Comparison of the Performance of Australian Banks with World Rivals - Example

Assessment Name Name of Institution Assessment The Parameters used to Rank the Relative Performance of the Top 1000 Banks and the Information they convey The Banker’s 2015 ranking of banks provides a wealth of information for the entire banking sector. The global financial crisis provided a critical example of the need to monitor the soundness of the financial sector as a whole. The crisis spurred improvements in the methodologies use to evaluate the performance of banks and other financial organizations. This is evident from the fact that nearly 66% of the top 1000 banks complied with a new reporting standard that is referred to as Basel III (The Banker 2015b). When it comes to the key findings from The Banker’s 2015 report, evidence suggests that Chinese Banks are taking an increasingly dominant position with the report showing that 117 out of the top 1000 banks were Chinese. Three out of the top five banks in the overall global ranking were Chinese. Additionally, the top four banks in China also recorded the biggest profits in the world (The Banker Database 2015). The dominance of the Chinese banks points to a trend where the most successful banks are not necessarily the ones that have a global footprint. This essay will focus on the parameters that were used by The Banker to determine the relative performance of the top 1000 banks. The first and most important parameter that was used in the ranking of the top global banks was Tier 1 capital. As stated, banks are always exposed to the risk of insolvency in cases where they take on too much debt. The Tier 1 Capital is a measure that has been developed by regulators of the financial industry with the aim of measuring the financial strength of banks. The parameter is composed of capital in the form of common stock as well as the reserves that have been disclosed. Additionally, firms can also list their preferred stock as part of the Tier 1 Capital (Graham & Carmichael 2012, p. 17). The emphasis given to Tier 1 capital in The Banker’s latest report confirms the importance of having a measure that can indicate whether a bank is in a strong position or exposed to insolvency. Businesses typically seek to achieve a number of objectives. When it comes to the banking sector, one of the most critical objectives is creating returns. An evaluation of The Banker’s ranking shows that profitability is one of the key parameters for measuring the performance of banks. This is done through determining the pre-tax profits, return on capital, and return on assets. It is an acceptable fact that different regions of the world have different tax regimes. Therefore, it is essential to determine the profits made by firms before these taxes are enforced. In general terms, the pre-tax profit provides a way to evaluate the direction of a firm. The return on capital and return on assets are other key parameter that is utilized to measure profitability in The Banker’s ranking of global banks. These parameter measures how effective the bank is at using its capital or assets to generate profits. A bank should always be able to satisfy its short-term and long term obligations. For instance, a bank should always be able to process large withdrawals. Liquidity is one of the parameters included in the ranking of the top banks in the world. It indicates the capability and ease with which a financial institution can convert assets to cash. The banks listed in the Banker’s top 1000 list serve some of the biggest corporations and governments in the world. This means that they cannot always have sufficient cash to serve these big businesses and governments. These banks opt to borrow funds on a short-term basis to meet emerging obligations. It is obvious that a bank that can get massive amounts of cash with ease has a good credit worthiness. Therefore, an evaluation of a bank’s liquidity enables regulators to check that a bank manages its assets and liabilities in the correct manner. The loans to deposits ratio and leverage ratio provide a way to measure the liquidity of a bank. In addition to capital, profitability, and liquidity, The Banker Top 1000 rankings also rates banks by their income. Banks typical get their incomes from a myriad of sources. As stated, large banks have to borrow funds to meet short-term obligations. These borrowings come with interests that are typically offset by the higher rates charged to bank clients. Therefore, one of the important sources of income for banks is the difference between the interest paid and the interest earned. This income is referred to as the net interest income. The Banker also utilizes the net fee and commissions income to rank the performance of global banks. Other similar parameters include total operating income and net trading income. An evaluation of the composition a bank’s income provides a clear picture of the risks it is exposed to. One of the emerging trends from the 2015 ranking is the desire by banks to keep expenses at the lowest possible levels. The rise of the Chinese Banks has demonstrated that banks do not have to have global operations or expand to all sectors of the financial industry. Banks in the Western world have resorted to reducing staff numbers in a bid to keep costs at the lowest possible levels. According to The Banker Database (2015), HSBC has reduced staff by 8% respectively since 2011, with the 8% representing a lot of job losses owing to the size of the workforce. In contrast, the leading Chinese Banks like ICBC have increased the number of employees by 13% in the same period. Importantly, this increase is matched by a growth in asset size and profitability. Sberbank, the top Russian lender, increased staff numbers by 63,413, but the bank will need to stop hiring due to non-performing assets and profit deteriorations. This leads to the conclusion that the financial strength of a bank is directly related to the trend in staff numbers. Therefore, the inclusion of staff costs in the 2015 ranking is meant to offer an indication of the financial strength of the leading banks. As stated, one of the major sources of income for banks is the interest from the money they loan out. Therefore, growth in lending is critical for banks that are competing on the global stage. In this case, total lending comprises of credit card loans, mortgages, commercial loans, and retail consumer loans. The Banker has used lending as one of the key parameters in the analysis of the relative performance of banks. In general, a rise in lending points to businesses and individuals who are confident that they will be able to repay the loans. On the other hand, a drop in the amount of loans offered by a bank shows that it is operating in an unfavorable environment. Data on the total lending by a bank is thus critical in assessing the general state of the economy in which the bank operates. In turn, the state of the economy can facilitate realistic predictions of the future performance of the bank. As in the case of lending, banks also need sufficient amounts of deposits. Although banks have evolved to handle numerous tasks, their primary role is to collect money in the form of deposits, pool the money, and lend the money. The system works since most depositors do not need their money at any given time. Additionally, deposits ensure that banks can access funds at low costs. This improves the profitability of banks as they might not be forced to borrow from other financial institutions to meet short-term obligations. Therefore, the inclusion of deposits in The Banker’s ranking is meant to provide an indication of the profitability of a bank. Comparison of the Performance of Australian Banks with World Rivals Chinese banks are gaining ground on the world’s biggest banks. This growth should have a direct impact on the wellbeing of Australian banks given their proximity. While the Chinese banks have limited their presence in foreign markets, they have a high level of involvement in Australia. One of the reasons for this presence is the fact that China has risen to become one of the largest market for international tourists. According to The Banker (2015a), Australian banks have maintained their position in the Asia-Pacific region when Japan and China are excluded. In fact, the top four banks in the region are Australian. These are the Commonwealth Bank Group, National Australia Bank, ANZ Banking Group, and Westpac Banking Corporation respectively. When it comes to parameters, the four major Australian banks have been ranked according to Tier 1 Capital. Commonwealth Bank Group is ranked 45th in the world with a Tier 1 Capital base of approximately $35 billion. National Australia Bank, ANZ Banking Group and Westpac Banking Corporation had $34 billion, $33 billion, and $30 billion in Tier 1 Capital respectively. In contrast, the largest bank in China, ICBC, has $248 billion in Tier 1 capital. The top Australian bank would be ranked in the eleventh position in China. JP Morgan and HSBC Holdings are other global rivals of the top Australian banks whose Tier 1 Capital was $186 billion and $152 billion respectively. It is evident from this data that the Australian banks lag far behind competitors from China, the US, and the UK. On the other hand, the top three Australian banks registered profits of between $7-11 billion, which was less than the pre-tax profits of the top banks in the UK, US, and China. Performance of Australian Banks from the Credit Risk Perspective and Implications of the Credit Risk Exposure Credit risk defines the probability that a borrower will fail to honor the set terms and conditions. Given that the main task of banks is lending, credit risk poses the greatest risk to banks. The risk is further worsened by the presence of complex financial instruments. An evaluation of The Banker’s ranking of the top 1000 banks in the world shows that the loans to assets ratio is one of the key parameters used in the ranking. The ratio measures the degree to which a firm is leveraged and exposed to risk. The presence of a high loans to assets ratio would indicate that a bank has issued excessive loans thereby increasing the probability that huge sums might be unpaid in case of a sudden financial crisis. A comparison of the loan to asset ratios of Australian banks and some of the top 10 banks shows that Australian banks are aggressive when it comes to the issuance of loans. The ratio for the top ten leading banks ranges from 31-64% while that of the top three Australian banks ranges from 69-74% (The Banker Database 2015). When it comes to non-performing loans, Australian banks perform better than the global rivals. The implication from the credit risk perspective is that the probability of borrowers failing to repay their loans is very low in Australia. However, the entire global banking industry is exposed to high credit risk should there be a financial crisis. References Basel III starts to dominate Top 1000 rankings, 2015b, The Banker, viewed 7 September 2015 Carmichael, DR & Graham L, 2012, Accountants' Handbook: Special Industries and Special Topics, John Wiley & Sons Inc., Hoboken. Top 1000 Banks 2015 – Asia, 2015a, The Banker, viewed 7 September 2015 Top 1000 Banks 2015, 2015, The Banker Database, viewed 7 September 2015 < http://www.thebankerdatabase.com/index.cfm/rankings/> Read More