PRESENTATION BY MIKE SMITH, CHIEF EXECUTIVE OFFICER AND PETER MARRIOTT, CHIEF FINANCIAL OFFICER OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ)

“Trading Update”

http://www.brr.com.au/event/48715

 

MONDAY, JULY 28, 2008, 10:00 AM.

 

ANZ Good morning to all of you. I am sorry about the late notice, but I am glad that

10 so many of you have taken the time to join us.

 

As you will have seen this morning, we announced that we would increase our provision in response to the deteriorating economic conditions and the impact that this is having on our business. None of this news is new;

15 however, conditions have deteriorated.

 

Before I take you through this in detail, let me make the point that having to do this is bad enough, but having to do it at a time when despite the general global economic gloominess, despite the global credit crisis, despite higher

20 funding costs, and higher oil and food prices, despite all that, in terms of our strategic endgame, we are actually making very good progress and we were picking up steam or are picking up steam.

 

Our personal division is on track for an even stronger second half. We have

25 seen our net profit in Asia. That will be up over 40%. Our full year profit before provisions will be up by around 8% year-on-year and cash profit will be over $3 billion. So I know you will all agree with me that having to announce this sort of provisions is beyond disappointing. In fact, we are also kind of language (inaudible) (0:01:24).

30

When I got here just 10 months ago, I made it very clear to you all that what I saw happening in the world credit market was unique, was different, and we started to take the action required to get into shape for that. However, what is really irritating is that we are having to spend so much time on remedial

35 action. So much time and money on addressing legacy issues when I know that there are real growth potential available to the business.

 

The reality is that, at least in most western countries, the game has changed in banking. The deterioration in the global credit markets is still playing out

40 with serious impact on the financial systems of the US and the UK. It would be naive to suggest that somehow Australia is immune. The reality is our financial system though is in relatively good shape.

 

In fact, if you look at market capitalization tables recently, ANZ is actually

45 currently bigger than (inaudible) (0:02:34). It is bigger than Lloyds Bank. It is bigger than Merrill Lynch. It is only just below Barclays and Morgan Stanley. Up to last week, we were heading to be half the size of Citigroup, which is an indictment on what has been happening.

 

Having said all that, I am under no illusions. The market is volatile and ANZ has underperformed this year. My job is to pragmatically deal with the hand we have been dealt and get the position turned around for our shareholders. The paradox is that while the rest of the western world is into their financial

5 crisis with asset prices falling and demands slowing, in Australia, we are trying to deal with the problem of success. The Australian economy will continue to slow though over the next 18 months, but that will be the result of deliberate Reserve Bank action to cool inflation and that will help underpin economic success in the longer term. In fact, we are facing up to that different

10 environment as well as the issues which are quite clearly of our own making.

 

Growth is slowing. Energy and food prices are rising. The cost of funding has gone up. So that means interest rates are up. Equities are significantly off. Overall, across the bank, lending growth has slowed, although our net

15 interest margin has stabilized. In Australia, arrears in mortgages and credit cards have risen only modestly, but we do need to take a conservative view as the economy slows further. I think it is entirely unrealistic to assume that the position can be maintained.

 

20 In New Zealand, the story is different. After a long period of growth, the economy is now contracting. High interest rates and high food prices and petrol prices are weighing heavily on consumers and business. As a result, individual provisions in New Zealand will be around three times higher than last year’s very low levels. Losses from New Zealand commercial and

25 corporate lending have also increased.

 

But as I said earlier, the main issue we continue to deal with comes from our institutional business. While we are turning around institutional, we still have to deal with a number of legacy issues. This is a challenge that is going to

30 take some time to fix. A small number of previously identified exposures are still causing us pain and including some commercial property clients and provisions for prime broker and Bill Express which are well known. We expect the number for our institutional individual provisions to be around 500 million against 371 million for the last half.

35

Overall, our collective provision charge for the full year will include 325 million for portfolio growth and credit rating deterioration and 425 million to take into account higher oil prices, interest rates, and slowing economic growth. This will bring us to over 1% of credit risk assets which I think is a prudent and

40 responsible level in the current environment. That will actually take us ahead of our peer group.

 

I do not wish to pre-empt the review of securities lending that David Crawford is assisting me with, but we are addressing some of those issues on an

45 ongoing basis, and once that review is complete, I will take the strongest possible action to put these issues behind us once and for all.

 

Now, let me make some more important points. We have no direct exposure to US sub prime. We have no exposure to US sub prime or mortgage-related CDOs. In fact, our total exposure to CDOs is 5.5 million. That is million, by the way, and not billion. On commercial property, commercial property exposures are only 8% of the total book. Listed property trusts are around 4%. The portfolio is high quality with a large percentage maintaining investment grade

5 rating. Overall, gearing to the listed property sector is typically under 50%.

 

With credit intermediation activities, the underlying assets are high quality corporate names in the US, Europe and Australia. These are structures of AAA-rated assets and were hedged with AAA to single A counterparties. The

10 portfolio is still behaving at AAA criteria despite the stress. It consists of 800 high quality names, mainly Fortune 500 type companies. We have assessed the total market valuation on these trades and have taken a further $160 million deduction from income. While these credit intermediation trades continue to maturity, they will be volatile, but we expect to be able to reverse

15 these adjustments in due time as they mature.

 

If I can turn to funding, we have successfully completed our 2008 term funding program and we are now focusing on the pre-funding for 2009. During the year, we have raised $34 billion in term funding with an average

20 duration of 35 months and an average cost of 70 basis points. Liquid assets totalled 32 billion which places ANZ in a very, very strong liquid position. We intend to exchange the ANZ’s StEPS hybrid securities into ordinary shares at a 2.5% discount under the terms and conditions detailed in the original prospectus. Importantly, we intend to maintain the full year dividend of 136

25 cents per share, fully franked, at the same level as 2007. We therefore anticipate our tier 1 ratio on the 30th of September to be above 7%.

 

So let me just sum up. The global game has changed and we are managing our business for that. But we also need to get on with the business of growing

30 and delivering and building a super-regional bank and delivering better outcomes for shareholders. That is what I am here for. It is what the management team and our 30,000 stocks are here for. We are making progress on that. It is slower than I had hoped when I arrived, but I am being pragmatic and decisive about our legacy issues, but equally, I am pleased

35 with the good head of steam we are building in the underlying business.

 

Personal continues to be a standout business. Institutional is turning around. New Zealand is performing reasonably well given the challenging economic circumstances. In fact, we believe it will still have to be the highest profit for

40 any New Zealand company this year. Asia Pacific is growing fast with an excellent management team in place.

 

No key executive likes to announce news like this that I have today. Our shareholders, our stocks, and our customers have a right to expect better.

45 But rest assured, all of us on the senior management team are committed to doing what it takes to achieve our objectives.

 

Now let me hand you over to Peter for a little bit more detail on the numbers. Peter?

 

ANZ Thanks very much, Mike. I thought I would just touch on four areas where you have probably noticed some observations within the trading update. You get a little bit more background to those. First of all, you will see that we are

5 saying here that our income for the year is expected to be between 8% and 9% which is obviously below what the market was originally expecting. Importantly, the personal business and the Asian business continue to be growing at the rates we were earlier expecting, and when you look at this, the main reasons for the reduction in our growth rate is in fact limited to four

10 things. First of all the valuation adjustment that Mike mentioned before, the financial guarantors take 1.5% off their income growth rate. They’re moving in exchange rate over the last three months. They take about 0.6% off the exchange rate. This (inaudible) (00:11:40) environment in New Zealand where we have commented that New Zealand is having essentially zero

15 income growth this half, takes off about 0.3. And then finally there’s a deal in the institutional business where there’s a debit to income of about $70 million which is offset by credit tax so the AC effect is neutral but from an income growth point of view that takes off about 0.6.

 

20 So when you adjust to those factors, that explain what’s the difference between where the market was thinking we’re going to be from an income point of view and the 8 to 9 number that you mentioned here. And in fact that explains about 3% income growth so that’s 5% in GDP?

 

25 Most importantly I think certainly compared to the situation over the last couple of halves, and again as Mike said, margins have stabilized indeed for the third quarter and the margin was 2.3%, 203 basis points compared to 199 basis points for the first half and that’s the effect of the pricing initiatives offsetting the rising cost of funding and less competition on the asset column

30 of the balance sheet.

 

On costs, you see here we’re talking about cost cuts of about 9%. A couple of key observations here. All of our divisions have positive jaws with the exception of the institutional business and the institutional business of course

35 has negative jaws because of the income we were just talking about before. Then the other point to stress of course is that over one quarter (inaudible) (00:13:13) in Asia, and once there’s 40% growth rate in Asia in cost, there’s a corresponding growth in income as well so that pushes up the overall growth in cost for the group.

40

From a provision point of view, we have got a lot of due diligence over the last 10 days and brought forth a normal half yearly assessment of the equity provision charge which is seen mentioned in here. Overall our provisions are projected to be up about 1.6 billion in 2007 and 84% of that relates to

45 institutional and about 9% to New Zealand where we’re seeing an increase in provisions over there as you mentioned in the release.

 

Mike has spoken about the same day charge, and in particular there, we have stood back and recognized that a lot of the effects of things like higher oil prices, the higher interest rates, and higher food prices are going to have a lag effect on our rating profiles and there are other factors within the portfolio which suggested to us that it’s appropriate to increase the scenario component of our collective provision. To put that in context, there’s only 15%

5 of the balance of the collective provision so we’re saying we need to have 15% more than the normal to reflect the unusual conditions that are likely to prevail.

 

Then in terms of our credit intermediation trade, it’s obviously a very complex

10 area. We’ve set up more information and Mike summarized it very well in his introductory comments that these are very different types of structures to the ones that attract a lot of attention, for example, late last week corporate names they continue to remain in AAA criteria. And in addition to the high quality of the underlying assets, we have of course the protection from

15 financial guarantors.

 

But of course we live in mark to market world. And in mark to market even though we do not expect to incur a lot from these transactions, the credit spreads are wide and there’s a negative market value which is then offset by

20 the positive market value on the financial guarantors. As you will see from the (inaudible) (00:15:30) about 80% of those financial guarantors continue to be rated AAA but the market practice now is to also adjust the value of the derivatives for those counterparties by credit valuation adjustment which is effectively allowing for the widening in credit spreads on the name on those

25 counterparties and marking down the value of the receivables from those counterparties. And that is being charged $160 million trading income and that is also a mark to market number that will move all the time as credit spreads change.

 

30 Mike covered off funding and I think key thing here again is that we have the highest level of liquid assets we have ever had and funding costs are being passed off in our margins. Hence, margins have been recovering. Finally from a capital point of view, the obvious question is what’s the impact of these adjustments that we placed on this current release on the capital ratio and our

35 capital ratio as of 30th of June, both adjusted for the change to include interceptors from the banking book and also for the first of July (inaudible) (00:16:42) remaining under the DIP underwriting which was in fact 7% so we have maintained a capital ratio which in fact was stronger than what it was at the end of March, and as Mike said, looking to see that that ratio continue to

40 be above 7% by September. So with that comment, I’ll pass it back to you.

 

Operator We will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel the request because your question has

45 been answered, please press the #. Your first question today comes from Robert Camilleri from Portfolio Partners. Please go ahead.

 

Q Good afternoon. I was wondering if you could speak briefly about your ongoing capital requirements in regards to that hybrid space. I mean, obviously you’ve taken the position to convert the existing steps into equity but what’s your ongoing requirement in regards to borrowing in that space going forward given the current market climate.

ANZ The decision to convert the ANZ’s StEPS program into equity basically

5 reflects the market conditions at present. We’d still like to do a hybrid issue at some stage and that keeps our options open. But it also allows us to look the dividend reinvestment program and to give a discount on that at the end of the year should we need to do so. So I think that it’s just providing us with a degree of extra flexibility.

10 ANZ Yeah, I’ll add to that with the conversion of StEPS into ordinary shares where we have in fact quite a bit of capacity to issue further hybrid and our ratio with 16% with the conversion of StEPS, so there is a lot of capacity for issuing more hybrids than when opportunities arise. And obviously part of the capital planning every year you need to be raising amounts of hybrid to supplement

15 the natural retained earnings so raising hybrid equities is an ongoing part of the capital management.

 

Operator Your next question today comes from John (inaudible) (00:19:02) of UBS. Please go ahead.

20 Q Hi, guys. Just had a question on credit intermediary trade. I just wanted to get a feel for the sensitivity that you have and the credit valuation adjustment to any changes in both the writings and the spreads of the monolines lines and can you give us a list of the names of which monolines you have exposure to?

25

ANZ Taking the first part of your question, it’s not our habit to (inaudible) (00:19:30) details of the names of our customers at least so long as they continue to perform. So I would like you (inaudible) (00:19:38) details of the names. The credit valuation adjustment is a function of the writing and so

30 obviously as a counterparty (inaudible) (00:19:50) down the rating profile, the credit valuation adjustment will increase. You’ll notice that we have one counterparty down there which is on investment grade. That of course is the one that we had a provision for in the first half and you can see that by the time that you’re down to that stage, you end up with 100% credit valuation

35 adjustment. But AAA will hold some of the credit valuation adjustments that are relatively modest but it’s usually a function of what happens to the ratings of these counterparties. Remembering of course again that the underlying asset – this is simply protection over the underlying asset on the derivatives where we have sole protection, and long term, we expect not to lose money

40 on those derivatives and to write back any mark to market negative value.

 

Q If you have a downgrade from say AAA to a notch or two below, what would be the sensitivity on the portfolio? Are we talking hundreds and million of dollars? Can you just give a sensitivity?

45 ANZ Well, certainly if you have a couple of downgrade in this portfolio. You could see the CBA adjustment there. You could see the number there of US$191 for an investment rate, that is. We had a quarter of this portfolio downgrade a notch, in fact, a couple of notches, you can see that number doubled. It’s reasonably sensitive to follow (inaudible) (00:21:10) just the vagaries of mark to market.

ANZ Yeah. But I think it’s also important to understand that a lot of this protection has been brought by effectively closed funds so there’s no cash leakage,

5 therefore, there should be no reason why the AAA rating will reduce. However, it’s also important to understand that these are derivatives instruments. What you’re seeing in the section on Page 6 of the pack is the bought protection side, and as Peter said on the sole protection side which has got the underlying credit risk, we don’t see any concern and it is likely

10 that all of this reduction to income will be brought back to book.

 

Operator Your next question today comes from James Freeman of Goldman Sachs JBWere. Please go ahead.

Q I’m sure Peter (inaudible) (00:22:12) plenty of questions on the credit quality,

15 so I am going to just actually ask on capital. You’ve said there that your dividend is going to be flat and tier 1 will be about 7% beyond giving an indication whether that would be written an underwritten DIP or underwritten dividend, I mean, it’s not a gradual point in having a flat dividend if it is just being funded out of shares. Can you comment on whether that dividend is

20 planning to be underwritten and whether your capital guidance has any indication on the DIP underwriting in there?

ANZ Yeah. The comment we made here, James, is that we have retained that flexibility and we will obviously revisit that closer to – at the time of the full year announcement as to whether we wish to underwrite the DIP or not. But

25 we have definitely retained that flexibility and it’s obviously something which is quite possible.

 

Q Put in another way, your target here tier 1 about 7% that you said. Is that including the DIP underwrite or a function of the DIP underwrite?

30 ANZ James, it does not because under (inaudible) (00:23:11) requirements, we’re not able to recognize the underwritten DIP until such time that the cash come in so therefore to underwrite the DIP, we will not be able to recognize the benefit of that until December when we actually receive the cash.

 

35 Q All right. Thanks.

 

Operator Your next question today comes from Tom (inaudible) (00:23:31) from Macquarie. Please go ahead.

 

40 Q Peter, could you help us reconcile both collective and individual provisions and with the collective, if I look at first half gross observable data in rating downgrade was about 303 million and I think what you’re calling now is a cycle adjustment with about 125 and so on the full year numbers for those categories 325 and 425 the second half numbers if you could help us

45 reconcile those because what I can come up with is that your collective provision for gross and observable performance would be about 22 million. And then on the specific, again it’s a very large number in the second half which we have just attributed to certain commercial property, et cetera, could you give us a bit more detail geographically where that might be and what the split would be between commercial property, securities, lending, and Bill Express?

ANZ Okay. First of all, we’ll take your question around the potential growth and potential portfolio’s duration. Remember that to the extent that a counterparty

5 downgrade is not approved, you reverse the collective provision charges associated with it. So there’s a partial edge back because of that. Mike made a comment early on as far as the trading updates that there are no new names here amongst the individual provisions, i.e., they are all accounts that we knew (inaudible) (00:24:58) some increase in provision and so the

10 extensive shift downgraded the accounts (inaudible) right back to collective provision. In the second half, we’re projecting moderate slip of the balance sheet growth, so you do not have as much balance sheet growth there and there’s still some allowance for risk deterioration, but there’s a credit back by virtue of accounts being transferred from the collective provisioning to the

15 individual provisional downgrade. So I think that helps you to understand what simple subtraction to use (inaudible) (00:25:29) does not quite work because you have to allow for the accounts that have migrated down to non-approval. In terms of where the individual provisions come from, again our normal practice here is not to talk about individual customers. And I think if

20 anyone is interested in actually talking about individual customers, the only two individual customers we have spoken about, of course, have been those two who were receivers or administrators that have been appointed in terms of Bill Express where there is a $53 million provision. And in terms of prime broker where we’re thinking that provision is likely to be higher than earlier

25 estimates and we have (inaudible) (00:26:04) in here. But beyond that, you know, we have not made any comment. We’re reluctant to do so beyond what we said.

 

Operator Your next question today comes from William (inaudible) (00:26:15) from

30 Credit Suisse. Please go ahead.

 

Q Good morning, gentlemen. Just two questions for you real quick. One of which is you highlighted that the mortgaging credit card arrears in Australia have risen only modestly and there’s some deterioration in New Zealand,

35 recognizing the component of today’s announcement relates to the credit intermediation trades, can you give us some view as to your beliefs as to what percent of this change in your view for this year comes about specific to ANZ and what component of that would be more bank-specific, meaning that your peers will face the same sorts of issues, and also on the dividend, I am

40 just wondering what conditions do you evaluate when you decided to keep it flat and what factors should we be looking for going forward to see if there would be a potential decline in that dividend.

ANZ Okay. Well, on the question of what is specific to ANZ rather than to the environment, I mean I think the IP numbers are really very specific to issues

45 that we face. I think the CP is more a reflection of what we expect to face in the overall environment. And your question concerning the dividend, I mean, at present I think it would be correct to expect that the dividend payout ratios will increase for banks here, but, you know, I think that certainly we would like to maintain the dividend and certainly not see any reduction that we have seen across the bank in the US and Europe. So at present I am fairly comfortable with where we sit and certainly we can fund that.

 

Q Thank you very much.

5

Operator Your next question today comes from Brian Johnson of JP Morgan. Please go ahead.

 

Q Hi, Mike. Mike, the first thing is congratulations to perhaps the more realistic

10 assessment earlier than some of your CRPs, but Mike, I was just wondering, if you look at the world changing and the value of funds management companies coming down, could you just run through the strategic merits or reasons why you wouldn’t be more interested in funds management at this particular point in time given that it is one differentiating factor for ANZ

15 competitive peers?

ANZ Well, as you know Brian, we do have an arrangement with ING. I mean, I think that that particular arrangement doesn’t come to maturity until 2012. So there are some distance to run. I think there may be opportunity in Asia for some additional asset management business and we certainly looked at that.

20 I think you’re right. I think the timing and values are looking better and we will keep our options open. However, I think it’s also fair to say that, you know, you have to look at the amount of cash available and really any significant deal in this space would have to be done through, by way of shares options. So I think the options are limited but we must keep our eyes open and I agree

25 with you. I think that this is a good time to look.

 

Q And, Mike, just another one. The messaging at the last trading update and the result was very much in the first half you felt that your bets are being conservative and forward-looking. And not withstanding the fact that you took

30 this in the first half. The end result is in the second half the charge is much bigger again. Once again the message tends to be that we’re very forward-looking and that we have dealt with it. Could you just – you know, could you just give us a definitive statement as to whether you felt you’ve dealt with it or not?

35 ANZ think we have. I mean, I think on the information that we have available now, I think this is the best guess. I think it is based on as I said on the information that is available to us. There is no doubt that the economic conditions and the global outlook have changed in the last few months. Are they going to continue to change? Possibly they are. You can never sa never, Brian, but I

40 think that this is the best guess at the moment. I think that we are positioning ourselves with a 1% or over 1% CP is a rational and sensible decision and we will be able to use that buffer if things get worse.

 

Q The other thing is, Mike, the 1% was like 96 basis points at the end of the first

45 half, you know, it sounds big (inaudible) (00:31:07) look at it. It’s not really all that much bigger.

ANZ Well, it’s going to be over 1%. I mean, I think it works out about 1.08% or something.

 

Q Yes.

ANZ So I mean, it’s, yeah, it’s not a huge difference but it is pulling it up rather than reducing it. I guess that – you know, if you’re looking to the trend, I think that’s important.

5

Q Okay. Thank you very much.

 

Operator Your next question today comes from Richard Wales of Morgan Stanley. Please go ahead.

10

Q Good morning, Mike.

ANZ Good morning.

 

Q Mike, (inaudible) (00:31:44) on Friday showed that their capital position

15 remained about the end of their target levels. Today you’ve said that your tier 1 ratio is 7% at the top end of your old target levels, but given the environment has changed the banks globally, are they appropriate level? Also, probably your peers, (inaudible) (00:32:10) on ratios around 7.5 and about that you should be targeting a high capital ratio.

20 ANZ Yeah. I think it’s a sad point. I think that as we move forward, we will have to see how the overall economy and the scenario turn out. I do believe that we’ll probably have global pressure to increase capital ratio. Over time, I think the introduction of (inaudible) (00:32:45) probably helped in a number of countries across but it hasn’t happened in North America. It will be interesting

25 to see, you know, what does come out of the situation. But I mean, regulators at the moment particularly in Europe and the US are not going to force banks to increase their capital, you know, right now whereas most of them are trying to repair that capital basis. So I think if we look two, three years ahead, there will no doubt be a move to increase that one requirement. But at present, you

30 know, we feel comfortable with where we’re at but it’s something that we will keep on the constant evaluation.

 

Q Are the tier 1 ratios in line with your peers?

ANZ Yes. I mean, you know, I think so long as we are within our own comfort

35 zone, you know, I think that’s fine. I think one of the issues that we have to realize here is that ROEs are going to reduce. I mean, the more capital you hold of course, the lower your ROE becomes and that’s something that, you know, you have to balance in the interest of shareholders.

 

40 Operator Your next question today comes from Brett Le Mesurier of Wilson HTM. Please go ahead.

 

Q Thanks. The non-investment grade CBA you showed on Page 6 is 178. Was that 216 at the end of first half? And also one other question in relation to that

45 slide you show notional principal amount of 11.6 billion but your result of first half ’08 showed total credit derivatives sold at 22 billion. So could you give us an idea as to what the rest is as well?

ANZ The second part, which is the other derivatives are all Australian -based derivative trade. So these are the only ones to do with this credit intermediation activity. Sorry, the first part of the question was?

 

5 ANZ Yes, the first part of the question was we’re looking at the 216 and the US$216 which is $226 million Australia that was the provision that we raised in the first half and the mark to market in that counterparty is reduced from what was a requirement of the provision of 36 Australian to 160 US and now 178, same counterparties you see there as non-investment grade. So its

10 mark to market has improved and so that part of the provision has been able to be written back. We have taken up the current valuation adjustment on the other counterparties that are investment grade.

 

Q How could it improve?

15 ANZ Well, the market has improved.

 

ANZ Yeah. Brett, these mark to market move around quite a lot day by day and so it will be a combination of the changes in the credit spread and the specific names within those tranches and also changes in the correlation between the

20 credit spreads for those individual names in those markets.

 

Q Have you reduced the correlations further in your mark to market?

ANZ I am sorry, Brett, you say it again. I did not hear you.

 

25 Q Have you reduced the correlations further in the mark to market of that transaction?

ANZ No, we have had no change in the methodology here, Brett. It’s just simply reflecting the changes in the observed market input.

 

30 Q So just the CDS spread?

ANZ There’ll be changes in CDS spreads down the line.

Q Okay. Thank you.

 

Operator Your next question today comes from Michael (inaudible) (0:36:41) of

35 Commonwealth Bank. Please go ahead.

 

Q Good morning. Have you had a chance to discuss this with the rating agencies, and if so, do you expect any change?

ANZ Well, we had a discussion with the rating agencies today. I’ve not had

40 conversations with them. As yet, I’ll be talking with them later on but certainly our treasurer has been talking with them. We provided the rating agencies with a briefing last Friday generally on the intermediation trade. They’re already very familiar with those. So liquidity once again is stronger than it’s ever been and our capital ratio is above the level it was at 31 of March, so I

45 think we continue to have very sound financial position.

 

Q So you do not expect any changes at all? We are just going to wait and see?

ANZ Well, we can’t speak for the rating agency.

ANZ Well, it’s up to the rating agency. My personal view is that our financial strength has not changed.

Q Okay, thanks.

 

5 Operator Your next question today comes from Ross Brown of Deutsche Bank. Please go ahead.

 

Q Good morning. Your comments earlier about the collective provision having a buffer in it for further deterioration. I take it therefore that if there are risks for

10 deterioration the collective provision does need to rise in relation to the buffer. The buffer will actually be torn down if the environment deteriorates. And secondly the comment about the institutional portfolio and previously identified large exposures. Does that mean the level of impaired assets actually hasn’t gone up at an institutional level? It’s still constant as reported

15 in March?

ANZ In answer to your first question, the answer is yes. In answer to your second, the amount has risen.

 

Q So there has been some new, large problem lines since the last result?

20 ANZ No.

ANZ What we’re talking about here, Ross, are accounts that were on the edge previously that’s why we said that they were identified as problem lines at 31 March, but had not specifically tripped over to the point where we said a lot of loss was likely and now there have been accounts that have tripped over to

25 the point that a loss is now likely and we have therefore raised individual provision and moved them into (inaudible) (0:39:04).

 

Q Will these names…?

ANZ Sorry. Ross, and have therefore made the adjustment against CP.

30

Q Right. Well, will these names that the market generally knew about at the time of results, are they not surprising to the market?

ANZ Yes. You know about them.

Q Okay. Thanks.

35

Operator Your next question today comes from Timothy Mark from Lehman Brothers. Please go ahead.

 

Q Hello. On Slide 4, there’s a mentioning of Alt-A RMBS securities in the US. Is

40 that valuation figure of 532 million a mark to market number already?

ANZ That is the face value of the bonds. These are all bonds that continue to be AAA rated. They are all eligible for (inaudible) (0:39:56) reserve. There are a couple of bonds in there that we think that have a heightened risk of losing their AAA status, so these results include an allowance of $35 million to sell

45 those bonds so that we continue to maintain a portfolio of AAA. The important thing is that these are assets which are repayable and continue to be AAA and not showing signs of impairment other than potentially for two bonds that we are intending to sell and recognize the loss in these (inaudible) (0:40:24).

 

Operator Your next question today comes from Craig Williams of Citigroup. Please go ahead.

 

Q Good morning, gentlemen. You have noted the resilience in your interest

5 margin performance in recent months. Could you please provide some comment on the outlook for interest margin as of the next 18 months given the slowing credit growth, rising funding costs, etc., etc., and perhaps more specifically whether or not you think there is a reasonable prospect of an interest margin actually increasing during that period of time?

10

ANZ Yes. I think, Craig, that we would hope that that interest margin actually probably pick up a little bit as the repricing comes through particularly on the corporate book. We have been able to reprice a little bit more quickly on the personal side, but we also have to expect further volatility and further stress

15 in the international credit market in terms of funding costs. We anticipate that funding cost increasing, and therefore, we will have to continue to pass that on. So it really is a question of how we manage that lag effect. But so far we feel that we are on top of that at the moment.

 

20 Q Okay, thank you.

 

Operator Your next question today comes from Anita Yadav of UBS. Please go ahead.

 

Q Good morning, gentlemen. My question is related to information on slide 6,

25 the estimated credit valuation adjustment of 191 million. Are you able to give me a breakdown of that based on the rating category? Second, do a sensitivity analysis of what happens if some of the credits fall below AAA to lower categories.

 

30 ANZ No, we have not given that breakdown. So we would look at this as a portfolio across all the names. As regards to their current rating, their current status, some of the information will become pensive if we breakdown (inaudible) (0:42:35) individual counterparty, so we prefer not to.

 

35 Q If not by the counterparty, just the rating band-wise.

 

ANZ Yes. But…

 

ANZ This is the bought protection, remember. This is the bought protection. It is

40 not the underlying sold protection.

 

Q Yes, I was not trying to drive that it is. The 191 million basically comes from the portfolio, and the portfolio has four different rating bands as you have identified. I am assuming you are obviously making bigger adjustment on the

45 lower ones and I am just trying to understand what percentage of the exact mark to market amount are you making as credit adjustment.

 

ANZ Yes. As I have said, we have looked at this as a portfolio so therefore I am not in the position to give you a breakdown by writing that.

 

Q Okay. No problem. Thank you.

 

Operator Your next question today comes from Tom (inaudible) (0:43:32) from

5 Macquarie. Please go ahead.

 

Q Mike, can I ask since last December when you talked about your strategy and aspiration for Asia, I guess a lot has changed in both your domestic business, the domestic economy, and the global economy. How has that changed your

10 plans for Asia at all?

 

ANZ We still continue to invest in Asia. The Asian business is still continuing to grow. In fact, the results have been extremely good. We have now got in place an extremely good management team. I am still confident that we can

15 continue to move ahead with our Asian strategy. I guess that we probably have not made as much progress as we would have liked because there has been a lot of attention and effort being paid to what I call fixing legacy and remedial action. But that is not to say that the strategy is not still sound. We are still on track.

20

Q I guess in relation to the ability to invest capital in Asia, your capital position has become tighter because of the domestic business. When do you start looking at the dividend and saying, “Well, we are going to be a growth business in Asia. We do need more capital and we will have to pay out less

25 than we used to.”

 

ANZ Well, I do not know if we will ever think that, but certainly, I think the issue in Asia is actually the price of assets. I expect that to come down. I mean, I do not think we have seen the adjustment in Asia that we have seen in the rest

30 of the world and I think that that will happen. When you are dealing in Asia, you have got to think for the medium of longer term. You just have to be patient. We are in no rush, and as you rightly point out, capital is something that we have to manage carefully at the moment.

 

35 Operator Your next question today comes from Brian Johnson of JP Morgan. Please go ahead.

 

Q Mike, just one other question. At least one of your peers(inaudible) (0:45:34), anecdotally anyway, would appear to be problem line comes in, cannot afford

40 to recognize it, just refine it throughout and going and revaluing the asset, as someone that is basically still in the new CEO status, how confident can you be that you are not seeing much of the same thing happening at ANZ? Like the line officer, we are not getting up-to-date valuations on the assets when they are coming in for refinancing because… you can see in some of the

45 stock exchange announcements the market cap versus the debt. There are some, certainly one or two banks out there that are kind of like ignoring the new reality of where assets values are.

 

ANZ Yes.

 

Q I do not know, you have got this process where you are going through the securities lending type businesses, but as the CEO sitting at the top, how confident can you be that there is not a similar problem at ANZ?

5

ANZ I am pretty confident of that, Brian. I mean, I have gone through an awful lot of this book myself and I actually keep a close eye on where the markets are valuing assets. I have a weekly meeting whereby we actually test particularly the market’s exposure and I am right in the front of that. So I am confident

10 that what we have right now is the right number. The issue, of course, is where markets go from here.

 

Q Just to go back to the legendary (inaudible) (0:47:13) comment or question, if you have a look at ANZ, your share prices form a long way. Mike and I

15 suspect that that will form on further. How does the share price or your own cost of capital let you plan to the Asian strategy? For example, if you have done (inaudible) (0:47:28), you would have been issuing new shares.

 

ANZ Yes. Of course, as I said earlier, it is going to affect the Asian strategy. I

20 mean, it means that we have to delay things a little bit. But everything is relative, Brian. I mean, if you look at a piece on where banks are trading to MCA in North America and Europe, we are seeing quite extraordinary adjustments. I mean, we will continue with our organic expansion into Asia. That is still at one time’s book and I am still happy with that approach. We are

25 making good progress there. Yes, we have to be realistic. Right now, I cannot afford Asian businesses but I do expect those values to come off in time. I do not think that that is going to stay there forever.

 

Q So the five-year target, hopefully you are going to say this, the five-year target

30 is, provided that it all steps u, we should not be thinking that it is a hard five-year target at all.

 

ANZ I mean, the five-year target, I still believe it is achievable. That strategy is still out there. If we have two or three bad years between times, then so be it, but

35 we will position the business to move forward. I mean, as I say, if you look at the share price right now, it is producing a yield of 11%, which is not such a bad deal.

 

Q Yes. Thank you.

40

Moderator While I have got the operator, we need one last question and then we will have to wrap it up.

 

Operator Thank you. Your next question today comes from Rob (inaudible) (0:49:10).

45 Please go ahead.

 

Q No, thank you. My question has been answered.

 

Operator Would you like to take one more question at this time?

 

Moderator We will take one more in view of that last question being short.

 

Operator Thank you. Your next question comes from Cathy Lawrence of HSBC. Please

5 go ahead.

 

Q Yes, good morning, gentlemen. I was just wondering if you would be able to give us some color around your commercial book in Australia noting you have spoken about the institutional book and the personal. Thank you.

10

ANZ Yes. The commercial book is still looking pretty good. We have not seen a huge deterioration. We have seen a reduction and low demand from that sector. As I mentioned earlier, one of the issues is the commercial property sector which we have got only 8% of the book. So far, we are able to manage

15 that fairly well. I mean, we are beginning to see the effects of the slowdown in the economy with receivable finance increasing somewhat as suppliers extend terms of payment. But that I consider normal. But so far it looks relatively good.

 

20 Q Thank you.

 

Moderator With that, everybody, thank you for your attention this morning. If you have any follow-up questions, you can ring either Cameron Davis or myself. We are happy to help you. Operator, with that, we will end the call. Thank you.

 

INTERVIEW CONCLUDED

 

 

 

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