Analysis of Australian Banking Sector: A Comparison of Bank of Queensland and Westpac Banking Corp

This paper presents an analysis of the Australian banking sector, with a focus on Bank of Queensland and Westpac Banking Corp. It includes a top-down analysis of the country's economic growth and a bottom-up analysis of the two banks' financial performance. Based on the analysis, recommendations are offered for potential investors.

Principles of Financial Management
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Executive Summary
The paper presented analysis of Australian banking sector and two banks operating within the
sector. The banking industry in Australia is said to be relatively competitive and is dominated
by several financial institutions. Bank of Queensland and Westpac Banking Corp which are
amongst the largest financial institutions operating in Australia were assessed in this paper.
From the analysis, it was found out that Australia is experiencing significant growth. This is
found to have contributed to the current growth in the two banks financial performance. In
essence, it was found out that Westpac enjoys competitive advantage in the banking sector
over the BOQ. This is founded on the notion that WBC experienced increased cash at the end
of the year reported in the cash flow statement over the last two years. With such analysis,
recommendations were offered where it was recommended that potential investors should
invest their money in WBC rather than in BOQ as they would end up gaining more returns in
future.

Introduction
Banking industry in Australia is relatively a competitive sector being dominated by several
financial institutions including the ANZ, Westpac, NAB, the Bank of Queensland and
Commonwealth Bank among others. To manage these banks, the industry is concentrated by
the international standards. The share of the banking industry owned by the four banks is
higher compared to equivalent shares in the other jurisdictions. Concentrations of this sector
has increased since the great recession with major institution’s share of the total ADI assets
experiencing an upward increment from 65.4% by 2007 to around 78.5% by 2014. Besides,
the banking sector has been experiencing significant growth due to the fact that major banks
benefited from the better access to finances and the lower financing costs allowing the sector
to grow at fast rate. In this case, the Bank of Queensland and Westpac Banking Corp would
be evaluated. Westpac and Bank of Queensland are amongst the largest financial institutions
operating in Australia each institutions providing different services ranging from savings to
credit card services.
To be more specific, Westpac is usually the second largest financial institution in Australia
(Westpac Banking Corp 2017). It has relatively large retail banking undertakings. Its brands
comprises of Bank of Melbourne, St George Bank, BT Financial Group as well as Westpac.
The bank is ranked second with market capitalization of $95 billion and are the principal
credit card providers in Australia controlling 25% of lucrative housing market in the country.
It was established in the year 1817 as the only bank in New South Wales (Morningstar 2017).
It employs approximately 32,620 personnel.
The bank of Queensland was established by the year 1874 making it amongst the oldest
financial institutions in Australia. It headquarter is in Queensland and provides retail financial
services to different clients. The institutions employ approximate 48,556 personnel and

operate around 200 branches across the country (Bank of Queensland 2017). In other words,
The Bank of Queensland has several branches via Australia with network of around 252
branches including 166 owner managed branches and 78 corporate branches. Its segment
includes insurance and banking. Insurance segment comprises life insurance, funeral
insurance, customer credit insurance, motor vehicle gap insurance and accident death
insurance (Reuters.com 2018). Banking segment comprises retail banking, personal,
equipment, treasury, commercial, debtor finance, small business loans, transaction and
savings accounts. Personal banking section offering comprises everyday savings, investment
and banking, personal loans, insurance, credit cards, home loans, investing, international
services, account switching and private bank among others (Morningstar 2017). Its business
banking section comprises of investment accounts, investment trust accounts, transaction
accounts, cash flow finance, business loan, equipment finance and statutory accounts.
Top-Down analysis
This form of analysis entails analysis of overall country’s economic growth including GDP
growth rate, interest rate, changes in inflation rate as well as currency exchange value over a
specified period. In essence, it entails analysis of some of the macroeconomic factors that
might influence or impact on the industry and companies financial performance. According
to RBA (2018) Australian economic growth has been promising for the recent months. This
has been evidenced by increasing GDP growth rate over the period. To be more specific,
according to Focus Economics (2018), Australian GDP advanced with around 1% by March
this year. This is considered as the highest growth rate in the country GDP since June last
year, which was boosted by the rebound in the exports. Currently, the growth rate has even
gone a notch higher experiencing a 1.3% increase from the second quarter this year moving

from 3.1% to 3.4% (Trading Economics 2018). The increase in GDP growth rate has been
attributable to the country consumption expenses of 0.6%.
Australia inflation rate averaged at 1.97% in 2016 in comparison to what was recorded in
2016. Given that the country has the world biggest economies and is a huge worldwide
exporter and importer, the country inflation rate decreased with 0.4% increase in its consumer
price (Focus Economics 2018). To be more specific, inflation rate in the country is projected
to be 2% by end of this year and is estimated to stand at around 1.7% in the next twelve
months. This is significantly low compared to other period meaning that the economy has
growth significantly over the years.
Interest rate for the country was approximately 4.52% since the year 1990. Nonetheless, the
rate has decreased to 1.50% this year which is an all-time low ever. The rate is consistent to
the country’s market projection since 2016 (Trading Economics 2018). This interest would
have great impact in the banking sector since it would result in increased lending to external
borrowers and in turn increased interest charges and increased income for the banking sectors
and companies operating within the sector.
AUD dollar against the US dollar over the last few months has been experiencing increasing
trend. In fact, the AUD dollar against the American dollar gained around 0.0012 moving to
around 0.7193 this month from 0.7181 reported in August. This increase in Australian
currency is projected to impact on the banking sector performance and to be specific on the
banks operating within this sector. To be more specific, the increase would result in increased
in net income since debtors would pay relatively high amount based on the current value of
the currency.
Another aspect that could be influential to the industry operations is the business cycle (Kent
2014). Currently, Australia is in the expansion phase which is a good picture for economic

development. In essence, with the fact that business cycle makes individuals to get losses in
their investment, understanding that the country is experiencing expansion phase is
important.
Bottom-Up analysis
Bottom-up analysis would comprise of examination of a specific stock’s financial trend. This
is usually determined through ratio and financial statement or trend analysis.
Ratio analysis of WBC and BOQ
Ratio analysis of Westpac Banking Corp and BOQ would include the net margin, ROA, EPS,
ROE, asset turnover, debt/equity and financial leverage.
Net margin
BOQ net margin over the last two years increased from 31.44% in 2016 to 33.59% in 2017.
This means that the bank was able to convert its sales into net income. On the other hand,
Westpac net margin increased from 35.51% in 2016 to 37.12% in 2017. The increase in net
margin for WBC is a clear sign that the company is capable of converting its sales into
income. From this analysis, WBC seems to enjoy high net margin compared to BOQ meaning
that for the past two years, WBC was more profitable than BOQ.
2016 2017
BOQ 31.44 33.59
WBC 35.51 37.12
Table 1: Comparison of net margin between BOQ and WBC
ROA

BOQ ROA over the last two years experienced an increasing trend from 0.68 in 2016 to 0.69
in 2017. On the other hand, Westpac Banking Corp ROA over the last two years increased
from 0.9% in 2016 to 0.94% in 2017. The results show that WBC was more efficient in
managing its assets to generate income compared to BOQ.
2016 2017
BOQ 0.68 0.69
WBC 0.9 0.94
Table 2: Comparison of ROA between BOQ and WBC
EPS
BOQ EPS over the last two years increased from 0.85 to 0.88. On the other hand, Westpac
Banking Corp EPS increased from 2.17 in 2016 to 2.29 in 2017. Despite the increasing trend
in BOQ, it is evident that WBC had higher EPS value meaning that it market value is
relatively higher compared to BOQ.
2016 2017
BOQ 0.85 0.88
WBC 2.17 2.29
Table 3: Comparison of EPS between BOQ and WBC
ROE
BOQ ROE over the past two years experienced a decreasing trend moving from 9.58% in
2016 to 9.55% in 2017. On the other hand, WBC ROE decreased in the last two years from

13.38% in 2016 to 13.37% in 2017. Comparing the two firms’ ratios, it is evident that WBC
has been more effective in managing its equity than its counterpart.
2016 2017
BOQ 9.58 9.55
WBC 13.38 13.37
Table 4: Comparison of ROE between BOQ and WBC
Asset turnover
BOQ asset turnover remained constant over the last two years at 0.02. On the other hand,
Westpac Banking Corp asset turnover for the last two years remained constant at 0.03. This is
a clear view that Westpac Banking Corp was more efficient in utilizing its assets to generate
revenue in comparison to its counterpart BOQ.
2016 2017
BOQ 0.02 0.02
WBC 0.03 0.03
Table 5: Comparison of asset turnover between BOQ and WBC
Debt/equity
BOQ debt/equity increased from 0.07 in 2016 to 0.13 in 2017. On the other hand, Westpac
Banking Corp debt/equity decreased from 3.2 in 2016 to 3.03 in 2017. Based on the above
information, it is evident that for the last two years, WBC was relying more on debt financing
as compared to BOQ which instead finance its daily operations through its equity.

2016 2017
BOQ 0.07 0.13
WBC 3.2 3.03
Table 6: Comparison of net margin between BOQ and WBC
Financial Leverage
BOQ financial leverage decreased over the past two years from 14.17 in 2016 to 13.64 in
2017. On the other hand, Westpac Banking Corp financial leverage decreased from 14.44 in
2016 to 13.9 in 2017. In this case, it can be stated that the two banks are reducing their
financial risks in financing their assets through debts and therefore looking for alternative
sources to finance their assets.
2016 2017
BOQ 14.17 13.64
WBC 14.44 13.9
Table 7: Comparison of financial leverage between BOQ and WBC
Financial statement Analysis
Financial statement analysis mostly comprises of evaluation of the items reported in the three
forms of financial statements. With these considerations the section would start with analysis
of the income statement. Based on BOQ income statement, it is evident that the bank interest
income or revenue decreased in the past two years. This is evidenced by the movement in the
interest income for the company from 2,157 million in 2016 to around 2,046 million reported
in 2017. The decrease could be associated with high competition in the economy as well as

decrease in the interest rate over the period. Further, its total non-interest revenue also
experienced a significant decrease over the years moving from 139 million in 2016 to 122
million in 2017 (Morningstar 2018). Its net revenue over the same period is also found to
decrease from 1,075 million in 2016 to approximately 1,048 million. This trend is also
observed in BOQ income from the continuing operations which is said to have decreased
from 479 million in 2016 to 452 million in 2017. Despite the decreasing trend in the revenue,
and income before expenses, net income for BOQ in the last two years experienced a
significant increase moving from 338 million in 2016 to around 352 million by 2017. Such
trend is observed in the bank EPS where it is reported that BOQ earnings per share increased
from 0.9 in 2016 to 0.91 in 2017.
From BOQ cash flow, it is evident that the banks cash flow from its operations experienced a
decreasing trend. On the other, cash utilized for investment increased over the period moving
from negative value to positive value (Morningstar 2018). To be more specific, BOQ cash
from investment increased from -68 million to 48 million in 2017. Further, net cash used for
the financing activities decreased from 1,266 million in 2016 to -61 million in 2017. With
decreasing trend in cash from operations, and increased cash used for investment, the bank
cash at the end of the year decreased from 2,301 million reported in 2016 to around 1,216
million in 2017.
Based on BOQ balance sheet, it is evident that its cash and cash equivalent decreased over
the past two years moving from 68 million in 2016 to 58 million in 2017. Its good will on the
other hand increased from 675 million to 682 over the same period. Further, the total assets
for the bank increased from 50,853 million in 2016 to 51,658 million in 2017. The increase
was attributable to the recent acquisition of Virgin Money Australia (Morningstar 2018). Its
payables over the period experienced a significant increase over the past two years moving

from 564 million to 652 million in 2017. Its short-term borrowings also increased from 5,063
million in 2016 to approximately 9,154 million in 2017. Basically, from the statement, it is
evident that the total liabilities for BOQ increased from 47,266 million in 2016 to 47,870
million by 2017. Despite the increase in total liabilities, BOQ total assets for the past two
years remained relatively high. Further, BOQ total equity increased from 3,587 million to
around 3,788 in 2017.
On the other hand, based on Westpac Banking Corp income statement, it is evident that total
interest income decreased from 31,822 million in 2016 to around 31,231 million in the year
2017. The decrease was as a result of hefty competition in the banking sector over the last
one year and decreased interest rate. Its total non-interest revenue increased from 5,806
million in 2016 to 5,990 million in 2017 (Morningstar 2018). On overall, WBC net revenue
in the last two years experienced an increasing trend moving from 20,954 million to 21,506
million in 2017. Further, based on the statement, it can also be derived that WBC net income
increased over the last two years moving from 7,445 million in 2016 to around 7,990 million
in 2017. Its EPS increased from 2.24 in 2016 to 2.38 in 2017.
Moreover, based on Westpac Banking Corp balance sheet, it is evident that the bank cash and
cash equivalents decreased in the last two years from 17,015 million in 2016 to around 8,439
million in 2017. Further, its receivable decreased from 9,951 million in 2016 to 9,280 million
in 2017. On the other hand, WBC goodwill increased from 8,829 million in 2016 to around
9,012 million in 2017 (Morningstar 2018). Its total assets increased from 839,202 in 2016 to
around 851,875 million in 2017. Further, WBC net payables increased over the year from
18,594 million in 2016 to 26,053 million in 2017. Its long-term borrowing or debts decreased
with a slight margin moving from 185,707 million in 2016 to 185,624 million in 2017. Total
liabilities for this bank increased from 781,021 million to 790,533 million as a result of

increased long-term borrowing over the period. Further, from this statement, it is evident that
WBC total equity increased from 58,120 million to 61,288 million in 2017 signifying
increased investment in the bank specifically in shares.
From WBC cash flow statement, it is evident that cash provided by its operations decreased
from 5,497 million in 2016 to around 2,820 million in 2017. This was mostly attributed by
decrease in other assets and liabilities over the period from 35,305 million to 12,997 million
in 2017. Further, cash utilized for investment decreased over the last two years moving from
7,245 million in 2016 to approximately 1,698 million by 2017 (Morningstar 2018). The
decrease is attributable to increment in sales and maturity of the investments. Besides, cash
provided by the financing activities decreased from 4,573 million in 2016 to 552 million in
2017. This was basically due to decrease in the other financing activities in 2017 from 5,197
million to -46 million. On overall, WBC cash at the end of the year reported in this statement
increased from 17,015 to 18,397.
Based this analysis, it can be stated that over the past two years Westpac Banking Corp has
been experiencing significantly attractive performance. This is based on the fact that the
company experienced significantly high net income over the past two years compared to it
counterpart Bank of Queensland Ltd.
5. Summary and Recommendations
In conclusion, based on the current economic growth in Australia, it is evident that the
country is experiencing significant growth. With this growth, banking sector has experienced
tremendous growth over the years. Basically, from the bottom-up analysis, it can be
concluded that the two banks are performing significantly good. Nonetheless, Westpac seems
to be enjoying competitive advantage in the banking sector over BOQ evidenced by its
increased and high net income. Further, with increased cash at the end of the year reported in

the cash flow statement, it can be concluded that Westpac is in a better position or is
performing relatively better.
Based on the aforementioned analysis, it is evident that Westpac Banking Stands a better
chance as an investment opportunity compared to BOQ. Therefore, it is recommendable that
potential investors should invest their money in this firm to get higher returns. Additionally, it
is recommended that existing shareholders should continue investing in Westpac shares
which seems to experiencing increasing value over the period. Basically, by investing in
Westpac, there is a high chance that investors would end up gaining more returns instead of
investing in BOQ since WBC is projected to continue experiencing increasing returns in
future.

REFERENCES
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