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Discuss about the Global Housing Markets for Crises, Policies, and Institutions.

Top-Down Analysis of Australia's Economy

Fundamental analysis helps to review the performance of various economic sectors of any country and also provides detailed information on how the players in such in particular are performing. For this purpose fundamental analysis of banking sector of Australia has been conducted trough applying top down and bottom up approach. The top down and bottom up are two main factors of the fundamental analysis that helps to understand changes in the market and impact of various policies on the financial performance of players in the industry. The aim of the report is to analysis the impact of Australia economy, policies of government and other plans on the performance of companies that falls in the banking sector. The two chosen companies from the banking sector of Australia are ANZ Bank and Westpac Bank. There are four major banks in Australia that rule the banking industry of Australia and New Zealand. The top down analysis will focus on changes in forecast has an impact on the companies in industry as a whole that include information on current interest rate, value of $AUD, inflation rate and impact on GDP. On the other hand bottom up analysis will reveal the current financial situation of ANZ Bank and Westpac through use of accounting ratios.

The top-down analysis is undertaken for analyzing the macro-economic factors that can have a detrimental impact on the overall growth and development of a business entity. The method is used by the investors for analyzing the wider context which is followed by examining the performances of individual stocks. The evaluation is carried out by analyzing the macro-economic indicators and then conducting a more specific sector analysis for evaluation of their performances. As such, the top-down analysis has primarily examined the economic condition of Australia for forecasting the future performance of the companies selected, that is, Westpac and Australia and New Zealand Banking Group (ANZ). The top-down evaluation for determining the impact of the forecasted economic fundamentals on the performance of the companies is carried out as follows:

The interest rate is determined by the Reserve Bank of Australia as it is regarded as the central authority of the country for regulating the banks. The Reserve Bank of Australia has maintained the interest rate to be low as 1.5 per cent due to the present economic condition of the country. The economy of the country is characterized by low growth in wages, decreased consumer spending and non-willingness of the consumers to take in household debt. These factors have caused the banking authority of Australia, i.e., RBA to lower down the interest rate for promoting the economic growth and development within the country. The inflation in the country is also regarded to be low to be about 2 per cent and it is expected to increase in the year 2020 that can rust in significant increase in the interest rates. The interest rate trend within the country can be presented by the graph below:

The low interest rate prevailing in the economy of Australia will have a positive impact on the growth prospects of the banking companies selected. Westpac and ANZ both the banking corporations are involved in providing deposit and lending services to the customers and therefore the lower interest rate will help in gaining customer attraction by providing easy loan facilitates ta lower interest rate (Trading Economics, 2018).

The AUD is current trending at lower value due to declining cash rates that has caused the foreign investors to withdraw the funds. This has resulted in weakening of the AUD that is currently trading at 0.73 and is further expected to decline to 0.7 by the end of the year 2020 if the decrease in the cash rate sustains. As a result, the foreign investors are likely to withdraw their money form Australia and will invest in the strong capital markets such as US having higher interest rates for realizing larger returns from their capital investment (International Monetary Fund, 2005). This will further lead to cause a downward pressure on the value of AUD due to less demand of the local currency.  The weakening of the Australian dollar in comparison to the foreign currencies will have a negative impact on the growth prospects of the banking companies. This is because the less capital inflows into the market will results in lesser deposit in the banks that could impact their performance to a large extent. Therefor, it is suggested to RBA for taking effective steps to tighten the economic policy within he country for causing a rise in the value of $AUD (Chau, 2018). The movement in the value of $ AUD can be depicted through the following graph:

Gross Domestic Product (GDP) is a strong indicator of the economic growth aspects of a nation in the future context as it determines the overall market value of the overall finished goods and services produced within a given time-period on an annual or quarterly basis. The GDP value of Australis is estimated to provide a representation of 2.13 per cent of the economy of the world. The value of GDP of the country in the year 2017 is stated as of A$1.69 trillion by the end of the year 2017. As such, it is estimated to be second-wealthiest nation in terms of GDP growth. The increasing GDP growth rate of the country depicts that it has growth prospects for the industries operating within the country. Finance and banking sector is estimated to play a significant role and contributes 68% of its GDP.

Gross Domestic Product of Australia

Australia economy is presently regarded to be in a state of growth and development characterized by low interest and positive GDP growth rate. The fiscal policy of the country si regarded to be very stable and its openness to trade and investment policies is attracting wide range of market hare. The low interest and inflation rate supported by improvement in the labor and housing market is further expected to improve the economic condition within the country. The economy of the country is presently regarded to be in a developing phase of the economy. Westpac and ANZ is regarded to be the major banking group companies of Australia. Th recent changes introduced within the Australian economy policies has facilitated the banks to accepted the investment from foreign investors. In addition to this, the deregulation of the financial service sector within the country would result in opening the companied to the use of new service technologies that would result in improving the competitive position of the banking companies across the world (Kroll, 2011). Therefore, it an be said from the overall analysis of the macro-economic factors of the country that they present a positive state of growth ad development for the banking companies selected. In this context, a major issue of concern is only weakening AUD and as such RBA is recommend to introduce major steps for strengthening the value of local currency to upsurge the development in the banking sector (Mutunga, 2014).

In this section of report financial performance of ANZ and Westpac has been analyzed through applying the technique of ratio analysis. Here it is important to compare the performance of selected company with their rival to discover profitability, liquidity, solvency and market position of companies in banking industry (Thomas, 2009). Top down analysis discuss about the micro economical factors that impact the financial performance of both selected companies.

The market capitalization of ANZ banking group limited is $84,994,500,000 whereas the market capitalization of Westpac Banking Corporation was $98,029,100,000 that shows Westpac has higher market capitalization as compare to ANZ Banking Group. Such a higher market capitalization of both the banks indicates the potential of Australian economy to grow and prosper.

Profitability analysis will help to provide performance information on how both companies has been able to convert its resources into revenue through its process. Some of important profitability ratios have been calculated as below:

Profitability Ratios

2015

2016

2017

Return on Equity

Westpac

15.77%

13.38%

13.37%

ANZ

14.19%

9.92%

10.97%

Net profit margin

Westpac

38.87%

35.51%

37.12%

ANZ

36.09%

27.02%

29.47%

Return on Equity: This ratio calculates the amount of net profit earned by the entity as the percentage of total shareholders’ equity employed by it. It means this ratio is useful from the point of view of investors as it reveals the percentage of profits earned on total shareholders’ equity.

Bottom-Up Analysis of ANZ Bank and Westpac Bank

Based on above bar chart and calculation of return on equity ratio of both the bank it can be said that Westpac has been able to utilize its equity resources in more useful manner (Westpac Group: Annual Report, 2018). There has been decreasing trend in return on equity ratio in case of both the companies that clearly indicates that norms and policies in banking industry has critically impacted the profit percentage of the companies (ANZ Group: Annual Report, 2018).

Net Profit Margin: This profitability ratio is the most important as it provides information on net income earned by the company on percentage of total sales revenue. Net profit is calculated as net sales less all expenses of the company including tax. This ratio is very useful form the point of view to compare the company’s performance in same industry.


The above chart clearly shows that performance of Westpac is much stronger than the net profit position of ANZ Bank in all the three years of review (ANZ Group: Annual Report, 2018). The overall profitability performance of both companies was in decreasing trend when profit of year 2015 has been compared with net profit in year 2017. The reason of decrease in profitability performance of both the banks is due to economic reforms and change in policies by Australian government in relation to the interest rate. As both the bank derive their revenue from the interest income and it has been noted from the top down analysis that there has been decrease in interest rate in current year. So it can be said that there is decline in profitability performance in industry as a whole (ANZ Group: Annual Report, 2018) & (Westpac Group: Annual Report, 2018).

Solvency analysis helps to evaluate the ability of the company to meet its financial obligations as and when they fall due (Chan-Lau, 2017). Important solvency ratio are as follows:

Debt to Equity ratio: This ratio calculates the proportion of debt and equity capital employed by the company. So it can be said that it provide information on financial leverage of the company.

Solvency ratios

2015

2016

2017

Debt Equity Ratio

Westpac

3.48

3.20

3.03

ANZ

1.93

1.96

0.30

Through looking the debt position of both the company it can be said that both companies employees debt capital more than equity capital. Westpac has higher debt to equity ratio as compare to ANZ Bank that shows high level of financial leverage condition in Westpac as compared to ANZ. So it can be said that ANZ Bank has very good solvency position as compared to Westpac (ANZ Group: Annual Report, 2018) & (Westpac Group: Annual Report, 2018).

Profitability Performance of Both Companies

Market analysis helps to evaluate the market potential of a company for determining its attractiveness to the investors. The market performance of the banking companies can be determined with the use of earning per share and dividend payout ratio.

Earnings per share: It determines the percentage of profit allocated to each outstanding share of common stock. It is calculated by dividing the net come by no of shares outstanding. The EPS ratio of Westpac has shown an increasing trend of 2.48 to 2.36 from the year 2015-2017. On the other hand, EPS ratio of ANZ has also depicted an increasing trend of 2.57 to 2.22 from the year 2015-2017 ANZ Group: Annual Report, 2018) & (Westpac Group: Annual Report, 2018).

Dividend Payout Ratio: The ratio determines the amount of profit generated by a company for its shareholders. There is only slight increase in the ratio of the company from the year 2015-2017 from 1.76 to 1.84 while that of ANZ has depicted a negative trend in the same financial period from 1.81 to 1.60 (ANZ Group: Annual Report, 2018) & (Westpac Group: Annual Report, 2018).

Conclusion

It can be said from the overall discussion held in the report that top-down analysis has examined the macro-economic conditions that could impact the future growth and development of Australia. The low interest and inflation rate is expected to support the growth in the financial service sector of the country. The drastic increase in the GDP of the country has further supported the growth in the financial service sector that favors the future growth of the banking companies selected. However, the major issue of concern is only the weakening in the $AUD that could have a negative impact on the banking performances. Bottom-up analysis have depicted a declining financial performance of both the banking companies as analyzed from declining profitability, liquidity ad market position. Thus, it can be stated that stocks of both the companies have declined in value and therefore investors need to wait and see the future performances before taking any investment decision.

References

ANZ Group: Annual Report. (2018). Retrieved 21 September, 2018, from https://institutional.anz.com/content/dam/Institutional/countries/laos/english/financial-report/2017%20Annual%20Report%20-%20Eng.pdf

Chan-Lau, M. (2017). Bottom-Up Default Analysis of Corporate Solvency Risk: An Application to Latin America. International Monetary Fund.

Chau, D. (2018). Australian dollar in 2018-19: Experts clash on whether it will crash or surge. Retrieved 21 September, 2018, from https://www.abc.net.au/news/2018-01-05/australian-dollar-forecast-2018/9292304

International Monetary Fund. (2005). Australia: 2005 Article IV Consultation: Staff Report and Public Information Notice on the Executive Board Discussion. International Monetary Fund.

Kroll, C. (2011). Global Housing Markets: Crises, Policies, and Institutions. John Wiley & Sons.

Mutunga, J. (2014). Developing and understanding of Australia's economy over the last two years. GRIN Verlag.

Thomas, R. (2009). The Valuation Handbook, (Custom Chapter 14): Valuation Techniques from Today's Top Practitioners. John Wiley & Sons.

Trading Economics. (2018). Australia Interest Rate. Retrieved 21 September, 2018, from https://tradingeconomics.com/australia/interest-rate

Westpac Group: Annual Report. (2018). Retrieved 21 September, 2018, from https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2017_Westpac_Annual_Report_Web_ready_&_Bookmarked.pdf

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