CAMELS analysis

Overview

CAMELS analysis refers an analysis performed on banks, usually to determine their credit worthiness.

Factors

Camels analysis evaluates a banks health on the basis of the following factors, each of which corresponds to one of the letters in the acronym, CAMELS.

• Capital Adequacy
• Asset Quality
• Management
• Earnings
• Liquidity
• Sensitivity - this is sensitivity to various risks

Considerations

When doing a CAMELS analysis, it is important to understand the interplay among the factors. For instance, if the bank is highly leveraged (low capital), it may still be a good credit if its asset quality is very high. On the other hand, if they are very sensitive to risks, so that asset quality could deteriorate quickly, then the bank may be a bad credit.

• Capital Adequacy plays against asset quality - Poor capital position is mitigated by strong asset quality
• Earnings plays against liquidity - if a bank is generating strong cash flow, this can mitigate against poor liquidity
• Earnings plays against asset quality - Losses from poor assets can be recouped easily with strong earnings. Additionally, strong earnings is sometimes achieved by lending further down the risk curve. The key is to be charging enough interest to cover risks.