The Market Cap of Australia and Europe Banking Sectors - Case Study Example

Name: Tutor: Title: The Market cap of Australia and Europe Date: The market cap of Australia and Europe Introduction There has been a colossal difference between the market capitalization of the banks in Australia and those of Europe[Den12]. The banks of Australia have proven to have extremely strong economic strengths. In 2008 for instance, the Australian banks were thriving economically while Europe was experiencing extreme economical drawbacks. The market cap of the banks is however intertwined with the economy of Australia as a nation. The economy of a nation directly affects the banking system because loaning and taking of debts between the government and the banks solely depend on the economic position of the country. The Australian bank sector, as compared to the other European nations is strong. The market capitalization of Australian banks has convincingly been improving while those of other European nations have kept dropping. The question that arises is why that is so (Denning, 2012). Reasons why the market cap of Australian banking sector could exceed that of its European counterpart The European banks were fully loaded with the subprime debts while the banks of Australia were not. The banks in Europe made real estate loans that were bad while Australian banks did not (Gizycki & Goldsworthy, 1999). The banks of Europe are seated on piles of debts while the banks in Australia are not. All these are explanations to the reasons why the financial sector of Europe in 2008 fell extremely while that of Australia rose. Every reason rotates around the economy. Exports of commodities have energized Australia; thanks to China. The Eurozone, on the other hand, is self-immolated in a common currency crisis. Any financial contract always expects incomes to rise steadily. Debts that were not meant to go bad go bad when the economy and incomes are not growing as tremendously as expected. Since 2008, the periphery of Europe experienced a thing that was incredibly rare and bad. Their total economies’ total size fell. The GDP, which refers to real growth plus inflation, is usually expected to rise by five per cent annually is what a bank counts on when making a loan. In circumstances where the economy has grown less than the GDP the borrowers who are creditworthy have difficult times in the payment of their debts. This refers to even the governments. The nominal GDP of Australia has healthily grown. The GDP of European countries have not. For Europe to rise again, it needs to raise its GDP to the current trend. Otherwise, it will continue to fall behind Australia. The banking crisis of Europe, in other terms, is likely to come to an end when the economy of Europe ends its crisis. The economic crisis of Europe is however held back by Europe’s banking crisis. The two are therefore intertwined and directly dependable on each other. The cycle is awfully never ending; it can only be broken by the European Central Bank (Furlong & Keeley, 1989). The banking sector of Australia is sophisticated, well regulated, profitable and strong (Gizycki & Levonian, 1993). It welcomes new entrants and at the same time, increasingly engaged in global and regional markets. The key contributor to the national output of Australia is the financial sector. The country was the fifth amongst the capital markets and financial systems of the world that are leading. The ranking was in the report of the World Economic Forum Financial Development in 2010 (Australian Government, 2011). Australia has been known to have government bonds that are highly related. It also has resource companies that are market leading, for instance, Rio Tinto, and BHP Billiton. The resource stocks, however, aren’t the only companies in Australia having been upfront with the investors thinking over the past one year. The relative strong Australian banks performance is contemporarily a point of discussion. The banks in Australia had a lot of resilience hence impressing several global investors. Contemporarily the bank rates third globally. It's bigger than any single country in Europe. It's only smaller than China and the USA. Australia more importantly is among the two nations whose market capitalization of the bank has tremendously improved since 2007, by increasing in dollars. The big four banks of Australia were in the top twenty of the world by 2007. Collectively, the banks of Australia have capitalization that is higher than those of the traditional financial hubs for instance Spain, London, Tokyo and Hong Kong. An investor may, as a result, therefore, question what the underpinnings of the other European nations are. The results hence clear reflections of the financial woes other nations are experiencing[Aus11]. The deteriorating bank statuses do not solely depend on a factor in the system of the bank but rather on the economic strengths of the respective nations[Giz99]. The economic strength of any bank depends on the economic strength of the nation. For any European nation to change the situation they are currently stuck in, they need to ensure that there global economic strength has significantly increased. Australia, to a large extent, tries to balance and maintain a constant economic status. Because of this reason, its banks are experiencing the consistency and relevance in the industry. The results of the analysis of Australia and the Europe, to a given extent, give a reflection of woes experienced in the other regions as far as the financial potential is concerned. The Australian financial systems relative strength and economy, together with the lending standards that are more conservative of the banks of Australia and their various models of operations, is a key depiction of the financial woes (Kim & Santomero, 1988). The banks in Australia have dominant positions in the large pension market fund of Australia as much as the traditional credit growth operates at historically very low levels. The large pension market fund of Australia is the fourth largest globally by assets being managed. Their global funding has also been diversified by raise of funding from local deposits. Another key factor that might have made Australia outperform Europe is the rise of the dollar of Australia against the other currencies globally as from 2008. However, the banks of Australia are as well capitalized and in that relation, possess pay-out ratios that are extremely higher than several other peers. The banks also have a very strong record of the increase in dividend. For instance, the largest bank in Australia, Commonwealth Bank of Australia recently made an announcement of its increase of dividend. This was the 19th announcement in the last twenty years (Kent & Debelle, 1998). Every investor might attract a risk. However, with around 6% dividend yield, the banks in Australia appear to be a high-yielding low-risk investment and hence being relative to their peers globally (Smith wealth partners, 2015). The most crucial earnings risks continue to build pressure on the margins interest rates, a ‘doubtful and bad debts’ charge that is cyclically low, and low credit growth. In case the unemployment of Australia, which is currently at 5.2% begins to rise, this charge may put much of pressure on the banks of Australia $US 1 trillion lending book. Australia, nevertheless, has traditional policy ammunition that is traditional that has been left to fight the higher unemployment. This comes with official domestic interest rates that are relatively high, currently at 3.5%, but that can be put in use. The modest growth of earnings of the banks of Australia at this economic cycle stage culminates in risk valuation. Valuations, indeed, relative to their peers, appear stretched historically and the assets book value (Ulmer, 1998). The economy of Australia’s growth is at a pace above trend, in the 2012 first half it was at around about 4%. This, therefore, means that the bank share prices risks are more likely to emanate from sources across the globe such as the US, China, and Europe (Merton, 1974). Every bank is hence ultimately exposed in that sense and not just those with valuations that are stretched. Perpetually, individuals continue searching for the companies whose balance sheets are strong. The companies have to have perfect operating models for generating surplus cash flow with boards and a management that can wisely invest capital. Such companies concentrate on creating wealth for their shareholders over a long period and the current surrounding isn’t an exception to the rule[Ken981]. Conclusion In conclusion, the Australian banks are prospering because of the financial strength of Australia in the global economy. The financial strengths of banks depend so much on how that particular nation is doing economically. Australia experienced massive economic growth in the year 2008. During this time, the market capitalization of the banks in Australia was doing very well. The banks of Europe experienced major economic challenges at around 2008 where there was an extreme drop in the economy of Europe. The market capitalization of banks depends on the economic performance of the nations. To salvage the market cap of the Europe banks, Europe needs to establish long-term strategies that will further lift the economic performance of the banks. List of references Den12: , ( Denning, 2012), Aus11: , (Goverment, 2011), Giz99: , (Gizycki & Goldsworthy, 1999), Ken981: , (Ulmer, 1998), Read More