Financial Markets Analysis: Westpac and Commonwealth Bank Report

This report provides a fundamental analysis of the Australian banking sector, with a focus on Westpac and Commonwealth Bank, utilizing both top-down and bottom-up approaches. The analysis begins with an executive summary, followed by an introduction to the principles of financial markets and an overview of the Australian banking industry. The report then delves into the background of the selected organizations, detailing their missions and key operational aspects. Top-down analysis is conducted, examining macroeconomic factors like GDP growth, inflation, interest rates, and unemployment rates, as well as the banking sector's contribution to the Australian economy. The bottom-up analysis involves an examination of the current financial situations of Westpac and Commonwealth Bank, employing ratio analysis to assess profitability, liquidity, efficiency, solvency, and growth. Finally, the report culminates in a summary of findings and provides investment recommendations based on the analysis. This report is a valuable resource for understanding the financial performance of these key Australian banks.

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

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Executive Summary
The present report is prepared to conduct the fundamental analysis of banking sector of Australia
using top down approach and bottom up approach. Selected organization for conducting analysis
is Common wealth bank and Westpac. Bottom up analysis has been done by considering the
macro economic factors influencing the economy as well as banking sector. Performance of
banking sector has significantly affected by various variables such as GDP, inflation and
unemployment rate. Top down analysis of organization has been done by implementation of ratio
analysis tool. Later part of report depicts the recommendation to investors for investing in the
chosen organizations.

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Table of Contents
Introduction:....................................................................................................................................6
Australian banking industry background:........................................................................................6
Background of Organizations:.........................................................................................................7
Top down analysis:..........................................................................................................................8
Bottom up analysis of current financial situation of Westpac and Common wealth bank:...........13
Summary and Recommendations:.................................................................................................22
Reference:......................................................................................................................................24

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Introduction:
For the purpose of investment, investors are required to conduct in depth analysis of the
industrial sector in which they are seeking investment prior to making any investment. Changes
in economic fundamentals and its impact on the performance of companies can be evaluate by
conducting fundamental analysis. Value and share price of company is considerably affected by
micro and macro-economic factors. For presenting the picture of industry and economy at macro
level, investors can perform top down analysis. Macro-economic picture of companies on other
hand is depicted by conducting bottom up analysis (Petty et al. 2016). Fundamental analysis of
two organizations from banking industry listed on Australian stock exchange are conducted in
present report. Two organizations are Westpac and Common Wealth Bank of Australia.
Australian banking industry background:
The banking sector of Australia has improved since the introduction of banking Act,
1959. Overall growth in performance of banking has been attributable to the growth in
performance of assets. Compilation of industry information has be from various sources such as
Reserve Bank of Australia, Australian Brea of statistics and Australian prudential regulatory
authority. Since the global financial crisis, there has been decline in the results of four major
Australian banks. Performance of credit control has remained stable and upside has been
witnessed in impairment theory. On the major agendas of banks, there is a continuous rise in
cash management. Since the proposal of government to nationalize the banking industry in late
1940s, the sector has experienced the most intense issue of social political agenda. There has
been lower credit growth outlook for major banks. Major Banks in Australia is working hard for
shaping new environment that helps in providing connected and more thoughtful experiences by

5PRINCIPLES OF FINANCIAL MARKETS
engaging staffs and technology as key enablers. Banks are diverse and large organizations
having long histories and changes in the banking sector is complex. Reframing the norms of
organizations along with resonant offerings, messages and contact points are need to be created
and that should be deeply embedded (Blondy et al. 2015).
The performance of assets of major Australian banks is responsible for analysis of
financial stability. Development and growth of country is analyzed by important decisions and
competitive positions of respective banks. There has been consistency in nature of growth of
competition in banking sector and evaluation of commercial property is trend of banking sector.
Some of developments of banking sector involves securitization quintessence and presence of
banks along with change in assets. Moreover, decline in growth has been in terms of falling and
declining of finance companies, building societies and credit unions.
Background of Organizations:
Common wealth bank is multinational bank of Australia offering business in wide range
of areas. The mission of organization is to provide valuable services to their customers and it
was established under Common wealth bank Act, 1911. Bank has a tremendous growth in its
people and shareholder base.
Westpac is one of the oldest bank of Australia that was established in year 1817. The
quality of portfolio of assets offered by bank was improved by low new problem facilities,
stressed asserts and work out of impaired facilities. Commercial and institutional segments of
organization continued to perform well due to their protective balance sheets and cautious
customers. Adequate provisioning is maintained by organization that involves provision of
impaired assets and collectively assessed provisions to weighted assets credit risks. During the

6PRINCIPLES OF FINANCIAL MARKETS
financial year 2015, there were provisions relating to growth that is largely offset by impact of
standard exposures and run off in watch list. Mission of organization is to provide sufficient
returns to shareholders, customer and business professionals (Banerjee 2015).
Top down analysis:
Investors for evaluating the performance of organization by looking the several macro
factors such as GDP growth rate, inflation, interest rate, unemployment rate, political factors and
exchange rate use top down approach. An impressive economic progress has been recorded for
more than 25 years that is unmarred by recession. There has been a robust entrepreneur
development supported by well-functioning legal system, effective system of government and
independent bureaucracy.
Banking and finance industry contributed $ 148.9 billion to $ 1.6 trillion of Australian
economy for the year ending 2016. Value added for banking sector is highest on record. For the
year ending, growth in insurance and finance industry was recorded at 4.5%. For the past for
years, there has been consistent growth in banking sector between 3.8% and 4.5%. The contrition
of banking industry to the national economic activity has reached a high of 9.5% (bankers.asn.au
2017).

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Banking industry value added:
(Source: bankers.asn.au 2017)
Over the four years as the effect of global financial crisis, there was a decline in the
contribution of banking industry toward the economy. However, there has been gradual increase
in contribution.
Banking sector contribution to economy:
(Source: bankers.asn.au 2017)

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The growth of banking sector has outperformed the growth of overall economy of
Australia. Growth of this sector was double that the growth of economy.
For the financial year 2016, it has been highlighted by the results of major banks in
Australia that there is a slow growth in recorded earning growth that reflects the subdued
domestic economy and increased requirement of regulatory capital. Banking sector is
experiencing the challenge of competitive environment and lower interest rate resulting for
increased funding of customer deposits and asset repricing. In light of challenging economic
outlook, the major banks will continue to focus on productivity, capital efficiency, refinement of
business model and productivity (Van Horne 2014).
Overview of Australian Economy
(Source: bankers.asn.au 2017)

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In order to offer and serving at best to Australian economy, banking sector has been
struggling in the past few years. One of the major contributor to the growth of gross domestic
product of country is GDP. The contribution of banking sector toward the growth of Australian
economy over the past five years is $ 25.9 billion and the percentage value stood at 13.4%.
Therefore, banking sector has contributed more than 10% of the economic growth of Australia.
There has been considerable contribution in the Australian economic sector towards the economy
that stood at 1.8% (Ogiela et al. 2015).
Other factor that needs to be crucially considered is the inflation factor that needs to be
considered while making repayment of debt value. Lower interest rate cannot be withstood that
has impact on gross domestic value of Australia. One of the biggest contributor to Australian
economy is banking sector as opined by many economists. An estimated 45000 people is
employed by this particular sector and the estimated amount of contribution of banking sector
stood at $ 140 million. Some of the major banks listed in Australian stock exchange includes
Westpac and Common wealth bank of Australia. 9.5% of economic activity received
contribution from banking sector and this was the highest contributor. Victorian and NSW
economies received great contribution from the banking sector.
It is expected that banking sector can significantly contribute to the growth of economy,
as the financial system of organization is robust.

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GDP indicators:
(Source: bankers.asn.au 2017)
The contribution of banks toward economy is evaluated by analyzing performance of
banks. Growth of economy has been assisted by the sustainable growth in banks performances.
Overall growth of sector has been received assistance from strategic mission established by
banks for helping shareholders.
Furthermore, for conducting top down analysis, it is requires to ascertain the performance
of selected organization. The financial performance of Common wealth bank and Westpac bank
can be significantly affected by growth in GDP rate in coming years. Market capitalization of
both organizations can be enhanced if there is declining Unemployment and GDP growth rate.
Since, last few years performances of organization is expected to grow resulting from economy
growing pattern.

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Domestic credit growth:
(Source: pwc.com.au 2017)
Domestic credit growth -There has been stability in the funding mix of major banks of
Australia including Westpac and Common wealth bank and the deposits of bank growth on
overall basis continued to increase.
Bottom up analysis of current financial situation of Westpac and Common wealth bank:
The bottom up approach takes into account approach of economy, industry and company.
This particular approach deals with the analysis of individual stocks and focuses on the
performance of specific organizations rather than the whole industry. Investors are required to
conduct a thorough analysis of the finance performance of organization prior to investing and
bottom up approach is a tool used for this purpose. This particular approach is consider suitable
when investors are seeking investment for long-term.
Analysis of financial performance of organization can be done by using the tool of ratio
analysis. Analyzing some particular ratios of organization would help in identifying the trend of

12PRINCIPLES OF FINANCIAL MARKETS
financial performance over long-term. Apart from identifying an organizations financial trend,
toll of ratio analysis also facilitates making comparison between different companies operating in
same sector.
Ratios that helps in ascertaining the financial position includes calculation of profitability
ratio, liquidity ratio, efficiency ratio, solvency ratio and growth ratio. Figures suggested by
calculation of these ratio helps in depicting overall financial position of particular organization.
The profitability position of organization is analyzed by calculating net profit margin.
Gross profit margin and dividend pay-out ratio. Operating profit is calculated as operating
income percentage with revenue generated from sales. Dividend pay-out ratio depicts total
amount of dividend that is payable to shareholders of organization in proportion of net income
generated by company (McKinney 2015).
Profitability ratio of CWB:
2011 2012 2013 2014 2015
39.00%
40.00%
41.00%
42.00%
43.00%
44.00%
45.00%
46.00%
47.00%
42.09%
45.17%
44.58%
46.56%
45.87%
Operating Margin
Operating Margin
Operating Margin of Common Wealth Bank of Australia: