Accounting

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.

Contents Executive Summary: 2 Introduction: 4 Assessment of the Financials: 5 Vertical Analysis: 5 Horizontal Analysis: 9 Financial Ratio Analysis: 13 Recommendations: 14 Conclusion: 14 References: 15

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 on-going 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 and 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 head quarters 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 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 the various businesses and traders to help them overcome the situation of corona virus pandemic. It has around 45,000 employees working around all its branches. The current market price of the shares amount 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 comprise 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 since long term and providing similar category of services.

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 are taken as a percentage i.e. in proportion to the total liabilities.

Income Statement of CIBC:

Balance Sheet of CIBC:

Comparative Vertical analysis

CBIC Company – It can be seen that percentage of interest income to total revenue have highly increased in year 2019 in comparison to 2018 and 2017. It is due to increase in interest income. The provisions for losses and other expenses have also increased in year 2019.

It can be seen that loans given to various clients amounts the highest percentage to the total assets in all the three years but it shows a declining trend in all the years. The securities comprise of the second largest asset of the company which shows an increasing trend in all the 3 years. The lowest share of asset is the cash and non -interest bearings deposits which does have follow any trend. For the liabilities the deposits comprise of highest share in total liabilities and shows declining trend but the approximate figures remain the same. The other liabilities comprise of the second largest share in liabilities. The company has more of deposit liabilities than loans given.

BMO Company – From the vertical income statement analysis it can be seen that the interest and dividends comprise of major part of revenue with around increasing trend in all the three years. The provisions made are very low and the company has good profits.

From vertical balance sheet analysis, it can be seen that loans given comprise of around 50% share of total assets whereas deposits comprise of 66.67% share of total liabilities. The company has good share of cash and cash equivalents showing an increasing trend.

It is a technique which is used to review the financial statements and to make a comparison of the various past data during the particular period of accounting. Horizontal analysis may either use comparisons which are absolute or proportional comparisons in which the numbers for each successive period are demonstrated as a proportion of the value in the benchmark period, with the base - line value being set at 100%. Here analysis is done for past figures and % change is calculated to find out the percentage change in the succeeding year in comparison to preceding year. Similarly, in the balance sheet the various items are taken for past years and an analysis is done on the basis of past figures. The percentage change in asset or liabilities is clearly known and represented in the horizontal analysis of balance sheet and income statement.

Income Statement of CIBC:

Analysis of Horizontal Statements

CIBC Company: The horizontal analysis of the income statement shows that the profits of company have declined in the year 2019. The profits have decreased by a percentage of 3.08% in the year 2019.

From the vertical analysis of the balance sheet it can be seen that the total assets have increased to 9.13% in the year 2019. The level of securities and other assets have increased highly in year 2019 along with a high increase in the levels of obligations. However, cash collaterals have highly declined in year 2019.

BMO Company: The horizontal analysis shows that the interest income have increased in comparison to previous year but the interest expenses have declined. There is an overall increase in net profits in year 2019.

From the balance sheet it can be seen that there is a high increase in Securities borrowed or purchased under resale agreement in year 2019 in the asset’s category. Similarly, subordinated debts have highly declined in year 2019.

From the above analysis it can be seen that:

· The CIBC bank has higher profitability ratios in comparison to ratios of BMO profit margin. CIBC Ratio do not show any trend where as the net profit margin of BMO shows a declining trend.

· The assets turnover ratio of CIBC is almost same in all the 3 years. Similarly, the company BMO holds the same ratio and both the company holds equivalent turnover ratio.

· Return on equity has declined for both the company in the previous 3 years. However, CIBC holds higher return on equity.

· Return on assets have also declined for both the company in the past 3 years and there is not much difference between the return on assets of these companies.

· The 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 CBIC indicating that the company believes in payment of more dividends.

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 show that deposits form customers and loans to customers form the major part of assets and liabilities. The company CIBC have larger proportion of deposits and loans as compared to BMO. The cash and cash equivalents share of BMO is much higher in comparison to the CIBC. Thus, from the perspective of an investor both the companies show a good vertical analysis report.

· Horizontal Analysis – From the horizontal analysis it can be seen that BMO has increased it profits in comparison to 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 a less decline in cash and cash equivalent for BMO company. Both the company shows good increase/decline but in comparison BMO shows a strong horizontal analysis.

· Financial ratios – Both the company holds good financial ratios and some ratios are equivalent in both the companies but CIBC have high profit margin and return on assets and to shareholders. BMO pays more dividend to its shareholders as compared to CIBC.

The report underscores the different aspects of different analysis. While some analysis may depict one entity's better performance, other ratio 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 analysis of the financial ratio show that both the company have good ratios and heathy position but CIBC shows a better and sound financial health.

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