Evaluation and Financial Analysis - Queensland and Bendigo & Adelaide Bank - Case Study Example

Executive Summary Queensland and Bendigo & Adelaide Bank are Australia based banks which provide various financial derivative instruments to customers. Queensland and Bendigo & Adelaide Bank have grown by opening up branches which has helped them to ensure smooth business from different areas. The report presents the analysis of Queensland and Bendigo & Adelaide Bank by looking into the financial angle by analyzing various ratios. The financial analysis of Queensland and Bendigo & Adelaide Bank highlights a poor current ratio stating more external obligations thereby making the payments back to the external bodies risky. Both the banking institution has good profits but working on the asset base and reducing it further will bolster the final profits. Both the bank has a sound management policy with regard to credit management apart from creditor payback period which is very low. The management of debt and equity has ensured sources of finance for the future. Working on the creditors pay back period will ensure that the credit policy improves and the overall scenario further gets better. Table of Contents Introduction 3 Purpose of the Report 3 Financial Analysis 4 Benchmark Analysis 10 Conclusion 11 References 12 Appendix 13 Introduction Bendigo & Adelaide Bank is a bank based in Australian which started its operation from 2007. The bank works through four different brand names which look towards performing the different functions performed by banks. The bank has more than 190 branches and provides an investor with different options to choose from (Bendigo & Adelaide Bank, 2011). This bank was formed after the merger between Adelaide and Bendigo bank which helped the bank to ensure that it was able to broaden its working arena (BEN, 2011). The bank has a majority of customers coming from Victoria and deals mostly with small to medium sized business firm (BEN, 2011). The bank has grown after consolidation and has improved the working scenario by working on the different aspect. Bank of Queensland on the other hand has a long existence and has been performing since ages. Being in the market for so many years has allowed the banking institution to establish and develops its network. Today it performs in over 270 branches and the new initiatives taken by the banking institution to ensure a national branch expansion has increased the volume of business conducted by the bank (Bank of Queensland, 2011). The major customer for the banking institution comes from Queensland and deals with mostly small to medium scale business firm by providing financial services to them (BOQ, 2011). The banking institution has grown over a period of time and has strengthened its manner of working so that customers feel satisfied. Purpose of the Report To analyze the performance of Bank of Queensland and Bendigo & Adelaide Bank by looking into different ratios To find the manner in which the performance of both the banks has an influence on external bodies To find out the effectiveness of the banking institutions by measuring it against certain set benchmarks. Financial Analysis Financial analysis helps to analyze the different aspect of the company by looking into various ratios so that the current performance level can be tracked. This ensures to draw a comparison against past performance and benchmarks so that the performance can further be enhanced in the future. A look at the financial analysis for both the banking institution is provided below Profitability Analysis The profitability analysis of Queensland and Bendigo & Adelaide Bank looks as follows Bank of Queensland Ratios Formula 2010 2009 Net Profit Margin Net Profit / Sales * 100 179.6 / 710.9 * 100 = 25.26% 141.1 / 629 * 100 = 22.43% Return on Assets Net Income / Total Assets * 100 179.6 / 38,570.9 * 100 = 0.46 141.1 / 34,012.0 * 100 = 0.41 Return on Equity Net Income / Equity * 100 179.6 / 2,402.5 * 100 = 7.47 141.1 / 2,111.4 * 100 = 6.68 Bendigo & Adelaide Bank Ratios Formula 2010 2009 Net Profit Margin Net Profit / Sales * 100 259.9 / 1,135.0 * 100 = 22.89% 83.8 / 873.7 * 100 = 9.59% Return on Assets Net Income / Total Assets * 100 259.9 / 52,141.1 * 100 = 0.49 83.8 / 47,114.2 * 100 = 0.17 Return on Equity Net Income / Equity * 100 259.9 / 3,880.4 * 100 = 6.69 83.8 / 3,118.7 * 100 = 2.68 The analysis shows strong bottom lines for both the banking institutions signifying that the indirect cost is well controlled. The net profit is around 25% both the banks signifying that ¼ of the total cost is the profit for the business. This also shows that banks are able to provide financial institutions at a low cost and at the same time are able to ensure proper cost associated with those instruments. Despite high the return for investor is low which could be due to low debt component and high equity. This aspect will be identified through the debt equity ratio which will help to find the percentage of each component. Banks due to the nature of business have high equity component which has resulted in the return for the shareholders to be low for both the banking institutions. High net profits should demonstrate a good return on assets. The result on the other hand is contrasting which is due to the fact that both the banking institutions have a lot of branches. This has resulted in high fixed assets as all regions don’t provide the same business. This has resulted in the return on assets to be low. The overall analysis looks sound and shows that Bank of Queensland has performed better than Bendigo & Adelaide Bank in all areas. This has resulted in better returns and higher profits. Also the fact that Bank of Queensland is an old institution and Bendigo & Adelaide Bank has been recently formed after the merger is one reason which has resulted in the difference in performance. Liquidity Analysis The liquidity analysis of Queensland and Bendigo & Adelaide Bank looks as Bank of Queensland Ratios Formula 2010 2009 Current Ratio Current Assets / Current Liabilities 5,934.9 / 28,226.7 = 0.210 4,851.7 / 24,389.9 = 0.198 Cash Ratio Cash / Currnt Liabilities 471.1 / 28,226.7 = 0.016 353.8 / 24,389.9 = 0.014 Bendigo & Adelaide Bank Ratios Formula 2010 2009 Current Ratio Current Assets / Current Liabilities 5769.7 / 46,314.5 = 0.124 5459.6 / 42,050.6 = 0.129 Cash Ratio Cash / Current Liabilities 760.5 / 46,314.5 = 0.016 912.6 / 42,050.6 = 0.021 The analysis shows that both the banking institution has very high external liabilities. This increases the risk for them because the short term assets are few in comparison to those which will make it difficult to ensure that the external bodies are paid back on time. The problem for both the banks increases as we look at the cash ratio because the external liabilities further increases highlighting fear that the external bodies might be reluctant to provide further investment. Findings in this direction show that banks have a low current and cash ratio but a very low ratio as shown by both the banking institution increases risk for the banks (Financial Ratios, 2011). The current ratio and cash ratio for banks are usually low and doesn’t signify the same risk as shown by other companies who have a low current and cash ratio. This is due to the fact that banks major objective is to lend money so banks are continuously involved in it. This makes the ratio to be low as banks looks towards ensuring that the inflows match the outflows (Gandy, 2011). This makes the current ratio and cash ratio for banking institution to be low. The overall liquidity position seems to be a bit risky for both Queensland and Bendigo & Adelaide Bank. But when we look at the individual performance we see that Queensland has performed better than Bendigo & Adelaide Bank as their liquidity position is better. This will improve the area of working for the banking institution which will ensure better liquidity and helps to improve the position of liquidity. Efficiency Analysis The efficiency analysis of Queensland and Bendigo & Adelaide Bank looks as Bank of Queensland Ratios Formula 2010 2009 Creditor repayment period Average account creditors / Cost of sales * 365 411.7 / 2128.2 * 365 = 71 days 277.6 / 1985.9 * 365 = 52 days Asset Turnover Ratio Sales Revenue / Average Total Assets 710.9 / 38,570.9 = 0.017 629 / 34,012.0 = 0.019 Fixed asset turnover Sales Revenue / Fixed Asset 710.9 / 32,636 = 0.021 629 / 29,160.3 = 0.022 Bendigo & Adelaide Bank Ratios Formula 2010 2009 Creditor repayment period Average account creditors / Cost of sales * 365 777.3 / 739.6 * 365 = 383.60 days 665.9 / 674.1 * 365 = 360.56 days Asset Turnover Ratio Sales Revenue / Average Total Assets 1,135.0 / 52,141.1 = 0.021 873.7 / 47,114.2 = 0.018 Fixed asset turnover Sales Revenue / Fixed Asset 1,135.0 / 46,371.4 = 0.024 873.7 / 41,654.6 = 0.020 The banks due to the kind of business has a low turnover asset which is low than 1 due to the fact that it has very high assets. This is mainly due to the reason that both the banks have a lot of branches which has resulted in the fixed assets to be very high. A very high fixed asset has resulted in turnover to be low which has thereby been affected due to the business both the banks generate at different locations. The fixed asset ratio shows similar finding showing high assets. Having many branches has resulted in high fixed assets but both the banks need to devise a model which will help to reduce assets to a certain extent and help the banks. The company policies with respect to credit management highlight the fact that the creditors are paid long after collecting money from its debtor. The company pays it creditors after a long interval of two months. The ratio worsens for Bendigo & Adelaide Bank as they pay their creditors even after a much longer period and is around 300 days. This is an area which Bendigo & Adelaide Bank as this could create an image which might make customer stay away from the banking institution. To ensure such a credit management policy banks need to ensure that creditors are paid quickly or have a higher return which is difficult considering the competition level. This will help to justify the credit management policy and improve the different ratios. The overall analysis shows that both Queensland and Bendigo & Adelaide Bank have a low turnover ratio. The situation worsens for Bendigo & Adelaide Bank as they have a much poorer ratio compared to Queensland. This makes it important that Bendigo & Adelaide Bank improves its image and ratio as it could hamper the future performance of the banking institution. Financial Stability Analysis The financial stability analysis of Queensland and Bendigo & Adelaide Bank looks as Bank of Queensland Ratios Formula 2010 2009 Debt to Equity Ratio Long Term Debts / Equity 36,168.4 / 2,402.5 = 15.05 31,900.6 / 2,111.4 = 15.10 Earning per Share Net Income / Outstanding shares 80.6c 75.9c Total debt ratio Total asset - total equity / total assets 38,570.9 - 2,402.5 / 38,570.9 = 0.94 34,012.0 - 2,111.4 / 34,012.0 = 0.93 Bendigo & Adelaide Bank Ratios Formula 2010 2009 Debt to Equity Ratio Long Term Debts / Equity 48,260.7 / 3,880.4 = 12.43 43,995.5 / 3,118.7 = 14.10 Earning per Share Net Income / Outstanding shares 67.4c 25.6c Total debt ratio Total asset - total equity / total assets 52,141.1 - 3,880.4 / 52,141.1 = 0.925 47,114.2 - 3,118.7 / 47,114.2 = 0.933 The analysis highlights proper maintenance of equity and debt as revealed by the equity and debt holding for each bank which shows a high equity holding. This shows that the both the banks have used internal sources for finance by ensuring that the money is raised through equity. The financial structure due to this looks more oriented towards equity compared to debt which is making the banking institution not able to take the tax advantage to the maximum fullest extent (Kim & Kim, 2010). Both the banks have a sound EPS which has ensured that the shareholders are able to get a proper return on their investment. This ensures that the shareholders are able to generate a good return on their advantage and has ensured that the banking institutions are able to use this source of finance for the future (Davis, 2008). The overall analysis looks sound for both Queensland and Bendigo & Adelaide Bank as both of the financial institution has a very high equity component. This has also affected their return to shareholders but it has been seen that banking institutions prefer the ratio to be high. Benchmark Analysis Banks directly deal with customers and the main purpose is to mobilize savings. This makes it important that banks have a strong liquidity ratio. This is a case which is not seen in Queensland and Bendigo & Adelaide Bank because both the banks have a low liquidity ratio which signifies that bank have a higher proportion of short term outside debt. This shows poor management of the savings of customer into prospective direction. This makes it important that both Queensland and Bendigo & Adelaide Bank find out a strategy which helps to improve it. Another aspect is the strong asset backing which banks require. This is something which is seen in both Queensland and Bendigo & Adelaide Bank. Having a strong asset base is ensuring that in case of liquidation the asset can be used to pay the external obligations. This ensures safety of banks to a certain extent and ensures smooth functioning of the financial institution. Conclusion The financial analysis shows that the banking institutions i.e. Queensland and Bendigo & Adelaide Bank has performed well and needs to concentrate on improving it further by working on certain areas so that the return for the shareholders improve. The profits for both Queensland and Bendigo & Adelaide Bank look sound and the banking institution has been able to manage its asset well. Both the banks have to improve their credit policies so that it creates a better impression and ensure regular supply of short term liabilities. Queensland and Bendigo & Adelaide Bank have been able to improve their performance over years and need to ensure strategies which further help them to grow. References Annual Report of Queensland Bank. 2011. Annual Report. Retrieved on August 1, 2011 from http://www.boq.com.au/shareholder_annual_report.htm Annual Report of Bendigo & Adelaide Bank. 2011. Annual Report. Retrieved on August 1, 2011 from http://www.bendigoadelaide.com.au/public/shareholders/annual_reports.asp Bendigo & Adelaide Bank. 2011. Bendigo & Adelaide Bank. Retrieved on August 1, 2011 from http://www.bendigoadelaide.com.au/about_us/index.asp BEN. 2011. Bendigo & Adelaide Bank. Retrieved on August 1, 2011 from http://www.investsmart.com.au/shares/asx/Bendigo-and-Adelaide-Bank-BEN.asp Bank of Queensland. 2011. Bank of Queensland. Retrieved on August 1, 2011 from http://www.boq.com.au/ BOQ. 2011. Bank of Queensland. Retrieved on August 1, 2011 from http://www.investsmart.com.au/shares/asx/Bank-of-Queensland-BOQ.asp Davis, K. 2008. Financial Regulation: Cost, benefit and process of regulatory change. Economic Society of Australia, High Beam Research Financial Ratios. 2011. Financial Ratios. Retrieved on August 1, 2011 from http://www.zeromillion.com/business/financial/financial-ratio.html Gandy, M. 2011. Is a low current ratio bad? Retrieved on August 1, 2011 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Kim, S. & Kim, Y. 2010. Non Linear Dynamic Relations Between Equity Return & Equity Fund Flow: Korean Market Empirical Evidence. Asia Pacific Journal of Financial Studies, Volume 39, Issue 2, pp. 139-170 Penman, S. 2011. Accounting for Risk & Return in Equity Valuation. Journal of Applied Corporate Finance, Volume 23, Issue 2, pp. 50-58 Appendix Calculation of Ratios for Bank of Queensland Ratios Formula 2010 2009 Current Ratio Current Assets / Current Liabilities 5,934.9 / 28,226.7 = 0.210 4,851.7 / 24,389.9 = 0.198 Debt to Equity Ratio Long Term Debts / Equity 36,168.4 / 2,402.5 = 15.05 31,900.6 / 2,111.4 = 15.10 Net Profit Margin Net Profit / Sales * 100 179.6 / 710.9 * 100 = 25.26% 141.1 / 629 * 100 = 22.43% Return on Assets Net Income / Total Assets * 100 179.6 / 38,570.9 * 100 = 0.46 141.1 / 34,012.0 * 100 = 0.41 Return on Equity Net Income / Equity * 100 179.6 / 2,402.5 * 100 = 7.47 141.1 / 2,111.4 * 100 = 6.68 Creditor repayment period Average account creditors / Cost of sales * 365 411.7 / 2128.2 * 365 = 71 days 277.6 / 1985.9 * 365 = 52 days Earning per Share Net Income / Outstanding shares 80.6c 75.9c Asset Turnover Ratio Sales Revenue / Average Total Assets 710.9 / 38,570.9 = 0.017 629 / 34,012.0 = 0.019 Cash Ratio Cash / Currnt Liabilities 471.1 / 28,226.7 = 0.016 353.8 / 24,389.9 = 0.014 Total debt ratio Total asset - total equity / total assets 38,570.9 - 2,402.5 / 38,570.9 = 0.94 34,012.0 - 2,111.4 / 34,012.0 = 0.93 Equity Multiplier Total Asset / Total Equity 38,570.9 / 2,402.5 = 16.04 34,012.0 /2,111.4 = 16.10 Fixed asset turnover Sales Revenue / Fixed Asset 710.9 / 32,636 = 0.021 629 / 29,160.3 = 0.022 Calculation of Ratios for Bendigo & Adelaide Bank Ratios Formula 2010 2009 Current Ratio Current Assets / Current Liabilities 5769.7 / 46,314.5 = 0.124 5459.6 / 42,050.6 = 0.129 Debt to Equity Ratio Long Term Debts / Equity 48,260.7 / 3,880.4 = 12.43 43,995.5 / 3,118.7 = 14.10 Net Profit Margin Net Profit / Sales * 100 259.9 / 1,135.0 * 100 = 22.89% 83.8 / 873.7 * 100 = 9.59% Return on Assets Net Income / Total Assets * 100 259.9 / 52,141.1 * 100 = 0.49 83.8 / 47,114.2 * 100 = 0.17 Return on Equity Net Income / Equity * 100 259.9 / 3,880.4 * 100 = 6.69 83.8 / 3,118.7 * 100 = 2.68 Creditor repayment period Average account creditors / Cost of sales * 365 777.3 / 739.6 * 365 = 383.60 days 665.9 / 674.1 * 365 = 360.56 days Earning per Share Net Income / Outstanding shares 67.4c 25.6c Asset Turnover Ratio Sales Revenue / Average Total Assets 1,135.0 / 52,141.1 = 0.021 873.7 / 47,114.2 = 0.018 Cash Ratio Cash / Current Liabilities 760.5 / 46,314.5 = 0.016 912.6 / 42,050.6 = 0.021 Total debt ratio Total asset - total equity / total assets 52,141.1 - 3,880.4 / 52,141.1 = 0.925 47,114.2 - 3,118.7 / 47,114.2 = 0.933 Equity Multiplier Total Asset / Total Equity 52,141.1 / 3,880.4 = 13.43 47,114.2 /3,118.7 = 15.10 Fixed asset turnover Sales Revenue / Fixed Asset 1,135.0 / 46,371.4 = 0.024 873.7 / 41,654.6 = 0.020 Read More