SUNCORP GROUP LIMITED — Call Transcript 2008

Nov 23, 2008

Suncorp – Banking Update 24 November 2008

Start of Transcript

John Mulcahy:

Good morning everyone and thank you all for attending this teleconference. With me in the room I have Chris Skilton who of course is our CFO and David Foster who is our Group Executive for the Bank.

I do hope that by now you have been able to assess the short presentation that we released to the market this morning. Chris and I will talk to those slides on the call today and then at the end of that we’ll open for questions.

Really the purpose of today is twofold. Firstly it is to provide you with a high level overview of our trading performance in the financial year to date and update our banking guidance. This became necessary late last week as we received the final consolidated October numbers which confirmed trends evident in our first quarter result. It is also an opportunity to provide you with some additional colour around our Basel II APS 330 disclosures, a process which now will become an essential part of the reporting process for all banks, irrespective of their accreditation under the Basel II framework.

Given the current state of the markets and the extent to which rumour becomes a surrogate for fact, we thought it important to further reinforce with you the steps we have taken to manage our way through these challenging times and the positive outcomes of those actions.

Before I go to the update I do want to reinforce the point that we have taken a number of important steps in order to prepare our business for the challenges that would inevitably accompany the global credit crisis and the resultant slowdown in economic activity. These are summarised on slide two and they overlap the history of a global dislocation. I won’t go through them in detail now as I will mention some of them during the course of the presentation, but I encourage you to read them.

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Before I reflect on our trading performance and update our guidance, I want to briefly mention lending growth as shown on slide three. As we pointed out at our full year result in August, the strong lending growth achieved across financial year ’08 was largely as a result of committed facilities continuing to drawdown, particularly in the development finance portfolio. During the course of financial year ’08 as we adapted our banking strategy and adjusted our pricing, we saw new sales slow appreciably. I would again emphasise the point that the growth strategy we adopted prior to the current market dislocation was entirely appropriate, given, first of all, we were on a path to achieving a AA credit rating subject to successfully completing the integration activities, and secondly, the pre-credit crunch funding differential to the majors was smaller and easily managed through efficiencies in the cost base.

However, the environment has dramatically changed and I’m sure we’re all aware of it. We at Suncorp, are no longer focused on lending in the more finely priced larger loan size end of the market and have refocused our efforts in the higher value relationship based lending portfolios. This forms part of a wider review of our portfolio management which in turn will have consequences for funding and capital and we will be in a position to provide more detail about the outcomes of this review when we present the interim result in February.

This slide provides a snapshot of assets held on the balance sheet at September 30. For ease of reference we have aggregated them in a manner consistent with the way we would use the report in our presentation material. As expected, we are seeing lending growth moderate consistent with a slowing economy, with retail and business lending assets increasing only by 1.6% in the quarter. In the retail portfolio we are seeing a slight reduction in home loan applications and we are also seeing customers maintaining repayment levels despite a falling interest rate environment.

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The smallest of our portfolios, consumer lending, has reduced quite significantly as consumers adjust their levels of discretionary spending.

In business lending we continue to see draw-downs of existing facilities, most notably in development finance. We would expect continued draw-downs would largely offset forecast amortisation in this portfolio for the rest of this financial year. In light of the moderation in asset growth in the first quarter, we now believe that growth in gross banking loans, advances, and other receivables for the year will be closer to 5% than the 10% we previously flagged at our full year result in August. This in turn will have a positive flowthrough effect to our term funding requirements and Chris will go through this in a moment.

So now to the trading update on slide four and starting with the banking revenues.

The pricing adjustments and renegotiations initiated last year to reflect the new funding and risk paradigm has enabled us to protect margins which are holding up well year to date. When you consider this improved margin performance in the context of relatively strong asset growth across the balance of ’07/’08, the flowthrough effects to the revenue line for the year to date have been extremely positive. This means we are comfortable in targeting low double-digit revenue growth for the full year.

If I move to expenses and the key drivers here are, first of all, the benefits being derived from the domestic and global outsourcing arrangements. Secondly, the concerted attack on discretionary expenditure, and finally, the merging of the business and retail banks which is weeding out duplication and improving efficiency and has so far resulted in the elimination of approximately 350 roles.

The impact of these expense initiatives will prove to be a material benefit to the P&L over the course of this financial year. While the first half will absorb redundancy costs associated with merging of

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the bank, it is in the second half that we expect to achieve full run rate benefits of these initiatives. Accordingly, our current forecast indicates that expenses for financial year ’09 will be of a similar level to financial year ’08.

So bringing this all together at our guidance line and it’s now clear to us, following confirmation of the October numbers, that profit growth before tax and bad debts is likely to be in the high teens, well ahead of our previous forecast of high single digits.

Now, our forecasting obviously takes account of our expectation of a continued deterioration of market conditions throughout the year. However, it is prudent to add the proviso that this guidance is subject to no further system wide external shocks, the odds of which we believe are low at this point now given the government guarantee.

So now we move down the P&L to bad debts and slide five provides a snapshot of our overall lending portfolio. As you can see the portfolio remains well diversified by industry and the geographic bias to Queensland is obviously beneficial given the relative strength of that economy. Unlike many of our competitors, the book overall has minimal exposure to unsecured lending. When you break down the book, approximately 60% ultimately supports residential exposures of some sort, where asset devaluations have historically been less severe than in other property classes. Commercial exposures overall remain well secured with conservative LVRs.

However, given the deteriorating market conditions we have instigated a credit review of the overall book, stress testing each of the portfolios under a range of scenarios which are outlined on slide six. This comprehensive review builds on a number of prior portfolio reviews, most specifically the review of the New South Wales development finance portfolio which we referred to in previous market updates.

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The team put in place to conduct the review comprised lenders with experience at all points of the credit cycle, and all of whom are extremely well regarded for their analytical skills and assessment and management of all the elements of risk. The key outcomes of the review and the methodology used were independently reviewed and verified. I won’t go through all the details on the slide, but the primary focus of the team was to identify specific issues with individual accounts based on various criteria including interest rates, reduction in property values and increases in project costs.

So moving on to slide seven and we have flagged previously that we expected NPLs and impaired assets to increase and as you can see from this slide and the APS 330 disclosures, that is the case. It is important, though, to point out the methodology employed in identifying impaired assets.

Many of our customers have a portfolio of properties with most performing. However, should one part of their portfolio become impaired, then we move their entire portfolio of properties into the impaired assets line. This, and the historical skew of the book to business lending and property in particular, tends to inflate our impaired asset line substantially and given the review we’ve just completed, it is not unexpected to have such an increase over a short period of time.

That aside, this slide clearly shows that three accounts, Raptis, Sun Leisure and a private south east Queensland property developer, identified in the portfolio review make up the majority of the increase in impaired assets in the three months to September.

Moving on to slide eight, and these three accounts also significantly impacted our first quarter provisioning. We are confident, given the outcomes of the review, that credit quality remains sound and that we are taking all the appropriate steps to manage our exposures to this stage of the credit cycle.

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We are fortunate that we are small enough that an account level review is a manageable exercise.

Therefore, based on the work that we have done, we estimate that our full year bad debt expense will be in the range of 35 to 40 basis points of gross loans, advances and other receivables which is broadly consistent with our view of being in the 60% to 70% range when compared to the average of the majors.

We are conscious of where we are, at this stage of the cycle, and this is our best estimate of the full year bad debt expense.

Our total provisioning as a percentage of risk weighted assets, taking into consideration the GRCL is in a reasonable range when compared to our peers, and our bad debt write-offs remain historically low against the majors, reflecting the strength of our underlying security position.

So at this point let me hand over to Chris to update you on funding.

Chris Skilton:

Thanks John and also good morning everyone. I’m on slide nine and as you know we previously advised that based on asset growth of around 10% for ’08/’09 we’d require something like $4 billion to $4.5 billion from the wholesale term debt markets.

Since then a number of events have occurred. Firstly, we’ve experienced what I’d call a monumental shift in the wholesale funding landscape with the effect of freezing all the short-term offshore ECP and USCP markets. But on that point I must say I am pleased to say that we saw our first offshore ECP actually roll last week, and that was without the benefit of the guarantee, which may be a tentative sign that markets are actually beginning to thaw.

Secondly, the government’s deposit guarantee has underpinned a level of confidence in all ADIs, not just those with a AA rating, and supported the deposit gathering market generally.

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Since the guarantee has been introduced we have experienced significant inflows of retail deposits in the order of $1.7 billion and this more than compensates for the outflows experienced in late September and early October.

We also expect this to help unlock offshore term debt markets. But as John mentioned, we now anticipate that growth assets will be closer to 5% for the 2008/’09 year and consequently, following the completion of $3.3 billion of term debt placements transactions by the 31[st] of October, I’m very pleased to say that our revised term debt program has now been completed.

Now although we do not normally reveal the parties involved in an RMBS private placement, which is of course term debt, for the sake of complete transparency I do want to note that $1.8 billion was placed with our general insurer. Following the de-risking of the GI investment portfolios, it now has over $10 billion invested in cash and fixed interest markets and it made good economic sense that some portion should be invested in AAA rated paper, of which I believe is undoubted quality, that is paying extremely high returns based upon current market conditions. So given that appetite in the portfolios, it was certainly logical that our bank should be the issuer.

I’d also like to add that despite completing our revised term funding program for ’08/’09, we will be seeking to further lengthen our balance sheet liabilities as opportunities arise. As you know we have all recently obtained the final details of the Government guarantee and we will be looking to explore opportunities offshore utilising this guarantee during early December.

So if I move now to slide ten and capital and consistent with our APS 330 disclosures you can see from the slide that our Tier One ratio continues to improve and, at 8.99% at the end of September compares pretty favourably with the other Australian banks.

Now I know that the major banks tend to have Tier One ratios around 8%, even after their recent DRP underwritings and

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placements, and accordingly, we believe that we are in a relatively strong position.

But despite this, and as you are no doubt aware, our chairman did indicate at the AGM that we may be inclined to adopt a conservative and prudent approach to our dividend policy and could reduce the quantum of our upcoming dividend. Now our final decision on this will only be made in the lead up to our first half results in February.

Let me also say that there appears to be a lot of noise in the market about our capital position which to some extent is understandable in an environment of increasing bad debt expense, and having just experienced the recent Brisbane storms. So I want to make a few comments as to why we believe we remain soundly capitalised today and well positioned to deal with future foreseeable shocks to profitability without any need to raise additional equity.

Now after the impact of significant claims experience in our GI business in ’08 as well as losses on shareholder funds, we substantially de-risked the earnings profile of the insurance operations. We switched our equities exposure in shareholders’ funds into fixed interest securities and took out additional composite group event retention cover, capping aggregate retained exposures on claims events greater than a $10 million excess in any one year at $250 million up to an aggregate level of $550 million. And as you know our single event CAT cover was also reduced from $200 million to $150 million.

The other point I’d make is that in 2008 the bank experienced significant growth in the balance sheets and resulting growth in risk weighted assets was a constraint on distributable earnings last year. As previously highlighted, the benefit of this growth is a contributing factor to the improvement in underlying earnings in the current period and in the ’09 year we expect growth in risk weighted assets to be negligible as the weighting of the portfolio

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increases to housing while higher risk weighted lending contracts marginally.

And I just stress again, finally, as I did note earlier, we are prepared to consider varying the dividend, if necessary, in order to maintain appropriate levels of capital.

So with that I’ll hand back to John.

John Mulcahy:

Thanks Chris. Turning to slide 11 and before I conclude I’d like to update you on the storms that have affected south east Queensland over the past week.

So far the group has received more than 13,000 claims as a result of these storms. Based on assessors reports and our experience of similar events in the past, we estimate the cost will be in excess of $150 million.

On the slide you will see that we have also provided the estimated cost of three previous weather events which need to be considered in the context of both our aggregate cover and our annual allowance for major events which, as you know, is $240 million for the group for the year.

It is obviously still too early to understand the effects, if any, on our ITR guidance and we will, of course, keep the market updated as we have more information and it is appropriate to do so.

So let me summarise our updated full year banking guidance which you can see is on slide 12. The strong first quarter performance in banking has given us the confidence to upgrade our profit before tax and bad debts. We now expect our lending growth to be closer to 5% than our previous forecast of 8% to 10%, and our profit before tax and bad debts to be in the high teens. This is made up of revenue growth in the low double digits and expenses in line with the prior year.

Given the outcomes of the portfolio credit review, we are well informed to forecast that our bad debt expense will be in the order

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of 35 to 40 basis points of gross loans, advances, and other receivables.

In conclusion, the past couple of months have been challenging for everyone associated with financial services, with market dislocation both here and abroad.

For Suncorp we had the added distraction of dealing with approaches from parties interested in acquiring our banking and wealth management businesses. The nature of the approaches required serious consideration on our part. They have been dealt with and we are now getting on with the job. The bank and wealth manager remain core assets of our group and integral to the group’s strategy, just as they were before the approaches were made. The ongoing work that we are doing to reshape our bank will give it a sustainable future in an environment of funding and capital scarcity, beyond the expiry of the government guarantees. We have reset our priorities and sharpened our focus while continuing to build on the momentum obvious in our underlying business.

So thank you all very much for attending at such short notice this morning and we are now happy to take questions.

Question:

I’ve just got a question on the bad debt charge in the guidance you’ve provided. Are you saying the $73 million in bad and doubtful debt charges in the first quarter largely relates to the three secured loans that you called out, Raptis, Sun Leisure and SEQ? I just wanted to get a feeling that if Babcock and Brown was to go into administration, how confident are you that you continue to hit this guidance of 35 to 40 basis points?

John Mulcahy: Thanks for the question. We already have in that 35 to 40 basis points what we think is an appropriate provision for Babcock. Question: And that’s just this senior debt or all parts of the group? John Mulcahy: No, for our exposure to the group.

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Chris Skilton:	Basically that would be the exposure to the head company. We
	are still very comfortable with the exposure to Babcock and Brown
	Power.
Question:	Okay. And just another question. On slide 3, you highlighted the
	growth in the book, especially the business banking book, and you
	were saying that effectively the growth in business lending is
	coming from drawdowns, which is offsetting the amortisation of
	the loans. I’m just wanting to get the feel for that demand and
	what the new lending is. Are you actually seeing new lending
	growth, or is effectively the book quite stagnant from a new
	lending perspective?
John Mulcahy:	Can I hand over to David. David will answer that question, David
	Foster.
David Foster:	Just in terms of the profile that we’re seeing at the moment,
	certainly the drawing of facilities that have been approved and
	pre-committed over the last 12-18 months. We’re not seeing –
	both driven from a market perspective, which is certainly slowing
	demand significantly, as well as just given our approach going
	forward, we’re not seeing any degree of new lending coming
	through, particularly on the development finance and property
	finance type areas. Obviously we’re dealing with existing
	customers around agribusiness and commercial, around those
	other portfolios.
Question:	Okay. So when you’re saying there’s no degree of new lending, is
	that your decision or there’s just no demand at all out there, so
	business lending property in particular?
David Foster:	You’re clearly seeing a couple of things at play, certainly a slowing
	in the system itself and certainly the development dynamics
	around particular projects and so forth are not the same that they
	were a couple of years ago in terms of ongoing projects, so driven
	by a few forces there.
John Mulcahy:	But also I’d have to say that our focus has certainly moved away
	from any large corporate lending, so that would be driven by us.

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Question: Just some questions on general insurance. I’m just surprised you haven't taken the opportunity to water down guidance for the margin. I mean, you’re close to $200 million in large losses against your $240 allowance. Firstly, can you give us any insight into some of the moving parts, as to why you haven't just taken a more prudent approach now, given that you’re implying net upgrades across other areas? And secondly, could you comment on what's happening to expenses outside the bank, so quite sizeable expense reductions in the bank? And I’m aware that those have been extended across the group. Can you just comment on expenses in general insurance and wealth management? John Mulcahy: To start with expenses James, we’ve had the same approach to expenses across the group as you’re seeing in the banks, so we’ve got good expense outcomes certainly in general insurance, and in the wealth business. The reason we haven't updated our guidance at this point in time around the ITR's is really because the SouthEast Queensland storms, it’s still too early for us to actually understand the implications against the ITR. We’ve given you what the absolute cost is, but we haven't really been able to identify the absolute reinsurance outcomes at this point in time. So as soon as we do know that we will certainly update our guidance, but we still have a number of other moving parts as well in our general insurer. So at this stage it’s just too early for us to make any adjustments, but Chris, you might want to add to that. Chris Skilton: Well the only other thing I was going to say James, is that having put the aggregate cover in, we’ve got much more protection than we did last year when we had to swallow the first $250, and then of course the minimum of 10 for how many events you’ve got there. So the first half could be hit reasonably strongly, but as John said, we don’t know until we know the reinsurance position. But over the year as a whole, we’re still – remember the guidance is for the year as a whole, not on half and half. So I think it is premature at the moment.

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Question:	But you know that you’ve gone through your retentions. I
	presume the uncertainty relates to the number of events that this
	will counter?
John Mulcahy:	Yeah, look, and the other issue is and I’m sure people will ask the
	question, but whether the South-East Queensland storm was one
	or multiple events. And if it’s a single event, which certainly our
	initial consulting advice is, then clearly then we have a maximum
	retention of $150, that we share that RACQI. So therefore it’s still
	unclear as to what the number will be.
Question:	Chris, I had a question on the tier one ratios at 30 September.
	Can you give us a little bit more detail about the uplifts that’s
	occurred in the last three months from 8% to almost 9%?
Chris Skilton:	I think you’re seeing three factors. We’ve got the benefit of the
	underwriting of the DRP in the first quarter, so that’s putting a lot
	more capital in. Also, risk weighted assets have tended to remain
	static, and we’ve had a very solid start to the year.
Question:	Actually just following up from that question, Chris, can you
	confirm that there’s been no additional capital upstream from
	general insurance or anywhere else?
Chris Skilton:	I’d prefer not to go into that level of detail quite frankly on
	quarterly numbers, but yeah, basically our policies around capital
	up streaming have been consistent with previous years.
Question:	And finally, just on the life wealth side of things, I was just
	wondering if you could give us some update there on the
	expectations for the year?
John Mulcahy:	Our expectation for wealth is as we said at the AGM, is
	approximately flat on last year. As I said earlier, there’s strong
	expense control but clearly it’s a pretty ugly market from a fund
	perspective, but it’s quite a strong market from the risk
	perspective, and a large proportion of our business is risk.
Question:	I just wanted to find out what you deem is an appropriate level of
	capital? And I guess just following on from the previous two

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	questions. What's happened to the fundamental tier one or the
	core tier one level over the quarter as well?
Chris Skilton:	Well we haven't had to declare that, so I don’t want to declare
	anything more than we’re basically required to. But I think it’s fair
	to say – and we will update you in February –that we are going to
	increase our target levels from where we are today. We’re looking
	at that at the moment and we’re taking it to the board in fact this
	week, so I think you can assume that we will be increasing our
	level of CAR and indeed probably tier one as well. We’re talking to
	the rating agencies around ATE and ACE, so we believe under
	these circumstances we should be holding more capital, but we’d
	prefer to go through that in more detail in February.
Question:	Great. And just a final one, John, is the bank – I mean you
	mentioned obviously you’ve been through the process on the sale
	of the bank, just your view now on where we sit. Is the bank off
	the table or off the market, or are you still looking at offers if they
	come along? And I guess what conditions would have you re-look
	at the opportunity of selling the bank?
John Mulcahy:	The bank is a core part of our group and integral to our strategy.
	But prior to the approaches, I’ve always said the same thing, even
	shortly after I joined, that we always had a small group of the
	organisation looking at potential M&A activity that added
	shareholder value, both driven by us and driven by others. And so
	we’re back to a sort of normal operating environment. If someone
	sees real value in these and is prepared to pay for it and it’s good
	for our shareholders, then we’d consider it. But what we’re doing
	is operating a business in an organic sense, driving and shaping it
	to be successful.
Question:	Structurally you don’t see any reasons why – you cannot compete
	with the majors, I mean if I look at the funding guarantee, you’re
	obviously going to be paying more for that than the major banks.
	Is this an issue for you or anything you’re worried about with no
	structural change?

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John Mulcahy:	Well clearly the whole world’s going through a structural change,
	and that does mean that we will change the target for the growth
	of the bank and the portfolio is where we want to operate in, and
	we’ll give you a lot more detail around that in February. But you
	can probably work it out pretty quickly that we don’t see large
	corporate lending that’s got fine margins, to be where we would
	want to be going forward. We want to focus around what being a
	strong regional bank means, and those portfolios that we have
	expertise in. So we can take you through that in more detail, but
	clearly given the spread on funding that that will prevail, we think
	beyond the guarantee then we’re going to have a targeted
	business. We’re also going to have to focus on deposits, and
	make sure that we’ve got a strong deposit performance.
Question:	It’s just a question on the bank capital, Chris. You’ve obviously
	improved that through the RMBS issue in the general insurance.
	Can you comment on how much potential for up streaming capital
	from the insurance divisions to the bank you have, and any colour
	as to other sort of initiatives that you may be working on, rather
	than just up streaming tier one?
Chris Skilton:	I don't think the position has really changed, in the sense that we
	try to hold an MCR of around about 1.55 in the general insurer and
	periodically upstream the surplus on that. I should say that the
	restructure that we’ve been talking about for some time now is
	still on track. We hope to have that completed by early
	December. We’ve talked about that releasing something in the
	order of $150m type in capital, so that’s still on track.
Question:	And on the dividend, do you have any view on a target ratio or
	would you potentially look at dropping the dividend this year,
	below a target should you need to?
Chris Skilton:	Well, I think we’ve flagged the fact that we would consider
	reducing the dividend, but we have not made any comment yet
	about whether or not that’s firm, or indeed the extent of what that
	would be, or indeed what target payout ratios would be. And I
	think we’ll do that in February.
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John Mulcahy:	There are too many moving parts at this point in time for us to
	make a decision about that, but we’ll certainly be making those
	decisions as we lead up to our February result.
Question:	I just wanted to check – I guess this is a question for Chris – what
	sort of balance you’d assume for your GRCL at September?
Chris Skilton:	We hold the GRCL roughly about 60 basis points, so that’s
	consistent.
Question:	If I look at your total provisioning as you’ve given us, the charges
	through the P&L, your total provision as a proportion of gross
	impaired assets has dropped from 40% to 26% in September.
	And if the GRCL hasn't moved too much…
Chris Skilton:	GRCL is $197 million at 30 September.
Question:	Okay. I’m just trying to get a feel for whether a) I guess your
	collective provisioning increased by 40% in the three months, yet
	it didn’t move from December, I guess what are we going to see in
	February?
Chris Skilton:	Well, all I can say is we’ll make the appropriate decisions around
	all of those provisions in February. I mean, as a percentage I
	think we’re always going to be lower than the majors, but that’s
	because of the makeup of the book. But we’re certainly
	considering a number of options around that, and again, you just
	have to wait till February.
Question:	But you’re quite comfortable, looking at your total provisioning or
	your explicit balance sheet provisioning, I mean, relative to
	December ’07, you’re less than half where you were then as a
	proportion of…
Chris Skilton:	Again, I think I’ll just refer back to what John said, that the way
	that we – the NPL’s do actually include the gross amount of
	exposure, even though we may expect quite a small relative write
	off. So I think that is a distortion in our particular book around
	that, so what I can say is I’m happy with the level of provisioning

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	but I do accept that from a percentage viewpoint, it can look very
	low relative to the market.
Question:	Just a follow up question if I may on the losses from the storms, is
	that event – I mean your estimations, is it one event or is it two or
	three?
John Mulcahy:	We think it’s one and certainly our advice from meteorology is that
	it’s one. But clearly we have to have discussions with the
	reinsurers, and that’s why we haven't really tried to make any
	adjustments as a result of it yet. Because if it’s three, then it will
	be a different bottom line outcome than if it’s one.
Question:	A variation around one of the questions asked earlier. It just
	relates to the capital position. You’re obviously trying to give the
	message that the capital position is strong and you’re referencing
	the tier one ratios. But there are large deductions in your tier one
	to get back to your ACE levels, and I’m just mindful that the major
	banks are now sitting at ACE capital levels north of 6%, and yours
	at last balance date was 4.5%. I’m sure it’s gone up, but I’m sure
	it’s probably less than where the majors sit. So I’m just
	wondering, what should be the right target and whether we should
	be focusing on tangible core capital, rather than this tier one and
	given that the message you’re trying to give is that the capital
	position is strong, whether we can get some proper clarity around
	that?
Chris Skilton:	Well, I think all I’m pointing out is we get a lot of criticism with
	markets saying our capital is a lot weaker than others, and I guess
	my first point is when you look at those numbers, it’s on a par.
	I’m very well aware the points that you’re making, and that we
	would also want to see our ACE ratio or ACE targets go up in the
	future. So what that implies is that we are looking at also
	increasing our CAR and Tier One levels, possibly above what may
	be industry standards at the moment, in order to get that ACE
	ratio higher.

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	Now, I’m not going to give numbers out at the moment, because
	we haven't taken those through the board. But those numbers will
	be more consistent with a higher ACE ratio, so they may be higher
	than industry average.
Question:	So then Chris, how can we get some comfort from your
	statements today that the group doesn't need to raise capital?
Chris Skilton:	Because the statement we’re making is that we would adjust
	dividends in order to get to our required targets. So what we’re
	saying is that we don’t need to raise additional capital in the
	markets. Now, if you want to say reducing your dividend is a way
	of raising capital, then I’ll concede that as a point.
Question:	Is it conceivable Chris that the dividend may have to be cut in its
	entirety to get to the point of meeting your revised ACE and/or
	core capital targets this year?
Chris Skilton:	I’m going to make no comment on that one.
Question:	A couple of questions if I could please. First of all, the investment
	risk charge in the GI as a result of investing in the RMBS. Does
	that go up as a result of that, or is there no real implication? And
	also just secondly, on the bad debt charge, I’m just wondering, I
	mean in terms of the guidance, are we looking at probably a
	higher first half charge than the second half – would that be an
	appropriate deduction from the guidance you’ve given today?
Chris Skilton:	Look, on the first one, sitting here today I’m actually not sure
	what the risk charge is on the RMBS. I mean, it is Triple A rated,
	and I think it’s pretty low, but I don’t have that level of detail at
	the top of my head, but it’s not a high charge. In terms of bad
	debt charge, I don't think you can draw any conclusions in terms
	of the weighting of the loan loss between first half and second
	half. Obviously though what we’re flagging is that the first quarter
	is not necessarily representative of the year as a whole.
Question:	I’ve got a few questions. If they were three storms, can you tell
	us how much it will cost?

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John Mulcahy:	Well, if it doesn't go to the maximum event retention, then it will
	cost what they cost, but it will contribute to the aggregate.
Question:	Say if they went to the maximum event retention, are you talking
	about $450 – is that right?
John Mulcahy:	No, I don’t understand that – how you get to $450.
Question:	Three lots of $150.
John Mulcahy:	No, no, no. They’re not three lots of $150. The three of them in
	cost to date estimated are $150 plus. So that $150 that we’ve put
	in the table is described as a single event, but it’s for the cost for
	all of those days of weather. There’s 13,000 claims in total at this
	point in time, and our estimated cost for those claims is $150
	million plus.
Chris Skilton:	Now let’s say they were three events and they were all – well they
	would be under $150m, then essentially $120m of that, because
	three events less $10 million each, would count towards the
	$250m aggregate.
Question:	Right, so your aggregate loss whether it’s one event or three won’t
	exceed 250?
Chris Skilton:	Correct, but that’s also for all events during the course of the year.
John Mulcahy:	For all events during the year. But for each independent event,
	you have to take off the first 10. So that’s how it works.
Question:	Okay now for your catastrophe risk capital charge, is that then 150
	or is it 250?
Chris Skilton:	It’s 150. It’s the single event retention.
Question:	Okay. The amount of capital that you’ve now got in the general
	insurer, how has that moved in the four months? Up or down? I
	don’t want dollars, just up or down.
Chris Skilton:	It’s moved up.
Question:	Now just on loans, bad debts, the impaireds have gone up $400
	million and you’ve got a specific of $31 million against it. So

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	you’re expecting a loss less than 10%? So recoveries of at least
	90? Is that the right way to read that?
Chris Skilton:	Yes it is.
Question:	So why are you so confident that that’s the outcome given what’s
	happening in real estate?
Chris Skilton:	Well all we can say is we’ve had very experienced people looking
	at those and looking at the values in terms of realistic current
	values. As you know, we tend to take specific security over
	specific buildings and we’re comfortable that the values are still
	there. Notwithstanding they have to go into non-performing,
	we’re quite confident that losses will be minimal.
David Foster:	The only thing I’d add to that is we also, in the NPL calculations,
	bring in the total connections for affected customers, even if they
	have multiple properties or multiple assets and obviously then
	specifically or collectively provide against a small subset of that
	NPL data. So you need to understand the differences between the
	two.
Question:	Can I ask one more question, what’s the fall in real estate prices
	that you’re factoring into that?
John Mulcahy:	It’s done on multiple assessments, so it depends on the market, it
	depends on the asset, and really it depends on what our judgment
	is around individual assets and individual markets. But it’s been
	done very thoroughly.
	We believe we’re well informed to predict 35 to 40 basis points on
	that. We’re clearly expecting a deteriorating economic
	circumstance, but we don’t have a single asset value or asset
	devaluation to use as a surrogate.
David Foster:	We look at each project closely on an individual basis and we take
	into account asset values, but also impacts on rental returns in the
	case of commercial property, interest rate movements as well as
	sale periods for development projects and so forth.

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Question:	Would a 20% decline in the value of the properties that you’re
	holding your provisions against surprise you?
John Mulcahy:	No. In some properties, no.
Question:	It’s really just a follow-up John and Chris. I’m just still trying to
	clarify your actual thoughts on the GI margin guidance. Because
	what you’re saying is you’re yet to define the number of events,
	but in saying that, you therefore are implying that if it was one
	event and you are comfortable with guidance...
John Mulcahy:	No we’re not saying...
Question:	In your references John you did say that in the event that it was
	one event, the $150 million loss would be absorbable into
	guidance.
John Mulcahy:	No I didn’t say that. I said that it would be more positive than if it
	was three events. But as you’d know, we share the maximum
	event retention with RACQI, and we don’t have any sense of what
	that means it will cost us at this point in time, because we don’t
	know what their claims are at this point in time. It’s not possible
	for us to make any assessment until these numbers become a bit
	clearer.
Question:	It looks like a reasonable band to be predicting and this 250 is the
	aggregate and 150 subject to the RACQ adjustment is...
John Mulcahy:	We said it’s 150 plus. The events are still being assessed. The
	claims are still being assessed. So it’s just too early for us to be
	categorical about it at all.
Question:	Good morning John, I was just wondering if you could elaborate a
	bit on this new strategic direction for the bank. Is it correct to
	assume you’re planning on shrinking the size of the business
	lending portfolio? Where are you with that?
John Mulcahy:	We want to give you the update in February in a lot more detail,
	but basically we are saying that we’re going to focus on the
	portfolios where we clearly think we’ll have a relationship
	management advantage and so that’s agribusiness, the core

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	property development, but not the corporate property
	development. Not big corporate lending or structured finance.
	So we will be adjusting our portfolio targeted sales approach, but
	it’s too early for us to be clear and precise about that. We’ll give
	you a lot more colour around that in February.
Question:	Hi guys, just a question on the strong revenue growth. I just
	wanted to get a feel on what margins have done in the first
	quarter? Can you comment on the margin performance?
Chris Skilton:	We’ve been trying to hold margins when in fact margins in the first
	quarter have been up on the same period last year. But there are
	lot of things affecting that at the moment. As we’ve always said, a
	lot of variables including the cash to bank bills spreads that’s
	moving around.
Question:	So it’s momentarily up, can you give us a bit more guidance just
	to get an indication on where the revenue growth’s coming from?
Chris Skilton:	Well the revenue growth is really coming from the fact that
	average assets this year will probably be about 17 to 25 per cent
	higher than what they were last year. So even if you maintain
	margins and you’ve got a fairly locked in, strong revenue growth...
Question:	Yes, but that would have been the guidance from the previous
	period. So with the upgrade of guidance for the revenue, it would
	have to be for a stronger margin performance than you initially
	thought. So I’m just trying to get a feel for how much stronger is
	that margin performance compared to your earlier expectations.
Chris Skilton:	Well I think that we’re saying now that we’re comfortable that they
	probably hold at least flat if not slightly up, whereas previously we
	were saying flattish but they could have been down slightly. Also
	in getting to the high teens, we are actually holding costs
	extremely strongly as well. So that’s a major contribution to the
	change in the profit before bad debts and tax.
Question:	Hi, I just wondered if you could be a bit more specific about how
	the revenue increased, what prices were raised etc, and just a bit

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	more specific about the expenses. Specifically how you specifically
	controlled costs.
John Mulcahy:	Look I think we’ve been saying for some time that we were looking
	to pass on the costs of funding and we’ve done that for over the
	last 12 months, as cost of funding have increased. We’ve passed
	that on both to the consumer and the business books.
	From a cost perspective we really have – given the slower asset
	growth, but also recognising – I’d say we recognised that the
	economy was slowing down from this time 12 months ago. We’ve
	been very careful about expenses. We’ve had an employment
	freeze on for some period of time. We’ve looked very strongly at
	what we describe as “thrift” which is our ongoing operating
	expenses, and we’ve had a good response to that right across the
	organisation. Not only in the bank but also in the general insurer
	and the wealth manager.
Question:	So to make it in I suppose clearer language for the Joe Blow out
	there basically you haven’t cut interest rates as much as the
	Reserve Bank for instance?
John Mulcahy:	And that’s because the cost of funding is not tied to the cash rate.
	So all banks have not been able to pass on the full reduction in the
	cash rate because the funding at the longer end of the curve has
	been significantly increased during this credit crunch period.
Question:	Sure, and that’s across all loans you said, or are there some loans
	that you’ve done that more than others say?
John Mulcahy:	No, look we don’t do it on a loan by loan basis. We try and work
	across what our cost of funding is and work it out appropriately.
Question:	I just wanted to follow-up on the question about the new strategy.
	You mentioned obviously you’re pushing out of the corporate end
	of the balance sheet. I’m just looking at the refinancing risk there.
	Are you committing to actually refinancing existing customers or is
	this just a decision to slow new growth in the segment, or are you
	going to look to actually shrink the existing book as well?

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John Mulcahy: Predominately at this point in time as we’re not growing that book with new sales, but over time there’ll be some customers in there that we wouldn’t see ourselves providing funds for in the ongoing environment. But we’ll handle that carefully with each of our customers. Question: Is that likely to be a large proportion or is it just a small proportion John? John Mulcahy: What do you mean in large? Question: A large proportion of the book in terms of the subject to that refinance risk? John Mulcahy: Well it’s those areas of the book that are the corporate size of the book and we don’t see ourselves having a significant competitive advantage in some of those large loans. Question: Hi guys. Just on those three exposures that you’ve called out in the Raptis, Sun Leisure and the South-East Queensland property developer. Was there anything unusual in the origination of those loans in terms of LVRs? Were they your typical 60 per cent, 60 to 70 per cent LVRs that you originated with? And if there’s anything unusual about them, is there anything more unusual about them in your book that’s specific to those developments? David Foster: No, there wasn’t anything unusual in those particular exposures. They fitted our normal bill. I’ll mention specifically a couple of things that may be of interest I guess around the Gold Coast where a couple of those portfolios are as well as the Raptis connections themselves. They therefore are properties that are not development projects, they’re existing properties that are receiving rental income. So they’re well provided for in our calculations. The Gold Coast more broadly which we often get questions around is not a homogenous market in itself. You need to look at it at the different classes both from the residential side, whether it be residential waterfront or houses loaned in the hinterland. And

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then likewise from a geographic perspective, it’s actually a makeup of a number of sub-markets on the Gold Coast.

We’ve had a lot of experience over the last 30 years dealing with our customers, many of which have been with us a long time, and we understand that market quite well. So we’re very selective around the markets that we deal in on an ongoing basis. And particularly the customers that we deal with. Question: So just going back to those ones where you are seeing pressures right now, there’s nothing unusual about them, how can you be confident there’s nothing else in your book that wasn’t unusual at the time of the origination that you could be at risk from further write downs? David Foster: As we flagged on the previous slide, we’ve undertaken a detailed review of all of our development finance and property investment books, right across the portfolio, and these were three of the ones that were identified as part of that review. So we maintain a diligent view on the remaining portfolio, but are confident that we’ve brought forward the ones of concern at this point. John Mulcahy: And that review leads us to be informed about our 35 to 40 basis points for the full year. John Mulcahy: Okay guys, well thank you very much for coming at such short notice, and thanks very much for the informed questions. I hope we’ve given you a better understanding of where we think we sit at the present time. I look forward to catching up with you all again soon. Thanks a lot.

End of Transcript

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