Term Paper on "Financial Institutions and Markets"

Term Paper 5 pages (1591 words) Sources: 1+

[EXCERPT] . . . .

Financial Institutions and Markets

Over the last several years, the financial crisis has caused a tremendous amount of challenges for a variety of institutions. At the heart of this issue, was the overall quality of assets that they were holding in: their portfolios and the practices of management. As the weaker institutions, were exposed to large defaults from a host of: mortgages and other asset classes. This is problematic, because it means that the viability of numerous financial institutions can be brought into question. In the case of the National Bank of Canada, they are in a strong position in comparison with most financial institutions. As the company has solid fundamentals and business practices, which are contributing to their strong financial foundation. To fully understand how the company is able to achieve these objectives requires: examining the different off balance sheet activities, the financial performance, three strengths / weaknesses of the institution and one recommendation that could improve its operations. Together, these different elements will provide the greatest insight, as to how strong the National Bank of Canada is in comparison with its competitors.

Off Balance Sheet Activities

The way that the National Bank of Canada is addressing various off balance sheet activities is through: their One Client, One Bank strategy. This is when the bank is offering a wide variety of solutions to: business, consumers and governments. As this tools is used to introduce the client to the total amount of financial services that they are offering. The way that this affects off the balance sheet activities is through: the support of various practices. These could be considered to be: somewhat risky or involve the use of derivates to offset these threats. A good example of this can be seen with the increase in the number of: interest rates derivates that were sold to institutional clients. as, this rose by 12% from: 2009 to 2010. This is significant, because the use of this tool is: illustrating how the bank is using derivates. To address possible risks customers are facing from: interest rates and defaults. In most cases, these kinds of transactions are subject to limited amounts of scrutiny (which increases: the possibility that it will be utilized in various off balance sheet solutions for customers). ("One Bank One Client")

The Financial Performance

In 2010, the National Bank of Canada experienced tremendous amounts of growth, despite the lingering effects from: the recession and global financial crisis. The areas that reported the largest increases include: Personal / Commercial Banking, Wealth Management and Financial Markets. As far as Personal and Commercial Banking is concerned, this unit experienced a dramatic increase in their profitability. Evidence of this can be seen by looking no further than, than the positive net income growth between: 2009 and 2010. In 2009, this number was rising by 6% (despite a severe recession). Then in 2010, the overall amount of income increase by 22% (on a year over year basis). This is important, because it is showing the overall strengths of: the underlying business model of the company. ("One Bank One Client")

In the case of Wealth Management division, they experienced a tremendous increase in the total amount of assets that they have under management. As this number would climb to over $1 billion dollars (in 2010), with a sizeable improvement in the overall clients they were working with. This is important, because it shows how the services that this division is offering; have become more in demand during the last two years. The reason why, is because the bank can provide customers with more: specialized services and they can bundle the different products together (to create value). ("One Bank One Client")

During 2010, the Financial Markets segment experienced a sharp increase in earnings. As the demise of major players (during the recession), meant that the company could fill this avoid. At which point, the number of offerings increased by: 15% for all public sector debt IPOs. This helped the company to improve their dominance in this area, with the bank becoming the fourth largest underwriter for a variety of securities. This is important, because this increased the company's bottom line in the markets that they were involved with, but are taking a more limited role. ("One Bank One Client")

When you put these different elements together, they are giving the National Bank of Canada a number of different strengths over other financial institutions. As they helped the company to: increase its earnings and market segments. This allowed the bank to adapt their business model to: the shifts that were taking place in the economy, increasing their overall profitability.

Three Strengths and Three Weakness of the Institution

Strengths

The three strengths of the business include: they have rising earnings, low amounts of debt and they are aggressively moving into new markets. The rising earnings have been helping the bank to: increase their dividends and the return that company is offering shareholders. The low amounts of debt are helping the financial institution to: offer additional loans and services to client (when other corporations may not have the net capital to do so). This has helped the National Bank of Canada to aggressively expand into other markets. as, management has seen tremendous amounts of opportunities, because of: the increasing earnings and low amounts of debt. ("One Bank One Client")

Weaknesses

Three of the weaknesses that could have an effect on the company down the road include: over concentrating on select regions, ignoring other asset classes and managers becoming complacent. The over concentrating on select regions is when the company has been focusing on increasing their offerings in the U.S. And Canada. This is problematic, because if these regions of the world go through a period of slow growth, it could reduce their earnings (in comparison with investing in other areas). Ignoring other asset classes is when the company has been focused mainly on various debt offerings. This is challenging, because it means that if customers begin demanding equity security offerings, they might not be prepared for these changes. Managers becoming complacent can occur, when everyone assumes that the success of the past will translate into future gains. This is troubling, because the increases in the overall bottom line could create a situation where everyone believes that they are on top of everything. At which point, some kind of shift could take place in: customer demand or the economy (exposing these kinds of risks). ("One Bank One Client")

When you compare the different strengths and weaknesses with one another, it is clear that they are providing the National Bank of Canada with the ability to: aggressively expand into different areas. However, they are also showing how an attitude of watchfulness must be embraced. This will prevent the company from being exposed to: shifts in the economy or changes in demand from customers.

One Recommendation that Could Improve the National Bank of Canada's Operations

To improve the operations of the bank, they could increase their internal controls surrounding derivatives activities. The reason why, is because derivatives trading has often been considered to be very risky. Over the last several decades, a variety of institutions and sophisticated investors have been using this strategy to: limit their overall amounts of risk. The problem is that many of these different investment tools are: relatively new and unregulated. This can be challenging in trying to monitor for possible over concentration in these areas. Once this occurs, it increases the risks that customers are facing (due to the fact that they were not fully aware of the possible dangers from this strategy). At the same time, this could have an impact upon the company's trading account, as they could use a similar approach for its own investments. This multiplies the risks facing the business, as the over concentration… READ MORE

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