Essay on Fundamentals of Corporate Finance
The development of the modern banking industry raises a number of challenges and issues concerning the stable performance of banks and their investment attractiveness. The economic recession and mortgage crisis of 2008 have raised apprehensions of investors and their uncertainty about many banks, which used to be quite reliable and stable, including behemoths of the industry. In this regard, I would conduct the detailed analysis of my bank from the standpoint of an investor rather than a customer. In fact, the analysis of the bank’s position and attractiveness for investors takes into consideration multiple perspectives, which help to determine not only the current position of the bank but also its further performance.
First of all, it is important to place emphasis on the fact that my bank was operating in both deposit and investment sectors and it has proved to be quite successful in both of them, although the investment sector became too challenging for the bank, especially in light of new government regulations that stimulated the bank to focus on deposit branch only (Pine & Gilmore, 2009). In such a way, the bank focuses on deposit business only and attempts to attract more customers. The past success of the bank and relatively high interest rate make the bank attractive for customers. Therefore, investors should also consider the possibility of the investment into the bank.
However, investors, should take into consideration the fact that the bank offers a high interest rate to attract more customers but the increasing number of customers raises the question of the capitalization of the bank and its further ability to pay customers the interest rate it has already promised to them. The failure of the bank to pay off the interest rate to customers will put under a question the further ability of the bank to survive in the market, unless the bank reaches the high level of profitability and its projects turn out to be extremely successful. Nevertheless, at the moment, it is obvious that the bank will have to decrease its interest rate to balance its financial performance and to retain its attractiveness for investors. Otherwise, investors will grow concerned about the financial performance of the bank in the future and its ability to keep maintaining its financial performance at the current level.
At the same time, the bank has substantial financial resources, which it has drawn from its investment branch. The bank shifts its financial resources into deposit business to enhance its market performance and to expand its market share. The available financial resources enhance the position of the bank because customers can feel to be secure enough as their deposits are safe and the bank has sufficient financial resources to cover current risks (McDaniel, Martin, & Maines, 2002). At this point, it is worth mentioning the fact that the bank is not inclined to a risky business behavior. On the contrary, the bank attempts to secure its position in the industry and customers feel being confident in the bank. Therefore, the bank is also attractive for investors.
In addition, after the shift toward deposit baking instead of investment banking, the bank has got rid of the unprofitable part of its business. Therefore, the bank has managed to optimize its organizational structure and financial performance. As the bank refused from its investment branch, its financial losses have dropped, whereas the deposit business was traditionally profitable for the bank (Parrino, 2006). This is why, at the moment, the bank has the possibility to expand its market share at cost of refusing from short-run profits and offering a higher interest rate to customers. In such a way, the bank expands its market share attracting more and more customers from its potential rivals in the industry. In such a way, at the moment, the bank demonstrates its readiness to invest into the further growth of the bank that makes it very attractive for investors.
Finally, the focus of the bank on the market expansion is another positive signal for investors because it implies that the bank is concerned with its further growth. The growth of the bank can bring profits to investors. On the other hand, the market growth can also bring negative outcomes, if the market expansion strategy of the bank fails. However, at the moment, there are no signs of the decline or deterioration of the marketing and financial performance of the bank. On the contrary, the positive dynamics of the bank’s business developments is a positive signal for investors that means that the bank is worth investing.
Thus, the bank is attractive at the moment, but still its marketing strategy involving the high interest rate, which are attractive for customers, is risky. In this regard, investors, who are ready to take a risk to obtain higher profits, should invest into the bank, whereas investors, who are ready to take such risks, should not invest into the bank.
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