The State of the Banking Industry - Case Study Example

Valuation project Executive summary The banking industry is diverse and imperative in the economic activities of any country. This paper candidly and comprehensively examines the state of the banking industry from the 1950 to present with an aim of establishing the challenges the industry has faced, advancement and exemplify how states jeopardize the operations of their banks through formulation and implementation of ineffective fiscal and pecuniary policies. We examined the financials of PNC Bank, National Association, located in Pittsburg Pennsylvania majorly due to the sheer fact that it is a prominent subsidiary of the PNC Group, which is among the top performing banks in America. Examination of the pro formas indicates that the banks net income has been increasing, total interests on borrowing and interest on deposits has been plummeting while investment interest income has been downscaling. However, an examination of its projected income statement reveals that the bank is fairly valued as the projections are sound, and rational rather than being absurdly exaggerated. It is a bank that still has a growth potential and the ability of making banking simple, and easier and the management should strive to continue upholding the bank’s market position in America and globally. State of the banking sector A sound banking system is imperative in the success of any economy. The banking industry the world over, and particularly the US is striving to reinstate itself after the 2008 financial crisis, a crunch that was unprecedented in magnitude and type, that threatened to engulf the world economy. Financial analysts strongly believe that the crisis began with an asset bubble in housing, extended into the subprime mortgage crunch, intensified into an unadorned freeze-up of the interbank borrowing and lending markets and climaxed when the US, as one of the industrialized nations, intervened to rescue its collapsing banking industry and banks that were facing the threat of being thrown out of business (Pelzer 141). Despite regeneration from the crisis, the banking industry is still facing various challenges including adoption of pertinent technology, low interests rates that plummet profitability, slow growth of loan volumes, changing customer needs with customers requiring more customer-tailored financial services and enactment of policies that have served to handicap the vivacious operation of banks. Such policies include the Federal Deposit Insurance Corporation Improvement Act of 1989 (FDICIA) and Federal Reserve Act that are more customer-oriented with financial analysts arguing that they flout the distinctive needs and conditions of banks (Pelzer 162). Being in the middle of a global industrial revolution primarily driven by the internet and the influence of technology, many banks still operate in a different age, an age that is apparently supposed to have been detoured. New entrants are entering the banking industry with modern technologies that ostensibly threaten the existence of banks that have not aggressively tackled the challenge presented by modern technologies. As of 2013, the US banking industry had assets worth $14.45 trillion, with earnings growing by 23% to $43.2 billion and is expected to grow at approximately 31% by the end of 2014. Its impact to the GDP has fledged from 2.5% in 1950s to a present percentage of 7.5% (Pelzer 19). PNC Bank, National Association has been striving to control a significant quota of a market that is greatly dominated by large banks including Goldman Sachs, JPMorgan Chase, Wells Fargo, Bank of America and Citigroup (Barbara 01). However, all these banks are regulated at federal and state level with regulations addressing anti-usury lending, fraud prevention, anti-money laundering, disclosure, privacy and the interest rates to encourage borrowing and savings. Particularly, the US has interceded in fixing of interest rates in an effort to control unemployment and inflation and banks are still operating below their potential. Moreover, times have changed and the banking industry should and must keep up with the dynamic corporate world. Previously, the core competency of a bank was its aptitude to evaluate customers’ needs, manage risks, and provide capital to customers requiring it. Noteworthy, these enabled banks to offer return on capital for shareholders and depositors. Financial managers then had a profound knowledge of the wholesale markets and their clients and could easily provide irreplaceable service. However, the 1980s marked a new beginning for the industry as various processes prerequisite for smooth running of the sector were incrementally automated. In a piecemeal fashion, payment methods evolved, ledgers and paper records were computerized, and the entire market became automated. It resulted in upsurge in processing power, creation of a new client experience, increased communications bandwidth and storage capacity (Pelzer 198). Today, banks have technologies that mimic human process and an examination of the IT budgets of any bank will reveal that maintenance and support contribute the largest amount. However, all this is aimed at achieving efficiency and delivery of services that meet the wants, anticipations and preferences of the diverse customers. With the current mergers and acquisitions, banks expect to have a greater potential of regulating competition and plummeting their expenditures and consequently create a competitive advantage. Overview of the bank PNC Bank National Association has total assets of 307735901 and income total of 10035979 as at December 2013. It’s one of the largest banks in United States of America and third largest in ATM provision (Barbara 01). The bank serves in markets of investments in over 2500 branches in Delaware, Florida, District of Columbia and West Virginia among others. The bank focuses on the asset lending to provide capital to the private entities as the alternative sources of capital to enhance their operations. Additionally, the bank focus on community initiatives as it sponsors health, education and other cultural activities. It commits itself in development investments and early childhood development. Nevertheless, the bank focuses on other acquisition to increase its size. It focuses to expand Florida by acquiring Alabama and Birmingham which will increase its presence in southern United States. The bank has earned a substantial decrease in the investment interest income over a period (-13.45%). Assumptions of Capital pricing model Capital pricing model is a model that defines the real relationship that exists between the expected returns and risks. It also stipulates what is normally used in the pricing of the risky securities. The model is helpful in pricing an individual security or portfolio. The assumptions of capital pricing model The model’s objective is to maximize the economic utilities in the economy. No single individual can influence the prices of the securities. All the investors in the market are risk averse in that they dislike the risks and they normally aim at maximizing the returns. There has been a progressive increase in the net operating income 35.1 leading to a subsequent increase in the cash dividends declared that increased overtime. Furthermore, the retained earnings scaled up with an increase overtime of 148.68. The net loans and leases have been increasing over the last period of time with 4.82. The total earnings assets have too been improving with a trend of 4.78. The average assets during the quarter have increased overtime. Finally, the total liabilities and capital have improved over the last period of time. Opportunities available Opportunities to make correct financial decision: the bank provides the customers with goals and financial plans to help customers grow their business. They create a mutual value exchange by personalizing the experiences based on customers’ needs. To make banking clear and simple: the bank provides relevant and transparent information for customer understanding through social media and on web. This enables customers to access the information 24/7 at a low cost hence understanding their choices. The bank is proactive in anticipating and solving problems: customers’ problems are inevitable and so the bank handles and solves such problems by explaining why such issues occurs and consequently follow up the issues to ensure a complete and successful handling problem. Threats to PNC bank The online operations are normal but difficult when it comes to accessibility through PNC.com when tried. This makes it problematic for customers to get their accounts though their money is safe. There is a major threat on financial services due to cyber-attacks rendering operations inefficient. All the investors are considered as efficient investors in that they like to position themselves on efficient frontier. Their exact location on the frontier depends on their risk return utility. Investors are free to lend or any amount on a free risk return rate. All the investors have homogeneous expectations either that is the future rates of return have identical probability distributions. The inflation rate is anticipated and it may not be totally absent. There is equilibrium in the capital markets. All investments are priced correctly on par with their risk levels. P/E ratio It is the ratio of price to earnings. Price and the earnings are known and predictable overtime. The economic factors such as inflation and interest are anticipated and therefore should not be overlooked. The payout ratio is known and stable over a period of time. Projected Income pro forma statement forecast 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 Interest and Fees on Loans 8,973,613 8,302,363 7,513,257 8,171,129 7,756,257 8,256,134 8,429,095 7,908,245 Investment Interest Income (TE) 2,694,164 2,407,926 2,186,275 2,067,957 1,789,839 1,879,026 1,987,207 2,098,165 Total interest income 11,667,777 10,710,289 9,699,532 10,239,086 9,546,096 10,135,160 10,416,302 10,006,410 Total interest on deposits 1,751,735 974,325 686,172 396,784 350,690 290,981 278,405 242,138 Total interest on borrowing 795,576 490,283 397,196 400,945 365,104 236,657 223,933 209,254 Total Interest Expense 2,547,311 1,464,608 1,083,368 797,729 715,794 710,029 700,189 681,729 Net Interest Income (TE) 9,120,466 9,245,681 8,616,164 9,441,357 8,830,302 9,425,131 9,716,113 9,324,681 Non-interest Income 5,338,210 4,667,711 4,597,877 4,635,852 5,492,207 5,231,906 5,014,297 5,529,015 Adjusted Operating Income (TE) 14,458,676 13,913,392 13,214,041 14,077,209 14,322,509 14,657,037 14,730,410 14,853,696 Non-Interest Expense 8,693,076 8,369,155 8,700,882 9,886,768 9,164,894 9,215,278 9,288,918 9,417,295 Provision: Loan & Lease Losses 3,969,456 2,609,721 1,099,108 977,178 651,026 651,006 651,203 631,296 Pretax Operating Income (TE) 1,796,144 2,934,516 3,414,051 3,213,263 4,506,589 4,790,753 4,790,289 4,805,105 Applicable Income Taxes 637,682 975,361 1,085,144 997,790 1,276,998 1,299,081 1,452,895 890,145 Net Income 1,114,159 1,907,994 2,223,697 2,068,916 3,064,430 3,341,829 3,337,393 3,276,151 Interest and Fees on Loans From the computation, the bank’s growth of interest and fees on loans was 6.4% in the year 2014. This was due to increase from previous year 2013 which was 7,756,257 to 8,256,134 in 2014. Later, there was a decrease in the interest and fees on loans from 8,429,095 in 2015 to 7,908,245 in 2016. This is a 6.2% decrease in interest. This articulates that the interest and fees on loans have high volatility growths hence an assumption of future increase and decrease in the interest and loans as per the economic factors prevailing in the bank environment. Investment Interest Income (TE) From the analysis of the historic data available on the income statement, there has been a decline of investment interest income from one fiscal year to another. For instance, interest income reduced from 8973613as at 31st December 2009 to 8302363 as at 31st December 2010. Another examination shows a decrease from 2067957 in 2012 to 1789839 in 2013. This significant decrease leads to an assumption to be made that there is a succeeding reduction in the interest income to investment over following years. Total interest income The total interest income has all through been increasing although not at a constant rate. For instance, it decreased from 1166777 in the year 2009 to 10710289 in the year 2010. This was a commendable growth for the bank. Subsequently, it improved from 9699532 in 2011 to 10239086 in 2012. This clearly states that though the bank initially performed badly, they improved overtime hence an assumption of future growth. Interest on deposits There was a decrease in the interest deposits due to underperformance of loans. This is due to default risks by the borrowers. For instance, the available data shows there has been a progressive decrease in interest on deposits over time. The interest on deposits decreased from 1751735 in 2009 to 974325 in 2010. A further decrease was from 396784 in 2012 to 350690 in 2013. This makes the assumption of subsequent years to have a decline in the interest on deposits. Total interest on borrowing The interest has been reducing from 2009 to 2013. This is from 795576 2009 to 490283 in 2010, a consequent decrease from 4000945 in 2012 to 365104 in 2013. The trend shows a decrease of the interest over following years. Total interest expense From the trend of the past years, interest expense has been scaling down from a high interest expense of 2547311 in 2009 to 715794 in 2013. From the analysis, this shows that the expense shall continue to decrease overtime in future hence the forecast being based on a continued decline in the interest expense. Net interest income The interest income is found subtracting the total interest expense from total interest income but since interest expense has been diminishing over the past period of time, an assumption of successive amplifying of the net interest income is valid. From the historic data available, net interest improved from 9120466 in 2009 to 9245681 in 2010. The interest itself declined from 9441357 in 2012 to 8830302 in 2013. This decline ascertains future dwindle in the net interest. Non-interest expense The non-interest expense dwindled during the year 2009 to 2012 then improved. This rise in the interest is assumed to increase for succeeding years hence increase in the non-interest income for forecasted years. Adjusted operating income The adjusted operating income initially scaled down from 14458676 in the year 2009 to 13913392 in 2010. This did not let to the discovery of the trend till the rise from 13214041 to 14077209 to 14322509 in the year 2013. These progressive increase clear shows a future increase and not dwindle in the adjusted operating income hence in forecasted operating income. Non-interest expense From the historical data available Non-interest expense amplified overtime from 8693076 in 2009 to 9164894 in 2013. This trend analysis demonstrates that the bank shall experience a rise in non-interest expense in future hence an assumption of future increase in non-interest expense holds water. Provision loan and lease losses The provisions on loan and lease expenses have been diminishing over time. For instance, they declined from 3969456 to 651026 in 2013. This clearly indicates that the provisions will further diminish in future hence an assumption of future drop off in the loan and leases losses. Pretax operating income taxes Pretax operating income improved from 1796144 in the year 2009 through 2010, 2011 and 2012 to 4506589. This progressive point out that other factors held constant, the operating taxes will hike in forthcoming years. Applicable income taxes The applicable income taxes scaled up all through the four years that is from 2009 to 2013. From the trend analysis, given constant operation of the bank, the operating applicable income taxes will continue improving overtime. The net income Due to effective company operations and effective management of financial management, the income has been growing for instance in 2009, the bank had net income of 114159 that increased to 3064430 by 2013. In conclusion, the above elucidation candidly indicates that PNC Bank, National Association is financially and expects to grow significantly in the imminent future. However, it has to effectively handle the challenge of new technology and explore more markets both within and without America. Works Cited Barbara Schenck. "PNC Bank, National Association: Private Company Information - Businessweek." Businessweek.com. N.p., 2012. Web. 20 Nov. 2014. http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4224636 Pelzer, Peter. Risk, Risk Management and Regulation in the Banking Industry: The Risk to Come. New York: Routledge, 2013. Print. Read More