Financial Assessment of National Australian Bank - Example

RUNNING HEAD: FINANCIAL ANALYSIS OF NATIONAL AUSTRALIAN BANK Financial Assessment of National Australian Bank Name: Course: Tutor: Date: National Australian Bank Executive summary This is a financial analysis paper of National Australian Bank. In order to present a detailed report and financial assessment of National Australian Bank, the following issues are addressed. A brief summary about the National Australian Bank, the company’s structure (including capital structure) and its governance, and a well defined and analysed main strategy of National Australian Bank. Analysis and discussion about the merits of the performance incentive scheme/executive compensation scheme available to management and where the scheme is not available, focus is given to that which can satisfy the current aims of the board. It has assessed the ways in which National Australian Bank has raised funds for new investment over the last three years. It also has investigated and analysed the main sources of debt and equity financing in the firm including loans, leases, commercial paper, ordinary and convertible shares over a period of the last three years. Discussion and analysis is on CAPM beta calculation and possible factor beta using factor models for the firm. The firm’s characteristics and decision-making parameters used by the firm’s management team for a significant project with derivation of WACC for the firm for use in NPV analysis. Determination of the level of success of the project against suitable criteria Application of real options analysis where necessary, and examination and discussion on recent merger and acquisition activity A thorough analysis on a potential takeover target that would suit the National Australian Bank strategy and recommendation of an acquisition plan Finally, analysis of the National Australian Bank’s risk management and hedging strategy and provision of recommendations of actions that would improve the risk exposure of the firm. Introduction National Australian Bank is a financial institution with over forty thousand employees and it operates over one thousand eight hundred branches in the country. The bank operates in various countries including Australia were it connects with a number of customers on daily basis in retail business and private banking, and wealth management. The bank offers various brands which include NAB, MLC and UBank. It offers various financial services which include personal banking, business banking, MLC and NAB Wealth, whole sale banking, and asset management (NAB, 2011). The Structure and Corporate Governance of National Australian Bank At the top of the firm is the board of directors which approve and provide the directors of National and all its controlled units with corporate governance guidelines. The corporate governance guiding principle set out the specific roles, obligations, everyday jobs and rights of the Directors of the National, and of the Directors of controlled entities of the Group. Such guidelines set out the board of director’s expectations of the national bank and directors of national bodies. The guidelines have been specifically adapted for the different types of entities depending on the nature of their business and their activities. The Board may from time to time, set up committees as it deems essential or appropriate to help it in carrying out its everyday jobs. There are number of committees have been established by the board and have adopted agreements setting out the matters relevant to the composition, responsibilities and administration of these committees. These are Principal Board Charter, Principal Board Risk Committee Charter, Principal Board Audit Committee Charter, Committee Charter and, The Nomination Committee Charter (NAB, 2011). Remuneration The board is responsible for the setting out of the payment packages and base this on its assessment of the performance of the group chief executive officer, with due attention to the recommendations of the remuneration committee. The process involves deliberations of the entire Board’s key areas of responsibility, and involves a virtually all inclusive feedback process, including feedback from the directors and senior executives on the performance of the Board. Capital Structure Christian (2010), observers that capital structures is one of the most paramount issues that a firms manager has to deal with in implementing the day to day businesss of the company. He asserts that the Credit Rating-Capital Structure- Hypothesize as the contemporary approach to capital sructure decisions. The hypothesis postulates that the credit rating has a influence on the capital structure decisions as a result of discrete costs or benefits associated with the change. Capital structure is a blend of firm’s long-term and specific short-term debts, common equity, and prefered equity. Capital structure is how a company finances its generation activities of the firm and its growth using various sources of funds (Arkadi, 2010). The following table shows the company’s performance and financial structure for the last three years. 2010 2009 2008 Basic earnings per share (cents) 191.8 123.4 262.7 Cash earnings (from ongoing operation) $4,581m $3,841m $3,916m Dividends paid $1.47 $1.70 $1.92 Share price at the beginning of the year $30.76 $24.26 $39.71 Share price at the end of the year $25.34 $30.76 $24.26 Bsolute TSR for the year 13.3% 34.6% 35.2% Table 1 Three year National Australian Bank perfomance Performance Incentive Scheme National Australian Bank has several performance incentive schemes that are in place to motivate the employees. These include special share for the employees which is priced below the normal share pricing (NAB, 2011). The incentives are important in encouraging employees to be part of the shareholders and thus own the company. Consequently, they will be motivated to work hard towards achieving the objectives of the firm. A firm’s source of capital is from its creditors and owners. Besides, firms also get capital by borrowing, by the issuance of bonds to investors, or the promissory notes to banks (Gallagher & Joseph, 2007). National Australian Bank has several sources of finance that it uses in its day to day operations. These are the sale of its shares listed at the stock exchange market. Besides, there are interests on incomes through the bank, and the sale of company’s premiums. In addition, the company gets income from investment revenues among other sources. For the year 2010, the net interest income was $12, 256m, and for the year 2009, it was $ 12,068m. The net life insurance income for the respective years was $ 813 and $ 357 respectively (NAB, 2011). The Capital Assets Pricing Model Analysis The Capital Assets Pricing Model (CAPM) was developed in 1960s by William Sharpe, John Lintner, and Jan Mossin. Latter, it was promptly adapted by various researchers since it depicted the correlation between the risks of investments and the expected returns on the investment (John, Scott, & William, 2009). Contemporarily, CAPM received some criticism. For instance its accuracy and predictability has come under criticism. However, it has remained popular and in use for quite some time since it came in use (Shannon & Roger, 2010). The table 3 in the appendix shows an excel extract calculation of the risk premium which is calculated by the difference between the market returns and the risk-free rate (CIB, 2011). The regression analysis is summarized in the table 2 below. From the figure, the value of National Australian Bank’s beta is 0.3240. SUMMARY OUTPUT Regression Statistics   Multiple R 0.456 R Square 0.208 Goodness of Fit < 0.80 Adjusted R Square 0.202 Standard Error 0.496 Observations 134 ANOVA   df SS MS F P-value Regression 1 8.52206808 8.52206808 34.58963347 0.000 Residual 132 32.52167987 0.246376363 Total 133 41.04374795       Confidence Level 0.95 0.99   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 99% Upper 99% Intercept -0.047834912 0.042952886 -1.113660026 0.267 -0.132799964 0.03713014 -0.1601 0.064426 X-variable 1 0.324007618 0.055091201 5.88129522 0.000 0.215031779 0.432983458 0.180022 0.467993 Figure 1 Scatter diagram of National Australian Bank and S&P 500 monthly Returns 2000 to 2011. Table 2 Regression of returns for the National Australian Bank The National Australian Bank beta is less than one; which implies that it is best suited for portfolio seeking defensive stocks. The board of directors can advertise the benefits of National Australian Bank stocks to portfolio managers, so that it can get finances to support it operations in various business ventures. Weighted Average Cost of Capital Analysis Every firm has a consortium of sources of capital which might include debts, preferential stock, and common equity. The latter causes the firm’s stock price to be maximised (Scott & Eugene, 2007). WACC is paramount to most firms; since those firms that employ this figure are aware that a higher value of WACC implies that a company must pass through hurdles towards generating shareholders wealth. Besides, when an occurrence beyond the firm’s control result in an increase in WACC; it might imply that its existing assets as well prospective investment opportunities become lowly valued in the capital market (John, Scott, & William, 2009). The Weighted Average Cost of Capital analysis for a firm is given by: WACC = (debt/ (debt + debt))*cost of debt + (equity/ (debt + equity))*cost of equity. Where share = market price *shares issued. The cost of debts frequently defined after taxation of the firm’s debts. However, for the above chosen firm, that is National Australian Bank, some of the information required to calculate WACC are not available, thus it is not easy to tell the value. The National Australian Bank in 2003 took part in de-merger which resulted into the formation of AMP’s which retained 15% ownership, however there has been neither recent merger activities that the firm took part in nor major acquisition of the firm’s shareholding. The Net Present Value is a more complex analysis, and is the replacement decision which must be made by the firm, when it thinks of replacing an older asset with a modern and more efficient one (William, Michael, & Glick, 2009). Net Present Value is a formula for calculating the expected net monetary gain or even financial loss from an investment venture. It is calculated by discounting all the expected cash flow and out flows to the present time (Kathy, 2009). National Australian Bank has a set of board committees that are mandated to carryout various responsibilities. The principal board risk committee charter is responsible for the oversight of the risk profile, and the governance of the national other sub groups of the firm; within its mandate is the determination of the risk appetite. Besides, it makes recommendations to the board; pertaining the risk appetite and certain risks as well as best practices in risk management. In addition, the committee review management’s plans for migration of the material risk faced by the group. References Arkadi, B. (2010). Financial Management: The Role and Importance of Capital Markets and EMH. Norderstedt: GRIN Verlag. Christian, K. (2010). Credit Rating and the Impact on Capital Structure. Norderstedt: GRIN Verlag. CIB. (2011, May 20). Calculating and interpreting Beta. Retrieved May 20, 2011, from Calculating and interpreting Beta: http://docs.google.com/viewer?a=v&q=cache:a8VSKh2o9J0J:www2.cob.ilstu.edu/kjbaue2/fil31/SV.pdf+how+to+calculation+of+CAPM+beta&hl=en&gl=ke&pid=bl&srcid=ADGEESgCsizDJiWeAC9eXoPSs3iUP0NxKIrdDUb9GUEAIPzbJsUGyW2NCJc682cFzwLipHV5eROD1C9A9NFSw7jQdZ3tqgZQlB10 Economic-Research. (2011, May 19). Federal Reserve Bank of St Louis. Retrieved May 19, 2011, from 20 Year treasury constant: http://research.stlouisfed.org/fred2/series/GS20/downloaddata Gallagher, T., & Joseph, A. (2007). Financial Management; Principles and Practice. New York: Freeload Press, Inc. John, G., Scott, B. S., & William, L. M. (2009). Corporate Finance: Linking Theory to What Companies Do. Mason, OH: Cengage Learning. Kathy, S. (2009). Information Technology Project Management. Boston, MA: Cengage Learning. NAB. (2011, May 19). National Australian Bank. Retrieved May 19, 2011, from: http://www.nabgroup.com/0,,32714,00.html Scott, B., & Eugene, F. B. (2007). Essentials Of Managerial Finance. Mason, OH: Cengage Learning. Shannon, P. P., & Roger, J. G. (2010). Cost of Capital: Applications and Examples. Hoboken: John Wiley and Sons. William, N. Z., Michael, J. M., & Glick, N. D. (2009). Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications. San Francisco: John Wiley and Sons. Yahoo-Finance. (2011, May 19). Yahoo finance. Retrieved May 19, 2011, from Yahoo: http://finance.yahoo.com/q/hp?s=^GSPC&a=03&b=1&c=1991&d=03&e=1&f=2011&g=m Appendix Date kNAB kRF kM Risk Premium 4/1/2011 0.060348162 0.059555147 3/1/2011 0.023255814 0.0428 -0.012567623 -0.055367623 2/1/2011 0.554744526 0.04 0.383478991 0.343478991 1/4/2011 0.486075949 0.0442 0.271747082 0.227547082 12/1/2010 0.12793177 0.0428 0.783600864 0.740800864 11/1/2010 -0.598055105 0.0427 -0.027483393 -0.070183393 10/1/2010 0.058631922 0.0382 0.442271293 0.404071293 9/1/2010 1.104490885 0.0352 1.050613248 1.015413248 8/2/2010 -0.921182266 0.0347 -0.569389978 -0.604089978 7/1/2010 0.951705804 0.0352 0.825333993 0.790133993 6/1/2010 -0.310746655 0.0638 -0.64658852 -0.71038852 5/3/2010 -1.444191344 0.0395 -0.983710994 -1.023210994 4/1/2010 0.208574739 0.0411 0.177111926 0.136011926 3/1/2010 0.982866695 0.0453 0.705556411 0.660256411 2/1/2010 -0.425634825 0.0449 0.342164322 0.297264322 1/4/2010 -0.451512801 0.0448 -0.443691149 -0.488491149 12/1/2009 -0.508172363 0.045 0.213247173 0.168247173 11/2/2009 -0.495726496 0.044 0.688367963 0.644367963 10/1/2009 -0.356599862 0.0424 -0.23714383 -0.27954383 9/1/2009 0.963045913 0.0416 0.428680606 0.387080606 8/3/2009 2.044560944 0.0414 0.40272208 0.36132208 7/1/2009 1.011842729 0.0433 0.889701083 0.846401083 6/1/2009 0.225868726 0.0438 0.002350023 -0.041449977 5/1/2009 0.809891808 0.0451 0.63697712 0.59187712 4/1/2009 0.317292438 0.0422 1.127100906 1.084900906 3/2/2009 1.491082045 0.0384 1.024854099 0.986454099 2/2/2009 -0.667040988 0.0378 -1.319174699 -1.356974699 1/1/2009 -1.112582781 0.0383 -1.027888182 -1.066188182 12/1/2008 0.523125997 0.0346 0.093858788 0.059258788 11/3/2008 -1.999113868 0.0318 -0.898188387 -0.929988387 10/1/2008 -0.131463628 0.0427 -2.033094413 -2.075794413 9/1/2008 -0.119739696 0.0445 -1.089497439 -1.133997439 8/1/2008 -0.098106713 0.0432 0.146286039 0.103086039 7/1/2008 -0.813477738 0.0453 -0.1183125 -0.1636125 6/2/2008 -1.841765705 0.0462 -1.03154858 -1.07774858 5/1/2008 0.434904996 0.0474 0.128089839 0.080689839 4/1/2008 0.02538787 0.046 0.570560218 0.524560218 3/3/2008 0.539425203 0.0444 -0.071514997 -0.115914997 2/1/2008 -1.994470046 0.0436 -0.417133945 -0.460733945 1/1/2008 -1.012658228 0.0449 -0.733961699 -0.778861699 12/3/2007 -0.159866778 0.0435 -0.103541866 -0.147041866 11/1/2007 -1.337607891 0.0457 -0.528521086 -0.574221086 10/1/2007 1.024625268 0.0456 0.17786802 0.13226802 9/3/2007 -0.067074794 0.0483 0.429528016 0.381228016 8/1/2007 0.492103076 0.0484 0.154363108 0.105963108 7/2/2007 -0.777403472 0.05 -0.383782885 -0.433782885 6/1/2007 -0.428785607 0.0519 -0.213795717 -0.265695717 5/1/2007 -0.127564895 0.0529 0.390590743 0.337690743 4/2/2007 0.770323599 0.0498 0.519488197 0.469688197 3/1/2007 0.012641559 0.0495 0.119759457 0.070259457 2/1/2007 -0.015781168 0.0481 -0.262153743 -0.310253743 1/1/2007 0.003157064 0.0493 0.168709018 0.119409018 12/1/2006 0.374389582 0.0495 0.151389018 0.101889018 11/1/2006 0.31403118 0.0478 0.197599315 0.149799315 10/2/2006 0.48305821 0.0478 0.378096343 0.330296343 9/1/2006 0.12642669 0.0494 0.294795294 0.245395294 8/1/2006 0.142137992 0.0493 0.25529115 0.20599115 7/3/2006 0.250302297 0.0508 0.061029759 0.010229759 6/1/2006 0.025446834 0.0525 0.001039296 -0.051460704 5/1/2006 -0.80384398 0.0529 -0.371002815 -0.423902815 4/3/2006 -0.030448266 0.0535 0.145867925 0.092367925 3/1/2006 0.333816285 0.0522 0.133150094 0.080950094 2/1/2006 0.994038281 0.0427 0.00543716 -0.03726284 1/2/2006 0.547244094 0.0473 0.305602064 0.258302064 12/1/2005 -0.023575639 0.0465 -0.011428754 -0.057928754 11/1/2005 0.043378245 0.0473 0.422233453 0.374933453 10/3/2005 -0.0157532 0.0483 -0.212888893 -0.261188893 9/1/2005 0.665050225 0.0474 0.08338728 0.03598728 8/1/2005 0.024991322 0.0451 -0.134664312 -0.179764312 7/1/2005 0.190409027 0.0453 0.431618443 0.386318443 6/1/2005 -0.012680521 0.0448 -0.001712128 -0.046512128 5/2/2005 0.943768997 0.0435 0.359424299 0.315924299 4/1/2005 0.342321219 0.0456 -0.241303077 -0.286903077 3/1/2005 -0.189230769 0.0475 -0.229411765 -0.276911765 2/1/2005 -1.841765705 0.0489 0.226840604 0.177940604 1/3/2005 0.336664105 0.0461 -0.303485379 -0.349585379 12/1/2004 0.326885116 0.0477 0.389497538 0.341797538 11/1/2004 -0.089341693 0.0488 0.463139267 0.414339267 10/1/2004 0.571428571 0.0489 0.16817097 0.11927097 9/1/2004 0.149625935 0.0485 0.112366877 0.063866877 8/2/2004 -0.009966777 0.0489 0.02744799 -0.02145201 7/1/2004 -1.273942094 0.0507 -0.411486273 -0.462186273 6/1/2004 -0.140865737 0.0524 0.215868937 0.163468937 5/3/2004 0.293122886 0.0545 0.145001355 0.090501355 4/1/2004 -0.591639871 0.0546 -0.201489953 -0.256089953 3/1/2004 0.038709677 0.0516 -0.19630723 -0.24790723 2/2/2004 0.134831461 0.0472 0.146508359 0.099308359 1/1/2004 0.24408284 0.0494 0.207317073 0.157917073 12/1/2003 0.427422444 0.0501 0.609185409 0.559085409 11/3/2003 -0.656046343 0.0511 0.085542157 0.034442157 10/1/2003 -0.081984898 0.0517 0.659537938 0.607837938 9/1/2003 -0.111150695 0.0521 -0.143331911 -0.195431911 8/1/2003 -0.57394844 0.0521 0.214478295 0.162378295 7/1/2003 -0.301587302 0.0539 0.194684454 0.140784454 6/2/2003 0.144578313 0.0492 0.135866914 0.086666914 5/1/2003 0.220858896 0.0434 0.610783929 0.567383929 4/1/2003 0.208044383 0.0452 0.972529416 0.927329416 3/3/2003 1.264852434 0.0491 0.100291268 0.051191268 2/3/2003 -1.060796646 0.0482 -0.204043473 -0.252243473 1/1/2003 -0.016748081 0.0487 -0.328976382 -0.377676382 12/2/2002 -0.369293203 0.0502 -0.723990986 -0.774190986 11/1/2002 -0.53875969 0.0501 0.684835621 0.634735621 10/1/2002 0.318302387 0.0504 1.037385929 0.986985929 9/2/2002 -0.403716757 0.05 -1.320292117 -1.370292117 8/1/2002 0.442524917 0.0487 0.058577039 0.009877039 7/1/2002 -0.673565381 0.0519 -0.948051161 -0.999951161 6/3/2002 -0.257747775 0.0551 -0.869464175 -0.924564175 5/1/2002 0.49456869 0.0565 -0.108977454 -0.165477454 4/1/2002 0.202729045 0.0581 -0.737011827 -0.795111827 3/1/2002 -0.543424318 0.0585 0.440866336 0.382366336 2/1/2002 0.610169492 0.0593 -0.249194833 -0.308494833 1/1/2002 0.827874564 0.0561 -0.186885931 -0.242985931 12/3/2001 0.105448155 0.0569 0.090885954 0.033985954 11/1/2001 0.663204748 0.0576 0.902111759 0.844511759 10/1/2001 2.245706737 0.0533 0.217188311 0.163888311 9/3/2001 -2.692622951 0.0534 -0.980680675 -1.034080675 8/1/2001 0.302521008 0.0553 -0.769300628 -0.824600628 7/2/2001 -0.912326108 0.0558 -0.128881556 -0.184681556 6/1/2001 1.218816821 0.0575 -0.30042522 -0.35792522 5/1/2001 0.940814758 0.0582 0.061082388 0.002882388 4/2/2001 0.625960372 0.0592 0.823317505 0.764117505 3/1/2001 -0.594926979 0.0578 -0.770456635 -0.828256635 2/1/2001 0.249509612 0.0549 -1.107488232 -1.162388232 1/1/2001 0.279405861 0.0562 0.415639107 0.359439107 12/1/2000 -0.409461031 0.0565 0.048640633 -0.007859367 11/1/2000 1.657546337 0.0564 0.059555147 0.003155147 10/2/2000 0.606397775 0.0598 -0.059393948 -0.119193948 9/1/2000 0.05027933 0.0604 -0.641795372 -0.702195372 8/1/2000 0.309455587 0.0609 0.728388418 0.667488418 7/3/2000 -1.348028826 0.0602 -0.196095146 -0.256295146 6/1/2000 1.117701576 0.062 0.28720259 0.22520259 5/1/2000 1.348453608 0.0628 -0.262979971 -0.325779971 4/3/2000 1.295259852 0.0655 -0.369549841 -0.435049841 3/1/2000 -0.122102883 0.0618 1.160638749 1.098838749 2/1/2000 -0.23933518 0.0638 -0.241297707 -0.305097707 1/4/2000 0.0654 -0.610842266 -0.676242266 0.0686 Table 3 The above data was collected from (Yahoo-Finance, 2011) and (Ecoonomic-Research, 2011) Read More