Financial Performance of Banking Institutions

This assignment requires you to analyze the financial performance of prominent Australian banking institutions, namely Commonwealth Bank (CBA) and Australia and New Zealand Banking Group Limited (ANZ). The analysis should encompass key aspects such as profitability, capital structure, efficiency, and their correlation with industry benchmarks. You are expected to utilize relevant financial ratios and analytical tools to present a comprehensive evaluation of these banks' performance.

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Principles of Financial Markets

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Executive Summary
This report analyses the financial situation of the Company Common wealth Bank and ANZ
Group. Researcher has given brief introduction of the economic factors like GDP and interest
rate. Its purpose is to analyze the ratios of both the Companies. The current GDP annual growth
rate has been analyzed of Australia that is 1.80% in second (June) quarter of 2017 and projected
2.1% for third quarter in 2017. The financial situation of the Companies is analyzed on the basis
of liquidity, profitability, efficiency, and capital structure and market performance ratio. It has
also been analyzed from the report that the Company Common Wealth Bank is more suitable for
investing by the investors in comparison with the ANZ Company of Australia.
Table of Contents

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Introduction......................................................................................................................................4
Common Wealth Bank.................................................................................................................4
Australia and New Zealand Banking Group................................................................................5
Top down Analysis..........................................................................................................................6
Current GDP................................................................................................................................6
Current Interest rate.....................................................................................................................7
Current Value of the $AUSD.......................................................................................................7
Current Inflation rate....................................................................................................................7
Personal Disposable Income........................................................................................................8
Bottom up Analysis.........................................................................................................................8
Ratio Analysis..................................................................................................................................9
Profitability ratio..........................................................................................................................9
Efficiency Ratio.........................................................................................................................10
Capital Structure Ratio...............................................................................................................11
Market Performance Ratio.........................................................................................................12
Comparative Analysis....................................................................................................................13
Summary and Recommendations..................................................................................................14
References......................................................................................................................................15

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Introduction
Common Wealth Bank
The Common Wealth Bank (CWB) was established in the year 1911 and started its working in
1912. It has the authority and permission for general banking business and savings. CWB is the
biggest Australian company that is listed on ASX. As per recent data of 2016, the CWB has a
staff of 52000 employees and approximately 800,000 shareholders (Commonwealth Bank,
2017). Due to multiple kinds of product offerings, it is quite easy for the CW bank to ensure
sustainable business growth in the market. Different kinds of banking products and services
offered by this bank are premium banking, retail banking, funds management, institutional
banking, and business banking and stock broking products/services. There are various strategies
of CWB diversification strategy, branding strategy, and the high scale sales generation strategy.
In Banking and Financial sector of Australia, the brand image of Common Wealth Bank is very
sound. Different products and services of CWB under retail banking include credit cards, home
loans, personal loan, transaction accounts etc. CWB was the first bank of Australia that has
obtained guarantee from Federal Government of country. CWB started its business from the city
of Melbourne with opening of first branch on 15th July 1912.
The mission of CWB is focused to provide customers the superior quality service. It also creates
value for its customers. It also promotes the stability and economic growth in the community. It
also has core values such as it ensures to the public that it is a great place to work. It also
provides opportunities to the Directors and other stakeholders (Commonwealth Bank, 2017). The
outstanding service is provided to the customers and helps them in achieving financial goals.

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Australia and New Zealand (ANZ) Banking Group
ANZ banking group counted in largest banking firms in Australia and New Zealand. ANZ
Banking Group is one of the major financial services group and international banking in top 100
banks of globe. The head office of ANZ banking group is situated at city of Melbourne. Starting
year of this bank was 1835. ANZ also operates in 30 other nations.
(Source: ANZ, 2017).
In year 1835, ANZ Bank Company started in London and was established according to
provisions and guidelines of Royal charter (ANZ, 2017). In the year 1950-60s the bank of
Australasia in order to frame the ANZ Bank, the merger has took place between Union Bank of
Australia and New Zealand bank. The ANZ bank started its operations at Solomon Islands and
Honiara in 1966. It has a culturally diverse organization with the employees, which are from
different countries with different culture. The employees with different culture are working in
this organization. Different types of flexibility offered by this bank to its employees are job
sharing, flexible hours etc. The 34 markets are operated globally by this bank in the New
Zealand and Australia countries. ANZ bank has recorded its place in topmost four banks in
Australia. At the same time, it has recorded place in the list of top fifty banks across globe.

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Its core values include ‘doing the things right’. It helps the business to achieve better outcomes.
Their values include integrity, Collaboration, Accountability, Respect and Intelligence.
Top down Analysis
In the top down analysis the overall picture of the economy and it analyses different industrial
sectors such as its macroeconomic trend. Here, the investors go through the economic factors and
narrow down the individual stocks (Calligaris, Villard, and Lafitte, 2011). There is an analysis of
economic factors such as, interest rates, GDP growth rates, exchange rates, energy prices and
productivity. This analysis would help the investors to pick a right stock that creates value. These
are described below:
Current GDP
The current Gross domestic product (GDP) of Australia expanded 0.8% in the second quarter in
the year 2017 from 1.8% of GDP in the year 2016. The high growth rate is recorded in
comparison with the expansion of 0.3% in first quarter of 2017. The expansion in the growth rate
is mainly because of increase in net export and domestic demand. The increase in GDP of
Australia is beneficial for the Companies as there is an increase in the economic activity of the
country (Natoli, and Zuhair, 2011).
Current Interest rate
Interest rate is the amount of interest that can be called as amount loaned, which a lender charges
to the borrower as an interest. Australia current interest rate of 2017 is 1.5% which is unchanged
by Reserve Bank of Australia as its interest rate in 2016 was 1.5% and its interest rate in 2015
was 2.0%. It can be seen that the constant interest rate adopted for 2017 which is low in
comparison to the interest rate of 2015 (Arrow, et al., 2013). So, it is expected that there will be
growth in the economy of Australia. Financial industry such as Australia and New Zealand and

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Common Wealth bank can adopt the benefit from the constant interest rate. The companies are
highly benefited because of the constant interest rate. There is fluctuation in the interest rate
according to the economic standing and the Reserve Bank.
Current Value of the $AUSD
The current value of 1 AUD is equal to 0.8035 US Dollar. It can be analyzed that value of
Australian dollar is lower than that of US Dollar. It has a negative and positive impact on the
fluctuation of the currency on the overall financial industry of Australia (Hull, et al., 2013). It
can be seen that the rate of AUD is increased in comparison to the value of 1 AUD was equal to
0.7693 on 30th June 2017. It can be said that it is good for the finance industry of Australian
economy.
Current Inflation rate
The inflation rate can be defined as hike price of different products and depreciation in the value
of currency. The inflation rate is increased by 0.2% from the previous year that is 1.5% in 2017
from 1.3 % in last quarter of the year 2016. The inflation rate has increased as compare to 2016
that was 1.3%. So, it can be disadvantage for the financial companies (Aizenman, et al., 2011).
The increase in inflation rate had chances of decrease in the interest rate, which is constant in
2017 that is 1.5%. It will be beneficial for the Companies such as Commonwealth Bank group
limited and ANZ bank. The changes in the interest rate directly affect the inflation and there is
increase or decrease in the inflation rate of banks such as CWB limited and ANZ Group. If there
is increase in interest rate the companies cannot afford to get the finance. It also affects the
demand and supply of inflation.

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Personal Disposable Income
Personal disposable income can be called as the amount of money, which is available for
population or an individual and it can also be called as an income, which is saved after paying of
taxes. The current personal disposable income of Australia is increased to $292336 million in
2017 from $289307 million in 2017. There is a change in the income that is $3029 million
increased from the last quarter and expected to increase more in the end of third quarter of 2017.
Personal disposable income growth reflects an increase in terms of trade (Mertens, and Ravn,
2013). It is important for the business to be considered. It can be analyzed that the Australian
people income is increased in 2017. The increase in income helps to encourage business to
increase in the employment. The increase in income makes a positive impact on the financial
industries such as CWB and ANZ. The increase in disposable income helps in increase in the
well-educated workforce. It would help in expanding the business.

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Bottom up Analysis
Financials (Ratio Analysis of
the Company)
Commonwealth bank
(2017) $
ANZ banking group
(2017) $
Revenue AUD Million 25026 23529
Operating income Million 14744 11178
Operating margin % 58.91 47.50
Net income AU*100D Mil 9928 7709
Earnings per share AUD Mil 574.4 245.4
Dividends AUD Mil 429 123.2
Payout ratio % 74.67 50.20
Book value per share 28.88 20.56
Operating cash flow AUD Mil -40628 8841
Fixed Assets Turnover 9.29 10.28
Asset turnover 2.56 1.02
Debt to equity ratio 1444.7 1580.1
Equity ratio 6.46% 6.22

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Ratio Analysis
Profitability ratio
Operating income, Operating margin and Net income
This ratio is used in the company so as to measure the overall efficiency. The profitability ratio
includes operating income, operating margin and net income of both the companies. These
margin ratios enable the companies at various measuring stages. The operating margin is also
known as operating profit margin. This margin helps the companies to determine that how well
the businesses are supporting their operations. It is a key indicator for investors and creditors
(Saleem, and Rehman, 2011). The operating margin of Commonwealth Bank Company of 2017
is 58.91% and Australia and New Zealand Banking Group Limited has 47.50% in June, 2017.
The operating income is helpful in analyzing the company’s profit. Operating income of
Commonwealth Bank and Australia and New Zealand is 14744 AUD Million and 11178 AUD
Million in June, 2017. It is taken into account for analyzing the overall profitability of the
banking firm. Moreover, when the operating income of the Company is higher then, it will be
able to pay its debt. The net income can also be called as net profit and these are measured
basically in accounting and finance. The Companies Commonwealth and Australia and New
Zealand net income of 2017 is 9928 AUD and 7709 AUD Mill. It can be analyzed from above
that Common Wealth Bank has high profitability as comparison with ANZ. Higher profit ratio is
more beneficial than the lower profit ratio. It helps the company in gaining profit from its
ongoing operations.
Efficiency Ratio
Fixed Assets Turnover and Assets Turnover Ratios

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Efficiency ratio is used by company for evaluating that efficiency of management of liabilities
and the assets of company. It includes the calculation and analysis of Fixed Assets turnover ratio
as well as the total asset turnover ratio. The ratio of fixed assets turnover is taken into account to
analyze the company’s return on their investment in the property. It also includes that how
efficiently the sales of a company is produced with its machines and equipments. The Companies
Commonwealth Bank and Australia and New Zealand fixed assets turnover ratio is 9.29% and
10.28% in 2017. It can be analyzed that the Company commonwealth is not efficiently using its
assets as its fixed assets as its assets is lower than that of ANZ (Cummins, and Weiss, 2013).
Moreover, Assets turnover ratio is also used by the company that how the Company is
successfully using its assets in order to generate revenue. The Commonwealth and Australia and
New Zealand assets turnover ratio are 2.56% and 1.02% in the year 2017. It can be analyzed that
ANZ bank does not use the assets efficiently as its Assets turnover ratio is low as comparison of
the other Company. It is based on the standard of the industry.
Capital Structure Ratio
Debt to equity ratio and Equity ratio
Capital structure is the ratio, in which the assets of the company are financed. It also helps the
investors to analyze that if the company is not in good condition then, what would happen to
their investments. Capital structure ratio shows the relationship between total debt and net
equity, which helps in making comparison between both the companies. The capital structure
ratio helps in analyzing the capital structure of the company (Eriotis, Frangouli, and Ventoura-
Neokosmides, 2011). It can also be analyzed that the capital structure of the CWB has 1444.7%
of Debt to equity ratio in 2017 and Equity Ratio is 6.46%. The other Company that is ANZ has
1580.1% Debt to equity ratio and 6.22% Equity ratio in 2017 respectively.

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The higher debt to equity ratio for both the companies helps in providing ratio of stock holder,
which is contributed to the capital to the creditor capital. From the above figure of the equity
ratio it is determined that how much of the total assets by the company are financed by the
investors. It also helps in determining the leverage of the company in respect to the debt of the
company. The equity ratio of CWB is higher as comparison of ANZ (Pratheepkanth, 2011). The
higher equity ratio of Commonwealth Bank Company helps in determining the potential
shareholders, which enables the shareholders to invest in the Company. From the above analysis
of the capital structure of both the companies, it can be determined that ANZ has stability in
comparison of Commonwealth Bank Company.
Market Performance Ratio
EPS, DPS, Dividend Payout and Book per share
It is used to evaluate the current share price of the companies. It includes EPS, DPS, Payout ratio
and Book value per share. EPS that is earning per share is like the profitability ratio as the higher
earnings ratio is better than the lower earnings ratio. If there is higher earnings ratio of the
Company then, the company is more profitable and able to distribute more profit to its
shareholders. The EPS AUD Million of Commonwealth and Australia and New Zealand
Company are 574.4$ and 245.4$ in 2017. It can be analyzed that the Commonwealth has higher
EPS then that of ANZ (Maditinos, et al., 2011). The Dividend per share is studied to measure the
dividend amount. The DPS of Common Wealth and Australia and New Zealand have 429$ and
123.2$. It can be analyzed that DPS of Commonwealth has a good amount of dividend as
comparison with ANZ.
Dividend payout ratio enables to measure the company’s net income, which is distributed among
the shareholders. It is measured in order to maintain the sustainable trends of a company. The

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Dividend Payout ratio of Commonwealth and Australia and New Zealand has 74.67% and
50.20% in 2017. It can be analyzed that the Company Australia and New Zealand has lower
dividend payout ratio as compare with the Commonwealth Company (Soana, 2011). If the
company has lower dividend payout ratio then, the company can no longer afford to pay the
dividend. The Company Commonwealth has higher dividend payout ratio and it can afford high
dividend. It is mandatory for the companies as it helps in analyzing how much stake can be sold
by the company.
The book value per share helps in the comparison in valuing of a Company. It is used in order to
determine the equity of a company by the investors. It helps the Company to relate the
shareholder’s to total number of equity shares. The market price per share of Commonwealth and
Australia and New Zealand has 28.88 $ and 20.56 $(Williams, and Naumann, 2011). It can be
analyzed that the Company Commonwealth has greater book value share as comparison with the
ANZ.
Comparative Analysis
CWB and ANZ Ltd have increased their assets as comparison of 2016. The increase in total
Assets is due to profit of the company. It can be analyzed from the above discussion of both the
Companies that the profitability of Commonwealth Bank is good as it is more profitable than the
other company. It can also be seen that Commonwealth bank has more assets in comparison with
ANZ. So, overall it can be concluded that the Company Commonwealth Bank is better than
ANZ.

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Summary and Recommendations
From the above analysis of Commonwealth and Australia and New Zealand Company that the
investors must invest their future investment funds in Commonwealth bank instead of ANZ
Banking Group Limited. It has been analyzed by evaluating the company’s financial statement
that ANZ is not suitable for investing. It is clearly seen from the figures of ANZ that the
company is not efficiently using its assets that is assets turnover ratio which is lower as 1.02% in
comparison of Common Wealth bank that is 2.56%. ANZ should raise the funds from equity as
it will help in the profitability of the company. The company should also use its assets efficiently
in order to generate revenue.
By this report, it can also be concluded that the profitability of the company is affected by the
economic factors of the country. The company’s Profitability is also based on increase in the
personal disposable income. It is also analyzed from the report that the profitability of the
Company can be decreased as there is increase in interest rate. The calculation of ratio analysis
of both the companies it can be analyzed that the Company Commonwealth is more profitable
than ANZ. It is also stable in its capital structure.

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References
Aizenman, J., Hutchison, M. and Noy, I. (2011) Inflation targeting and real exchange rates in
emerging markets, World Development, 39(5), pp. 712-724.
Arrow, K., Cropper, M., Gollier, C., Groom, B., Heal, G., Newell, R., Nordhaus, W., Pindyck,
R., Pizer, W., Portney, P. and Sterner, T. (2013) Determining benefits and costs for future
generations, Science, 341(6144), pp. 349-350.
Australia and New Zealand Banking Group Limited (2017) Our Company. [Online]. Available
at: http://www.anz.com/about-us/our-company/ (Accessed: 20 September, 2017)
Calligaris, D., Villard, C. and Lafitte, D. (2011) Advances in top-down proteomics for disease
biomarker discovery, Journal of proteomics, 74(7), pp. 920-934.
Commonwealth Bank (2017) About us. [Online]. Available at:
https://www.commbank.com.au/about-us/our-company/history.html (Accessed: 20 September,
2017)
Commonwealth Bank (2017) Commonwealth Bank. [Online]. Available at:
https://www.commbank.com.au/about-us/our-company/overview.html (Accessed: 20 September,
2017)
Cummins, J.D. and Weiss, M.A. (2013) Analyzing firm performance in the insurance industry
using frontier efficiency and productivity methods. New York : Springer.
Eriotis, N.P., Frangouli, Z. and Ventoura-Neokosmides, Z. (2011) Profit margin and capital
structure: an empirical relationship. Journal of Applied Business Research (JABR), 18(2).
Hull, J., Treepongkaruna, S., Colwell, D., Heaney, R. and Pitt, D. (2013) Fundamentals of
futures and options markets. USA: Pearson Higher Education.

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Maditinos, D., Chatzoudes, D., Tsairidis, C. and Theriou, G. (2011) The impact of intellectual
capital on firms' market value and financial performance, Journal of intellectual capital, 12(1),
pp. 132-151.
Mertens, K. and Ravn, M.O. (2013) The dynamic effects of personal and corporate income tax
changes in the United States, The American Economic Review, 103(4), pp. 1212-1247.
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