With your indulgence, I think it would be helpful if we take about 10 minutes:

Opening statement by David Craig Group Executive Financial Services and Chief Financial Officer Commonwealth Bank Parliamentary Joint Committee Hearin...
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Opening statement by David Craig Group Executive Financial Services and Chief Financial Officer Commonwealth Bank Parliamentary Joint Committee Hearing into Impaired Loans Canberra 2 December 2015 Check against delivery. Emphasis and section breaks provided for clarity.

David Craig: Thank you for the opportunity to appear before the Committee this evening. I have been the Chief Financial Officer of the Commonwealth Bank for over nine years, and was closely involved with the acquisition of Bankwest. With your indulgence, I think it would be helpful if we take about 10 minutes:  to revisit some of the history of our purchase of Bankwest,  to talk about the testimony that the Committee has heard, and particularly,  to address some policy ideas, which we believe will support lending to small businesses in the future. Banks play a critical role in financing commercial businesses in Australia. According to the Reserve Bank, 99.5 per cent of all businesses are successful – so their commercial loans are advanced and repaid without difficulty. Unfortunately, not every business is viable through the business cycle. Of those that go into default, commonly the customer and their bank work together to either restore the loan or to find other mutually agreeable solutions. If a business does default on its loan, it is understandably traumatic for those involved.

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We have listened to witnesses who have appeared before the Committee and who have told stories of financial distress, impacts on their relationships, depression and broader community impacts. These are not easy stories to hear. I do not pretend that our bank, or any bank, gets it right in every circumstance. We aspire to act in a consistent, transparent, patient and compassionate way. If we sometimes fall short of that mark, we will apologise and try to put things right. However, some witnesses have made untrue claims to the Committee which we wish to address. We owe it to the 800,000 Australian households who own CBA shares directly, and the millions who own our shares through their superannuation, to clearly refute claims that are just wrong on the facts. CBA’s purchase of Bankwest Let me start with the purchase of Bankwest. In the lead up to the Global Financial Crisis, Bankwest had grown its commercial lending rapidly, particularly on the East Coast. When the GFC hit, a higher percentage of these loans became impaired and, with wholesale funding markets freezing, Bankwest was unable to raise wholesale funding in its own right. It became wholly dependent on its parent HBOS to provide wholesale finance. Remember, this was a time when banks around the world were collapsing. When HBOS itself became troubled, there was an imperative to find a new owner for Bankwest, not so much to realise value for the assets, but more specifically to refinance the $17 billion of HBOS funding which HBOS had in turn borrowed from markets. The sale was agreed with urgency, and a deal was struck which was ultimately to the benefit of customers and shareholders of both Bankwest Page 2 of 6

and CBA. It was also to the benefit of the taxpayer, given the alternative of a possible collapse of Bankwest. The Committee has heard allegations that Bankwest engineered customer defaults to reduce the price that CBA paid for Bankwest. Allow me to address a range of these claims directly:  CBA could not reduce the purchase price payable to Lloyds by impairing customer loans and nor did it attempt to do so;  we repaid all of the wholesale funding – again, there was no clawback possible;  there were no warranty claims in relation to impaired loans;  there was no loan guarantee from the British government; and  nor was there any capital benefit from impairing loans. CBA did not receive compensation from HBOS for any loan that was subsequently impaired. In early October 2008, CBA agreed to buy Bankwest for $2.1 billion, with an acquisition date on 19 December. So just like when you buy a small business, you don’t know exactly what the stock will be on hand three months hence, and so you arrange for a stocktake and a valuation of stock on hand – and the purchase price is adjusted accordingly. A bank’s version of stock is mainly its loans. HBOS completed a stocktake as of 19 December 2008, PwC and CBA reviewed the figures, and where there was disagreement, it was arbitrated by Ernst & Young. As a result of that process, the final purchase price was slightly higher at $2.126 billion. Let me emphasise: the price adjustment mechanism allowed for changes to the quantity and quality of Bankwest’s loan book at the time it was bought by CBA. It did not allow for any clawback for loans which subsequently went bad. These are all matters on the public record in audited accounts. We have provided to the Committee letters from both PwC and Freehills – two highly respected firms – which fully corroborate our evidence to you. Page 3 of 6

Since the acquisition, CBA shareholders have lost approximately $2 billion on defaulted loans acquired in Bankwest. Bankwest’s circumstances at acquisition At the date of acquisition, Bankwest impaired loans were approximately 2.1% of its book. This compared to an average of around 0.4% for the Big 4 banks. This is due to a high exposure to commercial property and rapid expansion, dictated by an aggressive global HBOS strategy. This strategy was systematically examined and laid bare by the British Parliamentary Inquiry into HBOS. It has also been the subject of a report just released by the Bank of England Prudential Regulatory Authority on the failure of HBOS, which makes for compelling reading. I quote in particular from page 110 of that report… HBOS Australia’s push for market share often meant that it took on the poorer assets others did not want. However, the scale of the problems at Bankwest is nowhere near the level that the Committee has been led to believe. Around 40 Bankwest customers have provided submissions to this inquiry, out of around 26,000 commercial customers on the books at the time of acquisition. The interests of the bank and our customers are aligned – that is, the best outcome is that their businesses flourish and they repay their loans. We only appoint receivers as a last resort. In 2009/10, Bankwest appointed receivers to 116 entities – nothing like the 1,025 that Mr Hall suggested to this Committee – this was just 0.27% of Bankwest commercial customers. Now on defaults, by far the majority are monetary – that is the customer fails to repay principal or interest on time, including reasonable consideration for time extensions and so on.

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Non-monetary defaults are more likely to occur when financial difficulties have clearly emerged from issues, such as not paying tax, not paying employees, not paying creditors, or having poor financial results. It is not our practice, and we are not aware of any circumstances, where we have enforced based solely on security revaluation. In particular, we have examined 36 submissions that have been made to the Committee by Bankwest customers and in no case was a change in valuation used as the sole reason for default. Policy Ideas Finally, I’m aware that there is an appetite within the Committee to consider serious, forward looking policies, which would support small businesses and strengthen the market for lending. As I have stated, the vast majority of commercial loans are advanced and repaid without difficulty, so we need to ensure that we come up with constructive ideas that do not have any adverse effects on normal lending. I’d like to propose three policy ideas, which we consider are worthy of your close consideration 1. On the question of valuations,  We agree with the principle that, where possible, valuations should be prepared on the same basis going in as when an issue needs resolution and difficulty occurs.  We also think it’s appropriate that, where we are a sole lender on a business loan, customers should be provided with a copy of a valuation that they have paid for, so that both parties have all the facts on the table in a time of financial stress. 2. On the Committee’s concerns about adequate timing for resolution, we would suggest that there be a minimum of one month between when a customer defaults on a loan and when the bank requires full repayment of the loan as a result of default. Page 5 of 6

3. On default interest rates – these exist for a number of reasons From the bank’s point of view, loans in default are riskier, APRA requires us to hold much more capital against them, and there is significantly more intensive work and customer contact for credit counselling and so on, which is costly for us to provide. There are many cases where we don’t apply the default rates, as we recognise that higher interest rates can impinge on the cash flow of our customers. However, there have clearly been some very high rates charged, so we would be happy to see a standard industry practice for default interest rates. Conclusion In conclusion:  There was no way for CBA to benefit from any loan that went into default after the day it took ownership of Bankwest.  CBA did not engineer defaults, contrary to claims by witnesses, and had no incentive to do so. We incurred $2 billion of losses on Bankwest loans, and had no other recourse to any other party for those losses.  Although the number of loans in default are small in proportion to total loans, we do support sensible measures to assist customers in default to reduce the undoubted impacts. We look forward to taking your questions. -ENDS-

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