The two Institutions chosen or comparison are Wells Fargo (WFM) and Bank of America (BACK). To evaluate the overall strength the major assets, liabilities, capital, risk, liquidity and operating decisions of the three chosen institutions will be discussed. Balance Sheet Analysis Out of the three banks US bank is the smallest in regards to assets with Bank of America being the largest followed by Wells Fargo. When comparing total assets to total liabilities USB finds itself in the weakest position having a total debt to total assets ratio of 0. 11 . Commercial banks are known to leverage themselves highly and leverage Is normal in the Industry.
However In comparison to BACH'S ratio of 1 . 124 and Wife's ratio of 0. 89 this relatively high leverage Is a cause for concern. Federal Deposit Insurance Corp... Chairman Sheila Fair has advocated for the US Bank to reduce their leverage to half believing that their financial position poses too great a risk. The industry averages for long term debt to equity and total debt to equity ratios are 64. 36 and 177. 19 respectively. In respect to this, US Bank finds itself taking the middle ground between Wells Fargo and Bank of America. Wells Fargo seems to be In equity ratio of 84. 6, well below the industry average. The most indebted institution would be Bank of America who's ratios of 120. 09 and 249. 67 are well above the industry average. US Bank in comparison has a long term debt to equity ratio of 67. 93 which is right around the industry average while their total debt to equity is far below it at 139. 98. Despite being in good position relative to the industry and the two chosen similar financial institutions in these metrics, this indicator should be held with skepticism as many believe that all commercial banking institutions are unreasonably leveraged.
One of the reasons for US Banks highly leveraged position ay lay in the management's decision to acquire more banks through IBID-assisted deals. It is stated that, "In total, the firm has acquired $35 billion of banking assets through these deals at minimal costs. " Though these deals have been stated to be not significant enough to pose such a threat. They are still campaigning to acquire even more assets. Assets All three companies have real estate loans as their largest asset category. This includes residential loans, commercial real estate, and other loans secured by farmland.
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These loans can be considered safe as they are secured with liens on the reporter however they are illiquid and would be considered a long term asset. Wells Fargo has the largest amount of real estate loans as a percentage of their assets at 35. 81%, followed by US Banks 32. 18% and finally Bank of America's far smaller 20. 97%. All the banks second largest assets are debt securities over one year and they all have similar sizes as percentage of total assets. Commercial and industrials are the third largest asset for Wells Fargo and US Bank and they hold similar sizes as percentage of assets.
Bank of America's third largest asset however is trading assets which should be more marketable. Much of the securities held by US Bank are not held for sale which makes them susceptible to interest rate risk. It is unclear how much of the banks loans use a floating interest rate but we can assume which would better help determine the risks involved. With US Banks fairly high percentage of real estate loans and commercial and industrial loans which are usually long term these risks to the bank are significant. The largest liability for the three financial institutions are interest bearing deposits.
Wells Fargo holds the largest proportion at 50. 14% followed by US Bank at 47. 70% and then Bank of America at 32. 0%. US Bank holds and Wells Fargo have similar proportions of this liability. While these liabilities accrue interest the banks do have to expect frequent cash outflows from this. The three banks third largest liabilities are interested-bearing deposits with US Bank having the largest proportion of 23. 36%, followed by Wells Fargo at 21. 93% and Bank of America at 18. 97%. These proportions seems relatively similar to each other but with US Banks higher proportion they should be weary.
These interested bearing accounts are likely to be checking outs and while they do not accrue interest you can expect frequent editorials from customers which should keep them weary of loaning out too much money. Finally all three banks have listed other borrowed money as their third capitalized leases. Bank of America has the largest proportion of 14. 24%. Next is US Bank with 13. 66% and then Wells Fargo with 9. 62%. These proportions also seem quite similar too each other. Interest Revenue, last Quarter US Bank largest source of revenue is on fully taxable income on loans and leases at 44%.
This proportion is comparable to Bank of America that accounts for 41% of their revenues. What is surprising is the large mount of revenue Wells Fargo receives from interest and fees on which accounts for 76% of their revenues. While US Bank only receives 42% of its income in the same category. Interested Revenue, Last Quarter The largest sources of interested income for the chosen financial institutions vary greatly which makes it difficult to compare US Banks position in comparison to the other financial institutions.
The largest category listed in sources of interested income for US Bank was stated as unspecified at 18% and 19% for Wells Fargo. The largest source for Bank of America is investment banking fees and commissions. Expenses Last Quarter Largest Expenses US Bank amount % of expenses Interest on other borrowings & trade Lab 987,000 2 Interest on time deposits < $100K 191,000 3 Interest on time deposits of $100K or more 184,000 1 1. 02% Largest Expenses Bank of America % of total expenses Interest on borrowings and trade liabilities 80. 03% Interest on sub debt and mand conv sec 8. 2% Interest on other deposits 601,993 4. 60% Largest Expenses Wells Fargo Interest on other borrowing & Trad Liab 55. 05% Interest on sub debt & mand conv sec 471 ,OOO 11 . 93% The largest expenses for each company is interest on other borrowings and trade iabilities. US Banks proportion of 59. 14% is comparable to that of Wells Fargds 55. 05%. Bank of America on the other hand has a much larger expense in this category of 80. 03%. The other expense categories vary between the banks. Interest on time deposits is US Banks next largest category. Cash Flow investing activities.
Cash from operating activities has been steadily increasing which is a good sign but so is cash from financing activities which is much larger. As commercial bank it can be expected that they finance their operation with a significantly large portion of debt. However in combination with their highly averaged position with their competitors this could be a cause for concern in their financial viability. Corporate Risk Profile: As a company that operates in the financial services, U. S. Banks largest exposure of risk comes from credit risk, operational, residual value, interest rate, market, liquidity and reputation risk.
U. S. Bank has spent many years working to perfect managing these risks. For credit risk, U. S. Bank has incorporated "well-defined, centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all commercial and consumer credit exposures" (SEC. Gob). US Bank has developed a very strenuous and extensive procedure in order to evaluate the credit risk that it handles on a day to day basis. Another way US Bank manages its credit risk is "through diversification of its loan portfolio and limit setting by product type criteria and concentrations" (SEC.
Gob). US Bank divides its overall loan portfolio into three separate segments to, following the "don't put all your eggs in the same basket" theory. The three portions of the portfolio consist of commercial lending, consumer lending and covered loans. The risks associated with commercial lending include a rarity of factors including many risks associated with the borrower's business such as industry, geography, the loan's purpose, how the borrower will repay, debt capacity among others.
In order to prioritize these risks and keep them all organized, US Bank assigns risk ratings to these characteristics in attempt to create the ability to focus on specific risks depending on importance. As far as the consumer lending sector goes, this encompasses "residential mortgages, credit card loans, and other retail loans such as revolving consumer lines, auto loans and leases, student loans, and home equity loans and lines" (SEC. Gob). The risk characteristic of this section of the portfolio is focused on the borrower and their keenness to pay off the loan as well as prior repayment history.
The 3rd portion of the loan portfolio is the covered loan segment. Before touching on the risk of this venture, it must first be noted that there are loss sharing agreements between US Bank and the IBID that ultimately "reduce the risk of future credit losses to the company' (SEC. Gob). The risks that are associated with covered loans are "consistent with the segment they would otherwise be included in had the loss share coverage not been in place" (SEC. Gob). Another important aspect of US Bank to take into account is the sub-prime lending side of the banking industry.
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