Australian Banks. Banking s golden goose AUSTRALIA. Event. Impact. Outlook

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1 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 AUSTRALIA Banking s golden goose Event Investor lending growth estimates Implied credit growth from new flow Source: ABS, RBA, Macquarie Research, March 217 Earnings and target price changes Source: Macquarie Research, March 217 Total implied credit growth EPS Change Target Price FY17 FY18 FY19 Previous New Change ANZ CBA NAB WBC BEN BOQ In our view, strong investor lending growth is partly underpinned by off-theplan property purchases. We believe the regulator will avoid taking aggressive steps that may destabilise the market and therefore do not expect to see changes in the cap limit. As a result the banks should continue to enjoy robust investor housing growth over the next -18 months and likely to have more capacity to re-price investor loans. Impact We believe that traditional drivers such as housing turnover do not fully explain the current buoyant growth trends in investor housing lending. In our view, this is underpinned by a significant ramp-up of new construction activity. Based on our model, we estimate that lending to newly constructed properties underpins a significant share of total lending growth. We estimate that settlement of off-the-plan purchased properties drives ~4-5 of overall lending flow and ~5-6 of total investor flow. Based on our forecasts we estimate that the flow from off-the-plan settlements alone will underpin 5-6 of investor lending volume growth until the middle of 218. Combined with estimated existing turnover less repayments we estimate investor credit growth is likely to run at 7-9 during the course of 217 and 218. Our forecasts are based on domestic investors representing ~35 of overall new purchases. Should this figure increase towards 5, we believe it will result in the system level of investor growth potentially going above the Regulator s cap. Such a scenario is likely to have an adverse impact on banks development books and subsequently on their investor lending portfolios. We believe the near term trends that we explored in this note are largely positive for the sector, with most participants likely to be growing at close to their cap. This will also lead to less competition in the investor space and investor loans are likely to be written at higher margins. We expect the banks to benefits from ongoing robust volume growth as well as investor re-pricing initiatives (we now assume banks will pass additional 2bps to investor borrowers over the course of the next months). In aggregate this should provide ~1-3 earnings uplift with WBC and NAB being the bigger beneficiaries (given their overweight position in Australian investor lending), which was the driver of our 1-3 earnings upgrades. Outlook 14 March 217 Macquarie Securities (Australia) Limited While fundamentally banks look broadly fair value relative to the broader market (~1 above the yr average PE rel to Industrials and ~9 above its LT average), we note that recent earnings trends appear to be supportive and more defensive than Industrials (further reinforced by this analysis). Although this suggests that banks should continue to see share-price support, we remain Neutral on the sector given full valuations and remaining uncertainty around capital rules. Please refer to page 17 for important disclosures and analyst certification, or on our website

2 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan- Jan-11 Jan- Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan- Jan-11 Jan- Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Analysis Investor housing lending growth has continued to exceed expectations in recent months. Combined with appreciation in house prices these trends lead to ongoing scrutiny and calls for further intervention from the regulator (ie. a reduction in investor growth cap or other macro prudential measures). While we see moderation in investor growth as a positive risk management outcome in the medium term, in the short term we have concerns of potential market dislocation from such actions. In our view, investor lending growth is underpinned by off-the-plan purchases and a reduction in the investor lending cap may have unintended consequences on the domestic housing market. We believe the regulator will err on the side of caution and try to avoid taking aggressive steps that may destabilise the market. As a result, we do not expect to see changes in the cap limit and believe that the banks will continue to enjoy robust investor housing growth over the next - 18 months. Fig 1 Housing lending credit growth (3m ann) Fig 2 Housing lending credit growth (m rolling) Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Owner-occupier Investor Investor limit Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Owner-occupier Investor Investor limit Source: RBA, Macquarie Research, March 217 Source: RBA, Macquarie Research, March 217 We believe that traditional drivers such as housing turnover do not fully explain current buoyant growth trends in investor housing lending. In our view, this is underpinned by a significant ramp-up of new construction activity in recent years and elevated level of completions in recent months as well as increases in property prices. As newly completed properties come to the market and buyers settle on their purchases (generally made -3 months prior to the settlement date), it s unsurprising to see credit growth trends pick up. Fig 3 Units price index Index Fig 4 Detached house price index Index Sydney Melbourne Brisbane Adelaide Perth Sydney Melbourne Brisbane Adelaide Perth Source: APM, Macquarie Research, March 217 Source: APM, Macquarie Research, March March 217 2

3 As the figures below highlight, the number of newly competed properties that are coming to the market has increased by ~4 vs the average of and is expected to remain at broadly similar levels for the next -18 months. As the figure to the right highlights, this has been largely underpinned by a significant pick-up in the number of units (up ~7 in last two quarters vs previous 5 year average). We also note that while the price of existing houses generally exceeds the price of units, the trends for new stock tend to be reversed, hence funding requirements are likely to be even more elevated. Fig 5 MER value of construction and renovations Fig 6 No of completed properties by quarter $bn Alt. & adds. Total from new construction Houses Units Note: Figures are presented on a rolling annual basis Source: ABS, Macquarie Research, March 217 Source: ABS, Macquarie Research, March 217 Moreover, the charts below highlight that newly constructed apartments are generally skewed to NSW (Sydney), VIC (Melbourne) and QLD (Brisbane) markets where the average property prices are above other states. This suggests that the new stock that is coming to market is tilted towards the more expensive part of the market and hence the value of new completions appears to be elevated. Fig 7 Housing completions by state Fig 8 Unit completions by state NSW VIC QLD Rest of Aus NSW VIC QLD Rest of Aus Source: ABS, Macquarie Research, March 217 Source: ABS, Macquarie Research, March 217 We generally expect new housing to be absorbed by three types of buyers namely, owner occupiers, domestic investors and offshore investors. The owner occupier segment is split between first home buyers (currently running at subdued levels) and upgraders that generally tend to have lower LVR borrowing requirements underpinned by the existing equity build-up; 14 March 217 3

4 Offshore investors who generally are only able to buy new dwellings (units or detached housing). While we understand that offshore investors account for ~1/3 of total unit purchases in recent year, due to imposed funding restrictions we understand that there is a spill-over of properties that fail to settle to domestic investors; This leaves domestic investors, who currently seem to be attracted to property by low interest rates and ability to utilise negative gearing benefits. Moreover, we understand that increasingly first home buyers are entering the market as investors due to poor affordability metrics, particularly on the eastern seaboard. These trends are exerting pressure on investor volume growth. Fig 9 Credit lodgements (by state) Fig Credit lodgements (by type of borrower) NSW VIC WA QLD SA NT Investor First Home Buyers Refinance Upgrader Source: AFG, Macquarie Research, March 217 Note: Does not add to due to overlap between different borrower types (I.e. overlap between Investor and First Home Buyer) Source: AFG, Macquarie Research, March 217 Based on our model, we estimate lending to newly constructed properties underpins a significant share of total lending flow. We estimate settlement of off-the-plan purchased properties drives ~4-5 of overall lending flow and ~5-6 of total investor flow. We note overall lending growth is also impacted by the level of run-off and prepayments. Fig 11 Total credit flow and contribution from new stock Fig Investor credit flow and contribution from new stock Housing growth from new stock Underlying growth Investor growth from new stock Underlying growth Note: Figures are annualised quarterly growth rates Source: ABS, RBA, Macquarie Research, March 217 Note: Figures are annualised quarterly growth rates Source: ABS, RBA, Macquarie Research, March March 217 4

5 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 As the figure below highlights the current level of completions is running at ~5k properties per quarter. Based on the forecast of our economics team we expect this elevated level of completions to be sustained until the end of 217 (based on the pipeline of commencements). Moreover as the level of completions is weighted towards apartments we expect the level of investor activity to remain high. Fig 13 Estimated apartment completions No. of completions 3, 25, 2, 15,, 5, Fig 14 Estimated detached housing completions No. of completions 3, 25, 2, 15,, 5, - - Offshore Investor Owner Occupier Offshore Investor Owner Occupier Source: ABS, Macquarie Research, March 217 Source: ABS, Macquarie Research, March 217 Our assumptions around the flow from newly completed settlements are summarised below ~25 of new units and ~ of new houses are funded by offshore buyers outside of the domestic banking system. Albeit anecdotal evidence suggests that by the time of settlement some of these buyers become resident borrowers; Domestic investors represent ~3 of new detached houses and ~65 of units; Average price of off-the-plan apartment is ~$75k and a detached property is ~$6k. Completed units are settled with a ~2.5 year lag to pre-sales and detached houses with a ~1 year lag to pre-sales. This suggests that all other things being equal, financing requirements are likely to continue to rise due to appreciation of property prices over the last three years. Investor LVRs for new properties are ~75 and Owner Occupier LVRs are ~6. Fig 15 Rolling months investor lending flow forecast from off-the-plan settlements Fig 16 Total lending flow forecast from off-the-plan settlements $bn $bn Detached Multi-resi Detached Multi-resi Source: ABS, RBA, Macquarie Research, March 217 Source: ABS, RBA, Macquarie Research, March March 217 5

6 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Based on our forecasts we estimate that the flow from off-the-plan settlements will drive 5-6 of investor lending volume growth until the middle of 218. Combined with estimated existing turnover and repayments we estimate investor credit growth is likely to run at 7-9 during the course of 217 and 218. Moreover, our forecasts are based on domestic investors representing ~35 of overall new purchases. Should this figure increase towards 5, we believe it will result in the system level of investor growth going above cap. As a result we believe the regulator has little scope to reduce the limit, as a potential limit reduction may have undesirable consequences of destabilising domestic housing market. Should the regulator look to further implement macro prudential measures we expect those to come through tightening in lending standards. Fig 17 Forecast New Investor lending of outstanding investor lending Fig 18 Forecast New total housing lending of outstanding housing lending Implied credit growth from new flow Total implied credit growth Implied credit growth from new flow Total implied credit growth Source: ABS, RBA, Macquarie Research, March 217 Source: ABS, RBA, Macquarie Research, March 217 Recent data generally supports our findings with investor housing finance approvals up 23 (3 month rolling) vs PCP in January 217 and just shy of peak levels reached in mid-215. As the figure to the right suggests, investors currently represent ~45-5 of total approvals (ex refi), approaching the peak observed in the Jun-15 quarter. Fig 19 Housing loan approvals by type $bn 15 Fig 2 Investors share of loan approvals (ex refi) Dec-98 Dec-1 Dec-4 Dec-7 Dec- Dec-13 Dec-16 Dec-92 Dec-96 Dec- Dec-4 Dec-8 Dec- Dec-16 Investors First-home buyers Repeat buyers Refinancing Investor loan approvals year average share Long-run average share Source: ABS, Macquarie Research, March 217 Source: ABS, Macquarie Research, March March 217 6

7 Impact on banks We believe the trends that we explored in this note are largely positive for the banks in the near term. With most participants likely to be growing at close to their cap, we are likely to see less competition in the investor space and investor loans are likely to be written at higher margins. The figure below summarises banks exposure to mortgages and investor lending. We estimate that NAB and WBC are overweight Australian investor lending with ~14 earnings contribution coming from the segment. As a result, ongoing solid growth in that channel is likely to provide the most upside to NAB and WBC in 217. We note that current investor cap limit tends to favour banks with existing overweight position to the arguably riskier investor segment, which is presumably an unintended outcome. Should the regulator look to change the limit to allow underweight banks to increase their relative positions NAB, WBC and BOQ would be most adversely affected. Fig 21 Mortgages contribution to lending & earnings ANZ CBA NAB WBC BEN BOQ Investor loans of mortgages Investor loans as of gross loans Mortgages as cash earnings Investor mortgages of earnings Source: Company data, Macquarie Research, March 217 We also see opportunity for the majors to continue to reprice investor lending back-book. To ensure that each of the banks adheres to APRA s cap, flow will likely be redistributed between lenders in the coming months and pricing may be used as one of the levers. As the figure below highlights we estimate that the majors get 1-2 uplift to earnings from bps uplift in investor loans. Fig 22 Mortgage repricing sensitivities for bps of repricing +bps entire book Loans affected NIM benefit ($bn) (bps) Earnings uplift () +bps investor loans Loans affected NIM benefit ($bn) (bps) Earnings uplift () ANZ CBA NAB WBC BEN BOQ ABA MYS Source: Company data, Macquarie Research, March March 217 7

8 Development book risks are building Our base case assumption is for the influx of new properties to be absorbed over the course of next months and a subsequent slowdown in the construction activity will bring the market back to equilibrium (given ongoing favourable trends in population growth). However, we recognise the risk of potential dislocation with adverse impact on banks development books and subsequently on their investor lending portfolios. While the latter risk is more difficult to quantify and will arguably result in a material sector de-rating (even without a significant spike in losses), in this section we highlight potential risks around the development part of banks portfolios. Commercial Real Estate (CRE) lending portfolios across the majors account for $38bn to $61bn of the majors gross loans (6-11 of GLAs). We estimated CBA s exposure based on WBC s ratio of GLAs to exposures as CBA only disclose CRE exposures. Across the majors we estimate residential developer loan balances to be $5-bn, or ~1-1.5 of GLAs. To estimate the residential development loans across the majors we have made the following assumptions in addition to available disclosures: CBA and WBC s CRE residential percentage of loans is comparable to the residential percentage of exposures (18 and 27 respectively). We have used CBA s CRE investment disclosure (32 of residential) to draw out a like-forlike comparison across the majors. This has a netting effect on ANZ and WBC s disclosures and we gross up NAB s disclosed numbers to include the impact of CRE residential development. Fig 23 Commercial real estate lending Fig 24 Residential development loans (MRE) $bn $bn ANZ CBA NAB WBC ANZ CBA NAB WBC. Commercial real estate exposures CRE of GLA (RHS) Resi developer Resi investment Developer of GLA (RHS) Note: We estimate CBA s loan balance using WBC s CRE loan/exposure ratio Source: Company data, Macquarie Research, March 217 Source: Company data, Macquarie Research, March 217 Historically, during the downturns, banks losses on their development books were elevated. For example during the early 9s ANZ lost in excess of ~4 on its real-estate construction portfolio in the peak year and ~6 cumulatively between 1991 and If this experience was to be repeated we estimate it would result in losses of $2m-4m (ie. 2-3 of full year earnings) across the majors. Although the quantum of these losses appears relatively small we note that the risk around the broader investor portfolio would significantly increase if a large proportion of developers was to default due to inability to settle on new properties. 14 March 217 8

9 Fig 25 Residential developer loss rates and impact on earnings Resi developer loans ($bn) Peak year (4.3) Cumulative (5.8) Losses FY earnings Losses FY earnings ($m) impact () ($m) impact () ANZ CBA NAB WBC Source: Company data, Macquarie Research, March 217 Earnings Changes We have upgraded earnings by 1-2 across the sector (ex-downgrades at BOQ) based on our expectations for further investor repricing and stronger investor lending volume growth over the course of next two years. We continue to expect moderation in housing volume growth in the medium term as a result of regulatory scrutiny and reduced borrowing capacity from the overleveraged household sector (particularly when interest rates start to rise). Our earnings changes for BOQ were driven by ongoing challenging volume growth trends (volumes continue to decline despite relatively robust market conditions) and revised expectations around margin performance (following disappointing margin trends performance from the smaller banking peers in the recent reporting season). Fig 26 Earnings and target price changes EPS Change Target Price Change FY17 FY18 FY19 Previous New Change ANZ CBA NAB WBC BEN BOQ Source: Macquarie Research, March March 217 9

10 Fig 27 Bank Investment Fundamentals Victor German Anita Stanley Brendan Carrig ANZ CBA NAB WBC BEN BOQ CYB ( ) Recommendation Neutral Neutral Outperform Outperform Underperform Neutral Neutral Price target (A$) Upside/downside to TP () month TSR () Last Price (A$) Cash NPAT (A$mn) 216a 5,889 9,45 6,483 7, f 7,44 9,836 6,584 8, f 7,318,351 6,774 8, f 7,632,779 6,975 8, Fully diluted EPS (cps) 216a f f f EPS grow th () 216a f f f Price/Earnings Ratio (x) 216a f f f PE rel to All Industrials ex banks (x) 216a f f f Price/Earnings rel to bank sector (x) 216a f f f DPS (A$) 216a f f f Current Yield () 216a f f f Price/Book ratio (x) 216a f f f ROE 216a f f f Price/NTA ratio (x) 216a f f f yr fwd PE ratio yr fwd PE ratio (adj for div) Relative premium/discount yr fw d div yield Source: Company data, Macquarie Research, March March 217

11 Fig 28 ANZ Financial Summary ANZ Bank Year Ending 3 September 1H16 2H H17 2H Neutral PER SHARE DATA Cash EPS (AUD) - Macquarie Basis Current Price Target Price Cash EPS Growth () $31.89 $33. DPS (AUD) Total Shareholder Return 8.7 BVPS (AUD) NTA PS (AUD) Bloomberg: ANZ AU Shares on issue (m) 2,918 2,927 2,927 2,936 2,941 2,941 2,913 2,921 Reuters: ANZ.AX VALUATION METRICS Macquarie Equities P/E (Cash) Analyst(s) Contact(s) P/B (Stated) Victor German P/NTA Anita Stanley RoE () Brendan Carrig RoA () Dividend Yield () Dividend Payout () Volumes and margins Cost of Equity () H17 2H Net Interest Margin () GLAA growth () Efficiency and costs 1H17 2H Cost / Income Ratio () Cost growth () CET1 ratio and BDD/GLA 1H17 2H Core Tier 1 Ratio () - Basel III Source: Company data, Macquarie Research, March Impairment Charge / GLAA (bp) PROFIT & LOSS (AUDm) Net Interest Income 7,568 7,527 15,95 7,557 7,6 15,169 15,374 15,98 Non-Interest Income 2,748 2,734 5,482 3,36 2,98 6,16 5,474 5,462 Fees & Commissions 1,194 1,193 2,387 1,142 1,97 2,239 2,253 2,333 Financial Markets ,359 1,167 1,224 Life and Funds , ,543 1,61 1,662 Other Revenue Total Operating Income,316,261 2,577,593,592 21,185 2,848 21,369 Total Operating Costs 5,479 4,943,422 5,2 4,7 9,82 8,931 8,878 Employee Costs 2,79 2,65 5,359 2,544 2,516 5,6 5,39 5,149 Other Costs 2,77 2,293 5,63 2,557 2,185 4,742 3,892 3,729 Pre-Provision Operating Profit 4,837 5,318,155 5,491 5,892 11,382 11,917,491 Impairment Charge 918 1,38 1, ,62 1,616 1,722 Pre-Tax Profit 3,919 4,28 8,199 4,688 5,75 9,763,31,769 Tax Expense 1,133 1,166 2,299 1,289 1,416 2,75 2,97 3,3 Minority Shareholders Other Post Tax Items 1 Macquarie Cash Profit 2,782 3,7 5,889 3,391 3,652 7,44 7,318 7,632 Extraordinary & Other Items Reported Net Profit 2,738 2,971 5,79 3,391 3,652 7,44 7,318 7,632 BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets* 388,335 48,582 48,582 47,815 46,85 46,85 429,64 442,839 Average Interest Earning Assets 754, , ,16 758, , , , ,92 Gross Loans, Advances & Acceptances 565,868 58,35 58,35 585, , , ,174 62,59 Interest Bearing Liabilites 789,522 86,975 86, ,45 813, , ,2 863,285 Total Assets 895, , , , ,8 922,8 943, ,173 Shareholders Equity 56,464 57,927 57,927 58,959 6,46 6,46 61,13 63,29 Tier 1 Capital* 45,62 48,285 48,285 49,317 5,44 5,44 51,488 53,648 Tier 1 Ratio ()* Core Tier 1 Ratio () - Basel III ASSET QUALITY Impairment Charge / GLAA (bp) Impairment Charge / NHL (bp) Provisions / NPLs () KEY RATIOS & GROWTH Net Interest Income growth () Non-Interest Income growth () Total Revenue growth () Cost growth () Pre-Provision Profit growth () RWA growth () GLAA growth () Deposit growth () Net Interest Margin () Cost / Income Ratio () CET1 Capital 38,2 39,267 39,267 4,299 41,386 41,386 42,47 44,63 Cash Profit Growth () Weighted Average shares (m) Cash EPS (Basic) Cash EPS growth () March

12 Fig 29 CBA Financial Summary Commonwealth Bank of Australia Year Ending 3 June 1H16 2H H17 2H Neutral PER SHARE DATA Cash EPS (AUD) - Macquarie Basis Current Price Target Price Cash EPS Growth () A$84.49 $89. DPS (AUD) Total Shareholder Return.4 BVPS (AUD) NTA PS (AUD) Bloomberg: CBA AU Shares on issue (m) 1,78 1,715 1,715 1,723 1,729 1,729 1,742 1,749 Reuters: CBA.AX VALUATION METRICS Macquarie Equities P/E (Cash) Analyst(s) Contact(s) P/B (Stated) Victor German P/NTA Anita Stanley RoE () - Cash Brendan Carrig RoA () Dividend Yield () Volumes and margins Dividend Payout () Cost of Equity () H17 2H Net Interest Margin () GLAA growth () Efficiency and Costs PROFIT & LOSS (AUDm) Net Interest Income 8,364 8,58 16,872 8,743 8,848 17,591 18,43 18,975 Non-Interest Income 4,56 3,819 7,875 4,399 4,1 8,4 8,375 8,842 Fees & Commissions 1,721 1,567 3,288 1,787 1,814 3,61 3,743 3,896 Financial Markets , ,162 1,168 1,228 Life and Funds 1,519 1,292 2,811 1,397 1,386 2,783 2,965 3,171 Other Revenue Total Operating Income,42,327 24,747 13,142,85 25,992 26,778 27,817 Total Operating Costs 5,216 5,213,429 5,677 5,295,972,754,959 Employee Costs 3,85 3,79 6,164 3,8 3,152 6,26 6,382 6,477 Other Costs 2,131 2,134 4,265 2,569 2,143 4,7 4,372 4,482 Pre-Provision Operating Profit 7,24 7,114 14,318 7,465 7,555 15,2 16,24 16,858 Impairment Charge , ,248 1,522 1,758 Pre-Tax Profit 6,64 6,422 13,62 6,866 6,96 13,772 14,52 15, Tax Expense 1,825 1,767 3,592 1,95 1,968 3,918 4,133 4,34 Minority Shareholders Other Post Tax Items Macquarie Cash Profit 4,84 4,646 9,45 4,97 4,929 9,836,351,779 Extraordinary & Other Items Reported Profit 4,618 4,69 9,227 4,895 4,929 9,824,351, H17 2H Cost / Income Ratio () Cost growth () CET1 ratio and BDD/GLA 1H17 2H Core Tier 1 Ratio () - Basel III Source: Company data, Macquarie Research, March Impairment Charge / GLAA (bp) BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets 392, , , , , , , ,91 Average Interest Earning Assets 85, ,7 817, ,58 844, , , ,841 Gross Loans, Advances & Acceptances 675,728 71,73 71,73 719,25 739, , ,54 813,745 Total Interest bearing Liabilities 772, ,75 795,75 834, , , , ,749 Total Assets 93,75 933,78 933,78 971, , ,546 1,45,381 1,97,614 Shareholders Equity 59,847 6,756 6,756 61,8 63,826 63,826 67,74 71,25 Tier 1 Capital 47,972 48,553 48,553 5,218 51,232 51,232 54,445 57,946 Tier 1 Ratio () Core Tier 1 Ratio () - Basel III ASSET QUALITY Impairment Charge / GLAA (bp) Impairment Charge / NHL (bp) Provisions / NPLs () KEY RATIOS & GROWTH Net Interest Income growth () Non-Interest Income growth () Total Revenue growth () Cost growth () Pre-Provision Profit growth () RWA growth () GLAA growth () Deposit growth () Net Interest Margin () Cost / Income Ratio () March 217

13 Fig 3 NAB Financial Summary National Australia Bank Year Ending 3 September 1H16 2H H17 2H Outperform PER SHARE DATA Cash EPS (AUD) - Macquarie Basis Current Price Target Price Cash EPS Growth () A$32.91 $35. DPS (AUD) Total Shareholder Return. BVPS (AUD) NTA PS (AUD) Bloomberg: NAB AU Shares on issue (m) 2,645 2,657 2,657 2,679 2,694 2,694 2,728 2,763 Reuters: NAB.AX VALUATION METRICS Macquarie Equities P/E (Cash) Analyst(s) Contact(s) P/B (Stated) Victor German P/NTA Anita Stanley RoE () Brendan Carrig RoA () Dividend Yield () Volumes and margins Dividend Payout () Cost of Equity () H17 2H Net Interest Margin () GLAA growth () Efficiency and Costs PROFIT & LOSS (AUDm) Net Interest Income 6,6 6,33,93 6,461 6,611 13,72 13,661 14,214 Non-Interest Income 2,9 2,394 4,53 2,449 2,461 4,9 5,113 5,353 Fees & Commissions 1,27 1,66 2,93 1,85 1,7 2,192 2,289 2,377 Financial Markets ,182 1,196 1,254 Life and Funds , ,253 1,332 1,414 Other Revenue Total Operating Income 8,79 8,724 17,433 8,911 9,72 17,982 18,774 19,567 Total Operating Costs 3,755 3,683 7,438 3,781 3,821 7,62 7,753 7,976 Employee Costs 2,2 2,144 4,354 2,159 2,15 4,38 4,3 4,358 Other Costs 1,545 1,539 3,84 1,622 1,671 3,293 3,453 3,619 Pre-Provision Operating Profit 4,954 5,41 9,995 5,9 5,251,38 11,21 11,59 Impairment Charge ,4 1,378 1,667 Pre-Tax Profit 4,579 4,616 9,195 4,688 4,689 9,377 9,643 9,923 Tax Expense 1,295 1,293 2,588 1,336 1,336 2,672 2,748 2,828 Distributions Other Post Tax Items 1 Macquarie Cash Profit 3,22 3,263 6,483 3,292 3,293 6,584 6,774 6,974 Extraordinary & Other Items 4, , Reported Profit -1,742 3,196 1,454 3,352 3,353 6,74 6,894 7, H17 2H Cost / Income Ratio () Cost growth () BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets * 361, , , ,434 48,285 48, , ,757 Interest Earning Assets 683, , ,548 7, , , , ,152 Gross Loans, Advances & Acceptances 532, ,76 545,76 556, , , ,16 626,759 Total Interest bearing Liabilities 741, ,37 726,37 74, , , ,47 832,965 Total Assets 868,73 777, , ,68 811, , , ,245 Shareholders Equity 5,82 51,315 51,315 52,42 53,764 53,764 56,525 59,281 Tier 1 Capital 42,535 47,336 47,336 48,213 49,575 49,575 51,846 54,61 Tier 1 Ratio () * Core Tier 1 Ratio () - Basel III CET1 ratio and BDD/GLA ASSET QUALITY Impairment Charge / GLAA (bp) Impairment Charge / NHL (bp) Provisions / NPLs () H17 2H Core Tier 1 Ratio () - Basel III Impairment Charge / GLAA (bp) Source: Company data, Macquarie Research, March KEY RATIOS & GROWTH Net Interest Income growth () Non-Interest Income growth () Total Revenue growth () Cost growth () Pre-Provision Profit growth () RWA growth () GLAA growth () Deposit growth () Net Interest Margin () Cost / Income Ratio () March

14 Fig 31 WBC Financial Summary Westpac Bank Year Ending 3 September 1H16 2H H17 2H Outperform PER SHARE DATA Cash EPS (AUD) - Macquarie Basis (diluted) Current Price Target Price Cash EPS Growth () A$34.88 $37. DPS (AUD) Total Shareholder Return 11.5 BVPS (AUD) NTA PS (AUD) Bloomberg: WBC AU Shares on issue (m) 3,336 3,346 3,346 3,358 3,369 3,369 3,391 3,4 Reuters: WBC.AX VALUATION METRICS Macquarie Equities P/E (Cash) Analyst(s) Contact(s) P/B (Stated) Victor German P/NTA Anita Stanley RoE () Brendan Carrig RoA () Dividend Yield () Dividend Payout () Volumes and margins Cost of Equity () H17 2H Net Interest Margin () GLAA growth () Efficiency and Costs PROFIT & LOSS (AUDm) Net Interest Income 7,653 7,695 15,348 7,834 8, 15,844 16,468 17,68 Non-Interest Income 2,966 2,889 5,855 3,49 3,85 6,135 6,423 6,747 Fees & Commissions 1,375 1,38 2,755 1,415 1,448 2,862 2,994 3,119 Financial Markets , ,167 1,224 1,287 Life and Funds ,911 1,27 1,25 2,53 2,189 2,334 Other Revenue Total Operating Income,619,584 21,23,883 11,95 21,979 22,891 23,815 Total Operating Costs 4,419 4,479 8,898 4,529 4,548 9,77 9,219 9,46 Employee Costs 2,298 2,293 4,591 2,311 2,289 4,6 4,577 4,649 Other Costs 2,1 2,186 4,37 2,218 2,259 4,477 4,641 4,8 Pre-Provision Operating Profit 6,2 6,5,35 6,355 6,547,91 13,672 14,355 Impairment Charge , ,18 1,298 1,57 Pre-Tax Profit 5,533 5,648 11,181 5,872 6,11 11,884,374,848 Tax Expense 1,62 1,724 3,344 1,791 1,833 3,624 3,7 3,854 Minority Shareholders Macquarie Cash Profit 3,94 3,918 7,822 4,75 4,172 8,247 8,65 8,982 Extraordinary & Other Items Reported Profit 3,71 3,744 7,445 4,75 4,172 8,247 8,65 8, H17 2H Cost / Income Ratio () Cost growth () CET1 ratio and BDD/GLA BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets* 363,248 4,53 4,53 418, ,73 437,73 473,3 498,974 Interest Earning Assets 714, ,83 721, , ,65 755, , ,145 Gross Loans, Advances & Acceptances 644,54 665, , ,43 699, , , ,217 Total Interest bearing Liabilities 515, ,28 531,28 544, , , ,6 616,723 Total Assets 831,76 839,22 839,22 858,113 88,171 88, ,236 97,533 Shareholders Equity 57,981 58,181 58,181 59,444 6,796 6,796 63,746 66,93 Core Tier 1 Capital 38,41 38,875 38,875 4,138 41,491 41,491 44,44 47,625 Core Tier 1 Ratio () Tier 1 Capital 44,5 45,785 45,785 47,48 48,41 48,41 51,35 54,535 Tier 1 Ratio () -Basel ASSET QUALITY Impairment Charge / GLAA (bp) Impairment Charge / NHL (bp) Provisions / NPLs () H17 2H Core Tier 1 Ratio () Impairment Charge / GLAA (bp) Source: Company data, Macquarie Research, March KEY RATIOS & GROWTH Net Interest Income growth () Non-Interest Income growth () Total Revenue growth () Cost growth () Pre-Provision Profit growth () RWA growth () GLAA growth () Deposit growth () Net Interest Margin () Cost / Income Ratio () March

15 Fig 32 BEN Financial Summary Bendigo & Adelaide Bank Year Ending 3 June 1H16 2H H17 2H Underperform PER SHARE DATA Cash EPS (AUD) - Macquarie Diluted Basis Current Price Target Price Cash EPS Growth () A$11.69 $11.5 DPS (AUD) Total Shareholder Return 4.2 BVPS (AUD) $.97 $11.3 $11.3 $11.18 $11.29 $11.29 $11.52 $11.78 NTA PS (AUD) $7.42 $7.51 $7.51 $7.7 $7.86 $7.86 $8.16 $8.48 Bloomberg: BEN AU Shares on issue (m) Reuters: BEN.AX VALUATION METRICS Macquarie Equities P/E (Cash) 13.2x 14.1x 13.7x 13.5x 13.3x 13.4x 13.5x 13.1x Analyst(s) Contact(s) P/B (Stated) 1.1x 1.1x 1.1x 1.x 1.x 1.x 1.x 1.x Victor German P/NTA 1.6x 1.6x 1.6x 1.5x 1.5x 1.5x 1.4x 1.4x Anita Stanley RoE () Brendan Carrig RoA () Dividend Yield () Volumes and margins Dividend Payout () Cost of Equity () H17 2H Net Interest Margin () GLAA growth () Efficiency and Costs H16 2H H17 2H17 Cost / Income Ratio () Cost growth () CET1 ratio and BDD/GLA PROFIT & LOSS (AUDm) Net Interest Income , ,219 1,275 1,338 Non-Interest Income Fees Commissions Other Total Operating Income , ,598 1,621 1,693 Total Operating Costs Employee Costs Other Costs Pre-Provision Operating Profit Impairment Charge Pre-Tax Profit Tax Expense Minority Shareholders Other Post Tax Items Stated Net Profit Extraordinary & Other Items Preference shares Macquarie Cash Profit BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets 34,527 36,486 36,486 38,3 39,395 39,395 4,977 43,52 Interest Earning Assets 63,425 64,296 63,86 67,166 69,769 68,468 72,91 75,998 Gross Loans, Advances & Acceptances 55,545 57,472 57,472 6,2 62,11 62,11 64,983 68,776 Total Deposits 54,198 57,55 57,55 59,229 61,9 61,9 64,37 67,775 Total Assets 65,723 68,581 68,581 7,949 73,148 73,148 76,574 8,949 Shareholders Equity 5,35 5,116 5,116 5,32 5,418 5,418 5,649 5,891 Tier 1 Capital 3,687 3,795 3,795 3,895 4,21 4,21 4,252 4,493 Tier 1 Ratio () CET 1 Ratio () ASSET QUALITY Impairment Charge / GLAA (bp) Impairment Charge / NHL (bp) Provisions / NPLs () H17 2H CET 1 Ratio () Impairment Charge / GLAA (bp) Source: Company data, Macquarie Research, March KEY RATIOS & GROWTH Net Interest Income growth () Non-Interest Income growth () Total Revenue growth () Cost growth () Pre-Provision Profit growth () RWA growth () GLAA growth () Deposit growth () Net Interest Margin () Cost / Income Ratio () March

16 Fig 33 BOQ Financial Summary Bank of Queensland Year Ending 31 August 1H16 2H H17 2H Neutral PER SHARE DATA Cash EPS (AUD) - Macquarie Diluted Basis Current Price Target Price Cash EPS Growth () A$11.88 $.5 DPS (AUD) Total Shareholder Return 11.6 BVPS (AUD) $9.37 $9.41 $9.41 $9.5 $9.62 $9.62 $9.87 $.11 NTA PS (AUD) $7.7 $7.14 $7.14 $7.24 $7.38 $7.38 $7.65 $7.93 Bloomberg: BOQ AU Shares on issue (m) Reuters: BOQ.AX VALUATION METRICS Macquarie Equities P/E (Cash).9x 13.1x 13.x 13.5x.4x 13.x.6x.6x Analyst(s) Contact(s) P/B (Stated) 1.3x 1.3x 1.3x 1.3x 1.2x 1.2x 1.2x 1.2x Victor German P/NTA 1.7x 1.7x 1.7x 1.6x 1.6x 1.6x 1.6x 1.5x Brendan Carrig RoE () RoA () Dividend Yield () Volumes and margins Dividend Payout () PROFIT & LOSS (AUDm) 1.95 Net Interest Income ,15 5 Non-Interest Income Fees & Commissions Insurance Income Other H17 2H Net Interest Margin () GLAA growth () Efficiency and Costs 1H17 2H Cost / Income Ratio () Cost growth () CET1 ratio and BDD/GLA Total Operating Income , ,6 1,15 1,186 Total Operating Costs Employee Costs Other Costs Pre-Provision Operating Profit Impairment Charge Pre-Tax Profit Tax Expense Minority Shareholders Other Post Tax Items Stated Net Profit Extraordinary & Other Items Preference shares Macquarie Cash Profit BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets 27,467 28,54 28,54 27,774 27,997 27,997 29,71 31,719 Average Interest Earning Assets 47,56 49,353 48,43 49,237 49,36 49,299 51,153 54,242 Gross Loans, Advances & Acceptances 42,924 43,152 43,152 42,72 43,361 43,361 45,913 48,79 Total Deposits 36,8 36,72 36,72 36,353 36,898 36,898 39,69 41,448 Total Assets 49,841 5,853 5,853 5,353 51,95 51,95 54,51 57,29 Shareholders Equity 3,525 3,587 3,587 3,642 3,715 3,715 3,857 3,999 Tier 1 Capital 2,866 2,974 2,974 3,48 3,1 3,1 3,257 3,393 Tier 1 Ratio () Core Tier 1 Ratio () ASSET QUALITY Impairment Charge / GLAA (bp) Impairment Charge / NHL (bp) Provisions / NPLs () H17 2H Core Tier 1 Ratio () Impairment Charge / GLAA (bp) Source: Company data, Macquarie Research, March 217 KEY RATIOS & GROWTH Net Interest Income growth () Non-Interest Income growth () Total Revenue growth () Cost growth () Pre-Provision Profit growth () RWA growth () GLAA growth () Deposit growth () Net Interest Margin () Cost / Income Ratio () March

17 This publication was disseminated on 14 March 217 at 11:2 UTC. Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3 in excess of benchmark return Neutral return within 3 of benchmark return Underperform return >3 below benchmark return Benchmark return is determined by long term nominal GDP growth plus month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+ Neutral expected return from - to + Underperform expected return <- Macquarie South Africa Outperform expected return >+ Neutral expected return from - to + Underperform expected return <- Macquarie - Canada Outperform return >5 in excess of benchmark return Neutral return within 5 of benchmark return Underperform return >5 below benchmark return Macquarie - USA Outperform (Buy) return >5 in excess of Russell 3 index return Neutral (Hold) return within 5 of Russell 3 index return Underperform (Sell) return >5 below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6 in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4 in a year. Low medium stock should be expected to move up or down at least 25 3 in a year. Low stock should be expected to move up or down at least in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 216 AU/NZ Asia RSA USA CA EUR Outperform (for global coverage by Macquarie, 8.71 of stocks followed are investment banking clients) Neutral (for global coverage by Macquarie, 8.5 of stocks followed are investment banking clients) Underperform (for global coverage by Macquarie, 4.63 of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. 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