Corporate Strategy Weekly Radar Update

Week ending Friday 12 October 2012 (Snapshot: a potential housing 'bubble'?) Highlights and Insights Financial Services IAG are partnering with TAL (4th larger Life Insurer) to sell life cover directly to NRMA customers. A return to Life for IAG after the sale of ClearView to MBF in 2003 for $220m. o IAG say the identified existing policy-holders' desire for a wider range of products under the NRMA brand, including life cover. It is also happening in the context of identified underinsurance of Life cover in Australia: numbers are debated but it estimated to cost taxpayers more than $250m/year in extra social security payments after the deaths of parents with limited cover. These elements also drive SUNs strategy of underwriting life risks through direct GI brands, such as Suncorp, AAMI and APIA. Steadfast, largest insurance broker cluster group in Australia with 277 member brokers and $2.5B in premiums a year is preparing for an IPO in may 2013. In order to strengthen their management they have appointed former QBE CEO Frank O'Halloran as chairman of the board, after QBE removed previous restraint of trade clauses which prevented him from joining other insurance companies. o Their model is based on brokers negotiating wholesale rates with major insurers. This signals that local broker groups are proving to be strong against the international brokers and that further consolidation in the channels may be plausible in the next period. o A 2nd insight is that the architect of QBE is not only leaving as CEO but also from the Board, reinforcing observers' questions on the opacity of a system built from 120 acquisitions in 12 years. Dismissed speculations that RBA governor Glenn Stevens could be a candidate as new head of the Bank of England in a context where Reserve Banks have been pushed into assuming the role of super regulators beyond the mandate of containing inflation. o A change of the RBA head would be sensitive in the current period, and a reminder that Central Banks weight does not just come from monetary policies (ie. Setting cash rate, Quantitative Easing) but also from guidance language, a topic so important that it was tabled this year at Jackson Hole with the argument that "QE works best as a form of guidance" (Recommended further read http://pear.ly/oAM4y ) BOQ added a further $15m to the collective provisions pool and bad debts for the H2 that reach $75m. o BoQ CEO Stuart Grimshaw suggests this is a consequence of timing: majors allocated significant loan provisions early in the crisis to reflect their holdings of stressed corporate commercial debt (exposure BoQ didn't have). The residential and small-tomedium enterprise weakness came later. Westpac continue poaching senior management: CBA's David Lindberg (behind the online payment app Kaching) joins as chief product officer in WBC's recently created Australian Financial Services (AFS) division. He follows the defection of Jason Harries from ANZ to Westpac to head strategic marketing. o Westpac has been under pressure to articulate a strategy and recently shifted from multi-branding (St George, Bank of Melbourne) to concentrating on cross sell in AFS which houses the bulk of the domestic retail banking and wealth businesses. News Ltd tabloids published performance tables which highlighted the poor results of major superannuation players BT, AMP, AXA, MLC - over the past 10 years, with annual yields of their default funds between 2.5%-4%. o It is likely that those default funds had too much exposure to shares which have not performed as well as bonds or property; and those companies have other funds that did better. Financial Services (ct'd) o However this is increasing pressure on those listed funds on two fronts: 1) the better performance of industry funds over the same period, 2) the rise of Self-Managed Funds, which now make up 35% of the market and could reach 50%. Other industries BHP placed $1B in 5-year bonds in the domestic market on Tuesday, priced at 90bps above the bank rate, compares with the 120bps paid by banks on wholesale markets. o The deal boosts the total of non-financial corp bond issuance by 30% from 2011, filling the space left by banks due to increased capital requirements and higher wholesale costs. Australian retail investors also have gained access to the $146.7B Islamic Bond market for the first time through a deal between local Islamic wealth manager Crescent Wealth and its partner the Bank of London and The Middle East o Global Islamic banking assets exceed $US1T and are forecast to grow to $US2T by 2017: another example of the increasing diversification on the Australian Bond market Australian Post is planning to invest $2B to transform from a mail to a parcel business, including a new service Digital MailBox based on Telstras cloud (and following a previous $400m acquisition of StarTrack Express). o Post illustrates how digital is disrupting incumbents: Australians shop online half the rate of other Westerners, leaving room for growth. Post is now a 3 speed business: growth in Parcels (+24% since 2008) and Express, while Mail is shrinking (-17% since 2008). However, observers question Digital MailBox (ability to receive mail/parcels, pay bills, digital vault) as 'a good idea' done before (Computershare's Digital Post, the Banks' BPay) therefore a risky investment. Virgin queried the competitive benefits of the QANTASEmirates alliance in a submission to the ACCC. Whilst not opposing the deal, Virgin highlighted higher airfares and reinforcement of QANTAS dominance as a likely result. o Illustrates the ongoing contradiction faced by the ACCC between a mandate to boost competition vs the reality to 'protect' national champions (4 pillars in Banking, etc) Macro Economy, Politics and Regulation Treasury chief Dr Martin Parkinson provided some perspective on Australia's outlook and believes mining will expand from 5% of the economy 10 years ago to 10-12% in the coming decades. For him the debate is not about the end of the boom, but on the sustainability of the tax system. o Treasury believes the Mining boom is just the 1st wave of change arising from the Asian century, next comes the rural boom as global demand for agri surges, and the 3rd third wave being the global growth of the middle class from 0.5 billion to more than 3 billion souls. (more in a next radar) US Unemployment fell to 7.8% in Sept (8.1% Aug), beating expectations of a rise to 8.2%. Meanwhile, Australias job ads fell for the 6th consecutive month and Unemployment rose to 5.4% in Sept (5.1% Aug) due to a rebound in the participation rate, which increased from 65% to 65.2% Analysts expect further unemployment rise (5.5-5.7%) therefore further RBA rate cuts Finally Europe's Franco-German divisions materialise in the commercial world with the failure of the EADS BAE merger, divisions the EU's Peace Nobel Prize is trying to exorcise...

Snapshots of the week: A potential housing 'bubble'? After last week's snapshot on the transformation affecting the Australian car industry (cars being the 2nd biggest assets average Australians will ever buy), this week is looking at the biggest asset that average Australians will ever buy: property. Some analysts believe a housing 'boom' is looming even causing sensationalists media headlines such as "the mining boom ends, the housing boom begins" Despite the immensity of the land, Australia is an incredibly urban society Australias population is highly concentrated in urban centres: the 5 largest capital cities of Sydney, Melbourne, Brisbane, Perth and Adelaide, each with over 1 million people, account for more than 60% of the total Australian population. In contrast, almost 70% of Europes total urban population live in medium and smaller sized cities of fewer than 500,000 people. Consequently such a high density population concentrated in so few cities causes tensions on the supply of housing despite the available land. 60% of the population in 5 cities over 1m people Population distribution, Australia, 2008 (Red dots: areas with population density over 117 persons per Cities >3m 39% of total population square km, which is also the average population density in France) Rest of Australia 25%

61% Cities 100-250k 6%

Cities 250k-1m 8% Cities 1-3 million 22%

>60% of the population

Source: State of Australian Cities reports 2010 and 2011

This is causing Housing availability to reach record shortage Dwelling Approvals are at a cyclical low Dwelling construction is at a cyclical low (the cycle averages 5 years in duration). Adjusted for population growth, home building is actually near 30 year lows. This suggests a shortage of dwellings, which is generally corroborated by industry bodies' research. The government National Housing Supply Council and ANZ estimated current shortage between 214,700 and 240,000 dwellings in 2011, projected at 328,800 to 440,000 by 2015. Whilst there is a debate on the vested interests behind research warning of an "absolute" housing shortage, almost all parties at least agree that Australia does have an "affordable" housing shortage. For instance Goldman Sachs estimate that with just 1 further RBA rate cut completions are forecast to rise to 175k by 2014, which still won't match demand. Source: Goldman Sachs This projected housing growth is further supported by demographics trends After virtually no growth in 15 years to 2006 in the 25-34 cohort households Household Growth by Age Group, Average annual % growth growth is now expected in the 20-34 cohort over the next decade Household Growth by Age Group, Average annual % growth

So there is potential for the housing sector to even pick up some of the growth currently in mining over the next years, with some risks... Approvals have responded in all economic climates to rate cuts APRA and the RBA have recently suggested that they are already warning banks to maintain credit standards to avoid a US-style lending surge. Change in building approvals Former RBA board member Warwick McKibbin also argued that the transfer and interest rates of a bursting bubble from the commodity boom into a bubble in the housing market", creates magnified risks: what we saw in the US and Europe in the last 15 years. The risk of central banks cutting rates to a level near that Treasurer Wayne Swan described 3 years ago as unsustainable 50-year emergency lows has been seen in Switzerland and Canada that have a combination of high exchange rates and low cash rates, the later to help decrease the strength of their currencies - which ended up droving up property prices. Canada responded by forcing banks to tighten lending standards. o Globally this balancing act of central banks practicing Easing Policies (lowering rates, injecting liquidities) vs the Risk of Price Bubbles is expected to characterise the near term outlook: successions of "mini-cycles" of policies and market responses swinging between contraction and expansion, instead of a full recovery until systemic imbalances get resolved