Learning Objectives:

  • Apply the CAMELS framework to bank analysis.

  • Calculate and interpret capital adequacy, asset quality, earnings, and liquidity ratios.

  • Understand local and international benchmarks for key ratios.

5.1 The CAMELS Framework

The GICP course provides comprehensive coverage of the CAMELS framework (Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to market risk) . This is the industry-standard method for assessing bank performance.

5.2 Capital Adequacy Ratios

The HKU Business School course examines “how banks manage regulatory capital” .

  • Common Equity Tier 1 (CET1) Ratio: CET1 capital ÷ Risk-Weighted Assets.

  • Tier 1 Capital Ratio: Tier 1 capital ÷ RWA.

  • Total Capital Ratio: Total capital ÷ RWA.

  • Leverage Ratio: Tier 1 capital ÷ total exposure.

5.3 Asset Quality Ratios

  • Non-Performing Loans (NPL) Ratio: NPLs ÷ Total Loans.

  • Provision Coverage Ratio: Loan loss reserves ÷ NPLs.

  • Net Charge-Off Ratio: Net charge-offs ÷ Average loans.

5.4 Earnings Ratios

  • Return on Equity (ROE): Net income ÷ Shareholders’ equity.

  • Return on Assets (ROA): Net income ÷ Total assets.

  • Net Interest Margin (NIM): NII ÷ Average earning assets.

  • Efficiency Ratio: Non-interest expenses ÷ Revenue.

5.5 Liquidity Ratios

  • Loan-to-Deposit Ratio: Total loans ÷ Total deposits.

  • Liquidity Coverage Ratio (LCR): HQLA ÷ Net cash outflows over 30 days.

  • Net Stable Funding Ratio (NSFR): Available stable funding ÷ Required stable funding.

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