Abacus Lobbying Priorities

AM Institute Risk Forum – Barossa Valley, November 2012Mark Degotardi, Head of Public AffairsAbacus

2

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

3

The Operating Environment

44

Strong fundamentals

18%

28%

10%

8%

30%

26%

7%

Estimated percentage of population by state who are members of mutuals

5

Strong fundamentals

6

Strong fundamentals

0.34%

0.16%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

Sep-10 Apr-11 Nov-11 J un-12

Comparison of Mortgage Arrears (90+ days)

Major Banks CUBSs

7

Customer Satisfaction at 31 October

Total Building Societies Total Credit Unions Total Mutual Banks Total Banks -

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Series1

88

Key providers in bank dominated market

Source: APRA & RBA

2.8% 1.3% 1.0%

93.8%

2.3%

Credit Unions

Building Societies

Mutual Banks

Banks Finance Co.

Market Share of Personal & Housing Lending OutstandingAugust 2012

99

But we have changed over time

Mutual Sector – Distribution of ADIs by asset size ($bn)

48%

28%

12%

6%6%

$4bn+ (L6)

$1bn - $4bn

$500m - $1bn

$200m - $500m

<$200m

Source: 2011 Mutual Sector Annual Reports

10

Some reality checks in a tough market 1. Growth

- below system for assets and deposits- At system for loans

11

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 58bps, includes

81bps increase for $1bn+ group)

1212

Our environment - market

Source: APRANote: Mutual Banks Bankmecu, Defence Bank, Heritage Bank , QT Mutual Bank, Teachers Mutual Bank, and Victoria Teachers Mutual Bank excluded from the analysis.

0%

2%

4%

6%

8%

0%

2%

4%

6%

8%

Jun-97 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12

Components of Profitability - Credit Unions% of Average Assets (J une 2012)

Net I nterest I ncome

Non-I nterest I ncome

Operating Expenses

1313

Our environment - market

Source: APRANote: Mutual Banks Bankmecu, Defence Bank, Heritage Bank , QT Mutual Bank, Teachers Mutual Bank, and Victoria Teachers Mutual Bank excluded from the analysis.

0%

2%

4%

6%

8%

0%

2%

4%

6%

8%

Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

Components of Profitability - Building Societies% of Average Assets (J une 2012)

Net I nterest I ncome

Non-I nterest I ncome

Operating Expenses

14

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

15

Our Environment - market

16

Lobbying and Politics

17

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

18

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 forfurther reform(but this is OK)

Public apathy?

19

Lobbying – part of democracy?

20

Lobbying – slightly stinky?

21

Basic principles

Influencing decision makers–Recognition –Accommodation–Promotion –Risk reduction–Support–Solve problems

21

22

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

23

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

24

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

25

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

26

The Regulatory Environment

27

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

28

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 ($1.66bn 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

29

Lobbying Agenda – positive traction

Regulatory Wins DG at upper range of $250K GST RITC Item 16 restored,

saving $1.6M annually APRA public commitment to

work on BIII capital issues Basel III liquidity FoFA 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

30

Regulatory Focus - 2013 Basel III capital

3131

Regulatory Challenges

Basel III and capital framework

• Capital impacts for mutuals

• Tier 1 Capital definitions

• Non-viability clauses

• Accelerated timetable

• Abacus response

32

Basel III - capital

Senate Economics Committee9 August 2012

33

Regulatory Focus - 2013 Basel III capital Financial System Inquiry Liquidity Standard Review of APS120 Basic deposit product definitions Comprehensive credit reporting Payments reforms – EFTPOS, governance FATCA Taxation including franking credits Bankruptcy

34

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

35

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

36

Risks and Opportunities

3737

Competition – not going away

The Perfect Storm

Have we got the balance right?

Cooperation?

Do we?

Sometimes impossible becomes reality

Thank you