Analysis of Banking Competitors Financial Strengths and Weaknesses
Analysis of Banking Competitors Financial Strengths and Weaknesses Analysis of Banking Competitors Financial Strengths and Weaknesses Chase Bank Corporation, Wells Fargo Corporation, and Bank of America are three leading members of the banking industry. In analyzing Wells Fargo, Bank of America, and Chase we will consider the companies’ strengths and weaknesses over the past five years, to find the most financially strong company.
We will be able to determine this through analyzing the following key ratios:
Growth Rates: • Sales (MRQ) vs. Qtr a 1 year ago 5
Year Growth Probability: Net Profit Margin (TTM)? Net Profit Margin – 5 Year Average
Management Effectiveness: Return on Assets (TTM) Return on Assets 5 year average Sales: Based on the financial comparison chart, attached in Appendix 1, the sales ratios show that all three banks are under performing in both sales and sales growth. However, of the three banks, Chase Bank is closest to reaching a positive number at 0.03% below most recent quarter industry standard of 12. 58%. All three banks are under performing sales growth expectations.Sales Growth over the past five years demonstrates that all three banks have had some positive growth. Wells Fargo is the best performing of the three banks with a slim . 29% above industry standard of 14.96%. While Bank of America is 9.77% below the industry standard five-year industry average. While Bank of America’s sales growths are nearly stagnating, what have hindered their sales have been the mounting lawsuits in excess of $9 billion. They also have the mounting debt from the acquisition of toxic loans from Countrywide exceeding $30 billion in mortgage debt.Analysis: The banking industry is suffering tremendously from the current economy.
The mortgage industry’s downward slide is a large contributor to many of the economic issues currently present. The general population is wary of the banking industry and lacks the confidence it once had in the industry. Furthermore, the banking industry has not been given the loans they once offered – no money to lend, no money to spend. Banks want to stay competitive by constantly trying to predict interest rates and thereby adjusting their own rates.Speculation could affect the profitability of banks. (Son, H, 2011).
Profitability Ratios: Chase (JPM) leads the three banks in this comparison by a net profit margin of 19. 85%, which is 2. 67% over the industry average and 2. 03% over Wells Fargo. Bank of America is 100.01% below the industry’s net profit margin (TTM), which is 17. 18% below the industry average for the net profit margin over five years. (See Appendix I. ) Analysis: Bank of America is far below the industry standard. Its five-year net profit margin is 7. 4 points lower than the industry average of 17.9. Bank of America has suffered the most during our current economic crisis, due to the recent 9 billion pay off in lawsuits coupled with the acquisition of Countrywide’s loans reaching $30 billion in pay offs. All of these factors have caused Bank of America to be in the red for quite sometime. (Son, H, 2011) Management Effectiveness Ratios: The return on assets (ROA) is an indicator of how profitable a company is relative to its assets. This ratio is an indicator of how efficient management is at using its assets to generate earnings.
Wells Fargo is outperforming the three banks with a return on assets of 0.71% , nearly ? above the industry average of 0.48% (TTM). The five-year return on assets for Wells Fargo is a . 26% above the industry average, while in comparison, Bank of America is 0.
35% below the industry average. Chase is holding steady at . 95% (TTM) and a five-year average of 0. 7%. (See Appendix I. ) Industry Trends: The banking industry is taking a variety of steps to improve their profitability and competitive capabilities.
They are restructuring costs, enhancing and redesigning products, focusing on customer relationships, being selective regarding customer acquisition and mergers and acquisitions (M). (Decker, 2008) However, the entire industry is reliant upon the economy taking a significant upward swing for any real benefits in the industry to occur. Which bank is financially strongest? Chase. Why? Based on the financial statements analyzed, Chase has the most favorable numbers with respect to the three categories compared; sales, profitability, and management effectiveness. Although, Wells Fargo has the strongest 5 year profit margin of 15.7, which is 0. 02% higher than Chase, Wells Fargo does not have the most favorable numbers overall. Since we are looking for projected growth, Chase, on a trailing twelve month average, is outperforming the two banks at a net profit of 19. 85%. Which bank is financially weakest? Bank of America Why? Based on the financial statements and the criteria analyzed, Bank of America is struggling the most significantly.
Due to the mortgage crisis and current pending lawsuits, Bank of America’s negative net profit margin and poor sales margin makes the bank appear the weakest.Key competitive pressures/developments affecting the industry: Economy, unemployment rates, mistrust in the banking industry, and competitors are all relevant factors that need to be considered as competitive pressures in the banking industry. The lack of trust between individuals and the banking industry has created a Catch 22 of sorts. The banks are not lending money, and people are not borrowing. If neither takes the initiative, this cycle will continue.
Which ratios are important? Why? From analyzing the financial statements, net profit margin is the most crucial ratio.It reveals how much company profits with every dollar it invests. Profits are essential to investors, shareholders and company credit ratings. Conclusion: While the banking industry is in a state of distress, much of it can be attributed to the current economy, the slumping housing market, lawsuits and toxic mortgages. The ratios chosen for this analysis reflect the current banking industry’s dilemma. Chase seems to be holding steady with their current financial ratios.
Although they have no new sales (MRQ), they currently demonstrate that they are in balance with the industry standards.Of all three ratios discussed: sales, profitability and management effectiveness, Chase is the healthiest of the financial institutions analyzed. . Appendix I References Calabresi, M. , & Gundel, S.
(Sept 2011). Four Ways to Fix the Housing Market. Time, 178(9), 94-96. Decker, E. , (July 2008). Banking Industry in Distress.
Business Times 40(9), 1-5 Knight, W. T. (Aug. 30, 2011). Analyst Research on Wells Fargo & Company and JPMorgan Chase & Co.
– Money Center Banks Still Benefiting From Improving Credit. Retrieved from http://www. marketwatch. om/story/analyst-research-on-wells-fargo-company-and-jpmorgan-chase-co-money-center-banks-still-benefiting-from-improving-credit-2011-08-30? reflink=MW_news_stmp Mangla, I. S.
(September 2011). Banking Survey, Get a Better Deal from Your Bank. U. S. News, 40(8), 94.
Rueters. com. (Sept 1, 2011). Appendix 1, Bank Financials Retrieved from http://www. reuters.
com/finance/stocks/ Son, H. (July 21, 2011). Bad Mortgages Still Haunt Bank of America. Retrieved from http://www. businessweek.