Financial Performance Analysis Of National Australian Bank

Overview of the Company

With the changes in economic conditions and complex business structure, each and every organization has implemented a proper strategic program to run the business effectively. This report assist in evaluating whether National Australian Bank has positive financial performance or not. In this report, financial performance of National Australian Bank will be analyzed to determine whether bank has been running its busienss effectively or not. The share price analysis of two years, weighted average cost of capital and investment method of National Australian Bank has been analysed to identify where company needs to make improvement in its business. In the end, letter of recommendation have been given to directors and managers of Company.

It is an Australian Bank which is one of the four biggest financial institutions in Australia in context with the market capitalization, revenue and number of customers and earnings. This company has gained momentum throughout the time and increased its number of clients. The current CEO of the company is Andrew who takes all the necessary steps to run the business effectively.

The present CEO of the company is Andrew

The below-given table reflects the key major stakeholders who are owning the highest shares in Company (Laudon, and Traver, 2013).

The ratio analysis assists in evaluating the financial performance of National Australian Banks by setting the relation between two factors of the company (National Australian Bank. 2015).

Current ratio

It is evaluated that Current ratio of National Australian Bank is moderate which reflects that company has managed to operate its business (Vogel, 2014).

Liquidity ratio	Years
	2017	2016
Current ratio	1.2	.89
Quick ratio	.92	.57

This table shows that company has increased its current ratio by .30 points and also increased its quick ratio by .31 points in 2017 as compared to last year data.  

Note- If we do not consider any of its assets current then the current and quick ratio would be determined as zero.

(National Australian Bank. 2015).

Proving the equation

This equitation shows the left side of the company is equal to the right side of the company.

Providing equation	2014	2015	2016	2017
Net profit After tax/OE	0.55154	0.475979385	0.42241	0.34557
EBIT/TA*NPAT/EBIT*TA/OE	0.55154	0.475979385	0.42241	0.34557

 (The above-given table reflects the equation for the net profit and overall earning)

Both sides of the data are equivalent.

Debt to equity

The financial leverage of National Australian Bank is high which shows that bank has been enjoying the lower cost of capital.

The National Australian Bank has maintained 92% debt to equity ratio which reflects that company has high financial leverage. (Cikaliuk, et al.).

Ownership-Governance Structure

National Australian Bank needs to lower down its finanical leverage by reducing the debt portion. 

Computation of debt to equity of Company

Debt Equity
	2016	2017
A.  Total Liabilities	7,26,307	737008
B.      Total assets	7,77,622	7,88,325.00
(A/B)	93%	93%

Interpretation

It is analysed that the debt to equity of company has been showing the positive results which reflects that company could undertake more projects with it lower cost of capital. However,  the debt to equity has gone down to 93% which is 2% lower as compared to last four year data. 

Gearing ratio discussion

The gearing ratio is the ratio which reflects the relation between the interest payment and earnings before interest and tax. It is observed that company has increased its gearing ratio to 52% in 2017 which is 1% lower as compared to 2016.

Gearing Ratio
	2016	2017
Gearing Ratio	53%	52%

The Gearing ratio of National Australian Bank is not effective company needs to lower down its debt portion.

Inventory turnover ratio

This ratio shows company’s efficiency to deploy the funds in the books of account of Company.

Efficiency ratio	Years
	2017	2016
Inventory turnover ratio	0	0
Asset turnover ratio	.82	.86
Receivable turnover ratio	16.5	17.1
Days’ sales in inventory	2.1	2.2
Days’ sales in receivables	24	23

The National Australian Bank does not have inventory in its business due to its financial activities. Therefore, inventory turnover of company is zero

Asset turnover ratio

It shows that revenue generated capacity of company from its assets. The assets turnover of National Australian Bank has increased to .82 times which is .02 times higher as compared to last year data.

Debtor turnover ratio

The debtor turnover of National Australian Bank is very high which shows that it has been efficiently deploying its capital in the books of accounts..

Computation of the Return on Equity and Return on assets

National Australian Bank
Particulars (Amount in Million	2016	2017
	AUD$
EBIT	27,629	27,403
Interest	14,699	14,221
Net profit	21,666	17,730
Total Assets	7,77,622	7,88,325
Total Liabilities	7,26,307	7,37,008
Shareholders’ Equity	51,292	51,306

Computation of Return on Assets of Company

1.        The rate of Return on Assets
	2016	2017
A.      Net income (AUD $ in Million)	21,666	17,730
B.      Total assets (AUD $ in Million)	7,77,622	7,88,325
(A/B)	3%	2%

Interpretation of the data

National Bank Australia has kept its return on equity to 2% in 2017 which is 1 % lower as compared to last year data. It reflects that company has decreased its overall net income since last five years which is not a positive indicator for the business (Dahir, Mahat, and Ali, 2018).

Return on equity of the company

2.       The rate of Return on Equity
	2016	2017
A. Net income available to equity shareholders.	21,666	17,730
B. Shareholder’s Equity	51,292	51,306.00
(A/B)	42.24%	34.56%

Interpretation

The return on equity of company has been reduced to 34.56% which is 10 % lower as compared to last year data. The total revenue of the company has reduced the drastic rate which shows negative indicator. It has been observed that if a company wants to increase its overall return on equity then it must increase its overall revenue.

Earnings per share

It is the portion of the profit allocated to each outstanding shares of company.

Market Value ratios	Years
	2017	2016
Earnings per share	–        2.80	–        7.40
P/E ratio	–	–
Dividend pay-out ratio	–	–

Financial Performance Analysis

The EPS of National Australian Bank has been divided into two parts.

Price to earnings ratio

It measures company’s current share price in relation to its per share earnings. The PE ratio of company is positive which shows that Banks has increased its PE ratio to .68 in 2017 which is 20% higher as compared to last year data.  

Dividend payment ratio

The dividend payment ratio has increased by 20% as compared to last year data. 

The share price graph and calculation for the movement of the share price

Graph reflecting the share price movement of the National Australian Ban

(Yahoo Finance, 2017)

The comparison between the Share price movement of National Australian Bank and share price movement of all ordinary stock exchange

(Yahoo finance, 2017)

After evaluating the share price data of the National Australian Bank and share price movement of All ordinary stock exchange, it is observed that the share price movement of National Australian Bank is highly stable which reflects that as compared to all ordinary share price index, company has increased the share price value by 20% since last five years. On the other hand, the share price movement of the entire ordinary index is less stable which reflects the negative value creation on the overall investment.

It is observed that if investors want to create value on the invested amount then it needs to focus on investing their capital in National Australian Bank. The other companies are not doing well in market after analysing the all ordinary share price index (Zhu, 2014). 

It has been evaluated that the share price of National Australian Bank has been changed in the positive manner which shows a positive indicator of the value creation. It is analysed that the banking and finance sector of Australia reflects the positive indicator for the business. The high brand image and innovative functions used by National Australian Bank is the positive factor for increasing the overall share price of the company.

The reduction in the interest rate charged by the company for assigning the bank loan amount to borrowers was also the major announcement which eventually increases the overall share price of Company

Stock information and Beta calculation

The beta value of company is -0.07432 which shows that there will be changes in the capital value negatively due to changes in the share value of market.

The beta value of National Australian Bank is

Regression Statistics
Multiple R	0.124601
R Square	0.015525
Adjusted R Square	-0.0337
Standard Error	0.023978
Observations	22

ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.000181	0.000181	0.315406	0.580621
Residual	20	0.011499	0.000575
Total	21	0.01168

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	0.009079	0.005347	1.697947	0.105024	-0.00207	0.020233	-0.00207	0.020233
X Variable 1	-0.07432	0.132334	-0.56161	0.580621	-0.35036	0.201724	-0.35036	0.201724

The beta value calculated of National Australian Bank is -.074. It shows that if the market premium or change in the market is seen then there will be a negative impact on the share price of National Australian bank.  This beta calculation of National Australian Bank has shown that company needs to increase overall output if it wants to maintain less risky business as compared to shown market risk premium.

Liquidity Ratios

E(R) =

E(R) = expected Amount of rate of return

 = Risk free % rate of return

β = Computed Beta

= Market premium risk factor (National Australian Bank. (2017).

Calculation of Required rate of return
Risk-free rate (A)	4%
Beta (B)	-0.074320221
Market Risk premium (C)	6%
Required rate of return [A+(B*C)]	3.55%

(Please see the excel)

Notes- The risk-free rate of return is computed on the basis of government yield and rate of return offered on the issued gilt securities.

After analysing the annual report of the company, it is analysed that company has decreased its overall revenue due to its negative business functioning and tough banking and finance regulation. It is analysed that National Australian Bank should invest its capital in other business sectors with a view to creating value on their investment. National Australian Bank should diversify its business and indulge in other sectors. The conservative investment policy of the company is based on the less return on capital employed and low turnover of the company. Therefore, it is considered that if management of National Australian Bank wants to create value on its investment then it should focus on investing the capital in the other diversified business sector which has higher profitability.

Cost of capital- 3.55%

It is computed by using the capital assets pricing model.

Cost of debt- 1.93%

It is observed that cost of debt of the company is computed on the basis of interest payment and debt capital (Brigham, and Ehrhardt, 2013).

WACC = cost of debt* portion of the debt capital+ cost of Equity * portion of the Cost of equity

WACC	Capital Amount	Cost of capital	% of portion	WACC
Equity	51,306	3.55%	7%	0.00323%
Debt	7,37,008	1.93%	93%	1.80%
Total capital	7,88,314	WACC	2.04%

It is analysed that the weighted average cost of capital of the company is 2.04% which shows that weighted average cost of capital is based on the cost of equity and cost of debt multiplied with the portioned investment.

National Australian Bank has a low level of weighted average cost of capital. It is analysed that company has kept the lower weighted average cost of capital which reflects that company will have a higher return on capital employed if it invests its capital in other business.  It is observed that if the company has several project investment options then it could easily create value on their vestment. It is evaluated that if a company wants to create value on their investment then it has to find other projects which have a high return on investment. National Australian Bank has shown the positive amount of increment in the return on capital employed due to its less weighted average cost of capital it would make management to accept those projects which will offer a high return on capital employed.

Financial Leverage Ratios

The the debt to equity of company has been showing the positive results which reflects that company could undertake more projects with it lower cost of capital. However, the debt to equity has gone down to 93% which is 2% lower as compared to last four year data (Cikaliuk, et al.).

Computation of debt to equity of Company

Debt Equity
	2016	2017
A.  Total Liabilities	7,26,307	737008
B.      Total assets	7,77,622	7,88,325.00
(A/B)	93%	93%

Interpretation

Both year company had 93% debt to equtiy ratio which shows higher finaical leverage. It has been considered that the debt to equity of National Australian Bank is very high which reflects the company needs to lower down its debt portion. It will be negative to National Australian Bank if in case it fails to have adequate amount of net profit to cover its interest charges. 

The gearing ratio is the ratio which reflects the relation between the interest payment and earnings before interest and tax. The National Australian Bank has stable gearing ratio in spite of a decrease in its overall total revenue. It is observed that company has increased its gearing ratio to 52% in 2017 which is 3% lower as compared to 2013. It is observed that company should reduce the overall interest payment with a view to reducing the overall financial leverage.

Gearing Ratio
	2016	2017
Gearing Ratio	53%	52%

The Gearing ratio of National Australian Bank is not that effective. However, it is covering all of its interest payment out of the earnings before interest and tax. Nonetheless, National Australian Bank either needs to increase its overall profitability or reduce the interest payment if want to mitigate its business uncertainty and financial leverage.

Divided policies of the company

After considering the annual report of National Australian Bank, it is observed that company has been following profit based dividend policy. It has issued divided to its shareholders on the basis of the profit earned. It is analysed that company has reduced its dividend payment with the decrease in its total revenue. However, bonus shares and other incentives programs have been followed by the company to issue a dividend in the market. The company should focus on creating value on the investment by re-plug its earnings in its own value chain activities. Nonetheless, the company has also followed proper strategic program which focuses on issue less dividend and investing more in its operating activities such as securitisation, buying mutual funds and lending money to borrowers. This dividend policy is highly appreciable to the organizations which are running their business in sluggish market conditions. In this market condition, the company has followed the proper strategic program to attract more investors. The profit-based dividend police will eventually reduce the value of its business in the long run as the company has been offering less dividend amount with the decrease in its overall revenue. The dividend policy of National Australian Bank could be changed with the changing business factors and complex market situation. However, National Australian Bank has followed profit based dividend policies which is too logical in this ramified economy. Ideally, investors also appreciate these sort of dividend policies when company is having good amount of return. Nonetheless, in case of negative business situation, it might be result to negative impact on investors and they will stop making investment in National Australian Bank.

Efficiency Ratios

This investment method of National Australian Bank has shown that company has been increasing its investment in other business sectors with a view to diversify its business and increasing its overall return on capital employed.

There are several positive and negative factors which might impact the business functioning of the organization. It is observed that company could create value on its investment on the basis of invested capital. There are several finding such as total revenue of company has gone down by 20%, net profit has also decreased by 22% which is also not a positive indicator of the growth of the Bank. Nonetheless, the weighted average cost of capital is too low which could not only increase the overall return on capital employed but also increase the efficiency of the organization. The beta value calculated of National Australian Bank is -.074. Which reflects that if the market is changed by 1% then the share price of the company will also change by .74 in negative factors (National Australian Bank. 2018)? The Weighted average cost of capital of the company is 2.04% that is a positive indicator for creating value on the investment.  The share price of the National Australian Bank and share price movement is showing the positive value creation. It would help investors to create value on their investment. Now, in the end, it could be inferred that if investors want to invest their capital in National Australian Bank then it will not only increase the value of the investment but also provide them with the return on equity in terms of dividend.

Now, in the end, it could be inferred that if National Bank Australia want to increase its overall total revenue then it must reduce its overall interest charges on its lending capital.

Conclusion 

There are several financial analysis tools which could be used by investors and management department to analyse the financial performance of the company. It is observed that company has reduced its total revenue. The return on assets of the company has gone down to 2% in 2017 which is .99% lower as compared to last five year data. It reflects that company needs to reduce the return on its capital employed. It is analysed that if National Australian Bank wants to create value on its investment then it must tap another diversified market to create value on their investment. The company has kept high financial leverage in all of its five-year business which is not a good indicator to run the business efficiently. Nonetheless, in 2017, it had reduced its debt to equity ratio to 93% which is 2% lower as compared to last four year data

References

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Cikaliuk, M., Erakovic, L., Jackson, B., Noonan, C. and Watson, S., 2017. Board Leadership for Strategic Transformation: Aligning Diversity Initiatives at the Bank of New Zealand.

Dahir, A.M., Mahat, F.B. and Ali, N.A.B., 2018. Funding liquidity risk and bank risk-taking in BRICS countries: An application of system GMM approach. International Journal of Emerging Markets, 13(1), pp.231-248.

Laudon, K.C. and Traver, C.G., 2013. E-commerce. Pearson

National Australian Bank. (2015). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2015

National Australian Bank. (2016). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2018

National Australian Bank. (2017). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2018

National Australian Bank. (2018). Annual report. Available at https://www.wellard.com.au/assets/ASX%20Announcements/160930%20Annual%20Report.pdf, Accessed on 29th April 2018

Yahoo finance, 2018 retrieved on 19^h January from https://in.finance.yahoo.com/

Zhu, J., 2014. Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets (Vol. 213). Springer