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Overall Bank Ranking Report

These bank rankings are compiled from the financial statements issued by the banks at the end of the year as required by the Central Bank of Kenya. Banks are assessed based on selected key parameters in the following measures a) Asset Quality   b) Capital Adequacy  c) Profitability  d) Liquidity and  e) Efficient use of assets. It is from their individual performance in the ten key parameters that we have always used for the banking survey that form the financial rankings in their respective Tiers and overall performance.

The 10 Ranking Criteria used

1. Total Assets

Here, we assess the cumulative asset portfolio owned by banks. We rank banks according to the volume of assets they own. However, this alone is not a good measure of a bank’s performance as a large portion of a bank’s assets could be non-performing. What adds to the bank’s bottom line is the quality of assets it owns. Our contention here is that a large bank is much more difficult and challenging to run than a small one. This measure is purely a reward for size.

2. Profit Before Tax

Every banks desires to maximize its profits. A high level of profitability is desirable, especially in relation to other peer banks, as it is best regarded as earnings generated in relation to the resources invested in the bank. One can associate consistent increment in profits with stability. PBT is an overall parameter upon which a bank’s continued existence in business is justified.

3. Returns on Average Assets (ROAA)

This is a ratio of profits before tax to average total assets. This is a modification from our previous assessment where we used total assets at the end of the financial year to calculate this ration. What we have done this year is to add up the total assets at the beginning of the year and at the end of the year and divided by 2 to get the average. Shareholders are interested mainly in the return on their investment. A higher ratio is desirable.

4. Return on Average Core Capital (ROACC)

This is also a modification of previous assessment previously, we have used the ratio that reflects the level of profitability on shareholders’ funds. This year’s ratio, Return on Average Core Capital is a better measure because it averages the actual capital invested in the bank at the beginning and end of the year and works out a return on it. Using core capital at the end of the year would be unfair for banks that receive a capital injection on the very last day of the year because we would be assuming that that capital is what they started with at the beginning of the year.

Important to a bank’s capital position is a strong and steady earning with a low dividend payout, which allows earnings to be retained to boost the capital base and therefore avail more resources to the institution for the purpose of enhancing its profits. A higher ratio is desirable.

5. Average Cost of Funds

The ability of the bank to acquire external funding cheaply to boost its investments is a critical measure. There are two main sources of funds for the bank – deposits from customers and borrowed funds, which the bank then uses to generate income. This ratio therefore, is a measure of how cheaply, or expensively these funds have been acquired. It reflects the ease with which a bank is able to secure such funds. A lower rate is desirable.

6. Efficiency Ratio (Cost Income Ratio)

By taking the total operating expenses, which includes the bank’s overheads and weighing it against the total operating income, the resulting ratio is referred to as the cost income ratio, which is regarded as measure of efficiency. A lower ratio is desirable.

7. Total Non-Performing Loans to Total Advances

Non-performing loans is the single most important threat that a bank can face. To assess its magnitude, it is weighed against the total portfolio of all loans and advances that the bank has extended. A high ratio of non-performing loans to advances is a reflection of imprudent lending practice and poor credit management. It poses a threat to customer’s deposits. A low ratio is therefore desirable.

8. Non-Performing Loans Provision to Operating Income

Loans form a good chunk of a bank’s assets. But banks generally fail because of bad loans. When loans become non-performing, a bank is expected to make provisions for the eventuality that they may not be repaid. The provisions are specific to the individual loans. This ratio therefore measures how far the provisions are covered by the bank’s operating income. If the provisions suck up the entire operating income, meaning it is at 100 per cent and over, the bank is in trouble. Such a bank is likely to be struggling for survival.

The ratio of NPL provisions to operating income should be reviewed especially in relation to the bank’s current and future earning positions. However, higher provisions generally mean there are loan problems. This ratio measures a bank’s asset quality.

9. Core Capital to Total Deposit Liabilities

This ratio measures the level capital adequacy of a bank in relation to the amount of deposits held by it. For a bank, deposits are liabilities. From this ratio, we are able to determine the level of protection depositors have in the event of the bank winding-up. Depositors’ funds rank in priority before capital so depositors only lose money to the extent that its deposit base is higher than its capital. The higher the ratio, the higher the level of protection available to depositors since the bank is able to absorb a greater level of unexpected losses before becoming insolvent.

10. Quick Assets to Total Liability

This is one of the measures of a bank’s level of liquidity at any particular time. Liquidity in banking is difficult to measure because a bank’s liquidity position changes almost daily. However, we must strive to measure liquidity in the best way possible since it is the lack of liquidity, which may bring about the collapse of a bank if it becomes unable to pay its depositors, who form the largest chunk of a bank’s total liabilities. Generally, the more a bank invests in long-term assets, like long-term loans, the less they are able to meet unforeseen deposit withdrawals. Therefore, a higher ratio is desirable.