Tier 3 Banking in Australia

TIER 3 BANKING IN AUSTRALIA WILL THE REAL CUSTOMER CHAMPIONS PLEASE STAND UP? Sustaining competitiveness will be dependent upon developing successful management strategies, but also upon dispelling any public sense that the mutual building societies are weaker in corporate structure or governance than the societies that have converted to public limited company status.

The identity, confidence and integrity of mutuality has to be re- established. Reconceptualising its mission will be a vital part of any mutual society’s survival strategy.

David Robinson of the Scottish Provident put the fundamental questions every mutual society is now confronting: Its attitude to mutuality will be crucial. Is it comfortable with its constitution, or does it feel itself to be an anachronism in the contemporary commercial environment? Does it believe that its special relationship with its members gives it an advantage, or is it simply making the best of what it sees as an outmoded and limiting corporate structure? In short, is it happy with what it is?

Extract from “In defence of mutuality”, Thomas Clarke, DBM Professor of Corporate Governance at Leeds Business School (2008). While written about the mutual sector in the UK, the messages are equally as important and true for Australia today. CONTENTS

INTRODUCTION 4

1. OUR PERFORMANCE ASSESSMENT: ARE MEMBERS BENEFITTING? 6 1.1. Assessing performance 6 1.2. Valuing mutual returns 10

2. ARE MANDATES WORKING? 14 2.1. Are mutuals delivering on their original purpose? 14 2.2. Is the value proposition as articulated today sustainably differentiated? 16 2.3. How effectively are existing mandates implemented? 18

3. FUTURE SCENARIOS 20 3.1. The path to greater cooperation and consolidation 21 3.2. Moving along the ownership scale 22

4. CONCLUSION 25

5. APPENDICES 26

6. BIBLIOGRAPHY 30

Created as much to solve a social as a financial issue, in a world where banks limited credit and membership was local, Australia’s mutual organisations were built on, and still enjoy, a reputation as the friendly banking alternative. But after a century since mutuals came into existence, do they still provide a better deal for their members than banks? If so, can they maintain their relevance, and should management, boards and regulators be held more accountable for ensuring they deliver on their mandates?

Mutuals possess the distinguishing characteristic of being owned by, and run for the benefit of their members. They vary radically in size, geographic and sometimes industry focus, but their constitutions are tied by a common purpose centred around member and community benefit; each member who satisfies the voting member criteria1 holds one vote, regardless of investment level. This common legal ownership structure and socially-based value proposition enable the mutuals – comprising building societies, credit unions and mutual banks – to collectively present themselves as a “sector” (Tier 3) in their own right.

But how material a player are they in the Australian market? Tier 3 today accounts for just 3% market share of assets. Despite efforts to enhance competition, and a general reduction in public trust in major financial institutions, the relative shares of the four major banks (Tier 1), regionals and direct players (Tier 2), and the mutual sector have not materially changed. Indeed the mutuals share of assets has declined over time, suggesting that the sector’s value proposition is not as attractive as one might expect, especially given the ‘anti- major bank’ mood of the post-crisis world. The sector does however remain a significant part of the retail banking landscape; with 11% of Australian household deposits, across more than one hundred institutions, it claims aggregate membership of approximately 4.5 million people2.

Without the profit margins demanded by shareholders, mutuals should be able to provide better product pricing for their members, which ought to be a powerful platform for competition. Indeed in Australia, as in other countries with a vibrant mutual sector, Tier 3 institutions advertise among the most competitive mortgage and deposit prices on the market. However, this deal is not always as good as it might appear, nor convincing enough to drive significant change in consumer behaviour. Why then have the mutuals not gained new business market share in an environment of emotive public and governmental backlash against major financial institutions, when their published3 pricing is so apparently competitive?

A key observation is that advertised rates are just that; online rates are often cheaper, and major banks commonly discount substantially from their advertised rates (indeed many are now advertising these discounts), with the result that the actual differential between discretionary discounted rates from the banks and mutuals are often quite modest and frequently in favour of the major bank customer. Many mutual members can therefore get a better deal elsewhere.

1 Voting membership is typically based on tenure of a few months and investment of at least $250 – $500 2 Abacus “Key Fact Sheet” March 2012 3 See for example the advertised standard variable rates for mortgages. In writing this report, we have attempted to draw on the widest possible range of information, including published reports, academic research and our own primary research. Data is an important constraint on the depth of analysis that can be undertaken. Where possible we have, therefore, supplemented quantitative data with qualitative information obtained from interviews and market experience

Copyright © 2012 Oliver Wyman 4 Moreover, the economics are badly skewed; depositor members are in effect subsidising borrowers. Whilst this might suggest that the Tier 3 proposition should attract more borrowers than depositors, the reality is that institutions relying on retail funding must by definition ration credit – and pricing needs to reflect this. The banks, in contrast, also have access to wholesale funding markets – over the longer term this may better position them to attract borrowers meeting their credit criteria.

So whilst the 3rd Tier makes an important contribution to banking in Australia, many of the remaining players in the sector (with the notable exception of a handful such as CUA and ME Bank) have arguably stagnated in what should be an era of growth and prosperity. In this report, we examine the deal that members are getting and the reasons for this, and offer a number of potential future scenarios for the sector, drawing observations from other markets. In particular we make reference to the UK mutual sector which, during the 1980s and 1990s, saw some mutual organisations retain but successfully transform their mutual business models, whilst others transformed their operations through loosening the bonds of mutuality.

Oliver Wyman’s recommendations for the sector in Australia echo those made in our joint EACB report issued in Europe in 20084: a vibrant mutual sector needs institutions that genuinely champion the customer, address agency issues head on through clarification of membership and simplification of voting rights and control, enhance efficiency in terms of capital retention and cost, and create a compelling proposition evidenced by renewed growth.

4 See bibliography for a link to the report

We know that the sector has not been substantively growing. But is this a value or communication issue? Our assessment of the sector starts by focusing on whether the sector is providing value, perceived or quantifiable.

Before assessing the financial and non-financial benefits of mutuality, it is worth noting that whilst we focus our attention on the outcomes for members as owners, there are several other actors in the mutual sector, including members as customers, mutual management and boards, and regulators. Although historically the interests of these different groups were closely aligned, growth and opening of membership has increased the potential for conflicts of interest, both within and between these groups.

1.1. ASSESSING PERFORMANCE

Whilst we acknowledge that for some mutuals membership is seen as a political statement of disapproval of perceived capitalist greed by banks rather than a hard-headed financial choice, many customers do choose a financial service provider based on economics alone – at least before inertia kicks in. Yet even for those who choose based on economics alone, non-financial considerations (including practicalities of customer service and access) do matter over time. Mutual organisations have taken advantage of this by appealing directly to the non-financial objectives of customers, claiming to deliver outstanding service, competitive choice and community benefits, as well as positive returns to members. We assess performance therefore against both financial and non-financial dimensions: •• Service: as measured by customer satisfaction data relative to their banking counterparts •• Competitive choice: whether the mutuals are providing a genuine alternative to the listed sector with a sufficiently differentiated value proposition •• Community benefits: the extent to which communities served by mutuals benefit directly through community outreach, charity and inclusion programmes •• Pricing and member equity: how competitive mutual product pricing is, and the extent to which different member groups enjoy an equitable share of the benefit

SERVICE Customer satisfaction is a rare bright spot and the only dimension on which the industry outperforms the listed sector, a pattern consistent with the UK.

CUSTOMER SATISFACTION AUSTRALIA* % CUSTOMER SATISFACTION UK† % ROY MORGAN RESEARCH CUSTOMER SATISFACTION FINANCIAL RESEARCH SURVEY SURVEY 6 MONTHS TO JANUARY 2012 6 MONTHS TO JANUARY 2010 100 80

90 90% 88% 89% 70 70% 80 80% 63% 60 59% 70 50 60 47% 50 40

40 30 30 20 20 Mutuals 10 10 All other 0 0 providers Building Credit Mutual Non mutual Savings Mortgage societies unions banks banks satisfaction satisfaction * Satisfaction is the population who answered “very † Satisfaction is the population who answered “very satisfied” or satisfied” or “fairly satisfied” “extremely satisfied” Source: Abacus report, March 2012 Source: Financial Research Survey

COMPETITIVE CHOICE To assess viability as a banking alternative, we have focused on mutual organisations’ product ranges and their accessibility. Mutuals typically provide a relatively standardised and basic product set of transaction, deposit and loan accounts. These certainly meet the core needs of most retail and small business customers. Yet, their population coverage and hence customer access is often limited by geographic area or profession. Even worse, the largest mutuals are concentrated where banking competition is arguably amongst the highest in the country – in Newcastle, around Sydney, and South East Queensland.

Yet the segment is starting to address some of these geographic challenges of access. For example, developments over the past few years in shared infrastructure – such as the extensive Redi ATM network5 – indicate that the sector is making progress on some key dimensions.

Our assessment is thus that the mutual sector is providing a viable alternative to the banks in terms of product breadth and access, but only to limited segments of the population and often in areas where the listed competition is strongest.

5 The Redi ATM network today is greater than 10% of the combined ATM network of the majors

Copyright © 2012 Oliver Wyman 7 COMMUNITY BENEFITS Community contribution is often touted as a significant differentiator for the mutual sector, but this has become increasingly part of the proposition of every financial institution. Our research revealed that there are few examples of community outreach programs conducted by the mutual sector that are not at least matched by the major banks. Whilst the mutuals’ contribution to communities is significant and applauded, from Newcastle Permanent’s charitable foundation to the IMB Community Foundation, equally impressive are programs from the majors and regionals, whether NAB’s Auskick, CBA’s Community Grant program, Westpac’s sponsorship of rescue helicopters or ANZ’s Community Giving program. Equally worthy of mention are 2nd Tier bank contributions such as BOQ and Suncorp’s community partnerships and Bendigo’s community branch programmes. On this dimension the mutual sector is not setting itself apart.

PRICING AND MEMBER EQUITY We turn now to pure economics and examine comparative deposit and lending rates, and then expand our analysis to a broader definition of value.

The advertised lending rates of Tier 3 are on average lower than the major banks’ rates. Nevertheless, as shown in Exhibit 2 below, the pricing advertised by the largest five mutuals substantially lags both the online providers and the most attractive major bank deals. We further illustrate in a later section of the report that listed bank discounts can have an even greater impact on these relative economics.

Ex hibit 2: MORTGAGE STANDARD VARIABLE RATE COMPARISON (WHILE MUTUAL RATES ARE LOWER THAN MAJOR BANKS’ WITH AVERAGE RATE SET AT INDUSTRY LEVEL, ONLINE BANKS HAVE THE MOST ATTRACTIVE RATES INDUSTRY WIDE)

MORTGAGE RATE COMPARISON STANDARD VARIABLE RATE MAY 22, 2012E % 7.70

Highest

7.20 7.04% 6.97% 6.90% 6.70 6.64% Average

6.20 6.17%

Lowest 5.70 Big 4 banks Big 4 banks Major regional Online banks Largest Mutuals All mutuals All players (all brands) banks

BANKS MUTUALS

1. Big 4 banks: WBC, ANZ, NAB and CBA 2. Major regional banks: Suncorp, Bendigo & Adelaide, Macquarie, BoQ, Citigroup, HSBC 3. Largest mutuals: NPBS, GBS, IMB, Heritage, CUA 4. Online banks: ME Bank, Rabodirect, ING Direct, Ubank, eMoney, CBA online Source: Cannex website

Copyright © 2012 Oliver Wyman 8 This pricing position is structurally similar to pricing in the UK in the 1980s – a feature which became one of the triggers for the wave of demutualisation between 1995 and 2000. Some commentators6 even suggested that mutual pricing in the UK in the preceding years was intentionally less favourable than could be delivered. The contention was that this was a deliberate effort to boost capital bases and hence demutualisation dividends for management and other insiders. Although some large Australian mutuals have significantly boosted retained earnings in recent years, we acknowledge that retained earnings are necessary to ensure sustainability and do not claim this has been the ulterior motive in Australia.

However, it does raise the question of whether pricing from the mutual sector could be more competitive, particularly if there was greater challenge from members and if management drove more efficient business practices. For example, whilst historically depositors subsidising borrowers was arguably an equitable part of the lifetime proposition to members when membership was limited, should this view still hold true today? If members were better informed or more assertive, one presumes more borrowers would take advantage of the cross-subsidy from depositors to lenders in the sector and depositors would flee to online and major bank offerings. Or at least there might be a desire to revert to a stronger link between membership and benefits, for example, somehow linking pricing more closely to membership tenure or other measures of membership contribution. That we do not see this happening points to customers failing to understand the value they are getting, placing substantial value on non-monetary outcomes, customer inertia, agent/principle challenges or most likely a mix of all these features.

In pure economic terms there is little doubt that members are often getting a suboptimal outcome, and that many members are not even aware they could be better off with other providers. Is members’ willingness to “pay” for high levels of satisfaction, or ignorance of the suboptimal outcomes, rational when choosing a mutual over potentially cheaper alternative lenders? Could it be that it is driven more by perception of pricing benefits, an altruistic sense of investing in the community or the privilege of being an owner member? With cheaper rates from an online bank, members could in reality redirect their investment and still donate to charities of their choice, and perhaps have more aggregate impact.

6 Bank of England Boxhall and Gallaher 1997

Copyright © 2012 Oliver Wyman 9 SUMMARY Our review of sector performance gives top marks to the mutual sector for service, as measured by customer satisfaction, and indeed for their success in promoting a sense of purpose, but we cannot score it highly on the other areas of discernible value to members; overall delivery on these promises is generally no better than their bank counterparts.

Ex hibit 3: SUMMARY PERFORMANCE ASSESSMENT

AREA RATING COMMENTARY Service High Measured based on customer satisfaction as a proxy for service Competitive Medium Competitive relevance is adequate but limited primarily to deposits choice – A (reflected in the sector commanding 11% of household deposits), viable alternative basic transaction banking and sectors of the mortgage borrower community, and focused on specific geographic areas

There is continued aggressive pressure on deposits from the majors as the availability of wholesale funding remains tight Community benefits Medium We were able to find little data to evidence that community contributions are on average any higher than those of the major and regional banks Positive returns Medium to low and Headline rates appear favourable but in practice most members can under pressure get better deals elsewhere

1.2. VALUING MUTUAL RETURNS

Setting aside the non-monetary benefits of mutuality – be they better service, community contributions or just being part of something which remains in the community – many claim to offer superior pricing and a “mutuality dividend”. But how good a deal is this? We recognise that for many members the non-financial motivations for using a mutual rather than a listed bank may trump many financial considerations, but for many others one presumes that product pricing does matter – especially in an environment where expectations of earnings growth are falling. But what is the real financial value of mutuality to borrowers and depositors?

MUTUALITY DIVIDEND

The “Mutuality Dividend” is the industry’s own proxy measure of the additional benefit a member receives through being part of the mutual. It is independently calculated by Cannex but the basis of calculation is not publically available and varies by organisation. It is published only by a subset of mutuals and so may not accurately reflect the whole market, nor reflect discounting practices of other market participants, or other aspects of value, and therefore needs careful interpretation.

Copyright © 2012 Oliver Wyman 10 To address this question we have compared the outcome for a mutual member with that of a bank shareholder (with a shareholding equivalent to the equity interest “owned” by an average mutual member). The two components of value for shareholders are capital gain and dividend. We have used proxy measures for mutuals as follows:

CAPITAL GAIN In 2007 an average mutual member would, had their building society demutualised, have received approximately $3,000 as a payout7. For the purposes of assessing the economics of mutuality from the member’s perspective, we take this as a base and compare the outcome for the members over the period 2007-2011 under the scenario where they had then chosen to take this “equity” and their business to the listed sector.

We fully acknowledge that this is a simple thought experiment, and that mutual members will not have physically “paid” for this equity through the purchase of shares. However, a member’s interest in the equity of a mutual represents an investment in the mutual, albeit a largely illiquid one which cannot be accessed unless and until a demutualisation occurs.

The calculation was repeated on the same basis using 2011 industry data. The result was that equity that would be available for a mutual member was reduced over this period by $408 to $2,592. This proxy capital loss compares adversely with the capital erosion of $239, measured by the fall in share price, experienced by an average bank shareholder over the same period.

DIVIDEND A bank shareholder would also have benefitted by receiving dividends, whilst mutual members may have received a benefit through pricing. To work out a comparable benefit for a mutual member, we have used an average loan size of $200,000 discounted at 10bps and a deposit size of $20,000 again with 10bps of preferential pricing8. We also provide a comparison of the calculation for Newcastle Permanent (as the only large building society that appears to publish a near complete set of data). Newcastle’s average mutuality dividend estimate of $933 per member for the period falls between the values we estimate for borrowers and depositors – as one would expect of what is a “blended rate” for both populations and consistent with our directional estimates. However, the Newcastle figures do not allow us to confirm the extent of subsidy from depositors to borrowers.

Exhibit 4 compares the relative financial benefits for an average mutual member and bank shareholder respectively, under this analysis and set of assumptions.

7 This calculation uses published data and an NTA multiplier. Applying traditional valuation methodologies for profit driven organisations, such as price to earnings multipliers, is not relevant in the case of mutuals given the absence of a share price, and can lead to valuations lower than an organisation’s retained earnings. Academic research (see bibliography) favours the use of a Net Tangible Asset (NTA) multiplier as a proxy for valuation. This approach builds a valuation using the NTA over market capitalization ratios of major listed Australian banks to derive an industry level NTA multiple. The result was a multiplier of 3.09x in 2007 and 1.69x in 2011 for the consolidated mutual sector 8 These figures are used as indicative of typical levels for members. In the absence of robust industry level data they were derived by triangulation of select data points for individual institutions and industry aggregates

MUTUAL MEMBER MUTUAL NEWCASTLE ($200 K HOME MEMBER ($20 K PERMANENT BANK LOAN WITH DEPOSIT WITH BUILDING SHAREHOLDER 10BPS DISCOUNT) 10BPS BONUS) SOCIETY* EQUITY 3,000 3,000 3,000 4,789 (early 2007) CHANGE IN Capital loss OWNERSHIP STAKE (based on (239) (2007-2011) share price) Mutual equivalent (reduction in (408) (408) (1,292) benefit on demutualisation) BENEFIT Dividends 862 (2007-2011) Mutual equivalent (Pricing benefit) 2,000 100 933 NET BENEFIT 623 1,592 (308) (359) (2007-2011)

* Newcastle Permanent’s figures have been shown separately based on the organisation’s published mutuality dividend

The data suggests that a mortgagee with a $200,000 loan with a mutual might be coming out substantially ahead of a bank shareholder and depositors are the “losers”. However, discounts are very much proportional to the size of the loan and the rate negotiated. Since the major banks typically discount more aggressively for higher loan sizes, there comes a point where the mutual borrower too is losing out, as demonstrated in Exhibit 5 below.

Ex hibit 5: MUTUAL MEMBER FINANCIAL BENEFIT AS A BORROWER AGGREGATE BENEFIT (CAPITAL GAINS + MUTUALITY DIVIDENDS) OVER 2007-2011 (5 YEARS). DISCRETIONARY DISCOUNTS FROM MAJOR BANKS ARE ASSUMED TO BE 20BPS FOR LOANS HIGHER THAN $250 K, 40BPS FOR LOANS HIGHER THAN $500 K, 60BPS FOR LOANS HIGHER THAN $750 K AND 80BPS FOR LOANS HIGHER THAN $1 MM

MUTUAL MEMBER BENEFIT OVER 2007 2011 PERIOD $ 10000 ~$350,000 ~$700,000 5000

0 0 175,000 350,000 525,000 700,000 850,000 1,050,000 1,225,000 1,400,0000 -5000

-10000

-15000

-20000

-25000

-30000

-35000 LOAN SIZE $

Source: Cannex, capitallQ, Factiva, annual reports

Copyright © 2012 Oliver Wyman 12 Aside from the observation that “jumbo” borrowers are better off with a major, the example also illustrates that the average mutual depositor would have been better off had they taken the proceeds of a hypothetical demutualisation in 2007 and invested them in a bank. Indeed, the data reinforces the point that borrowers in the sector in general have been substantially subsidised by depositors, who get a relatively suboptimal deal: depositors directly provide capital to the institution, thus supporting lending, but the lion’s share of financial reward flows to borrowers.

The reality of the economics of the mutual sector is of course much more complex. Our calculations above assume average mortgage and deposit sizes and show that on average borrowers are the main beneficiaries. Whilst the problem has been simplified to demonstrate the point, ignoring for example that borrowers often become depositors over time and vice versa, the story is clear: different types of members have very different financial outcomes from their mutual. In many cases this represents a high and largely invisible loyalty cost to members.

Our assessment of the overall value provided to members by the mutual sector was not positive. But is the failure to provide value a problem of mandate (agreed and stated goals) or the way in which mutual mandates are being executed? Are the mandates clear and understood? Can they be implemented successfully? Are there management and broader governance issues preventing or slowing down effective implementation? And if so, how should the leadership of the sector respond?

In determining the mandate of the mutual sector we make reference both to historical and more recently published objectives from ABACUS, the industry promotion body.

2.1. ARE MUTUALS DELIVERING ON THEIR ORIGINAL PURPOSE?

To address this question we have attempted to assess the delivery of the following three key objectives set out as the drivers for the establishment of the mutuals, in some cases over 100 years ago: 1. To effectively supply credit to members who were unable to access bank funding at a time when banks were not making credit easily available 2. To be local and provide benefits to limited membership. Mutuals were small operations with limited membership focused in towns or on professions and designed to contribute in a broader sense to these communities 3. To be governed for the benefit of members on local voluntary boards. Typically the composition was experienced people “local” to the community, profession or society, wishing to “give something back”

SUPPLYING CREDIT TO MEMBERS Building societies were at one point the prime suppliers of mortgage finance but many have since demutualised and become second tier banks, continuing to compete for mortgage business. But as we have seen, some members can access cheaper deals elsewhere.

This change in the structure of the economy, and banking, calls into question the first of the three objectives. Indeed, the same situation was observed in the UK, where David Llewellyn and Mark Holmes noted that “competitive pressures (were) forc(ing) a convergence of behaviour and remov(ing) the major behavioural distinctions between mutuality and PLCs”9.

BEING LOCAL WITH BENEFITS TO LIMITED MEMBERSHIP With the opening up of membership criteria, the relevance of professionally aligned mutuals (typically credit unions) has reduced, whilst the geographic focus is no longer on towns but across states (and in some cases beyond). We have also assessed that the mutuals’ contribution to their targeted communities are on par with the banks. The second objective therefore also seems under threat. Even where the membership proposition is clear – for

9 “In Defence of Mutuality: A redress to an emerging conventional wisdom”, David Llewellyn & Mark Holmes, extracts published in “A European Review” (April 1998)

In part these trends in relevance have resulted in a reduction in number of players in the mutual sector. This has taken place both through consolidation within the sector and partial dismantling of the sector through acquisition by the majors. Exhibit 6 below depicts the organisations that have moved into the big 4 banks with the width of each timeline from left to right denoting the number of players making up each entity and the flow between categories denoting ownership aggregation. Our figure only shows those institutions that have merged into the majors (ignoring mutuals that still exist today) – yet depicted in this way, one can see that nearly a quarter of the historical banking “brands” that have merged into the major sector we know today started life as mutuals.

Ex hibit 6: TIMELINE OF AN INDUSTRY – AGGREGATION OF MUTUALS INTO THE MAINSTREAM (AND MAJOR) BANKS

192019101900189018801870186018501840183018201810 1960195019401930 2000199019801970

Savings Banks

Building Society

ANZ Big 4 Bank CBA NAB Westpac

Other Bank

TO BE GOVERNED FOR THE BENEFIT OF MEMBERS This objective is also under threat. The industry has bifurcated with an increasing number of larger mutuals now having paid boards, yet with less disclosure of board and executive remuneration and tenure, and significantly less member engagement in governance (e.g. by exercised voting) than bank shareholders enjoy. Increasingly stringent governance practices and reporting requirements applied to listed entities enforce a governance culture which is currently not mandated nor regulated to the same extent in mutuals. The result is that the motivation and oversight of mutual boards is not necessarily as aligned to members interests as it once was – a departure from the past without adjusting to current best practice.

Indeed, in the absence of modern practices of good governance, it could be argued that blind faith in the motivations of these boards is relied on to protect the interests of 4.5 million Australians.

If the mutuals are not delivering on the original reasons for their creation, do they have a compelling value proposition that is sufficiently differentiated from listed banks? Customers will increasingly become price takers; online bank offerings are likely to appeal much more strongly to the next generation of customers and we have seen this segment offers systematically better deals. Banks will continue to enlarge their universe to which they extend and target credit, as well as accelerate their community investments, making the mutual story harder to separate in the mind of consumers. The sector therefore presumably needs a compelling value proposition to attract members. Yet the sector is undeniably caught in the middle.

Ex hibit 7: CAUGHT IN THE MIDDLE – THE MUTUAL VALUE PROPOSITION UNDER PRESSURE FROM BOTH SIDES

CUSTOMER PRESSURES COMPETITIVE PRESSURES Trend Trend Customers Credit freely increasingly price available to all takers Mutuality value proposition and Banks increasing Reduced relevance squeezed corporate social importance of local by both sides responsibility community programs

Intergenerational Banks focused on transfer less service compelling

In this context where the original motivations for establishing the sector are considerably less relevant, we question how the sector currently communicates its mandate by assessing the industry level Mutual Banking Code of Practice maintained and promoted by ABACUS over and above the value and mission statements of each institution.

This code sets out 10 “key promises” of the sector, which we used to assess the sector’s success in redefining itself in the context of the trends discussed above. Unfortunately while the key promises are laudable goals, there are no specific measures associated with them and just one has room to sustainably differentiate the sector from the major banks. Each promise is listed below in Exhibit 8 with a comment on the extent to which it differentiates the sector from the mission statements of the major banks.

10 Based on ABACUS’s published Mutual Banking Code of Practice

CODE COMMITMENT RATING DIFFERENTIATION? 1. We will be fair and ethical in our dealings Unclear Customers would expect this of all financial institutions 2. We will focus on our members High Most majors would identify this as a core objective, with “customer” replacing the word “member” 3. We will give you clear information about our Med – High products and services Legal requirement 4. We will be responsible lenders Med – High 5. We will deliver high customer service and standards High Most majors would identify this as a core objective 6. We will deal fairly with any complaints Unclear Legal requirement

7. We will recognise member rights as owners Low Differentiated but open to interpretation – see below 8. We will comply with our legal and industry obligations Unclear Legal requirement 9. We will recognise our impact on the Med Most institutions in the financial sector have wider community a corporate social responsibility agenda 10. We will support and promote this Code of Practice Not rated – see We have not separately rated this comment promise as it is covered by the other promises

The one place where the sector can truly differentiate itself is in Promise #7, “recognising member rights as owners”. Yet, as we have already shown, in pure financial terms the “owners” are not always getting a great deal, and depositors are structurally supporting borrowers – borrowers who may no longer be locals or people from the same profession or community, but opportunists sensibly and practically seeking to benefit where they may see opportunities for lower rate lending.

Whilst both UK and Australian institutions continue to aggressively advertise their “differentiated” value proposition (for examples, see Appendix Exhibit 11), the key dimensions of these campaigns emphasise putting members and their communities first. Yet many of these broad statements are little more than marketing sound bites and increasingly undifferentiated from the major banks. We note that CUA’s recent television advertising campaign is an interesting exception, arguably promoting a vision of the mutual of the future. Indeed, CUA’s campaign is consistent with a core message Oliver Wyman published with the EACB in 200811, that mutuals need genuinely to be the “customer champion”. The challenge of course is defining what is meant by this unarguable objective which all the banks are trumpeting, and executing on it in a differentiated fashion.

The specific shortfalls we see in current mutual mandates and campaigns based on published materials are their ability to strongly articulate positions on issues such as pricing strategy, and the benefits of membership. In particular, mutuals should have a public view on the economics of mutualising costs between members, recognition of tenure and intergenerational benefits and members’ rights – for those are the things that make banking with a mutual different. What is clear is that many mutuals need to overhaul their mandates.

11 “Co-operative Bank: Customer Champion”, Oliver Wyman & EACB white paper, 2008 (http://www.oliverwyman.com/4147.htm)

Copyright © 2012 Oliver Wyman 17 This overhaul needs to focus on the customer in a way listed banks cannot – by personalising service (a cost), membership (mutualising benefits explicitly), and providing even more competitive pricing (e.g. credit to those a listed entity might not bank; discounts to members that are reflective of ownership and member contribution).

Ultimately, it is the responsibility of management to engage with members as owners to ensure that their constitutions reflect owners’ long-term best interests (adjusted for a broader organisational purpose). Whilst it is beyond the scope of this paper to recommend detailed solutions, we suggest some paths that leaders in the sector might take to achieve this equilibrium in Section 3.

2.3. HOW EFFECTIVELY ARE EXISTING MANDATES IMPLEMENTED?

Our assessment thus far has been blunt. Mutuals are not what they once set out to be and their stated mandates are undifferentiated from listed competition in almost every way. But are the mandates – at least as stated today – being implemented effectively? We see the following three aspects of governance as the main challenges to implementation: member engagement; board remuneration; and board composition and tenure.

MEMBER ENGAGEMENT Typically all voting members have equal rights with a single vote; realistically, in organisations with a larger number of members an immaterial proportion of votes are exercised. To make such a democracy effective you need to have either the disciplines of a listed company (for shareholders) or some representative framework (for members). Such representative frameworks are largely absent and as mutual organisations have grown, their members’ ability to ensure executive and board accountability has all but disappeared. Voting records show that members are not engaged, and member representative and consumer advocacy groups are equally largely absent. While leaders cannot be blamed for members not exercising their rights to vote, they ought to be addressing this lack of engagement and involvement. In Europe several institutions have made progress in this regard by creating layers of representative bodies that enhance the focus of accountability. This would be a step in the right direction in Australia.

If members are engaged and the proposition to members is a compelling one, presumably membership would grow. Yet member engagement needs a clear definition of membership itself: whilst mutuals should be seeking to increase membership this should be done within predetermined membership criteria. Unfortunately loose membership acceptance criteria has in many cases allowed membership to be opened to all, with those in best standing (e.g. long standing depositors) losing out most to the new members (typically small mortgage borrowers attracted by rates a major bank may not offer to someone of their credit rating). The fact that this steady relaxation of membership criteria and associated leaching of value from historical to newer members has happened is thus another sign that members no longer effectively exert control – or are simply unaware.

Lack of a representative framework for members is a key governance risk. Not only are members losing out as membership expands unchecked, it also limits probity over potential

Copyright © 2012 Oliver Wyman 18 conflicts of interest of the board and executive (for example in awarding of contracts, allocation of funds to specific community programs, and the approval process over significant strategic decisions). Indeed, it has been argued in other contexts and geographies that some in the mutual sector have or do rely on unquestioning altruistic member loyalty to avoid scrutiny and business optimisation. This may be no less true in Australia.

In short, members do not and cannot effectively exert control, and unlike shareholders cannot sell, or threaten to sell, their shares as a way of potentially influencing bank management. One potential remedy would be as mentioned above, having a governance structure where there are elected representatives who can vote the proxies of members with a smaller stake. Another critical need is a sharp definition of what constitutes a member – linking to our observation on cross subsidies above and tied to a strongly articulated value proposition.

BOARD AND EXECUTIVE REMUNERATION Disclosure of executive and board remuneration is generally significantly lower in mutual organisations than in listed companies, and in many cases there is no public disclosure at all. Yet the larger building societies, mutual banks, and some credit unions, now have boards with significant remuneration. An analysis of the CAGR of board and executive remuneration within some that are published reveals growth in excess of the average for listed companies, with the annual growth rate exceeding 10% in the case of one building society (see Appendix Exhibit 12).

But what justifies such increases – in some cases significantly outpacing those of the major banks – in a period of apparent value destruction for the sector? In the absence of effective voting control for members it could be argued that this is exactly the time when good board discipline is needed, and should be demonstrated. It is interesting that during the same period when some leaders in the listed sector have been giving up their bonuses where value has been demonstrably destroyed, some of their counterparts in the mutual sector have been rewarding themselves with pay rises without evident outperformance.

BOARD APPOINTMENTS AND TENURE New board members are typically proposed by existing boards and voted in by a very small minority of members – another link to the representation challenge discussed above. The average board tenure is also typically far greater than for listed companies, in some cases measured in decades, suggesting a weaker link to performance than might be ideal. In the case of smaller credit unions this could arguably be attributed to being unable to find suitable new volunteer directors, but this is not the case for boards with significant remuneration.

We acknowledge that enforcing greater transparency and member control of appointments would be challenging given the fragmentation of member bases. But the current lack of oversight is at least a reputational risk for the industry, and whilst it is beyond the scope of this paper to propose remedies to governance we would argue that mutuals need to fix these issues. Moreover, the governance issues deserve to be addressed whether or not mutuals rearticulate their mandates – although of course if the mandate is not clear, it will be hard to get the governance right.

Copyright © 2012 Oliver Wyman 19 In short, mutual boards should have an interest in acknowledging and addressing any perceptions of self-interest which can easily be levelled at a privileged group who largely set their own compensation, derive status from the role, and are not readily answerable to the owners.

3. FUTURE SCENARIOS

In Sections 1 and 2 we have articulated the case for change. The financial services sector has evolved rapidly in the last century and at an accelerated pace in the past decade, and mutuals too need to adapt and evolve. Some have shown resilience and continue to command an impressive share of the deposit market. As the proposition has weakened, some have benefited from opacity of pricing and member benefits, but as the war for deposits continues and member awareness of competitor offers increases, they will have to do much more to remain competitive and relevant in future. Demographic, cultural and technological change will continue to threaten their role and the urgency to redefine mandates and value propositions will only increase.

Yet we believe there is a way forward for the sector to redefine the mandate, enhance its relevance and build a brighter future and genuine alternative to the listed sector. Indeed public attitudes are certainly consistent with a thriving mutual sector providing a viable, competitive alternative to the major banks. Government is likely to support that and regulation may therefore be expected to remain favourable. We believe the sector has room to improve pricing even in the steady state, action on efficiency can enhance this, and we believe a renewed focus on the member value proposition can increase loyalty from an already dependable base. The environment then should provide a favourable climate for those willing to make the journey to a number of possible future states.

This section therefore outlines what a number of future scenarios might look like for different mutuals. Without claiming to forecast each mutuals’ evolution, these scenarios have been defined to illustrate the major dimensions of change on which we believe individual mutual organisations should focus. For example, in the UK there were many cases of successful demutualisation but equally Nationwide, Yorkshire and Coventry Building Societies – to mention a few – continue to thrive in their mutual state. This should provide encouragement to Australian mutuals to identify and then follow the path that best suits their members’ needs.

Our illustration in Exhibit 9 below represents the future scenarios we discuss. From left to right we illustrate scenarios where capital is released and owner status is selectively or completely transferred from member to shareholder status. Moving down the figure sees increasing cooperation between players within the sector, culminating in merger and/or consolidation activity. Once again, while we are not attempting a prediction for where the sector will land, we do not believe that the “Status Quo” scenario presents a credible long-term option, but rather it will only result in continued destruction of member value.

FUTURE OPTIONS FRAMEWORK

OWNERSHIP Member-owned Demutualisation

Status Quo Low Individual Listing Mutual 1.1

Fifth Cloud Fifth Pillar

CONSOLIDATION/COOPERATION Mega Mutual High

3.1. THE PATH TO GREATER COOPERATION AND CONSOLIDATION

For a limited number of smaller players, already enjoying shared service platforms and with niche membership bases, the status quo might be valuably defended just by reasserting their core mandate. This “Mutual 1.1” state involves sharpening mandate and accountability – making product pricing more transparent, enhancing governance and member engagement and better protecting intergenerational equity.

However, for most mutuals the conditions favouring a sharper version of the status quo have passed and, by not adapting, they remain subscale with ever reducing benefits and relevance. They need to move along the scale of higher cooperation and consolidation. With or without demutualising, mutuals are spending money on operational inefficiency (well beyond service) that could be returned as benefits – as evidenced by their high cost to income ratios (see Appendix Exhibit 13). They could enhance returns through shared back office, balance sheet, capital and risk management, and through sharing distribution channels; the Redi ATM network being a good example. Cuscal and Indue, back-office providers to the industry, are already helping many mutuals to achieve precisely this: indeed many smaller mutuals outperform their larger counterparts as a result.

The “Fifth Cloud” state imagines a group of mutuals benefiting from such co-operation. Such a group might achieve significant cost and efficiency improvements from cooperation with their peers whilst retaining their distinct brands and the benefits of mutuality. That being said, the “cloud” solution is not fully optimised as multi-brand multi-member existence limits the extent to which efficiencies of scale can be realised. Depending on how mandates are refined and develop, this may trigger a next stage in evolution towards greater consolidation.

Copyright © 2012 Oliver Wyman 21 The formation of a number of mutuals into an integrated “Mega Mutual” with a single ownership structure (under single or multiple brands) would seem to be a logical extension of the “Fifth Cloud”, maximizing the benefits of shared operating platforms, capital and management. We know that such a “Mega Mutual” scenario is credible and stable and can be well-governed – through the existence of entities such as Rabobank, with origins in multiple member banks. Aligning the objectives of those with similar characteristics would allow the partnership to be formalised through a merger. This would seem an obvious option for the four largest mutual organisations, along with Cuscal and Indue. Were these six to consolidate their operations and formally merge, we believe it would be reasonable to assume that they could reduce their combined cost base by up to 20%, in line with the average cost to income ratio of the majors and other banks (Appendix Exhibit 13). Improving the economics through such rationalisation could be a destination in its own right or a logical step towards releasing value in any potential future demutualisation and listing.

3.2. MOVING ALONG THE OWNERSHIP SCALE

Of course, those mutual organisations ready to transform their ownership could unilaterally go down the path of demutualising with the ultimate intention of an “Individual Stock Exchange Listing”.

Arguments against individual demutualisation include:

(i) intergenerational inequity – current members stand to benefit at the expense of past and future members, in that equity that might otherwise have been available to discount rates would be made immediately available to new members.

(ii) the fear of selling to an unknown buyer – demutualisation can be associated with loss of member control and ultimately the threat of hostile takeover.

Yet we know the material benefits which flow to current members have trumped these concerns. For example the “carrot” of these benefits sparked the wave of demutualisation and listings in the United Kingdom throughout the 1990s which included Cheltenham & Gloucester, Alliance & Leicester, Woolwich, Halifax, Northern Rock and Bradford & Bingley. Beyond the windfall benefits to members, this was seen by many as a logical outcome of the evolution of the financial sector, and society generally, over many years. Indeed many Australian participants have also already chosen this path as we saw in the heritage of the major banks. Demutualisation today in both the UK and Australia is a harder path than a decade ago due to anti “carpet bagging”12 features of constitutions and voting requirements. Moreover while many larger UK mutuals did demutualise, by no means every institution chose that path, showing that on top of the practical barriers there is a case in defence of mutuality that continues to succeed.

12 “Carpet bagging” became vernacular for the activities of investors who were not long-term members but who made small deposits into the building societies in the expectation of realizing quick share price gains once the society demutualised and listed

Copyright © 2012 Oliver Wyman 22 Yet our expectation is that there is more domestic demutualisation to come, based on relatively recent success stories – Bendigo Bank is just one example. Of particular interest, Bendigo provides an example of how a mutual can retain many of the characteristics and values of a mutual through demutualisation and listing. It is also a commercial success. In its listed form, Bendigo (even ignoring acquisitions) has outperformed its mutual peers as shown in Exhibit 10 below. While the significant step in total assets was acquisition driven, the growth rate trajectory has been steeper than Bendigo’s former mutual peers: Bendigo’s CAGR of total assets in excess of 18% compares handsomely with the below 12% CAGR for the largest mutual over the same period.

Ex hibit 10: BENDIGO BANK DEMUTUALISATION CASE STUDY

TOTAL GROWTH TOTAL ASSETS 60,000

50,000 BENDIGO

40,000 Bendigo Pre Acquisition Trend Line 30,000 Adelaide Bendigo Bank acquisition CAGR= 25% NPBS 20,000 Bendigo (ex assets from CUA Adelaide Bank) CAGR = 18% 10,000 Mutuals HERITAGE Average CAGR = 11% - IMB 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YEAR

Evidence also suggests that pricing is not adversely affected (i.e. product prices do not necessarily increase for consumers) as a result of the change of economic dynamic brought about by demutualisation. Indeed, it can actually improve as an outcome of demutualisation and listing, a further benefit to former members.

Demutualisation therefore, if properly managed, and taking account of intergenerational membership, tenure and quantum of investment, may be seen as a logical and optimal outcome; especially for larger mutuals with characteristics more akin to those of banks. As capital raising becomes increasingly difficult and the mutual proposition is eroded, it may in fact become the only viable long-term option. Member engagement (and at least immediate customer loyalty) could be significantly increased by the prospect of thousands of dollars demutualisation dividend. Our economic analysis in Section 1 suggested that members would on average benefit financially.

Whilst initiating such an agenda may not always be in the interests of those who would have to drive it – primarily the board and executive – organisations that have followed this path

Copyright © 2012 Oliver Wyman 23 have typically received overwhelming member support as evidenced in Appendix Exhibit 14. Our economic analysis therefore suggests that demutualisation and individual action would actually do more good for society. There will of course always be members who have an emotional preference for the mutual institution doing the good for them; even if they could put more money into good causes through different structures, we recognise the perception of locality and control (even though in many cases this is only a perception) has a value to members in and of itself.

As a commentary on the demutualisation pathway, Appendix Exhibit 15 shows a case study from the health insurance industry in Australia, another mutual-dominated industry. In most recent cases of health fund demutualisation domestically, these actions did not witness premium prices increasing significantly relative to industry averages or the pricing of major mutuals, again questioning any fear that shareholder-owned organisations deliver a worse financial outcome in terms of product pricing. Indeed in some cases demutualised entities increase their community and charitable contributions; NIB’s establishment of a charitable foundation as part of their demutualisation being a case in point.

The most extreme endgame would be a merger and demutualisation of major players to form a cohesive “5th Pillar” (a demutualised “Mega Mutual”). Such an entity would quite possibly enjoy protection from the Competition Commission (ACCC), and offer the best potential in terms of capital and efficiency benefits sought by “Fifth Cloud” or “Mega Mutual” endpoints. However we consider this outcome highly unlikely: there is little political reason to force it, and such a move is unlikely to be aligned to the interests of those who could drive it. Absent political pressure to take this path, or a solvency crisis inducing a wave of consolidations, we do not place a high likelihood on this outcome.

Between these five scenarios there are of course myriad staging posts. Yet given the long history of the disappearance of mutuals (into the majors, via consolidation or demutualisation) and the instability of the present context for all entities in the whole financial sector we believe it is a useful framework for a sector at a crossroads: management of mutual organisations should be analysing where their organisation is positioned and where they believe their members want to end up on this journey.

Timing will be a critical component, driven by the rapidly evolving capital and prudential landscape, including regulatory implementation timelines, coupled with banks’ increasingly aggressive positioning within the mutual funding homeland of retail deposits. Within this context we see a 12 to 18 month window of opportunity to advance change. Moreover, with popular sentiment on their side mutuals should seize this window of opportunity before it closes.

The value proposition mutual organisations offered in the early 20th century was unique, and provided Australians with a community-focused platform for economic growth. However, this member value proposition is now less differentiated and convincing: over time the sector’s core tenets of affordable credit provision, service and social responsibility have become as much a part of the value proposition of the majors and the 2nd Tier. What was once limited to your town or your profession has become largely unlimited and undifferentiated; and with the relaxation of membership criteria the logic and structure of mutualising the costs of finance has long since been muddied and lost.

Mutual organisations can offer a compelling and credible differentiating value proposition by providing members with unique additional benefits related to their status as owners. Yet as we have seen, mandates are often unclear, pricing is not always competitive, nor equitable, and the principal-agent relationship with members is often poorly implemented in management and board structures. Whilst there is little compelling evidence of a desire for change, it should be a matter of pride to be a mutual that encourages member participation and value.

In an era where bank boards are being held more accountable, mutual boards should reflect on how they would hold up to scrutiny, whether they are pursuing members’ best interests aggressively and without bias. With a reported 4.5 million members in the sector, there is a strong public interest consideration on which regulators and policy makers should also reflect. A situation where thousands of faceless and voiceless members may be losing small amounts of value unbeknownst to them, begs the challenge of whether policy makers should be subjecting the sector to greater scrutiny.

In summary, whilst the 3rd Tier makes an important contribution to banking in Australia, our research suggests the sector is failing to capitalise on opportunities presented by a populist backlash against major financial institutions, and has been insufficiently self-critical of its own mandate and purpose. Without pressure from regulators and policy makers, the sector has been allowed to stagnate in what could be an era of growth. However, we believe that the sector can have a bright future – as demonstrated by the UK experience – if leadership acts to transform operating models in a way that addresses 21st century challenges and expectations, while the opportunity remains.

Ex hibit 11: E XAMPLES OF MANDATES COMPONENTS ADVERTISED BY MAJOR MUTUALS IN THE UK AND IN AUSTRALIA

COVENTRY ••“We keep our members’ best interests at heart” HERITAGE BANK ••“We put people first” NEWCASTLE PERMANENT ••“We provide better value banking and significant financial support to the communities” GREATER BUILDING SOCIETY ••“We provide strength and security” IMB ••“We provide low-cost and better value banking to challenge the banks” ••“We care for our community” CUA ••“We provide a more balanced way of banking” ••“We reinvest profits back into our business to provide more competitive products, services and fees”

Ex hibit 12: EXECUTIVE REMUNERATION NON EXECUTIVE DIRECTOR AND TOP EXECUTIVE COMPENSATIONS HAVE INCREASED SIGNIFICANTLY IN LARGER BUILDING SOCIETIES COMPARED TO MOST MAJOR BANKS OVER THE LAST TWO YEARS

NON EXECUTIVE DIRECTOR COMPENSATION % CEO + CFO AGGREGATE COMPENSATION % GROWTH IN INDIVIDUAL NON EXECUTIVE GROWTH IN AGGREGATE COMPENSATION DIRECTOR COMPENSATION CAGR 20092011 CAGR 20092011 12 10

10 8

8 6 6 4 4 2 2 0 0

-2 -2

-4 -4 IMB CBA ANZ NAB IMB ANZ CBA NAB Heritage Westpac WESTPAC HERITAGE NEWCASTLE

Source: Company reports and websites

COST TO INCOME RATIOS % 100

70 Dierence = 24.6% Credit Unions Dierence 60 =19.2% Building Societies 50 All Banks

40 Big 4 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Ex hibit 14: DEMUTUALISATION EXAMPLES

MAXIMUM ENTITLEMENT % OF MEMBERS WHO NUMBER DATE OF PAID TO MEMBERS VOTED IN FAVOUR OF NAME OF MEMBERS DEMUTUALISATION UPON DEMUTUALISATION THE DEMUTUALISATION NIB 700,000 October 2007 $5,100 95% MBF 820,000 June 2008 $7,560 98% AHM 250,000 December 2008 $8,800 96% Manchester 90,000 December 2008 $3,000 99% Unity Goldfields CU Not avaliable April 2012 $2,300 (TBC) 98%

Source: The Australian, various sources from 2007 to 2012

Latest examples of demutualisation in Australia show that those operations were largely plebiscited by members.

INDIVIDUAL PRIVATE HEALTH INSURER AVERAGE PREMIUM INCREASE YEARLY INCREASE, 2010 2012 % 10

0 2010 2011 2012 NIB AHM MBF – Bupa Manchester Unity – HCF CUA Average Demutualised Funds Industry

DEMUTUALISED FUNDS MAJOR AVERAGES MUTUALS

Source: Australian Minister for Health and Ageing

Ex hibit 16: COMPARATIVE ANALYSIS OF MUTUAL MEMBER VALUE

MAJOR BANK SHARE PRICES MUTUAL VALUE PER MEMBER COLUMNS AUD LINES AUD 55 6,000

45 5,000

35 4,000

25 3,000

15 2,000

5 1,000 0 -5 - 2005 2008 2007 2008 2009 2010 2011

CBA WBC NAB ANZ Bendigo CUA Heritage Newcastle IMB GBS 3 YR CAGR 9.19% -1.80% -1.12% 5.53% -6.76% 4.29% 2.62% -0.28% 0.99% 1.15% 6 YR CAGR 5.49% -0.61% -3.00% 0.19% -1.78% -1.38% 5.04% -0.10% 0.54% 3.26%

MAJOR BANKS REGIONAL CREDIT BUILDING SOCIETIES BANKS UNIONS

Source: Factiva, CapitallQ, company reports

Major building society and credit union value per member has been in line with major bank share prices over the last six years.

TOTAL LOAN MARKET SHARE TOTAL LOANS* TOTAL DEPOSITS† 2004 2011 % 2.5 1% 2% 1% 3%

2.0 Credit unions 21% 9% 1.5 Building Societies 1.0 Building societies Credit Unions 0.5 76% 87% 0.0 Big 4 Banks 2005 2006 2007 2008 2011 2009 2010 2004 Tier 2 Banks

Bankstown City Credit Union

* Figures as at 30 September 2011 – net loans and advances † Figures as at 30 September 2011. Represents total deposits. Mutuals’ share of household deposits is somewhat higher at 11% Source: APRA

Kevin Davis (University of Melbourne) – i) “Credit Unions and Demutualisation” Draft – 20 January 2005 and ii) “Credit Union Demutualisation” – August 2005

Abacus Australian Mutuals – Credit Unions, Building Societies and Mutual Banks Fact Sheet – March 2012

Edward Butler – IBIS World Industry Report K7323 “Credit Unions in Australia” – November 2011

Reserve Bank of Australia Bulletin – “Demutualisation in Australia” – January 2009

David Llewellyn & Mark Holmes – “In Defence of Mutuality: A redress to an emerging conventional wisdom” – A European Review – April 1998

“Mutuality at the Crossroads”, Financial Stability Review (1997), Boxhall and Gallaher

Thomas Clarke, DBM Professor of Corporate Governance at Leeds Business School “In Defence of Mutuality” – 2008. Oliver Wyman & EACB: “Co-operative Bank: Customer Champion”, white paper jointly authored – 2008 (http://www.oliverwyman.com/4147.htm)

Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, organisational transformation, and leadership development.

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ABOUT THE AUTHORS David Howard-Jones, Partner, is Market Manager for Oliver Wyman in Australia & New Zealand. Geoffrey Buchanan is an internationally experienced Financial Services executive www.oliverwyman.com

Copyright © 2012 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.