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“Creating Shareholder Value -Organisational Renaissance”

Mr Pat HandleyMr Pat HandleyExecutive Director &

Chief Financial Officer

7 March 2000

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DisclaimerDisclaimerDisclaimer

The material contained in the following presentation isintended to be general background information on WestpacBanking Corporation and its activities as at 7 March 2000.

The information is supplied in summary form and is thereforenot necessarily complete. Also, it is not intended that it berelied upon as advice to investors or potential investors, whoshould consider seeking independent professional advicedepending upon their specific investment objectives, financialsituation or particular needs.

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Westpac retrospective - pre 1993Westpac retrospective - pre 1993Westpac retrospective - pre 1993

❑ Inadequate risk/reward balance

❑ Less sophisticated capitalmanagement

❑ Lacking holistic customerinformation

❑ Volume more than value

❑ Sub-optimal shareholder valuedelivery

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Value creation is a function ofValue creation is a function ofValue creation is a function of

❑ Excess returns

❑ Growth; and

❑ Sustainability of excess returns

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with sound foundationsShareholder value creation startsShareholder value creation startswith sound foundationswith sound foundations

❑ Risk management

❑ Capital management

❑ Customer relationshipmanagement

❑ Value based management

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Risk ManagementRisk ManagementRisk Management

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Inherited risk landscapeInherited risk landscapeInherited risk landscape

❑ Decentralised and ineffective riskmanagement structure

❑ Incomplete portfolio information

❑ Flawed incentive structure

❑ Poor risk/reward framework

❑ Historical provisioning

❑ Poor linkage to shareholder value

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management framework that enables:Rapidly evolved a risk portfolioRapidly evolved a risk portfoliomanagement framework that enables:management framework that enables:

❑ More accurate provisioning, capitalallocation, and pricing

❑ Management of concentrationsaccording to risk

❑ Active shedding of risk whenappropriate

❑ Measurement of performance arisingfrom changes in portfolio risk

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initiatives involvedSpecific risk managementSpecific risk managementinitiatives involvedinitiatives involved

❑ Best practice risk grading systems

❑ Integrated portfolio diversification

❑ Dynamic provisioning

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enhanced throughShareholder value was therebyShareholder value was therebyenhanced throughenhanced through

❑ Better portfolio management

❑ Improved loan asset quality

❑ Lower impaired assets

❑ Reduced provisioning

❑ Reduced volatility in earnings and

❑ Ensuring an adequate return oncapital employed against credit risk

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Where we stand todayWhere we stand todayWhere we stand today

0

2

4

6

8

10

1996 1997 1998 1999

WBC Peer Average

Net impaired assets to equity &general provision

%

0

50

100

150

200

250

1996 1997 1998 1999

WBC Peer average

%

Total provisions to totalimpaired assets

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Capital ManagementCapital ManagementCapital Management

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nce Focus on reducing invested capitalFocus on reducing invested capitalFocus on reducing invested capital

❑ Reviewed where capital was tied up in thebusiness and forced a greater discipline oncapital usage and efficiency

❑ Looked for ways to do more business withless capital

❑ Sold down or out-sourced value destroyingassets eg. Property portfolio

❑ Progressively reduced fixed cost base infavour of variable

❑ Securitised loans when market conditionsconducive

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restructuring the capital baseReducing the cost of capital byReducing the cost of capital byrestructuring the capital baserestructuring the capital base

❑ 1993 issued A$600M converting preferenceshares

❑ 1994 exercised call over 131.2M 12% non-cumulative reference shares

❑ 1996 - 1999 buy back programs - 382 millionshares, retiring $3.4 billion in surpluscapital

❑ 1999 issued US $322.5M TOPrS - hybridcapital

❑ 1999 issued NZ $650M NZ Class shares

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Capital Ratios

-2

2

6

10

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1994 1995 1996 1997 1998 1999

%

Tier 1 Tier 2

A2/A+

A1/A+

1996199519941993 1997 1998 1999

Aa3/AA-

External Debt Ratings

Ordinary Equity 4.7% - 5.1%

Hybrid Equity 0.9%

NZ Class Shares0.9% - 0.5%

TARGET

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that we have a larger bankValue-adding capital outcome isValue-adding capital outcome isthat we have a larger bankthat we have a larger bank

❑ Using proportionately less capital

❑ With a lower capital cost profile

❑ More diversified source of capital;and

❑ Improved external ratings

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Value-based customerrelationship management

Value-based customerValue-based customerrelationship managementrelationship management

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segmentConsumer customer value byConsumer customer value bysegmentsegment

0

5

10

15

20

25

Customer Value Segments

% in Segment $ Value per customerLow High

%

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nce CRM initiatives based upon a set of

strategic imperativesCRM initiatives based upon a set ofCRM initiatives based upon a set ofstrategic imperativesstrategic imperatives❑ GROW customers to become valuable

customers through targeted programs toincrease valuable product penetration

❑ RETAIN customers by recognising andrewarding their relationship with us

❑ ATTRACT customers by influencing andleveraging value driving product initiativeswith a strong customer categorypositioning

❑ REDUCE cost to serve customers

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❑ Data mining and market analysis usingpredictive modelling

❑ Pro-actively contacting over 200,000customers per year, with specificobjectives for channel migration, businessgrowth and attrition minimisation

❑ Customer value identification at allcustomer interfaces

❑ Staff training and tools

❑ Leverage Olympic sponsorship

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450

500

550

600

650

700

J-99 F-99 M-99 A-99 M-99 J-99 J-99 A-99 S-99 O-99 N-99 D-99

Consumer - PriorityCustomers

Consumer - Low valuecustomers

1.95

1.96

1.97

1.98

1.99

2

2.01

2.02

2.03

2.04

2.05

J-99 F-99 M-99 A-99 M-99 J-99 J-99 A-99 S-99 O-99 N-99 D-99

Consumer - Accounts percustomer (total base)

M-99 A-99 M-99 J-99 J-99 A-99 S-99 O-99 N-99 D-99

Consumer - Value percustomer

‘000

1500

1600

1700

1800

1900

2000

2100

2200

J-99 F-99 M-99 A-99 M-99 J-99 J-99 A-99 S-99 O-99 N-99 D-99‘000

‘000

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Value based managementValue based managementValue based management

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•Customerservice

•Transactionprocessing

•Productmanufacturing

•Productmanagement,development &sourcing

•Sales & marketing•Customerinformation & needsmanagement

Sales &Marketing

ProductSolutions

Servicing &Processing

Customer Activities

Re-organising around the valuechainRe-organising around theRe-organising around the value valuechainchain

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value chainKey benefits of aligning around theKey benefits of aligning around thevalue chainvalue chain

❑ Means to assess the market andour competition as the value chainunbundles

❑ Risk - adjusted framework forprioritising activities

❑ Better understanding of theeconomics of activities we perform

❑ Framework for prioritising scarceresources

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performance metrics thatEmbedding Value BasedEmbedding Value Basedperformance metrics thatperformance metrics that

❑ Establish robust linkages between marketvalue/share price appreciation and internalbenchmarks

❑ Provide clarity on which key drivers andmeasures maximise value

❑ Ensure measurement systems are alignedto support value maximising behaviour

❑ Directly link executive incentives to valuemaximisation outcomes

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nce To this end Westpac has implemented

a Customer and Business EvaluationSystem (CUBE) which

To this end Westpac has implementedTo this end Westpac has implementeda Customer and Business Evaluationa Customer and Business EvaluationSystem (CUBE) whichSystem (CUBE) which

❑ Provides a consistent view andmeasure of performance acrossproducts, customer segments andorganisational structure

❑ Uses economic profit as thefinancial performance measure

❑ Provides on line investigation andanalysis of trends, variances

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with shareholder value creation viaan economic profit metric

Aligning management behaviourAligning management behaviourwith shareholder value creation viawith shareholder value creation viaan economic profit metrican economic profit metric

Single period EP is ‘best’ fitwith shareholder value

Potential management actions(unexpected by market)

Impact on singleperiod performance measure

SHV EP NPATEFCF

Improve cost / income ratio

Grow assets at less than the cost of equity

Grow assets at lower margins but above cost ofequity

Reduce surplus capital eg special dividend

Issue unfranked dividend

ROE

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❑ In conclusion, we believe thatadoption of effective value-basedmanagement processes acrossour business, is the key tomaintaining the current highreturns sustainably into thefuture

❑ Westpac since 1993 hasundergone an organisationalrenaissance in this respect

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