Financial Analysis of Commonwealth and Westpac Banks in Australia

This assignment is prepared to financially analyse two listed companies of Australia that operates in the same industry. The financial reports of Common Wealth and Westpac Banks has been analysed in this assignment. At the end of this report, the users will be able to have a view about the efficiency of the organisation’s working.

CORPORATE ACCOUNTING

EXECUTIVE SUMMARY
This assignment is prepared to financially analyse two listed companies of Australia that
operates in the same industry. The financial reports of Common Wealth and Westpac Banks
has been analysed in this assignment. At the end of this report, the users will be able to have a
view about the efficiency of the organisation’s working.

Contents
INTRODUCTION......................................................................................................................3
ANALYSIS OF EQUITY..........................................................................................................4
Discussion on each item of equity for both the companies....................................................4
Discussion and debt and equity of both the companies..........................................................6
Analysis of Cash flow statement................................................................................................7
Discussion on the cash flow statement of both the companies..............................................7
Comparison of cash flow of three years of both the companies.............................................8
Description of analysis of cash flow of both the companies................................................10
Analysis of comprehensive income statement.........................................................................11
Items reported in the other comprehensive income statement.............................................11
Reasons for not reporting these items in the profit and loss statement................................11
Comparative analysis of the items of the other comprehensive income statement..............11
Use of other comprehensive income in evaluation of performance of managers................12
Analysis of corporate income tax.............................................................................................13
Tax expense for the companies for the current year.............................................................13
Effective income tax rate......................................................................................................13
Deferred tax liabilities and assets.........................................................................................13
Increase in DTA and DTL....................................................................................................14
Calculation of cash tax using the book tax...........................................................................14
Calculation of cash tax rate..................................................................................................16
Difference in cash tax and book tax.....................................................................................16
Conclusion............................................................................................................................17
Bibliography.............................................................................................................................18

INTRODUCTION
A financial report comprises of several components in it. In order to understand these parts
of the financial report, we need to know about its characteristics and their nature. In this
assignment various components of the companies in Australia has been discussed. The
discussion has been done on Commonwealth bank of Australia and Westpac bank are as
follows (Atkinson, 2012).
Commonwealth bank is considered to be one of the biggest banks operating in Australia.
However, this bank also carries out its business in various other countries such as Unite
Kingdom, New Zealand and also United states. It was establishes in the year 1991 also in the
same year it got listed in the Australian stock exchange (ASX). There are huge number of
branches of this bank which is nearly 1100 and also there are 51800 people employed in this
bank. This is not only considered as the biggest bank in Australia but also in the entire
southern hemisphere. The bank engages in providing many services such as superannuation,
institutional banking, insurance, fund management, broking services (Armstrong, 2015).
Westpac bank is located in Sydney and is considered to be among the four largest banks of
Australia. This bank is highly reputed as it has been ranked as the most sustainable bank
across the globe for four consecutive years (Berry, 2009). In 1817 there was an establishment
of a bank which was known as New south Wales. Later, in 1982 this bank it changed to
Westpac bank. This bank got listed in the Australian stock exchange in the year 1970. There
are about 14 million people that are associated with this bank and also there are 32620 people
who are employed in this bank. The bank believes in providing its services worldwide and so
there is huge number of branches set up which is nearly 1490.
In order to understand the financial position and performance of both these companies,
various components of the financial reports are studied and discussed in this report (Boyd,
2013).

ANALYSIS OF EQUITY
The equity shareholders fund comprises of the funds that are raised from the public in
exchange of equity shares, reserves and also the profits that are ploughed back by the
company which is also known as retained earnings.
Discussion on each item of equity for both the companies
The components of the equity portion of Commonwealth bank comprises of share capital,
retained as well as certain reserves that were created. The total share capital of the company
for the year 2017 amounts to $34971 which can be divided into two parts (Case, 2012). The
first part consist of ordinary equity share that amounts to $ 35266 and the second part consists
of the treasury stock which amounts to $295. There was an increase in the share capital of the
company which happened because of the issue of new equity shares which was planned by
the company under dividend reinvestment plan. There was increase in the retained earnings
of the company. It increased from $23435 to $ 26330 million. This was the result of the
phenomenal performance of the company during 2017 which was reflected in the increased
operating profits of the company. However, it was noticed that the reserves of the company
fell from $ 2734 to $1869 in the year 2017. This fall in the reserves was because of the
change in the foreign currency exchange rate as well as loss that has arisen because of
disposal of certain assets (Bragg, 2016). The equity of the company increased from $60014 in
2016 to $ 63170 in 2017.
Commonwealth Bank
2Shareholder’s Equity 2017 2016
Share capital 34,971 33,845
Reserves
1,86
9 2,734
Retained earning 26,330 23,435
Total 63,170 60,014

2017 2016
58,000
59,000
60,000
61,000
62,000
63,000
64,000
Commonwealth Bank
Shareholders
Equity
The components of the equity capital of Westpac bank are same as of the common wealth
bank which is share capital, reserves and retained earnings (Dickson, 2017). The ordinary
share capital of the company amounted to $34889 and the treasury stock amounted to $495
which made the total share capital of the company amount to $34394. It was observed that
the share capital in 2016 was $ 33014 but in 2017 it amounted to $34394. Also, there was an
increase in the retained earnings of the company from $ 24379 to $ 26100 which happened
because of the increasing operating profits earned by the company. The reserves of the
company increased from $727 in 2016 to $ 794 in 2017 because the gains that occurred from
the fair value changes. So, we can conclude that the shareholder’s fund has increased in 2017
when compared to 2016.
Westpac Bank
Shareholder’s Equity 2017 2016
Share capital 34,394 33,014
Reserves
79
4 727
Retained earning 26,100 24,379
Total 61,288 58,120

2017 2016
56,000
57,000
58,000
59,000
60,000
61,000
62,000
Westpac Bank
Shareholders
Equity
Discussion and debt and equity of both the companies
A company can raise funds either buy issuing common shares to the public or by raising debt
from the third parties (Donanldson, 2012). There are certain pros and cons of raising funds by
either of the ways. There are various factors that the company has to look upon before taking
the final decision regarding the source of finance. The few factors that the company must
look upon are industry to which the company belongs, the cost of capital, etc.
The data of debt and equity of both the companies are stated in the below table:
Particulars Equity Share Cap Debt Debt Equity ratio
Commonwealth Bank
63,17
0 6,26,655 9.92
Westpac Bank
61,28
8 5,33,591 8.71
The information provided above has helped us to calculate the debt equity ratio of both the
companies. The debt equity ratio of Commonwealth bank and Westpac bank is 9.92 and 8.71
times respectively.
As we can see, the debt equity ratio for both the companies is very high. This may be because
debt is preferred more as a source of finance in the banking sector. So, we can conclude that
both the banks have a similar capital structure (Edwards, 2014).

Analysis of Cash flow statement
The books of accounts that are prepared by the management of the company follows accrual
basis. The cash flow statement of the company is prepared in order to know about the
medium through which cash is flowing in the organisation. The company can use the
statement of cash flows in order to know about its liquidity position (Flood, 2017).
Discussion on the cash flow statement of both the companies
There was a decline in the cash outflow from operating activities from $4561 million to $807
million. The reason behind the decline from operating activities is the increase of cash inflow
from investments as well as interest income. The cash inflow from operating activity is a
company involved in banking sector usually comprises of cash inflow from interests and
income from investments as they are considered to be the main business activities in the
banking sector.
The cash flows from investing activities for common wealth bank consists of cash flows from
sale or acquisition of associate and subsidiaries, investments, fixed assets as well as the
dividend received from investments (Girard, 2014). It is observable that the cash outflow
from investing activities in the year 2016 was $ 2032 million but late on in the year 2017 it
decreased to $ 677. The reason behind this downfall in cash outflow from investing activity
was because of decrease in the payments made for acquisition of controlled entities, purchase
of certain plant and property along with some intangible assets.
Now, let’s talk about the cash flows from financing activities of Commonwealth bank.
Financing activity mainly comprises of raising funds as well as repayments of equity and
debt. The cash outflow from financing activity increased to $10472 million in 2017 whereas
it was $1620 million in 2016. The debt securities that were repaid were comparatively lower
because of which the cash inflow from financing activity was higher (Gow, 2016).
On analysing the cash flow statement, we can conclude that the net cash flow of
commonwealth bank was negative $4973 million but it increased to positive $8988 million in
the year 2018.
Westpac’s bank operating activities consisted of cash flows from insurance proceeds, interest
as well income tax. There was a decline in the cash inflow from operating activities because

of the fall in the fair value of the investments. The cash inflow declined from $5497 in 2016
to $2820 in 2017.
Westpac’s investing activities consists of buying and selling of different securities or assets
(tangible as well as intangible). There was a decline in the cash outflow from investing
activities from $7245 in 2016 to $1698 in 2017. There were a lot of securities that were sold
and therefore, the cash outflow declined (Holtzman, 2013).
The financing activity of the Westpac’s bank consisted of raising funds or making repayment
of equity and debt securities. There was a fall in the cash inflow from financing activity to
552 million whereas it was $4573 in 2016. The reason behind this decreased cash inflow was
the cash outflow for repayments of debt (Horngren, 2012).
The overall cash flow for Westpac’s bank was $1674 million in 2017 and $2825 in 2016.
Comparison of cash flow of three years of both the companies
The information about the cash flows from operating activities for both the banks is provided
in the table below:
Cash flow from operating Activities
Particulars 2017 2016 2015
Commonwealth -807 -4561 7183
Westpac 2820 5497 -541
2017 2016 2015
-6000
-4000
-2000
0
2000
4000
6000
8000
Commonwealth
Westpac
As we can see that the operating cash flows are not following any kind of trend.
The table provide below shows the cash flow from investing activities for both the
companies:

Cash flow from Investing Activities
Particulars 2017 2016 2015
Commonwealth -677 -2032 -1215
Westpac
-
1698 -7245 -18715
2017 2016 2015
-20000
-18000
-16000
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
Commonwealth
Westpac
There is no trend for the cash flows from investing activities of commonwealth bank whereas
for Westpac bank it is declining (Kieso, 2014).
The information of cash flows from financing activities are provided below:
Cash flow from Financing Activities
Particulars 2017
201
6 2015
Commonwealth 10472
162
0 -7875
Westpac 552
457
3 5513
2017 2016 2015
-10000
-5000
0
5000
10000
15000
Commonwealth
Westpac

The trend of cash flow from financing activities is in opposite direction. The cash flow of
Commonwealth group is increasing whereas it is declining in case of Westpac’s bank (Hubig,
2013).
Description of analysis of cash flow of both the companies
Cash flow from Activities
Particulars
201
7 2016 2015
Commonwealth
898
8 -4973 -1907
Westpac
167
4 2825 -13743
2017 2016 2015
-15000
-10000
-5000
0
5000
10000
15000
Commonwealth
Westpac
On analysing the information that has been provided regarding the cash flow of both the
banks, it has been observed that the cash flows of both the companies do not follow any
trend. We can also see that the net cash flows for Commonwealth bank has increased over
three years and in the case Westpac’s bank it is increasing as well as decreasing. It is
important for the companies to keep a track of their cash flows from operating activities in
order to function properly and carry out operations smoothly (Lerner, 2009).

Analysis of comprehensive income statement
The other comprehensive income statement is shown below the income statement in the
financial statements of the company. The profits and losses that are not realised in the current
year are recorded in the other comprehensive income statement of the company (Robinson,
2014).
Items reported in the other comprehensive income statement
In the other comprehensive income statement of the commonwealth bank we can find items
like change in the cash flow hedging instruments, valuation difference in respect to benefit
superannuation plan, foreign currency translation reserves, change in the value of those
investments that are held for sale, revaluations of properties after deducting tax and also
changes in the fair values due to increase/decrease in the credit risk.
The items that are included under this section of Westpac’s bank include re-measurement of
defined benefit obligation, cash flow hedging instruments, changes in values due to change in
credit risk and also in the investments that are held for sale, any exchange difference because
of translation in the foreign operations etc (Siciliano, 2015).
Reasons for not reporting these items in the profit and loss statement
There are many assets and liabilities of the company and few among these are not under the
control of the management of the company. These are the items that do not have any impact
on the profits / losses of the current year but they affect the income statement of the future
periods. If there is a change in the value of such items then they are not recorded in the
income statement rather they are recorded in the other income statement prepared by the
management. On realisation of such assets and liabilities, the management records these
changes in the income statement removing it from the other comprehensive income
statement. The income statement is prepared on accrual basis and therefore, only those items
that are realised is recorded in the books (Simpson, 2012).
Comparative analysis of the items of the other comprehensive income statement
The components of the other comprehensive income statement of both the banks are very
similar to each other. The similarity that we have found out is the changes in the fair value of
some items net of tax effect. These items are not recorded in the profit and loss account
because these changes in the fair value of certain assets and liabilities has not been realised. If

these items are recoded then the income statement would not be able to show the true picture
of the company.
Use of other comprehensive income in evaluation of performance of managers
The changes in the fair value of the assets and liabilities that are held by the management is
not under anyone’s control. The performance of the managers can be evaluated by looking
upon the operating profits of the company (Skonieczny, 2012). As we know, these items are
directly influenced by the market forces; therefore, any comprehensive income should not be
taken into consideration while evaluating the manager’s performance.

Analysis of corporate income tax
The taxes that are paid by the companies on the profits earned by them is known as Corporate
income tax (Taillard, 2013).
Tax expense for the companies for the current year
The profits of both the banks for the year 2017 have been reported. Both the banks are liable
to pay taxes on the profits that are earned by them. As per the records of the company, the
income tax charges of Wealth bank amounted to $3992 million whereas for Westpac bank it
is $3518 million.
Effective income tax rate
In order to calculate the effective income tax, we have to divide the income tax expense by
the earning before tax. In order to calculate the effective tax rate, the company has used this
formula. The calculation of effective tax rate for both the companies is shown in the table
below:
Effective tax rate
Particulars Commonwealth Westpac
Income tax expense 3,992 3,518
Earnings before
Tax 13,944 11,515
Effective tax rate 28.63 30.55
From the above table, we can conclude that the effective tax rate for Commonwealth bank
and Westpac bank is 28.63% and 30.55% respectively.
Deferred tax liabilities and assets
There are certain differences in accounting and tax provisions because of which there arises
some temporary differences in the books. These differences are known as deferred tax assets
and deferred tax liabilities.
In case of commonwealth bank the deferred tax assets and liabilities relate to provision for
impairment loss and employee benefits along with certain other provisions, unearned income,

financial instruments, defined benefit superannuation plan, insurance, and investment in
securities, lease financing and certain other items (White, 2015).
The deferred tax asset and liabilities that has been recorded in the Westpac bank’s books of
accounts consists of provision for long service leave as well as annual leave and other
employee benefit, provision for impairment charges, finance lease transactions and also life
insurance assets.
Increase in DTA and DTL
As we know, the temporary differences that arise because of deferred tax asset and liabilities
gets reversed in future. If the company pays more tax in the current year in comparison to
what it should actually pay, then it is known as deferred tax asset and vice versa. The credit is
received by the company in the future periods.
The deferred tax asset for commonwealth bank amounted to $389 million in 2016 and in the
year 2017 it amounted to $962 whereas the deferred tax liabilities were $340 in 2016 and it
decreased to $332 million in the year 2017.
In Westpac bank’s financial statement the deferred tax assets for 2017 was $1112 which has
increased from $1351 when compared to 2016. The deferred tax liabilities was $36 million in
2016 and $10 million in 2017.
Calculation of cash tax using the book tax
The tax that is calculated on the profits of the company is known as book tax. There is a 30%
corporate tax rate in Australia for the book profits of the company. The book tax of both the
companies is as follows:
Book tax calculation
Particulars Commonwealth Westpac
Income as per books
13,94
4 11,515
Tax rate 30% 30%
Book tax 4183.2 3454.5

The book profits of the commonwealth bank amounted to $4183 million. The company has
made certain adjustments in relation to deferred tax asset and liabilities in order to ascertain
the cash tax of the company.
Calculation of Cash tax for Commonwealth
Tax as per book profits 4,183
Adjustments made for the following:
Taxation offsets and other dividend adjustments -11
Tax adjustment referable to policyholder income 22
Tax losses not previously brought to account -56
Offshore tax rate differential -76
Offshore banking unit -42
Effect of changes in tax rates 4
Income tax (over) provided in previous years -66
Other 34
Cash Tax 3,992
The cash tax of the company in the year amounts to $3992.
Now, we are using the book profits of the company in order to calculate the cash tax. The
book profits of the company amounted to $3455 million. After adjusting the various deferred
tax assets as well as liabilities, the company has got the following cash tax:
Calculation of Cash tax for Westpac
Tax as per book profits 3,455
Adjustments made for the following:
Hybrid capital distributions 64
Life insurance:
Tax adjustment on policyholder earnings 8
Adjustment for life business tax rates -1
Dividend adjustments -3
Other non-assessable items -3
Other non-deductible items 32
Adjustment for overseas tax rates -30
Income tax (over)/under provided in prior 4

years
Other items -8
Cash Tax 3,518
We can conclude that the cash tax amount of Westpac bank is $3518 million in 2017.
Calculation of cash tax rate
We can calculate the cash tax rate by dividing the cash tax amount by the earning before tax.
The calculation of the cash tax rate has been shown in the table provided below:
Cash tax rate calculation
Particulars Commonwealth Westpac
Cash tax 3,992 3,518
Earnings before Tax 13,944 11,515
Cash tax rate 28.63 30.55
As we can see, the cash tax rate of Westpac is higher when compared to commonwealth
bank. This has occurred because of the adjustments made in relation to deferred tax asset and
deferred tax liabilities.
Difference in cash tax and book tax
The company is required to calculate profits under both accounting and tax provisions. There
is a difference in the profits of the company which has resulted in the difference in the tax
amount.
The book tax is calculated by the company using the book profits whereas the actual tax that
the company will pay is cash tax. Usually there is a difference in the cash tax rate and the
book tax rate because of the temporary differences between them. These differences in both
the rates get reversed when such temporary difference is reversed.

Conclusion
There are some financial items such as equity, cash flow, income tax and comprehensive
income that has been discussed in this report. In order to understand the concept practically
we have taken examples of two large banks of Australia. Such information are helpful to the
users of the financial reports and also help them to value the share of the company. It helps to
check whether the company is functioning properly or not.

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