Financial Industry of Australian and New Zealand Bank and Commonwealth Bank of Australia

This paper provides a comparative analysis of the Australian and New Zealand Bank and the Commonwealth Bank of Australia in 2017. It identifies the factors affecting operations and productivity in the finance industry, including the state of the economy, interest rates, economic policies, inflation, and customer expectations.

Running Head: Australian Financial Industry
Financial Industry of Australian and New Zealand Bank and Commonwealth Bank of Australia
By (Name)
(Tutor)
(University)
(Date)

Australian Financial Industry 2
Executive Summary
The finance industry provides the medium through which borrowers and suppliers of
funds interact. It is also the medium through which monetary policies are exercised in an
economy. There are several players in this sector but this paper lies emphasis on banks in
particular the Australian and New Zealand (ANZ) Bank and the Commonwealth Bank of
Australia. This paper seeks to identify the various factors which affect operations and thus
productivity in this sector. It also performs a comparative analysis on the two banks performance
in 2017. The Commonwealth bank emerges as the more profitable of the two despite its shortfall
in liquidity which needs to be improved for optimal performance.
The finance industry is composed of firms offering financial services in the economy by
both domestic and foreign financial institutions. Financial services include; money market
dealings, service provision, building society operations, financial assets investments, and non-
depository finance. The financial sector players include Authorized Deposit Taking institutions
(ADIs) which are banks, credit unions, building societies and insurance and superannuation
firms, the financial markets, that is, debt, equity and derivatives markets (Reserve Bank of
Australia, 2016).
The Australia’s financial services regulation is recognized as the world’s best practice as
it provides a transparent and secure base for expansion within the region. Australia has one of the
largest pool of uncontestable funds under management globally. Australia is one of the major
centers of capital markets and is ideally placed as a center for the Asia Pacific region. The
growth of its investment funds sector is attributed its financial services strength which arise from
its mandated retirement savings scheme, advanced business infrastructure and a highly
multilingual workforce (Ibisworld.com.au, 2018).
Australia has the world’s largest private wealth market. The wealth composition is
however changing from more cash wealth to more superannuation (pension funds) and equity.
There has been witnessed a growing private equity sector owed to an increased demand by
emerging and expanding businesses for equity funding. Another contributing factor to this trend
is an increase in institutional investors in Australia (Fintech.treasury.gov.au, 2018).

Australian Financial Industry 3
Table of Contents
Introduction.................................................................................................................................................4
Australian and New Zealand Bank...............................................................................................................4
History of ANZ Bank.................................................................................................................................5
Commonwealth Bank of Australia...............................................................................................................6
History of the CBA...................................................................................................................................6
Top down Analysis.......................................................................................................................................7
Bottom up Analysis......................................................................................................................................9
Conclusion.................................................................................................................................................10

Australian Financial Industry 4
Financial Industry of Australian and New Zealand Bank and Commonwealth Bank of Australia
Introduction
In this paper more emphasis will be laid on banks. Australia has 53 banks 14 of which are
predominantly Australian owned. They are all listed in the Australian Securities Exchange
market either independently or through the parent company. In Australia there is no government
owned bank. They are regulated by the Australian prudential Regulation Authority, APRA which
provides information on the licensing and regulation of banking businesses. Banks have in recent
times diversified into fund management and insurance.
The payment and clearing and settlement systems ensure the smooth functioning of
financial institutions by ensuring safe, efficient and reliable services. The categories of payment
include cash transactions which consist of notes and coins and are cleared through the
Australian Cash Distribution Exchange System, paper transactions which include cheques and
paper based instruments and are cleared by the Australian Paper Clearing System, direct entry
and finally consumer electronics such as ATMs and smart cards to name just but a
few.www.aima.australia.org .
The retail banking sector in Australia has been growing with a reduction of the credit
unions due to mergers, acquisitions purchase or conversion to banks. The four largest domestic
banks in the Australian market are the Australian and the New Zealand Bank (ANZ),
Commonwealth, National Australian Bank and Westpac Banking Corporation. The foreign banks
in Australia normally conduct wholesale banking but the recent times has seen some diversify
into retail banking. The top4 foreign companies include ING, HSBC, Citigroup and Robobank
(Reserve Bank of Australia, 2016).
Australian and New Zealand Bank
“Building a sustainable future for our business, shareholders, staff, customers, and communities.
Achieve and maintain the highest standards of corporate governance and continuous disclosure.
“We want the best talent working at ANZ - no matter who they are – where they are from.
Diversity of ideas and amorous experiences is key to our success” vision
Values: integrity, collaboration, accountability, respect and excellence.

Australian Financial Industry 5
ANZ bank is a public company with the vast of its operations in Australia and New Zealand. It is
the 3rd largest bank in Australia after commonwealth bank and Westpac by market capitalization.
The largest part of its operations are in the Australian market and mostly handles commercial
and retail banking. It is the largest bank in New Zealand. Its services include finance and
insurance, consumer, corporate, corporate and investment banking, investment and global wealth
management as well as credit card services, mortgages and private equity. ANZ has worldwide
operations in 34 nations.
History of ANZ Bank
ANZ was established in London as the Bank of Australasia under the royal charter. In
1852 the English, Scottish and Australian bank was formed in London and later in 1951 merged
with the Bank of Australasia to form the Australian and New Zealand Bank ltd From this point
on the ANZ bank undergoes change after change with opening of branches, representative
offices, mergers and joint ventures, closing other branches as will be briefly discussed below.
In the 1960s it started operations in Honiara in the Solomon Islands, opened a
representative office in Tokyo, japan and in 1969 opened an office in New York in the US. Its
first computer systems was launched in the new data processing Centre in Melbourne. During the
70s it entered the largest merger in the Australian banking history with the English, Scottish and
Australian Bank ltd to form the present day Australian and New Zealand Banking Group ltd. It
started operations in Vanuatu and the Channel Islands, established representative office in
Malaysia. It later established ANZ PNG, got incorporated in Australia and acquired the Bank of
Adelaide in the 80s it acquired Grindlays bank and Barclays Operations in Fiji and Vanuatu,
received full commercial banking license and opened a branch in Frankfurt Germany and opened
representative office in Bangkok. Purchased Post Bank from New Zealand Government, (Hogan
and Butlin, 1962).
In the 90s it was granted banking license in China and formed a joint venture with PT
Panin Bank Indonesia which led to its becoming the first Australian broker to enter the
Indonesian market. It entered a smart card joint venture with Mandex, Commonwealth Bank of
Australia and Westpac. It launched VISA cash on the Gold Coast, rolled out its own website,
www.anz.com, phone banking and master card and supermarket banking in the Gold Coast.
There was a change in management in 1997 as John McFarlane succeeded Donald Mercer as

Australian Financial Industry 6
CEO. In 1998 it delisted from the UK stock exchange and finally in 1999 started internet
banking.
In the 21st century it launched a new website www.anz.com>australia>aboutanz, entered
a joint venture with the with the ING Group for funds management and life insurance business in
Australia and New Zealand and received incorporation license for Vietnam. It rolled out mobile
phone banking for iphones and android phones and a web based cash management platform. In
2008 it received trading membership from the Shanghai Gold Exchange to trade gold in the
China market. It launched Bluenote, its corporate newsroom, a grow app, introduced a secure tap
and pin ATM, ANZ go Money. It has been an advocate for women’s equality and actually was
voted for Employer of Choice for Women for. The equal opportunity for women in the
workplace
Commonwealth Bank of Australia
It is a multinational bank with operations in New Zealand, Asia, US and the UK> if
offers retail banking, institutional banking, fund management, superannuation, insurance,
investment and brokerage. It is the largest Australian bank listed on the Australian Stock
Exchange and in the southern hemisphere. It has about 51800 employees as at 2017. It is the
largest of the big four banks in Australia. It was founded in 1911 by the Australian government
and fully privatized in 1996(commbank.com.au, 2015).
History of the CBA
It was established in 1911 by the Commonwealth Bank Act 1911for savings and general
bank business. In 1912 it established its first branch in Melbourne which traded through the
Posta office agencies. In the same year it acquired the state savings bank of Tasmania. It started
acquiring central bank powers in 1920 when it took over the issuing of Australian bank notes
from the treasury department. In the same year it acquired Queensland Government Savings
Bank. The New South Wales government transferred its savings bank business of the
Government Savings Bank to the commonwealth bank. After the great depression of 1931 there
was increased demand from Labor to reform the bank and give government more control over
monetary supply. After WWII, in an emergency legislation, it acquired full central banks power.
It used this power to fuel dramatic expansion of the economy. The government in line with this

Australian Financial Industry 7
agenda expanded its immigration programs which led to the expansion of the Commonwealth
bank which established hundreds of branches. Between 1958 and 1959 there arose controversies
on the duality of the bank as a central bank and the central bank. This led to a split where it
retained its commercial banking businesses and the central bank role was assigned to the reserve
bank of Australia.
In the 1970s it diversified to insurance and travel. It established the Commonwealth Bank
Finance Corporation, a finance company in 1974. This was involved in foreign currency trading
and international banking. In the same year it rolled out the Bankcard, its first credit card, which
was followed with the MasterCard in 1984 and Visa card in 1993. In 1981 it transferred its
ownership of Solomon Island operations to the National Bank of Solomon Islands through a joint
venture. In the year 1991 it started the privatization process which was finalized in 1996. In
2000 it acquired full ownership of the PT Bank International Indonesia and the Colonial National
Bank Fiji in 2006. In 2008 it acquired Bankwest and St. Andrews Insurances and sold the
National Bank of Fiji to the South Pacific Bank.
Top down Analysis
The Australian economy has managed to maintain its stability for quite some time now.
There is a high level of enthusiasm and optimism amongst households and business entities. This
is clearly established from the confidence index which is released by the Australian national
bank. This reveals a higher confidence index than expected, it is currently 8. Interest rates have
managed to remain low since august 2016 and is currently at 1.5%. The inflation rate on the
other hand falls than the projected range of between 2 %and 3% to stand at 1.9%. And is
especially favorable for business expansion. Consumer spending levels are higher (financed by
rising debt levels rather than income growth). Inflation remains steady. Australia ranks as the
2nd wealthiest nation (wealth per adult) and ranks as the 13th nation in terms of nominal GDP.
(Fletcher, 2018). Below we briefly discussed factors that affect the finance and specifically
banking industry.
a) State of the economy
A healthy economy is most desirable in the financial sector. An economy’s performance
is measured by the level of GDP. A higher GDP means there is increased spending and

Australian Financial Industry 8
investment in the nation at that time by households, businesses and the government (Abel,
Bernanke and Croushore, 2017). To finance the growing spending and investment, households
and businesses seek out the financial sector players, banks in this case, to provide them with
funds in return for interest payments on the loans. As a result the banking institutions get higher
returns in economic boom.
b) Interest rates
Interest rates are a major player in the financial sector as they influence the demand for
loans. Banks profits are obtained from the difference of the rate they charge borrowers and the
rate they pay their depositors. Higher interest rates encourage more saving in the economy and
less borrowing. This greatly affects banks as they now have to pay more to the depositors while
they earn less from borrowers.
c) Economic policies
These are policies implemented by the central banks of countries to regulate money
supply thus influence the direction of the economy. An expansionary monetary policy is effected
through lower interest rates. The lower interest rates increase the demand for money in the
economy. As a result banks roll out more loans to the public which translates to higher interest
revenues for the banks (Bikker and Gerritsen, 2017).
d) Inflation
Inflation acts to erode the real value of money. High inflation pushes interest rates up
which weighs heavily on the business people as they are now required to pay more interest when
they borrow. This raises the risk of loan default by borrowers. The banks spread is also affected
as the higher interest they receive from borrowers they pass to the depositors. This coupled with
higher default rates frustrates the banking industry (Riley, 2018). Inflation also affects the
exchange rate.
e) Customer expectations
Customer expectations are always evolving. Customers prefer financial services that are more
holistic. For banks to remain competitive they have to keep this in mind by seeking innovative
products and ways in which to better serve their clients. Clients in current times demand services

Australian Financial Industry 9
that can be accessed anywhere, at any time and with relative ease. They therefore seek out
transparent banks with clarified structures that are aligned to their preferences (Genpact.com,
2014)
Bottom up Analysis
This section involves the analysis of performance of companies. The measures of performance
include profitability, liquidity, solvency and operating efficiency (Finch, 2008).
i) Profitability ratios
These give the profitability of a company.
Return on total assets shows the amount of total income earned on the total assets of a company.
It is 0.71 and 1.04 for ANZ and Commonwealth banks respectively. The higher ratio for
Commonwealth indicates that it is more profitable than ANZ.
Return on equity explain the amount of total income earned on the equity. It is 10.97 for ANZ
and 16.09 for Commonwealth.
ii) Solvency Ratios
They show a company’s ability to pay its long-term debts. The debt equity ratio measures the
level of debt used to finance a company’s activities (drake and Fabozzi, 2012). The smaller the
amount the better. It is 0.3 for the two.
iii) Efficiency Ratios
They show how effective the management is in its operations. The asset turnover ratio shows the
revenue attained by the company on its assets. CBA is more efficient (0.03) than ANZ (0.02)
iv) Liquidity Ratios
They demonstrate a company’s ability to meet its short term liabilities.
The current ratio measures current liabilities relative to current assets and is 4.898 and 0.273 for
ANZ Bank Ltd and Commonwealth bank respectively. ANZ Bank is well equipped to meet its
short-term debt obligation while Commonwealth isn’t as it is less than 1.

Australian Financial Industry 10
Conclusion
The finance sector is an important player in an economy and a very volatile one at that as
even the slightest change in the economy affects its dynamics. It is necessary for the players to
keep coming up with innovative products and ideas to ensure they keep up with the ever
changing customer needs and increasing competition. The government should ensure a favorable
environment through sound policies for ultimate productivity.

Australian Financial Industry 11
References
Abel, A., Bernanke, B. and Croushore, D. (2017). Macroeconomics. NY: Pearson.
Bikker, J. and Gerritsen, D. (2017). Determinants of Interest Rates on Time Deposits and
Savings Accounts: Macro Factors, Bank Risk, and Account Features. International Review of
Finance.
Commbank.com.au. (2015). About Us - Our company - History - The beginnings -
Commonwealth Bank Group. [Online] Available at:
https://www.commbank.com.au/about-us/our-company/history/the-beginnings.html [Accessed
24 May 2018].
Finch, N. (2008). Summary of Financial Ratios. SSRN Electronic Journal.
Fintech.treasury.gov.au. (2018). The strength of Australia’s financial sector. [Online] Available
at: http://fintech.treasury.gov.au/the-strength-of-australias-financial-sector/ [Accessed 24 May
2018].
Fletcher, N. (2018). The Guardian's share tips for 2018. [Online] the Guardian. Available at:
https://www.theguardian.com/business/2018/jan/02/the-guardians-share-tips-for-2018 [Accessed
24 May 2018].
Genpact.com. (2014). Changing customer expectations and the demand for new service models
in banking. [Online] Available at: http://www.bing.com/cr?
IG=3CA3F589E0A7480C8E3B031E4612B6D9&CID=04CBF79683056A6C16F9FC6F82F86B
6D&rd=1&h=E4FK6v5M3z-sQ0M3wrWPs556uyepV07zfmB5wgX_mxE&v=1&r=http%3a%2f
%2fwww.genpact.com%2fdocs%2fresource-%2fchanging-customer-expectations-and-the-
demand-for-new-service-models-in-banking&p=DevEx.LB.1,5637.1 [Accessed 24 May 2018].
Hogan, W. and Butlin, S. (1962). Australia and New Zealand Bank: The Bank of Australasia and
the Union Bank of Australia Limited 1828-1951. The Australian Quarterly, 34(1), p.113.
Ibisworld.com.au. (2018). Finance – Australia Industry Research Reports | IBISWorld. [Online]
Available at: https://www.ibisworld.com.au/industry-trends/market-research-reports/financial-
insurance-services/finance.html [Accessed 24 May 2018].
International Monetary Fund. (2017). New Zealand: Financial Sector Assessment Program:
Technical Note-Macroprudential Institutional Framework and Policies. IMF Staff Country
Reports, 17(118), p.1.

Australian Financial Industry 12
Investopedia. (2018). The Banking System: Commercial Banking - Key Ratios/Factors. [Online]
Available at: https://www.investopedia.com/university/banking-system/banking-system9.asp
[Accessed 24 May 2018].
Reserve Bank of Australia. (2016). The Structure of the Australian Financial System. [Online]
Available at: https://rba.gov.au/publications/fsr/2006/mar/struct-aus-fin-sys.html [Accessed 24
May 2018].
Sullivan, E., Fabozzi, F. and Fabozzi, T. (1990). Bond Markets, Analysis and Strategies.
Southern Economic Journal, 56(4), p.1162.
Riley, G. (2018). Inflation - Consequences of Inflation. [Online] Available at:
https://www.tutor2u.net/economics/reference/inflation-consequences-of-inflation [Accessed 24
May 2018].