The rise continues - KPMG...Mutuals Industry Review 2016. November 2016. Join the conversation. #mutuals2016. The rise continues

Mutuals Industry Review 2016

November 2016

Join the conversation

#mutuals2016

The risecontinues

2© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

Document Classification: KPMG Public

Join the conversation#mutuals2016

1 Introduction

2 KPMG Interactive Dashboard

3 Financial results

4 Changes for growth

5 Financial market observations

Agenda


#mutuals2016

Presenter: Peter Russell

Introduction



Residential lending

increased by 9.8%

(2015: 7.9%)

Gross loans and receivables

Increased by9.5%

(2015: 7.0%)

Impairment provisions decreased to 0.07%

(2015: 0.08%)

Operating profit before tax increased 2.7%

(2015: 2.9%)

Non-interest income declined by 0.1% (2015: grew 3.3%)

Net interest income

grew 6.0%

(2015: 3.9%)

Deposits up 7.8%(2015: 7.6%)

Branches decreased by 7 to

820

(2015: 827)


185

Mutual banksof which

Converted in 2016(2015: 2)

7Mergers completed

(2015: 3)



Balance sheets strengthened, with asset growth of 7.8 percent.

Profitability metrics increased, with profit before tax up 2.7 percent to $626 million.

Capital levels decreased to 17.5% from 18.0%.

Looking forward, we see this momentum will continue.

Opportunities to propel growth: Regulatory reform Innovation and digital differences Operational cost leverage

IntroductionMutuals performed very well in an environment of low economic growth, interest rates and inflation.


Growth in lending portfolio

Continued strengthening

of staff

Continued strong credit

risk management

Greater digital

expansion

Increased technology

spend

More interaction with fintech

startups

Positive results in 2016 emerged on the back of…



Introduction: Top 10 Join the conversation

#mutuals2016

Greater$5.7bn

Heritage$8.4bn

Beyond$4.8bn

People’s Choice$7.5bn

NewcastlePermanent

$9.8bn

CUA$13.5bn

TeachersMutual$5.5bn

IMB$5.2bn

BankAus.$4.0bn

P&N$3.8bn



Introduction: Top 10 Join the conversation

#mutuals2016

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000

CUA NewcastlePermanent

Heritage People'sChoice

Greater IMB TeachersMutual

Beyond Bank Aus P&N

Top 10 Mutuals – Operating Profit before Tax

2012 2013 2014 2015 2016

$’000

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

CUA NewcastlePermanent

Heritage People'sChoice

Greater IMB TeachersMutual

Beyond Bank Aus P&N

$'000

Top 10 Mutuals – Total Assets

2012 2013 2014 2015 2016


#mutuals2016Presenter: Zachary Kutlow



1. Industry landscapeJoin the conversation

#mutuals2016



1. Industry landscapeJoin the conversation

#mutuals2016

Click on a fish –each fish is a mutual

Select a mutual



2. Pick a mutual, measure, and ratioJoin the conversation

#mutuals2016



2. Pick a mutual, measure, and ratioJoin the conversation

#mutuals2016

You can also define a peer group by selecting multiple individual mutuals

Select a category of mutuals



3. Pick a mutual and group ofmeasures




3. Pick a mutual and group ofmeasures




4. YoY changes in growth metricsJoin the conversation

#mutuals2016



4. YoY changes in growth metricsJoin the conversation

#mutuals2016

Define a peer group by selecting multiple individual mutuals



5. YoY performance in key ratiosJoin the conversation

#mutuals2016



5. YoY performance in key ratiosJoin the conversation

#mutuals2016

Define a peer group by selecting multiple individual mutuals



6. Growth in assets and members Join the conversation

#mutuals2016




#mutuals2016



2012

2013

20142015

2016


#mutuals2016



KPMG PowerBI DashboardJoin the conversation

#mutuals2016

Financial Results


#mutuals2016Presenter: Peter Russell



Assets and asset quality Total assets increased by 7.8 percent (2015: 7.6 percent) whilst the major banks fell 2

percent (2015: 9.7 percent). Impairment provisions fell by 1.2 percent to $53 million (2015: $54 million).

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

40,000

45,000

50,000

55,000

60,000

2012 2013 2014 2015 2016

Impairment Provisions

Provision

Provision as a % of Gross Receivables


-5%

5%

15%

25%

35%

45%

- 5,000 10,000 15,000

Growth in Total Assets (%)

Total Assets ($m)

Size vs Growth in Total Assets 2016

Top 10 Mutuals excluding top 10 Line of best fit

$’000



Deposits

Total deposits grew 7.8 percent (2015: 7.6 percent) Top 10 deposits increased 8.4 percent (2015: 8.1

percent). Composition of funding unchanged:

84 percent retail (2015: 84 percent)16 percent wholesale (2015: 16 percent)

0%

2%

4%

6%

8%

10%

12%

2012 2013 2014 2015 2016

Growth in deposits

Top 10 Mutuals excluding top 10

Capital

Average capital adequacy ratio for total mutualsdecreased to 17.5 percent (2015: 18.0 percent).

Top 10 decreased from 16.3 percent to 16.2 percent. Slight decrease by the mutuals indicates improved

efficiency.


4%6%8%

10%12%14%16%18%20%

2012 2013 2014 2015 2016

Average Capital Adequacy Ratio

APRA minimum capital requirementMajor banksTop 10Mutuals excluding top 10



Income

Net interest income increased 6% 65 percent of net interest income was

earned by the top 10. Net interest margin declined to 2.14 percent

(2015: 2.18 percent).

Non-interest income was down 0.1 percent increase from last year at $555 million


2.00%

2.05%

2.09%

2.14%

2.18%

2.23%

2.27%

2.32%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2012 2013 2014 2015 2016

Net interest income and net interest margin

Top 10Mutuals excluding top 10Net interest margin (%)

220,000230,000240,000250,000260,000270,000280,000290,000300,000

2012 2013 2014 2015 2016

Non-interest income

Top 10 Mutuals excluding top 10

$’000$’000



CostsTotal operating expenses increased by 3.4 percent to $1,946 million (FY15: $1,883 million).Average cost to income ratio for all mutuals decreased to 74.8 percent (2015: 75.7 percent).

Composition of costs - 2016


0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016

Cost to Income Ratio

Major banksTop 10Mutuals excluding top 10

49%Personnel

31%Other

7%Occupancy

7%Technology

5%Dep’n



ProfitsJoin the conversation

#mutuals2016

Total profit before tax for the sector was $626 million, up 2.7 percent.

Top 10 grew 5 percent (2015: 3.5 percent).

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2012 2013 2014 2015 2016

%$'000

Profit before tax

Top 10 Mutuals excluding Top 10

Growth in profit before tax-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

- 5,000 10,000 15,000

Growth in Operating Profit

After Tax (%)

Total Assets ($m)

Size vs Growth in Operating Profit Before Tax 2016



Z-Score Performance AssessmentJoin the conversation

#mutuals2016

METRICS

Member Growth (%)

Capital Adequacy ratio (%)

Cost to income ratio (%)

Provision for doubtful debts (%)

Deposit growth (%)

Gross Loans and Advances growth (%)

FINAL RANK


#mutuals2016



Changes for growthJoin the conversation

#mutuals2016

The sector continues to be a source for productivity

The 10% investment property lending growth cap has slowed loans to investors and held back growth opportunities.

All ADIs

$500bn

Mutuals$20bn

Other ADIs$480bn

Residential investmentlending in 2016

All ADIs

$50bn

Mutuals$2bn

Other ADIs$48bn

Growth at 10%

1% marketshare of totalinvestorlendinggrowth




#mutuals2016

Senate Inquiry into Co-operatives and Mutuals

Report issued in March 2016 17 recommendations, 6 of which relate to Capital and Regulation, and we consider these to

be key priorities

Capital

• Currently, mutuals hold additional capital over regulatory minimums

• Holding capital levels consistent with larger competitors at ~13.5% would increase loans by ~$25 billion

This would lead to… $375m additional profits assuming a

1.5% spread 60% in profitability 25% increase in size

Regulation

• Reducing regulatory burden aligned with government’s public commitment to reducing red tape by $1bn each year

• Improving competition so all players have a fair-go, regardless of size




#mutuals2016

We see a number of quick wins that could be achieved with potential regulatory changes.

Highlighting some of these ideas:

1. Simplifying regulatory rules, responsibilities and audit requirements

2. Allowing all ADIs to call themselves banks

3. Simplifying taxation arrangements

4. Allowing the strength of the sector to be analysed from a collective view

Presenter: Vic Jansen



Volatility in markets – 2016 started with a slippery slide

Stock Markets— China’s Shanghai Index finished January 26% lower than December.

— In the US, the Dow and S&P500 were down 8.5% and 8.1% respectively.

— Meanwhile in Japan, the Nikkei slumped 12%

— Locally, the All Ords and ASX200 were down 6.8% and 7% respectively.

Commodity Markets— Oil has been a major driver for commodity markets, with a supply glut, Iran

production back on line and low global growth all contributing to the price drops to commence the year and the volatility since.

— Most bulk and base metals were again under price pressure, with lower forecast demand, particularly from China, representing the major contributor to the price falls.

— As global stocks tumbled, precious metals gained friends, with Gold the standout performer rising rapidly in a risk aversion environment.

Interest Rate Markets— Australian Interest Rate Swap yields fell, with the 3yr some 0.25% lower in

early 2016.

— Negative yields take hold globally, with approx. one third of global bonds in negative yields territory.

— Australian Corporate Credit markets widen in early 2016, due to equity market turbulence, however the flight to sovereign bond credit narrows spreads there.

Foreign Exchange Markets— The Australian Dollar has traded a five cent range against the US

Dollar so far in 2016, as global influences take hold.

— The Japanese Yen has been jolted in both directions, following the shock BOJ actions in late January.

— The Great British Pound has been weaker, with uncertainty surrounding EU membership weighing.

— The Chinese Yuan has been under heavy pressure, with significant defence by the PBOC.

Central Bank Actions— European Central Bank (ECB) seeks to review stimulus measures

in March, however in the meantime, ECB President Draghireiterates a firm stance.

— Peoples Bank of China (PBOC) continued to add to currency market volatility with its daily Yuan fixings, attempting to curtail the impact of market forces by injecting extra liquidity in an attempt to combat capital flight.

— Bank of Japan (BOJ) adopts a negative interest rate stance, in a bold attempt to fight off deflation and slowing external demand.

— The US Federal Reserve, after a small rise to the Fed Funds rate, maintains a firm stance to the balance of 2016 with its monetary policy settings, albeit with no further changes in light of continuing soft inflation.

Do you remember how the Financial markets started this calendar year?




Approach taken to draw opinionsComment

During our analysis we have applied a number of generally available technical analysis tools, in conjunction with applying the overall experience of individuals within the KPMG Corporate Financial Risk Management team.

Both Thompson Reuters and ICE SuperDerivatives data and tools have been utilised for the analysis, as part of our KPMG (FAS) subscription services with these service providers.

There are numerous technical analysis approaches, methodologies and tools available with which to draw from, however we have maintained a consistent approach across all of the markets that are being discussed today.

A combination of wave analysis, made popular by RN Elliott, in conjunction with retracement/extension analysis, commonly used although identified by the mathematician Fibonacci, as well as time period analysis, derived by some of the theory in work by WD Gann.

Various other techniques including, but not limited to, noted patterns, such as double bottom, trend channels, resistance and support zones.

Below are some links to freely available information, should you seek further information on any of these analysis components.

Elliott Wave Principal

— http://www.elliottwave.com/info/elliott_bio.aspx

Leonardo (Pisano) Fibonacci

■ https://en.wikipedia.org/wiki/Fibonacci

■ https://www.mathsisfun.com/numbers/nature-golden-ratio-fibonacci.html

William Delbert Gann

— https://en.wikipedia.org/wiki/William_Delbert_Gann

Technical Chart Patterns

■ http://www.investopedia.com/university/technical/techanalysis8.asp

Technical analysis approach:


http://www.elliottwave.com/info/elliott_bio.aspx

https://en.wikipedia.org/wiki/Fibonacci

https://www.mathsisfun.com/numbers/nature-golden-ratio-fibonacci.html

https://en.wikipedia.org/wiki/William_Delbert_Gann

http://www.investopedia.com/university/technical/techanalysis8.asp


#mutuals2016

Currency

Long term price indicators



Australian Dollar v’s US DollarAustralia

— The RBA lowers and maintains the official cash rate at an all time low of 1.50%.

— AUD completes a major cyclical 5 Wave down trend from 1974 through until 2002, which incorporates the 1983 floating of the AUD.

— A 5 Wave retracement ensues, taking AUD, post the GFC, through to 1.1080, which was a major golden Fibonacci ratio (61.8%) retracement of the entire 1974-2002 down trend.

— The AUD then began a new 5 Wave fall, stopping so far at 0.6820, which has pierced the downward golden ratio by around 3 cents.

Source – Thompson Reuters









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2

3

4

5Source – Thompson Reuters








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2

3

4

561.8% Retracement of 1974-2002 down trend









1

2

3

4

5









Potential Technically Forecast outcomes Following the current completion of the 5 Wave sequence at 0.6820, the AUD begins a correction phase back towards 0.8000 or higher. Based on US Dollar Index read, the potential strength of the US Dollar may then turn the AUD lower, with the 0.6820 low becoming the

end of Wave 3 (and not Wave 5 as currently marked) thus encouraging a further down leg in AUD to complete the trend from 1.1080. In either scenario on the Wave count, the favoured position is for AUD higher in the first instance.


– Itraxx update– Have we seen a turn on global

benchmark bond yields in 2016?


#mutuals2016

Volatility (Credit)



Credit Spreads – Itraxx UpdateCredit

— Increasing risk sentiment, as global outlook weighs and stock indices tumble in early 2016.

— Credit spreads spiked dramatically as the onset of the GFC loomed, following a long hibernation period prior. A 5 Wave sequence is easily observed from late 2007 through until 2009.

— An initial 5 Wave correction into 2010 before what appears to be a broader A, B, C correction from 2010 currently. The B Wave completes in a double bottom formation at 80bp before moving higher.

— A smaller rising trend within Wave C follows, so far reaching the Fibonacci golden ratio 61.8% of the earlier 2012-2015 down move.










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2

3

4

5










C?

A

BDouble bottom noted at 80bpSource – Thompson Reuters









61.% Retracement










Potential Technically Forecast outcomes With the initial retracement target of 169bp met (from the 2012-2015 B Wave down), a short period of consolidation lower may ensue. Once this consolidation phase finishes, a break higher is favoured to complete the A, B, C formation. Potential target zone for the

Wave C completion lies in the 255-295bp window.





Benchmark Government Bond Yields: Have we seen the turn in 2016?

Consistent Technical Themes— Nearly all Benchmark Bonds corrected in an A, B, C Elliott wave correction in Mid 2015, before again turning lower.— A 5 Wave down in yields was the favoured view in early 2016, with all Benchmark yields having pushed to new lows in August 2016 on that

basis. — We appeared to be in the Wave 3’s (of the Wave 5’s sequences), so we did see an up move stage into May for the Wave 4’s, before a final

push lower.

Source – ICE Superderivatives




Consistent Technical Themes

■ Following the recently viewed completion of the Wave 5 downtrend across nearly all Benchmark Bonds, a significant shift may be noted.

■ All Benchmark Bonds moved back into positive yields. Is this the early stages of bull run in yields?






3

4

5

Consistent Technical Themes

■ Following the recently viewed completion of the Wave 5 downtrend across nearly all Benchmark Bonds, a significant shift may be noted.

■ All Benchmark Bonds moved back into positive yields. Is this the early stages of a bull run in yields?


2

1



– A long & winding road– Does history teach us anything?


#mutuals2016

The US Dow



The US Dow – a long & winding roadDow Jones

— Increasing risk sentiment, as global outlook weighs and stock indices tumble in early 2016, before the Dow posts a new high.

— With one of the longest data sets available we have the opportunity to view major wave sequences over 116 years.

— Two major 5 Wave multi decade trends may be noted into 2008 prior to the GFC, which also included the 1929 crash and subsequent Great Depression.

— The GFC produced a sharp freefall, a little lower than 50% retracement of the entire 75 year 5 wave trend.

— A new Wave 5 is currently well advanced since commencing in 2008, with the early 2016 falls confirming the Wave 4. A new high has been achieved, although the Wave 5 is not yet confirmed as in place.





Dow Jones







511

2

3

4

5

Join the conversation#mutuals2016The US Dow – a long & winding road




50% Retracement


Dow Jones








Source – Thompson Reuters 3

4

2

1


Dow Jones








Potential Technically Forecast outcomes The Dow Jones appears in the latter stages of its multi decade bull run. Given the long time frame to complete thus far, there may be quite

some time to fully develop the final stage. Standing back, a larger Wave 5 in totality may be observed, Wave 1 1800’s-1929, Wave 2 Great Depression, Wave 3 1933-2008, Wave 4

GFC, Wave 5 2009-Current (with 3 of 5 inside waves having already completed). A potential scenario, whereby the Dow corrects lower initially before attempting to make a new final high is starting to shape up. Volatility is

anticipated to heat up during this final phase of this long 120 year cycle.



Dow Jones








Does history teach us anything?Dow Jones

— With the benefit of modern analysis tools we can dive deeper into the study of the times, and whilst on a long chart the 1920’s appear insignificant, this time period snapshot highlights some interesting observations.

— The roaring 20’s gave us an early glimpse of a major bull market in stocks, with the Dow rising some 500+% from 1922 – 1929, a mere 7 years.

— Following the crash of 1929, the Dow eventually settled back at the level from 1904, nearly 30 years early. The speed at which the fall occurred ie. 3 years tipped global economies.

— Following the Great Depression and World War 2, The Dow took until the mid-1950’s to retrace the market high put in place back in 1929. This timeframe also marked the start of the baby boom.









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4

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#mutuals2016

Presenters:Peter Russell | 02 9335 7731 | [email protected] Kutlow | 02 9346 5406 | [email protected] Jansen | 08 9263 7284 | [email protected]


#mutuals2016

Please contact the KPMG Mutuals Survey mailbox at [email protected]

Please remember to enable macros when using the dashboard.


kpmg.com.au

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

Vic Jansen

Associate Director, Advisory

Corporate Financial Risk Management

KPMG

[email protected]

Peter Russell

Partner, Audit and Assurance

Financial Services

KPMG

[email protected]

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The rise continues - KPMG...Mutuals Industry Review 2016. November 2016. Join the conversation. #mutuals2016. The rise continues