Chapter 2: Analysis of CAMELS on Eastern Bank Limited

2.1 Capital Adequacy

In the following exhibits, we will show some disclosures of a reputed Bangladeshi Bank (EBL).
Then, we will analyze the capital ratio position of last two fiscal years.

Exhibit 1: Capital Ratios

Percentage
Items 2018 2019
Common Equity Tier - 1 Capital to RWA 9.33% 9.99%
Total regulatory capital ratio 12.16% 14.74%
Source: EBL Annual Report, page 51

Exhibit 2: Total Regulatory Capital and Risk-Weighted Assets

BDT in million
Items 2018 2019
Common Equity Tier-1 Capital 18,908 20,719
Tier-2 Capital 5,740 9,850
Total Regulatory capital (Tier 1 and Tier 2) 24,648 30,569
202,65 207,43
Total Risk weighted assets 5 7
Source: EBL Annual Report, page 51

Findings:
1. Strengthening of capital ratios: From 2018 to 2019, EBL’s common equity tier 1
capital ratio increased by 0.66%. In addition to that, total regulatory capital increased by
2.58%.
2. Reasons for the changes in capital ratios: EBL’s risk weighted assets amount
increased by BDT 4782 million from 2018 to 2019 which influenced the changes in total
capital ratios.

Comment on EBL’s Capital Adequacy:

In both years, EBL maintained common equity tier 1 capital to RWA ratio and total regulatory
capital ratio above the minimum criteria (4.5% for common equity tier 1 capital to RWA and 8%
for total regulatory capital ratio.

Capital adequacy score: 1 (Best)

 2.2 (a) Asset Quality: Composition of Assets
In exhibit 3, we will represent the asset portions of EBL’s balance sheet.
Exhibit 3: Balance Sheet (Asset part)
Particulars 2018 2019
2,624,9
In hand (Including foreign currencies) 3,088,367,831
83,711
13,713,2
Balances with Bangladesh bank and Sonali bank (Including foreign currencies) 16,601,918,975
76,245
16,338,2
Cash 19,690,286,806
59,956
9,071,8
In Bangladesh 19,963,271,483
91,788
2,374,4
Outside Bangladesh 4,405,925,232
10,405
11,446,3
Balance with other banks and financial institution 24,369,196,715
02,193
Money at call and short notice   594,300,000
22,221,7
Government 31,927,657,258
12,390
7,665,9
Others 10,138,813,514
07,401
Investment in shares & securities 29,887,619,791 42,066,470,771
194,873,6
Loans, cash credits, overdrafts/General Investments 218,070,540,410
43,755
22,506,6
Bills discounted and purchased 21,024,167,598
14,674
217,380,2
Total Loans and Advances 239,094,708,008
58,429
6,681,9
Land, building, furniture and fixtures (Including leased assets) 7,407,132,303
71,996
134,0
Non-Banking Assets 4,869,888,926
16,495
3,631,6
Other assets 108,736,495
41,088
285,500,0
Total assets 338,200,720,023
69,948
Source: EBL Annual Report, 2019, page 158

Findings:
1. Changes in the investments of liquid assets: In 2018, the proportions of EBL’s
balance sheet in highly liquid assets was 5.72%

[16,338,259,956/285,500,069,948]= 5.72%

In 2019, the proportions of EBL’s balance sheet in highly liquid assets was 6%

[(19,690,286,806+594,300,000/338,200,720,023] = 6%

EBL’s balance sheet’s liquidity increased slight by 0.28%.

 2. Changes in investments amount: In 2018, EBL’s total investments in terms of total
asset was 10.47%.

[29,887,619,791/285,500,069,948]= 10.47%

In 2019, EBL’s total investment to total asset ratio was 12.44%.

(42,066,470,771/338,200,720,023)= 12.44%

EBL invest in govt. securities increased significantly in 2019. In 2018, EBL’s investment
in govt. securities was BDT 22.22 billion, but in the next year, EBL’s invest BDT 9.7
billion additional amount in government securities which influenced their overall
investment amount.

Composition of assets score: 1 (Best)

2.2(b) Credit Quality

In the next exhibits, we will show the gross amount of EBL’s loans and investments. We’ll also
classify them in good/bad/moderate ratings.
Exhibit 4: Credit Quality
% of total gross %
  BDT in million
amount change
Items 2018 2019 2018 2019  
         
Debts considered good in respect of which the bank is
fully secured(Strong credit quality) 203,410 223,625 93.57% 93.53% 0.047%
Debts considered good for which the bank
holds no other security than the debtor's 5,251 5,844 2.42% 2.44% 1.18%
personal security (Good credit quality)
Debts considered good and secured by the
personal security of one or more parties in
8,719 9,626 4.01% 4.03% 0.38%
addition to the personal security of the
debtors(Satisfactory credit quality)
           
Total gross amount 217,380 239,095 100% 100%  
Less: Provisions for loans and off balance sheet (30.25%
2,652.18 2,034.61 1.22% 0.85%
items )

Total 214,728.0 237,060.0      

8 9
Source: EBL annual report and own calculations

Findings:
1. Credit quality of EBL’s financial instruments/loans: EBL’s loan amount strong
category increased by BDT 20,215 million. However, in terms percentage change, their
 debt amount (strong category) decreased 0.047%. So, it can be said that, EBL’s credit
quality remained same in 2019.
2. Impact of provisions for loans: EBL’s provisions for loan and off-balance sheet items
remained roughly stable in both years.

Credit quality score: 1 (Best)

2.2 ( c ) Provisions for Loans

We compiled their provisions for loan loss amount and analyzed them of the fiscal year of 2018
and 2019.

Exhibit 5: Loan loss provision analysis

BDT in million
Particulars
Loans 2017 2018 2019
Total loans 184,027 209,306 232,051
Nonperforming/classified loans 4,600 4,926 7,771
Provisions for loan losses 2602.901 2197.482 1429.153
Allowance for loan losses 4,379 4,118 6,009
Debts written off during the year 1,972 2,544 -
Recovery from previously written off loans 501 423 636
Net write-offs 1,471 2,121 -

Ratios 2017 2018 2019

Allowance for loan losses to nonperforming loans 0.95 0.84 0.77
Allowance for loan losses to net loan charge-offs 2.98 1.94 -
Provision for loan losses to net loan charge-offs 1.77 1.04 -

Findings:
 The allowance for loan losses to nonperforming loans ratio has declined from 0.84 to
0.77, in 2018 and 2019,indicating that EBL has not made sufficient provisions for loan
losses (i.e., possible aggressive accounting)
 Provision for net loan losses to net loan charge-offs has declined from 1.77 to
1.04(comparing 2017 and 2018, as 2019’s net write off could not be calculated). It
indicates that EBL is following aggressive accounting policy over the year.
 The allowance for loan losses to net loan charge-offs ratio has decreased for 2018,
showing that the rate of increase in allowance for loan losses is significantly below the
growth rate of actual write-offs.
1
For calculating the provisions for loan losses we added only two items from income statements which are specific
and general provision
2
Same as 1
3
Same as 1
 Provision for loans: 3 (Moderate)

Comment on EBL’s Overall Asset Quality

EBL managed to maintain optimum asset and loan portfolio in 2018 and 2019. EBL also
managed to increase their strong credit amount in last 2 years. Unfortunately, EBL’s classified/
non performing loan amount saw a rise in 2019. EBL should focus on their loan collection
policies. Our average total score is 1.67.

Overall asset quality score: 1.67 (Good)

2.3 Management capabilities

The quality of a bank’s management influences the success with which the bank is able to
exploit profitable opportunities while also controlling the level of risks taken. Risk management
and control is critical for banks. We tried to find some of their management practices.
 EBL has separate chair for Chairman and CEO. It can reduce conflict of interest.
 EBL has one independent director in their board which is compliant with Company Law.
 EBL’s risk management framework is based on the three line of defense (3LD) model.
Within this model, functional business line staffs and managers (the first line) incur and
own the risks, while risk management division and other control functions (the second
line) provide independent oversight to the functional business line stuffs, as well as
monitoring and control of risk. Internal audit department is responsible for providing
assurance that control objectives are achieved by first two groups
 EBL performed their related party transaction according to IAS 24
We try to find out the performance of EBL’s board based on loan and advances to deposit ratio,
ROE growth and operating profit per employee.

Loan & Advances to Deposit Ratios

1.15
1.10
1.05
1.00
0.95
0.90
0.85
2015 2016 2017 2018 2019

Chart 1: Loans and advances to deposit ratio

ROE
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2015 2016 2017 2018 2019

Chart 2: ROE growth

 Operating profit per employee
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2015 2016 2017 2018 2019

Chart 3: Operating profit per employee

EBL’s loans and advances to deposit ratio is decreasing over the last 3 years. However, their
ROE is increasing over the 5 years. EBL’s management also performs well to increase the
productivity of their workers. As a result, their operating profit to employee ratio is increasing.

Comment on EBL’s Management Capacity

EBL’s management is following some good practices. Their management performs well in terms
of efficiency ratio. But there is scope for improvement in loan to deposit ratio.

Management capacity score: 1.5 (Good)

 2.4 Composition of Earnings
In exhibit 4 and 5, EBL’s earnings source are described.

Exhibit 4: EBL's 5 years summary of operating income

  BDT in million
Income statement items 2019 2018 2017 2016 2015
Net interest income (excluding investment income) 8,159 7,506 5,745 5,529 3,545
Non-interest income 6,439 5,633 6,656 5,952 6,351
Investment income 2,752 2,318 3,415 3,315 3,576
Non investment income (exchange, fees & charges) 3,687 3,315 3,241 2,636 2,774
Total operating income 14,598 13,139 12,401 11,480 9,895
Operating expense 6,387 5,995 5,605 5,063 4,691
Operating profit (profit before provision and tax) 8,211 7,144 6,796 6,417 5,204
Source: EBL’s annual report financial highlights

Exhibit 5: EBL's 5 years summary of operating income: common size statement

  % of total operating income
Income statement items 2019 2018 2017 2016 2015
Net interest income (excluding investment income) 55.89% 57.13% 46.33% 48.16% 35.83%
Non-interest income 44.11% 42.87% 53.67% 51.85% 64.18%
Investment income 18.85% 17.64% 27.54% 28.88% 36.14%
Non investment income (exchange, fees & charges) 25.26% 25.23% 26.13% 22.96% 28.03%
100.00 100.00 100.00 100.00 100.00
Total operating income % % % % %
Operating expense 43.75% 45.63% 45.20% 44.10% 47.41%
Source: Own calculations

Findings:
1. Primary source of operating income: In 2019, 55.89% of their total operating income
came from interest income. EBL’s net interest income is increasing over the 5 years.
Their 2nd biggest income source comes in the forms of fees, exchanges etc. In 2019,
EBL’s non investment income was 25.26%. They also earned 18.85% income from
investment also.
2. Trend: EBL’s operating income increased every year from 2015 to 2019.

Comment on EBL’s Management Capacity

EBL managed to increase their net interest income over the 5 years which is the main source of
income for every bank. However, their non-interest income over the 5 years has been
decreased. Also, their investment income is also decreasing. EBL should focus on their
investment in govt. and other securities.

Earnings quality score: 2.5 (Above average)

2.5 Liquidity Position
Having adequate liquidity is critical for a bank. The Basel III framework introduced two minimum
liquidity standards:

Exhibit 7: Liquidity analysis

BDT in million
Particulars 2018 2019
Stock of High quality liquid assets 38,606 52,124
Total net cash outflows over the next 30 calendar days 30,238 15,411
127.67
Liquidity Coverage Ratio (%) % 338.23%
Available amount of stable funding 203,657 252,065
Required amount of stable funding 195,697 220,244
104.07
Net Stable Funding Ratio (%) % 114.45%
Source: EBL annual report, 2018 and 2019(Page

Findings
1. Impact on LCR: For 2019, EBL’s LCR has been increased from previous year. EBL’s
2019 LCR indicates that it can withstand cash outflows that are 238.23%(required
percentage ≥ 100%) higher than its 30 calendar days liquidity needs in response to a
stress scenario. So, it can be said that, EBL has enough liquidity for tackling an actual
stress event. But, for maintaining this level of additional liquidity, EBL is also losing
profitability chances.
2. Impact on NSFR: In both 2018 and 2019, EBL maintained their NSF well above the
required amount (> 100%).

Comment on EBL’s Liquidity

Based on LCR and NSFR, EBL maintained a very good position in terms of liquidity. We can
give them a rating of 1.

Liquidity position score: 1 (Good)

2.6 Sensitivity to Market Risk

EBL maintained their sensitivity interest rate thorough these methods. EBL follows simple
gap/funding gap analysis (asset-liability management), duration gap analysis, VaR analysis,
stress testing etc. We’ll focus mainly on funding gap and duration analysis.
i) Funding gap analysis: From the annual report of EBL (2019), we found the
following analysis. We will discuss them thoroughly.

Exhibit 8: Funding gap analysis

BDT in million
Particulars 3 months 6 months
For 1% increase/decrease in interest rate, impact on
±18.40 ±78.9
net interest income

For 2% increase/decrease in interest rate, impact on ±36.8 ±157.8

net interest income
If market interest goes up or down by 1%, EBL’s net interest income will be increased by BDT
18.40 million for first 3 months. If the change in market interest rate continues for 6 months,
changes in net interest income will be BDT 78.9 million. Again, if market interest rate changes
by 2%, EBL’s net interest income will also be affected by BDT 36.8 million and BDT 157.8
million for 3 and 6 months.
ii) Duration analysis: Duration Analysis intends to measure the level of a bank’s
interest rate risk exposure in response to sensitivity of Market Value of its Equity
(MVE) to interest rate changes. Duration Gap Analysis can be used to evaluate the
impact on the Market Value of Equity/net worth of the bank under different interest
rate scenarios.

Exhibit 9: Duration Gap Analysis

Particulars 31-Dec-18 31-Dec-19
Duration of Asset 1.37 1.25
Duration of Liabilities 1.49 1.37
Duration Gap -0.11 -0.12

Exhibit 10: Impact on interest change on market value of equity

Changes in market value of equity due to an increase in interest rates as of 31st
December, 2019
1% 2% 3%
BDT 9.93 million BDT 19.87 million BDT 29.80 million
EBL’s duration gap is negative in 2018 and 2019. EBL is a liability sensitive bank. As EBL is
liability sensitive, when we performed scenario analysis assuming increase in interest rate, we
found that EBL’s market value of equities of on different scenarios increased.
Comment on EBL’s Sensitivity to Market Risk