Comparison Of Commonwealth Bank Of Australia And Australia And New Zealand Bank Of Australia For Investment By [Business Name]

Summary

The financial performance is the most efficient measure which is required by the investors as well as the management of the company. This measure is basically used to identify the position of the firm in terms of the financial decisions and the management aspect as well. The report determines the analysis of the two Australian companies namely Commonwealth Bank of Australia and Australia and New Zealand Bank of Australia (Australia and New Zealand Bank of Australia, 2017). This report covers both the financial and non-financial aspects of the position of the companies. Not only the ratio analysis is the measure that is used for the purpose of the comparison but in addition to this, the share price movements have also been placed as criteria for the past three years are compared with each other to give the two way reflection. Later on the dividend policies are also analysed and at last a recommendation letter has been provided which has answers to all the concerns of the company and which company shall be selected from the given portfolio (Kimmel, Weygandt, and Kieso, 2010). 

Commonwealth Bank of Australia 

The Commonwealth Bank of Australia is one of the largest banks of Australia that is engaged in the business of providing the services of the financial and the advisory services which will help the client to deposit the amounts in the bank and earn interest. Apart from this the bank is also involved with the other services such as management of funds, superannuation, insurance, investment and the broking services (Krantz and Johnson, 2014). The company reported a profit of A$9.881 billion in the financial year 2017 with the team of 51800 employees. The division is divided into the retail banking services, premium business services, wealth management and under the supervision of Matt Comyn. Further the company has also introduced the online banking services through the Net bank. Net bank allows the customers to transfer the funds and manage the accounts and promote the saving goals (Commonwealth Bank of Australia, 2017).

Australia and New Zealand of Australia

It is the third largest bank in the Australia, after the Commonwealth Bank of Australia. The ANZ also became the legal entity in the year 2000 and change to ANZ Bank in the year 2012. Currently the ANZ bank is operating at profit of A$7.493 billion and the total revenue reported by the company is A$21.071 billion. Moreover the ANZ also provides the technical assistance in the areas of the risk management and retail and also enhances the business banking. Further in the other segments the ANZ bank is involved in the international trade facilities and also provides the flexible an d the competitive lending solutions. The bank is also engaged in providing the corporate structure solutions (Australia and New Zealand Bank of Australia, 2017).

The chosen companies are itself the biggest competitor of each other and therefore investing the funds in one of the bank will ensure more benefits. If the performance is analysed of both the companies than in recent financial year the Commonwealth bank of Australia has reported an EBIT of 10686 and increased by 11% and on the contrary the ANZ bank has reported an EBIT of 19% which is far better than the Commonwealth bank of Australia. The ANZ banking is operating on heights and enjoying the benefits of the customer satisfaction and the rate of interest set by the bank is high than the Commonwealth bank of Australia and therefore it can be concluded that the ANZ bank is having an advantage over the Commonwealth bank of Australia and potential investors as well as the shareholders can get an ideas on which bank to invest in and for how much time period (Australia and New Zealand Bank of Australia, 2017).

Background

Ratio analysis is basically a tool which described the performance of the company in terms of the different range of ratios to assess the financial position of the company in overall scenario. The ratios eventually lead to the quick decision making and the proper judgement of the performance of the company. In case of the Commonwealth bank of Australia and the ANZ bank of Australia the following kind of ratios are calculated and outlined below for the period of three years (Warren, Reeve and Duchac, 2011).

Profitability ratios

Profitability ratios are sued to evaluate the profitability of the company. The investors are usually interested in these type of ratios so that they can have an understanding of how much amount they’re getting in return in contrast to the amount invested in the particular banking company. There are varieties of the ratios under the range of the profitability ratios such as determined below (Warren and Jones, 2018).

Net profit margin: the amount of the net profit which has been arrived is the total revenue earned by the company after setting off all the operating as well as the non-operating expenses. The amount of profit of both the banking companies is determined below in the form of a table for the period of three years.

From the below table it can be analysed that the net profit margin of the CBA  is 32% for the year 2017 in comparison to the previous year where the margin was 29% and this is due to the fall in revenue that the company reported  a slow profit. The net profit margin of the ANZ bank is outstanding in contrast to its previous year as it reached from 31% to 38% due to decrease in the interest expense of the bank. Overall the interpretation can be made that the ANZ is operating in a better manner (Vogel, 2014).

(Source: By Author)

Return on Assets: This ratio basically depicts the capacity of the company on the basis of the assets and the resources that are employed in the business and the high ratio is considered as favourable for the company. The trend as determined by the table is constant in case of the CBA for all the tree years and when compared to the ANZ bank of Australia. The return on assets for the CBA is 1.09% in 2015 and it fall down to 1.04% and again came back to 1.09 in the year 2017. However if the scenario is observed carefully the ANZ bank was outstanding in the year 2015 at 1.18% and eventually it fell down due to minor fluctuations in the price and the stock prices went low and the ROA ended at 1.02% in the year 2016. Overall interpretation says that the ANZ performed better in the year 2017 as the ROA was 1.24% and the company showed the tremendous improvement (Tracy, A. 2012).

Return on Equity

The return on equity showcases the capability of the company in offering the return on the funds invested by the shareholders on their invested capital. If the profit is high the company will generate the higher returns for the company.

Financial Performance Analysis

Just like the return in assets the return on equity is also consistent in case of the Commonwealth Bank of Australia at 8%, while from the table it can be observed that in case of ANZ Bank the ratios are rising as the years are passing. In the year 2015 the ratio was 7% and it fell down to 5% due to lower equity factor and more outsourcing for the debt. Further in the year 2017 the return on equity went to 8% thereby surpassing the subsequent years (Vogel, 2014).

The capital structure ratios basically determine the risk taken by the company to evaluate the capital structure of the company. The measurement of the debt and the equity factors of the company against each other will assist the investors to figure out the degree of the financial leverage taken by the organisation (Kimmel, Weygandt and Kieso, 2010).

Debt to Equity Ratio

The debt to equity ratio determines the portion of the debt and the equity and determines the amount financed by the debt and the equity individually.

From the above analysis it can be observed that the debt to equity ratio of the Commonwealth Bank of Australia was 3.23 in the year 2015 and it reduced to 2.96 whereas, in case of the ANZ bank the debt to equity ratio is 2.36 in the year 2015 and it increased into 3.39 and lastly it reported at 2.08. The debt to equity ratio is feasible according to the two perspectives. If the company wants to take the tax advantage the debt is outsourced and if the company is willing to take the risk than the equity shall be funded. A balance of both is needed. In case of this ratio it can be interpreted that the CBA performed better (Krantz and Johnson, 2014).

The interest coverage ratio is the debt ratio and the profitability ratio which is used to depict how easily the company can pay the amount of the interest on its outstanding debt. The interest coverage ratio of the CBA is 0.68 in the year 2017 and that of the ANZ bank is 0.79 for the same year. Thought both the companies need to improve the ratio as below 1 it is assumed that the company is not able to pay off the interest expense well (Penman, Reggiani, Richardson and Tuna, 2017).

The liquidity ratio determines the liquid position of the company and the ability of the company and to convert the assets into the liquid to utilise it. The ratio basically measures the time period in which the company can easily convert the assets into cash (Saleem and Rehman, 2011).

 Current Ratio

The current ratio is the ratio which showcases the capability of the firm to pay off the current debts and majorly comprises of the inventories, cash, receivables and the marketable securities. The ideal ratio is 2:1 which implies that the current assets shall be more than the current liabilities.

From the above the above table it can be observed that the current ratio of the CBA was 0.26 in the year 2015 and it remained constant in the subsequent years as well. However in case of the ANZ bank the current ratio is 0.41 in the year 2015 and it remained same in the year 2016 as well as 2017. The interpretation is clear that though the ANZ bank is better in terms of the CBA yet both of the banks need to improve the position in order to align the current ratio to match the standards (Tracy, 2012).

Ratio Analysis

Quick ratio

The quick ratio determines the potentiality of the company in meeting the short term obligations and the liabilities with the assistance of the liquid assets. The ideal quick ratio is 1:1 and it includes all the current assets except the inventories and the prepaid expenses.

The Quick ratio analysis proceeds with the CBA which is very low. The Quick ratio of the CBA is recorded at 0.06 in the year 2015 and it even became in the next year at 0.04. However, in case of the ANZ bank the quick ratio is reported at 0.18 for the year 2015 and 2016 and 0.24 in the year 2017. This is due to decline in the balance of the cash and it can be interpreted that the ANZ bank is operating well in comparison to the CBA (Krantz and Johnson, 2014).

Commonwealth Bank of Australia 

(Source: Yahoo Finance. 2018).

The graph of the CBA showcases the price moving calculations in contrast to the average returns of the SandP 200 All Ords Index. At a glance, the trend lines plotted in the graph are coming on each other lie overlapping yet there are certain kinds of the differences that are reflected. Initially in the period of the 2015 the prices were negative and thereafter the CBA revamped and revised its pricing position and performed better when compared to the average price index (Lovett. 2018). The highest peak in the prices was shown in the month of November in the year 2015. Thereafter the trend was again a fluctuating one and at the end of the year 2018 the price rage was 4% to 6%. Therefore on a positive note can be concluded in a way that the prices are directly proportional to the performance of the market and the major reasons of the fluctuation is the competition by the other banks (Raskeiwickz, 2017) .

The graph of the ANX bank depicts the significant fall in the prices in particular years and in the remaining years the graph was near to same price. The trend line plotted in case of the ANZ started with the positive position unlike the CBA. In the year 2016 the price fell down drastically and again lifted up in the middle of the month and the similar situation occurred in the month of March 2017. Otherwise the ANZ bank delivered the high and the positive returns and in contrast to the market the market performance was low. So in a way ANZ bank was consistently performing better. After facing down fall, there was an improvement in the position of the returns in order to be in alignment with the market returns (Clarkson, 2018).

Henceforth, it can be concluded that the performance of the ANZ bank is not dependent more on the performance of the market and the pointing fluctuations occur when there is any major change taking place in the market.

CBA

There are three major reasons and it is advised to keep the stock on hold. The reasons are outlined below.

Profitability Ratios

Dividends: if the investor wish to earn more dividend than the prices shall be low. At the current CBA share price of $82 yielded dividend at 5.06% fully franked and if the prices are lower an tax effective franking credits are also included than the possibility of higher yield is valid at 7.3% (Yeates, 2016).

Dominance: CBA dominates mainly the mortgage market forming the 25.4% of the share of the home loans and the entire market of the home loans is estimated to be $400 billion per year. The home loans are the best generators of the revenue as they are sticky in nature. The problem arises when the owners of the home loans are not able to pay the interest as well as principal amounts on time. As long as the house prices go up the CBA will be beneficial in terms of the price movements (Yeates, 2016).

ANZ bank 

The ANZ bank are now trading at $28.05 per share with the market cap of $81.11 billion. In order to maintain their business practice the ANZ is working towards refund process of the $69 million to the customers above 400000 in number in an attempt to fix the errors made regarding the home loan packages (Clarkson, 2018).

In the processing factor also the ANZ bank is having the numerous problems with the loan account in the past period. In the month of the July 2017 identified a Break free package that had comparable.

The beta values of the CBA and the ANZ bank is 1.23 and the 1.37 respectively.

The dividend policy of the CBA is to seek and pay cash dividends at strong and the sustainable levels along with meeting the target of the full pay-out ratio of 70% and 80% and lastly to maximise the use of the franking credits in the account by paying the fully franked dividends. The interim dividend was kept flat at $1.98 a share (Yeates, 2016).

ANZ bank paid the interim dividend for the period of the 2018 of 80 cents per ordinary share on 2^nd July 2018. The 2018 Interim dividend was fully franked for the purpose of the Australia Tax. The major policy of the ANZ is to pay the dividends to its shareholders by direct credit to their nominated financial institution accounts which is exclusive of credit card accounts. ANZ has both the DRP and the BOP plans to receive the cash on ANZ ordinary shares (Nguyen and Balachandran, 2017).

Dear Client,

This is to inform you that as per the analysis undertaken above and the comparison done on the CBA and the ANZ bank for the past three years it is recommended that it will be beneficial to invest in the ANZ bank as it has high profitable returns, static liquid position and the low financial risk as compared to the CBA. The returns on the shareholder’s equity are also high in comparison to the price movements and the trends recorded. Moreover it offers the high dividend and is best suited for the purpose of the client portfolio.

Conclusion

It can be concluded that it is essential to do a financial analysis of the organizations to think about their budgetary position and execution. This will assist the speculators with taking better and proper choices in connection to their venture and furthermore makes the examination less demanding between the two contending organizations.

References

Australia and New Zealand Bank of Australia, (2017) Annual report 2017 [Online] Available from https://shareholder.anz.com/annual-report-annual-review [Accessed on 23rd September 2018].

Clarkson. R., (2018) ANZ Share Price Rises Slightly [Online] Available from https://www.moneymorning.com.au/20180321/anz-share-price-rises-slightly-asxu.html [Accessed on 23rd September 2018].

Commonwealth Bank of Australia, (2017) Annual report 2017 [Online] Available from https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf [Accessed on 23rd September 2018].

Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersy: John Wiley and Sons.

Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley and Sons.

Lovett. Y., (2018) What Does Commonwealth Bank of Australia’s (ASX:CBA) Share Price Indicate? [Online] Available from https://simplywall.st/stocks/au/banks/asx-cba/commonwealth-bank-of-australia-shares/news/what-does-commonwealth-bank-of-australias-asxcba-share-price-indicate/ [Accessed on 23rd September 2018].

Nguyen, J.H. and Balachandran, B., (2017) Carbon Risk and Dividend Policy in an Imputation Tax Regime.

Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price. New York: Springer

Raskeiwickz,. O., ( 2017) 3 reasons the Commonwealth Bank of Australia share price is a HOLD [Online] Available from  https://www.fool.com.au/2017/02/27/3-reasons-to-hold-commonwealth- [Accessed on 25th September 2018].

Saleem, Q. and Rehman, R.U. (2011) Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.

Tracy, A. (2012) Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. New York: Springer.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.

Warren, C. S., and Jones, J. (2018) Corporate financial accounting. USA: Cengage Learning.

Warren, C. S., Reeve, J. M., and Duchac, J. (2011) Accounting. USA: Nelson Education.

Yeates. C, (2016) Commonwealth defends dividend [Online] Available from https://www.smh.com.au/business/markets/commonwealth-bank-defends-dividends-20160210-gmq8c3.html  [Accessed on 23rd September 2018].

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