Analysis Of Major Australian Banks: Financial Performance And Regulatory Framework

Major sources and uses of funds for banks in Australia

The major sources of funds in Australia include the following:

• Local deposits- these include deposits and advances from local sources including local corporations and domestic sources.
• Local wholesale funding- Wholesale funding is a major source of finance employed by Australian banks. It is an additional source of funding that is employed by banks to finance operations and enable risk management. Local wholesale funding sources include federal funds public funds that include state and local municipalities.
• Inter sale wholesale funding- Inter sale wholesale funding includes sources of funds that represents foreign deposits, federal funds and brokered deposits (Cavusgil et al, 2014).

• Loans and advances – Loans and advances are the most important applications of funds in banks.
• Interbank lending – Sometimes banks lend money to other banks in case of meeting shortage requirements and other emergency requirements.
• Foreign currency and foreign currency assets-foreign currency and foreign currency assets are important applications of funds as they promote a source of foreign exchange (Petty et al. 2015).
• Cash and deposits with the RBA-The RBA includes the Reserve Bank of Australia. It conducts the monetary policy of Australia .The banks are required to keep a certain percentage of liquid cash of their deposits with the reserve bank of Australia (Tissot and Gadanecz 2018)

In reference to the question above the bank that can be discussed in the above is the commonwealth bank. The major sources of funds include proceeds from sale investments to the amount of $ 49392 million. Another important source of funds includes deposits and other public borrowings, to the extent of 39821 million dollars. The applications of funds include to the extents of purchase of investments that include $ 54608 million dollars. It also includes investments to the net increase in loans, bills discounted and other receivables, to the amount of $ 38744 million dollars (Commbank.com.au 2018).

1. Ranking the banks

• Total asset – based on the amount of total asset commonwealth bank will be ranked 1, Australia and New Zealand Banking Group Limited (ANZ) will be ranked 2, Westpac bank will be ranked 3 and National Australia Bank (NAB) will be ranked 4 (Westpac.com.au 2018).
• Total equity – based on the amount of total equity commonwealth bank will be ranked 1, Westpac bank will be ranked 2, ANZ will be ranked 3, and NAB will be ranked 4 (Capital.nab.com.au 2018).
• Market capitalization – based on the amount of market capitalization commonwealth bank will be ranked 1, ANZ will be ranked 2, NAB will be ranked 3 and Westpac bank will be ranked 4.
• Profit before tax – based on the amount of market capitalization commonwealth bank will be ranked 1, Westpac bank will be ranked 2, ANZ will be ranked 3 and NAB will be ranked 4 (Anz.com.au 2018).  

1. Financial performance and measures for Profit and loss

For analysing the financial performance of the banks ratio measure has been used. Net profit ratio has been used for analysing the bank’s performances and it is computed through dividing the operating profit of the banks by net profit. It can be identified from the above table that net profit margin of NAB is highest among all. After that, commonwealth bank comes 2^nd, Westpac bank comes 3^rd and ANZ comes 4^th (Anz.com.au 2018).

1. Overall financial position

Looking at the balance sheets of the banks it is found that if the debt equity ratios of the banks are taken into consideration except Westpac Bank all other bank’s debt equity ratio are almost same as it ranges from 14.19 to 14.36. However, the Westpac Bank’s position is quite better as its debt equity ratio is 12.89 (Westpac.com.au 2018). It indicates that Westpac Bank’s capital structure involve less amount of debt as compared to other banks. On the other hand, debt ratio that states the percentage of assets financed through borrowings for all the banks are same at 0.93. Therefore, financial positions of all the banks are almost same only with the exception that Westpac bank is in slightly better position.

1. Capital measure

The capital adequacy ratio measures amount of the bank’s capital in comparison to the amount of risk weighted credit exposure. The risk weightage procedure considers the associated riskiness of different types of the credit exposure of the bank and incorporates the impact of the off balance sheet contracts with regard to credit risk. Higher level of capital adequacy ratio indicates that the company is less exposed to unexpected looses and it can absorb higher level of unexpected losses before it becomes insolvent (Capital.nab.com.au 2018). It can be identified from the above table that among all the banks ANZ is in best position followed by Westpac Bank, Commonwealth Bank and NAB with regard to capital measure.

1. Credit quality measures

ANZ –

Commonwealth Bank –

Solid credit rating of the company provided by S & P, Moody’s and Fitch is AA- / Aa3 / AA

NAB –

• Senior investment grade: widely matches with Standard & Poor’s ratings of AAA to A- (internal rating 1 to 5).
• Investment grade: widely matches with Standard & Poor’s ratings of BBB+ to BBB- (internal rating 6 to 11).
• Sub-investment grade: widely matches with Standard & Poor’s ratings of BB+ up to but not including defaulted or impaired (internal rating 12 to 23)

Westpac Bank –

1. Other financial measures

ANZ – deposits and various other borrowings of the company increased significantly from $ 23,128 million to $ 30,904 million (Anz.com.au 2018).

Commonwealth Bank – operating income of the bank has been increased from $ 24,578 million to $ 26,121

NAB – Net profit of the bank significantly increased from $ 357 million to $ 5,288 million.

Ranking of banks by total assets, equity, market capitalization, and profit before tax

Westpac Bank – earnings per share has been reduced from 116.8 cents to 121.2 cents (Westpac.com.au 2018).

1. a) The Australian prudential regulation framework guides the regulation and supervision through this framework that was developed in 2003-04. This framework identifies the risks that are involved and provides a supervisory action in order to keep the risk in accepted levels. Since the introduction of this framework, this has made a significant evolution in terms of incorporating new risks, changing environments and changing international standards.

The scope of this framework is broad. It covers a range of activities, supporting procedures, systems, processes and guidelines that are necessary to form the assessment of risk and form supervision strategies (Apra.gov.au 2018).

There are five parts of Australian Prudential Regulatory Framework for prudential supervision that includes:

• Entity risk assessment
• Supervision outcomes and responses
• Supervisory activities
• Quality assurance within the framework
• Supporting material and infrastructure

The Australian prudential regulation framework is established for the purpose of regulating bodies in the financial sector. It provides the balance of objectives of financial safety and efficiency. It provides the competition, contestability and competitive neutrality. It tries to balance these objectives and promote financial system in Australia.

The specific industry act that coves banking, general insurance, life insurance and superannuation make this broad mandate and also sets out objectives with respect to licensing and supervision of the industry. The primary objective of ARPA is to protect depositor by promoting the management of regulated institutions in each industry. It also helps in promoting the financial stability in amore encompassing manner. In addition to the following, the ARPA also publishes financial reports, contracts and grants as well (ABC News 2018).

The Australian prudential regulation authority’s current asset growth is regulating investor growth fewer than ten percent a year. It places a more stringent approach on lending standards. APRA also suggested an additional spending limit that requires banks to keep interest only loan less than thirty percent than mortgage portfolio. The APRA has placed banks to provide assurance on the safety of lending standards APRA referred that the ten percent of the speed limit will not be applicable, and the boards will confirm that:

• The policies on lending meet APRA’s guidance on serviceability.
• The practices on lending must be strengthened where it is required.
• The lending has been below the investor growth of the loan sector for the last six months.

The major banks are required to keep a stringent check on asset lending those impacts its overall asset usability. According to the APRA framework, it is pretty evident that the banks will have a more tough time in meeting requirements. This will impact the growth of the banking sector in an adverse way and affect the Australian economy as well in a negative fashion (Apra.gov.au 2018).

Profit margin = net profit / sales = 21

Asset utilization = sales / total asset = 11

Equity multiplier = total asset / total equity = 12

Therefore, Return on asset = net profit / total asset = 0.21/0.11 = 2.31%

Return on equity = 19.32 calculated as follows –

Sales / total equity = 0.11/12 = 0.0092

Net profit / total equity = 0.21*0.0092 = 0.19%

Return on assets indicates the ability of the company to generate revenue from each dollar of assets. On the other hand, return on equity represents the ability of the company to create return for its shareholders.

Reference 

ABC News., 2018. Bank regulator relaxes investor loan ‘speed limit’, boards made accountable. [online] Available at: https://www.abc.net.au/news/2018-04-26/bank-regulator-relaxes-investor-lending-speed-limit/9698560 [Accessed 31 Aug. 2018].

Anz.com.au., 2018. ANZ Personal Banking | Accounts, credit cards, loans, insurance | ANZ. [online] Available at: https://www.anz.com.au/personal/ [Accessed 31 Aug. 2018].

Apra.gov.au., 2018. APRA. [online] Apra.gov.au. Available at: https://www.apra.gov.au/ [Accessed 31 Aug. 2018].

Capital.nab.com.au., 2018. [online] Available at: https://capital.nab.com.au/docs/NAB-2017-annual-financial-report.pdf [Accessed 31 Aug. 2018].

Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L., 2014. International business. Pearson Australia.

Commbank.com.au., 2018. [online] Commbank.com.au. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf [Accessed 31 Aug. 2018].

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Tissot, B. and Gadanecz, B., 2018. Measures of financial inclusion-a central bank perspective. IFC Bulletins chapters, 47.

Westpac.com.au., 2018. [online] Available at: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/ASX_FY17_Financial_Results_Bookmarked.pdf [Accessed 31 Aug. 2018].

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