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Commercial bank operations
For the commercial bank that we’ve selected at the beginning of the term, we’ll be using its annual report or any other related information to answer the following questions:
Identify the types of deposits that the commercial bank uses to obtain most of its funds
This Bank has the most of its funds because of :
Interest bearing deposits
Non-interest bearing deposits
Interest bearing deposits (foreign)
Non-interest bearing deposits (foreign)
Identify the main uses of funds by the bank. c. Summarize any statements made by the commercial bank in its annual report about how recent or potential regulations will affect its performance.
Bank mainly invests in federal funds and securities. From Consolidated balance sheet from edgar sec (261,131 million of $ worth of sold securities)
Does it appear that the bank is attempting to enter the securities industry by offering securities services? If so, explain how.
I believe that the bank already sells securities as we can see in ‘Notes to financial statements’ under ‘securities’ they offer various securities. And there are securities for sale so Bank of America does not want to enter the securities market, because it is already in it.
Does it appear that the bank is attempting to enter the insurance industry by offering insurance services? If so, explain how.
Bank of America offers various types of insurances. You can find them in the Financial statement as well.
Commercial bank management
Assess the bank’s balance sheet as well as any comments in its annual report about the gap between its rate-sensitive assets and its rate-sensitive liabilities. Does it appear that the bank has a positive gap or a negative gap?
Bank of America has a significant part of its assets in loans and leases which very often have variable rates. Bank earns on any interest rate rise. On the other side, bank has interest bearing deposits but they mostly have fixed rates. Therefore, I believe that Bank of America has a positive gap between rate-sensitive assets and liabilities.
Determine the bank’s interest income as a percentage of its total assets.
All of the data are taken from official edgar sec page from 10-k Annual Financial statements.
Total Assets from ‘Consolidated Balance sheet’
Total interest income from ‘Consolidated Statement of Income’
total_assets <- 2354507000000 # 2,354,507 million USD
total_interest_income <- 66769000000 # 66,769 million USDinterest_income_percentage <- (total_interest_income / total_assets) * 100
print(interest_income_percentage)## [1] 2.835795Determine the bank’s interest expenses as a percentage of its total assets.
total_interest_expense <- 19337000000 # 19,337 million USD
interest_expense_percentage <- (total_interest_expense / total_assets) * 100
print(interest_expense_percentage)## [1] 0.821276Determine the bank’s net interest margin.
net_interest_income <- 47432000000 # 47,432 million USD
average_earning_assets <- (2354507000000 + 2281234000000) / 2 # Average of Total Assets for 2017 and 2018
net_interest_margin <- (net_interest_income / average_earning_assets) * 100
print(net_interest_margin)## [1] 2.046361Determine the bank’s noninterest income as a percentage of its total assets. Determine the bank’s noninterest expenses (do not include the addition to loan loss reserves here) as a percentage of its total assets.
total_non_interest_income <- 43815000000 # 43,815 million USD
non_interest_income_percentage <- (total_non_interest_income / total_assets) * 100
print(non_interest_income_percentage)## [1] 1.860899total_non_interest_expense <- 53381000000 # 53,381 million USD
non_interest_expense_percentage <- (total_non_interest_expense / total_assets) * 100
print(non_interest_expense_percentage)## [1] 2.267184Determine the bank’s addition to loan loss reserves as a percentage of its total assets.
Provision for credit losses = 3,282 million USD
Total Assets = 2,354,507 million USD
provision_for_credit_losses <- 3282000000 # 3,282 million USD
total_assets <- 2354507000000 # 2,354,507 million USD
percentage <- (provision_for_credit_losses / total_assets) * 100
print(percentage)## [1] 0.1393922Determine the bank’s return on assets.
Net income from ‘Consolidated Statement of Income’ = 28,147 million USD
Total Assets from ‘Consolidated Balance Sheet’ = 2,354,507 million USD
net_income <- 28147000000 # 8,147 million USD
total_assets <- 2354507000000 # 2,354,507 million USD
return_on_assets <- (net_income / total_assets) * 100
print(return_on_assets)## [1] 1.195452Determine the bank’s return on equity.
Net income = 28,147 million USD
Total shareholder’s equity = 265,325 million USD
net_income <- 28147000000 # 28,147 million USD
total_shareholders_equity <- 265325000000 # 265,325 million USD
return_on_equity <- (net_income / total_shareholders_equity) * 100
print(return_on_equity)## [1] 10.6085##L5.13
Identify the bank’s income statement items described previously that would be affected if interest rates rise in the next year, and explain how they would be affected.
Interest income – positive impact, because bank would earn more on loans and investments.
##L5.14
Identify the bank’s income statement items described previously that would be affected if U.S. economic conditions deteriorate, and explain how they would be affected.
Provision for credit losses – as the market condition worsens, bank’s risk on loans and credit losses increases, so the bank needs to increase its provision for losses on the loans which would decrease the demand for those services.
Mutual funds
For the mutual fund that you selected at the beginning of the term, use its prospectus or any other related information to answer the following questions.
What is the investment objective of this mutual fund? Do you consider this mutual fund to have low risk, moderate risk, or high risk?
The S&P 500 mutual fund is a moderate risk investment due to its diversification across 500 large companies.
What was the return on the mutual fund last year? What was the average annual return over the last three years?
Return for year 2023 = 26.29%
Average return from the last 3 years = (26.29 - 18.11 + 28.71) / 3 = 12.3%
return_2021 <- 28.71
return_2022 <- - 18.11
return_2023 <- 26.29 # 28,147 million USD
average_return <- (return_2021 + return_2022 + return_2023) / 3
print(average_return)## [1] 12.29667What is a key economic factor that influences the return on this mutual fund? (That is, are the fund’s returns highly influenced by U.S. stock market conditions? By U.S. interest rates? By foreign stock market conditions? By foreign interest rates?)
S&P 500 is heavily influenced by fluctuations of stocks of companies included in S&P 500. It is highly dependent on stock market conditions.
Must any fees be paid when buying or selling this mutual fund?
Vanguard charges $25 for each brokerage account and 0.25% to 1% of transaction value depending on the amount.
What was the expense ratio for this mutual fund over the last year? Does this ratio seem high to you?
Securities firms
For the securities firm that you selected at the beginning of the term, use its annual report or any other related information to answer the following questions.
What are the main types of business conducted by the securities firm?
These companies serve individuals and companies by being an intermediary between buyer and seller on the financial market,offering a wide range of financial services including:
Trading
Investment banking
Asset management
Wealth management
…
Summarize any statements made by the securities firm in its annual report about how it may be affected by existing or potential regulations.
In their Financial statement in Part 1, Item 1A, Risk Factors, JP Morgan stated:
Regulatory risks, including the impact that applicable laws, rules, and regulations in the highly-regulated and supervised financial services industry, as well as changes to or in the application, interpretation or enforcement of those laws, rules and regulations, can have on JPMorgan Chase’s business and operations.
Describe the recent performance of the securities firm, and explain why the performance has been favorable or unfavorable.
JP Morgan’s performance in 2024 has been extremely successful due to many factors such as: rising interest rates which increase their margin on loans; high activity in financial markets; good revenues from branches like wealth management or investment banking and strong economic growth.