Effective ratios on financial performance with camels approach: An application of panel regression on commercial banks in Turkey

Measuring the financial performance of banks, which have an important place in the financial system today, is vital for banks to have a sound structure and to ensure economic stability. The existence of a large number of ratios that can be used in the performance evaluation of the bank is an important problem in assesing the determinants of the performance of the banks. In this study, factors effecting financial performance of commercial banks are determined based on the CAMELS performance evaluating system commonly used in this field. The purpose of this study is to determine which financial ratios concerning CAMELS system are effective on financial performance of the banks. In this sense, rates affecting financial performance of 23 commercial banks running on the period of 2003-2013 in The Bank Assocation of Turkey (BAT) are determined by using panel regression method. In the analysis, three different models are established for determinants which effect the financial performance in commercial banks. The dependent variables of models are namely ratios of return on equity, return on assets and interest income/ interest cost. As a result, CAMELS components including profitability (total income/total expenditure), asset quality (non-performing loan /total credits and receivables), management (net profit per branch), sensitivity to market risks (interest income /total assets) and control variables (group share and year of operation of the bank) were found to be effective factors in the bank financial performance. On the other hand, it became clear that CAMELS components including capital (capital adequacy), liquidity (liquid assets/short-term liabilities), balance sheet FX position/equity (for evaluating the effect of change in the exchange rate on profitability and capital of the bank) were found not to be effective factors in the financial performance of the bank. When the results of the three models analyzed by the CAMELS approach, it is concluded that the most significant factor in terms of financial performance of the bank is profitability. On the other hand, the management and sensitivity to market risks components of the CAMELS approach may also be considered to be effective in bank financial performance. Keywords: Bank, Financial Performance, CAMELS, Panel Regression Analysis