Suggestion and feedback: xrizos@westpac.com.

au 1
#1
Friday 4 July, 2014
Digestible insights connecting the dots between
Economics, Strategy, Transformation and Delivery
The Radar
FINANCIAL SERVICES
A week marked by the Senate Enquiry on CBAs Financial
Planners who provided inappropriate advice to customers in
2007-08 (eg switching them out of term deposits into
mortgage funds and negatively geared equity that paid high
commissions, resulting in heavy losses during the GFC).
As a consequence, 70 people exited CBAs WM, 8 financial
planners have been banned by ASIC, $51m have been paid
out to compensate clients. CBA WM exec Annabel Spring is
focusing on 3 remediations: 1) systems and processes (An
ASIC enforceable undertaking triggered a $25m IT spend to
move from paper to electronic customer files, and a new
Connect system gives a single view of the adviser, including
their customer complaints), 2) structure (the WM business is
now split in 2: Advice moved out of Colonial), 3) culture.
NAB WM was also in the spotlight with a Fair Work
Commission enquiry on JBWere. NAB acquired 80.1% stake
from Goldman Sachs in 2009 for $99m. Project Blaze
attempted to migrate client data from GS to NAB but overran
by $90m to $100m, doubling the cost of the acquisition,
impacting the staff morale, retention, and risk - exemplified
by NAB WM head Andrew Hagger arguing that it felt JBWere
existed for the sole purpose of enrichment of its advisers.
> Question is whether this crisis will be seen as contained to
CBA, or will lead to a wider crisis of confidence in the banks and
the 18,000 Australian Financial Planners. To be put in context
of our strategy with the delivery of Panorama and the Service
Revolution, also a reinforcement of the imperative to focus on
customer outcomes. It is also flagging that the commission
model has lost appropriateness: reason why a 1/3 of Super is
now in SMSF
1H 2014 reporting shows the continuing pressure on the Big4
NIM (down 5bps to an average
208bps) reflecting the low cash
rate environment, increased
lending competition as
customers refinance to lock-in
historically low rates, lower
earnings on capital and holdings
of liquid assets, regulatory
requirements driving a longer
maturity in borrowings.
WBC keeps leading on Costto-Income (42.8% -10bps from
2H13) followed by CBA catching up (42.9% -50bps).
> The continued pressure on NIM and cost is to be read in the
context of the IT arms race between the banks, and between
the banks and digital disruptors looking to carve out a share of
the $29B profit pool the Australian banks will generate this year
- that is over $1000 per Australian (see deep-dive on next page)
> Recent Macquarie Bank research acknowledges that banks
are protected by barriers to entry that are here to stay:
accessing central exchange settlement, holding a banking
licence, and accessing liquidity from the RBA.
However parts of this value chain are open to change:
including payments (eg PayPal), the front end relationship with
consumers (eg Moven, Simple), risk assessment and processing
capabilities, monitoring IP and risk transfer IP.
Macquarie sees 6 key drivers pushing transformation over the
next 5+ years: Post-GFC regulators now favouring innovation
(they demand single customer view, real-time reporting, real-
time payments, better risk management), the IT cloud (for
flexibility and cost), competitors (eg digital players like Moven,
Paypal, peer-to-peer lenders), social media (giving a stronger
voice to customers), mobile penetration (eg topical successes of
PayWave, CBA Kaching now integrated into the CommBank app),
and customer attitudes.
> This Macquarie research puts CBA ahead given their early start
in 2008 (SAP-Accenture), NAB behind due to the costs blow-outs
of NextGen (Oracle), whereas ANZ opted for a light-touch
approach, with initial focus on customer centric front-end
systems and deferring upgrading Hogan (CSC).
OTHER INDUSTRIES
Retailers Woolworths and Coles are pushing further into
finance. WoW is partnering with Visa and Macquarie Bank to
deliver consumer credit products via its brands (Woolworths,
BIGW, Dan Murphys, Thomas Dux, WoW Petrol). In parallel,
Coles is pursuing work to secure an ADI from APRA, and
recently assembled a senior team to develop its burgeoning
financial services. It also trademarked the brand Coles Mobile
Wallet, after Coles Money, Coles Financial Solutions and Coles
Financial Group.
> The threat from those retailers is already taken seriously by the
major insurers. While their market share in finance is low, they
have a high share of voice, a unique position to monitor
consumer basket, and could easily partner with Tech
players/aggregators to leverage their store footprint to compete
with Bank Branches.
IKEA announced it is going urban with its first high street
store in Hamburg. A 80m experiment part of a wider trend by
retailers to populate urban centres as companies from Tesco
to Carrefour open smaller downtown shops.
> A retail trend to be monitored to learn valuable lessons for our
Service Revolution, given that 60% of the Australian population
in 5 cities over 1m people.
MACRO-ECONOMICS
Although more distant from our delivery imperatives, it is
relevant to keep an eye on the interim report of the govts
Financial System Murray Inquiry into Australia's $5T financial
system due on July 15. Our system stands apart on two main
factors: the regulatory model split between APRA, ASIC (the
twin peaks) and the RBA; and the size of our domestic savings
pool in Super, which has grown to $1.6T, surpassing Bank
deposits at $1.3T and expected to double to $3.4T by 2022.
> The inquiry's most fundamental question is how to best fund
the economy's growth when banks still heavily rely on offshore
wholesale funding, and when the Super pool is destined to
overshadow banking deposits. This leads to the option of using
these funds for bank lending and infrastructure financing. To be
kept on the radar in the context of our Advancing Australia
strategic objective.

2
DEEP-DIVE: Our Service Revolution in the context of the post-GFC Australian Banking landscape
1 - The State of the Nation, and size of the pool: There are around 170 Authorised Deposit-taking Institutions (ADIs) and 100
insurers and friendly societies. In this landscape, the big 4 (CBA NAB WBC ANZ) have ~80% of the market share both in
lending (assets) and deposits (liabilities). The Australian banks are forecast to generate $29B in profit this financial year.


2 - This situation is the result of the GFC:
- On the deposit front, the Big4 benefited from
the flight to safety provided by the government
guarantee,
- On the lending front the crisis wiped out
securitisers and 3
rd
tier lenders (eg Wizard Home
Loans), and forced foreign banks to repatriate
capital to their respective troubled domestic
markets, significantly reducing market share
gained pre GFC.
However, this new domination led to the perception of an oligopoly of the 4 Pillars. It also resulted in the paradox of reduced
space for growth in market share: smaller banks had been acquired (CBA-Bankwest, Westpac-St George), the perception of a
homogenous pack had diminished their ability to differentiate and attack each other market share.
3 They consequently took calculated strategic bets to differentiate their strategies for future growth in the post-GFC
landscape ( ):
- CBA (Colonial, CommSec, Bankwest, ASB): one of the most profitable banks in the world with a ROE of 19%-20%, focuses on domestic
retail supported by 10 years of IT investments.
- NAB (MLC, uBank, BNZ): traditionally strong on Business Banking, grew its Retail books through the break-up strategy (effectively
buying customers with lower rates, and online via uBank), resulting in substantial customer switching (+650,000 new customers). But has
been struggling in Wealth (too much goodwill paid for MLC is an on-going drag on ROE, unrealised benefits of the AVIVA acquisition).
- ANZ (OnePath, E*Trade): modelling itself on HSBC by turning into a regional Asian lender, targeting 25-30% of profit from Asia by 2017,
from 20% in 2012. The shift is occurring: Australian retail (previous flagship) now has a lower profitability than offshore operations.
- Westpac (BT, St George, Bank of Melbourne, BankSA, RAMs) focused on a domestic "multi-brand strategy" (ie cross-selling). It put
service high on the agenda (eg brought managers back in branches). The 3rd focus was to maintain its traditional good record on costs.
4 - However there is a bigger picture beyond the intra-bank competition: a digital arms race that will favour disruption
from Peer-to-Peer lenders (eg SocietyOne in which Westpac has invested), neo-banks (Moven, Simple), retailers ( ):

ANZ
16%
CBA
28%
NAB
18%
WBC
22%
Credit Unions
3%
Other Aust Banks
9%
Subsid Banks
4%
Market shares
in housing loans
2013
ANZ
15%
CBA
29%
NAB
15%
WBC
23%
Credit Unions
2%
Other Aust Banks
9%
Subsid Banks
4%
Foreign
3%
Market shares
in transaction
accounts,
2013
Retail Business and Corporate Protection and Wealth
Home
Loans
Deposits
Credit
Cards
Business and
corporate lending
Corporate
Syndicated
lending
Equities General
Insurance
Life
insurance
Retail funds
management
The 4 pillars
(Big 4)
Regional
Banks,
Credit
Unions
Foreigners
Insurers
Retailers
Digital
Attackers
Investment
Funds
Managers
Sumitomo
Mitsui
Mitsubishi UFJ
P2P lenders
SME
accounting
Payments
Neo-Banks
Digital Vault
traditional
competition
between
banks
Rising pressure from
non-traditional players
2
(Non-exhaustive
list of selected
players)
1
1
2
Source: Murray Inquiry
S
o
u
r
c
e
:

T
&
D

a
n
a
l
y
s
i
s
,

A
P
R
A
,

M
u
r
r
a
y

I
n
q
u
i
r
y

i
n
t
o

t
h
e

F
i
n
a
n
c
i
a
l

S
y
s
t
e
m


3
Indeed, recent Macquarie Bank Research shows that:
- circa 10% of industry revenue is under threat from payment disruptors ($9B): facilitated by the continued penetration of
personal smartphones, online payment players (e.g. PayPal), as well as the introduction of the New Payments Platform
Program (real time payments) which began in June 2013 and will be delivered in 2016 and will also increase midterm
competition. Merchant acquiring also continues to heat up with Mobile Point-of-Sales (MPOS: tablet, smartphone merchant
payments): the immediate threat and supply chain integration challenging major banks.
- circa 20% of industry revenue is under threat from alternate lenders ($18B): The longer-term threat remains lending
disintermediation. This could take place in the form of Peer-to-Peer lending although the main impediment remains
information asymmetry and the associated funding risk/lack of diversification. However 3rd parties are gaining understanding
of customers (e.g. Alibaba, Google, PayPal) and becoming credible threat. These players understand their customers because
they run a market for their goods (Alibaba), or know their spending habits (Google Wallet, PayPal). So they enter the value
chain at a strategic point in direct contact with the consumers, and use the data they collect from regular and systematic
monitoring of people's activities to gain market share and cause a gradual transfer of the margin in their favour.
To counter those diruptions, the biggest assets that incumbents have is trust: indeed Macquarie research says that 70%
of Australian customers would trust their Main Financial Institutions (MFIs) mobile wallet solution vs. 15% for another
organisation. However challengers are becoming more trusted: they including PayPal, Visa/Mastercard, retailers, telcos and
technology companies.
5 - It is a valuable angle to inform our Service Revolution, which precisely aims at materially improving our customers
experience to enable them to bank at the speed of life, putting their Westpac experience on par with the leading global
companies which are currently redefining the notions of commercial trust, CX and UX.


#1 NPS AFS (Business
and Consumer)
25% Wealth Penetration
3.5 products per
customer
Recognise
Me
Remember
Me
Get Me
Always On
Seamless
Help Me
Help Myself
Advancing
Australia
Easy
Banking
Heroic
Bankers
Proactive
Service
The More
You Do the
Better it Gets
Know
Me
Empower
Me
Bank
Wow!
1m new customers
22% Retail MFI
25% Business MFI
<41% Cost-to-Income
Ratio
95% of standard Home
Loans <60 mins Time-to-
Yes
>60% Deposit-to-Loan
Ratio
25% ROTE
Remain
Strong
One
Team
Targeted
Growth
Deeper
Relationships
Radically
Simplify
Employee Engagement
Above global best practice
Craft simple, emotionally satisfying
experiences
Use data and digital to personalise
customer relationships
Services per customer mindset
Acquire customers through strong
brands, compelling reasons to join,
and simple on-boarding
Renew focus on mass, young and
business (especially SME)
segments
Simpler, digitised CX:
Straight-through processing
Simplify product set
Transform our distribution network
Invest in underlying technology
infrastructure
Drive transaction banking and
non-balance sheet businesses
Create end-to-end alignment across
the Group to drive the Service
Revolution
Help our people become Heroic
Bankers
Service Revolution 2017 objectives
banking at the speed of life
Economic, Social,
Cultural, and
Regulatory context
Insights from competitors, disruptors, economic, cultural and
regulatory context to inform our transformation (examples)
Source: Group Strategy, T&D analysis

4
6 Finally, this deep-dives allows to connect those market trends and strategic imperatives to the profitability drivers
that underpin our PnL and Balance Sheet.
For instance:
- Net Interest Income (NII) is primarily driven by interest rates, credit growth, volume of customer base.
- Non-Interest Income tend to be driven by fees and revenu streams generated by value add services and features that
customers are willing to purchase: this aligns with the depth of the relationship and the variety of services we offer, typically
enabled by digital capabilities (eg Digital Vault, Mobile Payments, etc).
- Operating Costs are underpined by the simplification of our operations (FTEs, IT) and remaining Strong as a Group (eg.
Credit Rating, Capital Adequacy, etc)



Source: T&D analysis

The proposal from this prototype paper is for following briefings to provide ongoing insights on 1 front page into the
competitive, economic, cultural and regulatory context to inform our transformation and delivery journey. This 1-pager is
complemented by short digestible 1 to 2 pages deep-dives (mini strategy studies) into topical questions ranging from
economic issues, to digital trends and emerging business models that we ought to understand.
The goal of this exercise is to inform, challenge our thinking, provoke value-add conversations, and connect the dots between
our internal delivery efforts and external thought leadership, in order to make more agile, better informed decisions when
driving our portfolio.


Return on
Tangible
Equity
(ROTE)
Net
Profit
Tangible
Common
Equity
(TCE)

Net Profit
Assets
Assets
TCE
x
=
Total Assets
Net Interest
Income (NII)
Net Non-Interest
operating income
Net non
operating income
Operating costs
+
+
-
Loan loss charges
Tax
-
-

Net Interest Income

Interest Earning Assets
Equity
Multiplier
Interest Earning Assets
Total Assets
x
Earning
Assets
Ratio
Fees, Commissions, Trading,
Wealth Management, Forex,
other operations (eg Fleet
Management)
Goodwill impairments, asset
write downs, minority
interests, income from
exceptional items
Credit Growth, Funding cost,
access to funds, Interest
Earning Assets
Bad debt (quality of loans
book)
Processes, IT, FTEs, Regulatory
costs
book value -
intangible assets,
goodwill and
preferred equity
=
=
Return on
Assets
(ROA)
Net
Interest
Margin
(NIM)
=
=
Targeted Growth
Deeper Relationships:
eg value add digital
customised services
generate new streams
of revenue
Radically Simplify,
Remain Strong
Key strategic goals aligned with PnL and Balance Sheet
profitability drivers