Credit Risk Analysis of Cba

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Operating in the ever challenging banking industry in Australia, Commonwealth Bank of Australia (CBA) aims to succeed through focusing on 5 main strategic areas:

Customer service

CBA believes that customer satisfaction is pivotal in creating value. Over the years, it emphasised employee training to deliver top-notch services to customers. CBA aims to add over 1000 employees to serve their growing customer base over the next 4 years.[1] It has also been awarded numerous awards for its excellence customer satisfaction.[2]

Business banking

CBA aims to be the leader in total capital solutions. It introduced the contactless card payment facility and more user-friendly and reliable features in CommBiz to increase banking efficiency.[3] This increased its share of the total business lending market.[4]

Technology and operational excellence

CBA invested in Core Banking Modernisation as its new banking platform, and CommBiz, enabling 24-hour real-time banking and transaction. CBA also introduced the paperless end-to-end Home Loan process, improving cost efficiency.[5]

Trust and team spirit

CBA encourages staff participation while providing equal opportunity to all its employees. Staff turnover and absenteeism have declined significantly while average group satisfaction has increased.[6]

Profitable growth through strategic management

CBA focuses on its existing local customers while expanding internationally through a partnership with Vietnam International Bank, joint venture with China’s Bank of Communication and a branch opening in Mumbai, India.[7]


In order to evaluate CBA’s financial performance, we will conduct an analysis on the financial statements, profitability, adequacy of future cash flows, and liquidity of CBA.

1. Interpreting the Financial Statements

1. Capitalisation and Leverage

CBA has a current market capitalisation of $79,829M.

With a substantial increase in leverage ratio from 2009 to 2010 as shown in Table 2.1, CBA is a highly leveraged financial firm relying on a relatively thin slice of shareholder’s equity, $35.2bn, to support $646,33bn in assets.

2. Profitability

1. Du Pont Analysis

ROE measures the amount of profit generated by each dollar of equity. Its calculation is given by the formula below:

ROE = Profit Margin (Profit/Sales) 

* Asset Turnover (Sales/Assets) 

* Equity Multiplier (Assets/Equity)

As illustrated in Table 2.2, CBA’s high net profit margin and low asset turnover, together with its highly leveraged position, contributed to the considerably high ROE over the last 3 years. Shareholder’s equity has also grown much faster than total asset from 2009-2010 implying that CBA is becoming more capital intensive.

A peer analysis is shown in Table 2.3. In maintaining the highest ROE of the three banks, NAB, Westpac and CBA, CBA became the most leveraged of the three. With the average cost of its funding rising and its increasing reliance on overseas funding, CBA is now bolstering its balance sheet and holding back dividend growth as part of its short-term plan.

3. Cash Flow Adequacy

Cash flow ratios are calculated in Table 2.4.

The large jump in CBA’s debt payback ratio of about 150% from 2009-2010 is a worrying sign. The debt payback ratio measures the proportion of debt to current period earnings. The ratio of 4.13 is largely attributable to a 250% increase in short-term debt, due to a significant increase in the issuance of USD, EUR, and particularly GBP commercial paper, further aggravating the issue. Long-term debt increased by about 140%.

The interest coverage ratio showed an improvement from 2009, a positive sign, particularly as the ratio reflects increasing earnings and decreasing interest expenses.

With these mixed signals, we believe that CBA has barely adequate cash flows to meet its debt repayment and interest expense.

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