Investment Report on Westpac & Commonwealth Bank

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Investment report of
Westpac Banking Corp. & Commonwealth Bank of Australia

Table of Contents

Executive Summary………………………………………………….……………...1

Introduction…………………………………………………………………………...2

Overview of the Current Financial Market……………………………………......2

Ratio Analysis………………………………………………………………………. 3

Return Measurement: Percentage Return……………………………...……...3

Risk Measurement: Reward-to-Risk…………………………………..……..…4

Market Value Measurement: P/EPS………………………………...…...……..5

Profitability Measurement: Net Interest Margin…………………………..……6

Conclusion and Recommendation………………………………………………...6

Appendices…………………………………….……………………………………..7

Reference list…………………………………………………………………..…....8

Executive Summary

This report is prepared to evaluate and recommend the investment in Westpac Banking Corporation or Commonwealth Bank of Australia. In the current crisis of the financial industry, the banking system is losing investors’ confidence and is facing high risks. The report provides the ratio analysis in risk and return measurement, market value measurement, and profitability measurement in medium- and long-term investments based on the past 7- to10- year data.

Risk and return measurement
CBA has an average of 12.48% rate of return comparing to WBC 13.62%. After taking the risk element into account, CBA offers a 0.09 reward in 5-year investment and 0.097 in 10-year investment per unit of risk in contrast to 0.039 and 0.089 offered by Westpac in the respective periods.

Market value measurement
CBA has a slightly higher P/E ratio than WBC over long-term investment, indicating the higher future expected growth.

Profitability measurement
CBA has a higher net interest margin, showing its stronger profitability position.

Besides the quantitative factors, Commonwealth Bank of Australia is merging with Bank West and St. Andrew’s to expand its market in Western Australia and services in the insurance sectors. The future growth of the group will provide greater value to the shareholders.

Therefore, we recommend investing Commonwealth Bank of Australia in our medium- and long-term financial planning.

Introduction
Westpac Banking Corporation (WBC) and Commonwealth Bank of Australia (CBA) are the two leading banks in home lending, financial service provider, and wealth management in Australia. Both banks have made their moves in market expansion in order to obtain greater market shares, to create more shareholders’ value and to enhance their financial influences. WBC is almost close to its acquisition of St. George Bank and CBA recently reached an agreement to merge with Bank of Western Australia Ltd and St. Andrew’s Australia Pty Ltd. The report is to evaluate the potential investment in WBC or CBA. To start with, the report will give an overview of the current volatile financial industry. Then it will focuses on several key ratios to evaluate the alternatives, taking risk and return into account. At last, the report will provide recommendations to the investment panel for the decision making.

Overview of the Current Financial Market
The global financial market has been very volatile recently. Financial Times Ltd (2008) indicated three of Wall Street’s five big independent investment banks disappeared within 6 months, due to the credit turmoil of commercial property in US. The takeover of Bear Stearns and Merrill Lynch, the bankruptcy of Lehman Brothers, and the government bail-out of American International Group, Inc. led to a sharp decline of investors’ confidence in financial market worldwide. According to the Wall Street Journal (2008), the Dow Jones index on 9 Oct, 2008 was 35% below its record a year ago. The major U.S. stock-market indexes had fallen by around 15% in a week by Oct. 7, 2008.

Australian stock market was greatly influenced by the deepening financial turmoil in the US. Appendix 1 provided by Netquote Information Services Pty Ltd (2008), Australian all ordinary share price...
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