Assessing the Impact of Liquidity on Australian Banks' Profitability

This research paper examines the impact of liquidity on the profitability of Australian banks. It begins with an executive summary, followed by an introduction that frames the problem statement, research aims, objectives, and questions. The paper then delves into a literature review, exploring liquidity concepts, theories of liquidity management (including Anticipated Income, Shift-ability, Liquidity Management, and Commercial Loan theories), bank profitability concepts, and methods of measurement. The methodology section outlines data collection and analysis processes, followed by data analysis and findings, including descriptive statistics and correlation analyses. The discussion chapter interprets the findings, while the conclusion addresses the research questions, acknowledges limitations, and offers recommendations. The research aims to determine the profitability and liquidity positions of Australian banks and assess the impact of liquidity on their profitability, employing financial ratios and empirical review to support its conclusions.

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

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
1.4 Research Question
The research question is constructed in order to take the research paper forward and
thereby construct the aspects in accordance to which the issues related to the research can be
understood and the research result can be ascertained. The research questions are as follows:
Q1. What is the degree of profitability of the Australian banks?
Q2. What is the position of liquidity of the Australian banks that are functioning in the economy?
Q3. Is there any impact of liquidity on the profitability of the Australian banks?

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Chapter 2: Literature Review
This research paper explains certain past papers and studies about the impact of
management of liquidity on the profitability of the banks and an understanding about the
economy of Australia. This section of the paper explains certain theoretical elements associated
to the liquidity concepts of the banks and the requirement of liquidity, the theories associated
with the management of the liquidity, profitability of the banks and their measures.
2.1 Liquidity Concept
The liquidity of the banks explains the capability to satisfy their financial responsibilities
as they become due (Alalaya, & Al Khattab 2015). The liquidity in the commercial banks
addresses the capability of the banks to finance their contractual responsibilities when they are
due and these responsibilities can be inclusive of investments, lending and deposit withdrawal
and the maturity of the liabilities which occurs in the general course of the actions taken by the
banks.
2.2 Theories of Liquidity Management
There are several theories of liquidity management and each one of them has been
explained as follows:
2.2.1 Anticipated Income Theory
This theory encourages the bankers to assess their portfolio of the loans which acts a
source of liquidity. The theory of anticipated income has influenced the bankers to treat the long
term loans as the probable liquidity sources (Duraj, & Moci 2015). By making use of the
anticipated income theory, the loans are specifically paid off by the borrower in various
instalments. In this manner, the loan portfolio of the banks gives the banks with sustainable flow
of cash that gets added to the liquidity of the banks (Mustafa, & Datta 2017). Furthermore, even

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
though the loans are long term in nature, in case of crisis of liquidity, the banks can sell off their
loans in order to gather the required cash in the secondary markets.
2.2.2 Shift-ability Theory
This theory is a measure to maintain the liquidity of the banks by assisting the
transferring of the assets. When the bank does not have ready money, then it is capable of selling
the assets to a bank that is more liquid (Ghosh, 2016). This process assists the banking process to
function in an effective manner: with less number of reserves and even investing in the long term
assets. In accordance to this theory, the banking process looks to avoid the crisis related to
liquidity by assisting the banks to sell or repo at effective prices.
2.2.3 Liquidity Management Theory
This theory explains that the banks can fulfil the demand for liquidity by borrowing from
the capital and the money markets (Chronopoulos et al., 2015). The principle contribution of this
theory looks to assess both aspects of the balance sheet of the banks as a source of liquidity.
2.2.4 Commercial Loan Theory
This theory explains that liquidity in the commercial banks are attained automatically
with the assistance of self-liquidation of the loan which is being given for a shorter time frame in
order to finance the working capital in which the borrowers refund the amount that has been
borrowed after completing the trade cycle in a successful manner (Ndoka et al., 2016). In
accordance to this theory, the banks do not loan money for the intention of buying real estates
and consumer goods and even investing in the bonds and stocks because of the tenure of the
anticipated payback period for these investments in which this theory is effective for the traders
who requires finance for their distinct transactions associated with trading and for the shorter
time frame (Narwal, & Jindal 2015).

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2.3 Concepts of the bank profitability
The profitability of the banks is the capability of the banks to create revenue over the
expenses in association to the capital base of the bank. An effective and profitable banking sector
is effectively able to endure the negative shocks and contribute to the sustenance of the financial
process (Rahman et al., 2015).
Profitability in the general sense is an association among the profit that is created by the
organizations and the investments that have contributed to the attainment of the profits and the
profitability ratios computes the effectiveness with which an organization transforms their
business operations into profits (Tan, 2016). The profit margin evaluates the capability to
transform the extent of revenue to profits. The return on assets computes the capability to utilise
the assets to manufacture net income (Borio et al., 2017). The return on equity makes a
comparison of the net income to the equity of the shareholders.
2.4 Measurement of Liquidity
Liquidity acts as a measure of the capability and the easiness with which the assets can be
transformed into cash. The liquid assets are those that can be converted into cash in order to
satisfy the financial obligations (Marozva, 2016). In order to remain viable, a financial
organization needs to have adequate liquid assets in order to fulfil their close obligations like the
withdrawals undertaken by the depositors. The key measures of liquidity are capital ratio, quick
ratio, current ratio, cash ratio and investment ratio.

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
2.5 Evaluation of the profitability of the banks
In order to ascertain the degree of the capability of the banks in order to make profits
from the money that has been invested, there are various financial ratios associated to both the
depositors and owners (Madhou et al., 2015).
2.6 Empirical Review
The impact of management of liquidity on the profitability of the banks has been assessed
by various researchers. Hussanie et al., (2017) assessed the liquidity management and the
profitability of the commercial banks in Nigeria. The results of this assessment explains that
there is a key relationship among the profitability and liquidity. This explains that profitability in
the commercial banks is vitally influenced by liquidity and vice versa.
Tran et al., (2016) looked to explain the association among the profitability and liquidity.
The key outcome of the research explains that each of the ratios has a vital impact on the
financial scenario of the organizations with variable amounts along with the liquidity ratios in the
initial phase. The profitability ratios have a key role to play in the financial scenarios of the
organizations.
Chen et al., (2017) examined the factors of liquidity risk and evaluated their effect on the
Pakistani banks. The outcome of the paper explains that there is a key effect in the factors of
liquidity risks on the profitability of the banks in which a rise in the deposits leads to the rise in
the profitability of the banks in accordance to lowering the reliance on the central banks in
satisfying the obligations of the customers and the profitability is impacted negatively by the
assignment of the liquidity gaps and non-performing loans.

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
Tan et al., (2017) assessed the effect of the performance of the liquidity in commercial
banks and the results indicate that there is a positive relationship among the management of
liquidity and presence of any banks.
Chaudhary, & Abbas (2017) investigated empirically the impact of effective liquidity
management on the performance of banking in Nigeria. The results from the assessment have
been clear and robust and explains that there is a key relationship among effective management
of liquidity and the performance of the banks and explains that efficient management of liquidity
develops the effectiveness of the banks. These results have been influential in providing an
understanding of the impact of liquidity in order to have an understanding of profitability in the
Australian banks and accordingly proceed with the research paper in order to gain effective
results.

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Chapter 3: Research Methodology
3.1 Process of data collection
The data gathering aim and objective of the paper has been to have an understanding
about the effect of liquidity on the profitability of the Australian banks. The research undertakes
descriptive research design and the paper looks to gather data through secondary sources and the
secondary information have been gathered from the annual report of the banks that have been
chosen in order to gain the return on assets and quick ratio of the banks (Al-Jafari, & Al Samman
2015). Data has been collected for the year 2016-17 and 2015-16 in order to have an
understanding about the changes and the effect of liquidity on the profitability of the Australian
banks. Secondary data has been collected even through internet websites, journals and books
with the help of which the analysis of the paper can be taken forward. The results from the past
researches of similar researches have even taken into consideration with the help of which
effective results have been obtained and use of these researches have been found to be
reasonable and cost effective (Gyamerah, & Amoah 2015). This kind of data is helpful in
addressing the current issues and can thereby gain the results that is desired. The information that
is collected are quantitative and this is effective in having an understanding of the future
mechanisms that would be used.
3.2 Data Analysis
This research paper has gathered quantitative data and this kind of information can be
processed with the help of the process of quantitative data analysis. Ariyadasa et al., (2017) have
expressed that the process of quantitative data process is a methodical process for the assessment
of the data with the help of which the data that are numerical data can be used to have an

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
understanding about the results that is desired. The paper would look to assess the independent
and dependent variables so that an idea about how liquidity has an effect in the Australian bank’s
profitability. The information has gone through assessments through different tools which aids in
providing outcomes that is required in this paper.

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Chapter 4: Data Analysis and Findings
The data analysis and findings section of the research paper tries to assess the data that
has been collected by undertaking descriptive statistical method and the correlation analysis in
order to make a comparison of two years and thereby understand the impact of liquidity on the
profitability of the Australian banks. The banks that have been selected are National Australia
Bank Ltd, Commonwealth Bank of Australia and Bank of Queensland Ltd. The return on asset
(ROA) and the net profit margin of the three companies for the year 2014-15 and 2015-16 have
been taken into consideration in order to have an understanding of the result of the topic.
4.1 Descriptive Statistics
Descriptive Statistics for the year 2014-15
Return on Asset Net Profit Margin
Mean 0.81 Mean 28.48
Standard Error 0.14 Standard Error
3.1716
9
Median 0.67 Median 29.23
Standard Deviation 0.242487113 Standard Deviation
5.4935
3
Sample Variance 0.0588 Sample Variance
30.178
9
Skewness 1.732050808 Skewness -0.6029
Range 0.42 Range 10.91
Minimum 0.67 Minimum 22.65
Maximum 1.09 Maximum 33.56
Sum 2.43 Sum 85.44
Count 3 Count 3
Confidence Level(95.0%) 0.602371382
Confidence
Level(95.0%)
13.646
7

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
The values that have been attained for return on asset for the three banks explains that the
mean comes to 0.81 and the standard error comes to 0.14. The median and the standard deviation
comes to 0.67 and 0.242. On the other hand, the value of net profit margin is seen to be 28.48 for
mean and the standard error coming to 3.17. The median for net profit margin is 29.23 and the
standard deviation is 5.49. The values indicate that the companies have effective level of return
on assets and net profit margin.
Descriptive Statistics for the year 2015-16
Return on Asset Net Profit Margin
Mean 0.576666667 Mean
21.693
3
Standard Error 0.29042115 Standard Error 10.261
Median 0.68 Median 30.26
Standard Deviation 0.503024188 Standard Deviation
17.772
5
Sample Variance 0.253033333 Sample Variance
315.86
3
Skewness -0.885399612 Skewness -1.6651
Range 0.99 Range 32.3
Minimum 0.03 Minimum 1.26
Maximum 1.02 Maximum 33.56
Sum 1.73 Sum 65.08
Count 3 Count 3
Confidence Level(95.0%) 1.249581354
Confidence
Level(95.0%)
44.149
4
The descriptive statistics for the return on asset for the year 2015-16 has a mean of 0.576
and the standard error of the same is 0.29. The median value is 0.68 and standard deviation is
0.503. The value for net profit margin in accordance to the mean is 21.69. The standard error is
10.261 while the median is 30.26. The standard deviation is 17.77 and the figures expresses that

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
no variable changes have been seen for the banks in the next year in accordance to the previous
year.
4.2 Correlation
Correlation for the year 2014-15
Correlation 0.800834254
MSE 6.348014782
The correlation for the three banks in accordance to return on asset and net profit margin
indicates that there exists a positive relationship among the same as the value comes to 0.800 as
the value is close to 1. The figure explains that return on asset and net profit margin are
interrelated to each other and therefore have direct impact on each other. The mean squared
deviation for the same comes to 6.34 and this value shows that return on asset and net profit
margin are effective.
Correlation for the year 2015-16
Correlation 0.968472885
MSE 6.585598302
The correlation for return on asset and net profit margin for the year 2015-16 for the three
selected banks indicate that the value comes to 0.9684 and this figure explains that this figure is
very close to 1 and thereby explaining that the two values are mutually related to each other and
the value is positively correlated. The mean squared deviation comes to 6.585 for the two

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
variables and these values indicate that liquidity has significant level of impact on the
profitability of the three Australian banks that have been taken into consideration.
Chapter 5: Discussion
The discussion that is undertaken looks to explain the results that have been attained in
the previous section. The discussion of the same are as follows:
5.1 Descriptive Statistics
The results that have been obtained for the three banks for the year 2014-15 and 2015-16
indicates that the mean, median and standard error has been good and effective and have been
able to explain that the banks have been performing efficiently and have been able to generate
profit according to their goals and objectives (Sufian, & Kamarudin 2015). There has been a rise
in the standard error in the year 2015-16 in accordance to the previous year it indicates that the
banks have been maintaining their operational level as there has not been a significant change in
their return on asset and net profit margin.
5.2 Correlation
The assessment of the correlation among the return on asset and net profit margin for the
year 2014-15 explains that there has been key level of relationship and the two variables are
positively related and are directly associated to each other. In the similar manner, correlation for
the year 2015-16 is even higher than the previous year and the figure is much closer to 1 which
indicates that the two variables are related directly to each other. The results therefore explains

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
that liquidity has significant level of impact on the profitability of the Australian banks and
therefore changes in the liquidity would directly have an impact on the profitability either
negatively or positively (Claessens, & Horen 2014).
Chapter 6: Conclusion, Limitation and Recommendation
6.1 Conclusion (Addressing the aims and questions)
The assessment of the results that have been attained explains that the research has been
able to answer the research aims and questions and thereby have been able to conclude the
research results. The explanation of the research questions have been given as follows:
Research Question 1
The results that have been gathered explains that the three banks have effective level of
profit during the two years and thereby have been able to pay for all their expenses and have
been able to operate in the economy in an effective manner.
Research Question 2
The liquidity scenario of the banks that have been chosen addresses that the banks have
significant level of liquidity that is essential for them to operate in the economy in an effective
manner. The liquidity position of the company has been in accordance to the aims and goals of
the banks.
Research Question 3

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
The results that have been obtained reveals that liquidity have significant amount of
impact on the profitability of the banks as it is seen that two variables namely return on asset and
net profit margin are correlated in a positive manner which explains that changes in liquidity
would have an effect on profit for the banks.
6.2 Limitation
The limitation that has been attained after the completion of the research paper explains
that the data that has been collected from secondary sources may not be authentic as the banks
may disclose manipulated data to the users in order to highlight their profit level and brand
image of the banks. This can have an impact on the results that have been obtained in this paper.
The other limitation has been the limitation of time as the researcher did not have adequate time
to collect more data that would have been effective in gaining a better research paper.
6.3 Recommendation
The research paper indicates that the banks should make changes in their policies and
should monitor their liquidity and profit on a frequent basis in order to mitigate the issues that
are existent in their financial reports. The management should even look to make a comparison
with their rival banks and construct a benchmark with the help of which their activities can be
understood. The market evaluation can even be a process with the help of which profit level can
be maintained.

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IMPACT ON LIQUIDITY ON THE PROFITABILITY OF AUSTRALIAN BANKS
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Appendix
2014-15
Return on
Asset
Net Profit
Margin
Banks
National Australia Bank Ltd 0.67 22.65
Commonwealth Bank of
Australia 1.09 33.56
Bank of Queensland Ltd 0.67 29.23
2015-16 Return on Asset
Net Profit
Margin
Banks
National Australia Bank Ltd 0.03 1.26
Commonwealth Bank of
Australia 1.02 33.56
Bank of Queensland Ltd 0.68 30.26