Bank One Case Essay

1476 Words Nov 28th, 2010 6 Pages
1. What are Banc One’s problems and why is share price decreasing?
The problem with Banc One is that their stock price is going down and is hurting their core growth strategy of acquisitions.
Compared with the financial results of the country’s largest 25 bank holding companies, Banc One has been very successful during the decade since 1982. It has the highest and most consistent ROA, ROE and EPS. Its EPS has been consistently growing for the last 24 years which none of the other banks have been able to imitate. The reason behind the success of Banc One has been a three pronged approach: * retail and middle market commercial customer focus * Superior Technology * Rapid growth by acquisition
They acquire retail regional
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(2) Maintain liquidity of the investments to quickly react to the demands for cash (3) Control the exposure of the reported earnings to the interest rate shifts
This was carried out by two ways (management of balancing assets): (1) Use of investment securities – They can sell floating rate investments and use the proceeds to buy a 3 year fixed rate treasury note. This deal will increase the relative proportion of bank’s fixed rate portfolio. (2) Use of derivatives – For example, Banc One can create an interest rate swap in which it paid a floating rate of interest and received a fixed rate in return. Such a transaction would increase the bank’s fixed rate inflows and reduce its periodic net floating-rate inflows.

(2) Reducing the Asset sensitivity of the portfolio
Banc One’s basic portfolio was asset sensitive because of their strategy to grow by acquisitions. Most of their commercial loans were indexed to the prime rate and shifted contractually with market rates. However, their liabilities were mostly fixed rate items whose rates changed much more slowly than market indices leading to higher earnings when the rates go up. This natural asset sensitivity was further supplemented by the acquisition program because most of their acquired banks were asset sensitive. Banc One had a policy to keep the earning sensitivity

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