FDB BOARD CHAIRMAN MR. BOB LYON’S ADDRESS TO FIJI INSTITUTE OF BANKERS

Bula vinaka. Good evening.

I am pleased to have been asked to address you tonight. The FIB has been in existence for over 20 years and this is their sixth Award night. The Institute fills a valuable role in the banking industry in Fiji.

I have been asked to talk about my reflections on the banking industry in the region and give some thoughts on the changing landscape and where the industry is going. But first, I am going to be a little indulgent and try and briefly recap on my fifty plus years in the banking fraternity.

I was appointed Chairman of FDB in 2010 but most of you who know me probably met me through my association with ANZ, which I first joined in a small country town in Australia in 1965. I have held many senior positions with ANZ including no.2 in the HR function, head of Retail Banking in Melbourne and from 1994 until my retirement in 2006, I was Managing Director Pacific looking after all ANZ’s operations from East Timor to the Cook Islands, although I spent a further two years as non-executive Chairman of the business. As well as running the Pacific business, I also ran ANZ’s Retail operations in Asia. This included the Private Banks in Singapore and Hong Kong and retail operations in countries like China, Japan, Vietnam and Indonesia where I looked after ANZ’s investment in Indonesia’s sixth biggest bank, Panin. These roles have given me a good perspective on international banking across the Asia Pacific region and more importantly an understanding of the role that countries like China are now having in the region.

While I was with ANZ, it was a time of intense competition and growth. During and just before my time we purchased the operations of Barclays in Fiji, Lloyds of New Guinea, Bank of New Zealand in Fiji and Samoa, Bank of Hawaii’s South Pacific branches, Amerika Samoa Bank, Westpac in Kiribati and opened in Tonga, East Timor and New Caledonia. While ANZ was acquiring new businesses, other banks were exiting the region and some big names were among them. Citibank, HSBC, Indosuez, Commonwealth Bank of Australia, National Australia Bank, plus the ones mentioned earlier, Barclays, Lloyds, BNZ and some smaller local banks folded. We should not overlook the French territories where several large French banks exited as well. And as you know Westpac has recently announced that they have sold their operations in several small Pacific countries. The only major new entrants are BSP from PNG and BRED from France.

Generally, banks in the Pacific are profitable, particularly, the international banks. Bad debts are low, populations are growing and there is no shortage of good customers. Why then, have so many international banks departed the shores of this beautiful region? It could be scale; lack of scale is the enemy of any business where capital costs are high and banking is such an industry. The move to computerization over the last 20 years has meant vast sums of investment being expended by banks and these changes are accelerating not slowing. The move to mobile and phone banking is becoming the competitive edge and all banks are being forced to keep up. While there are many efficiencies in this for banks, the lack of scale and the fact that wages are generally lower in the region, means that the pay back is not always there. This places a burden on the small local banks which find it hard to spread the cost, but it also affects the international banks if their core systems are not transportable from their home bases or if too many changes have to be made to adapt to local regulations, conditions etc.

Perhaps another reason for the departures is that they feel that the growth is not there and that their capital might be better invested elsewhere. For the largest banks the profits from small island countries is a decimal point on their balance sheet.

What then is the future of banking in the Pacific? Will the remaining large banks also leave? In reality, we are now down to one large player. Hopefully its dominant market share will persuade it to stay.

It has been said that the World needs bankers but doesn’t necessarily need banks. Maybe the future will involve players from outside the traditional banking market. The biggest revolution in banking in my time hasn’t been brought about by the banks themselves, but by the rapid growth in technology through the internet and in particular, mobile phones. The arrival of international mobile phone providers like Vodafone and Digicel has changed the way that people do their banking. I watched an interview with Bill and Melinda Gates last week and Bill was asked what he thinks will be the biggest change in technology over the next few years. He stated that the growth in mobile banking using phones will explode and create a new paradigm in banking. There is plenty of evidence that this is already happening. Does there need to be a traditional bank on the other end of these transactions? Not necessarily.

It is not just the change to the way we do personal transactions these days. Very few people or companies pay by cheque anymore and the paperless society is moving closer. The loan approval process for loans up to $1m or more is now largely automated. A customer service officer collects data from a customer and feeds it into a computer and if meets the criteria, an automated approval letter is generated and little human contact is required. Is it a matter of time before all straight forward banking transactions will be handled by new “banks” where technology is their strength and they have the capital and other requirements to participate in this industry. One aspect of the banking industry that was cherry picked by non-banks is the FX market, where there are many licensed and some non-licensed operators making good profits out of what used to be banks’ core business.

So what is our role in a world where non-banks are “eating our lunch” and technology is king? Small banks getting together, like the number of banks in a co-operative like BRED Bank or mergers and acquisitions as has happened in many countries to form sufficient scale? Yes, that’s part of the answer, but we need competition to ensure that customers have choice and don’t get screwed on price. There is also the question of the larger more complicated transactions.

Volume operators can probably match the banks on efficiency and service and maybe also price. All this will take strong regulation from central banks and governments. Another question is who will provide the capital and expertise to finance the large loans that are needed to fund the infrastructure and projects that a country like Fiji needs to continue growing its economy and create the number of jobs that are required to cater for a growing population which is the opposite of most western countries where we have a “youth bubble” as distinct from an aging population. Fiji needs to grow its GDP at 5% pa just to soak up school leavers.

Yes, we will have banks here, but they have smaller balance sheets than many of the banks who have left. If an individual bank is limited to doing loans of $10m – $20m, investors will have to seek finance from alternative sources. Where will that be? Most businesses prefer to borrow in the country where their revenue is generated and this is common sense. Banks could join together with club loans, but this brings other problems. Many businesses are regional in nature these days and require large amounts of capital to operate. Most local banks would struggle to accommodate them. Also a reduction in international banks will have an effect on companies that look for regional support. It follows that if banks cannot do the large deals, there will be a fall-off in experience and capability.

I don’t have the answers for all these questions, but it is something that I am sure governments and central banks will need to grapple with.

This brings me to risk management. From time-to-time, the World or individual countries suffer recessions or even depressions. Even I am not old enough to remember the Great Depression of the 1920s and ‘30s, but we have only recently emerged from the Global Financial Crisis, which began in 2007. The Pacific countries coped quite well during this event, thanks largely to our more remote location and good controls managed by our central banks including the RBF. However, it is contingent that all banks have the skills in-house and policies to cope with such situations. This does not mean being risk averse or demanding more security than seems reasonable. The words “risk management” mean just that, bankers should be able to take reasonable risks without having to rely on their security. If we only do deals because we believe that we can sell our security, I question whether we should have done the deal in the first place. More important to me is a reasonable equity stake by the customer. Lending to a customer is a partnership, where we are in it together. It is not venture capital; someone else usually provides that, but assistance toward the costs of a project or working capital. Commercial banking is different from other forms of lending in that we usually expect to do multiple deals with one customer during the term of the relationship.

While we endured the GFC without too many problems, Fiji has had its share of economic disasters. The most infamous was the National Bank of Fiji fiasco. While many people in this country would like to forget this episode, there are lessons which we should never forget. When I was appointed Chairman of FDB in 2010, the first thing that grabbed my attention was the level of unproductive loans, approaching 45% of the book. This has been redressed and I believe that FDB is now one of the strongest development banks in the World.

Banking is a people business, both between us and our customers and within the bank itself. One of the defining factors in running a successful bank is the quality of its leadership. I am sure that all banks have some great leaders, but I can only draw on my own experience and while I have met some very average leaders, I have been lucky enough to come across some that have made a big impact on me. Just to mention a few, John MacFarlane who was CEO at ANZ during my time in the Pacific has just been appointed Chairman of Barclays in the UK, My immediate boss, Elmer Funke Kupper is CEO of the Australian Stock Exchange, colleagues Alison Watkins took over as CEO of Coca Cola Amatil last year and Brian Hartzer has just taken the reins as CEO of Westpac. I list these because having people like this around obviously rubs off on other people in the organization and tends to lift everyone. Sometimes, we believe that lending is the most important thing in a bank, but without well trained and customer oriented staff, banks will not reach optimum performance. That is one of the reasons why we appointed our GM Human Resources last year on the same level as our most senior executives.

I cannot finish without giving a plug to my newest business interest, Sunergise, a solar company now operating in five countries in the region including New Zealand. Looking after our environment is something that is going to become more important for bankers around the world. Climate change means that many of the assets that we lend against today might have a limited shelf life. I was asked to speak at a climate change conference in Hong last October organized by the World Bank. It became apparent to all of us there that banks are going to have to adopt policies to help guide them in what loans they will participate in. Already banks are being punished by their shareholders over deals that have been done with industries seen as damaging to the environment. What will really make banks take notice is when the assets securing loans cannot be sold or the values have dropped substantially. Here in the Pacific, we are more the victims. The big polluters are from countries on each side of the Pacific, but we are getting the effects of rising sea levels and changing weather patterns. While we are not big contributors to climate change, because we are suffering the effects, we should be seen to be environmentally aware.

Tonight is about improving the skills of our banking colleagues and I commend the FIB on their role in this. I also offer my congratulations to tonight’s winners and wish them and each of you continued success in your chosen career.

Vinaka Vaka Levu