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Principles of Financial Markets for Australian ASX

Question:

Describe about the Principles of Financial Markets for Australian ASX.

Answer:

Introduction

The commonwealth bank of Australia and the National Australian bank are among the listed banks in ASX. Although the ASX has many banks listed in the banks and financial sector segment, the two banks compete in equal measures making a good analysis of their financial statements (Barth, 2009). Although the banks in the financial industry are not performing very well, these two banks are performing relatively well in Australia. Their shares are performing well where investors are considering increasing their investment in the company. A summary of the micro economic and macro-economic factors are enlisted in this report to help investors and shareholders get the best from the industry and the particular company.
Top down analysis

Common wealth bank of Australia and the National Australian Bank are whatAustralia is the only OECD country that did not suffer a recession during the financial crisis, it has continued to sustain its economy to date. The Australian economy experienced 25 years of consecutive growth. The growth was 2.4% in 2015, falling slightly compared to 2014 (Broadman, 2004). The Australian dollar fell in 2015, and the falling prices of coal and iron ore weighed heavily on exports. This trend should be similar in 2016 (Bushby, 2012). The slowdown is further explained by lower Chinese demand for exports. This has affected the banking industry and the banks that we look in this report are National Australian Bank(NAB) and the Common wealth bank of Australia. Since these two banks are multinationals and can be affected by macro-economic factors such as the exchange rate.

In September 2015, Malcolm Turnbull took over as prime minister. His predecessor, Tony Abbott, suffered more than the economic slowdown, and the public deficit increased during his tenure (Bushby and Eggleston, 2011). Malcolm Turnbull wants to implement a policy of economic recovery, investing in training and infrastructure as well as empowering the service industry where the banking sector lies. To revive the economy, the Central Bank lowered its key rate to 2% in May 2015, It is corresponding to a historically low level (Gowthorpe, 2008). This initiative supported the expense of Australian households, which are nevertheless particularly indebted. Australian economic situation remains enviable: the country's public debt is one of the lowest in the OECD.  This has led to increase in lending by the two banks and subsequently improvement in their financial of the banks as shown by in the financial statements of the two banks.

GDP

Australia is a prosperous country: its GDP per capita is among the highest in the world. The unemployment rate was 6.2% in 2015, slightly higher that 2014   due to the slowdown in the mining sector. The slow growth in GDP has affected the share price of the national australian bank which has not increased as projected as it is trading at A$27.80 and the while the share price of Commonwealth bank of Australia is trading at A$36.38. This shows that the growth of the country in terms of GDP affects the companies directly.

Inflation

Whilst at present there are economic changes which have troubled various nations , the Australian economic system is sustaining sound macro level when it comes to inflation . On the other  hand , inflation continues to be on a downhill trend since 2010 , with highs of around 2 .9 % in the past 2 years (Gup, 2007) . Nevertheless, these are not so low .Based on central bank statistics Australian , previous documented inflation for 2015 was 1 .5 % . Beside this , the rate of interest provides the same situation : stable to minimal and low . These indicators show an economy with healthy fundamentals that induce growth . Economic conditions such as inflation has been lower than was generally expected , with the CPI rate falling to 0 .1% on stationary base , while last year was 2 .5% in annual terms (Itō and Rose, 2010). This has positively affected the banks as they have posted improved figures as compared to the year 2014 .
Infact , this macroeconomic atmosphere should make it attractive to other nations looking to make investments . . On the other hand , a movement can be considered in household consumption in the funds moving in the economy is not limited . For international investors , one can find incentives to invest in the nation , since the reduced as well as stable inflation lowers uncertainty over time . Significantly , as opposed to other nations where potential deflation and gradual looms , inflation is lowered to dangerously minimum levels , the Australian Central Bank has preserved a stable inflation rate (Kim and McKenzie, 2010). This offers highly stable as well as enabled the bank industry in Australia to submit good results as well as attract investors .

Economic growth

Australia's gross domestic product in 2015 grew by 2.5% compared to 2014. This is a rate one tenth lower than this year, when it was 2.6%.The absolute value of GDP in Australia rose 8,280 M. € M. $ 218,064 compared to 2014.Per capita GDP of Australia in 2015 was € 46,708 $ 51,829, € 350 $ 9,234 higher than that of 2014, which was € 46,358  or $ 61,063. To see the evolution of GDP per capita is interesting to look few years back and compare these data with those of 2005 when the GDP per capita in Australia was $ 27,390 .
Overall, the economic outlook for Australia in 2016 show a positive picture in a region with a lower rate. In that sense, the country can concentrate their efforts on issues of growth and no recovery. To the extent that the macroeconomic situation has scope, monetary policy can continue to act and fulfill its role. Thus, the banking industry is vibrant. As shown by the commonwealth bank of Australia and National bank of Australia profits.

Exchange rate

Australia is a world power in natural resources and one of the five largest in the currency market. Thus, in its fundamental and technical analysis the exchange rate must affect the banking industry. Statements from the Reserve Bank of Australia (RBA) show the Basic reasons for the devaluation of its currency ,we can intuit the future of its currency. Growth  on exchange rate has been forecasted at 7.6% compared to 8.5% last year.The Australian economy is not progressing as expected by the government and is one of the reasons why its  depreciated and lowering the interest rate to 0.25%.We are seeing an outflow of capital from the four major banks in Australia since the devaluation of the currency and its dividend yield are losing interest (Sweeney, 2005). Hence we are seeing  gradual repatriation of  funds  in the market, The pair AUS / USD and AUS / JPY have been affected  so the returns have been affected and have  offered no interest which has further reduced the attractiveness of shares.The Aussi as it is known colloquially in the foreign exchange market has been one of the hardest hit this year and not only against the US dollar but also against pairs like EUR, GBP, JPY (Kim and McKenzie, 2010). Hence the money market generally has not been doing well which has consequently affected the banking industry. This has further affected the shares of commonwealth bank of Australia and the national bank of Australia negatively (Weithers, 2006). However in the recent months,Prices for Australian shares have increased as there have been strong gains in the financial sector to compensate for the decline of the resources associated with the raw materials sector. We have noted that the share price of Australian banks had gained.

Bottom-up analysis

Comparison: It consists of determining the similarities and differences between the various magnitudes contained in a balance sheet and other financial statements, in order to weigh the amount based on absolute and relative values ​​for diagnosing, mutations and variations (Lainà, Nyholm and Sarlin, 2015).

The commonwealth bank of Australia and the National Australian bank are among the listed banks in ASX. Although the ASX has many banks listed in the banks and financial sector segment, the two banks compete in equal measures making a good analysis of their financial statements.

Analysis of financial statements

Assets

The total assets of the National Australian Bank( NAB) stands at AUSD 945 Billion an increase of  (+ 10.19%) more than September 2015. The loan portfolio is the main item of the system's assets with a 55.4% share, followed by investments with 24.6% and 14.5% availability. The main increase was both the portfolio and investments (Napier, 2010).

The loan portfolio experienced an annual increase historically; this maintains a sustained upward trend reflected in the graph The 62.82% of the portfolio is denominated in local currency. However, it is more dollarized in 2010 (70.99% in local currency), although from previous periods to this report the percentage is maintained.

The increase in the loan portfolio in the sector came mainly from increased placements of Bank Industries. Significantly, the largest increase in percentage of portfolio was National Australian Bank at 40.23%, a portfolio that is mainly intended for service industry, and has entered the Australian market strongly in credit cards. The loan portfolio presents its increase more significant in the field of consumption which increased (Palepu, Healy and Bernard, 2000).

Commonwealth Bank of Australia, has assets of more than AUSD 933.06 Billion in 2016 an increase in net assets of about 13%.Availability totaled  to AUSD 33.859 million and increased 12.68% year on year in commonwealth  Bank (33.01%) and National Australian Bank at(25.74%).

Liabilities

Total liabilities recorded a balance of Q /. 211,430.84 million and increased Q /. 18981.44 million (+ 9.86%) year on year. Depository obligations, accounting for 80.70% of liabilities, grew in Q/. 13247.48 million (+ 8.42%). Time deposits and money, which make up 41.27% and 37.68% of those obligations, represent the main catchments system. The remaining deposits are savings (20.65%). In addition, 82.06% of depository obligations are in currency national. It is noteworthy that the funding is relatively diversified.When analyzing the growth of different funding sources, it is clear that all show growth similar percentage and balanced.

In analyzing the growth by funding amount, term deposits and savings have growths most relevant. While the growth of term deposits implies an increase in the cost of
financing, they have the benefit of requiring less immediate liquidity (Putten, 2008). Meanwhile rising monetary deposits involves greater banking penetration in the country.

The National Australian Bank presented the most significant increase for the year at  300.25 million (11.24%). The present banking system as a second source of funding relevant to the loans obtained as 94.26% comes from foreign financial institutions. It is worth mentioning that as part of the liability total credits earned have increased their share in a year (September 2013: 13.27% September 2015: 14.37%). By amount, these increased Q /. 4850.98 (+ 18.99%) over the same periodthe previous year, totaling Q /. 30,384.08 million.

Liquidity and solvency

The immediate liquidity indicator stood at 19.81% in September 2014 compared to September 2013 it remains relatively stable. Banks that had the greatest immediate liquidity are Citibank Branch (68.66%), (41.61%) and Bank (31.47%). This is because strengthening their availabilities He exceeded the growth of their deposits through depository obligations. Net income totaled Q 2,679,000, Q. 83.04 million (-3.01%) less than in September 2015 and as a percentage of financial income recorded a contraction of 2.07 p.p. and a score of 17.63%. It is noteworthy that this indicator shows a slight downward trend since March 2015 in both banks (Skousen, 2010). This iscoupled with the higher funding costs and administrative expenses in both banks (Stallings and Studart, 2006).

Profitability

The profitability indicators of the banking system show a slight downward trend since June 2014. The return on equity stood at 16.19%, 2.75 p.p. less than in September  and the Return on assets 1.53% 0.21 p.p. less than in September 2013. This is consistent with the lower operating efficiency registered by the sector.

Commonwealth Bank, and National Australian Bank  have the best lie about equity ( 24.08% and 22.54%). exhibit the best return on assets (3.20%,  and 2.94%).Meanwhile, banks that showed the greatest improvement in both performance and return on equity on assets they were: (ROE: +3.78%), ROA: +0.25%)  

The profits for the financial year ending 31 st June for National Australian Bank stood at AUSD 9.227 Billion while for Commonwealth Bank of Australia stood at slightly more than AUSD 10 Billion.

The ratios can be classified:

The interpretation of the ratios cannot be done mechanically. A ratio alone is meaningless, acquires its The intercompany comparison should be made with the greatest possible number of companies, albeit with reservations logical, since there may be differences in applied accounting A summary of the micro economic and macro-economic factors are enlisted in this report to help investors and shareholders get the best from the industry and the particular company techniques (Takáts and Tumbarello, 2009). In any event, the use-type ratios are those for companies that have considered certain situations and better targeted. The pilot ratios can be replaced by a medium-ratio expressing the situation of those companies that have similar situations. For determination can better the arithmetic mean or median used to avoid an arbitrary leveling.
 
Ratios are called value or quantity, as they relate to economic units (monetary) or (physical) technical units. If possible it is preferable to use ratios of amount as the data obtained will be more real (Wild, Bernstein and Subramanyam, 2001).
 
Considering the relations of elements or variables that can be set are called static ratios when derived from the analysis of dynamic balance and are those derived from the analysis of the income statements. They are mixed when data from the balance sheet and income statement are compared.
 
Considerations analysis of the balance between equity components.According to the above approach, the logic of the analysis assumes a fixed asset financing by the upper permanent capital to 100%.
 
However, a too high ratio of funding can pose problems from the standpoint of profitability. This always happen that the company is using some outside resources for a longer period than their needs and assuming further that the cost of long-term financing is higher than the short term.

Recommendations and summary

To improve the performance of the banking sector and more so the performance of the two banks on focus that is National Australian Bank(NAB) and the Common wealth bank of Australia, there need to be a raft of measure that the government as well as the banks themselves need to do. The government need to improve and stabilize the macro economic environment of the country (Vogel, 2007). The improvement should be in terms of increasing the country’s economic growth , reducing inflation, and stabilizing exchange rates. All these measures will improve the performance of the banking industry and subsequently the two banks.

Traditionally, banks have measured their penetration and market share through the number of branches, which have size and the number of executives who work in them. This based on the model in which customers had to go to a nearby place and should have at least one account executive that could meet their needs (Takáts and Tumbarello, 2009).

Given the increase in the number of customers who have access to the banking system today, this traditional model is increasingly difficult to meet operating costs have increased and the number of customers by executive has doubled or tripled. Given this, they have proliferated channels self-care that break with the previous premise: internet, smartphones, smart kiosks, ATMs, etc., where customers do not need to contact an executive, or go to a physical location to meet your needs. For banks, this benefit brings a decrease in operating costs (Coyle, 2000).

The banks  should Offer personalized customer services of the huge number of customers in the banking system in Australia, it is impossible to identify all the tools and traditional platforms. This made banks  to resort to the standardization of their value propositions, basically differentiated by segments according to income and sales, and with it came the dissatisfaction of customers with their banking institutions, precisely because of this lack of customization. Today consumers demand products according to their needs and behavior, wanting institutions to anticipate their problems, that historical information is already incorporated that service times are getting shorter and that banks are ready to serve them in any enabled formats (Mohr, 2011).  Hence the banks should offer improved services to its customers. These are measures that can be taken by the banks and the banking industry to improve their profits and the share price (Skousen, 2010).

References

Barth, J. (2009). The rise and fall of the U.S. mortgage and credit markets. Hoboken, N.J.: Wiley.

Broadman, H. (2004). Building market institutions in South Eastern Europe. Washington, D.C.: World Bank.

Bushby, D. (2012). The post-GFC banking sector. Canberra: Commonwealth of Australia.

Bushby, D. and Eggleston, A. (2011). Competition within the Australian banking sector. Canberra: Commonwealth of Australia.

Coyle, B. (2000). Foreign exchange markets. Chicago: Glenlake Pub. Co.

Gowthorpe, C. (2008). Financial analysis. Oxford: CIMA.

Gup, B. (2007). Corporate governance in banking. Cheltenham, UK: Edward Elgar.

Itō, T. and Rose, A. (2010). The economic consequences of demographic change in East Asia. Chicago: University of Chicago Press.

Kim, S. and McKenzie, M. (2010). International banking in the new era. Bingley, U.K.: Emerald.

Lainà, P., Nyholm, J. and Sarlin, P. (2015). Leading indicators of systemic banking crises. [Luxembourg]: [Publications Office].

Mohr, P. (2011). Economic indicators. Pretoria [South Africa]: UNISA Press.

Napier, M. (2010). Real money, new frontiers. Claremont [South Africa]: Juta.

Palepu, K., Healy, P. and Bernard, V. (2000). Business analysis & valuation. Cincinnati, Ohio: South-Western College Pub.

Putten, M. (2008). Policing the banks. Montréal [Québec]: McGill-Queen's University Press.

Revsine, L., Collins, D. and Johnson, W. (2005). Financial reporting and analysis. Upper Saddle River, NJ: Pearson/Prentice Hall.

Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.

Skousen, M. (2010). Economic logic. Washington, DC: Capital Press.

Stallings, B. and Studart, R. (2006). Finance for development. Washington, D.C.: Brookings Institution Press.

Takáts, E. and Tumbarello, P. (2009). Australian bank and corporate sector vulnerabilities. [Washington, D.C.]: International Monetary Fund.

Tang, Y. (2012). Document analysis and recognition with wavelet and fractal theories. Singapore: World Scientific Pub.

Sweeney, R. (2005). Foreign exchange markets. Cheltenham, UK: Edward Elgar Pub.

Vogel, H. (2007). Entertainment industry economics. Cambridge: Cambridge University Press.

Wild, J., Bernstein, L. and Subramanyam, K. (2001). Financial statement analysis. Boston, Mass.: McGraw-Hill.

Weithers, T. (2006). Foreign exchange. Hoboken, N.J.: John Wiley & Sons.

 

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