Westpac Bank Assessment - Essay Example

Running Header: Westpac Bank Westpac Bank Course Name Professor’s Name Institutional Affiliation City and State Where Institution is Located Date Executive Summary This report looks at the performance of Westpac bank shares with an intention of making a recommendation on whether to buy, sell or hold a $500 hypothetical investment in the company based on the performance of the shares during the tracking period that starts on 6th March and ends on 5th May 2017. The share performance is compared to ASX 200 performance as well as news and company’s internal information in a bid to make informed decision concerning the investment. The report also analyzes the company’s financial performance over the last two years using the financial ratio analysis and based on the trend observed as well as the share price, a recommendation to sell the shares in a bid to prevent further losses is made. Table of Contents Introduction 4 Purpose of the report 4 The scope of the report 4 Methodology 4 Company Research/Graphs/ Investor information 4 Why I have Chosen Westpac Bank 4 What I know about the company and its business 5 Products and services provided by the bank 5 Chief executive officer 5 Latest Dividend paid 6 Tracking period 6 Analysis of performance 8 Gain/Loss Analysis 9 Recommendations: 10 Key Financial Data 11 Calculation of financial ratios 11 PROFITABILITY 11 ACTIVITY RATIOS 12 LIQUIDITY RATIOS 12 CAPITAL STRUCTURE RATIOS 12 Conclusion 13 References: 14 Introduction Purpose of the report The purpose of the report is to advise on whether it is prudent to buy, sell or hold Westpac bank shares. In so doing, a hypothetical investment of 146 shares is made on 6th March 2017 and is observed during the tracking period that ends on 5th May 2017. The shares performance is compared with that of ASX 200 during the same period that is obtained from the ASX website. In order to make a good decision, news and investments experts’ views are taken in to consideration. In addition, the report performs a ratio analysis on the various aspects of the company’s financial performance during the last two years with an intention of basing the decision made on this. It is on the basis of this information that the decision concerning investing in Westpac shares is made. The scope of the report This report limits itself to making a decision concerning whether to buy, sell, or hold share investments in Westpac bank purely on the basis of the 146 hypothetical share investment made into the company. The decision is made on the basis of the whether the investment achieves a loss or a profit, the basis of past financial performance of the company as revealed by the financial ratio analysis and the information gathered from news and the expert opinions obtained online. Methodology The data used in this report was obtained from the internet which is a secondary source where various websites were accessed to obtain information on share prices during the tracking period. After the information was obtained, graphs were plotted on its basis and analyzed. Qualitative data was also obtained from news and expert opinions. Other quantitative data used include the financial statements information that was used to analyze the company’s financial performance. As such, the recommendations contained in this report are based on the various forms of quantitative and qualitative data obtained. Company Research/Graphs/ Investor information Why I have Chosen Westpac Bank I have chosen Westpac Bank. Westpac Banking Corporation also referred to as Westpac is an Australian Bank and financial services provider that has its headquarters in Westpac place. The bank is one of Australia’s big four banks. Its name is a portmanteau of western-pacific. Westpac has a long and proud history as Australia’s first and oldest bank. The bank also delivers a broad range of financial services to commercial, corporate, institutional and governmental customers. As such, I choose this bank since I consider it an attractive investment option. What I know about the company and its business The bank was established in 1987 as the bank of New South West under a charter of incorporation provided by governor Lachlan Macquarie. In October 1982, it changed its name to Westpac Banking Corporation following the acquisition of the Commercial Bank of Australia. As of November 2015, Westpac has 13.1 million customers and is Australia’s largest bank by branch network with 1429 branches and a network of 3850 ATMs. The first employee of the bank was Joseph Hyde Potts. As a porter and servant, he received weekly ration from the King’s stores and an annual salary of 29 pounds. Products and services provided by the bank As stated above, the bank also delivers a broad range of financial services to commercial, corporate, institutional and governmental customers. Chief executive officer The name of the banks Chief Executive Officer as per the 2016 annual report is Brian Hartzer. In 2016, the CEO received a total cash payments of $4,114,112. His total remuneration including share rights, options, restricted shares, long service leave, superannuation benefits, non-monetary benefits, STI cash and fixed remuneration amounted to $6,752,017 (Westpac, 2017). Latest Dividend paid The latest dividend paid by the bank was 94b cents which was paid on 30th September 2015. The lowest price of shares recorded by the company was 28.20 on 6th July 2016 while the highest price was recorded on 1st May at 35.30dollars (sharedividends.com.au, 2017). Tracking period The data relating to the shares’ performance during the tracking period is contained in the attached excel sheet. The graph below shows the trend of how the shares performed during the tracking period that lasted between 6th March 2017 to 5th May 2017. The ASX 200 price data is shown in the attached excel sheet with the associated graph showing the ASX 200 performance trend shown below (smh.com.au, 2017) Analysis of performance As can be seen from the graph above, the company’s share price performance has not been stable. The price has ranged from a low of $33.44 on 23rd March 2017 to a high of $35.50 on 1st May 2017. The share’s buying price was on 6th March was $34.17. The price sharply rose to $35.13 on 10th March 2017 before sharply declining to $34.44 on 23rd March 2017. Again, the price sharply rises to $35.26 on 30th March 2017 before declining again to $34.11 on 19th April 2017. Again, the price rises sharply to its highest during the period to $35.50 on 1st May 2017. The price has since declined to its current level of $33.86 on 5th May 2016. A look at the ASX 200 graph reveals some level of correlation between Westpac share prices and the ASX 200 prices. Both graphs depict price instability. Although at the beginning there is little correlation, it worth noting that the index is at its lowest on 23rd March 2017 with Westpac share prices falling to their lowest on 23rd March 2017. Both Westpac shares and ASX 200 shares rise again to a maximum on 30th March and on 12th and 11th April respectively before again declining to a lowest point on 19th April. Again, Westpac shares and ASX 200 shares are at their maximum on 1st and 2nd May respectively before declining to their current low points on 5th May 2017. Thus, the company’s performance is similar to that of ASX 200 with the minor differences being caused by internal factors such as announcement of half year results that are lower than expectation. Gain/Loss Analysis The gain or loss made on the portfolio during the tracking period is calculated below (Google.comfinance, 2017); Share price on 6th March 2017 =$34.17 Number of shares purchased on 6th March 2017 = $146 Total investment = $4,988.82 Share price on 5th May 2017 = 33.86 Number shares holding = 146 Market value of 146 shares = 146* 33.86 = $4,943.56 Profit or loss on 5th May 2017 = $4,943.56- $4,988.82 = -$45.26 Recommendations: As can be observed above, the value of the company’s shares has fluctuated up and down during the tracking period. This has also affected the value of the investment made. When making the investment of 146 shares on 6th March 2017, the investment was worth $4988.82. However, it has since lost $45.26 to be worth $4,943.56 on 5th May 2017. A number of factors are attributed to the decline in value. One reason is the fact that the company in April became the target of the financial regulator the Australian Securities and Investment Commission (ASIC) after the bank was alleged to be manipulating the bank bill swap rate. Secondly, investors are concerned about the bank’s bad debts with such companies as Arrium Ltd owing the bank more than $2billion being on the brink of administration. In addition, Mickleboro (2017) thinks that the shares might be overvalued and hence they might even be expected to fall even further since the current high price carries with it a lot of risk. Thus, I think that the shares are likely to fall even further in future. Thus, holding them for a longer period would result in the investment continuing to lose its value. On the other hand, I cannot recommend buying of more shares given the fact that the current investment has already lost some value while share price might even fall further. As such, I would recommend selling the shares to caution oneself against further loss in value (King, 2017). Key Financial Data The key financial data for the company is presented below; Data Type Amount ($000) 2016 2015 Revenue/Sales 37,659 39,670 Interest expense 16,674 18,028 EBIT (Earnings before interest and income tax) 27,318 29,444 Net profit before tax 10,644 11,416 Net profit after tax 7,460 8,068 Current assets 156,598 156,122 Total assets 839,202 812,156 Current liabilities 37,127 41,544 Total liabilities 781,021 758,241 Total Equity 58,181 53,915 Calculation of financial ratios Gross profit Margin- In this case, it is assumed that gross income is the bank’s net operating income before operating expenses and impairment charges. Thus, PROFITABILITY Gross profit margin = Gross profit/sales revenue 2016 = (20,985/31,822)* 100% = 65.94% 2015= (21,642/32,295)* 100% = 67.01% Net Profit Margin = Net profit after tax/ Sales revenue 2016 = ($7,460/31,822)*100% = 23.44% 2015 = (8,068/32,295)*100% = 24.98% From the above ratios, it is clear that the bank’s profitability slightly declined in 2016 compared to 2015 with net profit margin declining from 24.98% in 2015 to 23.44% in 2016. This is not good news for investors as it implies declining returns. ACTIVITY RATIOS Total assets turnover =Revenue/total assets 2016 = 37,659/839,202 = 4.49% 2015 = 39,670/812,156 = 4.88% The bank’s efficiency slightly declined in 2016 compared to 2015 as indicated by its total assets turnover ratio. The bank’s total assets turnover ratio slightly declined from 4.88% in 2015 to 4.49% in 2016 implying that the efficiency at which the bank uses its assets to generate profit slightly declined in 2016 as indicated by declining profits. LIQUIDITY RATIOS Current Ratio =Current assets/Current Liabilities 2016 = 156,598/37,127 = 4.21 2015 = 156,122/41,544 = 3.76 It is worth noting that the bank has not differentiated its current assets from its total assets. However, the bank’s current ratio improved from 3.76 in 2015 to 4.21 in 2016. This means that declining liquidity risk for the bank. CAPITAL STRUCTURE RATIOS Debt to Equity Ratio = Total Liabilities/ Total Equity 2016 = 781,021/ 58,181 = 13.42 2015 = 758,241/53,915 = 14.06 Equity Ratio = Total Equity/Total Assets *100 2016 = 58,181/839,202 *100 = 6.93% 2015 = 53,915/812,156 *100= 6.64% Debt to Asset ratio = Total debt/Total assets 2016 = 781,021/839,202 = 93.07% 2015 = 758,241/812,156 = 93.36% The bank’s leverage risk as indicated by the above capital structure ratios slightly declined in 2016 compared to 2015. The bank’s debt to equity ratio declined from 14.06 times in 2015 to 13.42 times in 2016 (Investopedia, 2017). At the same time, the bank’s equity ratio slightly improved from 6.64% in 2015 to 6.93% in 2016. Consequently, the bank’s debt to asset ratio slightly improved to 93.07% in 2016 from 93.36% in 2015. The improvement in the bank’s leverage risk is attributed to the increase in the company’s total equity thus increasing the company’s proportion of assets that is financed through equity while reducing the proportion financed through debt. Conclusion The ratios above indicate that the bank’s profitability slightly declined in 2016 when compared to 2015 as did its efficiency as indicated by total assets turnover. On the other hand, its leverage and liquidity risk slightly improved in 2016 when compared to 2015. Although this is favorable, the level of debts is still very high and with declining profitability, this is not good news for investors as the bank’s ability to assure improved returns in future could be declining. This could explain why the value of the company’s shares has declined over time. Thus, I may not recommend investing in the company’s shares and I would even sell the 146 shares I already bought above. References: Google.comfinance, 2017, Westpac Banking Corp, Retrieved on 18th May 2017, from; https://www.google.com/finance/historical?q=ASX%3AWBC&start=0&num=30&ei=0o kdWfnsIoHCsQGDvrjgCQ smh.com.au, 2017, S& P/ASX 200, Retrievd on 18th May 2017, from; http://www.smh.com.au/business/markets/indices/detail/XJO/sandpasx-200.html sharedividends.com.au, 2017, Westpac Banking Corporation dividend history, Retrieved on 18th May 2017, from; http://www.sharedividends.com.au/wbc+dividend+history Mickleboro, J2017, Should you buy Westpac Banking Corp shares for its 5.5% dividend? Retrieved on 19th May 2017, from; http://www.fool.com.au/2017/04/20/should-you-buy-westpac-banking-corp-shares-for- its-5-5-dividend/ King, M2017, 2 reasons why the Westpac share price is sinking today, Retrieved on 19th May 2017, from; http://www.fool.com.au/2016/04/06/2-reasons-why-the-westpac-share-price-is-sinking- today/ Investopedia, 2017, Ratio Analysis: Using financial ratios, Retrievd on 19th May 2017, from; http://www.investopedia.com/university/ratio-analysis/using-ratios.asp Westpac, 2017, Annual report 2016, Retrieved on 19th May 2017, from; https://www.westpac.com.au/about-westpac/investor-centre/financial- information/annual-reports/ Appendix Income statement Balance Sheet Read More