BANKING AND FINANCIAL MARKET COURSEWORK

Answer

Balance Sheets and Profitability; AIA Insurance and Bank of America

Part A: Analysis of Balance Sheet

Brief Overview of Bank of America and AIA Insurance

The Bank of America (BoA) was founded in the year 1904, hence it’s one of the oldest banks across the globe (Bank of America, 2019).  The Bank of America is the global leader in the management of corporate wealth, as well as investment banking.  The company offers a wide range of assets for corporations, governments, institutions and even to individuals.  It is headquartered in North Carolina in the USA.  AIA Group Limited, on the other hand, is the largest publicly listed company that deals in life insurance and securities business in Asia and Pacific regions.  Founded in 1919, AIA offers life insurance policy as its main product (AIA Insurance, 2019). Just like the Bank of America, AIA Insurance is listed in a number of popular stock markets mainly in the Middle East Market, though its headquarters is in Hong-Kong in China.

The Balance Sheets of AIA and the Bank of America

Table 1: Comparative balance sheets as at 3st December, 2019

Comparison and the contrast of the latest year-end balance sheet structures

            The balance sheets of the two organizations have used a largely similar format of presenting the information contained therein. All assets have been lumped together i.e. the insurance company and the bank did not separate total assets into current assets and non-current assets as is usually the practice in other firms. The two organizations have also lumped all the liabilities together i.e. they have not separated the liabilities into current and non-current liabilities as is usually the norm in many organizations.   The financial year of the two organizations ends in 31^st December of each year(Bank of America, 2019; AIA Insurance, 2019).

The following information was obtained to contrast the year-end balance sheets structures of the two organizations.

The first is a comparison of the total equity as a percentage of total assets as shown in the figure 1 below.

Figure 1: Total Equity as a % of total assets

            As shown in figure 1 above, Bank of America maintained a higher equity amount at 20% of its total assets as compared to AIA Group Limited which maintained it at 11%.  Equity represents the net worth of the shareholders in an organization. It represents the portion of an organizations assets financed by the equity holders. In this case therefore a larger portion of the assets of Bank of America are financed by shareholders when compared with AIA (Danişman, 2018). This follows that more of AIA’s assets are financed by creditors when compared with Bank of America.

The next contrast is a comparison of total liabilities against total assets as shown in figure 2 below.

Figure 2: Total Liabilities as a percentage of total assets

As shown in figure 2 above, the percentage of total liabilities to total assets was higher in Bank of America than in AIA.  This implies that Bank of America had higher liabilities as compared to its total assets than AIA. Liabilities represents the amount of assets of a company that are financed by creditors. This represents a financial risk since an organization would be at risk of bankruptcy if its unable to pay creditors on time due to adverse change in the business environment (Danişman, 2018). In this case Bank of America carried more financial risk in its balance sheet that AIA.

The next contrast is demonstrated in figure 3 below.

Figure 3: Cash and cash equivalents as a percentage of total liabilities

As shown in Figure 3 above, the Bank of America held more cash to pay its liabilities when they fell due than AIA. This is a liquidity measure and it shows whether a company is able to pay its liabilities using its most liquid assets which is cash (Danişman, 2018).

The next contrast is demonstrated in Figure 4 below;

Figure 4: Property, Plant and Equipment (PPE) as a percentage of total assets

Figure 4 above shows that Bank of America held more property, plant and equipment assets than AIA as at financial year that ended on 31^st December, 2019. Property, Plant and Equipment are non-current assets that are held by an organization. These assets are important because they are often used to secure loan facilities from financial institutions (Danişman, 2018). In this case Bank of America was at a better position than AIA to use its PPE assets to obtain credit facilities to finance business expansion in future.

Part B

Analysis of how the difference in AIA’s and Bank of America’s Roles are reflected in their balance sheet structures

            Bank of America just like any other bank in the world does the business of mobilizing customer deposits, giving out loans and investing its excess cash in interest earning securities. The bank’s biggest assets therefore relate to these transactions.  The banks biggest asset was loans and leases which stood at $ 983,426 million as at 31^st December, 2019. This represented financial resources lend out to clients and who repay with interest.  The banks largest liabilities also related to the business model of the bank were interest bearing deposits and non-interest bearing deposits which totaled $ 1,344,036 million(Danişman, 2018). These liabilities represented amounts owed to investors as interest bearing deposits with the bank and which are expected to generate interest payable on maturity.   These entries in the books of the bank represented the greatest liquidity risk for the bank. If the bank was owed more by investors than it could generate to pay, then it risked getting bankrupt(Danişman, 2018). The bank held cash and cash equivalents totaling $161, 560 million. This represented the most liquid assets that the bank held to pay its short term liabilities when they fell due and also meet running operating costs.   The bank must as a requirement maintain a certain amount of cash and cash equivalent to ensure it meets customer demands as and when they are made.  The bank is required to maintained a minimum capital ratio as required by the central bank. This explains the reason why the bank’s equity to risk weighted assets is very critical as if it falls below a certain minimum the bank risks contravening banking regulations and could be penalized (Jacques,2017). 

            Unlike the Bank of America, AIA undertakes insurance life business and also offers other financial services. Life assurance guarantees that, on the policy holder attaining a certain age or on death, he will receive a certain amount of money paid to him by the insurer.  Throughout the period of the policy the insured has to pay regular premiums.  The insurance company is therefore required to pay insurance claims made by policy holders when they fall due (Kulustayeva, Jondelbayeva, Nurmagambetova, Dossayeva & Bikteubayeva, 2020). AIA balance sheet reflected a total of US$189,597 million as insurance contract liabilities which was the largest liability as at the end of the financial year.  This represented the amount owed to policy holders that was due either within the following year or thereafter.  To ensure they do not fail to pay claims when they are made insurance companies invest the premium received in the money market or in equities market(Kulustayeva et al, 2020). The largest assets that AIA carried in its balance sheet was investments in debt securities and equities securities which totaled US$ 222, 306 million. These investments ensured the insurer was able to meet policy holders’ claims when they fell due.  This also represented the greatest liquidity risk since any adverse change in market conditions could lead to loss of revenue which would create liquidity problems.  The insurance company has hence invested in derivative financial instruments totaling US$ 971 million. These assets are aimed at mitigating the risk of sudden fall in rates which could be detrimental to the earnings of the insurer(Kulustayeva et al, 2020).

             AIA acts as a money market to individuals who wish to invest their funds. The company takes a certain amount from investors in form of deposits and invests it on behalf of the policy holders. The policy holders are, therefore, entitled to a particular interest monthly and annually. These amounts are reported as liabilities in the balance sheet. This is because the owners are entitled to withdraw the whole amount after a certain duration, or upon giving notice to the insurance company(Kulustayeva et al, 2020).

Part C

Different Ways of Measuring the Profitability of Bank of America

            Profitability refers to the ability of a company to generate profit for its shareholders (Chronopoulos et al., 2015). According to (Claessens Coleman & Donnelly, 2016), the profitability of a bank institution however, can only be measured using the financial ratios such as Return on Assets (ROA) and Net Interest Margin.

Return on Assets (ROA)

            Return on Assets (ROA) is a financial ratio used to measure the profitability of a company relative to its assets (Dina et al., 2020). This ratio gives an investor an overview of how the company has been able to use its assets to generate revenue. ROA is calculated using the following formula;

Return on Assets = Net Income/ Total assets

            Since its normally difficult to construct cash flow analysis of a bank accurately, most banks prefer using ROA to measure their profitability. The ratio indicates the profit earned per dollar of assets invested in the bank and hence it’s a critical ratio.  The ratio is a good measure of the quality of the management of the bank and its efficiency in utilizing the existing assets to generate income since most of the assets that the bank holds consist of money lend to customers (Ramesh, 2019).  A low ratio will therefore indicate that the bank’s management is inefficient while a high ratio shows that its management is strong and efficient(Ramesh, 2019).

The ROA for Bank of America for the past five years is shown below;

Table 2. Summary of ROA for the Bank of America in the Past 5 Years

Figure 5 below summarizes the Return on assets Bank of America in the past five years;

Figure 5. Comparative ROA for the Bank of America for the Past Five Years

Figure 5 above shows that the return on assets the return on assets for the Bank of America has grown steadily from 0.23% in 2014 to 1.20% in 2018. The low return on assets should not be a point of concern as the ratio even if low may represent substantial revenues and profits since banks are usually highly leveraged world over (Ramesh, 2019).  It therefore appears that the bank has a strong and efficient management team.

Net Interest margin

            Since banks’ core business is to provide loans from which they generate interest income, net interest margin is especially an important ratio in evaluating a bank’s performance over time.  Net interest margin reveals the ability of a bank to generate profits from its interest earning assets which primarily include loans and also other investment securities that it holds.  The predominant portion of a bank’s income is made up of interest income. Net interest margin is therefore a very important indicator in measuring how effective a bank is in carrying out its core business .  A bank that records higher margins generally implies that its more efficient and vice versa(Tu DQ, 2017).

  This ratio is also important because it measures how a bank is doing in relation to other banks in the market. It is also a good indicator on whether the bank has priced its financial products competitively or not. If the ratio is going down it may point to a problem with the pricing strategies used by the bank. It is also important in measuring how the economy is doing generally. If the ratio is falling it may imply people and businesses are avoiding loans since the economy is not doing well(Tu DQ, 2017).  The formula for calculating net interest margin is as follows;

(Interest Returns-Interest expenses)/average total of earning assets

Table 3. Summary of net interest margin for Bank of America in the Past 5 Years

The above can be presented graphically as follows;

Figure 6: Net Interest Margin of Bank of America

According to Figure 6 above, net interest income for the Bank of America grew during the five-year period. This implies that the entity operated profitably during the period. It also implies that the bank was able to generate income from its interest earning assets during the period.

Limitations of ROA and Net Interest Margin

            The first advantage of ROA and Net Interest Margin is that that they are very simple to calculate. This is because one just uses data from the statement of comprehensive income and balance sheet (Claessens Coleman & Donnelly, 2016). The second advantage is that these ratios are easy to interpret  to make a prudent investment decision. This is because the final result is presented in percentages.  The next advantage is that data that is used to calculate them is comparative hence they are able to measure the trend performance of an organization. The next is that they can be used to make investment decisions as they are able to show the performance of a company over time (Hanzlík & Teplý, 2019). They can also be used for forecasting, planning and even budgeting as they provide important trend analysis information.  They can be used to measure the operational efficiency of the bank and also they communicate important information about the bank(Hanzlík & Teplý, 2019).

Disadvantages

            These ratios have demerits in that they are prepared using historical information which may not give an accurate picture of the future state. The next demerit is that they do not take into account the impact of inflation on the performance of the bank(Hanzlík & Teplý, 2019). This is because they are prepared at a given point in time and by the time they are being communicated to stakeholders they are not adjusted for inflation. They information they provide is not realistic as a result.  The next disadvantage is that these ratios rely on information provided by management which may have been manipulated to provide a good picture of the bank(Hanzlík & Teplý, 2019).

Conclusion

            The above ratios show that the Bank of America has been trading profitably for the five years reviewed. The ratios show that the bank has a strong management which efficiently utilizes available resources to generate profits for shareholders. There is merit in investing in the bank as it promises to make capital gains in future.

Answer

Al Gore’s “An Inconvenient Truth” Movie Analysis

            While delivering a speech, persuasion is essential in convincing the audience to listen to their ideas in their address. In An Inconvenient Truth, former US Vice President Al – Gore speaks on global warming as an encroaching crisis affecting its atmosphere and the environment as his central message. Al- Gore effectively persuades the audience into joining his cause against global warming by using persuasive communication strategies, a solid introduction, rhetoric strategies, oral citations, proper speech delivery, and presentation aids to evoke the audience in supporting his cause.

            Al- Gore’s successfully incorporates a solid speech introduction to attract the audience’s attention. He begins the introduction with a joke alluding to him being the “former future president of the United States.” The use of such a satirical comment evokes the audience wondering who would be bold enough to stand on stage after losing a race, such as the presidential election. This captures the audience to be more involving in his speech and sit for a better listening into the matters at hand. Later on, he introduces his speech topic by focusing on his central message, outlining his whole address's main points. Finally, it eases the audience by showing a mangrove parchment indicated to involve the audience in relating to a preserved environment before expounding on his speech. The audience is engaged after this as he gets into his central message and further engaging in his speech.

Al-Gore's excellently persuades the audience by using ethos as a rhetorical strategy throughout the speech.  Ethos employs a sense of trustworthiness and competence that enables the audience to believe in the speaker's credibility. He shows ethos by acknowledging his commitment to the earth as an environmental activist. Al- Gore's speech is based on expansive research that helps the audience trust his competence in speaking on the issue. Al- Gore's possesses charisma and positive energy that attracts the audience to remain rooted in listening to his appeal towards addressing global warming. As characteristics of applying ethos in a speech, the combination of dynamism and competence draws the crowd to become trustworthy with his presentation and remains attentive throughout the address.

Al- Gore’s effectively employs persuasive communication strategies that include positive motivation, negative motivation, cognitive dissonance, non-verbal communication, and appeals to self-esteem in his speech. Positive and negative motivations are essential in persuading the audience to venture into addressing global warming to achieve positive outcomes in the environment. Consequently, Al-Gore uses negative motivation to convince the audience that failure to look into measures of curbing global warming and climate change, the earth might end up like the few places he depicts in his comparison photographs and videos. Cognitive dissonance helps change one's perspective to something by discomforting norms and beliefs to persuade an audience towards change. At the start of the documentary, Al-Gore introduces a short video of a beautiful mangrove parchment that would stay in the back of the audience's mind on what should be safeguarded.  To destabilize the audience, he shows pictorials of areas devastated by global warming, evoking fear and panic for the world that has become dormant in addressing this issue. Intertwined, with his central idea, Al- Gore persuades the audience in a bleak and disheartened tone to fight for preserving the environment.

            In addition, Al-Gore’s effectually uses non-verbal communication in his body language is established through a dejected worrying tone for identifying with the audience on the prevailing situation. Al- Gore’s body movement showed confidence in his walk and constant interactiveness with the audience. Al – Gore also has a confiden, genuine smile appearing as a well- groomed and dressed man in delivering his speech. In the documentary, Al-Gore's clear expression of displeasure with people who negated around global warming instead of addressing is clear.  Al-Gore aimed to show concern for the issue. Al –Gore's self-esteem pushes his central message across the audience by focusing on positivity and the audience's contributions to curb global warming. His articulation of each point across helps in building confidence with the audience. His confidence in his speech persuades the audience to be on board the matter.

            Oral citations are well used in An Inconvenient Truth to capture the audience's attention. Al- Gore uses oral citations effectively to show reliability, credibility, and validity of information conveyed in his speech address. Denoting empirical evidence from videos, charts, and maps allude the audience into believing that Al- Gore critically researched the issue and came up with a profound speech to convince the audience to join his cause to remove fallacies on wrong information presented in his speech. Virtually, his research pays off as he captures the audience in his factual interactions on the matter.

Al – Gore excellently uses presentation aids like projected images, comparison photographs, short videos, satirical cartoons, and info graphs like maps and charts to help persuade his audience to come to his plea in preserving the environment by combating global warming. Projected images show areas adversely affected by global warming, including flooded areas. The short videos as well show people injured due to flooding. The graphs and maps show empirical evidence of the effects of global warming in areas. A comparison of videos and pictures shows how some places were before global warming and its impact after years. All these visual aids serve as areas involving the audience's concern and worry over the deteriorating ecosystem around us. Al-Gore was not shy off, including videos of politicians passing over the global warming issue through satirical cartoons while also poking at renowned scientists worldwide who showed the existence of climate change. As much as Al-Gore is a politician, he intended for the audience to understand that his concern was for the environment and endeavors towards combating global warming rather than politically-driven shows with aspirations of a political seat.

Lastly, Al- Gore successfully uses ethos, pathos, and logos strategies to capture the audience's attention in his speech. Ethos employs a sense of trustworthiness and competence that enables the audience to believe in the speaker's credibility. He shows ethos by acknowledging his commitment to the earth as an environmental activist. The documentary shows the incorporation of logos through his presentation of scientific facts that support his claims to global warming as an issue of concern. Lastly, his attributes to incorporate his son's demise into comparing it to his commitment to the environment show pathos as a rhetoric strategy.  Successful integration of photographs and videos of areas affected by global warming helped provoke the audience to support his cause towards alleviating global warming.

In conclusion, Al – Gore effectively incorporates persuasive communication strategies, a solid introduction, rhetoric strategies, oral citations, proper speech delivery, and presentation aids to evoke the audience in supporting his fight against global warming.  Using all these techniques successfully convinces the audience to have a concern about the deteriorating ecosystem. Having watched the documentary, I am persuaded to carry on the legacy of conserving our environment as an environmental ambassador.         

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