Impact on Liquidity on the Profitability of Australian Banks

Running head: IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN
BANKS
Impact on liquidity on the profitability of Australian Banks
Name of the Student:
Name of the University:
Author’s Note:

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
Executive Summary
The research paper that has been constructed looks to have an understanding of the impact of
liquidity on the profitability of the Australian banks. The process of liquidity and the explanation
of the same is given in the paper along with what profitability is and how the associated
stakeholders of the banks are able to have an impact on profitability. The problem statement has
been framed in accordance to which the researcher can move ahead. The research aims and
objectives point out the process with the help of which the paper would move ahead. The
literature review explains all the ideas and the concepts that are related to liquidity and
profitability in order to have an understanding of what other researchers have expressed. The
methodology highlights the process of data collection and accordingly the analysis can be
undertaken. The analysis would be able to answer the issues and thereby would be able to
express whether liquidity has an impact on profitability of the Australian banks.

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
Table of Contents
Chapter 1: Introduction....................................................................................................................4
1.2 Problem Statement.................................................................................................................5
1.3 Research Aims and Objectives..............................................................................................5
1.4 Research Question.................................................................................................................6
Chapter 2: Literature Review...........................................................................................................7
2.1 Liquidity Concept..................................................................................................................7
2.2 Theories of Liquidity Management.......................................................................................7
2.2.1 Anticipated Income Theory............................................................................................7
2.2.2 Shift-ability Theory........................................................................................................8
2.2.3 Liquidity Management Theory.......................................................................................8
2.2.4 Commercial Loan Theory...............................................................................................8
2.3 Concepts of the bank profitability.........................................................................................9
2.4 Measurement of Liquidity.....................................................................................................9
2.5 Evaluation of the profitability of the banks.........................................................................10
2.6 Empirical Review................................................................................................................10
Chapter 3: Research Methodology................................................................................................12
3.1 Process of data collection....................................................................................................12
3.2 Data Analysis.......................................................................................................................12
Chapter 4: Data Analysis and Findings.........................................................................................14

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
4.1 Descriptive Statistics...........................................................................................................14
4.2 Correlation...........................................................................................................................16
Chapter 5: Discussion....................................................................................................................17
5.1 Descriptive Statistics...........................................................................................................17
5.2 Correlation...........................................................................................................................17
Chapter 6: Conclusion, Limitation and Recommendation............................................................18
6.1 Conclusion (Addressing the aims and questions)................................................................18
6.2 Limitation............................................................................................................................19
6.3 Recommendation.................................................................................................................19
Reference List................................................................................................................................20
Appendix........................................................................................................................................24

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
Chapter 1: Introduction
The investors who generally invests in equity are apprehensive about the ability of the
company to create, preserve and raise the amount of income. The extent of profitability can be
assessed various interconnected dimensions. Primarily there is a relationship of the profit of the
company in accordance to the revenue, which is even known as the residual return on per sales
dollar of the company (Atoom et al., 2017). The other measure is the return on investment that
associates to the profits to the investment that is needed to create them. The assessment of the
income is of significant issue to the stockholders as they create revenue in the form of dividends.
Additionally, the rise in the level of profit can lead to the rise in the price in the market that
would lead to capital gains.
The ability of an organization to endure their short term ability of debt payment is vital to
the financial report users. In case the company is not able to maintain their long term ability of
debt payment, then they would not be able to satiate their shareholders (Salim et al., 2016). A
profitable organization may even face bankruptcy if it is unable to meet their responsibilities to
the short term creditors. The capability of paying out present obligations when they are due is
even associated to the ability of cash generation of the organization. The evaluation of the debt
payment capability of the organization which is short term in nature discloses a close relationship
among the current liabilities and current assets. The profitability of an organization does not
ascertain the ability to pay out the short term debt (Al Nimer et al., 2015). It can even be said that
by making use of the accrual accounting, the organization may disclose high amount of profits
but may not have the capability to pay for their current bills and expenses as it does not have the
fund that is required. If the firm reports a loss, it may still be able to pay for their obligations that
are short term in nature. Liquidity acting as a factor of profitability is comparable to the one that

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
is taken under consideration in the researches that are associated with discovering the
profitability of the banks which is even known as the internal determinants that can be controlled
by the management (Alshatti, 2014). This research paper would therefore look to assess whether
quick ratio has key amount of impact on the profitability of the Australian banks with the help of
return on asset (ROA).
1.2 Problem Statement
The research based on this topic has been undertaken in order to address how liquidity
has an effect in the profitability of the Australian banks. The banks that are functioning in
Australia have their precise objectives and goals and thereby is able to understand the process
that would be taken in order to gain profit for the banks. Profit for any bank is the ultimate goal
as a bank will not be able to operate in the economy if they do not earn profit (Hesse, &
Poghosyan 2016). Therefore, it is essential for the banks to maintain their liquidity position at an
optimum level and thereby understand how liquidity affects profitability. This is the problem
statement and therefore assessment of several ratios would be influential in understanding the
liquidity impact on profitability.
1.3 Research Aims and Objectives
The objectives and the aim of the research paper looks to assess the degree of profitability of
the Australian banks by understanding the concerned ratios of the banks. The aims and
objectives of the research paper are as follows:
 Determine the scenario of profitability of the Australian banks
 Assess the position of liquidity of the Australian banks
 Determine the impact of liquidity on the degree of profitability of the Australian banks