Commonwealth of Australia was established in accordance to the Commonwealth Bank Act 1911. Commonwealth Bank is considered to be having sufficient savings pertaining to the general business in the bank. The initiation of the bank was further depicted in terms of receiving a federal government guarantee. The earliest and strenuous proponent is further seen to be flamboyant among the American-Australian politician, King O’Malley (Commbank.com.au 2018).
The key financial activities of the bank are seen to be based on various types of the financial services. This is seen to be included in terms of the financial services including the retail, funds management, institutional banking and broking services. The bank is also recognized as one of the largest listed Australian company including the several types of the brands pertaining to Commonwealth Insurance, Bankwest, Colonial First State Investments, ASB Bank (New Zealand) and Commonwealth Securities (CommSec) .
The important factors associated to the competitive advantage for the company needs to be identified with the visionary, creative and agile initiatives. The disruptors of the company are also considered with fresh thinking and appetite for growth. The proactive and positive change has been also seen to be major facilitator of the competitive advantage. It needs to be also seen that the harnessers are able to improve the overall business and also pus the optimization process. The competitive advantages need to be also considered with the approach taken by the policy adopters. These strategies are evident with a cautious focus on the innovation and the changes. The reluctant nature of the adopters has been further seen with reluctant need for the reassurance and evidence. The maintenance of the complacent resistors is also depicted with competitive advantage.
It needs to be discerned that banking in Australia mainly dominated by four major banks includes National Australia Bank (NAB), Westpac Banking Corporation, Australia and New Zealand Banking Group and Commonwealth Bank of Australia. In addition to this, there are very small and medium players were associated to financial services such as providing limited banking type services including mutual banks, unions of credit and building of society. These types of service are often identified as deposit taking institutions. Moreover, several foreign banks have been also depicted with presence of having retail banking experience. In general, the banks are required to adhere to the Banking Act 1959 in order to get the license for banking. Moreover, the foreign banks need to maintain the license through several branches in Australia which are incorporated as foreign subsidiary banks and complying with religious charitable development funds and several types of other requirement for license. It needs to be also understood that Australia is comprised of a sophisticated, profitable and competitive financial sector along with the strong regulatory system. In the last decade, Commonwealth Bank was ranked first by Bloomberg with a total riskless adjusted ratio of 18%. Westpac bank on the other hand is determined to be having 11% of riskless return. Similarly, Australia and New Zealand bank is identified with 8.7% of riskless return ranking (Rebello 2016).
Liquidity ratio or short-term solvency ratio acts as a financial metrics for the ability of the debtor to pay off the debt obligations by ensuring no withdrawal of external capital. This ratio is able to quantify the debt obligations of the company along with its margin of safety by including measures such as current ratio, operating cash ratio and quick ratio (Accounting Management 2015). The computation of short-term analysis for Commonwealth Bank has been considered with identifying the current assets, liabilities, EBIT and interest expense which is conducive for competition of current ratio and Times interest earned. The current assets of the company are seen as cash and liquid assets which amounted to $ 45,850m in $ 2017m in 2016. The current liabilities have included items such as payables due to other financial institutions and deferred tax liabilities (Paramasivan and Subramaniam 2014).
|
Liquidity Ratio Analysis: – |
||
|
Commonwealth Bank |
||
|
2017 |
2016 |
|
|
Total Current Assets (A) |
45850 |
23372 |
|
Total Current Liabilities (F) |
29882 |
29793 |
|
EBIT (D) |
13944 |
12849 |
|
Interest Expense (E) |
15693 |
16882 |
|
Current Ratio (A/F) |
1.53 |
0.78 |
|
Times interest earned (D/E) |
0.89 |
0.76 |
Table 1: Liquidity Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
The total current ratio for the bank was computed to be 1.53 in 2017 and 0.78 in 2016. This shows that there is a significant improvement in the cash reserves and liquid assets of the company in 2017 when compared to 2016. This is also evident with decreasing amount of payables due from other financial institution. This is clearly evident from the annual report states that payables due to other financial institutions was $ 28,771m in 2016 and it reduced to 28,432m in 2017 (Australian Office of Financial Management 2016).
The times interest earned is computed by dividing the EBIT amount by interest expense. The increasing times interest earned ratio clearly shows increasing ability of the bank to honor its debt payments. This is evident with times interest earned ratio of 0.76 in 2016 which increased to 0.89 2017.
The solvency ratio of the company acts as the key metrics to check whether a it is able to meet the debt and other types of obligations associated to payments. The main indications under the solvency ratio states whether cash flow is sufficient in nature to adhere to the long-term and short-term liabilities. In general, the lesser is the solvency ratio of the company, the better are the chances to reduce the defaults associated to debt obligations. The computation of solvency ratio for Commonwealth Bank is depicted with shareholders equity, total debt and total assets (Office of Financial Management 2016).
|
Solvency Ratio Analysis: – |
||
|
Commonwealth Bank |
||
|
2017 |
2016 |
|
|
Shareholder’s Equity (B) |
63716 |
60564 |
|
Total Debt (D) |
912658 |
872437 |
|
Total Assets (E) |
976374 |
933001 |
|
Debt Equity Ratio (D/B) |
14.32 |
14.41 |
|
Total Debt To Total Assets (D/E) |
0.93 |
0.94 |
Table 2: Solvency Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
The total debt to total assets is the percentage of total assets it was actually financed by the creditors of the bank. The total debt for the company in 2016 is noted as $ 872,437m which increased to $ 912,658m in 2017. However, the significant rise in the total liabilities was backed up by increasing total assets which was evident with $ 933,001m in 2016 which increased to $ 976,374 in 2017. Therefore, the computation of total debt to total assets has shown a decrease of 0.94 in 2016 to 0.93 in 2017 which clearly indicates a better long-term solvency prospects for Commonwealth Bank (Paramasivan and Subramaniam 2014).
The debt to equity ratio identifies the appropriate proportion of debt used as per the shareholders equity in order to finance the assets of the company. The total amount of shareholders’ equity is noted as $ 60,564m in 2016 which increased to $ 63,716m in 2017. However, the increasing amount of total debt is a major concern for future prospect. Therefore, despite of decreasing debt equity ratio in compared to 2016, a high proportion of 14.32 needs to be brought down to a significantly lower level (Inclusion 2014).
The typical categorization of efficiency ratio is comprised of elements such as repayments of liability, receivables turnover, usage of equity and general use of machinery or inventory. In case of Commonwealth Bank the efficiency, ratio elements are comprised of revenue, average total assets and Receivables due from other financial institutions. The main computation of efficiency ratio includes asset turnover ratio and receivables collection period (Healthcare, Management and Global 2015).
|
Efficiency Ratio Analysis: – |
||
|
Commonwealth Bank |
||
|
2017 |
2016 |
|
|
$m |
$m |
|
|
Revenue (A) |
23120 |
21795 |
|
Receivables due from other financial institutions (B) |
10037 |
11591 |
|
Average Total Assets (F) |
976374 |
933001 |
|
Assets turnover (A/F) |
0.024 |
0.023 |
|
Receivables Collection Period (365/(A/B)) |
158 |
194 |
Table 3: Efficiency Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
The asset turnover for Commonwealth Bank has been identified with use of company’s assets in generating its revenue. Based on the findings from the annual report it is clearly seen that the asset turnover ratio has increased from 2016 to 2017. This shows that companies in a better position to use its assets such as deposits and use them in an efficient manner in revenue generating tools such as disbursing loans to reliable parties (Fernandes, Lynch and Netemeyer 2014).
The receivables collection period or the average collection period is the average number of days on which credit sale is made or monies received from a customer. The important nature of receivables for the bank needs to be identified with the receivables which are due from other financial institutions. The decreasing amount of time for receiving the debt obligations in 2017 is depicted as a positive sign (Singapore Management University 2016).
Profitability ratio is considered as an important financial tool to assess earning capability of the business in compared to expenses.
|
Profitability Ratio Analysis: – |
||
|
Commonwealth Bank |
||
|
Particulars |
2017 |
2016 |
|
$m |
$m |
|
|
Revenue (A) |
23120 |
21795 |
|
Net Profit/Loss (D) |
9928 |
9228 |
|
Avg. ordinary shareholders equity(H) |
63716 |
60564 |
|
Gross Profit (B) |
13832 |
13057 |
|
Net cash from operating activities (E) |
25940 |
24606 |
|
Average Total Assets (F) |
976374 |
933001 |
|
Net Profit Margin (D/A) |
42.94% |
42.34% |
|
Return on Equity (A/H) |
16% |
15% |
|
Gross Profit Margin (B/A) |
60% |
60% |
|
Cash return on sales (E/A) |
112% |
112.90% |
|
Return on assets (D/F) |
0.010 |
0.010 |
Table 4: Profitability Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
The cash return on sales ratio indicates the amount of money a business is able to generate in terms of sales revenue. It can be clearly seen that there has been a slight decrease in this ratio in 2017 when compared to 2017.
This ratio is conducive in assessment of financial health as per the proportion of money left from the revenues pertaining to cost of goods sold. The gross profit margin is seen to decrease slightly from 59.91% in 2016 to 59.83% in 2017.
the net profit generated after deduction of interest and tax however seem to increase from 2016 to 2017. This is identified as a major positive aspect for the bank.
The return asset is depicted as the net profit which accompanies the book to generate in terms of its total assets. There has been a slight increase in this category which shows Commonwealth Bank has better utilised its assets in 2017 in compared to 2016.
The market Value ratio for the bank has been completed with price-earnings ratio, payout ratio and earnings per share ratio.
|
Share Market Performance Ratio |
||
|
Commonwealth Bank |
||
|
2017 |
2016 |
|
|
Market price per share (A) |
82.81 |
74.37 |
|
Earnings per shares (B) |
574.4 |
554.8 |
|
Proposed Dividend Per share (F) |
429 |
420 |
|
Price Earnings Ratio (A/B) |
0.14 |
0.13 |
|
Earning Price Per Share |
574.40 |
554.80 |
|
Pay-out Ratio |
74.69 |
75.70 |
Table 5: Share Market Performance Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
The increasing amount of price-earnings ratio clearly suggests that the bank is able to generate better earning in terms of share price prevailing in the market.
The decreasing amount of payout ratio suggests that Commonwealth Bank has paid out higher amount of dividend in 2017 when compared to 2016 .
It can be clearly depicted that the bank is in a better position in generating higher earnings from shares. This indicates growing share market performance in 2017.
The comparison of share price movement for Commonwealth Bank has been depicted with information available in ASX website for the closing price of shares in last two years. According to this information it can be seen that the change in price trend for Commonwealth Bank is slightly volatile compared to All Ordinaries index. This is evident when comparing the percentage daily change of share price movement for Commonwealth Bank and percentage daily change of share price movement for All Ordinaries index. Therefore, it can be stated that there is a high correlation of Closing Price of Commonwealth Bank with All Ordinaries index.
|
Date |
Closing Price of Commonwealth Bank |
Percentage daily change of Commonwealth Bank |
Closing Price of All Ordinaries (^AORD) |
Percentage change of All Ordinaries (^AORD) |
|
|
8/31/2016 |
null |
0% |
null |
0% |
|
|
9/30/2016 |
73.39 |
0% |
5402.40 |
0% |
|
|
10/31/2016 |
78.65 |
7% |
5502.40 |
2% |
|
|
11/30/2016 |
82.41 |
5% |
5719.10 |
4% |
|
|
12/31/2016 |
81.66 |
-1% |
5675.00 |
-1% |
|
|
1/31/2017 |
82.32 |
1% |
5761.00 |
2% |
|
|
2/28/2017 |
85.91 |
4% |
5903.80 |
2% |
|
|
3/31/2017 |
87.40 |
2% |
5947.60 |
1% |
|
|
4/30/2017 |
79.65 |
-9% |
5761.30 |
-3% |
|
|
5/31/2017 |
82.81 |
4% |
5764.00 |
0% |
|
|
6/30/2017 |
83.73 |
1% |
|
0% |
|
|
7/31/2017 |
75.80 |
-9% |
5776.30 |
0% |
|
|
8/31/2017 |
75.25 |
-1% |
5744.90 |
-1% |
|
|
9/30/2017 |
77.63 |
3% |
5976.40 |
4% |
|
|
10/31/2017 |
79.43 |
2% |
6057.20 |
1% |
|
|
11/30/2017 |
80.34 |
1% |
6167.30 |
2% |
|
|
12/31/2017 |
78.87 |
-2% |
6146.50 |
0% |
|
|
1/31/2018 |
76.39 |
-3% |
6117.30 |
0% |
|
|
2/28/2018 |
72.31 |
-5% |
5868.90 |
-4% |
|
|
3/31/2018 |
71.82 |
-1% |
6071.60 |
3% |
|
|
4/30/2018 |
69.30 |
-4% |
6123.50 |
1% |
|
|
5/31/2018 |
72.87 |
5% |
6289.70 |
3% |
|
|
6/30/2018 |
74.79 |
3% |
6366.20 |
1% |
|
|
7/31/2018 |
71.24 |
-5% |
6427.80 |
1% |
|
|
8/31/2018 |
71.21 |
0% |
6416.50 |
0% |
Table 6: Closing Share Price Movements of Commonwealth Bank and ^AORD
(Source: Au.finance.yahoo.com. 2018)
|
Date |
Percentage daily change of Commonwealth Bank |
Percentage change of All Ordinaries (^AORD) |
|
10/31/2016 |
7% |
2% |
|
11/30/2016 |
5% |
4% |
|
12/31/2016 |
-1% |
-1% |
|
1/31/2017 |
1% |
2% |
|
2/28/2017 |
4% |
2% |
|
3/31/2017 |
2% |
1% |
|
4/30/2017 |
-9% |
-3% |
|
5/31/2017 |
4% |
0% |
|
6/30/2017 |
1% |
0% |
|
7/31/2017 |
-9% |
0% |
|
8/31/2017 |
-1% |
-1% |
|
9/30/2017 |
3% |
4% |
|
10/31/2017 |
2% |
1% |
|
11/30/2017 |
1% |
2% |
|
12/31/2017 |
-2% |
0% |
|
1/31/2018 |
-3% |
0% |
|
2/28/2018 |
-5% |
-4% |
|
3/31/2018 |
-1% |
3% |
|
4/30/2018 |
-4% |
1% |
|
5/31/2018 |
5% |
3% |
|
6/30/2018 |
3% |
1% |
|
7/31/2018 |
-5% |
1% |
|
8/31/2018 |
0% |
0% |
Table 7: Share Price Movements of Commonwealth Bank and ^AORD in Percentage
(Source: Au.finance.yahoo.com. 2018)
As per the comparison of share price movement it can be seen that Commonwealth Bank is in a better position with an increasing position in the share market. It needs to be also discerned that in most of the month is over the past two years the trend line for Commonwealth Bank is higher than All Ordinaries index. However, in the month of April 2017 and July 2017 there is huge fluctuations with the market index which indicates high amount of volatility and inconsistent performance for share price.
References
Accounting Management 2015. Debt to equity ratio – explanation, formula, example and interpretation | Accounting for Management, Financial Statement Analysis.
Au.finance.yahoo.com., 2018. Yahoo is now a part of Oath. [online] Available at: https://au.finance.yahoo.com/quote/CBA.AX/history?p=CBA.AX [Accessed 5 Sep. 2018].
Australian Office of Financial Management (2016) Public Register of Government Borrowings, updated 10 October 2016. Available at: https://aofm.gov.au/statistics/public-register-of-government-borrowings/.
Commbank.com.au., 2018. Annual Report 2017 [online] Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf [Accessed 5 Sep. 2018].
Commbank.com.au. 2018., About us – CommBank. [online] Available at: https://www.commbank.com.au/about-us.html [Accessed 5 Sep. 2018].
Fernandes, D., Lynch, J. G. and Netemeyer, R. G., 2014. ‘Financial Literacy, Financial Education, and Downstream Financial Behaviors’, Management Science, 60(8), pp. 1861–1883.
Healthcare, A., Management, F. and Global, I. 2015., ‘Partnering with Payers to Optimize the Revenue Cycle.’, hfm (Healthcare Financial Management), 69(3), pp. 1–8. Available at: https://login.ezproxy.lib.umn.edu/login?url=https://search.ebscohost.com/login.aspx?direct=true&AuthType=ip,uid&db=buh&AN=101109950&site=ehost-live.
Inclusion, F. 2014. ‘Financial Inclusion’, GE-INTERNATIONAL JOURNAL OF MANAGEMENT RESEARCH.
Office of Financial Management 2016. Population Density and Land Area Criteria Used for Rural Area Assistance and Other Programs, State of Washington. Available at: https://www.ofm.wa.gov/pop/popden/rural.asp.
Paramasivan, C. and Subramaniam, T. 2014. ‘Financial Management’, Igarss 2014, (1), pp. 1–263.
Rebello, J., 2016. Australian Commonwealth Bank to shut down India operations. [online] The Economic Times. Available at: https://economictimes.indiatimes.com/industry/banking/finance/banking/australian-commonwealth-bank-to-shut-down-india-operations/articleshow/53914526.cms [Accessed 5 Sep. 2018].
Singapore Management University 2016. ‘Working with Fintech’, [email protected], 8(1), pp. 1–4. Available at: https://ink.library.smu.edu.sg/pers%0Ahttps://ink.library.smu.edu.sg/pers.
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