You are required to use 2 Australian commercial banks, you may choose to use the same
banks as you used in Group Assignment 1 or different banks . The time period of analysis is
from 2008 to 2010.
Part I. Loan Composition and Credit Risk (50% of marks)
Compare and discuss loan composition and loan credit (default) risk of the banks
Below are some considerations you might like to make (this is not an exhaustive guide )2
0 Loan composition
0 Compare the types of loans made by each bank, & analyse how these loans
changed over the sample period
0 Consider the types of loans made by industry, geographical location and the
maturity of the loans for each bank
0 Have the banks increased or reduced lending in some areas or industries?
0 Credit Risk
0 Use different methods of measuring credit risk (quality) of loans for each bank,
such as
I Provisions for loan impairment to total (gross) loans
I Loan impairment expense to provision for loan impairment
0 How has credit risk (quality) of loans changed for each bank over the sample
period?
0 Compare & discuss changes in loan composition & credit risk for each bank over the
sample period
Hint: Details of loan, bill discounted and other receivables (including advances ) composition
and provisions for loan impairment (and other proxies for credit risk) are usually provided in
the notes to the financial statements. You may need to read through annual reports for a
comprehensive understanding of the strategies & considerations made by the banks during the
sample period.
Part II. (50% of marks)
Compare and discuss the implications of credit risk for profitability of the banks
0 Some relevant measures you may like to consider:
I Provisions for loan impairment to total operating income
I Provisions for loan impairment to pre-provisional net income (net profit)
or
I Loan impairment expense to net income (net profit) before loan
impairment expense
0 Compare and discuss how the banks’ loan profitability has been affected by the loan
composition and credit risk
o How has loan profitability changed for each bank over the sample period?
0 Why do you think this has changed?
0 Did market conditions have a large impact on the banks profitability and loan
composition?
Part II. Credit risk and Profitability (1300 words)
Compare the two Australian Banks, Commonwealth Bank (CBA) and Westpac Corporation (WBC)
Introduction
Define credit risk
Compare and discuss the implications of credit risk for profitability of the bank.
How has loan profitability changed?
Why has this changed?
Market conditions (level of default)
Change in bank structure
Financial regulations
Use ratios (define each ratio?)
Provisions for loan impairment to total operating income
Provisions for loan impairment to to pre-provisional net income
Impairment expense to net income before loan expense
Net income ratio (change of loan profitability)
Leveragea borrower’s leverage or capital structure – the ratio of debt to equity- affects the probability of its
default. Because large amount of debt such as bonds and loans increase the borrower’s interest charges and pose a
significant claim on its cash flows.
Default Level
RAROC (adjusted) = RAROC adjusted (One-year net income on a loan)/(Loan (asset)risk or capital at risk )
a return adjusted for risk
used to evaluate (and price) credit risk based on market data
Loan will only be approved if the RAROC is sufficiently high relative to a benchmark ROE
WESTPAC CORPORATION (WBC) COMMONWEALTH BANK (CBA)
$M $M $M $M $M $M $M $M $M
LOAN CLASSIFICATION 2007 2008 2009 2010 LOAN CLASSIFICATION 2006 2007 2008 2009
2010
Australia australia
overdrafts 3,045 2,973 3,880 3,550 overdrafts 16,155 20,047 17,829
19,924
credit card outstandings 7,310 7,536 9,429 9,596 housing Loans 163,839 186,926
261,504 292,140
overnight and at call money market loans 280 297 231 223 Credit Card Outstandigns
7,185 7,555 9,055 10,200
acceptance of finance 21,847 24,499 49,103 43,672 Lease financing
4,532 4,239 4,572 4,657
term loans 184,160 214,541 339,153 366,076 bilsl discounted
3,640 5,868 10,936 14,379
finance leases 4,345 4,900 5,468 5,029 term loans 68,577 83,431
107,337 101,794
margin lending 4,939 3,833 3,900 3,521 other lending 1,339 1,076 1,616
1,288
other 3,105 4,293 4,907 2,287 other securities 11 13 524 564
total aus 229,031 262,872 416,071 433,954 total aus 265,278
309,155 413,373 444,946
overseas (NZ) overseas
overdrafts 1,254 1,200 1,122 926 Overdrafts 1,605 716 744 652
credit card outstannding 937 885 969 951 Housing Loans 28,931 28,817
30,702 31,433
overnight and at call money market loans 1,341 1,787 1,356 1,175 Credit Card Outstandigns
533 538 573 589
term loans 42,571 38,558 42,307 40,397 Lease financing
531 563 541 570
other 735 897 326 336 bilsl discounted 33
total other overseas 5,780 4,388 5,692 4,627 term loans 20,027 23,916
27,079 23,052
redeemable preference share financing 1,194 1,194 744
total os 52,618 47,715 51,772 48,412 other lending
183 25 16 27
other securities 303 300
total os 53,340 56,069 60,399
56,323
less
provisions for imparment 1,233 1,713 4,924 5,428
unearned income 1,920 2,229 2,217 2,382
3,153 3,942 7,141 7,810
net 315,465 361,282 466,631 493,459
CREDIT QUALITY 2007 2008 2009 2010 CREDIT QUALITY 2006 2007 2008 2009
2010
total australia
not due not impaired 362,297 420,665 560,705 585,352 not due not impaired
259,158 302,156 399,075 428,464
past due but imparied 11,315 13,977 14,339 17,423 past due but imparied
5,722 6,379 10,686 11,861
past due and impaired 539 1,194 3,854 4,659 past due and impaired 398 620 3,612
4,621
total 374,151 435,836 578,898 607,434 total aus 265,278
309,155 413,373 444,946
total impairment 1,369 1,967 4,392 4,723
os
carry value 372,782 433,869 574,506 602,711 not due not impaired
51,291 53,440 56,918 53,320
past due but imparied 2,026 2,566 2,904 2,513
past due and impaired 23 63 577 490
total os 53,340 56,069 60,399
56,323
total 318,618 365,224 473,772 501,269
PROVISIONS 2007 2008 2009 2010 PROVISIONS 2006 2007 2008 2009 2010
total provisions 1,369 1,945 4,384 4,711 total provisions 1,217 1,233 1,713 4,924
5,453
total charge 931 3,238 1,456 total charge 398 434 930 3,048 2,379
prov for impairment loan 406 594
collect prov %gross loan 0 0 0 1 1
impairment on loan/avg loan 0 0 0 0 total prov/total charge 3 3
2 2 2
LOANS WRITTEN OFF 2007 2008 2009 2010 LOANS WRITTEN OFF 2006 2007 2008 2009
2010
australia 355 394 1,550 1,202 australia
nz 6 75 350 146 sovereign
other os 10 2 23 3 agriculture 8 1 3 2 10
total – – – – bank & financial 1 5 110 383
real estate 11 21 24 40 167
presonal 388 408 364 496 651
IMPAIRMENT 2007 2008 2009 2010 asset financing 42 49 49 58 72
prov for impair (aus) 90 331 1,082 1,300 other comm and ind 36 30 34 255
604
prov for impair (OS-NZ) 22 56 124 270 total 486 509 479 961 1,887
prov for impair (other-OS) 36 26 22 52
overseas
total provisions for impairment 1,558 2,174 4,734 5,061 sovereign
agriculture 7
bank & financial 4 86 50
real estate 2 22 25
presonal 7 7 13 14 18
asset financing
other comm and ind 4 3 5 60 86
total 11 10 24 182 186
less recovered 127 103 77 73 77
total net impairments 370 416 426 1,070 1,996
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