Abacus Lobbying Priorities

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

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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

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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

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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

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Some reality checks in a tough market

1. Growth- below system for assets and deposits- At system for loans

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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)

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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

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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

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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

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Our Environment - market

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Lobbying and Politics

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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

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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 havecommitted to FSI

Government annoyedat our calls forfurther reform(but this is OK)

Public apathy?

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Lobbying – part of democracy?

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Lobbying – slightly stinky?

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Basic principles

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

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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

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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

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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!)

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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?”

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The Regulatory Environment

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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

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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

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Regulatory Focus - 2013

Basel III capital

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Regulatory Challenges

Basel III and capital framework

• Capital impacts for mutuals

• Tier 1 Capital definitions

• Non-viability clauses

• Accelerated timetable

• Abacus response

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Basel III - capital

Senate Economics Committee9 August 2012

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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

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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

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Media presence underpins our advocacy

Media report on usConsumers read/talk

about usGovernment hears us and

recognises our value

Building a balanced approach to Customer Owned Banking

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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