Risk Assessment Report for National Australian Bank (NAB)

This report analyzes the financial results of National Australian Bank (NAB) and makes a comparative risk assessment of the bank with other banks operating in the country. The report covers various types of risks, including credit risks, strategic risks, market risks, credit portfolio risks, liquidity risk, and foreign exchange risks.

Running head: INSTITUTIONAL ASSETS AND LIABILITIES
Institutional Assets and Liabilities
Name of the Student:
Name of the University:
Author’s Note

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INSTITUTIONAL ASSETS AND LIABILITIES
Executive Summary
The main purpose of this assessment is to formulate a risk assessment report which needs to
cover all the significant risks which are involved in the business of National Australian Bank
(NAB). The assessment incorporates discussion regarding various risks which can affect the
business of NAB and how the management can minimize the same. The risks are then to
comparatively analyzed with some of the close competitors of the business and analyzed
accordingly. The report also shows recommendations as to how the management of NAB can
reduce the risks which are associated with the business.

2
INSTITUTIONAL ASSETS AND LIABILITIES
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Strategic Risks.............................................................................................................................3
Interest Rate Risks.......................................................................................................................4
Market Risks................................................................................................................................5
Credit Risks.................................................................................................................................5
Credit Portfolio Risks..................................................................................................................7
Liquidity Risks.............................................................................................................................8
Foreign Exchange Risk................................................................................................................9
Recommendation...........................................................................................................................10
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11
Appendix........................................................................................................................................13

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INSTITUTIONAL ASSETS AND LIABILITIES
Introduction
The main purpose of this assessment is to analyze the financial results which are
available for National Australia Bank Ltd (NAB) in order to make a comparative risks
assessment of the bank with other banks which are operating in the country. The risk assessment
will be considering various types of risks which are credit risks, strategic risks, market risks,
credit portfolio risks, liquidity risk and foreign exchange risks. The risks for the NAB is to be
considered focusing on the operations of the business.
Discussion
Strategic Risks
As per the annual report of NAB, the vision and main goal of the bank is to achieve the
reputation of most respected bank in Australia. In order to achieve this vision, the management
of the bank has formulated a strategic path which aims towards customer satisfaction. The annual
reports of the business also specify that the management of the NAB focuses on four customer
segments (Begley, Purnanandam & Zheng, 2017). The management of NAB has achieved
growth as per the analysis of the financial statements which is presented for the year 2017. The
banking sector in Australia can be said to be on a growth phase. The main operations of NAB is
based on retail banking services as well as Wholesale banking which is provided by the
management. Similarly, other banks such as Westpac, ANZ and Commonwealth Bank are also
engaged in retail banking business offering the customers various services on a large scale.
As per the annual report of 2017, NAB has around 1590 branches which are set across
different locations and approximately employs around 33000 employees across different
locations of the business. This shows that the bank employs significant number of employees in

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INSTITUTIONAL ASSETS AND LIABILITIES
the business. The company has large scale of operation judging from the number of branches
which the bank has and also by the number of employees which is employed by the bank.
The strategic risks of a business can be analyzed properly by analyzing the estimate of
non-interest income/ operating income of the banks. The estimate which is shown for 2017
shows that the value of the ratio has significantly fallen which specifies that the portion on non-
interest revenue of the business has fallen which needs to be improved by the business. A
comparative analysis which is shown with a help of graph is shown below:
Non-interest Income/Operating Revenue
2017 2016 2015 2014 2013
CBA 28.84 29.29 30.89 31.3 31.57
ANZ 23.5 22.01 28.93 28.29 23.51
NAB 24.3 26.62 31.4 27.63 25.49
Westpac 27.85 27.71 39.73 32.15 31.13
2017 2016 2015 2014 2013
0
5
10
15
20
25
30
35
40
45
Non interest Income/Operati ng
Revenue
CBA ANZ NAB Westpac
The above graph shows that the maximum non-interest income is made by CBA for the
year 2017. In an analysis which is conducted for a period of five years, the maximum value for

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INSTITUTIONAL ASSETS AND LIABILITIES
the estimate was achieved by Westpac bank in 2015 as shown in above figure. The management
of NAB needs to improve this estimate as the same is related to the performance of the bank and
the same can be done by increasing the deposits for the business.
Interest Rate Risks
Interest rate risks takes place due to fluctuation in the interest rate of the business which
can result in earning losses for the business and also affect the economic value added for the
business. Such a risk can also arise from customer’s demands for interest related products of the
business (DellʼAriccia, Laeven & Marquez, 2014). The annual report of NAB shows that the
business has hedge contracts is shown in the notes to account section of the financial statement
which is present due to the minimizing the risks of such interest risk and currency risks
fluctuation of the business (Cade, 2013). The hedge contracts allow the management to maintain
the risks associated with fluctuations in interest rate.
The notes to account section of the annual report of NAB specifies the sources which are
related to interest rate risks related to banking books and the same is shown in points form
below:
 Repricing risks which is result of changes in the overall level of interest of the business
and can also arise due to mismatch in banking book terms of the business (Nab.com.au,
2018).
 Yield curve risks arises from changes in the relative level of interest rate of the business.
 Basis risks is another risk which arises from the difference between actual and expected
interest margin of the business.

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INSTITUTIONAL ASSETS AND LIABILITIES
The interest risks of the business are shown to be significant enough to affect the financial
statements of the business and thereby also affect the decision-making process of the business.
The key financial ratios which are also shown in the appendix section shows net interest margin
of the business which is shown to be 1.79%. The interest rate risks of the business has slightly
been on the high due to the additional credit which is being offered by the bank to the public.
The same has increased which shows that the demand for loans has increased which can be
considered favorable for the bank. The net interest margin all other banks which are considered
for comparative analysis is shown to higher than NAB. This means that the interest income of
NAB is not much in comparison to other banks which are operating in the industry.
Market Risks
Market risks refers to the risk which a business faces which can result in trading losses
for the bank due to changes in equity capital, interest rate, credit spreads and other foreign
exchanges rates. In this respect the equity to total asset margin of the business is shown to have
slightly fallen which represent fall in the equity capital of the business by a slight margin. The
capital fund to total margin ratio is shown to have decline from previous year analysis which is
effectively shown in the financial. The bank is also engaged in foreign trading in the form of
investments which are undertaken by the business during the period. The losses which are
incurred by the bank due to the changes in the trading capacity of the business. The market risks
factors can directly affect the earnings of the business which the business makes through trading.
Credit Risks
The credit risks of a bank arise when there exists a possibility of non-payment of loans by
the borrower of the loans. In other words, the borrower of loan might not be able to meet the
obligation of loan of the business (Waemustafa & Sukri, 2015). In order to analyze the credit

7
INSTITUTIONAL ASSETS AND LIABILITIES
risks of the business certain key financial ratios are to be considered for analysis which are
shown in the appendix section of the annual report of the business. The net loan to total assets of
the business shows that the estimate has increased during the year in comparison to previous year
analysis. This shows that the loan facilities which is provided by the bank has increased which
can be said to be a favorable sign for the business. The increase in the estimate suggest that the
bank is offering more loan facilities to the customers and therefore the increase can be said to be
a favorable sign for the business. On the other hand, the non-performing loans represent a
borrower who is not meeting the obligations of loans and the same increases the credit risks of
the business. It is always considered for a business to have low non-performing loans in the total
loans figures which is provided by the bank.
The net loans to deposits and short-term funding to is shown to have slightly improved
during the current year which shows that the business is performing well in terms of short term
funding requirements of the business. A graphical diagram is shown in figure below:
Net Loans to Total Assest
2017 2016 2015 2014 2013
CBA 75.00 74.687 73.411 76.17 74.644
ANZ 76.40 71.275 72.093 74.70 75.418
NAB 71.23 69.796 60.705 61.26 63.792
Westpac 80.40 78.876 76.748 75.29 76.475

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INSTITUTIONAL ASSETS AND LIABILITIES
2017 2016 2015 2014 2013
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Net Loans to Total Assest
CBA ANZ NAB Westpac
The fluctuation in the estimate of net loans to total assets of the business is shown in the
figure above. The above estimates show that Westpac has a better estimate which shows that the
loan facilities which are provided by the bank is better in the industry. The estimate is shown to
have improved for NAB during the year on a progressive basis.
Credit Portfolio Risks
Credit portfolio risks refers to the collection of loans which can be made up of car loans
and home loans and other loans which are kept by financial institution (Golin & Delhaise, 2013).
The credit portfolio risks of a business can be effectively ascertained with the help of certain
ratios which are discussed in details. The credit portfolio risks reflect the loans which are taken
by the management of the business.
Net Interest Margin
2017 2016 2015 2014 2013
CBA 1.91 1.95 1.982 2.03 1.969
ANZ 2.04 2.039 2.189 2.33 2.289
NAB 1.79 1.591 1.44 1.67 1.79

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INSTITUTIONAL ASSETS AND LIABILITIES
Westpac 1.92 1.92 1.903 1.95 1.96
2017 2016 2015 2014 2013
0.00
0.50
1.00
1.50
2.00
2.50
Net Interest Margin
CBA ANZ NAB Westpac
The net interest margin of the business is shown in the above figure which represent the
loan which is provided by the business. The net interest margin for ANZ is shown to be highest
for the business. After ANZ, the net interest margin of CBA is shown to be better than Westpac
and NAB (Shim, 2013). This shows that the credit portfolio of ANZ is shown to be better in
comparison to other banks which are operating in Australia.
Liquidity Risks
The liquidity risks of the business reflect the risks to cash position of the business for the
year and also shows the available cash which can be used by the business for carrying out the
day to day business activities (Gertler & Kiyotaki, 2015). In order to analysis the liquidity of a
bank four variables is taken as a basis which are money market variables, loans, deposits and
liquid assets of the business. An important ratio which can be considered for estimating the
liquidity position of the bank is Net loan to total deposits and borrowings made by a business.

10
INSTITUTIONAL ASSETS AND LIABILITIES
The estimate is shown to be 78.86 for the year 2018 for NAB which has improved from the
estimate which is presented for 2016. The liquid assets to total debt borrowings of the business
is also shown to have increased in terms of previous year analysis which is significant as the
same represent that the improvement in the liquidity position of the business (Calomiris, Heider
& Hoerova, 2015). The estimate is shown to be 18.72 for the year and the estimate which was
shown in 2016 is shown to be 17.61.
On the basis of comparative analysis with the competing banks, the estimate is shown to
be highest for NAB which suggest that the business is more exposed to money market variable
(Imbierowicz & Rauch, 2014). In addition to this, it also signifies that the management of the
business is effectively maintaining the liquidity status of the business and also meeting all the
current obligation of the bank effectively.
Foreign Exchange Risk
The foreign exchange risks arise when there is volatility in the foreign currency in which
the business is engaged in trading. The risk states that the business might incur losses in
translating the foreign currency into domestic currency due to fluctuations in foreign currency
rates of the business (Mancini, Ranaldo & Wrampelmeyer, 2013). As per the annual report of
NAB, the notes to account section covers disclosure requirements which is shown related to the
risks of the business. The risks which is related to foreign exchange is shown to be 10.1 which
has improved from previous year estimate which is shown to be 15.5. This improvement suggest
that the fluctuation has reduced slightly. In order to combat the risks which are associated with
foreign exchange fluctuations, the management has made investments in hedge contracts
(Cenedese, Sarno & Tsiakas, 2014). Foreign exchange and translation risk arises from the impact
of currency movements which can directly affect the values which are shown in the financial

11
INSTITUTIONAL ASSETS AND LIABILITIES
statements and also on the financial performance of the business. The total assets which the
business as per the annual report of 2017 for the business is shown to be $ 13,841 million and the
same has increased from previous year analysis. The liabilities which are associated with foreign
exchange contracts have also increased as shown in the annual reports of the business for the
year.
Recommendation
The recommendation which can be offered to the management of NAB are listed below
in details:
 The credit risks of the business are shown to be high which can be reduced by offering
loans to customers who have appropriate credit ratings and favorable collateral securities.
 The liquidity risks of the business is shown to be favorable but the same can be improved
further by encouraging more deposits from the customers.
 The credit portfolio risks of the business can be maintained by appropriately balancing
the portfolio of the business and loan should be offered to customers considering the
persons track record and also the liquidity position of the business.
Conclusion
The analysis of market conditions and the various information which is available from
the annual reports of the business, the management faces lots of risks which can be managed by
following an appropriate framework for risk management in the business. The credit risks and
market risks for the business is shown to be high and there is also slight rise or fall in other risks
of the business which can be controlled by following the recommendations provided above.

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INSTITUTIONAL ASSETS AND LIABILITIES
Reference
Begley, T. A., Purnanandam, A., & Zheng, K. (2017). The strategic underreporting of bank
risk. The Review of Financial Studies, 30(10), 3376-3415.
Cade, E. (2013). Managing banking risks: reducing uncertainty to improve bank performance.
Routledge.
Calomiris, C., Heider, F., & Hoerova, M. (2015). A theory of bank liquidity requirements.
Cenedese, G., Sarno, L., & Tsiakas, I. (2014). Foreign exchange risk and the predictability of
carry trade returns. Journal of Banking & Finance, 42, 302-313.
DellʼAriccia, G., Laeven, L., & Marquez, R. (2014). Real interest rates, leverage, and bank risk-
taking. Journal of Economic Theory, 149, 65-99.
Gertler, M., & Kiyotaki, N. (2015). Banking, liquidity, and bank runs in an infinite horizon
economy. American Economic Review, 105(7), 2011-43.
Golin, J., & Delhaise, P. (2013). The bank credit analysis handbook: a guide for analysts,
bankers and investors. John Wiley & Sons.
Imbierowicz, B., & Rauch, C. (2014). The relationship between liquidity risk and credit risk in
banks. Journal of Banking & Finance, 40, 242-256.
Mancini, L., Ranaldo, A., & Wrampelmeyer, J. (2013). Liquidity in the foreign exchange market:
Measurement, commonality, and risk premiums. The Journal of Finance, 68(5), 1805-
1841.

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INSTITUTIONAL ASSETS AND LIABILITIES
Nab.com.au (2018). . Retrieved 3 October 2018, from
https://www.nab.com.au/content/dam/nabrwd/documents/reports/corporate/2017-annual-
financial-report.pdf
Shim, J. (2013). Bank capital buffer and portfolio risk: The influence of business cycle and
revenue diversification. Journal of Banking & Finance, 37(3), 761-772.
Waemustafa, W., & Sukri, S. (2015). Bank specific and macroeconomics dynamic determinants
of credit risk in Islamic banks and conventional banks. International Journal of
Economics and Financial Issues, 5(2), 476-481.

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INSTITUTIONAL ASSETS AND LIABILITIES
Appendix
Additional
consolidated
statements
IFRS IFRS IFRS IFRS IFRS
Audited Audited Audited Audited Audited
Original Restated Restated Restated Restated
30/09/2017 30/09/2016 30/09/2015 30/09/2014 30/09/2013
12 months 12 months 12 months 12 months 12 months
th AUD th AUD th AUD th AUD th AUD
Assets quality
Loan loss res /
Gross loans%
0.57 0.57 0.60 0.57 0.77
Loan loss prov
/ Net int rev%
6.25 6.29 5.88 6.37 13.48
Loan loss res /
Impaired loans%
193.05 125.11 178.68 79.85 69.47
Impaired loans
/ Gross loans%
0.30 0.46 0.34 0.72 1.11
NCO / Average
gross loans%
0.15 0.14 0.21 0.30 0.42
NCO / Net inc
bef ln lss prov%
13.89 66.50 16.44 25.60 29.85
Impaired loans
/ Equity%
3.32 4.94 3.61 8.50 13.03
Unreserved
impaired loans /
Equity%
n.s. n.s. n.s. 1.71 3.98
Additional
consolidated
statements
IFRS IFRS IFRS IFRS IFRS
Audited Audited Audited Audited Audited
Original Restated Restated Restated Restated
30/09/2017 30/09/2016 30/09/2015 30/09/2014 30/09/2013
12 months 12 months 12 months 12 months 12 months
th AUD th AUD th AUD th AUD th AUD
Capital
Tier 1 ratio% 12.41 12.19 12.44 10.81 10.35
Total capital
ratio%
14.58 14.14 14.15 12.16 11.80
Equity / Tot
assets%
6.39 6.48 5.71 5.20 5.48
Equity / Net
loans%
8.97 9.29 9.41 8.49 8.59
Equity / Cust &
short term funding
%
9.37 10.00 10.04 8.81 9.19
Equity /
Liabilities%
6.97 7.08 6.16 5.55 5.87
Cap funds /
Tot assets%
8.38 8.52 7.24 6.38 6.55
Cap funds /
Net loans%
11.77 12.20 11.93 10.42 10.27
Cap funds /
Dep & ST funding
%
12.30 13.13 12.72 10.81 10.99
Cap funds / 9.15 9.31 7.80 6.82 7.01

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INSTITUTIONAL ASSETS AND LIABILITIES
Liabilities%
Subord debt /
Cap funds%
14.46 14.44 12.02 10.22 10.79
Additional
consolidated
statements
IFRS IFRS IFRS IFRS IFRS
Audited Audited Audited Audited Audited
Original Restated Restated Restated Restated
30/09/2017 30/09/2016 30/09/2015 30/09/2014 30/09/2013
12 months 12 months 12 months 12 months 12 months
th AUD th AUD th AUD th AUD th AUD
Operations
Net interest
margin%
1.79 1.59 1.44 1.67 1.79
Net int rev /
Avg assets%
1.69 1.49 1.36 1.59 1.70
Oth op inc /
Avg assets%
0.54 0.54 0.62 0.61 0.58
Non int exp /
Avg assets%
1.12 1.00 0.94 1.27 1.25
Pre-tax op
inc / Avg assets%
1.11 1.04 1.04 0.92 1.03
Non op items
& taxes / Avg ast
%
-0.32 -0.30 -0.30 -0.31 -0.35
Return On Avg
Assets (ROAA)%
0.68 0.04 0.70 0.63 0.68
Return On Avg
Equity (ROAE)%
10.50 0.68 12.73 11.73 12.44
Dividend pay-
out%
n.a. n.a. n.a. n.a. n.a.
Inc net of dist /
Avg equity%
n.a. n.a. n.a. n.a. n.a.
Non op items /
Net income%
-0.38 -1.68 -0.92 0.15 -0.21
Cost to
income ratio%
45.41 44.40 43.26 53.45 44.76
Recurring
earning power%
1.22 1.13 1.12 1.02 1.26
Additional
consolidated
statements
IFRS IFRS IFRS IFRS IFRS
Audited Audited Audited Audited Audited
Original Restated Restated Restated Restated
30/09/2017 30/09/2016 30/09/2015 30/09/2014 30/09/2013
12 months 12 months 12 months 12 months 12 months
th AUD th AUD th AUD th AUD th AUD
Liquidity
Interbank ratio
%
92.42 78.60 71.77 97.54 136.82
Net loans / Tot
assets%
71.23 69.80 60.71 61.26 63.79
Net loans /
Dep & ST funding
%
104.51 107.64 106.69 103.78 106.99
Net loans / Tot
dep & bor%
78.86 77.32 74.38 74.38 77.76
Liquid assets /
Dep & ST funding
24.81 24.52 23.30 24.14 23.32

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INSTITUTIONAL ASSETS AND LIABILITIES
%
Liquid assets /
Tot dep & bor%
18.72 17.61 16.24 17.30 16.95