MTU FACULITY OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT

G.MBA (EXTENSION PROGRAM)

FINANCIAL AND MANAGERIAL ACCOUNTING (MBA 5062)

Analyzing Financial Performance of

ABAY Banks in Ethiopia: CAMEL Approach
GROUP ASSINGNMENT

GROUP MEMBERS

NAME 1. ANDARGE WONDIMU ID NO- GSE/010/13

2. ABEBAYEHU WONDAFERASH ID NO- GSE/003/13

3. ABIE TADESSE ID NO- GSE/004/13

Jan/2020 G.C
Mizan Aman
 INTRODUCTION
Financial sector of an economy plays an important role in its economic development
and prosperity of the country. Banking industry serves as the backbone of the financial
sector that accumulates saving from surplus economic units in the form of deposits and
provides it to deficit economic units in the form of advances. Banking industry provides
support to the economy in general and industries in particular in the time of recessions
and economic crisis. So it is of great importance to keenly observe the performance of
the banks and their compliance with the regulatory requirements. Important to evaluate
the banks performance critically for an efficient management of banking operations as
well as to ensure financial soundness of the banking industry. In light of the above, the
purpose of this assignment is to evaluate the performance of Abay Banks using CAMELS
model. This model is the supervisory and regulatory rating system. It takes into account
six important components of a bank when it evaluates performance of the bank. These
components are Capital, Assets, Management, Earning, Liquidity and Sensitivity to
market risk.

From the Abay bank performance report the following analysis ratio listed
below.

Capital Adequacy Analysis

Capital adequacy is a reflection of the inner strength of banks, which would stand it in
good stead during the times of crisis. Capital adequacy is the capital to maintain the
balance with the risk exposure of the financial institution such as credit risk, market risk
and operational risk, in order to absorb the potential loss and protect the financial
institution’s debt holder in addition to this meeting a minimum level of statutory
requirement is also a key factor. The capital adequacy ratio measured by the ratio of
total capital to total asset.
According to the calculation presented below Abay Bank is at the top position with the
average capital adequacy ratio of 21.34 percent. The result indicates that a better
position to with stand potential loss and protect the financial institution debt holder.
The capital adequacy= total capital/Asset

From the performance report total capital is 264,237,501

Total asset is 1,237,900,145

The capital adequacy= total capital/Total Asset

=264,237,501/1,237,900,145*100=21.34%
Or
From the performance report
Liability= 778,905,138
Total asset = 1,237,900,145
Debt ratio=liability/total asset =778,905,138/1,237,900,145 *100

=62.92%
Asset Quality Analysis
Asset quality determines the healthiness of financial institutions against loss of value in
asset as asset impairment risks the solvency of financial institutions. The Asset quality
indicators highlight the use of non-performing loans ratios (NPLs) which are the proxy
of asset quality and the allowance or provision to loan loss reserve. The bank is
regulated to back up the bad debts by providing adequate provisions for loan loss.The
ratio of provision for loan loss to total loans take in to account to measure the quality of
loan portfolio. With this framework, the asset quality is assessed by taking the ratio of
loan loss provision to total loan. The lower the loan loss provision to total loan ratio
indicate the quality of the asset of the bank is relatively better than the other banks.

From the Abay bank performance report

loan loss provision 5,205,562
Total loans 452,147,885
Asset Quality= loan loss provision/ total loans
=5,205,562/ 452,147,885*100
=0.011(1.15%)
Management Efficiency Analysis
Management quality is basically the capability of the board of directors and
management, to identify, measure and control the risks of an institution’s activities and
to ensure the safe, sound and efficient operation in compliance with applicable laws and
Regulations. The performance of Management capacity is usually qualitative and can be
understood through the subjective evaluation of Management systems, organization
culture and control mechanisms and so on. However, the capacity of the management
of a bank can also be gauged with the help of certain ratios of off-site evaluation of a
bank. Such can include the ability of the management to deploy its resources,
aggressively to maximize the income, utilize the facilities in the bank productively and
reduce costs etc. In this assignment the management efficiency is measured by taking
the ratio of Non Interest expense to Net Interest Income plus Non Interest Income. The
lower this ratio indicates the management capability to control or minimize cost per unit
of revenue generated in the banks.
From the Abay bank performance report
Total Income 75,922,626
Total cost 44,538,930
Management Efficiency=Non Interest expense/ Net Interest Income + Non Interest Income
Or cost/Income
=44,538,930/75,922,626/*100
=58.6%

Asset turnover = sales/Total asset

Sales 75,922,626 and Total assets 1,237,900,145
Management efficiency Asset turnover =75,922,626 /1,237,900,145
=0.0613
Earning Analysis
The ‘Earnings is a Conventional Parameter of measuring financial performance. The
quality of earning represents the sustainability and growth of future earnings, value of a
banks lucrativeness and its competency to maintain quality consistently. The net
interest margin measures how large the spread between interest revenues and interest
cost over earning assets and the pursuit of the cheapest source of funding (Rose
etal.,2006).
From the performance report
Net Interest Income 18,117, 0 7 9
Total loan &Advance 451,577,408
Earning =Net Interest Income / Total loan &Advance
=18,117, 0 7 9/451,577,408
=4.01 %
Liquidity Ratio
Liquidity management is one of the most important functions of a bank. If funds tapped
are not properly utilized, the institution will suffer loss. Idle cash balance in hand has no
yield. On the other hand if the bank does not keep balanced liquid cash in hand, it
cannot be able to pay the demand withdrawal of depositors, as well as, installment of
creditors and ultimately payment for other contingent liabilities. These will lead
overtrading position to the institution and create problems to borrow funds at high rate.
Proper balanced liquidity should be maintained by avoiding inadequate cash position, or
excess cash position.
From performance report
Total loan =451,577,408
Total deposit =778, 905, 138
Liquidity Ratio= Total loan/ Total deposit
=451,577,408/778, 905, 138*100
= 57.97%
 Summary
The main objective of this assignment was to investigate the performance of Abay
banks based on CAMEL approach..

The major findings of the Assignment from Abay bank report are the following:
CAMEL rating based on last two Years (2011-2012) average performance of ABAY
banks is as follows:
In terms of Capital adequacy as measured by the ratio of total capital to total asset
Abay Bank with the average value of 21.34%.
 Asset quality ratio as measured by the ratio of provision for loan loss to total loan
again Abay bank is the first with an average value of 1.15 % .
Management efficiency as measured by the ratio of Non interest expense to Net-
interest income plus Non-Interest income Abay Bank average ratio of 58.6% their
income to cover Noninterest expense.
In terms of earning ratio as measured by Net Interest Income to total loan Abay
bank of Ethiopia stood on the top with the average ratio of 4.01% during june/2012..
Liquidity ratio as measured by the ratio of total loan to total deposit Abay Bank was
the first with the average ratio of 57.97%
According to CAMEL Approach
 capital adequacy mean value suggests 21.34 % of the total asset of the Abay
banks in Ethiopia were financed by shareholders contribution while the remaining
78.70% were financed from deposit.
 Asset quality ratio as measured by Provision for loan loss to total loan mean
value was 1.15 Percent it indicates almost all banks Provide consistent provision
to manage credit risk of the bank.
 Managerial efficiency ratio as measured by Non-Interest Expense to Net Interest
income plus Non Interest Income had mean value of 58.60 Percent which means
most of banks spends 58.60 percent of their revenue for operation expense
management efficiency of the banks variation among the banks was high
between the banks as revealed by standard deviation value. It is relatively high
among the explanatory variable.
 Earnings ratio in measured by the net interest income to total loan and advance
had the mean value of 4.01
 Percent with the lowest standard deviation among other CAMEL factors of
1.86.This reflects Abay banks were applying consistent interest rate on the loan.
The Liquidity ratio was the final explanatory variable it was measured by total
Loan to total deposit.
 During the period the mean value was 56.36 Percent with the standard deviation
of 8.05.This indicates 58.6 percent of the deposit of Abay banks converted in to
loan and 57.97 percent of the deposit maintained in the bank to manage the
liquidity risk with few variability among the banks on Equity.