Evolution of Commonwealth Bank of Australia-Samples for Students

Question: Discuss about the Commonwealth bank of Australia. Answer: Introduction Commonwealth Bank of Australia is a pioneer in providing integrated financial services. The business of the bank pertains to retail business, institutional banking, and products that pertain to management and services. The major chunk of the population in Australia hails the bank as the major financial institution. Moreover, Commonwealth bank played a leading role in securing a strong economy that enables employment opportunities, financial security, and growth. In the year 2017, the bank served more than 16.5 million customers, gave back 75% of cash profit and employed a whopping 51,800 people (CBA, 2017). The report evaluates Commonwealth Bank of Australia, a leader in the banking and financial services with eight major initiatives in hand that projects the commitment level of the company in the creation of long-term growth that is sustainable in nature. Ratio analysis is conducted so as to see the impact on the areas of profitability, use of the asset, liquidity and capital structure. The managements performance is evaluated with the help of ROA and EPS (Ferris et. al, 2010). The process of share valuation enables to forecast on the performance of the company. Further, the performance of share is ascertained and a comparison is done with the index of the market. An in-depth analysis of the shares has been done followed by a SWOT analysis. The report considers various information from external sources and conclusion has been derived whether or not to invest in the company (Brigham Daves, 2012). In 2017, the Commonwealth earned an income of $26bn. There was a marginal increment in the interest income. The figure stands at $33,293 million in 2017 as compared to a figure of $33,817 million in 2016. The bank had a profit of $9.9 billion out of which three quarters is provided to the shareholders while the rest remains reinvested. The bank returned profits to the shareholder in the form of a dividend of $7.4 billion (CBA Dividend, 2017). The expenses of the bank constituted to $4.8 billion and the tax amount stood at $3.9 billion. Financial health This section stresses on the profit reaping nature of the company and the potential of the management with the liquidity factor. A company can attain the desired goal and expand when it contains the desired liquidity and reaping good profits with a strong performance in the market (Davies Crawford, 2012). Profitability The profitability ratio denotes the ability of the company in generating profit from its activities. It evaluates the ability of the business to generate earnings in comparison to the expenses and various other costs that are relevant in nature that is incurred during a period of time. A comparison with the previous year ratio will help in answering about the performance of the company (Berk et. al, 2015). As for Commonwealth Bank of Australia, the ratio profitability ratio consists of the gross profit, net profit and the return on assets ratio. The gross profit margin of the Commonwealth bank has increased from 44.70% in 2016 to 47.37% in 2017 signifying that the bank has a proper manager management of the interest expense. It can be cited that the management of the bank has controlled the interest expense thereby leading to gross profit (Wood Sangster, 2005). Secondly, the net profit margin is computed by dividing the net profit by sales. Commonwealth banks net profit has shown an increment in 2017 that stands at 26.78% as compared to 24.92% in 2016. There is a slight or a marginal increment in the ratio that can be attributed to the better management of the operating income. The increment in the operating income indicates a strong management and hence, be able to post higher net profit ratio Brigham Ehrhardt, 2011). The ROA indicates the profitability that is linked with the assets of the company. From the computation, it can be commented that the bank has been able to post a better figure as compared to the year 2016 however; the increment in the ROA is marginal. Moreover, the returns should be at the higher end as higher the ROA, the better for the company. The assets have generated profit for the bank, however; the same can be utilized in a more efficient way for higher profit. Liquidity The liquid position determines the ability of the organization in meeting the obligations. The liquid position is highly observed by various parties because organizations that are heavily reliant on debt are vulnerable and risky in nature. Banks, suppliers and other parties who lend to the business generally check the liquid position (Melville, 2013). The liquidity position can be known with the help of current and quick ratio. A current ratio of more than 1 indicates that the organization has more current assets as compared to the current liabilities and hence, the obligations will be discharged. As per the computation, it is observed that the current ratio of Commonwealth bank stands at 1.28 times as compared to the ratio of 0.78 in the year 2016. As there is no inventory available with the company, therefore, the quick ratio will appear the same as the current ratio. The quick ratio projects the same finding like that of the current ratio. The increment in the ratio is a powerful indicator that the business can meet the obligations with ease and flexibility. The trend of both the current and the quick ratio stands positively. Both the current and the quick ratio move in the same director hence, additional loans can be procured and will be granted by the banks and the financial institutions for the proper ratios. Capital structure The capital structure constitutes an important part for the company as it determines the manner in which the company has structured the funds. It needs to be noted that the structure must be settled in mix blend of equity and debt otherwise the company will fail to produce the desired effect (Porter Norton, 2014). The debt to equity of Commonwealth Bank stands at 9.83 in 2017 as compared to 1.48 in 2016 meaning that the company is highly geared. When debt-equity ratio stands more than 1 it indicates that the company has a major reliance on debt. This ratio gives an instance that Commonwealth bank relies more on debt and a vast increment is witnessed in 2017 (Bodie et. al, 2014). Further, the debt ratio remained the same. In both the year the ratio stood at 0.93 indicating a major reliance on debt (CBA, 2017). The equity ratio of the company stands at 6.52% in 2017 as compared to 6.49% in 2016 indicating that a marginal increment has happened. Higher the equity ratio, the better is for the company. The capital structure is more infused with debt and hence, prone to more risks (Bodie et. al, 2014). Asset efficiency For Commonwealth bank, the asset turnover was 3.48 in 2017 as compared to 3.67 in 2016. This indicates that for each dollar in assets, the company generated $3.48 in sales (CBA, 2017). On the other hand, the Commonwealth bank posted a higher equity ratio in both the years. Though there was a drop in the equity ratio in 2017 yet the percentage was higher indicating the efficient use of the banks equity management. It implies that the shareholder equity has been utilized to the optimum level but of a lower extent as compared to the year 2016. Further, this ratio can be compared with other competitors that belong to the same industry (Wahlen et. al, 2010). Market performance The Earnings per share of Commonwealth bank has increased in 2017 that stands at 577.6 as compared to 542.3 in 2016 (CBA, 2017). It augurs a strong signal because a higher EPS is always required as it projects that the company is highly profitable and contains more profit for the purpose of distribution to the shareholders. Moreover, a higher EPS ensures an increment of the stock price (Shah, 2013). Hence, going by the structure of the EPS it can be commented that the market structure of Commonwealth bank is strong. Management assessment As at 5th October 2017, the market capitalization of Commonwealth Bank stood at $1,30.45 billion and the current stock price of the company stands at $75.40. The market capitalization of the company stands strong and as the market capitalization of the company exceeds $10 billion it is a large-cap company (CBA, 2017). Hence, the size of Commonwealth Bank provides ample advantages to the organization in terms of less volatility of the shares while the small caps are exposed to huge volatility. Further, the stability of the company remains intact and the large-cap companies provide more dividends. The ROA of the company is positive and the EPS of the company has undergone a strong change in a positive manner (Subramanyam Wild, 2014). It signifies a positive trend and stress that the management of the company is strong and is performing the duty in an effective manner. Growth in the EPS is one of the vital factors because an organization with a higher EPS is always vouched for as compa red to the company with a lower or a declining EPS (Albrecht et.al, 2011). Outlook/ forecast CBA has ensured a strong position in the market with high profits and by regular payment of dividend. It is a good investment for the long-term perspective. Banks always have a formidable business and being regulated in nature it helps them to make an immense profit. CBA stands among the Australias big four banks. At the current scenario, the shares of CBA are not a good buy and must be sold because the price of CBA is priced to perfection. The company has reached a peak in terms of growth and going by the trend it can be either hold for a price target of $83.91 or to sell at this juncture to book profits. Moreover, the banks are always under a cyclical nature of banking and the risks can pull it downwards. Moreover, valuation plays a significant part in the process of investment for the blue chips companies until availed at prices that are bargained. In this process, the investors lock themselves into returns that are mediocre (Choi Meek, 2011). Moreover, after reaching a significant height, it is difficult to assume that the prices of the share will move in the same rapidity as was seen in the past. The growth prospects are not diminished, however, at the current juncture it is important that the shares should not be purchased. The shares can be sold currently to book profits and later can be repurchased if any corrections take place (Libby et. al, 2011). Liquidity and size (table 18, p31) The stock of CBA is liquid in nature as the shares that are traded that are 2,117,817 shares. The average volume indicates that the company shares are having a high exposure. CBA fall under the large-cap and hence is able to enjoy the confidence of the investors. Since the volatility factor is less owing to the strength it is able to get a strong exposure (Deegan, 2011). Principal activities Since it is the banking industry, the organization is faced with innumerable challenges and opportunities. Therefore, a SWOT analysis of CBA is done that will stress upon the various aspect and provide a brief description of its strength, weakness, opportunities, and threats. SWOT of CBA Strengths Leading Australian Bank according to Main Financial Institutions (MFI) rankings: Customer care has been a bonus point of the CBA. It has maintained the no.1 spot for many customer-related services with award achievements. Attention is paid more towards an increase in customer satisfaction. Higher quality and well-diversified credit portfolio: CBA invests 58% of its received loans in property and mortgage while only 13% is used for international trading. Master Netting Arrangements helps it in the reduction of risks (CBA, 2017). Continues emphasis on technology with new offerings: A whole lot of apps and other associative projects have been launched by the bank to expand its area and dominance. Robust financial position with high credential ratings: CBAs profit increased by 7% in 2017 as compared to 2016. It also provided a huge unexpected dividend. Average net profit seemed to increase by 7% also. Continually improving work environment: The company posses strong beneficial training programs so as to increase the skills and ability of its employees. According to the Australian Workplace Equality Index Awards 2016 the company acquires the second place. Weakness High dependence on off-shore borrowings: CBA to survive through indiscriminate subsidy. This increases the risk nand makes it vulnerable in the marketing environment. CBA pays stress ion eliminating it but some of it still afloat. Embroilment in money laundering scandals: In 2017 the company was found guilty of breaking 53,700 anti-money rules and involvement in a scandal. This was a threat to the companys image and as a result, the bonus of senior employees was eliminated (CBA, 2017). Limited geographical diversity: CBA associates its working with New Zealand, China and Vietnam. The company has no roots in Asia or Europe which deprives its of chances to expand. Increasing operating expenses: Expenses of the bank have risen by 4% which is due to the alteration in technologies and market, but this reason is not satisfactory and the bank seems to now take control over the personnel costs and currency disorders. Opportunities Expansion into emerging markets: CBAs working in China has brought it dominance and expansion chances on a large scale. Free Trade Agreement between India and Australia will be finalized soon and this will take the companys dominance to another level (CBA, 2017). Indigenous Costumer Assistance Line (ICAL): Indigenous and Aboriginal Torres Straits Island get CBAs services through telephones. The bank has got some dominating chances by its association with this section by providing loans. Threats Phasing out of government guarantees to banks: The deposits and debt of CBA have been depriving of protection after the sale of the government shares which posses as a serious threat to the company. Higher Capital Requirement by APRA: The new rules set up by APRA and RBA will put pressure on CBA to push up their tier one ratios and this will affect and potentially increase the interest rates of the bank (Damodaran, 2010). Fragile business environment and slowdown in China: Lower rates have attracted retail loans but the field of corporate loan is empty, which is a threat to the bank is. Also, any effect in the Chinese market will affect the bank as it is its main associative (CBA, 2017). Price sensitive announcements (table 11, pg. 21) The share price of the company underwent a huge volatility in the past few months where the price of the share surged to a high of $85.05 and fell to the low of $73.24 (CBA, 2017). It needs to be noted that the high level of volatility provides investors the opportunity to select the stock and enter into the stock. Further, it can be purchased at a low price. From the financial statements, it can be commented that the CBA contains a strong management and is fundamentally strong but certain information has made the share price to fall. The price of the shares dropped to $76.60 because the Australian Prudential Regulatory Authority is concerned investigated a deep look into the company (CBA share graph, 2017). Further, a steep decline in August 2017 has been observed even considering the fact that the bank reported a $9.93 billion profit. The main reason for the decline can be cited due to the fall in the banks net interest margin that measures profitability and fell by 3 basis points to 2.11%. Conclusion The assessment and evaluation of CBA indicate that the financial health of the company is strong. When it comes to profitability, the bank has reported strong number. Both the gross profit margin and the net profit margin have shown an increment. The ROA is even positive. This signifies that the fundamental of the bank is intact and the assets are utilized in an effective manner. The liquidity of the CBA is strong because the current and the quick ratio stands above 1 meaning the bank wont face any problem while discharging the obligations. The two-year trend indicates a positive scenario of the company. Further, for a big organization like CBA, the ratio indicates that the company has a major reliance on the debt component. However, going by the size of CBA it can be said that for large cap companies the ratios are a little high. Further, the increment in the EPS as compared to 2016 is a major highlight that the management is performing in an effective manner References Albrecht, W, Stice, E Stice, J. (2011). Financial accounting. Mason, OH: Thomson/South-Western. Berk, J, DeMarzo, P. Stangeland, D. (2015). Corporate Finance. Canadian Toronto: Pearson Canada. Bodie, Z, Kane, A Marcus, A. J. (2014). Investments. McGraw Hill Brigham, E. Daves, P. 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