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Financial Standing of the Commonwealth Bank

Discuss about the Organizational Performance Actual Results Are Compared.

Organizational performance helps to evaluate the three core areas of the company, namely financial performance, market performance and shareholders’ value. While analyzing the organizational performance actual results are compared with the intended outputs. Professionals, management, stakeholders and strategic planners focus on the organizational performance in order to use the derived information in making useful decisions. In financial performance, there has been measurement of the company’s operations and defined policies in monetary terms. The financial performance analysis is likely to answer the question that what was return on investment or assets and whether there has been increased in debt or it has been gone down. In market performance there has been analysis of the share performance and other information that impacts the market. Shareholders analysis provides information whether company is providing enough returns to the shareholders or not and how company is maximizing the overall returns of the shareholders. There are various factors that impact the overall organizational performance of the company and while evaluating the organizational performance there is need to evaluate all these factors. Financial performance can be evaluated through analyzing the profitability of the company, analyzing the cash flow statement and evaluating the financial position of the company. In order to evaluate the financial performance there is need to perform the ratio analysis that compares the financial performance of the current year with the financial performance of previous year (Brealey, Myers and Marcus, 2012).

In this report, organizational performance of the Commonwealth Bank has been analyzed in order to report the current year performance to the management and other stakeholders of the company. In order to analyse the organizational performance, current year data has been compared with past year data and also compared with the financial data of competitor in same industry. There are overall three sections that has to be present in the report. First section evaluates all the financial statements in order to report the performance. In second section ratio analysis for last three years has been performed to report on financial strength of Commonwealth Bank. In last section, a report has been prepared to explain how the management performs in best interest of the company.

In order to analyse the profitability of the company there is need to evaluate the income statement of the company. The financial items of the income statement in current year are being compared with previous year in order to know the profitability of the company. Profitability of the Commonwealth Bank is being compared with the Westpac Bank (Competitor in same industry).

Analysis of the profitability of the company and comparison with the competitor

Below table represents the profitability performance of the Commonwealth Bank in year 2017 and year 2016. The financial data has been extracted from the annual reports of the company and morning star website.

Income Statement

COMMONWEALTH BANK OF AUSTRALIA

AUD in millions except per share data.

Financial Items

2016-06

2017-06

Increase/Decrease

In amount

in %

Revenue

Interest income

Other assets

33817

33293

-524

-1.55%

Total interest income

33817

33293

-524

-1.55%

Interest expense

Other expense

16882

15693

-1189

-7.04%

Total interest expense

16882

15693

-1189

-7.04%

Net interest income

16935

17600

665

3.93%

Noninterest revenue

Commissions and fees

5540

5097

-443

-8.00%

Other income

1750

2392

642

36.69%

Total noninterest revenue

7290

7489

199

2.73%

Total net revenue

24225

25089

864

3.57%

Provisions for credit losses

1256

1095

-161

-12.82%

Noninterest expenses

Compensation and benefits

6164

6268

104

1.69%

Tech, communication and equipment

1060

1038

-22

-2.08%

Professional and outside services

365

502

137

37.53%

Amortization of intangibles

393

790

397

101.02%

Other expenses

5327

4710

-617

-11.58%

Total noninterest expenses

13309

13308

-1

-0.01%

Income (loss) from cont ops before taxes

9660

10686

1026

10.62%

Provision (benefit) for taxes

3607

3992

385

10.67%

Other income (expense)

3174

3234

60

1.89%

Net income

9227

9928

701

7.60%

Earnings per share

Basic

5.42

5.77

0.35

6.46%

(Annual Report 2015, 2016 and 2017: Commonwealth Bank) and (Morning Star, 2018)

Some of the important profitability ratios need to be considered for analyzing the profitability of the commonwealth bank is as follows:

Commonwealth Bank

Ratios

Formula

2017

2016

2015

Net Profit Ratio

Net Profit/Net Revenue

39.57%

38.09%

38.07%

Return On Equity

Net Profit/Shareholders Equity

16.09%

16.38%

17.90%

Return on Assets

Net Profit/Total Assets

1.04%

1.02%

1.09%

Westpac Bank

Ratios

Formula

2017

2016

2015

Net Profit Ratio

Net Profit/Net Revenue

37.12%

35.51%

38.87%

Return On Equity

Net Profit/Shareholders Equity

13.37%

13.38%

15.77%

Return on Assets

Net Profit/Total Assets

0.94%

0.90%

1.01%


Commonwealth Bank generates its main revenue from the interest income and its main expenses are also interest paid on borrowed funds. It can be said from the above table that net interest income of the Commonwealth Bank has been increased by $665 million in year 2017 as compared to year 2016. The overall net income including the non interest income has been increased by $ 701 in year 2017 as compared to year 2016. It shows that there has been increasing trend in the profitability position of the company (Davies and Crawford, 2011).

Net Profit ratio: This ratio tells the percentage of net profit that has been earned by the company on total net revenue. Looking at the above table it can be said that Commonwealth Bank has maintained stable net profit margin in all the three years. In year 2017, the net profit margin of Commonwealth Bank was 39.57% while in case of Westpac it was 37.12%. It shows profitability position of Commonwealth Bank was much stronger than the Westpac Bank in year 2017.


Return on Equity: Return on equity shows the percentage of net profit earned using the equity capital as the resource. There has been slight decrease in return on equity ratio in year 2017 as compared to previous two years. On comparing return on equity of Commonwealth Bank with that of Westpac Bank, it has been found Commonwealth Bank earns more net income on the shareholders equity as compare to Westpac Bank (Lumby and Jones, 2007).

Return on Assets: Return on assets means percentage of net income earned through using the total assets of the company. On analyzing it has been found that Commonwealth Bank has higher return on assets as compare to Westpac Bank (Ross, Jaffe and Kakani, 2008).

Comparison of profitability of Commonwealth Bank with the profitability position of the Westpac Bank

Comparison of the profitability of Westpac and Commonwealth Bank

AUD in millions except per share data.

Financial Items

Commonwealth Bank

Westpac Bank

2016-06

2017-06

2016-06

2017-06

Revenue

Interest income

Loans and Leases

0.00

0.00

28953.00

28504.00

Deposits with banks

0.00

0.00

13.00

17.00

Other assets

33817.00

33293.00

2856.00

2711.00

Total interest income

33817.00

33293.00

31822.00

31232.00

Interest expense

Deposits

9369.00

8868.00

Short-term borrowing

Other expense

16882.00

15693.00

7305.00

6848.00

Total interest expense

16882.00

15693.00

16674.00

15716.00

Net interest income

16935.00

17600.00

16674.00

15716.00

Noninterest revenue

Commissions and fees

5540.00

5097.00

4654.00

4555.00

Securities gains (losses)

0.00

0.00

-100.00

63.00

Insurance premium

0.00

0.00

0.00

0.00

Other income

1750.00

2392.00

1252.00

1372.00

Total noninterest revenue

7290.00

7489.00

5806.00

5990.00

Total net revenue

24225.00

25089.00

20954.00

21506.00

Provisions for credit losses

1256.00

1095.00

0.00

0.00

Noninterest expenses

Compensation and benefits

6164.00

6268.00

4601.00

4701.00

Occupancy expense

125.00

134.00

Tech, communication and equipment

1060.00

1038.00

2041.00

2087.00

Professional and outside services

365.00

502.00

741.00

755.00

Amortization of intangibles

393.00

790.00

787.00

820.00

Merger, acquisition and restructuring

Other special charges

1348.00

799.00

Other expenses

5327.00

4710.00

-651.00

-87.00

Total noninterest expenses

13309.00

13308.00

8992.00

9209.00

Income (loss) from cont ops before taxes

9660.00

10686.00

11962.00

12297.00

Provision (benefit) for taxes

3607.00

3992.00

3184.00

3518.00

Other income (expense)

3174.00

3234.00

-1333.00

-789.00

Net income

9227.00

9928.00

7445.00

7990.00

Preferred dividend

5.00

6.00

Earnings per share

Basic

5.42

5.77

2.24

2.38

(Annual Report 2015, 2016 and 2017: Commonwealth Bank) and (Morning Star, 2018)

Financial Items of Cash flow statement

Cash Flow Activities

2017

2016

Change

% Change

Cash Flow/(Used) in operating activity

$     (807.00)

$ (4,561.00)

$    3,754.00

82.31%

Cash Flow/(Used) in investment  activity

$     (677.00)

$ (2,032.00)

$    1,355.00

66.68%

Cash Flow/(Used) in financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                      activity

$  10,472.00

$   1,620.00

$    8,852.00

546.42%

Net increase/(decrease) in cash and cash equivalents

$    8,988.00

$ (4,973.00)

$  13,961.00

280.74%

(Annual Report 2015, 2016 and 2017: Commonwealth Bank) and (Morning Star, 2018)

The above table shows that in year 2017, the cash flow position of the company has improved a lot as compared to previous year 2016. There has been positive 82.31% change in cash flow from the operating activity that shows great improvement in efficiency of cash collection in year 2017 when it was compared with previous year. It has been seen that Commonwealth Bank has reduced the amount cash used in the investment activity. There has been increase of 66.68% cash flow from investment activity in year 2017 as compared with previous year. Cash flow from financing Activity has increased by 546.42% due money raised by Commonwealth Bank through issue of debt capital. There has been overall increase of 280.74 % in cash flow from all activities (Weston and Brigham, 2015).

In order to evaluate the financial position of commercial bank it is important to look for the investments and loan receivable from the customers available in a year. Generally banks depend on the income derived from loans and other investments. For this purpose it is important to increase the investments and loan amount so that income from these sources can be increase. Banks borrow money from reserve banks or from the other banks to lend the money to their customers. So it is very important to analyse the amount borrowed by the Commonwealth Bank in order to report the debt position. There are many other factors that increases the debt liabilities that need to be consider to provide complete overview of financial position. Shareholder equity also plays very important role in deciding the debt equity position of the company (Arnold, 2013).

Financial Items

2017

2018

Change

% Change

Assets

Cash and liquid assets

45,850.00

23,372.00

22,478.00

96.17%

Receivables due from other financial institutions

10,037.00

11,591.00

-1,554.00

-13.41%

Other  Assets

7,882.00

7,161.00

721.00

10.07%

Loans, bills discounted and other receivables

731,762.00

695,398.00

36,364.00

5.23%

Available-for-sale investments

83,535.00

80,898.00

2,637.00

3.26%

Property, plant and equipment

3,873.00

3,940.00

-67.00

-1.70%

Intangible assets

10,024.00

10,384.00

-360.00

-3.47%

Derivative assets

31,724.00

46,567.00

-14,843.00

-31.87%

Liabilities

Deposits and other public borrowings

626,655.00

588,045.00

38,610.00

6.57%

Payables due to other financial institutions

28,432.00

28,771.00

-339.00

-1.18%

Liabilities at fair value through Income Statement

10,392.00

10,292.00

100.00

0.97%

Derivative liabilities

30,330.00

39,921.00

-9,591.00

-24.02%

Debt issues

167,571.00

161,284.00

6,287.00

3.90%

Bills payable and other liabilities

11,932.00

9,889.00

2,043.00

20.66%

Loan capital

18,726.00

15,544.00

3,182.00

20.47%

Shareholders’ Equity

63,716.00

60,564.00

3,152.00

5.20%

 (Annual Report 2015, 2016 and 2017: Commonwealth Bank) and (Morning Star, 2018)

Ratio

Formula

2017

2016

2015

Debt Equity ratio

Debt /Equity

0.3

0.26

0.24

Debt Ratio

Debt /Total Assets

0.0192

0.0167

0.0147


Debt Equity Ratio of Commonwealth Bank has increased in year 2017 as compared to year 2016 and year 2015, which indicates Commonwealth Bank has been continuously increasing its debt capital. There will adverse impact on the profitability of the Commonwealth Bank if it fails to keep the debt equity ratio below required limit. Commonwealth Bank maintain very low debt ratio that shows capital structure of the Bank was very strong.

Ratio analysis helps to report on the financial performance of the company as it provides information about the liquidity position, solvency position, efficiency, profitability position and market position of the company. It also compares financial data of current year with the financial data of previous year. Through this way it makes it possible to evaluate the overall financial position of the company and whether company has enough financial strength to meet the objectives of defined for future period. In this segment few financial ratios have been calculated for last three years on the basis of information provided in the annual reports of the company (Brigham and Ehrhardt, 2013).

Please Note: As financial performance of bank has been conducted in this report, which makes it impossible to calculate the Inventory Ratio and Quick Ratio. This is reason why there has been calculation of some other ratios in above section.

Financial Items

2015

2016

2017

Net Profit

9,063

9,227

9,928

Total Assets

873,446

933,078

976,374

EPS (June, 20__)

5.29

5.29

5.59

MPS (June, 20__)

65.61

55.85

63.77

Ratios

Return on Assets

1.04%

0.99%

1.02%

Price Earnings Ratio

12.40

10.56

11.41

(Annual Report 2015, 2016 and 2017: Commonwealth Bank) and (Morning Star, 2018)

Common Wealth Bank is a major multinational bank of Australia involved actively in providing personal banking and business solutions to the customers. The banking corporation is ASX listed and therefore has developed its corporate governance statement as per the ASX principles and recommendations. The ASX Council and principles has provided the standard corporate governance framework that need to be followed by the companies that are traded on stock exchange. The standard corporate governance principles are developing solid foundations for Board, structuring the Board for adding value, acting ethically and responsibly, protecting integrity in corporate reporting, protection of rights of shareholders, risk management and fair remuneration. The corporate governance statement has been developed by Bank as per the standard ASX principles and guidelines (Corporate Governance Statement, 2017).

The Banking Corporation as per the ASX principle has implemented an Audit Committee to review the effectiveness of the external financial reporting system of the Banking Group on an annual and half-year basis. Also, the committee reviews the internal control procedures and policies adopted by the Banking Group for managing financial, taxation and accounting risks (Deegan, 2013).

The Banking Corporation has established a risk committee for managing the risks that can occur subsequently due to nature of business activities of the banking corporation. The committee holds the responsibility of reviewing the management reports for identifying the chances of risk occurrence. It has developed the risk management policies and systems and the subsequent responsibilities of key management personnel’s in identifying, recognition, measurement and overcoming the risks. The policies and procedures provide guidance to the management on handling the various types of material risks. It has implanted a risk-adjusted performance measurement process for assessing the impact of risk on business performance. Also, it implemented an internal capital adequacy assessment process for incorporating proper capital buffers for assisting in strategic planning (Corporate Governance Statement, 2017).

Commonwealth Banking Group is ASX listed and therefore complies with the Corporations Act 2001 and AASB standards for development of financial reports and processes. The Banking Corporation prepares and discloses its general purpose financial statements on an annual basis as per the international accounting standards. Also, all the relevant accounting policies and methods adopted for the preparation of the financial statements is provided I the financial reports.

Commonwealth Bank prepares and discloses its annual reports, sustainability reports and corporate governance statement on a continuous basis for providing all the relevant information to the stakeholders. This is essential for achieving trust and confidence of the stakeholders and ensures the sustainable growth and development of the banking corporation. The Banking Corporation has recruited an accounting team consisting of Chief Financial Officer and financial accountants for carrying out various accounting functions and activities of the Banking Group. The bank is involved in providing financial products and services to the customers and therefore the role of accounting personnel is extremely important for maintaining the trust of customers (Corporate Governance Statement, 2017).

The Commonwealth Bank of Australia is proving variety of financial services including retail, business, and institutional banking services. In addition to this, it is also involved in carrying out financial activities relating to fund management, superannuation, insurance, investment and broking services. It provides its banking products and services across Australia, New Zealand and Asia (Annual Report 2017, Commonwealth Bank).

The  Banking Corporation investment activities includes acquisition of controlled entities, investment in property, plant and equipments, acquisitions of investments in associates and joint ventures and purchase of intangible assets. Commonwealth Bank has acquired 100% of the contributed equity of Water Utilities Australia Limited for about $32million. The Banking Group has also invested in Global Diversified Infrastructure Fund (GDIF) as a back support for insurance policy liabilities (Annual Report 2017, Commonwealth Bank).

The financing activities of the Banking Group includes dividends paid, redemption of equity instruments, proceeds from issuance of debt securities, purchase of treasury shares, sale of treasury shares, and issue of loan capital.

The banking sector of Australia is a multibillion dollar industry providing employment to about 400,000 workers across the country. It is regarded to be the largest contributor of economic growth and development of the country. It is estimated that it contributes about $140 billion to GDP annually. The four major banks present within the financial sector of Australia are ANZ, National Australia Bank, Commonwealth Bank and Westpac. In addition to this, there are several other commercial and other smaller banks having presence across the country. There are other financial institutions present across the country such as financial institutions, credit unions, building societies and mutual banks. Authorized-deposit taking institutions (ADI’s) comprise about 27 per cent of the market capitalization of S&P/ASX 100 (Annual Report 2017, Commonwealth Bank).

The major players of the banking industry of Australia are ANZ, National Australia Bank and Westpac other than Commonwealth Bank. In addition to this, there are also other commercial banks including community banks, regional banks, foreign banks and credit unions that impose a strong competitive pressure on the banking industry of country (Annual Report 2017, Commonwealth Bank).

The below pie chart shows market share of major banks in Australia:

(Source: https://bkilimited.com.au/news/what-do-you-think-about-the-banks/)

Recommendation and Conclusion

On the basis of overall analysis of the Commonwealth Bank it is highly advised to the investors to invest in the Bank because of its strong financial position and high returns on the investment. Commonwealth Bank earns double the earning per share as compared to the Westpac Bank that indicates that shareholders of the Commonwealth Bank will earn more returns as compared to returns earned by the shareholders of the Westpac Bank. In addition to this company has strong capital structure that shows capital derive its maximum revenue using its own funds.

References

Annual Report 2015. Commonwealth Bank. [Online]. Available at: https://www.republicast.com/publications/cbaar2015/ [Accessed on: 16 May, 2018].

Annual Report 2016. Commonwealth Bank. [Online]. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/2016_Annual_Report_to_Shareholders_15_August_2016.pdf [Accessed on: 16 May, 2018].

Annual Report 2017. Commonwealth Bank. [Online]. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf [Accessed on: 16 May, 2018].

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brealey, R., Myers, S.C. and Marcus, A.J., 2012. Fundamentals of Corporate Finance. Mc Graw Hill, New York.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Corporate Governance Statement. 2017. [Online]. Available at: https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/corporate-profile/corporate-governance/corporate-governance-statement-2017.pdf [Accessed on: 16 May, 2018].

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Lumby,S and Jones,C. 2007. Corporate finance theory & practice. Thomson.

 Morning Star. 2018. Commonwealth Bank. [Online]. Available at: https://financials.morningstar.com/cash-flow/cf.html?t=CMWAY&region=usa&culture=en-US [Accessed on: 16 May, 2018].

Morning Star. 2018. Westpac Bank. [Online]. Available at:https://financials.morningstar.com/ratios/r.html?t=WBK&region=usa&culture=en-US [Accessed on: 16 May, 2018].

Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.

Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Dryden Press.

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