Financial Management: Concepts & Practices

This assignment delves into the core principles of financial management, encompassing topics such as corporate finance, investment analysis, risk management, and international financial operations. Students are expected to demonstrate a comprehensive understanding of these concepts through critical analysis of provided readings and application to real-world scenarios.

Running head: PRINCIPLES OF FINANCIAL MARKETS
Principles of financial markets
Student Name:
University Name:
Author Note

2PRINCIPLES OF FINANCIAL MARKETS
Executive Summary
The present report is prepared to conduct the fundamental analysis of banking sector of Australia
using top down approach and bottom up approach. Selected organization for conducting analysis
is Common wealth bank and Westpac. Bottom up analysis has been done by considering the
macro economic factors influencing the economy as well as banking sector. Performance of
banking sector has significantly affected by various variables such as GDP, inflation and
unemployment rate. Top down analysis of organization has been done by implementation of ratio
analysis tool. Later part of report depicts the recommendation to investors for investing in the
chosen organizations.

3PRINCIPLES OF FINANCIAL MARKETS
Table of Contents
Introduction:....................................................................................................................................6
Australian banking industry background:........................................................................................6
Background of Organizations:.........................................................................................................7
Top down analysis:..........................................................................................................................8
Bottom up analysis of current financial situation of Westpac and Common wealth bank:...........13
Summary and Recommendations:.................................................................................................22
Reference:......................................................................................................................................24

4PRINCIPLES OF FINANCIAL MARKETS
Introduction:
For the purpose of investment, investors are required to conduct in depth analysis of the
industrial sector in which they are seeking investment prior to making any investment. Changes
in economic fundamentals and its impact on the performance of companies can be evaluate by
conducting fundamental analysis. Value and share price of company is considerably affected by
micro and macro-economic factors. For presenting the picture of industry and economy at macro
level, investors can perform top down analysis. Macro-economic picture of companies on other
hand is depicted by conducting bottom up analysis (Petty et al. 2016). Fundamental analysis of
two organizations from banking industry listed on Australian stock exchange are conducted in
present report. Two organizations are Westpac and Common Wealth Bank of Australia.
Australian banking industry background:
The banking sector of Australia has improved since the introduction of banking Act,
1959. Overall growth in performance of banking has been attributable to the growth in
performance of assets. Compilation of industry information has be from various sources such as
Reserve Bank of Australia, Australian Brea of statistics and Australian prudential regulatory
authority. Since the global financial crisis, there has been decline in the results of four major
Australian banks. Performance of credit control has remained stable and upside has been
witnessed in impairment theory. On the major agendas of banks, there is a continuous rise in
cash management. Since the proposal of government to nationalize the banking industry in late
1940s, the sector has experienced the most intense issue of social political agenda. There has
been lower credit growth outlook for major banks. Major Banks in Australia is working hard for
shaping new environment that helps in providing connected and more thoughtful experiences by

5PRINCIPLES OF FINANCIAL MARKETS
engaging staffs and technology as key enablers. Banks are diverse and large organizations
having long histories and changes in the banking sector is complex. Reframing the norms of
organizations along with resonant offerings, messages and contact points are need to be created
and that should be deeply embedded (Blondy et al. 2015).
The performance of assets of major Australian banks is responsible for analysis of
financial stability. Development and growth of country is analyzed by important decisions and
competitive positions of respective banks. There has been consistency in nature of growth of
competition in banking sector and evaluation of commercial property is trend of banking sector.
Some of developments of banking sector involves securitization quintessence and presence of
banks along with change in assets. Moreover, decline in growth has been in terms of falling and
declining of finance companies, building societies and credit unions.
Background of Organizations:
Common wealth bank is multinational bank of Australia offering business in wide range
of areas. The mission of organization is to provide valuable services to their customers and it
was established under Common wealth bank Act, 1911. Bank has a tremendous growth in its
people and shareholder base.
Westpac is one of the oldest bank of Australia that was established in year 1817. The
quality of portfolio of assets offered by bank was improved by low new problem facilities,
stressed asserts and work out of impaired facilities. Commercial and institutional segments of
organization continued to perform well due to their protective balance sheets and cautious
customers. Adequate provisioning is maintained by organization that involves provision of
impaired assets and collectively assessed provisions to weighted assets credit risks. During the

6PRINCIPLES OF FINANCIAL MARKETS
financial year 2015, there were provisions relating to growth that is largely offset by impact of
standard exposures and run off in watch list. Mission of organization is to provide sufficient
returns to shareholders, customer and business professionals (Banerjee 2015).
Top down analysis:
Investors for evaluating the performance of organization by looking the several macro
factors such as GDP growth rate, inflation, interest rate, unemployment rate, political factors and
exchange rate use top down approach. An impressive economic progress has been recorded for
more than 25 years that is unmarred by recession. There has been a robust entrepreneur
development supported by well-functioning legal system, effective system of government and
independent bureaucracy.
Banking and finance industry contributed $ 148.9 billion to $ 1.6 trillion of Australian
economy for the year ending 2016. Value added for banking sector is highest on record. For the
year ending, growth in insurance and finance industry was recorded at 4.5%. For the past for
years, there has been consistent growth in banking sector between 3.8% and 4.5%. The contrition
of banking industry to the national economic activity has reached a high of 9.5% (bankers.asn.au
2017).

7PRINCIPLES OF FINANCIAL MARKETS
Banking industry value added:
(Source: bankers.asn.au 2017)
Over the four years as the effect of global financial crisis, there was a decline in the
contribution of banking industry toward the economy. However, there has been gradual increase
in contribution.
Banking sector contribution to economy:
(Source: bankers.asn.au 2017)

8PRINCIPLES OF FINANCIAL MARKETS
The growth of banking sector has outperformed the growth of overall economy of
Australia. Growth of this sector was double that the growth of economy.
For the financial year 2016, it has been highlighted by the results of major banks in
Australia that there is a slow growth in recorded earning growth that reflects the subdued
domestic economy and increased requirement of regulatory capital. Banking sector is
experiencing the challenge of competitive environment and lower interest rate resulting for
increased funding of customer deposits and asset repricing. In light of challenging economic
outlook, the major banks will continue to focus on productivity, capital efficiency, refinement of
business model and productivity (Van Horne 2014).
Overview of Australian Economy
(Source: bankers.asn.au 2017)

9PRINCIPLES OF FINANCIAL MARKETS
In order to offer and serving at best to Australian economy, banking sector has been
struggling in the past few years. One of the major contributor to the growth of gross domestic
product of country is GDP. The contribution of banking sector toward the growth of Australian
economy over the past five years is $ 25.9 billion and the percentage value stood at 13.4%.
Therefore, banking sector has contributed more than 10% of the economic growth of Australia.
There has been considerable contribution in the Australian economic sector towards the economy
that stood at 1.8% (Ogiela et al. 2015).
Other factor that needs to be crucially considered is the inflation factor that needs to be
considered while making repayment of debt value. Lower interest rate cannot be withstood that
has impact on gross domestic value of Australia. One of the biggest contributor to Australian
economy is banking sector as opined by many economists. An estimated 45000 people is
employed by this particular sector and the estimated amount of contribution of banking sector
stood at $ 140 million. Some of the major banks listed in Australian stock exchange includes
Westpac and Common wealth bank of Australia. 9.5% of economic activity received
contribution from banking sector and this was the highest contributor. Victorian and NSW
economies received great contribution from the banking sector.
It is expected that banking sector can significantly contribute to the growth of economy,
as the financial system of organization is robust.

10PRINCIPLES OF FINANCIAL MARKETS
GDP indicators:
(Source: bankers.asn.au 2017)
The contribution of banks toward economy is evaluated by analyzing performance of
banks. Growth of economy has been assisted by the sustainable growth in banks performances.
Overall growth of sector has been received assistance from strategic mission established by
banks for helping shareholders.
Furthermore, for conducting top down analysis, it is requires to ascertain the performance
of selected organization. The financial performance of Common wealth bank and Westpac bank
can be significantly affected by growth in GDP rate in coming years. Market capitalization of
both organizations can be enhanced if there is declining Unemployment and GDP growth rate.
Since, last few years performances of organization is expected to grow resulting from economy
growing pattern.

11PRINCIPLES OF FINANCIAL MARKETS
Domestic credit growth:
(Source: pwc.com.au 2017)
Domestic credit growth -There has been stability in the funding mix of major banks of
Australia including Westpac and Common wealth bank and the deposits of bank growth on
overall basis continued to increase.
Bottom up analysis of current financial situation of Westpac and Common wealth bank:
The bottom up approach takes into account approach of economy, industry and company.
This particular approach deals with the analysis of individual stocks and focuses on the
performance of specific organizations rather than the whole industry. Investors are required to
conduct a thorough analysis of the finance performance of organization prior to investing and
bottom up approach is a tool used for this purpose. This particular approach is consider suitable
when investors are seeking investment for long-term.
Analysis of financial performance of organization can be done by using the tool of ratio
analysis. Analyzing some particular ratios of organization would help in identifying the trend of

12PRINCIPLES OF FINANCIAL MARKETS
financial performance over long-term. Apart from identifying an organizations financial trend,
toll of ratio analysis also facilitates making comparison between different companies operating in
same sector.
Ratios that helps in ascertaining the financial position includes calculation of profitability
ratio, liquidity ratio, efficiency ratio, solvency ratio and growth ratio. Figures suggested by
calculation of these ratio helps in depicting overall financial position of particular organization.
The profitability position of organization is analyzed by calculating net profit margin.
Gross profit margin and dividend pay-out ratio. Operating profit is calculated as operating
income percentage with revenue generated from sales. Dividend pay-out ratio depicts total
amount of dividend that is payable to shareholders of organization in proportion of net income
generated by company (McKinney 2015).
Profitability ratio of CWB:
2011 2012 2013 2014 2015
39.00%
40.00%
41.00%
42.00%
43.00%
44.00%
45.00%
46.00%
47.00%
42.09%
45.17%
44.58%
46.56%
45.87%
Operating Margin
Operating Margin
Operating Margin of Common Wealth Bank of Australia:

13PRINCIPLES OF FINANCIAL MARKETS
Net Profit Margin
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%
34.00%
29.71%
32.14% 31.91%
33.50% 32.96%
Net Profit Margin
2011 2012 2013 2014 2015
Net profit Margin of CWB:
2011 2012 2013 2014 2015
0.00%
0.02%
0.04%
0.06%
0.05%
0.04%
0.02%
0.05% 0.04%
Dividend payout ratio
Dividend payout ratio
Dividend payout ratio of CWB:
Operating profit margin of Common wealth bank has witnessed fluctuation since year
2011. However, fluctuation was not much significant. Profit margin has increased initially and
decreased subsequently (Sweeting 2017). Operating profit margin for year 2015 stood 45.87% as
against 46.56% in year 2014 respectively. Net profit margin on other hand, has initially increased

14PRINCIPLES OF FINANCIAL MARKETS
to 33.50% in year 2014 as compared to 31.91% in year 2013 and value further fell to 32.96% in
year 2015 respectively. Dividend payout ratio in initial period of analysis stood at 0.04% in year
2012 that fell to 0.025 in year 2013 and again value rose to 0.05% and further decreased to
0.04% in year 2015. Therefore, it can be said that there have not been considerable fluctuations
in the profitability position of Common wealth bank.
Profitability ratio of Westpac bank:
2011 2012 2013 2014 2015
44.00%
46.00%
48.00%
50.00%
52.00%
54.00%
56.00%
58.00%
50.34%
49.28%
52.93%
57.13%
52.75%
Operating margin
Operating margin
Operating margin ratio of Westpac
2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5
41.34% 33.20% 36.57% 37.92% 37.02%
Net Profit Margin
Net Profit Margin

15PRINCIPLES OF FINANCIAL MARKETS
Net profit margin ratio of Westpac
2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5
0.02%
0.03% 0.03% 0.02% 0.02%
Dividend payput ratio
Dividend payput ratio
Dividend payout ratio of Westpac
Operating margin of Westpac has initially declined and subsequently increased in
year 2014. Value stood at 36.57% in year 2014 as against 37.02% in year 2015 respectively. In
the initial period of analysis, operating margin has witnessed significant reduction from 50.34%
in year 2011 to 49.28% in year and this value increased significantly to 57.13% in year 2014.
Dividend pay-out ratio has remained more or less same. Value stood for 2013 at 0.03% and this
reduced to 0.02% in year 2015.
When comparing performances of both organization, it can be deduced from above graph
that operating profit of common wealth bank is lower than that of Westpac. The profitability
position o Westpac is much better than common wealth bank. Reason is attributable to the fact
that former is experiencing low direct and indirect expense along with higher amount of sales
revenue generation.

16PRINCIPLES OF FINANCIAL MARKETS
Utilization capacity of common wealth bank is less compared to Westpac as reflected in
the sales revenue figures. However, there has been decline in value of net profit of Westpac. This
is so because the sales revenue of Westpac is lower than Common wealth bank. Therefore,
despite higher net profit generated by Common wealth bank, they have failed in managing and
reducing their operating expenses.
Dividend pay-out ratio of CWB is better and efficient in comparison to Westpac and it
can be induced from this fact, that dividend payment of CWB is more efficient and frequent
corresponding to their profit margin. Receiving dividend at the end of any financial year is the
main concern of investors.
Efficiency ratio of CWB:
Efficiency position of organization is reflected by calculation of efficiency ratio that
depicts the organization’s internal behavior and how well assets and liabilities are efficiently
utilized. Investors are able to get idea about asset turnover, total amount of receivable and
payables and utility of assets.
2011 2012 2013 2014 2015
0.0275
0.028
0.0285
0.029
0.0295
0.03
0.0305
0.031
0.0315
0.032
0.0325
0.03221744605097
48
0.02925812733128
53
0.03040238751356
69
0.02950153758789
9
0.03148105320763
96
Asset Turnover ratio
Asset Turnover ratio

17PRINCIPLES OF FINANCIAL MARKETS
Asset turnover ratio of CWB:
Asset turnover ratio depicts the value of sales that is generated by organization in relation
or proportion of value of assets. It is depicted from the graph that there has been wide fluctuation
in asset turnover ratio and value increased from 0.29 in year 2014 to 0.31 in year 2015
respectively. This value depicts the efficiency of organization in utilizing their current and fixed
assets.
Efficiency ratio of Westpac:
2011 2012 2013 2014 2015
0.024
0.0245
0.025
0.0255
0.026
0.0265
0.027
0.02523469625261
85
0.02664286296326
48
0.02675699071063
43
0.02586392542181
15
0.02664758987189
65
Asset Turnover ratio
Asset Turnover ratio
Asset turnover ratio of Westpac:
It can be depicted from above graph that asset turnover ratio of Westpac has increased in
year 2015 to 0.026 as against 0.025 in year 2014. An increase in ratio is indicative of the fact that
efficiency of organization in utilizing their assets for generating revenue has increased in recent
year. This is regarded as favorable situation in investor’s eyes as they perceive that organization
is efficiently utilizing assets for generating revenue (Karadag 2015).

18PRINCIPLES OF FINANCIAL MARKETS
From the above analysis and by observing graphs, it can be said that a higher percentage
of sales to total assets has been utilized by CWB as compared to Westpac. Therefore, in this
regard, CWB is considered as more efficient compared to Westpac.
Liquidity ratio of CWB:
2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
1.328339418355791.3251619518106
0.99451641103075
6
2.26801902516362
0.89207681045162
8
Current ratio
Current ratio
Current ratio of CWB:
The liquidity position of organization is analyzed by calculating liquidity ratio such as
current ratio. Ability of organization to utilize its current assets and make its use for making
payment to short-term creditors and pay off short term obligations is depicted by using current
ratio. It depicts how efficient an organization is to make or clear its short-term obligations using
their current assets.
From the above graph, it can be said that current ratio of CWB has witnessed significant
decline in current ratio. Ratio has fallen from 2.26 in year 2014 to 0.89 in year 2015. It is
suggested by figure that efficiency of organization utilize their current assets for making short-

19PRINCIPLES OF FINANCIAL MARKETS
term payments has decreased. It depicts that there is adequate cash flow that helps in making
payment to short-term creditors.
Liquidity ration of Westpac:
2011 2012 2013 2014 2015
0
0.5
1
1.5
2
2.5
3
3.5
1.829382579933
85
3.258064516129
03
2.351087848932
68 1.798735620271
53 1.263777893098
08
Current ratio
Current ratio
Current ratio of Westpac:
The liquidity position of Westpac has reduced as depicted by fall in current ratio. Current
ratio stood at 1.798 for financial year 2014 that reduced considerably to 1.26 in year 2015
respectively. This fall in ratio is indicative of the fact that ability of organization to utilize their
current assets for meeting their obligations has decline. However, the liquidity position of
Westpac is much higher as compared to CWB. This shows that CWB is less efficient in utilizing
their current assets for meeting their obligations. There has been variation in current ratio for
both the organizations over the years and Westpac can make their short-term obligations
payment with ease as against CWB. Significant fall in current ratio of CWB has been due to
selling off current assets due to obsolescence.

20PRINCIPLES OF FINANCIAL MARKETS
Summary and Recommendations:
Banking sector plays a vital role in the economic development of Australia and it is
ascertained from the analysis that they would have prosperous growth in recent years. From the
above analysis and evaluation of banking sector of Australia, it can be said that although
performance of few banks have declined due to their slow earning. Conducting top down and
bottom up analysis helps in providing actual scenario of organization and the industry in which it
operates. Top down analysis depicted the contribution of banking sector to economy in terms of
Inflation, gross domestic product, employment and overall functioning of economy. Banking
sector contributes a significant proportion to the Gross domestic product of economy.
Using the bottom down approach has exhibited the performance of two large banks
operating in this sector that is Westpac and Common wealth bank of Australia. In terms of
liquidity and profitability position, Westpac has performed more efficiently as compared to
Common wealth bank. CWB has outperformed the market standard in terms of sales generated
and profit figure. Share prices of banks is significantly influenced by the performance of market
and the dividend policy that they adopt.
During last few financial year, it has been ascertained that CWB has not been able to
maintain their liquidity position and have not been able to restrain their ongoing operating
expenses. Over the last few years, Westpac has maintained a stable profitability and liquidity
position and have generated favorable return to investors.
When looking at economic scenario of Australia, some of economic factor was not
favorable such as interest rate, current account deficit and unemployment rate. Therefore,
investors seeking investment for long-term should make investment in both companies. When

21PRINCIPLES OF FINANCIAL MARKETS
investor seek investment for short-term, it should make investment in Westpac that would
generate favorable return for short-term.

22PRINCIPLES OF FINANCIAL MARKETS
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