Recently, the world has been facing financial crisis. During this period, many commercial banks have undertaken risky investment project with an aim of gaining profits from the situation. As a result, many banks have performed well whereas others have been underperforming. The result of the underperforming bank is the decline in the value of its stocks due to the reduced profitability. On the other hand, a well performing bank has increased value of its shares due to the increased profits.
One of the banks in the United States is Bancorp bank. The performance of this bank has been good for several years. The performance of this bank for the last 5 years is as follows:
Return on equity = 4.3 percent
Leverage ratio = 5.9
Return on assets= 6 percent
The total profits of the company are 201.1 million dollars per year.
Bank of America is another bank that is found in America. Its performance in the last 5 years as shown below;
Return on equity = 5.4 percent.
Leverage ratio= 1.89
Return on assets= 1.8 percent
The total profit of the company is 14.5 million dollars per year.
Pacific state bank is another bank that is owned by American citizens. Its performance is as shown below;
Leverage ratio= 3.88
Return on equity= 5.87 percent
Return on assets = 5.61
The average profits of the bank is around is 27.9 million dollars
Development credit bank is another international bank that operates in various countries. Its average performance for the last five years is as shown below.
Leverage ratio= 2.1
Return on equity= 4.2 percent
Return on assets= 2 percent.
The average profits of the bank for the last five years are 23 million dollars.
Bank one is another bank that operates in America. The performance of the bank is as shown below. The performance can be depicted from the following ratio;
Return on equity= 3.1 percent
Return on assets= 4.1 percent
The average profits of the bank for the last five years are 30 million dollars.
Analysis of the performance of the banks
From the data above, Bancorp bank has the highest return on assets among the banks. On the other hand, development credit bank has the lowest return on assets of about 2 percent. Pacific state bank recorded the highest returns on equity followed by Bancorp bank. The bank that recorded the lowest returns on equity is bank one followed development credit bank with 4.2 percent returns on equity. It shows that the last two banks performed least in utilizing the shareholders resources. The development credit bank is the last in terms of leverage ratio. This shows that this bank is not able to use credit to improve the value of the firm. On the other hand, Bancorp bank has the highest leverage ratio. This bank is therefore able to utilize credit to improve the value of the firm. In addition, the bank is the last in terms of profitability with 23 million dollars.
From the above analysis, development credit bank has the lowest performance in the last five years. In the economy, this bank can be described as a laggard. The ratios also show that Bancorp bank has been performing very well in the economy regardless of the economic conditions. This bank can therefore be said to be a leader in the banking sector.
From the observations above, it can be witnessed that the two banks have been performing differently in the market. The development credit bank has been performing poorly as compared to the southern Bancorp bank. Whereas the profitability of the development credit bank has been declining, the profitability of the southern Bancorp bank has been rising. This is regardless of the fact that the two banks operate in the same economic environment. This difference in the performance of the two banks may be attributed to the management and the policies adopted by the two banks.
One of the major strategies adopted by the development credit bank has been to expand its branches to many parts of the world. This is a good plan to enhance the profitability of the bank. By increasing the number of the branches it owns, the company aimed at increasing the number of its customers. By increasing the number of its customers, the company is able to get more profits.
In addition, the expansion of the bank to different parts, the bank aimed at gaining economies of scale. This is very crucial in the reduction of the operation costs of the bank. These reduced costs help to improve the profits of the bank. In addition, the bank aimed at diversifying its risks by expanding to different countries. This is because when some banks in one country are not performing well, the bank benefits from the other branches performing well in other countries (Nirmal, 2011).
The other strategy that has been adopted by the development credit bank is ensuring high quality management. As Rob (2010) outlines, these highly qualified managers have been adopted by the bank in order to come up with plans that can help solve the previous situation that has seen the decline in the performance of the bank for several years. These managers are assumed to come up with new ideas that can change the banking system in this bank in order to facilitate success in the competitive market. In addition, the bank has emphasized employing experienced workers who can stimulate the good performance of the bank. They have therefore been employing workers with experience in the banking sector as one of their strategies.
The development credit bank has also emphasized provision of retail creditors with loans as opposed to the wholesale creditors. This strategy was specifically put in place as a way of increasing the total deposits in the bank. The increased deposits aimed at ensuring that there is enough money to lend people. This means that more interest would be collected from the loans. As a result, the profits of the bank would automatically increase. By receiving deposits from the retailers, more people would afford to deposit with the bank. In addition, giving loans to the retailers would ensure that more customers will be served by the bank and this increase in the number of the customers would be the basis of increasing the profits of the bank (Nirmal, 2011).
The bank has also put in place strategies aimed at reducing the costs of the bank. This is with an aim of improving the profitability of the bank. Rob (2010), notes that the bank has aimed at reducing the operational costs of the banks. This is by reducing the employee numbers and other expenses that are not very vital for the operations of the bank.
The other method that the bank has adopted is the use of modern technology as a means of reducing the costs of the bank. The modern technology has been applied by the bank in the automatic teller machines. In this case, the teller does not require employee and therefore the bank do not incur any wages.
In the previous years, the bank has been providing unsecured loans. However, the bank is changing this situation and emphasizes on the provision of loans that are secured. Secured loans are aimed at ensuring that the loans are repaid by the borrower. Unsecured loans that are not repaid lead to great losses to the bank. This strategy aims at reducing the losses incurred by the bank resulting from failure of the customers to repay their loans (Rob, 2010).
The bank has also put in place recently strategies aimed at providing a variety of services to the customers. Providing a variety of services to the customers is likely to diversify the risks of the bank. When one service is not doing well in the market at a given period, the bank is able to benefit from other services that are doing well. Therefore, as Rob (2010) outlines, the downswings in the profitability of the bank are reduced. In addition, availing a variety of services to the customers is likely to increase the number of customers. This increase in the numbers of the customers is advantageous to the profitability of the company.
The southern Bancorp bank has applied various strategies in the last five years to facilitate the development of the bank in the competitive market. One of the strategies of the bank is promotion of the society’s objectives. This has been facilitated through giving scholarships to the students. In addition, the bank gives funds to the society to promote various development projects. The advantage of this strategy is that it promotes the image of the bank. Many people know the bank through these development projects. Thy therefore seek services from the bank in return (Rob, 2010). This increase in the customers is a source of the high profits of the firm.
The other strategy of the bank is ensuring that it avoids the pollution to the environment. The bank is aware that the environment is very important since it affects the health oft the society it serves if polluted. The bank has been promoting ensuring that the environment in which it operates is green. This has promoted the popularity of the bank. The customers of the bank therefore have become loyal to the bank. This loyalty of the customers has ensured that the performance of the bank is high even during the tough economic times.
The other strategy that the bank has used to capture more customers for its benefits is by offering free services to the poor. This is mainly in form of free tax information preparations. These free services created a better image to all the individuals in the community that the southern Bancorp bank serves. These poor people later become the customers of the bank after they have developed economically. In addition, the poor people spread the good information to other individuals in the society. This attracts more customers to the bank. The increase in the number of the customers served by the bank increases the profitability of the bank and this stimulates its development even in the tough economic times (Nirmal, 2011).
The bank has also increased the branches that it possesses all over the world. This has played a big role in the reduction of the risks that the bank is exposed to. This strategy has ensured that when some branches are not performing well due to the harsh economic times in some countries, the bank still profits from the good performance of the other branches.
The southern Bancorp bank has majored mainly in the rural areas where the population is high. It has encouraged people in the rural areas to save and the bank then uses these finds to carry out its activities. As a result, this bank has increased the number of customers that it serves. This has led to the increase in its revenues hence the increased profits annually (Rob, 2010).
The bank also provides a variety of services to its customers according to their needs. This has ensured that the customers are satisfied and as a result, they remain customers to the bank. These services also attract more customers to the bank and like any other business; increase in the number of customers increases the total revenues of the bank.
Generally, the two banks have very different strategies aimed at helping them achieve their set objectives. Southern Bancorp bank aims at improving the general social welfare of the society it serves and in return the bank benefits from the good public image created. On the other hand, the development credit bank has put in place strategies that help the bank benefit through increased revenues. The bank has not taken into consideration the social needs of the society.
Some of the strategies adopted by the Development Credit bank are not effective in the achievement of the goals of the organization. For example, the strategy of reducing the costs of the bank is a nice idea. However, some expenses are necessary to run any business. The provision of services to the community increases the costs of the firm but these costs are very important in retaining the customers (Nirmal, 2011). Reducing the number of employees and advertising costs have no positive impact on the profitability of the bank. This is because these strategies reduce the customers who go for services from the bank.
The provision of the unsecured loans has been a strategy of capturing more customers to the development credit bank. However, this is very risky and customers should be carefully evaluated before giving them unsecured loans. This strategy has been ineffective in this bank due to this situation. However, the solution is not denying those without security loans. The bank should adopt a strategy that can ensure that all the borrowers are carefully evaluated before giving them loans.
This strategy of serving the retailers only is not a good strategy to the development credit bank. The bank should put controls in place that will ensure that all the customers that require bank services are served. Meeting the needs of the customers help to retain them and the image of the bank improves.
On the other hand, the policies adopted by southern Bancorp are very effective in achieving the banks goal. This is because all the strategies show concern to the customers and the society in general. This acts as a motivation to the society to support the bank by seeking services from them. The customer loyalty created is enough to facilitate the success of the bank.
Rob Walton, 2010, Southern Bancorp building communities and changing lives, Arkadelphia printers.
Nirmal Bang 2011, Development Credit Bank review and analysis, Free Stock Market Newsletter.