UnionBanCal (NYSE: UB) is a bank holding company that operates commercial banking operations in the western United States and Texas. Its major subsidiary is Union Bank and the company is divided into two operating segments: retail banking and corporate banking. In the wake of the 2008 financial crisis, UB faces unfamiliar challenges as the credit market remains uncertain and the Dodd-Frank Act changes the financial sector.
In 2010, UB realized a net income of $573 million after incurring a net loss of $65 million in 2009. While revenue and loan volume increases helped the company in 2010, its turnaround resulted from a significant decrease in its effective tax rate from 71% in 2009 to 30% in 2010 as the company took advantage of tax credits and write-offs associated with its 2009 loss.
UB's primary source of revenue is its lending practice - like any commercial bank, Union Bank pays customers interest on their deposits so that it can lend out their money at a higher rate. The net interest margin metric acts as proxy for the bank's ability to earn interest on its assets. In the midst of credit market uncertainty following the 2008 financial crisis, UB's ability to lend profitably may be reduced and its net interest margin may decrease.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, the government's response to the 2008 Financial crisis, significantly impacts the way the financial sector operates. Its allowance for government support of institutions identified as "too big to fail" may increase the value of identified financial institutions while decreasing the prospects and equity value of smaller financial institutions like Union Bank. In addition, the Act increases financial regulation which may restrict UB's operations and increase back office expenses related to compliance.
Union Bank competes with other commercial banks in California including competing regional banks and national competitors:
UnionBanCal and its competitors increase revenues and income by increasing their deposit and loan volume. The industry is competitive as companies increase their deposit interest rates while decreasing their loan rates and fees to attract customers.