Annual General Meeting Chairman's Address 03/11/2010

145th ANNUAL GENERAL MEETING
ADELAIDE
By Chairman Robert Johanson

Good afternoon everybody and welcome to the 145th Annual General Meeting of Bendigo and Adelaide Bank. 2009/10 has been a very good year for Bendigo and Adelaide Bank.

The profitability of the business has largely been restored after the turmoil of the financial crisis. Despite the considerable uncertainties in the markets and the continuing severe funding pressures on the banking system, cash earnings per share and dividends per share are now back to the levels of 2007, the year before the crisis.

The total profit of the bank, cash earnings of $291 million, is by far the largest profit ever reported, but the capital base is also greater. We have maintained our conservative position of keeping the capital ratios of the bank well above the minimum levels required. Through the year we issued over 60 million new shares including through an institutional placement and retail shareholder entitlement offer which was strongly supported.

But as a result of our continued investment in the business, even through these difficult periods, its size and robustness is much greater than it was three years ago. We have continued to invest in the capacity of the business, each year opening new branches (22 new branches in 2009/10), investing in technology (you’ll hear more about this later in this meeting), developing new products, investing in the training and development of our staff, all 6000 of them, increasing our investment in our specialist agriculture bank, Rural Bank, and expanding our ability to assist our customers and the communities in which they live and work prosper.

So we believe Bendigo and Adelaide Bank is a much stronger organisation than it was before the financial crisis. Our ability to fund the business almost entirely from our retail base (together with the support of the government for our securitisation of assets through the AOFM) and the low level of bad debts we have suffered even through the worst of the crisis shows the strength of the franchise and the conservative disciplined approach to banking we follow.

The competitive landscape in financial services is now very different to what it was three years ago. It is dominated by the four major banks and many of the other players, regional banks and other intermediaries have disappeared. The opportunities for this bank, we believe, are considerable.

At each of the last two AGMs, I have talked about the necessity to reform the international banking systems to ensure that the lessons of 2008 are understood and that new rules and structures are put in place to reduce the risk of a repeat crisis. Some elements of this new regime are beginning to emerge.

Application of the new rules on capital adequacy and liquidity management, the Basel III rules, are now being debated and implemented. As a result more capital will be required by banks, in particular by those that are judged as being systemically important, that is “too big to fail”.

And all banks will need to hold additional liquidity, so reducing the amount of earning assets. In addition, some risky activity such as proprietary trading will be isolated from the bank’s deposit taking activity or, better still, conducted by companies or funds outside the banking system.

How quickly it will be possible to implement these new rules around the world remains to be seen. Risk will be priced more cautiously as a result and the growth of credit will properly be restricted. But that cuts across the need in many countries to stimulate economic activity so they can begin to grow again to allow them to repay their debts. A credit squeeze is the last thing the economies of Europe and the USA need.

Banks will be lower risk business as a result of the new capital and liquidity rules. So investors should accept lower returns. In pre-crisis days, returns on equity of 20 per cent or more were expected and delivered by banks in Australia and returns to yields like that are still expected and even anticipated by most analysts.

Historically and internationally such returns are unusually high and beyond what one would expect of a privileged, government guaranteed utility which is how some critics would characterise the banking industry after the GFC. Add to that the competitive structure of banking in Australia after the GFC, a structure characterised by overwhelming dominance by a few vertically and horizontally integrated players where rationalisation among them is prohibited and customer switching is expensive.

So it is no wonder that banking is attracting its share of political attention. So now we face a Senate inquiry into competition in banking and calls for another Wallis or Campbell style inquiry into the financial system in Australia. Hopefully a Senate inquiry will articulate better than the current debate what are proper community expectations for the banking system into which so much investment has been made. Hopefully it will not be just a whinge session.

Another Wallis type inquiry we think would also be warranted. It will be better to wait a year or so, until the international rules under which Australian banks will need to operate are clear. And I certainly hope it will have a more ambitious brief than Mr Hockey’s list of nine questions.

For example, one great vulnerability of the Australian banking system is its reliance on overseas funding. Yet we have a pool of savings in superannuation, currently about $1.5 trillion and growing to maybe $5 trillion by 2030, much of which is invested in equities and a lot of that offshore, and surprisingly little in fixed interest or absolute return securities.

In exchange for the tax advantage allowed to such savings, should we require or provide other incentives to induce part of that pool into domestic securities in part to help address that structural savings deficit and to help fund the domestic banks and other essential investments in, say, infrastructure?

Another question: is the risk weighting applied to housing assets on banks balance sheets appropriate? Is a system that provides incentives to lend cheaply for housing in preference to lending for entrepreneurial investment in the long term national interest? And even if it is, how can we better utilise some of the vast store of wealth tied up in housing for other purposes such as funding retirement?

Because of the crucial and privileged role that banks play in the collection of savings and the deployment of risk capital, these are really banking questions and it is important we research them, hopefully away from the day to day pressure of political media.

Another great political debate at present happening in Australia in which we are vitally interested concerns the role and place of the regions. The furious reaction to the report of the Murray Darling Basin Authority is the latest and loudest manifestation of this. The position of the regional independents holding the balance of power in the Federal Parliament means this will remain at the centre of attention, for three years at least.

At this bank, we have been investing in and dealing with the communities in the regions for all our existence. The building societies which were formed over the past 150 years and which are now the building blocks of this company, all were regional societies, all formed by local community entrepreneurs, working within local community structures and markets and legal systems to achieve good social outcomes; not waiting for some huge centrally driven social justice machinery to deliver their rights.

In the Murray Darling Basin there are 69 branches of this bank, 35 of them community owned and operated branches, but all of them informed by the same principles of individual responsibility and community spirit.

If all that occurs out of this new focus on the regions is a shift in the allocation of money; that is, for the next few years more will be spent in the regions than used to be, then the debate will be a failure. What we are looking for is government to establish the building blocks to encourage and to nurture local regional entrepreneurship. Handouts or regional subsidies will only suffocate that spirit.

Finally, let me thank some people. Three people stood down from the board this year: Kevin Roache stood down after last year’s annual meeting after 19 years on the board and Kevin Osborne resigned in December. We thank both of them for all their work on this board.

Jamie McPhee left in January after 21 years of working with the company. He had been the managing director of Adelaide Bank before the merger and he worked hard to help its success. We wish him all the best (and reasonable success) in his new role.

All our staff worked extremely hard this year and showed remarkable commitment to the bank amidst difficult times. To all members of the new executive, congratulations on your new roles and thanks for your work. And a special thanks to Mike Hirst after his first year as managing director: the bank has taken some great strides in maturity and capability in 2009/10 and we look forward to the future with great confidence.

Thank you