Detailed Financial Analysis of Westpac Banking Corp and Competitor

This report provides a critical financial analysis of Westpac Banking Corp, examining its adherence to Australian Accounting Standards Board (AASB) guidelines, the Corporations Act 2001, and its overall financial health. The analysis includes a detailed review of the company's annual report, f...Read More

WESTPAC BANKING
CORP

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Providing critical analysis of annual report of organisation...............................................1
2. Comparing firm with other corporations listed on ASX....................................................4
3. Summarising report to reach towards conclusion..............................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Finance is a fast field in which company's management takes crucial decisions so as to
enhance profitability in overall financial health. Present report deals with Westpac Banking Corp
engaged in imparting financial services listed on ASX. Critical analysis of the company on
accounting concepts, AASB guidelines and true and fair view has been explained. Comparison
of organisation is done with Commonwealth Bank of Australia engaged in same sector. At the
end, summary has been provided whether investment should be made or not. Ratio analysis is
conducted for 2016 and 2017 financial years for both organisations. Thus, strict adherence to
AASB and Corporation Act, 2001 enhances financial statements of company useful for
stakeholders.
MAIN BODY
1. Providing critical analysis of annual report of organisation
Business has to perform its operations by considering rules and framework governed by
the accounting professional body so that it may carry on tasks without any difficulty. It is
essentially required as organisation should obey all laws listed by body. The financial statements
such as cash flow statement, balance sheet and income statement shows true and fair view of
company's financial health (Sutherland, 2017). The information so supplied are quite beneficial
for stakeholders to rely on and take decisions in their favour. In relation to this, Westpac Banking
Corp which is one of the biggest banks of Australia has been pioneered in financial services
provided to customers. The Australian professional body regarded as AASB (Australian
Accounting Standards Board) guides and regulates corporations so as to provide true financials
to users of accounting information for taking better decisions. The adherence to AASB,
preparation of true financials conceptual framework and corporation law can be explored in
Westpac Banking Corp whether it has strictly adhered to it or not.
AASB provides variety of guidelines which are to be met by organisation for operating in
the best possible manner. AASB 101 provides that presentation of financial statements should be
made in accordance to general purpose statements to effectively ensure comparability of
organisation's previous accounting records and same with other similar organisations (AASB 101
Presentation of Financial Statements. 2015). The board lists down that firm should adhere to
rules and standards and prepare financials showing true and fair view quite effectually. AASB
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119 postulates benefits reserved for employees. It can be identified in annual report of Westpac
Banking Corp that CEO and Group executive’s personnel’s have been imparted with life
insurance cover under the scheme of Westpac Group Plan at no expense (Annual report of
Westpac Banking Corporation. 2017). Superannuation benefits are being given by complying
with AASB 119 Employee Benefits. Another standard such as AASB 2 for share based payment
has been included in financials of Westpac Banking Corp for the year 2017. Fair value of LTI
grants have been made during the year. LTI grants would be vested on satisfaction of
performance in forthcoming periods.
AASB 8 devoted to operating segments requires results of various segments of
organisation for presenting information consistent with that of Westpac Banking Corp decision-
maker. In addition to this, company utilises performance measures known as cash earnings. The
term represents profit from current ongoing operations useful for calculating dividends. It is
neither net profit nor as a measure for cash flow in firm. The management believes it allows
Westpac Group to effectively measure performance quite effectually. It can be seen that
company is strictly following all the standards and prepares financials accordingly for imparting
true view to stakeholders which have stake in overall financial health of organisation.
General purpose financial reports various aspects of qualitative characteristic of
information. The objective is to provide prominence included in financial reporting and
importance to assess management's capability of protecting resources. Moreover, to introduce
prudence concept which is useful for achieving neutrality. Another objective is to state that
faithful representation is on the basis of substances of economic phenomenon and not merely on
legal form. There are various qualitative characteristics of useful financial information are
relevance and faithful representation. It postulates that information should be capable for
initiating difference made by external or internal parties (Conceptual Framework for Financial
Reporting. 2015).
In simple words, accounting concept such as relevance states that information being
provided to users should make an impact on decision-making. This may include content or
timeliness by which decisions can be affected. On the other hand, faithful representation as name
suggests that substance of economic phenomenon must be given by which faith can be attained
by users of accounting information regarding financial statements. Moreover, complete
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explanation of each and every substance should be made which represents fairness of health
suitable for stakeholders for taking decisions by analysing the same.
Comparability is another qualitative characteristic implying that users can identify
differences and similarities among two items at least as it does not apply to single item.
Verifiability means that substances should be verified for enhancing quality of information
supplied in statements. Understandability states that whatever information given by financials
must be classified, summarised, in concise way by which it can be easily understood by even
layman. Timeliness means that timely information should be provided which helps and
influences decision-making of users as older one is less capable for taking decisions. Conceptual
framework has been properly implemented by organisation and financials are prepared
accordingly (Svoboda and Bohušová, 2017).
AASB 9 Financial Instruments will replace AASB 139 devoted to Recognition and
Measurement. It will include 'expected credit loss', impairment model and modified approach to
hedge accounting. This standard will be applicable in September 2019. AASB 9 standard is
devoted to revised impairment model based on for expected credit loss on unbiased forward
looking information. Hence, timely recognition utilises three stage approach. On the gross
amount of financial asset, interest is computed. However, it does not apply to asset when it is
credit impaired. Expected credit loss is probability-weighted amount by assessing possible
outcomes and by considering time value of money concept, past and current conditions. Thus,
greater judgement can be provided with new impairment model. It also replaces classification
and measurement model disclosed in AASB 139 that categorises assets on the basis of business
model and whether cash flows represent interest and principal payment.
AASB 15 Revenue from Contracts with Customers will replace AASB 118 Revenue with
effect from 30 September 2019. It is related to revenue recognition and no material impact is
expected to be there on the Westpac Group. On the other hand, Corporation Act, 2001 has been
followed and financial reports are prepared by adhering to same. Westpac Banking Corp is a
public limited by shares organisation listed on ASX. One of the interesting aspect found in
Australian organisation is that shareholder is not entitled to receive dividend (Mack, 2018).
When final dividend is declared, then it becomes debt payable to shareholder by company. The
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financial statements as audited discloses that Corporation Act, 2001 is being complied with and
all regulations are abided by organisation.
No contraventions to consolidated financial statements are there and these are produced
by taking into account AASB as well. The public company should have three directors of which
two of them must be Australian resident. Moreover, one secretary to be resident in Australia. The
remuneration of directors is fixed by company. Director which receives any remuneration is
liable for tax purpose just like an employee of corporation. There are various duties of directors
of which avoidance of conflicts is vital. The duty of care and loyalty should be exercised. They
should have the best interests in company. This means that company is effectively regulated by
Corporation Act, 2001 and AASB so as to attain true and fair financials. Hence, it can be
critically analysed that firm has produced financial statements with relevance to the standards
(Cohen and Karatzimas, 2017).
2. Comparing firm with other corporations listed on ASX
Financial performance is required to be enhanced so that business may be able to reach
towards new heights in the best possible manner. This is essentially required so that organisation
can attain higher profits and customers' may be satisfied. Westpac Banking Corp is a leading
bank in Australia engaged in providing financial services and has earned significant profits. It
can be reflected from annual report that net earnings were 7,445 in 2016 which reached to 7,990
in next year having positive 7 % of change. In relation to this, Earnings per share (cents) also
increased to 224.6 in 2016 to 238 in 2017. Cash earnings as disclosed in financial report was
7,822 and 8062 in 2016 and 2017 respectively. These figures provide that firm is performing
well in the market and satisfying stakeholders with its outstanding performance (Morton, 2018).
On the other side, main competitor of Westpac Banking Corp is Commonwealth Bank of
Australia which is engaged in banking sector and listed on ASX. The company whether
performing well or not can be disclosed by effectively producing financial ratios. From the
computation of ratios, comparison between Westpac Banking Corp and Commonwealth Bank of
Australia can be done with much ease. This will be clarified on the account of profitability,
efficiency, liquidity, investment aspect and collectively financial health of better company can be
analysed. Ratios analysis is conducted below-
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Westpac Banking Corp
Commonwealth Bank of
Australia
Particulars Formula 2017 2016 2017 2016
Profitability ratios
Net profit ratio
Net profit / Sales
revenue 37.12 35.51 39.57 38.09
Return on Assets
Net profit / total
number of assets 0.94 0.90 1.04 1.02
Return on Equity
Net profit /
Stockholders'
Equity 13.37 13.38 15.46 15.5
Efficiency Ratios
Fixed Assets
Turnover ratio
Net sales revenue
/ Average fixed
assets 13.34 12.59 6.42 7.15
Asset turnover ratio
Net sales revenue
/ Net assets 0.03 0.03 0.03 0.03
Solvency Ratio
Debt Equity ratio Debt/Equity 3.04 3.2 0.3 0.26
Investment Ratios
Dividend pay-out
ratio
Dividends / Net
income 84.60 76.60 77.9 79.8
Earnings Per Share
(in AUD)
Net profit –
Preference stock /
Outstanding
2.38 2.24 5.59 5.29
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weighted average
shares
It can be interpreted from the above ratios that both firms are performing competitively
and fighting for market share quite effectually. It is evident from the fact that profitability,
efficiency, solvency and investment aspects are categorised to evaluate which organisation is
generating revenue and has prospective financial health. This serves as a base for company's
internal and external parties to take decisions benefiting individual interests.
Profitability ratios
Westpac Banking Corp had net profit ratio of 35.51 in 2016 and it increased to 37.12 in
next period. This effectively shows that firm has controlled unwanted expenditures so as to
increase profit in the best possible manner. In this way, it is able to conquer by reducing costs.
On the other hand, Commonwealth Bank of Australia had net profit margin of 38.09 in past year
and increased to 39.57 in 2017 which clarifies that firm has more earnings in % as compared to
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Illustration 1: Net profit margin

other organisation. This shows that organisation is performing well and earning profits (Pilcher
and Gilchrist, 2018).
Return on Assets (ROA) of Westpac Banking Corp was 0.90 and 0.94 in last two years.
In this manner, other organisation had 1.02 in 2016 of ROA and maximised to 1.04 which
highlights Commonwealth Bank of Australia is generating good quantum of profits by utilising
assets in effective way. This means that sales are accomplished by using assets too much. This
shows that firm is performing well and assets are utilised to generate returns.
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Illustration 2: ROA

In relation to this, return on Equity (ROE) of Commonwealth Bank of Australia in 2016
was 15.5 and reached to 15.46 with a minor downfall. The ratio provides whether shareholder's
investment has been utilised properly or not for producing income. Higher the ratio, better for
company as it is favourable to it clarifying better profitability position. On the other side,
Westpac Banking Corp had ROE of 13.38 and 13.37 which is well for firm. However, in
comparison to its rival, it is low. Overall, it shows Westpac Banking Corp is unable to perform
higher than its competitor in terms of generating earnings.
Efficiency Ratios
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Illustration 3: ROE
Illustration 5: Fixed asset turnover ratio
Illustration 4: Asset turnover ratio

Fixed asset turnover ratio of Westpac Banking Corp was 12.59 in 2016 and maximised to
13.34 in 2017 financial year. On the other side, its rival had 7.15 in 2016 year which reduced in
next year to 6.42. This means that fixed assets are properly used by Westpac Banking Corp in
generating sales up to a high extent (Li, Nie, Chang and Yang, 2017). Asset turnover ratio of
both company had been same in 2016 and 2017 or constant and no change has been found. It
implies that assets are effectively utilised by companies.
Solvency Ratio
It can be analysed from debt equity ratio that Commonwealth Bank of Australia had 0.26
of ratio in 2016 which maximised to 0.30 in 2017. The ideal ratio is considered to be below 0.40
treated as pretty much safe for organisation in paying out debt within stipulated time (Driscoll
and et.al, 2018). It ensures that company is able to pay-off liabilities as debt is just 30 % and
remaining 70 % is capitalised through equity. While, Westpac Banking Corp had ratio of 3.2 in
2016 and 3.04 in next year showing firm is highly using debt in its capital structure and equity is
not used in good proportion. It is required that debt and equity should be used in an optimum
manner and balanced capital structure must prevail in order to reduce solvency risk. It is likely
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Illustration 6: Debt equity ratio

that Westpac Banking might face credit risk as organisation has to pay principal amount along
with interest accrued on it. Thus, ratio of Commonwealth Bank of Australia is good enough.
Investment Ratios
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Illustration 7: Dividend pay-out ratio

Investment ratio shows that whether adequate return on investment appraisal is generated
or not. Dividend pay-out ratio of Commonwealth Bank of Australia was 79.8 in 2016 and 77.9 in
2017. While, Westpac Banking Corp had 76.60 of ratio in earlier year and has been maximised
to 84.60 in 2017. EPS was 5.29 in 2016 of Commonwealth Bank of Australia and reached to
5.59. It clearly shows that Westpac Banking Corp had low investment ratio and its competitor
has good overall position.
3. Summarising report to reach towards conclusion
Hereby it can be concluded that financial performance is a key indicator whether firm is
earning as per the stated objectives or not. Moreover, it means that if investment of $10000 to be
made in company which is a huge amount and as such, it should be made in profitable firm.
Westpac Banking Corp has low profitability; however, it is progressing well in all aspect. In this
manner, debt equity ratio is more and company should use equity so that debt obligations can be
minimised (Craig and et.al, 2018). Dividend pay-out ratio is well-enough and is more compared
to its rival. Hence, it can be interpreted from above ratio analysis that Westpac Banking Corp has
low presentation in every aspect of financial performance. However, it is progressing well
because financial report shows that it will earn good amount of profits in the future. EPS is also
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Illustration 8: EPS

increased and hence, it is recommended that investment could be made for better returns to
shareholders.
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REFERENCES
Books and Journals
Cohen, S. and Karatzimas, S., 2017. Accounting information quality and decision-usefulness of
governmental financial reporting: Moving from cash to modified cash. Meditari
Accountancy Research. 25(1). pp.95-113.
Craig, S. G and et.al, 2018. Tumor-infiltrating lymphocytes and CD4/FOXP3 ratios reliably
predict survival using digital image analysis.
Driscoll, A. and et.al, 2018. The effect of nurse-to-patient ratios son nurse-sensitive patient
outcomes in acute specialist units: a systematic review and meta-analysis. European
Journal of Cardiovascular Nursing.17(1). pp.6-22.
Li, Z., Nie, F., Chang, X. and Yang, Y., 2017. Beyond trace ratio: weighted harmonic mean of
trace ratios for multiclass discriminant analysis. IEEE Transactions on Knowledge and
Data Engineering. 29(10). pp.2100-2110.
Mack, J., 2018. The consequences of the current public sector reporting framework for
government accountability and decision making. In Public Sector Accounting,
Accountability and Governance (pp. 43-54). Routledge.
Morton, E. F., 2018. A historical review of the rise of tax effect accounting as a financial
reporting norm. Accounting History. p.1032373218785405.
Pilcher, R. and Gilchrist, D., 2018. Differential reporting: What does it really mean for the public
sector? In Public Sector Accounting, Accountability and Governance (pp. 17-29).
Routledge.
Sutherland, D. W., 2017. Independent audit report. Newsmonth. 37(3). p.19.
Svoboda, P. and Bohušová, H., 2017. Amendments to IAS 16 and IAS 41: Are There Any
Differences between Plant and Animal from a Financial Reporting Point of View? Acta
Universitatis Agriculturae et Silviculturae Mendelianae Brunensis. 65(1). pp.327-337.
Online
AASB 101 Presentation of Financial Statements. 2015 [Online]. Available Through:
<https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf>
Conceptual Framework for Financial Reporting. 2015 [Online]. Available Through:
<https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf>
Annual report of Westpac Banking Corporation. 2017 [Online]. Available Through:
<https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/
2017_Westpac_Annual_Report_Web_ready_&_Bookmarked.pdf>
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