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PART A
ASSET-BASED LENDING
Executive Summary
• First Nationals Corporation is a top performer in the bank industry and its considering to venture into asset-based lending
• Asset-based lending is currently in the market and First Nationals Corporation intends to adopt it
• Asset-based lending will need a review of a few factors for it to provide proper assurance that it will perform well. These are:
o Analysis of the financial statement, that is, the balance sheet, profit and loss account and the cash flows for the current periods
o A projection of how the company’s financial statements for assuming that asset-based lending are adopted.
o A comparison of the current financial statements and the projected financial statements assuming asset-based lending is adopted.
• The asset-based lending will involve the use of collaterals which will act as the security for the loans.
• Serious measures will have to be put in place for consideration in order to ensure that asset-based lending lead to improvement in performance. These will include
o Having experts in asset-based lending to help in monitoring the collaterals and ensuring the departments works.
o Need a reasonable risk and have commensurate return?
Introduction
Asset-based lending is the kind of lending that either involves any particular company dealing in lending to other companies, organisations or even, at other times to individuals, given that the companies, organisations or individuals secure their loan. The security for such loans is usually referred to as collaterals. Loans are secured so that incise the company, organisations, individuals or any other party fail or are unable to pay back their loan, the security can be used to compensate for the payment of that particular loan. In this case, when one is asking for a loan, one qualification is that they have to have some property that they can use as their security for the loan, In case they do not have some property that they can use as their collateral for the loan, then they might not qualify for the loan.
The security favours the lending company, in that their loan cannot go unpaid or uncompensated for when due. The security also has to match in terms of value with the loan that the company, organisation or individual ask for. If it’s less than the loan value, then they also might not qualify for the loan. First National Corporation is in the business of reviewing if it could venture into asset-based lending. As much as asset-based lending is a good business and can yield a lot for the company, a company should be careful and put in place good strategies to ensure that the business, in the long-run, works to their advantage.
Asset-based lending has several advantages and disadvantages as well. Some of the advantages, for instance, are that it can give money for companies that are developing fast. They can take a loan that can help them to stabilise their flow of money as well as provide money to help run the organisation effectively and efficiently without the inefficiencies that could be brought about by failure t to have enough funds. The good thing is that they repay this loan over time and not instantly or in one lumpsum.Also, for companies that do not have an unpaid loan, they can still be given a loan due to their good credit-worthiness. This would help them grow their company. When the assets are a nice deal, the asset-based kind of lending can help the company have a good business and get good returns. Asset-based lending is also not very procedure us and complicated. Compared to the loans that are taken directly from banks, asset-based lending is simple to apply for and get. Banks loans are quite complex and procedural. But since asset-based lending are already secured and they are not from aback setting, then they are easy to apply and get ,divan that one is qualified already.
There are also advantages or benefits of set based lending. To start with, there is a probability if low valuations, to the disadvantage of the asset-based lending company or organisation. The value of the asset used as collateral might appreciate in value. However, this doesn’t mean that the value of the loan will go up. It all remains the same, despite the fact that the asset used as collateral goes up. Another disadvantage is also a decreased credit effect. Loans that do not require collateral increase the financial ability of a company than secured ones. Secured loans do not help a company’s financial ability grow and develop as fast as insecure Loans. Asset-based lending can also lead the loss of one’s property. This is because when one is applying for the loan, they write the collateral under the lender’s name and can only be retrieved once the loan is fully paid. Once anyone that has borrowed money does not pay back in time, they can lose the asset to the lender or the asset-based lending company.
Whether asset-based lending fits First Nationals Corporation’s image, tradition and philosophy
Asset-based lending does not actually fit First Nationals Corporation’s image, tradition and their philosophy. It is actually described as ‘a conservative bank in a conservative Ohio city’. First Nationals Corporation has yielded a lot of advantages from being conservative. For instance, during the depression, it was the only bank that was allowed to honour customers’ deposits and withdrawals fully. This has owed to it becoming the best performing bank. First Nationals Corporation had also, over the past years, used a conventional lending practice and structure, adding this asset-based lending to the company’s list of products could not succeed without a lot of commitment. This commitment would be required because asset-based lending also has its risks and disadvantages; for instance, the current loan-to-deposit ratio which is below 80% and below reliance on volatile deposits. First National Corporation is also traditionally sensitive to credit-risk and asset-based lending actually carried a higher degree of risk than these other normal or bank loans that it was already offering. However, the banks always want to satisfy the growing needs, tastes and preferences that change day after the other. The tastes and preferences of their customers keep changing and becoming both dynamic and diverse. The market is also really changing since it is not static. This makes the competition keep growing and becoming stiff, posing a threat to First National Corporation. First Nationals Corporation, being the best performing bank so far due to its mergers and acquisitions as well as the many branches or subsidiaries and a variety of landing options to its customers, was ranked the best performing bank. Now due to the dynamic and not static market, it has to keep up with the ever diversifying market. Failure to this, it might become obsolete and be kicked out of the industry.
We can also see that Robert, the vice president in charge of the department of special lending at First National Corporation was for the establishment of asset-based lending at the BHC lead bank. When he suggested this to the other loan officers, they seconded him about it. They were for it, which clearly demonstrated that this was good for the company. This would clearly help satisfy the growing needs of the customers. This would also, thinking business-wise, help them retain their customers, instead of leaving them freely to other companies. When this was mentioned to Bob, he thought it was a good idea too, and decided that a review of the asset-based lending form of lending be reviewed. They wanted to do a review and analysis and the development of an asset-based lending department in their company. They also wanted to review their current position and how the asset based lending would affect their financial statements including the statement of financial position and the profit and loss .They would even compare the current financial position with the projected financial statements of the asset-based lending product.
Asset-based lending is fit for First Nationals corporation image. It a best performing bank in the industry. It has to retain its competitive advantage by having a wide range of products for its customers who have different tastes and preferences. If well managed, it will actually help the company continue growing and developing and therefore increase its profits. The benefits of asset-based lending will apply to them. For instance, it can give money for companies that are developing fast. They can take a loan that can help them to stabilise their flow of money as well as provide money to help run the organisation effectively and efficiently without the inefficiencies that could be brought about by failure t to have enough funds. Therefore, to venture into asset-based lending, the process of venturing into it would involve a lot of care and concern by the concerned stakeholders. It would require some experience and have very improved monitoring standards of the credit risks would lead to improved performance. This would also require that the company embraces a risk-based approach so as to ensure that they minimise these risks and eventually reduce the risk of the asset-based lending as well as other forms of lending.
Auditing of the collaterals should also be put in place. This would help identify any risks and eventually reduce them in the future. According to the exempt, this approach that would be used for the asset-based lending department would also help to generally reduce the rates of risk for the other forms of lending in the company, thereby helping gin the performance of the company. The good thing is that they repay this loan over time and not instantly or in one lump sum. Also, for companies that do not have an unpaid loan, they can still be given a loan due to their good credit-worthiness. This would help them grow their company. When the assets are a nice deal, the asset-based kind of lending can help the company have a good business and get good returns. Asset-based lending is also not very procedures and complicated. Compared to the loans that are taken directly from banks, asset-based lending is simple to apply for and get. Banks loans are quite complex and procedural. But since asset-based lending are already secured and they are not from a bank setting, then they are easy to apply and get ,given that one is qualified already. All these advantages will apply to the company, helping it grow and keep pace with the ever dynamic market.
In conclusion, as much as it is quite risky, if well embraced and risks taken care of can help the company grow and diversify its products. Diversification is good for any company’s performance. So, as much as First Nationals Corporation bank is very conservative and its environs, that is, Ohio city is conservative as well, it still help the company grow, given that risk is well taken care of.
Whether asset-based lending improves the improves the bank’s Return on Net worth (RONW) and Return on Assets (ROA)
In the short-term, it might be quite tricky for First Nationals Corporation to increase its return on net worth and its return on assets as well. This is because the rates of lending were quite lower from the other forms of lending. The rates decreased to as low as 1-2.5%.This was due to the increasing competition in the industry. There were also many lenders going for the few loans, just a few people qualified to have the loans, and a decrease of the loan-lending rates of return due to the stiff competition in the industry. However, this did not mean that First Nationals Corporations would not make to handle the asset-based lending successfully. Bob had solutions and good strategies put in place to counter the barriers; that, they would need to have experts in this particular field that would help the company succeed in this. This is because the experts have techniques and technical experience and know-how. This would also involve bettering spending more costs doing the job right. The experts would also help to appraise and monitor the performance of the asset-based loans as well as the collaterals. With all these measure put in place, the company can easily make it through the asset-based lending business. For one, it had an advantage over its competitors, being that it had established a competitive edge for itself, in that it had knowledge of local companies, several contacts or networks, and cost-savings from market proximity in that it was located in the city of Ohio and it also had similarities culturally with the people. This would help it push through well while pursuing that goal of establishing an asset-based lending department, which would above all, increase the company’s rate of return. With these measure provided by Bob and his committee, first Nationals Corporation would make it through in the asset-based lending business. It’s Return on Net worth (RONW) and Return on Assets (ROI) will increase. This will be most probable in the long-term.
Also, as portrayed in the by the comparison between the current financial statements and the financial statements after incorporating asset-based lending, the Return on Net Worth (RONW) and return on Assets is most probable to increase in the long-term.
Whether First National Corporation deposit composition make it necessary to find higher yielding earning assets than are in current books
To start with, every company wants to improve its productivity, profitability, among everything that could make the business better. Ice 1986 to 1990, the deposits have been decreasing. The y will need to put some measure to ensure that the company’s deposits go high. Looking at the company’s deposits, they are just okay for the bank to run its business, although they the loan-to-deposit ratio is under 80%.It also have a high reliance on volatile deposits. This, infect, clearly means that the deposit composition necessitates that First Nationals Corporation should find a higher yielding sand earning assets than those that are in its current books of accounts. The exempt says that First Nationals Corporation has a high reliance on volatile deposits. The fact that the deposits are volatile means that they may not be depended on by First Nationals Corporation and its customers in the long-term, since they are volatile. Therefore, First Nationals Corporation should actually consider finding higher yielding assets. As shown in its books, the deposits are in real sense volatile and below 80% loan-to-deposit ratio. Deposits are important to any bank and therefore, the company should look into diversifying its banking business in a bid to increase its deposits and consequently increase its profitability and general performance.
By First Nationals Corporation Venturing or diversifying its banking business into dealing in asset-based lending, though risky, it might increase its returns highly. This is because the deposits will increase in that some customers will deposit money in First Nationals Corporation in the process of taking loans using their assists, because actually asset-based lending broadens the range of customers who can take loans, since they can use their property as security. Owing to the increased number of customers due to the provision of people using their loans to take loans, the amount of deposits will eventually increase. This will increase the loan-to-deposit ratio. This eventually means that the business will make more profits through the interests that the company will get from the loans taken by its customers. This means better profits, better performance and better business for First Nationals Corporation.
Whether First Nationals Corporation Venture in Asset-based lending parallel banks’ lending practices prior to the recent global financial crisis
The First Nationals Corporation venture in asset-based lending parallel banks’ lending practices to was prior to the financial depression or financial crisis. This is because the financial depression occurred in 1933 while the genesis of venturing into asset-based lending parallel to banks’ lending began in 1986.Actually,the year 1933,during the financial crisis or a state of depression, was one its favourite historical reflection. This is because during this depression, the clearing house authorised banks to limit withdrawals to 5% of the customer’s account. Actually, First Nationals Corporation was the only bank in town to honour deposits in full to all corners. It is in 1986, after the depression, that Robert, the senior vice president in charge of Lending Division at First National Corporation started advocating the establishment of asset-based lending at BHC’S lead bank. It is from here that the review and the process of establishing asset-based lending in First Nationals Corporation started, which was after the depression.
PART B
Abstract
Many people or people dealing in the banking business may not have it clear that there are several metrics that would impact their performance and valuations. Chandra and Williams established that there are several metrics for analysing the impact of metrics on their performance and valuations. Improvements on some metrics like deposit base and ratio of risk-weighted assets boost valuation of all banks. Improvements to other metrics like Improvements to other metrics boost valuation for the best performers and worst performers boost valuation for the best performers and worst performers, while some of the improvements like loan-loss provisions to revenue and equity to risk-weighted assets boost valuation only for laggards. This information will assist in making decisions on unearthing performance gains to boost book value.
Part B Chandra and Williams – Unearthing Performance Gains to Boost Book Value
According to Chandra and Williams’s findings, one of the very important tools for performance and valuation is robust GDP growth in their home economies. Currently; many banks around the globe are lacking this. Many banks do not set their priorities right. For instance, they struggle for other strategies to perform, for instance, huge cutting of cost, initiatives for growth, weighted-assets reductions, portfolio rebalancing among other strategies. These can help a business grow, however they all impact do not impact equally.
The best ways of a shrewd bank manager to set priorities is to makes decisions from the results from measuring several and different metrics. This is actually very important, since it will help to make decisions that are most appropriate. Analysing a higher number of metrics will be better. This is because a higher number of sample or analysis variables will help make more accurate decisions, thereby steering the company to produce better result and better performance for the companies. In this regard, it was very good of Chandra and Williams to measure sixty different metrics that banks could use to measure their performance and valuation, while particularly reviewing the effect of distinct levels of performance on the market-to-book ratios. Again they did this analysis for a good number of banks that is eighty in both Europe continent and America. This was important since a good number of banks used as samples for doing the analysis would help to produce better results for the company. There were many factors that banks considered for performance and analysis, that actually did not have marginal impact once you control for return on equity. Some of these include the size of the business, asset valuation, loan quality, business mix, market capitalisation, among others. What is the actual fact is that the home country Gross Domestic Product (GDP) and forecast revenue growth can have an effect on the price-to-book ratio. But they are not conspicuous in comparison with too many other factors that take part in affecting the measure or extend of Returns on Equity (ROE).The price-to-book ratio is a measure that the value of an entire or product in the market with its value in the books of accounts. This ratio shows the value of the stock. The stock’s value can be either just okay for business, overvalued or undervalued. The ratio will help a company to know if they are paying extra amounts for what the company would still have if the company ran into a state of financial depression. It was also very important for the analysis to look into the price-to-book ratio, since it will help the company to have an implication on the company’s future flow of money. The price-to-book ratio is affected by the home-country GDP, though they pale in comparison to many measures that affect the Return on Equity (ROE).
The Return on Equity is very important in the process of evaluating the performance and valuation of business, organisations or companies. Return on Equity (ROE) measure how much a unit of currency yield from the shareholders’ wealth Therefore this is an important measure of analysing a company’s performance and valuation. In the analysis done by Chandra and Williams, by measuring the effect of improving ROE BY 1%, through a single measure, ceteris paribus, they found out that changes in some elements of return on equity can drive bigger increases in valuation than others. However, the complexity of doing this many depend significantly.
When a company is considering which performance improvements to undertake, it is important to note that some relationships of banks relative to its peers may not be consistent but vary pretty much. Some others may adopt a consistent trend on the market-to-book ratios. Some other may do that if and only if the bank was highly ranked in the industry or getting down.
Improvements on some metrics boost valuation of all banks
Improvements of some performance metrics would boost the valuation of all banks. These metrics should be considered very well and taken into account by any bank. They should incorporate it in their system since they can help the company grow fast, earn better profits and thereby increase the shareholders’ wealth maximisation, which is the ultimate goal for any company that is running business. In the analysis and valuation analysis done by Chandra and Williams, performance in two specific areas increased the return on equity in spite of the banks ranking in relation to its peer banks .First of all, increasing the deposit base in relation to the amount or value of assets had the same effect to all the banks regardless of their size. A higher deposit base always led to an increase in the level of valuation. This therefore clearly means that this particular metric is dependable as a measure to increase the market-to-book value ratio. The second measure is the ratio of risk-weighted assets to total assets. When this particular ratio is decreased, the valuation increases. This is the best measure that any bank can apply since it is consistent and produces the best results. It applies to any bank despite their ranking with it steers any particular bank wants to really perform superbly well, it ought to take these two measures into consideration. The beautiful thing is that it applies to any bank, it does matter how small or big the bank could be. Applying them denotes good success in their business endeavours in the future. All banks should look into this measure to ensure they keep an upward trend in their performance.
Improvements to other metrics boost valuation for the best performers and worst performers
Apart from the metrics discussed above, the other metrics now boost valuation for the worst performers and best performers. They are not like the two metrics that increase valuation for any company regardless of their size. In this particular case, banks that fall in the two extremes of best performers or worst performers can have their valuations improved when these other metrics are applied. These metrics are efficiency ratio, fee income and revenue growth. The Improvements to other metrics boost valuation for the best performers and worst performers. Efficiency ratio tells how a company utilises its assets and liabilities inside the company. Particularly for banks, efficiency ratios are important since they tell the rate at which a bank can have its assets converted into income or revenue. An increase in the efficiency ratio or cost-to-income ratio for the best banks will lead to an increase or a boost in valuation. This is usually in the category of banks that do not appear in the category of below 30% of the worst performing banks. For market-to-book valuation, a gain can be taken, even for banks in the top docile of performance, which will come from looking for measures to increase the fee income to total assets.
Some of the improvements boost valuation only for laggards
Banks that are laggards, that is, if they lag behind their peers in performance, have some improvements that boost their valuation. These improvements may include, for instance, loan-loss provisions to revenue and equity to risk-weighted assets. These may work to the advantage of banks that are laggards in relation to their peers. The banks that are that are in the lowest decile, meaning that they are the worst performing, are the ones that benefit from, loan-loss provisions to revenue and equity to risk-weighted assets.
Comparing and contrasting Chandra and Williams’s text and First Nationals Corporation
Chandra and Williams’s text portray that some improvements in performance boost valuations for only laggard banks. For instance, loan-loss provisions to revenue and equity to risk-weighted assets. This means that these particular metrics cannot increase the performance of First Nationals Corporation, because it is a best performing company. Therefore, in its bid to venture into
Also, some metrics boost valuation for the best performers and worst as well. First Nationals Corporation’s performance may be boosted by these metrics, which include efficiency ratio, fee income and revenue growth. The efficiency ratio is also known as cost-to-income ratio. In its bid to venture to start dealing in asset-based lending, these may matter a lot to it.
References
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Manzer, A. R., Ruda, H., & Potter, C. (2015). Asset based lending in Canada: Canadian primer on asset based financing.
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Smith, E. E., & Practising Law Institute. (2011). Asset based financing in today's economy, 2011. New York, NY: Practising Law Institute.
Smith, E. E., & Practising Law Institute. (2013). Asset based financing strategies, 2013.
Udell, G. F., & Commercial Finance Association. (2004). Asset based finance: Proven disciplines for prudent lending. New York, N.Y.: Commercial Finance Association.