Performance Analysis of Commonwealth Bank Ltd and Westpac Group

The assignment analyzes the performance of Commonwealth Bank Ltd and Westpac Group by evaluating their income statements over three years, dividend policy, and expected rate of return. The results show that Commonwealth Bank Ltd has a more volatile share price and higher return on investment compared to Westpac Group.

Finance For Business

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Q1) Operation and comparative advantages of two companies..................................................1
Q2) Comparison of performance ratio of two companies...........................................................3
Q3. Analysis of monthly share prices movements of two companies........................................5
Q4). Identification of significant factors which may affected share prices of both the
companies....................................................................................................................................9
Q5). Calculation of Beta values and expected return using CAPM model...............................10
Q6)Dividend policy...................................................................................................................11
Q7 Recommendation letter.......................................................................................................12
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Finance is a wide term that is defined as the management of money in effective manner,
it also includes activities like budgeting, investing, borrowing and lending. It is consider the
actual study of money that how it is managed and its best usage to give maximum result ( Ben-
David, Graham and Harvey, 2013). As all the large and small business, government bodies and
individual need fund to operate the finance filed is separated into three sub categories such as
corporate, public and personal finance. As a large group of investment analysts the company
named ABL provide recommendation in this project. Two major bank of Australia which is
Commonwealth Ltd and Westpac Bank group are chosen to make recommendation for these big
institutes.
In this project report different Ratio, rate of return and Beta calculation are calculated to
know which company may have the investment. Analysis of monthly share price of these two
companies and comparison between these two bank are performed under this report. Dividend
policy for both banks are discussed under this project.
MAIN BODY
Q1) Operation and comparative advantages of two companies.
Investment analysis is the process of calculating and measuring an investments to know
the exact profitability and risk associated with them. These investment studies are done to judge
actual income generated from these investment and its resale value. So to provide the investment
analysis, Commonwealth bank Ltd and Westpac Group bank has been analysed.
Commonwealth bank Ltd
Commonwealth bank Ltd is one of the largest bank of Australia that provides its
Banking services in same country and other countries. It was founded under the banking act of
commonwealth in 1911 and started its services to common people in 1912 (Chun-juan, 2003).
The bank empowered to conduct various services majorly the two saving accounts and general
banking services like, business loan, merchant services, debit and credit cards etc. In present
bank has grown in a bigger unit and expand its business in almost every part of country and
overseas. It has large number of employee working in the Commonwealth bank Ltd and it attract
more number of shareholder because of its services and retur. In contrast, this bank is B&PB
(Business and Private bank) and IB&M (International bond & Marine brokerage) that are the
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leading provider of various financial services to different institutional bodies, corporate
companies, small and large business and various personal clients. The bank provide different
financial services under corporation act 2001 such as deal in financial product those are
investments and security for buyer and seller with a long and short term financial gain, it gives
guidance to provide advice for financial product. Commonwealth bank Ltd provide custodial or
depository services which are related to the individual or small business holding property of a
registered managed investment scheme to gain huge profit. The bank develop market for all
those security and investment of buyer and seller with the Australia and overseas (Fee, Hadlock
and Pierce, 2013). This large bank provide a full and big range of product to their customer such
as transaction services, saving and investments accounts, fund transfer and payments, Forex card
facilities foreign exchange, general insurance, debt and loan securities that includes government
bonds, money market instruments and margin lending facilities etc.
Westpac Group Bank.
The other bank which is selected for the comparison and ascertain the best bank in term
of investments is Westpac bank group. This is the first and the oldest company in banking
industry in Australia and one of the largest bank in New Zealand. It was founded in 1817 with its
headquarters at Sydney and now has become the one of four major banking organisation in
country. They provide a wide range of customer, different business and organization banking
services and wealth management services. There business comprises some major key customer
facing division that operates a specific function of brands such as, consumer bank, business
bank, balance transfer financial group in Australia (BTFG), Westpac institutes bank (WIB) and
Westpac bank in new Zealand (.Hribar and Yang, 2015).
Consumer bank is responsible for sales and services to their customer with in Australia
under the bank of Melbourne etc. Business bank prudent for sales and other services to micro
and medium firms and other commercial consumer in Australia. It also includes specialist
services like cash flow, trade, property, treasury and auto finance loans. BTFG are the provider
of services like manufacture and distribution of investments, retirement product such as
superannuation, wealth management, private banking, margin lending as well as general and
lenders of different mortgage insurances. WIB deliver financial services and product to their
overseas customer through their branches and adjunct located in other countries like New
Zealand, UK etc.
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As from the investment point of view, comparative advantage of Commonwealth Bank
Ltd are more satisfying to the customer as this bank has wide range of services and the level of
return and profitability is also high.
The other bank Westpac Group Ltd is also one the leading bank of Australia and has some
comparative advantages that reflect benefits if investment in this company.
Comparison of comparative Advantages
Commonwealth Bank Ltd Westpac Group Bank
The bank operate its some special services like
Forex card , insurance such as air, water, land
and general within Australia and outside that
make much more profitable.
Other advantages is high rate of return on
investment and fixed deposits allow
Commonwealth bank Ltd to earn more income
and strong their position in the market.
The bank have five customer facing division
which through which large number of
customer base and shareholder are attracted
towards this bank.
They are able to provide services like
retirement benefits, video banking etc. that
develop this bank one out of four major bank
(Li, 2005).
Q2) Comparison of performance ratio of two companies.
Performance ratio are the major source for comparing the position of both banks through
which effective performance can be determined. Various key ratio which are calculated to
compare are Liquidity ratio, Profitability Ratio and capital (leverage) ratio. To conduct
comparative analysis of these two bank annual statements of past three accounting year is taken
that is 2015, 2016 and 2017.
Ratio Analysis:
Liquidity Ratios: These ratio are used to find out the debtor's ability to pay its current
debts and their margin of safety by calculation the metrics that includes current ratio, quick ratio
and cash flow ratio. Current ratio are determined by comparing the current assets and liabilities
of both bank whereas Quick ratio are ascertained by measuring the quick assets and current
liabilities to calculate the short term debts in any emergency.
Formula 2015 2016 2017
Current ratio Current assets/current liabilities
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Commonwealth
Bank Ltd.
0.19 0.17 0.17
Westpac Group
Ltd
0.16 0.13 0.11
From the above table it can be observed both bank have low equal short term debt paying
ability. As Ideal current ratio is about 2:1 so from these report both the bank are not ideally able
to pay their current debit from the amount of income generated in the three consecutive year. The
current ratio for three year of commonwealth bank Ltd is 0.19:1, 0.17:1 and 0.17:1 for year
respectively (Malkiel, 2013). Same of Westpac Group Ltd current ratio of three year is 0.16:1,
0.13: and 0.11 for the following year. But on comparison some how Westpac bank is more ideal
to pay their debt as related to commonwealth bank. From the Analysis of both companies it was
observed that none of the bank had maintained their inventory and their were no prepaid
expenses so quick ratio will be same as current ratio.
Profitability ratio: These ratio are calculated to assess a business firm to generate
earning related to the expenses done with an accounting period. In case if the value of ratio are
higher for the current year as compared to previous period that will indicate that the organisation
is doing well. In respect to determine the profitability of these two bank two important ratio net
profit margin and return on equity is evaluated for the three year 2017, 2016 and 2017.
Net profit margin Net profit after tax/net sales*100 2015 2016 2017
Commonwealth
Bank Ltd.
38.07 38.09 39.57
Westpac Group Ltd 38.87 35.51 37.12
Return on equity Net income/owner's equity*100
Commonwealth
Bank Ltd.
17.9 16.38 16.09
Westpac Group Ltd 15.77 13.38 13.37
In the case of profitability ratio it can be said that both bank have good net profit margin
and return on equity is also better of banks. Net profit margin of Commonwealth bank is much
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more higher than Westpac Group Ltd in all three year that means the bank is earning more profit
even if they are paying all their debts. Similarly the return on equity is also much high of
Commonwealth Bank Ltd as compared to other bank. It shows that Commonwealth Bank Ltd
have more earning against the equity they have invested in its business operation (Moffett,
Stonehill and Eiteman, 2014).
Leverage ratio: These ratio are calculated to assess to figure out the actual debt level
incurred by a business organisation to meet its financial obligation. It is important as it provide
the exact values of debt and equity to finance its operations and ascertain leverage power of an
organisation. So to determine the leverage power of two bank certain ratio like assets to equity
and debt equity are calculated.
Debt equity Total debts/shareholder's equity 2015 2016 2017
Commonwealth
Bank Ltd.
0.24 0.26 0.3
Westpac Group Ltd 3.48 3.2 3.03
Assets to equity
ratio.
Total assets/total equity
Commonwealth
Bank Ltd.
15.5 15.46 14.49
Westpac Group Ltd 15.3 14.44 13.9
From the analysis of the two bank the two leverage ratio shows the overall performance
for the three accounting year. Debt equity ratio shows the long term power of two bank and
assets to equity ratio help to show the relation of assets of the bank to the part owned by their
shareholder. It is clear from the table that Westpac group Ltd has more ability to pay its debt as
compared to Commonwealth bank Ltd. However the relation of assets closely-held by
shareholder is much higher for commonwealth bank Ltd as compared to other bank.
Q3. Analysis of monthly share prices movements of two companies
Share are the equal part company capital that are issued to the public by public limited
organisation like commonwealth bank and Westpac Bank had issued to their various shareholder
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at a certain price. In order to receive a portion of profit generated by companies within an
accounting year. These price of share within two bank are shown by measuring and comparing
against the ordinary index of share price. These index are formed of the share price for 500 of the
largest companies which are listed on ASX. To show the share price of these two bank for the
respected three year are shown with the help of following graphs.
Graph for the accounting year 2015-16 for Commonwealth Bank Ltd.
Graph for the accounting year 2015-16 for Westpac group bank
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Thus it can be said that share price of Commonwealth Bank Ltd for accounting year
2015-16 is keeps of fluctuating but somehow it shows decreasing trends except in the mid-month
of December and January. The prices of share for bank started from 85 dollar and keeps on
fluctuate during the whole year and closed with 77.50 dollar and in mid goes to 85 dollar approx.
Similarly the movement in share price for Westpac Group Bank are more uneven as compared to
other bank. It that shows the increasing and decreasing trends in prices. For the accounting year
2015-15 prices started at 32 dollar and it was best for the months August at 34 dollar and the
share price ended with very lower price at 29 dollar (approx). These graph are prepared
according to the ordinary index (McLean and Zhao, 2014).
From the analysis it can be observed that the price of Commonwealth Bank Ltd is more
correlated with ordinary index as highest decline value for their prices is equal to 70 dollar which
is far better than Westpac Group bank.
Graph for the accounting year 2016-17 for Commonwealth bank Ltd:
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Graph for the accounting year 2016-17 for Westpac Group bank:
From the analysis of share price of both the bank during accounting year 2017-18 it can
be observed that share price are keeps on increasing. For commonwealth bank the prices shows
the increasing trends meanwhile Westpac Bank also shows the same increasing trends but at the
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last of year their share prices started to decline and ended on 30 dollar. So it can be said that
commonwealth Bank Ltd is highly correlated with ordinary index and its result are high volatility
(Scholes, 2015).
Graph for the accounting year 2017-18 for Westpac Group bank:
Graph for the accounting year 2017-18 for Commonwealth bank Ltd:
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From the above share prices analysis for year 2017-18 commonwealth bank shows a
certain decreasing trends while share prices of other bank give uneven trends with reference to
ordinary index. For Commonwealth bank share price started with 82.50 dollar and ended on
72.50 dollar which is more correlated to ordinary index of Australia and share of this bank is
more highly volatile.
Q4). Identification of significant factors which may affected share prices of both the companies
Share price of companies keeps on changing because of many factors such as merger or
acquisition, positive and negative earning forecast, unusual write-offs, macroeconomic factors ,
industry wide factor, significant management changes, changes in the focus of company and
impact of competitors or laws etc.
Unusual write-offs: It is the deduction in the value of earning by the amount of loss
incurred within an organisation. From the annual report or commonwealth there is an
announcements related to unusual write-offs by which share price of the bank keep on
fluctuating throughout the accounting year 2015-16.
Macroeconomic factors: These are those events which has direct impact the economy
such as inflation and deflation, unemployment in a country and environmental policies that incur
business costs and business tax. It would have a direct effect on the rate of currency of country
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and prices of share be lowered. From the analysis of accounting report of Westpac Group Bank
share price keeps on decreasing because of these macroeconomic factor during year 2017-18.
Q5). Calculation of Beta values and expected return using CAPM model
Beta values: It is defined as the measurement of systematic risk that is related to the
security and stock are going to face at the time when compared to market situation. CAPM is the
wider term and Beta is the component part which includes the calculation of the expected return
of the particular investments. This calculation and measurement are done to determine the exact
risk involved in the security (Ellison and Boyd, 2013). These are calculated through regression
analysis through which various estimation for the different variable is determined. It basically
help to find the typical value of the dependent variable keeps on changing to independent
variable when they are fixed.
It is defined as the best value of beta analysis is less or equal to 1, which means that the
security and stock value are less volatilisable that the market condition. If the beta value are
more than 1 it means that the prices of security are more volatilisable. As an investment analyst,
beta value of both bank is observed from finance section of their websites. From analysis the
beta value of Commonwealth Bank Ltd is 1.11 which means that the price of security and stock
are more volatile that the market values. Similarly the beta value of Westpac Group Bank is
observed 1.34 which is also more than the idle Beta value and this can be said that share price are
more volatile than the market. More volatile means that the share price of both the banks keeps
on fluctuating.
Expected return: The expected rate of return is calculated to describe the profit or loss
an investor or shareholder anticipate on a particular investments. Capital Asset pricing model is
used to describe the relationship between the specified risk and expected return for assets
specially in the organisation context.
Expected return using CAPM can be calculated as:
Expected return rf+β(rm-rf)
Where rf Risk free rate
rm Return on the market
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Calculation of expected return for Commonwealth Bank Ltd :
Expected return rf+β(rm-rf)
Risk free rate 5.00%
Return on the market 6.00%
Beta 1.11
Expected return 5%+1.11(6%-5%)
Expected return 0.06
From the above analysis it has been determined that expected rate of return is 0.06
because beta value of company is more volatile. Therefore it is said that fluctuation are highly
related to the changes in the share prices.
Calculation of expected return for Westpac Group Bank :
Expected return rf+β(rm-rf)
Risk free rate 5.00%
Return on the market 6.00%
Beta 1.34
Expected return 5%+1.34(6%-5%)
Expected return 0.06
From the above table it can be observed that expected rate of return for Westpac bank is
almost equal to that of commonwealth Bank Ltd which is 0.06. This is because the beta value for
bank is much more than Idle Value of beta.
Q6)Dividend policy
It is known as one of the effective set of guidelines a company used to decide after
making all the payment of debts and other outstanding expenses of the company. the company
which remain after that is been distributed among the shareholders and investors of an
organisation (Dividend policy, 2017 ). There is certain recommendation that investors are not
associated with a company’s divided policy hence they can sell some of the portion of their
portfolios of equities in case any cash requirements. Management do also have the option to sell
a certain portion of their shares if they think crucial for the benefit of the company or in order to
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generate sufficient amount of capital. From the analysis of annual report of both bank it is
observed that they follow regular dividend policy as banks. But Commonwealth Bank Ltd is
distributing dividend every year in increasing trends.
Q7 Recommendation letter
As an investment analyst for both bank which are Commonwealth Bank Ltd and
Westpac group Bank. Various key ratio like profitability, liquidity and leverage ratio which
shows that commonwealth bank is more profitable. The share price of Commonwealth bank is
also much higher and expected return is more considerable than the other bank. Share price for
three year is almost high than Westpac Group Bank as there price of share is approx 85 dollar.
There share price are more correlated and volatile as compared to ordinary index. CPMA also
shows the expected rate of return that is quietly higher than other bank that is 0.0611 that result
they are efficient and volatile. Dividend distributed by Commonwealth bank are also more and in
increasing trend that are more benefited to its shareholder.
CONCLUSION
In the above project report, it can be concluded that investment analysts are very
important from every company. The main aim of this project is to determine the performance of
both the companies by evaluating the various ratio expected rate of return, dividend policy etc.
from the analysis it is easy to recommend that share price of Commonwealth bank Ltd are more
correlated and volatile and the return on investment are much higher than other bank.
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REFERENCES
Books and Journals:
Ben-David, I., Graham, J. R and Harvey, C. R., 2013. Managerial miscalibration. The Quarterly
Journal of Economics, p. qjt023.
Chun-juan, W. A .N. G., 2003. A Research into the Loans for Small and Medium Enterprises
[J]. Yin Shan Academic Journal. 5. p.019.
Fee, C. E., Hadlock, C. J. and Pierce, J. R., 2013. Managers with and without style: Evidence
using exogenous variation. Review of Financial Studies. 26(3). pp.567-601.
Hribar, P. and Yang, H., 2015. CEO overconfidence and management forecasting. Contemporary
Accounting Research.
Li, P. I. N. G., 2005. Considerations on the Financing Problem of Chinese Medium and Small-
sized Enterprises [J]. Sci/tech Information Development & Economy. 2. p.118.
Malkiel, B. G., 2013. Asset management fees and the growth of finance. The Journal of
Economic Perspectives. 27(2). pp.97-108.
Moffett, M. H., Stonehill, A.I and Eiteman, D. K., 2014. Fundamentals of multinational finance.
Pearson.
Scholes, M. S., 2015. Taxes and business strategy. Prentice Hall.
Ellison, N. B. and Boyd, D. M., 2013. Sociality through social network sites. In The Oxford
handbook of internet studies.
McLean, R. D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly external
finance. The Journal of Finance. 69(3). pp.1377-1409.
Mian, A. R. and Sufi, A., 2018. Finance and business cycles: the credit-driven household
demand channel (No. w24322). National Bureau of Economic Research.
Online
Dividend policy. 2017. [Online]. Avalaible through: <https://www.chegg.com/homework-
help/definitions/dividend-policy-11>
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APPENDIX
Income statements of three year for Commonwealth Bank Ltd
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Income statements of three year for West Bank Ltd.
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