Australian Prudential Regulation Framework And Banking Analysis

Areas of fund utilization

Financial risk management is a management function wherein the entity tries to create economic value with the use of financial instruments. These financial instruments are used by the entity to manage the various exposures that the company faces from the different types of risks being the operations risks, credit risks, market risks, foreign exchange risks, shape risks, volatility risks, liquidity risks, and etc. In the current report, the financial analysis is done for the four major banks of Australia being the Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corporation. The first half year results for year 2018 are being analysed and results are provided as follows (Bessis, 2015).

1.The financial results for the half year for financial year 2018 have been analysed for the Commonwealth Bank of Australia to get an understanding of the carious sources from which the bank is able to fulfil its fund requirements, and the ways it is utilising the same. the major source of getting funds as evident from the financial reports tend to be the proceeds from the issue of debt securities, issuance of loan capital, issue of share capital, dividend income from shares purchased, proceeds from the sale of property, plant and equipment earlier invested in, interest received on acquired investments, the premium and investment income on the insurance product, proceeds from available-for-sale investments, proceeds from sale of insurance assets at fair value, public borrowings and etc.

The major areas where these funds are being utilised are observed to be the interest payments, the day to day expense payments, payment of income taxes, purchases of available-for-sale investments, purchases of insurance assets, repayment of public borrowings, purchases of property, plant, and equipment, payments for acquisition of investment, purchases of intangible assets, payment of dividends, redemption of debt securities, purchase of treasury shares, redemption of loan capital, and etc.

2.Analysis Of Latest Financial Reports

The following table shows the various results that are required for making the requisite ranking:

	ANZ BANK	COMMONWEALTH	NAB	WESTPAC	RANKING
TOTAL ASSETS ($ MILLION)	897,326	976,374	788,325	851,875	COMMONWEALTH BANK
TOTAL EQUITY ($ MILLION)	58,959	63,170	51,306	61,288	COMMONWEALTH BANK
MARKET CAPITALISATION ($ MILLION)	82,920	126,234	76,797	103,250	COMMONWEALTH BANK
PROFIT BEFORE TAX	6,818	9,928	5,285	8,281	COMMONWEALTH BANK
PRICE EARNING RATIO (TIMES)	11.7	13.4	12.4	11.8	COMMONWEALTH BANK
BOOK VALUE ($ MILLION)	29,088	34,971	34,627	34,889	COMMONWEALTH BANK
RETURN ON EQUITY (%)	10.97	16.09	10.11	13.37	COMMONWEALTH BANK
DEBT-EQUITY RATIO (TIMES)	0.30	0.30	0.19	3.04	COMMONWEALTH AND ANZ BANK
RETURN ON ASSET (%)	0.71	1.04	0.66	0.94	COMMONWEALTH BANK

• When the banks are ranked by the total assets, total equity, market capitalisation and profit before tax, it is well evident that commonwealth bank is leading all the remaining banks. The data used is for financial year 2017-18 as the rest banks than the commonwealth bank have not yet prepared reports for financial year 2018. If the data for financial year 2018 is even to be compared, then too it looks like commonwealth bank shall take a lead.
• The financial performance measure is taken to be as the price earnings ratio which measures the number of times the earning that the shareholders are ready to pay the price for the shares of the company.
• The financial position is measures using the book value of the company’s common stock except the retained earnings of the company. It is the perfect measure to highlight the balance sheet position.
• The capital measure used to evaluate the banks’ performance is return on equity, which measures the percentage at which the bank is providing return on the equity employed (Yuliana, et al. 2017).
• The credit quality is measured using the debt-equity ratio. This ratio measures the proportion of debt and equity in a business. Ideal ratio is 2. However, no bank is close to 2, but if a comparison is to be made then the Australia and New Zealand bank and the commonwealth bank tends to be the leading parties (Lewis, and Tan, 2016).

3.(a) What is the Australian Prudential Regulation Framework and what are the objectives?

The Australian Prudential Regulation Framework is framed by the Australian Prudential Regulation Authority which is applicable on the authorised deposit-taking institutions (ADIs), insurance companies, superannuation funds and other financial institutions. All these organisations work under the supervision of Australian Prudential Regulation Authority. This framework enforces prudential legislation, standards, and guidance that help in promoting prudent behaviour by these organisations. The key aim is the supervision of the protection of the varied interests of the above mentioned organisations’ depositors, policyholders, and superannuation fund members (Ward, 2016).   

Ranking of major Australian banks

The objectives of the Australian Prudential Regulation Framework are:

• Manage and conduct a continuous and effective supervision of all the organisations regulated by the Australian Prudential Regulation Authority as per the terms of the framework and supervisory approach.
• Enhancement of the prudential standards and the consolidation of the prudential framework in line with the initiatives of global reform that are initiated by the G-20, whose supervision is done by the Financial Stability Board.
• Better integration of the risk rating systems that involve the workflow and document management to enhance the efficiency and effectiveness of the Australian Prudential Regulation Authority supervisory tools.
• Formation of a good working staff by recruiting the right people for the right kind of job and retaining them to enhance its Australian Prudential Regulation Authority’s effectiveness.  Skill development training programmes should be generated for the staff to increase their knowledge base for future requirements.
• A financial crisis arrangement and plan should be made beforehand to get ready and prepared well for any financial crisis that can pop up in near future (Docherty, et al. 2016).

Although the aim of the Australian Prudential Regulation Framework is to boost the quality of an organisation and reduce the risk levels, it too cannot guarantee a zero level of failures in the system.

(b)When the 10 % cap used to exist there stood a reduced demand for investor loan. However, the removal of the 10% cap can be made only when a certain criteria of stringencies is confirmed by the banks. Due to this it is assumed that the there is no likely upsurge expected in the competition for investor loans. The slower house price growth is likely to be promoted by these strict lending standards. The cap is proposed to be removed to manage the credit crunch, but the stringent restrictions create a faith that the credit crunch cannot be ruled out. So it is observed that even after the cap is removed, no major impact shall be observed for these major banks.

As a personal opinion on the Australian Prudential Regulation Authority’s present position, it seems certain that there would be no change of any removal or non-removal. So there comes no question of agreement or disagreement.

4.Austral Bank Limited has the following ratios:

1. Profit Margin : 21
2. Asset Utilisation (turnover) : 11
3. Equity Multiplier : 12 Times

Given, the above set of ratios, the DuPont analysis comes into picture and can easily be helpful to calculate the return on equity and the return on the assets (Jin, 2017).

Return on Equity (ROE) = Net Profit Margin x Asset Turnover Ratio x Equity Multiplier.

= .21 * 11* 12

= 27.72 % (Kijewska, 2016).

Return on Assets (ROA) = Net Profit Margin % x Total Asset Turnover Ratio (ATO)

= 0.21 * 11

= 2.31 % (Benjamin, Mohamed, and Marathamuthu, 2018).

The return on equity is used as a measure to compute the return that the company is able generate on the equity invested in the business. It is an effective measure done for the capital analysis. This is the efficiency measure with which the enterprise has used the shareholder’s funds (Talamati, and Pangemanan, 2015).

Return on assets on the other hands shows the profit that the company has generated in respect to the assets that are employed by it in the business (Purnamasari, 2015). 

References

Benjamin, S.J., Mohamed, Z.B. and Marathamuthu, M.S., 2018. DuPont analysis and dividend policy: empirical evidence from Malaysia. Pacific Accounting Review, 30(1), pp.52-72.

Bessis, J., 2015. Risk management in banking. John Wiley & Sons.

Docherty, P., Bird, R., Henckel, T. and Menzies, G.D., 2016. Australian prudential regulation before and after the global financial crisis.

Jin, Y., 2017. DuPont Analysis, Earnings Persistence, and Return on Equity: Evidence from Mandatory IFRS Adoption in Canada. Accounting Perspectives, 16(3), pp.205-235.

Kijewska, A., 2016. Determinants of the return on equity ratio (ROE) on the example of companies from metallurgy and mining sector in Poland. Metalurgija, 55(2), pp.285-288.

Lewis, C.M. and Tan, Y., 2016. Debt-equity choices, R&D investment and market timing. Journal of Financial Economics, 119(3), pp.599-610.

Purnamasari, D., 2015. The effect of changes in return on assets, return on equity, and economic value added to the stock price changes and its impact on earnings per share. Research journal of finance and accounting, 6(6), pp.80-90.

Talamati, M.R. and Pangemanan, S.S., 2015. The Effect Of Earnings Per Share (EPS) & Return On Equity (ROE) On Stock Price Of Banking Company Listed In Indonesia Stock Exchange (Idx) 2010-2014. Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 3(2).

Ward, S., 2016. The Changing Face of Compliance: Managing Regulatory Risk. Routledge.

Yuliana, S., Datien, E.U.S. and Si, M., 2017. PENGARUH DEBT RATIO, SALES GROWTH, RETURN ON EQUITY, EARNING PER SHARE, DIVIDEND PAYOUT RATIO, CURRENT RATIO TERHADAP NILAI PERUSAHAAN: STUDI KASUS INDEX SAHAM SYARIAH INDONESIA TAHUN 2011-2015 (Doctoral dissertation, IAIN Surakarta).