Credit Suisse First Boston Asian Investment Conference Philip Chronican Chief Financial Officer Westpac Banking Corporation 25 March 2004
Westpac at a glance Established 1817 Top 100 bank globally 1 Core markets of Australia, New Zealand and near Pacific Tier 1 Ratio Sept 2003 4 year EPS 2 CAGR 11% Return on equity 2 21% Dividend yield 3 4.3% 7.2% 7.7 million customers Leader in sustainability Credit Rating Total assets Market cap 3 AA- / Aa3 A$221bn A$33bn 1 Euromoney June 2003 2 Cash earnings basis 3 As at 18 March 04 2
Improved staff and customer satisfaction Employee commitment % of employees reporting a positive score 100 80 60 40 20 0 2000 2001 2002 2003 Employee Commitment Leadership * New measure introduced in 2002 Employee engagement and effort* Consumer Satisfaction - % of main financial institution customers very or fairly satisfied 68% 65% 62% 59% 56% 53% 50% Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Bank X Westpac Bank Y Bank Z Source: Consumer - Roy Morgan Research. Have deposit account with bank and regard it as main financial institution. Increased market share of total Australian credit over last three years by 200 basis points 3
Driving the gap between revenue and expenses $m 4,000 3,500 4 Year CAGR 1 3,000 2,500 2,000 1,500 Revenue 7.5% 2 Expenses 3.5% Core earnings 12.5% 1,000 500 1H99 2H99 1H00 2H00 1H01 2H01 1H02 2H02 1H03 2H03 1. Underlying basis (excl. significant items but not adjusted for acquisitions and disposals) 2. Excluding goodwill 4
Points of differentiation Strategy - Focused on core markets of Australia, New Zealand and near Pacific - Customer centric organisational structure - Balanced wealth management position Customer franchise - Large customer base skewed towards higher value segments Low risk - Continued improvement in asset quality, sound provisioning coverage - Strong capital position Leader in sustainability - Corporate governance and sustainability ethic embedded in the organisation - Leading bank globally in the Dow Jones Sustainability index, two years running 5
Current issues Impact of the economy on our business Housing market coming off the boil Capital generation parameters Maintaining the efficiency momentum Credit cards industry developments and implications 6
Australian and New Zealand economic outlook Australia and New Zealand economic fundamentals sound due to: - Solid domestic demand Key economic indicators World 2004 % 2005 % - Strong business sentiment In year ahead, activity will be boosted by an export recovery driven by the rural sector and a stronger global economy GDP Australia GDP Unemployment 4.3 4.2 5.3 3.8 3.2 5.3 Short term interest rates increased in 2003, with further modest increases expected later in 2004 New Zealand GDP Unemployment 3.6 4.5 3.3 4.7 Source: Westpac 7
Economy operating with a more sustainable mix Percentage point contribution 8 6 4 2 0-2 8 Key contributors to Domestic Demand Source: ABS, Westpac Consumption Dwellings Business invest Domestic demand 8 6 4 2 0-2 8 2002 2003 2004f Percentage point contribution 6 4 2 0-2 Source: ABS, Westpac Key contributors to GDP Domestic demand Exports Imports GDP 6 4 2 0-2 2005f 8
Credit growth returning to longer term average Australian Credit Growth 24 20 16 12 8 4 0-4 % Forecasts 24 20 16 12 8 4 0-4 -8 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Housing Business Total Total period average -8 Source: RBA 9
Housing market beginning to slow Some easing in activity but growth still above long term average Higher proportion of refinancing/new approvals are fixed rate While growth is easing, the value is still higher than a year earlier Westpac housing loan applications 20 18 16 14 12 10 8 No '000 6 4 Oct02 Nov02 Dec02 Jan03 Feb03 Mar03 Apr03 May03 Jun03 Jul03 Aug03 Sep03 Oct03 Nov03 Dec03 Jan04 Feb04 Easing growth has been accompanied by increasing competition in both fee and margin discounting Westpac s Australian market share of housing has eased from 17.9% at September 2003 to 17.7% at January 2004 Australian housing finance AUDbn/mth 18 15 12 9 6 3 0 investor finance, ex-construction owner-occupier finance, ex refinancing 'total' finance Source: ABS Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 10
Considering Westpac s overall capital position Capital levels set to maintain a strong and efficient capital base and AA rating Tier 1 6.00 6.75% ACE 4.50 5.00% Factors relevant when considering capital management initiatives Overall capital position and capital generation/usage Level of franking credits no longer a constraint. Balance $612m at Sept 2003 Average share count aim to minimise difference between cash earnings growth and EPS growth Capital ratios (quarterly) 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 ACE Tier 1 Number of shares on issue ( 000) 1,850 1,830 1,810 1,790 1,770 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Spot shares Sep-03 Average shares Mar-03 Sep-03 11
Medium term parameters capital generated Capital generated for every $100 of equity Metric Cash return on equity 20% Dividends - 60% to 65% payout Dividend reinvestment 20%-27% participation Risk weighted asset growth 7%-10% Wealth management growth Other factors Excess capital Approximate Capital generated/ consumed $20 -$12.6 +$2.7 -$4.5 -$1.7 +/- $0 to $2 $2 - $4 Above 20% for over 3 years Comments Payout consistent with providing strong payments to shareholders and retaining sufficient capital for growth Participation rate has varied in the mid 20% s most recent participation was 22% Equivalent to long term credit growth around 8-12%. Wealth business is currently on a strong growth path Changes in capital deductions eg (FITB/FCTR), due to FX and timing issues Long run average of capital generated per annum 12
Factors impacting capital generation in 2004 Metric Return on equity Dividends Dividend reinvestment Capital usage above/ below standardised scenario In line In line In line Comments No reason to suggest ROE would be significantly different in 2004 Payout ratio expected to be similar to marginally higher Participation rate within normal range Risk weighted assets Wealth management Other factors Excess capital generated Above In line Higher Lower Credit continues to grow above long term norms Increasing life and risk business requiring additional capital Stronger AUD, Higher FITB and FCTR Overall capital generated in 2004 expected to be below long run average 13
Cost philosophy and the efficiency pipeline Medium term drivers suggest cost growth in 2-4% band Higher cost growth tolerated only if delivering higher revenue generation Conservative capitalisation policy Aim to absorb major projects and initiatives within cost growth bands Continue to develop initiatives delivering sustainable improvements in productivity the pipeline Growth in ongoing operating expenses 1 6 5 4 3 2 1 0 2000 2001 2002 2003 1. Excludes significant items and impact of acquisitions/divestments Cost efficiency pipeline 2-4% $m 2004(f) 2005(f) 2006(f) Outsourcing 8 17 17 Wealth integration Lending processes 21 19 42 60 42 74 Head office relocation - - 2 Other initiatives 42 46 46 Cumulative total 90 165 181 Annual increment 90 75 16 14
2004 cost outlook No expectation that cost growth will exceed medium term guidance of 2-4% Delivering result despite major initiatives underway Special factors impacting 2004 cost base Costs to be absorbed General salary increase of 4% in October 2003 Major compliance projects Increasing superannuation costs Additional investment to add to efficiency pipeline in 05 and 06 Benefits to be realised No additional pressure from NZD/AUD exchange rate Decreases in temporary staff as some project work eases Continued benefit from efficiency pipeline 15
Credit cards undergoing significant change Reserve Bank of Australia announced major credit card reforms Aug 2002 Reduced interchange fees for bank issued credit cards dropped from 95bps to around 53bps Reduced barriers to entry Removed prohibition on surcharging for card transactions Tougher competitive environment impacting profitability Entrance of new players - Virgin New no frills products being introduced Low introductory rates and special offers now prevalent Revolver rates lower than expectations 16
Credit cards Westpac s strategic response Realignment of various card related fees completed March 2003 Reducing cross-subsidisation across customers Partner with Virgin Money as a supplier to the Virgin card Reducing cost of loyalty points including redemption costs to airline frequent flyer schemes March 2004 Developing new card offerings to better meet specific customer needs Introduced new Altitude Amex companion card February 2004 17
Credit cards financial impact In 2003, previously advised that the cost of reforms would be approximately $25m - $40m p.a. (post tax) from 2004 The 2004 impact will be approximately $15m (post tax) Given our strategic response, the full-year impact of the credit card reforms in 2005 and beyond is likely to be broadly earnings neutral However, competitive intensity is increasing following the credit card reforms and is placing pressure on overall returns 18
Effectively addressing the challenges Robust capital generation with flexible options for capital management Efficiency disciplines remain Cards effective strategic response to changing industry dynamics 19
Westpac s on track Economic environment remains benign overall, despite the housing market softening Cash earnings for all major businesses tracking ahead of that for the same time in 2003 Asset quality remains sound No major impact from rise in Australian dollar The business has performed solidly, in the face of increasing competitive intensity 20
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.