21st September 2012IntroductionFinancial statement analysis is an integral part of an analyst’s report. It is a way to forecast future performance and identify weaknesses and problem areas of a firm. It is also necessary in determining the true and fair position of an organization. Through it, shareholders, investors, consumers and suppliers are able to make informative financial decisions. This analysis involves assessment of the profitability and financial position of a given organization. Therefore, it not only involves analysis of both the short-term and long-term profit level analysis but it also analysis the current financial position.
Accounting systems differ from one financial institution to another. Therefore, in order to judge the earnings and financial stability of a firm, analysts must undertake various measures. Such measures are of much importance in future reference and factual valuation of a firm’s performance. Analysis are done over many periods and matched with information from similar firms or banks. Banks have to balance between achieving profitability and taking risks (Major Australian Banks Half Year Results 2012). Comparing banks of similar size can signal deviation from the normal trend.
However, before concluding, it is essential to indicate the reasons for the deviation. The aim of this paper is to analyse and compare the performance of ANZ bank and NAB bank as well as the reasons for their differences in their performance. Additionally, the report forecasts the relative performance of the banks’ stocks in year 2013. This has been achieved by analysing the profitability, financial and earnings ratios. A comparison of current year performance (fiscal year 2011) and change in performance since 2007 (inclusive)Profitability comparison: this is involves profitability ratios.
They measure how profitable a firm is compared to another. Some of the profitability ratios used in this analysis are as follows (Financial Ratios 2012): Yield on earning assets (YEA): this involves analysis of the elements that affect net income. These include loans, leases, short-term money market investments and investment securities. These are the main sources of interest income for many banks. This ratio is calculated by dividing interest income obtained from assets by the average value of the assets. In order to take care of interest income of investment securities that are tax- exempt, fully tax-equivalent (FTE) base is used to calculate interest income.
If YEA is higher than the other banks, it may mean a high-risk portfolio of interest earning assets (Archived Results Announcements 2012). If it is lower than the competitor banks, it may mean that the banks have loans that yield less than expected. For example, in 2011 ANZ bank had a net interest income of $11,483m and the average value of assets was $(58,338+54,118+397,307) m=509,763m. Therefore, YEA = 2.25%. NAB bank had a net interest income of $13,034m and the average value of assets was $(382,369+48466+34,628+18,045+12,787) m= $496,295m.
Therefore, YEA= 2.63% in 2011. ANZ bank had the following YEA ratios between 2007 and 2010: 2.39% in 2010, 2.28% in 2009, 1.87% in 2008 and 2.19% in 2007. On the other hand, NAB bank had the following YEA ratios between 2007 and 2010: 2.75% in 2010, 2.81% in 2009, 2.60% in 2008 and 2.63% in 2007. Therefore, ANZ bank has loans that yield less interest than NAB bank. Additionally, NAB bank has a higher-risk portfolio of interest earning assets than ANZ bank (Major Australian Banks Half Year Results 2012).