Banc One Corporation+Case Study Solution

SUMMARY OF THE CASE STUDY

Banc One Corporation is a regional bank with $76.5 billion in assets. It was the largest bank holding company in Ohio, and the eighth largest in the USA. In addition to its 78 banking affiliates, Banc One controlled 10 nonbanking organizations in various business ranging from insurance to venture capital to data processing.

“Uncommon Partnership” means decentralized the people side of the business and centralized the paper side consisting with the strategy of economic scale. Although, it was an extremely complicated and decentralized organization, Banc One had one of the best financial track records in the country with highest average ROE, ROA and with string of 24 years of increasing EPS.

The main problems Banc One is currently facing according to the case study are falling share price of its stock from $48 to $36 within April - November 1993 which has a direct impact on its pending acquisition of Liberty National Bankcorp. The possible reasons for falling share price could be Banc One’s large growing interest rate derivative portfolio (synthetic CMO, AIRS) which concerns the shareholders as they are not comfortable with so much derivative exposure due to their unawareness about swaps and derivative as a tool to hedge the possible interest rate risk.

The recommended solutions to the problems highlighted above:

● Banc One should not continue to grow its interest rate derivative portfolio and should wait for the stock price to recover over time until the investors realized that derivative were helping bank manage interest rate and basis risk.

● Educate the investors and inform the analysts about how they use derivative and also explain that hedging position was the most prevalent option to take.

● It should not completely abandon their use of derivative unless Banc One can find alternate non- derivative safer methods.

1)

Considering like other banks, the Banc One’s basic portfolio was asset sensitive; therefore, without using swaps, Banc One could manage its market interest rate exposure through different ways:

● Banc sells floating rate investments OR

● Borrows at floating rate and use this proceeds TO

● Buy a fixed rate asset, such as Treasury note (balancing asset).

● Banc One reduces the offering of fixed-rate CDs, thus decreasing the proportion of fixed rate liability.

In summary, the potential target is to readjust the proportion among floating rate asset (decrease), fixed-rate assets (increase), floating-rate liabilities (increase) and fixed-rate liabilities (decrease).

Pros

● Swaps greatly improved

...

 

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