Financial Markets in Australia: Westpac and Commonwealth Bank Report

This report conducts a comprehensive analysis of the financial markets in Australia, with a specific focus on Westpac and Commonwealth Bank. The study begins with an executive summary, followed by an introduction that emphasizes the importance of evaluating corporate operations within their respective industries. The report then provides background information on the Australian banking industry, discussing key factors such as changing demographics, technology, consumer behavior, government regulations, and the global economy. The mission statements of both Westpac and Commonwealth Bank are presented, outlining their goals and strategies. The core of the report involves a top-down analysis, evaluating the Australian economy's performance, including GDP growth, inflation, and unemployment rates. This is followed by a bottom-up analysis, examining key financial ratios of both corporations. The report uses the Economic, Industry, and Company (EIC) tactic for the top-down analysis. The bottom-up analysis likely involves detailed financial statement analysis, including profitability, liquidity, and solvency ratios. The report concludes with recommendations based on the overall analysis, offering insights for financiers and stakeholders.

Running head: PRINCIPLES OF FINANCIAL MARKETS
Principles of financial markets
Student Name:
University Name:
Author Note

2
PRINCIPLES OF FINANCIAL MARKETS
Executive Summary
The current study elucidates illustratively about the financial markets in Australia and takes
into consideration the operations of two corporations Westpac and Commonwealth Bank.
This report elaborately discusses the mission statement of both the firms along with the
background and operations of the firms. This study also presents a fundamental analysis
mainly founded on both top down as well as bottom up analysis approach of both the
corporations. Essentially, a top down evaluation on the basis of nation’s inflation, rate of
growth of gross domestic product, unemployment level of the Australian economy is hereby
presented in this study. Furthermore, elaborate analysis using bottom up evaluation on the
basis of key financial ratio of both corporations is hereby presented in this current study.
Founded on the overall analysis, appropriate suggestions are also provided at the end.

3
PRINCIPLES OF FINANCIAL MARKETS
Table of Contents
Introduction................................................................................................................................3
Background of Banking industry of Australia...........................................................................3
Mission Statement......................................................................................................................4
Top down analysis......................................................................................................................4
Bottom up analysis.....................................................................................................................8
Summary and Recommendations.............................................................................................14
References................................................................................................................................15

4
PRINCIPLES OF FINANCIAL MARKETS
Introduction
In today’s world, it is of utmost importance to carry out appropriate evaluation of the
operations of the corporation along with the industry in which the company operates.
Fundamentally, the analysis can be carried out with the assistance of the top down as well as
bottom process of analysis. It can be hereby mentioned that the top down analysis assist
financiers by preparing and presenting a macro view of the overall condition of the economy
and the industry. Again, conversely, bottom up approach reflects a micro economic picture
of the respective business entity under consideration. Essentially, this current study can aid in
the process of conducting a fundamental evaluation of the two corporations that is
Commonwealth Bank and the Westpac, both listed in the Australian Stock Exchange (ASX).
Basically, this can be undertaken founded on the top down as well as bottom up analysis of
both the business entities. The study also presents apposite recommendations to the financiers
or the sponsors on the basis of the results obtained.
Background of Banking industry of Australia
The banking industry can be regarded to be in a state of instability. Essentially, six different
forces are said to shape the banking sector in Australia that include altering demographics,
technology, behaviour of consumers in the market, government and the subdued world
economy. The Banking Act declared during 1959 assisted Australia in the process of
enhancement of banking industry. Different licensed banks are operating under the banking
sector and there is a stable growth in the overall performance of banks in the industry. This in
turn assisted in the growth of the economy on the whole of the nation. Essentially, the
constancy of the banking sector is essentially maintained by the enhancement of the capital in
the current quarters. Again, the other important steps that can be taken up by the banking
sector of Australia include concentrating on the ratio on Liquidity Coverage (PwC 2017).

5
PRINCIPLES OF FINANCIAL MARKETS
Petty et al. (2015) asserts that analysis of financial stability of Australia claims that
significance can be attached to the performance of the asset of diverse banks operating in
Australia. During the financial year 2016, the banking sector assumed a major step of
creating business loans and the extreme competitive environment and significant decisions
helped in the process of the analysis of the overall growth as well as development of different
parts of the nation. Evaluation of the movement of the banking segment in Australia
essentially involves analytical evaluation of specifically the commercial property valuation.
Fundamentally, free market of Australia also aided in acquiring the present position of and
development of banking industry also takes account the importance of existence of banks and
securitization. Again, the growth is essentially based on the decrease in the occurrence of
different credit unions, finance corporations and building specific societies (Linkov et al.
2014).
Mission Statement
The mission statement of the two listed Australian banks (Commonwealth Banks and
Westpac) is hereby mentioned below:
The mission of the corporation Commonwealth Banks is to augment the overall wealth as
well as fulfilment of life of the customers of the bank. The management of the firm wants to
help customers to derive more out of their life. However, to this specific end, management of
the bank essentially follows a particular strategy of forward thinking, adopts stratagem of
innovative as well as dependable practices, maintains compliance to appropriate principles of
banking that includes capitalization, diversifies liquidity risk. In addition to this, conservative
policies of lending, investment in different channels of service delivery and maintains
orientation to customer experience (Cbagroup.com 2017).

6
PRINCIPLES OF FINANCIAL MARKETS
The mission of the business entity Westpac is to assist customers across the world to develop
and prosper. Essentially, they also want to present offer adequate service to different
customers and assist them in the process of growth. The mission of the bank is also to deliver
higher rate of return to all the customers, business professional as well as all other
shareholders of the corporation. In addition to this, management of this bank also want the
association with the customers to be very strong and at the same time reliable. Furthermore,
Westpac also wants to create a positive working environment and make it the best place for
all the employees of the corporation. Management of the corporation also intend to thrive on
the style of leadership and introduce an organization that is efficient in developing long term
associations (Westpac.com.au 2016).
Top down analysis
As rightly put forward by Ledgerwood et al. (2013), top down analysis can be carried out by
using the Economic, Industry in addition to Company (EIC) tactic. Leary and Roberts (2014)
assert that analysis of the industry is considered first in case of undertaking top down
analysis. In the current condition of the Australian market that is necessarily growing, GDP
growth can be considered to be significant. Essentially, this can be necessarily founded on the
present rate of growth of the gross domestic product that is 4.40%.

7
PRINCIPLES OF FINANCIAL MARKETS
Figure: Overview of the economy of Australia
(Source: Laitinen et al. 2014)
Based on the figure presented above, it can be essentially concluded that the rate of growth of
the Australian economy has eventually decreased as compared to the previous year’s figure.
Additionally, the rate of inflation in Australia has elevated and the gap in the current account
deficit has subsequently widened (Kou et al. 2014). However, this can be regarded as an
undesirable condition for the entire economy of Australia. Thus, numerous steps are essential
on the part of the Australian government in a bid to minimize the rate of growth. The
following hierarchy of particularly the top down evaluation is the said industry.
Fundamentally, the banking industry of Australia can be regarded as one of the most
important contributors of GDP of the nation. Essentially, there GDP percentage has altered
during the year 2015 by approximately 1% ever since the period of 2012. The GDP of the
nation is significantly contributed by essentially the agriculture as well as mineral resources
apart from the service sector. Reports reveal that the expenditure of the firm increased by

8
PRINCIPLES OF FINANCIAL MARKETS
around 1.9% in the developed economic circumstances. During the first quarter of the year
2016, the GDP growth of the nation is recorded to be approximately 1.1%. However, this
contribution is mainly by the service industry of the nation. Goodman et al. (2013) asserts
that all the well known economists are of the view the growth in the currency of the economy
in the worldwide market is substantial. However, this refers to the stability that can be offered
by the market capitalization.
Figure: Rate of Growth of Australia
(Source: Goldstein and Sapra 2013)
The banking segment in Australia is struggling hard to present the best to the economy of
Australia. By the way, it can be mentioned that rate of growth of GDP is recorded to be 3.1%
over the last few years. However, the banking segment can be regarded as one of major
contributors towards growth. Essentially, it can be hereby mentioned that majority of big
players in the banking industry in the nation is attempting to assist the customers to prosper.
Again, financial as well as insurance service of the nation has significantly contributed 1.8%
to the gross domestic product of the nation. Essentially, rate of inflation of Australia can be

9
PRINCIPLES OF FINANCIAL MARKETS
considered as the main reason that can make the process paying off debt difficult for all
customers. Again, the competition among different banks in the nation can be considered to
be pivotal in the process of evaluating main indicators of performance (Gitman et al. 2015).
This banking segment can be regarded as the basic obligatory needs of the customers to plan
for the future period. Different economists are of the opinion that banking industry in
Australia acts as the bridge between stakeholders of the banks and the economy.
Ennew et al. (2013) opine that financial services provided by different institutions in
Australia can be regarded as one of the largest contributors to the domestic economy.
However, then amount is approximated to be nearly $140 billion in the gross domestic
product. This specific segment of the nation employed approximately 450000 individuals.
The top banks of the nation such as the Commonwealth Bank as well as Westpac can be
regarded as one of the protected banks listed among the 25 others. In accordance to the
Financial Development Index of the year 2012, the nation Australia is rated as one of the
most excellent in nation’s financial segment. Again, financial constancy offered by the banks
such as Commonwealth Bank as well as the Westpac can be considered to be same.
The financial arrangement of the nation is necessarily vigorous and this is the reason why the
banking segment can develop and contribute considerably towards GDP.

10
PRINCIPLES OF FINANCIAL MARKETS
Figure: GDP Indicators
(Source: David 2017)
Evaluation of the banks aided in the process of comprehending the overall contribution of the
same in the nation’s GDP. The Australian banks might possibly be listed as one of the main
reasons that assisted in the overall growth of the country. The nature of associated by the
banks with particularly the tactical mission of assisting the shareholders of the firm has
contributed to the economy’s growth (Enekwe 2015).
Analysis of the company can be considered at the last in the process of top down analysis. It
can be hereby mentioned that the gross domestic product of the Australia is approximated to
develop in the upcoming years. Fundamentally, this is said to have a positive or desirable
effect on the operations of both the banks under consideration. In case if the rate of gross
domestic product as well as rate of unemployment decreases, then in that case, both the
corporations might succeed in enhancing the overall capitalization together with the base of
the customer (Castelnuovo et al. 2015). However, both the corporations have performed
fairly well all through the past years and are anticipated to develop. Besides this, the NRI

11
PRINCIPLES OF FINANCIAL MARKETS
segment of the bank Commonwealth Bank is anticipated to develop at a higher rate owing to
pattern of the economy. Again, the influence of the entire Australian economy is anticipated
to have a desirable influence on the price of the banks’ stocks listed in the Australian Stock
Exchange. It can be hereby observed that the prices of the stock of the bank Commonwealth
bank and the Westpac has developed by a huge percentage during the last few years. Again,
during the year 2012, stock price of the firm Westpac was recorded to be 18; however its
current traded price is necessarily 29. Based on this, it can be mentioned that the entire
Australian nation is directly and positively related to the financial performance of the banks
for instance, Commonwealth Banks and the Westpac (Cbagroup.com 2017).
Bottom up analysis
As rightly put forward by Bansal (2014), bottom analysis can be employed with the
assistance of the corporation, industry as well as the economy advance. Essentially, this refers
to the fact that a specific financier needs to appraise the company at first, thereafter the
industry and subsequently the entire industry/segment in which the banking firms function.
Thus, it can be considered to be very crucial to understand the financial state of affairs of the
selected corporation under consideration that includes the Commonwealth Bank (CBA) and
the Westpac bank by applying the bottom up process of evaluation.
The financial condition can be evaluated using the important financial ratio. Essentially,
financial ratio might be of different types that include profitability ratio, liquidity ratio,
growth ration as well as efficiency ratio (Robinson et al. 2015).
Profitability ratio of the corporation represents the overall framework of the corporation from
the perspective of the financier. Particularly, profitability ratio include operating profit ratio,
profit ratio (net) in addition to ratio on dividend pay-out ratio (Uechi et al. 2015).

12
PRINCIPLES OF FINANCIAL MARKETS
Graph: Operating Margin of CBA Australia
Graph: Operating Margin of Westpac Bank
As rightly indicated by Vogel (2014), operating profit essentially refers to the percentage of
operating earnings over the overall revenue from sales of the corporation. On the basis of the
graph presented above, it can be hereby concluded that the Westpac Bank has operating
margin of greater amount as compared to that of the Commonwealth Bank (CBA). Again, the
operating margin enumerated for the company Westpac is recorded to be 52.75% whereas the