Westpac Banking Corporation · ASX:WBC
Westpac Banking — Investor Presentation (November 2002)
70 slides from Westpac Banking's investor presentation, Nov 12, 2002
Slide 1: Investor Discussion Pack
Bis | Austialia’s First Bank Investor Discussion Pack Philip Chronican) Chief Financial Officer November 2002 “David Morgan... Chief Executive Officer
Slide 2: Index
Index Suramary of 2002 earnings and acquisitions/divestments Points of differentiation Strategy Customer base Low risk -- stressed loans, provisioning and capital generation Sustainability, staff, customers, comunity What the market is saying Wealth management position and acquisitions Wealth manage
Slide 3: A transformational year
A transformational year * Earnings momentum maintained - Record reported earnings of $2,192m up 15% - Underlying cash earnings (before significant items) up 9% - Ongoing cash earnings up 12% ~ Dividend of 70 cents per share fully franked up 13% - Return on equity maintained above 20% * Business repo
Slide 4: Reconciliation of ongoing earnings
Reconciliation of ongoing earnings gm 2002 2001 -% Change Reported NPAT - 2,192". 1,903 15% Less individually significant items? ~ (181) (49) Large Underlying NPAT : “2,014 1,854 8% ~ Add goodwill 100. 98 2% ~ Less distributions on other, equity instruments (48) (61) 8% Underlying cash earnings : 2,
Slide 5: Underlying cash earnings up 9%
Underlying cash earnings up 9% Lower corporate tax rate Expenses 1% lower and offshore losses $m over the year reduced tax charge 2,400 5 ~ 3 2,063 2,050 + 129 — _ 2,000 + f Sh, 4,950 + Increase due principally to 4,901 a small number. of high \ profile defaults Sound revenue growth oo S offset by l
Slide 6: Dividends
Dividends ai Cenis per * Dividends up 13% Shae? * 5 year CAGR 12% p.a. 80 * Pay-out ratio on underlying cash 70 4 earnings increased from 59% to 61% 60 - * Fully franked dividend yield 5.1% approx 50 - a7 * $400m returned to shareholders via 404 3 buy-back 30 20 10 8 i — 4997 1998 1999 2000 2001 200
Slide 7: Business unit performance
Business unit performance Net Profit SSE Contribution to growth - Consumer Products ‘eee ; ae ~- i 63 Bus, & Reg. Banking i 2 nn 56 ~ Consumer Distr. : a 69 Business Products mis. “Aust Funds Mgt essa, mS a . mi3 Insti, Bark [=e — NZ Rett mmm (20) Pacific Bank pi : 2)! Aust Life ; oo m2 NZ Jife : :
Slide 8: Rebalanced business mix
Rebalanced business mix al tegic atic AGC. divestmen : Low growth/higher risk business. Rothschild acquisition : os Rated funds & distribution - Hastings acquisition a infrastructure expertise ; BT Financial Group acquisition Platform and product capability, funds scale Cumulative earings impact of
Slide 9: Improving growth trajectory
Improving growth trajectory Strategy based on premise that value is a function of return and growth Economic profit * Value = rg * Growth rates a critical value determinate * Underlying profit from the AGC auto and consumer businesses had declined in the two years prior to 2002 * Industry consensus
Slide 10: Points of differentiation
Bis | Austalta’s First Bank : Points of differentiation - November 2002
Slide 11: Points of differentiation
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 ~ #41 0r#2 market share in all major custorner segments in Australia and New Zealand - Cust
Slide 12: A straightforward strategy — well executed
A straightforward strategy — well executed Customer focus Product innovation Process / cost efficiency * Broadening customer relationships * Embedding a high performance : : culture * Wealth management integration * Building strong corporate reputation * Driving operational efficiency 9 9 corp P Inv
Slide 13: Customer base skewed to higher value demographics
Customer base skewed to higher value demographics Customer numbers Australia 6.0m New Zealand 4.3m Other 0.2 Total 75m Position in core markets % Australian value quintiles’ 30 2 Population distribution #® Distribution of Westpac's Australian customer base Australia New Zealand Consumer 2i 42 Busine
Slide 14: Low risk - stressed loans remain near historic lows
Low risk - stressed loans remain near historic lows * Net impaired assets down $223m on September 2001 - $95m from 2 large write-offs - $51m from sale of AGC * Signs that corporate downgrades and defaults are easing * Business banking credit quality remains strong * Quality of mortgage book outstand
Slide 15: Low risk — sound provisioning cover
Low risk — sound provisioning cover Specific Provisions / impaired Assets (%) . : General provisions / non-housing - performing loans (%) oe Yo 24 60. as : os ; : ; ae ae B24 MR : ; : : 55.4 S. IN ; ee ; UN TAOS . f . e e ws . . . L_ 454 ; : 1.84 oye oy Fee AL “| ace ON aa fom 1.6.4 oe : We ae. . ve
Slide 16: Surplus capital generation continues to be a strength
Surplus capital generation continues to be a strength % of avg § million ordinary comments equity Average ordinary equity 10,269 Cash earnings 2,063 20.1% | Strong cash returns Dividends paid (1,266) 12.3% | Payout ratio 61.3% Rcinwestnent Bien (DRE) 289 2.8% | DRP participation 23% Reinvested for g
Slide 17: Enhanced sustainability - staff
Enhanced sustainability - staff Westpac Overall 2002 Category Summary Staff perspectives survey 2002 2002 vs 2001 percent increase over year % Favourable Response Community Involvement Competitive Position & Customer Experience Employee Commitment Training, Learning & Development Pay 25% Percent abo
Slide 18: Enhanced sustainability - customers
Enhanced sustainability - customers % of personal MF] customers very or fairly _ Satisfied! % Economic : “Vi 4 +VE & Profit. . ® f . _ t 204 | Le & : PPPPP PLIES? Eig —¢—Westpac ~“GPeer average’ e *average of other major banks a “Source Roy Morgan June 2002 wy £107 Business customer satistaction - v
Slide 19: Enhanced sustainability - governance and reputation
Enhanced sustainability - governance and reputation Number 1 Sydney Morning Herald / The Age Good Reputation Index 2002 Number 1 bank globally in Dow Jones Sustainability Index 2002/03 First social impact report produced LE Soe re tase A fresh perspective... Investor ion Pack — Full year 2002
Slide 20: What the market is saying
Bis | Austealta’s First Bank _ What the market is saying November 2002
Slide 21: What the market is saying
What the market is saying * Whatis Westpac’s wealth management strategy and how is value going to be created? * What are the risks in the wealth management integration? * What are the risks In the housing cycle? ° What are the significant items ? * Overseas exposures - what is Westpac’s position? °*
Slide 22: Wealth management - operating across the value chain
Wealth management - operating across the value chain 7.5 Million 700 Westpac | Leading wrap | Broad Core Australian | Outsourced Wesipac planners & and corporate | product equites style partners for customers advisers super range funds admin platforms External . Access to non- | 1,000 Proven mangers
Slide 23: Wealth management - BT acquisition and value acquired
Wealth management - BT acquisition and value acquired * Price $900m - net asset value $128m * EPS positive end 2004 * Retail funds outflow assumed to continue into 2003, turning around by end 2004 - base case * Price represents 81% of assessed value with all revenue benefits and 25% of cost synergie
Slide 24: Wealth management - BT synergies higher than expected
Wealth management - BT synergies higher than expected * Following nine week design phase, consolidated synergies are now estimated at $102m pa in FY05 with implementation costs of ~$142m Synergies identified gm) 120 4 : 700 increased revenue contribution. @ Cost savings : : 402° Re Sie pe ee oS fag
Slide 25: Wealth management — controlling integration risks
Wealth management — controlling integration risks Mitigating strategies/actions . 7 » Dedicated integration tearn in place Diversion » Internal distribution network is quarantined from integration 2 BT investment management tear not acquired Retail funds Put inted for int tional iti outflows » Putna
Slide 26: Wealth management — key milestones
Wealth management — key milestones Q3 ‘02 Q4 ‘02 OH 03 2 “OS Management team confirmed *: oe : ; : ; Investment team confirmed — : * Putnam selected : ; * ai Brand approved ~._ oe bie 48 Co-Locations 9 : a * . : BT Wrap rollout “0 S mesh ace, ae Corporate Super rollout = ; ; : . * Cail centre consol
Slide 27: Wealth management — combined funds under management
Wealth management — combined funds under management WBC: Rothschild. BT “Asset class ~ ; aaa $bn Sbn gbn “Total bn. “Cash and liquid assets °° 6800 05 oon ey ee ~ Australian fixed interest BB 2200 4.9 79. “international fixed interest Oe AO OS OB 0 7 26 Property So Se pg gg og fo ae “Australian equi
Slide 28: Housing market - state of play
Housing market - state of play * Growth in system housing lending has aeieacnge mene a8 a proportion of average been strong, increasing over 19% for 0% year to Septernber 2002 45% 40% / \ ° Market growth supported by: 33% t= al 30% . ee - Increase in investment loans 25% fae ~ 20% - - Government sub
Slide 29: Westpac mortgage portfolio
Westpac mortgage portfolio . . Composition of housing portfolio *® Housing lending grew 15% (16% Sbn . : including securitised loans) 80 é 70 ~ * Securitised $2.1bn in March 2002 60 mEquily access : 50 ' * Portfolio biased to upgrading borrowers 40 Tene not new home owners 30 si Owner occupied 20 .
Slide 30: Housing portfolio quality
Housing portfolio quality * 100% mortgage insurance where Mortgage portfolios $78bn at 30 Sept 2002 Loan to value (LVR) ratio > 60% Proportion of portfolio with initial LVR > 80% * Insurance required for loans > $1.3M and LVR > 70% newer ineurer * Overall delinquencies continue to 20% decline to rec
Slide 31: Stress testing mortgage portfolio
Stress testing mortgage portfolio * Detailed stress testing completed to determine expected losses under more severe economic conditions. Tested separately and jointly for: - upto a4 percentage point increase in cash rates; - 20 per cent decline in housing prices; and - a 200 basis point increase in
Slide 32: Offshore exposures
Offshore exposures *° Offshore exposures primarily te supporting customer relationships in Offshore committed EXPOSUTES Sbn Australia and New Zealand : us Europe dapan Asia Total * Total portfolio 5.5% of committed AAAIO AA 1,786. 803 160.85, 2,834 exposures ; : : ; * Proportion of total portfolio t
Slide 33: Offshore exposures - investment securities
Offshore exposures - investment securities History * Portfolio acquired in 1997 to 1998 * Proposition was that a widely diversified portfolio of BBB and BB rated securities would perform in a predictable manner and generate reliable income to consume US and UK tax losses * Rise in credit spreads and
Slide 34: Tax reconciliation on ongoing business
Tax reconciliation on ongoing business : Ongoing Operating profit before income tax (including gross up) Operating profit before income tax (excluding gross up) Prima facie incorne tax on operating profit before income tax {excluding gross up) based on the company tax rate of 30% Add (or deduct) per
Slide 35: Summary of significant items
Summary of significant items Acquisition and divestment : AGC sale “9 § 754m after tax profit Integration expenses (RAAM/BT) % > Integration expenses of $60m post tax More conservative treatments ’ "Written off embedded value (109m post Embedded value and goodwill oad tax) and recognise goodwill on
Slide 36: Significant items - wealth management financial impact
Significant items - wealth management financial impact Accounting rules require three approaches: ene Before Tax $m : : RAAM BT : Expenses incurred in acquiring entity 19 67 ~ charge when known Expense incurred in target entity 9 70 ~ fair value adjustment (increase in goodwill) Uncertain future exp
Slide 37: Significant items - superannuation prepayment
Significant items - superannuation prepayment Superannuation fund surplus brought to account in Staff Super Fund Value at 1 October 2004 1994 and treated as a prepayment of P $m superannuation expense. Decided to adopt 8 & international Accounting Standard ((AS19) given 2,000 =« 3 We SEAP 24 redunda
Slide 38: Significant items - outsourcing transition expenses
Significant items - outsourcing transition expenses Reviewed all categories of deferred expenditure and decided to change the policy to write-down $136m ($95m after tax) covering all outsourcing transition expenses relating to technology and telecommunications, the mortgage processing centre and oth
Slide 39: Assumptions underlying growth outlook
Assumptions underlying growth outlook * Credit growth in the 8% to 10% “Australian credit growth range % ann. : oe oo. 245 forecast * Atleast maintain market share 30 : momentum across core producis 16 4 * Expense to income trending lower . 124 against re-based costs a . . “84 * No material change i
Slide 40: Growth outlook - re-acquisition of AGC business portfolio
Growth outlook - re-acquisition of AGC business portfolio * Between Jan 02 and May 02 Westpac re-acquired $1.1bn of AGC business receivables 5.0 Forecast * Sold $4.1bn to AGC May 02 fl Actual re-acquisition 404- of business book : LL * $2.2bn re-acquired by end Sept 02 € Initial planned rate of * No
Slide 41: Growth outlook — expense analysis
Growth outlook — expense analysis ° Efficiency momentum expected to be Cost to income ratio maintained in 2003 60 % * Higher cost to income base of 53.6% following 55 M AGC Impact AGC sale and wealth management 50 acquisitions, including BT 45 * Given reduction in cost base in 2002, headline 40 cost
Slide 42: Small and medium enterprise (SME) portfolio growth
Small and medium enterprise (SME) portfolio growth * Small and medium businesses are in % Capitat expenditure and forward estimates excellent shape, with strong cash reserves and modest gearing * In 2003, expected pick-up in business lending driven by capacity constraints from solid consumer demand
Slide 43: Business banking portfolio quality
Business banking* portfolio quality * Total portfolio exposure $33bn* * In growing the portfolio, Westpac has maintained its credit standards with the overall quality of the book improving * Most growth expected from existing customers. * Business acquired from other financial institutions subject t
Slide 44: Institutional banking performance
Institutional banking performance * Disappointing performance from institutional banking with profit falling Financial markets eamings 25% $m . 500 + * Results impacted by: 450 + ~ Write down and charges against investment securities portfolio 400 = ~ Bad debts associated with a 350 5 small number o
Slide 45: Outlook
Bis | Austealta’s First Bank Outlook November 2002.
Slide 46: Priorities for 2003
Priorities for 2003 * Maintain momentum in ongoing businesses ~ Complete initiatives arising from NZ program review ~ Implement program reviews of Australian Banking and Institutional Banking ~ Complete end-to-end re-engineering of lending processes * Deliver value from new acquisitions ~ Complete w
Slide 47: Economic environment
Economic environment * Australian economy in good shape goa * GDP growth in 3.0% to 3.5% range 8 Aq) * Housing to slow; business / investment and exports up * Unemployment falling into the 6% to 6.5% range * Underlying inflation back in 2% - 3% Fe Ee ee a 0 bee range * Rise in official rates not exp
Slide 48: Where are the risks?
Where are the risks? Risk * Australian economy stalls * Irrational competition * New entrants * Re-reguiation * Acquisition risk * New wave of corporate collapses Probability of occurrence Low Low Low Medium / low Very low Low lnvesior Discussion Pack — Full year 2002
Slide 49: Regulatory issues
Regulatory issues * Credit card reform ~ Reforms released by Reserve Bank of Australia 27 Aug 02 ~ Affects interchange fees, ends restrictions on cost recovery by merchants and removes restrictions on new entrants ~ Interchange reforms apply from October 03 ~ Assuming average reduction of 40 bps in
Slide 50: Summary and earnings expectations
Summary and earnings expectations * Core businesses continuing to deliver * Transformed the business underpinning medium term growth trajectory * Lower risk and higher quality earnings : Earnings Expectations ao : cone Sepa 3003. Core business EPS growth ; , : 9%-11% Dilution of recent transactions
Slide 51: Supplementary Information
Bis | Austealia’s First Bank | Supplementary Information - November:2002
Slide 52: Composition of portfolio - % of total committed facilities
Composition of portfolio - % of total committed facilities Other consumer includes credit cards, personal lending and margin lending Mortgages represent 36% of total commitments and 55% of funded lending 70% business / corporate portfolio exceeding investment grade Portfolio by customer segment”. 10
Slide 53: Industry exposure — 1996 to 2002
Industry exposure — 1996 to 2002 is) Forestry, printing & paper products Insurance : : i i H i ; : i 3 i i i a i y a i i i 1 5 : : 2002 5 ; i ' #1996; 4 H i i i 0 q 2 3 4 5 6 7 % Group Total Committed Exposure Ful ye
Slide 54: Total exposure by booking office
Total exposure by booking office’ Australia pede . ‘Americas Europe ase Japan. Group. AAA to AAw 32,833 _ 6,663 4,786 - 20. 803 2 BG BO 42,994 Akio AL” 42,978 2,704 2,619.0 2,334 SB eB) 20,643. - BBB+ to BBB. “49,385.00 A772 “4,043 2,068 2600027 203 BB+ to Br ; 30,542 6,080. 37,260 <B+ 94324 288 2,2
Slide 55: Single name exposure concentrations
Single name exposure concentrations Top 10 exposures to corporations : Top 10 exposures as a % of total and NBFIs 0-0. foe committed exposure S&P Rating or Equivalent 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%. T i i i } i : 1 5 i i i i 5 : 5 i i i 5 : i i 4 fl i i } i : i i i i f i : i a i i 5 : i | 5 : i
Slide 56: Telco and energy exposures
Telco and energy exposures Telco exposure i Australia (100% 4,600 . & AAA TO BBB+ invesiment grade) 1,400 : 4,200 BBB fo BBB. (Asia (100% 4,000 . Invesiment grade) 800 "EBLIOBE. we Europe (54% 600. os 400 O >BB- ; investment Grade) 200 487 @ Nth Arnerica (0% oy 1” Invesiment grade) 4,516 Global ener
Slide 57: Institutional banking portfolio quality
Institutional banking portfolio quality * Increase in impaired assets since 2000 due to small number of high profile defaults * Decline in impaired assets in 2002 related to write-down in two major impaired assets of $95m impaired assets to total WIB © committed exposure : % 0.7 0.6 0.5 ae 0.4 “037
Slide 58: Consumer unsecured portfolio
Consumer unsecured portfolio * Strong growth in portfolio led to Bad debt charge as a per cent of outstandings. increase in bad debts Basis point : 300.5 000 * Planned pick-up in delinquencies in line with credit scoring adjustments 250 200 * Modest increase in bad debts in 2002 2000 ; 2004 “oe gona
Slide 59: Impaired assets — reconciliation of balance
impaired assets — reconciliation of balance Other includes 427 54 loans returning to ~ iat performing, and 4,200 4 461 security realised 1,000 4 902 4 800 4 696 600 4 400 + 200 - 0 r r T t t 1 Gross New AGC Sale Written off Other Gross impaired impaired Impaired Sept 2001 Sept 2002 Bis. Bank lovesto
Slide 60: Bad debts within long run averages
Bad debts within long run averages Total bad & doubtful debt charge to average loans and acceptances Expected long run average 25-35 bp 1995 1996 1997 1998 1999 2000 2001 2002 lovestor ion Pack — Full year 2002
Slide 61: Provisioning coverage
Provisioning coverage Total provisions to total. || General provision to non-housing impaired assets “oS performing loans & acceptances ys oe nae %, 300 po ee 3 243 250. + : 233 200 + 193,188 477 150.4 100 + bpp o- 1 t 4994.1995..1996. 19971998 1999. 2000..2004 2002 1996-1997. 1998 1999 - 2000. 2004
Slide 62: Analysis of margin dynamics
Analysis of margin dynamics 2001 H1 2002 H2 2002 2002 2003* Reported margin 3.14 2.90 2.70 2.80 icy bill acceptance . 0.15 0.20 0.18 0.20 lrnpact of AGC sale - - 6.09 0.05 0.16 Normalised margin 3.11 3.05 2.99 3.03 * Full year impact.of 2002 items .. : 2001 2002 Margin) ete ainteeage | _Marain Austr
Slide 63: Online growth
Online growth On-line Banking On-line Broking - Australia f 4,680,000" | la 1 in online usage 420,000 4,600,000 4,400,000 4,200,000 4,000,000 800,000 600,000 490,000 200,000 100,060 80,000 60,000 40,000 20,000. an) : o+ ee eee = ee “a: Se 55 $8 8 5 8 8.8. 3°85 8..8 8 BOB i Australia at New Zealand :
Slide 64: Executive compensation
Executive compensation * Retained and reshaped long term incentives ~ Alllong term incentives hurdled and eligibility reduced - Hurdles tightened (no vesting at <50"" percentile) ~ Moving from 100% options to - 50% performance options, 50% performance share rights * Cost of equity based compensation
Slide 65: Wealth management business
Wealth management business NPAT § million . : 992 2001 % Change Funds management (Australia) 02 WB ee 49 Funds management (New Zealand) . ; : - 3 : 5 (40%) Total funds management... 2 Le = 4108 . o7 . 14% Lite insurance and tisk (Australia) a en . 36 ; O24 . 50%. Life insurance and tisk (New Zealand
Slide 66: Capital levels comfortable
Capital levels comfortable 7.55 Tier 1 ratio ACE Ratio Wm A1HO2 @ 2HO2 @ After BT * Prior to change in APRA deductions | Wesnee | Austcalio’s iis! Bank Investor Discussion Pack — Full year 2002
Slide 67: Reconciliation of provisioning
Reconciliation of provisioning Provisioning Balance Movements from 31.March 2002 a Reconciliation of provisioning » Opening balances ; : = : 1.657 “Sold wih AGC (168) Write-off of wo major impaired assets _ : os (95) “Bub total 4,397 : ‘Net new. provisions 0 Sg Closing balance ; aga lovestor Discuss
Slide 68: Full year earnings reconciliation
Full year earnings reconciliation _twelve months to: Se me _tielve months to: 30 Sept. 2002... 30 Sept, 2001 individually a + . She . Reported --eivie Underlying Ongoing “Reported Accounting _ Underlying ‘Ongoing $m results significant “Business ACCT Business results change . Business “°° business.
Slide 69: Half-on-half earnings reconciliation
Half-on-half earnings reconciliation 30 Sept. 2002 31 Mareh 2002 Individually . . ; A 7 ~ ; Reported HOt Underlying Ongoing) “Reported Accounting Underlying Ongoing $m results sfanificant business AGC yusiness| results.” change _ business AGE susiness interest income Gnd. gross up) 4,088 : 4.686 178
Slide 70: Disclaimer
Disclaimer The material contained in this presentation is intended to be general background information on Westpac Banking Corporation and its activities as at 12 November 2002. The information is supplied in summary form and is therefore not necessarily complete. Also, it is not intended that it be
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