Westpac Bank Share Trend Analysis

The basic image above demonstrates a year-by-year rise in Westpac Bank’s share price. And it can clearly be inferred from the graph that the price was just above $20 in the first year, but the price ended at about $30 in the year 2013. There is a considerable price rise of about $10, but again a detailed review is required to ascertain the price increase of the shares. It is a growing development, though, and very promising for any investor.

Comparison for Rational Decision Making

Portfolio management allows an individual to participate in more than one asset, such that one investor’s systemic risk can be compensated by the return of some other portfolio investment. For reference and also for successful fund control, it is also desirable here to look at some other entity specifically linked to Westpac Bank. The better choice for contrasting Westpac Bank can only be the Commonwealth Bank of Australia from the organisation open. For this alternative, a variety of justifications may be provided; for example, both organisations are financial entities, both banks work in Australia, both banks are traded in the same capital exchange, and both banks are subject to the same macroeconomic conditions.

Commonwealth Bank of Australia

Like Westpac Bank, it is relevant here to have a pictorial view of the Commonwealth Bank of Australia’s share price patterns so that a detailed comparison can be carried out for both banks.

Share Prices Trend of Commonwealth Bank of Australia

The picture clearly states that the share price trend of the bank is in an increasing trend. The share prices were lowest in the year 2008 at around $21 but then the bank managed either to increase its share price or at least maintain its share prices. There are minor shrinks in the share process but these seem to be quite insignificant. And hence it is right to say that Commonwealth bank of Australia has brilliantly managed to live upto the expectations of its investors.

Yearly Trends

Same as we did for Westpac Bank it will be useful here too; to have a year by year analysis of the share prices of this bank. The trend can be shown in the picture below.

Year by Year Analysis of Share Price of CBA

From the picture above it is quite clear that the performance of Commonwealth Bank is quite good since hardly any decreasing trends could be found in this chart. From the previous year share prices have either increased significantly or at least have been static there is as such no decreasing trend here. Most importantly4 the current performance of shares is quite tempting since there is a lucrative increasing trend seen in the year 2013; it again reveals that if an investor is to take decision at this very day Commonwealth Bank of Australia will be one of the best options.

The Market Trends

It actually does not here; since another facet for better portfolio management is to compare the performance of company’s share with the overall trends of the market. Hence a trend in the performance of the market is also presented below in order to have a idea about the relational performance of Westpac and Commonwealth Bank of Australia’s share prices.

Market Fluctuations(S & P / ASX200)

The trend of S & P / ASX200 shows an increasing start at 5000 points at the start of the year 2008. However both of the companies analyzed here went opposite the trend of the market since both banks were at their lower share prices when they started from the year 2008. However after the year 2008; the Commonwealth Bank of Australia seems to have followed the trend of the market and initially the share prices saw a recovery and then retained the position till the 2011. And it was after 2011 that both Commonwealth Bank of Australia and the stock market started gaining some confidence and share process started to increase.
However if we talk about Westpac Bank the trends may seem to deviate a bit from the norms of the markets. For instance in the year 2010 and 2011 the market seems to have been regaining some confidence there was not a significant decrease in the overall prices; however if we see the trend of Westpac bank the story is somewhat different. This is because in this said time period Westpac Bank witnessed great fluctuations. However in the year 2013 Westpac Bank and the market seems to have been synchronized completely because both have almost identical trends where there is some recovery at the start of the year 2013 and a slight decline in the share process when 2013 ends.

Comparison of Share Prices of WBC and Market Trends

The diagram above endorses the points mentioned above that at the start WBC seemed too deviated from the market trends but however in the end of the year 2013 it seemed that there was a perfect alignment of WBC and S & P.

Systematic and Unsystematic Risks

Theoretically a systematic risk can be defined as the risk of the market which cannot be controlled and have to be beard by the investor. (Quijano, 2013) On the other hand unsystematic risk can be defined as the risk which is inherent to the single investment and can be mitigated by the investor. The unsystematic risk can be avoided by the investor by having diversified portfolio and having managed his funds with proper care. (Spence, 2010)
The systematic risk in this case study can be seen in the year from 2010 to 2011; this is the year in which the S & P witnessed a decreasing trend and same trend can also be seen in the process of the shares of selected companies. Thus it is right to say that market as a whole was effected and it also influenced the share prices of the companies.
On the other hand if we talk about the unsystematic risk; it is something which an individual organization experiences (James Bullard, 2009); for instance at the start of the year 2008-09 the Westpac Bank experienced a decreasing trend despite the fact that the market had seen as increasing trend in that time. This shows that it was the unsystematic risk which influenced the share prices of Westpac Bank.

Analysis on the Upcoming 12 Months

Over the past few year Australia economy is enjoying a roller coaster ride. All things seems to be in balance. Even though many believe that the trend will continue, some analysts suggest that the next 12 months are quite critical with respect to the Australian economy. Justin Parker, a reporter, believes that the economy is facing a “perfect storm” and the elections of 2014 hold high significance. Furthermore, he suggest that the then elected house will have to bring the federal budget back in surplus within the next three to five years (ABC News 2013). Leith van Onselen is in a view that the Australian economy will see a boom in the coming year as foreign retailers are all set to launch themselves in the country. The notable example he provides is that of H&M opening an outlet in Australia, which happens to be the second largest fashion retailer of the world and is Swedish based. This shall pressurize the retail sector which have been recently been facing a tough task. Furthermore, it is believed that the with Japanese fashion label Uniqlo along with homeware store Muji also plan on entering the Australian market (MacroBusiness 2013).

With respect to the banking sector of Australia, Greg Canavan, believes that the main point of consideration is to estimate the survival of Comm bank in the market leaders’ list. The others in the Australian Banking sector, as well as Comm bank are facing major threats on maintaining their returns as the economy has been hit with a major slowdown. The banks, being greatly leveraged, are highly prone to such economic treads. They take full advantage in the booms and are badly affected in the recessions or times of high unemployment.
The current state reveals a growing trend as a result of cost cutting measures and reduction in bad debts. However, the slowing down economy of Australia may deteriorate the condition, as suggested by the current trends which suggests the bad debts to boost again. The highly changing environment reduces the stability of share prices at the same or higher levels, making the industry and individual banks at risk (Dailyreckoning.com.au 2013)

The Final Decision

What business should be considered for investment remains a million dollar issue that needs to be addressed here. Before taking some such action, the financial burden and market risk of all firms must be carefully evaluated. The financial return alone is not enough to determine whether the organization is ideal for investing. However the financial data and stock market trends clearly gives a rational idea of whether an organization shall be opted for investment or not. Here the question is also based upon two factor i.e. financial and business risk.
The Westpac Bank though have some lacking at the financial front; but the Bank’s internal policies and aggressive marketing campaigns shows that the Bank is going to be much more string in the near future. The management of bank believes that a complete re-structuring is inevitable and this can help the bank to regain its glory and subsequently gain market confidence. (Denver, 2009) Hence rational and forward looking decisions will be to invest more in the Westpac Bank; because of its future plansand optimistic approach being adopted by the management of the bank. But again in order to diversify the systematic risk it is essential to invest in some other industry. The fact behind such statement remains that banking industry is still somewhat more vulnerable and the setbacks of US Economic meltdown has not been fully recovered till to this date. (Perkins, 2013) Hence a rational decision shall be to invest significant proportion of available funds in the Westpac Bank and also one should invest in some other industry so that risk could be diversified away.
 
The weekly returns of Westpac Bank was calculated basing on the formula; R_t=P_t/P_(t-1) -1 .The share price was from July 2008-July 2013.The data of return with the share price is shown in

Appendix 1

Return Graphs

Weekly Returns: S&P/ASX200

Weekly Returns: CWB

As indicated above there is similarity in the return graphs on some factors that may impact the entire business despite most trend relationship found in the return graphs is contradictory. S&P/ASX200 is seen to be a well-diversified portfolio that is impacted by the systematic risk straightly, while unsystematic risk appears in Westpac Bank shares. The unsystematic risk gives the differences between the returns of the two shares. In the posted weekly return graph, the S&P/ASX200 combines the Australian top 200 listed companies, which is more comparable stable to WBC.
Based on the share prices for the above period, the summary statistics calculated for the market benchmark S&P/ASX200, Westpac Bank, Commonwealth Bank of Australia is tabled below

Summary statistics for the period: from July 2008 – July 2013.

In this sample period, the average weekly returns of Westpac Bank are higher than both the Commonwealth Bank of Australia and the market benchmark S&P/ASX200.However there is high volatility in the Westpac Bank returns which is shown by a high standard deviation that is more than the variance of the market benchmark and commonwealth Bank with the minimum and maximum returns falling within a broader range. The coefficient of variation of common wealth Bank of Australia is also higher than that of ASX and commonwealth Bank. Therefore investing in Westpac Bank stocks involves higher risks than that of market average and the commonwealth Bank

Comparison with the overall market and Common wealth bank of Australia

Basing on the calculations above, it is observed that, there is a strong positive correlation between Westpac bank and Common wealth bank than S&P/ASX200 and Westpac Bank and Commonwealth Bank & S&P/ASX200. West Pac Bank being among the top 50 in ASX200 and one of the biggest Australia’s Banks, it has contributed much towards a strong connection in the common risk factors affecting the overall market. Hence to be able to reduce the risk, there is a need to diversify the portfolio of the Bank with an investment that is not related with risk factors similar to the banking industry. It is also noted that all the correlation coefficients are positive, showing risk factors and trend that are common to the overall market

Portfolio Weights

The negative outcome of GFC as well as other events that have affected the market, have led to the rational investors to diversify risks so that they can maximize returns. Basing on the weekly returns calculations together with the correlation coefficient and standard deviation of CWB, Westpac Bank and the ASX, it was observed that West Pac Bank average returns are higher as compared to the CWB average weekly return. The coefficient of variation of West pac Bank of Australia is also higher than that of ASX and commonwealth Bank. Therefore investing in Westpac Bank stocks involves higher risks than that of the market average and the commonwealth Bank. There is relatively less volatility for ASX as indicated by the standard deviation which is lower than the Westpac Bank. In regards to this, the decision reached was to assign a higher weight of 90% to ASX and lower weight of 10% for Westpac Bank in order to maximize the returns and minimizer.

References

• ABC News. “Economy facing ‘perfect storm’.” 2013. http://www.abc.net.au/news/2013-08-19/report-warns-of-economic-perfect-storm/4895632 (accessed 13 Oct 2013).
  Dailyreckoning.com.au. “The Warning Signs for Australia’s Economy.” 2013. http://www.dailyreckoning.com.au/the-warning-signs-for-australias-economy/2013/05/21/ (accessed 13 Oct 2013).
• MacroBusiness. “Foreign retailers set to invade our shores.” 2013. http://www.macrobusiness.com.au/2013/10/overseas-retailers-set-to-invade-our-shores/ (accessed 13 Oct 2013).
• Denver, J. (2009). Westpac Banking Corporation. The Newyork Times.
• James Bullard, C. J. (2009). Systemic Risk and the Financial Crisis: A Prime.
• Perkins, W. (2013). Lloyds agrees to sell Australian assets to Westpac. BBC News.
• Quijano, M. (2013). Is unsystematic risk priced in bank loan contracts? Applied Economic Letters.
• Spence, M. (2010). Can we regulate systematic risk? The Economic Times.

Appendix