6.0 Conclusion 12
7.0 Recommendation 12
7.1 Commonwealth Bank 12
7.2 Macquarie Bank Ltd 12
Referencing 12
Appendixes 13
- Introduction
Banks are the dominant financial institutions within a financial system and account for the largest share of total assets. As such, they are important in facilitating the flow of funds between savers and borrowers.
Investment Bank and Merchant Bank play an extremely important role in the provision of advisory services to their corporate and government clients. These types of institutions are less inclined to provide actual debt finance to their clients, but rather will advice their clients on how to meet their funding requirements in domestic and international money markets and capital markets.
Investment banks and Merchant bank manage debt and equity on behalf of their clients and also underwrite such issue. Other aspects of their off-balance sheet advisory include balance sheet restructuring, foreign exchange dealing, investment advice, risk management advice, mergers and acquisitions, project finance and securitisation.
Commonwealth Bank Australia
The Commonwealth Bank Group is one of Australia’s leading financial services organizations and provides retail, business and institutional banking, funds management, superannuation, insurance, investment and broking services. It is the most recognized brand in the Australian financial services industry.
Macquarie Bank Ltd
Macquarie Bank is a pre-eminent provider of investment banking and financial services. In Australasia, Macquarie provides a full range of investment, financial market and advisory products and services. Internationally it focuses on select markets where we are able to provide special value.
1.1 Background
Commonwealth Bank Australia
Commonwealth Bank Australia is a registered deposit taking institutions and a publicly listed company on the Australian Stock Exchange. (Appendix 1) As the deposit taking institutions, the bank is subjected to prudential supervision by the Australian Prudential Regulation Authority (APRA) that covers both banking and insurance sectors. The bank is the principal operating entity and the parent entity for the Commonwealth Bank Australia group.
Macquarie Bank Ltd
“As a listed Australian corporation, Macquarie has a reasonably broad ownership base, with its share price increasing strongly since its public listing in July 1996, corresponding with consistently improving profitability.”(Nikki, T., 1996) It commenced operations in 1969 as Hill Samuel Australia, before becoming a trading bank in 1985. Incorporated under the Corporation Act 2001, it is licensed bank under the Banking Act 1959, and is regulated and supervised by the Australian Prudential Regulation Authority (APRA). (Appendix 1)
1.2 Aim
This purpose of the report is to analyse the data of the annual report of the two major financial institutions in Australia, Macquarie Bank Ltd and Commonwealth Bank of Australia. Data from the annual report will then is used to and make a detail comparison between the performances of the bank in terms of business strategy, bank’s liquidity and ratios using the companies.
- Services Provided
2.1 Commonwealth Bank
“The Commonwealth Bank has a leading domestic market shares in home loans, retail deposits and discount stockbroking and is Australia’s largest issuer of credit cards.” (Anonymous, 2006) In general, the Commonwealth Bank provides a full range of retail banking services. It also provides investment products, superannuation and insurance. “The Commonwealth Bank is the country largest retial find manager in terms of total value of funds under management.”
The asset management business manages investment portfolio for a diverse range of retial and wholesale clients. It provides a large range of active and indexed investment options. These options include Australian and international shares, listed property, fixed interest, credit, infrastructure, private equity and cash.
Below is summary of the services provided by the Commonwealth Bank:
Banking Services
- Home Loans
- Credit cards
- Personal loans
- Transaction Accounts
- Term Deposits
- Business Loan
- Equipment and Trade Finance
- Rural and Agribusiness Products
Investment
- Master Fund
- First Choice (Fund)
Superannuation and Insurance
- Term Insurance
- Disability Insurance
- Master Trust
- Annuities
2.2 Major Customers
The Bank serves corporation, government entities and other major institutions operating in Australasia. Corporate customers have access to financial market services, securities underwriting, trading and distribution, corporate finance, equities, payments, and transaction services, investment management and custody services.
2.3 Macquarie Bank Ltd
Macquarie has six operating Groups within which individual business Divisions operate. The Groups specialise in defined product or market sectors and work in close cooperation. Great emphasis is placed on the client's relationship with the Bank as a whole.
The Investment Banking Group brings together the Bank's wholesale structuring, stockbroking, underwriting and advisory capabilities. “Macquarie's Equity Markets Group comprises the Bank's principal equity trading, market-making, product origination, structuring, warrants and derivatives sales and distribution activities.” (Abraham, A., 1998) Macquarie's Banking and Property Group provides a range of innovative banking and property-related services. The Financial Services Group is dedicated to the distribution of financial services via financial advisers and directly to individuals.
Below is summary of the services provided by the Macquarie Bank Ltd:
Investment Banking Group
- Project Financing
- Mergers and Acquisition, takeovers and Corporate Restructuring Advice
- Equity Capital Markets and Capital Management
- Specialised Infrastructure Fund Management
- Leasing and Asset Financing
- Cross-border Leasing
- Institutional and Corporate Stockbroking Services
- Equities Research
Treasury and Commodities Group
- Commodity Derivatives and Future Trading
- Commodity Finance
- Treasury
- Debt Market Trading and Origination Facilities
- Foreign Exchange
- Strategic Financial Advisory and Risk Management Services
- Economic Research
Banking and Property
- Property Funds Management
- Mortgages
- Margin Lending
- Structured Finance and Property Package
- Banking Services
Funds Management Group
- Fund Management
Financial Service Group
- Full Service Stockbroking and Investment Planning
- Online Stockbroking
- Strategic Financial Planning
- Executive Wealth Management
- Private Banking
- Private Portfolio Management
- Retial Treasury and Commodities Service
- Managed Funds and Cash Management
- Mortgages
- Margin Lending
3. Organisation Strategy
3.1 Commonwealth Bank
“Commonwealth Bank seeks to leverage off its broad distribution footprint and product capability by improving its customer service due to the fact that in the part, the bank’s unexceptional customer service experience and relative inefficiency of operations have constrained the bank’s ability to take advantage of its strong competitive position.” (Financial Service Distribution, 2005)
By looking at the facts, Commonwealth Bank is likely to remain predominantly focused on the Australian and New Zealand markets. Over the medium term, Commonwealth Bank’s offshore strategy is to capitalise on, leverage off, core competencies largely in funds management and life insurance. “The Colonial acquisition in 2000 provided it with a broad competency in the life insurance and fund management sectors and clear scale advantages over its domestic bank competitors.” (Hand, G., 2000)
The bank stands to benefit from the Australian government’s continued encouragement of superannuation as a form of a long-term saving using taxation incentives and a mandatory superannuation guarantee levy.
3.2 Macquarie Bank Ltd
Macquarie Banks Ltd has an opportunistic business strategy, which to date has been skilfully executed. “Many of Macquarie’s core markets, particularly project and infrastructure finance and equities have been subject to intense competition in recent years, driven by larger offshore investment and commercial banks and this can be back up by the fact that the bank has been active in the housing development in China since 1996.” (Anonymous, 1999)
Macquarie has countered the increasing competition by making full use of its abilities, market position, and strength in product innovation and targeted customer service. The Bank has further innovated its standard products in both specialization and complexity, and the transported and adapted its expertise between and across products and markets.
“Considering the Macquarie Bank Ltd modest size by international standard, the development of a well diversified business platform has somewhat insulated the bank from extreme market conditions in some segments, enabling it to have proactive, and long-term developmental, stance in other segments.” (Irvine, S., 1999)
4. Liquidity
“Liquidity is access to funds to enable a business to meet its day-today operating needs.”(Viney, C., 2003) “Under that APS210, the board of directors and management must implement and maintain a liquidity management strategy that will ensure the institution will be able to meet operational liquidity demands when due.” (Banking Act 1959)
4.1 Commonwealth Bank
The bank’s liquidity is very good, enhanced by its broad distribution capability that supports its retail-funding base, and maintenance of good quality liquid assets. The bank has a well-developed securitization capability that supplements its liquidity management, and is a frequent issuer to wholesale capital markets. The bank’s liquidity controls include stress test scenarios and a liquidity support agreement with other domestic major banks.
4.2 Macquarie Bank
The Bank’s balance sheet is liquid with about $31 billion, or nearly 40% of adjusted assets, in readily saleable or highly liquid securities. Funding is reasonably well diversified by counterparty, term, and currency, although funding is predominantly from the semi-professional or professional market.
5.0 Market Positioning
5.1 Commonwealth Bank
According to Retail Banker International, “Commonwealth Bank is a good market position in New Zealand banking and life insurance, and an emerging presence in selected Asian countries.” Although the bank has operations in New Zealand and throughout Asia, more than 80% of its earnings are from Australia. “The Bank’s franchise strength is principally in the retail segment, which, in part, reflects its history as a Commonwealth government-owned bank until it was privatized in 1996.” (Anonymous, 2005)
Many elements of Commonwealth Bank’s banking business profile are low risk by international standards. “It is Australia’s largest retail bank with leading market share in residential lending, credit cards, retail brokering and retail deposits.” (Haddock, F., 2001) Earnings have yet to be fully leveraged off Commonwealth Bank’s banking and wealth management operations, given it low penetration of products per customer and have the largest customer base and number of interaction in the domestic market.
5.2 Macquarie Bank Ltd
Macquarie Bank Ltd has a strong business franchise and profile in its core business lines in Australia and in the niches it is cultivating globally. Principal activities are in Australian wholesale markets relating to the intermediation and management of risk across credit, interest rate, currency, commodity, and new equity markets as well as various asset classes. “Its orientation is toward new innovative and complex products (Spectrum-desk.com), highly structured transactions, therefore, the bank’s businesses tend to be off-balance sheet or fee based.” (Lee, J., 2001) According to Surry, M., 1997, “the bank usually acts as an advisor debt provider and packager on infrastructure deals.” The bank also has a retail market presence in cash, stock-broking, and wealth management.
Macquarie Bank Ltd have a relatively broad international presence in relation to its overall size and activities, with international operations providing about 40% of revenues, derived mainly from Asia, the Americas, Europe and Africa. The bank has also a number of alliances and joint ventures throughout key international markets, including Asia.
Competing directly with rivals many times its size, Macquarie Bank Ltd has successfully occupied domestic market segments, in which it has particular expertise. Selective market entry, combined with well-defined products suite, has underpinned a sound business platform that is not limited by geographic boundaries. Although Macquarie is modestly sized compared with many global institutions operating wholesale markets, however, according to MacDonald, D. P., 2005, it has leading market position in many products and services for the Australian corporate and wholesale markets.
6.0 Conclusion
Based on the findings, Commonwealth Bank’s major strengths are well diversified business platform, with leading domestic market positions in banking, life insurance and wealth management. The bank has a strong asset quality that benefits from sound underwriting and risk management policies and well diversified retial funding base with a conservative and well experienced management team. As for the Macquarie Bank Ltd, its major strength is solid earning track records due to a well diversified business operations and entrenched risk discipline and conservative financial policies.
7.0 Recommendations
7.1 Commonwealth Bank of Australia
According to the data obtained, it is recommended that the Commonwealth Bank of Australia should concentrate more on the local franchise and diversification of its operation as the financial profile has reflected that both of these had benefited the bank. The bank’s asset quality is not expected to deteriorate materially from existing level, which is consistent with its underwriting and risk management capabilities. Its good internal capital generation capability and capital adequacy are expected to maintain at an outstanding level.
7.2 Macquarie Bank Ltd
Based on the information, it is recommended that Macquarie Bank Ltd. should maintain its focus on risk management and participate in segments where it has expertise, and corresponding with its risk management capabilities. Macquarie Bank Ltd. basically has improved its business profile across key businesses, both domestically and internationally, underpinning future earnings diversity and resilience, which in turn, have collectively underpinned the bank’s outstanding performance over the years. Reflecting excellent risk management framework and policies, asset quality is not expected to deteriorate from its current very good level, but could become volatile because the bank has some large and industry-concentrated exposures.
Maintaining its strategy of business diversity, a maturing of its specialist fund activities in offshore markets, and an improvement in capital adequacy will place upward pressure on the bank’s ratings. Continued broadening of its business base geographically and further leveraging of existing market capabilities, without a corresponding increase in risk enthusiasm, would also be viewed positively.
Reference:
Abraham, A., 1998, Multi-disciplined Approach Delivers, Corporate Finance, London, p. 12
Anonymous, 1999, Macquarie Plans China MBS, Euroweek, London, vol 612, p. 17
Anonymous, 2000, Commonwealth Bank of Australia acquires Colonial, International Financial Law Review, London, vol 19, no 4, p.10
Anonymous, 2005, Australia’s Commonwealth Bank and ANZ up to their focus on advice, Financial Services Distribution, Dublin, p. 1
Anonymous, 2005, Country Survey- Australia: Foreign players on the up Down Under, Retail Banker International, London, p.11
Anonymous, 2005, Australia’s Commonwealth Bank welcomes back high-flying Norris, Retail Banker International, p.3
Anonymous, 2005, CBA’s NetBank enhanced features, Financial Services Distribution, p. 5
Commonwealth Bank of Australia, 2006, Annual Report, Australia
Commonwealth Bank of Australia, 2006, European and Asian Investor Presentation, Australia
Haddock, F., 2001, Murray Sidelines Asia Aspirations, Asiamoney, London, vol 12, no 8, p.15-17
Hand, G., 2000, CBA rattles the four pillars, Euromoney, London, vol 372, p. 12
Lee, J., 2001, Macquarie Portal Puts Spectrum Trading Online, Asiamoney, London, no 1, pp 26-27
MacDonald, D., P., 2005, Macquarie Bank Half Year Result, Shaw Stock Broking, Australia
Macquarie Bank Ltd, 2006, Annual Report, Australia
Nikki, T., 1996, Macquarie Bank Ahead at Halfway, Financial Times, London, p. 32
Irvine, S., 1999, Macquarie’s Winning Way, Euromoney, London, vol 360, p. 34
Surry, M., 1999, Macquarie takes on the world, Asian Business, Hong Kong, vol 33, no 10, pp 32-35
Viney, C., 2003, Financial institutions, instruments and markets, 4th edn, McGraw Hill, Sydney
Appendixes
Share Price History
Source: Australian Stock Exchange
