Abacus Lobbying Priorities AM Institute Risk Forum Barossa

Abacus Lobbying Priorities AM Institute Risk Forum – Barossa Valley, November 2012 Mark Degotardi, Head of Public Affairs Abacus

Today § Identify some challenges in the operating environment § What on earth is lobbying anyway? § Identify some regulatory risks § Abacus’ main focus for 2013 § Risks and opportunities for mutual ADIs § Questions 2

The Operating Environment 3

Strong fundamentals Estimated percentage of population by state who are members of mutuals 26% 18% 7% 30% 28% 10% 4 8% 4

Strong fundamentals 5

Strong fundamentals 6

Customer Satisfaction at 31 October 100. 0 90. 0 80. 0 70. 0 60. 0 Total Building Societies 50. 0 Total Credit Unions Total Mutual Banks 40. 0 Total Banks 30. 0 20. 0 10. 0 Total Building Societies Total Credit Unions Total Mutual Banks Total Banks 7

Key providers in bank dominated market 8 Source: APRA & RBA 8

But we have changed over time Mutual Sector – Distribution of ADIs by asset size ($bn) 6% 6% $4 bn+ (L 6) 12% $1 bn - $4 bn 48% $500 m - $1 bn $200 m - $500 m 28% <$200 m 9 Source: 2011 Mutual Sector Annual Reports 9

Some reality checks in a tough market 1. Growth - below system for assets and deposits - At system for loans 10

Some reality checks in a tough market 1. Growth - below system for assets and deposits - At system for loans 2. Profitability - constrained (ROA at 0. 56% vs 0. 70% a year ago) reflecting margin pressure (10 bps decline) - cost/income increasing (CUFSS group up 58 bps, includes 81 bps increase for $1 bn+ group) 11

Our environment - market Source: APRA Note: Mutual Banks Bankmecu, Defence Bank, Heritage Bank , QT Mutual Bank, Teachers Mutual Bank, and Victoria Teachers Mutual Bank excluded from the analysis. 12 12

Our environment - market Source: APRA Note: Mutual Banks Bankmecu, Defence Bank, Heritage Bank , QT Mutual Bank, Teachers Mutual Bank, and Victoria Teachers Mutual Bank excluded from the analysis. 13 13

Some reality checks in a tough market 1. Growth - below system for assets and deposits - At system for loans 2. Profitability - constrained (ROA at 0. 56% vs 0. 70% a year ago) reflecting margin pressure (10 bps decline) 3. Funding under significant pressure - Major banks take share of deposit funding above 50% - Term Deposits account for almost half of retail deposits at major banks - Majors estimate further increase in funding costs for retail deposits 14

Our Environment - market 15

Lobbying and Politics 16

Faith in Political Leadership In my lifetime, we’ve gone from Eisenhower to George W Bush. We’ve gone from John F. Kennedy to Al Gore. If this is evolution, I believe in twelve years, we’ll be voting for plants. Lewis Black 17

Our Environment – politics § Partisan divide hampers genuine policy work § Government likely to hold through mid/late 2013 but Gillard and Abbott both under pressure § Hockey, Robb have committed to FSI § Government annoyed at our calls for further reform (but this is OK) § Public apathy? 18

Lobbying – part of democracy? 19

Lobbying – slightly stinky? 20

Basic principles § Influencing decision makers –Recognition –Accommodation –Promotion –Risk reduction –Support –Solve problems 21 21

Recognition “Most importantly, as mutual organisations, credit unions and building societies always put their members first. They are not-for-profit lenders — so they put their profits back into cheaper interest rates, lower fees, and better customer service. ” - Deputy PM, December 2010 22 22

Strategy & tactics § Engage at all points in the policy development process: - Public debate - Consultations, reviews and inquiries - Legislation and regulation - Implementation - Oversight of regulators § Elections: a chance to extract commitments, lift profile 23 23

What’s the message? § Decide the message; repeat the message § Political cliché that’s true: when the politicians and reporters are so sick of hearing something they want rip their own ears off, most of the voters are just picking it up § You’re the expert on your industry § Conflict sells – but avoid where possible § Always frame an issue from the consumer perspective; big banks can’t credibly do this (but they’re trying!) 24 24

Take your chances § Public debates § Be available to media § Parliamentary inquiries § Govt policy development § Regulator policy consultations § Brief the Opposition – they’ll be the next Govt § Connect local CUBS with local MPs § “How can we help? ” 25 25

The Regulatory Environment 26

Our Environment – regulation § Industry “exhausted” § CFR holds enormous sway and has written off concepts on RMBS, new guarantees, AOFM mandate expansion § Budget constraints impact even mild revenue issues making substantial reforms even harder 27

Competition: regulatory story (so far) § Positives: – – – Treasurer promotion of mutuals since 2010 Banking competition policy centred on mutuals Legislative recognition (eg covered bonds) Deposit guarantee maintained at upper level proposed AOFM support ($1. 66 bn utilised by mutuals) FSAC representation, face to face meetings for larger members § Realities – – Account switching, exit fee bans limited impact AOFM boost limited to large mutuals, +B note issue Major banks now dominate market on both sides Significant proposals (eg Canadian style RMBS support, expansion of guarantee for fee, AOFM mandate) rejected – Limited signs of member appetite on covered bonds (to date) – Regulator influence and dominance 28

Lobbying Agenda – positive traction Regulatory Wins § DG at upper range of $250 K § GST RITC Item 16 restored, saving $1. 6 M annually § APRA public commitment to work on BIII capital issues § Basel III liquidity § Fo. FA carve-outs expanded to benefit mutual ADIs § Less prescriptive training rules for ADIs on credit § Changes to unclaimed monies bill More to do. . . § Secure concessions on BIII capital, liquidity § Mutual friendly capital supported and encouraged § Legislative fix on ASIC TD interpretation & BDPs § Position for “Wallis Mk II” § Positive Credit Reporting § Franking Credits & mutuals 29

Regulatory Focus - 2013 § Basel III capital 30

Regulatory Challenges Basel III and capital framework • Capital impacts for mutuals • Tier 1 Capital definitions • Non-viability clauses • Accelerated timetable • Abacus response 31 31

Basel III - capital Senate Economics Committee 9 August 2012 32

Regulatory Focus - 2013 § Basel III capital § Financial System Inquiry § Liquidity Standard § Review of APS 120 § Basic deposit product definitions § Comprehensive credit reporting § Payments reforms – EFTPOS, governance § FATCA § Taxation including franking credits § Bankruptcy 33

Positioning – more to do § Media profile is growing, media is changing § Recent release of DAE report generated TV, radio, print nationally § Increased focus on partnership with members – “talent” § Still relatively unknown, hugely outgunned 34

Media presence underpins our advocacy Media report on us Consumers read/talk about us Government hears us and recognises our value Building a balanced approach to Customer Owned Banking 35

Risks and Opportunities 36

Competition – not going away 37 37

The Perfect Storm

Have we got the balance right?

Cooperation?

Do we?

Sometimes impossible becomes reality

Thank you