Capital One Bank Analysis Assignment

FNCE 3600:  E01: Capital One Bank Analysis Assignment

 

Hi all. Hope you are doing well!J

Here is your Bank Analysis assignment for Capital One Bank-with  selected pages of Capital One’s Uniform Bank Performance report (UBPR) posted as a pdf &

also an excel file posted in Module 4with tabs showing the ratios on these pages for each section for easy copying for your analysis.

 

• The bank performance/risks analysis can be done individually or as a team (2 to 4 individuals)—youcan select your own team and let me know and I’ll set up a Canvas team space for you.

 

• The analysis is due any time before or by November 10^th to upload to the Module 4DropboxAnalysis drop box (early turn-ins always welcome J). 

 

• The analysis is based on what you learned in Module 3 & Chapter 4 of the

Textbook pages 92 to 102 for Bank Star.  Also, in Module 3, see the audio

“OverviewUBPR Performance Analysis” for an example UBPR analysis.

 

• For an example analysis see the sample analysis write up for Meridian Bankposted in Module 3 (along with select pages of its UBPR report as a pdf).

You canuse the Meridian Sample Word file to set up your analysis, but remember Capital Bankis a much large bank—focusing on different types of loans, so your sectionscan be quite different from the Meridian sample example writeup).

 

• You will be analyzing the trends for 12/31/2019 from 12/31/2018 and a Peer comparison for 12/31/2019.

 

Overview Capital One:  Capital One began in 1988 with the support of Signet Financial Corporation& was spun off in 1994.  Capital One is now a large Financial Holding Company (ranked #11 in the U.S. with average total assets of about $313 billion) among top banks classified in Peer Group 1 (PG1)). It is  well-known for its extensive credit card offerings.  Capital One Bank also offers credit cards, checking & savings, auto loans, business banking services, and commercial loan with a network of no ATMs and ful- service branches in select U.S. states. It is unique by having no monthly fees or minimum balance requirements for checking and savings accounts & no fee access to over 39,000 ATMs & its mobile banking app, and coffee shops in some cities.The majority of Capital One Bank’s loans are in consumer loans (about 49%, with about 39% in auto loans&10% in credit card loans), with 20% in real estate loans (just 1.29% of these  in construction & development loans & 11% in non-farm non-residential loans) and 18% of its loans in commercial loans.

For your analysis, basically you’ll be doing a performance/risk trend analysis for

12/31/2018 to 12/31/2019 & a peer comparison for 2019, including:.

 

• An OROA Analysis, where OROA = NIM – PLL% – Burden%, explaining why Capital One’s OROA changed from 2018 to 2019 including examining why the NIM changed (IR% – IE% & funding gap) and the Burden changed (NIE% – NIR%), & comparing these items in 2019 for Capital One and its Peers to point out strengths/weaknesses for Capital One.

 

• A Dupont Analysis, where ROE = NPM x AU x EM to explain why

the ROE for Capital One changed from 2018 to 2019, and why Capital One’s ROE is different from the PG1 in 2019 to point out strengths/weaknesses for Capital One.

 

• A Burden Analysis examining why Capital One’s Burden % change in 2019 and comparing it to the PG1’s Burden in 2019, to point out strengths/weaknesses for Capital One.

 

• A Net Interest Margin Analysis (examining why there was a change in Capital One’s NIM based on IR% and IE% for Capital One based on (1) volume (% of earning assets & interest bearing liabilities & % loans); (2) mix (types of loans and types of liabilities); and (3) rates on loans & rates on liabilities), and why Capital One’s NIM differs from the Peers in 2019 based on these factors.

 

• A Risk Analysis examining Capital One’s credit risk, interest rate risk, liquidity risk, off-balance sheet risk, and capital risk compared to the PG1 in 2019.

 

 

*** ImportantNote: Ratios are already calculated for you on theselected UBPR pages,

so you won’t need to do any calculations, except for the Dupont Analysis (calculating AU, NPM, EM, and ROE).***

 

 

The Bank Analysis is due to the Module 4 DropbxBank Analysis drop box any time before or by November 10^thJ (early submissions always welcome!).

 

            See the sample analysis for Meridian Bank with is UBPR selected pages in Module 3 before you start your analysis.  You can use this format for your analysis,

but realize that Capital One is a very different, much larger bank holding company.

 

In Module 4, you’ll see three files posted in Module 4:

• This Word File giving an overview of the analysis assignmentparts and UBPR pagesto use for each section.

 

• The Pages forCapitalOneSelectPagesUBPRReport2019.pdfthat gives the pages you will need for the analysis.

 

• xlsthat gives a spreadsheet with all the ratios from the selected Capital One pages for easy copying for your analysis.

 

****Before you start  see the Sample Analysis for Meridian Bank with its selected UBPR pages posted as files in Module 3.  Module 3 discusses UBPR reports and has an overview audio example of how to do a financial performance and risk analysis using a UBPR report focusing on Chapter 4 in the textbook that also an example analysis on page 92-102 for Bank Star.

 

Here is an overview of the selected UBPR pages on the Capital 1SelectPagesUBPRReport2019.pdf:

 

(1) Page 0: Cover sheet for Capital One (shows that Capital 1 is in Peer

Group 1 (Banks >$100 billion) and that it is headquarters in McClean, Virginia

 

(2) Page 1: Summary Ratios: At the top,Earnings & Profitability Analysisgives you a common size income statement as a % of total average assets; along with a margin analysis and other risk ratios for Loan Credit Risk, Liquidity, Capitalization, and Growth Rates. At the bottomCapital One is shown to have 312.737 billion in average total assets.(All ratios shown are %).

 

(3) Page 3: Noninterest Income, Expenses & Yields: The top section under “Percent of Average Assets” shows each type of expense as a % of total average assets for your Burden analysis, and the efficiency ratio (non-interest expenses divided by net interest income and non-interest revenue) (higher more inefficient).

Below this, the section “Yield on or Cost of” gives rates for different types of loans and securities; and starting with “Total Interest Bearing Deposits” gives the rates on different types of deposits and other liabilities for your NIM, rate analysis.

 

(4) Page 5: Off Balance Sheet Items: This page shows off balance sheet items as a % of total assets, including LN&LS Commitments and Off-Balance Sheet Items Outstanding (at the bottom) for assessment of off-balance sheet liquidity risk and overall off-balance sheet risk.

 

(5) Page 5B: Derivative Analysis:  This page provides %’s of total assets for derivatives used by Capital One for hedging interest rate, foreign exchange rate, and other risks, and for trading.

 

(6) Page 6: Balance Sheet Composition:  Under Percent of Average Assets, this page provides a common size balance sheet for % of each asset held by the bank as a % of total average assets (asset mix), and towards the bottom “Under Liabilities” the liability mix with the % of different types of deposits and other liabilities held.

 

(7) Page 7: Analysis of Credit Allowance and Loan Mix:  For a credit risk analysis, this page shows analysis ratios for credit risk including the % of loan loss provisions to total average assets; the % of recoveries to prior credit losses; the % net loan & lease loss to average total loans and leases; the % of loan and lease allowance to total loans & leases, & the earnings coverage of net losses; along with net loan loss % for different types of loans

 

(8) Page 7A:Analysis of Credit Analysis & Loan Mix: Gives % details for types of loans that the bank has including % real estate loans & % then types of real estate loans and down the page other types of loans including financial institution loan%, agricultural loan%, commercial loan%, loans to individuals% (i.e. consumer loans), and then types of consumer loans%; and then municipal & other types of loan %.

 

(9) Pages 8 & 8A: Analysis of Past Due, Nonaccrual & Restructured Loans: For a credit risk analysis, this page gives %s for loans where payments are past due.

 

(10) Page 9: Interest-Rate Risk Analysis as % of Assets:  For the bank’s interest-rate risk analysis, this page shows at the top the % of loans & securities, the bank has that are long-term.  Towards the bottom of the page, you’ll see Net 3 Year Position (loans  & securities over 3 years less liabilities over 3 years) and the same for the Net 1 Year Position.  A positive position indicates a negative funding gap & a negative position a positive funding gap.

————————————————————————————————————

Here are details for each section you need to include for your analysis:

1. Introduction: Give a brief overview of Capital One including the types of loans the bank makes.
2. Profitability Analysis.
3. OROA Analysis:

Explain in detail why the OROA changed for in 2019 for Capital One and for 2019 why Capital One’s OROA  from its peers (PG1).

What strengths & weaknesses does Capital One have versus its Peers, the PG1?

What kind of funding gaps does Capital One and the PG1 respectively have?

 

Recall:   OROA = (IR% – IE%) – (NIE% – NIR%) – PLL%

 

See Page 1: Earnings & Profitability Analysis & Risk Ratios (format below): Note each item is already a % of total average assets, so each items is as a %:

Interest Income (TE)      (This is interest Revenue to Assets) (IR%)

– Interest Expense        (This is interest Expense to Assets) (IE%)

Net Interest Income (TE)(This is the NIM)

+ Noninterest Income (This is Non-interest Rev. to Assets) (NIR%)

– Noninterest Expense (This is Non-interest Exp. to Assets) (NIE%)

– Provision: Loan & Lease Losses  (This is the PLL%)

Pretax Operating Income       (This is the Pre-tax OROA)

+ Realized Gains/Losses         (% Sec/Gains or Losses)

Pretax Net Operating Income (TE)      (Pre-tax OROA)

Net Operating Income         (OROA)

Net Income                           (ROA)  (after adjustments and taxes)

 

1. Do a Dupont Analysis for ROE = NPM x AU X EM.

Use the information above on Page 1: Earnings & Profitability Analysis:

• Solve for Asset Utilization (AU) = Interest Income % + Non-Interest Income%
• Then solve for NPM = ROA / (AU expressed as a fraction)
• Then look at the bottom of p. 1 under Capitalization for Tier One Leverage Capital %, which is the bank’s equity to asset ratio.
• Solve for EM = 1 / (Tier 1 Capital Ratio as a fraction)
• Solve for ROE = ROA x EM

Example: Suppose interest income (IR%) = 3.00% & non-interest income (NIR%) =1%.   Solve for AU = 3% + 1% = 4% or as a fraction = .04.

Suppose ROA = 1%; solve for NPM = ROA/AU = 1% / .04 = 25%

Suppose Tier One Leverage Capital  (equity/assets)= 10% or .10

Solve for EM = 1/.10 = 10 and Solve for ROE = ROA x EM = 1% x 10 = 10%

 

Analyze why ROE changed in 2019, look at changes in NPM, AU, and EM changes to see which went up or down. Explain  why the ROE differs for the most current year  and the strengths/weaknesses that Capital One has versus its peers.

 

III. Do aNIM Analysis (based on mix and rates for assets & liabilities to explain why the NIM changed and is different from the peers)

 

1. Margin Analysis: (See page 1: Summary Ratios, Under Margin Analysis):

Explain how the % earning assets compares to the PG 1 that affects the IR%, and how the % of average interest bearing funds compares to the PG1 that affects the IE%, and examine any changes from 12/31/2018 and 12/31/2019 and how this affected any change in the IR% and IE% for the Bank.

 

1. Asset Rate & Mix Analysis:
2. Asset Rates: See page 3: Noninterest Income, Expenses and Yields

See the section below that starts off with Yield on or Cost of: That shows the average interest rates on loans and then rates on individual loans, securities, and other assets.   Compare rates for the Bank to the PG1 to explain why their IR%’s differ, and to explain the trend in the Bank’s IR% from 2018 to 2019.

 

2. Asset Mix: See Page 6: Balance Sheet Percentage Composition

Look at the % of loans held by the Bank compared to the Peers and trends in this % to explain why their IRs’ differ and why the Bank’s IR% changed.

Then look at page 7A: Analysis of Credit Allow & Loan Mix:  Look under Loan Mix % and compare the types of loans that the bank holds to the PG1 to help explain why the IR% for the bank differs from the PG1 and look for any changes in mix to explain why the bank’s IR% changed in 2019 (think about rate/mix effects—looking back at the asset rates for different types of loans).

 

1. Liability Rate & Mix Analysis:
2. Liability Rates:See page 3: Noninterest Income, Expenses and Yields: Look down the page after asset yields, Starting with Total Interest Bearing Deposits you’ll see s the average rate the bank pays for its deposits as liabilities, followed by the rates paid on different transaction, other saving, & time deposits, followed by the rates on other non-deposit types of liabilities.  Analyze differences between the Bank &the PG1 to explain why their IE%’s differ, and to analyze trends for the bank.

 

2. Liability Mix: See Page 6: Balance Sheet PercentageComposition towards the bottom of the page under Liabilities, that lists the %’s the bank has for different types of liabilities, and the total % of core deposits. Compare the differences between the bank and the PG1 to explain why their IE%s differ, and also look at trends for the bank in liability mix to explain changes over time in its IE%.

 

1. Burden Analysis: See page 3: Noninterest income and expenses. Compare the Bank’s different expense %’s to the PG1 to explain why their NIE%s differ.  Also compare their Overhead less noninterest income and Efficiency ratios.  Also look at trends in expenses to explain why the bank’s NIE% changed over time.

 

1. Risk Analysis: Do a Peer Comparison for 2019
2. Credit Risk: Comparison to the Peers in 2019:
3. Discuss any loan composition differences from your earlier analysis in terms of lower or greater risk than the PG1.
4. See Summary ratios—page 1 down the page under Loan & Lease Analysis:
   Use these ratios to compare the Bank’s credit risk to the PG1 in 2019 including the net loss to average total loans & leases, earnings coverage to net losses, loan and lease allowance to loans & leases; and total loans and leases 90+Days, and past due nonaccrual; and total non-accrual loans to compare the Bank & PG1 for credit risk.

(Also, see Analysis of Credit Allowance and Loan Mix—Page 7 for more details and net losses for particular types of loans & page 8 & 8A for details on different types of loans for non-accruals).

 

1. Interest Rate Risk: Comparison to the Peers in 2019:
2. Based on your previous NIM analysis, discuss the type of funding gap that the Bank exhibited in 2019 and the PG1 exhibited (remember if rates go up and a bank’s NIM goes down, or if rates go down and a bank’s NIM goes up, this implies a negative funding gap; while if the opposite occurs, this implies a positive funding gap).

 

2. 2. See Interest Rate Risk Analysis as a % of Assets—Page 9: Examine towards the bottom of the page, the Net Over 3 Year, and Net Over 1 Year Position %s (with larger positions indicating greater interest rate risk & a positive position indicating longer maturity assets than longer maturity liabilities, i.e. a negative funding gap).

 

1. Liquidity Risk: Comparison to the Peers for 2019:
2. See page 1: Summary Ratios: Look down the page for Liquidity Ratios (i.e. net non core fund dependence; net loans & leases) and Tier One Leverage Capital%.
3. See page 6: Balance Sheet Percentage Composition

(i.e. % core deposits & % brokered deposits & % of time deposits above insurance limit for liability liquidity risk; and % available for sale securities for asset liquidity risk)

3. See Page 5: Off Balance Sheet Items page 5 for off-balance sheet liquidity risk (i.e. % loan & lease commitments & % Off-Balance Sheet Items Outstanding)

 

1. Off-Balance Sheet Risk: See Page 5: %Off Balance Sheet Items and Page 5B Derivative Analysis: % Held for Trading

 

1. Capital Risk: See Page 1: Summary Ratios: Towards the bottom of the page, see Capitalization (i.e. Tier One Leverage Capital, Capital Dividends to Net Income, Retained Earnings to Average Total Equity). Also compare the Growth rate in Tier One Capital to the Growth Rate in Assets.

 

1. Summary and Conclusion: Give a detailed summary of what you found in your analysis on the performance and risk of the bank compared to the Peers and trends, and your conclusions about the strengths and weaknesses for the bank and any suggestions for improvement.

 

Have fun.  Let me know if you have any questions.