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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:  D
Market Flag:  N

HOMEX - Melbourne                                                     

Structure of Banking Industry

I would like now to make a number of comments and observations about
the banking industry in Australia.

First of all, let me refer to national prudential considerations. I
think it is fair to say that our banking sector, in conjunction with
sound policies from a succession of Governments from both political
persuasions and from the Reserve Bank, has served Australia well and
reliably throughout the last 50 years.

We take prudential standards and financial stability in this country
largely for granted. Yet recent events in Asia, in Eastern Europe,
and in Latin America remind us that banking sectors do not always
work well for the national interest, are not always reliable, are not
always principled. By all means we should recognise the need for
continuing change in the banking sector and the challenges this
poses. We should recognise shortcomings in the sector and look for
improvements. But let us remember that we have a strong and sound
prudential basis for the banking sector in this country. This is
something we must always maintain and protect.

Secondly, let me turn to the commercial structure of the banking
industry in Australia.

To listen to some, you might think that the banking industry is
archaic and unwilling to embrace change. This is simply not true.

The banking sector has been through more restructuring, more
re-engineering, and more technological change during the last decade
than almost any other major sector of Australian commerce and

There has been enormous change brought about by technology. Do you
remember how, at this time of year not too long ago, we all needed to
rush to the Bank by Christmans Eve to be sure we had enough cash to
tide us over the four day Christmas holiday period? The last decade
has seen the widespread expansion of ATMs, the introduction of
EFTPOS, the proliferation of plastic in the form of credit cards, and
the introduction of telephone and internet banking. Some may fret
about the intrusion of technology into our world, but the
transformation in banking, to the benefit of customers through
providing additional and better services, is very striking indeed.

The industry underwent a major rationalisation, though certainly not
the first, in 1981 and 1982 when it moved from six major banks to
four, Subsequently there was major deregulation of the industry in
the mid-1980s. Since then one of the four major banks has been

Today there is probably little argument that any proposed merger
between two of the major banks would provide considerable cost
savings and shareholder benefits. These cost savings would provide a
powerful reason for the other two major banks to also wish to merge.

However, cost savings and shareholder benefits arising from any such
industry restructure are not the only issues. There are also
important broader community interests which need to be assessed by
the Government in the light of its policies.

Government policy has moved from the "Six Pillars" policy introduced
in 1990, banning mergers between any of the four major banks and the
two leading life assurance companies, to the "Four Pillars" policy
introduced in April 1997. This latter policy prohibits mergers
between any of the four major banks.

The Prime Minister and Treasurer have each recently publicly stated
that they do not see this policy changing until they are satisfied
that competition from new and established participants in the
financial industry, particularly in respect to small business, has
increased. At the same time the Government has hardened its view on a
foreign bank acquiring one of the major four banks.

We accept the Government policy and understand it. It recognises
competitive, community, and prudential considerations and the already
high concentration in the industry. In Australia the four leading
banks hold 64% of bank assets which is a very high level of bank
industry concentration by any international standard. In the United
States, the law prohibits any institution holding more than 10% of
the nation's deposits and in Canada, the Government has just rejected
merger proposals which would have resulted in three rather than five
major banks citing concentration, competition and prudential

There is no point in proceeding down a path, with all the consequent
interruptions to the progress of our business, if there is not a
reasonable chance of a successful outcome.

It is our assessment that considerable changes to the current
environment would be required before there is a reasonable prospect
of a merger in Australia being approved. Accordingly, we believe, it
would be beneficial for the community as a whole to have an assurance
from the Government that the "Four Pillars" policy will remain in
place for a specified minimum period. At that time the policy could
of course be reviewed. By establishing a minimum period in this way
it would provide a more certain environment in which banks can
continue to restructure operations, hire key executives and enter
into discussions with partners for the expansion of business. We
consider such a policy would be in the interests of shareholders.

It may well be that at the end of the specified period the
competitive environment will be conducive to allowing mergers between
the major banks. In that event any proposal will of course, be
assessed in the interests of shareholders and whether it will add
value both in the near and long term.

We believe that an adjustment to the capital gains tax dealing with
shareholders' tax status in mergers involving an exchange of shares
is badly needed. The Government policy of not applying capital gains
tax to the sale of small businesses, provided the funds are
reinvested within a reasonable time in another business, should be
extended to the broader area of share exchanges between publicly
listed companies. This is the position today in both the UK and the
USA. We strongly encourage the Government to review its policy with a
view to granting "rollover relief" from capital gains in transactions
involving share exchanges.

There are many issues involved in any proposed takeover of one of the
four major Australian banks by a foreign bank. The Treasurer has
recently indicated he would need a lot of convincing that a foreign
takeover of one of our four major banks would be in the public
interest. I think the arguments for such a position can be readily
understood. Foreign acquisitions would have the potential to impact
on Australia's national identity, and the Government would need to
give this very careful consideration.

Now I would like to turn to the very important area of customer
service which is a key element of our strategy to increase
shareholder value. Last year, I introduced John McFarlane then our
new Chief Executive Officer to you and he outlined his programme for
the future. I wish to say that the Board is very pleased with the way
John and his management team have handled the difficult times of the
last twelve months. At this year's meeting he is going to focus on
one element, namely, what ANZ is doing to better service its