RATIO ANALYSIS

QUESTION

Group Assignment for 2204AFE Financial Institutions Management

• The assignment weight 10% of your overall course grade.

Group Assignment mark is split into two equal segments –

1)     Maximum 5 marks for the ‘Content’ of the report (Accuracy, readability, completeness).

2)     ‘Working in groups/teams’ component – with 5 marks maximum.

This means that if you fail to form the group of required size and decide to do your project alone, the maximum achievable mark for this assessment will be 5 marks.

If there are only two of you in the group, you can only achieve 2.5 marks for the group component (7.5 overall).

• Group size: 3 to 5 people in a group (group members – not necessarily from the same tute).
  • Deadline for forming groups: Friday, 16/03/2012.
  • Please follow the instructions of Lenka Boorer (next presentation) on how to let us know about your group (names & student ID’s of all group members) by Friday, 16/03/2012.

• Task:

Choose TWO of the Top 4 Australian banks (CBA, ANZ, NAB & Westpac) and download the banks’ annual reports from the following links:

• CBA

• http://www.commbank.com.au/about-us/shareholders/pdfs/annual-reports/2011_Commonwealth_Bank_Annual_Report.pdf

• ANZ

• http://media.corporate-ir.net/media_files/IROL/96/96910/2011_Annual_Report_ANZ.pdf

• NAB

• http://www.nabgroup.com/vgnmedia/downld/2011AnnualFinancialReview.pdf

• Westpac

• http://www.westpac.com.au/docs/pdf/aw/ic/2011_Annual_Report.pdf

• Produce the 2011 ratio table for each bank chosen similar to the “Non-textbook Question in Tute 2”. Based on these ratios and others available from the annul reports compare the performance of the two banks. Please write up your comments no more than 3 pages (Times New Roman, 11 font, single spaced with no less than 1cm margin on every side). All writings in excess of 3 pages will not be read.
• Note that Problem 1 in Tute 2 and the section “Evaluating Bank Performance: An Application” (starting from page 121 in the Supplementary Reading for Weeks 2-3) should be helpful in writing up the comments.

• Deadline: Week 6 – Thursday, 05/04/2012. Please note the University policy for late assignment without prior approval. If you have compeling circumstances you can apply by writing me on a.akimov@griffith.edu.au with names of the group members, and valid reason for the application.

• Submission:
• You will have to submit your report using Safe Assign system, which allows me to track plagiarism (Do Not Copy from each other). Lenka Boorer will shortly provide you some instructions how to do that.

• You are required to participate “SPARKPlus” (to evaluate the group members’ contribution) as will be explained shortly in the workshop
• Please note that your mark for group work will not be released until at least 3 students fill in the questionnaire.
• So, if do not participate, the maximum score you can achieve is 5 (out of 10).

Hints on group work

• Ms Averil Martin will shortly provide you with some tips (final presentation in today’s session).

• You can use Discussion Board (of this course’ Learning@griffith) in your search for group members.

• Finally, this workshop is recorded, so if you miss something important, you can check it later using Lectopia.

SOLUTION

FINANCIAL INSTITUTIONS MANAGEMENT

Commonwealth Bank of Australia and National Australia Bank are two of the topmost banks in Australia. The following write up aims to compare the performance of both these banks based on ratio analysis and information available in their annual reports.

The major ratios calculated for assessing financial performance of banks have been calculated below:

Leverage ratio and Equity to loans ratios are the basic measuring tools of capital strength. The position of both the banks is pretty good. Tier 1 leverage ratio for both the banks is also satisfactory, both being more than 5%. However, for Commonwealth Bank of Australia, it is better than for National Australia Bank. It means there is more capital to cover asset problems of the balance sheet.

On comparing various profitability ratios of both the companies, the profitability position of Commonwealth Bank is better than National Australia Bank. A higher Net Interest Margin shows how well bank is employing its earning asset base. A 1% return on asset base is considered satisfactory but both the banks have not achieved this ideal situation. However, Return on Equity for both the banks, is good at more than 15%. Operating profit margin for CBA is 53% which is much better than NAB, 40%. Now, the efficiency ratio of National Australia Bank is quite poor at 15%. It means either both interest and non interest income are quite low, or the non interest expense is quite high. In this case non interest expense of NAB is quite high than industry average and it needs to be worked upon.

An overall review of financial statements of both the banks shows that Commonwealth Bank is at quite a strong position as compared to National Australia Bank. It has higher profits for its shareholders and a wider asset base which secures the investments made by them. The EPS of CBA for the year 2011 is $411.2 and for NAB is $233.6. This proves that CBA is a better option to invest in.

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