Analyzing Annual Reports of Two Canadian Banks to Determine Career and Investment Opportunities - Essay Example

Analyzing annual reports of Two Canadian Banks to Determine Career and Investment Opportunities Lecturer: Introduction In this particular paper, there shall be an evaluation of TD and CIBC banks in regards to career and investment opportunity. This would be analyzed with the use of published audited annual reports of 2013 as instruments for evaluation of financial performance and strategy for the companies. In a perfect market place the annual report are supposed to provide the most comprehensive information regarding a particular entity in regards to a business year, its future plans, the structures and all matters that are party the company. Using the reports the writer shall find out the level of opportunities as well weakness that the entity exhibits. Basically, the companies are managed by directors on behalf of the shareholders and therefore have to be accountable to them. The annual report is a tool of communication by the directors and senior management to their shareholders explaining their business strategy of the previous year and explains their performance and also provides their vision for the company for the long term. It gives the shareholders the basis to critique and evaluate the effectiveness of their directors and also give input on what they expect from them. The annual report would also help to promote the agenda of the stakeholders internal, connected or external in a manner that would result in a win - win scenario. The two banks were selected randomly because they are among the largest financial institutions in Canada and have a long history of above average performance. They are therefore expected to have proper business models and offer an excellent career opportunity. Objectives In this analysis of the annual reports of TD and CIBC the writer is attempting to compare the two banks as investments and career opportunities. To begin with when an evaluation of the suitability of a bank as an investment opportunity there basic criteria include the profitability growth, level of liquidity and the capital structure of the company. The valuation of the company’s share and the performance in the stock market is also an indicator of the confidence the market has on the company. If a company has good profit history, a stable dividend growth policy and well managed working capital to ensure there are no liquidity problems would be the most attractive as an investment. regards to a banking institution as an location for career development what is critical depends on the needs of the potential employee. Employees are motivated to join companies that provide both intrinsic and extrinsic rewards. Apart from the monetary rewards expected from the company its also expected that employees would prefer the company that provides more job security, training and development opportunities and an atmosphere of innovation among many other things that vary from one employee to the other. CEO’s letter Question 1 (a) The CEO’s letters to the stakeholders give an insight into the activities of the entity. In this particular paper the letter by TD’s CEO summaries the company’s strategy and highlight how it fared over the previous business year. A critical statement noted is the CEO’s emphasis of the company’s strategy to focus on retail focused business model. He also says that this approach has delivered result providing 85% of the total earning. ” Once again, our retail-focused business model delivered strong performances despite continued challenges in our operating environment.pg4” Also in the first paragraph, he states that the company managed to provide value for its shareholders by two dividend increases in the year 2013. This is a critical performance indicator that shows a good investment opportunity; it shows that there was growth in the company and the company’s strategy aims at maximizing the shareholder value. This was achieved as TD’s stock prices closed at an all time high (Annual Report, pg 4). “The market rewarded our performance, as TD’s stock price closed the year at an all-time high.pg4” The CIBC’s CEO also had an optimistic mood in his letter and just like in TD the company had adopting retail and business banking as its focus and core competence. This particular segment accounted for a majority of their income and was able to grow from the previous year. “Retail and Business Banking accounted for 72% of CIBC’s reported annual earnings and 69% of adjusted earnings(1), reporting adjusted net income(1) of $2.5 billion in 2013, up from $2.3 billion in 2012.”pg II Another major announcement that was made by the CEO of CIBC in his letter was the intention to acquire a private wealth management company as part of its expansion program aimed at increasing revenue streams as well as diversifying the business interests both in terms of products and location away from the conventional streams of business. “During the year, we announced plans to acquire Atlantic Trust, a United States private wealth management firm, from its parent company, INVESCO pg III.” Question 1(b) Key Success Factors for the Companies From the CEO’s letter of TD it can be noted that the company did well in diversifying its products that enabled it mitigate poor performance from challenging lines of business. “TD’s diverse mix of revenue streams enabled us to weather a bumpy operating environment this year and our business model enabled us to continue to invest for the future.”pg.4 Another important success factor was with regards to the acquisition of a wealth management company which resulted in the company attaining record returns from the wealth management business. “We completed the acquisition of Epoch Holding Corporation, a successful asset management firm based in New York.pg4” The CIBC’s CEO highlighted the company’s commitment to ensure easy access by its customers to its services. This was achieved through their investment in mobile platforms as highlighted in his letter. This can be noted as a key success factor for retail focused financial institution. “During the year, we continued to invest in mobile banking innovations to make it easier for our clients to do business with us.”pg II The CIBC’s CEO also notes the critical aspect of the importance of the people in the profitability of the firm. He also states the commitment of the company on investing in the people where it operates by engaging in charities and also shows its recognition given by outsiders in the market place (cibc.com). “The success of our business is a direct result of the efforts made every day by our 43,000+ employees on behalf of our clients.pg IV” Question 1 (c) Significant failure TD’s CEO also highlights that the management blundered that resulted in floods and some events in the auto business though he does not dive into detail. He however states that learning was achieved and strategies put in place to mitigate future flaws in the businesses. “We had bumps of our own in 2013: in the immediate aftermath of the Alberta floods, as well as with our auto insurance business in Ontario”pg.4 The CIBC’s CEO also mentioned of the failure of the FirstCaribbean International bank due to harsh economic conditions. He however does not completely state the impact of the challenges in his letter. This is important as it impacts decisions and questions as to whether the entity’s business model can compete in the Caribbean market or if it should pull out and focus on its more profitable locations. “Like other financial institutions in the region, CIBC FirstCaribbean International Bank has been impacted by challenging economic conditions.pg IV Question 2 A comparison of the CEO’s Letters. The two CEO’s letters were quite different in their styles and more pronounced was the length of TD’s letter which was only one page as compared to CIBC’s letter that was about four pages. However, I found TD’s letter more credible since despite its brevity it gave the core information regarding the profitability of the various business and revenue centers. It also vividly highlighted the bank’s strategic focus and its comparative financial performance. A good example is the explanation of the wealth management business by both CEOs. TD’s CEO gives a good comparison and performance of the wealth management division as compared to the entire company and highlights the strategy to acquire another entity. This is a similar strategy employed by the CIBC company but the wordings of the CEO are too bulky and the key concept is not easily grasped by a layman reader of the annual report who might not have financial training or understanding. Question 3 (a, b,) Financial performance TD CIBC Diluted earnings per common share 6.91 8.78 Tier 1 Capital Ratios 9.0% 9.4% Efficiency ratios 52.8 56.2 Question 3 (c) Tier 1 Capital This is part of the two divisions that a bank’s capital is normally classified and consists of the most important part of the capital. According to regulations, the banks must ensure that they maintain a particular amount of tier one capital as a safeguard against liquidity problems. This tier one consists of equity and capital reserves. This capital has to be transparent and declared to the stakeholders and the public every so often as stipulated by the regulators. A higher number would mean that the company has more money on hand in the event of liquidation thus safeguarding the investors’ interests. Question 3 (d) (e) Efficiency ratio A bank efficiency ratio basically states how quickly or easily a bank is able to convert its resources into revenue. If the ratio is lower than 50 which is the optimal ratio indicate that a bank is performing well. A lower ratio basically implies that the bank is reducing the costs and increasing the revenues. In this analysis the TD bank is therefore the best performing bank if efficiency ratios were to be used as the yardstick. The ratio is calculated by dividing expenses from revenue generated at a particular period of business operations. Question (4) Corporate Social Responsibility The banks do not only focus on financial performance, in the report for CIBC it states that it invested over $41 million in supporting various community organizations. Other initiatives included one of the over 15,000 employees of CIBC who teamed up to raise over $3 million for breast cancer research. Other activities done by the bank included hosting youth forums on academic issues on the CIBC youthvision scholarship program. The bank also demonstrated environmental awareness by only using paper that is certified by (FSC) forest stewardship council. The bank also invested in entities that focused on renewable energy projects such as wind, hydro, geothermal, solar, biogas and biomass by financings about $6 billion for a period of 3 years. TD also has a commitment to the community to donate at least 1% of the domestic pretax profits to not for profits and charitable organizations. The company has a policy that encourages employees to get involved in community and fundraising efforts. It also is conscious about the preservation of the environment, according to the report on page 3. Particularly interesting is the fact that the firm focus on supporting advancements in areas of financial literacy, education, creation of opportunity for affordable housing, the creation of opportunities for young people and finally for the environment. Question 5 Investment appraisal The two banks are both profitable, though their financial performance differs to a great extent. I would prefer to invest in CIBC due to its consistent growth rate in revenues. TD has a lower efficiency ratio of 52% as compared to CIBC’s 56%, which imply that it most easily converts its resources into revenue. Despite having a lower tier 1 capital as compared to its counterpart its more efficient indicating a more effective business model operated by the bank. However, from an investor’s perspective, the return on shareholder’s equity is a more important indicator. CIBC has a higher return on equity of 20% as compared to 15% obtained from TD. Therefore, based on fundamentals CIBC is better investment option. Question 6 Career Options Both companies seem to have a good business model that generates revenue and is able to adapt to the changing needs of the customers. As an individual the author would prefer to work in a company that has a strong focus on developing its peoples and the community around it. CIBC seems to have a stronger sense of community and focus on talent development of its people and the community around it based on the information obtained from the annual report. The company is engaged in some of the areas of community involvement that the author enjoys being part such as the creation of opportunities for the youth and enabling access to housing to many of the country’s less fortunate. The growth potential of CIBC is also higher in my perception since it has a higher capital base which implies that it has more assets and thus more opportunities. The company also is diversified to other countries which make it quite a global workplace in which the employees can learn to appreciate and work with other people by developing a global mindset. I am particulary interested in working in a warmer country such as the Caribbean and working with CIBC gives me that opportunity to experience such and desire. The company is also aggressively getting to a growing market segment of wealth management which I have developed interest and passion. I believe being among the market leaders I would benefit most by gaining on their experience in the field of fund management and this would increase my capacity in the areas enable me to get specialist level at a faster pace (td.com). References http://www.td.com/document/PDF/ar2013/ar2013-Complete-Report.pdf https://www.cibc.com/ca/pdf/investor/ar-13-en.pdf Read More