Australia and New Zealand Banking Group
Annual Report 2010

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A N Z 2 0 1 0 A n n u a l R e p o r t YOUR ANZ YOUR WORLD ANNUAL REPORT 2010 We live in your world cover: James Riley, Relationship manager and Jenny fan, Assistant manager, Business Banking, melbourne, Australia BUiLDiNG A BANK OF GLOBAL QUALiTY WiTH A REGiONAL FOCUS Almost three years ago ANZ took a decision to change. We set an aspiration to become a super regional bank – a bank of global quality with clear strategy to focus on growth in Asia Pacifi c, one of the world’s fastest growing regions. We had strong franchise in retail, commercial and institutional banking in our home markets of Australia and New Zealand and an existing but under developed presence in Asia dating back more than 30 years. Our aspiration and the foundation we had to build on played perfectly into the growing economic, trade, educational and cultural linkages between Australia, New Zealand and Asia Pacifi c. With our roadmap for change, ANZ remained well capitalised and profi table through a time of great turmoil in global markets. This has enabled us to take advantage of opportunities to grow and to make tangible progress toward becoming a leading bank in the region. During that time, we have also made signifi cant changes to enable ANZ to deliver against the aspiration we have set. We have built a new leadership team of international bankers with the breadth of experience and the range of capability to grow in our developed home markets and to grow in new and emerging markets. We have created a new business structure focused on our customers and our core geographies supported by stronger governance and risk controls suited to our aspiration. We have established clear propositions for our customers supported by a new unifi ed brand to help drive organic growth. We have completed a number of strategic acquisitions in Asia, Australia and New Zealand providing us with an enhanced network, broader product capabilities and more customer relationships across our three core geographies. Together, our franchise, our clear strategy and the actions we have taken to change have uniquely positioned us to ride the wave of growth in the region and to create value for our customers and for our shareholders. Today, ANZ is the only Australian bank with a clearly articulated strategy to take advantage of Australia and New Zealand’s geographic, business and cultural linkages with Asia, the fastest growing region in the world. Our growth agenda is based on building 4 core capabilities: 1 2 3 4 PUTTING CUSTOMERS ATATA THE CENTRE OF EVERYTHING WE DO BEING PERFORMANCE DRIVEN BEING SALES AND MARKETING FOCUSED HAVAVA ING TECHNOLOGY AS THE BASIS FOR OUR BUSINESS We invite you to read more about our strategy and our business by visiting www.shareholder.anz.com Directors’ Report 1 CONTENTS SEcTiON 1 Financial Highlights Chairman’s Report Chief Executive Officer’s Report Directors’ Report Remuneration Report Corporate Governance Statement SEcTiON 2 Review of Operations Principal Risks and Uncertainties Five Year Summary SEcTiON 3 Financial Report Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report SEcTiON 4 Financial Information Shareholder Information Glossary of Financial Terms Alphabetical Index 5 6 8 10 15 46 65 74 82 84 90 205 206 208 216 220 224 2 ANZ Annual Report 2010 ANZ Annual Report 2010 3 SECTiON 1 SECTiON 1 Financial Highlights Chairman’s Report Chief Executive Offi cer’s Report Directors’ Report Remuneration Report Corporate Governance Statement 5 6 8 10 15 46 Financial Highlights Profi tability Profi t attributable to shareholders of the company ($m) Underlying profi t1 (m) Return on: Average ordinary shareholders’ equity2 Average ordinary shareholders’ equity (underlying profi t basis)1,2 Average assets Average assets (underlying profi t basis)1 Total income Net interest margin Net interest margin (excluding global markets) Underlying profi t per average FTE ($) Effi ciency ratios Operating expenses to operating income Operating expenses to average assets Operating expenses to operating income (underlying)1 Operating expenses to average assets (underlying)1 credit impairment provisioning collective provision charge ($m) individual provision charge ($m) Total provision charge ($m) individual provision charge as a % of average net advances3 Total provision charge as a % of average net advances3 Ordinary share dividends (cents) interim – 100% franked (mar 2009: 100% franked) final – 100% franked (Sep 2009: 100% franked) Total dividend Ordinary share dividend payout ratio4 Underlying ordinary share dividend payout ratio4 Preference share dividend ($m) Dividend paid5 Full year Sep 10 4,501 5,025 13.9% 15.5% 0.86% 0.96% 14.3% 2.47% 2.75% 117,486 46.5% 1.39% 44.2% 1.33% (4) 1,791 1,787 0.50% 0.50% 52 74 126 71.6% 64.1% Full year Sep 09 2,943 3,772 10.3% 13.3% 0.58% 0.75% 9.7% 2.31% 2.47% 100,821 45.7% 1.23% 42.2% 1.20% 235 2,770 3,005 0.78% 0.85% 46 56 102 82.3% 64.1% 11 33 4 ANZ Annual Report 2010 Financial Highlights 5 1 Adjusted for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, non continuing businesses, timing differences on economic hedges and acquisition related costs. Refer page 65. 2 Average ordinary shareholders’ equity excludes non-controlling interests, preference shares and includes iNgA treasury shares. 3 for the purposes of this ratio the individual provision charge excludes impairment expense on available-for-sale assets. 4 Dividend payout ratio is calculated using the 31 march 2009 interim, 30 September 2009 final and the 31 march 2010 interim dividends and the proposed 30 September 2010 final dividend. 5 Represents dividends paid on Euro Trust Securities issued on 13 December 2004. Chairman’s Report A mESSAgE fROm JOhN mORSchEL ANZ delivered a strong outcome for shareholders in 2010 while also performing for our customers and the community. Our Performance ANZ’s statutory profit after tax for the year ended 30 September 2010 was $4.5 billion, up 53% reflecting a strong performance across the bank and lower provisions. The final dividend of 74 cents per share is 32% higher than 2009 and will bring the total dividend for the year to 126 cents per share fully franked, an annual increase of 24%. Taking into account one-off items such as acquisition costs and subsequent fair value adjustments, and hedging timing differences our underlying profit for 2010 was $5.0 billion, up 33%. Revenue growth of 15% was solid while costs increased by 17% reflecting the integration of acquisitions and continued investment in growth. Provisions reduced by 41% to $1.8 billion reflecting the improved economic environment in Australia and New Zealand. ANZ remains strongly capitalised with Tier 1 capital as at 30 September 2010 at 10.1% and core Tier 1 of 8.0%. The group is well placed to meet new capital standards being developed by the Basel committee on Banking Supervision and the Australian Prudential Regulation Authority. Expansion and growth During 2010, we continued to advance our super regional strategy through organic growth and acquisitions. in December 2009, we acquired the Landmark financial services loan and deposit books from AWB bringing with it around $300 million in deposits and around $2.4 billion in lending. it has taken our Regional commercial business in Australia to the number two market share position in agri-business. We also completed the acquisition of the remaining 51% of the ANZ-iNg wealth management and life insurance joint ventures in Australia and New Zealand that we did not already own. it was pleasing to see the business performed strongly during the year. in Asia, we completed the acquisition of businesses from the Royal Bank of Scotland in six countries in Asia. A number of key strategic milestones were also reached including the establishment of a locally incorporated subsidiary in china, obtaining a qualifying full bank licence in Singapore and in principle approval for a foreign bank licence in india. customers and the community During 2010, ANZ continued to deliver good outcomes for our customers and the community. This is significant given the expectations that shareholders and society have of successful banks. in Australia, we were ranked number one for retail customer satisfaction while in institutional we were rated number one for ‘lead domestic bank relationships’ in Australia and in New Zealand we were named Bank of the Year by the institute of finance Professionals. We were also assessed as the leading sustainable bank globally by the Dow Jones Sustainability index for the fourth consecutive year. Together with our financial performance, the good outcomes we have achieved for our customers and the community reflects the significant efforts of our management and staff and i thank them for their contribution. This year we have provided an integrated view of how ANZ is managing financial and non-financial issues. This reflects how we think about our business and our commitment to growing responsibly. By combining the Annual Shareholder Review and our corporate Responsibility Review we have simplified our reporting and provided a more complete and balanced picture of our performance and results. Board changes charles goode retired in march 2010 after 18 years of distinguished service on the ANZ Board including 15 as our chairman. charles successfully oversaw an extraordinary period of change at ANZ and made an outstanding contribution to business and the community, not only in Australia, but in the Asia Pacific region. Outlook in 2011, we expect Asia ex-Japan to grow at around 8% compared to less than 3% in the US and Europe. Australia is expected to continue to perform well and in New Zealand the recovery is gathering momentum for 2011. Nevertheless, there is continuing uncertainty in the global economic environment, particularly in the US and Europe where the recovery remains fragile. At the same time, all banks are facing higher funding costs and there are regulatory uncertainties associated with new capital and liquidity requirements. Our super regional strategy positions us well but with global economic growth likely to continue to be soft over the medium term, the environment remains challenging to navigate. 2010 has marked the 175th anniversary of ANZ’s establishment and we continue to grow and to strengthen the bank. We have a clear direction and our results this year highlight the momentum we have established. i believe we will continue to deliver value and performance for our shareholders, our customers and the community in 2011. JOHN MORSCHEl chAiRmAN 6 ANZ Annual Report 2010 Chairman’s Report 7 Chief Executive Officer’s Report A mESSAgE fROm michAEL SmiTh ANZ is now a more predictable organisation for shareholders and a better place for our customers to do business. Three years after setting out our super regional ambition, our 2010 results have demonstrated that ANZ is now consistently delivering on the promises we made to our shareholders as well as to our customers and the community. While our statutory profit for the full year was $4.5 billion, up 53% our underlying business has performed strongly across the board. We reported an underlying net profit after tax1 of $5 billion which was up 33%. Our performance was assisted by the improved economic environment in Australia and New Zealand, and by Asia’s continued growth. The improved credit environment saw provisions for bad and doubtful debts fall by 41% to $1.8 billion. importantly though, we had good growth in underlying profit before provisions1 which was up 6%. Our balance sheet management remains a strength. We have a strong capital position and increasing diversity in our sources of funding including continued growth in deposits in Australia and in Asia. Regional Performance Our 2010 results show that ANZ has momentum in every area of our business. in Australia underlying profit grew 42%. market share growth was a feature, Retail lending was up 12% driven by a strong performance in mortgages and household customer deposits was up 11%. We have achieved this while continuing to improve our number one ranking on overall customer satisfaction in our Retail business. commercial Banking also made a strong contribution with profit up 34%. in Asia Pacific Europe and America, although 2010 was a year of consolidation following the acquisition of businesses from the Royal Bank of Scotland and the six business integrations we’ve completed in Asia during the year, earnings from our partnership investments and institutional resulted in a 21%2 lift in underlying profit1 to US$620 million. During the year we also achieved a number of milestones in our regional expansion plans including regulatory approval for new or expanded banking licences in china, Singapore, the Philippines and india. Our institutional business is now performing well with underlying profit1 up 23% to $1.8 billion. institutional’s strategy is totally aligned to our super regional ambition and it is providing a compelling and differentiated proposition for our clients. We are investing strongly in the business’s future and the results are showing through with inter-region client flows up 10% in 2010 and flows into Asia from elsewhere in the network up 20%. in New Zealand, the economy began to stabilise during the year, and a 48%2 decline in the provision charge was the main driver of a 40%2 rise in underlying profit1 off a low base in 2009 to NZ$882 million. i’m optimistic about what our business can do in New Zealand in 2011. Distinctive growth Strategy We are also now making significant progress with our strategic ambition to become a leading super regional bank in Asia Pacific. in addition to our strong financial performance, we completed the acquisitions in Australia, New Zealand and Asia which strengthened our activities in banking and wealth management, and we continued to grow our existing business. By remaining strong through the financial crisis, we have been able to continue supporting our customers and to look at further opportunities for growth. Our strategy is clear and differentiated and it now makes even more sense in the post-global financial crisis world where Asia, excluding Japan, is growing at around 8% while economic growth in developed markets such as the United States and Europe is around 2.5%. ANZ is the only Australian bank to give shareholders a material exposure to Asia’s growth combined with significant domestic businesses in Australia and New Zealand it’s pleasing that we are now increasingly recognised for our geographic diversification which focuses on the world’s best performing economies and the linkages that our corporate and personal customers have with the Asia Pacific region. To support this, we’ve continued to build a world-class team of experienced bankers throughout the company to take advantage of growth opportunities and to deliver on our strategy. 1 Adjusted for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, non continuing businesses, timing differences on economic hedges and acquisition related costs. 2 Represents growth in local currency. 8 ANZ Annual Report 2010 growing Sustainably While performance often tends to focus on financial results, over the long-term it is a reflection of how effectively we are serving our customers and contributing to the communities where we operate. Our commitment to growing our business responsibly is fundamental to our aspiration to become a super regional bank. in practice, this means understanding and responding to the issues that matter to our customers and communities; committing to the highest standards of corporate behaviour in order to build trust with governments and regulators seeking responsible businesses to operate in their countries; and prioritising those investors targeting well-managed companies with superior prospects for medium to long-term growth. And, of course, increasingly the best employees want to work for companies that are both financially successful and making a sustainable contribution to society. A commitment to growing responsibly, however, isn’t without its challenges and at times can raise unrealistic expectations about our ability alone to solve significant issues facing society. During the year we responded to concerns raised by stakeholders, including shareholders, regarding some of our financing decisions. These issues bring into focus the complexity of what it means to be a banker in today’s rapidly evolving world. it involves managing the financial risks and opportunities and carefully balancing the economic, social and environmental aspects of our decisions, giving due consideration to the short, medium and long-term impacts. i am proud of our work to support customers facing financial difficulty; assist communities affected by natural disasters; improve financial capability amongst people on low incomes; together with the progress we have made in further developing a culture of respect in our relationships with our customers, employees, suppliers and communities in every region where we operate. Our operating environment Looking ahead, there is continuing uncertainty in the global environment, particularly for the US and European economies. At the same time, higher funding costs are here to stay and there are regulatory uncertainties associated with new capital and liquidity requirements. All in all, this remains a challenging environment to navigate. The result is we will have to continue to think differently about our business. Lower credit growth and higher costs of doing business mean we’ll need to drive productivity and innovation to stay ahead of the game. We need to streamline our structures and do things in new and different ways. At the same time, our 8 million customers want simpler processes, convenience and more innovation from us and this also helps drive medium and long-term value for shareholders. Our performance in 2010 shows that after having weathered the global financial crisis in 2008 and 2009 we are now putting runs on the board and we are well placed to meet these challenges – and indeed to take advantage of them – and to continue delivering on the commitments we have made to all our stakeholders. MICHAEl SMITH chiEf ExEcUTivE OfficER Chief Executive Officer’s Report 9 Directors’ Report The directors present their report together with the Financial Report of the consolidated entity (the Group), being Australia and New Zealand Banking Group limited (the Company) and its controlled entities, for the year ended 30 September 2010 and the Independent Auditor’s Report thereon. The information is provided in conformity with the Corporations Act 2001. Principal Activities The group provides a broad range of banking and financial products and services to retail, small business, corporate and institutional clients. The group conducts its operations primarily in Australia and New Zealand and the Asia Pacific region. it also operates in a number of other countries including the United Kingdom and the United States. At 30 September 2010, the group had 1,394 branches and other points of representation worldwide excluding Automatic Teller machines (ATms). Results consolidated profit after income tax attributable to shareholders of the company was $4,501 million, an increase of 53% over the prior year. Strong growth in profit before credit impairment and income tax of $1,003 million or 14% and a reduction in the credit provision of $1,218 million reflected an improvement in economic conditions in each of the regions. Balance sheet growth was strong with total assets increasing by $54.8 billion (11%) and total liabilities increasing by $53.0 billion (12%). movements within the major components include: Net loans and advances including acceptances increased $15 billion (4%) primarily in mortgages Australia with housing loans increasing by $17.4 billion (12%). growth of $7.7 billion across Asia, primarily in Singapore, hong Kong and Taiwan were offset by reduced lending in institutional. customer deposits in Australia increased $11.3 billion driven by large growth in institutional and Retail deposits, as customers respond to attractive rates offered in line with six rate increases to the official cash rate. Asia Pacific, Europe and America (APEA) increased by $17.2 billion (56%) through successful initiatives to raise customer deposit levels. further details are contained on pages 65 to73 of this Annual Report. State of Affairs in the director’s opinion there have been no significant changes in the state of affairs of the group during the financial year, other than in respect of the following key acquisitions: On 30 November 2009, the group acquired the remaining 51% shareholding in the ANZ-iNg joint ventures in Australia and New Zealand, taking its ownership interest to 100%. On 1 march 2010, the group completed its acquisition of the Landmark financial services business from the AWB group. During 2009, ANZ announced the acquisition of selected RBS businesses in Asia. The acquisitions were completed in the Philippines on 21 November 2009, vietnam on the 5 December 2009, hong Kong on 20 march 2010,Taiwan on 17 April 2010, Singapore on 15 may 2010 and indonesia on 12 June 2010. The financial impacts of these acquisitions are included from these respective dates. further review of matters affecting the group’s state of affairs is also contained in the Review of Operations on page 65 to 73 of this Annual Report. Dividends The directors propose that a fully franked final dividend of 74 cents per fully paid ordinary share will be paid on 17 December 2010. The proposed payment amounts to approximately $1,895 million. During the financial year, the following fully franked dividends were paid on fully paid ordinary shares: Type cents per share Amount before bonus option plan adjustment $m Date of payment final 2009 interim 2010 56 52 1,403 1,318 18 December 2009 1 July 2010 The proposed final dividend of 74 cents together with the interim dividend of 52 cents brings total dividends in relation to the year ended 30 September 2010 to 126 cents fully franked. Review of Operations Review of the group during the financial year and the results of those operations, including an assessment of the financial position and business strategies of the group, is contained in the chairman’s Report, the chief Executive Officer’s Report and the Review of Operations on pages 65 to 73 of this Annual Report. Events Since the End of the financial Year On 27 October 2010 the company announced the investment of an additional RmB 1.65 billion ($250m) in Shanghai Rural commercial Bank (SRcB) as part of a major capital raising by SRcB. future Developments Details of likely developments in the operations of the group and its prospects in future financial years are contained in this Annual Report under the chairman’s Report. in the opinion of the directors, disclosure of any further information would be likely to result in unreasonable prejudice to the group. Environmental Regulation ANZ recognises its obligations to its stakeholders – customers, shareholders, staff and the community – to operate in a way that advances sustainability and mitigates ANZ’s environmental impact. ANZ’s commitment to improving its environmental performance is integral to successfully navigating responsible growth. ANZ acknowledges that it has an impact on the environment: directly through the conduct of its business operations; and indirectly through the products and services that it procures and the loans that it provides to customers and clients. ANZ may, however, become subject to environmental regulation as a result of its lending activities in the ordinary course of business. As such, ANZ has established strategies, policies, governance procedures and processes supported by internal responsibilities for reducing the impact of our operations and business activities on the environment. The operations of the group become subject to environmental regulation when enforcing securities over land. ANZ has developed policies to manage such environmental risks. having made due enquiry, to the best of ANZ’s knowledge, no member of the group has incurred any material environmental liability during the year. ANZ sets public targets regarding its environmental performance and has historically made data available on its direct and indirect environmental impacts on an annual basis through the corporate Responsibility Report (which this year is produced as an integrated report – see the 2010 Shareholder and corporate Responsibility Review) as well as through other avenues such as the carbon Disclosure Project. ANZ is also subject to two key pieces of legislation. ANZ’s operations in Australia are categorised as a ‘high energy user’ under the Energy Efficiency Opportunities Act 2006 (cth) (EEO). ANZ has a mandatory obligation to identify energy efficiency opportunities and report to the Australian federal government progress with the implementation of the opportunities identified. As required under the legislation, ANZ submitted a five year energy efficiency assessment plan in 2006 and will report to the government annually, every December, until the end of the five year reporting cycle in 2011. ANZ complies with its obligations under the EEO. The National greenhouse Energy Reporting Act 2007 (cth) has been designed to create a national framework for energy reporting including creating a baseline for emissions trading. The Act makes registration and reporting mandatory for corporations whose energy production, energy use, or greenhouse gas emissions trigger the specified corporate or facility threshold. ANZ is over the corporate threshold for this legislation and as a result was required under the legislation to submit its first report on 31 October 2009. A subsequent report was submitted on 31 October 2010. ANZ’s operations are not subject to any other particular and significant environmental regulation under any law of the commonwealth of Australia or of any state or territory of Australia. further details on ANZ’s environmental performance, including progress against its targets and details of its emissions profile are available on www.anz.com > About us > corporate Responsibility. Directors’ Qualifications, Experience and Special Responsibilities At the date of this report, the Board comprises seven non-executive Directors who have a diversity of business and community experience and one executive director, the chief Executive Officer, who has extensive banking experience. The names of Directors and details of their skills, qualifications, experience and when they were appointed to the Board are contained on pages 47 to 49 of this Annual Report. Details of the number of Board and Board committee meetings held during the year, Directors’ attendance at those meetings, details of Directors’ special responsibilities, and details of Directors who retired during the 2009/10 financial year are shown on pages 46 to 59 of this Annual Report. Details of directorships of other listed companies held by each current director in the three years prior to the end of the 2010 financial year are listed on pages 47 to 49. 10 ANZ Annual Report 2010 Directors’ Report 11 DiREcTORS’ REPORT (continued) company Secretaries’ Qualifications and Experience currently there are three people appointed as company Secretaries of the company. Details of their roles are contained on page 54. Their qualifications are as follows: Bob Santamaria, Bcom, LLB (hons), group general counsel and company Secretary. mr Santamaria joined ANZ in 2007. he had previously been a Partner at the law firm Allens Arthur Robinson since 1987. he was Executive Partner corporate, responsible for client liaison with some of Allens Arthur Robinson’s largest corporate clients. mr Santamaria brings to ANZ a strong background in leadership of a major law firm, together with significant experience in securities, mergers and acquisitions. he holds a Bachelor of commerce and Bachelor of Laws (honours) from the University of melbourne. he is also an Affiliate of chartered Secretaries Australia. Peter marriott, BEc (hons), fcA chief financial Officer and company Secretary. mr marriott has been involved in the finance industry for more than 25 years. mr marriott joined ANZ in 1993. Prior to his career at ANZ, mr marriott was a Partner in the melbourne office of the then KPmg Peat marwick. he is a fellow of the institute of chartered Accountants in Australia and the Australian institute of Banking and finance and a member of the Australian institute of company Directors. mr marriott is also a director of ASx Limited. John Priestley, BEc, LLB, fciS, company Secretary. mr Priestley, a qualified lawyer, joined ANZ in 2004. Prior to ANZ, he had a long career with mayne group and held positions which included responsibility for the legal, company secretarial, compliance and insurance functions. he is a fellow of chartered Secretaries Australia and also a member of chartered Secretaries Australia’s National Legislation Review committee. Non-audit Services The company’s Relationship with External Auditor Policy (which incorporates requirements of the corporations Act 2001) states that the external auditor may not provide services that are perceived to be in conflict with the role of the auditor. These include consulting advice and sub-contracting of operational activities normally undertaken by management, and engagements where the auditor may ultimately be required to express an opinion on their own work. Specifically the policy: limits the non-audit services that may be provided; requires that audit and permitted non-audit services must be pre-approved by the Audit committee, or pre-approved by the chairman of the Audit committee (or up to a specified amount by the chief financial Officer, the Deputy chief financial Officer) or the head of governance and Policy and notified to the Audit committee; and requires the external auditor to not commence an audit engagement (or permitted non-audit service) for the group, until the group has confirmed that the engagement has been pre-approved. further details about the policy can be found in the corporate governance Statement on page 46. The Audit committee has reviewed a summary of non-audit services provided by the external auditor for 2010, and has confirmed that the provision of non-audit services for 2010 is consistent with the company’s Relationship with External Auditor Policy and compatible with the general standard of independence for auditors imposed by the corporations Act 2001. This has been formally advised to the Board of Directors. The external auditor has confirmed to the Audit committee that they have: implemented policies and processes to ensure they comply with independence rules both in Australia and the United States; and complied with domestic policies and regulations, together with the regulatory requirements of the SEc, and ANZ’s policy regarding the provision of non-audit services by the external auditor. The non-audit services supplied to the group by the group’s external auditor, KPmg, and the amount paid or payable by the group by type of non-audit service during the year ended 30 September 2010 are as follows: Non-audit service market Risk benchmarking review market Risk system capability review Overseas branch registration regulatory assistance Review of foreign exchange process in overseas branch Training courses Accounting Advice Amount paid/payable $’000’s 2010 2009 50 30 2 8 – 82 75 41 – – 35 17 Total 172 168 for the reasons set out above, the directors are satisfied that the provision of non-audit services by the external auditor during the year ended 30 September 2010 is compatible with the general standard of independence for auditors imposed by the corporations Act 2001. Directors and Officers who were Previously Partners of the Auditor Peter marriott, ANZ’s chief financial Officer, was a partner of KPmg at a time when KPmg was the auditor of Australia and New Zealand Banking group Limited. in particular, Peter marriott was a partner in the melbourne office of the then KPmg Peat marwick prior to joining ANZ in 1993. chief Executive Officer/chief financial Officer Declaration The chief Executive Officer and the chief financial Officer have given the declarations to the Board concerning the group’s financial statements required under section 295A (2) of the corporations Act 2001 and Recommendation 7.3 of the ASx corporate governance Principles and Recommendations. Directors’ and Officers’ indemnity The company’s constitution (Rule 11.1) permits the company to indemnify each officer or employee of the company against liabilities (so far as may be permitted under applicable law) incurred in the execution and discharge of the officer’s or employee’s duties. it is the company’s policy that its employees should not incur any liability for acting in the course of their employment legally, within the policies of the company and provided they act in good faith. Under the policy, the company will indemnify employees against any liability they incur in carrying out their role. The indemnity protects employees and former employees who incur a liability when acting as an employee, trustee or officer of the company, another corporation or other body at the request of the company or a related body corporate. The indemnity is subject to applicable law and will not apply in respect of any liability arising from: a claim by the company; a claim by a related body corporate; serious misconduct, gross negligence, or a lack of good faith; illegal, dishonest or fraudulent conduct; or material non-compliance with the company’s policies or discretions. The company has entered into indemnity Deeds with each of its Directors, with certain secretaries and former Directors of the company, and with certain employees and other individuals who act as directors or officers of related body corporates or of another company. To the extent permitted by law, the company indemnifies the individual for all liabilities, including costs, damages and expenses incurred in their capacity as an officer of the company to which they have been appointed. The company has indemnified the trustees and former trustees of certain of the company’s superannuation funds and directors, former directors, officers and former officers of trustees of various company sponsored superannuation schemes in Australia. Under the relevant Deeds of indemnity, the company must indemnify each indemnified person if the assets of the relevant fund are insufficient to cover any loss, damage, liability or cost incurred by the indemnified person in connection with the fund, being loss, damage, liability or costs for which the indemnified person would have been entitled to be indemnified out of the assets of the fund in accordance with the trust deed and the Superannuation industry (Supervision) Act 1993. This indemnity survives the termination of the fund. Some of the indemnified persons are or were directors or executive officers of the company. The company has also indemnified certain employees of the company, being trustees and administrators of a trust, from and against any loss, damage, liability, tax, penalty, expense or claim of any kind or nature arising out of or in connection with the creation, operation or dissolution of the trust or any act or omission performed or omitted by them in good faith and in a manner that they reasonably believed to be within the scope of the authority conferred by the trust. Except for the above, neither the company nor any related body corporate of the company has indemnified or made an agreement to indemnify any person who is or has been an officer or auditor of the company or of a related body corporate. 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 and employees of the company and 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. Rounding of Amounts The company is a company of the kind referred to in Australian Securities and investments commission class order 98/100 (as amended) pursuant to section 341(1) of the corporations Act 2001. As a result, amounts in this Directors’ Report and the accompanying financial statements have been rounded to the nearest million dollars except where otherwise indicated. 12 ANZ Annual Report 2010 Directors’ Report 13 DiREcTORS’ REPORT (continued) REmUNERATiON REPORT Executive Officers’ and Employee Share Options Details of share options issued over shares granted to the chief Executive Officer and disclosed executives, and on issue as at the date of this report are detailed in the Remuneration Report. Details of share options issued over shares granted to employees and on issue as at the date of this report are detailed in note 46 of the 2010 financial Report. Details of shares issued as a result of the exercise of options granted to employees as at the date of this report are detailed in note 46 of the 2010 financial Report. No person entitled to exercise any option has or had, by virtue of an option, a right to participate in any share issue of any other body corporate. The names of all persons who currently hold options are entered in the register kept by the company pursuant to section 170 of the corporations Act 2001. This register may be inspected free of charge. Lead Auditor’s independence Declaration The lead auditor’s independence declaration given under section 307c of the corporations Act 2001 is set out below and forms part of this Directors’ Report for the year ended 30 September 2010. ThE AUDiTORS iNDEPENDENcE DEcLARATiON Lead Auditor’s independence Declaration under Section 307c of the corporations Act 2001 To: the directors of Australia and New Zealand Banking group Limited i declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 September 2010 there have been: (i) no contraventions of the auditor independence requirements as set out in the corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPmg michelle hinchliffe Partner melbourne 4 November 2010 contents Remuneration Report – Summary (Unaudited) Remuneration Structure Non-Executive Directors cEO and Executives 2010 Actual Remuneration Outcomes Non-Executive Directors cEO Executives Remuneration Report – Full (Audited) Board Oversight of Remuneration Non-Executive Directors Non-Executives Directors – Summary Executives Executives – Summary 1. Non-Executive Director Remuneration 1.1. Board Policy on Remuneration 1.2. components of Non-Executive Director Remuneration 1.3. Shareholdings of Non-Executive Directors 1.4. Remuneration paid to Non-Executive Directors 2. Executive Remuneration 2.1. Remuneration guiding Principles 2.2. Performance of ANZ 2.3. Remuneration Structure Overview 2.4. Remuneration components 2.5. cEO Remuneration 2.6. Executive Remuneration 2.6.1. fixed Remuneration 2.6.2. variable Remuneration 2.6.3. Short Term incentives (STi) 2.6.4. Long Term incentives (LTi) 2.7. Equity granted as Remuneration 2.8. Equity valuations 2.9. Equity vested/Exercised/Lapsed during 2009/10 2.10. Shareholdings of Executives 2.11. Legacy LTi Programs 2.12. Remuneration Paid to Executives 3. Contract Terms 3.1. cEO’s contract Terms 3.2. Executives’ contract Terms 16 16 16 16 16 16 16 18 21 21 21 21 22 22 23 23 24 25 26 28 28 28 29 30 30 32 32 32 32 34 36 36 37 38 40 41 44 44 44 14 ANZ Annual Report 2010 Remuneration Report 15 REmUNERATiON REPORT – SUmmARY (Unaudited) Remuneration Report – Summary (Unaudited) This overview has been written to provide you with a clear and simple summary of ANZ’s remuneration structure and the actual value derived from the various remuneration components by executives in 2009/10. Detailed data is provided in the Directors’ Remuneration Report on pages 21 to 45. Remuneration Structure NON-ExEcUTivE DiREcTORS full details of the fees paid to Non-Executive Directors (NEDs) in 2009/10 are provided on page 26 of the Remuneration Report. in summary, the chairman receives a base fee which covers all responsibilities including all Board committees. NEDs receive a base fee for being a director of the Board and additional fees for either chairing or being a member of a committee, working on special committees and/or for serving on a subsidiary board. They do not receive any performance/incentive payments and are not eligible to participate in any of the group’s incentive arrangements. chiEf ExEcUTivE OfficER AND ExEcUTivES ANZ’s remuneration framework is designed to create and enhance value for all ANZ stakeholders and to ensure there is strong alignment between the short and long-term interests of shareholders and executives. A key feature of ANZ’s reward structure is the role it plays in helping drive ANZ’s strategy to build a culture of out-performance with integrity, by ensuring differentiation of rewards and recognition of key contributors. To achieve this, remuneration for the chief Executive Officer (cEO) and Executives is comprised of: Fixed pay: This is the only ‘guaranteed’ part of the remuneration package. ANZ positions fixed pay for Executives against the median of the relevant financial services market. Short Term Incentive (STI): The STi provides an annual opportunity for an incentive award if certain company and individual objectives are met and there have been no inappropriate behaviour or risk/ compliance/audit breaches. long Term Incentive (lTI): The LTi provides an annual opportunity for an equity award that aligns a significant portion of overall remuneration to shareholder value over the longer term. Category Objective 2010 Actual Remuneration Outcomes NON-ExEcUTivE DiREcTORS in 2009 the Board again agreed not to increase the NED fees for 2009/10 apart from a small increase in the committee fees paid to members of the Audit committee. As a result, the fee structure has basically been maintained at 2008 levels again for the current year. cEO Fixed Pay: The level of fixed annual pay for the cEO was set for three years at $3 million on his commencement in October 2007. This was reviewed in October 2010. Short Term Incentive (STI): The cEO has an annual opportunity to receive a bonus payment equivalent to the value of his fixed remuneration, i.e. $3 million if targets are met. The actual amount paid can increase or decrease from this target dependent on group and individual performance. The cEO’s STi payment for 2009/10 has been determined having regard to both the company’s underlying profit for the current year as well as the significant progress achieved in relation to ANZ’s long-term strategic goals. The STi payment for 2009/10 will be $4.75 million with $2.5 million paid in cash and the balance awarded as deferred shares. half the deferred shares will be restricted for 1 year and half for 2 years. ANZ uses a Balanced Scorecard to measure performance in relation to STi. A balanced scorecard is used as it provides a framework where a combination of metrics can be applied to ensure a broad strategic focus on performance rather than just having a focus on short-term activities. There were five categories which contained around 20 metrics; these were agreed at the beginning of the year and were not changed. The following table provides examples of some of the key metrics, targets and outcomes that were used in 2009/10 for assessing performance for the purpose of determining bonus pools and also individual performance outcomes. The list is not comprehensive but provides examples of the metrics under each of the balanced scorecard categories. finance customer People meet Underlying Earnings Per Share growth target meet Price Earnings relative to peers’ target meet Underlying Economic Profit target meet Tier 1 Capital target Ensure full compliance with liquidity stress testing policies Business specific Customer Satisfaction targets based on improvements on prior year and relative to peers (external survey outcomes) Business specific Market Share targets based on improvements on prior year and relative to peers (external survey outcomes) increase on prior year Employee Engagement result increase on prior year in the percentage of Women in Management increase on prior year Corporate Social Responsibility result and achievement of goals Process/Risk meet target for reduction in underlying losses Reduction in number of outstanding internal audit items Strategic goals Effective Integration of business acquisitions Progress towards longer term strategic goals Outcome vs Target Exceeded met Did not meet Exceeded met met in majority of Businesses met in majority of Businesses Did not meet met Exceeded Exceeded Exceeded met Exceeded Special Equity Allocation: At the 2008 Annual general meeting, shareholders approved an additional grant of 700,000 options to the cEO at an exercise price of $14.18 and with a vesting date of 18 December 2011. At grant the options were valued at $2.27 each, i.e. a total value of $1.589 million. These options will only have any value if, at the vesting date or during the subsequent exercise period (i.e. 2 years after vesting), the share price exceeds $14.18. This value will be the difference between the exercise price ($14.18) and the price on the vesting date (as long as it is greater than $14.18) multiplied by the total number of options. No options have been granted subsequently. long Term Incentive (lTI): Three tranches of performance rights were provided to the cEO in December 2007, covering his first three years in the role. The first of these tranches will be tested against a relative Total Shareholder Return (TSR) hurdle after 3 years, i.e. December 2010 and the other two will be tested in December 2011 and December 2012 respectively. Therefore, since joining ANZ as cEO on 1 October 2007 the cEO has received no benefit from these LTi grants and will only do so from December 2010 onwards and only if the performance hurdles have been met. There is no retesting of these grants. Chief Executive Officer (M Smith)1 2009/10 Other: in addition to his standard remuneration arrangements, the cEO was provided with additional equity as part of his original sign-on arrangements to recognise remuneration forgone from his previous employer in order to join ANZ. The cEO was offered $9 million on his commencement which could have been taken in cash but which he elected to take as shares, with one third vesting at his 1st, 2nd and 3rd anniversaries respectively. This equated to a total of 330,033 ANZ shares at the time of grant when the share price was $27.27. On 2 October 2008, 110,011 shares became available to the cEO, however, the value had declined from the original grant value of $3 million to $2.097 million (based on the one day value weighted average price (vWAP) of $19.061 per share on 2 October 2008). The second grant vested on 2 October 2009. At that time, the value was $2.592 million (based on the one day vWAP of $23.560 per share on 2 October 2009) and the third grant will vest on 2 October 2010. The following tables, relating to the cEO, show: The actual amounts or grants made in respect of the years 2008/09 and 2009/10; Any amounts which had to be deferred in respect of the years 2008/09 and 2009/10; and The actual amounts received in respect of the years 2008/09 and 2009/10. Fixed Pay ($) STI ($) lTI2 ($) Other grants /benefits ($) TOTAl ($) Amounts paid or granted in respect of 2009/10 year less amounts which must be deferred in respect of 2009/10 year Amounts received in respect of 2009/10 year 3,000,000 – 4,750,000 2,250,000 3,000,000 2,500,000 2008/09 Amounts paid or granted in respect of 2008/09 year less amounts which must be deferred in respect of 2008/09 year Amounts received in respect of 2008/09 year 3,000,000 – 3,000,000 4,500,000 2,100,000 2,400,000 – – – – – – 5,5003 – 5,5003 7,755,500 2,250,000 5,505,500 1,594,0003,4 1,589,0004 5,0003 9,094,000 3,689,000 5,405,000 1 On commencement with ANZ, m Smith was granted three tranches of equity valued at $3 million each. The first of these tranches of deferred shares became available on 2 Oct 08 – price at vesting $19.0610 (based on 1 day vWAP as at 2 Oct 08). Therefore the value of this tranche at date of vesting was $2,096,920. The second tranche became available on 2 Oct 09 – price at vesting $23.5600 (based on 1 day vWAP as at 2 Oct 09). Therefore the value of this tranche at date of vesting was $2,591,859. These amounts are not reflected in the table above as they relate to a specific equity arrangement associated with his commencement and are not a part of his standard remuneration arrangements. 2 LTi grants covering the cEO’s first three years in the role were granted on his commencement and, therefore, no further grants were made in 2009/10 or 2008/09. A LTi grant is proposed for 2010/11, subject to approval by shareholders at the 2010 Agm. No value was received from previous LTi grants in either the current or previous years. 3 Provision of Australian taxation return services by Pwc. 4 Special equity grant – Dec 08 – 700,000 options valued @ $2.27 per option. 16 ANZ Annual Report 2010 Remuneration Report 17 REmUNERATiON REPORT – SUmmARY (Unaudited) 2010/11 Remuneration: The cEO’s TEc will increase to $3.15 million for the year commencing 1 October 2010. (This is the first adjustment since his commencement in 2007). The STi Target is 100% of TEc, therefore, for the 2010/11 year the STi Target will also be $3.15 million. The actual payment will be determined having regard to performance against relevant objectives and targets for the 2010/11 year. The cEO was only granted LTi for his first three years with ANZ (i.e. 2007 to 2009). for 2010, it is proposed to allocate $3 million LTi to be delivered as Performance Rights with a relative TSR hurdle, subject to shareholder approval at the 2010 Annual general meeting. ExEcUTivES Fixed pay: A review identified that ANZ’s current fixed remuneration levels for senior executives were competitively positioned within the market. As a result of this review and also being cognisant of the need for restraint in the prevailing climate, a decision was made that a salary freeze would be effected for the 2009 remuneration review. Short Term Incentive (STI): Executives have an opportunity to receive an on-target STi payment equivalent to 120% of their fixed pay, with top performers able to receive incentive payments well above the target level whereas poorer performers will receive a significantly reduced or no incentive payment at all. All incentives paid this year (approved in October 2009 but relating to 2008/09 performance) were impacted by the company’s performance with reductions applied to the STi payments for each executive. The STi pool for the 2009/10 year increased from the prior year, reflecting the link between increased performance and variable reward outcomes. A Balanced Scorecard is also used to measure performance in relation to STi for Executives – the metrics and targets for Executives are consistent with those detailed in the section above relating to the cEO’s STi. if the STi payment exceeds the deferral threshold, Executives are required to take half of the payment in excess of the threshold in ANZ equity. The equity is subject to mandatory deferral, with half of the deferred equity unavailable for a 1 year period and the other half of the deferred equity unavailable for a 2 year period. This is designed to strengthen the link between the STi award and longer term alignment with shareholder interests. This results in Executives receiving significantly less of their STi in cash with more deferred into equity than had been the case in the past. if an executive resigns or is terminated on notice from ANZ during the deferral period, the equity is forfeited. long Term Incentive (lTI): The target LTi for Executives is 50% of their fixed pay. This dollar value is converted into an actual number of performance rights using an independent and audited external valuation. These rights are subject to a relative TSR performance hurdle that compares ANZ’s performance with a selection of other comparable financial institutions over the three year period following the grant. ANZ’s performance ranking must be above the median for any rights to vest and exceed the 75th percentile to fully vest. if the hurdle is achieved, the shares are released and if not, they are forfeited. in 2009/10, the LTi grants made in 2006 were tested against the TSR performance of the comparator group. ANZ’s TSR performance was ranked just above the midpoint of the range between the median and 75th percentiles of the comparator group. Accordingly, 77.54% of the Performance Rights vested in October 2009. There was only one performance test, so the balance of the Performance Rights lapsed at that time. gOvERNmENT/REgULATORY iNfLUENcES following the global financial crisis, there has been stronger focus on executive remuneration by regulators, shareholders and the public. The government has also initiated a number of reviews and subsequent legislative changes that have impacted remuneration approaches. ANZ has carefully scrutinised its remuneration practices and a number of key changes have been introduced over the past year. The following changes specifically impact the remuneration of disclosed executives: ANZ has formalised the Board’s discretion to reduce or eliminate variable remuneration payments, including deferred amounts which have not yet vested, following consideration of any adverse outcomes that have arisen during the deferral period that impact the original assessment of performance, to meet unexpected or unknown regulatory requirements, or to protect the financial soundness of ANZ; Economic Profit, which is a risk adjusted metric, was introduced as one of the financial measures for assessment of company performance for the purpose of determining STi bonus payments. it was also included in the balanced scorecard of measures for management Board members which determines individual performance; The remuneration approach for Risk and financial control personnel has been carefully reviewed to ensure they remain independent from the businesses they support. To further strengthen the level of independence of the chief Risk Officer, changes to his remuneration mix were introduced for 2009/10 which resulted in an increase in fixed remuneration and a significant lowering of the leverage available to him through variable remuneration. The STi bonus opportunity will no longer be adjusted for group performance outcomes and the leverage percentage applied for individual performance outcomes has reduced overall from previously available levels. LTi will now be granted as deferred shares which further reduces the leverage available compared to the grants of rights previously available. The following tables cover those disclosed Executives who were employed at the Executive level for 2009/10 and for comparison include tables for 2008/09 from last years report. The tables detail: The actual amounts or grants made in respect of the years 2008/09 and 2009/10; Any amounts which had to be deferred in respect of the years 2008/09 and 2009/10; and The actual amounts received in respect of the years 2008/09 and 2009/10. Chief Executive Officer, Australia (P Chronican)1 2009/10 Fixed Pay ($) STI ($) lTI ($) Other grants /benefits ($) TOTAl ($) Amounts paid or granted in respect of 2009/10 year 1,079,000 1,400,000 650,000 296,974 less amounts which must be deferred in respect of 2009/10 year – 600,000 650,000 – Amounts received in respect of 2009/10 year 1,079,000 800,000 – 296,974 3,425,974 1,250,000 2,175,974 Chief Executive Officer, Institutional (S Elliott)2 2009/10 Amounts paid or granted in respect of 2009/10 year 1,000,000 2,500,000 550,000 less amounts which must be deferred in respect of 2009/10 year – 1,150,000 550,000 Amounts received in respect of 2009/10 year 1,000,000 1,350,000 – 12,334 – 12,334 4,062,334 1,700,000 2,362,334 Deputy Chief Executive Officer (G Hodges)3 2009/10 Amounts paid or granted in respect of 2009/10 year 1,000,000 1,140,000 500,000 17,309 2,657,309 less amounts which must be deferred in respect of 2009/10 year – 470,000 500,000 – 970,000 Amounts received in respect of 2009/10 year 1,000,000 670,000 – 17,309 1,687,309 2008/09 Amounts paid or granted in respect of 2008/09 year 1,000,000 860,000 500,000 145,940 2,505,940 less amounts which must be deferred in respect of 2008/09 year – 330,000 500,000 – 830,000 Amounts received in respect of 2008/09 year 1,000,000 530,000 – 145,940 1,675,940 Chief Financial Officer (P Marriott)4 2009/10 Amounts paid or granted in respect of 2009/10 year 1,000,000 1,140,000 500,000 2,595 2,642,595 less amounts which must be deferred in respect of 2009/10 year – 470,000 500,000 – 970,000 Amounts received in respect of 2009/10 year 1,000,000 670,000 – 2,595 1,672,595 2008/09 Amounts paid or granted in respect of 2008/09 year 1,000,000 850,000 500,000 less amounts which must be deferred in respect of 2008/09 year – 325,000 500,000 Amounts received in respect of 2008/09 year 1,000,000 525,000 – – – – 2,350,000 825,000 1,525,000 Chief Risk Officer (C Page)5 2009/10 Amounts paid or granted in respect of 2009/10 year 1,100,000 1,320,000 425,000 60,565 2,905,565 less amounts which must be deferred in respect of 2009/10 year – 560,000 425,000 – 985,000 Amounts received in respect of 2009/10 year 1,100,000 760,000 – 60,565 1,920,565 2008/09 Amounts paid or granted in respect of 2008/09 year 850,000 1,600,000 425,000 301,988 3,176,988 less amounts which must be deferred in respect of 2008/09 year – 700,000 425,000 – 1,125,000 Amounts received in respect of 2008/09 year 850,000 900,000 – 301,988 2,051,988 18 ANZ Annual Report 2010 Remuneration Report 19 REmUNERATiON REPORT – SUmmARY (Unaudited) (continued) REmUNERATiON REPORT – fULL (Audited) Chief Executive Officer, Asia Pacific, Europe & America (A Thursby)6 2009/10 Fixed Pay ($) STI ($) lTI ($) Other grants /benefits ($) TOTAl ($) Amounts paid or granted in respect of 2009/10 year 1,000,000 2,500,000 550,000 23,570 less amounts which must be deferred in respect of 2009/10 year – 1,150,000 550,000 – 4,073,570 1,700,000 Amounts received in respect of 2009/10 year 1,000,000 1,350,000 – 23,570 2,373,570 2008/09 Amounts paid or granted in respect of 2008/09 year 1,000,000 2,600,000 550,000 88,351 4,238,351 less amounts which must be deferred in respect of 2008/09 year – 1,200,000 550,000 – 1,750,000 Amounts received in respect of 2008/09 year 1,000,000 1,400,000 – 88,351 2,488,351 Former Executives Former Chief Executive Officer, New Zealand (J Fagg)7 2009/10 Amounts paid or granted in respect of 2009/10 year 782,000 892,400 391,000 105,359 2,170,759 less amounts which must be deferred in respect of 2009/10 year – 354,200 391,000 – 745,200 Amounts received in respect of 2009/10 year 782,000 538,200 – 105,359 1,425,559 1 Chronican – chronican commenced on 30 November 2009 so payments reflect amounts received for the partial service for the 2009/10 year. Other grants/benefits includes relocation expenses and car parking. in addition to the remuneration shown above, chronican received a LTi equity grant in December 2009. As chronican joined ANZ in November 2009 he was not included in the LTi grants made to other management Board members in early November. Accordingly, this grant was made in December on similar terms and conditions as those provided to management Board for 2009, apart from the allocation value which varied to reflect the different values at the respective grant dates. 2 Elliott – Other grants/benefits includes relocation expenses and taxation services provided by Ernst & Young. No equity from prior years first vested in 2009/10. in addition to remuneration shown above, Elliott received an equity grant in 2008/09 in accordance with his employment arrangements on joining ANZ. ANZ agreed to provide Elliott with shares to the value of $125,000 deferred for 1 year and shares to the value of $125,000 deferred for 2 years. The shares were granted on 11 June 2009. The 1 year deferred shares became available on 11 June 2010, valued at $172,589 at vesting. 3 Hodges – Other grants/benefits for 2009/10 includes taxation services provided by Pwc and for 2008/09 includes relocation expenses including an annual leave payment on change of contracts on transfer from New Zealand to Australia. Equity which has been previously disclosed in remuneration reports in prior years that first vested in 2009/10 included STi Deferred Options and Rights granted 31 October 2008 and LTi Performance Rights granted 24 October 2006. At the respective vesting dates the total value of the equity was $1,698,143. 4 Marriott – Equity which has been previously disclosed in remuneration reports in prior years that first vested in 2009/10 included STi Deferred Shares and Options granted 31 October 2008 and LTi Performance Rights granted 24 October 2006. At the respective vesting dates the total value of the equity was $1,600,774. Other grants/benefits includes car parking. 5 Page – Other grants/benefits for 2009/10 includes relocation expenses and taxation services provided by Pwc and for 2008/09 includes relocation expenses. No equity from prior years first vested in 2009/10. 6 Thursby – Other grants/benefits includes relocation expenses. Equity which has been previously disclosed in remuneration reports in prior years that first vested in 2009/10 included STi Deferred Shares and Options granted 31 October 2008. At the vesting date the total value of the equity was $778,843. in addition to remuneration shown above, Thursby received an equity grant in 2008/09 in accordance with his employment arrangements on joining ANZ. ANZ agreed to provide Thursby with 3 separate tranches of deferred shares to the value of $1 million per annum. The first grant was made on 3 September 2007, the second on 28 August 2008 and the final tranche was granted on 22 September 2009. The shares are restricted and held in trust for three years from the date of allocation. The first tranche became available on 3 September 2010, valued at $804,989 at vesting. 7 Fagg – fagg stepped down on 1 September 2010 so actual payments have been prorated based on time as a Key management Personnel in the 2009/10 year. Other grants/benefits includes relocation expenses and taxation services provided by Pwc. Equity which has been previously disclosed in remuneration reports in prior years that first vested in 2009/10 included LTi Performance Rights granted 24 October 2006. At the vesting date the total value of the equity was $804,743. in addition to remuneration shown above, fagg received a special equity grant in 2006/07 for retention purposes. ANZ agreed to provide fagg with an allocation of 3 year deferred shares to the maximum value of $300,000, granted on 3 September 2007. The deferred shares became available on 3 September 2010, valued at $241,483 at vesting. Remuneration Report – full (Audited) The Directors’ Remuneration Report is designed to provide shareholders with an understanding of ANZ’s remuneration policies which relate to Key management Personnel (KmP) as defined under the corporations Act and the link between remuneration and ANZ’s performance, along with individual outcomes for ANZ’s Directors and Executives. This Remuneration Report has been prepared in accordance with section 300A of the corporations Act for the company and the consolidated entity for 2009/10. The information provided in this Remuneration Report has been audited as required by section 308(3c) of the corporations Act. This Remuneration Report forms part of the Directors’ Report. Board Oversight of Remuneration The Board human Resources (hR) committee has responsibility for reviewing and making recommendations to the Board in relation to director and executive remuneration and executive succession (excluding the role of group general manager internal Audit which is addressed separately by the Board Audit committee). The Board hR committee specifically makes recommendations to the Board on remuneration and succession matters related to the cEO and individual remuneration arrangements for other key executives covered by the group’s Remuneration Policy, the design of significant incentive Plans such as ANZERS and institutional and remuneration structures for senior executives and others specifically covered by the Remuneration Policy (refer to page 57 of the corporate governance Report for more details about the committee’s role, and anz.com > about ANZ > corporate governance > ANZ human Resources committee charter, which details the terms of reference under which the committee operates). On a number of occasions throughout the year, both the Board hR committee and management received advice from external providers. (The following advisors were used: Ernst & Young, hay group, freehills and Pwc.) The Board’s decisions were made independently using the advice provided and having careful regard to ANZ’s position, strategic objectives and current requirements. Non-Executive Directors Throughout this report specific disclosures are provided in relation to the remuneration of the Non-Executive Directors (NEDs) set out in Table 1, who fall within the definition of KmP of the company and of the group. TABLE 1: NON-ExEcUTivE DiREcTORS Current Non-Executive Directors J morschel g clark P hay h Lee i macfarlane D meiklejohn A Watkins chairman, independent Non-Executive Director – Appointed Director October 2004; Appointed chairman 1 march 2010 independent Non-Executive Director – Appointed february 2004 independent Non-Executive Director – commenced 12 November 2008 independent Non-Executive Director – commenced 1 february 2009 independent Non-Executive Director – Appointed february 2007 independent Non-Executive Director – Appointed October 2004 independent Non-Executive Director – commenced 12 November 2008 Former Non-Executive Directors c goode J Ellis m Jackson chairman, independent Non-Executive Director – Appointed Director July 1991; Appointed chairman August 1995; Retired 28 february 2010 independent Non-Executive Director – Appointed October 1995; Retired 18 December 2009 independent Non-Executive Director – Appointed march 1994; Retired 21 march 2009 Non-Executives Directors – Summary Details fees Summary The chairman receives a fixed base fee which covers all responsibilities of the chairman including all committees. NEDs receive a fixed base fee for being a director of the Board and additional fixed fees for either chairing or being a member of a committee, working on special committees and/or for serving on a subsidiary board. Superannuation contributions are also made at a rate of 9% (but only up to the government’s prescribed maximum contributions cap). it was agreed that fees would not be increased again for 2009/10 apart from a small increase to Audit committee fees. NEDs do not earn separate retirement benefits.1 Discussion in Report Page 24 Remuneration Outcomes Details of NED remuneration for 2009/10 can be found in Table 6. Page 26 1 The NED retirement scheme was closed effective 30 September 2005. Accrued entitlements were fixed at that time and will be carried forward until the retirement of the relevant NEDs. 20 ANZ Annual Report 2010 Remuneration Report 21 REmUNERATiON REPORT – fULL (Audited) (continued) Executives Throughout this report specific disclosures are provided in relation to the remuneration of both the chief Executive Officer (CEO) and other executives (i.e. those direct reports of the cEO with key responsibility for the strategic direction and management of a major revenue generating division or who control material revenue and expenses) who fall within the definition of KMP of the company and of the group as defined by Section 300A (1AAA) of the corporations Act and AASB 124. Also included are executives who are within the group of the five highest paid executives in the company and the group. This has been defined as the five highest paid, relevant group and company executives who participate in making decisions that affect the whole, or a substantial part, of the business of the company or who have the capacity to significantly affect the company’s financial standing. Throughout this report the term “Executives” has been used to refer to these disclosed individuals. Details of these individuals are provided in Table 2. ANZ operates a matrix structure with three geographic Divisions (Australia, New Zealand and Asia Pacific Europe & America) and three business segments (Retail, Wealth and commercial) as well as the global institutional client business. All of these are supported by enablement functions (e.g. finance, Risk). TABLE 2: ExEcUTivES Executive Director m Smith Current Executives P chronican S Elliott g hodges P marriott c Page A Thursby Former Executives D cartwright R Edgar J fagg B hartzer chief Executive Officer chief Executive Officer, Australia – Appointed 30 November 2009 chief Executive Officer, institutional Deputy chief Executive Officer (previously Deputy chief Executive Officer and Acting chief Executive Officer, Australia) chief financial Officer chief Risk Officer chief Executive Officer, Asia Pacific, Europe & America chief Operating Officer former Deputy chief Executive Officer – Retired 8 may 2009 former chief Executive Officer, New Zealand – Stepped down from role due to illness 1 September 2010 former chief Executive Officer, Australia – ceased employment 31 July 2009 Executives – Summary Details Summary cEO fixed Remuneration Short Term incentives (STi) The cEO is the only executive director at ANZ. The cEO’s remuneration arrangements are detailed separately in section 2.5. This is the only ‘guaranteed’ part of the remuneration package. ANZ seeks to position its fixed remuneration for Executives against the median of the relevant financial services market in Australia. it was agreed that there were no increases to fixed remuneration in 2009 for Executives as part of the annual remuneration review. (An adjustment to the remuneration mix for the chief Risk Officer was introduced in 2009/10 to further strengthen the independence of this role and the risk function. This resulted in an increase to fixed remuneration and a reduction in leverage available for variable remuneration components.) The STi plan is designed to drive out-performance by providing rewards that significantly differentiate individual achievement against targets. The STi provides an annual opportunity for an incentive award if certain company and individual objectives are met and there have been no inappropriate behaviour or risk/compliance/audit breaches. half of the STi payment above a threshold level (currently $200,000) is subject to mandatory deferral into equity. 50% of the deferred portion vests after 1 year and 50% vests after 2 years. Executives – Summary (continued) Details Summary Long Term incentives (LTi) Other The LTi provides alignment of a significant portion of remuneration to sustained growth in shareholder value over the longer term. Executives are granted Performance Rights which only vest if ANZ’s Total Shareholder Return (TSR) hurdle relative to a peer group of comparator companies is achieved over the three year period from the date of grant. Performance equal to the median of the comparator group will result in half of the Performance Rights vesting. Achieving TSR above the median will result in further Performance Rights vesting, increasing on a straight line basis until ANZ’s TSR equals or exceeds the 75th percentile of the comparator group at which time all the Performance Rights vest. Where ANZ’s performance falls between two of the comparator companies, TSR is measured on a pro rata basis. The only exception is the chief Risk Officer who, under the new remuneration mix introduced this year, will be granted unhurdled deferred shares with lower leverage opportunity to strengthen independence. To ensure the interests of Executives continue to be aligned with those of shareholders, Executives are subject to a shareholding guideline which requires them to accumulate and maintain ANZ equity over a 5 year period equivalent to 200% of their fixed remuneration. To ensure equity remains at risk until vested, Executives are prohibited from hedging any unvested equity. ANZ also extended its policy last year to prohibit Executives from providing ANZ securities in connection with a margin loan or similar financing arrangement. Discussion in Report Page 31 Page 35 contract Terms The contract terms for the cEO and other Executives are provided in Section 3. Page 44 1. Non-Executive Director Remuneration 1.1. BOARD POLicY ON REmUNERATiON Table 3 sets out the key principles that underpin the Board’s policy on NED remuneration. TABLE 3: PRiNciPLES UNDERPiNNiNg ThE REmUNERATiON POLicY fOR NEDS Principle Comment Aggregate Board and committee fees are within the maximum annual aggregate limit approved by shareholders fees are set by reference to key considerations Discussion in Report Page 30 Page 30 The remuneration structure preserves independence whilst aligning interests of NEDs and Shareholders No Retirement Benefits Page 30 The current aggregate fee pool for NEDs of $3.5 million was approved by shareholders at the 2008 Annual general meeting. The annual total of NEDs’ fees, including superannuation contributions, are within this agreed limit. NEDs are also eligible for other payments outside the limit such as reimbursement for business related expenses, including travel, and retirement benefits accrued as at September 2005. Board and committee fees are set by reference to a number of relevant considerations including: general industry practice and best principles of corporate governance; the responsibilities and risks attaching to the role of NED; the time commitment expected of the NEDs on group matters; reference to fees paid to other NEDs of comparable companies; and advice from external advisors. So that independence and impartiality is maintained, fees are not linked to the performance of the company and NEDs are not eligible to participate in any of the group’s incentive arrangements. NEDS also have adopted Shareholding guidelines (refer section 1.3). NEDs do not accrue separate retirement benefits in addition to statutory superannuation entitlements. (Refer to Table 4 for details of preserved benefits for NEDs who participated in the ANZ Directors’ Retirement Scheme prior to its closure in 2005). 22 ANZ Annual Report 2010 Remuneration Report 23 REmUNERATiON REPORT – fULL (Audited) (continued) 1.2. cOmPONENTS Of NON-ExEcUTivE DiREcTOR REmUNERATiON 1.3. ShAREhOLDiNgS Of NON-ExEcUTivE DiREcTORS NEDs receive a fee for being a director of the Board, and additional fees for either chairing or being a member of a committee. The chairman of the Board does not receive additional fees for service on Board committees. for the 2009/10 year, the Board again agreed not to increase fees from those applied in 2008, apart from a small increase to fees paid in relation to the Audit committee. The fee for the chairman is slightly below that of his predecessor. for details of remuneration paid to directors for the 2009/10 year, refer to Table 6 in this Remuneration Report. in recognising that ownership of company shares aligns Directors’ interests with those of shareholders, Directors adopted shareholding guidelines in 2005. These guidelines provide for Directors to accumulate shares, over a five year period, to the value of 100% (200% for the chairman) of the base annual NED fee and to maintain this shareholding while a director of ANZ. Directors have agreed that where their holding is below this guideline they will direct a minimum of 25% of their fees each year toward achieving this shareholding. The movement during the reporting period in shareholdings of NEDs (held directly, nominally and by related parties) is provided below: TABLE 5: NED ShAREhOLDiNgS Name Current Non-Executive Directors J morschel g clark P hay h Lee i macfarlane D meiklejohn A Watkins Former Non-Executive Directors c goode J Ellis Balance as at 1 Oct 2009 Shares from changes during the year1 Balance as at 30 Sep 20102 Balance as at 30 Sep 2010 as a % of base fee3 Balance as at report sign-off date 12,902 13,521 7,006 1,575 12,616 16,198 19,461 773,251 154,343 3,000 1,958 2,037 8,079 1,500 – – 18,473 75 15,902 15,479 9,043 9,654 14,116 16,198 19,461 791,724 154,418 188% 183% 107% 114% 167% 192% 230% n/a n/a 15,902 15,479 9,043 9,654 14,116 16,198 19,461 n/a4 n/a4 1 Shares from changes during the year include the net result of any shares purchased/sold or acquired under the Dividend Reinvestment Plan. 2 The following shares were nominally held as at 30 September 2010: J morschel – 8,860; g clark – 15,479; P hay – 8,785; h Lee – 1,654; i macfarlane – 2,574; D meiklejohn – 13,698; A Watkins – 18,419. 3 The value of shares has been calculated using the closing price on 30 September 2010 of $23.68. The percentage of base fee has been determined by comparing the share value against the current base annual NED fee of $200,000. 4 current shareholdings for c goode and J Ellis are not provided as they are no longer NEDs as at the report sign-off date. TABLE 4: cOmPONENTS Of REmUNERATiON fOR NEDS Elements Details Board/committee fees For 2009/10 Fees per annum are: Board Audit committee Risk committee hR committee governance & Technology committees Chairman $745,000 $60,000 $52,000 $48,000 $30,000 NED $200,000 $30,000 $25,000 $21,000 $10,000 Other fees/benefits Work on special committees may attract additional fees of an amount considered appropriate in the circumstances. Post-employment Benefits Directors’ Share Plan Superannuation contributions are made at a rate of 9% (but only up to the government’s prescribed maximum contributions limit) which satisfies the company’s statutory superannuation contributions. The ANZ Directors’ Retirement Scheme was closed effective 30 September 2005. Accrued entitlements relating to the ANZ Directors’ Retirement Scheme were fixed at 30 September 2005 and NEDs had the option to convert these entitlements into ANZ shares. Such entitlements, either in ANZ shares or cash, will be carried forward and transferred to the NED when they retire (including interest accrued at the 30 day bank bill rate for cash entitlements). The accrued entitlements for current NEDs fixed under the ANZ Directors’ Retirement Scheme as at 30 September 2005 are as follows: g clark D meiklejohn J morschel The accrued entitlements for c goode and J Ellis at that time were $1,312,539 and $523,039 respectively. On their retirement, Retirement Benefit Shares were transferred to c goode valued at $1,398,845 (based on 1 day vWAP of $22.9507 as at 26 february 2010) and Retirement Benefit Shares were transferred to J Ellis valued at $478,333 (based on 1 day vWAP of $21.3694 as at 18 December 2009). $83,197 $64,781 $60,459 As a result of taxation changes which came into effect from 1 July 2009, ANZ ceased all new purchases under the Directors’ Share Plan (the Plan) with effect from 1 October 2009, although existing shares will continue to be held in trust. As shares were purchased from remuneration forgone, they were not subject to performance conditions. Participation in the plan was voluntary. Shares acquired under the plan were purchased on market and were subject to a minimum 1 year restriction, during which the shares could not be traded. in the event of serious misconduct, all shares held in trust will be forfeited. All costs associated with the plan are met by the company. The Plan is not a performance-based share plan and is not intended as an incentive component of NED remuneration. Included in Fee limit Yes Yes Yes No Yes 24 ANZ Annual Report 2010 Remuneration Report 25 REmUNERATiON REPORT – fULL (Audited) (continued) 1.4. REmUNERATiON PAiD TO NON-ExEcUTivE DiREcTORS Remuneration details of NEDs for 2009/10 and 2008/09 are set out below in Table 6. There is an increase in overall 2010 Total Remuneration for NEDs compared with 2009. This variation is primarily attributable to the termination benefits paid to c goode and J Ellis on their retirement from the Board, comprised of the benefit accrued under the retirement scheme which existed prior to September 2005. There was no major increase in actual fee levels so any individual changes can be primarily attributed to changes in representation on different committees. Refer to Section 1.2 for fee structure details. TABLE 6: NED REmUNERATiON fOR 2010 AND 2009 Short-Term Employee Benefits Post- Employment long-Term Employee Benefits Termination Benefits2 Share-Based Payments Financial Year Board fees $ Value of shares acquired in lieu of fees1 $ Committee fees $ Short term incentive $ Other4 $ Total $ Super contributions $ long service leave accrued during the year $ Current Non-Executive Directors J Morschel (Appointed Director October 2004; appointed Chairman March 2010) independent Non Executive Director, chairman G Clark (Appointed February 2004) independent Non-Executive Director P Hay (Appointed November 2008) independent Non-Executive Director H lee (Appointed February 2009) independent Non-Executive Director I Macfarlane (Appointed February 2007) independent Non-Executive Director D Meiklejohn (Appointed October 2004) independent Non-Executive Director A Watkins (Appointed November 2008) independent Non-Executive Director Former Non-Executive Directors C Goode (Appointed Director July 1991; appointed Chairman August 1995; retired 28 February 2010) independent Non-Executive Director, chairman J Ellis (Appointed October 1995; retired 18 December 2009) independent Non-Executive Director M Jackson (Appointed March 1994; retired March 2009) independent Non-Executive Director Total of all Non-Executive Directors5 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2009 2010 2009 517,917 180,000 200,000 200,000 200,000 139,500 200,000 107,778 200,000 200,000 200,000 200,000 200,000 127,313 326,250 783,000 43,000 17,500 94,444 2,087,167 2,049,535 – 19,987 – – – 37,498 – 24,995 – – – – – 49,670 – – – 182,429 – – 314,579 48,333 73,000 61,000 51,083 76,000 30,975 35,000 6,639 72,000 65,000 106,000 87,000 103,000 54,960 – – – 35,000 34,472 501,333 438,129 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1 Shares acquired through participation in Directors’ Share Plan. The value reflects the fees forgone to purchase shares on market (amortisation is not applicable). 2 The termination benefits paid to m Jackson (in 2008/09) and c goode and J Ellis (in 2009/10) on their respective retirements from the Board relate to the benefits accrued under the retirement scheme which existed prior to September 2005 and interest on that benefit. for c goode, Retirement Benefit Shares were transferred on retirement. The price on retirement was $22.9507 (based on 1 day vWAP as at 26 february 2010). for J Ellis, Retirement Benefit Shares were transferred on retirement. The price on retirement was $21.3694 (based on 1 day vWAP as at 18 December 2009). 3 Amounts disclosed for remuneration of directors exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts. The total premium, which cannot be disclosed because of confidentiality requirements, has not been allocated to the individuals covered by the insurance policy as, based on all available information, the directors believe that no reasonable basis for such allocation exists. 4 for c goode, Other relates to gifts on retirement. for J Ellis, Other relates to car parking, office space and gifts on retirement. 5 Due to consistency of remuneration structure, the Remuneration details of the cEO (who is the only Executive Director) are included in Table 17 with other Executives. – – – – – – – – – – – – – – 8,2334 – 8,5464 18,0854 – 16,779 18,085 566,250 272,987 261,000 251,083 276,000 207,973 235,000 139,412 272,000 265,000 306,000 287,000 303,000 231,943 334,483 783,000 51,546 253,014 128,916 2,605,279 2,820,328 14,646 13,924 14,646 13,924 14,646 13,343 14,646 10,149 14,646 13,924 14,646 13,924 14,646 13,477 7,231 13,924 3,615 13,924 6,872 113,368 127,385 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a $ – – – – – – – – – – – – – – 1,398,845 – 478,333 – 604,392 1,877,178 604,392 Total amortisation value of equity $ Total Remuneration3 $ n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 580,896 286,911 275,646 265,007 290,646 221,316 249,646 149,561 286,646 278,924 320,646 300,924 317,646 245,420 1,740,559 796,924 533,494 266,938 740,180 4,595,825 3,552,105 26 ANZ Annual Report 2010 Remuneration Report 27 REmUNERATiON REPORT – fULL (Audited) (continued) 2. Executive Remuneration 2.1. REmUNERATiON gUiDiNg PRiNciPLES ANZ’s Remuneration Policy, approved by the Board, shapes the group’s remuneration strategies and initiatives. The following principles underpin ANZ’s Remuneration Policy for Executives: focus on creating and enhancing value for all ANZ stakeholders; Emphasis on “at risk” components of total rewards which are designed to encourage behaviour that supports both the long-term financial soundness and the risk management framework of ANZ and delivers superior long-term total shareholder returns; Differentiation of individual rewards in line with ANZ’s culture of rewarding for out-performance, adherence to standards of behaviour and to risk and compliance policies and processes; and The provision of a competitive reward proposition to successfully attract, motivate and retain the highest quality individuals required to deliver ANZ’s business and growth strategies. 2.2. PERfORmANcE Of ANZ Sustained company performance over the long-term is a key focus for ANZ. The success of ANZ’s remuneration policy in aligning shareholder and executive rewards is demonstrated by the close correlation that exists between company performance and the benefits derived by Executives from the ‘at-risk’ components of their remuneration over the past 5 years. Table 7 shows ANZ’s annual performance over the five-year period spanning 1 October 2005 to 30 September 2010. The table illustrates the impact of ANZ’s performance on shareholder wealth, taking into account dividend payments, share price changes and other capital adjustments during the financial year. TABLE 7: ANZ’S PERfORmANcE 2006 – 2010 Basic Earnings Per Share (EPS) NPAT ($m) Total Dividend (cps) Share price at 30 September ($) Total Shareholder Return (12 month %) Underlying profit1 2009/10 2008/09 2007/08 2006/07 2005/06 178.9 4,501 126 23.68 1.9 5,025 131.0 2,943 102 24.39 40.3 3,772 170.4 3,319 136 18.75 -33.5 3,426 224.1 4,180 136 29.70 15.6 3,924 200.0 3,688 125 26.86 17.1 3,587 1 Underlying profit represents the directors’ assessment of the profit for the ongoing business activities of the group, and is based on guidelines published by the Australian institute of company Directors and the financial Services institute of Australasia. ANZ applies this guidance by adjusting statutory profit for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses, timing differences on economic hedges, and acquisition related costs. Refer to page 65 for details of adjustments. figure 1 compares ANZ’s TSR performance against the median TSR of the LTi comparator group and the S&P/ASx 200 Banks Accumulation index over the 2005/06 to 2009/10 measurement period. figURE 1: ANZ 5-YEAR cUmULATivE TOTAL ShAREhOLDER RETURN PERfORmANcE e g a t n e c r e P 180 160 140 120 100 80 60 Upper Quartile Median Fin Index ANZ figURE 2: ANZ – UNDERLYiNg PROfiT1 & AvERAgE STi PAYmENTS , 5 0 2 5 Underlying Profit1 ($milion) Average STI payments against targets Target STI , 3 9 2 4 , 3 5 8 7 , 3 4 2 6 , , 3 X 7 X 7 X 2 X % of target STI paid to the executive director and disclosed executives 112% 110% 76% 106% 137% 06 07 08 09 10 figure 2 illustrates the relationship between the average actual STi payments against target and the group’s performance measured using underlying profit over the last 5 years. The average STi payments for each year are based on those executives (including the cEO) disclosed in each relevant reporting period. As illustrated in the chart, the average STi payments are generally in alignment with the underlying profit trend, with both the underlying profit and the STi payments (as a percentage of target STi) again trending upwards in 2010. 1 Underlying profit represents the directors’ assessment of the profit for the ongoing business activities of the group, and is based on guidelines published by the Australian institute of company Directors and the financial Services institute of Australasia. ANZ applies this guidance by adjusting statutory profit for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses, timing differences on economic hedges, and acquisition related costs. Refer to page 65 for details of adjustments. 150 125 100 75 2.3. REmUNERATiON STRUcTURE OvERviEW The key aspects of ANZ’s remuneration strategy for Executives (including the cEO) is set out below: REmUNERATiON OBJEcTivES Shareholder value creation Emphasis on “at risk” components Reward differentiation to drive out-performance Attract, motivate and retain talent Pay for Performance Total Remuneration set by reference to geographic market fixed At Risk fixed Remuneration Short Term incentive (STi) Long Term incentive (LTi) fixed remuneration is set based on financial services market/internal relativities reflecting: responsibilities, performance, qualifications, experience and location STi targets are linked to the performance targets of the group, Division and individual using a balanced scorecard approach LTi targets have direct links to shareholder value creation 5 0 p e S 6 0 r a M 6 0 p e S 7 0 r a M 7 0 p e S 8 0 r a M 8 0 p e S 9 0 r a M 9 0 p e S 0 1 r a M 0 1 p e S 28 ANZ Annual Report 2010 Performance period Remuneration Report 29 REmUNERATiON REPORT – fULL (Audited) (continued) 2.4. REmUNERATiON cOmPONENTS The Board aims to achieve a balance between fixed and at-risk components of remuneration that reflects market conditions for each seniority level. The relative proportion of fixed and at-risk remuneration is as set out below: TABLE 8: ANNUAL TOTAL REWARD mix PERcENTAgE (% BASED ON AT TARgET LEvELS Of PERfORmANcE) cEO Executives 1 The STi for all Executives is subject to mandatory deferral (refer to section 2.6.3 for details). Fixed Fixed remuneration 33% 37% At Risk STI 33% 45%1 lTI 33% 18% The levels of reward within the remuneration structure are benchmarked against the financial services market median. however, the application of the structure allows for the opportunity to earn upper quartile variable pay for significant out-performance, and significantly reduced or nil payment for underperformance. in this way the remuneration structure reflects “reward for performance”. 2.5. cEO REmUNERATiON The components of the cEO’s remuneration package are substantially the same as other Executives. however, there are some differences in the quantum, delivery and timing of the cEO’s arrangements. in the interests of clarity and in order to ensure a thorough understanding of the arrangements that are in place for the cEO, the following table provides a summary of these arrangements as well as cross references to other sections of the report where these arrangements are outlined in further detail. Details Summary fixed Remuneration Short-Term incentives (STi) The level of fixed pay for the cEO was set at $3 million on his commencement in 2007. it was agreed this would be held constant for the first three years until October 2010 and will be subject to annual review from that time. The cEO has an annual opportunity to receive an incentive payment equivalent to the value of his fixed remuneration, i.e. $3 million if targets are met. The actual amount paid can increase or decrease from this number dependent on performance. The actual incentive payment paid in November 2009, but which related to the 2008/09 year, was $4.5 million of which $2.1 million was deferred (half deferred for one year and the other half deferred for two years). The Board approved the cEO’s 2009/10 balanced scorecard at the start of the year and then assessed his performance against these objectives at the end of the 2009/10 year to determine the appropriate incentive (relative to target). As per the Board hR committee charter, robust performance measures and targets for the cEO that encourage superior long-term performance and ethical behaviour are recommended by the Board hR committee to the full Board. The key objectives for 2009/10 included a number of quantitative and qualitative measures aligned with ANZ’s strategy, which included (but were not limited to) financial goals, risk management, progress towards long-term strategic goals, strengthening the management bench, and people/culture measures. A key focus of these objectives was on the strategic acquisition and disposal of assets in order to position the company for the future. Based on the Board’s assessment, the STi payment for the cEO for the 2009/10 year will be $4.75 million with $2.5 million paid in cash and the balance awarded as deferred shares. half the deferred shares will be restricted for 1 year and half for 2 years. Discussion in Report STi – Refer Page 32 Long-Term incentives (LTi) – grants covering first 3 years Sign-On Award 2.5. cEO REmUNERATiON (cONTiNUED) Details Summary Discussion in Report Special Equity Allocation in 2008 the Board reviewed the contract and retention arrangements of the cEO to ensure that they continued to be market competitive. following this review, the Board considered it reasonable and appropriate to grant the cEO 700,000 options. This resolution was approved by shareholders at the 2008 Agm and the options were granted on 18 December 2008. The rationale for the grant of options to the cEO was: As options only reward for uplift in the share price above the option exercise price, the award helps drive a longer term focus on sustained share price growth while strengthening the alignment of the cEO’s interests with shareholders; The grant recognised the cEO’s performance in establishing a solid foundation to enable ANZ to achieve its longer term vision, as well as acknowledging his very strong internal and external leadership during the significant challenges the organisation faced during that year; The grant took into consideration the fact that the cEO’s STi payment was reduced by 20% in 2008 as a result of ANZ’s performance, however, this result was largely attributable to decisions made prior to his appointment; Using Performance Rights as part of the long-term incentive program and Options for retention purposes provides a strong motivation and retention element in both flat and growth economic cycles. These options will be available for exercise from the date of vesting, December 2011, with the option exercise price being equal to the market value of ANZ shares at the date they were granted i.e. $14.18 per share. Upon exercise, each option entitles the cEO to one ordinary ANZ share. At grant the options were independently valued at $2.27 each i.e. a total value of $1.589 million. however, these options will only have any value if, at the vesting date or during the subsequent exercise period (i.e. 2 years after vesting), the share price exceeds $14.18. This value will be based on the amount by which the market price exceeds the exercise price multiplied by the total number of options. Three tranches of performance rights were provided to the cEO in December 2007, each to a maximum value of $3 million, covering his first three years in the role. The first of these tranches will be tested after three years (i.e. December 2010) based on ANZ’s relative TSR against a comparator group, consistent with the Executives comparator group (refer section 2.6.4). Performance equal to the median of the comparator group will result in half of the Performance Rights vesting. Achieving TSR above the median will result in further performance rights vesting, increasing on a straight line basis until ANZ’s TSR equals or exceeds the 75th percentile of the comparator group at which time all the performance rights vest. The other two tranches will be tested in December 2011 and December 2012 respectively. No retesting is available. Therefore, since joining ANZ as cEO on 1 October 2007 the cEO will only receive a benefit from December 2010 onwards and only if the performance hurdles have been met. in addition to his standard remuneration arrangements, the cEO was provided with additional equity as part of his original sign-on arrangements to recognise remuneration forgone from his previous employer in order to join ANZ. The cEO was offered $9 million on his commencement which he elected to take as deferred shares, with one third of the award vesting in each of October 2008, 2009 and 2010 respectively. The sign-on award equated to a total of 330,033 ANZ shares at the time of grant when the share price was $27.27. given the purpose of the sign-on award for the cEO was to compensate him for remuneration forgone, the ANZ Deferred Shares were not subject to any performance hurdles. The allocation of Deferred Shares will, however, strengthen the alignment of the cEO’s interests with shareholders. On 2 October 2008, 110,011 of those shares became available to the cEO. however, the nominal value of the shares had declined from the original grant value of $3 million to $2.097 million on 2 October 2008 (based on the one day vWAP of $19.0610 per share). The second grant vested on 2 October 2009 and, based on the one day vWAP of $23.560 per share, the value at vesting was $2.592 million. The final grant will vest on 2 October 2010. 30 ANZ Annual Report 2010 Remuneration Report 31 REmUNERATiON REPORT – fULL (Audited) (continued) 2.6. ExEcUTivE REmUNERATiON 2.6.1. fixED REmUNERATiON The fixed remuneration amount is expressed as a total dollar amount which can be taken as cash salary, 9% superannuation contributions, and other nominated benefits (e.g. novated car leases, superannuation contributions, car parking and contributions towards the Employee Share Save Scheme). fixed Remuneration at ANZ is reviewed annually. ANZ sets remuneration ranges with a midpoint targeted to the local market median being paid in the financial services industry in the relevant global markets in which ANZ operates. 2.6.2. vARiABLE REmUNERATiON mandatory Deferral variable remuneration forms a significant part of Executives’ potential remuneration, providing at risk components that are designed to drive performance in the short, medium and long-term. The term “variable remuneration” within ANZ covers both the STi and LTi arrangements. During the 2009/10 year, ANZ formalised the Board’s discretion to reduce or eliminate variable remuneration payments, including deferred amounts which have not yet vested, following consideration of any adverse outcomes that have arisen during the deferral period that impact the original assessment of performance, to meet unexpected or unknown regulatory requirements, or to protect the financial soundness of ANZ. The Board also considers all these factors when initially determining and approving bonus pools, payments and any significant individual bonus amounts. 2.6.3. ShORT TERm iNcENTivES (STi) Details of the STi arrangements for Executives are provided in Table 9 below: TABLE 9: SUmmARY Of STi ARRANgEmENTS Purpose Determining STi Pools Performance Targets The STi arrangements support ANZ’s strategic objectives by providing rewards that are significantly differentiated on the basis of achievement against annual performance targets. The introduction in 2008 of mandatory deferral of a portion of the STi places an increased emphasis on having a variable structure that is flexible, continues to be performance linked, has significant retention elements and motivates executives to drive continued performance over the longer term. ANZ’s Employee Reward Scheme (ANZERS) structure is reviewed by the Board hR committee and approved by the Board. The size of the overall pool is determined by the Board and is based on an assessment of the balanced scorecard of measures of the group, with this pool then distributed between the different Divisions based on their relative performance against a balanced scorecard of financial and qualitative measures. The STi targets are set to ensure appropriate focus on achievement of ANZ group, Division and individual performance aligned with ANZ’s overall strategy. individual performance objectives for Executives are based on a number of qualitative and quantitative measures which may include: financial measures including economic profit, revenue growth, EPS growth, capital, liquidity and operating costs; customer measures including customer satisfaction and market Share; Process measures including process improvements and cost benefits; and risk management, audit and compliance measures/standards; People measures including employee engagement, diversity targets, corporate responsibility and performance management behaviour. Strategic goals including integration of business acquisitions. The specific targets and features relating to all these qualitative and quantitative measures have not been provided in detail due to their commercial sensitivity. The performance of relevant executives against these objectives is reviewed at the end of the year by the Board hR committee and approved by the Board. Determining individual incentive Targets Each Executive has a target STi percentage which is determined according to market relativities. The 2009/10 target STi award level for Executives (excluding the cEO) is 120% of fixed Remuneration. TABLE 9: SUmmARY Of STi ARRANgEmENTS (cONTiNUED) Rewarding Performance The STi program and the targets that are set have been designed to motivate and reward superior performance. The size of the actual STi payment made at the end of each financial year to individuals will be determined based on performance as detailed above. Within the overall incentive pool approved by the Board, Executives who out-perform relative to their peers and significantly exceed targets may be rewarded with a maximum STi award which is significantly higher than their target STi. conversely, the poorest performers relative to their peers will not be eligible to receive any STi award. Since 2008, the following tiered STi deferral approach applies to Executives (excluding the cEO): STi up to the threshold (currently $200,000) paid in cash1 25% of STi amounts above the threshold deferred in ANZ equity for 1 year 25% of STi amounts above the threshold deferred in ANZ equity for 2 years The balance (i.e. 50%) of STi amounts above the threshold to be paid as cash1. in 2009/10, Executives could again elect to receive the deferral value as 100% shares or 50% shares/50% options2. Allowing a mix of options and shares for the mandatory STi deferral provides a strong retention element in both flat and growth economic cycles. Options contain an in-built price hurdle given that they are designed to reward for share price growth. That is, options can provide benefits to the extent the ANZ share price increases above the option exercise price. Options deliver no value where the ANZ share price is equal to or below the option exercise price during the exercise period. (As part of the changed remuneration arrangements introduced this year for c Page (chief Risk Officer) to strengthen his independence from the business, all mandatory deferral is granted as shares only, i.e. the higher leverage of options is not available.) As the incentive amount has already been earned, there are no further performance measures attached to the shares and options. however, prior to releasing deferred equity, the Board considers whether to reduce or eliminate the deferred portion having regard to any adverse outcomes that may have arisen during the deferral period that impact the original assessment of performance, to meet unexpected or unknown regulatory requirements, or to protect the financial soundness of ANZ. Unless the Board determines otherwise, all unvested deferred amounts are forfeited on resignation or termination on notice. in the case of retrenchment, retirement, death or total and permanent disablement, the unvested deferred amounts will vest unless the Board determines otherwise. 1 Executives are able to elect to take any cash bonus amounts they may be awarded as cash or superannuation. 2 J fagg received share rights rather than shares due to taxation implications in New Zealand. A share right effectively provides a right in the future to acquire a share in ANZ at nil cost to the employee. The value of the right at grant date is discounted (relative to the value of an ANZ share at grant), due to the fact that dividends will not be received during the deferral period. 32 ANZ Annual Report 2010 Remuneration Report 33 REmUNERATiON REPORT – fULL (Audited) (continued) 2.6.4. LONg TERm iNcENTivES (LTi) Details of the LTi arrangements for Executives are provided in Table 10 below: TABLE 10: SUmmARY Of LTi ARRANgEmENTS Purpose The LTi arrangements are designed to link a significant portion of Executives’ remuneration to shareholder interests. Type of Equity Awarded LTi is delivered to Executives (apart from the chief Risk Officer who receives unhurdled deferred shares) as Time Restrictions Performance hurdle vesting Schedule 100% Performance Rights. A Performance Right is a right to acquire a share at nil cost, subject to meeting time and performance hurdles. Upon exercise, each Performance Right entitles the executive to one ordinary share. The Performance Rights awarded to Executives will be tested once only against the performance hurdle at the end of three years. if they do not achieve the required performance hurdle they are forfeited at that time. Subject to the performance hurdle being met, Executives then have a two-year exercise period. The Performance Rights granted to Executives in November 2009 have a single long-term performance measure (refer to section 2.11 for details of legacy LTi programs). The Performance Rights are designed to reward Executives if the company’s TSR is at or above the median TSR of a group of peer companies over a three year period. TSR represents the change in the value of a share plus the value of reinvested dividends paid. TSR was chosen as the most appropriate comparative measure as it focuses on the delivery of shareholder value and is a well understood and tested mechanism to measure performance. The proportion of Performance Rights that become exercisable will depend upon the TSR achieved by ANZ relative to the companies in the comparator group (shown below) at the end of the three-year period. An averaging calculation is used for TSR over a 90 day period for start and end values in order to reduce the impact of share price volatility. To ensure an independent TSR measurement, ANZ engages the services of an external organisation (mercer) to calculate ANZ’s performance against the TSR hurdle. Performance equal to the median of the comparator group will result in half of the performance rights vesting. Achieving TSR above the median will result in further performance rights vesting, increasing on a straight line basis until ANZ’s TSR equals or exceeds the 75th percentile of the comparator group at which time all the performance rights vest. Where ANZ’s performance falls between two of the comparators, TSR is measured on a pro-rata basis. comparator group The peer group of companies against which ANZ’s TSR performance is measured, comprises the following nine companies: AmP Limited commonwealth Bank of Australia macquarie Bank Limited QBE insurance group Limited Westpac Banking corporation AxA Asia Pacific holdings Limited insurance Australia group Limited National Australia Bank Limited Suncorp-metway Limited Size of LTi grants The size of individual LTi grants for Executives is determined by an individual’s level of responsibility, their performance and the assessed potential of the executive. The target LTi for disclosed Executives is around 18% of the individual’s target reward mix and around 50% of fixed Remuneration. Executives are advised of the dollar value of their LTi grant, which is then converted into a number of Performance Rights based on an independent valuation. Refer to section 2.8 for further details on the valuation approach and inputs. LTi allocations are made annually after the annual review which occurs in October. The following example uses the November 2009 allocation value. Example: Executive granted LTi value of $500,000 Approved Allocation valuation is $12.17 per Performance Right $500,000 / $12.17 = 41,084 Performance Rights TABLE 10: SUmmARY Of LTi ARRANgEmENTS (cONTiNUED) cessation of Employment Provisions The following provisions apply in the case of cessation of employment: in case of dismissal for misconduct, Performance Rights are forfeited; in case of resignation all unvested or vested but unexercised Performance Rights are forfeited at the time notice is given: in case of termination on notice, unless the Board determines otherwise, only Performance Rights that are vested may be exercised and all unvested Performance Rights will be forfeited; and in case of death or total & permanent disablement, the performance hurdle is waived and a grace period is provided in which to exercise all Performance Rights. conditions of grant The conditions under which Performance Rights are granted are approved by the Board in accordance with the rules of the ANZ Share Option Plan. hedging and margin Lending Prohibitions Shareholding guidelines As specified in the ANZ Securities Trading Policy, equity allocated under ANZ incentive schemes must remain at risk until fully vested (in the case of Deferred Shares) or exercisable (in the case of Options or Performance Rights). As such, it is a condition of grant that no schemes are entered into that specifically protect the unvested value of Shares, Options and Performance Rights allocated. Doing so would constitute a breach of the grant conditions and would result in the forfeiture of the relevant Shares, Options or Performance Rights. The Policy was also extended in 2009 to incorporate a prohibition on Executives providing ANZ securities in connection with a margin loan or similar financing arrangements under which they may be subject to a call. To monitor adherence to this policy, ANZ’s Executives are required to sign an annual declaration stating that they have not entered into (and are not currently involved in) any schemes to protect the value of their interests in any unvested ANZ securities. Based on the 2009/10 declarations, ANZ can advise that Executives are fully compliant with this policy. Executives are expected to accumulate ANZ shares over a five year period, to the value of 200% of their fixed Remuneration and to maintain this shareholding while an executive of ANZ. This guideline was introduced in June 2005. New Executives are expected to accumulate the required holdings within five years of appointment. Shareholdings for this purpose include all vested and allocated but unvested equity which is not subject to performance hurdles. 34 ANZ Annual Report 2010 Remuneration Report 35 REmUNERATiON REPORT – fULL (Audited) (continued) 2.7. EQUiTY gRANTED AS REmUNERATiON 2.9. EQUiTY vESTED/ExERciSED/LAPSED DURiNg 2009/10 Details of Deferred Shares, Options and Performance Rights granted to Executives during the 2009/10 year are set out in Table 11 below. Details of the number and value of Deferred Shares, Options and Performance Rights granted to Executives in prior years which vested, were exercised or which lapsed during the 2009/10 year are set out in the table below. TABLE 11: DEfERRED ShARES, OPTiONS AND PERfORmANcE RighTS gRANTED AS REmUNERATiON DURiNg 2009/10 Name Type of Equity Current Executives m Smith P chronican S Elliott g hodges P marriott c Page A Thursby STi Deferred Shares1 STi Deferred Shares1 LTi Performance Rights2 STi Deferred Shares1 STi Deferred Shares1 STi Deferred Options1 STi Deferred Options1 LTi Performance Rights2 STi Deferred Shares1 STi Deferred Shares1 LTi Performance Rights2 STi Deferred Shares1 STi Deferred Shares1 LTi Performance Rights2 STi Deferred Shares1 STi Deferred Shares1 LTi Performance Rights2 STi Deferred Shares1 STi Deferred Shares1 LTi Performance Rights2 Former Executives J fagg STi Deferred Share Rights1 STi Deferred Share Rights1 LTi Performance Rights2 Number granted Grant date Vesting date Date of option expiry Option exercise price $ Equity Fair Value3 $ 46,053 46,052 57,726 1,096 1,096 5,307 5,307 41,084 7,237 7,236 41,084 7,127 7,127 41,084 15,351 15,350 34,921 26,316 26,315 45,193 4,086 4,291 41,084 13-Nov-09 13-Nov-09 24-Dec-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-10 13-Nov-11 24-Dec-12 13-Nov-10 13-Nov-11 13-Nov-10 13-Nov-11 13-Nov-12 13-Nov-10 13-Nov-11 13-Nov-12 13-Nov-10 13-Nov-11 13-Nov-12 13-Nov-10 13-Nov-11 13-Nov-12 13-Nov-10 13-Nov-11 13-Nov-12 – – 23-Dec-14 – – 12-Nov-14 12-Nov-14 12-Nov-14 – – 12-Nov-14 – – 12-Nov-14 – – 12-Nov-14 – – 12-Nov-14 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-10 13-Nov-11 13-Nov-12 12-Nov-14 12-Nov-14 12-Nov-14 – – 0.00 – – 22.80 22.80 0.00 – – 0.00 – – 0.00 – – 0.00 – – 0.00 0.00 0.00 0.00 22.54 22.54 11.26 22.54 22.54 4.83 5.09 12.17 22.54 22.54 12.17 22.54 22.54 12.17 22.54 22.54 12.17 22.54 22.54 12.17 21.41 20.39 12.17 1 Executives are required to take half of all STi amounts above the threshold as equity. Refer to Table 9 for further details of the mandatory Deferral arrangements and Table 12 for details of the valuation methodology, inputs and fair value. 2 The 2009 LTi grants for Executives were delivered as Performance Rights. Refer to Table 10 for further details of the LTi grant and Table 12 for details of the valuation, inputs and fair value. 3 The estimated maximum value of the grant can be determined by multiplying the number granted by the fair value of the equity instruments. The minimum value of the grants, if the applicable conditions are not met, is nil. 2.8. EQUiTY vALUATiONS ANZ engages two external experts (mercer and Pwc) to independently value any required Options, Rights and Shares, taking into account factors including the performance conditions, share price volatility, life of instrument, dividend yield and share price at grant date. These are then audited by internal audit and KPmg and the higher of the two values passing audit is then approved by the Board hR committee as the allocation and/or expensing/disclosure value. The following table provides details of the valuations of the various equity instruments issued during the year: TABLE 12: EQUiTY vALUATiON iNPUTS Recipients Type of Equity Executives Executives Executives Executives Executives Executives STi Deferred Options STi Deferred Options STi Deferred Share Rights STi Deferred Share Rights LTi Performance Rights LTi Performance Rights Grant date 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 24-Dec-09 Equity fair value ($) Share closing price at grant ($) ANZ expected volatility (%) Equity term (years) Vesting period (years) Expected life (years) Expected dividend yield (%) Risk free interest rate (%) 4.83 5.09 21.41 20.39 12.17 11.26 22.48 22.48 22.48 22.48 22.48 22.39 39 39 35 35 35 40 5 5 5 5 5 5 1 2 1 2 3 3 3 3.5 1 2 3 3 5.50 5.50 5.00 5.00 5.00 4.60 5.04 5.13 4.26 4.67 5.01 4.71 TABLE 13: EQUiTY vESTED/ExERciSED/LAPSED DURiNg 2009/10 Vested lapsed Exercised NameType of Equity Current Executives Number granted Grant date First date exercisable Date of expiry Number % Value1 $ Number % Value1 $ Number % Vested and exercisable as at 30 Sep 2010 Value1 $ Unexer -cisable as at 30 Sep 2010 m Smith Sign-on Shares2 110,011 19-Dec-07 02-Oct-09 – 110,011 100 2,591,859 P chronican – – – S Elliott Other Deferred Shares 7,530 11-Jun-09 11-Jun-10 – – – – – 7,530 100 172,589 g hodges STi Deferred Options 33,870 31-Oct-08 31-Oct-09 30-Oct-13 33,870 100 202,719 – – – – – – – – – – – – – – – – – – – – – (33,870) 100 192,338 P marriott hurdled Options hurdled Options index-Linked Options index-Linked Options STi Deferred Share Rights Performance Rights STi Deferred Shares STi Deferred Options hurdled Options hurdled Options index-Linked Options index-Linked Options Performance Rights 05-Nov-04 23-Oct-02 50 49,181 11-may-04 11-may-07 10-may-11 24,591 86 04-Nov-11 51,600 05-Nov-07 60,000 – – 63,000 22-Oct-09 23-Oct-05 – 113,000 20-may-03 20-may-06 19-may-10 – 30-Oct-13 123,725 5,341 100 24-Oct-11 57,340 100 1,371,699 – 172,498 – 141,296 – (63,000) 100 (398,714) – (113,000) 100 (427,598) – – (24,590) – (32,400) – – (5,341) 22 (305,351) (44,461) 31-Oct-09 25-Oct-09 31-Oct-08 24-Oct-06 – (12,879) 5,341 57,340 – – – - 31-Oct-08 31-Oct-08 31-Oct-09 3,638 24,193 31-Oct-09 69,263 11-may-04 11-may-07 10-may-11 34,632 04-Nov-11 58,136 05-Nov-07 67,600 – 153,000 22-Oct-09 23-Oct-05 158,000 20-may-03 20-may-06 19-may-10 – 24-Oct-11 57,340 100 1,371,699 57,340 3,638 100 30-Oct-13 24,193 100 50 86 – – 84,275 144,800 242,933 159,194 05-Nov-04 23-Oct-02 – – – – – (153,000) 100 (968,306) – (158,000) 100 (597,881) – – – – – – 22 (305,351) (44,461) – – – – – – – – 24-Oct-06 25-Oct-09 (12,879) 50 114,066 70,590 54 – – – – 100 122,088 78 1,016,321 – – – – – – – – – – – – 78 979,169 c Page – – – – – – – A Thursby Other Deferred Shares 34,602 03-Sep-07 03-Sep-10 – 34,602 100 804,989 STi Deferred Shares STi Deferred Options 12,369 82,255 31-Oct-08 31-Oct-08 31-Oct-09 31-Oct-09 – 12,369 100 30-Oct-13 82,255 100 286,530 492,313 – – – – – – – – – – – – – – – – – – – – – – – – Former Executives J fagg Other Deferred Shares hurdled Options hurdled Options hurdled Options index-Linked Options index-Linked Options Performance Rights 03-Sep-10 05-Nov-06 03-Sep-07 05-Nov-03 10,380 11,217 04-Nov-10 10,759 11-may-04 11-may-07 10-may-11 04-Nov-11 11,340 12,955 22-Oct-09 21,200 20-may-03 20-may-06 19-may-10 33,640 – 10,380 100 – 50 86 – – 24-Oct-11 33,640 100 – 5,380 9,752 – – 05-Nov-04 23-Oct-02 05-Nov-07 23-Oct-05 25-Oct-09 24-Oct-06 241,483 – 37,739 26,704 – – 804,743 – – – – – – – – (12,955) 100 (21,200) 100 (7,556) – – – (11,217) (5,379) – (6,350) – – (81,990) – (80,222) 22 (179,147) (26,084) – 100 50 56 – – – 62,268 25,342 14,295 – – 78 598,137 110,011 – 7,530 – 24,591 19,200 – – – – 3,638 24,193 69,263 58,136 – – – – 34,602 12,369 82,255 10,380 – 5,380 3,402 – – – – – – – – 8,400 – – – – – – – 9,464 – – – – – – – – – – 1,588 – – – 1 The value of shares and/or performance rights is based on the 1-day vWAP of the company’s shares traded on the ASx on the date of vesting, lapsing or exercising, multiplied by the number of shares and/or performance rights. The value of options is based on the difference between the 1-day vWAP and the exercise price, multiplied by the number of options. 2 The second tranche of 110,011 deferred shares granted to the cEO on his commencement vested on 2 October 2009 – refer to section 2.5 for further details. The value has been determined based on the 1-day vWAP on 2 October 2009 of $23.56 per share. 36 ANZ Annual Report 2010 Remuneration Report 37 REmUNERATiON REPORT – fULL (Audited) (continued) 2.10. ShAREhOLDiNgS Of ExEcUTivES The movement during the reporting period in shareholdings of Executives (held directly, nominally and by related parties) is provided below. The movement during the reporting period in options and performance rights of Executives (held directly, nominally and by related parties) is provided below. TABLE 14: ExEcUTivES’ ShAREhOLDiNgS (iNcLUDiNg mOvEmENTS DURiNg ThE 2009/10 YEAR) TABLE 15: ExEcUTivES’ OPTiON AND PERfORmANcE RighT hOLDiNgS (iNcLUDiNg mOvEmENTS DURiNg ThE 2009/10 YEAR) Name Current Executives m Smith P chronican6 S Elliott g hodges P marriott c Page A Thursby Former Executives J fagg Balance of shares as at 1 Oct 20091 Shares granted during the year as remuneration2 Shares from other changes during the year3 Balance as at 30 Sep 20104 Balance as at date of report sign-off5 375,025 1,499 15,060 282,054 534,350 – 167,824 92,105 – 2,192 14,473 14,254 30,701 52,631 2,246 3,000 817 (49,647) 5,210 748 2,648 469,376 4,499 18,069 246,880 553,814 31,449 223,103 469,376 4,499 18,069 324,540 553,814 31,449 223,103 47,144 – 37,821 84,965 n/a 1 Balance of shares held at 1 October 2009 include beneficially held shares (both direct and indirect) and shares held by related parties. 2 Details of shares granted as remuneration during 2009/10 are provided in Table 11. 3 Shares resulting from any other changes during the year include the net result of any shares purchased, or sold or any acquired under the Dividend Reinvestment Plan. 4 The following shares were held on behalf of Executives (i.e. indirect beneficially held shares) as at 30 September 2010: m Smith – 204,362; P chronican – 0; S Elliott – 18,069; g hodges – 141,573; P marriott – 134,218; c Page – 31,449; A Thursby – 223,103. 5 current holdings for J fagg are not provided as she is no longer a KmP as at the report sign off date. 6 commencing balance is based on holdings as at the date of commencement as a Key management Personnel. Name Type of options/rights Current Executives m Smith Special Options LTi Performance Rights P chronican3 LTi Performance Rights S Elliott g hodges P marriott c Page A Thursby Former Executives J fagg STi Deferred Options LTi Performance Rights hurdled Options index-Linked Options STi Deferred Options LTi Performance Rights STi Deferred Share Rights hurdled Options index-Linked Options STi Deferred Options LTi Performance Rights Performance Rights STi Deferred Options LTi Performance Rights hurdled Options index-Linked Options LTi Performance Rights STi Deferred Share Rights Balance as at 1 Oct 20091 Granted during the year as remuneration2 Exercised during the year Number changed, forfeited or lapsed during the year Balance as at 30 Sep 2010 Vested and exercisable as at 30 Sep 2010 Balance as at date of report sign-off4 700,000 779,002 – – – 109,181 176,000 67,739 165,260 11,004 136,863 311,000 48,385 165,260 38,038 164,509 101,351 33,316 34,155 83,794 37,722 – – 57,726 10,614 41,084 – – – 41,084 – – – – 41,084 34,921 – 45,193 – – – – – (56,990) – (33,870) (44,461) (5,341) – – – (44,461) – – – – – 41,084 8,377 (22,946) – (26,084) – – – – – – – (176,000) – (12,879) – – (311,000) – (12,879) – – – – (34,155) (7,556) – 700,000 779,002 57,726 10,614 41,084 52,191 – 33,869 149,004 5,663 136,863 – 48,385 149,004 72,959 164,509 146,544 10,370 – 91,238 46,099 – – – – – 43,791 – – – – 127,399 – 24,193 – – 82,255 – 8,782 – – – 700,000 779,002 57,726 10,614 41,084 8,400 – – 149,004 5,663 136,863 – 48,385 149,004 72,959 164,509 146,544 n/a n/a n/a n/a 1 Balance of options/rights held at 1 October 2009 include beneficially held options/rights (both direct and indirect) and options/rights held by related parties. 2 Details of options/rights granted as remuneration during 2009/10 are provided in Table 11. 3 P chronican’s commencing balance is based on holdings as at the date of commencement. 4 current holdings for J fagg are not provided as she is no longer a KmP as at the report sign off date. 38 ANZ Annual Report 2010 Remuneration Report 39 2.12. REmUNERATiON PAiD TO ExEcUTivES Remuneration details of Executives for 2009/10 and 2008/09 are set out below in Table 17. Overall the year-on-year total is higher. This is partly attributable to higher variable remuneration payments for the current year but also having full year remuneration data for nearly all Executives. LTi equity grants awarded in 2010 are broadly unchanged from 2009. The overall actual STi payments are higher than last year but this is consistent with the improvement in ANZ’s performance. for those Executives who were disclosed in both 2008/09 and 2009/10, the following are noted: S Elliott – 2008/09 remuneration only reflected a partial year as Elliott joined ANZ in that year. Accordingly, year-on-year comparisons are not appropriate. g hodges – Overall remuneration is fairly consistent. fixed remuneration is basically unchanged, with a decrease in some non-monetary benefits relating to relocation. The STi is higher and LTi amortisation is relatively unchanged. P marriott – fixed remuneration and LTi amortisation are virtually unchanged but the STi is higher than last year. c Page – As detailed earlier, the overall remuneration mix for Page has been changed with an increase in fixed remuneration but the STi is below last year’s level. The largest contributing factor to the year-on-year change is the amortisation of equity relating to prior year grants. A Thursby – fixed remuneration is unchanged and the STi is slightly lower than 2009. There is a significant increase in the equity amortisation relating to deferral of prior year variable payments and expensing of grants made to Thursby in relation to his commencement with ANZ. J fagg – 2009 remuneration only reflected a partial year as fagg was appointed as a KmP during that year. The 2010 disclosure also reflects a partial year as fagg stood down from her role as a KmP in late 2010 due to illness. Accordingly, year-on-year comparisons are not appropriate. REmUNERATiON REPORT – fULL (Audited) (continued) 2.11. LEgAcY LTi PROgRAmS There are a number of legacy LTi programs which are no longer offered to new entrants but which have existing participants. Details of these are shown in Table 16 below. Option plans described below have the following features: An exercise price that is set equal to the weighted average sale price of all fully paid ordinary shares in the company sold on the Australian Securities Exchange (ASx) during the 1 week prior to and including the date of grant; A maximum life of 7 years and an exercise period that commences 3 years after the date of grant, subject to performance hurdles being met. Options are re-tested monthly (if required) after the commencement of the exercise period; Upon exercise, each option entitles the option-holder to one ordinary share; in case of resignation or termination on notice or dismissal for misconduct: options are forfeited; in case of redundancy: options are pro-rated and a grace period is provided in which to exercise the remaining options (with hurdles waived, if applicable); in case of retirement, death or total & permanent disablement: A grace period is provided in which to exercise all options (with hurdles waived, if applicable); and Performance hurdles, which are explained below for each type of option. TABLE 16: LEgAcY LTi PLANS Type of Equity Details Deferred Shares (granted from february 2000) hurdled Options (hurdled A) (granted to Executives from November 2003 until may 2004) hurdled Options (hurdled B) (granted November 2004) Deferred Shares granted under the LTi arrangements were designed to reward executives for superior growth whilst also encouraging executive retention and an increase in the company’s share price. Shares are subject to a time-based vesting hurdle of 3 years, during which time they are held in trust; During the deferral period, the employee is entitled to any dividends paid on the shares; Shares issued under this plan may be held in trust for up to 10 years; The value used to determine the number of LTi deferred shares to be allocated has been based on the volume weighted average price of the shares traded on the ASx in the week leading up to and including the date of issue; in case of resignation or termination on notice or dismissal for misconduct: LTi shares are forfeited; in case of redundancy: the number of shares that are released is pro rated according to the time held as a proportion of the vesting period (for all grants made after february 2010, the pro-rated shares are only released at the original vesting date, not the cessation date); and in case of retirement, death or total & permanent disablement: LTi shares are released to executives. Deferred Shares no longer form part of ANZ’s Executive LTi program, however there may be circumstances (such as retention) where this type of equity (including Deferred Share Rights) will be issued. Until may 2004, hurdled options were granted to executives with the following performance hurdles attached. half the options may only be exercised once ANZ’s TSR exceeds the percentage change in the S&P/ASx 200 Banks (industry group) Accumulation index, measured over the same period (since issue) and calculated as at the last trading day of any month (once the exercise period has commenced); and The other half of hurdled options may only be exercised once the ANZ TSR exceeds the percentage change in the S&P/ASx 100 Accumulation index, measured over the same period (since issue) and calculated as at the last trading day of any month (once the exercise period has commenced). in November 2004 hurdled options were granted with a relative TSR performance hurdle attached. The proportion of options that become exercisable will depend upon the TSR achieved by ANZ relative to the companies in the comparator group shown below. Performance equal to the median TSR of the comparator group will result in half the options becoming exercisable. Performance above median will result in further options becoming exercisable, increasing on a straight-line basis until all of the options become exercisable where ANZ’s TSR is at or above the 75th percentile in the comparator group. Where ANZ’s performance falls between two of the comparators, TSR is measured on a pro rata basis. Comparator Group AmP Limited AxA Asia Pacific holdings Limited commonwealth Bank of Australia insurance Australia group Limited macquarie Bank Limited National Australia Bank Limited QBE insurance group Limited Suncorp-metway Limited Westpac Banking corporation 40 ANZ Annual Report 2010 Remuneration Report 41 REmUNERATiON REPORT – fULL (Audited) (continued) TABLE 17: ExEcUTivE REmUNERATiON fOR 2009/10 AND 2008/09 Short-Term Employee Benefits Post- Employment Financial Year Cash salary $ Non monetary benefits1 $ Total cash incentive2,3 $ Total $ Super contributions4 $ Current Executives M Smith11 chief Executive Officer P Chronican12 chief Executive Officer, Australia S Elliott chief Executive Officer, institutional G Hodges13 Deputy chief Executive Officer P Marriott chief financial Officer C Page chief Risk Officer A Thursby chief Executive Officer, Asia Pacific, Europe & America Former Executives D Cartwright chief Operating Officer R Edgar Deputy chief Executive Officer J Fagg12 chief Executive Officer, New Zealand B Hartzer14 chief Executive Officer, Australia Total of all Executive KMPs15 Total of all Disclosed Executives 2010 2009 2010 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2009 2009 2010 2009 2009 2010 2009 2010 2009 3,000,000 3,000,000 985,758 917,431 302,752 917,431 1,012,631 912,431 912,431 1,009,174 779,817 1,000,000 5,500 5,000 301,124 12,334 8,905 17,309 98,630 7,595 9,426 60,565 301,988 23,570 2,500,000 2,400,000 800,000 1,350,000 300,000 670,000 530,000 670,000 525,000 760,000 900,000 1,350,000 5,505,500 5,405,000 2,086,882 2,279,765 611,657 1,604,740 1,641,261 1,590,026 1,446,857 1,829,739 1,981,805 2,373,570 1,000,000 88,351 1,400,000 2,488,351 850,000 128,977 465,000 1,443,977 547,459 782,000 357,000 1,138,052 9,524,225 9,050,142 9,524,225 9,900,142 5,656 105,359 63,814 32,574 533,356 614,344 533,356 743,321 700,000 538,200 214,000 1,253,115 1,425,559 634,814 – 1,170,626 8,638,200 6,969,000 8,638,200 7,434,000 18,695,781 16,633,486 18,695,781 18,077,463 – – 89,092 82,569 27,248 82,569 34,679 82,569 82,569 90,826 70,183 – – – 49,541 – – 102,798 427,625 367,018 427,625 367,018 long-Term Employee Benefits Retirement benefit accrued during year5 $ long service leave accrued during the year $ Share-Based Payments6 Total amortisation value of STI shares $ lTI shares $ STI options $ lTI options $ – – – – – 4,278 28,588 – – – – – – – – – – – 45,668 45,663 16,535 18,630 1,679 15,222 (9,088) 15,222 15,222 23,197 14,527 15,222 1,369,343 – – 32,589 – 215,177 – 244,833 80,239 456,441 – 894,418 17,275 272,832 13,933 160,485 – 115,782 12,975 14,268 – – – – 4,278 28,588 162,671 99,546 3,212,801 468,853 4,278 162,671 3,212,801 28,588 113,479 629,338 – – – – – – – – – – – – – – – – – – – – – – – – – 34,421 – 57,446 132,340 41,033 94,529 – – 139,512 321,397 189,057 138,865 – – – 272,412 687,131 272,412 876,188 – – – – – – – – – – – – – – – – – – – – – – Performance rights $ Other equity allocations7 $ Termination benefits8 $ Total excluding termination benefits $ Grand Total Remuneration 9,10 $ 2,341,479 2,341,479 1,594,087 3,143,461 – 10,856,077 10,935,603 – 10,856,077 10,935,603 166,057 – – 2,358,566 2,358,566 146,439 – 151,034 57,810 616,061 790,098 565,243 670,933 250,792 115,909 – – – – – – 532,865 982,185 356,711 678,029 – – – – – – – – – – 2,745,447 698,394 2,595,493 2,617,878 2,538,926 2,390,349 2,650,995 2,182,424 2,745,447 698,394 2,595,493 2,617,878 2,538,926 2,390,349 2,650,995 2,182,424 4,937,772 4,937,772 4,134,595 4,134,595 310,957 82,736 – 2,201,145 2,201,145 233,660 606,276 222,457 – 421,902 1,790,963 2,212,865 85,300 42,061 – – 2,130,110 913,600 2,130,110 913,600 (762,604) – 212,967 510,820 723,787 5,225,212 3,968,643 2,812,606 3,921,361 – 30,813,386 26,174,626 634,869 30,813,386 26,809,495 5,225,212 2,812,606 – 30,813,386 30,813,386 4,279,600 4,004,097 634,869 28,375,771 29,010,640 1 Non-monetary benefits generally consists of salary packaged items such as car parking as 4 As m Smith, A Thursby and D cartwright are holders of long stay visas, their fixed Remuneration 7 Amortisation of other equity allocations for m Smith relates to the sign-on award and the 14 B hartzer’s 2009 share-based payments amortisation reflects the reversal of previously well as company-funded benefits including preparation of Australian taxation returns by Pwc. This item also includes costs met by the company in relation to relocation, such as airfares and housing assistance. The fringe benefits tax payable on any benefits is also included in this item. 2 The total cash incentive relates to the cash component only, with the deferred equity component to be amortised from the grant date. The relevant amortisation of the 2009 STi deferred components are included in share-based payments above. The 2010 STi deferred components will be amortised from the grant date in the 2011 Remuneration Report. The cash incentive component was approved by the Board on 25 October 2010 and will be paid in December 2010. 100% of the cash incentive awarded for the 2009 and 2010 years vested to the Executive in the applicable financial year. 3 The possible range of STi payments is between 0 and 2.5 times target STi. The actual STi received is dependent on ANZ group, Division and individual performance (refer to Section 2.6.3 for more details). The 2010 STi awarded (cash and equity component) as a percentage of target STi was: m Smith 158% (2009: 150%); P chronican 108%; S Elliott 208% (2009: 100%); g hodges 95% (2009: 72%); P marriott 95% (2009: 71%); c Page 100% (2009: 157%); A Thursby 208% (2009: 217%); D cartwright (2009: 72%); R Edgar (2009: 100% pro-rated to cessation date); J fagg 95% (2009: 71%); B hartzer (2009: 0%). Anyone who received less than 100% forfeited the rest of their STi entitlement. The minimum value is nil and the maximum value is what was actually paid. does not include the 9% Superannuation guarantee contribution, however they are able to elect voluntary superannuation contributions. for all other Australian based Executives, the superannuation contribution reflects the 9% Superannuation guarantee contribution – individuals may elect to take this contribution as superannuation or a combination of superannuation and cash. 5 Accrual relates to Retirement Allowance. As a result of being employed with ANZ prior to November 1992, g hodges is eligible to receive a Retirement Allowance on retirement, retrenchment, death, or resignation for illness, incapacity or domestic reasons. The Retirement Allowance is calculated as follows: 3 months of preserved notional salary (which is 65% of fixed Remuneration) plus an additional 3% of notional salary for each year of fulltime service above 10 years, less the total accrual value of long service leave (including taken and untaken). R Edgar was also entitled to a Retirement Allowance, which was paid to him on retirement and is included in the Termination Benefits amount. 6 in accordance with the requirements of AASB 2, the amortisation value includes a proportion of the fair value (taking into account market-related vesting conditions) of all equity that had not yet fully vested as at the commencement of the financial year. it is assumed that deferred shares will vest after 3 years. Assumptions for rights/options are detailed in Table 12. The fair value is determined at grant date and is allocated on a straight-line basis over the relevant vesting period. The amount included as remuneration is not related to nor indicative of the benefit (if any) that may ultimately be realised should the options/performance rights become exercisable. for deferred shares, the fair value is the volume weighted average price of the company’s shares traded on the ASx on the day the shares were granted. special equity allocations which were approved by shareholders at the 2007 and 2008 Annual general meetings respectively. Amortisation for S Elliott and A Thursby relates to equity granted on commencement – refer to Table 19 for more details; 2009 amortisation for J fagg relates to equity granted prior to commencement as a KmP but amortised and reflected since her commencement and inclusion as a KmP. 8 Termination benefits for R Edgar include retirement allowance and annual and long service leave entitlements payable on his retirement. Termination benefits for B hartzer include annual and long service leave entitlements only which were payable on his cessation. 9 Remuneration amounts disclosed exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts which cover current and former KmP of the controlled entities. The total premium, which cannot be disclosed because of confidentiality requirements, has not been allocated to the individuals covered by the insurance policy as, based on all available information, the directors believe that no reasonable basis for such allocation exists. 10 The value of rights/options for each KmP as a percentage of grand Total Remuneration is: m Smith 26%; P chronican 7%; S Elliott 7%; g hodges 26%; P marriott 24%; c Page 9%; A Thursby 14%; J fagg 28%. 11 While the cEO is an Executive Director he has been included in this table with other Executives. 12 chronican commenced on 30 November 2009 so payments reflect amounts received for the partial service for the 2009/10 year. J. fagg stepped down on 1 September 2010 so actual payments have been prorated based on time as a KmP in the 2009/10 year. 13 g hodges’ 2009 cash salary includes an annual leave payment of $47,310, paid on change of contracts on transfer from New Zealand to Australia. amortised values due to the forfeiture of equity on cessation of his employment. 15 Total of KmPs for 2009 excludes D cartwright who was included in the 2009 disclosures by virtue of being in the top 5 highest remunerated executives and was not included under the definition of KmP. 42 ANZ Annual Report 2010 Remuneration Report 43 REmUNERATiON REPORT – fULL (Audited) (continued) 3. contract Terms 3.1. cEO’S cONTRAcT TERmS The following table sets out details of the contract terms relating to the cEO. The contract terms are in line with industry practice (based on external advice on Australian and international peer company benchmarks) and ASx corporate governance Principles. TABLE 18: cONTRAcT TERmS – cEO (m SmiTh) Length of contract Smith commenced as cEO and Executive Director of ANZ on 1 October 2007 on a rolling twelve month contract with a minimum term of three years. Notice Periods Smith or ANZ may terminate the employment agreement by providing 12 months’ written notice. Resignation Smith may resign by providing 12 months’ written notice. On resignation, all unexercised Performance Rights (or cash equivalent) and unvested sign-on award will be forfeited. Termination on Notice by ANZ Death or Total and Permanent Disablement Termination for serious misconduct if ANZ terminates Smith’s employment, ANZ will give Smith 12 months’ written notice. ANZ may elect to pay in lieu all or part of the notice period based on Smith’s fixed Remuneration. On termination on notice by ANZ: All Performance Rights (or cash equivalent) which have vested or vest during the notice period will be retained and become exercisable; all Performance Rights (or cash equivalent) which have not yet vested will be retained and will vest and become exercisable subject to the relevant time and performance hurdles being satisfied. Sign-on award will vest in full. All Performance Rights (or cash equivalent) and sign-on award will vest. ANZ may immediately terminate Smith’s employment at any time in the case of serious misconduct, and Smith will only be entitled to payment of fixed Remuneration up to the date of termination. Payment of statutory entitlements of long service leave and annual leave applies in all events of separation. On Termination without notice by ANZ in the event of serious misconduct: All Performance Rights (or cash equivalent) and sign-on award will be forfeited. 3.2. ExEcUTivES’ cONTRAcT TERmS The following table sets out details of the contract terms relating to the Executives. The contract terms for all Executives are similar, but do, on occasion, vary to suit different needs. TABLE 19: cONTRAcT TERmS – ExEcUTivES Length of contract Rolling. Notice Periods Resignation Termination on Notice by ANZ in order to terminate the employment arrangements, Executives are required to provide the company with 6 months’ written notice, ANZ must provide Executives with 12 months’ written notice. Employment may be terminated by the Executive giving 6 months’ written notice. On resignation any options, performance rights and unvested deferred shares will be forfeited. ANZ may terminate the executive’s employment by providing 12 months’ written notice or payment in lieu of the notice period based on fixed Remuneration. There is discretion to pay STi on a pro-rata basis (depending on termination date, reason for termination and subject to business performance). On termination on notice by ANZ any options, performance rights or LTi deferred shares that have vested, or will vest during the notice period will be released, in accordance with the ANZ Share Option Plan Rules. Options, performance rights or LTi shares that have not yet vested will generally be forfeited. (Although in relation to P marriott there is a contractual requirement that equity granted prior to 1 October 2008 will vest in full.) Under the new mandatory deferral provisions of the STi program (effective from 2008), Executives must be in employment with ANZ and not in receipt of notice (given or received), to exercise vested STi deferred options or for vested STi deferred shares to be released in full. TABLE 19: cONTRAcT TERmS – ExEcUTivES (cONTiNUED) Redundancy Death or Total and Permanent Disablement Termination for serious misconduct Other arrangements if ANZ terminates employment for reasons of bona fide redundancy, a severance payment will be made that is equal to 12 months’ fixed Remuneration. All STi Deferred Shares are released. Options, Performance Rights and LTi Deferred Shares are either released in full or on a pro-rata basis, at the discretion of the Board with regard to the circumstances. There is discretion to pay short-term incentives on a pro-rata basis (depending on termination date and subject to business performance). On death or total and permanent disablement, Options, Performance Rights and Shares are released. ANZ may immediately terminate the Executive’s employment at any time in the case of serious misconduct, and the employee will only be entitled to payment of fixed Remuneration up to the date of termination. Payment of statutory entitlements of long service leave and annual leave applies in all events of separation. On Termination without notice by ANZ in the event of serious misconduct any Options, Performance Rights and Deferred Shares still held in trust will be forfeited. P Chronican As chronican joined ANZ in November 2009 he was not included in the LTi grants made to other management Board members in early November. Accordingly, a separate LTi grant was made in December providing Performance Rights on the same terms and conditions as those provided to management Board for 2009, apart from the allocation value which varied to reflect the different values at the respective grant dates. S Elliott As part of Elliott’s employment arrangement, he was granted Deferred Shares to a total value of $250,000. The grant was made in June 2009 with one-half vesting after 1 year and the other half vesting after 2 years. The Shares are restricted and held in trust for the beneficial interest of Elliott, during which period they will be forfeited if employment ceases for any reason other than retrenchment, death or total and permanent disablement, and that for the whole period that the Shares remain in trust (including any further period) they will be forfeited for any serious misconduct. A Thursby As part of Thursby’s employment arrangement, he was granted 3 separate tranches of Deferred Shares to the value of $1 million per annum, subject to Board approval. The first grant was to be made around the time of commencement with the subsequent two grants being awarded around his 1st and 2nd anniversaries with ANZ. The first tranche was approved by the Board on 3 September 2007, the second on 28 August 2008, and the third on 22 September 2009. The Shares are restricted and held in trust for three years from the date of allocation for the beneficial interest of Thursby, during which period they will be forfeited if employment ceases for any reason other than retrenchment, death or total and permanent disablement, and that for the whole period that the Shares remain in trust (including any further period) they will be forfeited for any serious misconduct. Signed in accordance with a resolution of the Directors John morschel chairman michael R P Smith Director 4 November 2010 44 ANZ Annual Report 2010 Remuneration Report 45 Corporate Governance The following statement sets out the governance framework the Board has adopted at ANZ as well as highlights of the substantive work undertaken by the Board and its Committees during the financial year. 2010 Key Areas of Focus and Achievements Supervision of the management of ANZ’s businesses in the aftermath of the global financial crisis and economic downturn, including in particular ANZ’s capital and funding requirements. Strengthening the link between remuneration and risk. Steps taken during the year include the adoption of the ANZ Remuneration Policy which addresses new APRA requirements relating to risk management practices and the amendment of the human Resources committee charter to require some overlap between the memberships of the human Resources and Risk committees. The intention of these steps is to ensure appropriate focus is given to alignment in remuneration policies, processes and incentives in order to avoid inappropriate risk taking. Recognition of ANZ as the leading bank globally on the Dow Jones Sustainability index (DJSi) for the fourth consecutive year. ANZ received a rating of 92/100 for corporate governance as part of this assessment. changes to the ASx governance Principles were announced in June 2010, and will come into effect for ANZ’s financial year beginning on 1 October 2011. in many cases ANZ is already in compliance with the revised ASx governance Principles, and in other cases ANZ will seek to be an early adopter of the changes, where possible and appropriate. NEW ZEALAND As an overseas listed issuer on the NZx, ANZ is deemed to comply with the NZx Listing Rules provided that it remains listed on the ASx, complies with the ASx Listing Rules and provides the NZx with all the information and notices that it provides to the ASx. The ASx governance Principles may materially differ from the NZx’s corporate governance rules and the principles of the NZx’s corporate governance Best Practice code. more information about the corporate governance rules and principles of the ASx can be found at asx.com.au and, in respect of the NZx, at nzx.com. ANZ has complied with all applicable governance principles both in Australia and New Zealand throughout the financial year. Succession planning for the role of the chairman of the Board, and Director retirements. John morschel was appointed to succeed charles goode as chairman upon charles’ retirement at the end of february 2010 following his service as a Director for close to 19 years and as chairman for approximately 15 years. in addition, Jerry Ellis retired from the Board at the 2009 Agm after 15 years service as a Director. completion of the acquisition of selected businesses in Taiwan, Singapore, indonesia, hong Kong, Philippines and vietnam from the Royal Bank of Scotland, and the acquisition of iNg groep’s 51% shareholding in the ANZ-iNg wealth management and life insurance joint ventures in Australia and New Zealand. Approach to governance in relation to corporate governance, the Board seeks to: embrace principles and practices it considers to be best practice internationally; be an ‘early adopter’, where appropriate, by complying before a published law or recommendation takes effect; and take an active role in discussions of corporate governance best practice and associated regulation in Australia and overseas. compliance with corporate governance codes ANZ has equity securities listed on the Australian Securities Exchange (ASx) and the New Zealand Stock Exchange (NZx), and debt securities listed on these and other overseas Securities Exchanges. ANZ must therefore comply with a range of listing and corporate governance requirements from Australia and overseas. AUSTRALiA As a company listed on the ASx, ANZ is required to disclose how it has applied the Recommendations contained within the ASx corporate governance council’s corporate governance Principles and Recommendations (ASx governance Principles) during the financial year, explaining any departures from them. full details of the location of the references in this statement (and elsewhere in this Annual Report) which specifically set out how ANZ applies each Recommendation of the ASx governance Principles are contained on www.anz.com >About us > Our company > corporate governance. OThER JURiSDicTiONS ANZ also monitors best practice developments in corporate governance across other relevant jurisdictions. ANZ deregistered from the US Securities and Exchange commission (SEc) with effect from October 2007. Despite no longer being required to comply with US corporate governance rules, ANZ has decided to continue with certain governance practices required under US regulations as being best practice, including practices in relation to the independence of Directors, the independence of the external auditor and the financial expertise of the Audit committee, as described in this statement. Website full details of ANZ’s governance framework are set out at www.anz.com > About us > Our company > corporate governance. This section of ANZ’s website also contains copies of all the charters and summaries of many of the documents and policies mentioned in this statement, as well as summaries of other ANZ policies of interest to shareholders and stakeholders. The website is regularly updated to ensure it reflects ANZ’s most recent corporate governance information. Directors The information below relates to the Directors in office, and sets out their Board committee memberships and other details, as at 30 September 2010. Mr J P Morschel chairman, independent Non-Executive Director, chair of the governance committee DipQS, FAicD Former Directorships include Non-executive director since October 2004. Ex officio member of all Board committees. Skills, experience and expertise mr morschel has a strong background in banking, financial services and property and brings the experience of being a chairman and Director of major Australian and international companies. Current Directorships Director: capitaLand Limited (from 2010), Tenix group Pty Limited (from 1998) and gifford communications Pty Limited (from 2000). Mr M R P Smith OBE chief Executive Officer, Executive Director BSc (HonS) chief Executive Officer since 1 October 2007. Skills, experience and expertise mr Smith is an international banker with over 30 years experience in banking operations in Asia, Australia and internationally. Until June 2007, he was President and chief Executive Officer, The hong Kong and Shanghai Banking corporation Limited, chairman, hang Seng Bank Limited, global head of commercial Banking for the hSBc group and chairman, hSBc Bank malaysia Berhad. Previously, mr Smith was chief Executive Officer of hSBc Argentina holdings SA. mr Smith joined the hSBc group in 1978 and during his international career he has held a wide variety of roles in commercial, institutional and investment Banking, Planning and Strategy, Operations and general management. Current Directorships Director: ANZ National Bank Limited (from 2007) and the financial markets foundation for children (from 2008). former chairman: Rinker group Limited (chairman and Director 2003–2007), Leighton holdings Limited (chairman and Director 2001–2004) and cSR Limited (Director 1996–2003, chairman 2001–2003). former Director: Singapore Telecommunications Limited (2001–2010), Rio Tinto Plc (1998–2005), Rio Tinto Limited (1998–2005), Westpac Banking corporation (1993–2001) and Lend Lease corporation Limited (1983–1995). Age: 67. Residence: Sydney. member: chongqing mayor’s international Economic Advisory council (from 2006), Australian Bankers’ Association incorporated (from 2007), Business council of Australia (from 2007), Asia Business council (from 2008), financial Literacy Advisory Board (from 2008), visa international Senior client council (from 2009) and Shanghai international financial Advisory council (from 2009). fellow: The hong Kong management Association (from 2005). Former Directorships include former chairman: hSBc Bank malaysia Berhad (2004–2007) and hang Seng Bank Limited (2005–2007). former cEO and Director: The hong Kong and Shanghai Banking corporation Limited (2004–2007). former Director: hSBc Australia Limited (2004–2007), hSBc finance corporation (2006–2007) and hSBc Bank (china) company Limited (2007). former Board member: visa international (Asia Pacific) Limited (2005–2007). Age 54. Residence: melbourne. 46 ANZ Annual Report 2010 Corporate Governance 47 cORPORATE gOvERNANcE (continued) Dr G J Clark independent Non-Executive Director, chair of the Technology committee Mr I J Macfarlane, AC independent Non-Executive Director, chair of the Risk committee BSc (HonS), pHD, FApS, FTSe Current Directorships Non-executive director since february 2004. member of the governance committee and human Resources committee. Skills, experience and expertise Dr clark is Principal of clark capital Partners, a US based firm that advises internationally on technology and the technology market place. Previously he held senior executive positions in iBm, News corporation, and Loral Space and communications. he brings to the Board international business experience and a distinguished career in micro-electronics, computing and communications. chairman: Kacomm communications Pty Ltd (Director from 2006). Former Directorships include former chairman: gPm classified Directories (2007–2008). former Director: Eircom holdings Ltd (formerly Babcock & Brown capital Limited) (2006–2009). Age: 67. Residence: Based in New York, United States of America and also resides in Sydney. Mr P A F Hay independent Non-Executive Director LLB (MeLB), FAicD Non-executive director since November 2008. member of the Risk committee, Audit committee and human Resources committee. Skills, experience and expertise mr hay has a strong background in company law and investment banking advisory work, with a particular expertise in relation to mergers and acquisitions. he has also had significant involvement in advising governments and government-owned enterprises. Current Directorships chairman: Lazard Pty Ltd Advisory Board (from 2009). Mr lee Hsien Yang independent Non-Executive Director MSc, BA Non-executive director since february 2009. member of the Technology committee and Risk committee. Skills, experience and expertise mr Lee is one of Asia’s most respected business leaders and has considerable knowledge of the region. he has a background in engineering and brings to the Board his international business and management experience across a wide range of sectors including food and beverages, properties, publishing and printing, telecommunications, financial services, education, civil aviation and land transport. Current Directorships chairman: fraser & Neave, Limited (from 2007), and civil Aviation Authority of Singapore (from 2009). Director: Singapore Exchange Limited (from 2004), The islamic Bank of Asia Limited (from 2007) and Kwa geok choo Pte Ltd (from 1979). Director: Alumina Limited (from 2002), Landcare Australia Limited (from 2008), gUD holdings Limited (from 2009), NBN co Limited (from 2009) and myer holdings Limited (from 2010). member: Takeovers Panel (from 2009). Former Directorships include former chief Executive Officer: freehills (2000–2005). former Director: Pacifica group Limited (1989–2008) and Lazard Pty Ltd (2007–2009). Age: 60. Residence: melbourne. member: governing Board of Lee Kuan Yew School of Public Policy (from 2005) and Rolls Royce international Advisory council (from 2007). consultant: capital international inc Advisory Board (from 2007). Former Directorships include former chairman: Republic Polytechnic (2002–2009). former Director: SingTel Optus Pty Limited (2002–2007), Singapore Post Limited (1995–2007), L & L Services Pte Ltd (2004–2008) and Board of iNSEAD (1999–2007). former member: Textron international Advisory council (1999–2008) and merrill Lynch PacRim Advisory council (2007–2010). former chief Executive Officer: Singapore Telecommunications Limited (1995–2007). Age: 53. Residence: Singapore. Bec (HonS), Mec, Hon DSc (SyD), Hon DSc (UnSW), Hon DcoM (MeLB), Hon DLiTT (MAcQ), Hon LLD (MonASH) Non-executive director since february 2007. member of the governance committee and Technology committee. Skills, experience and expertise During his 28 year career at the Reserve Bank of Australia including a 10 year term as governor, mr macfarlane made a significant contribution to economic policy in Australia and internationally. he has a deep understanding of financial markets as well as a long involvement with Asia. Current Directorships Director: Woolworths Limited (from 2007), Leighton holdings Limited (from 2007) and the Lowy institute for international Policy (from 2004). member: council of international Advisors to the china Banking Regulatory commission (from 2009), international Advisory Board of goldman Sachs JB Were (from 2007) and international Advisory Board of chAmP Private Equity (from 2007). Former Directorships include former chairman: Payments System Board (1998–2006), Australian council of financial Regulators (1998–2006) and financial markets foundation for children (1996–2006). former governor: Reserve Bank of Australia (member 1992–2006, chairman 1996–2006). Age: 64. Residence: Sydney. Mr D E Meiklejohn, AM independent Non-Executive Director, chair of the Audit committee BcoM, DipeD, FcpA, FAicD, FAiM Current Directorships Non-executive director since October 2004. member of the human Resources committee and Risk committee. Skills, experience and expertise mr meiklejohn has a strong background in finance and accounting. he also brings to the Board his experience across a number of directorships of major Australian companies spanning a range of industries. chairman: Paperlinx Limited (from 1999). Director: coca cola Amatil Limited (from 2005) and mirrabooka investments Limited (from 2006). President: melbourne cricket club (committee member from 1987). Former Directorships include former Director and chief financial Officer: Amcor Limited (1985–2000). Age: 68. Residence: melbourne. Ms A M Watkins independent Non-Executive Director, chair of the human Resources committee BcoM, FcA, F Fin, FAicD Former Directorships include former chairman: mrs crocket’s Kitchen (2006–2007). former cEO: Bennelong group (2008–2010). former Director: Just group Limited (2004–2008), Woolworths Limited (2007–2010) and Yarra capital Partners Pty Ltd (2008–2010). former Partner: mcKinsey & company (1996–1999). Age: 47. Residence: melbourne. Non-executive director since November 2008. member of the Audit committee and Risk committee. Skills, experience and expertise ms Watkins is an experienced cEO and established director with a grounding in finance and accounting. her experience includes retailing, agriculture, food manufacturing and financial services, and covers small to medium companies as well as large organisations. ms Watkins held senior executive roles with ANZ from 1999 to 2002. Current Directorships chief Executive Officer: graincorp Limited (from 2010). Director: AicD victorian council (from 2007) and The Nature conservancy Australian Advisory Board (from 2007). member: Takeovers Panel (from 2010). 48 ANZ Annual Report 2010 Corporate Governance 49 cORPORATE gOvERNANcE (continued) corporate governance framework CEO BOARD OF DIRECTORS PRINCIPAl BOARD COMMITTEES Audit and Financial Governance internal audit external audit financial controls AUDiT cOmmiTTEE gOvERNANcE cOmmiTTEE hUmAN RESOURcES cOmmiTTEE RiSK cOmmiTTEE TEchNOLOgY cOmmiTTEE MANAGEMENT BOARD KEY MANAGEMENT COMMITTEES cORPORATE RESPONSiBiLiTY cOmmiTTEE cREDiT & mARKET RiSK cOmmiTTEE gROUP ASSET & LiABiLiTY cOmmiTTEE gLOBAL ANTi-mONEY LAUNDERiNg/ SANcTiONS cOmmiTTEE REPUTATiON RiSK cOmmiTTEE TEchNOLOgY RiSK mANAgEmENT cOmmiTTEE cAPiTAL mANAgEmENT POLicY cOmmiTTEE OPERATiNg RiSK ExEcUTivE cOmmiTTEE PROJEcT & iNiTiATivES REviEW cOmmiTTEE Board meetings The Board normally meets at least eight times each year, including an offsite meeting to review in detail the group’s strategy. Typically at Board meetings the agenda will include: minutes of the previous meeting, and outstanding issues raised by Directors at previous meetings; the chief Executive Officer’s report; the chief financial Officer’s report; reports on major projects and current business issues; specific business proposals; reports from chairs of committees which have met shortly prior to the Board meeting on matters considered at those meetings; and for review, the minutes of previous committee meetings. There are two private sessions held at the end of each Board meeting which are each chaired by the chairman of the Board. The first involves all Directors including the cEO, and the second involves only the non-executive Directors. The chief financial Officer, group general counsel and company Secretary are also present at all Board meetings. members of senior management attend Board meetings when an issue under their area of responsibility is being considered or as otherwise requested by the Board. cEO and Delegation to management The Board has delegated to the chief Executive Officer, and through the chief Executive Officer to other senior management, the authority and responsibility for managing the everyday affairs of ANZ. The Board monitors management and their performance on behalf of shareholders. The group Discretions Policy details the comprehensive discretions framework that applies within ANZ and to employees appointed to operational roles or directorships of related entities. The group Discretions Policy is maintained by the chief financial Officer and reviewed annually by the Audit committee with the outcome of this review reported to the Board. Board Responsibility and Delegation of Authority The Board is chaired by an independent non-executive Director. The roles of the chairman and chief Executive Officer are separate, and the chief Executive Officer is the only executive Director on the Board. Role of the chairman The chairman plays an important leadership role and is involved in: chairing meetings of the Board and providing effective leadership to it; monitoring the performance of the Board and the mix of skills and effectiveness of individual contributions; being a member of all principal Board committees; maintaining ongoing dialogue with the chief Executive Officer and providing appropriate mentoring and guidance; and being a respected ambassador for ANZ, including chairing meetings of shareholders and dealing with key customer, political and regulatory parties. Board charter The Board charter sets out the Board’s purpose, powers, and specific responsibilities. The Board is responsible for: charting the direction, strategies and financial objectives for ANZ and monitoring progress in relation to such matters; monitoring compliance with regulatory requirements, ethical standards and external commitments, and the implementation of related policies; appointing and reviewing the performance of the chief Executive Officer; and reporting to shareholders on ANZ’s performance. in addition to the above and any matters expressly required by law to be approved by the Board, powers specifically reserved for the Board include: approval of ANZ’s Remuneration Policy, including various remuneration matters as detailed in the charter; any matters in excess of any discretions delegated to Board committees or the chief Executive Officer; annual approval of the budget and strategic plan; significant changes to organisational structure; and the acquisition, establishment, disposal or cessation of any significant business. Under ANZ’s constitution, the Board may delegate any of its powers and responsibilities to committees of the Board. The roles of the principal Board committees are set out on pages 55 to 59. 50 ANZ Annual Report 2010 Corporate Governance 51 cORPORATE gOvERNANcE (continued) At a senior management level, ANZ has a management Board which comprises the chief Executive Officer and ANZ’s most senior executives. As at 30 September 2010, the following senior executives, in addition to the chief Executive Officer, were members of management Board: graham hodges – Deputy chief Executive Officer; Peter marriott – chief financial Officer; Phil chronican – chief Executive Officer, Australia; David hisco – chief Executive Officer, New Zealand; Shayne Elliott – chief Executive Officer, institutional; Alex Thursby – chief Executive Officer, Asia Pacific, Europe and America; David cartwright – chief Operating Officer; Susie Babani – group managing Director, human Resources; chris Page – chief Risk Officer; Joyce Phillips – group managing Director, Strategy, m&A, marketing and innovation; and Anne Weatherston – chief information Officer. Typically, the management Board meets every week and has a full day meeting each month to discuss business performance, review shared initiatives and build collaboration and synergy across the group. Board composition, Selection and Appointment The Board strives to achieve a balance of skills, tenure, experience, diversity, and perspective among its Directors. Details regarding each Director in office at the date of this Annual Report can be found on pages 47 to 49. The governance committee (see page 56) has been delegated responsibility to review and make recommendations to the Board regarding Board composition, and to assist in relation to the director nomination process. The governance committee conducts an annual review of the size and composition of the Board, to assess whether there is a need for any new non-executive Director appointments. This review takes the following factors into account: relevant guidelines/legislative requirements in relation to Board composition; Board membership requirements as articulated in the Board charter; and other considerations including ANZ’s strategic goals and the importance of having appropriate Board balance and diversity. in relation to balance and diversity, the guiding principle is that the Board’s composition should reflect balance in such matters as: specialist skill representation relating to both functions (such as accounting/finance, law and technology) and industry background (such as banking/ financial services, retail, professional services); tenure; Board experience (amongst the members of the Board, there should be a significant level of familiarity with formal board and governance processes and a considerable period of time previously spent working at senior level within one or more organisations of significant size); age spread; diversity in general (including gender diversity); and geographic experience. Other matters for explicit consideration by the committee are personal qualities, communication capabilities, ability and commitment to devote appropriate time to the task, the complementary nature of the distinctive contribution each director might make, professional reputation and community standing. Potential candidates for new directors may be provided at any time by a Board member to the chair of the governance committee. The chair of the governance committee maintains a list of nominees to assist the Board in the succession planning process. Where there is a need for any new appointments, a formal assessment of nominees will be conducted by the governance committee. in assessing nominees, the governance committee has regard to the principles set out above. Professional intermediaries may be used from time to time where deemed necessary and appropriate to assist in the process of identifying and considering potential candidates for Board membership. if found suitable, potential candidates are recommended to the Board. The chairman of the Board is responsible for approaching potential candidates. The committee also reviews and recommends the process for the election of the chairman of the Board and reviews succession planning for the chairman of the Board, making recommendations to the Board as appropriate. APPOiNTmENT DOcUmENTATiON Each new non-executive Director receives an appointment letter accompanied by a: Directors’ handbook – The handbook includes information on a broad range of matters relating to the role of a Director, including details of all applicable policies; and Directors’ Deed – Each Director signs a Deed in a form approved by shareholders at the 2005 Annual general meeting which covers a number of issues including indemnity, directors’ and officers’ liability insurance, the right to obtain independent advice and requirements concerning confidential information. UNDERTAKiNg iNDUcTiON TRAiNiNg Every new Director takes part in a formal induction program which involves the provision of information regarding ANZ’s values and culture, the group’s governance framework, the non-executive Directors code of conduct and Ethics, Director related policies, Board and committee policies, processes and key issues, financial management and business operations. A briefing is also provided by senior management about matters concerning their areas of responsibility. mEETiNg ShARE QUALificATiON Non-executive Directors are required to accumulate within 5 years of appointment, and thereafter maintain, a holding in ANZ shares that is equivalent to at least 100% of a non-executive Director’s base fee (and 200% of this fee in the case of the chairman). ELEcTiON AT NExT ANNUAL gENERAL mEETiNg Subject to the provisions of ANZ’s constitution and the corporations Act 2001, the Board may appoint a person as a non-executive Director of ANZ at any time but that person must retire and, if they wish to continue in that role, must seek election by shareholders at the next Annual general meeting. fiT AND PROPER ANZ has a robust framework in place to ensure that individuals appointed to relevant senior positions within the group have the appropriate fitness and propriety to properly discharge their prudential responsibilities on appointment and during the course of their appointment. The framework, set out in ANZ’s fit and Proper Policy, addresses the requirements of APRA’s fit and Proper Prudential Standard. it involves assessments being carried out for each Director, relevant senior executives and the lead partner of ANZ’s external auditor prior to a new appointment being made. These assessments are carried out against a benchmark of documented competencies which have been prepared for each role, and also involve attestations being completed by each individual, as well as the obtaining of evidence of material qualifications and the carrying out of checks such as criminal record, bankruptcy and regulatory disqualification checks. These assessments are reviewed thereafter on an annual basis. The governance committee and the Board have responsibility for assessing the fitness and propriety of non-executive Directors. The human Resources committee is responsible for assessing the fitness and propriety of the chief Executive Officer and key senior executives. The Audit committee is responsible for assessing the fitness and propriety of the external auditor. fit and Proper assessments were successfully carried out in respect of each non-executive Director, the chief Executive Officer, key senior executives and the external auditor during the 2010 financial year. iNDEPENDENcE AND mATERiALiTY Under ANZ’s Board charter, the Board must contain a majority of non-executive Directors who satisfy ANZ’s criteria for independence. The Board charter sets out independence criteria in order to establish whether a non-executive Director has a relationship with ANZ which could (or could be perceived to) impede their decision-making. All non-executive Directors are required to notify the chairman of a potential change in their outside Board appointments. The chairman reviews the proposed appointments and will consult with other Directors as the chairman deems appropriate. in the 2010 financial year, the governance committee conducted its annual review of the criteria for independence against the ASx governance Principles and APRA Prudential Standards, as well as US director independence requirements. ANZ’s criteria are more comprehensive than those set in many jurisdictions including in particular criteria stipulated specifically for Audit committee members. The criteria and review process are both set out in the corporate governance section of ANZ’s website. in summary, a relationship with ANZ is regarded as material if a reasonable person in the position of a non-executive director of ANZ would expect there to be a real and sensible possibility that it would influence a Director’s mind in: making decisions on matters likely to come regularly before the Board or its committees; objectively assessing information and advice given by management; setting policy for general application across ANZ; and generally carrying out the performance of his or her role as a Director. During 2010, the Board reviewed each non-executive Director’s independence and concluded that the independence criteria were met by each non-executive Director. Directors’ biographies on pages 47 to 49 and on anz.com highlight their major associations outside of ANZ. cONfLicTS Of iNTEREST Over and above the issue of independence, each Director has a continuing responsibility to determine whether he or she has a potential or actual conflict of interest in relation to any material matter which comes before the Board. Such a situation may arise from external associations, interests or personal relationships. Under the Directors Disclosure of interest Policy and Policy for handling conflicts of interest, a Director may not exercise any influence over the Board if a potential conflict of interest exists. in such circumstances, the Director may not receive relevant Board papers and, unless the other Directors have resolved to the contrary, may not be present for Board deliberations on the subject, and may not vote on any related Board resolutions. These matters, should they occur, are recorded in the Board minutes. iNDEPENDENT ADvicE in order to assist Directors in fulfilling their responsibilities, each Director has the right (with the prior approval of the chairman) to seek independent professional advice regarding his/her responsibilities at the expense of ANZ. in addition, the Board and each committee, at the expense of ANZ, may obtain whatever professional advice it requires to assist in its work. TENURE AND RETiREmENT ANZ’s constitution, consistent with the ASx Listing Rules, provides that a non-executive Director must seek re-election by shareholders every 3 years if they wish to continue in their role as a non-executive Director. in addition, ANZ’s Board Renewal and Performance Evaluation Policy confirms that non-executive Directors will retire once they have served a maximum of three 3-year terms after first being elected by shareholders unless invited by the Board to extend their tenure due to special circumstances. 52 ANZ Annual Report 2010 Corporate Governance 53 cORPORATE gOvERNANcE (continued) cONTiNUiNg EDUcATiON ANZ Directors take part in a range of training and continuing education programs. in addition to a formal induction program (see page 52), Directors also receive regular bulletins designed to keep them abreast of matters relating to their duties and responsibilities as Directors. Each committee also conducts its own continuing education sessions from time to time as appropriate. internal and/or external experts are engaged to conduct all education sessions. Directors also receive regular business briefings at Board meetings. These briefings are intended to provide Directors with information on each area of ANZ’s business, in particular regarding performance, key issues, risks and strategies for growth. in addition, Directors have the opportunity to participate in site visits from time to time. AccESS TO DiREcTORS management is able to consult Directors as required. Employees have access to the Directors directly or through the company Secretary. Shareholders who wish to communicate with the Directors may direct correspondence to a particular Director, or to the non- executive Directors as a whole. Role of company Secretary The Board is responsible for the appointment of ANZ’s company Secretaries. The Board has appointed three company Secretaries. The group general counsel provides legal advice to the Board as and when required. he works closely with the chair of the governance committee to develop and maintain ANZ’s corporate governance principles, and is responsible to the Board for the company Secretary’s Office function. The company Secretary is responsible for the day-to-day operations of the company Secretary’s Office including lodgements with relevant Securities Exchanges and other regulators, the administration of Board and Board committee meetings (including preparation of meeting minutes), the management of dividend payments and associated share plans, the administration of the group’s Australian subsidiaries and oversight of the relationship with ANZ’s Share Registrar. The chief financial Officer is also appointed as a company Secretary. Profiles of ANZ’s company Secretaries can be found in the Directors’ Report on page 12. Performance Evaluations OvERviEW The framework used to assess the performance of Directors is based on the expectation that they are performing their duties: in the interests of shareholders; in a manner that recognises the great importance that ANZ places on the values of honesty, integrity, quality and trust; in accordance with the duties and obligations imposed upon them by ANZ’s constitution, Non-Executive Directors’ code of conduct and Ethics, and the law; and having due regard to ANZ’s corporate responsibility objectives, and the importance of ANZ’s relationships with all its stakeholders and the communities and environments in which ANZ operates. The performance criteria also take into account the Director’s contribution to: charting the direction, strategy and financial objectives of ANZ; monitoring compliance with regulatory requirements and ethical standards; monitoring and assessing management’s performance in achieving strategies and budgets approved by the Board; setting criteria for and evaluating the chief Executive Officer’s performance; and the regular and continuing review of executive succession planning and executive development activities. The performance evaluation process is set out in ANZ’s Board Renewal and Performance Evaluation Policy. NON-ExEcUTivE DiREcTORS Non-executive Director performance evaluations are conducted in two ways: Annual review – On an annual basis, or more frequently if appropriate, the chairman has a one-on-one meeting with each non-executive Director specifically addressing the performance criteria including compliance with the Non-Executive Directors’ code of conduct and Ethics. To assist the effectiveness of these meetings, the chairman is provided with objective information about each Director (e.g. number of meetings attended, committee memberships, other current directorships etc) and a guide for discussion to ensure consistency. A report on the outcome of these meetings is provided to the governance committee and to the Board. Re-election statement – Non-executive Directors when nominating for re-election are given the opportunity to submit a written or oral statement to the Board setting out the reasons why they seek re-election. in the non-executive Director’s absence, the Board evaluates this statement and has regard to the performance criteria when it considers whether to endorse the relevant Director’s re-election. chAiRmAN Of ThE BOARD Board committees An annual review of the performance of the chairman of the Board is undertaken based on input from each Director individually on the performance of the chairman of the Board against the competencies for the chairman’s role approved by the Board. The input from each Director is collated and an overview report is provided to the governance committee, as well as feedback to the chairman of the Board. As set out on page 51 of this statement, the Board has the ability under its constitution to delegate its powers and responsibilities to committees of the Board. This allows the Board to spend additional and more focused time on specific issues. ANZ’s Board has five principal Board committees: Audit committee, governance committee, human Resources committee, Risk committee and Technology committee. ThE BOARD it is expected that externally facilitated reviews of the Board will occur approximately every three years. During 2008/2009 the performance of the Board in respect of the previous year was assessed using an independent external facilitator, who sought input from each Director and certain members of senior management when carrying out the assessment. The review process in the intervening years is conducted internally, and considers progress against any recommendations implemented arising from the most recent externally facilitated review, together with any new issues that may have arisen. BOARD cOmmiTTEES Each of the principal Board committees conducts an annual committee performance self-assessment to review performance using guidelines approved by the governance committee. The guidelines set out that at a minimum, the self-assessments should review and consider the following: the scope of the committee’s responsibilities and duties as enshrined in its charter; the committee’s performance against its charter and annual calendar of business; the committee’s performance against any goals or objectives it set itself for the year under review; major issues considered by the committee during the year; and the identification of future topics for training/education of the committee. The outcomes of the performance self-assessments, along with plans and objectives for the new financial year, are submitted to the governance committee (and, in the case of the governance committee, to the Board) for discussion and noting. SENiOR mANAgEmENT Details of how the performance evaluation process is undertaken by the Board in respect of the chief Executive Officer and other key senior executives, including how financial, customer, operational and qualitative measures are assessed, are set out in the Remuneration Report on pages 16 and 18. REviEW PROcESSES UNDERTAKEN Board, Director, Board committee and relevant senior management evaluations in accordance with the above processes have been undertaken in respect of the 2009/10 reporting period, with one exception. it was believed not necessary or appropriate to carry out a performance review of the chairman of the Board given the recent change of chairman. mEmBERShiP AND ATTENDANcE Each of the principal Board committees is comprised solely of independent non-executive Directors, has its own charter and has the power to initiate any special investigations it deems necessary. membership criteria are based on each Director’s skills and experience, as well as his/her ability to add value and commit time to the committee. composition is reviewed annually by the Board. The chairman is an ex-officio member of each principal Board committee. The chief Executive Officer is invited to attend Board committee meetings as appropriate. his presence is not automatic, however, and he does not attend any meeting where his remuneration is considered or discussed, nor does he attend the non-executive Director private sessions of committees. Non- executive Directors may attend any meeting of any committee. Each Board committee may, within the scope of its responsibilities, have unrestricted access to management, employees and information it considers relevant to the carrying out of its responsibilities under its charter. Each Board committee may require the attendance of any ANZ officer or employee, or request the attendance of any external party, at meetings as appropriate. mEETiNgS The principal Board committees plan their annual agendas following a process approved by the Board. The offices of the executives who are appointed to assist the chair of each Board committee liaise in order to review the calendars of business prepared by each committee and identify any potential gaps and unnecessary overlaps between the committees. Any issues arising from this are reported to, and resolved by, the relevant committee chairs. The results of this process are then reported to the governance committee to assist the Board in fulfilling its oversight responsibilities in respect of the delegations it has made to the various Board committees. committees report at the next Board meeting through the committee chairs. When there is a cross-committee item, the committees will communicate with each other through their chairs. Throughout the year, each committee chair also conducts agenda planning meetings involving relevant stakeholders to take account of emerging issues. 54 ANZ Annual Report 2010 Corporate Governance 55 cORPORATE gOvERNANcE (continued) ANZ BOARD cOmmiTTEE mEmBERShiPS – as at 30 September 2010 Substantive areas of focus in the 2010 financial year included: Substantive areas of focus in the 2010 financial year included: Audit Governance Human Resources Risk mr D E meiklejohn fE, c mr J P morschel c ms A m Watkins c mr i J macfarlane c Technology Dr g J clark c mr P A f hay Dr g J clark ms A m Watkins fE mr i J macfarlane Dr g J clark mr P A f hay mr P A f hay mr i J macfarlane mr Lee hsien Yang mr Lee hsien Yang mr J P morschel (ex officio) mr D E meiklejohn mr D E meiklejohn mr J P morschel (ex officio) mr J P morschel (ex officio) ms A m Watkins mr J P morschel (ex officio) c – chair fE – financial Expert mr c B goode was an ex offico member of all Board committees prior to his retirement from the Board on 28 february 2010. mr J P morschel was a member of all Board committees from 1 October 2009 until he succeeded mr c B goode as chairman of the Board, when he continued to act as a member of each committee on an ex officio basis, other than the governance committee which he has chaired. mr J K Ellis was a Director prior to his retirement from the Board on 18 December 2009, but did not serve as a Board committee member during the 2009/10 financial year. AUDiT cOmmiTTEE The Audit committee is responsible for the oversight and monitoring of: ANZ’s financial reporting principles and policies, controls and procedures; the effectiveness of ANZ’s internal control and risk management framework in connection with financial governance; the work of internal Audit which reports directly to the chair of the Audit committee (refer to internal Audit on page 59 for more information); the Audit committees of significant subsidiary companies; prudential supervision procedures required by regulatory bodies relating to financial reporting; and the integrity of ANZ’s financial statements, compliance with related regulatory requirements and the independent audit thereof. The Audit committee is also responsible for: the appointment, annual evaluation and oversight of the external auditor, including reviewing their independence and fitness and propriety; compensation of the external auditor; where appropriate, replacement of the external auditor; and reviewing the performance and remuneration of the group general manager internal Audit. Under the committee charter, all members of the Audit committee must be appropriately financially literate. Both mr meiklejohn (chair) and ms Watkins were determined to be a ‘financial expert’ during the 2010 financial year under the definition set out in the Audit committee charter. While the Board has determined that mr meiklejohn and ms Watkins each have the necessary attributes to be a ‘financial expert’ in accordance with the relevant requirements, it is important to note that this does not give rise to mr meiklejohn or ms Watkins having responsibilities additional to those of other members of the Audit committee. The Audit committee meets with the external auditor and internal auditor without management being present. The chair of the Audit committee meets separately and regularly with the group general manager internal Audit, the external auditor and management. The Deputy chief financial Officer is the executive responsible for assisting the chair of the committee in connection with the administration and efficient operation of the committee. Substantive areas of focus in the 2010 financial year included: internal and External Audit – the committee approved the annual plans for internal and external audit and kept progress against those plans under regular review. Adjustments to the internal audit plan were made during the year to accommodate changes arising from businesses acquired and high focus items arising from the integration of these businesses; Regulatory developments – reports on accounting developments were provided to the committee outlining relevant changes and implications for ANZ; financial Reporting governance Program – the committee continued to monitor the progress of the 2010 financial Reporting governance Program and received regular updates on key themes, areas of focus, and Program status; and Whistleblowing – the committee received reports on disclosures made under ANZ’s global Whistleblower Protection Policy. gOvERNANcE cOmmiTTEE The governance committee is responsible for: identifying and recommending prospective Board members and ensuring appropriate succession planning for the position of chairman (see page 52); ensuring there is a robust and effective process for evaluating the performance of the Board, Board committees and non-executive Directors (see pages 54 to 55); ensuring an appropriate Board and Board committee structure is in place; reviewing and approving the charters for each Board committee except its own, which is reviewed and approved by the Board; and reviewing the development of and approving corporate governance policies and principles applicable to ANZ. The group general counsel is the executive responsible for assisting the chair of the committee in connection with the administration and efficient operation of the committee. Succession Planning – two long serving Directors retired during the financial year, and a new chairman was appointed. mr morschel was appointed to succeed mr goode as chairman upon mr goode’s retirement in february 2010 following 19 years service as a Director and 15 years service as chairman. in addition, mr Ellis retired at the 2009 Agm after 15 years service as a Director. All current non-executive Directors are subject to the Director tenure policy which limits the period of service to a maximum of three 3 year terms after election by shareholders; Board governance framework – the committee conducted its annual review of the Board’s governance framework and principles including in relation to Board composition and size, Director tenure, outside commitments, Board and committee education, nomination procedures and Director independence criteria; Board and committee performance evaluations – the committee reviewed the major themes arising from the annual Board performance review process, and considered whether any aspects of the Board’s oversight framework could be strengthened. The committee also received annual performance self-assessment reports from each of the other principal Board committees; and Review and approval of group policies – the committee reviewed and, where appropriate, approved amendments to existing group policies including the continuous Disclosure Policy, global Employee Securities Trading and conflict of interest Policy, Board Renewal and Performance Evaluation Policy, fit & Proper Policy, Director independence criteria and assessment process, Shareholder charter, Employee code of conduct and Ethics, and Policy on Provision of Banking facilities to Directors and Senior Officers. hUmAN RESOURcES cOmmiTTEE The human Resources committee assists the Board in relation to remuneration matters and senior executive succession, including for the chief Executive Officer. The committee also assists the Board by reviewing and approving policies, as well as monitoring performance, with respect to health and Safety issues and Diversity. The committee’s charter was reviewed and amended during the year to address new regulatory requirements issued by APRA. The committee is responsible for reviewing and making recommendations to the Board on: all remuneration matters relating to the chief Executive Officer (details in the Remuneration Report on pages 15 to 45); performance and remuneration, including incentive arrangements, for other Board Appointees and key senior executives who may be able to affect ANZ’s financial soundness; the design of remuneration structures and significant incentive plans; and the group’s Remuneration Policy and remuneration strategy. in addition, the committee considers and approves the appointment of Board Appointees and senior executive succession plans. The group managing Director, human Resources is the executive responsible for assisting the chair of the committee in connection with the administration and efficient operation of the committee. management roles and performance – the committee reviewed the performance of the cEO, the cEO’s direct reports and other key roles and ensured that succession plans were in place for management Board and business critical roles; Regulatory changes – the committee considered the impacts of APRA Prudential Standards on remuneration, the changes to taxation on employee equity plans, the Productivity commission Review and the termination payments cap legislation. As a result, a number of changes to remuneration practices were made during the year to further strengthen the alignment of rewards with prudent risk taking. The committee continues to closely monitor regulatory developments and implications for ANZ; fitness and Propriety – the committee completed fit and proper assessments for all existing and new Board Appointees; and Remuneration – the committee approved the grant of up to $1000 of shares to each eligible employee under the Employee Share Acquisition Plan, and reviewed and approved amendments to the bonus framework for the institutional Division. The committee conducted an annual review of remuneration for non-executive Directors and decided to maintain the existing freeze on director fees for the 2009/10 financial year (apart from a reduction in the chairman’s fees and an increase in the fees payable to the chair and members of the Audit committee), and also reviewed the compensation structure for senior executives and agreed not to increase their fixed remuneration for the 2009/10 financial year (other than in respect of the chief Risk Officer whose remuneration mix was adjusted). for more details on the activities of the human Resources committee, please refer to the Remuneration Report on pages 15 to 45. RiSK cOmmiTTEE The Board is principally responsible for approving the group’s risk tolerance, related strategies and policies, for the oversight of policy compliance, and for the effectiveness of the risk and compliance management framework that is in place. The Risk committee is delegated responsibility for overseeing, monitoring and reviewing the group’s risk management principles and policies, strategies, processes and controls including credit, market, liquidity, balance sheet, operational, compliance and other reputational risk control frameworks, as well as the culture of the organisation in connection with such matters. The committee is also authorised to approve credit transactions and other related matters beyond the approval discretion of executive management. The chief Risk Officer is the executive responsible for assisting the chair of the committee in connection with the administration and efficient operation of the committee. 56 ANZ Annual Report 2010 Corporate Governance 57 cORPORATE gOvERNANcE (continued) Substantive areas of focus in the 2010 financial year included: TEchNOLOgY cOmmiTTEE DiREcTORS’ mEETiNgS Economic Environment – the committee received updates on the global economic environment and closely monitored the volatility in markets as aftershocks continued to work through the system following the global financial crisis; Regulatory change – the committee monitored proposed new financial regulations, both local and global, aimed at promoting the resilience of the banking systems in various jurisdictions; Acquisitions – updates were received and reviewed regarding the integration of businesses acquired from the Royal Bank of Scotland group plc and Landmark financial Services, and the acquisition of iNg groep’s 51% shareholding in the ANZ-iNg wealth management and life insurance joint ventures; The Technology committee assists the Board in the effective discharge of its responsibilities in relation to technology and operations related matters. The committee is responsible for the oversight and evaluation of major technology and operations projects above $100 million, security issues relevant to ANZ’s technology, long-term technology and operations planning, and the approval of policies, strategies and control frameworks for the management of technology risk. The chief information Officer and chief Operating Officer are the executives responsible for assisting the chair of the committee in connection with the administration and efficient operation of the committee. Provisioning – the committee regularly monitored provisioning Substantive areas of focus in the 2010 financial year included: Review of new and existing major projects – the committee reviewed proposed new major projects and monitored progress of existing major projects; Strategy – the committee received reports on major strategic initiatives, including expected future technology and operations investments; Security – updates were received on key information security issues, and various tactical and strategic activities planned to remediate or control them; and Service and Systems Stability and Performance – the committee received regular reports on operational performance, and actions undertaken to maintain or improve service stability. levels; and Risk control frameworks – the committee approved an updated Operational Risk management framework and revised credit Approval Discretions. in addition, management reported to the Risk committee during the year as to the effectiveness of ANZ’s risk and compliance management framework and the management of ANZ’s material business risks. in August 2008, ANZ released the findings of the Review committee which examined ANZ’s involvement in Securities Lending and its relationship with Broker clients including the Opes Prime group. ANZ pursued a remediation program to address the 13 recommendations arising from the Review. While ANZ will continue to report its progress on some longer-term aspects of the program to APRA, in January 2010 APRA advised ANZ that it was comfortable to formally close its oversight of the remediation program. ANZ introduced a new training program (‘Understanding Risk in our World’) during the year as part of its commitment to embedding the principle that risk is every employee’s responsibility. The program, which is to be undertaken by all ANZ employees, focuses on increasing understanding of risk management to improve each employee’s ability to make more effective decisions on behalf of ANZ. for further information on how ANZ manages its material financial risks, please see the disclosures in relation to AASB 7 ‘financial instruments: Disclosure’ in the notes to the financial statements. for further information on risk management governance and related ANZ policies, please see the corporate governance section of anz.com. 58 ANZ Annual Report 2010 The number of Board meetings and meetings of committees during the year that each Director was eligible to attend, and the number of meetings attended by each Director were: Board Audit Committee Governance Committee Human Resources Committee Risk Committee Technology Committee Executive Committee* Shares Committee* Committee of the Board* A 12 4 6 12 12 12 12 12 12 12 B 12 3 6 12 12 12 12 12 12 12 A B 5 9 9 9 9 4 8 9 9 7 A 4 2 4 4 B 4 2 4 4 A 5 3 5 5 5 5 B 4 3 5 4 5 5 A B 2 6 6 6 6 6 6 2 6 6 6 6 6 5 A 5 3 5 5 5 B 5 3 5 5 5 A B A B A B 1 1 2 2 2 2 2 2 4 1 3 6 6 1 4 1 3 6 6 1 1 1 1 1 1 1 g J clark J K Ellis c B goode P A f hay Lee hsien Yang i J macfarlane D E meiklejohn J P morschel m R P Smith A m Watkins column A – indicates the number of meetings the Director was eligible to attend. column B – indicates the number of meetings attended. *The meetings of the Executive committee, Shares committee and committee of the Board as referred to in the table above include those conducted by written resolution. ADDiTiONAL cOmmiTTEES ExTERNAL AUDiT in addition to the five principal Board committees, the Board has constituted an Executive committee and a Shares committee, each consisting solely of Directors, to assist in carrying out specific tasks. The Executive committee has the full power of the Board and is convened as necessary between regularly scheduled Board meetings to deal with urgent matters. The Shares committee has the power to manage on behalf of the Board the issue of shares and options (including under ANZ’s Employee Share Plan and Share Option Plan). The Board also forms and delegates authority to ad-hoc committees of the Board as and when needed to carry out specific tasks. Audit and financial governance iNTERNAL AUDiT internal Audit is a function independent of management whose role is to provide the Board of Directors and management with an effective and independent appraisal of the company’s internal controls. Operating under a Board approved charter, the group general manager internal Audit reports directly and solely to the chair of the Audit committee, with a direct communication line to the chief Executive Officer and the external auditors. The global audit plan is developed utilising a risk based approach and is refreshed on a quarterly basis. The Audit committee approves the plan, the associated budget and any changes thereto quarterly. All audit activities are conducted in accordance with ANZ policies and values, as well as local and international auditing standards, and the results are reported to the Audit committee, Risk committee and management. These results influence the performance assessment of business heads. internal Audit also monitors the remediation of audit issues and highlights the current status of any outstanding audits. The external auditor’s role is to provide an independent opinion that ANZ’s financial reports are true and fair and comply with applicable regulations. The external auditor performs an independent audit in accordance with Australian Auditing Standards. The Audit committee oversees ANZ’s Policy on Relationship with the External Auditor. Under the Policy, the Audit committee is responsible for the appointment (subject to ratification by shareholders) and also the compensation, retention and oversight of the external auditor. The Policy also stipulates that the Audit committee: pre-approves all audit and non-audit services on an engagement by engagement basis or pursuant to specific pre-approval policies adopted by the committee; regularly reviews the independence of the external auditor; and evaluates the effectiveness of the external auditor. The Policy also requires that all services provided by the external auditor, including the non-audit services that may be provided by the external auditor, must be in accordance with the following principles: the external auditor should not have a mutual or conflicting interest with ANZ; the external auditor should not audit its own work; the external auditor should not function as part of management or as an employee; and the external auditor should not act as an advocate of ANZ. The Policy, which sets out in detail the types of services the external auditor may and may not provide, can be found on the corporate governance section of anz.com. Details of the non-audit services provided by the external auditor, KPmg, during the 2010 financial year, including their dollar value, together with the statement from the Board as to their satisfaction with KPmg’s compliance with the related independence requirements of the corporations Act 2001, are set out in the Directors’ Report on page 12. Corporate Governance 59 cORPORATE gOvERNANcE (continued) in addition, ANZ requires a two year period before any former partner or employee of the external auditor is appointed as a Director or senior executive of ANZ. The lead partner of the external auditor is required to rotate off the audit after 5 years and cannot return for a further 5 years. certain other senior audit staff are required to rotate off after a maximum of seven years. Any appointments of ex-partners or ex-employees of the external auditor as ANZ finance staff, at senior manager level or higher, must be pre-approved by the chair of the Audit committee. As disclosed in previous Annual Reports, in 2004 the US SEc commenced an inquiry into non-audit services provided by ANZ’s auditor, KPmg. ANZ has provided the information requested by the SEc. This inquiry has not concluded. Should the SEc determine that services provided by KPmg did not comply with the US auditor independence rules, the SEc may seek sanctions, the nature and amount of which are not known. Whilst ANZ cannot predict the outcome of the inquiry, based on information currently available, ANZ does not believe it will have a material adverse effect on ANZ. fiNANciAL cONTROLS The Audit committee of the Board oversees ANZ’s financial reporting policies and controls, the integrity of ANZ’s financial statements, the relationship with the external auditor, the work of internal Audit, and the Audit committees of various significant subsidiary companies. ANZ maintains a financial Reporting governance (fRg) Program which evaluates the design and tests the operation of key financial reporting controls. in addition half-yearly certifications are completed by senior management, including senior finance executives. These certifications comprise representations and questions about financial results, disclosures, processes and controls and are aligned with ANZ’s external obligations. This process is independently evaluated by internal Audit and tested by the fRg Program. Any issues arising from the evaluation and testing are reported to the Audit committee. This process assists the chief Executive Officer and chief financial Officer in making the certifications to the Board under the corporations Act and ASx governance Principles as set out in the Directors’ Report on page 13. Ethical and Responsible Decision-making cODES Of cONDUcT AND EThicS ANZ has two main codes of conduct and Ethics, the Employee code and the Non-Executive Directors code. These codes provide employees and Directors with a practical set of guiding principles to help them make decisions in their day to day work. having two codes recognises the different responsibilities that Directors have under law but enshrines the same values and principles. The codes embody honesty, integrity, quality and trust, and employees and Directors are required to demonstrate these behaviours and comply with the codes whenever they are identified as representatives of ANZ. The principles underlying ANZ’s codes of conduct and Ethics are: We act in ANZ’s best interests and value ANZ’s reputation; We act with honesty and integrity; We treat others with respect, value difference and maintain a safe working environment; 60 ANZ Annual Report 2010 We identify conflicts of interest and manage them responsibly; SEcURiTiES TRADiNg mEETiNgS We respect and maintain privacy and confidentiality; We do not make or receive improper payments, benefits or gains; We comply with the codes, the law and ANZ’s policies and procedures; and We immediately report any breaches of the codes, the law or ANZ policies and procedures. The codes are supported by the following detailed policies that together form ANZ’s conduct and Ethics Policy framework: ANZ Anti-money Laundering and counter-Terrorism financing Program; ANZ Use of Systems, Equipment and information Policy; ANZ global fraud and corruption Policy; ANZ group Expense Policy; ANZ Equal Employment Opportunity, Bullying and harassment Policy; ANZ health and Safety Policy; ANZ global Employee Securities Trading and conflict of interest Policy; ANZ global Anti-Bribery Policy; and ANZ global Whistleblower Protection Policy. ANZ has implemented values and Ethics training sessions to be run by ANZ leaders with their direct reports at manager level or above. The sessions are designed to build line manager capability, equipping ANZ leaders and their teams with tools and knowledge to make values-based, conscious and ethical business decisions and create team behaviour standards that are in line with the ANZ values. Within two months of starting work with ANZ, and thereafter on an annual basis, all employees are required to complete a training course that takes each employee through the eight code principles and a summary of their obligations under each of the policies in the conduct and Ethics Policy framework. Employees are required to declare that they have read and understand the principles of the Employee code, including key relevant extracts of the policies set out above. To support the Employee code of conduct and Ethics, ANZ’s global Performance improvement and Unacceptable Behaviour Policy sets out the process to be followed to determine whether the code has been breached and the consequences that should be applied to employees who are found to have breached the code. Under the ANZ global Performance management framework, any breach of the code that leads to a consequence (such as a warning) will result in an unacceptable risk/compliance/behaviour flag being given at the time of the performance assessment. A flag must be taken into account when determining an employee’s performance and remuneration outcome and will almost always negatively impact those outcomes for the financial year in question. Directors’ compliance with the non-executive Directors code continues to form part of their annual performance review. ANZ’s global Employee Securities Trading and conflict of interest Policy prohibits trading in ANZ securities or the securities of other companies by all employees and Directors who are aware of unpublished price-sensitive information. To allow as many shareholders as possible to have an opportunity to attend shareholder meetings, ANZ rotates meetings around capital cities and makes them available to be viewed online using webcast technology. The Policy specifically prohibits restricted employees and their associates trading in ANZ securities during ‘blackout periods’ leading up to the day following the half-yearly and annual results announcements. Non-executive Directors are required to seek approval from the chairman in advance of any trading in ANZ securities. The chairman of the Board is required to seek approval from the chairman of the Audit committee. Senior Executives and other restricted employees are also required to seek approval before they, or their associates, trade in ANZ securities. it is a condition of the grant of employee deferred shares, share options and rights that no schemes are entered into by any employee that specifically protect the value of such shares, options and rights before the shares have vested or the options or rights have entered their exercisable period. Any breach of this prohibition would constitute a breach of the grant conditions and would result in the forfeiture of the relevant shares, options or rights. Directors and management Board members are also prohibited from providing ANZ securities as security in connection with any margin loan or similar financing arrangement under which they may be subject to a margin call or loan to value ratio obligations. WhiSTLEBLOWER PROTEcTiON The ANZ global Whistleblower Policy provides a mechanism by which ANZ employees, contractors and consultants may report or escalate serious issues on a confidential basis, without fear of reprisal, dismissal or discriminatory treatment. complaints may be made under the Policy to designated Whistleblower Protection Officers, or via an independently managed Whistleblower Protection hotline. commitment to Shareholders Shareholders are the owners of ANZ and our approaches described below are enshrined in ANZ’s Shareholder charter, a copy of which can be found on the corporate governance section of anz.com. cOmmUNicATiON in order to make informed decisions about ANZ, and to communicate views to ANZ, it is important for shareholders to have an understanding of ANZ’s business operations and performance. ANZ encourages shareholders to take an active interest in ANZ, and seeks to provide shareholders with quality information in a timely fashion through ANZ’s reporting of results, ANZ’s Annual Report and 2010 Shareholder and corporate Responsibility Review, announcements and briefings to the market, half yearly newsletters and via its dedicated shareholder site on anz.com. ANZ strives for transparency in all its business practices, and recognises the impact of quality disclosure on the trust and confidence of shareholders, the wider market and the community. To this end, ANZ, outside of its scheduled result announcements, issued additional Trading Updates to the market during the financial year. Should shareholders require any information, contact details for ANZ and its Share Registrar are set out in the 2010 Shareholder and corporate Responsibility Review, ANZ’s half yearly shareholder newsletter, and the investor centre section of anz.com. further details on meetings and presentations held throughout this financial year are available on anz.com > About us > investor centre > Presentations and Webcasts. Prior to the Annual general meeting, shareholders are provided the opportunity to submit any questions they have for the chairman or chief Executive Officer to enable key common themes to be considered. The external auditor is present at ANZ Annual general meetings and available to answer shareholder questions on any matter that concerns them in their capacity as auditor. The letter of appointment, which has been agreed to and signed by all non-executive Directors, states that Directors are also expected to attend and be available to meet shareholders at the Annual general meeting each year. Shareholders have the right to vote on various resolutions related to company matters. if shareholders are unable to attend a meeting they can submit their proxies via post or electronically. Where votes are taken on a poll, which is usual ANZ practice, shareholders are able to cast their votes on a confidential basis. ANZ appoints an independent party to verify the results, normally KPmg, which are reported as soon as possible to the ASx and posted on anz.com. continuous Disclosure ANZ’s practice is to release all price-sensitive information to the ASx in a timely manner and as required under the ASx Listing Rules and then to all relevant overseas Securities Exchanges on which ANZ’s securities are listed, and to the market and community generally through ANZ’s media releases, website and other appropriate channels. Through ANZ’s continuous Disclosure Policy, ANZ demonstrates its commitment to continuous disclosure. The Policy reflects relevant obligations under applicable securities exchange listing rules and legislation. for disclosure purposes, price-sensitive information is information that a reasonable person would expect to have a material effect on the price or value of ANZ’s securities. Designated Disclosure Officers have responsibility for reviewing proposed disclosures and making decisions in relation to what information can be or should be disclosed to the market. Each ANZ employee is required to inform a Disclosure Officer regarding any potentially price-sensitive information concerning ANZ as soon as they become aware of it. in carrying out their role, the Disclosure Officers recognise ANZ’s commitment to achieving best practice in terms of disclosure by acting in accordance with the spirit, intention and purposes of the applicable regulatory requirements and by looking beyond form to substance. A committee of senior executives (the continuous Disclosure Review Sub-committee) also meets on a regular basis each quarter to overview the effectiveness of ANZ’s systems and procedures for achieving compliance with applicable regulatory requirements in relation to the disclosure of price-sensitive information. This Sub-committee reports to the governance committee of the Board on an annual basis. Corporate Governance 61 cORPORATE gOvERNANcE (continued) corporate Responsibility ANZ aims to be a role model for responsible business growth and business behaviour as it pursues its goal to become a super regional bank. ANZ’s corporate responsibility framework responds to the priorities of customers, shareholders, employees, community groups, regulators and governments across ANZ’s business. it emphasises the role ANZ plays in society – helping to create prosperity and build thriving communities while growing ANZ’s business responsibly. The following 5 priority areas guide ANZ’s corporate responsibility investments, initiatives and decisions globally: education and employment opportunities; bridging urban and rural social and economic divides; financial capability; responsible practices; and urban sustainability. The corporate Responsibility committee is chaired by ANZ’s chief Executive Officer. The committee provides strategic leadership on the corporate responsibility agenda and monitors progress and results. Each year, ANZ sets public targets and a business-wide program of work to respond to the most material issues and opportunities for its industry. This year ANZ achieved or made strong progress on over 90% of its public targets. ANZ established a Diversity council in 2004 to introduce strategies and sponsor initiatives to create a more inclusive culture at ANZ. The Diversity council is chaired by the chief Executive Officer and is responsible for setting the strategic direction and identifying focus areas across ANZ in relation to diversity. it is also a decision-making forum of senior executive members across the group, who are working together to build a diverse workforce and inclusive culture to enhance ANZ’s business performance. DivERSiTY AchiEvEmENTS fOR ThE YEAR ENDiNg 30 SEPTEmBER 2010 ANZ set an objective to increase the proportion of women in management from 36.8% to 38.0% during the year ended 30 September 2010. ANZ exceeded this target, with the proportion of women in management increasing to 38.4%. in addition, other diversity objectives set for the year ended 30 September 2010 and the outcomes achieved include the following: 215 indigenous trainees were recruited against a target of 180; and 38 new employees with a declared disability were recruited against a full year target of 35. As at 30 September 2010, the proportion of women employed globally at different levels of ANZ was as follows: Senior Executive level: 23.9% (including two new female appointees to ANZ’s management Board) ANZ keeps interested stakeholders abreast of developments through a monthly e-bulletin and annual and interim corporate responsibility reporting. Detailed information on ANZ’s approach and results is available on www.anz.com> About us> corporate Responsibility. Senior manager level: 27.6% management level: 40.6% Across the organisation: 56.9% Diversity at ANZ Workplace diversity is a strategic asset, helping ANZ to outperform its competitors and position ANZ as a super regional bank in all the geographies in which it operates. it is not just about doing the right thing; it’s about valuing and using people’s unique attributes and creating a level playing field so every employee can fully contribute and help ANZ achieve superior business performance and deliver value to its customers and shareholders. ANZ’s goal is to have a workforce that reflects the diversity of the communities in which it operates. it supports an inclusive workplace where employee differences in areas like gender, age, culture, disability and lifestyle choice are valued. The unique perspectives, experiences and contributions of ANZ’s people are the source of ANZ’s creativity, innovation and business success. That’s why diversity in the workforce is so important. ANZ’S PARTiciPATiON iN BROADER SOciETAL AcTiviTiES As one of the largest corporations operating in many of its markets, ANZ also recognises the role it can play as a responsible corporate citizen in creating a more inclusive society for people from diverse and disadvantaged backgrounds. This year, for example, ANZ supported the Equal Opportunity for Women in Workplace Agency (EOWA) Women in Leadership census; sponsored the Sydney mardi gras and participated in leadership forums aimed at encouraging more employment opportunities for indigenous Australian people, people with a disability and refugees. DivERSiTY OBJEcTivES fOR ThE YEAR ENDiNg 30 SEPTEmBER 2011 for the year ending 30 September 2011, ANZ has set the following measurable gender diversity objectives: Group Senior Executives Senior manager manager Total Women in Management Total across the organisation Baseline (30th September 2010) Year end target 23.9% 27.6% 40.6% 38.4% 56.9% 25.8% 29.3% 42.2% 40.0% maintain Donations and community investment During the year ended 30 September 2010, ANZ contributed around $16 million in cash, time and in-kind services to communities in the regions where ANZ does business. more than $4 million of this contribution was invested in financial literacy and inclusion programs such as moneyminded (and its cultural adaptations in Australia, New Zealand and the Pacific), Saver Plus and Progress Loans (Australia). This year the Saver Plus program was expanded from 20 to 60 communities in Australia and is currently delivered by ANZ’s community partners the Brotherhood of St Laurence, Berry Street, The Benevolent Society, The Smith family and other community agencies. funding of $13.5 million was provided by the Australian government to support this expansion over 2009–2011 with the goal of reaching 7,600 participants. Building financial capability is a key element of ANZ’s corporate Responsibility framework, targeting especially those in disadvantaged communities who are most at risk of financial exclusion. ANZ also contributed more than $1.5 million to support the recovery and rebuilding of communities in regions affected by disaster, including earthquakes in New Zealand, indonesia and china; Typhoon Ketsana, which swept across vietnam, the Philippines, Laos and cambodia; flooding in Queensland and india; and the tornado which devastated the chongqing region in china. further details can be accessed at www.anz.com> About us> corporate Responsibility. in addition, for the year to 30 September 2010, ANZ donated $100,000 to the Liberal Party of Australia and $100,000 to the Australian Labor Party. in addition, ANZ has set the following objectives: provide 100 additional traineeships to indigenous Australians and convert at least 65% of those who complete the program to permanent ANZ employees; support the advancement of people with a disability through a business mentoring program, which involves employing an additional 35 people with a declared disability across ANZ’s global businesses and achieving at least a 75% retention rate over the three year period from 2009–11; achieve a 100% completion rate for the 15 participants in ANZ’s refugee employment pathway program via ANZ’s given the chance program; and achieve a 2% increase in the number of maori graduates on ANZ’s New Zealand internship program. gENDER DivERSiTY ON ThE BOARD Specific targets have not previously been set in relation to the representation of women on ANZ’s Board. in November 2008, ms Alison Watkins was appointed to the Board, taking the number of female directors on the Board to two, including long-serving director ms margaret Jackson. ms Jackson subsequently retired from the Board in march 2009 and there have been no new Board appointments since that time. As a result, the Board currently comprises eight Directors, including one Director who is a woman. The Board has a tenure policy which limits the period of service of a non-executive Director to three 3-year terms after first being elected by shareholders. in accordance with this policy, the next scheduled Board retirements will occur at the 2013 Annual general meeting when messrs morschel and meiklejohn and Dr clark are due to retire as Directors. The Board’s objective is that the new Director appointments who will replace the three retiring Directors will include at least one woman, and it is expected these new appointments will be made in the period leading up to the 2013 Annual general meeting in order to provide an appropriate transition. it is not the Board’s current intention to make any new Board appointments in the interim. 62 ANZ Annual Report 2010 Corporate Governance 63 SECTiON 2 SECTiON 2 Review of Operations Principal Risks and Uncertainties Five Year Summary 65 74 82 Review of Operations Chief Executive Offi cer’s Report A mESSAgE fROm PETER mARRiOTT A mESSAgE fROm michAEL SmiTh ANZ reported a profi t after tax of $4,501 million for the year ended 30 September 2010. Income Statement ($m) Net interest income Other operating income Operating income Operating expenses Profi t before credit impairment and income tax Provision for credit impairment Profi t before income tax income tax expense Non-controlling interests Profi t attributable to shareholders of the company Underlying profi t 2010 10,869 4,823 15,692 (7,304) 8,388 (1,787) 6,601 (2,096) (4) 4,501 2009 9,888 3,722 13,610 (6,225) 7,385 (3,005) 4,380 (1,435) (2) 2,943 Profi t has been adjusted to exclude non-core items to arrive at underlying profi t, the result for the ongoing business activities of the group. The principles set out in the Australian institute of company Directors’ (AicD’s) and the financial Services institute of Australasia’s (finsia’s) joint recommendations “Principles for reporting of non-statutory profi t information” have been adopted in determining underlying profi t. Income Statement ($m) Statutory profi t attributable to shareholders of the company Adjust for the following gains/(losses) included in statutory profi t (net of tax) Acquisition costs and valuation adjustments Treasury shares adjustment Tax on New Zealand conduits impact of changes in New Zealand tax legislation Economic hedging – fair value gains/(losses) Revenue and net investment hedges Organisational transformation costs (incl. One ANZ restructuring) ANZ share of iNg NZ investor settlement Non continuing businesses credit intermediation trades Other Underlying profi t 2010 4,501 2009 2,943 (480) (32) 38 (36) (146) 24 – 34 54 20 5,025 – – (196) – (248) 21 (100) (121) (69) (116) 3,772 Movt 10% 30% 15% 17% 14% -41% 51% 46% 100% 53% Movt 53% n/a n/a large n/a -41% 14% -100% large large large 33% 64 ANZ Annual Report 2010 Review of Operations 65 REviEW Of OPERATiONS (continued) Pro Forma The underlying results have also been prepared on a pro forma basis which assumes the increase in ownership in funds management and insurance (OnePath (formerly iNg Australia) and iNg New Zealand) from 49% to 100% and the Landmark and Royal Bank of Scotland (RBS) Asia acquisitions took effect from 1 October 2008, effectively restating the group’s underlying profit for both periods. The pro forma results have also been adjusted for exchange rate movements which have impacted the results. This analysis enables readers to understand the estimated growth rates of the ongoing underlying business performance of the group, including the financial impact of the recent acquisitions. Refer to ANZ’s Results Announcement and Appendix 4E for more details. Pro Forma Underlying Underlying Pro Forma/Underlying profit by key line item Net interest income Other operating income1,2 Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment1 Profit before income tax income tax expense2 Non-controlling interests 2010 11,051 5,171 16,222 (7,298) 8,924 (1,875) 7,049 (1,977) (6) 2009 10,096 5,032 15,128 (6,783) 8,345 (3,065) 5,280 (1,512) (2) Profit attributable to shareholders of the company 5,066 3,766 Movt 9% 3% 7% 8% 7% -39% 34% 31% large 35% 2010 10,862 4,920 15,782 (6,971) 8,811 (1,820) 6,991 (1,960) (6) 2009 9,890 4,477 14,367 (6,068) 8,299 (3,056) 5,243 (1,469) (2) 5,025 3,772 Movt 10% 10% 10% 15% 6% -40% 33% 33% large 33% 1 credit valuation adjustments on defaulted or impaired exposures of $32 million are reclassified as provision for credit impairment (2009: $82 million). 2 Policyholder tax of $215 million (2009: nil) is netted off against the change in policyholder liabilities for underlying profit. ANZ reported a profit attributable to shareholders of the company of $4,501 million for the year ended 30 September 2010, up $1,558 million or 53% from $2,943 million for the year ended 30 September 2009. Underlying profit was up 33% to $5,025 million. Analysis of the business performance on a pro forma underlying basis excluding exchange rates by major income and expense categories follows: Net interest income Net interest income increased 9% with higher margins and growth in average interest earning assets and an increase in customer deposits. growth in balance sheet volumes1 was suppressed by the appreciation of the Australian dollar against other currencies. Numbers below are excluding the affects of foreign exchange. growth in average interest earning assets1, was $22.6 billion (5%). Net advances increased $5.8 billion (2%) with an increase of $3.9 billion in Australia driven by an increase in mortgages partially offset by reductions in institutional, reflecting the system trend of slowing business growth. New Zealand decreased $1.5 billion (2%) primarily in institutional also due to slowing business growth. Asia Pacific, Europe & America region increased $3.4 billion (19%), reflecting our business expansion in Asia. Other interest earning assets1 increased by $16.8 billion (24%) due primarily to increased trading activity and investments in government securities. Average deposits and other borrowings1 increased $24.1 billion (9%). customer deposits grew by $27.9 billion (13%), with good growth in Australia ($9.0 billion and 6%) and Asia Pacific, Europe & America ($18.9 billion and 77%). Net interest margin2 increased by 16 basis points to 2.47%. Excluding the impact of the global markets business, the group margin2 increased by 28 basis points. The main drivers of improved margin performance excluding global markets were: improved asset margin (+37 basis points) flowing from repricing activities, particularly in New Zealand and institutional; and improved fee returns in institutional due to higher commitment fees and line fees. higher funding costs (-11 basis points) were mainly due to an increase in wholesale funding costs and lower returns on capital. Other items (+4 basis points) includes the favourable impact (+2 basis points) from the acquisition of higher margin assets (RBS and Landmark), favourable movement in brokerage costs (+1 basis point) following a write down of Esanda capitalised brokerage costs in the prior year and other net impacts (+1 basis point). global markets had a -12 basis points impact on the total group margin. Net interest movements (-3 basis points) due to the impact of funding costs associated with unrealised trading gains on derivatives (-8 basis points), mismatch outcome (+3 basis point) and other net impacts (+2 basis points). The dilution impact of the global markets balance sheet on the group (-9 basis points) was driven by strong growth in trading and investment assets. Other Operating income Other operating income increased 3% for the year ended 30 September 2010. major movements include: fee income decreased $76 million (3%). Lending fee income decreased $36 million (5%): Australia decreased $35 million due to the reduction in exception fees and global markets fees partly offset by increased fees in other parts of institutional. New Zealand decreased $14 million also due to the reduction in exception fees. Asia Pacific, Europe & America increased $13 million due mainly to business expansion in china, Philippines and indonesia. Non-lending fee income decreased $40 million (2%): Australia region decreased $50 million with lower exception fees partly offset by higher fees in institutional and other Retail fees. New Zealand decreased $35 million which includes the reductions to exception fees. Asia Pacific, Europe and America increased $45 million mainly to increased volumes in Singapore and hong Kong. foreign exchange earnings decreased $176 million with lower global markets income (refer page 68), partly offset by increased volumes and pricing initiatives in Transaction Banking. Profit on trading instruments increased $15 million. Refer page 68 for an explanation of total global markets income. funding and Asset mix changes (+14 basis points) driven by Net income from wealth management increased $223 million in our funds management and insurance businesses in both Australia and New Zealand as a result of improved investment markets. increased capital from the full year impact of the share purchase and share placement plans in 2009 (+6 basis points), reduced reliance on wholesale funding due to higher customer deposits as a source of funding (+5 basis points), other net funding impacts (+1 basis point) and favourable asset mix impact from decline in low margin institutional assets (+2 basis points). This was partly offset by a higher cost of deposits (-16 basis points) and higher funding costs (-11 basis points). Deposit costs were higher due to competitive pressures (-8 basis points), continued customer migration to lower margin deposit products (-4 basis points) and lower returns from the replicating portfolio (-4 basis points). 1 Balance sheet growth and associated commentary is on a statutory (not pro forma) basis and is adjusted for the changes in exchange rates. 2 Net interest margin and associated commentaries are on a statutory (not pro forma) basis. The acquisitions did not have a significant impact on net interest margin. 66 ANZ Annual Report 2010 Review of Operations Directors’ Report 67 REviEW Of OPERATiONS (continued) Other income increased $153 million largely in Asia Pacific, Europe & America (up $158 million) as a result of higher profit from our Partnerships business. The 2010 year included the reversal of a $25 million write down of the investment in Saigon Securities incorporation (SSi) booked in the 2009 year, non-recurrence of a $14 million mark-to-market loss on Panin warrants booked in 2009 and higher equity accounted earnings (up $39 million) in Panin and AmmB holdings Berhad (AmmB). These were partly offset by lower earnings in Shanghai Rural commercial Bank (SRcB) and Bank of Tianjin (BoT). higher other income of $69 million included an increase in Europe of $11 million, a $16 million increase in Singapore due mainly to the sale of available-for-sale securities. Australia increased $13 million largely from increased insurance premiums in mortgages. New Zealand decreased $18 million with 2009 including income on the sale of 16 bank branches. global markets income revenue reduced 12% in total across the various income categories with reduced market volatility leading to lower customer hedging activity and reduced trading opportunities. in addition, margins have tightened as conditions have stabilised. Operating Expenses Operating expenses grew 8% with cost growth primarily in Asia Pacific, Europe & America and institutional as a result of ongoing investment in key strategic markets and infrastructure and system enhancements to support future growth. institutional cost growth was up 14% driven by higher personnel costs as staff numbers increased 22% with investment in the Asian franchise, frontline staff in Australia as well as building capability in infrastructure and system enhancements for future growth across the region. The Australian division was up 5% due to volume related costs to support strong mortgage and Deposit growth and project spend on revenue growth and productivity enhancements. costs were flat in New Zealand. Personnel expenses increased $381 million (10%) as a result of annual salary increases and a 10% increase in staff numbers. increases in staff numbers were in Asia Pacific, Europe & America up 23% (excluding the RBS acquisition) due to continued growth in the business. Premises costs increased $46 million (7%) reflecting higher staff numbers and an investment in upgrading our premises. This includes a $26 million increase in utilities and other outgoings including repairs and maintenance, security and in power costs driven by an increased space requirement from increasing staff numbers. Depreciation was $21 million higher due to the ANZ centre. computer costs increased $45 million (5%) due to a $53 million increase in depreciation and amortisation from our significant investment in technology. Other expenses increased $43 million (3%). Professional fees increased $53 million with increases across Technology, institutional and group centre. Provision for credit impairment Total credit impairment charge relating to lending assets, commitments and debt securities classified as available-for-sale assets decreased by $1,218 million from September 2009 to $1,787 million. The pro forma underlying credit impairment charge decreased by $1,190 million, driven by lower individual and collective provision charges. This reflected a slowing in single name large provisions, a stabilising loan portfolio and growth in low risk assets. The pro forma underlying individual provision charge decreased $976 million, due to reductions in Australia and New Zealand. The decrease in Australia of $887 million mainly reflected the reduction in the number of large single name provisions raised within the Australian institutional portfolio. The decrease in New Zealand of $126 million was mainly due to writebacks and recoveries. These reductions were partially offset by an increase of $37 million in Asia, Pacific and America. The collective provision charge decreased $239 million during the year to a release of $4 million, with decreases in New Zealand and Asia Pacific, Europe and America offset by an increase in Australia. The charge for Australia increased $127 million reflecting releases for migrations to impaired status in 2009. The New Zealand charge decreased $215 million following the high charge in 2009 and recognising some stabilisation in credit conditions. The charge for Asia Pacific, Europe & America decreased by $127 million as releases from large customer upgrades offset growth in the corporate business compared to the high charge for risk in 2009 which recognised the stress in global credit markets. Balance Sheet Summary Assets Liquid assets Due from other financial institutions Trading and available-for-sale assets Derivative financial instruments Net loans and advances including acceptances investments relating to insurance business Other Total Assets liabilities Due to other financial institutions customer deposits Other deposits and other borrowings Deposits and other borrowings Derivative financial instruments Liability for acceptances Bonds and notes insurance policy liabilities/external unitholder liabilities Other Total liabilities Total equity 2010 $m 2009 $m 21,521 5,481 54,257 37,821 360,816 32,171 19,672 531,739 20,521 257,964 53,508 311,472 37,217 11,495 59,714 34,429 22,736 497,584 34,155 25,317 4,985 47,566 37,404 345,769 – 15,946 476,987 19,924 233,141 61,229 294,370 36,516 13,762 57,260 – 22,726 444,558 32,429 Movt -15% 10% 14% 1% 4% n/a 23% 11% 3% 11% -13% 6% 2% -16% 4% n/a 12% 5% Asset growth of $54.8 billion (11%) includes $40.4 billion due to the acquisitions of OnePath (formerly iNg Australia), Landmark and Royal Bank of Scotland assets. growth in the existing business has been negatively impacted by movements in exchange rates which has subdued growth by $11.4 billion. Excluding exchange rates, growth in the existing business was 6%, principally driven by: growth in Liabilities of $53.0 billion (12%) includes $39.9 billion due to the acquisitions of OnePath (formerly iNg Australia), Landmark and Royal Bank of Scotland assets. growth in the existing business of $23.4 billion (5%) excluding exchange rate impacts was driven by an increase in customer deposits ($30.9 billion), partially offset by a decrease in wholesale funding ($6.2 billion). Net loans and advances including acceptances increased $17.8 billion (5%) primarily in mortgages Australia with housing loans increasing by $18 billion (12%). growth of $7.7 billion across Asia, primarily in Singapore, hong Kong and Taiwan was offset by reduced lending in institutional. Trading and available-for-sale assets increased $6.7 billion (17%) due primarily to local regulatory requirements to hold increased government securities in part due to business growth in Singapore of $2.9 billion and increased trading securities in institutional Australia and New Zealand of $4.5 billion. customer deposits in Australia increased $8.4 billion driven by large growth in institutional and Retail deposits, as customers respond to attractive rates offered in line with six rate increases to the official cash rate. Asia Pacific, Europe and America (APEA) increased by $10.3 billion (27%) through successful initiatives to raise customer deposit levels. 68 ANZ Annual Report 2010 Review of Operations 69 REviEW Of OPERATiONS (continued) Australia Region Income Statement ($m) Net interest income Other external operating income Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense Non-controlling interests Profit Adjustments between statutory profit and underlying profit1 Profit Number of Employees in Region Asia Pacific, Europe and America Region Pro Forma2 Underlying Pro Forma2 Underlying 2010 8,004 3,379 11,383 (4,774) 6,609 (1,315) 5,294 (1,630) – 3,664 2009 7,248 3,168 10,416 (4,477) 5,939 (2,075) 3,864 (1,193) (2) 2,669 Movt 10% 7% 9% 7% 11% -37% 37% 37% -100% 37% 2010 7,966 3,249 11,215 (4,667) 6,548 (1,300) 5,248 (1,613) – 3,635 (331) 3,304 2009 7,085 2,677 9,762 (4,034) 5,728 (2,053) 3,675 (1,113) (2) 2,560 (476) 2,084 23,713 20,231 Movt 12% 21% 15% 16% 14% -37% 43% 45% -100% 42% -30% 59% 17% Income Statement ($m) Net interest income Other external operating income Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense Non-controlling interests Profit Adjustments between statutory profit and underlying profit1 Profit Number of Employees in Region 2010 1,072 1,207 2,279 (1,300) 979 (194) 785 (80) (6) 699 2009 942 1,132 2,074 (1,082) 992 (283) 709 (120) – 589 Movt 14% 7% 10% 20% -1% -31% 11% -33% large 19% 2010 921 1,099 2,020 (1,094) 926 (154) 772 (76) (7) 689 (180) 509 2009 846 1,121 1,967 (852) 1,115 (276) 839 (140) – 699 1 700 13,542 8,555 Movt 9% -2% 3% 28% -17% -44% -8% -46% large -1% large -27% 58% 1 Adjusted for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses, 1 Adjusted for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses, timing differences on economic hedges, and acquisition related costs. Refer page 65. timing differences on economic hedges, and acquisition related costs. Refer page 65. 2 These results have been presented on a pro forma, foreign exchange adjusted basis. for more information on the presentation of this information on this basis, refer to page 66. 2 These results have been presented on a pro forma basis. for more information on the presentation of this information on this basis, refer to page 66. Other external operating income increased 7%. Australia division increased by 6% driven by a strong year on year performance in Wealth, partly offset by the reduction in exception related fees in Retail. institutional (excluding markets) increased 26% with higher fee income in Specialised Lending and Loan Products. markets income was lower after the strong earnings in 2009. Operating expenses increased 7%. Australia division increased by 5% due to volume related costs to support the strong mortgage and Deposit growth, projects and telecommunication costs. Project spend for the year was focused on revenue growth and productivity enhancements. Expenses in institutional increased 10% with investment directed at key initiatives to grow the business. The individual provision charge was significantly lower in 2010 mainly reflecting the reduction in the number of large single name provisions raised within the Australian institutional portfolio while within Retail, improvements to both delinquency trends and bankruptcies continue to improve and commercial losses, whilst mixed, are down. The collective provision release of $4 million reflects lending growth concentrated in lower risk assets and otherwise relatively stable portfolios. Profit for Australia region increased 59%. Underlying profit increased 42%, with profit before credit impairment and income tax up 14% in an environment punctuated by the rising cost of funding, intense competition for deposits and subdued business credit growth. Analysis of the Australia region’s business performance on a pro forma basis excluding exchange rate impacts follows: Net interest income increased 10% due to an increase in net interest margin2 of 23 basis points, while average deposits1 grew by 4% and average net loans and advances1 increased 2%. Key contributors were: Australia division net interest income increased 10% due to a 7 basis point improvement in net interest margin2 combined with an 8% increase in average net loans and advances1 and 7% increase in average customer deposits1. margin improvement reflected the impact of asset repricing to recoup higher funding costs and continued competition in deposit products. growth in average net loans and advances for Australia division was driven by above system growth in mortgages, whilst Deposits growth predominantly came through term deposits. institutional (excluding markets) grew net interest income 7% with improved lending margins offsetting lower lending volumes, while higher deposit volumes and margins were achieved. group centre increased significantly resulting from higher capital as a result of equity raisings in 2h09. 1 Balance sheet growth and associated commentary is on a statutory (not pro forma) basis and is adjusted for the changes in exchange rates. 2 Net interest margin and associated commentaries are on a statutory (not pro forma) basis. The acquisitions did not have a significant impact on net interest margin. Profit after tax decreased by 27%. Underlying profit decreased by 1%. On a pro forma, foreign exchange adjusted basis, underlying profit grew 19% with strong profit growth recorded in Asia Partnerships and a solid result in institutional dampened by spending to build the platform for the future. The institutional business result follows the exceptional additional earnings in 2009 arising from increased market volatility due to the global financial crisis. We completed the acquisitions of the RBS businesses in the Philippines, vietnam and hong Kong during the march 2010 half and in Taiwan, Singapore and indonesia during the September 2010 half. Key factors affecting the pro forma result were: Strong balance sheet growth contributed to net interest income increasing 14%. Other external operating income increased 7%, driven primarily by higher earnings from Asia Partnerships and the positive impact of the reversal in 2010 of the impairment charge taken in 2009 relating to the carrying value of our investment in Saigon Securities incorporation (SSi) in vietnam. This was offset by a 5% decrease in institutional due to the exceptional level of earnings in 2009 which was unable to be repeated as market volatility and credit spreads returned to more normal levels. Operating expenses were 20% higher as a result of ongoing investments in the key strategic markets of indonesia, vietnam and china, and building regional operating and support capabilities. Employees increased by 4,987 principally throughout Asia, including 2,786 from the RBS acquisition. We continued to invest in systems and build core front line capability in the region and increase our operations and technology support staff in Bangalore. 1 Balance sheet growth and associated commentary is on a statutory (not pro forma) basis and is adjusted for the changes in exchange rates. 2 Net interest margin and associated commentaries are on a statutory (not pro forma) basis. The acquisitions did not have a significant impact on net interest margin. Provisions for credit impairment were 31% lower year on year, in line with an improving outlook. Lower collective provision charges were mainly due to the write-backs associated with a few large institutional customers and de-risking of the loan portfolio in Europe and America compared to the higher charge in 2009. The reduced tax rate for 2010 was positively impacted by the resolution of an outstanding tax matter in the US and the higher proportion of earnings being derived from Asia Partnerships. Net loans and advances1 registered 45% growth year on year as a result of the acquisitions of the RBS businesses and growth in Transaction Banking and Specialised and Relationship Lending. The growth momentum in customer deposits1 continued, resulting in an increase of 72% year on year. Our deposits to loans ratio improved from 161% to 191%. margins2 were 16 basis points lower due to narrowing credit spreads and a higher proportion of lower yielding assets arising from increased liquidity from strong growth in customer deposits. 70 ANZ Annual Report 2010 Review of Operations 71 REviEW Of OPERATiONS (continued) New Zealand Region Income Statement ($m) Net interest income Other external operating income Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense Profit Adjustments between statutory profit and underlying profit1 Profit Number of Employees in Region Pro Forma2 Underlying institutional Division (global line of business, also included in each of the regions discussed on pages 70 to 72). 2010 1,975 585 2,560 (1,224) 1,336 (366) 970 (267) 703 2009 1,909 732 2,641 (1,224) 1,417 (706) 711 (200) 511 Movt 3% -20% -3% 0% -6% -48% 36% 34% 39% 2010 1,977 572 2,549 (1,212) 1,337 (366) 971 (270) 701 (13) 688 9,412 2009 1,879 759 2,638 (1,182) 1,456 (727) 729 (216) 513 (354) 159 8,879 Movt 5% -25% -3% 3% -8% -50% 33% 25% 37% -97% n/a 6% Income Statement ($m) Net interest income Other operating income Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense and non-controlling interests Profit Number of Employees in Division Pro Forma1 Underlying 2010 3,179 1,729 4,908 (1,735) 3,173 (747) 2,426 (668) 2009 3,053 1,766 4,819 (1,529) 3,290 (1,389) 1,901 (541) Movt 4% -2% 2% 14% -4% -46% 28% 23% 1,758 1,360 29% 2010 3,151 1,714 4,865 (1,706) 3,159 (740) 2,419 (665) 1,754 6,044 2009 3,117 1,848 4,965 (1,555) 3,409 (1,410) 2,000 (570) 1,430 4,963 Movt 1% -7% -2% 10% -7% -48% 21% 17% 23% 22% 1 These results have been presented on a pro forma basis. for more information on the presentation of this information on this basis, refer to page 66. 1 Adjusted for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses, timing differences on economic hedges, and acquisition related costs. Refer page 65. 2 These results have been presented on a pro forma basis. for more information on the presentation of this information on this basis, refer to page 66. Adjusting for the change in composition of the derivatives result, other external operating income decreased 17%. This largely reflected the lower contribution from markets, with the prior year result benefiting from exceptionally favourable trading conditions. fee growth remained weak, with Retail fees reducing $45 million largely due to the restructure of fees implemented in December 2009. These impacts were moderated by a stronger contribution from iNg (36% higher), with the result recovering from the low of 2009. Operating expenses were flat. This largely reflected the ongoing benefits from business transformation strategies implemented during 2009, and strong control of discretionary expenditure in the current environment. Provision for credit impairment charge reduced 48% as risk levels stabilised. The individual provision charge decreased $126 million, with loss rates falling in commercial and Retail as the cycle eases. The charge in Rural increased $25 million, with the agricultural recovery slightly lagging other sectors. The charge in institutional decreased $36 million, largely reflecting recoveries on a single name exposure that was provisioned during 2009. The collective provision charge decreased $215 million, with risk levels moderating across the businesses. credit cycle adjustments booked in 2009 (with smaller top-ups in 2010) contributed $97 million to the lower year on year charge. The total loss rate (total provision charge as a percentage of average net advances) for the 2010 year was 0.48%, down from 0.91% for the 2009 year. The New Zealand economy stabilised during 2010. The pace of recovery has been moderate, with the re-balancing process characterised by de-leveraging across the household, business and rural sectors resulting in subdued credit growth. The improvement in the financial performance for the 2010 year reflected the impact of these economic trends with provisioning moderating, and revenue in the NZ Businesses benefiting from margin recovery, although constrained by soft lending growth caused by de-leveraging and the lag in business investment. Profit more than tripled. Underlying profit increased by 36%, with the result including a $253 million after tax decrease in credit impairment charge. Profit before provisions decreased 6% (NZ Businesses 2% higher, institutional 28% lower). The institutional contribution, whilst falling short of the exceptional 2009 result, was the second best result ever. Key factors affecting the pro forma results were: Net interest income increased 3% after adjusting for a $5 million decrease in net interest income from derivative and liquidity positions that was offset by an increase in trading income. This result was driven by net interest margin1 improvement in the New Zealand Businesses (10 basis points), reflecting the lagged benefit from repricing the fixed rate lending book. The cost of funding that escalated during the credit crisis last year has remained at elevated levels and, together with intensified competition for deposits, continues to place pressure on margins. Other impacts on net interest income included higher break costs on mortgages, and a lower contribution from the management of interest rate risks. Lending and customer deposit volumes were substantially flat over the year. 1 Net interest margin and associated commentaries are on a statutory (not pro forma) basis. The acquisitions did not have a significant impact on net interest margin. 72 ANZ Annual Report 2010 institutional’s underlying profit grew 23%. On a pro forma and constant exchange rate basis, underlying profit increased 29%, with a lower credit impairment charge and a solid revenue result, increasing 2% in a year in which market volatility stabilised and customer hedging activity returned to more normalised levels. Excluding Trading Revenues, customer franchise revenues were up 9%, reflecting the focus on customer acquisition (in excess of 1,100 new relationships added in the year) and the growing strength of client relationships. The Peter Lee survey in Australia ranked ANZ outright first, or equal first, on 14 of the 26 categories, up from 8 categories last year. in New Zealand, ANZ was ranked first in 17 out of 25 dimensions. The strength of our super regional strategy is evident through inter-region client flows being up 10% year on year and flows into Asia from elsewhere in the network up 20%. in the analysis that follows, comparisons are on a pro forma exchange rate adjusted basis. Specialised & Relationship Lending increased revenue by 15%, benefiting from repricing for risk that occurred through the gfc. Average loan balances1 were down 10%, however the significant systemic reductions from 2009 have stabilised and the second half of 2010 has seen modest growth, particularly in Asia. Transaction Banking revenue increased 9%, with Payments and cash management up 6% due to strong deposit growth, especially in Asia, and improved margins in Australia. Trade & Supply chain revenues were up 17% driven by customer acquisition. global markets revenue fell 12%, a function of reduced market volatility leading to lower customer hedging activity and reduced trading opportunities, and tightening margins as market conditions have stabilised. comparing the result to the more “normal” level of 2008, markets’ revenue recorded circa 22% compound annualised growth on the 2008 year. Net interest margin2 (excluding global markets) increased by 56 basis points reflecting deposit growth and the repricing of credit risk. Operating Expenses increased by 14% driven by higher personnel costs as fTE increased 22% with investment in the Asian franchise and in Australia in frontline staff as well as building capability in infrastructure and system enhancements for future growth across the region. Provision for credit impairment decreased 46% reflecting an improvement in the economic environment and disciplined risk management. individual provisions of $799 million were predominantly in Australia, largely related to property exposures, agribusiness and a limited number of corporate names. The collective provision release of $58 million was due to migration of certain names to impaired loans and a general improvement in credit quality. Net impaired loans grew to $2.5 billion, however stabilising in the second half. The reduced tax rate was impacted by the resolution of an outstanding tax matter in the US. Significant factors affecting revenue geographically included: Australian revenue increased 6%, driven by repricing of the loan book, solid trade and deposit growth offset in part by a reduction in markets’ revenue as the exceptional conditions of 2009 reverted to more normalised levels. Asia Pacific, Europe & America revenue increased 7% reflecting the strategic investment in the region. New Zealand revenue decreased 23%, driven by a reduction in New Zealand markets’ opportunities. 1 Balance sheet growth and associated commentary is on a statutory (not pro forma) basis and is adjusted for the changes in exchange rates. 2 Net interest margin and associated commentaries are on a statutory (not pro forma) basis. The acquisitions did not have a significant impact on net interest margin. Review of Operations 73 Principal Risks and Uncertainties ANZ’s business activities are subject to risks that can adversely impact its business, future performance and financial condition. The risks and uncertainties described below are not the only ones ANZ may face. Additional risks and uncertainties that ANZ is unaware of, or that ANZ currently deems to be immaterial, may also become important factors that affect it. if any of the listed or unlisted risks actually occur, ANZ’s business, operations, financial condition or reputation could be materially adversely affected, with the result that the trading price of ANZ’s equity or debt securities could decline and investors could lose all or part of their investment. changes in general business and economic conditions, including disruption in regional or global credit and capital markets, may adversely affect ANZ’s results ANZ’s financial performance is primarily influenced by the economic conditions and the level of business activity in the major countries and regions in which it operates or trades, i.e., Australia, New Zealand, the Asia Pacific Region, Europe and the United States of America. ANZ’s business, operations and financial condition can be negatively affected by changes to these economic and business conditions. The economic and business conditions that prevail in ANZ’s major operating and trading markets are affected by domestic and international economic events, political events and by movements and events that occur in global financial markets. The impact of the global financial crisis (“gfc”) in 2008 and 2009 saw a sudden and prolonged dislocation in credit and equity capital markets, a contraction in global economic activity and the creation of many challenges for financial services institutions worldwide that still persist. The economic effects of the gfc in Australia included weakened retail sales, declines in personal and business credit growth, lower growth in housing credit and subdued business and consumer confidence. While some of these economic factors have since improved, there is no certainty as to the future sustainability of these improvements. The New Zealand economy contracted sharply in 2008 and in the first quarter of 2009, and economic conditions in Australia, New Zealand and some Asia Pacific countries remain difficult especially in the rural, commercial and corporate sectors. Should the difficult economic conditions of these countries persist or worsen, asset values in the housing, commercial or rural property markets could decline, unemployment could rise and corporate and personal incomes could suffer. Also, deterioration in global markets, including equity, property and other asset markets, could impact ANZ’s customers and the security ANZ holds against loans and other credit exposures, which may impact its ability to recover some loans and other credit exposures. All or any of these negative economic and business impacts could cause a reduction in demand for ANZ’s products and services and/or an increase in loan and other credit defaults and bad debts, which could adversely affect ANZ’s business, operations and financial condition. 74 ANZ Annual Report 2010 ANZ’s financial performance could also be adversely affected if it were unable to adapt cost structures, products, pricing or activities in response to a drop in demand or lower than expected revenues. Similarly, higher than expected costs (including credit costs) could be incurred because of adverse changes in the economy, general business conditions or the operating environment in the countries in which it operates. Other economic and financial factors or events which may adversely affect ANZ’s performance and results include, but are not limited to, volatility in foreign exchange rates and interest rates, changes in inflation and monetary supply, fluctuations in both debt and equity capital markets, declining commodity prices due, for example, to reduced Asian demand, and decreasing consumer and business confidence. geopolitical instability, such as threats of, potential for, or actual conflict, occurring around the world, may also adversely affect global financial markets, general economic and business conditions and ANZ’s ability to continue operating or trading in a country, which in turn may adversely affect ANZ’s financial performance. changes in the currency exchange rates may adversely affect ANZ’s results An appreciation in the Australian or New Zealand dollar relative to other currencies could adversely affect the Australian or New Zealand economies, including agricultural exports and international tourism, whereas a depreciation would increase debt service obligations in Australia or New Zealand dollar terms. Also, a depreciation in the value of the New Zealand dollar against the Australian dollar could have a negative effect on the financial results of our New Zealand businesses, which includes ANZ National Bank Limited (“ANZNBL”). Similarly, to the extent the Australian dollar appreciates against the United States dollar, this could also negatively impact ANZ’s growing US$ earnings from the group’s Asian businesses. competition may adversely affect ANZ’s results, especially in Australia, New Zealand and the Asian markets in which it operates The markets in which ANZ operate are highly competitive and could become even more so, particularly in those segments that are considered to provide higher growth prospects or are in greatest demand (for example customer deposits). factors that contribute to competition risk include industry regulation, mergers and acquisitions, changes in customers’ needs and preferences, entry of new participants, development of new distribution and service methods and increased diversification of products by competitors. for example, changes in the financial services sector in Australia and New Zealand have made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic payment systems, mortgages and credit cards. in addition, banks organised in jurisdictions outside Australia are subject to different levels of regulation and consequently some may have lower cost structures. increasing competition for customers could also potentially lead to a compression in ANZ’s net interest margins, or increased advertising and related expenses to attract and retain customers. The effect of the competitive market conditions, especially in ANZ’s main markets, may lead to erosion in ANZ’s market share and adversely affect ANZ’s business, operations and financial conditions. On October 28, 2010, the Australian Senate announced that it will hold an inquiry into competition within the Australian banking sector. The broad ranging inquiry will be undertaken by the Senate Economics committee and will examine, among other things, the products banks offer, their fees and charges, the current level of competition between bank and non-bank providers and any policies, practices and strategies that may enhance competition in banking, including legislative change. Any regulatory changes that occur in response to the Senate inquiry into “Competition within the Australian banking sector” could have the effect of limiting or reducing ANZ’s revenue earned from its banking products or operations. These regulatory changes could also result in higher operating costs. A reduction or limitation in revenue or an increase in operating costs could adversely affect ANZ’s profitability. changes in monetary policies may adversely affect ANZ’s results The Reserve Bank of Australia (“RBA”) and the Reserve Bank of New Zealand (“RBNZ”) set official interest rates so as to effect the demand for money and credit in Australia and New Zealand, respectively. Their policies determine, in large part, ANZ’s cost of funds for lending and investing and the return that ANZ will earn on those loans and investments. Both these factors impact ANZ’s net interest margin and can affect the value of financial instruments it holds, such as debt securities and hedging instruments. The policies of the RBA, the RBNZ and any other relevant central monetary authority can also affect ANZ’s borrowers, potentially increasing the risk that they may fail to repay loans. changes in the RBA’s and RBNZ’s policies are difficult to predict accurately. Sovereign risk may destabilize global financial markets adversely affecting all participants, including ANZ Sovereign risk or the risk that foreign governments will default on their debt obligations or be unable to refinance their debts as they fall due has emerged as a risk to the recovery prospects of global economies. This risk is particularly relevant to a number of European countries, though it is not limited to Europe. Should one sovereign default, there could be a cascading effect to other markets and countries, the consequences of which, while difficult to predict, may be similar to or worse than that experienced during the gfc. Such an event could destabilise global financial markets adversely affecting all participants, including ANZ. financial support packages jointly announced by EU authorities and the imf in the first half of 2010 were designed to reassure global markets regarding the risk of sovereign default and avert further financial turmoil. it is not certain whether such packages will achieve their intended effect, and the impact of any withdrawal and modifications to such packages over time. The withdrawal of the Australian government guarantee Scheme for Large Deposits and Wholesale funding and the New Zealand government Wholesale funding guarantee Scheme may adversely impact ANZ’s access to funding and liquidity With improvement in international capital market and liquidity conditions, and banks subsequently being able to again successfully raise non-government guaranteed funds in the international wholesale market, many government-sponsored financial stabilisation packages are progressively being withdrawn. There is a risk that this may result in unexpected stress on the global financial system or regional financial systems, which could adversely impact ANZ and its customers and counterparties. Specifically, on february 7, 2010, the Australian federal government announced the withdrawal of the Australian government guarantee scheme for wholesale funding with effect from march 31, 2010. Similarly, on march 10, 2010, the New Zealand government announced the withdrawal of its wholesale guarantee facility with effect from April 30, 2010. Other countries have also ended their guarantee schemes, are in the process of doing so or are likely to do so in the future. The withdrawal of the Australian and New Zealand wholesale funding guarantee schemes could adversely affect ANZ’s ability to access sources of funding and lead to a decrease in ANZ’s liquidity position and increase in funding costs, particularly if credit market conditions are disrupted. it is also possible that global financial conditions could again deteriorate, liquidity could tighten and new risks could emerge as a result of markets experiencing stress, or existing risks manifest in ways that are not currently foreseeable. Such conditions could adversely affect ANZ’s funding and liquidity position, negatively affecting ANZ’s business, operations and financial condition. ANZ is exposed to liquidity and funding risk, which may adversely affect its results Liquidity risk is the risk that ANZ has insufficient capacity to fund increases in assets, or is unable to meet its payment obligations as they fall due, including repaying depositors or maturing wholesale debt. Liquidity risk is inherent in all banking operations due to the timing mismatch between cash inflows and cash outflows. Reduced liquidity could lead to an increase in the cost of ANZ’s borrowings and possibly constrain the volume of new lending, which could adversely affect ANZ’s profitability. A significant deterioration in investor confidence in ANZ could materially impact ANZ’s cost of borrowings and ANZ’s ongoing operations and funding. ANZ uses a variety of funding sources including customer deposits and wholesale funding (including from outside of Australia) to seek to help ensure that it continues to meet its funding obligations and to maintain or grow its business generally. in times of systemic liquidity stress, in the event of damage to market confidence in ANZ or in the event that funding outside of Australia is not available or constrained, ANZ’s ability to access sources of funding and liquidity may be constrained. Deterioration in global markets and systemic market liquidity stress may limit ANZ’s ability to access sources of funding and liquidity. Principle Risks and Uncertainties 75 PRiNCiPAL RiSKS AND UNCERTAiNTiES (continued) Since the second half of 2007, developments in the US mortgage industry and in the US and European markets more generally, have adversely affected the liquidity in global credit and capital markets. This has resulted in an increase in funding costs that currently continues. future deterioration in these market conditions may limit ANZ’s ability to replace maturing liabilities and access funding in a timely manner necessary to fund and grow its business. global and domestic regulators have released proposals intended to strengthen liquidity requirements which, together with any risks arising from these regulatory changes, are set out below in the risk factor entitled “Regulatory changes or a failure to comply with regulatory standards, law or policies may adversely affect ANZ’s business, operations or financial condition”. ANZ is exposed to the risk that its credit ratings could change, which could adversely affect its ability to raise capital and wholesale funding ANZ’s credit ratings have a significant impact on both its access to, and cost of, capital and wholesale funding. credit ratings are not a recommendation by the relevant rating agency to invest in securities offered by ANZ. however, a downgrade or potential downgrade to ANZ’s credit rating may reduce access to capital and wholesale debt markets, potentially leading to an increase in funding costs, as well as affecting the willingness of counterparties to transact with it. credit ratings may be withdrawn, subject to qualifiers, revised, or suspended by the relevant credit rating agency at any time. in addition, the ratings of individual securities (including, but not limited to, Tier-1 and Tier-2 securities) issued by ANZ (and banks globally) could be impacted from time to time by changes in the ratings methodologies used by rating agencies. Ratings agencies may revise their methodologies in response to legal or regulatory changes or other market developments. ANZ may experience challenges in managing its capital base, which could give rise to greater volatility in capital ratios ANZ’s capital base is critical to the management of its businesses and access to funding. ANZ is required by regulators including, but not limited to, the Australian Prudential Regulation Authority (APRA), the Reserve Bank of New Zealand (RBNZ), the UK financial Services Authority (fSA), US regulators and various Asia Pacific jurisdictions where ANZ has operations, to maintain adequate regulatory capital. Under current regulatory requirements, risk weighted assets and expected loan losses increase as a counterparty’s risk grade worsens. These additional regulatory capital requirements compound any reduction in capital resulting from increased provisions for loan losses in times of stress. As a result, greater volatility in capital ratios may arise and may require ANZ to raise additional capital. There can be no certainty that any additional capital required would be available or could be raised on reasonable terms. global and domestic regulators have released proposals, including the Basel iii proposals, to strengthen, among other things, the liquidity and capital requirements of banks and funds management and insurance entities. These proposals, together with any risks arising from any regulatory changes, are described below in the risk factor entitled “Regulatory changes or a failure to comply with regulatory standards, law or policies may adversely affect ANZ’s business, operations or financial condition”. ANZ is exposed to credit risk, which may adversely affect its results As a financial institution, ANZ is exposed to the risks associated with extending credit to other parties. Less favourable business or economic conditions, whether generally or in a specific industry sector or geographic region, could cause customers or counterparties to experience adverse financial consequences, thereby exposing ANZ to the increased risk that those customers or counterparties will fail to meet their obligations in accordance with agreed terms. ANZ holds provisions for credit impairment. The amount of these provisions is determined by assessing the extent of impairment inherent within the current lending portfolio, based on current information. This process, which is critical to ANZ’s financial results and condition, requires difficult, subjective and complex judgments, including forecasts of how current and future economic conditions might impair the ability of borrowers to repay their loans. however, if the information upon which the assessment is made proves to be inaccurate or if ANZ fails to identify proper factors or fails to accurately estimate the impact of factors ANZ does identify, the provisions made for credit impairment may be insufficient, which could have a material adverse effect on ANZ’s financial performance. Since 2009, a stabilisation has occurred, and in most cases a reduction in impairment costs. This has been driven by an improvement in global economic conditions and a slowdown in corporate defaults. While emerging economies, including in Asia, where ANZ has focused its recent growth strategy, have been resilient amidst a moderation in growth in some developed economies, the uneven recovery supports ANZ’s intention to retain a cautious approach to impairment charges and provisions. in addition, in assessing whether to extend credit or enter into other transactions with customers, ANZ relies on information provided by or on behalf of customers, including financial statements and other financial information. ANZ may also rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. ANZ’s financial performance could be negatively impacted to the extent that it relies on information that is inaccurate or materially misleading. An increase in the failure of third parties to honor their commitments in connection with ANZ’s trading, lending, derivatives and other activities may adversely affect its results ANZ is exposed to the potential risk of credit-related losses that can occur as a result of a counterparty being unable or unwilling to honour its contractual obligations. As with any financial services organisation, ANZ assumes counterparty risk in connection with its lending, trading, derivatives and other businesses where it relies on the ability of a third party to satisfy its financial obligations to ANZ on a timely basis. ANZ is also subject to the risk that its rights against third parties may not be enforceable in certain circumstances. There is a risk that subsequent events will not be the same as assumed in ANZ’s original assessment of the ability of a third party to satisfy its obligations. Such credit exposure may also be increased by a number of factors including declines in the financial condition of the counterparty, the value of assets ANZ holds as collateral and the market value of the counterparty instruments and obligations it holds. credit losses can and have resulted in financial services organisations realising significant losses and in some cases failing altogether. To the extent ANZ’s credit exposure increases, the increase could have an adverse effect on ANZ’s business and profitability if material unexpected credit losses occur. Weakening of the real estate markets in Australia, New Zealand or other markets where it does business may adversely affect ANZ’s results Residential, commercial and rural property lending, together with property finance, including real estate development and investment property finance, constitute important businesses to ANZ. Overall, the property market has been variable and in some locations there have been substantially reduced asset values. With respect to the New Zealand housing market in particular, the outlook remains subdued, albeit with some signs of stabilisation, impacted by a strong market supply and an overall cautious economic outlook. A decrease in property valuations in Australia, New Zealand or other markets where it does business could decrease the amount of new lending ANZ is able to write and/or increase the losses that ANZ may experience from existing loans, which, in either case, could materially and adversely impact ANZ’s financial condition and results of operations. in particular, a significant slowdown in the Australian and New Zealand housing markets or in other markets where it does business could adversely affect ANZ’s results of operations. ANZ is exposed to market risk which may adversely affect its result ANZ is subject to market risk, which is the risk to ANZ’s earnings arising from changes in interest rates, foreign exchange rates, credit spreads, equity prices and indices, prices of commodities, debt securities and other financial contracts, including derivatives. Losses arising from these risks may have a material adverse effect on ANZ. As ANZ conducts business in several different currencies, its businesses may be affected by a change in currency exchange rates. Additionally, as ANZ’s annual and interim reports are prepared and stated in Australian dollars, any appreciation in the Australian dollar against other currencies in which ANZ earns revenues (particularly to the New Zealand dollar and US dollar) may adversely affect the reported earnings. The profitability of ANZ’s funds management and insurance businesses is also affected by changes in investment markets and weaknesses in global securities markets due to credit, liquidity or other problems. ANZ is exposed to the risks associated with credit intermediation and financial guarantors which may adversely affect its results ANZ entered into a series of structured credit intermediation trades from 2004 to 2007. ANZ sold protection using credit default swaps over these structures and then, to mitigate risk, purchased protection via credit default swaps over the same structures from eight US financial guarantors. The underlying structures involve credit default swaps (cDS) over synthetic collateralised debt obligations (cDOs), portfolios of external collateralised loan obligations (cLOs) or specific bonds/floating rate notes (fRNs). Being derivatives, both the sold protection and purchased protection are marked-to-market. Prior to the commencement of the gfc, movements in valuations of these positions were not significant and largely offset each other in income. following the onset of the gfc, the purchased protection has provided only a partial offset against movements in valuation of the sold protection as: one of the purchased protection counterparties defaulted and many of the remaining were downgraded, and ANZ makes a credit valuation adjustment on the remaining purchased protection counterparties reflective of changes to credit worthiness. ANZ is actively monitoring this portfolio with a view to reducing the exposure via termination and restructuring of both the bought and sold protection if and when the Bank deems it cost effective relative to the perceived risk associated with a specific trade or counterparty. consistent with this approach the Bank took action on several transactions throughout 2010 which resulted in a total notional reduction of US$2.6 billion leaving the notional outstanding on the sold trades at US$8.4 billion as at September 30, 2010 (September 2009: US$11 billion). The credit risk expense on structured credit derivatives still remains volatile reflecting the impact of market movements in credit spreads and USD/AUD rates. it is likely there will continue to be substantial volatility in this market value. 76 ANZ Annual Report 2010 Principle Risks and Uncertainties Corporate Governance 77 PRiNCiPAL RiSKS AND UNCERTAiNTiES (continued) ANZ is exposed to operational risk, which may adversely affect its results Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Operational risk includes legal risk and the risk of reputational loss, but excludes strategic risk. Loss from operational risk can include fines, penalties, loss or theft of funds or assets, legal costs, customer compensation, reputational loss, loss of life or injury to people and loss of property and/or information. Examples of operational risk that ANZ is exposed to include the risks arising from theft, fraud and crime; process error or failure to follow established procedures; operational or system failures; inadvertent violations of money laundering, sanctions or other laws and regulations; external events such as natural disasters, other bank failures, civil unrest and other events that lead to the loss or unavailability of bank property, systems or staff; failure and breach of security, physical protection and recovery systems; failure of third party suppliers or outsourced functions; failure of customer services; product development and maintenance; failure to disclose, provide adequate advice or mis-selling; and breaches of ANZ’s internal policies and of laws and regulations. Similarly, there are operational risks in the management, design and implementation of major projects. Direct or indirect losses that occur as a result of operational failures, breakdowns, omissions or unplanned events could adversely affect ANZ’s financial results. Disruption of information technology systems or failure to successfully implement new technology systems could significantly interrupt business ANZ is highly dependent on information systems and technology and there is a risk that these, or the services ANZ uses or is dependent upon, might fail. most of ANZ’s daily operations are computer-based and information technology systems are essential to maintaining effective communications with customers. The exposure to systems risks includes the complete or partial failure of information technology systems or data center infrastructure, the inadequacy of internal and third-party information technology systems due to, among other things, failure to keep pace with industry developments and the capacity of the existing systems to effectively accommodate growth and integrate existing and future acquisitions and alliances. To manage some of these risks, ANZ has disaster recovery and systems continuity plans in place. however, any failure of these systems could result in business interruption, loss of customers, financial compensation, damage to reputation and/or a weakening of ANZ’s competitive position and could adversely impact ANZ’s business and have a material adverse effect on ANZ’s financial condition and operations. in addition, ANZ must update and implement new information technology systems, in part to assist it to satisfy regulatory demands, ensure information security, enhance computer-based banking services for ANZ’s customers and integrate the various segments of its business. ANZ may not organise these implementation projects effectively or execute them efficiently, which could lead to increased project costs, delays in the ability to comply with regulatory requirements, failure of ANZ’s information security controls or a decrease in ANZ’s ability to service its customers. ANZ is exposed to risks associated with information security, which may adversely affect its financial results and reputation information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, perusal, inspection, recording or destruction. As a bank, ANZ handles a considerable amount of personal and confidential information about its customers and its own internal operations. ANZ Technology employs a team of information risk subject matter experts who are responsible for the development and implementation of ANZ’s information Security Policy. ANZ is conscious that threats to information security are continuously evolving and as such ANZ takes a proactive approach of conducting regular internal and external reviews to ensure new threats are identified, evolving risks are mitigated, policies and procedures are updated, and good practice is maintained. however, while significant efforts and precautions are taken by ANZ to protect and ensure the confidentiality, integrity and availability of this information, including the use of sophisticated firewalls, network intrusion detection systems, access control processes, data encryption, and the deployment of business controls and processes, there is nevertheless a risk that information may be inadvertently or inappropriately accessed or distributed or illegally accessed or stolen. Any unauthorised use of confidential information could potentially result in breaches of privacy laws, regulatory sanctions, legal action, and claims of compensation or erosion to our competitive market position. Such events could subsequently adversely affect ANZ’s financial position or reputation. ANZ is exposed to reputation risk, which may adversely impact its results Reputation risk may arise as a result of an external event or ANZ’s own actions and adversely affect perceptions about ANZ held by the public (including our customers), shareholders, investors, regulators or rating agencies. The impact of a risk event on ANZ’s reputation may exceed any direct cost of the risk event itself and may adversely impact ANZ’s earnings, capital adequacy or value. Accordingly, damage to ANZ’s reputation may have wide-ranging impacts, including adverse effects on ANZ’s profitability, capacity and cost of sourcing funding and availability of new business opportunities. The unexpected loss of key staff or inadequate management of human resources may adversely affect ANZ’s results ANZ’s ability to attract and retain suitably qualified and skilled employees is an important factor in achieving its strategic objectives. At ANZ, there are certain individuals and key executives whose skills, technical knowledge, creativity, inspiration and reputation are critical to setting the strategic direction, successful management and growth of ANZ, and whose unexpected loss due to resignation, retirement, death or illness may adversely affect its operations and financial condition. in addition, ANZ may in the future have difficulty attracting highly qualified people to fill important roles, which could adversely affect its financial performance and results of operations. ANZ may be exposed to the impact of future climate change, geological and other extrinsic events which may adversely affect its results Scientific observations and climate modelling point to changes in the global climate system that may see extreme weather events increase in both frequency and severity. Among the possible effects of climate change are the risks of volcanoes, severe storms, cyclones, hurricanes, floods and rising sea levels. Such events, and others like them, pose the risk of inundation and damage to the houses and commercial assets of ANZ’s customers. in some cases, this impact may also adversely affect ANZ’s collateral position in relation to credit facilities extended to those customers. While the future impact of climate change is difficult to predict accurately, it should nevertheless be considered among the risks that may adversely impact ANZ’s financial results in the future. in addition to climatic events, geological events, such as volcanic or seismic activity, or other extrinsic events, such as flu pandemic, can also severely disrupt normal business activity and have a negative effect on ANZ’s customer’s ability to pay interest or repay principal on their loans. Regulatory changes or a failure to comply with regulatory standards, law or policies may adversely affect ANZ’s business, operations or financial condition ANZ is subject to laws, regulations, policies and codes of practice in Australia, New Zealand and in the other countries (including but not limited to the United Kingdom, the United States, hong Kong, Singapore, china and other countries within the Asia Pacific region) in which it has operations, trades or raises funds or in respect of which it has some other connection. in particular, ANZ’s banking, funds management and insurance activities are subject to extensive regulation, mainly relating to our liquidity levels, capital, solvency, provisioning and insurance policy terms and conditions. Regulations vary from country to country but generally are designed to protect depositors, insured parties, customers with other banking products and the banking and insurance system as a whole. The Australian government and its agencies, including APRA, the RBA and other financial industry regulatory bodies including the Australian Securities and investments commission (“ASic”), have supervisory oversight of ANZ. The New Zealand government and its agencies, including the RBNZ, have supervisory oversight of ANZ’s operations in New Zealand. To the extent that ANZ has operations, trades or raises funds in, or has some other connection with, countries other than Australia or New Zealand, then such activities may be subject to the laws of, and regulation by agencies in, those countries. Such regulatory agencies include, by way of example, the US federal Reserve Board, the US Department of Treasury, the US Office of the comptroller of the currency, the US Office of foreign Assets control (“OfAc”), the UK’s financial Services Authority, the monetary Authority of Singapore, the hong Kong monetary Authority, the china Banking Regulatory commission and other financial regulatory bodies in those countries and in other relevant countries. in addition, ANZ’s expansion and growth in the Asia Pacific gives rise to a requirement to comply with a number of different legal and regulatory regimes across that region. A failure to comply with any standards, laws, regulations or policies in any of those jurisdictions could result in sanctions by these or other regulatory agencies, the exercise of any discretionary powers that the regulators hold or compensatory action by affected persons, which may in turn cause substantial damage to ANZ’s reputation. To the extent that these regulatory requirements limit ANZ’s operations or flexibility, they could adversely impact ANZ’s profitability and prospects. These regulatory and other governmental agencies (including revenue and tax authorities) frequently review banking and tax laws, regulations, codes of practice and policies. changes to laws, regulations, codes of practice or policies including changes in interpretation or implementation of laws, regulations, codes of practice or policies, could affect ANZ in substantial and unpredictable ways. These may include increasing required levels of bank liquidity and capital adequacy, limiting the types of financial services and products ANZ can offer and/or increasing the ability of non-banks to offer competing financial services or products, as well as changes to accounting standards, taxation laws and prudential regulatory requirements. As a result of the gfc, regulators have proposed various amendments to financial regulation that may affect ANZ. APRA, the Basel committee on Banking Supervision (the “Basel committee”) and regulators in other jurisdictions where ANZ has a presence have recently released discussion papers and proposals in regards to strengthening the resilience of the banking sector, including proposals to strengthen capital and liquidity requirements for the sector. in addition, the United States has recently passed into law the Dodd-frank Wall Street Reform and consumer Protection Act which significantly affects financial institutions and financial activities in the United States and the potential impacts of this new law are uncertain. The Australian Senate has also announced that it will hold an inquiry into competition within the Australian banking sector as discussed above in the risk factor entitled “Competition may adversely affect ANZ’s results, especially in Ausstralia, New Zealand and the Asian markets in which it operates”. 78 ANZ Annual Report 2010 Principle Risks and Uncertainties 79 Acquisitions and disposals may also result in business disruptions that cause ANZ to lose customers or cause customers to remove their business from ANZ to competing financial institutions. it is possible that the integration process related to acquisitions could result in the disruption of ANZ’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect ANZ’s ability to maintain relationships with clients, customers, depositors and employees. The loss of key employees in connection with an acquisition or disposal could adversely affect ANZ’s ability to conduct its business successfully. ANZ’s operating performance, risk profile or capital structure may also be affected by these corporate opportunities and there is a risk that any of ANZ’s credit ratings may be placed on credit watch or downgraded if these opportunities are pursued. PRiNCiPAL RiSKS AND UNCERTAiNTiES (continued) While uncertainty remains as to the final form that any proposed regulatory changes will take in Australia and other countries in which ANZ operate, any such changes may adversely affect ANZ’s results, operations or financial condition. The changes may lead ANZ to, among other things, incur additional costs as a result of increased management attention, raise additional amounts of higher-quality capital (such as ordinary shares) and hold significant levels of additional liquid assets and undertake additional wholesale long- term funding to replace short-term funding to more closely match ANZ’s long-term asset profile. Unexpected changes to ANZ’s license to operate in any jurisdiction may adversely affect its results ANZ is licensed to operate in the various countries, states and territories in which it operates. Unexpected changes in the conditions of the licenses to operate by governments, administrations or regulatory agencies which prohibit or restrict ANZ from trading in a manner that was previously permitted may adversely impact ANZ’s financial results. ANZ is exposed to insurance risk, which may adversely affect its results insurance risk is the risk of loss due to unexpected changes in current and future insurance claim rates. in life insurance business, insurance risk arises primarily through mortality (death) and morbidity (illness and injury) risks being greater than expected and, in the case of annuity business, should annuitants live longer than expected. for general insurance business, insurance risk arises mainly through weather-related incidents (including floods and bushfires) and other calamities, as well as adverse variability in home, contents, motor, travel and other insurance claim amounts. As a result of iNg Australia Limited (“iNgA”) and iNg New Zealand Limited (“iNgNZ”) becoming wholly owned subsidiaries of ANZ, ANZ has increased exposure to insurance risk in both life insurance and general insurance business, which may adversely affect its results. ANZ may experience reductions in the valuation of some of its assets, resulting in fair value adjustments that may have a material adverse effect on its earnings Under Australian Accounting Standards, ANZ recognizes at fair value: financial instruments classified as “held-for-trading” or “designated as at fair value through profit or loss”; financial assets classified as “available-for-sale”; derivatives; and financial assets backing insurance and investment liabilities. generally, in order to establish the fair value of these instruments, ANZ relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, fair values are based on present value estimates or other accepted valuation techniques. in certain circumstances, the data for individual financial instruments or classes of financial instruments used by such estimates or techniques may not be available or may become unavailable due to changes in market conditions. in these circumstances, the fair value is determined using data derived and extrapolated from market data and tested against historic transactions and observed market trends. The valuation models incorporate the impact of factors that would influence the fair value determined by a market participant. Principal inputs used in the determination of the fair value of financial instruments based on valuation techniques include data inputs such as statistical data on delinquency rates, foreclosure rates, actual losses, counterparty credit spreads, recovery rates, implied default probabilities, credit index tranche prices and correlation curves. These assumptions, judgments and estimates need to be updated to reflect changing trends and market conditions. The resulting change in the fair values of the financial instruments could have a material adverse effect on ANZ’s earnings. changes to accounting policies may adversely affect ANZ’s results The accounting policies and methods that ANZ applies are fundamental to how it records and reports its financial position and results of operations. management must exercise judgment in selecting and applying many of these accounting policies and methods so that they not only comply with generally accepted accounting principles but they also reflect the most appropriate manner in which to record and report on the financial position and results of operations. however, these accounting policies may be applied inaccurately, resulting in a misstatement of financial position and results of operations. in some cases, management must select an accounting policy or method from two or more alternatives, any of which might comply with generally accepted accounting principles and be reasonable under the circumstances, yet might result in reporting materially different outcomes than would have been reported under another alternative. ANZ may be exposed to the risk of impairment to capitalized software, goodwill and other intangible assets that may adversely affect its results in certain circumstances ANZ may be exposed to a reduction in the value of intangible assets. As at September 30, 2010, ANZ carried a goodwill balance of $4,086 million which principally relates to its investment in ANZNBL and iNgA; intangible assets of $1,327 million principally relating to assets recognized on the acquisition of iNgA and capitalised software balances of $1,217 million. ANZ is required to assess the recoverability of the goodwill balance on at least an annual basis using either a discounted cash flow or a multiple of earnings calculation. changes in the assumptions upon which the calculation is based, together with expected changes in future cash flows, could materially impact this assessment, resulting in the potential write-off of a part or all of the goodwill balance. The recoverability capitalised software and other intangible assets is assessed at least annually. in the event that asset is no longer in use, or that the cash flows generated by the asset do not support the carrying value, an impairment may be recorded, adversely impacting ANZ’s results. Litigation and contingent liabilities may adversely affect ANZ’s results from time to time, ANZ may be subject to material litigation, regulatory actions, legal or arbitration proceedings and other contingent liabilities which, if they crystallise, may adversely affect ANZ’s results. Details regarding ANZ’s material contingent liabilities as at September 30, 2010 are contained in Note 44 (“credit Related commitments, guarantees, contingent Liabilities and contingent Assets”) of the ANZ Annual Report for the full year ended September 30, 2010. There is a risk that these contingent liabilities may be larger than anticipated or that additional litigation or other contingent liabilities may arise. ANZ group regularly considers acquisitions and divestments, and there is a risk that ANZ may undertake an acquisition or divestment that could result in a material adverse effect on its performance ANZ regularly examines a range of corporate opportunities, including material acquisitions and disposals with a view to determining whether those opportunities will enhance ANZ’s financial performance and position. Any corporate opportunity that is pursued could, for a variety of reasons, turn out to have a material adverse effect on ANZ. The successful implementation of ANZ’s corporate strategy, including its strategy to expand in the Asia-Pacific region, will depend on a range of factors including potential funding strategies and challenges associated with integrating and adding value to an acquired business, as well as new regulatory, market and other risks associated with increasing operations outside of Australia and New Zealand. There can be no assurance that any acquisition would have the anticipated positive results, including results relating to the total cost of integration, the time required to complete the integration, the amount of longer-term cost savings or the overall performance of the combined entity or an improved price for ANZ’s securities. integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. integration efforts could divert management attention and resources, which could adversely affect ANZ’s operations or results. Additionally, there can be no assurance that customers, counterparties and vendors of newly acquired businesses will remain as such post-acquisition and the loss of customers, counterparties and vendors could adversely affect ANZ’s operations or results. 80 ANZ Annual Report 2010 Principle Risks and Uncertainties 81 Five Year Summary Financial Performance1 Net interest income Other operating income Operating expenses Profi t before income tax, credit impairment and non-core items1 Provision for credit impairment income tax expense Non-controlling interest Underlying profi t1 Adjustments between statutory profi t and underlying profi t1 Profi t attributable to shareholders of the Company Financial Position Assets2 Net Assets Tier 1 capital ratio3 Return on average ordinary equity4 Return on average assets4 cost to income ratio1 Shareholder value – ordinary shares Total return to shareholders (share price movement plus dividends) market capitalisation Dividend franked portion – interim – fi nal Share price – high – low – 30 Sep Share information (per fully paid ordinary share) Earnings per share Dividend payout ratio Net tangible assets per ordinary share5 No. of fully paid ordinary shares issued (millions) Dividend Reinvestment Plan (DRP) issue price – interim – fi nal Other information Points of representation6 No. of employees (full time equivalents) No. of shareholders7 2010 $m 2009 $m 2008 $m 2007 $m 2006 $m 10,862 4,920 (6,971) 8,811 (1,820) (1,960) (6) 5,025 (524) 4,501 531,739 34,155 10.1% 13.9% 0.9% 44.2% 9,890 4,477 (6,068) 8,299 (3,056) (1,469) (2) 3,772 (829) 2,943 476,987 32,429 10.6% 10.3% 0.6% 42.2% 7,855 4,440 (5,406) 6,889 (2,090) (1,365) (8) 3,426 107 3,319 471,024 26,552 7.7% 14.5% 0.8% 47.4% 7,302 3,720 (4,953) 6,069 (522) (1,616) (7) 3,924 256 4,180 392,773 22,048 6.7% 20.9% 1.2% 44.9% 1.9% 60,614 126 cents 100% 100% 40.3% 61,085 102 cents 100% 100% –33.5% 38,263 136 cents 100% 100% 15.6% 55,382 136 cents 100% 100% $26.23 $19.95 $23.68 $24.99 $11.83 $24.39 $31.74 $15.07 $18.75 $31.50 $25.75 $29.70 6,943 3,146 (4,605) 5,484 (407) (1,486) (4) 3,587 101 3,688 334,640 19,906 6.8% 20.7% 1.1% 45.6% 17.1% 49,331 125 cents 100% 100% $28.66 $22.70 $26.86 178.9c 71.6% $10.38 2,559.7 131.0c 82.3% $11.02 2,504.5 170.4c 82.6% $10.72 2,040.7 224.1c 60.9% $9.36 1,864.7 200.0c 62.6% $8.53 1,836.6 $21.32 $15.16 $20.82 $29.29 $26.50 – $21.75 $13.58 $27.33 $28.25 1,394 46,917 411,692 1,352 37,687 396,181 1,346 36,925 376,813 1,327 34,353 327,703 1,265 32,256 291,262 1 Adjusted for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses timing differences on economic hedges, and acquisition related costs. Prior to 2010 these were adjustments to arrive at cash profit in accordance with market convention. 2 in 2010, consolidated assets included assets from OnePath (formerly iNgA), iNg NZ, Landmark and RBS acquired during the financial year. 3 calculated in accordance with Australian Prudential Regulation Authority requirements effective at the relevant date. Basel ii has been applied from 1 January 2008. 4 Excludes minority interest. 5 Equals shareholders’ equity less preference share capital, goodwill, software and other intangible assets divided by the number of ordinary shares. 6 7 Excludes employees whose only ANZ shares are held in trust under ANZ employee share schemes. includes branches, offices, representative offices and agencies. SECTiON 3 SECTiON 3 Financial Report income Statements Statement of comprehensive income Balance Sheet cash flow Statement Statement of changes in equity Notes to the Financial Statements 1 Signifi cant Accounting Policies 2 critical Estimates and Judgements Used in Applying Accounting Policies income 3 4 Expenses 5 compensation of Auditors 6 current income Tax Expense 7 Dividends 8 Earnings per Ordinary Share 9 Liquid Assets 10 Due from Other financial institutions 11 Trading Securities 12 Derivative financial instruments 13 Available-for-sale Assets 14 Net Loans and Advances 15 impaired financial Assets 16 Provision for credit impairment 17 Shares in controlled Entities, Associates and Joint venture Entities 18 Tax Assets 19 goodwill and Other intangible Assets 20 Other Assets 21 Premises and Equipment 22 Deposits and Other Borrowings 23 income Tax Liabilities 24 Payables and Other Liabilities 25 Provisions 84 84 85 86 87 88 90 90 101 104 105 106 107 108 109 110 110 110 111 117 118 119 119 122 123 124 125 125 126 127 127 128 Notes to the Financial Statements (continued) 26 Bonds and Notes 27 Loan capital 28 Share capital 29 Reserves and Retained Earnings 30 Non-controlling interests 31 capital management 32 Assets charged as Security for Liabilities and collateral Accepted as Security for Assets 33 financial Risk management 34 fair value of financial Assets and financial Liabilities 35 maturity Analysis of Assets and Liabilities 36 Segment Analysis 37 Notes to the cash flow Statements 38 controlled Entities 39 Associates 40 41 Securitisations 42 fiduciary Activities 43 commitments 44 credit Related commitments, guarantees, interests in Joint venture Entities contingent Liabilities and contingent Assets 45 Superannuation and Other Post Employment Benefi t Schemes 46 Employee Share and Option Plans 47 Key management Personnel Disclosures 48 Transactions with Other Related Parties 49 Life insurance Business 50 Business combinations 51 Exchange Rates 52 Events since the End of the financial Year Directors’ Declaration Independent Auditor’s Report 128 129 132 134 135 136 139 140 165 172 173 175 177 178 179 180 181 182 183 187 192 196 197 197 202 204 204 205 206 82 ANZ Annual Report 2010 ANZ Annual Report 2010 Financial Highlights 83 83 Financial Report iNcOmE STATEmENT fOR ThE YEAR ENDED 30 SEPTEmBER STATEmENT Of cOmPREhENSivE iNcOmE fOR ThE YEAR ENDED 30 SEPTEmBER interest income interest expense Net interest income Net funds management and insurance income Other operating income Share of joint venture profit from OnePath (formerly iNg Australia) and iNg New Zealand Share of associates profit Operating income Operating expense Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense Profit after income tax Profit attributable to non-controlling interests Profit attributable to shareholders of the Company Earnings per ordinary share (cents) Basic Diluted Dividend per ordinary share (cents) The notes appearing on pages 90 to 204 form an integral part of these financial statements. Consolidated The Company 2010 $m 26,608 (15,739) 10,869 1,099 3,291 33 400 15,692 (7,304) 8,388 (1,787) 6,601 (2,096) 4,505 (4) 4,501 178.9 174.6 126 2009 $m 26,286 (16,398) 9,888 230 3,027 83 382 13,610 (6,225) 7,385 (3,005) 4,380 (1,435) 2,945 (2) 2,943 131.0 129.6 102 2010 $m 22,922 (14,677) 8,245 164 4,436 – – 12,845 (5,636) 7,209 (1,369) 5,840 (1,412) 4,428 – 4,428 n/a n/a 126 2009 $m 20,666 (13,600) 7,066 151 2,924 – – 10,141 (4,868) 5,273 (2,079) 3,194 (909) 2,285 – 2,285 n/a n/a 102 Note 3 4 3 3 3 3 4 16 6 8 8 7 Profit for the period Share of associates’ equity accounted profits Total profit for the period Other comprehensive income currency translation adjustments Exchange differences on translation of foreign operations taken to equity Available-for-sale assets valuation gain/(loss) taken to equity cumulative (gain)/loss transferred to the income statement cash flow hedges valuation gain/(loss) taken to equity Transferred to income statement for the period Actuarial gain/(loss) on defined benefit plans income tax on items transferred directly to/from equity foreign currency translation reserve Available-for-sale reserve cash flow hedge reserve Actuarial gain/(loss) on defined benefits plan Other comprehensive income Total comprehensive income for the period comprising: Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to shareholders of the company The notes appearing on pages 90 to 204 form an integral part of these financial statements. Note Consolidated The Company 2010 $m 4,072 433 4,505 2009 $m 2,480 465 2,945 2010 $m 4,428 – 4,428 2009 $m 2,285 – 2,285 29 (1,027) (919) (337) (283) 29 29 45 151 8 191 (54) (6) 10 (38) (36) 2 31 33 (156) (89) (173) 10 (17) 76 49 69 (23) 121 (69) (26) – (23) (16) 8 (799) 3,706 (1,155) 1,790 (296) 4,132 17 32 (135) (89) (153) – (11) 64 40 (518) 1,767 4 2 – – 3,702 1,788 4,132 1,767 84 ANZ Annual Report 2010 Financial Report Directors’ Report 85 BALANcE ShEET AS AT 30 SEPTEmBER NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS cASh fLOW STATEmENT fOR ThE YEAR ENDED 30 SEPTEmBER Note Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m Note Assets Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances customer's liability for acceptances Due from controlled entities Shares in controlled entities Shares in associates and joint venture entities current tax assets Deferred tax assets goodwill and other intangible assets1 investments backing policyholder liabilities Other assets Premises and equipment Total assets liabilities Due to other financial institutions Deposits and other borrowings Derivative financial instruments Liability for acceptances Due to controlled entities current tax liabilities Deferred tax liabilities Policyholder liabilities External unit holder liabilities (life insurance funds) Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net Assets Shareholders’ equity Ordinary share capital Preference share capital Reserves Retained earnings Share capital and reserves attributable to shareholders of the company Non-controlling interests Total shareholders’ equity commitments contingent liabilities The notes appearing on pages 90 to 204 form an integral part of these financial statements. 1 Excludes notional goodwill in equity accounted entities. 21,521 5,481 33,515 37,821 20,742 349,321 11,495 – – 2,965 76 792 6,630 32,171 7,051 2,158 25,317 4,985 30,991 37,404 16,575 332,007 13,762 – – 4,565 693 503 3,896 – 4,227 2,062 18,530 4,136 28,305 34,191 16,973 277,956 11,517 46,216 9,189 1,035 61 575 1,198 – 4,564 1,508 20,199 3,236 27,410 33,001 13,554 256,008 13,739 45,471 8,522 761 601 446 829 – 2,749 1,449 531,739 476,987 455,954 427,975 20,521 311,472 37,217 11,495 – 973 35 28,981 5,448 7,950 1,462 59,714 12,316 19,924 294,370 36,516 13,762 – 99 111 – – 7,775 1,312 57,260 13,429 18,849 253,608 34,647 11,517 38,487 987 39 – – 5,702 971 48,178 10,963 16,974 227,300 33,168 13,739 42,336 61 90 – – 6,006 905 46,033 11,885 497,584 444,558 423,948 398,497 34,155 32,429 32,006 29,478 19,886 871 (2,587) 15,921 34,091 64 34,155 19,151 871 (1,787) 14,129 32,364 65 32,429 20,246 871 (777) 11,666 32,006 – 32,006 19,151 871 (494) 9,950 29,478 – 29,478 9 10 11 12 13 14 17 17 18 18 19 49 20 21 22 12 23 23 49 24 25 26 27 28 28 29 29 30 43 44 86 ANZ Annual Report 2010 Cash flows from operating activities interest received Dividends received fee income received Other income received interest paid Personnel expenses paid Premises expenses paid Other operating expenses paid Net cash paid on settlement of derivatives income taxes paid Australia Overseas Net cash flows from funds management and insurance business funds management income received insurance premium income and other policyholder receipts claims and policyholder liability payments investment income received commission expense paid Net cash flows from investments backing policy liabilities Purchase of insurance assets Proceeds from sale/maturity of insurance assets goods and services tax paid (increase)/decrease in operating assets: Liquid assets – greater than three months Due from other financial institutions – greater than three months Trading Securities Loans and advances Net intra-group loans and advances increase/(decrease) in operating liabilities Deposits and other borrowings Due to other financial institutions Payables and other liabilities Net cash (used in)/provided by operating activities Cash flows from investing activities Net decrease/(increase) Available-for-sale assets Purchases Proceeds from sale or maturity controlled entities and associates Purchased (net of cash acquired) Proceeds from sale (net of cash disposed) Premises and equipment Purchases Proceeds from sale Other Net cash (used in)/provided by investing activities Cash flows from financing activities Net increase/(decrease) Bonds and notes issue proceeds Redemptions Loan capital issue proceeds Redemptions Dividends paid Share capital issues Net (purchase)/sale of treasury shares Net cash (used in)/provided by financing activities Net cash (used in)/provided by operating activities Net cash (used in)/provided by investing activities Net cash (used in)/provided by financing activities Net increase/(decrease) in cash and cash equivalents cash and cash equivalents at beginning of period foreign currency translation Cash and cash equivalents at end of period The notes appearing on pages 90 to 204 form an integral part of these financial statements. 26,362 54 2,177 1,230 (15,726) (4,102) (557) (1,625) (1,823) (353) (629) 665 6,144 (5,587) 536 (353) (9,982) 10,021 33 2,184 (65) (2,004) (17,044) – 14,726 55 (1,288) 3,049 26,795 49 2,799 962 (17,354) (3,652) (503) (1,161) (7,754) (851) (439) 119 28 – – 83 – – (29) 2,253 1,402 (15,971) (1,897) – 12,601 (168) (994) (3,682) 22,708 1,184 2,117 996 (14,651) (3,044) (389) (1,292) (1,110) 21,245 156 2,071 1,696 (14,503) (2,736) (362) (1,457) (7,936) (353) (123) (845) (78) 85 28 – – 51 – – 9 76 28 – – 47 – – 5 815 (145) (1,835) (20,345) (5,110) 20,862 1,329 (709) 1,078 2,427 1,032 (14,491) (23,162) 6,412 26,171 (1,027) 259 (4,972) (29,312) 25,244 (30,980) 31,559 (24,236) 20,955 (28,206) 29,480 50 15 (317) 24 (1,428) (5,724) (263) 15 (709) 27 (50) (401) 2,310 113 (240) – (687) (1,785) (231) 15 (211) 8 (704) 151 21,756 (17,105) 20,417 (20,648) 17,401 (14,070) 16,297 (14,009) 1,976 (2,565) (1,671) 37 (78) 2,350 3,049 (5,724) 2,350 (325) 22,805 (576) 21,904 1,287 (1,344) (697) 4,680 – 3,695 (3,682) (401) 3,695 (388) 23,487 (294) 22,805 1,976 (2,451) (1,660) 37 (78) 1,155 1,078 (1,785) 1,155 448 18,051 (364) 18,135 1,242 (1,344) (664) 4,680 – 6,202 (4,972) 151 6,202 1,381 17,156 (486) 18,051 Financial Report 87 37(a) 37(b) STATEmENT Of chANgES iN EQUiTY fOR ThE YEAR ENDED 30 SEPTEmBER NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS Consolidated As at 1 October 2008 Total comprehensive income for the period Transactions with equity holders in their capacity as equity holders: Share placement Dividends paid Dividend reinvestment plan Other equity movements: group employee share acquisition scheme Share based payments group share option scheme Other changes As at 30 September 2009 Total comprehensive income for the period Transactions with equity holders in their capacity as equity holders: Dividends paid Dividend reinvestment plan Other equity movements: group employee share acquisition scheme Treasury shares Share based payments group share option scheme Treasury shares iNgA adjustment Adjustments to opening retained earnings on adoption of revised accounting standard AASB 3R Other changes Ordinary share capital $m Preference shares $m 12,589 871 – 4,661 – 1,788 99 – 14 – 19,151 – – 1,007 129 (78) – 37 (360) – – – – – – – – – – 871 – – – – – – – – – – Reserves $m (742) (1,031) Retained earnings $m 13,772 2,819 Shareholders’ equity attributable to equity holders of the Bank $m 26,490 1,788 – – – – 9 – (23) – (2,485) – 4,661 (2,485) 1,788 – – – 23 99 9 14 – (1,787) (795) 14,129 4,497 32,364 3,702 – – – – 7 – – (2,678) – (2,678) 1,007 – – – – – 129 (78) 7 37 (360) (39) – – (12) (39) 12 As at 30 September 2010 19,886 871 (2,587) 15,921 34,091 The notes appearing on pages 90 to 204 form an integral part of these financial statements. Non-controlling interests $m Total shareholders’ equity $m 62 2 – – – – – – 1 65 4 – – – – – – – 26,552 1,790 4,661 (2,485) 1,788 99 9 14 1 32,429 3,706 (2,678) 1,007 129 (78) 7 37 (360) – (5) 64 (39) (5) 34,155 The Company As at 1 October 2008 Total comprehensive income for the period Transactions with equity holders in their capacity as equity holders: Share placement Dividends paid Dividend reinvestment plan Dividend reinvestment plan underwriting Other equity movements: group employee share acquisition scheme Treasury Shares Share based payments group share option scheme Other changes As at 30 September 2009 Total comprehensive income for the period Transactions with equity holders in their capacity as equity holders: Share placement Dividends paid Dividend reinvestment plan Other equity movements: Treasury shares Share based payments group share option scheme group employee share acquisition scheme Adjustments to opening retained earnings on adoption of revised accounting standard AASB 3R Other changes Ordinary share capital $m Preference shares $m 12,589 – 4,661 – 742 1,046 99 – – 14 – 19,151 – – – 1,007 (78) – 37 129 – – 871 – – – – – – – – – – 871 – – – – – – – – – – As at 30 September 2010 20,246 871 The notes appearing on pages 90 to 204 form an integral part of these financial statements. Shareholders’ equity attributable to equity holders of the Bank $m 23,592 1,767 4,661 (2,452) 742 1,046 99 – 9 14 – Retained earnings $m 10,207 2,172 – (2,452) – – – – – – 23 9,950 4,410 29,478 4,132 – (2,667) – – (2,667) 1,007 – – – – (39) 12 (78) 7 37 129 (39) – 11,666 32,006 Reserves $m (75) (405) – – – – – – 9 – (23) (494) (278) – – – – 7 – – – (12) (777) Non-controlling interests $m Total shareholders’ equity $m – – – – – – – – – – – – – – – – – – – – – – – 23,592 1,767 4,661 (2,452) 742 1,046 99 – 9 14 – 29,478 4,132 – (2,667) 1,007 (78) 7 37 129 (39) – 32,006 88 ANZ Annual Report 2010 Financial Report 89 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 1: Significant Accounting Policies The financial report of Australia and New Zealand Banking group Limited (the company or the Parent entity) and its controlled entities (the group) for the year ended 30 September 2010 was authorised for issue in accordance with the resolution of the directors on 4 November, 2010. The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied by all consolidated entities and to all periods presented in the consolidated financial report. A) BASiS Of PREPARATiON i) Statement of compliance The financial report of the company and group is a general purpose financial report which has been prepared in accordance with the accounts provisions of the Banking Act 1959 (as amended), Australian Accounting Standards (AASs), Australian Accounting Standards Board (AASB) interpretations, other authoritative pronouncements of the AASB, and the corporations Act 2001. international financial Reporting Standards (ifRS) are Standards and interpretations adopted by the international Accounting Standards Board (iASB). ifRS forms the basis of AASs and interpretations issued by the AASB. The group’s application of AASs and interpretations ensures that the consolidated financial report of the group and the financial report of the company comply with ifRS. ii) Use of estimates and assumptions The preparation of the financial report requires the use of management judgement, estimates and assumptions that affect reported amounts and the application of policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable. Actual results may differ from these estimates. Discussion of the critical accounting treatments, which include complex or subjective decisions or assessments, are covered in note 2. Such estimates may require review in future periods. iii) Basis of measurement The financial report has been prepared in accordance with the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, including in the case of fair value hedging (refer note 1 (E)(ii)) the fair value of any applicable underlying exposure; financial assets treated as available-for-sale; financial instruments held for trading; and assets and liabilities designated at fair value through profit and loss. in accordance with AASB 1038 Life insurance contracts, life insurance liabilities are measured using the margin of Services model. in accordance with AASB 119 Employee Benefits, defined benefit obligations are measured using the Projected Unit credit method. iv) changes in Accounting Policy and early adoptions All new accounting standards and interpretations applicable to annual reporting periods beginning on or after 1 October 2009 have been applied to the group effective from the required date of application. The initial application of these Standards and interpretations has not had a material impact on the financial position or the financial results of the group. The revised accounting standard relating to business combinations (AASB 3(R)) has been applied in these financial statements prospectively to all business combinations for which the acquisition date is on or after 1 October 2009. Prior to the adoption of the revised standard, the group had $39 million of capitalised transaction costs in respect of acquisitions not completed at 30 September 2009, which was written off to retained earnings on adoption of the revised standard. As a result of the adoption of the standard the group is required to: expense acquisition related costs ($21 million in the current period); remeasure the existing interest to fair value through profit or loss and reclassify from equity to profit or loss amounts previously held in the acquiree, for business combinations achieved in stages ($217 million debit in the current period); and recognise movements in contingent consideration, subsequent to initial measurement, in profit and loss (no impact in the current period). The revised accounting standard on consolidated and Separate financial Statements (AASB 127) has been adopted. As a result of the adoption the group is required to: replace the term ‘minority interests’ with ‘non-controlling interests’; account for changes in a parent’s ownership in a subsidiary that does not result in loss of control as an equity transaction (no impact in the current period); and recognise gains and losses upon loss of control of a subsidiary in profit and loss with any investment retained measured at fair value at the date control is lost (no impact in the current period). The revised accounting standard on Presentation of financial Statements (AASB 101) has been applied which has required inclusion of a new statement of changes in equity in these financial statements. The revised accounting standard on financial instruments: Disclosures (AASB 7) has been applied which requires additional disclosures about fair value measurements and liquidity risk. There has been no other change in accounting policy during the year. v) Rounding The Parent entity is an entity of the kind referred to in Australian Securities and investments commission class order 98/100 dated 10 July 1998 (as amended). consequently, amounts in the financial report have been rounded to the nearest million dollars, except where otherwise indicated. vi) comparatives certain amounts in the comparative information have been reclassified to conform with current period financial statement presentations. 1: Significant Accounting Policies (continued) vii) Principles of consolidation Subsidiaries The financial statements consolidate the financial statements of the company and all its subsidiaries where it is determined that there is a capacity to control. Where subsidiaries 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. control means the power to govern, directly or indirectly, the financial and operating policies of an entity so as to obtain benefits from its activities. All the facts of a particular situation are considered when determining whether control exists. control is usually present when an entity has: power over more than one-half of the voting rights of the other entity; or power to govern the financial and operating policies of the other entity; or power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the entity. in addition, potential voting rights that are presently exercisable or convertible are taken into account in determining whether control exists. in relation to special purpose entities, control is deemed to exist where: in substance, the majority of the residual risks and rewards from their activities accrue to the group; or in substance, the group controls decision making powers so as to obtain the majority of the risks and rewards from their activities. further detail on special purpose entities is provided in note 2(i). Foreign currency transactions foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which they were initially recognised or included in a previous financial report, are recognised in the income statement in the period in which they arise. Translation differences on non-monetary items, such as derivatives measured at fair value through profit or loss, are reported as part of the fair value gain or loss on these items. Translation differences on non-monetary items measured at fair value through equity, such as equities classified as available-for-sale financial assets, are included in the available-for-sale reserve in equity. Foreign operations The results and financial position of all group entities (none of which has the currency of a hyperinflationary economy), that have a functional currency different from the group’s presentation currency, are translated into the group’s presentation currency as follows: assets and liabilities of each foreign operation are translated at the rates of exchange ruling at balance date; revenue and expenses of each foreign operation are translated at the average exchange rate for the period, unless this average is not a reasonable approximation of the rate prevailing on transaction date, in which case revenue and expenses are translated at the exchange rate ruling at transaction date; and all resulting exchange differences are recognised in the foreign currency translation reserve. Associates and joint ventures The group adopts the equity method of accounting for associates and the group’s interest in joint venture entities. When a foreign operation is disposed, exchange differences are recognised in the income statement as part of the gain or loss on sale. The group’s share of results of associates and joint venture entities is included in the consolidated income statement. Shares in associates and joint venture entities are carried in the consolidated balance sheet at cost plus the group’s share of post-acquisition net assets. interests in associates and joint ventures are reviewed for any indication of impairment at least at each reporting date. This impairment review uses a discounted cash flow (Dcf) methodology and other methodologies to determine the reasonableness of the valuation, including the capitalisation of earnings methodology (cEm). in the company’s financial statements, investments in associates and joint venture entities are carried at cost. viii) foreign currency translation Functional and presentation currency items included in the financial statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars, which is the company’s functional and presentation currency. goodwill arising on the acquisition of a foreign entity is treated as an asset of the foreign entity and translated at the rate ruling at balance date. B) iNcOmE REcOgNiTiON i) interest income interest income is recognised as it accrues using the effective interest rate method. The effective interest rate method calculates the amortised cost of a financial asset or financial liability and allocates the interest income or interest expense over the expected life of the financial asset or financial liability so as to achieve a constant yield on the financial asset or liability. for assets subject to prepayment, expected life is determined on the basis of the historical behaviour of the particular asset portfolio, taking into account contractual obligations and prepayment experience assessed on a regular basis. 90 ANZ Annual Report 2010 Financial Report 91 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 1: Significant Accounting Policies (continued) ii) fee and commission income fees and commissions received that are integral to the effective interest rate of a financial asset are recognised using the effective interest method. for example, loan commitment fees, together with related direct costs, are deferred and recognised as an adjustment to the effective interest rate on a loan once drawn. commitment fees to originate a loan which is unlikely to be drawn down are recognised as income as the service is provided. fees and commissions that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees and underwriting fees) are recognised when the significant act has been completed. fees charged for providing ongoing services (for example, maintaining and administering existing facilities) are recognised as income over the period the service is provided. iii) Dividend income Dividends are recognised as revenue when the right to receive payment is established. iv) Leasing income finance income on finance leases is recognised on a basis that reflects a constant periodic return on the net investment in the finance lease. v) gain or loss on sale of premises and equipment The gain 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 recognised as an item of other income in the year in which the significant risks and rewards of ownership are transferred to the buyer. c) ExPENSE REcOgNiTiON i) interest expense interest expense on financial liabilities measured at amortised cost is recognised in the income statement as it accrues using the effective interest rate method. ii) Loan origination expenses certain loan origination expenses are an integral part of the effective interest rate of a financial asset measured at amortised cost. These loan origination expenses include: fees and commissions payable to brokers in respect of originating lending business; and other expenses of originating lending business, such as external legal costs and valuation fees, provided these are direct and incremental costs related to the issue of a financial asset. Such loan origination expenses are initially recognised as part of the cost of acquiring the financial asset and amortised as part of the effective yield of the financial asset over its expected life using the effective interest rate method. iii) Share-based compensation expense The group has various equity settled share-based compensation plans. These are described in note 46 and largely comprise the Employee Share Acquisition Plan and the ANZ Share Option Plan. 92 ANZ Annual Report 2010 ANZ ordinary shares The fair value of ANZ ordinary shares granted under the Employee Share Acquisition Plan is measured at grant date, using the one-day volume weighted average market price of ANZ shares. The fair value is expensed immediately when shares vest or on a straight-line basis over the relevant vesting period. Share options The fair value of share options is measured at grant date, using an option pricing model. The fair value is expensed on a straight- line basis over the relevant vesting period. This is recognised as an employee compensation expense with a corresponding increase in the share options reserve. The option pricing model takes into account the exercise price of the option, the risk-free interest rate, the expected volatility of ANZ’s ordinary share price and other factors. market vesting conditions are taken into account in estimating the fair value. Performance rights A Performance Right is a right to acquire a share at nil cost to the employee subject to satisfactorily meeting time and/or performance hurdles. Upon exercise, each Performance Right entitles the holder to one ordinary share in ANZ. The fair value of Performance Rights is determined at grant date using an option pricing model, taking into account market conditions. The fair value is expensed over the relevant vesting period. This is recognised as an employee expense with a corresponding increase in the share options reserve. Other adjustments Subsequent to the grant of an equity-based award, the amount recognised as an expense is adjusted for vesting conditions other than market conditions so that, ultimately, the amount recognised as an expense is based on the number of equity instruments that eventually vest. iv) Lease payments Leases entered into by the group as lessee are predominantly operating leases, and the operating lease payments are recognised as an expense on a straight-line basis over the lease term. D) iNcOmE TAx i) income tax expense income tax on earnings for the year comprises current and deferred tax and is based on the applicable tax law in each jurisdiction. it is recognised in the income statement as tax expense, except when it relates to items credited directly to equity, in which case it is recorded in equity, or where it arises from the initial accounting for a business combination, in which case it is included in the determination of goodwill. ii) current tax current tax is the expected tax payable on taxable income for the year, based on tax rates (and tax laws) which are enacted at the reporting date, including any adjustment for tax payable in previous periods. current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). 1: Significant Accounting Policies (continued) iii) Deferred tax Deferred tax is accounted for using the comprehensive tax balance sheet method. it is generated by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base. Deferred tax assets, including those related to the tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences or unused tax losses and credits can be utilised. Deferred tax liabilities are recognised for all taxable temporary differences, other than those relating to taxable temporary differences arising from goodwill. They are also recognised for taxable temporary differences arising on investments in controlled entities, branches, associates and joint ventures, except where the group is able to control the reversal of the temporary differences and it is probable that temporary differences will not reverse in the foreseeable future. Deferred tax assets associated with these interests are recognised only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and there will be sufficient taxable profits against which to utilise the benefits of the temporary difference. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement reflects the tax consequences that would follow from the manner in which the group, at the reporting date, recovers or settles the carrying amount of its assets and liabilities. iv) Offsetting current and deferred tax assets and liabilities are offset only to the extent that they relate to income taxes imposed by the same taxation authority, there is a legal right and intention to settle on a net basis and it is allowed under the tax law of the relevant jurisdiction. E) ASSETS financial assets i) financial assets and liabilities at fair value through profit or loss Trading securities are financial instruments acquired principally for the purpose of selling in the short-term or which are a part of a portfolio which is managed for short-term profit-taking. Trading securities are initially recognised and subsequently measured in the balance sheet at their fair value. Derivatives that are neither financial guarantee contracts nor effective hedging instruments are carried at fair value through profit or loss. certain financial assets and liabilities may be designated and measured at fair value through profit or loss where any of the following applies: investments backing policy liabilities (refer note 1 (i)(viii)); Life investment contract liabilities (refer note 1 (i)(i)); doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets and liabilities, or recognising the gains or losses thereon, on different bases; a group of financial assets or financial liabilities or both is managed and its performance evaluated on a fair value basis; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. changes in the fair value (gains or losses) of these financial instruments are recognised in the income statement in the period in which they occur. Purchases and sales of trading securities are recognised on trade date. ii) Derivative financial instruments Derivative financial instruments are contracts whose value is derived from one or more underlying price, index or other variable. They include swaps, forward rate agreements, futures, options and combinations of these instruments. Derivative financial instruments are entered into for trading purposes (including customer-related reasons), or for hedging purposes (where the derivative instruments are used to hedge the group’s exposures to interest rate risk, currency risk, price risk, credit risk and other exposures relating to non-trading positions). Derivative financial instruments are recognised initially at fair value with gains or losses from subsequent measurement at fair value being recognised in the income statement. included in the determination of the fair value of derivatives is a credit valuation adjustment to reflect the credit worthiness of the counterparty. The valuation adjustment is influenced by the mark-to-market of the derivative trades and by movement in credit spreads. Where the derivative is effective as a hedging instrument and is designated as such, the timing of the recognition of any resultant gain or loss in the income statement is dependent on the hedging designation. These hedging designations and associated accounting are as follows: Fair value hedge Where the group hedges the fair value of a recognised asset or liability or firm commitment, changes in the fair value of the derivative designated as a fair value hedge are recognised in the income statement. changes in the fair value of the hedged item attributable to the hedged risk are reflected in adjustments to the carrying value of the hedged item, which are also recognised in the income statement. hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised or no longer qualifies for hedge accounting. The resulting adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to the income statement over the period to maturity of the hedged item. if the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Cash flow hedge The group designates derivatives as cash flow hedges where the instrument hedges the variability in cash flows of a recognised asset or liability, a foreign exchange component of a firm commitment or a highly probable forecast transaction. The effective portion of changes in the fair value of derivatives qualifying and designated as cash flow hedges is deferred to the hedging reserve, which forms part of shareholders’ equity. Any ineffective portion is recognised immediately in the income statement. Amounts deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions take place. Financial Report 93 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 1: Significant Accounting Policies (continued) When the hedging instrument expires, is sold, terminated, or no longer qualifies for hedge accounting, the cumulative amount deferred in equity remains in the hedging reserve, and is subsequently transferred to the income statement when the hedged item is recognised in the income statement. When a forecast hedged transaction is no longer expected to occur, the amount deferred in equity is recognised immediately in the income statement. Net investment hedge hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. The gain or loss from remeasuring the fair value of the hedging instrument relating to the effective portion of the hedge is deferred in the foreign currency translation reserve in equity and the ineffective portion is recognised immediately in the income statement. Derivatives that do not qualify for hedge accounting All gains and losses from changes in the fair value of derivatives that are not designated in a hedging relationship but are entered into to manage the interest rate and foreign exchange risk of funding instruments are recognised in the income statement. Under certain circumstances, the component of the fair value change in the derivative which relates to current period realised and accrued interest is included in net interest income. The remainder of the fair value movement is included in other income. Set-off arrangements fair value gains/losses arising from trading derivatives are not offset against fair value gains/losses on the balance sheet unless a legal right of set-off exists and there is an intention to settle net. for contracts subject to master netting agreements that create a legal right of set-off for which only the net revaluation amount is recognised in the income statement, net unrealised gains on derivatives are recognised as part of other assets and net unrealised losses are recognised as part of other liabilities. iii) Available-for-sale financial assets Available-for-sale assets comprise non-derivative financial assets which the group designates as available-for-sale but which are not deemed to be held principally for trading purposes, and include equity investments, certain loans and advances, and quoted debt securities. They are initially recognised at fair value plus transaction costs. Subsequent gains or losses arising from changes in fair value are included as a separate component of equity in the ‘available-for-sale revaluation reserve’. When the asset is sold, the cumulative gain or loss relating to the asset is transferred to the income statement. Where there is objective evidence of impairment on an available- for-sale asset, the cumulative loss related to that asset is removed from equity and recognised in the income statement, as an impairment expense for debt instruments or as non-interest income for equity instruments. if, in a subsequent period, the amount of an impairment loss relating to an available-for-sale debt instrument decreases and the decrease can be linked objectively to an event occurring after the impairment event, the loss is reversed through the income statement through the impairment expense line. Purchases and sales of available-for-sale financial assets are recognised on trade date being the date on which the group commits to purchase or sell the asset. 94 ANZ Annual Report 2010 iv) Net loans and advances Net loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the group provides money to a debtor with no intention of trading the loans and advances. The loans and advances are initially recognised at fair value plus transaction costs that are directly attributable to the issue of the loan or advance. They are subsequently measured at amortised cost using the effective interest rate method (refer note 1 (B)(i)) unless specifically designated on initial recognition at fair value through profit or loss. All loans are graded according to the level of credit risk. Net loans and advances includes direct finance provided to customers such as bank overdrafts, credit cards, term loans, finance lease receivables and commercial bills. Impairment of loans and advances Loans and advances are reviewed at least at each reporting date for impairment. credit impairment provisions are raised for exposures that are known to be impaired. Exposures are impaired and impairment losses are recorded if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan and prior to the reporting date, and that loss event, or events, has had an impact on the estimated future cash flows of the individual loan or the collective portfolio of loans that can be reliably estimated. impairment is assessed for assets that are individually significant (or on a portfolio basis for small value loans) and then on a collective basis for those exposures not individually known to be impaired. Exposures that are assessed collectively are placed in pools of similar assets with similar risk characteristics. The required provision is estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective pool. The historical loss experience is adjusted based on current observable data such as changed economic conditions. The provision also takes account of the impact of inherent risk of large concentrated losses within the portfolio and an assessment of the economic cycle. The estimated impairment losses are measured as the difference between the assets’ carrying amount and the estimated future cash flows discounted to their present value. As this discount unwinds during the period between recognition of impairment and recovery of the cash flow, it is recognised in interest income. The process of estimating the amount and timing of cash flows involves considerable management judgement. These judgements are reviewed regularly to reduce any differences between loss estimates and actual loss experience. impairment of capitalised acquisition expenses is assessed through comparing the actual behaviour of the portfolio against initial expected life assumptions. The provision for impairment loss (individual and collective) is deducted from loans and advances in the balance sheet and the movement for the reporting period is reflected in the income statement. When a loan is uncollectable, either partially or in full, it is written-off against the related provision for loan impairment. Unsecured facilities are normally written-off when they become 180 days past due or earlier in the event of the customer’s bankruptcy or similar legal release from the obligation. 1: Significant Accounting Policies (continued) however a certain level of recoveries is expected after the write-off, which is reflected in the amount of the provision for credit losses. in the case of secured facilities, remaining balances are written-off after proceeds from the realisation of collateral have been received if there is a shortfall. Where impairment losses recognised in previous periods have subsequently decreased or no longer exist, such impairment losses are reversed in the income statement. A provision is also raised for off-balance sheet items such as loan commitments that are considered to be onerous. v) Lease receivables contracts to lease assets and hire purchase agreements are classified as finance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer or an unrelated third party. All other lease contracts are classified as operating leases. vi) Repurchase agreements Securities sold under repurchase agreements are retained in the financial statements where substantially all the risks and rewards of ownership remain with the group, and a counterparty liability is disclosed under the classifications of due to other financial institutions or payables and other liabilities. The difference between the sale price and the repurchase price is accrued over the life of the repurchase agreement and charged to interest expense in the income statement. Securities purchased under agreements to resell, where the group does not acquire the risks and rewards of ownership, are recorded as receivables in liquid assets, net loans and advances, or due from other financial institutions, depending on the term of the agreement and the counterparty. The security is not included in the balance sheet. interest income is accrued on the underlying loan amount. Securities borrowed are not recognised in the balance sheet, unless these are sold to third parties, at which point the obligation to repurchase is recorded as a financial liability at fair value with fair value movements included in the income statement. vii) Derecognition The group enters into transactions where it transfers financial assets recognised on its balance sheet yet retains either all the risks and rewards of the transferred assets or a portion of them. if all, or substantially all, the risks and rewards are retained, the transferred assets are not derecognised from the balance sheet. in transactions where substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred, the group derecognises the asset if control over the asset is lost. in transfers where control over the asset is retained, the group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. The rights and obligations retained or created in the transfer are recognised separately as assets and liabilities as appropriate. Non-financial assets viii) goodwill goodwill represents 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. goodwill is recognised as an asset and not amortised, but assessed for impairment at least annually or more frequently if there is an indication that the goodwill may be impaired. This involves using the (Dcf) or (cEm) methodology to determine the expected future benefits of the cash-generating units to which the goodwill relates. Where the assessment results in the goodwill balance exceeding the value of expected future benefits, the difference is charged to the income statement. Any impairment of goodwill is not subsequently reversed. ix) Software and computer system costs includes costs incurred in acquiring and building software and computer systems (“software”). Software is amortised using the straight-line method over its expected useful life to the group. The period of amortisation is between 3 and 5 years, except for certain core infrastructure projects where the useful life has been determined to be 7 years. At each reporting date, software assets are reviewed for impairment. if any such indication exists, the recoverable amount of the assets are estimated and compared against the existing carrying value. Where the existing carrying value exceeds the recoverable amount, the difference is charged to the income statement. costs incurred in planning or evaluating software proposals, or in maintaining systems after implementation, are not capitalised. x) Acquired portfolio of insurance and life investment business identifiable intangible assets in respect of acquired portfolios of insurance and life investment business acquired in a business combination are stated initially at fair value at acquisition date. These are amortised over the period of expected benefit of between 15 to 23 years. xi) Deferred acquisition costs Refer to note 1 (i)(vi). xii) Other intangible assets Other intangible assets include management fee rights, distribution relationships and distribution agreements where they are clearly identifiable, can be reliably measured and where it is probable they will lead to future economic benefits that the group can control. Where, based on historical observation, there is an expectation that, for the foreseeable future, the level of investment in the funds will not decline significantly and the group will continue to manage the fund, the management fee right is assessed to have an indefinite life and is carried at cost less any impairment losses. Other management fee rights, distribution relationships, distribution agreements and licenses are amortised over the expected useful lives to the group using the straight line method. The period of amortisation is as follows: management fee rights Aligned advisor relationships Distribution agreements 7 years 15 years 3 years Financial Report 95 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 1: Significant Accounting Policies (continued) xiii) Premises and equipment Assets other than freehold land are depreciated at rates based upon their expected useful lives to the group, using the straight-line method. The depreciation rates used for each class of asset are: Buildings Building integrals furniture & equipment computer & office equipment 1–1.5% 10% 10% 12.5%–33% Leasehold improvements are amortised on a straight-line basis over the shorter of their useful lives or remaining terms of the lease. At each reporting date, the carrying amounts of premises and equipment are reviewed for impairment. if any such indication exists, the recoverable amount of the assets are estimated and compared against the existing carrying value. Where the existing carrying value exceeds the recoverable amount, the difference is charged to the income statement. if it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash generating unit to which the asset belongs. A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. xiv) Borrowing costs Borrowing costs incurred for the construction of qualifying assets (principally the new office building in Docklands area, melbourne Australia) are capitalised into the cost of the qualifying asset during the period of time that is required to complete and prepare the asset for its intended use. The calculation of borrowing costs is based upon the group’s internal cost of capital. f) LiABiLiTiES financial liabilities i) Deposits and other borrowings Deposits and other borrowings include certificates of deposit, interest bearing deposits, debentures and other related interest bearing financial instruments. They are measured at amortised cost. The interest expense is recognised using the effective interest rate method. ii) Acceptances commercial bills accepted but not held in a portfolio are accounted for as a liability with a corresponding contra asset. The liability is disclosed as liability for acceptances, and the asset is disclosed as customer’s Liability for acceptances. The group’s own acceptances discounted are held as part of the trading securities portfolio. iii) Bonds, notes and loan capital Bonds, notes and loan capital are accounted for in the same way as deposits and other borrowings, except for those bonds and notes which are designated as at fair value through profit or loss on initial recognition, with fair value movements recorded in the income statement. iv) financial guarantee contracts financial guarantee contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, are initially recognised in the financial statements at fair value on the date the guarantee was given; typically this is the premium received. Subsequent to initial recognition, the group’s liabilities under such guarantees are measured at the higher of their amortised amount and the best estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience of similar transactions and the history of past losses. v) Derecognition financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires. Non-financial liabilities vi) Employee benefits leave benefits The amounts expected to be paid in respect of employees’ entitlements to annual leave are accrued at expected salary rates including on-costs. Expected future payments for long service leave are discounted using market yields at the reporting date on national government bonds with terms to maturity that match, as closely as possible, the estimated future cash outflows. Liability for long service leave is calculated and accrued for in respect of all applicable employees (including on-costs) using an actuarial valuation. Defined contribution superannuation schemes The group operates a number of defined contribution schemes and also contributes, according to local law, in the various countries in which it operates, to government and other plans that have the characteristics of defined contribution schemes. The group’s contributions to these schemes are recognised as an expense in the income statement when incurred. Defined benefit superannuation schemes The group operates a small number of defined benefit schemes. The liability and expense related to providing benefits to employees under each defined benefit scheme are calculated by independent actuaries. A defined benefit liability is recognised to the extent that the present value of the defined benefit obligation of each scheme, calculated using the Projected Unit credit method, is greater than the fair value of each scheme’s assets. Where this calculation results in a benefit to the group, a defined benefit asset is recognised, which is capped at the recoverable amount. in each subsequent reporting period, ongoing movements in the defined benefit liability or asset carrying value is treated as follows: the net movement relating to the current period’s service cost, interest cost, expected return on scheme assets, past service costs and other costs (such as the effects of any curtailments and settlements) is recognised as an employee expense in the income statement; movements relating to actuarial gains and losses are recognised directly in retained earnings; and contributions incurred are recognised directly against the net defined benefit position. 1: Significant Accounting Policies (continued) vii) Provisions The group recognises provisions when there is a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. Share-based payment reserves Share-based payment reserves include the share options reserve and other equity reserves which arise on the recognition of share-based compensation expense (see note 1 (c)(iii)). The amount recognised is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation at reporting date. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. g) EQUiTY i) Ordinary shares Ordinary shares in the company are recognised at the amount paid per ordinary share net of directly attributable issue costs. ii) Treasury shares Shares in the company which are purchased on-market by the ANZ Employee Share Acquisition Plan or issued by the company to the ANZ Employee Share Acquisition Plan are classified as treasury shares (to the extent that they relate to unvested employee share-based awards) and are deducted from capital. in addition, the life insurance business may also purchase and hold shares in the company to back policy liabilities in the life insurance statutory funds. These shares are also classified as treasury shares and deducted from share capital. These assets, plus any corresponding income Statement fair value movement on the assets and dividend income, are eliminated when the life statutory funds are consolidated into the group. The cost of the investment in the shares is deducted from contributed equity. however, the corresponding life investment contract and insurance contract liabilities, and related income Statement changes in the liabilities, remain upon consolidation. Treasury shares are excluded from the weighted average number of ordinary shares used in the earnings per share calculations. iii) Non-controlling interest Non-controlling interests represent the share in the net assets of subsidiaries attributable to equity interests not owned directly or indirectly by the company. iv) Reserves Foreign currency translation reserve As indicated in note 1 (A)(viii), exchange differences arising on translation of the assets and liabilities of all group entities are reflected in the foreign currency translation reserve. Any offsetting gains or losses on hedging these balances, together with any tax effect, are also reflected in this reserve. Available-for-sale revaluation reserve This reserve includes changes in the fair value of available-for- sale financial assets, net of tax. These changes are transferred to the income statement (in non-interest income) when the asset is derecognised. Where the asset is impaired, the changes are transferred to impairment expense in the income statement for debt instruments and in the case of equity instruments to other income. Cash flow hedging reserve This reserve includes the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments. h) PRESENTATiON i) Offsetting of income and expenses income and expenses are not offset unless required or permitted by an accounting standard. At the group level, this generally arises in the following circumstances: where transaction costs form an integral part of the effective interest rate of a financial instrument which is measured at amortised cost, these are offset against the interest income generated by the financial instrument; or where gains and losses relating to fair value hedges are assessed as being effective; or where gains and losses arise from a group of similar transactions, such as foreign exchange gains and losses. ii) Offsetting assets and liabilities Assets and liabilities are offset and the net amount reported in the balance sheet only where there is: a current enforceable legal right to offset the asset and liability; and an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. iii) cash and cash equivalents for cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with other financial institutions, other short-term, highly liquid investments with original terms to maturity of three months or less that are readily convertible to cash and which are subject to an insignificant risk of changes in value. iv) Segment reporting An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief Executive Officer to make decisions about resources to be allocated to the segment and assess its performance and for which discrete information is available. v) goods and services tax income, expenses and assets are recognised net of the amount of goods and services tax (gST), except where the amount of gST incurred is not recoverable from the Australian Tax Office (ATO). in these circumstances the gST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of gST included. The net amount of gST recoverable from or payable to the ATO is included as an other asset or liability in the balance sheet. cash flows are included in the cash flow statement on a gross basis. The gST components of cash flows arising from investing and financing activities which are recoverable from or payable to the ATO are classified as operating cash flows. 96 ANZ Annual Report 2010 Financial Report 97 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 1: Significant Accounting Policies (continued) i) LifE iNSURANcE AND fUNDS mANAgEmENT BUSiNESS The group conducts its life insurance and funds management business in Australia primarily through OnePath Life Limited (formerly iNg Life Limited), (the Life Business) which is registered under the Life insurance Act 1995 (Life Act), amended by the financial Sector Legislation Amendment (Simplifying Regulation and Review) Act 2007 (SRR Act) and in New Zealand through iNg Life (NZ) Limited and iNg insurance Services (NZ) Limited which are registered under the New Zealand Life insurance Act 1908. The operations of the Life Business comprise life insurance and funds management business and are conducted within separate statutory funds as required by the Life Act. The assets of the Life Business are allocated between policyholder and shareholder funds in accordance with the requirements of the Life Act. Under Australian Accounting Standards (AAS), the financial statements must include all assets, liabilities, revenues, expenses and equity, irrespective of whether they are designated as relating to shareholders or policyholders. Accordingly, the consolidated financial statements include both policyholder (statutory) and shareholder’s funds. (i) Policy liabilities Policy liabilities include liabilities arising from life insurance contracts and life investment contracts. Life insurance contracts are insurance contracts regulated under the Life Act. An insurance contract is a contract under which an insurer accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. All contracts written by registered life insurers that do not meet the definition of an insurance contract are referred to as life investment contracts. Life investment contract business relates to funds management products in which the group issues a contract where the resulting liability to policyholders is linked to the performance and value of the assets that back those liabilities. Whilst the underlying assets are registered in the name of the life insurer and the policyholder has no direct access to the specific assets, the contractual arrangements are such that the policyholder bears the risks and rewards of the fund’s investment performance with the exception of guaranteed products where the policyholder is guaranteed a minimum return or asset value. The group derives fee income from the administration of the underlying assets. Life investment contracts that include a discretionary participation feature (participating contacts) are treated as if they are life insurance contracts under AASB 1038 Life insurance contracts. life insurance liabilities Life insurance liabilities are determined using the ‘margin on Services’ (moS) basis using either a projection or accumulation method. Under the projection method, the liability is determined as the net present value of the expected future cash flows plus planned margins of revenues over expenses relating to services yet to be provided, discounted using a risk-free discount rate that reflects the nature and structure of the liabilities. Expected future cash flows include premiums, investment income, expenses, redemptions and benefit payments, including bonuses. An accumulation method is used where the policy liabilities determined are not materially different from those determined under the projection method. Profits from life insurance contracts are brought to account using the moS model in accordance with Actuarial Standard LPS 1.04 valuation of Policy Liabilities (formerly AS 1.04) as issued by the Australian Prudential Regulation Authority under the Life Act and Professional Standard 3 Determination of Life insurance Policy Liabilities as issued by the New Zealand Society of Actuaries. Under moS, profit is recognised as premiums are received and services are provided to policyholders. When premiums are received but the service has not been provided, the profit is deferred. Losses are expensed when identified. costs associated with the acquisition of policies are recognised over the life of the policy. costs may only be deferred, however, to the extent that a contract is expected to be profitable. Participating contracts, defined as those contracts that entitle the policyholder to participate in the performance and value of certain assets in addition to the guaranteed benefit, are entitled to share in the profits that arise from participating business. This profit sharing is governed by the Life Act and the life insurance company’s constitution. The profit sharing entitlement is treated as an expense in the consolidated financial statements. Any benefits which remain payable at the end of the reporting period are recognised as part of life insurance liabilities. life investment contract liabilities Life investment contracts involve both the origination of a financial instrument and the provision of investment management services. The financial instrument component of the life investment contract liabilities is designated as at fair value through profit or loss. The management services component, including associated acquisition costs, is recognised as revenue as services are performed. See note 1 (i)(vi) for the deferral and amortisation of life investment contract acquisition costs and entry fees. for investment-linked products, the life investment contract liability is directly linked to the performance and value of the assets that back them and is determined as the fair value of those assets after tax. for fixed income policies the liability is determined as the net present value of expected cash flows subject to a minimum of current surrender value. (ii) External unit holder liabilities (life insurance funds) The life insurance business includes controlling interests in trusts and companies, and the total amounts of each underlying asset, liability, revenue and expense of the controlled entities are recognised in the group’s consolidated financial statements. When a controlled unit trust is consolidated, the share of the unit holder liability attributable to the group is eliminated but amounts due to external unit holders remain as liabilities in the group’s consolidated balance sheet. (iii) claims claims are recognised when the liability to the policyholder under the policy contract has been established or upon notification of the insured event depending on the type of claim. claims are separated into their expense and liability components. claims incurred in respect of life investment contracts represent withdrawals and are recognised as a reduction in life investment contract liabilities. claims incurred that relate to the provision of services and bearing of insurance risks are treated as expenses and these are recognised on an accruals basis once the liability to the policyholder has been established under the terms of the contract. 1: Significant Accounting Policies (continued) (iv) Revenue Premium Life insurance premiums earned by providing services and bearing risks are treated as revenue. Life investment contract deposit premiums are recognised as an increase in policy liabilities. for annuity, risk and traditional business, all premiums are recognised as revenue. life insurance premiums Premiums with no due date are recognised as revenue on a cash received basis. Premiums with a regular due date are recognised as revenue on an accruals basis. Unpaid premiums are only recognised as revenue during the days of grace or where secured by the surrender value of the policy and are included as “Other assets” in the Balance Sheet. life investment contract premiums There is no premium revenue in respect of investment contracts. investment contract amounts received from policyholders in respect of investment contracts comprise a deposit component or origination fee and/or ongoing investment management fee or amounts directly credited to investment contract liabilities. Fees fees are charged to policyholders in connection with life insurance and life investment contracts and are recognised when the service has been provided. Entry fees from life investment contracts are deferred and recognised over the average expected life of the contracts. Deferred entry fees are presented within “Other liabilities” in the balance sheet. (v) Reinsurance contracts Reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of insurance contract liabilities, are accounted for on the same basis as the original contracts for which the reinsurance was purchased. (vi) Policy acquisition costs life insurance contract acquisition costs Policy acquisition costs are the fixed and variable costs of acquiring new business. The appointed actuary assesses the value and future recoverability of these costs in determining policy liabilities. The net profit impact is presented in the income statement as a change in policy liabilities. The deferral is determined as the actual costs incurred subject to an overall limit that future profits are anticipated to cover these costs. Losses arising on acquisition are recognised in the income statement in the year in which they occur. Amounts which are deemed recoverable in premiums or policy charges are deferred and amortised over the life of the policy. life investment contract acquisition costs incremental acquisition costs, such as commissions, that are directly attributable to securing a life investment contract are recognised as an asset where they can be identified separately and measured reliably and if it is probable that they will be recovered. These deferred acquisition costs are presented in the balance sheet as an intangible asset and are amortised over the period that they will be recovered from future policy charges. Any impairment losses arising on deferred acquisition costs are recognised in the income statement in the period in which they occur. (vii) Basis of expense apportionment All life investment contracts and insurance contracts are categorised based on individual policy or products. Expenses for these products are then allocated between acquisition, maintenance, investment management and other expenses. Expenses which are directly attributable to an individual policy or product are allocated directly to a particular expense category, fund, class of business and product line as appropriate. Where expenses are not directly attributable to an individual policy or product, they are appropriately apportioned based on detailed expense analysis having regard to the objective in incurring that expense and the outcome achieved. The apportionment has been made in accordance with Actuarial Standard LPS 1.04 valuation of Policy Liabilities (formerly AS 1.04), issued by the Life insurance Actuarial Standards Board, and on an equitable basis to the different classes of business in accordance with Division 2 of Part 6 of the Life Act. (viii) investments backing policy liabilities All policyholder assets, being those assets held within the statutory funds of the life company that are not segregated and managed under a distinct shareholder investment mandate are held to back life insurance and life investment contract liabilities (collectively referred to as policy liabilities). These investments are designated as at fair value through profit or loss. J) OThER i) contingent liabilities contingent liabilities acquired in a business combination are individually measured at fair value at the acquisition date. At subsequent reporting dates the value of such contingent liabilities is reassessed based on the estimate of the expenditure required to settle the contingent liability. Other contingent liabilities are not recognised in the balance sheet but disclosed in note 44 unless it is considered remote that the group will be liable to settle the possible obligation. ii) Earnings per share The group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding during the period after eliminating treasury shares. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effect of dilutive ordinary shares. 98 ANZ Annual Report 2010 Financial Report 99 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 1: Significant Accounting Policies (continued) 2: critical Estimates and Judgements Used in Applying Accounting Policies iii) Accounting Standards not early adopted The following standard and amendment was available for early adoption, but has not been applied by the company or group in these financial statements. The company or group does not intend to apply any of the pronouncements until their effective date. Application date for the company and group 1 October 2013 AASB standard Possible impact on the company and the group’s financial report in period of initial adoption AASB 9 financial instruments This standard and its associated amending standard (AASB 2009-11) specifies new recognition and measurement requirements for financial assets within the scope of AASB 139 financial instruments: Recognition and measurement. This standard represents the first phase of the project to replace AASB 139 and will ultimately result in fundamental changes in the way that the company and the group accounts for financial instruments. The main changes from AASB 139 include: All financial assets, except for certain equity instruments, will be classified into two categories: – amortised cost, where they generate solely payments of interest and principal and the business model is to collect contractual cash flows that represent principal and interest; or – fair value through the income statement. certain non-trading equity instruments will be classified at fair value through the income statement or fair value through other comprehensive income with dividends recognised in net income. financial assets which meet the requirements for classification at amortised cost are permitted to be measured at fair value if that eliminates or significantly reduces an accounting mismatch. future phases of the project to replace AASB 139 will cover accounting for financial liabilities, impairment of financial assets measured at amortised cost and hedge accounting. The group is currently assessing the impact of this standard, as well as developments arising from future phases of the project to replace AASB 139. A number of other AASB standards are also available for early adoption, but have not been applied by the company or group in these financial statements. These standards involve amendments of a technical nature which are not expected to have a material impact on the company or group. The group prepares its consolidated financial statements in accordance with policies which are based on Australian Accounting Standards (AAS), other authoritative accounting pronouncements of the Australian Accounting Standards Board (AASB), AASB interpretations and the corporations Act 2001. This involves the group making estimates and assumptions that affect the reported amounts within the financial statements. Estimates and judgements are continually evaluated and are based on historical factors, including expectations of future events that are believed to be reasonable under the circumstances. All material changes to accounting policies and estimates and the application of these policies and judgements are approved by the Audit committee of the Board. A brief explanation of critical estimates and judgements, and their impact on the group, follows: critical Accounting Estimates and Assumptions Provisions for credit impairment The accounting policy, as explained in note 1 (E)(iv), relating to measuring the impairment of loans and advances, requires the group to assess impairment at least at each reporting date. The credit provisions raised (individual and collective) represent management’s best estimate of the losses incurred in the loan portfolio at balance date based on experienced judgement. The collective provision is estimated on the basis of historical loss experience for assets with credit characteristics similar to those in the collective pool. The historical loss experience is adjusted based on current observable data and events and an assessment of the impact of model risk. The provision also takes into account the impact of large concentrated losses within the portfolio and the economic cycle. The use of such judgements and reasonable estimates is considered by management to be an essential part of the process and does not impact on reliability. individual provisioning is applied when the full collectability of a loan is identified as being doubtful. individual and collective provisioning is calculated using discounted expected future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are revised regularly to reduce any differences between loss estimates and actual loss experience. critical judgements in applying the entity’s accounting policies i) Special purpose and off-balance sheet entities The group may invest in or establish special purpose entities (SPEs) to enable it to undertake specific types of transactions. The main types of these SPEs are securitisation vehicles, structured finance entities, and entities used to sell credit protection. Where the group has established SPEs which are controlled by the group, they are consolidated in the group’s financial statements. The group does not consolidate SPEs that it does not control in accordance with the group’s policy outlined in note 1 (A)(vii). As it can be complex to determine whether the group has control of an SPE, the group makes judgements about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the SPE in question. The table below summarises the main types of SPEs with which the group is involved, the reason for their establishment, and the control factors associated with ANZ’s interest in them. Although there may be some indicators of control, ANZ does not bear the majority of residual risks and rewards of the SPEs. Therefore they are not consolidated. Type of SPE Reason for establishment Control factors Securitisation vehicles Securitisation is a financing technique whereby assets are transferred to an SPE which funds the purchase by issuing securities. This enables ANZ (in the case where transferred assets originate within ANZ) or customers to increase diversity of funding sources. Structured finance entities These entities are set up to assist with the structuring of client financing. The resulting lending arrangements are at arms length and ANZ typically has limited ongoing involvement with the entity. ANZ may manage these securitisation vehicles, service assets in the vehicle or provide liquidity or other support. ANZ retains the risks associated with the provision of these services. for any SPE which is not consolidated, credit and market risks associated with the underlying assets are not retained or assumed by ANZ except to the limited extent that ANZ provides arm’s length services and facilities. ANZ may manage these vehicles, hold minor amounts of capital, provide financing or derivatives. Credit protection The special purpose entities in this category are created to allow ANZ to purchase credit protection. ANZ may manage these vehicles. 100 ANZ Annual Report 2010 Financial Report 101 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS 2: critical Estimates and Judgements Used in Applying Accounting Policies (continued) 2: critical Estimates and Judgements Used in Applying Accounting Policies (continued) ii) Significant associates The carrying values of all significant investments in associates (as disclosed in note 39) are subject to an annual recoverable amount test. This assessment involves ensuring that the investment’s fair value less costs to sell or its value in use is greater than its carrying amount. Judgement is applied when determining the assumptions supporting these calculations. As at 30 September 2010, the group reviewed all investments in associates against the following impairment indicators: actual financial performance against budgeted financial performance; any material unfavourable operational factors and regulatory factors; any material unfavourable economic outlook and market competitive factors; carrying value against available quoted market values (supported by third-party broker valuations); and carrying value against market capitalisation (for listed investments). Where appropriate, additional potential impairment indicators are reviewed which are more specific to the respective investment. As at 30 September 2010, no impairment of associates was identified as a result of either the review of impairment indicators listed above or the recoverable amount test. iii) Available-for-sale financial assets The accounting policy for impairment of available-for-sale financial assets, as explained in note 1 (E)(iii), requires the group to assess whether there is objective evidence of impairment. This requires judgement when considering whether such evidence exists and if so, in reliably determining the impact of such events on the estimated cash flows of the asset. iv) Financial Instruments at fair value A significant portion of financial instruments are carried on the balance sheet at fair value. The best evidence of fair value is a quoted price in an active market. Accordingly, wherever possible, fair value is based on quoted market prices for the financial instrument. in the event that there is no active market for the instrument, fair value is based on present value estimates or other market accepted valuation techniques. The valuation models incorporate the impact of bid/ask spread, counterparty credit spreads and other factors that would influence the fair value determined by a market participant. The majority of valuation techniques employ only observable market data, however, for certain financial instruments the fair value cannot be determined with reference to current market transactions or valuation techniques whose variables only include data from observable markets. in respect of the valuation component where market observable data is not available, the fair value is determined using data derived and extrapolated from market data and tested against historic transactions and observed market trends. These valuations are based upon assumptions established by application of professional judgement to analyse the data available to support each assumption. changing the assumptions changes the resulting estimate of fair value. The majority of outstanding derivative positions are transacted over-the-counter and therefore need to be valued using valuation techniques. included in the determination of the fair value of derivatives is a credit valuation adjustment to reflect the credit worthiness of the counterparty, representing the credit risk component of the overall fair value increment on a particular derivative asset. The total valuation adjustment is influenced by the mark-to-market of the derivative trades and by the movement in the current market cost of credit. v) Goodwill and indefinite life intangible assets The carrying values of goodwill and intangible assets with indefinite lives are reviewed at each balance date and written-down to the extent that they are no longer supported by probable future benefits. goodwill and intangible assets with indefinite useful lives are allocated to cash-generating units (cgUs) for the purpose of impairment testing. in respect of goodwill, the cgUs are based on the operating segments of the group, which are the major geographies in which the group operates. impairment testing of goodwill and indefinite life intangibles is performed annually or more frequently when there is an indication that the asset may be impaired. impairment testing is conducted by comparing the recoverable amount of the cgU with the current carrying amount of its net assets, including goodwill and intangibles as applicable. Where the current carrying value is greater than recoverable amount, a charge for impairment is recognised in the income statement. The most significant components of the group’s goodwill balance at 30 September 2010 relate to ANZ National Bank Limited which was $2,464 million (Sep 2009: $2,657 million) and OnePath Australia Limited (formerly iNg Australia Limited) which is provisionally estimated to be $1,151 million. The recoverable amount of the cgU to which each goodwill component is allocated is estimated using a market multiple approach as representative of the fair value less costs to sell of each cgU. The price earnings multiples are based on observable multiples in the respective geographies in which the group operates and the earnings are based on the current forecast earnings of the geographies. changes in assumptions upon which the valuation is based, including forecast earnings, could materially impact the assessment of the recoverable amount of each cgU. The results of the impairment testing performed did not result in any impairment being identified. vi) Intangible assets with finite useful lives The carrying value of intangible assets with finite useful lives are reviewed each balance date for any indication of impairment. This assessment involves applying judgement and consideration is given to both internal and external sources of potential impairment. The majority of the group’s intangible assets with a finite life is represented by capitalised software and intangible assets purchased as part of the acquisition of OnePath Australia Limited (formerly iNg Australia Limited) and iNg NZ Limited. The review conducted by management for these assets at 30 September 2010 did not reveal any impairment indicators and accordingly no write-down was considered necessary. vii) life insurance contract liabilities Policy liabilities for life insurance contracts are computed using statistical or mathematical methods, which are expected to give approximately the same results as if an individual liability was calculated for each contract. The computations are made by suitably qualified personnel on the basis of recognised actuarial methods, with due regard to relevant actuarial principles and standards. The methodology takes into account the risks and uncertainties of the particular classes of life insurance business written. Deferred policy acquisition costs are connected with the measurement basis of life insurance liabilities and are equally sensitive to the factors that are considered in the liability measurement. The key factors that affect the estimation of these liabilities and related assets are: the cost of providing the benefits and administering these insurance contracts; mortality and morbidity experience on life insurance products, including enhancements to policyholder benefits; discontinuance experience, which affects the company’s ability to recover the cost of acquiring new business over the lives of the contracts; and, the amounts credited to policyholders’ accounts compared to the returns on invested assets through asset-liability management and strategic and tactical asset allocation. in addition, factors such as regulation, competition, interest rates, taxes and general economic conditions affect the level of these liabilities. The total value of policy liabilities for life insurance contracts have been appropriately calculated in accordance with these principles. viii) Taxation Significant judgement is required in determining provisions held in respect of uncertain tax positions. The group estimates its tax liabilities based on its understanding of the law. 102 ANZ Annual Report 2010 Financial Report 103 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 3: income Interest Income Other financial institutions Trading securities Available-for-sale assets Loans and advances Acceptances Other controlled entities Total interest income Interest income is analysed by types of financial assets as follows financial assets not at fair value through profit or loss Trading securities financial assets designated at fair value through profit or loss i) Fee and commission income Lending fees1 Non-lending fees and commissions controlled entities Total fee and commission income fee and commission expense 2 Net fee and commission income ii) Other income Net foreign exchange earnings Net gains from trading securities and derivatives3 credit risk on derivatives fair value impairment for investment in OnePath (formerly iNgA) and iNgNZ movements on financial instruments measured at fair value through profit or loss4 Dividends received from controlled entities Brokerage income ANZ Share of iNg NZ frozen funds investor settlement Writedown of assets in non continuing business Writedown (reversal) of investment in Saigon Securities inc mark to market (loss)/gain on Panin warrants Private equity and infrastructure earnings Other Total other income Total other operating income iii) Net funds management and insurance income funds management income investment income insurance premium income commission income (expense) claims changes in policyholder liabilities Elimination of treasury share gain Total net funds management and insurance income Total other operating income Share of joint venture profit from OnePath (formerly iNg Australia) and iNg (NZ) Share of associates’ profit Total share of joint venture and associates profit Total income5 Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 185 1,525 535 23,008 912 443 26,608 – 26,608 25,066 1,525 17 26,608 634 1,967 2,601 – 2,601 (277) 2,324 747 319 35 (217) (202) – 70 4 (12) 25 – 43 155 967 3,291 730 1,165 847 (358) (414) (836) (35) 1,099 4,390 33 400 433 31,431 313 989 678 22,657 927 722 26,286 – 26,286 25,273 989 24 26,286 684 1,982 2,666 – 2,666 (269) 2,397 962 303 (135) – (358) – 76 (173) (112) (25) (14) (1) 107 630 3,027 119 – 28 83 – – – 230 3,257 83 382 465 30,008 159 1,249 404 18,286 918 235 21,251 1,671 22,922 21,662 1,249 11 22,922 574 1,435 2,009 424 2,433 (200) 2,233 458 366 39 – (203) 1,490 – – (12) 25 – 43 (3) 2,203 4,436 85 – 28 51 – – – 164 4,600 – – – 27,522 254 832 556 15,866 927 444 18,879 1,787 20,666 19,819 832 15 20,666 598 1,390 1,988 365 2,353 (196) 2,157 740 370 (121) – (328) 234 – – (112) (25) – (1) 10 767 2,924 76 – 28 47 – – – 151 3,075 – – – 23,741 1 Lending fees exclude fees treated as part of the effective yield calculation and included in interest income (refer note 1 B(ii)). 2 includes interchange fees paid. 3 Does not include interest income. 4 includes fair value movements (excluding realised and accrued interest) on derivatives entered into to manage interest rate and foreign exchange risk on funding instruments, and not designated as accounting hedges, ineffective portions of cashflow hedges, and fair value movements in financial assets and liabilities designated at fair value. The net gain on financial assets and liabilities designated at fair value was $251 million (2009: $506 million loss) for the group and $253 million (2009: $488 million loss) for the company. 5 Total income includes external dividend income of $18 million (2009: $14 million) for the group and $16 million (2009: $12 million) for the company. 4: Expenses Interest Expense financial institutions Deposits Borrowing corporations’ debt commercial paper Acceptances Loan capital, bonds and notes Other controlled entities Total interest expense Interest expense is analysed by types of financial liabilities as follows: financial liabilities not at fair value through profit or loss financial liabilities designated at fair value through profit or loss Operating expenses i) Personnel Employee entitlements and taxes Salaries and wages Superannuation costs – defined benefit plans Superannuation costs – defined contribution plans Equity-settled share-based payments Temporary staff Other Total personnel expenses ii) Premises Amortisation of leasehold improvements Depreciation of buildings and integrals Rent Utilities and other outgoings Other Total premises expenses iii) Computer computer contractors Data communication Depreciation and amortisation1 Rentals and repairs Software purchased Software impairment Other Total computer expenses iv) Other Advertising and public relations Amortisation of other intangible assets (refer note 19) Audit and other fees (refer note 5) Depreciation of furniture and equipment (refer note 21) freight and cartage Loss on sale and write-off of equipment Non-lending losses, fraud and forgeries Postage and stationery Professional fees Telephone Travel Other Total other expenses v) Restructuring Total operating expenses Total expenses Consolidated The Company 2010 $m 326 9,784 135 499 563 4,171 261 15,739 – 15,739 15,355 384 15,739 253 2,615 14 253 140 210 742 4,227 42 37 365 160 32 636 121 90 299 95 211 17 33 866 244 95 15 89 62 11 67 127 347 68 196 220 2009 $m 431 9,821 472 730 646 3,975 323 16,398 – 16,398 15,911 487 16,398 242 2,238 20 238 103 155 602 3,598 38 18 335 134 34 559 97 77 239 92 181 27 55 768 195 7 14 72 64 16 74 118 197 63 149 201 2010 $m 279 8,081 – 287 569 3,419 212 12,847 1,830 14,677 14,504 173 14,677 184 1,885 9 201 119 165 575 3,138 28 18 240 117 32 435 81 59 248 74 150 12 3 627 151 3 8 75 48 3 40 92 307 38 142 495 2009 $m 306 7,328 – 336 646 3,125 42 11,783 1,817 13,600 13,450 150 13,600 169 1,622 14 196 87 115 501 2,704 27 4 236 92 34 393 76 54 197 71 148 22 25 593 134 3 9 58 50 10 55 84 171 34 105 356 1,541 34 7,304 23,043 1,170 130 6,225 22,623 1,402 34 5,636 20,313 1,069 109 4,868 18,468 104 ANZ Annual Report 2010 Financial Report 105 1 comprises software amortisation of $207 million (2009: $155 million), refer note 19, and computer depreciation of $92 million (2009: $84 million), refer note 21. The company comprises software amortisation of $183 million (2009: $140 million), refer note 19, and computer depreciation of $65 million (2009: $58 million), refer note 21. NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 5: compensation of Auditors Consolidated The Company 6: current income Tax Expense KPMG Australia Audit or review of financial reports of the company or group entities2 Other audit-related services1,2 Other services2,3 Total Overseas related practices of KPMG Australia Audit or review of financial reports of the company or group entities Other audit-related services1 Other services3 2010 $’000 7,916 2,280 80 10,276 4,119 539 92 4,750 2009 $’000 6,004 3,295 127 9,426 3,714 1,074 41 4,829 Total compensation of auditors 15,026 14,255 2010 $’000 5,053 1,595 80 6,728 1,040 400 20 1,460 8,188 2009 $’000 5,127 2,278 127 7,532 1,081 459 41 1,581 9,113 group policy allows KPmg Australia or any of its related practices to provide assurance and other audit-related services that, while outside the scope of the statutory audit, are consistent with the role of auditor. These include regulatory and prudential reviews requested by the company’s regulators such as the Australian Prudential Regulation Authority (APRA). KPmg Australia or any of its related practices may not provide services that are perceived to be in conflict with the role of auditor. These include consulting advice and subcontracting of operational activities normally undertaken by management, and engagements where the auditor may ultimately be required to express an opinion on its own work. includes prudential supervision reviews for central banks and work required for local statutory purposes. 1 2 goods and services tax inclusive. 3 Other assurance services comprises: Consolidated market Risk benchmarking review market Risk system capability review Overseas branch registration regulatory assistance Review of foreign exchange process in overseas branch Training courses Accounting Advice Total 2010 $’000 50 30 2 8 – 82 172 2009 $’000 75 41 – – 35 17 168 Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m Income tax recognised in the Income Statement Tax expense/(income) comprises: current tax expense/(income) Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax expense/(income) relating to the origination and reversal of temporary differences Total income tax expense charged in the Income Statement 2,153 (1) (56) 2,096 1,175 – 260 1,435 1,542 (1) (129) 1,412 643 – 266 909 Reconciliation of the prima facie income tax expense on pre-tax profit with the income tax expense charged in the income statement Operating profit before income tax Prima facie income tax expense at 30% change in income tax expense due to: Overseas tax rate differential Rebateable and non-assessable dividends Profit from associated and joint venture entities fair value adjustment for OnePath (formerly iNgA) and iNgNZ New Zealand conduits mark-to-market (gains)/losses on fair valued investments related to associated entities Writedown of investment in Saigon Securities inc. impact of changes in New Zealand tax legislation Structured transactions foreign exchange translation of US hybrid loan capital iNgA – policyholder income and contributions tax Non deductible RBS integration costs Resolution of US tax matter Other income tax (over) provided in previous years Total income tax expense charged in the Income Statement Effective Tax Rate Australia Overseas 6,601 1,980 4,380 1,314 5,840 1,752 3,194 958 5 (5) (130) 65 (38) (2) (7) 36 (7) – 150 27 (31) 54 (16) (8) (141) – 196 5 7 – 32 – – – – 46 2,097 1,435 (1) 2,096 31.8% 1,757 339 – 1,435 32.8% 957 478 15 (447) – – – (2) (7) – (7) 4 – 27 (31) 109 1,413 (1) 1,412 24.2% 1,328 84 (8) (72) – – – – 7 – 32 (37) – – – 29 909 – 909 28.5% 794 115 Tax consolidation The company and all its wholly owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. The company is the head entity in the tax-consolidated group. Tax expense/income and deferred tax liabilities/assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group on a ‘group allocation’ basis. current tax liabilities and assets of the tax consolidated group are recognised by the company (as head entity in the tax-consolidated group). Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivable by the company and each member of the group in relation to the tax contribution amounts paid or payable between the company and the other members of the tax-consolidated group in accordance with the arrangement. members of the tax-consolidated group have also entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its income tax payment obligations. Taxation of financial Arrangements “TOfA” During the year the group adopted the new tax regime for financial arrangements, TOfA. The regime aims to more closely align the tax and accounting recognition and measurement of the financial arrangements within scope and their related flows. Deferred tax balances for financial arrangements that existed on adoption at 1 October 2009 will reverse over a four year period. 106 ANZ Annual Report 2010 Financial Report 107 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 7: Dividends Ordinary dividends1 interim dividend final dividend Bonus option plan adjustment Dividend on ordinary shares 1 Dividends are not accrued and are recorded when paid. Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 1,318 1,403 (54) 2,667 993 1,514 (55) 2,452 1,318 1,403 (54) 2,667 993 1,514 (55) 2,452 A final dividend of 74 cents, fully franked, is proposed to be paid on 17 December 2010 on each eligible fully paid ordinary share (2009: final dividend of 56 cents, paid 18 December 2009, fully franked). The 2010 interim dividend of 52 cents, paid 1 July 2010, was fully franked (2009: interim dividend of 46 cents, paid 1 July 2009, fully franked). The tax rate applicable to the franking credits attached to the 2010 interim dividend and to be attached to the proposed 2010 final dividend is 30% (2009: 30%). 7: Dividends (continued) Dividend Reinvestment Plan During the year ended 30 September 2010, 22,970,973 ordinary shares were issued at $21.75 per share and 23,779,667 ordinary shares at $21.32 per share to participating shareholders under the dividend reinvestment plan (2009: 33,032,100 ordinary shares at $13.58 per share, and 19,354,790 ordinary shares at $15.16 per share). All eligible shareholders can elect to participate in the dividend reinvestment plan. for the 2010 final dividend, a discount of 1.5% will be applied when calculating the “Acquisition Price” used in determining the number of ordinary shares to be provided under the dividend reinvestment plan and bonus option plan terms and conditions, and the “Pricing Period” under the dividend reinvestment plan and bonus option plan terms and conditions will be the seven trading days commencing on and including 12 November 2010. Bonus Option Plan The amount of dividends paid during the year has been reduced as a result of certain eligible shareholders participating in the bonus option plan and foregoing all or part of their right to dividends. These shareholders were issued ordinary shares under the bonus option plan. During the year ended 30 September 2010, 2,481,103 ordinary shares were issued under the bonus option plan (2009: 3,928,449 ordinary shares). for the 2010 final dividend, details of the discount that will be applied when calculating the “Acquisition Price”, and of the “Pricing Period”, in respect of the bonus option plan are set out above in respect of the dividend reinvestment plan. Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 30 September 2010 and 2009 were as follows: 8: Earnings per Ordinary Share Paid in cash1 Satisfied by share issue2 Preference share dividend Euro trust securities3 Dividend on preference shares Consolidated The Company 2010 $m 1,660 1,007 2,667 2009 $m 664 1,788 2,452 Consolidated 2010 $m 11 11 2009 $m 33 33 2010 $m 1,660 1,007 2,667 2009 $m 664 1,788 2,452 The Company 2010 $m 2009 $m – – – – 1 During the year ended 30 September 2010, cash of $1,660 million was paid to shareholders who did not elect to participate in the dividend reinvestment plan or the bonus option plan (2009: $664 million). During the year ended 30 September 2009, cash of $1,046 million was received from the issue of shares pursuant to the dividend reinvestment plan underwriting agreement for the 2008 final dividend. includes shares issued to participating shareholders under the dividend reinvestment plan. During the year ended 30 September 2009, shares were issued pursuant to a dividend reinvestment plan underwriting agreement for the 2008 final dividend. 2 3 Refer to note 28 for details. Dividend franking Account The amount of franking credits available to the company for the subsequent financial year is $397 million (2009: $49 million) after adjusting for franking credits that will arise from the payment of tax on Australian profits for the 2010 financial year, $812 million of franking credits which will be utilised in franking the proposed 2010 final dividend and franking credits that may not be accessible by the company at present. Restrictions which Limit the Payment of Dividends There are presently no significant restrictions on the payment of dividends from controlled entities to the company. various capital adequacy, liquidity, statutory reserve and other prudential and legal requirements must be observed by certain controlled entities and the impact on these requirements caused by the payment of cash dividends is monitored. There are presently no significant restrictions on payment of dividends by the company. Reductions of shareholders’ equity through the payment of cash dividends is monitored having regard to the regulatory and other legal requirements to maintain a specified capital adequacy ratio. in particular, the Australian Prudential Regulation Authority (APRA) has advised that a bank under its supervision must consult with it before declaring a coupon payment or dividend on a Tier 1 or Upper Tier 2 instrument, if the bank proposes to pay coupon or dividends on Tier 1 or Upper Tier 2 instruments which exceed the level of current year profits. if any dividend, interest or redemption payments or other distributions are not paid on the scheduled payment date, or shares or other qualifying Tier 1 securities are not issued on the applicable conversion or redemption dates, on the group’s Euro Trust Securities, US Trust Securities, UK Stapled Securities or ANZ convertible Preference Shares in accordance with their terms, the group may be restricted from declaring or paying any dividends or other distributions on ANZ ordinary shares and the Euro Trust Securities. This restriction is subject to a number of exceptions. Basic Earnings per share (cents) Earnings reconciliation ($millions) Profit for the year Less: profit attributable to minority interests Less: preference share dividend paid Earnings used in calculating basic earnings per share Weighted average number of ordinary shares (net of treasury shares) (millions) Diluted earnings per share (cents) Earnings reconciliation ($millions) Earnings used in calculating basic earnings per share Add: US Trust Securities interest expense Add: UK hybrid interest expense Add: convertible Preference Shares interest expense Add: convertible Perpetual Notes interest expense Earnings used in calculating diluted earnings per share Weighted average number of ordinary shares (net of treasury shares) (millions) Used in calculating basic earnings per share Add: potential conversion of options to ordinary shares weighted average number of convertible US Trust Securities at current market prices weighted average number of convertible UK hybrid Securities weighted average number of convertible Preference Shares weighted average number of convertible Perpetual Notes Used in calculating diluted earnings per share Consolidated 2010 $m 178.9 4,505 4 11 4,490 2009 $m 131.0 2,945 2 33 2,910 2,509.3 174.6 2,221.6 129.6 4,490 35 51 134 – 4,710 2,509.3 4.8 37.2 32.8 112.9 – 2,697.0 2,910 54 – 52 25 3,041 2,221.6 3.8 51.3 – 45.5 24.7 2,346.9 The weighted average number of converted and lapsed options, weighted with reference to the date of conversion or lapse, and included in the calculation of diluted earnings per share is approximately 1 million (2009: approximately 1 million). 108 ANZ Annual Report 2010 Financial Report 109 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 9: Liquid Assets coins, notes and cash at bank money at call, bills receivable and remittances in transit Other banks’ certificates of deposit Securities purchased under agreements to resell in less than three months Total liquid assets Maturity analysis based on original term to maturity Less than three months more than three months Total liquid assets 10: Due from Other financial institutions Maturity analysis based on original term to maturity Less than three months more than three months Total due from other financial institutions 11: Trading Securities listed Other securities and equity securities Unlisted commonwealth securities Local, semi-government and other government securities ANZ accepted bills Other securities and equity securities Total trading securities Consolidated The Company 2010 $m 2,793 7,049 4,152 7,527 21,521 2009 $m 3,108 10,133 7,265 4,811 25,317 2010 $m 1,082 6,308 3,613 7,527 2009 $m 878 9,492 5,018 4,811 18,530 20,199 17,042 4,479 21,521 18,393 6,924 25,317 14,543 3,987 18,530 15,228 4,971 20,199 Consolidated The Company 2010 $m 4,862 619 5,481 2009 $m 4,412 573 4,985 2010 $m 3,592 544 4,136 2009 $m 2,823 413 3,236 Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 48 48 8 8 26 26 8 8 3,649 8,182 6,035 15,601 33,467 33,515 2,657 6,412 4,146 17,768 30,983 30,991 3,647 5,195 6,035 13,402 28,279 28,305 2,657 5,273 4,146 15,326 27,402 27,410 12: Derivative financial instruments Derivative financial instruments are contracts whose value is derived from one or more underlying variables or indices, require little or no initial net investment and are settled at a future date. Derivatives include contracts traded on registered exchanges and contracts agreed between counterparties, called “Over the counter” or “OTcs”. 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 (i.e. balance sheet risk management). 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. Types of derivative financial instruments The group transacts principally in foreign exchange, interest rate, commodity and credit derivative contracts. The principal types of derivative contracts include swaps, forwards, futures and options contracts and agreements, as detailed in the table below. Derivatives, except for those that are specifically designated as effective hedging instruments, are classified as held for trading. The held for trading classification includes two categories of derivative financial instruments: those held as trading positions and those used in the group’s balance sheet risk management activities. Trading positions Trading positions consist of both sales to customers and market making activities. Sales to customers include the structuring and marketing of derivative products to customers which enable them to take or mitigate risks. market making activities consist of derivatives entered into principally for the purpose of generating profits from short-term fluctuations in price or margins. Positions may be traded actively or held over a period of time to benefit from expected changes in market rates. gains or losses, including any current period interest, from the change in fair value of trading positions are recognised in the income statement as ‘other income’ in the period in which they occur. Balance sheet risk management The group designates balance sheet risk management derivatives into hedging relationships in order to minimise income statement volatility. This volatility is created by differences in the timing of recognition of gains and losses between the derivative and the hedged item. hedge accounting is not applied to all balance sheet risk management positions. gains or losses from the change in fair value of balance sheet risk management derivatives that form part of an effective hedging relationship are recognised in the income statement based on the hedging relationship. Any ineffectiveness is recognised in the income statement as ‘other income’ in the period in which it occurs. gains or losses, excluding any current period interest, from the change in fair value of balance sheet risk management positions that are not designated into hedging relationships are recognised in the income statement as ‘other income’ in the period in which they occur. current period interest is included in interest income and expense. The tables on the following pages provide an overview of the group’s and the company’s foreign exchange rate, commodity, credit and interest rate derivatives. They include all trading and balance sheet risk management 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 derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable, and as a consequence the aggregate fair values of derivative financial assets and liabilities, can fluctuate significantly from time to time. The fair values of derivative instruments held and notional principal amounts are set out as follows. 110 ANZ Annual Report 2010 Financial Report 111 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 12: Derivative financial instruments (continued) 12: Derivative financial instruments (continued) Trading Fair Value Hedging Total fair value of derivatives Fair value Cash flow Net investment in foreign operations Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Trading Fair Value Hedging Total fair value of derivatives Fair value Cash flow Net investment in foreign operations Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Consolidated at 30 September 2010 Foreign exchange contracts Spot and forward contracts Swap agreements futures contracts Options purchased Options sold Commodity contracts Derivative contracts Interest rate contracts forward rate agreements Swap agreements futures contracts Options purchased Options sold Credit Default Swaps Structured credit derivatives purchased1 Other credit derivatives purchased Total credit derivatives purchased Structured credit derivatives sold Other credit derivatives sold Total credit derivatives sold collateral Total 1 inclusive of credit valuation adjustment. Notional Principal Amount $m 244,322 210,038 739 7,594 12,701 475,394 5,616 10,677 93 323 0 (7,304) (15,368) (148) 0 (343) 16,709 (23,163) – 705 – – – 705 – (227) – – – (227) – – – – – – – – – – – – – – 31,852 1,381 (1,409) – – 108,534 1,159,637 148,600 37,497 32,292 17 16,387 1,576 268 – (15) (16,654) (1,595) – (329) 1,486,560 18,248 (18,593) – 2,132 – – – 2,132 – (486) – – – (486) 1 507 8 – – 516 – (491) (17) – – (508) 10,213 14,326 24,539 8,697 11,500 20,197 44,736 449 111 560 – 112 112 672 – (126) (126) (624) (99) (723) (849) – (2,544) 8,018 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2,038,542 34,466 (35,996) 2,837 (713) 516 (508) 2 – – – – 2 – – – – – – – – – – – – – – – 2 – – – – – – – – – – – – – – – – – – – – – – 5,618 (7,304) 11,382 (15,595) (148) – (343) 93 323 – 17,416 (23,390) 1,381 (1,409) 18 19,026 1,584 268 – (15) (17,631) (1,612) – (329) 20,896 (19,587) 449 111 560 – 112 112 672 – (126) (126) (624) (99) (723) (849) (2,544) 8,018 37,821 (37,217) Notional Principal Amount $m 204,830 168,826 281 7,067 14,089 5,648 10,084 19 569 – (6,795) (13,167) (28) – (530) – 233 – – – 233 – (260) – – – (260) 395,093 16,320 (20,520) 23,195 1,196 (1,472) – – 75,358 1,041,561 105,435 12,468 14,699 9 17,447 1,478 188 – (20) (16,880) (1,322) – (124) – 1,272 – – – – (1,297) – – – 1,249,521 19,122 (18,346) 1,272 (1,297) 11,303 13,071 24,374 12,454 9,804 22,258 46,632 704 271 975 – 146 146 – (14) (14) (1,019) (419) (1,438) 1,121 (1,452) – (2,078) 7,084 – – – – – – – – – – – – – – – – Consolidated at 30 September 2009 Foreign exchange contracts Spot and forward contracts Swap agreements futures contracts Options purchased Options sold Commodity contracts Derivative contracts Interest rate contracts forward rate agreements Swap agreements futures contracts Options purchased Options sold Credit Default Swaps Structured credit derivatives purchased1 Other credit derivatives purchased Total credit derivatives purchased Structured credit derivatives sold Other credit derivatives sold Total credit derivatives sold collateral Total 1 inclusive of credit valuation adjustment. – – – – – – – 1 193 14 – – 208 – – – – – – – – – – – – – – – (1) (236) (16) – – (253) – – – – – – – – 10 – – – – 10 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 5,658 10,317 19 569 – (6,795) (13,427) (28) – (530) 16,563 (20,780) 1,196 (1,472) 10 18,912 1,492 188 – (21) (18,413) (1,338) – (124) 20,602 (19,896) 704 271 975 – 146 146 – (14) (14) (1,019) (419) (1,438) 1,121 (1,452) (2,078) 7,084 37,404 (36,516) 1,714,441 35,681 (34,706) 1,505 (1,557) 208 (253) 10 112 ANZ Annual Report 2010 Financial Report 113 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 12: Derivative financial instruments (continued) 12: Derivative financial instruments (continued) The Company at 30 September 2010 Foreign exchange contracts Spot and forward contracts Swap agreements futures contracts Options purchased Options sold Commodity contracts Derivative contracts Interest rate contracts forward rate agreements Swap agreements futures contracts Options purchased Options sold Credit Default Swaps Structured credit derivatives purchased1 Other credit derivatives purchased Total credit derivatives purchased Structured credit derivatives sold Other credit derivatives sold Total credit derivatives sold Trading Fair value Fair Value Hedging Cash flow Total fair value of derivatives Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Notional Principal Amount $m 276,490 202,757 739 7,435 12,909 5,747 11,618 93 319 – (7,032) (16,817) (148) – (332) – 699 – – – 699 – (227) – – – (227) 500,330 17,777 (24,329) 31,826 1,381 (1,409) – – 80,014 943,720 124,457 37,247 30,428 13 12,000 1,574 258 – (11) (12,434) (1,579) – (323) 1,215,866 13,845 (14,347) – 1,742 – – – 1,742 – (119) – – – (119) 10,213 14,321 24,534 8,697 11,500 20,197 44,731 449 111 560 – 112 112 672 – (126) (126) (624) (99) (723) (849) – – – – – – – – – – – – – – – – – – – – – 1 334 8 – – 343 – – – – – – – – – – – – – 5,747 12,317 93 319 – (7,032) (17,044) (148) – (332) 18,476 (24,556) – 1,381 (1,409) – (432) (7) – – (439) 14 14,076 1,582 258 – (11) (12,985) (1,586) – (323) 15,930 (14,905) – – – – – – – 449 111 560 – 112 112 672 – (126) (126) (624) (99) (723) (849) The Company at 30 September 2009 Foreign exchange contracts Spot and forward contracts Swap agreements futures contracts Options purchased Options sold Commodity contracts Derivative contracts Interest rate contracts forward rate agreements Swap agreements futures contracts Options purchased Options sold Credit Default Swaps Structured credit derivatives purchased1 Other credit derivatives purchased Total credit derivatives purchased Structured credit derivatives sold Other credit derivatives sold Total credit derivatives sold collateral Total – 1,792,753 (2,268) 31,407 7,072 (33,862) – 2,441 – (346) – 343 – (439) (2,268) 34,191 7,072 (34,647) collateral Total 1 inclusive of credit valuation adjustment. 1 inclusive of credit valuation adjustment. Trading Fair value Fair Value Hedging Cash flow Total fair value of derivatives Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Assets $m liabilities $m Notional Principal Amount $m 186,901 181,534 281 6,941 14,074 5,201 10,900 19 563 – (5,670) (13,664) (28) – (517) – 233 – – – 233 – (260) – – – (260) 389,731 16,683 (19,879) 23,180 1,196 (1,472) – – 52,290 797,689 88,494 12,305 14,326 8 12,979 1,442 186 – (18) (12,740) (1,320) – (121) 965,104 14,615 (14,199) – 1,043 – – – 1,043 – (440) – – – (440) 11,303 13,066 24,369 12,454 9,804 22,258 46,627 704 271 975 – 146 146 – (14) (14) (1,019) (419) (1,438) 1,121 (1,452) – (1,984) 4,697 – – – – – – – – – – – – – – – – – – – – – – – 1 79 14 – – 94 – – – – – – – – – – – – – – – (1) (146) (16) – – (163) – – – – – – – – 5,201 11,133 19 563 – (5,670) (13,924) (28) – (517) 16,916 (20,139) 1,196 (1,472) 9 14,101 1,456 186 – (19) (13,326) (1,336) – (121) 15,752 (14,802) 704 271 975 – 146 146 – (14) (14) (1,019) (419) (1,438) 1,121 (1,452) (1,984) 4,697 1,424,642 31,631 (32,305) 1,276 (700) 94 (163) 33,001 (33,168) 114 ANZ Annual Report 2010 Financial Report 115 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 12: Derivative financial instruments (continued) 12: Derivative financial instruments (continued) hedging Relationships There are three types of allowable hedging relationships: fair value hedges, cash flow hedges and hedges of a net investment in a foreign operation. Each type of hedging has specific requirements when accounting for the fair value changes in the hedging relationship. for details on the accounting treatment of each type of hedging relationship refer to note 1. fair value hedges The risk being hedged in a fair value hedge is a change in the fair value of an asset or liability or unrecognised firm commitment that may affect the income statement. changes in fair value might arise through changes in interest rates or foreign exchange rates. The group’s fair value hedges principally consist of interest rate swaps and foreign currency swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates and exchange rates. The application of fair value hedge accounting results in the fair value adjustment on the hedged item attributable to the hedged risk being recognised in the income statement at the same time the hedging instrument impacts the income statement. if a hedging relationship is terminated, the fair value adjustment to the hedged item continues to be recognised as part of the carrying amount of the item or group of items and is amortised to the income statement as a part of the effective yield over the period to maturity. Where the hedged item is derecognised from the group’s balance sheet, the fair value adjustment is included in the income statement as ‘other income’ as a part of the gain or loss on disposal. Gain/(loss) arising from fair value hedges hedged item (attributable to the hedged risk only) hedging instrument Consolidated The Company 2010 $m (662) 668 2009 $m (467) 442 2010 $m (291) 299 2009 $m (773) 759 cash flow hedges The risk being hedged in a cash flow hedge is the potential variability in future cash flows that may affect the income statement. variability in the future cash flows may result from changes in interest rates or exchange rates arising from recognised financial assets and liabilities and highly probable forecast transactions. The group’s cash flow hedges consist principally of interest rate swaps, forward rate agreements and foreign currency swaps that are used to protect against exposures to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be refunded or reinvested in the future. The group primarily applies cash flow hedge accounting to its variable rate loan assets, variable rate liabilities and short-term re-issuances of fixed rate customer and wholesale deposit liabilities. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their forecast repricing profile. This forms the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges. The effective portion of changes in the fair value of derivatives qualifying and designated as cash flow hedges is deferred to the hedging reserve which forms part of shareholders’ equity. Amounts deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions take place. The schedule below shows the movements in the hedging reserve: 13: Available-for-sale Assets listed Other government securities Other securities and equity investments Total Listed Unlisted Local and semi-government securities Other government securities Other securities and equity investments Loans and advances Total unlisted Total available-for-sale assets The mechanics of hedge accounting results in the gain (or loss) in the hedging reserve being released into the income statement at the same time that the corresponding loss (or gain) attributable to the hedged item impacts the income statement. it will not necessarily be released to the income statement uniformly over the period of the hedging relationship as the fair value of the derivative is driven by changes in market rates over the term of the instrument. As market rates do not always move uniformly across all time periods, a change in market rates may drive more value in one forecast period than another, which impacts when the hedging reserve is released to the income statement. All underlying hedged cash flows are expected to be recognised in the income statement in the period in which they occur which is anticipated to take place over the next 0 –10 years (2009: 0–10 years). All gains and losses associated with the ineffective portion of the hedging derivatives are recognised immediately as ‘other income’ in the income statement. ineffectiveness recognised in the income statement in respect of cash flow hedges amounted to nil for the group (2009: $53 million loss) and a $1 million loss for the company (2009: $71 million loss). hedges of net investments in foreign operations in a hedge of a net investment in a foreign operation, the risk being hedged is the exposure to exchange differences arising on consolidation of foreign operations with a functional currency other than the Australian Dollar. hedging is undertaken using forward foreign exchange contracts or by financing with borrowings in the same currency as the foreign functional currency involved. ineffectiveness arising from hedges of net investments in foreign operations and recognised as ‘other income’ in the income statement amounted to $1 million gain (2009: $4 million gain). An impairment loss of $21 million was recognised in the income Statement (2009: $20 million), refer note 16. Balance at start of year items recorded in net interest income Tax effect of items recorded in the income statement valuation gain taken to equity Tax effect of net gain on cash flow hedges closing balance Consolidated The Company Available-for-sale by maturities at 30 September 2010 2010 $m (90) (54) 17 191 (53) 11 2009 $m 79 (89) 26 (156) 50 (90) 2010 $m (109) (69) 21 121 (37) (73) 2009 $m 51 (89) 26 (135) 38 (109) Local and semi government securities Other government securities Other securities and equity investments Loans and advances Total available-for-sale assets The table below shows the breakdown of the hedging reserve attributable to each type of cash flow hedging relationship: Available-for-sale by maturities at 30 September 2009 variable rate assets variable rate liabilities Re-issuances of short-term fixed rate liabilities Total hedging reserve 116 ANZ Annual Report 2010 Consolidated The Company 2010 $m 265 (106) (148) 11 2009 $m 236 (140) (186) (90) 2010 $m 65 (70) (68) (73) 2009 $m 111 (112) (108) (109) Local and semi government securities Other government securities Other securities and equity investments Loans and advances Total available-for-sale assets less than 3 months $m Between 3 months and 12 months $m Between 1 year and 5 years $m Between 5 years and 10 years $m After 10 years $m No maturity specified $m 3,113 5,075 3,202 – 11,390 448 2,605 1,994 99 5,146 42 1,027 1,897 98 3,064 4 8 203 – 215 14 3 163 258 438 – – 489 – 489 less than 3 months $m Between 3 months and 12 months $m Between 1 year and 5 years $m Between 5 years and 10 years $m After 10 years $m No maturity specified $m 602 2,482 4,775 57 7,916 114 1,111 3,524 84 4,833 – 851 2,018 – 2,869 – – 19 – 19 – – 156 284 440 – – 498 – 498 Financial Report 117 Consolidated The Company 2010 $m 3,501 2,040 5,541 3,621 5,217 5,908 455 15,201 20,742 2009 $m 1,501 1,578 3,079 716 2,943 9,412 425 13,496 16,575 2010 $m 3,127 1,715 4,842 3,552 3,705 4,419 455 12,131 16,973 2009 $m 1,147 1,334 2,481 716 1,079 8,853 425 11,073 13,554 Total fair value $m 3,621 8,718 7,948 455 20,742 Total fair value $m 716 4,444 10,990 425 16,575 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 14: Net Loans and Advances 15: impaired financial Assets Overdrafts credit card outstandings Term loans – housing Term loans – non-housing hire purchase Lease receivables commercial bills Other Total gross loans and advances Less: Provision for credit impairment (refer note 16) Less: Unearned income Add: capitalised brokerage/mortgage origination fees Net loans and advances lease receivables a) finance lease receivables gross finance lease receivables Less than 1 year 1 to 5 years Later than 5 years Less: unearned future finance income on finance leases Net investment in finance lease receivables b) Operating lease receivables gross operating lease receivables Less than 1 year 1 to 5 years Later than 5 years Total operating lease receivables Net lease receivables Present value of gross investment in finance lease receivables Less than 1 year 1 to 5 years Later than 5 years Hire purchase receivables Less than 1 year 1 to 5 years Later than 5 years Consolidated The Company 2010 $m 8,671 10,618 202,658 119,063 10,351 1,890 432 2,328 356,011 (5,028) (2,262) 600 (6,690) 2009 $m 8,347 9,376 188,090 116,609 10,766 2,367 136 2,654 338,345 (4,526) (2,372) 560 (6,338) 2010 $m 6,323 9,107 167,931 86,007 9,973 1,228 432 2,054 283,055 (3,659) (2,006) 566 (5,099) 2009 $m 6,653 7,910 149,761 82,068 10,387 1,700 136 2,290 260,905 (3,300) (2,102) 505 (4,897) 349,321 332,007 277,956 256,008 494 848 272 (107) 1,507 60 207 10 277 593 965 458 (262) 1,754 34 207 110 351 379 529 95 (83) 920 50 165 10 225 489 613 266 (225) 1,143 22 200 110 332 1,784 2,105 1,145 1,475 459 663 253 512 806 215 1,375 1,533 3,618 6,665 68 3,674 7,021 71 10,351 10,766 348 377 96 821 3,456 6,449 68 9,973 412 488 158 1,058 3,506 6,810 71 10,387 Presented below is a summary of impaired financial assets that are measured on the balance sheet at amortised cost. for these items, impairment losses are recorded through the provision for credit impairment. This contrasts to financial assets carried on the balance sheet at fair value, for which any impairment loss is recognised as a component of the overall fair value. Detailed information on impaired financial assets is provided in note 33 financial Risk management. Summary of impaired financial assets impaired loans Restructured items1 Non-performing commitments and contingencies Gross impaired financial assets individual provisions impaired loans Non-performing commitments and contingencies Net impaired financial assets Accruing loans past due 90 days or more2 These amounts are not classified as impaired assets as they are either 90 days or more past due and well secured, or are portfolio managed facilities that can be held on an accrual basis for up to 180 days past due Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 6,075 141 345 6,561 (1,849) (26) 4,686 4,392 673 530 5,595 (1,512) (14) 4,069 4,287 134 321 4,742 (1,253) (20) 3,469 3,310 504 504 4,318 (1,050) (12) 3,256 1,555 1,597 1,229 1,200 1 Restructured items are facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction 2 of interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk. includes unsecured credit card and personal loans 90 day past due accounts which are allowed by APRA to be retained on a performing basis for up to 180 days past due amounting to $139 million (2009: $135 million) for the group and $110 million (2009: $94 million) for the company. 16: Provision for credit impairment Provision movement analysis New and increased provisions Australia New Zealand Asia, Pacific, Europe and America Provision releases Recoveries of amounts previously written off individual provision charge impairment on available-for-sale assets collective provision charge/(credit) Charge to income statement Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 1,620 559 171 2,350 (437) 1,913 (143) 1,770 21 (4) 1,787 2,383 540 118 3,041 (206) 2,835 (85) 2,750 20 235 3,005 1,612 16 80 1,708 (254) 1,454 (111) 1,343 21 5 1,369 2,262 2 37 2,301 (173) 2,128 (50) 2,078 20 (19) 2,079 118 ANZ Annual Report 2010 Financial Report 119 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 16: Provision for credit impairment (continued) movement in provision for credit impairment by financial asset class 16: Provision for credit impairment (continued) movement in provision for credit impairment by financial asset class (continued) Consolidated Collective provision Balance at start of year Adjustment for exchange rate fluctuations and transfers Provision acquired charge to income statement Total collective provision Individual provision Balance at start of year charge to income statement Adjustment for exchange rate fluctuations and transfers Provision acquired Discount unwind Bad debts written off Recoveries of amounts previously written off Total individual provision Total provision for credit impairment liquid assets and due from other financial institutions 2010 $m 2009 $m Net loans and advances and acceptances 2010 $m 2009 $m Other financial assets 2010 $m 2009 $m Credit related commitments1 2009 $m 2010 $m Total provisions 2010 $m 2009 $m – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2,552 2,062 (68) 97 (4) (48) – 538 2,577 2,552 1,512 1,758 646 2,741 (100) 394 (165) (1,693) 143 1,849 4,426 (22) – (73) (1,865) 85 1,512 4,064 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 448 (15) 143 – 576 14 12 – – – – – 26 602 759 3,000 2,821 (8) – (303) 448 29 9 – – – (24) – 14 462 (83) 240 (4) (56) – 235 3,153 3,000 1,526 1,770 675 2,750 (100) 394 (165) (1,693) 143 1,875 5,028 (22) – (73) (1,889) 85 1,526 4,526 The Company Collective provision Balance at start of year Adjustment for exchange rate fluctuations and transfers2 Provision acquired charge to income statement Total collective provision Individual provision Balance at start of year charge to income statement Adjustment for exchange rate fluctuations and transfers2 Provision acquired Discount unwind Bad debts written off Recoveries of amounts previously written off Total individual provision Total provision for credit impairment liquid assets and due from other financial institutions 2010 $m 2009 $m Net loans and advances and acceptances 2010 $m 2009 $m Other financial assets 2010 $m 2009 $m Credit related commitments1 2009 $m 2010 $m Total provisions 2010 $m 2009 $m – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,886 1,519 (24) 84 4 95 – 272 1,950 1,886 1,050 1,336 459 2,071 (52) 333 (115) (1,410) 111 1,253 3,203 37 – (65) (1,502) 50 1,050 2,936 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 352 625 2,238 2,144 (5) 88 1 436 12 7 1 – – – – 20 456 18 – (291) 352 (29) 172 5 113 – (19) 2,386 2,238 29 7 1,062 1,343 488 2,078 – – – (24) – 12 364 (51) 333 (115) (1,410) 111 1,273 3,659 37 – (65) (1,526) 50 1,062 3,300 1 comprises undrawn facilities and customer contingent liabilities. The table below contains a detailed analysis of the movements in individual provision for Net loans and advances and acceptances. 1 comprises undrawn facilities and customer contingent liabilities. 2 includes the transfer of individual provisions of $49 million and collective provisions of $94 million from the Esanda Australia legal entity to the company in 2009. The table below contains a detailed analysis of the movements in individual provision for Net loans and advances and acceptances. Consolidated Individual provision Balance at start of year charge to income statement Adjustment for exchange rate fluctuations and transfers Provision acquired Discount unwind Bad debts written off Recoveries of amounts previously written off Total individual provision Australia Asia Pacific, Europe and America 2010 $m 2009 $m 2010 $m 2009 $m New Zealand 2010 $m 2009 $m Net loans and advances and acceptances 2010 $m 2009 $m 1,048 1,264 (8) 59 (112) (1,399) 107 487 2,140 (9) – (65) (1,569) 64 959 1,048 75 132 (54) 335 (6) (74) 20 428 48 101 (9) – (1) (69) 5 75 389 362 (38) – (47) (220) 16 462 111 500 (4) – (7) (227) 16 389 1,512 1,758 (100) 394 (165) (1,693) 143 646 2,741 (22) – (73) (1,865) 85 1,849 1,512 The Company Individual provision Balance at start of year charge to income statement Adjustment for exchange rate fluctuations and transfers Provision acquired Discount unwind Bad debts written off Recoveries of amounts previously written off Total individual provision Australia Asia Pacific, Europe and America 2010 $m 2009 $m 2010 $m 2009 $m New Zealand 2010 $m 2009 $m 1,026 1,287 424 2,042 (14) – (112) (1,380) 97 44 – (65) (1,468) 49 904 1,026 22 37 (38) 333 (2) (26) 14 340 35 27 (7) – (34) 1 22 2 12 – – (1) (4) – 9 – 2 – – – – – 2 Ratios individual provision as a % of total gross loans, advances and acceptances collective provision as a % of total gross loans, advances and acceptances Bad debts written off as a % of total gross loans, advances and acceptances Consolidated 2010 % 0.5 0.9 0.5 2009 % 0.4 0.9 0.5 Ratios individual provision as a % of total gross loans, advances and acceptances collective provision as a % of total gross loans, advances and acceptances Bad debts written off as a % of total gross loans, advances and acceptances Net loans and advances and acceptances 2010 $m 2009 $m 1,050 1,336 459 2,071 (52) 333 (115) (1,410) 111 37 – (65) (1,502) 50 1,253 1,050 Consolidated 2010 % 0.4 0.8 0.5 2009 % 0.4 0.8 0.6 120 ANZ Annual Report 2010 Financial Report 121 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 17: Shares in controlled Entities, Associates and Joint venture Entities Total shares in controlled entities Total shares in associates1 (refer note 39) Total shares in joint venture entities2 (refer note 40) Total shares in controlled entities, associates and joint venture entities Consolidated The Company 2010 $m – 2,965 – 2,965 2009 $m – 2,712 1,853 4,565 2010 $m 9,189 1,035 – 10,224 2009 $m 8,522 761 – 9,283 1 2 investments in associates are accounted for in the consolidated financial statements using the equity method of accounting and are carried at cost by the parent entity. investments in joint venture entities are accounted for in the consolidated financial statements using the equity method of accounting. DiSPOSAL Of cONTROLLED ENTiTiES There were no material controlled entities disposed of during the year ended 30 September 2010 or the year ended 30 September 2009. AcQUiSiTiON Of cONTROLLED ENTiTiES/BUSiNESSES During the year ended 30 September 2010, the group acquired the following entities/businesses: iNg Australia and iNg New Zealand (iNg) – on 30 November 2009, the group acquired the remaining 51% shareholding in the ANZ-iNg joint ventures in Australia and New Zealand, taking its ownership interest to 100%. The results for the year ended 30 September 2010 includes the financial impact of full ownership since 30 November 2009. for the period 1 October 2009 to 30 November 2009 and the year ended 30 September 2009, the investments were accounted for as joint ventures. Landmark financial Services (Landmark) – on 1 march 2010, the group completed its acquisition of the Landmark financial services business from the AWB group. The financial results since acquisition are included in earnings for the year ended 30 September 2010. Selected Royal Bank of Scotland group plc (RBS) businesses in Asia – during 2009, ANZ announced the acquisition of selected RBS businesses in Asia. The acquisitions were completed in the Philippines on 21 November 2009, vietnam on 5 December 2009, hong Kong on 20 march 2010, Taiwan on 17 April 2010, Singapore on 15 may 2010 and indonesia on 12 June 2010. The financial impacts of these acquisitions are included from these respective dates. The initial accounting for all the business combinations described above, including the fair value of assets acquired and liabilities assumed and the calculation of goodwill/discount on acquisition is provisional while valuations are finalised. There were no material controlled entities acquired during the year ended 30 September 2009. 18: Tax Assets Australia current tax asset Deferred tax asset New Zealand current tax asset Deferred tax asset Asia Pacific, Europe & America current tax asset Deferred tax asset Total current and deferred tax assets Total current tax assets Deferred tax assets recognised in profit and loss collective provision for impaired loans and advances individual provision for impaired loans and advances Other provisions Deferred fee income Provision for employee entitlements Other Deferred tax assets recognised directly in equity Defined benefits obligation Available-for-sale revaluation reserve cash flow hedges Deferred tax assets recognised on acquisitions Set-off of deferred tax assets pursuant to set-off provisions1 Net deferred tax assets Unrecognised deferred tax assets The following deferred tax assets will only be recognised if: assessable income is derived of a nature and an amount sufficient to enable the benefit to be realised the conditions for deductibility imposed by tax legislation are compiled with; and no changes in tax legislation adversely affect the group in realising the benefit. Unused realised tax losses (on revenue account) Unrealised losses on investments2 Total unrecognised deferred tax assets Consolidated The Company 2010 $m 61 295 356 14 231 245 1 266 267 868 76 861 458 362 102 144 171 2009 $m 586 214 800 107 – 107 – 289 289 1,196 693 882 445 325 108 130 217 2010 $m 61 346 407 – 6 6 – 223 223 636 61 666 318 223 91 105 85 2009 $m 601 194 795 – – – – 252 252 1,047 601 667 318 198 99 100 118 2,098 2,107 1,488 1,500 49 12 – 61 351 70 49 37 156 – 44 21 29 94 – 57 48 43 148 – (1,718) (1,760) (1,007) (1,202) 792 503 575 446 9 163 172 8 – 8 – – – – – – 1 Deferred tax assets and liabilities are set-off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same taxable group. 2 The group has unrecognised deferred tax assets arising from superannuation funds in OnePath Life Limited (formerly iNg Life Limited) as a result of the group’s policy of capping all deferred tax assets at levels such that the losses could be recoverable with asset growth rates of approximately 5% per annum over three years. 122 ANZ Annual Report 2010 Financial Report 123 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 19: goodwill and Other intangible Assets 19: goodwill and Other intangible Assets (continued) Goodwill Gross carrying amount Balances at start of the year Additions through business combinations Writedowns Derecognised on disposal foreign currency exchange differences Balance at end of year1 Software Gross carrying amount Balances at start of the year Additions through business combinations Additions from internal developments foreign currency exchange differences impairment Balance at end of year Accumulated amortisation and impairment Balances at start of the year Amortisation expense foreign currency exchange differences impairment Balance at end of year Net book value Balances at start of the year Balance at end of year Acquired Portfolio of Insurance and Investment Business Gross carrying amount Balances at start of the year Additions through business combination foreign currency exchange differences Balance at end of year Accumulated amortisation and impairment Balances at start of the year Amortisation expense (refer note 4) foreign currency exchange differences Balance at end of year Net book value Balances at start of the year Balance at end of year Other intangible assets Gross Carrying amount Balance at start of the year Additions through business combination Other additions foreign currency exchange differences Balance at end of year Accumulated amortisation and impairment Balances at start of the year Amortisation expense2 (refer note 4) Balance at end of year Net book value Balances at start of the year Balance at end of year Goodwill, software and other intangible assets Net book value Balances at start of the year Balance at end of year Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m goodwill allocated to cash–generating units The goodwill balance above largely comprises the goodwill purchased on acquisition of NBNZ holdings Limited in December 2003 and OnePath Australia Limited (formerly iNg Australia Limited) on 30 November 2009. Discussion of the goodwill and impairment testing for the cash generating unit containing this goodwill is included in note 2(v). 2,999 1,292 – – (205) 4,086 1,760 60 532 (8) (86) 2,258 911 207 (8) (69) 1,041 849 1,217 – 1,179 (2) 1,177 – 78 (1) 77 – 1,100 65 181 19 (4) 261 17 17 34 48 227 3,064 – – (4) (61) 2,999 1,385 – 411 (2) (34) 1,760 760 155 3 (7) 911 625 849 – – – – – – – – – – 62 – 3 – 65 10 7 17 52 48 – 108 – – (6) 102 1,573 – 466 (1) (19) 2,019 784 183 – (7) 960 789 1,059 – – – – – – – – – – 48 – – – 48 8 3 11 40 37 – – – – – – 1,234 – 372 (2) (31) 1,573 655 140 (4) (7) 784 579 789 – – – – – – – – – – 49 – – (1) 48 5 3 8 44 40 3,896 6,630 3,741 3,896 829 1,198 623 829 20: Other Assets Accrued interest/prepaid discounts Accrued commissions Prepaid expenses insurance contract liabilities ceded (refer to note 49) Outstanding premiums issued securities settlements Operating leases residual value capitalised expenses Other Total other assets 21: Premises and Equipment Freehold and leasehold land and buildings At cost Depreciation leasehold improvements At cost Depreciation Furniture and equipment At cost Depreciation Computer equipment At cost Depreciation Capital works in progress At cost Total premises and equipment Consolidated The Company 2010 $m 1,326 236 128 360 231 1,649 229 68 2,824 7,051 2009 $m 1,097 77 139 – – 917 277 37 1,683 4,227 2010 $m 944 191 48 – – 1,496 205 50 1,630 4,564 2009 $m 743 57 54 – – 581 160 37 1,117 2,749 Consolidated The Company 2010 $m 1,244 (235) 1,009 485 (288) 197 1,241 (674) 567 1,080 (763) 317 68 2,158 2009 $m 628 (218) 410 385 (229) 156 969 (613) 356 979 (748) 231 909 2,062 2010 $m 699 (53) 646 295 (185) 110 1,011 (513) 498 789 (565) 224 30 1,508 2009 $m 92 (42) 50 254 (150) 104 753 (459) 294 719 (550) 169 832 1,449 1 Excludes notional goodwill in equity accounted entities. 2 comprises brand names of $3 million (September 2009: nil), (September 2009: nil); aligned advisor relationships of $2 million (September 2009: nil), distribution agreements and management fee rights of $2 million (September 2009: nil) and other intangibles of $10 million (September 2009: $7 million). The company comprises other intangibles of $3 million (September 2009: $3 million). 124 ANZ Annual Report 2010 Financial Report 125 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 21: Premises and Equipment (continued) 23: income Tax Liabilities Reconciliations of the carrying amounts for each class of premises and equipment are set out below: Consolidated The Company Freehold and leasehold land and buildings carrying amount at beginning of year Additions through business combinations Additions1 Disposals Depreciation foreign currency exchange difference carrying amount at end of year leasehold improvements carrying amount at beginning of year Additions through business combinations Additions1 Disposals Amortisation foreign currency exchange difference carrying amount at end of year Furniture and equipment carrying amount at beginning of year Additions through business combinations Additions1 Disposals Depreciation foreign currency exchange difference carrying amount at end of year Computer equipment carrying amount at beginning of year Additions through business combinations Additions1 Disposals Depreciation foreign currency exchange difference carrying amount at end of year Capital works in progress carrying amount at beginning of year Net transfers/additions carrying amount at end of year Total premises and equipment 1 includes transfers. 22: Deposits and Other Borrowings certificates of deposit Term deposits Other deposits bearing interest and other borrowings Deposits not bearing interest commercial paper Borrowing corporations debt1 Total deposits and other borrowings Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 410 15 631 – (37) (10) 1,009 156 39 48 – (42) (4) 197 356 18 301 (12) (89) (7) 567 231 13 170 (1) (92) (4) 317 909 (841) 68 432 – 41 (34) (18) (11) 410 154 – 46 (1) (38) (5) 156 370 – 67 (4) (72) (5) 356 215 – 110 (8) (84) (2) 231 421 488 909 50 12 604 – (17) (3) 646 104 2 33 – (28) (1) 110 294 3 288 (11) (75) (1) 498 169 4 118 (1) (65) (1) 224 832 (802) 30 55 – 6 – (4) (7) 50 109 – 23 – (27) (1) 104 307 – 50 (3) (57) (3) 294 155 – 78 (5) (58) (1) 169 379 453 832 Australia current tax payable Deferred tax liabilities New Zealand current tax payable Deferred tax liabilities Asia Pacific, Europe & America current tax payable Deferred tax liabilities Total current and deferred income tax liability Total current tax payable Deferred tax liabilities recognised in profit and loss Lease finance Treasury instruments capitalised expenses Other Deferred tax liabilities recognised directly in equity cash flow hedges foreign currency translation reserve Deferred tax liabilities recognised on acquisitions 2010 $m 905 – 905 – – – 68 35 103 1,008 973 204 452 117 621 2009 $m – – – – – – 99 111 210 210 99 215 608 144 877 2010 $m 923 – 923 – – – 64 39 103 1,026 987 90 454 118 384 2009 $m – – – – – – 61 90 151 151 61 104 609 144 435 1,394 1,844 1,046 1,292 2 37 39 320 – 27 27 – – – – – – – – – Set-off of deferred tax liabilities pursuant to set-off provision1 (1,718) (1,760) (1,007) (1,202) Net deferred tax liability Unrecognised deferred tax liabilities The following deferred tax liabilities have not been bought to account as liabilities: Other unrealised taxable temporary differences2 Total unrecognised deferred tax liabilities 35 111 90 90 67 67 39 29 29 90 31 31 1 Deferred tax assets and liabilities are set-off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within 2,158 2,062 1,508 1,449 the same taxable group. 2 Represents additional potential foreign tax costs should all retained earnings in offshore branches and subsidiaries be repatriated. Consolidated The Company 2010 $m 39,530 136,556 111,391 10,598 11,641 1,756 2009 $m 44,711 108,367 113,304 10,174 14,227 3,587 2010 $m 37,059 109,793 94,999 5,677 6,080 – 2009 $m 41,019 79,332 92,987 5,800 8,162 – 311,472 294,370 253,608 227,300 24: Payables and Other Liabilities creditors Accrued interest and unearned discounts Defined benefits plan obligations Accrued charges Security settlements Other liabilities Total payables and other liabilities Consolidated The Company 2010 $m 1,114 2,611 186 1,346 710 1,983 7,950 2009 $m 1,689 2,448 246 1,028 765 1,599 7,775 2010 $m 394 2,090 167 1,020 635 1,396 5,702 2009 $m 1,295 1,771 200 780 652 1,308 6,006 1 included in this balance is debenture stock of $0.5 billion (September 2009: $2.1 billion) of Esanda finance corporation Limited (Esanda), together with accrued interest thereon, is secured by a trust deed and collateral debentures, giving floating charges upon the undertaking and all the assets of the entity $1.1 billion (September 2009: $3.1 billion) other than land and buildings. All controlled entities of Esanda have guaranteed the payment of principal, interest and other monies in relation to all debenture stock and unsecured notes issued by Esanda. The only loans pledged as collateral are those in Esanda and its subsidiaries. Effective from 18 march 2009, Esanda ceased to write new debentures and since September 2009 stopped writing new loans. in addition, this balance also includes NZD 1.4 billion (September 2009: NZD 1.6 billion) of secured debenture stock of the consolidated subsidiary UDc finance Limited (UDc) and the accrued interest thereon which are secured by a floating charge over all assets of UDc NZD 2.1 billion (September 2009: NZD 1.9 billion). 126 ANZ Annual Report 2010 Financial Report 127 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 25: Provisions 27: Loan capital Consolidated The Company Employee entitlements1 Restructuring costs and surplus leased space2 Non-lending losses, frauds and forgeries Other Total provisions 2010 $m 497 119 213 633 2009 $m 445 144 169 554 1,462 1,312 Reconciliations of the carrying amounts of each class of provision, except for employee entitlements, are set out below: Restructuring costs and surplus leased space2 carrying amount at beginning of the year Provisions made during the year Payments made during the year Transfer/release of provision carrying amount at the end of the year Non-lending losses, frauds and forgeries carrying amount at beginning of the year Additions through business combinations Provisions made during the year Payments made during the year Transfer/release of provision carrying amount at the end of the year Other provisions3 carrying amount at beginning of the year Additions through business combinations Provisions made during the year Payments made during the year Transfer/release of provision carrying amount at the end of the year Consolidated 2010 $m 144 34 (38) (21) 119 169 45 31 (41) 9 213 554 115 309 (292) (53) 633 2009 $m 183 111 (104) (46) 144 169 – 30 (12) (18) 169 421 – 476 (272) (71) 554 2010 $m 358 100 153 360 971 2009 $m 339 124 146 296 905 The Company 2010 $m 2009 $m 124 24 (28) (20) 100 146 – 14 (2) (5) 153 296 – 250 (202) 16 360 155 91 (77) (45) 124 140 – 29 (10) (13) 146 273 – 238 (155) (60) 296 1 The aggregate liability for employee benefits largely comprises employee entitlements provisions for annual leave and long service leave. 2 Restructuring costs and surplus leased space provisions arise from exit activities related to material changes in the scope of business undertaken by the group or the manner in which that business is undertaken and includes termination benefits. costs related to on-going activities are not provided for. Provision is made when the group is demonstrably committed, it is probable that the costs will be incurred, though their timing is uncertain, and the costs can be reliably estimated. 3 Other provisions comprise various other provisions including loyalty programs, workers’ compensation, make-good provisions on leased premises and contingent liabilities recognised as part of a business combination. 26: Bonds and Notes Bonds and notes by currency United States dollars USD great British pounds gBP Australian dollars AUD New Zealand dollars NZD Japanese Yen JPY Euro EUR hong Kong dollars hKD Swiss francs chf canadian dollars cAD Norwegian krone NOK Singapore dollars SgD czech koruna cZK Total bonds and notes 128 ANZ Annual Report 2010 Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 27,126 2,408 2,039 1,710 8,140 12,807 2,739 2,151 309 48 237 – 59,714 22,199 4,202 2,822 1,522 7,512 13,208 2,727 2,015 684 53 230 86 57,260 19,240 1,524 2,039 68 7,856 12,807 2,638 1,569 309 48 80 – 48,178 14,031 3,218 2,772 73 7,436 13,208 2,690 1,713 684 53 69 86 46,033 Hybrid loan capital (subordinated)4 US Trust Securities USD 350m non-cumulative trust securities due 20537 USD 750m non-cumulative trust securities due 2053 UK Stapled Securities ANZ convertible Preference Shares (ANZ cPS1) ANZ convertible Preference Shares (ANZ cPS2)5 Perpetual subordinated notes 300m USD 835m NZD floating rate notes fixed rate notes1 Subordinated notes4,6 AUD USD AUD gBP EUR USD AUD AUD gBP NZD AUD AUD AUD AUD gBP NZD NZD gBP AUD AUD AUD AUD EUR 400m 400m 300m 200m 500m 250m 300m 300m 250m 350m 350m 350m 100m 100m 175m 250m 350m 400m 290m 310m 365m 500m 750m floating rate notes due 2010 floating rate notes due 20152 fixed notes due 20153 fixed notes due 20152 fixed notes due 20153 floating rate notes due 20162 fixed notes due 20163 floating rate notes due 20162 fixed notes due 20163 fixed notes due 20168 fixed notes due 20172 floating rate notes due 20172 fixed notes due 20172 floating rate notes due 20172 fixed notes due 20172 fixed notes due 20178 fixed notes due 20178 fixed notes due 20183 fixed notes due 20173 floating rate notes due 20172 floating rate notes due 20182 floating rate notes due 20182 fixed notes due 2019 Total loan capital loan capital by currency AUD NZD USD gBP EUR Australian dollars New Zealand dollars United States dollars great British pounds Euro Interest Rate % 4.48 5.36 6.54 BBSW + 2.50 BBSW + 3.10 LiBOR + 0.15 9.66 BBSW + 0.29 LiBOR + 0.20 6.00 5.625 4.45 LiBOR + 0.21 6.25 BBSW + 0.22 4.75 7.16 6.50 BBSW + 0.24 7.30 BBSW + 0.40 6.375 7.60 8.23 4.75 7.75 BBSW + 0.75 BBSW + 1.20 BBSW + 2.05 5.125 Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m – 866 737 1,081 1,969 4,653 310 636 946 – – – 329 – 258 297 290 420 262 314 347 100 100 312 190 266 680 259 310 357 500 1,126 6,717 423 907 820 1,081 – 3,231 341 685 1,026 400 455 304 372 830 284 299 300 479 287 350 350 100 100 349 205 287 724 289 310 365 500 1,233 9,172 – 776 737 1,081 1,969 4,563 310 – 310 – – – 329 – 258 300 300 420 – 350 350 100 100 312 – – 680 290 310 365 500 1,126 6,090 397 853 820 1,081 – 3,151 341 – 341 400 455 304 372 830 284 299 300 479 – 350 350 100 100 349 – – 724 289 310 365 500 1,233 8,393 12,316 13,429 10,963 11,885 5,924 1,354 1,434 2,478 1,126 4,748 1,464 2,410 2,744 2,063 6,015 – 1,344 2,478 1,126 4,748 – 2,330 2,744 2,063 12,316 13,429 10,963 11,885 1 fixed until the first call date, 18 April 2013, whereupon the rate resets to the five Year Swap Rate +2.00%, if not called and remains fixed until the next call date, 18 April 2018 whereupon reverts to floating at the three month fRA rate +3.00% and is callable on any interest payment date thereafter. included within the carrying amount are, where appropriate, revaluations associated with fair value hedge accounting or an election to fair value the note through the income statement. 2 callable five years prior to maturity. 3 callable five years prior to maturity and reverts to floating rate if not called. 4 5 On 17 December 2009, ANZ issued 19.7 million convertible preference shares. 6 Loan capital balances held in subsidiary entities eliminated in consolidated accounts. 7 Redeemed at par on 15 January 2010. 8 callable five years prior to maturity. Should the bonds not be called, the coupon rate will be reset to the five year swap rate plus issue margin plus 0.50%. 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. The loan capital, except for the US Trust Securities, UK Stapled Securities, ANZ cPS1 and ANZ cPS2, constitutes Tier 2 capital as defined by APRA for capital adequacy purposes. The US Trust Securities constitute innovative Residual Tier 1 capital, as defined by APRA, for capital adequacy purposes. The UK Stapled Securities, ANZ cPS1 and ANZ cPS2 constitute Non-innovative Residual Tier 1 capital, as defined by APRA, for capital adequacy purposes. Financial Report 129 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 27: Loan capital (continued) US TRUST SEcURiTiES On 27 November 2003, the company issued 1.1 million USD non-cumulative Trust Securities (“US Trust Securities”) at USD1,000 each pursuant to an offering memorandum dated 19 November 2003 raising USD1.1 billion. US Trust Securities comprise two fully paid securities – an interest paying unsecured note (issued by Samson funding Limited, a wholly owned NZ subsidiary of the company) and a fully paid USD1,000 preference share (issued by the company), which are stapled together and issued as a US Trust Security by ANZ capital Trust i or ANZ capital Trust ii (the “Trusts”). investors have the option to redeem the US Trust Security from the Trusts and hold the underlying stapled security. The issue was made in two tranches: USD750 million tranche with a coupon of 5.36% and was issued through ANZ capital Trust ii. After 15 December 2013 and at any coupon date thereafter, ANZ has the discretion to redeem the US Trust Securities for cash. if it does not exercise this discretion, the investor is entitled to require ANZ to exchange the US Trust Security into a number of ANZ ordinary shares based on the formula in the offering memorandum at a 5% discount. USD350 million tranche with a coupon of 4.48% and was issued through ANZ capital Trust i. it had the same conversion and redemption features as the USD750 million tranche but from 15 January 2010. The company redeemed the USD350 million tranche of US Trust Securities on 15 January 2010 at par. Distributions on US Trust Securities are non-cumulative and are payable half yearly in arrears and are funded by payments received by the respective Trusts on the underlying note. Distributions are subject to certain payment tests (i.e. APRA requirements and distributable profits being available). Distributions are expected to be payable on 15 June and 15 December of each year. Dividends are not payable on the preference share while it is stapled to the note. if distributions are not paid on the US Trust Securities, the group may not pay dividends or distributions, or return capital on ANZ ordinary shares or any other share capital or security ranking equal or junior to the preference share component (subject to certain exceptions). At any time in the company’s discretion or upon the occurrence of certain other “conversion events”, such as the failure of the respective Trust to pay in full a distribution within seven business days of the relevant distribution payment date, the notes that are represented by the relevant US Trust Securities will be automatically assigned to a subsidiary of the company and the preference shares that are represented by the relevant US Trust Securities will be distributed to investors in redemption of such US Trust Securities. The distributed preference shares will immediately become dividend paying and holders will receive non-cumulative dividends equivalent to the scheduled payments in respect of the US Trust Securities for which the preference shares were distributed. if the US Trust Securities are not redeemed or bought back prior to the 15 December 2053, they will be converted into preference shares, which in turn will be mandatorily converted into a variable number of ANZ ordinary shares based upon the formula in the offering memorandum. The preference shares forming part of the US Trust Securities rank equally with the ANZ cPS1 and ANZ cPS2 and the preference shares issued in connection with the UK Stapled Securities, and Euro Trust Securities in all respects. Except in limited circumstances, holders of US Trust Securities do not have any right to vote in general meetings of the company. On winding up of the company, the rights of US Trust Security holders will be determined by the preference share component of US Trust Security. These preference shares rank behind all depositors and creditors, but ahead of ordinary shareholders. The US Trust Securities qualify as innovative Residual Tier 1 capital as defined by APRA. UK STAPLED SEcURiTiES On 15 June 2007, the company issued 9,000 non-cumulative, mandatory convertible stapled securities (“UK Stapled Securities”) at £50,000 each pursuant to a prospectus dated 12 June 2007 raising £450 million. UK Stapled Securities comprise two fully paid securities – an interest paying unsecured subordinated £50,000 note issued by the company through its New York Branch and a £50,000 preference share issued by the company, which are stapled together. Distributions on UK Stapled Securities are non-cumulative and are payable half yearly in arrears at a fixed rate of 6.54% (until converted into ANZ ordinary shares or the rate is reset as provided in the prospectus). Distributions are subject to certain payment tests (including APRA requirements and distributable profits being available). Distributions are expected to be payable on 15 June and 15 December of each year. Dividends are not payable on a preference share while it is stapled to a note. if distributions are not paid on UK Stapled Securities, the group may not pay dividends or distributions, or return capital, on ANZ ordinary shares or any other share capital or security ranking equal or junior to the preference share component (subject to certain exceptions). At any time in the company’s discretion or upon the occurrence of certain other events, such as the commencement of proceedings for the winding up of the company, the note component of the UK Stapled Security will be assigned to the company and the holder will retain only the preference share component of the UK Stapled Security. On 15 June 2012 (“conversion date”), or an earlier date under certain circumstances, UK Stapled Securities will mandatorily convert into a variable number of ANZ ordinary shares determined in accordance with the formula in the prospectus at a 5% discount. The mandatory conversion to ANZ ordinary shares is however deferred for five years if the conversion tests set out in the prospectus are not met. The preference shares forming part of the UK Stapled Securities rank equally with the ANZ cPS1 and ANZ cPS2 and the preference shares issued in connection with US Trust Securities, and Euro Trust Securities. Except in limited circumstances, holders of UK Stapled Securities do not have any right to vote in general meetings of the company. As noted above, in a winding up of the company, the note component of the UK Stapled Security will be assigned to the company and the holder will retain only the preference share component of the UK Stapled Security. Accordingly, the rights of investors in UK Stapled Securities in a winding up of the company are the rights conferred by the preference share component of UK Stapled Securities. These preference shares rank behind all depositors and creditors, but ahead of ordinary shareholders. The UK Stapled Securities qualify as Non-innovative Residual Tier 1 capital as defined by APRA. 27: Loan capital (continued) ANZ cONvERTiBLE PREfERENcE ShARES (ANZ cPS) On 30 September 2008, the company issued 10.8 million convertible preference shares (“ANZ cPS1”) at $100 each pursuant to a prospectus dated 4 September 2008 raising $1,081 million (excluding issue costs of $13 million: net raising of $1,068 million). On 17 December 2009, the company issued 19.7 million convertible preference shares (“ANZ cPS2”, together with ANZ cPS1 the “ANZ cPS”) at $100 each pursuant to a prospectus dated 18 November 2009 raising $1,969 million (excluding issue costs of $24 million: net raising of $1,945 million). ANZ cPS are fully-paid, preferred, non-cumulative mandatorily convertible preference shares. ANZ cPS are listed on the Australian Stock Exchange. Distributions on ANZ cPS are non-cumulative and are payable quarterly in arrears on each 15 December, 15 march, 15 June, 15 September and will be franked in line with the franking applied to ANZ ordinary shares. The distribution will be based on a floating distribution rate equal to the aggregate of the 90 day bank bill rate plus a 250 basis point margin (in the case of ANZ cPS1) and 310 basis point margin (in the case of ANZ cPS2), multiplied by one minus the Australian tax rate. At each quarter, the 90 day bank bill rate is reset for the next quarter. Should the distribution not be fully franked, the terms of the security provide for a cash gross up for the amount of the franking benefit not provided. Distributions are subject to the absolute discretion of the Board of Directors of the company and certain payment tests (including APRA requirements and distributable profits being available). if distributions are not paid on ANZ cPS, the group may not pay dividends or distributions, or return capital on ANZ ordinary shares or any other share capital or security ranking equal or junior to the ANZ cPS (subject to certain exceptions). On 16 June 2014 (in the case of ANZ cPS1) or 15 December 2016 (in the case of ANZ cPS2) (each a ‘conversion date’), or an earlier date under certain circumstances, the relevant ANZ cPS will mandatorily convert into a variable number of ANZ ordinary shares determined in accordance with the formula in the prospectus based on $100 divided by the average market price of ordinary shares over a 20 day trading period ending at the conversion date less a 2.5% discount (in the case of ANZ cPS1) or 1.0% discount (in the case of ANZ cPS2). The mandatory conversion to ANZ ordinary shares is however deferred for a quarter if the conversion tests set out in the prospectus are not met. The ANZ cPS rank equally with each other and the preference shares issued in connection with US Trust Securities, UK Stapled Securities and Euro Trust Securities. Except in limited circumstances, holders of ANZ cPS do not have any right to vote in general meeting of the company. in a winding up of the company, the ANZ cPS rank behind all depositors and creditors, but ahead of ordinary shareholders. ANZ cPS qualify as Non-innovative Residual Tier 1 capital as defined by APRA. 130 ANZ Annual Report 2010 Financial Report 131 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 28: Share capital Numbers of issued shares Ordinary shares each fully paid Preference shares each fully paid Total number of issued shares The Company PREfERENcE ShARES 28: Share capital (continued) 2010 2,559,662,425 500,000 2,560,162,425 2009 2,504,540,925 500,000 2,505,040,925 ORDiNARY ShARES Ordinary shares have no par value and entitle holders to receive dividends payable to ordinary shareholders and to participate in the proceeds available to ordinary shareholders on winding up of the company in proportion to the number of fully paid ordinary shares held. On a show of hands every holder of fully paid ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll one vote for each share held. Numbers of issued shares Balance at start of the year Bonus option plan1 Dividend Reinvestment Plan1 Dividend Reinvestment Plan underwriting ANZ employee share acquisition plan ANZ share option plan2 Share placement and Share Purchase Plan3,4,5 Balance at end of year Ordinary share capital Balance at start of the year Dividend Reinvestment Plan1 Dividend Reinvestment Plan underwriting ANZ employee share acquisition plan2 Treasury shares6 iNgA Treasury shares7 ANZ share option plan2 Share placement and Share Purchase Plan3,4,5 Balance at end of year The Company 2010 2,504,540,925 2,481,103 46,750,640 – 3,810,413 2,079,344 – 2009 2,040,656,484 3,928,449 52,386,890 75,000,000 6,224,007 818,805 325,526,290 2,559,662,425 2,504,540,925 Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 19,151 1,007 – 129 (78) (360) 37 – 19,886 12,589 742 1,046 99 – – 14 4,661 19,151 19,151 1,007 – 129 (78) – 37 – 20,246 12,589 742 1,046 99 – – 14 4,661 19,151 1 Refer to note 7 for details of plan. 2 Refer to note 46 for details of plan. 3 On 3 June 2009, shares were issued under a placement to institutions and sophisticated and professional investors. The share placement was made at a fully underwritten offer price of $14.40 per share. The placement was underwritten by Deutsche Bank Ag, Sydney Branch, J.P morgan Australia Limited and UBS Ag, Australia Branch. 4 On 13 July 2009 shares were issued to eligible shareholders in accordance with the terms and conditions of the Share Purchase Plan released to the ASx on 10 June 2009. The shares were 5 6 issued at a price of $14.40 per share. includes capital raising costs of $25 million. includes on-market purchase of shares for settlement of amounts due under share-based compensation plans. in addition, 3,740,873 shares were issued during the September 2010 year to the group’s Employee Share Trust for settlement of amounts due under share-based compensation plans (2009: 5,948,457). As at 30 September 2010, there were 11,472,666 Treasury shares outstanding (2009: 7,721,314). 7 ANZ acquired iNgA on 30 November 2009. iNgA treasury shares include shares held in statutory funds as assets backing policyholder liabilities. iNgA treasury shares outstanding as at 30 September 2010 were 16,710,967. Euro Trust Securities On 13 December 2004, the company issued 500,000 Euro floating Rate Non-cumulative Trust Securities (“Euro Trust Securities”) at €1,000 each pursuant to the offering circular dated 9 December 2004, raising $871 million (at the spot rate at the date of issue, net of issue costs). Euro Trust Securities comprise two fully paid securities – an interest paying unsecured note (issued by ANZ Jackson funding PLc, a United Kingdom subsidiary of the company) and a fully paid, €1,000 preference share (issued by the company), which are stapled together and issued as a Euro Trust Security by ANZ capital Trust iii (the Trust). investors have the option to redeem the Euro Trust Security from the Trust and hold the underlying stapled security. Distributions on Euro Trust Securities are non-cumulative and are payable quarterly in arrears and are funded by payments received by the Trust on the underlying note and/or preference share. The distribution is based upon a floating distribution rate equal to the 3 month EURiBOR rate plus a 66 basis point margin up until 15 December 2014, after which date the distribution rate is the 3 month EURiBOR rate plus a 166 basis point margin. At each payment date the 3 month EURiBOR rate is reset for the next quarter. Distributions are subject to certain payment tests (i.e. APRA requirements and distributable profits being available). Distributions are expected to be payable on 15 march, 15 June, 15 September and 15 December of each year. Dividends are not payable on the preference shares while they are stapled to the note, except for the period after 15 December 2014 when the preference share will pay 100 basis points to fund the increase in the margin. if distributions are not paid on Euro Trust Securities, the group may not pay dividends or distributions, or return capital on ANZ ordinary shares or any other share capital or security ranking equal or junior to the preference share component (subject to certain exceptions). At any time at ANZ’s discretion or upon the occurrence of certain other “conversion events”, such as the failure of the Trust to pay in full a distribution within seven business days of the relevant distribution payment date or the business day prior to 15 December 2053, the notes that are represented by the relevant Euro Trust Securities will be automatically assigned to a branch of the company and the fixed number of preference shares that are represented by the relevant Euro Trust Securities will be distributed to investors in redemption of such Euro Trust Securities. The distributed preference shares will immediately become dividend paying and holders will receive non-cumulative dividends equivalent to the scheduled payments in respect of the Euro Trust Securities for which the preference shares were distributed. The preference shares forming part of each Euro Trust Security rank equally with the ANZ cPS1 and ANZ cPS2 and the preference shares issued in connection with the US Trust Securities and UK Stapled Securities in all respects. Except in limited circumstances, holders of Euro Trust Securities do not have any right to vote in general meetings of the company. On winding up of the company, the rights of Euro Trust Security holders will be determined by the preference share component of the Euro Trust Security. These preference shares rank behind all depositors and creditors, but ahead of ordinary shareholders. The transaction costs arising on the issue of these instruments were recognised directly in equity as a reduction to the proceeds of the equity instruments to which the costs relate. Euro Trust Securities qualify as innovative Residual Tier 1 capital as defined by APRA. Preference share balance at start of year – Euro Trust Securities Preference share balance at end of year – Euro Trust Securities Consolidated The Company 2010 $m 871 871 2009 $m 871 871 2010 $m 871 871 2009 $m 871 871 132 ANZ Annual Report 2010 Financial Report 133 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 29: Reserves and Retained Earnings 29: Reserves and Retained Earnings (continued) a) Foreign currency translation reserve Balance at beginning of the year currency translation adjustments, net of hedges after tax Total foreign currency translation reserve b) Share option reserve1 Balance at beginning of the year Share-based payments Transfer of options lapsed to retained earnings2 Total share option translation reserve c) Available-for-sale revaluation reserve Balance at beginning of the year valuation gain/(loss) recognised after tax cumulative (gain)/loss transferred to the income statement Total available-for-sale revaluation reserve d) Hedging reserve Balance at beginning of the year gains/(loss) recognised after tax Transfer (to)/from income statement Total hedging reserve Total reserves 1 further information about share based payments to employees is disclosed in note 46 to the financial statements. 2 The transfer of balances from the share option and capital reserves to retained earnings represent items of a distributable nature. Retained earnings Balance at beginning of the year Profit attributable to shareholders of the company Transfer of options lapsed from share option reserve1,2 Actuarial gain/(loss) on defined benefit plans after tax3 Adjustments to opening Retained Earnings on adoption of revised accounting standard AASB 3R Ordinary share dividend paid Preference share dividend paid Retained earnings at end of year Total reserves and retained earnings Consolidated 2010 $m 2009 $m (1,725) (1,017) (2,742) (816) (909) (1,725) 69 7 (12) 64 (41) 112 9 80 (90) 138 (37) 11 83 9 (23) 69 (88) 29 18 (41) 79 (106) (63) (90) (2,587) (1,787) The Company 2010 $m (436) (337) (773) 69 7 (12) 64 (18) 45 (22) 5 (109) 84 (48) (73) (777) 2009 $m (153) (283) (436) 83 9 (23) 69 (56) 20 18 (18) 51 (97) (63) (109) (494) Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 14,129 4,501 12 (4) (39) (2,667) (11) 15,921 13,334 13,772 2,943 23 (124) – (2,452) (33) 14,129 12,342 9,950 4,428 12 (18) (39) (2,667) – 11,666 10,889 10,207 2,285 23 (113) – (2,452) – 9,950 9,456 1 further information about share based payments to employees is disclosed in note 46 to the financial statements. 2 The transfer of balances from the share option, general and capital reserves to retained earnings represent items of a distributable nature. 3 ANZ has taken the option available under AASB 119 to recognise actuarial gains/losses on defined benefit superannuation plans directly in retained profits (refer note 1 f(vi) and note 45). a) Foreign currency translation reserve The translation reserve comprises exchange differences, net of hedges, arising on translation of the financial statements of foreign operations, as described in note 1 A(viii). When a foreign operation is sold, attributable exchange differences are recognised in the income Statement. b) Share option reserve The share option reserve arises on the grant of share options to selected employees under the ANZ share option plan. Amounts are transferred out of the reserve and into share capital when the options are exercised. Refer to note 1 c(iii). c) Available-for-sale revaluation reserve changes in the fair value and exchange differences on the revaluation of available-for-sale financial assets are taken to the available-for-sale revaluation reserve. Where a revalued available-for-sale financial asset is sold, that portion of the reserve which relates to that financial asset, is realised and recognised in the income Statement. Where the available-for-sale financial asset is impaired, that portion of the reserve which relates to that asset is recognised in the income Statement. Refer to note 1 E(iii). d) Hedging reserve The hedging reserve represents hedging gains and losses recognised on the effective portion of cashflow hedges. The cumulative deferred gain or loss on the hedge is recognised in the income Statement when the hedged transaction impacts the income Statement. Refer to note 1 E(ii). 30: Non controlling interests Share capital Retained profit Total non-controlling interests Consolidated 2010 $m 36 28 64 2009 $m 39 26 65 134 ANZ Annual Report 2010 Financial Report 135 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 31: capital management ANZ pursues an active approach to capital management, which is designed to protect the interests of depositors, creditors and shareholders. This involves the on-going review and Board approval of the level and composition of the group’s capital base, assessed against the following key policy objectives: Regulatory compliance such that capital levels exceed APRA’s, ANZ’s primary prudential supervisor, minimum prudential capital ratios (PcRs) both at Level 1 (the company and specified subsidiaries) and Level 2 (ANZ consolidated under Australian prudential standards); capital levels are aligned with the risks in the business and to meet strategic and business development plans through ensuring that available capital (i.e. shareholders’ equity including preference shares and Tier 1 loan capital) exceeds the level of Economic capital required to support the Ratings Agency ‘default frequency’ confidence level for a “AA” credit rating category bank. Economic capital is an internal estimate of capital levels required to support risk and unexpected losses above a desired target solvency level; capital levels are commensurate with ANZ maintaining its preferred “AA” credit rating category for senior long-term unsecured debt given its risk appetite outlined in its strategic plan. ANZ’s risk appetite is the level of risk ANZ is prepared to accept in order to achieve its strategic objectives, expressed quantitatively in terms of limits and tolerances that provides a scale against which the Board and management can review ANZ’s risk profile, and directs Regions in the execution of their strategic objectives; and An appropriate balance between maximising shareholder returns and prudent capital management principles. The group achieves these objectives through an internal capital Adequacy Assessment Process (icAAP) whereby the group conducts detailed strategic and capital planning over a medium term time horizon. Annually, ANZ conducts a detailed strategic planning process over a three year time horizon, the outcomes of which are embodied in the Strategic Plan. This process involves forecasting key economic variables which Regions use to determine key financial data for their existing business. New strategic initiatives to be undertaken over the planning period and their financial impact are then determined. These processes are used for the following: Review capital ratios, targets, and levels of different classes of capital against the group’s risk profile and risk appetite outlined in the Strategic Plan. The group’s capital targets reflect the key policy objectives above, and the desire to ensure that under specific stressed economic scenarios that capital levels are sufficient to remain above both Economic capital and PcR requirements. Stress tests are performed under different economic conditions to ensure a comprehensive review of the group’s capital position both before and after mitigating actions. The stress tests determine the level of additional capital (i.e. the ‘capital buffer’ above Pillar 1 minimum capital) needed to absorb losses that may be experienced during an economic downturn. Stress testing is integral to strengthening the predictive approach to risk management and is a key component in managing risks, asset writing strategies and business strategies. it creates greater understanding of the impacts on financial performance through modelling relationships and sensitivities between geographic, industry and business unit exposures under a range of macro economic scenarios. ANZ has a dedicated stress testing team within Risk management that models and reports to management and the Board’s Risk committee on a range of scenarios and stress tests. 136 ANZ Annual Report 2010 Results are subsequently used to: recalibrate the group’s management targets for minimum and operating ranges for its respective classes of capital such that the group will remain compliant with APRA’s PcRs; and identify the level of organic capital generation and hence determine current and future capital requirements for the company (Level 1) and the group (Level 2). from these processes, a capital Plan is developed and approved by the Board which identifies the capital issuance and maturity profile, options around capital products, timing, markets and strategies under differing market and economic conditions. The capital Plan is maintained and updated through a monthly review of forecast financial performance, economic conditions and development of business initiatives and strategies. The Board and senior management are provided with monthly updates of the group’s capital position. Any actions required to ensure ongoing prudent capital management are submitted to the Board for approval. Regulatory environment The group’s regulatory capital calculation is governed by APRA’s Prudential Standards which adopt a risk-based capital assessment framework based on the Basel ii capital measurement standards. This risk-based approach requires eligible capital to be divided by total risk weighted assets (RWAs), with the resultant ratio being used as a measure of a bank’s capital adequacy. APRA determines PcRs for Tier 1 and Total capital, with capital as the numerator and RWAs as the denominator. To ensure that Authorised Deposit-taking institutions (ADis) are adequately capitalised on both a stand-alone and group basis, APRA adopts a tiered approach to the measurement of an ADi’s capital adequacy by assessing the ADis financial strength at three levels: Level 1 – the ADi on a stand-alone basis (i.e. the company and approved subsidiaries which are consolidated to form the ADis’ Extended Licensed Entity); Level 2 – the consolidated banking group (i.e. the consolidated financial group less certain subsidiaries and associates excluded under the prudential standards); and Level 3 – the conglomerate group at the widest level. ANZ is a Level 1 and Level 2 reporter and measures capital adequacy monthly on a Level 1 and Level 2 basis, and is not required to report on a Level 3 basis. Regulatory capital is divided into Tier 1, carrying the highest capital elements, and Tier 2, which has lower capital elements, but still adds to the overall strength of the ADi. Tier 1 capital is comprised of ‘fundamental’ capital, ‘Residual’ capital, and Tier 1 deductions. fundamental capital comprises shareholder’s equity adjusted for items which APRA does not allow as regulatory capital or classifies as lower forms of regulatory capital. fundamental capital includes the following significant adjustments: Reserves exclude the hedging reserve and available-for-sale revaluation reserve, and reserves of insurance and funds management subsidiaries and associates; Retained earnings excludes retained earnings of insurance and funds management subsidiaries and associates, but includes capitalised deferred fees forming part of loan yields that meet the criteria set out in the prudential standard; and 31: capital management (continued) current year net of tax earnings is net of any interim and special dividends paid during the current year and the expected final dividend payment, net of the expected dividend reinvestment under the Dividend Reinvestment Plan and Bonus Option Plan, and excludes profits of insurance and funds management subsidiaries and associates. Residual capital covers Non-innovative and innovative hybrid Tier 1 instruments with limits restricting the volume that can be counted as Tier 1 capital. Tier 1 deductions include amounts deducted solely from Tier 1, mainly intangible assets i.e. goodwill, acquired portfolio of insurance/ investment business and capitalised software; capitalised brokerage and borrowing expenses; and net deferred tax assets; and deductions taken 50% from Tier 1 and 50% from Tier 2, which mainly include the tangible component of investment in other subsidiaries and associates regulated by APRA, or their overseas equivalent, and the amount of Expected Losses (EL) in excess of Eligible Provisions for Loan Losses (net of tax). Tier 2 capital is comprised of Upper and Lower Tier 2 capital less capital deductions taken 50% from Tier 2 capital. Upper Tier 2 capital mainly comprises perpetual subordinated debt instruments, whilst Lower Tier 2 includes dated subordinated debt instruments which have a minimum term of five years. Total capital is the sum of Tier 1 capital and Tier 2 capital. in addition to the prudential capital oversight that APRA conducts over the company and the group, the company’s branch operations and major banking subsidiary operations are overseen by local regulators such as the Reserve Bank of New Zealand, the US federal Reserve and the UK financial Services Authority who may impose minimum capitalisation rates on those operations. Throughout the financial year, the company and the group maintained compliance with the minimum Tier 1 and Total capital ratios set by APRA and the US federal Reserve as well as applicable capitalisation rates set by regulators in countries where the company operates branches and subsidiaries. Regulatory change The Basel committee on Banking Supervision has released a series of consultation papers (Basel iii) containing a number of proposals to strengthen the global capital and liquidity framework to improve the banking sector’s ability to absorb shocks arising from financial and economic stress. The consultation papers aim to increase the quality, quantity, consistency and transparency of the capital base, whilst strengthening the risk coverage of the capital framework by: increasing the minimum level of capital, with new minimum capital targets for core Tier 1 (4.5%), Tier 1 (6.0%) and Total capital (8.0%) to be phased in between 2013 and 2015; increasing the capital buffers that banks are required to hold for stress scenarios and to dampen the impact of pro-cyclical elements of the prudential regulations. A capital conservation buffer of 2.5% and a counter-cyclical buffer of 0.0% to 2.5% will be phased in between 2016 and 2019. failure to maintain the full capital buffers will result in limitations on the amount of current year earnings that can be paid as discretionary bonuses and to Tier 1 and Tier 2 investors as coupons and capital returns; increasing Tier 1 deductions, although a number of the proposals are consistent with the current APRA prudential standards; increasing the focus on fundamental Tier 1 capital and tightening the regulations for Residual Tier 1 and Tier 2 capital instruments including a proposal that at the time of ‘non-viability’, these instruments will be written off, with any potential compensation for investors limited to an issuance of ordinary shares. Existing Tier 1 and Tier 2 instruments that do not have these requirements will be phased out between 2013 and 2022. These proposals are to be supplemented, by yet to be released details around ‘contingent capital’ and ‘bail in’ instruments, which may not initially be prudential capital, but are converted in part or in full into fundamental Tier 1 capital at predetermined trigger points; Supplementing the risk adjusted capital ratio targets with the introduction of a minimum leverage ratio (Tier 1 capital divided by Adjusted Total Assets including off balance sheet exposures) of 3.0% between 2013 and 2018. introducing measures (yet to be released) to address the impact of system risk and inter connectedness risk; improving transparency of reporting capital ratio calculations in the financial statements; and increasing the capital requirements for traded market risk, credit risk, and securitisation transactions. The Basel committee is expected to finalise the majority of the reforms by the end of 2010, for implementation between 2012 and 2019. following the release of the final reforms by the Basel committee, ANZ expects APRA to engage the Australian banking and insurance industry ahead of the development and implementation of revised Australian prudential standards. it is not possible to accurately determine the impacts associated with these reforms on ANZ, including revised operating capital targets, until APRA’s position is finalised. Financial Report 137 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 31: capital management (continued) 32: Assets charged as Security for Liabilities and collateral Accepted as Security for Assets The table below provides the composition of capital used for regulatory purposes and capital adequacy ratios. Regulatory Capital – Qualifying Capital Tier 1 Shareholders’ equity and non-controlling interests Prudential adjustments to shareholders’ equity fundamental Tier 1 capital Non-innovative Tier 1 capital instruments innovative Tier 1 capital instruments gross Tier 1 capital Deductions1 Tier 1 capital Tier 2 Upper Tier 2 capital Subordinated notes2 Deductions Tier 2 capital Total qualifying capital Capital adequacy ratios core Tier 1 Tier 1 Tier 2 Total 2010 $m 2009 $m 34,155 (2,840) 31,315 3,787 1,646 36,748 (10,057) 26,691 1,223 6,619 (3,026) 4,816 32,429 (2,341) 30,088 1,901 2,122 34,111 (7,492) 26,619 1,390 9,082 (2,661) 7,811 31,507 34,430 8.0% 10.1% 1.8% 11.9% 9.0% 10.6% 3.1% 13.7% 1 includes goodwill (excluding OnePath (formerly iNgA) and iNg New Zealand) of $2,910 million (2009: $2,999 million) and $2,043 million intangible component of investment in OnePath (formerly iNgA) and iNg New Zealand. 2 for capital adequacy calculation, subordinated note issues are reduced by 20% of the original amount over the last four years to maturity and are limited to 50% of Tier 1 capital. Regulatory environment – insurance and funds management Business Under APRA’s Prudential Standards, life insurance and funds management activities are de-consolidated for the purposes of calculating capital adequacy and excluded from the risk based capital adequacy framework for the ANZ Level 2 group. The intangible component of the investment in these controlled entities is deducted from Tier 1 capital with the balance of the investment deducted 50% from Tier 1 and 50% from Tier 2 capital. Additionally any profits from these activities included in the group’s results are excluded from the determination of Tier 1 capital to the extent they have not been remitted to the Level 2 group. The group’s life insurance business in Australia is regulated by APRA as a separate business. The Life Act includes a two tiered framework for the calculation of regulatory capital requirements for life insurance companies – “solvency” and “capital adequacy”. There are no regulatory capital requirements for life insurance companies in New Zealand. The group determines the minimum capital requirements for its New Zealand life insurance business according to the professional standard, “Solvency Reserving for Life insurers”, issued by the New Zealand Society of Actuaries. fund managers in Australia are subject to “Responsible Entity” regulation by the Australian Securities and investment commission (“ASic”). The regulatory capital requirements vary depending on the type of Australian financial Services Licence or Authorised Representatives’ Licence held, but a requirement of up to $5 million of net tangible assets applies. APRA supervises approved trustees of superannuation funds and requires them to also maintain net tangible assets of at least $5 million. These requirements are not cumulative where an entity is both an approved trustee for superannuation purposes and a responsible entity. The group’s insurance and funds management companies held assets in excess of regulatory capital requirements at 30 September 2010. Assets charged as security for liabilities The following assets are pledged as collateral: mandatory reserve deposits with local central banks in accordance with statutory requirements. These deposits are not available to finance the group’s day to day operations. Securities provided as collateral for liabilities in standard lending, and stock borrowing and lending activities. These transactions are conducted under terms that are customary to standard lending, and stock borrowing and lending activities. Debenture undertakings covering the assets of Esanda finance corporation Limited (Esanda) and its subsidiaries and UDc finance Limited (UDc). The debenture stock of Esanda and its subsidiaries and UDc is secured by a trust deed and collateral debentures, giving floating charges upon the undertaking of all the tangible assets of the entity, other than land and buildings. All controlled entities of Esanda and UDc have guaranteed the payment of principal, interest and other monies in relation to all debenture stock and unsecured notes issued by Esanda and UDc respectively. The only loans pledged are those in UDc and its subsidiaries. cash placed on deposit with a third party that is provided as collateral for a liability in a structured funding transaction. The funding was raised through a subsidiary, and to achieve more favourable pricing terms, ANZ provided cash collateral, given by the company. collateral provided to central banks. The carrying amounts of assets pledged as security are as follows: Regulatory deposits Securities sold under arrangements to repurchase Assets pledged as collateral under debenture undertakings cash deposited in structured funding transaction Other Consolidated The Company Carrying Amount Related liability Carrying Amount Related liability 2010 $m 1,056 1,977 2,695 840 153 2009 $m 509 3,586 4,665 1,080 97 2010 $m n/a 1,844 1,545 2,000 – 2009 $m n/a 3,586 3,398 2,006 – 2010 $m 616 1,822 – 840 153 2009 $m 330 1,974 – 1,080 97 2010 $m n/a 1,675 – – – 2009 $m n/a 1,974 – – – collateral accepted as security for assets ANZ has accepted cash as collateral on securities loaned to other parties. ANZ has received securities that it is permitted to sell or re-pledge without the event of default by a counterparty. Where the received securities are sold or re-pledged to third parties, ANZ is obliged to return equivalent securities. These transactions are conducted under terms that are customary to standard stock borrowing and lending activities. ANZ has received collateral as part of entering reverse repurchase agreements. These transactions are governed by standard industry agreements. The fair value of collateral received and provided is as follows: Securities lending activities1 cash collateral received on securities loaned fair value of lent securities Equity financing activities1 cash collateral received on securities borrowed fair value of received securities Collateral received on standard repurchase agreement fair value of assets which can be sold Amount of collateral that has been resold 1 Details of collateral agreements for derivatives are included in note 12. Consolidated The Company 2010 $m – – – – 2009 $m 746 740 – – 2010 $m – – – – 2009 $m 746 740 – – 7,756 1,196 5,700 3,340 7,554 1,011 4,811 2,488 138 ANZ Annual Report 2010 Financial Report 139 cONcENTRATiONS Of cREDiT RiSK concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities within the same geographic region, or when they have similar risk characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The group monitors its portfolios, to identify and assess risk concentrations. The group’s strategy is to maintain well-diversified credit portfolios focused on achieving an acceptable risk-return balance. credit risk portfolios are actively monitored and frequently reviewed to identify, assess and guard against unacceptable risk concentrations. concentration analysis will typically include geography, industry, credit product and risk grade. The group also applies single customer counterparty limits to protect against unacceptably large exposures to single name risk. These limits are established based on a combination of factors including nature of counterparty, probability of default and collateral provided. NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management STRATEgY iN USiNg fiNANciAL iNSTRUmENTS financial instruments are fundamental to the group’s business, constituting the core element of its operations. Accordingly, the risks associated with financial instruments are a significant component of the risks faced by the group. financial instruments create, modify or reduce the credit, market (including traded or fair value risks and non-traded or interest and foreign currency related risks) and liquidity risks of the group’s balance sheet. These risks, and the group’s objectives, policies and processes for managing and methods used to measure such risks are outlined below. cREDiT RiSK credit risk is the risk of financial loss resulting from the failure of ANZ’s customers and counterparties to honour or perform fully the terms of a loan or contract. The group assumes credit risk in a wide range of lending and other activities in diverse markets and in many jurisdictions. credit risks arise not only from traditional lending to customers, but also from inter-bank, treasury, international trade and capital market activities around the world. The group has an overall objective of sound growth for appropriate returns. The credit risk principles of the group are set by the Board and are implemented and monitored within a tiered structure of delegated authority designed to oversee multiple facets of credit risk, including business writing strategies, credit policies/controls, portfolio monitoring and risk concentrations. cREDiT RiSK mANAgEmENT OvERviEW The credit risk management framework ensures a consistent approach is applied across the group in measuring, monitoring and managing the credit risk appetite set by the Board. The Board is assisted and advised by the Board Risk committee in discharging its duty to oversee credit risk. The Board Risk committee sets the credit risk appetite, credit principles and credit strategies, as well as approving credit transactions beyond the discretion of executive management. Responsibility for the management and oversight of the credit risk framework (including the risk appetite) resides with the credit and market Risk committee (cmRc), which is an executive management committee comprising senior risk, business and group executives, chaired by the chief Risk Officer (cRO). central to the group’s management of credit risk is the existence of an independent credit risk management function that is staffed by risk specialists. independence is achieved by having all credit risk staff ultimately report to the cRO, even where they are embedded in business units. The primary responsibility for prudent and profitable management of credit risk assets and customer relationships rests with the business units. The authority to make credit decisions is delegated by the Board to the cEO who in turn delegates authority to the cRO. The cRO in turn delegates some of his credit discretion to individuals as part of a ‘cascade’ of authority from senior to the most junior credit officers. individuals are required to complete appropriate ongoing accreditation training in order to be granted and retain a credit discretion. credit discretions are reviewed on an annual basis, and may be varied based on the holder’s performance. The group has two main approaches to assessing credit risk arising from transactions: The larger and more complex credit transactions are assessed on a judgemental credit basis. Rating models provide a consistent and structured assessment, with judgement required around the use of out-of-model factors. credit approval for judgemental lending is typically on a dual approval basis, jointly by the business writer in the business unit and an independent credit officer. Programmed credit assessment typically covers retail and some small business lending, and refers to the automated assessment of credit applications using a combination of scoring (application and behavioural), policy rules and external credit reporting information. This highly automated risk assessment process means that sole approval discretions are the norm, with assessors reviewing the decision tool recommendation. central and divisional credit risk teams perform key roles in portfolio management such as the development and validation of credit risk measurement systems, loan asset quality reporting, stress testing, and the development of credit policies. credit policies and procedures cover all aspects of the credit life cycle such as transaction structuring, risk grading, initial approval, ongoing management and problem debt management, as well as specialist policy topics. The group’s grading system is fundamental to the management of credit risk, seeking to measure the probability of default (PD), the exposure at default (EAD) and the loss in the event of default (LgD) for all transactions. from an operational perspective, the group’s credit grading system has two separate and distinct dimensions that: measure the PD, which is expressed by a 27-grade customer credit Rating (ccR), reflecting the ability to service and repay debt. Within the programmed credit assessment sphere, the PD is typically expressed as a score which maps back to the PD. measure the LgD, which is expressed by a Security indicator (Si) ranging from A to g. The Si is calculated by reference to the percentage of loan covered by security which can be realised in the event of default. The security-related Sis are supplemented with a range of other Sis to cover situations where ANZ’s LgD research indicates certain transaction characteristics have different recovery outcomes. Within the programmed credit assessment sphere, exposures are grouped into large homogenous pools – and the LgD is assigned at the pool level. The development and regular validation of rating models is undertaken by specialist central risk teams. The outputs from these models drive many day-to-day credit decisions, such as origination, pricing, approval levels, regulatory capital adequacy, economic capital allocation and provisioning. The risk grading process includes monitoring of model-generated results to ensure appropriate judgement is exercised (such as overrides to take into account any out-of-model factors). 33: financial Risk management (continued) cOLLATERAL mANAgEmENT collateral is used to mitigate credit risk, as the secondary source of repayment in case the counterparty cannot meet its contractual repayment obligations. ANZ credit principles specify to only lend when the counterparty has the capacity and ability to repay, and the group sets limits on the acceptable level of credit risk. Acceptance of credit risk is firstly based on the counterparty’s assessed capacity to meet contractual obligations (such as the scheduled repayment of principal and interest). in certain cases, such as where the customer risk profile is considered very sound or by the nature of the product (for instance, small limit products such as credit cards), a transaction may not be supported by collateral. for some products, the collateral provided is fundamental to its structuring so is not strictly the secondary source of repayment. for example, lending secured by trade receivables is typically repaid by the collection of those receivables. The most common types of collateral typically taken by ANZ include: Security over residential, commercial, industrial or rural property; fixed and floating charges over business assets; Security over specific plant and equipment; charges over listed shares, bonds or securities; charges over cash deposits; and guarantees and pledges. credit policy and procedures set out the acceptable types of collateral, as well as a process by which additional instruments and/or asset types can be considered for approval. ANZ’s credit risk modelling areas use historical internal loss data and other relevant external data to assist in determining the discount that each type would be expected to incur in a forced sale. The discounted value is used in the determination of the Si for LgD purposes. in the event of customer default, any loan security is usually held as mortgagee in possession while the group is actively seeking to realise it. Therefore the group does not usually hold any real estate or other assets acquired through the enforcement of security. The group generally uses master agreements with its counterparties for derivatives activities. generally, international Swaps and Derivatives Association (iSDA) master agreements will be used. Under the iSDA master Agreement, if a default of counterparty occurs, all contracts with the counterparty are terminated. They are then settled on a net basis at market levels current at the time of default. in addition to the terms noted above, ANZ’s preferred practice is to use a credit Support Annex (cSA) to the iSDA master agreement. Under a cSA, open derivative positions with the counterparty are aggregated and cash collateral is exchanged daily. The collateral is provided by the counterparty that is out of the money. Upon termination of the trade, payment is required only for the final daily mark-to-market movement rather than the mark-to-market movement since inception. 140 ANZ Annual Report 2010 Financial Report 141 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) concentrations of credit risk analysis composition of financial instruments that give rise to credit risk by industry: 33: financial Risk management (continued) concentrations of credit risk analysis (continued): composition of financial instruments that give rise to credit risk by industry (continued): Consolidated Australia Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other New Zealand Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other liquid assets and due from other financial institutions Trading and AFS1 assets Derivatives loans and advances and acceptances Other financial assets2 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m Credit related commitments3 2009 2010 $m $m Total 2010 $m 2009 $m 8 49 2 – 25 22 – – 37 5 21 46 184 14 9 182 139 67 95 289 115 51 21 11,557 5,200 4,586 10,099 5,507 4,519 164 74 65 246 5,456 5,395 77 2,714 1,805 16,906 18,967 25,759 25,413 7,528 8,694 108 85 46 38 46 73 6,216 2,669 3,978 6,557 3,181 3,625 18,121 8,064 8,747 17,065 8,821 8,212 2,402 2,684 8,270 8,553 6,724 4,484 59,739 59,436 7,067 71 – 3 5 3 164 2 4,691 73 – 1 18 8 149 36 14,159 346 – 89 132 80 8 3,776 10,054 434 – 68 180 133 – 3,288 184 566 – 586 160 289 392 413 124 437 133 7,184 142 8,401 – 175,662 158,750 22,454 8,633 4,525 5,935 8,796 22,614 8,412 4,847 5,519 8,506 593 156 302 323 650 2 102 2,495 321 119 69 78 121 1 71 1,339 189 73 38 50 75 198 9,070 36,155 7,637 3,462 2,737 5,250 6,220 279 7,559 15,291 21,743 16,975 17,339 31,565 214,312 191,654 30,487 31,250 12,716 12,290 7,373 8,025 12,153 11,411 18,938 19,038 7,182 3,656 2,367 5,696 6,092 10,088 6,829 35,605 33,513 28,939 28,431 267,204 251,850 3,795 2,124 92,718 84,927 438,349 407,673 37 – – – 38 2 – – 1 1 – – – – – 39 96 15 2 30 71 11 2 23 14,529 590 764 16,835 710 702 840 837 108 4 6 6 1,376 3,668 2,383 3,396 5,361 6,287 1,369 1,074 181 6 42 – 24 80 4 42 – 31 66 – 2 72 5 15 5 4,248 15 – – 2 16 – 159 1,128 1 – – – 6 – 32 241 93 – 46 53 114 15 256 144 79 – 30 61 66 5 145 1,089 2,364 42,436 5,794 1,099 1,369 931 1,187 1,169 2,307 45,251 6,817 1,318 1,293 1,413 1,125 1,611 3,904 6,825 4,602 6,322 6,924 74,361 80,851 8 18 316 43 8 10 7 10 725 185 8 8 9 12 12 26 500 75 14 14 15 13 1,097 86 503 378 898 610 1,460 5,828 869 705 383 976 1,382 1,195 326 433 15,868 696 1,275 18,324 1,057 1,145 367 1,254 1,275 994 11,568 15,431 617 731 8,519 1,135 908 466 795 808 6,202 3,992 48,580 6,776 1,947 1,896 1,971 2,994 3,101 3,210 54,270 8,059 2,373 1,850 2,243 2,128 891 15,175 17,294 105,019 114,466 Consolidated Asia Pacific, Europe & America Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other Consolidated – aggregate Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other liquid assets and due from other financial institutions Trading and AFS1 assets Derivatives loans and advances and acceptances Other financial assets2 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m Credit related commitments3 2009 2010 $m $m Total 2010 $m 2009 $m 13 – 6 – 1 – – – – – – – 10 3 40 – 22 2 16 3 27 1 7 8 635 629 232 756 1,477 524 207 681 12,145 16,156 5,445 4,853 2,024 1,513 1,785 1,526 80 167 2 – – 13 63 21 220 6 – – – – 5 74 5,558 70 – 30 5 1 1 272 3,863 39 – 22 – 93 – 69 1 162 – 15 2 50 88 176 – 223 – 27 1 26 63 153 331 6,570 4,246 2,207 653 1,627 3,004 3,266 321 4,720 2,355 1,454 360 1,477 2,064 2,241 26 26 10 31 74 14 272 176 91 27 67 124 135 19 7 3 9 20 4 61 30 19 5 19 27 27 4,947 896 1,506 2,093 479 923 5,643 1,553 1,770 3,627 1,014 1,180 323 401 1,113 1,099 5,570 5,354 27,043 29,422 1,231 12,546 5,700 688 316 806 6,079 3,013 1,085 10,573 460 237 303 732 4,584 2,417 7,214 19,787 10,124 3,031 1,003 2,564 9,359 6,883 5,493 15,622 2,845 1,759 669 2,346 6,742 4,981 12,510 16,462 11,382 8,992 2,560 2,049 25,941 19,406 1,073 250 43,621 29,641 97,087 76,800 58 49 8 – 64 23 – – 38 5 21 46 193 17 49 221 257 84 113 322 213 63 30 26,721 6,419 5,582 28,411 6,741 5,428 277 7,052 6,913 16,235 21,629 24,734 27,216 33,144 33,213 10,682 11,294 7,153 280 2 27 85 21 269 23 4,942 145 – 3 90 13 169 115 23,965 431 – 119 139 97 9 4,207 15,045 474 – 90 180 233 – 3,389 425 821 – 647 215 453 495 846 268 739 1,553 16,118 1,632 15,428 – 222,344 206,356 30,725 10,311 7,294 9,412 12,162 30,615 10,164 7,843 9,454 12,959 650 218 394 391 948 298 104 81 114 363 24 392 2,987 455 154 146 209 266 290 61 49 12,260 3,651 5,987 9,845 3,986 4,981 39,632 10,313 11,792 39,016 10,892 10,537 64 3,103 3,452 10,637 10,927 105 13,192 10,832 98,350 104,289 17 158 1,869 283 92 71 92 115 2,039 23,076 47,683 9,194 4,483 3,926 12,305 10,615 23,885 35,159 1,981 18,863 35,807 41,118 40,542 273,016 248,769 40,305 41,057 8,554 15,758 15,240 4,867 11,568 12,485 3,564 21,139 22,741 11,075 26,047 28,915 9,318 1 Available-for-sale assets. 2 mainly comprises trade dated assets and accrued interest. 3 credit related commitments comprise undrawn facilities and customer contingent liabilities. Gross Total 24,209 27,194 53,812 47,107 37,821 37,404 367,506 352,107 5,593 3,265 151,514 131,862 640,455 598,939 individual provision for credit impairment collective provision for credit impairment – – – – – – – – – – – – (1,849) (1,512) (2,577) (2,552) – – – – (26) (14) (1,875) (1,526) (576) (448) (3,153) (3,000) 24,209 27,194 53,812 47,107 37,821 37,404 363,080 348,043 5,593 3,265 150,912 131,400 635,427 594,413 income yet to mature capitalised brokerage/ mortgage origination fees – – – – – – – – – – – (2,262) (2,372) – 600 560 – – – – – – – (2,262) (2,372) – 600 560 24,209 27,194 53,812 47,107 37,821 37,404 361,418 346,231 5,593 3,265 150,912 131,400 633,765 592,601 Excluded from analysis above4 2,793 3,108 445 459 – – – – – – – – 3,238 3,567 27,002 30,302 54,257 47,567 37,821 37,404 361,4185 346,2315 5,593 3,265 150,912 131,400 637,003 596,168 1 Available-for-sale assets. 2 mainly comprises trade dated assets and accrued interest. 3 credit related commitments comprise undrawn facilities and customer contingent liabilities. 4 Equity instruments and cash are excluded from maximum exposure amount. 5 Excludes individual and collective provisions for credit impairment held in respect of credit related commitments. 142 ANZ Annual Report 2010 Financial Report 143 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) concentrations of credit risk analysis (continued): composition of financial instruments that give rise to credit risk by industry (continued): 33: financial Risk management (continued) concentrations of credit risk analysis (continued): composition of financial instruments that give rise to credit risk by industry (continued): The Company Australia Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance4 government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other New Zealand Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other liquid assets and due from other financial institutions Trading and AFS1 assets Derivatives loans and advances and acceptances Other financial assets2 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m Credit related commitments3 2009 2010 $m $m Total 2010 $m 2009 $m 8 48 2 – 24 21 – – 37 4 21 46 29 14 9 181 139 67 94 288 114 51 21 9,677 5,191 4,578 10,073 5,493 4,507 245 5,447 5,382 2,593 1,684 16,767 18,931 29,500 28,077 8,291 9,776 92 49 44 52 79 68 37 31 37 66 6,022 2,669 3,978 6,550 3,178 3,621 15,975 8,028 8,717 16,858 8,794 8,189 2,402 2,681 8,235 8,526 6,724 4,637 63,954 63,171 6,969 70 – 3 5 3 162 2 4,626 72 – 1 17 8 147 36 14,060 344 – 88 131 79 8 3,621 10,043 434 – 67 180 133 – 3,286 184 567 – 586 160 288 392 413 123 435 131 7,174 142 8,371 – 175,359 158,347 22,397 8,599 4,451 5,920 8,771 22,575 8,397 4,773 5,508 8,480 590 155 301 321 648 2 68 1,671 215 80 45 52 82 1 57 1,076 152 58 30 40 61 198 9,070 36,155 7,637 3,462 2,734 5,249 6,217 279 7,551 15,214 21,546 16,920 17,293 31,531 213,185 190,954 30,374 31,104 12,661 12,235 7,287 7,922 12,118 11,371 18,891 18,815 7,167 3,652 2,364 5,690 6,089 9,865 6,636 35,206 33,308 32,678 31,081 265,583 252,229 2,531 1,714 92,517 84,990 438,380 409,957 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 381 28 – – – – – – – – – – – – – – – – 381 28 – – – – – – – 7,663 – – – – – 7,663 – – – – – – – 7,194 – – – – – 7,194 – – – – – – – 226 – – – – – 226 – – – – – – – 271 – – – – – 271 – – – – – – – 48 – – – – – 48 – – – – – – – 28 – – – – – 28 – – – – – – – – 381 28 – – 7,937 – – – – – 8,318 – – 7,493 – – – – – 7,521 1 Available-for-sale assets. 2 mainly comprises trade dated assets and accrued interest. 3 credit related commitments comprise undrawn facilities and customer contingent liabilities. 4 includes amounts due from other group entities. The Company Asia Pacific, Europe & America Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance4 government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other The Company – aggregate Agriculture, forestry fishing and mining Business Services construction Entertainment, Leisure and Tourism financial, investment and insurance4 government and Official institutions manufacturing Personal Lending Property Services Retail Trade Transport and Storage Wholesale trade Other liquid assets and due from other financial institutions Trading and AFS1 assets Derivatives loans and advances and acceptances Other financial assets2 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m Credit related commitments3 2009 2010 $m $m Total 2010 $m 2009 $m 13 – 1 – – – – – – – – – 9 3 38 – 10 1 7 1 23 1 6 7 391 442 104 585 1,223 318 89 423 11,383 15,643 5,031 4,476 897 1,403 1,555 1,271 68 164 2 – – 13 54 21 197 6 – – – – 5 70 4,388 67 – 29 5 1 1 170 2,522 37 – 21 – 88 – 60 – 71 – 6 1 22 38 78 – 199 – 26 – 24 60 143 277 5,806 2,961 2,193 437 1,329 2,599 2,648 255 3,830 1,340 1,402 162 1,052 1,617 2,239 11,719 15,921 9,692 7,254 1,132 1,892 21,327 15,221 21 48 3 – 24 21 – – 37 4 21 46 38 17 47 181 149 68 101 289 137 52 27 10,068 5,633 4,682 11,296 5,811 4,796 252 6,032 5,805 16 18 4 24 68 12 242 123 91 18 55 108 110 889 108 67 48 76 15 4 1 5 17 3 48 17 18 2 13 20 21 4,466 837 1,448 1,721 432 917 4,896 1,298 1,564 2,991 758 1,051 284 366 894 801 5,242 5,199 24,176 28,009 1,186 11,668 4,856 663 247 715 5,666 2,304 1,086 10,233 66 241 201 700 4,294 1,035 5,931 18,018 7,942 2,982 708 2,135 8,466 5,332 4,063 14,353 1,423 1,708 365 1,877 5,996 3,568 184 39,582 26,491 84,341 66,963 83 41 32 42 10,488 3,506 5,426 8,271 3,610 4,538 20,871 9,325 10,281 19,849 9,552 9,240 2,686 3,047 9,129 9,327 13,976 17,327 21,798 23,407 30,778 29,508 9,846 11,047 147 83 11,966 9,836 88,511 91,208 7,038 234 2 3 5 16 216 23 4,823 78 – 1 17 8 152 106 18,448 411 – 117 135 80 9 3,791 12,565 471 – 88 180 221 – 3,346 184 638 – 592 161 310 430 491 123 634 408 12,980 397 12,201 – 185,983 166,881 23,799 8,761 5,503 7,537 11,010 24,768 8,834 6,102 8,107 11,129 616 155 325 381 791 14 310 2,020 306 98 100 160 192 3,646 4 103 1,364 170 60 43 60 82 1,384 20,738 41,059 8,300 3,709 3,449 10,915 8,521 19,277 27,477 1,365 17,784 31,273 35,311 31,625 229,064 199,870 32,082 34,086 13,026 12,943 9,164 10,057 18,114 19,837 22,459 24,147 7,408 3,853 3,064 9,984 7,124 2,169 132,147 111,509 531,039 484,441 Gross Total 21,584 22,557 44,898 40,561 34,191 33,001 294,573 274,644 individual provision for credit impairment collective provision for credit impairment – – – – – – – – – – – – (1,253) (1,050) (1,950) (1,886) – – – – (20) (12) (1,273) (1,078) (436) (352) (2,386) (2,511) 21,584 22,557 44,898 40,561 34,191 33,001 291,370 271,708 3,646 2,169 131,691 111,145 527,380 481,141 income yet to mature capitalised brokerage/ mortgage origination fees – – – – – – – – – – – (2,007) (2,102) – 566 505 – – – – – – – (2,007) (2,102) – 566 505 21,584 22,557 44,898 40,561 34,191 33,001 289,929 270,111 3,646 2,169 131,691 111,145 525,939 479,544 Excluded from analysis above5 1,082 878 380 403 – – – – – – – – – 1,462 1,281 22,666 23,435 45,278 40,964 34,191 33,001 289,9296 270,1116 3,646 2,169 131,691 111,145 527,401 480,825 1 Available-for-sale assets. 2 mainly comprises trade dated assets and accrued interest. 3 credit related commitments comprise undrawn facilities and customer contingent liabilities. 4 5 Equity instruments and cash are excluded from maximum exposure amount. 6 Excludes individual and collective provisions for credit impairment held in respect of credit related commitments. includes amounts due from other group entities. 144 ANZ Annual Report 2010 Financial Report 145 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) cREDiT QUALiTY 33: financial Risk management (continued) maximum exposure to credit risk (continued) maximum exposure to credit risk for financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. in certain circumstances, there may be differences between the carrying amounts reported on the balance sheet and the amounts reported in the tables below. Principally, these differences arise in respect of financial assets that are subject to risks other than credit risk, such as equity investments which are primarily subject to market risk, or bank notes and coins. for contingent exposures, the maximum exposure to credit risk is the maximum amount the group would have to pay if the instrument is called upon. for undrawn facilities, the maximum exposure to credit risk is the full amount of the committed facilities. The following tables present the maximum exposure to credit risk of on-balance sheet and off-balance sheet financial assets before taking account of any collateral held or other credit enhancements. Consolidated Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets2 Undrawn facilities contingent facilities Total Maximum exposure to credit risk 2010 $m 18,728 5,481 33,515 37,821 20,297 2009 $m 22,209 4,985 30,991 37,404 16,116 2009 $m 3,108 – – – 459 Reported Excluded1 2010 $m 21,521 5,481 33,515 37,821 20,742 2009 $m 25,317 4,985 30,991 37,404 16,575 262,807 73,077 24,932 5,593 247,211 79,607 18,951 3,265 2010 $m 2,793 – – – 445 – – – – 485,489 464,306 3,238 3,567 482,251 460,739 124,029 27,485 106,644 25,218 151,514 131,862 – – – – – – 124,029 27,485 106,644 25,218 151,514 131,862 637,003 596,168 3,238 3,567 633,765 592,601 The Company Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets2 Undrawn facilities contingent facilities Total Reported Excluded1 Maximum exposure to credit risk 2010 $m 18,530 4,136 28,305 34,191 16,973 2009 $m 20,199 3,236 27,410 33,001 13,554 261,258 7,655 20,560 3,646 247,617 7,199 14,931 2,169 2010 $m 1,082 – – – 380 – – – – 2009 $m 878 – – – 403 2010 $m 17,448 4,136 28,305 34,191 16,593 2009 $m 19,321 3,236 27,410 33,001 13,151 – – – – 261,258 7,655 20,560 3,646 247,617 7,199 14,931 2,169 395,254 369,316 1,462 1,281 393,792 368,035 106,403 25,744 88,006 23,503 132,147 111,509 – – – – – – 106,403 25,744 88,006 23,503 132,147 111,509 527,401 480,825 1,462 1,281 525,939 479,544 – – – – 262,807 73,077 24,932 5,593 247,211 79,607 18,951 3,265 includes bank notes and coins and cash at bank within liquid assets and equity instruments within available-for-sale financial assets. 1 2 mainly comprises trade dated assets and accrued interest. includes bank notes and coins and cash at bank within liquid assets and equity instruments within available-for-sale financial assets. 1 2 mainly comprises trade dated assets and accrued interest. 146 ANZ Annual Report 2010 Financial Report 147 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) 33: financial Risk management (continued) DiSTRiBUTiON Of fiNANciAL ASSETS BY cREDiT QUALiTY The group has a comprehensive rating system that is used to quantify credit risk. The use of masterscales ensures consistency across exposure types at the group, providing a consistent framework for reporting and analysis. credit quality of financial assets neither past due nor impaired The credit quality of financial assets is managed by the group using internal ccRs based on their current probability of default. The group’s masterscales are mapped to external rating agency scales, to enable wider comparisons. All customers with whom ANZ has a credit relationship including guarantors, are assigned a ccR or score at origination either by programmed credit assessment or by judgemental assessment. in addition, the ccR or score is reviewed on an ongoing basis to ensure it accurately reflects the credit risk of the customer and the prevailing economic conditions. The group’s risk grade profile therefore changes dynamically through new lending, repayment and/or existing counterparty movements in either risk or volume. internal rating Strong credit profile customers that have demonstrated superior stability in their operating and financial performance over the long-term, and whose debt servicing capacity is not significantly vulnerable to foreseeable events. This rating broadly corresponds to ratings “Aaa” to “Baa3” and “AAA” to “BBB–” of moody’s and Standard & Poor respectively. Restructured items Restructured items are facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk. Satisfactory risk customers that have consistently demonstrated sound operational and financial stability over the medium to long- term, even though some may be susceptible to cyclical trends or variability in earnings. This rating broadly corresponds to ratings “Ba2” to “Ba3” and “BB” to “BB–” of moody’s and Standard & Poor respectively. Sub-standard but not past due or impaired customers that have demonstrated some operational and financial instability, with variability and uncertainty in profitability and liquidity projected to continue over the short and possibly medium term. This rating broadly corresponds to ratings “B1” to “caa” and “B+” to “ccc” of moody’s and Standard & Poor respectively. Consolidated Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 The Company Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 Neither past due nor impaired 2010 $m 18,728 5,481 33,515 37,752 20,297 2009 $m 22,209 4,985 30,991 37,272 16,116 – – – – – – – – – – 249,916 69,283 23,556 5,593 236,197 76,281 17,862 3,265 151,220 131,459 8,938 2,236 689 – – 7,489 2,352 528 – – 615,341 576,637 11,863 10,369 Neither past due nor impaired 2010 $m 17,448 4,136 28,305 34,122 16,593 2009 $m 19,321 3,236 27,410 32,869 13,151 – – – – – – – – – – Past due but not impaired Restructured Impaired Total 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m – – – 18 – 116 7 – – – 141 – – – 5 – 293 1 374 – – 673 – – – 51 – 3,837 1,551 687 – 294 2009 $m – – – 127 – 2010 $m 18,728 5,481 33,515 37,821 20,297 2009 $m 22,209 4,985 30,991 37,404 16,116 3,232 262,807 247,211 79,607 73,077 18,951 24,932 3,265 5,593 403 151,514 131,862 973 187 – 6,420 4,922 633,765 592,601 Past due but not impaired Restructured Impaired Total 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m – – – 127 – 2010 $m 17,448 4,136 28,305 34,191 16,593 2009 $m 19,321 3,236 27,410 33,001 13,151 – – – 51 – 248,618 236,625 6,992 14,305 2,169 131,878 111,132 7,350 19,514 3,646 8,828 272 487 – – 7,489 199 328 – – 511,610 467,210 9,587 8,016 3,696 33 558 – 270 3,210 261,258 247,617 7,199 7,655 14,931 20,560 2,169 3,646 377 132,147 111,509 8 92 – 504 4,608 3,814 525,939 479,544 – – – 5 – 293 – 206 – – – – – 18 – 116 – – – – 134 1 mainly comprises trade dated assets and accrued interest. 2 comprises undrawn facilities and customer contingent liabilities. Consolidated Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 The Company Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 1 mainly comprises trade dated assets and accrued interest. 2 comprises undrawn facilities and customer contingent liabilities. Strong credit profile Satisfactory risk 2010 $m 18,182 4,880 32,466 36,464 19,026 2009 $m 21,631 4,959 30,570 35,317 15,181 2010 $m 468 424 1,017 775 1,271 2009 $m 368 20 421 1,336 931 Sub-standard but not past due or impaired 2010 $m 78 177 32 513 – 2009 $m 210 6 – 619 4 Total 2010 $m 18,728 5,481 33,515 37,752 20,297 2009 $m 22,209 4,985 30,991 37,272 16,116 178,188 40,909 12,545 5,125 123,083 167,814 51,911 9,987 2,842 105,167 59,057 22,957 9,227 385 24,544 55,723 19,891 6,431 342 23,072 12,671 5,417 1,784 83 3,593 12,660 4,479 1,444 81 3,220 249,916 69,283 23,556 5,593 151,220 236,197 76,281 17,862 3,265 131,459 470,868 445,379 120,125 108,535 24,348 22,723 615,341 576,637 Strong credit profile Satisfactory risk 2010 $m 17,050 3,914 27,274 33,127 16,264 2009 $m 18,970 3,211 27,141 31,322 13,093 2010 $m 340 214 999 532 329 2009 $m 144 20 269 986 58 Sub-standard but not past due or impaired Total 2010 $m 58 8 32 463 – 2009 $m 207 5 – 561 – 2010 $m 17,448 4,136 28,305 34,122 16,593 2009 $m 19,321 3,236 27,410 32,869 13,151 178,188 5,871 11,786 3,315 109,789 168,156 6,487 9,199 1,859 90,469 57,854 1,279 6,752 275 19,724 55,809 418 4,283 254 18,397 12,576 200 976 56 2,365 12,660 87 823 56 2,266 248,618 7,350 19,514 3,646 131,878 236,625 6,992 14,305 2,169 111,132 406,578 369,908 88,298 80,637 16,734 16,665 511,610 467,210 148 ANZ Annual Report 2010 Financial Report 149 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) 33: financial Risk management (continued) Ageing analysis of financial assets that are past due but not impaired Ageing analysis of past due loans is used by the group to measure and manage emerging credit risks. financial assets that are past due but not impaired include those which are assessed, approved and managed on a portfolio basis within a centralised environment (for example credit cards and personal loans) that can be held on a productive basis until they are 180 days past due, as well as those which are managed on an individual basis. A large portion of retail credit exposures, such as residential mortgages, are generally well secured. That is, the value of associated security is sufficient to cover amounts outstanding. As at 30 September 2010 Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America1 Other financial assets2 credit related commitments3 As at 30 September 2009 Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America1 Other financial assets2 credit related commitments3 Consolidated The Company 1-5 days $m 6-29 days $m 30-59 days $m 60-89 days $m >90 days $m Total $m 1-5 days $m 6-29 days $m 30-59 days $m 60-89 days $m >90 days $m Total $m – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,528 739 – – – 4,223 788 483 – – 1,322 347 – – – 631 124 123 – – 1,234 238 83 – – 8,938 2,236 689 – – 1,523 68 – – – 4,215 134 355 – – 1,303 38 – – – 624 16 82 – – 1,163 16 50 – – 8,828 272 487 – – 2,267 5,494 1,669 878 1,555 11,863 1,591 4,704 1,341 722 1,229 9,587 Consolidated The Company 1-5 days $m 6-29 days $m 30-59 days $m 60-89 days $m >90 days $m Total $m 1-5 days $m 6-29 days $m 30-59 days $m 60-89 days $m >90 days $m Total $m – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,478 665 – – – 3,376 820 322 – – 1,110 315 – – – 457 187 42 – – 1,068 365 164 – – 7,489 2,352 528 – – 1,478 33 – – – 3,376 126 187 – – 1,110 22 – – – 457 9 18 – – 1,068 9 123 – – – – – – – – 7,489 199 328 – – 2,143 4,518 1,425 686 1,597 10,369 1,511 3,689 1,132 484 1,200 8,016 Estimated value of collateral for financial assets that that are past due but not impaired collateral provided as security is valued conservatively on a realistically recoverable basis assuming an event of default, and such valuations are updated on a regular basis with the frequency varying depending on the nature of the security. The adequacy of security valuations must also be considered at each customer review. in order to calculate the Si for a transaction, the value of a collateral item is reduced by an extension ratio which reduces its market value to a realisable value assuming a downturn scenario. Extension ratios have been determined based on analysis of historical loss information. for the purposes of this disclosure, where security is valued at more than the corresponding credit exposure, coverage is capped at the value of the credit exposure. Consolidated Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 Cash Real estate Other Total value of collateral 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m Credit exposure 2010 $m 2009 $m – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6,435 1,591 193 – – 5,238 1,606 76 – – 1,804 241 234 – – 1,501 320 287 – – 8,239 1,832 427 – – 6,739 1,926 363 – – 8,938 2,236 689 – – 7,489 2,352 528 – – Unsecured portion of credit exposure 2010 $m 2009 $m – – – – – 699 404 262 – – – – – – – 750 426 165 – – 8,219 6,920 2,279 2,108 10,498 9,028 11,863 10,369 1,365 1,341 The Company Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 Cash Real estate Other Total value of collateral 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m Credit exposure 2010 $m 2009 $m – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6,435 272 168 – – 5,238 199 53 – – 1,655 – 155 – – 1,501 – 153 – – 8,090 292 323 – – 6,739 199 206 – – 8,828 292 487 – – 7,489 199 328 – – 6,875 5,490 1,810 1,654 8,685 7,144 9,587 8,016 Unsecured portion of credit exposure 2010 $m 2009 $m – – – – – 738 – 164 – – 902 – – – – – 750 – 122 – – 872 1 for Asia Pacific, Europe and America, past due pools comprise 1-29 days (shown above in the 6-29 days band) and 30-89 days (shown above in the 60-89 days band). 2 mainly comprises trade dated assets and accrued interest. 3 comprises undrawn facilities and customer contingent liabilities. 1 mainly comprises trade dated assets and accrued interest. 2 comprises undrawn facilities and customer contingent liabilities. 150 ANZ Annual Report 2010 Financial Report 151 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) financial assets that are individually impaired 33: financial Risk management (continued) Estimated value of collateral for financial assets that are individually impaired Consolidated The Company Impaired assets 2010 $m 2009 $m – – – 51 – 3,837 – 260 – – – 127 – 3,232 – 377 4,148 3,736 – – – – – 1,551 – 24 1,575 – – – – – 687 – 10 697 – – – 51 – 6,075 – 294 – – – – – 973 – 26 999 – – – – – 187 – – 187 – – – 127 – 4,392 – 403 Individual provision balances 2010 $m – – – – – 957 – 20 977 – – – – – 463 – 6 469 – – – – – 429 – – 429 – – – – – 1,849 – 26 2009 $m – – – – – 1,048 – 12 1,060 – – – – – 389 – 2 391 – – – – – 75 – – 75 – – – – – 1,512 – 14 Impaired assets 2010 $m 2009 $m – – – 51 – 3,696 – 260 – – – 127 – 3,210 – 377 4,007 3,714 – – – – – 33 – – 33 – – – – – 558 – 10 568 – – – 51 – 4,287 – 270 – – – – – 8 – – 8 – – – – – 92 – – 92 – – – 127 – 3,310 – 377 Individual provision balances 2010 $m – – – – – 904 – 20 924 – – – – – 9 – – 9 – – – – – 340 – – 340 – – – – – 1,253 – 20 2009 $m – – – – – 1,026 – 12 1,038 – – – – – 2 – – 2 – – – – – 22 – – 22 – – – – – 1,050 – 12 6,420 4,922 1,875 1,526 4,608 3,814 1,273 1,062 Australia Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances Other financial assets1 credit related commitments2 New Zealand Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances Other financial assets1 credit related commitments2 Asia Pacific, Europe & America Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances Other financial assets1 credit related commitments2 Aggregate Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances Other financial assets1 credit related commitments2 1 mainly comprises trade dated trading assets and accrued interest. 2 comprises undrawn facilities and customer contingent liabilities. Cash Real estate Other Total value of collateral Credit exposure 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m – – – 32 – – – – 53 – – – – 19 – – – – 74 – – – – 51 – 2009 $m – – – 127 – 2010 $m – – – 51 – 2009 $m – – – 127 – Unsecured portion of credit exposure 2010 $m 2009 $m – – – – – – – – – – 1,502 743 15 – 9 1,011 400 13 – 9 1,378 395 243 – 258 1,173 184 99 – 375 2,880 1,088 258 – 268 2,184 584 112 – 389 3,837 1,551 687 – 294 3,232 973 187 – 403 957 463 429 – 26 1,048 389 75 – 14 2,301 1,486 2,243 1,905 4,545 3,396 6,420 4,922 1,875 1,526 Cash Real estate Other Total value of collateral Credit exposure 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m – – – 32 – – – – 53 – – – – 19 – – – – 74 – – – – 51 – 2009 $m – – – 127 – 2010 $m – – – 51 – 2009 $m – – – 127 – Unsecured portion of credit exposure 2010 $m 2009 $m – – – – – – – – – – 1,502 24 15 – 6 1,011 6 13 – 2 1,290 – 203 – 243 1,173 – 57 – 358 2,792 24 218 – 250 2,184 6 70 – 365 3,696 33 558 – 270 3,210 8 92 – 377 904 9 340 – 20 1,026 2 22 – 12 1,579 1,085 1,755 1,662 3,335 2,752 4,608 3,814 1,273 1,062 Consolidated Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 The Company Liquid assets Due from other financial institutions Trading securities Derivative financial instruments Available-for-sale assets Net loans and advances and acceptances – Australia – New Zealand – Asia Pacific, Europe & America Other financial assets1 credit related commitments2 – – – – – – – – – 1 1 – – – – – – – – – 5 5 – – – – – – – – – 1 1 – – – – – – – – – 5 5 1 mainly comprises trade dated assets and accrued interest. 2 comprises undrawn facilities and customer contingent liabilities. 152 ANZ Annual Report 2010 Financial Report 153 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) mARKET RiSK market risk is the risk to the group’s earnings arising from changes in interest rates, currency exchange rates, credit spreads, or from fluctuations in bond, commodity or equity prices. market risk arises when changes in market rates, prices and volatilities lead to a decline in the value of assets and liabilities, including financial derivatives. market risk is generated through both trading and banking book activities. ANZ conducts trading operations in interest rates, foreign exchange, commodities, securities and equities. ANZ has a detailed risk management and control framework to support its trading and balance sheet activities. The framework incorporates a risk measurement approach to quantify the magnitude of market risk within trading and balance sheet portfolios. This approach and related analysis identifies the range of possible outcomes that can be expected over a given period of time, establishes the relative likelihood of those outcomes and allocates an appropriate amount of capital to support these activities. group-wide responsibility for the strategies and policies relating to the management of market risk lies with the Board Risk committee. Responsibility for day to day management of both market risks and compliance with market risk policy is delegated by the Risk committee to the credit and market Risk committee (‘cmRc’) and the group Asset & Liability committee (‘gALcO’). The cmRc, chaired by the chief Risk Officer, is responsible for the oversight of market risk. All committees receive regular reporting on the range of trading and balance sheet market risks that ANZ incurs. Within overall strategies and policies, the control of market risk at the group level is the joint responsibility of Business Units and Risk management, with the delegation of market risk limits from the Board and cmRc allocated to both Risk management and the Business Units. The management of Risk management is supported by a comprehensive limit and policy framework to control the amount of risk that the group will accept. market risk limits are allocated at various levels and are reported and monitored by market Risk on a daily basis. The detailed limit framework allocates individual limits to manage and control asset classes (e.g. interest rates, equities), risk factors (e.g. interest rates, volatilities) and P&L limits (to monitor and manage the performance of the trading portfolios). market risk management and control responsibilities To facilitate the management, measurement and reporting of market risk, ANZ has grouped market risk into two broad categories: Traded market Risk Below are the aggregate value at Risk (vaR) exposures at 97.5% and 99% confidence levels covering both physical and derivatives trading positions for the Bank’s principal trading centres. 33: financial Risk management (continued) a) Traded market risk This is the risk of loss from changes in the value of financial instruments due to movements in price factors for both physical and derivative trading positions. Trading positions arise from transactions where ANZ acts as principal with customers, financial exchanges or interbank counterparties. The principal risk categories monitored are: Currency risk is the potential loss arising from the decline in the value of a financial instrument due to changes in foreign exchange rates or their implied volatilities. Interest rate risk is the potential loss arising from the change in the value of a financial instrument due to changes in market interest rates or their implied volatilities. Credit spread risk is the potential loss arising from a change in value of an instrument due to a movement of its margin or spread relative to a benchmark. Commodity risk is the potential loss arising from the decline in the value of a financial instrument due to changes in commodity prices, or their implied volatilities. Equity risk is the potential loss arising from the decline in the value of a financial instrument due to changes in stock prices or their implied volatilities. b) Non-traded market risk (or balance sheet risk) This comprises the management of non-traded interest rate risk, liquidity, and the risk to the Australian dollar denominated value of the group’s capital and earnings as a result of foreign exchange rate movements. Some instruments do not fall into either category that also expose ANZ to market risk. These include equity securities classified as available-for-sale financial assets that predominantly comprise long- term strategic investments. value at Risk (vaR) measure A key measure of market risk is value at Risk (vaR). vaR is a statistical estimate of the possible daily loss and is based on historical market movements. ANZ measures vaR at a 97.5% and 99% confidence interval. This means that there is a 97.5% or 99% chance that the loss will not exceed the vaR estimate on any given day. The group’s standard vaR approach for both traded and non-traded risk is historical simulation. The group calculates vaR using historical changes in market rates, prices and volatilities over the previous 500 business days. Traded and non-traded vaR is calculated using a one-day holding period. it should be noted that because vaR is driven by actual historical observations, it is not an estimate of the maximum loss that the group could experience from an extreme market event. As a result of this limitation, the group utilises a number of other risk measures (e.g. stress testing) and risk sensitivity limits to measure and manage market risk. Consolidated Value at risk at 97.5% confidence foreign exchange interest rate credit commodity Equities Diversification benefit Total vaR Value at risk at 99% confidence foreign exchange interest rate credit commodity Equities Diversification benefit Total vaR The Company Value at risk at 97.5% confidence foreign exchange interest rate credit commodity Equities Diversification benefit Total vaR Value at risk at 99% confidence foreign exchange interest rate credit commodity Equities Diversification benefit Total vaR 30 September 2010 30 September 2009 As at $m 2.6 11.2 3.0 2.1 0.5 (7.1) 12.3 3.6 19.3 3.9 3.6 0.8 (9.4) 21.8 As at $m 2.6 11.0 2.9 2.1 0.5 (6.9) 12.2 3.5 19.0 3.8 3.6 0.8 (9.3) 21.4 High for year $m low for year $m Average for year $m 7.8 24.9 4.9 3.7 0.8 n/a 24.9 10.4 57.4 7.0 5.4 1.2 n/a 71.4 0.8 9.2 1.7 1.1 0.2 n/a 10.0 1.3 15.2 2.1 2.4 0.5 n/a 15.0 2.0 17.2 3.1 2.3 0.4 (8.2) 16.8 3.1 30.5 4.4 3.6 0.8 (9.8) 32.6 30 September 2010 High for year $m low for year $m Average for year $m 7.7 24.8 4.8 3.7 0.8 n/a 24.8 10.3 57.3 7.0 5.4 1.2 n/a 71.3 0.7 9.0 1.6 1.1 0.2 n/a 9.9 1.3 15.0 2.1 2.4 0.5 n/a 14.6 2.0 17.0 3.1 2.3 0.4 (8.1) 16.7 3.1 30.3 4.3 3.6 0.8 (9.7) 32.4 As at $m 3.5 9.6 2.4 1.2 0.4 (7.5) 9.6 4.8 19.0 3.1 1.7 0.8 (11.6) 17.8 As at $m 3.1 9.4 2.4 1.2 0.4 (6.3) 10.2 4.5 18.8 3.1 1.7 0.8 (12.2) 16.7 High for year $m low for year $m Average for year $m 4.6 10.8 3.2 4.3 0.8 n/a 13.2 7.0 19.5 5.3 8.0 1.1 n/a 25.9 0.9 2.4 1.2 0.6 0.1 n/a 3.6 1.3 3.7 1.6 0.8 0.2 n/a 4.5 2.0 6.6 1.8 1.4 0.3 (4.7) 7.4 3.2 10.6 2.4 2.3 0.5 (7.2) 11.8 30 September 2009 High for year $m low for year $m Average for year $m 3.8 10.6 3.2 4.3 0.8 n/a 14.1 6.6 19.3 5.3 8.0 1.1 n/a 25.6 0.3 2.0 1.2 0.6 0.1 n/a 2.9 0.4 3.1 1.5 0.8 0.2 n/a 3.1 1.9 6.4 1.8 1.4 0.3 (4.1) 7.7 3.0 10.3 2.4 2.3 0.5 (6.5) 12.0 vaR is calculated separately for foreign Exchange, commodities, interest Rate, Equities and Debt market Equities, as well as for the group. The diversification benefit reflects the historical correlation between these products. Electricity commodities and Equities trading risk measurement is calculated under the standard method approach for regulatory purposes. To supplement the vaR methodology, ANZ applies a wide range of stress tests, both on individual portfolios and at a group level. ANZ ‘s stress-testing regime provides senior management with an assessment of the financial impact of identified extreme events on market risk exposures of ANZ. Standard stress tests are applied on a daily basis and measure the potential loss arising from applying extreme market movements to individual and groups of individual price factors. Extraordinary stress tests are applied monthly and measure the potential loss arising as a result of scenarios generated from major financial market events. 154 ANZ Annual Report 2010 Financial Report 155 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) 33: financial Risk management (continued) Non-Traded market Risk (Balance Sheet Risk) The principal objectives of balance sheet management are to manage interest income sensitivity while maintaining acceptable levels of interest rate and liquidity risk and to manage the market value of the group’s capital. Liquidity risk is dealt with in the next section. interest rate risk The objective of balance sheet interest rate risk management is to secure stable and optimal net interest income over both the short (next 12 months) and long-term. Non-traded interest rate risk relates to the potential adverse impact of changes in market interest rates on the group’s future net interest income. This risk arises from two principal sources: mismatches between the repricing dates of interest bearing assets and liabilities; and the investment of capital and other non-interest bearing liabilities in interest bearing assets. interest rate risk is reported using various techniques including: vaR and scenario analysis (to a 1% shock). a) vaR Non-Traded interest Rate Risk The repricing assumptions used to determine the vaR and 1% rate shock have been independently validated. Below are aggregate vaR figures covering non-traded interest rate risk. Consolidated Value at risk at 97.5% confidence Australia New Zealand Asia Pacific, Europe & America Diversification benefit The Company Value at risk at 97.5% confidence Australia New Zealand Asia Pacific, Europe & America Diversification benefit 30 September 2010 30 September 2009 As at $m 18.2 13.8 4.3 (11.6) 24.7 As at $m 18.2 0.1 4.2 (1.8) 20.7 High for year $m low for year $m Average for year $m 27.3 13.8 8.9 n/a 39.6 18.0 7.8 4.3 n/a 24.7 22.0 11.1 6.0 (8.3) 30.8 30 September 2010 High for year $m low for year $m Average for year $m 27.3 0.2 10.5 n/a 34.7 18.0 0.0 4.2 n/a 20.7 22.0 0.1 6.8 (2.6) 26.3 As at $m 18.3 9.3 6.4 (8.0) 26.0 As at $m 18.3 0.1 6.2 (1.1) 23.5 High for year $m low for year $m Average for year $m 20.7 9.3 7.9 n/a 27.1 12.5 2.8 3.3 n/a 13.8 17.6 6.0 6.0 (5.7) 23.9 30 September 2009 High for year $m low for year $m Average for year $m 20.7 0.1 7.5 n/a 24.5 12.5 0.0 3.1 n/a 13.5 17.6 0.0 5.8 (2.8) 20.6 vaR is calculated separately for Australia, New Zealand and Overseas markets, as well as for the group. To supplement the vaR methodology, ANZ applies a wide range of stress tests, both on individual portfolios and at group level. ANZ’s stress testing regime provides senior management with an assessment of the financial impact of identified extreme events on market risk exposures of ANZ. b) Scenario Analysis – A 1% Shock on the Next 12 months’ Net interest income A 1% overnight parallel positive shift in the yield curve is modelled to determine the potential impact on net interest income over the succeeding 12 months. This is a standard risk quantification tool. The figures in the table below indicate the outcome of this risk measure for the current and previous financial years – expressed as a percentage of reported net interest income. The sign indicates the nature of the rate sensitivity with a positive number signifying that a rate increase is positive for net interest income over the next 12 months. Impact of 1% Rate Shock As at 30 September maximum exposure minimum exposure Average exposure (in absolute terms) 156 ANZ Annual Report 2010 Consolidated The Company 2010 $m 2009 $m 2010 $m 2009 $m 1.09% 1.61% 0.60% 0.98% 0.67% 1.05% 0.49% 0.74% 1.12% 1.79% 0.63% 1.14% 1.11% 1.61% 0.67% 1.11% interest rate risk (continued) The extent of mismatching between the repricing characteristics and timing of interest bearing assets and liabilities at any point has implications for future net interest income. On a global basis, the group quantifies the potential variation in future net interest income as a result of these repricing mismatches. The repricing gaps themselves are constructed based on contractual repricing information. however, for those assets and liabilities where the contractual term to repricing is not considered to be reflective of the actual interest rate sensitivity (for example, products priced at the group’s discretion), a profile based on historically observed and/or anticipated rate sensitivity is used. This treatment excludes the effect of basis risk between customer pricing and wholesale market pricing. Equity securities classified as available-for-sale The portfolio of financial assets, classified as available-for-sale for measurement and financial reporting purposes, also contains equity investment holdings which predominantly comprise investments held for longer term strategic intentions. These equity investments are also subject to market risk which is not captured by the vaR measures for traded and non-traded market risks. Regular reviews are performed to substantiate valuation of the investments within the portfolio and the equity investments are regularly reviewed by management for impairment. The fair value of the constituents of equity securities classified as available-for-sale can fluctuate considerably. The table below outlines the composition of the equity holdings. visa inc. Sacombank Energy infrastructure Trust Other equity holdings impact on equity of 10% variation in value Consolidated The Company 2010 $m 275 80 40 50 445 44 2009 $m 258 114 43 44 459 46 2010 $m 215 80 40 45 380 38 2009 $m 202 114 43 44 403 40 foreign currency Risk – structural exposures The investment of capital in foreign operations, such as branches, subsidiaries or associates with functional currencies other than the Australian dollar, exposes the group to the risk of changes in foreign exchange rates. The main operating (or functional) currencies of group entities are the Australian dollar and the New Zealand dollar, with a number of overseas undertakings operating in various other currencies. The group presents its consolidated financial statements in Australian dollars, as the Australian dollar is the dominant currency. The group’s consolidated balance sheet is therefore affected by exchange differences between the Australian dollar and functional currencies of foreign operations. variations in the value of these overseas operations arising as a result of exchange differences are reflected in the foreign currency translation reserve in equity. The group routinely monitors this risk and conducts hedging, where it is expected to add shareholder value, in accordance with approved policies. The group’s exposures to structural foreign currency risks are managed with the primary objective of ensuring, where practical, that the consolidated Tier 1 capital ratio is neutral to the effect of changes in exchange rates. Selective hedges were in place during the 2010 and 2009 financial years. for details on the hedging instruments used and effectiveness of hedges of net investments in foreign operations, refer to note 12 to these financial statements. LiQUiDiTY RiSK (Excludes insurance and funds management) Liquidity risk is the risk that the group has insufficient capacity to fund increases in assets or is unable to meet its payment obligations as they fall due, including repaying depositors or maturing wholesale debt. The timing mismatch of cashflows and the related liquidity risk is inherent in all banking operations and is closely monitored by the group. capital market conditions were generally stronger in 2010 than the prior year, however periods of increased volatility continue to occur and funding costs remain elevated. ANZ has continued to manage liquidity risks by maintaining a strong funding profile that is supported by a portfolio of liquid assets that provides coverage of offshore wholesale debt maturities well in excess of one year. following the publication of earlier discussion papers relating to liquidity prudential requirements, APRA and the Basel committee have both made further announcements on this topic. These proposals include enhancements to governance and other qualitative requirements, including the requirement for a clear risk appetite statement on liquidity risk from the Board. many of these aspects have been integrated into ANZ’s liquidity management framework for some time. The proposed changes to the quantitative requirements, including changes to scenario stress tests and structural liquidity metrics, are more significant. While ANZ has an existing stress scenario framework and effective structural liquidity risk metrics and limits in place, the requirements proposed are in general more challenging. These changes will impact the future composition and size of ANZ’s liquid asset portfolio as well as the size and composition of the Bank’s funding base. Financial Report 157 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) LiQUiDiTY RiSK (Excludes insurance and funds management) (continued) The group’s liquidity and funding risks are governed by a detailed policy framework which is approved by the Board of Directors. in response to the impact of the global financial crisis, the framework has been reviewed and updated. The core objective of the framework is to ensure that the group has sufficient liquidity to meet obligations as they fall due without incurring unacceptable losses. ANZ has a low appetite for liquidity risk, as determined by the Board. Key principles of ANZ’s approach to liquidity risk management include: maintaining the ability to meet all payment obligations in the immediate term. Requiring that the group has the ability to meet ‘survival horizons’ under a range of ANZ-specific and general market liquidity stress scenarios, at the site and group-wide level, to meet cash flow obligations over the short to medium term. maintaining strength in the group’s balance sheet structure to ensure long-term resilience in the liquidity and funding risk profile. Limiting the potential earnings at risk implications associated with unexpected increases in funding costs or the liquidation of assets under stress. maintaining a liquidity management framework that is compatible with local regulatory requirements. Preparation of daily liquidity reports and scenario analysis, quantifying the group’s positions. Targeting a diversified funding base, avoiding undue concentrations by investor type, maturity, market source and currency. holding a portfolio of high quality liquid assets to protect against adverse funding conditions and to support day-to-day operations. Establishing detailed contingency plans to cover different liquidity crisis events. management of liquidity and funding risks are overseen by the group Asset and Liability committee (gALcO). Supervision and Regulation APRA supervises liquidity risk via its Prudential Standard APS 210 – Liquidity (last published January 2008) and has adopted guidelines based on the ‘Basel committee’ “Sound Practices for managing Liquidity in Banking Organisations”. APRA supervises liquidity through individual agreements with Authorised Deposit-taking institutions (ADis), taking into consideration the specific risk characteristics of each organisation’s operation. APRA requires ADis to have a comprehensive Board approved liquidity strategy defining: policy, systems and procedures for measuring, assessing, reporting and managing domestic and foreign currency liquidity. This must include a formal contingency plan for dealing with a liquidity crisis. The group maintains an APRA compliance Plan for APS 210 – Liquidity. The compliance Plan documents methods, processes, controls and monitoring activities required to support compliance with the Standard and assigns responsibilities for these activities. Scenario modelling A key component of the group’s liquidity management framework is scenario modelling. APRA requires ADis to assess liquidity under different scenarios, including the ‘going-concern’ and ‘name-crisis’. ‘Going-concern’: reflects the normal behaviour of cash flows in the ordinary course of business. APRA requires that the group must be able to meet all commitments and obligations under a going concern scenario, within the ADis normal funding capacity (‘available to fund’ limit), over at least the following 30 calendar days. in estimating the funding requirement, the group models expected cashflows by reference to historical behaviour and contractual maturity data. ‘Name-crisis’: refers to a potential name-specific liquidity crisis which models the behaviour of cash flows where there is a problem (real or perceived) which may include, but is not limited to, operational issues, doubts about the solvency of the group or adverse rating changes. Under this scenario the group may have significant difficulty rolling over or replacing funding. Under a name crisis, APRA requires the group to be cashflow positive over a five business day period. ‘Survival horizons’: The global financial crisis has highlighted the importance of differentiating between stressed and normal market conditions in a name-specific crisis, and the different behaviour that offshore and domestic wholesale funding markets can exhibit during market stress events. As a result, the group has enhanced its liquidity risk scenario modelling, to supplement APRA’s statutory requirements. The group has linked its liquidity risk appetite to defined liquidity ‘survival horizons’ (i.e. the time period under which ANZ must maintain a positive cashflow position under a specific scenario or stress). Under these scenarios, customer and/or wholesale balance sheet asset/liability flows are stressed. The following stressed scenarios are modelled: Extreme Short Term crisis Scenario (ESTc): A name-specific stress during a period of market stress. Short Term crisis Scenario (NSTc): A name-specific stress during a period of normal markets conditions. global funding market Disruption (gfmD): Stressed global wholesale funding markets leading to a closure of domestic and offshore markets. Offshore funding market Disruption (OfmD): Stressed global wholesale funding markets leading to a closure of offshore markets only. Each of ANZ’s operations is responsible for monitoring its compliance with all scenarios that are required to be modelled. Additionally, we measure, monitor and manage all modelled liquidity scenarios on an aggregated group-wide level. group funding composition ANZ manages its funding profile using a range of funding metrics and balance sheet disciplines. This approach is designed to ensure that an appropriate proportion of the group’s assets are funded by stable funding sources including core customer deposits, longer-dated wholesale funding (with a remaining term exceeding one year) and equity. ANZ’s funding profile strengthened further during 2010 as a result of solid growth in customer deposits and the continued focus on avoiding short-term wholesale funding maturity concentrations. customer deposits and other funding liabilities increased by 10% to $267.1 billion at 30 September 2010 (58% of total funding) from $242.4 billion (55% of total funding) at 30 September 2009. 33: financial Risk management (continued) The proportion of term wholesale funding has been maintained. As a result, the group’s proportional reliance on short-term wholesale funding decreased from 17% to 12% in the year to 30 September 2010. Proportionate short-term wholesale funding has approximately halved over the last two years (22% as at 30 September 2008). The table below outlines the group’s funding composition. Funding Composition Customer Deposits and other liabilities1 Australia Asia Pacific, Europe & America New Zealand Total customer Deposits Other funding liabilities2 Total customer liabilities (funding) Wholesale funding Unsubordinated debt Loan capital certificates of deposit commercial paper issued Bank's liability for acceptances Due to other financial institutions Other Wholesale Borrowing3 Total wholesale funds Shareholders' Equity (excl preference shares) Total Funding Wholesale funding4 Short term wholesale funding Liability for acceptances Long term wholesale funding – Less than 1 year residual maturity – greater than 1 year residual maturity hybrid capital including Preference shares Total wholesale funding and preference share capital excluding shareholders' equity Total funding maturity4 Short term wholesale funding Liability for acceptances Long term wholesale funding – Less than 1 year residual maturity – greater than 1 year residual maturity Total customer deposits and other liabilities (funding) Shareholders’ equity and hybrid debt Total funding and shareholders’ equity Consolidated 2010 $m 2009 $m 164,795 47,699 45,470 257,964 153,481 30,487 49,173 233,141 9,113 9,297 267,077 242,438 59,714 12,316 39,530 11,641 11,495 20,521 2,140 57,260 13,429 44,711 14,227 13,762 19,924 1,572 157,357 164,885 33,284 31,558 457,718 438,881 41,494 11,495 26,779 72,065 5,524 59,050 13,762 20,942 67,029 4,102 157,357 164,885 9% 3% 6% 16% 58% 8% 14% 3% 5% 15% 55% 8% 100% 100% includes term deposits, other deposits excluding securitisation deposits and an adjustment to eliminate OnePath (formerly iNg Australia) investments in ANZ deposit products. includes interest accruals, payables and other liabilities, provisions and net tax provisions, excluding other liabilities in iNg. includes net derivative balances, special purpose vehicles, other borrowings and preference share capital Euro hybrids. 1 2 3 4 Long term wholesale funding amounts are stated at original hedged exchange rates. movements due to currency fluctuations in actual amounts borrowed are classified as short-term wholesale funding. 158 ANZ Annual Report 2010 Financial Report 159 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS in february 2010 the Australian government announced that the guarantee Scheme for Large Deposits and Wholesale funding would close to new liabilities on 31 march 2010. The withdrawal of the Australian government guarantee did not have any adverse impact on ANZ’s funding activities. ANZ has not used the Australian government guarantee for a benchmark debt issue since June 2009. guaranteed wholesale funding comprise only 4.6% of ANZ’s total funding. When calculating volumes of wholesale debt outstanding and the weighted average term to maturity of the term wholesale funding portfolio, the ‘effective’ maturity of callable wholesale debt instruments is conservatively assumed to be the next call date (rather than final maturity) as extension beyond the call date is uncertain. Liquidity Portfolio management The group holds a diversified portfolio of cash and high-quality, highly-liquid securities that may be sold or pledged to provide same-day liquidity. This portfolio helps protect the group’s liquidity position by providing a source of cash in stressed conditions. All assets held in this portfolio are securities eligible for repurchase under agreements with the applicable central bank (i.e. ‘repo’ eligible). The sizing of the group’s Liquidity Portfolio is based on the amount of liquidity required to meet day-to-day operational requirements; potential name crisis or potential wholesale ‘funding stress’ requirements under each of the group’s various stress scenarios. At 30 September 2010 the volume of eligible securities available, post any repurchase (i.e. “repo”) discounts applied by the applicable central bank, was $66.7 billion. To further strengthen the Bank’s balance sheet, the group continues to maintain strong coverage ratios of Liquidity Portfolio to maturing wholesale offshore debt maturities. Liquidity portfolio levels provide coverage of offshore wholesale funding maturities for at least one year. The Liquidity Portfolio is well diversified by counterparty, currency, and tenor. Under the liquidity policy framework securities purchased must be of a similar or better credit quality to ANZ’s external long- term or short-term credit ratings and continue to be repo eligible. 33: financial Risk management (continued) Wholesale funding The group’s global wholesale funding strategy is designed to deliver a sustainable portfolio of wholesale funds that balances cost efficiency against prudent duration while targeting diversification by markets, investors, currencies, maturities and funding structures. To the extent that asset growth exceeds funding generated from customer deposits, additional wholesale funds are sourced. Short-term wholesale funding requirements, with a contractual maturity of less than one year, are managed through group Treasury and local markets operations. Long-term wholesale funding is managed and executed through group Treasury operations in Australia and New Zealand. During the 2010 financial Year, ANZ maintained the required access to all major wholesale funding markets to meet its borrowing requirements in full. Short-term wholesale funding markets continue to function effectively, both locally and offshore. During 2010, the group’s wholesale debt issuance program was supported by debt investor meetings held in Australia, New Zealand, the United States, United Kingdom, france, germany, Switzerland, Netherlands, hong Kong, china, Japan, Singapore, Korea and Taiwan. The group uses maturity concentration limits and geographic diversification limits under the wholesale funding and liquidity management framework. maturity concentration limits ensure that the group does not become reliant on issuing large volumes of new wholesale funding within a short time period. funding capacity and Debt issuance Planning group Treasury provides wholesale funding plans to senior management on a regular basis (via the group Asset and Liability committee). These plans address targeted funding volumes, markets, investors, tenors and currencies for senior, subordinated and hybrid transactions. Plans are supplemented with a regular forecasting process which reviews the funding position to-date in light of market conditions and balance sheet requirements. The debt issuance plan is linked to the group’s three-year strategic planning cycle, which is a key activity assisting the group to understand current and future funding requirements, and to quantify and plan volumes of funding required. ANZ maintained access to all major wholesale funding markets. Benchmark term debt issues were executed in AUD, USD, EUR, JPY, cAD, chf and NZD. Short-term wholesale funding markets continue to function effectively, both locally and offshore. $26.4 billion of term wholesale funding (with a remaining term greater than one year at the end of the financial year) was issued during 2010 largely to replace maturing term debt and also to commence pre-funding the 2011 term funding issuance requirement: The weighted average tenor of new term debt issuance lengthened to 4.7 years (from 3.9 years in 2009). The weighted average cost of new term debt issuance decreased approximately 42 basis points during 2010 as a result of more stable market conditions relative to the prior year. Average portfolio costs remain substantially above pre-crisis levels and continue to increase as maturing term wholesale funding is replaced at higher spreads. 33: financial Risk management (continued) Supplementing its liquidity position, the group holds additional cash and liquid asset balances. Our markets business also holds secondary sources of liquidity in the form of liquid instruments in its trading portfolios. These other assets are not included in the eligible securities held in the prime Liquidity Portfolio outlined below. Eligible securities (Market values1) Australia New Zealand United States United Kingdom Asia internal RmBS (Australia) internal RmBS (New Zealand) Total 1 market value is post the repo discount applied by the applicable central bank. counterparty credit ratings long term counterparty Credit Rating1 AAA AA+ AA AA- A+ A Total 2010 $m 20,974 7,547 1,275 2,183 4,204 26,657 3,812 66,652 2009 $m 18,694 8,771 1,301 2,939 1,984 24,508 1,954 60,151 Market Value $m 51,371 8,094 6,169 694 120 204 66,652 1 Where available, based on Standard & Poor’s long-term credit ratings. Liquidity crisis contingency Planning The group maintains APRA-endorsed liquidity crisis contingency plans defining an approach for analysing and responding to a liquidity threatening event at a country and group-wide level. To align with the enhanced liquidity scenario analysis framework, crisis management strategies are assessed against the group’s crisis stress scenarios. The framework is compliant with APRA’s key liquidity contingency crisis planning requirements and guidelines and includes: The establishment of crisis severity/stress levels; clearly assigned crisis roles and responsibilities; Early warning signals indicative of an approaching crisis, and mechanisms to monitor and report these signals; crisis Declaration Assessment processes, and related escalation triggers set against early warning signals; Outlined action plans, and courses of action for altering asset and liability behaviour; Procedures for crisis management reporting, and making up cash-flow shortfalls; guidelines determining the priority of customer relationships in the event of liquidity problems; and Assigned responsibilities for internal and external communications. Liquidity Risk – insurance and funds management The group’s insurance and fund management businesses, such as OnePath Australia Limited (formerly iNg Australia Limited) also applies its own liquidity and funding methods to address their specific needs. As at 30 September 2010 a number of investment options in the Life insurance statutory funds were suspended due to the prescribed limits on their liquidity facilities being reached. These suspensions are not a consequence of any performance issue of the Life company and do not affect the group’s future performance or distributions. The Net market value of suspended funds is $907 million. 160 ANZ Annual Report 2010 Financial Report 161 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) contractual maturity analysis of the group’s liabilities The tables below analyse the group’s contractual liabilities, within relevant maturity groupings based on the earliest date on which the group or company may be required to pay. The amounts represent principal and interest cash flows and hence may differ compared to the amounts reported on the balance sheet. it should be noted that this is not how the group manages its liquidity risk. The management of this risk is detailed above. contractual maturity analysis of financial liabilities at 30 September 2010: Consolidated at 30 September 2010 Due to other financial institutions Deposits and other borrowings certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest commercial paper Borrowing corporations’ debt Other borrowings Liability for acceptances Bonds and notes3 Loan capital3,4 Policyholder liabilities External unit holder liabilities (life insurance funds) Derivative liabilities (trading)5 Derivative assets and liabilities (balance sheet management)6 – funding Receive leg (-ve is an inflow) Pay leg – other balance sheet management Receive leg (-ve is an inflow) Pay leg Consolidated at 30 September 2009 Due to other financial institutions Deposits and other borrowings certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest commercial paper Borrowing corporations’ debt Other borrowings Liability for acceptances Bonds and notes3 Loan capital3,4 Policyholder liabilities External unit holder liabilities (life insurance funds) Derivative liabilities (trading)5 Derivative assets and liabilities (balance sheet management)6 – funding Receive leg (-ve is an inflow) Pay leg – other balance sheet management Receive leg (-ve is an inflow) Pay leg less than 3 months1 $m 20,119 15,919 95,714 109,279 10,598 6,266 797 2,141 11,265 5,506 341 28,002 5,448 17,830 3 to 12 months $m 367 8,163 41,325 – – 5,378 619 – 230 11,349 1,230 – – – 1 to 5 years $m 56 17,821 3,084 – – – 544 – – 40,080 7,955 – – – After 5 years $m – – 102 – – – – – – 5,830 3,240 – – – No maturity specified2 $m Total $m – 20,542 – – – – – – – – – 945 979 – – 41,903 140,225 109,279 10,598 11,644 1,960 2,141 11,495 62,765 13,712 28,981 5,448 17,830 (30,149) 32,748 (27,419) 30,457 (87,059) 95,752 (13,911) 15,317 (2,511) 2,638 (5,161) 5,371 (11,091) 11,075 (1,276) 1,225 – – – – (158,538) 174,273 (20,040) 20,309 less than 3 months1 $m 18,541 23,474 77,069 111,314 10,174 8,947 1,718 2,028 13,574 7,274 179 – – 23,344 3 to 12 months $m 1,428 9,928 29,395 – – 5,400 1,356 – 188 7,999 2,787 – – – 1 to 5 years $m 37 13,552 4,062 – – – 752 – – 44,075 9,940 – – – (19,623) 21,242 (22,830) 24,048 (90,946) 96,489 (1,887) 2,194 (4,485) 5,218 (9,499) 9,875 After 5 years $m – – 30 – – – – – – 1,699 1,551 – – – (6,388) 6,499 (2,339) 2,263 No maturity specified2 $m Total $m – 20,006 – – – – – – – – – 1,026 – – – 46,954 110,556 111,314 10,174 14,347 3,826 2,028 13,762 61,047 15,483 – – 23,344 – – – – (139,787) 148,278 (18,210) 19,550 includes at call instruments. includes perpetual investments brought in at face value only. 1 2 3 Any callable wholesale debt instruments have been included at their next call date. 4 5 The full mark-to-market of derivative liabilities held for trading purposes has been included in the ’less than 3 months’ category. 6 The undiscounted cash flows for all derivative instruments used for the purposes of balance sheet management have been included based on the contractual maturity of the instrument. includes instruments that may be settled in cash or in equity, at the option of the company. 33: financial Risk management (continued) contractual maturity analysis of financial liabilities at 30 September 2010 The Company at 30 September 2010 Due to other financial institutions Deposits and other borrowings certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest commercial paper Borrowing corporations’ debt Other borrowings Liability for acceptances Bonds and notes3 Loan capital3,4 Derivative liabilities (trading)5 Derivative assets and liabilities (balance sheet management)6 – funding Receive leg (-ve is an inflow) Pay leg – other balance sheet management Receive leg (-ve is an inflow) Pay leg The Company at 30 September 2009 Due to other financial institutions Deposits and other borrowings certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest commercial paper Liability for acceptances Bonds and notes3 Loan capital3,4 Derivative liabilities (trading)5 Derivative assets and liabilities (balance sheet management)6 – funding Receive leg (-ve is an inflow) Pay leg – other balance sheet management Receive leg (-ve is an inflow) Pay leg less than 3 months1 $m 18,469 13,558 83,541 95,001 5,677 2,941 – 121 11,287 5,128 328 17,998 3 to 12 months $m 367 8,044 26,787 – – 3,139 – – 230 9,517 1,189 – 1 to 5 years $m 34 17,818 1,878 – – – – – – 29,686 7,347 – After 5 years $m – – 101 – – – – – – 5,747 3,240 – No maturity specified2 $m Total $m – 18,870 – – – – – – – – – 310 – 39,420 112,307 95,001 5,677 6,080 – 121 11,517 50,078 12,414 17,998 (18,851) 20,980 (18,240) 21,009 (56,764) 64,847 (13,911) 15,317 (1,901) 1,886 (3,926) 3,978 (9,163) 8,954 (1,205) 1,117 – – – – (107,765) 122,153 (16,194) 15,935 less than 3 months1 $m 15,726 20,096 61,132 92,995 5,800 6,563 13,550 5,452 164 24,388 3 to 12 months $m 1,241 9,602 17,399 – – 1,720 188 5,979 2,741 – 1 to 5 years $m 19 13,552 1,922 – – – – 35,992 8,991 – (13,215) 14,519 (14,816) 15,814 (57,583) 62,560 (1,293) 1,308 (3,276) 3,463 (7,472) 7,277 After 5 years $m – – 29 – – – – 1,412 1,551 – (5,511) 5,653 (2,274) 2,175 No maturity specified2 $m Total $m – 16,986 – – – – – – – 341 – – – – – 43,250 80,482 92,995 5,800 8,283 13,738 48,835 13,788 24,388 (91,125) 98,546 (14,315) 14,223 includes at call instruments. includes perpetual investments brought in at face value only. 1 2 3 Any callable wholesale debt instruments have been included at their next call date. 4 5 The full mark-to-market of derivative liabilities held for trading purposes has been included in the ’less than 3 months’ category. 6 The undiscounted cash flows for all derivative instruments used for the purposes of balance sheet management have been included based on the contractual maturity of the instrument. includes instruments that may be settled in cash or in equity, at the option of the company. cREDiT RELATED cONTiNgENciES Undrawn facilities and issued guarantees comprises the nominal principal amounts of commitments, contingencies and other undrawn facilities and represents the maximum liquidity at risk position should all facilities extended be drawn. The majority of undrawn facilities are subject to customers maintaining specific credit and other requirements or conditions. many of these facilities are expected to be partially used, whereas others may never be required to be drawn upon. As such, the total of the nominal principal amounts is not necessarily representative of future liquidity risks or future cash requirements. 162 ANZ Annual Report 2010 Financial Report 163 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 33: financial Risk management (continued) 34: fair value of financial Assets and financial Liabilities The tables below analyse the group’s undrawn facilities and issued guarantees into relevant maturity groupings based on the earliest date on which ANZ may be required to pay. 30 September 2010 Undrawn facilities issued guarantees 30 September 2009 Undrawn facilities issued guarantees less than 1 year $m 124,029 27,485 Consolidated More than 1 year $m Total $m – – 124,029 27,485 less than 1 year $m 106,403 25,745 The Company More than 1 year $m Total $m – – 106,403 25,745 less than 1 year $m 106,644 25,218 Consolidated More than 1 year $m Total $m – – 106,644 25,218 less than 1 year $m 88,006 23,503 The Company More than 1 year $m – – Total $m 88,006 23,503 The liquidity risk of credit related commitments, contingencies and other undrawn facilities may be less than the contract amount, however the liquidity risk has been taken to be the contract amount. The amounts do not necessarily represent future cash requirements as many of these facilities are expected to be partially used or to expire unused. LifE iNSURANcE RiSK Although not a significant contributor to the group’s balance sheet the group’s insurance businesses give rise to unique risks which are managed separately from the group’s banking businesses. The nature of these risks and the manner in which they are managed is set out in note 49. in addition, market risk arises on the group’s Life insurance business in respect of contracts where an element of the liability to the policyholder is guaranteed by the group. The value of the guarantee is impacted by changes in underlying asset values and interest rates. As at September 2010, a 10% decline in the value of assets supporting these contracts would have decreased profit by $23 million and a 10% increase would have increased profit by $7 million. A 1% increase in interest rates at 30 September would have decreased profit by $15 million and 1% decrease would have increased profit by $7 million. OPERATiONAL RiSK mANAgEmENT Within ANZ, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, and the risk of reputational loss or damage arising from inadequate or failed internal processes, people and systems, but excludes strategic risk. The authority for operational risk oversight is delegated by the Board to the Board Risk committee. The Operational Risk Executive committee (OREc) supports the Board Risk committee in respect of operational risk oversight including compliance. The key responsibilities of OREc include: Approve Operational Risk and compliance policies; Approve ANZ’s group compliance framework; Endorse ANZ’s Operational Risk framework for approval by the Risk committee of the Board; monitoring the state of operational risk management and instigating any necessary corrective actions; Review all material actual, potential or near miss risk events; Approve extreme rated risks and high reputation impact risks; and monitor associated treatment plans. membership of OREc comprises senior executives and OREc is chaired by the chief Risk Officer. Business unit staff and line management have first line accountability for the day-to-day management of operational risk. This includes implementation of the operational risk framework and involvement in decision making processes concerning all material operational risk 164 ANZ Annual Report 2010 matters. Divisional risk governance functions provide oversight of operational risk undertaken in the business units. Divisional Risk committees and Business Unit Risk forums manage and maintain oversight of operational risks supported by thresholds for escalation and monitoring. group Operational Risk are responsible for exercising governance over operational risk through the management of the operational risk framework, policy development, framework assurance, operational risk measurement and capital allocation, fraud strategy and reporting of operational risk issues to executive committees. ANZ’s Operational Risk framework outlines the approach to managing operational risk and specifically covers the minimum requirements that divisions/business units must undertake in the management of operational risk. ANZ’s Operational Risk framework is supported by specific policies, guidelines and templates with the effectiveness of the framework assessed through a series of assurance reviews and related processes. This is supported by an independent review programme by internal Audit. The operational risk management process adopted by ANZ consists of a staged approach involving establishing the context, identification, analysis, treatment and monitoring of current, new and emerging operational risks. This is based on the Risk management Standard issued by Standards Australia/New Zealand (AS/NZS 4360). in line with industry practice, ANZ obtains insurance cover from third party and captive providers to cover those operational risks where cost-effective premiums can be obtained. in conducting their business, business units are advised to act as if uninsured and not to use insurance as a guaranteed mitigation for operational risk. Business disruption is a critical risk to a bank’s ability to operate, so ANZ has comprehensive business continuity, recovery and crisis management plans. The intention of the business continuity and recovery plans is to ensure critical business functions can be maintained, or restored in a timely fashion, in the event of material disruptions arising from internal or external events. group Operational Risk is responsible for maintaining ANZ’s Advanced measurement Approach (AmA) for operational risk regulatory capital calculations. ANZ uses a scenario analysis based methodology to assess exposure to unexpected operational risk events and uses probability distributions and monte carlo simulations to model and calculate its operational risk regulatory capital (ORRc). This methodology incorporates the use of business risk profiles which consider the current business environment and internal control factors over a twelve month time horizon. 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. The determination of the fair value of financial instruments is fundamental to the financial reporting framework as all financial instruments are recognised initially at fair value and, with the exception of those financial instruments carried at amortised cost, are remeasured at fair value in subsequent periods. The fair value of a financial instrument on initial recognition is normally the transaction price, however, in certain circumstances the initial fair value may be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets. Subsequent to initial recognition, the fair value of financial instruments measured at fair value is based on quoted market prices, where available. in cases where quoted market prices are not available, fair value is determined using market accepted valuation techniques that employ observable market data. in limited cases where observable market data is not available, the input is estimated based on other observable market data, historical trends and other factors that may be relevant. (i) fair values of financial assets and financial liabilities A significant number of financial instruments are carried at fair value in the balance sheet. Below is a comparison of the carrying amounts, as reported on the balance sheet, and fair values of all financial assets and liabilities. The fair value disclosure does not cover those instruments that are not considered financial instruments from an accounting perspective such as income tax and intangible assets. in our view, the aggregate fair value amounts do not represent the underlying value of the group. in the tables below, financial instruments have been allocated based on their accounting treatment. The significant accounting policies in note 1 describe how the categories of financial assets and financial liabilities are measured and how income and expenses, including fair value gains and losses, are recognised. financial asset classes have been allocated into the following groups: amortised cost; financial assets at fair value through profit or loss; derivatives in effective hedging relationships; and available-for-sale financial assets. Similarly, each class of financial liability has been allocated into three groups: amortised cost; derivatives in effective hedging relationships; and financial liabilities at fair value through profit and loss. The fair values are based on relevant information available as at the respective balance sheet dates and have not been updated to reflect changes in market condition after the balance sheet date. fiNANciAL ASSETS Consolidated 30 September 2010 Liquid assets Due from other financial institutions Trading securities Derivative financial instruments1 Available-for-sale assets Loans and advances2 customers’ liability for acceptances investments backing policy liabilities Other financial assets Consolidated 30 September 2009 Liquid assets Due from other financial institutions Trading securities Derivative financial instruments1 Available-for-sale assets Loans and advances2 customers’ liability for acceptances Other financial assets At amortised cost At fair value through profit or loss Hedging Available-for- sale assets Total Total Carrying amount Fair value Designated on initial recognition $m – – – – – 192 – 32,171 – 32,363 $m 21,521 5,481 – – – 349,129 11,495 – 5,668 393,294 Held for trading $m – – 33,515 34,466 – – – – – 67,981 Sub-total $m – – 33,515 34,466 – 192 – 32,171 – 100,344 $m – – – 3,355 – – – – – 3,355 $m – – – – 20,742 – – – – 20,742 $m 21,521 5,481 33,515 37,821 20,742 349,321 11,495 32,171 5,668 517,735 $m 21,521 5,481 33,515 37,821 20,742 349,387 11,495 32,171 5,668 517,801 At amortised cost At fair value through profit or loss Hedging Available-for- sale assets Total Total Carrying amount Fair value Designated on initial recognition $m – – – – – 190 – – 190 $m 25,317 4,985 – – – 331,817 13,762 3,265 379,146 Held for trading $m – – 30,991 35,681 – – – – 66,672 Sub-total $m – – 30,991 35,681 – 190 – – 66,862 $m – – – 1,723 – – – – 1,723 $m – – – – 16,575 – – – 16,575 $m 25,317 4,985 30,991 37,404 16,575 332,007 13,762 3,265 464,306 $m 25,317 4,985 30,991 37,404 16,575 331,991 13,762 3,265 464,290 1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges. 2 fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustments mean that the carrying value differs from the amortised cost. Financial Report 165 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 34: fair value of financial Assets and financial Liabilities (continued) 34: fair value of financial Assets and financial Liabilities (continued) fiNANciAL ASSETS (continued) The Company 30 September 2010 Liquid assets Due from other financial institutions Trading securities Derivative financial instruments1 Available-for-sale assets Loans and advances2 customers’ liability for acceptances Other financial assets The Company 30 September 2009 Liquid assets Due from other financial institutions Trading securities Derivative financial instruments1 Available-for-sale assets Loans and advances2 customers’ liability for acceptances Other financial assets At amortised cost At fair value through profit or loss Hedging Available-for- sale assets Total Total Carrying amount Fair value Designated on initial recognition $m – – – – – 139 – – 139 $m 18,530 4,136 – – – 277,817 11,517 3,707 315,707 Held for trading $m – – 28,305 31,407 – – – – 59,712 Sub-total $m – – 28,305 31,407 – 139 – – 59,851 $m – – – 2,784 – – – – 2,784 $m – – – – 16,973 – – – 16,973 $m 18,530 4,136 28,305 34,191 16,973 277,956 11,517 3,707 395,315 $m 18,530 4,136 28,305 34,191 16,973 278,037 11,517 3,707 395,396 At amortised cost At fair value through profit or loss Hedging Available-for- sale assets Total Total Carrying amount Fair value Designated on initial recognition $m – – – – – 143 – – 143 $m 20,199 3,236 – – – 255,865 13,739 2,169 295,208 Held for trading $m – – 27,410 31,631 – – – – 59,041 Sub-total $m – – 27,410 31,631 – 143 – – 59,184 $m – – – 1,370 – – – – 1,370 $m – – – – 13,554 – – – 13,554 $m 20,199 3,236 27,410 33,001 13,554 256,008 13,739 2,169 369,316 $m 20,199 3,236 27,410 33,001 13,554 256,210 13,739 2,169 369,518 1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges. 2 fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustments mean that the carrying value differs from the amortised cost. LiQUiD ASSETS AND DUE fROm/TO OThER fiNANciAL iNSTiTUTiONS The carrying values of these financial instruments where there has been no significant change in credit risk is considered to approximate their net fair values as they are short-term in nature, defined as those which reprice or mature in 90 days or less, or are receivable on demand. TRADiNg SEcURiTiES Trading securities are carried at fair value. fair value is based on quoted market prices, broker or dealer price quotations, or modelled valuations using prices for securities with similar credit risk, maturity and yield characteristics. DERivATivE fiNANciAL iNSTRUmENTS Derivative financial instruments are carried at fair value. Exchange traded derivative financial instruments are valued using quoted prices. Over-the-counter derivative financial instruments are valued using accepted valuation models (including discounted cash flow models) based on current market yields for similar types of instruments and the maturity of each instrument and an adjustment reflecting the credit worthiness of the counterparty. AvAiLABLE-fOR-SALE ASSETS Available-for-sale assets are carried at fair value. fair value is based on quoted market prices or broker or dealer price quotations. if this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics, or market accepted valuation models as appropriate (including discounted cash flow models) based on current market yields for similar types of instruments and the maturity of each instrument. NET LOANS AND ADvANcES AND AccEPTANcES The carrying value of loans and advances and acceptances includes deferred fees and expenses, and is net of provision for credit impairment and income yet to mature. fair value has been determined through discounting future cash flows. for fixed rate loans and advances and acceptances, the discount rate applied incorporates changes in wholesale market rates, ANZ’s cost of wholesale funding and movements in customer margin. for floating rate loans, only changes in wholesale market rates and ANZ’s cost of wholesale funding are incorporated in the discount rate. for variable rate loans where ANZ sets the applicable rate at its discretion, the fair value is set equal to the carrying value. iNvESTmENTS BAcKiNg POLicYhOLDER LiABiLiTiES investments backing policyholder liabilities are carried at fair value. fair value is based on quoted market prices, broker or dealer price quotations where available. Where substantial trading markets do not exist for a specific financial instrument modeled valuations are used to estimate their approximate fair values. OThER fiNANciAL ASSETS included in this category are accrued interest and fees receivable. 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. fiNANciAL LiABiLiTiES Consolidated 30 September 2010 Due from other financial institutions Derivative financial instruments1 Deposits and other borrowings Liability for acceptances Bonds and notes2 Loan capital2 Policyholder liabilities3 External unit holder liabilities (life insurance funds) Payables and other liabilities Consolidated 30 September 2009 Due from other financial institutions Derivative financial instruments1 Deposits and other borrowings Liability for acceptances Bonds and notes2 Loan capital2 Payables and other liabilities The Company 30 September 2010 Due from other financial institutions Derivative financial instruments1 Deposits and other borrowings Liability for acceptances Bonds and notes2 Loan capital2 Payables and other liabilities At amortised cost At fair value through profit or loss Hedging Total Total Carrying amount Fair value Designated on initial recognition $m – – 5,561 – 8,107 1,009 28,002 – – 14,677 $m 20,521 – 305,911 11,495 51,607 11,307 979 5,448 7,462 442,732 Held for trading $m – 35,996 – – – – – – – 35,996 Sub-total $m – 35,996 5,561 – 8,107 1,009 – – – 50,673 $m – 1,221 – – – – – – – 1,221 $m 20,521 37,217 311,472 11,495 59,714 12,316 28,981 5,448 7,462 494,626 $m 20,521 37,217 311,553 11,495 59,970 12,155 28,981 5,448 7,462 494,802 At amortised cost At fair value through profit or loss Hedging Total Total Carrying amount Fair value Designated on initial recognition $m – – 6,065 – 8,933 1,926 – 16,924 $m 19,924 – 288,305 13,762 48,327 11,503 7,215 389,036 Held for trading $m – 34,706 – – – – – 34,706 Sub-total $m – 34,706 6,065 – 8,933 1,926 – 51,630 $m – 1,810 – – – – – 1,810 $m 19,924 36,516 294,370 13,762 57,260 13,429 7,215 442,476 $m 19,924 36,516 294,593 13,762 57,493 13,179 7,215 442,682 At amortised cost At fair value through profit or loss Hedging Total Total Carrying amount Fair value Designated on initial recognition $m – – – – 8,107 1,009 – 9,116 $m 18,849 – 253,608 11,518 40,071 9,954 5,502 339,502 Held for trading $m – 33,862 – – – – – 33,862 Sub-total $m – 33,862 – – 8,107 1,009 – 42,978 $m – 785 – – – – – 785 $m 18,849 34,647 253,608 11,518 48,178 10,963 5,502 383,265 $m 18,849 34,647 253,635 11,518 48,407 10,840 5,502 383,398 1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges. 2 fair value hedging is applied to financial liabilities within bonds and notes and loan capital. The resulting fair value adjustments mean that the carrying value differs from the amortised cost. 3 includes life insurance contract liabilities of $979 million measured in accordance with AASB 1038 Life insurance contract liabilities and investment contracts of $28,002 million which have been designated at fair value through profit or loss in terms of AASB 1038. None of the fair value is attributable to changes in the credit risk of the life investment contract liabilities. 166 ANZ Annual Report 2010 Financial Report 167 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 34: fair value of financial Assets and financial Liabilities (continued) 34: fair value of financial Assets and financial Liabilities (continued) fiNANciAL LiABiLiTiES (continued) The Company 30 September 2009 Due to other financial institutions Derivative financial instruments1 Deposits and other borrowings Liability for acceptances Bonds and notes2 Loan capital2 Payables and other liabilities At amortised cost At fair value through profit or loss Hedging Total Total Carrying amount Fair value Designated on initial recognition $m – – – – 8,933 1,926 – 10,859 $m 16,974 – 227,300 13,739 37,100 9,959 5,786 310,858 Held for trading $m – 32,305 – – – – – 32,305 Sub-total $m – 32,305 – – 8,933 1,926 – 43,164 $m – 863 – – – – – 863 $m 16,974 33,168 227,300 13,739 46,033 11,885 5,786 354,885 $m 16,974 33,168 227,478 13,739 46,141 11,701 5,786 354,987 1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges. 2 fair value hedging is applied to financial liabilities within bonds and notes and loan capital. The resulting fair value adjustments mean that the carrying value differs from the amortised cost. DEPOSiTS AND OThER BORROWiNgS for interest bearing fixed maturity deposits and other borrowings and acceptances with quoted market prices, market borrowing rates of interest for debt with a similar maturity are used to discount contractual cash flows. The fair value of a deposit liability without a specified maturity or at call is deemed 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. certain deposits and other borrowings have been designated at fair value through profit or loss and are carried at fair value. BONDS AND NOTES AND LOAN cAPiTAL The aggregate fair value of bonds and notes and loan capital is 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 debt instrument is used. certain bonds and notes and loan capital have been designated at fair value through profit or loss and are carried at fair value. The fair value is based on a discounted cash flow model based on current market yields for similar types of instruments and the maturity of each instrument. The fair value includes the effects of the appropriate credit spreads applicable to ANZ for that instrument. ExTERNAL UNiT hOLDER LiABiLiTiES (LifE iNSURANcE fUNDS) The carrying amount represents the external unit holder’s share of net assets which are carried at fair value in the fund. LifE iNvESTmENT cONTRAcT LiABiLiTiES Life investment contract liabilities are carried at fair value. PAYABLES AND OThER fiNANciAL LiABiLiTiES This category includes accrued interest and fees payable for which the carrying amount is considered to approximate the fair value. cOmmiTmENTS AND cONTiNgENciES Adjustments to fair value for commitments and contingencies that are not financial instruments recognised in the balance sheet, are not included in this note. (ii) valuation methodology A significant number of financial instruments are carried on balance sheet at fair value. The best evidence of fair value is a quoted price in an active market. Accordingly, wherever possible fair value is based on the quoted market price of the financial instrument. in the event that there is no quoted market price for the instrument, fair value is based on present value estimates or other market accepted valuation techniques. The valuation models incorporate the impact of bid/ask spread, counterparty credit spreads and other factors that would influence the fair value determined by a market participant. The majority of valuation techniques employ only observable market data. however, for certain financial instruments the valuation technique may employ some data (valuation inputs or components) which is not readily observable in the current market. in these cases valuation inputs (or components of the overall value) are derived and extrapolated from other relevant market data and tested against historic transactions and observed market trends. valuations using one or more non-observable data inputs require professional judgement. ANZ has a control framework that ensures that the fair value is either determined or validated by a function independent of the party that undertakes the transaction. Where quoted market prices are used, independent price determination or validation is obtained. for fair values determined using a valuation model, the control framework may include, as applicable, independent development or validation of: (i) valuation models; (ii) any inputs to those models; and (iii) any adjustments required outside of the valuation model, and, where possible, independent validation of model outputs. The tables below provide an analysis of the methodology used for valuing financial assets and financial liabilities that are required to be measured at fair value. The fair value of the financial instrument has been allocated in full to the category which most accurately reflects the determination of the fair value. This allocation is based on the categorisation of the lowest level input into a valuation model or a valuation component that is significant to the reported fair value of the financial instrument. in this regard, the significance of an input is assessed against the reported fair value of the financial instrument and considers various factors specific to the financial instrument. The “quoted market price” category also includes financial instruments valued using quoted yield where it is available for a specific debt security. The methods used in valuing different classes of financial assets or liabilities are described in section (i) on pages 165 to 168. There have been no substantial changes in the valuation techniques applied to different classes of financial instruments since the previous year. ANZ continuously monitors the relevance of inputs used and calibrates its valuation models where there is evidence that changes are required to ensure that the resulting valuations remain appropriate. Valuation technique Consolidated Financial assets Trading securities Derivative financial instruments Available-for-sale financial assets investments backing policyholder liabilities Loans and advances (designated at fair value) Financial liabilities Derivative financial instruments Deposits and other borrowings (designated at fair value) Bonds and notes (designated at fair value) Life investment contract liabilities External unit holder liabilities (life insurance funds) Loan capital (designated at fair value) The Company Financial assets Trading securities Derivative financial instruments Available-for-sale financial assets Loans and advances (designated at fair value) Financial liabilities Derivative financial instruments Bonds and notes (designated at fair value) Loan capital (designated at fair value) Quoted market price Using observable inputs 2010 $m 2009 $m 2010 $m 2009 $m 22,690 2,050 17,816 16,585 – 59,141 19,288 1,862 12,930 – – 34,080 10,775 35,321 2,280 15,115 192 63,683 11,555 34,797 2,764 – 190 49,306 With significant non-observable inputs 2010 $m 50 450 646 471 – 2009 $m 148 745 881 – – Total 2010 $m 2009 $m 33,515 37,821 20,742 32,171 192 30,991 37,404 16,575 – 190 85,160 1,617 1,774 124,441 2,143 1,854 34,428 33,608 646 1,054 37,217 36,516 – – – – – – – – – – 2,143 1,854 5,561 8,107 28,002 5,448 1,009 82,555 6,065 8,933 – – 1,926 – – – – – – – – – – 50,532 646 1,054 5,561 8,107 28,002 5,448 1,009 85,344 6,065 8,933 – – 1,926 53,440 Quoted market price Using observable inputs With significant non-observable inputs Valuation technique 2010 $m 2009 $m 2010 $m 2009 $m 2010 $m 19,888 2,047 15,738 – 37,673 2,109 – – 2,109 12,933 1,808 11,175 – 25,916 1,767 – – 1,767 8,367 31,694 826 139 41,026 31,892 8,107 1,009 41,008 14,329 30,448 1,763 143 46,683 30,347 8,933 1,926 41,206 50 450 409 – 909 646 – – 646 2009 $m 148 745 616 – 1,509 1,054 – – 1,054 Total 2010 $m 2009 $m 28,305 34,191 16,973 139 79,608 34,647 8,107 1,009 43,763 27,410 33,001 13,554 143 74,108 33,168 8,933 1,926 44,027 168 ANZ Annual Report 2010 Financial Report 169 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 34: fair value of financial Assets and financial Liabilities (continued) 34: fair value of financial Assets and financial Liabilities (continued) (iii) Additional information for financial instruments carried at fair value where the valuation incorporates non-observable market data chANgES iN fAiR vALUE The following table presents the composition of financial instruments measured at fair value with significant non-observable inputs. Consolidated Asset backed securities illiquid corporate bonds and loans Structured credit products managed funds (suspended) Alternative assets Other derivatives Total The Company Asset backed securities illiquid corporate bonds and loans Structured credit products Other derivatives Total Financial assets Trading securities Derivatives Available-for-sale Investments backing policyholder liabilities 2010 $m 50 – – – – – 50 50 – – – 50 2009 $m 148 – – – – – 148 148 – – – 148 2010 $m – – 445 – – 5 450 – – 445 5 450 2009 $m – – 704 – – 41 745 – – 704 41 745 2010 $m – 555 91 – – – 646 – 409 – – 409 2009 $m 103 778 – – – – 881 – 616 – – 616 2010 $m – – 110 266 95 – 471 n/a n/a n/a n/a n/a 2009 $m n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Financial liabilities Derivatives 2010 $m – – 624 – – 22 646 – – 624 22 646 2009 $m – – 1,019 – – 35 1,054 – – 1,019 35 1,054 Asset backed securities and illiquid corporate bonds comprise illiquid bonds where the effect on fair value of issuer credit cannot be directly or indirectly observed in the market. Structured credit products categorised in derivatives comprise the structured credit intermediation trades that ANZ entered into from 2004 to 2007 whereby ANZ sold protection using credit default swaps over certain structures, and mitigated risk by purchasing protection via credit default swaps from US financial guarantors over the same structures. These trades are valued using complex models with certain inputs relating to the reference assets and derivative counterparties not observable in the market. investments in structured credit products comprise collateralised debt and loan obligations where there is a lack of active trading and limited observable market data. managed funds (suspended) are comprised of fixed income and mortgage investments in managed funds that are illiquid and are not currently redeemable. The following table details movements in the balance of these financial assets and liabilities. Derivatives are categorised on a portfolio basis and classified as either financial assets or financial liabilities based on whether the closing balance is a gain or loss. This could be different to the opening balance. Consolidated Opening balance New purchases and issues1 Disposals/(sales) and cash settlements Transfers: Transfers into the category Transfers out of the category fair value gain/(loss) recorded in the income statement fair value gain/(loss) recognised in equity closing balance The Company Opening balance New purchases and issues Disposals/(sales) and cash settlements Transfers: Transfers into the category Transfers out of the category fair value gain/(loss) recorded in the income statement fair value gain/(loss) recognised in equity closing balance Financial assets Trading securities Derivatives Available -for-sale Investments backing policyholder liabilities 2010 $m 148 – – – – (98) – 50 148 – – – – (98) – 50 2009 $m 149 32 (13) – – (20) – 148 149 32 (13) – – (20) – 148 2010 $m 745 – (16) – (35) (244) – 450 745 – (16) – (35) (244) – 450 2009 $m 1,237 7 (39) 2 (3) (459) – 745 1,237 7 (39) 2 (3) (459) – 745 2010 $m 881 150 (383) – (26) (5) 29 2009 $m 1,992 – (1,032) – (13) (28) (38) 2010 $m – 526 (24) – – (31) – 646 881 471 616 50 (231) – (26) (7) 7 924 308 (541) – (13) (24) (38) 409 616 n/a n/a n/a n/a n/a n/a n/a n/a n/a 2009 $m n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Financial liabilities Derivatives 2010 $m 2009 $m (1,054) – 2 (1,793) (4) (56) – 20 386 – (19) – 818 – (646) (1,054) (1,054) – 2 (1,793) (4) (56) – 20 386 – (19) – 818 – (646) (1,054) 1 included in new purchases and issues are $482 million of investments backing policyholder liabilities and $100 million of available-for-sale financial assets acquired as part of the purchase of the iNg businesses in Australia and New Zealand. 170 ANZ Annual Report 2010 SENSiTiviTY TO DATA iNPUTS Where valuation techniques use assumptions derived from significant non-observable market inputs, changing these assumptions changes the resultant estimate of fair value. The majority of these transactions are “back-to-back” in nature where ANZ either acts as a financial intermediary, or ANZ hedges market risks. Similarly, the performance of investments backing policyholder liabilities directly impacts the associated life investment contracts they relate to. in these circumstances, changes in the assumptions generally have minimal impact on the income statement and net assets of ANZ, with the exception of the structured credit intermediation trades that create significant exposure to market risk and/or credit risk. Principal inputs used in the determination of fair value of financial instruments included in this group include counterparty credit spreads, market-quoted cDS prices, recovery rates, default probabilities, correlation curves and other inputs, some of which may not be directly observable in the market. for both the group and the company, the potential effect of changing prevailing assumptions to reasonably possible alternative assumptions for valuing those financial instruments could result in an increase of $45 million (2009: $37 million) or a decrease of $30 million (2009: $27 million) in net derivative financial instruments as at 30 September 2010. The ranges of reasonably possible alternative assumptions are established by application of professional judgement and analysis of the data available to support each assumption. DEfERRED fAiR vALUE gAiNS AND LOSSES Where the fair value of a financial instrument is determined using non-observable data that has a significant impact on the valuation of the instrument, any difference between the transaction price and the amount determined based on the valuation technique arising on initial recognition of the financial instrument (day one gain or loss) is deferred on the balance sheet. Subsequently, the day one gain or loss is recognised in the income statement only to the extent that it arises from a change in factors (including time) that a market participant would consider in setting the price for the instrument. The table below shows movements in the aggregate amount of day one gain/(loss) not recognised in the income statement on the initial recognition of the financial instrument because the difference between the transaction price and the modelled valuation price was not fully supported by inputs that were observable in the market. Opening balance Deferral of gain/(loss) on new transactions Recognised in the income statement, including exchange differences Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 3 – – 3 5 – (2) 3 3 – – 3 5 – (2) 3 (iv) Additional information for financial instruments designated at fair value through profit or loss fiNANciAL ASSETS DESigNATED AT fAiR vALUE ThROUgh PROfiT OR LOSS The category loans and advances includes certain loans designated at fair value through profit or loss in order to eliminate an accounting mismatch which would arise if the asset were otherwise carried at amortised cost. This mismatch arises as the derivative financial instruments, which were acquired to mitigate interest rate risk of the loan and advances, are measured at fair value through profit or loss. By designating the economically hedged loans, the movements in the fair value attributable to changes in interest rate risk, will also be recognised in the income statement in the same periods. At balance date, the credit exposure of the group on these assets was $192 million (2009: $190 million) and for the company was $139 million (2009: $143 million). for the company $85 million (2009: $86 million) was mitigated by collateral held. The cumulative change in fair value attributable to change in credit risk was, for the group, a reduction to the assets of $4 million (2009: $5 million). for the company the reduction to the assets was $1 million (2009: $1 million). The amount recognised in the income statement attributable to changes in credit risk was a gain of $1 million (2009: $1 million gain). The change in fair value of the designated financial assets attributable to changes in credit risk has been calculated by determining the change in credit rating and credit spread implicit in the loans and advances issued by entities with similar credit characteristics. Financial Report 171 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 34: fair value of financial Assets and financial Liabilities (continued) 36: Segment Analysis fiNANciAL LiABiLiTiES DESigNATED AT fAiR vALUE ThROUgh PROfiT OR LOSS Parts of loan capital, bonds and notes and deposits and other borrowings have been designated as financial liabilities at fair value through profit or loss in order to eliminate an accounting mismatch which would arise if the liabilities were otherwise carried at amortised cost. This mismatch arises as the derivatives acquired to mitigate interest rate risk within the financial liabilities are measured at fair value through profit or loss. (i) Description of segments The group has three segments based on the geographic regions in which the group operates (Australia, New Zealand and the combined Asia, Pacific, Europe & America). Each geography focuses primarily on four customer based divisions being Retail, commercial, Wealth and institutional. The institutional division is also managed on a global basis. Life investment contracts are designated at fair value through profit or loss in accordance with AASB 1038. The table below compares the carrying amount of financial liabilities carried at full fair value, to the contractual amount payable at maturity and fair value gains and losses recognised during the period on liabilities carried at full fair value that are attributable to changes in ANZ’s own credit rating. Consolidated carrying amount Amount at which carrying value is greater/(less) than amount payable at maturity cumulative change in liability value attributable to own credit risk: – opening cumulative (gain)/loss – (gain)/loss recognised during the year – closing cumulative (gain)/loss life investment Contract liabilities Deposits and other borrowings Bonds and notes loan capital 2010 $m 28,002 (25) – – – 2010 $m 5,561 2009 $m 6,065 2010 $m 8,107 2009 $m 8,933 (1) – – – (6) (2) 2 – (187) 92 76 (86) (10) (166) 242 76 2010 $m 1,009 27 (59) 41 (18) 2009 $m 1,926 2 (47) (12) (59) The Company carrying amount Amount at which carrying value is greater/(less) than amount payable at maturity cumulative change in liability value attributable to own credit risk: – opening cumulative (gain)/loss – (gain)/loss recognised during the year – closing cumulative (gain)/loss Deposits and other borrowings 2010 $m 2009 $m – – – – – – – – – – Bonds and notes loan capital 2010 $m 8,107 2009 $m 8,933 (187) 92 76 (86) (10) (166) 242 76 2010 $m 1,009 27 (59) 41 (18) 2009 $m 1,926 2 (47) (12) (59) for each of loan capital, bonds and notes and deposits and other borrowings, the change in fair value attributable to changes in credit risk has been determined as the amount of change in fair value that is not attributable to changes in market conditions that give rise to market risks (benchmark interest rate and foreign exchange rates). 35: maturity Analysis of Assets and Liabilities The following is an analysis, by remaining contractual maturities at balance date, of selected asset and liability accounts and represents the actual obligation date expected for the asset or liability to be recovered or settled within one year, and greater than one year. 2010 2009 Consolidated Due from other financial institutions Available-for-sale assets Net loans and advances investments backing policy liabilities customers’ liability for acceptances Due to other financial institutions Deposits and other borrowings Liability for acceptances Bonds and notes Policy liabilities External unit holder liabilities Loan capital 1 includes items where no maturity is specified. 172 ANZ Annual Report 2010 Due within one year $m Greater than one year1 $m 5,291 16,793 83,110 4,575 11,495 20,465 292,054 11,495 16,035 28,002 5,448 – 190 3,949 266,211 27,596 – 56 19,418 – 43,679 979 – 12,316 Total $m 5,481 20,742 349,321 32,171 11,495 20,521 311,472 11,495 59,714 28,981 5,448 12,316 Due within one year $m Greater than one year $m Total $m 4,985 16,575 332,007 226 3,826 254,857 – – 13,762 35 16,481 – 45,943 – – 13,029 19,924 294,370 13,762 57,260 – – 13,429 4,759 12,749 77,150 – 13,762 19,889 277,889 13,762 11,317 – – 400 The segments and product and services categories as reported below are consistent with internal reporting provided to the chief operating decision maker, being the chief Executive Officer. The primary sources of external revenue across all business units are interest, fee income and trading income. (ii) Transactions between segments costs are allocated between business units across segments within ANZ for management reporting comparative purposes on an arms length basis. Consolidated External interest income External interest expense Adjustment for intersegment interest Net interest income Other external operating income Share of net profit/(loss) of equity accounted investments Segment revenue Other external expenses Net intersegment expenses Operating expenses Provision for credit impairment Segment result before tax income tax expense Non-controlling interests Profit after income tax attributed to shareholders of the company Acquisition of plant & equipment, intangibles and other non-current assets Non-Cash Expenses Depreciation and amortisation Equity-settled share-based payment expenses Provision for credit impairment credit risk on derivatives Provisions for employee entitlements Provisions for restructuring Financial Position Total external assets1 Shares in associates and joint venture companies Total external liabilities2 goodwill intangibles 1 Excludes deferred tax assets. 2 Excludes deferred tax liabilities. Australia New Zealand Asia Pacific, Europe & America Total 2010 $m 20,017 (12,525) 476 7,968 3,113 40 11,121 (4,752) (34) (4,786) (1,271) 5,064 (1,760) – 2009 $m 18,409 (11,653) 329 7,085 2,061 76 9,222 (4,161) (12) (4,173) (2,008) 3,041 (955) (2) 3,304 2,084 1,013 611 (453) (94) (1,271) 39 (49) (30) (285) (74) (2,008) (129) (50) (100) 2010 $m 5,116 (2,605) (531) 1,980 551 33 2,564 (1,172) (63) (1,235) (362) 967 (279) – 688 59 (55) (16) (362) (4) (56) (2) 2009 $m 6,186 (3,832) (397) 1,957 460 11 2,428 (1,130) (73) (1,203) (722) 503 (344) – 159 77 (40) (14) (722) (6) (59) (20) 2010 $m 1,475 (609) 55 921 726 360 2,007 (1,380) 97 (1,283) (154) 570 (57) (4) 509 97 (54) (30) (154) – (3) (2) 2009 $m 1,691 (913) 68 846 736 378 1,960 (934) 85 (849) (275) 836 (136) – 2010 $m 26,608 (15,739) – 10,869 4,390 2009 $m 26,286 (16,398) – 9,888 3,257 433 465 15,692 13,610 (7,304) – (7,304) (1,787) 6,601 (2,096) (4) (6,225) – (6,225) (3,005) 4,380 (1,435) (2) 700 4,501 2,943 67 1,169 755 (49) (15) (275) – (3) (10) (562) (140) (1,787) 35 (108) (34) (374) (103) (3,005) (135) (112) (130) 380,900 165 357,551 1,450 2,276 324,918 1,826 312,378 264 809 93,074 109 75,147 2,482 215 101,445 383 82,589 2,680 49 56,973 2,691 64,851 154 53 50,121 2,356 49,480 55 39 530,947 2,965 497,549 4,086 2,544 476,484 4,565 444,447 2,999 897 Financial Report 173 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 36: Segment Analysis (continued) External segment revenue by products and services The table below sets out revenue from external customers for groups of similar products and services as required by AASB 8 Operating Segments. Retail commercial Wealth institutional Partnerships Other Total revenue Australia New Zealand Asia Pacific, Europe & America Total 2010 $m 4,333 2,307 1,001 3,298 – 182 11,121 2009 $m 4,105 2,065 351 3,124 – (423) 9,222 2010 $m 1,262 720 132 476 – (26) 2,564 2009 $m 1,313 705 46 633 – (269) 2,428 2010 $m 603 – 38 1,091 390 (115) 2,007 2009 $m 449 – 35 1,208 349 (81) 1,960 2010 $m 6,198 3,027 1,171 4,865 390 41 2009 $m 5,867 2,770 432 4,965 349 (773) 15,692 13,610 The following disclosure represents a secondary segment view on a divisional basis, consistent with the group matrix reporting structure. Consolidated Year ended 30 September 2010 Net interest income Other operating income Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense Non-controlling interests Profit after income tax attributed to shareholders of the Company Consolidated Year ended 30 September 2009 Net interest income Other operating income Operating income Operating expenses Profit before credit impairment and income tax Provision for credit impairment Profit before income tax income tax expense Non-controlling interests Profit after income tax attributed to shareholders of the Company Australia $m Institutional $m Asia Pacific, Europe & America $m New Zealand Businesses $m 5,423 2,224 7,647 (3,266) 4,381 (584) 3,797 (1,102) – 3,151 1,714 4,865 (1,706) 3,159 (740) 2,419 (665) – 1,009 1,097 2,106 (1,141) 965 (154) 811 (100) (6) 1,648 476 2,124 (1,058) 1,066 (409) 657 (184) – less: Institutional Asia Pacific, Europe & America $m Consolidated $m (587) (504) (1,091) 488 (603) 77 (526) 105 – 10,869 4,823 15,692 (7,304) 8,388 (1,787) 6,601 (2,096) (4) Other $m 225 (184) 41 (621) (580) 23 (557) (150) 2 2,695 1,754 705 473 (705) (421) 4,501 Australia $m Institutional $m Asia Pacific, Europe & America $m New Zealand Businesses $m 4,869 1,658 6,527 (2,759) 3,768 (889) 2,879 (845) – 3,117 1,848 4,965 (1,555) 3,410 (1,410) 2,000 (567) (3) 896 1,118 2,014 (877) 1,137 (252) 885 (170) – 1,626 458 2,084 (1,010) 1,074 (635) 439 (125) – less: Institutional Asia Pacific, Europe & America $m Consolidated $m (572) (636) (1,208) 431 (777) 147 (630) 165 1 9,888 3,722 13,610 (6,225) 7,385 (3,005) 4,380 (1,435) (2) Other $m (48) (724) (772) (455) (1,227) 34 (1,193) 107 – 2,034 1,430 715 314 (1,086) (464) 2,943 37: Notes to the cash flow Statements a) Reconciliation of net profit after income tax to net cash provided by operating activities Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m Inflows (Outflows) Inflows (Outflows) Inflows (Outflows) Inflows (Outflows) Operating profit after income tax attributable to shareholders of the company 4,501 2,943 4,428 2,285 Adjustment to reconcile operating profit after income tax to net cash provided by/(used in) operating activities Provision for credit impairment credit risk on derivatives Depreciation and amortisation Profit on sale of businesses Provision for employee entitlements, restructuring and other provisions Payments from provisions (Profit)/loss on sale of premises and equipment (Profit)/loss on sale of available-for-sale assets Amortisation of discounts/premiums included in interest income Net foreign exchange earnings Net gains/losses on trading derivatives Net derivatives/foreign exchange adjustment Share based payments Net (increase)/decrease in operating assets Trading securities Liquid assets greater than three months Due from other banks greater than three months Loans and advances Net (decrease)/increase in investments backing policyholder liabilities Net derivative financial instruments Net intra-group loans and advances interest receivable Accrued income Net tax assets Net (decrease)/increase in operating liabilities Deposits and other borrowings Due to other financial institutions Payables and other liabilities interest payable Accrued expenses Other Total adjustments Net cash (used in)/provided by operating activities 1,787 (35) 560 – 461 (520) 8 (36) (32) (747) 95 658 7 (2,004) 2,184 (65) (17,044) 39 (1,823) – (181) (147) 1,114 14,726 55 (1,288) 163 363 250 (1,452) 3,049 3,005 135 375 3 675 (571) (5) (1) (162) (962) (424) 1,879 9 (15,971) 2,253 1,402 (1,897) – (7,754) – 722 92 144 12,601 (168) (994) (1,115) 294 (190) (6,625) (3,682) 1,369 39 372 – 326 (259) – (22) 2 (458) (82) 518 7 (1,835) 815 (145) (20,345) – (1,110) (5,110) (208) (116) 936 20,862 1,329 (709) 308 324 (158) (3,350) 1,078 2,079 121 289 3 409 (395) (5) – – (740) (467) 1,687 9 (14,491) 2,427 1,032 (23,162) – (7,936) 6,412 586 32 (14) 26,171 (1,027) 259 (788) 281 (29) (7,257) (4,972) b) Reconciliation of cash and cash equivalents cash and cash equivalents include liquid assets and amounts due from other financial institutions with an original term to maturity of less than three months. 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 statements of financial position as follows: Liquid assets – less than three months Due from other financial institutions – less than three months cash and cash equivalents in the statement of cashflows Consolidated The Company 2010 $m 17,042 4,862 21,904 2009 $m 18,393 4,412 22,805 2010 $m 14,543 3,592 18,135 2009 $m 15,228 2,823 18,051 174 ANZ Annual Report 2010 Financial Report 175 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 37: Notes to the cash flow Statements (continued) c) Acquisitions and disposals Cash (inflows)/outflows from acquisitions and investments (net of cash acquired) Purchases of controlled entities investments in controlled entities Purchases of interest in associates and joint ventures Cash inflows from disposals (net of cash disposed) Disposals of controlled entities Disposals of associates and joint ventures d) Non-cash financing and investing activities Share capital issues Dividends satisfied by share issue e) Financing arrangements credit stand by arrangements Standby lines Other financing arrangements Overw and other financing arrangements Total finance available Consolidated 2010 $m 2009 $m (55) – 5 (50) – 15 15 34 – 229 263 – 15 15 The Company 2010 $m (3,009) 694 5 (2,310) – 113 113 2009 $m 34 194 3 231 – 15 15 1,007 1,007 1,788 1,788 1,007 1,007 1,788 1,788 Consolidated 2010 2009 Available $m Unused $m Available $m Unused $m 987 – 987 987 – 987 1,186 1,186 – – 1,186 1,186 38: controlled Entities Ultimate parent of the Group Australia and New Zealand Banking Group limited All controlled entities are 100% owned unless otherwise noted. The material controlled entities of the group are: Amerika Samoa Bank* ANZ Bank (Vietnam) limited* ANZ Capel Court limited ANZ Capital Hedging Pty ltd ANZ Commodity Trading Pty ltd ANZCover Insurance Pty ltd ANZ Trustees limited ANZ Funds Pty ltd ANZ Bank (Europe) Limited* ANZ Bank (Kiribati) Limited*1 ANZ Bank (Samoa) Limited* ANZ holdings (New Zealand) Limited* ANZ National Bank Limited* ANZ investment Services (New Zealand) Limited* ANZ National (int’l) Limited* Arawata Assets Limited* iNg (NZ) holdings Limited* iNg insurance holdings Limited* iNg Life (NZ) Limited* Private Nominees Limited* UDc finance Limited* ANZ international (hong Kong) Limited* ANZ Asia Limited* ANZ Bank (vanuatu) Limited ANZ international Private Limited* ANZ Singapore Limited* ANZ Royal Bank (cambodia) Limited*1 LfD Limited minerva holdings Limited* Upspring Limited* votraint No. 1103 Pty Ltd ANZ lenders Mortgage Insurance Pty ltd ANZ Nominees limited ANZ Orchard Investments Pty ltd OnePath Australia limited (formerly ING Australia limited) OnePath Life Limited (formerly iNg Life Limited) OnePath general insurance Pty Limited (formerly iNg general insurance Pty Limited) OnePath funds management Limited (formerly iNg funds management Limited) OnePath custodians Limited (formerly iNg custodians Pty Limited) Australia and New Zealand Banking Group (PNG) limited* Chongqing liangping ANZ Rural Bank Company limited* Citizens Bancorp Inc ANZ guam inc.** Esanda Finance Corporation limited ETRADE Australia limited PT ANZ Panin Bank*1 ANZ Vientiane Commercial Bank limited* Incorporated in Nature of business Australia Banking American Samoa vietnam Australia Australia Australia Australia Australia Australia United Kingdom Kiribati Samoa New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand hong Kong hong Kong vanuatu Singapore Singapore cambodia Australia United Kingdom United Kingdom Australia Australia Australia Australia Australia Australia Australia Australia Australia Papua New guinea china guam guam Australia Australia indonesia Laos Banking Banking investment Banking hedging finance captive-insurance Trustee/Nominee holding company Banking Banking Banking holding company Banking fund manager finance finance holding company holding company insurance Nominee finance holding company Banking Banking holding company merchant Banking Banking holding company holding company investment investment mortgage insurance Nominee holding company holding company insurance insurance funds management custody Banking Banking holding company Banking general finance Online Stockbroking Banking Banking * Audited by overseas KPmg firms. ** Audited by Deloitte guam. 1 minority interests hold ordinary shares or units in the controlled entities listed above as follows: ANZ Bank (Kiribati) Limited – 150,000 $1 ordinary shares (25%) (2009: 150,000 $1 ordinary shares (25%)); PT ANZ Panin Bank – 7,500 iDR 1 million shares (15%) (2009: 7,500 iDR 1 million shares (15%)); ANZ Royal Bank (cambodia) Limited – 319,500 USD100 ordinary shares (45%) (2009: 319,500 USD100 ordinary shares (45%)). 176 ANZ Annual Report 2010 Financial Report 177 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 39: Associates Significant associates of the group are as follows: AmmB holdings Berhad1 P.T. Bank Pan indonesia Date became an associate Ownership interest held may 2007 April 2001 24% 39% Voting interest 24% 39% Shanghai Rural commercial Bank September 2007 20% 20% Bank of Tianjin Saigon Securities inc.1 Diversified infrastructure Trust4 metrobank card corporation Other associates Total carrying value of associates June 2006 July 2008 march 2008 October 2003 20% 18% 53% 40% 20% 18% 53% 40% Incorporated in malaysia indonesia Peoples Republic of china Peoples Republic of china vietnam Australia Philippines Carrying value 2010 $m Carrying value 2009 $m Fair value2 $m Reporting date 1,082 611 958 1,424 516 1,236 31 march 31 December Principal activity Banking Banking 499 327 128 105 43 170 461 n/a 31 December Banking n/a 893 145 n/a 31 December 31 December 30 September 31 December Banking Stockbroking investment cards issuing 276 108 104 34 255 2,965 2,712 1 Significant influence was established via representation on the Board of Directors. 2 Applicable to those investments in associates where there are published price quotations. 3 A value-in-use estimation supports the carrying value of this investment. 4 ANZ has significant influence but not control over this entity as key operational decisions require 75% resolution of unitholders. Aggregated assets of significant associates (100%) Aggregated liabilities of significant associates (100%) Aggregated revenues of significant associates (100%) Results of Associates Share of associates profit before income tax Share of income tax expense Share of associates net profit – as disclosed by associates Adjustments1 Share of associates net profit accounted for using the equity method 1 The results differ from the published results of these entities due to the application of ifRS, group Policies and acquisition adjustments. 2010 $m 116,107 106,589 5,812 2009 $m 88,726 80,817 6,089 Consolidated 2010 $m 437 (114) 323 77 400 2009 $m 262 (66) 196 186 382 40: interests in Joint venture Entities On 30 November 2009, the group acquired the remaining 51% shareholding in the ANZ-iNg joint ventures in Australia and New Zealand, taking its ownership interest to 100%. The year ended 30 September 2010 includes the financial impact of full ownership since 30 November 2009. for the period 1 October 2009 to 30 November 2009, the investments were accounted for as joint ventures. in the 2009 year, the results include the financial impact of the 49% interest in the joint venture. OnePath (formerly ING Australia limited) ING (NZ) Holdings limited Consolidated Total Retained profits attributable to the joint venture entity At the beginning of the year At the end of the year Movement in the carrying amount of the joint venture entity carrying amount at the commencement of the year Share of net profit movement of reserves Additional investment Transfer to shares in controlled entity Adjustment for exchange fluctuations carrying amount at the end of the year Share of assets and liabilities1, 2 investments Other assets Share of total assets Policy holder liabilities Other liabilities Share of total liabilities Share of net assets Share of revenues, expenses and results Revenues Expenses Profit before income tax income tax (expense)/benefit Profit after income tax Net equity accounted profit Share of commitments Lease commitments Other commitments Share of total expenditure commitments Share of contingent liabilities in relation to ANZ’s interest in the joint venture entity3 2010 $m 483 N/A 1,649 28 – – (1,677) – – N/A N/A N/A N/A N/A N/A N/A 87 (51) 36 (8) 28 28 N/A N/A N/A N/A N/A 2009 $m 410 483 1,589 73 (13) – – – 1,649 11,914 2,909 14,823 13,176 575 13,751 1,072 343 (229) 114 (41) 73 73 136 43 179 21 21 2010 $m 68 N/A 204 5 – – (201) (8) – N/A N/A N/A N/A N/A N/A N/A 16 (12) 4 1 5 5 N/A N/A N/A N/A N/A 2009 $m 58 68 178 10 – 19 – (3) 204 75 140 215 (38) 52 14 201 95 (89) 6 4 10 10 14 – 14 – – 2010 $m 551 N/A 1,853 33 – – (1,878) (8) – N/A N/A N/A N/A N/A N/A N/A 103 (63) 40 (7) 33 33 N/A N/A N/A N/A N/A 2009 $m 468 551 1,767 83 (13) 19 – (3) 1,853 11,989 3,049 15,038 13,138 627 13,765 1,273 438 (318) 120 (37) 83 83 150 43 193 21 21 1 This represents the group’s share of the assets and liabilities of OnePath Australia Limited (formerly iNg Australia Limited) and iNg (NZ) holdings Limited, less minority interests and including goodwill on acquisition of ANZ funds management entities. 2 At 30 September 2010 the assets and liabilities are fully consolidated by the group. 3 This represents Deeds of Subordination with ASic as buyer of last resort. 178 ANZ Annual Report 2010 Financial Report 179 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 41: Securitisations ANZ enters into transactions in the normal course of business by which it transfers financial assets directly to third parties or to special purpose entities. These transfers may give rise to the full or partial derecognition of those financial assets. full derecognition occurs when ANZ transfers its contractual right to receive cash flows from the financial assets, or retains the right but assumes an obligation to pass on the cash flows from the asset, and transfers substantially all the risks and rewards of ownership. These risks include credit, interest rate, currency, prepayment and other price risks. Partial derecognition occurs when ANZ sells or otherwise transfers financial assets in such a way that some but not substantially all of the risks and rewards of ownership are transferred but control is retained. These financial assets are recognised on the balance sheet to the extent of ANZ’s continuing involvement. 42: fiduciary Activities The group conducts various fiduciary activities as follows: investment fiduciary activities for trusts The group conducts investment fiduciary activities for trusts, including deceased estates. These trusts have not been consolidated as the group does not have direct or indirect control. Where the company or its controlled entities incur liabilities in respect of these operations as trustee, where the primary obligation is incurred in an agency capacity as trustee of the trust rather than on the group’s own account, 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 following table summarises ANZ’s securitisation activities for ANZ-originated assets. The 2010 securitisation activity relates to an internal residential mortgage securitisation creating instruments eligible for repurchase arrangements with the Reserve Bank of Australia. The aggregate amounts of funds concerned are as follows: carrying amount of assets securitised (sold) during the year Net cash proceeds received Retained interests gain/(loss) on securitisation/sale (pre-tax) Consolidated1 2010 $m 2009 $m – – – – – – – – The Company 2010 $m 7,001 – (7,001) – 2009 $m 22,971 – (22,971) – 1 The balances are nil as the company balances are eliminated as the balance in the company relates to an internal securitisation vehicle. ANZ-originated financial assets that do not qualify for derecognition typically relate to loans that have been securitised under arrangements by which ANZ retains a continuing involvement in the transferred assets. continuing involvement may entail: retaining the rights to future cash flows arising from the assets after investors have received their contractual terms; providing subordinated interests; liquidity support; continuing to service the underlying asset; or entering into derivative transactions with the securitisation vehicles. in such instances, ANZ continues to be exposed to risks associated with these transactions. The rights and obligations that ANZ retains from its continuing involvement in securitisations are initially recorded as an allocation of the fair value of the financial asset between the portion that is derecognised and the portion that continues to be recognised on the date of transfer. The carrying amount of ANZ-originated financial assets that did not achieve derecognition during the year are set out below: Securitisation carrying amount of assets (original) carrying amount of assets (currently recognised) carrying amount of associated liabilities Consolidated1 2010 $m 2009 $m – – – – – – The Company 2010 $m 7,001 6,749 6,749 2009 $m 22,971 19,929 19,929 1 The balances are nil as the company balances are eliminated as the balance in the company relates to an internal securitisation vehicle. Trusteeships Consolidated 2010 $m 2,443 2009 $m 2,439 funds management activities funds management activities are conducted through OnePath Australia Limited (formerly iNg Australia Limited) and iNg (NZ) holdings Limited and certain other subsidiaries of the group. funds under management in these entities are not included in these consolidated financial statements except where they are controlled by the group. The group controlled (or jointly controlled prior to 30 November 2009) companies with funds under management are as follows: OnePath Australia Limited iNg (NZ) holdings Limited Other controlled entities – New Zealand Other controlled entities – Australia1 2010 $m 42,091 5,655 5,885 1,053 54,684 2009 $m 42,160 5,541 5,948 1,053 54,702 1 This amount includes $991 million (2009: $972 million) where the group in its role as Trustee has the right to appoint or remove the funds manager. custodian services activities On 18 December 2009, ANZ completed a contract of sale to dispose of its Australian and New Zealand custodian Services business conducted through ANZ custodian Services. ANZ custodian Services held investment assets under custody on behalf of external customers and as a consequence were not consolidated in the group’s accounts. The contract of sale included a Transitional Service Agreement to run for at least 9 months from the completion date to a maximum of 12 months from the completion date. At 30 September 2010, ANZ custodian Services had funds under custody and administration in Australia of $20.4 billion (30 September 2009: $98.5 billion) and in New Zealand of $0.6 billion (30 September 2009: $5.4 billion). 180 ANZ Annual Report 2010 Financial Report 181 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 43: commitments Property contracts for construction of new office building in Docklands, melbourne, Australia Not later than 1 year Later than one year but not later than 5 years Capital expenditure contracts for outstanding capital expenditure Not later than 1 year Later than one year but not later than 5 years Later than 5 years Total capital expenditure commitments1 lease rentals land and buildings Not later than 1 year Later than one year but not later than 5 years Later than 5 years Furniture and equipment Not later than 1 year Later than one year but not later than 5 years Later than 5 years Total lease rental commitments Total commitments 1 Relates to premises and equipment. Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m – – 58 3 1 62 327 729 389 56 – 38 – – 94 252 559 324 1,445 1,135 45 76 – 121 1,566 1,628 38 68 – 106 1,241 1,335 – – 23 3 1 27 263 605 366 1,234 38 70 – 108 1,342 1,369 56 – 14 – – 70 187 422 298 907 31 63 – 94 1,001 1,071 44: credit Related commitments, guarantees, contingent Liabilities and contingent Assets cREDiT RELATED cOmmiTmENTS gUARANTEES AND cONTiNgENT LiABiLiTiES credit related commitments Facilities provided Undrawn facilities Australia New Zealand Asia Pacific, Europe & America Total Consolidated The Company Contract amount 2010 $m Contract amount 2009 $m 124,029 106,644 78,410 14,200 31,419 72,170 16,180 18,294 Contract amount 2010 $m 106,403 78,207 – 28,196 124,029 106,644 106,403 Contract amount 2009 $m 88,006 72,210 – 15,796 88,006 guarantees and contingent liabilities Details of the estimated maximum amount of guarantees and contingent liabilities that may become payable are disclosed on the following pages. These guarantees and contingent liabilities relate to transactions that the group has entered into as principal. Documentary letters of credit involve the issue of letters of credit guaranteeing payment in favour of an exporter secured against an underlying shipment of goods or backed by a confirmatory letter of credit from another bank. Performance related contingencies are liabilities that oblige the group to make payments to a third party should the customer fail to fulfil the non-monetary terms of the contract. To reflect the risk associated with these transactions, they are subjected to the same credit origination, portfolio management and collateral requirements for customers that apply for loans. The contract amount represents the maximum potential amount that could be lost if the counterparty fails to meet its financial obligations. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. financial guarantees Standby letters of credit Documentary letter of credit Performance related contingencies Other Total Australia New Zealand Asia Pacific, Europe & America Total Consolidated The Company Contract amount 2010 $m 6,313 1,991 2,498 16,103 580 27,485 14,309 975 12,201 27,485 Contract amount 2009 $m 4,760 1,528 3,195 14,924 811 25,218 12,758 1,113 11,347 25,218 Contract amount 2010 $m 5,981 1,867 2,276 15,176 445 25,745 14,309 – 11,436 25,745 Contract amount 2009 $m 4,561 1,492 2,942 14,004 504 23,503 12,781 – 10,722 23,503 182 ANZ Annual Report 2010 Financial Report 183 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 44: credit Related commitments, guarantees, contingent Liabilities and contingent Assets (continued) 44: credit Related commitments, guarantees, contingent Liabilities and contingent Assets (continued) OThER BANK RELATED cONTiNgENT LiABiLiTiES iv) interbank deposit agreement gENERAL There are outstanding court proceedings, claims and possible claims against the group, the aggregate amount of which cannot readily be quantified. Appropriate legal advice has been obtained and, in the light of such advice, provisions as deemed necessary have been made. in some instances we have not disclosed the estimated financial impact as this may prejudice the interests of the group. ANZ has entered into an interbank Deposit Agreement with the major banks in the payments system. This agreement is a payment system support facility certified by the Australian Prudential Regulation Authority, where the terms are such that if any bank is experiencing liquidity problems, the other participants are required to deposit equal amounts of up to $2 billion for a period of 30 days. At the end of 30 days the deposit holder has the option to repay the deposit in cash or by way of assignment of mortgages to the value of the deposit. i) Exception fees class action On 22 September 2010, litigation funder imf (Australia) Ltd commenced a class action against ANZ, which it said was on behalf of 27,000 ANZ customers and relating to more than $50 million in exception fees charged to those customers over the previous 6 years. The case is at an early stage. ANZ is defending it. v) Nominee activities 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 in accordance with the terms of the applicable agreement refer note 42. vi) New Zealand commerce commission ANZ is aware that the New Zealand commerce commission is looking at credit contract fees under the New Zealand credit contracts and consumer finance Act 2003 (“cccfA”). in its 2010–2013 Statement of intent the commission stated that: “in ccfcfA enforcement, the commission will continue to focus on unreasonable credit fees, whilst still being mindful of disclosure issues.” in particular ANZ is aware that the commission is investigating the level of default fees charged on credit cards and the level of currency conversion charges on overseas transactions using credit cards and also informal excess arrangements on credit cards under the cccfA. At this stage the possible outcome of these investigations and any liability or impact on fees cannot be determined with any certainty. vii) clearing and settlement obligations in accordance with the clearing and settlement arrangements set out: in the Australian Payments clearing Association Limited Regulations for the Australian Paper clearing System, the Bulk Electronic clearing System, the consumer Electronic clearing System and the high value clearing System (hvcS), the company has a commitment to comply with rules which could result in a bilateral exposure and loss in the event of a failure to settle by a member institution; and in the Austraclear System Regulations and the cLS Bank international Rules, the company has a commitment to participate in loss-sharing arrangements in the event of a failure to settle by a member institution. for hvcS and Austraclear, the obligation arises only in limited circumstances. ii) Securities Lending There are ongoing developments concerning the events surrounding ANZ’s securities lending business which may continue for some time. There is a risk that further actions (court proceedings or regulatory actions) may be commenced against various parties, including ANZ. The potential impact or outcome of future claims (if any) cannot presently be ascertained. ANZ would review and defend any claim, as appropriate. On 4 July 2008, ANZ appointed a receiver and manager to Primebroker Securities Limited. On 31 August 2009, an Associate Justice set aside some statutory demands served by the receiver and said that, among other things, ANZ’s appointment of the receiver to Primebroker was invalid. The receiver is appealing the decision. ANZ has joined in the appeal. Separately: On 14 April 2010, the liquidator of Primebroker filed an action against ANZ, alleging (among other things) that a charge created on 12 february 2008 is void against the liquidators. The action initially claimed $98 million and was subsequently increased to $176.5 million (plus interest and costs). On 15 July 2010, Primebroker and some associated companies brought an action against parties including ANZ, seeking $102 million and certain unquantified amounts. The allegations include misleading or deceptive conduct, wrongful appointment of receivers, and failure to perform an alleged equity investment agreement. ANZ is defending these actions. iii) contingent tax liability The Australian Taxation Office (ATO) is reviewing the taxation treatment of certain transactions, undertaken by the group in the course of normal business activities. Risk reviews are also being undertaken by revenue authorities in other jurisdictions, as part of normal revenue authority activity in those countries. The group has assessed these and other taxation claims arising in Australia and elsewhere, including seeking independent advice where appropriate, and considers that it holds appropriate provisions. 184 ANZ Annual Report 2010 viii) Deed of cross guarantee in respect of certain controlled entities Pursuant to class order 98/1418 (as amended) dated 13 August 1998, relief was granted to a number of wholly owned controlled entities from the corporations Act 2001 requirements for preparation, audit, and publication of individual financial statements. The results of these companies are included in the consolidated group results. The entities to which relief was granted are: ANZ Properties (Australia) Pty Ltd1 ANZ capital hedging Pty Ltd1 Alliance holdings Pty Ltd1 1 Relief originally granted on 21 August 2001. 2 Relief originally granted on 13 August 2002. 3 Relief originally granted on 9 September 2003. 4 Relief originally granted on 2 September 2008. 5 Relief originally granted on 11 february 2009. ANZ Orchard investments Pty Ltd2 ANZ Securities (holdings) Limited3 ANZ commodity Trading Pty Ltd4 ANZ funds Pty Ltd1 votraint No. 1103 Pty Ltd2 ANZ Nominees Ltd5 it is a condition of the class order that the company and each of the above controlled entities enter into a Deed of cross guarantee. A Deed of cross guarantee under the class order was executed by them and lodged with the Australian Securities and investments commission. The Deed of cross guarantee is dated 1 march 2006. 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 Act 2001. if a winding up occurs, 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. The consolidated income statement and consolidated balance sheet of the company and its wholly owned controlled entities which have entered into the Deed of cross guarantee are: Profit before tax income tax expense Profit after income tax foreign exchange differences taken to equity, net of tax change in fair value of available-for-sale financial assets, net of tax change in fair value of cash flow hedges, net of tax Actuarial gains/(loss) on defined benefit plans, net of tax Other comprehensive income, net of tax Total comprehensive income Retained profits at start of year Total available for appropriation Adjustments to opening retained earnings on adoption of revised accounting standard AASB 3(R) Ordinary share dividends provided for or paid Transfer from reserves Actuarial gains/(loss) on defined benefit plans after tax Retained profits at end of year Assets Liquid assets Available-for-sale assets/investment securities Net loans and advances Other assets Premises and equipment Total assets liabilities Deposits and other borrowings income tax liability Payables and other liabilities Provisions Total liabilities Net assets Shareholders’ equity1 1 Shareholders’ equity excludes retained profits and reserves of controlled entities within the class order. Consolidated 2010 $m 5,612 (1,449) 4,163 (391) 70 40 (18) (299) 3,864 11,596 15,759 (39) (2,667) 12 (18) 13,047 18,558 16,973 277,956 133,948 1,545 448,980 253,608 1,069 161,326 971 2009 $m 4,181 (925) 3,256 (469) 16 (164) (113) (730) 2,526 10,883 14,139 – (2,452) 22 (113) 11,596 20,201 13,554 256,017 130,885 1,487 422,144 227,301 143 164,317 905 416,974 392,666 32,006 32,006 29,478 29,478 Financial Report 185 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 44: credit Related commitments, guarantees, contingent Liabilities and contingent Assets (continued) 45: Superannuation and Other Post Employment Benefit Schemes ix) iNg New Zealand funds ANZ National Bank markets and distributes a range of wealth management products in New Zealand. The products are manufactured and managed by iNg (NZ) holdings Limited (“iNg NZ”). Trading in two of the products, the iNg Diversified Yield fund and the iNg Regular income fund (together, “the funds”), was suspended on 13 march 2008, due to the deterioration in the liquidity and credit markets. Some of the units in the funds were sold by ANZ National Bank to its customers. in June 2009, iNg NZ AUT investments Limited, a subsidiary of iNg NZ, made an offer to investors in the funds. investors holding approximately 99% of the funds accepted the offer to purchase their units. in June 2010, ANZ National Bank and iNg NZ reached settlements with the New Zealand commerce commission and the New Zealand Securities commission in relation to the commerce commission’s investigation into ANZ National Bank and iNg NZ’s marketing and promotion of the funds. As part of the settlement with the commerce commission, NZD45 million will be paid to eligible investors in the funds, and the group will pay the commerce commission NZD1 million towards their investigation costs. As part of the settlement with the Securities commission, iNg NZ has undertaken to engage an external party to complete, by 1 february 2011, an audit and review of its procedures and processes to the extent they relate to iNg NZ’s business of developing and offering investment products to the public and to subsequently implement any recommendations of that review. ANZ National Bank has undertaken to facilitate and assist with the iNg NZ audit, review and implementation. The commerce commission and the Securities commission have agreed they will not take any further action against ANZ National Bank, iNg NZ or their affiliates in relation to the funds. The ultimate cost to the group will depend on the final value of units in the funds, any recoveries under insurance, the assessment and outcome of customer complaints and the results of any litigation that may be brought in connection with the funds or their sale. The group considers that it has adequately provided for these matters. x) Sale of grindlays businesses On 31 July 2000, ANZ completed the sale to Standard chartered Bank (ScB) of ANZ grindlays Bank Limited and the private banking business of ANZ in the United Kingdom and Jersey, together with ANZ grindlays (Jersey) holdings Limited and its subsidiaries, for USD1.3 billion in cash. ANZ provided warranties and certain indemnities relating to those businesses and, where it was anticipated that payments would be likely under the warranties or indemnities, made provisions to cover the anticipated liability. The issues below have not impacted adversely the reported results. All settlements, penalties and costs have been covered within the provisions established at the time. FERA in 1991 certain amounts were transferred from non-convertible indian Rupee accounts maintained with grindlays in india. These transactions may not have complied with the provisions of the foreign Exchange Regulation Act, 1973. grindlays, on its own initiative, brought these transactions to the attention of the Reserve Bank of india. The indian authorities served notices on grindlays and certain of its officers in india and civil penalties have been imposed which are the subject of appeals. criminal prosecutions are pending and will be defended. The amounts in issue are not material. Tax Indemnity ANZ provided an indemnity relating to tax liabilities of grindlays (and its subsidiaries) and the Jersey Sub-group to the extent to which such liabilities were not provided for in the grindlays accounts as at 31 July 2000. claims have been made under this indemnity, with no material impact on the group expected. cONTiNgENT ASSETS National housing Bank in 1992, grindlays received a claim aggregating to approximately indian Rupees 5.06 billion from the National housing Bank (NhB) in india. The claim arose out of cheques drawn by NhB in favour of grindlays, the proceeds of which were credited to the account of a grindlays customer. grindlays won an arbitration award in march 1997, under which NhB paid grindlays an award of indian Rupees 9.12 billion. NhB subsequently won an appeal to the Special court of mumbai, after which grindlays filed an appeal with the Supreme court of india. grindlays paid the disputed money including interest into court. Ultimately, the parties settled the matter and agreed to share the monies paid into court which by then totalled indian Rupees 16.45 billion (AUD 661 million at 19 January 2002 exchange rates), with grindlays receiving indian Rupees 6.20 billion (AUD 248 million at 19 January 2002 exchange rates) of the disputed monies. ANZ in turn received a payment of USD 124 million (USD equivalent of the indian Rupees received by grindlays) from Standard chartered Bank under the terms of an indemnity given in connection with the sale of grindlays to Standard chartered Bank. ANZ recovered $114 million in 2006 from its insurers in respect of the above. in addition, ANZ is entitled to share with NhB in the proceeds of any recovery from the estate of the customer whose account was credited with the cheques drawn from NhB. however, the indian Taxation Department is claiming a statutory priority to all of the funds available for distribution to creditors of that customer. The Special court passed an order in late 2007 scaling down the income Taxation Department’s priority, however, that order has been partially set aside on appeal by the supreme court of india. The matter has been remanded to the Special court for deliberation on certain issues. Description of the group’s post employment benefit schemes The group has established a number of pension, superannuation and post retirement medical benefit schemes throughout the world. The group may be 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 are: Country Scheme Scheme type Australia ANZ Australian Staff Superannuation Scheme1,2 New Zealand ANZ National Bank Staff Superannuation Scheme (formerly ANZ group (New Zealand) Staff Superannuation Scheme)1,2 National Bank Staff Superannuation fund1,2 UK ANZ UK Staff Pension Scheme1 Defined contribution scheme Section c3 or Defined contribution scheme Section A or Defined benefit scheme Pension Section4 Defined benefit scheme5 or Contribution levels Employee/ participant Employer Optional8 Balance of cost10 Optional 9% of salary11 Nil Nil Balance of cost12 Balance of cost13 Defined contribution scheme minimum of 2.5% of salary 7.5% of salary14 Defined benefit scheme6 or 5.0% of salary Balance of cost15 Defined contribution scheme7 minimum of 2.0% salary 11.5% of salary16 Defined benefit scheme7 5.0% of salary9 Balance of cost17 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. These schemes provide for pension benefits. These schemes provide for lump sum benefits. 1 2 3 closed to new members in 1997. 4 closed to new members. Operates to make pension payments to retired members or their dependants. 5 closed to new members on 31 march 1990. Operates to make pension payments to retired members of that section of the scheme or their dependants. 6 closed to new members on 1 October 1991. 7 closed to new members on 1 October 2004. 8 Optional but with minimum of 1% of salary. 9 10 As determined by the Trustee on the recommendation of the actuary – currently 9% (2009: 9%) of members’ salaries. 11 2009: 9% of salary. 12 As determined by the Trustee on the recommendation of the actuary – currently nil (2009: nil). 13 As recommended by the actuary – currently nil (2009: nil). 14 2009: 7.5% of salary. 15 As recommended by the actuary – currently 24.8% (2009: 24.8%) of members’ salaries. 16 2009: 11.5% of salary. 17 As agreed by the Trustee and group after taking the advice of the actuary – currently 26% (2009: 26%) of pensionable salaries and additional quarterly contributions of gBP 7.5 million from 1 October 2003, all member contributions are at a rate of 5% of salary. until December 2015. 186 ANZ Annual Report 2010 Financial Report 187 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 45: Superannuation and Other Post Employment Benefit Schemes (continued) 45: Superannuation and Other Post Employment Benefit Schemes (continued) funding and contribution information for the defined benefit sections of the schemes The funding and contribution information for the defined benefit sections of the schemes as extracted from the schemes’ most recent financial reports is set out below. in this financial report, the net (liability)/asset arising from the defined benefit obligation recognised in the balance sheet has been determined in accordance with AASB 119 “Employee Benefits”. however, the excess or deficit of the net market value of assets over accrued benefits shown below has been determined in accordance with AAS 25 “financial Reporting by Superannuation Plans”. The excess or deficit for funding purposes shown below differs from the net (liability)/asset in the balance sheet because AAS 25 prescribes a different measurement date and basis to those used for AASB 119 purposes. The current contribution recommendations for the major defined sections of the schemes are described below. ANZ Australian Staff Superannuation Scheme Pension Section The Pension Section of the ANZ Australian Staff Superannuation Scheme is closed to new members. An interim actuarial valuation, conducted by consulting actuaries Russell Employee Benefits as at 31 December 2009, showed a deficit of $9 million and the actuary recommended that the funding position of the Pension Section be reviewed as part of the next actuarial valuation. group contributions to the Pension Section remain suspended until the review is completed. The next full actuarial valuation is due to be conducted as at 31 December 2010. The following economic assumptions were used in formulating the actuary’s funding recommendations: 2010 Schemes ANZ Australian Staff Superannuation Scheme Pension Section1 ANZ UK Staff Pension Scheme1 ANZ UK health Benefits Scheme4 ANZ National Bank Staff Superannuation Scheme2 National Bank Staff Superannuation fund3 Other5,6 Total Net market value of assets held by scheme $m Excess/(deficit) of net market value of assets over accrued benefits $m 20 662 – 5 261 25 973 (9) (241) (6) – (15) (7) (278) Accrued benefits* $m 29 903 6 5 276 32 1,251 * Determined in accordance with AAS 25 ‘financial Reporting by Superannuation Plans’, which prescribes a different measurement date and basis to those applied in this financial report under AASB 119 ‘Employee Benefits’. Under AASB 119, the discount rates used are based on prevailing government and corporate bond rates at the reporting date (30 September 2010), rather than the expected return on scheme assets as at the most recent actuarial valuation date (set out below) as prescribed by AAS 25. 1 Amounts were measured at 31 December 2009. 2 Amounts were measured at 31 December 2007. 3 Amounts were measured at 31 march 2010. 4 Amounts were measured at 30 September 2010. 5 Amounts were measured at 30 September 2007 and 30 September 2010 (as applicable). 6 Other includes the defined benefit arrangements in Japan, Philippines and Taiwan. following the acquisition of RBS, the amount shown for “other” has increased as a result of the inclusion of an additional defined benefit arrangement in Taiwan. 2009 Schemes ANZ Australian Staff Superannuation Scheme Pension Section1 ANZ UK Staff Pension Scheme1 ANZ UK health Benefits Scheme4 ANZ National Bank Staff Superannuation Scheme2 National Bank Staff Superannuation fund3 Other5,6 Total Net market value of assets held by scheme $m Excess/(deficit) of net market value of assets over accrued benefits $m 21 649 – 5 139 5 819 (13) (328) (9) – (15) (2) (367) Accrued benefits* $m 34 977 9 5 154 7 1,186 * Determined in accordance with AAS 25 ‘financial Reporting by Superannuation Plans’, which prescribes a different measurement date and basis to those applied in this financial report under AASB 119 ‘Employee Benefits’. Under AASB 119, the discount rates used are based on prevailing government and corporate bond rates at the reporting date (30 September 2009), rather than the expected return on scheme assets as at the most recent actuarial valuation date (set out below) as prescribed by AAS 25. 1 Amounts were measured at 31 December 2008. 2 Amounts were measured at 31 December 2007. 3 Amounts were measured at 31 march 2008. 4 Amounts were measured at 30 September 2009. 5 Amounts were measured at 30 September 2007. 6 Other includes the defined benefit arrangements in Japan, Philippines and Taiwan. Employer contributions to the defined benefit sections are based on recommendations by the schemes’ actuaries. funding recommendations are made by the actuaries based on assumptions of various matters such as future investment performance, interest rates, salary increases, mortality rates and turnover levels. The funding methods adopted by the actuaries are intended to ensure that the benefit entitlements of employees are fully funded by the time they become payable. The group expects to make contributions of $60 million (2009: $61 million) to the defined benefit sections of the schemes during the next financial year. Rate of investment return Pension indexation rate 8% p.a. 3% p.a. The group has no present liability under the Scheme’s Trust Deed to commence contributions or fund the deficit. ANZ UK Staff Pension Scheme An interim actuarial valuation, conducted by consulting actuaries Towers Watson, as at 31 December 2009 showed a deficit of gBP 147 million ($241 million at 30 September 2010 exchange rates). following the actuarial valuation as at 31 December 2008, the group agreed to make regular contributions at the rate of 26% of pensionable salaries. These contributions are sufficient to cover the cost of accruing benefits. To address the deficit, the group agreed to continue to pay additional quarterly contributions of gBP 7.5 million until 31 December 2015. These contributions will be reviewed following the next actuarial valuation which is scheduled to be undertaken as at 31 December 2010. The following economic assumptions were used in formulating the actuary’s funding recommendations: Rate of investment return on existing assets – to 31 December 2019 – to 31 December 2034 Rate of investment return for determining ongoing contributions Salary increases Pension increases 5.6% p.a. 4.3% p.a. 7.3% p.a. 5.4% p.a. 3.6% p.a. The group has no present liability under the Scheme’s Trust Deed to fund the deficit measured under AAS 25. A contingent liability may arise in the event that the Scheme was wound up. if this were to happen, the Trustee would be able to pursue the group for additional contributions under the UK Employer Debt Regulations. The group intends to continue the Scheme on an on-going basis. On adoption of AifRS, a net liability representing the defined benefit obligation calculated under AASB 119 was recognised in the balance sheet. The basis of calculation under AASB119 is detailed in note 1 f(vi) and on page 96. National Bank Staff Superannuation fund A full actuarial valuation of the National Bank Staff Superannuation fund, conducted by consulting actuaries AON consulting NZ, as at 31 march 2010 showed a deficit of NZD 20 million ($15 million at 30 September 2010 exchange rates). The actuary recommended that the group make contributions of 24.8% of salaries plus a lump sum contribution of NZD 5 million (net of employer superannuation contribution tax) in respect of members of the defined benefit section. The following economic assumptions were used in formulating the actuary’s funding recommendations: Rate of investment return (net of income tax) Salary increases Pension increases 5.5% p.a. 3.0% p.a. 2.5% p.a. The group has no present liability under the fund’s Trust Deed to fund the deficit measured under AAS 25. A contingent liability may arise in the event that the fund was wound up. Under the fund’s Trust Deed, if the fund were wound up, the group is required to pay the Trustees of the fund an amount sufficient to ensure members do not suffer a reduction in benefits to which they would otherwise be entitled. The group intends to continue the fund on an on-going basis. On adoption of AifRS, a net asset representing the defined benefit surplus calculated under AASB 119 was recognised in the balance sheet. The basis of calculation under AASB119 is detailed in note 1 f(vi) and on page 96. 188 ANZ Annual Report 2010 Financial Report 189 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 45: Superannuation and Other Post Employment Benefit Schemes (continued) 45: Superannuation and Other Post Employment Benefit Schemes (continued) The following tables summarise the components of the expense recognised in the income statement and the amounts recognised in the balance sheet under AASB 119 for the defined benefit sections of the schemes: Amount recognised in income in respect of defined benefit schemes current service cost interest cost Expected return on assets Past service cost Adjustment for contributions tax Total included in personnel expenses Amounts included in the balance sheet in respect of its defined benefits scheme Present value of funded defined benefit obligation fair value of scheme assets Net liability arising from defined benefit obligation Amounts recognised in the balance sheet Other assets Payables and other liabilities Net liability arising from defined benefit obligation Amounts recognised in equity in respect of defined benefit schemes Actuarial (gains)/losses incurred during the year and recognised directly in retained earnings cumulative actuarial (gains)/losses recognised directly in retained earnings Consolidated 2010 $m 2009 $m The Company 2010 $m 2009 $m 6 56 (50) – 2 14 8 72 (67) 5 2 20 (1,059) 873 (186) (1,095) 849 (246) – (186) (186) 6 229 – (246) (246) 175 223 5 48 (44) – – 9 (928) 761 (167) – (167) (167) 26 207 6 63 (60) 5 – 14 (938) 738 (200) – (200) (200) 153 181 The group has a legal liability to fund deficits in the schemes, but no legal right to use any surplus in the schemes to further its own interests. The group has no present liability to settle deficits with an immediate contribution. for more information about the group’s legal liability to fund deficits, refer to the earlier description of the current contribution recommendations for the schemes. Movements in the present value of the defined benefit obligation in the relevant period Opening defined benefit obligation current service cost interest cost contributions from scheme participants Actuarial (gains)/losses Past service cost Liabilities assumed in business combination Exchange difference on foreign schemes Benefits paid closing defined benefit obligation Movements in the fair value of the scheme assets in the relevant period Opening fair value of scheme assets Expected return on scheme assets Actuarial gains/(losses) Exchange difference on foreign schemes contributions from the employer contributions from scheme participants Benefits paid Assets acquired in business combination closing fair value of scheme assets1 Actual return on scheme assets 1,095 6 56 – 42 – 21 (103) (58) 1,059 849 50 36 (83) 59 1 (58) 19 873 86 1,160 8 72 1 126 5 – (205) (72) 1,095 1,006 67 (49) (161) 57 1 (72) – 849 18 938 5 48 – 52 – 21 (92) (44) 928 738 44 26 (75) 53 – (44) 19 761 70 1,003 6 63 – 121 5 – (202) (58) 938 871 60 (32) (157) 54 – (58) – 738 28 1 Scheme assets include the following financial instruments issued by the group: cash and short-term debt instruments $1.6 million (September 2009: $2.4 million), fixed interest securities $0.5 million (September 2009: $0.6 million) and equities nil (September 2009: $0.2 million). Analysis of the scheme assets Equities Debt securities Property Other assets Total assets 190 ANZ Annual Report 2010 Consolidated Fair value of scheme assets The Company Fair value of scheme assets 2010 % 39 39 8 14 100 2009 % 35 39 7 19 100 2010 % 37 39 9 15 100 2009 % 33 37 8 22 100 Key actuarial assumptions used (expressed as weighted averages) Discount rate ANZ Australian Staff Superannuation Scheme – Pension Section ANZ UK Staff Pension Scheme ANZ UK health Benefits Scheme ANZ National Bank Staff Superannuation Scheme National Bank Staff Superannuation fund Expected rate of return on scheme assets ANZ Australian Staff Superannuation Scheme – Pension Section ANZ UK Staff Pension Scheme ANZ UK health Benefits Scheme ANZ National Bank Staff Superannuation Scheme National Bank Staff Superannuation fund future salary increases ANZ UK Staff Pension Scheme National Bank Staff Superannuation fund future pension increases ANZ Australian Staff Superannuation Scheme – Pension Section ANZ UK Staff Pension Scheme – in payment – in deferment ANZ National Bank Staff Superannuation Scheme National Bank Staff Superannuation fund future medical cost trend – short-term ANZ UK health Benefits Scheme future medical cost trend – long-term ANZ UK health Benefits Scheme 2010 % 2009 % 5.00 5.00 5.00 6.00 6.00 8.00 5.60 n/a 4.50 5.50 5.00 3.00 2.50 3.20 2.70 2.50 2.50 4.50 4.00 5.25 5.50 5.50 6.00 6.00 8.50 6.20 n/a 4.50 5.50 4.90 3.00 3.00 3.10 3.10 2.50 2.50 7.00 5.00 To determine the expected returns of each of the asset classes held by the relevant scheme, the actuaries assessed historical return trends and market expectations for the asset class returns applicable for the period over which the obligation is to be settled. The overall expected rate of return on assets for each scheme was then determined as the weighted average of the expected returns for the classes of assets held by the relevant scheme. Assumed medical cost trend rates do not have a material effect on the amounts recognised as income or included in the balance sheet. Consolidated The Company 2010 $m 2009 $m 2008 $m 2007 $m 2006 $m 2010 $m 2009 $m 2008 $m 2007 $m 2006 $m History of experience adjustments Defined benefits obligation fair value of scheme assets Surplus/(deficit) Experience adjustments on scheme liabilities Experience adjustments on scheme assets (1,059) 873 (186) (2) 36 (1,095) 849 (246) 7 (49) (1,160) 1,006 (154) 12 (195) (1,267) 1,199 (68) (1,462) 1,238 (224) 9 6 7 48 (928) 761 (167) 1 26 (938) 738 (200) 7 (32) (1,003) 871 (132) 8 (177) (1,112) 1,037 (75) (1,296) 1,067 (229) 10 12 5 44 Financial Report 191 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 46: Employee Share and Option Plans ANZ operates a number of employee share and option schemes under the ANZ Employee Share Acquisition Plan and the ANZ Share Option Plan. ANZ EmPLOYEE ShARE AcQUiSiTiON PLAN ANZ Employee Share Acquisition Plan (ESAP) schemes that existed during the 2008/09 and 2009/10 years were the $1,000 Share Plan, the Deferred Share Plan, the Restricted Share Plan and the Employee Share Save Scheme (ESSS). Note the ESSS is an employee salary sacrifice plan and is not captured as a share based payment expense. $1,000 share plan Each permanent employee (excluding senior executives) who has had continuous service for one year is eligible to participate in the $1,000 scheme enabling the grant of up to $1,000 of ANZ shares in each financial year, subject to approval of the Board. At a date approved by the Board, the shares will be granted to all eligible employees using the 1 week weighted average price of ANZ shares traded on the ASx in the week leading up to and including the date of grant. in Australia and most overseas locations, ANZ ordinary shares are granted to eligible employees for nil consideration and vest immediately when granted, as there is no forfeiture provision. it is a requirement, however, that shares are held in trust for three years from the date of grant, after which time they may remain in trust, be transferred to the employee’s name or sold. in general, dividends received on the shares are automatically reinvested into the Dividend Reinvestment Plan. Shares granted to eligible New Zealand employees under this plan vest subject to the satisfaction of a three year service period, after which time they may remain in trust, to be transferred into the employee’s name or sold. At the time of transfer, employees are required to pay NZD 1 cent per share. Shares may be forfeited in the event of dismissal for serious misconduct or resignation. Dividends are received as cash. During the 2009/10 year, 1,344,436 shares with an issue price of $22.06 were granted under the plan to employees on 7 December 2009 (2008/09 year: 1,936,095 shares with an issue price of $14.40 were granted on 8 December 2008). Deferred share plan A Short Term incentive (STi) mandatory deferral program was implemented from 2009, with equity deferral relating to half of all amounts above a specified threshold. Deferred equity can be taken as 100% shares or 50% shares and 50% options. for management Board members, mandatory STi equity deferral commenced in 2008 (rather than 2009). Unvested STi deferred shares are forfeited on resignation or dismissal for serious misconduct. Selected employees may also be granted Long Term incentive (LTi) deferred shares which vest to the employee up to three years from the date of grant. Ordinary shares granted under this LTi plan may be held in trust beyond the deferral period. Unvested LTi deferred shares are forfeited on resignation, dismissal for serious misconduct or termination on notice. in the event of death or total and permanent disablement, all shares will be released to the employee in full. STi three year deferred shares were granted under an historical ANZ STi program, and may be held in trust beyond the deferral period. The last grant of three year STi deferred shares was made on 11 may 2004 (with the vesting date being 11 may 2007). There were no 3 year STi deferred share grants in the 2008/09 or 2009/10 years. STi deferred shares with a two year deferral period were granted under a business unit specific incentive plan (primarily as a retention tool), and may be held in trust beyond the deferral period. in exceptional circumstances, sign-on deferred shares are granted to certain employees upon commencement with ANZ to compensate for equity forgone from their previous employer. The vesting period generally aligns with the remaining vesting period of equity forgone, and therefore varies between grants. Retention three year deferred shares may also be granted occasionally to high performing employees who are regarded as a significant retention risk to ANZ. Sign-on and retention deferred shares will be forfeited on resignation, dismissal for serious misconduct or termination on notice. in the event of death or total and permanent disablement, all shares will be released to the employee in full. The employee receives all dividends on deferred shares while held in trust (cash or dividend reinvestment plan). The issue price for deferred shares is based on the volume weighted average price of the shares traded on the ASx in the week leading up to and including the date of grant. During the 2009/10 year, 5,511,965 deferred shares with a weighted average grant price of $22.83 were granted under the deferred share plan (2008/09 year1: 4,342,296 shares with a weighted average grant price of $17.23 were granted). Restricted share plan in prior years, eligible employees were able to elect a pre-tax sacrifice of part or all of their annual cash bonus for ANZ shares. The shares were subject to a 1 year restriction period, however, they may be left in trust beyond the restriction period. The shares are subject to forfeiture on dismissal for serious misconduct. The shares are released to the employee on termination for any other reason. The employee receives all dividends on these restricted shares (cash or dividend reinvestment plan). The issue price is based on the volume weighted average price of the shares traded on the ASx on the week leading up to and including the date of grant. During the 2009/10 year, no shares were granted under the restricted share plan (2008/09 year: 272,626 shares with an issue price of $17.18 were granted). Share valuations The fair value of shares granted in the 2009/10 year under the $1,000 share plan, the Deferred Share Plan and the Restricted Share Plan, measured as at the date of grant of the shares, is $154.4 million based on 6,856,401 shares at a weighted average price of $22.52 (2008/09 year1: fair value of shares granted was $108.4 million based on 6,551,017 shares at a weighted average price of $16.55). The volume weighted average share price of all ANZ shares sold on the ASx on the date of grant is used to calculate the fair value of shares. No dividends are incorporated into the measurement of the fair value of shares. CEO Options At the 2008 Annual general meeting, shareholders approved a special grant to the cEO of 700,000 options which were granted on 18 December 2008. These will be available for exercise from the date of vesting, 18 December 2011, with the option exercise price being equal to the market value of ANZ shares at the date they were granted i.e. $14.18 per share. Upon exercise, each Option entitles the cEO to one ordinary ANZ share. At grant the options were independently valued at $2.27 each i.e. a total value of $1.589 million. however, these options will only have any value if, at the vesting date or during the subsequent exercise period (i.e. 2 years after vesting), the share price exceeds $14.18. This value will be based on the amount by which the market price exceeds the exercise price multiplied by the total number of options. Deferred options (No performance hurdles) Under the STi deferral program half of all amounts above a specified threshold are provided as deferred equity. This can be taken as 100% shares or 50% shares and 50% options (refer to Deferred Share Plan section above). Deferred share rights (No performance hurdles) Deferred share rights are granted instead of deferred shares to accommodate off-shore taxation implications. They provide the right to acquire ANZ shares at nil cost after a specified vesting period. The fair value of rights is adjusted for the absence of dividends during the restriction period. Treatment of rights in respect of cessation relates to the purpose of the grant (refer to Deferred Share Plan and Restricted Share Plan sections). Legacy Option Plans The following legacy plans are no longer being offered to group employees, but were expensed during the 2008/09 and 2009/10 years. Performance option plan (No performance hurdle applies) Performance options were granted to certain employees (below executive levels) as part of an historical LTi program, with 7 November 2005 being the last grant of LTi performance options. The options can only be exercised after a three-year vesting period and before the seventh anniversary of the grant date. There are no performance conditions attached to these options as they were primarily granted as a retention tool. All unexercised options are forfeited on dismissal for serious misconduct, resignation and termination on notice. On death or total and permanent disablement, all unvested options will become available for exercise. 46: Employee Share and Option Plans (continued) ANZ ShARE OPTiON PLAN Selected employees may be granted options/rights, which entitle them to purchase ordinary fully paid shares in ANZ at a price fixed at the time the options/rights are granted. voting and dividend rights will be attached to the unissued ordinary shares when the options/ rights have been exercised. Each option/right entitles the holder to one ordinary share subject to the terms and conditions imposed on grant. The exercise price of the options, determined in accordance with the rules of the plan, is generally based on the weighted average price of the shares traded on the ASx in the week leading up to and including the date of grant. for rights, the exercise price is nil. ANZ Share Option Plan schemes expensed in the 2008/09 and 2009/10 years are as follows: current Option Plans Performance rights plan (excl. CEO performance rights) Performance rights are granted to certain employees as part of ANZ’s LTi program. The first grant of performance rights was in November 2005, and provides the right to acquire ANZ shares at nil cost, subject to a three-year vesting period and a TSR performance hurdle. The proportion of LTi performance rights that become exercisable will depend upon the TSR achieved by ANZ relative to a comparator group of major financial services companies, measured over the same period (since grant) and calculated at the third anniversary of grant. An averaging calculation is used for TSR over a 90 day period for start and end values in order to reduce the impact of share price volatility. Performance equal to the median TSR of the comparator group will result in half the performance rights becoming exercisable. vesting will increase on a straight-line basis until all of the performance rights become exercisable where ANZ TSR is at or above the 75th percentile of TSRs in the comparator group. Where ANZ’s performance falls between two of the comparators, TSR is measured on a pro-rata basis. The performance hurdle will only be tested once at the end of the three year vesting period. if the performance rights do not pass the hurdle on the testing date, or they are not exercised by the end of the exercise period (5 years from the date of grant), they will lapse. in the case of dismissal for serious misconduct, all unexercised performance rights will be forfeited. in the case of resignation or termination on notice, only performance rights that become exercisable (and pass the performance hurdle) by the end of the notice period may be exercised. in the case of death or total and permanent disablement, all performance rights are available for exercise (with the performance hurdle waived). CEO Performance rights The cEO’s LTi (as approved by shareholders at the 2007 Annual general meeting), consists of 3 tranches of performance rights, each to a maximum value of $3 million. The performance periods for each tranche begin on the date of grant of 19 December 2007 and end on the 3rd, 4th and 5th anniversaries respectively (i.e. only one performance measurement for each tranche). The level of vesting for each tranche will be based on ANZ TSR performance against a comparator group of companies consistent with the performance rights plan. Each tranche has a 1 year exercise period. in the case of resignation or dismissal for serious misconduct, all unexercised performance rights will be forfeited. in the case of termination on notice, only performance rights that become exercisable (and pass the performance hurdle) by the end of the notice period may be exercised. in the case of death or total and permanent disablement, all performance rights are available for exercise (with the performance hurdle waived). 192 ANZ Annual Report 2010 Financial Report 193 1 2008/09 figures are slightly higher then those reported in the 2009 Annual Report due to inclusion of further grants processed in 2009/10 relating to 2008/09. NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 46: Employee Share and Option Plans (continued) 46: Employee Share and Option Plans (continued) Option Movements Details of options over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2009/10 and movements during 2009/10 are set out below: Weighted Average Exercise Price Opening balance 1 October 2009 15,129,013 $14.80 Options Granted 1,529,032 $3.14 Options Forfeited (657,491) $12.30 Options Expired1 Options Exercised Closing balance 30 September 2010 (1,862,160) $17.54 (2,598,516) $14.57 11,539,878 $13.01 The weighted average share price during the year ended 30 September 2010 was $22.92 (2008/09: $16.57). The weighted average remaining contractual life of share options outstanding at 30 September 2010 was 2.2 years (2008/09: 2.4 years). The weighted average exercise price of all exercisable share options outstanding at 30 September 2010 was $19.43 (2008/09: $18.95). A total of 6,551,277 exercisable share options were outstanding at 30 September 2010 (2008/09: 4,015,504). Details of options over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2008/09 and movements during 2008/09 are set out below: Weighted Average Exercise Price Opening balance 1 October 2008 17,697,581 $14.81 Options Granted 3,260,938 $11.64 Options Forfeited (2,709,394) $7.83 Options Expired1 Options Exercised Closing balance 30 September 2009 (2,191,963) $18.71 (928,149) $15.04 15,129,013 $14.80 1 Numbers in the “Options Expired” column includes any options which may have expired due to a termination of employment whereby the employee was offered a grace period in which to exercise. No options over ordinary shares have been granted since the end of 2009/10 up to the signing of the Directors’ Report on 4 November 2010. Details of shares issued as a result of the exercise of options during 2009/10 are as follows: Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 17.34 17.60 370,945 9,648 9,637 9,637 23,765 9,669 17,956 223 500 50,354 9,144 7,081 192,344 525,843 – – – – – – – – – – – – 3,335,245 9,254,837 17.55 17.55 18.22 18.22 18.22 20.68 20.68 20.68 23.49 17.18 17.18 17.18 17.18 17.18 361,901 68,724 167,611 6,842 121,873 8,513 146,883 188,105 33,059 74,580 117,384 24,192 7,853 34,250 6,351,363 1,206,106 3,053,872 124,661 2,220,526 176,049 3,037,540 3,890,011 776,556 1,281,284 2,016,657 415,619 134,915 588,415 Details of shares issued as a result of the exercise of options during 2008/09 are as follows: Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 16.33 16.33 12,481 58,813 24,619 395 738 5,470 1,650 1,008 4,170 26,100 371,675 – – – – – – – – – 426,213 6,069,453 17.34 17.60 17.55 17.55 18.03 18.22 18.22 18.22 20.68 20.68 23.49 264,081 32,616 29,968 1,388 1,925 1,758 30,059 35,264 3,800 18,837 1,334 4,579,165 574,042 525,938 24,359 34,708 32,031 547,675 642,510 78,584 389,549 31,336 Details of shares as a result of the exercise of options since the end of 2009/10 up to the signing of the Directors’ Report on 4 November 2010 are as follows: Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 0.00 0.00 0.00 17.55 17.55 18.22 18.22 219 27,183 152 345,129 49,170 27,584 37,063 – – – 6,057,014 862,934 502,580 675,288 20.68 20.68 23.49 17.18 17.18 17.18 28,672 24,126 18,167 57,227 284 33,869 592,937 498,926 426,743 983,160 4,879 581,869 in determining the fair value below, we used standard market techniques for valuation including monte carlo and/or Black Scholes pricing models. The models take into account early exercise, non-transferability and market based performance hurdles. The signifi cant assumptions used to measure the fair value of instruments granted during 2009/10 are contained in the table below. Type of Equity STi Deferred Options STi Deferred Options STi Deferred Share Rights STi Deferred Share Rights LTi Deferred Share Rights LTi Deferred Share Rights LTi Performance Rights LTi Performance Rights LTi Performance Rights LTi Performance Rights Deferred Share Rights Deferred Share Rights Deferred Share Rights Deferred Share Rights Deferred Share Rights Deferred Share Rights Deferred Share Rights Grant date 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 13-Nov-09 24-Aug-10 13-Nov-09 24-Dec-09 17-mar-10 17-mar-10 21-Jan-10 20-Apr-10 20-Apr-10 20-Apr-10 25-Jun-10 25-Jun-10 25-Jun-10 Number of Options 105,252 105,243 96,431 101,260 310,789 2,439 371,811 57,726 168,918 173,130 3,701 8,576 3,118 3,259 8,369 2,916 6,094 Equity fair value ($) 4.83 5.09 21.41 20.39 19.42 22.13 12.17 11.26 14.80 14.44 20.26 23.32 24.05 23.01 21.50 20.57 19.69 Exercise price (5 day VWAP) ($) Share closing price at grant ($) ANZ expected volatility1 (%) Equity term (years) Vesting period (years) Expected life (years) Expected dividend yield (%) Risk free interest rate (%) 22.80 22.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 22.48 22.48 22.48 22.48 22.48 22.64 22.48 22.39 24.61 24.61 23.26 25.13 25.13 25.13 22.47 22.47 22.47 39 39 35 35 35 30 35 40 40 40 n/a 35 35 35 35 35 35 5 5 5 5 5 2.5 5 5 5 6 5 3.6 3 4 3 4 5 1 2 1 2 3 0.5 3 3 3 4 3 1.6 1 2 1 2 3 3 3.5 1 2 3 1.5 3 3 3 4 3 1.6 1 2 1 2 3 5.50 5.50 5.00 5.00 5.00 4.50 5.00 4.60 4.60 4.60 4.60 4.50 4.50 4.50 4.50 4.50 4.50 5.04 5.13 4.26 4.67 5.01 4.38 5.01 4.71 5.10 5.24 n/a 4.96 4.48 4.96 4.48 4.54 4.61 The signifi cant assumptions used to measure the fair value of instruments granted during 2008/09 are contained in the table below. Type of Equity Special Options STi Deferred Options STi Deferred Options STi Deferred Share Rights STi Deferred Share Rights LTi Deferred Share Rights LTi Performance Rights Special Retention Deferred Share Rights Grant date 18-Dec-08 31-Oct-08 31-Oct-08 31-Oct-08 31-Oct-08 31-Oct-08 31-Oct-08 Number of Options 700,000 1,212,216 418,766 84,659 89,121 369,598 368,368 Equity fair value ($) 2.27 2.80 2.94 16.38 15.45 14.58 9.99 Exercise price (5 day VWAP) ($) 14.18 17.18 17.18 0.00 0.00 0.00 0.00 Share closing price at grant ($) 14.27 17.36 17.36 17.36 17.36 17.36 17.36 9-Dec-08 18,210 14.39 0.00 14.10 ANZ expected volatility1 (%) Option term (years) Vesting period (years) Expected life (years) Expected dividend yield (%) Risk free interest rate (%) 30 30 30 30 30 30 30 34 5 5 5 5 5 5 5 5 3 1 2 1 2 3 3 2 4 3 3.5 1 2 3 3 2 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 3.37 4.48 4.64 4.28 4.48 4.48 4.25 3.49 1 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the options. The measure of volatility used in the model is the annualised standard deviation of the continuously compounded rates of return on the historical share price over a defined period of time preceding the date of grant. This historical average annualised volatility is then used to estimate a reasonable expected volatility over the expected life of the options. 194 ANZ Annual Report 2010 Financial Report 195 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 47: Key management Personnel Disclosures 48: Transactions with Other Related Parties SEcTiON A: ExEcUTivE DiREcTORS AND OThER KEY mANAgEmENT PERSONNEL cOmPENSATiON Key management personnel (KmP) are employees of the ultimate parent entity, Australia and New Zealand Banking group Limited (ANZ) or its subsidiaries. The KmP compensation included in the personnel expenses is as follows: Joint venture entities During the course of the financial year the group conducted transactions with joint venture entities on terms equivalent to those on an arm’s length basis as shown below: Short term employee benefits Post employment benefits Long term employment benefits Termination benefits Share-based payments 2010 $ 18,695,781 427,625 166,949 – 11,523,031 30,813,386 2009 $ 18,077,463 367,018 142,067 634,869 9,789,223 29,010,640 Amounts receivable from joint venture entities interest revenue interest expense commissions received from joint venture entities cost recovered from joint venture entities Consolidated 2010 $000 – 1,542 16,171 24,136 1,494 2009 $000 212,434 10,317 97,026 166,467 9,497 SEcTiON B: KEY mANAgEmENT PERSONNEL LOAN TRANSAcTiONS Loans made to directors of the company and other key management personnel of the group are made in the ordinary course of business on an arm’s length commercial basis, including the term of the loan, security required and the interest rate. Details of loans outstanding at the reporting date to directors of the company and other key management personnel of the group including their related parties, where the individuals aggregate loan balance exceeded $100,000 at any time in the year, are as follows: There have been no guarantees given or received. No outstanding amounts have been written down or recorded as allowances, as they are considered fully collectible. Revenue and cost recovery amounts include OnePath Australia Limited (formerly iNg Australia Limited) and iNg (NZ) holdings Limited only for the two months to full acquisition (2009: 12 months). Associates During the course of the financial year the company and group conducted transactions with associates on terms equivalent to those on an arm’s length basis as shown below: Directors Executive Director 2010 m Smith Executive Director 2009 m Smith Non-executive Directors 2010 P hay2 A Watkins3 Non-executive Directors 2009 P hay2 A Watkins3 Other key management personnel 2010 J fagg4 g K hodges A Thursby c Page Other key management personnel 2009 J fagg4 B c hartzer5 g K hodges P R marriott A Thursby c Page Opening balance 1 October $ Closing balance 30 September $ Interest paid and payable in the reporting period $ Highest balance in the reporting period $ – 6,840,953 592,896 6,840,953 535,611 – 62,297 1,000,000 1,125,000 3,289,964 – 3,189,724 4,117,937 10,415,975 1,890,097 1,750,932 3,641,055 12,438,898 3,055,034 905,479 1,931,834 – 1,125,000 3,490,211 1,125,000 3,289,964 – 8,018,058 1,596,910 559,471 4,117,937 12,105,808 10,415,975 – 1,890,097 1,750,932 65,023 250,694 3,954 213,132 240,024 552,875 110,871 22,798 208,765 381,671 170,733 7,399 99,751 19,854 1,131,263 3,490,211 1,128,856 3,295,434 4,625,136 10,530,669 1,890,097 1,760,616 4,319,402 13,039,953 10,581,121 912,467 1,931,834 1,843,116 Details regarding the aggregate of loans made, guaranteed or secured by any entity in the group to each group of directors and other key management personnel including related parties are as follows: Directors 2010 2009 Other key management personnel 2010 2009 4,414,964 3,725,335 11,456,164 4,414,964 18,174,941 21,972,300 10,174,439 30,280,749 908,613 279,783 926,568 888,173 3 2 3 5 1 Number in the group includes directors and specified executives with loan balances greater than $100,000. 2 P hay commenced as non-executive director effective 12 November 2008. 3 A Watkins commenced as non-executive director effective 12 November 2008 and the opening balance represents the balance on commencement. 4 J fagg commenced her role as cEO, ANZ (NZ) effective 1 may 2009 and the opening balance represents the balance on appointment to New Zealand’s cEO. J fagg stepped down from role due to illness 1 September 2010. 5 B hartzer ceased employment with ANZ effective 31 July 2009. 196 ANZ Annual Report 2010 Amounts receivable from associates Amounts payable to associates interest revenue interest payable Other revenue Dividend revenue cost recovered from associates Consolidated The Company 2010 $000 179,265 63,935 12,118 2,893 1,105 39,474 1,413 2009 $000 309,909 69,763 24,895 3,339 11,190 38,393 2,164 2010 $000 35,949 3,688 5,228 – 1,105 38,169 1,413 2009 $000 149,114 239 12,286 – 1,812 36,193 2,164 There have been no guarantees given or received. No outstanding amounts have been written down or recorded as allowances, as they are considered fully collectible. Subsidiaries During the course of the financial year subsidiaries conducted transactions with each other and joint ventures and associates on terms equivalent to those on an arm’s length basis. They are fully eliminated on consolidation. As of 30 September 2010, all outstanding amounts are considered fully collectible. 49: Life insurance Business The group conducts its Life insurance business through OnePath Life Limited (formerly iNg Life Limited) and iNg (NZ) Limited. This note is intended to provide disclosures in relation to the life businesses conducted through these controlled entities. SOLvENcY POSiTiON Of LifE iNSURER Australian Life insurers are required to hold reserves in excess of policy liabilities to meet certain solvency requirements under the Life Act. The Life insurance business in New Zealand is not governed by the Life Act as it is a foreign domiciled life insurance company. These companies are required to meet similar solvency tests based on the regulations in New Zealand. Solvency requirements as at 30 September represented by: – minimum termination value – other liabilities – solvency reserve Assets available for solvency reserves coverage of solvency reserves (times) OnePath life limited 2010 $m 29,966 831 346 564 1.63 Financial Report 197 Opening balance 1 October $ Closing balance 30 September $ Interest paid and payable in the reporting period $ Number in group at 30 September1 The summarised solvency information below in respect of solvency requirements under the Life Act has been extracted from the financial statements prepared by OnePath Life Limited (formerly iNg Life Limited). for detailed solvency information on a statutory fund basis, users of this annual financial report should refer to the financial statements prepared by the life insurer. NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 49: Life insurance Business (continued) LifE iNSURANcE PROfiT ANALYSiS Net Shareholder profit after income Tax1 Net Shareholder profit after income tax is represented by: Emergence of planned profit margins Difference between actual and assumed experience Loss recognition /(reversal of previous losses) on groups of related products investment earnings on retained profits and capital Net Policyowner Profit in Statutory funds after income Tax Net Policyholder profit in statutory funds after income tax is represented by: Emergence of planned profits investment earnings on retained profits 1 This represents the 10 months since acquisition of OnePath Life Limited (formerly iNg Life Limited) and iNg Life (NZ) Limited. iNvESTmENTS RELATiNg TO iNSURANcE BUSiNESS Equity security investments Direct indirect Debt security investments Direct indirect Units in property trusts Direct indirect Other Total investments backing policyholder liabilities designated at fair value through profit or loss1 life insurance contracts life investment contracts Consolidated 2010 $m 148 126 (1) (3) 26 4 2 2 2010 $m 119 91 5 – 23 – – – 2010 $m 267 217 4 (3) 49 4 2 2 Consolidated 2010 $m 11,652 5,584 9,673 1,216 1,682 462 1,902 32,171 1 This includes $5,448 million in respect of investments relating to external unitholders. in addition, the investment balance has been reduced by $2,633 million in respect of the elimination of intercompany balances, treasury shares and the re-allocation of policyholder tax balances. Direct investments refer to investments that are held directly with the issuer of the investment. indirect investments refer to investments that are held through unit trusts or similar investment vehicles. investments held in statutory funds can only be used to meet the liabilities and expenses of that fund, or to make profit distributions when solvency and capital adequacy requirements of the Life Act are met. Accordingly, with the exception of permitted profit distributions, the investments held in the statutory fund are not available for use by other parties of the group. 49: Life insurance Business (continued) iNSURANcE POLicY LiABiLiTiES a) Policy liabilities life insurance contract liabilities Best estimate liability value of future policy benefits value of future expenses value of future premium value of declared bonuses value of future profits Policy owner bonus Shareholder profit margin Business valued by non-projection method Total net life insurance contract liabilities Unvested policy owner benefits Liabilities ceded under reinsurance contracts1(refer note 20) Total life insurance contract liabilities life investment contract liabilities2,3 Total policy liabilities Consolidated 2010 $m 4,037 1,333 (6,515) 3 51 1,035 631 575 44 360 979 28,002 28,981 1 Liabilities ceded under insurance contracts are shown as ‘other assets’. 2 Designated at fair value through profit or loss. 3 Life investment contract liabilities that relate to the guaranteed element is $2,156 million. Life investment contract liabilities subject to investment performance guarantees is $1,141 million. b) Reconciliation of movements in Policy liabilities Contract policy liabilities gross liability at acquisition movements in life insurance liability reflected in the income statement Deposit premium recognised as a change in life investment contract liability fees recognised as a change in life investment contract liabilities Withdrawal recognised as a change in other life investment contract liability gross policy insurance liability closing balance liabilities ceded under reinsurance1 Balance at acquisition increase in reinsurance asset closing balance Total policy liability net of reinsurance asset 1 Liabilities ceded under insurance contracts are shown as ‘other assets’. life investment contracts life insurance contracts 2010 $m 27,353 948 5,264 (345) (5,218) 28,002 – – – 28,002 2010 $m 1,091 (112) – – – 979 306 54 360 619 Consolidated 2010 $m 28,444 836 5,264 (345) (5,218) 28,981 306 54 360 28,621 198 ANZ Annual Report 2010 Financial Report 199 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 49: Life insurance Business (continued) mEThODS AND ASSUmPTiONS LifE iNSURANcE cONTRAcTS Significant actuarial methods The effective date of the actuarial report on policy liabilities (which includes insurance contract liabilities and life investment contract liabilities) and solvency requirements is 30 September 2010. in Australia, the actuarial report was prepared by mr Nick Kulikov, fiAA, Appointed Actuary. The actuarial reports indicate mr Kulikov is satisfied as to the accuracy of the data upon which policy liabilities have been determined. The amount of policy liabilities has been determined in accordance with methods and assumptions disclosed in this financial report and the requirements of the Life Act, which includes applicable standards of the Australian Prudential Regulation Authority (APRA). Policy liabilities have been calculated in accordance with Actuarial Standard LPS 1.04 Valuation of Policy Liabilities (formerly AS 1.04) issued by the Australian Prudential Regulation Authority (APRA) in accordance with the requirements of the Life insurance Act (LiA). for life insurance contracts the Actuarial Standard requires the policy liabilities to be calculated in a way which allows for the systematic release of planned margins as services are provided to policy owners and premiums are received. The profit carriers used to achieve the systematic release of planned margins are based on the product groups. in New Zealand, the actuarial report was prepared by mr Anton gardiner fiA fNZSA, who is a fellow of the institute of Actuaries of UK and a fellow of the New Zealand Society of Actuaries. The amount of policy liabilities has been determined in accordance with Professional Standard 3: Determination of Life insurance Policy Liabilities of the New Zealand Society of Actuaries. The actuarial reports indicate that mr gardiner is satisfied as to the accuracy of the data upon which policy liabilities have been determined. critical assumptions The valuation of the life insurance liabilities is dependant on a number of variables including interest rate, equity prices, future expenses, mortality, morbidity and inflation. The critical estimates and judgments used in determining the policyholder liability is set out note 2 (vii), page 103. Sensitivity analysis The group conducts sensitivity analyses to quantify the exposure of the life insurance contracts to risk of changes in the key underlying variables such as interest rate, equity prices, mortality, morbidity and inflation. The valuations included in the reported results and the group’s best estimate of future performance is calculated using certain assumptions about these variables. The movement in any key variable will impact the performance and net assets of the group and as such represents a risk. The table below illustrates how changes in key assumptions would impact the reported profit, policyholder liabilities and equity at 30 September 2010. Variable Impact of movement in underlying variable market interest rates A change in market interest rates affects the value placed on future cash flows. This changes profit and shareholder equity. Expense rate mortality rate morbidity rate An increase in the level or inflationary growth of expenses over assumed levels will decrease profit and shareholder equity. greater mortality rates would lead to higher levels of claims occurring, increasing associated claims cost and therefore reducing profit and shareholder equity. The cost of health-related claims depends on both the incidence of policyholders becoming ill and the duration which they remain ill. higher than expected incidence and duration would increase claim costs, reducing profit and shareholder equity. Change in variable % change Profit/(loss) net of reinsurance $m -1% +1% -10% +10% -10% +10% -10% +10% 4 (1) 2 (2) 4 (9) 5 (5) Insurance contract liabilities net of reinsurance $m (5) 2 (3) 3 (6) 13 (7) 7 Equity $m 4 (1) 2 (2) 4 (9) 5 (5) 49: Life insurance Business (continued) LifE iNSURANcE RiSK insurance risk is the risk of loss due to increases in policy benefits arising from variations in the incidence or severity of insured events. insurance risk exposure arises in insurance business as the risk that claims payments are greater than expected. in the life insurance business this arises primarily through mortality (death) or morbidity (illness or injury) risks being greater than expected. financial risks relating to the group’s insurance business are generally monitored and controlled by selecting appropriate assets to back insurance and life investment contract liabilities. The assets are regularly monitored by the OnePath (formerly iNg) investment Risk management committee to ensure that there is no material asset and liability mismatching issues and other risks such as liquidity risk and credit risk are maintained within acceptable limits. All financial assets within the Life insurance statutory funds directly support either the group’s life insurance or life investment contracts. market risk arises for the group on contracts where the liabilities to policyholders are guaranteed by the Life company. The group manages this risk by the monthly monitoring and rebalancing of assets to contract liabilities. however, for some contracts the ability to match asset characteristics with policy obligations is constrained by a number of factors including regulatory constraints, the lack of suitable investments as well as by the nature of the policy liabilities themselves. Wherever possible within regulatory constraints, the group segregates policyholders funds from shareholders funds and sets investment mandates that are appropriate for each. A market risk also arises from those life insurance and life investment contracts where the benefits paid are directly impacted by the value of the underlying assets, the group is exposed to the risk of future decreased asset management fees as a result of a decline in assets under management and operational risk associated with the possible failure to administer life investment contracts in accordance with the product terms and conditions. insurance risks are controlled through the use of underwriting procedures and reinsurance arrangements, all of which are approved by the Appointed Actuary. controls are also maintained over claims management practices to assist in the correct and timely payment of insurance claims. Risk strategy in compliance with contractual and regulatory requirements, a strategy is in place to monitor that the risks underwritten satisfy policyholders’ risk and reward objectives whilst not adversely affecting the group’s ability to pay benefits and claims when due. The strategy involves the identification of risks by type, impact and likelihood, the implementation of processes and controls to mitigate the risks, and continuous monitoring and improvement of the procedures in place to minimise the chance of an adverse compliance or operational risk event occurring. included in this strategy is the process for underwriting and product pricing to ensure products are appropriately priced. capital management is also a key aspect of the group’s risk management strategy. Allocation of capital The group’s insurance businesses are subject to regulatory capital requirements which prescribe the amount of capital to be held depending on the type, quality and concentration of investments held. Solvency margin requirements established by the Australian Prudential Regulation Authority (APRA) are in place to reinforce safeguards for policyholders’ interest, which are primarily the ability to meet future claims payments in respect of existing policies. methods to limit or transfer insurance risk exposures Reinsurance – All reinsurance treaties are analysed using a number of analytical modeling tools to assess the impact on the group’s exposure to risk with the objective of achieving the desired choice of type of reinsurance and retention levels. Underwriting procedures – Strategic underwriting decisions are put into effect using the underwriting procedures detailed in the group’s underwriting manual. Such procedures include limits to delegated authorities and signing powers. Claims management – Strict claims management procedures are in place to assist in the timely and correct payment of claims in accordance with policy conditions. Asset and liability management techniques – Assets are allocated to different classes of business using a risk based approach. Duration analysis is primarily used for interest-sensitive products and policies with long-term fixed payout patterns. Concentration of insurance risk – The age profile and mix of sexes within the population of policyholders is stable and is sufficiently spread so that the group risk concentration is minimal. The group manages the insurance concentration risk by reflecting the individual premium rates the geographical concentration of insured workforces and through the purchase of reinsurance protection. 200 ANZ Annual Report 2010 Financial Report 201 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS 50: Business combinations 50: Business combinations (continued) During the year ended 30 September 2010, the group made a number of acquisitions (refer note 17). Details of each acquisition is set out below: iNg On 30 November 2009, ANZ purchased iNg groep’s 51% interest in the ANZ-iNg wealth management and life insurance joint ventures in Australia and New Zealand. The transaction was undertaken to strengthen the group’s position in wealth management and more closely integrate its retail banking and wealth management businesses. As part of the transaction the group also purchased iNg groep’s 51% interests in two fixed income unit trusts in New Zealand, the iNg Diversified Yield fund and the iNg Regular income fund (“the funds”), taking its ownership interest to over 99% of the funds. Fair values of assets acquired and liabilities assumed as at acquisition date (provisional) Liquid assets Available-for-sale assets investments backing policyholder liabilities Shares in associates Other assets1 Deferred tax assets intangible assets Premises and equipment Total assets Payables and other liabilities current tax liabilities Policyholder liabilities Deferred tax liabilities Provisions/contingent liabilities2 Total liabilities Net assets Non-controlling interests in the funds3 Net assets attributable to the Group4 Book value of existing equity interests Adjustment on re-measuring existing equity interests to fair value5 Acquisition date fair value of existing equity interests cash consideration transferred Total Consideration Provisional value of goodwill6 $m 707 1,441 27,715 8 762 350 1,420 53 32,456 1,015 59 28,444 320 181 30,019 2,437 (1) 2,436 1,956 (185) 1,771 1,816 3,587 1,151 1 2 includes receivables with a fair value of $432 million and a gross contractual amount receivable of $433 million. The best estimate at the acquisition date of the contractual cash flows not expected to be collected on these receivables is $1 million. includes employee related provisions and the fair value of contingent liabilities, which relate to possible claims by investors in the funds and investigations by regulatory bodies and other actual and potential claims and proceedings (refer to note 44). The expected timing and ultimate cost of contingent liabilities to the group will depend on the assessment and outcome of compliance performance, and the results of any litigation and regulatory investigations or proceedings that may be brought. $41 million of the contingent liabilities were used during the period. 3 Non controlling interest are measured as their proportionate share of the identifiable net assets of the funds. 4 5 The adjustment on re-measuring equity interests has been recognised in Other Operating income in the income Statement. in addition to this adjustment, the group reclassified the debit equity includes $362 million of treasury shares. accounted reserves of iNg of $32 million to Other Operating income in the income Statement. 6 Upon finalisation of fair value procedures, the remaining balance will be recognised as goodwill. The goodwill paid relates to expected synergistic benefits expected to be realised through the combination of the ANZ and iNg wealth businesses. goodwill is not expected to be deductible for income tax purposes. included in the consolidated income Statement and Statement of comprehensive income since 30 November 2009 is operating income of $955 million and a profit before tax of $527 million in respect of the acquired businesses, after eliminating gains on treasury shares and incorporating policyholder income and contributions taxes as revenue. had iNg been consolidated from 1 October 2009, the consolidated income Statement and Statement of comprehensive income would have included, for the twelve months ended 30 September 2010, operating income of $1,147 million and a profit before tax of $607 million. This excludes integration and transaction costs but includes the impact of grossing up income for tax paid on policyholder investments. in respect of transaction costs, $10 million is recognised in Other Operating Expenses in the income Statement and $2 million in Opening Retained Earnings on adoption of the revised standard. LANDmARK fiNANciAL SERvicES On 1 march 2010, the group completed its acquisition of the Landmark financial Services business from AWB group. The business is comprised mainly of an agribusiness based loan and deposit book as well as associated support staff. No legal entity was acquired as part of this acquisition. Fair values of assets acquired and liabilities assumed as at acquisition date (provisional) cash Net loans and advances1 Deferred tax asset Total assets customer deposits Employee entitlements Total liabilities Net fair value of assets acquired cash consideration paid Provisional value of goodwill and intangible assets $m 12 2,212 1 2,225 303 2 305 1,920 1,920 - 1 The gross contractual amounts receivable associated with these loans and advances is $2,312 million. The best estimate of amounts not expected to be received at acquisition date is $84 million. Transaction costs of $4 million are recognised in Other Operating Expenses in the income Statement. ROYAL BANK Of ScOTLAND During the year ended 30 September 2010, the group acquired selected Royal Bank of Scotland group plc (RBS) businesses in Asia. Selected Royal Bank of Scotland businesses in Asia During the 12 months ended 30 September 2010, ANZ acquired the Royal Bank of Scotland retail, wealth and commercial businesses in Taiwan, Singapore, indonesia and hong Kong, and their institutional businesses in Taiwan, Philippines and vietnam. The transactions create a new platform for our retail and wealth businesses in Asia and were undertaken as part of the strategy to be a leading super regional bank. Fair values of assets acquired and liabilities assumed as at acquisition date (provisional) Liquid assets Due from other financial institutions Derivative financial instruments Available-for-sale assets Net loans and advances1 Other assets Total assets Due to other financial institutions Deposits and other borrowings Derivative financial instruments Payables and other liabilities Total liabilities Net fair value of assets acquired/(liabilities assumed) Attributable to non-controlling interests Net fair value of assets acquired/(liabilities assumed) attributable to owners cash consideration paid Provisional value of goodwill and intangible assets2 $m 162 3,539 671 313 4,071 81 8,837 542 7,442 620 98 8,702 135 (7) 128 269 141 1 gross contractual amount receivable associated with these loans is $4,656 million. The best estimate of the contractual cashflows not expected to be received at acquisition date is $549 million. 2 Upon finalisation of fair value procedures, including recognition of intangible assets, the remaining balance will be recognised as goodwill. The goodwill paid relates to expected synergistic benefits expected to be realised through the combination of the ANZ and RBS business. Transaction costs of $7 million are recognised in Other Operating Expenses in the income Statement for expenses incurred in relation to facilitating the signing of the transaction and a further $37 million of acquisition costs are included in Opening Retained Earnings on adoption of the revised acquisition accounting standard pertaining to expenses incurred in 2009. 202 ANZ Annual Report 2010 Financial Report 203 NOTES TO ThE fiNANciAL STATEmENTS NOTES TO ThE fiNANciAL STATEmENTS DiREcTORS’ DEcLARATiON 51: 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: chinese Yuan Euro great British Pound indonesian Rupiah malaysian Ringgit New Zealand Dollar Papua New guinea Kina United States Dollar 2010 2009 Closing 6.4687 0.7111 0.6105 8625.3 2.9850 1.3139 2.5920 0.9668 Average 6.1242 0.6632 0.5769 8279.6 2.9582 1.2603 2.4570 0.8990 Closing 6.0026 0.6014 0.5486 8506.3 3.0548 1.2188 2.4154 0.8792 Average 5.0018 0.5392 0.4719 7837.9 2.6034 1.2248 2.0018 0.7319 The directors of Australia and New Zealand Banking group Limited declare that: a) in the directors’ opinion, the financial statements and notes of the company and the consolidated entity have been prepared in accordance with the corporations Act 2001, including that they: i) comply with applicable Australian Accounting Standards, (including the Australian Accounting interpretations) and the corporations Regulations 2001; and ii) give a true and fair view of the financial position of the company and of the consolidated entity as at 30 September 2010 and of their performance as represented by the results of their operations and their cash flows, for the year ended on that date; and iii) the financial statements and notes of the company and the consolidated entity comply with international financial Reporting Standards as described in note 1 (A)(i). b) in the directors’ opinion, the remuneration disclosures that are contained on pages 16 to 45 of the Remuneration Report comply with the corporations Act 2001; and c) the directors have received the declarations required by section 295A of the corporations Act 2001; and d) in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become 52: Events Since the End of the financial Year due and payable; and On 27 October 2010, the company announced the investment of an additional RmB 1.65 billion ($250 million) in Shanghai Rural commercial Bank (SRcB) as part of a major capital raising by SRcB. This transaction will increase the group’s ownership interest in SRcB from 19.9% to 20%. e) the company and certain of its wholly owned controlled entities (listed in note 44) have executed a Deed of cross guarantee enabling them to take advantage of the accounting and audit relief offered by class order 98/1418 (as amended), issued by the Australian Securities and investments commission. The nature of the Deed of cross guarantee is to guarantee to each creditor payment in full of any debt in accordance with the terms of the Deed of cross guarantee. At the date of this declaration, there are reasonable grounds to believe that the company and its controlled entities which executed the Deed of cross guarantee 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. Signed in accordance with a resolution of the directors. John Morschel chairman 4 November 2010 Michael R P Smith Director 204 ANZ Annual Report 2010 Directors’ Declaration 205 iNDEPENDENT AUDiTOR’S REPORT TO ThE mEmBERS Of AUSTRALiA AND NEW ZEALAND BANKiNg gROUP LimiTED iNDEPENDENcE in conducting our audit, we have complied with the independence requirements of the corporations Act 2001. SECTiON 4 SECTiON 4 Financial Information Shareholder Information Glossary of Financial Terms Alphabetical Index 208 216 220 224 AUDiTOR’S OPiNiON in our opinion: (a) the fi nancial report of Australia and New Zealand Banking group Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and the group’s fi nancial position as at 30 September 2010 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting interpretations) and the corporations Regulations 2001. (b) the fi nancial report also complies with international financial Reporting Standards as disclosed in note 1(A)(i). REPORT ON ThE REmUNERATiON REPORT We have audited the Remuneration Report included in pages 21 to 45 of the directors’ report for the year ended 30 September 2010. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. AUDiTOR’S OPiNiON in our opinion, the remuneration report of Australia and New Zealand Banking group Limited for the year ended 30 September 2010, complies with Section 300A of the Corporations Act 2001. KPMG melbourne, Australia 4 November 2010 Michelle Hinchliff e Partner REPORT ON ThE fiNANciAL REPORT We have audited the accompanying fi nancial report of Australia and New Zealand Banking group Limited (the company), which comprises the balance sheets as at 30 September 2010, and income statements and statements of comprehensive income, statements of changes in equity and cash fl ow statements for the year ended on that date, a summary or description of signifi cant accounting policies and other explanatory notes 1 to 52 and the directors’ declaration of the group comprising the company and the entities it controlled at the year’s end or from time to time during the fi nancial year. DiREcTORS’ RESPONSiBiLiTY fOR ThE fiNANciAL REPORT The directors of the company are responsible for the preparation and fair presentation of the fi nancial report in accordance with Australian Accounting Standards (including the Australian Accounting interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the fi nancial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. in note 1(A)(i), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the fi nancial report, comprising the fi nancial statements and notes, complies with international financial Reporting Standards. AUDiTOR’S RESPONSiBiLiTY Our responsibility is to express an opinion on the fi nancial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the fi nancial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the fi nancial report, whether due to fraud or error. in making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the fi nancial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the eff ectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the fi nancial report. We performed the procedures to assess whether in all material respects the fi nancial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting interpretations), a view which is consistent with our understanding of the company’s and the group’s fi nancial position and of their performance. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion. 206 ANZ Annual Report 2010 ANZ Annual Report 2010 207 Financial Highlights 207 fiNANciAL iNfORmATiON 1: capital Adequacy Qualifying Capital Tier 1 Shareholders’ equity and non-controlling interests Prudential adjustments to shareholders’ equity fundamental Tier 1 capital Non-innovative Tier 1 capital instruments innovative Tier 1 capital instruments gross Tier 1 capital Deductions Tier 1 capital Tier 2 Upper Tier 2 capital Subordinated notes Deductions Tier 2 capital Total qualifying capital capital adequacy ratios core Tier 1 Tier 1 Tier 2 Total Risk weighted assets 2010 $m 34,155 (2,840) 31,315 3,787 1,646 36,748 (10,057) 26,691 1,223 6,619 (3,026) 4,816 2009 $m 32,429 (2,341) 30,088 1,901 2,122 34,111 (7,492) 26,619 1,390 9,082 (2,661) 7,811 Table 1 Table 2 Table 3 Table 4 Table 2 31,507 34,430 8.0% 10.1% 1.8% 11.9% 9.0% 10.6% 3.1% 13.7% Table 5 264,242 252,069 1: capital Adequacy (continued) Table 1: Prudential adjustments to shareholders’ equity Treasury shares attributable to OnePath (formerly iNgA) policyholders Reclassification of preference share capital Accumulated retained profits and reserves of insurance, funds management and securitisation entities and associates Deferred fee revenue including fees deferred as part of loan yields hedging reserve Available-for-sale reserve Dividend not provided for Accrual for Dividend Reinvestment Plans Total Table 2: Deductions from Tier 1 capital Unamortised goodwill & other intangibles (excluding OnePath (formerly iNgA) and iNg New Zealand intangible component of investment in OnePath (formerly iNgA) and iNg New Zealand capitalised software capitalised expenses including loan and lease origination fees, capitalised securitisation establishment costs and costs associated with debt raisings Applicable deferred tax assets (excluding the component relating to the general reserve for impairment of financial assets) mark-to market impact of own credit spread Negative available-for-sale reserve Sub-total Deductions taken 50% from Tier 1 and 50% from Tier 2 investment in ANZ insurance subsidiaries (excluding OnePath (formerly iNgA) and iNg New Zealand investment in ANZ funds management subsidiaries investment in OnePath (formerly iNgA) and iNg New Zealand investment in other Authorised Deposit Taking institutions and overseas equivalents Expected losses in excess of eligible provisions1 investment in other commercial operations Other deductions Sub-total Total Gross (396) (72) (1,690) (1,976) (1,119) (42) (756) (6,051) Table 3: Upper Tier 2 capital Eligible component of post acquisition earnings and reserves in associates and joint ventures Perpetual subordinated notes2 general reserve for impairment of financial assets net of attributable deferred tax asset3 Total 2010 $m 358 (871) (1,312) 402 (11) (80) (1,895) 569 (2,840) (2,952) (2,043) (1,127) (655) (235) (19) – (7,031) 50% (198) (36) (845) (988) (560) (21) (378) (3,026) (10,057) – 943 280 1,223 2009 $m – (871) (1,010) 391 90 41 (1,403) 421 (2,341) (3,047) – (849) (602) (325) 12 (20) (4,831) 50% (161) (33) (737) (976) (506) (36) (212) (2,661) (7,492) 269 1,024 97 1,390 Table 4: Subordinated notes2 for capital adequacy calculation purposes, subordinated note issues are reduced by 20% of the original amount over the last four years to maturity and are limited to 50% of Tier 1 capital. 1 The gross deduction includes a collective provision component net of tax of $2,019 million, other eligible provisions of $1,417 million less an estimate for regulatory expected loss of $4,555 million. 2 The fair value adjustment is excluded for prudential purposes as the prudential standard only permits inclusion of cash received and makes no allowance for hedging. 3 Under Basel ii, this consists of the surplus general reserve for impairment of financial assets net of tax and/or the provisions attributable to the standardised portfolio. 208 ANZ Annual Report 2010 Financial information 209 fiNANciAL iNfORmATiON 1: capital Adequacy (continued) 1: capital Adequacy (continued) Table 5: Risk weighted assets On balance sheet commitments contingents Derivatives Total credit risk market risk – Traded market risk – iRRBB Operational risk Total risk weighted assets Table 6: Credit risk weighted assets by Basel asset class Subject to Advanced IRB approach corporate Sovereign Bank Residential mortgage Qualifying revolving retail (credit cards) Other retail Credit risk weighted assets subject to Advanced IRB approach 2010 $m 173,035 39,835 10,084 10,563 233,517 5,652 7,690 17,383 264,242 101,940 2,720 6,135 38,708 7,205 17,899 174,607 2009 $m 170,035 37,704 12,377 9,695 229,811 3,553 2,465 16,240 252,069 116,153 1,408 5,592 36,725 6,852 17,108 183,838 Credit risk specialised lending exposures subject to slotting criteria 26,605 24,272 Subject to Standardised approach corporate Residential mortgage Qualifying revolving retail (credit cards) Other retail Credit risk weighted assets subject to Standardised approach credit risk weighted assets relating to securitisation exposures credit risk weighted assets relating to equity exposures Other assets Total credit risk weighted assets 21,281 567 1,841 1,113 24,802 2,091 1,577 3,835 13,163 411 – 381 13,955 2,658 1,914 3,174 233,517 229,811 Table 7: Collective provision and Regulatory Expected loss by Region Australia Asia Pacific, Europe & America New Zealand Total Table 8: Expected loss in excess of eligible provisions Basel expected loss Defaulted Non-defaulted less: Qualifying collective provision after tax collective provision Non-qualifying collective provision Standardised collective provision Deferred tax asset less: Qualifying individual provision after tax individual provision Standardised individual provision collective provision on advanced defaulted Gross deduction 50/50 deduction Collective provision Regulatory Expected loss 2010 $m 2,021 520 612 3,153 2009 $m 2,001 339 660 3,000 2010 $m 3,360 135 1,060 4,555 As at Sep 10 $m As at Sep 09 $m 2,225 2,330 4,555 (3,153) 234 399 725 (1,795) (1,875) 458 (224) (1,641) 1,119 559 2,232 2,297 4,529 (3,000) 183 138 804 (1,875) (1,526) 66 (183) (1,643) 1,011 506 2009 $m 3,291 214 1,024 4,529 Movt % 0% 1% 1% 5% 28% large -10% -4% 23% large 22% 0% 11% 11% The measurement of risk weighted assets is based on: a) a credit risk-based approach whereby risk weightings are applied to balance sheet assets and to credit converted off-balance sheet exposures. categories of risk weights are assigned based upon the nature of the counterparty and the relative liquidity of the assets concerned; and b) the recognition of risk weighted assets attributable to market risk arising from trading and commodity positions. Trading and commodity balance sheet positions do not attract a risk weighting under the credit risk-based approach. The Basel ii Accord principles took effect from 1 January 2008. for calculation of minimum capital requirements under Pillar 1 (capital Requirements) of the Basel ii Accord, ANZ has gained accreditation from APRA for use of Advanced internal Ratings Based (AiRB) methodology for credit risk weighted assets and Advanced measurement Approach (AmA) for operational risk weighted asset equivalent. 210 ANZ Annual Report 2010 Financial information 211 fiNANciAL iNfORmATiON 2: Average Balance Sheet and Related interest 2: Average Balance Sheet and Related interest (continued) Averages used in the following tables are predominantly daily averages. interest income figures are presented on a tax-equivalent basis. impaired loans are included under the interest earning asset category, ‘loans and advances’. intra-group interest earning assets and interest bearing liabilities are treated as external assets and liabilities for the geographic segments. Average balance $m 2010 Interest $m Average rate % Average balance $m 2009 Interest $m Average rate % Interest bearing liabilities Time deposits Australia New Zealand Asia Pacific, Europe & America Savings deposits Australia New Zealand Asia Pacific, Europe & America Other demand deposits Australia New Zealand Asia Pacific, Europe & America Due to other financial institutions Australia New Zealand Asia Pacific, Europe & America Commercial paper Australia New Zealand Borrowing corporations’ debt Australia New Zealand liability for acceptances Australia Asia Pacific, Europe & America loan capital, bonds and notes Australia New Zealand Asia Pacific, Europe & America Other liabilities1 Australia New Zealand Asia Pacific, Europe & America Intragroup liabilities New Zealand intragroup elimination 1 includes foreign exchange swap costs. Average balance $m 2,951 717 7,509 34,994 6,716 10,897 2010 Interest $m 117 19 49 1,522 329 209 245,315 76,816 22,016 17,321 4,592 1,095 907 5 150 176 117 476 55 27,139 (531) 26,608 11,997 370 3,654 3,032 12,293 5,990 6,717 451,984 (12,707) 439,277 28,580 7,871 3,049 2,163 27,081 22,188 (3,046) (1,114) (679) 86,093 525,370 371,330 98,425 68,322 538,077 (12,707) 525,370 30.5% Average rate % Average balance $m 2009 Interest $m Average rate % 3.6 3.6 1.3 4.5 5.6 3.5 6.7 7.1 5.0 6.2 2.8 5.3 5.2 2.1 4.0 4.0 6.1 4.0 2.6 0.7 4.3 4.9 1.9 7.1 6.0 5.0 7.6 1.4 4.1 5.8 1.0 7.9 0.8 6.1 4,501 1,346 7,479 27,831 2,973 7,379 164 49 100 1,243 166 258 238,521 80,202 21,980 15,883 5,685 1,089 915 12 204 287 231 329 69 26,683 (397) 26,286 14,670 425 3,828 5,472 10,857 8,314 1,736 437,514 (10,050) 427,464 48,062 12,063 795 1,844 – 19,303 (2,826) (701) (341) 78,199 505,663 353,755 105,509 56,449 515,713 (10,050) 505,663 31.7% Interest earning assets Due from other financial institutions Australia New Zealand Asia Pacific, Europe & America Trading and available-for-sale assets Australia New Zealand Asia Pacific, Europe & America loans and advances Australia New Zealand Asia Pacific, Europe & America Customers’ liability for acceptances Australia Asia Pacific, Europe & America Other assets Australia New Zealand Asia Pacific, Europe & America Intragroup assets Australia Asia Pacific, Europe & America intragroup elimination Non-interest earning assets Derivatives Australia New Zealand Asia Pacific, Europe & America Premises and equipment Investments backing policyholder liabilities Other assets Provisions for credit impairment Australia New Zealand Asia Pacific, Europe & America Total average assets Total average assets Australia New Zealand Asia Pacific, Europe & America intragroup elimination % of total average assets attributable to overseas activities 212 ANZ Annual Report 2010 99,969 29,624 44,351 19,458 2,094 2,947 62,864 13,839 3,312 5,399 1,100 10,087 6,925 7,020 1,280 1,101 11,997 370 68,445 14,074 – 3,036 51 57 12,707 422,107 (12,707) 409,400 4,873 1,267 456 660 41 15 2,114 343 15 197 27 102 288 211 80 55 558 5 3,514 657 – 241 5 15 531 16,270 (531) 15,739 4.9 4.3 1.0 3.4 2.0 0.5 3.4 2.5 0.5 3.6 2.5 1.0 4.2 3.0 6.3 5.0 4.7 1.4 5.1 4.7 0.0 n/a n/a n/a 4.2 3.8 87,556 30,498 37,258 18,779 2,305 640 63,383 16,041 1,860 5,030 2,439 10,078 7,709 7,263 5,663 1,371 14,670 425 65,343 12,668 717 3,875 99 31 10,050 405,751 (10,050) 395,701 4,308 1,695 640 577 62 5 1,952 568 14 171 105 155 393 337 381 91 635 11 3,221 710 44 15 265 43 397 16,795 (397) 16,398 4.9 5.6 1.7 3.1 2.7 0.8 3.1 3.5 0.8 3.4 4.3 1.5 5.1 4.6 6.7 6.6 4.3 2.6 4.9 5.6 6.2 n/a n/a n/a 4.0 4.1 Financial information 213 fiNANciAL iNfORmATiON 2: Average Balance Sheet and Related interest (continued) 3: interest Spreads and Net interest Average margins Non-interest bearing liabilities Deposits Australia New Zealand Asia Pacific, Europe & America Derivative financial instruments Australia New Zealand Asia Pacific, Europe & America Policyholder liabilities External policyholder liabilities Other liabilities Total average liabilities Total average liabilities Australia New Zealand Asia Pacific, Europe & America intragroup elimination % of total average assets attributable to overseas activities Total average shareholders’ equity Ordinary share capital1 Preference share capital Total average liabilities and shareholders’ equity 1 includes reserves and retained earnings. 2010 Average balance $m 2009 Average balance $m 5,000 3,586 1,780 25,586 5,907 (1,830) 23,855 4,662 14,169 82,715 4,951 3,253 1,540 50,399 11,958 (3,147) – – 11,944 80,898 492,115 476,599 348,799 92,442 63,581 504,822 (12,707) 336,219 99,387 51,043 486,649 (10,050) 492,115 476,599 29.1% 29.5% 32,385 871 33,256 28,193 871 29,064 525,370 505,663 Net interest income Australia New Zealand Asia Pacific, Europe & America Average interest earning assets Australia New Zealand Asia Pacific, Europe & America less intragroup elimination Gross earnings rate1 Australia New Zealand Asia Pacific, Europe & America group Interest spread and net interest average margin may be analysed as follows: Australia Net interest spread interest attributable to net non-interest bearing items Net interest margin – Australia New Zealand Net interest spread interest attributable to net non-interest bearing items Net interest margin – New Zealand Asia Pacific, Europe & America Net interest spread interest attributable to net non-interest bearing items Net interest margin – Asia Pacific, Europe & America Group Net interest spread interest attributable to net non-interest bearing items Net interest margin 1 Average interest rate received on interest earning assets. Overseas markets includes intragroup assets. 2010 $m 2009 $m 7,968 1,980 921 10,869 7,085 1,957 846 9,888 304,901 87,281 59,802 (12,707) 297,665 89,993 49,856 (10,050) 439,277 427,464 % 6.30 6.87 3.53 6.15 2.01 0.37 2.38 1.77 0.41 2.18 1.74 (0.04) 1.70 2.00 0.31 2.31 6.72 5.86 2.56 6.06 2.23 0.38 2.61 2.02 0.25 2.27 1.56 (0.02) 1.54 2.21 0.26 2.47 214 ANZ Annual Report 2010 Financial information 215 Shareholders information Ordinary Shares At 8 October 2010, the twenty largest holders of ordinary shares held 1,491,400,485 ordinary shares, equal to 58.26% of the total issued ordinary capital. Name Number of shares % Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. hSBc cUSTODY NOmiNEES (AUSTRALiA) LimiTED J P mORgAN NOmiNEES AUSTRALiA LimiTED NATiONAL NOmiNEES LimiTED ciTicORP NOmiNEES PTY LimiTED cOgENT NOmiNEES PTY LimiTED JP mORgAN NOmiNEES AUSTRALiA LimiTED RBc DExiA iNvESTOR SERvicES AUSTRALiA NOmiNEES PTY LimiTED AmP LifE LimiTED ciTicORP NOmiNEES PTY LimiTED UBS WEALTh mANAgEmENT AUSTRALiA NOmiNEES PTY LTD QUEENSLAND iNvESTmENT cORPORATiON 446,984,331 371,451,021 343,611,753 98,249,488 42,380,166 17.46 14.51 13.42 3.84 1.66 29,710,001 1.16 29,388,568 25,265,475 16,013,808 13,149,540 1.15 0.99 0.62 0.51 12,642,137 0.49 12. 13. 14. 15. 16. 17. 18. 19. 20. ANZEST PTY LTD cOgENT NOmiNEES PTY LimiTED AUSTRALiAN fOUNDATiON iNvESTmENT cOmPANY LimiTED PERPETUAL TRUSTEE cOmPANY LimiTED AUSTRALiAN REWARD iNvESTmENT ALLiANcE UBS NOmiNEES PTY LTD RBc DExiA iNvESTOR SERvicES AUSTRALiA NOmiNEES PTY LimiTED ANZEST PTY LTD ciTicORP NOmiNEES PTY LimiTED Number of shares % 9,451,047 0.37 8,626,014 0.34 6,865,377 6,790,350 6,639,870 6,638,326 5,904,807 5,842,797 0.27 0.26 0.26 0.26 0.23 0.23 5,795,609 0.23 1,491,400,485 58.26 ANZ convertible Preference Shares (ANZ cPS) ANZ cPS1 On 30 September 2008 ANZ issued convertible preference shares (ANZ cPS1) which were offered pursuant to a prospectus dated 4 September 2008. At 8 October 2010, the twenty largest holders of ANZ cPS1 held 2,508,608 securities, equal to 23.20% of the total issued securities. Name Number of securities % Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. UBS WEALTh mANAgEmENT AUSTRALiA NOmiNEES PTY LTD RBc DExiA iNvESTOR SERvicES AUSTRALiA NOmiNEES PTY LimiTED UcA cASh mANAgEmENT fUND LTD hSBc cUSTODY NOmiNEES (AUSTRALiA) LimiTED J P mORgAN NOmiNEES AUSTRALiA LimiTED QUESTOR fiNANciAL SERvicES LimiTED hARmAN NOmiNEES PTY LTD NATiONAL NOmiNEES LimiTED NETWEALTh iNvESTmENTS LimiTED cOgENT NOmiNEES PTY LimiTED 493,730 4.57 333,865 239,791 236,899 203,560 176,005 104,794 102,819 91,738 3.09 2.22 2.19 1.88 1.63 0.97 0.95 0.85 69,468 0.64 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. RBc DExiA iNvESTOR SERvicES AUSTRALiA NOmiNEES PTY LimiTED ThE AUSTRALiAN NATiONAL UNivERSiTY BALLARD BAY PTY LTD JmB PTY LimiTED SPiNETTA PTY LTD AUSTRALiAN ExEcUTOR TRUSTEES LimiTED KOLL PTY LTD UBS NOmiNEES PTY LTD mUTUAL TRUST PTY LTD RJT fAmiLY hOLDiNgS PTY LimiTED Number of securities % 59,137 57,940 50,000 50,000 45,000 42,077 40,000 38,478 38,307 0.55 0.53 0.46 0.46 0.42 0.39 0.37 0.36 0.35 35,000 0.32 2,508,608 23.20 Total Distribution of shareholdings At 8 October 2010 Range of shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 Over 100,000 Total At 8 October 2010: Number of holders % of holders 211,496 163,252 23,998 12,832 457 51.33 39.62 5.82 3.12 0.11 Number of shares 87,379,102 364,005,569 165,287,732 261,495,851 1,681,549,304 % of shares 3.41 14.22 6.46 10.22 65.69 412,035 100.00 2,559,717,558 100.00 Total Distribution of ANZ cPS1 holdings At 8 October 2010 Range of shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 Over 100,000 Total Number of holders % of holders Number of securities % of securities 15,571 1,072 84 51 8 16,786 92.76 6.39 0.50 0.30 0.05 100.00 4,610,153 2,279,619 686,532 1,344,357 1,891,463 42.64 21.09 6.35 12.43 17.49 10,812,124 100.00 there were no persons with a substantial shareholding in the company; the average size of holdings of ordinary shares was 6,212 (2009: 6,292) shares; and there were 8,537 holdings (2009: 7,370 holdings) of less than a marketable parcel (less than $500 in value or 21 shares based on the market price of $24.07), which is less than 2.07% of the total holdings of ordinary shares. voting rights of ordinary shares The constitution provides for votes to be cast as follows: i) on show of hands, 1 vote for each shareholder; and ii) on a poll, 1 vote for each fully paid ordinary share. At 8 October 2010: There was no holding (2009: 1 holding) of less than a marketable parcel (less than $500 in value or 5 securities based on the market price of $102.00). voting rights of ANZ cPS1 An ANZ cPS1 does not entitle its holder to vote at any general meeting of ANZ except in the following circumstances: i) on any proposal to reduce ANZ’s share capital, other than a resolution to approve a Redemption of the ANZ cPS1; ii) on a proposal that affects the rights attached to the ANZ cPS1; iii) on any resolution to approve the terms of a buy-back agreement, other than a resolution to approve a Redemption of ANZ cPS1; iv) on a proposal to wind up ANZ; v) on a proposal for the disposal of the whole of ANZ’s property, business and undertaking; vi) on any matter during a winding up of ANZ; and vii) on any matter during a period in which a Divided remains unpaid. On a resolution or proposal on which an ANZ cPS1 holder is entitled to vote, the ANZ cPS1 holder has: i) on a show of hands, one vote; and ii) on a poll, one vote for each ANZ cPS1 held. 216 ANZ Annual Report 2010 Shareholder information 217 ShAREhOLDER iNfORmATiON (continued) ANZ cPS2 On 17 December 2009 ANZ issued convertible preference shares (ANZ cPS2) which were offered pursuant to a prospectus dated 18 November 2009. At 8 October 2010, the twenty largest holders of ANZ cPS2 held 3,594,881 securities, equal to 18.26% of the total issued securities. Name Number of securities % Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. UBS WEALTh mANAgEmENT AUSTRALiA NOmiNEES PTY LTD J P mORgAN NOmiNEES AUSTRALiA LimiTED RBc DExiA iNvESTOR SERvicES AUSTRALiA NOmiNEES PTY LimiTED hSBc cUSTODY NOmiNEES (AUSTRALiA) LimiTED QUESTOR fiNANciAL SERvicES LimiTED RBc DExiA iNvESTOR SERvicES AUSTRALiA NOmiNEES PTY LimiTED ANZ NOmiNEES LimiTED WiNchELADA PTY LimiTED AUSTRALiAN ExEcUTOR TRUSTEES LimiTED NETWEALTh iNvESTmENTS LimiTED 709,215 614,657 381,225 186,710 180,468 167,308 142,882 137,270 3.60 3.12 1.94 0.95 0.92 0.85 0.73 0.70 11. 12. 13. 14. 15. 16. 17. 18. 118,369 0.60 19. 115,414 0.59 20. NATiONAL NOmiNEES LimiTED JmB PTY LimiTED AvANTEOS iNvESTmENTS LimiTED RONi hUBAY iNvESTmENTS PTY LTD m f cUSTODiANS LTD RANDAZZO c & g DEvELOPmENTS PTY LTD ABN AmRO cLEARiNg SYDNEY NOmiNEES PTY LTD ciTicORP NOmiNEES PTY LimiTED AvANTEOS iNvESTmENTS LimiTED W miTchELL iNvESTmENTS PTY LTD Number of securities 106,092 100,600 % 0.54 0.51 100,000 91,100 78,500 0.51 0.46 0.40 73,828 0.37 68,000 0.34 63,243 0.32 60,000 0.30 3,594,881 18.26 Total Distribution of ANZ cPS2 holdings At 8 October 2010 Range of shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 Over 100,000 Total Number of holders 25,973 2,088 184 106 12 28,363 % of holders 91.57 7.36 0.65 0.38 0.04 100.00 Number of securities % of securities 7,808,711 4,681,982 1,466,796 2,769,525 2,960,210 39.66 23.78 7.45 14.07 15.04 19,687,224 100.00 At 8 October 2010: There were four holdings of less than a marketable parcel (less than $500 in value or 5 securities based on the market price of $104.70, which is less than 0.02% of the total holdings of ANZ cPS2). voting rights of ANZ cPS2 An ANZ cPS2 does not entitle its holder to vote at any general meeting of ANZ except in the following circumstances: i) on any proposal to reduce ANZ’s share capital, other than a resolution to approve a Redemption of the ANZ cPS2; ii) on a proposal that affects the rights attached to the ANZ cPS2; iii) on any resolution to approve the terms of a buy-back agreement, other than a resolution to approve a Redemption of ANZ cPS2; iv) on a proposal to wind up ANZ; v) on a proposal for the disposal of the whole of ANZ’s property, business and undertaking; vi) on any matter during a winding up of ANZ; and vii) on any matter during a period in which a Divided remains unpaid. On a resolution or proposal on which an ANZ cPS2 holder is entitled to vote, the ANZ cPS2 holder has: i) on a show of hands, one vote; and ii) on a poll, one vote for each ANZ cPS2 held. 218 ANZ Annual Report 2010 100,000 0.51 ANZ Share Option Plan; Employee Shareholder information At the Annual general meeting in January 1994, shareholders approved an aggregate limit of 7% of all classes of shares and options, which remain subject to the rules of a relevant incentive plan, being held by employees and directors. At 30 September 2010 participants held 1.27% (2009: 1.30%) of the issued shares and options of ANZ under the following incentive plans: ANZ Employee Share Acquisition Plan; ANZ Employee Share Save Scheme; ANZ Directors’ Share Plan; and ANZ Directors’ Retirement Benefit Plan. Stock Exchange Listings Australia and New Zealand Banking group Limited’s ordinary shares are listed on the Australian Securities Exchange and the New Zealand Stock Exchange. The group’s other stock exchange listings include: Australian Securities Exchange – ANZ convertible Preference Shares (ANZ cPS1 and cPS2) [Australia and New Zealand Banking Group Limited]; senior and subordinated debt [Australia and New Zealand Banking Group Limited]; channel islands Stock Exchange – Senior debt [ANZ Jackson Funding 2 Limited, ANZ Jackson Funding 3 Limited and ANZ Jackson Funding 4 Limited] and subordinated debt [ANZ Jackson Funding PLC]; London Stock Exchange – Non-cumulative mandatory convertible stapled securities (UK Stapled Securities) [Australia and New Zealand Banking Group Limited]; senior and subordinated debt [Australia and New Zealand Banking Group Limited]; and senior debt [ANZ National (Int’l) Limited]; Luxembourg Stock Exchange – Senior and Subordinated debt [Australia and New Zealand Banking Group Limited]; and non-cumulative Trust Securities (Euro Trust Securities) [ANZ Capital Trust III]; New Zealand Stock Exchange – Senior and subordinated debt and perpetual callable subordinated notes [ANZ National Bank Limited]; and Swiss Stock Exchange – Senior debt [Australia and New Zealand Banking Group Limited and ANZ National (Int’l) Limited]. American Depositary Receipts Australia and New Zealand Banking group Limited (“ANZ”) has American Depositary Receipts (“ADRs”) representing American Depositary Shares (“ADSs”) that are traded on the over-the counter (“OTc”) securities market on the Pink Sheets electronic platform operated by Pink Sheets LLc in the United States under the ticker symbol: ANZBY and the cUSiP number: 05258304. With effect from 23 July 2008, the ADR ratio changed from one ADS representing five ANZ ordinary shares to one ADS representing one ANZ ordinary share. The Bank of New York mellon corporation (“BNY mellon”) is the Depositary for the company’s ADR program in the United States. holders of the company’s ADRs should deal directly with BNY mellon on all matters relating to their ADR holdings, by telephone on 1-888-269-2377 (for callers within the US), 1-212-815-3700 (for callers outside the US) or by email to shareowners@bankofny.com. US Trust Securities in November 2003, ANZ issued 1.1 million fixed Rate Non-cumulative Trust Securities (“US Trust Securities”) at an issue price of USD1,000 each in two tranches. The USD350 million tranche was issued through ANZ capital Trust i and the USD750 million tranche was issued through ANZ capital Trust ii (both formed in the State of Delaware). Each US Trust Security is a stapled security comprising a preference share in ANZ and an unsecured note issued by Samson funding Limited. Prior to a conversion event, the preference share and note components of a US Trust Security cannot be separately traded. On 15 January 2010 ANZ redeemed for cash the USD350 million tranche of US Trust Securities issued through ANZ capital Trust i . After 15 December 2013, ANZ may redeem the USD750 million tranche of US Trust Securities issued through ANZ capital Trust ii. if ANZ fails to redeem, the remaining US Trust Securities may convert into ANZ ordinary shares at the discretion of the holder. Subject to prior redemption or conversion, the US Trust Securities will mandatorily convert into ANZ ordinary shares on 15 December 2053. Euro Trust Securities in December 2004, ANZ issued 500,000 floating Rate Non-cumulative Trust Securities (“Euro Trust Securities”) at an issue price of €1,000 each through ANZ capital Trust iii (formed in the State of Delaware). Each Euro Trust Security is a stapled security comprising a preference share in ANZ and an unsecured subordinated note issued by ANZ Jackson funding PLc. The Euro Trust Securities are listed on the Luxembourg Stock Exchange. The unsecured subordinated notes are listed on the channel islands Stock Exchange. Prior to a conversion event, the preference share and subordinated note components of a Euro Trust Security cannot be separately traded. UK Stapled Securities in June 2007, ANZ issued 9,000 non-cumulative stapled securities (“UK Stapled Securities”) at an issue price of £50,000 each. Each UK Stapled Security is a stapled security comprising a preference share in ANZ and an unsecured subordinated note issued by ANZ through its New York branch. The UK Trust Securities are listed on the London Stock Exchange. Prior to a conversion event, the preference share and subordinated note components of the UK Stapled Securities cannot be traded separately. The UK Stapled Securities will mandatorily convert into ANZ ordinary shares on 15 June 2012, however, the mandatory conversion is deferred for five years if the conversion conditions are not satisfied. ANZ cPS On 30 September 2008, ANZ issued 10,812,124 convertible Preference Shares (“ANZ cPS1”) and on 17 December 2009, ANZ issued 19,687,224 convertible Preference Shares (“ANZ cPS2”, together with ANZ cPS1 the “ANZcPS”) at an issue price of $100 each. ANZ cPS are floating-rate and non-cumulative and will mandatorily convert into ANZ ordinary shares on the relevant mandatory conversion Date. however, ANZ may elect for a third party to purchase the ANZ cPS rather than delivering the ANZ ordinary shares issued on conversion to the holder. The ANZ cPS are listed on the Australian Securities Exchange. The mandatory conversion Date for ANZ cPS1 is 16 June 2014 and for ANZ cPS2 is 15 December 2016 or each following quarterly dividend payment date provided that all of the mandatory conversion conditions are satisfied. Shareholder information 219 gLOSSARY AAS – Australian Accounting Standards. AASB – Australian Accounting Standards Board. AFS – Available-for-sale assets. AIFRS – Australian Equivalents to international financial Reporting Standards. Alt-A – Alternative A-paper, US mortgages underwritten with lower or alternative documentation than a full documentation mortgage loan or with higher loan to valuation ratios than mortgages guaranteed by US government sponsored enterprises. Alt-A mortgages have a stronger risk profile than sub-prime mortgages. APRA – Australian Prudential Regulation Authority. Asia Pacific, Europe & America – includes the following: Retail which provides retail and small business banking services to customers in the Asia Pacific region. Asia Partnerships which is a portfolio of strategic retail partnerships in Asia. This includes investments in indonesia with P.T. Panin Bank, in the Philippines with metrobank, in china with Bank of Tianjin and Shanghai Rural commercial Bank, in malaysia with AmmB holdings Berhad and in vietnam with Sacombank and Saigon Securities incorporation. Wealth which includes investment and insurance products and services across Asia Pacific and under the Private Bank banner assisting customers in the Asia Pacific region to manage, grow and preserve their assets. Operations & Support which includes the central support functions for the division. Institutional Asia Pacific, Europe & America matrix reports to the Asia Pacific, Europe & America division and is referred to in the paragraph below entitled “institutional”. Bangalore which includes operations, technology and shared services support services across all geographic regions. During the year, ANZ acquired selected Royal Bank of Scotland group plc businesses in Asia. The acquisition of the business in Philippines, vietnam and hong Kong were completed during the march 2010 half, and the acquisition of the business in Taiwan, Singapore and indonesia during the September 2010 half. The acquisition impacts all business segments within Asia Pacific, Europe & American region. Australia – includes the following: Retail Retail Distribution operates the Australian branch network, Australian call centre, specialist businesses (including specialist mortgage sales staff, mortgage broking and franchisees, direct channels (mortgage Direct and One Direct)) and distribution services. Retail Products is responsible for delivering a range of products including mortgages, cards, unsecured lending, transaction banking, savings and deposits: mortgages provide housing finance to consumers in Australia for both owner occupied and investment purposes. cards and Unsecured Lending provides consumer credit cards, ePayment products, personal loans and ATm facilities in Australia. Deposits provide transaction banking and savings products, such as term deposits and cash management accounts. Commercial Esanda provides motor vehicle and equipment finance and investment products. Regional Commercial Banking provides a full range of banking services to personal customers and to small business and agribusiness customers in rural and regional Australia and includes the recent acquisition of loans and deposits from Landmark financial Services. Business Banking provides a full range of banking services, including risk management, to metropolitan based small to medium sized business clients with a turnover of up to A$50 million. Small Business Banking Products provides a full range of banking services for metropolitan-based small businesses in Australia with unsecured loans up to A$100,000. Institutional A full range of financial services to institutional customers within Australia along the product lines of Transaction Banking, markets and Specialised Lending. Also includes Balance Sheet management and Relationship and infrastructure. Refer detailed description of the institutional business under the paragraph below entitled “institutional”. Wealth Private Bank specialises in assisting high net worth individuals and families to manage, grow and preserve their family assets. Investments and Insurance Products comprises Australia’s financial Planning, margin Lending, insurance distribution and Trustees businesses in addition to ETrade, an online broking business. OnePath Australia limited “OnePath” (formerly iNgA) was a joint venture between ANZ and the iNg group. ANZ owned 49% of iNgA and received proportional equity accounted earnings prior to ANZ acquiring the remaining 51% interest to take full ownership. OnePath manufactures and distributes investment and insurance products and services. Group Centre Group Centre includes the Australian portion of Operations, Technology & Shared Services, Treasury, group human Resources, group Strategy, group financial management, group Risk management and group items. Collective provision is the provision for credit Losses that are inherent in the portfolio but not able to be individually identified; presently unidentified impaired assets. A collective provision may only be recognised when a loss event has already occurred. Losses expected as a result of future events, no matter how likely, are not recognised. Credit equivalent represents the calculation of on-balance sheet equivalents for market related items. Customer Deposits represent term deposits, other deposits bearing interest, deposits not bearing interest and borrowing corporations debt excluding collateralised loan obligation and securitisation vehicle funding. IFRS – international financial Reporting Standards. Impaired assets are those financial assets where doubt exists as to whether the full contractual amount will be received in a timely manner, or where concessional terms have been provided because of the financial difficulties of the customer. financial Assets are impaired if there is objective evidence of impairment as a result of a loss event that occurred prior to the reporting date, and that loss event has had impact, which can be reliably estimated, on the expected future cash flows of the individual asset or portfolio of assets. Impaired commitments and contingencies comprises undrawn facilities and contingent facilities where the customer’s status is defined as impaired. Impaired loans comprises drawn facilities where the customer’s status is defined as impaired. Income includes external interest income and other external operating income. Individual provision charge is the amount of expected credit losses on those financial instruments assessed for impairment on an individual basis (as opposed to on a collective basis). it takes into account expected cash flow over the lives of those financial instruments. Institutional division provides a full range of financial services to institutional customers in all geographies. multinationals, institutions and corporates with sophisticated needs and multiple relationships are served globally. institutional has a major presence in Australia and New Zealand and also has operations in Asia, Europe and the United States. During the year, the institutional business has been expanded following the acquisition of selected businesses from Royal Bank of Scotland group plc. The acquisition impacts all business segments within institutional. Transaction Banking provides working capital solutions including lending and deposit products, cash transaction banking management, trade finance, international payments, clearing and custodian services principally to institutional and corporate customers. Global Markets provides risk management services to corporate and institutional clients globally in relation to foreign exchange, interest rates, credit and commodities. This includes the business providing origination, underwriting, structuring and risk management services, advice and sale of credit and derivative products globally. markets also manages the group’s interest rate risk position. Specialised Relationship lending provides complex financing and advisory services, structured financial products, leasing, project finance, leveraged finance and infrastructure investment products to the group’s global client set. Relationship and infrastructure includes client relationship teams for global institutional customers and corporate customers in Australia, and central support functions. liquid assets are cash and cash equivalent assets. cash equivalent assets are highly liquid investments with short periods to maturity, are readily convertible to cash at ANZ’s option and are subject to an insignificant risk of changes in value. Net advances include gross loans and advances and acceptances and capitalised brokerage/mortgage origination fees, less income yet to mature and allowance for credit impairment. 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 is the 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, which are referred to in the analysis of interest spread and net interest average margin, includes shareholders’ equity, impairment of loans and advances, deposits not bearing interest and other liabilities not bearing interest, offset by premises and equipment and other non-interest earning assets. Non-performing loans are included within interest bearing loans, advances and bills discounted. Net tangible assets equals share capital and reserves attributable to shareholders of the group less preference share capital and unamortised intangible assets (including goodwill and software). New Zealand – includes the following: New Zealand comprises three customer segments, Retail, commercial and institutional, a Wealth segment and an operations and support area which includes Treasury funding: Retail National Bank Retail, operating under the National Bank brand in New Zealand, provides a full range of banking services to personal and business banking customers. ANZ Retail, operating under the ANZ brand in New Zealand, provides a full range of banking services to personal and business banking customers. 220 ANZ Annual Report 2010 Glossary 221 gLOSSARY (continued) NOTES TO ThE fiNANciAL STATEmENTS NOTES TO THE FiNANCiAL STATEMENTS THIS PAGE INTENTIONAllY lEFT BlANK. Commercial Corporate & Commercial Banking incorporates the ANZBgL and ANZ National Bank brands and provides financial solutions through a relationship management model for medium-sized businesses with a turnover of up to NZ$150 million. Rural Banking provides a full range of banking services to rural Restructured items are included in impaired assets, and comprise of facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consists of reduction of interest, principal or other payments legally due or an extension in maturity materially beyond those typically offered to new facilities with similar risk. and agribusiness customers. Revenue includes net interest income and other operating income. UDC provides motor vehicle and equipment finance, operating leases and investment products. Segment assets/liabilities represents total external assets/liabilities excluding deferred tax balances. Segment result represents profit before income tax expense. Segment revenue includes net interest income and other operating income. Significant items are items that have a substantial impact on profit after tax, or the earnings used in the earnings per share calculation. Significant items also do not arise in the normal course of business and are infrequent in nature. Divestments are typically defined as significant items. Sub-prime represents mortgages granted to borrowers with a poor or limited credit history. Sub-prime loans carry higher interest rates to compensate for potential losses from default. Sub-standard assets are customers that have demonstrated some operational and financial instability, with variablility and uncertainty in profitability and liquidity projected to continue over the short and possibly medium term. Total advances include gross loans and advances and acceptances less income yet to mature (for both as at and average volumes). Loans and advances classified as available-for-sale are excluded from total advances. Underlying profit represents the directors’ assessment of the profit for the ongoing business activities of the group, and is based on guidelines published by the Australian institute of company Directors and the financial Services institute of Australasia. ANZ applies this guidance by adjusting statutory profit for material items that are not part of the normal ongoing operations of the group including one-off gains and losses, gains and losses on the sale of businesses, non-continuing businesses, timing differences on economic hedges, and acquisition related costs. Institutional A full range of financial services to institutional customers within New Zealand along the product lines of Transaction Banking, markets and Specialised Lending. Also includes Relationship and infrastructure. Refer detailed description of the institutional business under the paragraph below entitled “institutional”. Wealth Private Banking includes the private banking operations under the ANZBgL and ANZ National Bank brands and Bonus Bonds. iNg New Zealand Limited (“iNgNZ”) was a joint venture between ANZ and iNg whereby ANZ owned 49% of iNgNZ and received proportional equity accounting earnings prior to ANZ acquiring the remaining 51% interest to take full ownership. iNgNZ manufactures and distributes investment and insurance products and advice. Operations and Support includes the back-office processing, customer account maintenance, and central support areas including Treasury funding. Non-core items are disclosed separately in the income statement to remove volatility from the underlying business result, and include significant items, and non-core income arising from the use of derivatives in economic hedges on fair value through profit and loss. Operating expenses exclude the provision for impairment of loans and advances charge. Operating income in business segments includes net interest and other operating income. Operations, Technology & Shared Services comprises the group’s core support units responsible for operating the group’s global technology platforms, development and maintenance of business applications, information security, the group’s payments back-office processing, and the provision of other essential shared services to the group, including property, people capital operations, procurement and outsourcing. Overseas includes the results of all operations outside Australia, except if New Zealand is separately shown. Overseas Markets (also known as Asia Pacific, Europe & America) includes all operations outside of Australia and New Zealand. Return on asset ratio include net intra group assets. Repo discount is a discount applicable on the repurchase by a central bank of an eligible security pursuant to a repurchase agreement. 222 ANZ Annual Report 2010 Financial Report 223 Glossary ALPhABETicAL iNDEx NOTES TO THE FiNANCiAL STATEMENTS NOTES TO ThE fiNANciAL STATEmENTS Assets charged as Security for Liabilities and collateral Accepted as Security for Assets Associates Available-for-sale Assets Average Balance Sheet and Related interest Balance Sheet Bonds and Notes Business combinations capital Adequacy capital management cash flow Statement chairman’s Report chief Executive Officer’s Report commitments compensation of Auditors controlled Entities corporate governance Statement credit Related commitments, guarantees, contingent Liabilities and contingent Assets critical Estimates and Judgements Used in Applying Accounting Policies current income Tax Expense Deposits and Other Borrowings Derivative financial instruments Directors’ Declaration Directors’ Report Dividends Due from Other financial institutions Earnings per Ordinary Share Employee Share and Option Plans Events Since the End of the financial Year Exchange Rates Expenses fair value of financial Assets and financial Liabilities fiduciary Activities financial information financial Report financial Risk management five Year Summary glossary of financial Terms goodwill and Other intangible Assets impaired financial Assets income Statements income Tax Liabilities income independent Auditor’s Report interest Spreads and Net interest Average margins interests in Joint venture Entities Key management Personnel Disclosures Life insurance Business Liquid Assets Loan capital maturity Analysis of Assets and Liabilities Net Loans and Advances Non-controlling interests Notes to the cash flow Statements Notes to the financial Statements Other Assets Payables and Other Liabilities Premises and Equipment Provision for credit impairment Provisions Remuneration Report Reserves and Retained Earnings Review of Operations Securitisations Segment Analysis Share capital Shareholder information Shares in controlled Entities, Associates and Joint venture Entities Significant Accounting Policies Statement of changes in Equity Statement of comprehensive income Superannuation and Other Post Employment Benefit Schemes Tax Assets Trading Securities Transactions with Other Related Parties 139 178 117 212 86 128 202 208 136 87 6 8 182 106 177 46 183 101 107 126 111 205 10 108 110 109 192 204 204 105 165 181 208 84 140 82 220 124 119 84 127 104 206 215 179 196 197 110 129 172 118 135 175 90 125 127 125 119 128 15 134 65 180 173 132 216 122 90 88 85 187 123 110 197 224 ANZ Annual Report 2010 A N Z 2 0 1 0 A n n u a l R e p o r t anz.com Australia and New Zealand Banking Group limited ABN 11 005 357 522

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