Financial Analysis of Commonwealth Bank of Australia (CBA)

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APR+ HA1022 PRINCIPAL OF FINANCIAL MANAGEMENT (LOVE DEOL)

Table of Contents
Industry Description..................................................................................................................................2
Company Description...............................................................................................................................2
Financial Instrument Analysis.................................................................................................................3
Financial Ratio Analysis...........................................................................................................................5
Competitor Analysis..................................................................................................................................7
Financial Market Analysis........................................................................................................................9
Findings....................................................................................................................................................10
Conclusion...............................................................................................................................................11
Recommendations..................................................................................................................................11
References..............................................................................................................................................13
Appendix..................................................................................................................................................16
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Industry Description
The report in on financial management and financial analysis and for this assignment
the undertaken organization is Commonwealth Bank of Australia (CBA), which is a
leading Australian financial institute. The Australian banking and financial industry is a
booming industry as the Australian economy is rapidly growing and many foreign
companies are also competing in this Australian soil. Hence, the attractiveness of the
Australian financial and banking industry is even growing. Furthermore, the financial
and banking industry in Australia has been becoming harshly competitive since many
foreign banking institutions are also operating in the soil of Australian country. The
topmost banking organizations in Australia are subsequently Commonwealth Bank of
Australia (CBA), National Australian Bank (NAB), Australia and New Zealand Banking
Group (ANZ), Westpac Bank, AMP Bank, Bank of Queensland, Macquarie Bank,
Bendigo Bank, etc. Apart from this, the Foreign Banks such as HSBC Bank, Delphi
Bank, Citibank are also operating their business in this country. Moreover, due to so
many banking organization are operating in the same Australian market, the market is
becoming extensively competitive. The entire banking and financial companies in
Australia have to comply with the rules and regulation of the Australian Stock Exchange
(ASX) and the Australian Securities and Investment Commission (ASIC). Apart from
this, the banking and financial organizations in Australia have to comply with the
statutory legal framework and regulation for banking operation. There are some legal
and ethical issues emerging in the Australian banking and financial institutions and
these issues even involve the largest bank in Australia, the Commonwealth Bank of
Australia.
Company Description
The Commonwealth Bank of Australia is the largest bank in Australia and has most of
the branches in the Australian soil and serves most of the customers in this country.
The company is mainly associated with banking and financial services; hence, the
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financial industry in Australia is the relevant industry for the report. The CBA is the
leading financial organization in Australia and the organization offers integrated financial
services to its customers. The undertaken organization, Commonwealth Bank of
Australia is a multi-national corporation and its base is in Australia. The bank is currently
operating in New Zealand, the United Kingdom (UK), the United States (US) and
various Asian countries. Moreover, the bank offers integrated financial services to its
customers across the world. The company has an excellent management team that
ensures that the company will be able to accomplish sustainable growth in the global
market. Moreover, the management can be able to encourage the employees of the
organization to deliver their optimum level of performances. The organization has robust
corporate governance policies to ensure that it maintains the highest level of
professional standards plus it acts with integrity throughout the course of its operational
activities. The organization has been offering retail banking, premium, business, along
with institutional banking services. Besides this, it has fund management,
superannuation, investment, insurance, and share broking services to its customers.
The banking organization is maintaining its sustainable growth by its efficient corporate
governance policies and serving its customers across the globe.
Financial Instrument Analysis
Balance sheet for the year 2018 Commonwealth Bank of Australia
A financial statement is considered to be providing the financial position of the
company. The balance sheet is considered to be a part of a financial statement
prepared and published at the end of each fiscal year. The following elements are
considered to be scrutinized accordingly,
Company balance sheet for the year 2018 (Please refer to Appendix)
a)
Asset: Assets are considered to be a pivotal part of the balance sheet, the asset
of the company Commonwealth Bank of Australia is considered to be mentioned in the
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balance sheet. The mentioned assets in the balance sheet of the Commonwealth Bank
of Australia are cash due from banks which constitute 22897 (Commbank, 2019). This
reflects the cash and due remained as per the 2018 statistics of the company. The
federal fund sold from the company is considered to be a primary asset. The amount
included in the federal fund is around 13520. Trading assets are also listed in the
balance sheet in the asset segment. The trading assets of the company are 32303.
Derivative assets and debt securities are also considered to be an important asset for
the company. The derivative assets and debt securities are 32133 and 82449
respectively. Loans and net loans of the company is considered to be 743365.
Therefore the company asset in terms of the loan is immense which can be utilized for
future investment purpose. Receivable, premises, equipment, goodwill and other
intangible asset constitute to make a total asset of around 975165 (Commbank, 2019).
Liabilities:
The total liabilities of the company after analyzing the balance sheet of the company are
determined around 90, 7305. This is considered to be profitable in term of determining
business risk. The company total asset is greater than the total liability. This reflects that
the company is free from any further business risk.
Equities:
The equity of the company is reflected as the total stockholder equity in the balance
sheet. The total stockholder equity is considered to be around 67306 for the company
commonwealth bank Australia.
b)
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Sources: (Commbank, 2019)
The balance sheet of the company helps to throw light on the asset, liabilities and total
stockholder equity for the given fiscal year. With the help of a balance sheet, several
key business risks are being evaluated. The business risk such as liquidity risk and
solvency risk are calculated with the help of the current ratio and quick ratio. On the
basis of the balance sheet, analysis of the company Commonwealth Bank of Australia
helps to throw light on the off-balance sheet. The company does involve in the off-
balance sheet business. Managed securitized assets, guarantees, acceptances,
committed credit line total asset under management is mentioned in the off-balance
sheet (Commbank, 2019).
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Financial Ratio Analysis
A) The three financial ratios which have been identified in this report are mentioned
below:
 Debt Ratio
 Asset turnover ratio
 Net profit margin
Financial
ratios 2015 2016 2017 2018
Debt Ratio Total Liabilities 8,68,420 9,10,333
8,98,72
2
9,06,63
2
Total Assets 9,20,167 9,68,409
9,58,79
6
9,70,55
2
Formulae
Total Liabilities/
Total assets
0.94376346
9
0.94002947
1
0.93734
4
0.93414
1
Asset
turnover
ratio net sales 11,670 11,459 12,125 12,303
Total assets 9,20,167 9,68,409
9,58,79
6
9,70,55
2
Formulae
net sales / total
assets 0.01268248 0.01183281
0.01264
6
0.01267
6
Net profit
margin Profit after tax 8,976 8,639 8,979 9,010
revenue 11,670 11,459 12,125 12,303
Formulae
Profit after tax /
revenue
0.76915167
1
0.75390522
7
0.74053
6
0.73234
2
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B) The debt ratio is identified as the measurement of the company’s leverage. The
debt ratio is the ratio that evaluates the company’s total debt against the total
assets. The debt ratio of the Commonwealth bank was identified for the financial
years of 2015, 2016, 2017 and 2018. For the past four years, the company’s debt
ratio has been calculated. The debt ratio was 094% in 2015, 0.94% in 2016,
0.93% in 2017 and 0.93% during 2018. The ratios throughout the year were said
to be less than one. The debt ratio was the same in the financial period of 2015
and 2016. During the period between 2017 and 2018 the debt ratio has been
slightly decreased. Therefore the ratio lowers than one is identified to be very
favorable for the business enterprise. The lower ratio of the company has been
analyzed to be the strength of the company. The ratio of more than one signifies
that a considerable amount of debt has been funded by the company’s assets.
Moreover, it also states that the company has a greater volume of liabilities when
compared to that of their assets. The higher debt ratio means that the business is
at risk. The company’s ratio is less than one but the company has to keep its
ratio at the minimum level (Commbank, 2017).
The asset turnover ratio helps in the evaluation of organizational revenue from
their assets. The asset turnover ratio of the Commonwealth Bank has been
calculated for the last four years. The asset turnover ratio was 0.012% during the
period of 2015, 0.011 % during the period of 2016, 0.013 % during the period of
2017 and 0.013 % during the period of 2018. The asset turnover ratio of the
organization is at a very minimum position. The asset turnover ratio of the
Commonwealth Bank signifies that the business is not able to use their business
assets at very less efficiency. The company is unable to generate revenue from
their assets (Commbank, 2018).
Net profit margin refers to the proportion of profit that has been gained by the
company after deducting the overall expenditures. This ratio helps in measuring
the amount of revenue which has been extracted by the business from their
aggregate sales. The net profit margin of the Commonwealth Bank was
calculated for the last few years. The net profit margin of the company was
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identified to be 0.77 % during the period of 2015, 0.75 % during the period of
2016, 0.74 % during the period of 2017 and 0.73 % during the period of 2018.
Therefore as per the calculation, it has been identified that the net profit margin
of the company has been reduced at a great rate. The net profit margin of the
company was said to be less than one. The lower net profit margin means that
the company is not able to control its expenses and provide services those
values more than their expense (CBA), 2019).
Competitor Analysis
A) Commonwealth Bank is the leading banking organization in Australia. The
organization has well diversified and higher quality credit portfolio. This banking
organization is providing significant digital services to customers. The workplace
environment is one of the most hardcore strength of Commonwealth Bank. There
are several competitors exists of Commonwealth Bank. Westpac is one of the
most major competitors of Commonwealth Bank. The Commonwealth Bank is
providing significant by using its technological aspects. The major weakness of
the organization is its operating expenses. The operating expenses of the bank
are too much higher than the other banking organizations. Recently, the
organization has found guilty in a money laundering case. Due to this reason, the
organizational image of Commonwealth Bank is hampered. The other
competitors can be able to utilize these opportunities to enhance their customer
base. But, the popularity of the Commonwealth Bank is very high. Offshore
borrowing is the most significant business activity of the Commonwealth Bank.
The dependency on offshore borrowing of Commonwealth bank is rapidly
growing. High dependency on a single activity can hamper the overall
performance of the organization. However, the organization has a very strong
financial background.
B) Commonwealth Bank, Westpac, National Australia Bank, and Australia and New
Zealand Banking Group are recognized as the main banking institutions in
Australia. It is very important for the banking organizations to have available
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numbers of agency network. The Commonwealth bank has numerous agency
networks across Australia. The numbers of agency network of Commonwealth
bank are higher than the other competitors. In this case, it can be said that the
customers of the Commonwealth bank can be able to get significant services in
any region of Australia. In the case of firm size or location, there are no
significant differences between the four major banks of Australia. The main
differences between the Commonwealth Bank and the other competitors are
service quality related. The customer base of Commonwealth Bank gives it
competitive advantages over the other competitors. The organization has near
about 17 million customers all around the world (SWOT & PESTLE, 2019)
C) The Commonwealth Bank is the leading multinational bank in Australia. The
competitors are providing significant challenges to the Commonwealth Bank. The
Commonwealth bank is present in USA, UK, Fiji, New Zealand, and Asia along
with the entire region of Australia. But, this organization is not active in the Middle
East. The Australia and New Zealand Banking Group is significantly present in
the Middle East. The Commonwealth bank covers a smaller region than Australia
and New Zealand Banking Group. In National Australia Bank classic account, the
customers no need to pay any kind of monthly fee. But, in the case of the
Commonwealth Bank, the customers have to pay $ 4 for everyday account
access. The customers can be able to get significant monetary benefit from
National Australia Bank compare to the Commonwealth Bank.
National Australian Bank’s net profit margin was 31.14%. The market capital is
65.98B. The dividend was 0.83% (NAB), 2019).
Westpac Bank market capital was 60.88B. The latest dividend yield was 1.33.
The net profit was 33.37% (WBK), 2019).
Commonwealth Back has the market capitalization of 129.65B. The dividend was
2. The net profit margin is 36.04%.
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Australian & New Zealand market capital was identified as 76.2B. The dividend
yield of the organization was identified as 1.91. The net profit margin of the
company is 33.58% (ANZPD), 2019).
Financial Market Analysis
a) Financial player interaction within the company:
Borrower: in case of Commonwealth bank the borrowers are considered to be core
corporate houses such as Westpac, Woolworth limited and several other companies.
Ezy banking account partnership with Woolworth limited is considered to be meeting the
basic banking benchmark for the Australian banker relationship. With the help of EZY
banking account help to make the relationship between the two companies mutually
benefitted.
b) Government Intervention: Commonwealth bank and Telstra issues forced the
government to intervene in order to manage and control the prosperity of the two
corporate houses. Commonwealth bank quietly rolls Telstra’s $1 Bn deal in the year
2009. The government intervention enterprise and government chief David Thode
intervened to sort the scenario between the two Australia giants (Bajkowski, 2019).
C) Analysis of the unethical practices: The Company Commonwealth bank Australia is
associated with numerous unethical issues. Commonwealth bank executive chief Ian
Narev accept that the bank has made a mistake which is related to the breaches of anti-
money laundering and counter-terrorism financing laws.
Mr. Narev along with several bank executive to have their respective 2017 bonuses
declined in the response of the related allegation by the key regulator Australian
transaction report and several core analyses center. The Australian transaction report
and analysis center issued that the CBA fails to give essential on time report related to
the transaction which is occurred more than 53,500 times.
Another segment, Austrac put allegation on CBA that they have failed to give or provide
on-time reports of the 53,506 transactions of $10,000. Another issue related to
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intelligent deposit machine between the years 2012 to 2017 fails to provide the report
(Condie, 2017).
The transaction and its key detail are not been provided by the company which led them
to fail the ethical compliance. This eventually created a tough scenario for the company
to sustain. This eventually leads to a negative impact on the company image for coming
future time.
In the year 2015 proper measure was taken by the company CBA and focuses to
discover and fixed the error. The changed oversight of financial crime compliance helps
to improve the image of the company. The recruitment of around 50 specialists and up
gradation helps ion monitoring of the overall transaction which the company failed to
provide (Condie, 2017).
Findings
The banking organization Commonwealth Bank can be able to solve any kind of
challenges. The competitors are posing a significant threat to the Commonwealth Bank
in many segments. The competition among the Commonwealth Bank and other
competitors are rapidly growing. Apart from Westpac, Australia and New Zealand
Banking Group and National Australia Bank are also creating extreme threat for
Commonwealth Bank. This has been analyzed that the Commonwealth Bank has a
favorable debt ratio. The debt ratio helps in comparing the aggregate assets with the
aggregate debt. This also helps in presenting a general idea to the investors and
creditors regarding the leverage which is being used by the organization. The Company
has the most suitable leverage. The company has a lower rate of asset turnover and net
profit margin. The company has a very low rate of revenue from their assets and sale of
services. The lower net profit margin of the commonwealth portrays that the business is
not competent enough to convert its sales towards real profit. Moreover, it is also
analyzed that the financial institution is dealing with production or management issues.
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