An analysis of the Australian Banking Industry
The Australian financial market is large and well developed. It has a reputation for excellence in the supervision and regulation of financial institutions within the Australian banking industry. The Australian financial sector comprises banking, insurance and capital markets (Rubestein and Jong, 1). The banking industry is dominated by four major national banks: Commonwealth Bank of Australia, Westpac Banking Corporation, Australia and New Zealand Banking Group and National Australia Bank.
For over several decades even after the Second World War, the Australian banks like most banks then were under government regulations. The government-controlled interests on deposits and certain loans. It also determined the maturity period of deposits on which banks could pay interests (Westpac.com). It was until 1981 that the industry was deregulated to encourage competition which would lead to efficiency in the banks’ operations (Wu and Wang, 2). After the deregulation, Australian Banks tactfully realigned themselves for the competition expected from the entry of foreign banks into Australian banking. These foreign banks were able to operate more efficiently than the less competitive local banks.
The entry of foreign banks as well as the building societies which were speedily developing into banks and the emergence of other financial institutions increased competition in the Australian financial market (Wu and Wang, 2). The efficiency of the four major banks has enabled them to stay at the top over the others over many years with the wealth of the nation has improved in Australia and her environments. Notably, the ratio of bank assets to Gross Domestic Product has continued to grow since deregulation with exception of the recession period in 1991-1992 (Wu and Wang, 2).
Perhaps, it is the success of the financial institutions enhanced by a superb regulation that has helped improve the Australian economy. The industry is regulated by the Australian Prudential Regulation Authority (APRA). The regulatory body ensures that financial institutions comply with the reporting requirements as stipulated by APRA. Remarkably, the Australian financial institutions are some of the key players in global investment banking with services ranging from corporate finance, capital markets, financing of private infrastructure, offshore funding, derivative markets, underwriting, to advisory services.
The growth in investment banking can be attributed to the following factors:
- Increased turnover in the recent years
- A larger number of companies being listed on the stock market
- Increased mergers and acquisitions
- New financial instruments as banks become more innovative and increasingly use their technology advances
- Equity ownership has grown tremendously among the Australian people
- Entry of a higher number of foreign investors
The Reserve Bank of Australia is responsible for formulating and implementing monetary policy and the general banking industry regulations. The monetary policy seeks to ensure the stability of the Australian currency. Further, it helps maintain the full employment and economic prosperity and welfare of the residents of Australia. Preserving the value of money plays a very significant role in economic growth in the long run. The Reserve Bank Board makes independent decisions on the interest rates without leaving room for political manipulation.
Historical analysis
Historical analysis of the banking industry
The government has conducted a number of inquiries into the financial system. There has been a number of inquiries into the Australian banking regulations whose aim was to ensure a better financial sector. Some of these are the Campbell Inquiry 1981, Martin Inquiry of 1991 and Wallis Inquiry of 1996. The main objective of the inquiries was to deregulate the financial institutions and increase competition among the various players in this sector. The deregulation of the banks has had a positive impact on the economy.
The establishment of foreign banks and building societies has posed a great threat to the nationally operated banks as they compete for the existing market share (Reserve Bank of Australia, 1). This competition is healthy as it puts pressure on the banks to operate efficiently and continuously innovate to provide better products to the customers. In Australia, banks fall into the following categories:
- Central Bank which is the Reserve Bank of Australia
- Australian owned banks
- Foreign-owned subsidiary banks
- Foreign banks branches
The banks are performing reasonably well within the Australian industry whose technical efficiency is above 70%. However, foreign banks tend to perform much better than the existing regional banks. Notably, the newly established regional banks’ performance is the highest in the industry. Efficiency change is the growth in productivity that can be attributed to the bank’s ability to use the available technology efficiently. A bank can increase her productivity without any technology advancement by making optimal use of the available resources.
Pure technical change is determined by the ratio of combined inputs to outputs to the ratio achieved by best practices banks (Wu and Wang, 12). Scale efficiency is the improvements in the level of operations using technology to optimize the level of operations. A bank can use its returns to scale to design the size of operations that will increase productivity. The major cause of inefficiency in the banking industry is scale inefficiency as most banks’ operations are below the optimal level of operations.
Under this assumption, the variable returns to scale in most banks achieved high efficiency in the period 1983 to 2001 (Wu and Wang, 2). There was a small productivity decline during the period as the small increase in technical efficiency was diluted by the relatively high fall in scale efficiency. Improvements in technology account for a great change in productivity. Computerized systems and new payment methods are coming up every other year.
Historical analysis of Westpac Banking Corporation
Westpac Banking Corporation is one of the renowned Australia-owned banks’ categories. Westpac Banking Corporation was founded in 1817. It was the first bank to be established in Australia and it was known as the Bank of New South Wales. In 1982, it merged with the Commercial Bank of Australia. It was then that the name Westpac Banking Corporation was adopted. Westpac was registered as a public company limited by shares on 23rd August 2002. In December 2008, there was a merger with St. George Bank Ltd. The bank has branches throughout Australia, New Zealand and part of the Pacific region. The group has offices in London, Singapore, Hong Kong and New York.
As of 30th September 2011, the bank had global assets worth $670 billion and its market capitalization stood at $61.6 billion. On the Australian Exchange Securities Limited, it is ranked top five by market capitalization. Westpac reported $6991 million net profit after tax for the year ended 30th September 2011 (Victor Zarnowitz). It has 570,000 shareholders in Australia and overseas, and the number of employees at the end of the previous financial year was 38,000. The customer base is around 12 million. Westpac has three major divisions, namely, Australian Financial Services (AFS), Westpac Institutional Bank and Westpac New Zealand.
These divisions have different but closely related responsibilities. A number of ratios are used to measure the bank’s performance and analyze trends. Some of the ratios used in analyzing Westpac financial performance are operating expense ratio, net interest margin, total equity to total assets, return on equity, return on assets and dividend policy ratios. Operating expense ratio (OER) = Operating expense/operating income. OER is used to measure the efficiency of an income-generating property. The lower the OER the greater the profit will be. On average 44% of the bank’s property is used for operational and maintenance expenses. The management seeks to reduce this ratio by taking measures that can lower the operating expenses while increasing income.
Net interest margin measures the difference between the interest income generated by the bank and the interest paid out to their lenders relative to the interest-earning assets. The shareholders’ total equity ratio is used to determine how much shareholders would receive in case the company is liquidated. It is an indicator of the claim the shareholders have on the company’s assets.
Westpac shareholders have a claim on the bank’s assets of 5.68% on average for the period under consideration. The ratio declined in the year 2008 but has been on the increase from 2009to 2011. The Return on Equity is an indicator of how much profit the bank earned in relation to the total shareholders’ equity.
Return on equity (ROE) = Net profit after tax/ Shareholders equity
Table 1: Return on Equity Ratio Computation
In a stable economy, a ROE of 12-15 % is good. A higher ROE is desirable, however, ROE in itself is not enough to measure the bank’s financial performance as a high ROE could be due to high financial leverage which would be dangerous for the bank’s solvency. Westpac’s ROE was lowest in 2009 and highest in 2007. The range is however acceptable.
The dividend policy ratio has two components: dividend yield and dividend pay-out ratio.
These ratios indicate the bank’s dividend policy and their prospects for growth in the future. Westpac’s dividend payout ratio is relatively high. This may adversely impact the financial wellbeing of the organization more so the demands for the entity’s liquidity as well as finances for investments for the future prosperity of the organization.
The income/Revenue growth ratio measures the percentage increase in revenue or income between two periods. The periods under consideration could be weeks, months or years.
Income growth Westpac
Table 2: Income Growth Ratio Computation
Gross profit margin is used to measure the bank’s operating efficiency. Gross profit is calculated by subtracting operating expenses from the net operating income.
- Gross profit = net operating income – operating expenses
- Gross profit margin = (Gross profit)/ (Net operating income)
Table 3: Net Profits Analysis
Westpac’s gross profit margin has remained fairly stable over the last 5years. The margin indicates efficiency in the bank’s operations.
Table 4: Analysis of Tax expense
Forecasting the Income statement
The importance of forecasting is for the valuation of securities and to examine the viability of an entity’s strategies and assessing solvency (Rose and Hudgins, np).
- Net operating Income 16913 * 1.007407= 17,038.27
- Gross profit: 17,038.27 * 0.56211= 9,577.38
- Operating expenses 17038.27* 0.4379= 7,461.06
- Impairment charges on loans 993 * 0.882 = 875.83
- Profit before Income tax 9,577.38- 7,461.06- 875.83= 1,240.49
- Income tax expense 1,240.49* 0.17089= 211.99
- Profit attributable to non-controlling interests (1240.49-211.99)* 0.00963= 9.90
- Net profit attributable to owners of Westpac banking Corporation =1018.6
Financial analysis
Trend analysis calculates the percentage change in the different accounts of the bank over a certain period of time. A base year is selected and the amount in each non-base year is divided by the amount in the base year then multiplied by 100. The steps are repeated for each subsequent year.
In reference to the income, growth trend calculated earlier Westpac’s income growth was highest in 2009 and lowest in 2011. The fluctuations are quite high in the 5year period considered. Norm analysis measures how well a firm is performing in relation to the others in the industry. The productivity growth of Westpac and the other three major banks have been on the increase since deregulation except for the recessionary period in the early 1990s (Wu and Wang, 10).
Percentage financial statement is used to forecast financial statements. Each item on the income statement is expressed as a percentage of revenue. Westpac could use this to forecast estimates for 2012 which is the next accounting year. Forecasting an organization’s financial statements helps the management to see the future they intend to see the company attain. Failure to see the future the entity intends to reach may adversely affect the organization.
Table 5: A Percentage Income Statement
The inancial leverage ratio is an indicator of the firm’s solvency in the long term. Debt to equity ratio: total debt/total equity 626,420/43,808= 14.3. Westpac Group has been using relatively less leverage. Therefore, according to the sensitivity analysis using the percentage financial statement, the entity has a strong financial position.
The trend-cyclical analysis is important for the bank if it has to meet its objectives in whatever business cycle the economy maybe in. A thorough study of the high and low growth cycles is essential for the bank to stay afloat in turbulent financial times (conference-board.org). Australian banks performed well after the deregulation in 1981 up until 1991-92 when there was a recession. After the recessionary period, they picked pace once more and most have reported a significant growth in recent years. The banks have also managed to maintain a high level of efficiency in their operations.
Forecasted statements
Table 6: The Forecasted Statement of Income
Table 8: Forecasting assumptions/Ratios (%)
Suggested Strategy
The success of an organization is dependent on the entity leadership’s ability to interpret their business environment and align their financial capabilities to exploit the market for greater success. Failure to understand, their strengths and weaknesses may deny the organization the areas to capitalize on so as to make better success in the market. Further, an organization may also highly benefit from their understanding of the external factors. External factors represent the opportunities and threats in the market or industrial of operation.
The information as regards the market paradigms and the organization as a whole is obtained via an analysis of the business as well as financial analysis. Westpac is a registered bank within the Australian market. It is one of the oldest banking entities within the Australian market and the neighboring regions. With such an old experience in the banking industry, the entity is greatly competitive. The organization has many well strategically positioned branches in various parts of the Australian market. Furthermore, the Australian market has greatly stirred up Westpac bank to strive to compete since the industry has received a continuous high influx of other banks (The Conference Board n.d.).
However, the bank has is still quite competitive. The bank has grown in terms of its sales volumes, profitability and assets base. Her profits and assets base have been on the rise over the many years the company has been operational. It is notable that the bank’s profits have been increasing since the year 2005 every year. This signifies that the organization has been improving every year. The Net operating expenses of the company are quite high in the company. The rise in operations expense is a sign that the company is either not doing very well in the management of its operations and hence the operating costs are quite high.
The aggressive advertisement should be undertaken to increase sales. All avenues available for advertising should be exploited to the maximum. The promotional strategy to be adopted should reach the target market and meet the bank’s objectives (Bruch, 5). This would help the organization’s sales to increase hence better profitability. Thorough research on the target market should be carried out often to ensure the products offered are relevant to the consumers. The marketing activities should be cost-effective. The bank will also gain positive publicity through corporate social responsibility (Bruch, 13).
Keeping employees motivated will also go a long way in improving customer service. The Group could also consider opening up more branches in the neighboring Pacific countries. This will greatly increase revenue. The higher the number of branches the higher the customer confidence will be. The audit team should maintain tight control measures to ensure the bank does not lose money through fraud either by employees or customers. The bank will reap huge benefits by partnering and strengthening relations with the mobile services providers to provide mobile banking services. Streamlining operations will ensure the bank operates efficiently.
Works Cited
Reserve Bank of Australia. n.d. Web. 2012
Rose, S. Peter, and Sylvia S. Hudgins. Bank Management and Financial Services. 8thed. Irwin: Mc Graw Hill, 2009. Print
Rubenstein, Paul and Leigh De Jong. Australia Global Financial Services Regulators, 1 (2004): 1.
Westpac Banking Corporation. n.d. Web. 2012.
Wu M. Abbott, and Wei Chun Wang. The Performance of the Australian Banking Sector since Deregulation, 1 (2009): 2.
The Conference Board. Time Series Decomposition and Measurement of Business Cycles, Trends and Growth Cycles. n.d. Web. 2012.