Banc One Corporation an Analysis of Their Hedging Strategy
BANC ONE CORPORATION
An Analysis of their Hedging Strategy
By
Mark Glitto, Gajendra Tulsian, Robert Young
University of Florida
Summer 1997 INTRODUCTION
In 1993 the stock price of Banc One Corporation had dropped from about $45 at the beginning of the year to approximately $35 at the end of the year: roughly a 20% fall. This sharp decline in stock price greatly bothered John B. McCoy, chairman and CEO of Banc One Corporation. A high stock price was essential for Bank One’s strategic goal of continued acquisition by tendering its own stocks in each acquisition. The fall in stock prices put a damper on this drive for acquiring banks with potential for earnings and growth (it had 10 pending acquisitions worth $9 billion in November 1993). In this study we analyze the possible reasons for the fall in stock price and suggest ways to stop the hemoraging.
In December 1993 Banc One held presentations in New York, Boston, and San Francisco to clarify its position on the use of financial instruments known as derivatives. Banc One used Interest Rate Swaps, the most common type of derivative instrument, to manage interest rate sensitivity. At these presentations, Richard Lodge, the chief investment officer, made clear that Banc One was not a dealer but an end-user of swaps. Lodge emphasized that the bank’s position was one of hedging and not of speculating. They first started using swaps in 1983, and subsequently, when the tax reform act of 1986 eliminated the advantages of municipal bonds as a tool for managing interest rate exposure, their dependence on swaps further increased. By 1993 the notional value of Banc One’s derivative portfolio had grown to $38 billion, a sum almost equal to half its assets! The amounts of Banc One’s swaps contracts depended on various factors such as: the loan demand, the slope of the yield curve, the amount of capital held by the bank, and the cost of cash market versus the derivative market.
Interest rate swaps have several inherent
An Analysis of their Hedging Strategy
By
Mark Glitto, Gajendra Tulsian, Robert Young
University of Florida
Summer 1997 INTRODUCTION
In 1993 the stock price of Banc One Corporation had dropped from about $45 at the beginning of the year to approximately $35 at the end of the year: roughly a 20% fall. This sharp decline in stock price greatly bothered John B. McCoy, chairman and CEO of Banc One Corporation. A high stock price was essential for Bank One’s strategic goal of continued acquisition by tendering its own stocks in each acquisition. The fall in stock prices put a damper on this drive for acquiring banks with potential for earnings and growth (it had 10 pending acquisitions worth $9 billion in November 1993). In this study we analyze the possible reasons for the fall in stock price and suggest ways to stop the hemoraging.
In December 1993 Banc One held presentations in New York, Boston, and San Francisco to clarify its position on the use of financial instruments known as derivatives. Banc One used Interest Rate Swaps, the most common type of derivative instrument, to manage interest rate sensitivity. At these presentations, Richard Lodge, the chief investment officer, made clear that Banc One was not a dealer but an end-user of swaps. Lodge emphasized that the bank’s position was one of hedging and not of speculating. They first started using swaps in 1983, and subsequently, when the tax reform act of 1986 eliminated the advantages of municipal bonds as a tool for managing interest rate exposure, their dependence on swaps further increased. By 1993 the notional value of Banc One’s derivative portfolio had grown to $38 billion, a sum almost equal to half its assets! The amounts of Banc One’s swaps contracts depended on various factors such as: the loan demand, the slope of the yield curve, the amount of capital held by the bank, and the cost of cash market versus the derivative market.
Interest rate swaps have several inherent
Bibliography: Banc One Corporation (A): Harvard Business School Case, Dale O. Coxe, June 1995. Banc One Corporation: Asset and Liability Management. Harvard Business School Report, Ben Esty, Peter Tufano, and Jonathan Headley. Derivative use in Banks: The six ironies, Robert Albertson, Goldman Sachs & Co., Journal of Applied Corporate Finance, Vol 7, No. 3, p. 52, Fall 1994. The Use of Index Amortizing Swaps by Banc One, Christopher James and Clifford Smith, Journal of Applied Corporate Finance, Vol 7, No. 3, p. 54, Fall 1994. Comments on Banc One, Ethan Heisler, Salomon Brothers, Journal of Applied Corporate Finance, Vol 7, No. 3, p. 59, Fall 1994. What Can Bankers Learn About Hedging Strategy From The Banc One Case, Edward J. Kane, Journal of Applied Corporate Finance, Vol 7, No. 3, p. 61, Fall 1994. Futures - Options - Swaps - Forwards - Default Risk - AIRs Risk Management Lectures - Home