Financial Analysis of a Bank

This assignment presents a financial analysis of a bank over three fiscal years (FY2015, FY2016, and FY2017). Students are required to analyze the provided income statement, balance sheet, and key financial ratios. The analysis should include insights into profitability, liquidity, solvency, and overall performance trends. Specific calculations like vertical analysis of the balance sheet are also included in the data.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Authors note:

1ACCOUNTING
Table of Contents
1. Executive summary................................................................................................................2
2. Introduction............................................................................................................................2
3. Income statement...................................................................................................................3
4. Statement of Financial position..............................................................................................4
5. Cash Flow Statement..............................................................................................................6
6. Financial Ratio Analysis:.......................................................................................................7
7. Horizontal and Vertical Analysis.........................................................................................13
Reference..................................................................................................................................15
Appendices...............................................................................................................................17
Appendix 1 (BALANCE SHEET).......................................................................................17
Appendix 2 (INCOME STATEMENT)...............................................................................17
Appendix 3 Horizontal and vertical analysis.......................................................................18

2ACCOUNTING
1. Executive summary
In the following report, we are going to analyse the financial statements of a banking
company having its business operation in Australia and New Zealand. In terms of size and
assets held it is the second largest bank operating in both the countries. In pursuance of
analysing its financial position and performance we will take into consideration not only the
data of the current year but also will be conducting trend analysis to gauge the impact of the
decision and action taken by the company towards wealth creation of the shareholders. There
are many financial and non-financial matters to be considered by the shareholders before
investing in the shares of any company. On their behalf, we will be conducting these analyses
and will draw a conclusion about the present and future viability of the company’s financial
position and performance. The analysis will be based upon the data of the last three years of
the company’s operation in Australia. This data will be taken from the financial statements of
the company as laid down in the annual report of the company and will then be compared
with the industry standard. We will be using tools like horizontal analysis, vertical analysis,
and ratio analysis covering ratios relating to profitability, efficiency, solvency and liquidity of
the company. The trend obtained from comparing the data of the last three years will help us
to understand and present the data in graphical and other formats that will aide in the
understanding of the stakeholders about the financial position and performance of the
company.
2. Introduction
The company on which we will be presenting our analysis or report is Westpac
Banking Corporation or more commonly known as WESTPAC. It is a bank and also
provides various sorts of financial services. It has its headquarters in Sydney Westpac Place.
It has the largest number of branches with respect to any other bank carrying out operation
within Australia. The bank has around 1429 branches and 3850 ATMs all around Australia.

3ACCOUNTING
In terms of assets held by the banks of Australia it is the second largest bank operating within
the country (Louis et al., 2014). It is not only operating in Australia but also has its business
footprints in New Zealand. In New Zealand too it is the second largest bank in terms of assets
held. In our report we will be analysing various key financial indicators to determine the real
and accurate picture of the company’s financial position and performance. In addition to
current year data we will be taking the data of past to financial years and will try to draw up a
trend analysis which will enable us to decide whether the company is capable enough to
create wealth for its shareholders. Finally, based on our analysis we will be drawing
conclusion in respect of the company’s financial position and performance.
3. Income statement
One of the many reasons that influence the decisions of the shareholders is profit
earned by the company in a specific period of time and the capability of the organisation to
earn profits in the future. Information regarding the amount of profit earned by the
organisation is contained in the income statement of the company. The income statement also
enables the shareholders to get a picture of the ways in which the company earned its profit
and about the reliability that can be placed upon the company regarding its future viability
and profitability (Zeff, 2016). The profit of an organisation is arrived at by deducting the
expenses from the income of the company. Owner’s equity increases with financial profits
and it decreases with financial losses.

4ACCOUNTING
2017 2016 2015
7100
7200
7300
7400
7500
7600
7700
7800
7900
8000
8100
COMPARISON OF INCOME STATEMENT FROM
2015 TO 2017
$ MILLIONS
Figure 1: Income Statement
(Source: created by Author)
The comparison between the profits earned by the entity gives out a clear picture of
its profitability. We can very clearly observe that there was a dip in the profits of the
company in the year 2016. However, the company finally recorded a in the profit but it could
not catch up to the profit of the year 2015. This indicates that the company will have to work
on improving its profitability if it has to earn the trust of its shareholders.
4. Statement of Financial position
The balance sheet of the company also known as the statement of financial position is
that part of the financial statements that reflects the true financial position of the entity at a
particular point of time. It lays down the list of resources that are within the control of the
entity and also the various legal and contractual obligation of the company.

5ACCOUNTING
2017 2016 2015
$-
$100,000.00
$200,000.00
$300,000.00
$400,000.00
$500,000.00
$600,000.00
$700,000.00
$800,000.00
$900,000.00
Total Assets, Liabilities and equities
comparison
$MILLION
Figure 2: Assets liabilities comparison
(Source: created by Author)
From the analysis of statement of financial position we can analyse that the
companies Total Assets have been growing consistently year to year basis. That is from the
year 2015 the assets of the company have grown form $812156 million to $851875 million in
the year 2017. The liabilities of the company are also growing every year i.e. from $758241
million in the year 2015 they grew to $790533 million in the year 2017. Similar trend can be
observed in case of the equities of the company that grew steadily from $53915 million in the
year 2015 to $61342 million in the year 2017 (Warren & Jones, 2018). The company is
increasing its equity every year that is a good sign for the shareholders, as they will not have
to worry that the entity will dilute their holding by taking loans and borrowings.

6ACCOUNTING
5. Cash Flow Statement
The cash flow statement acts as a summary statement that shows us the movement of
cash that is in or out of the entity over a specified period of time. The cash flow analysis of
every entity becomes very important along with the accrual system of accounting because of
the fact the organisation will not able to function properly without having cash in hand and it
might threaten its solvency in the long run (Grant, 2016). The organisations often in pursuit
of over-trading and managing their losses in some part of the year tend to forget to cater to
needs of proper cash flow management. Our company that is WESTPAC as we have seen
was facing or recording fluctuating profits and at the same time it was able to increase its
assets and liabilities along with it. Hence we are concerned regarding any mismanagement or
serious issues in the cash flow of the company.
Year 2015 Year 2016 Year 2017
-25000
-20000
-15000
-10000
-5000
0
5000
10000
Analysis of Cash Flows from FY 2015-2017
$MILLION
Figure 3: cash flow Statement analysis
(Source: Created by Author)

7ACCOUNTING
Cash flow from Operating Activities:
The cash flow from operating activities shows that how much cash an entity is able to
recover from its principle revenue generating source of income. From the analysis we can
find the company had increased its revenue from operating activities in the year 2016 but
again fell back to $2820 million though greater than that of year 2015 but very low than year
2016.
Cash flow from investing activities:
The investment pattern as reflected by the cash flow of the company shows how
considerably it has reduced its investment over the years. From ($18715million) in the year
2015 it has reduced to ($1698) in the year 2017.
Cash flow from Financing Activities:
This segment of the cash flow statement allows us to get the true picture of the way in
which the company is able to arrange its financial resources for carrying out its business
operations (Weygandt et al., 2015).
The analysis of the cash flow from financial activities shows that the company is
facing difficulty in arranging funds lately as the cash flow from financing activities have
reduced from $5513million in the year 2015 to $552million in the year 2017.
6. Financial Ratio Analysis:
1) PROFITABILITY RATIO:
a) Return on Assets ratio (ROA):
RETURN ON ASSETS YEAR 2015 YEAR 2016 YEAR 2017
Total Assets $ 8,12,156.00 $ 8,39,202.00 $ 8,51,875.00

8ACCOUNTING
Net Income $ 8,012.00 $ 7,445.00 $ 7,990.00
ROA (%) 0.99 0.89 0.94
In the banking, industry an asset turnover ratio of around 1 % is considered good. As
we can see from the analysis or comparison of the different year’s ratio the company has been
able to keep the return on asset close to 1%.
b) Return on Equity ratio (ROE):
RETURN ON EQUITY YEAR 2015 YEAR 2016 YEAR 2017
Total Equity $ 53,915.00 $ 58,181.00 $ 61,342.00
Net Income $ 8,012.00 $ 7,445.00 $ 7,990.00
ROE (%) 14.86 12.80 13.03
For the banking industry the companies earning a return of 10% on equity are
considered to be performing well. As we can decipher from the comparison of ROEs of last
three years the company has been able to earn a return of more than 10 % every year which
means that the company is performing really well (Pratt, 2016). However, the company must
endeavour to earn a better return as its returns are decreasing year on year.
2) PERFORMANCE RATIO
a) Operating expense to operating income ratio:

9ACCOUNTING
2015 2016 2017
42.8
43
43.2
43.4
43.6
43.8
44
Operating Expense to Operating Income Ratio
RATIO (%)
Figure 4: operating ratio
(Source: created by Author)
It can be seen from the above chart that the company has been able to reduce its
amount of operating expense in respect of its operating income. The operating expense in
respect of the operating income is lowest in the year 2017 which is a good indicator of the
financial performance of the company (Wang, 2014).

10ACCOUNTING
b) NET INTEREST MARGIN:
2015 2016 2017
2.04
2.05
2.06
2.07
2.08
2.09
2.1
2.11
NET INTEREST MARGIN
MARGIN IN %
Figure 5: Net interest margin
(Source: created by Author)
It is quite evident that the amount of net interest margin (interest income – interest
expense) with respect to the assets of the company is hovering around 2%. The company
must focus on the trend that has been found and not on the amount or percentage of the
interest margin. The company should take steps to improve its net interest margin as soon as
possible (Kraft, 2014).
3) CAPITAL ADEQUACY RATIO:
Total Equity to Total Assets:

11ACCOUNTING
2015 2016 2017
6.2
6.4
6.6
6.8
7
7.2
7.4
Total equity to Total Assets
RATION IN %
Figure 6: Total Equity to total assets
(Source: Created by Author)
The trend shows the increasing contribution of equity in the increasing assets of the
company. It is a very healthy sign from the perspective of the shareholders as the increasing
Total Equity to Total Asset ratio signifies that the shareholders are holding more part of the
assets as the years are going past (Edmonds et al., 2016).
4) SHAREHOLDERS VALUE:
a) Dividend Pay-Out ratio:

12ACCOUNTING
2015 2016 2017
66
68
70
72
74
76
78
80
82
84
86
Dividend Pay-Out Ratio
RATIO IN %
Figure 7: Dividend Payout ratio
(Source: created by Author)
The company is maintaining a very decent dividend pay-out ratio i.e. above 70 %.
However, the trend analysis will not be very satisfactory for the shareholders. The
shareholders expect a uniform dividend pay-out ratio unless the market is very slow or
adverse with respect to the business (Cao et al., 2015). The company must endeavour to
improve its dividend pay-out ratio.
b) Basic Earnings Per share:

13ACCOUNTING
2015 2016 2017
200
210
220
230
240
250
260
Earning Per Share
AMPUNT IN CENTS
Figure 8: earning per share
(Source: Created by Author)
The earning per share of the company:
It is observable that the EPS of the company has been fluctuating and in fact the
company has been able to achieve the lowest EPS in the current year. This sort of fluctuating
EPS will never be appreciated by the shareholders. Even if the EPS is fluctuating it should be
creating value for the shareholders and not reducing their wealth (Drake et al., 2014).
7. Horizontal and Vertical Analysis
Income Statement:
From the analysis, it is evident that the net profit of the company has come down in
respect of FY2016. In 2016 the net profit grew by 7% whereas in year 2017 it grew only by
0.88%
Balance Sheet:

14ACCOUNTING
The assets and liabilities of the company is growing every year along with the growth
of the equity shareholders contribution. This suggest that the equity shareholders own most
part of the assets. This is a good indicator for the shareholders (Collier, 2015).
8. Conclusion:
The analysis has been started by comparing the income statement of the company and
we found that the profit of the company though fluctuating has increased significantly in the
year 2017. Then we started analysing the profitability ratios of the company and found that
the company is performing as per the industry standards and delivering an ROA of around
1% and ROE of more than 10% at all times. In case of banking sector 1% and 10%
respectively are considered parameters on which the company is assessed. After assessing, it
based on industry parameters we found that it is going to give better returns to the
shareholders in the near future too. Some of the areas in which the company needs to deliver
is improving its NET INTEREST MARGIN, DIVIDEND PAY-OUT RATIO and EPS as the
trend analysis showed that the company is lagging in these three matters. Other than that we
found that the company has good Asset to Equity ratio as well as Operating expense to
Operating Income ratio. Considering all these factors, we conclude that the company in the
long run is going to create value for its shareholders.

15ACCOUNTING
Reference
Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), 423-429.
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Drake, M. S., Guest, N. M., & Twedt, B. J. (2014). The media and mispricing: The role of the
business press in the pricing of accounting information. The Accounting
Review, 89(5), 1673-1701.
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental
managerial accounting concepts. McGraw-Hill Education.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Kraft, P. (2014). Rating agency adjustments to GAAP financial statements and their effect on
ratings and credit spreads. The Accounting Review, 90(2), 641-674.
Louis, H., Lys, T. Z., & Sun, A. X. (2014). Conservatism, analyst ability, and forecast error:
evidence on financial statement users' ability to account for conservatism.
Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting:
Vision, Tool, Or Threat?. Routledge.
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
Radebaugh, L. H. (2014). Environmental factors influencing the development of accounting
objectives, standards and practices in Peru. The international Journal of Accounting
Education and Research. Urbana, 11(1), 39-56.

16ACCOUNTING
Wang, C. (2014). Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting
Research, 52(4), 955-992.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting.
John Wiley & Sons.
Zeff, S. A. (2016). Forging accounting principles in five countries: A history and an analysis
of trends. Routledge.

17ACCOUNTING
Appendices
Appendix 1 (BALANCE SHEET)
Appendix 2 (INCOME STATEMENT)

18ACCOUNTING
Appendix 3 Horizontal and vertical analysis
INCOME STATEMENT HORIZONTAL ANALYSIS
(ALL amounts in $ million)
Particulars
FY2
017
FY2
016
FY2
015
CHA
NGE
CHA
NGE % %
2016 2017
201
6
201
7
INTEREST INCOME
312
32
318
22
322
95 473 1063
1.46
462
3.29
153
INTEREST EXPENSE
157
16
166
74
180
28 1354 2312
7.51
054
12.8
245
NET INTEREST INCOME
155
16
151
48
142
67 -881 -1249
-
6.17
51
-
8.75
45
NON-INTEREST INCOME
628
6
583
7
737
5 1538 1089
20.8
542
14.7
661
NET OPERATING INCOME BEFORE
OPERATING EXPENSES AND
218
02
209
85
216
42 657 -160
3.03
576
-
0.73
93
IMPAIRMENT EXPENSES 0 0
OPERATING EXPENSES
943
4
921
7
947
3 256 39
2.70
242
0.41
17
IMPAIRMENT EXPENSES 853
112
4 753 -371 -100
-
49.2
7
-
13.2
8
PROFIT BEFORE INCOME TAX
115
15
106
44
114
16 772 -99
6.76
244
-
0.86
72
INCOME TAX EXPENSE
351
8
318
4
334
8 164 -170
4.89
845
-
5.07
77
NET PROFIT FOR THE YEAR
799
7
746
0
806
8 608 71
7.53
594
0.88
002
PROFIT ATTRIBUTABLE TO NON-
CONTROLIING INTERESTS 7 15 56 41 49
73.2
143 87.5
NET PROFIT ATTRIBUTABLE TO
OWNERS
799
0
744
5
801
2 567 22
7.07
688
0.27
459
WEIGHTED AVG. NO. OF
ORDINARY SHARES($MILLIONS)
335
5
331
3
314
0 -173 -215
-
5.50
96
-
6.84
71
BASIC EARNING PER ORDINARY
SHARES (CENTS) 238
224.
6 255 30.4 17
11.9
216
6.66
667
DILUTED EARNING PER
SHARES(CENTS)
229.
3
217.
8
248.
2 30.4 18.9
12.2
482
7.61
483
DIVIDEND PER ORDINARY
SHARES(CENTS) 188 188 187 -1 -1
-
0.53
48
-
0.53
48
DIVIDEND PAY-OUT RATIO(%) 79.2
8
84.1
9
73.3
9
-10.8 -5.89 -
14.7
-
8.02

19ACCOUNTING
16 56
BALANCE SHEET HORIZONTAL ANALYSIS
(ALL amounts in $ million)
Particulars
FY20
17
FY20
16
FY20
15
CHAN
GE
CHAN
GE % %
2016 2017 2016 2017
LOANS
6849
19
6619
26
6233
16 -38610 -61603
-
6.194
3
-
9.883
1
OTHER ASSETS
1669
56
1772
76
1888
40 11564 21884
6.123
7
11.58
86
TOTAL ASSETS
8518
75
8392
02
8121
56 -27046 -39719
-
3.330
1
-
4.890
6
DEPOSITS AND OTHER
BORROWINGS
5335
91
5130
71
4753
28 -37743 -58263
-
7.940
4
-
12.25
7
DEBT ISSUES
1683
56
1699
02
1710
54 1152 2698
0.673
47
1.577
28
LOAN CAPITAL
1766
6
1580
5
1384
0 -1965 -3826
-
14.19
8
-
27.64
5
OTHER LIABILITIES
7092
0
8224
3
9801
9 15776 27099
16.09
48
27.64
67
TOTAL LIABILITIES
7905
33
7810
21
7582
41 -22780 -32292
-
3.004
3
-
4.258
8
TOTAL SHAREHOLDERS
EQUITY AND
6134
2
5818
1
5391
5 -4266 -7427
-
7.912
5
-
13.77
5
NON CONTROLLIN
INTERESTS
INCOME STATEMENT VERTICAL ANALYSIS- AS A PERCENTAGE OF NET
OPERATING INCOME
Particulars
FY20
17
FY20
16
FY20
17
% % %
NET OPERATING INCOME BEFORE OPERATING
EXPENSES AND 100 100 100

20ACCOUNTING
IMPAIRMENT EXPENSES
OPERATING EXPENSES 43.27 43.92 43.77
IMPAIRMENT EXPENSES 3.91 5.36 3.48
PROFIT BEFORE INCOME TAX 52.82 50.72 52.75
INCOME TAX EXPENSE 16.14 15.17 15.47
NET PROFIT FOR THE YEAR 36.68 35.55 37.28
PROFIT ATTRIBUTABLE TO NON-CONTROLIING
INTERESTS 0.03 0.07 0.26
NET PROFIT ATTRIBUTABLE TO OWNERS 36.65 35.48 37.02
VERTICLE ANALYSIS OF BALANCE SHEET AS A PERCENTAGE OF TOTAL
ASSETS
PARTICULARS FY2017 FY2016 FY2015
% % %
LOANS
80.4013499
6
78.8756461
5
76.7483094
4
OTHER ASSETS
19.5986500
4
21.1243538
5
23.2516905
6
TOTAL ASSETS 100 100 100
DEPOSITS AND OTHER BORROWINGS
62.6372413
8
61.1379620
2
58.5266869
9
DEBT ISSUES 19.7629934
20.2456619
5
21.0617172
1
LOAN CAPITAL 2.07377843
1.88333678
9
1.70410610
8
OTHER LIABILITIES
8.32516507
7 9.80014347
12.0689867
5
TOTAL LIABILITIES
92.7991782
8
93.0671042
3
93.3614970
5
TOTAL SHAREHOLDERS EQUITY AND
7.20082171
7
6.93289577
5
6.63850294
8