Financial Analysis Executive Summary: The Report Is Based Up ✓ Solved

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Financial Analysis Executive Summary: The report is based upon

Financial Analysis Executive Summary: The report is based upon financial analysis of two companies that are based in North America. The companies chosen are Bank of Montreal and Canadian Imperial Bank of Commerce as both these companies belong to same line of industry i.e. banking industry and an analysis of the companies have been done on the basis of various parameters given like ratios, income statement, balance sheet etc. It seeks to provide a complete knowledge regarding the various basis of comparison of financial statements of two companies and the decisions based on such analysis. The assessment gives an in-depth knowledge regarding the nature of the companies and their financial position.

Introduction: Canadian Imperial Bank of Commerce Canadian Imperial Bank of Commerce (CIBC) is a diversified commercial bank, which provides a wide range of financial services and facilities to businesses and investors in North America, the United States and internationally. It was established in year 1867 having its main headquarters at Toronto. The bank is involved into providing various services like investment services, exchange rate services, cash management, normal banking services etc. The company has adopted all the recent technological advancements to provide better, fast and convenient services to their clients in and around the globe.

The bank is providing loans to various small business owners to overcome the severity of ongoing pandemic COVID 19. Due to this the market prices of shares are low which is around USD 72.80. The bank provided interest free loans to the enterprises suffering from the Corona Virus and thus, have proved to be a saviour such businesses. The company has been divided into different segments to manage different areas namely divided into Canadian Personal and Small Business Banking, Wealth Management, Capital Markets, U.S. Commercial Banking, and Canadian Commercial Banking and Wealth Management.

All kinds of facilities are provided by the company namely savings, deposits, insurance, credit cards etc. Bank of Montreal Bank of Montreal is an international bank that provides financial services and investments. It was established in year 1977 and its headquarters are located in Canada. It is one of the biggest banks in Canada and known by the name BMO. It has around 900 branches serving around 7 million customers.

It is ranked 131 in the list of Forbes Global. It is one of the companies that pays the highest number of continuous dividends. It provides services like banking, capital market services, insurance, trading, wealth management services etc. It has shown growth over 10% over the decade. The bank does not only focus on payment of dividends but also foster future growth and sustainability.

It seeks to provide services to help people at every difficult point of time. Also, it seeks to provide interest-free loans to various businesses and traders to help them overcome the situation of the Corona virus pandemic. It has around 45,000 employees working around all its branches. The current market price of the shares amounts to USD 9.63. The company has just flourished over the number of years.

There are five main banks in the country namely Canadian Imperial Bank of Commerce, Desjardins, Toronto-Dominion Bank (TD), Royal Bank of Canada, Scotiabank, and Bank of Montreal. They are highly competitive in nature comprising of high valuations. However, the Royal Bank of Canada comprises of the largest share of valuation of around 89.6 billion. They are highly competitive in nature as they have been existing in the market for a long time and providing similar category of services.

Assessment of the Financials

Vertical Analysis: Vertical assessment is a financial statement review technique by which baseline figures are taken in records and every item is taken as proportion to such baseline figures. It is prepared for both income statement as well as for balance sheet. Each item in the column of headings is taken as proportionate to the revenue and for vertical balance sheet proportions are taken for items of assets and liabilities as proportion to total assets and total liabilities.

Each item of the income statement is shown as a proportion to the total revenue generated. It is taken as a baseline and other items are calculated on the basis of this baseline. It can be seen that the interest income shows an increasing trend due to an increase in total revenue. Also, there is an increase in provisions, interest expenses, and income taxes in the year 2019 as compared to other years.

A vertical analysis gives a clear picture of the various items in proportion to the interest income. In the vertical analysis of the balance sheet of the company for 3 years, the total assets are taken as the baseline and all other assets are taken in proportion to other assets. Similarly, the total liabilities are taken as base for the liabilities and every liability is taken as a percentage i.e. in proportion to the total liabilities.

Income Statement of CIBC (millions of Canadian dollars): CIBC Income Statement- Vertical Analysis Particulars 2019 % of revenue 2018 % of revenue 2017 % of revenue Interest Income $20,.21% $17,.16% $13,.50% Less: Interest expense $10,.52% $7,.72% $4,.35% Net interest income $10,.69% $10,.44% $8,.14% Non-interest income $8,.31% $7,.56% $7,.86% Total Revenue $18,.00% $17,.00% $16,.00% Provision for credit losses $1,.91% $.88% $.09% Non-interest expenses $10,.33% $10,.52% $9,.79% Income before income taxes $6,.76% $6,.60% $5,.12% Less: Income taxes $1,.24% $1,.97% $1,.14% Net income $5,.52% $5,.63% $4,.98%

Balance Sheet of CIBC (millions of Canadian dollars): CIBC Balance Sheet- Vertical Analysis Particulars 2019 % of Total assets 2018 % of Total assets 2017 % of Total assets Assets: Cash and non-interest-bearing deposits with bank $3,.59% $4,.73% $3,.61% Interest-bearing deposits with banks $13,.07% $13,.23% $10,.90% Securities $1,21,.62% $1,01,.03% $93,.53% Cash collateral on securities borrowed $3,.56% $5,.92% $5,.89% Securities purchased under resale agreement $56,.61% $43,.28% $40,.14% Loans $3,88,.69% $3,71,.20% $3,56,.11% Other $64,.86% $57,.61% $55,.83% Total Assets $6,51,.00% $5,97,.00% $5,65,.00%

Liabilities and Equity Deposits $4,85,.54% $4,61,.21% $4,39,.79% Obligations related to securities sold short $15,.40% $13,.31% $13,.43% Cash collateral on securities lent $1,.28% $2,.46% $2,.36% Obligations related to securities sold under repurchase agreement $51,.95% $30,.16% $27,.95% Other $53,.19% $49,.30% $47,.39% Subordinated indebtedness $4,.72% $4,.68% $3,.57% Total shareholders’ equity $38,.89% $34,.85% $31,.49% Non-controlling interest $.03% $.03% $.04% Total liabilities and equity $6,51,.00% $5,97,.00% $5,65,.00%

Financial Ratio Analysis

CIBC Financial Ratios Particulars Net profit margin 27.52% 29.63% 28.98% Asset turnover Ratio 0...0288 Return on equity 13.34% 15.12% 15.20% Return on assets 0.79% 0.88% 0.83% Total Debt to Shareholders' Equity Ratio 15...21 Total Debt to Total Equity Ratio 0...945 Dividend Pay-out ratio 46.15% 44.78% 48.99% BMO Financial Ratios Particulars Net profit margin 22.60% 23.81% 24.15% Asset turnover Ratio 0...0312 Return on equity 11.27% 11.93% 12.04% Return on assets 0.68% 0.71% 0.75% Total Debt to Shareholders equity is around 15 for both the companies showing that the companies/banks have higher ratio. The dividend pay-out ratio of BMO is much higher than CIBC indicating that the company believes in the payment of more dividends.

Recommendations

Various comparisons can be made on the basis of the calculations provided in the above analysis. The various recommendations are as follows:

  • Vertical Analysis – The Net income of both the companies have declined over the past 3 years. The balance sheet of both the companies shows that deposits from customers and loans to customers form the major part of assets and liabilities. The company CIBC have a larger proportion of deposits and loans as compared to BMO. The cash and cash equivalents share of BMO is much higher in comparison to CIBC.
  • Horizontal Analysis – From the horizontal analysis, it can be seen that BMO has increased its profits in comparison to the previous year 2018 but the other company CIBC shows that there is a reduction of profits i.e. net income of the company. The proportion of cash and cash collateral have highly declined for CIBC company whereas there is less decline in cash and cash equivalents for BMO company.
  • Financial ratios – Both companies hold good financial ratios and some ratios are equivalent in both companies but CIBC has high profit margin and return on assets and to shareholders. BMO pays more dividend to its shareholders as compared to CIBC.

Conclusion

The report underscores the different aspects of different analysis. While some analyses may depict one entity's better performance, other ratios may depict alternate outcomes. It depends on the requirements of the stakeholders regarding what the priorities are. The relevant decisions can be made based on that.

The above analysis of vertical analysis, horizontal analysis, and financial ratio show that both companies have good ratios and healthy positions but CIBC shows a better and sound financial health.

References

  • Andjelic, S., & Vesic, T. (2017). The importance of financial analysis for business decision making. In Book of proceedings from Sixth International Scientific Conference Employment, Education and Entrepreneurship (pp. 9-25).
  • Gibson, C. H., & Frishkoff, P. A. (1989). Financial statement analysis: Using financial accounting information.
  • Goldmann, K. (2020). Use of Financial Analysis in Operational and Strategic Management in Practice of Polish Business. In Eurasian Business Perspectives.
  • Hunold, M., & Schlütter, F. (2019). Vertical financial interest and corporate influence. DICE Discussion Paper.
  • Vogel, H. L. (2020). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting. John Wiley & Sons.

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