Investment and Insurance Services Division 19 October PDF Free Download

Investor Half Day Investment and Insurance Services Division 19 October 2004

Disclaimer The material that follows is a presentation of general background information about the Bank s activities current at the date of the presentation, 19 October 2004. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice when deciding if an investment is appropriate. 2

Discussion Outline Stuart Grimshaw Key Achievements, Group Executive Investment & Insurance Services Strategic Direction and Distribution Overview John Pearce Asset Management and Platform Chief Executive Officer Colonial First State Overview Peter Beck Insurance Overview Managing Director CommInsure Michael Cant Financial Performance Chief Financial Officer Investment & Insurance Services Stuart Grimshaw Conclusion Group Executive Investment & Insurance Services 3

Market trends shaping the wealth management industry Funds Management: Decline of retail and the rise of platform Margin squeeze Slowing, but healthy projected growth in funds management Rising popularity of blend and model portfolios Insurance: Strong long-term growth Rational approach to pricing Underinsurance and the need for further education Advice: Independence of advice Continuing consolidation of distribution Soft dollar benefits Quality of advice 4

Fund Managers / BDMs Our business model involves competing across all elements of the value chain IIS products and services by value chain element Product Manufacturing Administration Platforms Advice/ Support Services Distribution General Insurance Life Insurance Master Trust FirstChoice Dealer group services Research Compliance Technology Direct Bank Channels Aligned Managed Funds Property Wrap Avanteos Adviser Support Sales effectiveness Training and development Practice management External IFA s Brokers/Agents SME/Corporates Platforms Institutionals CBA Group IIS External 5

Our strategy is to foster a leading wealth management business Distribution Continue to strengthen and improve our multi-channel distribution capabilities Efficiency Platform Innovation Service Performance Focus on cost effective ways to deliver investment and insurance services Build market leading platform capabilities and leverage the scale and efficiency of our technology Strengthen our standing as a provider of innovative products and services Continued focus on a world-class customer service culture Lead in all parts of the wealth management value chain 6

Recent achievements and current focus Distribution Efficiency Platform Innovation Service Performance Centre for Adviser Development Launch of Enterprise 121 Increased productivity and number of planners IIS organisational restructure Legacy rationalisation program on target Cost to income ratio improvement Market leading platform inflows through FirstChoice Growth in Avanteos net flows since acquisition FirstChoice enhancements Launch of 5D Boutique alliances Launch of new CommInsure products Award winning service CommInsure service quality improvement Strong FUM flows in First State International CommInsure strong financial results Fixed Interest and Credit and Global Resources fund performance 7

Millions Distribution challenges and opportunities Retirement Savings Gap by Age 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 August 2003 25-29 30-34 35-39 40-44 45-49 50-54 55-59 Years of Age 16% 14% 12% 10% 8% 6% 4% 2% 0% Challenges/ Opportunities: Ageing population with inadequate savings Choice for investors and advisers Growth in DIY products Regulatory environment: Quality of advice Greater fee transparency Retirement Savings Gap for Males Additional Contribution Required Independence Source: IFSA Retirement Savings Gap, August 2003; 8

We are continually strengthening our distribution footprint Centre for Adviser Development Over 200 trained Feedback very positive Launch of Enterprise 121 Opportunity in the market to offer advice, platform and dealership services to HNW practices. Increased productivity of network advisers 26% improvement Recruitment of advisers Network and aligned 9

Legacy system rationalisation is on track Legacy Funds Management Systems Rationalisation 17 (2002 2005) 13 9 5 2002 2003 2004 2005 1/01/1900 2/01/1900 3/01/1900 4/01/1900 11 as at Oct 04 Source: Internal Projections. Policy Administration Systems rationalisation by calendar year end 10

Outline The value chain Asset management Platforms 12

The only segment with universal downward pressure in margins is platforms / administration. Asset Management Platform / Marketing / Administration Distribution Customer Pays Revenue Margins 10 100bps 50-120bps 40-100bps 200bps Margin Trends Drivers perceived commoditisation high alpha providers will maintain pricing power capacity is an issue commoditisation intense competition consolidation least commoditised move to fee for service increasing variation in range of fees 13

Our diversified asset management base provides growth opportunities. High Growth Potential Low Growth Potential Index Funds Income funds Fixed interest Credit Funds Australian Property Securities FirstChoice (house product) Global Equities Australian Equities (core) Australian Equities (GDP Plus) Global Property Securities Infrastructure Funds Hedge Funds Private Equity Low Margin High Margin Source: CBA Internal Analysis and Market Forecasts 14

Australian Equities (GDP-Plus) is now only 17% of FUA FUA: $109.8bn as at June 2004 Externally Managed Other ASB GDP Plus Australian equities Core Index Fixed Interest & Cash International equities Listed & Direct Property 15

Australian equity GDP+ investment performance in perspective. Year by year out-performance Growth bias market Value bias market 1997 12.04% 2001 7.71% 1998 4.41% 2002-0.03% 1999 13.39% 2003-0.07% 2000 7.48% 2004-4.86% 4 Yr Avg. 9.10% 4 Yr Avg. 0.70% Source: Wholesale Imputation Fund, excess performance before fees and taxes. Year to 30 June. 16

Investment performance has been generally strong over the medium term. Asset Class Performance Vs Benchmark (1 yr) Performance Vs Benchmark (3 yr) Fixed Interest Global Credit Australian Equities GDP+ Large Cap Australian Equities GDP+ Small Cap Australian Equities Core Large Cap Australian Equities Core Small Cap Global Equities Global Resources Australian Listed Property Global Listed Property Hedge Funds Infrastructure Private Equity Mortgage Funds 17

Platform strategy Avanteos: FirstChoice: White-label custodial wrap solution for wholesale platform market - feature-rich for high net-worth market Non custodial masterfund for Mass Market Retail Value proposition: 1. Best value for money 2. Great service 3. Enough choice 18

The Value Proposition - FirstChoice vs mastertrusts Effective Fee 4.0% 3.5% MLC Masterkey Custom FirstChoice vs mastertrusts Typical Australian Equities MER 0.85% Equalised advice fee 0.6% 3.0% 2.5% 2.0% 1.5% Summit Navigator AMP BT Essentials / Skandia / Perpetual / Asgard Elements FirstChoice Comparison based on Australian Equities portfolio of 0.85% MER. Equalised advice fee Assumptions: No entry fees, all competitor fees are as stated in their PDS as at April 2004. Manager rebates and volume discounts are not accounted for. Account Balance 19

The Value Proposition - FirstChoice vs wraps Effective Fee 2.4% 2.3% Asgard E-Wrap BT Wrap FirstChoice vs wraps Typical Australian Equities MER 0.85% Equalised advice fee 0.6% 2.2% 2.1% Macquarie Wrap 2.0% 1.9% 1.8% 1.7% FirstChoice Comparison based on Australian Equities portfolio of 0.85% MER. Equalised advice fee Assumptions: No entry fees, all competitor fees are as stated in their PDS as at April 2004. Manager rebates and volume discounts are not accounted for. Account Balance 20

How can we offer lower fees and still earn healthy margins? Simple model catering to mass market Manufacturing margin capture Ability to leverage scale and administration efficiency Mandate structure 21

FirstChoice: well diversified support and healthy CFS flows. Inflows: FirstChoice Split by Channel Managing the FUM: FirstChoice Split Internal vs External CBA Aligned Advisers 17% External 39% CFS 40% CBA Bank Network 44% External 60% Source: internal data; channel split based on flows for 6 months ended 31 August 2004; Manager split based on FUA at 31 August 2004 22

Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 $m Boutique alliance strategy has delivered strong FUM growth. 700 600 500 Colonial First State 452 Capital - Funds Under Management 400 300 200 100 0 Source: internal data, retail sourced FUM 23

Conclusion in a tough environment, we are very well positioned. Asset Management Strong, well diversified, asset management capability with growth opportunities 70% of sector funds outperformed their 3 year benchmark Combination of Avanteos and FirstChoice provides comprehensive admin capability Platforms Superior value proposition has underpinned FirstChoice success Boutique alliance strategy has been very successful 24

Agenda Industry Trends and Issues Achievements Opportunities 26

Summary Insurance underlying profit grew 107% last year. Further growth is a significant opportunity for the Group In the 03/04 year the Insurance business: Reduced Costs & Increased Profit Improved Service Insurance represents an opportunity to: Materially expand the Bank s business and support growth Deepen relationships / aid retention in the Bank s core banking portfolio Leverage distribution infrastructure & scale Significantly increase cross-sell 27

The insurance industry outlook has improved as predicted last year Industry Outlook Implications The Winners A maturing industry: Favourable long term growth Commoditised products Lower investment returns Competitive and consolidating Increased regulatory focus A time of surprises : Sept 11, Canberra, Bali, HIH Low penetration Scale is critical Rising re-insurance premiums Industry & legislative shake up Return to rational pricing Requires cost focus as well as revenue Importance of broad based distribution Commoditisation - difficult to differentiate Uncertainty - increasing importance of good corporate governance and security Winner will be larger players, who maintain profitability by: Leveraging scale Driving out efficiencies Building revenues through: Cross sell / bundling Multi-channel distribution Brand and reputation Whilst maintaining a service culture built around: Service focus Innovation Simplicity Platforms 28

Percent Achievements 80% 70% 60% 50% 40% 30% 20% 10% 0% 00/01 01/02 02/03 03/04 04/05 Year Improvement in Service levels and strong staff engagement: Internal service level measures have improved by up to 20% over the last 18 months Staff cultural surveys measuring staff engagement and satisfaction across a range of areas have improved significantly over the last year 800 700 600 500 400 300 200 100 0 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Full Time FTE Head Count Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 29

$m Insurance Inforce Premiums (Australia) continue to grow Continued growth in network channel Strong GI premium growth with further upside 400 350 300 Price increases on income protection impacted individual life sales Good growth in mastertrust segment 250 200 150 100 50 0 Personal Life Group Life General Insurance Jun-03 YTD Actual Jun-04 YTD Actual Multiple product holders demonstrate increase retention across all portfolios 30

Achievements - Annuity Sales - Leveraging a return to rational pricing and market opportunities. Monthly Sales ($) Monthly Annuity Sales 120000 100000 80000 60000 40000 20000 0 Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- 02 02 03 03 03 03 03 03 04 04 04 04 04 31

How is improvement being delivered People Process Technology Restructure to provide end to end service Cultural Measurement Reward & recognition Leadership Development Training (e.g. Risk Claims Competency assessment) Breakthrough Service Performance Simplified Life Insurance Underwriting Quote and Fulfil in all Branches Cross Sell Embed in Process GI & Risk Claims Reengineering Tele Follow Up End to End Process Simplification Fineos - Work Flow Genesys - Call Centre Dialogue - Document Management First Point Resolution 32

Market Penetration (%) Opportunity Opportunity Opportunity Opportunity Opportunity Opportunity Opportunity Significant Revenue Opportunities - Product Penetration 100% = Product Penetration 80% 60% 40% 20% 0% Motor Contents Building Health Term Life Disability Trauma 33

Insurance Cross Sell Opportunity Home Loan Cross Sell - 36% Credit Card Cross Sell - 17% Managed Funds Cross Sell - 17% Savings & Transaction Cross Sell - 11% 34

Conclusion Significant progress was made in the 2003/ 2004 year Insurance represents a significant opportunity for the Group going forward 35

We saw an 18% growth in underlying profit for our Funds Management businesses Strong investment markets underpinned revenue growth Income to average FUA ratio maintained Focus on tight cost control resulted in operating expenses falling 2% year on year Revenue growth negatively impacted by FX movements and sale of custody business $m 300 250 200 150 100 50 233 Net Operating Income 44 Volume based expense (8) Reduction in other operating expense 26 18% growth Tax( 21) 274 Incremental Which new Bank (26) S holder Invest Returns 20 268 0 Underlying Profit Jun-03 Underlying Profit Jun-04 Cash Profit Jun-04 37

Significant improvement in Cost to Income Ratio Leverage to growing FUA Back-office efficiencies % 80 Support function rationalisation Rationalisation of UK product range 60 Product rationalisation and system migration 40 2003 2004 Operating Expenses / Operating Income Other Operating Expenses / Income Net of Commissions *Excludes WnB Costs 38

Earnings/Average FUA (%) Margins declined slightly Run off of higher margin legacy business Shift in mix of retail business toward platforms Increased payments to distributors Increase in margins in UK business 1.2 1 0.8 0.6 0.4 0.2 0 % $bn 1.14 0.98 1.11 0.95 2002/2003 2003/2004 Average Jun-03 FUA Jun-04 Operating Income/Average FUA Income Net of Volume based expenses/average FUA 110 100 90 80 70 60 Average FUA ($bn) 39

bp FirstChoice margins are attractive, albeit less than our other retail products Revenue - net of external manager costs 200 150 100 60bp 45bp 125bp 50 90bp 65bp 0 FirstChoice Other Retail Wholesale Manufacturing Margin Commissions 40

Jun-04 FUA FX Investment Returns Net Flows Jun-03 FUA FX Disposal Investment Returns Net Flows Jun-02 FUA Strong turnaround in FUA with 11% growth Strong turnaround in net flow position from 2003 underpinned by FirstChoice and International flows. 110,000 105,000 $m 106 (1) (2) (3) 10 1 110 Outflows driven by: Industry shift away from traditional balanced funds Legacy products Fund closures Performance of flagship funds Industry shift to platforms 100,000 95,000 90,000 85,000 (1) 99 1 41

Across the industry investment returns have improved and flows have responded, but not to previous levels. Net flows ($b) 8 40% 6 4 2 0 30% 20% 10% 0% 1 year Investment Return -2-10% -4 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04-20% Industry Net Flows Industry Investment Returns Source: Investment returns: rolling annual returns based on a composite index made up of Australian Shares (50%), International Shares (35%), Property Securities (15%) Net flows: Plan for Life retail flows (ex-cash) 42

Net Flows show turnaround in 2004 Net Flows ($m) 5,000 2003 v. 2004 Jun-03 4,000 Jun-04 3,000 2,000 1,000 0-1,000-2,000-3,000-4,000 First Choice/ Avanteos Cash Management Other Retail Wholesale Property International Total 43

Market Share We are gaining market share in the platform market 18% 16% 14% 12% 10% 8% 6% Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 CBA Retail CBA Platforms Source: Plan for Life, Fund Source Research 44

CBA Net Flows We have experienced a very good June quarter 1,200 1,000 800 600 400 200 - (200) (400) No. 1 No. 4 Sep-03 Sep-03 Dec-03 Dec-03 M Mar-04 ar-04 Jun-04 Jun-04 Sep-04 Dec-04 Sep-03 M Dec-03 ar-05 Jun-05 Mar-04 Sep-05 Jun-04 Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr CBA Retail Net Flows CBA Platforms Net Flows Source: Plan for Life, Fund Source Research 45

Insurance - improved operating margins and strong investment returns Australia Market leader in life insurance in Australia 8% growth in risk inforce premiums Improved General Insurance claims ratio Tight expense controls expenses flat $m 250 200 150 101 (11) 179 Strong improvement in shareholder investment returns Improved margins on annuity business Portfolio re-pricing (in particular Disability and Wholesale Life) 100 50 0 43 Underlying Profit Jun-03 46 89 107% increase Underlying Profit Jun-04 S'holder Invest Returns Which new Bank Cash Profit Jun- 04 46

Business Valuation $m 16.2 x earnings multiple Uplift of $201m higher FUA 1 0 0 0 0 9 0 0 0 8,546 Increase in Value 201 8,402 improved lapses lower costs More conservative future sales assumption 8 0 0 0 7 0 0 0 6 0 0 0 Profit 519 Capital Movements (864) Capital Reduction change in asset allocation reduction in capital adequacy margins 5 0 0 0 Directors Valuation Jun-03 Directors Valuation Jun-04 47

Summary Strong profit result Reduced capital Growth in overall business valuation 48

Significant opportunities to achieve strong growth External/ market factors creating growth opportunities: Improved market returns Superannuation guarantee Internal opportunities to drive growth: Continuing product expansion and innovation Distribution capacity and productivity improvements Rationalisation and further efficiency gains Capital efficiency improvements 50

Investor Half Day Investment and Insurance Services Division 19 October 2004