westpac annual market update - transcript sydney – …€¦ · gaps, enhancing sustainability and...

WESTPAC ANNUAL MARKET UPDATE - TRANSCRIPT SYDNEY – 29 JULY 2004

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Andrew Bowden Good afternoon and welcome to Westpac’s annual market updated for 2004. In addition to those present today, we have a number of people who will be watching by web cast and also dialling in via conference call and I would like to welcome them. In terms of protocols today I have two very quick requests. Please switch off your mobile phones and we will have plenty of time for questions today, so if you wouldn’t mind holding off on any questions until the specific slots organised for question time.

We do have a full afternoon ahead of us and without further delay I would like David Morgan, Chief Executive Officer, to open the session and set the scene for the day. Thanks.

David Morgan Thanks Andrew. And thanks to all of you for taking time out of your schedules to join my executive team and I today. There are a few key messages that I would like to impart today. First, regarding Westpac’s performance and, notwithstanding the recent focus on the sector, we remain in good shape. Secondly, our strategic focus is unchanged. The franchise continues to have major untapped opportunities and we have the programs in place to tap those opportunities. And thirdly, as I said last year, during my tenure as CEO, execution has been a key theme of mine. Westpac is executing well and with this executive team and our high performance culture platform we have further entrenched that capability.

We asked you to respond with the issues that you wanted us to talk about today - thank you to those who responded. These are the top five: the changing operating landscape; the margin issue unsurprisingly; how we plan to continue to outperform our peers; IFRS; and Basel II. Now if we get to the final Q&A today and we have not addressed those issues to your satisfaction please raise that at the time and we will do our best to rectify it.

Over the last decade Westpac’s strategy has constantly evolved. At the start of the 90s we were focused simply on restoring viability. And that was followed then by acquisitions to expand the customer franchise.

Over the past five years or so our strategy has focussed on closing capability gaps, enhancing sustainability and getting a much better balance between sustainable growth and the return on equity. That simple strategy has delivered clearly for all of our four major stakeholder groups.

After pretty much hugging the financial services index over the period from 1993 to most of 2001, around the end of 2001 we started to out perform the index. And that out-performance has tended to accelerate over the past 12 to 18 months.

In terms of the operating environment we are faced with an increasing challenging landscape. Australia and New Zealand GDP growth outlook looks basically sound. However, the credit multiplier looks likely to return to much more conventional relativity vis a vis nominal GDP. The population is of course ageing, that’s bringing with it increasing demand for investment advice and those groups of customers are looking for a wider range of products and services.

Many of our competitors are reverting to customer-orientated strategies. At the same time niche providers and third party distributors will continue to have a place in the distribution footprint.


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Finally, regulatory issues such as IFRS and Basel II will continue to challenge us. Where are the major risks to the outlook? I have highlighted these risks in previous presentations however there are two particular that have increasingly taken the focus of my team and I.

Firstly, the threat of irrational competition has increased recently and must be considered medium to high in both terms of probability and potential impact.

Secondly, we are seeing a gradually increasing impact of new entrants, niche players and third party introducers, the threat of which we have raised to medium from low. We are still very confident that the housing market will for the most part have a soft landing. While the credit risk environment is perhaps as good as it’s been for a long time, we see no signs at all that it will deteriorate substantially in the short term.

What are our responses to those risks? We have a long-term strategy that we are effectively delivering against. We do not intend to make knee jerk reactions to any competitor’s particular pricing move. While we are of course recognise the need to be price competitive, we will not leave the market down or engage in unsustainable pricing.

We have clearly demonstrated our preparedness to forego unprofitable growth and unprofitable market share. Over the longer term Westpac’s strategy has been to increase the group’s resilience to external shocks including short run price cutting actions from competitors, across all four of the stakeholder groups.

The service profit chain causality works in most of our business. Hence employee commitment is one of our fundamental scorecard measures. The 2004 commitment score increased by 5% to 68%. This is a record for us. It takes us into line with global high performing companies, whatever their sector. It is above the norm for large Australian companies. It is above the norm for large global financial service companies.

Increases in employee commitment have been central to our strategy to enhance customer satisfaction. As measured by independent customer satisfaction surveys we generally made significant progress on this front in recent years, both relative to history and relative to our competitors. In turn we see customer satisfaction as a leading indicator of growth in customer value.

We have a global leadership position in sustainability. Our approach to sustainability is not about being fashionable and it is not about winning awards. Rather it reflects some very basic, simple views about leading and managing a bank like Westpac in a manner that best drives shareholder value.

Firstly, it reflects a broad approach. We are running an economic machine and a social system and the key task of leadership and management is to have those two operating seamlessly as a whole.

Secondly, it also reflects a long approach. This is a long game. Shareholder value is about long-term predictable sustainable earnings. Between 1994 and 1999 we lost market share right across the board. Since then, flowing from increases in employee commitment, increases in customer satisfaction, and a changed shareholder value metric, which now seeks to balance sustainable


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growth with return on equity, we have been consistently growing share over the last five years.

We have, as previously mentioned, foregone some share in certain sectors of the housing market, primarily on grounds of risk and profitability. In business lending we have recaptured all of the share that we lost in the 1994 to 1999 period. In the last couple of months, to the end of May 2004 we saw our share of total system credit constant; on business lending increasing by 30 basis points and retail deposits share increasing by 30 basis points.

This slide isn’t new but I think it encapsulates the Westpac story over the last five years. Consistent revenue growth at the top end of our peers combined with discipline expense management delivering double-digit core earnings growth. That, combined with our low credit risk profile, has in turn delivered compound annual growth rates of 10% in cash earnings and 11% in earnings per share, while returning a 5 year average ROE of 20%.

One of my key measures is the three year total shareholder return, as measured against the top 50 Australian corporates. The chart shows a generally improving trend over the past five years. As depicted in the last column, in the three years to June 04 Westpac was ranked the best performing bank, on the 77th percentile.

Over the medium term our performance also stacks up well against our international peers. Of the universe of 400 financial services companies with a market capitalisation greater than US$10 billion, Westpac was ranked 6th in the shareholder performance hall of fame over the last five years for which comparable data is available.

Adding up all these influences confirms our belief that the highest value strategy for us is to pursue one of organic growth in our chosen markets. Acquisitions as we all know are very distracting and we have no major capability gaps that require filling. That doesn’t mean to say that we will not look at opportunities that might arise, but we will only do so in terms of our often and clearly stated disciplines.

Finally, there are very few success stories of banks taking a host country comparative advantage offshore, notwithstanding many attempts. We keep an open mind but reiterate that we still have much untapped potential in our existing franchise and any offshore aspirations remain a low probability outcome.

I don’t want to overly dwell on this slide, you have all seen it often enough. It is however a powerful tool in helping all of our people to understand and embrace the strategy. Suffice to say we strongly believe that you can successfully deliver on a customer focus by superior execution as the key differentiator. The intention is that all the following presentations will link back to this strategy.

There is a lot of activity going on in the company, across all the four dimensions that we focus on. In seeking to entrench a high performance culture we have many programs on such aspects as leadership, customer service training and recruiting. The last of these for example, we are seeking to better align our employee demographics with the preferences of our customer base. Our customer based activities start with customer service and maximising value from


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our existing large and valuable customer base. We are continuing to embed sustainability in everything we do.

Finally, for shareholders it is all about lower risk, consistency of delivery and the right balance between sustainable growth and return on equity. Supporting these activities, we have many other programs that you will hear more about today. These include extending the reach and capability within our chosen markets, platforms to assist maximising the value from our existing customer base, and improving the efficiency and the effectiveness of our operations.

I am pleased to have a board of this quality supporting the bank. Of at least equal importance is the fact that there is a very positive high quality level of interaction between the board and the executive team. This is a very valuable corporate asset, one that is largely opaque to the market.

Once again, I am pleased to present my team to you today. A team that is unchanged from last year’s presentation and a team that is delivering across all of the businesses. It is, by a wide margin, the highest quality team I have had the privilege to lead.

The order of events is similar to last year. We will have a series of four presentations followed by a Q&A and a short break. After the remaining presentations, including my wrap up with a summary and the outlook, we will have a final Q&A session. So, on that note let me pass now to Mike Pratt, Group Executive of Business and Consumer Banking.

Mike Pratt Thank you David and good afternoon everybody. My presentation to you this afternoon will be in three sections. Firstly, I would like to talk to you about the progress that we’ve made in the Business and Consumer bank over the last 12 months on our strategic objectives. Secondly, I would like to talk to you about building sustainable performance. So what are we doing to continue to drive the sector leading performance that we’ve been experiencing going forward? And then thirdly I would like to show you my own balanced scorecard that I am accountable for both to David and to the board.

Firstly, just a quick reminder about business and consumer banking. We are a sizeable business. We are 52% of the group’s cash earnings at the latest March half. I think one of the key points to make on that pie chart is the equal split you now see in cash earnings between consumer and business banking. The business is focussed right across the retail customer base including, SME and our middle market customers. In aggregate we have around 12,500 staff and just over 5 million customers. One of the other key points to make here is the wallet share. And you will see here that in the consumer business we have 35% of wallet and in business banking 57%.

A quick snapshot on the results to remind you of the momentum that is in the business. Economic profit grew by 27%, BCB cash earnings up 19%, cost to income ratio down 290 basis points. Strong growth across all our key product lines and the particularly encouraging growth there was deposits of around 12% and business lending at 18%, which clearly was the sector leader over that period. The other really encouraging point about our March half performance is the diversification of revenue. We now have a very good mix between both our


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consumer and business banking operations and within that our core product lines.

David put this slide up about our DNA and again I won’t dwell on it either but simply to say that the BCB strategy is absolutely aligned and linked to the Westpac DNA. In a world of converging strategies in my business, superior execution is what will deliver the runs at the end of the day. So our superior execution focus on our DNA framework is very important to BCB.

Now 12 months ago when we did the market update I talked to you about what are the five key elements to look for in a very good, or a great retail franchise. Those five elements, if you recall, firstly around customer experience and relationship management, secondly risk management, thirdly products and solutions, fourthly multi-channel distribution and then finally what brings all that together is the key element in my view, the fifth element and that is people.

Now success in a big retail business like ours relies on understanding and being able to make the linkages between all of those five key elements to work together to get the optimum result.

Last year if you recall I spoke to you principally about customer experience and about people management. This year I want to focus more on product and solutions and on multi-distribution. Focus in on what we’ve been doing in those areas and what we will be doing more of in the future. All of this was underpinned by the bottom slide on that chart which, as you recall, was a strategy piece that we did at the end of 2002 that was called Red Power. Red Power had three elements to it, or three streams.

The first stream was around fundamentally driving quick wins. They were performance and planning opportunities that we saw in the 2003 year, and that has been completed. The second stream was around repositioning our franchise into 2004, and strategically undertaking and investing in areas where we saw growth opportunities. Finally, our stream three is what we call unlocking growth. That is the stream now that we are embarking into in the latter half of 2004 and into 2005.

So how are we going against those strategic objectives? What has been our progress over the last 12 months? Well firstly, on the customer side we’ve made significant advancements. All of this is really based around what David referred to in terms of the service profit chain. One of the enormous wins for us has been the appointment of what we call Ask Once co-ordinators. We now have 52 of these throughout our network and this role is principally all about problem resolution. One of the major complaints that our customers said, and I am sure many of you in this room said, is that when I contact my bank, firstly I don’t know who to talk to when I have a complaint, and secondly I don’t know who is going to come back to me. I can’t get the name or a phone number of a banker and so on.

This is all about addressing that key need that we identified and you can see on the bottom chart the response that we now have from this particular initiative and a number of others, but particularly this one, on addressing customer complaint management. The resolution on that at the first point of contact has gone from a very low rate as you can see here in June 2003 of just over 50% and now we are at 82% and that is a significant factor in customer satisfaction.


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We have an extensive program of work that is improving the customer experience. We now do 3,000 interviews per week of customers that interact with us through every channel, not just our branch channel, but through ATMs, through contact centres, etc. We have a program called ‘Find and Fix’, which is principally about closing the loop in terms of that feedback. Traditionally banks have tended to get customer complaints and fixed that complaint, one on one with the customer, without closing the loop around what was the actual core problem that caused that complaint. ‘Find and Fix’ is about taking those complaints and identifying the systemic issues, closing the loop and getting the problems resolved. We are having significant upsides and benefits here, not only in customer experience but also in cost management around addressing those issues.

As you can see on the chart a lot of these initiatives have led to a significant increase in customer satisfaction. And over the past 12 months we have been the leader in improvement in customer satisfaction in this sector. The really challenging segment here of the three that we measure, consumer, SME and middle markets, is the consumer segment. In two of the most recent five months we have beaten St George, on a spot monthly basis, on consumer satisfaction. That is a very significant achievement given that St George has been the acknowledged leader. So we’ve made a lot of improvement here in satisfaction.

Our client relationship management project called Reach is rolled out covering 450,000 customers and around 1,600 bankers. And as you are aware from my previous discussions with you, that has been rolled out in the small business sector only at this stage. But you are seeing some of the results come through from that, given the growth that we’ve had in that segment.

In the area of distribution over the past 12 months, we’ve made significant changes. I’ll talk more about our footprint a little later, but in the area of extended trading, 25% of our branches now have extended hours. That rolls from late night closing right through to Saturday morning opening. We now have significantly more bankers in what I call ‘feet on the street’ to drive business volumes.

That’s our customer achievements over the past 12 months. On our people, again we’ve made significant improvements. We’ve put 550 of our managers through a program called Mission Possible, which is principally about driving the achievement of our customer mission and what they as managers need to do in leading their people. This has been a very important program firstly to identify their own styles, and then identifying how they need to interact with the team that they are responsible for managing. This is fundamentally about leadership.

We’ve also put 7,500 of our people through customer experience training. And that’s been a massive initiative over this period. You can see there the results that we are having in retention, and I’ve just picked one of our metrics that we monitor very closely and you can see over this period of around 12 months we dropped our underlying resignation rate from 15.7% to 12.8%. Not only does that benefit you in terms of continuity within a role but clearly you save recruitment costs and so on, and training induction that are associated with a high resignation rate.


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On our brand, you are aware that we have now changed that and are in the process of changing our signage for Bank of Melbourne and the Challenge Bank in Western Australia. That project has been extremely successful. We were concerned for some time, particularly in Bank of Melbourne, about negative feedback from our customers. I can tell you now some 4 to nearly 5 months down the track, I have had 19 written letters of complaint on our new brand rollout and most of that has been about extended hours in Victoria on Saturday morning trading of which of course there’s been no change. So overall this is a very successful initiative for us. We now have one brand throughout Australia and of course with the changes that Ann will talk to you about in New Zealand, we have one brand through Australasia. Brand management is critical to what we do in our business.

Michael Coomer will talk to you about a project called Pinnacle that I am sure you are all well aware of, that is fundamentally about re-engineering our credit processes. The great news about that is - implementation is underway. 11,000 of our bankers now use the Pinnacle program, which is an online program basically to input credit details for online approval, tracking of loan applications where a banker can now see online where an application is within a given process and time. That is improving both the banker’s experience and the customers’ experience.

We’ve put 12,000 deals through our Pinnacle program since April and that program is going very well.

In the area of products I’ll talk about cards and mortgages and industry packages shortly. And then finally, corporate responsibility. In the last 12 months we’ve implemented FSR and we’ve implemented code of banking practice. We trained 14,500 people in FSR. We trained 3,500 people in the code of banking practice. Significantly regulatory programs that were put in place, but at the same time we have not dropped the ball on service or sales performance. I think it is fair to say that it’s been a challenging and rather big year.

So that’s an update on where we’ve been with our progress over the last 12 months on our strategic initiatives.

What I would like to do now is turn to the next leg of my presentation around what are we doing going forward to continue to build on sustainable performance. This is the three key approaches to the Red Power program that I have outlined for you. I’ve circled the areas on this chart of the key focus for us now moving into the end of this year and into the 2005 and 2006 years. And this is very much about much finer segmentation in our consumer and business banking areas. This is about customer allocation to what we call strategic segments, according to both life stage and value. It is about identifying the value to the market of each Westpac customer and then determining their potential value to Westpac. It is about value propositions and making sure that we execute by customer segment on those value propositions. And of course it is about measuring the success of those value propositions - both lifting our service delivery but ultimately our share of wallet and our cash earnings.

My view of this is that over the past 12 months we have significantly lifted what I would call the ticket to the game. That is, the fundamentals that we need to deliver in our business across our total business.


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Going forward now, having done that, our approach is much more targeted in identifying the profit pool areas that we’ve already looked at and now lifting the service delivery within those areas where we can drive more value.

Our approach to segmentation - I’ve set out here at three levels, to give you an understanding of how we are approaching segmentation in our business. There are three approaches here, strategic, operational and tactical. Strategic segmentation provides a map of the market and aims to define in which market Westpac will successfully operate. This allows us to identify target segments and to define value propositions to target those segments specifically. So using the analogy, if you like, it is very much a rifle shot approach rather than a mass shotgun approach to looking at segmentation.

The operational segmentation is simply how we structure or organise ourselves around those value segments. And tactically is our approach to identify opportunities within those segments for particular areas of focus.

For those hidden value customers in our business our focus is turning them into identified customers or revealed from hidden. And for the revealed customers, those that we already know are of value to us, our focus is on retention and on protection.

Now if I can turn to the consumer area of our business briefly. There are three key areas I would like to talk about, housing, cards, and savings & investments. As David indicated we do see a soft landing in housing. Our growth numbers at the moment would indicate growth in the market at around about 15%. We are seeing a lot more channel intensity. And as many of you are aware there are a number of players looking at opportunities to attack the mortgage market. That will be challenging. Margins are certainly under pressure. Our growth is now what it was previously. It is very easy to grow that business in a boom market of 22% and so the pressure is on to grow profitable business.

For our part we’ve had a deliberate strategy to grow profitable market share and we will not move away from that. In the area of brokers we are currently working through streamlining our low value, low quality brokers and focussing more on how we can improve the service proposition to our high quality, high volume brokers, and that work is underway as I speak.

The other key area of focus in our mortgage book is that of retention. We put a lot of time through relationship management capability that we now have, and a focussed retention unit, to improve the mortgage runoff in our book that is now at a record low of 14.5%. As you would appreciate there is no point in pumping a lot of volume in the top of the bucket if you are losing a lot of it out the bottom. So retention is a critical area of focus for us.

On cards, we are largely through the initiatives that we targeted as a result of the interchange reforms that have occurred. Our fee re-pricing as you know happened in the first half of 2003. Our rewards program has been repositioned. We’ve addressed a low value proposition to market in Virgin and we have in excess of 350,000 cards to market there. We’ve also addressed a high-end value proposition in the Amex Companion Card. Again the response to that card has been outstanding, and we now have over a 100,000 cards to market in just on 4 months.


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On household deposits, the savings and investment area, significant increase in competition in this area. It is the primary vehicle for customer acquisition, and so we are very focussed on that part of our business. We are streamlining a number of existing offerings, making processes simpler using our technology in this space and we will be targeting selective acquisition of customers based on our value segmentation work.

In terms of segmentation around our consumer segment, over the last 12 months we really have operationalised our profit pool thinking that I have presented to you previously. We’ve now developed customer segmentation and a framework that is based on footings, and that is both assets and liabilities and wealth.

Now we’ve chosen footings because it is observable - it is able to be reconciled easily to market and to competitor information. And it is related clearly to the overall value of the customer.

Revealed customers in our context are customers for which Westpac has captured the majority of their wallet and for which further up sell is limited. Hidden value customers are customers where Westpac has captured only a small proportion of their wallet and hence their potential value is higher.

Now in this pie chart, what I am saying to you here is 65% of consumer customers at Westpac are revealed, i.e., we’ve captured the majority of their wallet. The remaining 35% are hidden value customers where the greater opportunity to up sell occurs. Now if we were to increase the share of wallet for hidden customers, which are currently at 15% as you can see on that chart, to the overall segment average of 35% (not 76% which is for our revealed customers) but the overall segment average of 35%, then we would increase our footings by $55 billion or 44%. So that gives you an understanding of the significant opportunity that still remains within our existing consumer franchise.

Let me just turn to business banking. David mentioned that business banking has been a core part of our strategy now going back to 1999. And as you will see from this chart, which plots our market share position right back to 1994, the good news is that we have now restored our market share position that we had a decade ago. A key part of that has been clear about Westpac being open for business. The growth that we are experiencing is really now demonstrating both the quality of our people and the quality of our distribution and technology and the focus that we’ve put into this particular part of our business.

The three core segments in our business banking arena, SME, our middle market business and ‘not for profit’ business. We believe we still have significant opportunity to grow our business banking segment. Peers are also circling, given housing growth coming off - this is clearly now the area of major focus for all the banks I would suggest. But we believe that the work that we’ve already done, that we are in a terrific position now to capitalise on that growth we’ve already had. And that is not something that can be replicated easily.

Our strategy here in business banking is very clear. That is to pursue above market growth in the small business segment. Deepen relationships in our middle market segment and also remain a proactive and innovative market leader in selected industry categories. I will show you some of our success in that area shortly.


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We are also continuing to deploy business banking roles into our branch network. We are about delivering front line capabilities through our CRM into our branch network and throughout our business banking franchise setups throughout the network. And, to deliver much needed infrastructure improvements through our credit re-engineering program.

In the ‘not for profit’ area, we estimate that 750,000 of those organisations exist in Australia. Now, of themselves, many of those organisations hold small funds or very small borrowings. But of course when you pool those together that becomes a very significant amount, if you can get a reasonable share of that particular segment. Today that stands at 6% for us. Now we’ve recently taken a major alliance with a community organisation called OurCommunity.com. They are an organisation that services many of the needs of this sector. We have now produced a package targeted specifically at this sector and it is a sector we will be focussing on growing significantly over the next 12 months.

In terms of business segmentation, again around the profit … work we have done a very good job of capturing a major share of our business customer’s wallet, as you can see on this chart. 82% are revealed customers, 18% are hidden. However, if we were to increase the share of wallet for that 18% of hidden customers, from what is currently 11% to the segment average again of 57%, that would increase our total footings by $20 billion or 33%. So significant opportunity still remains within our current business banking customer base to grow our share of wallet.

In addition to that we have a range of attack strategies now in the market clearly targeting a number of the opposition. And you don’t have to think too far about where those targets are. I’m not talking further about that for reasons that are obvious, but business banking is clearly about segmentation growth within our current customer base and targeting new customer opportunities.

Why is it that this cannot be replicated easily? On this chart I have attempted to show you using, those five core elements of a great retail franchise, what our business banking strategy looks like. And it is made up there as you can see of very good segmentation. The technology now behind driving that around our client relationship management and our credit re-engineering programs, combined with some very good industry solution packages and then a lot of the work that I’ve talked about over the past 12 months on distribution. And getting a distribution footprint both in numbers and in areas where customers want in micro markets, and delivering that in a way that customers seek. All that is underpinned of course by the quality of your people, and the training, and the skill development that you give your people. That is why this model cannot be replicated easily. It takes time to build. And we now have that in place.

On client relationship management, I just want to talk briefly about our project here called Reach. A lot of people as you know talk about client relationship management. I think it is one of the most misused and abused terms in our industry without really understanding what it means. Many people think of CRM as simply populating data screens at the banker’s desktop. It is far more than that. This gives you an understanding of how we’ve built our CRM capability. Across the top of that chart are all the core components you should look for in a good CRM system.


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First of all it is about knowing your customers. It is about detailed customer knowledge that’s held in your data files, bringing that together in a data warehouse, and then being able to use that in a way that you can interrogate it and get good customer information from it. That leads you then to target those customers. As we have a series of programs called Westpac Leads where every night we send leads to our bankers based on the information that we get out of that data warehouse.

It then leads to a better service proposition, a better interaction with your customer. Fundamentally, our customers say “we want you to know me”. I’ve banked with you for 20 years and you still don’t know me. So CRM is putting much better information on the desktops of our bankers. That leads to a better sales experience because if I know you as a customer, I am much more likely to know your need and identify that much more readily. And in doing that I’m not becoming a product sales person, I am meeting your needs and identifying the right product to sell to you. This process is helping significantly with that.

Of course the other part here is sales management. On my desktop I now have the ability to track our sales every day across the network where we’ve rolled out this capability, through our small business segment. I can then drill down to a small business banker individually and look what their pipeline looks like through the sales process. As you can appreciate, that is a great capability for a sales manager in coaching, and that’s now rolled through as small business and we will be rolling that further.

Each month we send approximately 15,000 leads to those bankers. Let me give you some quick heads up on results. Over the past 9 months our Westpac Leads have generated 7,557 new accounts, 3,211 top ups, 4,621 redraws in excess of $5,000. No apologies for the detail because if you are going to drive technology like this you need to understand the benefits. And let me assure you those benefits are coming through. In total, the draw-downs over that 9 month period using this program amount to $1.026 billion in total footings.

Not only the financial results, customers are also giving very positive feedback and that’s another reason why you are seeing customer satisfaction move in the direction that it is moving. Equally importantly, our bankers are saying this is a much better experience for them. And a recent survey of our bankers on this technology delivered a 91% positive response rate.

Where are we going with our CRM technology? Over the next 12 months we will roll this out further into other core parts of our business. Into middle markets, into our home finance managers, our private bank and into our financial planning network. Once we’ve done that we’ll have all our core channels through our business on line with the same technology. And that is an extremely powerful proposition to market. In addition to that, we will have exactly the same sales management methodology in place throughout the company.

Let me just turn briefly to industry specialisation. We recognise of course that all industries are different. They do have specific banking needs and their requirements are different. So as a result of that from around the end of 2000 we began working on tailoring and developing a series of industry packages to market, particularly focussed of course around small and middle markets businesses. This has been an outstanding success for us. And we currently have


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ten sectors covered by this approach, from franchising right through to schools and aged care. The results that you can see in this table are quite compelling. Across all seven sectors that I’ve shown on this table we’ve improved the number of customers, the average footings and the average product penetration across the board.

Our customers are clearly saying to us that this is meeting their needs, as we drive down these industry segment sectors.

And finally in distribution, this is fundamentally about more ‘feet on the street’. What this chart is showing you is that we have now closed what we consider to be core distribution gaps in our business. By the implementation in the past 12 months of the two roles that I’ve circled here and - pardon for our acronyms, we all live on acronyms in our business as you know, but I’ve given you the table which I hope will be of help to you. But the BSR role, or what we are calling here the banking service representative, is a generalist role that has responsibility for both service and sales and is doing both small business sales and first level wealth sales. That’s been a key gap in our business. This role has now been implemented very successfully and is starting to produce results.

Then the other role is our business manager, and this operates in a hub and spoke, so the business finance manager is better qualified than the banking service representative, and where a business deal gets a little bit more complex in that hub and spoke model that deal rolls up into the BFM role. So we still deal within the local micro market but make sure we get a result quickly and those two roles work very closely together.

As you go further out on that you will see that when we get into middle market we then have our relationship management roles. All of that is underpinned there as you can by the FP&A role, our financial planning and advice role, which is now fully integrated in distribution throughout our business. This is a powerful model where I think I can say to you in distribution we really do have the right model with the right numbers of people now addressing those gaps.

So in closing, how have we done in business? The results I believe really are compelling. Our customer satisfaction has increased faster than the peer average. Our balance sheet continues to grow above market. We’ve had growth of 14% since the second half of 2001, and that includes our equipment finance book growth. Our recent brand positioning has resonated with our customers particularly in business that associate themselves much more with Westpac than other brands that we were running to market. And our approach is seen as innovative and more importantly backed by our industry packages that we are demonstrating a clear understanding of the sector.

In my view we are now clearly positioned to be the leading business bank in this country.

So in closing, my balanced score card. We’ve made strong progress on our people commitment. Fundamental to the service profit chain is driving our employee morale and commitment in the right direction. And you can see here that that is occurring. That is one of the core reasons, I believe, why you are seeing our customer satisfaction improve as well, along with the major programs of work that I’ve spoken about earlier.


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Our corporate responsibility, I see that in two ways, it is absolutely about being a good corporate citizen, making sure that we comply with the regulatory requirements of the day, and we not only comply but we use that effectively within our business in terms of well trained staff. But secondly, our community responsibilities and in that space we have achieved a lot again over the last 12 months in areas like helicopter sponsorship, our sponsorship of the Salvation Army and others. More recently our network, our branch network and our business banking network raised $700k to contribute to the Paralympics team going to Athens. Quite an outstanding effort.

You can see there our shareholder performance. I’ve touched on those numbers earlier.

Our shareholder performance, you can see strong results at the half. In summary then we do have a clear strategy. We have strong alignment from a highly motivated workforce. We have a track record of delivering. We have strong momentum throughout our business and that is continuing to lead sector leading results.

Thank you very much for listening and I believe we will take questions later.

I would like to introduce Ann Sherry who is the Group Executive for our New Zealand Banking business.

Ann Sherry Thank you Mike. Good afternoon everybody. I want to start my presentation with a very New Zealand slide that is to remind everybody how important we are. But really also to show that what’s changed since last year, that the BT business in NZ has become part of the geographic line responsibility. It is a relatively small business in New Zealand and its growth is really almost completely dependent on the engagement with the retail network in New Zealand.

In terms of the overall economy in New Zealand, we’ve been through a period of very strong growth. It has softened a little, but a lot of the data I’ve seen and some of the commentary I’ve seen, actually I think suggests a much grimmer picture than I think we are actually seeing in the market place. And a number of our indicators are still quite strong. Our labour market indicators are strong, our GDP growth is still quite strong and we are still really continuing to sit above OECD averages in terms of our growth.

The other thing that is worth noting is that after a period this of reduced immigration in New Zealand as a result of a policy change, the government recently announced that it is actually going to re-open the immigration flows into New Zealand, which as I will show you, has been one of the areas of our business where we’ve had significant growth and look forward to further growth as we move forward.

The other thing in our market place is that there has also been significant industry change. Our regulatory environment has changed and continues to. There is a much greater trend now to closer alignment to Australia. We are seeing that with the Securities Commission bringing much closer alignment of the securities legislation and regulations in New Zealand with the Australian. There is a lot of work happening around closer economic relations. There is work on banking harmonisation, prudential policy harmonisation happening.


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So that’s an accelerating trend. It is something we’ve talked about for a decade. There hasn’t been that much movement but we are now actually starting to see movement in that area.

There is also a review of a lot of the taxation regimes happening in New Zealand at the moment and the issue of local incorporation is one that we’ve been managing for a long time. The other thing that is changing for us is our competitive landscape. The biggest change there is obviously the impact of the ANZ and National Bank merger. That really has only just got underway. The final agreement with the Reserve Bank was reached only a month or so ago so we are now starting to see some real activity take place in the market.

The other thing that is happening in the market is that ASB is also, I guess, seeing the opportunity and looking to push into broader segments than has previously been the case. They’ve launched themselves simultaneously into the business bank, corporate market and also the agricultural market in New Zealand. So our competition isn’t just one bank and the industry landscape isn’t just changing in one dimension. It is changing in a number of areas.

When I was here a year ago we talked about the focus for the year ahead. We talked about how we were going to improve our sales effectiveness. How we were going to increase our Auckland market share and how we were going to build our Australasian operating model with a local feel. The way we’ve translated that and what you will see come through the presentation today is I am going to talk about overall our distribution effectiveness. In housing in particular, but not just in housing. To look at what we’ve done in the small and medium enterprise market that is obviously the core of the New Zealand business banking market. Franchising, our mobile managers and Auckland and migrants. How we’ve driven our customer experience. How we’ve thought about our market in terms of just identifying the areas where we can compete most effectively and finally, what we’ve done with our people given they are actually our mechanism to deliver all of this.

So let’s have a look at some of this. Across the business we are now starting to perform strongly. You saw at the first half reporting a strong growth in our cash earnings in the first part of 04. The good thing about that is that our revenue lift is in both net interest income and non-interest income. It is also across a number of our segments. We talked at the end of last year about the investment we were making in the business to give us the revenue lift in the first half 2004. And that we would start to bring that investment cost back down after we saw the revenue come up, and you can see that also over that same period we’ve started to bring our cost base back down.

We have made significant investments in people, in branding, in our distribution footprint and our overall capability over that period. That’s why the results are starting to come through.

Quite similar to what you heard Mike say, a lot of our focus has been on consumer franchise and our product excellence. Actually just making the engine room of our business work better and harder. In our retail bank our lending growth in housing over the last three months has averaged 24% market share. A year ago the equivalent number was around 15%. That’s quite significant growth


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for us over that period. And it has been our best growth since the Trust Bank merger in 1996.

This is built on our better distribution capability. Our branches are sharper, our capability is better, we’ve got people where we need them and in the markets where we need them. But it is also built on product excellence and we are the only bank in the New Zealand market that has a five star CANEX rating across all of our mortgage products.

We’ve also looked to fill our product gaps, so in the youth market for example, we had absolutely no offering in that market. We’ve leveraged the expertise from Australia and we’ve used the opportunity that we have from the growth that we are getting in the market now to go into markets where we traditionally have had no presence at all.

Our migrant bankers have of course also increased their share of market quite considerably. So to give you another look at that – in terms of housing Westpac and ASB are the only banks in the market currently growing above system in housing market share. Our migrant banking volumes are delivering the sorts of results that I talked to you about a year ago.

And the Auckland market, which is the heart really of the housing market of New Zealand, a third of New Zealanders live in Auckland. It is where most of the housing value actually sits. I’ve used here the mortgage registration to discharge ratio which actually shows you how fast we are growing in that market relative to the churn that we get from the high fixed rate market that we work in, and fixed rate market that we work in relative to our competitors.

This is a measure of our growth in the market. The growth is real and not just churn. So its not just growth we are churning at the back end, we are actually getting real system growth out of the market.

At the same time though we are also growing our business bank similar to the business and consumer banking story in Australia. It is not a one dimensional growth story. Our middle market, we are seen as best in market, we have a high quality team and we’ve been growing in that segment over the first half of this year and first nine months of this year at about 18%. We are strong in the property market in New Zealand - that of course has been one of the areas that’s fuelled growth. And our regional market that is largely an SME focus, we’ve had fantastic growth.

Our growth in agricultural business has been a bit slower. Some of that is to do with the fact that we are not focussed on ‘farm gate’ lending, which is where some of that growth has been, but we are looking to pitch our growth at the more corporate end of the agricultural sector and really focus on the quality of our earnings.

But overall our business banking growth has also been extremely good. Our re-branding has clearly been a contributor to all of that. We talked a year ago about how we were going to build the Trans Tasman branding alignment. How we were refocusing the business in New Zealand giving it a sort of refreshed, a more modern look, a la the branding here in Australia. That has now been done. We have rolled out the branding, we have re-badged the whole organisation, the


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branches have been refitted and we have rolled out a uniform the same as the look and feel in Australia. That investment is paying great dividends for us. Our brand recognition is now at the top of our competitors in the market place. That is a huge lead indicator for us. Previously we were sort of languishing as you can see towards the middle of the large banks in New Zealand, with us not being top of mind when people were thinking about who they would bank with and who would they move to if they were to change their bank. So this has given us a lot of energy, and actually it’s given us a lot of confidence in the market place. We just look and feel much better.

As Mike said in his presentation as well, branding is a very important part of just getting yourself top of mind and particularly in New Zealand, which is a very crowded banking market.

So the questions being asked - is this a really sustainable turnaround story or is it just a first half one off? And what I hope you will see in this slide is that its happening not just in one line of business. Our most recent turnaround has been in housing, which has probably been our biggest kick up since 1996. But the reality is that in our business banking and some of our other businesses we had started that turnaround already. So this is already starting to be a sustainable story, and with the kick in housing I think it will increase the rate of growth slightly faster. So our trends are showing momentum over more than a single half period.

And then the question is, how do you keep it going? Is that as good as it gets? We can see lots more value in our customer base. 1.3 million customers, a number of whom do a good piece of their banking but don’t see us as their main bank. A lot of those customers are in more valuable customer segment. The two components of the strategy going forward - one is obviously to increase the penetration of our customer base. Targeting customers with the highest potential, managing our relationships with them better and basically getting them to do more business with us. Making it compelling for them to do business for us.

Some of that’s happening because our footprint is better, our capabilities are better, product offering is better, but also we are starting to get to know them better.

The second thing is actually improving our retention - to hang on to the customers who are doing business with us. Not let them walk out the door. Prioritise them. We are now running retention call centres. Getting to them before our competitors do. We have a feature in the New Zealand market that is the number of people who sit in fixed rate housing loans. At the end of that period, when that rolls off basically everybody chases them, to get them to re-sign on to their product. A year ago some of our competitors were getting to our customers before we did. Now we get to them all before anybody gets to them. So we have got sharper in the way that we manage that retention for us in the market place. And for more of those customers it is more convenient to sign on with us. We are offering them a convenience proposition. So they just roll their loans over with us rather than just go out to the marketplace. We are getting better and better at doing that. And that is actually giving us some of the sustained growth as well.

But there are more opportunities as well in business banking. In the small and medium enterprise space we are doing very similar things Trans Tasman. In this space customers are being telling us for two, three years, we just want someone


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we can talk to. Give us the name and number of someone in a branch or some where who if we are in trouble we can talk to, or if we’ve got an issue we can talk to. What we’ve done in the business in New Zealand is we’ve used our branch managers for that role. In most of our network we have very experienced long serving managers. Many of them have worked across multiple segments. They know how to get things done in the business. We have written to all our small business customers and we have given them the name and the phone number of their local branch manager that they can use as their personal relationship manager.

The impact of that has been huge. Our customer satisfaction in that segment has seen an instant kick up because we’ve actually done what customers have been asking us to do for quite a long time.

In our business segment and agricultural business we are putting more ‘feet on the street’. Again it is a term we’ve been using commonly across the organisation. We need more people to face that market. Our growth has been substantial. This year we’ve done most of that growth with our existing workforce. So we’ve actually driven our productivity very hard this year. Now literally we need more people to keep that growing. So we will be investing in that in the year ahead as well. But we do have more opportunity and we have more opportunity to migrate the customers with split bank and make that work harder for us as well.

All of this is happening because of the enablers that we have in place, primarily our people. Our people are more confident about capacity. It is amazing as your business starts to get better press in the market place. You start to see real growth come through, just the investment and the look and feel of the place. Our people feel more confident and they actually believe now that this is a sustainable story and that this momentum is possible.

We are seen as a preferred employer in the New Zealand market place. And that’s really important in such a small market. The sort of hustle for skill in our market place is significant. Lots of the good people in New Zealand look to Australia and bigger markets as well. We have to keep those people in our market place. Offer them careers and jobs that make it compelling for them to stay.

We are also looking to leverage much more our group technology capability. A key to that this year has been the move of the mainframe from New Zealand to Australia. So we start to build a true Trans Tasman technology capability. The reality is the cost of the technology systems now is impossible in a business our size on a stand-alone basis. We need to leverage the fantastic implementations that we’ve been doing at group level in Australia, and make that work across the New Zealand business.

Our cards platform, we’ve moved to a common cards platform. Corporate online, we are already starting to look at how we leverage Trans Tasman. But there is much more that we can do in that space.

We are also leveraging our Australian experience in corporate responsibility. It is our intention as well to be the market leader in New Zealand. In August we are launching the first social impact report for New Zealand where we are actually


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measuring ourselves against a set of indicators, to actually show the market what we are doing and where it is real. I think this also has incredible resonance with our people. In small markets again where there is relatively little social infrastructure corporates play a very big role in this space. And we have played a big role but it is almost invisible to the market place. So some of this is also just about telling our story in the market place in a way we haven’t told it before.

We are also looking in this area to leverage very long-standing sponsorships that again are common Trans Tasman, things like the helicopters that we have in New Zealand as well. They are a very powerful public product that we have in the market place that we are looking to articulate. This is obviously a key driver of the sustainability of our business in the New Zealand market place.

So what does that look like for the New Zealand score-card? What has it all delivered? I think the best thing it has delivered is momentum. We have the best momentum in this business since 1996 when we acquired Trust Bank New Zealand. We have turned around a gradual decline in the housing market share that’s been happening since then. In the last 12 months we’ve grown our housing market share so that it sits above 20%. We are growing at faster than system for the first time since then as well.

We are delivering better outcomes for customers. We’ve lifted our customer satisfaction 7.8% this year. Is it where I want it to be? No, because we are not at the top of the customer satisfaction in New Zealand. But that’s where we are headed. We’ve also reduced our complaints 18%. We were a stand out in our market a year ago as the worst performing bank for complaints to the Ombudsman. We are now the best performing bank in the market place. And complaints to the Ombudsman are a pretty crude measure but they are a very public measure of dissatisfaction with the service in your organisation. And we’ve worked very hard to turn that around.

It is better for our people. The last 12 months has been much better for our people. Our employee commitment has lifted 5%. Our leadership index that is a measure of our people’s view, not just of the top leadership, but of their leadership at local level as well, has lifted 4%; very important to just pull the organisation up and to lift the confidence of the whole bank. Our staff turnover has dropped by 3%, and again that’s a very important measure for us because skill is so hard to hang on to, and even harder to rehire in our small market place.

The other reason why our people are so important, it is they who drive the results. And this is obviously better for our shareholders. Our cash earnings have lifted 14%, our EP (economic profit) has lifted 8% and we’ve dropped our cost to income ratio 150 basis points. All of this will make our business a sustainable growth story over the long term.

Now I would like to introduce to you my colleague David Clarke, the CEO of BT.

David Clarke Thanks Ann. Good afternoon everyone. I would like to give you an update on the state of play at BT.

This time last year we set ourselves pretty aggressive targets, and by and large those objectives at this point have now been achieved. We’ve delivered on synergies and we’ve turned the performance of the business around. We have


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stability in our team right across the organisation and just to pick up on what Ann and both Mike have been saying, Ann quoted you some statistics there, the lift in employee commitment within our BT business is of the order of 20%. The lift in the leadership index is 16%. So big lifts to bring us into a normal operating environment from one that people would normally associate with an integration/ merger and acquisition environment.

So we believe that we’ve actually established a very strong platform to drive further growth and value creation within the business. What’s that going to look like in the future? There will be an absolute focus on quality and our clients. So let me give you an update now in terms of the progress that we’ve made over that last year.

I’ve used this slide on previous occasions, on the left hand side is our existing market share of our business that we have today. On the right hand side you see the market share in the latest period. What we are looking for of course is a lift over and beyond that which we have from existing market share in the business that we are writing today in the most recent period.

You see at the top there, WRAP, a great success story. It has grown by nearly $3 billion in terms of funds under administration in the last 12 months. $1 billion of that has come from the Westpac financial planning channel. In corporate super, a great number one position there in the last period. I’ll leave there, I want to come back to it and talk to you about it in some detail later on.

Retail, clearly we’ve still got some work to do in retail flows. We always knew that our progress would be incremental here. The trend is up and it’s been so since December 2002. We are on track to meet the hurdles that we set in our acquisition model. We remain outside the top ten in terms of share of new business. But we are starting to see in our small positive flow coming through all those WRAP badges that we run for independent financial advisers. So that’s the first good sign that that flow is coming back.

In terms of life insurance, we are performing ahead of plan and on the back of very good claims experience. We are the third largest writer of personal life insurance in the Australian market place. That’s a share of new business of 10% from an existing business base of 5%.

Broking, you can see there maintaining good market share in the online market. In terms of margin lending also, the market share lifting there.

Our institutional business is growing, you can see there. Three times than our existing market share albeit as I am sure all of you are aware off a pretty low base.

The important thing is, the big difference between now and 12 months ago is that we are getting invited to the pitches. 12 months ago the door was closed to us, now it is open.

Integration is substantially complete. Remember this is less than two years since the acquisition of BT. Our approach has been rigorous planning. Planning and then very fast and very accurate execution. Integration will be complete by the end of this calendar year. Our last major piece is to bring in house the BT


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investment accounting process that was previously outsourced. The integration synergies are ahead of our acquisition model. The synergies that we’ve gathered during the course of this year, we’ve chosen to re-invest back into the business to foster growth in further years. That’s items like systems and brand that we’ve sought to reinvest back in.

Essentially integration has given us a blue print on how to run our business. And I would like to just share with you now some of the successes, some of the lessons out of that process to give you an idea about how we seek to run this business as we look forward.

In terms of successes, clearly investment performance, we knew that this was something we had to work on straight away. So that was the first thing that we did. We had to go through and make some robust decisions about what we were going to do there. We did that early, then we took the team and quarantined them from the noise of the integration process, and they have got on and delivered. We are on track to deliver $85 million worth of synergy benefits in financial year 2004.

We’ve also created, and this is exceptionally important, we’ve created one organisation, one product set, one IT system. In terms of running these organisations it is very important that integration is not a perpetual state of being. In terms of the lessons, focus your effort and resources. This was for this organisation a big budget, $150 million associated with integration, dedicated resources, highly skilled resources. We explicitly addressed the cultural issues that were a key concern put to us by the employee base. We made a major effort around organisational culture. We over communicated all of those around those issues and particularly in the early stages. And speed and momentum are very important as well. We quite consciously maintained an unreasonable time table associated with this. You only have a certain period of time in which to drive through the changes that are necessary to get you to where you want to go.

That whole process has given us enormous confidence as we face those inevitable challenges that we have ahead.

Now we might just look at those challenges that we as an industry has, and we as BT has. We know that we’ve got underlying growth in funds under management, clearly of those solid demographic shifts in our community. But we also know that revenue margins are continually being squeezed. Revenue, our revenue growth is still modest in our business and will be until the flows and our proprietary and package products return.

We think in the environment that we face ahead BT has a number of advantages. Our ‘multi manager’ and ’partner funds’ give us a flexibility to pull in specialist funds if that’s what the market needs. We’ve long since dealt with the sacred cow issues of having a manufacturing and investment manufacturing arm alongside an aggregation multi manager arm. So that is no longer an issue in our business. Our platforms, the incorporate super and WRAP continue to grow in size and scale and we can now look to leveraging that scale through creation of extra value out of those platforms and or benefits for our client.

In terms of distribution, we are engaged in an unprecedented overhaul of our Westpac financial planning arm, from a bottom up process of training, recruiting, remuneration and a management of advisers right across our Westpac network.


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And for BT customers, every month, every quarter we move forward in terms of greater transparency, and an education process that is embedded in the service that we provide. Remembering that we have a dedicated group of 500 people now in specialist premises built specifically for us in Adelaide. One day I think many of you should go and visit that operation and see what we do at the backend of our business, and where the future is heading in our business.

In this environment we need to ensure in particular that the customer can make an informed choice. We want to leverage our size, drive costs and efficiency with a high quality service outcome. If you look at many in our industry and the UK and the US, they grew rapidly and are somehow perplexed why the earnings growth hasn’t come through. It is because they built very complex businesses. They forgot about cleaning up as they moved forward. We are learning from those observations and the lessons and we do not wish to fall into that trap.

The key capabilities we need to build and strengthen across our business include differentiating ourselves in investment management, in our WRAP services. We need to ensure that compliance is embedded in everything we do. It is not a heavy overlay right across the top of the business, stopping business being done.

Low error rates, our client bases are becoming less and less tolerant of the backend servicing issues that many of our industry are putting on their plate. So that’s going to mean a lot more automation straight through processing. And we want to be finally, the benchmark, the leader in terms of empowering our employees, the creation of employee commitment and the key retention of talent in our business.

So I’ve just outlined those future challenges for BT, but what are we doing in the business today? We are very much focussed on improving investment performance, and we’ve got some great results. We’ve built a high quality team, stricter investment disciplines, additional transparency in performance and improved ratings. If you notice that ratings on the screen there, you can see where we were this time last year, and the substantial movement from sell and hold into buy ratings.

We continually challenge ourselves and ask is that sustainable? Not surprisingly, that’s what many of the researchers and clients ask us as well. So if I can just take say Australian equities, and look at what we’ve done over the last 18 months. We believe we’ve put in place a controlled risk environment that’s given us very good information ratios. Over 3% on the one year, 1% on the two years. We look at where the out performances come from. It hasn’t come from a couple of names. It’s come across many sectors in many different names. We look at what’s happened in terms of some of the problem stocks and by and large we seem to have avoided those as well.

All of that, and I quote it because all of that is part of that challenging process that we go through, because we all know that the world has been full of people who have had a good one year, maybe a good two years. But there are only rare organisations, people and processes that can sustain that over a long period of time. And as we look at our own outcomes it gives us confidence around our people and process.


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There is a slide in your pack that I haven’t put up here and it just compares with some of our very successful peers. I put it there because it is very important for us, because one of our goals we set was we wanted to return to the premier league. And as we need to push our way back into model portfolios, we need to push our way back into the researchers’ recommended lists, because that’s the way we are going to get the revenue growth lift.

So it is important that people understand how we are pushing our way back into that premier league.

We are always asked about retail flows and up here on the chart you can see that we’ve had some incremental improvement. We are on target however to meet our acquisition model. Remember that our acquisition model said that retail flows would return in calendar 2005. Now we’ve set ourselves a stretch target as a management team to get that moving in the final quarter of this calendar year. No other manager has come back to our knowledge from a figure like we had in December 2002. So from our point of view we are used to stretch targets. We believe that we can do things very, very well when we focus on the outcome we need. Those figures there are from our management information and they just reflect the various ways in which we think about our business. So we have the WRAP, we have our institutional business, our mezzanine business and of course the red line being our retail flow.

You would of course be much more familiar with the industry figures which are published by ASSIRT around retail flows. And I just want to give you a flavour there of where we see it. The dotted line suggests where the latest figures will be, so that is an inflow in the latest quarter of a net flow of some $90 million.

Clearly driving retail and mezzanine flows is vitally important to the profit growth in our business. And so what have we achieved. We’ve achieved increases, improvements in research rating ratings. We know that there is a lag time before that feeds through. Our investment performance, we know we need to sustain it. We have an absolute focus on customer service and satisfaction and on quality and efficiency. We believe those things go hand in hand, quality and customer service and efficiency.

We are working through improvements – including vast improvements to our plan and network. So what is actually happening on the ground? I could go through a whole range of actions, but in short, a lot of shoe leather is being worn out. We are getting in front of a vast number of people and telling our story and pushing our way back into their consideration. I don’t think there are many people that we haven’t seen in the last 12 months.

I said earlier that I wanted to talk about corporate superannuation when all that we have talked about comes together. It is also where the wealth business, BT and the bank come together in a very, very clear way with a powerful client proposition. So number one in net flows over the last 12 months over 15% market share of those net flows from a standing position of 5%. Where has that business come from? It has been equally split which shows you the good diversification of our business. It has been equally split between an independent financial advisers and the Westpac bank channel being essentially our institutional bank and our business bankers. Also we have high retention rates around our existing client base. 60% of that flow of new business, that net flow, came from existing clients.


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Why is that important? Because it says something about our service and how we are actually relating to those clients.

And most recently in the Chant West financial services or corporate superannuation rating survey we got a rating of 5 out of 5. And that’s also extremely important to small and medium sized businesses that do not want to spend a lot of money with an asset consultant to make their choice about where they are going to put their superannuation for them employees.

Successful businesses are about consistent delivery of promises. For us our ability to meet those promises has been really tested. Tested through an integration of three businesses, and tested by a very volatile market over the last two and a half years.

To summarise the last year, what have we seen? We’ve seen great investment performance, we’ve seen growing market share in all categories except retail. We have world’s best practice measures around leadership and employee commitment as a barometer of our internal health. We’ve got a focus on quality and customers now embedded in our business. And we are getting a clear message, a clear message in terms of our brand research that clients are prepared to give us a second chance.

Last year, last year we set ourselves aggressive targets. We’ve met those targets and we have delivered on our promises. So thank you all very much. I would now like to introduce my colleague Phil Coffey who is the leader of our institutional business.

Thank you.

Phil Coffey Thank you David and good afternoon everyone. It is nice to be talking to you all again.

When I took on this role two years ago, I took on a business that I thought had great potential. But we faced some challenges and there were considerable competitive pressures. We had quite a heavy reliance on our trading income and our earnings volatility was quite high. So my goal was to capture that potential and over time to improve the quality and the quantity of our earnings.

Today I would like to give you a snapshot on the progress that we are making towards that goal. I’d like to cover four areas. I’ll be giving you an overview of the business and the contribution and the component parts of our earnings. I’ll highlight the three core elements of our strategy. Thirdly, I’ll outline the growth potential in all of WIB’s business streams. And lastly I will touch on balancing risk and return as an institutional bank.

Westpac Institutional Bank or WIB has a clear strategy focussed on corporate and institutional customers. And target where we believe that we can have a comparative advantage. And that’s in our home markets in Australia and New Zealand. We recognise that we need to support that focus through global representation. Our goal is to sustainably grow economic profit and I’ll elaborate on that later in the presentation.


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Our cash earnings generally make up 18 – 20% of the group total whilst our total committed exposure amounts to about 30% of the group total. Today we also manage nearly $3 billion of wholesale alternative asset funds. WIB has a diversified earnings base and as discussed at the most recent half yearly financial results most aspects of WIB showed solid growth in the first half, although the higher Australian dollar impacted financial markets sales revenue and our trading profits were lower than the prior corresponding period.

Our goal is to grow our customer income faster than our market risk income. And in so doing to improve the quality of our earnings and to reduce some of that earnings volatility I talked about.

I would like to highlight two aspects of our financial reporting that get focussed on from time to time. In terms of our balance sheet I would note that we aim to leverage more the balance sheet rather than to achieve absolute growth. I would expect only modest overall growth in the balance sheet over the following halves whilst maintaining a very strong orientation to our home market lending.

One financial measure that is particularly important for us as an institutional bank is economic profit. Whilst we aim for cash earnings growth, as an institutional bank that can be achieved by simply lending. By using the balance sheet. But often that may be at sub hurdle returns. So whilst we might get cash earnings growth, we won’t actually get an economic profit. And also just by leveraging the balance sheet we can actually be setting ourselves up for worse bad debt performances in later periods. So by focussing on sustainable growth in EP we avoid those risks.

Last year I also spoke about our transformation program which we began early in 2003 and which emphasised three core opportunities for growth.

Firstly, client focus on achieving lead bank status.

Secondly, developing core capabilities and risk management expertise.

And thirdly, creating new products to meet investor demand particularly for alternative asset investments.

So this strategy set the framework and what we’ve been focussed on is the execution of that strategy.

Quite recently we undertook some structural change to further focus in on execution of that strategy - to sharpen the execution. We’ve aggregated our teams around those three core strategies. These changes will deliver specific benefits by combining our corporate institutional client focus into one area to eliminate overlaps and duplication. And we can make it easier for our customers to interact and do business with us end to end.

We’ve consolidated all our investor sales, our professional dealings, our trading activities and our portfolio management into financial markets. So we’ve consolidated our areas of risk expertise, and we’ve bolstered our focus in that area of the creation of alternative investments.


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I believe this robust framework positions WIB to take even further advantage of the market opportunities.

Turning to the components of our strategy. The logic for pursuing a lead bank focus is compelling. Our clients do 55 to 70% of their business with their lead banker. And in particular they apportion their more valuable business to that lead relationship. Cross sell opportunities are also almost double for a lead relationship versus a non-lead relationship. For WIB our lead bank clients conduct on average 4.9 products with us.

We believe that in addition to customer knowledge and industry knowledge and the personal relationships that underpin that, there are two core attributes that best position Westpac for lead status.

Those are provision of debt solutions and transactional banking capability. And I am really confident about the competitiveness that we have in those two key areas. Transactional banking tends to be less recognised, but it is an increasingly important part of our customers’ operations. We’ve been really successful in client acquisition in this area with over 40 new clients or transactions captured in this year to date. And we are rolling out innovative payment solutions that show even greater growth potential.

Last year I showed you where Westpac was positioned in its key markets, and we are ranked number one or number two in all key sectors. We are not number one in all sectors, however, that is not always a bad thing because from time to time the risk or the cost of achieving number one is not matched by the return that you achieve by getting that status. However, being ranked three starts to become quite marginal and below three starts to raise questions marks as to your real competitive proposition. And for sophisticated customers, for our corporate and institutional customers, that’s not an acceptable position to be in.

Our broad based competitive position is strong and positions us well in our core markets. So our lead bank focus and core expertise translates into a larger number of relationships which have a true value to both parties and with whom we do a larger number of transactions with different products and services.

Examples of this over the past year are the Fairfax Group, where a large bridging facility translated into a valuable US private placement. Or with the Transfield organisation where we moved from being a provider on a non-recourse basis of project finance to their Australasian transactional banker. Or Stockland, where we’ve been involved in a number of important domestic and global capital market issues.

Significantly our alliance with Bank of America provides real leverage, major leverage into global capital markets, and it has been the basis for a lot of success for us.

We have also looked to leverage WIB’s expertise across the broader bank so examples of where WIB provides support to the rest of Westpac include WIB’s expertise in industry analysis for business banking and SME customers and Mike talked about that industry focus and the benefits that come from that. As David mentioned we have been successful in introducing BT corporate superannuation


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services to our clients and WIB provides innovative investment products to both BT and BCB clients. And let me elaborate more on this last point.

As you recall we have three core elements to our strategy. Lead bank focus, core expertise and thirdly capitalising on growth in investor demand for alternative asset investments. Our business model in this third element aims to utilise the strength of the organisation right across the value chain. Whether it be in asset acquisition, in structuring and packaging the product, in the distribution of those investments or in the ongoing asset management.

WIB’s investment product is positioned right across the risk return spectrum. And this is in a really rapidly growing sector of the investment markets. The alternative asset market is growing roughly between 10 and 20% per annum. The growing popularity of this asset class as an investment is because of the increasing focus that investors are putting today on the absolute return and because these assets have a low correlation compared with traditional investments. So while liquidity is generally lower for alternative investments they can lower both the risk at the same time as providing additional return.

It is worth noting that WIB’s operations complement the offerings of BT. The range of how these deals can be structured is wide. Different assets can be packaged to meet the requirements of different forms of investor demand and different market opportunities. And we are looking to extend our offerings right across that broad spectrum, whether it be to retail or wholesale investors, whether it be single asset or multi asset or whether it be in the listed or unlisted markets.

Our two upcoming offerings are highlighted on this slide. Importantly the structure and distribution channel we chose depends on the target market suitability and investor appetite. And suitability is a really important factor here for us as we look to provide important and valuable investment product in a sustainable way to our retail investors.

An example of the success that we are having in this activity is the closing of the HALCYON notes offering which we did yesterday, and which was over subscribed at $65 million.

Now one of the key elements of success in this activity is retail distribution, and as you may recall we have been focused on building that capability for four years now. We have almost 17,000 customers who have invested in WIB investment product. And we are also beginning to see an increasing depth of relationship with these investors. With over 1,300 customers now having bought more than two of WIB’s investment products.

We are also looking to expand our product range to meet the changing markets and the changing investor demands that we see.

I would like to finish with some comments about balancing risk and reward. As an institutional bank it is here that we tend to see the greatest concentration of risks. And our risks tend to fall into three categories. Credit, market and operational risk. When looking at credit there is an obvious relationship between our credit health as measured by our impaired assets and our experience on the bad debt line. Positively for the business, over recent halves we have grown our


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credit related customer business while improving our underlying asset quality. We continue to experience relatively low write-offs and our book is in good shape.

In terms of market risk our average usage tends to be measured by value at risk measure, and VaR has really only grown in quite a modest way over the years, although there was an increase that we talked about in the preceding half. Utilisation of VaR tends to be related to three factors. To the cost customer flows that we are seeing, the size and nature of our customer flows, to the volatility that exists in the underlying markets and to the strength of our view and analysis and the positions that we want to hold. Our half on half revenue performance hasn’t always been as consistent as I would like. But overall growth is still healthy. It is not an annuity income stream and the variability of income we see is really just a function of the fact that we are taking risk.

My focus is not about just de-risking this activity. It is about getting a suitable return from the risks that we are taking and getting solid growth in revenue and earnings from this activity.

Lastly, we’ve recently seen the extent of operation risk in institutional banking. Good governance and culture are more important than ever before. At Westpac we have clear segregation of duties between each stage of a trade, whether it is being executed, booked, settled or reported. Nevertheless, we have recently thoroughly reviewed our systems and processes controlled environment and our culture. Ilana Atlas will elaborate some more on our cultural findings. But this wasn’t just a run of the mill tick the boxes review. This is one where we tested it and we probed it and we looked to find ways that we could examine and highlight weaknesses. And while we found the areas where we can improve and we will, the review firmly reinforced our confidence in our ability to control operational risk.

So to recap on our goal of being Australia’s leading institutional bank. WIB is a diversified business that is growing the quality of its earnings. We are successfully executing the three core elements of our lead bank strategy. Our structured investments, capital markets and alternative assets area are delivering growth right across the bank. And we are delivering this value within a very prudent risk return framework.

Thank you very much. Let me hand back to Andrew.

Q&A Session 1

Andrew Bowden Thanks Phil. We’ve got a little bit of time for questions here before we have a bit of a break. Can I see a hand, who would like to ask the first question of the team?

Brian Johnson was first up.

Brian Johnson I am not quite sure who the appropriate person is to answer this question, but just the Epic Rest and all the infrastructure assets that Westpac is holding as principal, how close are we to getting these off the balance sheet? Will they be off


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the balance sheet before September 2004? And can we also get a quantification of the dollar value and the capital treatment at the moment. I suspect it is Phil.

Phil Coffey Yeah why don’t I talk to where we are standing on that particular asset. Our absolute plan of attack is to have those assets into the market quite soon, and we would look to see them off the balance sheet by the end of September. The size of the equity is still being sorted out with our underwriters. In fact the whole structure of equity and debt is being sorted out right now.

Craig Williams Craig Williams, Smith Barney here, a question firstly for Phil. Could you give us some sort of feel for what your expectations are for customer derivative activity once IFRS is introduced and a question for Mike Pratt just with regards to your retail deposit growth, could you give us a feel for what some of the success has been, there doesn’t seem to have been a lot on product development. You don’t seem to have been leading the rate side of things.

Phil Coffey On IFRS, if we use the experience of the US as a guide, and I think it is a pretty good one, we think that in the process of the introduction there is an uplift in activity as clients look at where they can actually achieve full hedge accounting and where they can’t, and what they need to do to actually position their portfolios to achieve the kind of risk exposure they want. Ongoing after that, activity tends to be more plain vanilla. Partly to achieve that effective hedge accounting, but in the US as you have probably seen from you know the growth in the derivatives markets, that whilst that aspect of the derivatives market actually tends to, and greatly decline their other aspects of the derivatives markets that have actually grown at a faster pace. And so the total outstanding exposure, whether it be credit, interest or foreign exchange derivatives is actually much higher today than it was when those US accounting principles were put in place a few years ago.

Mike Pratt Craig on the product side regarding liability driven development, the focus on the last I guess six months or so has been much more on product development on the asset side of our balance sheet. Some of which I talked about this afternoon. We clearly are not ignoring the other side of balance sheet. It is a challenging environment on growing liabilities and you will see us bring to market in a very short time a couple of products that we have been working through. So it is not that it hasn’t been happening, you just haven’t seen it yet.

Craig Williams I was wondering what’s been the driver because the product development hasn’t been as perhaps as innovative or as regular as some of your competitors, yet the market share has been very, very good.

Mike Pratt Market share has been strong, but it is a very competitive environment, increasingly on the liability side of the balance sheet. So we can’t stand still on our development and there are issues underway in that space.

Craig Williams So what has been the success then in driving those achievements?

Mike Pratt I would say it is principally about driving the overall customer relationship focus, it is really getting that focus around offering a full suite of products to customers, educating our bankers on what is available at what rate. If you have a look at our term deposit growth you will see that that’s been quite outstanding over the period. So it has been more about that, than specific product development or price led. We do see as I indicated in the presentation real opportunities and


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efficiency and some extra features and functions available on deposit products. And that’s where we will be heading.

Andrew Bowden Question over here, Ross Brown.

Ross Brown Ross Brown from Deutsche Bank, a question probably for you Mike. You talked a lot about pressures in your various segments, in SME, broker, penetration, pricing issues and deposits, competition in cards, business banking, can you just flesh out in each one of those categories what exactly is the products that are under pressure. Where’s the party that’s driving that, whether you think it is a sustained or a temporary phenomena. I know David Morgan at the start referred to new entrants and who these guys are and whether this is a temporary or a permanent phenomena.

Mike Pratt Yes, good question. Time doesn’t, time probably doesn’t permit for me to go through product by product. However, I’ll try and group my comments together into logical product areas. In the mortgage space, clearly we are seeing a very competitive environment as growth has come off and it has been as you all know in the last few years around ~22%. It has now come back to as I indicated around 15% in my view. You are seeing a much more competitive environment now with the various channels that are dealing to that mortgage market and particularly in the broker environment. You are seeing a number of the major banks. Think about different players on their own, quasi broker type players, you are seeing the regional banks with a number of different players as well, and a couple of quite significant price led initiatives.

The issue that I have in that part of the business is fundamentally making money, and you know, there is no point in significant churn that we’ve seen in some of our peer group, with no movement on bottom line. So our focus is very much on good features in our mortgage products. We’ve got some very good offset products, our ‘rocket’ product mortgage and making sure that we are driving profitable growth in the mortgage area as I’ve indicated earlier.

It is also a broader story around diversification of income and hence our very strong focus on business banking. In the business banking arena it is very much about industry knowledge, about product opportunities in the industry segments that I’ve talked about with our segment packages, and about the total relationship management equation. I can’t say strongly enough Ross, it is not price led. In the growth that you’ve seen in business banking has not been price led. It is very much being driven about the relationship and the quality of the product offering.

On the liability side we just discussed, it is an extremely competitive environment now. You’ve seen one of the major banks move on their cash management in that space. You are seeing a number of different offers come to market. What I would ask you to do though is just get underneath the offers because most of them are for a limited period of time. The lead rates in some cases, which are then offset by increased fees, so it is not always a customer win situation, and it is very important to get underneath the detail of what’s being offered in the market.

More holistically I guess my comment would be, you know, we have a very clear customer lead strategy that is delivering and we intend to stick to that. Both David and I have talked about the fact that we will not lead the market down. We are


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about driving sustainable profitable market share. And you will recall that at our last presentation I presented to you some statistics from research around why customers leave banks, 65% of those customers who were switching were on service, i.e. poor service, 15% was on price. Now we believe with our customer led proposition we are in a very strong position to defend some of the competitor activity that is going on in the market.

I hope that, in a broad way, addresses some of your question. I am happy one on one to talk more specifically about products if you like.

Ross Brown Can I just follow up one point of the business banking front? Because NAB is saying that banks are targeting their customers and everything they are doing in that space is reacting to competitors, not actually going out there and being proactive. Are you saying you are not using price to attract NAB customers? Is that correct?

Mike Pratt That is absolutely correct.

Andrew Bowden I’ve got a call online, actually a question on line from Stewart Oldfield from the Financial Review. I’ll play it now.

Stewart Oldfield Just a question for Dr Morgan or Phil perhaps. Just on one of the other banks is reporting increased activity from the offshore players targeting the institutional end of the market, so I was just going to see if you guys have seen any evidence of that yourself perhaps targeting those led relationships that you were talking about?

Phil Coffey I’ll take that if you like. Stewart, no I don’t think that the market is anymore or less competitive than it has been probably for the last 15 years where we’ve had a global bank looking to come in and target the more senior sophisticated corporate institutional clients. It has been something that we’ve had to live with from a competitive proposition for that time.

Andrew Bowden Just another question from Mike Macrow.

Mike Macrow Just coming back to the issue of margin compression, I notice that subsequently today Phil will be talking, about his 5 to 10 basis point margins assumptions, and the market has had a rather frightening experience of a company coming out with radically new earnings outlook with one page of relatively sketchy information on how that occurs and most of it seems to come down to domestic margins, which have either fallen already at NAB or are going to fall over the next year as they use it as a bit of a war chest. Do you see it as, do you see them as being questionable in terms of the numbers that have come out or do you feel – I mean it is not just yourself, every other bank is saying margins haven’t particularly altered in recent times, so if there is a threat, it is about a threat of something is yet to take place?

David Morgan Mike let’s return to this, can we, in the final Q and A after we go through Phil’s presentation and also after an update on the outlook. But let me say for our own position it is essentially as you’ve described, and that for our own margin experience currently is not out of line with our longer run planning assumptions, and Phil will update on that. And when I’ve talked about risks I tried to be careful when I elevated the risk of irrational competition to talk about an increased threat


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of irrational competition on margins. At the moment, I think it is fair to say we are seeing some selective straws in the wind, and it is premature to say that we’ve really locked in some permanent and lower price points across the board. But I think it will be a richer discussion if we can return to it in the final Q and A after you’ve heard from Phil and me. Is that okay?

Mike Macrow Thank you.

Andrew Bowden Hamish Carlisle

Hamish Carlisle Hamish Carlisle, Merrill Lynch. A question for David Clarke around the wealth management side, I guess first that at an industry level and then within the context of BT. If you look at the industry there is a very clear shift obviously towards WRAP based product or master fund type product that is now well established. And if you look at the bulk of revenues coming out of your business it relates to sort of the more traditional packaged trust business. Is it realistic to expect you know significant positive inflows within that sort of trust business? And what does that mean, I suppose over I guess a five-year period in terms of your revenue and revenue margins?

David Clarke You are right, there has been a shift in the market place so that traditional retail master-trust business is one that as we look forward we don’t see the growth in it. I mean a large part of what we are doing is maintaining that. Part of what BT was historically very good at and as a consequence has a residual effect, is that they had a reasonable amount of direct business that was straight into that portion of the offering. So you are right. The growth is going to come through the WRAP platforms, being corporate super WRAP. What that has driven so that has at its face value a lowering of the growth trajectory in terms of revenue growth. That has driven the strategy of being in the platform providing business. But that is largely a utility type business. And while growth is very important in it but it has nowhere near the margins of the former investment, retail investment business.

What is therefore extremely important is that you get flow into your proprietary funds and what we call our packaged funds via the WRAP platforms. So that means that it’s a lower, slightly lower margin than we are seeing in the stand alone retail funds, is nevertheless a considerable lift on the margin associated with a WRAP stand alone offering, selling other people’s funds. So the desire and the goal of the business is still the same as it always was. We make a greater margin out of the selling of our own funds, and when I say those that we package, those are packaged funds that we put together with discrete mandates with external managers. That’s our counter to that lack of growth, that industry change in terms of the retail funds. It manifests itself as a decline in the overall margin. We’ve been well aware of it and quite frankly that was one of the goals that attracted us to BT with its strong platform based business. It keeps us in there. We are the people that speak to the advisory groups. We are the people that can put ancillary services on the sides of our, on our WRAP platforms. The stand-alone equities are now being flowed through all those sorts of things. So it is a replacement of that old retail margin strategy.

Andrew Bowden Helen, could you please pass that just to James.

James Freeman James Freeman from Golden Sachs JB Were. Just a question for Ann. I was wondering could you tell us whether you are experiencing any of the intensified


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competition on the margin side in New Zealand, and I guess just a follow on from that - is price a tool for retention?

Ann Sherry We haven’t seen what we call irrational pricing yet although I have to say when we look back at some of the other mergers and acquisitions in the market, price has been a very powerful retention tool. Its been used by National Australia Bank in the past in other acquisitions. We are seeing a little bit of it, but not a huge amount. Has price been a tool for us? No it hasn’t and deliberately not. So I guess my view on that is that we have to use price to win your business you’ll lose it as soon as somebody else offers a better price. And you’ve heard that across the board here. So our strategy has been explicitly not price led. Has been explicitly to offer a service proposition that’s better than the competition and basically draw people to us for the long term and then cross sell them so we make them sticky. A price proposition in that market in particular is a very un-sticky proposition. So we are looking for sticky customers as it were, not un-sticky customers. So that’s a very scientific way of explaining that, the margin proposition in New Zealand. But it is not a price proposition at all.

Andrew Bowden Could you just pass that, James, forward, please.

Jonathan Reoch Jonathan Reoch from ABN AMRO. A question for Ann again. You spoke a little bit about leveraging the group systems between Australia and New Zealand. Who does that square with the Reserve Bank of New Zealand’s desire to have all New Zealand banks operating stand alone systems, and do you have any idea how much that is going to cost you in the next couple of years?

Ann Sherry The move for mainframe has been done with the Reserve Bank’s full knowledge and agreement1. So the process we are going through, and we’ve been doing this for a while now has actually been to engage with them to identify the issues where they want some local control and where it actually is not that important. The key issue really is that, I articulated it quite publicly is that in the event of a bank failure the New Zealand customers are clearly identified and that we could run the bank in New Zealand from day one. That doesn’t require everything to be run physically out of New Zealand for that to happen. So we are aware of that in everything that we do, that’s a characteristic of what we build into it. Does that mean that you can’t leverage group systems? No it doesn’t. And so we are conscious of those constraints, conscious of the issues. I don’t see that as a big cost issue for us as we move forward because what we are looking to do is actually leverage something that we are currently not leveraging at all. And so there is still upside for us in actually getting the leverage from the systems that we only build once and then make work for the different customer bases in different geographies.

John Mott John Mott from UBS. Just a follow up question in New Zealand. Mike talked about earlier on an attacker strategy for a competitor in business banking in Australia. Do you have a similar strategy in New Zealand?

Ann Sherry Yes we do.

John Mott Would you like to elaborate on that?

Ann Sherry Well we clearly have a focus on the potential fallout of the ANZ/National Bank merger. And we have since that was first announced been working internally with


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our own people to look for the opportunities that that would present us. And we’ve been on the receiving end of this so we actually, and most of our people are quite keen to be on the taking end of it rather than on the receiving end of it. So we’ve used that to generate some focus and momentum. A lot of it has just been about getting better at looking for customer opportunities. And basically asking people for their business. An attacker strategy in a sense is just having the confidence to go out and trawl for business that otherwise you would assume is locked in somewhere else. What we do know is that a merger is a very disruptive activity for the customers involved in it and there will be some that will fall out and we want to be there to receive them.

John Mott You also talked about the housing market. You’ve been particularly successful. Are there any other products or areas where you’ve been successful?

Ann Sherry Where we have or haven’t?

John Mott Have been successful.

Ann Sherry Our deposit market growth has also been very good. And some of that has been product led because we didn’t have very good products on that side and we took the cash management account product that had been built in the Australian market and basically replicated it in the New Zealand market. Again that hasn’t been particularly price led, but we’ve put good product to market and we’ve seen great deposit growth. The youth product that I talked about, we opened 8,000 accounts in two weeks. In a market our size that’s a huge growth and that was really us identifying a gap in the market and opportunity. The deposit balances in those accounts aren’t huge, but that’s a market for us for the future as well which is why we’ve gone into it so hard.

David Morgan Can I just supplement what Ann said, and she picked it up in her report, migrant business has been a particularly successful niche and given the size of the migrant flows there that’s a non-trivial segment. The other thing is we’ve also drawn attention to the fact that we got back all of our business market share here over the last five years that we shed in 1994 to 1999 in Australia it’s an even bigger story in New Zealand where we are one bank more than all of that share in business since 1999.

Ann Sherry And it is not like me to undersell myself, so thank you.

David Morgan It is very, very unusual. I just wanted you to know that.

Andrew Bowden We might just take one more question. Brian.

Brian Johnson A question for David. David if you have a look at the Bankers Trust, the Rothschild, whatever acquisitions you want to name in the wealth management area, the idea I suspect is that if you bang a bank together with a wealth management business you’ve got a lot potential customers to sell wealth management to. Whilst we heard a lot in your presentation about a lot of bits and pieces, I think you have to agree the wealth management products sold through the bank channels, the tied agency network has not lived up to expectations despite the fact that business banking and corporate superannuation side seems to have done really well. Can you give us some commentary on what is happening with the number of planners and why when they have done from


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probably the worlds worst platform to one of the best, after all it was DOS based, which is incredible. And what are the specific plans to turn it around because there are a lot of things that really good with BT but the link between the BT and the internal planners appears to be the worse aspect of it.

David Clarke There is a lot of cover here so let me try to segment it. First of all let me talk about numbers. The model within the Westpac group of financial planners which was up to around 700 at one stage, and we are now down to 530. It was a model where there were a lot of people who really as the market peaked in 2000 and went through its considerable downhill run did not in our view cope as well with that as they might have. That caused us to look at, first of all, who we were recruiting, how we were training them, and how we were remunerating them. All of those things have been incorporated now under a project called Project Sunrise. The first changes of, and that’s been the gestation period for 12 months now, the first changes, material changes of that are going to be released at the beginning of calendar year 05. The whole purpose of that is to improve exactly what you talk about. I wouldn’t say it has been quite as bad as you paint. However, it has been I think one of the areas where we are conscious that we think we could have done better.

What is happening, one of the first things that have happened is that you’ve seen we worked on the pieces that we’ve thought would be clear, clear wins, that being the corporate and business superannuation arena. So that set up a good model. We are working clearly; we also now as you pointed out changed the platform. And there is something like close to 400 of those planners now using that platform, and $1 billion as I mentioned of that BT WRAP platform growth of the $3 billion of the last 12 months, a $1 billion of that has come from those planners.

It is a bottom up process. It has taken a little longer than we would like. As we set the goals for next year they are a substantial uplift on the performance that we’ve seen in the past year and take us back towards more of the level that was being achieved in 1999 and 2000.

In summary, we are aware of the opportunity, the resources are in there, and the focus is there. We will get it right. The issue is being addressed.

Andrew Bowden We will take one last question. Matt.

Matthew Ryland Thanks, Andrew; it’s Matthew Ryland from Merrill Lynch. This one is for Mike. Can you sort of comment on how parochial SME and smaller middle market clients are? And maybe comment on sort of Westpac’s growth, sort of ex-New South Wales and maybe sort of comment on Victoria?

Mike Pratt Thanks Matthew, the research that we’ve done on that particular segment would indicate that their clear focus on this end of the market is on service. It comes back to some of the comments I made earlier to Ross’s question. The SME sector is not price led from the research that we’ve done. Now that’s not to say that you don’t need to be price competitive, you do. But what they are really looking for fundamentally is a face-to-face relationship that really meets their needs when they need it on the ground. Hence you’ve seen me talk today about distribution capability and the importance of putting business bankers back into the network. That is really a key response to that particular segment’s need.


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That’s our approach to the sector; it is certainly winning business for us. So I believe from the research and our response we are doing the right things.

The second part of your question, you recall that I put up 12 months ago profit pools on that sector. Our core focus was Victoria where I showed you a very low percentage of that market that we lost to some of the competition. We are growing that business back very quickly. That actually forms part of the attacker strategies that I was referring to earlier.

Andrew Bowden I think we will take a short break, have a cup of coffee. For those of you on line we will be back on line again at about 3.35pm.

Andrew Bowden Welcome back to those on the conference call and online as well. We will kick off with our second section with Michael Coomer, Group Executive, Business & Technology Solutions & Services.

Michael Coomer Thank you Andrew. Welcome. Those who were here last year will be familiar with the general direction and broad themes that I will talk to you about this afternoon. I will provide you with some background and context to BTSS, describe our key objectives, review our progress since last year and reaffirm our focus and direction going forward.

My session may appear to be a repeat of last year’s update and I make no apologies for that because we are focused to continuing to execute on our current strategies. The execution of our strategy is predicated upon a number of key projects that form a part of the integrated program of work. And while we are continuing to progress that strategy our mind is very conscious, we are very focused upon four things which the first is to keep our expense base flat, to maintain the commitment of our staff and bring them along with us on the journey, thirdly to deliver on our “Ask Once” promise and finally to ensure we have a sensible balance between our risk and reward strategies.

BTSS is the servicing and processing heart of Westpac and delivers service to all parts of the organisation and to re-cap it is made up of a number of quite significant functions. The first one being generally to manage the operations which host our origination and servicing arms which are centrally the part that is managing the Pinnacle program. Our technology group, the embedded technology group, which hosts our architecture service delivery, application maintenance and group project management architectures. Strategic sourcing that by and large has control of our outsourcing relationships and also has ownership of our early stage research group, my strategy functions, and it also owns the supply chain, service chain.

Corporate services host our anti-money laundering, cash management, fraud, physical security and business continuity functions along with a couple of others.

And then our group property function that is our substantial physical template in the form of buildings and branches etc and also is responsible for delivery of our new head office which I will touch on a little later.


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BTSS collectively manages a little over 40% of Westpac’s expense base and this made up of two components. The first is outsourced services, which is self explanatory and retained services, which is essentially what the embedded BTSS resources do on a day-to-day basis.

To recap the major outsource functions are property which we use Investa as our strategic partner; technology operations and telecommunications which is a combination of IBM/GSA and Telstra; mortgage processing which we used EDS as our partner; cheque processing in which Unisys support us; and then finally First Data who support us on credit card processing.

All of these outsourced contracts are on track and are delivering their financial and service objectives to the organisation. Indeed, a number of those contracts are well in advance of their service levels, one organisation providing service levels 165% above the contract.

We have four reinforcing objectives within BTSS. The first is building a high performance culture. The service profit chain clearly suggests that we need to bring our people alone with us. BTSS is not just an information technology hot house or a back office function. It actually is a significant enabler of our major transforming capabilities as well as providing day-to-day service to our internal and external customers. And the second one is improving our operational efficiencies and productivity is an ongoing test of our capabilities and is constantly being benchmarked I might add by, in all categories by external benchmarks. Optimising the use of our capital and finally enhancing customer experience that is dealt with through our Ask Once objectives.

For consistency I would like to take you through what we said in previous years. What we did is we talked about the need for strong project alignment to the business and their outcomes and essentially what we have done is locked each of the business strategies into each of the functions that I manage so there is a very clear line of sight between business activity and activities that are going on within the BTSS function. Secondly, was the standardisation and reuse of infrastructure and Ann touched on that a little bit before where much of the infrastructure that we have developed through the Reach and Pinnacle Programs, the One Bank platform and many others that are going on are clearly now reusable across the organisation, and indeed we now have what we call a standard operating environment across the Tasman including BT and shortly we will be moving that into the wholesale bank.

Finally the realisation of benefits stemming from these projects that I will touch on shortly in which we are making great progress.

I would like to touch a little bit on the Reach program and perhaps provide a little bit more context more from a productivity and back office perspective but nonetheless this program of work is far reaching, let there be no doubt.

As Mike has indicated the Reach tools are now being used by almost 2,000 of our staff both in the front line and in the call centres. And we are delivering leads to almost 1,300 of those on a daily basis and 15,000 leads are being generated on a monthly basis. The staffs using these tools have a real time, complete view of the customer and the products they use and their balances and their history. This has significantly enhanced our internal service quality. By way of example in


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the business lending area, using these tools in conjunction with the Pinnacle capabilities that Mike spoke about before, has created a range of operating opportunities or cost reductions such as follow up calls from customers about the progress of their applications have decreased by 20% because they now are not ringing us ad hoc wanting to know where their applications are, our bankers can see those applications in real time and they have a consistent view of that interaction in real time. And they can communicate with the customer in real time. And on Mike’s slide you might have seen the term “We are delivering a continuous conversation”. Now there is a unique set of capabilities that we are building up that once again bridges both the front end i.e. the CRM and Reach capabilities in conjunction with the Pinnacle capabilities that is providing the straight through work capability. And the speed and consistency of this implementation has been unique and been nothing short of stunning. And directly as a result of the strong partnerships that we have between BTSS and the BCB and shortly New Zealand as well as our software providers, as well as IBM/GSA and our internal IT department.

The staff satisfaction has gone through the roof. Positive responses and feedback from the staff using these systems has been a key enabler to getting these systems in. Because we have all heard war stories of how difficult it is to get systems, not just get them but get staff using them. And first hand good stories from peers has been a good and powerful tool in respect to creating engagement and as I said for fulfilling delivery.

The financial benefits are well ahead of plan and Mike touched on that and our people are very excited by their technology.

We are using industry standard components, we are not building this in-house as others have tried and failed. All these capabilities are off the shelf with a modest amount of in-house development and the capabilities we are using are standard such as Siebel, NCR, SAS and Oracle.

With respect to the Pinnacle program, this is a very complex program of work. And it is progressing very well as Mike indicated. We have automated all of our business loan documentation and over 190,000 business security packets have now been processed, imaged and archived and this resulted in us taking well over 80 million pieces of paper out of the bank. We have delivered online loan applications for business customers and for credit cards; we have consolidated our delinquency management of all lending products but cards and that will go on onto a single platform soon.

And we are on track to realise all if not more of the projects originally identified productivity benefits. For example we are delivering around a 50% improvement in time to process loan verification activity that is a major leap forward. And our Basel II compliance program which sits underneath this from an MIS perspective we are progressing very well and are on track.

In respect to our information technology organisation it has also been undergoing a significant transition over the last 12 months consistent with our goal to align the back office with the front office. The IT organisation has also been decomposing itself and aligning itself with aligned businesses. We now have a Chief Information Officer within each of those businesses who reports into our Group Chief Information Officer, Simon McNamara.


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The IT organisation has also been very busy rolling out infrastructure, tactical, offensive and defensive. I have touched on the offensive pieces around Pinnacle but we have also been spending a lot of time on our infrastructure, both improving our operational risk and our cost profile. And we have rolled out well over 17,000 desktops for example across both Australia and New Zealand and we have enhanced the organisation’s ability to use these capabilities. So once again we are expecting to see our staff satisfaction with our systems improve dramatically over the coming years.

Also in the past 12 months we have moved the ratio of IT spend from 55% maintenance, 45% project related and we have reversed that to now 55% project related expenditure and 45% maintenance, which is an outstanding outcome which has both financial benefits to the organisation and my own function, but what it means is an additional 10% of our IT fire power is now directed into the businesses for strategic programs of work without any additional cost to the group. And our IT costs have been kept flat throughout that period.

The outcome of our efforts has allowed BTSS to absorb significant business volume growth while basically holding our expense growth flat. Indeed this demonstrates less than a 1% expense growth over the last three years and I expect this trend to continue going forward.

This is a good outcome and if I am permitted I would like to give my staff a big pat on the back for that.

We are in the process of putting a new head office in place. This new head office comprises a little over 73,000 sq metres of capacity for 5,200 of our staff. This building will permit us to move out of ten Sydney CBD sites. And the site will differentiate us from our competitors and we believe it will reinforce our brand attributes quite significantly and we will be using the latest technologies to enhance staff satisfaction and worker productivity. We believe that this site will help facilitate ease of communications by having everyone in the one location. It will certainly be a flexible workplace and will provide greater interaction for teamwork and for an organisation such as Westpac where teamwork is already world class, in my view; this will take us to another level. And it will also provide us with an opportunity to increase easier collaboration across business units, easier than perhaps it may have been with ten sites.

We will be using enabling technologies such as voice over IP, and you may have read recently that Westpac will be the first corporate in Australia with voice over IP and indeed we are trialling that in this building as we speak very successfully, and all of the issues associated with its stability have been resolved, and Telstra is standing behind it as are we. The building will be entirely wireless and we will be using wireless computing on a single operating environment.

The construction is the largest tenant pre-commitment in Australia and the second largest single office tower in Sydney in square metres behind Grosvenor Place. The business case for this program of work is very compelling.

So what else have we done? The newspapers over the last 12 months have been talking a lot about internet security and fraud etc. and I would just like to give you an update on where Westpac is.


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Year on year, our fraud related losses have declined by 16% with substantial changes in the mix due to increases in internet banking fraud. All other classes of fraud have reduced. In some cases very, very significantly.

Internet fraud prevention is a key focus for my team and I and in particular respect to closely managing fraudulent email attacks i.e. fishing, viruses, ghost websites, and keystroke logging activity. We are strengthening our customer authentication capabilities, particular to our high value segments by rolling out low cost security tokens to our business segments. We are upgrading our forward detection capabilities and moving them to a 24 x 7 capability for our internet fraud and we are focussing an enormous amount of time and effort on educating our customer base and letting them be aware of the risks but also things that they should be doing to protect themselves. So customer education can be accessed via our internet site, but we are also improving security on our websites as well as offering anti-virus software to our customers. And finally we are working very closely with the industry, with government and law enforcement agencies throughout Australia and New Zealand.

Our staff remain committed to the change. By any measure BTSS and Westpac has gone through an enormous amount of change over the last two and a half to three years and what this suggests is we are bringing our people with us which is great. And without that there is no way we could have been advancing the Ask Once commitments in the positive way that we have. So I am pleased to say that although we have gone through a significant amount of change our people are continuing to come with us, they are telling us what is wrong, they are not backward in letting us know what is wrong, and by and large they are voting for the Ask Once commitment.

So going forward. We will continue to enhance our tactical and strategic resources. We will create more rewarding working environment for our staff. They want that and they demand that of us and better align their skills to business requirements and our own and certainly moving a significant number of people what we call process workers to knowledge workers is well in hand and we have a partnership with Alana and her people to help us through that transition. And clearly we are continuing to seek further technology-enabled efficiencies through the next period.

I would like to conclude by reinforcing the message that we are about continued execution of the strategy I spoke about last year. The operational efficiencies that we are achieving and continuing to do are assisting us certainly to keep our expense base flat but as you have seen before it is also allowing us to create additional headroom to invest in the businesses.

So in summary we intend to maintain our focus and expense discipline, continue to drive our major programs of work, deliver on those Ask Once commitments, maintain our employee commitment and finally sensibly balance the risk/reward trade offs.

With that I would like to pass over to my colleague Ilana Atlas.

Ilana Atlas Thank you Michael. Good afternoon everybody. In preparing for today I looked at the presentation that Ann gave on People and Performance two years ago and what was interesting in that was there were a few slides in that presentation


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about the value of intangible assets and essentially that was a euphemism for people. What’s interesting is that in two years that is no longer necessary. And there is a clear understanding about the importance of people in everything we do. Certainly people adding value and not simply as a cost. So it has been interesting for me coming into this role and I think I would make three observations.

The first would be that at Westpac people are absolutely involved in every strategic initiative that is considered and I think you would see evidence of that in the presentations today.

The second is that Westpac is absolutely committed to be a great place to work and there are many initiatives right through the organisation with that as its objective. Very recently we have run focus groups through the organisation about what do we need to do next towards that aspiration of being a great place to work and what’s come through loud and clear is that people here want more opportunities to develop. So in response to that not only have we looked at what we are doing through Westpac Academy which is where we providing our learning through the organisation we are also enhancing the leadership skills through the organisation in relation to the opportunities that leaders give people in their teams to develop. And we are also looking at careers at Westpac and how we allow people to see what careers are available to them through the organisation to allow us to get much more internal mobility.

The third observation I would make is that we certainly have state of the art people and performance management processes. What we need to do in the future is make them simpler and more integrated and get them online as much as possible.

So what I would like to do today is just address three things. The first is our clear aspirations and challenges around people; the second our progress to date and the third some of the initiatives for the next few years.

Now you will have seen this slide many times today and the reason I put it up in this presentation is just to highlight the importance of people in our DNA. People are integral to our vision of being a great Australian and New Zealand company and a great place to work. Our values of teamwork, integrity and performance are integrated in everything that we do. Our high performance culture is the lynch pin of our business strategy. We are focused on superior execution of our customer’s experience. In simple terms this means that we are focused on quality people, leaders and teams. We support them through high quality processes and systems and we ensure that everything we do is grounded in our values.

As you have heard many times today we believe in the service profit chain. So we believe that the more committed our employees the more they are willing to apply their discretionary effort the better the experience of our customers will be.

So to move to our challenges. These are constant. Not only do we see our people as key enablers of the way that we execute our strategy we certainly see them as a point of differentiation for us from our competitors. And why is that the case? Clearly our people person-on-person are no different to the people working for our competitors. But we absolutely believe that with the strength of our culture and also the focus we have on creating outstanding leaders in the organisation


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we will have a competitive edge. And later I want to take you through in a little more detail some of those initiatives that I believe will give us that point of differentiation.

First a few statistics around Westpac’s workforce. This is a bit of a snapshot of who we are. Some of the points to note - we have a headcount of approximately 27,300 people, that includes people who work as contractors, who are casual workers, part time workers, who work flexibly. And it really does point to the fact that we are focused on creating a increasingly flexible workforce. Although 50% of our workforce is in the retail bank we are always conscious of the need to make sure that we are very aware of the different needs of people in different parts of our organisation. So we are conscious that we require talent in our institutional bank and BT and we really need to understand the aspirations of all our people and cater to them.

As you see the majority of our people are located in Australia but as Ann said, our New Zealand workforce is extremely important and what we have found is that we have learnt from each other in terms of what we are doing. And so we have certainly acquired lots of knowledge about recruiting solutions from New Zealand and similarly Ann has taken a lot of her experience from here in terms of part time workforces and introduced that into New Zealand.

Certainly our voluntary separation rate has reduced as Mike has mentioned and you will see a significant reduction in that side. A lot of that relates to the work we have done with people in their first year with us, a lot of that has been related to a tightening up of the recruiting process and also a focus on not only younger workers but mature age workers as well. But I will come back to that in a minute.

So if we can just move on to some of our progress to date. This slide is an indication of what we have done over the last four years in pursuit of our objective of a high performance culture. What it tends to indicate is that this is something that requires focus, persistence, patience and a lot of measurement. There is a need to operate across all the dimensions that I have mentioned. We need to lift the skills and capability of our people and that happens through excellent talent management, it happens through development. We have to focus on the behaviour of our people and be very clear about what is expected. And we have to constantly support them through processes such as rigorous objective setting, risk performance appraisals and also sophisticated online processes and systems. One initiative that Mike has mentioned but I will emphasise the customer experience and what we have done through Westpac Academy. Over the last two years over 10,000 people have been through the customer experience training module. It is a three and a half day training session in which we bring people together from right across the organisation – so it’s people from the retail area with people from BTSS and BT working together to understand the customer experience and it has been incredibly effective for us. It has had really a very significant impact. We follow up four weeks after the course and what has been indicated to us is about 99% of people have found it significantly changed the way they work and the way they interact with customers and that the skills that they have learnt from that course they have been able to apply in the business.

David noted our employee commitment score. The employee commitment score is the primary measure we have within Westpac about how we are going with


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people. We measure it each year in our staff perspective survey. The response rate for that survey is over 81% so it gives us a really good indication of what is going on in the organisation. As far as we are concerned commitment is about hearts and minds, it is about people saying they want to stay with us and want to excel. They answer questions like “I am doing something I consider worthwhile in my job”; or “I would recommend Westpac as a great place to work”. You can certainly see the increasing scores we have had over the past five years and as David Morgan said, our score in 2004 is the highest ever.

So these are some of our initiatives over the next few years and what this does is show you how they are absolutely aligned with what we are trying to do from a business perspective. If I can just touch on a few details of some of the most important to us. The first is around our people leader initiative. We have assessed that the most significant impact we can get through the organisation is to lift the skills and development of our leaders. The most important relationship that anyone has in Westpac is the relationship they have with their immediate leader. And so we have absolutely focused organisationally on what that means. And you have heard today about a number of initiatives that are happening in businesses in relation to leadership. What we have done right across Westpac is be very clear about what we expect from a leader at Westpac. We have also been very clear about what we expect in terms of behaviour. And to embed that we have brought through Westpac Academy a number of leadership modules where we are encouraging people right through the organisation to do those modules and assist them with their management and skills. In addition to that we communicate which is extremely important here. The Executive team every six months goes on a roadshow where we speak to the 2,000 top leaders in the organisation and talk about leadership and development as being the most important thing that people do here. And probably most important of all is we measure improvement. So in our staff perspective survey we have a number of questions where people are assessed by their teams as to how they are going as leaders and this comprises our people leader index. And you will see that this year through this constant emphasis on leadership we have had an increase from 70% which is a very high score in itself to 74% in 2004 so on that basis we really assess that what we are doing is working.

I would like to focus just a little bit on culture. At the end of 2002 we conducted a culture diagnostic throughout the organisation. The reason for that was to determine whether or not our strategy would work. We were absolutely focused on the customer experience but just wanted to know what the culture of the organisation was like and whether actually that could be effective and what changes were necessary in relation to it. What came through that diagnostic was that Westpac is a very relationship based organisation. That our people in a sense jump over the counter and want to stand in the shoes of the customer which provided us with an excellent basis on which to proceed with the strategy.

What we have done since then, as you would know, is release Ask Once that has had incredible traction right throughout the organisation. Ask Once is all about our business strategy, it is all about customer focus. But what it also has done is shifted the culture of the organisation to an even more customer focused bias. What this shows is that we don’t have separate stand-alone culture program. What we do is embed culture change in everything we do. It is also very clear that regulators are very interested in the culture of organisations as well and certainly interested from a risk and compliance perspective. And what’s been


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interesting for us is to analyse some of the questions out of our staff perspective survey that go to the questions around the risk and compliance culture within Westpac. And one of the most important is the answer to the question do I feel free to speak up. And the answer here really speaks for itself. You will see that we have a 70% favourable response in 2004 that really ranks very well against the global financial services norm. And as Phil mentioned we have conducted a thorough risk assessment within the institutional bank and part of that was a culture audit. That involved asking a cross section of people across the institutional bank a comprehensive set of questions that went to the culture of the institutional bank. This was conducted by an independent consultancy that is expert in these matters. We were exceptionally pleased with the outcome of that because it showed that we were extremely strong in relation to our integrity value. And it also showed that people in WIB take their risk responsibilities very seriously.

On reward. We have also recently conducted a thorough audit of our reward and recognition processes through the organisation. And what’s come out of that is we are very comfortable with our mix between short-term incentive, long-term incentive and our general positioning in the market. At senior levels our short-term incentive scheme is called Value Management and at other levels of the organisation it is called Performance Pays. As a result of that work we have done we have set ourselves an objective of moving our short term objectives to 30% of top performers to receive 70% of our short-term incentive pool. Currently that stands at around 34% receiving 63% of the pool. We are also looking at our pay mix, and are attempting to move to an 80:20 mix fixed and variable, where currently we stand at 84:16. Now clearly that pay mix 80:20 is across the whole of the organisation. And there are variations to that in the different businesses. In retail we are looking at something like 90:10 and in WIB and BT it is quite different, something like 75:25. What is very important to us is that 86% of permanent employees in Australia hold shares in Westpac and clearly that gives us very important alignments across the organisation. It gives everybody, all our people, a direct interest in our success.

Now meritocracy is a fundamental principle on which we operate at Westpac and we are finding and retaining the best people as our objective. So we are ensuring that Westpac can do what it can to attract and retain the best talent wherever it can be found. So from our perspective we can get a significant competitive edge through our diversity practices. One of the areas in which we have focused and have an excellent external reputation is around age balance. You may have heard us commit to recruit 900 mature age workers by 2005 and we are on track to meet that commitment. What’s been interesting for us is to actually go through the process of how we go about that. And this ad that you see is just one example of some of the differences we have found in recruiting mature age workers from other workers. For example, mature age workers do not look in positions vacant columns and so what we did to attract mature age workers to our Cannon Hill contact centre in Brisbane was to put an ad in the Courier Mail to advertise an open day to try and attract as many people as possible to Cannon Hill so they could see what it was like.

Similarly we have found that we have to change some of our recruitment practices so we can’t put as much emphasis on recruiting skills as we may have done previously. So what we have done is assist mature age workers with their computing skills so they can actually get through our recruiting processes and


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then work with them to develop them while on the job. Similarly we are focused on retention of our mature age workers and one of the key issues around that is flexibility. We are already a very flexible organisation and have had to be that to keep our women workers. But we have found that flexibility for mature age workers is something different. People want significant times out, rather than a couple of days a week rather than working just three or two days a week. What we have found is we have had to change the way we think about flexibility to retain mature age workers. Similarly we have had to work with out leaders because they are having to manage and lead multi generational workforces. So we have oriented our leadership program to give people the skills and development to understand how to do that.

So if we look at how we retain outstanding talent another key issue for us is retaining women at Westpac. As you will see 65% of our workforce is women and so it is essential that we retain as many as possible. How do we do that? Clearly to provide promotion prospects. And it is a fantastic effort for us that 40% of management within Westpac is women and you will see we have had a significant increase in relation to that over the last couple of years. Similarly we are focusing on our return to work rate after maternity leave. It is currently 77% for women managers.

Also our focus is on disability, workers with a disability and our second disability action plan is to be launched this month. Again with our disability action plan they are absolutely grounded in the business. They are very much what people do as a come to work activity. This is not something that is driven by a third party in people and performance. And what’s been interesting to us out of our recent staff perspective survey where we asked people voluntarily to tell us something about themselves is that 5,000 people within Westpac were born overseas and this allows us to tap into incredible talent and a natural resource in terms of language training and obvious very reflective of our customer demographic.

So finally just to summarise this is very much a journey for us. This isn’t something that happens quickly, this is very much about staying the course and it is about focus, it is about persistence and we are focused on our objectives of building an outstanding quality workforce who apply their full discretionary effort and to aspirations and we understand very clearly for that to happen we absolutely must support them with state of the art processes and systems to make it as easy as possible.

Thank you.

So now let me introduce you to Phil Chronican, our Chief Financial Officer.

Phil Chronican Thank you Ilana. As one of the 5,000 overseas Westpac staff I will move on. I am not sure I am going to assist you with your language skills though.

Thank you everyone and let me talk today about a few financial management steps.

I want to talk about a few of the steps we have been taking to reduce financial risk in our business. I then want to deal with some of the regulatory requirements that are starting to impinge on us in our business largely those arising from the conversion to IFRS and the Basel II Capital Accord. And then I want to speak


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about the issues that relate to what we have been doing on capital management and share some thoughts with you about our priorities in that area. And lastly I want to talk on two of the longstanding New Zealand related issues that are our structured finance issues and the ID tax audit and the New Zealand corporate structure - that is the local incorporation issue.

Over the last few years we have taken a number of steps that have been intended to improve the sustainability of Westpac’s earnings. As David touched on earlier, five years ago Westpac’s focus was more on maximising return on equity and while this may have had a place in the 90s as we were trying to drive our return on equity up above hurdle rates it did mean that at times we were giving up profitable share in some key markets and accordingly what we have chosen to do over the last few years is to make sure we strike a sensible balance between growth and rate of return. So our cash return on equity has now been sitting at around 20% for a number of years and yet at the same time we have been able to sustain a level of growth ahead of that of most of our peers while picking up market share in key segments. We continue see profitable growth but as you have already heard we are not interested in chasing new business that unduly sacrifices long term value. We have also over this time tried to simplify and improve the transparency in our financial reporting and I think it is most exemplified now by the fact that we focus now on the same cash earnings numbers that most of you in the market would focus in on as well. We have also been enhancing risk management systems to ensure that they cover all our elements of risk and that has been a part that has kept us very busy over the last year, or the last six months it has been highlighted as well. We have also taken the opportunity in recent times to reduce credit risk concentrations by being more selective in the businesses that we acquire but also by selling off risk where we have got excess exposure and also by migrating more of our corporate exposure to be domiciled in Australia and New Zealand rather than offshore.

A characteristic of the organisation over the last five years has been the ability to maintain cost growth within a relatively tight range. This has been due to a lot of strong financial disciplines and hard work across the organisation and it is also due in no small part to the work that we have put in to improving the fixed/variable mix in our cost base partly through the outsourcing of selected non-strategic activity.

We have also been trying to enhance the quality of our spend and enabling the group to keep its cost growth overall but more importantly getting it aligned around value or revenue generation that is having more customer facing staff and less cost associated with our processing, technology and operations.

It is also important to recognise the resilience of the earnings base has been helped by the diversity of the businesses and income streams we have. We have got a fairly balanced portfolio now of businesses across the wealth, corporate, institutional banking and business banking and consumer banking in both Australia and New Zealand. For example there has been a lot of discussion this year in the market about the impact a slowing housing market might have on the revenue streams of the Australian banks, including Westpac. And while mortgages have been an important part of our business and a key generator of earnings I think it is important to recognise that they make up around 13% of our revenue streams and a little less of our net earnings. More importantly that says that 87% of our revenue streams are not related to the housing sector.


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So clearly while a housing market decline is not going to be something that we want to see, I think it is fair to say that the impact of that in isolation is relatively modest. In any event the slow down in consumer banking that we might see over the coming period, could easily be absorbed by growth in our Australian business banking which we have seen over recent times and the New Zealand retail business where we clearly have good momentum and our BT wealth management activities where we hope to be able to drive stronger profit growth going forward.

Last year at the full year results we ceased providing specific short-term earnings guidance and we have got no intention of changing that position now. Indeed we were pleasantly surprised by the response from many institutions and brokers who have supported both the decision and the reasons for it. That said though we have not moved away from any of the drivers of the medium term scenarios that we have been presenting to you now for a couple of years. These scenarios aim to provide some guidance as to how we think about the business and the interaction that some of the key value drivers can have in driving earnings outcomes. The revenue position that we imply by this model has certainly worked well for us in the current year and but as a result of some of the discussion we have had earlier in the day we have still yet to see whether that flows through to the next year as well. But at this stage I think we feel really comfortable and that in a broad sense we should be able to get there.

The expense position of this model is of course something that we have much more control over and generally we would look to spend towards the top end of the range of growth if we can do so without sacrificing earnings outcomes because it gives us the ability to invest in our future capacity. Obviously would aim to spend towards the bottom end if we felt that the revenue was under threat.

Looking forward however, a model like this will eventually lose its relevance because with the changing to the international financial reporting standards the way in which we recognise income and expense is going to change, so we will need to recalibrate this model for future periods.

It is important to note that while IFRS will not fundamentally change the underlying economic profile or the average returns through time what it will do is change the timing of recognition of income, that is it will change the volatility of earnings and as a result we will need to broaden the range of possible earnings outcomes in any one year.

Let me talk now about the IFRS project. It is a project that I am obviously very close to, not only do I lead the steering committee but most of the people that work with me are fully involved in this as well. We commenced planning for the implementation of IFRS nearly two years ago, as soon as the announcement was made that Australia would move to the new international standard and we have been developing project plans to meet all of the issues that arise from it. We have about 100 people at any one time involved in this although not full time, only about 20 would be full time committed to the project and in terms of cost we would expect around $26 million to be spent over the next three years with a higher concentration of it in 2005.

One of the key challenges we have in implementing IFRS has been the complexity around the standards 32 and 39. Those are the standards relating to


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the presentation of and valuation of financial instruments and if I can get through the jargon essentially that means the treatment of securities, the treatment of derivatives and the treatment of loans and by definition from that, bad debts.

These standards have been adopted. The Standards Board has produced them and they have been adopted in Australia but we are on clear notice that those standards are subject to change and its implementation date will be deferred. That is where we have provided comparative data we have a transition date at an earlier date these standards will only apply on the actual date we start having to comply with the new international regime.

Apart from these standards we have pretty much completed the analysis of what the impact is going to be, what we need to do and we are now already implementing against this.

So in terms of our work plan we are pretty well advanced on the analysis and evaluation. June this year was a pretty important milestone for us. We completed the analysis of all of the standards other than the two I have already mentioned and importantly we have now prepared our opening balance sheet as at 1 October last year that will assist in preparing the comparative data. You may recall that we may be required to produce two years of comparative data which means we will need to produce an IFRS compliant set of accounts for the current year to be published at a future date.

We have obviously engaged with our auditors through the process making sure that our assessment of standards is going to be correct and that we are abreast of the practices elsewhere in the world.

We have also been meeting with other major financial institutions both here and abroad where possible, making sure that the direction we are taking on some of these key standards is aligned with where industry practice will be and it has also given us some comfort in terms of our relative degree of preparation for the changes. We would expect to have all of the changes in our general ledger by December this year and that will put us in a pretty good position then to run on parallel in the future.

What this table does is set out some of the key areas where IFRS is going to impact the group. We have rated the issues according to the influence we think it will have on the business on the one hand and our financial reporting on the other. Clearly the greatest impacts on the group will come from the changes to hedge accounting and bad debt provisioning and also for the accounting for superannuation surpluses. So I will talk about those in a few minutes.

There are also changes in life insurance accounting, these will be modest initially as there is only going to be a few changes to the Australian standards for the 2005 implementation but there is a subsequent standard scheduled for 2007 that could produce more substantial change.

The changes in the special purpose vehicles will see many of our SPVs that are principally the securitisation vehicles needing to be consolidated, so at an early estimate we would expect our balance sheet footings to increase by about $2.2 billion. We will of course have to expense any of the employee share schemes, we have already been disclosing the financial impact that this would have and


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that will obviously come through onto the expense line in the future. Offsetting that of course will be that we won’t have to amortise goodwill going forward. There will be a myriad of other small items that I haven’t mentioned here most of which deal with classification items some items which today are netted off revenues might have to go back onto expenses and timing of recognition, but none of them have any permanent or lasting impact on earnings or on volatility.

The business issues are also quite complex of course, we have to prepare all our credit assessment now for our customers based on the IFRS accounting standards and in some cases that may change in the way we set our underwriting standards.

We will also see as I think has already been discussed with Phil Coffey earlier on, the change in the pattern of demand for derivatives is likely to be a feature as well. A big opportunity as well for is the ability to help our customers understand this impact and walk them through the changes. The big three IFRS issues in terms of earnings volatility will be hedge accounting, the changes to bad debt provisioning and the impact on superannuation funds.

Hedge accounting is probably the biggest prospective source of volatility as we are quite active managers of our balance sheet exposures. And most of these on a prima facie basis would need to be reported now on a mark to market basis however there is quite an opportunity, both within the existing standard for us to achieve hedge compliance by changing the structure of some of these derivatives but there is also of course a very active debate with European banks at the forefront seeking to allow more liberal macro hedge approach to be permitted.

The new approach to bad debt provisioning is based on an incurred loss model and essentially that would require us to abandon the dynamic provisioning model that we have been using over recent years. The chart that I have put up here maps out what the movement in our bad charge would have been in recent times before and after the impact of dynamic provisioning while it is not a perfect replica of what would be allowed under the new standard it does give you a sense of the greater volatility of a total incurred loss model compared to our dynamic provisioning.

The superannuation surplus will also be a source of volatility with the change in the value of the surplus having to be taken directly to P&L statement. That will become an issue for us but it will also become an industry wide issue, as the other institutions with defined benefit funds will need to bring their superannuation surpluses or deficits onto the balance sheet and treat them in the same way.

The costs of IFRS conversion are not insignificant but, at $26 million over the life of the program, they are clearly manageable and not out of line with the sort of normal level of expense we would have for compliance projects of this nature. It is not hard to look back over recent years and think about the introduction of GST, the business tax reform, tax consolidation, financial services reform and IFRS just becomes another burden on that long line to which we can add Basel II compliance and Sarbanes Oxley.

But while we will be reporting our first IFRS result in 2005/2006 the issue of when we will be providing comparatives is still an open one. We are preparing to have comparative data to go back two years but there was a recent SEC ruling that


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suggested we may only have to require one year of comparative data. Unfortunately the way the ruling was worded it is not 100% clear that we will be able to take advantage of it, so we are preparing to be able to do two-year comparatives and hope to only have to produce one.

We will be looking to have the capability to run parallel reporting and at this stage we have certainly determined that for the first comparative year we will run fully and parallel and we may choose to run parallel for the first post comparison year as well just to make sure that we can provide you a list of high level mapping of our results would have been under the old framework and under the new.

Let me move on and talk about the Basel II capital adequacy frame. We are continuing to push forward in our preparations, the discipline has been important for the group, it has really helped us understand and validate the relative risk profile of our organisation against other banks. The quantitative impact study (QIS3) that was done was done against the other major internationally active banks around the world showed that the Australian banking system, including Westpac, clearly have lower risk profiles than other banking markets. The final accord has been released last month and whilst it gives us quite a lot of certainty over the operation of the new standards the Basel committee has left themselves an open door to recalibrate factors right up until the day of conversion because they want to stay true to their commitment which was that the aggregate amount of capital in the banking system shouldn’t materially change on the conversion.

Because of the varying state of readiness of banks around the world unfortunately the date of implementation has been moved out now until January 2008. Given that we were getting ready for an earlier implementation we would expect to be able to be Basel II compliant by the end of 2006 and therefore we will have a good run at being able to have comparable data and a longer lead time for the ultimate conversion.

You may know from previous work we have run the QIS factors through our balance sheet and at this stage would expect a prima facie reduction in risk weighted assets of around 25%. What does that mean? Well the key question of course will be does that actually change anything in terms of the capital intensity of our business? Unfortunately the answer to this question is a little unclear given that a number of important stakeholders in the process haven’t finalised their positions. The short answer is that APRA will seek to ensure that there isn’t a major withdrawal of capital from the Australian banking system as a whole on day one but clearly they do see that this should provide some benefit and an incentive for us to convert to the advanced internal ratings based approach.

More important for management in our core equity of course is the impact that the rating agencies would have. Preliminary discussions would indicate that the lower risk profile of the Australian banks is being acknowledged but the agencies are obviously nervous that not all of the risks have been fully encapsulated by Basel II factors. In New Zealand the authorities there are taking a slightly different approach and are resisting the adoption of the advanced internal ratings based approach and the higher capital associated with the standardised approach will applied in that market. Despite all of this suggesting that some of the release that might appear on paper won’t be made available on day one what is clear is that the capital intensity of future growth will clearly be lower under this new approach to the old.


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Most of you will be familiar with the way Westpac thinks about capital management and has arrived at our target ratios. Ultimately the outcome is really one of weighing up the overall economic capital needs against the needs of the various regulators and rating agencies. These deliberations have led us to having a target Tier 1 ratio between 6 and 6.75% and an adjusted common equity ratio of between 4.5 and 5%. And what you can see from this chart that following the various capital management initiatives that we have conducted over the last months we have got our capital ratios now back within our target ranges and feel that we are therefore running our capital ratios at pretty much where we want them to be. Equally importantly we are now comfortable with the composition of the capital base, following the addition of the further hybrid securities over the period and the redemption of the more expensive older TOPrS transaction that was called in July. The end result of this is that we now have hybrid issuance at the top end of the allowable range. These changes have lowered the overall cost of the capital base, improved our flexibility and given us a platform for growth and means that we will not require any further capital raisings for some time.

The introduction of the deduction for capitalised expenses removes around 20 basis points from our capital ratios that does not really impact any of the economic capital analysis so you could argue that the same ratio now implies a higher degree of capital strength that it would have previously.

For those who saw our presentation last year you would be familiar with the slide where we talked about the priorities that we had for our capital usage. Nothing has changed in our view since then, but it is instructive to use the framework to set the scene for how we are going to think about uses of capital going forward including the popular subject of dividends. In particular behind profitable growth, which we clearly see as the best use of capital generated, particularly as we are able to maintain 20% ROE, fully franked dividends are clearly then the most efficient use of capital following that. Conversely we see little value to shareholders in distributing un-franked or partially franked dividends because of the implied tax penalty that has.

Importantly Westpac remains a strong generator of capital with a cash return on equity continuing to sit at around 20%. If you work through the various sources and uses of capital it highlights that for $100 of equity we have in the business we generate between $2 and $4 of surplus equity each year. The key change that we have built into this model from last year is the inclusion of the capital absorption of our wealth business that is principally related to the life company where growth over recent times has been capital intensive and a relatively small proportion of the profit available for distribution. The inclusion of this line highlights that while the business is on a high growth it will not be throwing off a significant amount of surplus capital in the near term and therefore depressing the overall rate of capital accumulation. Nonetheless, it is still the case that we generate strong capital and even in a half like the first half of this year where a number of other factors went against us we were still able to generate around $1.90 of capital for every $100 invested in the business.

If you look at the sources and uses line closely it was one of the other factors, the future income tax benefit, which is something that bounces around from time to time and a more important one was the change foreign currency induced changes in our foreign currency translation reserve. They were major contributors to the capital accumulation in our first half being below the long run average. At


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least one of those, that is the currency related one, has partially reversed in the current half.

As has been well reported our dividend path has been very consistent and we have demonstrated a willingness to absorb volatility in the payout ratios to maintain this consistent dividend path. At the interim results we has a pay out ratio right on 63% and that was following another 2 cent increase in the half, 4% lift over the year. We continue to hold a healthy buffer in the franking account to support future dividend payment and our capital management disciplines are reflected in our buyback track record as well, as we have repurchased nearly $3.2 billion of stock over the last 5 years.

I have read some commentators suggesting that we could have a payout that climbs to a level in excess of 70% and while this is theoretical possibly it would be quite stretching in the current environment. If you look at the factors that impact the potential payout ratio the key constraint has been the growth and risk weighted assets and in periods where we have been touching double-digit growth a substantial lift in the payout is simply not possible.

However a key consideration in determining the payout ratio has emerged with the pending introduction of IFRS and the inevitable increase in earnings volatility that is expected under this new regime. While we have yet to determine the extent of the volatility and how much volatility we will seek to manage it is almost a certainty that an average payout ratio in the 70s would be impossible to maintain and that is not a phenomenon isolated to Westpac. We continue to prefer a stable growth path in the dividend and allow volatility in the payout ratio but as I said earlier still see that fully franked dividends is the first best use of surplus capital.

Westpac has had a structured finance business for a number of years and the portfolio has changed in line with opportunities, as and where they arise. An important part of that have been our activities in New Zealand that in aggregate make up about one third of the total portfolio of transactions that we have. We have been under review in New Zealand since late last year and because of the late commencement of this audit it was never going to be possible for the New Zealand IRD to go through its normal processes in respect of the 1999 tax year which should have been statute barred at 31 March. Indeed you will be familiar with the fact that one of our competitors received assessments relating to their transactions in the 1999 year just on 31 March 2004.

Westpac however granted a waiver to the IRD to allow them to do a more complete analysis. Even with this waiver though it is clear that the IRD is not going to be able to complete their normal processes by the time the waiver has to expire in September this year.

We had multiple layers of advice on our transactions when they were taken on both at the time they were taken on and more recently and of course received a private binding ruling on an early transaction. And this is the transaction on which we have modelled the bulk of the others. As a result of that we believe our position is a very strong one and that we have treated these items correctly for tax purposes. Realistically though what we should expect is that the IRD will seek to preserve its position in respect to the 1999 year and that would involve them issuing a notice to us and a subsequent assessment prior to 30 September


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irrespective of the strength of their or our position. It is our intention to keep you updated closely in terms of how these developments occur but as at today we have neither received any notice or any assessment. As a result of that clearly we can’t quantify the exposure to you.

As most of you are aware Westpac operates in New Zealand as a branch that is inconsistent with the Reserve Bank’s recent policy on local incorporation. Westpac has been in discussion with the Reserve Bank of New Zealand as to how we can meet their needs without incurring the costs and customer disruption implied by going through the incorporation process. On the one hand we are very supportive of the long run solution by advancing the Trans Tasman harmonisation agenda that the respective ministers, Michael Cullen and Peter Costello have indicated their support for. On the other hand, of course, we need to deal with the here and now issues because harmonisation is more of a medium term agenda. As a result we presented a next best alternate model to the Reserve Bank in what’s become known as the buttressed branch and this was presented to the Reserve Bank in June. This was a model that was worked out jointly on a working party with our people and with Reserve Bank officials aimed at providing many of the key protections that the Reserve Bank of New Zealand has been seeking but seeking to achieve those through other means than incorporation. As I said this was presented to the Reserve Bank in June of this year but we have yet to receive any formal response from them. Again we will keep you fully informed on that as developments occur.

So let me summarise. We have had good progress on IFRS and BaseI II and I think we have pretty realistic view of the likely impacts on our business from these two initiatives. We have a sound capital structure and we have a comfortable dividend payment capacity. We have got tax and regulatory issues in New Zealand and they remain unresolved but work is progressing positively on both fronts. Most importantly of course we have got a business mix and a financial structure that has prepared us well for what might be a more testing operating environment.

So thank you for your attention. I would now like to hand you back to David Morgan for the summary and outlook.

David Morgan Thanks Phil. I have been fortunate enough to secure the highly coveted number nine speaking slot, I would like to thank you for that Andrew.

We have been with you for four hours and you have been very patient. Let me be brief and try and pull together some of the main messages today and then provide comments on the economic and business operations outlook.

Our priorities are to continue improving the sustainability of earnings through delivering for all of our major stakeholders. We will keep a watching brief on acquisition opportunities but we will maintain our proven disciplines. We will also continue to capture profitable growth through the further refinement of our current successful customer focus strategies.

A lot of you ask rightly about points of differentiation. Does Westpac have any? If so, what are they? And are they sustainable? And they are all highly pertinent questions. We do have a very simple strategy built around a very determined focus across all elements of the service profit chain. We do have a very tight


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focus on our core markets of Australia New Zealand and the near Pacific. We have a very large, high quality customer base that continues to have substantial untapped potential. We have built up a very low risk portfolio with sound forward indicators. Over the past five years or so we have built into the organisation a very strong degree of resilience against some of the inevitable un-forecastable shocks. We have been widely recognised as a leader in sustainability. We have a strong board and a high quality management team. But fundamentally we believe our main source of differentiation is around execution. And this in turn is driven by the three factors in our DNA. First the quality of our people leaders starting with the executive team that you have seen here today but extending to the 2,000 people leaders in Westpac because it is they, and particularly first line supervisors, who are critical to securing the commitment and the discretionary effort of our 25,000 team members. We, me and my team, spend an enormous amount of time with these top 2,000 people, developing them, engaging with them, including through a time intensive people leader forums twice a year.

The second driver of differentiation we believe is our disciplined processes particularly our people and our performance management processes. These are broadly our equivalent of GE’s operating system. And we adhere to them with a lot of discipline although as you have also heard from Ilana there is still more upside available to us there.

Thirdly is around values, around integrity, around teamwork and around performance. These are the values that tightly align with our organisational purpose, they also meet the needs of most of our people and they are genuinely authentic values in the fabric of this organisation. We believe that it is these three elements that are driving execution as a source of differentiation. We think that differentiation is starting to become evident and we believe the drivers of that differentiation will be hard for our competitors to quickly emulate.

Let me turn to the outlook, the Australian and New Zealand fundamentals remain sound due to solid demand and continuing low unemployment. We do however expect to see some moderation in New Zealand growth. On interest rates our best guess is there will be a further slight increase in rates in late 2004. Looking at the major components in Australia we expect to see a more sustainable growth mix between domestic demand and net exports than we have in recent years. What does all that mean for credit growth, total credit growth has continued at around 15% with housing credit levelling off in excess of 20% growth per annum. At the same time business credit growth has recovered from near zero on mid-2002 to be currently growing at around 8%. Our best guess is for housing credit growth to ease to the below 20% by the end of September 2004 and perhaps to around 13% by September 2005. Business lending we expect growth of around 8% over both periods. So putting that altogether suggests total credit growth might be around 14% to the year to September 2004 and something around 10% in September 2005.

Long term there is a pretty tight correlation between nominal GDP and credit growth. The long term average credit multiplier is about 1.5 currently as we have just discussed that is running at about 2 but looking forward we expect that to multiplier to come back more in line with that long term trend.

So, what does that all add up to for the financial sector as a whole? In addition to credit growth moderating to more sustainable levels we do expect there to be


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ongoing and increasing competitive intensity coupled with rising demands around the customer experience. The wealth management environment remains broadly favourable. We expect the credit environment to remain relatively benign in the short term. Putting all that together we see the overall sector dynamics as broadly favourable.

We believe we are well positioned to maintain our momentum. We have got an established track record in delivering low risk growth and executing wealth with a consistent growth return mix and disciplined management. You have heard from all our businesses today, we believe they are well positioned and they all have options for growth. We have improved the sustainability of our earnings with increased employee commitment flowing into higher customer satisfaction, flowing into market share improvements. We remain committed to this very focused strategy and are delivering it through a quality management team.

Today you have had the opportunity to hear from my team about the issues that are occupying their minds. In summary I am very pleased with how they are implementing their strategic agendas. In BCB we have seen a disciplined approach to seeking profitable growth and they have very strong momentum in the sectors that they are targeting particularly business banking. In New Zealand you can see the success that we have had from the transformation program that we put in place a couple of years ago. And you can also see that we are building on that success by leveraging off the Australian business model.

With integration virtually complete BT is now a single diversified wealth management operation. It has over delivered on the synergies and has delivered outstanding funds management performance.

The institutional bank is building capabilities required to enhance our franchise earnings and it is also delivering new product offerings that will go right across the group.

BTSS maintained its focus on delivering the capabilities required to meet our customer service objectives and at the same time the division is making a major contribution not simply to controlling expenses but simultaneously giving us investment head room and you also heard Michael make some very bold predictions for the future that I noted very carefully. Thanks Michael.

I firmly believe that it is Westpac’s people that are the key asset in execution as our differentiator. It is hard to see this progress because of the nature of these drivers but we have had very good progress in people leadership and Ilana Atlas gave you some proof points on that. We have made good progress on people and performance management processes and on our values and culture and it is these three things more than any other that are driving the shareholder value. The compliance projects on our plate are tracking well, financially we are in solid shape, our dividend capacity is comfortable.

In conclusion, there is no change to our full year’s earnings outlook. We are seeing some emergence of some intensified price based competition at the margin. Notwithstanding this the operating environment remains broadly accommodating with credit growth lower but still above the 15 year average and no signs of asset quality deterioration. We had good momentum with our first half


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earnings and reiterate that we remain positive for the full year outlook with solid earnings growth in 2004.

Thank you for your extraordinary patience. Let me hand back to Andrew.

Nick Selvaratnam Thanks Andrew for allowing me the microphone this time around.

Andrew Bowden You’re welcome.

Nick SelvaratnamI have two questions the first one is very quick for Phil Chronican. On the New Zealand tax situation which you raised would it be correct for us to assume that if you were levied an assessment that this would be treated as a contingent liability rather than one which would affect your capital and your capital ratios?

Phil Chronican That’s our current thinking but clearly until I get an assessment, or until I even get a notice I don’t know what it is that the IRD is thinking and until I get an assessment I won’t be able to get legal advice as to where it stands. But certainly as at today it would seem that that would be the approach that would be taken.

Nick SelvaratnamThank you. And as it happens the second question is very similar to what was asked earlier on by Ross Brown and Mike Pratt. But I would like to go back to the topic of irrational competition if I could. You’ve highlighted this probability as medium to high and as yet there is no noticeable alteration to your apparent earnings guidance so are the risk to those guidance actually increasing to reconcile the two statements? And secondly how much of the thinking is effectively a fear of the unknown in that you have got a new chief executive in charge of National Australia Bank, there is a history in the UK environment of John Stewart adopting very aggressive pricing policies in the past, how much is that influencing the thinking here?

David Morgan Thanks Nick. You’re right we have not changed our earnings guidance – which we don’t give. And I think also as I have already said in answer to Mike Macrow that in terms of current evidence they are more straws in the wind than something that one would interpret as entrenched lower price points. But there are some straws in the wind. We have seen in zero establishment fees, we have seen it in some extraordinarily aggressive pricing on cash management, and we have seen it in other items sometimes as Mike Pratt has said is more apparent than real, once you pick through the offers and some of them have attracted headlines but are very restricted of in terms to new customers and temporary. So the dust is still settling on that Nick and it is always easier to see where your own margin is than where the industry margin is but as I said when I gave my answer I said it is more a prospective threat than something that we have here currently and probably then it is a little fear of the unknown but it is not without some straws in the wind such as the ones I have just described.

Nick SelvaratnamAnd fear of the unknown as in National Australia Bank.

David Morgan Fear of the unknown.

Andrew Bowden A question at the back there.


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Stephen Kench (Macquarie Equities). Just going back to Mike Pratt’s presentation for a couple of questions. You mentioned you were currently reviewing your mortgage broker usage. I was just wondering if you are actually reviewing or intending to review the pricing, the potential pricing of mortgage brokers and what I am talking about there is obviously moving to a trail only type of basis. And secondly just to labour on the competitive issues around the deposit market, the issue in terms of CMTs is not, as I see it, the price per se, it is more around the migration from transaction account deposits into the CMTs. Are you actually seeing any migration over and above what you normally see in the CMT market, sorry from the transactional to the CMTs? And what is your view in terms of going forward of the acceleration and timing of that potential?

Mike Pratt Thanks Stephen. The first question I indicated earlier that we have some work under way on review of our broker arrangements. That is very much focusing on where we drive high quality high value business through particular brokers. Part of that will undoubtedly be around product mix and product features and pricing accordingly and then another part of it will be around pricing to the channel. So this is quite a comprehensive review. It is appropriate timing to do so with the market where it is at, as you would appreciate. And you know there is I think in this current market opportunities just to have a fresh look at how we approach these things. I have indicated that we will still be looking at flows of around 30% through that channel so there is no intention on our behalf to either decrease or increase flows. We are currently doing around 29%. But for example in the UK market where there is higher brokerage use in this channel there is only an upfront payment, there is no trailer, which is around about 40 basis points. In this market the average upfront is somewhere between 50 to 80 basis points and trailers of 25 to 35 basis points. Now in a margin environment that we are going into there isn’t a lot of head room left there to make money so it is very appropriate we review it and that is why I indicated earlier I think you will see some rather interesting plays from a number of peers and perhaps ourselves around how we approach that market. On the second point your point is absolutely correct. There is certainly a trend in the market where customers in terms of main bank customers are looking more and more at options in other perhaps regional or niche players for investment of their money. If you want to not look too far you can look at the ING model where very quickly as an online offering they have built book of $13 billion. That is a trend. And I indicated earlier that we are working on a number of initiatives, you probably don’t have to think too hard about what direction they are going in.

Stephen Kench My question related around that trend, has that actually accelerated and do you intend that to accelerate from here?

Mike Pratt No it hasn’t it has been fairly steady for us over the last six months. I track every month outflows from our savings and investment portfolio and then look obviously where they are going to. The good news on that front is there is significant inter group movement. So whilst it is coming out of our liability book there are very good flows going into wealth and BT so you know this is very much about the model that we were talking about earlier about getting our bankers and our planners working together to really present to the customer good opportunities on their investment. So not seen an increase in the last months but as I have indicated to you there is a lot of competitive intensity in that part of our business.

Stephen Kench Thanks Mike.


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James Freeman A question for you Phil on your analysis about cash ROE 20% being sustainable and earnings growth of 7-11% in the medium term, which is consistent with risk weighted asset growth growing at the same sort of level. Can you comment on the factors that give you confidence that you can sustain that 20% ROE in the medium term from a macro perspective?

Phil Chronican A lot of it is subject to the earlier discussion about straws in the wind and threats to the top line, essentially when I look down through the rest of the lines things look fairly stable. So yes can we sustain 4% expense growth, below 4% expense growth? I think there is still plenty of productivity opportunity in the business and Michael has talked about some of that. We are pretty comfortable now that the 25-35 basis points range on the bad debts covers us through a number of cycles. As we have said it took us right through the 01/02 cycle and we have been a basis of one or two out of the range at either end from time to time but it seems a pretty good descriptor. And the tax rate looks pretty stable from that as well. So I think the one factor that you look at the model to say well can we in this market through a combination of business growth, credit growth, other activity, grow our revenue stream by about 5-8% and you know it is all predicated on an economy that is growing strongly so if we get, or growing soundly, so if we get 3-4% real GDP growth, 2-3% inflation the question is can we get 5-8% revenue growth out of an economy where the nominal GDP is growing by 5-8% and you know you can all form your own view on that, we certainly feel that there is plenty of capacity for us in our business to do that. That was an earnings per share number that you had of 7-11.

Hamish Carlisle I had a related question in terms of returns but coming back to your reference about the drive for profitable growth I wonder if you could clarify what you viewed as profitable growth. Whether it was in absolute terms, whether it was with reference to your 20% ROE target, or whether it was sort of within the context of driving the sort of EPS growth that you have talked about. I guess. Sorry just going back to the late 90s where you set your return hurdles too high and it cost you in a market share sense, is there some risk that that happens again and what would be the review point for Westpac?

Phil Chronican The decision framework we use is one where if you go back to your textbooks everything that we, every incremental piece of business we do that is over the hurdle rate adds economic value and therefore at the margin you should be prepared to do business. We are currently using about 11.5% cost of equity. So anything that is generating a return of 11.5% plus is in theory adding shareholder value and therefore you should accept that business if you are confident enough about it. We take a slightly more conservative view that is that if it is that close to 11.5% maybe we are not that confident and we become a bit more testing about it. But there are parts of our business that are pockets of quite significant return and that’s what keeps the average up. So we don’t target 20% for our incremental business. The good news is that without targeting it we have still been able to get it on average, so therefore clearly the business mix has got a lot of things going for it.

Hamish Carlisle Is there a risk that your competitors are happy with a lower return overall?

Phil Chronican That’s possible. If you look at US regional banks you know there have been significant regional banks who have been able to maintain 18-22% ROEs for extended periods of time simply by choosing their markets carefully and choosing


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their positioning carefully and yeah we like to track what’s best practice around the world and see what we can do to emulate it. I am not saying it is there forever, but it can be there for a lot longer than some people think.

Brian Johnson I have a question that has got two legs. One for Michael Coomer and one for Phil. Michael, unfortunately you did give the slides out last year and you gave a slide which was slide 14 in last year’s presentation and what it showed was that the outsourced expenses were expected to actually kick up in the 04 year and the retained expenses were going to kick up and then they were going to decline in absolute dollars. If I look at the slide today that is probably not identical but we actually see that the cost outcome in 2004 is actually down on 2003. Is that, have you done materially better?

Michael Coomer I should have actually put that slide back in you’re right because it is good news. I should have actually put that in so you could see an apples to apples comparison. We have done significantly better, yes.

Brian Johnson So if it is 40% of the cost base and it has actually declined whereas the initial plan is that it was going up. Why aren’t we sitting here talking about a profit upgrade Phil?

Phil Chronican I thought I had chosen my words carefully. When we are happy with our earnings outlook rather than constrain other parts of the business we would rather fund that growth. So that when you look at the business composition what you will see is some parts of our business and Mike Pratt will be one of them who will have rates of growth in their expenses above that guidance because we see opportunities to grow the number business bankers, we see opportunities to invest in capacity so we don’t want to starve off the growth opportunities if we have been given a release from activities like what Michael has been able to achieve in the BTSS world.

Brian Johnson So this year we are seeing basically an investment spend going through?

Phil Chronican Yes and as long as we are able to generate the sort of returns we have been able to do what we are saying is we think that we need to build for the future and we are forever constraining on the expense line that target where we don’t have to, if you know what I mean, where we can, if I can meet the 4% growth and reinvest in the business I consider that to be a better outcome than saying we only got 2-2.5% growth.

Brian Johnson Well can I come back on that because as I say it is 40% of the cost base and the slides last year said it goes down from this year.

Phil Chronican Some of that is a timing difference in the contracts. What Michael has been able to do is to get some realignment of the contracts with some of the suppliers so that we get a better spread through time.

Brian Johnson So it still goes down from this point?

Phil Chronican I think it won’t be as sharp because some of that benefit is what we have brought forward to get to the outcome that we have got.


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Brian Johnson Okay well there was another comment you made today on this where you were saying in 2007 is when you basically you expect the investment spend to slow down would be the way I would interpret it, is that the year where se costs decline in absolute dollars across the group?

Phil Chronican It is too far away to day that. There are certainly pressures between now and then that look unusual such as all the compliance activity that I have spoken about. But who know what’s going to happen between now and then so I wouldn’t want to be quoted in two years on a commitment like that.

Brian Johnson Okay. Thank you.

Phil Chronican Brian, can I answer a question that you asked earlier or provide an additional answer to a question you asked earlier. You asked Phil about the EPIC assets and whether they would be off the balance sheet by the end of the year and he gave you the answer that I wanted which is that he will sell them by the end of the year. I just highlight that if they are not the balance sheet by the end of the year then clearly they will be on the balance sheet. We are taking the full investment in the EPIC assets as a capital deduction and we are able to meet our capital ratios with that so we are meeting them continuously as we go through. And if we hold the EPIC assets as at 30 September then they will be fully consolidated in the balance sheet because we control the unit trust so you will see little bit of gas income in our P&L as well.

Brian Johnson That is not Tier 1 deduction - it is a total capital deduction?

Phil Chronican No it is an ACE deduction because we control the entity and a total capital deduction but not Tier 1.

Craig Williams A question for Mike Pratt. Your comments earlier about the mortgage broker market and perhaps what is happening in your competitor space and what they are doing. Could you comment on business models if you like that would seem to be competing more accurately with the mortgage brokers and what you think their reaction might be because I sense that some of the other banks are looking at internal franchise style models and that sort of thing which would appear to be more closely competing with the brokers?

Mike Pratt Yes it is an accurate observation Craig. Two comments on that. Firstly as the traditional mortgage broker channel gets squeezed you can expect that a number of these brokers will try to encroach into the small business space. We are seeing some evidence of that. The challenge they have in terms of the significant growth in that particular part of the market fundamentally lies in skills and as you would appreciate that does take an additional skill level in business banking to move into the broker’s space. So there is some limitation on them in doing that simply around the provision of people that really moves into your next point and that is that there are various models starting to emerge around approaching the business market in a broker way within the business itself. We are obviously looking at that ourselves in terms of a number of approaches however the other piece that is really a significant upside for us is relationships with small to medium size accountancy firms and in the past we have not leveraged those relationships anywhere near as strongly as we should. Part of what I talked about earlier with the industry specialisation packages we have developed an accountancy package targeted at those particular businesses and we will be using that


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package to leverage into those relationships to then drive broker business through those accountancy firms on the back of that. That will tend to be what I would call an introducer model so that would be an upfront payment only once that business is written to the book it will not be a trailer base model. Now that’s a model that we are looking at and already starting to get some wins with. So yes, you will see a number of models emerge and you will see us doing something along those lines.

Andrew Bowden Question here.

Hugh Maxwell-Davis from Morgan Stanley. I have a question for David Morgan. Four or five years ago you correctly identified that under investing in the customer and not maximising market share was probably the biggest risk that Westpac faced. You now highlight risks to margin that are emerging in the industry. Would it possibly be too great a risk for Westpac to continue to throw down more capacity in the business bank and actually seek to enact Mike Pratt’s goal of becoming the leading business bank. I mean it is just inconceivable that John Stewart is going to let you do that.

David Morgan Hugh, we have been doing it for five years in Australia and we have been doing it for about the same time in New Zealand and so far we have been able to execute that without leading on price ourselves which I agree would absolutely just hasten the decline of industry profitability in that segment and to do it gradually through time rather than very sudden shifts in share and to do it around a strategy of much deeper understanding of our needs through industry specialisation, much quicker credit decisions in getting the right relationship management model for the right segment. So it has been a value based proposition non-price led, gradual but cumulatively very sustainable and I think it has got a long way to run.

Hugh Maxwell-Davis I guess I agree with all that, you made the right choices, other banks made the wrong choices but they are now changing their ways so doesn’t that increase the risk that if it is not going to be on the price side if every bank throws out another 500 small business bankers returns are coming down on the cost side. You would be either building up capacity to write the same business or you are going to get a response on price. Do you step back from the business bank segment at any point in the way you have from the mortgage market?

David Morgan Hugh, it is fair to say that in every strategy that we pursue we think deeply about competitor response, think very deeply about competitor response. And when we say we eschew price led strategies we not only eschew them as far as us initiating them but we are also very aware of our behaviour is causing in another competitor and that’s a very fine balance. You do rely – I think the barriers to entry are higher in the SME segment so it is mainly the incumbents that own that market, the incumbents have a large block of business to protect at existing margins and so if they lead on price you have got to ask how rational is that strategy when they know that won’t get sustainable comparative advantage from that they will simply hasten the decline of industry profitability so you, it’s reasonable where barriers to entry are high to assume rational behaviour on the part of competitors but not take it for granted. And that is the balance we are trying to strike.

Hugh Maxwell-Davis Thank you.


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Andrew Bowden Just over there.

Ross Brown Phil you mentioned one way of getting a higher ratio payout would be to buy back DRP. Obviously you have to give up some EPS accretion. Where do you stand in terms of preference? Would you rather have a higher payout ratio and give up one or two percent EPS? Or are your preferences for the EPS enhancement?

Phil Chronican It sort of might be an old fashioned way of viewing the world but I figure that the DRP and the share issuance pursuant to the staff share schemes is stuff that should be managed out, paying dividends out of new capital just strikes me as somehow morally wrong but maybe I had too religious upbringing as a child. So our internal planning assumption has been that through time we try to manage the share account to a broadly stable level and obviously that comes and goes depending on issues around time but to build a dividend payment capacity around reliance on new stock issuance I am not sure how smart that really is so I haven’t got there yet in my mind.

Ross Brown Which means that the only way you will increase the payout ratio is if loan growth starts to slow to a more sustainable level?

Phil Chronican Yes, although I think I tried to make the point that some of the noise more recently has been because the life company has gone through a strong growth phase and the deferred acquisition costs in the life company which you have to hold capital against have grown and the second is that the foreign currency translation reserves ran against us for a period of time. So as those issues revert that might give us some more capacity going forward. So I am not ruling it out but I just think you know unless you are prepared to fund dividends out of new stock issuance then a permanently higher payout ratio is something that is not necessarily as immediate as some people might think. It doesn’t say there isn’t scope for further increases but for a massive shift up into the 70s I think it would take quite a lot stretch.

Andrew Bowden We have time for one more question.

Mike Macrow Stockbrokers have never predicted a Labour Federal election victory but on the off chance there is one how do you see that changing the environment on things like re-regulation and industry structure?

David Morgan Mike we maintain a dialogue with both sides of politics obviously as is our responsibility to be able to work sensibly with both sides. We think in terms of Labour’s banking policy we think we have already herein Westpac executed 85% of it. So also there is a habit, not simply in Australia but it was certainly in the election of the last Labour government, the policies espoused in opposition and what actually gets done in office is a very sobering impact of responsibility of office but basically the bottom line of your answer is why we think like everything else we need to manage it sensibly and not be complacent about it, it is not something that we fear. We think we have made appropriate responses particularly ourselves but also to a lesser extent of the industry to earn the right to be deregulated and avoid the major risk for re-regulation.

Mike Macrow David is there some follow on where there may be some benefit in superannuation in the Labour policy on super versus Liberal?


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David Clarke That is a difficult judgment to make give that the Labour spokesman tends to talk in quite broad terms about the objectives. I think that what we look at is if there is a lift we think that there is potentially going to be some conditions associated with it that might offset one another so it is quite difficult to make that judgment at this point. Clearly we would be very, very supportive of the lift in contributions perhaps less so if some of the conditions around it are onerous. So the party hasn’t actually articulated that in a clear way yet so it is too early to make that call.

Mike Macrow Thank you.

Andrew Bowden Without any further ado I would like to wind up proceedings today. Thank you all for attending. We appreciate you coming today. Thanks to those who have been on line. Thanks also to those who have travelled up from Melbourne today for the session, we appreciate you making the trip up. Good afternoon.

1 Clarification – Westpac Market Update – media release issued on 3 August 2004

At the "Westpac Banking Corporate Annual Market Update" on Thursday 29 July 2004 in Sydney, it was stated that Westpac has "full knowledge and agreement" with the Reserve Bank of New Zealand (RBNZ) in regard to Westpac moving its mainframe-based retail processing out of New Zealand. This is not correct. Westpac acknowledges that the RBNZ has not given consent to any change of that nature. The statement carried no intention to mislead about the current status of the project, about which Westpac has been very clear in recent statements to New Zealand media. Westpac also acknowledges that it has been advised that the Reserve Bank of New Zealand is currently working on a generic outsourcing policy for banks to cover issues such as this which, when finalised, will apply to all systemically important banks in New Zealand (which includes Westpac).

westpac annual market update - transcript sydney – …€¦ · gaps, enhancing sustainability and...

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