The Rationale for Hedging Currency Risk True/False In a perfect financial market, financial contracts are zero-NPV investments. ANS: True. If hedging currency risk is to add value to the stakeholders….
Capital One Bank Evaluation
Bank Performance Evaluation Project Capital One Bank Capital One Financial Corporation’s headquarters is in McLean, Virginia and in the Federal Reserve district five, The Federal Reserve of Richmond, Virginia. It is number 89 in peer group one with their consolidated assets of over $300 million. Peer group one banks are institutions that have equal to or greater than $10 million in consolidated assets. Capital One Bank specializes in credit cards, home loans, auto loans, while providing banking and savings products.
They are a Fortune 500 company and have paved the way for mass credit card marketing in the 1990’s. Since its inception in 1988, Capital One has acquired numerous smaller banks and has kept growing to become one of the most well know bank holding companies in the United States. Unfortunately in November 2008, Capital One Bank suffered devastating losses and received $3. 5 billion bail-out funds from the Federal Emergency Economic Stabilization Act. But by mid 2009, Capital One Bank had bought back over 3. 5 million of their preferred stock shares from the United States Treasury.
Although Capital One Bank has experienced some economic hardships in the recent past, it seems to be holding steady after the wake of the 2008 financial system meltdown. If we take a close look at this bank’s performance report, we can find some interesting information about their biggest asset components. For Capital One’s assets their percentage for loans to individuals is relatively high, 36. 77 percent compared to that of the peer group average of 4. 98 percent. This is indicative of a company that produces a large number of loans to individuals in the form of real estate, auto, and credit cards.
This also indicates that this bank is interested in making profits from interest on loans. Real estate loans for this company are high with 22. 26 percent compared to the peer group average of 32. 89 percent. Although this bank dabbles in commercial banking, it keeps its commercial and industrial loans to a minimum in comparison to its other peer one counterparts. There are a few areas where Capital one shows virtually no interest such as; agricultural loans, investments in mutual funds and equity securities, and fed funds sold and reverse repos which are purchased under an agreement to resell.
Federal funds sold are used for overnight funds that “keep balances on deposits at Federal Reserve Banks for purposes of clearing daily checks and deposits”(Olsen Research Associates). A reason Capital One Bank does not use this practice may be because it does not want to risk losing assets in the event that the borrowing bank defaults. Because Fed Funds Contracts are not secured they are always subject to loss if the borrowing bank defaults (Olsen Research Associates). Capital One Bank has relatively average percentages of debt securities of less than or more than one year.
A debt security can be bought or sold between two parties, has defined amounts, rates, and maturities. As a whole, debt securities are relatively safer than equity securities because they have a principal amount that is returned to the lender at a specified maturity date. Moving on to the liquidity and funding of Capital One Bank, the core deposits are above those of other peer banks at 64. 84 percent compared to 55. 17 percent. Core deposits are comprised of demand deposits, deposit accounts that are subject to negotiable orders of withdrawal or automatic transfer from the savings accounts.
This section also includes time deposits of less than $100,000, money market deposit accounts, other savings accounts, and other non-interest bearing deposit balances. Banks count on core deposits to fund loans while offering advantages “such as predictable costs and a measurement of the degree of customer loyalty” (Core Deposits). Core deposits are less vulnerable to short-term changes in the interest rates than CD’s or money market accounts (Core Deposits). The net loans and leases percentages of Capital One Bank are high as well compared to their competing banks.
This is due to the high number of loans this bank awards to individuals in the form of mortgages, car loans, personal loans, and credit cards. Credit card loans blow the competition out of the water with an extremely high 40. 9 percent compared to peer group one’s average of 2. 41 percent. The liquid assets of Capital One are slightly lower in comparison to their peers by about 10 percentage point; this is another indicator that this bank produces numerous loans and has its assets “tied” up.
Turning the attention to the relative income statement and marginal analysis portion of the report will describe the key components of earnings relative to average assets, margin analysis ratios, the yields or returns of specific assets, and the cost of funds. The report shows that Capital One’s main source of income is interest income including; high interest income equaling a higher net interest income. Adjusted operating income, which is net interest income plus non-interest income, for Capital One Bank is 7. 45 percent to the peer group average of 4. 74.
This is almost twice the amount of income from interest over its competitors. After accounting for operating expenses and realized gains and losses, the company has a pretax net income of 1. 82 percent and a net operating income of 1. 38 percent. The company’s interest expenses are insignificantly higher than those of its peers. Capital One has made provisions for loan and lease losses which are monies set aside for default loans. These provisions are greater than the competitors by 1. 25 percent and represent the bank’s desire to survive if loans default.
Looking at the margin analysis portion of this section, you can note that the net interest income to average earning assets is twice as high as its competitors in peer group one at 6. 49 percent. It is safe to say that Capital One Bank receives the majority of its income from interest. “Capitalization is the long-term funding that allows a business firm to operate. It is the investment that the business owner and any other investors make in the firm. It is a financial term which refers to the sum of the stockholder’s equity of the firm and the firm’s long-term debt, such as bonds or mortgages” (Peavler).
Capitalization is also a measurement of business value based on the share price and number of shares outstanding. This is generally the market’s representation of the company’s value (Ycharts). For Capital One Bank, there capitalization is relatively similar to its counterparts. Equity capital to total asset ratio for Capital one is 13. 13 percent while the average for peer group one is 11. 30 and does not represent a substantial difference. Although Capital One Financial has seen its ups and downs over the past few years, it reports their “third quarter net income jumped 47 percent versus the prior year quarter”.
This increase in profits is credited to the acquisition of ING Direct a financial institution of Dutch origin offering banking, insurance, and asset management services, and HSBC’s United States card business (Associated Press). Net income increased $357 million from this time last year and price per share went from $1. 77 to $2. 01, a 24 cent increase (Associated Press). Revenues also soared 39 percent to $5. 78 billion. Capital One Financial reports that it expects consumer demand to slow down soon, but they are prepared for what the future holds. ————————————————-
Top of FormDec 10, 2012 12:17 p. m. ET| COF (Common Stock) | Exchange:NYSE (US Dollar)| Last Trade| $57. 77| Change| + 0. 70| | | | % Change| 1. 23%| | Volume| 1,167,465| Intraday High| $57. 80| | Open| $56. 91| Intraday Low| $56. 78| | Minimum 20 minute delay Bottom of Form| | (Capital One: Stock Quote and Chart) Works Cited Associated Press. “News Summary:Capital One Posts Higher 3Q Profit. ” Bloomberg Businessweek News. 18 2012: n. page. Web. 10 Dec. 2012. <http://www. businessweek. com/ap/2012-10-18/news-summary-capital-one-posts-higher-3q-profit>. “Capital One Financial Corporation Market Cap. Ycharts. N. p. , 06 2012. Web. 6 Dec 2012. <http://ycharts. com/companies/COF/market_cap>. “Core Deposits. ” Investopedia US. United States: 2012. <http://www. investopedia. com/terms/c/core-deposits. asp Olsen Research Accociates, . “Term Federal Funds Sold. ” BANKdynamics. Olsen Research Associates, Inc. , 07 2007. Web. Web. 1 Dec. 2012. <http://blogs. olsonresearch. com/bankdynamics/2007/09/term-federal-fu. html>. Peavler, Rosemary. “Business Finance. ” Business Finance. n. page. Web. 6 Dec. 2012. <http://bizfinance. about. com/od/glossaryoffinanceterms/g/Capitalizatio