You are on page 1of 11

REPORT ON

U.S. BANK OF WASHINGTON (The Redhook Ale Brewery)

GROUP NO: 2
BHASKAR JAIN 105 ARVIND KUMAR 153 SUHAS ANJARIA 202 ABHISHEK SHAH 319 SIDDHARTH LAHOTI 409 MANSI AGRAWAL 502 GROUP NO: 2 Page 1

Performance of US Bank in comparison to all US insured Commercial Banks:


To analyze the performance of US Bancorp, several financial parameters have been calculated and then compared with the industry benchmarks. The parameters taken into consideration are: ROA, ROE, gross interest income, net interest margin, retained earnings and cash dividends. Also, revenues earned from different industries have been compared with the industry standards to highlight the sectors preferred by the US Bancorp. All the analysis has been done for the years 1987, 1988 and 1989. Apart from this the following analysis has also been done for the year 1990-1994. Cash flow analysis for the Redhook Ale Brewery loan application Banks exposure to additional risk in case they accept the loan application Analysis of Balance Sheet and P/L for Redhook Ale Brewery

Interest Earning Assets: For the industry, the interest earning assets recorded a rise in
1988. However, there has been a stable growth in the specified period. Observing the performance of US Bancorp, the interest earning assets declined in 1988 and saw a sharp rise in 1989.

Loans: The earnings from loans for US Bancorp have been significantly higher than the
industry benchmarks. The loan earnings have shown a consistent growth in these three years. Commercial and Industrial: The industry earnings from this sector are very low in comparison to the US Bank, which has recorded a continuous rise. This reflected that the US Bank focused more on the industrial and commercial sectors. Although the real estate and C&I sector saw a declining trend in the number of loans advanced, the US Bancorp was focused for a majority part of its revenues from these two sectors.

Real Estate: The earnings from this industry have almost been similar for the US Bank
and all the other Banks. The real estate sector saw a slight decline in the loan advanced owing to the Real estate crisis of 1980-90.

Consumer: The % earnings from this sector have seen a downward trend. However, in
comparison with the other players, the earnings for US Bank have been relatively higher.
GROUP NO: 2 Page 2

Foreign Government: Industry standards were way higher than that of US Bank for
the foreign government loan advances. This implies that the US Bank restrained from lending money to foreign governments. Deposit Liabilities: The deposit liabilities for the US Bank were less than the industry. Also, US Bancorp has witnessed a gradual fall in these liabilities. This can be seen from the growing trend to invest in other opportunities available to the investors. Gross Interest Income: The earnings of the US Bancorp have been higher than the industry average of other banks. Also, the earnings have observed a continuous growth reflecting efficient performance of the bank. Gross Interest Expense:Along with the gross interest income, the expenses have also seen a rising trend for the US Bank. The average industry expenses are lower. Income before tax: The IBT has recorded an upward trend for the US Bancorp. Also these earnings were higher than the industry standards. This was primarily due to the better working practices being adopted and more focus on automation. This not only decreased the working force but also made faster access to resources. Net Income: Similar to the IBT, the net income has also been growing for the US Bank. Also, higher values than the industry average reflect that the Bank is performing better than most of the other commercial banks. Cash Dividends:US Bancorp has been paying dividends to its investors to retain their confidence. However, the dividends paid are less than the industry average, but increasing by over 53% over the span of 3 years from 1987 to 1989. Net Retained Earnings: The US Bancorp has been maintaining high cash reserves so that it does not face operational obstructions. Because of higher retained earnings, the dividends paid out have been less than the industry standards. Return on Assets: The % return on assets for the US Bank has been higher than the industry, reflecting a better performance than most of the banks. Return on Equity: The US Bank has witnessed a continuous rise in the ROE. Moreover, the ROE has been significantly higher than the average industry ROE.

GROUP NO: 2

Page 3

Exhibits and analysis:


1987 Interest-earning assets Loans Commercial and industrial Real Estate Consumer Foreign Government Deposit liabilities 86.62 58.36 20.04 18.69 11.1 1.34 76.43 Industry 1988 87.94 60.59 19.55 20.56 11.31 1.23 76.22 1989 87.84 61.3 19.2 22.18 11.4 1.03 76.01 US Bancorp 1987 1988 84.65% 64.92% 53.68% 21.49% 21.54% 0.19% 75.28% 83.59% 67.27% 54.33% 22.67% 20.09% 0.23% 74.37% 1989 85.07% 67.21% 55.84% 22.15% 18.56% 0.33% 70.00%

Item Gross Interest Income Gross Interest Expense Net Interest Margin Income before tax Net Income Cash dividends declared Net retained earnings

1987 8.34 4.95 3.4 0.28 0.11 0.36 -0.24

Industry 1988 8.95 5.42 3.53 1.14 0.84 0.44 0.4

1989 9.92 6.41 3.51 0.8 0.51 0.44 0.07

US Bancorp 1987 1988 8.64% 5.37% 3.27% 1.32% 0.96% 0.25% 0.71% 9.67% 6.02% 3.65% 1.54% 1.03% 0.33% 0.70%

1989 9.95% 6.48% 3.47% 1.60% 1.04% 0.31% 0.74%

Industry 1987 1988 Return on Assets Return on Equity 0.11 1.8 0.84 16.52

1989 0.51 7.94

US Bancorp 1987 1988 0.9 13.39 0.92 13.78

1989 1 15.12

Note: 1. All figures are in % 2. The data has been taken from the Exhibits provided in the case study

GROUP NO: 2

Page 4

Interest earning assets for bank

interest earning asset-1987


Money market investment Investment securities trading account securities Mortgages held for sale Loans

interest earning asset-1988


Money market investment Investment securities trading account securities Mortgages held for sale Loans

GROUP NO: 2

Page 5

interest earning asset-1989


Money market investment Investment securities

trading account securities


Mortgages held for sale Loans

Interest earning asset for U.S. Bancorp have increased from $11,302,2671 in year 1987 to $16,975,382 in year 1989, this increase was due to decrease in money market investment and increase in investment security, investment in trading account security and by giving more loans. Loans accounts for major part of the total interest earning assets. It was also found out proportion of loans out of interest earning assets have increased from 76% to 80% in 1988 and then slightly decreased to 79% in 1989 U.S Barncop loan portfolio consists of following loans: Year Amount in 1000$ Total loans Commercial Real estate construct Real estate mortgage Consumer Foreign Leasing Finance 1987 8668.730 53.67% 5.6% 15.8% 21.53% .19% 3.1% 1988 9676.1 54.32% 6.5% 16.15% 20.09% .23% 2.67% 1989 11409.464 55.84% 6.7% 15.44% 18.5% .32% 3.11%

GROUP NO: 2

Page 6

U.S commercial Bank, Loans account for over 61% of the total assets, up from 58.5% in 1985. The increase in loan portfolio was result of strong growth in real estate loans and consumer loan and decrease in commercial and industrial loan. Increase in residential loan is due to shrinking of the drift industry and Shift from commercial to real estate loan is due to higher perceived risk in commercial sector and recession climate of 1990, led banks to increase margins for business loan which had tightened the bank credit term and standard and reduce in C&I loan growth. As can be seen from above ,loan portfolio of US Barncop, commercial loan have increased from 1987 to 1988 so it is riskier to further invest in this sector because of the current market condition and increase in competition for real estate sector. Therefore it is recommended not to invest in the Redhook Ale Brewery expansion project

Debt Service Coverage Ratio (DSCR)


DSCR PAT Depreciation Interest Sub Total (A) Interest Principal Repayment Sub Total (B) DSCR 1989-90 455243.00 299340.00 110934.00 865517.00 110934.00 1990-91 1122512.00 299340.00 95079.00 1516931.00 95079.00 1991-92 1558057.00 309102.00 203982.00 2071141.00 203982.00 1992-93 2203490.00 1555258.00 771536.00 4530284.00 771536.00 1993-94 6505044.00 1317911.00 600332.00 8423287.00 600332.00

129669.00 240603.00 3.60

146620.00 241699.00 6.28

158418.00 362400.00 5.72

815740.00 1587266.00 2.85

1496557.00 2096889.00 4.02

Average DSCR

4.49
Page 7

GROUP NO: 2

DSCR ratio is showing a good loan obtaining capacity but it has fluctuating value.

Projection
Current Ratio = Current assets/Current liabilities Year 1990 1991 1992 1993 1994 Current assets/Current liabilities 5,050,895/520,737 4,791,830/684,031 1,315,169/871,673 4,188,730/1,574,317 11,635,090/2,662,829

9.6995 7.0052 1.5087 2.6607 4.3694

Current Ratio

4.3694 9.6995 7.0052 1.5087 2.6607

1990

1991

1992

1993

1994

Quick Ratio = Current Assets Inventories & Prepaid expenses / Current liabilities 1990 1991 1992 1993
GROUP NO: 2

(5,050,895 428,457)/520,737 (4,791,830 613,577)/684,031 (1,315,169 874,742)/871,673 (4,188,730

8.8767 6.1082 0.5053 1.3363


Page 8

1994

2,084,912)/1,574,317 (11,635,090 3,567,349)/2,662,829

3.0298

Current ratio and quick ratio are very volatile but they are showing good liquidity.

Debt to Equity Ratio = Total long term debt / shareholders Fund 1990 1991 1992 1993 1994 861,689/7,088,831 732,019/8,211,343 6,750,400/9,769,400 5,951,983/11,972,890 4,476,2437/18,477,933 0.1216 0.0891 0.6909 0.4971 2.4225

Debt Equity Ratio


1990 1991 1992 1993 1994

2.4225

0.6909 0.4971 0.1216 0.0891 1

GROUP NO: 2

Page 9

Analysis of Company Cash Flow


Redhook Loak Application : Cash Flow statement

Particulars Operating Activities Net Income Depreciation & Ammortization on Tangible Assets Decrease/(Increase) in recievables Increase/ (Decrease) in payables Decrease/(Increase) in deposits Increase in accrued liabilities Increase in Tax Payable Decrease/(Increase) in short Term Investments TOTAL Investing Activities Cash Outflow for Investments in P&M Decrease/ (Increase ) in Intangibles & Deposits Change in Cash Balance Total Financing Activities Increase/ (Decrease) in New Term Loan Increase/ (Decrease) in existing Term Loans

1990

1991

1992

1993

1994

11,22,512 2,99,340 92,559 92,559 30,720 462 22,603 5,36,745 20,12,382

15,58,057 3,09,102 1,30,583 1,30,583 42,840 88 2,332 38,21,464 57,33,883

22,03,490 14,65,258 8,90,121 6,05,085 11,220 4,300 64,717 7,26,327 27,37,622

65,05,044 13,17,911 10,80,774 7,41,219 81,300 5,600 2,39,576 48,83,147 29,26,729

10,00,000 10,00,000 -

8,00,000 46,943 8,46,943 -

1,41,97,950 46,943 1,41,51,007

1,29,670 -

61,65,000 1,46,619 -

6,40,000 1,58,417 -

13,00,000 1,75,740

Net Cash from Financing Activities Cash Flow to the Firm Cash at beginning Increase in Cash Net Cash flow to the firm

28,82,712 58,95,094 58,95,094 58,95,094

47,40,321 96,27,260 58,95,094 96,27,260 1,55,22,355 -

1,15,71,802 2,29,85,187 1,55,22,355 2,29,85,187 74,62,833 -

27,50,989 56,77,718 74,62,833 56,77,718 17,85,115

GROUP NO: 2

Page 10

Analysis We would not recommend accepting the loan application for Redhook due to the volatile nature of cash flows. They fluctuate between positive and negative cashflows. The company might be able to survive the two years of negative cash flows by financing through the reserves but it is not feasible for US bank to disburse a loan of this amount based on uncertainity. Since returns are risky at a floating rate of interest, this loan would not be viable for Us bank of Washington

GROUP NO: 2

Page 11

You might also like