Finance for Masters: Analysis of Commonwealth Bank of Australia and Australia and New Zealand Bank of Australia

The report determines the analysis of the two Australian companies namely Commonwealth Bank of Australia and Australia and New Zealand Bank of Australia. This report covers both the financial and non-financial aspects of the position of the companies. Ratio analysis is used for the purpose of the comparison and share price movements have also been placed as criteria for the past three years are compared with each other to give the two way reflection.

Running Head: FINANCE FOR MASTERS 0
Finance for Masters

FINANCE FOR MASTERS 1
Table of Contents
Introduction................................................................................................................................2
Description of operation and comparative advantages of the two chosen companies...............2
Commonwealth Bank of Australia.........................................................................................2
Australia and New Zealand of Australia................................................................................3
Calculation of the performance ratios........................................................................................3
Profitability ratios...................................................................................................................4
Capital structure (leverage) ratios..........................................................................................7
Liquidity ratios.......................................................................................................................9
Analysis of monthly share prices movements..........................................................................12
Commonwealth Bank of Australia.......................................................................................12
Significant factors which may have influenced the share price...............................................14
CBA......................................................................................................................................14
ANZ bank.............................................................................................................................15
Calculation of beta values and expected Rates of Return using the CAPM............................15
Dividend policies.....................................................................................................................17
Recommendation letter............................................................................................................17
Conclusion................................................................................................................................18
References................................................................................................................................19

FINANCE FOR MASTERS 2
Introduction
The financial performance is the most efficient measure which is required by the investors as
well as the management of the company. This measure is basically used to identify the
position of the firm in terms of the financial decisions and the management aspect as well.
The report determines the analysis of the two Australian companies namely Commonwealth
Bank of Australia and Australia and New Zealand Bank of Australia (Australia and New
Zealand Bank of Australia, 2017). This report covers both the financial and non-financial
aspects of the position of the companies. Not only the ratio analysis is the measure that is
used for the purpose of the comparison but in addition to this, the share price movements
have also been placed as criteria for the past three years are compared with each other to give
the two way reflection. Later on the dividend policies are also analysed and at last a
recommendation letter has been provided which has answers to all the concerns of the
company and which company shall be selected from the given portfolio (Kimmel, Weygandt,
and Kieso, 2010).
Description of operation and comparative advantages of the two chosen companies
Commonwealth Bank of Australia
The Commonwealth Bank of Australia is one of the largest banks of Australia that is engaged
in the business of providing the services of the financial and the advisory services which will
help the client to deposit the amounts in the bank and earn interest. Apart from this the bank
is also involved with the other services such as management of funds, superannuation,
insurance, investment and the broking services (Krantz and Johnson, 2014). The company
reported a profit of A$9.881 billion in the financial year 2017 with the team of 51800
employees. The division is divided into the retail banking services, premium business

FINANCE FOR MASTERS 3
services, wealth management and under the supervision of Matt Comyn. Further the company
has also introduced the online banking services through the Net bank. Net bank allows the
customers to transfer the funds and manage the accounts and promote the saving goals
(Commonwealth Bank of Australia, 2017).
Australia and New Zealand of Australia
It is the third largest bank in the Australia, after the Commonwealth Bank of Australia. The
ANZ also became the legal entity in the year 2000 and change to ANZ Bank in the year 2012.
Currently the ANZ bank is operating at profit of A$7.493 billion and the total revenue
reported by the company is A$21.071 billion. Moreover the ANZ also provides the technical
assistance in the areas of the risk management and retail and also enhances the business
banking. Further in the other segments the ANZ bank is involved in the international trade
facilities and also provides the flexible an d the competitive lending solutions. The bank is
also engaged in providing the corporate structure solutions (Australia and New Zealand Bank
of Australia, 2017).
The chosen companies are itself the biggest competitor of each other and therefore investing
the funds in one of the bank will ensure more benefits. If the performance is analysed of both
the companies than in recent financial year the Commonwealth bank of Australia has
reported an EBIT of 10686 and increased by 11% and on the contrary the ANZ bank has
reported an EBIT of 19% which is far better than the Commonwealth bank of Australia. The
ANZ banking is operating on heights and enjoying the benefits of the customer satisfaction
and the rate of interest set by the bank is high than the Commonwealth bank of Australia and
therefore it can be concluded that the ANZ bank is having an advantage over the
Commonwealth bank of Australia and potential investors as well as the shareholders can get
an ideas on which bank to invest in and for how much time period (Australia and New
Zealand Bank of Australia, 2017).

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Calculation of the performance ratios
Ratio analysis is basically a tool which described the performance of the company in terms of
the different range of ratios to assess the financial position of the company in overall
scenario. The ratios eventually lead to the quick decision making and the proper judgement of
the performance of the company. In case of the Commonwealth bank of Australia and the
ANZ bank of Australia the following kind of ratios are calculated and outlined below for the
period of three years (Warren, Reeve and Duchac, 2011).
Profitability ratios
Profitability ratios are sued to evaluate the profitability of the company. The investors are
usually interested in these type of ratios so that they can have an understanding of how much
amount they’re getting in return in contrast to the amount invested in the particular banking
company. There are varieties of the ratios under the range of the profitability ratios such as
determined below (Warren and Jones, 2018).
Net profit margin: the amount of the net profit which has been arrived is the total revenue
earned by the company after setting off all the operating as well as the non-operating
expenses. The amount of profit of both the banking companies is determined below in the
form of a table for the period of three years.
From the below table it can be analysed that the net profit margin of the CBA is 32% for the
year 2017 in comparison to the previous year where the margin was 29% and this is due to
the fall in revenue that the company reported a slow profit. The net profit margin of the ANZ
bank is outstanding in contrast to its previous year as it reached from 31% to 38% due to
decrease in the interest expense of the bank. Overall the interpretation can be made that the
ANZ is operating in a better manner (Vogel, 2014).

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2015 2016 2017
0.278739002932
551
0.285655143862
554
0.320968371729
793
0.065444477439
8658 0.049370438271
8185
0.080547499109
5507
Operating Profit Margin
Commonwealth bank ANZ Banking
(Source: By Author)
2015 2016 2017 2015 2016 2017
Profitabilit
y Ratios
Profitabilit
y Ratios
Return on
total assets
Return on
total assets
EBIT
1.09
%
1.04
%
1.09
% EBIT
1.18
%
1.02
%
1.24
%
Total Assets Total Assets
Rate of return
on ordinary
equity
Rate of return
on ordinary
equity
Net income -
preferred
dividends 9% 8% 8%
Net income -
preferred
dividends 7% 5% 8%
Average ordinary Average ordinary

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shareholders
equity
shareholders
equity
Net profit
Margin
Net profit
Margin
PAT *
100 28% 29% 32%
PAT *
100 34% 31% 38%
Sales Sales
Gross
profit
margin
Gross
profit
margin
Gross
profit 46% 50% 53%
Gross
profit 48% 50% 51%
Sales Sales
Return on Assets: This ratio basically depicts the capacity of the company on the basis of
the assets and the resources that are employed in the business and the high ratio is considered
as favourable for the company. The trend as determined by the table is constant in case of the
CBA for all the tree years and when compared to the ANZ bank of Australia. The return on
assets for the CBA is 1.09% in 2015 and it fall down to 1.04% and again came back to 1.09
in the year 2017. However if the scenario is observed carefully the ANZ bank was
outstanding in the year 2015 at 1.18% and eventually it fell down due to minor fluctuations in
the price and the stock prices went low and the ROA ended at 1.02% in the year 2016.
Overall interpretation says that the ANZ performed better in the year 2017 as the ROA was
1.24% and the company showed the tremendous improvement (Tracy, A. 2012).
Return on Equity

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The return on equity showcases the capability of the company in offering the return on the
funds invested by the shareholders on their invested capital. If the profit is high the company
will generate the higher returns for the company.
Just like the return in assets the return on equity is also consistent in case of the
Commonwealth Bank of Australia at 8%, while from the table it can be observed that in case
of ANZ Bank the ratios are rising as the years are passing. In the year 2015 the ratio was 7%
and it fell down to 5% due to lower equity factor and more outsourcing for the debt. Further
in the year 2017 the return on equity went to 8% thereby surpassing the subsequent years
(Vogel, 2014).
Capital structure (leverage) ratios
The capital structure ratios basically determine the risk taken by the company to evaluate the
capital structure of the company. The measurement of the debt and the equity factors of the
company against each other will assist the investors to figure out the degree of the financial
leverage taken by the organisation (Kimmel, Weygandt and Kieso, 2010).
Leverage
Ratios 2015 2016
201
7
Leverage
Ratios 2015
201
6 2017
Debt to assets
ratio
Debt to assets
ratio
Debt 0.19 0.19 0.19 Debt 0.15 0.21 0.14
Total assets Total assets
Interest coverage
ratio
Interest coverage
ratio

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EBIT 0.52 0.57 0.68 EBIT 0.66 0.63 0.79
Interest
Expense
Interest
Expense
Debt to Equity
ratio
Debt to Equity
ratio
Debt 3.23 2.96 2.96 Debt 2.36 3.39 2.08
Equity Equity
Debt to Equity Ratio
The debt to equity ratio determines the portion of the debt and the equity and determines the
amount financed by the debt and the equity individually.
From the above analysis it can be observed that the debt to equity ratio of the Commonwealth
Bank of Australia was 3.23 in the year 2015 and it reduced to 2.96 whereas, in case of the
ANZ bank the debt to equity ratio is 2.36 in the year 2015 and it increased into 3.39 and
lastly it reported at 2.08. The debt to equity ratio is feasible according to the two perspectives.
If the company wants to take the tax advantage the debt is outsourced and if the company is
willing to take the risk than the equity shall be funded. A balance of both is needed. In case of
this ratio it can be interpreted that the CBA performed better (Krantz and Johnson, 2014).

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2015 2016 2017
Debt to Equity Ratio
ANZ Banking Commonwealth bank
Interest Coverage Ratio
The interest coverage ratio is the debt ratio and the profitability ratio which is used to depict
how easily the company can pay the amount of the interest on its outstanding debt. The
interest coverage ratio of the CBA is 0.68 in the year 2017 and that of the ANZ bank is 0.79
for the same year. Thought both the companies need to improve the ratio as below 1 it is
assumed that the company is not able to pay off the interest expense well (Penman, Reggiani,
Richardson and Tuna, 2017).
Liquidity ratios
The liquidity ratio determines the liquid position of the company and the ability of the
company and to convert the assets into the liquid to utilise it. The ratio basically measures the
time period in which the company can easily convert the assets into cash (Saleem and
Rehman, 2011).

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Liquidity
Ratios 2015 2016 2017
Liquidity
Ratios 2015 2016 2017
Current
Ratio
Current
Ratio
Curren
t assets 0.26 0.24 0.24
Curren
t assets 0.41 0.41 0.38
Current
Liabilitie
s
Current
Liabilitie
s
Quick
Ratio
Quick
Ratio
Quick
assets 0.06 0.04 0.06
Quick
assets 0.18 0.18 0.21
Current
Liabilitie
s
Current
Liabilitie
s
Working
Capital
Working
Capital
Current
Assets -
-
57505
4
-
63134
1
-
66052
2
Current
Assets -
-
39186
9
-
40969
0
-
47287
1
Current
Liabilitie
Current
Liabilitie

FINANCE FOR MASTERS 11
s s
Current Ratio
The current ratio is the ratio which showcases the capability of the firm to pay off the current
debts and majorly comprises of the inventories, cash, receivables and the marketable
securities. The ideal ratio is 2:1 which implies that the current assets shall be more than the
current liabilities.
From the above the above table it can be observed that the current ratio of the CBA was 0.26
in the year 2015 and it remained constant in the subsequent years as well. However in case of
the ANZ bank the current ratio is 0.41 in the year 2015 and it remained same in the year 2016
as well as 2017. The interpretation is clear that though the ANZ bank is better in terms of the
CBA yet both of the banks need to improve the position in order to align the current ratio to
match the standards (Tracy, 2012).
Quick ratio
The quick ratio determines the potentiality of the company in meeting the short term
obligations and the liabilities with the assistance of the liquid assets. The ideal quick ratio is
1:1 and it includes all the current assets except the inventories and the prepaid expenses.
The Quick ratio analysis proceeds with the CBA which is very low. The Quick ratio of the
CBA is recorded at 0.06 in the year 2015 and it even became in the next year at 0.04.
However, in case of the ANZ bank the quick ratio is reported at 0.18 for the year 2015 and
2016 and 0.24 in the year 2017. This is due to decline in the balance of the cash and it can be
interpreted that the ANZ bank is operating well in comparison to the CBA (Krantz and
Johnson, 2014).

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Analysis of monthly share prices movements
Commonwealth Bank of Australia
42247
42338
42429
42521
42613
42704
42794
42886
42978
43069
43159
43251
43343
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Price Moving Calculations
Average return (CBA)
Average return (S&P 200)
Years
Avearge Return
(Source: Yahoo Finance. 2018).
The graph of the CBA showcases the price moving calculations in contrast to the average
returns of the SandP 200 All Ords Index. At a glance, the trend lines plotted in the graph are
coming on each other lie overlapping yet there are certain kinds of the differences that are
reflected. Initially in the period of the 2015 the prices were negative and thereafter the CBA
revamped and revised its pricing position and performed better when compared to the
average price index (Lovett. 2018). The highest peak in the prices was shown in the month of
November in the year 2015. Thereafter the trend was again a fluctuating one and at the end of
the year 2018 the price rage was 4% to 6%. Therefore on a positive note can be concluded in
a way that the prices are directly proportional to the performance of the market and the major
reasons of the fluctuation is the competition by the other banks (Raskeiwickz, 2017) .

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42277
42338
42400
42460
42521
42582
42643
42704
42766
42825
42886
42947
43008
43069
43131
43190
43251
43312
43364
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
Price Index
Anz bank S&P 200
The graph of the ANX bank depicts the significant fall in the prices in particular years and in
the remaining years the graph was near to same price. The trend line plotted in case of the
ANZ started with the positive position unlike the CBA. In the year 2016 the price fell down
drastically and again lifted up in the middle of the month and the similar situation occurred in
the month of March 2017. Otherwise the ANZ bank delivered the high and the positive
returns and in contrast to the market the market performance was low. So in a way ANZ bank
was consistently performing better. After facing down fall, there was an improvement in the
position of the returns in order to be in alignment with the market returns (Clarkson, 2018).
Henceforth, it can be concluded that the performance of the ANZ bank is not dependent more
on the performance of the market and the pointing fluctuations occur when there is any major
change taking place in the market.

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Significant factors which may have influenced the share price
CBA
There are three major reasons and it is advised to keep the stock on hold. The reasons are
outlined below.
Dividends: if the investor wish to earn more dividend than the prices shall be low. At the
current CBA share price of $82 yielded dividend at 5.06% fully franked and if the prices are
lower an tax effective franking credits are also included than the possibility of higher yield is
valid at 7.3% (Yeates, 2016).
Dominance: CBA dominates mainly the mortgage market forming the 25.4% of the share of
the home loans and the entire market of the home loans is estimated to be $400 billion per
year. The home loans are the best generators of the revenue as they are sticky in nature. The
problem arises when the owners of the home loans are not able to pay the interest as well as
principal amounts on time. As long as the house prices go up the CBA will be beneficial in
terms of the price movements (Yeates, 2016).
ANZ bank
The ANZ bank are now trading at $28.05 per share with the market cap of $81.11 billion. In
order to maintain their business practice the ANZ is working towards refund process of the
$69 million to the customers above 400000 in number in an attempt to fix the errors made
regarding the home loan packages (Clarkson, 2018).
In the processing factor also the ANZ bank is having the numerous problems with the loan
account in the past period. In the month of the July 2017 identified a Break free package that
had comparable.

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Calculation of beta values and expected Rates of Return using the CAPM
The beta values of the CBA and the ANZ bank is 1.23 and the 1.37 respectively.
CAPM MODEL Commonwealth Bank CAPM MODEL ANZ
Risk free rate of Return 5% Risk free rate of Return 5%
Beta 1.23 Beta 1.37
Expected return on Market 6% Expected return on Market 6%
Expected Return 6.23% Expected Return 6.37%
Dividend policies
The dividend policy of the CBA is to seek and pay cash dividends at strong and the
sustainable levels along with meeting the target of the full pay-out ratio of 70% and 80% and
lastly to maximise the use of the franking credits in the account by paying the fully franked
dividends. The interim dividend was kept flat at $1.98 a share (Yeates, 2016).
ANZ bank paid the interim dividend for the period of the 2018 of 80 cents per ordinary share
on 2nd July 2018. The 2018 Interim dividend was fully franked for the purpose of the
Australia Tax. The major policy of the ANZ is to pay the dividends to its shareholders by
direct credit to their nominated financial institution accounts which is exclusive of credit card
accounts. ANZ has both the DRP and the BOP plans to receive the cash on ANZ ordinary
shares (Nguyen and Balachandran, 2017).

FINANCE FOR MASTERS 17
Recommendation letter
Dear Client,
This is to inform you that as per the analysis undertaken above and the comparison done on
the CBA and the ANZ bank for the past three years it is recommended that it will be
beneficial to invest in the ANZ bank as it has high profitable returns, static liquid position
and the low financial risk as compared to the CBA. The returns on the shareholder’s equity
are also high in comparison to the price movements and the trends recorded. Moreover it
offers the high dividend and is best suited for the purpose of the client portfolio.
Conclusion
It can be concluded that it is essential to do a financial analysis of the organizations to think
about their budgetary position and execution. This will assist the speculators with taking
better and proper choices in connection to their venture and furthermore makes the
examination less demanding between the two contending organizations.

FINANCE FOR MASTERS 18
References
Australia and New Zealand Bank of Australia, (2017) Annual report 2017 [Online] Available
from http://shareholder.anz.com/annual-report-annual-review [Accessed on 23rd September
2018].
Clarkson. R., (2018) ANZ Share Price Rises Slightly [Online] Available from
https://www.moneymorning.com.au/20180321/anz-share-price-rises-slightly-asxu.html
[Accessed on 23rd September 2018].
Commonwealth Bank of Australia, (2017) Annual report 2017 [Online] Available from
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-
reports/annual_report_2017_14_aug_2017.pdf [Accessed on 23rd September 2018].
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for
business decision making. New Jersy: John Wiley and Sons.
Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John
Wiley and Sons.
Lovett. Y., (2018) What Does Commonwealth Bank of Australia’s (ASX:CBA) Share Price
Indicate? [Online] Available from
https://simplywall.st/stocks/au/banks/asx-cba/commonwealth-bank-of-australia-shares/
news/what-does-commonwealth-bank-of-australias-asxcba-share-price-indicate/ [Accessed
on 23rd September 2018].
Nguyen, J.H. and Balachandran, B., (2017) Carbon Risk and Dividend Policy in an Imputation Tax
Regime.

FINANCE FOR MASTERS 19
Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for
Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-
To-Price. New York: Springer
Raskeiwickz,. O., ( 2017) 3 reasons the Commonwealth Bank of Australia share price is a HOLD [Online]
Available from https://www.fool.com.au/2017/02/27/3-reasons-to-hold-commonwealth-
[Accessed on 25th September 2018].
Saleem, Q. and Rehman, R.U. (2011) Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Tracy, A. (2012) Ratio analysis fundamentals: how 17 financial ratios can allow you to
analyse any business on the planet. New York: Springer.
Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New
York: Cambridge University Press.
Warren, C. S., and Jones, J. (2018) Corporate financial accounting. USA: Cengage Learning.
Warren, C. S., Reeve, J. M., and Duchac, J. (2011) Accounting. USA: Nelson Education.
Yeates. C, (2016) Commonwealth defends dividend [Online] Available from
https://www.smh.com.au/business/markets/commonwealth-bank-defends-dividends-
20160210-gmq8c3.html [Accessed on 23rd September 2018].