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Agenda

Adapting to Trends in Financial Markets Competing Under the Forces of Financial Globalisation: A Case of Commercial Banking from Australia Paul W. McCarthy Commonwealth Bank of Australia Bank of Thailand Conference Modernizing Our Financial System Bangkok, January 2002. Agenda.

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Agenda

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  1. Adapting to Trends in Financial Markets Competing Under the Forces of Financial Globalisation: A Case of Commercial Banking from AustraliaPaul W. McCarthyCommonwealth Bank of AustraliaBank of Thailand ConferenceModernizing Our Financial SystemBangkok, January 2002

  2. Agenda 1. Overview of CBA and the Regulatory Reform Process 2. Globalisation • Offshore Expansion • Global Competitors in the Domestic Market • Technological Change 3. CBA Strategy

  3. 1. Overview of CBA & the Australian Regulatory Reform Process

  4. Commonwealth Bank of Australia Largest Australian Domestic Financial Institution Personal Banking Operating Income $A 8.8 bn Business Banking Balance Sheet $A 230 bn Institutional Banking Total Funds under Management $A 101 bn Life Insurance Discount Broking Funds Management Financials as at 30 June 2001

  5. Business Mix (June 2001) While still having a strong base in banking, the Group has a diversified business mix Banking Assets (A$191b) Life Assets (A$39b) External FUM* (A$77b) A$b A$b A$b * Excluding A$24b of internally managed life insurance assets

  6. CBA History and Growth Strategy 1911 - 1990 Federal Government ownership including, for a time, central banking functions 1980’s Domestic financial market deregulation 1991 - 1996 CBA privatisation in three stages 1989 & 2000 Acquisition of ASB Bank (New Zealand) in two stages  offshore expansion 1996 Acquisition of Commonwealth Funds Management  business mix diversification 2000 Acquisition of Colonial  business mix diversification and offshore expansion

  7. CBA Growth Path - Share Price Performance CBA Share Price ($A)

  8. Regulation and Diversification • Deregulation enabled diversification - financial conglomerates • Regulatory reforms have facilitated flexibility and efficiency

  9. Australian Regulatory Environment • Integrated financial services structure • integrated regulatory architecture • Open and pro-market regulatory framework based on prudential supervision and informed markets • Clarity of roles and responsibilities of regulators

  10. Australian Regulatory Environment Preconditions • Sound banking system • Sound financial infrastructure • Sound regulatory architecture

  11. Australian Regulatory Environment Outcomes • Transition • Skills and Culture • Integration • Continuous improvement

  12. 2A. Globalisation: Offshore Expansion

  13. Globalisation: Impact of Change • MARKETS & IT • Trade & financial market liberalisation - dominance of capital flows • Increasing financial market sophistication • Widespread, ongoing IT developments • Strengthening of institutional structures to manage these changes • FINANCIAL PLAYERS • Deep & diverse • Global M&As - conglomerates • Sound banks = market foundations • Shareholder driven • Pricing for spectrum of risk - information dependent • Survival by scale or niche • REGULATORS • Promote stable, transparent & efficient financial systems which encourage competition, innovation & risk taking • Increasing cross border issues • CUSTOMERS • Diverse • Competition driving suppliers to anticipate & seek better ways to service demands and needs • Choice • Lower cost services • Better quality services

  14. A Sound & Responsive Regulatory System . . . 1. Provides a framework which allows institutions to allocate capital against properly assessed and priced loans/risks 2. Seeks a balance between too little leverage and excessive leverage 3. Is harmonised and takes a multi-sectoral approach (not segmented)

  15. . . . Creates a Virtuous Circle Degree of Financial Innovation Efficiency of Resource Allocation Quality of the Regulatory System Sustainable Economic Growth

  16. Why CBA Looks Offshore • Australian domestic market is mature and opportunities constrained • Offshore markets provide higher profit growth and shareholder value • Offshore markets provide access to new sources of capital and strengthen the balance sheet through diversification of capital base • Capital and skills becoming more globally mobile Globalisation enhances offshore opportunities & value

  17. CBA’s International Network CBA is represented in 14 countries, with offshore earnings comprising around 15% of total revenue China Edinburgh London New York Japan Hong Kong SAR Grand Cayman Philippines Vietnam South Pacific Malaysia Singapore Indonesia Australia New Zealand Commonwealth Bank Group presence

  18. Key Criteria for Market Attractiveness

  19. Key Criteria for Effective Regulatory Structure SYSTEM DESIGN • Political Independence • Regulatory Design • Skills and Agency Resourcing • Culture and Governance Moves towards adoption of international standards PRACTICE

  20. 2B. Globalisation: Global Competitors in the Domestic Market

  21. Changes in the Domestic Market • Global players have challenged traditional market share • Customer demand changes - savings increasingly diversified away from traditional banking products into wide array of wealth management products • Funding base changes - relatively cheap retail deposit base advantage is eroded; wholesale funding and off-balance sheet funding via securitisation is increasingly utilised Globalisation enhances domestic competition, customer choice & industry efficiency

  22. Declining Net Interest Margins . . . Source: Company Annual Reports

  23. . . . Increase in Australian Managed Funds Source: Reserve Bank of Australia

  24. 2C. Globalisation: Technological Change

  25. Unbundling of the Financial Services Value Chain First Wave: Increasing customer access options …. Branch ATM / EFTPOS Internet Phone / Mobile 3rd Party Access Second Wave: Re-engineering business processes …. Savings Credit cards Home loans Investments Insurance Products …. Transactions Cheques Statements Loan processing Asset management Processing CBA Response • New proprietary distribution channels • Web enablement • co-branding - retailer alliance • Third Party - IFAs, brokers & alliances • Outsourcing

  26. 3. CBA Strategy

  27. CBA Goals and Implementation Areas of focus Strategic vision Financial goal To be the best brand in helping customers manage and build wealth Top Quartile Total Shareholder Returns Customisation Distribution Business goals Drivers Provide customised service to grow revenue Third Party • Wealth Management Customer service • Services aligned to customers needs Brand International Develop the best team Business mix Technology Competitive scale Develop offshore opportunities Risk management Business Process Re-engineering Achieve global best-practice costs Management quality • Productivity

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