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Institutional Banking
Performance and Strategy
Michael Katz
Commonwealth Bank of Australia
27 September 2001
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The material that follows is a presentation of general background information about the Bank’s activities current at the date of the presentation, 27 September 2001. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice when deciding if an investment is appropriate.
Disclaimer
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•IB’s Business
•Performance 2000/01
•Strategy
•People
•Environment
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Outline
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An integrated, client focussed
capital and risk management
business
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IB’s Business
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• Corporate Finance
• Financial Markets
• Transaction Services
• Equities
• CIM
• Fund Servicesi n s
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IB’s Six Business Lines
Business Development
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• Risk Management
• Human Resources
• Financial Control
• Financial Markets Operations
• Technology
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Five Support Streams
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• Financial Institutions
• Government Entities including State and Local Government
• Large Corporates - Turnover greater than $75m pa
• Middle Market since 1 July 2001 - Turnover between $40m and $75m pai n
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The Client Base
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Financial MarketsOperations
Financial Control
Human Resources
Information Technology
PRODUCT GROUPSInvestment
Management Corporate
FinanceFinancial Markets
EquitiesTransaction
Services
Deliver Products
DiagnoseNeeds
RiskManagement
AnalyseCredit Risk
BusinessDevelopment
Calculate the EquityRisk per Client
Clients
Integrated Approach
FundServices
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• IB’s Business
• Performance 2000/01
• Strategy
• People
• Environment
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Outline
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• Colonial integration completed in Jan 01
• Growth in Corporate Finance and internationalisation
• Trading income up 30%
• Equities
– Implementation of VoiceBroker
– Entry to IPOs
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Highlights of 2000/01
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• Development of Funds Management /Fund Services products focussed on IB’s origination skills
• Integration of Middle Market business
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Highlights of 2000/01 - contd
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• CommSec - 38% (1)
• Margin Lending - 24% (2)
• Domestic Bonds - 10% (3)
• FX - 10% (4)
• Transaction Banking - 22% (5)
• Sources: (1) ASX; (2) RBA; (3) IFR; (4) RBA; (5) Greenwich Survey
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Market Share at June 2001
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Capital Raised
Syndication
Equity
Loans
Orgination
IB raised $17 bn of Capital for its Clients, an increase of 49% over 1999/00
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• IB’s Business
• Performance 2000/01
• Strategy
• People
• Environment
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Outline
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An integrated, client focussed
capital and risk management
business
operating domestically
and in niche markets offshore
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IB’s Strategy
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• Commercial banks are a stock business - rely on balances for revenue
• Flow business - transition through the balance sheet
• IB’s dependency on the lending business is reducingi n
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Migration to a Flow Business
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n s • Broad range of products
• Preferred access to both wholesale and retail clients
• Developing skills in product integration
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Competitive Advantage
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• Client Service
• Products
• International
• People
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What Makes us Different?
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Investment Banks
• Credit Risk
• Market Risk
• Operational Risk
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Risk Management
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• KMV
• Large Credit Exposure Policy
• Highly skilled analysis
Diversification is key
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Credit Risk Management
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Impact of LCEP
Term of LoanRiskRating
1 yr 3 yr 5 yr 10 yr
1 100% 82% 71% 51%2 68% 59% 52% 39%3 48% 41% 34% 27%4 29% 21% 19% 18%
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• CBA maintains the lowest VaR across the big 4*
– CBA 2.9
– ANZ 4.0
– WBC 4.8
– NAB 13.0
* Data to 31 March 01 based on CBA Analysis
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Market Risk Management
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• Unique presence in Australian market place
• Have a relatively lower cost base
• Will succeed by providing better broader service to the chosen segment
• Lack international client and product coverage of global competitors
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Client Service is Paramount
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Model is better Business Development, better Risk Management and bundled product delivery
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Better Service is our Business
• Continuity of Coverage
• Quality and Transparency
• Responsiveness
• Innovation
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• “Technology” Technology
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Innovation
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• Cross Border Leases
• Royal Bank of Scotland
• ComputerFleet
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Innovation
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service
• Examples: eCommCorporateCommSec -
VoiceBroker
• Ensures cost effective service levelsi n s
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Technology Innovation
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eCommCorporate
Client and trade volumes are growing
Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01
Trades Clients
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VoiceBroker
VoiceBroker is handling 45% of calls
Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01
Call centre VoiceBroker
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• Broad product range servicing providers and users of capital - retail & wholesale
• Equities business
• Corporate Finance focus on risk adjusted return
• Exportable productsi n s
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Product Set
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• Product focus rather than client focus
• Growth from product initiatives
– distribute institutional equity offshore
– export ComputerFleet technology
– residual value risk - ships, planes, trains
• Develop position as Asian Dollar Bloc specialist - AUD, NZD, HKD
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International Strategy
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• IB’s Business
• Performance 2000/01
• Strategy
• People
• Environment
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Outline
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Staff growth
Staff numbers have increased by 35% over the last two years
1,000
1,500
2,000
2,500
FY 99 FY 00 FY 01
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• Executive team of 12 with average age of 45 and 23 years post-graduate experience each
• Intranet based 360 degree performance review for all staff
• International staff rotation program - 25 Australian staff posted overseasi n
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The Best Team
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with business performance with incentive payments based on a factor of:
• Year on year growth in net profit after tax
• Return on Target Equity
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Remuneration Model
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Fixed vs Variable Remuneration
98/99 99/00 00/01
Tot
al R
emun
erat
ion
Cos
ts Variable remuneration
Fixed remuneration
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- Provide client continuity and service levels required- Domestic skill base
Product- Provide the focus for international expansion- Have international skill sets- Accept a degree of turnover
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People Segmentation Strategy
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• IB’s Business
• Performance 2000/01
• Strategy
• People
• Environment
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Outline
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The Environment
Spreads to Rating (AA+) on Kangaroo Bond Issues
0
5
10
15
20
25
30
35
40
45
03-Sep
04-Sep
05-Sep
06-Sep
07-Sep
10-Sep
11-Sep
12-Sep
13-Sep
14-Sep
17-Sep
18-Sep
19-Sep
20-Sep
21-Sep
2005 Issue
2003 Issue
Source: Commonwealth Research CBASpectrum 24 September 2001
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We are caught between
a rock and
a hard place
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The Environment
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The most dangerous words in Financial Services:
“This time it’s different”
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The Rock
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“Generals (Management)
always prepare to fight
the last war
not the next”
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The Hard Place
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Mean reversion suggests that
after 20 years of
exceptional growth
we should expect
a long hard drought
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Summary
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• Focus on Costs
• Focus on Large Exposures
• Focus on Continuity
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Conclusion