Graham Hodges Address at Anzroc Christmas Lunch Dec 2015

ANZROC December 2015

Thanks for the opportunity to address you today. At the outset, let me pass on to you and your families Mike Smith’s best wishes for the festive season and for 2016. Mike unfortunately has a longstanding customer commitment in Sydney and can’t be at today’s event.

Today I wanted to give you a brief summary of our 2015 year (which as you would know is our 180^th year as a bank) and, a bit later, Shayne will touch on the future for ANZ under his leadership.

2015 has been a challenging year for banking in general. The local economic environment has been impacted by the fall in commodity prices and the slowdown in the resources sector, but has benefitted from the weaker $A. These trends, and of course, concerns about China’s slowing growth (and also SE Asia) have been a key focus for investors as they have tried to assess what will be the impact on the Australian economy and therefore bank earnings.

As well, and more positively, we have seen a strong housing market (especially in Sydney and Melbourne) and a pick up in business credit demand towards the end of the year. These have supported balance sheet growth and earnings.

Two other issues have been, and remain, at the top of the list of investor questions – the amount of capital banks are, and will be required to hold and second, the outlook for provisioning for bad loans.

Anyone who follows banking news, would know that APRA has required all the major banks to strengthen their capital levels to make us, in the jargon, “unquestionably strong”. Capital levels have increased through 2015 (market raisings) and we feel well positioned today, but there are further proposals to come from the Basel Committee in 2016 – and, of course, they will suggest more, not less, capital.

On provisioning, our best judgement is that we are around the bottom of the cycle, so looking forward, provisions will go up, reflecting both less writebacks and higher loan losses – the issue for markets is when and by how much?

Both these key trends (and importantly our revenue and cost growth) are critical to determining banks earnings per share and therefore the sustainability of dividends at current levels. You will all have followed the share price volatility that has resulted from the market reacting to news on all these factors.

For ANZ, 2015 was a bit of a mixed year. We had a very strong performance in Australia (profit up 7%) driven by further growth in home loan share (now #3 bank), good margin and cost management and solid performance in commercial/corporate banking. Our investment in NSW is generating strong payback and market growth.

Our International and Institutional Division’s performance was a little disappointing (with profit down a little in $A terms), reflecting key trends in the businesses and the markets in which we operate.

In Institutional banking, competition remains intense here and in Asia because of low interest rates and surplus global liquidity – these factors have seen margins continue to decline. Our trade business (which is still core to what we do as a bank) is being impacted by the fall in commodity prices and our markets businesses have felt the impact of periodic weakness in sentiment and reduced customer activity. Our cash management, Asian retail and partnership businesses performed well during the year

These are now very big businesses in the bank with revenue of around $7.5bn, and global trends do impact the numbers. We have completed the rollout of our network across the region, with banking licences now in Thailand and Myanmar.

On other matters, ANZ has sold its Esanda dealer finance business, rolled out tap and pin ATMs Australia wide (a world first for ANZ and dubbed the world’s safest ATM’s), upped its investments in technology, with new digital platform releases, visits by the Board to Silicon valley and establishment of a new international advisory committee on all technology.

On non-financial matters, ANZ has continued to be recognised for its contribution to the community – our financial literacy programs Money Minded and Saver Plus have won awards again this year with more than 360,000 participating in these programs across Australia, NZ and the Pacific since 2003. We have distributed $275,000 in grants to 35 community groups, extended drought relief for farmers for a further year and, on climate change, have revisited our policies on sustainability and launched green bonds.

Finally, we have the CEO transition, which all of you in this room know, is an important time for any institution. For ANZ there is a sense of excitement at the appointment of Shayne while also respect and thanks for Mike for his time as CEO.

I’m sure you will enjoy the opportunity to hear from Shayne later. So from me, and my management board colleagues here today, and from all current staff, I’d like to wish you and your families all a very merry Christmas and a safe, healthy and happy 2016.