Research Article

Volume 10:8, 2021

Journal of
Accounting & Marketing
ISSN: 2168-9601 Open Access

Financial Performance Analysis through CAMEL Rating: A

Comparative Study of Selected Private Commercial Banks
in Ethiopia
Edilawit Gebregiorgies*
College of Business and Economics, Department of Accounting and Finance, Debre Markos University, East Gojjam, Ethiopia

Abstract
This study was focused on the area of financial performance analysis of commercial banks by using CAMEL approach in Ethiopian banking industry. The study was
conducted on six senior private Ethiopian commercial banks over the period 2010-2014 by collecting data from their annual reports from year 2010 to 2014 and
thereby ranked the overall financial performance of the respective banks based on CAMEL model and this study also aimed to investigate the inter connection between
CAMEL ratios with profitability, late and early establishment of banks.. The study used quantitative approach from the three methods of conducting business and social
research. The finding of this study indicated that, UNB, NIB, and BOA held from 1st to 3rd of the rank based on CAMEL model overall performance. NIB was on top
position with capital adequacy ratio parameter, while DAB got lowest rank. Under the asset quality parameter, UNB held the top rank while AIB held the lowest rank.
Under management efficiency parameter the top rank has been taken by AIB& BOA and jointly and the lowest rank has been held by WEB. In terms of earning quality
parameter, NIB got the top rank and BOA held the second rank & WEB held the third rank. DAB got the last rank. Under the liquidity parameter NIB stood first and DAB
held the lowest.
Keyword: CAMEL • Financial performance • Private commercial banks

The Capital adequacy is rated upon different factors inter alia: The level
Introduction and quality of capital and the overall financial condition of the institution, the
ability of management to address emerging needs for additional capital, the
Background of the study nature, trend, and volume of problem assets, and the adequacy of allowances
Any economy's financial environment is normally composed of five elements: for loan and lease losses and other valuation reserves, balance sheet
capital, financial instruments, financial institutions, regulations and financial composition, including the nature and amount of intangible assets, market
markets. Banks are fundamental component of the different financial risk, concentration risk, and risks associated with non-traditional activities,
institutions. The bank system thus plays a crucial role in the country's risk exposure represented by off- balance sheet activities, the quality and
economic growth as a critical element of financial systems. The success of strength of earnings, and the reasonableness of dividend.
the economy depends largely on the deployment and efficient use of capital The ratings of a financial institutions’ Asset quality is based upon, but not
and above all on the operating efficiency of the various sectors. In addition limited to, an assessment of the following evaluation factors: the adequacy
to promoting monetary policy, the banking sector helps to promote capital of underwriting standards, soundness of credit administration practices and
growth, innovation and monetization. To maintain a stable financial system appropriateness of risk identification practices, the level, distribution, severity,
and a productive economy, it is important to estimate and examine the and trend of problem, classified, nonaccrual, restructured, delinquent, and
performance of banks carefully. A banks good financial health protects its nonperforming assets for both on- and off-balance sheet transactions,
depositors, as do stakeholders, employees and the country's economy as a the adequacy of the allowance for loan and lease losses and other asset
whole. As a consequence of this fact, from time to time attempts have been valuation reserves, the credit risk arising from or reduced by off-balance sheet
made to calculate and efficiently & effectively manage the financial condition transactions, such as unfunded commitments, credit derivatives, commercial
of each bank. Therefore, it is important to evaluate the performance of the and standby letters of credit, and lines of credit, the diversification and quality
bank in the country. of the loan and investment portfolios.
CAMEL is a system of rating for on-site examinations of banks. Officially The Management is rated upon different factors inter alia: the level and quality
known as the Uniform Financial Institutions Rating System (UFIRS), CAMEL of oversight and support of all institution activities by the board of directors
is a supervisory rating system adopted by the Federal Financial Institutions
and management, the ability of the board of directors and management, in
Examination Council (FFIEC) on 1979. CAMEL stipulates the evaluation of
their respective roles, to plan for, and respond to, risks that may arise from
financial institutions on the basis of five critical dimensions which are: Capital
changing business conditions or the initiation of new activities or products, the
adequacy, Asset quality, Management, Earnings and Liquidity. Sensitivity
adequacy of, and conformance with, appropriate internal policies and controls
to market risk, a sixth dimension was added in 1997 and the acronym
was changed to CAMELS. These components are used to reflect financial addressing the operations and risks of significant activities, the accuracy,
performance, operating soundness and regulatory compliance of financial timeliness, and effectiveness of management information and risk monitoring
institutions. They are defined as follows. systems appropriate for the institution's size, complexity, and risk profile, the
adequacy of audits and internal controls to: promote effective operations
and reliable financial and regulatory reporting; safeguard assets; and ensure
*Address for Correspondence: Edilawit Gebregiorgies, College of Business and
compliance with laws, regulations, and internal policies.
Economics, Department of Accounting and Finance, Debre Markos University, East
Gojjam, Ethiopia, Tel: +251961091325; E-mail: edilegnabehone@gmail.com Financial institution's earnings is rated upon different factors inter alia:
Copyright: © 2021 Edilawit Gebregiorgies. This is an open-access article the level of earnings, including trends and stability, the ability to provide
distributed under the terms of the Creative Commons Attribution License, which for adequate capital through retained earnings, the quality and sources of
permits unrestricted use, distribution, and reproduction in any medium, provided earnings, the level of expenses in relation to operations, the adequacy of
the original author and source are credited. the budgeting systems, forecasting processes, and management information
Received 22 July 2021; Accepted 20 August 2021; Published 27 August 2021 systems in general.
Gebregiorgies E. J Account Mark, Volume 10:8, 2021

Liquidity is rated based upon inter alia, these factors: the adequacy of in using its assets to generate net income. Higher values of the return on
liquidity sources compared to present and future needs and the ability of the assets show that the company is more effectively managing its assets to
institution to meet liquidity needs without adversely affecting its operations or produce greater amount of net income [5]. ROE is a financial ratio that
condition, the availability of assets readily convertible to cash without undue refers to how much profit a company earned compared to the total amount
loss, access to money markets and other sources of funding, the level of of shareholder equity invested or found on the balance sheet or it is what the
diversification of funding sources, both on- and off-balance sheet, the degree shareholders look in return for their investment. Further, it accentuates over
of reliance on short-term, volatile sources of funds, including borrowings the well management of the organization in order to channelize the capital of
and brokered deposits, to fund longer term assets, the trend and stability the shareholders in right direction to achieve the desired goals [4].
of deposits. Sensitivity to market risk is rated based upon, but not limited
Though economic development of a particular country is dependent on a
to, an assessment of the following evaluation factors: the sensitivity of the
number of factors such as industrial growth and development, modernization
financial institution's earnings or the economic value of its capital to adverse
of agriculture, expansion of domestic and foreign trade, its dependence to
changes in interest rates, foreign exchange rates, commodity prices, or
largest extent on the banking sector is undeniable and/or banks play a key
equity prices, the ability of management to identify, measure, monitor, and
role in improving economic efficiency by channelling funds from resource
control exposure to market risk given the institution's size, complexity, and
surplus it to those with limited access and/or the needy [6]. According to
risk profile, the nature and complexity of interest rate risk exposure arising
Zerayehu [7] a sound financial system is indispensable for a healthy and
from non-trading positions.
vibrant economy. The financial system in Ethiopia, which is characterized
The paper has used historical formation and/or years of existence in the as highly profitable, concentrated, and moderately competitive is dominated
industry so as to systematically analyse the effects of bank specific factors by banking Industry and it is also amongst the major under banked economy
over profitability. According to the information from the NBE (regulatory in the world. The development of a vibrant and active private banking
organ) Ethiopian commercial banks can be broadly categorize into three system that complements with the existing public sector work is considered
major strata’s: Large, long stayed commercial banks that have existed important to Ethiopia’s economic progress according to the professional
long before the financial sector reform measures are introduced (CBE and advice of group of experts working in well-known financial organization like
CBB), Medium: banks that are established immediately after the financial WB, AFDB, and IMF.
liberalization, banks that have existed from 15 to 20years are found in this
The rationale behind focusing on bank specific variables only is owing
category, and banks that have lived in the industry for less than a decade
to the existing less competitive and highly protected Ethiopian banking
are classified as small. Hence, all the target banks selected for this particular
environment. Moreover, the exogenous factors are not expected to differ
study are classified under the medium category since all of them have stayed
among the target banks that are selected for this particular study since all
15 or more years in the business. To be specific, Awash International Bank
are operating under the same financial system, same regulatory organ and
(AIB), Bank of Abyssinia (BOA), Dashen Bank SC (DAB), Nib International
are within the same geographic area (Ethiopia). Therefore, this paper solely
Bank SC (NIB), United Bank SC (UNB), and Wegagen Bank SC (WEB) are
seeks to examine the effect of bank specific variables on profitability using
the banks that were selected for the desired end and/or study.
CAMEL model and thereby tries to rank the overall financial performance of
selected private commercial banks. Accordingly, the researcher would try to
Statement of the Problem answer the following research questions.
1. What is the essence of CAMEL?
Performance of financial institutions is relevant from the policy point of view
because as finance- growth literature suggests, if banks become better- 2. What are the pros and cons of CAMEL model bank performance
functioning entities, it is expected to be reflected in strengthening capital measure approach?
buffer, safety and soundness of the financial systems. Efficiency estimates
3. Which private commercial banks are performing better under CAMEL
are leading indicators, as such, efficiency measurement of individual banks
model bank performance?
is an important research activity carried out by the central bank of the country
in order to identify the effects of deregulation, merger, market structure 4. Why does the CAMEL rating system play a crucial role in banking
as well as their scale and scope of activity. Segmenting the industry into supervision?
different strategic groups can help the banks position themselves and take
long-term overhauling of their delivery design process [1].
Research Objectives
Profit is the final goal of commercial banks in every aspects of their service.
All the strategies and activities performed are to realize this impressive General objective
objective. Beside these goals, commercial banks also have social and
economic goals. Though, the goal of this study is in connection with the The general objective of this study is to analyse the financial performance
first and foremost objective of profitability. Among different ratios used to of selected private commercial banks and to rank the respective private
measure the performance of commercial banks, Return on Asset and commercial banks based on their performances.
Return on Equity are the major ones [1]. On the other hand as noted by Specific Objectives
Mustafa [2] the two widely used profitability measurements in order to assess
commercial banks‟ performance are return on total assets (ROA) and return Specific objectives that are derived from the general objective and needed to
on total equity (ROE). These measures have been used by analysts and be addressed in the study are:
bank regulators is for, assessing industry performance and, on other hand
• To identify the key bank profit drivers and/or to measure the
for, forecasting market structure trends which is used to predict bank failures
significance level of the profit drivers in Ethiopian private commercial
and mergers and finally, for other purposes where a profitability measure is
banks
wanted [3].
• To evaluate the performance of the selected private commercials by
The growth of private banks has been much faster than state-owned banks,
rating each bank specific proxy(in a multi-dimensional way)
although more than two-thirds of assets are still held by state-owned banks.
It is also an evident that private banks show generally better performance Scope of the study
than state-owned banks. In seven out of nine years, private banks had higher
The study is going to use the data’s of six senior private commercial banks
ROA than state-owned banks. According to Haque [4] the role of Return on
for the years 2010-2014 (5years); however, results can be generalized to
Asset (ROA) is to display the percentage of profit which any company’s gain
cover all private commercial banks.
against its entire capital investment. It measures efficiency of the company
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Gebregiorgies E. J Account Mark, Volume 10:8, 2021

and became “CAMELS”. Each of the component factors is rated on a scale of

Literature Review 1 (best) to 5 (worst). According to Wirnkar &Tanko as cited on Gulgzoztorul,
rate of 1 stands for sound in every respect, a rate of 2 shows sound but has
Introduction modest weaknesses, 3 indicates weaknesses, 4 implies serious weaknesses
Banks play very significant role in the economies of the nation. The well- and finally a rating of 5 tells us critical weaknesses. In US this rating system
being of the economy is highly related to the soundness of its banking is used by federal banking supervisors like (Federal Reserve, Federal
system. Financial performance of banks refers to the capacity in generating Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of
sustainable profitability. According to Olweny and Shipho [8] a more the Currency (OCC) and other financial supervisory agencies to provide a
organized study of bank performance started in the late 1980‟s with the convenient summary of bank conditions.
application of Market Power and Efficiency Structure theories. Banks The main focus of this study is to analyse the performances of Ethiopian
Performance is measured at two levels, one is at the management and commercial banks by using CAMEL approach. As argued by Andreas and
regulatory level of the respective banks and another is at external rating Gabrielle, bank profitability is usually measured by internal determinants
agencies. The main objective of regulatory and supervisory rating systems which include bank specific variables. However, the main focus of this
is to measure the bank performance at internal level and its compliance with particular study is to investigate the impact of bank specific factors on banks
regulatory requirements to keep the bank on right track. These ratings are profitability. CAMEL approach is used because, according to Misra and
highly confidential and are only available to the bank management. External Aspal [6] “CAMEL rating criteria has become a concise and indispensable
credit rating agencies examine and evaluate the banks and issue ratings for tool for examiners and regulators”; and also as noted by Dakito Alemu [14]
the general public and investors in particulars Haseeb [9]. in recent days, the most commonly used approach of evaluating the overall
Olweny and Shipho [8] also argued that the Market Power theory assumes performance of financial institutions as shown/proven in different literatures
bank profitability is a function of external market factors, whereas the is CAMEL rating system and finally, as concluded by Kaya only 17% of the
Efficiency Structure theories and the balanced portfolio theory largely banks pointed out as successful by CAMELS system have failed which
assume that bank performance is under the influence of internal efficiencies means 83% of the prediction of CAMEL is correct in relation with their failure.
and managerial decisions. Camels in brief
According to Vincent Okoth bank performance is highly influenced by both Bank’s supervisory agencies are responsible for monitoring the financial
internal and external factors. The internal factors are within the scope of conditions of commercial banks and enforcing related legislation and
the bank and are easy to be manipulated and differ from bank to bank. It regulatory policy. Accordingly, CAMELS rating are one of the rating
includes bank size, capital, management efficiency and risk management systems applied for regulatory policy and to rank the overall performances
capacity Vincent Okoth. Athanasoglou argued that profitability is a function of commercial banks. CAMEL is a standardized financial rating system
of internal factors that are mainly influenced by a bank’s management having short form of five measures namely: Capital adequacy, Asset quality,
decisions and policy objectives such as the level of liquidity, provisioning Management efficiency, Earnings quality and Liquidity. CAMEL method is
policy, capital adequacy, expense management and bank size On the other commonly used for the evaluation of performance and ranking of banks.
hand external factors are macroeconomic variables such as interest rate, According to Yuva P [15] CAMEL rating is a subjective model which indicates
inflation, economic growth and other factors like ownership Vincent Okoth. financial strength of a bank, whereas CAMEL ranking indicates the banks
Various studies have used different models to evaluate banks performance. relative position with reference to other banks. Each of these performance
Data Envelopment Analysis (DEA) is one of the measures of bank indicators are described below:
performance which is used to measure the production or performance Capital adequacy
function of DMUs (decision making unit). DEA evaluates the input consumed
and outputs produced by DMUs and identify those units that comprise an Capital adequacy shows whether banks have adequate capital in order
efficient frontier and those that lie below this frontier. The standard DEA to meet the withdrawal demand of its customers in crisis period. In other
models have an input and output orientation. An input orientation identifies words, it reflects whether the bank has enough capital to bear unexpected
the efficient consumption of resources while holding outputs constant. losses arising in the future. According to Misra and Aspal [6] it is prominent
An output orientation identifies the efficient level of output given existing indicators of the financial health of a banking system. It is very useful for
resource consumption. The output orientation provides estimates of the a bank to conserve & protect stakeholders‟ confidence and preventing the
amount by which outputs could be proportionally expanded given existing bank from being bankrupt. According to Chen, 2003 to prevent the bank from
input levels R hoque [10] and Karan S. Thagunna [11]. failure it is necessary to maintain a significant level of capital adequacy. The
following ratios are included under this category by various researchers for
The other method for bank performance analysis is Z score. The Z score analysis purpose.
was first developed by NYU Professor Edward Altman in 1968. The Z score
methodology was developed to provide a more effective financial assessment Capital Adequacy Ratio (CAR) measures the ability of the bank to absorbing
tool for credit risk analysts and lenders. The model claims for more than loses arising from risk assets. The higher the ratio represents better
70% accuracy in predicting corporate bankruptcy [12]. The Z score method performance of the bank. According to Yuva P [15] it shall be computed as
examines liquidity; profitability; reinvested earnings and leverage which are tier I capital +tier II capital/risk weighted asset. Tier I capital represents for
integrated into a single composite score Roli Pradhan [13]. The Z score is Equity Share Capital + Disclosed Reserves and Tier II capital is the sum of
also a critical business tool manager utilizes to make informed business Undisclosed Reserves + General loss Reserves + Subordinate term debts
decisions to improve the financial health of the business by assessing the [16]. Debt to equity ratio (leverage ratio) represents the degree of leverage
factors contributing to poor financial health, which enables managers to of a bank. It shows how much proportion of the bank business is financed
initiate actions to be taken to improve the score of these factors contributing through equity and how much through debt. It is calculated by dividing sum
to financial distress. CAMEL rating approach is also other contributor in the of total borrowing and deposits with shareholders‟ net worth. Higher ratio is
financial performance analysis of banks. CAMELS rating is a supervisory an indication of less protection for the depositors and creditors and lower
rating system first developed in the US to label a banks overall condition. ratio is seen as better performance of the bank [6]. Advance to asset ratio
It was become functional to every bank and credit union in the US and indicates the proportion of loans and advances deployed to the total funds.
outside the US by various banking supervisory regulators. The short form Higher the ratio better is the availability of funds for loans and advances out
“CAMEL” refers to the five components of a bank’s condition namely: Capital of their total assets and vice versa. Jayanta k [16] government Securities to
adequacy, Asset quality, Management efficiency, Earnings, and Liquidity, total investment ratio shows the percentage of risk-free investment in bank’s
before the sixth component, Sensitivity to market risk, was added in 1997 investment portfolio. It will be computed as [(Investment in government

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Gebregiorgies E. J Account Mark, Volume 10:8, 2021

securities inside the country +Investment in government securities outside the banks or according to Yuva P [15] this ratio is a ratio to check efficiency
the country)/ Total Investment] × 100. Higher government securities to total of the bank in maximizing profit per employee. Improvement in profit per
investment ratio is an indication of risk-free investment in bank’s investment employee advocates efficiency of the management effective utilization of
portfolio. However, it may affect the return on investment because of lower employee as an input and profit as a measure of output. Expenditure to
return from government securities. income is one of the management efficiency measurement, which is used to
measures the amount of expenditure incurred to generate a 1 birr income.
Asset quality The lower the ratio is better performance of the management.
The quality of assets is an important parameter to gauge the strength of
Earning Quality
a bank. The logic behind calculating the asset quality is to determine the
employment of assets in investment using net income as a fraction of the The Earnings/Profit is a Conventional Parameter of measuring financial
bank total assets (ROA). Dakito Alemu [16] one important objective of the performance. Higher income generally reflects a lack of financial difficulties
financial sector reforms is to improve the quality of loan assets and assets and so would be expected to reduce the likelihood of failure of a bank. It is
have been classified into performing and nonperforming assets. Assets that another important parameter for judging the operational performance of a
have low quality usually have higher possibility to become a Non-Performing bank. Total income of a bank is divided into two parts. Income from core
Loan. Non-Performing loans are usually bad debts that are in default or they activities (i.e. income from lending operations) and income generated by
are near to be in default. According to Sangmi and Nazir [17] Asset quality non- core activities like investments, treasury operations, corporate advisory
is classified as: Standard assets are those assets that are performing and services etc. The excellence of earnings determines the capability of a bank
loan is paying interest and instalment at due date, further they do not carry to earn consistently. It mainly determines the profitability and productivity of
more than normal risk. Formerly, no provisions were required. Sub-standard the bank, explains the growth and sustainability in future earnings capacity.
assets are those assets that have been classified as non-performing for a In order to measure earning quality of the bank the following ratios were
period less than or equal to three quarters. In such cases, the Current net used in different literatures. (NIM) is an important measure of a bank’s core
worth of the borrower/guarantor or the current market value of the security income i.e. income from lending operations. NIM is the difference between
charged is not enough to ensure recovery fully. It has fully developed the interest income and the interest expended. In the computation of Net
weaknesses that jeopardize the liquidation of a debt. Doubtful assets are interest margin to total asset, NIM is expressed as a percentage of total
those assets that have remained substandard for 18 months. The provision assets. A higher spread indicates the better earnings given the total assets
of 100% of the provisions is to be made by the realizable value of the security and vice versa.
to which a bank has recourse. The quality of assets has been examined with
Net profit to total asset ratio reflects the return on assets employed or the
the help of following three ratios:
efficiency in utilization of assets. It is calculated by dividing the net profits
Net NPAs to Total Assets reflects the efficiency of bank in assessing the with total assets of the bank. Higher the ratio reflects better earning potential
credit risk and recovering the debts. In this ratio, the Net NPAs are measured of a bank in the future. Misra and Aspal [6] percentage growth in net profit is
as a percentage of total assets. The lower the ratio reflects, the better is the ratio of percentage growth in net profit after tax over the previous year
the quality of advances [6]. According to Misra and Aspal [6] and Jayanta or last year. Higher the ratio better is the profitability of the bank and vice
K [16] net NPAs to Net Advances is the most standard measure to judge versa. Operating profit to total asset ratio indicates how much a bank can
the assets quality, measuring the net nonperforming assets as a percentage earn from its operation after meeting its operating expenses for every birr
of net advances. Net NPA will be computed as Net NPAs = Gross NPAs – investment in total asset. Higher the ratio shows the better profitability of
(Provisions on NPAs + Interest on suspense account. Investments to total the bank and vice versa. The interest income to total income ratio reflects
asset ratio is used as a tool to measure the percentage of total assets locked the banks capability in generating income from its lending activities. Interest
up in investment. Alternatively, it indicates the extent of development of income includes income on loans and advances, interest earned on deposits
assets in investment as against advances. This ratio is used as a proxy to maintained in different banks. Non-interest income is any income earned by
measure the quality of assets. the banks other than interest income. Non-Interest income to total income
ratio of non-interest income to total income measures the income from
Management Efficiency various operations other than lending as a percentage of total income.
As per management is most important ingredient that ensures the sound
Liquidity
functioning of banks. It is another essential component of the CAMEL model
that guarantee the growth and survival of a bank. With increased competition Public deposit their money in banks mainly for two reasons, the first one is for
in the banking sector, efficiency and effectiveness have become the rule safety and the other is to earn interest income. Thus, repayment of deposits
as banks constantly strive to improve the productivity of their employees. along with timely payment of interest is of crucial importance for a bank. For
In order to satisfy customers, banks maintained extended working hours, this reason, banks should always maintain sufficient liquidity. Liquidity shows
flexible time schedules, outsourcing marketing etc. The performance of the ability of the banks to discharge their liabilities as and when they mature.
Management capacity is usually qualitative and can be understood through Or, it is the ability of the banks to convert non-cash assets into cash as
the subjective evaluation of Management systems, organization culture, and and when needed. In order to examine the liquidity position of banks, there
control mechanisms and so on. However, the capacity of the management are four ratios used by different authors. Liquid Assets to demand deposits
of a bank can also be gauged with the help of certain ratios as follows [17]. ratio measures the ability of a bank to meet the demand for withdrawal of
cash from demand deposits in a particular year. It is calculated by dividing
According to Yuva P [15] and Jayanta K 16] total advances to total deposits
liquid assets by total demand deposits. Liquid assets include cash in hand,
ratio measures the efficiency of management in converting the deposits
balances with banks in country and outside the country and money at call
available with the bank into high earning advances. Total deposits include
on short notice [16].
demand deposits, savings deposits, term deposits and deposits of other
banks. According to the above authors, total advances also include the Liquid assets to total deposits ratio indicates the ability of the bank to meet
receivables. Improvement and enlargement of business (total of deposits and its deposit obligations with available liquid funds. Total deposits include
advances) is the main function of banks. Increase in business per employee demand deposits, savings deposits, term deposits and other deposits. Liquid
is an important indicator of productivity of banks because employees are assets to total assets measure of liquidity indicate the percentage of a bank’s
generally considered as input and business as output of a bank. This ratio is total assets in liquid form. Higher the percentage better is the liquidity and
used to find out whether the bank is relatively under or over staffed. Higher the vice versa. Term deposit to total deposit ratio indicates that total proportion
ratio better is the productivity efficiency of the employees of the banks. Profit of term deposit in the total deposit. If the proportion of term deposit is more in
per employee is used to measure the productivity efficiency of employees of total deposit that is not good for long term survival of any bank. Lowest ratio

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Gebregiorgies E. J Account Mark, Volume 10:8, 2021

of term deposit to total deposit is favourable one [5]. significant. Interest income showed negative relation with the operational
efficiency and results were also statistically significant.
Empirical review
Ansarul Haque [4] evaluated the concurrent performance of chosen few
Siva and Natarajan [18] empirically tested the applicability of CAMEL and major Indian banks from 2009 -2013 following the global financial slump of
its consequential impact on the performance of SBI Groups. The study 2008. In order to judge their performance, he compares the financial position
found that CAMEL scanning helps the bank to diagnose its financial health of Banks and to prove the viability, he had used the parameters Return on
and alert the bank to take preventive steps for its sustainability. Prasuna Asset, Return on Equity and Net Interest Margin. In order to check whether
examined the performance of 65 Indian banks according to the CAMEL there is significant difference of profitability means among different banking
Model and concluded that better service quality, innovative products and groups, he used analysis of variance (ANOVA). The result indicates that
better bargains were beneficial because of the prevailing tough competition. there is no significant means in difference of profitability among various
Saminathan [15] evaluated financial performance of 18 private banks, 25 banking groups in respect to ROA and NIM, yet a significant means of
public banks and 8 foreign Indian banks for the purpose of ranking one difference is seen among the peer groups in terms of ROE. In the paper on
against the other. The result shows that there is a statistically significant financial performance of commercial banks, the financial performance of the
difference between the CAMEL ratios of the selected Public Sector Banks, two major banks namely J&K Bank and Punjab National Bank operating in
Private Sector Banks and Foreign Banks in India. northern India has been evaluated by using CAMEL model. Its result reveals
Abdulazeez [20] investigated the financial performances of Saudi commercial that the position of the banks under study is sound and commendable so far
banks during the period 2000-2013. A sample of 21 commercial banks their capital adequacy, asset quality, management capability and liquidity
comprising of 10 foreign owned banks and 11 Saudi domestic banks for the are concerned [17].
captioned 14 years period have been used in the study. Panel data Linear Srinivas and Saroja [21] compared and analysed the Financial Performance
Multiple Regression model and Ordinary Least Squares have been used in the of HDFC and ICICI Bank. For the purpose of analysis of comparative financial
present study to estimate the impact of the driver ratios like capital adequacy, performance of the selected banks by using CAMELS model with t-test. The
asset quality, operational efficiency, bank size, net loan to total deposits, result showed that there is no significance difference between the ICICI
liquid assets to total assets. On the financial parameters like Return on Equity and HDFC bank’s financial performance but the ICICI bank performance is
(ROE), Return on Asset (ROA), Net Interest Margin (NIM). The study found slightly less compared with HDFC. Reddy K. Sriharsha [22] analysed relative
that at the pool level, that capital adequacy, operational efficiency, bank performance of banks in India using CAMEL approach. It is found that
size, net loan to total deposits and liquid assets to total assets have positive public sector banks have appreciably improved indicating positive impact
and significant relationship with ROA but asset quality has negative and of the reforms in liberalizing interest rates, rationalizing directed credit an
significant relationship with ROA. Similarly, capital adequacy, bank size and Investments and increasing competition.
liquid assets to total assets have positive significant relationship with ROE,
whereas net loan to total deposits has positive but insignificant relationship Mulualem examined financial performance of 14 Ethiopian Commercial Banks
with ROE. Asset quality has negative and significant relationship and using CAMEL approach from year 2010 to 2014. The study used quantitative
operational efficiency has negative but insignificant relationship with ROE. research approach, and analysed by using multiple linear regression models
All the determinant variables excepting capital adequacy and operational for two profitability measures: ROE and ROA. Fixed effect regression model
efficiency of banks have positive significant relationship with NIM. Capital was applied to investigate the impact & relationship of CAMEL factors with
adequacy has positive but insignificant relationship with NIM and operational bank profitability measures separately. The empirical result shows that
efficiency has negative but significant relationship with NIM. Tarawneh found capital adequacy, Asset Quality and Management efficiency have negative
that the banks having high total capital, deposits, credits, or total assets relation whereas earning and liquidity shows positive relationship with both
does not always means that has healthier profitability performance. The profitability measures with strong statically significance except Capital
operational efficiency and asset management, in adding to the bank size, Adequacy which is insignificant for ROA whereas Asset quality for ROE.
positively influenced the financial performance of these banks. In the light
Dakito Alemu [14] studied banks performance with the title“ Assessment
of his empirical study he concluded that the operational efficiency and asset
of Banking Performance using Capital Adequacy in Ethiopia” to evaluate
management, in addition to the bank size, strongly and positively influenced
the financial performance of banking sector in Ethiopia and also to see the
financial performance of the banks.
relation between capital adequacy and bank’s performance of 8 banks for
Ahmad in his study of the financial performance of seven Jordanian the period of 2000-2013. In order to address these, he used both descriptive
commercial banks used ROA as a measure of banks performance and and econometric analyses. The descriptive analyses were made using
the bank size, assets management and operational efficiency as three CAMEL approach and central tendency measures. The result shows that, as
independent variables affecting ROA. He concluded that there is a strong compared to other banks NIB‟s overall performance was good. In addition
negative correlation between ROA and bank size and with operational to the descriptive data analysis, the study also employed regression model,
efficiency, while, find positive correlation between ROA and asset GLS, which is used to see whether capital adequacy which is measured
management ratio. Khizer in his study about profitability indicators of banks by the amount of shareholders fund affect the bank performance which is
in Pakistan for the period of 2006-2009 find that profitability is directly and
measured by Return on asset (ROA). The finding shows that, shareholders‟
positively affected by operating efficiency, assets management ratios, and
fund is the main factor that determines the performance of banking industry
size when using ROA as profitability indicator. The association between
Therefore; there exist positive relationship between capital adequacy and
profitability and other indicators is different, when using ROE as profitability
indicator. ROE is positively related with assets management and negative bank performance.
association was found with size and operating efficiency.
Rizwan Jan analysed financial performance of top ten Private commercial Conceptual Framework
private banks in Pakistan. The study used Regression analysis and
correlation technique in order to address the issue. Returns on asset The conceptual schema of the relationship between the bank performance
and interest income were taken as dependent variables while bank size, indicator (ROA) and bank specific variables is depicted in figure 1.
asset management and operational efficiency were taken as independent Research Methods
variables. The results showed that, ROA of the banks were strongly and
negatively influenced by the bank size. Operational efficiency is negatively For the purpose of the present study, the research instrument used is
related with the ROA. Other dependent variable interest income of the banks the CAMEL model which is the recent innovation in the area of financial
was strongly and positively influenced by the bank size and is statistically performance evaluation of banks.

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Gebregiorgies E. J Account Mark, Volume 10:8, 2021

Data analysis and presentation

Bank Performance Indicator
The ranking process
Management Efficiency
Capital Adequacy
As discussed earlier, capital adequacy has emerged as one of the major
indicators of the financial health of banks. Hence, it reflects the overall
financial condition of the banks and also the ability of management to meet
Source: Self-extracted
the need of additional capital. Capital also serves as an indicator whether the
Figure 1. Conceptual framework. respective bank has sufficient capital to absorb any possible shock or not.
Though capital adequacy can be scrutinized in a lot of ways; Total Equity
Research Design over Total Assets, Debt to Equity Ratio, and Advances to Assets Ratio has
been considered forth is particular study.
This particular study has employed quantitative research approach and
secondary data was used. Capital adequacy ratio
Sample Design As per the National Bank of Ethiopia (NBE) directive, Ethiopian banks are
required to maintain a minimum capital adequacy ratio of 8percent of their
Population risk weighed assets. As stated earlier, though there are a lot of ways to
According to recently availed information from the regulatory organ (NBE), compute CAR, however, capital to total assets ratio has been considered for
there are nineteen banks in Ethiopia, out of which, eighteen are commercial the sake of this particular study (Table 1).
banks and one is a development bank. Among the total nineteen banks As exhibited above, WEB, NIB and AIB held the rank from first to third
three of them are owned by the government and the remaining sixteen respectively and DAB is seen to be the last. Moreover, the average capital
are privately owned. Hence, the sixteen private commercial banks can be ratio for the study period is seen to be above the minimum requirement set
treated as population of the study. by the regulatory organ. However, three of the targeted banks (UNB, BOA,
Sample Frame and DAB) are seen to have less than peer average.

As stated earlier, amongst the total sixteen private commercial banks, six of Debt to equity ratio
them have stayed 15or more years in the business and the remaining ten This ratio indicates the degree of leverage of a bank. It indicates how much
private commercial banks have stayed less than or equal to ten years. Thus, of the bank business is financed through debt and how much through equity.
the sample frame of this particular study is private commercial banks that Higher ratio indicates less protection for the creditors and depositors and
have stayed 15 or more years. vice versa in the banking system (Table 2).
Sample Units, Sample Technique, and Sample size/Sam- Here, minimum debt to equity ratio indicates lessor indebtedness/obligation/.
pling Higher ratio indicates higher indebtedness which in turn may lead to liquidity
crunch. Hence, WEB is indicated to have minimum commitment to third
Out of the total sixteen private commercial banks, only six senior private
parties when compared with its peers whereas DAB is seen to be the most
commercial banks that had been in operation for 15 or more years were
indebted bank when it is compared with its peers.
selected for the purpose of the study (purposive sampling). In other words,
the bank selection is done following the historical time formation of banks. Advances to assets ratio
Data Source/Types of Data This ratio indicates the bank’s aggressiveness in lending. Though aggressive
lending (increasing the level of credit) might have its own limitations, better
Since it is all about the measure of private commercial banks performance in
(high) profitability is anticipated by doing so in general. It must be also noted
Ethiopia, the type of data for the study will be more of a quantitative so that that the total advances include receivables and higher ratio is preferred to a
it could be measured and ranked. In other words, though mixed research lower one (Table 3).
method is believed to be more efficient to address the shortcomings being
observed in each method, the quantitative method will be much helpful when In the above table, NIB is seen to be relatively at the top with highest average
we speak about performance measures. The data from the sample banks of 54.94 followed by BOA with an average score of 46.874. On the other
hand, WEB is the least performer in this regard with an average score of
were gathered from published financial statements of the respective private
41.598.
commercial banks & respective websites of the banks to be investigated, and
different bullet in sand publications of the NBE. The coverage of data for this Composite capital adequacy
particular study is from 2010-2014. In line with the afore-stated fact, various
On the basis of group averages of the three parameters selected to rank the
documents mainly from secondary sources like Books, Journals, Magazines,
capital adequacy status of the six banks: NIB, UNB, and BOA held from first
Reports and Internet were reviewed to demonstrate familiarity gaps. to third of the ranks respectively and AIB stood last in this composite capital
Data Collection Methods adequacy parameter (Table 4).

For this study purpose only secondary data was used and the data was Assets quality
collected from NBE, websites of private commercial banks, annual reports, The prime objective of measuring the assets quality is to ascertain the
financial statements and other published and unpublished sources. component of Non-performing Assets (NPAs) as percentage of the
Data Analysis total assets. In the Ethiopian case, it is worthy to mention Directive No.
SBB/43/2008 under the title “Asset Classification & Provisioning” that dictates
The ranking process of the targeted banks was accomplished using multi- the bank’s non- performing loan not to exceed 5%. Based on this directive
dimensional parameters in order to incorporate different aspects of each , loans or advances with pre-established repayment programs or overdrafts
bank specific variable. The results and/or ranks obtained in each bank and loans or advances that do not have a pre-established repayment
specific proxy were once again summarized into a grand group composite program is termed non-performing when principal and/or interest is due
rank-CAMEL so as to get the overall picture. and uncollected for ninety consecutive days or more beyond the scheduled

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Gebregiorgies E. J Account Mark, Volume 10:8, 2021

Table 1. Capital adequacy ratio.

Serial no. Year Capital Adequacy Ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 11.83 9.32 7.54 15.36 10.82 18.32 12.20
2 2011 12.93 9.08 9.53 16.47 11.66 16.59 12.71
3 2012 13.49 11.01 10.43 18.46 12.54 19.22 14.19
4 2013 11.47 10.94 10.36 18.22 12.04 17.61 13.44
5 2014 11.81 13.56 11.83 18.27 14.05 19.07 14.77
6 Average 12.30 10.78 9.93 17.35 12.22 18.16 13.46
7 Rank 3 5 6 2 4 1

Table 2. Debt-equity ratio.

Serial no. Year Debt-Equity Ratio (Times) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 7.45 9.74 12.25 5.51 8.24 4.46 7.94
2 2011 6.73 10.01 9.50 5.07 7.57 5.03 7.32
3 2012 6.41 8.08 8.58 4.42 6.97 4.20 6.45
4 2013 7.72 8.14 8.65 4.49 7.31 4.68 6.83
5 2014 7.47 6.37 7.45 4.47 6.12 4.24 6.02
6 Average 7.156 8.468 9.286 4.792 7.242 4.522 6.912
7 Rank 3 5 6 2 4 1

Table 3. Advances to assets ratio.

Serial no. Year Advances to Assets (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 39.60 50.21 40.87 42.64 44.34 43.09 43.46
2 2011 39.41 45.56 42.42 38.91 42.42 36.10 40.80
3 2012 46.11 47.30 46.37 44.82 46.49 42.72 45.63
4 2013 51.89 46.42 44.88 49.68 47.21 45.12 47.53
5 2014 52.13 44.88 42.94 50.32 42.47 40.96 45.62
6 Average 45.828 46.874 43.496 54.94 45.274 41.598 44.608
7 Rank 3 2 5 1 4 6

Table 4. Composite capital adequacy.

Bank CAR Debt-Equity Advances to Assets Group Rank
% Rank Times Rank % Rank Avg. Rank
AIB 12.30 3 7.156 3 45.828 3 3 3
BOA 10.78 5 8.468 5 46.874 2 4 4
DAB 9.93 6 9.286 6 43.496 5 5.67 5
NIB 17.35 2 4.792 2 54.94 1 1.67 1
UNB 12.22 4 7.242 4 45.274 4 4 4
WEB 18.16 1 4.522 1 41.598 6 2.67 2

payment or maturity. Therefore, Non-performing assets to gross loans, total Total investments to total assets
investments to total assets ratio, and Allowance for Doubtful Loans to Loans
outstanding ratio, and Allowance for Doubtful Loans to Total Assets ratio is Total investments to total assets indicate the extent of deployment of assets
considered to assess the asset quality of the respective banks. in investment as against advances. This ratio is used as a tool to measure
the percentage of total assets locked up in investments. A higher ratio
Total non-performing loans to gross loans means conservative policy of a bank to provide safeguard to the investments
This ratio reflects /measures the loss incurred due to poor loan quality. In this against NPAs (Table 6).
ratio, NPLs are measured as percentage of Total Loans. The lower the ratio Allowance for doubtful loans to loans outstanding
reflects, the better is the quality of advances (Table 5).
According to literatures, it is the most standard measure of asset quality
When the average NPAs ratio of each bank over the study period is measuring. In this case, highest average score means higher probability
observed UNB has least average score which makes it better performer than of un-collectability or default and minimum allowance for un-collectability
its competitors. Similarly, DAB& WEB stood 2nd and 3rd respectively. On means minimum level of default. Hence, the bank with higher AFDL will get
the contrary, the NPL status for NIB was on average around 4%during the the lowest rank and the rank with lowest AFDL will get the higher rank (Table 7).
study period.

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Table 5. NPLs to gross loans ratio.

Serial no. Year Non-Performing Loan Ratios (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 5.47 6.98 3.00 7.37 3.76 3.47 5.01
2 2011 3.81 3.97 3.38 5.04 3.35 3.51 3.84
3 2012 1.91 3.76 2.44 2.47 1.53 2.98 2.52
4 2013 2.29 2.75 2.97 3.76 2.53 2.70 2.83
5 2014 3.19 3.37 3.29 3.08 1.73 2.63 2.88
6 Average 3.334 4.166 3.016 4.344 2.58 3.058
7 Rank 4 5 2 6 1 3

Table 6. Total Investment to total assets ratio.

Serial no. Year Total Investment to Total Assets Ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 24.67 10.16 30.00 19.11 11.28 22.76 19.66
2 2011 27.55 19.29 26.66 22.98 21.36 24.21 23.68
3 2012 34.02 27.61 29.10 28.99 26.93 32.41 29.84
4 2013 29.39 27.91 31.76 27.13 32.41 32.91 30.25
5 2014 11.42 29.96 29.26 26.37 32.00 6.50 22.58
6 Average 25.41 22.986 29.356 24.916 24.796 23.758 25.202
7 Rank 2 6 1 3 4 5

Table 7. Allowance for doubtful loans to loans outstanding ratio.

Serial no. Year Allowance for Doubtful Loans to Loans Outstanding ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 4.70 7.42 2.18 3.89 3.63 3.96 4.30
2 2011 3.64 3.33 1.99 4.12 2.78 4.54 3.40
3 2012 2.70 2.57 2.15 2.72 2.33 2.43 2.48
4 2013 2.31 1.99 2.14 2.51 1.87 2.24 2.18
5 2014 2.27 0.00 0.00 0.00 1.46 1.67 0.90
6 Average 3.124 3.062 1.692 2.648 2.414 2.968 2.652
7 Rank 6 5 1 3 2 4

As exhibited above, AIB has held highest allowance for uncollectable loans banks and by discounting poorly managed ones. So as to see better picture
and advances followed by BOA. On the contrary, DAB is seen to have the in this regard, Non-interest Expense to Gross Expense ratio, Total Advances
least average probability of default. to Total Deposits ratio, Return on Equity, and Interest Income over Total
Assets ratios are considered.
Allowance for doubtful loans to total assets
Non-interest expense to gross expense
This ratio discloses the efficiency of bank in assessing the credit risk and
to an extent, recovering the debts. The lower the ratio reflects, the better is This parameter is used to gauge management’s control over expenses. The
quality of advances (Table 8). more the ratio the less efficient the management is to control its expenses.
Hence, better rank will be fetched if the ratio is minimal in contrast and worse
In line with the Allowance for Doubtful Loans to Total Assets Ratio, DAB,
will be there stultify the ratio is higher in contrast (Table 10).
UNB& NIB are amongst the banks with better quality of advances respectively
in contrast. As exhibited above, DAB, BOA, and AIB are seen to be relatively efficient
when compared with their peers and they held the ranks from 1st to 3rd
Composite asset quality respectively.
Based on the availed data, average group ratios of the above four asset
Total advances to total deposits
quality assessment ratios have been considered. Hence, UNB is in better
position with an average rank of 2.00 in NPLs to Gross Advance, Total The ratio measures the efficiency of management in converting the deposits
Investments to Total Assets, AFDL to Advances, and AFDL to Total Assets available with the bank into high earning advances. Total deposits include
ratio. Here, AIB is ranked sixth on the average of the four parameters demand deposits, savings deposits, term deposits and deposits of other
selected to assess assets quality. In other words, the composite ratio tells banks. According to literatures, total advances also include the receivables.
that AIB need to improve its asset quality in order to cope up with an/or excel
As per the average score displayed in table 11, NIB has the highest Advances
from its peers (Table 9).
to Total Deposits ratio 63.078% and it is followed AIB with 60.44% and the
Management efficiency least performer in this regard is DAB with an average ratio of 53.854%.
Management efficiency is another vital component of the CAMEL model Return on equity
that ensures the survival and growth of a bank. This parameter is used to
ROE is a measure of the profitability of a bank (Table 12).
evaluate management efficiency by assigning premium to better performing

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Table 8. Allowance for doubtful loans to total assets ratio.

Serial no. Year Allowance for Doubtful Loans to Total Assets Ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 1.86 3.73 0.89 1.66 1.61 1.71 1.91
2 2011 1.43 1.52 0.84 1.60 1.18 1.64 1.37
3 2012 1.25 1.21 1.00 1.22 1.08 1.04 1.13
4 2013 1.20 0.92 0.96 1.25 0.88 1.01 1.04
5 2014 1.19 0.00 0.00 0.00 0.62 0.68 0.42
6 Average 1.386 1.476 0.738 1.146 1.074 1.216 1.174
7 Rank 5 6 1 3 2 4

Table 9. Composite asset quality.

Bank NPAS to Gross Advances Total Invest.to Total A.F.D.L to Total A.F.D.L to Total Group Rank
Assets Loans Assets
% Rank % Rank % Rank % Rank Avg. Rank
AIB 3.334 4 25.41 2 3.124 6 1.386 5 4.25 5
BOA 4.166 5 22.986 6 3.062 5 1.476 6 5.5 6
DAB 3.016 2 29.356 1 1.692 1 0.738 1 1.25 1
NIB 4.344 6 24.916 3 2.648 3 1.146 3 3.75 3
UNB 2.58 1 24.796 4 2.414 2 1.074 2 2.25 2
WEB 3.058 3 23.758 5 2.968 4 1.216 4 4 4

Table 10. Non-interest expense to gross expense.

Serial no. Year Non-Interest Expense to Gross Expense Avg.
AIB BOA DAB NIB UNB WEB
1 2010 53.87 53.31 50.99 66.91 60.46 69.35 59.15
2 2011 50.42 54.49 50.13 61.86 52.92 71.95 56.96
3 2012 50.87 52.02 50.71 58.92 53.18 64.31 55.00
4 2013 55.31 52.07 51.20 59.78 58.83 65.46 57.11
5 2014 56.46 52.18 51.73 59.87 64.71 65.52 58.41
6 Average 53.386 52.814 50.952 61.468 58.02 67.318 57.326
7 Rank 3 2 1 5 4 6

Table 11. Total advances to total deposits ratio.

Serial no. Year Total Advances to Total Deposits Ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 51.52 61.35 49.77 61.69 55.32 63.06 57.12
2 2011 51.48 54.58 52.51 53.66 54.02 48.85 52.52
3 2012 59.81 57.56 57.75 63.53 60.45 61.93 60.17
4 2013 61.45 55.34 55.91 68.26 58.43 62.11 60.25
5 2014 77.94 55.64 53.33 68.25 56.08 54.92 61.03
6 Average 60.44 56.894 53.854 63.078 56.86 58.174 58.218
7 Rank 2 4 6 1 5 3

Table 12. Return on equity ratio.

Serial no. Year Return on Equity Ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 29.35 25.35 37.68 24.42 30.14 23.66 28.43
2 2011 32.08 28.98 38.71 23.61 30.13 27.06 30.10
3 2012 27.03 27.66 40.44 21.21 29.74 22.86 28.16
4 2013 28.06 21.52 31.33 18.75 18.56 19.99 23.04
5 2014 27.26 33.97 45.82 16.38 53.48 15.34 32.04
6 Average 28.756 27.496 38.796 20.874 32.41 21.782 28.354
7 Rank 3 4 1 6 2 5

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Profit after tax is expressed as a percentage of equity and average score The interest income to total income ratio reflects the banks capability in
of 38.786%, 32.41%, and 28.756% were registered for DAB, UNB and AIB generating income from its lending activities. Interest income includes
and it has given them the chance to hold 1st to 3rd of the available ranks income on advances, interest on deposits including interest for the balances
respectively. On the other hand, NIB is the one who held the (6th) rank with maintained with the regulatory organ (NBE) (Table 16).
an average rate of return of 20.874% to its shareholders.
As exhibited above, BOA is on top position with highest average score of
Interest income over total assets 63.102 followed by UNB and UNB with average scores of 60.072 and 57.934
respectively. DAB is seen to stand last with average score of 50.102.
It is a measure of the interest income earned as percentage of total assets
during the study period. Net interest margin (NIM) to total assets
As exhibited above in table 13, BOA and UNB has scored above the average NIM (Spread) is the difference between the interest income and the interest
score during the study period whereas the interest income score of the expended. It is expressed as percentage of total assets. A higher spread
remaining four banks during the study period is seen to be below the average indicates the better earnings given the total assets (Table 17).
score of the peer banks. In this regard BOA, UNB, and AIB are ranked from
In this parameter, NIB, WEB, and UNB have held the rank from 1st to 3rd
first to third respectively whereas DAB has stood 6th with an average interest
with average net interest margin ratio of 3.434, 3.416, and 3.182 respectively.
income ratio of 4.702% during the period of analysis.
DAB scored the last position with average net interest margin of 2.368. Thus,
Composite management efficiency DAB’s NIM is very narrow when compared with its peers.
On the basis of group averages of the four ratios AIB and BOA has held the Composite earning quality
first rank (2 in this case) based on average of the two similar ranks with an
Based up on the group averages of three indicators of quality of earning NIB,
average score of (2.75), followed by UNB with average score of 3.25. On the
BOA, and WEB held the ranks from 1st to 3rd respectively. The last position
other hand, WEB has held the last position and it is seen to be less efficient
in the composite earning quality parameter is held by DAB (Table 18).
in controlling its general expenses in contrast (Table 14).
Earning quality Liquidity
Liquidity for a bank is a crucial aspect which represents its ability to meet its
Earning quality reflects quality of a bank’s profitability and its ability to earn
financial obligations. It is of utmost important for a bank to maintain correct
consistently. Therefore, Net Profit to Total assets, Interest Income to Total
level liquidity. Hence, Liquid Assets to Total Assets, Liquid Assets to Total
Income, and Spread or Net Interest Margin (NIM) to Total Assets, are the
Deposits, and Liquid Assets to Demand Deposits are considered.
ratios considered to assess earning quality in the targeted banks.
Net Profit to total assets Liquid assets to total assets
The ratio reflects the return on assets employed or the efficiency in utilization This ratio measures the liquidity available to the depositors of a bank.
of assets. It by dividing the net profit with total assets of the bank. The higher Liquid assets include cash in hand, balance with NBE, balance with other
the ratio the better the earning potential of the bank will be (Table 15). banks (both in Ethiopia and abroad), and money at call and short notice.
Total deposits include demand deposits, term deposits and deposits of
As exhibited above, WEB is at the top with an average ratio of 3.586 followed
other financial institutions (Table 19). As exhibited above, UNB, NIB, and
by DAB and AIB with 3.464 and 3.384 respectively. On the other hand, BOA
is on the floor when compared with other peers. AIB held from 1st to 3rd with an average ratio of 36.726, 36.226 and 36.06
respectively in this particular parameter. To the contrary, BOA is seen to be
Interest income to total income at the bottom of the rank with an average ratio of 32.278.
Interest income is considered as prime source of revenue for banks.

Table 13. Interest income over total assets ratio.

Serial no. Year Interest Income over Total Assets (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 3.81 4.17 3.91 4.45 4.26 4.30 4.15
2 2011 3.90 5.11 4.12 4.68 4.39 3.91 4.35
3 2012 5.60 6.04 5.12 5.24 5.91 5.29 5.53
4 2013 5.99 4.91 5.17 6.24 6.03 5.63 5.66
5 2014 6.92 6.51 5.19 5.31 6.09 5.87 5.98
6 Average 5.244 5.348 4.702 5.184 5.336 5 5.134
7 Rank 3 1 6 4 2 5

Table 14. Composite management efficiency.

Bank Total Advances to Total ROE Interest Income Over Non-Interest Expense to Group Rank
Deposits Total Assets Gross Expense
% Rank % Rank % Rank % Rank Avg. Rank
AIB 60.44 2 28.756 3 5.244 3 53.386 3 2.75 1
BOA 56.894 4 27.496 4 5.348 1 52.814 2 2.75 1
DAB 53.854 6 38.796 1 4.702 6 50.952 1 3.5 3
NIB 63.078 1 20.874 6 5.184 4 61.468 5 4 4
UNB 56.86 5 32.41 2 5.336 2 58.02 4 3.25 2
WEB 58.174 3 21.782 5 5 5 67.318 6 4.75 5

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Table 15. Net Profit to total assets ratio.

Serial no. Year Net Profit to Total Assets Ratio (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 3.12 2.23 2.62 3.37 2.95 3.88 3.03
2 2011 3.57 2.49 3.07 3.46 3.00 4.01 3.27
3 2012 3.30 2.63 3.72 3.46 3.39 4.03 3.42
4 2013 3.42 2.14 3.07 3.27 2.14 3.30 2.89
5 2014 3.51 3.97 4.84 2.76 2.15 2.71 4.05
6 Average 3.384 2.692 3.464 3.264 2.726 3.586 3.332
7 Rank 3 6 2 4 5 1

Table 16. Interest income to total income.

Serial no. Year Interest Income to Total Income Avg.
AIB BOA DAB NIB UNB WEB
1 2010 44.17 55.86 50.05 47.84 49.12 43.72 48.46
2 2011 42.55 60.20 47.06 50.68 53.72 38.64 48.81
3 2012 60.20 68.76 52.02 57.11 62.38 51.98 58.74
4 2013 59.81 68.74 56.19 67.02 66.37 61.51 63.27
5 2014 63.41 61.95 45.70 67.02 68.77 61.74 61.43
6 Average 54.028 63.102 50.204 57.934 60.072 51.518 56.142
7 Rank 4 1 6 3 2 5

Table 17. Net interest margin to total assets ratio.

Serial no. Year Net Interest Margin (NIM) to Total Assets (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 1.86 2.15 1.89 2.96 2.49 3.00 2.39
2 2011 1.83 2.86 1.90 2.99 2.51 2.67 2.46
3 2012 3.22 3.51 2.78 3.41 3.64 3.62 3.36
4 2013 3.55 2.85 2.69 4.22 3.55 3.97 3.47
5 2014 4.22 3.71 2.58 3.59 3.72 3.82 3.61
6 Average 2.936 3.016 2.368 3.434 3.182 3.416 3.058
7 Rank 5 4 6 1 3 2

Table 18. Composite earning quality.

Bank Net Profit to Total Assets Interest Income to Total NIM to Total Assets Group Rank
Income
% Rank % Rank % Rank Avg. Rank
AIB 2.46 5 60.91 2 2.94 5 4.00 4.5
BOA 2.00 6 70.61 1 3.45 1 2.67 2
DAB 2.62 3 59.90 5 2.89 6 4.67 6
NIB 2.80 1 60.30 3 3.42 2 2.00 1
UNB 2.61 4 59.99 4 3.20 4 4.00 4.5
WEB 2.72 2 55.98 6 3.40 3 3.67 3

Table 19. Liquid assets to total assets ratio.

Serial no. Year Liquid Assets over Total Assets (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 50.89 47.17 42.54 51.38 55.55 52.87 50.07
2 2011 40.02 39.79 42.48 51.24 46.07 51.37 45.16
3 2012 26.48 30.62 32.96 36.02 32.58 33.44 32.02
4 2013 24.04 19.46 30.69 24.66 20.67 26.70 24.37
5 2014 38.07 24.35 29.79 17.83 28.76 15.92 25.79
6 Average 35.09 32.278 35.692 36.226 36.726 36.06 35.482
7 Rank 4 6 5 2 1 3

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Liquid assets to total deposits As exhibited above, AIB (179.072), BOA (164.752), and UNB (158.384) held
the ranks from 1st to 3rd respectively based on the higher average liquidity
This ratio measures the liquidity available to the depositors of a bank. It is score of the target banks. In contrast, WEB is seen to lag behind when
calculated by dividing the liquid assets with total deposits (Table 20). compared with its peers.
In this particular parameter, NIB, WEB, and AIB are seen to have better Composite liquidity
liquidity to depositors and they have held from 1st to 3rd of the rank in this
regard with an average liquidity ratio of 50.824 , 50.692 and 47.64. On the Based on the group average ratios of the above three parameters, UNB
other hand, BOA is seen to be in the lowest position with an average liquid (1.33), AIB (2.67), WEB (3.33) has held from first to third unlike BOA who
asset (LA) to total deposit (TD) ratio of 39.192. ranked 6th (Table 22).

Liquid assets to demand deposits Grand composite ranking (overall performance)

This ratio measures the ability of a bank to meet the demand from demand As exhibited below, the composite ratings of the respective banks have been
deposits in a particular year. In order to provide higher liquidity for depositors, calculated in order to assess the overall performance of private Ethiopian
bank has to invest these funds in highly liquid form. It is calculated by dividing commercial banks by CAMEL model.
the liquid assets with total demand deposits (Table 21). Table 23 depicts the group and/or grand ranking of the medium banks of

Table 20. Liquid assets to total deposits ratio.

Serial no. Year Liquid Assets to Total Deposits (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 66.21 57.64 51.80 74.34 69.31 77.39 66.12
2 2011 52.27 47.67 52.58 70.66 58.67 69.51 58.56
3 2012 34.34 37.26 41.05 51.06 42.36 48.47 42.43
4 2013 28.47 23.20 38.24 33.88 25.57 36.75 31.02
5 2014 56.91 30.19 37.00 24.18 37.99 21.34 34.60
6 Average 47.64 39.192 44.134 50.824 46.78 50.692 46.546
7 Rank 3 6 5 1 4 2

Table 21. Liquid assets to demand deposits ratio.

Serial no. Year Liquid Assets to Demand Deposits (%) Avg.
AIB BOA DAB NIB UNB WEB
1 2010 292.34 242.99 193.55 234.38 218.04 171.53 225.47
2 2011 201.00 181.98 182.68 202.22 174.12 132.85 179.14
3 2012 146.45 154.74 131.46 147.65 158.70 119.81 143.13
4 2013 108.57 95.78 142.08 106.17 91.20 92.38 106.03
5 2014 147.00 148.27 142.15 76.29 127.72 57.99 399.90
6 Average 179.072 164.752 158.384 153.342 153.956 114.912 210.734
7 Rank 1 2 3 5 4 6

Table 22. Composite liquidity.

Bank Liquid Assets to Total Assets Liquid Assets to Total Liquid Assets to Demand Group Rank
Deposits Deposits
% Rank % Rank % Rank Avg. Rank
AIB 35.09 5 47.64 3 179.072 1 3 2
BOA 32.278 6 39.192 6 164.752 2 3.5 6
DAB 35.692 4 44.134 5 158.384 3 4 5
NIB 36.226 2 50.824 1 153.342 5 2.667 4
UNB 36.726 1 46.78 4 153.956 4 3 1
WEB 36.06 3 50.692 2 114.912 6 3.667 3

Table 23. Grand composite ranking (overall performance).

Bank C A M E L Average Rank
AIB 3 5.25 2.75 4.00 3 4.03 6
BOA 4 4.50 2.75 2.67 3.5 3.68 3
DAB 5.67 2.75 3.5 4.67 4 4.00 5
NIB 1.67 2.75 4 2.00 2.667 2.88 2
UNB 4 2.00 3.25 4.00 3 2.70 1
WEB 2.67 3.75 4.75 3.67 3.667 3.70 4

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Gebregiorgies E. J Account Mark, Volume 10:8, 2021

Ethiopian Private commercial banks for the period 2010-2014. Hence, UNB, asset quality, earning ability and liquidity. Therefore future researcher is
NIB, and BOA held from 1st to 3rd of the rank based on CAMEL model recommended to consider additional financial ratios.
overall performance. As discussed earlier, NIB was on top position with
The CAMEL model is useful rating tools for banking sectors, however, the
capital adequacy ratio parameter, while DAB got lowest rank. Under the
tool can be equally be applicable to other related financial institution Like
asset quality parameter, UNB held the top rank while AIB held the lowest
Micro Finance Institution and Insurance Companies. Thus, future research
rank. Under management efficiency parameter the top rank has been taken
is recommended to use the CAMEL model for such kind of institution.
by AIB& BOA and jointly and the lowest rank has been held by WEB. In terms
Furthermore bank performance is now a day’s seen from the perspective
of earning quality parameter, NIB got the top rank and BOA held the second
of economic value added (EVA) in addition to the usual ROA and ROE
rank & WEB held the third rank. DAB got the last rank. Under the liquidity
measures.
parameter NIB stood first and DAB held the lowest.
To the financial institutions
Conclusion The Ethiopian banking system need to give due emphasis to efficiency
objectives so as to stay competitive and more resilient to economic shocks
CAMEL rating model plays a crucial role in the supervisory process and in
Banks are advised to equip their staffs with comprehensive knowledge about
identifying Problematic Banks. The finding of the CAMEL model rating revels
essence of CAMEL and CAMEL rating. Moreover, strong bond between
that the banks under the study had different ranking on the CAMEL model.
banks and bank supervisors should be in place all the time.
This is because mainly due to bank specific related factors and different
business experience in the Banking industry. The study tried to investigate Ethiopian commercial banks in general and private commercial banks in
the effects of internal determinants of profitability on senior Ethiopian private particular need to develop their credit risk management capacity in order
commercial banks over the period 2010-2014 and thereby ranked the overall to avoid poor performance of assets that mainly emanate from loans and
performance of each bank based on CAMEL model. advances so as to boost their profitability
The study used secondary panel data obtained from different sources such The Ethiopian commercial banks in general and Ethiopian private commercial
as National Bank of Ethiopia (NBE), the websites & financial statements of banks in particular need to venture into on-traditional areas and generating
the respective senior domestic commercial banks. The level of understanding income through diversified activities other than the core banking activities in
about CAMEL model in the targeted private Ethiopian commercial banks is order to enhance profitability and sustain growth.
very limited and the supervisory organ is not also practicing the model in its
fullest (well-articulated) form as per the fact gathered during the study. Hence,
neither the management members at the respective banks nor the practice in
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