Top-Down analysis
The banking industry is the largest sector in Australia. The industry is dominated by four key banks; that is, ANZ Bank, NAB, CBA as well as the Westpac Banking Corporation. Besides, the banking industry is amongst the largest contributor to national economy in Australia contribution about $140 billion in the country GDP every year. Besides, the industry is the key driver of the economic development in Australian employing around 450,000 individuals.
Commonwealth and ANZ Bank are the two biggest players in the Australian banking sector each providing wide range of savings accounts, transaction accounts as well as other financial services and products (CBA 2018). The different types of banking services and products provided by CBA Bank includes saving accounts, credit cards, the personal loans, the home loans, the transaction’s accounts, term deposits, superannuation products credit card and loan protection, insurance products, products for the students and youths online and international banking services (D’Amato 2015). On the other hand, ANZ Bank is provides numerous financial and banking products to personal clients. Currently, ANZ has around 1,273 branches and is well-known for provision of the best class of the financial services and products to its clients. It is also involved in credit analysis, execution, structuring and the on-going monitoring of its clients (Investing.com, 2018).
Top-down analysis usually entails assessing the big picture or how overall economy of a given country and macroeconomic aspects drive the market and the stock prices. In essence, this form of analysis entails analysis of the country inflation rate, economic or GDP growth, interest rates and currency value against the USD. With such information, this section entails analysis of some of the macroeconomic aspects in Australia and their effect to ANZ and Commonwealth Banks.
To start with the overall economic environment in Australia has been quite promising in the past few years. Interest rate within Australia is said to average 4.52% since 1990 to 2018 (RBA 2018). Nonetheless, at 7th August during the RBA monetary policy meeting, the interest rate was left at the all-time low at approximate 1.50% where the rate is said to have been since 1st August 2016. This move has been broadly in line with the market expectations (Focus Economics 2018). This rate had significant impact on the banking industry since it has brought about upward growth in the banking sector. The week wage growth as well as strong competition amongst the retailers is said to have continued keeping the prices in check. With the reported interest rate, the RBA reaffirmed its key view that Australian economy would remain on track with a growth rate slightly above 3% in 2018 and 2019 (Trading Economics 2018). This in turn has resulted in a positive growth in ANZ and Commonwealth bank financial performance.
Bottom-Up analysis
Further, the recent resealed information indicates that inflation rate moved within 2 to 3%, though it nonetheless remained moderate, moving at 2.1% (Focus Economics 2018). With decrease in inflation rate causes an increase in the banking lending activities as well as stock market development. This is in turn said to result in increased lending for the financial institution and in turn increased profitability (Trading Economics 2018). In this case, with decrease in Australian inflation rate, the ANZ and Commonwealth Bank financial performance is expected to increase over this year in comparison to the year 2017. This is based on the fact that if the inflation is kept between 2 and 3% over time, this rate does not greatly influence individual’s economic decisions (Statista 2018). Maintaining inflation rate between 2 and 3% would enhance full employment and increased growth (Boyd & Levine 1996). Besides, maintaining inflation rate low would enhance high return on investment to the two banks since Boyd, Levine and Smith (2001) argued that if inflation is lower, lenders would get high amount as planned since it increasing purchasing power of interest earning the banks receive.
The $AUD or Aussie has been a favoured currency in the recent years (Daily FX 2018). This is as a result of the multi-decade product boom that is said to have brought Aussie to the all-time high against US dollar. To be more specific, the $AUD increased with 0.0012 or 0.16% against the US Dollar to 0.7193 on 5th September 2018 from 0.7181 in previous trading period (Trading Economics 2018). The rise in the $AUD is said to affect performance of the two banks positively. To be more specific, the performance of the Commonwealth and ANZ Bank is said to have improved with the rise in the Australia Dollar this year.
The country GDP is also said to have advanced 0.9% in June this year above the market consensus of around 0.7% expansion (Focus Economics 2018). The growth in Australian GDP is reinforced by the strong point in the local demand as well as foreign trade as fixed investment remained flat (Trading Economics 2018). The high or advancement in the country GDP growth is reported to affect financial performance of ANZ and the CBA to a greater extent. In essence, the growth in Australia GDP has resulted to a positive growth in the two banks net income in their third quarter (Khan Senhadji & Smith 2006).
Ratio analysis of ANZ and Commonwealth Banks
A good number of individuals fail to recognize business cycle. Hence, before the Great Recession, several individuals failed to get out of stock markets in time. Contrary, several individual often fear placing too much cash in the stock market at the start of expansion cycle, which is the right period to do so (Kent 2014). Therefore, even though it is tricky for someone to time the market, one can improve his or her return by understanding the business cycle. Here, they can be able to adjust their asset allocation in order to take advantage of different phases. There are four different phases in a business cycle; that is, expansion, the peak, the contraction and the trough. The expansion phase is that phase when a country economy is said to grow at 2 to 3%. In this phase the stocks enter the bull market. In the peak phase, the economy is said to grow at 3% (Amaded 2018). Here, there are several asset bubbles and stock is in irrational exuberance state. In the contraction phase the economic growth of the country is slow though it is not negative and the stocks get in bear market. Finally, in the trough phase, the country economy would tend to contract. As Australian economy has been in expansion phase since June 2009, a good number of individuals are warning that recession is just about to start. Though there has not been any inflation (Kent 2014). This is a warning that expansion is getting to its peak and instead of inflation increasing, there are some asset bubbles.
Bottom-up analysis entails an approach of examining fundamentals of stock irrespective of the market trends. In essence, bottom-up analysis focuses less on the market situation, industry fundamentals and macroeconomic indicators but focuses more on how a specific firm within a particular industry is performing in comparison to other firm within the industry. In this case, the bottom-up analysis of the two banks would include financial ratio analysis as well as banks’ financial statement analysis over the past one year.
To start with the financial ratio analysis of ANZ and Commonwealth Bank entails current ratio, net margin, ROE, ROA and price to the earnings ratio.
Current ratio
CBA current ratio by June 2018 was 1. This is promising since it implies the bank is not struggling at all to meet most of its short-run debts (ADVFN 2018). On the other hand, ANZ bank current ratio by June 2018 was 1 meaning that the bank was doing well in settling its short-term debts.
Net profit margin
CBA net margin by June 2018 was 36%. The ratio is a good one for the bank since it implies that the bank has been able to generate enough profit over the period. On the other hand, ANZ net margin by June 2018 was 29% meaning that the company is profitable (ADVFN 2018).
ROE
CBA ROE by June 2018 was 14%. This ratio implies that CBA is utilizing its equity more effectively in generating income (ADVFN 2018). ANZ bank’s ROE on the other hand was 11%. The ratio is lower compared to that one of Commonwealth Bank though it implies that ANZ is utilizing its equity more effectively.
ROA
CBA ROA by June 2018 was 1%. This is promising since a positive ROA means that the company is effectively utilizing its assets in generating net income. ANZ bank’s ROA June 2018 was 1% (ADVFN 2018). Such ratio is a good indicator that the bank was utilizing its assets effectively.
P/E ratio
The P/E ratio for CBA by June 2018 was 13.12. Such value is a good sign that CBA is able to generate more earnings to its existing stakeholders (ADVFN 2018). ANZ Bank’s P/E ratio by June 2018 was 15.08 meaning that the bank was generating positive earnings for its stakeholders.
CBA total revenue by 30th June 2018 was 25,630 million. Its net income available to the common stockholders was 9,329 million. The bank’s basic EPS was 5.34 by June 2018 while its net income from the continuing operation within this period was 9,375 million. On the other hand, its total assets by June 2018 were 975,165 million while its total liabilities were 907,305. This is a favourable picture to such firm since it implies that the bank is not struggling to meet its financial obligations (ADVFN 2018). Further, CBA total equity was 67,860 million.
On the contrary, ANZ Bank total revenue by June 2018 was 21,737 million. Its net income available to the common stockholders was 6,406 million while its basic EPS was 2.20. Furthermore, its net income from the continuing operations was 6,406 million. Besides, its total assets in June 2018 were 897,326 million while its total liabilities were 838,251 million. Moreover, total equity was 59,075 million (ADVFN 2018). In this case, Commonwealth seems to perform relatively better in comparison to ANZ Bank though both firms seem to have promising financial data over this period.
In conclusion, Australian economy is relatively attractive to any business and in particular to banking operations. In this case, it can be stated that with attractive economy within Australia, the banking industry is found to have improved performance over the period. With the improved performance of the overall industry resulting from improved economic performance of the country, ANZ and Commonwealth Banks’ performance is relatively attractive. This is based on the fact that the two banks have relatively high financial ratios with increased or upward growth in their financial statement items. With these findings, it is recommendable for potential investors to invest in the two banks since there is high probability to get high returns.
References
ADVFN (2018). ANZ Financial Data; Viewed at: https://au.advfn.com/stock-market/ASX/anz-ANZ/financials (Accessed 6th September 2018).
ADVFN (2018). Commonwealth Bank of Australia Financial Data; Viewed at: https://au.advfn.com/stock-market/ASX/CBA/financials (Accessed 6th September 2018).
Amaded, K (2018), Where Are We in the Current Business Cycle?: Viewed at: https://www.thebalance.com/where-are-we-in-the-current-business-cycle-3305593 (Accessed 6th September 2018).
Boyd, J. H., & Levine, R. (1996). In?ation and Financial Market Performance. Federal Reserve Bank of Minneapolis, Working Paper D, 573.
Boyd, J. H., Levine, R., & Smith, B. D. (2001). The impact of inflation on financial sector performance. Journal of monetary Economics, 47(2), 221-248.
CBA (2018), CBA, About us: Viewed at: https://cbagroup.com/about-us/ (Accessed 6th September 2018)
D’Amato, E (2015), Commonwealth Bank of Australia vs Westpac Banking Corporation: Viewed at: https://www.afr.com/personal-finance/commonwealth-bank-of-australia-vs-westpac-banking-corporation-20150224-13nipf (Accessed 6th September 2018)
Daily FX (2018), Forex market news and analysis: AUD/USD: Viewed at: https://www.dailyfx.com/aud-usd (Accessed 6th September 2018)
Focus Economics (2018), Australia Economic Outlook: Viewed at: https://www.focus-economics.com/country-indicator/australia/gdp-usd-bn (Accessed 6th September 2018)
Focus Economics (2018), Australia Interest rate forecast: Viewed at: https://www.focus-economics.com/country-indicator/australia/interest-rate (Accessed 6th September 2018)
Focus Economics (2018), Inflation in Australia: Viewed at: https://www.focus-economics.com/country-indicator/australia/inflation (Accessed 6th September 2018)
Investing.com (2018), ANZ Banking Group (ANZ) Company profile: Viewed at: https://www.investing.com/equities/australia—nz-banking-grp-ltd-company-profile (Accessed 6th September 2018)
Kent, C (2014). The Business Cycle in Australia; Viewed at: https://www.rba.gov.au/speeches/2014/sp-ag-131114.html (Accessed 6th September 2018).
Khan, M. S., Senhadji, A. S., & Smith, B. D. (2006). Inflation and financial depth. Macroeconomic Dynamics, 10(2), 165-182.
RBA (2018), Interest rate decisions 2018: Viewed at: https://www.rba.gov.au/monetary-policy/int-rate-decisions/2018/ (Accessed 6th September 2018)
Statista (2018), Australia: Inflation rate from 2012 to 2022* (compared to the previous year); Viewed at; https://www.statista.com/statistics/271845/inflation-rate-in-australia/ (Accessed 6th September 2018)
Trading Economics (2018), Australia dollar: Viewed at: https://tradingeconomics.com/australia/currency (Accessed 6th September 2018)
Trading Economics (2018), Australia GDP growth rate: Viewed at: https://tradingeconomics.com/australia/gdp-growth (Accessed 6th September 2018)
Trading Economics (2018), Australia inflation rate: Viewed at: https://tradingeconomics.com/australia/inflation-cpi (Accessed 6th September 2018)
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