MONEY IN THE BANK - bank sector outlook

Sector Focus
Banks
1
MONEY IN THE BANK: BANK SECTOR REVIEW (NOV 2012)
Following the completion of the FY12 banks reporting season, we
summarise EAP‟s bank sector preferences (in declining order of
preference) as follows:
1. WBC – Positive view - $26.84 blended valuation – Doing
the basics right; strong performance in Wealth management
and Retail Banking; sector-leading efficiency.
2. NAB – Neutral - $27.07 – Australian Banking is performing
well, but UK will remain a drag whilst NAB works through its
UK exit. Evidence of improvement in the UK outlook is
emerging. Appears over-sold at current levels.
3. CBA – Neutral - $56.94 – Positive outlook given: (i) positive
3Q12 Trading Update; and (ii) WBC‟s strong FY12 results (CBA
and WBC share similar loan and business mix). However, CBA
remains the sector‟s most expensive bank (FY13F PE of 12.8x).
4. ANZ – Negative - $23.54 – ANZ‟s share price has declined to
match our bearish valuation. However, we remain bearish
given: (i) profitless growth in Asia; (ii) above-peer net interest
margin (NIM) expected to mean-revert; and (iii) sector‟s
highest cost outlook driven by ongoing investment in Asia.
5. BEN – Neutral – $8.81 (under review) – Revenue growth
limited by NIM squeeze (exacerbated during a Reserve Bank
rate cutting cycle) and low housing credit growth. Emerging re-
potential catalysts are: (i) price-value margin of safety; and
(ii) possible Southern Finance acquisition.
6. BOQ – Negative - $6.72 –Leading indicators point to more
bad debt downside risk in South East Queensland, whilst
provision coverage is deteriorating. We remain cautious on
BOQ‟s outlook.
E&P Bank Sector Summary
NAB CBA ANZ WBC
Recommend Neutral Neutral Negative Positive
Share Price $23.83 $59.22 $23.81 $24.89
Valuation $27.07 $56.94 $23.54 $26.84
Market Cap $54.8b $95.3b $64.7b $76.7b
Avg Daily Vol 7.1m 4.4m 7.6m 8.5m
Avg Daily Value $177m $238m $176m $194m
12-mth return 12.7% 33.4% 31.6% 31.0%
Earnings Forecasts
(FY end) NAB(30 Sep) CBA(30 Jun) ANZ(30 Sep) WBC(30 Sep)
E&P Cash EPS (¢) 237.9 458.5 219.7 225.6
Basic Cash EPS (¢) 239.5 461.2 220.0 225.6
Reported EPS (¢) 235.7 461.2 219.7 195.9
E&P Cash EPS Growth (%) (5.6) 1.8 (3.1) 4.0
DPS (¢) 179.6 345.0 145.0 168.5
Yield (%) 7.5 5.8 6.1 6.8
Grossed-Up Yield (%) 10.8 8.3 8.7 9.7
Franking (%) 100% 100% 100% 100%
E&P Cash Multiple (x) 9.9 12.8 10.8 11.0
Price/Book (x) 1.3 2.2 1.6 1.8
PEG Ratio (x) 1.4 3.6 2.5 2.3
Net Interest Margin (%) 2.04 2.16 2.21 2.08
Return on Average Assets (%) 0.7 1.0 0.9 1.0
ROE (%) 13.0 18.0 14.6 15.2
Valuation (blended) $27.07 $56.94 $23.54 $26.84
George Gabriel, CFA
ggabriel@evansandpartners.com.au
November 28, 2012
+61 3 9631 9853

2
BANK SECTOR SUMMARY
ANZ CBA NAB WBC BOQ BEN
Regionals
Average
Bank
Majors
E&P Current Recommendation NEGATIVE NEUTRAL NEUTRAL POSITIVE NEGATIVE NEUTRAL
E&P preferred ranking 4 3 2 1 6 5
Curent Price $23.75 $59.18 $23.74 $24.83 $6.91 $7.89
E&P 12-month weighted valuation $23.54 $56.94 $27.07 $26.84 $6.72 $8.81
Upside/(downside) to E&P valuation -0.9% -3.8% 14.0% 8.1% -2.8% 11.7% 5.9% 3.3%
E&P 13F cash dividend yield 6.1% 5.8% 7.6% 6.8% 7.4% 8.1% 7.8% 6.5%
12-mth forecast total shareholder return 5.7% 3.9% 14.6% 10.8% 4.7% 19.8% 13.7% 8.1%
12A Cash EPS $2.27 $4.53 $2.54 $2.17 -$0.07 $0.84
E&P 13F Cash EPS $2.20 $4.61 $2.40 $2.26 $0.79 $0.75
FY13F earnings growth (% change 12-13 EPS) -3.1% 1.8% -5.6% 4.0% -1254% -11% -508.9% -0.1%
E&P 14F Cash EPS $2.22 $4.78 $2.49 $2.32 $0.79 $0.80
FY13F earnings growth (% change 13-14 EPS) 0.9% 3.6% 3.8% 3.0% NM 7% 4.1% 2.9%
FY13F earnings yield 9.3% 7.8% 10.1% 9.1% 11.4% 9.5% 10.3% 8.9%
FY14F earnings yield 9.3% 8.1% 10.5% 9.4% 11.4% 10.2% 10.7% 9.1%
12A Cash DPS $1.45 $3.34 $1.80 $1.66 $0.52 $0.60
E&P 13F Cash DPS $1.45 $3.45 $1.80 $1.68 $0.51 $0.64
FY13F dividend growth (% change 12-13 EPS) 0.0% 3.3% -0.2% 1.5% -1.0% 6.7% 4% 1.4%
E&P 14F Cash DPS $1.45 $3.57 $1.80 $1.71 $0.52 $0.64
FY14F dividend growth (% change 13-14 EPS) -0.2% 3.5% 0.0% 1.4% 0.8% -0.3% 0% 1.5%
E&P 13F grossed up cash yield 8.7% 8.3% 10.8% 9.7% 10.6% 11.6%
10-year government bond 3.68% 3.68% 3.68% 3.68% 3.68% 3.68%
Target average bank yield/bond yield 1.05x 1.05x 1.05x 1.10x 2.00x 1.20x 1.52x 1.07x
Implied FY12F share price target $37.56 $89.36 $46.53 $41.66 $7.00 $14.50
% upside from current price 58.1% 51.0% 96.0% 67.8% 1.3% 83.8% 50.7% 65.5%
Implied FY13 share price target $37.48 $92.46 $46.51 $42.26 $7.05 $14.46
% upside from current price 57.8% 56.2% 95.9% 70.2% 2.1% 83.3% 50.8% 67.7%
FY13 NTA per share $12.40 $20.18 $14.73 $10.08 $7.47 $6.14
FY13 book value per share $14.94 $26.87 $18.19 $14.14 $9.27 $10.22
Price/FY13F NTA 1.92x 2.93x 1.61x 2.46x 0.92x 1.29x 1.14x 2.34x
Price/FY13F book value 1.59x 2.20x 1.31x 1.76x 0.75x 0.77x 0.76x 1.78x
Premium/(discount) to sector average FY12F P/B -10.7% 23.7% -26.7% -1.3% -22.7% -7.4%
FY12A Price-Earnings ratio 10.5x 13.1x 9.4x 11.5x -101.3x 9.4x -35.0x 11.4x
FY13F Price-Earnings ratio 10.8x 12.8x 9.9x 11.0x 8.8x 10.5x 9.8x 11.4x
Premium/(discount) to sector average FY13F PE -5% 13% -12.7% -3% -11% 7%
FY14F Price-Earnings ratio 10.7x 12.4x 9.6x 10.7x 8.8x 9.8x 9.4x 11.0x
Consensus wtd reco rating (1-5, 5 Strong Buy) 3.4 2.5 3.4 3.1 2.8 2.6
No. of broker recommendations (Buy/Hold/Sell) 9B/4H/5S 2B/8H/6S 7B/8H/3S 5B/8H/4S 3B/10H/5S 1B/12H/4S
Consensus Target Price $26.11 $56.41 $26.30 $25.86 $6.72 $8.81
Consensus FY12 Net Profit ($m) $5,992 $7,096 $5,367 $6,448 $25 $323
Consensus FY12 EPS $2.18 $4.39 $2.42 $2.06 $0.09 $0.83
Consensus FY13 EPS $2.24 $4.49 $2.49 $2.14 $0.75 $0.81
Consensus FY13 EPS Growth 3.2% 2.3% 3.1% 3.7% 747.2% -2.3%
Consensus FY12 DPS $1.46 $3.30 $1.80 $1.66 $0.52 $0.60
1 Jan 12 share price $20.53 $49.22 $23.36 $20.00 $7.09 $8.03
2012 year to date performance 15.7% 20.2% 1.6% 24.2% -2.5% -1.7% -2.1% 16.8%
52 week high $25.96 $59.40 $26.95 $25.95 $7.96 $9.60
Fall from 52 week high (%) -8.5% -0.4% -11.9% -4.3% -13.2% -17.8% -16.0% -5.4%
All time high $31.74 $62.16 $44.84 $31.32 $19.32 $17.78
Fall from all time high (%) -25.2% -4.8% -47.1% -20.7% -64.2% -55.6% -59.1% -21.5%
Source: Bloomberg, E&P Estimates
Earningspershare(EPS)Priceperformance
Bond-relative
dividendyield
Dividendspershare(DPS)E&PForecastsConsensusEarningsandAssetValuation

3
ANZ BANKING GROUP (ANZ) - STRUCTURAL HEADWINDS
RECOMMENDATION : NEGATIVE (PREV. NEUTRAL)
WHAT’s NEW?
 Underlying cash earnings (post adjustment for cash earnings,
capitalised software and hedging gains) are in decline, down 5.2% in
2H12 if we include$220m of capitalised software as an expense and
down 11.4% if we normalise excessive hedging gains to 1H12 levels.
 Adjusted revenue growth (i.e. stripping out hedging gains) is down
-0.2% in 2H12 (vs. ANZ reported +2.4%), highlighting the
challenging revenue growth outlook. Table 7.
 Adjusted operating expenses up +5.0%. Table 5. Asian (APEA)
investment remains an earnings drag, with APEA cash earnings
down 23% as income declined 4% and expenses increased 9%.
 ANZ’s provisioning is underweight. To match CBA, ANZ requires
$146m in provision top-ups. Table 3.
 Re-allocation of resources away from Australia (FTE down 1,901 to
21,682) to Asia (FTE up by 626 to 17,500) creates medium-term
risks for Australian franchise competitiveness.
WHAT CHANGED?
 FY13F EPS down -2.6%; FY14F EPS down -9.1%.
WHAT NOW?
We downgrade to Negative and blended valuation to $23.54 (prev.
$23.30) reflecting carry forward of key medium-term risks:
 We expect structural decline in net interest margin (NIM) towards
mean-reversion. ANZ‟s 2H12 NIM of 2.35% is 20bp above CBA.
 Profitless growth in Asia to continue in the short-term reflecting
ongoing investment costs within a subdued revenue context.
Cash earnings down 23% in 2H12. Table 5.
Sector implications:
 No sign of broader asset quality decline across Australia.
 Net interest margin (NIM) downside pressures remain across the sector
(higher funding costs, competition).
Trading Data
Last Price $25.38
12 month range $18.77 - $25.96
Market Cap $68,970m
Free Float $67,680m (98%)
Avg. Daily Volume 7.7m
Avg. Daily Value $176.7m
12 month return (historical) 24.1%
AIEA to grow in line with system.
ANZ’s NIM decline is both structural,
driven by reversion to its peer-group mean
after having increased interest rates out of
cycle by more than its peer group post the
GFC, and sectoral, with the sector facing
rising deposit costs, lower free funds
returns, increased competition and rising
wholesale funding costs.
Earnings Forecasts
Yr to September 10A 11A 12A 13E 14E 15E
E&P Cash EPS (¢) 199.8 219.8 226.6 219.7 221.6 239.6
Basic Cash EPS (¢) 200.3 220.3 227.1 220.0 221.9 239.8
Reported EPS (¢) 178.9 208.2 213.4 219.7 221.6 239.5
E&P Cash EPS Growth (%) 26.1 10.0 3.1 (3.1) 0.9 8.1
DPS (¢) 126.0 140.0 145.0 145.0 144.7 158.5
Yield (%) 5.0 5.5 5.7 5.7 5.7 6.2
Grossed-Up Yield (%) 7.1 7.9 8.2 8.2 8.1 8.9
Franking (%) 100% 100% 100% 100% 100% 100%
E&P Cash Multiple (x) 12.7 11.5 11.2 11.5 11.4 10.6
Price/Book (x) 1.9 1.8 1.7 1.7 1.6 1.5
PEG Ratio (x) 0.9 (298.6) (5.0) 1.3
Net Interest Margin (%) 2.5 2.4 2.3 2.2 2.2 2.1
Return on Average Assets (%) 1.0 1.0 1.0 0.9 0.9 0.9
ROE (%) 15.1 15.7 15.2 14.6 14.4 14.8
Valuation (blended) 23.54
George Gabriel, CFA
November 28, 2012
+61 3 9631 9853

4
EAP INVESTMENT VIEW
We downgrade ANZ to Negative (prev. Neutral), and our blended valuation to (prev. $23.30)
given: (i) underlying 2H12 cash earnings growth was negative and the outlook is for a
challenging revenue growth environment; (ii) the competitive position of ANZ’s Australian
franchise is at risk given ongoing re-allocation of resources and management attention
towards Asia; (iii) increased provisioning outlook given ANZ is underweight provisioning
relative to peers; (iv) structural net interest margin (NIM) decline is expected to continue;
and (v) profitless growth in ANZ’s Asian investment phase is expected to remain a medium-
term earnings drag.
We consider these issues in more detail below.
1. STRUCTURAL NET INTEREST MARGIN (NIM) DECLINE
We expect ANZ‟s Net Interest Margin (NIM) to continue to mean-revert. There is no apparent reason
why ANZ should enjoy an above-peer NIM. Even when compared to NAB, whose business mix is most
similar to ANZ, ANZ‟s NIM appears excessive.
The key explanation for ANZ‟s above-peer NIM is that it re-priced margins the most aggressively in the
post-GFC period (up 44bp from FY08 to 1H10). Its NIM is now down 17bp since then, compared to
CBA‟s NIM decline of 9bp. Tables 1-2.
Comparing ANZ to peers implies ANZ faces another 10-20bp of NIM decline for mean-
reversion, in addition to sector-wide structural NIM decline driven by higher funding costs
(both wholesale and deposit costs).
Chart 1 summarises the key drivers of 2H12 NIM. We expect these NIM pressures (rising
deposit costs, lower “free float” return in a rate cutting cycle and competition partially offset
by asset re-pricing) to continue to drive structural decline in NIM.
TABLE 1: MAJOR BANKS’ NET INTEREST MARGINS (NIM)
NIM FY08 2H09 1H10 2H10 1H11 2H11 1H12 2H12
ANZ 2.01% 2.37% 2.45% 2.50% 2.47% 2.44% 2.35% 2.28%
CBA 2.02% 2.16% 2.18% 2.08% 2.12% 2.25% 2.15% 2.09%
NAB 2.25% 2.25% 2.26% 2.24% 2.23% 2.28% 2.17%
WBC 2.07% 2.39% 2.27% 2.17% 2.21% 2.23% 2.17%
Source: Company reports
TABLE 2: CHANGE IN NIM
NIM change (%) FY09 1H10 2H10 1H11 2H11 1H12 2H12
Total change
FY08-1H10
Total change
1H10 - 2H12
ANZ 0.36% 0.08% 0.05% -0.03% -0.03% -0.09% -0.07% 0.44% -0.17%
CBA 0.14% 0.02% -0.10% 0.04% 0.13% -0.10% -0.06% 0.16% -0.09%
NAB 0.00% 0.01% -0.02% -0.01% 0.05% -0.11% 0.01%
WBC 0.32% -0.12% -0.10% 0.04% 0.02% -0.06% 0.20%
Average major banks 0.20% -0.13%

5
CHART 1: NIM TRENDS
2. ASSET QUALITY AND PROVISIONING
There are no signs of broader-based asset quality deterioration across Australia, with
declines in both gross impaired and new impaired assets. Table 3.
Furthermore, ANZ’s mortgage asset quality in Queensland appears to be stable/improving.
Chart 2. Accordingly, we infer that Bank of Queensland’s (BOQ) asset quality issues are
specific to BOQ’s exposures and credit underwriting standards. (Refer EAP Note, “Leading
Indicators Point to More Bad Debt Downside”, 23 October 2012). Key trends are summarised in Table 3.
CHART 2: AUSTRALIA 90 DAYS PAST DUE LOANS

6
TABLE 3: ANZ & CBA – COMPARING PROVISIONING LEVELS
ANZ 1H10 2H10 1H11 2H11 1H12 2H12
Asset quality summary
90 DPD + impaired/gross loans 2.37% 2.28% 2.12% 1.84% 1.73% 1.60%
New impaired loans 3,126 2,319 2,437 1,842 2,356 1,847
% growth in new impaired -26% 5% -24% 28% -22%
New impaired/gross loans 0.91% 0.66% 0.66% 0.47% 0.57% 0.43%
Source: Company Reports
However, although there is no sign of broader based asset quality deterioration, we conclude that
ANZ’s provisioning is underweight relative to CBA and that therefore ANZ faces a high risk of
increased future provisioning. This conclusion is consistent with the ANZ CEO’s commentary who
stated that ANZ has a slightly higher provision outlook. We believe this is due to ANZ‟s
underweight provisioning relative to peers such as CBA. Table 4. ANZ has to increase its provisions
by $146m in order to match CBA’s level of total provisioning/credit RWA.
TABLE 4: ANZ & CBA – COMPARING PROVISIONING LEVELS
Credit Quality Summary ANZ CBA
CP/Total RWA 0.92% 0.93%
CP/Credit RWA 1.08% 1.08%
CP/Credit RWA (ex housing) 1.32% 1.56%
SP/Gross Impaired Assets 34.12% 44.63%
90 DPD + impaired/gross loans 1.60% 1.40%
Total Provision to Credit RWA 1.78% 1.85%
Source: Company Reports
CHART 3: ANZ COLLECTIVE PROVISION COVERAGE DECLINING

7
3. ASIAN BUSINESS SEGMENT (“APEA”)
ANZ has created a new division called “International and Institutional Bank”, subsuming within it Global
Institutional Banking (including Institutional Australia and New Zealand), APEA (Asia Pacific, Europe &
America) and Institutional APEA. There appears to be little rationale for this conglomeration of business
segments into one larger unit and the impact of the disclosure change is that analysts can now
only analyse 2011 and 2012 financial data for time series trend analysis.
We remain sceptical of the merits of ANZ‟s Asian investment strategy for several reasons:
 It is not clear how ANZ can add value to non-controlling, minority equity interests without (cost or
revenue) synergies.
 The short-term cost impact of the Asian rollout will continue to act as an earnings drag.
In 2H12, APEA cash earnings were down 23% as income declined 4% and expenses
increased 9%.
TABLE 5: ANZ IN ASIA
Divisional Performance Indicators - APEA (IIB)
APEA 2H11E 1H12 2H12
1H12 vs
2H11E
% 1H12 -
2H12
Net operating income (A$M) 625.0 788.0 755.0 26.1% -4.2%
Expenses (A$m) -320.0 -350.0 -380.0 9.4% 8.6%
Bad Debts (A$m) -41.0 -55.0 -58.0 34.1% 5.5%
Cash earnings (A$M) 201.0 305.0 234.0 51.7% -23.3%
Individual Provision Charge/(Release) 36.0 47.0 34.0 30.6% -27.7%
Collective Provision Charge/(Release) 5.0 8.0 24.0 60.0% 200.0%
Total Provision Charge/(Release) 41.0 55.0 58.0 34.1% 5.5%
Source; EAP Research; Company Reports
Growth Rates

8
FY12 RESULTS OVERVIEW
ANZ’s accounting over-states its underlying earnings performance. We believe that it is
appropriate to adjust ANZ’s reported cash earnings of $6.011bn down to $5.606bn to reflect
the true underlying earnings power of the ANZ business franchise as follows:
 Deduct capitalised software expense write-downs of $220m as this is a normal business
expense for modern banks.
 Hedging gains. In our view, ANZ‟s large 2H12 hedging gains of $207m (almost 10 times 1H12‟s
$22m) do not reflect underlying earnings power since they are highly volatile. For conservatism, our
adjustment assumes ANZ only earned $22m in 2H12 (as in 1H12).
KEY TRENDS
After we adjust ANZ’s earnings to reflect its true underlying earnings power (i.e. removing
accounting classification which in our view do not reflect business economics) of ANZ, it is
clear that the ANZ business franchise declined in 2H12.
 ANZ reported cash earnings are up +2.2% in 2H12 (Table 6), but are down -11.4% on an EAP
adjusted basis (Table 7). If we only deduct the software capitalisation as an expense, then cash
earnings are down -5.2% in 2H12.
 Operating income is flat/negative in the half. EAP adjusted operating revenue is down -0.2% in
2H12 (vs. ANZ reported +2.4%).
 Bad debt expenses increased 21% in 2H12 to $681m, driven by an increase in specific provision
of $912m but offset by a $231m collective provision release. We expect this to increase as
ANZ’s total provisioning is below peers.
 EAP’s adjusted operating expenses are up +5.0%, compared to ANZ‟s reported expenses of -
0.4%. This partly reflects the cost of the Asian investment program.
 Group FTE was reduced from 49509 to 48239. Within this, Australian FTE declined from 23,583 to
21,682 (down 1,901) whilst APEA FTE increased by 626 to 17,500. Re-allocation of resources
away from Australia to APEA creates a medium term risk of damaging the Australian
business franchise.
 The risks of reallocating resources away from Australia are highlighted by the fact that the only
segment to substantially grow in 2H12 was Australia +9.9% cash earnings (Table 8), of which the
key driver was the Retail Business Unit +23% to $815m, whilst the Commercial Business Unit was
down -8% to $486m.
TABLE 6: ANZ REPORTED CASH EARNINGS TRENDS
Group Performance
Cash earnings (A$M) 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 2H11 -
1H12
% 1H12 -
2H12
Net interest income 4,822 4,988 5,239 5,623 5,642 5,839 5,984 6,127 0.3% 3.5% 2.5% 2.4%
Other operating income 2,218 2,339 2,328 2,592 2,788 2,543 2,720 2,748 7.6% -8.8% 7.0% 1.0%
Operating income 7,040 7,327 7,567 8,215 8,430 8,382 8,704 8,875 2.6% -0.6% 3.8% 2.0%
Operating expenses -2,944 -3,124 -3,249 -3,722 -3,821 -3,897 -4,020 -4,002 2.7% 2.0% 3.2% -0.4%
Pre-provision operating profit 4,096 4,203 4,318 4,493 4,609 4,485 4,684 4,873 2.6% -2.7% 4.4% 4.0%
Bad debt expense -1,435 -1,621 -1,098 -722 -660 -551 -565 -681 -8.6% -16.5% 2.5% 20.5%
Cash earnings before tax 2,661 2,582 3,220 3,771 3,949 3,934 4,119 4,192 4.7% -0.4% 4.7% 1.8%
Tax expense -749 -720 -920 -1,040 -1,126 -1,096 -1,142 -1,152 8.3% -2.7% 4.2% 0.9%
Cash earnings before minorities 1,912 1,862 2,300 2,731 2,823 2,838 2,977 3,040
Minority equity -4 2 -2 -4 -5 -4 -4 -2
Underlying cash earnings 1,908 1,864 2,298 2,727 2,818 2,834 2,973 3,038 3.3% 0.6% 4.9% 2.2%
Growth ratesCash earnings (A$M)

9
TABLE 7: EAP ADJUSTED CASH EARNINGS
Group Performance
Cash earnings (A$M) 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 2H11 -
1H12
% 1H12 -
2H12
Net interest income 4,822 4,988 5,239 5,623 5,642 5,839 5,984 5,942 0.3% 3.5% 2.5% -0.7%
Other operating income 2,218 2,339 2,328 2,592 2,788 2,543 2,720 2,748 7.6% -8.8% 7.0% 1.0%
Operating income 7,040 7,327 7,567 8,215 8,430 8,382 8,704 8,690 2.6% -0.6% 3.8% -0.2%
Operating expenses -2,944 -3,124 -3,249 -3,722 -3,821 -3,897 -4,020 -4,222 2.7% 2.0% 3.2% 5.0%
Pre-provision operating profit 4,096 4,203 4,318 4,493 4,609 4,485 4,684 4,468 2.6% -2.7% 4.4% -4.6%
Bad debt expense -1,435 -1,621 -1,098 -722 -660 -551 -565 -681 -8.6% -16.5% 2.5% 20.5%
Cash earnings before tax 2,661 2,582 3,220 3,771 3,949 3,934 4,119 3,787 4.7% -0.4% 4.7% -8.1%
Tax expense -749 -720 -920 -1,040 -1,126 -1,096 -1,142 -1,152 8.3% -2.7% 4.2% 0.9%
Minority equity -4 2 -2 -4 -5 -4 -4 -2
Underlying cash earnings 1,908 1,864 2,298 2,727 2,818 2,834 2,973 2,633 3.3% 0.6% 4.9% -11.4%
Cash earnings (A$M) Growth rates
TABLE 8: SEGMENTAL PERFORMANCE
ANZ Divisional Performance
Cash earnings (A$M) % 2H12 total FY11 1H12 2H12 FY12
% FY11 -
FY12
% 1H12 -
2H12
Australia 43.0% 2,390 1,187 1,305 2,492 4.3% 9.9%
International & Institutional 37.4% 2,301 1,235 1,137 2,372 3.1% -7.9%
New Zealand 12.4% 662 365 378 743 12.2% 3.6%
Wealth & Private Banking 8.1% 457 206 245 451 -1.3% 18.9%
Group Centre -0.9% -158 -20 -27 -47 -70.3% 35.0%
Total 100.0% 5,652 2,973 3,038 6,011 6.4% 2.2%
“BANKING ON AUSTRALIA” PROGRAM
 ANZ has estimated its “Banking on Australia” program will result in a 36% reduction in its branch
property portfolio and will result in savings of 25% in property expenses “over time”.
 However, timing of expense benefit realisation is not specified.
 An unspoken upside is the potential for further staff reduction resulting from these initiatives.
 Our base case analysis assumes these initiatives will save ~$124m in FY15F.

10
FINANCIAL SUMMARY
Australia and New Zealand Banking
Group
ANZ
As at: 28/11/2012 Recommendation: Negative Share Price $23.81
Year end September 2012A 2013E 2014E 2015E
INCOME STATEMENT
Interest Income $m 30,538 28,262 31,214 35,238
Interest Expense $m (18,428) (15,928) (18,558) (22,201)
Net Interest Income $m 12,110 12,334 12,656 13,037
Non Interest Income
Fees & Commissions $m 2,412 2,490 2,540 2,589
Trading Income $m 280 121 121 121
Other Banking Income $m 1,256 1,401 1,506 1,616
Banking Non Interest Income $m 3,948 4,012 4,167 4,327
Wealth Management Income $m 1,203 1,477 2,366 1,800
Income/(Loss) from Associates $m 450 460 469 478
Total operating income $m 17,711 18,283 19,657 19,643
Operating Expenses
Personnel Expenses $m (4,765) (3,180) (3,247) (3,362)
Occupancy & Equipment $m (2,099) (2,466) (2,591) (2,702)
Total Operating Expenses $m (8,519) (7,431) (7,713) (8,020)
Pre Prov. Oper. Profit Before Tax $m 9,192 10,852 11,944 11,623
Bad debt charge $m (1,198) (2,133) (3,143) (2,254)
Pre Tax Profit $m 7,994 8,718 8,801 9,368
Tax Expense $m (2,327) (2,662) (2,688) (2,860)
Minorities $m (6) (7) (7) (7)
Reported Profit Statutory $m 5,661 6,050 6,107 6,501
Cash earnings adjustment $m 350 0 0 0
Reported Cash Profit $m 6,011 6,050 6,107 6,501
Preference Share Dividends $m (11) (8) (8) (8)
E&P Normalised NPAT $m 6,000 6,042 6,099 6,494
E&P Cash EPS ¢ 226.6 219.7 221.6 239.6
Basic Cash EPS ¢ 227.1 220.0 221.9 239.8
Reported EPS ¢ 213.4 219.7 221.6 239.5
Dividend per Share ¢ 145.0 145.0 144.7 158.5
BALANCE SHEET
Gross Loans & Other Receivables $m 432,560 454,353 478,399 503,173
Total Assets $m 642,127 633,581 657,865 683,104
Impaired Assets $m 5,196 5,679 5,980 6,133
Deposits & Other Pub. Borrowing $m 397,123 416,986 438,586 461,714
Bonds, notes & subordinat’d debt $m 63,098 63,098 63,098 63,098
Total Shareholder Equity $m 41,220 41,622 43,047 44,515
Avg housing loans $m 233,268 248,262 258,972 270,275
Avg non-housing loans $m 140,691 149,734 156,194 163,011
Avg total gross loans $m 373,960 397,996 415,166 433,286
Avg Interest Earning Assets $m 523,461 557,106 581,140 606,504
Avg Total Assets $m 627,270 667,587 696,388 726,781
Avg Interest Bearing Liabilities $m 483,594 509,053 531,035 554,699
Avg Total Liabilities $m 587,706 626,166 654,053 683,000
Avg Shareholders’ Equity $m 39,564 41,421 42,335 43,781
GROWTH RATES
Per Share
E&P Cash EPS % 3.1% (3.1)% 0.9% 8.1%
Basic Cash EPS % 3.1% (3.1)% 0.9% 8.1%
Dividend Per Share % 3.6% 0.0% (0.2)% 9.5%
Profit & Loss
Net Interest Income % 5.5% 1.8% 2.6% 3.0%
Banking Non Interest Income % (2.0)% 1.6% 3.9% 3.8%
Wealth Management Income % 22.9% 22.8% 60.2% (23.9)%
Total Non Interest Income % (2.0)% 1.6% 3.9% 3.8%
Total Operating Income % 4.6% 3.2% 7.5% (0.1)%
Operating Expenses % 6.2% (12.8)% 3.8% 4.0%
Pre-Provision Profit % 3.2% 18.1% 10.1% (2.7)%
Impairment Charges % (3.2)% 78.1% 47.3% (28.3)%
Cash Profit % 6.4% 0.6% 0.9% 6.4%
Balance Sheet
Gross Loans & Other Receivables % 7.4% 5.0% 5.3% 5.2%
Total Shareholders’ Equity % 8.6% 1.0% 3.4% 3.4%
Average Balance Sheet
Housing Loans % 11.3% 6.4% 4.3% 4.4%
Non-Housing Loans % 11.3% 6.4% 4.3% 4.4%
Avg Interest Earning Assets % 12.0% 6.4% 4.3% 4.4%
Avg Interest Bearing Liabilities % 10.4% 5.3% 4.3% 4.5%
VALUATION METRICS
E&P Cash P/E Multiple x 10.5 10.8 10.7 9.9
Basic P/E Multiple x 10.5 10.8 10.7 9.9
Price/Pre-prov. operating profit x 7.0 6.1 5.4 5.5
NTA per share $ 12.5 12.4 13.2 13.9
Book Value per Share $ 15.2 14.9 15.8 16.5
Price/NTA x 1.9 1.9 1.8 1.7
Price/Book x 1.6 1.6 1.5 1.4
Dividend Payout Ratio x 0.6 0.7 0.7 0.7
Dividend Yield % 6.1% 6.1% 6.1% 6.7%
Grossed Up Yield % 8.7% 8.7% 8.7% 9.5%
Issued Shares m 2,717.4 2,782.0 2,722.4 2,699.0
Weighted Average Shares m 2,887.6 2,874.7 2,877.2 2,835.7
PERFORMANCE ANALYSIS
Profitability
Income / Avg Assets % 2.8% 2.7% 2.8% 2.7%
Expense / Avg Assets % 0.4% 0.4% 0.4% 0.4%
Return on Average Assets % 1.0% 0.9% 0.9% 0.9%
Return on Ordinary Equity % 15.2% 14.6% 14.4% 14.8%
Return on Risk Weighted Assets % 2.0% 1.8% 1.7% 1.7%
Net Interest Margin Analysis
Net Interest Spread % 2.0% 1.9% 1.9% 1.8%
Net Interest Margin % 2.3% 2.2% 2.2% 2.1%
Non Int. Income to Total Income % 31.6% 32.5% 35.6% 33.6%
Efficiency
Cost/Income % 48.1% 40.6% 39.2% 40.8%
Tax Rate
Effective tax rate % 29.1% 30.5% 30.5% 30.5%
CAPITAL ADEQUACY
Risk Weighted Assets $m 300,119 336,221 354,016 372,348
Tier 1 Capital $m 32,501 33,622 35,402 37,235
Total Capital $m 36,574 40,347 42,482 44,681
Tier 1 Ratio % 10.8% 10.0% 10.0% 10.0%
Tier 2 Ratio % 1.4% 2.0% 2.0% 2.0%
Total Capital Ratio % 12.2% 12.0% 12.0% 12.0%
ACE Ratio % 9.6% 9.0% 9.0% 9.0%
Tangible Leverage Ratio % 5.3% 5.4% 5.5% 5.5%
ASSET QUALITY
90-day Past Due Loans $m 9,601 10,495 11,050 11,332
Non Performing Loans $m 1,773 1,704 2,272 2,201
NPL / Gross Loans and Other Rec % 0.4% 0.4% 0.5% 0.4%
Total Provisions $m 4,538 4,884 5,526 5,472
Total Prov. / Gr. Loans & Oth Rec % 1.0% 1.1% 1.2% 1.1%
Individual Provision $m 1,773 1,704 2,272 2,201
Individual Provision Cover % 34.1% 30.0% 38.0% 35.9%
Collective Provision $m 2,765 3,180 3,253 3,271
Collective Prov. / Perform. Loans % 0.6% 0.7% 0.7% 0.7%
Impairment Charges / Avg RWA % 0.4% 0.6% 0.9% 0.6%
Imp Assets / Gr. Loans & Oth Rec % 1.2% 1.3% 1.3% 1.2%
Impaired asset coverage % 34.1% 30.0% 38.0% 35.9%
Collective Provision / RWA % 0.9% 0.9% 0.9% 0.9%
BDD / Gr. loans and Oth Rec % 0.3% 0.5% 0.7% 0.4%
WEALTH MANAGEMENT
Funds Under Administration $m 51,667 51,270 53,803 56,483
Inforce Premiums $m 1,822 2,221 2,615 3,004
Funds Mgt Revenue Margin % 1.6% 1.6% 2.9% 1.6%
Life Insurance Revenue margin % 20.7% 29.7% 30.2% 30.5%
Shareholder Invest. Returns % 0.0% 0.0% 0.0% 0.0%

11
COMMONWEALTH BANK (CBA) - LOW GROWTH OUTLOOK
RECOMMENDATION : NEUTRAL
CBA’s FY12 result manifest some key sector-wide trends: (i)
subdued/negative revenue growth (CBA 2H12 revenue down
-1%); (ii) margin pressure (CBA 2H12 NIM down 6bp to
2.06%) to be partially mitigated in 1H13 by asset re-pricing;
(iii) sound asset quality (CBA’s troublesome/impaired assets
down from $10.9bn to $10.3bn) and (iv) strong cost control
(CBA 2H12 expenses flat), with ongoing cost reduction
expected as banks re-align to a lower credit growth outlook
(+4.4% annual system growth as at June 2012). We upgrade
our blended valuation +2.0% to $59.70 (prev. $58.53).
WHAT’s SURPRISED?
 2H12 payout ratio of 89% raises sustainability concerns. CBA
announced new 70-80% target payout ratio, with 70% interim payout.
 ROE declined from 19.2% (1H12) to 18.1% (2H12) driven by
underperforming Institutional Bank and Markets and higher liquid assets.
 Business and Private Banking (BPB) margin expansion from
2.04% to 2.14% (FY12).
WHAT’s CHANGED?
 FY13 EPS -1.3%; FY14 EPS -3.6% driven by longer-term impairment
expense decline.
WHAT NOW?
 Asset re-pricing to benefit 1H13 with full impact of May (+10bp) and
June (+4bp) out-of-cycle rate rises and potential re-pricing of business
portfolio to follow NAB‟s lead in this regard.
 Dividend sustainability will remain in focus. However, CBA can
opportunistically release its $847m economic overlay to support
earnings (A$123m released in 2H12).
 Vulnerable to PE de-rating if ROE continues to decline. CBA
currently trades at sector premium of x%. However, we believe a
more sustained earnings downturn is required before this would occur.
Trading Data
Last Price $56.05
12 month range $42.93 - $57.59
Market Cap $88,428m
Slowing growth in AIEA with credit growth
outlook remaining subdued.
NIM is expected to decline as (i) cheaper
pre-GFC debt is refinanced with more
expensive wholesale debt; (ii) funding
costs continue to rise but mitigated by full-
year impact of May and June’s out-of-cycle
rate rises.
Earnings Forecasts
Yr to June 09A 10A 11A 12E 13E 14E
E&P Cash EPS (¢) 332.5 395.8 439.7 450.4 457.3 474.6
Basic Cash EPS (¢) 336.5 399.5 442.4 453.1 460.0 477.2
Reported EPS (¢) 336.5 399.5 442.4 453.1 460.0 477.2
E&P Cash EPS Growth (%) (7.5) 19.1 11.1 2.4 1.5 3.8
DPS (¢) 228.0 290.0 320.0 334.0 344.0 357.0
Yield (%) 4.1 5.2 5.8 6.0 6.2 6.4
Grossed-Up Yield (%) 5.9 7.5 8.2 8.6 8.8 9.2
Franking (%) 100% 100% 100% 100% 100% 100%
Price/Book (x) 2.7 2.5 2.4 2.2 2.1 2.0
PEG Ratio (x) 0.5 1.0 3.2 2.3
ROE (%) 15.9 18.6 19.3 18.0 18.0 18.2
George Gabriel, CFA
November 28, 2012
+61 3 9631 9853

12
EXECUTIVE SUMMARY
CBA‟s FY12 result highlighted a number of sector-wide trends:
 Subdued/negative revenue growth in an environment of low single-digit credit growth
and weak markets-facing revenue;
 Margin pressure driven by extension of term duration of wholesale funding and deposit
competition;
 Sound asset quality;
 Strong cost control as the cost base is re-structured to align with a structurally low credit
growth outlook.
Banks face another 2-4 years of structural adjustment to their funding, capital and cost
positions to satisfy Basel 3 and adjust to the medium-term low credit growth outlook. At the
end of this structural adjustment process, banks will be leaner, less leveraged, and exhibit
improved credit quality (with greater focus on return over volume growth).
Consequently, we expect banks to trade as regulated utilities, providing low capital
growth but a steadily growing dividend stream.
FY12 RESULT SUMMARY
CBA‟s margin contraction was exacerbated by slight negative revenue growth. The key drivers
of CBA‟s underlying 2H12 cash earnings increase of -1.1% HoH were:
 -1.0% other operating income growth.
 -0.2% decline in decline in bad debt expenses.
 -0.6% net interest income growth, which highlights the effect of increased competition
and funding cost pressures starting to erode top-line growth.
 -0.1% decline in wealth management, with ongoing global markets weakness flagged
as being a significant challenge to market-facing segments.
 -0.6% revenue growth overall which is indicative of the revenue growth challenges
facing major banks.
 In a solid result, operating expenses declined 0.2% reflecting lower FTE and
productivity gains.
 NIM down 3bps to 2.09%.
TABLE 1: GROUP PERFORMANCE
Group Performance Cash earnings (A$M)
Cash earnings (A$M) % FY12 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 1H12 -
2H11
% 2H12 -
1H12
Net interest income 64.8% 4,543 5,052 6,062 5,806 6,170 6,488 6,551 6,513 6.3% 5.2% 1.0% -0.6%
Other operating income 19.9% 2,036 1,972 2,078 2,034 2,059 1,924 2,020 2,000 1.2% -6.6% 5.0% -1.0%
Funds Mgt, Insurance & Inv experience15.3% 1,254 1,202 1,552 1,527 1,510 1,508 1,534 1,532 -1.1% -0.1% 1.7% -0.1%
Net operating income 100.0% 7,833 8,226 9,692 9,367 9,739 9,920 10,105 10,045 4.0% 1.9% 1.9% -0.6%
Operating expenses -45.7% -3,551 -3,731 -4,268 -4,333 -4,408 -4,483 -4,602 -4,594 1.7% 1.7% 2.7% -0.2%
Pre-provision operating profit (PPOP)54.3% 4,282 4,495 5,424 5,034 5,331 5,437 5,503 5,451 5.9% 2.0% 1.2% -0.9%
Bad debt expense -5.4% -1,607 -1,328 -1,383 -692 -722 -558 -545 -544 4.3% -22.7% -2.3% -0.2%
Cash earnings before tax 48.9% 2,675 3,167 4,041 4,342 4,609 4,879 4,958 4,907 6.1% 5.9% 1.6% -1.0%
Tax expense* -27.8% -646 -864 -1,089 -1,177 -1,265 -1,372 -1,373 -1,363 -7.5% -8.5% -0.1% 0.7%
Cash earnings before minorities 35.3% 2,029 2,303 2,952 3,165 3,344 3,507 3,585 3,544 5.7% 4.9% 2.2% -1.1%
Minority equity -16 -14 -9 -7 -9 -7 -9 -7
Other 0 113 0 0 0 0 0 0
Underlying cash earnings 35.2% 2,013 2,402 2,943 3,158 3,335 3,500 3,576 3,537 5.6% 4.9% 2.2% -1.1%
Source: CBA Reports
Growth rates

13
Net Interest Margin (NIM)
We expect 2bp NIM decline in 1H13, with rising funding costs (deposit competition, term
duration expansion of wholesale debt) supported by (i) May and June 2012 asset re-pricing
impacting the full 1H13 period; (ii) recent evidence of diminishing asset price competition;;
and (iii) stable liquid assets outlook, having already increased by $40bn to $135bn over FY12.
Chart 1 summarises the movements in NIM from 2.12% in 1H12 to 2.06% in 2H12. Key
negative drivers were (i) increased funding costs; (ii) higher holdings of liquids assets.
CHART 1. GROUP NET INTEREST MARGIN (bps)
Source: CBA
Cost control
Unlike peers, CBA instead manage with natural attrition of approx. 1,200 FTE loss per annum,
and increased its investment expenditure to improve technology and processes.
It appears that this CBA is now beginning to capitalise on its investment spend as costs
declined in 2H12, with strong productivity gains noted in retail sales and business banking.
CBA is targeting flat to positive jaws (revenue less expense growth), though this half was
slightly negative.
o Jaws -0.4% for 2H12, despite operating expenses decreasing 0.2% over the half.
o Group cost to income ratio (CTI) increased slightly to 45.7% from 45.5% in 1H12.
o Cost-to-income ratio largely rose in all business segments except retail banking, CBA‟s
largest cost base, where CTI declined 24bps. Wealth management saw the worst cost
management as the CTI ratio increased 692bps due to organic offshore growth in CFSGAM
and the acquisition of Count Financial.
Asset Quality
Impairment
Asset quality metrics are improving.
o Provisioning continues to normalise as Bankwest individual and collective provisions
continued to run-off and management overlays declined.

14
o Gross impaired assets/gross loans ratio declined from0.83%, well below peers.
o 30+ day home loan arrears declined to 1.69% over the year and 90+ day home
loan arrears fell to 0.88%, down from 1.03% over the year.
o Impairment expenses was slightly lower over the half, representing 20bps of
average gross loans and acceptances (annualised), down from 21bps in 1H12.
o CBA‟s economic overlay of in collective provisioning declined to $847m from $970m
in 2H12, as CBA continues to runoff higher risk Bankwest loans and amortise BWA
fair value provisioning. The economic overlay remains unchanged, providing
potential for a future earnings buffers or provision release.
o CBA noted that impaired loans includes „hardship‟ loans where repayments have
been suspended or altered otherwise.
Return on Equity (ROE)
Declining ROE, if sustained, is likely to lead to de-rating of CBA‟s peer-relative PE premium.
Capital
CBA‟s capital position strengthened during the FY, somewhat explaining the decline in ROE as
CBA added 9% of capital during the year. CBA set an internal target to achieve a Basel III
Internationally Harmonised common equity tier 1 (CET1) target > 9% from Jan 2013. At FY12
CBA has a Basel III CET1 of 9.8%.
o Organic capital generation was relatively low, with Basel 2 core Tier 1 ratio
increasing to 7.82%, given loan growth was concentrated in higher risk weighted
business lending.
o Basel 3 common equity Tier 1 of 9.08% in Dec 2011, up from 7.1% in 1H12,
comfortably exceeding the minimum of 7.5% required by APRA. CBA now compares
well to peers. Chart #
CHART 3. BASEL 3 CAPITAL REQUIREMENTS

15
Source: EAP
Note: Minimum 4.5% Core Tier 1 (comprising common equity and retained profits) target implemented by APRA on 1 Jan 2013
(vs Basel committee phase in by 1 Jan 2015). Capital conservation buffer of 2.5% implemented by APRA on 1 Jan 2016 (vs
Basel Committee phased in by 1 Jan 2019).
Source: CBA; Morgan Stanley
Funding costs

16
Funding costs pressured margins as deposit competition intensified and older pre-GFC
wholesale funding rolled-off and was replaced with more expensive wholesale funding.
o Wholesale funding costs have been steadily increasing since the GFC. Chart 5.
o Whilst credit growth has been subdued, CBA has been able to satisfy the bulk of its
funding requirement from domestic deposits.
o Deposits growth is mitigating exposure to wholesale funding, with strong growth in
retail and business deposits maintaining deposits‟ share of 62% of total funding.
Chart 4.
We have forecast for a further ~2bp decline in NIM for 1H13. We have forecast CBA to capture
a full period of benefits from repricing of its lending portfolios from out-of-cycle rate rises in
May 2012 and June 2012 and for this to increase NIM by 9.6bps. However, we believe that
near-term funding pressures continue, with pricing competition in deposits and term deposits
intensifying and long-term wholesale funding continuing to creep up.
CHART 4. FUNDING COMPOSITION CHART 5. INDICATIVE WHOLESALE FUNDING COSTS
Source: CBA Source: CBA
Capital Management
CBA announced its total FY12 dividend to be $3.34, up 4% pcp, whilst also flagging a number
of changes to its dividend policy:
 Board will target FY payout ratio of 70-80% on a cash basis (75% in FY12).
 Payout ratio for interim dividends will be increased to approximately 70% of interim
profits to smooth dividend distribution over the FY.
 The DRP will continue but no discount will be applied. The CEO noted that it could move
to buyback DRP shares in the future so as to remove any impact from dilution and also
stated that there is a future point where there will be no need for further capital and the
DRP may be scrapped entirely.
Shares will trade ex-dividend on the 20 August 2012.

17
SEGMENT PERFORMANCE
TABLE #: DIVISIONAL PERFORMANCE
CBA Divisional Performance
Cash earnings (A$M)
% FY12
total 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H11 - 2H10
2H10 -
1H10
1H12 -
2H11
% 2H12 -
1H12
Retail Banking Services 42.3% 1119 988 1,237 1,207 1,383 1,453 1,439 1495 14.6% 5.1% -1.0% 3.9%
Business & Private Banking 14.6% 205 531 440 453 506 532 551 516 11.7% 5.1% 3.6% -6.4%
Institutional Banking & Markets 14.5% 553 646 512 506 547 513 -20.7% -1.2% 8.1% -6.2%
Wealth Management 8.4% 175 111 379 339 359 283 272 297 5.9% -21.2% -3.9% 9.2%
New Zealand 6.6% 161 227 234 236 258 232 3.1% 0.9% 9.3% -10.1%
Bankwest 7.2% 15 -60 224 239 268 256 n/a 6.7% 12.1% -4.5%
Other 6.4% 514 722 158 346 117 251 241 228 -66.2% 114.5% -4.0% -5.4%
Totals 100.0% 2,013 2,402 2,943 3,158 3,335 3,500 3,576 3,537 5.6% 4.9% 2.2% -1.1%
Source: CBA Reports
Cash earnings (A$M) Growth Rates
Retail Banking Services (RBS) (42.3% of 2H12 earnings)
5bp net interest margin (NIM) decline did not surprise, but recent out-of-cycle rate rises lated
in 2H12 is expected to boost margins early in 1H13.
o Cash net profit after tax (NPAT) up 3.9% hoh, driven by strong volume growth in
consumer finance offsetting net interest margin contraction of 5bps since December
1H12 result (from 2.30% to 2.25%). Chart 4.
o Asset quality remains strong, a reduction in impairment expense by ~30% driving
earnings and 30+ days and 90+ days arrears falling across all businesses as trends
normalised after natural disasters and collections effectiveness improved. CBA noted
that contrary to recent press suggestions hardship cases were factored into arrears.
Chart 5.
o Cost-to-income (CTI) target remains 35%, with the CTI ratio improving in 2H12 to
38.0% from 38.3%.
CHART 4. RBS NET INTERST MARGIN (bps)
Source: CBA

18
CHART 5. HOME LOAN ARREARS (%)
Source: CBA
Business & Private Bank (BPB) 15.4% of 1H12 earnings.
Cost reductions and productivity gains failed to offset declining business banking income
declining equities and margin lending income.
o Cash NPAT +3.6% hoh to $551m.
o Segment income growth driven by: Banking income down 2% as effective margin
management didn‟t mitigate lower sales of risk management products.
o Equities and margin lending income decreased 9%, reflecting the decline in equities
trading volumes and poor investor sentiment.
o CTI +100bps to 43.9% hoh.
Institutional Banking & Markets 14.5% of Group 2H12 earnings
CBA again flagged cyclical headwinds against their key markets-facing business.
o Cash NPAT -6.2% to $513m for 2H12.
o Loan impairment expense increased 264% hoh, reflecting not only the low base in
1H12 but an increase in individually assessed provisions.
o Income was also hit by unfavourable counterparty fair value adjustments due to
widening credit spreads and falling interest rates, but also largely reversing the
favourable fair value adjustment in the prior FY.
o CTI -50bps to 36.0%.
Wealth Management 8.4% of Group 2H12 earnings
Performance was mixed as cash profit declined 11% YoY, but 2H12 showed a strong
improvement HoH, increasing 9.2% as revenue increased 25% despite significant pressure on
investment markets. FUA increased despite poor sentiment, with strong investor flows
weighted towards less volatile asset classes.
o Cash NPAT +9.2% to $297m.
o Average FUA up 3% to $192.3bn.
o CTI +690bps in 2H12.
Bankwest 7.2% of 1H12 cash earnings

19
Cash NPAT declined as repricing initiatives lagged increases in wholesale funding costs.
o Cash NPAT -4% to $256m
o Business loan balances declined due to pressure from funding costs.
o CTI +140bps in 2H12 to 51.9% as funding pressures eroded a decline in operating
expenses due to lower IT expenses and cost management.
New Zealand 6.6% of Group earnings.
Profit decline driven by: (i) margin decrease as loan portfolio shift to higher margin variable
rate loans abated; (ii) operating expenses climbed due to increased renewal commission
expenses; and (ii) loan impairment expense increased as lending portfolios stabilised in the
second half after benefiting from improvement in the rural portfolio in 1H12.
o CBA‟s smallest segment
o Cash NPAT -10% to NZ$302m.
o CTI +145bps to 51.6%.

20
FINANCIAL SUMMARY
Commonwealth Bank of Australia CBA
As at: 28/11/2012 Recommendation: Neutral Share Price $59.22
Year end June 2012A 2013E 2014E 2015E
INCOME STATEMENT
Non Interest Income
Other Banking Income $m 0 0 0 0
Operating Expenses
Bad debt charge $m (1,089) (1,110) (1,000) (1,042)
Pre Tax Profit $m 9,964 10,113 10,587 10,978
Tax Expense $m (2,858) (2,832) (2,964) (3,074)
Minorities $m (16) (16) (17) (18)
E&P Cash EPS ¢ 450.4 458.5 475.2 492.4
Basic Cash EPS ¢ 453.1 461.2 477.8 494.9
Reported EPS ¢ 453.1 461.2 477.8 494.9
BALANCE SHEET
Total Assets $m 718,229 744,671 775,027 806,821
GROWTH RATES
Per Share
E&P Cash EPS % 2.4% 1.8% 3.6% 3.6%
Basic Cash EPS % 2.4% 1.8% 3.6% 3.6%
Dividend Per Share % 4.4% 3.3% 3.5% 3.9%
Profit & Loss
Banking Non Interest Income % 18.4% (10.2)% (3.4)% 1.3%
Wealth Management Income % (5.0)% 37.1% 6.1% 0.0%
Total Non Interest Income % 18.4% (10.2)% (3.4)% 1.3%
Total Operating Income % 5.1% 1.3% 2.3% 3.1%
Operating Expenses % 3.0% 1.1% 1.1% 2.4%
Pre-Provision Profit % 6.9% 1.5% 3.2% 3.7%
Impairment Charges % (14.9)% 1.9% (9.9)% 4.2%
Cash Profit % 4.1% 2.5% 4.7% 3.7%
Balance Sheet
Total Shareholders’ Equity % 11.5% 4.3% 4.3% 4.2%
Housing Loans % 4.0% 4.6% 4.9% 5.1%
Non-Housing Loans % 53.9% (31.9)% 1.8% 1.8%
Year end June 2012A 2013E 2014E 2015E
VALUATION METRICS
NTA per share $ 19.3 20.2 21.0 21.9
Price/NTA x 3.1 2.9 2.8 2.7
Price/Book x 2.3 2.2 2.1 2.0
Dividend Yield % 5.6% 5.8% 6.0% 6.3%
Grossed Up Yield % 8.1% 8.3% 8.6% 8.9%
Issued Shares m 1,592.0 1,593.1 1,599.8 1,596.4
Profitability
Efficiency
Cost/Income % 45.8% 45.7% 45.1% 44.8%
Tax Rate
CAPITAL ADEQUACY
Tier 1 Capital $m 30,299 32,021 33,341 34,724
Total Capital $m 33,238 40,026 41,676 43,405
Tier 1 Ratio % 10.0% 10.0% 10.0% 10.0%
Tier 2 Ratio % 1.0% 2.5% 2.5% 2.5%
ACE Ratio % 7.8% 8.0% 8.2% 8.4%
ASSET QUALITY
WEALTH MANAGEMENT

21
NAB - UK BANK CONCEALS AUSTRALIAN BANKING’S HIDDEN VALUE
RECOMMENDATION : NEUTRAL (WAS POSITIVE)
Downgrade to Neutral (was Positive), blended valuation $27.07 (was
$27.83).
WHAT’s NEW?
 The UK has experienced a “double dip” earnings recovery, with a good
turnaround coming into 2H11 (up +25.8% in 1H11 and up +36.1% in 2H11),
followed by a downturn coming in the last two halves. Chart 3.
 NAB’s Australian Banking segment is outperforming peers, with earnings
up +10.5% in 1H12 and up +2.2% in 2H12 (vs CBA 2.1% and 0%). Table 3.
 Business Banking loses it growth momentum, up +7.6% in 1H11 and up
+7.0% in 2H11, then flat in 1H12 and now down -9.4% in 2H12.
 Personal Banking price discounting (then re-pricing) strategy is working.
 Strong cost performance, with 2H12 operating expense down -1.9%,
contrasting sharply with ANZ‟s +6.1% 2H12 cost growth. Table 5.
WHAT CHANGED?
 FY13F EPS down 8%, FY14F EPS down 10%
WHAT NOW?
 Positive sector read-through for Australian Banking franchises,
particularly for CBA and WBC, given their domestic focus: (i) Australian banking
earnings are still growing; and (ii) asset quality leading indicators are benign.
NAB‟s Australian banking operations are performing well and asset quality outlook
remains benign.
 Personal Banking re-pricing to continue. CEO would not commit to NAB
retaining the lowest standard variable mortgage rate. Table 6.
 Business Banking turnaround deferred. Despite an increase in system
business credit of +3.8%, average interest earning assets only increased
+2.9% through FY12.
 When NAB eventually exits the UK (refer EAP Note, “NAB’s Battle of Britain:
Beginning of the End for UK Exit”, 1 May 2012”), we estimate NAB will trade at
$28.32, based on a PE-valuations of CBA and WBC and that NAB’s
Australian Banking performance metrics are comparable.
 In the medium-term, we expect the underlying value of NAB‟s Australian
franchise to come through. In the short-term, the risk of further asset quality
declines in the UK remains, which may cap near-term upside.
Trading Data
Last Price $25.79
12 month range $21.82 - $26.95
Market Cap $59,246m
Asset growth supported by NAB’s lower
product pricing relative to peers.
Funding costs have continued to pressure
margins.
Earnings Forecasts
Yr to September 09A 10A 11A 12A 13E 14E
E&P Cash EPS (¢) 190.1 219.4 255.6 251.9 237.9 247.0
Basic Cash EPS (¢) 204.7 221.2 257.3 253.6 239.5 248.6
Reported EPS (¢) 123.4 202.1 244.2 190.2 235.7 245.8
E&P Cash EPS Growth (%) (15.2) 15.4 16.5 (1.4) (5.6) 3.8
DPS (¢) 146.0 152.0 172.0 180.0 179.6 179.6
Yield (%) 5.7 5.9 6.7 7.0 7.0 7.0
Grossed-Up Yield (%) 8.1 8.4 9.5 10.0 10.0 9.9
Franking (%) 100% 100% 100% 100% 100% 100%
Price/Book (x) 1.4 1.4 1.3 1.3 1.4 1.4
PEG Ratio (x) 0.4 0.8 (1.5) (5.2)
ROE (%) 9.8 11.8 13.4 13.0 13.0 13.3
George Gabriel, CFA
November 28, 2012
+61 3 9631 9853

22
DISCOVERING HIDDEN VALUE - WHAT IS NAB WORTH WITHOUT UK BANKING?
We conclude that the equity market is attributing a negative value of -$4.3bn to NAB‟s UK Banking franchise. When
NAB eventually exits the UK (its exit plan was analysed in EAP Note, “NAB’s Battle of Britain: Beginning of the End
for UK Exit”, dated 1 May 2012), we would expect this discount to unwind, resulting in a $28.32 PE-based valuation
of NAB. Table 1. We believe NAB Australian Banking warrants a 11.5x PE multiple, the average of WBC and CBA,
given NAB Australian Banking‟s profitability is on par with WBC and CBA. Table 2.
Furthermore, we believe that NAB UK does have some intrinsic value. Assuming its value is in line with the
depressed UK bank sector trading multiples of 0.2-0.4x price/book, this implies a value range of ~$659m to
~$989m, implying a normalised PE multiple of 6.6x - 9.9x.
In the medium-term, we expect the underlying value of NAB’s Australian franchise to come through.
However, in the short-term, the risk of further asset quality declines in the UK remains, which may cap
near-term upside.
TABLE 1: NAB AUSTRALIAN BANKING STAND-ALONE VALUATION
NAB Australian and New Zealand Banking valuation FY12A
Business Banking 2,409
Personal Banking 1,045
Wholesale Banking 1,092
MLC & NAB Wealth 518
Subtotal Australian Banking 5,064
NZ Banking 575
Australian and NZ Banking 5,639
less: normalised Corporate Functions -114
FY12 Normalised Cash Earnings 5,525
PE - average CBA and WBC 11.5x
Implied Equity Market Value 63,538
Implied equity value per share of NAB Australia $28.32
Current market value attributed to UK Banking -4,292
% upside excluding UK Banking 7.2%
Source: EAP
TABLE 2: NAB AUSTRALIAN BANK STAND-ALONE VS AUSTRALIAN BANK PEERS
CBA WBC
NAB Australian
Banking
Reported cash NPAT (A$M) 7113 6390 5,525
RWA (A$M) 302,787 300,046 258,331
RoRWA 2.35% 2.13% 2.14%
NIM 2.09% 2.17% 2.03%
AIEA growth (% LTM) 5.40% 5.99% 9.63%
Source: EAP

23
SECTOR IMPLICATIONS
There are two key sector implications of the NAB result: (i) Australian Banking segments are performing well; and
(ii) stable Australian asset quality leading indicators.
 Australian Banking is actually performing well
Australian earnings comprise 93% of CBA‟s total FY12 cash earnings and 89% of NAB‟s total cash earnings. Our
analysis indicates NAB’s Australian Banking segment is outperforming. The UK remains the key drag.
 NAB‟s Australian Banking earnings were up +10.5% in 1H12 and up +2.2% in 2H12. Table 3.
 CBA Australia‟s cash earnings in Australia were up +2.1% in 1H12 and were flat in 2H12. Table 4.
NAB’s positive momentum in Australian Banking implies a positive read-through for domestically
focused banks such as WBC and CBA.
TABLE 3: NAB CASH EARNINGS TRENDS
Divisional Performance
Cash earnings (A$M) % FY12 total 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 2H11 -
1H12
% 1H12 -
2H12
Business Banking 44.0% 823 776 1,095 1,098 1,181 1,264 1,264 1,145 7.6% 7.0% 0.0% -9.4%
Personal Banking 22.3% 408 467 317 426 432 500 464 581 1.4% 15.7% -7.2% 25.2%
Wholesale Banking 22.0% 613 535 403 302 393 268 518 574 30.1% -31.8% 93.3% 10.8%
MLC & NAB Wealth 9.9% 178 259 263 285 269 234 259 259 -5.6% -13.0% 10.7% 0.0%
Subtotal Australian Banking 2,022 2,037 2,078 2,111 2,275 2,266 2,505 2,559 7.8% -0.4% 10.5% 2.2%
NZ Banking 10.7% 233 189 202 214 215 254 297 278 0.5% 18.1% 16.9% -6.4%
UK Banking -6.8% 110 52 107 97 122 166 -36 -177 25.8% 36.1% -121.7% -391.7%
Specialised Group Assets -0.2% -258 -319 -217 -45 77 33 -3 -6 271.1% -57.1% -109.1% -100.0%
Great Western Bank 1.9% 40 33 33 41 47 41 48 50 14.6% -12.8% 17.1% 4.2%
Subtotal International Businesses 125 -45 125 307 461 494 306 145 50.2% 7.2% -38.1% -52.6%
Corporate Functions -0.2% 24 -77 58 56 17 142 92 -5 -69.6% 735.3% -35.2% -105.4%
Other -3.6% -144 -101 -68 -86 -85 -110 -75 -94 1.2% -29.4% 31.8% -25.3%
Subtotal Other -120 -178 -10 -30 -68 32 17 -99 -126.7% 147.1% -46.9% -682.4%
Totals 100.0% 2,027 1,814 2,193 2,388 2,668 2,792 2,828 2,605 11.7% 4.6% 1.3% -7.9%
Source: EAP, company reports
TABLE 4: CBA CASH EARNINGS TRENDS
CBA Divisional Performance
Cash earnings (A$M)
% FY12
total 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 1H12 -
2H11
% 2H12 -
1H12
Retail Banking Services 42.3% 1119 988 1,237 1,207 1,383 1,453 1,439 1495 14.6% 5.1% -1.0% 3.9%
Business & Private Banking 14.6% 205 531 440 453 506 532 551 516 11.7% 5.1% 3.6% -6.4%
Institutional Banking & Markets 14.5% 553 646 512 506 547 513 -20.7% -1.2% 8.1% -6.2%
Wealth Management 8.4% 175 111 379 339 359 283 272 297 5.9% -21.2% -3.9% 9.2%
Bankwest 7.2% 15 -60 224 239 268 256 n/a 6.7% 12.1% -4.5%
Subtotal Australia 1,499 1,630 2,624 2,585 2,984 3,013 3,077 3,077 15.4% 1.0% 2.1% 0.0%
New Zealand 6.6% 161 227 234 236 258 232 3.1% 0.9% 9.3% -10.1%
Other 6.4% 514 772 158 346 117 251 241 228 -66.2% 114.5% -4.0% -5.4%
Totals 100.0% 2,013 2,402 2,943 3,158 3,335 3,500 3,576 3,537 5.6% 4.9% 2.2% -1.1%
Source: CBAReports
Cash earnings (A$M) Growth Rates
Source: EAP, company reports
 Leading indicators of Australian asset quality are benign.
NAB’s 90 days past due and impaired assets/total gross loans in Australia have actually declined from
1.5% in 1H12 to 1.43%. However, including the UK, the leading indicators have turned negative, reversing a
trend decline from 1.92% in 1H11 to 1.77% to 1.73% then back up to 1.78% in 2H12.

24
CHART 1: ASSET QUALITY
Source: EAP
CHART 2: ASSET QUALITY
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
1H10 2H10 1H11 2H11 1H12 2H12
(Grossimpaired+90dpd)/Gross
Loans
NAB CBA WBC
Source: EAP. Note 2H12 for WBC is a forecast.

25
FY12 RESULTS ANALYSIS
Our Positive recommendation on NAB has been based on:
(i) NAB providing the sector‟s greatest leverage to a turnaround in Business Banking loan volumes, given NAB has
a sector leading 24% corporate loan market share, generating 44% of FY12 earnings.
(ii) The eventual exit from UK to help unwind NAB‟s valuation discount. Refer EAP Note, “NAB’s Battle of Britain:
Beginning of the End for UK Exit”, dated 1 May 2012.
(iii) Free option within NAB‟s Personal Banking segment to re-price its standard variable mortgage rates and
increase margins.
In this result, Personal Banking outperformed, but both Business Banking and UK Banking
disappointed. They key 2H12 result drivers were that strong performances in Personal Banking (up +$117m) and
Wholesale Banking (+$56m) were offset by declines in Business Banking (down -$114m) and UK Banking (down -
$141m).
 Australian Banking is actually performing well, up +2.2% in 2H12 and up +10.5% in 1H12.
Furthermore, it has the potential to outperform as Business Banking volumes increase and MLC & NAB Wealth
experiences cyclical growth. Table 5.
 The UK has experienced a “double dip” earnings recovery, with a good turnaround coming into 2H11 (up
+25.8% in 1H11 and up +36.1% in 2H11), followed by a downturn coming in the last two halves. Chart 3.
 Business Banking has also lost its growth momentum, up +7.6% in 1H11 and up +7.0% in 2H11, then
flat in 1H12 and now down -9.4% in 2H12.
 Wholesale Banking increased +10.8% through higher sales of FX and risk management products to
customers and through development of its debt capital raising and distribution capability.
 Strong cost performance, with 2H12 operating expense down -1.9%. Table 5.
 Strong growth in other operating income, up +8.0% in 2H12, driven by a substantial increase in sales of
risk management products to customers.
TABLE 5: CASH EARNINGS TRENDS
Group Performance
Cash earnings (A$M)
% 2H12
total 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 2H11 -
1H12
% 1H12 -
2H12
Net interest income 252.9% 5,884 6,188 6,114 6,174 6,304 6,788 6,708 6,589 2.1% 7.7% -1.2% -1.8%
Other operating income 68.0% 2,091 1,675 1,375 1,463 1,725 1,291 1,640 1,772 17.9% -25.2% 27.0% 8.0%
MLC net operating income 29.0% 539 529 748 764 770 716 760 755 0.8% -7.0% 6.1% -0.7%
Net operating income 349.9% 8,514 8,392 8,237 8,401 8,799 8,795 9,108 9,116 4.7% 0.0% 3.6% 0.1%
Operating expenses -148.8% -3,770 -3,810 -3,861 -4,001 -3,991 -3,983 -3,952 -3,876 0.2% -0.2% -0.8% -1.9%
PPOP 201.2% 4,744 4,582 4,376 4,400 4,808 4,812 5,156 5,240 9.3% 0.1% 7.1% 1.6%
Bad debt expense -57.0% -1,811 -2,004 -1,230 -1,033 -988 -834 -1,131 -1,484 4.4% -15.6% 35.6% 31.2%
Cash earnings before tax 144.2% 2,933 2,578 3,146 3,367 3,820 3,978 4,025 3,756 13.5% 4.1% 1.2% -6.7%
Tax expense -40.6% -725 -726 -884 -893 -1,066 -1,076 -1,121 -1,057 -19.4% -0.9% -4.2% 5.7%
Cash earnings pre-minorities 103.6% 2,208 1,852 2,262 2,474 2,754 2,902 2,904 2,699
Minority equity 0.0% -11 11 -1 0 -1 0 -1 0
Other -3.6% -170 -49 -68 -86 -85 -110 -75 -94 1.2% -29.4% 31.8% -25.3%
Underlying cash earnings 2,027 1,814 2,193 2,388 2,668 2,792 2,828 2,605 11.7% 4.6% 1.3% -7.9%
Source: Company Reports; EAP
PERSONAL BANKING
 NAB’s Personal Banking strategy has worked, with Personal Bank net interest margin up 2bp to 2.04% (an
upside surprise in a tough competitive environment), whilst volumes were also up +4.1% in 2H12, and cash
earnings up +25.2%.
 NAB has gained share through its price discounting strategy, and is slowly unwinding its price discounts to
increase earnings. Table 6.
 Note that NAB remains the sector‟s cheapest on SVR mortgages, and has an embedded option to re-price its
home loan back book to continue earnings growth in Personal Banking.
 The CEO has declined to commit to retaining the lowest standard variable mortgage rate: “We haven’t decided,
but we will decide before New Year’s Eve”. NAB‟s out-of-cycle rate rises are driving Personal Banking earnings
growth and we expect this to continue as an incremental upside.

26
TABLE 6: OUT-OF-CYCLE RATE RISES
Standard Variable Mortgage Rates ANZ CBA NAB WBC BEN BOQ Average
Out-of-cycle rate rises
11/2011 (RBA 25bp cut) - - 0.05% - - - 0.05%
12/2011 (RBA 25bp cut) - - - - - - -
02/2012 0.06% 0.10% 0.09% 0.10% 0.15% - 0.10%
03/2012 - - - - - 0.10% 0.10%
04/2012 0.06% - - - - - 0.06%
1/05/2012 (RBA 50 bp cut) 0.13% 0.10% 0.18% 0.13% 0.15% 0.15% 0.14%
1/06/2012 (RBA 25bp cut) - 0.04% 0.04% 0.05% 0.05% 0.05% 0.05%
1/10/2012 (RBA 25bp cut) 0.05% 0.05% 0.05% 0.07% 0.06% 0.05% 0.06%
Total re-pricing 0.30% 0.29% 0.41% 0.35% 0.41% 0.35% 0.35%
Current SVR 6.60% 6.60% 6.58% 6.71% 6.71% 6.71% 6.65%
Source: EAP
UK BANKING
 UK exit – Battle of Britain – correct strategy not to fire-sell UK assets, and run them off over time.
 UK cash earnings have experienced a “double dip” in cash earnings, with large increases in 1H11
+35.1%, +37.7% in 2H11 to negative in 1H12 and 2H12 on increased bad debt expenses. Chart 3. Tables 3-5.
 Also, despite NAB’s planned exit from the UK, the outlook for its remaining assets is disappointing,
with 90 days past due and gross impaired/total loans increased from 1H12 3.68% to 4.76%.
CHART 3: UK CASH EARNINGS “DOUBLE DIP”
BUSINESS BANKING
 Business Banking has disappointed on lower margin outcomes (tougher competition and funding
markets), with cash earnings down -9.4%. Given Business Bank comprises ~45% of total revenue, its
disappointment has more than offset upside in Personal Bank (16% total revenue). Table 3.
 Despite strong performances in both Personal Banking (up 25.2% in 2H12; 16.4% total revenue)
and Wholesale Banking (up +10.8% in 2H12, 18.3% total revenue), the key disappointment is
Business Banking (down -9.4% in 2H12).
 Despite a volume increase, Business Banking margins have been hurt by competition, with the margin
result surprising on the downside.
 Cash earnings in Business Bank down -9.4% in 2H12, driven by declining Net Interest Margin (NIM) of 6bp in
2H12, even though loan assets increased +1% in 2H12.

27
TABLE 7: BUSINESS BANKING CASH EARNINGS TRENDS
Business Banking Key Metrics
Business banking 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 2H11 -
1H12
% 1H12 -
2H12
Net operating income (A$M) 2538 2684 2782 2837 2938 3101 3047 3015 3.6% 5.5% -1.7% -1.1%
Expenses (A$M) -809 -836 -843 -871 -879 -885 -875 -866 -0.9% -0.7% 1.1% 1.0%
Bad debt expense (A$M) -559 -757 -381 -410 -385 -417 -372 -521 6.1% -8.3% 10.8% -40.1%
Cash earnings (A$M) 823 776 1095 1098 1181 1264 1264 1145 7.6% 7.0% 0.0% -9.4%
Average Interest Earning Assets (A$M) 184 183 185 188 191 194 198 200 1.5% 1.8% 1.9% 1.0%
RWA (A$M) 137 136 139 145 148 141 141 141 1.9% -4.2% -0.6% 0.4%
Net interest margin (%) 2.24% 2.45% 2.51% 2.50% 2.57% 2.66% 2.56% 2.50% 0.07% 0.09% -0.10% -0.06%
Jaws 2.4% 2.8% -1.3% 2.6% 4.9% -0.6% 0.0%
Cost to income ratio 31.9% 31.1% 30.3% 30.7% 29.9% 28.5% 28.7% 28.7% -2.6% -4.6% 0.6% 0.0%
Cash earning on AIEA (%) 0.89% 0.85% 1.19% 1.17% 1.24% 1.30% 1.28% 1.15% 0.07% 0.06% -0.02% -0.13%
Source: Company Reports; EAP
Growth rates

28
FINANCIAL SUMMARY
National Australia Bank NAB
As at: 28/11/2012 Recommendation: Neutral Share Price $23.83
INCOME STATEMENT
Non Interest Income
Operating Expenses
Occupancy & Equipment $m (609) (663) (676) (697)
Bad debt charge $m (2,615) (2,119) (2,257) (2,364)
Pre Tax Profit $m 6,278 7,939 8,295 9,183
Tax Expense $m (2,077) (2,397) (2,497) (2,752)
Minorities $m 0 0 0 0
Cash earnings adjustment $m 1,313 12 (11) (49)
E&P Cash EPS ¢ 251.9 237.9 247.0 274.4
Basic Cash EPS ¢ 253.6 239.5 248.6 276.1
Reported EPS ¢ 190.2 235.7 245.8 274.9
BALANCE SHEET
Total Assets $m 773,399 804,066 839,480 876,096
GROWTH RATES
Per Share
E&P Cash EPS % (1.4)% (5.6)% 3.8% 11.1%
Basic Cash EPS % (1.4)% (5.6)% 3.8% 11.1%
Dividend Per Share % 4.7% (0.2)% 0.0% 1.8%
Profit & Loss
Banking Non Interest Income % 12.9% 9.1% 5.9% 2.5%
Wealth Management Income % 2.0% 36.4% (11.0)% 8.0%
Total Non Interest Income % 12.9% 9.1% 5.9% 2.5%
Impairment Charges % 49.4% (19.0)% 6.5% 4.7%
Cash Profit % 1.7% 0.7% 4.2% 10.2%
Balance Sheet
Total Shareholders’ Equity % 1.8% (1.1)% 5.1% 5.1%
Housing Loans % 8.9% 6.8% 6.2% 6.1%
VALUATION METRICS
NTA per share $ 16.1 14.7 15.4 16.3
Price/NTA x 1.5 1.6 1.5 1.5
Price/Book x 1.2 1.3 1.3 1.2
Dividend Yield % 7.6% 7.5% 7.5% 7.7%
Grossed Up Yield % 10.8% 10.8% 10.8% 11.0%
Issued Shares m 2,188.9 2,334.9 2,343.4 2,325.5
Profitability
Efficiency
Cost/Income % 49.8% 46.7% 45.7% 43.8%
Tax Rate
CAPITAL ADEQUACY
Tier 1 Capital $m 35,000 34,962 36,910 38,921
Total Capital $m 39,636 40,429 42,681 45,007
Tier 1 Ratio % 10.6% 10.0% 10.0% 10.0%
Tier 2 Ratio % 1.4% 1.6% 1.6% 1.6%
ACE Ratio % 8.6% 8.1% 8.2% 8.3%
ASSET QUALITY
WEALTH MANAGEMENT

29
WESTPAC (WBC) - BREAD AND BUTTER BANKING DELIVERS THE
DOUGH
RECOMMENDATION : POSITIVE
WHAT’s NEW?
Focus on banking basics has driven the banking sector’s leading 2H12 result.
 Net operating income showing good momentum in 2 halves, up 3.1% 1H12
and 3.4% 2H12, driven by strong momentum in BT Financial Group, up
+10.2% in 1H12 and 7.0% in 2H12.
 Focus on profitable business drove 2H12 net interest margin (NIM)
outperformance (up 1bp to 2.18% 2H12), defying sector-wide NIM decline trends.
 Deposit market share gains supports customer cross-sell and strong
balance sheet.
 Sector-leading efficiency and profitability metrics. Charts 2-4.
WHAT’s CHANGED?
 FY13F EPS +4%, FY14F EPS +6%.
 Retain Positive view, blended valuation +7.2% to $26.84 (prev. $25.03)
WHAT NOW?
 Sector preferences: 1. WBC - Positive (upgrade from #2), $26.84 val; 2. NAB –
Neutral (downgrade from #1), $27.07 val; 3. CBA –Neutral, $56.94; 4. ANZ –
Negative, $23.54
 Out-of-cycle rate rises and cost reduction to continue supporting Australian
Banking earnings.
 WBC’s sector-leading franking account balance ($1,029m; CBA $390m) and
common equity Tier 1 ratio (Chart 6) provide medium-term flexibility for a
special fully-franked dividend up to 78cps. We expect WBC will wait for
further clarity on bad debt outlook and potentially extra capital charges for
domestic systemically important banks.
SECTOR IMPLICATIONS
 WBC’s relatively strong result is positive for CBA given its asset and
business mix most closely resemble WBC.
 Higher payout ratios and subdued revenue growth highlight the sector’s
vulnerability to external shocks (e.g. a bad debt cycle or higher funding
costs).
 NAB has turnaround/growth potential in New Zealand and Wealth given
its underperformance relative to WBC.
 Institutional Banking margin pressure is evident across the sector.
Trading Data
Last Price $25.59
12 month range $19.50 - $25.95
Market Cap $78,103m
WBC is targeting profitable business
acquisition (rather than volume per se)
and so maintaining relatively high Net
Interest Margin.
Out-of-cycle repricing continues to support
Australian Banking margins.
Earnings Forecasts
Yr to September 10A 11A 12A 13E 14E 15E
E&P Cash EPS (¢) 198.6 210.2 216.8 225.6 232.4 248.0
Basic Cash EPS (¢) 198.6 210.2 216.8 225.6 232.4 248.0
Reported EPS (¢) 214.4 233.3 196.2 195.9 202.3 217.2
E&P Cash EPS Growth (%) 17.9 5.9 3.1 4.0 3.0 6.7
DPS (¢) 139.0 156.0 166.0 168.5 170.9 171.6
Yield (%) 5.5 6.2 6.5 6.6 6.7 6.8
Grossed-Up Yield (%) 7.8 8.8 9.4 9.5 9.6 9.7
Franking (%) 100% 100% 100% 100% 100% 100%
Price/Book (x) 2.0 1.9 1.8 1.8 1.8 1.8
PEG Ratio (x) 1.4 1.7 1.6 1.1
ROE (%) 15.3 15.3 14.7 15.2 15.5 16.7
Valuation (blended) $26.84
George Gabriel, CFA
November 28, 2012
+61 3 9631 9853

30
EAP VIEW
WBC’s focus on the fundamentals of banking (eg. deposit accounts, product cross-sell, margin
retention, costs) has helped it deliver the sector’s strongest 2H12 results.
 Good underlying earnings momentum.
Underlying cash earnings growth is now up +2.0% in 1H12 and +6.5% in 2H12, following a decline of -1.1% in
1H11.
 Deposit market share acquisition provides basis for product cross-sell
WBC has gained +2.3% market share in business deposits, strongly outperforming peers. It has good momentum
in deposits acquisitions, up 12% in the year, with a high 2H12 exit run-rate of 9%.
TABLE 1: CHANGE IN MARKET SHARES IN LAST TWELVE MONTHS
 Cross-sell
Cross-sell continues to improve wealth management penetration in insurance and funds management. Chart 1.
CHART 1: CUSTOMER CROSS SELL TRENDS CHART 2: WBC LEADING WEALTH PENETRATION
Notes: 1. Westpac Retail and Business Bank (WRBB) and St George Bank (SGB)
 Costs
WBC‟s efficiency metrics are improving as its ongoing productivity focus is bears fruit.
We analyse further (i) sector efficiency and profitability metrics; (ii) capital adequacy; and (iii) dividend payout
ratio trends.

31
1. SECTOR EFFICIENCY AND PROFITABILITY
WBC is leading the sector on several key metrics:
 Efficiency metrics.
o Highest average loan value per staff member (FTE). Chart 3.
o Highest revenue per staff member (FTE). Chart 2.
 Profitability metrics.
o Highest cash profit per staff member (FTE). Chart 4.
o Lowest cost-to-income ratio. Chart 5.
CHART2: REVENUE TO STAFF NUMBERS (FTE) CHART 3: AVERAGE LOAN VALUE PER STAFF MEMBER
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
ANZ CBA NAB WBC
AIEAtoFTE($m)
1H07 2H12 Source:Company Reports
Source: EAP, company reports.
CHART 4: CASH PROFIT PER FTE CHART 5: COST-TO-INCOME RATIO (%)
30%
35%
40%
45%
50%
55%
60%
65%
70%
ANZ CBA NAB WBC BOQ BEN
Cost-to-IncomeRatio(%)
1H07 2H12
Source: E&P ResearchCost /Income (%)
2. CAPITAL
WBC leads the sector on capital adequacy. This positions WBC well for potential flexibility around active capital
management.
CHART 6: BASEL 3 COMMON EQUITY TIER 1 CAPITAL

32
3. DIVIDEND PAYOUT RATIOS
We remain alert to the risk of dividend cuts across the sector, though at this stage our base case outlook is flat
dividends in FY13F for ANZ and NAB, with some growth for WBC.
Higher payout ratios combine with low earnings growth to create a vulnerability to an external shock such as a (i)
bad debt expense cycle; or (ii) funding shocks. Either scenario could be the catalyst for bank sector dividend cuts.
History illustrates that as payout ratios approach 100% in any half, banks are likely to cut dividends in subsequent
halves. ANZ Bank‟s payout ratio in 2H08 reached 97% and then cut its dividend by 26% in 1H09, with the rest of
the sector following.
TABLE 2: DIVIDEND PAYOUT RATIOS
Payout Ratios 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
ANZ 71% 97% 106% 54% 58% 68% 58% 69% 58% 69%
EPS cash 0.87 0.76 0.43 1.03 0.90 1.09 1.11 1.10 1.13 1.14
DPS 0.62 0.74 0.46 0.56 0.52 0.74 0.64 0.76 0.66 0.79
growth % -26% -24% 13% 32% 23% 3% 3% 4%
CBA 63% 87% 84% 74% 63% 84% 62% 84% 60% 89%
EPS cash 1.79 1.76 1.35 1.55 1.90 2.02 2.13 2.26 2.27 2.22
DPS 1.13 1.53 1.13 1.15 1.20 1.70 1.32 1.88 1.37 1.97
growth % 0% -25% 6% 48% 10% 11% 4% 5%
NAB 70% 96% 68% 80% 72% 71% 67% 70% 70% 79%
EPS cash 1.38 1.01 1.08 0.92 1.03 1.10 1.25 1.26 1.29 1.14
DPS 0.97 0.97 0.73 0.73 0.74 0.78 0.84 0.88 0.90 0.90
growth % -25% -25% 1% 7% 14% 13% 7% 2%
WBC 71% 72% 71% 76% 65% 76% 72% 77% 78% 76%
EPS cash 0.99 1.00 0.79 0.79 1.00 0.97 1.06 1.04 1.05 1.11
DPS 0.70 0.72 0.56 0.60 0.65 0.74 0.76 0.80 0.82 0.84
growth % -20% -17% 16% 23% 17% 8% 8% 5%
BEN 54% 64% 69% 66% 68% 71% 67% 63% 68% 74%
EPS cash 0.52 0.58 0.41 0.23 0.41 0.42 0.45 0.48 0.44 0.40
DPS 0.28 0.37 0.28 0.15 0.28 0.30 0.30 0.30 0.30 0.30
growth % 0% -59% 0% 100% 7% 0% 0% 0%
BOQ 78% 79% 108% 36% 65% 70% 130% 54% NM 50%
EPS cash 0.45 0.48 0.24 0.73 0.40 0.37 0.20 0.52 -0.39 0.52
DPS 0.35 0.38 0.26 0.26 0.26 0.26 0.26 0.28 0.26 0.26
growth % -26% -32% 0% 0% 0% 8% 0% -7%
Source: Company Reports, EAP

33
FY12 RESULTS OVERVIEW
WBC’s underlying cash earnings growth momentum is sector-leading, turning around from declines of -
1.1% in 1H11, to increases of +2.0% in 1H12 and +6.5% in 2H12. Table 3.
 This compares to ANZ‟s (on EAP adjusted basis) decline of -5.2% in 2H12. Refer EAP Note, “Structural
Headwinds”, 26 Oct 2012.
 NAB‟s Australian Banking segment (~98% total cash earnings) showed +2.2% cash earnings growth in 2H12,
but on a Group level (including the UK and Specialised Group Assets) down -7.9%. Refer EAP Note, “NAB Ex UK
Business Offers Hidden Value”, 31 Oct 2012.
TABLE 3: GROUP PERFORMANCE
Group Performance
Cash earnings (A$M) % 2H12 total 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 2H11 -
1H12
% 1H12 -
2H12
Net interest income 186.3% 5,678 6,043 5,995 5,860 5,964 6,205 6,223 6,340 1.8% 4.0% 0.3% 1.9%
Non-interest income 83.7% 2,629 2,405 2,578 2,477 2,537 2,417 2,663 2,850 2.4% -4.7% 10.2% 7.0%
Net operating income 270.1% 8,307 8,448 8,573 8,337 8,501 8,622 8,886 9,190 2.0% 1.4% 3.1% 3.4%
Operating expenses -109.4% -3,355 -3,385 -3,438 -3,534 -3,501 -3,605 -3,655 -3,724 -0.9% 3.0% 1.4% 1.9%
Pre-provision Op profit (PPOP) 160.6% 4,952 5,063 5,135 4,803 5,000 5,017 5,231 5,466 4.1% 0.3% 4.3% 4.5%
Bad debt expense -17.7% -1,611 -1,681 -879 -577 -463 -530 -608 -604 -19.8% 14.5% 14.7% -0.7%
Cash earnings before tax 142.9% 3,341 3,382 4,256 4,226 4,537 4,487 4,623 4,862 7.4% -1.1% 3.0% 5.2%
Tax expense -41.9% -1,005 -1,020 -1,275 -1,262 -1,334 -1,321 -1,393 -1,425 5.7% -1.0% 5.5% 2.3%
Minority equity -41 -30 -32 -34 -35 -33 -35 -34
Underlying cash earnings 2,295 2,332 2,949 2,930 3,168 3,133 3,195 3,403 8.1% -1.1% 2.0% 6.5%
Source: WBC Reports
TABLE 4: SEGMENTAL PERFORMANCE
Segmental Performance
Cash earnings (A$M) % 2H11 total 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12
% 1H11 -
2H10
% 2H11 -
1H11
% 1H12 -
2H11
% 2H12 -
1H12
Retail & Business Banking 31.7% 990 918 873 883 921 994 1,001 1,113 4.3% 7.9% 0.7% 11.2%
St George 19.6% 158 203 472 569 602 615 574 657 5.8% 2.2% -6.7% 14.5%
BT Financial Group 11.6% 215 278 301 294 342 363 301 352 16.3% 6.1% -17.1% 16.9%
Institutional Bank 21.1% 573 470 807 707 655 661 734 739 -7.4% 0.9% 11.0% 0.7%
New Zealand 7.1% 168 26 100 158 205 222 267 281 29.7% 8.3% 20.3% 5.2%
Pacific Banking 1.2% 69 33 34 47 40 37 55 52 -14.9% -7.5% 48.6% -5.5%
Group Businesses 7.7% 122 404 362 272 403 241 263 209 48.2% -40.2% 9.1% -20.5%
Totals 100.0% 2,295 2,332 2,949 2,930 3,168 3,133 3,195 3,403 8.1% -1.1% 2.0% 6.5%
Source: WBC Reports. Note that WBC restated divisional results in 2H12 after reallocating economic and capital and adjusting its transfer pricing methodology. Only 1H12 and 2H12 figures reflect this.
Net operating income growth has good momentum, up 3.1% 1H12 and 3.4% 2H12.
 The key driver was non-interest income, up +10.2% in 1H12 and 7.0% in 2H12 strongly outperforming
peers (2H12 NAB +8.0%, ANZ +1.0%). This was driven by growth in wealth management (BT Financial
group, including additional income from JO Hambro and insurance) and higher markets income. Furthermore,
the earnings quality of 2H non-interest income growth seems strong across the board, with increases in general
insurance from premium repricing (+$64m) and lower claims, higher life insurance premium income (+$14m),
higher advice income (+$15m).
 WBC‟s BT Financial Group is performing strongly (12% cash earnings), up +16.9% in 2H12, with average
Group FUA up +4% or $3bn including positive flows to Wrap Platforms and Corporate Super portfolios, and
average Group FUM up +6% or $3.5bn including inflows from Wholesale and Institutional. Wealth management
enjoyed good earnings growth across several areas, including general insurance premium repricing (+$64m)
and lower claims, higher life insurance premium income (+$14m) and higher advice income (+$15m).
WBC’s net interest income growth of +1.9% is at the upper end of peers.
 WBC highlighted its focus on margin discipline in a low credit growth environment, prudently avoiding
unprofitable growth, and resulting in sector-leading 2H12 NIM performance.
 A good result relative to peers (ANZ +2.4%, NAB -1.8%).

34
TABLE 5: NET INTEREST MARGIN (NIM) TRENDS
FY08 2H09 1H10 2H10 1H11 2H11 1H12 2H12
ANZ 2.01% 2.37% 2.45% 2.50% 2.47% 2.44% 2.35% 2.28%
CBA 2.02% 2.16% 2.18% 2.08% 2.12% 2.25% 2.15% 2.09%
NAB 2.25% 2.25% 2.26% 2.24% 2.23% 2.28% 2.17% 2.06%
WBC 2.07% 2.39% 2.27% 2.17% 2.21% 2.23% 2.17% 2.18%
BEN 1.78% 1.78% 1.77% 1.88% 1.89% 1.87% 1.80% 1.76%
BOQ 1.67% 1.60% 1.65% 1.56% 1.63% 1.64% 1.66% 1.66%
Source: Company Reports.
Cost control reasonable, with costs up +1.4% in 1H12 and +1.9% in 2H12
 NAB‟s cost control has been sector-leading, down -0.8% in 1H12 and down -1.9% in 2H12.
 ANZ has a structurally high cost base, driven by its ongoing Asian investment program. It reported expense
growth of +3.2% in 1H12 and -0.4% in 2H12, but this excludes ANZ‟s capitalised software impairment expense
which we believe should be included as a more true reflection of ANZ‟s underlying cost base.
 WBC costs up +1.4% in 1H12 and +1.9% in 2H12.
TABLE 6: OPERATING EXPENSE TRENDS
Operating exp (A$M) FY09 1H10 2H10 1H11 2H11 1H12 2H12
ANZ 6,068 3,249 3,722 3,821 3,897 4,020 4,002
CBA 7,765 4,268 4,333 4,408 4,483 4,602 4,594
NAB 7,979 3,861 4,001 3,991 3,983 3,952 3,876
WBC 7,171 3,438 3,534 3,501 3,605 3,655 3,724
BEN 355 384 390 377 463 391
BOQ 370 161 187 186 188 197 226
Expense growth (%) FY09 1H10 2H10 1H11 2H11 1H12 2H12
ANZ 12.2% 4.0% 14.6% 2.7% 2.0% 3.2% -0.4%
CBA 10.6% 1.3% 1.5% 1.7% 1.7% 2.7% -0.2%
NAB 9.6% 1.3% 3.6% -0.2% -0.2% -0.8% -1.9%
WBC 31.5% 1.6% 2.8% -0.9% 3.0% 1.4% 1.9%
BEN 8.1% 1.6% -3.5% 22.9% -15.6%
BOQ 8.2% 2.0% 16.2% -0.7% 1.5% 4.6% 14.5%
Source: Company Reports.
SEGMENTAL PERFORMANCE
WBC’s 3 largest segments all performed strongly - Retail & Business Banking, St George and BT
Financial Group.
Retail and Business Banking (32% 2H12 cash earnings) was strong, up +11.2% in 2H12, driven by NIM
increase, in line with sector (result of out-of-cycle rate rises).
 Retail and Business Banking (32% 2H12 cash earnings) was strong, up +11.2% in 2H12, driven by NIM
increase, in line with sector.
 Volumes were reasonably strong net loans up +1.8% in 1H12 and up +1.6% in 2H12.

35
Net interest margin was up for all Australian Banking segments, driven by out-of-cycle rate rises.
 WBC RBB NIM up 4bp from 2.21% in 1H12 to 2.25% in 2H12.
 ANZ‟s Australia segment (including Retail, Commercial and Other) reported 4bp NIM increase from 2.45% to
2.49% in 2H12.
 NAB‟s Personal Banking segment NIM up 2bp from 2.02% to 2.04% in 2H12.
St George strong (20% cash earnings), up +14.5% in 2H12.
 Key drivers were decline in bad debt expenses, down -19.6% in 2H12, and NIM increase from 2.08% to 2.16%
in 2H12.
Institutional Bank (21% cash earnings) flat, up +0.7% in 2H12. Institutional Banking margin pressure
is across the sector.
 WBC‟s NIM decline in Institutional Bank, down 2.59% to 2.39% in 2H12, is consistent with ANZ, but mitigated
by bad debt expense decline of -4.6% in 2H12.
 ANZ‟s International and Institutional Bank (37% 2H12 cash earnings) NIM has been in trend decline, down
2.09% in 2H11 to 1.95% (down 14bp) in 1H12 and 1.76% (down 19bp) in 2H12.
 NAB‟s Business Bank experienced 6bp NIM decline to 2.50% in 2H12, a key driver of NAB‟s disappointing result
given the segment‟s 45% cash earnings contribution.
New Zealand (7% cash earnings) reasonably strong, up +5.2% in 2H12.
 NAB underperformed in NZ (11% cash earnings) relative to peers , with 2H12 cash earnings down -7.5% in
2H12.
 Meanwhile, ANZ New Zealand (12% total earnings), up +3.6% in 2H12 cash earnings and WBC NZ (7%
earnings) up +5.2%.

36
FINANCIAL SUMMARY
Westpac Banking Corporation WBC
As at: 28/11/2012 Recommendation: Positive Share Price $24.89
INCOME STATEMENT
Non Interest Income
Operating Expenses
Bad debt charge $m (1,212) (1,316) (1,325) (1,373)
Pre Tax Profit $m 8,862 8,799 9,158 9,884
Tax Expense $m (2,826) (2,640) (2,747) (2,965)
Minorities $m (66) (80) (80) (80)
Preference Share Dividends $m 0 0 0 0
E&P Cash EPS ¢ 216.8 225.6 232.4 248.0
Basic Cash EPS ¢ 216.8 225.6 232.4 248.0
Reported EPS ¢ 196.2 195.9 202.3 217.2
BALANCE SHEET
Total Assets $m 687,794 715,598 744,660 782,277
GROWTH RATES
Per Share
E&P Cash EPS % 3.1% 4.0% 3.0% 6.7%
Basic Cash EPS % 3.1% 4.0% 3.0% 6.7%
Dividend Per Share % 6.4% 1.5% 1.4% 0.4%
Profit & Loss
Net Interest Income % 4.2% (0.6)% 1.6% 5.6%
Banking Non Interest Income % 11.3% 1.9% 3.6% 4.4%
Wealth Management Income % 10.7% 15.9% 7.9% 6.8%
Total Non Interest Income % 11.3% 1.9% 3.6% 4.4%
Impairment Charges % 22.1% 8.6% 0.7% 3.6%
Cash Profit % 4.7% 6.1% 3.9% 7.4%
Balance Sheet
Total Shareholders’ Equity % 4.6% 0.8% 3.0% (2.8)%
Housing Loans % 4.8% 4.4% 4.8% 5.3%
VALUATION METRICS
NTA per share $ 10.3 10.1 10.3 9.6
Price/NTA x 2.4 2.5 2.4 2.6
Price/Book x 1.7 1.8 1.7 1.8
Dividend Yield % 6.7% 6.8% 6.9% 6.9%
Grossed Up Yield % 9.5% 9.7% 9.8% 9.9%
Issued Shares m 3,080.0 3,126.2 3,131.8 3,166.6
Profitability
Efficiency
Cost/Income % 44.0% 44.6% 44.1% 43.1%
Tax Rate
CAPITAL ADEQUACY
Tier 1 Capital $m 30,542 31,190 32,505 30,951
Total Capital $m 34,711 35,346 36,836 35,509
Tier 1 Ratio % 10.3% 10.5% 10.5% 9.5%
Tier 2 Ratio % 1.4% 1.4% 1.4% 1.4%
ACE Ratio % 0.0% 0.0% 0.0% 0.0%
ASSET QUALITY
90-day Past Due Loans $m 190 185 188 192
WEALTH MANAGEMENT
Inforce Premiums $m 0 0 0 0

37
BENDIGO BANK (BEN) - FINDING AN EARNINGS BASE?
RECOMMENDATION : NEUTRAL
Since its March 2008 merger with Adelaide Bank, BEN
has had to navigate hostile funding markets, facing
sharply rising deposit costs. However, BEN appears to
be moving towards finally finding an earnings baseline,
with the rate of cash earnings decline slowing in 2H12
and the lagged impact of out-of-cycle mortgage re-
pricing in May and June 2012 to help mitigate further
1H13 downside pressure. Table 1. However, given its
concentrated exposures to both residential mortgages
and deposit funding markets, BEN remains vulnerable to
external macroeconomic shocks. Increased Tier 1
capital provides some additional comfort. We initiate
with a Neutral recommendation and $8.81 blended
valuation.
WHAT SURPRISED?
 No major surprises. Medium-term thematic remains intact:
rising deposit costs and margin pressure to be offset by
loan re-repricing.
WHAT’S CHANGED?
 We initiate with a Neutral recommendation and $8.81
blended valuation.
WHAT NOW?
 Loan re-pricing to mitigate deposit price pressure in 1H13.
 Community Bank margin sharing to be reviewed in 1H13.
 We prefer to wait for any future share price declines to offer
a margin of safety before considering an upgrade to our
views as we believe there is little risk of a near-term re-
rating.
Trading Data
Last Price $8.68
12 month range $6.85 - $9.70
Market Cap $3,443m
Strong loan growth outperforming system
is a regular feature of BEN.
NIM pressure from rising deposit costs is
expected to be mitigated by out-of-cycle
rate rises.
Earnings Forecasts
Yr to June 09A 10A 11A 12A 13E 14E
E&P Cash EPS (¢) 15.5 81.2 89.9 82.0 73.0 78.2
Basic Cash EPS (¢) 18.8 83.3 92.3 84.2 75.1 80.3
Reported EPS (¢) 18.8 83.3 92.3 84.2 75.1 80.3
E&P Cash EPS Growth (%) (86.0) 423.0 10.7 (8.8) (11.0) 7.1
DPS (¢) 43.0 58.0 60.0 60.0 64.0 63.8
Yield (%) 5.0 6.7 6.9 6.9 7.4 7.4
Grossed-Up Yield (%) 7.1 9.5 9.9 9.9 10.5 10.5
Franking (%) 100% 100% 100% 100% 100% 100%
Price/Book (x) 0.9 0.8 0.9 0.9 0.8 0.8
PEG Ratio (x) 0.1 10.8 (0.5) (2.3)
ROE (%) 1.5 7.5 7.9 7.4 7.1 8.2
Valuation (blended) $8.81
George Gabriel, CFA
November 28, 2012
+61 3 9631 9853

38
FY12 RESULT SUMMARY
BEN appears to be finally finding an earnings baseline, with the rate of cash earnings decline
slowing in 2H12. Table 1. Since its March 2008 merger with Adelaide Bank, BEN has had to
navigate hostile funding markets, facing sharply rising deposit costs. However, we expect that
the lagged impact of out-of-cycle mortgage re-pricing in May and June 2012 will help mitigate
downside pressure in 1H13 earnings.
However, the outlook is not highly visible. Given the narrow deposit funding base and
concentrated residential mortgages loan book, BEN is vulnerable to deposit market or
residential property shocks. Indeed, CEO Mike Hirst said: “There's no doubt that it's been a
very challenging 12 months for banks generally, with the issues in Europe meaning
competition for deposits has been particularly strong since September. We don't really see any
reason why we shouldn't be able to continue to return a reasonable result, but the uncertainty
that is around the market makes it difficult to provide any guidance.” Hirst said funding cost
pressures, plus the weak demand for loans, was likely to continue in the year ahead.
Comparing BEN‟s performance against a stable baseline is difficult given M&A, capital
management and changing business segment composition (key segments are Retail Banking;
Third Party Banking; Wealth; Rural Bank and Central functions). Recent events include:
 Bank of Cyprus Australia (BOCA) acquisition included in 2H12 results for 4 months from
March 2012, contributing income of $11.1m.
 $150m capital raising (17.751m shares at $8.45 per share) on 19 Dec 2011.
 Sale of 7.8% in IOOF (IFL) for $110m in Aug 2012, increasing Tier 1 by ~13bp.
 Sale of portfolio of subordinated notes, releasing ~$90m of capital deductions against
these holdings, increasing Tier 1 by ~29bp.
 Purchase of Macquarie‟s $1.5bn margin lending portfolio for $52m in Jan 2009.
Key 2H12 result trends include:
 Cash earnings down -1.7% in 2H12 and -6.9% in 1H12.
 Cash EPS down -8.2% in 1H12 and -7.8% in 2H12.
 Net interest income down -1.3% in 2H12.
 DPS has been flat at 30cps over the last 5 halves (from 2H10 onwards).
 Tier 1 capital increased to 8.39% as at June 2012 and will increase to 8.81% given post-
balance date sale of IFL and subordinated notes.
TABLE 1: BEN EARNINGS TRENDS

39
KEY DRIVERS
Key drivers of BEN’s earnings outlook are (i) residential property market outlook;
(ii) deposit funding markets; and (iii) system credit growth. We consider these
issues below.
1. Overweight residential property
BEN‟s loan portfolio is overweight residential property (69% total loans). Even WBC, which is
predominantly Australian-focused, only has ~51`% earnings exposure to Australian
residential property. Tables 1-2.
TABLE 1: BEN LOAN MIX BY SEGMENT
Source: BEN. Loan mix by security as at June 12.
TABLE 2: WBC EARNINGS MIX
2. Sector-leading deposit base
BEN leads the sector in deposit funding mix, comprising ~80% total funding. Whilst deposit
funding is usually a strength (reducing reliance on volatile wholesale funds), rising deposit
costs have recently hurt earnings.

40
CHART 1: DEPOSITS AS % OF TOTAL FUNDING
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CBA ANZ NAB WBC BEN BOQ
Source: Company Reports, EAP Research. NB. Funding positions as at 1H12, BEN as at 2H12.
3. Above-system credit growth
Even though system credit growth has been low, BEN typically grows above-system. System
credit growth (year to June 2012) was 4.4%, up from 2.8% in June 2011. The key driver has
been business credit growth (to which BEN has little exposure), with housing credit growth in
decline (both investor and owner-occupied), from 6% in June 2011 to 5.4% in December 2011
to 5.1% YTD. Charts 2-3. Table 3.
CHART 2: TOTAL SYSTEM CREDIT GROWTH
-10%
0%
10%
20%
30%
Total Credit Housing Credit Business Credit
Source: RBA
CHART 3: HOUSING CREDIT GROWTH
0.0%
10.0%
20.0%
30.0%
40.0%
Owner Occupied Housing Investor Housing
Source: RBASource: RBA
Source: APRA

41
TABLE 3: BANKING MARET SHARE CHANGES
CHART 4: BEN MORTGAGE MARKET SHARE GROWTH RELATIVE TO PEERS
4. Net interest margin
Chart 5 illustrates the declining NIM. Chart 6 illustrates the sudden structural shift in Term
Deposit pricing relative to the RBA cash rate, the key driver of NIM decline. BEN also incurred
margin pressure due to its asset mix as its margin lending book significantly unwound during
FY12 due to global volatility, reweighting the asset mix towards lower margin residential
mortgages ($2.3bn in FY12 vs. $3.2bn in FY11).
However, Table 4 summarises the sector‟s out-of-cycle rate rises. BEN will continue to reprice
its loans in line with its sector, and has greater leverage to this given its overweight
residential mortgage book.

42
CHART 5: NET INTEREST MARGIN
CHART 6: AVERAGE TD PRICING v RBA CASH RATE
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
Source: RBA
TABLE 4: OUT-OF-CYCLE RATE RISES
Source: RBA; EAP Research

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