Financial Statement Analysis of Australian Banks: A Deep Dive

This report provides a detailed financial analysis of Commonwealth Bank and National Australia Bank, two major Australian banks. The analysis encompasses key elements of financial statements, including equity, cash flow, other comprehensive income, and corporate income tax. The report delves into the components of equity, comparing the share capital, reserves, and retained earnings of both banks. It examines the debt-equity ratios, providing insights into their capital structures. The cash flow analysis explores operating, investing, and financing activities over a three-year period, comparing trends and performance. Additionally, the report investigates other comprehensive income, identifying relevant items and evaluating management's performance based on these metrics. Finally, the analysis covers corporate income tax, including tax expenses, effective tax rates, deferred tax assets and liabilities, and cash tax calculations, offering a comprehensive view of the banks' financial positions and performance.

ACCOUNTING

EXECUTIVE SUMMARY
In this report, we will discuss about few elements of financial statements. The companies
whose financial statements will be analysed are two largest banks of Australia. They are
Commonwealth Bank and National Australian Bank. The information used in this report is
derived from the annual reports of the company.

Contents
INTRODUCTION......................................................................................................................3
Equity Analysis..........................................................................................................................4
Understanding the components of equity...............................................................................4
Discussion on debt and equity of both the companies...........................................................6
Cash flow analysis......................................................................................................................8
Understanding each item of cash flow statement...................................................................8
Comparative analysis of cash flow for the past three years...................................................9
Other comprehensive income analysis.....................................................................................12
Reasons of not reporting these items in the income statement.............................................12
Comparative analysis of the items of other comprehensive income statement....................12
Evaluation of manager’s performance on the basis of other comprehensive income
statement...............................................................................................................................13
Analysis of Corporate income tax............................................................................................14
Tax expenses of the current year..........................................................................................14
Effective tax rate calculation................................................................................................14
Deferred tax assets and liabilities.........................................................................................14
Change in deferred tax assets and liabilities.........................................................................15
Calculation of cash tax amount for both the companies.......................................................15
Calculation of cash tax rate..................................................................................................17
Difference in cash tax rate and book tax rate.......................................................................17
Conclusion................................................................................................................................18
Bibliography.............................................................................................................................19

INTRODUCTION
Financial reports are prepared by all the companies in order to provide information to the
investors about the performance and position of the company. The few elements that are
discussed in this report are cash flow, equity, other comprehensive income and equity. The
financial reports of two of the largest banks are taken into consideration. The name of the
banks is Commonwealth Bank and National Australian Bank.
Commonwealth bank is one of the multinational banks which is widespread in Australia,
United Kingdome, United States and New Zealand. It is considered to be the largest bank of
the entire Southern hemisphere. There are various headquarters of this bank which is located
in different areas such as Sydney, Australia and Diamond Harbour. The services that are
offered by this bank include fund management of the retail sector, insurance and brokerage
services, institutional as well as business banking (Alvarez, 2013). This bank was establishes
in the year 1911 by the government and the banks got listed in the same year. However, this
bank was later privatised in the year 1996.
In the year 1982, two banks merged together which led to the establishment of National
Australia Bank. In regards to market capitalisation, this bank is considered to be the 21st
largest bank in the whole world. There are 8 major divisions of this bank which is divided in
two different geographical areas. The customer base is huge which is nearly 12.7 million.
Also, there are about 15900 branches and 4412 ATM. The major business activities that are
carried out by this bank is wealth management, wholesale banking as well as insurance
services (Datar, 2015).

Equity Analysis
The shareholders fund in the balance sheet of a company comprises of the share capital that
has been raised by the public to carry out operations along with the profits that has been set
aside over the years. These funds are set aside to meet the capital expenses of the company.
Understanding the components of equity
Commonwealth Bank
The shareholder’s equity in the balance sheet of the company comprises of ordinary share
capital along with certain reserves and retained profits.
Commonwealth Bank
Shareholder’s
Equity 2017 2016
Share capital 34,971 m 33,845 m
Reserves 1,869 m 2,734 m
Retained earning 26,330 m 23,435 m
Total 63,170 m 60,014 m
2017 2016
58,000
59,000
60,000
61,000
62,000
63,000
64,000
Commonwealth Bank
Shareholders
Equity
As we know, ordinary share capital is the amount that has been raised from the general public
to carry out operations (Easton, 2010). The amount of ordinary share capital amounts to $
33845 million in the year 2016 whereas it amounted to $34971 in the year 2017. The reasons
that resulted in the increase of shareholders equity was issue of shares, dividend reinvestment
plan set up by the company and also minimal purchases of treasury.

We can also observe from the table provided above that the retained earning has increased
from $23435 to $26330 in two years. The profit earned in the current year that has
contributed to such increase amounts to $9928 (Elaine, 2015).
There was a decline in the total reserves on the company which happened because of the fall
in the foreign currency translation reserve and also the cash flow hedge of the company. this
declined the total reserves of the company from $2734 million to $18967 million.
National Australian Bank
The components of the equity section of National Australian bank are contributed capital,
reserves and the retained profits (Fridson & Alvarez, 2012).
National Australia Bank
Shareholders’ Equity 2017 2016
Share capital 34,627 34,285
Reserves
23
7 629
Retained earning 16,442 16,378
Total 51,306 51,292
2017 2016
51,285
51,290
51,295
51,300
51,305
51,310
NAB
Shareholders
Equity
As we can see in the above table, the contributed capital of the company in the year 2016
amounted to $ 3425 million but in the year 2017 it increased to $34627 million. The company
reinvested the dividend which increased the share capital by $ 569 million and also the
company made a transfer from equity based compensation reserve of $170 million.

There was a decline in the reserves of the bank from $629 million to $ 237 million because of
the decline in the foreign currency translation reserve, general reserve and cash flow hedge
reserve (Horngren, 2012).
However, the retained earnings of the company showed a considerable increase from $16378
million to $ 16442 million. This reason for this increase was the profits earned by the
company in the current year along with the lower changes in the fair value of the investments
that the company holds.
Discussion on debt and equity of both the companies
A company has to raise funds from different sources in order to carry out its business
operations. There are two major sources of raising funds- raising capital from public by
issuing shares or by raising debt from third parties.
On observing the balance sheet of Commonwealth bank we found that the company has
equity of $63170 million and debt of $626655 million in 2017 whereas the National Bank has
a share capital of $51306 million and debt of $ 500604 million (Ittelson, 2009).
In order to analyse the capital structure of the company, we have calculated the debt equity
ratio for both the companies which are as follows:
Particulars Equity Share Cap Debt Debt Equity ratio
Commonwealth Bank 63,170 6,26,655 9.92
National Australia
Bank 51,306 5,00,604 9.76
Commonwealth Bank National Australia Bank
9.65
9.70
9.75
9.80
9.85
9.90
9.95
Debt Equity ratio
Debt Equity ratio

We can conclude from the table given above that the debt equity ratio of Commonwealth
Bank was 9.92 times and for National Australia bank it was 9.76 times. The ratio for both the
companies is almost similar.
A company has to plan for its capital structure so that it can hold the correct ratio of debt and
equity ratio. This plan helps the company to analyse the cost of capital and various other
factors also (Jensen & Meckling, 1976).

Cash flow analysis
The amount of cash outflow and inflow in the current year is recorded in the cash flow
statement of the company. There are three major sources of cash transactions which are
divided as-
 Cash from operating activities- The cash that is received or paid in relation to the
principal business activity or the activities that are carried out to fulfil the objectives
of the company is recorded under this head.
 Cash from investing activities- Cash received or spent on the selling or purchasing of
any investments is recorded under this head. Also, if there is dividend received from
such investments then it is recorded under this head.
 Cash from financing activities- Cash flows that relate to raising funds or repaying
them are usually recorded under this head (Lerner, 2009).
Understanding each item of cash flow statement
Commonwealth Bank
In the year 2016, the cash flow from operating activities amounted to $(4561) million but
the loss reduced to $(807) million in 2017 due to decrease in the interest payment in the
current year in comparison to the previous year.
Now let us talk about the cash flow from investing activity which amounted to $(2023)
million in 2016 and $677 million in 2017. This increase in the cash flow resulted because
of the decreased amount of investments that were made in certain tangible and intangible
assets (Menifield, 2014).
There was a decrease in the cash flow from financing activities from $1620 million to
$10472 million. Such increase in the cash flow from financing activity was because of the
fall in the funds that were present for the purpose of redemption of the debt securities,
purchase of treasury and also loan capital.
However, the net cash flow of the company increased from $(4973) million to $8988
million in the year 2017.
National Australian Bank

The cash flow from operating activity fell from $14460 million to $13217 million in
2017. Such decline was observed because of the lower interest and premium that was
received by the bank when compared to the previous year.
There was an increase in the cash flow from investing activity from $(9970) million to
$(313) million because there was less purchase of securities and more inflow from the
sale of controlled entities (Penman, 2012).
Now let us talk about cash from financing activity which declined from $9496 million to
$(313) million in 2017. This decline was observed because there was a huge amount of
repayments made and also cash inflows from instruments were lower.
The net cash of the company declined from $13986 million in 2016 to $12573 million in
2017 (Picker, 2016).
Comparative analysis of cash flow for the past three years
The cash flow from operating activities for both the companies are shown in the table
below:
Cash flow from operating Activities
Particulars 2017 2016 2015
Commonwealth -807 -4561 7183
National Australia 13217 14460 -13090
2017 2016 2015
-15000
-10000
-5000
0
5000
10000
15000
20000
Commonwealth
National Australia
Commonwealth bank has larger operations when compare to National Australian Bank
still the volume of cash flows are higher for National Australian Bank.

The cash flow from investing activities for both the banks are shown below:
Cash flow from Investing Activities
Particulars 2017 2016 2015
Commonwealth -677 -2032 -1215
National Australia -313 -9970 -7830
2017 2016 2015
-12000
-10000
-8000
-6000
-4000
-2000
0
Commonwealth
National Australia
We can observe in the graph provided above that the trend followed by both the banks is
the same. There has been a decrease in the cash flows in 2016 and increase in the cash
flows in 2017 for both the banks (Piper, 2015).
The cash flow from financing activities for both the banks are shown in the table provided
below:
Cash flow from Financing Activities
Particulars 2017 2016 2015
Commonwealth 10472 1620 -7875
National Australia -331 9496 1326

2017 2016 2015
-10000
-5000
0
5000
10000
15000
Commonwealth
National Australia
The cash flows under this head are following an opposite direction for both the banks.
There has been increase in the cash flows for Commonwealth bank whereas there has
been a decline in the cash flows for National Australian Bank (Ramírez, 2018).