Banc One Corporation Harvard Case Solution & Analysis

Banc One Corporation Case Study Solution

ARIS in Banc One

AIRS stand for “Amortizing Interest Rate Swaps”. It is developed by Banc one and its counter parties. It facilitates the borrowers by its flexible polices such as: for mortgage securities, it provides with lower interest rate with prepay mortgages. It facilitates with the attractive yields. Banc one has to pay LIBOR; a fluctuating rate based on market trend, while receiving a fix income from fixed interest rate with the help of swaps. This leads to an onlinear earning sensitivity, which causes decline in the revenues with double effect if the interest rate increases.(Schoutens, 2003)

Basis Swaps

Basis swap best works under the interest rate term. Basis swap is an agreement that illustrates a change in the interest rate based on prevailing market rates. Basis swap helps the company in decreasing its interest rate risk by averting its interest risk with other interest rates.

Initially, Banc one was working on the basis of asset sensitive but gradually it analyzed a change in its structure because of its policy of not depending on fluctuating interest rates for its earnings. This shows a decreased profit trend because earnings have become fixed whereas, the payments are made on the fluctuation basis. To avert this situation; the company has increased its earning sensitive portfolio, which has led to increased profits and requirement of a wider portfolio for more revenue generation. (Vang, 2010)

Bank’s Stock Price

The bank uses derivatives and swaps to present its financial projections annually, because it is a new financial tool that shows the true financial condition,but the company’s investors are unhappy with this situation and have criticized the company’s usage of this technique to manipulate its earning and its liquidity condition. Concerning this situation, it has led to a decrease in the company’s stock price by a significant margin.It has become more difficult for the investors to analyze the real risks associated with the company and the profit that it actually generates. The company’s  stock price has witnessed a decrease of $10.

Recommendations

After having a thorough analysis of the current situation; it is suggested that the company should modify its current strategy. Three alternative solutions have been provided by McCoy and Lodge,out of which the first solution would cause negative impact on the investors as it lacks in providing a best suited solution to cope up with this situation. The second option suggests cutting down of its derivatives portfolio, which is also not a good solution because it will leave the company with an increased interest rate as well as with lower revenues. The third option is relatively better as compared to the other options suggested. It suggests that Banc one should educate its investor about the usage of derivatives and should increase their knowledge about how it could be beneficial for them. It is recommended that company should arrange awareness programs for its investors in order to increase and enhance their knowledge about the structural benefits that could rise from this policy, along with addressing some of the liquidity aspects by showing the expected profitability.

 

Appendices

Appendix: 1

proposed projections
Total Assets
($ millions)
Net Income ($ millions)Net Income Per ShareReturn on Average AssetsReturn on Common EquityStock PriceTotal Market Capital
($ millions)
Average Common Equity to AssetsNet Interest MarginaCredit Rating on Senior Debt
19931Q73,8682000.58          369.3418.9450.0011,9568.186.57AA-
2Q73,6862040.59          361.2117.9152.0012,2788.446.30AA-
3Q74,226208.080.60          356.7217.4353.0011,3238.606.22AA-

 

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