Financial Ratio Analysis

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Griffith University, Gold Coast | Group Assignment for 2204AFE Financial Institutions Management | Comparative Analysis of ANZ and Westpac | | s2758329, s2762895, s2773847, s2784238Diamond, E., Dong, G., Huang, Y. & Lin, B.Due: 5th April 2012Tutor: Sonja Kobinger | | | The following report is a brief comparative analysis of two of Australia’s largest deposit-taking financial institutions (FI), Australia and New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corporation (Westpac). This report seeks to identify which of the FIs has a greater aggregate return per dollar of equity and thus establish the highest performer, or most profitable, of the two. The Return on Equity Model (ROE) (Koch & MacDonald,…show more content…
According to ROA, ANZ’s profitability fell short of Westpac’s by 0.146%, with the ROA percentage at 0.95% and 1.096% respectively (Appendix A). The difference in profits is caused by Westpac’s substantially higher total assets, which outweigh ANZ’s by $75,740,000. Although ANZ has a greater level of liquid assets, Westpac’s substantially higher loan portfolios generate higher returns. The lower ROA is caused by ANZ’s interest-bearing assets under-performing, or carrying lower risks leading to lower yields, or a greater reliance upon non-interest bearing assets. ROE is linked to ROA through the EM. ANZ’s 2011 EM was 15.62x, slightly higher than Westpac’s 15.35x, suggesting ANZ’s assets are funded by more debt than Westpac, this combined with lower returns is usually indicative of a low-performing institution (Koch & MacDonald, 2010, pg. 122). Further decomposition leads to analysis of the Expense ratio (ER) and Asset Utilisation (AU). ANZ’s overall ER of 4.99% is relatively lower than Westpac’s at 5.36% (Appendix A) supporting the earlier conclusion that ANZ’s lower ROA is caused by lower earning interest-bearing assets rather than an inability to control expenses (Koch & MacDonald, 2010, pg. 122). ANZ’s lower ER can be attributed to its considerably lower Interest Expense (IE) percentage, 3.35% compared with Westpac’s 4.05% (Appendix A), suggesting that, during

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