Corporate Strategy Weekly Radar Update

Week ending Friday 2 November 2012 (Key event: Storm Sandy in the US) Highlights and Insights Financial Services (an illustration of the range of issues impacting the sector) NAB became the first Australian big4 to post an annual fall in profit since the GFC (over FY12): Reported profit $4.4B (-22% yoy); Cash Earnings $5.4B (-1%); NIM 2.11% (-14bps); BDD/RWA 0.78% (+25bps); C:I 42.8% (-240bps). Results driven by the UK Division (declining margins and rising bad debt charges) and compounded by flat revenue and declining NIM: somewhat offset by better than expected cost management. o Commentators are contrasting NAB's results in the UK with ANZ's Asian fortunes, which echo the current macroeconomic climate. NAB is ruling out a 'fire sale' of its UK assets so now relying on a turnaround there. On the Australian front, the break-up campaign that successfully grew the loan book with cheap rates will also likely stop to refocus on depositors. A positive note for NAB is to become the first Big4 to score over 80% in Roy Morgans customer satisfaction survey since its inception in 1996. Bendigo-Adelaide Bank also posted a 43% fall in net profit for FY12 and MD Michael Hirst used the AGM to pass the message that investors must expect lower returns and moved to reposition the strategy towards customer relationship and 'innovation': "longer term growth objectives than repricing and cost cutting" o Whilst this will be popular with consumers and the community, efficiency measures were still announced during the AGM, indicating a focus remains on certain cost control measures and improving the banks operations and business. UBS are cutting 10,000 jobs globally from a global 110,000 (predominantly in London.), effectively folding its investment bank: one of the most important strategic repositioning undertaken by a global bank in recent period. o UBS are repositioning from Fixed-Income Investment Banking (requiring greater capital) built over the past 20 years, and is returning to wealth management and private banking for high value clients. By 2015, UBS expects to save CHF5.4B annually by reducing costs, up from the CHF2B/year target set last year: meant to raise ROE to 15% from 2015, up from 8.6% in 2011 Executive remuneration: Perpetual saw 11% of shareholders disapprove of the companys remuneration report, down from 26% last year. Recent legislative changes would have seen a board spill with two consecutive years of >25% disapproval. Chairman Peter Scott said they have started to reduce executive pay levels. o This occurred in conjunction with Business Council President Tony Shepherd calling for a realignment of executive remuneration towards incentive based and away from excessive salaries. The board of Elders put its 173-year-old rural services business up for sale: they have a total debt of $450m for a market capitalisation of $110m, which will leave little to the 35,000 shareholders once banks owed $300m and hybrid debt holders owed $150m are repaid. o This is concluding the dismantlement of an iconic brand, after shareholding in Rural Bank was sold to Bendigo and Adelaide, and insurance was sold to QBE. A likely buyer is rural services group Ruralco, which approached Elders on a possible takeover proposal. Collapsed debenture issuer Banksia was cleared by APRA of illegally pretending it was a bank, despite its name and at-call deposit accounts. The majority of victims are regional Victorians customers of this non-bank alternative o The debenture industry has $4.5B of investments despite a string of collapses: since 2007, when ASIC identified 34 issuers of nonlisted, non-rated debentures used to fund property investments, including Banksia, 16 have collapsed. Of the 18 that still operate, 12 do not have enough capital to meet ASICs minimum. Other industries Virgin announced a takeover proposal of Tiger Airways, via a 60% stake still needing regulators approval. o The move could suppress the ultra-low fares (ie. $45 MELSYD flights at 7am). Analysts question whether Virgin will use Tiger as their budget carrier in direct competition with Jetstar: segment they left to move to the business market when they rebranded from Virgin Blue to Virgin Australia. Macro Economy, Politics and Regulation The Asian Century White Paper was released by PM Julia Gillard. It is seen as a return to big picture, vision politics, highlights Asias recent and projected growth over the coming decades, and outlines a set of national objectives to take advantage of the Asian Century: objectives by 2025 include lifting Australia GDP/person into the Top 10 th (currently 13 ), schools in the Top 5, Asian experience on Australian Boards and Asian language education. o This paper echoes Prof Garnault's landmark 1989 report on Australias future in Asia. Whilst agreeing with the new objectives commentators are questioning 1) the lack of implementation strategy and 2) the overestimated Chinas future demand: the lack of popular media uptake is also illustrative of the lack en engagement. The damage caused by Hurricane Sandy could reach US$50B with NYC bearing 34%, Jersey 30% and the rest by Pennsylvania and other states. However to give a sense of the magnitude it is estimated losses will be half of those from 9/11 and from Katrina. o A pattern highlighted in last year's board paper is illustrated: the integration of the economy that amplifies losses. Power outage, fuel shortage and lost economic activity take a particular toll. Moody's gave an interesting range: $US50B will be split between: $US12B in NYC public infrastructure, $US20B from lost economic activity such as meals not served in restaurants, cancelled flights ("and bets not placed in casinos"!), the rest $US30B from property destruction (damage to homes, cars and businesses). o Most of the property damage (~$40B) will be covered by the National Flood Insurance Program (NFIP) which is responsible for almost all flood coverage in the US, and the remaining $10B by private insurers o Analysts do not expect much effect on reinsurance markets, particularly for Australian insurers including IAG and SUN; thanks largely to a well capitalised insurance sector. o Finally, the disaster has also weighted into US politics illustrated by New Jersey Republican Gov. Chris Christie (a staunch critic of Obama) praising the Presidents effectiveness in managing the crisis and materially helping by pushing emergency relief through the bureaucracy. Ultimate outcome to be decided on US Election Day (Tue) Chinese manufacturing growth improved in Oct confirming Sept momentum: highlighted by increases in the state manufacturing Purchasing Managers Index to 50.2 (+40bps) and the HSBC PMI to 49.5 (+160bps). >50 in both indices indicates an expansion in manufacturing activity. o These measures indicate an improvement in the slowing Chinese economy, as the govt continues to ease policy through the period of leadership transition. However the stocks of raw materials sub-index measured 47.3, indicating that manufacturing enterprises are remain cautious and not yet accumulating raw materials.