The current report has been developed based on the financial performances of the Commonwealth Bank of Australia. This report has highly focused on the financial efficacy of the respective bank, as compared to the industry based financial performances of Australia. In that case, the systematic and unsystematic risks if CBA has been developed that may have been largely affecting the financial efficacy of CBA. The entire report has brought the glimpse over the financial practices of CBA that are related to the Time Value of Money (TVM). In addition to that, this report has developed that CBA is operating with Dividend payout policy for paying the Equity Investors. It has further been seen that CBA has faced financial downfall in 2018, which may have significantly leading the company to improve financial outcomes.
Commonwealth Bank of Australia (CBA) has been considered for this report to present the managerial financial activities of the respective organisation. This study is going to figure out the risks, financial performances, sources of funds, and the time value of money for the business. In addition to that, the payout policy for CBA and its competitors, the respective sector, and the general market are to be determined.
1.1 Principal Activities of CBA
CBA is a banking organisation; therefore, it operates with numerous financial operations that are commonly related to businesses. Principal activities of CBA have been identified as follows (Finder.com.au, 2019):
Credit cards for business
International management of money and insurance
Superannuation, investments, and finance of assets
1.2 Industry Profile
The Australian banking industry has commonly been considered under the sector of ADIs (Authorised Deposit-taking Institutions). In line with the characteristics of the ADIs, it can be said that the banking businesses of Australia are used for funding different types of businesses (Financialservices.royalcommission.gov.au, 2019). To be precise, the Australian banking sector uses to help the businesses that are ranging from national to international level with huge assets.
1.3 Major Competitors of CBA
Major competitors of the Commonwealth Bank of Australia have been identified as Westpac, ANZ, Bank of Queensland, and many more.
1.4 Organisational Goals of CBA
Being the leading retail bank of Australia, CBA’s main goal is to offer a range of services and products such as credit cards, loans, savings accounts, and transactions to the customers, especially, to the businesspersons.
2. Risk Profile
In a banking organisation, it is obvious to face some kinds of risks, as it operates with different types of financial products and services. In accordance with the risks, it can be said that the financial risks are segregated into two types. These are as follows:
The market risks that are not diversifiable have been known as systematic risks. These risks have commonly appeared from the returns related to the macroeconomic factors. The risks that are related to services such as loans, asset management, and many more can be considered as systematic risks (Waemustafa & Sukri, 2016). In relation to that, it can be said that in the case of interest rates, managing assets, and commodity management; the systematic risks appear.
Unsystematic risks are generally known as the risks that are largely known as industry-specific risks. In that case, it can be said that the investments made in the respective organisation by the investors may have created the unsystematic risks or residual risks. In accordance with the words of Waemustafa & Sukri (2016), it has been known that the unsystematic risks be largely reduced with the assistance of diversification. Henceforth, it has been understood that the unsystematic risks can be avoided if the financial distribution and the resource allocation of that company are made conveniently.
3. Overall Financial Performance
The Annual Report, 2018 of CBA has been presenting the net interest income of CBA is $18336, the revenue is $18928.24, and the diluted EPS has been determined as $517.7 at the end of the relative financial period. On the other hand, in the case of 2017, it has been seen that the revenue is $25190, net income is $17543, and the Diluted EPS is $558.8. By taking into account the financial outcomes of the respective organisation for the years 2017 and 2018, it can be said that the financial growth rate of CBA is a little less in 2018. In relation to that, it can be said that CBA has to face a decrease in the cases of revenue and diluted EPS (Commbank.com.au, 2018).
Figure 1: Financial Growth of CBA over Periods
The above figure of financial growth of CBA over different years, it has been understood that the respective company has faced a stagnant situation in the financial growth in the financial periods of 2015 and 2016. At the other side, CBA has generated a comparatively larger scale of financial growth at the end of the financial year 2017. Due to reduce in the income from the domestic loans and the liquid assets, it has been seen that CBA has faced the financial issue. In the year 2018, it has been seen that the volume of liquid assets has come to $33581, whereas, in the year 2017 that has been determined as $42814. Therefore, it can be seen that CBA may have a lack of effective distribution of financial resources. Along with that, the Annual Report of 2018 has demonstrated that the respective company has invested more in purchasing inventory in 2018, as compared to 2017.
Figure 2: Income Statement of CBA for 2018, as Compared to 2017
On the other hand, in the case of diversified sources of finances of the respective company such as trading, insurance, and others; CBA has generated comparatively less amount of income. For instance, in the case of trading, the earning volume has been found as $29993 in the year 2018 and $31127 in the year 2017. From this difference, it can be said that the investments of CBA in the segment of trading may be unverified and that has created an unsystematic risk for the concerned organisation. In addition to these, in the case of interest income, it has been found that CBA has generated $33534 in the year 2017, whereas, this volume has been seen has $33418 in the year 2018. Therefore, it can be said that such other downfalls may have appeared in CBA during the financial period of 2018. These may further have led the considered business to face a downfall in its financial operations.
4. Time Value of Money
The concept of Time Value of Money (TVM) reflects the money that may have earned today and has a higher degree of potentiality to be a larger value than the relative intrinsic value in the future. This can only be possible with respect to the possible capacity of earning related to the given volume of the finances. In accordance with the comments of Al Rahahleh, Ishaq Bhatti & Najuna Misman (2019), it has been known that TVM can be considered as the current value that is discounted. With the assistance of future value of money, interest rate, and the present value of money; TVM of a company can be computed. With respect to the financial operations of CBA, it has been determined that the respective organisation is highly concern about the present and the future values related to financial resources. As per this reason, the company has developed its payout policy as dividend policy, which is based on liquid returns to the equity investors. Furthermore, this has ensured that CBA is willing to enlarge its base of equity investors so that the volume of financial inflow can be increased for the business.
Figure 3: Interest Rate Risk
In accordance with the above figure, it has been seen that the increase in TVM has created an increase in the rate of interest that is the interest rate has become 4.5% in the year 2017 and in 2016, the interest rate has been found as 3.6%. Therefore, it can be said that TVM in the CBAS may have increased the rate of payment and that can create financial risks for the respective company. In relation to maintaining TVM in the financial CBA, it has been known that the respective organisation has imposed a set of financial principles. With the help of that, CBA itself and the relative stakeholders of the company may have been maintaining the allocation of their resources in an effective way. These principles have been identified as follows:
Earning money from diversified sources
Saving finances by cutting off the external and additional expenses
Diversifiable ways of paying out to the shareholders and the stakeholders
Reviewing the transactions and the earnings related to those transactions
As it has been seen that CBA has faced a downturn in its financial operations, the respective business may have been willing to lowering down the financial risks at all the levels. In this context, Waemustafa & Sukri (2016) have stated that if a financial organisation is able to minimise the rate of systematic risks, financial outcomes of the company may appear in the favour of the business growth in a significant way.
5. Sources of Finances
In the case of financial establishments, it can be said that the respective organisation may have to create a wide range of diversified sources of funds. In relation to that, it can be seen that CBA has developed diversified sources of finances. These have been identified as follows (Commbank.com.au, 2019):
Agricultural businesses and the SMEs in Australia
Commercial lending and institutional banking practices
Providing business credit cards
Offering loans and transactions to the international business that are originated from Australia
Business-related mortgages and credits
Loans for housing
Short-term and long-term borrowings
By availing a number of diversified sources of finances, it can be seen that CBA has become able to manage the financial resources in accordance with the needs and improvement of the respective organisation
Figure 4: Diversified Sources of Finances for CBA
6. Payout Policy
Payout policy has been known as a process, which may have been implemented in an organisation with respect to capital returns to the equity of the shareholders. As per the statements of Williams (2016), it has been determined that the payout to the equity investors may have taken the term of either share repurchases or dividends. In accordance with the business practices of CBA, it has been found that the organisation’s payout policy is a dividend and that is based on the cash.
a) Compared to that of the Major Competitors
In accordance with the competitor’s analyses, it has been derived that the payout policy of Westpac is also dividend policy. However, Westpac's dividend policy is not based on cash, rather it is base on donation plans and is centred on the investors’ interests (Ausbanking.org.au, 2019).
As per the business policies of ANZ, it can be said that the payout policy of ANZ is oriented to the shareholders. In that case, the respective company pays through the plans of bonus share, which is somewhat based on cash not completely.
The Bank of Queensland (BOQ) has been consisting of the share repurchases as the policy of payout. In that case, the shareholders and the investors are offered to reinvest in the organisation through electronic transfers.
b) Compared to that of the Entire Industry
With respect to the banking industry of Australia, it has been seen that some of the business have set their payout policy as dividend and some have set as share repurchases. The financial sectors that have set the dividend policy are not following the cash-based returns such as CBA.
c) Compared to that of the Operating General Market
In the general market of Australia, it can be seen that the payout policy is following dividend form, which is free from cash returns, unlike the payout policy of CBA (Collom & Lasker, 2016).
d) Compared to that of the Alternative Investments
As compared to the payout policy of CBA, it can be said that the alternative investments are oriented strictly to the non-cash returns (Salim, Arjomandi & Seufert, 2016). In that case, it has been understood that the payout policy related to the alternative investments is reinvestment and share repurchase policy.
At the end of the chapter, it can be concluded that CBA is offering an effective range of time value for money (TVM). With the help of that, the respective company has become able to manage the risks related to interest rates, commodity management, and asset management. In that case, it is evaluated that by providing adequate TVM for the equity investors, shareholders, and the customers, the respective organisation can efficiently manage the cash inflows and the financial outcomes. With the help of that, CBA has been effectively maintaining its financial performances that are bringing favour for the considered organisation. In addition, it has been derived that CBA emphasises its payout policy on a dividend that is based on cash return, which attracts the equity investors to invest funds in this company. With the assistance of that, CBA has become the largest banking organisation in the operating market of Australia.
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