholders. Thus, in this paper we obtain the financial records of Emirates NBD bank from is
annual reports thus establishing a good platform to ensure that the information is correct and
accurate. The information is provided annually and quarterly and is readily available on the
bank’s website. These financial records are prepare3d by the accountants of these bank in the bid
to ensure that all factors involving the banks operations are well documented. This information is
vital because it can be used to access the position of the bank from different angle and
perspective. This information is legally binding and in the even the bank gives false information,
it can actually be held culpable of offering such wrong information. There are very companies
that have been penalized in the past for offering such false information. The CAMELS approach
makes a good use of these financial information availed by the company to ensure it scrutinize
all its operations thus ensuring that the best information’s is brought out. The financial data for
Emirates NBD from 2010 to 2019 properly documents how the bank is actually offer the best
platform to perform the analysis. [ CITATION AlS20 \l 1033 ]

Methodology

The methodology of this research paper is to comprehend the use of financial ratios. The
CAMELS approach analyzes financial information using ratio analysis of a certain bank, and in
this case, it is Emirates NBD Bank. Financial ratios reflect on multiple aspects of the company to
ensure that company evaluation is being done accurately. [ CITATION Gle20 \l 1033 ] Financial data
used within this paper will be gathered from the organization’s annual financial reports from year
2010 to year 2019 (10 years period). The data is of high importance since it helps in establishing
a trend of highlighted downward loops of the bank over the mentioned time period. The ratios to
be applied in this research paper include liquidity ratios which will evaluate the position of the
bank and whether the bank would be able to operate within the given period. [ CITATION Wha \l
1033 ]

In this analysis we engage ratios such as capital adequacy ratios, asset quality ratios,
management quality ratios, earnings efficiency ratios, sensitivity ratios, and liquidity risk ratios.
These ratios originate from the name CAMELS, since they are the basic ratios used for outlining
the company’s performance. The Capital adequacy ratio address the equity of the bank compared
to its total assets; we are evaluating on whether the bank can support its equity given the amount
of its assets. These ratios are given in percentages to ensure the bank is growing stronger over the
years in its management of equity and assets. The capital adequacy ratios also outline the banks
equity compared to its long-term debts, this tests on whether the bank can rely on its equity given
the amount of long term-debt it has. The second ratio that will be applied is the asset quality
ratio, this ratio evaluates the banks loans provision compared to its net interest income. This is to
say, it compares the total loans by the bank over its total assets. These ratios generally help in
acknowledging the position of the bank over a period of time and how well it can survive at that
position (Alkaabi & Nobanee, 2019).

Ratios of quality management indicate how the firm’s staff is willing to put the best of its
vital resources, hence the plan to evaluate the organization’s expenses over total assets. During
the 10 year period, keeping an eye on the firm’s performance over assets and expenses is key.
The task is to monitor the improvement of the bank’s operations over the given time period in
regard to cost cutting. The bank’s return on investment measure is the ROE and ROA ratios in
regard to the assets or equity of the company. Such ratios reflect on the performance of the bank
to its investors whether their investment is being run well and efficiently managed by the
management to contribute with the grow of the company. Sensitivity and liquidity ratios are
critical in building predictions. We will also determine the assets of the bank over deposits and
loans over deposits as well. This will help us to build an understanding the of the bank’s position
over the past 10 years. [ CITATION AlK20 \l 1033 ]
 Analysis and Discussion

Capital Adequacy Ratios

The first ratio of this group is total capital ratio, which is total equity divided by total
assets. The second one is total equity over long-term debts. The third and final ratio is total
equity over total liabilities. This ratio group is a type of measurement to test a bank’s available
capital as a percent of its credit exposures. [ CITATION Ada202 \l 1033 ] The shown analysis in the
graph below states that the bank’s equity increased with total assets. The bank’s equity over
long-term debts also made an increase over the given time. This informs us that the bank is
holding a proper position in regard to its capital sourcing. Therefore, the bank is able to attain
capital through equity without interfering in future long-term debts.

Capital adequacy rati o

250%

200%

150%

100%

50%

0%
TOTAL CAPITAL RATIO TOTAL EQUITY/LONG-TERM DEBT TOTAL EQUITY/TOTAL LIABILITIES

2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
  2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

total Equity 81,606,861 64,024,363 59,361,537 53,860,918 50,748,527 46,762,917 41,715,312 36,498,576 34,981,054 33,749,590

Total Assets 683,320,564 500,342,746 470,372,283 448,004,012 406,560,175 363,020,991 342,061,275 308,296,351 284,613,386 286,078,324

Long-Term Debt 52,997,236 44,400,390 45,315,497 46,063,872 34,959,842 30,370,691 23,778,052 20,863,792 16,876,048 20,682,994

Total Liabilities 601,713,703 436,318,383 411,010,746 394,143,094 355,811,648 316,258,074 300,345,963 271,797,775 249,632,332 252,328,734

Ratio/Year 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

12.8%
TOTAL CAPITAL RATIO 11.9% 12.6% 12.0% 12.5% 12.9% 12.2% 11.8% 12.3% 11.8%

TOTAL EQUITY/LONG-TERM DEBT 154.0% 144.2% 131.0% 116.9% 145.2% 154.0% 175.4% 174.9% 207.3% 163.2%

TOTAL EQUITY/TOTAL LIABILITIES 13.6% 14.7% 14.4% 13.7% 14.3% 14.8% 13.9% 13.4% 14.0% 13.4%
Source: EmiratesNBD Annual reports from 2010 to 2019
Note: all numbers in million
 Asset Quality Ratios

Asset quality ratios also has three ratios underneath it. Coverage of non perfuming loans
is the equation of loan provision divided by net interest income. Another ratio is total loans
divided by total assets. The final ratio is loan loss provision over the total loans by the bank.
Emirates NBD increased its deposits and loans which has placed it in a situation where its on its
toes. The bank put effort to improve its liquid assets, but its loans as well. Data within the 10
years shows that the ban increased on the quantity of deposits; increasing the liquidity. As shown
in the graph below, ratios are volatile between 70 and 30 percent, which reflects a significant
change in the industry. This states the improvement in loss provision. However, there is a need
for the bank to improve its non-performing loans. Emirates NBD total assets are increasing over
the years, hence it can move to higher loans and a steady place for a futuristic advancement.

Assets Quality Ratios

80%

70%

60%

50%

40%

30%

20%

10%

0%
LOAN PROVISION/NET INTREST TOTAL LOANS/TOTAL ASSETS LOAN PROVISION/TOTAL LOANS
INCOME

2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
YEAR 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
683,320,56 500,342,74 470,372,28 448,004,01 406,560,17 363,020,99 342,061,27 308,296,35 284,613,38

Total Assets 4 6 3 2 5 1 5 1 6 286,078,324

loan provision 5,110,345 2,085,859 2,279,374 2,503,772 3,136,537 4,595,152 4,402,219 3,854,216 4,694,735 2,847,022

net interest income 14,607,862 10,933,356 8,958,736 8,515,509 8,558,750 8,136,793 7,055,443 6,259,146 6,715,012 6,365,514

437,430,02 304,092,61 290,396,30 270,580,85 245,973,74 238,344,09 218,161,40 203,140,31

total loans 7 327930500 4 9 8 1 8 8 3 196,223,525

Ratio/Year 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
LOAN PROVISION/NET

INTREST INCOME 35% 19% 25% 29% 37% 56% 62% 62% 70% 45%

TOTAL LOANS/TOTAL

ASSETS 64% 66% 65% 65% 66% 67% 70% 71% 71% 69%
LOAN

PROVISION/TOTAL

LOANS 1% 1% 1% 1% 1% 2% 2% 2% 2% 1%
Note: all numbers in million
 Management Quality Ratios

Two important calculations within this group, that are operating expense divided by total
assets, and staff expense over total assets. Within this group, the bank showed a pleasuring
performance over the given period. Ratios show that the bank is managing its available resources
in the bid in a positive manner to keep up with the industrial competitiveness. Staff expenses and
operating expenses spotted a major decrease toward the last years. Efficient resource
management is obvious from the numbers and graph, which makes stakeholders satisfied in
regard to the current management. Emirates NBD has also positively increased its operation
which also states a good use of resources. The graph below shows the number comparison from
year 2010 to year 2019 taking into consideration both ratios mentioned at the beginning of this
paragraph.

Managment Quality
1.40%

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%
2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

operating expense/total assets staff expense/total assets

  2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

Operating
expense 7,207,079 5,619,671 4,844,229 4,887,687 4,719,437 4,388,818 4,114,942 3,674,252 3,507,734 3,053,289

683,320,56 500,342,74 470,372,28 448,004,01 406,560,17 363,020,99 342,061,27 308,296,35 284,613,38

Total Assets 4 6 3 2 5 1 5 1 6 286,078,324

Staff expense 4,196,703 3,451,057 3,031,722 3,220,947 3,082,824 2,780,274 2,624,972 2,287,617 2,253,521 1,949,479
Note: all
numbers in
million

RATIO/YEAR 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
operating
expense/total
assets 1.05% 1.12% 1.03% 1.09% 1.16% 1.21% 1.20% 1.19% 1.23% 1.07%
staff
expense/total
assets 0.61% 0.69% 0.64% 0.72% 0.76% 0.77% 0.77% 0.74% 0.79% 0.68%
 Earnings Efficiency Ratios

The return on assets and return on investment along with the efficiency of operating
activity are all part of the earnings efficiency ratios. They are used to imply the bank’s
investment situation and how properly is the management making use of its resources to allow
shareholders a return of their investments. The ROE and ROA ratios show that the bank is
increasing its resources to improve operations. This leads to a direct encouragement for
shareholders to put more investments into the bank’s assets. Speaking about the ROA in
particular, it shows an uprising improvement over time due to the effective asset operation by the
bank. ROE ratio is also increasing, which tells us that Emirates NBD is making smart investment
decisions. The merge of the two banks into one has created a difficulty for such rates, but this
can be overcome by injecting useful resources within the bank’s assets. The ROA and ROE
made a positive stability at the ending years, which gave it a good reputation among investors
and stakeholders. [ CITATION AlM191 \l 1033 ]

EARNINGS EFFICIENCY
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
ROA ROE EFFICIENCY

2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
  2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
683,320,56 500,342,74 470,372,28 448,004,01 406,560,17 363,020,99 342,061,27 308,296,35 286,078,32

Total Assets 4 6 3 2 5 1 5 1 284,613,386 4

total Equity 81,606,861 64,024,363 59,361,537 53,860,918 50,748,527 46,762,917 41,715,312 36,498,576 34,981,054 33,749,590

net income 14,503,683 10,041,523 8,345,796 7,239,163 7,123,768 5,139,030 3,256,366 2,554,019 2,483,483 2,339,183

operating cost 7,207,079 5,619,671 4,844,229 4,887,687 4,719,437 4,388,818 4,114,942 3,674,252 3,507,734 3,053,289

interest income 24,686,936 16,930,894 13,573,947 12,397,749 11,077,468 10,419,145 9,643,395 9,236,309 10,283,230 11,288,438

  2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

ROA 2.1% 2.0% 1.8% 1.6% 1.8% 1.4% 1.0% 0.8% 0.9% 0.8%

ROE 17.8% 15.7% 14.1% 13.4% 14.0% 11.0% 7.8% 7.0% 7.1% 6.9%

EFFICIENCY 29.2% 33.2% 35.7% 39.4% 42.6% 42.1% 42.7% 39.8% 34.1% 27.0%
 Liquidity Risk Ratios

Four ratios within the liquidity risk ratios tell us how the organization is meeting its
short-term obligations with the use of its short-term assets. These ratios are current assets divided
by total deposits, loans over total deposits, liquid assets divided by total assets, and term deposits
over total deposits. In this section, we will focus on the bank’s ability to meet loan requests from
its customers by having a suitable amount of deposits. Furthermore, how Emirates NBD is uses
accessible assets to meet such liabilities. The bank faced low liquidity ratios during years from
2015 to 2018 reflecting on its inability to fully meet such obligations at those time periods.
Although such happening occurred, the trend seems positive overall and the bank’s liquidity ratio
is considered healthy and of low risk.

Liquedity Risk Ratios

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

liqued assets/total depositis loans/total depositis

liqued assets/total assets term depositis/total depositis
RATIO/YEAR 2019 2018 2017 2016 2015 2014 2013 2012 2011
149,524,4 124,511,5 125,170,0 115,872,0 96,490,12 77,283,29 60,258,45 49,411,18 41,966,39 52,
liquid assets 88 69 50 87 3 5 6 1 5
347,839,49 329,654,91 306,054,62 273,644,53 263,263,14 236,097,27 219,419,28 218,
total deposits 513,896,130 370,205,690 4 6 4 6 5 4 6
437,430,0 327,930,5 304,092,61 290,396,30 270,580,85 245,973,74 238,344,09 218,161,40 203,140,31 196,
Loans 27 00 4 9 8 1 8 8 3
470,372,28 448,004,01 406,560,17 363,020,99 342,061,27 308,296,35 284,613,38 286,
Total Assets 683,320,564 500,342,746 3 2 5 1 5 1 6

352,718,859.0 227,324,830.0 202,902,64 191,733,09 175,713,33 151,112,60 159,569,01 161,289,17 149,301,79 163,
term deposits 0 0 4 2 7 2 1 6 9

RATIO/YEAR 2019 2018 2017 2016 2015 2014 2013 2012 2011
liquid
assets/total
deposits 29% 34% 36% 35% 32% 28% 23% 21% 19%
loans/total
deposits 85% 89% 87% 88% 88% 90% 91% 92% 93%
liquid
assets/total
assets 22% 25% 27% 26% 24% 21% 18% 16% 15%
term
deposits/tota
l deposits 69% 61% 58% 58% 57% 55% 61% 68% 68%
 Sensitivity to Market Risk Ratio

This ratio outlines the shocks a bank can get from eventualities in the sector, such
eventualities may include change in interests’ rates, inflation or even adjustments in cooperate
laws. The ratios evaluate to what extent the bank is able to hand such eventualities without
exposing or putting its stakeholders at risk. In this analysis we identified that the bank actually
has a strong rating in the sector putting it at very strong position to handle any problems arising
in the sector. Note that Emirates NBD bank succeeded to significantly improve its ability to
handle such shocks evidenced by its lower ratios suggesting a stable bank (Al Ahbabi &
Nobanee, 2019, p. 12).

Sensitivity to Market Risk

250%

200%

150%

100%

50%

0%
2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
  2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

Total Assets 683,320,564 500,342,746 470,372,283 448,004,012 406,560,175 363,020,991 342,061,275 308,296,351 284,613,386 286,078,324

total sector
assets 308,300,000 286,800,000 269,300,000 261,100,000 247,800,000 230,500,000 212,400,000 187,700,000 173,400,000 166,200,000
Source:
Note all EmiratesNBD
numbers in bank from
million 2010 to 2019

RATIO/YEAR 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

total
sector/assets 222% 174.5% 174.7% 171.6% 164.1% 157.5% 161.0% 164.2% 164.1% 172.1%
 Conclusion

The banks operating expenses has significantly increased over the last 10 years, this is an
indication that the bank is operating well in the industry. Its expenses on staff has also
significantly increased to show that it employs more staff members due to its increased
operations and wide range of services in UAE region. The equity of the company has also
significantly increased to donate its active participation in the sector. Through the regulation by
the central bank of UAE the bank has managed to remain afloat thus offering its best services to
its customers. The stocks of the bank are also performing well in the market to signify growth.
The CAMEL approach of bank analysis has widely been applied to understand and acknowledge
the position of various commercial banks. The UAE region is not an exception given that since
inception of AMELS approach analysi8s it has been applied successfully to help banks improve
on their financial positions. In this report we applied the CAMELS approach to Emirates NBD
bank to assess it performances in the sector. The company does well in its management of its
resources, its equity has considerably grown over the years signifying that the management is
using the banks resources to bring out the best in its profits. Thus, the bank has a stable and
strong financial position. However, it is worth noting that the bank is not doing that well in terms
of its liabilities given that it has borrowed a lot of money out, putting it at a tricky position of
facing a possible bankruptcy in future. The Emirates NBD bank, stands out as a bank that the
investors can put their faith in, once it streamlines its financial management that points that over
the past 10-year period the bank has not been doing that well. However, it has massively
improved on its operations.
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