Maximizing Shareholder Wealth: Evaluation of ANZ Banking Group's Capital Structure

In this document we will discuss about Maximizing Shareholder Wealth and below are the summary points of this document:- ANZ Banking Group Limited under scrutiny of banking royal commission Evaluation of capital structure to assess shareholder wealth maximization Analysis includes categorization of debt and equity, cost of capital calculation, and financial ratios evaluation

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Evaluation of the maximization of the
Shareholder’s wealth of the ANZ Banking
group Limited
Prepared By
Student’s Name:
Date:
Executive Summary

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Australia and New Zealand Banking Group Limited (ANZ) is one of the big four banks in
Australia, providing various banking and financial products and services to individual and
business customers and playing a substantial role in the financial sector (Yahoo Finance, n.d.).
However, together with other big banks within the sector, ANZ has been under the scrutiny of
the banking royal commission. As part of the finance team of ANZ Limited I have been tasked
with reviewing and preparing a report on the capital structure of the firm to critique whether the
firm has been successful in maximizing wealth generation for shareholders.

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Table of Contents
Introduction.................................................................................................................................................4
Answer to Question No 1............................................................................................................................4
Answer to Question No. 2...........................................................................................................................6
Answer to Question No.3............................................................................................................................7
Answer to Question No.4............................................................................................................................7
Conclusion...................................................................................................................................................8
References...................................................................................................................................................8

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Introduction
This report is being prepared by the finance team of the ANZ banking Group Limited so as to
provide a broad review on the current capital structure of the ANZ bank. This is intended to
evaluate of the fact whether the Bank has succeeded in achieving the goal of the maximization of
the shareholders wealth. The reason behind the preparation of this report is that in spite of its
major contribution in the Australian banking Industry it is now under the scrutiny of the banking
royal commission. The broad areas of evaluation as covered in the report includes categorization
of the capital structure into debt and equity, calculation of the weighted average cost of capital,
use of the CAPM model to evaluate whether the company is providing appropriate return on
given risk, a comparison of the firm’s capital structure with tone of the industry player, major
changes noticed in its capital structure for last three years , Use of the five key financial ratios for
the evaluation and finally an evaluation of its adequacy of disclosure made.
Answer to Question No 1
a. Categorization of the ANZ’s Current capital structure into debt and equity on the basis of
2017 balance sheet
Equity Amount ($m)
Ordinary Share capital 29088
Reserves 37
Retained Earnings 29834
Non-controlling interests 116
Total equity 59075
Debt Amount ($m)
Debt issuances 107973
Total Debt 107973
b. Calculation of the firm’s after tax cost of capital
Cost of Equity* amount of equity/ total value of the firm+after tax cost of debt*value of
debt/ total value of the firm

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16.234*59075/167048+8.80*107973/167048
=11.43%
Working: Total value of the firm= Value of Debt +value of equity
=$107973m+$59075m
=$167048m
Cost of debt= Amount of interest/ value of debt
=$14248m/$107973m*100
=13.20%
After tax cost of debt= before tax cost of debt (1-tax rate)
=13.20 %( 1-33.30%)
=8.80%
C .Calculation of the cost of equity using CAPM model
Cost of equity= Risk-free rate of return+ (market risk premium)*Beta
=5%+8.2%*1.37
=5%+11.234
=16.234%
Let the risk –free rate of return be 5% be assumed
D. In the given case the capital structure of the ANZ banking group limited has been
compared with the capital structure of the Common wealth bank for the same financial
year in which it is found that the total equity of the Common wealth Bank is $63716m
and the total debt is $167571 million, hence if we go for computing the debt equity ratio
of both the banks then for the ANZ banking limited it is coming as 1.83 times, whereas
for the common wealth bank it is coming as 2.63 times (Jefferson, 2017). It means
undoubtedly the performance in terms of gearing the position of the ANZ is much better
than its competitor in the industry.
Answer to Question No. 2
The five key financial ratios used in our case are as follows

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1. Net profit margin = Net profit after taxes/revenue*100
$6421m/$20273m*100
=31.67%
2. Return on Assets= Net profit after taxes/Total Assets
=$6421m/$897326m*100
=.72%
3. Return on equity= Net profit after taxes/ Equity*100
=$6421m/$59075m*100
=10.87%
4. Dividend payout ratio= Dividend /earnings =
=$4609/$6421
=71.78%
5. Gross profit margin= Gross profit/ Net revenue*100
=$9627m/$20973*100
=45.90%
The prime reasons behind using these five ratios in order to justify my evaluation is
that our objective is to ensure that the capital structure has contributed in the
maximization of the shareholder’s wealth.
The net profit margin comes under one of the profitability ratios that ensures addition
to the shareholders wealth (Linden & Freeman, 2017).
The return on assets also comes under one of the profitability ratios that talks about
how efficiently the company has used the assets to generate revenue.
The return on equity measures the return on the equity capital employed.
The dividend payout talks about the amount which is distributed out of the profit
earned by the company.
Finally the logic which is given for the net profit margin is also applicable for the
gross profit margin.
Hence all of the above ratios make significant contribution in the shareholders’ value
addition measurement.
Answer to Question No.3

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The significant changes in the capital structure of the ANZ Banking limited for the last three
years is depicted below:
(Figure in Million Dollar)
2017 2016 2015
Debt 107973 113044 110756
Equity 59075 57927 57353
Total 167408 170971 168109
There is no significant change as noticed in the capital structure of the last three years, but what
is to be noticed that subordinated debt were present in 2015 and 2016, as a result of which the
debt equity ratio of both the years were higher than the year 2017.
Answer to Question No.4
Yes, in the given case as reflected through the page no.35 of the annual report of the ANZ
Banking limited it is clear that it has clearly reveled the reputational risks associated with its
operations and it has worked with integrity and accountability in maintaining these reputational
risk (Choy, 2018). But what the royal commission’s findings went much far from what was
revealed in the annual report of the Bank. Somewhere in other words it can be said that bank has
hidden a big part of its reputations risks associated with it because of the wrong doings of its
staff. It showed that it did not resect the social and environmental standard as it said in its annual
report for maintaining the reputational risk. It caused a huge damage to the social standard. As
the report submitted revealed the serious allegations against the bank in form of sexual
harassment, fake account opening etc. Hence it is clear that the Bank has failed to maintain the
integrity and accountability to manage its reputational risk (Goldmann, 2016). Though in another
way it is to be seen too that the report of all these misconducts were submitted by the Bank itself
to the royal commission, that justifies the principle of integrity. One of the serious misconduct
that was reveled through the royal commission’s report was that the bank had sent unsolicited
preapproved overdrafts proposal to its customers through mail. So that by availing that overdraft
facility their account balance might go negative on which the Bank could earn interest. During
February 2016 the ASIC issued five infringement notice to the ANZ Banking just because it
failed to comply with the requirement of making necessary queries on the credit limit of the
customers. The Bank was also found to consider the remediation programme for those customers
who were severely affected by the overdraft facility offered by the Bank. The royal
commission’s report further revealed that bank failed to offer its home loan and car loan facility

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and other services in a most fair, honest and efficient way. This is further substantiated by the
fact that before extending the car loan facility to its customers it should have adequately justified
itself about the income or the earning capacity of the proposed customer for which their income
relating information was required. Instead the same was submitted with the Bank by a group of
intermediary and not directly by the customers themselves. The royal commission’s report
revealed that these intermediaries made high level manipulation of the income relating
information of the several customers before submitting the same with the Bank. This is the
reason why the Bank not only had to incur loss due to the choice of wrong group of customers
who failed to repay the principal and interest on such loan, but also caused the reputational
damage to the Bank.
Conclusion
In a nutshell it is to be said that not only the quantitative factor, but the qualitative factors too
play a significant role in the determination of the shareholders’ value enhancement. As a result of
which though the ANZ Banking limited performed very strongly in financial terms, but due to its
failure to meet the social and environmental standard it had to pay big price in the year 2018.
References
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 3(1), 145. doi:https://doi.org/10.1016/j.ecolecon.2017.08.005
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4, 103-112. Retrieved from
https://doi.org/10.1007/978-3-319-39919-5_9
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, 3(9), 353-354.
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), 353-379. doi:https://doi.org/10.1017/beq.2017.1

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