Principal of Financial Market Finance and Insurance

Question: Discuss about thePrincipal of Financial Market for Finance and Insurance. Answer: Introduction Australia and New Zealand Bank Australia and New Zealand Bank (ANZ) is one of the largest providers of financial Services in finance and insurance. ANZ has it's headquartered in Auckland, New Zealand. The company is conducting its operation in New Zealand within the legal entity of ANZ National Bank Limited. This was formed after the merger between ANZ Banking Group in the year 2012. ANZ New Zealand will be operating in different kind of brands like ANZ, UDC Finance, Bonus Bonds and Direct Broking. The bank is also providing several financial services with banking services, investment, asset finance and payments of solutions. ANZ has shareholdings of 13% in ISL (Interchange Settlement Limited) is operating on the processing of the retail payment for conducting transactions in the interbank and 16% in VNZL (Visa New Zealand Limited) is the board for granting access for Visa network of New Zealand. ANZ is dealing in providing cheque accounts, share brokerage, investment banking, consumer finance, lending on asset a nd insurance. ANZ is focusing on strategy for building the best connected as well as respected bank all over the region in Asia Pacific. ANZ is thinking to expand with its branches in retail commercial and institutional banking system (Anz.com.2016). Commonwealth Bank Limited Commonwealth Bank (CAB) is one of the multinational banks of Australia in the list of big four banking companies. It has its business all over New Zealand, Asia, USA, Fiji, and UK. It is listed the company on ASX with various financial services of retail, institutional banking, management of the fund, superannuation and broking services. CAB was listed as government privatized company in 1996 and 1991 it was listed on ASX. CAB is considered to be the largest bank in all over the southern hemisphere. CBA was founded by through Commonwealth Bank Act on 1911. CAB was the first bank to get Federal Government guarantee in Australia. In Melbourne, CAB's first branch was opened. The bank is aiming at providing financial services to the owner of a small business and person. The company has headquartered in Sydney, Australia. In 1989, 75% of ASB Bank which is situated in New Zealand was acquired by CAB. Then further in 1991 CAB also took over failing bank that is State Bank of Victoria which was owned by a Victorian government. In 2009, Colonial National Bank was sold to Bank of South Pacific by CAB. In March 2012, CAB transferred the services of ATM from HP Enterprise to ITS in Sydney (Commbank.com.au.2016). Top-Down Analysis Top-down Analysis is one of the parts of fundamental analysis, which is qualitative in nature. Top-down analysis is looked as Big Picture' with featuring small component (Bartram and Grinblatt 2015). Top down approach is known as designing of step and in few cases it is decomposition. The top-down analysis will be done by taking into view micro and a macro factor of both the bank. Top-down analysis is also said to be investment approach. Fundamental analysis of the top-down approach will include economic, industry and company analysis. For analyzing in an economic perspective, analysis and comparison will be done on GDP growth and inflation rate structure and also its effect on the two banking company (Goodman et al., 2013). Next, industry perspective will be analyzed regarding demand Supply structure and effect of exchange rate on the banking sector. Finally, Company analysis will be done regarding dividend and return achieved by the company. (Source: Breyer et al., 2013) Given economic analysis, GDP can be measured by observing the employment opportunity given by the bank and banks contribution towards per capita income. From the research it has been observed that Australia economy is giving stable, it is not getting affected by the economic crisis faced by the entire world in 2014. GDP has been showing an increasing trend CAB has employees more than 50000, whereas ANZ too has employed more than 52000 employees working in the company (Fornelli et al., 2013). This also shows a contribution toward the growth of the country, which in term says that both the banking company are providing a lot of employment opportunity every to Australia. Moreover, the analysis will be done given the inflation rate of the country. From the above figure, it has been found that inflation rate has decreased as compared to the last. But CAB and ANZ has no effect; it is because banking industry in Australia is referred to be the most favorable environment for conducting the f inancial services. Inflation can be mitigated by investing them in long duration fixed interest rate (Geis-Asteggiante et al., 2015). Next moving to industry analysis, in this analysis factor of demand supply and exchange rate will be determined. Exchange rate plays a vital role in the role of companies operation, especially in a case of banking institution because its business is mostly involving with the currency. So increase and decrease in exchange rate gives an indication huge effect on the revenue generation of the company (Tvardovskiy et al., 2015). From the financial statement of CAB, it has been observed that there has been the increase in cash and cash equivalent regarding foreign exchange rate. Since 2013 CAB has got a lot of increased generation form the effect of foreign exchange. Next moving to in the case of ANZ it has been observed that movement of Australian and New Zealand dollar plays a great role of volatility, in comparison to the other global currency available. In the Australian and New Zealand dollars get depreciated then there can be the increase in the debt service of the company which in terms is not the good signal. There has been the increase in net loans and advances from $ 19 billion to $ 48 billion. The deposits and another borrowing were increased from $ 60 billion to $ 32 billion. Similarly, adjustment made in the cash flow because of the exchange rate has been increased for the previous year (Guerrero et al., 2015). Finally, arriving at the company analysis, it will be measured regarding dividend given and return achieved on the capital employed. Dividend given by the company gives a picture of the company regarding investing it further or not (Vyatkina et al., 2016). From the annual report of the CAB, it is noted that company will be contributing some portion of the dividend in the dividend reinvestment plan, as compared to earlier year amount contributing to DRP system has increased, which show a good sign of respect of company. In 2013 the final dividend on fully paid ordinary share was $ 73.42 whereas in the next year it was $ 80.39 this indicated good sign in CAB bank. In the case of CAB, Return has decreased about the employed capital. Whereas in the case of ANZ its dividend was paid in cash as well as it was reinvested in DRP (Anz.com.2016). The annual report says that Bank has revenue in dividend has been increased from the previous year. There has been 80% increase in the revenue from a dividend. It the perspective of return it has been observed that there has been increasing in return percentage regarding capital employed (Mao et al., 2013). Bottom-up Analysis Bottom-up analysis is evaluated on the evaluation of quantitative data available for the company (Lee et al., 2016). Bottom-up analysis is said to be huge category to be evaluated. Bottom-up analysis is done on the economic environment of the company through the business cycle explanation. The bottom-up analysis does not include the micro factor of the environment. Bottom-up analysis is done on the financial ratio (Sun et al., 2013). Financial ratios are the best way of evaluating firm performance. Financial taken into consideration are of three category profitability ratio (includes net profit margin ratio and return on asset), Liquidity ratio (includes current ratio and quick ratio) and Solvency ratio (includes debt to equity ratio and equity ratio). Analyses of the ratio are given below: Liquidity ratio - Liquidity ratio helps in measuring the capacity of the firm to pay current and long term liability (Parker and Vannest 2012). It is also helpful in measuring the level of cash of the company with capacity to pay liability and availability of cash to transform some assets. For measuring this ratio there are several numbers of ratios are there, but for the research, there are only two of them are taken into consideration, i.e., Quick Ratio and Liquidity Ratio (Brigham and Ehrhardt 2013). Commonwealth Bank Australia and New Zealand Bank From the above, it can clearly figure out the CAB current ratio is not a sound indication. From the graph, it is clear that bank does not have the capacity to pay it long term and current liability but on the overall basis, the trend shows that in 2014 there was sufficient fund available to pay of the liabilities (Arnold 2014). Similarly, Quick ratio of the shows that in 2014 the level of cash totally decreased at present it is at constant. This indicates that in the 2014 and 2015 the bank has almost same level of cash to transform them into cash. From the above, it can be said that in 2014 the current ratio decreased at an instant. But in 2015 it again increased, which says that bank had sufficient amount of cash to pay its liabilities. What the bank is gaining is position gradually. Similarly, Quick ratio in 2013 shows a sound indication. But in the year 2014 Quick ratio falls with huge difference. But in the current year, the bank is gradually improving its position, which says that company has sufficient cash available to get the cash converted into cash. Profitability Ratio Profitability measure and compares some of the aspects of income statement as well as it focuses on the capacity of the company to utilize its available resources properly for the generation of profit (Brigham and Houston 2012). Whether the company is proceeding with the operations for the purpose of generating profit. It also measures the efficiency of company to for managing its assets to generate profit during the year. For measuring this ratio there are several numbers of ratios are there, but for the research, there are only two of them are taken into consideration, i.e., Net Profit Margin Ratio and Return on Asset Ratio Commonwealth Bank Australia and New Zealand Bank From the above figure, it can be stated that company ability to generated profit by utilizing its resources has been totally fulfilled. In 2014, the bank generated more profit than as compared to 2015. But on the overall basis company is suitably utilizing its resources for the generation of profit. Similarly, return on asset has been observed as constant all throughout the three years. It implies that bank is generating constant profit through the utilization of available asset. ANZ do not show a good position regarding profit generation. ANZ is not utilizing its available resources properly. ANZ do not have good sign in the net profit margin ratio (Titman et al., 2015). Similarly, regarding return on assets, it also does not show good indication. The bank is not utilizing its assets for the generation of profit of the company. It is gradually decreasing as compared to earlier year. Solvency Ratio Solvency ratio is calculated to measure ability of the firm to maintain the operations with indefinitely through comparison of various debts levels regarding asset, equity, and earnings (Dixon , 2013). In another way, it is recognized as concept of going concern problems and capacity of the firm to pay the bill in long term. It is mainly concentrating on the sustainability of long term. This ratio also indicated the creditworthiness and financial way of sounding company. It also highlights solvent and sustainability of the business regarding finance. For measuring this ratio there are several numbers of ratios are there, but for the research, there are only two of them are taken into consideration, i.e., Debt to Equity Ratio and Equity Ratio Commonwealth Bank Australia and New Zealand Bank From the above figure, Equity ratio shows a straight line, which in term says that CAB has the same level of equity, is maintained as compared to the level of total assets (Commbank.com.au.2016). Debt to Equity ratio is showing an increasing trend, which in terms also say that bank is getting more liability regarding creditors, bank loans from other financial institutions, which can be said that more and more investors are planning to invest in the company. From the above figure, Equity ratio shows falling trend just after 2014 and then remains to be at constant for the period (Lasher 2013). Similarly, ANZ is a showing gradual increase in debt-to-equity ratio in 2014, and then after that remaining at constant stage, which it terms says that bank is gradually getting investment and funding for the investors and creditors as well as other banking institutions. Summary Recommendations Detail discussion has been, after the adoption of top down and bottom up analysis. Brief analysis has been done on the banking sector of Australia. The explanation has also be done by taking into account micro and macro factor affecting the company. It has been analyzed that both the companies are providing its best financial services to the clients in Australia. Banks has been effectively providing its services to its clients and continuing to increase its operation of the business. It is further analyzed that CAB is in the front line of solvency ratio as well as profitability. So at best position but comparably in better position than ANZ. It is recommended that ANZ should adopt some strategy to high profit as well as able give more return to its investor. From the above analysis, it has been noticed that CAB is one of the oldest banks for providing its financial services. Due to this CAB's goodwill is helping his to maintain its position regarding profitability and solvency. These two are the most important criteria for choosing a company for the investment to be done. Finally, to make a conclusion to the research conducted, it can be said that all the requirement of the report has been truly fulfilled with successful attempt. The finding and analysis have been done by having a complete analysis of the company's website and annual report. The analysis has been from 2013 to 2015. Details explanation has also been done on the complete analysis of top down and bottom up analysis with the help of accounting ratio the analysis is completed. Reference List Anz.com. (2016).Personal - Online Banking | ANZ. 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