Annual General Meeting Chairman's Address 29/10/2012

Thank you all for attending the annual general meeting for 2012.

It is now 5 years since we completed the merger between Bendigo and Adelaide banks and 5 years since the start of the global financial crisis. You will remember that it was not for another year that the extent of the problems became apparent and we saw the collapse of funding markets for banks around the world; but it is now obvious, looking back, that the financial markets, particularly in Europe and North America, had become distorted and corrupted with excessive leverage and unsustainable asset price bubbles and that a major disruptive correction was inevitable.

If history is any guide, we have some time to go before this one is over. And as Reinhardt and Rogoff demonstrate in their book on eight centuries of financial folly called "This Time Is Different', it is never that different. These financial crises occur regularly and follow consistent patterns and, as such, we should expect this one to last at least another 5 years and perhaps longer. I was in New York 2 weeks ago and no one I met believed that this crisis is nearly over.

As a result of the merger that we implemented 5 years ago, this bank is now in a much stronger and more robust and resilient condition to deal with the current difficult trading conditions than either antecedent company would have been. Not every business that we had at the time of the merger is still strong: our margin lending book is much smaller than it was and our third party lending business has been shrunk and reengineered to better control credit and risk. And we are still dealing with a few remaining issues: we are very pleased that at last the litigation around the loans to investors in Great Southern’s agricultural managed investment schemes is starting today in the Supreme Court of Victoria.

We find ourselves on some measures the 5th biggest retail bank in Australia with among the highest levels of customer advocacy and staff engagement of any company. The difficult conditions which meant the end of a number of other deposit taking institutions in Australia we have survived, with a clearer more distinctive proposition for our customers and their communities.

The banking industry is experiencing very slow credit growth when compared to the strong growth during the decade leading up to the GFC. To a large extent this is driven by low levels of business and consumer confidence, which in turn leads to a desire to deleverage. It is entirely appropriate that both individuals and businesses seek to reduce debt levels in times of uncertainty.

For example, more than one-in-three of our mortgage holders are making repayments faster than they are contractually required, and are accordingly ahead of their repayment schedule. This is impacting the net credit growth and is a drag on our key lending portfolios.

However, there is still very strong competition in the marketplace, as financial institutions compete for the reduced demand for credit. The industry-wide desire to attract more retail deposit funding has led to heightened competition for retail term deposits in particular. While Bendigo and Adelaide Bank moved early to complete the restructuring of our balance sheet, we continue to need to offer competitive prices for our term deposits. This expensive funding, combined with low absolute interest rates is squeezing the margins of all banks, and we are no exception.

Our strong level of deposit funding, in the order of 80% of our overall funding mix, places us in an enviable position. However, it is important we continue to avail ourselves of a range of different funding options to ensure we can call on different funding sources if necessary. Recent improvements in the pricing of wholesale funding markets allowed us last week to issue $400m of three year term debt to institutional investors at a competitive price. This is the first time we have undertaken a deal of this nature since the merger in 2007. The strong demand for this offer, much of it from institutions in Asia who had never before participated in an issue by us, reflects the strength of our balance sheet and low risk business model in addition to the recent ratings upgrades from S&P and Fitch.

Last week we also completed the issue of convertible preference shares and raised a total of approximately $270 million. With this, we are now compliant with the new capital requirements for banks under the Basle III rules. Thank you to the many current retail shareholders who participated in the offers of these new securities.

In times of low revenue growth such as this, it is important we continue to take a measured approach to generating demand, by carefully monitoring and managing the credit risk we are taking as we provide funding to our customers. We have an excellent record of sound credit risk management. However, in the current patchwork economy, certain industries and geographic regions will experience difficulties from time to time as different industries and different regions make the structural adjustments necessary to compete. Accordingly we will continue to be mindful of managing our credit risks and working collaboratively with our customers to ensure appropriate financial outcomes for them and us.

Around the world banks are trying to adapt to a radically changed regulatory and market environment that has left them with lower returns and much higher capital needs. In Australia the difficulties of this change have been less traumatic because of the mildness of the impact of the crisis here and the already rigorous regulatory structure that we had. Nonetheless there will be significant investment in new capabilities required. Our project to become accredited under the advanced Basle II model will require investment by the bank of tens of millions over the next few years in systems and new skills. And every day, new technologies and devices are adopted by our customers which we must use.

So constant investment in change and innovation will continue. The values by which we aspire to manage Bendigo and Adelaide Bank are long lasting and are not negotiable, but the methods by which we engage with our customers and their communities are changing at a furious rate.

You have seen a lot of change in the board over the past 5 years. Of the 12 people who made up the board on completion of the merger 5 years ago, only 4 are left. During the year Terry O’Dwyer retired. Terry joined on the merger with First Australian Building Society in 2000 and was a great advocate for the business, particularly in his home state of Queensland. He was always a strong and forthright participant at the board and in some of the tense moments that we had over the decade of his service on the board, he was a great help and contributor and we shall miss him.

After my visit to New York that I mentioned earlier, I went on to visit New Delhi in India. Yesterday the Prime Minister launched the report on Australia in the Asian century and on the opportunities for Australia, as the economic centre of the world shifts from the old Atlantic axis to the new Indo Pacific region. The levels of energy and optimism in these countries - not just India and China but also Indonesia and Thailand and many others - are extraordinary and, if Australia engages properly and respectfully, should give us all good reason for optimism for the future.

In that new Australia, we are confident that Bendigo and Adelaide Bank has a significant role to play for our customers, their communities and for our shareholders. We will do it by staying true to the values that have informed this organisation for 154 years.

Thank you.