uet 21194

UBS Investment Research

Australian Banking Sector Update

The dawn of a new housing boom? How will APRA and the RBA react?

The housing market is firming quickly across parts of Australia Recent months have seen a steady pick-up in the housing market, with increasedactivity and rising prices. Low interest rates, tight rental market, readily availablecredit, and negative gearing are attracting buyers back to housing. Credit statisticssuggest that the improving housing market is mainly driven by investors.

Oslo, Toronto, Auckland … Sydney? It may come as no coincidence that many developed economies which are notundertaking Quantitative Easing, but have cut rates to support their economies (andease pressure on their currency) have experienced house price booms. Oslo sawhouse prices up 45% (’09-’12), Toronto prices were up 41% (’09-Sep ’12) while Auckland is now rallying, up 20% over the last two years. We believe ifconfidence returns the ingredients are now in place for another bout of house price inflation in Australia, and Sydney in particular. Given Australian housing isalready expensive by most measures; we see this as undesirable and dangerous.

Global Equity Research

Australasia

Banks

Company News

12 April 2013

www.ubs.com/investmentresearch

Jonathan Mott

[email protected]

+61-2-9324 3864

Chris Williams, CFAAnalyst

[email protected]+61-2-9324 3968

Adam LeeAnalyst


Rate rises are a challenge. What about other macro-prudential options?

If house price inflation does eventuate the most likely reaction may be higher RBA cash rates. This may be possible if the US recovery continues, QE is coming to an end and the USD strengthens. But what if QE stays in place for longer? Traditional RBA Monetary Policy reactions may be difficult given it could push the AUD even higher. This provides a significant policy dilemma. In response to similar challenges in Scandinavia, Canada and New Zealand (proposal only) regulators have reacted by using other Macro-Prudential options such as loss given default floors, higher mortgage risk weightings and loan-to-valuation caps.

How would APRA and RBA react? Again look to ‘push against the boom’? We see it as no coincidence that there have been a number of recent speeches by APRA and RBA discussing Macro Prudential ‘supervision’ and ‘prudence’. In March APRA highlighted the need to ‘push against a boom’, where “risk is at its highest point, and risk perception at its lowest point”. APRA highlighted steps undertaken to restrict the early 2000s housing boom, including: changing risk weightings to reflect: LTV ratios; non-standard/risky lending; and stress testing. We believe APRA could again look at similar options where a potential boom could threaten stability. Non-public Pillar 2 capital buffers are a viable regulatory option. While the banks are well capitalised, such ‘Macro Prudence’ measures could limit the capital flexibility in the event of a material housing acceleration.

Banks less leveraged to a housing recovery than may expect The direct leverage to the banks from a stronger housing market is not large given stock vs flow and the law-of-big-numbers. All-else-equal, a 20% rise in mortgage lending (flow) would lead to a 1.5% increase in housing credit (stock). This would increase EPS by <1%. Banks remain much more leveraged to margins than to volumes. While the near term earnings outlook for the banks appears solid, we are concerned valuations have detached from fundamentals (another undesirable impact of QE). The sector is on 13.8 PE (FY13E), 2.1x book and 5.4% yield.

This report has been prepared by UBS Securities Australia Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 26. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

ab

mailto:[email protected]



Australian Banking Sector Update 12 April 2013

UBS 2

Contents page

Housing shows signs of life 3 — Why are house prices rallying? ............................................................................4 — Why is this a concern? .........................................................................................6

Lessons from Norway, Canada and New Zealand 7 — Norway.................................................................................................................7 — Canada ................................................................................................................9 — New Zealand......................................................................................................10

Will Australia come under similar pressure? 12 — Recent comments by APRA and the RBA ..........................................................12

Impact on the banks of a pick-up in housing 15 — “What if” analysis – Impact of greater housing lending (flow) on housing credit

growth (stock) ....................................................................................................15 What if APRA was to tighten mortgage risk weights? 17

— Capital sensitivities.............................................................................................20 — Sector Valuations and Pricing ............................................................................24 — Stock Valuations and Pricing..............................................................................25

Jonathan Mott

[email protected]

+61-2-9324 3864

Chris Williams, CFAAnalyst


Adam LeeAnalyst



UBS 3

Housing shows signs of life Over the last six months there have been ongoing signs of a pick-up in the Australian housing market. Auction clearance rates are now back up around 70%, activity levels are improving and house prices are again rising. With interest rates low, improving rental yields, tight housing supply in some markets, readily available credit and negative gearing many people are again being drawn back into the housing market.

Chart 1: Movement in Australian Five City Aggregate Home Values (%)

-10-505

10152025

Jan-

94

Jan-

95Ja

n-96

Jan-

97

Jan-

98

Jan-

99Ja

n-00

Jan-

01

Jan-

02

Jan-

03

Jan-

04Ja

n-05

Jan-

06

Jan-

07

Jan-

08Ja

n-09

Jan-

10

Jan-

11

Jan-

12Ja

n-13

Jan-

14Annual Change in House Prices (Rismark Hedonic Series) (%)

(%)

Source: RP-Data-Rismark, UBS estimates

National house prices are now up 2.4% over the last year. However, house price inflation is accelerating. During the 1Q13 prices were up 3.4% in Sydney, 4.3% in Perth, 2.5% in Melbourne and 2.7% across the nation.

If house price inflation continues in coming months it is possible that Sydney and Perth may show rolling 12 month house price growth of around 10% by May 2013. We believe that house price inflation prints of around 10% would grab a number of headlines, not just with real estate agents, property developers and investors, but also with governments and regulators.

Chart 2: RP Data- Rismark Daily Home Value Index Accumulation Indices

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Sy dney Melbourne Brisbane Adelaide Perth National

(A$m)

Source: RP-Data-Rismark, UBS estimates

Low interest rates, improving rental yields, readily available credit and negative gearing are drawing people back into the housing market

National house prices were up 2.7% in 1Q13… with Sydney up 3.4% and Perth up 4.3% If the trend continues, double digit house price inflation is possible in some cities This will likely grab the attention of the government and regulators


UBS 4

Why are house prices rallying? One of the reasons we believe housing prices are again rising is the low interest rate environment. Not only is this improving affordability, but the low yields available on alternative investments makes property rental yields appear more attractive.

Chart 3: Australian Unit Rental Yields relative to Term Deposit Rates (%)

40

60

80

100

120

140

Jun-

93

Jun-

95

Jun-

97

Jun-

99

Jun-

01

Jun-

03

Jun-

05

Jun-

07

Jun-

09

Jun-

11

Jun-

13

Unit Rental Yield to Term Deposit Rate (%) Av erage

(%)

Cheap

Ex pensiv e

Source: REIA, RBA, UBS estimates. Note rental yield on a two bedroom unit

It must also be remembered that taxpayers are able to negatively gear investment property in Australia, meaning that interest and other expenses can be offset against both rental income and other taxable income, reducing tax paid. With the proposed changes to superannuation, negative gearing remains one of the last tax reduction tools available to higher income tax payers.

Chart 4: Housing affordability is the best in a decade (%) Chart 5: However levels of household debt remain very high

14

18

22

26

30

34

Mar

-80

Mar

-83

Mar

-86

Mar

-89

Mar

-92

Mar

-95

Mar

-98

Mar

-01

Mar

-04

Mar

-07

Mar

-10

Mar

-13

Mortgage repay ments % of household disposable income

(%)

0%20%40%60%80%

100%120%140%160%180%

Sep-

84Se

p-86

Sep-

88Se

p-90

Sep-

92Se

p-94

Sep-

96Se

p-98

Sep-

00Se

p-02

Sep-

04Se

p-06

Sep-

08Se

p-10

Sep-

12

Household Debt to Disposable Income (%)

Source: RBA, RPData-Rismark, REIA, ABS, UBS estimates. Source: RBA, UBS estimates.

The lower rate environment and falls in house prices in 2011 and early 2012 have improved housing affordability. While this has begun to attract owner occupied buyers (mainly second and subsequent houses) back to the market, the improvement has been slower than many had expected. We believe this is mainly a result of the substantial amount of debt which is still required by many borrowers to access the market. Low rates help, but the absolute borrowing amount is likely to still put many people off entering the market, in our view.

Low yields available on alternative investments makes property rental yields appear more attractive


UBS 5

Chart 6: Investor vs Owner Occupied housing lending (flow) (A$m)

0

5,000

10,000

15,000

20,000

Sep

92Se

p 93

Sep

94Se

p 95

Sep

96Se

p 97

Sep

98Se

p 99

Sep

00Se

p 01

Sep

02Se

p 03

Sep

04Se

p 05

Sep

06Se

p 07

Sep

08Se

p 09

Sep

10Se

p 11

Sep

12Se

p 13

Sep

14

Gross Ow ner Occupied Lending Gross Inv estor Lending

(A$m) ForecastActual

Source: ABS, UBS estimates

As a result, it is investors who appear to be the primary drivers of the improvement in the housing market to date. There has also been a noticeable pick-up in investor housing credit growth in recent times (albeit still well below historical levels due to the law-of-big numbers) while owner occupied borrowers continue to deleverage, with owner occupied housing credit hitting new lows.

Chart 7: Investor vs Owner Occupied Housing Credit Growth

0%

4%

8%

12%

16%

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Dec

12

12 Month Inv estor Housing Credit Grow th

12 Month Ow ner Occupied Housing Credit Grow th

Source: RBA, UBS estimates

It is also worth noting that there is a very strong relationship between growth in investor housing lending (flow) and growth in house prices. This relationship has been consistent since the recession of the early 1990s and has survived through the financial crisis. As a result, we believe it is investment buyers, not owner occupiers who are the key drivers of house price inflation in Australia.

Investors appear to have been the primary drivers of improvement in housing to date

While owner-occupied credit growth has continued to trend down, investor credit has been steadily improving


UBS 6

Chart 8: Growth in Investor Housing Lending vs Growth in Dwelling Prices

-40-20

020406080

100

Jan

91Ja

n 92

Jan

93Ja

n 94

Jan

95Ja

n 96

Jan

97Ja

n 98

Jan

99Ja

n 00

Jan

01Ja

n 02

Jan

03Ja

n 04

Jan

05Ja

n 06

Jan

07Ja

n 08

Jan

09Ja

n 10

Jan

11Ja

n 12

Jan

13

-10-50510152025

12 mth grth in Inv estor Lending Grow th in Av e Dw elling Price (%)

(%) (%)

Source: ABS, RP-Data-Rismark, UBS estimates

Why is this a concern? We believe that if this situation continues and more investors enter the market to take advantage of negative gearing and house price appreciation opportunities, it leaves significant risk to the housing market.

While house price inflation per se is not necessarily a bad thing, we believe it is more concerning if house prices rally from already elevated levels. As discussed previously, affordability of housing has improved given recent rate cuts. However, the absolute level of house prices relative to median household incomes remains elevated at around 7.2x in Australian capital cities.

As a result, a normalisation of interest rates or an economic shock could lead to a rapid correction in prices in the future. Such a movement could threaten banking stability which is a key target of the regulators.

Chart 9: Australian Median Dwelling Price to Income Ratios

2

34

5

6

78

9

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Capital Cities Regional Areas Australia Wide

(x )

Source: ABS, APM, ATO, CBA/HIA; RBA, REIA, UBS estimates

A strong relationship exists between growth in investor housing lending and growth in house prices

While affordability has improved substantially with rate cuts, the absolute level of house prices relative to household income levels remains elevated


UBS 7

Lessons from Norway, Canada and New Zealand Norway At the start of the financial crisis, Norway moved quickly to cut interest rates to defend its currency and exporters against the adverse issues in the broader EU. As a result, household credit growth remained robust through the initial period, up 7-9% y/y. House prices grew similarly, up 23% over the following 2 years in Oslo, and up 47% to the recent peak in Sep-2012.

Chart 10: Norway aggregate house price index Chart 11: Major Norwegian city house prices rebased to Dec-08

60

90

120

150

180

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Norw ay Aggregate House Price Index

(Index )

80

100

120

140

160

Dec-

08

Jun-

09

Dec-

09

Jun-

10

Dec-

10

Jun-

11

Dec-

11

Jun-

12

Dec-

12

Norw ay - Oslo Norw ay - Bergen

(Index = 100, Dec-08) Oslo +47% to Sep-12 peak

Source: SSB, UBS estimates. Source: SSB, UBS estimates.

Household indebtedness levels started to become a concern, with household debt to disposable income rising towards 200% in Norway. However, mortgage credit growth didn’t rise until Sep-11 when house prices were already up 29% from their base. Mortgage credit was elevated by 1-1.5% for 2 quarters before returning to ~5%. What’s interesting in Norway is the housing boom wasn’t investment credit led – ‘buy-to-let’ is a small, very tightly regulated component in Norway suggesting the house price inflation wasn’t well correlated.

Chart 12: Norwegian mortgage credit growth did not rebound with house prices

-10

-5

0

5

10

15

20

25

Jun-

89Ju

n-90

Jun-

91Ju

n-92

Jun-

93Ju

n-94

Jun-

95Ju

n-96

Jun-

97Ju

n-98

Jun-

99Ju

n-00

Jun-

01Ju

n-02

Jun-

03Ju

n-04

Jun-

05Ju

n-06

Jun-

07Ju

n-08

Jun-

09Ju

n-10

Jun-

11Ju

n-12

Norw ay mortgage credit grow th (%, y /y ) Norw ay house prices (%, y /y )

(%)

Source: StatBank Norway, SSB, UBS estimates.

Norway moved quickly to cut rates at the start of the crisis

House prices in Oslo were up 47% to their Sep-12 peak

Mortgage credit did not accelerate through this period of house price inflation

It was elevated by 1-1.5% for 2 quarters, but returned to ~5% afterwards despite the 38% increase in house prices at a country level


UBS 8

In response the Norwegian central bank, Norges Bank, and the ministry of finance began exploring two elements of macro-prudential policy to curb the housing boom problem:

(1) Loan-to-valuation (LTV) caps – lowered to 85% from 90% with the intention of slowing the level of front book, high LTV lending;

(2) Proposing to alter the risk weightings on housing loans – the Ministry of Finance released a consultation paper in March proposing 4 possible alterations to the risk weight framework. They included (a) returning to a ‘standardised’ default approach with risk weights ~35% for housing; (b) tightening parameters around banks IRB models; (c) using a simple multiplier on a bank’s risk weights, or; (d) adopting a minimum ‘floor’ for risk weights.

While the first measure may have taken some steam out of the higher risk segments of the market, anecdotally some banks continued with lending above the official guideline.

Norges Bank argued that in order for regulation to alter bank behaviour around an asset class, either the relative return on equity of the asset class must be affected, or the changes must result in a constraint on the bank’s capital adequacy, internal or external. This is supportive of altering the risk weight framework. Norway has an average risk weighting across the sector of between 10-13%. The risk-weight outcomes contained in the current set of Ministry proposals range from a doubling of housing RWAs (~20-25%) to closer to 35% should they choose to return to a standardised housing risk-weight model.

Responding to the increase in household leverage and house price concerns, Norway has been exploring: (1) LTV caps, and; (2) higher risk weights for mortgage lending

Norges bank argues that for regulation to alter bank behaviour, it must impact profitability or capital for lenders


UBS 9

Canada Canadian regulators have faced a similar conundrum to that of their Nordic counterparts. Ongoing quantitative easing from its US neighbour and trade partner has compelled Canada to operate artificially low cash rates to protect the ‘Loonie’, exporters and the domestic economy. This resulted in a 26% increase in house prices in Canada between Mar-09 and Sep-12, and household debt to disposable income levels rising towards 165%.

Toronto house prices were up 41% from trough to peak, while Vancouver increased 30%.

Chart 13: Canada aggregate house price index Chart 14: Major Canadian city house prices rebased to Dec-08

60

90

120

150

180

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

Dec-

06

Dec-

07

Dec-

08

Dec-

09

Dec-

10

Dec-

11

Dec-

12

Canada Aggregate House Price Index

(Index )

80

100

120

140

Dec-

08

Jun-

09

Dec-

09

Jun-

10

Dec-

10

Jun-

11

Dec-

11

Jun-

12

Dec-

12

Canada - Toronto Canada - Vancouv er

(Index = 100, Dec-08) Toronto +41% to Sep-12 peak

Source: Teranet, National Bank of Canada, UBS estimates. Source: Teranet, National Bank of Canada, UBS estimates.

In responding to the household leverage and house price concerns the Canadian regulator has so far not proposed adjusting risk weights on mortgages. Instead, the OSFI (Canadian regulator) in conjunction with the Canadian Government has employed different components of macro-prudential regulation on a number of occasions in the last 5 years. These have included:

Reducing the maximum amortisation period for residential mortgages from 40 to 25 years;

Requiring that all borrowers meet the more stringent serviceability requirements set for a five year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term;

Reducing the maximum LTV allowable upon re-financing a mortgage from 90% to 85%;

Requiring a minimum deposit of 20% for government-backed mortgage insurance on non-owner occupied housing loans;

Limiting LTV ratios on home equity lines of credit to 65%, and withdrawing the Government insurance backing from them.

Toronto house prices increased 41% to their Sep-12 peak, with household debt to disposable income levels rising towards 165%

Canadian regulators have responded with a number of macro-prudential policy initiatives… … but they have so far avoided the adjustment of risk weights


UBS 10

New Zealand New Zealand has been the most recent developed economy to see this trend emerge. With a combination of low rates, resurgent mortgage competition and a lack of supply, Auckland house prices have risen 12% y/y.

Chart 15: Auckland median house price index

$0

$100

$200

$300

$400

$500

$600

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Jan-

10

Jan-

12

Jan-

14

Auckland Stratified Median House Price (NZ$,000)

(NZ$,000)

Source: REINZ, UBS estimates.

With concerns that interest rate rises may push the NZD up further, Bill English, the NZ Finance Minister stated in February that “Over the next several weeks the Reserve Bank will consult on its proposals to use more tools to help ensure financial stability”.

The RBNZ has identified several more specific macro-prudential tools above the countercyclical capital buffer (CCB) adopted under the Basel III capital adequacy framework to assist in managing the housing boom risk. These tools include adjustments to the core funding ratio (deposits and term wholesale funding), sectoral capital requirements and restrictions on high LVR (or LTV) residential mortgage lending.

The RBNZ has a fairly wide net to utilise macro-prudential tools, with around 90% of the total assets of the banking system held by locally incorporated banks. Reciprocity arrangements with other regulators should maintain a level playing field for offshore banks and mitigate the risk that foreign banks not primarily regulated by the RBNZ gain a commercial advantage during periods where macro-prudential tools are implemented.

It’s interesting to note the divergent approaches towards macro-prudential policy between APRA and the RBNZ. While the RBNZ discusses the 'governance' and public interest in openly communicating the use of the macro-prudential toolkit, we interpret APRA's commentary to suggest that it is far more likely to use undisclosed measures. We still believe that APRA's tools and active use of macro-prudential tools may in fact closely replicate those in other markets.

In implementing macro-prudential policy, the RBNZ has indicated that measures would be introduced in a forward-looking way to avoid impacts on existing loan agreements. This is understandable and practical given that retrospective adjustments would be likely to affect the confidence of both borrowers and

New Zealand is the most recent market to see the ‘QE led’ house price inflation

NZ has begun exploring macro-prudential tools to deal with the issues

The RBNZ has identified adjustments to core funding ratios, sectoral capital requirements and LTV caps

While APRA’s commentary suggests it may prefer undisclosed measures (Pillar 2), the RBNZ appears to be taking a more open path of discussion


UBS 11

lenders in the fundamentals of intermediated finance and credit provision. Does this imply mortgage back-books are insulated from potential risk weight adjustments?

The tools of macro-prudential regulation being discussed appear likely to be utilised in times of increasing risk, and potentially reversed as buffers during downturns. A very fundamental consideration here is the conviction of policy makers and regulators in easing credit, capital or other considerations during a downturn. While it is likely to be fairly effective to 'lean' against a boom, it is challenging to stimulate lending at the depths of a downturn. So what is the likelihood that regulators mis-time the easing of macro-prudential tools and in fact create less stability where they have sought to manage overall system stability?

As an aside, the RBNZ has provided an interesting insight into the indicators of risk in a post crisis world:

"… since the crisis, 'credit gap' indicators appear to have become distorted and there is a risk that they might be late in signalling the need for intervention."

We read from this that in the new world, it’s not necessarily about excessive credit growth creating imbalances.

It may be prudent to ‘lean’ against a boom, but what is the risk that regulators mis-time the easing of macro-prudential tools?

The RBNZ notes traditional indicators of risk in housing may not be proving effective lead indicators since the crisis


UBS 12

Will Australia come under similar pressure? Monetary Policy in Australia has proven to be a very effective tool of economic management over the last twenty years. With around 90% of Australian mortgages variable rate changes to interest rates have a direct impact on both household cash flows and housing affordability.

If the signs of life now being seen across the housing market and the domestic economy as a whole continue to accelerate, the usual reaction would be for the RBA to begin of a new tightening cycle. This would be consistent with the RBA’s economic targets as well as its role in Macro Prudential Supervision.

However, as has been seen in other developed economies, the flexibility of monetary policy is more limited in an environment where much of the world is undertaking Quantitative Easing. The beginning of a tightening cycle would most likely lead to a further rise in the AUD putting additional pressure on currency sensitive sectors of the economy.

However, what if the US economic recovery takes longer than some anticipate and QE remains in place for some time? Would this limit the ability of the RBA to use monetary policy to slowdown an acceleration in the housing market? Would other tools be required to slow the housing market without the negative repercussions on other sectors of the economy?

Recent comments by APRA and the RBA In recent months there have been a number of speeches by both APRA and the RBA which provide some indication as to their thinking on managing a potential housing boom.

On 22nd March 2013, Charles Littrell, Executive General Manager, APRA, made a speech “Macro Prudence vs Macro Prudential Supervision”1. This speech talked through the idea that while ‘macro prudential supervision’ is an “unobjectionable concept”, “macro prudence is the mindset which the public sector must maintain if we are to have a reasonable chance to preserve financial stability” over the long run.

A large section of this speech was dedicated to the need for the agencies to “Push against the boom” to maintain financial stability. It stated:

“The key challenge here is that in the boom, risk is at its highest point, and risk perception at its lowest point, not only among regulated entities but in society more generally. Furthermore, the most aggressive, rapidly growing institutions are led by the most aggressive, least risk-conscious, and often most arrogant managers.

In this environment, APRA must take strenuous action to reduce entity and system risks, at a point when there is least public consensus that we should do so, and most resistance from the entities creating the biggest problems…

1 http://www.apra.gov.au/Speeches/Documents/Charles%20Littrell%20-%20Macro%20Prudence%20vs.%20Macro-Prudential%20Supervision%20-%20Macquarie%20-%20%20Sydney%2022%20March%202013.pdf

Tighter monetary policy is the obvious response to inflationary house price conditions

However, quantitative easing and currency concerns are now emerging as constraints to its use

APRA and the RBA have provided indications of their thinking on how to manage a potential housing boom


UBS 13

This is the point in the cycle where most public sectors drop the ball. They don’t intervene with sufficient counter-cyclical force, and the boom inevitably becomes a bust. This is not because regulators can’t see the boom, but because industry and politicians mistake the boom for the ‘new normal’, and don’t want regulators to do anything to mess up this dream.”

APRA highlighted that in the past it has taken actions to ‘push against a boom’

“Consider the early 2000s home loan boom. Both APRA and the RBA identified that the 1998 to 2002 boom might get out of hand. APRA took the following steps from 2002 to 2005:

a) We materially ramped up our communication with ADI boards and executives on the dangers they evidently weren’t seeing in home lending; b) We strongly discouraged sub-prime lending; c) We disallowed capitalised origination expenses, which removed up to 15 per cent of the Tier 1 capital from some institutions; d) We changed the risk weighting on home loans to reflect loan to valuation ratios, insurance status, and non-standard conditions, in a fashion that strongly discouraged more risky home lending; e) We removed capital arbitrages between the ADI and lenders mortgage insurance industries, and greatly increased the capital requirements on LMIs; f) We conducted a major stress test, which demonstrated among other things that many ADIs were taking much more downside risk than they thought they were taking; and g) We engaged in strenuous supervisory intervention to restrain the most aggressive lenders.“

So where are we at the moment? Is APRA again considering using such tools?

“With inflation and unemployment low, personal income and wealth high, and asset values high, we are in no worse than ‘normal’ territory… We are lifting our focus on stress testing … but on current credit growth rates and from what we are seeing on our visits, there is no reason to take a more consciously anti-boom approach.”

We agree with this assessment, but note that things are hotting up pretty quickly, and see that house price inflation in other developed economies has generally not coincided with excessive credit growth.

Regulators appear less comfortable with LTV ratio limits

It appears that regulators in Australia are less comfortable with setting Loan-to-Valuation ratio limits and varying these limits over time. In a speech on 11th October 2012 “Macroprudential policy: A suite of tools or a state of mind?”2 Luci Ellis (Head of Financial Stability Department, RBA) questioned the effectiveness of Loan-to-Valuation ratio limits:

2 http://www.rba.gov.au/speeches/2012/sp-so-111012.html


UBS 14

“The cap [LTV ratio] would have to be set very low to be binding on existing home buyers who are trading up. First home buyers would be squeezed out, but most buyers would be little affected.”

So what are the regulators looking out for?

“Risk-taking, in the form of easier lending standards, is what we are watching for. It's about behaviour, not a single number. A qualitative assessment might well be good enough. ... Existing models of systemic risk simply aren't good enough to be relied on that way, and they probably never will be. But informed judgement is probably good enough in most cases” 2

Higher capital ratios via Pillar 2 appears the preferred method

We believe that the regulators may look to utilise the non-public Pillar 2 capital requirements in the event that they become concerned with risks to financial stability. This may be undertaken at either a system wide or individual institution level. Importantly there would be no requirement for the regulators to announce such measures to the market.

“Prudential supervisors have always had the scope to increase banks' minimum capital ratios above the Basel minimum. That is what Pillar 2 of the Basel framework is for.”2

The counter-cyclical buffer – not only in a credit boom

A recent publication by the RBA “Macroprudential Analysis and Policy in the Australian Financial Stability Framework” (September 2012) 3 looks at the application of the counter-cyclical capital buffer. While the Basel Committee for Banking Supervision favours the application of this buffer in periods when the Credit to GDP ratio is rising, this should only be seen as a “guide”.

“The Australian authorities do not propose to restrict their analysis to a single indicator or small number of pre-specified indicators. The full array of available data and analysis will be marshalled to support the detection of a harmful credit boom, and the full suite of prudential tools – including but not limited to this buffer – remain available for use in response.”

We see this as extremely important, as given the significant level of household debt in Australia it is mathematically difficult for housing credit to accelerate significantly from current levels even in a housing boom. We believe that the regulators would be correct in utilising the counter-cyclical buffer when there are other signs of a housing boom, even if credit growth does not accelerate materially. This is consistent with the current experiences in New Zealand.

3 http://www.rba.gov.au/fin-stability/resources/2012-09-map-aus-fsf/pdf/2012-09-map-aus-fsf.pdf


UBS 15

Impact on the banks of a pick-up in housing With the potential for a re-acceleration of the housing market, higher prices and more activity, questions are being asked over the banks’ exposure and potential earnings benefit. We believe that any benefit is likely to be much less material than many perceive.

Why? In banking the Balance Sheet drives the Profit and Loss, not the other way around. This is different to most other companies. It is the growth in outstanding credit (stock) which leads to higher revenue, not activity (flow) per se.

While the flow of gross housing lending has been relatively stagnant at around $250-260bn per annum since 2006 ($180-$205bn p.a. net of refinancing), the stock of outstanding housing debt has risen from $800bn to $1.3tr during this period. Further, the level of mortgage paydowns (repayments excluding interest) has steadily risen in line with contractual obligations, falling interest rates and customer deleveraging.

As a result, the flow of net new mortgage lending is a much smaller proportion of outstanding credit (stock) than it has been in the past. Therefore, even a relatively material rise in new flow, has a muted impact on outstanding mortgage credit growth, especially compared to the pre-GFC days of double-digit credit growth.

Chart 16: Flow of Mortgage Credit – New Lending, Paydowns and Mortgage Credit Growth

624 707 799 89

3 980

1,05

7

1,14

1

1,20

1

1,25

2

1,31

0

1,36

9

152

211

142

199

130

181

122

182

119

204

126

202

105

193

108

201

85

184

81

164

0

200

400

600

800

1,000

1,200

1,400

1,600

FY04

Net L

endin

g

Payd

owns

FY05

Net L

endin

g

Payd

owns

FY06

Net L

endin

gPa

ydow

ns

FY07

Net L

endin

g

Payd

owns

FY08

Net L

endin

g

Payd

owns

FY09

Net L

endin

g

Payd

owns

FY10

Net L

endin

g

Payd

owns

FY11

Net L

endin

gPa

ydow

ns

FY12

Net L

endin

g

Payd

owns

FY13

E

Net L

endin

g

Payd

owns

FY14

E

(A$m)

+13.2% +14.1% +10.7% +9.9% +7.8% +8.0% +5.3% +4.2% +4.6% +4.5%

Source: RBA, ABS, UBS estimates

“What if” analysis – Impact of greater housing lending (flow) on housing credit growth (stock) If we assume that the level of housing lending (flow) continues to accelerate at a rate of 15% per annum until September 2015 this will take net housing lending to around $21bn per month, well above its pre-GFC highs of around $19bn per month.

We believe the potential earnings benefit for the banks from an improving housing market is likely to be less material than many perceive This boils down to the fact that it is the growth in the substantial outstanding credit (stock) not the activity (flow) that drives higher revenue for the banks


UBS 16

All else equal this will lead to an increase in housing credit growth to around 7% per annum by the end of 2015. This compares to around 4.5% per annum growth in our current forecasts. Given mortgages are a low margin product, this would increase EPS by around 1% all else equal.

Table 1: Growth in Housing Credit by FY15

Growth in Net Lending (flow) excluding Refinancing (%)

-10.0% -7.5% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0%

8.0% 4.1% 4.6% 5.0% 5.5% 6.0% 6.5% 7.0% 7.6% 8.1% 8.7% 9.2% 9.8% 10.5%

8.5% 3.7% 4.2% 4.6% 5.1% 5.6% 6.1% 6.6% 7.2% 7.7% 8.3% 8.9% 9.5% 10.1%

9.0% 3.3% 3.8% 4.2% 4.7% 5.2% 5.7% 6.2% 6.8% 7.3% 7.9% 8.5% 9.1% 9.7%

9.5% 2.9% 3.4% 3.8% 4.3% 4.8% 5.3% 5.8% 6.4% 6.9% 7.5% 8.1% 8.7% 9.3%

10.0% 2.5% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 6.0% 6.6% 7.1% 7.7% 8.3% 9.0%

10.5% 2.1% 2.5% 3.0% 3.5% 4.0% 4.5% 5.1% 5.6% 6.2% 6.8% 7.4% 8.0% 8.6%

11.0% 1.7% 2.1% 2.6% 3.1% 3.6% 4.1% 4.7% 5.2% 5.8% 6.4% 7.0% 7.6% 8.2%

11.5% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.3% 4.8% 5.4% 6.0% 6.6% 7.2% 7.9%

12.0% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.9% 4.4% 5.0% 5.6% 6.2% 6.9% 7.5%

12.5% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.5% 4.1% 4.6% 5.2% 5.9% 6.5% 7.1%

13.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.1% 3.7% 4.3% 4.9% 5.5% 6.1% 6.8%

13.5% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.7% 3.3% 3.9% 4.5% 5.1% 5.7% 6.4%

Perc

enta

ge o

f mor

tgag

e prin

cipal

repa

id an

nuall

y

14.0% -0.8% -0.3% 0.2% 0.7% 1.2% 1.8% 2.3% 2.9% 3.5% 4.1% 4.7% 5.4% 6.0%

Source: RBA, ABS, UBS estimates

While growth in net mortgage lending of this level is possible, especially in the event of a Quantitative Easing fuelled Australian housing boom, some response in the form of higher interest rates or macro-prudential regulation would be highly likely to “lean against the boom”.

Chart 17: “What if” Net Mortgage Lending accelerated at 15% p.a. until September 2015

0

5,000

10,000

15,000

20,000

25,000

Sep-

83

Sep-

85

Sep-

87

Sep-

89

Sep-

91

Sep-

93

Sep-

95

Sep-

97

Sep-

99

Sep-

01

Sep-

03

Sep-

05

Sep-

07

Sep-

09

Sep-

11

Sep-

13

Net Mortgage Lending (ex Refinancing)

(A$m) Actual "What if"

Source: ABS, UBS estimates

If we assume net mortgage lending accelerates at 15% pa to Sep-2015, housing credit growth would accelerate to ~7% pa by the end of 2015 This would increase EPS by ~1% all else being equal


UBS 17

What if APRA was to tighten mortgage risk weights? Many banking regulators around the world have explored using risk weightings to discourage banks from excessive behaviour that may be to the detriment of financial stability – in theory the risk weighting system is a mechanism for just that. The most evident example has been in regulators applying higher risk weight settings for lending above a certain maximum LTV ratio.

However, assuming this sort of adjustment is prudent through-the-cycle, what about the application of measures to adjust risk-weightings on specific asset classes (eg mortgages) at points in the cycle where risk is building?

The introduction of Basel II advanced accreditation, and the Internal Ratings Based approach to risk weightings brought with it a level of flexibility for banks to model their own risk weights (with regulator-approved models).

Certain banks have done particularly well in ‘optimising’ risk weighted mortgage assets. For example, the Norwegian banks operate with average risk weights across their IRB mortgage portfolios of 12% - not far ahead of WBC at 14.5% and CBA at 15.2%.

Table 2: Sector Internal Ratings Based (IRB) mortgage risk weights

ANZ CBA NAB WBC Sector

Mortgage Exposures 255,208 418,544 283,366 399,982 1,357,100

Mortgage RWAs 43,664 63,637 56,686 58,041 222,028

IRB calculated Mortgage risk weight 17.1 15.2 20.0 14.5 16.4

Implied capital held @ 8% Core Tier 1 (APRA) 3,493 5,091 4,535 4,643 17,762

Implied Leverage Ratio 73.1x 82.2x 62.5x 86.1x 76.4x

Implied capital held per $ exposure $0.014 $0.012 $0.016 $0.012 $0.013

Source: Bank Pillar 3 data, UBS estimates.

At these risk weightings, the leverage of Australian IRB mortgage portfolios is substantial – an average of 76x for the sector, with WBC at 86x and CBA at 82x. This implies WBC and CBA hold 1.2c for every $1.00 of mortgage exposure across the IRB component of their portfolios.

Over the last 20 years, this has proven a sufficient buffer, partly given dynamic LTVs of ~50-60% across mortgage portfolios and loss rates around 2-3bp for ANZ, CBA and WBC… or 7bp for NAB. However, this period has been particularly benign for mortgage credit. Its arguably not surprising to have low modelled risk weight outcomes given this benign 20 years is at the historical limits of data used for most banks’ IRB models. Perhaps it’s also not surprising that regulators are looking at risk weights as a tool of influence over housing markets that are becoming a systemic concern.

But how could this work in practice? It depends if the regulator’s intention is: (1) to discourage the marginal dollar of credit being lent against inflating mortgage assets; (2) to build a larger capital buffer against the entire mortgage asset class assuming a systemic shock would affect the whole book, or; (3) a combination of both.

Many regulators around the world have explored risk weight adjustments to manage banking sector behaviour What if APRA was to look at a more dynamic approach to risk weighting in order to ‘lean’ against a housing boom?

Average risk weightings on mortgages across the bank IRB portfolios have been ‘optimised’ to average 16.4% Bank sector leverage in IRB mortgage books is substantial at 76x

Banks hold on average 1.3c of capital against each $1 of mortgage credit

While capital models are limited in their history, APRA already applies a minimum Loss-Given-Default floor of 20% as an offset

How could APRA and the RBA utilise risk weight adjustments in practice?


UBS 18

Mortgages written in the current funding environment are particularly profitable for the major banks (refer UBS research “Have mortgages ever been more profitable?”, 22-Feb-13). UBS analysis using the Bank of England’s funding cost methodology suggests the after-tax profit on a new mortgage funded in the current environment is ~60-70bp, averaging these levels for the last 12 months.

Chart 18: Decomposition of new mortgage lending rates (%) Chart 19: Estimated bank profit from writing a new mortgage(%)

0

2

4

6

8

10

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Blended Funding Cost Expected LossCapital Charge ResidualDiscounted M ortgage Rate

(%)

-0.25

0.00

0.25

0.50

0.75

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Banks' Profit on a new mortgage - B lended Funding

(%)

Source: Bank of England methodology, UBS estimates. Note: Assumes a blended funding mix of both Term Deposits and Wholesale Term.

Source: Bank of England methodology, UBS estimates. Note: Assumes a blended funding mix of both Term Deposits and Wholesale Term.

Taking the low end of this range as a starting point, and assuming a sector average risk-weighting on an incremental mortgage, we find the implied marginal ROE is 46%. Conscious not to draw too many conclusions comparing mortgages funded at marginal deposit/wholesale costs and written at currently offered spreads with mortgages in the back-books of the Major banks, the major bank’s retail business ROEs support the conclusions. CBA’s Retail Banking Services made an estimated 46% ROE in 1H13, ANZ made a 38% ROE in Retail Australia in 2H12, while NAB made a 35% ROE in its Personal Bank.

Table 3: Estimated ROE on writing a new mortgage in the current funding environment

Exposure (A$'000) $250

Bank profit on a new mortgage (bp) 60bp

Avg Mortgage risk weight (%) 16.4%

Implied capital held @ 8% Core Tier 1 (A$'000, APRA) 3.3

Implied ROE* 46%

Source: UBS estimates. Note: ROE = return on regulatory capital @ 8% Basel III CT1, excludes benefit of free float earnings on capital.

If regulators were looking to influence bank lending behaviour, we believe the changes implemented should alter the relative return on equity of an asset class, or influence capital adequacy to some extent or they will have little impact on bank (or customer) behaviour. Adjusting the risk weighting methodology for new mortgages during times in the cycle where regulators see a build up of risk is becoming a concern is one way to influence returns.

In table 4 we illustrate the sensitivity of mortgage ROE to changes in the marginal risk weight applied to a new housing loan. The table also illustrates the sensitivity to ROE of banks altering their pricing on a new mortgage (eg via a

Our analysis suggests banks are writing new mortgages at ~60-70bp profit

We estimate the implied ROE on a new mortgage funded at marginal deposit and wholesale costs is 46%


UBS 19

reduction in discounts). We estimate that if the regulator was to require a 5% increase in the marginal risk weight applied to new mortgage lending, banks would need to adjust pricing by ~20bp (after on-costs and tax) to restore the marginal ROE. If the regulators were to require a 35% risk weighting to new mortgages, the repricing required would be closer to 80bp.

Table 4: Sensitivity of estimated mortgage ROE to risk weight (%) and spread

Marginal risk weight 15% 20% 25% 30% 35%

30 25.0 18.8 15.0 12.5 10.7 40 33.3 25.0 20.0 16.7 14.3 50 41.7 31.3 25.0 20.8 17.9 60 50.0 37.5 30.0 25.0 21.4 70 58.3 43.8 35.0 29.2 25.0 80 66.7 50.0 40.0 33.3 28.6 Mo

rtgag

e pro

fit (b

p)

90 75.0 56.3 45.0 37.5 32.1

Source: UBS estimates.

This could leave banks and regulators facing multiple difficult decisions… If the regulator was to communicate the requirements via Pillar 2 (ie undisclosed to the market), how would banks communicate the repricing to customers? If the regulator was public with its risk concerns, would this compromise its system stability mandate in some way? Is a broad approach applying the risk weighting to all new mortgages desirable, or only to certain asset types showing the greatest risk eg specifically to investor lending?

Applying changes to discrete asset types – even something as broad as ‘investor lending’ – has its own definitional constraints. Recall Westpac reclassified 10% of its mortgage book (~$30bn) in Nov-2011 from owner-occupied to investor lending to “reflect better the purpose of the loan”. Would banks and new customers simply find loopholes in documentation or disclosure to avoid the additional capital impost?

If the regulators chose to re-weight the mortgage back-book, the implications for Core Tier 1 capital vary across the banks depending on the degree of risk-weight optimisation. We’re not convinced a broad approach such as this would achieve the targeted outcome of reducing further investment in specific asset classes of concern (eg inflated housing) – but it would certainly expand the capital buffer of a system-wide shock. We include capital sensitivities on the following page.

Table 5: Scenario 1: increase mortgage risk weights to a 20% portfolio average

Scenario 1: Mortgage risk weight avg 20% ANZ CBA NAB WBC Sector

Mortgage RWAs 51,042 83,709 56,673 79,996 271,420

Implied capital @ 8% Core Tier 1 (APRA) 4,083 6,697 4,534 6,400 21,714

Implied Leverage Ratio 62.5x 62.5x 62.5x 62.5x 62.5x

Additional capital (A$m) 590 1,606 0 1,756 3,951

Additional capital (bp) 19 53 0 60 32

Basel III Core Tier 1 (APRA, % last reported) 8.0 8.1 7.9 8.2 8.1

Adjusted Basel III CT1 (APRA, %) 7.8 7.6 7.9 7.6 7.7

Source: Bank Pillar 3 data, UBS estimates.

We estimate a 5% increase in the marginal risk weighting on a new mortgage would require ~20bp of repricing to restore the marginal ROE

Applying an average risk-weighting of 20% to the back book would imply an additional 32bp of capital is required at the sector level


UBS 20

Capital sensitivities Table 6: ANZ CT1 sensitivity to mortgage risk weights (bp Δ) Table 7: ANZ CT1 sensitivity to mortgage risk weights (CT1 %) Avg risk weight

15% 20% 25% 30% 35%

7.0% -27 3 32 61 91

7.5% -20 11 43 74 106

8.0% -14 19 53 87 120

8.5% -8 28 64 99 135 CT1 t

arge

t

9.0% -2 36 74 112 150


Avg risk weight

15% 20% 25% 30% 35%

7.0% 8.3 8.0 7.7 7.4 7.1

7.5% 8.2 7.9 7.6 7.3 6.9

8.0% 8.1 7.8 7.5 7.1 6.8

8.5% 8.1 7.7 7.4 7.0 6.6 CT1 t

arge

t

9.0% 8.0 7.6 7.3 6.9 6.5

Source: UBS estimates. Note: latest disclosed Basel III Core Tier 1 8.0% for ANZ.

Table 8: CBA CT1 sensitivity to mortgage risk weights (bp Δ) Table 9: CBA CT1 sensitivity to mortgage risk weights (CT1 %) Avg risk weight

15% 20% 25% 30% 35%

7.0% -23 25 74 123 171

7.5% -13 39 91 143 195

8.0% -2 53 109 164 220

8.5% 8 67 126 185 244 CT1 t

arge

t

9.0% 19 81 143 206 268


Avg risk weight

15% 20% 25% 30% 35%

7.0% 8.3 7.8 7.4 6.9 6.4

7.5% 8.2 7.7 7.2 6.7 6.1

8.0% 8.1 7.6 7.0 6.5 5.9

8.5% 8.0 7.4 6.8 6.2 5.7 CT1 t

arge

t

9.0% 7.9 7.3 6.7 6.0 5.4

Source: UBS estimates. Note: latest disclosed Basel III Core Tier 1 8.1% for CBA.

Table 10: NAB CT1 sensitivity to mortgage risk weights (bp Δ) Table 11: NAB CT1 sensitivity to mortgage risk weights (CT1 %) Avg risk weight

15% 20% 25% 30% 35%

7.0% -46 -17 12 42 71

7.5% -40 -8 23 54 85

8.0% -33 0 33 67 100

8.5% -27 8 44 79 115 CT1 t

arge

t

9.0% -21 17 54 92 129


Avg risk weight

15% 20% 25% 30% 35%

7.0% 8.4 8.1 7.8 7.5 7.2

7.5% 8.3 8.0 7.7 7.4 7.0

8.0% 8.2 7.9 7.6 7.2 6.9

8.5% 8.2 7.8 7.5 7.1 6.8 CT1 t

arge

t

9.0% 8.1 7.7 7.4 7.0 6.6

Source: UBS estimates. Note: latest disclosed Basel III Core Tier 1 7.9% for NAB.

Table 12: WBC CT1 sensitivity to mortgage risk weights (bp Δ) Table 13: WBC CT1 sensitivity to mortgage risk weights (CT1%) Avg risk weight

15% 20% 25% 30% 35%

7.0% -15 33 80 128 175

7.5% -5 46 97 148 199

8.0% 5 60 114 168 223

8.5% 16 73 131 189 247 CT1 t

arge

t

9.0% 26 87 148 209 270


Avg risk weight

15% 20% 25% 30% 35%

7.0% 8.4 7.9 7.4 6.9 6.4

7.5% 8.2 7.7 7.2 6.7 6.2

8.0% 8.1 7.6 7.1 6.5 6.0

8.5% 8.0 7.5 6.9 6.3 5.7 CT1 t

arge

t

9.0% 7.9 7.3 6.7 6.1 5.5

Source: UBS estimates. Note: latest disclosed Basel III Core Tier 1 8.2% for WBC.


UBS 21

Table 14: Sector Earnings and Valuation Summary (A$m)

ANZ CBA NAB WBC Majors Recommendation Sell Sell Neutral Neutral Underweight Share price ($) 12 April 2013 28.74 68.10 31.67 31.58 Price Target ($) 26.00 60.00 28.00 28.50 Implied 2013E Price to Book (x) 1.6 2.2 1.6 1.9 1.9 Implied 2014E PE (%) 12.6 14.1 12.5 13.6 13.3 % Price Upside to Price Target -10% -12% -12% -10% -11% Valuations PE (x) 2012 13.6 15.7 13.3 15.1 14.6 2013E 13.1 14.8 12.8 14.1 13.8 2014E 12.6 14.1 12.5 13.6 13.3 2015E 11.9 13.5 12.0 13.2 12.8 PE Relative to All Industrials (%) 2012 80 93 78 89 86 2013E 78 88 76 84 82 2014E 88 98 86 94 92 2015E 89 102 90 99 96 PE Relative to Major Banks (%) 2012 93 108 91 104 n.a. 2013E 95 107 93 102 n.a. 2014E 95 106 94 102 n.a. 2015E 93 106 94 104 n.a. Price to Core Earnings (Pre-Prov'n Profit) (x) 2012 8.5 10.2 6.9 9.4 8.9 2013E 8.1 9.5 6.9 8.8 8.5 2014E 7.8 9.0 6.8 8.4 8.1 2015E 7.4 8.6 6.7 8.2 7.8 Diluted EPS growth (%) 2011 5.4 10.7 16.3 5.2 9.2 2012 3.2 2.9 -3.7 3.3 1.7 2013E 3.7 6.3 3.5 7.2 5.4 2014E 3.8 4.8 3.0 4.1 4.0 2015E 6.3 4.2 3.8 2.4 4.1 Growth in Book Value Per Share (%) 2011 8.5 4.4 6.1 8.1 6.6 2012 6.4 9.6 -0.1 4.1 5.4 2013E 5.4 6.2 5.2 4.4 5.3 2014E 6.0 4.9 4.7 4.3 4.9 2015E 6.2 4.5 4.8 4.1 4.8 Div Yield (%) 2012 5.0 4.9 5.7 5.3 5.2 2013E 5.1 5.3 5.9 5.5 5.4 2014E 5.3 5.7 6.1 5.8 5.7 2015E 5.6 6.0 6.3 6.0 6.0 Price to Book (x) 2012 1.92 2.70 1.87 2.20 2.22 2013E 1.82 2.54 1.78 2.11 2.11 2014E 1.72 2.43 1.70 2.02 2.01 2015E 1.62 2.32 1.62 1.94 1.92 Price to NTA (x) 2012 2.35 3.64 2.29 3.02 2.91 2013E 2.20 3.35 2.14 2.84 2.71 2014E 2.05 3.15 2.02 2.68 2.55 2015E 1.91 2.98 1.91 2.54 2.40


UBS 22

ANZ CBA NAB WBC Majors Financials Cash NPAT (UBS post prefs) ($m) 2012 5,819 7,071 5,395 6,598 24,883 2013E 6,169 7,610 5,765 7,132 26,677 2014E 6,496 8,018 6,044 7,448 28,007 2015E 7,010 8,366 6,375 7,651 29,402 Cash NPAT (Company format) ($m) 2012 5,830 7,113 5,433 6,598 24,974 2013E 6,177 7,650 5,803 7,132 26,763 2014E 6,504 8,058 6,082 7,448 28,093 2015E 7,018 8,406 6,413 7,651 29,488 Cash EPS (fully diluted) (cps) 2012 211 433 239 209 n.a. 2013E 219 460 247 224 n.a. 2014E 227 482 254 233 n.a. 2015E 242 503 264 239 n.a. Basic EPS (Company format) (cps) 2012 220 449 241 216 n.a. 2013E 228 475 247 231 n.a. 2014E 237 498 255 241 n.a. 2015E 252 520 264 247 n.a. Book Value Per Share (cps) 2012 1,499 2,519 1,691 1,437 n.a. 2013E 1,579 2,676 1,778 1,500 n.a. 2014E 1,673 2,806 1,862 1,565 n.a. 2015E 1,777 2,933 1,951 1,628 n.a. Dividend (cps) 2012 145 334 180 166 n.a. 2013E 147 360 187 174 n.a. 2014E 152 385 192 182 n.a. 2015E 162 406 198 190 n.a. Return on Equity (%) 2011 15.6 19.6 15.0 16.0 16.8 2012 15.1 18.6 13.9 15.5 16.0 2013E 14.9 18.1 13.7 16.0 15.9 2014E 14.6 18.1 13.5 16.0 15.8 2015E 14.6 18.0 13.4 15.7 15.7 Return on Assets (%) 2011 0.97 1.05 0.85 1.02 0.98 2012 0.93 1.02 0.77 1.01 0.95 2013E 0.94 1.07 0.79 1.04 0.98 2014E 0.94 1.09 0.77 1.05 0.98 2015E 0.96 1.09 0.77 1.04 0.98 Core Tier 1 (APRA Basel III, %) 2012 8.0 7.5 7.9 8.2 n.a. 2013E 8.5 8.3 8.2 8.8 n.a. 2014E 9.0 8.7 8.4 9.2 n.a. 2015E 9.5 8.9 8.7 9.5 n.a. Core Tier 1 (Globally Harmonised Basel III, %) 2012 10.0 9.8 9.3 10.6 n.a. 2013E 10.9 10.9 10.1 11.3 n.a. 2014E 11.6 11.4 10.4 11.7 n.a. 2015E 12.1 11.6 10.7 11.9 n.a.


UBS 23

ANZ CBA NAB WBC Majors Key Earnings Drivers Growth in Ave Interest Earning Assets (%) 2011 6.4 4.8 6.2 2.5 4.9 2012 12.0 6.4 8.5 5.4 7.9 2013E 7.3 4.2 5.0 4.1 5.1 2014E 5.7 4.0 4.2 4.0 4.4 2015E 6.3 4.0 3.2 4.0 4.3 Margins (%) 2011 2.46 2.14 2.25 2.22 2.27 2012 2.31 2.09 2.11 2.17 2.17 2013E 2.24 2.12 2.04 2.21 2.15 2014E 2.20 2.13 2.01 2.20 2.14 2015E 2.19 2.12 1.99 2.18 2.12 Non-Interest Income Growth (%) 2011 8.4 -2.5 2.3 -2.0 1.1 2012 6.5 -0.3 9.6 11.3 6.1 2013E -4.8 7.6 3.0 4.3 2.7 2014E 5.2 2.6 3.6 3.9 3.7 2015E 4.9 3.5 3.3 3.6 3.8 Revenue Growth (%) 2011 7.0 3.1 5.4 1.3 4.1 2012 5.7 2.5 3.6 5.6 4.3 2013E 1.1 6.4 2.0 5.3 3.8 2014E 4.3 3.7 2.7 3.8 3.6 2015E 5.5 3.6 2.6 3.3 3.7 Cost Growth (%) 2011 15.1 3.4 1.4 1.9 5.2 2012 6.2 3.4 -1.8 3.8 2.9 2013E -5.4 3.8 1.2 2.7 0.5 2014E 2.5 1.4 1.9 2.1 1.9 2015E 3.4 2.2 1.4 3.0 2.5 Cost to Income Ratio (%) 2012 47.7 45.6 42.8 40.8 44.2 2013E 44.6 44.5 42.5 39.8 42.8 2014E 43.9 43.5 42.2 39.1 42.1 2015E 43.0 42.9 41.7 39.0 41.6 Core Earnings Growth 2011 0.6 3.0 9.0 0.8 3.3 2012 5.3 1.7 8.1 6.8 5.4 2013E 7.1 8.7 2.6 7.1 6.4 2014E 5.7 5.5 3.3 5.0 4.9 2015E 7.1 4.6 3.4 3.5 4.6 BDD charge/loans (bp) 2011 31 25 38 20 28 2012 29 20 53 24 31 2013E 31 23 45 24 31 2014E 32 24 41 25 30 2015E 31 25 38 26 30

Source: Company data, UBS estimates


UBS 24

Sector Valuations and Pricing Chart 20: Sector PE (x) Chart 21:Sector PE Relative to the All Industrials (ex Financials)

2468

10121416

Dec-

80De

c-82

Dec-

84De

c-86

Dec-

88De

c-90

Dec-

92De

c-94

Dec-

96De

c-98

Dec-

00De

c-02

Dec-

04De

c-06

Dec-

08De

c-10

Dec-

12

Sector PE

(x )

0%20%40%60%80%

100%120%140%

Dec-

80De

c-82

Dec-

84De

c-86

Dec-

88De

c-90

Dec-

92De

c-94

Dec-

96De

c-98

Dec-

00De

c-02

Dec-

04De

c-06

Dec-

08De

c-10

Dec-

12

Aust banks PE Rel (All Industrials ex Financials)

Chart 22:Sector Price to Pre-Provision Profits (x) Chart 23: Sector Earnings Yield to Bond Yield (%)

02468

1012

Dec-

80De

c-82

Dec-

84De

c-86

Dec-

88De

c-90

Dec-

92De

c-94

Dec-

96De

c-98

Dec-

00De

c-02

Dec-

04De

c-06

Dec-

08De

c-10

Dec-

12

Sector Price to Pre-Prov isions Profit

(x )

050

100150200250300350400

Dec-

80De

c-82

Dec-

84De

c-86

Dec-

88De

c-90

Dec-

92De

c-94

Dec-

96De

c-98

Dec-

00De

c-02

Dec-

04De

c-06

Dec-

08De

c-10

Dec-

12

(%)

EXPENSIVE

CHEAP

Chart 24: Sector Price to Book Ratio (x) Chart 25: Sector Price to Book (x) vs Return on Equity (%)

0.00.51.01.52.02.53.0

Dec-

93

Dec-

95

Dec-

97

Dec-

99

Dec-

01

Dec-

03

Dec-

05

Dec-

07

Dec-

09

Dec-

11

Dec-

13

Banks Price/Book (LHS)

(x )

0.00.51.01.52.02.53.03.54.0

10 12 14 16 18 20 22 24Sector ROE v s P/Book

1995

1996

2004

1994

2005 2006

2008

2007

2009

Price to Book (x )

ROE (%)

EXPENSIVE

CHEAP

1997, 1998, 1999, 2000, 2001, 2002,

2003 2012

2010

2011

2013E

Chart 26: Sector Dividend Yield (%) Chart 27: Sector Dividend Yield vs TD Special Rate (%)

0%2%4%6%8%

10%12%14%

Dec-

80De

c-82

Dec-

84De

c-86

Dec-

88De

c-90

Dec-

92De

c-94

Dec-

96De

c-98

Dec-

00De

c-02

Dec-

04De

c-06

Dec-

08De

c-10

Dec-

12

Bank Sector Div idend Yield

0%25%50%75%

100%125%150%175%200%

Dec-

80De

c-82

Dec-

84De

c-86

Dec-

88De

c-90

Dec-

92De

c-94

Dec-

96De

c-98

Dec-

00De

c-02

Dec-

04De

c-06

Dec-

08De

c-10

Dec-

12

Sector Div idend Yield to Term Deposit Special Rate Av erage

Cheap

Ex pensiv e

Source: Company data, UBS estimates Source: Company data, UBS estimates


UBS 25

Stock Valuations and Pricing Chart 28: ANZ PE Relative to the Major Banks (%) Chart 29: ANZ Price to Book (x) vs Return on Equity (%)

80%

90%

100%

110%

120%

130%

Dec-

93De

c-94

Dec-

95De

c-96

Dec-

97De

c-98

Dec-

99De

c-00

Dec-

01De

c-02

Dec-

03De

c-04

Dec-

05De

c-06

Dec-

07De

c-08

Dec-

09De

c-10

Dec-

11De

c-12

Dec-

13

ANZ PE Relativ e to the Sector

0.00.51.01.52.02.53.03.54.0

10 12 14 16 18 20 22 24ANZ ROE v s P/Book

1995

1996

19971998

1999

2000 2001 2002

20032004

1994

20052006

2008

2007

2009

Price to Book (x)

ROE (%)

EXPENSIVE

CHEAP

2010

20112012

2013E

Chart 30: CBA PE Relative to the Major Banks (%) Chart 31: CBA Price to Book (x) vs Return on Equity (%)

80%

90%

100%

110%

120%

130%

Dec-

93De

c-94

Dec-

95De

c-96

Dec-

97De

c-98

Dec-

99De

c-00

Dec-

01De

c-02

Dec-

03De

c-04

Dec-

05De

c-06

Dec-

07De

c-08

Dec-

09De

c-10

Dec-

11De

c-12

Dec-

13

CBA PE Relativ e Sector

0.00.51.01.52.02.53.03.54.0

10 12 14 16 18 20 22 24CBA ROE v s P/Book

1995

1996

19971998

19992000

20012002

20032004

1994

2005

2006

2008

2007

2009

Price to Book (x)

ROE (%)

EXPENSIVE

CHEAP

2012

2010

2011

2013E

Chart 32: NAB PE Relative to the Major Banks (%) Chart 33: NAB Price to Book (x) vs Return on Equity (%)

80%

90%

100%

110%

120%

130%

Dec-

93De

c-94

Dec-

95De

c-96

Dec-

97De

c-98

Dec-

99De

c-00

Dec-

01De

c-02

Dec-

03De

c-04

Dec-

05De

c-06

Dec-

07De

c-08

Dec-

09De

c-10

Dec-

11De

c-12

Dec-

13

NAB PE Relativ e Sector

0.00.51.01.52.02.53.03.54.0

10 12 14 16 18 20 22 24

NAB ROE v s P/Book

1995 1996

19971998

1999

2000

2001

200220032004 1994

20052006

2008

2007

2009

Price to Book (x)

ROE (%)

EXPENSIVE

CHEAP2012

20102011

2013E

Chart 34: WBC PE Relative to the Major Banks (%) Chart 35: WBC Price to Book (x) vs Return on Equity (%)

80%

90%

100%

110%

120%

130%

Dec-

93De

c-94

Dec-

95De

c-96

Dec-

97De

c-98

Dec-

99De

c-00

Dec-

01De

c-02

Dec-

03De

c-04

Dec-

05De

c-06

Dec-

07De

c-08

Dec-

09De

c-10

Dec-

11De

c-12

Dec-

13

WBC PE Relativ e Sector

0.00.51.01.52.02.53.03.54.0

10 12 14 16 18 20 22 24WBC ROE v s P/Book

1995 19961997

1998

1999

20002001

2002

20032004

1994

2005

2006

2008

2007

2009

Price to Book (x)

ROE (%)

EXPENSIVE

CHEAP

2012

2010

2011

2013E

Source: Company data, UBS estimates Source: Company data, UBS estimates


UBS 26

Statement of Risk

Australian banks are large, highly leveraged financial institutions operating across a number of markets, and as such are subject to the risk of changes in the general business and economic conditions within these markets. A change in these conditions could include changes in interest rates, inflation, unemployment, monetary supply, exogenous shock, changes in foreign exchange rates, and the health of the general economy. The banks also face the risk of regulatory changes and increased competition which could affect the profitability of the sector. A key risk that financial institutions face is associated with extending credit to other parties. Less favourable business conditions could cause potential losses from loans to increase putting pressure on the group’s capital. The bank sector also faces operational risk from operating such large and complex businesses.

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.


UBS 27

Required Disclosures This report has been prepared by UBS Securities Australia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 45% 36%Neutral Hold/Neutral 45% 36%Sell Sell 11% 19%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 33%Sell Sell less than 1% 0%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2013. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.


UBS 28

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities Australia Ltd: Jonathan Mott; Chris Williams, CFA; Adam Lee. Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date ANZ Banking Group2a, 4, 5a, 6, 16 ANZ.AX Sell N/A A$28.69 11 Apr 2013 Commonwealth Bank of Australia2a, 2b, 4, 5b, 16, 22 CBA.AX Sell N/A A$68.05 11 Apr 2013

National Australia Bank2a, 4, 5a, 5b, 16,

22 NAB.AX Neutral N/A A$31.60 11 Apr 2013

Westpac Banking Corporation2a, 4,

5a, 5b, 16, 22 WBC.AX Neutral N/A A$31.53 11 Apr 2013

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2a. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

this company/entity or one of its affiliates within the past 12 months. 2b. UBS Securities Canada Inc or an affiliate has acted as manager/co-manager, underwriter or placement agent in regard

to an offering of securities for this company/entity or one of its affiliates within the past 12 months. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity. 5a. UBS AG, Australia Branch or an affiliate expect to receive or intend to seek compensation for investment banking

services from this company/entity within the next three months. 5b. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services

from this company/entity within the next three months. 6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking

services are being, or have been, provided. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.


UBS 29

22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. ANZ Banking Group (A$)

01-Ap

r-08

01-Ju

l-08

01-O

ct-08

01-Ja

n-09

01-Ap

r-09

01-Ju

l-09

01-O

ct-09

01-Ja

n-10

01-Ap

r-10

01-Ju

l-10

01-O

ct-10

01-Ja

n-11

01-Ap

r-11

01-Ju

l-11

01-O

ct-11

01-Ja

n-12

01-Ap

r-12

01-Ju

l-12

01-O

ct-12

01-Ja

n-13

01-Ap

r-13

0.05.0

10.0

15.020.0

25.030.0

Price Target (A$) Stock Price (A$)

BuyNeutral

SellNo Rating

Short-term Buy

Source: UBS; as of 11 Apr 2013 Commonwealth Bank of Australia (A$)

01-Ap

r-08

01-Ju

l-08

01-O

ct-08

01-Ja

n-09

01-Ap

r-09

01-Ju

l-09

01-O

ct-09

01-Ja

n-10

01-Ap

r-10

01-Ju

l-10

01-O

ct-10

01-Ja

n-11

01-Ap

r-11

01-Ju

l-11

01-O

ct-11

01-Ja

n-12

01-Ap

r-12

01-Ju

l-12

01-O

ct-12

01-Ja

n-13

01-Ap

r-13

0.0

20.0

40.0

60.0

80.0


BuyNeutral

SellNo Rating

Source: UBS; as of 11 Apr 2013


UBS 30

National Australia Bank (A$)

01-Ap

r-08

01-Ju

l-08

01-O

ct-08

01-Ja

n-09

01-Ap

r-09

01-Ju

l-09

01-O

ct-09

01-Ja

n-10

01-Ap

r-10

01-Ju

l-10

01-O

ct-10

01-Ja

n-11

01-Ap

r-11

01-Ju

l-11

01-O

ct-11

01-Ja

n-12

01-Ap

r-12

01-Ju

l-12

01-O

ct-12

01-Ja

n-13

01-Ap

r-13

0.0

10.0

20.0

30.0

40.0


BuyNeutral

No RatingShort-term Buy

Source: UBS; as of 11 Apr 2013 Westpac Banking Corporation (A$)

01-Ap

r-08

01-Ju

l-08

01-O

ct-08

01-Ja

n-09

01-Ap

r-09

01-Ju

l-09

01-O

ct-09

01-Ja

n-10

01-Ap

r-10

01-Ju

l-10

01-O

ct-10

01-Ja

n-11

01-Ap

r-11

01-Ju

l-11

01-O

ct-11

01-Ja

n-12

01-Ap

r-12

01-Ju

l-12

01-O

ct-12

01-Ja

n-13

01-Ap

r-13

0.0

10.0

20.0

30.0

40.0


BuyNeutral

No Rating

Source: UBS; as of 11 Apr 2013


UBS 31

Global Disclaimer This document has been prepared by UBS Securities Australia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. This document is for distribution only as may be permitted by law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject UBS to any registration or licensing requirement within such jurisdiction. It is published solely for information purposes; it is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained in this document (‘the Information’), except with respect to Information concerning UBS. The Information is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. UBS does not undertake to update or keep current the Information. Any opinions expressed in this document may change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS. Nothing in this document constitutes a representation that any investment strategy or recommendation is suitable or appropriate to an investor’s individual circumstances or otherwise constitutes a personal recommendation. Investments involve risks, and investors should exercise prudence and their own judgement in making their investment decisions. The financial instruments described in the document may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates or other market conditions. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument referred to in the document. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. The value of any investment or income may go down as well as up, and investors may not get back the full amount invested. Past performance is not necessarily a guide to future performance. Neither UBS nor any of its directors, employees or agents accepts any liability for any loss (including investment loss) or damage arising out of the use of all or any of the Information. Any prices stated in this document are for information purposes only and do not represent valuations for individual securities or other financial instruments. There is no representation that any transaction can or could have been effected at those prices, and any prices do not necessarily reflect UBS's internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions by UBS or any other source may yield substantially different results. Research will initiate, update and cease coverage solely at the discretion of UBS Investment Bank Research Management. The analysis contained in this document is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting market information. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS into other areas, units, groups or affiliates of UBS. The compensation of the analyst who prepared this document is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues; however, compensation may relate to the revenues of UBS Investment Bank as a whole, of which investment banking, sales and trading are a part. For financial instruments admitted to trading on an EU regulated market: UBS AG, its affiliates or subsidiaries (excluding UBS Securities LLC) acts as a market maker or liquidity provider (in accordance with the interpretation of these terms in the UK) in the financial instruments of the issuer save that where the activity of liquidity provider is carried out in accordance with the definition given to it by the laws and regulations of any other EU jurisdictions, such information is separately disclosed in this document. For financial instruments admitted to trading on a non-EU regulated market: UBS may act as a market maker save that where this activity is carried out in the US in accordance with the definition given to it by the relevant laws and regulations, such activity will be specifically disclosed in this document. UBS may have issued a warrant the value of which is based on one or more of the financial instruments referred to in the document. UBS and its affiliates and employees may have long or short positions, trade as principal and buy and sell in instruments or derivatives identified herein; such transactions or positions may be inconsistent with the opinions expressed in this document.


UBS 32

United Kingdom and the rest of Europe: Except as otherwise specified herein, this material is distributed by UBS Limited to persons who are eligible counterparties or professional clients. UBS Limited is authorised and regulated by the Financial Services Authority (FSA). France: Prepared by UBS Limited and distributed by UBS Limited and UBS Securities France S.A. UBS Securities France S.A. is regulated by the Autorité des Marchés Financiers (AMF). Where an analyst of UBS Securities France S.A. has contributed to this document, the document is also deemed to have been prepared by UBS Securities France S.A. Germany: Prepared by UBS Limited and distributed by UBS Limited and UBS Deutschland AG. UBS Deutschland AG is regulated by the Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin). Spain: Prepared by UBS Limited and distributed by UBS Limited and UBS Securities España SV, SA. UBS Securities España SV, SA is regulated by the Comisión Nacional del Mercado de Valores (CNMV). Turkey: Prepared by UBS Menkul Degerler AS on behalf of and distributed by UBS Limited. No information in this document is provided for the purpose of offering, marketing and sale by any means of any capital market instruments and services in the Republic of Turkey. Therefore, this document may not be considered as an offer made or to be made to residents of the Republic of Turkey. UBS AG is not licensed by the Turkish Capital Market Board under the provisions of the Capital Market Law (Law No. 2499). Accordingly, neither this document nor any other offering material related to the instruments/services may be utilized in connection with providing any capital market services to persons within the Republic of Turkey without the prior approval of the Capital Market Board. However, according to article 15 (d) (ii) of the Decree No. 32, there is no restriction on the purchase or sale of the securities abroad by residents of the Republic of Turkey. Poland: Distributed by UBS Limited (spolka z ograniczona odpowiedzialnoscia) Oddzial w Polsce. Russia: Prepared and distributed by UBS Securities CJSC. Switzerland: Distributed by UBS AG to persons who are institutional investors only. Italy: Prepared by UBS Limited and distributed by UBS Limited and UBS Italia Sim S.p.A. UBS Italia Sim S.p.A. is regulated by the Bank of Italy and by the Commissione Nazionale per le Società e la Borsa (CONSOB). Where an analyst of UBS Italia Sim S.p.A. has contributed to this document, the document is also deemed to have been prepared by UBS Italia Sim S.p.A. South Africa: Distributed by UBS South Africa (Pty) Limited, an authorised user of the JSE and an authorised Financial Services Provider. Israel: UBS Limited and its affiliates incorporated outside Israel are not licensed under the Investment Advice Law. This material is being issued only to and/or is directed only at persons who are Sophisticated Investors within the meaning of the Israeli Securities Law, and this material must not be relied or acted upon by any other persons. Whilst UBS Limited holds insurance for its activities, it does not hold the same insurance that would be required for an investment advisor or investment marketer under the relevant Investment Advice Law Regulations. Saudi Arabia: This document has been issued by UBS AG (and/or any of its subsidiaries, branches or affiliates), a public company limited by shares, incorporated in Switzerland with its registered offices at Aeschenvorstadt 1, CH-4051 Basel and Bahnhofstrasse 45, CH-8001 Zurich. This publication has been approved by UBS Saudi Arabia (a subsidiary of UBS AG), a foreign closed joint stock company incorporated in the Kingdom of Saudi Arabia under commercial register number 1010257812 having its registered office at Tatweer Towers, P.O. Box 75724, Riyadh 11588, Kingdom of Saudi Arabia. UBS Saudi Arabia is authorized and regulated by the Capital Market Authority to conduct securities business under license number 08113-37. United States: Distributed to US persons by either UBS Securities LLC or by UBS Financial Services Inc., subsidiaries of UBS AG; or by a group, subsidiary or affiliate of UBS AG that is not registered as a US broker-dealer (a ‘non-US affiliate’) to major US institutional investors only. UBS Securities LLC or UBS Financial Services Inc. accepts responsibility for the content of a document prepared by another non-US affiliate when distributed to US persons by UBS Securities LLC or UBS Financial Services Inc. All transactions by a US person in the securities mentioned in this document must be effected through UBS Securities LLC or UBS Financial Services Inc., and not through a non-US affiliate. Canada: Distributed by UBS Securities Canada Inc., a registered investment dealer in Canada and a Member-Canadian Investor Protection Fund, or by another affiliate of UBS AG that is registered to conduct business in Canada or is otherwise exempt from registration. Hong Kong: Distributed by UBS Securities Asia Limited. Singapore: Distributed by UBS Securities Pte. Ltd. [mica (p) 016/11/2011 and Co. Reg. No.: 198500648C] or UBS AG, Singapore Branch. Please contact UBS Securities Pte. Ltd., an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110); or UBS AG, Singapore Branch, an exempt financial adviser under the Singapore Financial Advisers Act (Cap. 110) and a wholesale bank licensed under the Singapore Banking Act (Cap. 19) regulated by the Monetary Authority of Singapore, in respect of any matters arising from, or in connection with, the analysis or document. The recipients of this document represent and warrant that they are accredited and institutional investors as defined in the Securities and Futures Act (Cap. 289). Japan: Distributed by UBS Securities Japan Co., Ltd. to institutional investors only. Where this document has been prepared by UBS Securities Japan Co., Ltd., UBS Securities Japan Co., Ltd. is the author, publisher and distributor of the document. Australia: Distributed by UBS AG (Holder of Australian Financial Services License No. 231087) and/or UBS Securities Australia Ltd (Holder of Australian Financial Services License No. 231098). The Information in this document has been prepared without taking into account any investor’s objectives, financial situation or needs, and investors should, before acting on the Information, consider the appropriateness of the Information, having regard to their objectives, financial situation and needs. If the Information contained in this document relates to the acquisition, or potential acquisition of a particular financial product by a ‘Retail’ client as defined by section 761G of the Corporations Act 2001 where a Product Disclosure Statement would be required, the retail client should obtain and consider the Product Disclosure Statement relating to the product before making any decision about whether to acquire the product. New Zealand: Distributed by UBS New Zealand Ltd. The information and recommendations in this publication are provided for general information purposes only. To the extent that any such information or recommendations constitute financial advice, they do not take into account any person’s particular financial situation or goals. We recommend that recipients seek advice specific to their circumstances from their financial advisor. Dubai: The research prepared and distributed by UBS AG Dubai Branch is intended for Professional Clients only and is not for further distribution within the United Arab Emirates. Korea: Distributed in Korea by UBS Securities Pte. Ltd., Seoul Branch. This document may have been edited or contributed to from time to time by affiliates of UBS Securities Pte. Ltd., Seoul Branch. Malaysia: This material is authorized to be distributed in Malaysia by UBS Securities Malaysia Sdn. Bhd (253825-x). India: Prepared by UBS Securities India Private Ltd. 2/F, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai (India) 400051. Phone: +912261556000 SEBI Registration Numbers: NSE (Capital Market Segment): INB230951431, NSE (F&O Segment) INF230951431, BSE (Capital Market Segment) INB010951437. The disclosures contained in research documents produced by UBS Limited shall be governed by and construed in accordance with English law. UBS specifically prohibits the redistribution of this document in whole or in part without the written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. Images may depict objects or elements which are protected by third party copyright, trademarks and other intellectual property rights. © UBS 2013. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

ab