Banking Ratios and CAMELS Rating To Look at While Buying a Small Bank
If you’re interested in buying a small bank, what should you focus on? Experts suggest that you look into the banking ratios and the CAMELs rating. These two factors determine the success rate and the bank’s profitability that you should consider. Whenever you buy a small bank, the competition may be slightly difficult to handle. That is the main reason you should do your due diligence properly. Here are some important aspects you should focus on when you wish to buy a small bank.
Banking ratios such as the liquidity ratio must be a focus when deciding to buy a small bank. How much capacity does the bank have to make up for the money that constantly flows in and out of the bank system? Pay attention to this when you wish to purchase a bank. Consider the business flow and management type applied to sustain that ratio. If the ratio is too high or too low, then the bank is not a good investment at all. But, if the ratio is within the middle, then it most like maintains its function at an optimal level. Look into efficiency ratios of the bank, it gives you an idea how much money does it takes for the bank to make one dollar. Look into the loan loss reserves, the loan portfolio.
The CAMELS rating offers you authorized insight on a bank’s performance. This is a U.S. supervisory rating that focuses on the component aspect of a bank, namely: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. This system is used by the United States in order to qualify the functionality banks. Although the rating (1 being strongest and 5 weakest) isn’t shown to the public, the top management of the banking company has access to this data. If you wish to purchase the bank based on this rating, make sure you have access to this data through proper measures taken. Some of the things to be review 1. Review regulatory reports, 2. Review portion of loan portfolio 3. Review ALLL methodology and process. 4. Review portfolio of HTM securities for impairment, 5. Review minutes 6. Review call reports, and external audit.
When you wish to buy a small bank, always consider these two factors. Experts suggest that this will help you identify a functional bank from a struggling one. The methods that surround that particular bank of interest should meet market demands, and with the patterns established through the ratios and the CAMELS rating, you will know if a small bank is worth the purchase.