Business and Consumer Banking

Business and Consumer Banking Discussion Pack Mike Pratt Group Executive, Business & Consumer Banking August/September 2003

Disclaimer The material contained in this presentation is intended to be general background information on Westpac Banking Corporation and its activities. The information is supplied in summary form and is therefore not necessarily complete. Also, it is not intended that it be relied upon as advice to investors or potential investors, who should consider seeking independent professional advice depending upon their specific investment objectives, financial situation or particular needs. 2

Business and Consumer Banking today Australian retail banking and wealth distribution Customer-driven organisational structure Optimal geographic footprint 5.1 million customers Customers that consider us their main bank: - 13% Consumer - 20% Middle Markets - 16% SME 13,841 staff employed Underlying cash earnings by business unit (1H03) Institutional Bank 19% NZ Retail 15% Wealth 8% Other 5% BCB 53% 3

Business and Consumer Banking March 03 Cash earnings up 13% $m 1H03 1H02 %Mov t Expense to income down 340bps Operating income Operating expenses 2,124 (1,145) 1,975 (1,131) 8 (1) Bad debt increase primarily due to dynamic provisioning for rebuild of equipment finance book Core earnings Bad debts Operating profit Tax & OEI Cash earnings Goodwill Profit on operations 979 (149) 830 (251) 579 (29) 550 844 (126) 718 (207) 511 (29) 482 16 (18) 16 (21) 13-14 Expense to income 53.9% 57.3% 340bps 4

Achievements - year to date Business-unit led initiatives contributed 13% to cash earnings Pricing review Disciplined cost management Branch and small business initiatives in place quality of referrals up customer satisfaction is up Lending Process Project (Pinnacle) credit card scorecards upgraded single customer view within collections CRM Project (Reach) early results leads converted to opportunity 78% cross-sell 23% of contacts, contact to sale 9% Customer Experience queues and credit cards being addressed Westpac Academy 14% of staff have participated in the training 5

What the market is saying What is behind the strong growth in loans and acceptances, particularly in business banking? How can market share growth momentum be maintained? What is happening in the mortgage book, and how are you managing the broker channel? How is Westpac going to differentiate itself from its peers on customer service? What is Westpac doing in CRM? How is the Virgin Card partnership progressing? 6

Growth in key products Growth March 2002 to March 2003 Group Average interest earning assets 10% Housing Corporate - net loans & accept. 17% 16% Non-housing term loans 27% Total deposits 15% Australia Housing 18% Business lending # 10% Retail deposits 20% 0 5 10 15 20 # Excludes impact of rebuilding ex-agc equipment finance book. 7

Market share - across the board growth Westpac has grown at 1.5 times financial system credit over the last 12 months Share of Reserve Bank of Australia financial system aggregates Credit Housing Personal Other mainly business Jun 03 % 17.8 12.2 11.1 Mar 03 % 17.9 11.5 11.0 Mar 02 % 18.1 10.2 10.0 Change (basis points) Mar03 Jun03 (10) 70 10 Total credit 14.3 14.2 13.4 10 Total retail deposits 13.7 13.3 12.7 40 8

Housing market economic setting Established house prices have risen sharply circa 40% over last two years Investment housing and loans for renovation have been the predominant source of recent growth First home owners are now a smaller proportion of new lending Australian real house prices index 300 250 200 150 100 50 1959/60 1969/70 1979/80 1989/90 1999/00 Owner occupied and investment housing % 14 12 10 8 6 4 2 0 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 owner-occupier Feb-99 Feb-00 Feb-01 investment Feb-02 Feb-03 9

Growth in small and medium enterprises (SME) SME lending increased 10% to Mar 03, excluding reacquisition of the business finance portfolio. Initiatives boosting growth: - Industry specialisation - 6 industry packages now in place and more planned - Lifecycle packages specialist business options tailored to each business lifecycle stage - Rolling out CRM to business bankers - Redeployment of business specialists closer to the customer; including 30 business development managers and 250 branch based business specialists - For past 3 years, number 1 in customer satisfaction compared to peers Growth achieved without compromising credit standards Equipment Finance portfolio (Original balance - $5.1bn) 5.0 4.0 Actual re-acquisition of business book Initial planned rate of re-acquisition 3.0 2.0 1.0 0.0 $bn May-02 Jun-02 Sep-02 Mar-03 Sep-03 Sep-04 10

Housing market state of play Household gearing has increased moderately Affordability not stretched In Westpac s portfolio over 70% of borrowers paying in excess of scheduled repayments Household debt to assets. % 45% 40% 35% 30% 25% 20% Ratio to financial assets (lhs) 15% Ratio to financial and dwelling assets (rhs) 10% 88/89 90/91 92/93 94/95 96/97 98/99 00/01 02/03 % 22% 20% 18% 16% 14% 12% 10% 8% 6% Affordability interest payments as a percent of income % % 10 10 8 6 8 6 4 4 Mortgage 2 Total 2 Source: RBA Total (period average) 0 0 Dec-77 Dec-82 Dec-87 Dec-92 Dec-97 Dec-02 11

Housing credit growth Housing credit growth returning to decade average in year ahead Housing credit growth will, on average, continue to grow ahead of nominal GDP, supported by: - Continuing positive population growth - Decrease in average household size - A higher proportion of earnings is devoted to dwelling investment as standards of living increase Alterations and additions now accounting for a substantial proportion of overall dwelling investment 12 Drivers of household formation % 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Population growth (lhs) Persons per dwelling, avg (rhs) 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 Dwelling expenditure $bn 8 6 4 2 0 New dwelling investment Alterations & additions People 2.9 2.8 2.8 2.7 2.7 2.6 2.6 2.5 Dec-79 Dec-83 Dec-87 Dec-91 Dec-95 Dec-99 Source: APRA

Mortgage portfolio characteristics Investment loans grew 20% but only represent 33% of Australian portfolio Average LVR of new loans 61% 20% of portfolio mortgage insured Lending criteria tightened for specific hot spots Delinquencies continue to track at record lows Growth supported by a reduction in run-off from 23% to 18% Australian Mortgage Portfolio $bn 90 80 70 60 50 40 30 20 10 0 $3 $19 $4 $21 $5 $23 $7 $25 $37 $40 $41 $43 2H01 1H02 2H02 1H03 Owner occupied Investment housing Equity access Proportion of total 10% 33% 57% 13

Mortgages - broker introduced loans 30% of outstanding mortgage portfolio is broker originated In April 03 brokers introduced 26% of new loans by number and 29% of new loans by value Average size of loan is up to 15% higher than branch originated loans Strict accreditation and monitoring processes in place for all brokers Same underwriting standards applied to all applications, and more rigorous validation process Broker introduced loans behave no differently to branch introduced loans Broker Introduced Loans (Proportion of total 1 by number) % 35 30 25 20 15 10 5 0 24 23 26 27 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Apr-03 28 26 26 1 Australian Retail housing 14

Housing portfolio quality 100% mortgage insurance where Loan to value (LVR) ratio > 80% Insurance required for loans > $1.3M and LVR > 70%, and for inner city apartments with LVR > 70% Transitional arrangements in mortgage insurance following industry changes Long run losses less than 3 basis points More rigorous criteria for potential property hot spots, i.e. inner city apartments Exposure to inner city apartments 2% of mortgage portfolio ($1.6bn) with an average LVR of 56% Mortgage insurance for new loans as at September 2002 20% Proportion of portfolio with initial LVR > 80% 20% 80% AA insurer AAA insurer Westpac Lenders Mortgage Insurance (Capital base $31m) 65% 35% Mortgage insurance for new loans as at March 2003 20% A+ insurer Sub underwritten Retained Proportion of portfolio with initial LVR > 80% 100% AA insurer 30% Westpac Lenders Mortgage Insurance (Capital base $38m) 15

Housing portfolio stress test Stress tested separately and jointly for: - Up to a 4 percentage point increase in interest rates; - 20 per cent decline in housing prices; and - A 200 basis point increase in the unemployment rate Behaviour of investment loans closely tracks that of the owner occupied portfolio Interest rate % pa 6.5% 8.5% 10.5% Individual effect $m 0.0 2.2 5.2 Price fall % 0% 10% 20% Individual effect $m 0.0 6.8 20.3 Unemployment rate 6.3% 7.3% 8.3% Individual effect $m 0.0 1.6 3.3 Total effect $m 1 0.0 15.5 64.3 Total w rite-offs $m 2 6.7 22.2 71.0 Total w rite-offs bps 2 0.9 3.1 10.1 1. Individual effects do not sum to the total effect because the impact of each of the individual effects is multiplicative in the model 2. Total write-offs on residential mortgage products should all factors coincide Maximum additional expected loss if all economic factors coincided 16

Our strategy is focused on profit pools Australian Retail Banking Sector Profit Pool Estimated Profile of 2002 NPAT (A$Mn) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 15% 0 Cards Mortgage Personal Savings Consumer Transactions Personal Lending Short Term Lending Long Term Lending Leasing & Equip Finance Business Transactions Total Mkt Share 18.5% 18.0% 14.7% 14.0% 11.0% 16.0% 16.0% 6.0% 15.0% Competitors Note: Market share figures based on outstandings, except cards which is based on NPAT estimates. Growth is for balances outstanding, for coming year Source: Group Data Warehouse, Company reports, Analyst reports, Taylor Nelson, Roy Morgan, BAH Analysis Westpac 17

In business, the biggest opportunity is in SME Geography Segments State 1 State 2 State 3 State 4 State 5 Total Agribusiness 26 112 74 35 95 44 360 23% 32 43% 15 44% 12 13% 10 22% 95 26% SME 53 462 303 145 389 182 1481 11% 18 6% 7 5% 34 9% 18 10% 130 9% Middle Market 54 133 87* 42 112 52 426 41% 12 14% 5 11% 31 28% 8 16% 111 26% Total 133 707 464 223 596 279 c2.268 19% 62 13% 27 12% 78 13% 36 13% 335 15% Source : Westpac analysis Estimated industry profit pool ($m) Estimated Westpac profit ($m) # # # Estimated share of pool % 18

In Consumer, mid lifestages are the biggest opportunity Consumer by Age Group Products 18-29 30-44 45-64 Age 65+ TOTAL Credit Cards Mortgage 12% $1Bn 15% $700M 13% $1.9Bn Personal Savings Consumer Transactions Personal Lending Total Banking $280M $1.6Bn $1.6Bn $300M c$3.8bn 11% 13% 15% 11% 14% Source : Westpac analysis Estimated industry profit pool ($m) Estimated Westpac share of pool % # # 19

Redpower - Building sustainable success Early 2003 Alignment, planning & quick wins Detailed environmental diagnostic 2003-2005 Re-position and Unlock Growth Redefine customer experience Delivery of lifecycle customer solutions Mapped capabilities and positioning against optimum Identified 80 quick wins Reposition to exploit key profit pools Upscale retention capability Optimise distribution Customer Experience Integrated Wealth People Experience Advice and coordination driven distribution model Deliver on Ask Once 20

Business - maximising value from profit pools Early 2003 Alignment, planning & quick wins Regain equipment finance book Business superannuation 2003-2005 Re-position and Unlock Growth Integrated distribution model Put business solutions into branches Feet on the street Business CRM pilot Tiered relationship management model Business CRM rollout Lifecycle packages Customer Experience Integrated Wealth People Experience Strengthen link between banking and wealth creation 21

Piloting new capabilities serving SME customers We faced key questions How to better serve SME customers in the branch? How to develop an aggressive acquisition capability? How to provide capability in the branch to serve and support customers who prefer the branch channel? (especially cash flow solutions ) How do we improve service/ problem resolution for small business customers - providing a name, face, place relationship (i.e. institutionalised service model)? How do we improve small business customer cross sell and retention? Enhancing SME in the Branch Network BSR BSR BSR Financial Centre BFM BSR BSR BSR Place Business Finance Managers (BFMs) in financial centre to gather business leads from 6-8 surrounding branches Add Banking Services Representative (BSR) role with business sales/servicing capability in each of the branches Provide Tiered relationship management model based on customer value and needs 22

Consumer - maximising value from profit pools Early 2003 Alignment, planning & quick wins 2003-2005 Re-position and Unlock Growth Extend hours to meet customer need Renew focus on customer retention Internal cost savings Increase product penetration Meet more customer needs at first contact Develop solutions that evolve with customer lifecycle Align distribution to better capture profit pools Customer Experience Integrated Wealth People Experience Integrated distribution model Strengthen link between banking and wealth creation 23

Integrated program supporting customer focused strategy Programs Key projects Cus tomer Expe rience Distribution Product & Process Excellence People Experience ask once Branch & Small Business capabilities Lending Process Project (Pinnacle) CRM Project (Reach) Customer Experience specification framework Contact Centre Optimisation Branch IT Infrastructure Westpac Academy 24

An aligned, customer focused business model Vision Strategy How? Outcomes To be a great Australian Company A great place to work A superior customer experience 1st quartile shareholder returns A good corporate citizen Customer Focus Differentiator: Superior Execution Our high performance culture: Quality people Effective people & performance management processes Values Core Group Objectives 2003 Increase employee commitment by at least 5% Improve customer satisfaction by at least 5% Achieve 7-9% EPS growth Top 5 corporate citizenship ranking Mission To be the No.1 service organisation in the financial services industry by September 2005 Values Teamwork Integrity Performance Internal Service Quality Employee Commitment Employee Retention Employee Productivity Service Profit Chain Employee Customer Shareholder Superior Customer Experience Customer Satisfaction Customer Loyalty Revenue Growth Profitability Shareholder Value Ask Once 25

Our people feel increasingly connected to our Mission Staff perspectives survey 2002 Westpac Overall 2002 Category Summary % Favourable Response 2002 vs 2001 percent increase over year Percent above / below Global Financial Services Norm 2002 Community Involvement 87 7% N/A Employee Engagement 77 N/A 1% Working Relationships Competitive Position & Customer Experience 74 73 1% 7% 7% 9% Work Processes/Systems 72 3% 3% Morale Index 67 8% 3% Leadership 65 8% 8% Employee Commitment 65 8% 2% Training, Learning & Development 64 8% 7% Performance 62 3% 15% Communication 61 5% 17% Organisational Change 59 7% N/A Pay 30 25% 3.4% 0 20 40 60 80 0% 10% 20% 30% 0% 10% 20% 30% 26

Customer satisfaction is improving Consumer Satisfaction - % of main financial institution customers very or fairly satisfied 68% 66% 64% 62% 60% SME satisfaction - total satisfied 65% 60% 55% 50% Bank X WBC 45% Bank Z Bank Y 40% Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 58% 56% 54% Westpac Bank Y Bank X Bank Z Middle Market Satisfaction - total satisfied 75% 70% 65% 52% 60% Apr00 - Mar01 Jul00 - Jun01 Oct00 - Sep01 Jan01 - Dec01 Apr01 - Mar02 Jul01 - Jun02 Oct01 - Sep02 Jan02 - Dec02 Apr02 - Mar03 Mar03 - Jun03 55% 50% Bank X WBC 45% Bank Z Bank Y 40% Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Source: Consumer -Roy Morgan Research, Apr01-Mar03, Have deposit account with bank and regard it as MFI. Business: TNS Business Finance Monitor 27

Customer experience has a strategic, operational and tactical focus Theme Projects Strategic Westpac Brand Launch of new communications positioning People and Performance (Align) Several initiatives covering KPIs, redeployment, Change Management, Learning & Development Joint Transformation Programs Reach, Pinnacle and Redpower Complaints Handling - capture, resolution, analysis & tracking Operational Runs on the Board Customer Experience Specification work 4th Leaning Map across all business units and partners Tactical Westpac Academy Customer Experience Module Network Initiatives - Ask Once coordinators in Branches and Call Centres 28

Positive and negative customer experiences Overview of customer experience Positive 74% 64% 64% 59% 57% 48% 52% Instore Phone VRU Sales Phone Staff Assisted Branches ATM Enquiries Negative 30% Source: Westpac Proprietary Research (ANOP) 29

A disciplined approach identifying customer experience improvements 1 Prioritisation Framework 2 Complaints count per month + # Customer Interactions 3 Problem? Complaint Incidence Rate & How Happy? 4 5 Current Customers Satisfaction levels & Size of Prize $? Profit pool data count per month 30

Improvement opportunities prioritised Score and Rank Order of Specifications - by Product Need & Evaluation Offer & purchase Usage - transactions Usage enquires/ problems Renew/ upgrade Mortgage Investments & advice Credit card Business Transactions Transaction Accounts Transactions Credit Cards Enquiry, Problem or Complaint Savings Risk Other lending Top 10 priority that equal 76% of the interactions 31

Customer voice identifies areas for improvement Inputs Customer Research Customer Complaint Staff Feedback Conduct Key Issue Identification Process Teambased lists created from multiple inputs Long List Issues FOCUS ONE Ten Key Issues FOCUS ONE 2-3 Key Issues FOCUS ONE Research and analysis to provide size and scope Spec. Development Touch point mapping of the customer experience Research customer s expectations Is the experience important to the customer? Can we make a noticeable improvement? Commercial Viability? 32

The first two specifications are being implemented Owner Go / No-Go Approved Decision Scope Quantify Analyse Fix Measures / Controls Customer Experience Development Team Research, Issue Identification, Solution Development Check solutions built to spec Business Owner Agree and Implement Solutions Project Management Strategy Development & Implementation Support for financial estimates as required Ongoing initiative monitoring and reporting 33

People experience has five strategic thrusts Strategic Thrusts BCB People Experience Leadership & Management People Capability Aligning reward to performance Nimble Organisation Programs to Deliver Employment Value Proposition Change management methodologies Culture development Westpac Academy Talent management strategy Recruitment strategy Learning and Development strategy Performance measurement Reward philosophy, strategy and incentive schemes review KPI Alignment Flexible industrial frameworks Continuous improvement vs large scale restructuring 34

Westpac Academy What is it? A new approach to Training Learning & Development Key focus areas - Customer Experience, Leadership, e-learning Academy Objectives Develop strategic learning framework - deployed quicker, faster and more effectively Deliver a better service experience - new ways of developing the knowledge, skills & attitudes of our people Create a learning environment that supports people development Customer Experience Module Workplace briefings and off-site activities Real customer scenarios and feedback Collaboration between customer interacting staff and business partners Individual and team reflection and action planning 35

Westpac Academy Customer Experience Module Module Structure First Activity (workplace) Second Activity (off-site) Third Activity (off-site) Fourth Activity (workplace) Fifth Activity (off-site) What should I Expect How do I lead my team to deliver Delivering Customer Experience Reinforcing what we have learnt Reinforcing leadership skills All 1.25 Hours People Leaders 1 Day All 1 Day All 30 Min People Leaders 2 Hours Rollout Workplace briefings and off-site activities Real customer scenarios and feedback Collaboration between customer interacting staff, business partners and BTSS operations 11,000 staff over the next 12 months 36

Reach program A cross product, cross geography, end-to-end sales and information management re-engineering program including CRM Key Objectives FY2003 to deliver end-end capabilities within SME market segment FY2004 to roll-out SME capabilities across all channels and segments Key Focus: - Improve customer retention rates - Provides increased sales opportunities - Improves lead and campaign management Early results Installed major infrastructure ahead of schedule SME Pilot launched over a month ago Encouraging pilot results: - Leads converted to opportunity - 78% - Cross sell - 23% - Contact to sale - 8% - Lead actioning rate - 93% 37

Virgin credit card partnership early success Strong initial demand Approvals in line with normal customer experience Value of card to Westpac supported by: - Customer skew complementary to Westpac customer base - Higher average balances - Higher revolver rate - No loyalty points cost 38

Business & Consumer Banking maintaining momentum Strong earnings growth Maintaining or growing market share in key segments Profit pool analysis highlighting significant untapped potential across the franchise Significant enhancements to core infrastructure beginning to deliver benefits Superior staff commitment delivering a leading customer experience and a sustainable competitive advantage 39