More annual reports from Australia and New Zealand Banking Group:
2023 Report2013
AnnuAl RepoRt
} Kate Camerlengo
Marketing Manager
Unsecured Lending
Melbourne, Australia
} patrick Zhu
Market Manager North Asia,
Transaction Banking
Shanghai, China
ANZ ANNUAL REPORT 2013
ANZ IS ExECUTINg A FOCUSED STRATEgy
TO bUILD THE bEST CONNECTED, MOST RESPECTED
bANk ACROSS THE ASIA PACIFIC REgION
WHO WE ARE AND HOW WE OPERATE
ANZ’s history of expansion and growth stretches over 175 years. We have a strong franchise
in Retail, Commercial and Institutional banking in our home markets of Australia and
New Zealand and we have been operating in Asia Pacific for more than 30 years.
Today, ANZ operates in 33 countries globally. We are the third largest bank in Australia, the
largest banking group in New Zealand and the Pacific, and among the top 20 banks in the world.
Our strategy is based on the belief that the future of our
home markets of Australia and New Zealand are increasingly
linked to the fast growing region of Asia through trade,
capital and wealth flows. We also believe that people want a
bank that understands their specific needs, and increasingly
can meet these needs in more than one market through a
variety of means.
Our Institutional business in Asia is growing quickly, focused
on the fast-growing cross-border trade and capital flows, with
particular emphasis on regional treasury centres like Hong Kong
and Singapore, and products like Cash Management, Trade,
Foreign Exchange and Debt Capital Markets. Returns in our
Asian retail business are improving, with a focus on productivity
and building our brand across the region.
By building a ‘super-regional’ bank, ANZ can better serve our
customers and achieve superior financial returns over the
longer term.
ANZ’s aspiration is to have 25 to 30% of ANZ Group profit after
tax (including network revenues) sourced from Asia Pacific,
Europe and America, by 2017. ANZ has made good progress
towards this goal.
Achievements and progress during 2013
In 2013, management continued to focus on balancing the
need for investment to meet the needs of our customers and
drive longer-term growth, and the need to generate attractive
returns for our shareholders in the near-term.
We are building stronger positions in our home markets of
Australia and New Zealand, led by solid market share gains
in Australian Retail and Commercial, emerging productivity
benefits from our program of simplification in New Zealand,
and improved penetration of Wealth products into our existing
customer base.
Our operations strategy is delivering economies of scale, speed to
market and a stronger control environment, resulting in lower unit
costs, better quality and lower risk. More generally, our business
risk profile improved, with a continuing shift to investment-grade
clients and shorter tenor Trade Finance, and greater earnings
diversification across products and geographies.
Finally, we focused on strengthening management depth
and the alignment between business, operations, support
and technology.
We are committed to delivering above-peer earnings growth
with strong capital and expense disciplines, targeting further
productivity improvements over the next three years while
increasing return on equity from current levels.
This will be achieved by strengthening our position in Australia
and New Zealand, growing in Asia and sharing common
technology, processes, products and services that are designed
with our customers in mind.
ANZ ANNUAL REPORT 2013
1
2
CONTENTS
Section 1
Financial Highlights
Chairman’s Report
Chief Executive Officer’s Report
Directors’ Report
- Operating and Financial Review
- Remuneration Report
Corporate Governance
Section 2
Financial Statements
Notes to the Financial Statements
Directors’ Declaration and
Responsibility Statement
Independent Auditor’s Report
5
6
7
8
12
28
51
72
78
187
188
ANZ ANNUAL REPORT 2013
Section 3
Five Year Summary
Principal Risks and Uncertainties
Supplementary Information
Shareholder Information
Glossary of Financial Terms
Alphabetical Index
190
191
200
210
217
220
CONTENTS
3
ANZ ANNUAL REPORT 2013 SECTION 1
Financial Highlights
Chairman’s Report
Chief Executive Officer’s Report
Directors’ Report
- Operating and Financial Review
- Remuneration Report
Corporate Governance
5
6
7
8
12
28
51
4
FINANCIAL HIgHLIgHTS
Profitability
Profit attributable to shareholders of the Company ($m)
Cash profit1 ($m)
Return on:
Average ordinary shareholders’ equity2
Average ordinary shareholders’ equity (cash basis)1,2
Average assets
Net interest margin
Net interest margin (excluding Global Markets)
Cash profit per average FTE ($)1
Efficiency ratios
Operating expenses to operating income
Operating expenses to average assets
Operating expenses to operating income (cash basis)1
Operating expenses to average assets (cash basis)1
Credit impairment provisioning
Collective provision charge/(release) ($m)
Individual provision charge ($m)
Total provision charge ($m)
Individual provision charge as a % of average net loans and advances
Total provision charge as a % of average net loans and advances
Ordinary share dividends
Interim – 100% franked (cents)
Final – 100% franked (cents)
Total dividend (cents)
Ordinary share dividend payout ratio3
Cash ordinary share dividend payout ratio1,3
Preference share dividend ($m)
Dividend paid4
ANZ ANNUAL REPORT 2013
2013
2012
6,272
6,498
5,661
5,830
14.9%
15.3%
0.93%
2.22%
2.63%
137,230
14.6%
15.1%
0.90%
2.31%
2.71%
117,635
44.6%
1.22%
44.8%
1.22%
30
1,158
1,188
0.26%
0.27%
73
91
164
71.8%
69.3%
48.1%
1.36%
47.7%
1.36%
(379)
1,577
1,198
0.38%
0.29%
66
79
145
69.4%
67.3%
6
11
1 Statutory profit has been adjusted to exclude non-core items to arrive at cash profit, and has been provided to assist readers to understand the results for the ongoing business activities of the
Group. The adjustments made in arriving at cash profit are included in statutory profit which is subject to audit within the context of the Group statutory audit opinion. Cash profit is not audited
by the external auditor, however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented. Refer to
page 15 and pages 208 to 209 for analysis of the adjustments between statutory profit and cash profit.
2 Average ordinary shareholders’ equity excludes non-controlling interests and preference shares.
3 The 2013 dividend payout ratio is calculated using the March 2013 interim and the proposed September 2013 final dividend. The 2012 dividend payout ratio is calculated using the March 2012
interim and September 2012 final dividend.
4 Represents dividends paid on Euro Trust Securities issued on 13 December 2004.
FINANCIAL HIgHLIgHTS
5
ANZ ANNUAL REPORT 2013ANZ ANNUAL REPORT 2013 Chairman’s report
a message from John morsChel
i am pleased to report that anZ’s statutory profit after tax for the 2013 finanCial year
was $6.3 billion up 11%. this is a strong performanCe, the result of a distinC tive long-term
strategy foCused on growth in our domestiC franChises in australia, new Zealand and
the paCifiC, and targeted expansion in asia.
The final dividend of 91 cents brings the total dividend for the year
to 164 cents per share fully franked, an increase of 13%. This will see
us pay out $4.5 billion to shareholders, largely retail shareholders and
superannuation funds.
ANZ is also delivering for shareholders over the medium term.
Our total shareholder return for the past five years was 121%.
This compares to 110% for the S&P/ASX 200 Banks Accumulation
Index and 13% for the S&P/ASX200 Index as a whole.
We continue to operate from a strong financial position. ANZ is
one of the best capitalised banks in the world with an increasingly
high‑quality balance sheet. A measure of this financial strength is that
ANZ remains one of a small number of banks with a AA credit rating
from all three ratings agencies.
Delivering our Strategy
There continue to be significant growth opportunities for ANZ in our
home markets of Australia and New Zealand.
At the same time, Asia is now the key driver of global economic
growth and the key driver of Australia and New Zealand’s growth.
Our strategy involves a focus on profitable expansion in Asia through
an integrated network connecting customers with faster growing
trade, capital and wealth flows into and across the region. ANZ is the
only Australian bank positioned to fully benefit from Asia’s growth.
The growth of our business in Australia, New Zealand and Asia
Pacific is being supported by an enterprise approach to building the
business on common platforms and processes to reduce unit costs,
complexity and risk, and to improve our customers experience.
ANZ’s performance and the progress we made in delivering our
strategy in 2013 are detailed in this Annual Report.
Board Changes
During the year, we completed a board transition with two directors,
David Meiklejohn and Greg Clark, due to retire at the 2013 Annual
General Meeting. Paula Dwyer joined the board in 2012 as part of a
succession plan for David Meiklejohn and this year Graeme Liebelt
joined to succeed Greg Clark. Graeme was previously Chief Executive
Officer at Orica, a leading global mining services company. On behalf
of shareholders I would like to express our thanks to David and Greg
for their enormous contribution to the Board over the past nine years.
Outlook
As we enter the 2014 financial year, the major economies in the
United States, Europe and Japan are gradually strengthening.
In emerging Asia growth rates are expected to remain above those
in the major developed economies. China is well positioned with
growth expected to be around 7.5% in 2014.
However, there continues to be volatility in global markets. In recent
months this has been seen in response to an expectation that the
US will begin to tighten monetary policy and the political impasse
over the US fiscal position.
Australia and New Zealand remain in a strong position with
improving consumer and business confidence and strong trade
and investment links with Asia. The Australian and New Zealand
economies are expected to expand by around 2.5% in 2014.
ANZ’s super regional strategy means we are well‑placed to benefit
from the resilience of our home markets and the growth in Asia.
Together with the expense and capital management disciplines
we have in place, it means we are positioned to continue to deliver
growth and performance to our shareholders in 2014.
Notably, ANZ was again assessed the global banking sector leader in
the Dow Jones Sustainability Index. This is the sixth year in the past
seven that we have received this assessment. Building sustainability
into the way we do business supports delivery of our strategy.
Finally, I would like to acknowledge the hard work and dedication
of our management and staff who achieved so much in 2013.
I would also like to express my thanks to my fellow Directors for
their commitment and support during the year.
John Morschel
Chairman
6
ANZ ANNUAL REPORT 2013
CHIEF ExECUTIvE OFFICER’S REPORT
A MESSAgE FROM MICHAEL SMITH
ANZ DELIvERED A STRONg, HIgH qUALIT y PERFORMANCE IN 2013 DEMONSTRATINg THAT OUR
SUPER REgIONAL STRATEgy IS CREATINg A bETTER bANk FOR CUSTOMERS AND A bETTER bANk FOR
SHAREHOLDERS. TOTAL SHAREHOLDER RETURN IN 2013 WAS 32%.
Some highlights include the market share growth we achieved in
key customer segments, particularly in Australia and Asia. Good
progress was made with our focus on productivity which saw a
further improvement in the cost-to-income ratio. We also invested
$1.3 billion in Australia, New Zealand and Asia Pacific to produce
growth and returns for the longer-term.
Divisional Performance1
Looking at our Divisional performance, we continued to grow the
already large franchises we have in our home markets of Australia and
New Zealand.
In the Australia Division profit was up 11% with the strongest overall
growth of the major Australian banks across home lending, deposits
and credit cards.
We also gained market share in commercial banking. Customer
acquisition and loyalty is being driven through new digital
applications such as ANZ goMoneyTM, Australia’s most popular
banking app with one million active users.
In the New Zealand Division (NZD) profit was up 29% reflecting
progress in simplifying the business, improving productivity and
building share in core markets. The result also saw a significant
improvement in provisions.
In the Global Wealth Division we are focused on cross-sell,
simplification and digital innovation. Cash profit was up 36% with
a highlight being an 11% increase in Wealth solutions held by
ANZ customers.
We also continued our profitable expansion in Asia through an
integrated network that connects customers with faster growing
regional capital, trade and wealth flows. Our International and
Institutional Banking Division (IIB) grew profit 15%, and Institutional
Asia grew profit 28% driven by strong performances in Trade, Markets
and Cash Management.
ANZ’s balance sheet strengthened in 2013 supported by management
actions to create more diversity by product, by customer and by
geography; and to provide greater quality and predictability through
more exposure to investment grade and multi-national customers.
Significant progress was made with our operations and technology
strategy. The outcome was lower unit costs, better management of
risk through standardisation, and stronger enterprise standards and
controls. Notably, in 2013 we absorbed business volume increases of
up to 12% while reducing operations expenses by 10%.
Corporate Sustainability
In 2013 we also made progress with our approach to Corporate
Sustainability. By building sustainability into our business we can
ensure that we achieve the greatest benefits for our customers,
shareholders, people and communities. We have three areas of
particular focus:
} Sustainable development. Integrating social and environmental
considerations into our business decisions, products and services
to help our customers achieve their sustainability ambitions and
deliver long term value for all our stakeholders.
} Diversity and inclusion. Building the most diverse and inclusive
workforce of any major bank in our region to help us innovate,
identify new markets, connect with customers and make better,
more informed decisions.
} Financial inclusion and capability. Building the financial capability
of people across our region to promote financial inclusion and
progression of individuals and communities.
Building on our Momentum
Our super regional strategy is a long term strategy and our
momentum in 2013 means we are confident ANZ can continue
to perform well in the coming years.
We have set clear priorities within the bank to improve the customer
experience, to diversify revenues, to drive productivity and to
increase shareholder returns. As a result, we have set new targets
to reduce the cost-to-income ratio from 44.8% to below 43% by the
end of 2016 and to achieve a return on equity of above 16% over the
same period.
These targets reflect the confidence we have that our super regional
strategy can deliver on its promise to achieve market-leading
outcomes for our shareholders, our customers and for
the community.
Michael Smith
Chief Executive Officer
1 All figures on a cash basis unless noted otherwise.
CHAIRMAN’S REPORT AND CHIEF ExECUTIvE OFFICER’S REPORT
7
ANZ ANNUAL REPORT 2013ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT
THE DIRECTORS PRESENT THEIR REPORT TOgETHER WITH THE FINANCIAL STATEMENTS 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 2013 AND THE
INDEPENDENT AUDITOR’S REPORT THEREON. THE INFORMATION IS PROvIDED IN CONFORMIT y WITH
THE CORPORATIONS ACT 2001.
Principal Activities
State of Affairs
The Group provides a broad range of banking and financial
products and services to retail, small business, corporate and
institutional clients.
Geographically, operations span Australia, New Zealand, a number
of countries in the Asia Pacific region, the United Kingdom and the
United States. At 30 September 2013, the Group had 1,273 branches
and other points of representation excluding Automatic Teller
Machines (ATMs).
The Group operates on a divisional structure with Australia,
International and Institutional Banking, New Zealand and Global
Wealth being the major operating divisions.
Results
Consolidated profit after income tax attributable to shareholders of the
Company was $6,272 million, an increase of 11% over the prior year.
Operating income growth of $735 million (4%) was primarily driven
by higher net interest income following a 10% increase in average
interest earning assets, partially offset by a 9 basis point decline in
net interest margin. Operating expenses decreased $283 million (3%),
impacted by a software impairment charge of $274 million in the
prior year.
Provision for credit impairment decreased by $10 million (1%),
with improvements across the New Zealand and International and
Institutional Banking divisions.
Balance sheet growth was strong with total assets increasing by
$60.9 billion (9%) and total liabilities increasing by $56.5 billion (9%).
Movements within the major components include:
} Net loans and advances increased by $41.5 billion (10%) primarily
driven by sustained above system housing lending growth
of $12.9 billion (7%) in the Australia division and growth of
$11.8 billion (12%) in IIB, mainly in Transaction Banking.
} Growth in customer deposits of $40.9 billion (12%) comprised
growth in Australia of $11.6 billion (8%), growth in IIB of
$20.5 billion (14%) driven by strong momentum in Asia Pacific,
Europe and America (APEA) and strong customer deposit growth
in New Zealand of $6.9 billion (17%) mainly in Retail and Small
Business Banking.
Further details are contained in the Operating and Financial
Review section of this Directors’ Report on pages 12 to 27 in this
Annual Report.
In the Directors’ opinion there have been no significant changes in
the state of affairs of the Group during the financial year.
Further review of matters affecting the Group’s state of affairs is
also contained in the Operating and Financial Review section of this
Directors’ Report on pages 12 to 27 in this Annual Report.
Dividends
The Directors propose that a fully franked final dividend of 91 cents
per fully paid ordinary share will be paid on 16 December 2013.
The proposed payment amounts to approximately $2,497 million.1
During the financial year, the following fully franked dividends were
paid on fully paid ordinary shares:
Type
Cents
per share
Dividend amount
$m1
Final 2012
Interim 2013
79
73
2,150
2,003
Date of payment
19 December 2012
1 July 2013
The 2013 interim dividend of 73 cents together with the proposed
2013 final dividend of 91 cents brings total dividends on ANZ
ordinary shares in relation to the year ended 30 September 2013 to
164 cents per ordinary share fully franked. New Zealand imputation
credits of NZ 9 cents per ordinary share were attached in respect
of the 2013 interim dividend and it is proposed that New Zealand
imputation credits of NZ 10 cents per ordinary share will be attached
in respect of the proposed 2013 final dividend. No NZ imputation
credits were attached in respect of the 2012 final dividend.
Further details on dividends provided for or paid during the year
ended 30 September 2013 on ANZ’s ordinary and preference shares
are set out in notes 7, 28, 29 and 30 to the financial statements.
Operating and Financial Review
A 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 Operating
and Financial Review section of this Directors’ Report in this
Annual Report.
Events since the end of the Financial Year
There were no significant events from 30 September 2013 to the date
of this report.
1 Amounts are before bonus option plan adjustments.
8
ANZ ANNUAL REPORT 2013
Future Developments
Details of likely developments in the operations of the Group and its
prospects in future financial years are contained in the Chairman’s
Report, the Chief Executive Officer’s Report and the Operating and
Financial Review section of this Directors’ Report in this Annual Report.
Environmental Regulation
The Company recognises the expectations of its stakeholders –
customers, shareholders, staff and the community – to operate
in a way that mitigates its environmental impact.
The Company sets and reports against public targets regarding
its environmental performance.
The Company does not believe that its operations are subject to
any particular and significant environmental regulation under a
law of the Commonwealth or of a State or Territory. However in
Australia, the Company is subject to two pieces of legislation which
impose environmental reporting requirements: the Energy Efficiency
Opportunities Act 2006 (Cth) (EEO Act) and the National Greenhouse
and Energy Reporting Act 2007 (Cth) (NGER Act). In addition, the
Company holds a licence under the Water Act 1989 (Vic) (Water Act)
for the extraction of water from the Yarra River.
Under the EEO Act, the Company meets the ‘energy use threshold’2
and, as such, has a mandatory obligation to identify energy efficiency
opportunities and report progress on their implementation to the
Australian Federal Government. As required under the legislation,
the Company identifies a cycle of works that are designed to reduce
energy usage over a 5 year timeframe. The first five-year assessment
cycle was completed with submission of a report in December 2011.
The Company has now commenced its second five-year cycle with its
Assessment Plan approved by the Department of Resources, Energy
and Tourism in June 2013. The Company complies with its obligations
under the EEO Act.
The NGER Act provides a national framework for reporting energy
and associated greenhouse gas emissions. Under the Act registration
and reporting is mandatory for corporations whose energy
production, energy use, or greenhouse gas emissions trigger the
specified corporate or facility threshold.3 The Company is over the
corporate threshold as defined within this legislation and, as a result,
submitted its first report in October 2009 and each year thereafter.
The Company also holds a licence under the Water Act, allowing it
to extract water from the Yarra River for thermal regulation of its
Melbourne Head-Office building. The licence specifies daily and
annual limits for the extraction of water from the Yarra River with
which the Company fully complies. The extraction of this river water
reduces reliance on the high-quality potable water supply and is one
of several environmental initiatives that the Company has introduced
at its Melbourne Head-Office building.
2
‘energy use threshold’ is defined as annual energy use of over 0.5 PJ. In Australia, ANZ’s
annual energy use is 0.67 PJ.
3 The NGER Act specifies corporate reporting thresholds of 50kt or more of greenhouse gases
(CO2-e) and consumption or production of 200 TJ or more of energy. ANZ exceeded these
thresholds from 2008-09.
The Company may become subject to environmental regulation as
a result of its lending activities in the ordinary course of business.
The Company has developed policies to identify and manage such
environmental matters.
Having made due enquiry, and to the best of the Company’s
knowledge, no entity of the Group has incurred any material
environmental liability during the year.
Further details on the Company’s environmental performance,
including progress against its targets and details of its emissions
profile, are available on anz.com > About us > Corporate
Responsibility.
Directors’ Qualifications, Experience
and Special Responsibilities
At the date of this report, the Board comprises nine 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 52 to 55 of this Annual Report.
Details of the number of Board and Board Committee meetings
held during the year, Directors’ attendance at those meetings and
details of Directors’ special responsibilities, are shown on pages 61
to 64 of this Annual Report. No Directors retired during the 2013
financial year.
Details of directorships of other listed companies held by each
current Director in the three years prior to the end of the 2013
financial year are listed on pages 52 to 55.
Company Secretaries’ Qualifications
and Experience
Currently there are two people appointed as Company Secretaries
of the Company. Details of their roles are contained on page 59.
Their qualifications and experience are as follows:
} Bob Santamaria, BCom, LLB (Hons) Group General Counsel.
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 the Governance Institute of Australia.
DIRECTORS’ REPORT
9
ANZ ANNUAL REPORT 2013ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
} John Priestley, BEc, LLB, FCIS Company Secretary.
Mr Priestley, a qualified lawyer, joined ANZ in 2004. Prior to
joining 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 the Governance Institute of Australia and also a member
of the Governance Institute of Australia’s National Legislation
Review Committee.
Non-audit Services
The Group’s Stakeholder Engagement Model for Relationship
with the External Auditor (which incorporates requirements of the
Corporations Act 2001 and international best practice) states that
the external auditor may not provide services that are perceived
to be in conflict with the role of the external auditor. These include
consulting advice and sub-contracting of operational activities
normally undertaken by management, and engagements where the
external auditor may ultimately be required to express an opinion
on its own work.
Specifically the Stakeholder Engagement Model:
} limits the non-audit services that may be provided;
} requires that audit, audit-related 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 a limited number of authorised senior members of
management) and notified to the Audit Committee; and
} requires that the external auditor does not commence an
engagement for the Group until the Group has confirmed that
the engagement has been pre-approved.
The non-audit services supplied to the Group by the Group’s external
auditor, KPMG, or by another person or firm on KPMG’s behalf, and
the amount paid or payable by the Group by type of non-audit
service during the year ended 30 September 2013 are as follows:
Amount paid/payable
$’000’s
Non-audit services
Review of internal regulatory framework policies
submitted to the UK, US and Indian regulators
Review operational risk management scenario
analysis process
Review of accounts for divestment purposes
Industry benchmarking for Wealth Australia
Accounting advice for Wealth Australia
Review analysis tool developed by Wealth Australia
Assistance with review of IT controls of ANZ’s
vendors in Vietnam
Regulatory services related to the UK regulator
Review terminal stocktake as part of the sale of
EFTPOS New Zealand Limited
Assistance with regulatory registration processes
in Taiwan
Review of Wealth internal capital adequacy
assessment process
Review application of new Australian consumer
cards legislation
Regulatory benchmarking review (Taiwan)
Accounting advice for Group Centre
2013
324
77
53
26
22
20
13
13
8
7
–
–
–
–
2012
–
–
35
75
–
–
–
–
–
11
83
50
49
28
Further details about the Stakeholder Engagement Model can be
found in the Corporate Governance Statement on pages 64 to 65.
Total
563
331
The Audit Committee has reviewed the non-audit services provided
by the external auditor (KPMG) for 2013, and has confirmed that
the provision of non-audit services for 2013 is consistent with the
Stakeholder Engagement Model and compatible with the general
standard of independence for external auditors imposed by the
Corporations Act 2001. This has been formally advised by the Audit
Committee to the Board of Directors.
The external auditor has confirmed to the Audit Committee that
it has:
} implemented procedures to ensure it complies with independence
rules both in Australia and the United States (US); and
} complied with domestic policies and regulations, together with
the regulatory requirements of the US Securities and Exchange
Commission, and ANZ’s policy regarding the provision of non-audit
services by the external auditor.
Further details on the compensation paid to KPMG is provided
in note 5 to the financial statements including details of
audit-related services provided during the year of $3.879 million
(2012: $4.313 million).
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 2013 is compatible with the general
standard of independence for external auditors imposed by the
Corporations Act 2001.
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 and other matters as required under section 295A(2)
of the Corporations Act 2001 and Recommendation 7.3 of the
ASX Corporate Governance Principles and Recommendations.
10
Directors’ and Officers’ Indemnity
The Company’s Constitution (Rule 11.1) permits the Company to
indemnify any officer or employee of the Company against liabilities
(so far as may be permitted under applicable law) incurred as such
an officer or employee. It is the Company’s policy that its employees
should be protected from any liability they incur as a result of acting
in the course of their employment, subject to appropriate conditions.
Under the policy, the Company will indemnify employees against
any liability they incur to any third party in carrying out their role.
The indemnity applies to 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 in addition will not
apply to liability arising from:
} serious misconduct, gross negligence or lack of good faith;
} illegal, dishonest or fraudulent conduct; or
} material non-compliance with the Company’s policies, processes
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 bodies corporate 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 against liabilities incurred as an officer or auditor of
the Company.
During the financial year, the Company has paid premiums for
insurance 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
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.
Key Management Personnel and Employee
Share and Option Plans
Details of equity holdings of Non-Executive Directors, the Chief
Executive Officer and Disclosed Executives during the 2013 financial
year and as at the date of this report are detailed in note 46 of the
financial statements.
Details of options/rights issued over shares granted to the Chief
Executive Officer and Disclosed Executives during the 2013 financial year
and as at the date of this report are detailed in the Remuneration Report.
Details of options/rights issued over shares granted to employees
during the 2013 financial year and on issue as at the date of this
report are detailed in note 45 of the 2013 financial statements.
Details of shares issued as a result of the exercise during the 2013
financial year of options/rights granted to employees are detailed in
note 45 of the 2013 financial statements.
Other details about the share options/rights issued, including any
rights to participate in any share issues of the Company, are set out in
note 45 of the 2013 financial statements. No person entitled to exercise
any option/right has or had, by virtue of an option/right, a right to
participate in any share issue of any other body corporate.
The names of all persons who currently hold options/rights 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 2013.
THE AUDITOR’S 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 2013, 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
Andrew Yates
Partner
Melbourne
8 November 2013
DIRECTORS’ REPORT
11
ANZ ANNUAL REPORT 2013
DIRECTORS’ REPORT (continued)
OPERATING AND FINANCIAL REVIEW
This Operating and Financial Review has been prepared in
accordance with section 299A of the Corporations Act 2001 and
Australian Securities and Investments Commission (ASIC) Regulatory
Guide 247: Effective disclosure in an operating and financial review.
It sets out information that allows shareholders to assess the Group’s
operations, financial position, business strategies and prospects for
future financial years. This information complements and provides
context to the financial report.
Operations of the Group
OvER vIE w
ANZ provides a broad range of banking and financial products
and services to retail, high net worth, small business, corporate
and institutional customers. It conducts its operations primarily in
Australia, New Zealand and the Asia Pacific region. ANZ also operates
in a number of other countries including the United Kingdom and the
United States.
BUSINESS MODEL
ANZ’s business model primarily consists of raising funds through
customer deposits and the wholesale debt markets and lending
these funds to customers. In addition, the Group earns revenue
from the Global Wealth business through the provision of insurance,
superannuation and funds management services, and our Global
Markets business from trading and risk management activities.
Our primary lending activities are personal lending covering
residential mortgages, credit cards and overdrafts, and lending to
corporate and institutional customers.
Our income is derived from a number of sources, primarily:
} Net interest income – represents the difference between the
interest income the Group earns on its lending activities, less
interest paid on deposits and our wholesale funding;
} Net fee and commission income – represents fee income earned
on lending and non-lending related financial products and
services; and
} Net funds management and insurance income – represents
income earned from the provision of investment, insurance and
superannuation solutions.
PRINCIPAL ACTIvITIES Of SEGMENTS
The Group operates and manages its results on a divisional structure
with Australia, International & Institutional Banking (IIB), New
Zealand and Global Wealth being the major operating divisions.
Global Technology, Services and Operations (GTSO) provides global
enablement capability to those operating divisions.
Australia
The Australia division comprises Retail and Corporate & Commercial
Banking business units. Retail includes Mortgages, Deposits, Cards
and Payments along with the Retail Distribution Network. Corporate
& Commercial Banking includes Corporate Banking, Esanda, Regional
Business Banking, Business Banking and Small Business Banking.
International and Institutional Banking
The IIB division comprises Global Institutional, Retail Asia Pacific
and Asia Partnerships business units, along with Relationship
& Infrastructure.
New Zealand
The New Zealand division comprises Retail and Commercial business
units, and Operations and Support which includes the central support
functions (including Treasury funding).
Global wealth
The Global Wealth division comprises Funds Management, Insurance
and Private Wealth which provides investment, superannuation,
insurance products and services as well as Private Banking for
customers across Australia, New Zealand and Asia.
Global Technology, Services & Operations
GTSO includes Global Services and Operations, Group Technology
and Group Centre. Group Centre comprises Group Human Resources,
Group Risk, Group Strategy, Group Corporate Affairs, Group Corporate
Communications, Group Treasury, Global Internal Audit, Group
Finance, Group Marketing, Innovation and Digital, Shareholder
Functions and discontinued businesses.
A detailed description of each of the segments is included in the
appendix to the Annual Report.
12
ANZ ANNUAL REPORT 2013
THE GROUP ’S STRATEGIC PRIORITIES AND OUTLOOK
SUPER REGIONAL STRATEGY
To become the best connected and most respected bank across the region
Strengthen our position in
Australia and New Zealand
Grow in Asia, focused on
corporate and financial
institutions, supported by our
Asia retail branch network
Share common technology,
processes, products and services
that are designed with our
customers in mind, and to reduce
costs, complexity and risk
Manage risk, balance sheet and capital to drive superior return for shareholders.
Develop the best connected and most respected people in banking.
ANZ is executing a focused strategy to build the best connected,
most respected bank across the Asia Pacific region, and in doing so
provide shareholders with above-peer earnings growth.
The bank is pursuing significant organic growth opportunities in
the Asia Pacific region, and with our strong businesses in Australia
and New Zealand, our distinctive footprint and super regional
connectivity we are uniquely positioned to meet the needs of
customers, who are increasingly linked to regional capital and
trade flows.
ANZ’s aspiration is to have 25 to 30% of ANZ Group profit after tax
(including network revenues) sourced from APEA, by 2017. ANZ has
made good progress towards this aspiration.
STRATEGIC PROGRESS IN 2013
While economic conditions across the Asia Pacific region remain more
robust by comparison to much of the rest of the world, conditions for
banking were once again challenging – particularly for institutional
banking where subdued credit conditions and margin compression
have impacted income growth.
Within that environment, management continued to focus on
balancing the need for investment to meet the needs of our
customers and drive longer-term growth, and the need to generate
attractive returns for our shareholders in the near-term. This has been
achieved by focusing on both productivity initiatives and capital
management to improve returns and support strong earnings per
share (EPS) growth.
} We are building stronger positions in our Australia and
New Zealand markets, led by solid market share gains in Australia
Retail and Commercial, emerging productivity benefits from our
program of simplification in New Zealand, and much improved
penetration of Wealth products into our existing customer base
in these markets.
} We have continued to build in Asia, focused on intermediating
the fast growing trade and capital flows in the region with
particular emphasis on regional treasury centres like Hong Kong
and Singapore and products like Trade, Foreign Exchange and
Debt Capital Markets for Institutional customers. The Commercial
segment in Asia is quickly emerging as a source of valuable Markets
and Trade cross-sell.
} Our retail business in Asia is maturing, with improving return on
equity (ROE) and cost to income ratio. It is focused on building USD,
AUD and RMB liquidity and building our brand across the region.
} We reached a level of maturity with Operations and Technology
which are now managed on an equal footing as our other Business
Divisions. Our operations and technology strategy is delivering
economies of scale, speed to market and a stronger control
environment to the business, particularly from our regional hubs
and our use of common platforms and processes, resulting in lower
unit costs, better quality and lower risk.
} We globalised the operating model for Finance and Human
Resources in line with the existing way we manage Risk, and
we believe these changes will deliver greater consistency, higher
control standards and lower cost.
DIRECTORS’ REPORT
13
ANZ ANNUAL REPORT 2013ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
} The Group generated around $4.5 billion of additional capital over
the year, and remains well capitalised with a Common Equity Tier 1
ratio of 10.8% at 30 September 2013 on a Basel 3 internationally
harmonised basis or 8.5% under APRA’s Basel 3 standards.
Customer funding was slightly higher at 62% of total funding.
} Gross impaired assets reduced, and the Group’s coverage ratios
remain strong with collective provision (CP) to credit risk weighted
asset (CRWA) at 1.00% and individual provision (IP) to gross
impaired assets at 34.4%.
} Finally, we focused on strengthening management depth and the
alignment between business, operations, support and technology.
MEDIUM TO LONG TERM STRATEGIC GOALS AND OUTLOOK
As we enter 2014 the global economy is continuing to recover slowly.
The major economies in the United States, Europe and Japan are
gradually strengthening and while growth in emerging Asia has come
off recent highs, growth rates are expected to remain above those in
the major developed economies. China has come through a managed
slow-down well positioned with growth expected to be around 7.5%
in 2014.
Australia and New Zealand remain in a strong position with economic
growth increasingly linked to Asia with the two economies expected
to expand by around 2.5% in 2014.
ANZ is committed to delivering top quartile total shareholder
returns and above-peer earnings growth, targeting a Group cost to
income ratio of less than 43% and ROE of at least 16% by the end of
September 2016. The target dividend payout ratio remains at around
65-70% of cash profit, with a bias towards the upper end of this range,
which we believe to be a sustainable level in a Basel 3 environment.
To do this we will continue to:
} Strengthen our position in our Australia and New Zealand markets
by growing our Retail and Commercial operations, driving
productivity benefits, leveraging the super regional strategy and
using technology to drive better functionality:
– In Australia, we are transforming the way we serve our customers
by investing in physical, mobile and digital channels to support
our retail customers, by increasing sales capacity to support
our business banking customers, and by investing in customer
analytics; and
– In New Zealand, we will work under one brand on one platform
with more efficient market coverage.
} Focus our Asia expansion primarily on Institutional Banking,
supporting our Australian and New Zealand customers, targeting
profitable markets and segments in which we have expertise
and which are connected through trade and capital flows, while
continuing to build our niche Commercial and Retail businesses.
} Achieve greater efficiency and control through the use of scalable
common infrastructure and platforms.
} Maintain strong liquidity and actively manage capital to
enhance ROE.
} Build on our Super Regional capabilities by utilising our
management bench-strength and continuing to deepen our
international pool of talent.
} Apply strict criteria when reviewing existing investment and new
inorganic opportunities.
The ability of the Group to achieve its goals set out above is
dependent on the success of the Group’s ability to manage its
material risks which are outlined on pages 26 to 27.
Further information on business strategies which may affect the
operations of the Group in subsequent years are contained in the
Chairman’s Report and the CEO Report.
14
Results of the operations of the Group
ANZ REPORTED A PROfIT AfTER TAx Of $6,272 MILLION fOR THE YEAR ENDED 30 SEPTEMBER 2013.
Income Statement
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 attributable to shareholders of the Company
2013
$m
12,758
5,688
18,446
(8,236)
10,210
(1,188)
9,022
(2,750)
6,272
2012
$m
12,110
5,601
17,711
(8,519)
9,192
(1,198)
7,994
(2,333)
5,661
Movt
5%
2%
4%
-3%
11%
-1%
13%
18%
11%
Non-IfRS information
The Group provides an additional measure of performance which is prepared on a basis other than in accordance with the accounting standards
– cash profit. The guidance provided in ASIC Regulatory Guide 230 has been followed when presenting this information.
Cash Profit
From 1 October 2012, the Group changed to reporting profit on a cash basis from reporting profit on an underlying profit basis. Comparative
information has been restated on a consistent basis.
Statutory profit has been adjusted to exclude non-core items to arrive at cash profit, and has been provided to assist readers to understand
the results for the ongoing business activities of the Group. The adjustments made in arriving at cash profit are included in statutory profit
which is subject to audit within the context of the Group statutory audit opinion. Cash profit is not subject to audit by the external auditor,
however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each
period presented.
Statutory profit attributable to shareholders of the Company
Adjustments between statutory profit and cash profit
Cash profit
Adjustments between statutory profit and cash profit ($m)
Treasury shares adjustment
Revaluation of policy liabilities
Economic hedging – fair value (gains)/losses
Revenue and net investment hedges (gains)/losses
Structured credit intermediation trades
Total adjustments between statutory profit and cash profit
2013
$m
6,272
226
6,498
2013
84
46
(13)
159
(50)
226
2012
$m
5,661
169
5,830
2012
96
(41)
229
(53)
(62)
169
Movt
11%
34%
11%
Movt
-13%
large
large
large
-19%
34%
Refer pages 208 to 209 for analysis of the adjustments between statutory profit and cash profit.
DIRECTORS’ REPORT
15
ANZ ANNUAL REPORT 2013 DIRECTORS’ REpORT (continued)
Analysis of the business performance by major income and expense lines and by Division, is on cash basis.
Income Statement
Net interest income
Other operating income
Operating income
Operating expenses
Profit before credit impairment and income tax
Provision for credit impairment
Profit before income tax
Income tax expense and non-controlling interests
Cash profit
Financial performance metrics
Return on average ordinary shareholders equity1
Return on average assets
1 Average ordinary shareholders’ equity excludes non-controlling interests and preference shares.
2 Basis points (bps).
Non-financial key performance metrics3
Employee engagement
Customer satisfaction
- Australia (retail customer satisfaction)4
- New Zealand (retail customer satisfaction)5
- IIB (Institutional Relationship strength index ranking)6
- Australia
- New Zealand
Women in management7
Net Interest Income
Net interest income ($m)
Net Interest Margin (%)
Net Interest Margin (%) (excluding Global Markets)
Average interest earnings assets ($m)
Average deposits and other borrowings (excluding Global Markets)
2013
$m
12,772
5,606
18,378
(8,236)
10,142
(1,197)
8,945
(2,447)
6,498
2013
15.3%
0.96%
2012
$m
12,110
5,738
17,848
(8,519)
9,329
(1,258)
8,071
(2,241)
5,830
Movt
5%
-2%
3%
-3%
9%
-5%
11%
9%
11%
2012
15.1%
0.93%
Movt
20 bps2
3 bps
2013
72%
80%
84%
2
1
2012
70%
76%
89%
2
1
38.7%
37.8%
2013
12,772
2.22%
2.63%
575,339
342,247
2012
12,110
2.31%
2.71%
523,461
317,977
Movt
5%
-9 bps
-8 bps
10%
8%
3 The Group uses a number of non-financial measures to assess performance. These metrics form part of the balanced scorecard used to measure performance in relation to the Group’s main
incentive programs. Discussion of the non-financial performance metrics is included within the Remuneration report on pages 38 to 39 of this Directors’ report.
4 Source: Roy Morgan Research. Base: ANZ Main Financial Institution Customers, aged 14+, based on six months to September for each year.
5 Camorra Research Retail Market Monitor (2013). The Nielson Company Consumer Finance Monitor (2012) excludes National Bank brand. Base: ANZ main bank customers aged 15+, rolling
6 months moving average to September. Based on responses of excellent, very good and good.
6 Source: Peter Lee Associates 2013 Large Corporate and Institutional Relationship Banking Survey, Australia and New Zealand.
7 Calculation for 2013 includes employees on parental leave.
16
Net interest income increased $662 million (5%), with strong growth in average interest earning assets, up 10%, partially offset by a decline in
the net interest margin.
The Group net interest margin (excluding Global Markets) of 2.63% was 8bps lower than 2012 driven by the impacts of lower interest rates
on capital and rate-insensitive deposits, the impacts of the high growth in lower margin Trade business within IIB, increased competition for
deposits across all businesses and the impacts of lower margins arising from improved credit quality.
These declines were partially offset by improvements in margins in Australia and the benefits of an improved funding mix arising from an
increased proportion of customer deposits and lower reliance on more expensive wholesale funding.
Average interest earning assets (excl. Global Markets) increased $33.3 billion (8%) over the year with increases driven by:
} Australia increased $15.4 billion with mortgages up $10.4 billion and Corporate & Commercial Banking up $4.8 billion primarily in Fixed
lending and Tailored Commercial Facilities;
} IIB (excl. Global Markets) increased $10.6 billion due to $1.7 billion increase in Global Loans and a $6.8 billion increase in Trade Finance
lending; and
} New Zealand increased $6.9 billion driven by an uplift in Retail lending, particularly in mortgages.
Other Operating Income
Fee income1
Foreign exchange earnings1
Net income from wealth management
Share of associates’ profit1
Global Markets other operating income3
Other1,2
Total other operating income
2013
$m
2,316
209
1,216
478
1,306
81
5,606
2012
$m
2,293
288
1,099
396
1,213
449
5,738
Movt
1%
-27%
11%
21%
8%
-82%
-2%
1 Excluding Global Markets.
2 Other income includes a $291 million gain on sale of Visa shares during 2012.
3 During the year the Group recognised a funding valuation adjustment of $61 million for the net cost of funding associated with collateralised and uncollateralised derivative positions.
Other operating income decreased $132 million (2%) during the period. The decline primarily relates to a reduction in ‘other’ due to
non-recurring gains recorded in 2012 from the sale of Visa inc. shares of $291 million, partially offset by increased Wealth Management and
Global Markets other operating income during the year.
Fee income increased by $23 million due to trade finance loan volume growth and pricing initiatives partially offset by reductions in advisory
fees due to a reduction in corporate advisory activity and lower levels of non-yield related fee income.
Foreign exchange earnings (FX) income decreased by $79 million as a result of realised FX revenue hedge losses in Group Centre which offset
translation gains elsewhere in the Group.
Net income from wealth management increased $117 million due to increases in Global Wealth of $65 million arising from increased insurance
and funds management income and $11 million in New Zealand arising from an increase in branch distribution of insurance products and
improved Kiwisaver performance. Retail Asia Pacific increased $8 million as a result of improved insurance and investment performance in
Singapore and Indonesia and Group Centre increased $34 million due to a reduction in the elimination of OnePath investments in ANZ products
(with a corresponding reduction reflected in net interest income).
Share of associates’ profit increased by $82 million as a result of increases across a number of our associates. Shanghai Rural Commercial Bank
(SRCB) increased $33 million mainly attributable to growth in interest income driven by loan repricing and reduced low margin lending as well
as lower credit provisions. Bank of Tianjin (BoT) increased $21 million due to an increase in underlying earnings driven by strong asset growth,
and AMMB Holdings Berhad (AMMB) increased $15 million mainly attributable to an increase in underlying earnings driven by growth in interest
income and lower credit provisions.
Global Markets income increased $93 million and is affected by mix impacts between the categories within other operating income and net
interest income. The key movements related to:
} Fixed income increased $43 million with Credit and Balance Sheet trading benefiting from contracting spreads during the year which more
than offset the impact of a funding valuation adjustment;
} FX income increased $107 million with growth in the FX business, particularly in the key global FX markets of Singapore and London. FX
income in Asia was up 25% over the year and up 40% in Europe over the same period; and
} Capital Markets increased $22 million mainly driven by increased deal activity in Loan Syndications.
DIRECTORS’ REPORT
17
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
Operating Expenses
Personnel expenses
Premises expenses
Computer expenses
Restructure expenses
Other expenses
Total operating expenses
Key performance metrics
2013
$m
4,757
733
1,243
85
1,418
8,236
2012
$m
4,765
716
1,383
274
1,381
8,519
Movt
0%
2%
-10%
-69%
3%
-3%
Operating expenses to operating income
Full time equivalent staff (FTE)
44.8%
47,512
47.7%
48,239
-290 bps
-2%
Operating expenses reduced by 3%, with all business divisions recording reductions.
Personnel expenses decreased $8 million with annual salary increases and the adverse impact of foreign exchange movements being offset by
reductions in staff numbers, increased utilisation of our hub resources and lower temporary staff costs.
Premises expenses increased $17 million mainly due to rent increases and the transition to new buildings in Sydney and New Zealand.
Computer expenses reduced $140 million due to the $274 million impairment of software assets in 2012, partially offset by an increase in
depreciation and amortisation and technology investment.
Restructuring expenses decreased $189 million mainly due to the wind down of NZ Simplification and lower spend on restructuring initiatives.
Other expenses increased $37 million due to higher costs relating to Banking on Australia and investment in technology, along with higher
advertising spends.
Credit impairment provisioning
Individual provision charge / (credit)
Collective provision charge / (credit)
Charge to income statement
2013
$m
1,167
30
1,197
2012
$m
1,637
(379)
1,258
Movt
-29%
Large
-5%
The total individual provision charge decreased $470 million (29%), primarily driven by a reduced number of individual provision charges in
IIB and New Zealand where credit quality improved. This was partially offset by an increase in individual provision in Australia division, driven
primarily by commercial lending.
The collective provision charge increased $409 million from a $379 million release in September 2012 to a $30 million charge in September
2013. The increase was driven primarily by a $98 million increase in Australia division reflecting releases from the economic cycle balance
in 2012 and lending growth in 2013, and a $326 million movement in IIB due to crystallisation of individual provisions on a few large legacy
exposures in 2012 and the associated collective provision release.
The $30 million collective provision charge reflects a $49 million charge in Australia division primarily related to volume growth in the
commercial portfolio, a $37 million charge in IIB primarily due to growth, and a release in New Zealand of $58 million reflecting economic
cycle releases.
18
fINANCIAL POSITION Of THE GROUP
Summary Balance Sheet
Assets
Liquid assets/due from other financial institutions
Trading and available-for-sale assets
Derivative financial instruments
Net loans and advances
Investments backing policy liabilities
Other
Total Assets
Liabilities
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments
Bonds and notes
Policy liabilities/external unit holder liabilities
Other
Total Liabilities
Total equity
2013
$b
61.9
69.4
45.9
469.3
32.1
24.4
703.0
36.3
439.7
47.5
70.4
35.9
27.6
657.4
45.6
2012
$b
53.7
61.2
48.9
427.8
29.9
20.6
642.1
30.5
397.1
52.6
63.1
33.5
24.1
600.9
41.2
Movt
15%
13%
-6%
10%
7%
18%
9%
19%
11%
-10%
12%
7%
15%
9%
11%
The Group’s balance sheet continued to strengthen during 2013 with stronger capital ratios, a higher level of liquidity, an increased proportion
of funding from customer deposits and a reduction in the proportion of impaired assets to gross loans and advances.
Asset growth of $61 billion (9%) was principally driven by:
} Liquid assets/due from other financial institutions increased $8 billion primarily attributable to the impact of the AUD depreciation on
liquidity portfolios held in offshore branches; and
} Net loans and advances increased $42 billion primarily driven by an $18 billion increase in the Australia division from above system growth in
Mortgages and growth in Corporate & Commercial Banking; an $11 billion increase in New Zealand due to above system growth in mortgages
and favourable exchange rate movements; and a $12 billion increase in IIB with strong growth across all business lines in the APEA geography.
Liabilities growth of $57 billion (9%) was principally driven by:
} Deposits and other borrowings which increased $43 billion due to growth in customer deposits of $41 billion primarily in Australia (increased
by $12 billion) and IIB (increased by $21 billion) with solid growth from new retail savings products and greater penetration in the APEA
region respectively.
DIRECTORS’ REPORT
19
ANZ ANNUAL REPORT 2013
DIRECTORS’ REPORT (continued)
Credit Provisioning
Gross impaired assets ($m)
Credit risk weighted assets ($b)1
Total provision for credit impairment ($m)
Individual provision as % of gross impaired assets
Collective provision as % of credit risk weighted assets1
2013
4,264
287.7
4,354
34.4%
1.00%
2012
5,196
254.9
4,538
34.1%
1.08%
Movt
-18%
13%
-4%
30 bps
-8 bps
1 September 2013 risk weighted assets under Basel 3 methodology. September 2012 risk weighted assets under Basel 2 methodology. The change from Basel 2 to Basel 3 on 1 January 2013
increased risk weighted assets by $15.2 billion at that date.
Gross impaired assets decreased by 18% driven by several single names returning to performing in IIB and New Zealand, combined with lending
book credit quality improvements reducing the flow of new impaired assets. The Group has an individual provision coverage ratio on impaired
assets of 34.4% at 30 September 2013, up from 34.1% as at 30 September 2012.
The collective provision ratio of 1.00% provides conservative coverage given the ongoing improvement in credit quality, particularly in the
Institutional lending book where credit exposure to investment grade clients now comprises 78% of the book compared with 60% in 2008.
Liquidity and funding
Total liquidity portfolio ($b)
Total customer liabilities funding (%)
2013
121.6
62%
2012
114.6
61%
Movt
6%
100 bps
The Group maintains a portfolio of liquid assets to manage potential stresses in funding sources. The minimum level of liquidity portfolio assets
to hold is based on a range of ANZ specific and general market liquidity stress scenarios such that potential cash flow obligations can be met
over the short to medium term.
The Group holds a diversified portfolio of cash and high credit quality securities that may be sold or pledged to provide same-day liquidity.
All assets held in the prime portfolio are securities eligible for repurchase under agreements with the applicable central bank (i.e. ‘repo eligible’).
The liquidity portfolio is well diversified by counterparty, currency and tenor. Under the liquidity policy framework, securities purchased for
ANZ’s liquidity portfolio 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.
During the year customer funding increased by $44 billion and now represents 62% of total funding. Wholesale funding increased $13 billion,
with an additional $24 billion of term wholesale debt issued across a well diversified range of domestic and international investors during 2013.
Capital Management
Common Equity Tier 1
- APRA Basel 3
- Internationally Harmonised1 Basel 3
Risk weighted assets ($b) (APRA Basel 3)2
2013
2012
Movt
8.5%
10.8%
339.3
8.0%
10.0%
315.4
50 bps
80 bps
8%
1 ANZ’s interpretation of the regulations documented in the Basel Committee publications; “Basel III: A global regulatory framework for more resilient banks and banking systems” (June 2011) and
“International Convergence of Capital Measurement and Capital Standards” (June 2006)
2 September 2013 risk weighted assets under Basel 3 methodology. September 2012 risk weighted assets under Basel 2 methodology. The change from Basel 2 to Basel 3 on 1 January 2013
increased risk weighted assets by $15.2 billion at that date.
APRA, under the authority of the Banking Act 1959, sets minimum regulatory capital requirements for banks including what is acceptable as
capital and provide methods of measuring the risks incurred by the Bank.
The Group’s Common Equity Tier 1 ratio increased 50 basis points to 8.5% based upon the APRA Basel 3 standards, exceeding APRA’s minimum
requirements, with cash earnings and capital initiatives (including divestments) outweighing dividends, incremental risk weighted assets
and deductions.
20
RESULTS Of MAJOR SEGMENTS Of THE GROUP
Australia
Across ANZ’s Retail and Commercial businesses in Australia, we serve approximately six million customers.
During 2013, we have continued to strengthen our Australian domestic franchise with market share gains in our target segments while
maintaining strong margins, cost discipline and asset quality. We continue to leverage ANZ’s Super Regional advantage to bring the whole of
ANZ to our customers.
Banking on Australia Transformation Program
Our Banking on Australia program is transforming the business to position ANZ for growth in a changing environment. We are building our lead
in digital and mobile channels to enhance the customer experience, expand our reach and deepen customer loyalty by making it easier for our
customers to bank with us, while delivering a lower cost to serve. Our customer connectivity continues to grow with one million active ANZ
goMoneyTM users, more than 7,000 active ANZ FastPayTM merchants and 1,200 frontline bankers enabled with mobility tools (iPads).
We are transforming our distribution network to focus on more complex sales, reduce branch footprint costs, build out contact centre capability
and improve frontline banker productivity. This has resulted in revenue per full time equivalent (FTE) increasing 7% and the expense to income
ratio reducing from 40.8% in 2012 to 37.5% in 2013.
Banking on Australia is delivering. ANZ had the strongest overall growth of the major banks across Home Loans, Deposits, Cards1, and also Share
of Wallet2 in 2013. ANZ has now grown Housing Lending at above system levels for 14 consecutive quarters1 and 53% of Home Loans are now
sold through our proprietary channels, up from 49% in September 2012. Corporate & Commercial Banking has leveraged Banking on Australia
by focusing on delivering an easy, connected and insightful customer experience and utilising ANZ’s super regional footprint. As a result C&CB
has grown net customer numbers3 by 30,000 (8%), delivered strong volume growth and increased cross-sell by 8% over the year.
Income statement
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
Cash profit
Key performance metrics
Number of employees
Net interest margin (%)
Operating expenses to operating income (%)
Net loans and advances ($b)
Customer deposits ($b)
2013
$m
6,678
1,189
7,867
(2,951)
4,916
(820)
4,096
(1,223)
2,873
14,586
2.53%
37.5%
271.6
152.4
2012
$m
6,163
1,193
7,356
(3,002)
4,354
(642)
3,712
(1,114)
2,598
Movt
8%
0%
7%
-2%
13%
28%
10%
10%
11%
14,606
2.48%
40.8%
253.9
140.8
0%
5 bps
-330 bps
7%
8%
1 Source: APRA Monthly Banking Statistics for the year end to June 2013.
2 Source: Roy Morgan research: Aust Population aged 14+, rolling 12 months, Trade Banking Consumer Market (Deposits, Cards and Loans), Peers: CBA (excl. Bankwest), NAB, Westpac (excl. Bank of
Melbourne and St George).
3 Excluding Esanda.
Cash profit increased 11%, with a 7% increase in income and a 2% reduction in expenses, partially offset by a 28% increase in credit provisions.
Key factors affecting the result were:
} Net interest income increased 8% from growth in average net loans and advances of 6%, driven by sustained above system growth in
home loans, including branch originated home loan sales growth of 16%, and strong lending growth in Corporate & Commercial Banking.
Additionally, net interest margin improved 5bps as a result of disciplined margin management, partly offset by deposit pricing pressures.
} Operating expenses reduced 2% (flat after adjusting for significant software impairments in the prior year). Investment spending was funded
by a reduction in average FTE and benefits from a focus on productivity and expense management.
} Provision for credit impairment increased 28%. Individual provisions increased driven by lower asset valuations across the rural and vehicle
finance sectors in Corporate & Commercial Banking, partially offset by an improvement in cards delinquency. Collective provisions increased
in both Retail and Corporate & Commercial Banking reflecting asset growth as well as releases in the prior period.
DIRECTORS’ REPORT
21
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
International and Institutional Banking
IIB’s result reflected continued progress of the Super Regional Strategy through diversified income streams, improved quality of lending and
enhanced connectivity for our customers. We are doing more business with more customers in more products in more countries and this has
helped offset margin pressure compared to prior years.
This result highlights the continued progress of our expansion into Asia with the APEA component of IIB (which consists of our Asian
Partnerships, Asian Retail and Institutional banking operations in APEA geographies) now contributing 48% of income and delivering income
growth of 10% in the current year. This result reflects the ongoing investment in systems and people in the region, building scale and capability
which has helped generate strong volume growth experienced in Asia compared to the more constrained business environments in Australia
and New Zealand.
The division reported a 21% fall in gross impaired assets over the year which reflects our continued actions to reduce risk the Global Institutional
loan portfolio, with 78% of the Institutional lending book now being investment grade (compared to 60% in 2008) and transforming the lending
book to shorter dated Trade exposures.
Income statement
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
Cash profit
Key performance metrics
Number of employees
Net interest margin (%)
Operating expenses to operating income (%)
Net loans and advances ($b)
Customer deposits ($b)
2013
$m
3,666
2,898
6,564
(2,970)
3,594
(317)
3,277
(847)
2,430
13,182
1.61%
45.2%
110.1
163.2
2012
$m
3,667
2,760
6,427
(3,069)
3,358
(451)
2,907
(796)
2,111
13,838
1.85%
47.8%
98.3
142.7
Movt
0%
5%
2%
-3%
7%
-30%
13%
6%
15%
-5%
-24 bps
-260 bps
12%
14%
Cash profit increased 15% with strong other operating income growth in Global Markets and Transaction Banking, a 3% reduction in operating
expenses and a 30% reduction in credit provision charges, partially offset by a decrease in net interest margin. The key factors affecting the
result were:
} Net interest income was largely unchanged year on year, with solid growth net loans and advances in APEA (32%), offset by a decrease in net
interest margin from a shift in focus to lower risk, shorter duration trade products coupled with increased competition and a lower interest
rate environment.
} Other external operating income increased 5%. This increase was driven by the focus on growing Trade and the Markets businesses, along
with a 15% improvement in the contributions from Asia Partnerships.
} Operating expenses were 3% lower (2% higher after adjusting for the software impairments in the prior year), with cost savings from
productivity gains and greater utilisation of the hub resources partially offset by continued re-investment in the business.
} Provision charges for credit impairment were 30% lower than the prior year. This was due in most part to higher individual provision charges
that were booked in 2012 on a few legacy Global Institutional loans in Australia but also improved quality across the lending book in 2013.
22
New Zealand
The New Zealand division has successfully completed its brand integration and moved to a single core banking system. This has driven
continued benefits as we leverage our scale and work to build a better bank for our customers.
By investing in our digital channels, optimising our branch network and simplifying our business, we are enhancing the experience for
customers while making it easier for them to deal with us. This has driven an increase in revenue of 12% per FTE and 16% per branch in 2013.
We grew market share in target segments and our brand consideration improved more than any other bank in New Zealand.
Retail update
Under a single brand, the Retail business progressed its optimisation of the branch network which has resulted in increased coverage and
cost savings. Lending volumes have held up well in a subdued credit environment and net interest margin has stabilised notwithstanding
unfavourable product mix impacts.
Commercial update
Commercial has focused on growing Small Business Banking and improving the quality of the CommAgri lending portfolio. Small Business
Banking delivered above-system lending growth through investment in sales capabilities which has more than offset the impact of
margin compression.
Income statement
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 and non-controlling interests
Cash profit
Key performance metrics
Number of employees
Net interest margin (%)
Operating expenses to operating income (%)
Net loans and advances ($b)
Customer deposits ($b)
2013
$m
1,860
348
2,208
(952)
1,256
(37)
1,219
(338)
881
7,400
2.49%
43.1%
81.4
46.5
2012
$m
1,780
315
2,095
(1,061)
1,034
(148)
886
(244)
642
8,217
2.63%
50.6%
70.3
39.6
Movt
4%
10%
5%
-10%
21%
-75%
38%
39%
37%
-10%
-14 bps
-750 bps
16%
17%
Cash profit increased 37% (29% after removing the impact of the depreciation of the AUD during the year) predominantly from strong deposit
and lending growth, lower costs and a substantial reduction in provisioning charges, partly offset by net interest margin contraction. Key factors
affecting the result were:
} Average lending growth of 4% in a subdued credit environment was driven by above-system growth in mortgages and small business bank
lending, with a lower reliance on CommAgri lending. Net interest margin contracted 14 basis points due to strong lending competition,
unfavourable mix impacts from customers preferring lower margin fixed rate products, and higher year on year wholesale funding costs,
partially offset by improved deposit margins, particularly in term deposits.
} Other operating income increased 10%, driven by the gain on sale of EFTPOS New Zealand Limited and an increase in wealth management
and insurance revenues.
} Operating expenses reduced 10% (2% after adjusting for the program of Simplification in New Zealand) reflecting productivity benefits from
simplifying our business and leveraging our scale.
} Credit impairment charges reduced 75% driven by lower individual provisioning levels as credit quality and processes both continued to
improve, particularly in the Commercial book. The collective provision release was $13 million higher due to a larger release of economic cycle
and model risk provisions in 2013.
DIRECTORS’ REPORT
23
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
Global wealth
Global Wealth serves over two million customers and manages over $58 billion in investment and retirement savings in Australia and
New Zealand and is focused on delivering innovative and compelling financial solutions to our customers across the region, that enable them
to actively engage in growing and protecting their wealth.
Customers can access ANZ’s Wealth solutions through teams of highly qualified financial planners and advisers, innovative online and mobile
platforms, ANZ Private Bankers and ANZ’s branch network.
Global Wealth is investing in strategic growth initiatives to change the game in wealth. The focus of these initiatives is on digital platforms that
better connect customers to their wealth, innovative solutions for the self-directed customers and programs to leverage capabilities across the
region to deliver service and scale efficiencies.
funds Management update
The Funds Management business continues to strengthen the core retail superannuation and investment offerings. ANZ’s Smart Choice
Super product experienced strong growth with higher levels of insurance take-up which is an embedded feature of the product. Strategic
initiatives continue to focus on simplifying operational processes, as well as reshaping the business to overcome the impacts of the changing
regulatory environment.
The New Zealand business continues to hold a dominant market position in KiwiSaver with strong growth in net flows and the business’ key
focus is to improve customer experience by offering innovative solutions and enhancing self service capabilities.
Insurance update
The business is focused on strengthening our position in the insurance market with strong growth in inforce premium across Direct and Retail
channels. In an environment that is challenging, continued investment in claims management processes and targeted retention activities have
contributed to an improvement in claims experience and a stabilising of lapse rates over the past 12 months.
Private wealth update
Business momentum remains strong, with continued focus on building a platform for growth through strengthening resources and improved
product offerings and global investment solutions for our customers.
Income statement
Net Funds management and insurance income
Other operating income including net interest income
Operating expenses including credit provision
Profit before income tax
Income tax expense and non-controlling interests
Cash profit
Consisting of:
- Funds Management1
- Insurance
- Private Wealth
- Corporate and Other²
Total Global wealth
Key performance metrics
Number of employees
Operating expenses to operating income (%)
Funds under management ($m)
In-force premiums ($m)
Retail insurance lapse rates (%)
- Australia
- New Zealand
2013
$m
1,211
299
(948)
562
(93)
469
128
221
50
70
469
4,267
62.5%
58,578
1,986
13.7%
15.9%
2012
$m
1,146
294
(971)
469
(123)
346
68
203
37
38
346
Movt
6%
2%
-2%
20%
-24%
36%
88%
9%
35%
84%
36%
4,024
67.2%
51,667
1,822
13.9%
16.6%
6%
-470 bps
13%
9%
-20 bps
-70 bps
1 Funds management includes Pensions & Investments business and E*Trade.
2 Corporate and other includes income from invested capital, profits from advice and distribution business and unallocated corporate tax credits.
24
Cash Profit increased by 36%, with a 6% increase in net funds management and insurance income, a 2% reduction in expenses as well as the
impact of a favourable one-off tax consolidation adjustment. Key factors affecting the result were:
} Funds Management operating income increased by 4%. This was mainly driven by 13% growth in funds under management (FUM) as a result
of strong gains from the investment market, partially offset by net interest margin contraction and losses from the annuity portfolio.
} Insurance operating income grew 6% driven by improved life insurance related claims and stable lapse experience, along with strong growth
in inforce premium in retail products. General insurance operating margins also improved, delivering a strong result with 11% higher inforce
premium, as well as improved event and working claims.
} Private Wealth operating income was up by 6% mainly driven by solid growth in volumes. Net loans and advances grew by 15% and customer
deposits increased by 22%.
} Operating expenses reduced by 2%, with productivity and simplification activities offsetting increased investment in strategic
growth initiatives.
GTSO
GTSO is ANZ’s business support division responsible for the delivery of technology, shared services and operations across the Group and was
formed in 2012 to provide an integrated approach to ANZ’s business transformation agenda and to enable and accelerate the delivery of the
Group’s super regional strategy. This includes a focus on rapid productivity improvements and delivering value to our customers. Group Centre
also houses a number of shared functions.
Income statement
Operating income
Operating expenses
Profit/(Loss) before credit impairment and income tax
Provision for credit impairment
Profit/(Loss) before income tax
Income tax expense and non-controlling interests
Cash profit/(loss)
Key performance metrics
Number of employees
2013
$m
229
(419)
(190)
(19)
(209)
54
(155)
2012
$m
530
(420)
110
(13)
97
36
133
Movt
-57%
0%
Large
46%
Large
50%
large
8,077
7,554
7%
GTSO, including Group Centre, result was impacted by:
} Operating income decreased $301 million mainly due to a $291 million gain on sale of VISA shares in the September 2012.
} Operating expenses were flat with $24 million software impairment expense in 2012 offset by higher depreciation and amortisation and
restructuring expenses in 2013.
} Provision for credit impairment increased $6 million due to higher provisions relating to discontinued businesses.
DIRECTORS’ REPORT
25
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
Risks
The success of the Group’s strategy is underpinned by sound management of its risks. As the Group progresses on its strategic path of becoming
the best connected and most respected bank across the region, the risks faced by the Group will evolve in line with the strategic direction.
The success of the Group’s strategy is dependent on its ability to manage the broad range of interrelated risks it is exposed to across our
expanding geographic footprint.
Risk Appetite
ANZ’s risk appetite is set by the Board and integrated within ANZ’s strategic objectives. The risk appetite framework underpins fundamental
principles of strong capitalisation, robust balance sheet and sound earnings, which protects ANZ’s franchise and supports the development
of an enterprise-wide risk culture. The framework provides an enforceable risk statement on the amount of risk ANZ is willing to accept and it
supports strategic and core business activities and customer relationships ensuring that:
} only permitted activities are engaged in;
} the scale of permitted activities, and subsequent risk profile, does not lead to potential losses or earnings volatility that exceeds ANZ
approved risk appetite;
} risk is expressed quantitatively via limits and tolerances;
} management focus is brought to bear on key and emerging risk issues and mitigating actions; and
} risk is linked to the business by informing, guiding and empowering the business in executing strategy.
ANZ’s risk management is viewed as a core competency and to ensure that risks are identified, assessed and managed in an accurate and timely
manner, ANZ has:
} An independent risk management function, with both central and enterprise-wide functions (which typically cover such activities as risk
measurement, reporting and portfolio management), together with embedded risk managers within the businesses.
} Developed frameworks to provide structured and disciplined processes for managing key risks. These frameworks include articulation of the
appetite for these risks, portfolio direction, policies, structures, limits and discretions.
Material Risks
All the Group’s activities involve, to varying degrees, the analysis, evaluation, acceptance and management of risks or combinations of risks.
The material risks facing the Group and its approach to management of those risk are described below:
Credit Risk – is defined as 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. ANZ has a comprehensive framework to manage credit risk and support sound growth for appropriate returns.
The framework is top down, being defined by credit principles and policies. The effectiveness of the credit risk management framework is
assessed through various compliance and monitoring processes. These, together with portfolio selection, define and guide the credit process,
organisation and staff.
Market Risk – is defined as the risk to earnings arising from changes in market risk factors, which ANZ may have an exposure to in the Banking
Book and/or Trading Book. The key market risk factors can be summarised as follows:
- Interest rate risk: exposure to changes in the level and volatility of interest rates, slope of the yield curve and changes in credit spreads.
- Currency rate risk: exposure to changes in foreign exchange spot and forward prices and the volatility of foreign exchange rates.
- Commodity price risk: exposure to changes in commodity prices and the volatility of commodity prices.
- Equity price risk: exposure to changes in equity prices and the volatility of equity prices.
The Market Risk function is a specialist risk management unit independent of the business that is responsible for measuring and monitoring
market risk. Market Risk have implemented policies and procedures to ensure that ANZ’s market risk exposures are managed within the appetite
and limit framework set by the Board.
Liquidity Risk – is defined as the risk that the Group is unable to meet its payment obligations as they fall due, including repaying depositors
or maturing wholesale debt, or that the Group has insufficient capacity to fund increases in assets. The timing mismatch of cash flows and the
related liquidity risk is inherent in all banking operations and is closely monitored by the Group. The Group maintains a portfolio of liquid assets
to manage potential stresses in funding sources. The minimum level of liquid assets held is based on a range of ANZ specific and general market
liquidity stress scenarios such that potential cash flow obligations can be met over the short to medium term.
26
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 but excludes strategic risk. The Group Operational Risk function is
responsible for exercising governance over operational risk by ensuring business management usage of the operational risk measurement and
management framework. They are also responsible for ensuring that key operational risks and their management are reported to executive
risk committees. Key operational risk themes include business disruption, rogue trader and mis-selling. Business units are responsible for the
day to day management of operational risks through the implementation of the Operational Risk Measurement and Management framework.
This includes the identification, analysis, assessment, monitoring, treatment and escalation of operational risks.
Compliance Risk – is defined as the probability and impact of an event that results in a failure to act in accordance with laws, regulations,
industry standards and codes, internal policies and procedures and principles of good governance as applicable to ANZ’s businesses. Group
Compliance is accountable for designing a compliance program that allows ANZ to meet its regulatory obligations. It also provides assurance to
the Board that material risks are identified, assessed and managed by the business.
Reputational Risk – is defined as the risk of loss caused by adverse perceptions of ANZ held by the public, shareholders, investors, regulators,
or rating agencies that directly or indirectly impact earnings, capital adequacy or value. We have established decision-making frameworks and
policies to ensure our business decisions are guided by sound social and environmental standards and take into account reputation risk.
Insurance Risk – is defined as 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) and longevity risks. For general insurance business,
insurance risk arises mainly through weather-related incidents and similar calamities, as well as adverse variability in home, contents, motor,
travel and other insurance claim amounts. Insurance risk is managed primarily by: product design to price all applicable risks into contracts;
reinsurance to reduce liability for large individual risks; underwriting to price/reserve for the level of risk associated with an individual contract;
claims management to admit and pay only genuine claims; insurance experience reviews to update assumptions and portfolio management to
maintain a diversity of individual risks.
Reinsurance Risk – Reinsurance is an agreement in which one insurer (‘the reinsurer’) indemnifies another insurer for all or part of the risk of
a policy originally issued and assumed by that other insurer. Reinsurance is a risk transfer tool between the insurer and reinsurer. The main
risk that arises with reinsurance is counterparty credit risk. This is the risk that a reinsurer fails to meet their contractual obligations, i.e. to pay
reinsurance claims when due. This risk is measured by assigning a counterparty credit rating or probability of default. Reinsurance counterparty
credit risk is mitigated by restricting counterparty exposures on the basis of financial strength and concentration.
Further information on risk management including approach, framework and key areas of focus can be found in the Corporate Governance
section of the Directors’ Report as set out on page 63. A listing of the principal risks and uncertainties facing the Group are set out in the
Supplementary information on pages 191 to 199.
DIRECTORS’ REPORT
27
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
REMUNERATION REPORT
Contents
1 Basis of Preparation
2 Key Management Personnel (KMP)
3 Role of the Board in Remuneration
4 HR Committee Activities
5 Remuneration Strategy and Objectives
6 The Composition of Remuneration at ANZ
6.1 Fixed Remuneration
6.2 Variable Remuneration
6.2.1 Short Term Incentives (STI)
6.2.2 Long Term Incentives (LTI)
6.3 Other Remuneration Elements
7 Linking Remuneration to Balanced Scorecard Performance
7.1 ANZ Performance
7.2 STI – Performance and Outcomes
7.3 LTI – Performance and Vesting
8 2013 Remuneration
8.1 Non-Executive Directors (NEDs)
8.2 Chief Executive Officer (CEO)
8.3 Disclosed Executives
8.4 Remuneration Tables –
CEO and Disclosed Executives
Non Statutory Remuneration Disclosure Table
Statutory Remuneration Disclosure Table
9 Equity
9.1 Equity Valuations
29
29
30
30
31
32
33
33
34
35
36
37
37
38
39
39
39
41
43
46
46
48
50
50
Introduction from the Chair of the Human Resources Committee
Dear Shareholder,
I am pleased to present our Remuneration Report for the year ending 30 September 2013.
Our remuneration framework is designed to create value for all stakeholders, to differentiate rewards based on performance and in line with our
risk management framework, and to provide competitive rewards to attract, motivate and retain the right people.
We are pleased to report that the ANZ Board has assessed the overall 2013 performance as being on or slightly above target for each category
within the balanced scorecard of measures, which reflects both annual priorities and also progress toward broader long term strategic goals.
During 2013 the Human Resources Committee continued to have a strong focus on the relationship between business performance, risk
management and remuneration. The Committee conducted a comprehensive review of the reward structure and agreed the following with
the Board:
} The reduction of the maximum STI opportunity from 250% to 200% of target;
} The introduction of a second LTI comparator group (ASX/S&P 50) with half of future LTI allocations to be based on Total Shareholder
Return (TSR) relative to this group and half on TSR relative to the existing financial services comparator group, better reflecting the range of
investors in ANZ;
} Fees paid to Non-Executive Directors would remain unchanged for 2013; and
} No increases to fixed remuneration for the CEO or Disclosed Executives in 2013.
Further detail is provided within the Remuneration Report which we hope you will find informative.
Alison watkins
Chair – Human Resources Committee
2828
ANZ ANNUAL REPORT 2013
1. Basis of Preparation
The Remuneration Report is designed to provide shareholders with an understanding of ANZ’s remuneration policies and the link between our
remuneration approach and ANZ’s performance, in particular regarding Key Management Personnel (KMP) as defined under the Corporations
Act 2001. Individual outcomes are provided for ANZ’s Non-Executive Directors (NEDs), the Chief Executive Officer (CEO) and Disclosed Executives
(current and former).
The Disclosed Executives are defined as those direct reports to the CEO with responsibility for the strategic direction and management of a major
revenue generating Division or who control material revenue and expenses that fall within the definition of KMP.
The Remuneration Report for the Company and the consolidated entity for 2012 and 2013 has been prepared in accordance with section 300A of
the Corporations Act 2001. Information in Table 6: Non Statutory Remuneration Disclosure has been prepared in accordance with the presentation
basis set out in Section 8.4. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the
Corporations Act 2001, unless indicated otherwise, and forms part of the Directors’ Report.
2. Key Management Personnel (KMP)
The KMP disclosed in this year’s report are detailed in Table 1. The movements which occurred during 2013 are summarised as follows:
NEDs
Effective 1 July 2013, Mr Graeme Liebelt was appointed as a NED.
DISCLOSED ExECUTIvES
ANZ announced the appointment of Mr Andrew Géczy as CEO International and Institutional Banking effective 16 September 2013, succeeding
Mr Alex Thursby who concluded in this role on 30 April 2013.
TABLE 1: KEY MANAGEMENT PERSONNEL
Name
Position
Non-Executive Directors (NEDs)
J Morschel
Chairman – Appointed Chairman March 2010 (Director October 2004)
G Clark
P Dwyer
P Hay
H Lee
G Liebelt
I Macfarlane
D Meiklejohn
A Watkins
Director – Appointed February 2004
Director – Appointed 1 April 2012
Director – Appointed November 2008
Director – Appointed February 2009
Director – Appointed 1 July 2013
Director – Appointed February 2007
Director – Appointed October 2004
Director – Appointed November 2008
Chief Executive Officer (CEO)
M Smith
Chief Executive Officer
Disclosed Executives – Current
P Chronican
Chief Executive Officer, Australia
S Elliott
D Hisco
G Hodges
A Géczy
J Phillips
N Williams
Chief Financial Officer
Chief Executive Officer, New Zealand
Deputy Chief Executive Officer
Chief Executive Officer, International & Institutional Banking – appointed 16 September 2013
Chief Executive Officer, Global Wealth and Group Managing Director, Marketing, Innovation and Digital
Chief Risk Officer
Disclosed Executives – former
P Marriott
Former Chief Financial Officer – concluded in role 31 May 2012, ceased employment 31 August 2012
C Page
A Thursby
Former Chief Risk Officer – retired 16 December 2011
Former Chief Executive Officer, International & Institutional Banking – concluded in role 30 April 2013,
ceased employment 30 June 2013
Term as KMP
in 2013
Full Year
Full Year
Full Year
Full Year
Full Year
Part Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Part Year
Full Year
Full Year
- -
- -
Part Year
DIRECTORS’ REPORT
29
ANZ ANNUAL REPORT 2013ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
3. Role of the Board in Remuneration
The Human Resources (HR) Committee is a Committee of the Board. The HR Committee is responsible for:
} reviewing and making recommendations to the Board in relation to remuneration governance, director and senior executive remuneration
and senior executive succession;
} specifically making 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 the ANZ Employee Reward Scheme (ANZERS) and the Institutional Total Incentives
Performance Plan); and
} remuneration structures for senior executives and others specifically covered by the Remuneration Policy.
More details about the role of the HR Committee can be found on the ANZ website.1
The link between remuneration and risk is considered a key requirement by the Board, with Committee membership structured to ensure
overlap of representation across the HR Committee and Risk Committee, with three Non-Executive Directors currently on both committees.
Throughout the year the HR Committee and management received information from external providers (Ernst & Young, Herbert Smith Freehills,
Mercer (Australia) Pty Ltd, Hay Group and PricewaterhouseCoopers). This information related to remuneration market data and analysis,
market practice on the structure and design of incentive programs (both short and long term), legislative requirements and interpretation of
governance and regulatory requirements both in Australia and globally.
The HR Committee did not receive any recommendations from remuneration consultants during the year in relation to the remuneration
arrangements of KMP. ANZ employs in-house remuneration professionals who provide recommendations to the HR Committee/Board, taking
into consideration market information from external providers. The Board’s decisions were made independently using the information provided
and having careful regard to ANZ’s strategic objectives and Remuneration Policy and principles.
4. HR Committee Activities
During 2013, the HR Committee met on five occasions, with remuneration matters a standing agenda item on each occasion. The HR Committee
has a strong focus on the relationship between business performance, risk management and remuneration, with the following activities
occurring during the year:
} annual review of the effectiveness of the Remuneration Policy;
} review of terms and conditions of key senior executive appointments and terminations;
} engagement with APRA on remuneration compliance and application of the APRA Remuneration Standard;
} involvement of the Risk function in remuneration regulatory and compliance related activities;
} monitoring of domestic and international regulatory and compliance matters relating to remuneration governance;
} review of STI and LTI arrangements; and
} review of ANZ’s progress in building a culture aligned to its super regional aspirations.
1 Go to anz.com > about us > our company > corporate governance > HR Committee Charter.
30
5. Remuneration Strategy and Objectives
ANZ’s remuneration strategies and initiatives shape the Group’s Remuneration Policy, which is approved by the Board. The following principles
underpin ANZ’s Remuneration Policy, which is applied globally across ANZ:
} creating and enhancing value for all ANZ stakeholders;
} emphasising the ‘at risk’ components of total rewards to increase alignment with shareholders and encourage behaviour that supports both
the long term financial soundness and the risk management framework of ANZ, and to deliver superior long term total shareholder returns;
} differentiating rewards in line with ANZ’s culture of rewarding for outperformance and demonstration of values led behaviours; and
} providing a competitive reward proposition to attract, motivate and retain the highest quality individuals in order to deliver ANZ’s business
and growth strategies.
The core elements of ANZ’s remuneration strategy for the CEO and Disclosed Executives are set out below:
fIGURE 1: REMUNERATION OBJECTIvES
Shareholder
value creation
Emphasis on ‘at risk’
components
Reward differentiation to
drive outperformance and
values led behaviours
Attract, motivate
and retain talent
Total target 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 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,
which considers short term performance
and contribution towards longer term
objectives, and also the demonstration
of values led behaviours.
LTI targets are linked to relative
Total Shareholder Return (TSR)
over the longer term.
Cash
Delivered as:
Part cash and part equity,
with the equity deferred
for 1 and 2 years.
Deferred equity remains
at risk until vesting.
Equity deferred for 3 years.
Deferred equity remains
at risk until vesting.
This is tested once
at vesting date.
DIRECTORS’ REPORT
31
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
6. The Composition of Remuneration at ANZ
The Board aims to find a balance between:
} fixed and at-risk remuneration;
} short term and long term incentives; and
} amounts paid in cash and deferred equity.
Figure 2 provides an overview of the target remuneration mix for the CEO and Disclosed Executives.
fIGURE 2: ANNUAL TOTAL RE wARD MIx PERCENTAGE (% BASED ON ‘AT TARGET’ LE vELS Of PERfORMANCE)
Target Reward Mix
Deferred
Equity
50%
At risk
67%
Cash
50%
Fixed
33%
LTI
33%
STI deferred
16.5%
STI cash
16.5%
Fixed
remuneration
33%
Deferred
Equity
40%
At risk
63%
Cash
60%
Fixed
37%
LTI
19%
STI deferred
21%
STI cash
23%
Fixed
remuneration
37%
CEO
Disclosed Executives
The CEO’s target remuneration mix is equally weighted between fixed remuneration, STI and LTI, with approximately half of total target
remuneration payable in cash in the current year and half allocated as equity and deferred over one, two or three years. The deferred
remuneration remains at risk until vesting date.
The target remuneration mix for Disclosed Executives is weighted between fixed remuneration (37%), STI (44%) and LTI (19%), with
approximately 60% of total target remuneration payable in cash in the current year and 40% allocated as equity and deferred over one, two or
three years. The deferred remuneration remains at risk until vesting date. The Board has adopted this mix as an effective reward mechanism to
drive strong performance and value for the shareholder in both the short and longer term. In line with that, the STI balanced scorecard contains
a combination of short and long term objectives. See Section 7.2, STI – Performance and Outcomes.
ANZ’s STI and LTI deferral arrangements are designed to ensure that the CEO and Disclosed Executives are acting in the best long term interests
of ANZ and its shareholders. Deferring part of their STI and all of their LTI over one to three years every year results in a substantial amount of
their variable remuneration being directly linked to long term shareholder value. For example as at 30 September 2013 the CEO held 109,397
unvested STI deferred shares and 908,398 unvested LTI performance rights, the combined value1 of which was around 10 times his fixed
remuneration. Similarly as at 30 September 2013 Disclosed Executives held unvested equity, the value1 of which was around five times their
average fixed remuneration. All unvested deferred remuneration is subject to ANZ’s clawback provisions.
1 Value is based on the number of unvested deferred shares and unvested performance rights held at 30 September 2013 multiplied by the ANZ share price as at 30 September 2013.
32
The following diagram demonstrates the time horizon associated with STI and LTI awards.
fIGURE 3: STI AND LTI TIME HORIZON
1 Oct 2012 30 Sept 2013
Oct 2013
Nov 2013
Dec 2013
Nov 2014
Nov 2015
Nov/Dec 2016
Annual
Performance
and
Remuneration
Review
STI
LTI
Performance and
Measurement Period
STI outcomes
determined and
approved by
the Board
Deferred STI
allocated as
equity
Cash STI paid
1 Year
50% of
deferred STI
vests (subject
to Board
discretion)
1 Year
50% of
deferred STI
vests (subject
to Board
discretion)
LTI outcomes
determined and
approved by
the Board
Deferred LTI
allocated
as equity
(performance
rights) to
Disclosed
Executives1
CEO grant of
LTI (subject to
shareholder
approval)
3 Years
LTI vests
(subject to
Board discretion
and meeting
performance
hurdles)
1 CRO allocated deferred share rights.
The reward structure for the CEO and Disclosed Executives is detailed below. The only exception is the Chief Risk Officer (CRO) whose
remuneration arrangements have been structured differently to preserve the independence of this role and to minimise any conflicts of interest
in carrying out the risk control function across the organisation. The CRO’s role has a greater weighting on fixed remuneration with more limited
STI leverage for individual performance and none (either positive or negative) for Group performance. LTI is delivered as unhurdled deferred
share rights, with a three year time based hurdle, and is therefore not subject to meeting a relative TSR performance hurdle.
6.1 fIxED REMUNERATION
The fixed remuneration amount is expressed as a total dollar amount which can be taken as cash salary, superannuation contributions and other
nominated benefits.
ANZ positions fixed remuneration for the CEO and Disclosed Executives against the relevant financial services market (referencing both
domestic and international financial services companies) and takes into consideration role responsibilities, performance, qualifications,
experience and location. The financial services market is considered the most relevant comparator as this is the main pool for sourcing talent
and where key talent may be lost.
6.2 vARIABLE REMUNERATION
Variable remuneration forms a significant part of the CEO’s and Disclosed 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.
DIRECTORS’ REPORT
33
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
6.2.1 Short Term Incentives (STI)
The STI provides an annual opportunity for an incentive award. It is assessed against Group, Divisional and individual objectives based on a
balanced scorecard of measures and positive demonstration of values led behaviours. Many of the measures relate to contribution towards
medium to longer term performance outcomes aligned to ANZ’s strategic objectives as well as annual goals. For the CEO and Disclosed
Executives, the weighting of measures in the balanced scorecard will vary to reflect the responsibilities of each role. For example the CEOs of
the Australia, New Zealand, Wealth and International and Institutional Banking divisions and also the Chief Financial Officer (CFO) have a heavier
weighting on financial measures.
STI ARRANGEMENTS
Purpose
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 coupled with demonstration of values led behaviours.
ANZ’s Employee Reward Scheme (ANZERS) structure and pool is reviewed by the HR Committee and approved by the
Board. The size of the overall pool is based on an assessment of the balanced scorecard of measures of the Group. This pool
is then distributed based on relative performance against a balanced scorecard of quantitative and qualitative measures.
In order to focus on achieving individual, Divisional and Group performance objectives a mix of quantitative and
qualitative short, medium and long term measures are assessed. Examples of these are given below and further detail
is provided in Section 7.2, STI – Performance and Outcomes:
} High Performing – cash profit, economic profit, return on equity and cash earnings per share;
} Most Respected – senior leaders as role models, employee engagement and workforce diversity;
} Well Managed – maintain strong credit rating, core funding ratio, cost to income ratio and number of outstanding
internal audit items;
} Best Connected – strong growth in Asia Pacific, Europe and America, with increasing cross border referrals and
revenues into and out of domestic markets of Australia and New Zealand; and
} Customer Driven – customer satisfaction (based on external survey outcomes).
Targets are set considering prior year performance, industry standards and ANZ’s strategic objectives. Many of the
measures also focus on targets which are set for the current year in the context of progress towards longer term
goals. The specific targets and features relating to all these measures have not been provided in detail due to their
commercial sensitivity.
The validation of performance and achievements against these objectives at the end of the year, for:
} the CEO involves a review and endorsement by the CRO and CFO, followed by review and endorsement by the
HR Committee, with final outcomes approved by the Board; and
} Disclosed Executives involves a review by the CEO, input on each individual’s risk management from the CRO and
input on the financial performance of all key Divisions from the CFO. Preliminary and final review is completed by
the HR Committee and final outcomes are approved by the Board.
The Board reviews performance outcomes against target for each metric, combined with a judgmental assessment
of the prioritisation and impact of each outcome relative to overall business performance for both the short and
longer term.
This method of assessment to measure performance has been adopted to ensure validation from a risk management
and financial performance perspective, along with independent input and recommendation from the HR Committee
to the Board for approval.
Rewarding performance The 2013 target STI award level for the CEO represents one third of total target remuneration and for Disclosed
Executives approximately 44% of their total target remuneration. The maximum STI opportunity for the CEO and
Disclosed Executives is up to 200% of the target whereas weaker performers receive a significantly reduced or no
incentive payment at all.
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 aligns the interests of the CEO and
Disclosed Executives to shareholders to drive continued performance over the longer term.
The mandatory deferral threshold for STI payments is currently $100,000 (subject to a minimum deferral amount of
$25,000) with:
} the first $100,000 of STI paid in cash;
} 50% of STI above $100,000 paid in cash;
} 25% of STI above $100,000 deferred in ANZ equity for one year; and
} 25% of STI above $100,000 deferred in ANZ equity for two years.
The deferred component of bonuses paid in relation to the 2013 year is delivered as ANZ deferred shares or deferred
share rights. Where deferred share rights are granted, for grants made after 1 November 2012, any portion of the
award which vests may be satisfied by a cash equivalent payment rather than shares at the Board’s discretion. At the
end of the deferral period, each deferred share right entitles the holder to one ordinary share. Deferred shares are
ordinary shares.
The deferred amounts remain at risk and are subject to clawback until the vesting date.
Mandatory deferral
34
6.2.2 Long Term Incentives (LTI)
The LTI provides an annual opportunity for an equity award deferred for three years that aligns a significant portion of overall remuneration to
shareholder value over the longer term.
LTI awards remain at risk and subject to clawback until vesting and must meet or exceed a relative TSR performance hurdle.
The HR Committee will determine the appropriate quantum of awards to be allocated by reference to the performance achieved in the financial
year to which the awards relate. A grant is then made after the end of the year to which it relates.
Awards granted in November/December 2012 are subject to a TSR performance condition relative to one comparator group only and are
described below.
LTI ARRANGEMENTS (granted during the year to 30 September 2013)
Type of equity
awarded
LTI is delivered to the CEO and Disclosed Executives as 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
CEO and Disclosed Executives to one ordinary share.
The future value of the grant may range from zero to an undefined amount depending on performance against the hurdle
and the share price at the time of exercise.
For grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent
payment rather than shares at the Board’s discretion.
Time restrictions
Performance rights awarded to the CEO and Disclosed Executives will be tested against the performance hurdle at the end
of three years. A three year performance period provides a reasonable period to align reward with shareholder return and
also acts as a vehicle to retain the CEO and Disclosed Executives. If the performance rights do not achieve the required
performance hurdle they are forfeited at that time.
Performance hurdle The performance rights are designed to reward the CEO and Disclosed Executives if the Group’s TSR is at or above the
Vesting schedule
Comparator group
Size of LTI grants
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 performance rights granted to the Disclosed Executives and CEO in November/December 2012 have a single
comparator group outlined below.
The proportion of performance rights that become exercisable will depend upon the TSR achieved by ANZ relative to the
companies in the comparator group 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 (Australia) Pty Ltd) to calculate ANZ’s performance against the TSR hurdle. The level of performance required
for each level of vesting, and the percentage of vesting associated with each level of performance, are set out below.
The performance rights lapse if the performance condition is not met. There is no re-testing.
If the TSR of ANZ:
The percentage of performance rights which will vest is:
Does not reach the 50th percentile of the TSR of the
Comparator Group
0%
Reaches or exceeds the 50th percentile of the TSR
of the Comparator Group but does not reach the
75th percentile
50%, plus 2% for every one percentile increase above the
50th percentile
Reaches or exceeds the 75th percentile of the TSR
Comparator Group
100%
The ANZ comparator group currently consists of the following nine companies:
} AMP Limited
} ASX Limited
} Commonwealth Bank of Australia Limited
} Insurance Australia Group Limited
} Macquarie Group Limited
} National Australia Bank Limited
} QBE Insurance Group Limited
} Suncorp-Metway Limited
} Westpac Banking Corporation
These companies represent domestic financial services companies and were considered by the Board as the most
appropriate comparator for ANZ at the time of the grant.
Refer to Section 8.2, Chief Executive Officer (CEO), for details on the CEO’s LTI arrangements.
The size of individual LTI grants for Disclosed Executives is determined by reference to market practice, ANZ’s target
remuneration structure for the role, their performance and the assessed potential of the Disclosed Executive. Disclosed
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 9.1, Equity Valuations for further details on the valuation approach
and inputs.
DIRECTORS’ REPORT
35
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
LTI ARRANGEMENTS (to be granted after 1 October 2013)
LTI awards which will be granted in November/December 2013 will be divided into two equal tranches and vest based on the Company’s relative
TSR against two different comparator groups over the performance period. One tranche will be measured against the existing select financial
services comparator group. The second tranche will be measured against a comparator group comprising companies making up the S&P/ASX 50
Index as at 22 November 2013.
Each tranche will be measured independently from the other so an allocation may vest against one comparator group but not the other.
LTI ARRANGEMENTS fOR THE CRO
Deferred share rights
The CRO is the only Disclosed Executive to receive LTI deferred share rights, rather than performance rights.
Deferred share rights are subject to a time-based vesting hurdle of three years, during which time they are held in
trust. The value used to determine the number of LTI deferred share rights to be allocated is based on an independent
valuation, as detailed in Section 9.1, Equity Valuations.
For grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent
payment rather than shares at the Board’s discretion.
6.3 OTHER REMUNERATION ELEMENTS
Clawback
The Board has on-going and absolute discretion to adjust performance-based components of remuneration (including previously deferred
equity or cash) downwards, or to zero, at any time, including after the grant of such remuneration, where the Board considers such an
adjustment is necessary to protect the financial soundness of ANZ or to meet unexpected or unknown regulatory requirements, or if the
Board subsequently considers that having regard to information which has come to light after the grant of deferred equity/cash, the deferred
equity/cash was not justified.
Prior to any scheduled release of deferred equity/cash, the Board considers whether any downward adjustment should be made.
Hedging and Margin Lending Prohibition
As specified in the Trading in ANZ Securities Policy and in accordance with the Corporations Act 2001, 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, deferred share rights or
performance rights). As such, it is a condition of grant that no schemes are entered into, by an individual or their associated persons, that
specifically protects the unvested value of shares, options, deferred share rights or performance rights allocated. Doing so would constitute a
breach of the grant conditions and would result in the forfeiture of the relevant shares, options, deferred share rights or performance rights.
ANZ also prohibits the CEO and Disclosed Executives from providing ANZ securities in connection with a margin loan or similar financing
arrangements which may be subject to a margin call or loan to value ratio breach.
To monitor adherence to this policy, ANZ’s CEO and Disclosed Executives are required to sign an annual declaration stating that they and their
associated persons have not entered into (and are not currently involved in) any schemes to protect the value of their interests in any ANZ
securities. Based on the 2013 declarations, ANZ can advise that the CEO and Disclosed Executives are fully compliant with this policy.
Shareholding Guidelines
The CEO and Disclosed 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. Shareholdings for this purpose include all vested and allocated
(but unvested) equity which is not subject to performance hurdles. The CEO and all Disclosed Executives have met or, if less than five years
tenure, are on track to meet their minimum shareholding guidelines requirement.
Cessation of Employment Provisions
The provisions that apply for STI and LTI awards in the case of cessation of employment are detailed in Sections 8.2, Chief Executive Officer (CEO)
and 8.3, Disclosed Executives.
Conditions of Grant
The conditions under which STI (deferred shares and deferred share rights) and LTI (performance rights and deferred share rights) are granted
are approved by the Board in accordance with the rules of the ANZ Employee Share Acquisition Plan and/or the ANZ Share Option Plan.
36
7. Linking Remuneration to Balanced Scorecard Performance
7.1 ANZ PERfORMANCE
TABLE 2: ANZ’S fINANCIAL PERfORMANCE 2009 – 2013
Statutory profit ($m)
Cash/Underlying profit1 (unaudited)
Cash/Underlying return on equity (ROE) (%)
Cash/Underlying earnings per share (EPS)
Share price at 30 September ($)2
Total dividend (cents per share)
Total shareholder return (12 month %)
Average STI as a % of target3
2009
2,943
3,772
13.3%
168.3
24.39
102
40.3
106%
2010
4,501
5,025
15.5%
198.7
23.68
126
1.9
137%
2011
5,355
5,652
16.2%
218.4
19.52
140
(12.6)
110%
2012
5,661
5,830
15.1%
218.5
24.75
145
35.4
117%
2013
6,272
6,498
15.3%
238.5
30.78
164
31.5
133%
1 From 1 October 2012, the Group has used Cash profit as a measure of the result of the ongoing business activities of the Group enabling shareholders to assess Group and divisional performance
against prior periods and against peer institutions. For 2013 and 2012 statutory profit has been adjusted for non-core items to arrive at Cash profit. For 2009 - 2011 statutory profit has been
adjusted for non-core items to arrive at Underlying profit, which like Cash profit is a measure of the ongoing business performance of the Group but used somewhat different criteria for the
adjusting items. Neither Cash profit nor Underlying profit are audited; however, the external auditor has informed the Audit Committee that the Cash/Underlying profit adjustments have been
determined on a consistent basis across the respective periods presented.
2 The opening share price at 1 October 2008 was $19.00.
3 The average STI payments for each year are based on those executives (including the CEO) disclosed in each relevant reporting period.
Figure 4 compares ANZ’s TSR performance against the median TSR and upper quartile TSR of the LTI select financial services comparator group
and the S&P/ASX 200 Banks Accumulation Index (Fin Index) over the 2009 to 2013 measurement period. ANZ’s TSR performance has well
exceeded the upper quartile TSR of the LTI comparator group over the five year period to 30 September 2013.
fIGURE 4: ANZ 5-YEAR CUMULATIvE TOTAL SHAREHOLDER RETURN PERfORMANCE
e
g
a
t
n
e
c
r
e
P
250.0%
230.0%
210.0%
190.0%
170.0%
150.0%
130.0%
110.0%
90.0%
70.0%
50.0%
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
1
1
r
a
M
1
1
p
e
S
2
1
r
a
M
2
1
p
e
S
3
1
r
a
M
3
1
p
e
S
Performance period
ANZ TSR
Fin Index TSR
Upper Quartile TSR
Median TSR
DIRECTORS’ REPORT
37
ANZ ANNUAL REPORT 2013
DIRECTORS’ REPORT (continued)
7.2 STI – PERfORMANCE AND OUTCOMES
ANZ uses a balanced scorecard to measure performance in relation to the Group’s main incentive programs. The scorecard provides a framework
whereby a combination of measures can be applied to ensure a broader long term strategic focus on driving shareholder value as well as a focus
on annual priorities.
The HR Committee considers a balanced scorecard that is aligned to the Group’s long term strategic intent under the themes of High
Performing, Most Respected, Well Managed, Best Connected and Customer Driven, with each of the five categories having broadly
equal weighting.
The Board has assessed ANZ’s overall 2013 performance as on or slightly above target for each category within the balanced scorecard of
measures. The Board has given full consideration to the performance of the Group and the Disclosed Executives in determining their rewards.
Overall spend approved by the Board for the main short term incentive pool was below target levels with a range of underlying outcomes for
individuals, in line with ANZ’s objectives of differentiating reward based on performance.
The following provides examples of some of the key measures within each category of the balanced scorecard of measures used in 2013 for
assessing performance for the purpose of determining short term incentive pools.
Category
Measure
Outcome
High Performing
Slightly Above Target:
ANZ aims to outperform peers both in terms of financial strength and earnings performance.
Cash profit
A record cash profit after tax of $6,498 million up 11% on 2012.
Economic profit
Economic profit1 of $2,701 million, up 14%.
Both cash profit and statutory profit were up 11% on 2012.
Return on equity
Cash ROE of 15.3%, up 20 bps on the prior year as a result of a higher cash profit and effective
capital management.
Cash earnings per share
(EPS)
Cash EPS of 238.5 cents has improved 9% from 2012.
Most Respected
On Target:
Senior leaders as
role models
The overall assessment of Senior Leaders as role models improved from 67% to 71% this year
bringing it higher than the Financial Services norm.
Employee engagement An engaged workforce is regarded as an important driver of sustainable long term performance.
Despite continuing challenging business conditions and significant bank-wide changes over the
year, employee engagement has improved to 72% in 2013.
Workforce diversity
Workforce diversity is core to delivering on our super regional strategy. Management roles filled
by women remain steady year on year. ANZ is continually focused on increasing the diversity of
its workforce.
Well Managed
On Target:
Maintain strong
credit rating
The maintenance of a strong credit rating is fundamental to the ongoing stability of the Group
and there have been no changes to the Group’s credit ratings during the year.
Core funding ratio (CFR) CFR of 93%, improved from 89% in the prior year.
Cost to income ratio
Significant productivity improvement in 2013 with the cost to income ratio reducing 130 bps
(excluding VISA sales proceeds, NZ Simplification costs and software impairment charges
in 2012) on the back of tight cost management.
Number of outstanding
internal audit items
ANZ Global Internal Audit conducts an ongoing and rigorous review process to identify
weaknesses in procedures and compliance with policies. In 2013 there was an historically low
number of outstanding items.
38
Category
Measure
Best Connected
Outcome
On Target:
Growth in Asia Pacific,
Europe and America
ANZ aspires to be the most respected bank in the Asia Pacific region using super regional
connectivity to better meet the needs of customers which are increasingly linked to regional
capital, trade and wealth flows. One important measure of the success of the super regional
strategy is the growth in total Network revenues (revenue arising from having a meaningful
business in Asia Pacific, Europe and America regardless of whether the revenue is subsequently
booked within the region or in Australia or New Zealand). APEA Network revenues remained
stable at 21% of Group revenue in 2013. This continues to differentiate ANZ from its Australian
peer group.
Customer Driven
On Target:
Customer satisfaction
(based on external
survey outcomes)
ANZ tracks customer satisfaction across its businesses as part of a group of indicators of longer
term performance trends. ANZ aims to achieve top quartile customer satisfaction scores in each
business based on external surveys.
In 2013 customer satisfaction in Australia, across Retail and Corporate and Commercial
segments has improved significantly on prior year.
However, customer satisfaction in New Zealand has declined slightly as a result of
NZ Simplification but market share has been retained.
1 Economic profit is an unaudited risk adjusted profit measure determined by adjusting cash profit for economic credit costs, the benefit of imputation credits and the cost of capital.
7.3 LTI – PERfORMANCE AND vESTING
Performance rights previously granted to the CEO and Disclosed Executives which reached their third anniversary were tested in November/
December 2012. ANZ’s relative TSR exceeded the 75th percentile of the comparator group over the three year period and therefore the rights
vested in full.
The performance rights granted in November/December 2010 will be tested at their third anniversary in November/December 2013 to
determine the vesting outcome.
8. 2013 Remuneration
8.1 NON-ExECUTIvE DIRECTORS (NEDS)
Principles underpinning the remuneration policy for NEDs.
Principle
Comment
Aggregate Board and Committee fees are
within the maximum annual aggregate
limit approved by shareholders
The current aggregate fee pool for NEDs of $4 million was approved by shareholders at the 2012
Annual General Meeting. The annual total of NEDs’ fees, including superannuation contributions,
is within this agreed limit. Retirement benefits accrued as at September 2005 are not included
within this limit.
Fees are set by reference to key
considerations
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 attached to the role of NEDs;
} the time commitment expected of NEDs on Group and Company matters; and
} reference to fees paid to NEDs of comparable companies.
ANZ compares NED fees to a comparator group of Australian listed companies with a similar size
market capitalisation, with particular focus on the major financial services institutions. This is
considered an appropriate group, given similarity in size, nature of work and time commitment
required by NEDs.
The remuneration structure preserves
independence whilst aligning interests of
NEDs and shareholders
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.
DIRECTORS’ REPORT
39
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
Components of NED Remuneration
NEDs receive a fee for being a Director of the Board, and additional fees for either chairing or being a member of a Board Committee.
The Chairman of the Board does not receive additional fees for service on a Board Committee.
The Board agreed not to increase the individual NED fees for 2013. For details of remuneration paid to NEDs for the years 2012 and 2013, refer
to Table 3.
Elements
Details
Board/Committee fees per annum – 2013 Board Chairman Fee
Board NED Base Fee
$775,000
$210,000
Post-employment Benefits
Committee fees
Committee Chair
Committee Member
Audit
Governance
Human Resources
Risk
Technology
$65,000
$35,000
$55,000
$57,000
$35,000
$32,500
$15,000
$25,000
$30,000
$15,000
Superannuation contributions are made in accordance with the current Superannuation Guarantee
legislation (but only up to the Government’s prescribed maximum contributions limit) which
satisfies the Company’s statutory superannuation contributions. Contributions are not included in
the base fee.
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, have been carried forward or will be transferred to the NED when they retire
from the ANZ Board (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 were as follows:
} G Clark
} D Meiklejohn
} J Morschel
$83,197
$64,781
$60,459
Shareholdings of NEDs
The movement in shareholdings during the reporting period (held directly, indirectly and by related parties) is provided in the Financial
Statements – note 46.
The NED shareholding guidelines require NEDs to accumulate shares, over a five year period from appointment, 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. NEDs 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.
All NEDs have met or, if appointed within the last five years, are on track to meet their minimum shareholding guidelines requirement.
40
NED Statutory Remuneration Disclosure
Remuneration details of NEDs for 2012 and 2013 are set out in Table 3. There was no increase in NED fees throughout the year. Overall, there is
an increase in total NED remuneration year on year due to the commencement of Ms Dwyer in April 2012, the commencement of Mr Liebelt in
July 2013 and the prescribed increase in Superannuation Guarantee Contributions.
TABLE 3: NED REMUNERATION fOR 2013 AND 2012
Short-Term NED Benefits
Post-Employment
Non-Executive Directors (NEDs)
financial
Year
fees1
$
J Morschel4
G Clark
P Dwyer5
P Hay
H Lee
G Liebelt5
I Macfarlane
D Meiklejohn4
A watkins
Total of all Non-Executive Directors
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2013
2012
2013
2012
2013
2012
2013
2012
775,000
775,000
300,000
300,000
297,500
136,250
302,500
302,500
280,000
280,000
70,000
314,500
314,500
320,000
320,000
312,500
312,500
2,972,000
2,740,750
Non
monetary
benefits
$
5,336
–
–
–
–
–
–
–
–
–
–
–
–
1,485
1,322
–
–
6,821
1,322
Super
contributions
$
16,796
15,949
16,796
15,949
16,796
8,061
16,796
15,949
16,796
15,949
4,444
16,796
15,949
16,796
15,949
16,796
15,949
remuneration2,3
Total
$
797,132
790,949
316,796
315,949
314,296
144,311
319,296
318,449
296,796
295,949
74,444
331,296
330,449
338,281
337,271
329,296
328,449
138,812
119,704
3,117,633
2,861,776
1 Fees are the sum of Board fees and Committee fees, as included in the Annual Report.
2 Long-term benefits and share-based payments are not applicable for the Non-Executive Directors. There were no termination benefits for the Non-Executive Directors in either 2012 or 2013.
3 Amounts disclosed for remuneration of Directors exclude insurance premiums paid by the Group 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 J Morschel, non monetary benefits relate to car parking. For D Meiklejohn, non monetary benefits relate to the provision of office space.
5 P Dwyer commenced as a Non-Executive Director on 1 April 2012 so 2012 remuneration reflects amounts received for the partial service for the 2012 year. G Liebelt commenced as a
Non-Executive Director on 1 July 2013 so 2013 remuneration reflects amounts received for the partial service for the 2013 year.
8.2 CHIEf ExECUTIvE OffICER (CEO)
Actual remuneration provided to the CEO in 2013 is detailed below, with remuneration tables provided in Section 8.4, Remuneration Tables –
CEO and Disclosed Executives.
fixed pay: The CEO’s fixed remuneration remained unchanged at $3.15 million (with his only increase since commencement being three years
ago, effective 1 October 2010).
Short Term Incentive (STI): The CEO has a target STI opportunity of $3.15 million. The actual amount paid can increase or decrease from this
number dependent on his performance as CEO and the performance of the organisation as a whole. Specifically, if, in the Board’s view the CEO
has performed above/below his targets, the Board may exercise its discretion to increase/decrease the STI beyond his target payment.
The Board approved the CEO’s 2013 balanced scorecard objectives at the start of the year and then assessed his performance against these
objectives at the end of the year. The CEO’s STI payment for 2013 was then determined having regard to his delivery against these objectives
including ANZ’s productivity performance and focus on capital efficiency, his demonstration of values led behaviours, as well as progress
achieved in relation to ANZ’s long term strategic goals. The STI payment for 2013 will be $4.0 million with $2.05 million paid in cash and the
balance ($1.95 million) awarded as deferred shares, half deferred for one year and half for two years.
Unvested deferred shares will be forfeited if the CEO resigns. Unvested deferred shares will be retained and released at the vesting date where
the CEO is terminated with notice or where cessation of employment is by mutual agreement, unless the Board determines otherwise.
DIRECTORS’ REPORT
41
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
Long Term Incentive (LTI): Three tranches of performance rights were granted to the CEO in December 2007, covering his first three years in the
role. All three tranches have now vested. The third tranche was tested on 18 December 2012 and as a result of the testing 100% (260,642) of the
performance rights vested. There is no re-testing of these grants.
At the 2012 Annual General Meeting shareholders approved an LTI grant to the CEO equivalent to 100% of his 2012 fixed pay, being
$3.15 million. This equated to 328,810 performance rights being granted, at an allocation value of $9.58 per right, deferred for three years and
subject to testing against a TSR hurdle relative to a comparator group of selected financial services companies.
For 2013, it is proposed to grant $3.15 million (100% of fixed pay) LTI, subject to shareholder approval at the 2013 Annual General Meeting, to
be delivered as performance rights split into two equal tranches, each subject to a relative TSR performance hurdle, as outlined in Section 6.2.2.
The TSR hurdles will be subject to testing after three years, i.e. November 2016.
The performance rights will be forfeited if the CEO resigns before they have vested and/or been exercised. The performance rights will be
retained and will vest and become exercisable, subject to the relevant time and performance conditions being satisfied, where the CEO is
terminated with notice or where cessation of employment is by mutual agreement.
CEO Equity
Details of deferred shares, options and performance rights granted to the CEO during the 2013 year and in prior years which vested, were
exercised/sold or which lapsed/were forfeited during the 2013 year are set out in Table 4 below.
TABLE 4: CEO EqUITY GRANTED, vESTED, ExERCISED /SOLD AND LAPSED/fORfEITED
vested
Lapsed/forfeited
Exercised/Sold
Name
Type of equity
Number
granted1
Grant
date
first date
exercisable
Date
of expiry Number %
value2
$ Number %
value2
$ Number %
vested and
exercisable
as at 30 Sep
2013
value2
$
Unexer
-cisable
as at
30 Sep
2013
CEO
M Smith
47,448
STI deferred shares
36,730
STI deferred shares
STI deferred shares3
36,334
STI deferred shares3
36,334
LTI performance rights4 260,642
LTI performance rights5 328,810
–
12-Nov-10 12-Nov-12
–
14-Nov-11 14-Nov-12
–
12-Nov-12 12-Nov-13
12-Nov-12 12-Nov-14
–
19-Dec-07 19-Dec-12 18-Dec-13
19-Dec-12 19-Dec-15 19-Dec-17
47,448 100 1,165,683
888,859
36,730 100
–
–
–
–
–
–
260,642 100 6,419,352
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(47,448)
(36,730)
–
–
(260,642)
–
100 1,174,888
909,494
100
–
–
–
–
100 6,453,913
–
–
–
–
–
–
–
–
–
–
36,334
36,334
–
328,810
1 The maximum value at the time of the grant is determined by multiplying the number granted by the fair value of the equity instruments. (Refer to Table 8: Equity Valution Inputs – Options/Rights
for the fair value of rights at grant and Table 9: Equity Valuation Inputs – Deferred shares for the fair value of shares at grant.) The minimum value of the grants, if the applicable conditions are not
met at vesting date, is nil. Options/rights granted include those granted as remuneration to the CEO. No options/rights have been granted since the end of 2013 up to the signing of the Director’s
Report on 8 November 2013.
2 The value of shares and/or performance rights is based on the one day VWAP of the Company’s shares traded on the ASX on the date of vesting, lapsing/forfeiture or exercising/sale, multiplied by
the number of shares and/or performance rights.
3 The CEO had a proportion of his STI amount deferred as equity. The Board determined the deferred amount for the CEO. Refer to Table 9 for details of the valuation methodology, inputs and
fair value.
4 LTI performance rights granted 19 December 2007 were exercised on 20 December 2012. One day VWAP on date of exercise was $24.7616. The exercise price was $0.00.
5 The 2012 LTI grant for the CEO was delivered as performance rights. Refer to the section on CEO LTI for further details of the LTI grant and Table 8 for details of the valuation, inputs and fair value.
The movement during the reporting period in shareholdings, options and performance rights of the CEO (held directly, indirectly and by related
parties) is provided in the Financial Statements – note 46.
CEO’s Contract Terms
The following 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.
Length of contract
Mr Smith commenced as CEO and Executive Director of ANZ on 1 October 2007 and is on a permanent contract,
which is an ongoing employment contract until notice is given by either party.
Notice periods
Mr Smith or ANZ may terminate the employment agreement by providing 12 months’ written notice.
Resignation
On resignation, all unvested STI deferred shares and all unexercised performance rights (or cash equivalent)
will be forfeited.
Termination on notice
by ANZ
ANZ may terminate Mr Smith’s employment by providing 12 months’ written notice or payment in lieu of the notice
period based on fixed remuneration.
On termination on notice by ANZ all unvested STI deferred shares will be released at the original vesting date unless
the Board determines otherwise; 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.
42
Death or total and
permanent disablement
On death or total and permanent disablement, all unvested STI deferred shares and all performance rights (or cash
equivalent) will vest.
Change of control
In the event of takeover, scheme of arrangement or other change of control event occurring, the performance
condition applying to the performance rights will be tested and the performance rights will vest based on the extent
the performance condition is satisfied. No pro-rata reduction in vesting will occur based on the period of time from
the date of grant to the date of the change of control event occurring, and vesting will only be determined by the
extent to which the performance condition is satisfied.
Any performance rights which vest based on satisfaction of the performance condition will vest at a time (being no
later than the final date on which the change of control event will occur) determined by the Board.
Any performance rights which do not vest will lapse with effect from the date of the change of control event
occurring, unless the Board determines otherwise.
Any unvested STI deferred shares will vest at a time (being no later than the final date on which the change of control
event will occur) determined by the Board.
Termination for serious
misconduct
ANZ may immediately terminate Mr Smith’s employment at any time in the case of serious misconduct, and Mr Smith
will only be entitled to payment of fixed remuneration up to the date of termination.
On termination without notice by ANZ in the event of serious misconduct all STI deferred shares remaining in trust
and performance rights (or cash equivalent) will be forfeited.
Statutory Entitlements
Payment of statutory entitlements of long service leave and annual leave applies in all events of separation.
8.3 DISCLOSED ExECUTIvES
Actual remuneration provided to the Disclosed Executives in 2013 is summarised below, with remuneration tables provided in Section 8.4,
Remuneration Tables – CEO and Disclosed Executives.
fixed pay: During 2013, fixed pay for Disclosed Executives remained unchanged. The annual review of ANZ’s fixed remuneration levels for
Disclosed Executives identified they were generally competitively positioned within the market and there were no increases to fixed pay.
Short Term Incentive (STI): All incentives actually paid in the 2013 financial year related to performance from the 2012 financial year, and all
deferred components are subject to the Board’s discretion to reduce or adjust to zero before vesting.
For the 2013 year, the Board took into consideration overall Company performance against the balanced scorecard of measures, along with
individual performance against set objectives. Overall, the total amount of STI payments to Disclosed Executives for the 2013 year (which are
paid in the 2014 financial year) has increased from 2012, reflecting the improvement in company performance, the focus on productivity and
capital efficiency, and progress towards the achievement of longer term targets, demonstrating the link between performance and variable
reward outcomes.
The range in payments to individuals was broad, ranging from on target to well above target.
Long Term Incentive (LTI): LTI performance rights granted to Disclosed Executives during the 2013 financial year were allocated in November
2012. Subject to meeting the relative TSR performance hurdle, these performance rights will vest in November 2015.
For awards to be allocated in November/December 2013, the Board elected to grant LTI awards to Disclosed Executives at or above target,
reflecting the importance of focusing Disclosed Executives on the achievement of longer term strategic objectives and alignment with
shareholders interests, and recognising the capabilities of these individuals and the need to retain their expertise over the longer term.
Disclosed Executives Equity
Details of deferred shares, options and performance rights granted to the Disclosed Executives during the 2013 year and granted to the
Disclosed Executives in prior years which vested, were exercised/sold or which lapsed/were forfeited during the 2013 year are set out in Table 5.
The movement in shareholdings, options and performance rights of the Disclosed Executives (held directly, indirectly and by related parties)
during the reporting period is provided in the Financial Statements – note 46.
DIRECTORS’ REPORT
43
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
TABLE 5: DISCLOSED ExECUTIvES EqUITY GRANTED,
vESTED, ExERCISED /SOLD AND LAPSED/fORfEITED
vested
Lapsed/forfeited
Exercised/Sold
vested and
exercisable
as at 30 Sep
2013
value2
$
Name
Type of equity
Number
granted1
Grant
date
first date
exercisable
Date
of expiry Number %
value2
$ Number %
value2
$ Number %
S Elliott4
Current Disclosed Executives
P Chronican3STI deferred shares
STI deferred shares
STI deferred shares10
STI deferred shares10
LTI performance rights
LTI performance rights11
STI deferred shares
STI deferred shares
STI deferred shares10
STI deferred shares10
STI deferred options
STI deferred options
STI deferred options
STI deferred options
LTI performance rights
LTI performance rights11
-
STI deferred share rights
STI deferred share rights
STI deferred share rights10
STI deferred share rights10
LTI performance rights
LTI performance rights11
A Géczy5
D Hisco6
G Hodges7 STI deferred shares
STI deferred shares
STI deferred shares10
STI deferred shares10
STI deferred share rights
LTI performance rights
LTI performance rights11
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares10
STI deferred shares10
LTI performance rights
LTI performance rights11
J Phillips8
N Williams STI deferred shares
STI deferred shares
STI deferred shares10
STI deferred shares10
LTI deferred shares
LTI deferred share rights11
former Disclosed Executives
A Thursby9 Other deferred shares
Other deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares10
STI deferred shares10
STI deferred options
STI deferred options
–
–
–
–
12,652 12-Nov-10 12-Nov-12
–
16,588 14-Nov-11 14-Nov-12
–
15,139 12-Nov-12 12-Nov-13
15,139 12-Nov-12 12-Nov-14
–
57,726 24-Dec-09 24-Dec-12 23-Dec-14
63,976 12-Nov-12 12-Nov-15 12-Nov-17
–
12,125 12-Nov-10 12-Nov-12
–
9,573 14-Nov-11 14-Nov-12
–
20,186 12-Nov-12 12-Nov-13
–
20,185 12-Nov-12 12-Nov-14
5,307 13-Nov-09 13-Nov-10 12-Nov-14
5,307 13-Nov-09 13-Nov-11 12-Nov-14
69,238 12-Nov-10 12-Nov-11 11-Nov-15
69,238 12-Nov-10 12-Nov-12 11-Nov-15
41,084 13-Nov-09 13-Nov-12 12-Nov-14
118,110 12-Nov-12 12-Nov-15 12-Nov-17
–
8,903 12-Nov-10 12-Nov-12 11-Nov-15
19,072 14-Nov-11 14-Nov-12 14-Nov-14
17,338 12-Nov-12 12-Nov-13 12-Nov-15
18,382 12-Nov-12 12-Nov-14 12-Nov-16
32,867 13-Nov-09 13-Nov-12 12-Nov-14
49,212 12-Nov-12 12-Nov-15 12-Nov-17
–
–
–
–
5,663 31-Oct-08 31-Oct-10 30-Oct-13
41,084 13-Nov-09 13-Nov-12 12-Nov-14
49,212 12-Nov-12 12-Nov-15 12-Nov-17
–
9,911 12-Nov-10 12-Nov-11
–
9,911 12-Nov-10 12-Nov-12
–
9,005 14-Nov-11 14-Nov-12
–
11,102 12-Nov-12 12-Nov-13
11,102 12-Nov-12 12-Nov-14
–
36,976 13-Nov-09 13-Nov-12 12-Nov-14
49,212 12-Nov-12 12-Nov-15 12-Nov-17
–
16,343 12-Nov-10 12-Nov-12
–
13,626 14-Nov-11 14-Nov-12
–
11,607 12-Nov-12 12-Nov-13
–
11,606 12-Nov-12 12-Nov-14
–
21,929 13-Nov-09 13-Nov-12
29,225 12-Nov-12 12-Nov-15 12-Nov-17
9,911 12-Nov-10 12-Nov-12
11,848 14-Nov-11 14-Nov-12
11,102 12-Nov-12 12-Nov-13
11,102 12-Nov-12 12-Nov-14
–
–
–
–
–
–
–
12,652 100 310,829
16,588 100 401,426
–
–
–
–
57,726 100 1,440,697
–
–
12,125 100 297,882
9,573 100 231,665
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
69,238 100
59,379
41,084 100 995,424
–
–
–
–
8,903 100 218,725
19,072 100 461,539
–
–
–
–
32,867 100 796,335
–
–
9,911 100 243,489
11,848 100 286,719
–
–
–
–
–
–
41,084 100 995,424
–
–
–
–
9,911 100 243,489
9,005 100 217,919
–
–
–
–
36,976 100 895,892
–
–
16,343 100 401,508
13,626 100 329,746
–
–
–
–
21,929 100 531,318
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
34,602 03-Sep-07 03-Sep-10
–
43,610 22-Sep-09 22-Sep-12
–
12,369 31-Oct-08 31-Oct-09
–
12,369 31-Oct-08 31-Oct-10
–
26,316 13-Nov-09 13-Nov-10
–
24,251 12-Nov-10 12-Nov-12
–
16,588 14-Nov-11 14-Nov-12
–
16,587 14-Nov-11 14-Nov-13
–
20,186 12-Nov-12 12-Nov-13
20,185 12-Nov-12 12-Nov-14
–
82,255 31-Oct-08 31-Oct-09 30-Oct-13
82,254 31-Oct-08 31-Oct-10 30-Oct-13
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24,251 100 595,789
16,588 100 401,426
–
–
–
–
–
–
–
–
–
–
–
–
– (16,587) 100 469,883
– (20,186) 100 571,837
– (20,185) 100 571,809
–
–
–
–
–
–
–
–
–
–
–
–
–
310,829
(12,652) 100
401,426
(16,588) 100
–
–
–
–
–
–
(57,726) 100 1,440,697
–
–
–
291,133
(12,125) 100
229,857
(9,573) 100
–
–
–
–
–
–
46,259
(5,307) 100
46,259
(5,307) 100
540,513
(69,238) 100
540,513
(69,238) 100
995,424
(41,084) 100
–
–
–
–
–
–
218,725
(8,903) 100
461,539
(19,072) 100
–
–
–
–
–
–
796,335
(32,867) 100
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
173,404
(5,663) 100
995,424
(41,084) 100
–
–
–
233,762
(9,911) 100
233,762
(9,911) 100
212,393
(9,005) 100
–
–
–
–
–
–
895,892
(36,976) 100
–
–
–
395,975
(16,343) 100
329,746
(13,626) 100
–
–
–
–
–
–
531,318
(21,929) 100
–
–
–
(34,602) 100 1,098,686
(43,610) 100 1,110,088
392,742
(12,369) 100
392,742
(12,369) 100
637,610
(26,316) 100
587,577
(24,251) 100
401,426
(16,588) 100
–
–
–
–
–
–
–
–
–
662,079
(82,255) 100
911,260
(82,254) 100
LTI performance rights
45,193 13-Nov-09 13-Nov-12 12-Nov-14
45,193 100 1,094,981
–
–
–
(45,193) 100 1,094,981
LTI performance rights
45,986 12-Nov-10 12-Nov-13 11-Nov-15
LTI performance rights
LTI performance rights11
77,519 14-Nov-11 14-Nov-14 14-Nov-16
118,110 12-Nov-12 12-Nov-15 12-Nov-17
–
–
–
–
–
–
– (45,986) 100 1,302,710
– (77,519) 100 2,195,989
– (118,110) 100 3,345,867
–
–
–
–
–
–
–
–
–
44
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9,911
11,848
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Unexer
-cisable
as at
30 Sep
2013
–
–
15,139
15,139
–
63,976
–
–
20,186
20,185
–
–
–
–
–
118,110
–
–
–
17,338
18,382
–
49,212
–
–
11,102
11,102
–
–
49,212
–
–
–
11,102
11,102
–
49,212
–
–
11,607
11,606
–
29,225
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1 The maximum value at the time of the grant is determined by multiplying the number granted by the fair value of the equity instruments. (Refer to Table 8: Equity Valuation Inputs – Options/
Rights for the fair value of rights at grant and Table 9: Equity Valuation Inputs – Deferred shares for the fair value of shares at grant). The minimum value of the grants, if the applicable conditions
are not met at vesting date, is nil. Options/rights granted include those granted as remuneration to the five highest paid executives, inclusive of Disclosed Executives or any other 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. No options/rights have been granted since the end of 2013 up to the signing of the Director’s Report on 8 November 2013.
2 The value of shares and/or share rights and/or performance rights is based on the one 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 share rights and/or performance rights. The value of options is based on the difference between the one day VWAP and the exercise price, multiplied by
the number of options.
3 P Chronican – LTI performance rights granted 24 December 2009 were exercised on 24 December 2012. One day VWAP on date of exercise was $24.9575. The exercise price was $0.00.
4 S Elliott – STI deferred options granted 13 November 2009 were exercised 2 May 2013. One day VWAP on date of exercise was $31.5166. The exercise price was $22.80. STI deferred options
granted 12 November 2010 were also exercised 2 May 2013. The exercise price was $23.71. LTI performance rights granted 13 November 2009 were exercised 13 November 2012. One day VWAP
on date of exercise was $24.2290. The exercise price was $0.00.
5 A Géczy – A Géczy commenced in role 16 September 2013. No equity transactions were applicable for the period.
6 D Hisco – STI deferred share rights granted 12 November 2010 were exercised on 12 November 2012. One day VWAP on date of exercise was $24.5676. The exercise price was $0.00. STI deferred
share rights granted 14 November 2011 were exercised on 14 November 2012. One day VWAP on date of exercise was $24.1998. The exercise price was $0.00. LTI performance rights granted
13 November 2009 were exercised 13 November 2012. One day VWAP on date of exercise was $24.2290. The exercise price was $0.00.
7 G Hodges – STI deferred share rights granted 31 October 2008 were exercised on 9 May 2013. One day VWAP on date of exercise was $30.6205. The exercise price was $0.00. LTI performance rights
granted 13 November 2009 were exercised on 13 November 2012. One day VWAP on date of exercise was $24.2290. The exercise price was $0.00.
8 J Phillips – LTI performance rights granted 13 November 2009 were exercised 13 November 2012. One day VWAP on date of exercise was $24.2290. The exercise price was $0.00.
9 A Thursby – Ceased employment 30 June 2013 so equity transactions are to that date. Transactions include those that transpired prior to cessation and those that were forfeited on cessation.
STI deferred options granted 31 October 2008 were exercised 2 November 2012. One day VWAP on date of exercise was $25.2291. The exercise price was $17.18. STI deferred options granted
31 October 2008 were exercised 22 February 2013. One day VWAP on date of exercise was $28.2586. The exercise price was $17.18. LTI performance rights granted 13 November 2009 were
exercised 13 November 2012. One day VWAP on date of exercise was $24.2290. The exercise price was $0.00.
10 The Disclosed Executives had a proportion of their STI amount deferred as equity. In 2013 D Hisco received share rights rather than shares due to taxation regulations 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. Refer to the STI arrangements section for further details of the mandatory deferral
arrangements for the Disclosed Executives and Table 9 for details of the valuation methodology, inputs and fair value.
11 The 2012 LTI grants for Disclosed Executives were delivered as performance rights excluding for the CRO. Refer to Section 6.2.2, LTI Arrangements for further details and Table 8 for details of the
valuation, inputs and fair value.
Disclosed Executives’ Contract Terms
The following sets out details of the contract terms relating to the Disclosed Executives. The contract terms for all Disclosed Executives are
similar, but do on occasion, vary to suit different needs.
Length of contract
Disclosed Executives are on a permanent contract, which is an ongoing employment contract until notice is given by
either party.
Notice periods
Resignation
In order to terminate the employment arrangements, Disclosed Executives are required to provide the Company with
six months’ written notice. ANZ must provide Disclosed Executives with 12 months’ written notice.
On resignation, unless the Board determines otherwise, all unvested deferred shares, all unvested or vested but
unexercised performance rights and all deferred share rights are forfeited.
Termination on notice
by ANZ
ANZ may terminate the Disclosed Executive’s employment by providing 12 months’ written notice or payment
in lieu of the notice period based on fixed remuneration. On termination on notice by ANZ, unless the Board
determines otherwise:
} all unvested deferred shares, performance rights and deferred share rights are forfeited at the time notice is given to
the Disclosed Executive; and
} only performance rights and deferred share rights that are vested may be exercised.
Redundancy
If ANZ terminates employment for reasons of redundancy, a severance payment will be made that is equal to
12 months’ fixed remuneration.
All STI deferred shares and STI deferred share rights remain subject to clawback and are released at the original vesting
date. Performance rights, LTI deferred shares and LTI deferred share rights are either released in full or on a pro-rata
basis, at the discretion of the Board with regard to the circumstances.
Death or total and
permanent disablement
On death or total and permanent disablement all unvested STI deferred shares, all deferred share rights and all
performance rights will vest.
Termination for serious
misconduct
ANZ may immediately terminate the Disclosed 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.
On termination without notice by ANZ in the event of serious misconduct all deferred shares held in trust will be
forfeited and all performance rights and deferred share rights will be forfeited.
Statutory Entitlements
Payment of statutory entitlements of long service leave and annual leave applies in all events of separation.
Other arrangements
P Chronican – As Mr Chronican joined ANZ in November 2009 he was not included in the LTI grants made to other
Management Board members in early November 2009. Accordingly, a separate LTI grant was made in December 2009
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.
DIRECTORS’ REPORT
45
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
8.4 REMUNERATION TABLES – CEO AND DISCLOSED ExECUTIvES
Table 6: Non Statutory Remuneration Disclosure has been prepared to provide shareholders with a view of remuneration structure and how
remuneration was paid or communicated to the CEO and Disclosed Executives for 2012 and 2013. The Board believes presenting information in
this way provides the shareholder with increased clarity and transparency of the CEO and Disclosed Executives’ remuneration, clearly showing
the amounts awarded for each remuneration component (fixed remuneration, STI and LTI) within the financial year. Details of prior year awards
which may have vested in 2012 and 2013 are provided in the footnotes.
Individuals included in table
fixed remuneration
Non monetary benefits
Long service leave accrual
NON
STATUTORY
REMUNERATION
DISCLOSURE
TABLE
STATUTORY
REMUNERATION
DISCLOSURE
TABLE
CEO and
Current Disclosed Executives
Total of cash salary and
superannuation contributions
(pro-rated for period
of year as a KMP)
CEO, Current and
Former Disclosed Executives
(pro-rated for period
of year as a KMP)
Cash salary (including
reductions made in relation
to the utilisation of ANZ’s
Lifestyle Leave Policy) and
superannuation contributions
Non monetary benefits
which typically consists
of company-funded benefits
and fringe benefits tax
payable on these benefits
Not included
As above
Long service leave
accrued during the year
1 Subject to Shareholder approval for the CEO
TABLE 6: NON STATUTORY REMUNERATION DISCLOSURE – CEO AND CURRENT DISCLOSED ExECUTIvE
REMUNERATION fOR 2013 AND 2012
fixed
CEO and Current Disclosed Executives
M Smith3
Chief Executive Officer
P Chronican4
Chief Executive Officer, Australia
S Elliott5
Chief Financial Officer
A Géczy6
Chief Executive Officer, International & Institutional Banking
D Hisco7
Chief Executive Officer, New Zealand
G Hodges8
Deputy Chief Executive Officer
J Phillips9
Chief Executive Officer, Global Wealth and Global Managing
Director, Marketing, Innovation and Digital
N williams10
Chief Risk Officer
financial
Year
Remuneration1
$
Non monetary
benefits
$
Cash
$
Deferred as
equity
$
2013
2012
2013
2012
2013
2012
2013
2013
2012
2013
2012
2013
2012
2013
2012
3,150,000
3,150,000
1,300,000
1,300,000
1,250,000
1,187,000
50,000
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
580,000
1,000,000
790,000
145,681
121,900
15,669
7,590
15,669
40,853
–
411,398
309,757
27,404
13,789
5,500
5,500
248,328
32,675
2,050,000
1,900,000
1,050,000
850,000
1,300,000
1,100,000
–
1,050,000
900,000
675,000
650,000
700,000
377,000
850,000
533,250
1,950,000
1,800,000
950,000
750,000
1,200,000
1,000,000
–
950,000
800,000
575,000
550,000
600,000
319,000
750,000
454,250
1 Fixed remuneration was unchanged for Disclosed Executives year on year. The difference for S Elliott year on year reflects his promotion in 2012 where remuneration was increased to reflect
expanded responsibilities. The differences for J Phillips and N Williams year on year reflects partial service as a Disclosed Executive in 2012.
2 The possible range of STI is between 0 and 2 times target STI. The actual STI received is dependent on ANZ and individual performance (refer to Section 6.2.1, Short Term Incentives (STI) for more
details). Anyone who received less than 100% of target forfeited the rest of their STI entitlement. The minimum value is nil and the maximum value is what was actually paid.
3 M Smith – The 2013 LTI relates to the LTI grant that is proposed for 2013, subject to approval by shareholders at the 2013 Annual General Meeting. The 2012 LTI relates to the LTI grant approved
by shareholders at the 2012 Annual General Meeting. Non monetary benefits include car parking, life insurance and taxation services. In 2013 equity to the value of $2,054,542 vested in respect
of previously disclosed deferred STI granted in 2010 and 2011. In addition, equity to the value of $6,419,352 vested in respect of previously disclosed deferred LTI granted in 2007, as approved
by shareholders.
4 P Chronican – Non monetary benefits include car parking and taxation services. In 2013 equity to the value of $712,255 vested in respect of previously disclosed deferred STI granted in 2010 and
2011. In addition, equity to the value of $1,440,697 vested in respect of deferred LTI granted in 2009.
5 S Elliott – 2012 fixed remuneration represents what was paid during the year (an increase to $1,250,000 occurred at date of promotion, 1 March 2012 - this figure has been referenced to calculate
2012 STI as a % of target). Non monetary benefits include car parking and taxation services. In 2013 equity to the value of $588,926 vested in respect of previously disclosed deferred STI granted
in 2010 and 2011. In addition, equity to the value of $995,424 vested in respect of deferred LTI granted in 2009.
46
The information provided in Table 6 is non statutory information and differs from the information provided in Table 7: Statutory Remuneration
Disclosure, which has been prepared in accordance with Australian Accounting Standards. A description of the difference between the two
tables is provided below:
Retirement benefits
STI
LTI
Other equity allocations
Not included
STI awarded in Nov 2013
for the 2013 financial year –
expressed as a cash value plus
a deferred equity grant value
Communicated value of
LTI granted in Nov/Dec1 2013
Nil, as nothing awarded
in 2012 or 2013
The equity fair value multiplied by the number of instruments
granted equals the STI/LTI deferred equity dollar value
Retirement benefit accrued
during the year. This relates
to a retirement allowance
available to individuals
employed prior to Nov 1992
Includes cash STI (Nov 2013 element
only) and amortised STI for deferred
equity from prior year awards
Amortised STI values relate
to STI awards made in Nov 2010,
2011 and 2012
Amortised LTI values relate to
LTI awards made in Nov 2009 and
Nov/Dec 2010, 2011 and 2012
Amortised values for equity
awards made in prior years,
excluding STI and LTI awards
Equity is amortised over the vesting period of the award. Refer to footnote 7 of the
Statutory Remuneration Disclosure Table for details of how amortised values are calculated
STI
Total
$
As % of target
%
As % of maximum
opportunity2
%
LTI
Total (deferred
as equity)
$
Total Remuneration
Received
$
Deferred as equity
$
Total
$
4,000,000
3,700,000
2,000,000
1,600,000
2,500,000
2,100,000
–
2,000,000
1,700,000
1,250,000
1,200,000
1,300,000
696,000
1,600,000
987,500
127%
117%
128%
103%
167%
140%
–
167%
142%
104%
100%
108%
100%
133%
104%
63%
64%
83%
–
83%
52%
54%
89%
3,150,000
3,150,000
700,000
650,000
1,000,000
1,200,000
625,000
699,200
500,000
500,000
500,000
500,000
290,000
750,000
474,000
5,345,681
5,171,900
2,365,669
2,157,590
2,565,669
2,327,853
50,000
2,461,398
2,209,757
1,702,404
1,663,789
1,705,500
962,500
2,098,328
1,355,925
5,100,000
4,950,000
1,650,000
1,400,000
2,200,000
2,200,000
625,000
1,649,200
1,300,000
1,075,000
1,050,000
1,100,000
609,000
1,500,000
928,250
10,445,681
10,121,900
4,015,669
3,557,590
4,765,669
4,527,853
675,000
4,110,598
3,509,757
2,777,404
2,713,789
2,805,500
1,571,500
3,598,328
2,284,175
6 A Géczy – A Géczy commenced in role 16 September 2013 so fixed remuneration reflects amounts received for the partial service for the 2013 year.
7 D Hisco – Non monetary benefits includes expenses related to his relocation to New Zealand, car parking and taxation services. In 2013 equity to the value of $680,264 vested in respect of
deferred STI granted in 2010 and 2011. In addition, equity to the value of $796,335 vested in respect of deferred LTI granted in 2009.
8 G Hodges – Non monetary benefits include car parking and taxation services. In 2013 equity to the value of $530,208 vested in respect of previously disclosed deferred STI granted in 2010 and
2011. In addition, equity to the value of $995,424 vested in respect of previously disclosed deferred LTI granted in 2009.
9 J Phillips – J Phillips commenced in role on 1 March 2012 so 2012 remuneration (fixed, STI and LTI) reflects amounts received for partial service for that year. Non monetary benefits include
taxation services. In 2013 equity to the value of $461,408 vested in respect of previously disclosed deferred STI granted in 2010 and 2011. In addition, equity to the value of $895,892 vested in
respect of previously disclosed LTI granted in 2009.
10 N williams – N Williams commenced in role on 17 December 2011 so 2012 remuneration (fixed, STI and LTI) reflects amounts received for the partial service for that year. Non monetary benefits
include relocation expenses, car parking and taxation services. In 2013 equity to the value of $731,254 vested in respect of previously disclosed deferred STI granted in 2010 and 2011. In addition,
equity to the value of $531,318 vested in respect of previously disclosed LTI granted in 2009.
DIRECTORS’ REPORT
47
ANZ ANNUAL REPORT 2013 DIRECTORS’ REPORT (continued)
TABLE 7: STATUTORY REMUNERATION DISCLOSURE – CEO AND DISCLOSED ExECUTIvE REMUNERATION fOR 2013 AND 2012
Short-Term Employee Benefits
Post-Employment
financial
Year
Cash salary1
$
Non monetary
2
benefits
$
Total cash
incentive
$
3,4
Super
5
contributions
$
Retirement
benefit accrued
6
during year
$
CEO and Current Disclosed Executives
M Smith11
Chief Executive Officer
P Chronican
Chief Executive Officer, Australia
S Elliott
Chief Financial Officer
A Géczy12
Chief Executive Officer, International
& Institutional Banking
D Hisco
Chief Executive Officer, New Zealand
G Hodges
Deputy Chief Executive Officer
J Phillips12
Chief Executive Officer, Global Wealth
and Group Managing Director,
Marketing, Innovation and Digital
N williams12
Chief Risk Officer
Former Disclosed Executives
P Marriott12
Former Chief Financial Officer
C Page12
Former Chief Risk Officer
A Thursby12
Former Chief Executive Officer,
International & Institutional Banking
Total of all Executive KMPs13
2013
2012
2013
2012
2013
2012
2013
2013
2012
2013
2012
2013
2012
2013
2012
2012
2012
2013
2012
2013
2012
3,150,000
3,150,000
1,191,978
1,192,661
1,146,133
1,088,991
48,942
1,000,000
1,000,000
916,906
917,431
916,906
532,110
145,681
121,900
15,669
7,590
15,669
40,853
–
411,398
309,757
27,404
13,789
5,500
5,500
2,050,000
1,900,000
1,050,000
850,000
1,300,000
1,100,000
–
1,050,000
900,000
675,000
650,000
700,000
377,000
899,347
724,771
248,328
32,675
850,000
533,250
–
–
108,022
107,339
103,867
98,009
1,058
–
–
83,094
82,569
83,094
47,890
83,094
65,229
886,239
20,229
412,500
79,761
211,927
937,500
1,187,000
10,207,712
10,891,130
14,257
10,130
7,590
879,779
574,140
–
–
1,100,000
7,675,000
7,822,750
19,073
–
–
462,229
499,870
–
–
–
–
–
–
–
5,436
4,237
5,071
4,237
–
–
5,286
20,477
–
–
–
–
15,793
28,951
1 Cash salary includes reductions made in relation to the utilisation of ANZ’s Lifestyle Leave Policy, where applicable.
2 Non monetary benefits generally consist of company-funded benefits such as car parking and taxation services. This item also includes costs met by the company in relation to relocation, gifts
received on leaving ANZ for former Disclosed Executives, and for the CEO, life insurance. The fringe benefits tax payable on any benefits is also included in this item.
3 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 2012 STI deferred
components are included in share-based payments. The 2013 STI deferred components will be amortised from the grant date. The cash incentive component was approved by the Board on
24 October 2013. 100% of the cash incentive awarded for the 2012 and 2013 years vested to the Disclosed Executive in the applicable financial year.
4 The possible range of STI is between 0 and 2 times target STI (0 and 2.5 times target STI in 2012). The actual STI received is dependent on ANZ and individual performance (refer to Section 6.2.1,
Short Term Incentives (STI) for more details). The 2013 STI awarded (cash and equity component) as a percentage of target STI was: M Smith 127% (2012: 117%); P Chronican 128% (2012: 103%);
S Elliott 167% (2012: 140%); D Hisco 167% (2012: 142%); G Hodges 104% (2012: 100%); J Phillips 108% (2012: 100%); N Williams 133% (2012: 104%); P Marriott n/a (2012: 86% – pro-rated to date
ceased in role, 31 May 2012); A Thursby nil (2012: 140%). Anyone who received less than 100% of target forfeited the rest of their STI entitlement. The minimum value is nil and the maximum value
is what was actually paid.
5 For all Australian based Disclosed Executives other than M Smith and A Thursby, the superannuation contribution reflects the Superannuation Guarantee Contribution – individuals may elect to
take this contribution as superannuation or a combination of superannuation and cash. As M Smith is and A Thursby was a holder of a long stay visa, their fixed remuneration does not include the
Superannuation Guarantee Contribution, however they are able to elect voluntary superannuation contributions.
6 Accrual relates to Retirement Allowance. As a result of being employed with ANZ prior to November 1992, D Hisco, G Hodges and N Williams are 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: three 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).
7 In accordance with the requirements of AASB 2 Share-based payments, 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 three years. Assumptions for options/rights are detailed in Table 8:
Equity Valuation Inputs – Options/Rights. 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/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.
8 Amortisation of other equity allocations for M Smith relates to the special equity allocation which was approved by shareholders at the 2008 Annual General Meeting. Amortisation for A Thursby
relates to equity granted on commencement.
48
Long-Term
Employee
Benefits
Share-Based Payments7
Total amortisation value of
STI
LTI
Other equity allocations8
Long service
leave accrued
during the year
$
Shares
$
Options and
Rights
$
Shares
$
Rights
$
Shares
$
Options
$
Termination
benefits
$
Grand total
remuneration
$
9,10
47,289
48,079
19,614
19,842
22,038
22,985
780
1,719,210
1,750,829
723,368
637,349
796,167
438,387
–
14,064
15,263
14,429
15,263
15,078
10,710
–
7,788
527,240
477,366
490,516
225,957
14,214
120,504
575,216
494,744
–
778,868
–
–
26,625
849,289
(78,480)
838,469
–
–
–
–
16,708
178,342
–
768,790
602,172
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10,958
–
–
–
–
2,991,143
2,590,496
672,705
623,306
771,029
540,049
–
461,622
412,856
498,760
493,164
480,192
258,774
347,119
373,958
176,435
9,198
–
646,594
27,986
–
–
39,377
(529,830)
586,415
147,506
279,271
4,753,237
6,499,046
785,498
780,514
347,119
412,902
5,522,056
6,200,229
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
329,842
–
329,842
–
113,189
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10,103,323
9,674,493
3,781,356
3,438,087
4,171,611
3,507,616
50,780
3,711,310
3,263,031
2,747,904
2,653,819
2,691,286
1,457,941
3,199,039
2,374,806
1,154,384
3,978,575
16,842
127,038
–
1,178,751
466,358
4,075,941
–
113,189
127,038
1,171,226
30,922,967
35,603,060
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 disclosed amortised value of rights/options for each KMP as a percentage of Grand Total Remuneration is: M Smith 30%; P Chronican 18%; S Elliott 19%; A Géczy 0%; D Hisco 33%;
G Hodges 18%; J Phillips 18%; N Williams 6%; A Thursby -114%.
11 While the CEO is an Executive Director, he has been included in this table with the Disclosed Executives.
12 A Géczy was appointed to the CEO, International & Institutional Banking role on 16 September 2013 so remuneration reflects amounts received for the partial service of the 2013 year. J Phillips was
appointed to the CEO, Global Wealth and Group Managing Director, Marketing, Innovation and Digital role on 1 March 2012 so remuneration reflects amounts received for the partial service for
the 2012 year. N Williams was appointed to the Chief Risk Officer role on 17 December 2011 so remuneration reflects amounts received for the partial service for the 2012 year. P Marriott ceased
employment 31 August 2012 and remuneration is to this date, the STI has been pro-rated to date ceased in role, 31 May 2012. C Page retired 16 December 2011 and remuneration is to this date.
A Thursby ceased employment 30 June 2013 and remuneration is to this date.
13 For those Disclosed Executives who were disclosed in both 2012 and 2013, the following are noted:
- P Chronican – uplift in year-on-year remuneration, driven by a combination of factors including increases in non monetary benefits, cash STI and amortised value of equity.
- S Elliott – uplift in year-on-year remuneration, driven by a combination of factors including fixed remuneration on promotion in 2012, increases in cash STI, superannuation and amortised value
of equity.
- D Hisco – uplift in year-on-year remuneration, driven by a combination of factors including non monetary benefits, cash STI and amortised value of equity.
- G Hodges – uplift in year-on-year remuneration, driven by a combination of factors including non monetary benefits, cash STI and amortised value of equity.
- J Phillips – 2012 remuneration only reflected a partial year as she commenced in role 1 March 2012. Uplift in year-on-year remuneration due to full year in role in 2013.
- N Williams – 2012 remuneration only reflected a partial year as he commenced in role 17 December 2011. Uplift in year-on-year remuneration due to full year in role in 2013.
- A Thursby – 2013 remuneration only reflected a partial year as he concluded in role 30 April 2013 and ceased employment effective 30 June 2013. Decrease in year-on-year remuneration reflects
reversals in the amortised value of equity due to equity forfeiture on resignation. Termination benefits relate to statutory leave entitlements paid on termination.
A Géczy is disclosed only for part of the 2013 year from commencement in a KMP role.
DIRECTORS’ REPORT
49
ANZ ANNUAL REPORT 2013
DIRECTORS’ REPORT (continued)
9. Equity
All shares underpinning equity awards may be purchased on market, or be newly issued shares or a combination of both. For the 2012 equity
granted to the CEO and Disclosed Executives, all STI deferred shares were purchased on market and for LTI performance rights, the approach to
satisfy awards will be determined closer to the time of vesting.
9.1 EqUITY v ALUATIONS
ANZ engages two external experts (Mercer (Australia) Pty Ltd and PricewaterhouseCoopers) to independently value any required options,
deferred share rights and performance rights, taking into account factors including the performance conditions, share price volatility, life of the
instrument, dividend yield and share price at grant date. These valuations are audited by KPMG and ANZ Global Internal Audit. The higher of the
two valuations is approved by the HR Committee as the allocation and/or expensing/disclosure value (using the higher valuation results in fewer
instruments being granted). The following tables provide details of the valuations of the various equity instruments issued during the year and
in prior years for shares and rights where vesting, lapse/forfeiture or exercise/sale has occurred during the year:
TABLE 8: EqUITY vALUATION INPUTS – OPTIONS /RIGHTS
Recipients
Type of equity
Grant date
Exercise
price
$
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
%
Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives
CEO
Executives
Executives
Executives
Executives
Executives
CEO
31-Oct-08
STI deferred options
31-Oct-08
STI deferred options
13-Nov-09
STI deferred options
13-Nov-09
STI deferred options
12-Nov-10
STI deferred options
12-Nov-10
STI deferred options
STI deferred share rights
31-Oct-08
STI deferred share rights 12-Nov-10
STI deferred share rights 14-Nov-11
STI deferred share rights 12-Nov-12
STI deferred share rights 12-Nov-12
12-Nov-12
LTI deferred share rights
19-Dec-07
LTI performance rights
13-Nov-09
LTI performance rights
24-Dec-09
LTI performance rights
12-Nov-10
LTI performance rights
14-Nov-11
LTI performance rights
12-Nov-12
LTI performance rights
19-Dec-12
LTI performance rights
17.18
17.18
22.80
22.80
23.71
23.71
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
2.80
2.94
4.83
5.09
3.96
4.20
15.45
21.06
19.40
23.07
21.76
20.53
11.51
12.17
11.26
11.96
9.03
10.16
9.58
TABLE 9: EqUITY vALUATION INPUTS – DEfERRED SHARES
Recipients
Executives
Executives
Executives
Executives
CEO and Executives
CEO and Executives
CEO and Executives
CEO and Executives
CEO and Executives
CEO and Executives
CEO and Executives
Executives
Type of equity
Other deferred shares
Other deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
LTI deferred shares
17.36
17.36
22.48
22.48
23.22
23.22
17.36
23.22
20.66
24.45
24.45
24.45
26.85
22.48
22.39
23.22
20.66
24.45
24.64
30.0
30.0
39.0
39.0
30.0
30.0
30.0
30.0
25.0
22.5
22.5
22.5
17.0
35.0
40.0
30.0
25.0
22.5
22.5
Grant date
03-Sep-07
22-Sep-09
31-Oct-08
31-Oct-08
13-Nov-09
12-Nov-10
12-Nov-10
14-Nov-11
14-Nov-11
12-Nov-12
12-Nov-12
13-Nov-09
5
5
5
5
5
5
5
5
3
3
4
5
6
5
5
5
5
5
5
1
2
1
2
1
2
2
2
1
1
2
3
5
3
3
3
3
3
3
3
3.5
3
3.5
3
3.5
2
2
1
1
2
3
5
3
3
3
3
3
3
6.00
6.00
5.50
5.50
5.00
5.00
6.00
5.00
6.50
6.00
6.00
6.00
4.50
5.00
4.60
5.00
6.50
6.00
6.00
4.48
4.64
5.04
5.13
5.04
5.11
4.48
4.97
3.70
2.82
2.66
2.58
6.66
5.01
4.71
5.04
3.53
2.58
2.77
Equity fair
value1
$
Share closing
price at grant
$
vesting period
(years)
29.05
23.22
17.18
17.18
22.54
23.32
23.32
20.89
20.89
24.57
24.57
22.54
29.22
23.33
17.36
17.36
22.48
23.22
23.22
20.66
20.66
24.45
24.45
22.48
3
3
1
2
1
1
2
1
2
1
2
3
1 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.
Signed in accordance with a resolution of the Directors.
John Morschel
Chairman
8 November 2013
50
Michael R P Smith
Director
ANZ ANNUAL REPORT 2013
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.
2013 key Areas of Focus and Achievements
} Continued monitoring of the ongoing volatility and
} Successful implementation of the New Zealand
uncertainties in global markets and their impact on the
risk culture and management of ANZ.
} Review of the increasing global regulatory requirements
in relation to capital and funding, and the implications for
ANZ, including both the potential risks and opportunities.
} Oversight of Management’s execution of ANZ’s
super-regional strategy.
} Overview of productivity focus in recognition of
industry-wide pressures on revenue growth, particularly
in Australia and New Zealand.
} Strong focus on ANZ’s technology program, including
upgrading infrastructure to deliver improved systems
security, stability and standardisation and to respond to
growing demand, scale and complexity.
simplification program which involved the transition to
one technology system and the combination of the ANZ
and National Bank brands into one ANZ brand – ANZ Bank
New Zealand.
} Appointment of Mr Liebelt as a Non-Executive Director
(in addition to the appointment of Ms Dwyer in April
2012) as part of a managed succession plan having regard
to expected Non-Executive Director retirements.
} ANZ was assessed the global banking sector leader in the
Dow Jones Sustainability Index (DJSI). This is the sixth year
in the past seven that ANZ has received this assessment.
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.
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 differ materially 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.
Compliance with Corporate Governance Codes
ANZ has complied with all applicable governance principles in
New Zealand throughout the financial year.
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. ANZ confirms it has
followed the Recommendations of the ASX Corporate Governance
Council during the reporting period.
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 anz.com > About us > Our company > Corporate
governance. The information in this Statement is current as at
11 October 2013 except where otherwise indicated.
Other jurisdictions
ANZ also monitors best practice developments in corporate
governance across other relevant jurisdictions.
ANZ deregistered from the US Securities Exchange Commission
with effect from October 2007. Despite no longer being required
to comply with United States corporate governance rules, ANZ’s
corporate governance practices continue to have regard to US
corporate governance regulations 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.
CORPORATE gOvERNANCE
51
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
Website
Further details of ANZ’s governance framework are set out at anz.com > About us > Our company > Corporate governance.
This section of ANZ’s website also contains copies of all the Board/Board Committee 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 at the time of
preparation of this Statement.
MR J P MORSCHEL Chairman, Independent Non-Executive Director
DipQS, FAICD
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 2008) and Gifford Communications Pty Limited (from 2000).
former Directorships include
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), Lend Lease Corporation
Limited (1983–1995) and Tenix Pty Ltd (1998–2008).
Age: 70. Residence: Sydney, Australia.
MR M R P SMITH , OBE, Chief Executive Officer, Executive Director
BSc (Hons) City Lond., Hon LLD Monash
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 Hongkong
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
Chairman: Australian Bankers’ Association Incorporated (from 2011,
Member from 2007).
Executive Chairman: Chongqing Mayor’s International Economic
Advisory Council (from 2013, Member from 2006).
Director: ANZ Bank New Zealand Limited (from 2007), the Financial
Markets Foundation for Children (from 2008), Financial Literacy
Australia Limited (from 2012), the International Monetary Conference
(from 2012) and the Institute of International Finance (from 2010).
Member: Business Council of Australia (from 2007), Asia Business
Council (from 2008), Australian Government Financial Literacy
Advisory Board (from 2008) 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 Chief Executive Officer and Director: The Hongkong 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 Member: Visa APCEMEA Senior Client Council (2009–2011).
Age: 57. Residence: Melbourne, Australia.
52
ANZ ANNUAL REPORT 2013
DR G J C LARK Independent Non-Executive Director, Chair of the Technology Committee
BSc (Hons), PhD, FAPS, FTSE
Non-Executive Director since February 2004. Member of the Risk
Committee and Human Resources Committee.
Skills, experience and expertise
Dr Clark brings to the Board international business experience
and a distinguished career in micro-electronics, computing and
communications. He was previously Principal of Clark Capital Partners,
a US based firm that has advised internationally on technology and the
technology market place, and he has held senior executive positions in
IBM, News Corporation and Loral Space and Communications.
Current Directorships
Chairman: KaComm Communications Pty Ltd (from 2006) and CUDOS
Advisory Board (from 2011).
Member: The Royal Institution of Australia (from 2010) and Council of
the University of Sydney Physics Foundation (from 2013).
former Directorships include
Former Principal: Clark Capital Partners (2003–2010).
Age: 70. Residence: Based in New York, United States and also resides
in Sydney, Australia.
MS P J Dw YER Independent Non-Executive Director
BCom, FCA, SF Fin, FAICD
Non-Executive Director since April 2012. Member of the Audit
Committee, Risk Committee and Human Resources Committee.
Skills, experience and expertise
Ms Dwyer is an established non-executive director with extensive
experience in financial services and a strong accounting background,
and has previously held executive roles in the investment
management, corporate finance and accounting industries.
Current Directorships
Chairman: Tabcorp Holdings Limited (from 2011, Director from 2005).
Deputy Chairman: Leighton Holdings Limited (from 2013, Director
from 2012).
Director: Lion Pty Ltd (from 2012).
Member: Australian Government Takeovers Panel (from 2008), Kirin
International Advisory Board (from 2012) and ASIC External Advisory
Panel (from 2013).
former Directorships include
Former Deputy Chairman: Baker IDI Heart and Diabetes Research
Institute (2005–2013).
Former Director: Suncorp Group Limited (2007-2012), Foster’s Group
Limited (2011), Astro Japan Property Group Limited (2005-2011),
Healthscope Limited (2010) and CCI Investment Management Limited
(1999-2011).
Age: 53. Residence: Melbourne, Australia.
MR P A f H AY Independent Non-Executive Director, Chair of the Governance Committee
LLB Melb., FAICD
Non-Executive Director since November 2008. Member of the 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
Director: Alumina Limited (from 2002), Landcare Australia Limited
(from 2008), GUD Holdings Limited (from 2009), Myer Holdings
Limited (from 2010), Australian Institute of Company Directors (from
2012) and Newcrest Mining Limited (from 2013).
Member: Australian Government Takeovers Panel (from 2009).
former Directorships include
Former Chairman: Lazard Pty Ltd Advisory Board (2009–2013).
Former Chief Executive Officer: Freehills (2000–2005).
Former Director: NBN Co Limited (2009–2012), Myer Pty Limited
(2010-2011) and Lazard Pty Ltd (2007–2009).
Age: 63. Residence: Melbourne, Australia.
CORPORATE gOvERNANCE
53
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
MR LEE HSIEN YANG Independent Non-Executive Director
MSc, BA
Non-Executive Director since February 2009. Member of the Technology
Committee, Risk Committee and Human Resources Committee.
Skills, experience and expertise
Mr Lee has considerable knowledge of and operating experience in
Asia. He has a background in engineering and brings to the Board his
international business and management experience across a wide
range of sectors including telecommunications, food and beverages,
properties, publishing and printing, financial services, education, civil
aviation and land transport.
Current Directorships
Chairman: Civil Aviation Authority of Singapore (from 2009), The
Islamic Bank of Asia Limited (from 2012, Director from 2007) and
General Atlantic Singapore Fund Pte Ltd (from 2013).
MR G R LIEBELT Independent Non-Executive Director
BEc (Hons), FAICD, FTSE, FAIM
Non-Executive Director since July 2013. Member of the Risk Committee,
Human Resources Committee and Technology Committee.
Skills, experience and expertise
Mr Liebelt has extensive international experience and a strong
record of achievement as a senior executive including in strategy
development and implementation. He brings to the Board his
experience of a 23 year executive career with Orica Limited (including
a period as Chief Executive Officer), a global mining services company
with operations in more than 50 countries.
Director: Singapore Exchange Limited (from 2004), Caldecott Inc.
(from 2013) and Kwa Geok Choo Pte Ltd (from 1979).
Member: Governing Board of Lee Kuan Yew School of Public Policy
(from 2005) and Rolls Royce International Advisory Council (from 2007).
Special Adviser: General Atlantic (from 2013).
Consultant: Capital International Inc Advisory Board (from 2007).
President: INSEAD South East Asia Council (from 2013).
former Directorships include
Former Chairman: Republic Polytechnic (2002–2009) and Fraser &
Neave, Limited (2007-2013).
Former Member: Merrill Lynch PacRim Advisory Council (2007–2010).
Former Chief Executive Officer: Singapore Telecommunications
Limited (1995–2007).
Age: 56. Residence: Singapore.
Current Directorships
Deputy Chairman: The Global Foundation (from 2013, Director from
2006) and Melbourne Business School (from 2012, Director from 2008).
Director: Amcor Limited (from 2012), The Australian Foundation
Investment Company Limited (from 2012) and Carey Baptist Grammar
School (from 2012).
former Directorships include
Former Chief Executive Officer and Managing Director: Orica Limited
(2005-2012).
Former Director: Business Council of Australia (2010-2012).
Age: 59. Residence: Melbourne, Australia
MR I J MACfARLANE, AC, Independent Non-Executive Director, Chair of the Risk Committee
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 Audit 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) 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 (from 2007) and International Advisory Board of
CHAMP Private Equity (from 2007).
former Directorships include
Former Chairman: Payments System Board (1998–2006) and
Australian Council of Financial Regulators (1998–2006).
Former Governor: Reserve Bank of Australia (Member 1992–2006,
Chairman 1996–2006).
Former Director: Leighton Holdings Limited (2007–2013).
Age: 67. Residence: Sydney, Australia.
54
MR D E MEIKLEJOHN , AM, Independent Non-Executive Director, Chair of the Audit Committee
BCom, DipEd, FCPA, FAICD, FAIM
Non-Executive Director since October 2004. Member of the
Technology 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.
Current Directorships
Chairman: Manningham Centre Association Board of Governance
(from 2011).
Director: Coca Cola Amatil Limited (from 2005) and Mirrabooka
Investments Limited (from 2006).
former Directorships include
Former Chairman: PaperlinX Limited (1999–2011).
Former Director and Chief Financial Officer: Amcor Limited (1985–2000).
Former President: Melbourne Cricket Club (2007–2011).
Age: 71. Residence: Melbourne, Australia.
MS A M wATKINS Independent Non-Executive Director, Chair of the Human Resources Committee
BCom, FCA, SF Fin, FAICD
Non-Executive Director since November 2008. Member of the Audit
Committee and Governance Committee.
Skills, experience and expertise
Ms Watkins is an experienced CEO and established director with
a grounding in strategy, finance and accounting. Her industry
experience includes retailing, agriculture, food processing and
financial services. Ms Watkins held senior executive roles with
ANZ from 1999 to 2002.
Corporate Governance Framework
Current Directorships
Chief Executive Officer and Managing Director: GrainCorp Limited
(from 2010).
Chairman: Allied Mills Australia Pty Limited (from 2010).
Director: The Centre for Independent Studies (from 2011).
Member: Australian Government Takeovers Panel (from 2010).
former Directorships include
Former Chief Executive Officer: Bennelong Group (2008–2010).
Former Director: Woolworths Limited (2007–2010) and AICD National
Board and Victorian Council (2009–2011).
Former Member: The Nature Conservancy Australian Advisory
Board (2007-2011).
Age: 50. Residence: Melbourne, Australia.
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
SUSTAINABILITY &
DIVERSITY COMMITTEE
CREDIT & MARKET
RISK COMMITTEE
GROUP ASSET &
LIABILITY COMMITTEE
GLOBAL MARKETS
& LOANS PRODUCT
COMMITTEE
REPUTATION RISK
COMMITTEE
TECHNOLOGY RISK
MANAGEMENT
COMMITTEE
CAPITAL MANAGEMENT
POLICY COMMITTEE
OPERATIONAL
RISK EXECUTIVE
COMMITTEE
CREDIT RATINGS
SYSTEM OVERSIGHT
COMMITTEE
CORPORATE gOvERNANCE
55
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
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 an ex officio 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 bodies.
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 the implementation of those strategies and
financial objectives;
} monitoring compliance with regulatory requirements, ethical
standards and external commitments, and the implementation of
related policies; and
} appointing and reviewing the performance of the Chief
Executive Officer.
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 approvals of the following (except to the extent delegated by
the Board from time to time):
} the budget and strategic plan, at least annually;
} ANZ’s Remuneration Policy, including various remuneration
matters as detailed in the Charter;
} significant changes to organisational structure;
} the acquisition, establishment, disposal or cessation of any
significant business;
} the issue of any shares, options, equity instruments or other
equity securities;
} where practicable, the substance of any announcements to the
Australian Securities Exchange in relation to matters that have been
the subject of a decision by the Board or any public statements
which reflect significant issues of ANZ policy or strategy; and
} any changes to the discretions delegated from the Board.
Under ANZ’s Constitution, the Board may delegate any of its
powers to Committees of the Board. The roles of the principal Board
Committees are set out on pages 60 to 64. The Charters of the Board
and each of its principal Committees are set out on anz.com in the
Corporate Governance section.
56
Board Meetings
The Board normally meets at least eight times each year, including a
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
} the minutes of previous Committee meetings for review.
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 to all employees and contractors within ANZ
and its controlled entities, including when acting at ANZ’s request in
operational roles or as directors of other 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.
At a Senior Management level, ANZ has a Management Board
which comprises the Chief Executive Officer and ANZ’s most
senior executives.
At the time of preparation of this Statement, the following Senior
Management, in addition to the Chief Executive Officer, were
members of the Management Board: Graham Hodges – Deputy
Chief Executive Officer; Shayne Elliott – Chief Financial Officer;
Phil Chronican – Chief Executive Officer, Australia; Andrew Géczy
– Chief Executive Officer, International and Institutional Banking;
David Hisco – Chief Executive Officer, New Zealand; Joyce Phillips –
Chief Executive Officer, Global Wealth and Group Managing Director,
Marketing, Innovation and Digital; Gilles Planté – Chief Executive
Officer, Asia Pacific; Nigel Williams – Chief Risk Officer; Alistair Currie
– Group Chief Operating Officer; Anne Weatherston – Chief
Information Officer; and Susie Babani – Group Managing Director,
Human Resources.
Typically, a sub-group of Management Board meets every week
with all Management Board members meeting each month to
discuss business performance, review shared initiatives and build
collaboration and synergy across the Group.
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.
Board Composition, Selection and Appointment
The Board strives to achieve an appropriate mix of skills, tenure,
experience and diversity among its Directors. Details regarding each
Director in office at the date of this Annual Report can be found on
pages 52 to 55.
The Governance Committee (see page 62) 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 diversity within the Board
including in relation to matters such as skills, tenure, experience,
age and gender.
The overarching guiding principle is that the Board’s composition
should reflect an appropriate mix having regard to the
following matters:
} specialist skill representation relating to both functions (such as
accounting/finance, law and technology) and industry background
(such as banking/financial services, retail and 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.
Nominations may be provided from time to 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 members of the Governance
Committee and should be documented by the Committee Chair. In
assessing nominees, the Governance Committee has regard to the
principles set out above.
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. Briefings are also provided
by Senior Management about matters concerning their areas
of responsibility.
Meeting Share qualification
Non-Executive Directors are required to accumulate within five 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).
Non-Executive Director Remuneration
Details of the structure of the Non-Executive Directors’ remuneration
(which is clearly distinguished from the structure of the remuneration
of the Chief Executive Officer and other senior executives) are set out
in the Remuneration Report on pages 39 to 41.
The ANZ Directors’ Retirement Scheme was closed effective
30 September 2005. Accrued entitlements were fixed on that date for
Non-Executive Directors in office at the time who had the option to
convert those entitlements into ANZ shares. Such entitlements, either
in ANZ shares or cash, will be carried forward and transferred to the
Non-Executive Director when they retire (including interest accrued
at the 30 day bank bill rate for cash entitlements). Only three current
Non-Executive Directors have entitlements under the Scheme,
namely Messrs Morschel and Meiklejohn and Dr Clark. Further details
are set out in the Remuneration Report.
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.
CORPORATE gOvERNANCE
57
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
fit and Proper
ANZ has an effective and robust framework in place to ensure that
individuals appointed to relevant senior positions within the APRA
regulated entities of 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 for APRA
Regulated Entities, addresses the requirements of APRA’s Fit and
Proper Prudential Standards. 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 to an APRA
regulated entity 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 the Company’s Non-Executive
Directors. The Human Resources Committee has primary responsibility
for assessing the fitness and propriety of the Chief Executive Officer
and key senior executives, and the Audit Committee carries out
assessments of 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 2013 financial year.
Director Independence
Under ANZ’s Board Charter, the Board must include a majority of
Non-Executive Directors who satisfy ANZ’s criteria for independence.
The Board Charter sets out criteria that are considered in order
to determine whether a Non-Executive Director is to be regarded
as independent.
All Non-Executive Directors are required to notify the Chairman
before accepting any new outside appointment. The Chairman will
review the proposed new appointment and will consider the issue
on an individual basis and, where applicable, also the issue of more
than one Director serving on the same outside board or other body.
When carrying out the review, the Chairman will consider whether
the proposed new appointment is likely to impair the Director’s
ability to devote the necessary time and focus to their role as an
ANZ Director and, where it will involve more than one ANZ Director
serving on an outside board or other entity, whether that would
create an unacceptable risk to the effective operation of the ANZ
Board. Non-Executive Directors are not to accept a new outside
appointment until confirmed with the Chairman who will consult the
other Directors as the Chairman deems appropriate.
In the 2013 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 the additional criteria stipulated
specifically for Audit Committee members in the Audit Committee
Charter. Further details of the criteria and review process are set out
in the Corporate Governance section of ANZ’s website.
58
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 2013, 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 52 to 55 and on anz.com highlight
their major associations outside 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 relates to the affairs of ANZ. Such a situation may arise
from external associations, interests or personal relationships.
Under the Directors Disclosure of Interest Protocol and Procedures for
Handling Conflicts of Interest, a Director may not exercise any influence
over the Board if an actual or potential conflict of interest exists.
In such circumstances, unless a majority of other Directors who do
not have an interest in the matter resolve to the contrary, the Director
may not be present for Board deliberations on the subject, and may
not vote on any related Board resolutions. In addition, the Director
may not receive relevant Board papers. 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 principal 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 three years if they wish to continue in their role as a
Non-Executive Director.
In addition, ANZ’s Board Renewal and Performance Evaluation
Protocol 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.
Continuing Education
ANZ Directors take part in a range of training and continuing
education programs. In addition to a formal induction program (see
page 57), 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 in relation 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.
Directors have unrestricted access to Management and, in addition
to the regular presentations made by Management to Board and
Board Committee meetings, Directors may seek briefings or other
additional information from Management on specific matters where
appropriate. The Company Secretary also provides advice and
support to the Directors as required.
Role of Company Secretary
The Board is responsible for the appointment of ANZ’s Company
Secretaries. The Board has appointed two 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 and the Company Secretary 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, and oversight of the
relationship with ANZ’s Share Registrar.
Profiles of ANZ’s Company Secretaries can be found in the Directors’
Report on pages 9 to 10.
Performance Evaluations
Non-Executive Directors
The framework used to evaluate the performance of Non-Executive
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, ANZ’s Non-Executive Directors Code of
Conduct and Ethics, and the law; and
} having due regard to ANZ’s corporate sustainability 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 Non-Executive
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 Protocol.
Performance evaluations of the Non-Executive Directors 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/roles etc) and a guide for
discussion to ensure consistency. When considering the Director’s
meeting attendance record during the previous year and also their
other roles outside ANZ, the Chairman reviews generally whether
the Director has sufficient time to properly carry out their duties as
an ANZ Director and more specifically whether they are making a
sufficient time commitment to their role at and outside meetings.
A report on the outcome of these performance evaluations is
provided to the Governance Committee and to the Board; and
} Re-election statement – when nominating for re-election,
Non-Executive Directors are given the opportunity to submit a
written or oral statement to the Board setting out their reasons for
seeking re-election. In the Non-Executive Director’s absence, the
Board evaluates this statement (having regard to the performance
criteria) and also considers their capacity to commit the necessary
time to their role as a Director before deciding whether to endorse
the relevant Director’s re-election.
CORPORATE gOvERNANCE
59
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
Chairman of the Board
An annual review of the performance of the Chairman of the Board
is facilitated by the Chair of the Governance Committee who seeks
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.
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 Management, including how financial, customer,
operational and qualitative measures are assessed, are set out in
the Remuneration Report on pages 30 to 39.
The Chair of the Governance Committee collates the input in order to
provide an overview report to the Governance Committee and to the
Board, as well as feedback to the Chairman of the Board.
The Board
On a periodic basis, the performance of the Board is assessed using
an independent external facilitator. The facilitator seeks input from
each Director and certain members of senior management when
carrying out the assessment.
The assessment is conducted in accordance with broad terms of
reference agreed by the Governance Committee. The results of
such assessment are discussed with the Chair of the Governance
Committee and together with any recommendations, are presented
to the Governance Committee and the Board. The last externally
facilitated review took place in 2011, and it is expected that externally
facilitated reviews of the Board will occur approximately every
three years. The review process in the intervening years (including
with respect to the year ended 30 September 2013) is conducted
internally based on input sought from each Director and also
members of the Management Board, and considers progress against
any recommendations implemented arising from the most recent
externally facilitated review, together with any new issues that may
have arisen.
During the year, the Governance Committee considers assessments
by a number of independent bodies regarding the Board and its
performance. The Chair of the Governance Committee reports any
material issues or findings from these evaluations to the Board.
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 Committee’s performance having regard to its role and
responsibilities as set out in its Charter;
} whether the Committee’s Charter is fit for purpose, or whether
any changes are required; and
} the identification of future topics for training/education of
the Committee.
The outcomes of the performance self-assessments are reported
to the Governance Committee (or to the Board, if there are any
material issues relating to the Governance Committee) for discussion
and noting.
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 2013 financial year.
Board Committees
As set out on page 56 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. The Board has
five principal Board Committees: Audit Committee, Governance
Committee, Human Resources Committee, Risk Committee and
Technology Committee.
Membership and Attendance
Each of the principal Board Committees is comprised solely of
independent Non-Executive Directors (a minimum of three is
required), has its own Charter and has the power to initiate any
special investigations it deems necessary. Board Committee
composition is reviewed annually.
The Chairman is an ex-officio member of each principal Board
Committee but does not chair any of the Committees. The Chief
Executive Officer is invited to attend Board Committee meetings as
appropriate. His presence is not automatic, however, and he does not
attend where his remuneration is considered or discussed, nor does
he attend the Non-Executive Director private sessions of Committees
unless invited. 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.
60
Under the Committee Charter, all members of the Audit Committee
must be appropriately financially literate. Mr Meiklejohn (Chair),
Ms Dwyer and Ms Watkins were determined to be ‘financial experts’
during the 2013 financial year under the definition set out in
the Audit Committee Charter. While the Board determined that
Mr Meiklejohn, Ms Dwyer 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, Ms Dwyer 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 Global 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 2013 financial year included:
} Global Internal Audit and External Audit – the Committee approved
the annual plans for Global Internal Audit and External Audit
and kept progress against those plans under regular review.
Adjustments to the Global Internal Audit Plan were made during
the year to accommodate changing circumstances, risk profiles
and business unit requests;
} Accounting and regulatory developments – reports on
developments were provided to the Committee outlining relevant
changes and implications for ANZ;
} Financial Reporting Governance Program – the Committee
monitored the financial reporting process and the controls in
place to ensure the integrity of the financial statements;
} Whistleblowing – the Committee received and reviewed
information on disclosures made under ANZ’s Global
Whistleblower Protection Policy; and
} Charter Review – the Committee reviewed and recommended to
the Governance Committee for approval proposed changes to the
Audit Committee Charter.
Meetings
Prior to the commencement of each year, each principal Board
Committee prepares a calendar of business which details the items to
be included on the agenda for each scheduled Committee meeting
in the coming year. In addition, any training/education topics that
have been identified as part of the Committee’s annual performance
self-assessment process are also included in the calendar. In advance
of each Board Committee meeting, at least one planning session
is held by the Committee Chair with relevant internal and external
stakeholders to ensure that all emerging issues are also captured in
the agenda for the forthcoming meeting as appropriate.
Minutes from Committee meetings are included in the papers for
the following Board meeting. In addition, Committee Chairs update
the Board regularly about matters relevant to the Committee’s role,
responsibilities, activities and matters considered, discussed and
resolved at Committee meetings. When there is a cross-Committee
item, the Committees will communicate with each other through
their Chairs.
Audit Committee
The Audit Committee is responsible for reviewing:
} ANZ’s financial reporting principles and policies, controls and
procedures;
} the effectiveness of ANZ’s internal control and risk management
framework;
} the work of Global Internal Audit which reports directly to the Chair
of the Audit Committee (refer to Global Internal Audit on page 64
for more information);
} reports from major subsidiary audit committees;
} prudential supervision procedures required by regulatory bodies to
the extent relating to financial reporting;
} the integrity of ANZ’s financial statements and the independent
audit thereof, and compliance with related legal and regulatory
requirements; and
} any due diligence procedures.
The Audit Committee is also responsible for:
} the appointment, annual evaluation and oversight of the external
auditor, including reviewing their independence, fitness and
propriety and qualifications;
} compensation of the external auditor;
} where deemed appropriate, replacement of the external
auditor; and
} reviewing the performance and remuneration of the Group General
Manager, Global Internal Audit and making recommendations to
the Board as appropriate.
CORPORATE gOvERNANCE
61
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
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 57);
} ensuring there is a robust and effective process for evaluating the
performance of the Board, Board Committees and Non-Executive
Directors (see pages 59 to 60);
} monitoring the effectiveness of the Gender Balance and Diversity
Policy to the extent it relates to Board diversity and reviewing and
approving measurable objectives for achieving gender diversity on
the Board (see page 57);
} 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;
} reviewing the development of and approving corporate
governance policies and principles applicable to ANZ; and
} approving corporate sustainability objectives for ANZ, and
reviewing progress in achieving them.
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.
Substantive areas of focus in the 2013 financial year included:
} Board succession planning – the Committee monitored the
process in place to identify potential candidates to replace the
Non-Executive Directors who are scheduled to retire in late 2013
(together with the succession planning process for the Chairman
of the Board). Mr Liebelt was appointed as a Non-Executive Director
with effect from 1 July 2013;
} Diversity – the Committee reviewed progress against the
measurable objective for Board gender diversity set for 2012/2013
and approved a new objective;
} 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;
} Performance evaluation processes – the Committee reviewed
existing processes relating to the annual performance reviews of
the Board, Chairman of the Board, Non-Executive Directors and
Board Committees;
} Board and Committee performance evaluations – the Committee
reviewed the major themes arising from the annual Board
performance review process and received a report on the outcome
of the Board Committee review process; and
} Review and approval of Group policies – the Committee reviewed
and, where appropriate, approved amendments to existing Group
policies including the Continuous Disclosure Policy, Board Renewal
and Performance Evaluation Protocol, Fit and Proper Policy, and
Director Independence Criteria.
Human Resources Committee
The Human Resources Committee assists and makes
recommendations to 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 certain policies, as well as monitoring performance with
respect to health and safety issues and diversity (excluding Board
diversity which is monitored by the Governance Committee).
The Committee is responsible for reviewing and making
recommendations to the Board on:
} remuneration matters relating to the Chief Executive Officer (details
in the Remuneration Report on pages 28 to 50);
} remuneration matters, including incentive arrangements, for other
Board Appointees (other than the Group General Manager, Global
Internal Audit);
} the design of remuneration structures and significant incentive
plans; and
} the Group’s Remuneration Policy.
In addition, the Committee considers and approves the appointment
of Board Appointees (other than the Group General Manager, Global
Internal Audit), approves clawback processes and outcomes, reviews
senior executive succession plans, and monitors the effectiveness of
ANZ’s health and safety, culture, engagement and diversity programs.
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.
ANZ Board Committee Memberships – as at 30 September 2013
Audit
Governance
Human Resources
Risk
Technology
Mr D E Meiklejohn FE, C
Mr P A F Hay C
Ms A M Watkins C
Mr I J Macfarlane C
Dr G J Clark C
Ms P J Dwyer FE
Mr I J Macfarlane
Dr G J Clark
Mr P A F Hay
Ms A M Watkins
Ms P J Dwyer
Dr G J Clark
Ms P J Dwyer
Mr Lee Hsien Yang
Mr G R Liebelt
Mr I J Macfarlane
Mr J P Morschel (ex officio) Mr P A F Hay
Mr Lee Hsien Yang
Mr D E Meiklejohn
Ms A M Watkins FE
Mr J P Morschel (ex officio)
C – Chair FE – Financial Expert
62
Mr Lee Hsien Yang
Mr G R Liebelt
Mr J P Morschel (ex officio)
Mr G R Liebelt
Mr D E Meiklejohn
Mr J P Morschel (ex officio) Mr J P Morschel (ex officio)
Substantive areas of focus in the 2013 financial year included:
} Management roles and performance – the Committee reviewed
the performance of the Chief Executive Officer, the Chief Executive
Officer’s direct reports and other key roles, and the succession
plans in place for Management Board and business critical roles;
} Regulatory changes – the Committee closely monitored regulatory
developments and the implications for ANZ both in Australia
and globally;
} Fitness and propriety – the Committee completed fit and proper
assessments for all existing and new Board Appointees;
} Remuneration – the Committee conducted an annual review of
remuneration for Non-Executive Directors and also reviewed the
compensation structure for the Chief Executive Officer and Senior
Management. The Committee also agreed with the Board the
contractual arrangements for a number of senior appointments
and departures at Board Appointee level;
} Remuneration Policy – the Committee reviewed ANZ’s Remuneration
Policy to ensure it remains appropriate for its intended purpose;
} Health, Safety and Diversity – the Committee received reports on
health and safety performance and related initiatives, and reviewed
ANZ’s diversity strategy and performance towards stated targets; and
} Employee Engagement and Culture – the Committee reviewed the
annual employee engagement results and action plan and also the
cultural alignment with ANZ Strategy and Values.
For more details on the activities of the Human Resources Committee,
please refer to the Remuneration Report on pages 28 to 50.
Risk Committee
The Board is principally responsible for approving the Group’s risk
appetite and risk tolerance, related strategies and major policies, for
the oversight of policy compliance, and for the effectiveness of the
risk and compliance management framework that is in place.
The purpose of the Risk Committee is to assist the Board in the
effective discharge of its responsibilities for business, market,
credit, equity and other investment, financial, operational, liquidity
and reputational risk management and for the oversight of the
management of ANZ’s compliance obligations.
The Committee is also authorised to approve credit transactions and
other related matters beyond the approval discretion of the Chief
Risk Officer.
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.
Substantive areas of focus in the 2013 financial year included:
} Regulatory change – the Committee monitored proposed new
regulations, both local and global, including in particular in relation
to capital and liquidity requirements for banks;
} Credit portfolios – the Committee received regular updates on
the quality of ANZ’s credit portfolios and the status of the more
significant exposures;
} Market, Funding and Liquidity Risk – the Committee received
regular updates on the Group’s exposures and responses to
changes in market conditions;
} Operational Risk and Compliance – the Committee received regular
updates on the Group’s approach and policy implementation in
response to market developments; and
} Business updates – the Committee received updates from
businesses across the Group.
A risk management and internal control system to manage ANZ’s
material business risks is in place, and Management reported to the
Board during the year as to the effectiveness of the management
of ANZ’s material business risks. In addition, the Board received
assurance from the Chief Executive Officer and the Chief Financial
Officer that the declaration provided in accordance with section
295A of the Corporations Act is founded on a sound system of
risk management and internal control and that the system is
operating effectively in all material respects in relation to financial
reporting risks.
For further information on how ANZ manages its risks arising
from financial instruments, please see the disclosures in relation
to AASB 7 ‘Financial Instruments: Disclosures’ in the notes to the
financial statements.
Directors’ Meetings
The number of Board meetings and meetings of Committees during the year the 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
Committee1
Shares
Committee1
Committee
of the Board1
G J Clark
P J Dwyer
P A F Hay
Lee Hsien Yang
G R Liebelt
I J Macfarlane
D E Meiklejohn
J P Morschel
M R P Smith
A M Watkins
A
11
11
11
11
3
11
11
11
11
11
B
10
11
11
11
3
11
11
11
11
11
A
6
6
6
6
6
6
B
6
6
6
6
6
6
A
B
4
4
4
4
4
3
4
4
A
5
5
5
5
2
5
5
B
5
5
5
5
2
5
5
A
8
8
8
2
8
8
8
B
8
8
8
2
8
8
8
A
4
4
1
4
4
B
4
4
1
4
4
A
B
A
B
1
3
1
1
1
3
1
1
A
1
2
1
2
1
6
6
6
1
B
1
2
1
2
1
6
6
6
1
Column A – Indicates the number of meetings the Director was eligible to attend.
Column B – Indicates the number of meetings attended. The Chairman is an ex-officio member of the Audit, Governance, Human Resources, Risk and Technology Committees.
With respect to Committee meetings, the table above records attendance of Committee members. Any Director is entitled to attend these meetings and from time to time Directors attend meetings
of Committees of which they are not a member.
1 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.
CORPORATE gOvERNANCE
63
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
For further information on risk management governance and ANZ’s
approach in relation to risk oversight and the management of
material business risks, please see the Corporate Governance section
of anz.com.
Technology Committee
The Technology Committee assists the Board in the effective
discharge of its responsibilities in relation to technology and related
operations. The Committee is responsible for:
} monitoring that appropriate key technology related controls are
in place;
} approving the technology strategy of ANZ;
} making recommendations to the Board regarding and monitoring
material technology investments;
} reviewing and monitoring the progress of the strategic and
operating plans for the management and control of technology
activities and services; and
} the approval and monitoring of ANZ’s information and technology
security strategy.
The Chief Information 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 2013 financial year included:
} Operational performance and major projects – the Committee
reviewed reports on operational performance (including service
and systems stability and performance) and monitored the
progress of major projects;
} Strategy – the Committee received updates on the progress of
ANZ’s Technology strategy. During the year the Committee visited
the US and met with some of the world’s leading technology-
based organisations to discuss the role of technology in driving
competitive advantage;
} Investment – the Committee reviewed Management’s progress in
delivering the business investment agenda; and
} Information Security – the Committee monitored the continuing
process of improving information security capability to address
constantly evolving security threats and increasing regulatory
requirements.
Additional Committees
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 Acquisition 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
Global Internal Audit
Global Internal Audit is a function independent of Management and
its role is to provide the Board and Management with an efficient and
independent appraisal of the internal controls established by ANZ’s
first (business) and second (Group and Divisional risk and finance
functions) lines of defence. Operating under a Board approved
Charter, the reporting line for the outcomes of work conducted by
Global Internal Audit is directly and solely to the Chair of the Audit
Committee, with a direct communication line to the Chief Executive
Officer and the external auditor.
The Global Internal 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.
All audit activities are conducted in accordance with ANZ policies
and values, as well as local and international auditing standards
promulgated by the professional auditing bodies, and the results
thereof are reported to the Audit Committee, Risk Committee and
Management. These results influence the performance assessment
of business heads.
Furthermore, Global Internal Audit monitors the remediation of audit
issues and highlights the current status of any outstanding audits.
External Audit
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 Stakeholder Engagement Model for Relationship with
the External Auditor. Under the Stakeholder Engagement Model,
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 Stakeholder Engagement Model also stipulates that the
Audit Committee:
} pre-approves all audit, audit related 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 Stakeholder Engagement Model 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.
64
The Stakeholder Engagement Model, 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 2013 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 10. In addition, the auditor has provided an independence
declaration under Section 307C of the Corporations Act 2001.
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 five years and cannot return for a further
five 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.
financial Controls
The Audit Committee oversees ANZ’s financial reporting policies and
controls, the integrity of ANZ’s financial statements, the relationship
with the external auditor, the work of Global Internal Audit, and the
audit committees of various significant subsidiary companies.
ANZ maintains a financial governance framework which evaluates
the design and tests the operational effectiveness 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.
Any material 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 referred to in the Directors’ Report on
page 10.
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;
} we identify conflicts of interest and manage them responsibly;
} 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 Policy;
} ANZ Use of Systems, Equipment and Information Policy;
} ANZ Fraud Policy;
} ANZ Expenses Policy;
} ANZ Equal Opportunity, Bullying and Harassment Policy;
} ANZ Health and Safety Policy;
} Conflict of Interest Policy;
} Trading in ANZ Securities Policy;
} Trading in Non-ANZ Securities Policy;
} ANZ Anti-Bribery and Anti-Corruption Policy; and
} ANZ Whistleblower Protection Policy.
Leaders are encouraged to run sessions for new direct reports and
ensure they, in turn, brief their teams where required on ANZ’s
values and ethical decision making within the team. The sessions
are designed to build line manager capability, equipping ANZ
leaders and their teams with tools and knowledge to make carefully
considered, values-based and ethical business decisions and to 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, understand and have complied with the
principles of the Employee Code, including key relevant extracts of
the policies set out above.
CORPORATE gOvERNANCE
65
ANZ ANNUAL REPORT 2013 CORPORATE gOvERNANCE (continued)
To support the Employee Code of Conduct and Ethics, ANZ’s
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.
Securities Trading
The Trading in ANZ Securities Policy prohibits trading in ANZ
securities by all employees, Directors and contractors who are aware
of information that could be reasonably expected to have a material
or significant effect on the price or value of an ANZ security and
which is not generally available.
The Policy specifically prohibits certain ‘restricted persons’ (which
includes ANZ Directors, senior executives and their associates) from
trading in ANZ securities during ‘blackout periods’ as defined in
the Policy. The Policy also provides that certain types of trading are
excluded from the operation of the trading restrictions under the
Policy, and for exceptional circumstances where trading may be
permitted during a prohibited period with prior written clearance.
ANZ Directors are required to obtain written approval from the
Chairman in advance before they or their associates trade in ANZ
securities. The Chairman of the Board is required to seek written
approval from the Chair of the Audit Committee. Senior executives
and other restricted persons are also required to obtain written
approval before they, or their associates, trade in ANZ securities.
The Policy also prohibits employees from hedging interests that have
been granted under any ANZ employee equity plan that are either
unvested or subject to a holding lock.
ANZ Directors and Management Board members are also prohibited
from using ANZ securities in connection with a margin loan or similar
financing arrangement which may be subject to a margin call or
loan-to-value ratio breach.
whistleblower Protection
The ANZ Global Whistleblower Protection Policy provides a
mechanism by which ANZ employees and contractors can
raise concerns regarding actual or suspected contraventions of
ANZ’s ethical and legal standards without fear of victimisation
or disadvantage.
Complaints may be made under the Policy to Managers, designated
Whistleblower Protection Officers, or via an independently managed
Whistleblower hotline.
Commitment to Shareholders
Shareholders are the owners of ANZ and the 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, the Annual
Report, the Shareholder 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 investor market and
the community. To this end, ANZ, outside of its scheduled results
announcements, issued additional Trading Updates to the market
during the 2013 financial year.
Should shareholders require any information, contact details for
ANZ and its Share Registrar are set out in ANZ’s Annual Report, the
2013 Shareholder Review, the half yearly shareholder newsletter and
the Shareholder centre section of anz.com.
Meetings
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.
Further details on meetings and presentations held throughout this
financial year are available on anz.com > About us > Shareholder
centre > Menu > Investor guide > Investor presentations. Prior to the
Annual General Meeting, shareholders are given 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.
Directors are also required to attend the Annual General Meeting
each year, barring unusual circumstances, and be available afterwards
to meet with and answer questions from shareholders.
Shareholders have the right to vote on various resolutions related
to company matters. Shareholders are encouraged to attend and
participate in meetings but, 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.
66
Continuous Disclosure
ANZ’s practice is to release price-sensitive information to the ASX in
a timely manner 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 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. 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.
A committee of senior executives (the Continuous Disclosure
Review Sub-Committee) also meets on a regular basis to review
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 Sustainability
ANZ aims to be a role model for responsible business growth and
behaviour as it pursues its goal of becoming a super regional bank.
ANZ’s purpose is to achieve sustainable growth and prosperity for
its customers, shareholders and people and the communities in
which ANZ operates. ANZ’s well established Corporate Sustainability
Framework, launched in 2009, supports its purpose.
During 2013, ANZ reviewed its Corporate Sustainability Framework,
taking into account issues of importance to ANZ and its stakeholders
and the areas in which it can achieve greatest impact. Following
review, ANZ’s realigned framework distinguishes between ‘Enhanced
Value’ – areas of the sustainability agenda distinctive to ANZ that could
offer competitive advantage – and fundamental responsibilities that
determine ANZ’s ‘Licence to Operate’.
Enhanced Value contributes to ANZ’s commercial value and is
delivered through:
} Sustainable development – integrating social and environment
considerations into business decisions, products and services to
help customers achieve their sustainability ambitions and deliver
long term value for stakeholders.
Working with institutional and commercial clients in this way
benefits ANZ customers, strengthens business relationships and
opportunities and reduces ANZ’s reputational and commercial risk.
} Diversity and inclusion – building the most diverse and inclusive
workforce of any major bank in the region.
ANZ employees come from more than 230 different cultural
backgrounds. Diversity assists ANZ to innovate, identify new
markets, connect with customers effectively and make better, more
informed decisions.
} Financial inclusion and capability – building the financial capability
of people across the region to promote financial inclusion and
progression of individuals and communities.
Delivery of financial education programs to the employees of
ANZ institutional and commercial clients strengthens business
relationships and opportunities. Delivery to low income and
excluded groups in many of the countries in which ANZ operates
supports business expansion plans as financial inclusion and
building financial capability is a policy aim of many governments.
Financially capable retail customers hold more financial products.
ANZ’s Licence to Operate activities include commitments to ensuring
that ANZ’s customers, people and suppliers, and the communities
and environment in which it operates, are treated in a manner
befitting a responsible corporate citizen.
The Corporate Sustainability and Diversity Committee is chaired
by the Chief Executive Officer. It provides strategic leadership on
ANZ’s corporate sustainability agenda and monitors progress and
results. The Committee reports to the Management Board and
Board Governance Committee. Each year, ANZ sets public targets
and a business-wide program of work to respond to key issues and
opportunities. This year ANZ achieved or made strong progress on
80% of its public targets. Detail is reported in ANZ’s 2013 Shareholder
Review and 2013 Corporate Sustainability Review.
In 2013 ANZ was again assessed the global banking sector leader in
the Dow Jones Sustainability Index (DJSI). This is the sixth year in the
past seven that ANZ has received this assessment. The Dow Jones
Sustainability Index assessment tracks the approach and performance
of companies across a broad range of criteria such as corporate
governance, risk management, codes of conduct and compliance,
environmental management and reporting, products and services,
brand management, HR practices and policies, stakeholder
engagement and community investment. ANZ performed strongly
across all criteria, with particularly notable ratings for risk and brand
management, policies and initiatives to create a diverse and highly
engaged workforce and investment in building financial capability
and inclusion in Australia, New Zealand and Asia-Pacific.
ANZ keeps interested stakeholders abreast of sustainability
developments through a monthly e-bulletin, and annual and interim
Corporate Sustainability reporting. ANZ follows the guidelines of the
Global Reporting Initiative for its full online corporate sustainability
reporting. Detailed information on ANZ’s approach and results is
available on anz.com > About us > Corporate Responsibility.
CORPORATE gOvERNANCE
67
ANZ ANNUAL REPORT 2013 CORPORATE GOVERNANCE (continued)
Diversity at ANZ
Gender Balance and Diversity at ANZ
Having the best connected and most respected workforce is a key
‘people’ foundation for achieving ANZ’s goals. ANZ is focused on
attracting, valuing and capitalising on the inherent strength of
a vibrant, diverse and inclusive team to innovate, connect with
customers and make better, more informed decisions for its business.
Gender Balance at Board, Senior Executive and
Management Levels
ANZ’s Board currently comprises ten Directors including two women
– 20% of the Board. This figure will increase to 25% following the
retirement of two Non-Executive Directors at the time of the 2013
AGM at which point the Board will comprise eight Directors.
Ms Watkins and Ms Dwyer joined the Board as Non-Executive Directors
in November 2008 and April 2012 respectively. Ms Watkins is Chair
of the Human Resources Committee and a member of the Audit
Committee and Governance Committee. Ms Dwyer is a member of the
Audit Committee, Risk Committee and Human Resources Committee.
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 unless invited by the Board to extend their
tenure due to special circumstances. In accordance with this policy,
Mr Meiklejohn and Dr Clark will retire at the time of the 2013 AGM
and Mr Morschel will retire following completion of the succession
process relating to the Chairman of the Board. The objective
previously set by the Board in relation to Board gender diversity
was that the new Directors appointed to replace the retiring
Directors would include at least one woman. This objective has been
achieved as evidenced by the appointment of Ms Dwyer in April
2012. The Board has now set a new objective which is to increase
the number of women on the Board over time as vacancies arise
following completion of the current succession process.
ANZ has three women on its Management Board: the CEO Global
Wealth & Group Managing Director Marketing, Innovation & Digital;
the Chief Information Officer; and the Group Managing Director
Human Resources. At Senior Executive and Executive levels, 22.2%
of leadership positions are held by women.
Overall representation of women in management remains relatively
steady at 38.7% (including those on Parental Leave), and 44.3% in
ANZ’s Australia Division. A low employment growth environment,
together with challenges accessing balanced candidate pools in
some geographic and some business areas has slowed ANZ’s progress
in achieving its targets, however improvements in particular occurred
at senior management from 28.1% to 30.6%.
Targets and Progress for Improving Outcomes in
Gender Equality
Annual public targets have been set for women in management
since 2004. Progress and results for 2013 are set out below including
a more detailed breakdown on progress in ANZ’s Senior Executive
and Executive ranks, in line with work undertaken by the Male
Champions of Change initiative to improve the consistency and detail
of reporting on women in management in Australia. These senior
roles typically involve leading countries, large businesses, operations
or projects, and/or strategy, policy and governance in specific areas
for the Group.
Group
Senior Executives and Executives1
• CEO-1: Direct reports to the CEO
• CEO-2: Direct reports to CEO-1
• CEO-3: All other Group 1 Senior Executives
• CEO-4: All other Group 2 Executives
Senior Manager2
Manager3
Total women in management4
Non-Management5
ANZ Overall
Notes
2012 Baseline
2013 Target
(excludes employees
on Parental Leave)
23.9%
24.9%
29.1%
40.6%
38.8%
28.1%
39.7%
37.8%
64.4%
54.2%
2013 Actual %
of women*
2013 Actual
number
of women*
2014 Target*
22.2%
23.1%
30.9%
20.8%
21.4%
30.6%
40.6%
38.7%
64.6%
54.6%
190
3
25
20
142
604
6,457
7,251
18,968
26,219
39.7%
* Includes employees on Parental Leave. Parental Leave data is available for Australia, New Zealand and Bangalore employees only.
1 Senior Executives and Executives comprise persons holding roles within ANZ designated as Group 1 and 2 respectively.
2 Senior Manager comprises persons holding roles within ANZ designated as Group 3.
3 Manager comprises persons holding roles within ANZ designated as Group 4.
4 Total women in management represents all roles within ANZ designated as Group 1 to 4.
5 Non-Management comprises persons holding roles within ANZ designated as Group 5 and 6.
68
Leadership, Governance and Accountability
The ANZ Chairman is actively involved in the Australian Institute of
Company Directors Chairmen’s Mentoring Program to advance more
women into Board positions. CEO Michael Smith is a member of the
Male Champions of Change program convened by the Australian
Sex Discrimination Commissioner, Elizabeth Broderick, in April 2010.
The program encourages and supports male CEOs and Directors
to use their individual and collective influence to ensure the issues
of gender equality and women’s representation in leadership are
elevated on the national Australian business agenda.
The Human Resources Committee plays an important role in relation
to ANZ’s people strategy, remuneration strategy and approach
to gender balance and diversity. This includes annual reviews of
progress on gender balance and diversity priorities (other than
gender diversity matters in connection with the Board, which
are the responsibility of the Governance Committee), succession
planning and overall representation of women in management.
The Human Resources Committee also reviews annual performance
and remuneration outcomes to ensure there is no unconscious or
systemic bias in related processes and outcomes.
Management Board sets annual CEO and Group shared targets
for improving the representation of women in management, and
creating a vibrant, diverse and inclusive culture. Progress is reviewed
monthly and results inform performance bonus outcomes.
The Corporate Sustainability and Diversity Committee which is
chaired by the CEO and meets five times per year is responsible
for advising the ANZ Board and Management Board on corporate
sustainability and diversity, setting diversity strategies, policies and
targets and monitoring progress. In 2013, the Committee determined
that ‘Building the most diverse and inclusive workforce in our region’
should be one of three sustainability priorities to be pursued by ANZ
over the coming years.
Building a Vibrant, Diverse and Inclusive Workforce
ANZ has prioritised building a vibrant, diverse and inclusive work
environment for all employees regardless of gender, age, ethnicity,
cultural background, disability, religion, sexual orientation, marital
status and caring responsibilities.
In 2013, ANZ conducted a comprehensive review of its workforce
diversity. The survey revealed that ANZ employees come from more
than 230 different cultural backgrounds, 43% identify with an Asian
cultural background and, regardless of gender or other diversity
grouping, there are no material differences in levels of engagement.
Globally, 88% of employees agreed or strongly agreed that their
manager treats them with respect, while 89% agreed or strongly
agreed ANZ is creating a workforce that is open and accepting of
individual difference.
Progress on 2013 publicly stated gender balance and diversity goals
Status
Improve employee engagement to at least 73%, with a
long term target of 83%.
Partially
achieved1
Improve perceptions of ‘values-based leadership’
amongst ANZ employees to at least 70%, with a long
term target of 80%.
Achieved
Achieve a 1% increase in the representation of women
in management in 2013, with a medium term goal of
40% and a long term target of 45% representation.
Did not
achieve
Achieve gender balance and greater cultural diversity
in ANZ’s key recruitment, talent development and
learning programs.
Play a leadership role in advancing women in
society and improving cultural diversity in business
through high profile business, government and
community partnerships.
Provide 230 positions to people from traditionally
excluded groups and disadvantaged backgrounds
through ANZ’s traineeships, graduate program and
permanent employment.
Develop and commence implementation of a
global approach to improving age diversity across
ANZ’s business.
Achieved
Achieved
Achieved
In progress
Publicly report outcomes of ANZ’s current
Reconciliation Action Plan and Disability Action Plan.
Partially
achieved2
1 ANZ achieved an improvement in employee engagement to 72%, on track for ANZ’s long
term target.
2 ANZ reported on its Accessibility and Inclusion Plan (formerly Disability Action Plan) in
May 2013. ANZ will refresh its Indigenous Action Plan (formerly Reconciliation Action Plan)
in December 2013, reporting on outcomes achieved through the current plan.
Prevention of Sex-Based Harassment and Discrimination
ANZ reviews its Equal Employment Opportunity (EEO) policies and
training annually to ensure they are up-to-date and proactively
educating employees and their managers on harassment, bullying
and victimisation for sex-based issues. All ANZ employees are
required to complete EEO training on an annual basis, and reported
incidents related to sexual harassment, bullying and victimisation for
sex-based issues are carefully tracked and managed.
Recruitment, Progression and Development Practices
ANZ aims to achieve gender balance and diversity in its key
recruitment, talent development and learning programs to ensure
it is building a strong pipeline of men and women leaders for the
future. For example, ANZ’s 2014 graduate intake is 50% women and
24% of the total intake speaks an Asian language; one graduate
has a self-disclosed disability and four graduates are from an
Indigenous background. ANZ’s latest intake of the Generalist Banker
accelerated development program has 45% women and 73% of
all participants speak an Asian language. Of the participants in the
Building Enterprise Talent program, 50% are women and 60% of all
participants have had more than three years international experience.
45% of participants in the Leadership Pathway training programs
are women.
CORPORATE GOVERNANCE
69
ANZ ANNUAL REPORT 2013 Community Investment
ANZ has made a long term public commitment to invest in
the communities in which it operates and contributed around
$15.1 million in cash, time and in-kind services during the year ended
30 September 2013. Adding ‘foregone revenue’ such as the cost of
providing low or fee free accounts to government benefit recipients,
ANZ’s total contribution amounted to over $65.1 million.
Building financial inclusion and capability is a key element of ANZ’s
Corporate Sustainability framework, targeting especially those
in disadvantaged communities who are most at risk of financial
exclusion. For this reason approximately $4.7 million was invested in
programs designed to build money management skills and savings:
Saver Plus, MoneyMinded and MoneyBusiness. MoneyMinded is
the most widely used financial literacy program in Australia. In 2013
MoneyMinded received a MoneySmart Award for “Outstanding
Achievement” in the Community category, reflecting its effectiveness
and the success of the corporate and community partnership
approach to program delivery.
MoneyMinded has been adapted for use in Asia and the Pacific
and is now delivered in 17 countries in which ANZ operates. RMIT
University estimates that since 2003, more than 240,000 people have
completed MoneyMinded.
ANZ supports many community causes and organisations through
its Giving, Investing, Volunteering and Emergency (GIVE) program.
This highlights the ways ANZ contributes to local communities
by giving donations to charities, investing in partnerships with
community organisations, volunteering skills and time to support
community causes and responding to emergencies through
supporting disaster relief and recovery activities. This year ANZ
contributed over $900,000 to communities affected by natural
disasters in the locations in which it operates.
ANZ offers all staff at least one day of paid volunteer leave per year
to make a difference in their local communities. In the past year,
ANZ staff volunteered more than 89,000 hours. A number of staff
contribute to non-profit organisations through workplace giving,
which ANZ matches dollar for dollar.
Further details can be accessed at anz.com/cr.
Political Donations
For the year to 30 September 2013, ANZ donated $150,000 to the
Liberal Party of Australia and $75,000 to the Australian Labor Party.
CORPORATE gOvERNANCE (continued)
Pay Equity
ANZ tracks progress in achieving pay equity across the organisation.
The gender pay differential between males and females (based
on like-for-like job size) continues to be minimal, with further
reductions achieved in 2013. Annual reviews of ANZ’s performance
and remuneration outcomes occur to ensure balance and parity,
with absolute performance outcomes and relative performance
assessments (which inform remuneration outcomes) being equitably
applied between males and females.
Parental Leave and flexible work Arrangements
ANZ offers flexible work arrangements, breaks from work and other
support in special circumstances to help balance life priorities with
work and to manage careers. Considerable work was completed
in 2013 to enhance ANZ’s flexible working policies and support
resources, and build awareness and profile of key leaders (male and
female) who are role models of flexible working. The 2013 employee
survey showed that 82% of employees believe ANZ supports their
efforts to balance their work and personal commitments.
Recognition and Support for Equality and Inclusion in
ANZ’s Communities
In 2013 ANZ was again assessed by the Dow Jones Sustainability
Index as the leading bank globally, including specific recognition
for its gender balance and diversity progress. ANZ also continues to
be recognised as an Employer of Choice for Women by WGEA – the
Australian Government’s Workplace Gender Equality Agency. In
New Zealand ANZ was recognised by the United Nations Women
National Committee for excellence in Equal Opportunity and
Non-discrimination.
ANZ partners and/or participates in the Male Champions of Change
initiative; Chief Executive Women; and Melbourne Business School’s
Gender Equality Project. ANZ is a founding member of the annual
Sustaining Women in Business conference and the Diversity Council
of Australia; a member of Pride in Diversity and the Australian
Network on Disability; and it supports the Australian Government’s
‘Racism, it stops with me’ program.
future Goals
Building the most diverse and inclusive workforce of any major bank
in our region.
2014 Gender Balance, Diversity and Inclusion Goals:
Improve employee engagement to at least 74%.
Improve perceptions of ‘values-based leadership’ amongst ANZ
employees to at least 73%.
Increase the representation of women in management by 1%
and achieve gender balance in ANZ’s key recruitment, talent and
leadership programs.
Employ 230 people through ANZ’s traineeships, graduate
program and permanent employment from disadvantaged and
under-represented groups to enhance diversity and support
economic and social inclusion in ANZ’s communities.
Achieve 80% favourable perceptions of ‘Involvement and
Empowerment’ in ANZ’s employee survey as a measure of ANZ’s
progress in building a diverse and inclusive workforce.
70
SECTION 2
financial Statements
Income Statement
Statement of Comprehensive Income
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity
Notes to the financial Statements
1 Significant Accounting Policies
2 Critical Estimates and Judgements Used
Income Tax Expense
in Applying Accounting Policies
3
Income
4 Expenses
5 Compensation of Auditors
6
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 and Associates
18 Tax Assets
19 Goodwill and Other Intangible Assets
20 Other Assets
21 Premises and Equipment
22 Due to Other Financial Institutions
23 Deposits and Other Borrowings
24 Income Tax Liabilities
72
72
73
74
75
76
78
78
89
91
92
93
94
95
96
97
97
97
97
104
105
106
106
108
109
110
111
111
112
113
113
ANZ ANNUAL REPORT 2013
114
114
115
116
118
120
121
25 Payables and Other Liabilities
26 Provisions
27 Bonds and Notes
28 Loan Capital
29 Share Capital
30 Reserves and Retained Earnings
31 Capital Management
32 Assets Charged as Security for Liabilities and
Collateral Accepted as Security for Assets
124
33 Financial Risk Management
125
34 Fair Value of Financial Assets and Financial Liabilities 147
155
35 Maturity Analysis of Assets and Liabilities
156
36 Segment Analysis
159
37 Notes to the Cash Flow Statements
161
38 Controlled Entities
162
39 Associates
163
40 Transfers of Financial Assets
164
41 Fiduciary Activities
42 Commitments
164
43 Credit Related Commitments, Guarantees,
Contingent Liabilities and Contingent Assets
44 Superannuation and Other Post Employment
Benefit Schemes
45 Employee Share and Option Plans
46 Key Management Personnel Disclosures
47 Transactions with Other Related Parties
48 Life Insurance Business
49 Exchange Rates
50 Events since the End of the Financial Year
Directors’ Declaration and Responsibility Statement
Independent Auditor’s Report
165
168
173
178
182
182
186
186
187
188
SECTION 2
71
ANZ ANNUAL REPORT 2013
FINANCIAL STATEMENTS
INCOME STATEMENT FOR THE yEAR ENDED 30 SEPTEMbER
Interest income
Interest expense
Net interest income
Other operating income
Net funds management and insurance income
Share of associates’ profit
Operating income
Operating expenses
Profit before credit impairment and income tax
Provision for credit impairment
Profit before income tax
Income tax expense
Profit for the year
Comprising:
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 78 to 186 form an integral part of these financial statements.
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
28,627
(15,869)
30,538
(18,428)
25,513
(16,149)
27,340
(18,372)
12,758
3,775
1,431
482
18,446
(8,236)
10,210
(1,188)
9,022
(2,740)
6,282
(10)
6,272
231.3
224.4
164
12,110
4,003
1,203
395
17,711
(8,519)
9,192
(1,198)
7,994
(2,327)
5,667
(6)
5,661
213.4
205.6
145
9,364
5,186
203
–
14,753
(6,505)
8,248
(1,132)
7,116
(1,770)
5,346
–
5,346
n/a
n/a
164
8,968
5,015
207
–
14,190
(6,715)
7,475
(985)
6,490
(1,615)
4,875
–
4,875
n/a
n/a
145
Note
3
4
3
3
3
4
16
6
8
8
7
72
STATEMENT OF COMPREHENSIvE INCOME FOR THE yEAR ENDED 30 SEPTEMbER
Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Actuarial gain/(loss) on defined benefit plans
Income tax on items that will not be reclassified subsequently to profit or loss
Actuarial gain/(loss) on defined benefit plans
Items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve
Exchange differences taken to equity
Available-for-sale assets
Valuation gain/(loss) taken to equity
Transferred to income statement
Cash flow hedges
Valuation gain/(loss) taken to equity
Transferred to income statement
Share of associates’ other comprehensive income1
Income tax on items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve
Available-for-sale assets revaluation reserve
Cash flow hedge reserve
Other comprehensive income net of tax
Total comprehensive income for the year
Comprising total comprehensive income attributable to:
Non-controlling interests
Shareholders of the Company
Consolidated
The Company
Note
2013
$m
6,282
2012
$m
5,667
2013
$m
5,346
2012
$m
4,875
44
30
30
30
28
(14)
(54)
10
(19)
(2)
(35)
6
1,712
(416)
234
(174)
13
3
(186)
–
18
–
(7)
52
1,619
7,901
15
7,886
259
(246)
43
17
(31)
(1)
(17)
(17)
(453)
5,214
3
5,211
32
4
(78)
24
–
–
(20)
16
191
5,537
–
5,537
153
(171)
32
27
–
–
4
(17)
(175)
4,700
–
4,700
1 Share of associates’ other comprehensive income for 2013 is comprised of available-for-sale assets $18 million (2012: $(28) million), foreign currency translation reserve
$(1) million (2012: $1 million) and cash flow hedge reserve $1 million (2012: $(4) million).
The notes appearing on pages 78 to 186 form an integral part of these financial statements.
FINANCIAL STATEMENTS
73
ANZ ANNUAL REPORT 2013ANZ ANNUAL REPORT 2013 Note
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
9
10
11
12
13
14
17
17
18
18
19
48
20
21
22
23
12
24
24
48
25
26
27
28
29
29
30
30
39,737
22,177
41,288
45,878
28,135
469,295
2,106
–
–
4,123
20
721
7,690
32,083
7,574
2,164
36,578
17,103
40,602
48,929
20,562
427,823
1,478
–
–
3,520
33
785
7,082
29,895
5,623
2,114
33,838
18,947
31,464
41,011
23,823
372,467
990
71,354
14,955
841
18
936
2,124
–
5,246
983
32,782
14,167
30,490
43,266
17,841
350,060
514
63,660
11,516
897
13
768
1,752
–
3,747
1,534
702,991
642,127
618,997
573,007
36,306
439,674
47,509
–
972
14
32,388
3,511
12,594
1,228
70,376
12,804
657,376
45,615
23,641
871
(907)
21,948
45,553
62
45,615
30,538
397,123
52,639
–
781
18
29,537
3,949
10,109
1,201
63,098
11,914
600,907
41,220
23,070
871
(2,498)
19,728
41,171
49
41,220
34,149
359,013
41,827
64,649
882
12
–
–
9,545
825
56,968
12,062
579,932
39,065
23,914
871
(473)
14,753
39,065
–
39,065
28,394
333,536
46,047
57,729
726
12
–
–
7,554
745
49,975
11,246
535,964
37,043
23,350
871
(686)
13,508
37,043
–
37,043
bALANCE SHEET AS AT 30 SEPTEMbER
Assets
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Regulatory deposits
Due from controlled entities
Shares in controlled entities
Shares in associates
Current tax assets
Deferred tax assets
Goodwill and other intangible assets1
Investments relating to insurance business
Other assets
Premises and equipment
Total assets
Liabilities
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Policy liabilities
External unit holder liabilities (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
1 Excludes notional goodwill in equity accounted entities.
The notes appearing on pages 78 to 186 form an integral part of these financial statements.
74
CASH FLOW STATEMENT FOR THE yEAR ENDED 30 SEPTEMbER
Consolidated
2013
$m
2012
$m
Note
The Company
2013
$m
2012
$m
Cash flows from operating activities
Interest received
Interest paid
Dividends received
Other operating income received
Other operating expenses paid1
Income taxes (paid)/refunds received
Net cash flows from funds management & insurance business
Premiums, other income and life investment deposits received
Investment income and policy deposits received/(paid)
Claims and policy liability payments
Commission expense (paid)/income received
Cash flows from operating activities before changes in operating assets and liabilities
Changes in operating assets and liabilities arising from cash flow movements
(Increase)/decrease in operating assets
Liquid assets
Due from other financial institutions
Trading Securities
Loans and advances
Net intragroup loans and advances
Net cash flows from investments backing policy liabilities
Purchase of insurance assets2
Proceeds from sale/maturity of insurance assets
Increase/(decrease) in operating liabilities:
Deposits and other borrowings2
Due to other financial institutions
Payables and other liabilities
Changes in operating assets and liabilities arising from cash flow movements
Net cash provided by/(used in) operating activities
Cash flows from investing activities
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 assets
Net cash provided by/(used in) investing activities
Cash flows from financing activities
Bonds and notes
Issue proceeds
Redemptions
Loan capital
Issue proceeds
Redemptions
Dividends paid
Share capital issues
Share buyback
37(A)
37(C)
37(C)
Net cash provided by/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
37(B)
28,752
(16,333)
114
9,616
(7,351)
(2,494)
6,093
198
(4,983)
(446)
13,166
(72)
674
768
(28,952)
–
(3,505)
4,341
27,184
3,033
969
4,440
17,606
30,421
(18,827)
80
7,432
(7,890)
(2,835)
5,955
78
(4,428)
(439)
9,547
435
(4,256)
(4,589)
(32,748)
–
(6,917)
7,866
32,630
4,184
209
(3,186)
6,361
25,706
(16,613)
1,340
9,437
(5,874)
(2,043)
152
–
–
51
27,255
(18,742)
1,437
6,300
(6,509)
(2,454)
150
–
–
58
12,156
7,495
860
746
(736)
(24,295)
(3,734)
–
–
23,668
4,283
929
1,721
13,877
419
(3,886)
(2,275)
(28,592)
(283)
–
–
30,834
4,836
441
1,494
8,989
(16,320)
10,224
(30,441)
31,200
(12,944)
8,042
(28,558)
28,839
(2)
81
(356)
–
(1,234)
(7,607)
(1)
18
(319)
20
(702)
(225)
(484)
25
(354)
–
(507)
(6,222)
(327)
36
(264)
–
(473)
(747)
18,895
(19,773)
24,352
(15,662)
16,658
(15,766)
19,442
(12,038)
1,868
(1,465)
(3,226)
30
(425)
(4,096)
5,903
41,450
1,670
49,023
2,724
(2,593)
(2,219)
60
–
6,662
12,798
30,021
(1,369)
41,450
1,869
(1,465)
(3,239)
30
(425)
(2,338)
5,317
36,268
1,130
42,715
2,502
(2,121)
(2,230)
60
–
5,615
13,857
23,651
(1,240)
36,268
1 During the year, the Group and The Company reclassified on market share purchases used to satisfy equity-settled share-based payments from financing to operating cash flows
(2012: $55 million).
2 During the year, the Group reclassified certain transactions undertaken by the Wealth business in relation to investments in securities issued by entities within the Group in order to better reflect
the nature of the cash flows for the Group (2012: $1,032 million).
The notes appearing on pages 78 to 186 form an integral part of these financial statements.
FINANCIAL STATEMENTS
75
ANZ ANNUAL REPORT 2013 STATEMENT OF CHANgES IN EqUIT y FOR THE yEAR ENDED 30 SEPTEMbER
Consolidated
As at 1 October 2011
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with equity holders in their
capacity as equity holders:
Dividends paid
Dividend income on Treasury shares held within
the Group’s life insurance statutory funds
Dividend reinvestment plan
Transactions with non-controlling interests
Other equity movements:
Share-based payments/(exercises)
OnePath Australia Treasury shares
Group share option scheme
Group employee share acquisition scheme
Transfer of options/rights lapsed
As at 30 September 2012
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with equity holders in their
capacity as equity holders:
Dividends paid
Dividend income on Treasury shares held within
the Group’s life insurance statutory funds
Dividend reinvestment plan
Transactions with non-controlling interests
Other equity movements:
Share-based payments/(exercises)
OnePath Australia Treasury shares
Group share option scheme
Group employee share acquisition scheme
Group share buyback
Transfer of options/rights lapsed
Ordinary
share capital
$m
Preference
shares
$m
21,343
871
–
–
–
–
–
1,461
–
–
78
60
128
–
–
–
–
–
–
–
–
–
–
–
–
–
Shareholders’
equity
attributable
to equity
holders of
the Bank
$m
37,906
5,661
(450)
5,211
Retained
earnings
$m
17,787
5,661
(44)
5,617
Non-controlling
interests
$m
Total
shareholders’
equity
$m
48
6
(3)
3
37,954
5,667
(453)
5,214
Reserves1
$m
(2,095)
–
(406)
(406)
(3,702)
(3,702)
(2)
(3,704)
–
–
–
(1)
6
–
–
–
(2)
24
–
–
–
–
–
–
2
24
1,461
(1)
6
78
60
128
–
23,070
871
(2,498)
19,728
41,171
–
–
–
–
–
843
–
–
7
30
116
(425)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,600
1,600
6,272
14
6,286
6,272
1,614
7,886
–
–
–
(10)
3
–
–
–
–
(2)
(4,088)
(4,088)
20
–
–
–
–
–
–
–
2
20
843
(10)
3
7
30
116
(425)
–
–
–
–
–
–
–
–
–
49
10
5
15
(1)
–
–
(1)
–
–
–
–
–
–
24
1,461
(1)
6
78
60
128
–
41,220
6,282
1,619
7,901
(4,089)
20
843
(11)
3
7
30
116
(425)
–
As at 30 September 2013
23,641
871
(907)
21,948
45,553
62
45,615
1 Further information on other comprehensive income is disclosed in note 30 to the financial statements.
The notes appearing on pages 78 to 186 form an integral part of these financial statements.
76
The Company
As at 1 October 2011
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with equity holders in their
capacity as equity holders:
Dividends paid
Dividend reinvestment plan
Other equity movements:
Share-based payments/(exercises)
Group share option scheme
Group employee share acquisition scheme
Transfer of options/rights lapsed
Ordinary
share capital
$m
Preference
shares
$m
21,701
871
–
–
–
–
1,461
–
60
128
–
–
–
–
–
–
–
–
–
–
Shareholders’
equity
attributable
to equity
holders of
the Bank
$m
34,379
4,875
(175)
4,700
Retained
earnings
$m
12,351
4,875
(29)
4,846
Reserves1
$m
(544)
–
(146)
(146)
–
–
6
–
–
(2)
(3,691)
–
(3,691)
1,461
–
–
–
2
6
60
128
–
As at 30 September 2012
23,350
871
(686)
13,508
37,043
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transactions with equity holders in their
capacity as equity holders:
Dividends paid
Dividend reinvestment plan
Other equity movements:
Share-based payments/(exercises)
Group share option scheme
Group employee share acquisition scheme
Group share buyback
Transfer of options/rights lapsed
–
–
–
–
–
843
–
30
116
(425)
–
–
–
–
–
–
–
–
–
–
–
–
–
212
212
–
–
–
3
–
–
–
(2)
5,346
(21)
5,325
–
(4,082)
–
–
–
–
–
2
5,346
191
5,537
–
(4,082)
843
3
30
116
(425)
–
As at 30 September 2013
23,914
871
(473)
14,753
39,065
1 Further information on other comprehensive income is disclosed in note 30 to the financial statements.
The notes appearing on pages 78 to 186 form an integral part of these financial statements.
Non-controlling
interests
$m
Total
shareholders’
equity
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
34,379
4,875
(175)
4,700
(3,691)
1,461
6
60
128
–
37,043
5,346
191
5,537
–
(4,082)
843
3
30
116
(425)
–
39,065
FINANCIAL STATEMENTS
77
ANZ ANNUAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS
1: Significant Accounting Policies
The financial statements of Australia and New Zealand Banking
Group Limited (the Company) and its controlled entities (the Group)
for the year ended 30 September 2013 were authorised for issue in
accordance with the resolution of the Directors on 8 November 2013.
The principal accounting policies adopted in the preparation of these
financial statements are set out below. These policies have been
consistently applied by the Company and all Group entities for all
years presented in these financial statements.
The Company is incorporated and domiciled in Australia. The address
of the Company’s registered office is ANZ Centre, Level 9, 833 Collins
Street, Docklands, Victoria, Australia 3008.
The Company and Group are for-profit entities.
A) BASIS Of PREPARATION
i) Statement of compliance
The financial statements of the Company and Group are general purpose
financial statements which have been prepared in accordance with
the relevant provisions of the Banking Act 1959, Australian Accounting
Standards (AASs) and other authoritative pronouncements of the
Australian Accounting Standards Board (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. The Group’s application of AASs
ensures that the financial statements of the Company and Group comply
with IFRS.
ii) Use of estimates and assumptions
The preparation of these financial statements requires the use of
management judgement, estimates and assumptions that affect
reported amounts and the application of accounting policies.
Discussion of the critical accounting treatments, which include
complex or subjective decisions or assessments, are covered in note 2.
Such estimates and judgements are reviewed on an ongoing basis.
iii) Basis of measurement
The financial information 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 adjustment on the
underlying hedged exposure;
} available-for-sale financial assets;
} 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 (AASB
1038), life insurance liabilities are measured using the Margin on
Services model.
In accordance with AASB 119 Employee Benefits (AASB 119),
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 commencing on or before 1 October 2012
have been applied to the Group effective from their 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.
78
There has been no other change in accounting policy during the year.
v) Rounding
The Company 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
statements 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.
During the current year the reporting treatment of chattel mortgages
changed from ‘hire purchase’ to ‘term loans – non housing’ within
the net loans and advances balance to better reflect the nature of
the asset financing transactions. As a result, 30 September 2012
hire purchase was reduced by $7,100 million; unearned income
reduced by $994 million; and term loans – non housing increased by
$6,106 million for both the Company and the Group.
vii) Principles of consolidation
Subsidiaries
The consolidated financial statements of the Group comprise the
financial statements of the Company and all its subsidiaries where it
is determined that there is a capacity to control.
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(iii).
The effect of all transactions between entities in the Group is eliminated.
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.
In the Company’s financial statements investments in subsidiaries are
carried at cost less accumulated impairment losses.
ANZ ANNUAL REPORT 2013
1: Significant Accounting Policies (continued)
Associates
The Group applies the equity method of accounting for associates.
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 is included in the
consolidated income statement. Shares in associates are carried in the
consolidated balance sheet at cost plus the Group’s share of changes
in post-acquisition net assets less accumulated impairment. Interests
in associates are reviewed for any indication of impairment at least
at each reporting date. Where an indication of impairment exists
the recoverable amount of the associate is determined based on the
higher of the associate’s fair value less costs to sell and its value in use.
A discounted cash flow (DCF) methodology and other methodologies
such as the capitalisation of earnings methodology (CEM) are used to
determine the resonableness of the recoverable amount calculation.
In the Company’s financial statements, investments in associates are
carried at cost less accumulated impairment losses.
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.
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 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.
Translation to presentation currency
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 are translated at the rates of exchange ruling at
reporting date;
} revenue and expenses 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.
Goodwill arising on the acquisition of a foreign operation is treated as
an asset of the foreign operation and translated at the rate ruling at
reporting 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. This is assessed on a regular basis.
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 origination fees, together with
related direct costs, are deferred and recognised as an adjustment to
the effective interest rate on a loan once drawn.
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 assets
The gain or loss on the disposal of assets is determined as the
difference between the carrying amount of the asset at the time of
disposal and the proceeds of disposal, net of incremental disposal
costs. This is recognised as an item of other income in the year in
which the significant risks and rewards of ownership transfer to
the buyer.
NOTES TO THE FINANCIAL STATEMENTS
79
ANZ ANNUAL REPORT 2013 1: Significant Accounting Policies (continued)
C) ExPENSE RECOGNITION
i) Interest expense
Interest expense on financial liabilities measured at amortised cost is
recognised 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 and certain customer
incentive payments 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 45 and comprise the ANZ
Employee Share Acquisition Plan and the ANZ Share Option Plan.
ANZ Employee Share Acquisition Plan
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.
ANZ Share Option Plan
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
share-based 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.
A deferred share right or 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. For equity grants made after
1 November 2012, any portion of the award which vests may
be satisfied by a cash equivalent payment rather than shares at
the Board’s discretion. The fair value of deferred share rights or
performance rights is determined at grant date using an option
pricing model, taking into account market-based performance
conditions. The fair value is expensed over the relevant vesting
period. This is recognised as share-based compensation 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 reversed when an employee fails to
satisfy the minimum service period specified in the award upon
resignation, termination or notice of dismissal for serious misconduct.
The expense is not reversed where the award does not vest due to
the failure to meet a market-based performance condition.
80
iv) Lease payments
Leases entered into by the Group as lessee are predominantly
operating leases. 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).
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, and associates, 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.
Notes to the fiNaNcial statemeNts (continued) 1: Significant Accounting Policies (continued)
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 not effective accounting 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:
} the asset represents investments backing policy liabilities
(refer note 1 (I)(viii));
} it is a life investment contract liability (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. Valuation adjustments
are integral in determining the fair value of derivatives. This includes
a credit valuation adjustment (CVA) to reflect the credit worthiness of
the counterparty and funding valuation adjustment (FVA) to account
for the funding cost inherent in the portfolio.
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 in 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. 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 the Group 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.
NOTES TO THE FINANCIAL STATEMENTS
81
ANZ ANNUAL REPORT 2013 1: Significant Accounting Policies (continued)
iii) Available-for-sale financial assets
Available-for-sale financial 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 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 except for interest, dividends and foreign
exchange gains and losses on monetary assets, which are recognised
directly in the income statement. When the asset is sold, the
cumulative gain or loss relating to the asset is transferred from the
available-for-sale revaluation reserve to the income statement.
Where there is objective evidence of impairment on an available-
for-sale financial 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 other 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.
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 asset’s carrying amount and the estimated future cash
flows discounted to their present value. As the discount unwinds
during the period between recognition of impairment and recovery
of the cash flow, it is recognised in interest income.
Impairment of capitalised acquisition-related 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.
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. A counterparty liability is
recognised and classified as 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, or due from other financial institutions.
The security is not included in the balance sheet. Interest income is
accrued on the underlying loan amount.
82
Notes to the fiNaNcial statemeNts (continued) 1: Significant Accounting Policies (continued)
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 or a portion of
the risks and rewards of the transferred assets. If all, or substantially
all, of 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
(CGU) to which the goodwill relates. Where the goodwill balance
exceeds the assessed 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
Software and computer system costs include 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 major core infrastructure
projects where the useful life has been determined to be 7 or 10
years. The amortisation period for software assets is reviewed at least
annually. Where the expected useful life of the asset is different from
previous estimates the amortisation period is changed accordingly.
At each reporting date, software assets are reviewed for impairment
indicators. 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 and
distribution agreements 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
The amortisation period is reviewed at least at the end of each annual
reporting period and changed if there has been a significant change
in the pattern of expected future benefits from the asset.
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
1.5%
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.
The depreciation rate is reviewed at least at the end of each annual
reporting period and changed if there has been a significant change
in the pattern of expected future benefits from the asset.
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
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 on an
internal measure of the costs associated with the borrowing of funds.
NOTES TO THE FINANCIAL STATEMENTS
83
ANZ ANNUAL REPORT 2013 1: Significant Accounting Policies (continued)
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. Deposits and other borrowings not designated
at fair value through profit or loss on initial recognition are measured
at amortised cost. The interest expense is recognised using the
effective interest rate method.
ii) financial liabilities at fair value through profit or loss
Refer to note 1(E)(i).
iii) Acceptances
The exposure arising from the acceptance of bills of exchange that
are sold into the market is recognised as a liability. An asset of equal
value is recognised to reflect the offsetting claim against the drawer
of the bill. Bill acceptances generate fee income that is recognised in
the income statement when earned.
iv) 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.
v) financial guarantee contracts
Financial guarantee contracts that require the issuer to make
specified payments to reimburse the holder for a loss the holder
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 reporting date. These estimates
are determined based on experience of similar transactions and the
history of past losses.
vi) Derecognition
Financial liabilities are derecognised when the obligation specified
in the contract is discharged, cancelled or expires.
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 an asset of
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 made by the Group are recognised directly against
the net defined benefit position.
viii) 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.
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.
NON-fINANCIAL LIABILITIES
G) EqUITY
vii) Employee benefits
Leave benefits
The liability for long service leave is calculated and accrued for in
respect of all applicable employees (including on-costs) using an
actuarial valuation. 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.
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.
84
Notes to the fiNaNcial statemeNts (continued) 1: Significant Accounting Policies (continued)
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 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
Capital. However, the corresponding life investment contract and
insurance contract liabilities, and related changes in the liabilities
recognised in the income statement, 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 other operating 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.
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)).
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 and other short-term highly liquid investments
with terms to maturity of three months from the date of acquisition
or less that are readily convertible to known amounts of 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. Changes in the internal organisational
structure of the Group can cause the composition of the Group’s
reportable segments to change. Where this occurs corresponding
segment information for the previous financial year is changed,
unless the information is not available and the cost to develop it
would be excessive.
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.
I) LIfE INSURANCE AND fUNDS MANAGEMENT BUSINESS
The Group conducts its life insurance and funds management
business (the Life Business) in Australia primarily through OnePath
Life Limited, which is registered under the Life Insurance Act 1995
(Life Act) and in New Zealand through OnePath Life (NZ) Limited and
OnePath Insurance Services (NZ) Limited which are licensed under
the Insurance (Prudential Supervision) Act 2010.
The operations of the Life Business are conducted within separate
statutory funds. The assets of the Life Business in Australia are
allocated between policyholder and shareholder funds in accordance
with the requirements of the Life Act. Under AASs, 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
shareholders’ funds.
NOTES TO THE FINANCIAL STATEMENTS
85
ANZ ANNUAL REPORT 2013 1: Significant Accounting Policies (continued)
(i) Policy liabilities
Policy liabilities include liabilities arising from life insurance contracts
and life investment contracts.
Life investment contract liabilities
Life investment contracts involve both the origination of a financial
instrument and the provision of investment management services.
Life insurance contracts are insurance contracts regulated under
the Life Act and similar contracts issued by entities operating
outside Australia. 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.
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.
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.
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.
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 contracts) are accounted for 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) model using a projection method or using an 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, structure and term of the liabilities. Expected future
cash flows include premiums, 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 APRA 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.
86
(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 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.
(iv) Revenue
Life insurance premiums
Life insurance premiums earned by providing services and bearing
risks are treated as revenue. Life insurance deposit premiums
are recognised as an increase in policy liabilities. For annuity, risk
and traditional business, all premiums are recognised as revenue.
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 life investment contracts.
Amounts received from policyholders in respect of life investment
contracts are recognised as an investment contract liability where
the receipt is in the nature of a deposit.
Notes to the fiNaNcial statemeNts (continued) (viii) Investments backing policy liabilities
All investments backing policy liabilities are designated as at fair
value through profit or loss. For OnePath Australia, all policy holder
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 43 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.
1: Significant Accounting Policies (continued)
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 underlying direct insurance
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 are
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 from future 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 Australian Prudential Regulation Authority,
and on an equitable basis to the different classes of business in
accordance with Division 2 of Part 6 of the Life Act.
NOTES TO THE FINANCIAL STATEMENTS
87
ANZ ANNUAL REPORT 2013 1: Significant Accounting Policies (continued)
iii) Accounting Standards not early adopted
The following standards (except AASB 2011-4) were available for early adoption, but have not been applied by the Company or Group
in these financial statements.
AASB standard
AASB 10 Consolidated
Financial Statements
AASB 12 Disclosure of
Interests in Other Entities
AASB 13 Fair Value
Measurement
Possible impact on the Company and the Group’s financial report in period of initial adoption
This standard replaces the guidance on control and consolidation in AASB 127 Consolidated and
Separate Financial Statements and Interpretation 112 Consolidation – Special Purpose Entities.
The standard provides a single definition of ‘control’ based on whether the investor is exposed
to, or has rights to, the variable returns from its involvement with an investee and has the ability
to affect those returns through its power over the investee. The standard also provides guidance
on how the control principle is applied in certain situations, such as where potential voting rights
exist or where voting rights are not the dominant factor in determining whether control exists, for
example, where relevant activities are directed through contractual means.
The most significant impact of applying this standard relates to the judgemental approach
required when assessing control over the Group’s OnePath fund entities. While it is likely that
additional fund entities will be consolidated, the financial impact is expected to be minimal on
the net assets and earnings of the Group.
This standard applies where an entity has an ‘interest in another entity’ (essentially, any
contractual or non-contractual interest that exposes an entity to the returns from the
performance of the other entity). Such interests include a subsidiary, joint arrangement, associate
or an unconsolidated structured entity. A range of disclosures is required which assist users to
evaluate the nature, extent and financial effects and risks associated with an entity’s interest
in other entities. These disclosures replace and significantly enhance those in other standards
applicable to subsidiaries, joint arrangements or associates and impose new disclosures
particularly around structured entities, a much broader concept than special purpose entity.
As the amendments only relate to disclosure, there will be no impact on the Company or Group.
This standard provides a single source of guidance on fair value measurement and requires
certain disclosures regarding fair value. It does not change when fair value is required to
be applied, but rather provides guidance on how to determine fair value when fair value
measurement is required or permitted. Application of this standard may result in different fair
values being determined for certain assets and liabilities of the Group. For example, the standard
permits, subject to certain criteria, financial instruments to be measured at mid market rates,
removing the requirement to incorporate the impact of the bid/ask spread from the valuation.
The financial impact of changes arising from this standard is not expected to be material to the
Company or Group.
AASB 119 Employee
Benefits
Amendments to this standard will result in changes to the measurement of interest cost
from defined benefit obligations, as well as additional disclosures for all employee benefits.
The amendments will not have a material impact on the Group.
This standard amends AASB 7 Financial Instruments: Disclosures to require disclosure of the effect
or potential effect of netting arrangements, including rights of set-off associated with an entity’s
recognised financial assets and recognised financial liabilities, and on an entity’s financial position,
when all the offsetting criteria in AASB 132 Financial Instruments: Presentation are not met.
As the amendments only relate to disclosure, there will be no impact on the Company or Group.
Mandatory application
date for the Company
and Group
1 October 2013
1 October 2013
1 October 2013
1 October 2013
1 October 2013
This amendment deletes from AASB 124 Related Party Disclosures individual key management
personnel (KMP) disclosure requirements for all disclosing entities in relation to equity holdings,
loans and other related party transactions.
As the amendments only relate to disclosure, there will be no impact on the Company or Group.
1 October 2013
This standard adds application guidance to AASB 132 to clarify the offsetting criteria of AASB 132
(as amended by AASB 2012-2).
This is not expected to have a material impact on the Company or Group.
1 October 2014
AASB 2012-2
Amendments to
Australian Accounting
Standards – Disclosures
– Offsetting Financial
Assets and Financial
Liabilities
AASB 2011-4
Amendments to
Australian Accounting
Standards to Remove
Individual Key
Management Personnel
Disclosure Requirements
AASB 2012-3
Amendments to
Australian Accounting
Standards – Offsetting
Financial Assets and
Financial Liabilities
88
Notes to the fiNaNcial statemeNts (continued) 1: Significant Accounting Policies (continued)
AASB standard
AASB 2013-4
Amendments to Australian
Accounting Standards –
Novation of the Derivatives
and Continuation of Hedge
Accounting
AASB 9 Financial
Instruments
Mandatory application
date for the Company
and Group
1 October 2014
1 October 2015
Possible impact on the Company and the Group’s financial report in period of initial adoption
This standard amends AASB 139 Financial Instruments: Recognition and Measurement to
permit the continuation of hedge accounting where a derivative which has been designated
as a hedging instrument is novated from one counterparty to a central counterparty as a
consequence of laws or regulations.
This is not expected to have a material impact on the Company or Group.
This standard is being released in phases when combined will form AASB 9. To date only new
recognition and measurement requirements for financial assets and financial liabilities have
been released.
The main recognition and measurement requirements of AASB 9 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;
} equity instruments not held for trading purposes will be classified at fair value through
the income statement except for certain instruments which may be classified at fair value
through other comprehensive income (OCI) 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 this eliminates or significantly reduces an accounting
mismatch; and
} financial liabilities – gains and losses attributable to own credit arising from financial
liabilities designated at fair value through profit or loss will be taken to OCI.
Future phases of the AASB 9 project will cover impairment of financial assets measured at
amortised cost and hedge accounting.
Until all phases of AASB 9 are completed, it remains impractical to quantify the impact of
this standard.
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 relate to standards that have limited application to the Company or Group.
2: Critical Estimates and Judgements Used in Applying Accounting Policies
The preparation of the financial statements of the Company and
Group involves making estimates and judgements that affect the
reported amounts within the financial statements. The estimates and
judgements are continually evaluated and are based on historical
factors, including expectations of future events, which 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 the critical estimates and judgements follows.
i) PRO vISIONS fOR CREDIT IMPAIRMENT
The measurement of impairment of loans and advances requires
management’s best estimate of the losses incurred in the loan
portfolio at reporting date.
Individual and collective provisioning involves the use of assumptions
for estimating the amount and timing of expected future cash flows.
The process of estimating the amount and timing of cash flows
involves considerable management judgement. These judgements
are regularly revised to reduce any differences between loss estimates
and actual loss experience.
The collective provision involves estimates regarding the 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 management’s
assessment of 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 the reliability of the provision.
ii) IMPAIRMENT Of NON-LENDING ASSETS
The carrying values of non-lending assets are subject to impairment
assessments at each reporting date. Judgement is required in
identifying the cash-generating units to which goodwill and other
assets are allocated for the purpose of impairment testing.
Impairment testing involves identifying appropriate internal and
external indicators of impairment and whether these exist at each
reporting date. Where an indication of impairment exists, the
recoverable amount of the asset is determined based on the higher of
the assets fair value less costs to sell and its value in use. Judgement
is applied when determining the assumptions supporting the
recoverable amount calculations.
NOTES TO THE FINANCIAL STATEMENTS
89
ANZ ANNUAL REPORT 2013 2: Critical Estimates and Judgements Used in Applying Accounting Policies (continued)
iii) SPECIAL PURPOSE AND Off-BALANCE SHEET ENTITIES
v) PRO vISIONS (OTHER THAN LOAN IMPAIRMENT)
The Group holds provisions for various obligations including
employee entitlements, restructurings and litigation related
claims. The provision for long-service leave is supported by an
independent actuarial report and involves assumptions regarding
employee turnover, future salary growth rates and discount rates.
Other provisions involve judgements regarding the outcome of
future events including estimates of expenditure required to satisfy
such obligations.
vi) 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 class 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.
vii) TAxATION
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 relevant law in each of the countries in
which it operates.
The Group invests in or establishes special purpose entities (SPEs)
to enable it to undertake specific types of transactions such as
structured finance arrangements, covered bond issuances and
securitisations.
An SPE is consolidated where it is controlled by the Group in
accordance with the Group’s policy outlined in note 1 (A)(vi). As it can
be complex to determine whether the Group has control of a SPE, the
Group makes judgements about its exposure to the risks and rewards
of the SPE, as well as about its ability to make operational decisions
regarding the SPE.
The main types of unconsolidated SPEs with which the Group is
involved are structured finance entities. These entities are set up to
assist with the structuring of client financing. ANZ may manage these
vehicles, hold minor amounts of capital in these vehicles or provide
financing or derivatives to these vehicles. Any resulting lending
arrangements with these SPEs are at arm’s length and ANZ typically
has limited ongoing involvement with the entity.
iv) fINANCIAL INSTRUMENTS AT fAIR vALUE
The Group’s financial instruments measured at fair value are
stated in note 1 (A)(iii). In estimating fair value the Group uses,
wherever possible, quoted market prices in an active market 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 selection of appropriate valuation techniques, methodology
and inputs requires judgement. These are reviewed and updated as
market practice evolves.
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 (CVA) to reflect the credit
worthiness of the counterparty. This is influenced by the mark-to-
market of the derivative trades and by the movement in the market
cost of credit. Further adjustments are made to account for the
funding costs inherent in the derivative. Judgment is required to
determine the appropriate cost of funding and the future expected
cashflows used in this funding valuation adjustment (FVA).
90
Notes to the fiNaNcial statemeNts (continued) 3: Income
Interest income
Other financial institutions
Trading securities
Available-for-sale assets
Loans and advances and acceptances
Other
Total interest income
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 expense2
Net fee and commission income
ii) Other income
Net foreign exchange earnings
Net gains from trading securities and derivatives3
Credit risk on intermediation trades
Movement on financial instruments measured at fair value through profit or loss4
Dividends received from controlled entities5
Brokerage income
Write-down of investment in Saigon Securities Inc
Gain on sale of investment in Sacombank
Private equity and infrastructure earnings
Gain on sale of Visa shares
Dilution gain on investment in Bank of Tianjin
Profit on liquidation/(write-down) of investment in subsidiaries and branches
Other
Total other income
Other operating income
iii) Net funds management and insurance income
Funds management income
Investment income
Insurance premium income
Commission income (expense)
Claims
Changes in policy liabilities
Elimination of treasury share (gain)/loss
Total net funds management and insurance income
Total other operating income
Share of associates’ profit
Total income
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
290
1,315
529
25,994
499
28,627
–
28,627
27,298
1,315
14
28,627
744
2,085
2,829
–
2,829
(370)
2,459
844
300
63
(5)
–
53
(26)
–
(3)
–
–
–
90
1,316
3,775
862
4,135
1,348
(446)
(709)
(3,669)
(90)
1,431
5,206
482
329
1,368
621
27,737
483
30,538
–
30,538
29,159
1,368
11
30,538
697
2,060
2,757
–
2,757
(345)
2,412
1,081
280
73
(327)
–
55
(31)
10
28
291
10
–
121
1,591
4,003
825
2,730
1,237
(438)
(598)
(2,449)
(104)
1,203
5,206
395
222
955
433
20,850
349
22,809
2,704
25,513
24,551
955
7
25,513
659
1,482
2,141
968
3,109
(279)
2,830
648
291
63
21
1,314
–
(21)
–
(3)
–
–
18
25
2,356
5,186
109
–
43
51
–
–
–
203
260
1,010
531
22,896
308
25,005
2,335
27,340
26,325
1,010
5
27,340
621
1,504
2,125
753
2,878
(265)
2,613
707
265
73
(284)
1,411
–
(31)
10
28
224
10
(34)
23
2,402
5,015
111
–
38
58
–
–
–
207
5,389
5,222
–
–
34,315
36,139
30,902
32,562
Includes interchange fees paid.
1 Lending fees exclude fees treated as part of the effective yield calculation and included in interest income (refer note 1 B(ii)).
2
3 Does not include interest income relating to trading securities.
4
Includes fair value movements (excluding realised and accrued interest) on derivatives entered into for management of interest rate and foreign exchange risk on funding instruments, and not
designated as accounting hedges (refer to note 12 for further discussion on Balance Sheet Management), ineffective portions of cash flow hedges, and fair value movements in financial assets
and liabilities designated at fair value. The net gain (loss) on financial assets and liabilities designated at fair value through profit or loss was $6 million gain (2012: $141 million loss) for the Group
and $5 million gain (2012: $140 million loss) for the Company.
5 Dividends received from controlled entities are subject to meeting applicable regulatory and corporate law requirements, including solvency requirements.
NOTES TO THE FINANCIAL STATEMENTS
91
ANZ ANNUAL REPORT 2013 4: Expenses
Interest expense
Financial institutions
Deposits
Borrowing corporations’ debt
Commercial paper
Loan capital, bonds and notes
Other
Total interest expense
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
– defined contribution plans
Equity-settled share-based payments
Temporary staff
Other
Total personnel expenses (excl. restructuring)
ii) Premises
Amortisation and depreciation of buildings and integrals (refer note 21)
Rent
Utilities and other outgoings
Other
Total premises expenses (excl. restructuring)
iii) Computer
Computer contractors
Data communication
Depreciation and amortisation (refer notes 19 and 21)
Rentals and repairs
Software purchased
Software impairment
Other
Total computer expenses (excl. restructuring)
iv) Other
Advertising and public relations
Audit fees and other fees (refer note 5)
Depreciation of furniture and equipment (refer note 21)
Freight and cartage
Loss on sale and write-off equipment
Non-lending losses, frauds and forgeries
Postage and stationery
Professional fees
Telephone
Travel and entertainment expenses
Amortisation and impairment of other intangible assets (refer note 19)
Other
Total other expenses (excl. restructuring)
v) Restructuring1
Total operating expenses
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
484
11,071
60
439
3,558
257
15,869
–
15,869
15,391
478
15,869
264
3,103
7
283
200
148
752
4,757
88
435
170
40
733
181
115
496
142
275
8
26
1,243
241
18
97
65
15
54
128
268
70
187
100
175
1,418
85
8,236
473
12,962
69
633
4,127
164
18,428
–
18,428
17,801
627
18,428
288
3,066
13
292
189
218
699
4,765
90
412
168
46
716
150
106
424
131
253
274
45
1,383
229
18
99
65
8
52
137
253
69
170
110
171
1,381
274
8,519
438
9,229
–
311
2,834
191
13,003
3,146
16,149
15,799
350
16,149
196
2,353
2
237
171
109
592
3,660
45
344
115
33
537
112
70
391
112
219
8
3
915
146
9
88
48
6
38
84
223
39
134
9
503
1,327
66
6,505
422
11,299
–
510
3,387
138
15,756
2,616
18,372
17,868
504
18,372
218
2,382
8
251
160
158
564
3,741
54
300
117
43
514
133
64
337
87
188
239
19
1,067
141
10
84
51
5
42
91
210
40
125
8
460
1,267
126
6,715
1
Includes $18 million (2012: $148 million) relating to costs associated with the New Zealand Simplification program in the Group (Company: nil).
92
Notes to the fiNaNcial statemeNts (continued)
5: Compensation of Auditors
KPMG Australia1
Audit or review of financial reports of the Company or Group entities
Audit-related services2
Non-audit services3
Overseas related practices of KPMG Australia
Audit or review of financial reports of the Company or Group entities
Audit-related services2
Non-audit services3
Total compensation of auditors
Consolidated
The Company
2013
$’000
8,644
2,886
198
2012
$’000
8,752
3,147
236
11,728
12,135
5,093
993
365
6,451
4,955
1,166
95
6,216
18,179
18,351
2013
$’000
5,327
1,747
130
7,204
1,143
471
222
1,836
9,040
2012
$’000
5,614
2,216
160
7,990
1,483
571
60
2,114
10,104
Inclusive of goods and services tax.
1
2 For the Group, comprises prudential and regulatory services of $2.908 million (2012: $3.067 million), comfort letters $0.508 million (2012: $0.930 million) and other $0.463 million
(2012: $0.316 million). For the Company, comprises prudential and regulatory services of $1.541 million (2012: $1.979 million), comfort letters of $0.374 million (2012: $0.688 million) and other
$0.303 million (2012: $0.120 million).
3 The nature of the non-audit services include reviews of compliance with legal and regulatory requirements, benchmarking reviews and accounting advice. Further details are provided in the
Directors’ Report.
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 external auditor. These include regulatory and prudential reviews requested by the
Company’s regulators such as APRA. Any other services that are not audit or audit-related services are non-audit services. Group Policy allows
certain non-audit services to be provided where the service would not contravene auditor independence requirements. KPMG Australia or any
of its related practices may not provide services that are perceived to be in conflict with the role of the external 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.
NOTES TO THE FINANCIAL STATEMENTS
93
ANZ ANNUAL REPORT 2013 6: Income Tax Expense
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
Reconciliation of the prima facie income tax expense on pre-tax profit
with the income tax expense charged in the Income statement
Profit before income tax
Prima facie income tax expense at 30%
Tax effect of permanent differences:
Overseas tax rate differential
Rebateable and non-assessable dividends
Profit from associates
Gain on sale of investment in Sacombank
Write-down of investment in Saigon Securities Inc.
Offshore Banking Units
Foreign exchange translation of US hybrid loan capital
OnePath Australia – policyholder income and contributions tax
OnePath Australia – Tax Consolidation adjustment
Tax provisions no longer required
Interest on Convertible Instruments
Adjustment between members of the Australian tax-consolidated group
Other
Income tax (over) provided in previous years
Total income tax expense charged in the income statement
Effective tax rate
Australia
Overseas
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
2,662
2
76
2,740
9,022
2,707
(41)
(4)
(144)
–
8
(6)
–
261
(50)
(4)
58
–
(47)
2,738
2
2,740
30.4%
2,125
615
2,523
2
(198)
2,327
7,994
2,398
(48)
(4)
(118)
(3)
9
(12)
–
106
–
(70)
68
–
(1)
2,325
2
2,327
29.1%
1,823
504
1,911
2
(143)
1,770
1,690
(3)
(72)
1,615
7,116
2,135
6,490
1,947
4
(394)
–
–
6
(6)
27
–
–
–
58
(24)
(38)
1,768
2
1,770
24.9%
1,626
144
(9)
(423)
–
(3)
9
(12)
(16)
–
–
(60)
68
108
9
1,618
(3)
1,615
24.9%
1,511
104
TAx CONSOLIDATION
TAxATION Of fINANCIAL ARRANGEMENTS ‘TOfA’
The Group adopted the new tax regime for financial arrangements
(TOFA) in Australia effective from 1 October 2009. 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.
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
tax-consolidated 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.
94
Notes to the fiNaNcial statemeNts (continued)
7: Dividends
Ordinary share dividends2
Interim dividend
Final dividend
Bonus option plan adjustment
Dividend on ordinary shares
Consolidated1
2013
$m
2012
$m
The Company
2013
$m
2012
$m
2,003
2,150
(71)
4,082
1,769
2,002
(80)
3,691
2,003
2,150
(71)
4,082
1,769
2,002
(80)
3,691
1 Dividends paid to ordinary equity holders of the Company. Excludes dividends paid by subsidiaries of the Group to non-controlling equity holders (2013: $1 million; 2012: $2 million).
2 Dividends are not accrued and are recorded when paid.
A final dividend of 91 cents, fully franked for Australian tax purposes,
is proposed to be paid on each eligible fully paid ordinary share
on 16 December 2013 (2012: final dividend of 79 cents, paid
19 December 2012, fully franked for Australian tax purposes). It is
proposed New Zealand imputation credits of NZ 10 cents per
ordinary share will also be attached to the 2013 final dividend
(2012: nil). The 2013 interim dividend of 73 cents, paid 1 July 2013,
was fully franked for Australian tax purposes (2012: interim dividend
of 66 cents, paid 2 July 2012, fully franked for Australian tax purposes).
New Zealand imputation credits of NZ 9 cents per ordinary share
were attached to the 2013 interim dividend (2012: nil).
The tax rate applicable to the Australian franking credits attached to
the 2013 interim dividend and to be attached to the proposed 2013
final dividend is 30% (2012: 30%).
Dividends paid in cash or satisfied by the issue of shares under
the Dividend Reinvestment Plan during the years ended
30 September 2013 and 2012 were as follows:
Paid in cash1
Satisfied by share issue2
Preference share dividend3
Euro Trust Securities4
Dividend on preference shares
Consolidated
The Company
2013
$m
3,239
843
4,082
2012
$m
2,230
1,461
3,691
Consolidated
2013
$m
6
6
2012
$m
11
11
2013
$m
3,239
843
4,082
2012
$m
2,230
1,461
3,691
The Company
2013
$m
2012
$m
–
–
–
–
Includes shares issued to participating shareholders under the dividend reinvestment plan.
1 Refers to cash paid to shareholders who did not elect to participate in the dividend reinvestment plan or the bonus option plan.
2
3 Dividends are not accrued and are recorded when paid.
4 Refer to note 29 for details.
DIvIDEND fRANKING ACCOUNT
The amount of Australian franking credits available to the Company
for the subsequent financial year is $265 million (2012: $386 million)
after adjusting for franking credits that will arise from the payment of
tax on Australian profits for the 2013 financial year, $1,070 million of
franking credits which will be utilised in franking the proposed 2013
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 material controlled entities to the Company. Various
capital adequacy, liquidity, foreign currency controls, statutory
reserve and other prudential and legal requirements must be
observed by certain controlled entities and the impact of these
requirements on the payment of cash dividends is monitored.
There are presently no significant restrictions on the payment of
dividends by the Company, although reductions in shareholders’
equity through the payment of cash dividends are monitored having
regard to the following:
} There are regulatory and other legal requirements to maintain a
specified level of capital. Further, APRA has advised that a bank
under its supervision, including the Company, must obtain its
written approval before paying dividends (i) on ordinary shares
which exceed its after tax earnings after taking into account any
payments on more senior capital instruments in the financial year
to which they relate or (ii) where the Company’s Common Equity
Tier 1 capital ratio falls within capital range buffers specified by
APRA from time to time;
} The Corporations Act 2001 (Cth) provides that the Company must
not pay a dividend on any instrument unless (i) it has sufficient net
assets for the payment, (ii) the payment is fair and reasonable to
the Company’s shareholders as a whole, and (iii) the payment does
not materially prejudice the Company’s ability to pay its creditors;
} The terms of the Group’s Euro Trust Securities, US Trust Securities
and ANZ Convertible Preference Shares also limit the payment of
dividends on these securities in certain circumstances. Whilst the
terms of the securities vary, generally the Company may not pay
a dividend if to do so would result in the Company becoming, or
likely to become, insolvent or breaching specified capital adequacy
ratios, if the dividend would exceed its after tax prudential profits
(as defined by APRA from time to time) or if APRA so directs; and
NOTES TO THE FINANCIAL STATEMENTS
95
ANZ ANNUAL REPORT 2013 7: Dividends (continued)
} 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, ANZ Convertible Preference Shares or ANZ Capital
Notes in accordance with their terms, the Group may be restricted
from declaring or paying any dividends or other distributions on
Tier 1 securities including ANZ ordinary shares and preference shares.
This restriction is subject to a number of exceptions.
DIvIDEND REINvESTMENT PLAN
During the year ended 30 September 2013, 19,090,655 ordinary
shares were issued at $23.64 per share and 13,535,178 ordinary
shares at $28.96 per share to participating shareholders under the
Dividend Reinvestment Plan (2012: 39,662,663 ordinary shares at
$19.09 per share, and 34,448,302 ordinary shares at $20.44 per share).
All eligible shareholders can elect to participate in the Dividend
Reinvestment Plan.
Refer to note 29 for details of the on-market buyback of ordinary
shares issued under the Dividend Reinvestment Plan and Bonus
Option Plan in connection with the 2013 interim dividend.
For the 2013 final dividend, no discount will be applied when
calculating the ‘Acquisition Price’ used in determining the number
of ordinary shares to be provided under the Dividend Reinvestment
Plan and Bonus Option Plan terms and conditions, and the ‘Pricing
Period’ under the Dividend Reinvestment Plan and Bonus Option Plan
terms and conditions will be the ten trading days commencing on
13 November 2013 (unless otherwise determined by the Directors
and announced on the ASX). The Company intends to neutralise the
impact of ordinary shares issued under the Dividend Reinvestment
Plan and Bonus Option Plan in connection with the 2013 final
dividend through an on-market buyback of ordinary shares in an
amount equal to the value of those ordinary shares issued under the
Dividend Reinvestment Plan and Bonus Option Plan.
BONUS OPTION PLAN
The amount paid in dividends during the year has been reduced as
a result of certain eligible shareholders participating in the Bonus
Option Plan and foregoing all or part of their right to dividends. These
shareholders were issued ordinary shares under the Bonus Option Plan.
During the year ended 30 September 2013, 2,719,008 ordinary
shares were issued under the Bonus Option Plan (2012: 4,090,494
ordinary shares).
8: Earnings per Ordinary Share
Basic earnings per share (cents)
Earnings reconciliation ($millions)
Profit for the year
Less: profit attributable to non-controlling interests
Less: preference share dividend paid
Earnings used in calculating basic earnings per share
weighted average number of ordinary shares (millions)1
Diluted earnings per share (cents)
Earnings reconciliation ($millions)
Earnings used in calculating basic earnings per share
Add: US Trust Securities interest expense
Add: UK Stapled Securities interest expense
Add: ANZ Convertible Preference Shares interest expense
Add: ANZ Capital Notes interest expense
Earnings used in calculating diluted earnings per share
weighted average number of ordinary shares (millions)1
Used in calculating basic earnings per share
Add: weighted average number of options/rights potentially convertible to ordinary shares
weighted average number of convertible US Trust Securities at current market prices
weighted average number of convertible UK Stapled Securities
weighted average number of ANZ Convertible Preference Shares
weighted average number of convertible ANZ Capital Notes
Used in calculating diluted earnings per share
Consolidated
2013
$m
231.3
6,282
10
6
6,266
2,709.4
224.4
6,266
31
–
186
7
6,490
2,709.4
5.0
27.5
–
144.6
5.5
2,892.0
2012
$m
213.4
5,667
6
11
5,650
2,647.4
205.6
5,650
30
31
225
–
5,936
2,647.4
5.3
30.5
24.6
179.8
–
2,887.6
1 Weighted average number of shares excludes 12.6 million shares held in OnePath (2012: 13.1 million) and 15.8 million shares in ANZEST Pty Ltd (2012: 15.7 million) for the Group employee share
acquisition scheme.
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 1.3 million (2012: approximately 0.5 million).
96
Notes to the fiNaNcial statemeNts (continued)
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
10: Due from Other Financial Institutions
Cash collateral
Other receivables from financial institutions
Total due from other financial institutions
11: Trading Securities
Commonwealth Securities
Local, semi-government and other government securities
Other securities and equity securities
Total trading securities
Consolidated
The Company
2013
$m
2,907
24,966
1,970
9,894
39,737
2012
$m
3,056
21,112
2,257
10,153
36,578
2013
$m
954
22,901
191
9,792
33,838
2012
$m
1,010
19,792
2,177
9,803
32,782
Consolidated
The Company
2013
$m
6,530
15,647
22,177
2012
$m
6,878
10,225
17,103
2013
$m
5,638
13,309
18,947
2012
$m
5,875
8,292
14,167
Consolidated
The Company
2013
$m
3,445
16,638
21,205
41,288
2012
$m
2,168
14,332
24,102
40,602
2013
$m
3,198
11,834
16,432
31,464
2012
$m
2,073
7,468
20,949
30,490
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. The use of derivatives
and their sale to customers as risk management products is an
integral part of the Group’s trading and sales activities. Derivatives
are also used to manage the Group’s own exposure to fluctuations
in foreign exchange and interest rates as part of its asset and liability
management activities.
Derivative financial instruments are subject to market and credit risk,
and these risks are managed in a manner consistent with the risks
arising on other financial instruments.
TYPES Of DERIv ATIvE 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.
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 arise from both sales to customers and market
making activities. Sales to customers include the structuring and
marketing of derivative products which enable customers to manage
their own risks. Market making activities consist of derivatives entered
into principally for the purpose of generating profits from short-term
fluctuations in prices 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.
NOTES TO THE FINANCIAL STATEMENTS
97
ANZ ANNUAL REPORT 2013 12: Derivative Financial Instruments (continued)
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, interest rate, commodity
and credit 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 the terms of the
derivative. The aggregate 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
their notional principal amounts are set out below.
Trading
fair value
fair value
Hedging
Cash flow
Total fair value
of derivatives
Net investment
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Consolidated at
30 September 2013
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
Notional
Principal
Amount
$m
463,606
377,385
546
65,991
78,352
7,593
(7,514)
10,276 (12,641)
(23)
–
(1,449)
22
1,376
–
985,880
19,267 (21,627)
23,169
1,346
(1,232)
84,547
2,076,377
100,849
26,909
35,282
3
(5)
21,249 (20,735)
(459)
–
(1,233)
452
1,049
–
2,323,964
22,753 (22,432)
–
76
–
–
–
76
–
–
(10)
–
–
–
(10)
–
–
1,272
1
–
–
1,273
–
(998)
(39)
–
–
(1,037)
Credit default swaps
Structured credit
derivatives purchased
Other credit derivatives purchased
Total credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold
Total credit derivatives sold
4,811
14,332
19,143
4,811
13,045
17,856
36,999
136
122
258
–
64
64
322
–
(143)
(143)
(169)
(50)
(219)
(362)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
3,370,012
43,688 (45,653)
1,349
(1,047)
841
(743)
98
–
–
–
–
–
–
–
–
838
3
–
–
841
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(743)
–
–
–
(743)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(25)
(41)
–
–
–
(66)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,593
(7,539)
10,352 (12,692)
(23)
–
(1,449)
22
1,376
–
19,343 (21,703)
1,346
(1,232)
3
(5)
23,359 (22,476)
(498)
–
(1,233)
456
1,049
–
24,867 (24,212)
136
122
258
–
64
64
322
–
(143)
(143)
(169)
(50)
(219)
(362)
(66)
45,878 (47,509)
Notes to the fiNaNcial statemeNts (continued) Trading
fair value
fair value
Hedging
Cash flow
Total fair value
of derivatives
Net investment
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
12: Derivative Financial Instruments (continued)
Consolidated at
30 September 2012
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
purchased
Other credit derivatives purchased
Total credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold
Total credit derivatives sold
Notional
Principal
Amount
$m
390,756
280,664
954
66,348
71,318
4,112
7,608
99
1,228
–
(5,336)
(11,681)
(134)
–
(1,091)
–
171
–
–
–
171
810,040
13,047
(18,242)
34,820
1,600
(1,803)
–
240,576
1,583,257
113,974
26,040
35,367
24
29,185
148
963
–
(23)
(29,035)
(138)
–
(1,116)
1,999,214
30,320
(30,312)
–
1,811
–
–
–
1,811
7,634
11,632
19,266
7,634
10,870
18,504
37,770
243
277
520
–
44
44
564
–
(62)
(62)
(346)
(122)
(468)
(530)
–
–
–
–
–
–
–
–
(4)
–
–
–
(4)
–
–
(788)
(30)
–
–
(818)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,288
9
–
–
1,297
–
(922)
(8)
–
–
(930)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35
84
–
–
–
119
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,147
7,863
99
1,228
–
(5,336)
(11,685)
(134)
–
(1,091)
13,337
(18,246)
1,600
(1,803)
24
32,284
157
963
–
(23)
(30,745)
(176)
–
(1,116)
33,428
(32,060)
243
277
520
–
44
44
564
–
(62)
(62)
(346)
(122)
(468)
(530)
48,929
(52,639)
Total
2,881,844
45,531
(50,887)
1,982
(822)
1,297
(930)
119
NOTES TO THE FINANCIAL STATEMENTS
99
ANZ ANNUAL REPORT 2013 Trading
fair value
fair value
Hedging
Cash flow
Total fair value
of derivatives
Net investment
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(41)
–
–
–
7,391
9,493
22
1,370
–
(6,803)
(11,028)
(22)
–
(1,427)
(41)
18,276
(19,280)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,339
(1,231)
3
19,569
455
1,047
–
(4)
(19,239)
(493)
–
(1,218)
21,074
(20,954)
136
122
258
–
64
64
322
–
(143)
(143)
(169)
(50)
(219)
(362)
(41)
41,011
(41,827)
12: Derivative Financial Instruments (continued)
The Company at
30 September 2013
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
purchased
Other credit derivatives purchased
Total credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold
Total credit derivatives sold
Notional
Principal
Amount
$m
438,555
334,548
499
65,510
78,001
7,391
9,418
22
1,370
–
(6,803)
(10,977)
(22)
–
(1,427)
917,113
18,201
(19,229)
22,662
1,339
(1,231)
–
75
–
–
–
75
–
72,112
1,723,852
78,728
25,879
34,372
3
17,684
451
1,047
–
(4)
(17,655)
(454)
–
(1,218)
–
1,127
1
–
–
1,934,943
19,185
(19,331)
1,128
4,811
14,332
19,143
4,811
13,045
17,856
36,999
136
122
258
–
64
64
322
–
(143)
(143)
(169)
(50)
(219)
(362)
–
–
–
–
–
–
–
–
(10)
–
–
–
(10)
–
–
(930)
(39)
–
–
(969)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
758
3
–
–
761
–
(654)
–
–
–
(654)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
2,911,717
39,047
(40,153)
1,203
(979)
761
(654)
100
Notes to the fiNaNcial statemeNts (continued) Trading
fair value
fair value
Hedging
Cash flow
Total fair value
of derivatives
Net investment
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
Assets
$m
Liabilities
$m
12: Derivative Financial Instruments (continued)
The Company at
30 September 2012
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
purchased
Other credit derivatives purchased
Total credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold
Total credit derivatives sold
Notional
Principal
Amount
$m
390,283
236,951
840
65,803
70,877
3,921
7,511
99
1,224
–
(4,603)
(10,675)
(134)
–
(1,073)
–
169
–
–
–
169
764,754
12,755
(16,485)
34,288
1,595
(1,801)
–
204,539
1,247,578
90,176
26,173
35,822
22
24,240
146
962
–
(21)
(24,420)
(135)
–
(1,116)
1,604,288
25,370
(25,692)
–
1,624
–
–
–
1,624
7,634
11,632
19,266
7,634
10,870
18,504
37,770
243
277
520
–
44
44
564
–
(62)
(62)
(346)
(122)
(468)
(530)
–
–
–
–
–
–
–
–
(4)
–
–
–
(4)
–
–
(633)
(30)
–
–
(663)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,096
9
–
–
1,105
–
(864)
(8)
–
–
(872)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
84
–
–
–
84
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,921
7,764
99
1,224
–
(4,603)
(10,679)
(134)
–
(1,073)
13,008
(16,489)
1,595
(1,801)
22
26,960
155
962
–
(21)
(25,917)
(173)
–
(1,116)
28,099
(27,227)
243
277
520
–
44
44
564
–
(62)
(62)
(346)
(122)
(468)
(530)
43,266
(46,047)
Total
2,441,100
40,284
(44,508)
1,793
(667)
1,105
(872)
84
NOTES TO THE FINANCIAL STATEMENTS
101
ANZ ANNUAL REPORT 2013 12: Derivative Financial Instruments (continued)
HEDGING RELATIONSHIPS
There are three types of 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 consist principally of interest rate swaps
Gain/(loss) arising from fair value hedges
Hedged item
Hedging Instrument
and cross 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.
Consolidated
The Company
2013
$m
534
(532)
2012
$m
91
(103)
2013
$m
476
(466)
2012
$m
63
(68)
CASH fLO w 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 affecting 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 cross currency swaps that are used to protect against exposures
to variability in future 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 ineffective portion of a designated cash flow hedge relationship
is recognised immediately in the income statement. The schedule
below shows the movements in the hedging reserve:
Opening
Item recorded in net interest income
Tax effect on items recorded in net interest income
Valuation gain taken to equity
Tax effect on net gain on cash flow hedges
Closing Balance
Consolidated
The Company
2013
$m
208
–
–
(185)
52
75
2012
$m
169
17
(5)
39
(12)
208
2013
$m
89
24
(7)
(78)
23
51
2012
$m
47
27
(8)
32
(9)
89
102
Notes to the fiNaNcial statemeNts (continued) 12: Derivative Financial Instruments (continued)
The table below shows the breakdown of the hedging reserve attributable to each type of cash flow hedging relationship:
Variable rate assets
Variable rate liabilities
Re-issuances of short term fixed rate liabilities
Total hedging reserve
Consolidated
The Company
2013
$m
446
(184)
(187)
75
2012
$m
922
(330)
(384)
208
2013
$m
457
(192)
(214)
51
2012
$m
755
(307)
(359)
89
The mechanics of a cash flow hedge 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 balance is released
to the income statement.
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 rate differences arising on
consolidation of foreign operations with a functional currency other
than the Australian Dollar. Hedging is undertaken using foreign
exchange derivative contracts or by financing with borrowings in the
same currency as the applicable foreign functional currency.
Ineffectiveness arising from hedges of net investments in foreign
operations and recognised as ‘other income’ in the income statement
amounted to nil (2012: nil).
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 (2012: 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 a $1 million
loss for the Group (2012: $3 million loss) and a $1 million loss for the
Company (2012: $3 million loss).
NOTES TO THE FINANCIAL STATEMENTS
103
ANZ ANNUAL REPORT 2013 13: Available-for-sale Assets
Listed
Other government securities
Other securities and equity securities
Total listed
Unlisted
Local and semi-government securities
Other government securities
Other securities and equity securities
Total unlisted
Total available-for-sale assets
Consolidated
The Company
2013
$m
1,197
7,976
9,173
9,468
5,402
4,092
18,962
28,135
2012
$m
756
3,664
4,420
7,311
5,323
3,508
16,142
20,562
2013
$m
422
7,737
8,159
8,366
3,893
3,405
15,664
23,823
2012
$m
313
3,569
3,882
6,131
4,871
2,957
13,959
17,841
During the year net gains recognised in the income statement in respect of available-for-sale assets amounted to nil for both the Group
(2012: $281 million) and for the Company (2012: $206 million). In 2012, the net gains recognised included $301 million for the Group and
$234 million for the Company on the sale on investments in Visa Inc. and Sacombank.
In addition, a loss of $3 million (2012: $35 million) for both Group and Company was recycled from equity (the Available-for-sale revaluation
reserve) into the income statement on the impairment of assets previously reclassified from available-for-sale into loans and advances
(refer note 16).
AvAILABLE-fOR-SALE BY MATURITIES AT 30 SEPTEMBER 2013
Local and semi-government securities
Other government securities
Other securities and equity securities
Total available-for-sale assets
Less than
3 months
$m
1,018
3,604
446
5,068
AvAILABLE-fOR-SALE BY MATURITIES AT 30 SEPTEMBER 2012
Local and semi-government securities
Other government securities
Other securities and equity securities
Total available-for-sale assets
Less than
3 months
$m
1,325
4,896
421
6,642
Between
3 and 12
months
$m
819
1,342
1,376
3,537
Between
3 and 12
months
$m
464
808
1,022
2,294
Between
1 and
5 years
$m
2,201
1,566
6,948
10,715
Between
5 and 10
years
$m
3,741
78
602
4,421
After
10 years
$m
1,689
9
2,632
4,330
No
maturity
specified
$m
–
–
64
64
Between
1 and
5 years
$m
Between
5 and 10
years
$m
1,406
369
2,443
4,218
2,880
–
296
3,176
After
10 years
$m
1,236
6
2,858
4,100
No
maturity
specified
$m
–
–
132
132
Total
fair
value
$m
9,468
6,599
12,068
28,135
Total
fair
value
$m
7,311
6,079
7,172
20,562
104
Notes to the fiNaNcial statemeNts (continued) 14: Net Loans and Advances
Overdrafts
Credit card outstandings
Term loans – housing
Term loans – non-housing1
Hire purchase1
Lease receivables
Commercial bills
Other
Total gross loans and advances
Less: Provision for credit impairment (refer to note 16)
Less: Unearned income1
Add: Capitalised brokerage/mortgage origination fees
Add: Customer liability for acceptances
Adjustments to gross loans and advances
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 net investment in finance lease receivables
Less than 1 year
1 to 5 years
Later than 5 years
Total
Hire purchase receivables
Less than 1 year
1 to 5 years
Later than 5 years
Total
Consolidated
The Company
2013
$m
8,833
11,247
253,277
177,963
2,760
1,858
16,536
488
472,962
(4,354)
(1,067)
942
812
(3,667)
2012
$m
8,014
10,741
230,706
156,605
3,285
1,885
19,469
861
431,566
(4,538)
(1,241)
797
1,239
(3,743)
2013
$m
6,945
9,213
206,711
132,505
2,010
1,395
16,257
125
375,161
(3,242)
(723)
787
484
(2,694)
2012
$m
6,598
9,222
192,912
120,353
2,667
1,363
19,342
243
352,700
(3,407)
(952)
707
1,012
(2,640)
469,295
427,823
372,467
350,060
531
433
365
(114)
1,215
133
395
1
529
438
647
286
(141)
1,230
76
374
64
514
350
320
202
(91)
781
130
392
1
523
226
507
129
(107)
755
71
366
64
501
1,744
1,744
1,304
1,256
500
403
312
409
586
235
1,215
1,230
907
1,838
15
2,760
1,079
2,191
15
3,285
335
297
149
781
641
1,354
15
2,010
210
467
78
755
867
1,785
15
2,667
1 Comparative information has been restated to reflect the reclassification of chattel mortgages from hire purchase (2012: $7,100 million) and unearned income (2012: ($994 million)) to term loans
– non-housing (2012: $6,106 million) for the Group and the Company (refer note 1).
NOTES TO THE FINANCIAL STATEMENTS
105
ANZ ANNUAL REPORT 2013 15: Impaired Financial Assets
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
2013
$m
2012
$m
The Company
2013
$m
2012
$m
3,751
341
172
4,264
(1,440)
(27)
2,797
4,364
525
307
5,196
(1,729)
(44)
3,423
2,723
284
149
3,156
(1,046)
(10)
2,100
3,146
377
287
3,810
(1,242)
(27)
2,541
1,818
1,713
1,576
1,455
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
of interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk.
2 Includes unsecured credit card and personal loans 90 days past due accounts which are retained on a performing basis for up to 180 days past due amounting to $151 million (2012: $127 million)
for the Group and $106 million (2012: $104 million) for the Company.
16: Provision for Credit Impairment
Provision movement analysis
New and increased provisions
Australia
New Zealand
Asia Pacific, Europe & America
Write-backs
Recoveries of amounts previously written off
Individual provision charge
Impairment on available-for-sale assets
Collective provision charge/(credit) to income statement
Charge to income statement
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
1,304
310
275
1,889
(487)
1,402
(247)
1,155
3
30
1,188
1,730
376
187
2,293
(537)
1,756
(214)
1,542
35
(379)
1,198
1,304
15
157
1,476
(255)
1,221
(194)
1,027
3
102
1,132
1,628
16
154
1,798
(333)
1,465
(180)
1,285
35
(335)
985
106
Notes to the fiNaNcial statemeNts (continued)
16: Provision for Credit Impairment (continued)
MO vEMENT IN PRO vISION fOR CREDIT IMPAIRMENT BY fINANCIAL ASSET CLASS
Consolidated
Collective provision
Balance at start of year
Adjustment for exchange rate fluctuations
and transfers
Disposal
Charge/(credit) to income statement
Total collective provision
Individual provision
Balance at start of year
New and increased provisions
Adjustment for exchange rate fluctuations
and transfers
Write-backs
Discount unwind
Bad debts written off
Total individual provision
Total provision for credit impairment
Liquid assets and due
from other financial
institutions
Net loans
and advances
Other financial assets
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
Credit related
commitments1
2012
$m
2013
$m
Total provisions
2013
$m
2012
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,236
2,604
63
–
(7)
(21)
(4)
(343)
2,292
2,236
1,729
1,889
1,687
2,259
62
(481)
(102)
(1,657)
1,440
3,732
(34)
(537)
(143)
(1,503)
1,729
3,965
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
529
572
2,765
3,176
29
–
37
(7)
–
(36)
92
–
30
(28)
(4)
(379)
595
529
2,887
2,765
44
–
(11)
(6)
–
–
27
622
10
34
–
–
–
–
44
573
1,773
1,889
1,697
2,293
51
(487)
(102)
(1,657)
1,467
4,354
(34)
(537)
(143)
(1,503)
1,773
4,538
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.
Consolidated
Individual provision
Balance at start of year
New and increased provisions
Adjustment for exchange rate fluctuations
and transfers
Write-backs
Discount unwind
Bad debts written off
Total individual provision
Australia1
International
and Institutional
Banking1
New Zealand2
Global wealth
GTSO2
Total
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
716
1,132
679
1,066
–
(229)
(34)
(838)
747
–
(227)
(43)
(759)
716
650
447
22
(70)
(45)
(587)
417
585
891
(100)
(144)
(59)
(523)
650
348
294
34
(180)
(23)
(231)
242
396
362
5
(159)
(41)
(215)
348
15
4
(1)
(2)
–
(1)
15
12
9
1
(4)
–
(3)
15
–
12
7
–
–
–
19
15
(69)
1,729
1,889
1,687
2,259
60
(3)
–
(3)
62
(481)
(102)
(1,657)
(34)
(537)
(143)
(1,503)
–
1,440
1,729
1 Corporate Banking Australia transferred from IIB to Australia Division, effective 1 October 2012. Comparatives have been restated accordingly.
2 Divisional transfers occurred in the 2013 year and comparatives were updated accordingly.
Ratios (as a percentage of total gross loans and advances)
Individual provision
Collective provision
Bad debts written off
Consolidated
2013
%
0.31
0.61
0.35
2012
%
0.41
0.64
0.35
NOTES TO THE FINANCIAL STATEMENTS
107
ANZ ANNUAL REPORT 2013 16: Provision for Credit Impairment (continued)
The Company
Collective provision
Balance at start of year
Adjustment for exchange rate fluctuations
Disposal
Charge/(credit) to income statement
Total collective provision
Individual provision
Balance at start of year
New and increased provisions
Adjustment for exchange rate fluctuations
Write-backs
Discount unwind
Bad debts written off
Total individual provision
Total provision for credit impairment
Liquid assets and due
from other financial
institutions
Net loans
and advances
2013
$m
2012
$m
2013
$m
2012
$m
Other financial
assets
2013
$m
2012
$m
Credit related
commitments1
2012
$m
2013
$m
Total provisions
2013
$m
2012
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,728
(55)
–
56
2,042
(8)
(4)
(302)
1,729
1,728
1,242
1,476
(51)
(249)
(75)
(1,297)
1,046
2,775
1,144
1,777
(45)
(333)
(91)
(1,210)
1,242
2,970
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
410
1
–
46
457
27
–
(11)
(6)
–
–
10
467
454
(11)
–
(33)
410
6
21
–
–
–
–
27
437
2,138
(54)
–
102
2,186
1,269
1,476
(62)
(255)
(75)
(1,297)
1,056
3,242
2,496
(19)
(4)
(335)
2,138
1,150
1,798
(45)
(333)
(91)
(1,210)
1,269
3,407
1 Comprises undrawn facilities and customer contingent liabilities.
Ratios (as a percentage of total gross loans and advances)
Individual provision
Collective provision
Bad debts written off
The Company
2013
%
0.28
0.58
0.35
2012
%
0.36
0.61
0.34
17: Shares in Controlled Entities and Associates
Total shares in controlled entities1
Total shares in associates2 (refer note 39)
Total shares in controlled entities and associates
Consolidated
The Company
2013
$m
–
4,123
4,123
2012
$m
–
3,520
3,520
2013
$m
14,955
841
15,796
2012
$m
11,516
897
12,413
1 The increase during the year related primarily to the acquisition of ANZ Wealth Australia Limited and its associated subsidiaries from ANZ Orchard Investments Pty Ltd, a wholly owned subsidiary
of the Company; the creation of the ANZ Centre Trust and ANZ Centre Chattels Trust.
Investments in associates are accounted for using the equity method of accounting by the Group and are carried at cost by the Company.
2
ACqUISITION OR DISPOSAL Of CONTROLLED ENTITIES
There were no material controlled entities acquired or disposed of during the year ended 30 September 2013 or the year ended
30 September 2012.
108
Notes to the fiNaNcial statemeNts (continued)
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
Total deferred tax assets
Deferred tax assets recognised in profit and loss
Collective provision for loans and advances
Individual provision for impaired loans and advances
Other provisions
Provision for employee entitlements
Policyholder tax assets
Other
Deferred tax assets recognised directly in equity
Defined benefits obligation
Available-for-sale revaluation reserve
Set-off of deferred tax assets pursuant to set-off provisions1
Net deferred tax assets
Consolidated
The Company
2013
$m
–
530
530
1
33
34
19
158
177
741
20
721
764
359
318
154
67
323
2012
$m
13
520
533
20
73
93
–
192
192
818
33
785
732
454
310
154
269
349
2013
$m
–
815
815
–
6
6
18
115
133
954
18
936
612
279
223
119
–
134
2012
$m
13
610
623
–
6
6
–
152
152
781
13
768
578
333
188
119
–
156
1,985
2,268
1,367
1,374
16
–
16
37
–
37
(1,280)
(1,520)
721
785
7
–
7
(438)
936
14
5
19
(625)
768
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 complied 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
5
–
5
5
205
210
–
–
–
–
–
–
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 Unrecognised deferred tax assets arose from unrealised losses on investments backing the superannuation business held in OnePath Life Limited. At 30 September 2013, the unrecognised
deferred tax assets is nil (2012: $205 million) due to an improvement in the performance of the investments backing the superannuation business during the year.
NOTES TO THE FINANCIAL STATEMENTS
109
ANZ ANNUAL REPORT 2013 19: Goodwill and Other Intangible Assets
Goodwill1
Gross carrying amount
Balances at start of the year
Additions through business combinations
Reclassifications3
Impairment/write off expense
Derecognised on disposal
Foreign currency exchange differences
Balance at end of year
Software
Balances at start of the year
Software Capitalisation during the period
Amortisation expense
Impairment expense/write-offs
Foreign currency exchange differences
Balance at end of year
Cost
Accumulated amortisation
Accumulated impairment
Carrying amount
Acquired Portfolio of Insurance and Investment Business
Balances at start of the year
Amortisation expense
Foreign currency exchange differences
Balance at end of year
Cost
Accumulated amortisation
Carrying amount
Other intangible assets
Balances at start of the year
Other additions
Reclassification3
Amortisation expense2
Impairment expense
Derecognised on disposal
Foreign currency exchange differences
Balance at end of year
Cost
Accumulated amortisation
Accumulated impairment
Carrying amount
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
4,212
–
–
–
(23)
310
4,499
1,762
780
(383)
(8)
19
2,170
4,258
(1,884)
(204)
2,170
928
(78)
6
856
1,187
(331)
856
180
3
–
(21)
(1)
–
4
165
272
(102)
(5)
165
4,163
11
7
(1)
–
32
4,212
1,572
786
(320)
(274)
(2)
1,762
3,502
(1,537)
(203)
1,762
1,013
(85)
–
928
1,179
(251)
928
216
5
(7)
(24)
(1)
(8)
(1)
180
260
(76)
(4)
180
92
–
–
–
(23)
8
77
1,613
710
(315)
(8)
7
2,007
3,866
(1,663)
(196)
2,007
–
–
–
–
–
–
–
47
–
–
(8)
(1)
–
2
40
74
(35)
1
40
87
10
–
–
–
(5)
92
1,402
720
(268)
(239)
(2)
1,613
3,180
(1,372)
(195)
1,613
–
–
–
–
–
–
–
55
1
–
(8)
–
–
(1)
47
74
(27)
–
47
Goodwill, software and other intangible assets
Net book value
Balances at start of the year
Balance at end of year
7,082
7,690
6,964
7,082
1,752
2,124
1,544
1,752
1 Excludes notional goodwill in equity accounted entities.
2 Comprises brand names $2 million (2012: $1 million), aligned advisor relationships $6 million (2012: $6 million), distribution agreements and management fee rights $3 million (2012: $8 million),
credit card relationships $2 million (2012: $2 million) and other intangibles $8 million (2012: $7 million). The Company comprises distribution agreements and management fee rights $2 million
(2012: $2 million), credit card relationships $2 million (2012: $2 million) and other intangibles $4 million (2012: $4 million).
3 Reclassification in 2012 of $7 million from other intangible assets to goodwill.
110
Notes to the fiNaNcial statemeNts (continued) 19: Goodwill and Other Intangible Assets (continued)
GOOD wILL ALLOCATED TO CASH–GENERATING UNITS
The goodwill balance largely comprises the goodwill purchased on
acquisition of NBNZ Holdings Limited in December 2003 (included in
the New Zealand division) and ANZ Wealth Australia Limited (formerly
OnePath Australia Limited) on 30 November 2009 (included in the
Global Wealth division).
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 cost to sell of each
CGU. The price earnings multiples are based on observable multiples
reflecting the businesses and markets in which each CGU operates.
The earnings are based on the current forecast earnings of the
divisions. The aggregate fair value less cost to sell across the Group
is compared to the Group’s market capitalisation to validate the
conclusion that goodwill is not impaired.
Key assumptions on which management has based its determination
of fair value less cost to sell include assumptions as to the market
multiples being reflective of the segment’s businesses, cost to sell
estimates and the ability to achieve forecast earnings. Changes in
assumptions upon which the valuation is based could materially
impact the assessment of the recoverable amount of each CGU. As at
30 September 2013, the impairment testing performed did not result
in any material impairment being identified.
20: Other Assets
Accrued interest/prepaid discounts
Accrued commissions
Prepaid expenses
Insurance contract liabilities ceded
Outstanding premiums
Issued securities settlements
Operating leases residual value
Capitalised expenses
Others
Total other assets
21: Premises and Equipment
freehold and leasehold land and buildings
At cost
Depreciation
Leasehold improvements
At cost
Amortisation
furniture and equipment
At cost
Depreciation
Computer equipment
At cost
Depreciation
Capital works in progress
At cost
Total premises and equipment
Consolidated
The Company
2013
$m
1,300
134
319
519
315
3,384
378
–
1,225
7,574
2012
$m
1,433
144
232
509
273
1,481
331
21
1,199
5,623
Consolidated
2013
$m
2012
$m
1,219
(315)
904
587
(394)
193
1,377
(880)
497
1,342
(951)
391
179
2,164
1,207
(281)
926
548
(353)
195
1,327
(811)
516
1,244
(895)
349
128
2,114
2013
$m
890
98
140
–
–
3,140
378
–
600
5,246
2012
$m
1,087
100
96
–
–
1,349
321
21
773
3,747
The Company
2013
$m
94
(49)
45
406
(262)
144
1,077
(639)
438
998
(693)
305
51
983
2012
$m
696
(88)
608
373
(232)
141
1,084
(633)
451
923
(667)
256
78
1,534
NOTES TO THE FINANCIAL STATEMENTS
111
ANZ ANNUAL REPORT 2013 21: Premises and Equipment (continued)
Reconciliations of the carrying amounts for each class of premises and equipment are set out below:
freehold and leasehold land and buildings
Carrying amount at beginning of year
Additions1
Disposals2
Depreciation
Foreign currency exchange difference
Carrying amount at end of year
Leasehold improvements
Carrying amount at beginning of year
Additions1
Disposals
Amortisation
Foreign currency exchange difference
Carrying amount at end of year
furniture and equipment
Carrying amount at beginning of year
Additions1
Disposals2
Depreciation
Foreign currency exchange difference
Carrying amount at end of year
Computer equipment
Carrying amount at beginning of year
Additions1
Disposals2
Depreciation
Impairment
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
Consolidated
2013
$m
2012
$m
926
43
(42)
(36)
13
904
195
48
(7)
(52)
9
193
516
84
(14)
(97)
8
497
349
161
(13)
(113)
(3)
10
391
128
51
179
936
33
(6)
(35)
(2)
926
193
64
(5)
(55)
(2)
195
541
83
(8)
(99)
(1)
516
324
137
(6)
(104)
–
(2)
349
131
(3)
128
2,164
2,114
The Company
2013
$m
608
1
(558)
(9)
3
45
141
37
(2)
(36)
4
144
451
248
(176)
(88)
3
438
256
129
(4)
(76)
(3)
3
305
78
(27)
51
983
2012
$m
625
5
(2)
(19)
(1)
608
102
79
(3)
(35)
(2)
141
471
73
(7)
(84)
(2)
451
223
108
(5)
(69)
–
(1)
256
81
(3)
78
1,534
Includes transfers.
1
2 On the 31st of December 2012, “the Company” transferred the ownership of all Land and Buildings, Furniture and Equipment and Computer Equipment relating to the premises known as
“ANZ Centre” located at 833 Collins Street, Docklands into two fully owned Unit Trusts – ANZ Centre Trust and ANZ Centre Chattels Trust. Land and Buildings were transferred at market value of
$545.1 million. Furniture and Equipment and Computer Equipment were transferred at their written down value of $167.4 million.
22: Due to Other Financial Institutions
Deposits from central banks
Cash collateral
Other
Total due to other financial institutions
Consolidated
The Company
2013
$m
13,223
3,921
19,162
36,306
2012
$m
13,185
2,531
14,822
30,538
2013
$m
13,221
3,531
17,397
34,149
2012
$m
13,026
2,326
13,042
28,394
112
Notes to the fiNaNcial statemeNts (continued) 23: 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
The Company
2013
$m
58,276
186,691
166,659
14,446
12,255
1,347
2012
$m
56,838
172,313
142,753
11,782
12,164
1,273
2013
$m
56,453
148,593
138,378
7,574
8,015
–
2012
$m
55,326
141,042
122,794
6,556
7,818
–
439,674
397,123
359,013
333,536
1
Included in this balance is debenture stock of $19 million (2012: $96 million) of Esanda Finance Corporation Limited (Esanda), together with accrued interest thereon, which is secured by a trust
deed and collateral debentures, giving floating charges upon the undertaking and all the assets of the entity of $0.3 billion (2012: $0.4 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 1.5 billion (2012: NZD 1.5 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 2.2 billion (2012: NZD 2.1 billion).
24: Income Tax Liabilities
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
Total deferred income tax liabilities
Deferred tax liabilities recognised in profit and loss
Acquired portfolio of insurance and investment business
Insurance related deferred acquisition costs
Lease finance
Treasury instruments
Capitalised expenses
Other
Deferred tax liabilities recognised directly in equity
Cash flow hedges
Foreign currency translation reserve
Available-for-sale revaluation reserve
Set-off of deferred tax liabilities pursuant to set-off provision1
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
Consolidated
The Company
2013
$m
811
–
811
–
–
–
161
14
175
986
972
14
258
108
227
–
–
581
2012
$m
660
–
660
–
–
–
121
18
139
799
781
18
278
99
230
149
46
570
1,174
1,372
30
38
52
120
82
38
46
166
(1,280)
(1,520)
14
18
216
216
163
163
2013
$m
811
–
811
16
–
16
55
12
67
894
882
12
–
–
39
–
–
373
412
21
–
17
38
(438)
12
38
38
2012
$m
660
–
660
15
–
15
51
12
63
738
726
12
–
–
59
148
46
345
598
39
–
–
39
(625)
12
23
23
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 Represents additional potential foreign tax costs should all retained earnings in offshore branches and subsidiaries be repatriated.
NOTES TO THE FINANCIAL STATEMENTS
113
ANZ ANNUAL REPORT 2013
25: Payables and Other Liabilities
Creditors
Accrued interest and unearned discounts
Defined benefits plan obligations
Accrued expenses
Security settlements
Liability for acceptances
Other liabilities
Total payables and other liabilities
26: Provisions
Employee entitlements1
Restructuring costs and surplus leased space2
Non-lending losses, frauds and forgeries
Other
Total provisions
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
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
Provisions made during the year
Payments made during the year
Transfer/release of provision
Carrying amount at the end of the year
Consolidated
The Company
2013
$m
1,182
2,135
74
1,517
3,210
812
3,664
2012
$m
984
2,539
149
1,478
1,115
1,239
2,605
12,594
10,109
2013
$m
431
1,644
29
1,133
3,117
484
2,707
9,545
2012
$m
468
2,032
67
1,174
915
1,012
1,886
7,554
Consolidated
The Company
2013
$m
533
57
155
483
2012
$m
533
140
163
365
1,228
1,201
140
49
(116)
(16)
57
163
23
(16)
(15)
155
365
463
(336)
(9)
483
135
189
(157)
(27)
140
205
29
(16)
(55)
163
368
353
(305)
(51)
365
2013
$m
403
38
131
253
825
51
45
(41)
(17)
38
139
12
(7)
(13)
131
151
147
(31)
(14)
253
2012
$m
404
51
139
151
745
78
82
(86)
(23)
51
149
17
(6)
(21)
139
153
75
(30)
(47)
151
1 The aggregate liability for employee entitlements largely comprises provisions for annual leave and long service leave.
2 Restructuring costs and surplus leased space provisions arise from 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 relating 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.
114
Notes to the fiNaNcial statemeNts (continued) 27: Bonds and Notes
ANZ utilises a variety of established and flexible funding programmes issuing medium term notes featuring either senior or subordinated
debt status (details of subordinated debt are presented in note 28: Loan Capital). All risks associated with originating term funding are closely
managed. Refer to description of ANZ risk management practices in note 33 Financial Risk Management in relation to market risks such as
interest rate and foreign currency risks, as well as liquidity risk.
The table below presents Bonds and Notes by currency of issue which broadly is representative of the investor base location.
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 dollar
CAD
Norwegian krone
NOK
Singapore dollars
SGD
Turkish Lira
TRY
South African rand
ZAR
Mexico peso
MXN
Chinese yuan
CNH
Total bonds and notes
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
33,094
2,711
7,329
2,939
6,681
10,443
1,285
3,460
901
592
259
171
146
190
175
70,376
27,035
2,114
6,054
2,531
9,532
9,109
1,422
3,253
857
557
265
79
111
–
179
63,098
28,645
2,277
6,572
488
6,356
7,545
1,201
1,621
901
592
88
171
146
190
175
56,968
20,718
1,725
5,691
392
9,167
7,256
1,310
1,823
857
557
110
79
111
–
179
49,975
NOTES TO THE FINANCIAL STATEMENTS
115
ANZ ANNUAL REPORT 2013 28: Loan Capital
Additional Tier 1 capital (subordinated)
US Trust Securities
ANZ Convertible Preference Shares (ANZ CPS)1
ANZ CPS1
ANZ CPS2
ANZ CPS3
ANZ Capital Notes
Tier 2 capital – perpetual subordinated notes
USD
NZD
floating rate notes
fixed rate notes2
300m
835m
Tier 2 Capital – term subordinated notes
GBP
AUD
AUD
AUD
AUD
EUR
AUD
AUD
USD
AUD
fixed rate notes due 20184
fixed rate notes due 20174
floating rate notes due 20173
floating rate notes due 20183
floating rate notes due 20183
fixed rate notes due 2019
floating rate notes due 20223
floating rate notes due 20223
fixed rate notes due 20223
floating rate notes due 20233
400m
290m
310m
365m
500m
750m
500m
1509m
750m
750m
Total loan capital
Loan capital by currency
AUD
NZD
USD
GBP
EUR
Australian dollars
New Zealand dollars
United States dollars
Great British pounds
Euro
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
812
752
805
715
1,081
1,963
1,329
1,106
6,291
322
743
1,065
699
–
–
–
–
1,211
500
1,496
793
749
5,448
1,078
1,958
1,326
–
5,114
287
666
953
633
285
297
355
500
1,057
500
1,505
715
–
5,847
1,081
1,963
1,329
1,106
6,284
322
–
322
699
–
–
–
–
1,214
500
1,500
793
750
5,456
1,078
1,958
1,326
–
5,077
287
–
287
633
290
310
365
500
1,060
500
1,509
715
–
5,882
12,804
11,914
12,062
11,246
8,224
743
1,927
699
1,211
7,804
666
1,754
633
1,057
8,229
–
1,920
699
1,214
7,836
–
1,717
633
1,060
12,804
11,914
12,062
11,246
1 Fully franked preference share dividends recognised as interest expense and paid during the year ended 30 September 2013:
ANZ CPS1
ANZ CPS2
ANZ CPS3
Consolidated
The Company
2013
$m
43
86
59
2012
$m
53
105
67
2013
$m
43
86
59
2012
$m
53
105
67
2 Rate reset on 18 April 2013 to the five year swap rate +2.00% until the next call date, 18 April 2018, whereupon, if not called, reverts to a floating rate at the three month FRA rate +3.00% and is
callable on any interest payment date thereafter.
3 Callable five years prior to maturity.
4 Callable five years prior to maturity and reverts to floating rate if not called.
Loan capital is subordinated in right of payment to the claims of depositors and other creditors of the Company and its controlled entities which
have issued the notes or preference shares.
As defined by APRA for capital adequacy purposes, the US Trust Securities, ANZ CPS and ANZ Capital Notes constitute Additional Tier 1 capital
and all other subordinated notes constitute Tier 2 capital. The US Trust Securities, ANZ CPS and all outstanding Tier 2 subordinated notes have
been granted transitional Basel 3 capital treatment by APRA. Transition will apply until the relevant security’s first call date, except in the case of
the outstanding USD and NZD perpetual subordinated notes and ANZ CPS3 where the transition treatment will apply up until the earlier of the
end of the transition period (1 January 2021) and the first call date when either a step-up event (i.e. an increase in credit margin) or a conversion
to ANZ ordinary shares is to occur.
116
Notes to the fiNaNcial statemeNts (continued) 28: Loan Capital (continued)
US TRUST SECURITIES
On 27 November 2003, the Company issued 750,000 non-cumulative
Trust Securities (‘US Trust Securities’) at USD1,000 each raising
USD750 million. US Trust Securities comprise an interest paying
unsecured note and a preference share, which are stapled together
and issued by ANZ Capital Trust II (the ‘Trust’).
Dividends are not payable on the preference share while it is stapled
to the note. Distributions on US Trust Securities are non-cumulative
and are payable half yearly in arrears at a fixed rate of 5.36%.
Distributions are subject to certain payment tests (i.e. APRA
requirements and distributable profits being available) and are
expected to be payable on 15 June and 15 December of each year.
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).
ANZ has announced that it will redeem the US Trust Securities
for cash on 16 December 2013. If the US Trust Securities are not
redeemed, the investor is entitled to exchange the US Trust Security
into a variable number of ANZ ordinary shares based on the average
market price of ANZ ordinary shares less a 5% discount.
At any time at the Company’s discretion or upon the occurrence of
certain other ‘conversion events’, the notes that are represented by the
US Trust Securities will be automatically assigned to a subsidiary of the
Company and the preference shares that are represented by the US
Trust Securities will be distributed to investors on 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. If the US Trust Securities are not converted, 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 (as described above).
The preference share forming part of the US Trust Securities confers
protective voting rights that allow the holder to vote in the Company,
in limited circumstances, such as a capital reduction, Company
restructure involving a disposal of the whole of the Company’s
business and undertaking, proposals affecting rights attached to the
preference shares, and similar.
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. The preference shares forming part of the US Trust Securities
rank equally with each of the ANZ CPS, the ANZ Capital Notes and the
preferences shares issued in connection with the Euro Trust Securities.
ANZ CONvERTIBLE PREfERENCE SHARES (ANZ CPS)
} On 30 September 2008, the Company issued 10.8 million
convertible preference shares (‘ANZ CPS1’) at $100 each, raising
$1,081 million before issue costs.
} On 17 December 2009, the Company issued 19.7 million
convertible preference shares (‘ANZ CPS2’) at $100 each, raising
$1,969 million before issue costs.
} On 28 September 2011, the Company issued 13.4 million
convertible preference shares (‘ANZ CPS3’) at $100 each raising
$1,340 million before issue costs.
ANZ CPS are fully paid, mandatorily convertible preference shares.
ANZ CPS are listed on the Australian Stock Exchange.
Dividends on ANZ CPS are non-cumulative and are payable quarterly
in arrears in December, March, June and September (in the case of
ANZ CPS1 and ANZ CPS2) and semi-annually in arrears in March
and September (in the case of ANZ CPS3) in each year and will be
franked in line with the franking applied to ANZ ordinary shares. The
dividends will be based on a floating rate equal to the aggregate of
the 90 day bank bill rate plus a 250 basis point margin (ANZ CPS1) or
a 310 basis point margin (ANZ CPS2) and the 180 day bank bill rate
plus 310 basis point margin (ANZ CPS3), multiplied by one minus
the Australian Company tax rate. Should the dividend not be fully
franked, the terms of the securities provide for a cash gross-up for
the amount of the franking benefit not provided. Dividends 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 dividends are not paid on
ANZ CPS, the Group may not pay dividends or distributions, or return
capital, on ANZ ordinary shares or (in the case of ANZ CPS1 and ANZ
CPS2 only) any other share capital or security ranking equal or junior
to the ANZ CPS for a specified period (subject to certain exceptions).
On 16 June 2014 (ANZ CPS1), 15 December 2016 (ANZ CPS2) or
1 September 2019 (ANZ CPS3) (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
based on the average market price of ANZ ordinary shares less a 2.5%
discount (ANZ CPS1) or 1.0% discount (ANZ CPS2 and ANZ CPS3),
subject to a maximum conversion number.
The mandatory conversion to ANZ ordinary shares is however
deferred for a specified period if the conversion tests are not met.
In respect of ANZ CPS3 only, if a common equity capital trigger event
occurs the ANZ CPS3 will immediately convert into ANZ ordinary
shares, subject to a maximum conversion number. A common equity
capital trigger event occurs if ANZ’s Common Equity Tier 1 capital
ratio is equal to or less than 5.125%.
In respect of ANZ CPS3 only, on 1 September 2017 and each
subsequent semi annual Dividend Payment Date, subject to receiving
APRA’s prior approval and satisfying certain conditions, the Company
has the right to redeem or convert into ANZ ordinary shares all or
some ANZ CPS3 at its discretion on similar terms as mandatory
conversion on a conversion date.
The ANZ CPS rank equally with each other, the ANZ Capital Notes and the
preference shares issued in connection with the US Trust Securities and
Euro Trust Securities. Except in limited circumstances, holders of ANZ CPS
do not have any right to vote in general meetings of the Company.
ANZ CAPITAL NOTES
On 7 August 2013, the Company issued 11.2 million convertible
notes at $100 each, raising $1,120 million before issue costs.
The ANZ Capital Notes are fully paid mandatorily convertible
subordinated perpetual notes. The notes are listed on the Australian
Stock Exchange.
Distributions on the notes are non-cumulative and payable
semi-annual in arrears in March and September in each year and
will be franked in line with the franking applied to ANZ ordinary
shares. The distributions will be based on a floating rate equal to the
aggregate of the 180 day bank bill rate plus a 340 basis point margin,
multiplied by one minus the Australian Company tax rate. Should the
distribution not be fully-franked, the terms of the notes provide for
a cash gross-up for the amount of the franking benefit not provided.
Distributions are subject to ANZ’s absolute discretion and certain
payment conditions being satisfied (including APRA requirements).
If distributions are not paid on the notes, ANZ may not pay dividends
or distributions, or return capital, on ANZ ordinary shares for a
specified period (subject to certain exceptions).
NOTES TO THE FINANCIAL STATEMENTS
117
ANZ ANNUAL REPORT 2013 28: Loan Capital (continued)
On 1 September 2023 (a conversion date), or an earlier date under
certain circumstances, the notes will mandatorily convert into a
variable number of ANZ ordinary shares based on the average
market price of ordinary shares less a 1% discount, subject to
a maximum conversion number. The mandatory conversion to
ANZ ordinary shares is however deferred for a specified period if
the conversion tests are not met.
If a common equity capital trigger event or a non-viability trigger
event occurs the notes will immediately convert into ANZ ordinary
shares, subject to a maximum conversion number. A common equity
capital trigger event occurs if ANZ’s Common Equity Tier 1 capital
ratio is equal to or less than 5.125%. A non-viability trigger event
occurs if APRA notifies the Company that, without the conversion or
write-off of certain securities or a public sector injection of capital
(or equivalent support), it considers that the Company would
become non-viable.
29: Share Capital
Numbers of issued shares
Ordinary shares each fully paid
Preference shares each fully paid
Total number of issued shares
ORDINARY SHARES
On 1 September 2021, subject to receiving APRA’s prior approval
and satisfying certain conditions, the Company has the right to
redeem or convert into ANZ ordinary shares all or some of the notes
at its discretion on similar terms as mandatory conversion on a
conversion date.
The notes rank equally with each of the ANZ CPS and the preference
shares issued in connection with the US Trust Securities and Euro
Trust Securities. Holders of the notes do not have any right to vote in
general meetings of the Company.
The Company
2013
2012
2,743,655,310
500,000
2,744,155,310
2,717,356,961
500,000
2,717,856,961
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
Group employee share acquisition scheme2
Group share option scheme2
Group share buyback3
Balance at end of year
Ordinary share capital
Balance at start of the year
Dividend reinvestment plan1
Group employee share acquisition scheme2,4
OnePath Australia Treasury shares5
Group share option scheme2
Group share buyback3
Balance at end of year
The Company
2013
2,717,356,961
2,719,008
32,625,833
4,850,856
1,354,856
(15,252,204)
2,743,655,310
2012
2,629,034,037
4,090,494
74,110,965
6,983,162
3,138,303
–
2,717,356,961
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
23,070
843
116
7
30
(425)
23,641
21,343
1,461
128
78
60
–
23,070
23,350
843
116
–
30
(425)
23,914
21,701
1,461
128
–
60
–
23,350
1 Refer to note 7 for details of plan.
2 Refer to note 45 for details of plan.
3 Following the issue of 14,766,019 ordinary shares under the Dividend Reinvestment Plan and Bonus Option Plan for the 2013 interim dividend, the Company repurchased $425 million of ordinary
shares via an on-market share buy-back resulting in 15,252,204 ordinary shares being cancelled. The Company intends to neutralise the impact of the ordinary shares issued under the Dividend
Reinvestment Plan and Bonus Option Plan in connection with the 2013 final dividend through an on-market buyback of ordinary shares in an amount equal to the value of those ordinary shares
issued under the Dividend Reinvestment Plan and Bonus Option Plan.
Includes on-market purchase of shares for settlement of amounts due under share-based compensation plans. In addition, 4,850,856 shares were issued during the year ended 30 September
2013 to the Group’s Employee Share Trust for settlement of amounts due under share-based compensation plans (2012: 6,983,162). As at 30 September 2013, there were 15,821,529 Treasury
Shares outstanding (2012: 15,673,505).
4
5 OnePath Australia Limited (OPA) Treasury Shares include shares held in statutory funds as assets backing policyholder liabilities. OPA Treasury Shares outstanding as at 30 September 2013 were
12,573,976 (2012: 13,081,042).
118
Notes to the fiNaNcial statemeNts (continued) 29: Share Capital (continued)
NON-CONTROLLING INTERESTS
Share capital
Retained earnings
Total non-controlling interests
PREfERENCE SHARES
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, raising $871 million net of issue costs. Euro Trust
Securities comprise an interest paying unsecured note and a
€1,000 preference share, which are stapled together and issued
as a Euro Trust Security by ANZ Capital Trust III (the Trust).
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 in addition to the
distributions on the note. Distributions on Euro Trust Securities are
non-cumulative and are payable quarterly in arrears. The distributions
are based upon a floating rate equal to the three month EURIBOR
rate plus a 66 basis point margin up until 15 December 2014, after
which date the distribution rate is the three month EURIBOR rate plus
a 166 basis point margin. At each payment date the three 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. 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).
Preference share balance at start of year
– Euro Trust Securities
Preference share balance at end of year
– Euro Trust Securities
Consolidated
2013
$m
43
19
62
2012
$m
40
9
49
At any time at ANZ’s discretion or upon the occurrence of certain
other ‘conversion events’, the notes that are represented by the
relevant Euro Trust Securities will be automatically assigned to
a branch of the Company and the 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.
The preference share forming part of the Euro Trust Securities confers
protective voting rights that allow the holder to vote in the Company,
in limited circumstances, such as a capital reduction, Company
restructure involving a disposal of the whole of the Company’s
business and undertaking, proposals affecting rights attached to the
preference shares, and similar.
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 preference shares forming each part of each Euro Trust Security
rank equally with each of the ANZ CPS, the ANZ Capital Notes and the
preferences shares issued in connection with the US Trust Securities.
Euro Trust Securities currently qualify as Additional Tier 1 Capital as
defined by APRA for capital adequacy purposes. APRA has granted
ANZ transitional Basel 3 capital treatment for the Euro Trust Securities
until their first call date on 16 December 2014.
Consolidated
The Company
2013
$m
871
871
2012
$m
871
871
2013
$m
871
871
2012
$m
871
871
NOTES TO THE FINANCIAL STATEMENTS
119
ANZ ANNUAL REPORT 2013 30: Reserves and Retained Earnings
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/(exercises)
Transfer of options/rights lapsed to retained earnings2
Total share option reserve
c) Available-for-sale revaluation reserve
Balance at beginning of the year
Gain/(loss) recognised after tax
Transferred to income statement
Total available-for-sale revaluation reserve
d) Hedging reserve
Balance at beginning of the year
Gains/(loss) recognised after tax
Transferred to income statement
Total hedging reserve
e) Transactions with non-controlling interests reserve
Balance at beginning of the year
Transactions with non-controlling interests3
Total transactions with non-controlling interests reserve
Total reserves
Consolidated
2013
$m
2012
$m
(2,831)
1,706
(1,125)
(2,418)
(413)
(2,831)
54
3
(2)
55
94
(6)
33
121
208
(133)
–
75
(23)
(10)
(33)
50
6
(2)
54
126
193
(225)
94
169
27
12
208
(22)
(1)
(23)
The Company
2013
$m
(850)
234
(616)
54
3
(2)
55
21
14
2
37
89
(55)
17
51
–
–
–
2012
$m
(676)
(174)
(850)
50
6
(2)
54
35
110
(124)
21
47
23
19
89
–
–
–
(907)
(2,498)
(473)
(686)
1 Further information about share-based payments to employees is disclosed in note 45.
2 The transfer of balances from the share option reserve to retained earnings represents items of a distributable nature.
3 The premium in excess of the book value paid to acquire an additional interest in a controlled entity from the non-controlling shareholder.
Retained earnings
Balance at beginning of the year
Profit attributable to shareholders of the Company
Transfer of options/rights lapsed from share option reserve1,2
Actuarial gain/(loss) on defined benefit plans after tax3
Dividend income on Treasury shares
Ordinary share dividends paid
Preference share dividends paid
Retained earnings at end of year
Total reserves and retained earnings
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
19,728
6,272
2
14
20
(4,082)
(6)
21,948
21,041
17,787
5,661
2
(44)
24
(3,691)
(11)
19,728
17,230
13,508
5,346
2
(21)
–
(4,082)
–
14,753
14,280
12,351
4,875
2
(29)
–
(3,691)
–
13,508
12,822
1 Further information about share-based payments to employees is disclosed in note 45.
2 The transfer of balances from the share option reserve to retained earnings represents 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(vii) and note 44).
A) fOREIGN CURRENCY TRANSLATION RESER vE
C) AvAILABLE-fOR-SALE RE vALUATION RESER vE
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 RESER vE
The share option reserve arises on the grant of options, performance
rights and deferred share rights to selected employees under the ANZ
share option plan. Amounts are transferred out of the reserve and
into share capital when the equity investments are exercised. Refer to
note 1 C(iii).
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 RESER vE
The hedging reserve represents hedging gains and losses recognised on
the effective portion of cash flow 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).
120
Notes to the fiNaNcial statemeNts (continued) 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 ANZ’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),
along with US Federal Reserve’s minimum Level 2 requirements
under ANZ’s Foreign Holding Company Licence in the United States
of America;
} capital levels are aligned with the risks in the business and to meet
strategic and business development plans through ensuring that
available 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; and
} an appropriate balance between maximising shareholder returns
and prudent capital management principles.
ANZ achieves these objectives through an Internal Capital Adequacy
Assessment Process (ICAAP) whereby ANZ 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 Divisions 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 ANZ’s risk profile and risk appetite outlined in the
Strategic Plan. ANZ’s capital targets reflect the key policy objectives
above, and the desire to ensure that under specific stressed
economic scenarios that capital levels have sufficient capital to
remain above both Economic Capital and Prudential Capital Ratio
(PCR) requirements;
Results are subsequently used to:
} recalibrate ANZ’s management targets for minimum and operating
ranges for its respective classes of capital such that ANZ will have
sufficient capital to remain above both Economic Capital and
regulatory requirements; and
} identify the level of organic capital generation and hence
determine current and future capital issuance requirements for
Level 1 and Level 2.
From these processes, a Capital Plan is developed and approved by
the Board which identifies the capital issuance requirements, capital
securities maturity profile, and options around capital products,
timing and markets to execute the Capital Plan 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 ANZ’s
capital position. Any actions required to ensure ongoing prudent
capital management are submitted to the Board for approval.
REGULATORY ENvIRONMENT
ANZ’s regulatory capital calculation is governed by APRA’s Prudential
Standards which adopt a risk-based capital assessment framework
based on the Basel 3 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 an Authorised Deposit-taking Institution’s (ADIs) capital
adequacy. APRA determines PCRs for Common Equity Tier 1 (CET1),
Tier 1 and Total Capital, with capital as the numerator and RWAs as
the denominator.
To ensure that 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
} stress tests are performed under different economic conditions
} Level 3 – the conglomerate group at the widest level.
to ensure a comprehensive review of ANZ’s capital position both
before and after mitigating actions. The stress tests determine the
level of additional capital (i.e. the ‘stress capital buffer’) needed
to absorb losses that may be experienced during an economic
downturn; and
} 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 Divisional 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.
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 yet 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.
NOTES TO THE FINANCIAL STATEMENTS
121
ANZ ANNUAL REPORT 2013 REGULATORY CHANGE
The Basel Committee on Banking Supervision has released a series
of consultation papers (Basel 3) 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.
Following the above, APRA’s released its new prudential capital
standards in September 2012 detailing the implementation of the
majority of Basel 3 capital reforms in Australia. ANZ has implemented
APRA’s Basel 3 capital reforms from 1 January 2013, and is also well
placed to meet the future implementation of the capital conservation
measures included in the reforms, including the capital conservation
buffer from 1 January 2016.
APRA is still to finalise capital standards on the Basel 3 reforms
dealing with the leverage ratio, contingent capital and measures to
address systematic and inter-connected risks.
APRA has announced that it will proceed with implementing Level 3
Conglomerates framework on 1 January 2015, with final Level 3
Prudential Standards on capital adequacy to be released by January
2014. The standards will regulate a bancassurance group such as ANZ
as a single economic entity with minimum capital requirements and
additional reporting on risk exposure levels. Based upon APRA’s draft
prudential standards covering group governance and risk exposures
in December 2012 and draft Level 3 capital adequacy standards
released in May 2013, ANZ is not expecting any material impact on
its operations.
31: Capital Management (continued)
Tier 1 capital is comprised of Common Equity Tier 1 capital less
deductions and Additional Tier 1 capital instruments. Common Equity
Tier 1 capital comprises shareholders’ equity adjusted for items which
APRA does not allow as regulatory capital or classifies as lower forms
of regulatory capital. Common Equity Tier 1 capital includes the
following significant adjustments:
} Additional Tier 1 capital instruments included within shareholders’
equity are excluded;
} Reserves excluding the hedging reserve and reserves of insurance
and funds management subsidiaries excluded for Level 2 purposes;
} Retained earnings excluding retained earnings of insurance and
funds management subsidiaries excluded for Level 2 purposes, but
includes capitalised deferred fees forming part of loan yields that
meet the criteria set out in the prudential standard;
} Inclusion of qualifying treasury shares; and
} Current year net of tax earnings less profits of insurance and funds
management subsidiaries excluded for Level 2 purposes.
Additional Tier 1 capital instruments are high quality components
of capital that provide a permanent and unrestricted commitment of
funds, are available to absorb losses, are subordinated to the claims of
depositors and senior creditors in the event of the winding up of the
issuer and provide for fully discretionary capital distributions.
Deductions from the capital base comprise mainly deductions to
the Common Equity Tier 1 component. These deductions are largely
intangible assets, investments in insurance and funds management
entities and associates, capitalised expenses (including loan and
origination fees) and the amount of regulatory expected losses (EL)
in excess of eligible provisions.
Tier 2 capital mainly comprises perpetual subordinated debt
instruments and dated subordinated debt instruments which have
a minimum term of five years at issue date.
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, the UK Prudential Regulation Authority, the Monetary
Authority of Singapore, the Hong Kong Monetary Authority and the
China Banking Regulatory Commission who may impose minimum
capitalisation rates on those operations.
Throughout the financial year, the Company and the Group
maintained compliance with the minimum Common Equity Tier 1,
Tier 1 and Total Capital ratios set by APRA and the US Federal
Reserve (as applicable) as well as applicable capitalisation rates set
by regulators in countries where the Company operates branches
and subsidiaries.
122
Notes to the fiNaNcial statemeNts (continued) 31: Capital Management (continued)
CAPITAL ADEqUACY
The table below provides the composition of capital used for regulatory purposes and capital adequacy ratios.
qualifying capital
Tier 1
Shareholders' equity and non-controlling interests
Prudential adjustments to shareholders equity
Gross Common Equity Tier 1 Capital
Deductions
Common Equity Tier 1 Capital
Additional Tier 1 capital
Tier 1 capital
Tier 2 capital
Total qualifying capital
Capital adequacy ratios
Common Equity Tier 1
Tier 1
Tier 2
Total
Risk Weighted Assets
Basel 3
2013
$m
Basel 2
2012
$m
45,615
(932)
44,683
(15,892)
28,791
6,401
35,192
6,190
41,382
8.5%
10.4%
1.8%
12.2%
41,220
(3,857)
37,363
(10,839)
26,524
5,977
32,501
4,073
36,574
8.8%
10.8%
1.4%
12.2%
339,265
300,119
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. Under
APRA’s Basel 3 framework, investment in these controlled entities
is deducted from CET 1 capital (previously, under Basel 2, only the
intangible component of the investment in these controlled entities
was 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 ANZ’s results are excluded
from the determination of CET 1 capital to the extent they have not
been remitted to the Level 2 Group.
ANZ’s insurance companies in Australia are regulated by APRA on
a stand-alone basis. Prudential Standards issued under the Life
Insurance Act 1995 and Insurance Act 1973 determine the minimum
capital requirements these companies are required to meet.
APRA reviewed its capital standards for life and general insurers,
and introduced new prudential standards that came into effect
on 1 January 2013. Life insurance companies in New Zealand are
required to meet minimum capital requirements as determined by
the Insurance (Prudential Supervision) Act.
Fund managers in Australia are subject to ‘Responsible Entity’
regulation by the Australian Securities and Investment Commission
(ASIC). ASIC’s new financial requirements for Responsible Entities
became effective from 1 November, 2012. The regulatory capital
requirements vary depending on the type of Australian Financial
Services Licence or Authorised Representatives’ Licence held.
APRA supervises approved trustees of superannuation funds and it
introduced new financial requirements which became effective from
1 July 2013.
ANZ’s insurance and funds management companies held assets in
excess of regulatory capital requirements at 30 September 2013.
NOTES TO THE FINANCIAL STATEMENTS
123
ANZ ANNUAL REPORT 2013 32: Assets Charged as Security for Liabilities and Collateral Accepted as Security for Assets
ASSETS CHARGED AS SECURITY fOR LIABILITIES 1
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 repurchase transactions. These transactions are governed by standard industry agreements.
} 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 undertakings and all the tangible assets of the entity, other than land and buildings (of Esanda only). 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 as collateral are those in Esanda, UDC and their subsidiaries.
} Specified residential mortgages provided as security for notes and bonds issued to investors as part of our covered bond programs.
} 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
Covered bonds1
Other
Consolidated
The Company
Carrying Amount
Related Liability
Carrying Amount
Related Liability
2013
$m
2,106
1,547
2,179
21,770
277
2012
$m
1,478
536
2,073
15,276
165
2013
$m
n/a
1,540
1,347
17,639
145
2012
$m
n/a
528
1,273
11,162
58
2013
$m
990
1,347
–
16,558
258
2012
$m
514
289
–
11,304
164
2013
$m
n/a
1,341
–
16,558
132
2012
$m
n/a
286
–
11,304
58
1 The consolidated related liability represents covered bonds issued to external investors. The related liability for the Company represents the liability to the covered bond SPE.
COLLATERAL ACCEPTED AS SECURITY fOR ASSETS 1
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 sold or repledged is as follows:
Collateral received on standard repurchase agreement
Fair value of assets which can be sold
Amount of collateral that has been resold
Consolidated
The Company
2013
$m
2012
$m
2013
$m
2012
$m
10,164
3,073
10,007
3,246
9,974
3,073
9,661
2,903
1 The value of cash collateral for derivatives is included in notes 10 and 22. The terms and conditions of the collateral agreements are included in the standard Credit Support Annex that forms part
of the International Swaps and Derivatives Association Master Agreement.
124
Notes to the fiNaNcial statemeNts (continued) 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 and non-traded
interest rate 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 measuring 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 have been 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 and credit strategies, as well as approving
credit transactions beyond the discretion of executive management.
Responsibility for the oversight and control 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, including where they are embedded in
business units. The primary responsibility for prudent and profitable
management of credit risk 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 must be suitably skilled and accredited 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; and
} 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.
Where an application does not meet the automated assessment
criteria it will be referred out for manual assessment, with assessors
considering 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 and requirements. Credit
policies and requirements 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 CCR is typically
expressed as a score which maps back to the PD; and
} 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 the 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).
NOTES TO THE FINANCIAL STATEMENTS
125
ANZ ANNUAL REPORT 2013 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:
} charges over cash deposits;
} security over real estate including residential, commercial,
industrial or rural property; and
} other security includes charges over business assets, security over
specific plant and equipment, charges over listed shares, bonds or
securities and guarantees and pledges.
Credit policy requirements 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
approach uses historical internal loss data and other relevant external
data to assist in determining the discount that each type of collateral
would be expected to incur in a forced sale. This 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 a 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 (or other forms of eligible 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.
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 the nature of
counterparty, probability of default and collateral provided.
126
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
Concentrations of credit risk analysis
Composition of financial instruments that give rise to credit risk by industry:
Consolidated
Australia
Agriculture, forestry
fishing and mining
Business services
Construction
Electricity, gas and
water supply
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
Electricity, gas and
water supply
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
2013
$m
2012
$m
Trading and AfS1
2012
2013
$m
$m
Derivatives
Loans
and advances2,6
Other
financial
assets3
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
Credit related
commitments4
2012
2013
$m
$m
Total5,6
2013
$m
2012
$m
11
7
–
–
–
101
11
23
3
–
2
6
–
4
274
101
68
83
65
109
13,132
5,679
5,141
12,666
5,490
4,989
213
94
91
154
68
66
8,519
3,658
4,090
8,136
3,003
3,650
22,152
9,539
9,392
21,146
8,637
8,841
–
162
162
715
928
3,284
3,316
–
–
3,091
2,245
7,252
6,651
40
–
2
118
264
7,431
7,075
108
78
2,146
2,370
9,803
9,829
14,527
9,131
19,305
18,853
27,558
30,680
9,878
8,986
138
101
5,920
4,051
77,326
71,802
–
54
–
–
2
8
281
107
32
63
–
345
35
5
264
14
20,930
41
–
10
112
66
3
23
16,642
53
–
24
122
104
6
280
155
472
–
552
146
411
448
1,084
281
906
653
6,929
484
8,124
– 215,540 202,042
25,006
9,203
6,413
6,429
8,675
24,821
10,535
6,592
5,684
8,118
1,007
194
669
207
705
5
145
3,233
424
163
97
102
145
3
105
2,428
307
118
70
74
105
329
8,132
38,477
9,759
4,204
3,206
5,738
4,805
312
7,646
17,754
22,072
16,897
15,773
34,525 257,250 238,995
35,370
35,566
13,746
15,162
10,469
10,380
12,719
12,256
14,791
14,282
8,681
4,074
3,208
5,739
5,012
14,997
10,064
40,657
36,258
32,102
36,098 323,417 308,898
4,958
3,677 102,074
92,652 518,205 487,647
13
9
–
17
–
19
10
–
10
–
26
–
–
27
–
–
–
–
29
6
–
59
9
2
16,365
835
921
14,555
1,154
812
23
322
463
665
748
–
24
33
919
931
82
4
5
3
5
75
6
4
4
5
1,590
414
447
1,491
428
491
18,105
1,268
1,373
16,199
1,607
1,309
1,321
1,251
2,355
2,499
259
306
1,207
1,275
1,389
1,232
4,557
2,950
5,939
6,880
747
400
231
59
736
832
13,599
12,353
20
48
–
12
91
17
78
–
283
34
–
5
22
20
43
–
5,226
–
–
–
–
3
–
41
6,843
5
–
–
5
40
–
26
221
61
–
15
36
48
12
55
322
78
–
32
34
74
17
18
1,094
2,595
53,978
7,065
1,529
1,293
1,092
601
1,063
2,327
45,304
6,056
1,416
1,322
954
689
1,694
1,678
9,880
9,892
6,768
8,021
89,699
77,731
5
13
270
35
8
6
5
3
675
5
12
234
31
7
7
5
4
861
1,437
9,099
990
627
542
1,185
891
855
1,632
6,973
899
807
462
1,055
415
7,427
4,154
63,347
8,117
2,291
1,909
2,372
1,591
9,371
4,088
52,511
7,023
2,291
1,925
2,074
1,152
458
20,399
17,897 129,115 115,677
1 Available-for-sale assets.
2 Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
3 Mainly comprises trade dated assets and accrued interest.
4 Credit related commitments comprise undrawn facilities and customer contingent liabilities.
5 Prior period restatement due to account reclassification.
6 Comparative information has been restated to reflect the reclassification of Chattel Mortgages (refer note 1).
NOTES TO THE FINANCIAL STATEMENTS
127
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
Concentrations of credit risk analysis (continued):
Composition of financial instruments that give rise to credit risk by industry (continued):
Liquid assets and due
from other financial
institutions
Trading and
AfS1 assets
Derivatives
Loans
and advances2,6
Other
financial
assets3
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
Credit related
commitments4
2012
2013
$m
$m
Total6
2013
$m
2012
$m
–
3
1
–
–
7
1
1
–
–
–
–
–
36
–
–
–
–
308
4
14
48
2
10
2,850
919
610
1,590
492
457
29
121
127
2,054
1,603
–
9
5
1,057
825
42,161
38,629
11,662
8,442
5,401
3,992
8,795
6,686
16
32
1
–
1
–
101
–
29
11
–
–
1
3
74
127
6,444
81
–
84
8
69
21
422
5,525
220
–
–
13
1
4
709
39
371
–
159
32
60
140
350
8
269
–
111
22
78
86
52
364
14,198
9,143
4,238
1,172
2,890
9,739
2,629
281
11,404
6,469
3,312
934
2,416
7,315
2,392
45
30
11
–
22
73
12
347
183
103
30
73
165
149
36
24
9
5,530
2,953
2,826
4,002
2,155
2,662
8,733
3,909
3,462
5,683
2,674
3,139
–
2,316
1,687
4,527
3,446
18
424
258
1,512
1,106
59
10,646
6,836
78,738
64,644
10
279
147
83
24
59
133
120
1,041
26,598
7,821
1,877
1,253
1,891
17,564
1,989
1,059
18,804
6,444
1,349
690
1,211
13,171
2,861
7,916
41,627
17,148
6,461
2,496
4,983
27,730
5,539
6,912
30,987
13,060
4,855
1,684
3,768
20,783
6,261
42,316
38,883
18,827
14,943
7,008
4,810
60,658
46,176
1,243
1,001
84,729
63,189 214,781 169,002
24
19
1
17
–
127
22
24
10
40
29
–
2
6
–
4
611
111
82
190
76
121
32,347
7,433
6,672
28,811
7,136
6,258
340
128
107
265
98
79
15,639
7,025
7,363
13,629
5,586
6,803
48,990
14,716
14,227
43,028
12,918
13,289
225
214
1,158
1,518
6,003
5,667
3
4
6,728
5,183
14,134
12,596
–
2
151
302
9,407
8,831
135
101
2,829
2,934
12,522
12,210
58,077
48,992
35,524
30,245
38,898
41,552
19,420
16,072
442
219
17,302
11,719 169,663 148,799
36
134
1
12
94
25
460
107
344
108
–
350
58
28
381
141
32,600
122
–
94
120
138
24
486
29,010
278
–
24
140
145
10
1,015
415
904
–
726
214
519
600
1,489
611
1,253
2,111
23,722
1,828
21,855
– 278,661 253,815
34,374
11,553
10,151
14,698
11,756
36,124
13,236
10,775
16,515
11,348
1,150
250
821
310
775
22
505
3,686
562
201
176
272
297
18
396
2,809
421
149
136
212
229
2,231
36,167
55,397
12,626
6,084
5,639
24,487
7,685
2,226
34,037
37,415
28,082
51,972
61,554
47,942 337,745 304,566
47,248
50,144
10,929
17,721
19,949
5,571
16,162
17,272
4,881
35,576
42,358
19,965
22,204
21,412
8,288
Consolidated
Overseas Markets
Agriculture, forestry
fishing and mining
Business services
Construction
Electricity, gas and
water supply
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
Electricity, gas and
water supply
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
Gross Total
59,007
50,625
69,364
61,093
45,878
48,929 473,774 432,805
6,876
5,136 207,202 173,738 862,101 772,326
Individual provision for
credit impairment
Collective provision for
credit impairment
Income yet to mature
Capitalised brokerage/
mortgage origination
fees
Excluded from analysis
above
Net Total
–
–
–
–
–
–
(1,440)
(1,729)
–
–
(27)
(44)
(1,467)
(1,773)
–
59,007
–
50,625
–
69,364
–
61,093
–
45,878
–
(2,236)
(2,292)
48,929 470,042 428,840
–
6,876
–
(2,765)
(529)
5,136 206,580 173,165 857,747 767,788
(2,887)
(595)
–
–
–
–
–
–
(1,067)
(1,241)
–
–
–
–
(1,067)
(1,241)
–
59,007
–
50,625
–
69,364
–
61,093
–
45,878
2,907
61,914
3,056
53,681
59
69,423
71
61,164
–
45,878
–
797
48,929 469,917 428,396
942
–
–
48,929 469,917 428,396
–
–
6,876
–
6,876
–
797
5,136 206,580 173,165 857,622 767,344
942
–
–
–
3,127
5,136 206,580 173,165 860,588 770,471
2,966
–
–
1 Available-for-sale assets.
2 Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
3 Mainly comprises trade dated assets and accrued interest.
4 Credit related commitments comprise undrawn facilities and customer contingent liabilities.
5 Prior period restatement due to account reclassification.
6 Comparative information has been restated to reflect the reclassification of Chattel Mortgages (refer note 1).
128
Notes to the fiNaNcial statemeNts (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
Electricity, gas and
water supply
Entertainment, leisure
and tourism
Financial, investment
and insurance5
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
Electricity, gas and
water supply
Entertainment, leisure
and tourism
Financial, investment
and insurance5
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
2013
$m
2012
$m
Trading and AfS1
2012
2013
$m
$m
Derivatives
Loans
and advances2,6
Other
financial
assets3
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
Credit related
commitments4
2012
2013
$m
$m
Total6
2013
$m
2012
$m
11
7
–
–
–
101
11
23
–
40
3
–
2
53
–
6
–
4
274
101
68
83
65
109
12,948
5,670
5,129
12,295
5,451
4,952
56
715
928
3,275
3,292
2
118
264
7,412
7,021
161
75
72
–
86
103
48
46
8,517
3,658
4,086
6,362
2,354
2,860
21,914
9,511
9,357
18,950
7,929
7,994
–
3,088
–
7,131
4,276
55
2,144
1,857
9,760
9,239
14,308
9,169
20,173
19,224
32,837
35,149
9,974
10,299
122
78
6,030
23,885
83,444
97,804
–
53
–
–
2
8
276
107
32
63
–
345
35
5
264
14
20,929
41
–
10
112
66
3
23
16,642
53
–
24
122
104
6
280
155
472
–
552
146
411
448
1,084
281
906
651
6,905
481
8,059
– 214,958 200,586
24,826
9,135
6,358
6,383
8,665
24,768
10,519
6,592
5,684
8,059
1,007
194
669
207
705
5
116
2,669
339
130
78
81
117
3
74
1,710
217
83
50
52
75
329
8,132
38,437
9,749
4,204
3,206
5,738
4,746
244
5,991
17,683
22,069
15,146
15,719
27,056 256,064 229,352
33,247
35,418
12,761
15,113
9,699
10,361
11,409
12,230
14,735
14,136
6,828
3,192
2,513
4,497
4,996
14,772
10,102
41,415
36,523
37,381
40,567 322,544 307,803
4,051
2,594 102,064
92,635 522,227 490,224
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11
10
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,252
–
–
–
–
–
–
–
7,518
–
–
–
–
–
11
10
8,252
7,518
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
48
–
–
–
–
–
48
–
–
–
–
–
–
–
–
82
–
–
–
–
–
82
–
–
–
–
–
–
–
–
–
–
11
10
–
–
8,300
–
–
–
–
–
–
–
7,600
–
–
–
–
–
8,311
7,610
1 Available-for-sale assets.
2 Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
3 Mainly comprises trade dated assets and accrued interest.
4 Credit related commitments comprise undrawn facilities and customer contingent liabilities.
5 Includes amounts due from other Group entities.
6 Comparative information has been restated to reflect the reclassification of Chattel Mortgages (refer note 1).
NOTES TO THE FINANCIAL STATEMENTS
129
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
Concentrations of credit risk analysis (continued):
Composition of financial instruments that give rise to credit risk by industry (continued):
Liquid assets and due
from other financial
institutions
Trading and
AfS1 assets
Derivatives
Loans
and advances2,6
Other
financial
assets3
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
Credit related
commitments4
2012
2013
$m
$m
Total6
2013
$m
2012
$m
–
2
1
–
–
2
–
–
–
–
–
–
–
–
–
–
–
–
27
–
173
2
7
56
5
25
1
5
2,363
778
414
988
422
296
69
1,759
1,493
3
815
598
36,952
35,720
9,765
6,671
2,804
2,269
7,875
6,466
12
8
–
–
1
–
81
2
25
3
–
–
1
3
46
37
3,608
7
–
76
–
62
–
310
4,332
204
–
–
–
1
–
507
22
158
–
83
17
32
63
197
5
113
–
79
11
40
41
28
222
8,385
5,708
3,559
627
2,291
7,885
2,168
255
9,149
5,300
2,938
563
1,940
6,117
1,866
37,059
35,837
13,828
11,742
3,619
2,689
44,849
38,391
11
9
1
–
–
103
11
23
–
40
3
–
2
53
–
6
–
4
447
103
75
108
66
114
15,311
6,448
5,543
13,283
5,873
5,248
83
771
997
5,034
4,785
2
123
267
8,227
7,619
17
13
4
–
11
47
8
196
93
65
13
36
93
81
677
178
88
76
–
97
18
14
4
4,335
2,361
2,737
3,655
2,040
2,560
6,888
3,156
3,163
4,688
2,477
2,865
–
1,743
–
3,558
1,589
12
307
180
1,138
793
49
7,859
6,731
65,302
57,906
8
207
98
68
14
38
98
85
963
21,024
3,647
1,441
691
1,461
14,247
1,543
1,053
16,021
5,672
1,165
454
1,191
11,780
2,861
4,835
29,778
9,448
5,224
1,349
3,882
22,369
4,301
5,678
25,697
11,070
4,250
1,043
3,213
18,082
5,384
713
64,359
55,363 164,391 144,735
121
62
50
12,852
6,019
6,823
10,017
4,394
5,420
28,802
12,667
12,520
23,638
10,406
10,859
–
4,831
–
10,689
5,865
67
2,451
2,037
10,898
10,032
51,260
44,889
29,938
25,895
35,652
37,428
17,849
16,765
169
127
13,889
30,616 148,757 155,720
12
61
–
–
3
8
357
109
57
66
–
345
36
8
310
51
24,537
48
–
86
112
128
3
333
20,974
257
–
24
122
105
6
787
177
630
–
635
163
443
511
1,281
286
1,019
873
15,290
736
17,208
– 228,918 213,404
27,764
9,698
8,298
12,500
10,531
28,327
11,146
8,883
13,569
10,227
1,086
205
709
248
733
13
312
2,762
404
143
114
174
198
11
281
1,808
285
97
88
150
160
1,292
29,156
42,132
11,190
4,895
4,667
19,985
6,289
23,361
26,904
1,297
22,012
40,843
45,497
32,810 273,812 248,022
37,497
40,642
13,804
16,462
12,912
14,243
29,491
34,599
20,119
18,437
7,993
3,646
3,704
16,277
7,857
The Company
Overseas Markets
Agriculture, forestry
fishing and mining
Business services
Construction
Electricity, gas and
water supply
Entertainment, leisure
and tourism
Financial, investment
and insurance5
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
Electricity, gas and
water supply
Entertainment, leisure
and tourism
Financial, investment
and insurance5
Government and
official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other
Gross Total
51,831
45,939
55,243
48,265
41,011
43,266 375,645 353,712
4,728
3,307 166,471 148,080 694,929 642,569
Individual provision for
credit impairment
Collective provision for
credit impairment
–
–
–
–
–
–
–
–
–
–
–
–
(1,046)
(1,242)
(1,729)
(1,728)
–
–
–
–
(10)
(27)
(1,056)
(1,269)
(457)
(410)
(2,186)
(2,138)
51,831
45,939
55,243
48,265
41,011
43,266 372,870 350,742
4,728
3,307 166,004 147,643 691,687 639,162
Income yet to mature
Capitalised brokerage/
mortgage origination
fees
–
–
–
–
–
–
–
–
–
–
–
(723)
(952)
–
787
707
–
–
–
–
–
–
–
(723)
(952)
–
787
707
51,831
45,939
55,243
48,265
41,011
43,266 372,934 350,497
4,728
3,307 166,004 147,643 691,751 638,917
Excluded from analysis
above
954
1,010
44
66
–
–
–
–
–
–
–
–
998
1,076
Net total
52,785
46,949
55,287
48,331
41,011
43,266
372,934 350,497
4,728
3,307 166,004 147,643 692,749 639,993
1 Available-for-sale assets.
2 Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
3 Mainly comprises trade dated assets and accrued interest.
4 Credit related commitments comprise undrawn facilities and customer contingent liabilities.
5 Includes amounts due from other Group entities.
6 Comparative information has been restated to reflect the reclassification of Chattel Mortgages (refer note 1).
130
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
Credit quality
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
On-balance sheet positions
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments2
Available-for-sale assets
Net loans and advances3
– Australia4
– International and Institutional Banking4
– New Zealand4
– Global Wealth
Other financial assets5,6
On-balance sheet sub total
Off-balance sheet positions
Undrawn facilities
Contingent facilities
Off-balance sheet sub total
Total
The Company
On-balance sheet positions
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments2
Available-for-sale assets
Net loans and advances3
Other financial assets6
On-balance sheet sub total
Off-balance sheet positions
Undrawn facilities
Contingent facilities
Off-balance sheet sub total
Total
Reported on
Balance Sheet
Exclude1
Maximum exposure
to credit risk
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
39,737
22,177
41,288
45,878
28,135
36,578
17,103
40,602
48,929
20,562
2,907
–
–
–
59
3,056
–
–
–
71
36,830
22,177
41,288
45,878
28,076
33,522
17,103
40,602
48,929
20,491
271,619
110,075
81,414
6,187
6,876
253,892
98,302
70,268
5,361
5,136
–
–
–
–
–
–
–
–
–
–
271,619
110,075
81,414
6,187
6,876
253,892
98,302
70,268
5,361
5,136
653,386
596,733
2,966
3,127
650,420
593,606
170,670
36,532
141,355
32,383
207,202
173,738
–
–
–
–
–
–
170,670
36,532
141,355
32,383
207,202
173,738
860,588
770,471
2,966
3,127
857,622
767,344
Reported on
balance Sheet
2013
$m
2012
$m
33,838
18,947
31,464
41,011
23,823
372,467
4,728
32,782
14,167
30,490
43,266
17,841
350,060
3,307
526,278
491,913
134,622
31,849
118,461
29,619
166,471
148,080
Exclude1
Maximum exposure
to credit risk
2013
$m
954
–
–
–
44
–
–
998
–
–
–
2012
$m
2013
$m
2012
$m
1,010
–
–
–
66
–
–
32,884
18,947
31,464
41,011
23,779
372,467
4,728
31,772
14,167
30,490
43,266
17,775
350,060
3,307
1,076
525,280
490,837
–
–
–
134,622
31,849
118,461
29,619
166,471
148,080
692,749
639,993
998
1,076
691,751
638,917
Includes individual and collective provisions for credit impairment held in respect of credit related commitments.
1 Includes bank notes and coins and cash at bank within liquid assets and equity instruments within available-for-sale financial assets.
2 Derivative financial instruments are net of credit valuation adjustments.
3
4 Includes impact of divisional reclassification.
5 Prior period restatement due to account reclassification.
6 Mainly comprises trade dated assets and accrued interest.
NOTES TO THE FINANCIAL STATEMENTS
131
ANZ ANNUAL REPORT 2013 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.
All customers with whom ANZ has a credit relationship including guarantors, are assigned a Customer Credit Rating (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.
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 expansion in maturity materially
beyond those typically offered to new facilities with similar risk.
Consolidated
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
– Australia3
– International and Institutional Banking3
– New Zealand3
– Global Wealth
Other financial assets4,5
Credit related commitments6
Total
The Company
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Other financial assets4
Credit related commitments6
Total
Neither past
due nor
impaired
Past due but not
impaired
Restructured
Impaired
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
36,830
22,177
41,288
45,786
28,076
33,522
17,103
40,602
48,784
20,491
–
–
–
–
–
–
–
–
–
–
261,250
108,450
79,136
6,069
6,876
207,124
244,196
96,499
67,621
5,241
5,136
173,591
9,447
443
1,770
103
–
–
8,550
623
1,863
99
–
–
843,062
752,786
11,763
11,135
–
–
–
25
–
3
300
13
–
–
–
341
–
–
–
29
–
39
309
148
–
–
–
525
Maximum exposure
to credit risk
2013
$m
2012
$m
36,830
22,177
41,288
45,878
28,076
33,522
17,103
40,602
48,929
20,491
2012
$m
–
–
–
116
–
1,107
871
636
21
–
147
271,619
110,075
81,414
6,187
6,876
207,202
253,892
98,302
70,268
5,361
5,136
173,738
–
–
–
67
–
919
882
495
15
–
78
2,456
2,898
857,622
767,344
Neither past
due nor
impaired
2013
$m
2012
$m
32,884
18,947
31,464
40,919
23,779
360,814
4,728
166,399
31,772
14,167
30,490
43,122
17,775
338,717
3,307
147,935
679,934
627,285
Past due but not
impaired
Restructured
Impaired
2013
$m
–
–
–
–
–
9,717
–
–
9,717
2012
$m
–
–
–
–
–
9,091
–
–
9,091
2013
$m
–
–
–
25
–
259
–
–
284
2012
$m
–
–
–
29
–
348
–
–
377
2013
$m
–
–
–
67
–
1,677
–
72
1,816
Maximum exposure
to credit risk
2013
$m
2012
$m
32,884
18,947
31,464
41,011
23,779
372,467
4,728
166,471
31,772
14,167
30,490
43,266
17,775
350,060
3,307
148,080
2012
$m
–
–
–
115
–
1,904
–
145
2,164
691,751
638,917
Includes individual and collective provisions for credit impairment held in respect of credit related commitments.
Includes impact of divisional reclassification.
1 Derivative assets, considered impaired, are net of credit valuation adjustments.
2
3
4 Mainly comprises trade dated assets and accrued interest.
5 Prior period restatement due to account reclassification.
6 Comprises undrawn facilities and customer contingent liabilities.
132
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
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.
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’s respectively.
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’s 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’s respectively.
Consolidated
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
– Australia2
– International and Institutional Banking2
– New Zealand2
– Global Wealth
Other financial assets3,4
Credit related commitments5
Total
The Company
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
Other financial assets3
Credit related commitments5
Total
Strong credit profile
Satisfactory risk
2013
$m
2012
$m
36,704
21,206
41,288
44,531
26,781
32,790
16,296
40,503
46,577
19,065
2013
$m
112
967
–
1,104
1,280
2012
$m
664
792
99
1,962
1,420
Sub-standard
but not past
due or impaired
2013
$m
14
4
–
151
15
2012
$m
68
15
–
245
6
Neither past due nor
impaired total
2013
$m
2012
$m
36,830
22,177
41,288
45,786
28,076
33,522
17,103
40,602
48,784
20,491
194,152
84,070
54,512
3,378
6,536
175,609
181,060
73,172
43,532
2,464
4,742
142,037
54,603
21,429
22,381
2,667
289
29,275
51,990
20,105
21,262
2,701
334
29,535
12,495
2,951
2,243
24
51
2,240
11,146
3,222
2,827
76
60
2,019
261,250
108,450
79,136
6,069
6,876
207,124
244,196
96,499
67,621
5,241
5,136
173,591
688,767
602,238
134,107
130,864
20,188
19,684
843,062
752,786
Strong credit profile
Satisfactory risk
Sub-standard
but not past
due or impaired
Neither past due nor
impaired total
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
32,820
18,526
31,464
39,763
23,707
272,401
4,510
143,669
31,107
13,806
30,460
41,090
17,707
253,522
3,032
125,774
43
421
–
1,011
63
73,628
182
20,939
609
357
30
1,837
62
71,334
230
20,500
21
–
–
145
9
14,785
36
1,791
56
4
–
195
6
13,861
45
1,661
32,884
18,947
31,464
40,919
23,779
360,814
4,728
166,399
31,772
14,167
30,490
43,122
17,775
338,717
3,307
147,935
566,860
516,498
96,287
94,959
16,787
15,828
679,934
627,285
Includes individual and collective provisions for credit impairment held in respect of credit related commitments.
1
2 Includes impact of divisional reclassification.
3 Mainly comprises trade dated assets and accrued interest.
4 Prior period restatement due to account reclassification.
5 Comprises undrawn commitments and customer contingent liabilities.
NOTES TO THE FINANCIAL STATEMENTS
133
ANZ ANNUAL REPORT 2013 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 Sep 13
Liquid assets
Due from other financial
institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
– Australia
– International and
Institutional Banking
– New Zealand
– Global Wealth
Other financial assets2
Credit related commitments3
Consolidated
The Company
1-5
days
$m
–
–
–
–
–
3,096
2,231
–
852
13
–
–
6-29
days
$m
–
–
–
–
–
4,416
3,622
299
435
60
–
–
30-59
days
$m
–
–
–
–
–
1,506
1,295
1
209
1
–
–
60-89
days
$m
–
–
–
–
–
927
745
88
83
11
–
–
>90
days
$m
–
Total
$m
–
–
–
–
–
1,818
1,554
–
–
–
–
11,763
9,447
55
191
18
–
–
443
1,770
103
–
–
1-5
days
$m
–
–
–
–
–
2,240
–
–
–
–
–
–
6-29
days
$m
–
–
–
–
–
3,798
–
–
–
–
–
–
30-59
days
$m
–
–
–
–
–
1,313
–
–
–
–
–
–
60-89
days
$m
–
–
–
–
–
790
–
–
–
–
–
–
>90
days
$m
–
–
–
–
–
1,576
–
–
–
–
–
–
Total
$m
–
–
–
–
–
9,717
–
–
–
–
–
–
Total
3,096
4,416
1,506
927
1,818
11,763
2,240
3,798
1,313
790
1,576
9,717
As at 30 Sep 12
Liquid assets
Due from other financial
institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
– Australia4
– International and
Institutional Banking4
– New Zealand
– Global Wealth
Other financial assets2
Credit related commitments3
Unknown
Consolidated
The Company
1-5
days
$m
–
–
–
–
–
2,285
1,454
46
772
13
–
–
–
6-29
days
$m
–
–
–
–
–
4,926
3,823
409
619
75
–
–
–
30-59
days
$m
–
–
–
–
–
1,478
1,263
4
208
3
–
–
–
60-89
days
$m
–
–
–
–
–
733
561
80
84
8
–
–
–
>90
days
$m
–
Total
$m
–
–
–
–
–
1,713
1,449
–
–
–
–
11,135
8,550
84
180
–
–
–
–
623
1,863
99
–
–
–
1-5
days
$m
–
–
–
–
–
1,544
–
6-29
days
$m
–
–
–
–
–
4,197
–
30-59
days
$m
–
–
–
–
–
1,289
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
60-89
days
$m
–
–
–
–
–
606
–
–
–
–
–
–
–
>90
days
$m
–
–
–
–
–
1,455
–
Total
$m
–
–
–
–
–
9,091
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
2,285
4,926
1,478
733
1,713
11,135
1,544
4,197
1,289
606
1,455
9,091
Includes individual and collective provisions for credit impairment held in respect of credit related commitments.
1
2 Mainly comprises trade dated assets and accrued interest.
3 Comprises undrawn commitments and customer contingent liabilities.
4 Prior period restatement includes impact of divisional reclassification.
134
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
Estimated value of collateral for all financial assets
Consolidated
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
– Australia2
– International and Institutional Banking2
– New Zealand2
– Global Wealth
Other financial assets3,4
Credit related commitments5
Total
The Company
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
Other financial assets3
Credit related commitments5
Total
financial effect
of collateral
Maximum exposure to
credit risk
Unsecured portion of
credit exposure
2013
$m
9,640
–
1,037
3,921
330
2012
$m
9,103
–
705
2,531
210
2013
$m
36,830
22,177
41,288
45,878
28,076
2012
$m
33,522
17,103
40,602
48,929
20,491
2013
$m
27,190
22,177
40,251
41,957
27,746
2012
$m
24,419
17,103
39,897
46,398
20,281
242,647
38,803
76,328
5,587
1,188
35,938
225,934
39,091
66,047
5,088
1,263
35,604
271,619
110,075
81,414
6,187
6,876
207,202
253,892
98,302
70,268
5,361
5,136
173,738
28,972
71,272
5,086
600
5,688
171,264
27,958
59,211
4,221
273
3,873
138,134
415,419
385,576
857,622
767,344
442,203
381,768
financial effect
of collateral
Maximum exposure to
credit risk
Unsecured portion of
credit exposure
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
9,292
–
671
3,531
222
296,307
843
29,394
8,619
–
346
2,326
102
270,895
1,008
29,744
32,884
18,947
31,464
41,011
23,779
372,467
4,728
166,471
31,772
14,167
30,490
43,266
17,775
350,060
3,307
148,080
23,592
18,947
30,793
37,480
23,557
76,160
3,885
137,077
23,153
14,167
30,144
40,940
17,673
79,165
2,299
118,336
340,260
313,040
691,751
638,917
351,491
325,877
Includes individual and collective provisions for credit impairment held in respect of credit related commitments.
1
2 Includes impact of divisional reclassification.
3 Mainly comprises trade dated assets and accrued interest.
4 Prior period restatement due to account reclassification.
5 Comprises undrawn commitments and customer contingent liabilities.
NOTES TO THE FINANCIAL STATEMENTS
135
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
financial assets that are individually impaired
Consolidated
The Company
Impaired assets
2013
$m
2012
$m
Individual provision
balance
2013
$m
2012
$m
Impaired assets
Individual provision
balance
2013
$m
2012
$m
2013
$m
2012
$m
–
–
–
67
–
2,353
–
82
2,502
–
–
–
–
–
814
–
23
837
–
–
–
–
–
584
–
–
584
–
–
–
67
–
3,751
–
105
3,923
–
–
–
111
–
2,838
–
173
3,122
–
–
–
–
–
991
–
18
1,009
–
–
–
5
–
535
–
–
540
–
–
–
116
–
4,364
–
191
4,671
–
–
–
–
–
934
–
10
944
–
–
–
–
–
244
–
17
261
–
–
–
–
–
262
–
–
262
–
–
–
–
–
1,440
–
27
1,467
–
–
–
–
–
1,100
–
27
1,127
–
–
–
–
–
351
–
17
368
–
–
–
–
–
277
–
–
277
–
–
–
–
–
1,729
–
44
1,773
–
–
–
67
–
2,260
–
82
2,409
–
–
–
–
–
30
–
–
30
–
–
–
–
–
433
–
–
433
–
–
–
67
–
2,723
–
82
2,872
–
–
–
111
–
2,664
–
172
2,947
–
–
–
–
–
31
–
–
31
–
–
–
4
–
451
–
–
455
–
–
–
115
–
3,146
–
172
3,433
–
–
–
–
–
896
–
10
906
–
–
–
–
–
8
–
–
8
–
–
–
–
–
142
–
–
142
–
–
–
–
–
1,046
–
10
1,056
–
–
–
–
–
1,009
–
27
1,036
–
–
–
–
–
9
–
–
9
–
–
–
–
–
224
–
–
224
–
–
–
–
–
1,242
–
27
1,269
Australia
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Loans and advances
Other financial assets1
Credit related commitments2
Subtotal
New Zealand
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Loans and advances
Other financial assets1
Credit related commitments2
Subtotal
Overseas
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Loans and advances
Other financial assets1
Credit related commitments2
Subtotal
Aggregate
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Loans and advances
Other financial assets1
Credit related commitments2
Total
1 Mainly comprises trade dated assets and accrued interest.
2 Comprises undrawn commitments and customer contingent liabilities.
136
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
Market risk (excludes insurance and funds management)
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 profit and loss 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:
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.
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 99% confidence interval. This means that
there is a 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.
NOTES TO THE FINANCIAL STATEMENTS
137
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
Traded Market Risk
Below are the aggregate Value at Risk (VaR) exposures at a 99% confidence level covering both physical and derivatives trading positions for the
Bank’s principal trading centres.
30 September 2013
30 September 2012
Consolidated
value at risk at 99% confidence
Foreign exchange
Interest rate
Credit
Commodity
Equity
Diversification benefit
The Company
value at risk at 99% confidence
Foreign exchange
Interest rate
Credit
Commodity
Equity
Diversification benefit
As at
$m
3.0
3.9
4.2
1.6
1.4
(8.5)
5.6
As at
$m
3.0
3.7
3.8
1.6
1.4
(8.6)
4.9
High for
year
$m
Low for
year
$m
Average for
year
$m
12.6
11.6
8.6
4.2
3.4
n/a
13.6
2.3
2.8
2.8
1.2
0.6
n/a
4.9
5.2
5.8
4.2
2.3
1.6
(10.4)
8.7
30 September 2013
High for
year
$m
Low for
year
$m
Average for
year
$m
11.5
12.8
8.6
4.2
3.4
n/a
12.9
2.3
2.6
2.7
1.2
0.6
n/a
4.7
5.2
5.8
4.1
2.3
1.6
(10.4)
8.6
As at
$m
3.5
4.5
4.0
1.8
1.2
(6.9)
8.1
As at
$m
3.5
4.0
4.0
1.8
1.2
(6.7)
7.8
High for
year
$m
Low for
year
$m
Average for
year
$m
10.0
8.1
7.5
4.8
4.0
n/a
13.6
3.5
2.8
2.6
1.5
0.7
n/a
5.7
5.9
5.4
4.7
3.3
1.6
(11.6)
9.3
30 September 2012
High for
year
$m
Low for
year
$m
Average for
year
$m
9.9
7.5
7.5
4.8
4.0
n/a
13.3
3.5
2.3
2.6
1.5
0.7
n/a
5.4
5.9
4.6
4.6
3.3
1.6
(11.1)
8.9
VaR is calculated separately for foreign exchange, interest rate, credit, commodity and equities and for the Group. The diversification
benefit reflects the historical correlation between these products. Electricity commodities risk is measured under the standard 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.
138
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
Non-traded Market Risk (Balance Sheet Risk)
The principal objectives of balance sheet management are to maintain acceptable levels of interest rate and liquidity risk to mitigate the
negative impact of movements in interest rates on the earnings and market value of the Group’s banking book, while ensuring the Group
maintains sufficient liquidity to meet its obligations as they fall due.
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.
2013
2012
Consolidated
value at risk at 99% confidence
Australia
New Zealand
Asia Pacific, Europe & America
Diversification benefit
The Company
value at risk at 99% confidence
Australia
New Zealand
Asia Pacific, Europe & America
Diversification benefit
As at
$m
66.3
12.6
9.7
(11.4)
77.2
As at
$m
66.3
0.2
9.2
(1.8)
73.9
High for
year
$m
Low for
year
$m
Average for
year
$m
71.8
17.9
11.1
n/a
79.6
25.5
10.0
4.2
n/a
27.3
49.3
13.2
6.3
(16.1)
52.7
2013
High for
year
$m
Low for
year
$m
Average for
year
$m
71.8
0.6
10.3
n/a
76.3
25.5
0.1
3.0
n/a
26.5
49.3
0.3
5.3
(3.3)
51.6
As at
$m
25.9
11.2
5.5
(14.9)
27.7
As at
$m
25.9
0.1
4.5
(3.8)
26.7
High for
year
$m
Low for
year
$m
Average for
year
$m
28.5
14.6
6.0
n/a
29.4
13.7
10.3
4.5
n/a
15.7
20.4
12.3
5.2
(15.3)
22.6
2012
High for
year
$m
Low for
year
$m
Average for
year
$m
28.5
0.2
5.1
n/a
28.9
13.7
0.1
3.9
n/a
12.9
20.4
0.1
4.5
(4.7)
20.3
VaR is calculated separately for the Australia, New Zealand and APEA geographies, 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 measure which assumes the parallel shift is reflected in all wholesale and customer rates.
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 period end
Maximum exposure
Minimum exposure
Average exposure (in absolute terms)
Consolidated
The Company
2013
2012
2013
2012
1.00%
1.72%
1.00%
1.29%
1.55%
2.45%
1.26%
1.95%
1.16%
2.04%
1.16%
1.55%
1.92%
2.99%
1.47%
2.36%
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.
NOTES TO THE FINANCIAL STATEMENTS
139
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
Interest rate risk (continued)
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 equity securities can fluctuate.
The table below outlines the composition of the equity holdings.
Consolidated
The Company
2013
$m
59
6
2012
$m
71
7
2013
$m
44
4
2012
$m
66
7
The Group’s liquidity and funding risks are governed by a set of
principles which are approved by the ANZ Board Risk Committee.
The core objective of the overall framework is to ensure that the
Group has sufficient liquidity to meet obligations as they fall due,
without incurring unacceptable losses. In response to the impact
of the global financial crisis, the framework has been reviewed
and updated. The following key components underpin the
overall framework:
} Maintaining the ability to meet all payment obligations in the
immediate term;
} Ensuring 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;
} Ensuring the liquidity management framework 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; and
} 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).
Other equity holdings
Impact on equity of 10% variation in value
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, the New Zealand dollar and the US 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 capital ratios are neutral to the effect of
changes in exchange rates.
Selective hedges were in place during the 2013 and 2012 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. The Group’s economic hedges against
New Zealand Dollar and US Dollar revenue streams are included
within ‘Trading derivatives’ at note 12.
Liquidity Risk (Excludes Insurance and funds Management)
Liquidity risk is the risk that the Group is unable to meet its payment
obligations as they fall due, including repaying depositors or
maturing wholesale debt, or that the Group has insufficient capacity
to fund increases in assets. The timing mismatch of cash flows and
the related liquidity risk is inherent in all banking operations and is
closely monitored by the Group. The Group maintains a portfolio
of liquid assets to manage potential stresses in funding sources.
The minimum level of liquidity portfolio assets to hold is based on a
range of ANZ specific and general market liquidity stress scenarios
such that potential cash flow obligations can be met over the short to
medium term.
140
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
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 ensuring 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.
Liquidity Portfolio Management
The Group holds a diversified portfolio of cash and high credit quality
securities that may be sold or pledged to provide same-day liquidity.
This portfolio helps protect the Group’s liquidity position by providing
cash in a severely stressed environment. All assets held in the prime
portfolio are securities eligible for repurchase under agreements with
the applicable central bank (i.e. ‘repo eligible’).
The liquidity portfolio is well diversified by counterparty, currency
and tenor. Under the liquidity policy framework, securities purchased
for ANZ’s liquidity portfolio 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.
Supplementing the prime liquid asset portfolio, the Group holds
additional liquidity;
} central bank deposits with the US Federal Reserve, Bank of England,
Bank of Japan and European Central Bank of $21.2 billion,
} Australian Commonwealth and State Government securities of
$6.9 billion and gold & precious metals of $2.9 billion, and,
} cash and other securities to satisfy local country regulatory liquidity
requirements which are not included in the liquid assets below.
Eligible securities
Prime liquidity portfolio (market values1)
Australia
New Zealand
United States
United Kingdom
Singapore
Hong Kong
Japan
Prime Liquidity Portfolio (excluding Internal RMBS)
Internal RMBS (Australia)
Internal RMBS (New Zealand)
Total Prime Portfolio
Other Eligible Securities
Total
1 Market value is post the repo discount applied by the applicable central bank
2013
$m
27,787
11,095
2,067
5,129
3,106
596
1,359
51,139
35,677
3,738
90,554
31,013
2012
$m
24,050
10,990
1,367
3,260
4,491
608
1,340
46,106
34,871
2,981
83,958
30,605
121,567
114,563
NOTES TO THE FINANCIAL STATEMENTS
141
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
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.
Group funding
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.
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.
Regulatory change
The Basel 3 Liquidity changes include the introduction of two new
liquidity ratios to measure liquidity risk (the Liquidity Coverage Ratio
(LCR) and the Net Stable Funding Ratio (NSFR)). A component of the
liquidity required under the proposed standards will likely be met
via the previously announced Committed Liquidity Facility from the
Reserve Bank of Australian (RBA), however the size and availability
of the facility has not yet been agreed with APRA and the RBA.
While ANZ has an existing stress scenario framework and structural
liquidity risk metrics and limits in place, the requirements proposed
are in general more challenging. These changes may impact the
future composition and size of ANZ’s liquidity portfolio, the size
and composition of the Bank’s funding base and consequently
could affect future profitability. The Basel Committee on Banking
Supervision released revised LCR details in January 2013 which
included the re-calibration of certain balance sheet ‘run-off factors’.
APRA released a second draft Prudential Standard on its requirements
in May 2013 which largely adopted the recalibrated Basel runoff
factors. ANZ is expecting a final Prudential Standard from APRA
before the end of the 2013 calendar year as well as draft standards on
Basel 3 Liquidity implementation from some offshore regulators from
late 2013 onwards.
The Group’s global wholesale funding strategy is designed to
deliver a sustainable portfolio of wholesale funds that balances cost
efficiency against prudent diversification and duration.
Funding plans and performance relative to those plans are reported
regularly to senior management via the Group Asset and Liability
Committee (GALCO). These plans address customer balance sheet
growth and changes in wholesale funding including, targeted
funding volumes, markets, investors, tenors and currencies for senior,
subordinated and hybrid transactions. Plans are supplemented with
a monthly forecasting process which reviews the funding position
to-date in light of market conditions and balance sheet requirements.
Funding plans are generated through the three-year strategic
planning process. Asset and deposit plans are submitted at the
business segment level with the wholesale funding requirements
then derived at the geographic level. 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.
funding Position 2013
ANZ targets a diversified funding base, avoiding undue concentrations
by investor type, maturity, market source and currency.
$23.7 billion of term wholesale debt (with a remaining term greater
than one year as at September 30, 2013) was issued during the
financial year ended 30 September 2013. In addition, $1.1 billion of
ANZ Capital Notes and $0.4 billion of ANZ Wealth bonds were issued.
} Access to all major global wholesale funding markets remained
available to ANZ during 2013.
} All wholesale funding needs were comfortably met.
} The weighted average tenor of new term debt was 4.3 years
(4.6 years in 2012).
} The weighted average cost of new term debt issuance decreased in
FY13 as a result of improved market conditions. Although average
portfolio costs remain substantially above pre-crisis levels, they
have started to decrease from these elevated levels during 2013.
142
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
The following tables show the Group’s funding composition:
funding composition
Customer deposits and other liabilities1
Australia2
International & Institutional Banking2
New Zealand
Global Wealth
Group Centre
Total customer deposits
Other3
Total customer deposits and other liabilities (funding)
wholesale funding4,5
Bonds and notes6
Loan capital
Certificates of deposit (wholesale)
Commercial paper
Due to other financial institutions
Other wholesale borrowings7
Total wholesale funding
Shareholders equity
Total funding maturity
Short term wholesale funding (excl. Central Banks)
Central Bank Deposits
Long term wholesale funding
– less than 1 year residual maturity
– greater than 1 year residual maturity5
Total customer deposits and other liabilities (funding)
Shareholders’ equity and hybrid debt
Total funding and shareholders’ equity
Includes term deposits, other deposits and an adjustment to the Group Centre to eliminate ANZ Wealth investments in ANZ deposit products.
Includes impact of divisional reclassification.
Includes interest accruals, payables and other liabilities, provisions and net tax provisions, excluding other liabilities in ANZ Wealth.
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.
5 Liability for acceptances have been removed as they do not provide net funding.
6 Excludes term debt issued externally by ANZ Wealth.
7
Includes net derivative balances, special purpose vehicles, other borrowings and Euro Trust Securities (preference shares).
Consolidated
2013
$m
2012
$m
152,403
163,151
46,494
11,569
(4,788)
140,810
142,651
39,622
9,449
(4,656)
368,829
327,876
13,158
9,841
381,987
337,717
69,570
12,804
58,276
12,255
36,306
2,507
62,693
11,914
56,838
12,164
30,538
4,585
191,718
178,732
44,744
40,349
12%
3%
3%
12%
62%
8%
11%
3%
5%
12%
61%
8%
100%
100%
NOTES TO THE FINANCIAL STATEMENTS
143
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
Contractual maturity analysis of the Group’s liabilities
The table below analyses the Group and Company’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:
Consolidated at 30 September 2013
Due to other financial institutions
Deposits and other borrowings
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Borrowing corporations' debt
Other borrowing
Liability for acceptances
Bonds and notes3
Loan capital3,4
Policy liabilities
External unit holder liabilities (life insurance funds)
Derivative liabilities (trading)5
Derivative assets and liabilities (balance sheet management)
– 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 2012
Due to other financial institutions
Deposits and other borrowings
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Borrowing corporations' debt
Other borrowing
Liability for acceptances
Bonds and notes3
Loan capital3,4
Policy liabilities
External unit holder liabilities (life insurance funds)
Derivative liabilities (trading)5
Derivative assets and liabilities (balance sheet management)
– 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
34,154
34,310
137,218
166,587
14,446
6,021
372
315
812
3,116
1,570
31,703
3,511
39,557
3 to 12
months
$m
2,161
10,361
47,934
–
–
6,246
687
–
–
10,624
1,525
–
–
1 to
5 years
$m
8
15,492
4,601
–
–
–
351
–
–
51,256
7,334
–
–
After
5 years
$m
–
–
111
–
–
–
–
–
–
10,858
3,993
–
–
No
maturity
specified2
$m
Total
$m
–
36,323
–
–
–
–
–
–
–
–
–
1,065
685
–
60,163
189,864
166,587
14,446
12,267
1,410
315
812
75,854
15,487
32,388
3,511
39,557
(17,475)
18,469
(28,736)
30,560
(79,312)
81,302
(23,167)
23,474
(9,127)
9,258
(11,791)
11,924
(14,640)
14,656
(5,645)
5,593
–
–
–
–
(148,690)
153,805
(41,203)
41,431
Less than
3 months1
$m
29,345
30,058
126,137
142,527
11,782
7,373
353
246
1,239
5,708
722
28,763
3,949
39,725
3 to 12
months
$m
1,177
13,462
43,676
–
–
4,795
715
–
–
11,133
2,028
–
–
–
1 to
5 years
$m
36
15,072
5,918
–
–
–
269
–
–
41,813
7,768
–
–
–
After
5 years
$m
–
–
108
–
–
–
–
–
–
8,770
2,552
–
–
–
(23,932)
25,714
(35,200)
36,402
(69,846)
75,419
(18,033)
19,073
(5,570)
5,593
(6,471)
6,663
(11,254)
11,009
(3,475)
3,263
No
maturity
specified2
$m
Total
$m
–
30,558
–
–
–
–
–
–
–
–
–
953
774
–
–
58,592
175,839
142,527
11,782
12,168
1,337
246
1,239
67,424
14,023
29,537
3,949
39,725
–
–
–
–
(147,011)
156,608
(26,770)
26,528
Includes at call instruments.
1
2 Includes perpetual investments brought in at face value only.
3 Any callable wholesale debt instruments have been included at their next call date.
4 Includes instruments that may be settled in cash or in equity, at the option of the Company.
5 The full mark-to-market of derivative liabilities held for trading purposes has been included in the ‘less than 3 months’ category.
144
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
The Company at 30 September 2013
Due to other financial institutions
Deposits and other borrowings
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Other borrowing
Liability for acceptances
Bonds and notes3
Loan capital3,4
Derivative liabilities (trading)5
Derivative assets and liabilities (balance sheet management)
– 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 2012
Due to other financial institutions
Deposits and other borrowings
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Other borrowing
Liability for acceptances
Bonds and notes3
Loan capital3,4
Derivative liabilities (trading)5
Derivative assets and liabilities (balance sheet management)
– 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
31,996
32,486
117,209
138,372
7,574
3,926
208
484
1,613
1,552
35,890
3 to 12
months
$m
2,160
10,331
31,056
–
–
4,097
–
–
9,982
1,504
1 to
5 years
$m
8
15,522
2,301
–
–
–
–
–
40,337
7,334
After
5 years
$m
–
–
101
–
–
–
–
–
9,541
3,993
(10,426)
11,234
(19,887)
21,073
(64,244)
65,310
(21,332)
21,643
(7,760)
7,857
(9,343)
9,464
(10,091)
10,161
(4,983)
4,948
Less than
3 months1
$m
27,198
28,685
109,924
122,614
6,556
5,272
197
1,012
3,883
669
36,070
3 to 12
months
$m
1,173
13,322
30,023
–
–
2,549
–
–
8,841
2,010
–
1 to
5 years
$m
36
15,072
3,587
–
–
–
–
–
33,466
7,803
–
After
5 years
$m
–
–
106
–
–
–
–
–
7,047
2,552
–
(16,166)
17,511
(21,771)
23,142
(53,558)
57,983
(15,506)
16,523
(5,028)
4,992
(4,816)
4,962
(9,030)
8,703
(3,197)
2,988
No
maturity
specified2
$m
Total
$m
–
34,164
–
–
–
–
–
–
–
–
322
58,339
150,667
138,372
7,574
8,023
208
484
61,473
14,705
35,890
–
–
–
–
(115,889)
119,260
(32,177)
32,430
No
maturity
specified2
$m
Total
$m
–
28,407
–
–
–
–
–
–
–
–
287
–
57,079
143,640
122,614
6,556
7,821
197
1,012
53,237
13,321
36,070
–
–
–
–
(107,001)
115,159
(22,071)
21,645
1 Includes at call instruments.
2 Includes perpetual investments brought in at face value only.
3 Any callable wholesale debt instruments have been included at their next call date.
4 Includes instruments that may be settled in cash or in equity, at the option of the Company.
5 The full mark-to-market of derivative liabilities held for trading purposes has been included in the ‘less than 3 months’ category.
NOTES TO THE FINANCIAL STATEMENTS
145
ANZ ANNUAL REPORT 2013 33: Financial Risk Management (continued)
Credit related contingencies
Undrawn facilities and issued guarantees comprise 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.
The tables below analyse the Group’s and Company’s undrawn facilities and issued guarantees into relevant maturity groupings based on the
earliest date on which ANZ may be required to pay.
Less than
1 year
$m
170,670
36,532
Less than
1 year
$m
141,355
32,383
Consolidated
More than
1 year
$m
Total
$m
–
–
170,670
36,532
Consolidated
More than
1 year
$m
Total
$m
–
–
141,355
32,383
Less than
1 year
$m
134,622
31,849
Less than
1 year
$m
118,461
29,619
The Company
More than
1 year
$m
Total
$m
–
–
134,622
31,849
The Company
More than
1 year
$m
Total
$m
–
–
118,461
29,619
Membership of OREC comprises senior executives and the committee
is chaired by the Chief Risk Officer.
ANZ’s Operational Risk Measurement and Management Framework
(ORMMF) outlines the approach to managing operational risk.
It specifically covers the minimum requirements that divisions/
business units must undertake to identify, assess, measure, monitor,
control and manage operational risk in accordance to the Board
approved risk appetite. ANZ does not expect to eliminate all risks,
but to ensure that the residual risk exposure is managed as low as
reasonably practical based on a sound risk/reward analysis in the
context of an international financial institution. ANZ’s ORMMF is
supported by specific policies and procedures with the effectiveness
of the framework assessed through a series of governance and
assurance reviews. This is supported by an independent review
programme by Internal Audit.
Divisional Risk Committees and Business Unit Risk Forums manage
and maintain oversight of operational and compliance risks
supported by thresholds for escalation and monitoring which
is used to inform and support senior management strategic
business decision making. Day to day management of operational
and compliance risk is the accountability of every employee.
Business Units undertake operational risk activities as part of
this accountability. Divisional risk personnel provide oversight of
operational risk undertaken in the Business Units.
Group Operational Risk is responsible for exercising governance over
operational risk through the management of the operational risk
frameworks, policy development, framework assurance, operational
risk measurement and capital allocations and reporting of operational
risk issues to executive committees.
30 September 2013
Undrawn facilities
Issued guarantees
30 September 2012
Undrawn facilities
Issued guarantees
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 48.
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 ANZ Board has delegated its powers to the Risk Committee to
approve the ANZ Operational Risk Framework which is in accordance
with Australian Prudential Standard APS 115 Capital Adequacy:
Advanced Measurement Approaches to Operational Risk. Operational
Risk Executive Committee (OREC) is the primary senior executive
management forum responsible for the oversight of operational risk
and the compliance risk control environment. OREC supports the Risk
Committee in relation to the carrying out of its role in connection
with operational risk and compliance.
OREC monitors the state of operational risk and compliance
management and will instigate any necessary corrective actions.
Key responsibilities of OREC include:
} Ensuring the execution of ANZ’s Operational Risk Measurement
and Management Framework and Compliance Framework
} Ensuring the execution of Board approved Operational Risk and
Compliance Policies
} Monitor and approve the treatment plans for Extreme rated risks
} Review material (actual, potential and near miss) operational risk
and compliance events
146
Notes to the fiNaNcial statemeNts (continued) 33: Financial Risk Management (continued)
Group Compliance has global oversight responsibility for the ANZ
Compliance Framework, and each division has responsibility for
embedding the framework into its business operations, identifying
applicable regulatory compliance obligations, and escalating
when breaches occur. The Compliance Framework fosters an
integrated approach where staff are responsible and accountable
for compliance, either within their job role, or within their area
of influence.
The integration of the Operational Risk Measurement and
Management and Compliance Frameworks, supported by common
policies, procedures and tools allows for a simple and consistent way
to identify, assess, measure and monitor risks across ANZ.
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.
Operational risk capital is held to protect depositors and shareholders
of the bank from rare and severe unexpected losses. ANZ maintains
and calculates operational risk capital (including regulatory and
economic capital), on at least a six monthly basis. The capital is
calculated using scaled external loss data, internal loss data and
scenarios as a direct input and risk registers as an indirect input.
34: Fair Value of Financial Assets and Financial Liabilities
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.
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 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 management’s 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.
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.
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 adjusted to account for funding risk inherent in the
derivative financial instrument, the maturity of each instrument and
an adjustment reflecting the credit worthiness of the counterparty.
NOTES TO THE FINANCIAL STATEMENTS
147
ANZ ANNUAL REPORT 2013 34: Fair Value of Financial Assets and Financial Liabilities (continued)
Investments relating to insurance business
Investments backing policy 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 modelled 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.
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
The carrying value of loans and advances includes deferred fees
and expenses, and is net of provision for credit impairment and
unearned income.
Fair value has been determined through discounting future cash
flows. For fixed rate loans and advances, the discount rate applied
incorporates changes in wholesale market rates, the Group’s cost of
wholesale funding and the customer margin. For floating rate loans,
only changes in wholesale market rates and the Group’s cost of
wholesale funding are incorporated in the discount rate. For variable
rate loans where the Group sets the applicable rate at its discretion,
the fair value is set equal to the carrying value.
financial assets
Consolidated 30 September 2013
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Investments relating to insurance business
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
–
–
–
–
–
136
–
32,083
–
32,219
$m
39,737
22,177
–
–
–
469,159
2,106
–
6,876
540,055
Held for
trading
$m
–
–
41,288
43,688
–
–
–
–
–
84,976
Sub-total
$m
–
–
41,288
43,688
–
136
–
32,083
–
117,195
Carrying amount
$m
–
–
–
2,190
–
–
–
–
–
2,190
$m
–
–
–
–
28,135
–
–
–
–
28,135
$m
39,737
22,177
41,288
45,878
28,135
469,295
2,106
32,083
6,876
687,575
$m
39,737
22,177
41,288
45,878
28,135
469,818
2,106
32,083
6,876
688,098
fair value
At amortised
cost
At fair value through profit or loss
Hedging
Available-for-
sale assets
Total
Total
Consolidated 30 September 2012
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Investments relating to insurance business
Other financial assets
Designated
on initial
recognition
$m
–
–
–
–
–
104
–
29,895
–
29,999
$m
36,578
17,103
–
–
–
427,719
1,478
–
5,136
488,014
Held for
trading
$m
–
–
40,602
45,531
–
–
–
–
–
86,133
Sub-total
$m
–
–
40,602
45,531
–
104
–
29,895
–
116,132
$m
–
–
–
3,398
–
–
–
–
–
3,398
$m
–
–
–
–
20,562
–
–
–
–
20,562
$m
36,578
17,103
40,602
48,929
20,562
427,823
1,478
29,895
5,136
628,106
$m
36,578
17,103
40,602
48,929
20,562
428,483
1,478
29,895
5,136
628,679
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.
148
Notes to the fiNaNcial statemeNts (continued) 34: Fair Value of Financial Assets and Financial Liabilities (continued)
financial assets (continued)
The Company 30 September 2013
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Due from controlled entities
Other financial assets
The Company 30 September 2012
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Due from controlled entities
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
–
–
–
–
–
94
–
–
–
94
$m
33,838
18,947
–
–
–
372,373
990
71,354
4,728
502,230
Held for
trading
$m
–
–
31,464
39,047
–
–
–
–
–
70,511
Sub-total
$m
–
–
31,464
39,047
–
94
–
–
–
70,605
Carrying amount
$m
–
–
–
1,964
–
–
–
–
–
1,964
$m
–
–
–
–
23,823
–
–
–
–
23,823
$m
33,838
18,947
31,464
41,011
23,823
372,467
990
71,354
4,728
598,622
$m
33,838
18,947
31,464
41,011
23,823
372,963
990
71,354
4,728
599,118
fair value
At amortised
cost
At fair value through profit or loss
Hedging
Available-for-
sale assets
Total
Total
Designated
on initial
recognition
$m
–
–
–
–
–
65
–
–
–
65
$m
32,782
14,167
–
–
–
349,995
514
63,660
3,307
464,425
Held for
trading
$m
–
–
30,490
40,284
–
–
–
–
–
70,774
Sub-total
$m
–
–
30,490
40,284
–
65
–
–
–
70,839
$m
–
–
–
2,982
–
–
–
–
–
2,982
$m
–
–
–
–
17,841
–
–
–
–
17,841
$m
32,782
14,167
30,490
43,266
17,841
350,060
514
63,660
3,307
556,087
$m
32,782
14,167
30,490
43,266
17,841
350,572
514
63,660
3,307
556,599
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.
NOTES TO THE FINANCIAL STATEMENTS
149
ANZ ANNUAL REPORT 2013 34: Fair Value of Financial Assets and Financial Liabilities (continued)
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 or observable inputs
where applicable. 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
financial liabilities
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.
Policy 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.
Consolidated 30 September 2013
Due to other financial institutions
Derivative financial instruments1
Deposits and other borrowings
Bonds and notes2
Loan capital2
Policy liabilities3
External unit holder liabilities (life insurance funds)
Payables and other liabilities
Consolidated 30 September 2012
Due to other financial institutions
Derivative financial instruments1
Deposits and other borrowings
Bonds and notes2
Loan capital2
Policy liabilities3
External unit holder liabilities (life insurance funds)
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
–
–
4,240
5,600
700
31,703
3,511
–
45,754
$m
36,306
–
435,434
64,776
12,104
685
–
12,518
561,823
Held for
trading
$m
–
45,653
–
–
–
–
–
–
45,653
Sub-total
$m
–
45,653
4,240
5,600
700
31,703
3,511
–
91,407
Carrying amount
$m
–
1,856
–
–
–
–
–
–
1,856
$m
36,306
47,509
439,674
70,376
12,804
32,388
3,511
12,518
655,086
$m
36,306
47,509
439,912
71,235
12,973
32,388
3,511
12,518
656,352
fair value
At amortised
cost
At fair value through profit or loss
Hedging
Total
Total
Designated
on initial
recognition
$m
–
–
4,346
6,465
633
28,763
3,949
–
44,156
$m
30,538
–
392,777
56,633
11,281
774
–
9,958
501,961
Held for
trading
$m
–
50,887
–
–
–
–
–
–
50,887
Sub-total
$m
–
50,887
4,346
6,465
633
28,763
3,949
–
95,043
$m
–
1,752
–
–
–
–
–
–
1,752
$m
30,538
52,639
397,123
63,098
11,914
29,537
3,949
9,958
598,756
$m
30,538
52,639
397,571
63,780
11,869
29,537
3,949
9,958
599,841
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 $685 million (2012: $774 million) measured in accordance with AASB 1038 Life insurance contract liabilities and life investment contract liabilities of
$31,703 million (2012: $28,763 million) which have been designated at fair value through profit or loss in terms under AASB 139. None of the fair value is attributable to changes in the credit risk
of the life investment contract liabilities.
150
Notes to the fiNaNcial statemeNts (continued) 34: Fair Value of Financial Assets and Financial Liabilities (continued)
financial liabilities (continued)
The Company 30 September 2013
Due to other financial institutions
Derivative financial instruments1
Deposits and other borrowings
Due to controlled entities
Bonds and notes2
Loan capital2
Payables and other liabilities
The Company 30 September 2012
Due to other financial institutions
Derivative financial instruments1
Deposits and other borrowings
Due to controlled entities
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
–
–
–
–
5,600
700
–
6,300
$m
34,149
–
359,013
64,649
51,368
11,362
9,517
530,058
Held for
trading
$m
–
40,153
–
–
–
–
–
40,153
Sub-total
$m
–
40,153
–
–
5,600
700
–
46,453
Carrying amount
$m
–
1,674
–
–
–
–
–
1,674
$m
34,149
41,827
359,013
64,649
56,968
12,062
9,517
578,185
$m
34,149
41,827
359,199
64,649
57,631
12,262
9,517
579,234
fair value
At amortised
cost
At fair value through profit or loss
Hedging
Total
Total
Designated
on initial
recognition
$m
–
–
–
–
6,465
633
–
7,098
$m
28,394
–
333,536
57,729
43,510
10,613
7,485
481,267
Held for
trading
$m
–
44,508
–
–
–
–
–
44,508
Sub-total
$m
–
44,508
–
–
6,465
633
–
51,606
$m
–
1,539
–
–
–
–
–
1,539
$m
28,394
46,047
333,536
57,729
49,975
11,246
7,485
534,412
$m
28,394
46,047
333,917
57,729
50,476
11,230
7,485
535,278
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 $685 million (2012: $774 million) measured in accordance with AASB 1038 Life insurance contract liabilities and life investment contract liabilities of
$31,703 million (2012: $28,763 million) which have been designated at fair value through profit or loss in terms under AASB 139. None of the fair value is attributable to changes in the credit risk
of the life investment contract liabilities.
(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 spreads, counterparty credit spreads, funding costs
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 carried at fair value.
The fair value of the financial instrument has been allocated in full
to the category in a fair value hierarchy which most appropriately
reflects the determination of the fair value. This allocation is based
on the categorisation of the lowest level input or component into a
valuation model that is significant to the reported fair value of the
financial instrument. 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.
NOTES TO THE FINANCIAL STATEMENTS
151
ANZ ANNUAL REPORT 2013 34: Fair Value of Financial Assets and Financial Liabilities (continued)
The allocation into the fair value hierarchy is determined as follows:
} Level 1 – Financial instruments that have been valued by reference
to unadjusted quoted prices in active markets for identical
financial assets or liabilities. This category includes financial
instruments valued using quoted yields where available for
specific debt securities.
} Level 2 – Financial instruments that have been valued through
valuation techniques incorporating inputs other than quoted
prices within Level 1 that are observable for the financial asset or
liability, either directly or indirectly.
} Level 3 – Financial instruments that have been valued using
valuation techniques which incorporate significant inputs for the
financial asset or liability that are not based on observable market
data (unobservable inputs).
The methods used in valuing different classes of financial assets or
liabilities are described in section (i) on pages 147 to 151. There have
been no substantial changes in the valuation techniques applied
to different classes of financial instruments since the previous
year. The Group 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.
Consolidated
financial assets
Trading securities1
Derivative financial instruments
Available–for–sale financial assets
Investments relating to insurance business2
Loans and advances (designated at fair value)
financial liabilities
Trading securities
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)
valuation techniques
quoted market price
Using observable inputs
with significant
non–observable inputs
Total
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
37,645
826
23,900
21,029
–
83,400
36,797
678
16,098
20,909
–
74,482
2,505
803
1,742
750
–
–
–
–
–
–
–
–
–
–
3,643
44,852
4,199
10,949
136
63,779
56
46,269
4,240
5,600
31,703
3,511
700
3,804
47,916
4,433
8,673
104
64,930
12
51,414
4,346
6,465
28,763
3,949
633
–
200
36
105
–
341
–
437
–
–
–
–
–
1
335
31
313
–
680
–
475
–
–
–
–
–
41,288
45,878
28,135
32,083
136
40,602
48,929
20,562
29,895
104
147,520
140,092
2,561
47,509
4,240
5,600
31,703
3,511
700
1,754
52,639
4,346
6,465
28,763
3,949
633
Total
3,308
2,492
92,079
95,582
437
475
95,824
98,549
The Company
financial assets
Trading securities
Derivative financial instruments
Available-for-sale financial assets
Loans and advances (designated at fair value)
financial liabilities
Trading securities
Derivative financial instruments
Bonds and notes (designated at fair value)
Loan capital (designated at fair value)
valuation techniques
quoted market price
Using observable inputs
with significant
non–observable inputs
Total
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
2013
$m
2012
$m
27,939
826
20,905
–
49,670
1,919
803
–
–
2,722
26,855
676
14,901
–
42,432
1,244
746
–
–
1,990
3,525
39,985
2,889
94
46,493
56
40,587
5,600
700
46,943
3,634
42,255
2,914
65
48,868
12
44,826
6,465
633
51,936
–
200
29
–
229
–
437
–
–
437
1
335
26
–
362
–
475
–
–
475
31,464
41,011
23,823
94
96,392
1,975
41,827
5,600
700
50,102
30,490
43,266
17,841
65
91,662
1,256
46,047
6,465
633
54,401
1 $3.7 billion (Company: nil) of trading securities which were categorised as Level 2 in 2012 have been restated to Level 1 for the 2012 year as they are valued using quoted yields.
2 $5.9 billion (Company: nil) of Investments relating to insurance business which were categorised as Level 2 in 2012 have been restated to Level 1 for the 2012 year as they are valued
using quoted prices or yields.
152
Notes to the fiNaNcial statemeNts (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-OBSER vABLE 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
Structured credit products
Managed funds (suspended)
Alternative assets
Other derivatives
Total
The Company
Asset backed securities
Illiquid corporate bonds
Structured credit products
Alternative assets
Other derivatives
Total
financial assets
Trading securities
Derivatives
Available-for-sale
Investments relating
to insurance business
financial
liabilities
Derivatives
2013
$m
2012
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
1
1
–
–
–
–
1
2013
$m
–
–
137
–
–
63
200
–
–
137
–
63
200
2012
$m
–
–
243
–
–
92
335
–
–
243
–
92
335
2013
$m
2012
$m
2013
$m
2
11
–
–
23
–
36
–
9
–
20
–
29
2
9
–
–
20
–
31
–
6
–
20
–
26
2
–
–
31
72
–
105
n/a
n/a
n/a
n/a
n/a
n/a
2012
$m
–
–
94
133
86
–
313
n/a
n/a
n/a
n/a
n/a
n/a
2013
$m
–
–
(169)
–
–
(268)
(437)
–
–
(169)
–
(268)
(437)
2012
$m
–
–
(346)
–
–
(129)
(475)
–
–
(346)
–
(129)
(475)
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.
Managed funds (suspended) are comprised of fixed income and
mortgage investments in managed funds that are illiquid and are not
currently redeemable.
Structured credit products categorised as derivatives comprise the
structured credit intermediation trades that the Group entered into
from 2004 to 2007 whereby it 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 being observable in the market.
Structured credit products categorised as investments relating to
insurance business comprise collateralised debt and loan obligations
where there is a lack of active trading and limited observable
market data.
Alternative assets are largely comprised of various investments
in unlisted equity securities. No active market exists for these
securities and the valuation model incorporates significant
unobservable inputs.
Other derivatives predominantly comprise interest rate swaptions
containing multi-callable features. Modelling uncertainties and
complexities are inherent in the valuation model which result in a
significant range of possible valuation outcomes for these financial
assets and liabilities.
NOTES TO THE FINANCIAL STATEMENTS
153
ANZ ANNUAL REPORT 2013 34: Fair Value of Financial Assets and Financial Liabilities (continued)
The following table details movements in the balance of Level 3 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 an unrealised gain or loss. This could be
different to the opening balance.
Consolidated
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
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
Trading securities
Derivatives
Available-for-sale Insurance investments
Derivatives
financial assets
financial liabilities
2013
$m
2012
$m
1
–
–
–
(1)
–
–
–
1
–
–
–
(1)
–
–
–
62
–
(60)
–
–
(1)
–
1
62
–
(60)
–
–
(1)
–
1
2013
$m
335
–
(79)
16
–
(72)
–
200
335
–
(79)
16
–
(72)
–
200
2012
$m
609
5
–
84
(4)
(359)
–
335
609
5
–
84
(4)
(359)
–
335
2013
$m
31
3
(3)
4
–
–
1
2012
$m
519
–
–
24
(508)
(4)
–
2013
$m
313
11
(183)
–
–
(36)
–
2012
$m
359
29
(79)
–
–
4
–
2013
$m
(475)
–
57
(7)
–
(12)
–
36
31
105
313
(437)
26
–
(2)
4
–
–
1
29
372
–
–
20
(366)
–
–
26
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
(475)
–
57
(7)
–
(12)
–
(437)
2012
$m
(789)
(1)
–
(128)
1
442
–
(475)
(789)
(1)
–
(128)
1
442
–
(475)
Transfers out of Level 3 relate principally to certain assets and
liabilities where the valuation model has been altered to include
only observable inputs.
Transfers in to Level 3 predominantly comprise reverse mortgage
swaps where certain valuation parameters became unobservable
during the year.
Sensitivity to data inputs
Where valuation techniques use assumptions due to significant data
inputs not being directly observed in the market place, changing these
assumptions changes the resultant estimate of fair value. The Group’s
exposure to financial instruments whose valuations incorporate
significant unobservable inputs is limited to a small number of financial
instruments which comprise an insignificant component to total
assets and liabilities measured at fair value. In these circumstances,
changes in the assumptions generally have minimal impact on the
income statement and net assets of ANZ. An exception to this is the
‘back-to-back’ structured credit intermediation trades which although
do not have a significant impact on the current year’s sensitivity
analysis due to the benign current market environment, could have a
larger impact should market conditions change. This is as a result of
their 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 these financial instruments
could result in an increase of $10 million (2012: $27 million) or a decrease
of $7 million (2012: $18 million) in net derivative financial instruments
as at 30 September 2013. The ranges of reasonably possible alternative
assumptions are established by application of professional judgement
and analysis of the data available to support each assumption.
154
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 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, amounted to $4 million (2012: $4 million). $1 million
(2012: $3 million) in unrecognised gains was added during the year
with $1 million (2012: $1 million) being recognised in the income
statement during the year through the amortisation process.
(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
loans 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
$136 million (2012: $104 million) and for the Company was $94 million
(2012: $65 million). For the Group and Company $66 million (2012:
$66 million) of this exposure was mitigated by collateral held.
Notes to the fiNaNcial statemeNts (continued) 34: Fair Value of Financial Assets and Financial Liabilities (continued)
The cumulative change in fair value attributable to change in
credit risk was, for the Group, a reduction to the assets of $2 million
(2012: $4 million). For the Company the cumulative change to the assets
was $nil (2012: $nil). The amount recognised in the income statement
attributable to changes in credit risk for the Group was a gain of
$2 million (2012: $1 million loss) and for the Company $nil (2012: $nil).
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 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.
Life investment contracts are designated at fair value through profit
or loss in accordance with AASB 1038.
External unitholder liabilities, which are not included in the table
below, represent the external unitholder share of the ‘Investments
relating to insurance business’ which are designated at fair value
through the profit or loss.
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 by which the consideration payable at maturity
is greater/(less) than carrying amount
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
2013
$m
2012
$m
31,703
28,763
2013
$m
4,240
2012
$m
2013
$m
2012
$m
4,346
5,600
6,465
–
–
–
–
–
–
–
–
–
–
–
–
(3)
(158)
(123)
–
–
–
(60)
47
(13)
(151)
91
(60)
2013
$m
700
(5)
(4)
16
12
2012
$m
633
(12)
(32)
28
(4)
The Company
Carrying Amount
Amount by which the consideration payable at maturity is
greater/(less) than carrying amount
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
Bonds and notes
Loan capital
2013
$m
2012
$m
2013
$m
2012
$m
–
–
–
–
–
–
–
–
–
–
5,600
6,465
(158)
(123)
(60)
47
(13)
(151)
91
(60)
2013
$m
700
(5)
(4)
16
12
2012
$m
633
(12)
(32)
28
(4)
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.
Consolidated
Due from other financial institutions
Available-for-sale assets
Net loans and advances
Investments relating to insurance business
Due to other financial institutions
Deposits and other borrowings
Bonds and notes
Policy liabilities
External unit holder liabilities (life insurance funds)
Loan capital
2013
2012
Due within
one year
$m
Greater than
one year
$m
No maturity
specified
$m
Total
$m
Due within
one year
$m
Greater than
one year
$m
No maturity
specified
$m
Total
$m
22,096
8,605
110,778
3,336
36,298
420,965
10,222
31,703
3,511
1,893
81
19,466
358,517
6,548
8
18,709
60,154
–
–
9,846
– 22,177
64 28,135
– 469,295
22,199 32,083
– 36,306
– 439,674
– 70,376
685 32,388
3,511
1,065 12,804
–
17,037
8,936
101,577
3,938
30,502
377,113
15,005
28,763
3,949
–
66
11,494
326,246
6,168
36
20,010
48,093
–
–
10,961
– 17,103
132 20,562
– 427,823
19,789 29,895
– 30,538
– 397,123
– 63,098
774 29,537
3,949
953 11,914
–
NOTES TO THE FINANCIAL STATEMENTS
155
ANZ ANNUAL REPORT 2013
36: Segment Analysis
(i) DESCRIPTION Of SEGMENTS
The Group operates on a divisional structure with Australia, IIB, New Zealand and Global Wealth being the major operating divisions. The IIB and
Global Wealth divisions are co-ordinated globally.
The segments and product and services categories as reported below are consistent with internal reporting provided to the chief operating
decision maker, being the Chief Executive Officer.
The primary sources of external revenue across all divisions are interest income, fee income and trading income. The Australia and New Zealand
divisions derive revenue from products and services from retail banking and commercial banking. IIB derives its revenue from retail banking, and
institutional and commercial products and services. Global Wealth derives revenue from wealth products and private banking. GTSO (including
Group Centre) provides support to all divisions, including risk management, financial management, strategy and marketing, human resources
and corporate affairs.
Effective 1 October 2012, Corporate Banking Australia transferred to Australia Division from IIB and comparatives have been restated accordingly.
(ii) OPERATING SEGMENTS
Transactions between business units across segments within ANZ are conducted on an arms length basis.
Year ended 30 September 2013 ($m)
External interest income
External interest expense
Adjustment for intersegment interest
Net interest income
Other external operating income
Share net profit/(loss) of equity
accounted investments
Segment revenue
Other external expenses
Net intersegment expenses
Operating expenses
Profit before income tax and provision
for credit impairment
Provision for credit impairment
Segment result before tax
Income tax expense
Non-controlling interests
International
and
Institutional
Banking
7,384
(2,670)
(1,048)
3,666
2,421
477
6,564
(2,395)
(575)
(2,970)
3,594
(317)
3,277
(837)
(10)
Australia
16,424
(5,726)
(4,020)
6,678
1,186
3
7,867
(2,088)
(863)
(2,951)
4,916
(820)
4,096
(1,223)
–
New
Zealand
4,452
(2,137)
(455)
1,860
347
1
2,208
(997)
45
(952)
1,256
(37)
1,219
(338)
–
Profit after income tax attributed to shareholders
of the company
2,873
2,430
881
Non-cash expenses
Depreciation and amortisation
Equity-settled share based payment expenses
Provision for credit impairment
financial position
Goodwill
Shares in associates
Total external assets
Total external liabilities
(114)
(23)
(820)
–
9
274,533
165,903
(210)
(120)
(317)
1,122
4,017
296,524
254,702
(76)
(18)
(37)
1,763
3
85,229
64,565
Global wealth
317
(406)
214
125
1,385
–
1,510
(807)
(137)
(944)
566
(4)
562
(93)
–
469
(33)
(14)
(4)
GTSO
50
(4,916)
5,309
443
(215)
1
229
(1,949)
1,530
(419)
(190)
(19)
(209)
54
–
Other
items1
–
(14)
–
(14)
82
–
68
–
–
–
68
9
77
(303)
–
Group
Total
28,627
(15,869)
–
12,758
5,206
482
18,446
(8,236)
–
(8,236)
10,210
(1,188)
9,022
(2,740)
(10)
(155)
(226)
6,272
(246)
(23)
(19)
–
(2)
(2)
9
(681)
(200)
(1,188)
1,614
9
49,010
51,237
–
85
(2,113)
121,040
–
–
(192)
(71)
4,499
4,123
702,991
657,376
1
In evaluating the performance of the operating segments, certain items are removed from the operating segment results, where they are not considered integral to the ongoing performance of
the segment and are evaluated separately. These items are set out in part (iii) of this note (refer pages 208 to 209 for further analysis).
156
Notes to the fiNaNcial statemeNts (continued)
36: Segment Analysis (continued)
Year ended 30 September 2012 ($m)
External interest income
External interest expense
Adjustment for intersegment interest
Net interest income
Other external operating income
Share net profit/(loss) of equity
accounted investments
Segment revenue
Other external expenses
Net intersegment expenses
Operating expenses
Profit before income tax and provision
for credit impairment
Provision for credit impairment
Segment result before tax
Income tax expense
Non-controlling interests
Profit after income tax attributed to shareholders
of the company
Non-cash expenses
Depreciation and amortisation
Equity-settled share based payment expenses
Provision for credit impairment
financial position
Goodwill
Shares in associates
Total external assets
Total external liabilities
Australia
17,825
(6,643)
(5,019)
6,163
1,195
(2)
7,356
(2,207)
(795)
(3,002)
4,354
(642)
3,712
(1,114)
–
(115)
(27)
(642)
–
6
256,805
158,289
International
and
Institutional
Banking
New
Zealand
Global wealth
7,980
(3,146)
(1,167)
3,667
2,361
399
6,427
(2,540)
(529)
(3,069)
3,358
(451)
2,907
(790)
(6)
(181)
(104)
(451)
4,286
(1,857)
(649)
1,780
315
–
2,095
(1,082)
21
(1,061)
1,034
(148)
886
(244)
–
642
(60)
(16)
(148)
325
(416)
213
122
1,318
–
1,440
(828)
(139)
(967)
473
(4)
469
(123)
–
346
(38)
(12)
(4)
2,598
2,111
1,014
3,426
267,467
228,333
1,604
2
73,807
57,917
1,594
9
45,472
46,245
–
68
(1,256)
110,252
GTSO
122
(6,365)
6,621
378
154
(2)
530
(1,861)
1,441
(420)
110
(13)
97
36
–
Other
items1
–
(1)
1
–
(137)
Group
Total
30,538
(18,428)
–
12,110
5,206
–
395
(137)
17,711
–
–
–
(137)
60
(77)
(92)
–
(8,518)
(1)
(8,519)
9,192
(1,198)
7,994
(2,327)
(6)
133
(169)
5,661
(223)
(29)
(12)
4
(1)
59
–
9
(168)
(129)
(613)
(189)
(1,198)
4,212
3,520
642,127
600,907
1
In evaluating the performance of the operating segments, the results are adjusted for certain items where they are not considered integral to the ongoing performance of the segment and
are evaluated separately. These items are set out in part (iii) of this note (refer pages 208 to 209 for further analysis). From 1 October 2012, the Group revised its methodology for determining
non-core items. 30 September 2012 information has been restated on a consistent basis.
(iii) OTHER ITEMS
The table below sets out the profit after tax impact of other items.
Item
Related segment
Treasury shares adjustment
Revaluation of policy liabilities
Economic hedging – fair value (gains)/losses
Revenue and net investment hedges (gains)/losses
Structured credit intermediation trades
Australia
Australia and New Zealand
Australia, IIB and New Zealand
GTSO
IIB
Total
Profit after tax
2013
$m
(84)
(46)
13
(159)
50
(226)
2012
$m
(96)
41
(229)
53
62
(169)
NOTES TO THE FINANCIAL STATEMENTS
157
ANZ ANNUAL REPORT 2013
36: Segment Analysis (continued)
(iv) ExTERNAL SEGMENT RE vENUE BY PRODUCTS AND SER vICES
The table below sets out revenue from external customers for groups of similar products and services.
Retail
Commercial
Wealth
Institutional
Partnerships
Other
Revenue
2013
$m
6,602
4,204
1,510
5,302
403
425
2012
$m
6,120
4,037
1,440
5,232
347
535
18,446
17,711
(v) GEOGRAPHICAL INfORMATION
The following table sets out revenue and non-current assets1 based on the geographical locations in which the Group operates.
Consolidated
Total external revenue1
Non-current assets2
Australia
2013
$m
2012
$m
12,447
12,117
307,162
288,171
APEA
New Zealand
Total
2013
$m
3,180
33,640
2012
$m
2,801
21,162
2013
$m
2,819
66,073
2012
$m
2013
$m
2012
$m
2,793
18,446
17,711
54,562
406,875
363,895
Includes net interest income.
1
2 Non-current assets referred to are assets that are expected to be recovered more than 12 months after balance date. They do not include financial instruments, deferred tax assets,
post-employment benefits assets or rights under insurance contracts.
158
Notes to the fiNaNcial statemeNts (continued) 37: Notes to the Cash Flow Statements
A) RECONCILIATION Of NET PROfIT AfTER INCOME TAx TO NET CASH PRO vIDED BY /(USED IN) OPERATING ACTIvITIES
Consolidated
The Company
Operating profit after income tax attributable to shareholders of the Company
Adjustment to reconcile operating profit after income tax to net cash
provided by/(used in) operating activities
Provision for credit impairment
Depreciation and amortisation
(Profit)/loss on sale of businesses
(Profit)/loss on sale of premises and equipment
(Profit)/loss on sale of available-for-sale assets
Impairment on available-for-sale assets transferred to profit and loss
Net derivatives/foreign exchange adjustment
Equity settled share-based payments expense1
Other non-cash movements
Net (increase)/decrease in operating assets
Trading securities
Liquid assets
Due from other banks
Loans and advances
Investments backing policy liabilities2
Net intra-group loans and advances
Interest receivable
Accrued income
Net tax assets
Net (decrease)/increase in operating liabilities
Deposits and other borrowings2
Due to other financial institutions
Change in policy liabilities
Payables and other liabilities
Interest payable
Accrued expenses
Provisions including employee entitlements
Total adjustments
Net cash provided by/(used in) operating activities
2013
$m
6,272
1,188
781
(20)
2
–
3
5,814
119
(303)
768
(72)
674
(28,952)
(3,402)
–
133
(25)
246
27,184
3,033
3,669
969
(464)
(17)
6
11,334
17,606
2012
$m
5,661
1,198
723
(4)
23
(225)
44
3,568
134
(27)
(4,589)
435
(4,256)
(32,748)
(1,537)
–
(110)
25
(525)
32,630
4,184
2,449
209
(399)
(455)
(47)
700
6,361
2013
$m
5,346
1,132
533
(11)
(1)
–
3
5,664
90
(8)
(736)
860
746
(24,295)
–
(3,734)
197
(59)
(273)
23,668
4,283
–
929
(464)
(74)
81
8,531
13,877
2012
$m
4,875
985
483
(20)
17
(164)
35
2,384
134
289
(2,275)
419
(3,886)
(28,592)
–
(283)
(88)
4
(839)
30,834
4,836
–
441
(179)
(368)
(53)
4,114
8,989
1 The equity settled share-based payments expense is net of on-market share purchases of $81 million (2012: $55 million) in the Group and the Company used to satisfy the obligation.
Comparatives have been restated.
2 During the year the Group reclassified certain transactions undertaken by the Wealth business in relation to investments in securities issued by entities within the Group in order to better reflect
the nature of the cash flows for the Group (2012: $1,032 million).
NOTES TO THE FINANCIAL STATEMENTS
159
ANZ ANNUAL REPORT 2013 37: Notes to the Cash Flow Statements (continued)
B) RECONCILIATION Of CASH AND CASH EqUIv ALENTS
Cash at the end of the period as shown in the statement of cash flows is reflected in the related items in the balance sheet as follows:
Liquid assets
Due from other financial institutions
Cash and cash equivalents in the statement of cash flows
C) ACqUISITIONS AND DISPOSALS
Cash (inflows)/outflows from acquisitions and investments (net of cash acquired)
Purchases of controlled entities and businesses
Investments in controlled entities
Purchases of interest in associates
Cash inflows from disposals (net of cash disposed)
Disposals of controlled entities
Disposals of associates
D) NON-CASH fINANCING ACTIvITIES
Share capital issues
Dividends satisfied by share issue
Dividends satisfied by bonus share issue
E) fINANCING ARRANGEMENTS
There were no financing arrangements in place in 2013 or 2012.
Consolidated
The Company
2013
$m
38,552
10,471
49,023
2012
$m
35,583
5,867
41,450
2013
$m
33,646
9,069
42,715
2012
$m
31,787
4,481
36,268
Consolidated
2013
$m
2012
$m
1
–
1
2
56
25
81
11
–
–
11
–
18
18
The Company
2013
$m
–
483
1
484
–
25
25
2012
$m
10
327
–
337
–
36
36
843
71
914
1,461
80
1,541
843
71
914
1,461
80
1,541
160
Notes to the fiNaNcial statemeNts (continued) 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:
ANZ Bank (Lao) Limited3
ANZ Bank (Taiwan) Limited1
ANZ Bank (vietnam) Limited1
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) Limited1
ANZ Bank (Kiribati) Limited1,2
ANZ Bank (Samoa) Limited1
ANZcover Insurance Pte Ltd1
ANZ Holdings (New Zealand) Limited1
ANZ Bank New Zealand Limited1
ANZ Investment Services (New Zealand) Limited1
ANZ New Zealand (Int’l) Limited1
ANZNZ Covered Bond Trust1
ANZ Wealth New Zealand Limited1 (formerly OnePath Holdings (NZ) Limited)
OnePath Insurance Holdings (NZ) Limited1
OnePath Life (NZ) Limited1
Arawata Holdings Limited1
Private Nominees Limited1
UDC Finance Limited1
ANZ International (Hong Kong) Limited1
ANZ Asia Limited1
ANZ Bank (Vanuatu) Limited4
ANZ International Private Limited1
ANZ Singapore Limited1
ANZ Royal Bank (Cambodia) Limited1,2
Votraint No. 1103 Pty Ltd
ANZ Lenders Mortgage Insurance Pty Ltd
ANZ Residential Covered Bond Trust
ANZ wealth Australia Limited
OnePath Custodians Pty Limited
OnePath Funds Management Limited
OnePath General Insurance Pty Limited
OnePath Life Australia Holdings Pty Limited
OnePath Life Limited
Australia and New Zealand Banking Group (PNG) Limited1
Australia and New Zealand Bank (China) Company Limited1
Chongqing Liangping ANZ Rural Bank Company Limited1
Citizens Bancorp
ANZ Guam Inc.5
Esanda finance Corporation Limited
ETRADE Australia Limited
ETRADE Australia Securities Limited
PT Bank ANZ Indonesia1,2
Incorporated in
Nature of business
Australia
Banking
Banking
Laos
Banking
Taiwan
Banking
Vietnam
Securitisation Manager
Australia
Hedging
Australia
Finance
Australia
Captive-Insurance
Australia
Trustee/Nominee
Australia
Holding Company
Australia
Banking
United Kingdom
Banking
Kiribati
Banking
Samoa
Captive-Insurance
Singapore
Holding Company
New Zealand
Banking
New Zealand
Funds Management
New Zealand
Finance
New Zealand
Finance
New Zealand
Holding Company
New Zealand
Holding Company
New Zealand
Insurance
New Zealand
New Zealand Property Holding Company
Nominee
New Zealand
New Zealand
Finance
Holding Company
Hong Kong
Banking
Hong Kong
Vanuatu
Banking
Holding Company
Singapore
Merchant Banking
Singapore
Banking
Cambodia
Investment
Australia
Mortgage Insurance
Australia
Australia
Finance
Holding Company
Australia
Australia
Trustee
Funds Management
Australia
Australia
Insurance
Holding Company
Australia
Insurance
Australia
Banking
Papua New Guinea
Banking
China
China
Banking
Holding Company
Guam
Banking
Guam
Australia
General Finance
Holding Company
Australia
Online Stockbroking
Australia
Banking
Indonesia
1 Audited by overseas KPMG firms.
2 Non-controlling interests hold ordinary shares or units in the controlled entities listed above as follows: ANZ Bank (Kiribati) Limited – 150,000 $1 ordinary shares (25%) (2012: 150,000 $1 ordinary
shares (25%)); PT Bank ANZ Indonesia – 16,500 IDR 1 million shares (1%) (2012: 16,500 IDR 1 million shares (1%)); ANZ Royal Bank (Cambodia) Limited – 319,500 USD100 ordinary shares (45%)
(2012: 319,500 USD100 ordinary shares (45%)).
3 Audited by Ernst & Young.
4 Audited by Hawkes Law.
5 Audited by Deloitte Guam.
NOTES TO THE FINANCIAL STATEMENTS
161
ANZ ANNUAL REPORT 2013
39: Associates
Significant associates of the Group are as follows:
AMMB Holdings Berhad
PT Bank Pan Indonesia2
Shanghai Rural
Commercial Bank
Bank of Tianjin3
Saigon Securities Inc.2,3,4
Metrobank Card Corporation
Other associates
Total carrying value of associates
Date
became
an associate
Ownership
interest
held
May 2007
April 2001
24%
39%
voting
interest
24%
39%
September 2007
20%
20%
June 2006
July 2008
October 2003
18%
18%
40%
18%
18%
40%
Incorporated
in
Malaysia
Indonesia
Peoples Republic
of China
Peoples Republic
of China
Vietnam
Philippines
Carrying
value
2013
$m
Carrying
value
2012
$m
fair
value1
$m
Reporting
date
1,282
692
1,143 1,753
542
668
31 March
31 December
Principal
activity
Banking
Banking
1,261
959
n/a
31 December
Banking
n/a
52
n/a
31 December
31 December
31 December
Banking
Stockbroking
Cards Issuing
601
54
58
175
448
74
50
178
4,123
3,520
1 Applicable to those investments in associates where there are published price quotations. Fair value is based on a price per share and does not include any adjustments for holding size.
2 A value-in-use estimation supports the carrying value of this investment.
3 Significant influence is established via representation on the Board of Directors.
4 During the 2013 year the investment in Saigon Securities Inc. was written down by $26 million (2012: $31 million).
Aggregated assets of significant associates (100%)
Aggregated liabilities of significant associates (100%)
Aggregated revenues of significant associates (100%)
Aggregated profits 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.
2013
$m
192,480
177,542
9,806
2,013
2012
$m
140,610
128,245
8,244
1,761
Consolidated
2013
$m
637
(160)
477
5
482
2012
$m
542
(135)
407
(12)
395
162
Notes to the fiNaNcial statemeNts (continued) 40: Transfers of Financial Assets
The Group enters into transactions in the normal course of business
by which it transfers financial assets directly to third parties or to
special purpose entities (SPEs). These transfers may give rise to the
full or partial derecognition of those financial assets.
} Full derecognition occurs when the Group 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 the Group 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 continue
to be recognised on the balance sheet to the extent of the Group’s
continuing involvement.
Group-originated financial assets that do not qualify for
derecognition typically relate to repurchase agreements and loans
that have been transferred under arrangements by which the Group
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 and entering into derivative
transactions with the SPEs. In such instances, the Group continues
to be exposed to risks associated with these transactions.
SECURITISATIONS
Net loans and advances include residential mortgages securitised
under the Group’s securitisation programs which are assigned to
bankruptcy remote SPEs to provide security for obligations payable
on the notes issued by the SPEs. This includes mortgages that
are held for potential repurchase agreement (REPO) with central
banks. The noteholders have full recourse to the pool of residential
mortgages which have been securitised. The Company cannot
otherwise pledge or dispose of the transferred assets.
As holder of the securitised notes the Company retains the credit risk
associated with the securitised mortgages. In addition, the Company
is entitled to any residual income of the SPEs and, where the SPEs
include interest rate and foreign currency derivatives that have not
been externalised, the interest rate and foreign currency risk are held
in the Company. The Company is therefore deemed to have retained
the majority of the risks and rewards of the residential mortgages
and as such continues to recognise the mortgages as financial assets.
The obligations to repay this amount to the SPE is recognised as a
financial liability of the Company. As the Group has control over the
SPEs’ activities, they are consolidated by the Group.
COvERED BONDS
The Group operates various global covered bond programs to
raise funding in the primary market. Net loans and advances
include residential mortgages assigned to bankruptcy remote SPEs
associated with these covered bond programs to provide security for
the obligations payable on the covered bonds issued by the Group.
The covered bond holders have dual recourse to the issuer and the
cover pool of assets. The issuer cannot otherwise pledge or dispose
of the transferred assets, however, it may repurchase and substitute
assets as long as the required cover is maintained.
The Company, as an issuer of covered bonds is required to maintain
the cover pool at a level sufficient to cover the bond obligations.
Therefore, the majority of the credit risk associated with the
underlying mortgages within the cover pool is retained by the
Company. In addition, the Company is entitled to any residual income
of the covered bond SPE and where the SPE includes interest rate
and foreign currency derivatives that have not been externalised,
the interest rate and foreign currency risk are held in the Company.
The Company is therefore deemed to have retained the majority
of the risks and rewards of the residential mortgages and as such
continues to recognise the mortgages as financial assets. The
obligation to repay this amount to the SPE is recognised as a financial
liability of the Company. As the Group has control over the SPE’s
activities, they are consolidated by the Group. The external covered
bonds issued are included within Bonds and Notes.
REPURCHASE AGREEMENTS
Securities sold subject to repurchase agreements are considered
transferred assets that do not qualify for derecognition when
substantially all the risks and rewards of ownership remain with the
Group. An associated liability is recognised for the consideration
received from the counterparty.
The table below sets out the balance of assets transferred that do not
qualify for derecognition, along with the associated liabilities.
Securitisations1,2
Current carrying amount of assets transferred
Carrying amount of associated liabilities
Covered bonds1
Current carrying amount of assets transferred
Carrying amount of associated liabilities3
Repurchase agreements
Current carrying amount of assets transferred
Carrying amount of associated liabilities
Consolidated
2013
$m
2012
$m
The Company
2013
$m
2012
$m
–
–
–
–
–
–
–
–
1,547
1,540
536
528
41,718
41,718
16,558
16,558
1,347
1,341
41,789
41,789
11,304
11,304
289
286
1 The consolidated balances are nil as the Company balances relate to transfers to internal special purpose vehicles. The total covered bonds issued by the Group to external investors at
30 September 2013 was $17,639 million (2012: $11,162 million), secured by $21,770 million (2012: $15,276 million) of specified residential mortgages.
2 The securitisation noteholders have recourse only to the pool of residential mortgages which have been securitised. The carrying value of securitised assets and the associated liabilities
approximate their fair value value.
3 The associated liability represents the Company’s liability to the covered bond SPE. Covered bonds issued by the Company to external investors at 30 September 2013 was $14,146 million
(2012: $8,798 million).
NOTES TO THE FINANCIAL STATEMENTS
163
ANZ ANNUAL REPORT 2013 41: 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 aggregate amounts of funds concerned are as follows:
Trusteeships
fUNDS MANAGEMENT ACTIvITIES
2013
$m
4,875
2012
$m
3,958
Funds management activities are conducted through Group controlled entities ANZ Wealth Australia Limited and ANZ Wealth New Zealand
Limited and certain other subsidiaries of the Group. Funds under management in these entities are included in these consolidated financial
statements where they are controlled by the Group.
The aggregate funds under management which are not included in these consolidated financial statements are as follows:
2013
$m
8,331
7,335
7,751
10
2012
$m
7,079
5,845
6,673
22
23,427
19,619
Consolidated
The Company
2013
$m
77
77
1,633
201
1,834
423
945
466
2012
$m
78
78
1,561
177
1,738
400
887
451
2013
$m
54
54
1,918
185
2,103
375
981
747
2012
$m
70
70
1,313
161
1,474
330
767
377
1,834
1,738
2,103
1,474
ANZ Wealth Australia Limited
ANZ Wealth New Zealand Limited
Other controlled entities – New Zealand
Other controlled entities – Australia
42: Commitments
Property capital expenditure
Contracts for outstanding capital expenditure
Total capital expenditure commitments for property
Lease rentals
Land and buildings
Furniture and equipment
Total lease rental commitments
Not later than 1 year
Later than one year but not later than 5 years
Later than 5 years
Total lease rental commitments
164
Notes to the fiNaNcial statemeNts (continued) 43: 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
Overseas markets
Total
Consolidated
The Company
Contract
amount
2013
$m
Contract
amount
2012
$m
Contract
amount
2013
$m
Contract
amount
2012
$m
170,670
141,355
134,622
118,461
85,091
18,754
66,825
77,137
16,822
47,396
85,081
–
49,541
77,119
–
41,342
170,670
141,355
134,622
118,461
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
2013
$m
8,223
4,437
3,197
19,960
715
36,532
16,983
1,645
17,904
36,532
Contract
amount
2012
$m
6,711
2,450
3,201
19,440
581
32,383
15,516
1,075
15,792
32,383
Contract
amount
2013
$m
6,713
3,873
2,312
18,242
709
31,849
16,983
–
14,866
31,849
Contract
amount
2012
$m
5,812
2,156
2,689
18,330
632
29,619
15,516
–
14,103
29,619
OTHER BANK RELATED CONTINGENT LIABILITIES
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.
i) Exception fees class action
Litigation funder IMF (Australia) Ltd commenced a class action against
ANZ in 2010, followed by a second similar class action in March 2013.
The separate actions are claimed to be on behalf of more than 40,000
ANZ customers for more than $50 million in fees claimed to have
been charged to those customers. The second of the class actions is
scheduled for trial commencing 2 December 2013. ANZ is defending
it. In June 2013, litigation funder Litigation Lending Services (NZ)
commenced a representative action against ANZ for certain fees
charged to New Zealand customers since 2007. There is a risk that
further claims could emerge in Australia, New Zealand or elsewhere.
ii) Security recovery actions
Various claims have been made or are anticipated, arising from
security recovery actions taken to resolve impaired assets over recent
years. ANZ will defend these claims and any future claims.
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 and audits 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.
NOTES TO THE FINANCIAL STATEMENTS
165
ANZ ANNUAL REPORT 2013 43: Credit Related Commitments, Guarantees, Contingent Liabilities and Contingent Assets (continued)
iv) Interbank Deposit Agreement
ANZ has entered into an Interbank Deposit Agreement with the major
banks in the payment system. This agreement is a payment system
support facility certified by APRA, 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.
v) Clearing and settlement obligations
In accordance with the clearing and settlement arrangements set out:
} in the Australian Payments Clearing Association Limited’s
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 (Austraclear) 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.
vi) 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 lodgement of individual financial statements in Australia.
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
} 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 Limited5
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.
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 or subsequent Assumption Deeds
under the class order were 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 in
any other case, 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.
166
Notes to the fiNaNcial statemeNts (continued) 43: Credit Related Commitments, Guarantees, Contingent Liabilities and Contingent Assets (continued)
The consolidated statement of comprehensive income and consolidated balance sheet of the Company and its wholly owned controlled entities
which have entered into the Deed of Cross Guarantee in the relevant financial years 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
Profit after income tax
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
Consolidated
2013
$m
7,196
(1,784)
5,412
310
15
(37)
(19)
269
5,681
15,145
5,412
(4,082)
1
(19)
16,457
33,838
23,823
371,983
180,992
1,034
611,670
359,013
932
211,835
825
572,605
39,065
39,065
2012
$m
6,497
(1,549)
4,948
(275)
(15)
39
(28)
(279)
4,669
13,914
4,948
(3,691)
2
(28)
15,145
32,782
17,841
349,048
171,362
1,573
572,606
333,536
804
200,479
745
535,564
37,042
37,042
1 Shareholders’ equity excludes retained profits and reserves of controlled entities within the class order.
vii) 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
existing provisions.
foreign Exchange Regulation Act (India)
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
ANZ is pursuing recovery of the proceeds of certain disputed cheques
which were credited to the account of a former Grindlays customer in
the early 1990s.
The disputed cheques were drawn on the National Housing Bank
(NHB) in India. Proceedings between Grindlays and NHB concerning
the proceeds of the cheques were resolved in early 2002.
Recovery is now being pursued from the estate of the Grindlays
customer who received the cheque proceeds. Any amounts recovered
are to be shared between ANZ and NHB.
NOTES TO THE FINANCIAL STATEMENTS
167
ANZ ANNUAL REPORT 2013 44: Superannuation and Other Post Employment Benefit Schemes
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
Contribution levels
Employee/participant
Employer
Australia
ANZ Australian Staff
Superannuation Scheme1,2
New Zealand
ANZ National Bank Staff
Superannuation Scheme1,2
Defined contribution scheme Section C3 or Optional8
Balance of cost10
Defined contribution scheme Section A or
Optional
Defined benefit scheme Pension Section4
Defined benefit scheme5 or
Defined contribution scheme
Nil
Nil
Minimum of 2.5%
of salary
9.25% of salary11
Balance of cost12
Balance of cost13
7.5% of salary14
National Bank Staff Superannuation Fund1,2
Defined benefit scheme6 or
5.0% of salary
Balance of cost15
Defined contribution scheme7
Minimum of 2.0%
of salary
11.5% of salary16
United Kingdom ANZ UK Staff Pension Scheme1
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.
1 These schemes provide for pension benefits.
2 These schemes provide for lump sum benefits.
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 From 1 October 2003, all member contributions are at a rate of 5% of salary.
10 As determined by the Trustee on the recommendation of the actuary – currently 9.25% (2012: 9%) of members’ salaries.
11 2012: 9% of salary.
12 As determined by the Trustee on the recommendation of the actuary – $4.7 million p.a. (2012: $4.7 million p.a.).
13 As recommended by the actuary – currently nil (2012: nil).
14 2012: 7.5% of salary.
15 As recommended by the actuary – currently 24.8% (2012: 24.8%) of members’ salaries and net additional contributions of NZD 5 million p.a.
16 2012: 11.5% of salary.
17 As agreed by the Trustee and Group after taking the advice of the actuary – currently 26% (2012: 26%) of pensionable salaries and additional quarterly contributions of GBP 7.5 million until
September 2016.
168
Notes to the fiNaNcial statemeNts (continued) 44: 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. 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.
2013 Schemes
ANZ Australian Staff Superannuation Scheme Pension Section2
ANZ UK Staff Pension Scheme2
ANZ UK Health Benefits Scheme5
ANZ National Bank Staff Superannuation Scheme3
National Bank Staff Superannuation Fund4
Other5,6
Total
Net market
value of
assets held
by scheme
$m
Excess/(deficit)
of net
market value
of assets over
accrued benefits
$m
18
929
–
4
298
33
1,282
(8)
(168)
(7)
–
(30)
(9)
(222)
Accrued
benefits1
$m
26
1,097
7
4
328
42
1,504
1 Determined in accordance with AAS 25, which prescribes a different measurement date and basis to those applied in this financial report under AASB 119. Under AASB 119, the discount rates
used are based on prevailing government and corporate bonds at the reporting date (30 September 2013), rather than the expected return on scheme assets as at the most recent actuarial
valuation date (set out below) as prescribed by AAS 25.
2 Amounts were determined at 31 December 2012.
3 Amounts were determined at 31 December 2010.
4 Amounts were determined at 31 March 2012.
5 Amounts were determined at 30 September 2013.
6 Other includes the defined benefit arrangement in Japan, Philippines and Taiwan.
2012 Schemes
ANZ Australian Staff Superannuation Scheme Pension Section2
ANZ UK Staff Pension Scheme2
ANZ UK Health Benefits Scheme5
ANZ National Bank Staff Superannuation Scheme3
National Bank Staff Superannuation Fund4
Other5,6
Total
Net market
value of
assets held
by scheme
$m
Excess/(deficit)
of net
market value
of assets over
accrued benefits
$m
15
749
–
4
267
28
1,063
(11)
(279)
(7)
–
(27)
(10)
(334)
Accrued
benefits1
$m
26
1,028
7
4
294
38
1,397
1 Determined in accordance with AAS 25, which prescribes a different measurement date and basis to those applied in this financial report under AASB 119. Under AASB 119, the discount rates
used are based on prevailing government and corporate bond rates at the reporting date (30 September 2012), rather than the expected return on scheme assets as at the most recent actuarial
valuation date (set out below) as prescribed by AAS 25.
2 Amounts were measured at 31 December 2011.
3 Amounts were measured at 31 December 2010.
4 Amounts were measured at 31 March 2012.
5 Amounts were measured at 30 September 2012.
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 $67 million (2012: $61 million) to the defined benefit sections of the schemes during the next
financial year.
NOTES TO THE FINANCIAL STATEMENTS
169
ANZ ANNUAL REPORT 2013 44: Superannuation and Other Post Employment Benefit Schemes (continued)
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 2012, showed a deficit of $8 million and the actuary recommended that
the Group make contributions to the Pension Section of $4.7 million p.a. for the two years to 31 December 2014. The next full actuarial valuation
is due to be conducted as at 31 December 2013.
The following economic assumptions were used in formulating the actuary’s funding recommendations:
Rate of investment return
Pension indexation rate
6.5% p.a.
2.5% 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 actuarial valuation, conducted by consulting actuaries Towers Watson as at 31 December 2012, showed a deficit of GBP 97 million
($168 million at 30 September 2013 exchange rates).
Following the actuarial valuation as at 31 December 2012, 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. These contributions will be reviewed following the next actuarial valuation which is
scheduled to be undertaken as at 31 December 2015.
The following economic assumptions were used for the interim actuarial valuation as at 31 December 2012:
Rate of investment return on existing assets
– to 31 December 2018
– to 31 December 2033
Rate of investment return for determining ongoing contributions
Salary increases
Pension increases
In deferment increases
4.1% p.a.
2.8% p.a.
6.0% p.a.
3.4% p.a.
2.9% p.a.
2.2% 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.
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 2012 showed a deficit of NZD 34 million ($30 million at 30 September 2013 exchange rates). The actuary recommended that the Group
make contributions of 24.8% of salaries plus a lump sum contribution of NZD 5 million p.a. (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
5.0% 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.
The basis of calculation under AASB119 is detailed in note 1 F(vii).
170
Notes to the fiNaNcial statemeNts (continued) 44: 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
Adjustment for contributions tax
Total included in personnel expenses
Amounts recognised in the balance sheet in respect of defined benefit schemes
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
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
2013
$m
2012
$m
The Company
2013
$m
2012
$m
8
44
(46)
1
7
(1,256)
1,182
(74)
(74)
(74)
(28)
270
7
48
(44)
2
13
(1,109)
960
(149)
(149)
(149)
54
298
4
38
(40)
–
2
(1,054)
1,025
(29)
(29)
(29)
19
227
5
42
(39)
–
8
(913)
846
(67)
(67)
(67)
35
208
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.
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
Exchange difference on foreign schemes
Benefits paid
Transfer of Taiwan liabilities to subsidiary1
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
Transfer of Taiwan assets to subsidiary1
Closing fair value of scheme assets2
Actual return on scheme assets
1,109
8
44
–
24
129
(58)
–
1,256
960
46
52
115
67
–
(58)
–
1,182
98
1,033
7
48
1
105
(24)
(61)
–
1,109
885
44
51
(21)
61
1
(61)
–
960
95
913
4
38
–
66
107
(44)
(30)
1,054
846
40
47
99
59
–
(44)
(22)
1,025
87
857
5
42
–
79
(25)
(45)
–
913
775
39
44
(22)
55
–
(45)
–
846
83
1 During 2013, the assets and liabilities of the Taiwan defined benefit scheme were transferred from the Taiwan branch of the Company to a subsidiary of the Company. There was no gain or loss on
transfer. As a result of this transfer, the assets and liabilities of the Taiwan defined benefit scheme are no longer included in the Company balances.
2 Scheme assets include the following financial instruments issued by the Group: cash and short-term debt instruments $1.8 million (September 2012: $1.4 million), fixed interest securities
$0.7 million (September 2012: $0.6 million) and equities nil (September 2012: nil).
Analysis of the scheme assets
Equities
Debt securities
Property
Other assets
Total assets
Consolidated
fair value of scheme
assets
The Company
fair value of scheme
assets
2013
%
40
46
6
8
100
2012
%
38
43
7
12
100
2013
%
38
48
7
7
100
2012
%
36
44
8
12
100
NOTES TO THE FINANCIAL STATEMENTS
171
ANZ ANNUAL REPORT 2013 44: Superannuation and Other Post Employment Benefit Schemes (continued)
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
2013
%
4.00
4.30
4.30
4.60
4.60
6.50
4.70
n/a
4.50
5.00
3.80
3.00
2.50
3.30
2.40
2.50
2.50
6.10
6.10
2012
%
2.75
4.40
4.40
3.50
3.50
6.50
4.70
n/a
4.50
5.00
4.50
3.00
2.50
2.70
2.00
2.50
2.50
6.60
6.60
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
2013
$m
2012
$m
2011
$m
2010
$m
2009
$m
2013
$m
2012
$m
2011
$m
2010
$m
2009
$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
(1,256)
1,182
(74)
(1,109)
960
(149)
15
52
1
51
(1,033)
885
(148)
(11)
(25)
(1,059)
873
(186)
(2)
36
(1,095)
849
(246)
7
(49)
(1,054)
1,025
(29)
10
47
(913)
846
(67)
2
45
(857)
775
(82)
(10)
(21)
(928)
761
(167)
1
26
(938)
738
(200)
7
(32)
172
Notes to the fiNaNcial statemeNts (continued) 45: 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 2012 and 2013 years were the Employee Share Offer, the Deferred
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.
Employee Share Offer
Each permanent employee (excluding senior executives) who has had continuous service for one year is eligible to participate in the Employee
Share Offer 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 one 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 three overseas locations (Cook Islands, Kiribati and Solomon Islands), 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. Dividends
received on the shares are automatically reinvested into the Dividend Reinvestment Plan.
In New Zealand shares are granted to eligible employees upon payment of NZD one cent per share.
Shares granted in New Zealand and the remaining overseas locations under this plan vest subject to the satisfaction of a three year service period,
after which time they may, remain in trust, be transferred into the employee’s name or sold. Unvested shares are forfeited in the event of resignation
or dismissal for serious misconduct. Dividends are either received as cash or reinvested into the Dividend Reinvestment Plan.
During the 2013 year, 1,450,558 shares with an issue price of $24.44 were granted under the plan to employees on 6 December 2012 (2012 year:
1,822,760 shares with an issue price of $20.21 were granted on 5 December 2011).
Deferred Share Plan
A Short Term Incentive (STI) mandatory deferral program was implemented from 2009, with equity deferral relating to half of all STI amounts
above a specified threshold. Prior to 2011, STI deferred equity could be taken as 100% shares or 50% shares and 50% options. From 2011, all STI
deferred equity is taken as 100% shares.
Selected employees may also be granted Long Term Incentive (LTI) deferred shares which vest to the employee three years from the date of
grant. Ordinary shares granted under this LTI plan may be held in trust beyond the deferral period.
In exceptional circumstances, deferred shares are granted to certain employees upon commencement with ANZ to compensate for
remuneration forgone from their previous employer. The vesting period generally aligns with the remaining vesting period of remuneration
forgone, and therefore varies between grants. Retention deferred shares may also be granted occasionally to high performing employees who
are regarded as a significant retention risk to ANZ.
Unless the Board decides otherwise, unvested STI, LTI or other deferred shares are forfeited on resignation, termination on notice or dismissal for
serious misconduct.
The employee receives dividends on deferred shares while those shares are held in trust (cash or Dividend Reinvestment Plan).
Deferred share rights may be granted instead of deferred shares in some countries to accommodate offshore taxation regulations (refer to
Deferred Share Rights section).
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 2013 year, 6,233,626 deferred shares with a weighted average grant price of $25.00 were granted under the deferred share plan
(2012 year: 7,001,566 shares with a weighted average grant price of $21.19 were granted).
In accordance with the clawback provisions detailed in Section 6.3, Other Remuneration Elements of the 2013 Remuneration Report, Board
discretion was exercised during 2013 resulting in 5,691 shares granted in 2013 being clawed back under the deferred share plan.
Share valuations
The fair value of shares granted in the 2013 year under the Employee Share Offer and the Deferred Share Plan, measured as at the date of grant
of the shares, is $190.6 million based on 7,684,184 shares at a volume weighted average price of $24.81 (2012 year: fair value of shares granted
was $185.4 million based on 8,824,326 shares at a weighted average price of $21.01). 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.
ANZ SHARE OPTION PLAN
Selected employees may be granted options/rights, which entitle them to acquire 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 ordinary shares allocated on exercise of the options/rights.
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.
NOTES TO THE FINANCIAL STATEMENTS
173
ANZ ANNUAL REPORT 2013 45: Employee Share and Option Plans (continued)
The option plan rules set out the entitlements a holder of options/rights has prior to exercise in the event of a bonus issue, pro-rata new issue or
reorganisation of ANZ’s share capital. In summary:
} if ANZ has issued bonus shares during the life of an option and prior to the exercise of the option, then when the option is exercised the
option holder is also entitled to be issued such number of bonus shares as the holder would have been entitled to if the option holder had
held the underlying shares at the time of the bonus issue;
} if ANZ makes a pro-rata offer of securities during the life of an option and prior to the exercise of the option, the exercise price of the option
will be adjusted in the manner set out in the ASX Listing Rules; and
} in respect of rights, if there is a bonus issue or reorganisation of ANZ’s share capital, the number of rights or the number of underlying shares
may be adjusted so that there is no advantage or disadvantage to the holder.
Holders otherwise have no other entitlements to participate in any new issue of ANZ securities prior to exercise of their options/rights. Holders
also have no right to participate in a share issue of a body corporate other than ANZ (e.g. a subsidiary).
ANZ Share Option Plan schemes expensed in the 2012 and 2013 years are as follows:
Current Option Plans
Performance Rights Plan (excluding CEO Performance Rights)
Performance rights are granted to selected employees as part of ANZ’s LTI program. Performance rights provide the right to acquire ANZ
shares at nil cost, subject to a three year vesting period and a Total Shareholder Return (TSR) performance hurdle. Further details in relation to
performance rights are detailed in Section 6.2.2, Long Term Incentives (LTI) in the 2013 Remuneration Report.
For equity grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent payment rather than
shares at the Board’s discretion.
The provisions that apply in the case of cessation of employment are detailed in Section 8.3, Disclosed Executives in the 2013 Remuneration Report.
During the 2013 year, 641,728 performance rights (excluding CEO performance rights) were granted (2012: 586,925).
CEO Performance Rights
At the 2012 Annual General Meeting shareholders approved an LTI grant to the CEO equivalent to 100% of his 2012 fixed pay, being
$3.15 million. This equated to a total of 328,810 performance rights being allocated, which will be subject to testing against a TSR hurdle after
three years, i.e. December 2015.
For equity grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent payment rather than
shares at the Board’s discretion.
At the 2010 and 2011 Annual General Meetings shareholders approved LTI grants to the CEO equivalent to 100% of his fixed pay, being
$3.15 million. This equated to a total of 253,164 (2010) and 326,424 (2011) performance rights being allocated, which will be subject to testing
against a TSR hurdle after three years, i.e. December 2013 and 2014 respectively.
At the 2007 Annual General Meeting shareholders approved an LTI grant consisting of three tranches of performance rights, each to a maximum
value of $3 million. The performance periods for each tranche began on the date of grant of 19 December 2007 and ended on the third,
fourth and fifth anniversaries respectively (i.e. only one performance measurement for each tranche). The first of these tranches was tested in
December 2010 and 258,620 performance rights vested and were exercised in 2011. The second tranche was tested in December 2011 and
259,740 performance rights vested and were exercised in 2012. The third tranche was tested in December 2012 and 260,642 performance rights
vested and were exercised in 2013.
The provisions that apply in the case of cessation of employment are detailed in Section 8.2, Chief Executive Officer (CEO) in the 2013
Remuneration Report.
Deferred Share Rights (no performance hurdles)
Deferred share rights 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 section above).
For deferred share rights grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent
payment rather than shares at the Board’s discretion.
During the 2013 year 1,133,780 deferred share rights (no performance hurdles) were granted (2012: 1,013,185).
Legacy Option Plans
The following legacy option plans are no longer being offered, but were expensed in the 2012 and 2013 years.
CEO Options
At the 2008 Annual General Meeting, shareholders approved a special grant to the CEO of 700,000 options, granted on 18 December 2008.
At grant the options were independently valued with a fair value of $2.27 each (total value of $1.589 million) and an option exercise price of
$14.18 per share. Upon exercise, each option entitled the CEO to one ordinary ANZ share. The options vested on 18 December 2011 and were
exercised during 2012.
174
Notes to the fiNaNcial statemeNts (continued) 45: Employee Share and Option Plans (continued)
Deferred Options (no performance hurdles)
Under the STI deferral program half of all amounts above a specified threshold are provided as deferred equity. Previously deferred equity could
be taken as 100% shares or 50% shares and 50% options. From 2011, all deferred equity is taken as 100% shares (refer to Deferred Share Plan
section above).
Options, deferred share rights and performance rights on issue
As at 8 November 2013, there were 15 holders of 192,424 options on issue, 1,836 holders of 2,142,901 deferred share rights on issue and
13 holders of 2,485,640 performance rights on issue.
Option Movements
Details of options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2013 and
movements during 2013 follow:
Weighted average exercise price
Opening balance
1 October 2012
Options/rights
granted
Options/rights
forfeited
Options/rights
expired
Options/rights
exercised
Closing balance
30 September 2013
5,941,291
$6.53
2,104,318
$0.00
(295,701)
$0.35
(185,617)
$23.48
(2,693,773)
$10.81
4,870,518
$1.07
The weighted average closing share price during the year ended 30 September 2013 was $27.68 (2012: $21.88).
The weighted average remaining contractual life of options/rights outstanding at 30 September 2013 was 2.9 years (2012: 2.5 years).
The weighted average exercise price of all exercisable options/rights outstanding at 30 September 2013 was $17.53 (2011: $20.93).
A total of 297,018 exercisable options/rights were outstanding at 30 September 2013 (2012: 1,629,751).
Details of options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2012 and
movements during 2012 are set out below:
Weighted average exercise price
Opening balance
1 October 2011
Options/rights
granted
Options/rights
forfeited
Options/rights
expired
Options/rights
exercised
Closing balance
30 September 2012
8,961,579
$12.44
1,926,534
$0.00
(192,972)
$9.63
(474,499)
$21.37
(4,279,351)
$14.18
5,941,291
$6.53
No options/rights over ordinary shares have been granted since the end of 2013 up to the signing of the Directors’ Report on 8 November 2013.
Details of shares issued as a result of the exercise of options/rights during 2013 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
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
0.00
46,061
3,968
186
5,861
12,820
144
404
38,462
174,762
3,701
1,102
11,277
67,967
3,841
1,625
2,799
17,037
30,850
80,146
2,929
22,039
18,547
13,989
11,524
713
57
788
3,295
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.00
0.00
0.00
23.49
17.18
17.18
17.18
17.18
17.18
17.18
22.80
22.80
22.80
22.80
22.80
22.80
23.71
23.71
23.71
23.71
23.71
23.71
0.00
0.00
0.00
0.00
0.00
10,610
612
1,536
631,388
245,093
90,483
90,479
4,076
1,185
1,184
17,071
656
8,792
17,070
656
8,791
113,492
4,251
1,225
113,489
4,250
1,225
260,642
225,963
41,084
57,726
163,850
–
–
–
14,831,304
4,210,698
1,554,498
1,554,429
70,026
20,358
20,341
389,219
14,957
200,458
389,196
14,957
200,435
2,690,895
100,791
29,045
2,690,824
100,768
29,045
–
–
–
–
–
NOTES TO THE FINANCIAL STATEMENTS
175
ANZ ANNUAL REPORT 2013 45: Employee Share and Option Plans (continued)
Details of shares issued as a result of the exercise of options/rights during 2012 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
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
3,486
13,491
19
59
63
249,166
3,945
1,224
17,474
78,287
20,677
8,576
3,259
1,860
2,916
10,741
65,994
3,658
8,329
3,149
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.00
0.00
0.00
0.00
0.00
14.18
17.18
17.18
17.18
17.18
17.18
17.18
20.68
20.68
22.80
22.80
22.80
22.80
23.49
259,740
268,268
90,520
25,748
399
700,000
314,660
124,835
124,832
13,841
380
760
218,637
785,411
35,823
2,388
35,822
2,388
778,526
–
–
–
–
–
9,926,000
5,405,859
2,144,665
2,144,614
237,788
6,528
13,057
4,521,413
16,242,299
816,764
54,446
816,742
54,446
18,287,576
Details of shares issued as a result of the exercise of options/rights since the end of 2013 up to the signing of the Directors’ Report on
8 November 2013 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
2,773
262
491
3,115
2,319
1,026
48
–
–
–
–
–
–
–
0.00
0.00
17.18
22.80
22.80
23.71
23.71
96
57
15,804
7,430
7,430
1,444
1,444
–
–
271,513
169,404
169,404
34,237
34,237
176
Notes to the fiNaNcial statemeNts (continued) 45: Employee Share and Option Plans (continued)
In determining the fair value below, the standard market techniques for valuation, including Monte Carlo and/or Black Scholes pricing models,
were applied in accordance with the requirements of AASB 2 Share-based payments. The models take into account early exercise of vested
equity, non-transferability and market based performance hurdles (if any). The significant assumptions used to measure the fair value of
instruments granted during 2013 are contained in the table below:
Type of equity
STI deferred share rights
LTI deferred share rights
LTI performance rights
Other deferred share rights
Number of
options/rights
Exercise
price
($)
Equity fair
value
($)
Share
closing
price at
grant
($)
ANZ
expected
volatility1
(%)
Equity
term
(years)
vesting
period
(years)
Expected
life
(years)
Expected
dividend
yield
(%)
Risk free
interest
rate
(%)
54,511
240,751
255,250
28,694
415,056
641,728
328,810
72,059
12,941
13,623
9,795
2,392
7,935
2,518
8,735
1,830
3,732
3,958
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
24.45
23.07
21.76
20.53
20.53
10.16
9.58
20.80
26.87
25.53
28.78
28.09
27.34
26.68
25.98
25.35
23.07
21.76
24.45
24.45
24.45
24.45
24.45
24.45
24.64
24.72
28.28
28.28
29.56
29.56
29.56
29.56
29.56
29.56
24.45
24.45
n/a
22.5
22.5
22.5
22.5
22.5
22.5
22.5
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
22.5
22.5
2.4
3
4
5
5
5
5
3
3
4
2.5
3
3.5
4
4.5
5
3
4
0.4
1
2
3
3
3
3
3
1
2
0.5
1
1.5
2
2.5
3
1
2
0.4
1
2
3
3
3
3
3
1
2
0.5
1
1.5
2
2.5
3
1
2
n/a
6.00
6.00
6.00
6.00
6.00
6.00
6.00
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.25
6.00
6.00
n/a
2.82
2.66
2.58
2.58
2.58
2.77
2.63
2.62
2.63
2.38
2.38
2.47
2.47
2.73
2.73
2.82
2.66
Grant date
12-Nov-12
12-Nov-12
12-Nov-12
12-Nov-12
12-Nov-12
12-Nov-12
19-Dec-12
6-Dec-12
27-Feb-13
27-Feb-13
20-Aug-13
20-Aug-13
20-Aug-13
20-Aug-13
20-Aug-13
20-Aug-13
12-Nov-12
12-Nov-12
The significant assumptions used to measure the fair value of instruments granted during 2012 are contained in the table below:
Type of equity
STI deferred share rights
LTI deferred share rights
LTI performance rights
Deferred share rights
Number of
options/rights
Exercise
price
($)
Equity fair
value
($)
Share
closing
price at
grant
($)
ANZ
expected
volatility1
(%)
Equity
term
(years)
vesting
period
(years)
Expected
life
(years)
Expected
dividend
yield
(%)
Risk free
interest
rate
(%)
51,241
143,711
153,099
21,968
510,804
586,925
326,424
11,524
13,989
12,081
12,269
13,211
788
839
3,295
3,301
2,172
10,610
11,455
7,491
12,822
5,928
10,587
20.66
19.40
18.21
17.10
17.10
9.03
9.65
19.09
18.80
18.21
17.93
17.42
20.73
19.46
20.73
19.21
17.63
21.91
21.43
20.62
20.12
19.31
18.89
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
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
20.66
20.66
20.66
20.66
20.66
20.66
20.93
20.66
20.66
20.66
20.66
21.05
22.08
22.08
21.56
21.56
21.56
22.82
22.82
22.82
22.82
22.82
22.82
25
25
25
25
25
25
25
25
25
25
25
n/a
n/a
n/a
25
25
n/a
25
25
25
25
25
25
2.4
3
4
5
5
5
5
3.3
3.5
4
4.3
3
3
4
2.8
3.7
4.8
2.7
3
3.6
4
4.7
5
0.4
1
2
3
3
3
3
1.3
1.5
2
2.3
3
1
2
0.8
1.7
2.8
0.7
1
1.6
2
2.7
3
0.4
1
2
3
3
3
3
1.3
1.5
2
2.3
3
1
2
0.8
1.7
2.8
0.7
1
1.6
2
2.7
3
6.50
6.50
6.50
6.50
6.50
6.50
7.00
6.50
6.50
6.50
6.50
6.30
6.30
6.30
5.20
6.90
7.50
6.50
6.50
6.50
6.50
6.50
6.50
4.48
3.70
3.65
3.53
3.53
3.53
3.06
3.70
3.65
3.65
3.65
n/a
n/a
n/a
2.70
2.41
2.31
3.43
2.40
2.28
2.28
2.17
2.17
Grant date
14-Nov-11
14-Nov-11
14-Nov-11
14-Nov-11
14-Nov-11
14-Nov-11
16-Dec-11
14-Nov-11
14-Nov-11
14-Nov-11
14-Nov-11
5-Dec-11
27–Feb–12
27–Feb–12
8–Jun–12
8–Jun–12
8–Jun–12
23–Jul–12
23–Jul–12
23–Jul–12
23–Jul–12
23–Jul–12
23–Jul–12
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/rights. 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/rights.
NOTES TO THE FINANCIAL STATEMENTS
177
ANZ ANNUAL REPORT 2013 46: Key Management Personnel Disclosures
SECTION A: KEY MANAGEMENT PERSONNEL COMPENSATION
The Key Management Personnel (KMP) compensation included in the personnel disclosure expenses is as follows:
Short-term benefits
Post-employment benefits
Long-term benefits
Termination benefits
Share-based payments
Non-
Executives
$
2,978,821
138,812
–
–
–
3,117,633
2013
Executives
$
18,762,491
478,022
147,506
127,038
11,407,910
Total
$
21,741,312
616,834
147,506
127,038
11,407,910
Non-
Executives
$
2,742,072
119,704
–
–
–
2012
Executives
$
19,288,020
528,821
279,271
1,171,226
14,335,722
Total
$
22,030,092
648,525
279,271
1,171,226
14,335,722
30,922,967
34,040,600
2,861,776
35,603,060
38,464,836
SECTION B: KEY MANAGEMENT PERSONNEL LOAN TRANSACTIONS
Loans made to directors of the Company and other KMP of the Group are made in the ordinary course of business on normal commercial terms
and conditions no more favourable than those given to other employees or customers, 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 KMP of the Group including their related parties, where
the individual’s aggregate loan balance exceeded $100,000 at any time during the year, are as follows:
Directors
Executive Director 2013
M Smith
Executive Director 2012
M Smith
Non–Executive Directors 2013
A Watkins
Non–Executive Directors 2012
P Hay
A Watkins
Other key management personnel 2013
G Hodges
A Thursby1
D Hisco
S Elliott
N Williams
Other key management personnel 2012
G Hodges
A Thursby
C Page2
D Hisco
S Elliott
N Williams3
Opening balance
1 October
$
Closing balance
30 September
$
Interest paid and
payable in the
reporting period
$
Highest balance
in the reporting
period
$
1,000,000
1,000,000
49,900
1,000,000
18,380,409
1,000,000
81,957
18,380,409
3,600,000
3,600,000
192,890
3,600,000
661,793
3,320,081
5,150,773
2,859,500
2,000,000
3,200,000
–
5,202,380
2,984,500
511,605
2,000,000
–
729,218
–
3,600,000
5,094,023
1,650,000
2,039,869
2,000,000
1,581,874
5,150,773
2,859,500
739,500
2,000,000
3,200,000
–
12,746
233,540
289,143
80,685
116,352
117,880
48,826
311,475
161,276
5,115
84,031
79,362
22,115
674,539
3,600,146
5,564,383
2,859,500
2,963,156
3,200,000
1,658,411
5,671,775
2,984,500
739,777
2,000,000
3,900,000
864,755
Details regarding the aggregate of loans made, guaranteed or secured by any entity in the Group to each group of Directors and other KMP,
including their related parties, are as follows:
Directors
2013
2012
Other key management personnel
2013
2012
Opening balance
1 October2
$
Closing balance
30 September
$
4,600,000
22,362,283
4,600,000
4,600,000
13,210,273
11,427,703
12,365,766
13,949,773
Interest paid and
payable in the
reporting period
$
242,790
328,243
652,866
663,374
Number in
Group at
30 September4
2
3
5
6
1 The closing balance represents the balance on cessation as a KMP on 30 June 2013.
2 The closing balance represents the balance on cessation as a KMP on 16 December 2011. This amount is not included in the opening balance of all loans exceeding $100,000 as at 1 October 2012
of $13,210,273.
3 The opening balance represents the balance on appointment as a KMP on 17 December 2011.
4 Number in the Group includes directors and other KMP with loan balances greater than $100,000 at any time during the year.
178
Notes to the fiNaNcial statemeNts (continued) 46: Key Management Personnel Disclosures (continued)
SECTION C: KEY MANAGEMENT PERSONNEL EqUITY INSTRUMENT HOLDINGS
i) Options, deferred share rights and performance rights
Details of options, deferred share rights and performance rights held directly, indirectly or beneficially by each KMP, including their related
parties, are provided below:
Name
Type of options/rights
Opening
balance at
1 October
Granted
during the
year as
remuneration1
Exercised
during
the year
Resulting from
any other change
during the year
Closing
balance at
30 September2
vested and
exercisable at
30 September3
LTI performance rights
840,230
328,810
(260,642)
Executive Director 2013
M Smith
Executive Director 2012
M Smith
Other Key Management Personnel 2013
P Chronican
S Elliott
Special options
LTI performance rights
LTI performance rights
STI deferred options
LTI performance rights
–
LTI performance rights
STI deferred share rights
LTI performance rights
STI deferred share rights
LTI performance rights
LTI deferred share rights
STI deferred options
LTI performance rights
A Géczy4
D Hisco
G Hodges
J Phillips
N Williams
A Thursby5
Other Key Management Personnel 2012
P Chronican
S Elliott
D Hisco
G Hodges
J Phillips6
N Williams7
A Thursby
P Marriott8
C Page9
LTI performance rights
STI deferred options
LTI performance rights
Hurdled options
LTI performance rights
STI deferred share rights
Hurdled options
LTI performance rights
STI deferred share rights
LTI performance rights
–
STI deferred options
LTI performance rights
Hurdled options
STI deferred options
LTI performance rights
LTI performance rights
700,000
773,546
184,055
149,090
159,052
–
121,681
48,293
138,260
5,663
129,971
–
164,509
168,698
112,073
149,090
87,070
10,530
66,311
17,383
8,400
132,940
5,663
129,971
–
164,509
146,234
67,600
48,385
132,940
72,959
–
326,424
(700,000)
(259,740)
63,976
–
118,110
–
49,212
35,720
49,212
–
49,212
29,225
–
118,110
71,982
–
71,982
–
55,370
39,390
–
55,370
–
–
–
–
77,519
–
–
55,370
–
(57,726)
(149,090)
(41,084)
–
(32,867)
(27,975)
(41,084)
(5,663)
(36,976)
–
(164,509)
(45,193)
–
–
–
(10,003)
–
(8,480)
(5,400)
(50,050)
–
–
–
–
(55,055)
(64,220)
(48,385)
(50,050)
(38,038)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(241,615)
–
–
–
(527)
–
–
(3,000)
–
–
–
–
–
–
(3,380)
–
(41,265)
(10,671)
908,398
–
840,230
190,305
–
236,078
–
138,026
56,038
146,388
–
142,207
29,225
–
–
184,055
149,090
159,052
–
121,681
48,293
–
138,260
5,663
129,971
–
164,509
168,698
–
–
96,995
24,250
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
79,852
–
–
–
–
–
–
5,663
–
–
164,509
–
–
–
38,310
24,250
1 Details of options/rights granted as remuneration during 2013 are provided in tables 4 and 5 of the 2013 Remuneration Report. Details of options/rights granted as remuneration during 2012 are
provided in tables 4 and 5 of the 2012 Remuneration Report.
2 There was no change in the balance as at report sign-off date.
3 No options/rights were vested and unexerciseable as at 30 September 2013, or at cessation date for those who ceased being a KMP in 2013 (2012: nil).
4 Opening balance is based on holdings at the date of appointment as a KMP on 16 September 2013.
5 Closing balance is based on holdings at the date of cessation as a KMP on 30 June 2013.
6 Opening balance is based on holdings at the date of appointment as a KMP on 1 March 2012.
7 Opening balance is based on holdings at the date of appointment as a KMP on 17 December 2011.
8 Closing balance is based on holdings at the date of cessation as a KMP on 31 August 2012.
9 Closing balance is based on holdings at the date of cessation as a KMP on 16 December 2011.
NOTES TO THE FINANCIAL STATEMENTS
179
ANZ ANNUAL REPORT 2013 46: Key Management Personnel Disclosures (continued)
ii) Shares
Details of shares held directly, indirectly or beneficially by each KMP, including their related parties, are provided below:
Name
Type
Opening
balance at
1 October
Shares granted
during the year
as remuneration1
Received during
the year on
exercise of
options or rights
Resulting from
any other change
during the year2
Closing balance
at 30 September3,4
Non-Executive Directors 2013
J Morschel
G Clark
P Dwyer
P Hay
H Lee
G Liebelt5
I Macfarlane
D Meiklejohn
A Watkins
Non-Executive Directors 2012
J Morschel
G Clark
P Dwyer6
P Hay7
H Lee
I Macfarlane
D Meiklejohn
A Watkins
Executive Director 2013
M Smith
Executive Director 2012
M Smith
Directors’ Share Plan
Ordinary shares
CPS2
Capital Notes
Directors’ Share Plan
Ordinary shares
Ordinary shares
Directors’ Share Plan
Ordinary shares
Directors’ Share Plan
Ordinary shares
Ordinary Shares
CPS1
Capital Notes
Ordinary shares
CPS2
CPS3
Capital Notes
Ordinary shares
Ordinary Shares
Capital Notes
Directors’ Share Plan
Ordinary shares
CPS2
Directors’ Share Plan
Ordinary shares
Ordinary shares
Directors’ Share Plan
Ordinary shares
Directors’ Share Plan
Ordinary shares
Ordinary shares
CPS2
CPS3
Ordinary shares
Directors’ Share Plan
Ordinary shares
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
7,860
15,742
1,000
–
5,479
10,000
4,000
3,209
9,290
1,888
8,000
9,748
2,500
–
17,616
500
1,000
–
16,198
19,461
–
7,860
11,042
–
5,479
10,000
–
2,990
8,653
1,759
8,000
17,616
500
1,000
16,198
3,419
16,042
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,000
–
2,000
1,500
191
3,374
112
–
–
–
1,500
–
–
–
1,000
–
650
300
–
4,700
1,000
–
–
4,000
219
637
129
–
–
–
–
–
(3,419)
3,419
7,860
15,742
1,000
1,000
5,479
12,000
5,500
3,400
12,664
2,000
8,000
9,748
2,500
1,500
17,616
500
1,000
1,000
16,198
20,111
300
7,860
15,742
1,000
5,479
10,000
4,000
3,209
9,290
1,888
8,000
17,616
500
1,000
16,198
–
19,461
129,780
1,042,590
150,600
679,698
72,668
–
73,459
–
–
260,642
(90,294)
(2,184)
112,154
1,301,048
–
959,740
(94,279)
(596,848)
129,780
1,042,590
1 Details of shares granted as remuneration during 2013 are provided in table 4 of the 2013 Remuneration Report. Details of shares granted as remuneration during 2012 are provided in table 4 of
the 2012 Remuneration Report.
2 Shares resulting from any other change during the year include the net result of any shares purchased, sold or acquired under the Dividend Reinvestment Plan.
3 The following shares (included in the holdings above) were held on behalf of the KMP (i.e. indirect beneficially held shares) as at 30 September 2013 (and for former KMPs as at cessation
date): J Morschel – 18,560 (2012: 17,560); G Clark – 17,479 (2012: 15,479); P Dwyer – 5,500 (2012: 4,000); P Hay – 15,752 (2012: 12,204); H Lee – 2,000 (2012: 1,888); G Liebelt – 13,748;
I Macfarlane – 20,116 (2012: 19,116); D Meiklejohn – 13,698 (2012: 13,698); A Watkins – 20,411 (2012: 19,461); M Smith – 112,154 (2012: 129,780).
4 There was no change in the balance as at report sign-off date except for G Clark whose Director’s Share Plan balance at report sign-off date was nil and whose Ordinary shares balance at report
sign-off date was 17,479 and P Dwyer whose ordinary shares balance at report sign-off date was 7,500.
5 Opening balance is based on holdings at the date of appointment as a KMP on 1 July 2013.
6 Opening balance is based on holdings at the date of appointment as a KMP on 1 April 2012.
7 Shareholdings for P Hay excludes 19,855 shares which are held indirectly where P Hay has no beneficial interest.
180
Notes to the fiNaNcial statemeNts (continued) 46: Key Management Personnel Disclosures (continued)
ii) Shares (continued)
Name
Type
Opening
balance at
1 October
Shares granted
during the year
as remuneration1
Received during
the year on
exercise of
options or rights
Resulting from
any other change
during the year2
Closing balance
at 30 September3,4
Other Key Management Personnel 2013
P Chronican
S Elliott
A Géczy5
D Hisco
G Hodges
J Phillips
N Williams
A Thursby6
Other Key Management Personnel 2012
P Chronican
S Elliott
D Hisco
G Hodges
J Phillips7
N Williams8
A Thursby
P Marriott9
C Page10
Deferred shares
Ordinary shares
CPS2
Deferred shares
Ordinary shares
–
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
Deferred shares
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
CPS2
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
Deferred shares
Deferred shares
Deferred shares
Ordinary shares
Deferred shares
Ordinary shares
CPS3
Deferred shares
Ordinary shares
CPS3
49,741
25,399
1,499
32,280
1,116
–
34,587
10,000
148,271
89,785
71,761
–
114,811
206,902
–
26,051
6,000
1,499
44,177
–
47,364
9,023
120,181
109,735
70,471
113,307
278,230
–
156,072
480,052
5,000
59,075
12,129
2,500
30,278
–
–
40,371
–
–
–
–
22,204
–
22,204
–
23,213
40,371
–
33,175
–
–
19,146
–
–
–
23,696
–
–
–
33,175
–
29,383
–
–
30,805
–
–
–
57,726
–
–
190,174
–
–
60,842
–
46,747
–
36,976
–
–
209,702
–
–
–
–
–
–
18,483
–
55,450
–
–
–
55,055
–
162,655
–
–
38,038
–
(30,367)
33,154
–
(18,959)
(189,844)
–
–
(50,842)
5,142
–
(59,797)
(27,243)
(54,211)
(247,273)
(209,702)
(9,485)
19,399
–
(31,043)
1,116
(12,777)
(17,506)
4,394
(75,400)
1,290
1,504
(104,503)
(55,055)
(28,634)
(253,529)
–
(25,235)
(24,028)
–
49,652
116,279
1,499
53,692
1,446
–
34,587
20,000
175,617
136,532
34,168
9,733
83,813
–
–
49,741
25,399
1,499
32,280
1,116
34,587
10,000
148,271
89,785
71,761
114,811
206,902
–
156,821
389,178
5,000
64,645
26,139
2,500
1 Details of shares granted as remuneration during 2013 are provided in table 5 of the 2013 Remuneration Report. Details of shares granted as remuneration during 2012 are provided in table 5 of
the 2012 Remuneration Report.
2 Shares resulting from any other change during the year include the net result of any shares purchased, forfeited, sold or acquired under the Dividend Reinvestment Plan.
3 The following shares (included in the holdings above) were held on behalf of the KMP (i.e. indirect beneficially held shares) as at 30 September 2013 (and for former KMPs as at cessation
date): P Chronican – 49,652 (2012: 49,741); S Elliott – 53,692 (2012: 32,280); A Géczy – nil; D Hisco – 49,587 (2012: 39,587); G Hodges – 218,352 (2012: 191,006); J Phillips – 34,168 (2012: 71,761);
N Williams – 83,813 (2012: 114,811); A Thursby – nil (2012: 206,902); P Marriott – (2012: 156,821); C Page – (2012: 64,645).
4 There was no change in the balance as at report sign-off date.
5 Opening balance is based on holdings at the date of appointment as a KMP on 16 September 2013.
6 Closing balance is based on holdings at the date of cessation on 30 June 2013.
7 Opening balance is based on holdings at the date of appointment as a KMP on 1 March 2012.
8 Opening balance is based on holdings at the date of appointment as a KMP on 17 December 2011.
9 Closing balance is based on holdings at 31 August 2012.
10 Closing balance is based on holdings as at the date of cessation as a KMP on 16 December 2011. Due to cessation, 11,452 LTI deferred shares granted to C Page on 12 November 2010 were
forfeited and processed by Computershare on 20 December 2011.
SECTION D : OTHER TRANSACTIONS Of KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIES
All other transactions of the directors of the Company and other KMP of the Group and their related parties are conducted on normal
commercial terms and conditions no more favourable than those given to other employees or customers, and are deemed trivial or domestic
in nature.
NOTES TO THE FINANCIAL STATEMENTS
181
ANZ ANNUAL REPORT 2013 47: Transactions with Other Related Parties
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:
Amounts receivable from associates1
Amounts payable to associates
Interest revenue1
Interest expense
Dividend revenue
Cost recovered from associates
Consolidated
The Company
2013
$000
96,627
78,265
992
1,870
113,874
1,548
2012
$000
126,944
70,918
2,035
1,844
74,804
1,930
2013
$000
95,654
2,661
869
–
45,828
356
2012
$000
122,984
3,105
1,704
–
20,110
328
1 Comparative information has been updated to reflect the inclusion of two additional loans to associates and the related interest revenue omitted from the prior year disclosures.
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 associates on terms equivalent to those on an
arm’s length basis. As of 30 September 2013, all outstanding amounts are considered fully collectible.
48: Life Insurance Business
The Group conducts its life insurance business through OnePath Life Limited, OnePath Life (NZ) Limited and OnePath Insurance Services (NZ)
Limited. This note is intended to provide disclosures in relation to the life businesses conducted through these controlled entities.
CAPITAL ADEqUACY Of LIfE INSURER
Australian life insurers are required to hold reserves in excess of policy liabilities to support capital requirements under the Life Act (LIA).
The life insurance business in New Zealand is not governed by the Life Act as these are foreign domiciled life insurance companies.
These companies are however required to meet similar capital tests.
The summarised capital information below in respect of capital requirements under the Life Act has been extracted from the financial
statements prepared by OnePath Life Limited. For detailed capital adequacy information on a statutory fund basis, users of this annual financial
report should refer to the separate financial statements prepared by OnePath Life Limited.
Capital Base
Prescribed Capital Amount (PCA)
Capital Adequacy Multiple (times)
OnePath Life Limited
20121
$m
2013
$m
568
294
1.93
n/a
n/a
n/a
1 APRA reviewed its capital standards for life and general insurers, and introduced new prudential standards that came into effect on 1 January 2013. Equivalent figures for 2012 are not available.
In 2012 OnePath Life Limited reported under the previous Solvency standards. At 30 September 2012 it reported assets available for solvency reserves of $652 million and a Solvency Reserve of
$339 million for a Solvency Reserve coverage of 1.92 times.
182
Notes to the fiNaNcial statemeNts (continued) 48: Life Insurance Business (continued)
LIfE INSURANCE BUSINESS PROfIT ANALYSIS
Net shareholder profit after income tax
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
Changes in assumptions
Net policyholder 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
INvESTMENTS RELATING TO INSURANCE BUSINESS
Life insurance
contracts
Life investment
contracts
Consolidated
2013
$m
186
2012
$m
259
2013
$m
152
2012
$m
115
2013
$m
338
2012
$m
374
181
(51)
1
55
–
15
13
2
178
(29)
1
88
21
18
10
8
109
9
–
34
–
–
–
–
77
30
–
8
–
–
–
–
290
(42)
1
89
–
15
13
2
255
1
1
96
21
18
10
8
Equity securities
Debt securities
Investments in managed investment schemes
Derivative financial assets
Other investments
Total investments backing policy liabilities designated at fair value through profit or loss1
Consolidated
2013
$m
10,901
8,870
11,378
9
925
32,083
2012
$m
9,383
9,226
9,195
28
2,063
29,895
1 This includes $3,511 million (2012: $3,949 million) in respect of investments relating to external unitholders. In addition, the investment balance has been reduced by $3,982 million
(2012: $4,203 million) in respect of the elimination of intercompany balances, Treasury Shares and the re-allocation of policyholder tax balances.
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 LIA and Insurance (Prudential Supervision) Act 2010 are met. Accordingly, with the exception
of permitted profit distributions, the investments held in the statutory funds are not available for use by other parties of the Group.
INSURANCE POLICY LIABILITIES
a) Policy liabilities
Life insurance contract liabilities
Best estimate liabilities
Value of future policy benefits
Value of future expenses
Value of future premium
Value of declared bonuses
Value of future profits
Policyholder bonus
Shareholder profit margin
Business valued by non-projection method
Total net life insurance contract liabilities
Unvested policyholder benefits
Liabilities ceded under reinsurance contracts1 (refer note 20)
Total life insurance contract liabilities
Life investment contract liabilities2,3
Total policy liabilities
Consolidated
2013
$m
2012
$m
6,312
1,809
(9,426)
13
6,651
1,891
(10,021)
15
31
1,379
5
123
43
519
685
21
1,663
3
223
42
509
774
31,703
32,388
28,763
29,537
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 capital guaranteed element is $1,671 million (2012: $1,803 million). Life investment contract liabilities subject to investment performance
guarantees is $1,064 million (2012: $1,108 million).
NOTES TO THE FINANCIAL STATEMENTS
183
ANZ ANNUAL REPORT 2013
48: Life Insurance Business (continued)
b) Reconciliation of movements in policy liabilities
Life investment
contracts
2013
$m
2012
$m
Life insurance
contracts
2013
$m
2012
$m
Consolidated
2013
$m
2012
$m
Policy liabilities
Gross liability brought forward
Movements in policy liabilities reflected in the income statement
Deposit premium recognised as a change in life investment contract liabilities
Fees recognised as a change in life investment contract liabilities
Withdrawal recognised as a change in other life investment contract liabilities
Gross policy liabilities closing balance
Liabilities ceded under reinsurance1
Balance brought forward
Increase in reinsurance assets
Closing balance
28,763
3,758
3,947
(457)
(4,308)
31,703
26,619
2,559
3,920
(435)
(3,900)
28,763
–
–
–
–
–
–
Total policy liabilities net of reinsurance asset
31,703
28,763
774
(89)
–
–
–
685
509
10
519
166
884
(110)
–
–
–
774
427
82
509
265
29,537
3,669
3,947
(457)
(4,308)
32,388
509
10
519
27,503
2,449
3,920
(435)
(3,900)
29,537
427
82
509
31,869
29,028
Critical assumptions
The valuation of the policy liabilities is dependant on a number
of variables including interest rate, equity prices, future expenses,
mortality, morbidity and inflation. The critical estimates and
judgements used in determining the policy liabilities is set out in
note 2 (vi) on page 90.
Sensitivity analysis – life insurance contracts
The Group conducts sensitivity analysis 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, policy liabilities
and equity at 30 September 2013.
1 Liabilities ceded under insurance contracts are shown as ‘other assets’.
c) Sensitivity analysis – Life investment contract liabilities
Market risk arises on the Group’s life insurance business in respect
of life investment 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 2013, a 10% decline in equity markets would have
decreased profit by $7 million (2012: $20 million) and a 10% increase
would have increased profit by $nil (2012: $3 million). A 1% increase
in interest rates at 30 September would have decreased profit by
$1 million (2012: $14 million) and 1% decrease would have increased
profit by $nil (2012: $3 million).
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 2013.
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 LIA, which includes applicable standards of
the APRA.
Policy liabilities have been calculated in accordance with Prudential
Standard LPS 1.04 Valuation of Policy Liabilities issued by the APRA
in accordance with the requirements of the LIA. For life insurance
contracts the 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 policyholders.
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 Michael
Bartram FIAA FNZSA, a fellow of the Institute of Actuaries of Australia
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 Bartram is satisfied as to the accuracy of the data upon which
policy liabilities have been determined.
184
Notes to the fiNaNcial statemeNts (continued) 48: Life Insurance Business (continued)
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 risk
Mortality risk
Morbidity risk
Discontinuance risk
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.
An increase in discontinuance rates at earlier durations has a
negative effect as it affects the ability to recover acquisition
expenses and commissions.
Change in
variable
% change
-1%
+1%
-10%
+10%
-10%
+10%
-10%
+10%
-10%
+10%
Profit/(loss)
net of
reinsurance
Insurance
contract
liabilities
net of
reinsurance
$m
26
(21)
–
–
(16)
(61)
–
(3)
–
(15)
$m
(35)
28
–
–
22
87
–
4
–
15
Equity
$m
26
(21)
–
–
(16)
(61)
–
(3)
–
(15)
LIfE INSURANCE RISK
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 and longevity risks.
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.
Insurance risks are controlled through the use of underwriting
procedures and reinsurance arrangements. Controls are also
maintained over claims management practices to assist in the correct
and timely payment of insurance claims. Regular monitoring of
experience is conducted at a sufficiently detailed level in order to
identify any deviation from expected claim levels.
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. Wherever possible
within regulatory constraints, the Group segregates policyholders
funds from shareholders funds and sets investment mandates that
are appropriate for each. The assets are regularly monitored by the
Global Wealth Investment Risk Management Committee to ensure
that there are 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 contracts or life investment
contracts. Market risk arises for the Group on contracts where the
liabilities to policyholders are guaranteed. The Group manages
this risk by the monthly monitoring and rebalancing of assets
to policy 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.
A market risk also arises from those 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.
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 are the
processes and controls over underwriting, claims management and
product pricing. 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 contract liability.
Solvency margin requirements established by 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 – Reinsurance treaties are analysed using a number
of analytical modelling 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.
NOTES TO THE FINANCIAL STATEMENTS
185
ANZ ANNUAL REPORT 2013 49: 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
Indian Rupee
Indonesian Rupiah
Malaysian Ringgit
New Zealand Dollar
Papua New Guinea Kina
United States Dollar
50: Events Since the End of the Financial Year
There have been no material events since the end of the financial year.
2013
2012
Closing
Average
Closing
Average
5.6976
0.6896
0.5760
58.5306
10,860.1
3.0334
1.1237
2.2385
0.9312
6.1395
0.7565
0.6360
56.1479
9,861.4
3.0925
1.2132
2.1472
0.9929
6.5848
0.8092
0.6437
55.1714
10,022.6
3.2077
1.2529
2.1773
1.0462
6.5150
0.7914
0.6522
53.9494
9,476.4
3.1998
1.2883
2.1657
1.0278
186
Notes to the fiNaNcial statemeNts (continued) ANZ ANNUAL REPORT 2013
DIRECTORS’ DECLARATION AND RESPONSIbILIT y STATEMENT
Directors’ Declaration
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 are in accordance with the
Corporations Act 2001, including:
i)
section 296, that they comply with the Australian Accounting Standards and any further requirements of the Corporations Regulations
2001; and
ii) section 297, that they give a true and fair view of the financial position of the Company and of the consolidated entity as at 30
September 2013 and of their performance for the year ended on that date;
b) the notes to the financial statements of the Company and the consolidated entity include a statement that the financial statements and
notes of the Company and the consolidated entity comply with International Financial Reporting Standards;
c) the Directors have been given the declarations required by section 295A of the Corporations Act 2001;
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
due and payable; and
e) the Company and certain of its wholly owned controlled entities (listed in note 43) 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
8 November 2013
Michael R P Smith
Director
Responsibility statement of the Directors in accordance with the Disclosure and Transparency Rule 4.1.12 (3)(b) of the
United Kingdom financial Conduct Authority
The Directors of Australia and New Zealand Banking Group Limited confirm to the best of their knowledge that:
The Group’s Annual Report includes:
i) a fair review of the development and performance of the business and the position of the Group and the undertakings included in the
consolidation taken as a whole; together with
ii) a description of the principal risks and uncertainties faced by the Group.
Signed in accordance with a resolution of the Directors.
John Morschel
Chairman
8 November 2013
Michael R P Smith
Director
DIRECTORS’ DECLARATION
187
ANZ ANNUAL REPORT 2013 INDEPENDENT AUDITOR’S REPORT TO THE MEMbERS
OF AUSTRALIA AND NEW ZEALAND bANkINg gROUP LIMITED
REPORT ON THE fINANCIAL REPORT
INDEPENDENCE
We have audited the accompanying financial report of Australia and
New Zealand Banking Group Limited (the Company), which comprises
the balance sheets as at 30 September 2013, and income statements,
statements of comprehensive income, statements of changes in
equity and statements of cash flow for the year ended on that date,
notes 1 to 50 comprising a summary of significant accounting policies
and other explanatory information and the directors’ declaration
of the Company and the Group comprising the Company and the
entities it controlled at the year’s end or from time to time during the
financial year.
DIRECTORS’ RESPONSIBILITY fOR THE fINANCIAL REPORT
The directors of the Company are responsible for the preparation
of the financial report that gives a true and fair view in accordance
with Australian Accounting Standards and the Corporations
Act 2001 and for such internal control as the directors determine
is necessary to enable the preparation of the financial report that
is free from material misstatement whether due to fraud or error.
In note 1(A)(i), the directors also state, in accordance with Australian
Accounting Standard AASB 101 Presentation of Financial Statements,
that the financial statements comply with International Financial
Reporting Standards.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on the financial 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 financial report is free from
material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial report.
The procedures selected depend on the auditor’s judgement,
including the assessment of the risks of material misstatement of the
financial report, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity’s preparation of the financial report that gives a true and fair
view in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness 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 financial report.
We performed the procedures to assess whether in all material
respects the financial report presents fairly, in accordance with
the Corporations Act 2001 and Australian Accounting Standards,
a true and fair view which is consistent with our understanding
of the Company’s and the Group’s financial position and of
their performance.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
188
In conducting our audit, we have complied with the independence
requirements of the Corporations Act 2001.
AUDITOR’S OPINION
In our opinion:
(a) the financial 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
financial position as at 30 September 2013 and of their
performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards and the
Corporations Regulations 2001.
(b) the financial 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 28 to
50 of the directors’ report for the year ended 30 September 2013.
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 Australian 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 2013,
complies with Section 300A of the Corporations Act 2001.
KPMG
Melbourne
8 November 2013
Andrew Yates
Partner
KPMG, an Australian partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.
ANZ ANNUAL REPORT 2013
SECTION 3
Five Year Summary
Principle Risks and Uncertainties
Supplementary Information
Shareholder Information
Glossary of Financial Terms
Alphabetical Index
190
191
200
210
217
220
SECTION 3
189
ANZ ANNUAL REPORT 2013 FIvE yEAR SUMMARy
financial performance1
Net interest income2
Other operating income2
Operating expenses
Profit before credit impairment and income tax
Provision for credit impairment
Income tax expense
Non-controlling interests
Cash/underlying profit1
Adjustments to arrive at statutory profit1
Profit attributable to shareholders of the Company
financial position
Assets2,3
Net assets
Common Equity Tier 14
Common Equity Tier 1 – Internationally Harmonised Basel 35
Return on average ordinary equity6
Return on average assets2,3
Cost to income ratio (cash/underlying)1
Shareholder value – ordinary shares
Total return to shareholders (share price movement plus dividends)
Market capitalisation
Dividend
Franked portion
– interim
– final
Share price
– high
– low
– closing
Share information
(per fully paid ordinary share)
Earnings per share
Dividend payout ratio
Net tangible assets per ordinary share7
No. of fully paid ordinary shares issued (millions)
Dividend Reinvestment Plan (DRP) issue price
– interim
– final
Other information
Points of representation8
No. of employees (full time equivalents)
No. of shareholders9
2013
$m
2012
$m
2011
$m
2010
$m
12,772
5,606
(8,236)
10,142
(1,197)
(2,437)
(10)
6,498
(226)
6,272
702,991
45,615
8.5%
10.8%
14.9%
0.9%
44.8%
31.5%
84,450
164 cents
100%
100%
$32.09
$23.42
$30.78
231.3c
71.8%
$13.48
2,743.7
$28.96
–
1,274
47,512
468,343
12,110
5,738
(8,519)
9,329
(1,258)
(2,235)
(6)
5,830
(169)
5,661
642,127
41,220
8.0%
10.0%
14.6%
0.9%
47.7%
35.4%
67,255
145 cents
100%
100%
$25.12
$18.60
$24.75
213.4c
69.4%
$12.22
2,717.4
$20.44
$23.64
1,337
48,239
438,958
11,500
5,385
(8,023)
8,862
(1,220)
(2,167)
(8)
5,467
(112)
5,355
604,213
37,954
8.5%
n/a
15.3%
0.9%
47.5%
-12.6%
51,319
140 cents
100%
100%
$25.96
$17.63
$19.52
208.2c
68.6%
$11.44
2,629.0
$21.69
$19.09
1,381
50,297
442,943
10,862
4,920
(6,971)
8,811
(1,820)
(1,960)
(6)
5,025
(524)
4,501
531,703
34,155
8.0%
n/a
13.9%
0.9%
44.2%
1.9%
60,614
126 cents
100%
100%
$26.23
$19.95
$23.68
178.9c
71.6%
$10.38
2,559.7
$21.32
$22.60
1,394
47,099
411,692
2009
$m
9,890
4,477
(6,068)
8,299
(3,056)
(1,469)
(2)
3,772
(829)
2,943
476,987
32,429
9.0%
n/a
10.3%
0.6%
42.2%
40.3%
61,085
102 cents
100%
100%
$24.99
$11.83
$24.39
131.0c
82.3%
$11.02
2,504.5
$15.16
$21.75
1,352
37,687
396,181
1 Since 1 October 2012, the Group has used Cash Profit as a measure of the result of the ongoing business activities of the Group enabling shareholders to assess Group and divisional performance
against prior periods and against peer institutions. For 2013 and 2012 statutory profit has been adjusted for non-core items to arrive at Cash Profit. For 2009 – 2011 statutory profit has been
adjusted for non-core items to arrive at Underlying Profit, which like Cash Profit, is a measure of the ongoing business performance of the Group but used somewhat different criteria for the
adjusting items. Neither Cash Profit nor Underlying Profit are audited; however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent
basis across each period presented.
2 The reporting treatment of derivative related collateral posted/received and the associated interest income/expense changed in 2012 and 2011 comparatives were restated. The 2009 and 2010
comparative information has not been restated.
3 The 2010 year onwards includes assets resulting from the acquisition of ANZ Wealth Australia, OnePath NZ, Landmark Financial Services and certain assets from the Royal Bank of Scotland.
4 Calculated in accordance with APRA Basel 3 requirements for 2013 and 2012. Comparatives for 2009 – 2011 are calculated on an APRA Basel 2 basis.
5 ANZs interpretation of the regulations documented in the Basel Committee publications: ‘Basel III: A global regulatory framework for more resilient banks and banking systems’ (June 2011)
and ‘International Convergence of Capital Measurement and Capital Standards’ (June 2006).
6 Average ordinary equity excludes non-controlling interests and preference shares.
7 Equals shareholders’ equity less preference share capital, goodwill, software and other intangible assets divided by the number of ordinary shares.
8 Includes branches, offices, representative offices and agencies.
9 Excludes employees whose only ANZ shares are held in trust under ANZ employee share schemes.
190
PRINCIPAL RISkS AND UNCERTAINTIES
ANZ ANNUAL REPORT 2013
1. Introduction
The Group’s activities are subject to risks that can adversely
impact its business, operations and financial condition. The risks
and uncertainties described below are not the only ones that the
Group may face. Additional risks and uncertainties that the Group
is unaware of, or that the Group currently deems to be immaterial,
may also become important factors that affect it. If any of the listed
or unlisted risks actually occur, the Group’s business, operations,
financial condition, or reputation could be materially and adversely
affected, with the result that the trading price of the Group’s equity
or debt securities could decline, and investors could lose all or part
of their investment.
2. Changes in general business and economic
conditions, including disruption in regional
or global credit and capital markets, may
adversely affect the Group’s business,
operations and financial condition
The Group’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. The Group’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 the Group’s
major operating and trading markets are affected by domestic and
international economic events, political events and natural disasters,
and by movements and events that occur in global financial markets.
The global financial crisis 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 to some extent in many regions. Sovereign
risk and its potential impact on financial institutions in Europe and
globally subsequently emerged as a significant risk to the growth
prospects of the various regional economies and the global economy.
The impact of the global financial crisis and its aftermath (such as
heightened sovereign risk) continue to affect regional and global
economic activity, confidence and capital markets. Prudential
authorities have implemented increased regulation to mitigate the
risk of such events recurring, although there can be no assurance that
such regulations will be effective.
The economic effects of the global financial crisis and the European
sovereign debt crisis have been widespread and far-reaching
with unfavourable ongoing impacts on retail spending, personal
and business credit growth, housing credit, and business and
consumer confidence. While some of these economic factors have
since improved, lasting impacts from the global financial crisis and
subsequent volatility in financial markets and the European sovereign
debt crisis suggest ongoing vulnerability and potential adjustment of
consumer and business behaviour.
A sovereign debt crisis could have serious implications for
the European Union and the Euro which, depending on the
circumstances in which it takes place and the countries and
currencies affected, could adversely impact the Group’s business
operations and financial condition. Likewise, if one or more European
countries re-introduce national currencies, and the Euro de-stabilises,
the Group’s business operations could be disrupted by currency
fluctuations and difficulties in hedging against such fluctuations.
The New Zealand economy is also vulnerable to more volatile
markets and deteriorating funding conditions. Economic conditions
in Australia, New Zealand, and some Asia Pacific countries remain
difficult for many businesses.
Should the difficult economic conditions described above 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, currency and other asset markets, could
impact the Group’s customers and the security the Group holds
against loans and other credit exposures, which may impact its ability
to recover some loans and other credit exposures.
All or any of the negative economic and business impacts described
above could cause a reduction in demand for the Group’s products
and services and/or an increase in loan and other credit defaults
and bad debts, which could adversely affect the Group’s business,
operations, and financial condition.
The Group’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 and funding
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 the Group’s performance and results, include, but are not
limited to, the level of and volatility in foreign exchange rates and
interest rates, changes in inflation and money supply, fluctuations in
both debt and equity capital markets, declining commodity prices
due to, for example, reduced demand in Asia, especially North
Asia/China, and decreasing consumer and business confidence.
Geopolitical instability, such as threats of, potential for, or actual
conflict, occurring around the world, such as the ongoing unrest and
conflicts in North Korea, Syria, Egypt, Afghanistan and elsewhere, may
also adversely affect global financial markets, general economic and
business conditions and the Group’s ability to continue operating or
trading in a country, which in turn may adversely affect the Group’s
business, operations, and financial condition.
Natural disasters such as (but not restricted to) cyclones, floods and
earthquakes, and the economic and financial market implications
of such disasters on domestic and global conditions can adversely
impact the Group’s ability to continue operating or trading in the
country or countries directly or indirectly affected, which in turn
may adversely affect the Group’s business, operations and financial
condition. For more specific risks in relation to earthquakes and the
Christchurch earthquakes, refer to the risk factor entitled “The Group
may be exposed to the impact of future climate change, geological
events, plant and animal diseases, and other extrinsic events which
may adversely affect its business, operations and financial condition”.
PRINCIPAL RISkS AND UNCERTAINTIES
191
PRINCIPAL RISkS AND UNCERTAINTIES (continued)
for deposits and mortgages customers, empowerment of the ACCC
to investigate and prosecute anti-competitive price signalling,
changes in the way fees and interest are charged on credit cards and
reforms which allow Australian banks, credit unions and building
societies to issue covered bonds. While many of these reforms have
been implemented since 2011, and have the potential to change
the competitive position of all banks in Australia, the Group has
adapted to these reforms and has maintained its competitive
position. Nevertheless any regulatory or behavioural change that
occurs in response to these reforms could have the effect of limiting
or reducing the Group’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 the Group’s profitability.
The effect of competitive market conditions, especially in the Group’s
main markets and products, may lead to erosion in the Group’s
market share or margins, and adversely affect the Group’s business,
operations, and financial condition.
5. Changes in monetary policies may adversely
affect the Group’s business, operations and
financial condition
Central monetary authorities (including the Reserve Bank of
Australia (RBA) and the Reserve Bank of New Zealand (RBNZ), the
United States Federal Reserve and the monetary authorities in the
Asian jurisdictions in which ANZ carries out business) set official
interest rates or take other measures to affect the demand for
money and credit in their relevant jurisdictions. Also, in some Asian
jurisdictions currency policy is used to influence general business
conditions and the demand for money and credit. These policies
can significantly affect the Group’s cost of funds for lending and
investing and the return that the Group will earn on those loans
and investments. Both these factors impact the Group’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
central monetary authorities can also affect the Group’s borrowers,
potentially increasing the risk that they may fail to repay loans.
Changes in such policies are difficult to predict.
6. Sovereign risk may destabilise global financial
markets adversely affecting all participants,
including the Group
Sovereign risk, or the risk that foreign governments will default on
their debt obligations, increase borrowings as and when required
or be unable to refinance their debts as they fall due or nationalise
participants in their economy, has emerged as a risk to many
economies. This risk is particularly relevant to a number of European
countries though it is not limited to these places and includes
the United States. 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 those
currently being experienced or which were experienced during the
global financial crisis. Such an event could destabilise global financial
markets adversely affecting all participants, including the Group.
3. Changes in exchange rates may adversely
affect the Group’s business, operations and
financial condition
The previous appreciation in and continuing high level of the value
of the Australian and New Zealand dollars relative to other currencies
has adversely affected, and could continue to have an adverse effect
on, certain portions of the Australian and New Zealand economies,
including some agricultural exports, tourism, manufacturing, retailing
subject to internet competition, and import-competing producers.
The relationship between exchange rates and commodity prices
is volatile. Since April 2013, the Australian dollar has depreciated
against the US dollar and New Zealand dollar. A depreciation in the
Australian or New Zealand dollars relative to other currencies would
increase the debt service obligations in Australia or New Zealand
dollar terms of unhedged exposures. Appreciation of the Australian
dollar against the New Zealand dollar, United States dollar and
other currencies has a potential negative earnings translation
effect on non-hedged exposures, and future appreciation could
have a greater negative impact on the Group’s results from its
other non-Australian businesses, particularly its New Zealand and
Asian businesses, which are largely based on non-Australian dollar
revenues. The Group has put in place hedges to partially mitigate the
impact of currency changes, but notwithstanding this there can be
no assurance that the Group’s hedges will be sufficient or effective,
and any further appreciation could have an adverse impact upon the
Group’s earnings.
4. Competition may adversely affect the Group’s
business, operations and financial condition,
especially in Australia, New Zealand and the
Asian markets in which it operates
The markets in which the Group operates are highly competitive
and could become even more so, particularly in those countries that
are considered to provide higher growth prospects (such as those
in the Asian region) and segments that are in the greatest demand
(for example, customer deposits in Australia and New Zealand).
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, increased diversification of
products by competitors, and regulatory changes in the rules
governing the operations of banks and non-bank 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
payments systems, mortgages, and credit cards. In addition, it is
possible that existing companies from outside of the traditional
financial services sector may seek to obtain banking licences to
directly compete with the Group by offering products and services
provided by banks. In addition, banks organised in jurisdictions
outside Australia and New Zealand 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 the Group’s net interest margins, or increased
advertising and related expenses to attract and retain customers.
Additionally, the Australian Government announced in late 2010 a
set of measures with the stated purpose of promoting a competitive
and sustainable banking system in Australia. The reforms consisted
of a variety of actions, including but not limited to, a ban on exit fees
for new home loans, implementation of easier switching processes
192
7. The Group is exposed to liquidity and funding
risk, which may adversely affect its business,
operations and financial condition
9. The Group may experience challenges in
managing its capital base, which could give
rise to greater volatility in capital ratios
The Group’s capital base is critical to the management of its
businesses and access to funding. The Group is required by regulators
including, but not limited to, APRA, RBNZ, the United Kingdom
Prudential Regulation Authority and Financial Conduct Authority,
United States regulators and regulators in various Asia Pacific
jurisdictions (such as the Hong Kong Monetary Authority, and the
Monetary Authority of Singapore) where the Group 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 lower profits in times of stress. As a
result, greater volatility in capital ratios may arise and may require the
Group to raise additional capital. There can be no certainty that any
additional capital required would be available or could be raised on
reasonable terms.
The Group’s capital ratios may be affected by a number of factors,
such as lower earnings (including lower dividends from its
deconsolidated subsidiaries including its insurance and funds
management businesses and associates), increased asset growth,
changes in the value of the Australian dollar against other currencies
in which the Group operates (particularly the New Zealand dollar
and United States dollar) that impacts risk weighted assets or the
foreign currency translation reserve and changes in business strategy
(including acquisitions and investments or an increase in capital
intensive businesses).
APRA’s new Prudential Standards implementing Basel 3 are now
in effect, and other regulators in jurisdictions where ANZ operates
have either implemented or are in the process of implementing
regulations, including Basel 3, which seek to strengthen, among
other things, the liquidity and capital requirements of banks, funds
management entities, and insurance entities, though there can be
no assurance that these regulations will have their intended effect.
These regulations, 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 the Group’s business, operations or
financial condition”.
Liquidity risk is the risk that the Group is unable to meet its payment
obligations as they fall due, including repaying depositors or maturing
wholesale debt, or that the Group has insufficient capacity to fund
increases in assets. 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 the Group’s
borrowings and possibly constrain the volume of new lending,
which could adversely affect the Group’s profitability. A significant
deterioration in investor confidence in the Group could materially
impact the Group’s cost of borrowing, and the Group’s ongoing
operations and funding.
The Group raises funding from a variety of sources including
customer deposits and wholesale funding in Australia and offshore
markets 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 the Group or in the event that
funding inside or outside of Australia is not available or constrained,
the Group’s ability to access sources of funding and liquidity may be
constrained and it will be exposed to liquidity risk. In any such cases,
ANZ may be forced to seek alternative funding. The availability of
such alternative funding, and the terms on which it may be available,
will depend on a variety of factors, including prevailing market
conditions and ANZ’s credit ratings. Even if available, the cost of these
alternatives may be more expensive or on unfavourable terms.
Since the advent of the global financial crisis, developments in
the United States mortgage industry and in the United States and
European markets more generally, including recent European and
United States sovereign debt concerns, have adversely affected the
liquidity in global capital markets and increased funding costs. Future
deterioration in market conditions may limit the Group’s ability to
replace maturing liabilities and access funding in a timely and cost-
effective manner necessary to fund and grow its business.
8. The Group 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. Credit ratings may be withdrawn, subject to
qualifiers, revised or suspended by the relevant credit rating agency
at any time and the methodologies by which they are determined
may be revised. 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.
In addition, the ratings of individual securities (including, but not
limited to, certain Tier 1 capital and Tier 2 capital securities and
covered bonds) issued by ANZ (and banks globally) could be impacted
from time to time by changes in the ratings methodologies used by
rating agencies. On 5 September 2013, Moody’s Investors Service
downgraded the subordinated debt ratings of eight Australian banks
including ANZ. Ratings agencies may also revise their methodologies in
response to legal or regulatory changes or other market developments.
PRINCIPAL RISkS AND UNCERTAINTIES
193
ANZ ANNUAL REPORT 2013 PRINCIPAL RISkS AND UNCERTAINTIES (continued)
For example, the Group is directly and indirectly exposed to the
Australian mining sector and mining-related contractors and
industries. Should commodity prices materially decrease due to,
for example, reduced demand in Asia, especially North Asia/China,
and/or mining activity, demand for resources, or corporate
investment in the mining sector suffer material decreases from
historical levels, the amount of new lending the Group is able to write
may be adversely affected, and the weakening of the sector could be
of sufficient magnitude to lead to an increase in lending losses from
this sector.
Credit losses can and have resulted in financial services organisations
realising significant losses and in some cases failing altogether.
Should material unexpected credit losses occur to the Group’s credit
exposures, it could have an adverse effect on the Group’s business,
operations and financial condition.
12. Weakening of the real estate markets in
Australia, New Zealand or other markets
where it does business may adversely
affect the Group’s business, operations and
financial condition
Residential, commercial and rural property lending, together with
property finance, including real estate development and investment
property finance, constitute important businesses to the Group.
A decrease in property valuations in Australia, New Zealand or other
markets where it does business could decrease the amount of new
lending the Group is able to write and/or increase the losses that
the Group may experience from existing loans, which, in either case,
could materially and adversely impact the Group’s financial condition
and results of operations. A significant slowdown in the Australian
and New Zealand housing markets or in other markets where it does
business could adversely affect the Group’s business, operations and
financial conditions.
13. The Group is exposed to market risk which
may adversely affect its business, operations
and financial condition
The Group is subject to market risk, which is the risk to the Group’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 the Group. As the Group conducts business in several different
currencies, its businesses may be affected by a change in currency
exchange rates. Additionally, the Group’s annual and interim reports
are prepared and stated in Australian dollars, any appreciation in the
Australian dollar against other currencies in which the Group earns
revenues (particularly to the New Zealand dollar and United States
dollar) may adversely affect the reported earnings.
The profitability of the Group’s funds management and insurance
businesses is also affected by changes in investment markets and
weaknesses in global securities markets.
10. The Group is exposed to credit risk, which
may adversely affect its business, operations
and financial condition
As a financial institution, the Group 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, or natural disasters, could cause
customers or counterparties to fail to meet their obligations in
accordance with agreed terms. For example, our customers and
counterparties in the natural resources sector could be adversely
impacted in the event of a prolonged slowdown in the Chinese
economy. Also, our customers and counterparties in the agriculture,
tourism and manufacturing industries have been and may continue
to be adversely impacted by the sustained strength of the Australian
and New Zealand dollar relative to other currencies. The Group 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 the Group’s financial condition
and results, 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 the Group fails to analyse the information correctly,
the provisions made for credit impairment may be insufficient,
which could have a material adverse effect on the Group’s business,
operations and financial condition.
In addition, in assessing whether to extend credit or enter into
other transactions with customers, the Group relies on information
provided by or on behalf of customers, including financial statements
and other financial information. The Group 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. The Group’s financial performance could be
negatively impacted to the extent that it relies on information that is
inaccurate or materially misleading.
11. An increase in the failure of third parties to
honour their commitments in connection
with the Group’s trading, lending, derivatives
and other activities may adversely affect its
business, operations and financial condition
The Group 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, the Group 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 the Group on a timely basis. The Group is also subject to the
risk that its rights against third parties may not be enforceable in
certain circumstances.
The risk of credit-related losses may also be increased by a number
of factors, including deterioration in the financial condition of the
economy, a sustained high level of unemployment, a deterioration
of the financial condition of the Group’s counterparties, a reduction
in the value of assets the Group holds as collateral, and a reduction
in the market value of the counterparty instruments and obligations
it holds.
194
14. The Group is exposed to the risks associated
with credit intermediation and financial
guarantors which may adversely affect its
business, operations and financial condition
The Group entered into a series of structured credit intermediation
trades from 2004 to 2007. The Group 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 United States financial guarantors. The underlying structures
involve credit default swaps (CDSs) 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 global
financial crisis, movements in valuations of these positions were not
significant and the credit valuation adjustment (CVA) charge on the
protection bought from the non-collateralised financial guarantors
was minimal.
During and after the global financial crisis, the market value of the
structured credit transactions increased and the financial guarantors
were downgraded. The combined impact of this was to increase the
CVA charge on the purchased protection from financial guarantors.
Volatility in the market value and hence CVA will continue to persist
given the volatility in credit spreads and USD/AUD rates.
Credit valuation adjustments are included as part of the Group’s profit
and loss statement, and accordingly, increases in the CVA charge or
volatility in that charge could adversely affect the Group’s profitability.
15. The Group is exposed to operational risk,
which may adversely affect its business,
operations and financial condition
Operational Risk is 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.
Loss from operational risk events could adversely affect the Group’s
financial results. Such losses can include fines, penalties, loss or
theft of funds or assets, legal costs, customer compensation, loss of
shareholder value, reputation loss, loss of life or injury to people, and
loss of property and/or information.
Operational risk is typically classified into the risk event type
categories to measure and compare risks on a consistent basis.
Examples of operational risk events according to category are
as follows:
} internal fraud: risk that fraudulent acts are planned, initiated or
executed by employees (permanent, temporary or contractors)
from inside ANZ e.g. a rogue trader.
} external fraud: fraudulent acts or attempts which originate from
outside ANZ e.g. valueless cheques, counterfeit credit cards, loan
applications in false names, stolen identity etc.
} employment practices & workplace safety: employee relations,
diversity and discrimination, and health and safety risks to ANZ
employees.
} clients, products & business practices: risk of market manipulation,
product defects, incorrect advice, money laundering and misuse of
customer information;
} business disruption (including systems failures): risk that
ANZ’s banking operating systems are disrupted or fail. At ANZ,
technology risks are key Operational Risks which fall under
this category.
} damage to physical assets: risk that a natural disaster or terrorist or
vandalism attack damages ANZ’s buildings or property; and
} execution, delivery & process management: risk that ANZ
experiences losses as a result of data entry errors, accounting
errors, vendor, supplier or outsource provider errors, or failed
mandatory reporting.
Direct or indirect losses that occur as a result of operational failures,
breakdowns, omissions or unplanned events could adversely affect
the Group’s financial results.
16. Disruption of information technology
systems or failure to successfully implement
new technology systems could significantly
interrupt the Group’s business which may
adversely affect its business, operations and
financial condition
The Group is highly dependent on information systems and
technology and there is a risk that these, or the services the
Group uses or is dependent upon, might fail, including because of
unauthorised access or use.
Most of the Group’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 centre 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,
prevent unauthorised access and integrate existing and future
acquisitions and alliances.
To manage these risks, the Group has disaster recovery and
information technology governance in place. However, any
failure of these systems could result in business interruption,
customer dissatisfaction and ultimately loss of customers, financial
compensation, damage to reputation and/or a weakening of the
Group’s competitive position, which could adversely impact the
Group’s business and have a material adverse effect on the Group’s
financial condition and operations.
In addition, the Group has an ongoing need to 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 the Group’s customers and
integrate the various segments of its business. The Group may not
implement these projects effectively or execute them efficiently,
which could lead to increased project costs, delays in the ability
to comply with regulatory requirements, failure of the Group’s
information security controls or a decrease in the Group’s ability to
service its customers.
PRINCIPAL RISkS AND UNCERTAINTIES
195
ANZ ANNUAL REPORT 2013 PRINCIPAL RISkS AND UNCERTAINTIES (continued)
17. The Group 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 unauthorised access, use, disclosure, disruption,
modification, perusal, inspection, recording or destruction. As a
bank, the Group handles a considerable amount of personal and
confidential information about its customers and its own internal
operations. The Group also uses third parties to process and
manage information on its behalf. The Group employs a team of
information security subject matter experts who are responsible for
the development and implementation of the Group’s Information
Security Policy. The Group is conscious that threats to information
security are continuously evolving and as such the Group conducts
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, there is 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
for compensation or erosion to the Group’s competitive market
position, which could adversely affect the Group’s financial position
and reputation.
18. The Group is exposed to reputation risk,
which may adversely impact its business,
operations and financial condition
Damage to the Group’s reputation may have wide-ranging
impacts, including adverse effects on the Group’s profitability,
capacity and cost of sourcing funding, and availability of new
business opportunities.
Reputation risk may arise as a result of an external event or the
Group’s own actions, and adversely affect perceptions about
the Group held by the public (including the Group’s customers),
shareholders, investors, regulators or rating agencies. The impact of
a risk event on the Group’s reputation may exceed any direct cost of
the risk event itself and may adversely impact the Group’s business,
operations and financial condition.
19. The unexpected loss of key staff or
inadequate management of human
resources may adversely affect the Group’s
business, operations and financial condition
The Group’s ability to attract and retain suitably qualified and skilled
employees is an important factor in achieving its strategic objectives.
The Chief Executive Officer and the management team of the Chief
Executive Officer have skills and reputation that are critical to setting
the strategic direction, successful management and growth of the
Group, and whose unexpected loss due to resignation, retirement,
death or illness may adversely affect its operations and financial
condition. The Group may in the future have difficulty retaining or
attracting highly qualified people for important roles, which could
adversely affect its business, operations and financial condition.
20. The Group may be exposed to the impact
of future climate change, geological
events, plant and animal diseases, and
other extrinsic events which may adversely
affect its business, operations and
financial condition
ANZ and its customers are exposed to climate related events
(including climate change). These events include severe storms,
drought, fires, cyclones, hurricanes, floods and rising sea levels.
ANZ and its customers may also be exposed to other events such as
geological events (volcanic or seismic activity, tsunamis); plant and
animal diseases or a pandemic. Examples include earthquakes in
New Zealand and floods in Australia and the Philippines.
Depending on their severity, events such as these may temporarily
interrupt or restrict the provision of some local or Group services, and
may also adversely affect the Group’s financial condition or collateral
position in relation to credit facilities extended to customers.
21. Regulatory changes or a failure to comply
with regulatory standards, law or policies
may adversely affect the Group’s business,
operations or financial condition
The Group is subject to laws, regulations, policies and codes of
practice in Australia, New Zealand, the United Kingdom, the United
States of America, Hong Kong, Singapore, Japan, 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, the Group’s banking, funds management
and insurance activities are subject to extensive regulation, mainly
relating to its 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. Some
of the jurisdictions in which the Group operates do not permit local
deposits to be used to fund operations outside of that jurisdiction.
In the event the Group experiences reduced liquidity, these deposits
may not be available to fund the operations of the Group.
The Australian Government and its agencies, including APRA, the
RBA and other financial industry regulatory bodies including the
Australian Securities and Investments Commission (ASIC), and the
Australian Competition and Consumer Commission (ACCC), have
supervisory oversight of the Group. The New Zealand Government
and its agencies, including the RBNZ, the Financial Markets Authority
and the Commerce Commission, have supervisory oversight of the
Group’s operations in New Zealand. To the extent that the Group 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 United States Federal Reserve Board, the United States
Department of Treasury, the United States Office of the Comptroller
of the Currency, the United States Office of Foreign Assets Control,
the United Kingdom Prudential Regulation Authority and the
Financial Conduct Authority, the Monetary Authority of Singapore,
the Hong Kong Monetary Authority, the China Banking Regulatory
196
22. The Group may face increased tax reporting
compliance costs
In March 2010, the United States enacted legislation (Foreign Account
Tax Compliance Act - “FATCA”) that requires non-United States banks
and other financial institutions to provide information on United
States account holders to the United States Federal tax authority,
the Internal Revenue Service (“IRS”). In addition, it is likely that
future laws will be adopted by jurisdictions (including Australia and
New Zealand), that enter into intergovernmental agreements (“IGAs”)
with the United States in furtherance of FATCA and will require that
such information be reported to a non-United States institution’s
local revenue authority to forward to the IRS. If this information is not
provided in a manner and form meeting the applicable requirements,
a non-United States institution may be subjected to penalties and
potentially a 30% withholding tax applied to certain amounts paid to
it. No such withholding tax will be imposed on any payments derived
from sources within the United States that are made prior to 1 July
2014, and no such withholding tax will be imposed on any payments
derived from sources outside the United States that are made
prior to 1 January 2017, at the earliest. Australia and New Zealand
have not yet entered into IGAs as described above. ANZ Group is
expected to make significant investments in order to comply with the
requirements of FATCA or, if applicable, any local laws implementing
an IGA.
23. Unexpected changes to the Group’s
license to operate in any jurisdiction may
adversely affect its business, operations
and financial condition
The Group is licensed to operate in the various countries, states and
territories. Unexpected changes in the conditions of the licenses to
operate by governments, administrations or regulatory agencies
which prohibit or restrict the Group from trading in a manner
that was previously permitted may adversely impact the Group’s
operations and subsequent financial results.
Commission, the Kanto Local Finance Bureau of Japan, and other
financial regulatory bodies in those countries and in other relevant
countries. In addition, the Group’s expansion and growth in the Asia
Pacific region 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 the Group’s reputation.
To the extent that these regulatory requirements limit the Group’s
operations or flexibility, they could adversely impact the Group’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 the Group in substantial and
unpredictable ways and may even conflict with each other.
These may include increasing required levels of bank liquidity
and capital adequacy, limiting the types of financial services and
products the Group 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 global financial crisis, the Basel Committee
released capital reform packages to strengthen the resilience of the
banking and insurance sectors, including proposals to strengthen
capital and liquidity requirements for the banking sector. APRA has
released Prudential Standards implementing Basel 3 with effect from
1 January 2013. Other regulators in jurisdictions where the Group
has a presence have also either implemented or are in the process
of implementing Basel 3 and equivalent reforms. In addition, the
United States has 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. There can be
no assurance that any of the foregoing will be effective.
Uncertainty remains as to the final form that some of the proposed
regulatory changes will take in certain jurisdictions outside Australia
in which the Group operates (including the United Sates) and any
such changes could adversely affect the Group’s business, operations
and financial condition. The changes may lead the Group to, among
other things, change its business mix, incur additional costs as a
result of increased management attention, raise additional amounts
of higher-quality capital (such as Ordinary Shares, Additional Tier 1
Capital or Tier 2 Capital instruments) or retain capital (through lower
dividends), and hold significant levels of additional liquid assets and
undertake further lengthening of the funding base.
PRINCIPAL RISkS AND UNCERTAINTIES
197
ANZ ANNUAL REPORT 2013 PRINCIPAL RISkS AND UNCERTAINTIES (continued)
24. The Group is exposed to insurance risk,
which may adversely affect its business,
operations and financial condition
26. Changes to accounting policies may
adversely affect the Group’s business,
operations and financial condition
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, such as earthquakes, tsunamis and volcanic activities,
as well as adverse variability in home, contents, motor, travel and
other insurance claim amounts. For further details on climate and
geological events see also the risk factor entitled “The Group may be
exposed to the impact of future climate change, geological events,
plant and animal diseases, and other extrinsic events which may
adversely affect its business, operations and financial condition”.
The Group has exposure to insurance risk in both life insurance and
general insurance business, which may adversely affect its business,
operations and financial condition.
In addition, the Group has various direct and indirect pension
obligations towards its current and former staff. These obligations
entail various risks which are similar to, among others, risks involving
a capital investment. Risks, however, may also arise due to changes in
tax or other legislation, and/or in judicial rulings, as well as inflation
rates or interest rates. Any of these risks could have a material adverse
effect on the Group’s business, operations and financial condition.
25. The Group 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, the Group recognises
the following instruments at fair value with changes in fair value
recognised in earnings:
} derivative financial instruments, including in the case of fair
value hedging, the fair value adjustment on the underlying
hedged exposure;
} financial instruments held for trading; and
} assets and liabilities designated at fair value through profit and loss.
In addition, the Group recognised available-for-sale financial assets
at fair value with changes in fair value recognised in equity unless the
asset is impaired, in which case, the decline if fair value is recognised
in earnings.
Generally, in order to establish the fair value of these instruments,
the Group 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
which incorporate the impact of factors that would influence the
fair value as determined by a market participant. The fair value
of these instruments is impacted by changes in market prices or
valuation inputs which could have a material adverse effect on the
Group’s earnings.
The accounting policies and methods that the Group 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.
27. The Group may be exposed to the risk
of impairment to non-lending related
assets including investments in associates,
capitalised software, goodwill and other
intangible assets that may adversely
affect its business, operations and
financial condition
In certain circumstances the Group may be exposed to a reduction
in the value of non-lending related assets.
As at 30 September 2013, the Group carried goodwill principally
related to its investments in New Zealand and Australia, intangible
assets principally relating to assets recognised on acquisition of
subsidiaries, and capitalised software balances and investment in
equity accounted associates.
The Group is required to assess the recoverability of the goodwill
balances on at least an annual basis. For this purpose the Group uses
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 balances.
Capitalised software and other intangible assets (including Acquired
portfolio of insurance and investment business and deferred
acquisition costs) are assessed for indicators of impairment at least
annually. In the event that an asset is no longer in use, or that the
cash flows generated by the asset do not support the carrying value,
impairment may be recorded, adversely impacting the Group’s
financial condition.
Investments in associates are assessed for indicators of impairment
at least annually. In the event that the equity accounted carrying
value is above the recoverable value, impairment may be recorded,
adversely impacting the Group’s financial condition.
198
28. Litigation and contingent liabilities may
adversely affect the Group’s business,
operations and financial condition
From time to time, the Group may be subject to material litigation,
regulatory actions, legal or arbitration proceedings and other
contingent liabilities which, if they crystallise, may adversely affect
the Group’s results. The Group’s material contingent liabilities are
described in Note 43 to the audited annual consolidated financial
statements for the year ended 30 September 2013. There is a risk that
these contingent liabilities may be larger than anticipated or that
additional litigation or other contingent liabilities may arise.
29. The Group regularly considers acquisition
and divestment opportunities, and there is a
risk that ANZ may undertake an acquisition
or divestment that could result in a material
adverse effect on its business, operations
and financial condition
The Group regularly examines a range of corporate opportunities,
including material acquisitions and disposals, with a view to
determining whether those opportunities will enhance the Group’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 the Group.
The successful implementation of the Group’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
acquired businesses, 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, the overall performance of
the combined entity, or an improved price for the Group’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, customers, counterparties,
suppliers and other business partners. Integration efforts could
divert management attention and resources, which could adversely
affect the Group’s operations or results. Additionally, there can be no
assurance that employees, customers, counterparties, suppliers and
other business partners of newly acquired businesses will remain
as such post-acquisition, and the loss of employees, customers,
counterparties, suppliers and other business partners could adversely
affect the Group’s operations or results.
Acquisitions and disposals may also result in business disruptions
that cause the Group to lose customers or cause customers to remove
their business from the Group to competing financial institutions.
It is possible that the integration process related to acquisitions
could result in the disruption of the Group’s ongoing businesses or
inconsistencies in standards, controls, procedures and policies that
could adversely affect the Group’s ability to maintain relationships
with employees, customers, counterparties, suppliers and other
business partners, which could adversely affect the Group’s ability to
conduct its business successfully. The Group’s operating performance,
risk profile or capital structure may also be affected by these
corporate opportunities and there is a risk that any of the Group’s
credit ratings may be placed on credit watch or downgraded if these
opportunities are pursued.
30. The Group may be exposed to risks
pertaining to the provision of advice,
recommendations or guidance about
financial products and services in the course
of its sales and marketing activities which
may adversely affect the Group’s business
and operations
Such risks can include:
} the provision of unsuitable or inappropriate advice (commensurate
with a customer’s objectives and appetite for risk),
} the representation of, or disclosure about, a product or service
which is inaccurate, or does not provide adequate information
about risks and benefits to customers,
} a failure to appropriately manage conflicts of interest within
sales and /or promotion processes (including incentives and
remuneration for staff engaged in promotion, sales and/or the
provision of advice),
} a failure to deliver product features and benefits in accordance with
terms, disclosures, recommendations and/or advice.
Exposure to such risk may increase during periods of declining
investment asset values (such as during a period of economic
downturn or investment market volatility), leading to sub-optimal
performance of investment products and/or portfolios that were not
aligned with the customer’s objectives and risk appetite.
ANZ is regulated under various legislative mechanisms in the
countries in which it operates that provide for consumer protection
around advisory, marketing and sales practices. These may include,
but are not limited to, appropriate management of conflicts of
interest, appropriate accreditation standards for staff authorised
to provide advice about financial products and services, disclosure
standards, standards for ensuring adequate assessment of client/
product suitability, quality assurance activities, adequate record
keeping, and procedures for the management of complaints
and disputes.
Risks pertaining to advice about financial products and services may
result in material litigation (and associated financial costs), regulatory
actions, and/or reputational consequences.
PRINCIPAL RISkS AND UNCERTAINTIES
199
ANZ ANNUAL REPORT 2013 SUPPLEMENTARy INFORMATION
1: Capital Adequacy
qualifying capital
Tier 1
Shareholders' equity and non-controlling interests
Prudential adjustments to shareholders’ equity
Gross Common Equity Tier 1 Capital
Deductions
Common Equity Tier 1 Capital
Additional Tier 1 capital
Tier 1 capital
Tier 2 capital
Total qualifying capital
Capital adequacy ratios
Common Equity Tier 1
Tier 1
Tier 2
Total
Risk Weighted Assets
Table 1
Table 2
Table 3
Table 4
Basel 3
2013
$m
Basel 2
2012
$m
45,615
(932)
44,683
(15,892)
28,791
6,401
35,192
6,190
41,382
8.5%
10.4%
1.8%
12.2%
41,220
(3,857)
37,363
(10,839)
26,524
5,977
32,501
4,073
36,574
8.8%
10.8%
1.4%
12.2%
Table 5
339,265
300,119
200
1: Capital Adequacy (continued)
Table 1: Prudential adjustments to shareholders’ equity
Treasury Shares attributable to OnePath policy holders
Reclassification of preference share capital
Accumulated retained profits & reserves of insurance, funds management & securitisation entities
Deferred fee revenue including fees deferred as part of loan yields
Hedging reserve
Available-for-sale reserve attributable to deconsolidated subsidiaries
Dividend not provided for
Accrual for Dividend Reinvestment Plans
Other
Total
Table 2: Deductions from Common Equity Tier 1 capital
Unamortised goodwill & other intangibles (excluding OnePath Australia and New Zealand)
Intangible component of investments in OnePath Australia and New Zealand
Capitalised software
Capitalised expenses including loan and lease origination fees
Applicable deferred net tax assets
Expected losses in excess of eligible provisions
Investment in ANZ insurance and funds management subsidiaries
Investment in OnePath Australia and New Zealand
Investment in banking associates
Other deductions
Total
Table 3: Additional Tier 1 capital
Convertible Preference Shares
ANZ CPS1
ANZ CPS2
ANZ CPS3
ANZ Capital Notes
Preference Shares
Hybrid Securities
Regulatory adjustments and deductions
Transitional adjustments
Total
Table 4: Tier 2 capital
General reserve for impairment of financial assets
Perpetual subordinated notes
Subordinated Debt
Regulatory adjustments and deductions
Transitional adjustments
Total
ANZ ANNUAL REPORT 2013
Basel 3
2013
$m
272
(871)
(583)
381
n/a
(90)
n/a
n/a
(41)
(932)
(3,970)
(2,096)
(2,102)
(979)
(1,102)
(376)
(453)
(1,059)
(3,361)
(394)
Basel 2
2012
$m
280
(871)
(1,660)
415
(208)
(94)
(2,149)
430
–
(3,857)
(3,052)
(2,074)
(1,702)
(850)
(301)
(542)
(327)
(721)
(1,070)
(200)
(15,892)
(10,839)
1,081
1,963
1,329
1,106
871
812
(78)
(683)
6,401
245
1,065
5,448
(340)
(228)
6,190
1,078
1,958
1,326
–
871
752
(8)
n/a
5,977
234
953
5,847
(2,961)
n/a
4,073
SUPPLEMENTARy INFORMATION
201
SUPPLEMENTARy INFORMATION (continued)
1: Capital Adequacy (continued)
Table 5: Risk weighted Assets
On balance sheet
Commitments
Contingents
Derivatives
Total credit risk
Traded Market Risk
Total Interest Rate Risk RWA – IRRBB
Operational Risk RWA
Total Risk weighted Assets
Table 6: Risk weighted Assets
Subject to Advanced IRB approach
Corporate
Sovereign
Bank
Residential mortgage
Qualifying revolving retail (credit cards)
Other retail
Credit risk weighted assets subject to advanced approach
Credit Risk Specialised lending exposures subject to slotting criteria
Subject to Standardised approach
Corporate
Residential mortgage
Qualifying revolving retail (credit cards)
Other retail
Credit risk weighted assets subject to standardised approach
Credit valuation Adjustment and qualifying Central Counterparties
Credit risk weighted assets relating to securitisation exposures
Credit risk weighted assets relating to equity exposures
Other assets
Total credit risk weighted assets
Basel 3
2013
$m
208,326
47,809
11,184
20,332
287,651
4,303
18,287
29,024
339,265
121,586
4,360
16,270
47,559
7,219
24,328
221,322
27,640
19,285
1,922
1,728
985
23,920
8,501
2,724
n/a
3,544
Basel 2
2012
$m
190,210
42,807
9,962
11,896
254,875
4,664
12,455
28,125
300,119
111,796
4,088
11,077
42,959
7,092
21,277
198,289
27,628
18,168
1,812
2,028
1,165
23,173
n/a
1,170
1,030
3,585
287,651
254,875
The measurement of risk weighted assets is based on:
} 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;
} the recognition of risk weighted assets attributable to market risk arising from trading positions and interest rate movements; and
} a risk weighted asset equivalent of a charge for operational risk.
For calculation of minimum capital requirements under Pillar 1 (Capital Requirements) of the Basel 2 Accord implemented from January 2008,
ANZ 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. Basel 3 reforms were introduced on 1 January 2013.
In addition to the disclosures in this section, ANZ provides capital information as required under APRA’s prudential standard
APS 330: Public Disclosure Attachment A. This information is located in the Regulatory Disclosures section of ANZ’s website:
shareholder.anz.com/pages/regulatory-disclosure.
202
1: Capital Adequacy (continued)
Table 7: Collective provision and regulatory expected loss by division
Australia
International and Institutional Banking
New Zealand
Global Wealth
Group Centre
Cash collective provision and regulatory expected loss
Adjustments between statutory and cash
Collective provision and regulatory expected loss
Table 8: Expected loss in excess of eligible provisions
Basel expected loss
Defaulted
Non-defaulted
Less: qualifying collective provision
Collective provision
Non-qualifying collective provision
Standardised collective provision
Deferred tax asset
Less: qualifying individual provision
Individual provision
Standardised individual provision
Collective provision on advanced defaulted
Gross deduction
50/50 deduction
Collective Provision
Regulatory
Expected Loss
2013
$m
1,123
1,310
399
12
43
2,887
–
2,887
2012
$m
1,073
1,224
413
11
44
2,765
–
2,765
2013
$m
2,393
1,037
763
21
19
4,233
9
4,242
Basel 3
2013
$m
1,854
2,388
4,242
(2,887)
346
245
n/a
(2,296)
(1,467)
219
(322)
(1,570)
376
n/a
2012
$m
2,309
1,270
814
23
1
4,417
20
4,437
Basel 2
2012
$m
2,168
2,269
4,437
(2,765)
334
269
625
(1,537)
(1,773)
268
(312)
(1,817)
1,083
542
SUPPLEMENTARy INFORMATION
203
ANZ ANNUAL REPORT 2013
SUPPLEMENTARy INFORMATION (continued)
2: Average Balance Sheet and Related Interest
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
3,649
14,353
1,435
2013
Interest
$m
Average
rate
%
Average
balance
$m
2012
Interest
$m
Average
rate
%
107
169
14
2.9%
1.2%
1.0%
3,283
12,461
1,509
125
188
16
3.8%
1.5%
1.1%
1,014
8
0.8%
1,026
7
0.7%
1,372
265
353
21,400
1,766
4,572
175
167
132
575
(24)
31,089
(551)
30,538
4.1%
1.8%
4.0%
7.1%
4.2%
6.2%
4.2%
0.7%
5.9%
13.3%
-0.3%
5.8%
1,234
256
354
19,308
1,862
4,824
257
121
113
433
(9)
29,051
(424)
28,627
3.3%
1.5%
3.6%
6.1%
3.5%
5.9%
3.0%
0.4%
4.7%
17.0%
-0.1%
5.0%
37,728
16,970
9,823
315,582
53,146
81,316
8,566
29,340
2,417
2,554
8,121
586,014
(10,675)
575,339
33,349
4,879
6,784
2,092
30,840
26,404
(2,804)
(801)
(816)
99,927
675,266
33,568
15,022
8,877
302,063
41,905
73,994
4,216
23,304
2,233
4,318
7,293
535,072
(11,611)
523,461
36,492
4,783
9,974
2,085
29,973
25,217
(3,037)
(793)
(885)
103,809
627,270
Interest earning assets
Due from other financial institutions
Australia
Asia Pacific, Europe & America
New Zealand
Regulatory deposits
Asia Pacific, Europe & America
Trading and available-for-sale assets
Australia
Asia Pacific, Europe & America
New Zealand
Net loans and advances
Australia
Asia Pacific, Europe & America
New Zealand
Other assets
Australia
Asia Pacific, Europe & America
New Zealand
Intragroup assets
Australia
Asia Pacific, Europe & America
Intragroup elimination
Non-interest earning assets
Derivatives
Australia
Asia Pacific, Europe & America
New Zealand
Premises and equipment
Insurance assets
Other assets
Provisions for credit impairment
Australia
Asia Pacific, Europe & America
New Zealand
Total average assets
204
2: Average Balance Sheet and Related Interest (continued)
Interest bearing liabilities
Time deposits
Australia
Asia Pacific, Europe & America
New Zealand
Savings deposits
Australia
Asia Pacific, Europe & America
New Zealand
Other demand deposits
Australia
Asia Pacific, Europe & America
New Zealand
Due to other financial institutions
Australia
Asia Pacific, Europe & America
New Zealand
Commercial paper
Australia
New Zealand
Borrowing corporations’ debts
Australia
New Zealand
Loan capital, bonds and notes
Australia
Asia Pacific, Europe & America
New Zealand
Other liabilities1
Australia
Asia Pacific, Europe & America
New Zealand
Intragroup liabilities
New Zealand
Intragroup elimination
Non-interest bearing liabilities
Deposits
Australia
Asia Pacific, Europe & America
New Zealand
Derivatives
Australia
Asia Pacific, Europe & America
New Zealand
Insurance liabilities
External unit holder liabilities
Other liabilities
Total average liabilities
1
Includes foreign exchange swap costs.
2013
Interest
$m
5,313
666
1,158
837
25
234
2,408
33
398
293
164
27
311
128
5
55
2,873
31
653
170
37
50
424
16,293
(424)
15,869
Average
balance
$m
135,747
75,059
29,633
24,166
5,276
7,035
85,104
10,916
16,400
11,311
25,375
1,572
10,306
4,212
63
1,215
64,749
2,240
13,839
1,803
1,797
286
10,675
538,779
(10,675)
528,104
5,511
3,202
4,380
30,447
5,226
6,845
30,625
3,839
13,983
104,058
632,162
Average
rate
%
Average
balance
$m
2012
Interest
$m
Average
rate
%
6,821
741
1,130
862
24
119
2,845
29
391
260
181
32
510
123
14
55
3,461
2
664
206
53
(95)
551
18,979
(551)
18,428
5.1%
1.2%
4.0%
4.0%
0.6%
3.2%
3.7%
0.3%
2.6%
3.6%
0.8%
1.7%
4.4%
3.4%
6.4%
4.9%
5.4%
1.8%
5.0%
n/a
n/a
n/a
4.7%
3.8%
3.9%
0.9%
3.9%
3.5%
0.5%
3.3%
2.8%
0.3%
2.4%
2.6%
0.6%
1.7%
3.0%
3.0%
7.9%
4.5%
4.4%
1.4%
4.7%
n/a
n/a
n/a
4.0%
3.0%
134,508
60,643
27,981
21,779
4,280
3,757
77,581
9,817
15,135
7,308
21,624
1,851
11,676
3,669
220
1,124
63,620
89
13,278
2,060
1,394
200
11,611
495,205
(11,611)
483,594
5,103
2,387
3,863
31,329
5,044
9,207
28,386
4,779
14,014
104,112
587,706
SUPPLEMENTARy INFORMATION
205
ANZ ANNUAL REPORT 2013 SUPPLEMENTARy INFORMATION (continued)
2: Average Balance Sheet and Related Interest (continued)
Total average assets
Australia
Asia Pacific, Europe & America
New Zealand
Less intragroup elimination
% of total average assets attributable to overseas activities
Average interest earning assets
Australia
Asia Pacific, Europe & America
New Zealand
Less intragroup elimination
Total average liabilities
Australia
Asia Pacific, Europe & America
New Zealand
Less intragroup elimination
% of total average assets attributable to overseas activities
Average interest bearing liabilities
Australia
Asia Pacific, Europe & America
New Zealand
Less intragroup elimination
Total average shareholders’ equity1
Ordinary share capital, reserves and retained earnings
Preference share capital
Total average liabilities and shareholders’ equity
1 Average shareholders equity includes OnePath Australia shares that are eliminated from the closing shareholders equity balance of $273 million (2012: $280 million).
2013
$m
2012
$m
443,975
136,502
105,464
(10,675)
425,515
113,341
100,025
(11,611)
675,266
627,270
34.6%
32.9%
368,079
122,944
94,991
(10,675)
347,448
101,011
86,613
(11,611)
575,339
523,461
414,046
131,221
97,570
(10,675)
398,639
107,562
93,116
(11,611)
632,162
587,706
34.5%
32.2%
333,249
120,663
84,867
(10,675)
318,752
97,847
78,606
(11,611)
528,104
483,594
42,233
871
43,104
38,693
871
39,564
675,266
627,270
206
3: Interest Spreads and Net Interest Average Margins
Net interest income
Australia
Asia Pacific, Europe & America
New Zealand
Gross earnings rate1
Australia
Asia Pacific, Europe & America
New Zealand
Total 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
Asia Pacific, Europe & America
Net interest spread
Interest attributable to net non-interest bearing items
Net interest margin – Asia Pacific, Europe & America
New Zealand
Net interest spread
Interest attributable to net non-interest bearing items
Net interest margin – New Zealand
Group
Net interest spread
Interest attributable to net non-interest bearing items
Net interest margin
Net interest margin (excluding Global Markets)
1 Average interest rate received on average interest earning assets.
2013
$m
9,131
1,450
2,177
2012
$m
8,668
1,339
2,103
12,758
12,110
%
%
5.80
1.96
5.58
4.98
2.14
0.34
2.48
1.17
0.01
1.18
1.90
0.39
2.29
1.98
0.24
2.22
2.63
6.81
2.35
5.86
5.83
2.10
0.39
2.49
1.30
0.03
1.33
2.08
0.35
2.43
2.02
0.29
2.31
2.71
SUPPLEMENTARy INFORMATION
207
ANZ ANNUAL REPORT 2013 SUPPLEMENTARy INFORMATION (continued)
4. Explanation of adjustments between statutory profit and cash profit
TREASURY SHARES ADJUSTMENT
ANZ shares held by the Group in the consolidated managed funds
and life business are deemed to be Treasury shares for accounting
purposes. Dividends and realised and unrealised gains and losses
from these shares are reversed as these are not permitted to be
recognised in income for statutory reporting purposes. In deriving
cash profit, these earnings are included to ensure there is no
asymmetrical impact on the Group’s profits because the Treasury
shares support policy liabilities which are revalued in deriving
income. Accordingly, an adjustment to statutory profit of $84 million
gain after tax (2012: $96 million gain after tax), pre-tax $90 million
gain (2012: $104 million gain) has been recognised.
RE vALUATION Of POLICY LIABILITIES
When calculating policy liabilities, the projected future cash flows
on insurance contracts are discounted to reflect the present
value of the obligation, with the impact of changes in the market
discount rate each period being reflected in the income statement.
ANZ includes the impact on the remeasurement of the insurance
contract attributable to changes in the market discount rates as an
adjustment to cash profit to remove the volatility attributable to
changes in market interest rates which reverts to zero over the life of
the insurance contract.
ECONOMIC HEDGING AND REvENUE AND
NET INvESTMENT HEDGES
The Group enters into economic hedges to manage its interest rate
and foreign exchange risk. The application of AASB 139: Financial
Instruments – Recognition and Measurement results in fair value
gains and losses being recognised within the income statement.
ANZ includes the mark-to-market adjustments as an adjustment
to cash profit as the profit or loss resulting from the transactions
will reverse over time to match with the profit or loss from the
economically hedged item as part of cash profit. This includes gains
and losses arising from:
} approved classes of derivatives not designated in accounting
hedge relationships but which are considered to be economic
hedges, including hedges of NZD and USD revenue;
} the use of the fair value option (principally arising from the
valuation of the ‘own name’ credit spread on debt issues designated
at fair value); and
} ineffectiveness from designated accounting cash flow, fair value
and net investment hedges.
In the table below, funding and lending related swaps are primarily
cross currency interest rate swaps which are being used to convert
the proceeds of foreign currency debt issuances into floating rate
Australian dollar and New Zealand dollar debt. As these swaps do
not qualify for hedge accounting, movements in the fair values
are recorded in the Income Statement. The main drivers of these
fair values are currency basis spreads and the Australian dollar
and New Zealand dollar fluctuation against other major funding
currencies. This category also includes economic hedges of select
structured finance and specialised leasing transactions that do not
qualify for hedge accounting. The main drivers of these fair value
adjustments are Australian and New Zealand yield curves.
Gains in funding and lending related swaps were the result of a
significant weakening in AUD across the major currencies, most notably
USD and EUR in the second half of 2013 partially offsetting losses from
contraction in currency basis spreads in the first half of 2013.
Losses arising from the use of the fair value option on own name
debt hedged by derivatives are a result of a contraction of the Group’s
credit spreads in the first half of 2013, with spreads stabilising in the
second half of 2013.
The losses from revenue and net investment hedges for 2013 were
principally attributable to the depreciation of the AUD against the
USD in 2012.
Impact on income statement
Timing differences where IFRS results in asymmetry between the hedge and hedged items
Funding and lending related swaps
Use of the fair value option on own debt hedged by derivatives
Revenue and net investment hedges
Ineffective portion of cash flow and fair value hedges
Profit/(loss) before tax
Profit/(loss) after tax
Cumulative pre-tax timing differences relating to economic hedging
Timing differences where IFRS results in asymmetry between the hedge and hedged items (before tax)
Funding and lending related swaps
Use of the fair value option on own debt hedged by derivatives
Revenue and net investment hedges
Ineffective portion of cash flow and fair value hedges
2013
$m
2012
$m
(78)
63
224
(8)
201
146
194
119
(75)
16
254
176
As at
2013
$m
2012
$m
678
(1)
179
(25)
831
756
(64)
(45)
(17)
(630)
208
4. Explanation of adjustments between statutory profit and cash profit (continued)
CREDIT RISK ON IMPAIRED DERIvATIvES
(NIL PROfIT AfTER TA x IMPACT)
Reclassification of a charge to income for credit valuation
adjustments on defaulted and impaired derivative exposures to
provision for credit impairment of $9 million (2012: $60 million).
The reclassification has been made to reflect the manner in which
the defaulted and impaired derivatives are managed.
POLICYHOLDERS TAx GROSS UP
(NIL PROfIT AfTER TA x IMPACT)
For statutory reporting purposes policyholder income tax and
other related taxes paid on behalf of policyholders are included
in net income from wealth management and the Group’s income
tax expense. The gross up of $371 million (2012: $151 million) has
been excluded from the underlying results as it does not reflect the
underlying performance of the business which is assessed on a net of
policyholder tax basis.
STRUCTURED CREDIT INTERMEDIATION TRADES
ANZ entered into a series of structured credit intermediation trades
from 2004 to 2007. 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). 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.
Being derivatives, both the sold protection and purchased protection
are marked-to-market. Prior to the commencement of the global credit
crisis, movements in valuations of these positions were not significant
and largely offset each other in income. Following the onset of the
credit crisis, the purchased protection has provided only a partial offset
against movements in valuation of the sold protection because:
} one of the counterparties to the purchased protection defaulted
and many of the remaining counterparties were downgraded; and
} a credit valuation adjustment is applied to the remaining
counterparties to the purchased protection reflective of changes to
their 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 ANZ deems it cost effective relative to
the perceived risk associated with a specific trade or counterparty.
During the year ANZ terminated all bought CDSs with one financial
guarantor along with the corresponding sold CDSs for a net
profit of $7 million (including termination costs and release of the
associated credit valuation adjustment (CVA)). The bought and sold
protection trades are by nature largely offsetting, with notional
amounts on the outstanding bought CDSs and outstanding sold
CDSs at 30 September 2013 each amounting to USD 4.5 billion
(2012: USD 8.0 billion).
The profit and loss impact of credit risk on structured credit
derivatives remains volatile reflecting the impact of market
movements in credit spreads and AUD/USD rates. The (gain)/loss on
structured credit intermediation trades is included as an adjustment
to cash profit as it relates to a legacy non-core business where the
cumulative mark-to-market movements are expected to reverse to
zero in future periods.
The (gain)/loss included in income for these transactions is set
out below.
Credit risk on intermediation trades
Profit before income tax
Income tax expense
Profit after income tax
financial impacts on credit intermediation trades
Mark-to-market exposure to financial guarantors
Cumulative costs relating to financial guarantors1
Credit valuation adjustment for outstanding transactions
Realised close out and hedge costs
Cumulative life to date charges
2013
$m
2012
$m
As at
(63)
13
(50)
2013
$m
179
42
333
375
(73)
11
(62)
2012
$m
359
116
322
438
1 The cumulative costs in managing the positions include realised losses relating to restructuring of trades in order to reduce risks and realised losses on termination of sold protection trades.
It also includes foreign exchange hedging losses.
SUPPLEMENTARy INFORMATION
209
ANZ ANNUAL REPORT 2013 SHAREHOLDER INFORMATION
Ordinary Shares
At 11 October 2013, the twenty largest holders of ordinary shares held 1,607,188,663 ordinary shares, equal to 58.58% of the total issued
ordinary capital.
Name
BNP PARIBAS NOMS PTY LTD
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