Performance of ANZ Bank and NAB Bank - Assignment Example

Comparing Banks Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 21st September 2012 Introduction Financial 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). Cost of funding earning assets (COF). This refers to the cost of getting deposits and borrowed money. It is obtained by dividing total interest expense by total average funds used in supporting a firm’s earnings. The level of COF is dependent on the level of interest rates and liabilities. The greater the level of non-interest-earning accounts and low equity, the lower the COF and vice versa. ANZ bank had the following COF between 2007 and 2011: 1.36% in 2007, 1.31% in 2008, 1.23% in 2009, 2.96% in 2010 and 3.18% in 2011. On the other hand, NAB bank had the following COF between 2007 and 2011: 1.89% in 2007, 1.92% in 2008, 1.86% in 2009, 2.56% in 2010 and 2.82% in 2011. Therefore, ANZ bank has higher interest –earning accounts than NAB bank. This is because of the many assets that ANZ obtains as part of its capital. As a result, the bank acquires little shareholder support. NAB bank has less COF because it obtains most of its funding from its shareholders (Archived Results Announcements 2012). Return on equity (ROE): This is another measure of profitability. It is obtained by dividing net income by average shareholders’ equity. ROE is greater than Return on Assets (ROA) because it measures only a small proportion of a bank’s total assets. Additionally, a bank obtains high ROE if it depends on deposits and borrowings in order to obtain capital rather than on stock holders’ equity. If the ROE is too high above ROA it means that the bank’s equity is very small compared to its debt. Between 2007 and 2011 ANZ bank had the following ROE ratios: 18.96% in 2007, 12.90% in 2008, 11.63% in 2009, 13.18% in 2010 and 14.11% in 2011. Between 2007 and 2011 NAB bank had the following ROE ratios: 15.32% in 2007, 13.81% in 2008, 6.84% in 2009, 10.85% in 2010 and 12.37% in 2011. Therefore, ANZ bank has a higher ROE ratio than NAB bank which means that it depends more on deposits and borrowings to finance it-self rather than on stock holders’ equity (Archived Results Announcements 2012). Measures of financial condition: These are used to determine the financial stability or positioning of a given firm by analysing the elements that affect the firms’ profitability (Liquidity Measurement Ratios 2012). They are as follows: Allowance for loan losses: This is a measure that banks undertake in order to protect themselves from loan defaulters. Therefore, companies are required to keep not only the balance sheet, but also the details of outstanding loans. There is also a need to provide for loans. The allowance is a measure of the management’s ability to judge a loan portfolio. ANZ and NAB bank can judge the need for the loan allowance relative to the loan problem. Both banks have high loan allowances, which indicate that the management is prudent enough to avoid loan defaulters. The management should also report the accurate earnings that have been audited. This is because audited accounts can reveal the true and fair position of loan accounts. Liquidity: a bank’s liquidity is its ability to raise money in order to lend and for use in other activities. One measure of liquidity is the ratio of outstanding loans to total assets. A bank is said to be illiquid if its ratio of loans to assets is 65% or more. On the other hand, a bank is said to be liquid if it has a smaller proportion of its assets in loans and more in cash and cash equivalents. Both ANZ and NAB are liquid because their liquidity ratios fall below 65%. ANZ bank is liquid because it has few external investments that can deplete its cash base. However, NAB bank is less liquid because it investments more in securities and mutual funds (Strength, momentum, connectivity 2011). Debt leverage: when banks engage in expansion and production activities, they incur debts. A bank’s financial leverage indicates its risk profile. It can be measured by dividing long term debt by total equity and debt. A maximum figure of 45% is desirable and if it is lower than this, then the bank has more ability to borrow. For example, in 2011 ARZ had a debt leverage of 32% while NAB 2007 had 22% in debt leverage. Equity evaluation Banks are also evaluated based on their stock prices. This valuation can be used to determine a firm’s true value. Such valuation can determine the quality of a firm’s management, future business prospects and earnings. ANZ and NAB are both listed on the Australian Stock Exchange. Their stock prices range between $20 and $30 (Strength, momentum, connectivity 2011). An analysis of what drive the differences in current and change in performance over time between the two banks Some of the factors that drive change in the performance of the two banks is the level of interest earning assets. ANZ bank has less interest earning assets than NAB bank. This means that the ANZ bank takes less risk in security and other investments as compared to its competitors. Additionally, the ANZ bank has a higher ROE ratio than NAB bank. This means that it relies more on borrowing and deposits or reserves in order to finance its operations rather than to sell shares. This is a safer ground that is of less benefit compared to other expansion methods. Therefore, NAB bank is outsourcing and aggressive because it tries to acquire capital from both within and without the company. The other difference between the two banks is that they have different profitability levels (Strength, momentum, connectivity 2011). For example in the financial year ended 2011, ANZ bank had a net profit of $5,355m while NAB bank had a net profit of $5,220m. This means that ANZ bank has less expenses and more income as compared to NAB bank. ANZ bank is less involved in external investments because they can consume a lot of money. Therefore, it has managed to reduce its expenses while its revenues remain low. The level of asset base between the two banks is also different. For example, in 2011, NAB bank had total assets amounting to $753,757m while ANZ bank had assets worth $594,488m. This is because ANZ bank holds few of its capital in form of assets as compared to NAB bank. The net interest income is also different. For example, in 2011 ANZ bank had a net interest income of $11,481m while NAB bank had $34,270m. This is because NAB invests more in securities and mutual funds as compared to ANZ bank. As a result, the interest earned from these funds, NAB has been able to increase its assets and capital base (Business Money Today: Liquidity Ratios 2012). ANZ bank had basic earnings per share of 233.6 while NAB bank had 208.2 as at 2011. This shows the ability of the two companies to be able to return back to the investors. ANZ paid its shareholders better than NAB. This is because ANZ had a higher profit level than NAB. As a result, it could be able to spread a high cost across its shareholders. These differences show that although the two banks have similar performances, they still differ in some areas (Consolidated Financial Reports, 2012). An analysis of what these differences tell about the future profit growth and the weaknesses and problems areas of the two banks. The differences above show that the two banks have a different level of profitability. For example, ANZ bank was found to be profitable as compared to NAB bank. This means that it has more income and few expenses. On the contrary, NAB bank has a lower income level than NAB. This shows that it is less efficient in management of its expenses. Such expenses cause increase in costs that eventually affect the performance level. The profitability of the two banks is still expected to rise given the current market conditions. This is because the economy is stabilizing from the long period of recession (Australia and New Zealand Banking Group Limited 2012). Additionally, the two banks are among the top banks in Australia which makes them receive a wide market and customer base as compared to the other banks. However, some weaknesses such as unstable interest rates, tariffs, government policies and regulations are a limitation to the growth of the two banks. The Australian Stock Exchange (ASX) is also a challenge to the future growth of the two banks. This is because it requires them to publish their financial reports. This means that the banks cannot use manipulative ways of interfering with their financial reports. Leadership is also a main area that can bring problems to the two banks. This is because with poor leadership. They are unable to work efficiently and effectively (Capital adequacy 2012). A forecast for the relative stock performance of ANZ bank and NAB bank in 2013 based on the previous analysis It is important to evaluate a firm’s stocks in order to determine their true value. This analysis reveals the quality of a firm’s management, earnings, history and volatility. . In this case the evaluation has been done by observing and comparing the stock prices of the two banks. ANZ bank is currently trading at $24.74 at the Australian Stock Exchange. The graph below shows the stock performances for the banks for the last two years. The price has been ranging between 20.00 and 24.00. This means that the price is likely to rise to approximately 26.00. The rise is expected because the economy is still stabilizing. Additionally, the company’s performance has been on the rise. Therefore, more investors are likely to come-by which will lead to improved stock prices (Price results.2012) NAB bank’s shares are currently trading at $25.53. This is a price that is lower than ANZ’s stock price. This is because the company performance is also lower than ANZ. As a result, there are slightly less investors. The table below shows that the share prices for the bank’s shares have been unstable. However, over the last few months, this price has been rising. This means that the price is expected to stabilize at 26 by the year 2013. Conclusion Financial analysis involves financial, profitability and earnings analysis. From the above analysis it is clear that NAB bank has higher profitability ratios as compared to ANZ bank. However, ANZ has higher liquidity ratios. The two firms are different in profit levels, interest income, assets costs and return on assets. The ratios shown reveal that the banks have been deviating from the optimum performance. However, there are no indications of performances that have gone above the set target. These deviations are attributed to different investment policies. ANZ bank has more profits, assets, share piece and earnings ratio. This has been attributed to its failure to invest in many securities and mutual funds. On the other hand, NAB has low income, assets, share price and earnings ratio. Banks must engage in competitive activities that investors to choose between one bank and another. The choice is based on performance and merit. ANZ and NBA banks are competitors whose stock value, profitability and stability have made them to obtain numerous shareholders and investors. In conclusion, it is clear that the choice of investment will affect the performance of the two banks in the year 2013. The stock charts reveal that the two firms have had unstable stock prices. However, this is expected to stabilize as the economy grows (Price results.2012). The two banks can attract more investors with the level of financial standing that they currently hold. However, they need to observe the elements that indicate inefficiency and ineffectiveness. References Consolidated Financial Reports: ANZ Oneanswer Investment Portfolio, viewed 20 September 2012, . Australia and New Zealand Banking Group Limited, viewed September 20, . Strength, momentum, connectivity: 2011 annual report, viewed 20 September 2012, . Major Australian Banks Half Year Results, viewed 20 September 2012, .\ Capital adequacy 2012, viewed 20 September 2012, . Archived Results Announcements, viewed 20 September 2012, . Price results, viewed 20 September 2012, . Business Money Today: Liquidity Ratios, viewed 20 September 2012, < http://www.businessmoneytoday.com/calculators/financial-ratio-liquidity.php>. Read More