Financial Management: Commonwealth Bank of Australia Case Study

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Principles of Financial Management
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Table of Contents
Introduction................................................................................................................................................3
Question 1.................................................................................................................................................4
Industry Description..............................................................................................................................4
Role of regulators of banking industry............................................................................................4
Question 2.................................................................................................................................................5
Company Description...........................................................................................................................5
Question 3.................................................................................................................................................6
Question 4.................................................................................................................................................9
Financial structure analysis of the Commonwealth Bank of Australia...........................................9
Question 5...............................................................................................................................................13
Financial Market Analysis..................................................................................................................13
Recommendations..................................................................................................................................15
Conclusion...............................................................................................................................................16
References..............................................................................................................................................17
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Introduction
Financial management is an important part of management which deals in Finance functions of
the organization. This report covers the Relevance of Principles of Financial Management in the
Company. This report is divided into Six Parts. In the first part of this report covers the
Framework of the Australian Taxation system. Description of Commonwealth bank which is a
GICS Group industry has to be explained. The second part of this report covers the description
of products and services which are offered by Concern Company. Ownership and Management
structure part will be discussed in the second part. In the third part financial instrument of the
concern, the company has to be discussed. Forth part of this report concerns with calculation of
financial ratios which are important to Creditors and shareholders. Fifth part of this report an
analysis is to be done on how financial players of the concerned company interact with each
other.
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Question 1
Industry Description
Financial Industry is one of the major industries of the GICS group. Financial Industry covers
Banks, Diversified Financials and insurance sector. The banking industry covers the major part
of the Australian financial system. Currently, there are 147 financial institutions in Australia.
Australian Financial sector is considered the biggest contributor to the Economy. This Sector
Provides Employment to Barely 450,000 People. Four major banks of Australia ranks in 25 Safe
banks in the World. Australian Financial system is mainly dominated by four major banks. In
simple words, there is an Oligopoly situation in the Australian Financial Sector
(Business.gov.au, 2019).
Role of regulators of banking industry
Australian Financial sector is regulated by ASIC which is the Australian Securities and
investment commission and Reserve bank of Australia. ASIC is Responsible for Consumer
protection and integration of market in the financial sector, on the other hand, RBA is
responsible for making monitory policy for maintaining stability in the overall financial system.
Most of the Polices of Financial sectors are regulated by only these two regulators. ASIC and
RBA have full Power to make changes in the Financial sector. But there are some other industry
groups like Foreign Exchange control, Capital and money market, and Foreign investment
review board ( Treasury.gov.au,2015).
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Question 2
Company Description
Commonwealth Bank of Australia is one of the reputed bank which deals in financial services
like Institutional Banking, funds management, insurance, superannuation, and share trading.
Commonwealth is listed in the Australian stock exchange in the year 2015. This bank has
diversified its business in 1960 and 1970 into the areas of insurance and Travel. Concern bank
also Involved in Trading of International Currency (Business.gov.au, 2019).
Governor, Managing director, chief Executive officers, and Managing Director are included in
the Ownership Structure of the company. Concern Company also has Group Executive, Deputy
Chief Executive officers, marketing and sales manager in the Ownership Structure.
Commonwealth Bank is one of the biggest financial institutions Not only in Australia but also in
New Zealand and the United States. Currently, more than 52,000 employees are Working In the
Commonwealth bank and it also has more than 800,000 Shareholders. The management
structure of the bank is divided into four parts i.e. Retail Banking, Institutional and banking
services, Financial Services and Investment and insurance services. The management structure
of CBA is designed to fulfil the needs of customers. Management structure enables CBA to
meet the needs of Wealth management. Management structure of CBA Also Help in Delegating
Authority and responsibility effectively (Business.gov.au, 2019).
As Commonwealth bank is one of the major banks In the Financial sector of Australia it is
responsible for maintaining Policies and Procedures in the Banking sector. CBA Also provides
recommendation to ASIC and Reserve bank of Australia regarding Financial Issues which are
faced by the banking industry.CBA Sources its funds mainly from the capital market of Australia.
CBA Ensures sustainable and cost Effective funding to meet its Liquidity needs. CBA also acts
as a financial intermediary by providing required information to shareholders to Facilitate
financial transactions.
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Question 3
a. Financial reports of an organization are prepared in order to know the financial
stability of the company. Here the Annual financial report of the Commonwealth
Bank of Australia justifies the financial stability of the company in the market
(Commbank, 2018).
Commonwealth Bank of Australia is an Australian bank service which provides its services
across the Globe including New Zealand, Asia, United States and The United Kingdom.
Here is the balance sheet of Commonwealth Bank of Australia:-
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According to the 2018 Annual report of Commonwealth Bank of Australia. It is clear that the
company deals in the trading, insurance. Other than the insurance, the company also deals in
the shares and loans of the clients and also in the property and plants. The total assets that the
company have with them amounts to $9, 75,165 in group and $9, 70,552 in the bank
(Commbank, 2018).
Assets and liabilities of the company are very much equal. The total liabilities of the company
produced in the Group and the Bank amounts to $9, 07,305 and $9, 06,632. The company has
a liability on debt issues and insurance policy (Commbank, 2018).
The company also deals in the shareholder’s equity as well. The company deals in the share
capital and reserves. The total shareholder’s equity generated in the group and the bank
amounts to $67,860 and $63,920 respectively (Accounting tools,2018)
a. Yes, Commonwealth Bank of Australia do engage in the Off Balance Sheet
Business. Off Balance Sheet are those assets and liabilities which are not
recorded in the company’s balance sheet (Commbank, 2018).
According to the Annual Report of 2018, the off balance sheet items were recorded in the
loan commitments, guarantees and other commitments amounting to $9,62,018. This
amount was calculated for total Australia. In the Liquidity and the funding risk section, the
total monetary liabilities in the Off Balance Sheet amounts to $1, 086, 990 (Commbank,
2018). The total balancer sheet items comprises of $1,69, 548. In the section disclosure and
fair value the total of amount of Off Balance Sheet was $ 170,586. All the Off Balance Sheet
was included in the 0-3 month’s maturity band which was there to reflect the earliest
possible maturity. The total national amounts of the Off Balance Sheet exposures on 30
June 2018 was $ 7,547. Under Investments in subsidiaries and other entities, the amount for
the Off balance sheet was $ 9,511. These were the variations in the actual balance sheet
which was not recorded (Commbank, 2018).
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Question 4
Financial structure analysis of the Commonwealth Bank of Australia
Analysis of financial statements is necessary to know the Financial Performance of the
company. Analysis it helps the investors to review the company based on their decision-making
capacity. Financial Analysis of the company is done based on financial ratios. Financial ratios
enable investors to Know the company's Position concerning Profitability, solvency, Liquidity,
and Efficiency of Cash Flow (Accounting tools, 2018).
Commonwealth bank is one of the leading banks in providing financial services to Institutional
clients and retail businesses. Banking products and services of CBA includes saving accounts,
transaction accounts, term deposit fix deposit personal and home loan. In this case, CBA has
the Requirement of 10 Million to Finance new project and the Finance managers are evaluating
from were to arrange this amount. This amount can be arranged either by issuing shares to the
General public or by taking loans from any other financial institution.
Ratio analysis
Ratio analysis is done to compare the financial statements of the company. There are no
financial issues in the company. These issues can be related to Efficiency, Liquidity, and
profitability of business. Results of ratio analysis is beneficial to outsiders of business such as
shareholders, debenture holders, and investors. Ratio analysis is used to calculate the trend of
the company’s cycle. Ratios show whether the profit of the company is increasing or decreasing
over the period. Ratios can also be used for comparison of Different types of industries. The
result of ratio analysis should be similar for the companies which have similar capital structure.
If the Results of Analysis is not similar for two similar companies then it indicates Potential issue
(Accounting tools, 2018).
Identification of three financial ratios which will be important to creditors
Creditors are the persons who provide financial support to the company. Creditors can also be
termed as Loan providers as lenders of the company. Liquidity and Turnover ratios are the
important ratios for the creditors. Liquidity ratios are calculated by business firms to determine
the debtor's ability to pay company liabilities. Liquidity is the ability to convert the assets as
quick as possible. Liquidity ratio is also helpful when the comparison is to be done by the
management of the company. Current ratios and Quick ratios are the part of Liquidity ratios
(Campbell, 2017)
Current ratio
The current ratio is calculated by dividing current assets with current liabilities. Creditors use the
current ratio to determine the capacity of the company to repay the loan. Ideal current ratio is
2:1. Current ratios are generally calculated for one year. Current assets are those assets that
can be converted into cash within one year and then, on the other hand, current liabilities are
short term liabilities that have to pay within a period of one year (Penman, 2015).
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Current ratio is calculated as Current assets/current liabilities
Quick ratio
The quick ratio calculates is Calculated by dividing quick assets by current liabilities. Quick
assets refer to those assets which can be converted into cash as soon as possible. If the quick
ratio of the company is less than one then the company is not able to repay its current liabilities
in the short term. However, there may be a case when the company can pay its liabilities in the
long term (Penman, 2015).
Quick ratio is calculated by = Quick assets/Current liabilities
Debt equity ratio
Debt Equity ratio can be calculated by dividing debt which are External liabilities with equity
which are Internal Liabilities of the company. The debt-equity ratio helps the creditors to know
the Position of Debt and equity which is used to finance the company’s assets. In Simple words,
Creditors and investors are interested in knowing the Company’s Source of the fund. These
persons wanted to know whether the firm has taken loan from outsiders to finance its assets or
the internal earning of the company is invested in financing the assets. These ratios also gives
the idea to creditors of how the Company uses its ability to pay additional Debt (Penman, 2015).
Identification of three ratios which are important to Shareholders
Shareholders are those persons who purchase shares of the company. Shareholders are also
known as stakeholders. If any person owns at least one share of any company then he will be
treated as Stakeholders of the company (Accounting tools, 2018).
Working capital ratio
Working capital is the amount of money which is required to run the business. It is calculated by
subtracting short term liabilities of the business from current assets. The working capital ratio
also tells the shareholders that how a company uses its assets to pay short term Liabilities.
Earnings per share
Earnings per share is an important ratio in which shareholders of the company are interested.
Earnings per share shows the net amount of income which is earned from each share of the
company. EPS is the part of profit that is allocated to every share. Earnings per share also show
the Profitability of the company. If the EPS ratio of company is high then it is a good sign for
new shareholders of the company or the persons who are planning to purchase shares of the
company on the other hand if the EPS ratio of the company is low that means amount earned
from shares is less to shareholders. Shareholder’s Decisions are based on the EPS ratio
regarding Investment (Accounting tools, 2018).
Return on equity ratio
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This ratio is calculated by the company to find the amount of Profit that can be earned on equity.
Every shareholder wants to know whether the capital invested by him is Profitable or not. Return
on Equity is calculated by dividing Net Income of the company by Equity share capital.
Ratio calculation for Commonwealth bank and Kina securities
Bank
Current ratio
Name of bank 2016 2017 2018
Commonwealth Bank 0.187 0.176 0.186
Kina Securities limited Bank 0.286 0.287 0.279
Quick ratio
Commonwealth Bank 0.187 0.175 0.179
Kina Securities limited Bank 0.247 0.277 0.269
Operating profit ratio
Commonwealth Bank 52.02% 53.08% 54.23%
Kina Securities limited Bank 50.78% 51.76% 52.88%
Return on total assets ratio
Commonwealth Bank 0.96% 0.99% 1.02%
Kina Securities limited Bank 0.89% 0.88% 0.89%
Fix assets turnover ratio
Commonwealth Bank 0.0311 0.031 0.0317
Kina Securities limited Bank 0.0337 0.0334 0.314
Debt Equity ratio
Commonwealth Bank 3.97 2.67 2.62
Kina Securities limited Bank 1.88 1.89 2.05
While analysing the financial ratios of CBA it was found that the current ratio has increased over
the previous year. In the year 2016-17 current ratio of the company was 0.187 and it has
decreased in the year 2017-18 but again increased in the year 2018-19. It is clearly shown from
the current ratio that the company is not able to maintain current assets in the business. This
shows that Concern Company can face a shortage of funds in its day to day activities. CBA is
also not able to maintain a quick ratio which means major short term requirements are not
fulfilled by short term current assets. The operating profit of CBA is almost the same in these
three years (Commbank, 2018). There is a minor change in the operating profit of the company.
Return on total assets has also increased over these years which mean CBA can maintain
assets on such a small amount of profit. While analysing fix assets turnover ratio it was found
that there was minor change in fix assets over these three years. The debt-equity ratio of CBA
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has decreased over the years. In the year 2016-17, it was 3.97 but in the year 2018-19, it has
decreased to 2.62. Based on the analysis of the above ratios it was concluded that CBA should
Issue share for arranging the amount of 10 Million Rather than Borrow this Amount because the
financial position of the company is not so good that it can pay the loan amount (Commbank,
2018).
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