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MODULE 5
THE MANAGEMENT OF CAPITAL

COMMERCIAL BANK MANAGEMENT

The Key Topics in Module 5

AN OVERVIEW OF CAPITAL ADEQUACY PLANNING TO MEET

CAPITAL AT BANK CAPITAL REQUIREMENTS

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An overview of Capital at Bank

 The Tasks Capital Performs
 Absorbing unanticipated losses to inspire public confidence and allows the
institution to continue as a going concern.
 Protecting uninsured depositors, bondholders, and creditors in the event of
insolvency, and liquidation.
 Protecting FI insurance funds and the taxpayers
 Protecting the FI owners against increases in insurance premiums
 Funding the branch and other real investments necessary to provide financial
services

An overview of Capital at Bank

 Types of Capital in Use
• Common Stock
• Preferred Stock
• Surplus
• Undivided Profits
• Equity Reserves
• Subordinated Debentures

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Measuring Capital
 Market value and Book value of Capital
• Market value of an FI’s capital is the difference between the market values of its assets
and its liabilities. It is also called the economic net worth.
• Book value is defined as the historical cost basis for valuing an institution's assets and
liabilities, and therefore the net worth or equity.
 The Discrepancy between the Market and Book Values of Equity
• Economic Accuracy: Market valuation is more accurate than book value accounting in
reflecting the solvency position of an FI.
• Losses from risks are immediately charged against the value of ownership claims in
market value accounting but subject to FI’s discretion in book value accounting.
• Insolvency Protection: If a financial institution is closed by regulators before its
economic net worth reaches zero, the liability holders and the regulators guaranteeing
those claims would not lose any money.

Measuring Capital

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Measuring Capital
 Arguments against Market Value Accounting
• Difficulty of Implementation: The small commercial banks and thrifts that
hold large amounts of nontraded assets.
• An unnecessary degree of variability into an FI’s earnings. Reporting
unrealized capital gains and losses on assets that are passed through the income
statement is distortionary if the institution intends to these assets to maturity.
• Reduced acceptance for longer-term asset exposures. There is a concern that
this could interfere with the special functions of financial institutions as lenders
and potentially result in a major credit crunch.

CAPITAL ADEQUACY
 Approaching to Basel
The international capital standards, known as the Basel Agreement, were first
established in 1988 by the Federal Reserve Board and representatives from more
than 10 leading nations.
• Encourage leading banks around the world to keep their capital positions
strong.
• Reduce inequalities in capital requirements across different countries to
promote fair competition.
• Catch up with rapid changes in financial services and the expansion of off-
balance-sheet commitments.
• Limit the risk of failures
• To preserve public confidence

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CAPITAL ADEQUACY : Basel III framework

 The goal: raising the quality, consistency, and transparency of the capital base of
banks to withstand credit risk and to strengthen the risk coverage of the capital
framework.
 Three pillars:
• Pillar 1: Regulatory minimum capital requirements for credit, market, and
operational risk.
• Pillar 2: Supervisory review of firmwide risk management and capital planning.
• Pillar 3: Market discipline through enhanced disclosure of capital and risk
exposures

CAPITAL ADEQUACY: Approaching to Basel

Pillar 1 Pillar 2 Pillar 3
Minimum Capital Supervisory Review Market Discipline
Requirements
Basel 1 Credit Risk
Credit Risk Regulatory supervisory to Disclosure Capital structure,
Market risk complement and enforce risk exposures, and capital
minimum capital requirements adequacy so as to increase FI
Basel 2 Operational risk calculated under Pillar 1 transparency and enhance
market/investor discipline

Credit Risk Enhanced risk disclosure and

Market risk market discipline
Basel 3
Operational risk
Liquidity risk
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CAPITAL ADEQUACY : BASEL III

 Key Regulatory Ratios

Common equity Tier I Common equity Tier I capital

Minimum 4.5%
risk−based capital ratio Credit risk–adjusted assets

Tier I risk−based capital Tier I capital

Minimum 6.0%
ratio Credit risk–adjusted assests

Total risk−based capital Total capital (Tier I + Tier II)

Minimum 8.0%
ratio Credit risk–adjusted assests

Tier I leverage ratio Tier I capital/Total exposure Minimum of 4.0%

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CAPITAL ADEQUACY: BASEL III

 Capital Tiers
• Common Equity Tier I (CET1): the book value of common equity plus
minority equity interests held by the DI in subsidiaries minus goodwill.
• Tier I Capital: Sum of CET1 and Additional Tier I. Included in additional Tier
I capital are instruments with no maturity dates or incentives to redeem (e.g.,
noncumulative perpetual preferred stock)
• Tier II Capital: Supplementary capital, including loan loss reserves plus
various convertible and subordinated debt instruments with maximum caps.

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CAPITAL
ADEQUACY:
BASEL III

Summary Definition of
Qualifying Capital for
Depository Institutions

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BASEL III: Credit Risk-Adjusted Assets

 Standardized Approach
 The Standardized Approach is the regulatory framework used by almost all
national and state banks, savings associations, and credit unions.
 It aims to align capital requirements more closely with actual economic risks
by assigning specific risk weights to different categories of assets
 Internal Ratings-Based (IRB) Approach
 It is a more sophisticated method reserved for the largest banking
organizations—typically those with consolidated assets of $250 billion or
more or significant foreign exposure
 It allows DIs to use their own internal estimates of borrower creditworthiness
to determine capital requirements

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Credit Risk-Adjusted Assets: Standardized Approach

 Credit Risk–Adjusted On-Balance-Sheet Assets
 The risk-adjusted value is calculated by multiplying the dollar amount of the
asset by its assigned weight.
 Key categories include:
• 0% Weight: Cash, Federal Reserve balances, and direct claims on the U.S. government
• 20% Weight: Claims on U.S. depository institutions, general obligation municipal bonds,
and U.S. agency-backed securities.
• 35% to 200% Weights: Residential 1–4 family mortgages, where the weight is determined
by the mortgage category and the loan-to-value (LTV) ratio.
• 100% Weight: Most commercial and consumer loans, premises, and equipment
• 150% Weight: Loans and exposures that are 90 days or more past due
• Sovereign Exposures: Using OECD Country Risk Classifications (CRCs) (0% to 150%).

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CAPITAL
ADEQUACY:
BASEL III

Example: TABLE.
Bank’s Balance Sheet
under Basel III
(in millions of dollars)

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Credit Risk-Adjusted Assets: Standardized Approach

 Credit Risk–Adjusted Off-Balance-Sheet (OBS) Activities
For contingent claims:
 Step 1: Convert to Credit Equivalent Amounts: The face value of the OBS
item is multiplied by a Conversion Factor (CF) to create an on-balance-sheet
equivalent.
o100% CF: Direct-credit substitute standby letters of credit.
o50% CF: Unused loan commitments with maturity over one year and
performance-related standby letters of credit.
o20% CF: Commercial letters of credit and loan commitments of one year or
less.
 Step 2: Assign Risk Weights: The resulting credit equivalent amount is then
multiplied by the appropriate risk weight.
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Credit Risk-Adjusted Assets: Standardized Approach

 Credit Risk–Adjusted Off-Balance-Sheet (OBS) Activities
For contingent claims:
Conversion Factors

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Credit Risk-Adjusted Assets: Standardized Approach

 Credit Risk–Adjusted Off-Balance-Sheet (OBS) Activities
For Derivative Instruments (Market Contracts):
 Step 1: Convert OBS Values into On-Balance-Sheet Credit Equivalent Amounts. The credit
equivalent amount is the sum of two elements
o Potential Exposure: The risk that a counterparty to a derivative securities contract will default in
the future. It is calculated by multiplying the notional value by a factor based on the contract type
and remaining maturity.
o Current Exposure: The cost of replacing the contract at today's prices (replacement cost) . If the
replacement cost is negative, it is set to zero for regulatory purposes.
 Step 2: Assign the OBS Credit Equivalent Amount to a Risk Category
Credit risk–adjusted
=Total credit equivalent amount × 1.0 (risk weight)
value of OBS market contracts

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Credit Risk-Adjusted Assets: Standardized Approach

 Credit Risk–Adjusted Off-Balance-Sheet (OBS) Activities
For Derivative Instruments (Market Contracts):

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CAPITAL ADEQUACY: BASEL III

 Capital Conservations Buffer
o Protecting the banking system from losses incurring during periods of financial
stress.
o Greater than 2.5 percent of total risk-weighted assets to avoid being subject to
limitations on capital distributions and discretionary bonus payments to executive
officers.
 Countercyclical Capital Buffer
o Protecting the banking system and reduce systemic exposures to economic
downturns.
o Varying between 0 percent and 2.5 percent of risk-weighted assets. If not,
restrictions on earnings payouts are applied.
 G-SIB Surcharge: Global Systemically Important Banks face an extra surcharge
of 1% to 3.5% because their failure would cause significant disruption to the
global financial system. 21

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CAPITAL ADEQUACY: BASEL III

 Leverage Ratio
 Goal: discourage the use of excess leverage
 Total exposure is equal to the DI’s total assets plus off-balance-sheet exposure.
Off-balance-sheet exposure:
o For derivative securities: current exposure plus potential exposure
o For off-balance-sheet credit (loan) commitments, a conversion factor of 100
percent is applied unless the commitments are immediately cancelable. In this
case, a conversion factor of 10 percent is used.
 Requirements: minimum 5% (well capitalized); minimum 4% (adequately
capitalized)

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CAPITAL ADEQUACY: BASEL III

Interest Rate Risk, Market Risk, and Risk-Based Capital
 Market Risk
• Capital Add-on: Since 1998, regulators have required DIs to calculate a
specific capital add-on to the 8 percent risk-based capital ratio for credit risk to
account for market risk exposure.
• Measurement Methods: DIs traditionally used either a standardized model or
internal Value-at-Risk (VAR) models to determine this add-on
• Basel III introduced more sensitive measures, including the "partial risk factor"
and "fuller risk factor" standardized approaches

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CAPITAL ADEQUACY: BASEL III

Interest Rate Risk, Market Risk, and Risk-Based Capital
 Interest Rate Risk (IRR)
• There is no formal mandatory add-on currently required for interest rate risk in
the standardized risk-based capital formula
• Basel II and III emphasize that DIs must have internal interest rate risk
measurement systems and Regulators monitor IRR through Pillar 2

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CAPITAL ADEQUACY: BASEL III

 Operational Risk and Risk-Based Capital
 Standardized Measurement Approach (SMA) is based an enterprise-wide approach that
combines a financial statement-based measure of operational risk–the “Business Indicator”
(BI).
 BIt, avg = Interest Componentt, avg + Services Componentt, avg + Financial Componentt, avg
o Interest Component: The absolute value of interest income minus interest expense.
o Services Component: Includes fee income, fee expenses, and other operating
income/expenses.
o Financial Component: The absolute value of net profit or loss on the trading book and the
banking book
 Tiered Capital Requirements

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Credit Risk-Adjusted Assets:

Internal Ratings-Based Approach
 Formula: The specific capital requirement for an asset (i) as a function of five
key variables:
Capital requirementi = f (PDi , LGDi , Ri , EADi , Mi )
where:
PDi = One-year probability of default of the ith borrower
LGDi = Loss given default of the ith borrower
Ri = Correlation of the ith borrower with the rest of the economy
EADi = Amount (in dollars) of exposure at default
Mi = Maturity of the loan

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Credit Risk-Adjusted Assets:

Internal Ratings-Based Approach
 Calculation Approaches
 Foundations Approach: The DI internally estimates the one-year probability of
default (PD) and the exposure at default (EAD). For the remaining components—
loss given default (LGD) and maturity (M)—the DI must rely on supervisory rules
set by regulators.
 Advanced Approach: The DI utilizes its own internal estimates for all four
primary risk components: PD, EAD, LGD, and M

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Credit Risk-Adjusted Assets:

Internal Ratings-Based Approach
Expected Loss (EL) vs. Unexpected Loss (UL)
 Expected Losses (EL) = PD x LGD. These are anticipated losses that a DI
should cover through its loan loss reserves
 Unexpected Losses (UL): Losses beyond those that are expected. The required
capital is specifically held to protect the DI against these unexpected losses.
 Confidence Level: the combination of loss reserves and capital is sufficient to
protect the DI against failure in 99.9 percent of cases
 The whole loss distribution on the loan:
VARloan = ELloan + ULloan = Loan loss reserves + Capital reserves
 Capital reserves (UL) = VARloan - ELloan

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Credit Risk-Adjusted Assets:

Internal Ratings-Based Approach
Calculating Risk-Weighted Assets (RWA):
RWA=K×12.5×EAD
The 12.5 multiplier is the asset multiplier for an 8 percent capital ratio ((i.e.,
1/0.08 = 12.5).
The Capital Adequacy "Acid Test“
To determine if a DI is adequately capitalized for a specific loan, regulators compare
the actual capital held (Kactual) against the calculated requirement (K)
 Kactual ≥ K, the 8 percent target is met or exceeded
 Kactual < K, the institution is considered capital deficient and must either
increase its capital or reduce its exposure to that borrower

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CAPITAL ADEQUACY
Approaching to State Bank of Vietnam
 Capital Adequacy Ratios (Circular 14/2025/TT-NHNN)
Capital Adequacy Ratio 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 >= 8.0%
(CAR) 𝐑𝐖𝐀 + 𝟏𝟐. 𝟓 × (𝐊 𝐎𝐑 × 𝐊 𝐌𝐑 )
Tier 1 Capital Ratio: Tier 1 Capital >= 6.0%
𝐑𝐖𝐀 + 𝟏𝟐. 𝟓 × (𝐊 𝐎𝐑 × 𝐊 𝐌𝐑 )
Common Equity Tier 1 CET 1 Capital >= 4.5%
(CET1) Ratio 𝐑𝐖𝐀 + 𝟏𝟐. 𝟓 × (𝐊 𝐎𝐑 × 𝐊 𝐌𝐑 )

Where:
• Capital / Tier 1 / CET1: capital components
• RWA (Risk-Weighted Assets): Total assets weighted by credit risk
• KOR : Capital requirement for Operational Risk
• KMR : Capital requirement for Market Risk

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CAPITAL ADEQUACY
Approaching to State Bank of Vietnam
 Additional Capital Buffers (Circular 14/2025/TT-NHNN)
 Capital Conservation Buffer (CCB)
This is the remaining CET1 capital after meeting all minimum ratios. It follows a
phase-in schedule:
• Year 1: 0.625% (Total CAR required: 8.625%)
• Year 2: 1.25% (Total CAR required: 9.25%)
• Year 3: 1.875% (Total CAR required: 9.875%)
• Year 4 and onwards: 2.5% (Total CAR required: 10.5%)
 Countercyclical Capital Buffer (CCyB)
• An additional CET1 layer ranging from 0% to 2.5% of total RWA, applied at
the discretion of the State Bank of Vietnam (SBV) Governor.

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Capital Tiers: Approaching to State Bank of Vietnam

 Common Equity Tier 1 (A1)
(A1) = Common Equity Tier 1 capital before deductions (A11) - Deductions (A12)
 Common Equity Tier 1 Capital Before Deductions (A11)
1) Charter capital (paid-in capital)
2) Charter capital supplementary reserve fund
3) Development investment fund
4) Financial reserve fund
5) Other funds established from after-tax profit as per regulations (excluding reward and welfare funds, and
management board bonus funds)
6) Capital for basic construction and fixed asset procurement
7) Other capital
8) Undistributed profit, which must exclude the positive difference between required risk provisions and
actual provisions made
9) Share premium of common shares.
10) Foreign exchange differences arising from the revaluation of equity in foreign currencies or from the
translation of financial statement.
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Capital Tiers: Approaching to State Bank of Vietnam

 Deductions from Common Equity Tier 1 Capital (A12)
11) Intangible fixed assets (excluding land use rights).
12) Deferred income tax assets.
13) Accumulated losses.
14) Treasury shares corresponding to common equity.
15) Positive difference between total expected loss and risk provision (applicable to portfolios
using the Internal Ratings-Based (IRB) approach).
16) Capital contributions and share purchases in other credit institutions, subsidiaries, or
insurance and securities companies.
17) Positive difference between Land Use Rights and 15% of the adjusted A11 capital.
18) Compensation for negative values of Additional Tier 1 capital (if Additional Tier 1 capital
is less than zero).
19) Goodwill arising from business combinations (applicable when calculating Consolidated
Common Equity Tier 1 capital)

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Capital Tiers: Approaching to State Bank of Vietnam

 Tier 1 Capital (A) = Common Equity Tier 1 (A1) + Additional Tier 1 (A2)
 Additional Tier 1 (A2) = Additional Tier 1 capital before deductions (A21) - Deductions (A22)
 Pre-deduction Items (A21):
1) Additional Tier 1 instruments issued by the bank that meet specific regulatory conditions (e.g., no
maturity date, no dividend push-ups, and loss absorption mechanisms).
2) Share premium associated with these instruments
 Deductions (A22):
1) Buybacks of Additional Tier 1 instruments.
2) Compensation for negative values of Tier 2 capital

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Capital Tiers: Approaching to State Bank of Vietnam

 Tier 2 Capital = Tier 2 capital before deductions (B1) - Deductions (B2)
 Pre-deduction Items (B1):
1) Subordinated debt issued by the bank that meets specific regulatory conditions, such as having
an initial maturity of at least 5 years and being subordinate to other creditors.
2) 80% of general provisions for banks using the Standardized Approach.
 Regulatory Deductions (B2): Subtracted items include treasury shares associated with Tier 2
instruments and specific capital-related differences

 Capital = Tier 1 Capital + Tier 2 Capital

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Risk-Weighted Assets (RWA)

Approaching to State Bank of Vietnam
 Risk-Weighted Assets (RWA) (The Standardized Approach _ SA)
RWA = RWACR + RWACCR

RWACR: Risk-weighted assets for customer credit risk, covering on-balance

sheet claims and off-balance sheet commitments.
RWACCR: Risk-weighted assets for counterparty credit risk, arising from
self-trading transactions, Repo/Reverse Repo, derivatives, and financial asset
trades

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Risk-Weighted Assets (RWA)

Approaching to State Bank of Vietnam
 Risk-weighted assets for customer credit risk (RWACR)

Ej : The value of the jth asset that is not a claim (e.g., cash, gold, or equity
instruments)
Ei : The value of the ith claim, calculated by combining on-balance sheet balances
(Eon) and off-balance sheet commitments (Eoff) adjusted by a Credit Conversion
Factor (CCF).

Ei∗ : The exposure value after applying Credit Risk Mitigation (CRM) techniques
SPi : Specific provisions made for the ith claim
CRW: The Credit Risk Weight assigned by the regulator to a specific asset category

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Risk-Weighted Assets (RWA)

Approaching to State Bank of Vietnam
 Asset Classifications and Risk Weights (CRW)
 Sovereigns & Central Banks: 0% for Vietnam; 0% - 150% for Other sovereign
based on credit ratings
 Financial Institutions: 20% to 150% depending on the counterparty's credit
rating and maturity
 Corporates: 85% for SMEs; 50% to 160% for Other corporates based on
annual revenue and leverage ratios; 200% if negative equity or fails to provide
financial statements.
 Retail Claims: 75%
 Real Estate Mortgages: 20% to 200% based on the Loan-to-Value (LTV) ratio
and the source of repayment

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Risk-Weighted Assets (RWA)

Approaching to State Bank of Vietnam
Credit Conversion Factors (CCF)
Off-balance sheet items are converted into on-balance sheet equivalents using
these factors:
• 10%: Revocable commitments.
• 20%: Commercial letters of credit with a maturity of under one year.
• 50%: Unused loan commitments over one year.
• 100%: Direct credit substitutes (e.g., guarantees, standby letters of credit)
Credit Risk Mitigation (CRM)
 Financial Collateral: Cash, gold, and qualified debt securities.
 On-balance sheet netting: Offsetting loans against the customer's deposits.
 Third-party Guarantees and Credit Derivatives
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CAPITAL ADEQUACY
Approaching to State Bank of Vietnam
 Operational Risk Capital (KOR):
KOR = BIC x ILM
Where: BIC: Business indicator component; ILM: Internal loss multiplier
 Business indicator component (BIC):
𝐁𝐈𝐂 = ∑𝟑𝐢 𝟏 𝐁𝐈𝐢 × 𝛂𝐢
o Group 1 (BI≤600 billion VND): Coefficient of 12%
o Group 2 (600<BI≤18,000 billion VND): Coefficient of 15%.
o Group 3 (BI>18,000 billion VND): Coefficient of 18%
 BI (Business Indicator) = ILDC + SC + FC
o LDC (interest, leases, and dividends), SC (services), and FC (financial)

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CAPITAL ADEQUACY
Approaching to State Bank of Vietnam
 Operational Risk Capital (KOR):
 ILM (Internal Loss Multiplier)
o The ILM is defaulted to 1 if the bank's BI is 600 billion VND or less, or if the
bank lacks a loss data sequence of at least 05 years.
o In other cases, the ILM is calculated using a formula involving the Loss
Component (LC) and the BIC:

o LC (Loss Component): Defined as 15 times the average annual net operational

loss over the calculation timeframe (typically 10 years)

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CAPITAL ADEQUACY
Approaching to State Bank of Vietnam
Capital Requirements for Market Risk (KMR)
KMR=KIRR+KER+KFXR+KCMR+KOPT
Where:
o KIRR (Interest Rate Risk): Capital requirement for interest rate risk (excluding options).
o KER (Equity Price Risk): Capital requirement for equity price risk (excluding options).
o KFXR (Foreign Exchange Risk): Capital requirement for foreign exchange risk, including gold
(excluding options).
o KCMR (Commodity Price Risk): Capital requirement for commodity price risk (excluding options).
o KOPT (Options Risk): Capital requirement for options

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Risk-Weighted Assets (RWA) under IRB Approach

Approaching to State Bank of Vietnam
 Formula for the total Risk-Weighted Assets (RWA)
RWA = ∑RWi x EADi
Where:
o RW: the risk weight. RW = K x 12.5. The capital requirement (K) is a complex
function of PD, LGD, M, and a correlation factor (R)
o EAD : The expected outstanding value of the claim at the moment the customer
defaults

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 Internal Sources of Capital

• Undivided Profits (Retained Earnings)
• Equity Reserves
 Factors:
• Dividend Policy and Retention Ratio

Planning to • Internal Capital Growth Rate (ICGR)

External Sources of Capital
Meet Capital • Issuing Common Stock, Preferred Stock, Subordinated
Requirements Notes and Debentures.
• Selling Assets and Leasing Facilities (Sale-and-
leaseback)
• Swapping Stock for Debt Securities
 Choosing the Best Alternative
• Earnings Per Share (EPS); Risk exposure, ownership control,
regulatory agencies and private marketplace investors

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MODULE 2
EVALUATING THE PERFORMANCE
OF BANKS

COMMERCIAL BANK MANAGEMENT

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The CAMELS Ratings

 What are the CAMELS Ratings ?
CAMELS ratings are a supervisory rating system originally developed in the
United States to assess the overall financial condition of commercial banks and
other financial institutions.

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The CAMELS Ratings

 What Does CAMELS Stand For?
• C - Capital Adequacy: Evaluates an institution's compliance with minimum capital reserve
regulations and its future capital position based on business plans.
• A - Asset Quality: Assesses the quality of a bank's assets, focusing on credit risks, loan
practices, and the potential for assets to lose value.
• M - Management Capability: Measures the ability of the management team to identify and
react to financial stress, as well as the effectiveness of their business strategy and internal
controls.
• E - Earnings: Examines the bank's long-term viability and ability to grow through metrics like
return on assets (ROA) and net interest margin (NIM).
• L - Liquidity: Evaluates a bank’s ability to meet present and future cash flow needs without
disrupting daily operations, which is crucial for preventing bank runs.
• S - Sensitivity to Market Risk: Measures the degree to which an institution's earnings are
affected by fluctuations in interest rates, exchange rates, and commodity prices

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The CAMELS Ratings

 The Rating Scale
• 1 (Strong): Indicates robust performance, sound risk management, and very
few supervisory concerns.
• 2 (Satisfactory): Indicates the institution is financially sound but possesses
moderate weaknesses.
• 3 (Fair): Suggests that the institution shows supervisory concerns in several
areas.
• 4 (Marginal): Indicates unsound practices and serious financial problems that
make the institution unsafe.
• 5 (Unsatisfactory): Represents a fundamentally unsound institution with a high
probability of failure and a need for immediate corrective actio

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The CAMELS Ratings

The Rating Scale for Vietnam.
 Quantitative and Qualitative Groups: Each CAMELS component consists of
quantitative indicators (financial health) and qualitative indicators (legal
compliance)
 Scoring Scale: Each indicator is scored on a scale from 1 to 5, where 5
represents the best performance (lowest risk) and 1 represents the poorest.
 Final Ratings:
o Grade A (Excellent): Total score ≥ 4.5.
o Grade B (Good): 3.5 ≤ Total score < 4.5.
o Grade C (Average): 2.5 ≤ Total score < 3.5.
o Grade D (Weak): 1.5 ≤ Total score < 2.5.
o Grade E (Poor): Total score < 1.5.

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