Letter of Recommendation for Investment in Commonwealth Bank and Westpac Bank

Letter of Recommendation

Letter of Recommendation
To,
Client
27th September 2018
Subject: Letter of recommendation
Sir,
In the lieu of the above analysis of the Commonwealth Bank and the Westpac Bank this it to
inform you that after having a comparative analysis it can be interpreted that the performance
of the Commonwealth bank and the Westpac bank in terms of the liquidity is not satisfactory
as the current ratio of both the organisation is lower than the set bench marks. The current
ratio of the commonwealth bank is 0.45 for the year 2016 and the year 2017 and 0.03
consistently in case of the Westpac bank. The company needs to improve the position
otherwise the scenario for the investors and the shareholders will be that the company is not
able to pay back the current liabilities and therefore it is recommended to the company to pay
back. The cash ratio is very low in comparison to the set cash reserves required to be
maintained by the company (Katsouras, 2015). Due to slight improved ratio in terms of the
comparison it is recommended to invest the money in the shares of the Commonwealth bank
of Australia. Thought the cash ratio of the Commonwealth bank is also low still it has an edge
over the Westpac bank.
Moreover when analysing the profitability ratios of the Commonwealth and the Westpac
bank the Commonwealth bank has an edge over the Westpac bank as the operating profit

ratio of the Commonwealth bank is 54.9% for the financial year 2017. However, in case of
the Westpac bank the profitability ratio is 32.8% due to the lower revenue and more
expenditure for the advertising. On the basis of the profitability the commonwealth bank is
appropriate to invest. Apart from this the Net income ratio of the Commonwealth bank and
the Westpac bank is almost on the same pitch. The year 2017 reported the 22.4% of the net
income ratio in case of the commonwealth bank and 21.3% in case of the Westpac bank. The
net income ratio determines the profitability segment in the most transparent manner and
henceforth, it is advised to the company to increase the net income ratio to provide the greater
portion to the shareholders. The return on assets is another big reason to analyse and after
getting the results it can be seen that the return on the asset ratio is low in case of the banking
firms. The ratio is not even above 1% and this eventually showcases that the company is not
utilising the assets efficiently to generate the revenue. The return on equity is again the metric
which determines the amount invested by the investors and in response to that how much
they get in return. The table in the report showcases the return on equity for the
Commonwealth bank for the year 2017 at 15.2% and in case of the Westpac bank 13.4% due
to selling of shares. Hence it is recommended to put the money in the Commonwealth bank to
get the higher returns on the investment for the purpose of the future prospective (Joshi,
2015).
It is also advised to the management of the banking companies to assess the debt position of
the company to give a larger picture. The debt ratio of the Commonwealth bank of Australia
is 94% which is high than the expected and therefore it is recommended to the company to
eventually bring a balance between the debt and the equity finance and as a client the
investment can be done in Commonwealth bank keeping the other factors also. From the
point of view of the tax component the financing through the debt position is feasible and
beneficial and in case the company is willing to take the risk the finance is done through the