Australia and New Zealand Banking Group
Annual Report 1997

Plain-text annual report

Australia and New Zealand Banking Group Limited 1997 Annual Report Who we are ANZ is Australia and New Zealand’s international bank. In our home markets of Australia and New Zealand, we are a major financial institution providing the full range of banking and other financial services. We seek to differentiate ourselves from our competitors by the quality of our customer service, our professionalism, and our international capability. Overseas, we have a significant presence in countries from the Middle East through South and East Asia to the Pacific– the region of greatest geographic and economic relevance to Australia and New Zealand. These businesses are complemented by wholesale and investment banking operations in the world’s major financial centres. Our values We have a strong customer focus and build relationships based on integrity, superior service and mutual benefit. We strive for profit and sound growth. We work as a team to serve the best interests of the Group. We are relentless in pursuit of business innovation and improvement. We value and respect people and make decisions about people based on merit. Contents ANZ at a Glance ................................................... 2 Chairman’s Report ................................................ 4 Chief Executive Officer’s Review...................... 5 ANZ 2000 ................................................................ 6 Going Global ......................................................... 7 Review of Results ................................................ 9 Eight Year Summary........................................... 13 Personal Banking ............................................... 14 Corporate & Investment Banking .................... 16 Funds Management & Private Banking ......... 18 Risk Management .............................................. 19 Group Executive ................................................. 22 Board of Directors.............................................. 24 Corporate Governance ...................................... 26 Community Involvement.................................... 29 Business Environment....................................... 30 Events of 1997...................................................... 31 Financial Highlights in Key Currencies ......... 32 1997 Financial Statements ................................ 33 ANZ’s Worldwide Representation ................ 118 Phone Directory ................................................ 120 We base recognition and reward on performance. Shareholder Information ....... Inside back cover We value open and honest communication. We are responsible, trustworthy and law-abiding in all we do. Key Dates Books close for Final Dividend .......... 12 December 1997 Annual General Meeting ........................ 21 January 1998 Payment of Final Dividend ...................... 21 January 1998 Announcement of Interim Results ............. 27 May 1998* Books close for Interim Dividend .............. 12 June 1998* Payment of Interim Dividend ......................... 6 July 1998* Announcement of Final Results ....... 18 November 1998* *tentative dates only Australia and New Zealand Banking Group Limited ACN 005 357 522 Unless otherwise stated, all amounts are expressed in Australian dollars ANZ Internet Home Page: www.anz.com 1997 Achievements Underlying profit growth of 17%, well spread across Australia and international operations Annual dividend increased 14% to 48 cents, fully franked Asset growth of 8% Conservative provisioning Significant restructuring Named Australian “Bank of the Year” New branch in Beijing and branch in Jerusalem re-opened Earnings* and Dividends# per Share 78.4 48 91 92 93 94 95 96 97 Earnings* Dividends# *before abnormal items #excludes preference shares Sharemarket Accumulation Index 306 Oct97 203 ¢ 90 60 30 0 -30 -60 350 300 250 200 150 100 50 Sep91 Sep92 Sep93 Sep94 Sep95 Sep96 Sep97 ANZ All Ords Our Commitment for the Future ANZ 2000 Build a truly unique financial company Make dealing with ANZ an enjoyable customer experience Create an environment where people excel Deliver superior growth and financial performance Transform the way we do business Australia and New Zealand Banking Group Limited – 1997 Annual Report 1 ANZ at a Glance Group Profile Australia ANZ, with assets of A$138 billion, is amongst the world’s top 100 banks and operates in 43 countries. The Group originated in the United Kingdom in 1835 when the Bank of Australasia was established by Royal Charter. ANZ is Australia and New Zealand’s international bank. In its home markets of Australia and New Zealand, ANZ is a major financial institution providing the full range of banking and other financial services. Overseas, we have a significant presence in countries from the Middle East through South and East Asia to the Pacific– the region of greatest geographic and economic relevance to Australia and New Zealand. These businesses are complemented by wholesale and investment banking operations in the world’s major financial centres. ANZ is one of the “big four” Australian domestic banks providing a full range of retail and corporate financial services. Within this spectrum, ANZ’s relative strengths are in business banking, cards and international banking services. Through wholly owned subsidiaries, ANZ offers complementary financial services-investment and insurance services through ANZ Funds Management; personal and corporate stockbroking services through ANZ Stockbroking and ANZ Securities Limited; and specialised leasing, motor vehicle and property finance services through Esanda Finance Corporation Limited, the largest finance company in Australia. Town & Country provides retail banking services in Western Australia. Underlying profit after tax in 1997 of $1,308m An increase of 17% Underlying profit after tax in 1997 of $764m An increase of 16% Personal Banking Corporate & Investment Banking p14 p16 Funds Management & Private Banking p18 2 “Bank of the Year” award Branches - 868, down 202 EFTPOS devices - 25,167, up 7,852 Telephone banking - 875,000 registrations Lending transformation - 60% of mortgage applications processed within 24 hours Strong growth in cards - to 24% market share Interactive internet site launched Trial of Smart Cards PC Banking development Strong business lending growth Focus on risk adjusted profitability Esanda completes major transformation - staff numbers down 30%, - record new business writings exceeding $5 billion “Best Foreign Exchange Dealer” award ANZ Investment Bank leads largest Australian privatisation deal - Loy Yang A Strong growth $10 billion in funds under management Strategic alliance with Frank Russell company Peter Jonson appointed Managing Director of ANZ Funds Management New Zealand International ANZ is the oldest (1840) and the third largest bank in the country. ANZ provides a complete range of products and services to the retail and business markets, and is known as New Zealand’s international bank. PostBank was purchased in 1989. The finance subsidiary (UDC Finance Limited) is New Zealand’s largest finance company specialising in leasing and motor vehicle finance. ANZ Securities (NZ) Limited provides wholesale broking services while ANZ Funds Management provides investment management services. ANZ has a network of specialist banking operations, principally trading as ANZ and ANZ Grindlays (purchased in 1984), providing trade finance and commercial banking services in 41 countries outside Australia and New Zealand, mainly throughout Greater Asia (pages 118 & 119 list ANZ’s worldwide representation). In the emerging markets of South Asia and the Middle East, ANZ Grindlays has provided high quality retail banking services since 1846. This network is complemented by an active presence in major global financial centres. ANZ provides on-the-ground banking services to support the international activity of ANZ’s customers worldwide. Underlying profit after tax in 1997 of $165m An increase of 20% Underlying profit after tax in 1997 of $379m An increase of 18% Branches - 198, down 61 EFTPOS devices - 13,423, up 1,909 Mobile sales force expanded Jerusalem branch re-opened Oman operations restructured Insurance launched in Vanuatu and PNG Trial of supermarket and hyperstore branches ATMs introduced in Fiji and PNG Strong mortgage lending growth Credit cards expanded in India Internet site launched Trial of “Branch of the Future” Planning for move to new technology platform David Airey appointed Managing Director of ANZ New Zealand Credit cards launched in Pakistan and Bangladesh Commercial Banking System trial in Vanuatu completed New Zealand’s international bank Beijing branch licence approved Specialist property lending group established Offices opened in regional centres; Nelson and West Auckland UDC - strong growth in operating leases UDC & Esanda to integrate Indian Arbitration result announced - successful, appeal pending ANZ Investment Bank executes major financing deals Strong business growth in South Asia, Middle East and Asia Pacific Expand asset based finance into Asia and Middle East Strong growth, 17% “Number 1” Emerging Market Debt Fund Over $3 Billion in funds under management Grindlays Private Bank expanded Ranked “Number 1” on investment performance Global Private Banking integrated Bonus Bonds re-launched Australia and New Zealand Banking Group Limited – 1997 Annual Report 3 Chairman’s Report Australia and New Zealand Banking Group Limited A.C.N. 005 357 522 Level 32, 100 Queen Street, Melbourne, V ic 3000, Australia G.P.O Box 537E, Melbourne, Vic 3001, Australia Charles Goode Chairman ANZ continues to perfor m well. In 1997 there was a 17% increase in underlying profit which was well spread across the Group. This was prior to making an additional transfer to the general provision and abnormal restructuring costs. The decision to increase the general provision reflects our desire to be more consistent and conservative in our provisioning. The abnor mal restructuring charge is necessary to allow us to achieve further reductions in costs under the ANZ Global Program. The annual dividend was increased by 14% to 48 cents per share, fully franked. We said last year that there would be some limit on our franking capacity going forward as the proportion of Group profits ear ned offshore increases. This, together with the dividend increase and the costs associated with the restructuring underway to position ANZ for the future, does impact on our franking capacity. As a result dividends are not expected to be fully franked in 1998. As well as being a year of significant achievement, 1997 has been a year of change including at Board level. Mr Don Mercer, who was Chief Executive Officer during the recovery in profits over the last five years retired at the end of September. An Executive Director, Mr Alister Maitland, and the Chief Financial Officer and Company Secretary, Mr David Craig, retired at the end of June after distinguished careers with the Bank spanning 34 and 41 years respectively. Sir Ronald Trotter, a non-executive director, retired in October after providing wise counsel to the Board over his ten years of service. We thank these gentlemen for their enormous contr ibutions to the Bank and wish them all the best in their retirement. The new Chief Executive Officer, Mr John McFarlane, started with the Bank on 1 October. He has 22 years of banking experience, and in particular, at senior levels in international banking. I look forward to introducing Mr McFarlane to shareholders at the Annual General Meeting in January. There are many challenges ahead of us in our domestic markets and overseas, but there are also many opportunities. ANZ is well positioned to meet these by improving efficiency and growing the business, notably the inter national banking and funds management activities. We are confident of our ability to continue adding to shareholder value over the medium term. Charles Goode Chairman 4 Chief Executive Officer’s Review ANZ is in good shape. We are well positioned to take advantage of the opportunities available to us and to meet our challenges head on. We have recently launched “ANZ 2000” (page 6), to ensure that we meet our customers’ expectations into the 21st century, and deliver superior performance for our shareholders. Review of 1997 ANZ’s performance in 1997 underlines the financial strength of the Group. We are a ‘AA’ bank, with assets of $138 billion, shareholders’ funds of $6.9 billion and a comfortable Tier 1 capital ratio of 6.6%. Asset quality remains excellent and we are also carrying conservative provisions. During 1997 underlying profit increased by 17%. Despite aggressive competition domestically, underlying profit in Australia grew by 16%, and in the rest of the world by 19%. Asset growth, increased fee income, and buoyant market-related earnings, all offset lower interest margins. Core cost increases were contained at 2%, as a result of a reduction in staff numbers in Australia and New Zealand mainly in retail banking and Esanda. A charge of $417 million before tax has been made this year, to cover current and future redundancy and related restructuring costs, including those arising from the ANZ Global program. Most of this has been treated as an abnormal item. Assets quality remains sound. Non- accrual loans were reduced by 29% to $872 million, and specific provision charges fell by 26% to $86 million. Nevertheless, the directors decided to increase the general provision by $201 million, significantly higher than the Reserve Bank of Australia’s guideline of 0.5% of growth in risk-weighted assets. This recognises that loan losses would normally be higher than current levels across the economic cycle. The total charge is based on the annual average debt charge implied in our portfolio risk management models, and is not linked to any need to provide against specific regions, industries or individual borrowers. A discussion of the financial performance in 1997 is contained on pages 9 to 12, which I recommend to shareholders, with full details contained in the second half of this Report. Outlook The Government has announced its acceptance of the majority of the key recommendations from The Report of the Financial System Inquiry which was released in March 1997. Legislation to facilitate the package of reforms is now being formulated. There will be further change in the financial services industry arising from this legislation and continued technological advance. Domestic economic conditions in Australia and New Zealand appear to be improving, but competition in the finance industry will remain intense. The recent unsettling events in financial markets in Asia will undoubtedly dampen growth prospects in the region in the near term. We have reviewed our exposures in the region and are satisfied there are no immediate concerns. We remain convinced of the long term growth prospects for the region, and are cautiously looking for opportunities to expand our operations. John McFarlane Chief Executive Officer Australia and New Zealand Banking Group Limited – 1997 Annual Report 5 ANZ 2000 We have developed a clear vision for ANZ going forward which we call ANZ 2000. Unique Customers People Build a truly unique financial company ANZ is already unique. We are strong in our domestic markets and in the world’s emerging markets. We are recognised as “Australia and New Zealand’s international bank”. Recently we expanded our funds management and investment banking activities. This foundation gives us the opportunity to create a truly unique international financial services company through organic growth and by acquisition. Make dealing with ANZ an enjoyable customer experience On those rare occasions where we experience moments of memorable customer service dedication, how many of them have been in banking? This is the challenge facing all banks, particularly in Australia. We aim to meet this challenge. We are currently reorganising our branches into financial retail outlets. We are building our Private Banking, Priority Banking and Business Banking capabilities, to provide higher levels of service for our best customers. We are also investing in new marketing and customer service training for all of our front-line staff which will be launched early next year. We know we have some way to go, but we aim to make a real difference in this area. Create an environment where people excel ANZ has talented people everywhere we operate. Our challenge is to create the environment and the opportunity for them to enjoy their work and to reach their potential. This is made more difficult when we are reducing costs. We are restricting external recruitment to ensure our people have the opportunity to move from areas of restructuring into growth segments. One exception is that we will increase substantially our recruitment of graduates. We are also launching a programme to identify people with high potential, and to channel them to the best opportunities. Our incentive programs have been changed to reward those who do deliver. We intend also to achieve a better balance of women and men in senior management. Deliver superior growth and financial performance In our mature markets we are facing relatively low levels of growth, and certain emerging markets are experiencing economic uncertainty. At the same time, competition is reducing margins. This more difficult revenue environment places greater priority on cost management. Our current relatively high cost-income ratio gives us scope to improve productivity substantially, and to enable us to achieve superior earnings growth. The overall risk of our business needs to be controlled to ensure an acceptable level of earnings volatility. Whilst we are comfortable with the balance today, we will manage the growth of higher risk segments to within the overall growth rate of the group. Our overall aim is to deliver superior earnings growth and maintain a high return on equity for shareholders. Our new performance management process which was launched this month will focus ongoing attention to achieving these objectives. Transform the way we do business Banking in the 21st century will be different. To prepare ourselves, we need to radically restructure the way we do business today, to invest in new technologies to manage our business and to reach our customers. Recently we announced our reorganisation around global business lines. Under “ANZ Global”, we are developing three major technology platforms to improve customer service and to lower product costs. Our “Branch of the Future” program is changing the face of branch banking; we are investing in telephone, direct and internet banking and card technologies. We also announced our strategic alliance with Frank Russell – a world leader in funds management. These and other new ventures will ensure that for ANZ, the best is yet to come. Transform 66 Performance Going Global ANZ, with representation in 43 countries, is the most international of the Australasian banks. We have a long tradition in Australia, New Zealand, the Pacific Islands and, through Grindlays, in South Asia and the Middle East. Our presence in East Asia, while more recent, has been expanded significantly over recent years. We are now radically altering our management approach to focus on global lines of business to improve efficiency and build a better platform for growth. Global Rationale With the rapid development of information technology and the globalisation of financial markets, banking is changing. To capture the efficiency opportunities of our scale and establish a better platform for growth, we have radically altered our management approach. From October 1997 all businesses moved to global management and reporting. Previously they operated according to geographic areas with independent country management. ANZ is by no means unique in facing these issues. Other leading multinational companies, both within the finance sector and outside it, have made or are making similar changes. The objective of moving to global business lines is to improve efficiency and build a better platform to support growth. This will achieve economies of scale and scope, minimise duplication of effort, develop and leverage the capabilities of our people and build common values and culture throughout the organisation. Inventing things once and applying them many times is the goal. We are pleased with the success of our investment banking and capital markets activities which were combined last year to form the first global business unit. By managing activities on a functional rather than geographic basis, ANZ Investment Bank has been able to develop real expertise across geographic boundaries and mobilise quickly to respond to changing client and market needs. Managing Director John Sunderland, closest to TV screens (in Melbourne), uses video conference facilities to meet regularly with General Manager United Kingdom, Dr Holger van Paucker and Gordon Branson, Head of Structured and Project Finance (in London), and General Manager Americas, Roy Marsden (in New York). Australia and New Zealand Banking Group Limited – 1997 Annual Report 7 The ANZ Global Program With the assistance of specialists from the international finance consultancy, KPMG Barents, teams of ANZ staff have been working to re-design processes across almost all of of ANZ’s activities. To ensure line management ownership of the changes, ANZ’s management structure has been changed to reflect line of business focus. There are now the principal business activities of Personal Banking, Corporate & Investment Banking and Funds Management & Private Banking, and a single Operations and Technology support unit, whereas previously these functions were all part of country management. MANAGEMENT ANZ Global Organisation Chief Executive Officer Finance & Risk Human Resources Group Office Corporate & Investment Banking Personal Banking Operations & Technology Funds Management Private Banking Global Management Australia New Zealand India... Corporate & Investment Banking Personal Banking Funds Management Private Banking Operations & Technology 8 There are some 38 individual programs within ANZ Global covering all aspects of the Group’s activities. Fundamental to the overall program is increasing the consistency of approach across the Group and the consolidation of technology and support platforms. We will be moving to a single banking technology platform in Australia and New Zealand (Hogan), a single global cards system, and a single system supporting banking outside Australia and New Zealand (the Commercial Banking System or CBS). New Zealand will move to the new platform during 1998, and Australia, which already operates on Hogan based systems, in 1999/ 2000. There will be significant efficiency savings through achieving scale operations and having fewer systems. Also, by standardising products and processes across countries, development and training costs will be reduced. Customer service will also be enhanced by having consistent product and processes across all of ANZ’s operations. Central to this is the project called “Branch of the Future”, which is designed to improve efficiency and facilitate the development of a sales culture throughout the branch network. Branch layouts are being redesigned to be more “people friendly” for customers and staff. Sales and enquiry areas are being grouped together near the entrance, with separate private areas for detailed discussions with customers and the telling functions located towards the rear. The trial of the new model, which includes expanded use of modular furniture, is underway in Australia and New Zealand and will be implemented simultaneously in both countries. Application of the same model outside our domestic markets will follow. Implementation of ANZ Global will involve significant restructuring. A provision for these costs was taken in the 1997 financial year. Review of 1997 Results Operating Profit* 1171 91 92 93 94 95 96 97 *before abnormal items Underlying Profit* 764 379 165 $M 1200 1000 800 600 400 200 0 -200 -400 -600 $M 800 700 600 500 400 300 200 100 0 Summary Australia and New Zealand Banking Group Limited recorded a 17% increase in underlying profit after tax to $1,308 million for the year ended 30 September 1997. This was prior to an additional transfer to the general provision of $137 million giving an operating profit after tax and before abnormal items of $1,171 million. Abnormal items were $147 million (after tax) leading to an operating profit after tax and abnormal items of $1,024 million. Dividends for the year were increased by 14% to 48 cents per share, fully franked. Despite aggressive competition, underlying profit in Australia grew by 16%, and in the rest of the world by 19%. Asset growth, increased fee income, and buoyant market-related earnings, all offset lower interest margins. Core cost increases were contained to 2%, as a result of a reduction in staff numbers in Australia and New Zealand, mainly in retail banking and Esanda. A charge of $417 million before tax has been made this year, to cover existing and committed redundancy and related restructuring costs, mainly arising from the ANZ Global program. Most of this has been treated as an abnormal item. Non-accrual loans were reduced by 29% to $872 million, and specific provision charges fell by 26% to $86 million. Nevertheless, the directors decided to increase the general provision by $201 million, significantly higher than the Reserve Bank of Australia’s guideline of 0.5% of growth in risk-weighted assets. This is in recognition that loan losses across the economic cycle would normally be higher than current levels. The total charge is based on the annual average debt charge implied in our portfolio risk management models, and is not linked to any need to provide against specific regions, industries or individual borrowers. Australia New Zealand International 1995 1996 1997 *Operating profit after tax before additional transfer to general provision of $137 million and abnormal items Distribution of Gross Income Interest Payments to Depositors & Bondholders 51% Personnel Costs 16% Other 15% Provision for Doubtful Debts 2% Tax 5% Dividends to Shareholders 6% Reinvested (depreciation & retained earnings) 5% $M 1600 1400 1200 1000 800 600 400 200 0 Change in Profit 320 -139 31 -27 -89 Higher Costs Lower Specific Provision General Provision (RBA) Increased Tax 1,308 -137 Abnormals 1,171 -212 Additional General Provision 65 1,024 Restructuring NHB Interest 1,116 -319 415 Growth in Non-Interest Income Lower Margins Balance Sheet Growth Net Interest Income 1996 Profit Underlying Profit After Tax 1997 Profit Before Abnormals 1997 Profit After Abnormals Australia and New Zealand Banking Group Limited – 1997 Annual Report 9 Review of 1997 Results Income Net interest income grew by 3% as asset growth offset reduced margins in the domestic markets. Competitive pressures in Australia and New Zealand led to the 19 point decline in gross interest spread. Lower levels of non-accrual loans and lower interest rates reduced the related funding costs. However, the lower interest rates also reduced the earning rate on non-interest bearing items, resulting in a 32 point reduction in overall margins. The reduction in margins was more than offset by strong growth in interest earning assets in International markets, particularly South Asia, Asia Pacific and the Middle East, the Investment Bank and business lending in Australia. Non-interest income increased by 15%. Strong growth in our Cards business together with higher transaction and corporate advisory fees lifted fee income. Foreign exchange continues to be a stable core business. Good trading performances in buoyant global markets led to the significant increase in trading, fee and other income. The Group’s earnings from investment banking capital markets activities is sensitive to asset prices in the global financial markets. Profits before tax from these activities were $208 million in 1997 (1996: $100 million). Strong growth in operating lease income and the profit on the sale of the Omani operation also lifted other income. Operating Expenses Core costs increased by only 2% (this excludes restructuring costs and Direct Income Related Costs which directly reflect the level of business activity in our Cards and Operating Lease businesses). Staff numbers in Australia and New Zealand declined as a result of branch closures and increased automation and centralisation of processes particularly in retail banking and Esanda, but there were higher overtime and temporary staff costs relating to these major change programs. Personnel costs grew by 8% as a result of increased salaries offsetting low staff numbers, higher performance related bonuses in our investment banking activities and higher overtime and temporary staff costs. The recruitment of relatively highly paid professional staff in the Investment Bank and the impact of high salary inflation in South Asia and Middle East also contributed to the increase in personnel expenses. Premises costs fell due to branch closures in Australia and New Zealand while computer expenses were steady. Other expenses fell reflecting a favourable non-lending loss experience both in Australia and overseas following the resolution of certain Indian scam related issues. Expansion of our Cards and operating lease businesses drove the growth in direct income-related costs. 10 Operating Income 2415 3413 91 92 93 94 95 96 97 Net Interest Income Non-Interest Income Operating Expenses Personnel 51% Premises 10% Other 19% Restructure 2%* Income Related 9% Computer 9% *A further $327m restructuring costs were abnormal Operating Expenses as % of Net Income 64.9 91 92 93 94 95 96 97 $M 6000 5000 4000 3000 2000 1000 0 % 80 75 70 65 60 55 50 Net Non-Accrual Loans to Shareholders’ Equity 6.1 91 92 93 94 95 96 97 Specific Provisions for Doubtful Debts 86 91 92 93 94 95 96 97 % 80 70 60 50 40 30 20 10 0 $M 1800 1600 1400 1200 1000 800 600 400 200 0 Asset Quality Gross non-accrual loans were reduced by $353 million to $872 million through asset realisations and reduced new non-accrual loans. Net non- accrual loans fell to $428 million and represent 6% of shareholders’ equity at September 1997, down from 11% in 1996. The specific provision charge fell by 26% to $86 million, reflecting continued good credit conditions and experience. New and increased provisions were slightly down while releases and recoveries were also favourable to last year. The Group remains well provided with the coverage ratio (specific provisions to gross non-accrual loans) now above 50%. The general provision charge was $201 million, including an additional transfer of $137 million. The latter was in recognition that loan losses would normally be higher than current levels across the economic cycle. The total charge is based on the annual average provision implied in our portfolio risk management models and is not linked to any need to provide against specific regions, industries or individual borrowers. The general provision now stands at 0.9% of risk-weighted assets, well in excess of the Reserve Bank of Australia guideline of 0.5%. Income tax The pre-abnormal tax expense increased by $89 million reflecting the higher earnings and an increase in the effective tax rate to 32.9% (1996: 30.3%) owing to the impact of the increased general provision charge more than offsetting the increased level of rebateable dividends. Abnormal Items The Arbitrators of the long running dispute with the National Housing Bank of India (“NHB”) handed down their award in the Group’s favour on 29 March 1997. The NHB has repaid the deposit together with interest at 18% p.a. in accordance with the decision. Given its size, the $145 million interest receipt (before tax) is disclosed as an abnormal item. Subsequently, NHB filed documents with the relevant Court to challenge the award. ANZ is confident that the award will stand. Cost reduction is a major priority for the Group. We are proceeding with the implementation of ANZ Global. The change programs resulted in a $417 million before tax restructuring charge. This amount covers both completed restructuring programs and those ANZ Global projects in train to which the Group is demonstrably committed. Of this charge, $327 million is abnormal. Australia and New Zealand Banking Group Limited – 1997 Annual Report 11 Review of 1997 Results Dividends Dividends for the year have been increased by 14% to 48 cents per share, fully franked (from 42 cents in 1996). We foreshadowed last year that there would be some limit on our franking capacity going forward as the proportion of Group profits earned offshore increases. This, together with the dividend increase and the costs associated with the restructuring underway to position ANZ for the future, impact on our franking capacity. As a result we do not expect dividends in 1998 to be fully franked. Balance Sheet & Capital Adequacy Total assets grew by 8% to $138 billion. Good lending growth was achieved, particularly in business lending in Australia, the Investment Bank and international markets (South Asia, Asia Pacific and the Middle East). Funding for asset growth came from the wholesale market, as well as from increased retail and corporate deposits. Total shareholders’ equity increased to $7 billion and capital resources increased to $10 billion, after the redemption of some subordinated debt. The Reserve Bank of Australia’s guideline ratio of qualifying capital to risk-weighted assets is a minimum of 8.0%, of which Tier 1 capital must be at least 4.0%. The Group’s capital adequacy ratio is 9.8%, with a Tier 1 ratio of 6.6%, down 0.1% from September 1996. Retained earnings and dividend reinvestment supported the 14% growth in risk- weighted assets achieved over the year. The Group seeks to maintain the Tier 1 ratio in the range of 6.5% to 7.0%. 12 ¢ 90 60 30 0 -30 -60 $B 140 120 100 80 60 40 20 0 % 12 10 *8 6 *4 2 0 Earnings* and Dividends# per Share 78.4 48 91 92 93 94 95 96 97 Earnings* Dividends# *before abnormal items #excludes preference shares Group Assets 138 106 91 92 93 94 95 96 97 Total Assets Risk-Weighted Assets Capital Adequacy 9.8 6.6 91 92 93 94 95 96 97 Tier 1 *RBA minima Eight Year Summary Profit and loss Net interest income Other operating income Operating expenses Operating profit before tax, debt provisions and abnormal items Provisions for doubtful debts - specific - general Operating profit(loss) before abnormal items Income tax (expense)benefit Outside equity interests Operating profit(loss) after tax before abnormal items Net abnormal (loss)profit Operating profit(loss) after income tax and outside equity interests Balance Sheet Assets Net assets Ratios (after abnormal items) Return on average shareholders’ equity Return on average assets Capital adequacy - total Share information (per fully paid share) Dividend - declared rate Franked portion Earnings before abnormal items - basic Earnings after abnormal items - basic Net tangible assets Share price on ordinary shares - high - low 1997 $M 1996 $M 1995 $M 1994 $M 1993 $M 1992 $M 1991 $M 1990 $M 3,413 2,415 (3,783) 3,317 2,096 (3,644) 3,081 1,975 (3,334) 2,800 1,969 (3,183) 2,543 1,875 (3,124) 2,438 2,109 (3,329) 2,602 2,067 (3,153) 2,475 1,765 (2,848) 1,218 (1,600) (337) 1,516 (1,037) (16) 2,045 (86) (201) 1,758 (579) (8) 1,769 (117) (37) 1,615 (490) (9) 1,722 (63) (111) 1,548 (505) (10) 1,586 (368) (13) 1,205 (395) (7) 1,294 (629) (5) 660 (193) (7) 1,171 (147) 1,116 - 1,033 19 803 19 460 (213) (719) 146 (5) (578) (1) 1,392 (788) (5) 599 (186) (1) 463 (193) (4) 266 1 412 (191) 1,024 1,116 1,052 822 247 (579) 267 221 138,241 127,604 112,587 103,874 103,045 101,138 98,212 99,300 6,993 6,336 5,747 5,504 5,133 4,591 5,018 4,323 14.8% 18.3% 0.7% 0.9% 9.8% 10.5% 17.9% 0.9% 10.9% 5.0% -11.4% 15.6% -0.6% 0.8% 0.2% 9.0% 11.3% 10.8% 5.8% 0.3% 9.9% 5.4% 0.2% 8.6% 48.0¢ 100% 78.4¢ 68.6¢ $4.59 $11.58 $7.10 42.0¢ 79% 76.3¢ 76.3¢ $4.24 $7.28 $5.41 33.0¢ 18% 68.5¢ 69.9¢ $3.94 $5.75 $3.55 25.0¢ - 54.5¢ 55.9¢ $3.58 $5.68 $3.78 20.0¢ - 30.8¢ 13.5¢ $3.43 $4.40 $2.53 20.0¢ 50% -60.1¢ -60.2¢ $3.40 $4.88 $2.87 20.0¢ 100% 26.7¢ 26.9¢ $4.31 $4.20 $2.92 38.0¢ 100% 45.0¢ 24.2¢ $4.45 $6.38 $3.95 Number of fully paid ordinary shares on issue (millions) 1,508.6 1,478.1 1,446.0 1,353.6 1,308.2 1,054.5 1,019.3 971.1 Dividend reinvestment plan Share price - interim - final Other information Points of representation Number of employees (full-time equivalents) Number of shareholders $9.77 - $5.59 $7.60 $4.40 $6.27 $3.78 $3.73 $3.42 $4.44 $3.58 $2.51 $3.42 $4.46 $4.35 $2.72 1,473 2,367 2,026 35,926 46,261 39,642 132,450 121,847 114,829 121,070 115,000 112,036 101,188 1,744 39,721 1,881 39,240 2,136 40,277 2,302 43,977 2,431 48,182 92,606 Australia and New Zealand Banking Group Limited – 1997 Annual Report 13 Personal Banking ANZ, one of the big full service banks in Australia and New Zealand, is the dominant retail bank in several Pacific Islands, and ANZ Grindlays is one of the leading foreign retail banks in the emerging markets of South Asia. Retail Banking In Australia and New Zealand ANZ has some 3 million and 1 million customers respectively. During 1997 ANZ was awarded Australian ‘Bank of the Year’ by Personal Investment Magazine. During the year there was a strong growth in telephone banking in both markets. The National Teleservicing Centre in Melbourne is now handling the majority of telephone calls from metropolitan customers nationwide. Approximately 60% of these calls are now being handled automatically through telephone banking which provides 24 hour, 7 days a week service. In New Zealand it is the bill payment feature of ‘Phone Direct’ that is growing fastest. The centralisation of credit assessments into the National Finance Centre has reduced both approval times for customers and costs. There has also been a complete re- engineering of the sales and credit processes for the small business customer to make greater use of automated procedures and focus effort more closely on the higher risk elements of the business. This system will be implemented in New Zealand in 1998. The development of new delivery channels is epitomised in ‘ANZ Direct’. Launched in 1996, ‘ANZ Direct’ provides, without the use of branches, very competitively priced home and car loans, a deposit product and a range of insurance and investment products. It is accessing a new market niche with up to 100% larger mortgages. These developments, the expansion of the ATM and EFTPOS networks over recent years, and the new pricing regime for transaction accounts introduced in Australia in January 1997, have led to a significant reduction in branch withdrawals (30% in Australia in 1997 and 50% in New Zealand since 1995). With the number of customers visiting our branches to conduct transactions falling steadily there is no longer the need for as many branches. 20% of branches were closed last year in both countries. The trial of smaller in-store branches in supermarkets (and ‘hyperstores’ in New Zealand) reflect the changing role of branches away from transactions and toward sales and information. At the same time as making these changes we have taken initiatives to grow the business including launching a business mortgage product, taking the opportunity of the official interest rate reduction in late May to gain price leadership in the mortgage market in Australia and launching a ‘no fees’ campaign in New Zealand. Also to enhance our position in the premium market, private banking has been launched across Australia to provide premium ANZ Phone Banking provides customers with flexible access to ANZ services 24 hours a day. 14 service to high net worth customers. Priority banking will provide enhanced service levels to the next tier of customers. Mortgage and small business lending in Australia, while slow in the first half of 1997, have picked up considerably later in the year, stabilising our market share. In New Zealand, strong growth in mortgage lending has continued with ANZ maintaining its 17.5% market share. The global management of personal banking services will enable greater coordination and joint development of retail banking services. “Branch of the Future” involves the total redesign of branch procedures and layouts to drive efficiencies and free-up staff to focus on sales. It is currently being trialed in both New Zealand and Australia. The full roll-out of the concept to all branches is expected to take place during 1998. We will also be transferring the New Zealand core operating system to Hogan, on which the Australian system is based. PC Banking is into the final stages of development and will enable a secure internet-based PC banking service for individuals. This will enable customers to use PCs to look up their account balances, transfer funds and pay bills. ANZ also provides retail banking in the Pacific Islands, including Papua New Guinea, Fiji and Samoa,where we are a major provider of retail banking products such as cards, transaction accounts and home mortgages. The rollout of the new banking platform across the network in the next few years will standardise products, improve efficiency and facilitate improved customer service. Cards ANZ holds a strong market position in the cards market in Australia and New Zealand. In Australia the co-branded Telstra and Qantas/Telstra credit cards were very well received by customers. As a result, despite ANZ Grindlays offers retail banking services in the United Arab Emirates. strong competition, ANZ’s market share has increased from 18% two years ago, to 24% today. Around 80% of customers taking these cards had no previous relationship with ANZ, providing an excellent opportunity to cross- sell other ANZ products. Outside Australia and New Zealand, ANZ has card activities in 15 countries, all of which are now part of one business unit. In the near term we plan to replace the current multiple systems with one new system to support all activity. During the year new cards and merchant acquiring facilities were launched in a number of countries including Pakistan, Bangladesh, and Nepal, supported by systems and infrastructure in Melbourne. Use of this same system also allowed the expansion of cards in India, with a doubling of cards on issue to over 150,000. These are markets of enormous growth potential. In 1998 we will be growing these businesses and expanding into new countries. The development of Smart Card technology is well advanced. ANZ, together with the other major banks, has taken a shareholding in Mondex International. With experience in both the Visa Cash and MasterCard Cash trials, ANZ is well positioned for a market launch of the Mondex Electronic Purse in 1998. Australia and New Zealand Banking Group Limited – 1997 Annual Report 15 Corporate & Investment Banking The provision of banking services to the business and corporate markets has been at the centre of the ANZ franchise in Australia and New Zealand for 150 years, with cross border international banking the basis of our international network. The restructuring of our investment banking activities (financial markets, structured and project finance on to a global basis) the first business unit to do so, has proven to be highly effective is the forerunner for change in other business units. Business Banking About 30% of all Australian and New Zealand corporates have a relationship with ANZ and the bank provides about $30 billion in lending to this business community. Growth of around 10% was achieved during 1997. The quality of the lending portfolio was improved through the shedding of high risk business and net non- accruals now amount to less than 0.5% of corporate banking lending assets. A management information system that provides risk adjusted customer profitability data to front line managers in Australia is a key driver of customer strategies, designed to develop medium term shareholder value. Business Banking has conducted a major process improvement exercise focused on stripping out non-essential functions, simplifying technology infrastructure, streamlining credit processes and defining service standards by customer size and industry. This is allowing Relationship Managers to spend more time on developing new account relationships and also to extend and deepen relationships with existing customers. This process was assisted by the establishment of an expanded number of Business Centres, where Business Banking is co-located with International, Leasing, Treasury, Electronic Banking and Funds Management specialists, as well as Retail services, in geographic areas of significant business activity. In order to meet the particular needs of customers, Business Banking has been segmented into Corporate and Middle Market, along with separate specialist industry lending teams, such as Commercial Property Development. This has been received in the market as a distinctive and professional financial service offering. Process improvement is also being assisted by the rapid acceptance of electronic banking service by business customers, with well over half of target customers now using the ANZ service. The provision of international banking services is also greatly enhanced by electronic delivery. International Services itself underwent a major tranformation during the year to centralise and automate back office processing – to free up managers’ time to help existing and new customers with their export and import finance and other international transactions. Asset Based Finance Esanda is Australia’s largest asset financier providing $9.5 billion of asset lending to some 290,000 customers nationwide. Esanda also, through issuing debentures, raised $5.3 billion medium term funding for the Group. During 1997, Esanda underwent a major transformation program to streamline and automate its processes while maintaining service levels to its customers. This greatly improved efficiency and involved a 24% reduction in staffing levels. Paul Henderson, Relationship Sales Consultant with Esanda, spends the majority of his days on the road visiting customers. 16 Notwithstanding the impact on the business during the implementation of these changes, new business writings exceeded $5 billion for the first time – an improvement of 6.8% on 1996. Plans are well advanced to make the same process changes in UDC Finance, the largest asset financier in New Zealand. UDC Finance’s strength and experience in operating lease business will be utilised to further develop the Australian operations. Investment Banking ANZ Investment Bank was formed early in 1996 recognising the increasingly global nature of our largest corporate and institutional clients’ service and product needs. By managing activities on a functional rather than geographic basis, ANZ Investment Bank is able to develop real expertise across geographic boundaries and to respond quickly to changing client and market needs. Combined, Esanda and UDC Finance There have been a number of notable are one of the Asia Pacific region’s largest asset finance businesses. The expertise in these companies will be used as the foundation for the expansion of the Group’s asset finance business into overseas markets, particularly Asia, South Asia and the Pacific. International Commercial Banking ANZ has a commercial banking presence in the region from the Middle East through South and East Asia to the Pacific. This is the region of greatest economic relevance to Australia and New Zealand. The commercial banking activities in these countries focus on providing international trade and investment services to companies from Australia and New Zealand, elsewhere in the international network, and local corporates. The rollout of the new technology platform (the Commercial Banking System) continues. During the year it was successfully implemented in United Arab Emirates, Qatar and Bahrain. The Commercial Banking System, when fully implemented will provide the Bank with an International Core Processing System to replace the existing variety of systems and processes currently in place. The international network differentiates ANZ from the competition. This provides leadership in trade finance which is a competitive advantage in the business market and uniquely positions ANZ as Australia and New Zealand’s international bank. achievements during the year which have demonstrated the strength of the integrated approach and the quality of ANZ’s franchise among major corporations and institutions in Australia and Greater Asia. ANZ Investment Bank secured major structured finance deals including the $4.7 billion privatisation of the Loy Yang A power station and coal mine. We led the US$300 million sovereign Eurobond issue for the Islamic Republic of Pakistan. We have also won a number of project finance advisory and arrangement roles from the Cable and Wireless telecom project in Vietnam to the Mangalore independent power project and Haldia petrochemicals project in India. ANZ Investment Bank also acted as advisor, underwrote an equity issue and provided long term funding for Village Roadshow’s expansion in Europe and their acquisition of Austereo. The quality of ANZ Investment Bank’s operations has also been recognised in the receipt of a number of industry awards and rankings. These included a clean sweep of the Australian Business Review Weekly’s foreign exchange service awards including Best Overall Service. Project Finance International magazine, in citing the Top 10 Project Finance Deals in Asia, included three deals in which ANZ Investment Bank had a lead arranger status, the only bank to be represented in such a way. ANZ Investment Bank secured major structured finance deals including the privatisation of the Loy Yang A power station and coal mine. Australia and New Zealand Banking Group Limited – 1997 Annual Report 17 Funds Management & Private Banking The Group manages $18 billion of investment funds for customers around the world. Funds Management is one of the fastest growing sectors of the finance industry. The focus is on providing retail investment and insurance services. Australia and New Zealand In our two principal domestic markets of Australia and New Zealand we have in excess of $10 billion and $3 billion of funds under management respectively. ANZ Funds Management provides retail funds management and insurance products through specialist investment advisers working with the branch network. Products include balanced and specialist investment funds, cash management accounts, insurance products, administration and advice services. In New Zealand there are also “Bonus Bonds”. In October 1997, ANZ Funds Management announced a strategic alliance with Frank Russell company, one of the world’s leading asset consulting and investment management firms. Under this alliance, customers will be offered access to world-class investments through the launch of a unique, personalised investment program. ANZ Funds Management will be able to focus on what it does best – providing quality financial planning services – while Russell will focus on managing the investments and selecting the appropriate fund managers. Russell uses multi-style, multi-manager investment approval which has an impressive record of investment performance. To enhance our position in the premium market, private banking has been launched across Australia to provide premium service to high net worth customers. The New Zealand operation has recorded a very strong growth in funds under management (17%) on the back of outstanding investment performance. Both retail and wholesale funds increased significantly over the year. In New Zealand, ANZ Funds Management was ‘Best International Equities Manager’, and second for balanced funds, while also achieving the best investment performance with the balanced investment fund. Bonus Bonds – a capital guaranteed product where in lieu of interest, holders participate in weekly and monthly cash prize draws – has been relaunched and invested funds have grown to AUD$1.5 billion. International Overseas, our funds management activities draw on our presence in the emerging economies. We have a very successful emerging market investment operation based in London. The success of our six managed emerging markets funds has won us a leading reputation in managing emerging market debt investment funds. Micropal has rated the ANZ flagship fund, EMLIP, the No. 1 emerging market debt fund over three years, and in 1997 Lipper Analytical Services – the leading fund analysts in the USA – rated ANZ Global Emerging Market Debt Fund as the best performing fund over a 12 month period. Grindlays Private Bank provides full private banking and asset management services to high net worth individuals primarily from Asia and the Middle East through offices in London, Geneva, the Channel Islands and Singapore. Ross Chessari, General Manager Estate Planning & Management for ANZ Funds Management, provides advice to customer. 18 Risk Management Good risk management is good banking. The identification and monitoring of risk is an essential part of the Bank’s operations. Our objective is to make risk management a prime core competency of the organisation by continuous improvement of our systems and procedures to ensure risks are accurately identified and assessed. ANZ manages risk through an approval and delegation of limits structure that starts with the Board of Directors and is administered by an independent department. The Risk Management Committee of the Board approves and oversees the framework of risk standards, policies and processes for credit, market and operating risks. Delegations pass through Executive Committees to individual customer controllers and risk managers. Regular reports and compliance checks are presented back through the Risk Management Committee to the Board. The Risk Management Department is the independent group which has responsibility for ensuring the cohesion and effectiveness of the Group’s risk management framework. It oversees the activities of all areas involving risk policy and monitoring. The work of the department is subject to independent review and audit by both the internal and external auditors to ensure Sources of Risk Illustrative Credit Risk Customers unable to meet contractual obligations Market Risk Potential loss due to fluctuations in interest or exchange rate markets Operating & Other Risk compliance with policies, procedures and industry/government regulations. Credit Risk Credit risk is the potential financial loss resulting from the failure of customers to honour fully the terms of a loan or contract. Credit risk represents some 50% of Group risk exposures. The Board establishes the framework of delegated authority limits for the approval of credit risk transactions. The largest transactions are approved by the Risk Management Committee. That Committee also receives regular reports on asset quality issues, including portfolio composition, large customer exposures, and developments in credit management policy and processes. The Credit Approvals Committee, involving senior executive management, makes decisions on transactions, portfolio strategy, policy and processes. Specialist credit and business areas have been established for the larger portfolios (e.g. real estate and agriculture), whilst a specialist group handles the effective management of problem loans. At operational levels the loan approval process requires independent specialist credit officers to be involved in all major lending decisions, in conjunction with customer relationship managers. A sophisticated customer credit risk grading system is supported by objective risk measurement tools which aids in the assessment of default risk. Australia and New Zealand Banking Group Limited – 1997 Annual Report 19 Risk Management Framework Board Board Risk Management Committee Group Risk Management Department Global Funds Management Committee Credit Approvals Committee Credit Portfolio & Policy Committee Operating Risks Executive Committee Trading Risks Balance Sheet Risks Credit Risks Operating Risks Market Risk Management Market risk is the potential risk to earnings resulting from changes in interest rates, currencies, equities and commodity prices. ANZ’s approach starts with independence and segregation of operations, risk measurement and control. The activities are guided by separate sets of policies approved by the Risk Management Committee of the Board. At the executive level, the Global Funds Management Committee is the most senior market and balance sheet management risk forum and is responsible for maintenance of the Board approved control framework. Its membership includes the Chief Executive Officer and it is chaired by the Executive Director. The Market Risk Management Unit, as part of the Group Risk Management Department, has responsibility for co- ordination of policy and compliance for market risk and related credit and operating risks. This includes the co-ordination of the independent control of all market risk related activities within the specific business units. ANZ increasingly is integrating its approach to the management of credit and market risk and the monitoring of operating risk from trading activities. Trading Risk Management Market risk activities include trading, distribution and underwriting, dealing in a wide range of financial products. Principal portfolios consist of capital markets securities, foreign exchange and money market products, derivatives, equities and commodities. ANZ’s principal trading activities are well diversified, and now managed on a global product basis. The key principles for control of market risk are “Value at Risk” measurement supplemented with volume and risk concentration limits. The “Value at Risk” limit framework is designed in three levels with an aggregate global market risk limit, global product limits and individual trading book limits. These are supported by daily mark to market profit accounting and advice of loss procedures. Supporting the risk management framework, particularly for the Bank’s major trading and geographically isolated business units, are Professional Standards Reviews. Market specialists conduct reviews of the trading activities to ensure high standards of professional conduct throughout all offices of the Group world-wide. Balance Sheet Risk Management The balance sheet risk management process embraces the management of balance sheet interest rate risk, liquidity and foreign currency capital exposures. These risks are managed by a specialist Global Balance Sheet Management unit and are monitored by the Global Funds Management Committee. Balance sheet interest rate risk management involves minimising fluctuations in net interest income that may occur over time as a result of changes in market interest rates. 20 reviewing and approving key practices and approving deviations from policy. The Operating Risk methodology is based on the risk management standards issued by the Australian and New Zealand Standards bodies. In addition to addressing today’s risks, such as the Year 2000 issue and disaster recovery, there is also a forward looking responsibility, to ensure that risks associated with new business initiatives, delivery channels and technology are being properly addressed. ANZ also trains staff in operating risk management. Year 2000 ANZ, along with all other users of computer systems, faces the issue of the potential disruption to business that may eventuate with the date change from 1999 to 2000. ANZ has a well established process for dealing with this threat. A project team, with dedicated staff assisted by external consultants, has been established to provide management and control across all Year 2000 compliance related work world-wide. All ANZ systems have been analysed and work is underway to develop, test and implement the necessary changes. Full systems testing for internal applications is scheduled to be completed by December 1998, and in conjunction with other organisations, full cross industry integration testing will take place during 1999. The potential risk to the Group from vendors and customers not being adequately prepared to manage this issue is also receiving detailed attention. A leading edge modelling system was installed in 1997 and is used to simulate the impact on earnings and market value of a large number of market scenarios and balance sheet structures. This enables management to quantify the risks and formulate strategies to manage current and future risk profiles. The liquidity management process ensures that funds are available at all times to meet maturing obligations as they fall due. ANZ policy establishes daily liquidity management practices as well as scenario - based guidelines to monitor future liquidity flows under normal operating conditions and to cater for a worst case scenario arising from an unfounded, name-specific rumour. Structural foreign exchange exposures are managed with the objective of ensuring that the ANZ capital ratio is not adversely impacted by changes in the value of the Group’s foreign currency capital as a result of movements in exchange rates. Operating Risk Operating Risk embraces those risks arising from day to day operational activities which may result in direct or indirect loss. Operating Risk may arise, for example, from failure to comply with internal policies, laws and regulations, from fraud and forgery or from breakdown in the availability, integrity and confidentiality of services, systems and information. Some operating risks are insurable and appropriate cover is taken. The majority are not insurable. The objective of Operating Risk management is to ensure that risks are known, assessed and managed in a structured environment. ANZ does not expect to eliminate all risks, but to minimise exposure based on a sound risk/reward analysis in the context of an international financial institution. Reporting to the Board’s Risk Management Committee, the Operating Risk Executive Committee is responsible for the Operating Risk policy, methodology, Australia and New Zealand Banking Group Limited – 1997 Annual Report 21 Group Executive John McFarlane Peter Hawkins John Sunderland Peter McMahon John Ries Peter Marriott Peter Jonson JOHN McFARLANE Chief Executive Officer John McFarlane joined ANZ in October 1997 as Chief Executive Officer. He was previously Executive Director of Standard Chartered plc and prior to that he spent 18 years with Citibank where he held a number of positions in corporate banking, treasury, investment banking, stockbroking, strategy, human resources and training. JOHN RIES Executive Director John Ries joined ANZ in 1961 and has held senior management positions within the corporate banking and international banking divisions. In June 1988 he was appointed as Managing Director, ANZ Grindlays Bank, London. He returned to Melbourne in August 1990 to take up the position of Chief General Manager International Banking. In August 1992, John was appointed to the ANZ Board as Executive Director with responsibility for Australia. He currently has responsibility for the Group’s Corporate and Investment banking activities. PETER HAWKINS Global Head of Personal Banking Peter Hawkins joined ANZ in December 1971 and has had experience in most aspects of banking including treasury, corporate banking, retail banking, strategy and international banking. He was appointed to his present position in November 1997 after two and a half years as Chief General Manager Australian Retail Division and before that he was Managing Director ANZ Banking Group (New Zealand) Limited. Prior to that he was General Manager Asia Pacific. PETER MARRIOTT Chief Financial Officer and Company Secretary Peter Marriott joined ANZ in February 1993 as General Manager, Group Accounting and was promoted to Group General Manager Credit/Risk Management in July 1995. He was appointed to his present position as Chief Financial Officer and Company Secretary in July 1997. Prior to joining ANZ, Peter was a partner in KPMG’s Melbourne office. JOHN SUNDERLAND Managing Director, ANZ Investment Bank John Sunderland joined ANZ in November 1996 to head the Group’s global investment banking activities. He has responsibility for the various business activities undertaken by ANZ to support its large corporate and institutional customers around the globe. Prior to joining ANZ John held senior investment banking positions with BZW in London, New York and Hong Kong. PETER JONSON Managing Director, ANZ Funds Management Dr Peter Jonson was appointed to ANZ’s Group Executive in the position of Managing Director ANZ Funds Management in March 1997. Prior to joining ANZ he was Group Managing Director of Norwich Australia. He has also held senior positions with James Capel Australia Limited and the Reserve Bank of Australia. PETER McMAHON Managing Director, Esanda Finance Corporation Limited Peter McMahon joined ANZ in July 1992 as General Manager Special Projects. In December 1992 he was appointed General Manager of the Asset Management Group and then Group General Manager Credit. Prior to joining ANZ he was Managing Director of Costain Australia. He was appointed to his current position of Managing Director Esanda Finance Corporation Limited in July 1995. 22 Bob Edgar David Airey John Winders Andrew Ward Murray Horn Charles Carbonaro Grahame Miller Dave Richardson Peter Wilson Elmer Funke Kupper BOB EDGAR Managing Director, Business Banking GRAHAME MILLER Managing Director, International Network Dr Bob Edgar joined ANZ in December 1984 as Senior Economist and in 1986 he was appointed Chief Economist. Since then he held a number of executive positions before he was appointed to his present position in Business Banking in March 1995. Before joining ANZ Bob held senior positions with the Australian Bankers’ Association and the Reserve Bank of Australia in Sydney. CHARLES CARBONARO Managing Director, Global Cards Division Charles Carbonaro joined ANZ in January 1987 as a senior consultant in the Electronic Network Services Division. He was appointed General Manager-Cards in 1989 and was promoted to Chief General Manager - Australian Operations and Payments Division in 1992. He was appointed to his current position in Global Cards Division in December 1996. Before joining ANZ Charles was Chief General Manager at Resi-Statewide Building Society (now Bank of Melbourne). DAVID AIREY Managing Director, ANZ Banking Group (New Zealand) Ltd David Airey was appointed Managing Director, ANZ Banking Group (New Zealand) Limited in March 1997. Prior to this appointment he was Chief Executive Officer of the Bank of Melbourne from February 1993 to February 1997 and from January 1990 to December 1992 he was Managing Director of The Rural Bank based in Wellington. Grahame Miller joined ANZ in 1968. He has held a number of senior positions including General Manager Financial Markets, General Manager Global Treasury, Chief Manager/General Manager Hogan for Retail, Senior Manager Group Strategic Planning and Assistant Vice President Los Angeles. He was appointed to his current position as Managing Director, International Network in July 1997. JOHN WINDERS Group General Manager, ANZ Global John Winders joined ANZ in 1969 and worked across a wide range of business and support areas and spent a number of years with ANZ overseas before leaving in 1985. He returned to ANZ in early 1994 and was appointed to the position of General Manager International Services. He currently heads the ANZ Global program in addition to his International Services role. DAVE RICHARDSON Group General Manager, Information Technology Dave Richardson joined ANZ as General Manager Information Technology in Australia in March 1993. He was appointed Group General Manager, Corporate Development in 1996. This position was responsible for Strategic Planning, Economics, Public Affairs and Technology. He was appointed to his current role as head of global information technology in 1997. Dave Richardson has over 20 years experience in Information Technology and has held a variety of senior positions in Coles Myer, Ansett Australia and overseas. ANDREW WARD Head of Operations and Payments Mr Andrew Ward joined ANZ in February 1971. He has held a number of senior management positions including Adminis- tration Executive - Corporate Banking Australia, Zone Chief Manager - Melbourne North and West Zone, Assistant General Manager - Asset Management Group, General Manager Operations and Payment Services - ANZ Banking Group (New Zealand) Ltd, Acting Managing Director of ANZ Banking Group (New Zealand) Limited. He is responsible for the Group’s Operations and Payments functions globally. PETER WILSON Group General Manager, Human Resources and Management Services Peter Wilson joined ANZ in October 1990 as Group General Manager, Strategic Planning and Economics. From 1992-95 he was General Manager, Asia Pacific, responsible for the Bank’s operations in North Asia, South East Asia, Sri Lanka, Papua New Guinea and the Pacific Islands. Peter took up his current role as Group General Manager, Human Resources and Management Services in January 1996. MURRAY HORN Group General Manager, Strategic Planning Dr Murray Horn was appointed to the posi- tion of General Manager Strategic Planning in September 1997. His responsibilities include overseeing the development of stra- tegic planning as the Group strengthens its global lines of business. Prior to joining ANZ he had a distinguished career with the New Zealand Treasury, where he had been Secretary of the Treasury since 1993. ELMER FUNKE KUPPER Group General Manager, Risk Management Elmer Funke Kupper joined ANZ in 1995 as General Manager, Portfolio Management within Group Credit/Risk Management. Prior to joining the Group he worked as a consultant for McKinsey & Company and later Mitchell Madison Group. In March 1997 he became team leader, Support and Business Management and Organisation Design for ANZ Global and has recently been appointed to the role of Group General Manager, Risk Management. Elizabeth Proust Elizabeth Proust will join ANZ in January 1998 as Head of Group Human Resources. Until recently Ms Proust was Secretary of the Victorian Department of Premier and Cabinet. Previously she had held the positions of Chief Executive Officer of the City of Melbourne, Secretary of the Victorian Attorney-General’s Department and Deputy Director General of the Department of Industry, Technology and Resources. Australia and New Zealand Banking Group Limited – 1997 Annual Report 23 Board of Directors 24 MR C B GOODE (left) B Com (Hons) (Melb), MBA (Columbia University, New York), FCPA, FSIA Chairman Company Director. Director since July 1991, appointed Chairman August 1995. Director of CSR Limited, Pacific Dunlop Ltd, Queensland Investment Corporation, Woodside Petroleum Ltd, Mercury Asset Management Ltd and other companies. Lives in Melbourne. Age 59. Mr J McFARLANE OBE MA, MBA, MSI, FHKIB, FRSA Chief Executive Officer. Appointed Group Managing Director and Chief Executive Officer in October 1997. Former Group Executive Director, Standard Chartered plc (1993-1997), Head of Citibank, United Kingdom (1990-1993), Managing Director, Citicorp Investment Bank Ltd (1987-1990). Lives in Melbourne. Age 50. (left to right) DR B W SCOTT AO B Ec, MBA, DBA Company Director. Director since August 1985. Chairman of Management Frontiers Pty Ltd, W.D. Scott International Development Consultants Pty Ltd, Television Makers Pty Ltd and The Foundation for Development Co-operation Ltd. Director of Air Liquide Australia Ltd and the James N. Kirby Foundation Ltd. Australian member of the Board of Governors of the Asian Institute of Management and Chairman of the Australia-Korea Foundation. Former Chairman of the Australian Government’s Trade Development Council (1984-1990). Former Federal President, Institute of Directors in Australia (1982-1986) Lives in Sydney. Age 62. MR J K ELLIS MA (Oxon) FAIMM FTS Chairman, The Broken Hill Proprietary Co Ltd. Director since October 1995. Chairman of Sandvik Australia Pty Ltd and Chairman of the International Copper Association Ltd. Patron of the Australian-Korea Business Council. Board Member of the Museum of Contemporary Art. Lives in Melbourne. Age 60. MR R B VAUGHAN AO (seated) Company Director. Director since January 1988. Chairman of MIM Holdings Limited and Queensland Sugar Corporation Limited. Deputy Chairman of Commercial Union Assurance Limited and Transgrid. Chairman of the Federal Government’s Trade Policy Advisory Council, APEC Committee and Sugar Industry Review Working Party, and Vice-President of the Australia Japan Business Co-operation Committee. President and Chairman of the Research Institute for Asia and the Pacific. Former Chairman and Chief Executive of Dalgety Farmers Limited and former Chairman of ICI Australia Limited. Lives in Sydney. Age 69. MR C J HARPER CA (Scots) Company Director. Director since October 1976. Chairman of CSL Ltd. Former General Manager and Chief Executive of the merchant bank Australian United Corporation Ltd (1968-1976) and since then a professional non-executive director. Inaugural National Vice President of The Australian Institute of Company Directors. Lives in Melbourne. Age 66. (left to right) DR R S DEANE PhD, B Com (Hons), FCA, FCIS, FNZIM Chief Executive and Managing Director, Telecom New Zealand Limited. Director since September 1994. Director of Fletcher Challenge Limited, IHC Mortgages Ltd, The Centre for Independent Studies Ltd and Institute of Policy Studies, Victoria University, Wellington. Formerly Chief Executive, Electricity Corporation of New Zealand Ltd, Chairman State Services Commission, Alternate Executive Director, International Monetary Fund and Deputy Governor, Reserve Bank of New Zealand. Lives in Wellington, New Zealand. Age 56. MR J F RIES B Bus, FCPA, FAIB Executive Director. Executive Director since August 1992. Thirty-seven years experience in banking with the Group including Managing Director, ANZ Grindlays Bank plc, London (1988- 1990) and Chief General Manager, International Banking (1990- 1992). Lives in Melbourne. Age 53. MS M A JACKSON MBA, B Econ, FCA Company Director. Director since March 1994. Chairman of Transport Accident Commission (Victoria). Director of The Broken Hill Proprietary Co Ltd, Pacific Dunlop Ltd, Qantas Airways Ltd and other companies. Fund Committee Member of The Walter and Eliza Hall Institute of Medical Research and Trustee of The Brain Imaging Research Foundation. Lives in Melbourne. Age 44. MR J C DAHLSEN LLB, MBA (Melb) Solicitor and Company Director. Director since May 1985. Consultant to and former Partner of the legal firm Corrs Chambers Westgarth. Chairman of Woolworths Ltd and Melbourne Business School Ltd, Director of Southern Cross Broadcasting (Australia) Ltd, Mining Project Investors Pty Ltd, The Smith Family, GS Private Equity Pty Limited and J. C. Dahlsen Pty Ltd Group. Former Chairman of The Herald and Weekly Times Ltd and Deputy Chairman Myer Emporium Ltd. Lives in Melbourne. Age 62. Retired Directors Three Directors retired during the year. Mr Charles Goode in farewelling them said, “We thank these gentlemen for their enormous contribution to the Bank and wish them all the best in their retirement”. Sir Ronald Trotter Mr D P Mercer Mr A T L Maitland Director 1988-1997 Chief Executive Officer & Executive Director 1992-1997 Executive Director 1992-1997 Australia and New Zealand Banking Group Limited – 1997 Annual Report 25 Corporate Governance Good governance is essential for ANZ to carry out its business activities and meet the objectives of its shareholders, employees, customers and regulators around the world. Role of the Board of Directors To ensure the benefit of independent The Board of Directors is responsible to shareholders for the corporate governance of ANZ. The Board charts the direction of the Group by participating in the setting of objectives and strategy formulation and establishing policy guidelines monitors management’s running of the business to ensure implementation is in accordance with the agreed framework. Effective risk management is central to good banking. The Board and the Risk Management Committee approve and oversee the framework of risk standards, policies and processes. A detailed explanation of the Bank’s Risk Management procedure is contained on pages 19 to 21 of this Report. The Board, and particularly, Audit & Compliance Committee, liaises with the external auditors on accounting policies and practices and compliance issues. Composition of Board To achieve its objectives, a well structured Board is necessary. Details of directors, their qualifications and experience are set out on pages 24 and 25. The Board Nominations Committee identifies and nominates suitable candidates for consideration by the full Board. Although flexible, criteria include the individual’s background, experience, and skills. Geographical considerations and availability to commit sufficient time to the Board’s program are also considered. views, the Articles of Association of the Company state that there must be a majority of non-executive directors on the Board and that the role of Chairman cannot be held by an executive director, ensuring that the roles of Chairman and Chief Executive Officer are separate. Committees of the Board are chaired by non-executive directors and the Audit & Compliance Committee comprises only non-executive directors. All non-executive directors are regarded as independent, having no substantial supplier customer relationship and no prior executive role in the Group. The Board has established a code of conduct in the event of a conflict of interest. The Board currently has eight non- executive directors and two executive directors. Both non-executive and executive directors (other than the Managing Director) are subject to re-appointment by shareholders on a rolling three year basis and must retire upon attaining the age of 70. Executive directors retire as directors on the termination of their employment with the Group. Their status after that date is a matter for the Board at the time. In the interests of ensuring smooth succession and a reasonable range and turnover of skills, non-executive directors appointed since 1993 have agreed that they will not, in normal circumstances, serve as a Director beyond 15 years. 26 Board Activities To assist in the exercise of their The Board meets ten times a year. Committee meetings are held at regular intervals. Details of attendance are shown below. The Board receives regular reports on performance and outlook, and reviews activities and strategies of the Bank and each division. Directors participate in a programme of visits to operations and create opportunities to meet and discuss current issues with management and staff. The Board held its February 1997 meeting in India which allowed Directors to visit local banking operations, meet staff and customers and government representatives in India and also in neighbouring countries in which the Bank operates. Whilst there is no restriction on the number of external Board or charitable committee appointments a director may have, they are required to seek Board approval before accepting appointment. responsibilities, directors are entitled to seek independent professional advice. With the Chairman’s prior approval the advice can be obtained at the Bank’s expense and is to be made available to the whole Board. Directors are required to hold at least 2,000 shares in the Company. Details of their holdings are shown on page 115. They must refrain from dealing in the Company’s shares for their personal benefit except in three four week periods; following the announcement of half year and full year results, and the Annual General Meeting, and in each case the Chairman of the Board must be informed prior to any trading. The same restrictions are also imposed upon senior management and those staff in departments with access to market sensitive information, with the notification being required to the Chief Executive Officer. The Articles of Association provide an indemnity to directors and employees for costs and liabilities incurred in the execution of duty. The External Auditor is not indemnified. continued overleaf... Attendance of Board and Committee meetings for the period 1/10/96–30/9/97 Board A 10 10 10 10 10 10 7 10 10 10 10 10 B 10 10 10 10 10 9 7 10 10 10 9 10 Risk Management B A Audit & Compliance B A 11 11 11 11 11 8 11 11 11 8 11 11 5 5 5 5 5 4 5 5 4 5 Personnel Executive App. & Remuneration A 3 3 3 3 B 3 3 3 3 A 7 7 7 7 7 7 7 7 7 7 B 7 6 7 7 6 7 6 7 5 7 C B Goode J C Dahlsen R S Deane1 J K Ellis C J Harper M A Jackson A T L Maitland2 D P Mercer3 J F Ries B W Scott Sir Ronald Trotter1,4 R B Vaughan Donations A 3 B 3 Board Nominations B A 4 4 3 3 4 4 4 4 Column A–Indicates number of meetings held during the period the Director was a Member of the Board and/or Committee. Column B–Indicates number of meetings attended during the period the Director was a Member of the Board and/or Committee. The Executive Committee met three times during the year. The Chairman is an ex officio member of all Board committees. 1Resident of New Zealand 2Mr Maitland retired 30/6/97 3Mr Mercer retired 30/9/97 4Sir Ronald Trotter retired 9/10/97 Australia and New Zealand Banking Group Limited – 1997 Annual Report 27 Committee Structure The Board’s function is to address issues in their broadest context. It is through the Board’s committee structure that specific areas of detail are examined. There are six board committees, each with a defined Charter. These committees are charged with providing quality and independent advice to the Board as a whole. Details of the role of each committee is shown opposite. Membership of the committees and attendance at committee meetings during the year is set out on page 27. Directors have also participated in meetings of Committees of the Board (4 meetings during 1997) to sign accounts, to declare dividends and make allotments under the Company’s various dividend reinvestment and employee share schemes. The Board has the power to nominate Directors to form an Executive Committee of the Board at any time and delegate to that Committee general executive authority to deal with any matter relating to the company’s affairs in circumstances where it is not possible to call a full Board meeting. Subsidiary Boards - Non-executive Directors ANZ has a number of subsidiary companies, some of which have non-executive directors. The major subsidiaries in this regard are: ANZ Grindlays Bank Limited M A Jackson, B W Scott AO ANZ Banking Group (New Zealand) Limited J G Todd, F H Wilde Companies within ANZ Funds Management Group D P McDonald, C M William, L J Willett AO. B W Scott and R B Vaughan, directors on the ANZ Board, are members of the boards of the main Australian Staff Superannuation and Pension companies. The Audit & Compliance Committee (Chairman - J C Dahlsen) Reviews the Group’s accounting policies and practices; financial statements; due diligence processes in relation to capital raisings; and compliance with the Group’s statutory responsibilities including those relating to Consumer Credit Legislation, Trade Practices Act and privacy issues. Monitors compliance with approved policies and controls; liaises with internal and external auditors. Approves audit plans and the audit fee of the external auditor. The Risk Management Committee (Chairman - C J Harper) Supervises all aspects of risk management. This includes approving and overseeing the setting of delegation policies, standards and reporting mechanisms for credit risk, trading risk, balance sheet risk and operating risk. Monitors the risks being assumed by the Group to ensure standards are being met. A full description of the Group’s Risk Management procedures is contained on pages 19 to 21 of this report. Personnel Committee (Chairman - Dr B W Scott) Reviews and advises on executive remuneration policies. Has the responsibility of developing and monitoring the new senior executive remuneration scheme, which more closely aligns management remuneration to the generation of shareholder value. The Executive Appointment & Remuneration Committee (Chairman - C B Goode) Approves appointments and individual remuneration packages for the senior officers of the Group. The Committee obtains independent advice on the appropriateness of remuneration packages. The Board Nominations Committee (Chairman - C B Goode) Reviews the composition of the Board to ensure that it has the appropriate mix of expertise and experience. Recommends appointments to the Board where it is considered that the Board would benefit from the service of a new director with particular skills. The Donations Committee (Chairman - C B Goode) Advises on donations policy and considers requests for corporate contributions. Committee members shown on page 27. 28 Community Involvement Our responsibility to shareholders, customers and staff extends to playing an active role in the communities in which we operate. This involvement covers many areas of community life from local sports activities and multicultural festivals to community welfare and the arts. India’s leading musicians, dancers and theatre artists performed in the Festival, in celebration of India’s history and independence. ANZ has also supported the establishment of a Chair in South Asian Economics at the Australian National University in Canberra. The Chair is dedicated to India’s late Prime Minister, Rajiv Gandi and recognises the growing economic links between Australia and India. ANZ Foundation During 1997, ANZ further encouraged staff involvement in the community through the ANZ Foundation. Formerly known as the ANZ Staff Foundation, the ANZ Foundation was relaunched in November 1996 to support the Australian community through staff donations and involvement. The Bank provides financial support to the Foundation, and in 1997 over $90,000 of grants were made to charities such as the Australian Sport and Recreation Association for Persons with an Intellectual Disability (AUSRAPID), Youth Insearch and the Down Syndrome Assocation of Victoria. The ANZ Foundation aims to fund projects which offer opportunities for staff to become involved by giving their time. During 1997, ANZ has contributed to a wide range of initiatives in community welfare, medical research, education and cultural activities. Fostering the talents of young people is an important contribution to the community’s future. ANZ has built on its long running commitment to the arts by supporting young artistic talent through the ANZ Visual Arts Fellowship and the ANZ Music Fellowship. Food Bank In Victoria and New South Wales we have provided support to Food Bank, a charity which works with welfare agencies to give assistance to more than 40,000 people in need each week through the provision of meals and food hampers. Our support included providing finance for a new vehicle to assist in delivering food. Our focus in this area has also extended to supporting The Salvation Army’s Family Support Services Network in Victoria which involves the distribution of food to people in need in rural areas. India’s 50th Anniversary of Independence ANZ has had a presence in India since 1854 and ANZ Grindlays has played an active part in supporting India’s cultural heritage. In August 1997, India celebrated the 50th anniversary of its independence. As part of the celebrations, ANZ Grindlays was involved in sponsoring the National Centre for Performing Arts’ festival of dance and drama in Mumbai. Some of Pictured with the new Food Bank truck are Peter Bearsley, ANZ’s General Manager Charitable Trusts, and Glenn Ellam, General Manager Food Bank Victoria. Background - Li Cunxin, Private Client Adviser with ANZ Stockbroking and one of the six principal male dancers with the Australian Ballet. Australia and New Zealand Banking Group Limited – 1997 Annual Report 29 Business Environment Financial System Inquiry In March 1997 the final report of the Australian Financial System Inquiry was presented to the Federal Treasurer. Rapid technological change and globalisation of the financial services industry since the deregulation of the first half of the 1980s prompted the Inquiry. The Report concluded that improvement in efficiency, choice and quality within the financial sector has occurred since the deregulation of the 1980s and recommended a package of 115 regulatory reforms to secure further improvements. In early September, the Treasurer announced the Government’s acceptance of the majority of the Report’s recommendations. Implementation of the reform package to sharpen competition and ensure Australia has a world class regulatory structure able to accommodate the significant change that lies ahead, is scheduled to begin in 1998. Key reforms are: establishment of a new regulatory framework. • The Reserve Bank of Australia (RBA) will retain responsibility for the stability of the financial system with a new Payments System Board within the RBA, will be responsible for payments system regulation. • A new regulatory body, the Australian Prudential Regulation Authority, will have prudential oversight of all deposit taking institutions, life and general insurance offices and superannuation funds. • A single agency, the Corporations and Financial Services Commission, will be responsible for the corporations law, market integrity and consumer protection roles of the Australian Securities Commission, the Insurance and Superannuation Commission and the Australian Payments System Council. Liberalisation of access to the payments system. While participation has until now been limited to banks and a small number of ‘special service providers’ offering clearing services to building societies and credit unions, new guidelines for access to payments clearing and settlement to be developed by the Payments System Board will allow access to non-banks. Increased flexibility in corporate structures. Banks will be permitted to restructure their operations under a more flexible non-operating holding company structure; mutual organisations will be permitted to hold a banking licence; and the principle of separating financial activities from non-financial activities within the one corporate group is to be relaxed, subject to prudential and other conditions being met. Political Donations ANZ supports a vigorous multi-party democracy as the best guarantee of a market- oriented economy with strong private and commercial rights and freedoms. Accordingly, from time to time, we provide some level of support for the major parties in our home markets. In Australia we provide details to the Australian Electoral Commission which are published on an annual basis. In the year to 30 September 1997 in Australia, we donated $125,000 to the Liberal Party, $25,000 to the National Party and $20,000 to the Australian Labor Party. In New Zealand, we donated NZ$10,000 to the National Party, NZ$5,000 to the Labour Party and NZ$5,000 to the Association of Consumers and TaxPayers. 30 Events of 1997 OCTOBER MAY Half Year profit of $646M Chief Executive Officer, Mr Don Mercer, retirement announced Home loan interest rates reduced CBS rolled out in United Arab Emirates JUNE ANZ Health Insurance launched ANZ No. 1 in foreign exchange CBS rolled out in Qatar ANZ wins Gold at Annual Report Awards ANZ New Zealand Funds Management wins industry awards JULY ANZ “Bank of the Year” Emerging markets debt fund launched Home loan and business interest rates reduced CBS rolled out in Bahrain AUGUST Supermarket banking launched on the Gold Coast Credit card interest rates reduced Interactive Internet Web site launched Omani operations restructured NOVEMBER 1996 profit of $1,116M “ANZ Money Saver Home Loan” introduced Home loan interest rates reduced DECEMBER Business index rate and business reference rate reduced Credit card interest rates reduced JANUARY Mr David Airey appointed Managing Director, ANZ New Zealand Launch of ANZ Phone Banking FEBRUARY Dr Peter Jonson appointed Managing Director, ANZ Funds Management $1 billion committed to small business sector Home loan rates reduced MARCH Indian arbitration ruling ANZ Direct home loans introduced APRIL Jerusalem branch re-opened Financial System Inquiry Report Approval granted to proceed with Beijing branch licence SEPTEMBER Mr John McFarlane appointed Chief Executive Officer Home loan rates reduced ANZ Beijing branch opened Supermarket branch at Tweed Heads, New South Wales. Charles Goode, Dai Ziang Long, Governor of the People’s Bank of China, and John Howard, Prime Minister of Australia, cut the ribbon to mark the granting of ANZ’s branch banking licence in Beijing. Australia and New Zealand Banking Group Limited – 1997 Annual Report 31 Financial Highlights in Key Currencies Millions Profit and loss Net income Operating expenses Profit before tax and doubtful debts Provisions for doubtful debts - specific - general Profit before tax and abnormal items Income tax expense Outside equity interests Profit before abnormal items Abnormal loss Profit after tax and abnormal items Profit after tax by geographic segment Australia New Zealand UK & Europe Asia Pacific South Asia2 Americas Middle East3 Profit after tax and before abnormal items Abnormal items Profit after tax and abnormal items Balance Sheet Assets Liabilities Shareholders’ equity4 Ratios Earnings per share - after abnormal items (basic) Dividends per share - declared rate Net tangible assets per share 1997 AUD 5,828 (3,783) 2,045 (86) (201) 1,758 (579) (8) 1,171 (147) 1,024 627 165 112 95 82 36 54 1,171 (147) 1,024 138,241 131,248 6,993 68.6¢ 48.0¢ $4.59 1997 USD1 4,475 (2,905) 1,570 (66) (154) 1,350 (445) (6) 899 (113) 786 481 127 86 73 63 28 41 899 (113) 786 99,492 94,459 5,033 52.7¢ 36.9¢ $3.30 1997 GBP1 2,736 (1,776) 960 (40) (94) 826 (272) (4) 550 (69) 481 295 77 53 45 38 17 25 550 (69) 481 1997 NZD1 6,522 (4,234) 2,288 (96) (225) 1,967 (648) (9) 1,310 (165) 1,145 702 185 125 106 92 40 60 1,310 (165) 1,145 61,724 58,602 3,122 32.2p 22.5p £2.05 155,826 147,943 7,883 76.8¢ 53.7¢ $5.17 1 USD, GBP and NZD amounts - profit and loss converted at average rates for financial year ended 30 September 1997 and balance sheet items at closing rates at 30 September 1997 2 Includes Bangladesh, India and Nepal 3 Includes Bahrain, Greece, Israel, Jordan, Oman, Pakistan, Qatar and United Arab Emirates 4 Includes outside equity interests 32 1997 Financial Statements 33 Australia and New Zealand Banking Group Limited – 1997 Annual Report 33 Table of Contents Page Page Alphabetical index ......................................... 35 Directors’ report ........................................... 36 Profit and loss accounts ................................. 40 Balance sheets .............................................. 41 Statements of changes in shareholders’ equity ...................................... 42 Statements of cash flows ................................ 44 Notes to the financial statements 1 Accounting policies ............................................. 45 2 Income ................................................................ 48 3 Expenses .............................................................. 48 4 Remuneration of auditors .................................... 50 5 Abnormal items ................................................... 50 6 Income tax expense ............................................. 51 7 Dividends ............................................................ 51 8 Earnings per share ................................................ 53 9 Liquid assets ......................................................... 54 10 Due from other financial institutions .................... 54 11 Trading securities ................................................. 55 12 Investment securities ............................................ 56 13 Net loans and advances ........................................ 58 14 Impaired assets ..................................................... 60 15 Provisions for doubtful debts ................................ 62 16 Customers’ liabilities for acceptances..................... 63 17 Regulatory deposits ............................................. 63 18 Shares in controlled entities and associates ............ 64 19 Other assets.......................................................... 65 20 Premises and equipment ...................................... 66 21 Due to other financial institutions ........................ 66 22 Deposits and other borrowings ............................. 67 23 Income tax liability .............................................. 68 24 Creditors and other liabilities ............................... 68 25 Provisions ............................................................ 68 26 Bonds and notes ................................................... 69 27 Loan capital ......................................................... 70 28 Outside equity interests ........................................ 71 29 Average balance sheet .......................................... 71 30 Interest sensitivity gap .......................................... 73 31 Net fair value of financial instruments .................. 74 32 Segment analysis .................................................. 76 33 Notes to the statements of cash flows ................... 78 34 Controlled entities ............................................... 80 35 Associates ............................................................. 81 36 Commitments ...................................................... 82 37 Derivative financial instruments ........................... 82 38 Contingent liabilities and credit related commitments .................................. 88 39 Superannuation commitments .............................. 90 40 Fiduciary activities ............................................... 91 41 Exchange rates ..................................................... 91 42 Employee share purchase and share option schemes ........................................... 92 43 Related party disclosures ...................................... 94 44 Remuneration of directors ................................... 97 45 Remuneration of executives ................................ 98 46 US GAAP reconciliation...................................... 99 47 Events since the end of the financial year ........... 102 Directors’ statement .................................... 103 Auditors’ report .......................................... 104 Financial information 1 Capital adequacy ................................................ 105 2 Interest spreads and net interest average margins ................................................ 106 3 Cross border outstandings .................................. 107 4 Certificates of deposit and term deposit maturities ............................................... 107 5 Volume and rate analysis .................................... 108 6 Concentrations of credit risk .............................. 110 7 Doubtful debts - industry analysis ....................... 112 8 Short term borrowings ....................................... 113 Shareholder information 1 Major shareholders ............................................. 114 2 Substantial ordinary shareholders ........................ 114 3 Average size of shareholdings ............................. 114 4 Distribution of shareholdings ............................. 114 5 Voting rights of shareholders .............................. 115 6 Holders of non-marketable parcels ..................... 115 7 Employee shareholder information ..................... 115 8 Directors’ shareholding interests ......................... 115 Glossary ..................................................... 116 34 Alphabetical Index Page Page Abnormal items ......................................................... 50 Accounting policies ................................................... 45 Associates .................................................................. 81 Auditors’ report ....................................................... 104 Average balance sheet ................................................ 71 Average size of shareholdings ................................... 114 Balance sheets ........................................................... 41 Bonds and notes ........................................................ 69 Capital adequacy ..................................................... 105 Certificates of deposit and term deposit maturities ... 107 Commitments ........................................................... 82 Concentrations of credit risk ................................... 110 Contingent liabilities and credit related commitments ....................................... 88 Controlled entities ..................................................... 80 Creditors and other liabilities ..................................... 68 Cross border outstandings ........................................ 107 Customers’ liabilities for acceptances .......................... 63 Deposits and other borrowings .................................. 67 Derivative financial instruments ................................. 82 Directors’ report ........................................................ 36 Directors’ shareholding interests ............................... 115 Directors’ statement ................................................. 103 Distribution of shareholdings ................................... 114 Dividends .................................................................. 51 Doubtful debts - industry analysis ............................ 112 Due from other financial institutions ......................... 54 Due to other financial institutions .............................. 66 Earnings per share ..................................................... 53 Employee share purchase and share option schemes .......................................................... 92 Employee shareholder information .......................... 115 Events since the end of the financial year ................. 102 Exchange rates .......................................................... 91 Expenses ................................................................... 48 Fiduciary activities ..................................................... 91 Glossary .................................................................. 116 Holders of non-marketable parcels ........................... 115 Impaired assets ........................................................... 60 Income ..................................................................... 48 Income tax expense ................................................... 51 Income tax liability.................................................... 68 Interest sensitivity gap ................................................ 73 Interest spreads and net interest average margins ....... 106 Investment securities ................................................. 56 Liquid assets .............................................................. 54 Loan capital ............................................................... 70 Major shareholders .................................................. 114 Net fair value of financial instruments ........................ 74 Net loans and advances .............................................. 58 Notes to the financial statements ............................... 45 Notes to the statements of cash flows ......................... 78 Other assets ............................................................... 65 Outside equity interests ............................................. 71 Premises and equipment ............................................ 66 Profit and loss accounts .............................................. 40 Provisions .................................................................. 68 Provisions for doubtful debts ..................................... 62 Regulatory deposits ................................................... 63 Related party disclosures ........................................... 94 Remuneration of auditors ......................................... 50 Remuneration of directors ........................................ 97 Remuneration of executives ...................................... 98 Segment analysis ........................................................ 76 Shares in controlled entities and associates .................. 64 Short term borrowings ............................................ 113 Statements of cash flows ............................................ 44 Statements of changes in shareholders’ equity ............. 42 Substantial ordinary shareholders ............................. 114 Superannuation commitments ................................... 90 Trading securities ...................................................... 55 US GAAP reconciliation ........................................... 99 Volume and rate analysis .......................................... 108 Voting rights of shareholders.................................... 115 Australia and New Zealand Banking Group Limited – 1997 Annual Report 35 Directors’ Report The directors present their report together with the Review of Operations accounts of the parent entity (the Company) and the A review of the operations of the Group during the consolidated accounts of the Economic entity (the financial year and the results of those operations are Group) for the year ended 30 September 1997. The information is provided in conformity with the Corporations Law. Activities contained in the Chairman’s Report, the Chief Executive Officer’s Review, the Review of 1997 Results and the financial statements. State of Affairs The principal activities of the Group during the year were general banking, mortgage and instalment lending, In the directors’ opinion, there have been no significant changes in the state of affairs of the Group during the life insurance, leasing, hire purchase and general finance, financial year, other than: international and investment banking, investment and portfolio management and advisory services, nominee and custodian services, stockbroking and executor and trustee services. There has been no significant change in the nature of the principal activities of the Group during the financial year. At 30 September 1997, the Group had 1,473 points of representation. Result Consolidated operating profit after income tax and abnormal items attributable to members of the Company was $1,024 million. Further details are contained in the Chief Executive Officer’s Review and the Review of 1997 Results on page 5 and pages 9 to 12 respectively of the 1997 Annual Report. Dividends The directors propose payment of a final dividend of 26 cents per ordinary fully paid share, fully franked at Net loans and advances increased by 11% from $75,901 million to $84,148 million, primarily from growth in International markets, particularly South Asia, Asia Pacific and the Middle East, and business lending in Australia. Deposits and other borrowings increased by 12% from $79,709 million to $89,152 million. The charge for provisions for doubtful debts increased by 86% to $287 million. New and increased specific provisions were $280 million and releases and recoveries totalled $194 million. The charge for the general provision increased from $37 million in 1996 to $201 million for 1997. This included an additional $137 million transfer. This transfer was based on the annual average provision implied in the Group's portfolio risk management models and is not linked to any need to provide against specific regions, industries or individual borrowers. Gross non-accrual loans fell to $872 million, or 1% of net loans and advances, from $1,225 million at 30 September 1996. 36%, to be formally declared on 15 December 1997 and The Arbitrators of the long running dispute with to be paid on 21 January 1998. The proposed payment the National Housing Bank of India (“NHB”) handed amounts to $392 million. Since the end of the previous financial year, the down their award in the Group's favour on 29 March 1997. The NHB has repaid the deposit together with following fully franked dividends on fully paid ordinary interest at 18% in accordance with the decision. Given shares have been paid: Type Final Interim Cents per share Amount before bonus option $m Date of payment 24 22 355 329 15 January 1997 7 July 1997 its size, the $65 million interest receipt (after tax) is disclosed as an abnormal item. Subsequently, NHB filed documents with the relevant Court to challenge the award. The Group is confident that the award will stand. Restructuring costs of $417 million before tax have The final dividend paid on 15 January 1997 was been charged of which $327 million are shown as an detailed in the directors’ report dated 29 November abnormal item. 1996. Neither the interim dividend paid on 7 July 1997 nor the current proposed dividend have been mentioned in previous directors’ reports. 36 Directors’ Report While the above matters are those considered to be items) for the relevant one of the financial years ending significant changes, reviews of matters affecting the 30 September 1996, 1997 or 1998 are at least 50% over Group’s state of affairs are also contained in the the equivalent figure for the 1993 financial year. 95,000 Chairman’s Report, the Chief Executive Officer’s options were exercised and 95,000 shares issued since Review, the Review of 1997 Results and the financial the end of the financial year, in accordance with the statements. Rules of the Scheme. Events since the End of the Financial Year No matter or circumstance has arisen between 30 September 1997 and the date of this report that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent years. Future Developments In addition there are 1,400,837 unexercised options issued over ordinary shares of $1 each at an exercise price of $8.76 per share. The options held by current employees cannot be exercised earlier than three years or later than five years from the date of issue. 2,254 options were exercised by former employees and 2,254 shares issued since the end of the financial year, in accordance with the Rules of the Scheme. Details of likely developments in the operations of the The Company is of the kind referred to in class Group in subsequent financial years are contained in the order 97/1011 issued by the Australian Securities Chairman’s Report and the Chief Executive Officer’s Commission on 9 July 1997 under which the directors Review on pages 4 and 5 respectively of the 1997 are relieved from the need to disclose the names of Annual Report. In the opinion of the directors, disclosure of any further information would be likely to result in unreasonable prejudice to the Group. Rounding of Amounts The Company is a company of the kind referred to in the Australian Securities Commission class order 97/1005, dated on 9 July 1997 pursuant to section 313(6) of the Corporations Law. As a result, amounts in this report and the accompanying financial statements have been rounded to the nearest million dollars except where otherwise indicated. Shareholdings The directors’ interests, beneficial and non-beneficial, in the shares of the Company are detailed on page 115 of the Shareholder Information section of the 1997 Annual Report. employees and relevant details in respect of options granted to those employees under the scheme. The directors have availed themselves of the relief granted under this class order. The names of all persons who currently hold options granted under the schemes are entered in the register kept by the Company pursuant to section 216C of the Corporations Law and the register may be inspected free of charge. No person entitled to exercise any option has or had, by virtue of the option, a right to participate in any share issue of any other body corporate. Further details on the ANZ Group Share Option Scheme are contained in note 42 to the financial statements and form part of this report. Directors’ Share and Option Purchase Scheme At the date of this report, there are 50,000 unexercised options over ordinary shares of $1 each at an exercise The directors are not aware of any single beneficial price of $3.44 per share with an expiry date of 1 March interest of five per cent or more in the share capital of 1998 or 90 days after cessation of a director’s term of the Company. Share Options ANZ Group Share Option Scheme At the date of this report, there are 5,435,000 unexercised options over ordinary shares of $1 each at an exercise price of $5.34 per share. The options held by current employees cannot be exercised earlier than three years from the date of issue or later than office, whichever is the earlier. No partly paid shares or options were issued under this Scheme since the end of the financial year. Further details on the Directors’ Share and Option Purchase Scheme are contained in note 42 to the financial statements and form part of this report. Details of directors’ shareholdings interests are set out on page 115 of the Shareholder Information section of the 1997 30 January 1999 and may only be exercised if the basic Annual Report. earnings per share of the Company (before abnormal Australia and New Zealand Banking Group Limited – 1997 Annual Report 37 Directors’ Report Directors, their Qualifications and Experience seeking the approval of shareholders for the issue of The Board includes eight non-executive directors who options, and alternative arrangements if such options have a diversity of business and community experience cannot be issued; and two directors with executive responsibilities who (e) retirement benefits paid to Sir Ronald Trotter have extensive banking experience. The names, pursuant to an agreement of the type referred to in qualifications and experience of the directors who are in Article 79(b), following his retirement on 9 October office at the date of this report are contained on pages 1997; and 24 and 25 of the 1997 Annual Report. (f) benefits that may be deemed to have arisen because Special responsibilities and attendance at meetings, legal fees have been paid or are payable to Corrs are shown on pages 27 and 28 of the 1997 Annual Chamber Westgarth of which J C Dahlsen is a Report. Directors’ Benefits No director has, during or since the end of the financial consultant. Further details are set out in note 43 to the financial statements dealing with Related Party Disclosures. year, received or become entitled to receive a benefit Directors’ and Officers’ Indemnity (other than a benefit included in the aggregate amount Article 143 provides that to the extent permitted by the of emoluments received, or due and receivable, by Corporations Law “every director, secretary or directors shown in the Company’s financial statements employee of the Company shall be entitled to be for the financial year or the fixed salary of a full-time indemnified by the Company against all costs, charges, employee of the Company, or an entity controlled by losses, expenses and liabilities incurred by him in the the Company, or a body corporate that was related to execution and discharge of his duties or in relation the Company at a relevant time) because of a contract thereto”. The Corporations Law prohibits a company that the director, or a firm of which the director is a from indemnifying directors, secretaries, executive member, or an entity in which the director has a officers and auditors for liabilities except for a liability to substantial financial interest, has made with the a party, other than the Company or a related body Company or an entity that the Company controlled, or corporate, where the liability arises out of conduct a body corporate that was related to the Company, involving good faith, and for costs and expenses when the contract was made or when the director incurred in defending proceedings in which the officer received, or became entitled to receive the benefit, with or auditor is successful. An indemnity for officers or the exception of the following: employees who are not directors, secretaries or (a) subscription by a director and certain former executive officers, is not expressly restricted by the directors for options to take up unissued shares under Corporations Law. the ANZ Group Share Option Scheme, pursuant to In addition to its obligations under Article 143, it is approval by shareholders at the January 1997 Annual the policy of the Company to: General Meeting; (a) indemnify, in the same terms as Article 143, (b) variable benefits payable under the Senior Executive directors, secretaries and executive officers of related Remuneration Scheme to which J F Ries became bodies corporate; and entitled after the end of the financial year; (c) benefits which may have arisen from an agreement with a former executive director, A T L Maitland, relating to consulting services; (d) an employment agreement between the Company and J McFarlane providing, inter alia, for a variable component of remuneration and for the Company (b) indemnify other employees of related bodies corporate for all liability incurred, where they are acting in good faith in furtherance of the objectives of the Company and its related bodies corporate. 38 Directors’ Report The directors, the secretaries of the Company, being P R Marriott, R T Jones and J E Clark, and a former secretary D T Craig, and executive officers of the Company have the benefit of the indemnity in Article 143. During the financial year, and again since the end of the financial year, the Company has paid a premium for an insurance policy for the benefit of the directors, secretaries as named above and executive officers of the Company, and directors, secretaries and executive officers of related bodies corporate of the Company. In accordance with common commercial practice, the insurance policy prohibits disclosure of the nature of the liability insured against and the amount of the premium. Except for the above, during the financial year and since the end of it, no person has been indemnified nor has the Company or a related body corporate of the Company made an agreement for indemnifying any person who is or has been an officer or auditor of the Company or of a related body corporate. Signed in accordance with a resolution of the directors. Charles Goode Chairman 28 November 1997 John McFarlane Chief Executive Officer Australia and New Zealand Banking Group Limited – 1997 Annual Report 39 Australia and New Zealand Banking Group Limited and Controlled Entities Profit and Loss Accounts for the year ended 30 September 1997 Interest income Interest expense Net interest income Other operating income Operating income Operating expenses Operating profit before debt provisions and abnormal items Provisions for doubtful debts Operating profit before abnormal items Abnormal loss Operating profit before tax Income tax (expense) benefit Operating profit Abnormal loss Income tax expense Operating profit after income tax Outside equity interests Operating profit after income tax attributable to members of the Company Retained profits at start of year Total available for appropriation Transfers (to) from reserves Dividends provided for or paid Ordinary shares Preference shares Retained profits at end of year Earnings per share (cents) Basic Before abnormal items After abnormal items Diluted Before abnormal items After abnormal items Consolidated 1996 $M 1997 $M 1995 $M The Company 1996 $M 1997 $M Note 2 3 2 3 3 5 6 5 6 7 8 9,431 (6,018) 9,286 (5,969) 8,310 (5,229) 6,045 (3,981) 5,974 (4,037) 3,413 2,415 3,317 2,096 3,081 1,975 2,064 1,971 1,937 1,994 5,828 (3,783) 5,413 (3,644) 5,056 (3,334) 4,035 (2,805) 3,931 (2,574) 2,045 (287) 1,758 (182) 1,576 (579) 35 (544) 1,032 (8) 1,024 1,583 2,607 (82) (695) - 1,769 (154) 1,615 - 1,615 (490) - (490) 1,125 (9) 1,116 1,106 2,222 (55) (584) - 1,722 (174) 1,548 - 1,548 (505) 19 (486) 1,062 (10) 1,052 585 1,637 (27) (424) (80) 1,830 1,583 1,106 1,230 (221) 1,009 (214) 795 (225) 77 (148) 647 - 647 781 1,428 - (695) - 733 78.4 68.6 78.2 68.4 76.3 76.3 76.1 76.1 68.5 69.9 68.4 69.7 n/a n/a n/a n/a 1,357 (110) 1,247 - 1,247 (224) - (224) 1,023 - 1,023 317 1,340 15 (574) - 781 n/a n/a n/a n/a The notes appearing on pages 45 to 102 form an integral part of these financial statements n/a Not applicable 40 Australia and New Zealand Banking Group Limited and Controlled Entities Balance Sheets as at 30 September 1997 Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M Note Assets Liquid assets Due from other financial institutions Trading securities Investment securities Net loans and advances Customers’ liabilities for acceptances Due from controlled entities Regulatory deposits Shares in controlled entities and associates Other assets Premises and equipment Total assets Liabilities Due to other financial institutions Deposits and other borrowings Liability for acceptances Due to controlled entities Income tax liability Creditors and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Shareholders’ equity Issued and paid-up capital Reserves Retained profits Share capital and reserves attributable to members of the Company Outside equity interests Total shareholders’ equity and outside equity interests Commitments Derivative financial instruments Contingent liabilities and credit related commitments 6,298 11,588 7,266 3,139 84,148 14,040 - 1,206 7 8,490 2,059 6,901 11,352 7,334 2,570 75,901 14,013 - 1,163 10 6,340 2,020 3,940 7,594 5,148 1,416 53,345 13,585 7,952 638 5,117 6,437 459 4,784 8,258 6,157 910 48,086 13,307 6,251 612 4,769 4,196 480 138,241 127,604 105,631 97,810 10,874 89,152 14,040 - 778 9,807 1,218 1,990 3,389 12,682 79,709 14,013 - 575 7,471 954 2,264 3,600 9,330 56,848 13,585 4,921 314 7,532 1,011 1,990 3,159 131,248 121,268 98,690 6,993 6,336 6,941 1,509 3,604 1,830 6,943 50 1,478 3,229 1,583 6,290 46 1,509 4,699 733 6,941 - 11,363 50,443 13,307 4,310 301 5,551 785 2,264 3,196 91,520 6,290 1,478 4,031 781 6,290 - 6,993 6,336 6,941 6,290 9 10 11 12 13 16 17 18 19 20 21 22 23 24 25 26 27 28 36 37 38 The notes appearing on pages 45 to 102 form an integral part of these financial statements Australia and New Zealand Banking Group Limited – 1997 Annual Report 41 Australia and New Zealand Banking Group Limited and Controlled Entities Statements of Changes in Shareholders’ Equity for the year ended 30 September 1997 Authorised capital 2,100,000,000 shares of $1 each 1,000,000,000 preference shares of $0.01 each Total authorised capital Issued and paid-up capital Balance at start of year Conversion of preference shares Ordinary shares Shares issued on conversion of preference shares Share buy-back Dividend reinvestment plan1 Employee share purchase scheme2 Bonus share option plan3 Group share option scheme4 Senior officers’ share purchase scheme5 Directors’ share and option purchase scheme6 Consolidated 1996 $M 1997 $M 1995 $M The Company 1996 $M 1997 $M 2,100 10 2,110 1,478 - - - 22 4 3 2 # # 2,100 10 2,110 1,446 - - - 23 3 6 - # # 2,100 10 2,110 2,100 10 2,110 1,360 (6) 1,478 - 129 (100) 47 2 11 - 3 # - - 22 4 3 2 # # 2,100 10 2,110 1,446 - - - 23 3 6 - # # Total issued and paid-up capital 1,509 1,478 1,446 1,509 1,478 Share premium reserve Balance at start of year Premium on issue of shares Conversion of preference shares Share buy-back Total share premium reserve Asset revaluation reserve Balance at start of year Revaluation of investments in controlled entities Transfer to retained profits Total asset revaluation reserve Foreign currency translation reserve Balance at start of year Currency translation adjustments, net of hedges after tax Total foreign currency translation reserve General reserve Balance at start of year Transfers from retained profits Total general reserve Capital reserve Total reserves 2,637 189 - - 2,826 2,516 121 - - 2,637 2,905 621 (594) (416) 2,516 - - - - - - - - (183) (88) 104 (79) 626 82 708 149 (95) (183) 571 55 626 149 - - - - (87) (1) (88) 544 27 571 149 2,637 189 - - 2,826 1,152 441 - 1,593 187 38 225 55 - 55 - 2,516 121 - - 2,637 1,143 24 (15) 1,152 223 (36) 187 55 - 55 - 3,604 3,229 3,148 4,699 4,031 42 Australia and New Zealand Banking Group Limited and Controlled Entities Statements of Changes in Shareholders’ Equity for the year ended 30 September 1997 Consolidated 1996 $M 1997 $M 1995 $M The Company 1996 $M 1997 $M Note Retained profits Balance at start of year Operating profit after income tax 1,583 1,106 585 attributable to members of the Company 1,024 1,116 1,052 781 647 Total available for appropriation Transfers (to) from reserves Dividends provided for or paid Ordinary shares Preference shares Retained profits at end of year 7 2,607 (82) 2,222 (55) 1,637 (27) 1,428 - (695) - (584) - (424) (80) 1,830 1,583 1,106 (695) - 733 317 1,023 1,340 15 (574) - 781 Total shareholders’ equity attributable to members of the Company 6,943 6,290 5,700 6,941 6,290 Number of issued shares The Company 1997 1996 1995 Ordinary shares of $1 each fully paid Ordinary shares of $1 each paid to 10 cents per share 1,508,550,854 274,500 1,478,089,641 1,446,047,877 929,500 687,500 Total number of issued shares 1,508,825,354 1,478,777,141 1,446,977,377 The notes appearing on pages 45 to 102 form an integral part of the financial statements # Amounts less than $500,000 1 Dividend reinvestment plan issues were 6 Directors’ share and option purchase scheme issue of shares 10,661,444 ordinary shares at $7.60 per share 10,132,948 ordinary shares at $9.77 per share 50,000 ordinary shares at $3.44 per share (on exercise of options) issue proceeds from conversion of partly paid to fully paid 140,000 ordinary shares at $3.75 per share 100,000 ordinary shares at $4.76 per share 50,000 ordinary shares at $5.46 per share Total uncalled capital at 30 September 1997 was $1.3 million, comprising capital of $0.3 million and share premium of $1 million 2 Employee Share Purchase Scheme issues were 4,135,275 ordinary shares at $6.43 per share 3 Bonus option plan issues were 1,617,564 ordinary shares at $7.60 per share 1,401,371 ordinary shares at $9.77 per share 4 Group share option scheme issues were 2,040,000 ordinary shares at $5.34 per share 9,611 ordinary shares at $8.76 per share 5 Senior officers’ share purchase scheme issue proceeds from conversion of partly paid to fully paid 3,000 ordinary shares at $3.42 per share 30,000 ordinary shares at $3.75 per share 3,000 ordinary shares at $4.55 per share 12,000 ordinary shares at $4.60 per share 3,000 ordinary shares at $4.68 per share 15,000 ordinary shares at $5.20 per share 10,000 ordinary shares at $5.26 per share 10,000 ordinary shares at $5.36 per share 10,000 ordinary shares at $5.42 per share 5,000 ordinary shares at $5.46 per share 10,000 ordinary shares at $5.56 per share 2,000 ordinary shares at $5.60 per share 10,000 ordinary shares at $5.62 per share Australia and New Zealand Banking Group Limited – 1997 Annual Report 43 Australia and New Zealand Banking Group Limited and Controlled Entities Statements of Cash Flows for the year ended 30 September 1997 Cash flows from operating activities Interest received Dividends received Fees and other income received Interest paid Personnel expenses paid Premises expenses paid Other operating expenses paid Income taxes paid Net decrease (increase) in trading securities Consolidated 1996 $M 1997 $M 1995 $M The Company 1996 $M 1997 $M Note Inflows/(Outflows) Inflows/(Outflows) 9,364 327 1,970 (5,995) (2,155) (315) (1,041) (426) 304 9,458 111 1,946 (6,136) (1,850) (351) (1,134) (353) (1,595) 7,945 4 1,918 (4,864) (1,618) (362) (1,118) (153) (1,222) 5,922 581 1,387 (3,867) (1,347) (296) (975) (198) 1,212 6,061 516 1,490 (4,101) (1,309) (333) (755) (79) (1,339) Net cash provided by operating activities 33(a) 2,033 96 530 2,419 151 Cash flows from investing activities Net decrease (increase) Due from other financial institutions Regulatory deposits Loans and advances Shares in controlled entities and associates Investment securities Purchases Proceeds from sale or maturity Controlled entities and branches Purchased (net of cash acquired) Proceeds from sale (net of cash disposed) Premises and equipment Purchases Proceeds from sale Other 1,840 (14) (7,447) - (171) (28) (8,269) - (1,801) (291) (7,487) (6) 1,869 (26) (4,570) 92 (562) (61) (6,769) 480 (3,140) 2,803 (2,166) 2,381 (6,949) 8,573 (1,060) 647 33(c) (11) 41 (457) 110 982 13 14 (412) 104 (954) (81) 14 (361) 69 (44) (718) 609 (198) - - - (110) 10 392 (202) 5 (1,832) Net cash used in investing activities (5,293) (9,488) (8,364) (2,756) (9,248) Cash flows from financing activities Net (decrease) increase Due to other financial institutions Deposits and other borrowings Due from/to controlled entities Creditors and other liabilities Bonds and notes Issue proceeds Redemptions Loan capital Issue proceeds Redemptions Decrease in outside equity interests Dividends paid Share capital issues Share buy-back (2,787) 7,861 - 425 973 (1,434) 323 (851) (3) (478) 39 - 2,094 10,109 - 879 1,427 (655) 634 (110) (8) (354) 18 - 520 6,080 - (186) 655 (578) 165 - (8) (241) 19 (516) (3,142) 5,330 (1,090) 296 973 (1,434) 323 (642) - (478) 39 - 2,395 7,959 929 653 1,427 (655) 634 - - (343) 18 - Net cash provided by financing activities 4,068 14,034 5,910 175 13,017 Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Foreign currency translation on opening balances 2,033 (5,293) 4,068 808 11,246 402 96 (9,488) 14,034 4,642 7,079 (475) 530 (8,364) 5,910 (1,924) 9,092 (89) 2,419 (2,756) 175 (162) 6,804 351 151 (9,248) 13,017 3,920 3,238 (354) Cash and cash equivalents at end of year 33(b) 12,456 11,246 7,079 6,993 6,804 The notes appearing on pages 45 to 102 form an integral part of these financial statements 44 Notes to the Financial Statements 1: Accounting Policies (iv) Goodwill (i) Bases of preparation This general purpose financial report complies with the accounts provisions of the Banking Act, applicable Australian Accounting Standards, the accounts provisions of the Corporations Law and Urgent Issues Group Consensus Views. The accounting policies are consistent with those of the previous year except for the change disclosed in note (ii). Disclosures required by the United States Securities and Exchange Commission in respect of foreign registrants have also been included in this report. The financial report has been prepared in accordance with the historical cost convention as modified by the revaluation of certain properties, trading instruments and shares in controlled entities. The latter are revalued annually based on the net tangible assets of the entity. The Company is a company of the kind referred to in the Australian Securities Commission class order 97/1005, dated 9 July 1997. Consequently, amounts in the financial report have been rounded to the nearest million dollars except where otherwise indicated. All amounts are expressed in Australian dollars, unless otherwise stated. Where necessary, amounts shown for the previous year have been reclassified to facilitate comparison. (ii) Change in accounting policy Effective 1 October 1996, the Group adopted the equity method of accounting for associates. Shares in associates are stated in the consolidated balance sheet at cost plus the Group's share of post acquisition net assets. The Group's share of results of associates is included in the profit and loss account. ASC Class Order 97/798 dated 5 June 1997 permitted the adoption of equity accounting. As a result of the change in accounting policy, the carrying value of associates has increased by $2 million, and $2 million of profit after tax has been recognised. (iii) Consolidation The financial statements consolidate the financial statements of Australia and New Zealand Banking Group Limited (the Company) and its controlled entities. Where controlled entities and associates have been sold or acquired during the year, their operating results have been included to the date of disposal or from the date of acquisition. Goodwill, representing the excess of the purchase consideration over the fair value of the identifiable net assets of a controlled entity at the date of gaining control, is recognised as an asset and amortised on a straight line basis over the period during which the benefits are expected to arise, not exceeding 20 years. The unamortised balance of goodwill and the period of amortisation are reviewed annually. Where the balance exceeds the value of expected future benefits, the difference is charged to the profit and loss account. (v) Foreign currency Revenues and expenses of overseas branches and controlled entities are translated at average exchange rates for the year, while assets and liabilities are translated at the mid-point rates of exchange ruling at balance date. Net translation differences arising from the translation of overseas branches and controlled entities considered to be self-sustaining operations are included in the foreign currency translation reserve, after allowing for those positions hedged by foreign exchange contracts and related currency borrowings. Assets and liabilities denominated in foreign currencies are translated into Australian dollars at the rates of exchange ruling at balance date. (vi) Net loans and advances Net loans and advances include direct finance provided to customers such as bank overdrafts, credit cards, term loans, lease finance, hire purchase finance and commercial bills. Overdrafts, credit cards and term loans are carried at principal balances outstanding. Interest on amounts outstanding is accounted for on an accruals basis. Finance leases and hire purchase contracts are accounted for using the finance method whereby income is taken to account progressively over the life of the lease or the contract in proportion to the outstanding investment balance. Investments in leveraged leases are recorded at an amount equal to the investment participation, and income is taken to account on an actuarial basis over the term of each lease. Customer financing through redeemable preference shares is included within net loans and advances. Dividends received on redeemable preference shares are taken to the profit and loss account as part of interest income. Australia and New Zealand Banking Group Limited – 1997 Annual Report 45 Notes to the Financial Statements All loans are subject to regular scrutiny and graded according to the level of credit risk. Loans are classified as either productive or non-accrual. The Group has adopted the Reserve Bank of Australia Impaired Assets Guidelines in assessing non-accrual loans. Non-accrual loans include loans where the accrual of interest and fees has ceased due to doubt as to full recovery, and loans that have been restructured with an effective yield below the Group’s average cost of funds at the date of restructuring. A specific provision is raised to cover the expected loss, where full recovery of principal is doubtful. Restructured loans are loans with an effective yield above the Group’s cost of funds and below the yield applicable to a customer of equal credit standing. Cash receipts on non-accrual loans are, in the absence of a contrary agreement with the customer, applied as income or fees in priority to being applied as a reduction in principal, except where the cash receipt relates to proceeds from the sale of security. (vii) Bad and doubtful debts Specific provisions are maintained to cover identified doubtful debts. General provisions are maintained for losses which, although not specifically identified, are known from experience to be inherent in any asset portfolio. The level of the general provision is determined having regard to economic conditions, the level of on and off-balance sheet assets and other general risk factors. Premiums and discounts are capitalised and amortised from the date of purchase to maturity. Interest and dividend income is accrued. Changes in market values of securities are not taken into account unless there is considered to be a permanent diminution in value. (xi) Repurchase agreements Securities sold under repurchase agreements are retained in the financial statements and a counterparty liability is disclosed under the classifications of Due to other financial institutions or Deposits and other borrowings. The difference between the sale price and the repurchase price is amortised over the life of the repurchase agreement and charged to interest expense in the profit and loss account. Securities purchased under agreements to resell are recorded as Liquid assets, Net loans and advances, or Due from other financial institutions, depending on the term of the agreement and the counterparty. (xii) Derivative financial instruments Derivative financial instruments (derivatives) are contracts whose value is derived from one or more underlying financial instruments or indices. They include swaps, forward rate agreements, futures, options and combinations of these instruments. Trading derivatives comprising derivatives entered into for customer-related or proprietary reasons or for hedging the trading portfolio, are measured at fair value and all gains and losses are taken to the profit and loss account. All known bad debts are written off in the year Fair value losses arising from trading derivatives in which they are identified. Provisions for doubtful debts are deducted from loans and advances in the balance sheet. (viii) Acceptances Commercial bills accepted but not held in portfolio are accounted for and disclosed as a liability with a corresponding contra asset. The Group’s own acceptances discounted are held as part of either the trading securities portfolio or the loan portfolio, depending on whether, at the time of such discount, the intention was to hold the acceptances for resale or until maturity. (ix) Trading securities Securities held for trading purposes are recorded at market value. Unrealised gains and losses on revaluation are taken to the profit and loss account. (x) Investment securities Investment securities are those which the Group purchased with the positive intent and ability to hold until maturity. Such securities are recorded at cost or at cost adjusted for amortisation of premiums or discounts. are not offset against fair value gains unless a legal right of set-off exists. Derivatives designated, and effective, as hedges of underlying non-trading exposures are accounted for on the same basis as the underlying exposures. Gains and losses resulting from the termination of a derivative that was designated as a hedge of non-trading exposures are deferred and amortised over the remaining period of the original term covered by the terminated instrument where the underlying exposure still exists. Where the underlying exposure no longer exists, the gains and losses are recognised in the profit and loss account. Gains and losses on derivatives related to hedging exposures arising from anticipated transactions are deferred and recognised in the financial statements when the anticipated transaction occurs. These gains and losses are deferred only to the extent that there is an offsetting unrecognised (unrealised) gain or loss on the exposures being hedged. Deferred gains and losses are amortised over the expected term of the hedged exposure. 46 Notes to the Financial Statements (xiii) Premises and equipment (xv) Life insurance business Premises and equipment (including computer equipment) are carried at cost less depreciation or amortisation, or at valuation. Any surplus on revaluation of a class of assets is credited directly to the asset revaluation reserve. Where a deficit arises, this is debited to the asset revaluation reserve to the extent of any previous revaluation surplus for that class, and the excess debited to the profit and loss account. Potential capital gains tax arising from revaluations is not taken into account as the Group has no current intention to dispose of the subject properties. Profit or loss on the disposal of premises and equipment is determined as the difference between the carrying amount of the assets at the time of disposal and the proceeds of disposal, and is included in the results of the Group in the year of disposal. Assets other than freehold land are depreciated at rates based upon their expected useful lives to the Group, using the straight line method. Leasehold improvements are amortised on a straight line basis over the remaining period of each lease. The carrying values of all non-current assets have been assessed and are not in excess of their recoverable amounts. In assessing recoverable amounts, the relevant cash flows have not been discounted to their present value. (xiv) Income tax The Group adopts the liability method of tax effect accounting whereby income tax expense is calculated based on accounting profit adjusted for permanent differences. Permanent differences are items of revenue and expense which are recognised in the profit and loss account but are not part of taxable income. General provisions for doubtful debts are treated as permanent differences as the provisions do not relate to specific accounts for which a tax deduction would be available in the event of a loss. Future tax benefits and deferred tax liabilities relating to timing differences and tax losses are carried forward at tax rates applicable to future periods. Future tax benefits relating to tax losses are only carried forward where realisation of the benefit is considered virtually certain. Provision for Australian income tax is made where the earnings of overseas controlled entities are subjected to Australian tax under the attribution rules for the taxation of foreign sourced income. Otherwise, no provision is made for overseas withholding tax or Australian income tax which may arise on repatriation of earnings from overseas controlled entities, where it is expected these earnings will be retained by those entities to finance their ongoing business. The Group conducts life insurance business through ANZ Life Assurance Company Limited (ANZ Life). The Group’s financial statements include its interest in the actuarially assessed surplus of ANZ Life’s statutory funds for the year, after allowing for increases in policyholder reserves determined under the margin on services methodology. The net result for the year of $82 million (1996: $55 million) has been included in the profit and loss account and then transferred to the general reserve, until available for distribution under the requirements and restrictions of the Life Insurance Act 1995 and statutory accounting practices. The Group’s interest in the accumulated retained earnings of the life insurance statutory funds of $436 million (1996: $354 million), together with the net assets of the shareholders’ funds of ANZ Life, are included within the balance sheet of the Group. Due to the provisions of the Life Insurance Act 1995, the assets of the life insurance statutory funds attributable to policyholders of ANZ Life do not form part of the assets to which the Group is entitled and are therefore not consolidated. (xvi) Employee entitlements The amounts expected to be paid in respect of employees’ entitlements to annual leave are accrued at current salary rates including on-costs. Liability for long service leave is accrued in respect of all applicable employees at the present value of future amounts expected to be paid. (xvii) Superannuation commitments Contributions, which are determined on an actuarial basis, to superannuation schemes are charged to personnel expenses in the profit and loss account. Any aggregate deficiencies arising from the actuarial valuations of the Group’s defined benefit schemes have been provided for in the financial statements. The assets and liabilities of the schemes have not been consolidated as the Company does not have direct or indirect control of the schemes. (xviii) Leasing Leases entered into by the Group as lessee are predominantly operating leases, and the operating lease payments are included in the profit and loss account in equal instalments over the lease term. Assets relating to operating leases entered into by the Group as lessor are included within Premises and equipment with rental income and depreciation separately classified in income and expense. Australia and New Zealand Banking Group Limited – 1997 Annual Report 47 Notes to the Financial Statements 2: Income Interest income From other financial institutions On regulatory deposits On trading and investment securities On loans and advances Dividends from redeemable preference share finance Other From controlled entities Total interest income Other operating income (i) Fee income Lending Other including commissions From controlled entities Total fee income (ii) Other income Foreign exchange earnings Profit on trading instruments Rental income Operating lease income Life insurance fund surplus Development ventures Income Diminution in value Profit on sale of premises and equipment Other1 Total other income Consolidated 1996 $M 1995 $M 1997 $M The Company 1997 1996 $M $M 753 13 835 7,284 8 538 9,431 - 9,431 570 964 1,534 - 1,534 245 192 35 146 94 10 - 5 154 881 766 25 754 7,320 9 412 9,286 - 9,286 550 854 1,404 - 1,404 231 113 36 116 55 6 7 10 118 692 661 43 698 6,502 2 404 8,310 - 8,310 537 801 1,338 - 1,338 226 96 33 89 52 13 14 4 110 637 535 6 501 4,286 - 374 5,702 343 6,045 458 644 1,102 284 1,386 153 142 27 - - - - - 263 585 525 14 480 4,381 - 216 5,616 358 5,974 440 571 1,011 269 1,280 140 80 28 - - - 6 3 457 714 Total other operating income 2,415 2,096 1,975 1,971 1,994 Abnormal items (refer note 5) 145 - - - - Total income 11,991 11,382 10,285 8,016 7,968 1 Includes dividend income of $327 million (1996: $111 million) for the Group and $581 million (1996: $516 million) for the Company. The Company's dividends include dividends received from controlled entities of $276 million (1996: $405 million) 3: Expenses Interest expense To other financial institutions On deposits On borrowing corporations’ debt On commercial paper On bonds and notes On loan capital Other To controlled entities Total interest expense 48 804 3,838 512 275 25 364 200 6,018 - 6,018 862 3,826 520 247 134 245 135 5,969 - 5,969 809 3,271 490 179 114 254 112 5,229 - 5,229 648 2,464 - 102 25 322 170 3,731 250 3,981 694 2,498 - 109 134 210 107 3,752 285 4,037 Notes to the Financial Statements 3: Expenses (continued) Provisions for doubtful debts (refer note 15) New and increased provisions Provision releases Recoveries of amounts previously written off Specific provision General provision Total provisions for doubtful debts Operating expenses (i) Personnel Salaries and wages Pension fund Employee taxes Payroll Fringe benefits tax Provision for employee entitlements Other Consolidated 1996 $M 1995 $M 1997 $M The Company 1996 $M 1997 $M 280 (145) 135 (49) 86 201 287 292 (129) 163 (46) 117 37 154 293 (178) 115 (52) 63 111 174 161 (89) 72 (31) 41 180 221 201 (87) 114 (26) 88 22 110 1,453 114 1,387 105 1,270 93 1,084 86 1,031 10 76 46 19 241 73 53 29 158 64 48 19 116 73 40 14 184 70 48 27 122 Total personnel expenses 1,949 1,805 1,610 1,481 1,308 (ii) Premises Rent Depreciation of buildings and integrals Amortisation of leasehold improvements Other To controlled entities Total premises expenses (iii) Other Computer costs Depreciation Other Non-lending losses, frauds and forgeries Remuneration of auditors (refer note 4) Depreciation of furniture and equipment Depreciation of motor vehicles Loss on disposal of premises and equipment Other Total other expenses Total core operating expenses (iv) Direct income-related expenditure Brokerage and commissions Interchange and card costs Operating lease depreciation Total direct income-related expenditure (v) Restructuring1 Total operating expenses Total expenses 189 31 16 126 362 - 362 98 232 2 27 49 3 7 627 204 31 13 137 385 - 385 97 231 55 8 49 3 24 635 1,045 3,356 1,102 3,292 49 197 91 337 90 61 172 62 295 57 3,783 10,088 3,644 9,767 207 31 16 147 401 - 401 86 224 79 8 49 5 5 588 1,044 3,055 67 150 49 266 13 3,334 8,737 145 6 8 91 250 60 310 63 152 1 23 31 2 2 488 762 144 4 7 92 247 87 334 64 150 44 3 31 2 15 430 739 2,553 2,381 25 158 - 183 69 22 141 - 163 30 2,805 7,007 2,574 6,721 1 In addition, restructuring costs of $327 million have been treated as abnormal for the Group (Company: $214 million) in the 1997 financial year. Refer note 5 Australia and New Zealand Banking Group Limited – 1997 Annual Report 49 Notes to the Financial Statements 4: Remuneration of Auditors Amounts received and due and receivable Auditing the accounts By KPMG By other Group auditors Other services By KPMG Audit related services1 Taxation Accounting Consulting2 By other Group auditors Total remuneration of auditors 1997 $'000 Consolidated 1996 $'000 1995 $'000 The Company 1996 $'000 1997 $'000 3,771 11 3,782 2,008 90 120 20,657 59 22,934 26,716 3,652 8 3,660 2,143 1,037 74 658 42 3,954 7,614 3,833 84 3,917 2,123 1,201 200 785 101 1,637 - 1,637 1,553 - 1,553 847 48 65 20,565 25 997 402 18 57 5 4,410 21,550 8,327 23,187 1,479 3,032 1 Audit related services are services other than those relating to the audit or review of the statutory financial statements of the Group. These services include prudential supervision reviews for central banks, prospectus reviews, trust audits and other audits required for local statutory purposes 2 Includes fees of $20,326,000 in 1997 paid to KPMG Barents (a wholly owned entity of the USA practice of KPMG) for consultancy work in connection with the ANZ Global Project By virtue of an Australian Securities Commission class order dated 29 June 1992, the auditors of Australia and New Zealand Banking Group Limited and its related bodies corporate, KPMG, have been exempted from compliance with the requirements of Section 324(2) of the Corporations Law. The class order exemption applies in that partners and associates of KPMG not engaged on the audit of Australia and New Zealand Banking Group Limited and its related bodies corporate may be indebted to the Company, provided that such indebtedness arose upon ordinary commercial terms and conditions. 5: Abnormal Items Profit before tax Interest on National Housing Bank deposit Loss before tax Restructuring costs Total abnormal loss before tax Income tax (expense) benefit applicable to Interest on National Housing Bank deposit Restructuring costs Restatement of net deferred tax balances to reflect the increase in the Australian corporate tax rate Total abnormal tax benefit Total abnormal (loss) profit after tax Consolidated 1996 $M 1995 $M 1997 $M The Company 1996 $M 1997 $M 145 145 327 (182) (80) 115 - 35 (147) - - - - - - - - - - - - - - - 19 19 19 - - 214 (214) - 77 - 77 (137) - - - - - - - - - 50 Notes to the Financial Statements 6: Income Tax Expense Reconciliation of the prima facie income tax payable on operating profit and abnormal items with the income tax expense charged in the profit and loss account Operating profit before income tax and before abnormal items Prima facie income tax at 36% (1996: 36%, 1995: 33%) Tax effect of permanent differences Overseas tax rate differential Other non-assessable income Rebateable and non-assessable dividends Non-allowable depreciation and amortisation General provision for doubtful debts Other Income tax over provided in prior years Total income tax expense on operating profit before abnormal items Abnormal loss before tax Prima facie income tax at 36% (1996: 36%, 1995: 33%) Tax effect of permanent differences Overseas tax rate differential Restatement of net deferred tax balances (refer note 5) Total income tax benefit on abnormal items Total income tax expense 7: Dividends Ordinary dividends Interim dividend Proposed final dividend Bonus option plan adjustment (see over) Dividends on ordinary shares Preference dividends (13.25% per annum, unfranked) Dividend paid in January Dividend paid in July Dividends on preference shares Total dividends Consolidated 1996 $M 1995 $M 1997 $M The Company 1997 1996 $M $M 1,758 1,615 1,548 1,009 1,247 632 14 (25) (117) 3 72 10 589 (10) 579 (182) (65) 30 - (35) 544 581 1 (27) (41) 4 13 (19) 512 (22) 511 18 (34) (4) 3 37 (10) 521 (16) 490 505 - - - - - 490 - - - (19) (19) 486 363 449 7 (6) (205) 3 64 10 236 (11) 225 (214) (77) - - (77) 148 6 (24) (184) 3 8 (15) 243 (19) 224 - - - - - 224 Consolidated 1996 $M 1995 $M 1997 $M The Company 1996 $M 1997 $M 329 392 (26) 695 - - - 264 355 (35) 584 - - - 208 260 (44) 424 40 40 80 329 392 (26) 695 - - - 254 355 (35) 574 - - - 695 584 504 695 574 A final dividend of 26 cents fully franked is proposed to be paid on each fully paid ordinary share (1996: final dividend of 24 cents per fully paid share, fully franked; 1995: final dividend of 18 cents per fully paid share, franked to 6 cents at 36%). Non-resident shareholders will be exempt from dividend withholding tax on the full dividend. The 1997 interim dividend of 22 cents was fully franked (1996: interim dividend of 18 cents was franked to 9 cents; 1995: unfranked interim dividend of 15 cents per fully paid ordinary share). Australia and New Zealand Banking Group Limited – 1997 Annual Report 51 Notes to the Financial Statements 7: Dividends (continued) Dividend Franking Account The amount of franking credits available for the subsequent financial year is nil, after adjusting for franking credits that will arise from the payment of tax on Australian profits for the 1997 financial year, less franking credits which will be utilised in franking the proposed final dividend and franking credits that may be prevented from being distributed in the subsequent year. Restrictions which Limit the Payment of Dividends There are presently no significant restrictions on the payment of dividends from controlled entities to the Company. Various capital adequacy, liquidity, statutory reserve and other prudential requirements must be observed by certain controlled entities and the impact on these requirements caused by the payment of cash dividends is monitored. In practice however, there are significant tax considerations associated with the receipt of dividends from controlled entities by a company. Payment of dividends from domestic controlled entities constitutes assessable income to a recipient Australian company. The recipient company is generally entitled to a rebate of tax otherwise payable on the assessable dividend. Should the recipient company's total assessable income be less than the dividend income, or it be in a tax loss position, the rebate will reduce or be eliminated. The Group therefore acts to preserve the availability of rebates by avoiding the payment of dividends by domestic controlled entities in this situation. Payments of dividends from overseas controlled entities may attract withholding taxes which have not been provided for in these financial statements. (i) There are presently no restrictions on payment of dividends by the Company other than the share premium reserve is not available for distribution other than in the form of bonus issues (share dividends); and (ii) reductions of shareholders' equity through payment of cash dividends is monitored having regard to the regulatory requirements to maintain a specified capital adequacy ratio. In particular, the Reserve Bank of Australia has advised Australian banks that a bank under its supervision must consult with it before declaring a dividend if the bank has incurred a loss, or proposes to pay dividends which exceed the level of profits earned. Bonus option plan Dividends paid during the year have been reduced by way of certain shareholders participating in the bonus option plan and forgoing all or part of their right to dividends in return for the receipt of bonus shares. Final dividend 1996 Interim dividend 1997 Declared dividend $M 355 329 684 Bonus options exercised $M 12 14 26 Amount paid $M 343 315 658 52 Notes to the Financial Statements 8: Earnings per Share Before abnormal items Basic Operating profit after income tax attributable to shareholders of the Company Abnormal items after tax Operating profit after income tax before abnormal items Preference share dividend Total adjusted earnings Weighted average number of ordinary shares (millions) Basic earnings per share (cents) Diluted Operating profit after income tax before abnormal items Preference share dividend Add: notional interest earned on capital raised from exercise of options Total adjusted earnings Weighted average number of ordinary shares (millions) Add: potential dilution of options to ordinary shares Total adjusted number of shares Diluted earnings per share (cents) After abnormal items Basic Operating profit after income tax attributable to shareholders of the Company Preference share dividend Total adjusted earnings Weighted average number of ordinary shares (millions) Basic earnings per share (cents) Diluted Operating profit after income tax attributable to shareholders of the Company Preference share dividend Add: notional interest earned on capital raised from exercise of options Total adjusted earnings Weighted average number of ordinary shares (millions) Add: potential dilution of options to ordinary shares Total adjusted number of shares Diluted earnings per share (cents) 1997 $M Consolidated 1996 $M 1995 $M 1,024 147 1,171 - 1,171 1,492.9 78.4 1,171 - 2 1,173 1,492.9 7.2 1,500.1 78.2 1,024 - 1,024 1,492.9 68.6 1,024 - 2 1,026 1,492.9 7.2 1,500.1 68.4 1,116 - 1,116 - 1,116 1,052 (19) 1,033 (80) 953 1,462.3 1,390.3 76.3 68.5 1,116 - 2 1,118 1,462.3 7.6 1,469.9 76.1 1,033 (80) 1 954 1,390.3 5.0 1,395.3 68.4 1,116 - 1,116 1,052 (80) 972 1,462.3 1,390.3 76.3 69.9 1,116 - 2 1,118 1,462.3 7.6 1,469.9 76.1 1,052 (80) 1 973 1,390.3 5.0 1,395.3 69.7 Australia and New Zealand Banking Group Limited – 1997 Annual Report 53 Notes to the Financial Statements 9: Liquid Assets Australia Coins, notes and cash at bankers Money at call Other banks’ certificates of deposit Securities purchased under agreement to resell less than 90 days Bills receivable and remittances in transit Overseas Coins, notes and cash at bankers Money at call Other banks’ certificates of deposit Securities purchased under agreement to resell less than 90 days Bills receivable and remittances in transit Total liquid assets Maturity analysis based on original term to maturity at 30 September Less than 90 days More than 90 days Total liquid assets Consolidated 1997 $M 1996 $M The Company 1997 $M 1996 $M 508 189 8 142 41 888 342 622 2,785 823 838 5,410 6,298 3,857 2,441 6,298 1,351 25 7 130 3 1,516 216 687 3,321 900 261 5,385 6,901 4,285 2,616 6,901 410 133 - 142 41 726 50 85 1,992 749 338 3,214 3,940 1,829 2,111 3,940 1,334 - - 130 2 1,466 23 145 2,695 445 10 3,318 4,784 2,456 2,328 4,784 10: Due from Other Financial Institutions Australia Overseas Total due from other financial institutions 1,480 10,108 1,607 9,745 11,588 11,352 1,480 6,114 7,594 1,507 6,751 8,258 Maturity analysis based on remaining term to maturity at 30 September Overdraft Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Total due from other financial institutions 2,154 7,495 1,786 82 71 { { 6,9611 4,3911 11,588 11,352 { { 1,597 4,377 1,520 48 52 7,594 4,3481 3,9101 8,258 1 Maturity analysis at 30 September 1996 was based on original terms to maturity of less than 90 days and greater than 90 days 54 Notes to the Financial Statements 11: Trading Securities Trading securities are allocated between Australia and Overseas based on the domicile of the issuer Listed - Australia Commonwealth securities Local and semi-government securities Other securities and equity investments Listed - Overseas Indian government securities Other securities and equity investments Total listed Unlisted - Australia Treasury notes and bills Other government securities ANZ accepted bills Other securities and equity investments Unlisted - Overseas Treasury notes and bills Other government securities Other securities and equity investments Total unlisted Total trading securities Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 75 20 622 717 397 912 1,309 2,026 - 1,567 1,846 320 3,733 770 335 402 1,507 5,240 7,266 1,496 10 91 1,597 272 265 537 2,134 103 1,577 1,317 269 3,266 1,564 64 306 1,934 5,200 7,334 75 20 350 445 - 331 331 776 - 1,567 1,665 299 3,531 465 223 153 841 4,372 5,148 1,496 10 - 1,506 - 236 236 1,742 103 1,577 1,249 199 3,128 1,177 64 46 1,287 4,415 6,157 Australia and New Zealand Banking Group Limited – 1997 Annual Report 55 Notes to the Financial Statements 12: Investment Securities Investment securities are allocated between Australia and Overseas based on the domicile of the issuer Listed - Australia Commonwealth securities Local and semi-government securities Other securities and equity investments Listed - Overseas Indian government securities Other government securities Other securities and equity investments Total listed Unlisted - Australia Other securities and equity investments Unlisted - Overseas New Zealand government securities Indian government securities Other government securities Other securities and equity investments Total unlisted Total investment securities Market value information Listed - Australia Commonwealth securities Local and semi-government securities Other securities and equity investments Listed - Overseas Indian government securities Other government securities Other securities and equity investments Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M - 58 462 520 404 99 431 934 4 46 297 347 304 147 316 767 1,454 1,114 448 476 2 646 113 1,237 1,685 3,139 - 58 462 520 424 100 431 955 139 540 32 576 169 1,317 1,456 2,570 4 46 297 347 300 149 316 765 - 58 451 509 - 84 259 343 852 412 - - 151 1 152 564 1,416 - 58 451 509 - 84 259 343 852 412 - - 151 1 152 564 1,416 4 46 286 336 10 83 187 280 616 134 9 - 146 5 160 294 910 4 46 286 336 10 83 187 280 616 134 9 - 145 6 160 294 910 Total market value of listed investment securities 1,475 1,112 Unlisted - Australia Other securities and equity investments Unlisted - Overseas New Zealand government securities Indian government securities Other government securities Other securities and equity investments Total market value of unlisted investment securities Total market value of investment securities 448 475 2 635 114 1,226 1,674 3,149 140 537 32 575 171 1,315 1,455 2,567 56 Notes to the Financial Statements 12: Investment Securities (continued) Investment Securities by Maturities and Yields Based on remaining term to maturity at 30 September 1997 At book value Australia Commonwealth securities Local and semi- government securities Other securities and equity investments Overseas New Zealand government securities US treasury and government securities Indian government securities Other government securities Other securities and equity investments Total book value Total market value 1,022 1,012 Weighted average yields1 Australia Commonwealth securities Local and semi-government securities Other securities and equity investments Overseas New Zealand government securities US treasury and government securities Indian government securities Other government securities Other securities and equity investments Between Less than 3 months and 12 months 3 months Between 1 year and 5 years Between 5 years and 10 years After No maturity specified 10 years $M - 44 309 353 35 17 19 484 114 669 $M 90 18 145 253 441 14 54 53 172 734 987 988 $M $M $M $M 304 11 11 326 - - 274 144 218 636 962 977 - - - - - - 53 25 28 106 106 108 - - - - - 7 6 1 3 17 17 17 - - 36 36 - - - - 9 9 45 47 Market Value $M Total $M 394 394 73 73 501 968 501 968 476 475 38 406 707 37 426 699 544 544 2,171 2,181 3,139 n/a n/a 3,149 Less than 1 year Between 1 year and Between 5 years and After 5 years 10 years 10 years % 5.88 7.04 5.62 7.53 5.19 11.67 11.98 7.31 % 5.25 5.93 5.76 - - 11.74 9.11 9.86 % - - - % - - - - - 12.68 8.36 11.65 - 6.99 12.15 16.58 16.02 1 Based on effective yields for fixed interest and discounted securities and dividend yield for equity investments at 30 September 1997 Australia and New Zealand Banking Group Limited – 1997 Annual Report 57 Notes to the Financial Statements 13: Net Loans and Advances Loans and advances are classified between Australia and Overseas based on the domicile of the lending point Australia Overdrafts Credit card outstandings Term loans - owner-occupied housing Term loans - other Lease finance (refer below) Hire purchase Commercial bills Redeemable preference share finance Other Overseas Overdrafts Credit card outstandings Term loans - housing Term loans - non-housing Lease finance (refer below) Hire purchase Commercial bills Redeemable preference share finance Other Total gross loans and advances Provisions for doubtful debts (refer note 15) Income yet to mature Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 2,877 1,430 15,862 26,880 3,272 5,958 16 20 377 56,692 3,070 266 7,539 17,689 74 383 786 44 376 30,227 86,919 3,358 1,156 15,001 23,026 3,282 5,803 21 20 422 52,089 2,699 231 6,878 15,590 68 458 568 9 329 26,830 78,919 2,877 1,430 15,862 24,556 700 - - - 370 45,795 702 3 224 7,399 32 - 184 - 54 8,598 3,352 1,156 15,001 20,583 657 - - - 412 41,161 587 2 187 6,868 22 - 189 - - 7,855 54,393 49,016 (1,371) (1,400) (1,218) (1,800) (1,027) (21) (2,771) (3,018) (1,048) (884) (46) (930) Total net loans and advances 84,148 75,901 53,345 48,086 Lease finance consists of gross lease receivables Current Non-current 627 2,719 3,346 885 2,465 3,350 252 480 732 187 492 679 58 Notes to the Financial Statements 13: Net Loans and Advances (continued) Maturity Distribution and Concentrations of Credit Risk Based on remaining term to maturity at 30 September 1997 Overdraft $M Less than 3 months $M Between 3 months and 12 months $M Between 1 year and 5 years $M Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal1 Real estate - construction Real estate - mortgage2 Retail and wholesale trade Other Overseas Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal1 Real estate - construction Real estate - mortgage2 Retail and wholesale trade Other Gross loans and advances Specific provisions for doubtful debts Income yet to mature Loans and advances net of specific provisions and income yet to mature General provision Net loans and advances Interest rate sensitivity Fixed interest rates3 Variable interest rates 341 217 97 102 1 - 538 361 192 117 718 211 99 74 8 118 54 - 349 935 29 10 139 384 647 136 176 434 - 331 566 1,729 127 1,551 1,593 1,094 734 119 68 1,701 198 19 1,612 480 359 304 550 836 619 208 188 123 - 320 297 491 208 1,468 403 404 596 62 306 818 192 12 1,580 409 119 1,528 619 498 761 636 682 3,283 29 2,588 824 2,995 600 1,689 921 1,208 589 85 158 328 125 29 1,260 656 325 4,509 492 771 After 5 years $M 348 291 249 55 38 33 221 653 89 21,270 740 481 421 6 15 224 87 13 371 372 68 3,061 51 293 Total $M 2,716 1,488 1,392 3,997 68 3,272 2,446 6,229 1,216 26,095 4,375 3,398 2,439 346 555 3,189 656 73 5,172 2,852 900 9,412 1,851 2,782 5,094 (453) - (453) 15,364 11,468 25,543 29,450 86,919 - (72) (72) - (139) - (1,168) (139) (1,168) - (21) (21) (453) (1,400) (1,853) 4,641 15,292 11,329 24,375 29,429 85,066 4,641 15,292 11,329 24,375 28,511 84,148 (918) (918) 196 4,898 5,094 8,150 7,214 7,636 3,832 17,969 7,574 10,122 19,328 44,073 42,846 15,364 11,468 25,543 29,450 86,919 1 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 2 Real estate mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 3 Housing loans and other loans that are capped for an initial period are treated as fixed interest rate loans and their maturities based on the principal repayments due over the term of the loan Australia and New Zealand Banking Group Limited – 1997 Annual Report 59 Notes to the Financial Statements 14: Impaired Assets Summary of impaired assets Non-accrual loans Restructured loans Other real estate owned Unproductive facilities Gross impaired assets Specific provisions Non-accrual loans Unproductive facilities Net impaired assets Non-accrual loans Non-accrual loans Specific provisions Total net non-accrual loans Restructured loans For these loans interest and fees are recognised as income on an accruals basis Other real estate owned In the event of customer default, any loan security is held as mortgagee in possession and therefore the Group does not hold any other real estate owned assets Unproductive facilities Unproductive facilities Specific provisions Net unproductive facilities Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 872 13 - 75 960 (444) (9) 507 872 (444) 428 1,225 33 - 82 1,340 (501) (8) 831 1,225 (501) 724 13 33 - 75 (9) 66 - 82 (8) 74 545 4 - 21 570 (295) (9) 266 545 (295) 250 4 - 21 (9) 12 835 25 - 22 882 (338) (7) 537 835 (338) 497 25 - 22 (7) 15 Accruing loans past due 90 days or more These amounts, comprising loans less than $100,000 or fully secured, are not classified as impaired assets and therefore are not included within the above summary 243 212 180 174 60 Notes to the Financial Statements 14: Impaired Assets (continued) Further analysis of non-accrual loans at 30 September 1997 and interest and/or other income received during the year under Reserve Bank of Australia guidelines is as follows Consolidated The Company Gross balance outstanding $M Specific provision $M Interest and/or other income received $M Gross balance Specific outstanding provision $M $M Interest and/or other income received $M Non-accrual loans Without provisions Australia New Zealand International markets With provisions and no, or partial performance1 Australia New Zealand International markets With provisions and full performance1 Australia New Zealand International markets Total non-accrual loans 89 35 39 163 404 59 113 576 132 - 1 133 872 - - - - 270 20 105 395 49 - # 49 444 # Amounts less than $500,000 1 A loan’s performance is assessed against its contractual repayment schedule 13 2 1 16 17 1 3 21 11 # # 11 48 64 - 29 93 290 - 30 320 132 - - 132 545 - - - - 228 - 18 246 49 - - 49 295 12 - 1 13 17 - 2 19 11 - - 11 43 Interest and other income forgone on impaired assets The following table shows the estimated amount of interest and other income that would have been recorded had interest and other income on non-accrual loans been accrued to income (or, in the case of restructured loans, had interest and other income been accrued at the original contract rate), and the amount of interest and other income received with respect to such loans. Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M Gross interest and other income receivable on non-accrual loans and restructured loans Australia New Zealand International markets Total gross interest and other income receivable on non-accrual loans and restructured loans Interest and other income received Australia New Zealand International markets Total interest and other income received Net interest and other income forgone Australia New Zealand International markets Total net interest and other income forgone 96 10 15 121 42 3 5 50 54 7 10 71 149 13 19 181 69 4 8 81 80 9 11 100 74 - 2 76 41 - 2 43 33 - - 33 128 - 4 132 69 - 3 72 59 - 1 60 Australia and New Zealand Banking Group Limited – 1997 Annual Report 61 Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 509 8 (199) 135 - 453 709 8 201 - 918 702 (10) (346) 163 - 509 678 (6) 37 - 709 345 # (113) 72 - 304 539 4 180 - 723 454 (3) (239) 114 19 345 504 (1) 22 14 539 884 % 0.5 0.8 0.5 0.7 0.4 0.1 Notes to the Financial Statements 15: Provisions for Doubtful Debts Specific provision Balance at start of year Adjustment for exchange rate fluctuations Bad debts written off Transfer from profit and loss account (refer note 3) Acquired Total specific provision General provision Balance at start of year Adjustment for exchange rate fluctuations Charge to profit and loss account (refer note 3) Acquired Total general provision Total provisions for doubtful debts 1,371 1,218 1,027 Ratios Provisions1 as a % of total advances2 Specific General Provisions as a % of risk weighted assets Specific General Bad debts written off as a % of total advances2 Specific provision charge as a % of total advances2 # Amounts less than $500,000 1 Excludes provisions for unproductive facilities 2 See definition on page 116 % 0.4 0.9 0.4 0.9 0.2 0.1 % 0.5 0.8 0.5 0.8 0.4 0.1 % 0.4 1.1 0.4 0.8 0.2 0.1 62 Notes to the Financial Statements 16: Customers’ Liabilities for Acceptances Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Manufacturing Personal1 Real estate - construction Real estate - mortgage2 Retail and wholesale trade Other Overseas Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Manufacturing Personal1 Real estate - construction Real estate - mortgage2 Retail and wholesale trade Other Consolidated 1997 $M 1996 $M The Company 1996 $M 1997 $M 757 279 1,937 791 3 2,403 204 104 4,093 1,730 984 556 228 1,629 1,054 8 2,155 343 111 4,079 1,904 890 757 279 1,937 791 3 2,403 204 104 4,093 1,730 984 556 228 1,629 1,054 8 2,155 343 111 4,079 1,904 890 13,285 12,957 13,285 12,957 11 45 14 202 - 301 7 55 - 108 12 755 24 94 1 218 - 311 28 45 6 168 161 1,056 - 12 - 187 - 19 - 38 - 39 5 300 5 51 - 163 - 42 - 13 - 33 43 350 Total customers’ liabilities for acceptances 14,040 14,013 13,585 13,307 1 Personal includes non-business acceptances to individuals through overdrafts, personal loans, credit cards and fully drawn advances 2 Real estate mortgage includes residential and commercial property exposure. Acceptances within this category are for the purchase of such properties and must be secured by property 17: Regulatory Deposits Reserve Bank of Australia Overseas central banks Total regulatory deposits 572 634 551 612 1,206 1,163 572 66 638 551 61 612 Australia and New Zealand Banking Group Limited – 1997 Annual Report 63 Notes to the Financial Statements Consolidated 1997 $M 1996 $M The Company 1996 $M 1997 $M 18: Shares in Controlled Entities and Associates Refer notes 34 and 35 for details of controlled entities and associates. Controlled entities At directors’ valuation 1996 At directors’ valuation 1997 Total shares in controlled entities Associates Total shares in associates1 Total shares in controlled entities and associates - 5,116 5,116 4,768 - 4,768 7 7 10 10 1 1 5,117 4,769 Acquisitions of controlled entities Date acquired Interest acquired % Consideration Net tangible assets on acquisition $M $M Goodwill $M Year ended 30 September 1997 Fleetlink Leasing Pty Ltd2 Greyloch Investments Limited La Serigne Limited Repair Authorisation Centre (RAC) Pty Limited Truck Leasing Limited3 Year ended 30 September 1996 3 Dec 1996 23 Jun 1997 12 Feb 1997 1 Dec 1996 31 Aug 1997 50 100 100 100 20 Autofleet Pty Ltd4 1 Jul 1996 50 Disposals of controlled entities The entire interest in these entities was disposed of during the year Year ended 30 September 1997 Valiant Heart Limited Year ended 30 September 1996 Esanda Limited Pukeko Holdings Limited Pukeko Investments Limited Pukeko Securities Limited5 5 - 4 # 2 11 # 1 # 4 # # 5 # 4 # - # 2 6 - Profit on disposal Net tangible assets on disposal $M $M - - - - - - - - - - # Amounts less than $500,000 1 The Group has adopted equity accounting for the year ended 30 September 1997 (refer note 1(ii)) 2 During 1997, the remaining 50% interest in Fleetlink Leasing Pty Ltd was acquired by Esanda Finance Corporation Limited, bringing the total interest to 100% 3 During 1997, the remaining 20% interest in Truck Leasing Limited was acquired by UDC Finance Limited, bringing the total interest to 100% 4 During 1996, the remaining 50% interest in Autofleet Pty Ltd was acquired by Esanda Finance Corporation Limited, bringing the total interest to 100% 5 Formerly ANZ Securities (New Zealand) Limited 64 Notes to the Financial Statements 19: Other Assets Property held for resale Cost of acquisition Development expenses capitalised Interest, rates and taxes capitalised Provision for diminution in value Accrued interest/prepaid discounts Accrued commission Prepaid expenses Future income tax benefits (refer below) Treasury instruments revaluations Security settlements National Housing Bank deposit (refer note 38) Life insurance reserves (refer note 1[xv]) Other Total other assets Future income tax benefits comprises Provision for doubtful debts Interest Tax losses Provision for employee entitlements Provision for non-lending losses, frauds and forgeries Provision for leased premises surplus to current requirements Provision for diminution in development ventures Development venture income Treasury instruments Leveraged leasing Provision for restructuring costs Other Consolidated 1997 $M 1996 $M The Company 1996 $M 1997 $M 67 65 3 135 (11) 124 1,004 57 89 516 5,232 304 - 436 728 8,490 136 - 11 90 39 16 1 21 - 3 97 102 516 70 68 3 141 (16) 125 836 39 48 491 3,070 525 179 354 673 6,340 148 3 26 80 54 12 8 22 11 19 4 104 491 1 - - 1 - 1 736 35 15 360 4,659 300 - - 331 6,437 99 - 1 68 34 16 1 1 - 6 58 76 5 14 - 19 (12) 7 575 32 23 344 2,692 386 - - 137 4,196 107 - 3 68 43 12 4 4 11 24 4 64 360 344 Certain potential future income tax benefits within the Group have not been recognised as assets because recovery cannot be regarded as virtually certain. These potential benefits arise from tax losses and timing differences (benefits could amount to $19 million, 1996: $5 million) and from realised capital losses (benefits could amount to $141 million, 1996: $133 million). These benefits will only be obtained if (i) the relevant entities derive future assessable income of a nature and amount sufficient to enable the benefit of the taxation deductions to be realised; (ii) the relevant entities continue to comply with the conditions for deductibility imposed by law; and (iii) there are no changes in taxation legislation adversely affecting the benefit of the taxation deductions. Australia and New Zealand Banking Group Limited – 1997 Annual Report 65 Notes to the Financial Statements 20: Premises and Equipment Freehold and leasehold land and buildings At directors’ valuation 1996 At cost Provision for depreciation Leasehold improvements At cost Provision for amortisation Furniture and equipment At cost Provision for depreciation Computer equipment At cost Provision for depreciation Motor vehicle operating lease assets At cost Provision for depreciation Capital works in progress At cost Consolidated 1997 $M 1996 $M The Company 1997 $M 1996 $M 942 26 (28) 940 146 (83) 63 845 (467) 378 734 (491) 243 555 (141) 414 944 26 (20) 950 121 (71) 50 811 (429) 382 668 (423) 245 430 (97) 333 21 60 91 1 (2) 90 82 (47) 35 394 (219) 175 459 (308) 151 - - - 8 83 1 (1) 83 61 (35) 26 374 (210) 164 416 (260) 156 - - - 51 480 Total premises and equipment 2,059 2,020 459 Valuations of premises are assessed annually by officers of the Group. All premises over a specific value are also subject to external valuation at least once every three years by independent valuers. Valuations are based on the estimated open market value and assume that the premises concerned continue to be used in their existing manner by the Group. An officers’ valuation undertaken during the financial year indicated that the estimated market value of premises exceeded the book value by $81 million. The excess has not been booked in the financial statements. 21: Due to Other Financial Institutions Australia Overseas Total due to other financial institutions Maturity analysis based on remaining term to maturity at 30 September At call Less than 3 months Between 3 months and 12 months Between 1 year and 5 years Total due to other financial institutions 910 9,964 10,874 717 11,965 12,682 910 8,420 9,330 717 10,646 11,363 1,041 8,031 1,786 16 8931 7,9171 3,8721 - { 10,874 12,682 878 6,714 1,722 16 9,330 { 7451 6,9981 3,6201 - 11,363 1 Maturity analysis at 30 September 1996 was based on original term to maturity and comprised at call, less than 90 days and greater than 90 days 66 Notes to the Financial Statements 22: Deposits and Other Borrowings Deposits and other borrowings are classified between Australia and Overseas based on the location of the deposit taking point Australia Certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Borrowing corporations’ debt Securities sold under agreement to repurchase Other unsecured borrowings Overseas Certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Borrowing corporations’ debt Securities sold under agreement to repurchase Other secured borrowings Total deposits and other borrowings Maturity analysis based on remaining term to maturity at 30 September 1 At call Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Total deposits and other borrowings Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 927 17,256 21,175 2,865 3,023 5,350 - 196 1,135 17,366 17,612 2,751 2,341 5,286 394 20 927 17,219 21,175 2,865 1,942 - - 196 1,135 17,313 17,612 2,751 1,394 - 394 20 50,792 46,905 44,324 40,619 5,934 18,741 6,994 2,909 1,808 1,158 722 94 38,360 89,152 33,262 38,911 12,049 4,335 595 89,152 4,218 16,880 5,837 2,459 946 1,199 1,171 94 32,804 79,709 n/a n/a n/a n/a n/a n/a 4,025 6,461 869 363 - - 716 90 12,524 56,848 25,025 25,122 5,743 958 - 56,848 2,203 5,583 547 257 - - 1,142 92 9,824 50,443 n/a n/a n/a n/a n/a n/a 1 Disclosure of comparative information not required in first year of adoption of Australian Accounting Standard AASB 1032 “Specific Disclosures by Financial Institutions” Australia and New Zealand Banking Group Limited – 1997 Annual Report 67 Notes to the Financial Statements 23: Income Tax Liability Australia Provision for income tax Provision for deferred income tax (refer below) Overseas Provision for income tax Provision for deferred income tax (refer below) Total income tax liability Provision for deferred income tax comprises Lease finance Depreciation Investment income Treasury instruments Other 24: Creditors and Other Liabilities Australia Creditors Accrued interest and unearned discounts Treasury instruments revaluations Accrued charges Security settlements Other liabilities Overseas Creditors Accrued interest and unearned discounts Treasury instruments revaluations Accrued charges Security settlements Other liabilities Total creditors and other liabilities 25: Provisions Employee entitlements Dividends (refer note 7) Non-lending losses, frauds and forgeries Leased premises surplus to current requirements Restructuring costs Other Total provisions 68 Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 93 415 508 116 154 270 778 201 38 6 23 301 569 228 700 1,828 92 - 700 3,548 456 752 4,285 182 308 276 6,259 9,807 262 392 130 44 275 115 1,218 116 384 500 14 61 75 575 204 33 8 - 200 445 306 748 1,648 93 170 436 3,401 164 647 2,249 134 594 282 4,070 7,471 272 355 171 32 - 124 954 3 176 179 107 28 135 314 29 9 2 23 141 204 224 501 1,828 80 - 207 2,840 90 452 3,640 80 255 175 4,692 7,532 197 392 96 31 160 135 1,011 95 154 249 25 27 52 301 33 8 1 - 139 181 228 497 1,648 88 170 183 2,814 13 312 1,890 49 376 97 2,737 5,551 211 355 120 21 - 78 785 Notes to the Financial Statements 26: Bonds and Notes USD medium term notes GBP medium term notes AUD medium term notes JPY medium term notes GBP 78m floating rate notes due 1997 USD 250m floating rate notes due 1998 USD 300m floating rate note due 1998 Total bonds and notes Bonds and notes by currency USD United States dollars GBP Great British pounds JPY Japanese yen AUD Australian dollars Bonds and notes by maturity Maturity analysis based on remaining term to maturity at 30 September Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Consolidated 1997 $M 1996 $M The Company 1996 $M 1997 $M 1,016 22 176 184 175 - 417 1,990 1,433 197 184 176 1,990 834 89 235 257 154 316 379 2,264 1,529 243 257 235 2,264 1,016 22 176 184 175 - 417 1,990 1,433 197 184 176 1,990 834 89 235 257 154 316 379 2,264 1,529 243 257 235 2,264 449 974 539 28 1,990 { 8311 1,3711 62 1 2,264 449 974 539 28 1,990 { 8311 1,3711 62 1 2,264 1 Maturity analysis at 30 September 1996 was based on remaining term to maturity of less than 1 year, between 1 and 5 years and after 5 years Australia and New Zealand Banking Group Limited – 1997 Annual Report 69 Notes to the Financial Statements 27: Loan Capital Perpetual subordinated notes USD 300m USD 258.7m fixed rate notes USD 120m USD 30m floating rate notes floating rate notes floating rate notes Subordinated notes LUX 1,000m fixed notes due 1998 fixed notes due 1999 AUD 48.8m 10,000m fixed notes due 19992 JPY USD 30m USD 70m USD 200m 22.7m GBP AUD 65m AUD 55.3m USD 140m USD 70m AUD 58.2m GBP 60m USD 200m USD 250m USD 125m USD 500m USD 12.5m JPY 482m USD 250m JPY USD 14.3m USD 79m floating rate notes due 1999 floating rate notes due 1999 floating rate notes due 1999 fixed notes due 2000 floating rate notes due 2000 floating rate notes due 20004 floating rate notes due 2000 floating rate notes due 2000 floating rate notes due 20015 fixed notes due 2001 floating rate notes due 2002 fixed rate notes due 2004 floating rate notes due 2005 fixed notes due 2006 floating rate notes due 2007 floating rate notes due 2007 floating rate notes due 20076 568.8m floating rate notes due 2008 floating rate notes due 2008 floating rate notes due 20087 Total loan capital Loan capital by currency USD United States dollars AUD Australian dollars GBP Great British pounds JPY Japanese yen LUX Luxembourg francs Loan capital by maturity Maturity analysis based on remaining term to maturity at 30 September Between 3 months and 12 months Between 1 year and 5 years After 5 years Perpetual Interest Rate % Consolidated 1997 $M 1996 $M The Company 1996 $M 1997 $M LIBOR1 + 0.15 9.125 LIBOR + 0.80 LIBOR + 0.80 9.375 7.720 7.430, 5.800 LIBOR + 0.46 LIBOR + 0.46 LIBOR + 0.50 7.050 BB3 + 0.40 BB + 0.40 LIBOR + 0.50 LIBOR + 0.625 BB + 0.40 12.625 LIBOR + 0.70 6.25 LIBOR + 0.45 7.55 LIBOR + 0.50 LIBOR + 0.50 LIBOR + 0.25 LIBOR + 0.55 LIBOR + 0.50 LIBOR + 1.03 417 359 - - 776 38 48 115 42 - - 56 65 55 - - 58 134 278 348 174 695 17 6 347 7 20 110 2,613 3,389 2,807 226 190 128 38 3,389 38 573 2,002 776 3,389 379 327 152 38 896 40 49 114 38 88 253 57 65 55 177 88 58 119 253 316 157 632 16 5 - 6 18 100 2,704 3,600 3,032 227 176 125 40 3,600 - 1,025 1,679 896 3,600 417 359 - - 776 38 48 115 42 - - - 65 55 - - 58 134 278 348 - 695 17 6 347 7 20 110 2,383 3,159 2,633 226 134 128 38 3,159 38 517 1,828 776 3,159 379 327 - - 706 40 49 114 38 88 253 - 65 55 177 88 58 119 253 316 - 632 16 5 - 6 18 100 2,490 3,196 2,685 227 119 125 40 3,196 - 968 1,522 706 3,196 1 LIBOR is an average of rates offered on loans to leading banks in the London inter-bank market 2 Two equal tranches of notes were issued with different interest rates 3 BB is the stated average of Bank Bill rates 4 Prior to March 1995 the interest rate was 12.5% p.a. 5 Prior to July 1996 the interest rate was 12.5% p.a. 6 After February 2002 the interest rate is LIBOR+ 0.75% 7 After January 2002 the interest rate is LIBOR+ 0.53% Loan capital is subordinated in right of payment to the claims of depositors and all other creditors of the Company and its controlled entities which have issued the notes, and constitutes tier 2 capital as defined by the Reserve Bank of Australia for capital adequacy purposes 70 Notes to the Financial Statements 28: Outside Equity Interests Issued and paid-up capital Reserves Retained profits Total outside equity interests Consolidated 1997 $M 1996 $M 22 16 12 50 22 14 10 46 29: Average Balance Sheet and Related Interest Averages used in the following table are predominantly daily averages. Interest income figures are presented on a tax-equivalent basis. Non-accrual loans are included under the interest earning asset category “Loans, advances and bills discounted”. Average balance $M 1997 Interest $M Average rate % Average balance $M 1996 Interest $M Average rate % Average balance $M 1995 Interest $M Average rate % Interest earning assets Due from other financial institutions Australia New Zealand International markets Regulatory deposits with Reserve Bank of Australia Investments in public securities Australia New Zealand International markets Loans, advances and bills discounted Australia New Zealand International markets Other assets Australia New Zealand International markets 480 359 10,380 556 4,770 1,603 5,094 32 21 700 5 301 107 427 52,827 14,089 14,578 4,657 1,384 1,258 1,655 831 5,920 105 80 361 113,142 9,438 6.7 5.8 6.7 0.9 6.3 6.7 8.4 8.8 9.8 8.6 6.3 9.6 6.1 8.3 Non-interest earning assets Acceptances Australia New Zealand International markets Premises and equipment Other assets Provisions for doubtful debts Australia New Zealand International markets Total assets Total assets Australia New Zealand International markets % of total assets attributable to overseas activities 13,248 244 556 1,975 9,740 (917) (118) (217) 24,511 137,653 77,604 18,395 41,654 137,653 43.6% 630 346 10,209 535 4,897 1,090 2,973 41 27 699 13 380 88 289 48,399 12,619 11,770 4,939 1,315 1,084 618 760 4,825 53 77 293 6.5 7.8 6.8 2.4 7.8 8.1 9.7 10.2 10.4 9.2 8.6 10.1 6.1 390 339 8,940 25 28 607 6.4 8.3 6.8 491 30 6.1 4,464 1,116 3,195 332 81 290 7.4 7.3 9.1 44,783 11,134 10,313 861 800 4,086 4,471 1,143 922 10.0 10.3 8.9 61 70 278 7.1 8.8 6.8 9.2 99,671 9,298 9.3 90,912 8,338 12,581 597 462 2,027 6,842 (1,002) (118) (238) 21,151 120,822 70,917 16,212 33,693 120,822 41.3% 11,521 672 586 1,982 7,714 (1,163) (96) (300) 20,916 111,828 66,095 14,924 30,809 111,828 40.9% Australia and New Zealand Banking Group Limited – 1997 Annual Report 71 Notes to the Financial Statements 29: Average Balance Sheet and Related Interest (continued) 1996 1997 Average balance $M Interest $M Average rate % Average balance $M Average rate % Interest $M Average balance $M 1995 Interest $M Average rate % Interest bearing liabilities Time deposits Australia New Zealand International markets Savings deposits Australia New Zealand International markets Other demand deposits Australia New Zealand International markets Due to other financial institutions Australia New Zealand International markets Commercial paper Australia International markets Borrowing corporations’ debt Australia New Zealand International markets Loan capital, bonds and notes Australia New Zealand International markets Other liabilities1 Australia New Zealand International markets 18,495 8,304 15,904 1,097 658 1,015 8,216 2,462 1,266 11,237 1,789 1,009 300 843 11,549 3,081 1,731 5,326 1,237 - 4,998 530 653 425 199 2,010 222 96 69 518 122 41 15 73 716 181 94 409 103 - 313 35 41 49 33 118 5.9 7.9 6.4 2.7 3.9 5.5 4.6 6.8 4.1 5.0 8.7 6.2 5.9 5.4 7.7 8.3 - 6.3 6.6 6.3 n/a n/a n/a 18,542 7,313 11,722 1,340 622 785 7,530 2,183 1,142 8,683 1,534 810 397 732 11,501 2,469 1,087 5,081 1,167 - 4,246 186 621 676 - 698 264 83 57 520 121 35 27 72 763 186 61 420 99 - 322 19 37 76 7 53 101,564 6,018 5.9 88,320 5,969 Non-interest bearing liabilities Deposits 7.2 8.5 6.7 3.5 3.8 5.0 6.0 7.9 4.3 6.8 9.8 6.6 7.5 5.6 8.3 8.5 - 7.6 10.2 6.0 n/a n/a n/a 6.8 17,605 6,175 9,885 1,251 491 644 7,408 1,959 1,158 7,207 1,395 628 213 863 10,902 1,601 1,173 4,915 1,137 2 4,060 120 605 727 - 406 239 52 55 408 103 30 15 69 722 110 68 402 87 - 314 17 38 78 9 27 80,144 5,229 7.1 8.0 6.5 3.2 2.7 4.7 5.7 7.4 4.8 7.0 8.0 6.6 6.9 5.8 8.2 7.7 - 7.7 14.2 6.3 n/a n/a n/a 6.5 Australia New Zealand International markets Acceptances Australia New Zealand International markets Other liabilities Total liabilities Total liabilities Australia New Zealand International markets Shareholders’ equity Total liabilities and shareholders’ equity 2,817 1,288 1,529 13,248 244 556 9,444 29,126 130,690 72,063 17,548 41,079 130,690 6,963 137,653 % of total liabilities attributable to overseas activities 44.9% 1 Includes foreign exchange swap costs 72 2,736 1,139 1,249 12,581 597 462 7,586 26,350 114,670 66,679 15,352 32,639 114,670 6,152 120,822 41.9% 3,340 1,075 1,139 11,521 672 586 7,420 25,753 105,897 62,193 14,022 29,682 105,897 5,931 111,828 41.3% Notes to the Financial Statements 30: Interest Sensitivity Gap The following table represents the interest rate sensitivity as at 30 September 1997 of the Group’s assets, liabilities and off-balance sheet instruments repricing (that is, when interest rates applicable to each asset or liability can be changed) in the periods shown. Sensitivity to interest rates arises from mismatches in the period to repricing of assets and that of the corresponding liability funding. These mismatches are managed within policy guidelines for gap positions. Major changes in gap positions can be made to adjust the profile as market outlooks change. Liquid assets and due from other financial institutions Trading and investment securities Net loans and advances Other assets Total assets Certificates of deposit and term deposits Other deposits Other borrowings and due to other financial institutions Other liabilities Bond, notes and loan capital Total liabilities Shareholders’ equity and outside equity interests Off-balance sheet items affecting interest rate sensitivity Interest sensitivity gap - net - cumulative Less than 3 months $M 14,085 6,533 53,015 2,674 76,307 34,611 26,207 13,151 1,953 2,991 78,913 Between 3 months and 6 months $M Between 6 months and 12 months $M Between 1 year and 5 years $M 1,402 1,073 7,602 148 1,071 587 8,285 2 361 1,172 14,726 16 After 5 years $M 14 539 1,019 2 Not bearing interest $M Total $M 953 501 (499) 22,960 17,886 10,405 84,148 25,802 10,225 9,945 16,275 1,574 23,915 138,241 3,409 523 4,023 55 688 8,698 3,368 212 2,962 9 - 1,454 1,223 2,196 16 298 15 5 - 5,774 42,857 33,944 - - 1,402 893 23,810 - 23,225 25,843 5,379 6,551 5,187 1,422 30,477 131,248 - - - - - 6,993 6,993 3,382 (1,447) 275 (1,035) (1,175) - 776 776 80 856 3,669 4,525 10,053 (1,023) 14,578 13,555 (13,555) - - - - Australia and New Zealand Banking Group Limited – 1997 Annual Report 73 Notes to the Financial Statements 31: Net Fair Value of Financial Instruments Australian Accounting Standard AASB 1033: Presentation and Disclosure of Financial Instruments (AASB 1033) requires disclosure of the net fair value of on and off-balance sheet financial instruments. The disclosures exclude all non-financial instruments, such as income taxes and regulatory deposits, and specified financial instruments, such as interests in controlled entities. Accordingly, the aggregate net fair value amounts do not represent the underlying value of the Group. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s-length transaction. Net fair value is the fair value adjusted for transaction costs. Quoted market prices, where available, are adjusted for material transaction costs and used as the measure of net fair value. In cases where quoted market values are not available, net fair values are based on present value estimates or other valuation techniques. For the majority of short term financial instruments, defined as those which reprice or mature in 90 days or less, with no significant change in credit risk, the net fair value was assumed to equate to the carrying amount in the Group’s balance sheet. The fair values are based on relevant information available as at 30 September 1997. While judgement is used in obtaining the net fair value of financial instruments, there are inherent weaknesses in any estimation technique. Many of the estimates involve uncertainties and matters of significant judgement, and changes in underlying assumptions could significantly affect these estimates. Furthermore, market prices or rates of discount are not available for many of the financial instruments valued and surrogates have been used which may not reflect the price that would apply in an actual sale. The net fair value amounts have not been updated for the purposes of these financial statements since 30 September 1997, and therefore the net fair value of the financial instruments subsequent to 30 September 1997 may be different from the amounts reported. Financial Assets Liquid assets Due from other financial institutions Trading securities Investment securities and shares in associates Loans and advances Customers’ liabilities for acceptances Other financial assets Net fair value 1996 $M 1997 $M Carrying value 1996 $M 1997 $M 6,298 11,588 7,266 3,156 85,537 14,040 7,665 6,906 11,356 7,334 2,577 76,958 14,006 5,731 6,298 11,588 7,266 3,146 84,148 14,040 7,761 6,901 11,353 7,334 2,580 75,901 14,013 5,609 Liquid assets and Due from other financial institutions The carrying values of these financial instruments are considered to approximate their net fair values as they are short term in nature or are receivable on demand. Trading securities Trading securities are carried at market value. Market value is generally based on quoted market prices, broker or dealer price quotations, or prices for securities with similar credit risk, maturity and yield characteristics. Investment securities and shares in associates Net fair value is based on quoted market prices or broker or dealer price quotations. If this information is not available, net fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics, or by reference to the net tangible asset backing of the investee. Loans, advances and customers’ liabilities for acceptances The carrying value of loans, advances and acceptances is net of specific and general provisions for doubtful debts and income yet to mature. The estimated net fair value of loans, advances and acceptances is based on the discounted amount of estimated future cash flows and accordingly has not been adjusted for either specific or general provisions for doubtful debts. Estimated contractual cash flows for performing loans are discounted at estimated current market rates to determine fair value. For loans with doubt as to collection, expected cash flows (inclusive of the value of security) are discounted using a rate which includes a premium for the uncertainty of the flows. The difference between estimated net fair values of loans, advances and acceptances and carrying value reflects changes in interest rates and the credit worthiness of borrowers since loan origination. The excess of net fair value of loans and advances over the carrying value is primarily a result of offsetting the general provision for doubtful debts against the carrying value and the effect of declining interest rates. Finance lease receivables, with a carrying value of $2,694 million (1996: $2,880 million) and a net fair value of $2,722 million (1996: $2,864 million), are included in loans and advances. 74 Notes to the Financial Statements 31: Net Fair Value of Financial Instruments (continued) Other financial assets Included in this category are accrued interest, fees receivable and derivative financial instruments. The carrying values of accrued interest and fees receivable are considered to approximate their net fair values as they are short term in nature or are receivable on demand. The fair values of derivative financial instruments such as interest rate swaps and currency swaps were calculated using discounted cash flow models based on current market yields for similar types of instruments and the maturity of each instrument. Foreign exchange contracts and interest rate option contracts were valued using market prices and option valuation models as appropriate. Properties held for resale, future income tax benefits and prepaid expenses are not considered financial assets. Financial Liabilities Due to other financial institutions Deposits and other borrowings Liability for acceptances Bonds and notes Loan capital Other financial liabilities Net fair value Carrying value 1997 $M 10,872 89,277 14,040 1,984 3,413 9,457 1996 $M 12,697 79,724 14,006 2,277 3,586 7,160 1997 $M 10,874 89,152 14,040 1,990 3,389 9,471 1996 $M 12,682 79,709 14,013 2,264 3,600 7,115 Due to other financial institutions The carrying value of amounts due from other financial institutions is considered to approximate the net fair value. Deposits and other borrowings The net fair value of a deposit liability without a specified maturity or at call is deemed by AASB 1033 to be the amount payable on demand at the reporting date. The fair value is not adjusted for any value expected to be derived from retaining the deposit for a future period of time. For interest bearing fixed maturity deposits and other borrowings and acceptances without quoted market prices, market borrowing rates of interest for debt with a similar maturity are used to discount contractual cash flows. The net fair value of interest bearing deposits and other liabilities reflects declining interest rates during the year ended 30 September 1997. Bonds and notes and loan capital The aggregate net fair value of bonds and notes and loan capital at 30 September 1997 was calculated based on quoted market prices. For those debt issues where quoted market prices were not available, a discounted cash flow model using a yield curve appropriate for the remaining term to maturity of the instrument was used. Other financial liabilities This category includes accrued interest and fees payable for which the carrying amount is considered to approximate the fair value. Also included are derivative financial instruments, where fair value is determined on the basis described under “other financial assets”. Income tax liabilities, other provisions and accrued charges are not considered financial instruments. Commitments and contingencies As outlined in note 38, the Group has various credit-related commitments. Based upon the level of fees currently charged for granting such commitments, taking into account maturity and interest rates, together with any changes in the creditworthiness of counterparties since origination of the commitments, their estimated replacement or net fair value is not material. Transaction costs The fair value of financial instruments required to be disclosed under US accounting standard, Statement of Financial Accounting Standards No. 107 “Disclosures about Fair Value of Financial Instruments” (SFAS 107) is calculated without regard to estimated transaction costs. Such transaction costs are not material, and accordingly the fair values shown above would not differ materially from fair values calculated in accordance with SFAS 107. Australia and New Zealand Banking Group Limited – 1997 Annual Report 75 Notes to the Financial Statements 32: Segment Analysis The following analysis shows income, operating profit, total assets and risk weighted assets based on geographical locations and income, operating profit and total assets by industry segments. Geographical Income1 Australia New Zealand UK and Europe Asia Pacific South Asia Americas Middle East Operating profit before income tax Australia New Zealand UK and Europe Asia Pacific South Asia Americas Middle East Abnormal items Australia New Zealand UK and Europe Asia Pacific South Asia America Middle East Operating profit after income tax Australia New Zealand UK and Europe Asia Pacific South Asia Americas Middle East Abnormal items Australia New Zealand UK and Europe South Asia Middle East 1997 Consolidated 1996 1995 $M 6,534 2,020 1,191 865 657 364 360 % 55 17 10 7 5 3 3 $M 6,623 1,886 1,000 826 435 325 287 % 58 16 9 7 4 3 3 $M 6,145 1,657 861 680 339 317 286 % 60 16 8 7 3 3 3 11,991 100 11,382 100 10,285 100 892 233 160 141 166 63 103 51 13 9 8 9 4 6 886 203 155 147 81 64 79 55 13 9 9 5 4 5 903 204 116 124 57 60 84 58 13 8 8 4 4 5 1,758 100 1,615 100 1,548 100 (240) (61) (13) (1) 136 (1) (2) (182) 1,576 627 165 112 95 82 36 54 - - - - - - - - - 54 14 9 8 7 3 5 - - - - - - - - 1,615 657 138 106 99 36 38 42 - - - - - - - - - 59 12 10 9 3 3 4 - - - - - - - - 1,548 612 146 83 79 27 39 47 - - - - - - - - - 59 14 8 8 3 4 4 1,171 100 1,116 100 1,033 100 (155) (41) (9) 59 (1) (147) 1,024 - - - - - - - - - - - - - 1,116 - - - - - - - 19 - - - - 19 1,052 - - - - - - - 76 Notes to the Financial Statements 32: Segment Analysis (continued) Total assets Australia New Zealand UK and Europe Asia Pacific South Asia Americas Middle East Risk weighted assets Australia New Zealand UK and Europe Asia Pacific South Asia Americas Middle East Industry Income1 General banking Investment banking capital markets Finance Insurance and funds management Operating profit before income tax General banking Investment banking capital markets Finance Insurance and funds management Abnormal items Operating profit after income tax General banking Investment banking capital markets Finance Insurance and funds management Abnormal items Total assets General banking Investment banking capital markets Finance Insurance and funds management 1 Includes abnormal items n/a Not applicable 1997 Consolidated 1996 1995 $M % $M % $M % 80,321 18,831 16,886 9,844 3,959 4,611 3,789 58 14 12 7 3 3 3 75,110 17,463 15,008 9,163 3,333 4,723 2,804 59 13 12 7 3 4 2 67,594 15,310 12,001 7,874 3,306 3,666 2,836 60 13 11 7 3 3 3 138,241 100 127,604 100 112,587 100 66,687 14,332 8,471 6,489 2,897 4,505 2,766 63 14 8 6 3 4 2 59,681 13,492 6,220 5,358 2,244 4,527 1,995 64 14 7 6 2 5 2 53,531 11,748 5,238 4,766 2,213 3,535 2,045 65 14 6 6 3 4 2 106,147 100 93,517 100 83,076 100 9,797 708 1,293 193 82 6 11 1 9,496 480 1,253 153 84 4 11 1 8,955 n/a 1,154 176 11,991 100 11,382 100 10,285 1,272 208 203 75 1,758 (182) 1,576 832 144 130 65 1,171 (147) 1,024 120,319 6,353 11,258 311 138,241 72 12 12 4 100 - 1,257 100 201 57 1,615 - 78 6 12 4 100 - 1,217 n/a 234 97 1,548 - - 1,615 - 1,548 71 12 11 6 100 - - 860 72 133 51 1,116 - 1,116 87 5 8 - 112,169 4,549 10,639 247 77 6 12 5 100 - 793 n/a 158 82 1,033 19 - 1,052 88 4 8 - 102,120 n/a 9,997 470 100 127,604 100 112,587 87 n/a 11 2 100 79 n/a 15 6 100 - - 77 n/a 15 8 100 - - 91 n/a 9 - 100 Australia and New Zealand Banking Group Limited – 1997 Annual Report 77 Notes to the Financial Statements 33: Notes to the Statements of Cash Flows a) Reconciliation of operating profit after income tax to net cash provided by operating activities Consolidated 1996 $M 1997 $M 1995 $M The Company 1996 $M 1997 $M Inflows (Outflows) Inflows (Outflows) Operating profit after income tax 1,024 1,116 1,052 647 1,023 287 288 560 (362) 2 29 (10) (2) 304 (127) (18) 162 154 255 189 (194) 14 (7) 2 - 174 236 201 (190) 1 2 - - 221 110 386 (207) 1 10 - (1) 110 108 81 (49) 12 (8) - - (1,595) 230 8 137 (1,222) (282) 6 333 1,212 (126) (3) 28 (1,339) 101 8 145 (85) (58) (83) (167) 62 - (50) 364 (2) 1 (61) (1,020) (522) 1,772 96 530 2,419 3 114 23 - 1 (14) (64) 44 - (7) (872) 151 23 47 - (89) 1,009 2,033 Adjustments to reconcile operating profit after income tax to net cash provided by operating activities Provisions for doubtful debts Depreciation and amortisation Provisions for employee entitlements and other Payments from provisions Loss on sale of premises and equipment Provision for surplus lease space (Profit) loss on sale of controlled entities and associates Profit on sale of investment securities Net decrease (increase) Trading securities Interest receivable Accrued income Net debit tax balances Amortisation of discounts/premiums included in interest income Net increase (decrease) Interest payable Accrued expenses Amortisation of discounts/premiums included in interest expense Other Total adjustments Net cash provided by operating activities b) Reconciliation of cash and cash equivalents Cash and cash equivalents include liquid assets and amounts due from other financial institutions with original term to maturity of less than 90 days. Cash and cash equivalents at the end of the financial year as shown in the statements of cash flows are reconciled to the related items in the balance sheets as follows Liquid assets - less than 90 days Due from other financial institutions - less than 90 days 3,857 8,599 4,285 6,961 12,456 11,246 2,824 4,255 7,079 1,829 5,164 6,993 2,456 4,348 6,804 78 Notes to the Financial Statements Consolidated 1996 $M 1995 $M 1997 $M The Company 1997 $M 1996 $M 33: Notes to the Statements of Cash Flows (continued) c) Acquisitions and disposals Details of aggregate assets and liabilities of controlled entities and branches acquired, and disposed of, by the Group are as follows Fair value of net assets acquired Liquid assets Due from other financial institutions Net loans and advances Other assets Premises and equipment Due to other financial institutions Creditors and other liabilities Deposits and other borrowings Due to controlled entities Income tax liability Provisions Fair value of net assets acquired Goodwill on acquisition Consideration paid Cash acquired Cash consideration paid (received) Fair value of net assets disposed Liquid assets Due from other financial institutions Net loans and advances Other assets Premises and equipment Due to other financial institutions Creditors and other liabilities Deposits and other borrowings Provisions Fair value of net assets disposed Net profit on disposal Consideration received/receivable Deferred settlements Cash consideration received 2 - - 2 4 - (3) - - - - 5 6 11 - 11 4 35 72 20 1 (2) (13) (104) 1 14 10 24 17 41 13 - 2 1 - - (1) - - (5) (10) - - - (13) (13) - - - - - - - - - - - - 14 14 - - - 81 - - - - - - - 81 - 81 - 81 - - - - - - - - - - - - 14 14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 10 1,672 42 83 4 (39) (16) (1,596) (7) (9) - 144 64 208 (10) 198 - - - - - - - - - - - - - - d) Non-cash financing and investing activities Share capital issues Dividend reinvestment plan Bonus option plan e) Financing arrangements Financing arrangements which are available under normal financial arrangements Credit standby arrangements Commercial bills acceptance discount lines Standby lines Other financing arrangements Overdrafts and other financing arrangements Total finance available 180 3 135 6 192 11 180 3 135 6 1997 1996 Available Unused Available Unused $M $M $M $M 100 2,719 1,065 3,884 100 2,057 100 1,955 100 1,854 452 457 449 2,609 2,512 2,403 Australia and New Zealand Banking Group Limited – 1997 Annual Report 79 Notes to the Financial Statements Notes to the Financial Statements Incorporated in Book value 1996 $M 1997 $M Contribution to the consolidated result 1997 $M 1996 $M Nature of Business 34: Controlled Entities All controlled entities are 100% owned unless otherwise noted. The material controlled entities of the Group are Australia and New Zealand Banking Group Limited 371 557 Banking La Serigne Limited * ANZ Grindlays International Limited * ANZ Asia Pacific Holdings Ltd * ANZ Bank (Vanuatu) Limited * A.F.T. Investors Services Limited ANZ Adelaide Group Limited 3 ANZ Bank (Guernsey) Limited * ANZ Capital Hedging Limited ANZ (Delaware) Inc.* ANZ Executors & Trustee Company Limited ANZ Finance (Far East) Limited ANZ Funds Pty Ltd Australia Australia Guernsey Australia USA Australia Australia Australia Hong Kong Hong Kong Vanuatu Vanuatu Singapore Singapore New Zealand ANZ Banking Group (New Zealand) Limited * New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand National Mutual Permanent Building Society* New Zealand ANZ International Private Limited * ANZCOVER Insurance Pte Ltd * ANZ Holdings (New Zealand) Limited * Mutual Leasing Limited * Truck Leasing Limited * UDC Leasing Limited * Bage Investments Limited * Endeavour Investments (NZ) Limited * Greyloch Investments Limited * UDC Group Holdings Limited * UDC Finance Limited * ANZ Singapore Limited * 4 Bank of Western Samoa * LFD Limited GNPL Limited RFDL Limited Minerva Holdings Limited * ANZ Grindlays Export Finance Limited * Town & Country Land Holdings Limited ANZ Lenders Mortgage Insurance Pty Limited Town & Country Housing Trust ANZ General Insurance Pty Limited ANZ Grindlays Jersey Holdings Limited * ANZ Grindlays Bank (Jersey) Limited * ANZ Grindlays Holdings Limited ANZ Grindlays Bank Limited Grindlays Bahrain Bank B.S.C. 5 Grindlays Modaraba Management (Private) Limited Nepal Grindlays Bank Limited * A.N.Z. Holdings Limited ANZ Investment Holdings Limited 530 Collins Street Property Trust A.N.Z. Investments Limited ANZ Life Assurance Company Limited ANZ Managed Investments Limited A.N.Z. Properties (Australia) Limited ANZ Securities (Holdings) Limited ANZ Securities (Corporate) Limited ANZ Securities Limited Australia and New Zealand Banking Group (PNG) Limited * Bellinz Pty Ltd Singapore Samoa Australia Australia Australia England England Australia Australia Australia Australia Jersey Jersey Australia Australia Bahrain Pakistan Nepal Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Papua New Guinea Australia 80 6 52 33 7 - 54 22 3,765 # 78 # 4 715 75 202 356 222 847 106 66 54 16 4 16 12 12 18 204 11 1 82 49 115 9 43 3 164 58 1,101 204 16 # 12 128 54 397 17 436 85 21 33 1 6 6 63 27 52 - 41 22 3,327 # 71 # - 715 75 203 355 221 843 - 66 54 16 2 16 12 11 18 204 11 1 82 43 115 9 46 3 130 51 841 204 14 # 10 128 44 397 16 354 70 21 47 1 6 # (11) 3 (6) - 13 # 2 (3) 1 3 - 1 9 (11) 59 12 47 1 - 18 (3) (1) 2 # 6 3 21 - (6) 5 1 2 5 # # - 15 - 204 2 - 3 # 1 7 1 82 15 # 1 (12) 3 Holding Company Property Owner Banking Capital Hedging Finance Trustee/Nominee Property Owner # 3 3 8 - 9 # 21 Holding Company # Holding Company 1 Holding Company 3 - (2) Holding Company 15 Insurance (12) Holding Company Banking 60 13 Investment 47 Holding Company Banking Property Owner Finance Holding Company Finance Lease Finance Leasing Lease Finance Building Society - - 22 5 # 2 # 6 Merchant Banking Banking 3 23 Finance # Non-operative Finance 8 Holding Company # Export Finance 2 (1) Property Development 2 Mortgage Insurance Property Investment # General Insurance # Holding Company - Banking 17 Banking Banking Fund Management Banking Property owner Investment Investment Activities Investment Life Assurance Investment Services Property Owner 1 Holding Company 94 2 - 3 # # 18 # 55 11 (1) (1) Holding Company Corporate Advisory # Administration 6 33 25 27 - 17 # 13 - Banking Investment 80 80 Notes to the Financial Statements Notes to the Financial Statements Incorporated in Book value 1996 $M 1997 $M Contribution to the consolidated result 1997 $M 1996 $M Nature of Business 34: Controlled Entities (continued) Esanda Finance Corporation Limited Finance Corporation of Australia Limited Mercantile Credits Limited Alliance Holdings Limited 6 Fleet Partners Pty Limited Australia Australia Australia Australia Australia Repair Authorisation Centre (RAC) Pty Limited Australia Australia Australia Australia Australia Indonesia ANZ Capel Court Limited NMRSB Limited Fleetlink Leasing Pty Limited PT ANZ Panin Bank * NMRB Limited 865 75 9 119 # # 5 445 57 132 40 937 75 9 119 # - 1 420 57 132 41 86 (2) (1) - 2 - - # 21 # 8 General Finance 95 3 Real Estate Finance (2) General Finance 1 Holding Company Fleet Management - Fleet Maintenance - Lease Finance - Holding Company 2 5 Investment Banking # Holding Company 8 Banking Contributions of above entities to the Group result after income tax and abnormal items Adjustment for controlled entities sold/liquidated Adjustments on consolidation Contribution of non-material controlled entities Equity accounting profit (notes 1(ii) and 35) Consolidated operating profit after income tax 997 1,128 # # # # 25 (12) 2 - 1,024 1,116 * # 1 2 3 4 5 6 7 Audited by overseas KPMG firms Amounts less than $500,000 The above controlled entities are 100% owned with the exception of Australia and New Zealand Banking Group (PNG) Limited (93%), Grindlays Bahrain Bank B.S.C. (40%), Nepal Grindlays Bank Limited (50%), PT ANZ Panin Bank (85%) and Town & Country Housing Trust (93%) Outside equity interests hold ordinary shares or units in the controlled entities listed above as follows: Australia and New Zealand Banking Group (PNG) Limited - 371,507 PGK1 shares (7%) Grindlays Bahrain Bank B.S.C. - 3,600,000 BHD1 shares (60%) Nepal Grindlays Bank Limited - 750,000 NPR 100 shares (50%) PT ANZ Panin Bank - 7,500 IDR1m shares (15%) Town & Country Housing Trust - 2,435,931 $1 units (7%) ANZ Adelaide Group Limited owns 100% of the issued ordinary shares of Penplaza Investments Pty Limited but does not control that company as it does not have substantially all the risks and benefits incidental to ownership or control Subsequent to 30 September 1997, Bank of Western Samoa was renamed ANZ Bank (Samoa) Limited ANZ Grindlays Bank Limited controls Grindlays Bahrain Bank B.S.C. due to the existence of an agreement whereby ANZ Grindlays Bank Limited provides management and other technical services giving the capacity to dominate decision making Formerly Autofleet Pty Limited The following controlled entities were audited by firms other than KPMG Clive Street Nominees Private Limited Grindlays Bahrain Bank B.S.C. Grindlays International (Cayman Islands) Limited Grindlays Modaraba Management (Private) Limited Grindlays Services of Pakistan (Private) Limited 81 Incorporated in Interest % 1997 $M 1996 $M Balance date Book value Contribution to the consolidated result 1997 $M Principal activity 35: Associates Significant associates of the Group are Sime Merchant Bankers Berhad1 Malaysia 26.5 Other associates Associates disposed of or reclassified as controlled entities during the current year 2 Total shares in associates Merchant Bank 31 Jan 6 1 - 7 4 - 6 10 2 - - 2 1 Formerly Asian International Merchant Bankers Berhad. The investment is held by ANZ Grindlays Bank Limited 2 The investment held by UDC Finance Limited in Amalgamated Finance Limited was disposed of during the year 81 Australia and New Zealand Banking Group Limited – 1997 Annual Report 81 Notes to the Financial Statements 36: Commitments Capital expenditure Contracts for outstanding capital expenditure Not later than 1 year Total capital expenditure commitments Lease rentals Future rentals in respect of leases Land and buildings Not later than 1 year Later than 1 year but not later than 2 years Later than 2 years but not later than 5 years Later than 5 years Furniture and equipment Not later than 1 year Later than 1 year but not later than 2 years Later than 2 years but not later than 5 years Total lease rental commitments Total commitments 37: Derivative Financial Instruments Consolidated The Company 1997 $M 1996 $M 1997 $M 1996 $M 56 56 139 130 219 444 932 5 3 3 11 943 999 43 43 143 131 251 475 1,000 4 3 1 8 1,008 1,051 27 27 110 106 168 398 782 1 1 - 2 784 811 9 9 114 107 204 472 897 - - 1 1 898 907 Derivatives Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices. They include swaps, forward rate agreements, futures, options and combinations of these instruments. The use of derivatives and their sale to customers as risk management products is an integral part of the Group’s trading activities. Derivatives are also used to manage the Group’s own exposure to fluctuations in exchange and interest rates as part of its asset and liability management activities. Derivatives are subject to the same types of credit and market risk as other financial instruments, and the Group manages these risks in a consistent manner. The principal exchange rate contracts used by the Group are forward foreign exchange contracts, currency swaps and currency options. Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency on a specified future date at an agreed rate. A currency swap generally involves the exchange, or notional exchange, of equivalent amounts of two currencies and a commitment to exchange interest periodically until the principal amounts are re-exchanged on a future date. Currency options provide the buyer with the right, but not the obligation, either to purchase or sell a fixed amount of a currency at a specified rate on or before a future date. As compensation for assuming the option risk, the option writer generally receives a premium at the start of the option period. The principal interest rate contracts used by the Group are forward rate agreements, interest rate futures, interest rate swaps and options. Forward rate agreements are contracts for the payment of the difference between a specified interest rate and a reference rate on a notional deposit at a future settlement date. There is no exchange of principal. An interest rate future is an exchange traded contract for the delivery of a standardised amount of a fixed income security or time deposit at a future date. Interest rate swap transactions generally involve the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. Derivative transactions generate income for the Group from buy-sell spreads and from trading positions taken by the Group. Income from these transactions is taken to net interest income, foreign exchange earnings or profit on trading instruments. Income or expense on derivatives entered into for balance sheet hedging purposes is accrued and recorded as an adjustment to the interest income or expense of the related hedged item. 82 Notes to the Financial Statements 37: Derivative Financial Instruments (continued) Credit risk The credit risk of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligation. Credit risk arises when market movements are such that the derivative has a positive value to the Group. It is the cost of replacing the contract in the event of counterparty default. The Group limits its credit risk within a conservative framework by dealing with creditworthy counterparties, setting credit limits on exposures to counterparties, and obtaining collateral where appropriate. The following table provides an overview of the Group’s exchange rate and interest rate derivatives. It includes all trading and non trading contracts. Notional principal amounts measure the amount of the underlying physical or financial commodity and represent the volume of outstanding transactions. They are not a measure of the risk associated with a derivative. The gross replacement cost is the cost of replacing those financial instruments with a positive market value to the Group. It represents the potential credit loss had all counterparties defaulted on the reporting date and any collateral become worthless. There is no allowance for netting arrangements. The credit equivalent amount is calculated in accordance with the Reserve Bank of Australia’s Capital Adequacy guidelines. It combines the aggregate gross replacement cost with an allowance for the potential increase in value over the remaining term of the transaction should market conditions change. Consolidated Foreign exchange contracts Spot and forward contracts Swap agreements Options purchased Options sold1 Interest rate contracts Forward rate agreements Swap agreements Futures contracts2 Options purchased Options sold1 Other contracts Notional principal amount 1997 $M Gross replacement cost 1997 Credit equivalent amount 1997 $M $M Notional principal amount 1996 $M Gross replacement cost 1996 Credit equivalent amount 1996 $M $M 202,885 10,810 11,537 11,033 236,265 66,719 193,092 125,942 13,548 20,899 944 421,144 657,409 3,547 321 182 n/a 4,050 37 2,030 n/a 27 n/a 3 2,097 6,147 5,404 678 325 n/a 6,407 122 2,465 n/a 38 n/a 13 2,638 9,045 159,243 5,872 5,637 5,385 176,137 95,994 148,495 87,864 4,001 3,632 248 340,234 516,371 1,487 127 47 n/a 1,661 65 1,256 n/a 8 n/a 3 1,332 2,993 2,916 355 111 n/a 3,382 137 1,567 n/a 15 n/a 4 1,723 5,105 1 Options sold have no credit exposure, as they represent obligations rather than assets 2 Replacement costs have not been included as there is minimal credit risk associated with exchange traded futures where the clearing house is the counterparty Australia and New Zealand Banking Group Limited – 1997 Annual Report 83 Notes to the Financial Statements 37: Derivative Financial Instruments (continued) The maturity structure of derivative activity is a primary component of potential credit exposure. The table below shows the remaining maturity profile by class of derivatives based on notional principal amounts. Consolidated At 30 September 1997 Foreign exchange contracts Spot and forward contracts Swap agreements Options purchased Options sold Interest rate contracts Forward rate agreements Swap agreements Futures contracts Options purchased Options sold Other contracts Total At 30 September 1996 Foreign exchange contracts Spot and forward contracts Swap agreements Options purchased Options sold Interest rate contracts Forward rate agreements Swap agreements Futures contracts Options purchased Options sold Other contracts Total Less than 1 year $M 200,173 4,575 11,195 10,492 226,435 49,731 105,900 97,043 9,613 14,413 918 277,618 504,053 157,429 1,645 5,454 5,239 169,767 81,573 86,096 64,403 2,576 2,269 228 237,145 406,912 Remaining life 1 to 5 years Greater than 5 years $M $M 2,680 4,757 342 541 8,320 16,988 75,440 27,479 2,034 2,202 26 124,169 132,489 1,800 3,921 183 146 6,050 14,421 58,518 22,926 1,293 1,230 19 98,407 104,457 32 1,478 - - 1,510 - 11,752 1,420 1,901 4,284 - 19,357 20,867 14 306 - - 320 - 3,881 535 132 133 1 4,682 5,002 Total $M 202,885 10,810 11,537 11,033 236,265 66,719 193,092 125,942 13,548 20,899 944 421,144 657,409 159,243 5,872 5,637 5,385 176,137 95,994 148,495 87,864 4,001 3,632 248 340,234 516,371 84 Notes to the Financial Statements 37: Derivative Financial Instruments (continued) Concentrations of credit risk exist for groups of counterparties when they have similar economic characteristics. Major concentrations of credit risk arise by location and type of customer. The following table shows the concentrations of credit risk, by class of counterparty and by geographic location, measured by credit equivalent amount. In excess of 78% of the Group’s exposures are with counterparties which are either Australian banks or banks based in other OECD countries. Consolidated Class of Counterparty Commonwealth and OECD governments Australian and OECD banks Corporations, non-OECD banks and others Geographic location Australia New Zealand International markets Credit equivalent 1997 $M 55 7,062 1,928 9,045 1996 $M 60 4,200 845 5,105 Credit equivalent 1997 $M 4,007 601 4,437 9,045 1996 $M 1,959 486 2,660 5,105 Market risk The market risk of derivatives arises from the potential for changes in value due to movements in interest and foreign exchange rates. The Group calculates value at risk based on historical models of movements in interest rates and exchange rates, and using a 97.5% confidence level that the adverse movements will not exceed the value at risk. If value at risk is estimated to be $1 million, then based on historical analysis over 500 working days there is approximately one chance in 40 of seeing an adverse movement in excess of $1 million within the current trading day, on the basis of the opening position. Reflecting the nature of its trading activities, the Group monitors its value at risk by reference to close-to-close (overnight) risk levels. Below are the Group’s aggregate value at risk figures covering both physical and derivatives trading positions for its principal treasury trading centres. The increase in value at risk is due to the inclusion of the Group's Capital Markets activities within the value at risk regime. Previously, the risks associated with these activities were managed as credit risks within the Group's credit systems and controls. As at Maximum Average 1997 1997 30 Sep 97 Consolidated Value at risk at 97.5% confidence Foreign exchange Interest rate $M 4 19 $M $M 4 23 3 18 As at 30 Sep 96 Maximum Average 1996 1996 $M 2 10 $M $M 5 13 2 6 Australia and New Zealand Banking Group Limited – 1997 Annual Report 85 Notes to the Financial Statements 37: Derivative Financial Instruments (continued) The next table shows the fair values of the Group’s derivatives by product type, disaggregated into gross unrealised gains and gross unrealised losses. The fair value of a derivative represents the aggregate net present value of the cash inflows and outflows required to extinguish the rights and obligations arising from the derivative in an orderly market as at the reporting date. Fair value does not indicate future gains or losses, but rather the unrealised gains and losses from marking to market all derivatives at a particular point in time. Consolidated Foreign exchange contracts Spot and forward contracts Gross unrealised gains Gross unrealised losses Swap agreements Gross unrealised gains Gross unrealised losses Options purchased Options sold Interest rate contracts Forward rate agreements Gross unrealised gains Gross unrealised losses Swap agreements Gross unrealised gains Gross unrealised losses Futures contracts Gross unrealised gains Gross unrealised losses Options purchased Options sold Other contracts Gross unrealised gains Gross unrealised losses Total Fair value as at 30 Sep 1997 $M Average fair value 1997 $M Fair value as at 30 Sep 1996 $M Average fair value 1996 $M 3,579 (3,503) 321 (274) 182 (138) 167 37 (46) 2,030 (2,741) 8 (9) 37 (30) 3 (11) (722) (555) 2,301 (2,450) 198 (273) 102 (31) (153) 48 (48) 1,558 (2,111) 28 (46) 25 (10) - (1) (557) (710) 1,510 (1,778) 127 (343) 47 (73) (510) 65 (71) 1,256 (1,579) 6 (26) 8 - 3 - (338) (848) 1,515 (1,736) 88 (325) 66 (104) (496) 5 (23) 1,174 (1,385) 12 (30) 7 (7) 2 - (245) (741) The fair values of derivatives vary over time depending on movements in interest and exchange rates and the trading or hedging strategies used. The negative fair value as at 30 September 1997 does not represent the profitability from such transactions. It arises from contracts that have generated net positive cash flows (on which interest is being earned) since their inception but which are expected to generate negative cash flows over their remaining term. 86 Notes to the Financial Statements 37: Derivative Financial Instruments (continued) In addition to customer and trading activities, the Group uses, inter alia, derivatives to manage the risk associated with its balance sheet. The principal objectives of asset and liability management are to hedge the market value of the Group’s capital and to manage and control the sensitivity of the Group’s income while maintaining acceptable levels of interest rate and liquidity risk. The Group also uses a variety of foreign exchange derivatives to hedge against adverse movements in the value of foreign currency denominated assets and liabilities. The table below shows the notional principal amount, gross replacement cost and fair value of derivatives held by the Group, split between those entered into for customer-related and trading purposes, and those entered into for balance sheet hedging purposes. Consolidated Notional principal amount 1997 $M Gross replacement cost 1997 $M Foreign exchange contracts Customer-related and trading purposes 220,761 15,504 Balance sheet hedging purposes 236,265 Interest rate contracts Customer-related and trading purposes 400,942 20,202 Balance sheet hedging purposes Total 421,144 657,409 3,864 186 4,050 1,801 296 2,097 6,147 Notional principal amount 1996 $M Gross replacement cost 1996 $M Fair value 1997 $M 214 (47) 167 165,861 10,276 176,137 Fair value 1996 $M (323) (187) (510) (396) 58 (338) (848) 1,587 74 1,661 1,102 230 1,332 2,993 (790) 68 (722) (555) 317,122 23,112 340,234 516,371 Detailed below are the net deferred realised and unrealised gains and losses arising from hedging contracts used to manage interest rate exposure or used to hedge anticipated transactions. These gains and losses are deferred only to the extent that there is an offsetting unrecognised gain or loss on the exposure being hedged. Deferred gains or losses are generally amortised over the expected term of the hedged exposure. Consolidated Expected recognition in income Within one year One to two years Two to five years Greater than five years Balance sheet hedging contracts at 30 Sep 1997 Balance sheet hedging contracts at 30 Sep 1996 $M 39 (24) 45 22 82 $M 19 (16) 39 (20) 22 Australia and New Zealand Banking Group Limited – 1997 Annual Report 87 Notes to the Financial Statements 38: Contingent Liabilities and Credit Related Commitments Credit related commitments The credit risk of the following facilities may be less than the contract amount, but as it cannot be accurately determined, the credit risk has been taken to be the contract amount. Undrawn facilities Underwriting facilities Securities lending Consolidated 1997 Contract amount $M 1996 Contract amount $M 38,614 679 - 30,014 361 590 The Company 1997 Contract amount $M 1996 Contract amount $M Controlled Entities 1996 Contract amount $M 1997 Contract amount $M 27,555 408 - 21,592 82 590 11,059 271 - 8,422 279 - 8,701 39,293 30,965 27,963 22,264 11,330 Contingent liabilities The Group guarantees the performance of customers by issuing standby letters of credit and guarantees to third parties. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers, therefore these transactions are subjected to the same credit origination, portfolio maintenance and collateral requirements for customers applying for loans. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. The credit risk of these facilities may be less than the contract amount, but as it cannot be accurately determined, the credit risk has been taken to be the contract amount. Consolidated 1997 Contract amount $M 1996 Contract amount $M The Company 1997 Contract amount $M 1996 Contract amount $M Controlled Entities 1996 Contract amount $M 1997 Contract amount $M Guarantees Standby letters of credit Bill endorsements Documentary letters of credit Performance related contingents Other 2,776 917 18 1,927 7,761 1,069 2,149 355 29 1,349 6,614 828 2,250 867 10 1,123 6,368 797 Total contingent liabilities 14,468 11,324 11,415 1,431 319 25 608 5,328 631 8,342 526 50 8 804 1,393 272 3,053 718 36 4 741 1,286 197 2,982 The details and estimated maximum amount of contingent liabilities classified according to the party from whom the contingent liability could arise are set out below. The Company In accordance with the clearing arrangements set out in the Australian Payments Clearing Association Limited (APCA) Regulations for the Australian Paper Clearing System, the Bulk Electronic Clearing System and the High Value Clearing System, the Company has a commitment to provide liquidity support to these clearing streams in the event of a failure to settle by a member institution; for the latter clearing stream, the obligation arises only in limited circumstances. Controlled entities (i) The Group will indemnify each customer of controlled entities engaged in nominee activities against loss suffered by reason of such entities failing to perform any obligation undertaken by them to a customer. (ii) Pursuant to class order 95/1530 dated 10 November 1995, relief was granted during the year to a number of wholly owned controlled entities from the Corporations Law requirements for preparation, audit, and publication of financial statements. The entities to which relief was granted are A.F.T. Investors Services Limited A.N.Z. Holdings Limited A.N.Z. Properties (Australia) Limited ANZ Adelaide Group Limited ANZ Capital Hedging Limited ANZ Finance (Far East) Limited ANZ Funds Pty Ltd ANZ Grindlays Holdings Limited ANZ Investment Holdings Limited A.N.Z. Nominees Limited Australian Fixed Trusts Limited E.S.&A. Holdings Limited E.S.&A. Properties (Australia) Limited NMRB Limited NMRSB Limited It is the condition of the class order that the Company and each of the above controlled entities enter into a Deed of Cross Guarantee. 88 Notes to the Financial Statements 38: Contingent Liabilities and Credit Related Commitments (continued) A Deed of Cross Guarantee under the class order was lodged and approved by the Australian Securities Commission. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up any of the controlled entities under certain provisions of the Corporations Law. The Company will only be liable in the event that after six months any creditor has not been paid in full. The controlled entities have also given similar guarantees in the event that the Company is wound up. At 30 September 1997 the controlled entities which are parties to the Deed had external aggregate assets of $2,393 million (1996: $2,721 million); external aggregate liabilities of $473 million (1996: $747 million); and their operating (loss) profit after tax and abnormal items for the year was $(9) million (1996: $418 million). A Deed of Revocation was executed during the year for the following companies which were party to the Deed of Cross Guarantee. These companies are small proprietary companies which are not required by the Corporations Law to prepare accounts. Ecomel Pty Limited Elgeba Pty Limited NMRB Insurance (Agents) Pty Limited Dinias Pty Limited Weelya Pty Limited A.F.T. Property Management Pty Limited A.F.T. Property Services Pty Limited Analed Pty Limited ANZ Business Licensing Pty Limited ANZ Leasing (ACT) Pty Limited ANZ Leasing (NSW) Pty Limited ANZ Leasing (NT) Pty Limited ANZ Leasing (VIC) Pty Limited ANZ Leasing Pty Limited ANZ Payment Services Pty Limited Eriel Pty Limited FCA Finance Pty Limited (iii) Pursuant to class order 95/1530 dated 10 November 1995, relief was granted during the year to Capel Court Management Limited, a wholly owned controlled entity, from the Corporations Law requirements for preparation, audit and publication of accounts. It is the condition of the class order that ANZ Capel Court Limited and its controlled entity enter into a Deed of Cross Guarantee. A Deed of Cross Guarantee under the class orders was lodged and approved by the Australian Securities Commission. The effect of the Deed is that ANZ Capel Court Limited guarantees to each creditor payment in full of any debt in the event of winding up its controlled entity under certain provisions of the Corporations Law. ANZ Capel Court Limited will only be liable in the event that after six months any creditor has not been paid in full. The controlled entity has also given a similar guarantee in the event that ANZ Capel Court Limited is wound up. At 30 September 1997 ANZ Capel Court Limited and its controlled entity which is party to the Deed had external aggregate assets of $348 million (1996: $358 million); external aggregate liabilities of $151 million (1996: $163 million); and their operating profit after tax and abnormal items for the year was $21 million (1996: $6 million). A Deed of Revocation was executed during the year for Capel Court International Investments Pty Limited which was a party to the Deed of Cross Guarantee. This company is a small proprietary company which is not required by the Corporations Law to prepare accounts. (iv) The Company has guaranteed payment on maturity of the principal and accrued interest of commercial paper notes issued by ANZ (Delaware) Inc. of $1,822 million (1996: $956 million). (v) The Company is party to an underpinning agreement with ANZ Grindlays Bank Limited whereby the Company undertakes to assume risk in relation to credit facilities extended by ANZ Grindlays Bank Limited to certain individual customers which exceed 25% of ANZ Grindlays Bank Limited’s capital base. (vi) The Company is party to an underpinning agreement with ANZ Banking Group (New Zealand) Ltd whereby the Company undertakes to assume risk in relation to credit facilities extended by ANZ Banking Group (New Zealand) Ltd to individual customers which exceed 35% of ANZ Banking Group (New Zealand) Ltd's capital base. (vii)The Company has guaranteed, on a subordinated basis, the issue of $174 million Subordinated Floating Rate Notes issued by ANZ Banking Group (New Zealand) Ltd. Australia and New Zealand Banking Group Limited – 1997 Annual Report 89 Notes to the Financial Statements 38: Contingent Liabilities and Credit Related Commitments (continued) General There are outstanding court proceedings, claims and possible claims against the Group, the aggregate amount of which cannot readily be quantified. Where considered appropriate, legal advice has been obtained and, in the light of such advice, provisions as deemed necessary have been made. India - National Housing Bank In 1992 the branch of ANZ Grindlays Bank Limited in India (the Bank) received a claim, aggregating approximately Indian Rupees 5.06 billion ($194 million) from the National Housing Bank (NHB) in that country. The claim arose out of certain cheques drawn by NHB in favour of the Bank, the proceeds of which were credited into the account of one of the customers of the Bank. On 29 March 1997, pursuant to an Arbitration Agreement entered into on 4 November 1992, the Arbitrators made an award on this dispute in favour of the Bank. NHB has paid to the Bank the principal and interest due under the award. Subsequently, NHB filed documents with the relevant Court to challenge the award. ANZ is confident that the award will stand. India - Foreign Exchange Regulation Act In 1991 certain amounts were transferred from non-convertible Indian Rupee accounts to convertible Rupee accounts maintained with the Bank in India. In making these transactions it would appear that the provisions of the Foreign Exchange Regulation Act 1973 were inadvertently not complied with. The Bank, on its own initiative, brought these transactions to the attention of the Reserve Bank of India. The Indian authorities have served preliminary notices on the Bank and certain of its officers in India which could lead to proceedings and possible penalties. The Group’s lawyers in India have prepared responses to these notices, and the Group considers that the outcome will have no material adverse effect on the financial statements. 39: Superannuation Commitments A number of pension/superannuation schemes have been established by the Group worldwide. The Group is obliged to contribute to the schemes as a consequence of legislation and provisions of trust deeds. Legal enforceability is dependent on the terms of the legislation and trust deeds. The major schemes with assets in excess of $25 million are Country Australia Australia Scheme ANZGROUP (Australia) Staff Pension Scheme1 ANZ Australian Staff Superannuation Scheme2 New Zealand ANZGROUP (New Zealand) Staff Superannuation Scheme1, 2 England ANZ UK Staff Pension Scheme1 Scheme type Defined Benefit Scheme Defined Contribution Scheme Contributory or Section A Defined Benefit Scheme or Defined Contribution Scheme Defined Benefit Scheme Contribution levels Employee Employer nil Balance of cost 2.5% min Balance of cost3 optional 7% of salary 5.5% Balance of cost 2.5% min Balance of cost4 nil Balance of cost Balance of cost: the Group's contribution is assessed by the actuary after taking account of members’ contributions and the value of the schemes’ assets 1 These schemes provide for pension benefits 2 These schemes provide for lump sum benefits 3 As recommended by the actuary, not to exceed 7.25% of members’ superannuation salaries for the financial year ended 30 September 1998 4 7.5% of superannuation salaries 90 Notes to the Financial Statements 39: Superannuation Commitments (continued) The details of major defined benefit schemes with assets in excess of $25 million are as follows Employer’s contribution $M 1997 Scheme ANZGROUP (Australia) Staff Pension Scheme1 ANZ UK Staff Pension Scheme1 Employer’s contribution $M 1996 Scheme ANZGROUP (Australia) Staff Pension Scheme2 ANZ UK Staff Pension Scheme3 4 - 5 - Accrued benefits Net market value of assets held by scheme (Deficiency)excess of net market value of assets over accrued benefits $M 59 558 $M 46 715 $M (13) 157 Accrued benefits Net market value of assets held by scheme (Deficiency)excess of net market value of assets over accrued benefits $M 64 459 $M 44 584 $M (20) 125 Vested benefits $M 59 522 Vested benefits $M 64 429 1 Amounts were measured at 31 December 1996 2 Amounts were measured at 30 September 1996 3 Amounts were measured at 31 December 1995 40: Fiduciary Activities The Group conducts investment management and other fiduciary activities as trustee or manager for investment funds and trusts, including superannuation and approved deposit funds, equity trusts, property trusts and deceased estates. These funds have not been consolidated as the Company does not have direct or indirect control of the funds. Where the Company or its controlled entities incur liabilities in respect of these operations as trustee, a right of indemnity exists against the assets of the applicable funds or trusts. As these assets are sufficient to cover the liabilities and it is therefore not probable that the Company or its controlled entities will be required to settle the liabilities, the liabilities are not included in the financial statements. The aggregate amounts of funds concerned are as follows Funds managed Trusteeships 1997 $M 13,478 4,411 17,889 1996 $M 11,312 2,142 13,454 41: Exchange Rates The exchange rates used in the translation of the results and the assets and liabilities of major overseas branches and controlled entities are Great British pound United States dollar New Zealand dollar 1997 1996 1995 Closing Average Closing Average Closing Average 0.4465 0.7197 1.1272 0.4694 0.7679 1.1191 0.5062 0.7914 1.1314 0.4963 0.7685 1.1340 0.4764 0.7520 1.1498 0.4659 0.7406 1.1407 Australia and New Zealand Banking Group Limited – 1997 Annual Report 91 Notes to the Financial Statements 42: Employee Share Purchase and Share Option Schemes The Company has four share purchase and share option schemes available for employees and directors of the Group: the ANZ Group Employee Share Purchase Scheme; the ANZ Group Senior Officers’ Share Purchase Scheme; the ANZ Group Share Option Scheme; and the Directors’ Share and Option Purchase Scheme. Shareholders of the Company have approved the Rules of each of the schemes. Fully paid ordinary shares issued under these schemes rank equally with other existing fully paid ordinary shares, except for fully paid ordinary shares issued on conversion from partly paid shares which are not entitled to the first dividend paid. Partly paid ordinary shares, paid to 10 cents, issued under the ANZ Group Senior Officers’ Share Purchase Scheme and the Directors’ Share and Option Purchase Scheme are not entitled to dividends payable by the Company, but are entitled to one vote for every ten partly paid shares. They are also entitled to participate in rights and bonus issues. Each option granted under the ANZ Group Share Option Scheme and the Directors’ Share and Option Purchase Scheme entitles a holder to purchase one ordinary share subject to any attached terms and conditions. An offer to employees and non-executive directors cannot be made under any of the schemes if an issue pursuant to that offer will result in the aggregate of shares issued, and those liable to be issued pursuant to exercisable options granted under any of the schemes, and bonus shares issued in respect of shares issued under these schemes, exceeding 7% of the issued capital of the Company. During the financial year, loans at concessional interest rates were available for financing shares purchased under the ANZ Group Employee Share Purchase Scheme. Shares issued under these schemes are free of brokerage and stamp duty costs. The market price of one ordinary share at 30 September 1997 was $11.28. Amounts received from employee share purchase and share option schemes are accounted for as follows the par value of fully paid shares and amounts received on partly paid shares are recognised as issued and paid-up capital; - the difference between par value and issue price is credited to the share premium reserve; and amounts received for options are credited to the general reserve. Amounts received from employee share purchase and share option schemes during the financial year, excluding calls on partly paid shares issued in prior financial years, were recognised as follows Issued and paid-up capital Share premium reserve General reserve The Company 1997 $ 1996 $ 6,175,275 31,382,725 (7,469) 3,200,483 12,679,869 - ANZ Group Employee Share Purchase Scheme All employees, excluding part-time service employees, who have had continuous service for one year with the Company or any of its controlled entities are eligible to participate in this scheme. Each eligible employee’s entitlement depends on the employment level of the employee, and the maximum entitlement is 5,000 ordinary shares. During the financial year, 4,135,275 fully paid ordinary shares were issued at a 20% discount to the market price at 28 February 1997 to 2,777 eligible employees for a total consideration of $26,589,818. 32,780 employees were eligible to participate in this offer. The total market value of the shares at issue date, which was 25 March 1997, was $33,785,198. At 30 September 1997, 43,798,610 ordinary shares had been issued since the commencement of this scheme. ANZ Group Senior Officers’ Share Purchase Scheme Senior officers eligible to participate in this scheme may be offered fully paid or partly paid ordinary shares. During the financial year, no ordinary shares were issued under the scheme. At 30 September 1997, 11,035,400 fully paid ordinary shares and 7,805,000 partly paid ordinary shares had been issued since the commencement of this scheme. The partly paid ordinary shares were paid to 10 cents on application and the balance payable either at the request of the employee or upon cessation of employment, except in the event of death, retirement or illness, in which case, the balance is payable three months after the event. 92 - - Notes to the Financial Statements 42: Employee Share Purchase and Share Option Schemes (continued) ANZ Group Share Option Scheme Executive directors and executive officers may be invited to purchase options at one cent each under this scheme. These options do not entitle the holder to participate in a share issue of any other body corporate apart from the Company. 1,412,850 options were issued during the financial year. 60,148 options granted under the scheme lapsed during the financial year. At 30 September 1997, 6,933,091 options were outstanding under this scheme. Options which may be exercised no later than 30 January 1999 may only be exercised if the basic earnings per share of the Group (before abnormal items) for one of the financial years ending 30 September 1996, 1997 or 1998 is at least 50% over the equivalent figure for the 1993 financial year. Options issued during the financial year were issued pursuant to the Senior Executive Remuneration Scheme which requires that part of an executive's remuneration relative to performance against target must be taken in the form of options. These options cannot be exercised until the expiration of three years after the date of issue or after the expiration of five years after the date of issue. No. of options outstanding at 30 September 1997 Exercise price Exercisable period 300,000 1,110,000 4,120,000 366,753 36,338 100,000 900,000 $5.34 $5.34 $5.34 $8.76 $8.76 $8.76 $8.76 1Not exercisable before 31 Jan 1997, or later than 30 Jan 1999 1Not exercisable before 22 Dec 1997, or later than 30 Jan 1999 1Not exercisable before 23 Mar 1998, or later than 30 Jan 1999 Not exercisable before 31 Jan 2000, or later than 30 Jan 2002 Not exercisable before 14 Feb 2000, or later than 13 Feb 2002 Not exercisable before 24 Mar 2000, or later than 23 Mar 2002 Not exercisable before 2 Jun 2000, or later than 1 Jun 2002 1 subject to performance condition These options will expire immediately on termination of employment, except in the event of retirement, death or where agreed by the directors of the Company, in which case, the directors may allow the options to be exercised. 2,049,611 options were exercised by former employees during the financial year with the consent of the directors where required. In the event of a takeover offer or takeover announcement, the directors of the Company may allow the options to be exercised within thirty days from the date of notification. If there is a bonus issue prior to the expiry or exercise of the options, option holders are entitled to those shares as if the options have been exercised prior to that issue. Those shares will be allotted to the option holder when the options are exercised. Directors’ Share and Option Purchase Scheme This Scheme was approved by shareholders in January 1988. During the financial year, no director was eligible to subscribe for shares under the scheme and no shares were issued and no options were offered. There will be no further issues of shares or options under this Scheme and following the expiration of the remaining options on issue on 1 March 1998 or earlier exercise, the Scheme will be discontinued. Under the Scheme each non-executive director was entitled to subscribe for up to 50,000 partly paid ordinary shares at market price, paid to 10 cents, with the balance payable any time at the request of the director or upon ceasing to be a director, except in the event of retirement, death or illness, in which case the balance is payable 90 days after such date. Each director was, subject to the Board’s approval, eligible to subscribe for an equivalent number of options at one cent each under this scheme. Options granted under this scheme were exercisable within five years after issuance or within 90 days after ceasing to be a director, if earlier. The exercise price of an option is based on the market price of an ordinary share when the option is granted, less one cent, which is payable on issue of the option. During the financial year 290,000 partly paid shares were paid up and 50,000 options were exercised. Australia and New Zealand Banking Group Limited – 1997 Annual Report 93 Notes to the Financial Statements 42: Employee Share Purchase and Share Option Scheme (continued) At 30 September 1997, 950,000 partly paid shares, paid to 10 cents and 1,100,000 options had been issued since the commencement of this scheme. No. of options outstanding at 30 September 1997 50,000 Exercise Price Expiry date $3.44 1 March 1998 43: Related Party Disclosures The directors during the year were C B Goode (Chairman) Dr R S Deane J K Ellis J C Dahlsen C J Harper M A Jackson A T L Maitland (retired 30 June 1997) D P Mercer (retired 30 September 1997) J F Ries Dr B W Scott Sir R R Trotter (retired 9 October 1997) R B Vaughan Australian banks, parent entities of Australian banks and controlled entities of Australian banks have been exempted, subject to certain conditions, by an Australian Securities Commission class order, 97/1016 dated 9 July 1997, from making disclosures of loans made, guaranteed or secured by a bank to related parties (other than specified categories of directors) and financial instrument transactions (other than shares and share options) of a bank where a director of the relevant entity is not a party to the transaction and where the loan or financial instrument transaction is lawfully made and occurs in the course of ordinary banking business either at arm’s length or with the approval of a general meeting of the relevant entity and its ultimate chief entity (if any). The class order does not apply to a loan or financial instrument transaction of which any director of the relevant entity should reasonably be aware that, if not disclosed, would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources. A condition of the class order is that for each financial year to which it applies, the Company must provide evidence to the Commission that the Company has systems of internal controls and procedures which (i) in the case of any material financial instrument transaction, ensure that; and (ii) in any other case, are designed to provide a reasonable degree of assurance that, any financial instrument transaction of a bank which may be required to be disclosed in the Company’s financial statements and which is not entered into regularly, is drawn to the attention of the directors. (a) Transactions with directors and director-related entities Shares and Share Options Aggregate number of shares and share options issued to directors of the Company and their director-related entities by the Company were as follows Fully paid ordinary shares in the Company Partly paid ordinary shares in the Company Options issued under the ANZ Group Share Option Scheme The Company 1996 1997 No. No. 886,050 - 40,944 224,229 50,000 - Certain executive directors have acquired fully paid ordinary shares under the ANZ Group Senior Officers’ Share Purchase Scheme on conditions no more favourable than those offered to other employees. All other fully paid ordinary shares were acquired on terms and conditions no more favourable than those offered to other shareholders. Certain non-executive directors paid up partly paid ordinary shares issued to them in prior years under the Directors’ Share and Option Purchase Scheme, approved by shareholders in January 1988. No partly paid ordinary shares or options have been issued to directors under this scheme during the financial year. The reduction in the number of partly paid shares held by directors of the Company and their director- related entities during the financial year was 290,000 (1996: 100,000). 94 Notes to the Financial Statements 43: Related Party Disclosures (continued) Aggregate number of shares and share options held directly, indirectly or beneficially by directors of the Company and their director-related entities, as at balance date, were as follows Fully paid ordinary shares in the Company Partly paid ordinary shares, paid to 10 cents per share, in the Company Share options over ordinary shares in the Company 1997 No. 1996 No. 1,039,536 - 380,234 872,544 290,000 1,200,000 Directors of the Company and their director-related entities received normal dividends on these shares, with the exception of partly paid ordinary shares, paid to 10 cents per share, which qualify for dividends only when fully paid. Loans made to Directors Loans made to non-executive directors of the Company and controlled entities are made in the course of ordinary business on normal commercial terms and conditions. Loans to executive directors of the Company and controlled entities are made pursuant to the Executive Directors' Loan Scheme authorised by shareholders on 18 January 1982, on the same terms and conditions applicable to other employees within the Group in accordance with established policy. Under the Australian Securities Commission class order referred to above, disclosure is limited to the the Company to its directors; aggregate amount of loans made, guaranteed or secured by (i) (ii) any controlled entity to the directors of the Company; (iii) banking corporation controlled entities to their directors; and (iv) non-banking corporation controlled entities to directors of controlled entities and to parties related to any one of them or the directors of the Company. The directors involved are S Armstrong 1,2 I W A Brandon 1,2,3,4 D J Brunskill 1,3,4 A H Buhindi 3 G J Camm 3 K Chan 1,2 G M Collinson 2 P J Conway 1,4 J C Dahlsen 3 R M Evans 1,2 1 Repayments made during the year 2 Loans made during the year 3 Repayments made during the prior year 4 Loans made during the prior year J L Roach 1,3 J G Todd 1,3,4 R R Trotter 1,4 A E Ward 1,3 D F Wicks 3 C J Harper 1,2,3 P F Horsfall 1,3,4 B J Joliffe 1,3,4 R G Jones 3 W J C Laird 1,2 A T L Maitland1,3 D W Manoa 1,4 D P Mercer1,3,4 I F Peterkin 1,3 J F Ries 1,2,3,4 The aggregate amount of such loans outstanding at 30 September was Consolidated The Company 1996 $’000 1997 $’000 1997 $’000 1996 $’000 Balance outstanding at 30 September Total interest received The aggregate amount of repayments received from directors and their director-related entities during the financial year was Normal terms and conditions Employee terms and conditions The aggregate amount of loans made during the financial year was Normal terms and conditions Employee terms and conditions 1,599 185 2,176 173 743 103 1,198 89 413 657 73 413 1,012 1,689 273 238 102 565 73 139 305 1,460 13 187 Australia and New Zealand Banking Group Limited – 1997 Annual Report 95 Notes to the Financial Statements 43: Related Party Disclosures (continued) Other transactions of Directors and Director-Related Entities (i) Financial instrument transactions Under the Australian Securities Commission class order referred to above, disclosure of financial instrument transactions regularly made by a bank is limited to disclosure of such transactions with a director of the entity concerned. Financial instrument transactions which have occurred on arm’s length terms and conditions, and are deemed trivial or domestic in nature are required to be disclosed by general description. Financial instrument transactions between the directors and the banks during the financial year were in the nature of normal personal banking, investment and deposit transactions. These transactions occurred on an arm’s length basis and on normal commercial terms and conditions no more favourable than those given to other employees or customers. (ii) Transactions other than financial instrument transactions of banks All other transactions with directors and their director-related entities are conducted on arm’s length terms and conditions, and are deemed trivial or domestic in nature. These transactions are in the nature of deposits, debentures, or investment transactions conducted with non-bank controlled entities. (b) Transactions with associated entities During the course of the financial year the Company and the Group conducted transactions with associated entities on normal commercial terms and conditions, other than a loan of nil (1996: $2,390,000) to Valuta Group Pty Ltd at an interest rate of 5%. Transactions with associated entities on normal commercial terms and conditions are detailed below. Aggregate Amounts receivable from associated entities Interest revenue Dividend revenue Interest expense Other revenue Consolidated The Company 1997 $’000 1996 $’000 1997 $’000 1996 $’000 336 171 790 - 13 2,290 630 2,581 105 186 300 77 - - 27 300 24 - - - 96 Notes to the Financial Statements 44: Remuneration of Directors Remuneration includes income from salaries, bonuses, other benefits (including non-cash benefits), retirement benefits and superannuation contributions. The maximum total remuneration for non-executive directors of the Company was set at the Annual General Meeting of 20 January 1995 at $0.85 million. Total fees paid to non-executive directors by the Company for the year was $0.8 million (1996: $0.7 million). The number of directors of the Company with total income in each of the following bands was $60,001 to $70,000 $70,001 to $80,000 $80,001 to $90,000 $160,001 to $170,000 $170,001 to $180,000 Total number of directors The Company 1997 1996 1 5 2 - 1 4 4 - 1 - $580,001 to $590,000 $630,001 to $640,000 $1,000,001 to $1,010,000 $1,940,001 to $1,950,000 $4,210,001 to $4,220,000 The Company 1997 1996 - 1 - 11 12 12 2 - 1 - - 12 1 A T L Maitland - comprises fixed remuneration ($355,274), 1995/96 bonus ($114,481), 1996/97 bonus ($330,178), annual leave and long service leave payout ($353,839), retirement allowance under pre-existing arrangements ($319,797) and payment under contract ($475,000) 2 D P Mercer - comprises fixed remuneration ($770,000), 1995/96 bonus ($187,782), 1996/97 bonus ($659,033), annual leave and long service leave payout ($352,140), additional superannuation contribution and retirement allowance under pre-existing arrangements ($589,925) and payment relating to unexpired period of contract ($1,656,027) Total income paid or payable to directors of the Company and controlled entities from the Company or related entity3 Consolidated The Company 1997 $’000 1996 $’000 1997 $’000 1996 $’000 13,127 7,555 7,587 2,911 3 Including the total income of executive directors, excluding executive directors of wholly owned controlled entities who are executives of the Company Australia and New Zealand Banking Group Limited – 1997 Annual Report 97 Notes to the Financial Statements 45: Remuneration of Executives Remuneration includes salaries, bonuses, other benefits (including non-cash benefits), and superannuation contributions. The remuneration of executives who work wholly or mainly outside Australia are excluded from this disclosure. The number of executives with total remuneration exceeding $100,000 in each of the following bands was Consolidated The Company 1997 1996 1997 1996 Consolidated The Company 1997 1996 1997 1996 $100,001 to $110,000 $110,001 to $120,000 $120,001 to $130,000 $130,001 to $140,000 $140,001 to $150,000 $150,001 to $160,000 $160,001 to $170,000 $170,001 to $180,000 $180,001 to $190,000 $190,001 to $200,000 $200,001 to $210,000 $210,001 to $220,000 $220,001 to $230,000 $230,001 to $240,000 $240,001 to $250,000 $250,001 to $260,000 $260,001 to $270,000 $270,001 to $280,000 $280,001 to $290,000 $290,001 to $300,000 $300,001 to $310,000 $310,001 to $320,000 $320,000 to $330,000 $330,001 to $340,000 $340,001 to $350,000 1 - 2 - 11 1 - 3 1 1 61 51 1 1 1 4 2 2 3 - 51 31 21 - - - 2 - 11 - 21 3 2 4 2 51 1 4 2 1 1 1 3 4 1 - - 21 11 1 - - - - 11 - - 1 - - 1 1 - 1 - 1 1 - 2 - 2 1 11 - - - 1 - - - - - - 1 1 1 - 2 1 1 1 1 1 3 1 - - 21 - 1 $350,001 to $360,000 $360,001 to $370,000 $370,001 to $380,000 $380,001 to $390,000 $390,001 to $400,000 $400,001 to $410,000 $410,001 to $420,000 $420,001 to $430,000 $430,001 to $440,000 $440,001 to $450,000 $460,001 to $470,000 $470,001 to $480,000 $520,001 to $530,000 $530,001 to $540,000 $580,001 to $590,000 $590,001 to $600,000 $630,001 to $640,000 $650,001 to $660,000 $720,001 to $730,000 $760,001 to $770,000 $1,000,001 to $1,010,000 $1,280,001 to $1,290,000 $1,550,001 to $1,560,000 $1,940,001 to $1,950,000 $4,210,001 to $4,220,000 1 - 31 1 11 1 1 - 2 1 21 2 - 31 1 1 31 - - - - 1 1 12 13 1 21 - 31 1 1 - 1 2 1 - - 2 - 2 - - 11 1 1 1 - - - - 1 - 2 1 11 1 1 - 2 1 - 2 - 2 1 1 31 - - - - 1 1 1 1 1 1 - 31 1 1 - 1 2 1 - - 2 - 2 - - 11 1 - 1 - - - - Total number of executives 72 63 36 36 Total remuneration received or due and receivable directly or indirectly by executives of the Company and controlled entities ($’000) 30,651 19,778 21,265 13,621 1 The executives whose remuneration is recorded in these bands include fixed term employees with contracts which recognise their particular expertise and that they have been recruited by the Group for specialised activities. These bands also include employees in the sharebroking industry whose income includes bonuses in accordance with the practice of that industry 2 A T L Maitland - comprises fixed remuneration ($355,274), 1995/96 bonus ($114,481), 1996/97 bonus ($330,178), annual leave and long service leave payout ($353,839), retirement allowance under pre-existing arrangements ($319,797) and payment under contract ($475,000) 3 D P Mercer - comprises fixed remuneration ($770,000), 1995/96 bonus ($187,782), 1996/97 bonus ($659,033), annual leave and long service leave payout ($352,140), additional superannuation contribution and retirement allowance under pre-existing arrangements ($589,925) and payment relating to unexpired period of contract ($1,656,027) 98 Notes to the Financial Statements 46: US GAAP Reconciliation The consolidated financial statements of the Group are prepared in accordance with Generally Accepted Accounting Principles applicable in Australia (“Australian GAAP”) which differ in some respects from Generally Accepted Accounting Principles in the United States (“US GAAP”). The following are reconciliations of the financial statements, applying US GAAP instead of Australian GAAP. Operating profit after income tax using Australian GAAP1 Items having the effect of increasing (decreasing) reported income: Depreciation charged on the difference between revaluation amount and historical cost of buildings Difference in gain or loss on disposal of properties revalued under historical cost Amortisation of goodwill Write-off of goodwill Amortisation of sale-leaseback gain over lease term Pension expense adjustment Net income according to US GAAP Shareholders’ equity according to Australian GAAP2 Elimination of gross asset revaluation reserves Adjustment to provision for depreciation on buildings revalued Restoration of previously deducted goodwill Accumulated amortisation and write-off of goodwill Provision for final dividend Pension expense adjustment Restoration of deferred gain on sale-leaseback transactions less amortisation Shareholders’ equity according to US GAAP Total assets according to Australian GAAP Elimination of gross asset revaluation reserves Adjustment to provision for depreciation on buildings revalued Restoration of previously deducted goodwill Accumulated amortisation and write-off of goodwill Prepaid pension adjustment Reclassification of deferred tax assets against deferred tax liabilities Total assets according to US GAAP 1 After abnormal items 2 Excluding outside equity interests Note 1997 $M 1996 $M 1995 $M 1,024 1,116 1,052 (i) (i) (ii) (ii) (iii) (vi) (i) (i) (ii) (ii) (iv) (vi) (iii) (i) (i) (ii) (ii) (vi) (v) 3 17 (36) - - 10 1 4 (36) (7) 4 5 2 2 (36) (5) 5 2 1,018 1,087 1,022 6,943 (349) 36 807 (472) 392 44 6,290 (366) 33 807 (436) 355 34 5,700 (370) 32 807 (393) 260 30 - - (4) 7,401 6,717 6,062 138,241 (349) 36 807 (472) 33 127,604 (366) 33 807 (436) 26 112,587 (370) 32 807 (393) 26 (392) (388) (350) 137,904 127,280 112,339 Australia and New Zealand Banking Group Limited – 1997 Annual Report 99 Notes to the Financial Statements 46: US GAAP Reconciliation (continued) Premises and equipment (i) Properties have been revalued by the Group at various times, increasing the book value of these assets (refer note 1(xiii)). Under Australian GAAP, any increments on revaluation are credited directly to the Asset Revaluation Reserve (“ARR”), and decrements are debited to the ARR to the extent of any previous revaluation increments. Decrements in excess of any previous revaluation increments are charged to the Profit and Loss Account. The ARR forms part of Shareholders’ equity. Under US GAAP, revaluation of properties is not permitted except for decrements which are regarded as permanent. Accordingly, under Australian GAAP, depreciation charges are generally higher and profits on disposal are lower than those required under US GAAP. The depreciation charges, together with the profits and losses on revalued assets sold have been adjusted to historical cost in the US GAAP reconciliation. (ii) Goodwill The Group changed its accounting policy in respect of goodwill in the financial year ended 30 September 1993. Previously, goodwill on acquisition was charged in full to the Group’s Profit and Loss Account in the year of acquisition. Under US GAAP, goodwill is capitalised and amortised over the period of time during which the benefits are expected to arise, such period not exceeding 40 years generally or 25 years in respect of bank acquisitions. Adjustments have been made in the US GAAP reconciliation statement to writeback goodwill written-off in full and to amortise such goodwill over the period of the expected benefits. Additionally, to the extent that periodic reviews of the carrying amount of goodwill lead to a write-down of goodwill previously capitalised for US purposes, this is adjusted in the US GAAP reconciliation. Sale-leaseback transactions (iii) Under Australian GAAP for operating leases, gains on disposal under sale-leaseback transactions can be recognised in the period of sale. Under US GAAP, the gain is amortised over the remaining lease term. This difference in treatment has been adjusted in the US GAAP reconciliation. (iv) Dividends Under Australian GAAP, dividends are shown in the Profit and Loss Account in the period to which they relate rather than in the period when they are declared as required by US GAAP. This difference in treatment has been adjusted in the US GAAP shareholders’ equity reconciliation. Income taxes (v) Under Australian GAAP, tax benefits relating to carry forward tax losses must be “virtually certain” of being realised before being booked. Realisations of benefits relating to other timing differences must be “beyond reasonable doubt” before they may be booked. These tests are as stringent as those applied under US GAAP and hence no write-down of future tax benefits is required. Australian GAAP allows offsetting of future income tax benefits and liabilities to the extent they will reverse in the same period. US GAAP requires an offset of these two items where reversal will occur within twelve months and in the period exceeding twelve months. This has been adjusted in the US GAAP reconciliation. Pension commitments (vi) Under Australian GAAP, contributions in respect of defined benefit schemes are made at levels necessary to ensure that these schemes are maintained with sufficient assets to meet their actuarially assessed liabilities. Any net deficiency arising from the aggregation of assets and liabilities of the Group’s defined benefit schemes is provided for in the Group’s financial statements (refer note 39 in the Financial Statements). Under US SFAS 87 “Employer’s Accounting for Pensions”, pension expense is a function of an employee’s service period, interest costs, actuarial return on the schemes’ assets, amortisation of unrecognised prior service costs and unrecognised net gains or losses. (vii) Post retirement benefits Post retirement benefits other than pension payments are not material and no adjustment is required in the US GAAP reconciliation. (viii) Trading securities US GAAP requires that in instances where trading securities are not bought and held principally for the purpose of selling them in the near term, they should be classified as available for sale and recorded at market value with unrealised profits and losses in respect of market value adjustments recognised in Shareholders’ equity. No adjustment is required to be made in the US GAAP reconciliation as the effect of reclassifying certain trading securities as available for sale is not material. (ix) Accounting for the impairment of loans SFAS 114 “Accounting by Creditors for Impairment of a Loan”, as amended by SFAS 118 “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures”, requires the value of an impaired loan to be measured as the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. 100 The issue of SFAS 127 “Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125” has deferred the application of certain provisions of SFAS 125 until 1 January 1998. The adoption of the provisions of SFAS 125 by the Group during the year ending 30 September 1997 did not result in a material adjustment to the US GAAP reconciliation. The adoption of certain provisions of SFAS 125 applicable from 1 January 1998 is not expected to have a material impact on the US GAAP reconciliation. (xiii) Statements of comprehensive income and disclosures about segments The Group has not adopted the disclosure provisions of SFAS 130 “Reporting Comprehensive Income” and SFAS 131 “Disclosures about Segments of an Enterprise and Related Information”, which are not effective until financial years commencing on or after 15 December 1997. The adoption of these standards would not have resulted in a material impact on the Group’s net income, total assets or shareholders’ equity. Notes to the Financial Statements 46: US GAAP Reconciliation (continued) There is no requirement under Australian GAAP to discount the expected future cash flows attributable to impaired loans in assessing the level of specific provision for doubtful debts. No adjustment is required in the US GAAP reconciliation as the estimated fair value of impaired loans is not materially different from the carrying value as at 30 September 1997. (x) Accounting for the impairment of long lived assets and for long-lived assets to be disposed of SFAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ”, requires that where an event or a change in circumstance indicates that the carrying value of an asset that is expected to be held and used may not be recoverable, an impairment loss should be recognised. The standard also requires that where there is a committed plan to dispose of an asset, the asset should be reported at the lower of the carrying value or fair value less selling costs. SFAS 121 was adopted by the Group effective for the year ending 30 September 1997. The Group has assessed the carrying values of all non- current assets and determined that they are not in excess of their recoverable amounts. (xi) Accounting for stock-compensation plans Under Australian GAAP, an expense is not recognised for share options issued to employees or for shares issued at a discount. SFAS 123 “Accounting for Stock-Based Compensation”, requires share options and shares issued to employees to be recognised using either the fair value based method or the intrinsic value based method as prescribed by APB No 25. No adjustment is made for the impact of the intrinsic value based method in the US GAAP reconciliation as the impact is not material. (xii) Accounting for transfers and servicing of financial assets and extinguishments of liabilities The Group has adopted certain provisions of SFAS 125 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS 125 prescribes the accounting and reporting requirements for transfers of financial assets and extinguishments of liabilities occurring after 31 December 1996. Under certain circumstances, the statement also requires a transferor of financial assets that are pledged as collateral to reclassify those assets, and the transferee to recognise those assets and their obligation to return them. Australia and New Zealand Banking Group Limited – 1997 Annual Report 101 Notes to the Financial Statements 46: US GAAP Reconciliation (continued) (xiv) Details of Pension Schemes and Pension Expense Reconciliations of the funded status of major defined benefit schemes as at 30 September 1997 are summarised below. Details of the funding of the schemes are set out in note 39. Accumulated benefit obligation - vested Projected benefit obligation Fair value of plan assets (Deficiency)excess of assets over projected benefit obligation Unrecognised net transition loss(gain) Unrecognised net loss(gain) Unrecognised prior service cost Adjustment required to recognise minimum unfunded projected benefit obligation (Pension liability)prepaid pension cost The assumptions used in the actuarial calculations are as follows Australian Scheme accumulated benefits exceed assets $M UK Scheme assets exceed accumulated benefits $M 59 59 47 (12) 7 6 - (13) (12) 544 596 748 152 (46) (103) 30 - 33 Australian Scheme UK Scheme Discount rate used in determining present values - active members - pensioners Annual increase in future compensation levels - salary - pensions Expected long-term rate of return on assets 9% 8% 5% 3% 8% The elements of the net periodic pension cost of the above schemes are as follows Service cost Interest cost Actual return on schemes’ assets Net amortisation and deferral Net periodic pension cost 7.5% 7.5% 6% 6% 8.5% 1997 $M 13 49 (95) 34 1 The Group also sponsors defined contribution schemes. The Group’s contributions to major defined contribution schemes amounted to $75 million for the year. 47: Events Since the End of the Financial Year There have been no significant events since 30 September 1997 to the date of this Report. 102 Directors’ Statement In the opinion of the directors of Australia and New Zealand Banking Group Limited, the accompanying financial statements of the Company and the Economic entity are properly drawn up in accordance with the provisions of the Corporations Law in the manner authorised for a prescribed corporation being a bank and on this basis (i) the financial statements set out on pages 40 to 102 are drawn up so as to give a true and fair view of the results and cash flows for the financial year ended 30 September 1997, and the state of affairs at 30 September 1997, of the Company and the Economic entity; the consolidated accounts have been made out in accordance with Divisions 4A and 4B of Part 3.6 of the Corporations Law; and (ii) (iii) at the date of this statement there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due. The directors have elected to adopt early AASB 1014: Set-off and Extinguishment of Debt, AASB 1016: Accounting for Investments in Associates, AASB 1032: Specific Disclosures by Financial Institutions, and AASB 1033: Presentation and Disclosure of Financial Instruments. Signed in accordance with a resolution of the directors The financial statements have been prepared in accordance with applicable Australian Accounting Standards and Urgent Issues Group Consensus Views. The Company and some of its wholly owned controlled entities listed in note 38 executed a Deed of Cross Guarantee enabling them to take advantage of the accounting and audit relief offered by the class order 95/1530, dated 10 November 1995 issued by the Australian Securities Commission. The nature of the Deed of Cross Guarantee is to guarantee each creditor payment in full of any debt in accordance with the terms of the Deed of Cross Guarantee. At the date of this statement, there are reasonable grounds to believe that the Company and its controlled entities to which the class order applies, are able, as an Economic entity, to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee. Charles Goode Chairman 28 November 1997 John McFarlane Chief Executive Officer Australia and New Zealand Banking Group Limited – 1997 Annual Report 103 Audit Opinion In our opinion, the financial statements of Australia and New Zealand Banking Group Limited, and the financial statements of the Economic entity, are properly drawn up: so as to give a true and fair view of: (a) (i) the state of affairs of the Economic entity at 30 September 1997 and 1996 and the results and cash flows of the Economic entity for the financial years ended on 30 September 1997, 1996 and 1995; (ii) the state of affairs of the Company at 30 September 1997 and 1996 and of the results and cash flows of the Company for the financial years ended 30 September 1997 and 1996; and (iii) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements; (c) (b) in accordance with the provisions of the Corporations Law in the manner authorised for a prescribed corporation being a banking corporation; and in accordance with applicable Australian Accounting Standards and other mandatory professional reporting requirements. Accounting principles generally accepted in Australia vary in certain respects from accounting principles generally accepted in the United States of America. An explanation of the major differences between the two sets of principles is presented in note 46 to the financial statements. The application of the United States principles would have affected the determination of consolidated net profit for each of the three years in the period ended 30 September 1997 and the determination of the consolidated financial position as of 30 September 1997, 1996 and 1995 to the extent summarised in note 46 to the financial statements. Auditors’ Report To the Members of Australia and New Zealand Banking Group Limited Scope We have audited the financial statements of Australia and New Zealand Banking Group Limited for the financial year ended 30 September 1997, consisting of the profit and loss accounts, balance sheets, statements of changes in shareholders’ equity, statements of cash flows, accompanying notes and the directors’ statement set out on pages 40 to 103. The financial statements comprise the accounts of the Company and the consolidated accounts of the Economic entity being the Company and its controlled entities. The Company’s directors are responsible for the financial statements. We have conducted an independent audit of these financial statements in order to express an opinion on them to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards (which are substantially the same as auditing standards generally accepted in the United States of America) to provide reasonable assurance whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial statements are presented fairly in accordance with accounting standards and other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) and statutory requirements in the manner authorised for a prescribed corporation being a banking corporation so as to present a view which is consistent with our understanding of the Company’s and the Economic entity’s financial position, the results of their operations and their cash flows. The names of the controlled entities of which we have not acted as auditors are set out in note 34. We have received sufficient information and explanations concerning these controlled entities to enable us to form an opinion on the consolidated accounts. The audit opinion expressed in this report has been formed on the above basis. KPMG Chartered Accountants Melbourne 28 November 1997 104 P M Burroughs Partner P S Nash Partner Financial Information 1: Capital Adequacy The Reserve Bank of Australia (RBA) adopts a risk-based capital assessment framework for Australian banks based on internationally accepted capital measurement standards. This risk-based approach requires eligible capital to be divided by total risk weighted assets, with the resultant ratio being used as a measure of a bank’s capital adequacy in relation to its credit risk. Capital is divided into tier 1, or ‘core’ capital, and tier 2, or ‘supplementary’ capital. For capital adequacy purposes, eligible tier 2 capital cannot exceed the level of tier 1 capital. Banks are required to deduct from total capital any strategic holdings of other banks' capital instruments and investments in entities engaged in life insurance, funds management and securitisation activities. Under RBA guidelines, banks must maintain a ratio of qualifying capital to risk weighted assets of at least 8 per cent. Risk weightings are applied to balance sheet assets and to credit converted off-balance sheet exposures to determine total risk weighted assets. Categories of risk weights are assigned based upon the nature of the counterparty and the relative liquidity of the assets concerned. Qualifying capital Tier 1 Total shareholders’ equity and outside equity interests Unamortised goodwill Net future income tax benefit Tier 1 capital Tier 2 Perpetual notes - subordinated General provision for doubtful debts Subordinated notes1 Tier 2 capital Investment in ANZ Life Investments in funds management and securitisation activities Total qualifying capital Balance sheet assets Liquid assets Due from other financial institutions Trading securities Investment securities Net loans and advances Customers’ liabilities for acceptances Regulatory deposits Shares in associates Other assets Premises and equipment Off-balance sheet exposures Direct credit substitutes Trade and performance related items Commitments Foreign exchange, interest rate and other market related transactions Total risk weighted assets and off-balance sheet exposures Capital adequacy ratios Tier 1 Tier 2 Deductions 1997 $M 1996 $M 1997 $M 1996 $M 1997 $M 1996 $M 6,993 (21) - 6,972 776 918 1,694 2,336 4,030 (436) (151) 6,336 (17) (46) 6,273 896 709 1,605 2,418 4,023 (354) (122) 10,415 9,820 Assets Risk weighted assets 6,298 11,588 7,266 3,139 84,148 14,040 1,206 7 8,490 2,059 6,901 11,352 7,334 2,570 75,901 14,013 1,163 10 6,340 2,020 138,241 127,604 Credit equivalent 4,779 4,266 4,574 9,045 3,360 3,577 4,085 5,105 Contract/ notional amount 4,779 9,689 39,293 3,360 7,964 30,965 657,409 516,371 1,878 2,387 4,191 769 66,182 13,563 189 7 1,464 2,059 92,689 3,506 3,715 3,911 2,326 1,715 2,403 2,681 630 59,142 12,948 178 10 1,538 2,020 83,265 2,369 3,202 3,431 1,250 13,458 10,252 106,147 93,517 % 6.6 3.8 (0.6) 9.8 % 6.7 4.3 (0.5) 10.5 Total 1 Subordinated note issues are reduced each year by 20% of the original amount during the last five years to maturity Australia and New Zealand Banking Group Limited – 1997 Annual Report 105 Financial Information 2: Interest Spreads and Net Interest Average Margins Net interest income Australia New Zealand International markets Average interest earning assets Australia New Zealand International markets Gross earnings rate1 Australia New Zealand International markets Total Group Interest spreads and net interest average margins may be analysed as follows Australia Gross interest spread Interest forgone on impaired assets2 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin - Australia New Zealand Gross interest spread Interest forgone on impaired assets2 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin - New Zealand International markets Gross interest spread Interest forgone on impaired assets2 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin - International markets Group Gross interest spread Interest forgone on impaired assets2 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin - Group 1 Average interest rate received on interest earning assets 2 Refer note 14 to the financial statements 106 1997 $M 2,296 472 652 3,420 1996 $M 2,271 484 574 3,329 1995 $M 2,102 494 513 3,109 60,288 16,882 35,972 55,079 14,815 29,777 50,989 13,389 26,534 113,142 99,671 90,912 % % % 8.46 9.43 7.63 8.34 9.85 10.17 7.94 9.33 9.65 9.87 7.90 9.17 3.16 (0.09) 3.07 0.74 3.81 2.18 (0.04) 2.14 0.66 2.80 1.53 (0.03) 1.50 0.32 1.82 2.48 (0.06) 2.42 0.60 3.02 3.37 (0.15) 3.22 0.90 4.12 2.43 (0.06) 2.37 0.90 3.27 1.49 (0.04) 1.45 0.48 1.93 2.67 (0.10) 2.57 0.77 3.34 3.46 (0.25) 3.21 0.91 4.12 2.77 (0.01) 2.76 0.93 3.69 1.48 0.02 1.50 0.43 1.93 2.79 (0.14) 2.65 0.77 3.42 Financial Information 3: Cross Border Outstandings Cross border outstandings of the Group to countries which individually represented in excess of 0.75% of the Group’s total assets are shown below. There were no cross border outstandings to any other country exceeding 0.75% of total assets. Cross border foreign outstandings are based on the country of domicile of the borrower or guarantor of the ultimate risk and comprise loans (including accrued interest), placements with banks, acceptances and other monetary assets denominated in currencies other than the borrower’s local currency. At 30 September 1997 New Zealand USA Japan United Kingdom Singapore Hong Kong South Korea India France Indonesia At 30 September 1996 New Zealand USA Japan United Kingdom Singapore Hong Kong France Governments and other official institutions $M Banks and other financial institutions $M Other commercial and industrial $M 10 462 12 94 12 1 16 - 12 2 13 922 84 97 26 1 92 1,462 1,803 1,033 772 1,371 1,288 918 661 577 559 788 683 1,675 1,367 1,180 904 1,019 4,498 937 1,084 894 324 356 600 531 574 542 3,998 881 623 786 336 537 73 % of Economic entity assets 4.3 2.3 1.5 1.3 1.2 1.2 1.1 0.9 0.8 0.8 3.8 2.0 1.9 1.8 1.2 1.1 0.9 Total $M 5,970 3,202 2,129 1,760 1,707 1,645 1,534 1,192 1,163 1,103 4,799 2,486 2,382 2,250 1,542 1,442 1,184 4: Certificates of Deposit and Term Deposit Maturities The following table shows the maturity profile of the Group’s certificates of deposit and term deposits in excess of $100,000 issued at 30 September 1997 Australia Certificates of deposit Term deposits Overseas Certificates of deposit Term deposits Total Less than 3 months $M 883 7,391 8,274 2,919 10,711 13,630 21,904 Between 3 months and 6 months $M Between 6 months and 12 months $M - 892 892 1,436 1,323 2,759 3,651 - 730 730 1,297 1,275 2,572 3,302 After 1 year $M 44 632 676 271 363 634 Total $M 927 9,645 10,572 5,923 13,672 19,595 1,310 30,167 Australia and New Zealand Banking Group Limited – 1997 Annual Report 107 Financial Information 5: Volume and Rate Analysis The following table allocates changes in interest income and interest expense between changes in volume and changes in rate for the past two years. Volume and rate variances have been calculated on the movement in average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities. The variance caused by the change of both volume and rate has been allocated in proportion to the relationship of the absolute dollar amounts of each change to the total. 1997 over 1996 Change due to Rate $M Volume $M Total $M Volume $M Interest earning assets Due from other financial institutions Australia New Zealand International markets Regulatory deposits with Reserve Bank of Australia Investments in public securities Australia New Zealand International markets Loans, advances and bills discounted Australia New Zealand International markets Other assets Australia New Zealand International markets (10) 1 12 - (10) 36 182 427 147 246 69 7 67 1 (7) (11) (8) (69) (17) (44) (709) (78) (72) (17) (4) 1 Change in interest income 1,174 (1,034) (9) (6) 1 (8) (79) 19 138 (282) 69 174 52 3 68 140 16 1 87 2 33 (2) (21) 367 155 133 (19) (4) 47 795 1996 over 1995 Change due to Rate $M - (2) 5 Total $M 16 (1) 92 (19) (17) 15 9 20 101 17 29 11 11 (32) 165 48 7 (1) 468 172 162 (8) 7 15 960 108 Financial Information 5: Volume and Rate Analysis (continued) 1997 over 1996 Change due to Rate $M Volume $M Total $M Volume $M 1996 over 1995 Change due to Rate $M Interest bearing liabilities Time deposits Australia New Zealand International markets Savings deposits Australia New Zealand International markets Other demand deposits Australia New Zealand International markets Due to other financial institutions Australia New Zealand International markets Commercial paper Australia New Zealand International markets Borrowing corporations’ debt Australia New Zealand International markets Loan capital, bonds and notes Australia New Zealand International markets Other liabilities Australia New Zealand International markets Change in interest expense Change in net interest income (3) 80 268 22 11 6 133 19 8 (6) 10 3 41 - 35 20 6 - 52 25 2 (29) 26 79 808 366 (240) (44) (38) (64) 2 6 (135) (18) (2) (6) (9) (50) (46) - (2) (31) (2) - (61) (9) 2 2 - (14) (759) (275) (243) 36 230 (42) 13 12 (2) 1 6 (12) 1 (47) (5) - 33 (11) 4 - (9) 16 4 (27) 26 65 49 91 67 95 123 4 6 (1) 87 11 8 13 (11) 40 65 - (5) 14 2 - 14 8 1 (6) - 22 557 238 Total $M 89 131 141 25 31 2 112 18 5 12 3 41 76 - (7) 18 12 - 8 2 (1) (2) (2) 26 22 36 18 21 25 3 25 7 (3) (1) 14 1 11 - (2) 4 10 - (6) (6) (2) 4 (2) 4 183 (18) 740 220 Australia and New Zealand Banking Group Limited – 1997 Annual Report 109 Financial Information 6: Concentrations of Credit Risk Concentrations of credit risk exist if a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Off-balance sheet transactions of the Group are substantially with other banks. 1997 1996 1995 Loans and advances1 $M Specific provision $M Loans and advances1 $M Specific provision $M Loans and advances1 $M Specific provision $M Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate - construction Real estate - mortgage3 Retail and wholesale trade Other Overseas Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate - construction Real estate - mortgage3 Retail and wholesale trade Other 2,716 1,488 1,392 3,997 68 3,272 2,446 6,229 1,216 26,095 4,375 3,398 56,692 2,439 346 555 3,189 656 73 5,172 2,852 900 9,412 1,851 2,782 12 5 28 6 - 5 29 90 8 54 14 64 315 4 6 - 4 - - 53 12 8 2 15 34 2,038 950 1,302 2,472 70 3,282 2,998 7,384 857 23,518 4,210 3,008 52,089 1,471 439 393 4,493 377 68 3,722 3,115 753 8,034 1,711 2,254 21 27 18 22 - 8 17 35 12 82 51 53 346 4 6 3 23 3 - 55 15 16 8 28 2 1,721 1,053 1,079 2,106 104 3,138 2,639 7,109 817 22,734 3,615 2,157 48,272 1,309 501 319 2,066 320 51 3,973 3,221 602 7,488 1,554 1,618 25 36 23 32 - 14 62 40 15 126 75 57 505 11 9 7 26 3 - 54 11 16 10 27 23 Total portfolio 30,227 86,919 138 453 26,830 78,919 163 509 23,022 71,294 197 702 1 Loans and advances exclude acceptances 2 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 3 Real estate mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 110 Financial Information 6: Concentrations of Credit Risk (continued) Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate - construction Real estate - mortgage3 Retail and wholesale trade Other Overseas Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate - construction Real estate - mortgage3 Retail and wholesale trade Other Total portfolio 1994 1993 Loans and advances1 $M Specific provision $M Loans and advances1 $M Specific provision $M 1,884 851 827 2,359 345 3,179 1,752 6,379 704 21,674 3,362 1,451 44,767 750 481 237 1,607 595 52 2,598 2,388 373 6,245 1,485 1,486 42 48 88 36 - 21 65 69 14 221 107 96 807 20 5 10 31 17 - 52 17 38 23 27 38 1,802 759 894 1,638 205 3,212 1,948 6,252 774 19,676 3,497 2,042 42,699 901 449 227 1,776 409 63 2,821 2,366 865 4,958 1,524 1,991 18,297 63,064 278 1,085 18,350 61,049 98 91 34 44 - 32 93 78 45 712 132 22 1,381 24 12 32 20 1 2 58 49 61 29 33 423 744 2,125 Australia and New Zealand Banking Group Limited – 1997 Annual Report 111 Financial Information 7: Doubtful Debts - Industry Analysis Balance at start of year Adjustment for exchange rate fluctuations Bad debts written off (refer (i) below) Transfer from profit and loss account Provisions acquired(disposed) Tax (liability) realised on rescheduled debt Recognition of provisions previously netted against tax benefits Other 1997 $M 1,218 16 (199) 336 - - - - 1996 $M 1,380 (16) (346) 200 - - - - 1995 $M 1,652 (2) (497) 226 - - - 1 1994 $M 2,690 (84) (1,427) 469 3 - 1993 $M 3,338 56 (1,440) 718 (22) (2) - 1 35 7 Total provisions for doubtful debts 1,371 1,218 1,380 1,652 2,690 (i) Total write-offs by industry Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal1 Real estate - construction Real estate - mortgage2 Retail and wholesale trade Other Overseas Rescheduled country debt Other Total write-offs (ii) Total recoveries by industry Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal1 Real estate - construction Real estate - mortgage2 Retail and wholesale trade Other Overseas Rescheduled country debt Other Total recoveries Net write-offs Ratio of net write-offs to average loans and acceptances (5) (3) (11) (8) - (5) (10) (55) (6) (26) (11) (4) n/a (55) (199) 4 1 1 2 - 2 4 9 - 7 2 7 (11) (17) (19) (8) - (12) (49) (46) (6) (77) (33) (23) n/a (45) (346) 3 1 2 3 - 3 2 9 1 9 2 2 n/a 10 49 n/a 9 46 (19) (11) (29) (11) (75) (52) (95) (34) - (#) (26) (79) (42) (36) (382) (127) (21) (45) (41) (47) (6) (102) (50) (55) n/a (81) (321) (137) (55) (75) (22) (49) - (53) (46) (91) (22) (576) (93) (18) (82) (258) (497) (1,427) (1,440) 1 1 3 2 - 3 1 10 - 3 4 3 n/a 21 52 4 1 3 4 - 4 1 11 1 5 6 3 12 33 88 1 2 1 5 - 5 # 8 # 7 2 1 30 9 71 (150) (300) (445) (1,339) (1,369) 0.1% 0.3% 0.6% 1.9% 1.9% # Amounts less than $500,000 n/a Not applicable 1 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 2 Real estate mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 112 Financial Information 8: Short Term Borrowings The Group’s short term borrowings comprise commercial paper, as well as unsecured notes issued by subsidiary borrowing corporations with an original term to maturity of less than one year. The Group has commercial paper programmes in the United States, where it issues paper through ANZ (Delaware) Inc., and in Europe and Asia, where the Group issues paper direct. Balance at end of year Commercial paper - ANZ (Delaware) Inc. Commercial paper - other Unsecured notes Weighted average interest rate at end of year Commercial paper - ANZ (Delaware) Inc. Commercial paper - other Unsecured notes Maximum amount outstanding at any month end during year Commercial paper - ANZ (Delaware) Inc. Commercial paper - other Unsecured notes Average amount outstanding during year Commercial paper - ANZ (Delaware) Inc. Commercial paper - other Unsecured notes Weighted average interest rate during year Commercial paper - ANZ (Delaware) Inc. Commercial paper - other Unsecured notes 1997 $M 1,808 3,023 552 5.55% 5.39% 6.35% 2,094 3,395 564 1,731 3,081 427 5.41% 5.87% 6.64% 1996 $M 946 2,341 490 5.58% 7.22% 6.93% 1,841 3,021 506 1,087 2,469 478 5.58% 7.53% 6.48% 1995 $M 1,164 2,046 382 5.76% 5.71% 7.40% 1,860 2,396 419 1,173 1,601 379 5.80% 6.90% 7.40% Australia and New Zealand Banking Group Limited – 1997 Annual Report 113 Shareholder Information 1: Major Shareholders Ordinary shares At 31 October 1997 the twenty largest holders of ordinary shares held 817,497,668 ordinary shares, equal to 54.1 per cent of the total issued ordinary capital. Westpac Custodian Nominees Limited Chase Manhattan Nominees Ltd National Nominees Limited ANZ Nominees Ltd Australian Mutual Provident Society Citicorp Nominees Pty Limited Queensland Investment Corporation MLC Limited Pendal Nominees Pty Limited SAS Trustee Corporation Permanent Trustee Australia Limited Perpetual Trustees Victoria Limited Perpetual Trustees Company Limited Mercantile Mutual Life Insurance Company Limited HKBA Nominees Pty Limited Commonwealth Custodial Services Limited Permanent Trustee Company Limited Perpetual Trustees Nominees Limited The National Mutual Life Association of Australasia Limited Commonwealth Superannuation Board of Trustees Number of shares 168,798,501 148,354,109 89,662,708 58,440,942 38,821,349 31,654,043 30,377,728 29,749,298 29,057,731 27,304,960 25,864,240 17,934,743 17,350,265 16,764,357 15,909,044 15,685,776 15,584,947 15,450,963 13,166,460 11,565,504 817,497,668 % 11.2 9.8 5.9 3.9 2.6 2.1 2.0 2.0 1.9 1.8 1.7 1.2 1.2 1.1 1.0 1.0 1.0 1.0 0.9 0.8 54.1 2: Substantial Ordinary Shareholders At 31 October 1997, there were no entries in the Register of Substantial Shareholdings. During the year to 31 October 1997 notices were received from The Capital Group Companies Inc regarding shares held by that company. On 29 October 1997 they advised that they held 75,317,646 shares (being 4.99% of the ordinary voting shares). This holding is held by several of the companies listed in Item 1 above. 3: Average Size of Shareholdings At 31 October 1997 the average size of holding of ordinary shareholdings was 11,432 (1996: 12,119) shares. 4: Distribution of Shareholdings Ordinary shares - fully paid At 31 October 1997 Range 1 to 1,000 shares 1,001 to 5,000 shares 5,001 to 10,000 shares 10,001 to 100,000 shares Over 100,001 shares 114 Number of holders % of holders 52,207 59,618 11,903 7,698 552 39.6 45.2 9.0 5.8 0.4 Number of shares ’000 25,397 140,247 84,200 167,045 1,091,933 % of shares 1.7 9.3 5.6 11.0 72.4 131,978 100.0 1,508,822 100.0 Shareholder Information 5: Voting Rights of Shareholders Ordinary shares - fully paid The Articles provide for (i) on show of hands 1 vote; (ii) on a poll 1 vote for each ordinary share held; and (iii) 1 vote for every 10, 10 cent paid shares issued pursuant to the Company’s Senior Officers’ Share Purchase Scheme and the Directors’ Share and Option Purchase Scheme. 6: Holders of Non-Marketable Parcels Ordinary shares At 31 October 1997, shareholdings of less than a marketable parcel (1 to 99 shares) were 6,519 (1996: 5,370), which is 4.9% of the total holdings of ordinary shares. 7: Employee Shareholder Information At the January 1994 Annual General Meeting, shareholders approved a limit of 7% of the issued share capital of the Company on the number of shares which may be issued under the Employee and Senior Officers’ Share Purchase Schemes and the unissued shares to which options may be granted under any incentive schemes for employees and directors of the Group. At 31 October 1997, participants in the Employee and Senior Officers’ Share Purchase Schemes held 1.6% (1996: 1.8%) of the issued share capital. At 31 October 1997, 6,983,091 options to purchase ordinary shares which have been granted under the Directors’ Share and Option Purchase and the ANZ Group Share Option Schemes, had not been exercised. 8: Directors’ Shareholding Interests C B Goode J C Dahlsen Dr R S Deane J K Ellis C J Harper M A Jackson J McFarlane J F Ries Dr B W Scott R B Vaughan A B C D 267,075 83,400 75,000 52,471 55,500 71,123 2,000 102,000 84,053 88,512 881,134 - - - - - - - 50,000 - - 50,000 - - - - - - - 310,710 - - 310,710 - 12,000 - - - - - - - - 12,000 A Beneficially held - fully paid ordinary shares of $1.00 each B Beneficially held - options issued pursuant to the Directors’ Share and Option Purchase Scheme to take up shares in the Company during the period of 5 years after issue at market prices fixed as at the time of issue less one cent, which was paid on issue of the option C Beneficially held - options issued pursuant to the ANZ Group Share Option Scheme to take up shares in the Company no earlier than 3 years or later than 5 years after issue at market prices fixed as at the time of issue less one cent, which was paid on issue of the option, provided certain performance criteria are met D Non-beneficially held - fully paid ordinary shares of $1.00 each Australia and New Zealand Banking Group Limited – 1997 Annual Report 115 Glossary Core Operating Expenses Core operating expenses represents total operating expenses excluding direct income-related expenditure and restructuring expenses. Geographic segmentation UK and Europe includes France, Germany, Guernsey, Jersey, Italy, Switzerland and United Kingdom. Asia Pacific includes Cook Islands, Fiji, Hong Kong, Indonesia, Japan, Korea, Malaysia, Papua New Guinea, Philippines, Samoa, Singapore, Solomon Islands, Sri Lanka, Taiwan, Thailand, The People’s Republic of China, Tonga, Vanuatu and Vietnam. South Asia includes Bangladesh, India and Nepal. Americas includes Argentina, Brazil, Chile, Mexico and United States of America. Middle East includes Bahrain, Greece, Israel, Jordan, Oman, Pakistan, Qatar and United Arab Emirates. Impaired assets Impaired assets are loans or other credit facilities where there is reasonable doubt about the collectability of interest, fees (past and future) or principal outstanding, or where concessional terms have been provided because of the financial difficulties of the customer. Net advances Net advances include gross loans and advances, acceptances and ANZ accepted bills held as part of trading securities less income yet to mature and specific provisions (for both as at and average volumes). Net interest average margin Net interest average margin is net interest income as a percentage of average interest earning assets. Non-assessable interest income is grossed up to the equivalent before tax amount for the purpose of these calculations. Net interest spread Net interest spread is average interest rate received on interest earning assets less the average interest rate paid on interest bearing liabilities. Non-assessable interest income is grossed up to the equivalent before tax amount for the purpose of these calculations. Net non-interest bearing items Net non-interest bearing items, referred to in the analysis of interest spread and net interest average margin, includes shareholders’ equity, provisions for doubtful debts, and deposits not bearing interest and other liabilities not bearing interest, offset by premises and equipment and other non- interest earning assets. Non-accrual loans are included within interest bearing loans, advances and bills discounted. Operating expenses Operating expenses exclude charges for doubtful debts and abnormal items. Total advances Total advances include gross loans and advances, acceptances and ANZ accepted bills held as part of trading securities less income yet to mature (for both as at and average volumes). Unproductive facilities Unproductive facilities comprise standby letters of credit, bill endorsements, documentary letters of credit and guarantees to third parties. 116 Australia and New Zealand Banking Group Limited – 1997 Annual Report 117 Worldwide Representation Australia Group Headquarters Australia and New Zealand Banking Group Limited, 100 Queen Street, Melbourne, Victoria 3000 GPO Box 537E, Melbourne 3001 Telephone: (61-3) 9273 5555 Telex: AA 68210 (International) AA 139920 (Domestic) Esanda Finance Corporation Limited, 85 Spring Street, Melbourne 3000 Telephone: (61-3) 9666 9100 Fax: (61-3) 9666 9626 Town & Country Bank (a division of Australia and New Zealand Banking Group Limited) 297 Murray Street, Perth W.A. 6000 Telephone: (61-8) 9267 3333 Fax: (61-8) 9267 3435 Principal State Offices New South Wales 20 Martin Place, Sydney 2000 GPO Box 495, Sydney 2001 Telephone: (61-2) 9227 1911 Queensland 324 Queen Street, Brisbane 4000 GPO Box 1051, Brisbane 4001 Telephone: (61-7) 3228 3228 South Australia 13 Grenfell Street, Adelaide 5000 GPO Box 1819, Adelaide 5001 Telephone: (61-8) 8218 8122 Tasmania ANZ Centre 2nd Floor, 22 Elizabeth Street, Hobart 7000 GPO Box 504E, Hobart 7001 Telephone: (61-03) 6221 2601 Western Australia 77 St. George’s Terrace, Perth 6000 GPO Box L905, Perth 6001 Telephone: (61-8) 9323 8111 Australian Capital Territory 25 Petrie Plaza, Canberra City 2601 GPO Box 371, Canberra City 2601 Telephone: (61-2) 6276 4100 Northern Territory Smith Street, 43 The Mall, Darwin 0800 GPO Box 1, Darwin 0800 Telephone: (61-8) 89 823510 Subsidiary Companies ANZ Funds Management, (ANZ Managed Investments Limited/ANZ Life Assurance Company Limited/ANZ Executors and Trustee Company Limited) 68 Pitt Street, Sydney 2000 Telephone: (61-2) 9216 2345 Fax: (61-2) 9216 2350 ANZ Securities Limited, 10th Floor, 530 Collins Street, Melbourne 3000 Telephone: (61-3) 9205 1400 Fax: (61-3) 9649 7023 New Zealand Headquarters ANZ Banking Group (New Zealand) Limited, 215-229 Lambton Quay, Wellington PO Box 1492, Wellington Telephone: (64-4) 496 7000 Telex: NZ 3385 Fax: (64-4) 473 6919 Subsidiary Companies ANZ Securities (NZ) Limited, 21st Floor, ASB Building, 135 Albert Street, Auckland PO Box 6243, Wellesley Street, Auckland Telephone: (64-9) 356 3450 Freephone: 0800 800 611 Telex: 63372 Fax: (64-9) 309 9410 UDC Group Holdings Limited, 113-119 The Terrace, Wellington PO Box 1616, Wellington Telephone: (64-4) 471 4500 Fax: (64-4) 471 4592 International Headquarters Australia and New Zealand Banking Group Limited, 100 Queen Street Melbourne Victoria 3000 Australia Tel: (61-3) 9273 5555 Fax: (61-3) 9273 4909 ARGENTINA Australia and New Zealand Banking Group Limited Bouchard 547, 10th Floor 1106 Buenos Aires Argentina Tel: (54-1) 315 2330 Fax: (54-1) 313 3967 BAHRAIN Grindlays Bahrain Bank B.S.C. (c) P O Box 793 Manama Centre, Entrance No 3 Government Road Manama Bahrain Tel: (973) 225 999 Fax: (973) 224 482 ANZ Grindlays Bank Limited Offshore Banking Unit P O Box 5793 1st Floor, Manama Centre Bahrain Tel: (973) 224 210 Fax: (973) 224 478 BANGLADESH ANZ Grindlays Bank Limited P O Box 502 2 Dilkusha Commercial Area Dhaka 1000 Bangladesh Tel: (880-2) 955 0181 Fax: (880-2) 956 2329/956 2332 BRAZIL Australia and New Zealand Banking Group Limited Av. Nilo Pecanha, 50 Grupo 810 20044 Rio de Janeiro - RJ Brazil Tel: (55-21) 240 2294 Fax: (55-21) 220 0840 CHILE Australia and New Zealand Banking Group Limited Edificio Atlantis Av. El Bosque Norte 0440, Of. 604 Las Condes Santiago Chile Tel: (56-2) 203 5217 Fax: (56-2) 203 5226 CHINA Australia and New Zealand Banking Group Limited 10th Floor, Novel Plaza 116-128 Nanjing Road West Shanghai 200003 Peoples Republic of China Tel: (86-21) 6350 9599 Fax: (86-21) 6350 9590 COOK ISLANDS Australia and New Zealand Banking Group Limited 1st Floor, Development Bank Building P O Box 907 Avarua, Rarotonga Cook Islands Tel: (682) 21 750 Fax: (682) 21 760 FIJI Australia and New Zealand Banking Group Limited ANZ House, 25 Victoria Parade P O Box 179 Suva Fiji Tel: (679) 302 144 Fax: (679) 300 267 FRANCE Australia and New Zealand Banking Group Limited 6 rue de Berri 75008 Paris France Tel: (33-1) 40 75 05 37 Fax: (33-1) 40 75 05 46 GERMANY Australia and New Zealand Banking Group Limited Mainzer Landstrasse 46 60325 Frankfurt am Main Germany Tel: (49-69) 710 0080 Fax: (49-69) 710 00821 GREECE ANZ Grindlays Bank Limited 7 Merlin Street P O Box 30391 Athens 10671 Greece Tel: (30-1) 362 4601/5 Fax: (30-1) 360 3811 GUERNSEY ANZ Bank (Guernsey) Ltd P O Box 153 Frances House, Sir William Place St Peter Port Guernsey Channel Islands Tel: (44-1481) 726 771 Fax: (44-1482) 727 851 HONG KONG Australia and New Zealand Banking Group Limited 27th Floor, One Exchange Square 8 Connaught Place Central Hong Kong Tel: (852) 2843 7111 Fax: (852) 2525 2475/2868 0089 INDIA ANZ Grindlays Bank Limited 90 Mahatma Gandhi Road P O Box 725 Mumbai 400 001 India Tel: (91-22) 267 0162/267 1495 Fax: (91-22) 261 9903 INDONESIA PT ANZ Panin Bank 17th Floor, BNI Building Jl Jend, Sudirman Kav. 1 Jakarta Pusat 10220 Indonesia Tel: (62-21) 251 0530 Fax: (62-21) 251 0536 Australia and New Zealand Banking Group Limited Representative Office 17th Floor, BNI Building Jl Jend, Sudirman Kav. 1 Jakarta Pusat 10220 Indonesia Tel: (62-21) 570 1204 Fax: (62-21) 570 5138 IRAN Australia and New Zealand Banking Group Limited 3rd Floor, No 14, 4th Alley Shahid Ahmad Ghasir (Ex Bucharest Avenue) Tehran 15146 Iran Tel: (98-21) 873 3554 Fax: (98-21) 873 3559 118 SWITZERLAND ANZ Grindlays Bank Limited Case Postale 1560 7 Quai du Mont Blanc CH-1211 Geneva Switzerland Tel: (41-22) 906 0111 Fax: (41-22) 906 0122 TAIWAN Australia and New Zealand Banking Group Limited P O Box 9-595 8F, 44 Chung Shan North Road Section 2 Taipei Taiwan Tel: (886-2) 568 3353 Fax: (886-2) 511 1232 THAILAND Australia and New Zealand Banking Group Limited 9th Floor, Tower A, Diethelm Towers 93/1 Wireless Road Bangkok 10330 Thailand Tel: (66-2) 256 6350 Fax: (66-2) 256 6347 TONGA Australia and New Zealand Banking Group Limited Cnr Salote & Railway Roads P O Box 910 Nuku’alofa Tonga Tel: (676) 24 944 Fax: (676) 23 870 UNITED ARAB EMIRATES ANZ Grindlays Bank Limited P O Box 4166 Al Maktoum Street Near Deira Clock Tower Deira, Dubai United Arab Emirates Tel: (971-4) 508 8111 Fax: (971-4) 508 8222 UNITED KINGDOM Australia and New Zealand Banking Group Limited P O Box 7 Minerva House Montague Close London SE1 9DH United Kingdom Tel: (44-171) 378 2656 Fax: (44-171) 378 2257 Grindlays Private Banking 13 St James’s Square London SW1Y 4LF United Kingdom Tel: (44-171) 451 3500 Fax: (44-171) 451 3652 UNITED STATES OF AMERICA Australia and New Zealand Banking Group Limited 1177 Avenue of the Americas New York, NY 10036 USA Tel: (1-212) 801 9800 Fax: (1-212) 801 9859 VANUATU ANZ Bank (Vanuatu) Ltd ANZ House, Kumul Highway Port Vila Vanuatu Tel: (678) 22 536 Fax: (678) 22 814 VIETNAM Australia and New Zealand Banking Group Limited 14 Le Thai To Street Hanoi Vietnam Tel: (84-4) 825 8190 Fax: (84-4) 825 8188 ANZ Grindlays, Mumbai, India. ISRAEL Australia and New Zealand Banking Group Limited 1 Salahadin Street P O Box 19390 Jerusalem 91133 Israel Tel: (972-2) 626 3444 Fax: (972-2) 626 3311 JAPAN Australia and New Zealand Banking Group Limited 8th Floor, Yanmar Tokyo Building 1-1 Yaesu 2-Chome, Chuo Ku Tokyo 104 Japan Tel: (81-3) 3271 1151 Fax: (81-3) 3281 8417 JERSEY ANZ Grindlays Bank (Jersey) Ltd P O Box 80 West House, Wests Centre Peter Street St Helier Jersey Channel Islands Tel: (44-1534) 874 248 Fax: (44-1534) 877 695 ANZ Grindlays Trust Corporation (Jersey) Ltd West House, Wests Centre Peter Street St Helier Jersey Channel Islands Tel: (44-1534) 607 351 Fax: (44-1534) 37 600 JORDAN ANZ Grindlays Bank Limited P O Box 9997 Shmeissani Amman 11191 Jordan Tel: (962-6) 660 201/7 Fax: (962-6) 679 115 KOREA Australia and New Zealand Banking Group Limited 18th Floor, Kyobo Building 1 Chongro 1, Chongro-ku KPO 1065 Seoul Korea Tel: (82-2) 730 3151 Fax: (82-2) 737 6325 MALAYSIA Australia and New Zealand Banking Group Limited Wisma Genting 4th Floor, Jalan Sultan Ismail 50250 Kuala Lumpur Malaysia Tel: (60-3) 261 6088 Fax: (60-3) 261 3210 MEXICO Australia and New Zealand Banking Group Limited Ejercito Nacional No 926 - 2o Piso 11510 Mexico D.F. Tel: (52-5) 580 1036 Fax: (52-5) 580 1031 NEPAL Nepal Grindlays Bank Ltd Grindlays Bhawan P O Box 3990 Kathmandu Nepal Tel: (977-1) 247 304 Fax: (977-1) 247 314 PAKISTAN ANZ Grindlays Bank Limited I.I. Chundrigar Road P O Box 5556 Karachi Pakistan Tel: (92-21) 241 4131 Fax: (92-21) 241 4914 PAPUA NEW GUINEA Australia and New Zealand Banking Group (PNG) Ltd 3rd Floor, Defens Haus Cnr Champion Parade & Hunter Street Port Moresby Papua New Guinea Tel: (675) 322 3333 Fax: (675) 322 3306 PHILIPPINES Australia and New Zealand Banking Group Limited Tower One, Ayala Triangle, Ayala Avenue Makati City Philippines Tel: (632) 848 5091 Fax: (632) 848 5086 QATAR ANZ Grindlays Bank Limited Rayyan Road P O Box 2001 Doha Qatar Tel: (974) 418 222 Fax: (974) 428 077 SAMOA ANZ Bank (Samoa) Limited P O Box L 1855 Apia Western Samoa Tel: (685) 22 422 Fax: (685) 24 595 SINGAPORE Australia and New Zealand Banking Group Limited 10 Collyer Quay 17-01/07 Ocean Building Singapore 0104 Tel: (65) 535 8355 Fax: (65) 539 6111 SOLOMON ISLANDS Australia and New Zealand Banking Group Limited Mendana Avenue Honiara Solomon Islands Tel: (677) 21 835 Fax: (677) 22 957 SRI LANKA ANZ Grindlays Bank Limited P O Box 112 37 York Street Colombo 1 Sri Lanka Tel: (94-1) 446 150/7 Fax: (94-1) 446 158 Australia and New Zealand Banking Group Limited – 1997 Annual Report 119 Phone Directory Customer Banking Enquiries 13 13 14 8.00am-8.00pm, Monday to Friday ANZ Phone Banking 13 13 14 24 Hours, 7 days a week • Account balances & enquiries • Account balances • Periodical payment information • Statement information • Transaction history • Order statements • Cheque/Deposit book ordering • Funds transfer • Account maintenance • Product information Credit Card Enquiries 13 22 73 8.00am - 6.00pm, Monday to Friday ANZ Gold Card 13 17 24 Qantas/Telstra Gold Card 13 27 24 • Stop payments • Fee information • Cheque/Deposit book ordering • Bill payments Qantas/Telstra Card 13 19 51 Business/Purchasing Card 1800 032 481 Lost or Stolen Cards 1800 033 844 24 Hours, 7 days a week EFTPOS & Fast Track Help Centre 1800 035 315 24 Hours, 7 days a week Merchant Enquiries 1800 039 025 8.00am-6.00pm, Monday to Friday ANZ product and service information is also available on ANZ’s internet site: www.anz.com Home Buyers Line 1800 035 500 8am-11pm, 7 days a week Small Business Hotline 1800 035 500 8am-11pm, 7 days a week • Arrange a callback from an ANZ Business Manager • Arrange an appointment to see an ANZ Business Manager Customer Compliments & Concerns 1800 805 154 International Services 1800 678 273 ANZ Securities ANZ Stockbroking 13 13 70 ANZ Margin Lending 1800 639 330 (Australia wide) 1800 243 554 (NSW) 07 3228 3283 (QLD) ANZ Futures 02 9322 6514 (Australia wide) 03 9205 1450 (VIC) ANZ Direct Home Loans & Investment Loans 13 14 09 Car Loans 13 22 07 Superannuation, Insurance & Investments 13 11 95 Esanda Esanda Finance 13 23 73 Esanda Investments 13 12 15 ANZ Funds Management Unit Trusts 1800 022 893 Life Insurance & Superannuation 1800 021 052 Rollovers/Approved Deposits/ Superannuation Savings 1800 036 190 D.I.Y. Super 1800 655 431 Charitable Trusts Information Line 1800 808 910 Estate Planning & Management (ANZ Trustees) 1800 011 047 V2 Plus General Enquiries 13 28 33 V2 Plus Rate Recorded Message 1800 033 043 120 Shareholder Information Dividends The final dividend of 26 cents per share will be paid on 21 January 1998 bringing the full year dividend to 48 cents per share. The interim dividend paid in July 1997 was fully franked and the final dividend is fully franked at 36% for Australian taxation purposes. Dividends may be paid directly to a bank account in Australia, New Zealand or United Kingdom. Shareholders who want their dividends paid this way should advise the relevant share registry in writing prior to books closing date. Dividend Reinvestment and Bonus Option plans are available to shareholders. The plans are detailed in a booklet called “Shareholder Alternatives”, copies of which are available from the share registries at the addresses shown. Stock Exchange Listings The Group’s ordinary shares are listed on the Australian Stock Exchange, the London Stock Exchange and the New Zealand Stock Exchange. The Capital Securities offered in February 1993 are listed on the New York Stock Exchange. American Depositary Receipts The Bank of New York sponsors an American Depositary Receipt (ADR) program in the United States of Amer ica. The ADRs were listed on the New York Stock Exchange on 6 December 1994. ADR holders should deal directly with the Depositary, Bank of New York, New York, Telephone (212) 815-2729, Fax (212) 571-3050 on all matters relating to their ADRs. Enquiries Shareholders who wish to contact the Company on any matter related to their shareholding are invited to telephone or write to the most convenient share registry. Change of Address It is important that shareholders notify the share registry in writing if there is a change to their address. For added protection shareholders should quote their Shareholder Number. Removal from Annual Report Mailing List Shareholders who do not want the Annual Report or who are receiving more than one copy should advise the share registry in writing. These shareholders will continue to receive all other shareholder information. To Consolidate Shareholdings Shareholders who wish to consolidate their separate holdings should advise the share registry in writing. Annual General Meeting The Annual General Meeting will be held at the Melbourne Concert Hall, 100 St Kilda Road, Melbourne on Wednesday, 21 January 1998. Chairman’s Address A summary of the Chairman’s address to the AGM will be published in the “Shareholder Contact” magazine issued in February 1998. Credit Ratings (December 1996) Short Term Debt Moody’s Investors Service Standard & Poor’s Ratings Group P-1 A-1+ Long Term Debt Moody’s Investors Service Standard & Poor’s Ratings Group Aa3 AA- Registered Office Level 2, 100 Queen Street, Melbourne, Victoria 3000 Australia Phone: (03) 9273-6141 Fax: (03) 9273-6142 Secretary: R T Jones General Manager Investor Relations: D H Ward Share Registry Australia Coopers & Lybrand Level 12, 333 Collins Street, Melbourne, Victoria 3000 Phone: (03) 9205 4999 Toll Free: 1800 331 721 (outside Melbourne metropolitan area) Fax: (03) 9205 4900 New Zealand C/- ANZ Banking Group (New Zealand) Limited 8th Floor, 215-229 Lambton Quay, Wellington Phone: (04) 496 7000 Fax: (04) 496 8872 United Kingdom 7th Floor, Jupiter House Triton Court 14 Finsbury Square London EC2A IBR UK Phone: (0171) 920 0010 Fax: (0171) 920 0120 Australia New Zealand Argentina Bahrain Bangladesh Brazil Chile China Cook Islands Fiji France Germany Greece Guernsey Hong Kong India Indonesia Iran Israel Japan Jersey Jordan Korea Malaysia Mexico Nepal Pakistan Papua New Guinea Philippines Qatar Samoa Singapore Solomon Islands Sri Lanka Switzerland Taiwan Thailand Tonga United Arab Emirates United Kingdom United States of America Vanuatu Vietnam Australia and New Zealand Banking Group Limited ACN 005 357 522 Registered Office: Level 2, 100 Queen Street, Melbourne, Victoria 3000, Australia. Telephone: (03) 9273 6141 Facsimile: (03) 9273 6142 

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