Bea112 Principles Of Finance And Assessment Answers

Answer:

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).

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).

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%.  

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 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.

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 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.

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 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).

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 operating profit margin of the bank Westpac is registered to be 45.75% during the year 2015. Nevertheless, the operating profit margin calculated for both the banks have lessened during 2015 as compared to the year 2014, yet the profitability of the corporation Westpac is enumerated to be greater than that of CBA (Cbagroup.com 2017).

Likewise, net profit margin refers to the percentage of net profit calculated over the revenue from sales. Essentially, the net profit margin of necessarily both the banks can be analysed using the following graph:

Based on the graph presented above, it can be hereby derived that Westpac Bank has a superior profitability position as compared to that of Commonwealth Bank. Fundamentally, this is primarily because the revenue from sales of Westpac is necessarily on rising trend and the corporation is doing well in the process of minimizing the direct along with indirect expends. Again, this subsequently states that Westpac has a superior capacity of utilization of the revenue as compared to that of the Commonwealth bank although the net profit margin has lessened from the level of 37.92% to around 37.02% during the year 2015 (Westpac.com.au 2016). Contrarily, it can be derived that the revenue derived from the sales of the firm CBA was necessarily 27497, whereas Westpac had a lower level of revenue from sales and it stood at 21642 (Cbagroup.com 2017). However, it can be stated that the administration of the corporation failed to curtail operating expends even though the net profit is greater than that of the bank Westpac.

In essence, ratio on dividend pay-out refers to the total amount of dividend payment to all the shareholders of the firm according to the net earnings of the respective corporation (Uechi et al. 2015). Essentially, this specific ratio can again be compared with the help of the graph mentioned below

On the basis of the above mentioned graph, it can be hereby deduced that CBA has a superior ration result on dividend payout compared to that of the Westpac Bank (Westpac.com.au 2016). This essentially assumes that the bank CBA offer dividend to shareholders on a more frequent basis, taking into the consideration the margin of profit. However, this can be regarded as a desirable sign for the financiers since their primary concern is essentially divided percentage. This shows that total revenue as well as net earnings of CBA is superior to that of Westpac over the last 5 years (Cbagroup.com 2017).

As rightly indicated by Robinson et al. (2015), efficiency ratio helps in comprehending internal behaviour of specific assets along with liabilities of business entity over a specific time period. In particular, this also provides a vivid idea regarding the inventory turnover, overall utilization of both equity as well as entire amount of receivable along with payable.

Petty et al. (2015) opines that asset turnover ratio presents the asset percentage that is being utilized from the overall revenue obtained from the sales of the firm. On the basis of the above mentioned graphs, it can be hereby deduced that the bank CBA has used a greater percentage of the total assets out of the sales revenue (net). During the financial year 2015, the asset turnover ratio deduced from the financial assertions of the corporation Commonwealth Bank is found to be 0.31 while the same is found to be 0.0267 for the firm Westpac. Again, this also represents the fact that CBA has a desirable financial state of affairs as compared to that of the rival of the firm that is Westpac. Based on the appraisal, it can be said that CBA has a more desirable position from the perspective of financiers since it is efficiently handling both fixed assets as well as current assets (Cbagroup.com 2017).

Linkov et al. (2014) asserts that the liquidity ratio also represents the overall percentage of liquidity conditions of the corporation. In case if the respective ratio is on a rising trend then in that case, it can be hereby deduced that the corporation has enough inflows of cash and the firm has used all the working capital in an effectual way. This can also be assumed that excessive liquidity is also not a good indicator for any corporation since the company necessarily get exposed to diverse risks related to financial leverage (Leary and Roberts 2014). 

On the basis of the graph mentioned above, it can be hereby deduced that enumerated current ratio for both the corporation have altered over the specific period that is taken into consideration. As per the past financial year, the calculated current ratio of the corporation Westpac can be found to be 1.26 whereas the same is recorded to be 0.89 during the same period. Results of the study show that the bank Westpac can repay all short term obligations in a more effective manner as analysed and compared against CBA (Westpac.com.au 2016). Again, in case of the bank CBA, it can be hereby deduced that the current ratio for the firm dropped down from the level 2.26 to nearly 0.89. In essence, during the financial year 2014, a superior fraction of the current resources of the corporation has already become outmoded while the during the financial year 2015, the corporation CBA have sold out the current resources that again led to huge drop in the current ratio (Cbagroup.com 2017).

Comparison of the financial state of affairs of particularly both the firms with the assistance of significant financial ratio reveals that the Westpac bank has a comparatively desirable position than that of the CBA when considered in terms of liquidity as well as profitability. Nonetheless, CBA’s level of efficiency is said to be superior to that of Westpac, yet the corporation Westpac has to some extent a more favourable edge as compared to that of CBA (Cbagroup.com 2017).

Recommendations

In conclusion it can be said that the banking industry in Australia is expected flourish in the future period. Based on the results of the top down as well as bottom up evaluation, it can be hereby be concluded that the banking segment of Australia have hugely contributed towards the overall national income and along with the gross domestic product. Top down analysis represents that the Australian financial system is constantly moving up in the current years. However, based on then past year’s figures, it can be deduced that the current account deficit, rate of interest in Australia and unemployment level in Australia was on a rising trend. Therefore, from the perspective of a financier it can be proposed that a financier need to invest on both the banks on long term plan. Bottom up analysis reflects that CBA struggled hard to lessen operating expends and liquidity within the corporation. Westpac has maintained a constant pattern of liquidity with margin of profitability although sales declined during the specified period.

References 

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