Bank_of_America

Banking Industry Analysis Thomas L. Lowther III MGT/521 May 23, 2011 Chuck Andre Banking Industry Analysis Banking is an important industry that not only serves people on a personal level, but also the United States in a global economy. The highly regulated and volatile banking industry is due to the success of different companies across America. Banks recently have been the backbone of a recession and have held their ground during a time of low earnings nationally. By looking at some of the larger banks in America, these are what we see as trends in today’s society. These trends seem to be prevalent in each bank and these trends even delve into the mid-cap banks. The five giants in the industry are The Bank of America, J.P. Morgan Chase, Citigroup, Wells Fargo bank, and Sun Trust Bank (The Bank Stress Test, 2011). Compared to the market, banks have earned better returns and have provided their shareholders more during this last recession. This is an indicator that this industry is doing well and will continue to be profitable. History The banking industry is becoming more competitive as it moves further into the 21st century. A bank’s main objective is to control the territory it occupies. The only problem with this is that there is no limit to real estate that these banks can work with. The geographical trend with banks is that they are starting to look for more territory in which to do business. A bank such as Compass, which is a mid-cap bank, was originally doing business in southern states such as Alabama, Tennessee, and Georgia. Since there is very much competition around this area, and with large banks such as SunTrust gobbling up customers, banks such as Compass are looking elsewhere such as Texas and Colorado to find areas in which it can operate and control. The big banks in the system are acquiring small banks in a process known as consolidation to allow each more area to work in. This has been a huge trend as of late as even giants such as Fleet Boston Merrill Lynch has been acquired by Bank of America, and as JP Morgan Chase acquisition of Bank One. This just shows that not only has the trend been prevalent in small banks but also in giant banks. Industry Overview Business cycles play a role in determining how well a bank can handle adverse conditions within the economy. This is a good assessment to see how the banking industry compares to the market and how particular banks compare to each other. Recently the economy was hit by a recession that hurt many industries and put many businesses out of operation. A bank’s profit margin is a good indicator of how well it is doing and what affects it is having by the interest rate and the amount of loans made. With people not acquiring as much money, they are less willing to take out loans and purchase expensive items like cars and homes that may require a loan. The fewer loans made the less profit a bank makes in its main source of revenue. Even through these difficult times, banks continued to be profitable and continued to give their investors steady returns. With the economy turning for the better, the profit margins can only grow larger. Historically, bank stock has been extremely conservative, and the earnings have been positive for larger banks over long length of time. The recession was hardly affected the big banks, and this shows that this industry because as the economy begins to move in the upward direction, the banks will only reap more profits and better returns. During different cycles, government pressures exist that can greatly affect banks and their profitability. Monetary policies are constructors of interest rates. As stated earlier, these interest rates are the most influencing factor when considering profitability in this industry. When the government sets the rates low, people rush to refinance their currents loans and pay off their high interest loans. Also government regulates the amount of cash banks must have on hand and make them ensure themselves to prevent any kind of crash from occurring. This is a highly governed industry. Strategy Bank of America has risen to its dominance with a mission is to execute effective sourcing of external products and services based on integrity, teamwork, personal excellence and accountability. Bank of America vision is to be the finest financial services company in the world (Investor Fact Book, p. 2). They are simply saying that they passionately committed to serving their customers, associates, shareholders, and communities to the best of their ability (Investor Fact Book, p. 2). Through Bank of America dedication to service, they create value for their customers, community, and shareholders. For the banking industry, a highly spoken fact is the bigger the better. The banking industry competition has been a fight for the land. Bank of America is not only expanding throughout the United States every day. They are also expanding to be the largest global company in foreign markets. Bank of America has more than 3,600 correspondent banking relationships in 130 countries. Expansion has been a major strategy decision for Bank of America, especially in the most recent years during this latest recession that our country has endured lately. Standard and Poor Even as the banking industry continues to come to terms with the impact of soured residential mortgages, anemic home sales, and the prospect of further foreclosures, some of the largest banks may still face potentially large losses (The U.S. Banking Industry Improves Slowly amid Uncertainties about Regulatory Reform, 2011). For example, they may have repurchase obligations arising from breaches of representations and warranties that they made as part of the mortgage underwriting process. If the six large banks--Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc., U.S. Bancorp, and PNC Financial Services Group--have to repurchase these loans, we expect that it could cost them as much as $43 billion in aggregate losses through 2012 (The U.S. Banking Industry Improves Slowly amid Uncertainties about Regulatory Reform, 2011). They estimate that the banks will have already accounted for about $12.4 billion of this amount on their income statements, which leaves about $31 billion in possible losses. Although this represents about 36% of the 2010 pretax earnings we have projected, we expect the banks to account for this amount during a period of at least two years (The U.S. Banking Industry Improves Slowly amid Uncertainties about Regulatory Reform, 2011). On a broader note, we believe that banks may have a harder time clearing the backlog of foreclosed homes as a result of issues that have arisen about the validity of many foreclosures (The U.S. Banking Industry Improves Slowly amid Uncertainties about Regulatory Reform, 2011). Regulators and state legal authorities have been questioning many foreclosures on the basis that some banks conducted mass sign-offs on foreclosures without proper authority that the holders of the mortgages did not hold title and that the rightful mortgage owner has not been the party to foreclose. In our base case, we do not believe that foreclosure delays will extend well beyond the end of the year (The U.S. Banking Industry Improves Slowly amid Uncertainties about Regulatory Reform, 2011). Technology As competition increases within this industry, technology coupled with new products has brought new trends to this industry in the way in which it competes. The normal customer today can in a sense “shop around for a loan.” With the Internet broadening the options a customer has, banks have to add more value to what it can offer a particular client. Technology not only sets trends with competition but also with cost reducing avenues. One of the industry’s biggest costs is the large amount of paperwork that comes with writing checks. With electronic banking on the rise, the role checks use to play has changed and lessened, thus providing banks with more space and less hassle. This has created a trend in every day transactions becoming electronic, which benefits both the bank and the client. Financial Ratio’s Return on Assets As strong as the big banks are in this industry, individually, they are even stronger compared to other industries in the market. The Return on Asset forecast for the five big banks combined are forecasted at 1.20% for 2011. This ROA is up by 0.05% from last year’s figure of 1.15% and is growing more by another 0.05% in the next three to five years in the future. Return on Equity Another statistic that is an indicator of where this industry is heading is the return of equity. These five banks have forecasted 2011 is 16.5%, which is the same figure as last year. The experts expect ROE for the future of the five major banks to go down by 0.05% over the next five years in the future. This may not be the case for the forecasted ROA and ROE for the banking industry in the future. Financial Earning Per Share The next forecasts for this industry is Earning per share and the Book value ratio for the banking industry. The EPS for year 2009 of the banking industry is ranging from $3 to $7.05 depending on which one of the five big bank’s EPS they see. For example, Bank of America had the highest EPS of $7.05 and J.P. Morgan Chase had the lowest EPS of $3 in 2009 of all the big banks in the United States. The range of these banks increased in 2010 for each of the big banks. Book Value Ratio The next historical statistic was the Book value ratio of all of these banks for the years of 2009 and 2010. The Book value ratio of 2009 was between the ranges of $19.10 to $34.90 for the big banks in the banking industry. The forecast for 2009 for the Book value ratio range in the banking industry is a little bit higher than it was in 2010. The range in 2009 of the book value ratio is between $21.40 and $38.55. The difference in the change in the prices of 2009 and 2010 is between $2.30 and $3.65 in this industry from one year to the next. They expected forecast range of the next five years is to increase significantly from $29.10 to $50.50 in the banking industry. The banking industry is a strong industry that has survived the tests of recessions and even depressions. Currently the industry offers clients many services that they could obtain from any other organization. The returns to shareholders always have been steady and profitable and unless some anomaly occurs, they should not change. The future is bright for banks as the economy is turning for the better. With advancements in technology, banking will surely become a more profitable venture, and will gain more strength compared to the market. References The U.S. Banking Industry Improves Slowly Amid Uncertainties About Regulatory Reform (2011). Retrieved from http://www.standardandpoors.com/ratings/articles/en/us/'assetID=1245264297636 The Bank Stress Test (2011). Retrieved from http://www.wikinvest.com/wiki/Supervisory_Capital_Assessment_Program_(SCAP) Investor Fact Book Full Year (2010). Retrieved from http://phx.corporate-ir.net/External.File'item=UGFyZW50SUQ9ODc4Nzh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1