Banking Industry Analysis and Trends

This assignment requires a comprehensive analysis of the modern banking industry. Students are tasked with examining key social and ethical issues within the sector, including corporate social responsibility (CSR) and fraud risk management. The analysis should also consider the influence of technology on banking practices, such as electronic banking channels and the impact of fintech. Furthermore, students need to explore the relationship between the banking industry's volatility and economic growth, while discussing the role of regulation in shaping bank behavior both domestically and internationally.

Auditing

Executive Summary
This report aims to explain the concept material misstatement and their influence on the
organization. In this report, it explores the different areas of the organization namely National
Australian Bank (NAB).In this report, it gives the detail explanation of the nature of the industry,
its operations, corporate governance and impact of the external environment that influence the
financial statements of the company. Moreover, it is also found from the compliances and
policies that would give the idea of the level of the material misstatement risk exists in their
financial records. Similarly, it is also found from the board structure and their working style
exhibits the transparency level in their operations that could assess the risk of misstatement in its
operations. Lastly, it finds that the overall aim of the company’s assessment is to identify the
information from the various levels of its operations and evaluate the level of risk that will
impact the company and its environment.

Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Part 1- Nature of Entity....................................................................................................................4
Part 2- Understanding the Industry..................................................................................................5
Part-3 Understanding legal environment.........................................................................................7
Part 4- Understanding external environmental factors....................................................................8
Part 5 – Objectives, strategies and business risks..........................................................................12
Part 6- Ratio analysis for entity performance................................................................................15
Part-7 Understand management and Governance..........................................................................17
Conclusion.....................................................................................................................................20
References......................................................................................................................................21

Introduction
The overall report is based upon the assessment of the bank namely National Australian Bank
(NAB) that assess the every aspect of the organization at several criteria’s like nature of the
entity, industry regulations and external factors that influence the organization. Similarly, it also
assesses the business risks and strategies arise in the operations. Furthermore, it also explains the
performance measures and monitoring of the activities of the board members. Lastly, this reports
depict the corporate governance structure is followed by the NAB in a precise manner.
Part 1- Nature of Entity
Business Operations
The operations of the business deals in financial services that operate in Australia and New
Zealand, the business operations are also spread into the Asia, the UK, and the US. The products
of the business committed to the customers with quality product and services with fair fees and
charges (NAB, 2017).
Investment and Investment activities
The bank invests in diverse sectors and investment activities. Presently the firm invests in
communities $48.8M in 2016 to the Australian communities and 1.8million in CSR activities.
Apart from that the business invests in Technological sectors to provide effective services to
their clients (Knechel and Salterio, 2016)
Financing and financing activities

The firm undertakes finance activities of A$18bn over the seven years to September 2022 to
address the climate change requirements in future and environmental activities. The bank fairly
supports the transition to a low-carbon economy in 2016 (NAB, 2017).
Financial reporting practices
The bank's financial reports were shown in the proper format and it discloses the clear
information to their shareholders. The firm makes the report under Banking Act
1959.Accounting standards and interpretations according to Australian Accounting Standards
Board (AASB) (Admati and Hellwig, 2014).
Part 2- Understanding the Industry
A) Industry Size
The present banking industry of Australia consists of a number of banks licensed to carry on the
business under the Banking Act 1959.The banking industry has grown at the rate of 13 percent in
the last decade. It indicates that a major number of players in the banking industry, holding the
major portion of financial assets.
B) Industry Growth
The strong growth in assets of the banking system has occurred at the same time the stock of the
household savings in banks increased significantly. The growth of the banking sector is 27% in
2016 as compared to previous year, due to increase in foreign funding and assets ownership
(Cohn, Fehr and Maréchal, 2014).

C) Industry Supply Chain
Due to increase in competition in the banking industry, the supply chain is strong and diverse for
Australian Banking system. The reduction proportion of wholesale deposits, the capital adequacy
is maintained and major players focus on selected credit opportunities and reduce unsecured
retail portfolio.
D) Major players
Currently, the major banking players in the Australian market are Westpac Bank, Bendigo Bank,
ANZ Bank, Sun Corp Bank and AMP Bank Ltd which holds the major financial market
(Taleghani, Gilaninia and Mousavian, 2011).
E) Market Shares of Industry players
(Source: Australian Broker, 2017)

There are four leading players in the financial market in Australia. The growth of these firms is
indicates according to the financial years. It seems that ANZ bank share is increased from
$1600m to $2600m from the past years. Similarly, the growth of the CBA and NAB is not seen
such improvement in past years.WBC has grown significantly from the past recent years and
reach to $3000m (Goyal and Joshi, 2011).
f) Critical success factors
The critical success factors of NAB are product attributes, competitive capabilities, resources
competencies, technological advancement and low cost. These factors help firm to become
competitive in the long run.
g) Major Threats
The banking industry is under ‘oligopoly’ situation. As per the analysis of the Moody’s report,
there are new threats that can be faced by the banks i.e. longer period of low-interest rates, home
price risks, improper wage rate and unwinding global commodity cycle.
Part-3 Understanding legal environment
Banking regulations in Australia are beneficial for the housing market it provides low collateral
security on home loans. The regulations are split between the Australia Securities and Investment
Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) played an
important role in regulating market conduct. The firm is regulated by APRA. The current
accounting standards are followed by the NAB under The Australian Accounting Standards
Board (AASB) and IFRS. The IFRS standards are beneficial for the banks to meet the

international financial requirements of the clients (Beatty and Liao, 2014). Moreover, the
political stability of the country is good that supports the policies of the government.
Part 4- Understanding external environmental factors
PEST analysis- As per the analysis, it depicts that banking industry is accountable by the
government. It provides good offer and services to the customers are the example of good
political systems and regulations. Proper systems reduce the risk of fraud and illegal activities in
the companies. Additionally, it can also analyze from the economic point of view banks are at
the whim of economy because inflation rates can be devastate banking prospects as it influences
the value of the currency. Technology is helping customers regarding spending and save money
with help of applications and online services that reduce the chances of illegal transactions, fraud
and risk in daily transactions due to digital records (Bhasin, 2015). Social factors indicate that
changing behavior and necessities influence how people use banking options that reduce the risk
of misstatement in their accounts and it will increase the trust between consumers and banks.
SWOT analysis

(Source: Dechow, 2011)
As per the above SWOT analysis, it summarizes that key strengths of the bank are the strong
brand name and leading financial player in the Australian banking that reduces the chances of
risk from the consumer point of view. Similarly, opportunities depict that bank has expanded in
other countries with a large number of portfolios. Similarly, weakness and threats increase the
chances of the risk of low revenues and government regulations that impact the operations of the
business.
Porter’s Five Forces Analysis

(Source: Dechow, et al., 2011)
As per the above picture, it can be analyzed from the factor ‘Rivalry among existing firms’
indicated that competition is high in the market due to other players i.e. Westpac, Sun Corp
Financials and ANZ Bank. As per level of high competition, the risk of material misstatement is
high to attract customers through low-interest rates with hidden terms and conditions. The threat
of new entrants is low because of trust and brand name among the customers (Haiss, 2013).
Similarly, the power of customers is low as a bank as large no of customers due to their quality
services and pricing strategies.
Other External Factors
Economic conditions: The economy of the country is strong and it is increased from last decade
2001-2011.It can be forecasted that Australian economy is grown by 1.93 trillion by 2017.The
banking sector contributes the major role in Australian economy that will be the positive signs of

development. The interest rate is competitive in the Australia for home loans. Below given figure
indicated the interest rates of the banks and financial institutions in Australia.
(Source: Munro and Stewart, 2011)
Above given picture indicated the interest rates application fees, maximum finance and EMI’s
for the different banks. It is identified that interest rate is 3.69% which is low as compared to
other banks that will positively impact on the business. The current inflation rate in the Australia
is 1.9% as it is increased from last year (Lau, et al., 2013).

(Source: Ongena, Popov and Udell, 2013)
The above given indicated the trend of inflation from last years, it identified that inflation rate
influence the spending and income of the consumers that will impact the transactions of the
business that reduce the cash flow in the economy.
Part 5 – Objectives, strategies, and business risks
Industry developments- The Australian financial sector is the major contributor to the country’s
GDP. The objective of the firm to attract 20% customers in the next quarter but there are risks
related to credit is high due to counterparty fail to meet its obligations according to the current
terms and conditions. The current human resources are not able to handle these types of risks
effectively (Uddin, and Suzuki, 2011).
New Products and Services
The firm introduces the new product and services that increase the risk of payments and
borrowings from the customers. Interbank transactions, swaps, and superannuation plans meet

the objectives of the customers but there are certain products increase the financial risk caused
by the loans, swaps derivatives, foreign exchange transactions and the settlement of transactions.
If any person borrows money, product or service from bank and unable to pay due to any worst
reasons the bank faces financial risks.
Business risk: The bank can face the risk of business expansion in other countries or segments.
The risks related to the failure of long term strategy regarding the revenues and profitability of
the business into other countries. The profits and revenues can be influenced by the inflation rate,
interest rate and currency rate of the nation increase the risk related to expansion (Hoehle,
Scornavacca, and Huff, 2012).
New accounting requirements
The possible risks related to the improper information processing, leaking or hacking of
information and inaccuracy of data processing due to new accounting standards adapt by the
banks in long run. The current accounting standards might not be met with new standards in
future that will increase the chances of fraud and misstatement in records.
Regulatory requirements
The current regulatory requirements support the policy of banking and met the objectives of the
firm. But there is a risk of changes in regulations in future likes terms and conditions on
investments, mergers and joint ventures impact the profitability of the business operations.
Compliance procedures impact the transaction costs and cash flow of the business.
Current and Prospective financing requirements

The current financing requirements are analyzed the financial records of the banks which
indicate from the income statement of the bank below. The below-given figure indicates that the
new revenue of the company is decreased in 2016 i.e. $26,369 to 18,122 as compared to its
previous years. It means that the current financing capacity of the bank is low due to fewer
revenues generated from its securities and services. It can be analyzed from the balance sheet
that total assets of the banks are increased that indicated that the current financial condition is
good

(Source: Lou and Wang, 2011)
and the bank can borrow the money from the central bank to meet their current obligations.
Similarly, on the other side, it can be analyzed that liabilities of the bank are high as compared to
the previous year which increases the debt level that would be riskier for the profitability of the
business (Pérez and Rodríguez del Bosque, 2014).
IT Risks
In banking industry data and information is a very crucial element for the organization. It is
stored in the computer systems with high-security passwords and firewalls. But still, there is the
risk of leaking data and information related to the consumers is the major risk for the banks to
protect the information from hackers. Similarly, another risk for the bank due to system failures
and server down problems during peak hours of operations results in a significant loss of the
system failures and programming errors might hamper the work.
Implementation of strategy
The bank needs to implement the proper strategy in their process and its operations to reduce the
gaps in the system that will impact the business in a long run. The banks will need to train their

employees regarding changing requirements of the business. Moreover, the firm needs to adopt
the new systems that will improve the process of the business (Coulbeck, 2012). From this
implementation, there will be a positive impact on organization performance.
Part 6- Ratio analysis for entity performance
Ratios NAB (2016) (2015) (2014) Industry
average
Westpac
(2016)
Return on
Assets
0.03 0.67 0.60 0.92% 0.02
Return on
Equity
0.44 12.87 11.92 15.5 0.45
Dividend
growth rate
2.81% 2.83% 2.76 6.1% 3.2%
Asset turnover
ratio
0.03 0.02 0.03 1.5% 0.04
(Source: Czerney, Schmidt and Thompson, 2014)
As per the above-given table, the profitability ratio of the company i.e. return on assets ratio is
low as compared to the previous years it means that the company cannot generates an effective
return from the assets. As compared to industry average the return on assets ratio would be low
that indicated that the other competitors generate good revenues from assets. Similarly, dividend
growth ratio of the company is reduced from 2.81% from 2.83% which indicates that the
company can effectively get the returns from the investments and gives good returns to the
investors (Moshirian and Wu, 2012). As compared to the industry average the dividend growth

rate is low it indicates that other banks give sufficient returns to the shareholders on their
investments.
Moreover, compared to competitor firm i.e. Westpact the dividend growth rate is good as
compared to NAB. Lastly, Asset turnover ratio of the NAB is 0.03 in 2016 that is high from last
year. It indicates that company is effectively deployed its assets in generating revenue. As
compared to industry average growth the asset turnover ratio is low it means that the bank needs
to effectively utilize their assets to generate good returns to remain competitive in the industry.
As per their competitor analysis, it finds that Asser turnover ratio of Westpac is good as
compared to the NAB (Bryant, 2012).
Part-7 Understand management and Governance
a) Communication and enforcement of integrity and ethical values
The NAB develops the robust frameworks in its business operations which clearly indicate the
code of ethics and internal communication policies helps management to take effective
decisions. Similarly, the board provides a strong compliance culture that is disseminated at all
hierarchical levels and is based on the sound laws, regulations and best practices. The bank has
effectively designed, developed and implemented an integrated compliance framework set by
compliance policy and supported by compliance plans, processes and assurance (Kiliç, Kuzey,
and Uyar, 2015).
b) Commitment to competence
Both are an integral part of the NAB and bank simultaneously develops their employees’ skills
according to the objectives of the bank. The skills and attitudes of the employees are good to

perform the tasks effectively and efficiently. The commitment of the people is sincerely towards
the purpose of the tasks. Effective training modules and programs help employees to remain
positive in their tasks.
C) Participation by those charged with governance
 Their Independence from management: The level of ‘Independence’ of the directors
of the company is based upon the following conditions below:
1. The director is substantial shareholder of the company or if he or she represents
or officer of the substantial shareholder of the company.
2. The director has within the past five years been affiliated with the company
3. The director received any remuneration from the company apart from the fees
in the form of cash and shares and whether or not the director participates in
any of the company’s executive share option performance pay schemes
(Staikouras and Wood, 2011).
 Experience and Stature of Board members: Currently there are 9 members of the
board with more than 30 years of experience in their services.7 members are non
executive director and one is group chief executive officer and chairman.
 The extent of involvement: The involvement of board is to represent shareholders and
serve the interest of the company by evaluating its policies, strategies, and
performance. Moreover, the board also monitors the company’s performance and build
sustainable value for shareholders in accordance with duties with any duties and
obligation by the law of board and company (Ariff and Iqbal, 2011)
 Interactions with internal and external auditors: The board of directors properly
analyze the reports before present to the external auditors. The director analyses and

approves the complete report before present to the auditors and takes appropriate
response during any issue.
d) Management Philosophy and operating style: Every board of member has different
mindset and operating style in the
 Approach to taking and managing business risks- Managing business risk is an important
part of the business. It comprises into two categories i.e. financial risk which is handled
by the finance team efficiently, it may arise sometimes due inefficient cash flow to
continue its operations. Secondly, operational risk is arising due to decline in sales and
profitability. The director's approach is towards these risks has obvious ramifications on
company’s financial statements
 Attitudes and actions toward financial reporting- Financial reporting standards facilitates in
fairness, consistency, and transparency of the financial reporting. There are some issues
like valuation of profits and depreciation measures in financial reporting is an issue to the
subjective judgment of management. The auditor gains an understanding regarding the
issues and behavior of the directors in financial issues.
 Attitude towards information processing and accounting functions and personnel-Properly
financed and equipped with sufficient numbers of appropriately qualified staff and
information technology is important for the company for its ongoing operations. It is
connected with third parties, administration and control systems that help directors to
take strategic decisions (Cao, Chychyla and Stewart, 2015).
E) Organizational structure – The bank structure is accordance with ISA 315 standards. It
depicts that the framework of the bank activities for achieving its objectives is planned, executed,

controlled and reviewed. In this company document, it is also mentioned that NAB has located in
many countries and its diverging operations and number of branches in the many countries.
F) Assignment of authority and responsibility – The Company’s operations are diversified
into various countries and the size of the workforce is large which exhibits the larger amount of
assignment of authority and responsibility. The bank maintains the clear authority and
responsibility structure that indicates the actions, objectives, and responsibilities of the
individuals that help in decision making.
G) Human Resource policies and practices – According to ISA 315 human resources is an
important matter in the company regarding the control standards. The recruitment and policies
are framed in that manner, which ensures that only competent individuals with integrity are
employed by the company (Ettredge, Xu and Yi, 2014). The company conducts induction
program for new employees and gives appropriate training to the employees according to their
roles and positions. The senior members of the team counsel the employees regarding their tasks
and compare the performance according to the standards. Moreover, the company has the open
grievance procedures where an employee can file the issues and management take decisions.
Conclusion
As per the above analysis of the report, it concludes that chances of material misstatement are
less due to strict regulations and compliances followed by the bank. Moreover, it is also
concluded that management follows the proper standards and corporate governance measures to
reduce the risks of material misstatement in their financial reports.

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