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Australia’s Banking Industry

Australias Banking Industry

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Page 1: Australias Banking Industry

Australia’s Banking Industry

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Date: May 2011

Disclaimer

This publication has been prepared as a general overview of the Banking Industry in Australia and does not constitute and is not intended to constitute financial product advice as defined under the Corporations Act 2001 (Cwth). Nothing in this document should be construed as a recommendation or statement of opinion intended to influence a person in making an investment decision.

The information is made available on the strict understanding that the Australian Trade Commission (Austrade) is not providing professional advice. While all care has been taken in the preparation of this publication, Austrade expressly denies liability for any loss or damage of any nature (including but not limited to any errors or omissions) arising out of or connected with reliance on the contents of this publication. Any person relying on this publication does so entirely at their own risk. Austrade strongly recommends that the reader obtain independent professional advice prior to making any investment decision.

Austrade’s role in the promotion of Australian trade includes facilitating engagement by Australian financial services exporters in markets outside Australia. Austrade is not a promoter of any financial services products or investments and does not provide investment advice. Austrade assumes no responsibility however so arising for any company, product or service mentioned in this document, nor for any materials provided in relation to such products, nor for any act or omission of any business connected with such products. Investors should always make their own enquiries as to whether an investment is appropriate for their needs and should consult an independent and licensed advisor.

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Contents

Executive Summary 5

Australia’s Banking Industry 6

Market Participants 9

Banks 9 Credit Unions 11 Building Societies 12 Non-Deposit-Taking Finance Companies 12Retail Banking 13

Size and Scope 13 Residential Mortgages 14 Credit Cards 15 Margin Lending 16 Deposits 16 Private Wealth 18 Retirement or Superannuation savings 18 Self-Managed Superannuation Funds 18 Government Reforms ‘Competitive and Sustainable Banking’ 19

Commercial Banking and Corporate Finance 21

Scope 21 Market Participants 21 Authorised Deposit-taking Institutions 21 Boutique Advisory Firms and Securities Brokers 21 Specialised Finance Companies 21 Commercial Lending 22 Syndicated Debt 25 Project and Infrastructure Finance 26 Trade Finance 28 Corporate Finance and Advisory 30 Mergers and Acquisitions 30 Equity Capital Markets 30 Debt Capital Markets 33 Asset-backed Securities 36 Kangaroo Bonds 37 Over-the-counter and exchange-traded markets 39Transaction Services – Payments System 40

Operations Processing 40

Regulation and Tax Environment 44

Regulation of the financial system 44 Overview 44 Australian Prudential Regulation Authority 44 Australian Securities and Investments Commission 45 Reserve Bank of Australia 45 Federal Treasury 45 Australian Competition and Consumer Commission 45

Other regulatory agencies 45Summary of available operating models 46

Overview 46 Australian Credit Licence 46 Available options 46 Summary of requirements for each option 47 The authorisation and application processes 51Australian financial services licences 52

Introduction 52 What is a financial service? 52 What is a financial product? 52 Retail and wholesale clients 53Other considerations 53

Privacy laws 53 Anti-money laundering and similar laws 53 New laws to change the way to take security 53 in Australia

Taxation 54

Summary 54 Taxation of business profits 55 Taxation treatment of funding options 55 When is interest withholding tax payable? 55 Exemptions from IWT 55 Notional borrowing by an Australian branch 56

of a foreign bank Deductibility of IWT 56 Phasing down Australian IWT for financial institutions 56 Special treatment for offshore banking units 57 Thin capitalisation 57Useful Links 58

Appendix A – Banking Institutions 59Appendix B – Credit Unions and Building Societies 60Appendix C – Foreign Retail Banks in Australia 62Appendix D – International Expansion of 64 Australia’s Largest BanksAppendix E – Selected Australian Legal and 67 Accounting/Tax Advisors in Financial ServicesAppendix F – Infrastructure Australia’s Reform and 68 Investment PrioritiesAppendix G – Capital Expenditure in Australia’s 70 Mining Sector Appendix H – Transaction Services – Payments System 72 Regulation 72 Payments System Access Points 72 Payment Settlements 73 Future Trends 73

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Australia ranked fifth amongst the world’s leading financial systems and capital markets

in the 2010 World Economic Forum Financial Development report.

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Australia has a strong, profitable, sophisticated and well regulated banking sector which is welcoming of new entrants and increasingly engaged in regional and global markets.

The financial sector is the largest contributor to Australia’s national output, around 11 per cent of Australian output or A$135 billion of real gross value added in 2010.1

Australia ranked fifth amongst the world’s leading financial systems and capital markets in the 2010 World Economic Forum Financial Development report.

Total assets of Australia’s banks, defined as Authorised Deposit-taking Institutions (ADIs)2, were A$2.7 trillion. Australia has four large domestic banks (the “four pillars”) that provide full service retail and commercial lending to the Australian economy; Australia and New Zealand Bank (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), and Westpac Banking Corporation (WBC). Each has a AA rating (Standard & Poor’s) with only nine of the top 100 banks globally enjoying a rating of AA or higher.3

Foreign banks4 are also well represented in the Australian market with 20 of Forbes’ top 25 banking institutions having a presence in Australia. The majority of these foreign competitors are focused on commercial banking and capital market activities, although a number are now significant players in the retail banking market.

Australia’s retail banking sector is relatively concentrated, with twenty one banks providing the bulk of banking services to consumers (12 domestic banks, 9 foreign owned subsidiaries). Consumer lending in Australia totalled A$1.3 trillion as at October 2010, of which the largest component is mortgage lending.

While the major Australian banks have dominant market shares across most consumer finance lines, there is also increasing competition from foreign banks and regional Australian banks and competition from non-bank lenders (credit unions, building societies and non-deposit-taking specialist finance companies).

Australia’s payments system has undergone, and continues to undergo, change designed to increase competition and innovation. Australians are early adopters of new technology, as reflected in the significant growth in electronic payments, EFTPOS and ATMs in the country.

The commercial banking and corporate finance and advisory sector incorporates a full range of services provided to commercial, corporate, government and institutional sectors. Specialist expertise exists in mining and resources, infrastructure and project finance (including public-private partnerships), agriculture, and property.

Competition in this sector includes the major and regional domestic banks, foreign banks, securities brokerage companies, specialised corporate advisory firms, and asset finance companies.

Australia’s commercial and corporate advisory market comprises:

› A$620 billion commercial lending market.

› A sizeable syndicated loans market that has raised US$336 billion over the five years to 2010, equivalent to 2.1 per cent of world issuance.

› The second largest project finance market in Asia-Pacific after India, with US$14.6 billion worth of deals in 2010, or 15 per cent of the region’s total.

› The second largest free-floating stock market in the Asia-Pacific region, and sixth largest globally, with a capitalisation of US$1.1 trillion and 2,072 listed companies.

› One of the three largest Mergers and Acquisitions markets in Asia-Pacific, with announced deals totalling US$132 billion in 2010 and US$528 billion for the five years to 2010; 3.5 per cent of globally announced deals.

› The second largest Equity Capital Market in Asia-Pacific and fifth largest globally, with US$199 billion of equity issuance over the five years to 2010.

› A securitisation market that has resumed growth following the global financial crisis, with A$19.5 billion in RMBS issuance in 2010, up from A$9.9 billion in 2008.

› A fast growing Kangaroo bond market that has increased from A$9 billion to A$129 billion bonds outstanding over the ten years to October 2010 – a compound annual growth rate of 28 per cent.

› The world’s seventh largest foreign exchange market with total FX turnover averaging US$192 billion per day in April 2010. The US$/A$ pair being the world’s fourth most traded pair after the Euro, Yen and Pound Sterling.

› The Asia-Pacific’s second largest pension fund industry after Japan, at US$1,261 billion in 2010 – and, by some measures the fourth largest globally.

Australia’s banking sector has sought to leverage the country’s strengths in natural resources, infrastructure, public-private partnerships, property and related capital market activities.

Foreign banks operating in Australia have also been attracted by our reputation for product innovation, advanced capital and risk management systems, our highly skilled workforce and our proximity to key regional markets. Decisions have also been influenced by our political stability, strong rule of law, transparent and highly regarded regulatory environment, advanced social and economic infrastructure, and enviable lifestyle.

Executive Summary

1. Australian Bureau of Statistics cat no. 5206.0 – Australian National Accounts: National Income, Expenditure and Product, Dec 2010 (released 02 Mar 2011), Table 6, Gross Value Added by Industry, chain volume measured.

2. ADIs include banks, credit unions and building societies.3. Ranked by The Banker, “Top 1000 World Banks 2010”, 6 July 2010.4. Includes foreign banks with locally incorporated subsidiaries, a foreign bank branch licence or representative office.

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The financial sector is the largest contributor to Australia’s national output, generating more than 10 per cent of Australian output or A$135 billion of real gross value added in 2010.5

As at February 2011, total assets of Australia’s banks,6 stood at A$2.7 trillion accounting for around 56 per cent of the total A$4.9 trillion in financial sector assets. This represents a compound annual growth rate (CAGR) of 13 per cent over the past decade.

Australia ranks 12th in the world in terms of bank assets as rated by The Banker, Top 1000 World Banks, December 2009.

Among 21 countries surveyed by the Asian Bankers 500, Australia has the third largest pool of bank assets in the region after Japan and China. Australia’s total bank assets accounted for around 240 per cent of the country’s nominal GDP, well above Japan (193), China (178), South Korea (146), India (102), and the regional average (176).

Australia’s Banking Industry

Australia’s Financial Sector Assets – September 2010 (A$ Billion)

Authorised deposit-takingInstitutions

$2,724b or 55.9%

Securitisation Vehicles$141.6b or 2.9%

Registered Financial Corporations$169b or 3.5%

Life offices,Superannuation Funds& Other Managed Funds$1,707b or 35.0%

General Insurance Offices$134b or 2.7%

Sources: Reserve Bank of Australia, Statistical Table B1, Assets of Financial Institutions (updated 1 Feb 2011); Austrade

5. Australian Bureau of Statistics cat no. 5206.0 – Australian National Accounts: National Income, Expenditure and Product, Dec 2010 (released 02 Mar 2011), Table 6, Gross Value Added by Industry, chain volume measured.

6. Defined as Authorised Deposit-taking Institutions (ADIs), which includes banks, credit unions and building societies.

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Australia’s four major banks are amongst the world’s 100 largest by assets and are four of only nine global banks with a rating of AA or higher by Standard & Poor’s. Moody’s rating for the four major Australian banks is Aa2, with stable outlook (18 May 2011).

The top Australian banks are also within the top 25 banking institutions as ranked by Forbes in its April 2010 top 2,000 companies.

7. The Banker, “Top 1000 World Banks 2010”, 6 July 2010.

The Asian Banker Top 500 Banks

World’s 100 Largest Banks’ Credit Rating

Rank Country Numbers of Banks Total Assets Regional Market Total Assets % 2009 GDP in AB500 (US$ Billion) Share % of GDP (US$ Billion)

1 Japan 123 9,779.7 35.51 192.9 5,069

2 China 103 8,853.4 32.14 177.6 4,985

3 Australia 14 2,388.6 8.67 240.2 994

4 India 43 1,258.9 4.57 101.8 1,237

5 Korea 13 1,213.5 4.41 145.8 833

6 Hong Kong 18 1,143.0 4.15 542.8 211

7 Taiwan 35 958.7 3.48 253.3 379

8 Singapore 4 488.5 1.77 268.1 182

9 Malaysia 17 405.2 1.47 210.0 193

10 Thailand 14 273.0 0.99 103.4 264

11 New Zealand 8 230.4 0.84 195.6 118

12 Indonesia 27 214.6 0.78 39.8 539

13 Vietnam 19 97.9 0.36 105.1 93

14 Philippines 15 97.6 0.35 60.5 161

15 Pakistan 15 67.0 0.24 41.4 162

16 Bangladesh 17 26.0 0.09 27.5 95

17 Sri Lanka 6 17.1 0.06 40.5 42

18 Macau 5 14.3 0.05 67.4 21

19 Myanmar 2 12.0 0.04 35.0 34

20 Brunei 1 1.8 0.01 17.3 10

21 Cambodia 1 0.9 0.00 8.3 11

TOTAL 500 27,542.1 100.00 176.2 15,633

Sources: The Asian Banker 500, Issue 101 October 2010; GDP data was sourced from IMF World Economic Outlook October 2010; Macau GDP was sourced from Statistics and Census Service Macau; Austrade

Sources: This chart was sourced from the Reserve Bank of Australia Financial Stability Report March 2009, page 25, Graph 38, and updated with the 2009 data of banks assets from The Banker 1000 World Banks 2010 and Standard and Poor’s Credit Ratings (downloaded 27 July 2010) from Bloomberg; Austrade

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1,000

1,500

2,000

2,500

3,000

Australia’s four major banks

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AAA AA AA- A+ A A- BBB+ BBB BBB- NR

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Australia is well positioned as a banking centre in the region, with 20 of Forbes’ top 25 banking institutions having a presence in Australia.

Australia ranked fifth amongst the world’s 57 leading financial systems and capital markets in the World Economic Forum Financial Development Report 2010.

In addition to its geographic position in the Asia-Pacific region, close to the world’s fastest growing economies, Australia offers:

› A sizeable domestic economy – the fourth largest in the Asia-Pacific (after Japan, China and India);

› A highly skilled and multilingual workforce where 1.4 million Australians speak an Asian language (equivalent to around one-third of Singapore’s, and one-fifth of Hong Kong’s entire population);

› Advanced business and IT infrastructure;

› A sophisticated investor base, including the third largest high-net-worth market in the region (after Japan and China);

› A stable political and economic environment, and an enviable quality of life;

› Strong and efficient regulatory environment and legal institutions; and

› Mature and innovative financial markets including:

› A leading pension fund market with A$1.3 trillion in funds;

› The fourth largest pool of investment fund assets globally with A$1.8 trillion FUM;

› The second largest free-floating stock market in the Asia-Pacific with a market capitalisation of US$1.2 trillion;

› A fast growing and liquid foreign exchange market having grown 12 per cent CAGR since 1998.

The Forbes World’s Leading Companies

Rank1 Company Country Sales Profits Assets Market Value

1 JPMorgan Chase USA 115.6 11.7 2,032.0 166.2

3 Bank of America USA 150.5 6.3 2,223.3 167.6

5 ICBC China 71.9 16.3 1,428.5 242.2

6 Banco Santander Spain 109.6 12.3 1,438.7 107.1

7 Wells Fargo USA 98.6 12.3 1,243.7 141.7

8 HSBC Holdings UK 103.7 5.8 2,355.8 178.3

11 BNP Paribas France 101.1 8.4 2,952.2 86.7

17 China Construction Bank China 59.2 13.6 1,106.2 184.3

21 Barclays UK 65.9 15.2 2,223.0 56.2

22 Bank of China China 52.2 9.5 1,016.3 147.0

29 Lloyds Banking Group UK 106.7 4.6 1,650.8 50.3

34 UniCredit Group Italy 92.2 5.6 1,438.9 44.0

43 Deutsche Bank Germany 63.0 6.9 2,150.6 39.8

44 Credit Suisse Switzerland 50.3 6.1 988.9 53.9

48 BBVA-Banco Bilbao Vizcaya Spain 49.3 6.0 760.4 48.2

51 Banco Bradesco Brazil 59.1 4.6 281.4 54.5

52 Banco do Brasil Brazil 56.1 5.8 406.5 42.8

53 Royal Bank of Canada Canada 35.4 3.6 608.1 78.2

54 Intesa Sanpaolo Italy 50.7 3.6 877.7 44.7

59 Commonwealth Bank Australia 31.8 3.8 500.2 75.1

67 Westpac Banking Group Australia 31.2 3.0 519.0 71.0

73 Crédit Agricole France 92.0 1.6 2,227.2 34.4

79 National Australia Bank Australia 32.5 2.3 574.4 48.8

83 ANZ Banking Australia 26.9 2.6 420.5 53.7

86 Toronto-Dominion Bank Canada 23.6 2.9 517.3 55.4

1. Forbes’ rank according to an equal weighting of sales, profits, assets and market value.

Sources: Forbes, The World’s Leading Companies, April 2010; Austrade

(US$ Billion)

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Banks, credit unions and building societies – known as Authorised Deposit-taking Institutions (ADIs) – provide the bulk of banking services to Australian households, businesses and governments – and are prudentially regulated by the Australian Prudential Regulation Authority (APRA). Non-deposit taking finance companies also provide competition in selected consumer credit products.

BanksAustralia has a sound, well capitalised banking sector. Its banks are large by global standards, with a strong retail base, highly developed wealth management capabilities, and full service commercial, trade finance and corporate advisory operations reaching out into the region.

There are 56 banks operating in Australia (12 domestic banks, 9 foreign subsidiary banks and 35 foreign branch banks) with total resident assets of A$2.4 trillion as 30 September 2010.8

Australia’s banking sector offers opportunities for new entrants providing innovative products and distribution systems.

Australian banks are increasingly looking to export their expertise in retail banking, funds management, private banking and distribution to the region.

The four major domestic banks have the largest market shares in the retail and commercial banking sectors: the Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac Banking Corporation (WBC). They accounted for 77.49 per cent of resident assets (A$2.4 trillion) as at September 2010. Other domestic banks accounted for 9.2 per cent, while foreign bank subsidiaries and branches accounted for 13.4 per cent.

The largest of the other domestic retail bank competitors are Suncorp-Metway, Macquarie Bank, Bendigo Adelaide Bank and Bank of Queensland.

Of the foreign banks with a subsidiary or branch licence, ING, Bank of Scotland, Citigroup, Deutsche Bank and HSBC have the largest presence as measured by Australian banking assets. ING now ranks fifth in retail banking with its innovative, internet based model. Rabobank has built a strong regional footprint drawing on its rural heritage and is now looking to widen its scale of operations. In addition, there are a number of smaller foreign retail banking operations that target specific immigrant groups including the Arab Bank, Bank of China, Bank of Cyprus and Beirut Hellenic Bank.

Market Participants

8. APRA, Monthly Banking Statistics, September 2010 (issued 29 Oct 2010).9. Includes Bank of Western Australia Ltd (wholly owned subsidiary of the Commonwealth Bank).

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Assets on Australian Books of Individual Banks (A$ Million)

1. BankWest (Bank of Western Australia) is a wholly owned subsidiary of the Commonwealth Bank of Australia.

Sources: Australian Prudential Regulation Authority, Monthly Banking Statistics, September 2010 (issued 29 October 2010), Table 1; Austrade

September 2010 Resident Assets

Westpac Banking Corporation 528,148

Commonwealth Bank of Australia 515,805

National Australia Bank Ltd 407,793

Australia and New Zealand Banking Group Ltd 360,592

Four Major Domestic Banks 1,812,338

Bank of Western Australia Ltd1 70,877

Suncorp-Metway Ltd 70,813

Macquarie Bank Ltd 60,560

Bendigo and Adelaide Bank Ltd 41,306

Bank of Queensland Ltd 32,901

AMP Bank Ltd 7,746

Members Equity Bank Pty Ltd 6,255

Rural Bank Ltd 4,126

Total Other Domestic Banks 294,584

ING Bank (Australia) Ltd 46,572

Citigroup Pty Ltd 22,449

HSBC Bank Australia Ltd 17,917

Rabobank Australia Ltd 11,819

Investec Bank (Australia) Ltd 4,580

Bank of Cyprus Australia Ltd 1,483

Arab Bank Australia Ltd 1,363

Beirut Hellenic Bank Ltd 950

Bank of China (Australia) Ltd 472

Total Foreign-owned Bank Subsidiaries 107,605

Bank of Scotland plc 25,211

Citibank, N.A. 22,402

Deutsche Bank Aktiengessellschaft 20,819

UBS AG 16,617

JPMorgan Chase Bank, National Association 15,057

BNP Paribas 14,452

Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. 13,046

The Royal Bank of Scotland Plc 11,828

The Bank of Tokyo-Mitsubishi UFJ, Ltd 8,684

The Hongkong and Shanghai Banking Corporation Ltd 8,368

Top 10 Foreign-owned Bank Branches 156,484

Other Foreign-owned Bank Branches 62,878

Total Foreign-owned Bank Branches 219,362

TOTAL 2,433,889

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Credit UnionsCredit unions operate predominately in the ‘retail’ sector with business driven by deposit taking, consumer credit and housing loan finance. There is also a small proportion of commercially focussed business targeted at small and medium-sized enterprises (SMEs).10 Many credit unions also distribute products in areas such as health insurance, travel and managed funds as a means of providing greater member value.

Australia’s 107 credit unions had total assets as at September 2010 of A$50.6 billion, which represented an increase of 8 per cent over the year.11 This growth was driven predominantly by housing loans, which account for A$33.9 billion (up more than 8.5 per cent over the same period).

There are approximately 900 credit union branches around Australia, although New South Wales is home to the bulk of these with 43.3 per cent of all branches. Queensland accounts for the second largest number, with 17 per cent of credit union branches, followed by Victoria with 15.7 per cent.12

The level of concentration in the credit union sector is significant, with the top five credit unions – Credit Union Australia Limited, Australian Central Credit Union, Savings & Loans Credit Union (SA) Limited, Police and Nurses’ Credit Society, and NSW Teacher’s Credit Union – holding an estimated 42.5 per cent of market share in terms of total industry revenue and 41.8 per cent of total industry assets.13

The credit union sector is going through a period of consolidation and has seen a number of mergers and acquisitions over the last five years, driven by the need to achieve further cost savings through economies of scale. The sector has a diverse range of small and large organisations with the largest credit union having in excess of 400,000 members and around A$7.5 billion in assets.

Top 5 Credit Unions Market Share Assets 2008-09 (% of Revenue) (A$ Million)

Credit Union Australia Ltd 19.0 7,690

Australian Central Credit Union Ltd 7.0 2,595

Savings & Loans Credit Union (SA) Ltd 7.0 3,230

Police and Nurses’ Credit Society 5.0 2,403

NSW Teachers’ Credit Union 4.5 2,893

Sources: Annual Reports, IBISWorld Industry Report K7323, Credit Unions in Australia, November 2010, page 23

A list of Australian authorised credit unions as at August 2010 is provided in Appendix B. More information on this sector is available through ABACUS, the peak body representing mutual financial institutions, at www.abacus.org.au.

10. IBISWorld estimates that approximately 4 per cent of Credit Union business is with the commercial sector. IBISWorld Industry Report K7323, Credit Unions in Australia, November 2010.

11. APRA, Quarterly Credit Union and Building Society Performance, September 2010 (issued 30 November 2010).12. IBISWorld Industry Report K7323, Credit Unions in Australia, August 2010, page 16.13. Ibid, page 23.

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Building SocietiesAustralia’s 11 building societies had total assets as at September 2010 of A$24.6 billion, which represented an increase of 8.7 per cent over the year.14 This growth was driven predominantly by housing loans, which account for A$16.5 billion (up 9.9 per cent over the same period).

Similarly to credit unions, the bulk of building society business is in the retail sector, with less than 10 per cent of their activities estimated to be in the commercial sector.15

Building societies tend to target their financing in niche and rural markets that are not adequately covered by the banks.16 They are predominantly located in NSW and Queensland, which are home to an estimated 86 per cent of the industry’s establishments.

The level of concentration in the building society sector is high, with the top four having around 80 per cent of industry revenue and over 95 per cent of industry assets.17

Top 4 Building Societies Market Share Assets 2008-09 (% of Revenue) (A$ Million)

Heritage Building Society Limited 25.0 7,114

Newcastle Permanent Building Society 22.0 6,303

Illawarra Mutual Building (IMB) Society 17.0 4,444

Greater Building Society 15.4 4,106

Source: Annual Reports, IBISWorld Industry Report K7322, Building Societies in Australia, August 2010, page 21

A list of Australian authorised building societies as at August 2010 is provided in Appendix B. More information on this sector is available through ABACUS, the peak body representing mutual financial institutions, at www.abacus.org.au.

Non-Deposit-Taking Finance CompaniesNon-deposit-taking finance companies represent another significant group of institutions that service the retail banking sector in Australia. These institutions do not take deposits but have traditionally provided strong competition in consumer lending, such as mortgage lending, credit cards, and asset or lease financing (i.e., motor vehicles, computers, furniture).

Examples of non-deposit-taking finance companies in Australia include GE Money, Liberty Financial, Resi, La Trobe Financial Services, AIMS Financial Group, Assured Home Loans, Rate Busters and Home Star.

As these institutions do not take deposits, they are not required to hold a banking license. However, once they reach a certain size (total assets exceeding A$5 million), they are generally required to register as a registered finance corporation, for the purposes of the Financial Sector (Collection of Data) Act, 2001. Further information, including a list of registered financial corporations, is available from the APRA website at http://www.apra.gov.au/RFC/Registered-Financial-Corporations.cfm.

More information on this sector is available through the Australian Finance Conference at www.afc.asn.au, and the Australian Equipment Lessors Association, at www.aela.asn.au.

14. APRA, Quarterly Credit Union and Building Society Performance, September 2010 (issued 30 November 2010). 15. IBISWorld Industry Report K7322, Building Societies in Australia, August 2010.16. IBISWorld Industry Report K7322, Building Societies in Australia, August 2010.17. Ibid.18. APRA website at www.apra.gov.au/ADI/ADIList.cfm#AOBC

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Size and ScopeConsumer lending in Australia has continued to grow rapidly over the past decade, at a compound annual growth rate (CAGR) of 12.6 per cent – although in more recent years this growth rate has slowed to single digits. As at October 2010, total housing and other personal credit from Australia’s financial intermediaries reached A$1.3 trillion. House lending for owner occupiers and investors accounted for 89 per cent of total consumer credit outstanding.

Banks provide the majority of credit to Australian households with a market share of 83 per cent, representing almost A$1.1 trillion as at September 2010. Banks providing deposit-taking services to the household sector are required to be locally incorporated and are prudentially regulated by APRA. There are 12 domestic banks and nine foreign bank subsidiaries in Australia – see Appendix A for full list of banks.

The table following provides an overview of household loans held by banks as at 30 September 2010. Consumer lending in Australia, defined as loans and advances to households, accounted for 70 per cent of total bank loans and advances. The four major banks accounted for 87 per cent of all household loans, while the other domestic banks accounted for 7.6 per cent, and foreign bank subsidiaries held 5.4 per cent.

Retail Banking

Australia’s Consumer Credit (Incl. Securitisation) – Year End, A$ Billion

0

200

400

600

800

1,000

1,200

1,400

Mortgage – Owner-occupier (13.5%)

Mortgage – Investor (13.4%)

Other personal (7.2%)

A$

Bill

ion

Year EndOct-2000 Dec-2001Dec-2000 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Oct-2010

Note: The number in the brackets represents compound annual growth rate since 2000.

Sources: Reserve Bank of Australia, Statistical Table D2 Lending and Credit Aggregates (Last updated 30 Nov 2010); Austrade

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Residential MortgagesThe residential mortgage market in Australia is by far the largest category of loans to households, representing 90 per cent of all bank lending to the household sector. Since 2000, bank mortgage loans for owner-occupied and investment properties have increased much faster (13.5 per cent p.a) than other consumer credit (7.2 per cent p.a.).

Australian laws place full recourse lending to residential mortgages in Australia at a national level. This has provided homogeneity across the national mortgage market and places greater responsibility for the loan on the borrower than has been the case in some overseas jurisdictions.

Australia’s market is characterised by high levels of Lender’s Mortgage Insurance. This is an additional charge, borne by the lender and often passed on to the borrower, which serves to meet any shortfall arising between the proceeds from foreclosure on the collateral (e.g., residential property) and the loan amount. Typically, lenders require such insurance where the borrowers’ loan to valuation ratio exceeds 80 per cent.

Tax laws are favourable towards residential property ownership, with capital gains tax exempt for owner occupiers and discounts of up to 50 per cent available for investors who own for periods greater than 12 months.19 Investors can also offset the interest expenses and property costs against their income, including other income sources. If their property expenses exceed their property income, these expenses can be ‘negatively geared’ against other personal income sources.

Loans and Advances to Household on Australian Books of Individual Banks (A$ Million)

Housing: Housing: Credit September 2010 Owner-occupied Investment Cards Other Total

Westpac Banking Corporation 184,755 82,190 9,397 15,403 291,745

Commonwealth Bank of Australia 169,375 79,166 8,566 9,754 266,861

National Australia Bank Limited 101,098 49,607 5,101 17,900 173,706

Australia and New Zealand Banking Group Ltd 107,614 41,207 7,965 13,806 170,592

Four Major Domestic Banks 562,842 252,170 31,029 56,863 902,904

Bank of Western Australia Ltd1 29,993 8,199 1,260 569 40,021

Suncorp-Metway Ltd 18,304 8,099 6 670 27,079

Bendigo and Adelaide Bank Ltd 12,028 6,792 267 2,516 21,603

Bank of Queensland Ltd 9,455 7,862 – 315 17,632

Macquarie Bank Ltd 1,167 585 359 4,520 6,631

AMP Bank Ltd 3,830 1,418 – 417 5,665

Members Equity Bank Pty Ltd 2,978 769 137 144 4,028

Total Other Domestic Banks 77,755 33,724 2,029 9,151 122,659

ING Bank (Australia) Ltd 27,458 9,240 – – 36,698

Citigroup Pty Ltd 4,785 2,442 4,586 1,133 12,946

HSBC Bank Australia Ltd 2,910 3,199 991 162 7,262

Arab Bank Australia Ltd 126 116 – 143 385

Bank of China (Australia) Ltd 208 141 – 8 357

Bank of Cyprus Australia Ltd 167 46 – 141 354

Beirut Hellenic Bank Ltd 122 222 – 1 345

Rabobank Australia Ltd 189 23 – – 212

Investec Bank (Australia) Ltd 16 – – – 16

Total Foreign-owned Bank Subsidiaries 35,981 15,429 5,577 1,588 58,575

TOTAL 676,593 301,341 38,635 67,653 1,084,222

1. BankWest (Bank of Western Australia) is a wholly owned subsidiary of the Commonwealth Bank of Australia.

Sources: Australian Prudential Regulation Authority, Monthly Banking Statistics, September 2010 (issued 29 October 2010), Table 2; Austrade

Households

19. Australian Taxation Office http://www.ato.gov.au/

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In July 2010, regulatory oversight for consumer credit protection laws was transferred from the state governments to the federal government under the National Consumer Credit Protection Act 2009. The Act largely replicates the previous state-based Uniform Consumer Credit Code (UCCC). These laws are designed to protect Australian consumers from predatory or unscrupulous lending practices. The emphasis is placed on the provider to ensure that the borrower has the capacity to borrow, is properly informed of their responsibilities and that loans are not written in an unfair or misleading manner. Under these laws, the provider is to access the borrower’s capacity to repay; all the repayments, fees and charges associated with the credit provided (including a change in repayments due to the ending of a ‘honeymoon’ interest rate period). For further information see Regulatory and Tax Environment section.

Credit CardsThe credit card market in Australia has grown steadily over the past decade in terms of number of accounts, transactions and balances outstanding. As at October 2010, there were 14.7 million credit card accounts in Australia, the equivalent of 87 per cent of Australia’s adult population, with a total balance outstanding of A$48 billion.20 The average outstanding balance is around A$3,200.

Credit cards are provided by domestic and foreign banks, credit unions, building societies and some specialised credit card providers. In recent years, some banks have provided white labelling services to other mass market channels such as retailers and airlines. Many of Australia’s largest retailers, such as Coles, David Jones, Harvey Norman, Myer and Woolworths have credit card offers.

Within the banks, the four major banks account for 83.6 per cent21 of total bank credit card loans outstanding, while other domestic banks account for 1.6 per cent, and foreign banks, 14.4 per cent.22 The foreign bank share of the credit card market is dominated by two institutions, Citigroup and HSBC, with Citigroup having the bulk of credit card loans outstanding (around 12 per cent market share), the fifth largest provider after the major domestic banks.

20. Reserve Bank of Australia, Statistical Table C1, Credit and Charge Card Statistics as at October 2010.21. Includes Bank of Western Australia Ltd (wholly owned subsidiary of the Commonwealth Bank).22. Australian Prudential Regulation Authority, Monthly Banking Statistics, September 2010 (issued 29 October 2010), Table 2.

Australia’s Credit and Charge Card Statistics (Values and Number, Not Seasonally Adjusted)

0

10,000

20,000

30,000

40,000

50,000

60,000

0

2

4

6

8

10

12

14

16

Number of Accounts ('000, RHS)

A$

Mill

ion

Num

ber, ‘millions

Mar

-200

0

Sep

-200

0

Mar

-200

1

Sep

-200

1

Mar

-200

2

Sep

-200

2

Mar

-200

3

Sep

-200

3

Mar

-200

4

Sep

-200

4

Mar

-200

5

Sep

-200

5

Mar

-200

6

Sep

-200

6

Mar

-200

7

Sep

-200

7

Mar

-200

8

Sep

-200

8

Mar

-200

9

Sep

-200

9

Mar

-200

10

Sep

-200

10Balances Outstanding (A$ Million, LHS)

Sources: Reserve Bank of Australia, Statistical Table C1 Credit and Charge Card Statistics (Last updated 30 Nov 2010); Austrade

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Margin LendingMargin lending has developed as another consumer credit product over the past two decades. Margin lending is borrowing to invest in financial securities – typically listed shares or managed funds. Each individual security can be leveraged up to a set loan to value ratio (LVR). If the securities’ move outside of the allowed valuation limit, borrowers are issued a ‘margin call’ that requires them to either add cash to their margin account or to sell down existing securities to bring the loan back under the LVR limit.

Over the ten years to September 2010, balances outstanding on margin loans grew at 10 per cent (CAGR) to A$17.8 billion. Growth was rapid during the seven years to 2007, but reduced following the global financial crisis. Today, there are 205,000 client accounts. Quarterly statistics published by the Reserve Bank of Australia indicate that the average loan to security valuation is 37.5 per cent, with a mean loan size of A$91,000.

DepositsAs at September 2010, total deposits23 (retail and corporate/wholesale) held by banks, credit unions and building societies were A$1,485 billion, significantly up from A$780 billion five years ago. This represents a compound annual growth rate of 13.7 per cent since September 2005. Banks account for 95 per cent of these deposits.

The following table provides an overview of household deposits held by banks24 as at 30 September 2010. Deposits sourced from households amounted to $477.8 billion and accounted for 37 per cent of total bank deposits, with the remainder sourced from businesses, governments and institutions. The four major banks accounted for 78.725 per cent of all deposits, while the other domestic banks accounted for 10.4 per cent and foreign banks26 11.0 per cent.

Australia’s Margin Lending (September each year)

0

5

10

15

20

25

30

35

40

0

50,000

100,000

150,000

200,000

250,000

Number of Accounts

Margin Lending Credit Outstanding (A$ Billion)

2000 20022001 2003 2004 2005 2006 2007 2008 2009 2010

Sources: Reserve Bank of Australia, Statistical Table D10; Austrade

23. Reserve Bank of Australia, statistical tables B3, B7 and B8.24. The domestic books of a bank has the following scope: includes operations/transactions booked or recorded inside Australia; does not consolidate Australian or offshore

controlled entities; includes transactions of Australian-based offshore banking units; excludes transactions of overseas-based offshore banking units; excludes offshore branches; and excludes transactions, assets and liabilities with offshore.

25. Includes Bank of Western Australia Ltd (wholly owned subsidiary of the Commonwealth Bank).26. Includes foreign owned subsidiary and foreign branch licenced banks.

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Deposits on Australian Books of Individual Banks (A$ Million)

1. BankWest (Bank of Western Australia) is a wholly owned subsidiary of the Commonwealth Bank of Australia.

Sources: Australian Prudential Regulation Authority, Monthly Banking Statistics, September 2010 (issued 29 October 2010), Table 4; Austrade

September 2010 Households Total Deposits

Commonwealth Bank of Australia 130,008 288,559

Westpac Banking Corporation 113,058 276,907

National Australia Bank Ltd 64,865 216,748

Australia and New Zealand Banking Group Ltd 66,840 194,527

Four Major Domestic Banks 374,771 976,741

Bank of Western Australia Ltd1 14,349 42,622

Bendigo and Adelaide Bank Ltd 17,265 33,417

Suncorp-Metway Ltd 14,680 32,390

Macquarie Bank Ltd 7,015 29,929

Bank of Queensland Ltd 14,896 27,232

Members Equity Bank Pty Ltd 1,271 4,186

Rural Bank Ltd 1,320 3,485

AMP Bank Ltd 1,254 3,524

Total Other Domestic Banks 72,050 176,785

ING Bank (Australia) Ltd 17,095 27,624

HSBC Bank Australia Ltd 3,876 12,146

Citigroup Pty Ltd 6,256 7,670

Rabobank Australia Ltd 1,830 4,966

Investec Bank (Australia) Ltd 242 2,370

Arab Bank Australia Ltd 377 1,170

Bank of Cyprus Australia Ltd 459 980

Beirut Hellenic Bank Ltd 491 780

Bank of China (Australia) Ltd 309 311

Total Foreign-owned Bank Subsidiaries 30,935 58,017

BNP Paribas - 12,778

Citibank, N.A. - 6,766

Deutsche Bank Aktiengessellschaft - 6,608

Bank of Scotland plc - 5,586

The Royal Bank of Scotland Plc - 4,426

The Bank of Tokyo-Mitsubishi UFJ, Ltd - 3,794

Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. - 3,541

Sumitomo Mitsui Banking Corporation - 3,440

The Northern Trust Company - 3,095

Mizuho Corporate Bank, Ltd - 2,696

Top 10 Foreign-owned Bank Branches 0 52,730

Other Foreign-owned Bank Branches 59 31,247

Total Foreign-owned Bank Branches 59 83,977

TOTAL 477,815 1,295,518

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Private Wealth

Private wealth is a key driver of retail deposit demand. Australia’s private wealth market now ranks among the largest and fastest growing in the world. Since 1990, Australia’s total private sector wealth (including consumer durables, dwellings, deposits, shares and other equities, and reserves of life offices and pension funds) grew by 8.3 per cent per annum to A$6.7 trillion.27

Australia was the third largest high net worth individual (HNWI) market in the Asia-Pacific region and the 10th largest in the world in 2009.28 The number of HNWI in Australia, defined as persons with greater than US$1 million in investable assets, grew 34.4 per cent to reach 173,600, as at December 2009. Australia had almost 6 per cent of the region’s HNWI population, accounting for 5.4 per cent of the region’s total wealth, with a combined value of US$519 billion.

See Austrade’s publication on the Private Banking Industry in Australia http://www.austrade.gov.au/ArticleDocuments/2792/Private-Banking-in-Australia-Publication.pdf.aspx

Retirement or Superannuation savings

In addition to voluntary savings, Australia has a mandatory retirement or superannuation savings regime which requires 9 per cent of income to be deposited in superannuation accounts which, generally speaking, can only be accessed their preservation age. Recently, the Government foreshadowed its intention to introduce legislation to gradually increase the compulsory level of superannuation savings to 12 per cent by 2019-20.29

The pool of investment fund assets (including mandatory pension, self-managed superannuation and other investment assets) stands at A$1.8 trillion, which by some measures is the fourth largest pool of savings globally.30 The majority of these superannuation savings are managed by trustees of APRA-regulated superannuation funds and invested at arms-length by professional investment managers.

See Austrade’s publication on the Investment Management Industry in Australia http://www.austrade.gov.au/ArticleDocuments/2792/Investment-Management-Industry-in-Australia.pdf.aspx

Self-Managed Superannuation Funds

Self-Managed Superannuation Funds (SMSFs) are a superannuation fund managed by the members themselves as trustees of the fund. Each SMSF can have up to four members, where all members are required to be trustees. Statistics released by the Australian Prudential Regulation Authority in December 2010 show that the number of SMSFs grew from 412,560 to 439,397 over the past 12 months. SMSFs now hold A$420.6 billion, or 32 per cent of the nation’s A$1.3 trillion superannuation pool.

The latest Multiport SMSF Investment Patterns Survey October 2010 revealed that SMSF members allocated 21.8 per cent of their assets to cash and short-term deposits in September 2010.

27. Private wealth is defined as the sum of household dwellings, household consumer durables (including market values of motor vehicles, furnishings and other household equipment), and household and unincorporated enterprises’ financial assets (including deposits, assets of life offices, superannuation funds and friendly societies, shares and other equity, unfunded superannuation claims and all other). Data sourced from Reserve Bank of Australia, Statistical Table B20.

28. Merrill Lynch Capgemini, World Wealth Report 2010 and Asia-Pacific Wealth Report 2010. See also Austrade’s data alert http://www.austrade.gov.au/ArticleDocuments/2792/Data-Alert-101013-Asia-Pacific-Wealth-Report.pdf.aspx

29. See the Australian Governments ‘A tax plan for our future’ http://www.futuretax.gov.au/pages/FairerSuperannuation.aspx 30. See Austrade’s publication ‘Investment Management Industry in Australia’ http://www.austrade.gov.au/ArticleDocuments/2792/Investment-Management-Industry-in-

Australia.pdf.aspx

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Government Reforms: ‘Competitive and Sustainable Banking’In December 2010, the Australian Government announced three broad streams of reform across the Australian banking system, titled ‘Competitive and Sustainable Banking System’.

› Stream One: Empower consumers to get a better deal.

› Stream Two: Support smaller lenders to compete with big banks.

› Stream Three: Secure the long-term safety and sustainability of our financial system.

These reforms are aimed at boosting consumer flexibility to transfer deposits and mortgages; banning exit fees on new home loans; empowering the Australian Competition and Consumer Commission (ACCC) to prosecute anti-competitive price signalling; and a community awareness and education campaign.

The Government will also introduce a new official ‘Government Protected Deposits’ symbol for ADIs, regulated by APRA, to help consumers identify that their deposits, up to a certain cap, have the protection of the Financial Claims Scheme (FCS) in the unlikely event that the entity is wound up. The FCS, which was introduced in October 2008, is to be made a permanent feature of the Australian financial architecture and the Government has been working with the Council of Financial Regulators to determine an appropriate cap to apply from October 2011 onwards. The current cap is A$1 million per depositor per ADI.

Funding sources will be supported through additional Government investments in high quality AAA-rated Residential Mortgage Backed Securities (RMBS). This is a further A$4 billion investment, taking the total Government support to RMBS since the financial crisis to A$20 billion. The Government has tasked the Treasury to design bullet RMBS structures and will amend the Banking Act 1959 to allow Australian banks, credit unions and building societies to issue covered bonds.

Full details of the Government’s announced banking reforms are available from the Treasury website: http://www.treasury.gov.au/banking/content/_downloads/competitive_and_sustainable_banking.pdf

Superannuation Industry in Australia

Jun 2009 Jun 2010 Jun 2009 Jun 2010

By fund type

Corporate 54.0 56.2 190 168

Industry 191.8 225.5 67 65

Public Sector 153.0 175.3 40 39

Retail 304.7 339.0 166 154

Sub Total 703.5 795.9 463 426

Pooled Superannuation Trusts 69.7 79.1 82 79

Small APRA funds 2.0 1.6 4,277 3,869

Single-member ADFs 0.1 0.0 112 103

Self-managed Super Fundsa 334.2 390.8 401,929 428,198

Balance of Life Office Statutory Funds 35.5 38.9 – –

TOTALB 1,075.3 1,227.2 406,863 432,675

a. Estimated data on self-managed superannuation funds are provided by the Australian Taxation Office (ATO). b. Total assets does not include pooled superannuation trusts.

Sources: Australian Prudential Regulation Authority Statistics, Quarterly Superannuation Performance, June 2010 (issued 9 September 2010); Austrade

Assets (A$ Billion) Number of Entities

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ScopeServices to the commercial sector can be segregated into a number of core markets:31

› Commercial Lending – Intermediated lending to SMEs, large corporates, institutions and government;

› Corporate Finance and Advisory:

› Mergers and Acquisitions – M&A, demergers and other advisory;

› Equity Capital Markets – Initial public offerings (IPOs), secondary raisings, underwriting; and

› Debt Capital Markets – corporate, government and institutional bonds, structured finance – securitisation, syndicated loans and project finance.

Australia’s commercial and corporate advisory sectors are known for specialised expertise in particular industries including energy, mining and resources, infrastructure and project finance, agriculture, and real estate.

Market Participants

Authorised Deposit-taking Institutions

There are 56 banks licensed to service wholesale clients in Australia and a further 16 banks with representative offices. Nine foreign banks operate with a subsidiary license, and a further 35 as a foreign bank branch. In addition, there is a growing number of emerging market banks that have entered Australia, particularly from China and India, primarily focused on servicing their corporate clients in Australia, as well as Australian companies interested in entering their markets. A list of authorised banking institutions in Australia is provided in Appendix A.32

There has been a re-alignment of foreign bank operations in Australia following the global financial crisis – changes in Australia largely reflect outcomes of parent banks. Leading houses such as Citibank, Deutsche Bank, HSBC, JPMorgan, Royal Bank of Scotland, UBS, and others have a substantial commercial banking presence here.

Boutique Advisory Firms and Securities Brokers

Corporate advisory firms and small specialist finance companies provide competition in niche areas such as mergers and acquisitions advisory. Included in this category are the larger accounting firms that have a corporate advisory arm, as well as a range of smaller specialist boutique firms, including: Moelis & Company, Palladio Partners, Gresham Partners, Caliburn Partnership and BKK Partners. Securities brokers or stockbrokers are generally categorised as either institutional or retail. Many of these firms provide auxiliary services in capital market financing.

Specialised Finance Companies

As in the consumer lending area, non-deposit-taking specialised finance companies provide an alternative source of financing for corporations and institutions. Such institutions include asset finance and leasing companies, vendor finance companies, factoring or inventory finance companies and specialised trade finance companies.

This sector was significantly affected by the financial crisis due to its dependence on wholesale markets and securitisation to fund its activities. In addition, the Australian operations of a number of foreign owned institutions were hit hard by effects in their home markets.

Commercial Banking and Corporate Finance

31. Many foreign banks providing commercial banking and corporate advisory services are also active in investment and asset management. This sector is covered in Austrade’s Investment Management Industry in Australia publication, 2010. http://www.austrade.gov.au/ArticleDocuments/2792/Investment-Management-Industry-in-Australia.pdf.aspx

32. Source: APRA website at http://www.apra.gov.au/ADI/ADIList.cfm

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Australia’s Bank Commercial Lending – Finance and Non-Finance (Year End, A$ Billion, Excluding Securitisation)

33. Reserve Bank of Australia, Statistical Table D2, Lending and Credit Aggregates (last updated 30 November 2010).34. Includes Bank of Western Australia, a wholly owned subsidiary of the Commonwealth Bank of Australia.35. APRA, Monthly Banking Statistics, May 2010 (issued 30 June 2010).

Commercial LendingThe level of total business loans outstanding from Australia’s financial institutions was in excess of A$620 billion as at October 2010.33 Commercial Lending credit to the non-financial sector grew at a CAGR of 11.1 per cent over the ten years to October 2010, with lending to the financial sector growing at 18.8 per cent CAGR over the same period. Lending grew more rapidly in the early part of the decade and in 2007 and 2008 there was a market shift to intermediated lending as debt capital markets became more difficult to access. Since 2008, commercial lending has been in decline, subtracting 6.6 per cent in 2009 and 2.4 per cent in 2010. Coinciding with this, equity capital markets saw a rise in secondary market issuance, with many companies choosing to increase the proportion of their capital funded from equity (see Equity Capital markets section).

The major domestic banks provide the bulk of commercial intermediated lending in Australia, which includes loans to large corporates, financial institutions, government organisations and SMEs. Regional banks, credit unions and building societies provide some additional competition in the smaller enterprise sector and niche areas such as rural and agricultural organisations. Similarly, leasing companies and other non-deposit taking finance companies provide specialised lending.

As at February 2011, the major domestic banks account for 72 per cent34 of bank loans to non-financial corporations, while the other domestic banks account for 9 per cent and foreign banks 19 per cent. Suncorp-Metway and Bendigo Adelaide Bank are the most significant competitors in the regional domestic banks, while the largest foreign bank competitors in non-financial commercial lending are Rabobank, Bank of Tokyo-Mitsubishi, ING and BNP Paribas.35

Note: The number in the brackets of the legends represents the compound annual growth rate since 2000.

Sources: Reserve Bank of Australia, Statistical Table D5 Lending and Credit Aggregates (Last updated 30 Nov 2010); Austrade

0

100

200

300

400

500

600

700

800

Non-financial sector (11.1%)

Financial intermediaries (18.8%)

A$

Bill

ion

Year EndDec-2001Dec-2000 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Oct-2010

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Loans and Advances to Corporations on Australian Books of Individual Banks (A$ Million)

1. BankWest (Bank of Western Australia) is a wholly owned subsidiary of the Commonwealth Bank of Australia.

Sources: Australian Prudential Regulation Authority, Monthly Banking Statistics, September 2010 (issued 29 October 2010), Table 2; Austrade

September 2010 Non-financial Corporations Financial Corporations Total

National Australia Bank Ltd 92,370 9,936 102,306

Australia and New Zealand Banking Group Ltd 71,747 7,410 79,157

Westpac Banking Corporation 63,476 10,668 74,144

Commonwealth Bank of Australia 56,673 12,674 69,347

Four Major Domestic Banks 284,265 40,689 324,954

Bank of Western Australia Ltd1 23,313 698 24,011

Suncorp-Metway Ltd 17,360 397 17,757

Bendigo and Adelaide Bank Ltd 7,933 76 8,009

Macquarie Bank Ltd 4,147 1,253 5,400

Bank of Queensland Ltd 5,297 0 5,297

Rural Bank Limited 3,572 0 3,572

AMP Bank Limited 583 5 587

Members Equity Bank Pty Ltd 51 19 70

Total Other Domestic Banks 62,256 2,448 64,703

Rabobank Australia Ltd 11,001 0 11,001

ING Bank (Australia) Ltd 3,287 0 3,287

HSBC Bank Australia Ltd 3,097 99 3,197

Investec Bank (Australia) Ltd 2,357 0 2,357

Bank of Cyprus Australia Ltd 842 0 842

Arab Bank Australia Ltd 526 63 589

Beirut Hellenic Bank Ltd 405 0 405

Citigroup Pty Ltd 31 131 162

Bank of China (Australia) Ltd 0 0 0

Total Foreign-owned Bank Subsidiaries 21,547 293 21,840

The Bank of Tokyo-Mitsubishi UFJ, Ltd 6,728 347 7,075

BNP Paribas 5,921 200 6,121

The Royal Bank of Scotland Plc 4,214 981 5,195

Sumitomo Mitsui Banking Corporation 4,661 398 5,059

Mizuho Corporate Bank, Ltd 3,856 687 4,543

Bank of China Limited 4,131 121 4,252

UBS AG 1,696 1,361 3,057

ING Bank N.V. 2,687 0 2,687

The Hongkong and Shanghai Banking Corporation Ltd 2,181 436 2,617

Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. 2,574 0 2,574

Top 10 Foreign-owned Bank Branches 38,649 4,530 43,179

Other Foreign-owned Bank Branches 18,099 4,517 22,616

Total Foreign-owned Bank Branches 56,748 9,047 65,795

TOTAL 424,816 52,477 477,292

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Over the past ten years, the fastest growing segment of commercial lending in Australia has been to larger corporations, borrowing over A$2 million. Loans to SMEs have grown more gradually during this period.

Growth in lending by industry sector has varied considerably over the past 10 years. The fastest growing segments have been finance and insurance, wholesale and retail trade, transport, storage, agriculture and fishing.

Australia’s Bank Lending To Business – Total Credit Outstanding by Size (A$ Billion)

Australia’s Bank Lending To Business – Total Credit Outstanding by Sector (A$ Billion)

Under $100 000 to $500 000 to $2 Million A$100,000 < $500,000 < $2 Million and Over Total

Jun-2000 22.6 44.1 39.0 151.2 256.9

Jun-2001 22.8 46.3 42.0 164.7 275.8

Jun-2002 23.7 50.9 45.2 164.6 284.4

Jun-2003 24.3 54.3 50.2 169.7 298.6

Jun-2004 24.8 60.2 57.8 196.1 338.9

Jun-2005 24.5 66.4 67.6 215.6 374.1

Jun-2006 24.1 70.1 76.5 268.7 439.5

Jun-2007 23.0 70.8 93.3 338.0 525.1

Jun-2008 23.7 75.0 101.1 449.7 649.6

Jun-2009 25.3 72.6 103.3 489.9 691.0

Jun-2010 26.0 67.3 101.4 464.1 658.8

Share % 4.0 10.2 15.4 70.4 100.0

CAGR % 1.4 4.3 10.0 11.9 9.9

Wholesale Trade, Retail Agriculture, Trade & Transport Finance & Fishing, etc Mining Manufacturing Construction & Storage Insurance Other Total

Jun-2000 23.2 7.5 30.0 13.1 34.3 39.5 109.4 256.9

Jun-2001 25.2 7.5 28.7 13.6 35.2 41.9 123.8 275.8

Jun-2002 26.8 7.5 28.9 12.8 40.7 43.4 124.2 284.4

Jun-2003 29.0 6.1 29.2 14.4 43.9 42.7 133.2 298.6

Jun-2004 34.1 5.2 31.8 17.7 49.3 47.4 153.5 338.9

Jun-2005 39.3 5.7 31.3 19.4 54.9 49.6 173.9 374.1

Jun-2006 43.5 6.8 37.1 21.3 64.2 62.5 204.1 439.5

Jun-2007 47.2 9.4 40.8 24.8 74.4 80.5 248.0 525.1

Jun-2008 53.7 11.7 44.6 30.5 87.2 123.7 298.2 649.6

Jun-2009 57.4 11.5 43.7 31.5 93.2 133.1 320.6 691.0

Jun-2010 59.3 15.1 39.7 28.3 92.9 126.1 297.4 658.8

Share % 9.0 2.3 6.0 4.3 14.1 19.1 45.1 100.0

CAGR % 9.8 7.3 2.8 8.0 10.5 12.3 10.5 9.9

Sources: Reserve Bank of Australia, Statistical Table D7 Bank Lending To Business (Last updated 16 Sep 2010); Austrade

Sources: Reserve Bank of Australia, Statistical Table D7 Bank Lending To Business (Last updated 16 Sep 2010); Austrade

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Syndicated Debt

Global syndicated lending for the year to December 2010 totalled US$2.7 trillion, up 49 per cent from the previous year. The energy and power sector was most active, with a market share of 21 per cent.

Australian mandated loans rose by 42 per cent for this same period, with total proceeds of US$66 billion. Australia’s total syndicated loans represent around 2.1 per cent of the global market. Industrials, energy, power and financials were the most active, with combined market share of 57 per cent of total syndicated loan proceeds (24 per cent, 17 per cent and 16 per cent respectively). Other major sectors included materials (14 per cent), real estate (14 per cent) and telecommunications (9 per cent).36

The four major banks are prominent in this market, in terms of both arrangers and bookrunners.37 Significant foreign competitors include RBS, Mitsubishi, Sumitomo Mitsui, JP Morgan, Credit Agricole and HSBC.

On a five year total basis, Australian syndicated loan activity exceeded US$330 billion. Australian activity represents around 2.1 per cent of the world market and around 13 per cent of the Asia-Pacific region.

Australian Syndicated Loans Ranking

36. Thomson Reuters, Global Syndicated Loans Review, Full Year 2010.37. Bookrunner is the main underwriter to the issue.

Mandated Arranger 2010 Rank 2009 Rank

ANZ Banking Group 1 1

Westpac Banking 2 3

Commonwealth Bank of Australia 3 2

National Australia Bank 4 4

RBS 5 7

Mitsubishi UFJ Financial Group 6 9

Sumitomo Mitsui Financial Group Inc 7 10

JP Morgan 8 18

Credit Agricole CIB 9 8

HSBC Holdings PLC 10 12

Bookrunner 2010 Rank 2009 Rank

ANZ Banking Group 1 3

Westpac Banking 2 1

Commonwealth Bank of Australia 3 4

National Australia Bank 4 2

RBS 5 6

JP Morgan 6 16

Bank of China Ltd 7 14

Mitsubishi UFJ Financial Group 8 9

Mizuho Financial Group 9 7

HSBC Holdings PLC 10 18

Sources: Thomson Reuters, Global Syndicated Loans Review, Full Year 2010; Austrade

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Project and Infrastructure Finance

The global project finance market showed a significant rebound in 2010, with 587 deals valued at US$206.6 billion. This represented an expansion in total loans of 44.4 per cent compared to the previous year. According to the latest survey of Reuters Thomson, each region saw an increase in deal activity: Americas increased 24.6 per cent, Europe/Middle East/Africa (EMEA) increased 28.3 per cent and Asia Pacific, with the largest rise, increased 69.8 per cent.

The Asia Pacific (including Japan) accounted for 47.2 per cent of global activity (US$97.5 billion). This increased from a global share of 40.2 per cent in 2009 (US$57.4 billion). Australia has remained the second most active market in the region, behind India, with 32 deals valued at US$14.6 billion38, which accounted for 15 per cent of the region’s total. Australia’s four major banks all ranked within the top 20 mandated arrangers for the Asia Pacific in 2010.39

Infrastructure is one of the most significant areas for project financing and Australia is widely recognised as a global leader and innovator in infrastructure financing. The nation has a long history of engagement in the infrastructure sector, beginning with the privatisations of the late 1980s and 1990s that has resulted in extensive experience with private infrastructure financing and public-private partnerships (PPPs).

2010 2009 2008 2007 2006 2006-2010 Proceeds Market Proceeds Market Proceeds Market Proceeds Market Proceeds Market Proceeds Market (US$Bn) Share % (US$Bn) Share % (US$Bn) Share % (US$Bn) Share % (US$Bn) Share % (US$Bn) Share %

Global 2,718.7 100.0 1,829.9 100.0 2,624.0 100.0 4,617.9 100.0 3,981.7 100.0 15,772.2 100.0

By country

USA 1,089.0 40.1 579.2 31.7 1,036.2 39.5 2,136.2 46.3 1,735.4 43.6 6,576.1 41.7

Japan 252.1 9.3 249.2 13.6 289.7 11.0 208.4 4.5 216.3 5.4 1,215.6 7.7

UK 190.9 7.0 82.8 4.5 196.7 7.5 389.8 8.4 314.1 7.9 1,174.3 7.4

Germany 96.3 3.5 104.2 5.7 84.7 3.2 231.9 5.0 303.1 7.6 820.1 5.2

France 129.2 4.8 89.7 4.9 119.1 4.5 255.0 5.5 226.5 5.7 819.5 5.2

Canada 110.1 4.0 71.3 3.9 123.1 4.7 137.3 3.0 118.5 3.0 560.4 3.6

Australia 66.0 2.4 46.4 2.5 52.7 2.0 100.3 2.2 70.9 1.8 336.3 2.1

Taiwan 55.6 2.0 22.1 1.2 31.1 1.2 29.1 0.6 29.1 0.7 166.9 1.1

UAE 16.4 0.6 22.1 1.2 45.7 1.7 45.0 1.0 33.8 0.8 163.0 1.0

Hong Kong 41.1 1.5 18.4 1.0 10.8 0.4 20.7 0.4 31.7 0.8 122.7 0.8

Singapore 22.8 0.8 16.5 0.9 35.2 1.3 14.1 0.3 19.7 0.5 108.2 0.7

Brazil 7.8 0.3 15.0 0.8 13.9 0.5 25.3 0.5 33.6 0.8 95.6 0.6

Mexico 9.9 0.4 24.8 1.4 6.3 0.2 20.1 0.4 19.4 0.5 80.5 0.5

New Zealand 8.6 0.3 5.9 0.3 7.0 0.3 6.5 0.1 11.4 0.3 39.4 0.2

Malaysia 11.1 0.4 3.8 0.2 5.4 0.2 10.8 0.2 7.2 0.2 38.3 0.2

By Region

Americas 1,222.3 45.0 694.4 37.9 1,205.4 45.9 2,339.0 50.6 1,925.9 48.4 7,386.9 46.8

Europe 818.3 30.1 608.5 33.3 784.7 29.9 1,633.6 35.4 1,481.2 37.2 5,326.4 33.8

Asia-Pacific/Central Asia 610.5 22.5 470.9 25.7 533.6 20.3 505.5 10.9 470.0 11.8 2,590.4 16.4

Africa/Middle East 67.6 2.5 56.1 3.1 100.3 3.8 139.9 3.0 104.6 2.6 468.5 3.0

Sources: Thomson Reuters Global Syndicated Loans Review, Full Year 2010, Syndicated Loans Review, Fourth Quarters of 2009, 2008 and 2007; Austrade

Worldwide Syndicated Loans

38. Thomson Reuters, Project Finance Review, Full Year 2010.39. Ibid.

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40. KPMG, Federal Budget 2009-10 national infrastructure spending priorities June 2009.41. Infrastructure Australia, Getting the Fundamentals Right for Australia’s Infrastructure Priorities, June 2010.42. ABARE-BRS, Minerals and energy Major development projects report, October 2010.

Australian expertise extends across the full spectrum of economic and social infrastructure including toll roads, airports, railway rolling stock and terminals, broadcast communications, power generators, gas and electricity transmission and distribution, shipping ports, water utilities, schools, hospitals, aged care facilities and public housing.

The Australian infrastructure market is among the most sophisticated markets in the world with estimated A$9 billion in infrastructure construction projects work contracted annually. In the 2009-10 Budget, the Australian Government committed A$22 billion to improve the nation’s infrastructure in transport, communications, energy, education and health sectors as part of the ‘Building Australia Fund’. In addition, State Governments have committed an estimated A$2.5 billion to infrastructure projects.40

Infrastructure needs and priorities for Australia are laid out by Infrastructure Australia. Appendix F provides an overview of priority projects as at June 2010. The value of these projects totals almost A$83 billion.41

Stage Definition Total Cost Estimates (A$ Million)

Early Stage Initiatives address a nationally significant issue or problem, 19,634 but the identification or development of the right solution is at an early stage.

Real Potential Initiatives clearly address a nationally significant issue or problem 41,522 and, there has been a considerable amount of analysis of potential solutions.

Threshold Initiatives have strong strategic and economic merit, and are only not 10,123 ready to proceed due to a small number of outstanding issues.

Ready to proceed Initiatives meet all of Infrastructure Australia’s criteria. 11,566

Infrastructure Australia

Infrastructure Australia (IA) was established in 2008 to coordinate a national approach to Australia’s future infrastructure needs. The agency plays an advisory role to governments, investors and owners of infrastructure concerning:

› Significant national infrastructure priorities and initiatives;

› Recommendations for policy and regulatory reforms to drive better efficiencies in the utilisation of national infrastructure networks;

› Options to address hindrances to the development and provision of efficient national infrastructure;

› Infrastructure needs of the Australian public; and

› Possible financing mechanisms.

More information on Infrastructure Australia and its policies and guidelines is available at: www.infrastructureaustralia.gov.au

In addition to public sector infrastructure projects, Australia is currently undergoing significant investment in private sector projects that will increase the output of Australia’s mineral and energy sectors.

Infrastructure projects directly associated with the minerals and energy sector currently stand at 15, with an estimated cost of A$11.0 billion in committed projects, and a further 31 valued at A$27.8 billion in less advanced projects.42 Committed infrastructure projects include iron ore and coal ports, rail projects and gas pipelines. Appendix G outlines the future capital expenditure commitments within Australia’s minerals and energy sectors.

Source: Infrastructure Australia, ‘Getting the fundamentals right for Australia’s infrastructure priorities’, June 2010 http://www.infrastructureaustralia.gov.au/publications/files/Report_to_COAG_2010.pdf

Infrastructure Australia’s Investment Priorities

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Trade Finance

Australia has an open, diversified economy that is actively engaged in international trade and has increasingly exported goods and services to the fast growing Asian region.

In 2010, Australia exported A$231 billion in merchandise trade, having grown at 7.7 per cent CAGR since the year 2000. The majority of Australia’s exports are natural resources and primary products and account for around 70 per cent of Australia’s total merchandise exports.

Over the past ten years, Australian exports to Asia have grown more rapidly than other regions. Four of Australia’s top five country export destinations are now based in Asia.

Australia’s Merchandise Exports, FOB Value (A$ Billion)

Exports – 2010 (% Share) Imports – 2010 (% Share)

2000 2002 2004 2006 2008 2010  2010 CAGR % % Share 2000/2010

Crude Materials, Inedible, except Fuels 21.2 22.0 23.1 39.2 56.3 75.6 32.8 13.5

Metalliferous Ores & Metal Scrap 13.4 13.9 16.3 32.7 50.0 68.9 29.9 17.8

Mineral Fuels & Related Materials 23.0 24.7 23.8 39.3 71.1 66.6 28.8 11.2

Coal, Coke & Briquettes 9.3 12.9 13.5 23.4 46.9 43.1 18.7 16.5

Petroleum & Related Materials 10.5 8.6 7.1 9.8 13.8 12.9 5.6 2.1

Gas, Natural & Manufactured 3.2 3.2 3.3 6.2 10.4 10.5 4.6 12.6

Manufactures 34.9 37.2 33.9 42.0 47.1 40.4 17.5 1.5

Food & Beverage & Tobacco & Live Animals 21.0 24.1 23.7 23.4 25.2 23.7 10.3 1.2

Other1 10.1 11.5 13.2 19.9 22.7 24.5 10.6 9.3

TOTAL 110 119 118 164 222 231 100 7.7

1. Commodities not classified elsewhere in the Standard International Trade Classification. CAGR = Compound Annual Growth Rate.

Sources: Australian Bureau of Statistics Cat No. 5368.0 International Trade in Goods and Services, Australia, Table 12a. Merchandise Exports; Austrade

Sources: Department of Foreign Affairs and Trade, Monthly Trade Data Dec 2010, Table 3; Austrade

Sources: Department of Foreign Affairs and Trade, Monthly Trade Data Dec 2010, Table 4; Austrade

East Asia 67.9%

Africa 1.6%

Europe 9.1%

South Asia 7.8%

Americas 6.1%

Oceania 4.9%

Middle East 2.9%

East Asia 54.6%

Europe 20.9%

South Asia 1.2%

Americas 14.3%

Oceania 5.3%

Middle East 2.2% Africa 1.6%

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In addition to merchandise trade, Australia exported A$53 billion worth of services in the fiscal year 2009-10, with travel (including business and personal education-related services) contributing A$33.4 billion, or over 60 per cent of Australia’s services exports.

The Australian Government also assists Australian businesses with trade finance solutions through the Export Finance & Insurance Corporation (EFIC). In fiscal year 2010, EFIC provided financing facilities totalling A$971.3 million that supported export contracts and overseas investments of over A$5.9 billion.43

Export Finance Navigator for SMEs lists the following banks with specialist trade finance teams44 in Australia:

› Australia and New Zealand Bank

› Bank of Queensland

› Bendigo Bank

› Commonwealth Bank of Australia

› HSBC

› National Australia Bank

› Westpac

Australia’s Merchandise Exports by Country, FOB Value (A$ Billion)

43. Export Finance & Insurance Corporation (EFIC) http://www.efic.gov.au/Pages/homepage.aspx44. Export Finance Navigator http://www.exportfinance.gov.au/Pages/Preparingforexport.aspx

2000 2002 2004 2006 2008 2010  2010 CAGR % % Share 2000/2010

1 China 6.0 8.4 11.0 20.4 32.3 58.3 25.3 25.5

2 Japan 21.8 22.2 22.2 32.4 50.8 43.6 18.9 7.2

3 South Korea 9.0 10.0 9.2 12.4 18.4 20.4 8.8 8.5

4 India 1.8 2.5 5.4 8.8 13.5 16.4 7.1 24.5

5 USA 11.0 11.5 9.5 10.1 12.1 9.3 4.0 -1.7

6 Taiwan 5.6 4.7 4.1 6.3 8.3 8.4 3.6 4.2

7 UK 3.8 5.6 5.1 8.1 9.3 8.3 3.6 8.3

8 New Zealand 6.6 7.9 8.8 8.9 9.3 8.0 3.5 2.0

9 Thailand 2.0 2.5 3.1 4.3 5.3 5.8 2.5 11.6

10 Singapore 5.9 5.0 3.3 4.6 6.1 4.8 2.1 -1.9

11 Indonesia 2.9 3.1 3.2 4.4 4.3 4.5 1.9 4.5

12 Malaysia 2.4 2.3 2.4 2.8 4.0 3.6 1.6 4.4

13 Hong Kong 3.6 3.5 2.7 3.2 3.0 3.2 1.4 -1.2

14 Netherland 1.8 1.4 1.5 2.8 3.6 2.6 1.1 3.9

15 UAE 1.0 1.3 1.3 2.0 3.9 2.1 0.9 7.8

16 Papua New Guinea 1.0 1.0 0.9 1.5 1.6 2.0 0.9 7.5

17 Germany 1.3 1.6 1.3 1.4 2.1 1.8 0.8 3.4

18 South Africa 1.3 1.3 1.6 2.3 2.5 1.8 0.8 3.6

19 Saudi Arabia 1.6 2.4 2.0 2.2 2.5 1.6 0.7 -0.1

20 Brazil 0.6 0.4 0.6 0.9 1.6 1.6 0.7 10.6

Other Markets 19.5 20.8 18.4 24.0 27.7 22.6 9.8 1.5

TOTAL 110 119 118 164 222 231 100 7.7

CAGR = Compound Annual Growth Rate.

Sources: Australian Bureau of Statistics Cat No. 5368.0 International Trade in Goods and Services, Australia, Table 14a; Austrade

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Corporate Finance and Advisory

Mergers and Acquisitions

Mergers and Acquisitions (M&A) activity improved in 2010 as the world economy recovered from the global financial crisis, according to the Thomson Reuters’ Full Year 2010 M&A Financial Advisory Review. The value of global-announced M&A totalled US$2.4 trillion in 2010, up 22.9 per cent from 2009. Australia’s M&A announced value reached US$132 billion in 2010, a 140 per cent increase from 2009. The rebound in Australia’s M&A activity last year was largely driven by the mining, financial, energy and telecommunications sectors.

In the Asia-Pacific region M&A activity is heavily concentrated in the top three economies (Australia, China and Japan). Together, their announced deals were worth around US$347 billion—accounting for more than 60 per cent of the region’s total.

Of the top ten financial advisors in Australia, based on completed M&A by imputed fees, nine are foreign-based global investment houses and one is the Australia-based Macquarie Group. They together generated US$648 million in imputed fees in 2010, accounting for 43 per cent of Australia’s M&A advisory fees.

On a five-year total basis, Australian M&A activity has been significant with announced deals totalling US$528 billion. The total value of the Australian deals was the largest in the Asia-Pacific region. Australian activity represents around 3.5 per cent of global deal flow and more than one-fifth of that of the Asia-Pacific region.

Australia has a vibrant Private Equity (PE) market, raising A$17 billion over the five years to June 2010. International and domestic PE leveraged buyouts continue to contribute significantly to M&A activities. The largest PE deal for 2010 was the A$2.7 billion45 buyout of Australia’s second largest private hospital owner and pathology provider, Healthscope.

Equity Capital Markets

Australia has a large and liquid equities market. During the financial crisis in 2008-09, Australia’s equity capital market provided support for corporations seeking capital off-setting, in part, the disruption experienced in international debt markets. Total equity market raisings46 increased by 7.5 per cent during this period with secondary market raisings rising 74 per cent from A$50.6 billion to A$88.1 billion. Many companies raised equity through rights issues and placements to strengthen their balance sheets and meet the short fall from debt markets at this time.

Sources: Thomson Reuters Mergers & Acquisitions Financial Advisors, Full Year 2010, Fourth Quarter 2009, Fourth Quarter 2008 and Fourth Quarter 2007; Austrade

Worldwide Announced Mergers & Acquisitions – Financial Advisors

45. Enterprise Value at time of announced deal, 19th July 2010.46. Includes Rights Issues, placements, calls on contributing shares, exercise of options, employee share schemes, DRPs, SPPs.

2010 2009 2008 2007 2006 2006-2010 Rank Market Rank Market Rank Market Rank Market Rank Market Rank Market Value Share Value Share Value Share Value Share Value Share Value Share US$Bn % US$Bn % US$Bn % US$Bn % US$Bn % US$Bn %

Worldwide 2,434.2 100.0 1,980.3 100.0 2,887.0 100.0 4,169.1 100.0 3,609.9 100.0 15,080.6 100.0

Americas 1,136.3 46.7 921.7 46.5 1,156.4 40.1 1,890.4 45.3 1,762.9 48.8 6,867.7 45.5

USA 821.6 33.8 719.4 36.3 923.8 32.0 1,570.8 37.7 1,475.2 40.9 5,510.8 36.5

Brazil 104.2 4.3 65.4 3.3 93.1 3.2 46.0 1.1 33.6 0.9 342.2 2.3

Canada 99.6 4.1 95.9 4.8 85.5 3.0 197.6 4.7 162.1 4.5 640.8 4.2

Europe 641.0 26.3 581.0 29.3 1,168.7 40.5 1,592.6 38.2 1,325.2 36.7 5,308.4 35.2

UK 162.9 6.7 160.0 8.1 269.0 9.3 387.1 9.3 333.8 9.2 1,312.8 8.7

Asia-Pacific 565.9 23.2 428.4 21.6 512.2 17.7 596.6 14.3 458.5 12.7 2,561.5 17.0

Australia 131.7 5.4 54.8 2.8 90.2 3.1 136.5 3.3 114.5 3.2 527.7 3.5

Japan 83.9 3.4 104.9 5.3 77.0 2.7 136.4 3.3 101.3 2.8 503.4 3.3

China 131.1 5.4 108.7 5.5 113.6 3.9 75.4 1.8 46.7 1.3 475.6 3.2

Africa/Middle East 91.0 3.7 49.3 2.5 49.7 1.7 89.5 2.1 63.4 1.8 342.9 2.3

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With 2,072 listed companies, the Australian stock market is the second largest free-floating stock market in Asia-Pacific after Japan at US$1,148 billion.

New Capital Raisings for Cash in Australia (A$ Million)

Size of Key Stock Markets in the Asia-Pacific Region Market Capitalisation of Floating Captals (US$ Billion, 31 Dec 2010)

% of Average MarketSurvey Year IPOs Privatisations Rights Issues Placements Other1 Total Capitalisation

1999-00 6,939 9,706 4,587 9,024 6,613 36,869 5.9

2000-01 8,519 6,400 549 4,293 5,748 25,509 3.7

2001-02 2,857 200 992 5,310 6,758 16,117 2.2

2002-03 5,961 0 2,446 7,032 7,608 23,047 3.4

2003-04 12,753 0 8,753 7,640 9,487 38,633 5.0

2004-05 14,883 0 3,242 7,896 11,125 37,146 4.1

2005-06 23,108 0 2,468 12,817 13,041 51,434 4.7

2006-07 19,694 8,679 13,001 19,789 16,742 77,905 5.6

2007-08 11,003 0 12,449 20,920 17,271 61,643 4.3

2008-09 1,885 0 28,506 38,235 21,338 89,964 7.5

2009-10 11,459 0 23,182 23,118 18,785 76,544 5.6

CAGR % 5.1 – 17.6 9.9 11.0 7.6 –

Primary Raisings Secondary Raisings

1. Other includes Calls on Contributing Shares, Exercise of Options, Employee Share Schemes, Dividend Reinvestment, Prospectus, SPP.

Sources: AFMA Australian Financial Markets Report; Austrade

0

200

400

600

800

1,000

1,200

1,400

US

$ B

illio

n

Australia China SouthKorea

Taiwan HongKong

India Singapore Malaysia Indonesia Thailand Philippines NewZealand

1,148

806

718

638

472 446

245

125 11084

38 20

USA 14,187Japan 2,856UK 2,675Canada 1,578France 1,160Germany 999

Sources: Standard & Poor’s, Global Broad Market Index, Dec 2010; Austrade

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Corporate advisory services are provided by way of arranging and underwriting new equity securities for domestically domiciled corporations from the private and public sectors. A large portion of equity is raised in the secondary market through rights issues (or entitlement offers) and institutional placements. Over the past three years, secondary market issuance far exceeded primary market issuance as listed companies recapitalised and paid down debt. Commentators expect primary issuance to increase as the market outlook improves.

Over the five years, Australia’s equity capital market raised almost US$200 billion, representing 5.1 per cent of the global equity raisings of US$3.9 trillion.

All ten of the world’s largest arrangers operates in the Australian equity capital markets. In 2010, A$29.1 billion equity was raised with estimated imputed fees of A$756 million.47

2010 2009 2008 2007 2006 2006-2010 Proceeds Market Proceeds Market Proceeds Market Proceeds Market Proceeds Market Proceeds Market (US$Bn) Share % (US$Bn) Share % (US$Bn) Share % (US$Bn) Share % (US$Bn) Share % (US$Bn) Share %

USA 200.9 23.5 249.1 28.5 238.2 37.7 227.1 27.8 208.1 28.9 1,123.4 28.9

Europe, Middle 179.6 21.0 268.7 30.8 214.8 34.0 345.2 42.3 228.9 31.8 1,237.2 31.8 East & Africa2

Asia Pacific 306.6 35.9 165.7 19.0 79.0 12.5 159.5 19.6 141.9 19.7 852.7 21.9 (ex Japan & Australia)

Japan 58.3 6.8 64.3 7.4 15.1 2.4 25.4 3.1 68.0 9.5 231.1 5.9

Australia 29.1 3.4 58.9 6.8 40.1 6.4 36.7 4.5 34.5 4.8 199.4 5.1

Latin America 51.6 6.0 30.5 3.5 24.2 3.8 49.4 6.1 17.8 2.5 173.5 4.5

Global Total2 854.2 872.7 631.3 815.5 719.5 3,893.1

Jan 1 2010 – Dec 31 2010 2010 Market Manager MarketBookrunner Rank Proceeds Share (%) Fees Share (%)

UBS 1 8,366 26.1 144.8 19.2

Bank of America Merrill Lynch 2 3,088 9.6 46.8 6.2

Credit Suisse 3 2,393 7.5 37.6 5.0

RBS 4 2,179 6.8 56.1 7.4

JP Morgan 5 2,154 6.7 42.0 5.6

Goldman Sachs & Co 6 2,144 6.7 37.2 4.9

Macquarie Group 7 1,694 5.3 49.1 6.5

Morgan Stanley 8 1,455 4.5 27.2 3.6

Citi 9 1,094 3.4 19.1 2.5

Deutsche Bank AG 10 1,077 3.4 22.5 3.0

Top Ten Total 25,643 80.0 482.4 63.8

Industry Total 32,056 100.0 755.7 100.0

1. Including Intial Public Offerings, Secondary Offerings and Convertible Offerings. 2. The regional total for Europe, Middle East & Africa in 2007 include Rights Offers that are not included in other regional sub-totals or the Global total.

Sources: Thomson Reuters Global Equity Capital Markets, Full Year 2010, Fourth Quarter 2009, Fourth Quarter 2008 and Fourth Quarter 2007; Austrade

Global Equity Capital Markets – Equity and Equity-Related1

Australian Equity Capital Markets

Proceeds per Bookrunner (A$Mn) Imputed Fees (A$Mn)

Sources: Thomson Reuters, Equity Capital Markets Review, Full Year 2010, Australian Equity Capital Markets; Austrade

47. Thomson Reuters, Equity Capital Markets Review, Full Year 2010.

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The Government is progressing towards the introduction of competition to exchange markets in Australia. On 1 August 2010, market supervision for local exchanges transferred to the Australian Securities and Investment Commission (ASIC) and in April 2011, ASIC published new market integrity rules to provide the framework for the introduction of competition in equity exchange markets. These rules are expected to begin on 31 October 2011.48 On 4 May 2011, the Government granted a licence to Chi-X Australia Pty Ltd as an alternative securities exchange. In a joint media release, the Treasurer and Assistant Treasurer said “Competition in Australia’s financial markets is critical to promoting exchange innovation, lowering transaction costs for market participants, leveraging our pool of national superannuation savings, and improving liquidity and access to capital for companies”.49

Debt Capital MarketsDebt capital markets include the issuance of bonds by Australian governments and non-government institutions, asset-backed securities and Kangaroo bonds (bonds issued in Australian dollars by non-residents).

Australia has US$1.4 trillion debt securities outstanding – the region’s third largest amount after Japan and China. Australian governments and business issue in both domestic and international markets. Domestic debt market issuance totalled A$116.6 billion50 in 2010 with A$70.3 billion51 issued through offshore markets – namely the US, Europe and Japan.

Over the decade to June 2010, non-government debt outstanding more than tripled from around A$400 billion to A$1.3 trillion. Non-government debt securities were more than four times the government debt securities outstanding with the local financial institutions being the largest issuers in these markets.

48. Australian Securities and Investment Commission ‘10-151MR ASIC ready for market supervision’ http://www.asic.gov.au/asic/asic.nsf/byheadline/10-151MR+ASIC+ready+for+market+supervision?openDocument. ASIC ’11-87MR ASIC publishes final competition market integrity rules’ 29 April 2011 http://144.140.79.138/asic/asic.nsf/byheadline/11-87MR+ASIC+publishes+final+competition+market+integrity+rules?openDocument

49. Australian Government Treasury ‘Government approves new financial markets competitor’ 4 May 2011 http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/067.htm&pageID=003&min=brs&Year=&DocType

50. Includes public domestic non-government bonds (including Kangaroo bonds), semi-government bonds and asset backed securities. Does not include The Commonwealth Government of Australia’s bonds that had gross bond issuance of A$58.4 billion in the year to June 2010. See the AOFM Annual Report http://www.aofm.gov.au/content/publications/reports/AnnualReports/2009-2010/download/AOFM_Annual_Report_2009-10.pdf

51. Australian and New Zealand entities. Source, INSTO League Tables as at 10 January 2011.

International and Domestic Debt Securities – Amount Outstanding Residence of Issuer (US$ Billion, June 2010)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Domestic Securities

International Securities

US

$ B

illio

n

China Australia SouthKorea

India Malaysia Taiwan Thailand HongKong

Singapore Indonesia Philippines NewZealand

USAJapanUKFranceGermanyItalyCanada

25,08112,4571,5502,8502,4113,1921,336

6,1771683,5001,6941,9011,001592

2843

24

845

531

1049

126

655

30

205

26225

5

2018

117

50

115

51

10623 58

37329

Sources: Bank for International Settlements, Quarterly Review, Dec 2010, Tables 11 and 16A; Austrade

Page 34: Australias Banking Industry

34 > Australian Trade Commission Australia’s Banking Industry > 35

In 2010, public domestic bond issuances (including self-led deals) in Australia totalled 194 deals valued at A$116.6 billion. By far the majority of these issues were in public domestic non-government bonds, the bulk of which were issued by financial institutions (106 deals valued at A$69.6 billion). This figure also includes 76 Kangaroo bond issues (foreign entity bonds issued through the domestic market in Australian dollars) valued at A$36.1 billion.

Bonds issued onshore totalled A$417 billion at June 2010, of which A$294 billion was issued by locally domiciled entities and A$124 billion issued by non-resident issuers (Kangaroo bonds). Australia’s financial institutions are the largest issuers of bonds in the local market.

Australia’s Debt Securities Outstanding (Fiscal year ending June, A$ Billion)

Public Domestic Bond Issuances including self-led deals 01/01/2010 – 31/12/2010

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Non-Government Short Term

Non-Government Long Term

Non-Government Overseas

Government

A$

Bill

ion

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Sources: Reserve Bank of Australia, Statistical Table D4 (data downloaded 30 Sep 2010); Austrade

1. Includes A$36.1 billion Kangaroo bonds.

Source: INSTO League Tables as at 10 January 2011

Bookrunner A$m Deals

Public Domestic non-government¹ 81,665 149

Semi-government bonds 13,100 10

Public Domestic ABS 21,785 35

TOTAL 116,550 194

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Australia’s Corporate Bonds Outstanding Issued Onshore1

Public Domestic Non-Government Bonds1 including self-led deals 01/01/2010 – 31/12/2010

Banks and Other Non-financial Asset- Non-Residents A$ Billion Financial Corporations corporations backed (Kangaroo Bonds) Total

Jun-2000 19 17 24 9 70

Jun-2001 24 23 30 18 95

Jun-2002 27 28 42 21 117

Jun-2003 28 32 52 20 132

Jun-2004 35 33 64 34 166

Jun-2005 48 39 79 48 214

Jun-2006 64 42 99 81 286

Jun-2007 78 48 122 103 352

Jun-2008 99 45 112 110 366

Jun-2009 135 41 99 103 378

Jun-2010 172 41 81 124 417

Share % 41.1 9.7 19.5 29.7 100.0

CAGR % since 2000 24.3 8.9 12.8 30.1 19.5

Australia’s major banks were the largest arrangers in 2010 with many foreign banks providing competition in the market.

Rank Bookrunner A$m Deals2

1 ANZ 14,871 53

2 National Australia Bank 10,663 21

3 Westpac Institutional Bank 10,106 36

4 Commonwealth Bank of Australia 9,669 35

5 UBS 7,896 34

6 RBC Capital Markets 7,488 40

7 TD Securities 5,963 34

8 JPMorgan 2,971 10

9 HSBC 2,933 5

10 Royal Bank of Scotland 2,546 12

11 Deutsche Bank 2,392 13

12 Credit Suisse 1,058 5

13 BNP Paribas 1,017 5

14 Macquarie Group 629 3

15 BMO Capital Markets 350 2

16 Merrill Lynch 300 1

17 Barclays 300 1

18 Nomura 238 2

19 Nikko SSB 225 1

20 RaboBank 50 1

TOTAL 81,665 149

1. A$50 million minimum, 1 year minimum. Pricing must be disclosed. All increases eligible. Excludes ASX listed corporate bonds. 2. Bookrunners given equal allocation.

Source: INSTO Leagues Table, as at 10 January 2011

1. Long-term non-government securities issued in Australia.

Sources: Reserve Bank of Australia, Statistical Table D4 Debt Securities Outstanding; Austrade

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36 > Australian Trade Commission Australia’s Banking Industry > 37

0

10

20

30

40

50

60

Onshore

Offshore

Purchases by the AOFM

A$

Bill

ion

Year2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

A recent Government review, Australia as a Financial Centre (November 2009),52 found that “if Australia is to develop as a leading financial centre that provides liquid and efficient financial services across a broad range of products and asset classes, then a more diversified and liquid bond market should be part of that vision.”

In May 2010, the Government announced that the Australian Securities and Investment Commission (ASIC) would introduce a class order relief permitting listed entities, within certain parameters, to issue bonds to retail investors using a simplified process.53

The initiatives simplify the disclosure requirements for certain offers of listed vanilla bonds by allowing such offers to be made with reduced disclosure under a short-form prospectus. The measures also allow vanilla bonds to be offered under a two-part prospectus, comprising a base prospectus (which may be used for a number of different offers) and a second part prospectus (which will relate to a particular offer).

In December 2010, the Government announced further reforms, including reducing red tape associated with issuing corporate bonds to retail investors, streamlining disclosure requirements and prospectus liability regulations. It will also facilitate the trading of Commonwealth Government Securities on a securities exchange in Australia, as part of its broader agenda to foster a deep and liquid corporate bond market.54

Asset-backed Securities

Australia’s asset-backed securities market has operated for over twenty years and has provided funding for Australian commercial and residential mortgages, credit cards, auto and equipment leases, and other asset-backed securities (ABS). The largest component of this market has been residential mortgage backed securities (RMBS) which represents around 77 per cent of Australian ABS on issue. Worldwide, this market was dramatically affected by the credit crisis. Recent RMBS issuance in Australia has increased from a low of A$9.9 billion in 2008 to A$14.1 billion and A$19.5 billion in 2009 and 2010 respectively.

Commercial banks (both domestic and foreign) are the main arrangers in the local market.

52. ‘Australia as a Financial Centre’ Report http://www.austrade.gov.au/ArticleDocuments/2792/Investment-Management-Industry-in-Australia.pdf.aspx53. Australian Securities and Investment Commission ‘MR10-98 Prospectus relief to help corporate bond market’ http://www.asic.gov.au/asic/asic.nsf/byheadline/MR10-98+Pr

ospectus+relief+to+help+corporate+bond+market?openDocument54. See Australian Government ‘Competitive and Sustainable Banking System’ report http://www.treasury.gov.au/banking/content/_downloads/competitive_and_sustainable_

banking.pdf

Australian RMBS Issuance $A Equivalent, Annual

Sources: The Reserve Bank of Australia, ‘The State of Play in the Securitisation Market’, 30 November 2010; Austrade

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Rank Bookrunner A$m Deals

1 Westpac 4,788 15

2 Deutsche Bank 3,553 12

3 Macquarie 3,368 9

4 National Australia Bank 3,231 13

5 ANZ 1,855 9

6 Commonwealth Bank of Australia 1,421 6

7 Royal Bank of Scotland 1,181 4

8 JPMorgan 662 3

9 Credit Suisse 636 4

10 Suncorp Metway 533 1

11 Barclays 217 2

12 Bank of Scotland 204 1

13 Lloyds TSB 136 1

Source: INSTO Australian League Tables, as at 13 January 2011

Securitisation remains an important funding source for non-bank lenders, regional banks, building societies and credit unions. The Australian Government continues to offer support to this market through the Australian Office of Financial Management’s (AOFM’s) active buying program of high quality AAA-rated RMBS. In December 2010, the Federal Treasurer announced an additional A$4 billion commitment to the AOFM’s purchasing program, taking the total AOFM program to A$20 billion. Since 2008 the AOFM has purchased 74 tranches in 46 RMBS deals totalling A$12.8 billion.

As part of the Federal Government’s Banking Reforms announced in December 2010, the Treasury will accelerate work on designing structures for the issuance of bullet RMBS. In late 2010, two Australian issuers – BankWest and Bendigo Adelaide Bank – issued tranches with bullet features. More recently, the Commonwealth Bank of Australia issued a A$3 billion RMBS deal with a soft bullet tranch worth A$525 million. Bullet structures may increase the investor universe to include those who require non-amortising principal repayments. Bullet RMBS could be eligible for inclusion in certain bond market indices –opening the market to institutional investors restricted to the securities listed in these indices.

Further details on Australia’s Residential Mortgage Backed Securities Market can be found at Austrade’s January 2011 publication ‘Securitisation. Australian Residential Mortgage Backed Securities’ available at http://www.austrade.gov.au/ArticleDocuments/2792/Data-Alert-110124-RMBS.pdf.aspx

Kangaroo bonds

Kangaroo bonds are corporate, semi-government or supranational bonds issued by non-resident entities through A$ markets. The Kangaroo bond market is the fastest growing sector of Australia’s domestic bond market, having increased considerably since the late 1990s with many non-resident corporations issuing bonds into the market during the decade commencing 2000. Over the ten years to October 2010, Kangaroo bonds outstanding have increased from A$9 billion to almost A$130 billion, a CAGR of 27.7 per cent.

Public Domestic Asset-Backed Securities including self-led deals 01/01/2010 – 31/12/2010

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The attractiveness of the market is intrinsically tied to the development of Australia’s foreign currency swap market. The development of Australia’s swap market provides competitive pricing for foreign firms to swap currency exposures back into their local currencies. In 2010, a total of A$36.1 billion was issued across 76 transactions. Arrangers included the Australian operations of foreign banks and Australia’s major banks.

Rank Bookrunner A$m Deals2

1 RBC Capital Markets 6,572 37

2 TD Securities 5,963 34

3 UBS 4,558 24

4 Australia and New Zealand Bank 4,083 21

5 Commonwealth Bank of Australia 3,196 16

6 HSBC 2,433 4

7 Westpac Institutional Bank 2,317 11

8 JPMorgan 2,117 7

9 Deutsch Bank 1,942 11

10 Royal Bank of Scotland 775 4

11 National Australia Bank 567 3

12 BMO Capital Markets 350 2

13 Credit Suisse 325 2

14 Merrill Lynch 300 1

15 Nomura 238 2

16 Nikko SSB 225 1

17 BNP Paribas 100 1

18 RaboBank 50 1

TOTAL 36,110 76

1. A$50 million minimum, 1 year minimum. Pricing must be disclosed. All increases eligible.

2. Bookrunners given equal allocation.

Source: INSTO Australian Financial Markets League Tables

Kangaroo Bonds1

0

20

40

60

80

100

120

140

Bon

ds O

utst

andi

ng A

$ M

illio

n

1992

1993

1993

1994

1994

1995

1995

1996

1996

1997

1997

1998

1998

1999

1999

2000

2000

2001

2001

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

1. Long-Term Non-Government Securities Issued in Australia – Non-Residents.

Sources: Reserve Bank of Australia, Statistical Table D4 Debt Securities Outstanding

Public Domestic Kangaroo Bonds1 including self-led deals 01/01/2010 – 31/12/2010

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Many Kangaroo bonds have high credit ratings and, as they can be eligible collateral for use by ADIs in repurchase agreements with the RBA, provide extra liquidity to holders of these bonds. The local investors for these bonds include domestic and foreign banks and local fixed-interest fund managers. Non-resident issuers benefit from an alternative funding source in a developed market with strong common law, a developed derivatives market and a fast growing pension funds industry.

Austrade’s publication ‘Investment Management Industry in Australia’ highlighted that Australia’s asset allocation to fixed income investments has been maintained at 12-15 per cent over recent years. With superannuation funds projected to continue to grow strongly over the coming decades, the appetite for quality bond issuance in the Australian market place is expected to continue.

Over-the-counter and exchange-traded marketsThe 2010 Australian Financial Markets Report, released by the Australian Financial Markets Association (AFMA), shows that Australia’s annual turnover of over-the-counter and exchanged-traded markets have exceeded A$100 trillion. Aggregate Australian financial markets (over-the-counter (OTC) and exchange-traded) turnover rose 5.4 per cent to almost A$102 trillion in 2009-10, reversing the global financial crisis induced decline (16.3 per cent) of the previous year. The total market turnover in 2009-10 was more than two and half times that of ten years ago, reinforcing the growth in depth and sophistication of Australia’s financial markets.

Australia Financial Markets Annual Turnover

CAGR = Compound Annual Growth Rate. Sources: 2010 Australian Financial Markets Report and various previous year reports; Austrade

Financial Year Ending June 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

OTC Markets 27.4 30.3 37.9 42.5 53.3 51.7 60.5 70.9 73.0 69.9 66.7 9.3

Foreign Exchange 15.9 18.2 21.8 26.4 34.1 33.6 41.6 46.9 46.7 44.3 40.3 9.7

Other 11.4 12.1 16.1 16.2 19.2 18.1 18.9 23.9 26.3 25.6 26.4 8.7

Exchange Traded Markets 10.8 11.7 12.2 13.8 17.8 24.1 29.5 39.0 42.3 26.6 35.0 12.5

Equities 0.5 0.6 0.7 0.7 0.9 1.2 1.4 1.8 2.2 1.5 1.9 14.8

Futures 10.3 11.2 11.5 13.1 16.9 22.9 28.0 37.2 40.1 25.1 33.2 12.4

All Financial Markets 38.1 42.0 50.2 56.4 71.1 75.7 89.9 109.8 115.3 96.5 101.7 10.3

OTC Markets -2.1 10.6 25.3 12.2 25.3 -3.1 17.0 17.2 3.0 -4.3 -4.6 65.6

Foreign Exchange -16.7 14.0 19.9 20.9 29.2 -1.4 23.9 12.8 -0.5 -5.1 -9.1 39.6

Other 29.6 5.7 33.5 0.4 18.9 -6.1 4.4 26.9 10.0 -2.7 3.1 26.0

Exchange Traded Markets 2.1 8.7 4.5 13.0 28.9 35.1 22.5 32.2 8.6 -37.1 31.6 34.4

Equities 24.9 18.0 29.5 4.8 17.7 32.1 24.7 24.9 21.2 -31.8 24.2 1.8

Futures 1.3 8.2 3.3 13.5 29.5 35.2 22.4 32.6 7.9 -37.3 32.0 32.6

All Financial Markets -0.9 10.0 19.5 12.4 26.2 6.5 18.8 22.1 5.0 -16.3 5.4 100.0

(A$ Trillion)

% Change on a Year AgoMarket Share

% 2009-10

CAGR % since2000

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The Payments System Board (PSB) of the Reserve Bank of Australia (RBA) oversees the payments system and is responsible for promoting the safety and efficiency of the payments system. Through the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, the Reserve Bank has a clear mandate to oversee the operation of the payments system.

The Australian Payments Clearing Association (APCA) is the Australian payments industry’s principal self-regulatory body. It is the primary vehicle for payments industry collaboration with a mandate to manage and develop regulations, procedures, policies, and standards governing payments clearing and settlement within Australia.

The sophistication and competitive nature of Australia’s payments system is reflected in the changing nature of access points to the system. Access to the payments system comes from bank and non-bank (credit union and building society) branches, Bank@Post,55 ATMs and EFTPOS56 terminals.

Cash remains the most important payment instrument for small retail transactions and accounts for the highest volume of transactions. Non-cash payments account for most of the value of payments in the Australian economy. It is estimated that approximately A$220 billion57 of non-cash payments are made each business day, equivalent to 20 per cent of GDP.

Arrangements for clearing most payment instruments – cheques, direct entry payments, ATMs, EFTPOS and high-value payments – are coordinated by APCA. Scheme credit and debit cards (MasterCard and Visa) and BPAY are cleared independently of APCA.

The Reserve Bank of Australia announced in May 2010 that the Payments System Board is undertaking a strategic review of innovation in the Australian payments system. The objective is to identify areas in which innovation in the Australian payments system may be improved through more effective co-operation between stakeholders and regulators. Further details are available at the RBA’s website: http://www.rba.gov.au/media-releases/2010/mr-10-14.html

Appendix H outlines further details on Australia’s Payment and Settlement Systems.

Operations Processing

Outsourcing and offshoring of mid and back office activities undertaken by commercial banks and capital market participants is a key strategy aimed at reducing costs and improving efficiencies. The following table provides an overview of relevant operations functions and products for these firms.

Operations currently being carried out in Australia vary by company, reflecting a range of global and national strategies. A 2008 survey of operations heads for 45 commercial banks found that almost 20 per cent of 3,500 operations staff in Australia support activities outside Australia and New Zealand.58

The large Australian domestic banks undertake the bulk of their operations functions in Australia, with some evidence of offshoring to London, Singapore and India. ANZ Bank, for example, has back office operations in Melbourne, Wellington, Bangalore, Fiji, Singapore and Hong Kong, and has recently announced a new centre in Manila.

For foreign banks, there is a mix of models, including supporting their Australian and New Zealand operations from Australia, supporting operations for the Asia-Pacific region, and using Australia as a global service centre within a ‘follow-the-sun’ operations model.

Transaction Services – Payments System

55. ‘Bank@Post’ (formerly giroPost) provides a limited range of financial services at certain Australia Post offices on behalf of member financial institutions. In June 2010, member institutions comprised Adelaide Bank, Bank of Queensland, BankWest, Bendigo Bank, Citibank, Commonwealth Bank, HSBC Bank Australia, ING Direct, Members Equity, National Australia Bank, St. George Bank, B&E Ltd, GE Capital Finance Australia, Heritage Building Society, IMB Ltd, Maitland Mutual Building Society, RAMS Home Loans, Wide Bay Australia Ltd and 56 credit unions. http://www.rba.gov.au/statistics/tables/xls/c08hist.xls

56. EFTPOS – Electronic Funds Transfer at Point of Sale. Payment occurs through hand held terminals at the point of sale through a debit to a customer’s savings or cheque account with corresponding credit to the merchants’ account.

57. RBA website, http://www.rba.gov.au/payments-system/about.html 58. Survey of members of the AFMA Operations committee, 2008.

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Operations Functions

Staff supporting financial markets product processing

Operational Risk

Market Risk

Credit Risk

Nostro Reconciliations & Investigations

Accounting

Back Office Service Provider

Custodial Services

Trade Finance Processing

Equity Clearing Services

Future Clearing Services

Stock Broking

Other

Margin Lending

Operations Products

Money Market

Debt

Foreign Exchange/OTC Derivatives

Futures

OTC Interest Rate Derivatives

Energy

Equities

OTC Credit Derivatives

Precious & Base Metals

OTC Equity Derivatives

Managed Funds

Agricultural Commodities

Real property

Source: Invest Australia & AFOA, “ AFOA Member Survey: Summary Report”, September 2006.

Operations Functions and Products

Australia is viewed as being best suited for operations related to more complex financial products, such as equities and derivatives, treasury, non-automated confirmations, structured transactions, gold, electricity and carbon trading, over-the-counter transactions, corporate actions, risk management and process renewal and engineering.

Key criteria in selecting a location to establish or expand financial service operations include cost of labour, availability of skilled labour with suitable financial services skills, as well as access to a proficient, English speaking and multi-lingual work force.

The skilled workforce is seen as Australia’s greatest strength. Australia has a very highly skilled, multilingual workforce, which ranks favourably across the region and other major financial centres.

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Complementing the Australian university educated population is vocational and professional training that is focused specifically on financial service operations. For example, TAFE NSW (Technical and Further Education commission) recently launched a training certificate in financial services focused specifically on back office operations.59 In addition, the Australian Financial Markets Association offers a range of professional training courses leading to a financial services operations designation.60

Australia’s major financial centres – Sydney and Melbourne – also have comparatively high proportions of their populations with tertiary education and employed in financial services.

59. TAFE NSW is Australia’s leading vocational education and training provider and operates through 10 institutions and 130 campuses across the State of New South Wales. http://www.tafensw.edu.au/howex/servlet/Course?Command=GetCourse&CourseNo=11343

60. http://www.afma.com.au/learning/qualifications/opsaccred.html

Sources: (a) Institute for Management Development (IMD), Switzerland, IMD World Competitiveness Online 1995-2010 (Updated: May 2010, 58 economies); (b) World Economic Forum, Switzerland and Harvard University, Global Competitiveness Report 2009-10 (133 economies); (c) The United Nations Development Programme (UNDP), Human Development Report 2009 (182 economies), Statistical Annex, Table H; Austrade

Australia China India Hong Kong Japan Singapore USA UK

World Competitiveness Yearbook 2010 Rankinga in:

Attracting and Retaining 3 16 8 23 13 2 10 39

University Education 7 49 22 23 36 1 10 28

Labour Productivity (PPP) 9 55 58 22 25 21 3 14

Management Education 18 46 13 27 40 2 8 29

Global Competitiveness Report 2009-10 Rankingb in:

Secondary Enrolment Rate 1 89 107 73 24 17 43 36

Reliance on Professional Management 7 46 30 38 19 8 11 13

Quality of Scientific Research Institutions 10 35 25 34 15 12 2 4

Tertiary Enrolment Rate 13 80 100 66 32 29 6 30

UNDP’s Human Development Report 2009 Rankingc in:

Human Development Index (HDI) 2 92 134 24 10 23 13 21

Workforce Skill Base Comparisons

Selected Demographic Comparisons1 – Mid Year 2009

1. For New York City, the closest available figure for population, mid-2008 is used. The latest data available for students is from 2008. State-wide public and private institution students (studying in Australia) data was used for Sydney (New South Wales) and Melbourne (Victoria). For Singapore, data represents 2008 full-time enrolment. For London and Hong Kong, data represents 2008-09 academic year.

Sources: AUSTRALIA: Australian Bureau of Statistics (ABS), cat. no. 3101.0, Australian Demographic Statistics, Dec 2009; ABS cat. no. 6291.0.55.001 Labour Force; ABS cat. no. 6291.0.55.003 E03_aug 94 – Employed Persons by Sex, Industry, Capital City-Balance of State, Hours Worked; Department of Education, Employment and Workplace Relations; Austrade. USA: US Census Bureau, Population Division, Table 27: Incorporated Places over 100,000 or more Inhabitants in 2008 population; State of New York and U.S. Bureau of Labour Statistics, Quarterly Census of Employment and Wages; U.S. Department of Labour, Bureau of Labour Statistics, Status of the Civilian Labour Force. UK: Office of National Statistics (ONS), Statistical Bulletin, Population Estimates June 2010; ONS Time series Labour Market Statistics 18A Regional Labour Market Summary (data downloaded 28 June 2010); London Development Agency, Mayor of London, The Mayor’s Economic Development Strategy for London, Table 1: London Higher, HESA Fact sheets, Student numbers in London 2008-09. HONG KONG: Census and Statistics Department, Hong Kong in Figures 2010 Edition, February 2010; Education Bureau. SINGAPORE: Ministry of Manpower (MOM), online Statistics, Labour Force; MOM Research and Statistics Department, Labour Market, Second Quarter 2009 Table 1.1; Statistics Singapore Ministry of Education, Education Factsheet 2009

(’000) Melbourne Sydney New York City London Hong Kong Singapore

Population 3,996 4,504 8,364 7,754 7,004 4,988

Labour Force 2,114 2,379 3,994 4,052 3,695 3,030

Employed Persons – All Industries 1,979 2,223 3,609 3,676 3,504 2,906

Finance and Insurance 90 142 315 332 210 158

% of Total Employed Persons 4.5 6.4 8.7 9.0 6.0 5.4

Universities – Total Enrolled Students 179 251 446 426 102 53

% of Total Population 4.5 5.6 5.3 5.5 1.5 1.1

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This section provides an overview of the regulation of banks and other financial institutions in Australia and summarises the key considerations that are most relevant to a foreign financial institution considering the establishment of an Australian operation (Australia’s taxation laws are separately considered in the section entitled ‘Taxation’). However, a full discussion of all relevant considerations is beyond the scope of this publication and it is necessary to seek independent legal advice in all cases.

Regulation of the financial system

Overview

Australia’s financial regulation framework is based on three separate agencies, operating on functional lines. These regulatory bodies have prime responsibility for maintaining the safety and soundness of financial institutions, protecting consumers, and promoting systemic stability through implementing and administering the regulatory regimes that apply to the financial sector. Specifically:

› (a) Australian Prudential Regulation Authority (APRA) is responsible for prudential regulation and supervision of ADIs (including Australian incorporated banks, the Australian branches of foreign banks, building societies and credit unions), as well as life and general insurance companies (including reinsurers and friendly societies) and most participants in the superannuation (retirement savings) industry;

› (b) Australian Securities and Investment Commission (ASIC) is the corporate, markets and financial services regulator, responsible for market conduct and investor protection; and

› (c) The Reserve Bank of Australia (RBA) is responsible for monetary policy, overseeing financial system stability and oversight of the payments system.

Responsibility for the day-to-day supervision of financial institutions and markets lies with these individual regulatory bodies. The broad framework for the regulation of the financial sector is determined by the Australian Government, with the involvement of the Federal Treasury and the Council of Financial Regulators (whose membership consists of high-level representatives of the RBA, Federal Treasury, APRA and ASIC).

In addition, the Australia Competition and Consumer Commission (ACCC) is responsible for competition policy, with a mandate which extends across the entire economy, including the financial services sector. Further details of the key regulators are set out below.

Australian Prudential Regulation Authority

APRA is the key prudential regulator for the Australian financial system. APRA’s core mission is to establish and enforce prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by the institutions APRA supervises are met within a stable, efficient and competitive financial system. APRA also acts as the national statistical agency for the Australian financial sector and plays a role in preserving the integrity of Australia’s retirement incomes policy.

APRA’s risk-based approach is underpinned by supervisory tools developed within the authority to ensure that risks are assessed rigorously and consistently, that critical warning signs are identified early and that our supervisory response is prompt and measured. APRA is provided with strong statutory powers to regulate and intervene in the operations of financial institutions, including:

› (a) authorisation or licensing powers, including the power to revoke a supervised entity’s authorisation if it fails to meet statutory requirements or prudential standards;

› (b) powers to make, apply and enforce prudential standards;

› (c) powers to collect information, to conduct on-site examinations of supervised entities and to require third-party audits; and

Regulation and Tax Environment

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› (d) powers to act in certain circumstances to protect depositors, policy holders and superannuation fund members and to maintain the stability of the financial system, including powers related to investigating, giving directions and assuming control of supervised entities in difficulty. APRA can appoint a statutory manager to assume full control of an ADI.

APRA has developed a regulatory framework for ADIs under the Banking Act which is based on the banking supervision principles published by the Basel Committee on Banking Supervision. The framework for prudential regulation includes requirements regarding capital adequacy, credit risk, market risk, securitisation, liquidity, credit quality, large exposures, associations with related entities, outsourcing, business continuity management, risk management of credit card activities, audit and related arrangements for prudential reporting, governance and fit and proper management.

Australian Securities and Investments Commission

ASIC is an independent statutory body that is Australia’s corporate, markets and financial services regulator. It acts under the Australian Securities and Investments Commission Act 2001 of Australia and administers the Corporations Act 2001 of Australia (Corporations Act), including the provisions governing the operation of companies in Australia, corporate fundraising, financial reporting, takeovers and compulsory buyouts and external administration/insolvency.

ASIC has responsibility for the investor protection regime that applies to the provision of financial services in, and into, Australia.The regime includes licensing, conduct and disclosure provisions that apply to financial services providers (including ADIs), as well as product disclosure provisions applicable to financial products. ASIC is responsible for monitoring compliance by market and clearing and settlement facility licensees with the relevant legislative frameworks and the supervision of real time trading on all of Australia’s domestic licensed markets.

ASIC is also responsible for (a) administering the market misconduct provisions of the Corporations Act, which cover market manipulation, insider trading and misleading or deceptive conduct, and (b) national credit regulation which includes licensing of all credit providers and credit service providers.

Reserve Bank of Australia

The RBA is responsible for maintaining stability of the overall financial system and monetary policy, promoting the safety and efficiency of the payments system (through the PSB), managing the issuance of banknotes, providing banking services for the Australian Government and managing Australia’s official reserve assets.

In exceptional circumstances, the RBA may provide liquidity support to an individual ADI if the institution was solvent and its failure to make payments would have serious implications for the rest of the financial system. In assessing solvency, the RBA would rely on APRA’s judgment.

The RBA is also responsible for issuing financial stability standards for clearing and settlement facilities and it monitors compliance with those standards.

Federal Treasury

The Treasury is an executive arm of the Australian Government and focuses primarily on economic policy. Amongst a range of other domestic functions, the Federal Treasury also provides advice on policy processes and reforms for the promotion of a secure financial system, sound corporate practices and safeguarding the public interest in matters such as consumer protection and foreign investment.

Australian Competition and Consumer Commission

The ACCC has responsibility for competition policy under the Competition and Consumer Act 2010 of Australia (formerly known as the Trade Practices Act), which prohibits anti-competitive arrangements between competitors, such as price fixing, market sharing and boycotts. The ACCC’s consumer protection activities complement those of Australian state and territory consumer affairs agencies which administer separate unfair trading legislation.

Other regulatory agencies

Other primary regulatory agencies and bodies in Australia include the Australian Taxation Office (ATO), the Australian Transaction Reports and Analysis Centre (AUSTRAC), the Privacy Commissioner, and the Foreign Investment Review Board (FIRB).

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Summary of available operating models

Overview

Under the Banking Act, an entity must not conduct ‘banking business’ in Australia without authorisation from APRA. Banking business includes any business that, to any extent, both (a) takes money on deposit (otherwise than as part payment for identified goods or services), and (b) makes advances of money (or conducts certain other financial activities prescribed in the Banking Act).

In addition, a person who carries on a financial services business ‘in Australia’ is required to hold an Australian financial services licence (AFSL) from ASIC or enjoy the benefit of an exemption from requirement to do so. ‘Business’ is not defined under the Corporations Act, but under the common law ‘business’ imports notions of system, repetition and continuity and is to be assessed by reference to the activities of the entity as a whole. The applicable AFSL must specifically cover each financial service that a person intends to provide and refer to each specific financial product for which that service is to be provided (see below). An AFSL will also stipulate whether the financial service is to be provided to wholesale clients or both retail and wholesale clients.

Australian Credit Licence

Under the National Consumer Credit Protection Act 2009 (Cth) all persons that engage in ‘credit activities’ in Australia are now required to hold an Australian Credit Licence (ACL) from ASIC, or operate as a credit representative of an ACL holder, or enjoy the benefit of an exemption from the requirement to do so. However, the regime only applies to credit provided to individuals predominantly for personal, domestic or household purposes or for investment in residential property. A credit activity includes: providing credit under a credit contract or consumer lease; suggesting or assisting in relation to a particular credit contract or consumer lease; and acting as an intermediary between a lender or lessor and a consumer (in relation to a credit contract or lease).

A licensee must comply with disclosure and conduct obligations including, for example, being a member of an external dispute resolution scheme, providing debtors with disclosure documents (such as ‘credit guides’) and meeting overarching requirements such as ensuring its credit activities are engaged in efficiently, honestly and fairly, ensure that debtors are not entered into credit contracts that are unsuitable to them, and do not involve conflicts of interest that are disadvantageous to debtors.

Available Options

In summary, there are four primary options available to a foreign financial institution considering the establishment of an Australian operation:

In the case of a foreign bank:

› (a) a representative office and then a branch authorised as a foreign ADI. APRA normally requires to a foreign bank considering the establishment of an Australian branch to first open a representative office; or

› (b) a new Australian-incorporated subsidiary authorised as an ADI.

In the case of a foreign financial institution which is not a bank:

› (c) a branch operating as a foreign non-bank financial institution (NBFI); or

› (d) a new Australian-incorporated subsidiary operating as a NBFI.

Other options may be available for specific types of foreign financial institutions (e.g., partnerships, collective investment vehicles, co-operatives, government agencies and international organisations).

Insofar as regulatory approvals are concerned, the first two options involve applying to APRA for authorisation as a representative office and/or an ADI and, except in the case of a representative office, are likely to involve applying to ASIC for an AFSL (which can be made contemporaneously with an application to APRA). The third and fourth options will only involve applying to ASIC for an AFSL. Depending on whether regulated ‘credit activities’ is undertaken, the options will require applying to ASIC or ACL.

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61. The guidelines are available at: http://www.apra.gov.au/ADI/upload/APRA_GL_ROFB_032007_ex.pdf.62. Regulatory Guide 204 Applying for a Credit License is available at: http://www.asic.gov.au/asic/asic.nsf/byheadline/Regulatory+guides?openDocument#rg204.63. The guidelines are available at: http://www.apra.gov.au/ADI/upload/ADI-Guidelines-11-4-08.pdf.

Summary of requirements for each option

Type of entity Process Comments

A. Representative office Consent from APRA The activities of the representative office are limited to those set out in APRA’s guidelines.61

Consent to use word ‘bank’ Required under section 66 of the Banking Act which provides that a person must obtain consent from APRA to assume or use the words ‘bank’, ‘banker’, ‘banking’ or cognate expressions in Australia in connection with a financial services business carried on by that person, whether that business is conducted within or outside Australia.

Minimum entry standards Must be authorised as a bank in its home jurisdiction, of substance and high standing, subject to adequate prudential standards consistent with Basel II and have received approval from home regulator to establish representative office.

Operating conditions The activities of the representative office must be confined to a pure liaison office. In particular, a representative office cannot grant loans, enter into derivatives, deal in or issue securities or buy or sell foreign exchange – see APRA’s guidelines.

Register as a foreign company Application to ASIC.

ACL from ASIC ACL or appointment as credit representative required if undertaking ‘credit activities’ in Australia. There is ASIC Guidance that assists applicants apply for an ACL.62

Must comply with ongoing conduct obligations under the NCCP Act, including responsible lending requirements, and provide ASIC with an Annual Compliance Certificate.

B. Branch as a foreign ADI Consent from APRA Application must comply with APRA’s guidelines.63

A branch of a foreign ADI is not permitted to accept initial deposits (and other funds) from individuals and non-corporate institutions of less than A$250,000. They can, however, accept deposits and other funds in any amount from incorporated entities, non-residents and their employees. The branch must also disclose that it is not subject to the depositor protection provisions of the Banking Act.

APRA may impose conditions on the operations of a foreign bank branch, especially during the initial phase of operations.

Need only comply with some of APRA’s prudential standards for foreign bank branch (see following).

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Type of entity Process Comments

Consent to use the word ‘bank’ Required under section 66 of the Banking Act.

Minimum authorisation criteria Home jurisdiction requirements – must be authorised as a bank in its home jurisdiction, of substance and high standing, subject to adequate prudential standards consistent with Basel II and have received approval from home regulator to establish a branch.

Capital – not required to maintain endowed capital in Australia, but the foreign ADI must be subject to comparable capital adequacy standards in its home jurisdiction.

Ownership – subject to limits under the Financial Sector (Shareholdings) Act 1998 of Australia (FSSA). Direct or indirect holdings of 15 per cent of more are subject to a national interest test and must be approved by the Federal Treasurer.

Prudential standards – must comply with APRA’s prudential standards in relation to corporate governance, securitisation and funds management, liquidity, credit quality, large exposures, associations with related entities, outsourcing, business continuity management, risk management, audit and information and prudential reporting (although in some cases only some of the provisions of the prudential standards apply to branches of foreign banks). APRA can also impose additional, entity specific prudential requirements where it believes they are necessary.

Business plan – applicants must provide APRA with a 3-5 year business plan and APRA will not authorise a foreign bank as an ADI unless the business plan demonstrates that a real and substantial business is to be carried on in Australia. APRA also expects that the vast majority of business undertaken by the foreign bank with Australian customers (excluding non-Australian operations of such customers) will be undertaken through the branch in Australia, unless there are sound and prudent business reasons for particular businesses or financial accommodation to be provided by branches outside Australia.

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Type of entity Process Comments

Register as a foreign company Application to ASIC.

AFSL from ASIC Required if the branch proposes providing certain financial services (such as advice) and financial products (such as, dealing in or issuing securities, derivatives, foreign exchange contracts) – see below.

Audit and other reports must be provided to ASIC on an ongoing basis. There are exemptions from some of the audit obligations where the holder of an AFSL is a foreign ADI where equivalent reports prepared for the overseas regulator of the foreign ADI are lodged with ASIC.

ACL from ASIC ACL or appointment as credit representative required if undertaking ‘credit activities’ in Australia. There is ASIC Guidance that assists applicants apply for an ACL.

Must comply with ongoing conduct obligations under the NCCP Act, including responsible lending requirements, and provide ASIC with an Annual Compliance Certificate.

C. Locally-incorporated Consent from APRA Application must comply with APRA’s subsidiary as an ADI guidelines and are subject to the same prudential

standards and legislation as local banks. A locally incorporated ADI can undertake all types of banking business.

APRA may impose conditions on the operations of a newly established bank, especially during the initial phase of operations.

Consent to use the word ‘bank’ Required under section 66 of the Banking Act.

Minimum authorisation criteria Home jurisdiction requirements – must have received approval from home regulator to establish a local bank subsidiary.

Capital – a minimum capital base of A$50 million. Locally incorporated ADIs are currently required to maintain at all times a minimum capital ratio of 8 per cent, of which at least half must be made up of a Tier 1 capital (i.e., a minimum Tier 1 capital ratio of 4 per cent). Newly established ADIs may be subject to a higher minimum capital ratio in their formative years, depending on the risk profile of the proposed operations.

Ownership – subject to limits under the Financial Sector (Shareholdings) Act 1998 of Australia (FSSA). Direct or indirect holdings of 15 per cent of more are subject to a national interest test and must be approved by the Federal Treasurer.

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Type of entity Process Comments

Prudential standards – must comply with all APRA’s prudential standards (including in relation to corporate governance, capital adequacy, securitisation and funds management, liquidity, credit quality, large exposures, associations with related entities, outsourcing, business continuity management, risk management, audit and information and prudential reporting). APRA can also impose additional, entity specific prudential requirements where it believes they are necessary.

Business plan – applicants must provide APRA with a 3-5 year business plan.

Establish subsidiary Application to ASIC.

AFSL from ASIC Required if the ADI proposes providing certain financial services (such as advice) and financial products (such as, dealing in or issuing securities, derivatives, foreign exchange contracts) – see below.

Audit and other reports must be provided to ASIC on an ongoing basis.

ACL from ASIC ACL or appointment as credit representative required if undertaking ‘credit activities’ in Australia. There is ASIC Guidance that assists applicants apply for an ACL.

Must comply with ongoing conduct obligations under the NCCP Act, including responsible lending requirements, and provide ASIC with an Annual Compliance Certificate.

D. Foreign subsidiary branch Register as a foreign company Application to ASIC.

AFSL from ASIC Required if the branch proposes providing certain financial services (such as advice) and financial products (such as, dealing in or issuing securities, derivatives, foreign exchange contracts) – see below.

Audit and other reports must be provided to ASIC on an ongoing basis.

ACL from ASIC ACL or appointment as credit representative required if undertaking ‘credit activities’ in Australia. There is ASIC Guidance that assists applicants apply for an ACL.

Must comply with ongoing conduct obligations under the NCCP Act, including responsible lending requirements, and provide ASIC with an Annual Compliance Certificate.

Financial requirements for In summary, a NBFI holder of an AFSL must, non-ADI holders of an AFSL on an ongoing basis, (i) at all times, have positive

net assets, (ii) at all times, be solvent (i.e., be able to pay its debts as and when they become due and payable), (iii) have sufficient cash resources to cover the next three months’ expenses with adequate

as a NBFI

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Type of entity Process Comments

cover for contingencies, (iv) if holding client money or properties which equal or exceed A$100,000 in value, have A$50,000 in surplus liquid funds, and (v) if incurring adjusted liabilities or contingent liabilities equal to or exceeding A$100,000 in providing a financial service by entering into transactions with clients, have adjusted surplus liquid funds of between A$50,000 and A$100,000,000 in accordance with ASIC’s requirements.

Cannot use the word ‘bank’ APRA will not grant consent under section 66 of the Banking Act to a NBFI.

E. Locally incorporated subsidiary Establish subsidiary Application to ASIC.

AFSL from ASIC Required if the NBFI proposes providing certain financial services (such as advice) and financial products (such as, dealing in or issuing securities, derivatives, foreign exchange contracts) – see below.

Audit and other reports must be provided to ASIC on an ongoing basis.

ACL from ASIC ACL or appointment as credit representative required if undertaking ‘credit activities’ in Australia. There is ASIC Guidance that assists applicants apply for an ACL.

Must comply with ongoing conduct obligations under the NCCP Act, including responsible lending requirements, and provide ASIC with an Annual Compliance Certificate.

Financial requirements fo As for a foreign subsidiary branch as a NBFI non-ADI holders of an AFSL (see above).

Cannot use the word ‘bank’ APRA will not grant consent under section 66 of the Banking Act to a NBFI.

The authorisation and application processes

The first step in establishing a representative office, foreign branch or locally incorporated ADI in Australia is to apply to APRA for authorisation to do so and to use the words ‘bank’, ‘banker’, ‘banking’ and cognate expressions. There is a no formal application form, but the usual practice is to submit a letter (together with attachments) that satisfy the criteria in the relevant guidelines published by APRA.

Usually, the minimum time for APRA to approve an application for a representative office is 3-6 months from submission of an application with all required information attached. The process for authorisation as a branch of a foreign ADI or a locally incorporated ADI is longer and can take up to 12 months (or longer in certain circumstances) from the date the initial application is made to APRA.

The process for applying for an AFSL is called ‘eLicensing’, which is an electronic licence application process. The process requires an applicant to identify the specific financial services and financial products it wishes to provide and the types of customers to whom these financial services and products are to be provided. A list of the supporting documentation (known as ‘proofs’) required will be produced automatically by the eLicensing service on the basis of that information.

as a NBFI

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The proofs are designed to demonstrate to ASIC how the applicant meets, or will meet, the AFSL conditions. Generally, the proofs will either be existing documents or a description of systems and processes. The proofs may be both specific to the entity applying for the AFSL or may cover a corporate group.

It is not possible to commence the eLicensing process until an Australian entity is established or a foreign branch is registered and an Australian Company Number (ACN) is received from ASIC. On lodging a complete application, ASIC aims to decide whether to grant or vary an AFSL within 28 days of receiving a complete application – although can take longer if it involves complex issues or information is incomplete.

The process for applying for an ACL can occur by completing and lodging an online application form and paying the applicable application fee. The process is similar to the one outlined above in relation to an AFSL.

An applicant is not automatically entitled to a credit licence, but must meet the requirements for a credit license, including being able to comply with the general conduct obligations under the National Credit Act, which aim to ensure that the credit business operates properly; and satisfy the fit and proper person requirements to engage in credit activities.

Australian financial services licences

Introduction

As noted above, person who carries on a financial services business ‘in Australia’ is required to hold an AFSL from ASIC or enjoy the benefit of an exemption from requirement to do so.

Although there are numerous exemptions available for particular financial services and/or financial products, there are few exemptions of general application. ASIC has provided a number of class order exemptions of general application for some regulated foreign financial institutions which operate in jurisdictions which have a similar level of investor protection to Australia. These exemptions only permit financial services to provided to ‘wholesale clients’ (see below), are subject to some other conditions and involve submitting a standard form deed of reliance to ASIC and providing certain information to ASIC every six months.

What is a financial service?

A person provides a financial service if they engage in certain activities, which include:

› (a) providing financial product advice;

› (b) dealing in a financial product;

› (c) making a market for a financial product;

› (d) operating a registered managed investment scheme (i.e., collective investment vehicles); and

› (e) providing a custodial or depository service.

What is a financial product?

Financial product is defined in general terms and there are specific inclusions and exclusions. The general definition is that a ‘financial product’ is any facility through which a person:

› (a) makes a financial investment;

› (b) manages financial risk; or

› (c) makes non-cash payments.

This applies even if the facility is acquired for some other purpose.

The specific inclusions to the definition of ‘financial product’ illustrate the wide scope of the concept. Specific inclusions are equity and debt securities, interests in managed investment schemes, derivatives, foreign exchange contracts, most insurance contracts, most superannuation (i.e., pension) products, most deposit taking facilities provided by Australian ADIs and government debenture and bond issues.

The specific exclusions to the definition are generally products that are more suitably regulated under some other regime (such as credit facilities and a facility for the exchange and settlement of non cash payments betwen providers of non cash payment facilities).

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Loans in Australia can be structured as a ‘credit facility’ or, for tax reasons, as an issue of ‘debentures’ (i.e., a type of debt security). If the loan is a bilateral or syndicated ‘credit facility’, then there should be no particular licensing requirements as credit facilities are not financial products for the purposes of the AFSL regime. However, if the loan is structured as an issue of ‘debentures’, which is a financial product, then it may be necessary for a lender to hold an AFSL. More structured transactions may involve derivatives, foreign exchange contracts (excluding most spot transactions) or other financial products, which will also require the provider of those financial products to hold an AFSL.

Retail and wholesale clients

An AFSL will also stipulate whether the financial service is to be provided to wholesale clients or both retail and wholesale clients. In summary, a person is a ‘wholesale client’ if at least one of the following four tests applies (all other persons are retail clients):

› (a) a value test: the consideration payable for the investment is at least A$500,000 (or such other amount set by regulation);

› (b) a business test: the product or service is provided in connection with a business that is not a small business (this normally means at least 20 employees);

› (c) an individual wealth test: the client’s net assets are at least A$2.5 million or income for each of the last two years is at least A$250,000 (or such other amounts set by regulation); and

› (d) a professional investor (as broadly defined in the Corporations Act) test.

Other considerations

Privacy laws

The Privacy Act 1988 of Australia (‘Privacy Act’) requires that ‘personal information’ must not be collected unless the person concerned either consents or is informed why it is being collected, who will use it, and how the person may access it and correct it, if necessary.

Further, the Privacy Act requires that such ‘personal information’ not be used for a purpose other than that for which it was collected and not be disclosed to anyone else unless the person concerned has consented or the law requires it.

Anti-money laundering and similar laws

AUSTRAC acts as the regulator for both the Financial Transactions Report Act 1988 of Australia and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 of Australia. The reporting of financial transactions, including:

› (a) cash transactions of A$10,000 or more or the foreign currency equivalent;

› (b) suspicious transactions; and

› (c) international funds transfer instructions.

is required, as well as the verification of the identity of persons who are signatories to accounts. Financial institutions are required to establish a compliance plan to ensure that the reporting and other obligations under both Acts are satisfied.

New laws to change the way to take security in Australia

The Personal Property Securities Act 2009 of Australia (‘PPSA’) commenced on 15 December 2009, but will not apply until a date to be announced in October 2011.

Once the PPSA begins to apply, it will have a retroactive effect on security interests and security agreements arising before that time. The PPSA will establish a national system for the registration of security interests in personal property (i.e., all property other than land), whether given by a company or a natural person, together with new rules for the creation, priority and enforcement of security interests in personal property.

It will radically alter many long-standing rules relating to title and the taking of security and will result in significant changes to secured transactions and lending practices. It extends the concept of security to capture many transaction not now registrable or considered to be a security interest, such as assignments of receivables, leases of property, title retention arrangements and flawed asset arrangements.

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This section summarises the Australian taxation laws that are most likely to apply when a foreign financial institution sets up an Australian operation. However, a full discussion of all relevant issues is beyond the scope of this publication and it is necessary to seek independent tax advice in all cases.

Australia has also entered into tax treaties with over forty countries to prevent double taxation and allow co-operation between Australia and overseas authorities in enforcing their respective tax laws. These treaties are commonly referred to as ‘double tax agreements’ or ‘DTAs’ and can apply when a foreign financial institution from a relevant country sets up an Australian operation.

SummaryThe following table summarises the key Australian tax considerations in relation to each of the alternative business structures that could be adopted when establishing a financial institution in Australia.

Taxation

Type of entity

1. Representative office Activities limited solely to liaison and marketing activities, and no banking business conducted in Australia.

2. Branch authorised as a foreign ADI

Key tax considerations

Taxation of business profits No significant Australian tax issues should generally arise on the basis that:

› The foreign bank should not be held to be carrying on business through a permanent establishment in Australia; and

› The foreign bank should not otherwise be deemed to have a taxable presence in Australia.

Taxation treatment of funding options Not generally applicable.

Taxation of business profits The Australian taxable income of the branch as a foreign ADI will generally be subject to Australian tax at the ordinary corporate rate (currently 30 per cent).

Taxation treatment of funding options The funding of the branch will generally be treated in the following way:

› Interest withholding tax (IWT) will generally apply to offshore inter-branch funding at the rate of 5 per cent.1

› IWT will also generally apply to other offshore funding at the rate of 10 per cent1, subject to relief under an applicable DTA (e.g., exemption for qualifying financial institutions).

› Exemption from IWT may be available in relation to publicly offered funding from unrelated lenders (commonly referred to as the section 128F exemption).

1. Refer to the proposed reduction in IWT that follows.

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Type of entity

3. Locally-incorporated subsidiary authorised as an ADI, foreign subsidiary branch operating as a foreign non-bank financial institution (NBFI), or locally incorporated subsidiary operating as a NBFI

Key tax considerations

Taxation of business profits The Australian taxable income of each entity will generally be subject to Australian tax at the ordinary corporate rate (currently 30 per cent).

Taxation treatment of funding options The funding of each entity will generally be treated in the following way:

› IWT will generally apply to offshore funding at the rate of 10 per cent1, subject to relief under an DTA (e.g., exemption for qualifying financial institutions).

› Exemption from IWT may be available in relation to publicly offered funding from unrelated lenders (commonly referred to as the section 128F exemption).

Taxation of business profitsThe business profits of an Australian branch or an Australian subsidiary of a foreign financial institution will generally be subject to Australian tax at the ordinary corporate rate (currently 30 per cent). The Government has announced that it intends to reduce the corporate tax rate to 29 per cent from the 2013-14 income year.

In contrast, a foreign financial institution which merely carries on activities of a preparatory or auxiliary nature in Australia (e.g., through a representational office) will not generally be liable to pay Australian income tax, provided that the activities of the office are limited solely to liaison and marketing activities, and the office does not conduct any banking business in Australia.

Taxation treatment of funding options

When is interest withholding tax payable?

A foreign financial institution that has an Australian subsidiary or an Australian branch may be subject to IWT. Broadly, under Australian tax legislation, interest that is paid to a non-resident is generally subject to withholding tax where the payment is made by an Australian resident or a non-resident acting through an Australian permanent establishment (e.g., an Australian branch). No IWT is generally imposed on domestic payments of interest (including payments made to foreign banks which are in receipt of the funds through a permanent establishment in Australia).

IWT is imposed at the rate of 10 per cent, but may be reduced depending on the terms of any applicable DTA between Australia and the jurisdiction of the recipient.

Exemptions from IWT

Australian tax law does provide for a number of exemptions to IWT. These include, where:

› interest is paid on publicly offered debentures, non-equity shares, certain other prescribed debt interests and certain syndicated loans (commonly referred to as the section 128F exemption);

› interest payments qualify for exemption under an applicable DTA (e.g., exemption for qualifying financial institutions);

› interest is paid by offshore banking units (OBU) in relation to certain borrowings; and

› the payee is specifically exempt from IWT (e.g., the payee is exempt from tax in both Australia and home country, or the payee is an exempt foreign pension fund).

1. Refer to the proposed reduction in IWT that follows.

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The exemptions that are most likely to apply to a foreign financial institution acting through an Australian subsidiary or an Australian branch are outlined below.

Exemption for certain publicly offered debentures (section 128F exemption)

In broad terms, under Australian taxation law, interest paid on publicly-offered debentures, non-equity shares and prescribed debt instruments is exempt from IWT if the following conditions are met:

› (a) the issuer is a company which is a resident of Australia (or a non-resident carrying on business through an Australian branch) when it issues debt instruments and at the time when interest is paid;

› (b) the debt instruments were issued under an offer which satisfies the ‘public offer’ test (which is defined under Australian tax legislation); and

› (c) the issuer does not know, or have reasonable grounds to suspect, that: (i) at the time of issue the debt instruments would be acquired by an ‘associate’ of the issuer; and (ii) at the time of the payment of interest, the payee is an ‘associate’ of the issuer.

Additional requirements apply before interest paid on certain syndicated loans will be exempt from IWT.

Exemptions under Australia’s new DTAs

The Australian Government has entered into new DTAs (New Treaties) with a number of countries (Specified Countries) which contain certain exemptions from IWT. For example, New Treaties have been concluded with each of Finland, France, Japan, New Zealand, Norway, South Africa, the United Kingdom and the United States.

Broadly, an exemption from IWT is available in respect of interest derived by:

› (a) the government and certain governmental authorities and agencies of the Specified Country; and

› (b) a ‘financial institution’ which is a resident of a Specified Country and which is unrelated to and dealing wholly independently with the payer of interest.64 This includes interest payments to a bank or other entity that derives most of its profits by carrying on a business of raising and providing finance.

Notional borrowing by an Australian branch of a foreign bank

Where a foreign bank conducts business in Australia through an Australian branch, special taxation rules will apply in relation to certain financing transactions between the foreign bank (e.g., head office) and its Australian branch.

Broadly, where the foreign bank makes an amount available for use by the Australian branch and the amount is recorded in the branch’s accounting records as having been provided by the bank to the branch, the law treats the Australian branch and the foreign bank as separate legal entities and the Australian branch is taken to have borrowed the amount from the foreign bank. Where the Australian branch records a payment of interest in respect of this notional borrowing, the notional interest is deemed to have been paid to the foreign bank and the branch and is subject to IWT at the reduced rate of 5 per cent.

This special tax treatment does not apply to locally incorporated subsidiaries of a foreign bank. Accordingly, funding transactions between a foreign bank and its Australian subsidiary may still be subject to IWT at the usual rate of 10 per cent.

Deductibility of IWT

Generally, a branch or subsidiary of a foreign financial institution which pays interest should be entitled to a tax deduction in respect of the interest paid when calculating its Australian taxable income. This deduction should be gross of any IWT imposed on the interest payments. If the payer of interest was required to ‘gross-up’ payments to the payee, the payer should also be entitled to a tax deduction for the grossed-up amount. No deduction will generally arise to the extent that there is a failure to withhold an amount on account of IWT.

Phasing down Australian IWT for financial institutions

The Australian Government announced in the 2010-11 Federal Budget that it would phase down the IWT payable by financial institutions on most interest paid on offshore borrowings, including when an Australian subsidiary or an Australian branch of a foreign financial institution pays interest on borrowings from their overseas parent.

64. However, interest paid under a back-to-back loan or an economically equivalent arrangement will not qualify for this exemption.

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The following table summarises the current and proposed IWT position:

Special treatment for offshore banking units

Entities that are OBUs are effectively subject to a reduced tax rate of 10 per cent on eligible income (rather than at the general corporate tax rate of 30 per cent) and are not required to pay IWT on certain borrowings.

An entity becomes an OBU when its OBU status is declared by the Treasurer in a Gazette notice. Generally, OBU status is generally available for ADIs, state banks, registered life insurance companies, certain dealers in foreign exchange, and funds management companies.

A recent report by the Australian Financial Centre Forum – Australia as a Financial Centre Forum: Building on our strengths recommended that the Government improve Australia’s attractiveness as a financial hub by publicising the OBU regime more widely and by simplifying the process for obtaining OBU status.

Thin capitalisation

Australia’s thin capitalisation rules seek to limit the amount of debt used to fund Australian operations or investments. In very broad terms, this is achieved by disallowing debt deductions (such as interest payments) that an entity can claim against Australian assessable income where the entity is too thinly capitalised.

The thin capitalisation rules are complex and need to be considered on a case-by-case basis; however, they are normally manageable for financial institutions which operate in Australia.

Type of borrowing Current IWT position From 2013-14 From 2014-15

Financial institution borrows from a foreign 0% 7.5% 5% financial institution (where not exempt under a DTA) (aspirational target of zero)

Foreign bank branch borrows from overseas head office 5% 2.5% Exempt

Financial institution borrows from offshore retail deposits 10% 7.5% 5% (proceeds used and traced to Australian operations) (aspirational target of zero)

Financial institution borrows in a section 128F compliant manner Exempt Exempt Exempt

Offshore banking unit (borrows and on-lends offshore) Exempt Exempt Exempt

Financial institution borrows from non-resident retail deposits 10% 10% 10% held in Australia

Future IWT position

Source: Treasurer’s press release number 035/2010 issued on 11 May 2010

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Useful Links

Primary Regulators › Australian Prudential Regulation Authority www.apra.gov.au

› Australian Securities and Investments Commission www.asic.gov.au

› Reserve Bank of Australia www.rba.gov.au

Australian Government › Australian Bureau of Statistics www.abs.gov.au

› Australian Competition and Consumer Commission www.accc.gov.au

› Australian Taxation Office www.ato.gov.au

› Australian Trade Commission www.austrade.gov.au

› Australian Transaction Reports and Analysis Centre www.austrac.gov.au

› Federal Treasury www.treasury.gov.au

› Foreign Investment Review Board www.firb.gov.au

› Future Fund www.futurefund.gov.au

› MoneySmart www.moneysmart.gov.au

Other › Abacus (credit union and building society industry body) www.abacus.org.au

› Alternative Investment Management Association www.aima-australia.org

› Association of Superannuation Funds of Australia www.superannuation.asn.au

› Australian Accounting Standards Board www.aasb.com.au

› Australian Bankers Association www.bankers.asn.au

› Australian Equipment Lessors Association www.aela.asn.au

› Australian Finance Conference www.afc.asn.au

› Australian Financial Markets Association www.afma.com.au

› Australian Institute of Superannuation Trustees www.aist.asn.au

› Australian Payments Clearing Association www.apca.com.au

› Australian Securities Exchange www.asx.com.au

› Australian Securitisation Forum www.securitisation.com.au

› Australian Private Equity & Venture Capital Association www.avcal.com.au

› Financial Planning Association www.fpa.asn.au

› Financial Services Council www.ifsa.com.au

› Financial Services Institute of Australasia www.finsia.com

› Fund Executives Association Ltd www.feal.asn.au

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Appendix A – Banking Institutions

65. Bank of Western Australia Ltd is a wholly owned subsidiary of the Commonwealth Bank of Australia.

Domestic Banks – Four Major Banks

Australia and New Zealand Banking Group Ltd

Commonwealth Bank of Australia

National Australia Bank Ltd

Westpac Banking Corporation

Domestic Banks – Other

AMP Bank Ltd

Bank of Queensland Ltd

Bank of Western Australia Ltd65

Bendigo and Adelaide Bank Ltd

Macquarie Bank Ltd

Members Equity Bank Pty Ltd

Rural Bank Ltd

Suncorp-Metway Ltd

Foreign Bank Subsidiaries

Arab Bank Australia Ltd

Bank of China (Australia) Ltd

Bank of Cyprus Australia Ltd

Beirut Hellenic Bank Ltd

Citigroup Pty Ltd

HSBC Bank Australia Ltd

ING Bank (Australia) Ltd

Investec Bank (Australia) Ltd

Rabobank Australia Ltd

Foreign Bank Representative Offices

Agricultural Bank of China

Banco Bilbao Vizcaya Argentaria S.A.

Banco Santander, S.A.

Bank Hapoalim B.M.

Bank of Baroda

Bank of Communications Co., Ltd.

Bank Leumi Le-Israel BM

Bank of Valletta p.l.c

China Construction Bank Corporation

Commerzbank AG

Credit Industriel et Commercial

National Bank of Greece SA

Saxo Bank A/S

The Bank of Nova Scotia

The People’s Bank of China

Union Bank of India

Wells Fargo Bank, National Association

Foreign Bank Branches

Bank of America, National Association

Bank of China Ltd

Bank of Scotland plc

Barclays Capital

BNP Paribas

China Construction Bank Corporation

Citibank, N.A.

Credit Suisse AG

Deutsche Bank Aktiengessellschaft

First Commercial Bank

Industrial and Commercial Bank of China Ltd

ING Bank N.V

JPMorgan Chase Bank, National Association

Lloyds TSB Bank plc

Mega International Commercial Bank Co., Ltd.

Mizuho Corporate Bank, Ltd.

Oversea-Chinese Banking Corporation Ltd

Rabobank Nederland

Royal Bank of Canada

Société Générale

Standard Chartered Bank

State Bank of India

State Street Bank and Trust Company

Sumitomo Mitsui Banking Corporation

Taiwan Business Bank

The Bank of New York Mellon

The Bank of Tokyo-Mitsubishi UFJ, Ltd

The Hongkong and Shanghai Banking Corporation Ltd

The Northern Trust Company

The Royal Bank of Scotland N.V.

The Royal Bank of Scotland PLC

The Toronto-Dominion Bank

UBS AG

United Overseas Bank Ltd

WestLB AG

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Appendix B – Credit Unions and Building Societies

Credit Unions

Alliance One Credit Union Ltd

Allied Members Credit Union Ltd

AMP Credit Union Ltd

Australian Central Credit Union Ltd

Australian Country Credit Union Ltd (trading as Reliance Credit Union)

Australian Defence Credit Union Ltd

AWA Credit Union Ltd

Bananacoast Community Credit Union Ltd

Bankstown City Credit Union Ltd

Berrima District Credit Union Ltd

Big Sky Credit Union Ltd

CAPE Credit Union Ltd

Central Murray Credit Union Ltd

Central West Credit Union Ltd

Circle Credit Co-operative Ltd

Coastline Credit Union Ltd

Collie Miners Credit Union Ltd

Community Alliance Credit Union Ltd

Community CPS Australia Ltd

Community First Credit Union Ltd

Country First Credit Union Ltd

Credit Union Australia Ltd

Credit Union SA Ltd

Defence Force Credit Union Ltd

Dnister Ukrainian Credit Co-operative Ltd

EECU Ltd

Electricity Credit Union Ltd

Encompass Credit Union Ltd

Family First Credit Union Ltd

Fire Brigades Employees’ Credit Union Ltd

Fire Service Credit Union Ltd

Firefighters & Affiliates Credit Co-operative Ltd

First Choice Credit Union Ltd

First Option Credit Union Ltd

Fitzroy & Carlton Community Credit Co-Operative Ltd

Ford Co-operative Credit Society Ltd

Gateway Credit Union Ltd

Geelong & District Credit Co-operative Society Ltd

Goldfields Credit Union Ltd

Goulburn Murray Credit Union Co-operative Ltd

Heritage Isle Credit Union Ltd

Holiday Coast Credit Union Ltd

Horizon Credit Union Ltd

Hunter United Employees’ Credit Union Ltd

Industries Mutual Credit Union Ltd

Intech Credit Union Ltd

La Trobe University Credit Union Co-Operative Ltd

Laboratories Credit Union Ltd

Latvian Australian Credit Co-operative Society Ltd

Lithuanian Co-operative Credit Society “Talka” Ltd

Lysaght Credit Union Ltd

MacArthur Credit Union Ltd

Macquarie Credit Union Ltd

Manly Warringah Credit Union Ltd

Maritime, Mining & Power Credit Union Ltd

MCU Ltd

MECU Ltd

Melbourne University Credit Union Ltd

MemberFirst Credit Union Ltd

MyState Financial Ltd

New England Credit Union Ltd

Newcom Colliery Employees Credit Union Ltd

Northern Inland Credit Union Ltd

Nova Credit Union Ltd

Old Gold Credit Union Co-operative Ltd

Orange Credit Union Ltd

Phoenix (N.S.W.) Credit Union Ltd

Plenty Credit Co-operative Ltd

Police & Nurses Credit Society Ltd

Police Association Credit Co-operative Ltd

Police Credit Union Ltd

Pulse Credit Union Ltd

Qantas Staff Credit Union Ltd

Queensland Country Credit Union Ltd

Queensland Police Credit Union Ltd

Queensland Professional Credit Union Ltd

Queensland Teachers’ Credit Union Ltd

Queenslanders Credit Union Ltd

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Railways Credit Union Ltd

Resources Credit Union Ltd

R.T.A. Staff Credit Union Ltd

Select Credit Union Ltd

Service One Credit Union Ltd

SGE Credit Union Ltd

Shell Employees’ Credit Union Ltd

South West Slopes Credit Union Ltd

Southern Cross Credit Union Ltd

South-West Credit Union Co-Operative Ltd

Summerland Credit Union Ltd

Sutherland Credit Union Ltd

Swan Hill Credit Union Ltd

Sydney Credit Union Ltd

Tartan Credit Union Ltd

Teachers Credit Union Ltd

The Broken Hill Community Credit Union Ltd

The Capricornian Ltd

The Gympie Credit Union Ltd

The Police Department Employees’ Credit Union Ltd

The University Credit Society Ltd

Traditional Credit Union Ltd

TransComm Credit Co-operative Ltd

Victoria Teachers Credit Union Ltd

Wagga Mutual Credit Union Ltd

Warwick Credit Union Ltd

WAW Credit Union Co-Operative Ltd

Woolworths Employees’ Credit Union Ltd

Wyong Council Credit Union Ltd

Building Societies

ABS Building Society Ltd

B & E Ltd

Greater Building Society Ltd

Heritage Building Society Ltd

Hume Building Society Ltd

IMB Ltd

Lifeplan Australia Building Society Ltd

Maitland Mutual Building Society Ltd

Newcastle Permanent Building Society Ltd

The Rock Building Society Ltd

Wide Bay Australia Ltd

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Bank of ChinaIn 1985, Bank of China recommenced its operations in Australia and has since set up its Australian headquarters in Sydney’s York Street and established seven branches in Sydney, Melbourne, Perth and Brisbane. In 2005, Bank of China (Australia) Limited, the Australian subsidiary of Bank of China, was established in Sydney.

The bank offers a wide range of corporate and personal banking services in Australia and targets the local Chinese community, Chinese students studying in Australia, Chinese companies investing in Australia, and Australian businesses with trade and investment links to China.

› www.bocau.com.au

CitibankCitibank’s presence in Australia extends back to 1971. The organisation was the first foreign bank to be granted a banking license in 1985 and today provides consumer, corporations, governments and institutions a full range of financial products and services. Citi, the parent company of Citibank in Australia, employs approximately 2,300 staff, and services over 1 million customers in Australia.

Citibank is one of the largest foreign banks servicing Australia’s retail banking sector. In Australia, Citibank holds approximately A$6.2 billion in retail deposits, and has more than A$13 billion in loans and advances to households. Citibank is one of the largest credit card issuers in Australia, ranking fifth in terms of credit card loans outstanding, just behind the big four domestic banks.

› www.citibank.com.au

HSBCHSBC operates through a network of 35 branches and offices in Australia. HSBC first entered Australia through the establishment of a finance company in 1965 and obtained a full banking license in 1986. With retail deposits as at September 2010 of approximately A$3.9 billion and A$7.3 billion in loans and advances to households, HSBC is the third largest foreign bank competitor in the retail banking sector.

HSBC offers a full range of consumer, commercial and institutional banking services. They target their retail services to high-end expatriates and customers with continued links between Asia and Australia.

› www.hsbc.com.au

ING DIRECTING DIRECT launched in Australia in 1999 and pioneered branchless banking. It has grown to become the fifth largest retail bank in Australia and largest foreign bank competitor in the retail banking sector. ING DIRECT has approximately 1.4 million customers, A$17 billion in retail deposits and A$36.7 billion in loans and advances to the household sector.

The bank first entered Australia with an online interest earning savings deposit account. Most recently, ING DIRECT expanded its deposit service offering to include an everyday transaction account – Orange Everyday. ING DIRECT also offers home loans and business banking and deposit services. Headquartered in Sydney, ING DIRECT employs some 900 people in Australia.

› www.ingdirect.com.au

Appendix C – Foreign Retail Banks in Australia

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RabobankRabobank first entered Australia in 1994, through the acquisition of Primary Industry Bank of Australia, which was renamed Rabobank Australia in 2003, the same year Rabo acquired Lend Lease Agro Business in Australia. Rabobank operates through 51 branches throughout Australia and targets primarily the rural and agricultural sector.

The bank entered the retail banking space in May 2007 with the launch of its RaboPlus internet bank, which was rebranded RaboDirect in May 2010. RaboDirect offers a range of high interest savings, term deposits and online access to a selection of wholesale managed funds. As at September 2010, Rabobank held A$1.8 billion in retail deposits.

› www.rabodirect.com.au

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Australia and New Zealand BankANZ has some 1,346 branches and offices worldwide with operations in Australia, New Zealand, 15 Asian markets (including the Middle East), 12 Pacific countries, Europe (London and Frankfurt) and New York. The focus of its current growth strategy is the Asia-Pacific, with the aim of becoming a ‘super-regional bank’ increasing its presence in the region to around 20 per cent of earnings by 2012.

To achieve this vision, ANZ has been investing significantly in the region, building branch networks in Indonesia, Vietnam and China through a combination of organic growth and strategic acquisition. The bank recently acquired select businesses from Royal Bank of Scotland in Singapore, Taiwan, Indonesia, Philippines and Hong Kong.

In China, ANZ has seven branches and sub branches and holds the maximum allowable investments in two significant Chinese banks: Shanghai Rural Commercial Bank and Bank of Tainjin. ANZ anticipates having twenty outlets open by 2013. Its China expansion strategy received a boost when ANZ was granted local incorporation approval in September 2010. This means ANZ can apply for a renminbi licence and will allow the bank to provide domestic retail and business banking services along with foreign currency products to its institutional clients. In Taiwan, the bank has grown from one branch with a small institutional client base in 2008 to a pan-island network of 22 branches serving 1 million clients. In Hong Kong, ANZ has grown from a single branch serving institutional and private banking clients in 2008 to having six branches with full retail, wealth, private banking, institutional and commercial banking capabilities.

ANZ is also the leading bank within the Pacific region, with operations in 12 Pacific countries. The bank was granted a universal bank licence in the Philippines in January 2010 and has 28 branches across 11 cities with almost 1,000 employees in Indonesia. In the greater Mekong region (Vietnam, Cambodia and Laos) the bank’s aim is to become the leading foreign bank. ANZ currently has 11 offices, 100 ANZ branded ATMS and 1,000 shared ATMs, as well as an extensive EFTPOS network and call centre in Vietnam. In Cambodia, ANZ has a 55 per cent owned joint venture with 18 branches, and 124 ATMs serving 90,000 customers; and in Laos, ANZ is the only international bank, with three branches and nine ATMs.

› www.anz.com.au

Commonwealth Bank of AustraliaThe Commonwealth Bank of Australia (CBA) has operations and investments globally; however, the bulk of its international growth initiatives are centred in the Asia-Pacific region, primarily in China, Indonesia, Vietnam and India. The Bank’s Asian Growth strategy is focused on building long-term growth opportunities in the areas of banking, wealth and insurance/bancassurance, in emerging markets where there are young and well-educated populations, strong economic growth and strong, cultural and trade linkages with Australia.

In Europe, the bank has approximately 100 employees and has had a branch in the UK since 1913. CBA established a second European branch in Malta in 2005, focused primarily on commercial banking solutions in infrastructure and utilities, corporate lending, and asset finance. In North America, the bank’s New York branch was established in 1977 and focuses on corporate banking activities in infrastructure, natural resources and global market services (foreign exchange, derivatives, commodities, fixed income products, money markets and private placements).

In the Asia-Pacific, CBA has operations in China, Hong Kong, Indonesia, Japan, Singapore, Vietnam and India. The bank’s Indonesian subsidiary employs more than 1600 people and has been operating for more than 14 years. It offers retail banking services and foreign exchange through 84 branches and 100 ATMs across 22 Indonesian cities. CBA established its Ho Chi Minh City branch in 2008 after having had a representative office in Hanoi since 1994. The bank provides retail banking services (savings accounts, loans, money transfers) in Vietnam, as well as some business banking and international trade finance. In 2010, CBA also made a 15 per cent investment in local Vietnamese bank, VIB.

Appendix D – International Expansion of Australia’s Largest Banks

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In China, CBA has had representation in Beijing since 1994 and in 2010 opened its first corporate and institutional branch in Shanghai. The bank has a 20 per cent investment in two Chinese city commercial banks (Qilu Bank and Bank of Hangzhou). Also, in 2010, CBA entered into a life insurance joint venture partnership called BoCommLife with China’s fifth largest bank, Bank of Communications.

CBA has been in Hong Kong since 1986 and in Singapore since 1982. In both markets, CBA focuses on servicing multinationals from Australia and New Zealand, Asian institutional clients, and offers private banking services for expatriates and local professionals. The Tokyo branch was established in 1986 and conducts wholesale business activities, CBA’s newest international branch was officially opened in Mumbai, India, in August 2010 and is a fully functional commercial banking operation.

› www.cba.com.au

Macquarie GroupAustralian-headquartered Macquarie Group describes itself as a ‘global provider of banking, financial, advisory, investment and funds management services’. The Group has steadily grown its international activities, with a network of more than 70 offices in 28 countries and in recent years has consistently generated more than 50 per cent of its operating income from international sources. As at 31 March 2010, Macquarie had more than 14,600 staff, with approximately 50 per cent of those located offshore, and $A326 billion of assets under management.

Macquarie holds a number of leading market positions in the various markets in which it operates. It is a top ten institutional equities broker based on global stock coverage, and has been a top two ranked manager of Hong Kong initial public offerings since 2008, and is ranked in the top five North American physical gas marketers. Macquarie has more than one million retail clients and 200,000 specialist finance and leasing clients worldwide.

Macquarie has grown through a mix of organic growth and selective acquisitions. In 2009-10, Macquarie made several North American acquisitions, including Constellation’s downstream natural gas trading business, Fox-Pitt Kelton Cochran, Caronia Waller, Tristone Capital, Delaware Investments and Blackmont Capital. Macquarie also acquired the cash equities and equity derivatives operations of Sal. Oppenheim in Europe.

Organic growth initiatives include the global build-out of the institutional cash equities platform, the expansion of debt capital markets activities into the US and Europe, and the commencement of physical oil trading in Singapore.

› www.macquarie.com.au

National Australia BankNational Australia Bank (NAB) is a financial services organisation comprising nearly 40,000 people, more than 1800 branches and service centres, and more than 450,000 shareholders. NAB provides products, advice and services through the major Australian franchise and businesses in the United Kingdom, New Zealand, the United States and Asia.

NAB’s international strategy has focused more significantly on the New Zealand, UK and US markets. The bank’s UK franchises, Clydesdale Bank and Yorkshire Bank, provide retail, business and corporate banking services to more than 2.7 million customers across the UK. Its US company, Great Western Bank, has more than 900 employees and services 300,000 customers through 125 branches across seven US States, primarily in the mid-west. Great Western Bank focuses on retail banking, business banking and agribusiness banking.

In New Zealand, NAB has BNZ and BNZ Partners who provide retail, business and agribusiness banking and insurance services to more than one million customers across New Zealand. BNZ has pioneered a number of innovative concepts designed to provide customers with a retail, rather than a traditional banking, experience. New concept stores, mobile banking carts and trailers, and ‘Out of the Box’ packaged customer solutions have all been introduced.

National Australia Bank in Asia has banking operations in Hong Kong, Singapore and Japan as well as representative offices in China and India. In China, NAB recently applied for its first branch licence in Shanghai.

› www.nab.com.au

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WestpacWestpac’s international operations focus on supporting Australian and New Zealand customers in foreign markets, and providing a gateway for foreign firms and individuals interested in Australia and New Zealand. Westpac Institutional Bank (WIB) delivers a broad range of financial services to commercial, corporate, institutional and government customers either based in, or with interests in, Australia and New Zealand.

Westpac’s Asian operations are led out of Singapore, where it offers a full suite of private, corporate and institutional banking services. Westpac has a branch licence in Hong Kong, Singapore and Shanghai and representative offices in Beijing, Jakarta and Mumbai. There is an extensive Westpac network throughout the South Pacific with a presence in seven island nations. The bank has twenty branches in Fiji, 16 in Papua New Guinea and smaller number of branches in the Cook Islands, Samoa, Tonga, Soloman Islands and Vanuatu.

In Australia, Westpac Retail and Business Banking (WRBB) is responsible for sales, marketing and customer service for around 5 million consumer and SMEs enterprise customers within Australia under the Westpac and RAMS brands.

In December 2008, Westpac merged with St.George Bank Limited adding 2.6 million St.George customers to the group. St.George bank now operates as an operating division within the wider multi-branded Westpac Group.

› www.westpac.com.au

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Legal › Allens Arthur Robinson www.aar.com.au

› Allen & Overy www.allenovery.com

› Baker & McKenzie www.bakermckenzie.com

› Blake Dawson www.blakedawson.com

› Clayton Utz www.claytonutz.com

› Corrs Chambers Westgarth www.corrs.com.au

› DLA Piper www.dlapiper.com

› Freehills www.freehills.com

› Gadens www.gadens.com.au

› Gilbert and Tobin www.gtlaw.com.au

› Hall and Wilcox Lawyers www.hallandwilcox.com.au

› Henry Davis York www.hdy.com.au

› Holding Redlich www.holdingredlich.com.au

› HWL Ebsworth www.hwlebsworth.com.au

› Maddocks www.maddocks.com.au

› Mallesons Stephen Jaques www.mallesons.com

› Middletons www.middletons.com.au

› Minter Ellison Lawyers www.minterellison.com

› Norton Rose www.nortonrose.com

Accounting/Tax › BDO Kendalls www.bdo.com.au

› Deloitte www.deloitte.com.au

› Ernst & Young www.ey.com

› Grant Thornton www.grantthornton.com.au

› HLB Judd Mann www.hlb.com.au

› Horwath www.horwath.com.au

› KPMG www.kpmg.com

› Moore Stephens www.moorestephens.com

› Pitcher Partners www.pitcher.com.au

› PricewaterhouseCoopers www.pwc.com

› PKF www.pkf.com.au

› WHK Group www.whk.com.au

Appendix E – Selected Australian Legal and Accounting/Tax Advisors in Financial Services

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Appendix F – Infrastructure Australia’s Reform and Investment Priorities

Development Project Project Estimated Category Area Name State Cost (A$m)

Early Stage Transforming our cities Melton Rail Line Duplication VIC 1,300 and Electrification (VIC, A$1,300m)

Sydney’s Future Public NSW n/a Transport Network (NSW; n/a)

Gold Coast City Rail QLD 2,875 (SE Qld Mayors; A$2,875m)

North-West Sydney to NSW 7,000 CBD Rail Link (AIS: A$7,000m)

Hobart: A World class, TAS 90 Livable, Waterfront City

Adaptable and Secure An Innovative Strategy for TAS 105 Water Supplies Tasmania: Focus on food bowl concept

Competitive International Eyre Peninsula Port Proposals SA tbc Gateways

Port of Hastings VIC tbc (incl. Peninsule Link rail freight corridor)

Port Hedland Inner Harbour WA 3,400 – Capacity Enhancements

Road and Rail Access and WA 756 Port Upgrades at Bunbury

Pilbara Cities WA 2,900

National Freight Network Australian Digital Train 20 Control System (ARA)

Mount Isa – Townsville Rail QLD 788 Corridor Upgrade

Bruce Highway Corridor Upgrades QLD n/a

Transcontinental Rail Link – VIC 400 Mildura to Menindee

Total ‘Early Stage’ Capital Expenditure 19,634

Real Potential Transforming our cities Brisbane Inner City Rail Capacity Upgrade QLD 14,000

Melbourne Metro Stage 2 VIC tbc

Managed Motorway Proposals NSW, 3,200 VIC SA, WA

Integrating Sydney’s Motorway NSW n/a Network

Moreton Bay Rail Link QLD 1,100

Darra-Springfield Rail and Road project QLD 2,400

Adaptable and Secure Water Security Program ACT 551 Water Supplies

Tasmanian Water and Sewerage Reform TAS 1,000

A True National Energy Market Smart Grid Demonstration Pilot Project ACT 150

Installation of Low Flow Bypasses SA 47 in the Mount Lofty Ranges

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Development Project Project Estimated Category Area Name State Cost (A$m)

Heywood Interconnector Upgrade SA 80

Mid-West Energy – Stage 2 WA 795

Competitive International Abbot Point Multi Purpose Harbour QLD 2,890 Gateways

Bell Bay Intermodal Expansion Project TAS 150

Smart Port ICT VIC 16

Melbourne International Freight Terminal VIC 260

Gateway WA – Perth Airport and Freight Access WA 600

Road Freight Access to Port NSW 4,000 Botany and Kingsford Smith Airport – M5 East

Road Freight Access to Port of QLD 934 Brisbane and Brisbane Airport – Port of Brisbane Motorway Upgrade

Road Freight Access to Port of Melbourne – Westlink VIC 5,000

Freight Access to Port of Adelaide SA 1,120 – Northern Connector

National Freight Network East West Rail Freight Corridor (ARTC) n/a

North South Rail Freight Corridors NSW n/a

Eastern Goldfields Railway – 75 Freight Gateway Upgrade (WNR)

Advanced Train Management System (ARTC) 500

Western Interstate Freight Terminal VIC 2,314

Green Triangle Freight Transport Project SA/VIC 340

Total ‘Real Potential’ Capital Expenditure 41,522

Threshold Transforming our cities South West Rail Link NSW 2,400

Eastern Busway (Stages 2b and 3) QLD 825

Managed Motorways Proposals – SE Qld QLD 782

Northern Link Road Tunnel QLD 1,780

Competitive International Oakajee Port (potential equity injection) WA 4,000 Gateways

Darwin Port Expansion (potential equity injection) NT 336

Moorebank Intermodal Terminal NSW tbc

Total ‘Threshold’ Capital Expenditure 10,123

Ready to Proceed Transforming our cities Melbourne Metro Stage 1 VIC 4,900

Integrated Transit Corridor VIC 28 Development – Route 86 Demonstration, Project

National Freight Network Adelaide Rail Freight – Goodwood SA 418 and Torrens Junction

Federal Highway Link to Monaro ACT 220 Highway – Majura Parkway

Pacific Highway Corridor Upgrades NSW 6,000

A National Broadband Network National Broadband Network (NBN)

Total ‘Threshold’ Capital Expenditure 11,566

TOTAL ESTIMATED INFRASTRUCTURE PRIORITY PIPELINE CAPITAL COSTS 82,845

Abbreviations: Australasian Railways Association (ARA), Australian Rail Track Corporation (ARTC), West Net Rail (WNR) . Source: Infrastructure Australia, ‘Getting the fundamentals right for Australia’s infrastructure priorities’, June 2010.

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International demand for Australian natural resources has grown significantly over the past decade and the local industry has responded through increased production capacity. Much of this has depended on expanding infrastructure along the supply chain – like railways, ports and pipelines – to transport increased mining volumes to market. Large capital projects in infrastructure and production facilities can be seen in the doubling of annual capital expenditure from A$10 billion to A$19.9 billion in the five years to October 2010.66

Currently, there are 72 projects with forecast capital expenditure of A$132.9 billion at an advanced stage (projects ‘committed’ or ‘under construction’) of development – the equivalent of 12 per cent of Australian GDP. These projects are spread across commodities and states, although concentrated by value in petroleum (66 per cent), iron ore (13 per cent) and coal (4 per cent). Western Australia represents 70 per cent of these projects, followed by Queensland (21 per cent) and New South Wales (5 per cent).

There are currently sixteen projects committed or under construction that exceed A$1 billion in capital cost, with six projects costing in-excess of A$5 billion.

Appendix G – Capital Expenditure in Australia’s Mining Sector

66. ABARE-BRS, Minerals and energy major development projects report, October 2010.

Committed projects, October 2010

No. Cost No. Cost No. Cost No. Cost No. Cost State (A$m) (A$m) (A$m) (A$m) (A$m)

New South Wales 7 3,194 2 2,050 4 1,715 0 0 13 6,959

Victoria 2 2,611 1 44 1 45 1 65 5 2,765

Queensland 6 19,711 5 1,990 6 3,343 3 2,797 20 27,841

Western Australia 7 65,447 15 19,237 4 5,922 1 2,444 27 93,050

South Australia 1 138 2 242 0 0 0 0 3 380

Tasmania 1 345 0 0 0 0 1 150 2 495

Northern Territory 2 1,444 0 0 0 0 0 0 2 1,444

Australia 26 92,890 25 23,563 15 11,025 6 5,456 72 132,934

Energy projects

Mineral projects

Infrastructure Projects

Minerals and Energy Processing

Total

Sources: ABARE, Minerals and energy Major development projects – October 2010

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Further, there are A$248.0 billion of less advanced projects (undergoing feasibility or pre-feasibility). The fifteen largest of these are estimated to cost in-excess of A$2 billion. The largest four projects are in the energy sector.

Infrastructure projects directly associated with the Minerals and Energy sector currently stand at 15 with an estimated cost of A$11.0 billion in committed projects, and a further 31 valued at A$27.8 billion in less advanced projects. Committed infrastructure projects include iron ore and coal ports, rail projects and gas pipelines. The largest committed projects include the Cape Lambert A$3.4 billion port expansion in Karratha, W.A. and the A$1.1 billion Connyella to Abbot Point rail expansion in Queensland. The largest of the less advanced infrastructure projects include the A$4.3 billion Oakajee Port Rail and the A$2.1 billion Port Hedland projects.

Further information can be found at ABARE-BRS, ‘Minerals and energy major development projects report – October 2010’ http://adl.brs.gov.au/data/warehouse/pe_abarebrs99001758/MEP_Oct2010_report.pdf

Capital Expenditure committed or under construction by inidvidual projects over A$5 billion

Expected Capital Project Company 1 Location Startup Expenditure2 Sectors

Gorgon LNG Chevron / Shell / ExxonMobil Barrow Island, WA 2015 $43b Petroleum

Queensland Curtis LNG project BG Group Gladstone, Qld 2014 US$15b (A$16.7b) Petroleum (BG Group’s Share)

Pluto (train 1) Woodside Energy Carnarvon Basin/ 2011 $12.1b Petroleum Burrup Peninsula, WA (inc site works for train 2)

Rapid Growth Project 5 (RGP5) BHP Billiton Pilbara, WA 2011 US$5.65b (A$6.3b) Iron Ore incl. infrastructure)

NWS North Rankin B Woodside Energy/ 150 km NW of Dampier 2013 $5.1b (A$5.7b) Petroleum BHP Billiton/BP/Chevron/ Carnarvon Basin, WA Shell/Japan Australia LNG

Sino Iron Project CITIC Pacific Mining Cape Preston, WA 2011 US$5.2b (A$5.8b) Iron Ore

1. Principal operating companies. 2. Total capital expenditure as reported by the company in current dollars. Includes cost of development, plant and equipment. Sources: ABARE-BRS, Minerals and energy major development projects, October 2010

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Australia’s payments system represents a unique model of combined government and industry self-regulation.

RegulationThe Payments System Board (PSB) of the Reserve Bank of Australia oversees the payments system and is responsible for promoting the safety and efficiency of the payments system. Through the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998, the Reserve Bank has a clear mandate to oversee the operation of the payments system.

The Australian Payments Clearing Association (APCA) is the Australian payments industry’s principal self-regulatory body. It is the primary vehicle for payments industry collaboration with a mandate to manage and develop regulations, procedures, policies, and standards governing payments clearing and settlement within Australia.

Payments System Access PointsThe sophistication and competitive nature of Australia’s payments system is reflected in the changing nature of access points to the system. Access to the payments system comes from bank and non-bank (credit union and building society) branches, Bank@Post,67 ATMs and EFTPOS terminals.

As at June 2010, banks operated out of 5,544 branches while non-bank branches numbered 1,167.68 While bank branches have been steadily increasing since 2001, non-bank branches have shown a slow decline over the past few years.

ATM and EFTPOS terminal numbers grew significantly over the decade to June 2010, with ATM numbers tripling to 28,764 and EFTPOS terminals more than doubling to 712,434.69

Cash Payments

Cash remains the most important payment instrument for small retail transactions and accounts for the highest volume of transactions. Automated Teller Machines (ATMs) have facilitated the use of cash by making it more readily available. In 2009, monthly withdraws from ATMs averaged A$12.6 billion,70 or approximately A$575 per person.

Non-cash Payments

Non-cash payments account for most of the value of payments in the Australian economy. It is estimated that approximately A$22071 billion of non-cash payments are made each business day, equivalent to 20 per cent of GDP.

Approximately three-quarters of the value of non-cash transactions are high-value business transactions, which are processed through Australia’s real-time gross settlement (RTGS) system.

The use of debit cards has also grown significantly in recent years. As at 31 August 2010, there were 32.1 million bank accounts that could be accessed by a debit card, and these cards processed some 197 million transactions (purchases and cash-outs) during the month with a total value of A$13 billion.72

Australia was ranked one of the Top Ten in the world in the Economic Intelligence Unit’s Digital Economy Rankings 2010. Australia is a very sophisticated market where ICT companies can successfully develop solutions with global applicability. The country is also the source of a number of distinctive technologies – especially in the areas of e-finance, e-health, and e-government.

Appendix H – Transaction Services – Payments System

67. Bank@Post’ (formerly giroPost) provides a limited range of financial services at certain Australia Post offices on behalf of member financial institutions. In June 2010, member institutions comprised Adelaide Bank, Bank of Queensland, BankWest, Bendigo Bank, Citibank, Commonwealth Bank, HSBC Bank Australia, ING Direct, Members Equity, National Australia Bank, St. George Bank, B&E Ltd, GE Capital Finance Australia, Heritage Building Society, IMB Ltd, Maitland Mutual Building Society, RAMS Home Loans, Wide Bay Australia Ltd and 56 credit unions. http://www.rba.gov.au/statistics/tables/xls/c08hist.xls

68. RBA website, http://www.rba.gov.au/statistics/tables/xls/c08hist.xls69. RBA website http://www.rba.gov.au/statistics/tables/xls/c08hist.xls 70. RBA website, http://www.rba.gov.au/payments-system/about.html 71. RBA website, http://www.rba.gov.au/payments-system/about.html72. RBA website, http://www.rba.gov.au/statistics/tables/xls/c05hist.xls

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Payment SettlementsArrangements for clearing most payment instruments – cheques, direct entry payments, ATMs, EFTPOS and high-value payments – are coordinated by the Australian Payments Clearing Association (APCA), which is a private company owned by banks, building societies and credit unions. Scheme credit and debit cards (MasterCard and Visa) and BPAY are cleared independent of APCA. APCA administers five payments clearing systems covering cheques, direct debit and direct credit payments, EFTPOS and ATMs, high value and bulk cash, and the COIN Infrastructure System.

Final settlement of obligations between payments providers is undertaken by entries to the providers Exchange Settlement (ES) accounts at the Reserve Bank. Large-value payments are settled one-by-one on a real-time gross settlement (RTGS) basis, while retail payments are settled as a batch on a deferred net settlement basis.

BPAY

Launched in 1997, BPAY was a world first single bill payment system that was adopted across the banking sector. Its objectives were to provide a convenient and secure way for consumers to pay bills and a more efficient collection service for billers and financial institutions. More than 170 Australian financial institutions (Authorised Deposit-taking institutions under the Banking Act), covering approximately 90 per cent of the consumer banking market, belong to the scheme. There are more than 18,000 biller codes that accept BPAY and each month 25.7 million bills worth A$19.2 billion are paid using BPAY. More information on BPAY is available at www.bpay.com.au.

Future TrendsIn December 2008, APCA released its vision for the evolution of Australia’s electronic payments systems, entitled ‘Low Value Payments: An Australian Roadmap’. The report was based on extensive consultations with industry and lays out a high level vision for low value payments in Australia for 2018. The roadmap focuses on cheque and direct entry systems and sets out a series of industry initiatives, including new connectivity of applications to international standards and standard messaging.73

In May 2010, the Payments System Board announced a strategic review of innovation in the Australian payments system. The objective is to identify areas in which innovation in the Australian payments system could be improved through more effective co-operation between stakeholders and regulators. The Board anticipates finalising its conclusions by the end of 2011.

New Technologies

Mobile Banking/Payments

Mobile payments (which include SMS-based stored value services, top ups of mobile accounts and phone bill charges) are at an early stage of adoption in Australia. Most mobile payments are for phone-related products (such as ringtones) or are internet banking payments initiated on a smartphone.

Stored Value Cards

Stored value cards (also known as rechargeable stored value, smart cards or electronic purses) are cards which store ‘rechargeable’ value. Such cards come with various characteristics and degrees of sophistication and are being used in Australia primarily in the form of gift cards, telephone cards, and public transport. Take-up of these cards and other SMART card type applications in Australia has been less than in other countries such as the United States.

A recent entrant to the Electronic Funds Transfer at Point of Sales (EFTPOS) system is Tyro. Tyro provides an internet based EFTPOS solution for credit, debit and gift card transactions on behalf of Australian merchants.

Touch and Go

Touch and Go technology (MasterCard Paypass and Visa Paywave) has recently appeared in the Australian market; it allows for the rapid payment of goods and services by simply touching the card against the terminal. A special chip in the debit card is detected by the terminal. It is limited to transactions with a value below $100. While the lack of verification has created concerns about security, the Commonwealth Bank has reported that 25 per cent of eligible transactions at its 15,000 terminals are now processed using this technology.

73. APCA, Low Value Payments: An Australian Roadmap, December 2008.

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