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Chairman`s & CEO`s Address to Shareholders

Document date:  Mon 21 Dec 1998
Published:  Mon 21 Dec 1998 00:00:00
Document No:  144153
Document part:  C
Market Flag:  N
Classification: 

HOMEX - Melbourne                                                     

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RISK MANAGEMENT

First to risk management. In addressing this, let me answer two
questions that I am sure are on shareholders minds: What happened and
what have we done about it?

Looking back 1998 was not a normal year by any stretch of the
imagination. As the year started, the Asian Crisis began to unfold,
and this has turned out to be one of the most severe economic
problems that the world has encountered in the post-war period. ANZ,
through its long established international franchise was naturally
affected. Over the last decade, ANZ has played a major role in
supporting the drive into Asia by Australian companies. As a result,
million during the year.

Additionally, for a decade, we have had a substantial business in
trading emerging markets bonds, out of our London dealing room. The
financial crisis in Asia spread to Russia and subsequently to other
markets. The JP Morgan Emerging Markets Bond Index fell by some 36%.
Russian Bonds, hitherto one of the most actively traded securities in
the emerging markets, fell by 85%. These were amongst the largest
financial collapses in recent history.

Prior to this, our portfolio of emerging market bonds was around
US$600 million or 0.7%of total assets. In the 10 years prior to this
year we generated some $270 million in pre-tax profits from trading
in emerging markets bonds without a single year of losses. However
this year, as market prices collapsed and market liquidity dried up,
trading losses of $188 million were incurred.

The scale of the losses was the result of unusually large market
movements and a general decline in market liquidity. This restricted
our ability to sell the portfolio. Our own risk management processes
are sophisticated, and in line with other international banks who
engaged in this business. They include value at risk limits,
cumulative loss limits, and stress testing. Whilst these tests
indicated that sizeable losses were possible in extreme
circumstances, the magnitude of the event was neither foreseen nor
expected, by ourselves, nor by other major participants.

We did take action however, to reduce our potential losses by acting
quickly and decisively, once the significance of the situation became
clear:

* We established a special Asian risk team early in the year to
  manage down our exposures. As a result our total exposure to the
  region was reduced by 47% in US dollar terms during the year.

* Credit approval procedures were changed and managed centrally so we
  could continue to provide trade finance to franchise customers while
  reducing non-core assets.

* International lending guidelines have been tightened. Greater focus
  is being given to; growing lower risk trade assets, the area of our
  traditional strength; building our foreign exchange business and
  supporting the needs of our network customers.

* In July, after the initial weakness in Russia bonds we made the
  decision initially to exit all proprietary trading activities across
  the group, and subsequently to exit from the London Capital Markets 
  business. We had made considerable progress in reducing our 
  positions prior to the market collapse. The residual portfolio was 
  written down to the market value of US$138 million as at 30 
  September.
 
* We scaled back individual customer and country policy limits, and
  are more actively managing industry risk concentrations.

* We are also relocating the headquarters of our Investment Banking
  business from London, back to Melbourne. This will enable more 
  direct control and direction.

The Bank now has a lower risk profile going forward. Whilst further
provisions from Asia can be expected in 1999, we expect they will be
significantly below 1998 levels.


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