FACULTY BUSINESS AND ACCOUNTING

PFS3273 - FINANCIAL INSTITUTION AND BANKING

ASSGINMENT

PREPARED TO:
MR. ZULKIFLEE BIN ABD RAHIM @ AB RASIM

PREPARED BY:
JOSUA DANEIL (4145002651)
BACHELOR OF FINANCE
GROUP 1

Date of Submission:

08th May 2017

Table of Contents
1.Introduction ......................................................................................................................................... 1
2.Vision and Mission ............................................................................................................................... 2
2.1 Vision............................................................................................................................................. 2
2.2 Mission .......................................................................................................................................... 2
2.3 Values ............................................................................................................................................ 2
2.4 Brand ............................................................................................................................................. 2
3.Board of Director ................................................................................................................................. 3
4. History of the Bank Australia .............................................................................................................. 5
5. Product or services from Bank Australia............................................................................................. 6
5.1 Credit Cards................................................................................................................................... 6
5.2 Home Loans .................................................................................................................................. 6
5.3 Overdraft ....................................................................................................................................... 6
5.4 Term and Revolving Loans ............................................................................................................ 6
5.5 Secured and Unsecured Loans ...................................................................................................... 6
5.6 Guarantees .................................................................................................................................... 7
6.0 The risk that cause the bank from Home Loans. .............................................................................. 8
6.1 Credit risk ...................................................................................................................................... 8
6.1.1 Impaired loans and securities ................................................................................................ 8
6.1.2 Past due but not impaired loans ............................................................................................ 8
6.1.3.Collateral ................................................................................................................................ 8
6.1.4 Credit risk exposures .............................................................................................................. 9
6.1.5 On-balance sheet financial instruments .................................................................................... 9
6.2 Liquidity risk .................................................................................................................................. 9
6.2.1 Exposure to liquidity risk ........................................................................................................ 9
6.3 Interest rate risk ............................................................................................................................ 9
6.3.1 Fair value sensitivity analysis for fixed rate instruments ..................................................... 10
6.3.2 Sensitivity to interest rate risk ............................................................................................. 10
6.3.3 Interest rate movement ....................................................................................................... 10
6.4 Operational Risk .......................................................................................................................... 11
7.0 Contribution of Earnings from the Bank Product. .......................................................................... 12
7.1 Review of Operations for Contribution of Earnings .................................................................... 12
 7.2 Statement of Profit and Loss....................................................................................................... 13
8.0 How Bank Maintain Product and Services ...................................................................................... 14
8.1 Protection in advance ................................................................................................................. 14
8.2 Monitoring the borrower during the loan agreement................................................................ 15
8.3 Collection of non-performing loans ............................................................................................ 16
9.0 Recommendation............................................................................................................................ 18
1.Introduction

Bank Australia's business practices are based on a values-based system focusing on

environmental, social, and economic responsibility. The organisation undertakes a variety of
initiatives to build capacity within the community through social programs, such as its
Community Investment Program, which establishes how the organisation maximises its
positive impacts in the community, prioritising those that are most relevant to the company's
core business, products, services, members, and employees.

On 25 March 2004, it became the first credit union in the world to become a signatory to the
United Nations Environmental Programme Statement by Financial Institutions on the
Environment & Sustainable Development. By becoming a signatory, it committed to promote
positive interaction between economic and social development, and environmental
protection, through development of a sustainability strategy.

Being sharp on price, and making a profit is important to us all. But we believe money should
also be put to good use, creating positive social, environmental and cultural outcomes. A kind
of mutual prosperity for all.

Not being bound by the demands of investors means we act in the best long term interests of
our customers. Put simply, as a customer and part owner of the bank, we’re answerable only
to you. We respect your point of view, which is why our customers each have an equal say in
how we go about our business.

Customers have been banking with us since 1957 and today nearly 130,000 people and
community sector organisations choose to bank with us.

And be reassured, we have to meet the same prudential standards that apply to all Australian
banks, so you can be certain that banking with Bank Australia is safe and secure.

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2.Vision and Mission
Bank Australia is committed to customer ownership and to operating in accordance with the
international principles for cooperative financial institutions.

2.1 Vision
To be Australia’s leading customer owned responsible bank

2.2 Mission

To create mutual prosperity for our customers in the form of positive economic, personal,
social, environmental and cultural outcomes

2.3 Values – Bank Australia will:

o treat our customers with dignity and respect

o value, encourage and support our employees
o operate ethically and with integrity
o apply prudent financial and business practices
o be economically, environmentally and socially responsible

2.4 Brand

Customer owned responsible bank.

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3.Board of Director
Picture Board of Director Position
Judith Downes Chairman

Helen Clarke Deputy Chairman

David Wakeley Director

Greg Camm Director

Melissa Bastian Director

Michelle Somerville Director

Anne-Marie Corboy Director

Damien Walsh Managing Director

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Rowan Dowland General Manager Corporate
Development

Louise O'Brien Chief Financial Officer

John Yardley Deputy Chief Executive

Officer

Patrick Ashkettle Chief Risk Officer

Lorna Heyward Chief Operating Officer

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4. History of the Bank Australia

Bank Australia, formerly bankmecu and prior to that, the Members and Education Credit
Union (mecu), is an Australian financial co-operative based in Kew, Victoria. In 2012, it
reported that it had approximately 125,000 customers across Australia. The organisation
employs 348 staff across Australia. Total assets were reported at A$4.32 billion, as of
December 31, 2016.

Profits are reinvested in Bank Australia, which was also formerly known as bankmecu.
Today, nearly 130,000 people and community sector organisations choose to bank with Bank
Australia. On 1 September 2011, mecu Ltd became Australia's first customer owned bank,
and changed its trading name to bankmecu.

On 27 July 2015, the bank announced their subsequent and final change of name, to Bank
Australia, from 17 August 2015.

We are not a new bank, but one with a rich 59 year history. Our success story is made up of
the individual stories of tens of thousands of people who have been customers and owners of
our bank since 1957.

Our customers have always looked to us for competitive prices and personal service. But they
also look to us to be a genuinely responsible and progressive bank with values that mirror
their own - one with a strong sense of purpose that cares about customers, creates mutual
prosperity and plays an important role in building a strong, fair nation and a healthy planet.
Today Bank Australia is a bank all Australians can call their own. As of 2015, half of the
Board of Directors of Bank Australia are women, which is far better than the average rate of
20% reported by ASX boards in ANZ’s 2015 study.

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5. Product or services from Bank Australia
Bank Australia markets a full range of products and services to Australian. These products
and services are delivered to our customer with our 'origination strategy'. Bank Australia
offers a wide range of types of loans. As such credit cards, home loans, overdraft, term and
revolving loans, secured and unsecured loans, and guarantees.

5.1 Credit Cards

A credit card is a form of borrowing. It may be a convenient mode of payment as it allows
you to buy goods and services without using cash, but it is not intended to be a long-term
credit facility.

5.2 Home Loans

Buying a home is a long-term commitment which should be carefully planned upfront.
Before you start looking for a home, first work out what you can afford as well as find out
what you need to pay for and also the loan amount you are eligible for.

5.3 Overdraft
An overdraft facility allows you to write cheques or withdraw cash from your current account
up to the overdraft limit approved. It is a short-term standby credit facility which is usually
renewable on a yearly basis. It is repayable on demand by the bank at any time.

5.4 Term and Revolving Loans

With a term loan, you must repay the loan either by instalments over the loan period, or in
full at the end of the loan period, depending on the terms agreed with your lender. Revolving
loans allow you to use the money up to an agreed credit limit whenever you need it. Once
you repay the amount owed, the credit becomes available to draw on again.

5.5 Secured and Unsecured Loans

Loans can either be secured or unsecured. A loan is secured when a borrower is asked to
pledge assets to the lender as security or collateral for the loan. For unsecured loans, the
borrower does not provide any assets to the lender as security for the loan. Interest rates for
such loans tend to be higher.

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5.6 Guarantees
If you have agreed to be a guarantor for someone, you will have to pay off his debt if he is
unable to repay it himself. Agreeing to be a guarantor is not an administrative matter. Being a
guarantor is a serious commitment. Think about it seriously, and seek legal advice if
necessary, before you agree to be a guarantor.

Above are detail about the types of loan. But for this assignment I choose Home loans as my
product.

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6.0 The risk that cause the bank from Home Loans.
6.1 Credit risk
Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument
fails to meet its contractual obligations, and arises principally from loans and advances to
customers, debt and investment securities held to maturity. The consolidated entity has
adopted a policy of dealing only with credit worthy counterparties and obtaining sufficient
collateral or other security where appropriate, as a means of mitigating the risk of financial
loss from defaults. The maximum exposure to credit risk at the reporting date is the carrying
amount of the financial assets. The credit risk on financial assets that have been recognised in
the balance sheet, other than investments in shares, is generally the carrying amount, net of
any provisions for impairment and is shown gross before the effect of mitigation through use
of collateral. Credit risk for physical securities and investments is monitored by exposure to
credit limits to counterparties. These limits are determined by reference to third party ratings

6.1.1 Impaired loans and securities

Impaired loans and securities are those for which the consolidated entity determines that it is
probable that it will be unable to collect all principal and interest due according to the
contractual terms of the loan/securities agreements.

6.1.2 Past due but not impaired loans

These are loans and securities where contractual interest or principal payments are past due
but the consolidated entity believes that impairment is not appropriate on the basis of
security/collateral available and/or the stage of collection of amounts owed.

6.1.3.Collateral
The consolidated entity holds collateral against loans and advances to the customers in the
form of mortgage interest over property, other registered securities over assets, and
guarantees. Estimates of fair value are based on the value of collateral assessed at the time of
borrowing, and generally are not updated except when a loan is individually assessed as
impaired. Collateral is usually not held against investment securities.

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6.1.4 Credit risk exposures
Credit risk represents the loss that would be recognised if counterparties failed to perform as
contracted.

6.1.5 On-balance sheet financial instruments

The credit risk on financial assets, excluding investments, of the Company that have been
recognised on the balance sheet is the carrying amount, net of any provision for impairment.
The Company minimises concentrations of credit risk by undertaking transactions with a
large number of customers and counterparties. The Company is not materially exposed to any
individual counterparty.

6.2 Liquidity risk

Liquidity risk is the risk that the consolidated entity will encounter difficulty in meeting
obligations from its financial liabilities.

6.2.1 Exposure to liquidity risk

The key measure used to manage liquidity risk is the ratio of high quality liquid assets to
adjusted liabilities. For this purpose, liquid assets are considered to include cash and cash
equivalents and investment grade debt securities for which there is an active and liquid
market. The calculation is used to ensure compliance with the minimum level of liquidity
prescribed by APRA. The consolidated entity complied with all APRA liquidity requirements
throughout the year.

6.3 Interest rate risk

The principal risk to which portfolios held to maturity are exposed is the risk of loss from
fluctuations in the future cash flows or fair values of financial instruments because of a
change in market interest rates. The Board has established limits on Earnings at Risk (EaR),
market value fluctuations and interest rate repricing gaps for stipulated periods. The ALCO
monitors compliance with these limits.

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6.3.1 Fair value sensitivity analysis for fixed rate instruments
The Company does not account for any fixed rate financial assets and liabilities at fair value
through profit or loss.Therefore a change in interest rates at the reporting date would not
affect profit or loss.

6.3.2 Sensitivity to interest rate risk

The consolidated entity also measures on a monthly basis the stress sensitivity of earnings to
interest rate movements,utilising an Earnings at Risk (EaR) sensitivity calculation. The
calculation involves the measuring of the static interest rate repricing gaps arising as a result
of the varying interest rate repricing characteristics of assets, liabilities and capital, and the
impact, over a 12 month period, of a 1% and 2% interest rate increase and 1% and 2%
interest rate decrease on earnings arising from the static gap position. The information below
shows the Company’s and consolidated entity’s stress sensitivity to interest rates utilising
EaR sensitivity (+/-1% change): The major classes of financial assets and liabilities that are
subject to interest rate variation are loans to customers, cash with banks, investments and
deposits from customers. The interest rates on the major proportion of these assets and
liabilities can be adjusted in the short term to minimise any significant impact of mismatch on
interest margins.

6.3.3 Interest rate movement

Consolidated Entity and the Company
+1% +1% -1% -1%
2016 2015 2016 2015
$’000 $’000 $’000 $’000
Pre-tax earnings at 4,240 3,439 (9,750) (8,097)
risk

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6.4 Operational Risk
Operational risk is the risk of direct or indirect loss arising from a wide variety of causes
associated with the consolidated entity’s processes, personnel, technology and infrastructure.
It can also arise from external factors other than credit, market and liquidity risk such as those
arising from legal, regulatory requirements, natural disasters or climatic events and generally
accepted standards of corporate behaviour.

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7.0 Contribution of Earnings from the Bank Product.
7.1 Review of Operations for Contribution of Earnings
The consolidated entity reported a net profit after income tax for the financial year ended 30
June 2016 of $22,592,177 (2015: $23,955,579). The year has seen significant growth in net
loans and advances of 20.84% year on year, to $3,218.1 million from $2,663.2 million. This
has contributed to the stable interest income result despite the margin compression resulting
from rate reductions. The consolidated entity has also continued to increase its household
deposits in a competitive environment for market share, growing 12.46% year on year to
$3,402.6 million from $3,025.6 million. Higher expenses for the consolidated entity are a
result of strategic decisions to invest in our digital platforms and in building awareness of the
bank’s brand and products with our target audience who are looking for a responsible
approach to banking. Additionally, there has been a significant investment in the
development of our people as we continually equip them with the skills to support and
enhance the experience of our customers. These investments are made to ensure that we
continue to return value to our customers not only today but into the future.

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7.2 Statement of Profit and Loss

As the profit and loss comprehensive income above shows that Bank Australia have a lower
income for the year 2016 compare to the last year income statement. At the year 2016 Bank
Australia income was $21,270,000 compare to the year 2015 was $34,828,000.

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8.0 How Bank Maintain Product and Services

8.1 Protection in advance

Before and during the execution of a loan agreement, the Bank Australia should evaluate any
potential risk that may cause the borrower to default on its loan obligation. These risks
include the ability of the borrower to repay the loan, and the validity and enforceability of the
guaranty. Based on the bank's analysis and evaluation of the potential risks, it will decide
whether to issue the loan and what conditions and protection measures should be stipulated in
the loan agreement.

As for loans without any guaranty - namely credit loans - when the borrower is an enterprise,
firm, or other entity, the bank will prefer a borrower with good credit standing or with a good
business relationship with the bank. In some cases, if the bank deems necessary, the borrower
will need to prove its qualifications by providing its financial report to the bank before the
loan is issued. However, different banks have different assessment criteria. Generally, the
elements considered include: academic degrees; jobs; titles; financial capability; housing
conditions; depositing status in the bank where the loan application is made; past credit
record; and even marital status. Some banks require that the borrower's employer to be
recognized and have a sound relationship with the bank, and that the bank is authorized for
salary payment on behalf of that organization. Some banks will only issue unsecured credit
loans to public clerks, teaching staff, medical professionals and bank employees.

In the case of a loan involving a guarantor, the bank also faces risks of bad credit, even if the
guarantor is provided for security. For example, the borrower and guarantor may conspire to
illegally take out a loan, or breach the guaranty agreement by claiming the guarantor to be
financially insolvent, or bankrupt, to avoid payment. In practice, apart from examining the
credit rating of the guarantor as well as examining the credit level of the borrower, the bank
also imposes certain restrictions on the guarantor. For example, some banks may allow
applications for housing loans with a guarantor, but only if the guarantor is a corporate
organization with a high credit rating and a deposit at that bank. In the case of individual
guarantors, some banks prohibit a mutual guaranty between a wife and husband.

As for loans with guaranty such as mortgages and pledges, the mortgaged or pledged
property may depreciate. A car loan is an example. According to the relevant regulations, a

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borrower may mortgage an automobile he has purchased for an amount that does not exceed
70% of the price, with a term of no more than five years.

Therefore, a car mortgaged now may depreciate greatly during the loan term, and as a result,
undermine the interest due to the bank. If the borrower cannot repay the loan on time, the
mortgaged car will need to be sold. But any significant depreciation of the value of the car
will defeat the purpose of the mortgage. In view of these risks, some banks, while taking
caution in granting the loan, may minimize the amount of the loan where necessary. Or the
bank may require the borrower provide other guaranties, such as a guarantor.

Once there is a decision to issue the loan, the bank will minimize its own risk in the loan
agreement by including as many types of legal measures as possible. For instance, in issuing
the loan, the bank usually requires the borrower to buy insurance. Mortgage loan insurance
mainly includes mortgaged property insurance and life insurance for the borrower as an
individual. The former is designed to avoid depreciation of the property as a result of damage
or destruction, and the latter is required in the event the borrower is unable to repay the loan
because of injury, incapability, or disability.

In the case of property insurance, the bank may exercise its rights over the compensation
provided by the insurance company. According to the Guaranty Law of PRC and the relevant
judicial interpretation, in the event the mortgaged property is damaged, the mortgagee may
have priority to claim the insurance compensation. In practice, if the mortgaged property has
been damaged before the full repayment of the loan, the bank may apply to the court for
preservation of the insurance compensation. In the case of life insurance bought by the
borrower, the bank may have priority rights over the compensation.

8.2 Monitoring the borrower during the loan agreement

The loan agreement will generally stipulate that a borrower must provide the bank with a
report regarding its assets, business or other financial conditions from time to time. This is
the Bank Australia monitoring to their borrower.

The agreement often states that the loan can be declared immediately due and the borrower
must repay the loan immediately - or the mortgaged property will be auctioned for repayment

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- upon the occurrence of certain events. These events include: the borrower's repeated failure
to fulfill its obligations of repayment, installments, for this loan as well as any other loans
due; criminal prosecution for the borrower; relocation of the borrower's assets; or any other
event that the bank deems necessary to be included in the agreement.

The agreement may also include a condition that would limit the borrower's ability to conduct
certain activities. For example, it is common for the bank to stipulate in a mortgage
agreement that the borrower shall not lease the mortgaged property without the bank's
consent. If the mortgagee does lease the mortgaged property without consent, then it will be
deemed to be in breach of the mortgage agreement. However, in practice, the mortgagee can
always secretly lease the mortgaged property to a third party to evade its repayment
obligation. In this case, the mortgagor should act according to the Urban Area Real Estate
Mortgage Administration Measures, which state that the income gained through leasing
mortgaged properties should first be used to repay loans, for relief.

It will be difficult for the bank to keep track of every borrower during the term of the
agreement. The borrower will sometimes default on its loan repayment obligation even
before the bank becomes aware of it. The bank must then resort to a collection procedure to
recover the unpaid loan.

8.3 Collection of non-performing loans

When the borrower fails to repay the loan, the bank can make a claim against the borrower or
try to enforce the guaranty. In the case of an unsecured loan the Bank Australia can only
realize its right of recourse against the borrower. The borrower may breach the loan
agreement for various reasons, including bad faith, inability, disability, death, liquidation and
bankruptcy. The bank may, to some extent, encounter higher risk for loans made to individual
borrowers than they would with corporate borrowers. It is difficult for the bank to keep track
of an individual borrowers' whereabouts once the loans are made.

Including a declaration and authorization clause in a loan agreement can solve this problem.
This clause may state that in the event of default, the borrower will waive any right that he or
she might have in connection with the bank's recovery of the loan and agree that the bank has
the right to authorize its affiliates or collection agencies in other jurisdictions to collect the

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outstanding or defaulted loan. However, enforceability of the clause depends on whether the
bank's authorized agent can legally collect debts in the other jurisdictions.

The bank will have more remedies if the loan is a secured loan. For example, according to the
Guaranty Law of PRC, which governs mortgages, if the bank is not repaid upon expiration of
the term of the debt, it may negotiate with the mortgagee to convert the mortgaged property
into cash or sell the property for repayment of the loan. If the parties fail to reach an
agreement on a sale, the bank can file a claim against the mortgagee in court.

The loan agreement will be subjected to an enforceable notarization test to determine its
enforceability. At this stage, both parties submit proof of the individual's capacity for signing
the loan and the power of attorney signed by the borrower, if the borrower is not the signee of
the loan agreement, or any other documents or certificates as required by the notary public.
After the completion of the notary, when the borrower breaches the loan agreement, the bank
may directly apply to the court for auction of the property.

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9.0 Recommendation

In order to make bank Australia in line with an outstanding financial services organization, I
would like to recommend the bank to build a Sales Culture in Banking. So, how do we go
about building an energetic, passionate and perpetually engaged culture of sales
performance? It is not an exact science, and will never work exactly the same from one
organization to another, but there are six principles, steps, and actions that are the building
blocks of a potentially rich sales culture in a financial institution:

1. Analyze the Organization. Fit people where their talents, experience, knowledge, and
adaptability can best impact the critical consumer ‘touch points’ in your business
model. Build a small subset of sales engagement practices for each of their roles and
product areas, and teach, train and coach informally but perpetually. Measure,
recognize and reward growth and improvement. Keep it positive, not punitive. Not
pressured, but fun and engaging. Be willing to encourage ideas and to make changes
often accordingly.

2. Coach the Leadership. Top management needs to drive collaborative, open, and fun
acceptance of the sales activities to bring focus and energy to the company. Walking
around, holding brief team and organizational meetings, sharing success stories and
creating an “all for one and one for all” mindset for success is required … at a
minimum.

3. Simplify the Process. Studies have shown that consumers and business owners want
to be sold to … when it is done well. Teach the simple principles of needs-based
selling to everyone in the organization. Teach all customer-facing personnel that a
few simple questions and good listening, followed by offering a needs-based solution
is repeatable, effective, and quite simple for virtually anyone to do.

4. Celebrate Successes. Don’t be shy about rejoicing and celebrating the victories,
growth and improvement. Provide positive reinforcement to everyone. Find ways to
provide continual, ‘surprise and delight’ recognition. Recognition should precede
competition. Competition comes over time, but if emphasized too early, the true

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 practice of solving problems for customers can get distorted, and results can have a
negative long term impact.

5. Train And Coach the Board. Don’t forget to include your board in the training
process. Make sure that they are being continually coached. Find ways to engage
these key leaders, recognizing them and making them part of success celebrations.

6. Exhibit Energy and Passion. All of this must be done and led with energy, passion and
conviction. Measure regularly and don’t be afraid to adjust your strategies –
combining both employee and customer feedback that is being constantly gathered,
measured, and adapted to when deemed necessary.

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