FINC5090 - Finance in the Global Economy Semester 2 2024R

Java Python FINC5090 - Finance in the Global Economy

Individual Assignment Outline

Semester 2, 2024

Instructions

1. Read the instructions carefully.

2. This assignment is worth 25% of total marks for FINC5090.

3. The DUE DATE is 6 SEPTEMBER 2024. The submission link will stop accepting submissions at 23:59 on the submission date. Do not send your work via email if

you miss the deadline. Submissions after the deadline will not be accepted.

4. Plagiarism is a serious academic offense that will result in receiving zero marks and possible disciplinary action.

5. Ensure that you write your correct Student ID at the top of each page.  This is important so that the marker knows who the author of the assignment is.

6. Submit your assignment in PDF format only.

Task

1. In this task, you will analyze monthly banking statistics data to answer specific questions about the Australian banking sector.  You are provided with data on monthly banking statistics from the this website. For this assignment, you must focus from March 2019 to May 2024.

2. In these data, you will see monthly statistics for each bank operating in Australia. For this assignment, we are only interested in commercial banks,i.e., banks that, in addition to other activities, also take deposits from and make loans to house- holds.

3. Using these data, you are required to answer the following five questions:

(a) (3 Marks) The first task relates to the composition of banks’ loan portfolios. Here, you must determine the share of households’ real-estate loans in the overall loan portfolio of banks. Technically, this corresponds to a ratio:

Please note that the dataset is a panel dataset, meaning it provides time- series information for multiple banks. As you work with the data, you can estimate this ratio at the bank level and then present a time-series plot of the mean with 95 percent confidence intervals. OR, you can aggregate the data across all banks,estimate this ratio for each month, and present a time-series of this estimate. Your interpretation will differ slightly depending on which of the two you choose.

What are the potential factors driving the fluctuations in the time-series?

(b) (10 Marks) The next task relates to a core activity performed by banks: tak- ing deposits and making loans. We are interested in deposits (from all sec- tors).  You are required to estimate the Loan-To-Deposit ratio that is esti-mated as:

This ratio generally tells how much of the loan volume is funded by de- posits. For instance, a ratio of 1 means that a bank has originated a dollar of loan for each dollar of deposit. A very high or very low Loan-To-Deposit ratio is not ideal.  A very high ratio implies excessive risk due to liquidity, funding, and credit risk.  A very low ratio indicates low profitability, idle funds, and low competitiveness.

Based on average values over the sample period for each bank, rank the big 4 Australian banks, i.e., ANZ Banking Group, Commonwealth Bank, NAB, and Westpac.

Next, from Yahoo Finance,  download time-series of monthly returns for these four banks.  From these data,

estimate a stock’s monthly return as From Ken French’s Data Library, click on ‘International Research Returns’ and download file named ‘Fama/French Asia Pacific ex Japan 5 Factors’ . This zipped folder contains monthly returns for factors known to systematically affect stock returns. We are interested in the sum of Mkt_Rf and RF, which will yield a monthly return series for the market.  Next, subtract this sum from each stock’s return for each period, which yields a market-adjusted return. We do this operation to subtract fac- tors affecting all stocks in a given month. The output for this task should include a 2x2 panel of figures: one figure for each bank. Each&n FINC5090 - Finance in the Global Economy Semester 2, 2024R bsp;figure will contain a time series of a bank’sLoan-To-Deposit Ratio and market-adjusted stock returns based on adjusted closing price. In your write-up, explain how you think the market perceived changes in this ratio.

(c) (5 Marks) The next task relates to the competitiveness of the Australian banking sector.  Your main task is determining the evolution of the bank- ing sector’s competition between March 2019 and May 2024.  In finance, a measure of market concentration and competition is Herfindahl–Hirschman Index (HHI). A higher HHI indicates a less competitive market. The HHI is defined as:

Here, Xi  equals either total loans (for loan markets) or total deposits (for deposit markets) for bank i. When you repeat this calculation for each time period, you will end up with two time-series for HHI based on loan and deposit markets. Based on this information, you are required to understand and interpret the competition dynamics in the Australian banking sector.

For example, in market there are total deposits of 4 dollars, and Bank A and B has deposits of 3 dollars and 1 dollar, respectively.  Thus, Bank A and B have a deposit market share of 75 ( = 3/4) and 25 ( = 1/4) percent. Then,HHI for this market is 752 + 252  = 6, 250. In your judgment, whether competition is high or low, you should use the following classification:

Value	Classification
HHI <= 100	Highly competitive industry
HHI <= 1500	Unconcentrated markets
1500 < HHI <= 2500	Moderately concentrated markets
HHI > 2500	Concentrated markets

(d) (5 Marks) In June 2022, ANZ Banking Group Limited announced the takeover of Suncorp-Metway Group.  In August 2023, the Australian Competition   and Consumer Commission (ACCC) blocked the deal, stating that this deal   would further entrench the banking oligopoly. Evaluate how substantial is ACCC’s claim. To do so, you may assume ANZ and Suncorp as one bank, repeat the steps that you took in part (c) above, and contrast the results.

(e) (2 Marks) What is (are) the key caveat(s) of your analysis in (a)-(d)?

4. The word limit for this project is 2,000 words. This word limit includes your write-up only and excludes all other sections like references, section headings/sub-headings, and figure descriptions, et cetera. Write on A4 sized page, single-spaced, 2.5cm margins (top, bottom, left, and right) with the Times New Roman font with size 12.

5. Refrain from writing stories. Make your point as quickly as possible. A suc- cinct write-up of analysis is always appreciated by the readers. Note that this is academic work. You must substantiate your claim either by your analysis or by providing a reference from an academic journal (not random websites or blogs). The referenced work must be peer-reviewed (academic journals) or reputable (the Australian Financial Review, the Economist, the Time, Wall Street Journal, etcetera). You have access to all sources via the University’s library. Follow APA citation style.

6. We will discuss these questions in detail in the first three tutorials (Weeks 2, 3, and 4). Please make sure you attend these tutorials