1203AFE Lecture Notes - Lecture 9: Initial Public Offering, Basel Ii, Project Finance
30 May 2018
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Week 6 Money, Bank and Finance Lecture Notes
Topic 7: Commercial and Investment Banking
Australian Banks
• There are 26 locally owned, 7 subsidiaries of foreign banks, and 41 branches of
foreign banks in Australia as of December 2015. In addition- 71 CUs, 5 building
societies, 7 other AIDs
• Notice that several credit unions are now banks (e.g. Defence Bank Ltd, QT Mutual
Bank Ltd)
• However, the big four banks account for approximately 80 per cent of the total
assets of this group
Consolidation
• Consolidation through mergers and takeovers has characterized the Australian
banking sector over the last twenty years.
• Banks have used mergers and takeovers to grow quickly, diversify their operations
and improve their geographical spread.
• While Australian banks have undertaken takeovers of foreign entities, the Australian
government has required no further consolidation of the local market.
• This is the four pillars poliy that ais to aitai opetitio i the akig
sector.
Bank Balance Sheets
• The balance sheet lists a usiesss assets liailities ad the oers iestet
(equity)
• The relationship between these accounts is:
• Assets= Liabilities + Capital
Source of Bank Funds
• The principal source of funds for banks is deposit accounts: demand, savings and
term deposits.
• Funds sourced from deposits are similar to funds sourced elsewhere except that
deposits take precedence in the event of a bank failure.
• For large banks, borrowed funds are a more important source of funds than
deposits. Increased demand for loans has outpaced the growth of deposits and
banks rely on borrowed funds to finance their operations.
Deposit Accounts
• Deposit accounts may take three main forms:
• Transaction accounts: in which the owner is entitled to receive their funds on
demand, which transfers ownership of the funds to others by cheque or EFTPOS.
• Savings accounts: interest bearing accounts of individuals and partnerships.
• Term deposits: are legally due on a maturity date and the funds cannot be
transferred to others.
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Borrowed Funds
• Borrowed funds are short-term borrowings by commercial banks from the wholesale
money markets.
• These borrowings may include:
o Bakers aeptaes
o Debt issues
o Loan capital (notes and debentures).
Capital Accounts
• Bank capital is the ownership funds of the bank.
• Loan and security losses are charged against this account.
• Bank capital includes:
o Share capital
o Retained profits
o Reserve accounts
Bank Use of Funds
• Once raised, the funds are used for issuing loans or purchasing investments.
• Loans are contracts between a borrower and the bank.
• Investments are contracts issued by large borrowers and purchased by banks. They
can be resold on the secondary markets.
Off-Balance-Sheet Activity
• There has been a large increase in
off-balance-sheet banking.
• Off-balance-sheet items earn a fee income for the bank.
• However, these items are contingent assets or liabilities and may include loan
commitments and unrealized gains or losses on derivate securities.
ANZ Annual Report
• ANZ Bank 2013 Annual Report.
• Note 43 in the Financial Statements shows three (3) pages of detail on their
contingent liabilities.
• There are outstadig ourt proeedigs, lais ad possile lais agaist the
Group, the aggregate amount of which cannot readily be quantified. Appropriate
legal advice has been obtained and, in the light of such advice, provisions as deemed
necessary have been made. In some instances, we have not disclosed the estimated
fiaial ipat as this ay prejudie the iterests of the Group. [p. ]
Loan Commitments
• Bank loans usually begin as formal promises by a bank to lend money according to
certain terms.
• These loan commitments may be of three types:
o Lines of credit
o Term loans; and
o Revolving credit facilities
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Derivative Securities
• Banks participate in markets for interest rate and currency forwards, futures, options
and swaps.
• This participation serves several purposes:
o Hedging risks
o Speculation
o Serving as a counterparty for a customer
Bank Performance
• Profitability
o Generally, the profitability of banks has trended upwards.
o This is measured in a number of ways:
▪ Rate of return on average assets
▪ Rate of return on average equity
o The return on average assets is the key ratio in evaluating the quality of bank
management because it tells how much profit bank management can
generate with a given amount of assets.
Source of Income
• Interest income on loans is the major source of income for banks.
• This is supplemented by income from:
o ATM surcharges
o Credit card fees
o Fees from the sale of managed funds
o Trust operations
o Investment services, insurance and financial products
Bank Risk Management
• Liquidity Risk
• Capital Adequacy
• Credit Risk
• Interest Rate Risk
Liquidity Management
• The management of bank liquidity involves:
o Asset management: maintaining sufficient cash and noncash assets that can
be quickly converted to cash.
o Liability management: acquiring liquidity from the liability side of the
balance sheet.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Week 6 money, bank and finance lecture notes. Australian banks: there are 26 locally owned, 7 subsidiaries of foreign banks, and 41 branches of foreign banks in australia as of december 2015. In addition- 71 cus, 5 building societies, 7 other aids: notice that several credit unions are now banks (e. g. defence bank ltd, qt mutual. Bank ltd: however, the big four banks account for approximately 80 per cent of the total assets of this group. Bank balance sheets: the balance sheet lists a (cid:271)usi(cid:374)ess(cid:859)s assets lia(cid:271)ilities a(cid:374)d the o(cid:449)(cid:374)er(cid:859)s i(cid:374)(cid:448)est(cid:373)e(cid:374)t (equity, the relationship between these accounts is, assets= liabilities + capital. Increased demand for loans has outpaced the growth of deposits and banks rely on borrowed funds to finance their operations. Borrowed funds: borrowed funds are short-term borrowings by commercial banks from the wholesale money markets, these borrowings may include, ba(cid:374)ker(cid:859)s a(cid:272)(cid:272)epta(cid:374)(cid:272)es, debt issues, loan capital (notes and debentures).
