Banking Industry In Australia: Overview And Analysis

Introduction: Competitive Banking Industry in Australia

Banking industry in Australia is relatively a competitive sector being dominated by several financial institutions including the ANZ, Westpac, NAB, the Bank of Queensland and Commonwealth Bank among others. To manage these banks, the industry is concentrated by the international standards. The share of the banking industry owned by the four banks is higher compared to equivalent shares in the other jurisdictions. Concentrations of this sector has increased since the great recession with major institution’s share of the total ADI assets experiencing an upward increment from 65.4% by 2007 to around 78.5% by 2014. Besides, the banking sector has been experiencing significant growth due to the fact that major banks benefited from the better access to finances and the lower financing costs allowing the sector to grow at fast rate. In this case, the Bank of Queensland and Westpac Banking Corp would be evaluated. Westpac and Bank of Queensland are amongst the largest financial institutions operating in Australia each institutions providing different services ranging from savings to credit card services.

To be more specific, Westpac is usually the second largest financial institution in Australia (Westpac Banking Corp 2017). It has relatively large retail banking undertakings. Its brands comprises of Bank of Melbourne, St George Bank, BT Financial Group as well as Westpac. The bank is ranked second with market capitalization of $95 billion and are the principal credit card providers in Australia controlling 25% of lucrative housing market in the country. It was established in the year 1817 as the only bank in New South Wales (Morningstar 2017). It employs approximately 32,620 personnel.

The bank of Queensland was established by the year 1874 making it amongst the oldest financial institutions in Australia. It headquarter is in Queensland and provides retail financial services to different clients. The institutions employ approximate 48,556 personnel and operate around 200 branches across the country (Bank of Queensland 2017). In other words, The Bank of Queensland has several branches via Australia with network of around 252 branches including 166 owner managed branches and 78 corporate branches. Its segment includes insurance and banking. Insurance segment comprises life insurance, funeral insurance, customer credit insurance, motor vehicle gap insurance and accident death insurance (Reuters.com 2018). Banking segment comprises retail banking, personal, equipment, treasury, commercial, debtor finance, small business loans, transaction and savings accounts. Personal banking section offering comprises everyday savings, investment and banking, personal loans, insurance, credit cards, home loans, investing, international services, account switching and private bank among others (Morningstar 2017). Its business banking section comprises of investment accounts, investment trust accounts, transaction accounts, cash flow finance, business loan, equipment finance and statutory accounts.

This form of analysis entails analysis of overall country’s economic growth including GDP growth rate, interest rate, changes in inflation rate as well as currency exchange value over a specified period. In essence, it entails analysis of some of the macroeconomic factors that might influence or impact on the industry and companies financial performance. According to RBA (2018) Australian economic growth has been promising for the recent months. This has been evidenced by increasing GDP growth rate over the period. To be more specific, according to Focus Economics (2018), Australian GDP advanced with around 1% by March this year. This is considered as the highest growth rate in the country GDP since June last year, which was boosted by the rebound in the exports. Currently, the growth rate has even gone a notch higher experiencing a 1.3% increase from the second quarter this year moving from 3.1% to 3.4% (Trading Economics 2018).  The increase in GDP growth rate has been attributable to the country consumption expenses of 0.6%.

Evaluation of Westpac and Bank of Queensland

Australia inflation rate averaged at 1.97% in 2016 in comparison to what was recorded in 2016. Given that the country has the world biggest economies and is a huge worldwide exporter and importer, the country inflation rate decreased with 0.4% increase in its consumer price (Focus Economics 2018).  To be more specific, inflation rate in the country is projected to be 2% by end of this year and is estimated to stand at around 1.7% in the next twelve months. This is significantly low compared to other period meaning that the economy has growth significantly over the years.

Interest rate for the country was approximately 4.52% since the year 1990. Nonetheless, the rate has decreased to 1.50% this year which is an all-time low ever. The rate is consistent to the country’s market projection since 2016 (Trading Economics 2018). This interest would have great impact in the banking sector since it would result in increased lending to external borrowers and in turn increased interest charges and increased income for the banking sectors and companies operating within the sector.

AUD dollar against the US dollar over the last few months has been experiencing increasing trend. In fact, the AUD dollar against the American dollar gained around 0.0012 moving to around 0.7193 this month from 0.7181 reported in August. This increase in Australian currency is projected to impact on the banking sector performance and to be specific on the banks operating within this sector. To be more specific, the increase would result in increased in net income since debtors would pay relatively high amount based on the current value of the currency.

Another aspect that could be influential to the industry operations is the business cycle (Kent 2014). Currently, Australia is in the expansion phase which is a good picture for economic development. In essence, with the fact that business cycle makes individuals to get losses in their investment, understanding that the country is experiencing expansion phase is important.

Bottom-up analysis would comprise of examination of a specific stock’s financial trend. This is usually determined through ratio and financial statement or trend analysis.

Ratio analysis of Westpac Banking Corp and BOQ would include the net margin, ROA, EPS, ROE, asset turnover, debt/equity and financial leverage.

 BOQ net margin over the last two years increased from 31.44% in 2016 to 33.59% in 2017. This means that the bank was able to convert its sales into net income. On the other hand, Westpac net margin increased from 35.51% in 2016 to 37.12% in 2017. The increase in net margin for WBC is a clear sign that the company is capable of converting its sales into income. From this analysis, WBC seems to enjoy high net margin compared to BOQ meaning that for the past two years, WBC was more profitable than BOQ.

Table 1: Comparison of net margin between BOQ and WBC

BOQ ROA over the last two years experienced an increasing trend from 0.68 in 2016 to 0.69 in 2017. On the other hand, Westpac Banking Corp ROA over the last two years increased from 0.9% in 2016 to 0.94% in 2017. The results show that WBC was more efficient in managing its assets to generate income compared to BOQ.

Macro Analysis of Australian Economy

Table 2: Comparison of ROA between BOQ and WBC

EPS

BOQ EPS over the last two years increased from 0.85 to 0.88. On the other hand, Westpac Banking Corp EPS increased from 2.17 in 2016 to 2.29 in 2017. Despite the increasing trend in BOQ, it is evident that WBC had higher EPS value meaning that it market value is relatively higher compared to BOQ.

Table 3: Comparison of EPS between BOQ and WBC

BOQ ROE over the past two years experienced a decreasing trend moving from 9.58% in 2016 to 9.55% in 2017. On the other hand, WBC ROE decreased in the last two years from 13.38% in 2016 to 13.37% in 2017. Comparing the two firms’ ratios, it is evident that WBC has been more effective in managing its equity than its counterpart.

Table 4: Comparison of ROE between BOQ and WBC

BOQ asset turnover remained constant over the last two years at 0.02. On the other hand, Westpac Banking Corp asset turnover for the last two years remained constant at 0.03. This is a clear view that Westpac Banking Corp was more efficient in utilizing its assets to generate revenue in comparison to its counterpart BOQ.

Table 5: Comparison of asset turnover between BOQ and WBC

BOQ debt/equity increased from 0.07 in 2016 to 0.13 in 2017. On the other hand, Westpac Banking Corp debt/equity decreased from 3.2 in 2016 to 3.03 in 2017. Based on the above information, it is evident that for the last two years, WBC was relying more on debt financing as compared to BOQ which instead finance its daily operations through its equity.

Table 6: Comparison of net margin between BOQ and WBC

BOQ financial leverage decreased over the past two years from 14.17 in 2016 to 13.64 in 2017. On the other hand, Westpac Banking Corp financial leverage decreased from 14.44 in 2016 to 13.9 in 2017. In this case, it can be stated that the two banks are reducing their financial risks in financing their assets through debts and therefore looking for alternative sources to finance their assets.

Table 7: Comparison of financial leverage between BOQ and WBC

Financial statement analysis mostly comprises of evaluation of the items reported in the three forms of financial statements. With these considerations the section would start with analysis of the income statement. Based on BOQ income statement, it is evident that the bank interest income or revenue decreased in the past two years. This is evidenced by the movement in the interest income for the company from 2,157 million in 2016 to around 2,046 million reported in 2017. The decrease could be associated with high competition in the economy as well as decrease in the interest rate over the period. Further, its total non-interest revenue also experienced a significant decrease over the years moving from 139 million in 2016 to 122 million in 2017 (Morningstar 2018). Its net revenue over the same period is also found to decrease from 1,075 million in 2016 to approximately 1,048 million. This trend is also observed in BOQ income from the continuing operations which is said to have decreased from 479 million in 2016 to 452 million in 2017. Despite the decreasing trend in the revenue, and income before expenses, net income for BOQ in the last two years experienced a significant increase moving from 338 million in 2016 to around 352 million by 2017.  Such trend is observed in the bank EPS where it is reported that BOQ earnings per share increased from 0.9 in 2016 to 0.91 in 2017.

Bottom-up Analysis: Ratio Analysis of BOQ and Westpac

From BOQ cash flow, it is evident that the banks cash flow from its operations experienced a decreasing trend. On the other, cash utilized for investment increased over the period moving from negative value to positive value (Morningstar 2018). To be more specific, BOQ cash from investment increased from -68 million to 48 million in 2017. Further, net cash used for the financing activities decreased from 1,266 million in 2016 to -61 million in 2017. With decreasing trend in cash from operations, and increased cash used for investment, the bank cash at the end of the year decreased from 2,301 million reported in 2016 to around 1,216 million in 2017.

Based on BOQ balance sheet, it is evident that its cash and cash equivalent decreased over the past two years moving from 68 million in 2016 to 58 million in 2017. Its good will on the other hand increased from 675 million to 682 over the same period. Further, the total assets for the bank increased from 50,853 million in 2016 to 51,658 million in 2017. The increase was attributable to the recent acquisition of Virgin Money Australia (Morningstar 2018). Its payables over the period experienced a significant increase over the past two years moving from 564 million to 652 million in 2017. Its short-term borrowings also increased from 5,063 million in 2016 to approximately 9,154 million in 2017. Basically, from the statement, it is evident that the total liabilities for BOQ increased from 47,266 million in 2016 to 47,870 million by 2017. Despite the increase in total liabilities, BOQ total assets for the past two years remained relatively high. Further, BOQ total equity increased from 3,587 million to around 3,788 in 2017.

On the other hand, based on Westpac Banking Corp income statement, it is evident that total interest income decreased from 31,822 million in 2016 to around 31,231 million in the year 2017. The decrease was as a result of hefty competition in the banking sector over the last one year and decreased interest rate. Its total non-interest revenue increased from 5,806 million in 2016 to 5,990 million in 2017 (Morningstar 2018). On overall, WBC net revenue in the last two years experienced an increasing trend moving from 20,954 million to 21,506 million in 2017. Further, based on the statement, it can also be derived that WBC net income increased over the last two years moving from 7,445 million in 2016 to around 7,990 million in 2017. Its EPS increased from 2.24 in 2016 to 2.38 in 2017.

Moreover, based on Westpac Banking Corp balance sheet, it is evident that the bank cash and cash equivalents decreased in the last two years from 17,015 million in 2016 to around 8,439 million in 2017. Further, its receivable decreased from 9,951 million in 2016 to 9,280 million in 2017. On the other hand, WBC goodwill increased from 8,829 million in 2016 to around 9,012 million in 2017 (Morningstar 2018). Its total assets increased from 839,202 in 2016 to around 851,875 million in 2017. Further, WBC net payables increased over the year from 18,594 million in 2016 to 26,053 million in 2017. Its long-term borrowing or debts decreased with a slight margin moving from 185,707 million in 2016 to 185,624 million in 2017. Total liabilities for this bank increased from 781,021 million to 790,533 million as a result of increased long-term borrowing over the period. Further, from this statement, it is evident that WBC total equity increased from 58,120 million to 61,288 million in 2017 signifying increased investment in the bank specifically in shares.

From WBC cash flow statement, it is evident that cash provided by its operations decreased from 5,497 million in 2016 to around 2,820 million in 2017. This was mostly attributed by decrease in other assets and liabilities over the period from 35,305 million to 12,997 million in 2017. Further, cash utilized for investment decreased over the last two years moving from 7,245 million in 2016 to approximately 1,698 million by 2017 (Morningstar 2018). The decrease is attributable to increment in sales and maturity of the investments. Besides, cash provided by the financing activities decreased from 4,573 million in 2016 to 552 million in 2017. This was basically due to decrease in the other financing activities in 2017 from 5,197 million to -46 million. On overall, WBC cash at the end of the year reported in this statement increased from 17,015 to 18,397.

Based this analysis, it can be stated that over the past two years Westpac Banking Corp has been experiencing significantly attractive performance. This is based on the fact that the company experienced significantly high net income over the past two years compared to it counterpart Bank of Queensland Ltd.

1. Summary and Recommendations

In conclusion, based on the current economic growth in Australia, it is evident that the country is experiencing significant growth. With this growth, banking sector has experienced tremendous growth over the years. Basically, from the bottom-up analysis, it can be concluded that the two banks are performing significantly good. Nonetheless, Westpac seems to be enjoying competitive advantage in the banking sector over BOQ evidenced by its increased and high net income. Further, with increased cash at the end of the year reported in the cash flow statement, it can be concluded that Westpac is in a better position or is performing relatively better.

Based on the aforementioned analysis, it is evident that Westpac Banking Stands a better chance as an investment opportunity compared to BOQ. Therefore, it is recommendable that potential investors should invest their money in this firm to get higher returns. Additionally, it is recommended that existing shareholders should continue investing in Westpac shares which seems to experiencing increasing value over the period. Basically, by investing in Westpac, there is a high chance that investors would end up gaining more returns instead of investing in BOQ since WBC is projected to continue experiencing increasing returns in future.

References

Bank of Queensland (2017), Bank of Queensland annual report 2017: Viewed from: https://www.boq.com.au/content/dam/boq/files/reports/annual-report/annual-report-2017.pdf (Accessed 22nd September 2018)

Export.gov (2018), Australia-Banking Systems: Viewed from: https://www.export.gov/article?id=Australia-banking-systems (Accessed 22nd September 2018)

Focus Economics (2018), Australia Economic Outlook: Viewed at: https://www.focus-economics.com/country-indicator/australia/gdp-usd-bn (Accessed 22nd September 2018)

Focus Economics (2018), Inflation in Australia: Viewed at: https://www.focus-economics.com/country-indicator/australia/inflation (Accessed 22nd September 2018)

Kent, C (2014). The Business Cycle in Australia; Viewed at: https://www.rba.gov.au/speeches/2014/sp-ag-131114.html (Accessed 22nd September 2018).

Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/balance-sheet/bs.html?t=BOQ&region=aus&culture=en-US (Accessed 22nd September 2018)

Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/ratios/r.html?t=BOQ&region=aus&culture=en-US (Accessed 22nd September 2018)

Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/income-statement/is.html?t=BOQ&region=aus&culture=en-US (Accessed 22nd September 2018)

Morningstar (2018), Bank of Queensland (BOQ): Viewed from: https://financials.morningstar.com/cash-flow/cf.html?t=BOQ&region=aus&culture=en-US (Accessed 22nd September 2018)

Morningstar (2018), Westpac Banking Corp (WBC): Viewed from: https://financials.morningstar.com/ratios/r.html?t=WBC&region=aus&culture=en-US (Accessed 22nd September 2018)

Morningstar (2018), Westpac Banking Corp (WBC): Viewed from: https://financials.morningstar.com/balance-sheet/bs.html?t=XASX:WBC&region=AUS (Accessed 22nd September 2018)

Morningstar (2018), Westpac Banking Corp (WBC): Viewed from: https://financials.morningstar.com/income-statement/is.html?t=WBC&region=aus&culture=en-US (Accessed 22nd September 2018)

Morningstar (2018), Westpac Banking Corp (WBC): Viewed from: https://financials.morningstar.com/cash-flow/cf.html?t=XASX:WBC&region=AUS (Accessed 22nd September 2018)

RBA (2018), Interest rate decisions 2018: Viewed at: https://www.rba.gov.au/monetary-policy/int-rate-decisions/2018/ (Accessed 22nd September 2018)

Reuters.com (2018), Bank of Queensland annual report 2017: Viewed from: https://www.reuters.com/finance/stocks/companyProfile/BOQ.AX (Accessed 22nd September 2018)

Westpac Banking Corporation (2017), Westpac Banking Corp annual report 2017: Viewed from: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2017_Westpac_Annual_Report_Web_ready_&_Bookmarked.pdf (Accessed 22nd September 2018)

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