Investigating Financial Instruments of AMP and CBA Banks in Australia

Running head: BANKING AND FINANCE
Banking and Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1BANKING AND FINANCE
Table of Contents
Introduction:...............................................................................................................................2
Research (a literature survey):...................................................................................................2
Analysis:.....................................................................................................................................3
Part A: AMP and CBA share price........................................................................................3
Part B: Capital budgeting:......................................................................................................6
Recommendations:...................................................................................................................10
Conclusion:..............................................................................................................................10
References:...............................................................................................................................11

2BANKING AND FINANCE
Introduction:
The current paper would investigate the financial instruments of the two popular
banks operating in the Australian banking industry. These two banks include AMP Limited
and Commonwealth Bank (CBA). Firstly, it would intend to discuss the trend and evolution
of the current stock price of the banks over the past five years. Secondly, the essay would
focus on the ways through which the Royal Commission is inquiring into the activities of the
Australian financial institutions and their effects on market and firm-specific risks. The
second part of this essay would shed light on the capital budgeting techniques in the context
of Henry Property Limited. For this organisation, the two chosen capital budgeting
techniques include net present value (NPV) method and internal rate of return (IRR) method
based on which recommendations would be provided.
Research (a literature survey):
Resiliency could be observed in the Australian financial system and this has assisted
to deal with any adverse shocks. The capital levels of the financial institutions are quite above
the existing regulatory minimums and the increasing profit levels have further boosted their
capital (Reserve Bank of Australia 2018). Even though the trend of net interest margins is
lower, they are broadening now with the improvement in funding conditions and the impact
of current loan repricing is recognised. The rise in capital of the banks over the recent time
has increased their resiliency with a lowering return on equity. However, the investors still
expect equivalent returns to those obtained a decade back. Such tension could motivate the
financial institutions to obtain greater returns by accepting additional risks. This is the
primary reason that the regulators have raised their concentration on the risk culture of the
financial institutions and the sector is undertaking moves so that their approach to various
risks is strengthened.
As commented by Almazan, Chen and Titman (2017), capital budgeting could be
defined as a procedure where an organisation ascertains and analyses potential big
investments or expenses. Such investments and expenses might be projects like establishment
of a new plant or investment in any long-term venture. Primarily, all organisations need to
pursue all opportunities and projects, which increase shareholders’ wealth. However, due to
the limited availability of funds for new projects, it is crucial to use capital budgeting
methods for ascertaining the most profitable projects. Some of the significant capital

3BANKING AND FINANCE
budgeting methods include net present value, internal rate of return, payback period,
accounting rate of return, profitability index and others.
Analysis:
Part A: AMP and CBA share price
01/06/2014
01/08/2014
01/10/2014
01/12/2014
01/02/2015
01/04/2015
01/06/2015
01/08/2015
01/10/2015
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
01/10/2017
01/12/2017
01/02/2018
01/04/2018
01/06/2018
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Share price of AMP for the past five years
Figure 1: Share price of AMP Limited for the past five years
(Source: Au.finance.yahoo.com 2018)
According to the above figure, the current stock price of the bank is $3.44 and it is
evident that the price has made significant fluctuations over the five-year period. The main
reason that the stock price has fallen is due to the minimisation in firm valuation. Moreover,
downfall in the financial health of the bank has been another reason contributing to its falling
stock price. Even though stock price has increased considerably between 2014 and 2015,
decline has been inherent after March 2015. This could be validated by the fact that the stock
price of the bank has declined from $6.50 in 2015 to $3.44 in 2018 (Amp.com.au 2018). Due
to such declining trend, the shareholders are unwilling to buy or retain stocks of the bank;
instead, they are motivated to sell the same. In this context, it needs to be mentioned that the
share charts are used by the investors to understand the existing business trend and