Investor Roadshow Presentation: David Murray


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  • This is the agenda for today’s presentation. I will be covering three areas: In the first section, I will provide an overview of the Australian market in terms of: the performance and outlook of the Australian economy and the performance of Australian equity markets generally and banking stocks in particular, within the current environment In the second section, I will provide an overview of the Commonwealth Bank, covering our recent full-year result, the Bank’s differentiators and growth drivers. In the final section I will address how is the Bank is positioned against the current outlook by looking at some of the key questions that have been raised by investors in relation to the Bank and how we are placed to deal with the current operating environment.
  • Australia’s economy has been relatively resilient in a climate of global uncertainty and continues to grow at a reasonable pace, currently at 3.8% or just below the long-run average. The trend in corporate profitability remains at relatively high levels and the recent trend for small business income growth has been positive. This performance has been buoyed by strong private sector spending growth of 7.7% over the last year, resulting from solid consumer demand, a delay in the expected downturn in housing construction and a sooner-than-expected recovery in business investment. Domestic economic indicators remain positive, with the main drivers of growth this year expected to be consumer spending and substantial lift in business investment. In relation to consumer spending, retail sales growth has been firm over the12 months to August 2002. Retail sales are currently growing at an annual rate of 7.3%, with growth forecast to remain at reasonably strong levels. A number of negative factors are likely to impact economic performance over this period however, with GDP expected to grow at the slightly lower rate of 3.4% in 2002/03. The negative factors affecting this include: A negative economic contribution from the rest of the world Continuing falls in share prices may damage business and consumer confidence and spending levels The drought, which is expected to reduce GDP growth by around 0.5 of a percentage point (factored into the 3.4% growth forecast) A potential housing bubble forming, which I will address in more detail in the coming slides.
  • The credit growth trend is a key factor for Australia in achieving a solid growth outcome in 2002/03. Although having shown some initial signs of easing around the middle of the year, housing credit has continued to grow, with lending for investment purposes emerging as the main driver of this growth. Personal lending has peaked and growth has slowed over the last two quarters, but remains well above levels of a year ago. In other parts of the economy, lending for business purposes, has at the same time shown positive signs of lifting. Recent quarterly business credit growth data has been volatile, however all indications are that it will continue to grow sufficiently this year to offset lower personal lending growth and the expected slowdown in the housing market. Overall credit growth is expected to be in the 8-10% range over the next year. The expectations for the level and timing of a peak in interest rates has changed and is now forecast at 5.5% for the cash rate, with a peak expected to be reached in the first half of the 2003 calendar year. A key risk is whether the expected 5.5% peak in interest rates, will be enough to curtail the high level of activity in the housing market, without stifling business credit growth, which will become an increasingly important driver of economic growth under this scenario.
  • As I have mentioned, a surge in investment related lending is the main driver in the continuation of a strong housing market. Returns from real estate assets have been strong with growth outstripping that of Australian equities over the period 1986 to 2002. The performance of the property sector in recent months has been exceptionally strong resulting from the weakness in equity markets, and a corresponding re-allocation of funds by many investors away from equities in favour of property assets. The most recent home loan approvals data, shows a levelling-off in activity in the owner-occupied segment of the housing market, although this has been more than offset by a corresponding rise in investment home loan approvals. The most recent housing loan approvals data released shows a softening in investment housing loan approvals, however the upward trend remains strong.
  • Considerable attention has been focussed on the strength of house prices in the Australian market, the possibility of a house-price bubble forming, and the eventual impact slowing housing credit growth and higher interest rates will likely have. House prices in Australia continue to rise strongly. The CBA measure of established house prices rose 26.3% nationally over the four quarters to September 2002. As a multiple of earnings, house prices also continue to grow significantly. This slide sets out the growth of the average established house prices in each state as a multiple of annualised earnings over a three year period to September 2002. While house prices in many states have increased at a significantly higher rate than earnings over the last three years, thereby increasing the amount of household debt, this does not necessarily imply that undue stress will be placed on repayment levels in a rising interest rate environment. I will talk more about this on the next slide.
  • In terms of consistency with longer term trends, real house-price growth is running at a rate above the peak of previous cycles, but is still well below the exceptionally rapid growth recorded in the late 1980’s. The Sydney housing market is traditionally seen as most exposed to speculative excesses and is a reasonable proxy for the Australian market overall. The ‘Sydney House Prices’ chart in this slide shows the strength of the Sydney market. On only a few occasions since 1900 have Sydney house prices risen to above the 90th percentile, or more than 20% growth per annum. Based on CBA established house price data for September, house-price growth in Sydney is actually running above most other Australian states (28.5% as against 26.3% nationally), up from an annual growth rate of 19.5% compared with 23.9% nationally in the March quarter. A number of factors have contributed to the strength of the housing cycle in Australia, by providing greater access and affordability: A progressive step down of inflation during the 1990’s, leading to the lowest interest rates in 30 years. The increased competition in the mortgage market, and growth of mortgage brokers. The favourable tax status of housing. The government First Home Owners Grant And, more recently the comparatively lower investment returns available from other asset classes. A key outcome from these factors has been an increase in the level of household debt, but does not necessarily imply that undue stress will be placed on repayment levels in a higher interest rate environment. Household debt-repayment practices have changed, with many borrowers preferring to hold repayments constant as interest rates have fallen. This has meant that the average household has built up a considerable payments buffer and the rate rises so far in 2002 are unlikely to have had much impact on the average household. The extent to which higher interest rates will affect groups such as investment home loan borrowers, first time home buyers, or lower income earners who have relied on the First Home Owners Grant remains to be seen, however the signs at this stage remain positive. Of greater potential concern is the risk associated with a fall in house prices, particularly for those borrowers that have entered the market late, and I will outline in the third section of my presentation the credit policies that the Bank has in place to manage this risk and the potential outcomes from stress testing our home loan portfolio. In relation to unsecured household credit, the level of unemployment has historically had a larger impact on default rates in this segment than high interest rates have, although clearly high interest rates is also a key risk factor. To this end, the unemployment rate outlook is positive, having steadily decreased over the last year from 6.9% to 6.5% and is forecast to reach 6.2% this financial year. The risk that must be managed as interest rates rise however, is the extent to which debt repayments begin to represent a greater percentage of household income, potentially placing pressure on borrowers at the lower end of the income range.
  • If we look to Australian equity markets: Throughout the current year, the Australian sharemarket has to date displayed a degree of resilience relative to the performance of global equity markets. On a US$ currency adjusted basis, the Australian All Ordinaries Index has declined by 6% calendar YTD, compared with a decline in the FTSE of 15% and the Dow Jones Industrial Average of 18% (Source: Deutsche Bank, data current at close of business 15 October 2002). Australian banking stocks have generally outperformed the broader Australian market over the last year, with 12 month relative outperformance to the All Ordinaries Index of 12.4% (Source: Deutsche Bank research, September 2002).
  • If we look briefly at Australian Banks in terms of credit quality and shareholder value performance: Despite an increase over the past year in the proportion of non-performing loans due to a small number of large exposures that became impaired (as highlighted in previous market announcements), the quality of credit held by Australian banks is relatively strong with high levels of provisioning when compared with overseas counterparts.
  • As indicated by the latest Oliver Wyman & Co survey of the financial services industry, the Australian banking sector has a history of delivering strong shareholder value. The Oliver Wyman & Co Shareholder Performance Index (SPI) regularly tracks shareholder value for the largest 400 quoted financial services companies in the world over a moving five year period. The index provides a measure of risk adjusted performance, so that if two firms have the same absolute return to shareholders, the firm with less volatility of returns is ranked more highly. The most recent survey indicates that the four main Australian banks all rank within the top 25 financial services companies worldwide when it comes to shareholder value performance, with Commonwealth Bank ranked as number one worldwide. Commonwealth Bank also ranked second worldwide in terms of delivering consistent value performance to shareholders over the last five years.
  • In August 2002, the Bank announced its full year profit result for financial year ended 30 June 2002. To touch on the highlights of the result: The Bank’s reported net profit after tax result of $2,655m represents growth of 10.7% over the previous financial year. This result was underpinned by strong growth in pre-tax profit from Banking (15%) and Funds Management (21%). On a cash basis, i.e. after tax but before goodwill amortisation and appraisal value uplift, the Bank’s net profit after tax of $2,501m represents an increase around 10.6% over the previous financial year, equating to growth in cash EPS of 10.1%. The Bank’s commitment to productivity improvement and ongoing cost containment led to a reduction in the cost to income ratio and greater than 5% productivity improvement on a normalised basis. The Bank’s tradition of a high dividend payout ratio continued in the 2002 financial year, with the total dividend for the year of $1.50 representing a payout ratio of more than 76%. The Bank’s capital position also remained strong throughout the financial year, with Tier 1 capital at 6.78%, Tier 2 capital at 4.28% and total capital ratios higher than June 2001 and December 2001 levels. And while bad debt expense was impacted during the first half by two large corporate exposures that became impaired, strong and prudent credit quality and provisioning levels were maintained throughout the year.
  • In terms of segment results, and on a cash basis: The net profit after tax from the Banking business for the 2002 financial year was $2,067m, which represents an increase of 15% for the year. This result reflected strong growth in net interest earnings and other banking income, with the margin remaining relatively stable over the course of the year. While the result was partly offset by the increase in bad debt expense experienced during the first half, operating costs remained steady over the year. The Funds Management business also recorded strong growth for the year, with the net profit after tax result of $216m representing an increase of 45% over the prior year. In pre-tax terms, this equates to growth of 21% for the year. The underlying result reflects continued strong performance within the Australian business, with average FUM balances 10% higher than the prior year. The net profit after tax from Life Insurance on a "margin on services" basis of $218 million represents a decrease of $102m (or 32%) over the prior year. Operating margins from the life businesses decreased by 5% or $9m over the year, reflecting growth in Australian and New Zealand margins being offset by declines in Asia. The overall result was impacted by a lower return on equity markets over the year. The proportions of operating income earned by each segment were relatively constant year on year.
  • Following the merger with Colonial, we announced to the market our business plan expectation that the merger would be EPS accretive by June 2002. This expectation was met, with total cash EPS for the year increasing by 10.1% or 18 cents to $1.97 per share. The second half result of $1.03 represents growth of 9.6% over the previous half and growth of 13.2% on the prior comparative period. Return on equity on a cash basis for the full year was 13.93%, up 110 basis points on the prior financial year. A strong second half performance of 14.61% was achieved.
  • The Bank continued its tradition of a high dividend payout ratio relative to its peers throughout the financial year. The Bank’s final dividend, paid on 8 October 2002, was 82c per share fully franked at 30%. The total full year dividends of $1.50 represent an increase of 10.3% on the prior year dividend of $1.36 and an improvement in the payout ratio from 75.5% in the previous year to 76.2%. (The payout ratio has been calculated by dividing dividends paid by cash earnings.) This equates to a strong pre-tax dividend yield of 6.5%, which is favourable to our peers.
  • The Group’s charge for Bad and Doubtful Debts rose by 17% over the year from $385m to $449m at 30 June 2002. Further analysis of this expense reveals two very distinct halves. As announced to the market in February, the first half was impacted by the default of a small number of large corporate facilities. This significantly increased the level of impaired assets and the level of specific provisioning required by the Group. At a rate of approximately 32 basis points of risk weighted assets for the year to 30 June 2002, bad debt expense for the year was within expectations for the current stage of the cycle, but slightly outside the 25 to 30 basis point range for the underlying charge that we expect to see on average through the cycle. However, the annualised rate achieved for the second half of the year to 30 June 2002 was 23 basis points. Through pro-active management, $369m of gross impaired assets were resolved during the second half and the ratio of the general provision to RWA remained at the same level (0.96%) for the first and second halves. There has been no change to the methodology employed for determination of the general provision. For the 2002 year, the significant defaults in the first half improved the credit quality of the remaining performing portfolio. The Group continues to grow the home loan portfolio, which is traditionally an extremely high quality, low loss segment. The home loan portfolio (excluding securitisation) grew from 49% to 53% of loans, advances and acceptances at June 2002. Before moving on to the Bank’s differentiators and growth drivers, I would like to briefly discuss the current operating outlook.
  • The Bank has reviewed its earnings outlook having regard to results for the first quarter and the trend of investment markets up to 30 October 2002. The profitability of our core business remains sound in the current environment. However, continued equity market volatility has resulted in poor investment returns being experienced during the first quarter. As a result, returns on shareholders’ funds in the life business have been well below the long range expectations for this business and operating margins in the Life Insurance and Funds Management businesses have been flat. While investment returns in October were better, significant volatility remains in the market. As announced at the annual results, the Bank has taken the position that in the interests of governance, the cost of various restructuring initiatives during 2002/03 should be expensed ‘above the line’ and not form part of a restructuring provision. The Bank also announced that all employee equity plan costs would be expensed. In prior years part of these costs were expensed, depending upon the nature of the related plan. The combination of the restructuring costs and expensing the cost of employee equity arrangements will affect profitability during this half. Otherwise, expenses are in line with expectations and the charge for bad and doubtful debts is running lower than in the prior corresponding period. Credit quality remains sound. Given these factors, the Bank’s first half Net Profit After Tax (cash basis) is likely to be about that of the prior corresponding half year. The outlook for the full year will depend on the direction of investment markets and continuing growth in housing and business credit in Australia. With restructuring benefits beginning to emerge in the second half, the Bank expects modest growth in Net Profit After Tax (cash basis). Directors do not anticipate any change to the Bank’s dividend policy.
  • In the current operating environment, growth through strategic differentiation becomes increasingly important. Earlier this year, the Bank embarked on a major restructure programme to align operating divisions with customer segments. These changes to organisational structure position the Bank well to capture an increasing share of the wealth management market and to enhance service delivery to all customer segments. Under the restructure, four new end to end business divisions have been created, each focussing on a particular customer base: Retail Banking Services, Premium Financial Services, Investment and Insurance Services and Institutional and Business Services. These new divisions, combined with the existing International Financial Services division, constitute the customer-facing divisions of the Group. While some divisions may act as principal manufacturer of products, all divisions are responsible for the sale of those products to the target customer group on which they are focussed. One of the major benefits of the restructure is that for customers, it brings greater clarity on how we are engaging them now and what we can offer them in future. Similarly, we have initiatives in place to ensure that our people are better skilled, equipped, authorised and engaged within the restructured environment.
  • This slide shows the strength of the franchise. Commonwealth Bank is positioned either first or second in all its main markets for retail customers. These products are important to our wide customer base, and form a core for packaging products for premium customers. The home lending market is an area of critical focus. The reduction in market share above has partly been a result of the growth in the broker market for home loans in Australia. While we did not anticipate its rapid acceptance, which resulted in market share loss, we now compete actively and have grown our position from 7% to 14% over the 12 months to June 2002. Overall, the broker channel now accounts for 30% of total new home lending business. In credit cards we have the highest revolving balance of all majors and have 45% of all merchants as the prime acquirer. The acquisition of Colonial has placed us in a strong position in the funds under management and life insurance segments over the longer term. For the June 2002 quarter, which is the last available market data, higher outflows than usual were experienced in our funds under management, which were associated with: An outflow of funds from managed cash trusts in the June quarter that was to an extent offset by inflows into the Bank’s Cash Management Call Account product, which is a deposit product and therefore not included in the quarterly funds management market share figures. What we effectively saw was a substitution effect occurring between these different cash management products. Outflows associated with Commonwealth Bank and Colonial Life legacy products, such as insurance bonds, old style superannuation and masterfund products, and duplicated managed products, which are all in the process of being rationalised. This has resulted in some switching into Colonial First State products and some external leakage. Subsequent internal data is showing some continuation of this trend.
  • With regard to distribution, the Bank manages the largest financial services distribution network in Australia meeting the needs of customers through well over 100,000 points of service. Over recent years, the Bank has improved the accessibility of retail transaction services by offering an increasing range of new channels such as electronic and telephone banking. What we are seeing is a customer base that is increasingly utilising convenience options, eg DirectBanking registrations have grown more than 20% over the last year. Customers have embraced these cheaper and convenient channels, with more than 85% of all transactions now undertaken through electronic channels. The overwhelming shift to electronic transaction channels is significant because the per transaction cost is lower than for equivalent over the counter transactions. This enables the Bank to pass on the benefits of lower per transaction costs to our customers.
  • The Commonwealth Bank brand is one of Australia's leading and strongest brands associated with attributes of security, safety, convenience and trust. According to Interbrand, a global consultancy specialising in brand, Commonwealth Bank’s brand is Australia’s second most valuable brand behind Telstra. Overall, 42% of all consumers have some relationship with the Bank, this is twice as many as our nearest competitor. Breaking down overall consumer relationships into the main retail segments, the slide shows that Commonwealth Bank has more relationships across the whole of the retail consumer base than any other financial institution in Australia.
  • In a competitive financial services environment, we recognise the value of a strong brand and the attributes that help to attract and retain customers. Commonwealth Bank has consistently achieved higher ratings than its competitors in independent surveys such as the Research International Brand Monitor, for key attributes relating to service and innovation. From an internal perspective, the Bank has in place staff and service measurement systems that assess customer and staff satisfaction and engagement across a wide range of factors. The component factors are continually reviewed and refined to obtain important and relevant feedback that is used to drive improvement in the work environment for our staff and how they interact with customers. We believe that motivated staff are vital in achieving high customer satisfaction levels.
  • The Bank views good corporate governance as integral to the Bank's strategy in the current and forecast environment. The Bank's commitment to a high standard of corporate governance principles can be seen in the following practices: The appointment of independent, non-executive directors in all positions except for the Chief Executive Officer. The nominations, remunerations and audit committees only consist of non-Executive Directors. Separation of the roles of CEO and Chairman Terms of office generally limited to twelve years with one third of directors other than CEO standing for re-election each year. The Chairman consults with the rest of the Board and reviews the Director’s performance before they are endorsed for re-nomination. In relation to Board appointments, the Nominations Committee establishes the criteria for the appointment of new directors and will continue to engage external consultants in search of new directors. Induction programs, continuing education and succession planning are undertaken to ensure that the Board is equipped with a range of skill sets. The Board carries out an annual assessment of its performance and its interaction with Management (every second year this is done by an external facilitator). In relation to audit committee: there is a separation of roles between Chairman and Audit Committee members at least twice a year, the Audit Committee meets the external auditors and the Group Internal Auditor independently of management all material accounting matters requiring exercise of judgement by management are specifically reviewed by the Audit Committee and reported on by the Committee to the Board. Directors are required to take a minimum of 20% of their fees in shares in the Bank, acquired at market price, and hold them for a minimum of 10 years or end of service. Where buying and selling can be undertaken and the Board member does not have price sensitive information, a strict window policy is in place that restricts the trading period for shares. Window policies are also in place for employees. Two recently introduced changes to governance practices include: Management options : Incentive payments for Executives are related to performance. Vesting of options and shares allocated under the long term incentive plan is directly related to shareholder value, measured by Total Shareholder Return over a minimum three year period in relation to the Bank’s listed peers. From the beginning of this financial year (i.e. July 2002) options have been eliminated from the remuneration package of Executives and the total value of long term incentives allocated under the Equity Reward Plan will be in the form of Reward Shares. Directors’ Retirement: The Board has decided to close the Directors’ retirement scheme, which was approved by shareholders at the 1997 Annual General Meeting. The entitlement for current directors will be “grandfathered” and no new members will be admitted to the scheme. The Bank also has a number of policies in place as regards External Auditors, including: the Board has established a policy governing the carrying out of non-audit work by the External Auditor to ensure that the Auditor’s independence is not affected by conflicts. The policy identifies the nature of non-audit work which cannot be undertaken and establishes a process for approval by the Audit Committee of the nature and quantum of permissible non-audit work. the Bank also requires the Partner managing the audit for the External Auditor to be changed every five years.
  • Under the new organisational structure, the manufacturing of all non bank products falls under the responsibility of the Investment and Insurance Services division, which brings together the Life and Funds Management businesses of the Commonwealth with the Colonial First State business. In this market, despite current market volatility, our long term competitive advantage primarily arises through having an established position along each component of the value chain, including the manufacturing of products and the distribution of products and services (including advice). As the Australian wealth management industry matures, the ‘power’ is increasingly shifting towards the distributors and the distribution portion of the value chain is expected to increase. However, as a wealth management provider, the largest and most profitable segment of the value chain remains asset management. It has therefore become increasingly important to compete in all parts of the value chain - by owning distribution to capture the flows and asset management to generate the profit. By participating in each area of the value chain, the Group has the flexibility to vary margins in each area of the business to ensure the end offering to the customer is competitive. At the same time, given the size of the domestic business, the Group is able to enjoy the scale benefits from both manufacturing and distribution.
  • In addition to the Bank’s own brand, and other well known Group brands such as CommSec, the Group has a strong wealth management brand in Colonial First State. When advisers are asked their overall opinion of fund managers, Colonial First State ranks first (ASSIRT Service Level Survey 2001 & 2002) . And in surveys of the general public, Colonial First State now ranks in the top three funds management brands in terms of brand awareness and purchase intention (Newspoll June 2002). Colonial First State Investments' vision for the next decade is to cement the company as a mainstream brand in the funds management industry. Its expertise has been recognised through many industry awards including Personal Investor Magazine’s Fund Manager of the Year for 2002. In addition, many of its investment options have been given the highest rating (five stars or AA) by independent researchers ASSIRT, Morningstar and van Eyk. These ratings are based on historical performance as well as on factors such as corporate strength, investment management, investor and adviser services, and product features. The high recognition of the Colonial First State brand is important for the positive attributes that it conveys to investors and the advantage of achieving greater retail attraction to the products offered. In the independent financial adviser market, this attraction and strong brand recognition translates into a greater capacity to recommend Colonial First State products.
  • In terms of our recent funds management performance: Despite recording growth in underlying earnings of around 21% and a 10% increase in average FUM balances for the financial year, the funds management business recorded only 1% growth in total assets under management over the period, with investment returns for the year to June 2002 of negative $3bn being achieved. While the first half of the 2001/02 financial year saw strong sales and relatively flat domestic investment markets, the second half of the year (particularly the second quarter) was impacted by a sharp decline in local and international investment markets, a shift by retail investors to defensive, cash based products (including retail bank deposits) and the expected withdrawal of funds due to the run down of an asset management contract in the UK. The impact of equity markets on the broader Australian wealth management industry is evident in industry figures for the quarter ended June 2002, which were down 47% from the same period last year. During this time we were able to maintain our leading market share in funds management and hold a top three position across almost all product categories and asset classes. And while continuing equity market volatility subsequent to year end has has created flat operating margins in the Funds Management business for the first quarter of 2003, we have a strong long term position in a market that is expected to grow from $600 billion currently to $1.4 trillion by 2011.
  • I would now like to talk about our latest product innovation in non-banking products, “FirstChoice”. In May 2002, the Bank entered the retail masterfund market through the launch of “FirstChoice”, an innovative multi-manager investment solution that is distributed through both our proprietary and third party distribution channels. “FirstChoice” products include a general investment product, a personal super product and an allocated pension. We have also launched a corporate superannuation product known as “FirstChoice Employer Super” in the last couple of weeks. “ FirstChoice” provides retail investors with a differentiated offering and there are four key points that distinguish it from other products in the market: 1. Underlying investment structure : The “FirstChoice” structure consists of individual investment mandates and enables us to offer superior service standards. It is also more profitable and makes it easier for a fund manager to be replaced. 2. Superior service standards : The “FirstChoice” investment structure allows us to control all product administration, which means that we can offer superior turnaround times for transactions such as applications, distributions and redemptions. In addition, “FirstChoice” is built on the existing Colonial First State administration infrastructure, which has a history of delivering superior servicing to clients. 3. Value for money : The average ongoing fee is less than 1.9%, which is well below the market average. In addition, the fee structure is simple and easy to understand, with the adviser also receiving a highly competitive trail commission. 4. Simplicity : “FirstChoice” has been designed to be as simple as possible. This contrasts to most masterfunds in the market which have complex features and fees structures. “ FirstChoice” was developed and launched by leveraging existing systems and capacity. Not having to undertake new investment in this respect has meant that we have been able to enter the masterfund market at low cost, through the quality of the people, processes and technology employed in the Colonial First State business. The instant popularity of “FirstChoice” in the Australian market is reflected in the strong uptake experienced since launch. As at the end of September, total funds under administration had grown to almost $1,100m, with cumulative net inflows of almost $800 million. To date, the majority of flows have been into personal super (48%), followed by investment products (30%) and the allocated pension (22%). The newly launched corporate superannuation product is also expected to attract strong uptake. And although the “FirstChoice” product was largely designed for distribution through proprietary channels, all channels have been well represented in terms of inflows of new business.
  • As highlighted by the changes to our organisational structure, the premium and business segments are also high priority areas for us. For the premium segment, the Bank has a unique opportunity to grow the potential that already exists in the customer base. We will be offering not only a high standard of relationship management but also specific, relevant products for the needs of these key segments. These customers know us already so acquisition costs are low. We have a culture of sales and service that is well established and we are working to refine and further develop this to make a difference to the customers in this segment. For business customers we are refining how we service this segment and focus is on targeting to gain a greater share of this market. Greater emphasis will be placed on relationship management for small to medium size businesses and addressing the need to provide more sophisticated financial solutions to businesses as they grow and their needs change. The focus on relationship management and provision of value-added financial solutions will also drive the opportunity to cross-sell a greater range of product to this customer segment. The following two slides provide more detail about the type of initiatives being implemented for our Premium and Business Banking customers.
  • The opportunity that exists within the Bank’s premium customer base, has been recognised through the establishment of the Premium Financial Services division earlier this year. A differentiated business model is being implemented with the objective to ensure that the expectations of premium customers are continually exceeded. The approach to delivering this outcome is two-fold, and consists of: Offering a differentiated product set to that available within the rest of the Bank or the wider market. Through an integrated broking and banking platform, premium customers will have access to an extensive range of products, sourced from across all divisions of the Bank, and externally where necessary, and have these packaged into unique offerings. Creating a high value service experience, by implementing a team-based relationship management model, consisting of a number of experts working in small teams to service pools of clients, and managing the complexity that exists across a range of different specialist areas. We believe that to provide a true premium experience by offering unique product offerings, high quality service and advice across so many different specialty areas, it is not possible to deliver this through a single individual. Our approach will focus on providing each client with a primary relationship manager who will be part of a team, that is on hand to provide secondary relationship management and specialty advice to the client.
  • For our business (middle market) customers the Bank’s focus is to increase cross-sell. To achieve this, a number of initiatives are well under way, and include: Lending and Protecting your Money in Business - Designed to increase balances and revenue on lending products, and revenue and product penetration of risk products. Sales Initiative - To increase balances and revenue in commercial lending fundings and deposits CBFC* - To drive increased CBFC performance amongst business customers Life Insurance Upgrade - Encourage business customers to upgrade their existing insurance cover. Corporate Finance - Develop products which can be cascaded to business banking eg. computer hardware leasing. Financial markets - Provide foreign exchange and interest rate products to business banking customers. FirstChoice Employer Super product - designed to provide a competitive offering within the corporate superannuation market. An example of the revenue potential that exists through achieving greater cross-sell comes from the Corporate segment, in which: 26% of clients buy from all three product areas 31% of clients buy from at least two product areas The opportunity is to attain similar levels of cross-sell into our business banking customer base through a greater focus on service and in fulfiling a range of customer needs. This is being proactively undertaken, for example, through the range of targeted initiatives such as I have mentioned above. * CBFC Limited is a wholly owned subsidiary of the Commonwealth Bank of Australia which specialises in providing vehicle and equipment finance to a broad range of Australian businesses on flexible terms tailored to your business needs.
  • The Bank’s focus is to achieve greater efficiency outcomes in the face of an uncertain operating environment, which as a consequence of a range of economic and structural factors, are expected to increase the intensity of competition within the Australian financial services industry and place greater pressure on margins. We are also likely to see lower shareholder returns over the medium term, to those achieved over the last decade. In response to the changed environment, we are currently implementing five key initiatives that will streamline our processes to significantly improve turnaround times to customers and improve our efficiency. These are: Remove all remaining back-office functions from branches Streamline home-loan processes Streamline Business Banking processes Rationalise investment products and systems Organisational design. As a result of implementing these productivity initiatives, we expect a net reduction in total staff numbers of around 1,000 by the end of this financial year. As mentioned in the discussion of current operating outlook and in previous market announcements, to implement these changes an incremental net cost of approximately $120m after tax will be expensed in the accounts to cover systems changes, re-engineering of overall processes and staff redundancies.
  • The high level of housing loans in the Bank’s portfolio is one of the reasons for its low credit risk profile. Housing loans, excluding securitisation, constitute approximately 53% of the Group’s total loans. Credit quality in this segment remains strong with low arrears levels. Housing loans have experienced loss rates no greater than 3 basis points in 17 out of the past 20 years. The actual loss rates experienced in the 2001/02 financial year were 1.5 basis points. This is believed to be similar to the experience of our Australian peers. The average loan to valuation ratio for the Bank’s total housing loan portfolio is a conservative 55%. We have maintained our prudent approach to ensure our risk parameters and conservative balance sheet are sustained. The Bank undertakes regular and extensive stress testing of its home loan portfolio, covering both owner-occupied and investment home loans under ‘crisis’ scenarios of high unemployment, high interest rates and sharp falls in residential property values. We have determined that in a scenario where defaults in the Bank’s home loan portfolio reached unprecedented levels and residential property values fall by up to 30%, the Bank could write off up to $56m, on a home loan portfolio of $86 billion. This would equate to three times the current level of expected loss. The unsecured consumer segment represents around 8% of our total loan book. In this segment, including credit cards and personal loans, the Bank’s prudent lending policies and credit scoring systems are designed to protect against abnormal losses during periods where credit conditions are less favourable. Arrears levels in this segment have not increased in response to the official interest rate rises in May and June of this year. The extent to which any increase in the level of arrears occurs will depend on where interest rates peak and the resultant effect of higher loan repayments on some borrowers. The following slides highlight the relative strength of our asset quality and prudent credit management practices.
  • The Bank maintains a high quality credit portfolio, with over 60% of the individually risk rated portfolio at a rating of investment grade or equivalent. Generally, credit risk quality has improved over the last half. The bulk of the non investment grade portfolio is represented by secured business lending.
  • This slide shows sets out the exposure size of our investment grade portfolio. The bulk of the Bank’s investment grade counterparties over $750m are primarily financial institutions. At 30 June 2002, only one corporate exposure exceeded $1bn. This exposure has since been sold down to less than $400m.
  • Total loans and advances excluding ASB are around $5bn, or less than 8% of total lending excluding home loans. Of these offshore exposures, 95% are rated investment grade or better.
  • Turning to aggregate provisions: The Bank is well provisioned. Total provisions for impairment for the Bank as at 30 June 2002 were $1,626 million. This is consistent with the prior comparative period, but with an increase in specific provisions to cater principally for the increase in the small number of large corporate defaults, partly offset by a small reduction in the level of general provisioning due to an improvement in overall portfolio quality. The Bank has total provisions to impaired assets of 184%, which is at the stronger end of our peer group at 30 June 2002. General provisions have been determined on a basis consistent with prior periods, and represent an assessment of the overall expected loss inherent in the portfolio at 30 June 2002.
  • The Bank’s continued active management of troubled and impaired assets is reflected in the downward trend of its net impaired assets as a percentage of total shareholders’ equity. Looking at the trend over the last 8 years we can see that the increase in impaired assets in June 1998 reflects the impact of the Asian crisis. The increase in June 2000 reflects the merger with Colonial and moving the Colonial portfolio onto the Bank’s risk rating system. Following the merger with Colonial the Group reported a higher level of net impaired assets, partly due to the Colonial policies which had applied, and for this reason the pre- and post-Colonial figures are not directly comparable. The increase in the year to 30 June 2002 primarily reflects the impact of a small number of large corporates that defaulted in the first half of the year (primarily Pasminco and Enron, as disclosed previously).
  • We have continued to focus the development of our credit management methodology and portfolio management to ensure we manage the concentrations in the portfolio. As a result we are endeavouring to minimise the potential for single large exposures to have a significantly adverse impact on our results. There is only one impaired client with exposure exceeding $100m (Pasminco), and two with exposures greater than $50m.
  • The non accruals are spread across the industries that make up the Australian economy. The bulk of the mining impaired assets are for one client (Pasminco).
  • This slide provides an updated snapshot of the credit portfolio by industry from our portfolio management system (‘GEMS’) that we use to monitor our credit exposures. As previously advised to the market, we endeavour to manage our portfolio to contain our exposures to industrial segments in line with their contribution to the Australian economy. The spike in impaireds in particular industries (Metal Mining and Manufacturing, Transport and Storage) is due to specific outriders that have been already flagged to the market. A troublesome asset is classified as one that is still performing, but requires intensive management. At this stage we remain of the view that there is no systemic risk in any particular sector. Industries specifically vulnerable to the impacts of September 11 (insurance, transport and storage, accommodation, cafes and restaurants) have not shown any significant deterioration to date. Similarly, agricultural and associated industries have not shown any significant deterioration as a result of the drought being experienced in parts of Australia.
  • The Bank’s financial strength has been recognised by affirmation of our credit ratings by Moody’s in October 2001, Fitch in January 2002 and by Standard & Poor’s in May 2002. We continue to grow shareholders equity, despite maintaining the highest pay-out ratio of the four major Australian banks. The DRP in respect of the interim dividend was satisfied without issuing new shares. The Bank continues to maintain a strong capital position. The tier 1 capital ratio at June 2002 was 6.78% compared to 6.51% for 2001. The total capital ratio at June 2002 was 9.80% compared to 9.16% for 2001. All capital ratios are well within regulatory requirements. They are also well within the Bank’s own target ranges, which are more conservative than the regulations require. During the 2002 financial year, we distributed $1,790 million in dividends to shareholders. This included $168 million in new shares issued to satisfy the DRP in respect of the final dividend for the 2001 financial year.
  • Some analysts debate that BIS I as it currently stands allows an element of double gearing in the Bank’s capital calculations. This argument arises from the current regulatory approach of including the shareholders funds attributable to the life and funds management businesses in the Tier 1 calculation, without making an allowance for the risks of these businesses in the calculation of risk weighted assets. To successfully avoid double gearing, we believe that any deductions from Tier 1 should account for the unique risk profiles of a company’s subsidiaries. In addition, risk weights should be risk aligned and take account of the benefits of earnings and risk diversification. This is why the use of internal models that employ the concept of economic equity are important in determining our capital management activities. Our models certainly ensure that our capital ratios sit well within the regulatory framework. But in addition, by considering the economic equity requirements for each line of business, they better reflect capital needs that are based upon the true risks of each of our businesses. The Bank calculates economic equity is calculated to a 99.95% confidence level using consistent methodologies across all our businesses. Our models consistently show that the capital position of the Group comfortably exceeds the aggregate economic equity requirement for our business activities. The Bank’s capital ratios are likely to further improve upon the introduction of the BIS II capital framework. One of the improvements under BIS II will be the better alignment of regulatory risk weightings with the nature of the risk. This is particularly true in respect of the new risk weights to be applied to residential mortgages, which account for more than 50% of our loan book. However, being solely related to bank regulatory capital, BIS II does not purport to set realistic capital requirements for financial services groups such as CBA. As such, our internal modelling of economic equity will continue to be important.
  • For financial year 2002, volatility in domestic and offshore equity markets saw a decline in the investment returns achieved on shareholders’ funds, which decreased by $93m (or $46m excluding prior year one off items) during the financial year. As mentioned, this volatility has continued into the first quarter of 2003. The Bank’s policy is that where it has discretion, the capital supporting its life insurance businesses is invested in instruments that reflect the underlying nature of the business. In the case of traditional and investment account business, the capital supports the guarantees provided and is likely to be tied up for many years. Thus the supporting capital is invested principally in equities. This recognises that over long periods of time equities should produce a higher rate of return than cash or fixed interest. In the case of unit-linked policies the capital principally supports deferred acquisition costs. The time horizon on this capital is 2 to 3 years. Thus, capital supporting this business is invested principally in cash, reflecting the short-term nature of the requirement. While an asset allocation that includes equities or fixed interest may result in short-term volatility, the current poor performance of equity markets does not change our belief in the need to allocate investments in a way that maximises long term value.
  • Before closing, I would like to re-state our focus on further reducing costs and delivering productivity improvements. We have lowered our cost to income ratio steadily over the last four half-year periods and are focussing on achieving greater efficiencies in our operations to further improve this ratio in line with best practice. The Bank achieved a solid cost outcome for the year ended 30 June 2002, with costs increasing only 1% above the previous year. Ongoing containment of costs is crucial to delivering the 3-6% productivity improvement target previously stated. To this end, the five productivity initiatives that I outlined earlier are a critical component of this and are examples of how the Bank is achieving greater efficiency from its operations, that will benefit the customer and translate into a better service experience. While the combination of restructuring costs and the expensing of employee equity arrangements will affect profitability over the current half, expenses are otherwise running in line with expectations. And over the longer term, targeted spending in key areas will deliver greater efficiency outcomes, that will lower costs and at the same time generate greater revenue growth opportunities.
  • Looking to strategic outcomes: Despite the current environment, the aspirations detailed in our five year plan remain unchanged. The Group will continue to target top quartile Total Shareholder Return over the long term, albeit market uncertainties in Australia and abroad may lower the quantum of TSR in comparison to recent historical trends.
  • So, in closing I would just like to reiterate the main points: The Australian economy has held up relatively well despite global uncertainty and is showing signs of a continued positive outlook. Within this framework, the domestic equity market generally, and banking stocks in particular, have also shown relative resilience in a market dominated by volatility. The Commonwealth Bank has a sound track record and represents a differentiated proposition in the Australian market place. This is by virtue of our competitive strengths in scale, brand and distribution, our service focus and our growth drivers within key customer segments. In the current uncertain global outlook, the Commonwealth Bank has positioned itself prudently through the maintenance of its low credit risk profile, strong capital position and focus on productivity. The focus of, and our commitment to, our five year plan remains unchanged.
  • Investor Roadshow Presentation: David Murray

    1. 1. November 2002 Investor Roadshow David Murray Chief Executive Officer Stuart Grimshaw Chief Financial Officer
    2. 2. <ul><li>The material that follows is a presentation of general background information about the Bank’s activities current at the date of the presentation, 4 November 2002. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice when deciding if an investment is appropriate. </li></ul><ul><li>A full colour version of this presentation is available on the News & Information page of the Commonwealth Bank’s Shareholder Centre website </li></ul>Disclaimer
    3. 3. Speaker’s Notes <ul><li>Speaker’s notes for this presentation are attached below each slide. </li></ul><ul><li>To access them, you may need to save the slides in PowerPoint and view/print in “notes view.” </li></ul>
    4. 4. Agenda <ul><li>The Australian Economy and recent Equity Market Performance </li></ul><ul><li>Commonwealth Bank: Track Record, Differentiators and Growth Drivers </li></ul><ul><li>How is Commonwealth Bank Positioned Against the Current Outlook? </li></ul>
    5. 5. The Australian Economy and recent Equity Market Performance
    6. 6. Australia’s Economy has been Resilient % % % Source: Commonwealth Research %
    7. 7. Interest Rates & Credit Growth Source: Commonwealth Research
    8. 8. Housing Market Source: Commonwealth Research % Index *CBA Est. House Price Index EQUITIES AND HOUSE PRICES (RELATIVE PERFORMANCE) HOUSING LOAN APPROVALS Compound Annual Growth Rate: 1986-2002 2000-2002 All Ordinaries Index: 6.2% -3.5% House Prices: 10.1% 20.5%
    9. 9. Housing Market Brisbane Sydney Melbourne Darwin Perth Adelaide Hobart Canberra House Price as Multiple of Gross Yearly AWE* Source: CBA Research AWE: average weekly earnings
    10. 10. Housing Market Source: Commonwealth Research, unless otherwise marked $’000 %pa %pa Source: Residex *assumes principal repayment ratio fixed at 1997/98 level Income ($'000pa) DEBT REPAYMENT LEVELS (% of h/hold income, Mar'02) Source: Melbourne Institute 5 10 15 20 <30 31-50 51-70 71-100 >100 5 10 15 20 % %
    11. 11. Australian Equity Market Performance Source: Deutsche Bank As at close of business 15 October, 2002
    12. 12. Australian Banks - Credit Quality Source: Merrill Lynch Global Banks Team Global Asset Quality Map - Selected Regions/Segments (2002E)
    13. 13. Australian Banks - Shareholder Value Performance 1 3 12 25 CBA ANZ WBC NAB Index Source: Oliver Wyman & Co Shareholder Performance Index, 2002. Period covered by index 1 Jan 1997 - 31 Dec 2001 Global Five Year Shareholder Performance Index
    14. 14. Commonwealth Bank: <ul><li>Our Track Record </li></ul><ul><li>Our Differentiators and Growth Drivers </li></ul>
    15. 15. Recent Result Highlights <ul><li>Solid Earnings Growth </li></ul><ul><ul><li>Reported Profit up 10.7% to $2,655m </li></ul></ul><ul><ul><li>Cash Profit up 10.6% to $2,501m </li></ul></ul><ul><ul><li>Cash EPS up 10.1% to $1.97 </li></ul></ul><ul><li>Costs steady year on year </li></ul><ul><ul><li>Improved productivity and cost to income ratio </li></ul></ul><ul><li>High dividend payout ratio relative to peers </li></ul><ul><li>Capital position remains strong </li></ul><ul><li>Credit Quality and Provisioning remains strong </li></ul>
    16. 16. Net Profit* * Net Profit after tax and outside equity interest - cash basis. Excludes appraisal value uplift and goodwill amortisation. 1,109 1,153 $million 1,192 1,309 Full Year = 2,262 Full Year = 2,501
    17. 17. ROE and EPS Dec 00 Jun 01 Dec 01 Jun 02
    18. 18. Dividend Growth
    19. 19. Asset Quality Overview
    20. 20. Current Operating Outlook 2002-2003 <ul><li>Core business remains sound </li></ul><ul><li>Equity market volatility has continued in the first quarter of 2003 </li></ul><ul><li>Additional costs of governance to be included in first half result: </li></ul><ul><ul><li>expensing of employee option plans </li></ul></ul><ul><ul><li>restructuring provisions taken above the line </li></ul></ul>
    21. 21. Commonwealth Bank: Differentiators
    22. 22. Segmentation: Aligned Domestic Structure with Customer Needs
    23. 23. Scale : Strong Market Share Positioning Jun 2001 Dec 2001 Jun 2002 Home Loans^ 20.4% 20.1% 20.1% (Residentially Secured) Credit Cards 21.4% 21.4% 21.6% Retail Deposits^ 24.0% 24.1% 24.2% Retail FUM (Plan for Life) 16.1% 16.1% 15.7% Superannuation/Annuities 16.3% 16.4% 16.4% Retail Broking 9.0% 8.5% 9.2% Inforce Premiums 14.4% 14.5% 14.4% ^ Due to delays in implementing new APRA reporting methodology, no market share data has been available since March 2002. Australian Market Share Rank 1 1 1 1 1 2 2 * * * March 2002 data * *
    24. 24. Australia’s Most Accessible Bank <ul><li>Over 146m DirectBanking calls </li></ul><ul><li>Almost 2m registered NetBank users </li></ul><ul><li>Around 126,000 EFTPOS terminals </li></ul><ul><li>Over 10,000 third party advisers, brokers and agents </li></ul><ul><li>Around 4,000 ATMs </li></ul><ul><li>Nearly 4,000 postal and private agencies </li></ul><ul><li>Over 1,000 branches </li></ul><ul><li>Over 700 EzyBanking store locations </li></ul><ul><li>Around 700 personal lenders </li></ul><ul><li>Over 700 financial planners </li></ul><ul><li>Around 200 mobile bankers </li></ul><ul><li>Over 70 business banking centres </li></ul><ul><li>13 premium banking centres </li></ul>Customer Choice Branches ATMs EFTPOS Agencies 3rd Party Premium Banking EzyBanking NetBank Business Banking Direct Banking Mobile Banking Financial Planners Personal Lenders
    25. 25. Brand: We Have More Relationships Than Any Other Financial Institution Source: Research International, April 2002 Popularity of Australian Financial Institutions…. * Customers under 25 years of age ^ Excludes Youth customers
    26. 26. Brand: We Achieve Consistently High Ratings from Retail Customers Source: Research International Brand Monitor Average across all brand attributes for CBA Vs average of ANZ, NAB and Westpac % <ul><li>In touch with its customers </li></ul><ul><li>Is leading the way </li></ul><ul><li>Is doing new and different things </li></ul><ul><li>Has knowledgable and competent staff </li></ul><ul><li>Has friendly and reliable staff </li></ul>
    27. 27. Strong Corporate Governance Policies <ul><li>CEO is the only Executive Director </li></ul><ul><li>Roles of CEO and Chairman separate </li></ul><ul><li>Limits on Board members’ terms of office </li></ul><ul><li>Nominations Committee establish criteria for Board appointment </li></ul><ul><li>Board induction, continuing education and succession planning </li></ul><ul><li>Annual assessment of performance </li></ul><ul><li>Audit Committee independence </li></ul><ul><li>Limits placed on share trading </li></ul><ul><li>Options eliminated from executive remuneration </li></ul><ul><li>Closure of Directors’ retirement scheme </li></ul><ul><li>Policy that covers non-audit work conducted by External Auditor </li></ul><ul><li>Rotation of External Audit Partner </li></ul>
    28. 28. Commonwealth Bank: Growth Drivers
    29. 29. Established in All Components of the Wealth Management Value Chain Investment Products Sales Teams / BDMs CommInsure Sales Teams / BDMs Retail Banking Services (Branch Network) Third Party Premium Financial Services Institutional & Business Services Online Direct (Mail & Telemarketing) Customers Commonwealth Bank Retail Distribution Channels (Sales & Advice) Product Manufacturer Banking Products Sales Teams Third Party Non Commonwealth Bank Channels
    30. 30. Brand - Colonial First State AMP AMP AMP BT Colonial or Colonial First State Colonial First State AXA Colonial First State ING Consumer Brand Awareness - Unaided 3 Consumer Brand Awareness - Total Consumer Purchase Intention 2 2 Adviser Brand Awareness - Overall Opinion of Organisation Colonial First State Platinum 1 Perpetual Source: Consumer Charts - Newspoll June 2002; Source: Adviser Chart - ASSIRT Service Level Survey 2002
    31. 31. Funds Under Management $103bn
    32. 32. Innovation through FirstChoice Masterfund Product You and your Financial Adviser Colonial First State FirstChoice Your financial future Value Simplicity Structure Service Investments Pension Employer Super Personal Super
    33. 33. Premium and Business Opportunity Business (Middle Market) Premium Customers Source : Commonwealth Bank illustration Current market share Natural market share Current number of premium customers Potential number of premium customers
    34. 34. Premium: A Differentiated Business Model Banking Platform Broking Platform Borrowing Services Lending Services Transactional Banking Advisory Services Direct Investment Indirect Investment Debt Products Equity Products Client Primary Relationship Manager Secondary Relationship Manager & specialised advice Personal Banker Commercial Banker Investment/ Equities Expert Event Based Adviser Insurance Expert
    35. 35. Business: Increasing Cross-sell Corporate Segment Example Bundled Products Example 26% Working Capital Services 26% of corporate clients use products from all three areas Financial Markets Corporate Finance Business Banking Financial Markets Working Capital Services Interest rate risk management FX products Investments Bill financing Cash funded loans Overdrafts Transaction services
    36. 36. Productivity: Focus on Efficiency Remove all remaining back-office functions from branches Streamline home loan processes Streamline Business Banking processes Rationalise investment products & systems Organisational design achieve: <ul><li>A better service experience for customers, through greatly improved turnaround times </li></ul><ul><li>Elimination of duplication and inefficiencies </li></ul><ul><li>Annual benefits from FY 2004, following an incremental net cost of ~$120m in FY2003 </li></ul>Five productivity initiatives...
    37. 37. How is Commonwealth Bank Positioned Against the Current Outlook? <ul><li>Credit Quality </li></ul><ul><li>Capital Position </li></ul><ul><li>Investment Market Volatility </li></ul><ul><li>Productivity Focus </li></ul>
    38. 38. Commonwealth Bank Group: Low Credit Risk Profile <ul><li>Housing Loans </li></ul><ul><ul><li>53% of total loan book* </li></ul></ul><ul><ul><li>Loan loss rate of < 3bps in 17 of last 20 years </li></ul></ul><ul><ul><li>55% average loan to valuation ratio </li></ul></ul><ul><ul><li>Extensive stress testing of loan portfolio undertaken </li></ul></ul><ul><li>Asset Quality </li></ul><ul><ul><li>Impaired assets to risk weighted assets of less than 1% </li></ul></ul><ul><ul><li>in line with domestic peers </li></ul></ul><ul><ul><li>Relatively low bad debt expense </li></ul></ul><ul><ul><li>Well provisioned </li></ul></ul>* Excluding securitisation (or 57% including securitisation)
    39. 39. Credit Risk Total Individually Rated* Exposures 61% Investment Grade * Corporate and business lending
    40. 40. Investment Grade Exposures by Size 8 customers 9 customers 13 customers 66 customers 99 customers 101 customers >15,000 customers
    41. 41. Offshore * Loans & Advances by Industry Other Commercial Government Agriculture Finance Construction Personal Leasing * Excludes New Zealand (ASB )
    42. 42. Aggregate Provisions * Includes Colonial $millions
    43. 43. Net Impaired Assets * Excluding Colonial prior to 30 June 2000 $millions Asian Crisis Acquisition of Colonial Two Accounts %
    44. 44. Non-Accrual Loans by Size $5m<$10m $50m<$100m $20m<$50m $10m<$20m >=$100m <$5m 1 Customer 2 Customers 4 Customers 4 Customers 12 Customers As at 30 June 2002
    45. 45. Non Accruals by Industry Mining Manufacturing Agriculture Property & Business Services Finance Transport Government Other As at 30 June 2002 Accommodation, Cafes & Restaurants
    46. 46. Industry Exposures Exposure to selected industries $b $b $b $b $b $b Balances $m % Portfolio % Troublesome % Impaired Left Axis: Right Axis:
    47. 47. Strong Capital Position 2H01 1H02 2H02 2H01 1H02 2H02 Total Tier 1 CBA Target Range <ul><li>Strong credit ratings </li></ul><ul><li>Shareholders equity up $637m </li></ul><ul><li>Strong regulatory capital ratios </li></ul><ul><li>Payments to shareholders of $1,622m </li></ul>
    48. 48. Economic Equity <ul><li>Regulatory capital ratios can be misleading: </li></ul><ul><ul><li>Risk weights are not risk aligned </li></ul></ul><ul><ul><li>Capital required for residential mortgages is overstated </li></ul></ul><ul><ul><li>No operational risk charge </li></ul></ul><ul><ul><li>No value placed on earnings and risk diversification </li></ul></ul><ul><li>Internal models show the Group is strongly capitalised </li></ul>
    49. 49. Shareholder Funds in Life Insurance Companies Income $0.5 billion $2.1 billion 53% 47% Growth $2.6 billion 67% 33% 50% 50% *Risk includes traditional, investment account, annuities, personal risk and group risk.
    50. 50. Greater Cost Control & Targeted Investment in Priority Areas <ul><li>Upgrading infrastructure to </li></ul><ul><li>improve service </li></ul><ul><li>Developing and managing </li></ul><ul><li>relationships with all customers </li></ul><ul><li>Product simplification & </li></ul><ul><li>rationalisation; packaging </li></ul><ul><li>products for premium customers, </li></ul><ul><li>and manufacture innovative new </li></ul><ul><li>products </li></ul>% Focus on achieving further productivity improvements... reducing costs and spending to improve service quality and drive revenue growth
    51. 51. Strategic Outcomes Business Driver Profile 5-Year Plan Growth in market share Major product groups At or above market Margins Comparable for Continuing decline business mix Sources of income Comparable financial Continued shift institutions toward non-interest Costs Reduction in cost- 3%-6% p.a. income - best practice productivity change Capital Management Optimise regulatory Rating AA- capital & maintain rating Total Shareholder Return Relative to peers Top Quartile
    52. 52. Summary <ul><li>The Australian Economy and the Australian Equities Market </li></ul><ul><ul><li>Have been relatively resilient </li></ul></ul><ul><ul><li>Economic outlook remains positive in global context </li></ul></ul><ul><li>Commonwealth Bank’s strengths include: </li></ul><ul><ul><li>Our track record </li></ul></ul><ul><ul><li>Our differentiators </li></ul></ul><ul><ul><li>Our growth drivers </li></ul></ul><ul><li>How is Commonwealth Bank Positioned Against the Current Outlook? </li></ul><ul><ul><li>Low credit risk profile </li></ul></ul><ul><ul><li>Strong capital position </li></ul></ul><ul><ul><li>Productivity focus </li></ul></ul>
    53. 53. November 2002 Investor Roadshow David Murray Chief Executive Officer Stuart Grimshaw Chief Financial Officer