ANZ Banking Group Analysis - Assignment Example

Executive Summary This report looks at ANZ banking group which is listed on the Australian Securities Exchange as a potential investment opportunity. The report starts with a brief description of the company as well as the reason why it has been considered as an investment option. The company’s performance as well as the current CEO and his remuneration is also analyzed. The report then considers a hypothetical $500 worth of ANZ shares investment bought to track the market value of the bank as well as that of ASX 200 over the period beginning 6th March to 6th May 2017. The price data is then presented in a graph to show the trend of how the company’s share price has been performing in comparison to ASX 200. News and current affairs over the period are also analyzed in an attempt to explain the shares performance while forecasting how they are likely to perform in future. The result of the two months investment has been a loss in vale and hence the report’s recommendation to sell the share to prevent further loss in value since the share price is expected to fall further. The report also uses the bank’s financial statements to analyze its performance using financial ratios analysis. The results of the analysis serve to strengthen the recommendation that the hypothetical investment should be sold owing to declining profitability and the general shunning of banks shares by investors that has caused a decline in the ASX 200 value. Table of Contents Executive Summary 1 Table of Contents 2 Introduction 3 The Purpose 3 The Scope 3 Methodology 3  Why did you choose this company? 4  What do you know about the company and its business? 4 Chief Executive Officer 4 Latest Dividend paid 5 Share Prices 5 Analysis of performance 7 Gain/Loss Analysis 7 Recommendations 8 Key Financial Data 8 Financial Ratio Analysis 8 Ratio analysis 9 Profitability 9 Efficiency 10 Liquidity 10 Capital Structure Ratios 11 Conclusion 11 References: 12 Appendices: 14 Appendix 1: ANZ Income Statement 14 Appendix 2: ANZ Balance Sheet 15 Appendix 3: CBA Income Statements 16 Appendix 4: CBA Balance Sheet 17 Introduction The Purpose This report aims at making recommendation on whether to hold, buy or sell the ANZ banking group share. This is done by following the Australian Securities Exchange 200 (ASX 200) for a tracking period that starts on 6th March to 5th May 2017 while particular attention is paid to ANZ and any correlation between ASX 200 and ANZ price figures. By so doing, one is able to discern the cause of the market move whether from global events, currency or news that affect the company. At the end of the tracking period, ANZ’s financial performance is analyzed on the basis of the figures that have been presented in its financial statements and thus one is able to determine whether the investment made at the start of the tracking period was a success or not and hence be able to make an informed decision on whether to continue holding the investment, make more investment or sell the investment. The Scope The scope of this report was limited to making a hypothetical $5,000 worth of shares investment in a company listed on the ASX. The limitation was that of choosing one company from a number of sectors including resource, consumer, health care, communication or financial sector. A hypothetical investment was made into the company and the movement of the company’s share was tracked over the tracking period and significant movements in the investment were taken note of. Methodology The information contained in this report has been majorly sourced from secondary sources of data through the internet. However, limited information has been obtained through primary sources by talking to acquaintances who are share market experts. The report contains both quantitative and qualitative data concerning ANZ banking group. COMPANY NAME SHARE PRICE On Monday of week beginning Week 3 Monday 6th March NO. OF SHARES TOTAL INVESTMENT $ (cannot exceed $5,000) Australia and New Zealand Banking Group Opening: 31.14 Closing: 31.23 160 $4996.80  Why did you choose this company?  What do you know about the company and its business? I choose this company because it’s one of the biggest Australian banking system registered in stock exchange. Financial institutions are large by capitalization and their data annual report, shareholders, share market annual reports are easily available on their site. As well as finance is my course of intention so this research on ANZ will be very helpful for me in future. ANZ Bank is the fourth largest bank in Australia by capitalization and operates in 32 countries globally, founded on 2 March, 1835. It has more than 8 million customers global who are assisted by the network of 4100 ATMs and 1300 branches. ANZ provides you with financial product assistance or sells you a financial product (anz.com, 2017). It provides Financing, Investing, transaction services, risk management, Insurance and International services. ANZ has a total revenue of A$ 21.071 billion (2015). Chief Executive Officer The new company chief executive is Shayne Elliot as per the 2016 annual report. The CEO received a total compensation of $1,550,000 which comprised of cash and shares (Appendix 5). Latest Dividend paid The last dividend per share paid by the bank was 80 cents and this was paid on 16th December 2016 (Appendix 6). Share Prices The company’s shares had the lowest prices on 6th July 2016 when the price was $22.96. On the other hand, the highest price was on 1st may when the price was $32.950 (Appendix 7). Tracking period NB// The data related to the ANZ and ASX 200 share price performance as well as the associated graphs are contained in the attached excel document. The performance of ANZ share price during the tracking period that lasted from 6th March 2017 to 5th May 2017 has been depicted in the graph below (Nz.finance.yahoo.com, 2017); Daily movement of ANZ share prices from 6th March to 5th May 2017 Price Date The graph below shows the behaviour of the ASX 200 share prices over the period between 6th March 2017 and 5th May 2017 (marketindex.com.au, 2017). Price Date The graph below compares the performance of ANZ shares and the average share price of ASX 200 between 6th March 2017 and 5th May 2015. Price Date Analysis of performance From the graph above, it is clear that the ANZ share has been unstable as far as its price is concerned for the tracking period. The share started on a low price of $31.23 on 6th March and rose to a high of $32.05 on 15th March before declining again to a low of $30.76 on 22nd March 2017. The share price then lose to a high of $32.30 on 29th March but lost ground to a low of $31.36 on 6th April 2017 before rising again to a high of 32.13 on 12th March 2017. The price then rose again to its highest point of $32.95 on 1st May 2017. However, the share price has now fallen to its lowest point to reach $30.65 on 5th May 2017 (ddividend.net.au, 2017). When the company’s share price is compared to that of ASX 200, there is a high level of correlation that is observed. For instance, both the company and the ASX 200 attain a low on 22nd March as shown on the graphs above while attaining a high on 30th March. Again, both ANZ and ASX 200 have attained a high on 12th April and another low on 19th April. By 5th May 2017, both the company and ASX 200 have their share prices declining towards their lowest. Thus, it is worth concluding that ANZ’s performance is in line with the ASX 200 performance although there might be minor differences that may be attributed to factors that are specific to the company (wsj.com, 2017). It is worth noting that the reason for the recent decline in the ASX 200 is because investors have been avoiding banks shares and hence ANZ shares are expected to fall further. Gain/Loss Analysis Share buying price on 6th March 2017 $31.23 Total investment $4996.80 Closing price on 5th May 2017 $30.65 Investment value on 5th May 2017 $4904 Loss in value = $4,996.80- $4,904 $92.80 Recommendations From analyzing the company shares’ performance during the tracking period, the share price is observed to be the highest on 1st May before losing ground to its lowest by 5th May. What is more, the rate of decline is more than that of ASX 200. On 6th March 2017, I invested $4,996.80 to buy 146 shares. By 5th May 2017, the shares are now worth $4,904 and hence I have lost $92.80. It is clear that the share has been one of the best performer on the ASX 200 and has outperformed the market average. However, I think the current share prices are only likely to continue falling since I think the price is overrated. As such, I would recommend a sale of the shares to prevent accumulating more losses as the share price continues to fall (Mickleboro, 2017). Key Financial Data ANZ selected financial data for 2015 and 2016. Data is obtained from ANZ financial statements and in the appendices below (Appendix 1& 2) 2016 2015 Revenue/Sales $35,385,000 $37,000,000 Interest expense 14,856,000 15,910,000 EBIT (Earnings before interest and income tax) 23,034,000 26,443,000 Net profit before tax 8,178,000 10,533,000 Net profit after tax 5,720,000 7,507,000 Current assets 161,398,000 148,433,000 Total assets 914,869,000 889,900,000 Current liabilities 60,365,000 61,649,000 Total liabilities 856,942,000 832,547,000 Total Equity 57,927,000 57,353,000 Financial Ratio Analysis ANZ financial analysis for 2015 and 2016. Data is obtained from ANZ financial statements and in the appendices below Ratio Formula 2016 2015 Profitability Ratios Gross Margin Net Margin Gross profit/Revenue Net Profit/Revenue $20,529/35,385 =58.02% $5,720/35,385 = 16.16% 21,090/37,000 =57% 7,507/37,000 =20.29% Activity Ratios Total Asset Turnover Revenue/Total Assets 35,385/914,869 = 3.87% 37,000/889,900 =4.16% Liquidity Ratios Current Ratio Current Assets/Current Liabilities 161,398/60,365 = 2.67 148,433/61,649 = 2.41 CapitalStructure Ratios Debt to Equity Ratio Debt Ratio Equity Ratio Total Debt/Total Equity Total Debt/Total Assets TotalEquity/TotalAssets 856,942/57,927 = 14.73 856,942/914,869=93.67% 57,927/914,869 = 6.33% 832,547/57,353= 14.52 832,547/889,900= 93.56% 57,353/889,900 = 6.44% Assumptions: Revenue is total income for the bank from various sources Gross profit is total income less interest expense Ratio analysis Profitability The company’s profitability ratio measures the percentage of sales or interest revenue in this case that is generated as profit to the bank after deducting various expenses. In other words, this is the company’s net profit rate and hence the amount that the company makes out of profit out of every dollar of revenue. This can be increased through increased sales and declining related expenses. The company’s profitability in comparison to its competitor CBA is shown below; ANZ 2015 ANZ 2016 CBA 2015 CBA 2016 Profitability Ratios Net profit margin 20.29% 16.16% 21.63% 22.56% The company’s profitability greatly declined from 20.29% in 2015 to 16.16% in 2016. This does not compare well with other its competitor CBA whose net profit margin increased over the same period. The decline is bad for investors as it may lead to returns declining and the shares losing their value (Appendix 1and Appendix 3). Efficiency These ratios look at how the company is in using its assets to generate income and hence returns for investors. A higher ratio is more desirable as it means that the company is more efficient. ANZ 2015 ANZ 2016 CBA 2015 CBA 2016 Efficiency ratios Total Assets Turnover 4.16% 3.87% 1.04% 0.99% The efficiency with which the company uses its assets in generating profit as depicted by total assets turnover has also declined from 4.16% in 2015 to 3.87% in 2016. ANZ has however performed much better than its competitor CBA as shown above. The declining performance though not common to the bank is not desirable since it could have caused the declining profitability and hence the returns on investment. Liquidity The organization’s liquidity ratio is a representation of its ability to pay its short term and long-term obligations falling due within the current financial period. The ratio is arrived at by dividing the company’s current assets with its current liabilities. ANZ Liquidity analysis for 2015 and 2016 and comparison to its competitor CBA ANZ 2015 ANZ 2016 CBA 2015 CBA 2016 Liquidity Ratio Current Ratio 2.41 2.67 2.61 2.91 The company’s liquidity greatly improved as seen in its current ratio which increased from 2.41 in 2015 to 2.67 in 2016. This trend was also observed for the company’s competitor CBA. This is desirable since it means that the bank’s liquidity risk is on the decline meaning that the bank’s normal operations are not at increased risk. Capital Structure Ratios Capital structure ratios give an indication of how the company has used the mixture of debt and equity in financing its assets. In this regard, it attempts to show what proportion of total assets was financed by debt. It thus gives an indication of the company’s leverage risk. The company’s capital structure ratios presented below show that a large proportion of the bank’s assets as well as those of its competitors are financed through debt. ANZ 2015 ANZ 2016 CBA 2015 CBA 2016 Capital structure ratios Debt to Equity Ratio Debt Ratio Equity Ratio 14.52 times 93.56% 6.44% 14.73 Times 93.67% 6.33% 15.48 times 93.93% 6.06% 14.36 times 93.49% 6.51% There was a slight improvement on the company’s capital structure as far as debt composition is concerned meaning that the company’s leverage and hence risk of takeover slightly declined. This is seen in the company’s debt to equity ratio which increased to 14.73 times in 2016 from 14.52 times in 2016. While this is comparable to how the company’s competitors performed, the ratio may be too high and may expose the company to leverage risk. Similarly, the company’s debt ratio slightly improved from 93.56% in 2015 to 93.67% in 2017 while the debt ratio also slightly improved from 6.44% in 2015 to 6.33% in 2016. This is comparable to the bank’s competitor’s performance and has resulted from the increased proportion of equity for the company as compared to the debt proportion. Conclusion The analysis above has revealed that the bank’s profitability has declined over the two years while its leverage and liquidity have improved. On the other hand, its efficiency is noted to have declined. In addition, the company’s share prices are noted to be declining as stated above. This is probably because of the declining profitability and given that investors are interested in good returns and hence profitability, the company’s share price is likely to decline even further. Thus, this is not a share I would recommend a buy but I would adopt a wait and see approach and probably invest in it at its lowest so that I can gain when the company’s performance and hence share price improves. References: anz.com, 2017, ANZ 2016 Annual Report, Retrieved on 19th May 2017, from; https://www.shareholder.anz.com/annual-report-and-shareholder-review Nz.finance.yahoo.com, 2017, Australia and New Zealand Banking Group Limited (ANZ.AX), Retrieved on 19th May 2017, from; https://nz.finance.yahoo.com/quote/ANZ.AX/history?ltr=1 marketindex.com.au, 2017, Australia and New Zealand Banking Group Limited (ANZ), Retrieved on 19th May 2017, from; http://www.marketindex.com.au/asx/anz wsj.com,2017, Australia $ New Zealand Banking Group Ltd, Retrieved on 19th May 2017, from; http://quotes.wsj.com/AU/XASX/ANZ ddividend.net.au, 2017, ANZ Bank share price rebound? Nothing falls forever, Retrieved on 19th May 2017, from; http://dividend.net.au/anz/ Mickleboro, J2017, The Australian and New Zealand Banking Group share price just hit a 52- week high: Time to sell? Retrieved on 19th, May 2017, from; http://www.fool.com.au/2017/04/27/the-australia-and-new-zealand-banking-group- share-price-just-hit-a-52-week-high-time-to-sell/ Appendices: Appendix 1: ANZ Income Statement (ANZ Annual Report, 2016, pp. 62) Appendix 2: ANZ Balance Sheet (ANZ Annual Report, 2016, pp. 63) Appendix 3: CBA Income Statements (CBA Annual Report, 2016, pp. 75) Appendix 4: CBA Balance Sheet (CBA Annual Report, 2016, pp. 76) Appendix 5: CEO’s remuneration Appendix6: Dividends paid Appendix 7: Closing share prices since March 6th 2017 Read More