Westpac Banking Corporation · ASX:WBC
Westpac Banking — CEDA lunch (September 2003)
16 slides from Westpac Banking's conference presentation, Sep 26, 2003
Slide 1: Impact of Basel II on Australian Banking
Ba Austratia’s First Bank “Impact of Basel Ilon n Australian ~ ‘Banking: ~ Philip Chronican Chief Financial Officer SLIDE 1 - TITLE SLIDE Thank you and welcome to this CEDA funch focusing on the impact of Basel il on the Australian Banking environment.
Slide 2: Basel II - Agenda
Basel Il - Agenda * What changed? ~ Basel | ~ Basel Il evolution to more sophisticated risk measurement and management ~ Three pillars * Australian banking system well placed to benefit * Challenges of introduction are surmountable * Westpac likely to see significant benefit * Understanding the barr
Slide 3: Basel II - what changed?
Basel Il - what changed? Basel i Basei li — internal Ratings Based (IRB) approach 420% Corporates 60% 400% a +600% 400% . 160% 2 60% 2 80% EJ gs Risk weights assigned across 2 Mortgages $ the spectrum % 60% 50% ¥ 60% 8 z @ 40% 40% Banks 20% 20% Govern: 20% ments 0% 0% O% * More risk sensitive * New
Slide 4: The three pillars
The three pillars Pillar 4 : : Minimum capital requirements Standardised Risk weights established from external credit assessment Probability of Default provided by internal bank estimates Foundation IRB Loss Given Default, Exposure At Default and Maturity Coefficients set by Basel formula Advanced
Slide 5: Basel II shows Australian banks to be high quality
Basel Il shows Australian banks to be high quality * APRA expecis the 4 Australian majors to comply with the most sophisticated modeis (IRB & AMA approach) * [International peer analysis shows Australian major bank risk- adjusted assets to decrease by more than any other jurisdiction ~ APRA expects
Slide 6: Pillar 3 - reducing the 'black box' perception
Pillar 3 — reducing the ‘black box’ perception Transparent > Transparent risks a a oo tiske 7 increased transparency Risks Reduced ‘Black Box’ Today Basel Hl Berane: inpact of Basel | on Australian Banking SLIDE 6 - PILLAR 3 - REDUCING THE ‘BLACK BOX’ PERCEPTION - Banks have tong agreed that Basel |
Slide 7: Westpac disclosed Basel II results early
Westpac disclosed Basel Il results early ‘DRET Reviils - expoctest parcontige ctionge:in ick weighted asvets basad:on the rich: | measurement methodology adupted ~ staudardived, folmdation or adeanced, Tse mare Ayoras, tha. sueehadtotogy, the giemter ite pstendtal reduction in Fisk a3aate. Gandordse
Slide 8: Challenges in implementing Basel II
Challenges in implementing Basel il * Data and systems changes * Pro-cyclicality ~ amount of capital required to support a business capable of absorbing losses through the cycle * Some vagaries in interpretation of the Accord * Discretion by regulators needed to avoid market disruption in some secto
Slide 9: Challenges - accuracy of credit risk parameters
Challenges — accuracy of credit risk parameters * Large variances in the quality and credibility of systerns used to collect loan data (Q1S3 highlighted wide variations in reported numbers) * Credit scoring for investment grade loans relatively new for some banks * Banks need to understand ratings m
Slide 10: Challenges - Westpac's LGDs (conservative and compliant)
Challenges - Westpac’s LGDs (conservative and compliant) Benchmark Loss Given Default (LGDs) = - : : indexed to Base! 1 QIS3 requirement * Westpac has: ass WBC QIS3 = 44 years of LGD data require- | Submission ment ~ Westpac has 25 risk Raw LGD “ “grades (19 for 7 No costs 40 60 performing loans and
Slide 11: Westpac to benefit from Basel II
Westpac to benefit from Basel II ¢ Wesipac has been working on Basel compliance for three years ¢ Early results support the hypothesis that we are “safer” than previously perceived ¢ Feedback from stakeholders has been positive * However, barriers still exist 1 Giest anak Impact of: Basel Lon: Austr
Slide 12: Addressing the barriers
Addressing the barriers * Consistent adoption of the accord globally ¢ Implementation delays suggested ~ Europe - US ¢ Augmenting with approaching IFRS changes - dynamic provisioning ~ hybrid instruments ~ loan portfolios on-sold * Gaining regulatory approval 1 Giest anak Impact of: Basel Lon: Austr
Slide 13: APRA have indicated some level of capital relief
APRA have indicated some level of capital relief ¢ APRA has provided significant input to the Accord ¢ Basel ll provides deeper insight into bank risk management - Gives greater comfort in the robustness of risk management practices - Compliance simplifies assessment of operational risk management ~
Slide 14: Hesitancy from rating agencies globally
Hesitancy from rating agencies globally View Response Agree in principle but QIS shows the average Australian bank was as good as/better than the top bank globally — Maintaining capital for the industry as a | whole leads directly to lower - requirements for Australian Banks Proposition that capital
Slide 15: Recognition already exists in the global capital markets
Recognition already exists in the global capital markets Senior FRN Spreads to US$ Libor Abbey Aad/AA- i nnn HBOS Aa2iAA 16 Spread to US$ Libor (bps} 0 1 2 3 4 5 & Tenor (years) = Westpac {AasiAAY % HBOS (Aa2/AA) 8 ABBEY {Aa3/AA} nmees Polynomial (HBOS {Aa2/AA)} — Polynomial (Westpac {Aa3/AA-)) mmm
Slide 16: Conclusion
Ba Austratia’s First Bank ~— Conclusion CONCLUSION In summary let me recap. - The Basei il approach is a major step forward for banks, regulators, investors and rating agencies. - Australian banks are well prepared for the changes and Westpac does not support any delays in implementation. - We expec