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CAMEL Analysis – The good, the bad, and the chronically mispriced

05/07/2019 - 12:27

CAMEL analysis: A fundamental framework for understanding and ranking commercial bank operations. In this report we examine the entire universe of 17 listed Vietnamese banks based on the old-school CAMEL framework, a fundamental approach to analyzing banks that focuses on Capital, Asset quality, Management, Earnings, and Liquidity. Our analysis is based on 2018A audited financial statements and seven-year trends in 67 bank-related metrics (largely financial ratios). Not surprisingly, the results are a mixed bag: asset quality has improved notably across the sector in recent years, but balance sheets remain highly leveraged and the liability structure of most banks is somewhat less than ideal.

Stock implications. A bank’s CAMEL score does not by itself imply that the stock is a “Buy” or “Sell”. Valuations and future expectations of business performance are critical to make that decision. Also, our reliance on FiinPro data for this exercise has limitations common to all data aggregators; a closer examination of the individual banks’ published disclosures and discussions with management teams are required for a more complete understanding. However, the CAMEL framework provides us with a good platform to search for hidden diamonds and/or lumps of coal, as well as a solid reference on the overall sector trends. Among the four banks in our coverage universe, we continue to recommend a barbell strategy comprising 1) a core long position in VCB as a proxy on Vietnam’s economic development and 2) an allocation to STB as an undervalued turnaround play (think risk-reward).

Ranking the banks. In our opinion, bank analysis is a mix of science and art. This view is reflected in our application of the CAMEL model, an old-school fundamental analytical framework that takes a bottom-up approach based on quantifiable metrics (i.e., ratio analysis) with a dash of qualitative judgement. The overall results can be seen in the chart at left. Note that lower scores representing stronger quality.

Implications for investors? We believe that banks with stronger CAMEL rankings deserve a premium valuation relative to weaker banks. This is the case with VCB, which scores highly and trades at a sector-high 4.2x 2018 P/BV (source: Bloomberg). By contrast, MBB trades at just 1.5x 2018 P/BV despite generating the same CAMEL score as VCB. We almost hesitate to mention TCB (Not Rated), but its sector-high CAMEL score of 1.9 doesn’t match up to its 1.5x P/BV valuation either.

FOL cap drives the anomaly. We attribute the mismatch between fundamentals and valuation to market inefficiencies created by these banks’ full FOL status. This anomaly may eventually correct as the market develops (NVDRs might represent a solution). But reaping the potential rewards is likely to require patience, and foreign investors must also consider the risks related to FOL premiums and settlement issues. Ultimately, this exercise bolsters our cautious tactical view on full-FOL stocks.

For the complete report, please access here: Banks — CAMEL_05.07


Matthew Smith, Head of Research, matthew.smith@yuanta.com.vn

Tanh Trantanh.tran@yuanta.com.vn

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