Principles of Financial Markets: Australian Banking Industry Report

This report provides a comprehensive analysis of the Australian banking industry, with a specific focus on Commonwealth Bank of Australia (CBA) and Westpac. It begins with an executive summary outlining the background of the Australian banking sector, followed by an introduction emphasizing the importance of industry and company analysis for investment decisions. The study employs both top-down and bottom-up approaches, examining the macroeconomic environment of Australia and the microeconomic performance of CBA and Westpac. The report analyzes the industry's growth, stability, and key trends, including the impact of the Banking Act of 1959 and the emphasis on the Liquidity Coverage Ratio. Mission statements and vision statements of both corporations are presented. The top-down analysis evaluates the Australian economy's growth, GDP, and unemployment rates. The report also delves into the bottom-up analysis using financial ratios such as profitability, efficiency, liquidity, and growth ratios to assess the financial health of CBA and Westpac. The report concludes with recommendations based on the findings, offering insights into the banks' performance and the broader economic context.

Running head: PRINCIPLES OF FINANCIAL MARKETS
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Executive Summary
The entire background of the banking industry in Australia is also illustrated in this segment.
A top down as well as bottom up analysis of corporations Westpac as well as Common
Wealth Bank of Australia, functional in the Australian banking industry is analysed herein
this study. Furthermore, the study also critically analyses the impact of Australian economy
on both the companies functioning in the banking industry. Moving further, the current study
also conducts a bottom up approach founded on significant financial ratio of both the selected
corporation. Based on the findings of the study, the study proposes recommendations of the
study.

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Introduction
In terms of business, it can be hereby mentioned that proper analysis of company as well as
industry is of utmost importance to investors before arriving at investment decisions.
Fundamentally this study undertakes fundamental analysis on two corporations explicitly,
Common Wealth Bank of Australia (CBA) as well as Westpac listed in the ASX. The top
down analysis presented current study can aid the financiers in presenting a macro view of
the respective economy as well as industry. Again, the bottom up approach carried out in the
present study can help in representing the micro-economic view of the respective corporation.
Moving further, the current study also proposes recommendations based on the findings of
the study.
Analysis of Australian Banking industry
As rightly indicated by Moradi-Motlagh and Babacan (2015), there are a large number of
licensed banks that are operating in the banking segment of the nation. However, a steady
growth can be witnessed in the overall performance of the asset of the banks and this in turn
helps in the overall growth rate of the economy. Again, the stability of this particular segment
is maintained by the augmentation of the capital of the company in the recent quarters. Again,
another significant factor covered by the segment of the nation includes greater emphasis on
the Liquidity Coverage Ratio or else the LCR (Moradi-Motlagh and Babacan 2015). The
Banking Act of 1959 helps in improvement of functioning of Australian banking
corporations.
Evaluation of the financial stability of the nation refers to the fact that high importance can be
attached to the process of analysis of performance of asset of the Australian banks. During
the year 2016, an important step comprises of generation of business loans (Kpmg.com

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2017). However, competitive pressure as well as significant decisions undertaken by the
nation that helps in analysis of growth as well as development of diverse cities. However, the
trend that can be witnessed in the banking segment in Australia consists of critical evaluation
of the process of valuation of commercial property (Deloitte 2017). Again, the nature of
competition in the banking segment is essentially considered to be consistent. Particularly,
this can be considered as the primary reason that has led to the development of this particular
sector over the years. The free democracy of the banking segment consists of the significance
of presence of banks along with securitization. Besides this, the third alteration exists in the
share of resources. Finally, economy’s growth is founded on the decrease in the existence of
credit unions, finance corporations as well as building societies (Clmr.unsw.edu.au 2017).
Mission Statement of the corporations
Commonwealth Bank of Australia pronounces the mission statement. This declaration reads
about the intention to foster the amount of wealth of all the clientele. In essence, this can help
in making certain that the wishes of the customers are satisfied. Again, the vision statement
of the bank states about the intention of enhancement of overall financial well being of the
individual. Essentially, this also takes account of retention of trust of clientele by securing
both the business as well as the community in which the business operates
(Commbank.com.au 2017).
The vision of the corporation Westpac is to aid the customers of the firm across the globe to
attain growth and prosperity. The management of the corporation also intends to offer
specialised services to the consumers by supporting them in their process of growth.
However, the mission of the bank Westpac also involves providing higher rate of return to
different clientele, business professionals along with other investors. In addition to this, the
corporation also intends to the best place for the worker. In essence, the members of the staff

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of the firm also intend to thrive on their own style of management and institute a business
concern that is effective in developing long term association (Westpac.com.au 2017).
Top down analysis
Arjomandi et al. (2014) affirms that analysis of industry primarily starts with the top down
analysis. Essentially, the Australian economy is a developing nation. However, in the present
state of affairs this industry has attained considerable amount of growth. The growth rate of
GDP is taken roughly 4.40% and on the basis of this growth rate the top down analysis can be
undertaken.
Figure: Representing Highlights of Australian Economy
(Source Joshi et al. 2013)
Based on the data presented in the figure, it can be hereby concluded that rate of growth of
nation Australia is on a rising trend and simultaneously the rate of unemployment also has
declined as compared to previous years. Furthermore, rate of inflation registered for the

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nation Australia has also escalated and present current account deficit has also widened.
However, this can be regarded as a negative mark for the Australian economy, therefore,
numerous steps are necessary from the government in a bid to minimize the overall rate of
growth (Paradi and Zhu 2013)
Banking industry is one of the largest contributors towards the growth of the entire nation.
Transformations have taken place as a whole in the proportion of GDP in FY 2015. Analysis
of GDP of the nation divulges the fact that this particular indicator augmented by nearly 1%
from the time of June, 2012 (Paradi and Zhu 2013). Besides this, the service segments such
as the banking industry, considerable growth of the country’s GDP has significantly
contributed by particularly the agriculture as well as mineral resources (Zander et al. 2015).
Additionally, expenses also got amplified by roughly 2% in advanced economic state of
affairs. Essentially, during 2016, it complete growth in GDP of the nation was observed to be
1%, primarily driven by service segment. Majority of the renowned economists are of the
view that the overall intensification of the Australian Dollar in the global market would be
substantial (Zander et al. 2015). Again, this will also comprise of the instability that has been
delivered by the market capitalization (Zander et al. 2015).

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Figure: GDP- Australia
(Source: Joshi et al. 2013)
Intrinsically, the banking sector is struggling to deliver the best to the entire economy. The
overall development of GDP is just about 3% as recorded during prior years. Even so, the
banking business is a major contributor towards the overall development. In this connection,
it can be mentioned that majority of the banks operating in the nation is attempting to help the
clients prosper. Again, this is essentially one of the primary reasons behind the significant
rate of growth of the economy. Biener et al. (2016) opines that economic plus insurance
facility has roughly 2% contribution in nation’s Gross Domestic Product (Sharma et al.
2013). Nevertheless, the other side of the story indicates towards the banking segment and
development of GDP and this refers to the inflation. Again, inflation might be the
fundamental cause that might possibly make repayment of debt difficult for the clientele. This
essentially influences the rate of growth of GDP by in spite of lower rate of interest.
However, the competition of diverse banks in the nation is pivotal in evaluating the key
performance markers. Analysis of this specific market reflects that this sector can be
considered to be one of the primary necessities of the clientele to plan about their future.
Majority of the economists of the nation assert that that the banking segment take action to
bridge the gap between the stakeholders and the entire economy.
As a matter of fact, economists consider pecuniary services of Australia as one of the prime
givers to the advancement attained by a nation. Necessarily, this contributed sum is said to be
just about $139.9 billion in the entire GDP (Cavusgil et al. 2014).This specific sector of the
nation employed roughly 450000 individuals. However, this top category bank of the nation
for instance Commonwealth Bank of Australia (CBA) in addition to Westpac can be
measured as banks with utmost security specified among the 25 most secured banks in the

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entire universe. According to the World Economic Forum Financial Development Index of
the year 2012, Australia can be rated as one of the best performing among all others in the
financial unit. Essentially, financial stability or else consistency offered by the banks that is to
say the Commonwealth Banks and the Westpac play a very significant role in the same.
Basically, the financial system of the nation is essentially robust and this is the main reason
behind the high rate of growth of the sector that subsequently contributes towards the GDP.
Figure: GDP Indicators
(Source: Stufflebeam and Coryn 2014)
Evaluation of the banks assisted in comprehending the overall contribution of this segment
towards the GDP. Again, the banks have also contributed towards sustainable growth that has
again led to overall growth of the nation. Strong existence of this banking segment might
probably be regarded as one of the most important reasons that facilitated growth of the
nation (Needles et al. 2013). The connection or in other words the relation instituted by the

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banks with tactical mission of assisting the shareholders has contributed towards the growth
on the whole.
Analysis of the company is lastly considered in the process of top down analysis. Essentially,
this can be concluded that the GDP of the Australian economy is anticipated to grow in the
upcoming period. Particularly, this might have a desirable influence on the operations of
Commonwealth Bank and the Westpac. In case if the rate of GDP and the rate of
unemployment decreases, then both of these corporations might successfully enhance the
market capitalization together with the base of the customers (Leuz and Wysocki 2016).
However, both of these corporations have performed well throughout the past few years and
is anticipated to grow at an even higher rate in the future. The Australian economy has a
positive influence on the prices of the stock listed in the Australian Stock Exchange (ASX).
Again, it can be observed that the prices of the stock of the Commonwealth Bank (CBA)
have developed by a huge percentage in the recent years (Commbank.com.au 2017). During
the year 2012, the price of shares of the firm CBA was registered to be around 40 and
presently, it is traded at a price $74.43. Again, on the other hand, price of share of the bank
Westpac was documented to be 18 during the year 2012 while it is currently traded at a price
of nearly 29.59. Based on this, it can be hereby conclude that the Australian economy has a
direct as well as positive association on the overall financial performance of all the two
different banks such as CBA and Westpac (Hail 2013)
Bottom up Analysis
Bottom up analysis can be employed with the assistance of the Company, industry as well as
the economy tactic. This refers to the fact that firstly, a particular financier has the need to
evaluate a corporation and thereafter the industry and subsequently the economy in which the

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firm is functioning (Bauer 2016). Thus, it is of much importance to understand the overall
financial state of affairs of the two corporations selected for the current study.
In addition to this, the financial condition can be analytically evaluated using key financial
ratio. Essentially, financial ratio can be said to be of different types that includes the
profitability ratio, efficiency ratio, liquidity ratio as well as growth ratio among many others.
However, the entire financial ratio might assist a financier to compare between firms from the
perspective of financial performance of the corporation (Makkonen et al. 2014).
Profitability ratio of the corporation essentially replicates the profit framework of the
corporation for the financiers (Grant 2016). The primary profitability ratio includes the
operating profit ratio, dividend payout ratio together with the net profit ratio.
Figure: Operating Margin of CBA Australia

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Graph 2: (Operating Margin) for the business firm Westpac Bank
Overall fraction of operating earnings over proceeds deciphered from sales is operating profit
(Bartov and Mohanram 2014). Based on findings presented above, Westpac has considerably
greater operating profit margin in comparison to the operating profit of Commonwealth Bank
(Leuz and Wysocki 2016). Again, the operating margin of the firm Westpac is recorded to be
nearly 52.57%. On the other hand, the operating margin of Commonwealth Bank is registered
to be 45.75% during the FY 2015 (Bauer 2016). Even so, operating profit margin dropped for
both banks. However, on the other hand, the profitability of the bank Westpac is calculated to
be more than that of the other bank CBA.
In the same way, net profit margin indicates percentage of acquired net profit of firms over
proceeds from sales (Makkonen et al. 2014). In effect, net profit margin of banks under
deliberation is as graphically represented below:

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Graph: CBA (Net profit Margin)
Graph: (Net profit Margin) for the business firm Westpac Bank
Westpac has relatively enhanced financial situation when considered in terms of profitability
in comparison to CBA. Observation says that proceeds of Westpac Bank are mounting and
business has succeeded in diminishing direct and indirect pay outs. Thus, it can be hereby
inferred that Westpac has enhanced capacity for use of sales proceeds in comparison to that
of Commonwealth Bank (Commbank.com.au 2017). However, the overall profit of
Commonwealth Bank has dropped from 37.92% to roughly 37.02% in the financial year
2015. Proceeds of CBA were enumerated to be $27497. Nonetheless, Westpac had relatively
lower profits of just about $21642. Therefore, it can be assessed that the management of CBA
has failed to restrict the operating outlay, even if net profit is more than what is recorded for
Westpac (Bartov and Mohanram 2014).
Ratio of dividend payout represents that the entire amount of dividend compensated to the
shareholders according to the net earnings of corporation. However, this ratio can again be
evaluated with the assistance of the two graphs presented below: