Analyzing Organizational Performance: Actual Results Vs Intent

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.