Industry Analysis Report: Australian Commonwealth Bank (CBA) Economics

This report provides a comprehensive analysis of the Australian Commonwealth Bank (CBA) and its position within the Australian banking industry. The report begins with an overview of CBA, detailing its financial services and global presence, followed by an examination of the broader banking sector in Australia, highlighting its significance to the national economy and the impact of technological advancements. The analysis delves into the market structure, identifying the dominance of a few major banks and the challenges faced by new entrants, while also discussing factors influencing demand and supply for CBA's products, including technological changes and consumer behavior. Furthermore, the report assesses demand elasticity, concluding that demand for CBA's services is inelastic, and examines factors affecting this elasticity, such as income-to-debt ratios and technological advancements. Overall, the report provides a detailed economic assessment of CBA within its industry context.

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Table of Contents
Introduction.................................................................................................................................................3
Overview of the Company...........................................................................................................................3
Overview of the Industry.............................................................................................................................4
Analysis........................................................................................................................................................4
Market Structure.........................................................................................................................................4
Factors that influence demand for the company’s product(s)....................................................................5
Factors that influence supply of the company’s product(s).........................................................................6
Demand Elasticity........................................................................................................................................7
Two factors that affects the elasticity of Demand.......................................................................................7
An analysis of the recent event...................................................................................................................8
Effect of the event on the demand and supply...........................................................................................9
Effect of the event on the market price and the quantity...........................................................................9
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction
Overview of the Company
The Australian Commonwealth Bank is an Australian multinational bank that has business occurring in
many countries that includes Asia, New Zealand, United Kingdom and United States. The company
provides variety of financial services that includes institutional banking, retail management, fund
management, superannuation, investment and insurance services. It one of the largest company that is
listed on the Australian Stock Exchange and the company was founded in 1911. The present revenue of
the company is more than $25 billion and the growth prospects of the company is huge. The company
employs thousands of people around the globe. In this assignment we shall discuss about the company
and the industry in which it operates. The bank has also expanded into other areas and countries with
the help of indulging in various mergers and acquisition (Abdullah & Said, 2017).
Overview of the Industry
The Banking sector is one of the largest and most flourishing industries in Australia. Australia has a
sophisticated profitable and competitive banking sector and a very well-regulated financial sector. The
Common Wealth Bank is the largest bank in Australia for now. The banking sector is one of the largest
contributor to the Australian economy in today’s time and it employs more than 500,000 people every
year. In recent times with growth in technology banks have also metamorphized and have tried to
increase the overall banking efficiency in terms of providing better customer base services, focusing
more on customer management, providing 24 hours support and the major shift has been to the e
banking sector that is growing lately to become a major pioneer changes in the banking sector
(Boghossian, 2017). The growth in the banking sector also depends upon the GDP of the country in
which it is operating, like in case of Australia GDP is stable but there has been a decrease in the income
ratio to household debt and that might affect the financial economy on some levels. The main job in the
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banking sector is not only just to run the bank but also to run the bank in a sustainable manner as that
would contribute to the economy.
Regulatory compliance also plays a hindrance in the overall growth that the banking sector aims to
achieve and often we see that these complications hinders the overall growth that banks might have
achieved. Thus, in Australia it is important to look through the legal complications that are involved and
go for simplified banking rules and regulations. In case of Australia the banking sector contributes to
10%-15% of the overall growth in the GDP (Borit & Olsen, 2012). There are few large banking
organization and few small banks that work together in regulating the overall financial sector with flow
and generation of funds being the main concern. There are other banks also like retail banks and
foreign banks that also works in this sector, but there are many legal compliances that needs to be taken
care of. Overall the banking sector is the largest in Australia and Commonwealth Bank is the largest
bank.
Analysis
Market Structure
The overall banking and regulatory industry in Australia is huge and contributes to the economy in major
ways with the average contribution to the GDP being 15-20% every year. This sector employs more than
500,000 employs; thus, it is a major source of employment and is also contributing to the GDP. The
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banking sectors consists of four major banks that includes National Australian Bank (NAB),
Commonwealth Bank (CBA), Australia and New Zealand Banking Group (ANZ) and Westpac (WBC), these
contribute to 85% of the overall banking sector in Australia. These banks have formed a cartel-based
arrangement because all the shareholders of these banks are common and hence they are having a
common interest with all the four banks. The main aim of the shareholder is to maximize the profit and
generate more revenue (Johan, 2018). This kind of arrangement works mostly in a monopoly kind of
business but now we see that since there are four banks that there is a cartel-based arrangement. We
see that there is a cartel-based system that makes entry to the banking industry very difficult and it is
very difficult for the new entrants to compete with the bigger banking companies already existing. The
major shareholdings in these banks shall consists of HSBC, Citibank and JP Morgan Chase. All these
banks have very high interest rate margin and is supported by the government officials and hence these
banks can dominate the industry on regulatory basis. Thus, we see that in case of the banking industry in
Australia the structure is very much dominated by just few banks and these banks are holding the reigns
when it comes to managing the interest rates and taking care of the fluctuations with respect to that.
Thus, the aim should be that market concentration should be reduced which means that there should be
more new entries in the market and smaller banks should also get an opportunity to play a part and the
percentage of the overall contribution on part of these banks to the industry should also be increased.
This will help in leveraging the total interest rates that the banks are charging and would also help in
improving the debt to income ratio that would indirectly help in increasing the total revenue of the
industry (Kaufmann, 2017). Other foreign banks should also be allowed to enter the market and in case
they fail the government need to make sure that there is proper rules and regulatory policies that would
help in managing the banking business. It will also help in understanding how changes in the interest
rate fluctuations can affect an entire industry. Overall the market structure can be seeming to be very
cluttered and there are only big banks that plays the major part of handling the business, the smaller
banks do not have entry easily. The foreign banks also require a lot of effort to enter these markets and
then manage the funds so that the overall return is profitable.
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Factors that influence demand for the company’s product(s)
The demand for the banking services have increased in the current years and the lot of it can be
contributed to many factors and those are stated below:
1. The major reasons are that changes in the technology and increase in consumer awareness,
along with financial deregulation and globalization that has helped in improving the overall
business of the banks. There has been huge demand by the customers for sophisticated financial
products and services and all that has been due to the reasons stated above. These forces have
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helped in three major development in the banking sector that includes further consolidation
among banks within the banking sector this will help breaking the cartel arrangement that the
top banks were having. The second has been development in conglomerates that would help in
supplying a wide variety of services within the same organization. The third is that competitive
pressure among the banks have also increased so each is trying to develop a good consumer
base by providing them with the best resources and making sure that changes in the interest
rates due to the changes in the economy does not affect the company on many ends with
respecting to provide more return to the shareholder (Kusolpalalert, 2018).
Figure 1: US banks, by type, with defined customer experience programs.
URL:https://www2.deloitte.com/au/en/pages/financial-services/articles/banking-industry-
outlook-2018.html
2. The second determinant is that with increase in the household income the demand for financial
services and products have also increased. In Australia there has been few other factors like
greater financial depth, changes in the overall legislative structure, changes with regards to
compulsory superannuation, and the growing awareness among individuals that they need to
fund their own retirement and not depend on public pensions (Sikka, 2010). Thus, we see that
all these factors will help in development of the financial services and its requirement and thus
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that has increased the overall demand and accelerate the demand of the financial sector and
manage the regulatory requirements.
Factors that influence supply of the company’s product(s)
With respect to supply of financial services, there is a huge increase in the consumer base. There are
many factors that can be contributed to the increase in the supply of the company’s products and this
includes-
1. The first determinant is that there has been development of many conglomerates within the
banking sector and these conglomerates can supply a variety of products within the same
organization. The companies are also influenced towards merging and continuing their
operations as merged entities will have better resources and thus they can provide better
services to the consumer.
2. The second determinant can be the development of other banks than the major banks that are
dominating the industry. These include the smaller banks and entry of foreign banks in the
industry. As foreign banks now have the capacity to compete with the domestic banks and there
has been a huge development in the overall credit as domestic banks have found their new
stand and that can be attributed to the new regulatory mechanism that are supporting the
expansion of the business and the banking sector and that led to an increase in the overall
supply.
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Demand Elasticity
Based on the overall analysis that has been given above with respect to the company and the industry it
can be said that the demand is inelastic and does not changes much with changes in supply or the rate
of interest, which can be considered as a price hereunder. Banking business is such that the need of the
same shall prevail so even if the price drops very low, people will still like to avail banking services so
that their overall monetary gains can be increased. Australian Commonwealth bank is one of the largest
banks in the Australian Banking sector and the bank does contributes to the major share of the
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economic development that happens with respect to this sector. Thus, it can be said that demand is
inelastic and does not changes with changes in the interest rate (Truong, et al., 2008).
Two factors that affects the elasticity of Demand
In case of the banking sector there are different factors that affects the elasticity of the banks and that is
very different from the general factors that affects demand for any products. In case of the given bank
the two factors that affects the elasticity of the bank are-
1. Changes in the income ratio to household debt ratio- This is one of the major factor that affects
the elasticity of demand because as the household debt increases the income to be invested
decreases and thus we see that there is existing a reverse ratio between household debt and
income ratio. So, with increase in debt the demand for the banking services also decreases and
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people look for alternatives that will help them in regulating their debt in such a manner that
overall interest rate is low (Vieira, et al., 2017).
2. Increase in technological and globalization advancement – These factors are very important in
accelerating consumer demand for banking products as there is improved facilities that are
being provided. The consumers are getting more confident with respect to the kind of financial
products that the banking companies are offering and hence they are switching to the same. So,
we see that these factors have helped in accelerating the growth and the overall elasticity of the
demand is highly affected by these one factor, as increase in better technological factor has
helped in offering better banking services by the banks and that has indirectly accelerated the
growth of the business.
An analysis of the recent event
In last September 2018, there was a money laundering scandal in which the Commonwealth Bank was
involved. In this case it was seen that the bank had installed Intelligent Deposit Machines (IDMs), which
are a type of ATM in which there is no need to human bank teller to perform the various tasks like
depositing the money and transferring large amount of money. These machines would allow customers
to anonymously deposit 200 notes per transaction, which can total all the way up to A$20,000 each
transaction, and immediately transfer the money to another account. The bank does not limit the total
transactions per day. This means that an individual can transfer millions and the company will not be
able to regulate the same (Webster, 2017). Due to this there was mismanagement of the funds and the
individuals have taken advantage of the same and there was huge case of money laundering that was
reported. It was found that millions were transferred by individuals through use of IDMs and there was
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no reporting done by them to the financial authorities. Thus, we see that this led to a case of money
laundering the bank was held liable for the same as they were not able to manage the funds and there
were no proper regulations to look over these transactions. The result of this case was that CBA was
fined by A$700 million. The bank was also fined with heavy legal fees of A$2.5 million. The Anti-Money
Laundering and Counter-Terrorism Financing Amendment Act 2017 (AML/CTF Amendment Act) was
passed by the House of Parliament in Australia. The bank also took it upon itself and few directors were
asked to resign from the company and the independent risk and audit committee was set up to look
over such transactions that might affect the company. Thus, we see that the bank was wrong on moral
grounds that they were not able to manage their funds (Wellmer, 2018).
Effect of the event on the demand and supply
Based on the event stated above it can be seen that there was a decrease in the overall demand and
supply for the CBA services and these events are contributing to the loss of the business. The bank was
charged on moral grounds and thus consumer was skeptical enough to invest with the bank and earn
return.
Effect of the event on the market price and the quantity
Because of this it was seen that there was a decrease in the prices of the shares and many investors had
stopped investing in the company as the company was held guilty for its negligence that had caused a
major loss to the company and the economy.
Conclusion
Based on the overall analysis the Commonwealth Bank is the largest bank in the Australian financial
sector. With increase in globalization and technological factors the banking sector has improved a lot
and that has helped in improving the overall consumer base for the company.
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References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, 3(1), pp. 129-149.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), pp. 244-253.
Borit, M. & Olsen, P., 2012. Evaluation framework for regulatory requirements related to data recording
and traceability designed to prevent illegal, unreported and unregulated fishing. Marine Policy, 36(1),
pp. 96-102.
Johan, S., 2018. The Relationship Between Economic Value Added, Market Value Added And Return On
Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan Kewirausahaan,
3(1), pp. 121-134.
Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New York: Routledge.
Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period
and financial crisis. AU Journal of Management, 11(1).
Sikka, P., 2010. Smoke and mirrors: Corporate social responsibility and tax avoidance.. Accounting
Forum, 34(1), pp. 153-168.
Truong, G., Partington, G. & Peat, M., 2008. Cost-of-Capital Estimation and Capital-Budgeting Practice in
Australia. Australian Journal of Management, 33(1), pp. 95-121.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1), pp. 23-48.
Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants'
Perspective. ProQuest Dissertations Publishing, 3(1), pp. 142-156.
Wellmer, A., 2018. The Persistence of Modernity: Aesthetics, Ethics and Postmodernism. fourth ed. UK:
Polity Press.
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