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2012 Annual General Meeting - Managing Director’s address

29 October 2012 |Media centre

I am sure everyone is well aware of the tough conditions that all companies, but particularly financial services and retail companies, continue to face.

Low demand for credit makes it difficult to grow revenue whilst maintaining profitability. Additionally, the new regulatory changes arising from Basel III require higher capital to be held by banks and have driven increased costs of deposits. These imposts, combined with the lower level of absolute interest rates, will ensure lower returns from banks than those experienced in the years prior to the Global Financial Crisis.

All of these issues reflected in our performance for the financial year ending 30 June 2012. Our after tax statutory profit of $195.0 million was impacted by a goodwill write-down of $95 million primarily relating to the reduction in the size of our margin lending book.

However, our cash earnings were $323.0 million, a decrease of only 3.9 per cent over the prior corresponding period, reflecting a solid year's performance. Our core revenue generating businesses of retail, third party banking, wealth and rural banking continue to perform well, and we have been determined in our efforts to improve the funding and capital profile of the bank.

We have been able to limit net interest margin contraction through prudent and proactive balance sheet management and have sought to price both assets and liabilities in the most appropriate manner for all stakeholders. This has been combined with an active hedging program which, while expensive, has successfully mitigated the risk of significant margin volatility over the period.

Importantly, we have strengthened the bank's balance sheet over the last 12 months through a capital raising to support the Bank of Cyprus Australia acquisition; through non-dilutive actions such as the sale of our stake in IOOF and lower rated securitised notes; and, through our current offer of Converting Preference Shares. All of these initiatives have added significantly to our prudential capital base and our readiness for the new regulation under Basel III.

Our funding profile remains very strong.

Cost containment and efficiency continue to be a major focus of management and, over the reporting period, operating expenses (excluding the purchase of the Bank of Cyprus Australia (BOCA)) grew by just 1.1 per cent. Operational expense growth including the BOCA acquisition was only 2.2 per cent.

Due to deteriorating revenues the cost-to-income ratio increased to 59.1 per cent, versus 57.4 per cent in 2011. The group maintains its long-term 55 per cent cost-to-income target. As part of the continued cost focus no short term incentives (STI) were paid to staff this year.

So, the bank is holding its own in a tough operating environment and I would like to take this opportunity to thank all our staff, partners, customers and shareholders for their effort and support for our bank.

I'd now like to turn my attention to the future and explain why I believe our bank is well placed for pleasing long term performance.

Over the last few weeks we have seen several Australian banks reporting results that reflect the operating conditions outlined above. Two of those banks announced profit downgrades and I note this for no other reason than to underline the challenges all businesses now face. Current opportunities for meaningful growth are limited to acquisitions and gaining market share - the latter often as a result of silly pricing and I'm sure you've all seen that before.

When the economy enters a low growth phase such as this, markets reward companies that drive bottom line improvement through cost cutting at both the operating and investment level. However, long term research on companies shows that the best performed firms are those that invest, innovate and grow through periods of difficulty - and that is what we plan to do.


Some recent research by Ernst & Young entitled "Global Customer Banking Survey 2012 - The customer takes control" examines the views of more than 28,000 banking customers across 35 countries, including Australia.

Relevant to my point on investing through low growth times, the research looked at:

How likely are customers to change banks, and if so, why;
How customer behaviour towards their banks is changing; and
What is driving customer satisfaction and advocacy?
The key takeouts are quite insightful as a whole, although probably predictable as standalone points.

The bottom line is that "customers remain sceptical of the banking industry and are taking control, demanding value, flexibility and choice."

Customers are doing their research and are using multiple banks to ensure they get the best products and services for their needs. 56% have a relationship with two or more banks and they are increasingly using social media and comparison sites for that research.

They want products tailored to what they are trying to achieve in their financial life and 72% are willing to provide their personal information to make it happen. Moreover, a significant proportion of customers are willing to actively maintain that personal information with the bank. In return, they expect to receive tangible improvements in the offers they receive.

Customers want the flexibility to shape the relationship, contacting the bank whenever and however they choose. On-line banking is very popular with Australians but the branch network remains important to them for advice on products and services - with 58% preferring the branch for this - and when undertaking complex transactions 81% want to use the branch. Importantly, they believe loyalty should be rewarded.

The researchers have outlined what they think the implications of this are for banks. None of it should be news to us:

They believe there will be an increasing need for banks to create a stronger engagement with their customers to prevent disintermediation.

There will be an increasing presence of differentiated banking models that serve specific customer needs, such as low cost or high accessibility.

There will also be a greater need to deliver personalised products and services to a broad customer base, while lowering costs and generating sustainable profitability. Banks will have to reduce costs in manufacturing and provide tailoring through distribution models.

Whilst they do go on to outline some things banks should do to meet these challenges, I don't intend to repeat those here.

My reasoning for not doing so is that I believe our strategy addresses the issues raised by the research and the difficult economic conditions in which we operate.

Our vision - in aiming to be Australia's leading customer connected bank - recognises that need customers have for stronger engagement.

Our mission - to focus on the success of our customers, people, partners and communities underlines our commitment to deliver products and services that help all our stakeholders achieve their goals. The Board and Executive are very conscious of the need for all those involved in our business to feel they are benefiting through that involvement - if we don't achieve that we run the risk of losing their support.

Our willingness to take a long term view of the business means that we take decisions that will generate value for years to come - we will not be price driven or cut costs at the expense of long term value.

We listen - and as technology advancements and competition in the sector both mean the battle for customers is hotting up, listening to what it is our customers and partners want will help us in tailoring product to meet their needs.

We respect every customer's choice, needs and objectives - putting the customer in control of how they want to define their banking relationship and how they want to deal with us. We partner for sustainable long term outcomes - if we want to meet the expectations of our customers and grow in this difficult environment then we have to be prepared to continually improve our business. To facilitate that we must have open and honest conversations about the balance, fairness and commitment required to operate our model.

Doing all of the above earns us the right to compete for a customer's business. But how do we make sure we win it?

Understanding the privileged role a bank has and its obligation to feed into the prosperity of the community is paramount to this and is a key focus of all our businesses.

Remember, we have market leading brand advocacy and the EY research tells us 20% of people use social media to find out about banking services and a whopping 63% rely on family and friends opinions when considering new products or providers.

But that opportunity won't be maximised unless we make the investment to back it up. And we are!

The significant investment the bank has made into our customer relationship management system allows us to record our interactions with customers and make offers that are relevant. So far it works well.

Then there's our investment in Hub It and its No Q application. Those of you who were at last year's AGM may recall me talking about the threat posed by technology and disruptive banking models. I outlined some of the really smart applications that were being developed and the opportunities and threats that presented for our bank and for our consumer and business customers. Our investment here is a direct response to that threat and we are already seeing how great the NoQ application is and the benefit it provides our customers in helping them easily enter the mobile commerce world.

In addition, we are rethinking on-line banking and we are willingly investing in technology that will allow our customers to define how and when they deal with us.

Our digital strategy, of which these initiatives are a part, is principally being driven out of our newly formed Customer Led Connections team. This is an exciting area of development for us and it reaches across on-line product, payments, telecommunications and social media. I think we are as advanced as anyone in our thinking in this area and we are happy to invest because we can see the long term value for our customers and other stakeholders.

Digital is just one of the four major investments that currently support our strategy. The other three are Wealth, Continuous Improvement and the advanced accreditation model. I won't spend too much time on the last one as it is very technical but, suffice to say it should make us a more robust and capital efficient business and significantly level the playing field for us against the major banks.

The Wealth investment is more tangible and is focussed on allowing us to meet all of our customers' financial requirements. Many of you will have read of our strategy in this area and we are committed to delivering a meaningful offering for our customers. It will take some time, but progress to date is pleasing and our new Smartsuper product is a good example of that.

Continuous Improvement, driven by a developing improvement culture that predominantly uses Lean technology, is the centrepiece of our desire to make it easier for customers to do business with us. Through that, we are striving to both grow our customer business and improve our efficiency by doing more things - such as advanced accreditation - within the existing cost base.

So, in conclusion, I hope you can see that we are well positioned for success in the current environment.

We have a highly differentiated value proposition that will enable us to win customers and market share without resorting to price.

It is supported by investment in areas that meet customers' current and future requirements.

It will ensure that we are relevant and connected to our customers and communities and, as a result, valued by them.

The economic outlook might be gloomy but our strategy provides a bright light to guide us.

Thank you

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