More annual reports from Australia and New Zealand Banking Group:
2023 Report 2017
ANNUAL
REPORT
WE WANT OUR CUSTOMERS TO VALUE US AND THE COMMUNITY
TO TRUST US. FOR THIS TO HAPPEN WE KNOW THAT THINGS
NEED TO CHANGE AT ANZ.
Cover story — Latrobe Valley Bus Lines
Rhonda Renwick and her dedicated team at Latrobe Valley
Bus Lines are rolling out new buses that are at the leading
edge of transport technology in Australia.
Since 2015 Latrobe Valley Bus Lines has been investing in
low emission technologies which improve the efficiency
and environmental impact of its buses.
The newest vehicles in the fleet have been designed to
dramatically reduce particulate emissions in the atmosphere.
Latrobe Valley Bus Lines has been trialling new hybrid technology
and will introduce eight new hybrid vehicles into the fleet over
the next three years.
As the company focuses on its mission of helping the community,
and providing the highest quality and safest service for its
customers and employees, it has benefitted from its long-term
relationship with ANZ.
“ANZ’s proactive team has a genuine understanding of our
business goals, providing flexibility along with competitive
banking options,” Rhonda explains.
Rhonda Renwick, Managing Director
We are proud to be supporting a business like Latrobe Valley
Bus Lines — a Certified B Corporation — which shares our
commitment to helping communities thrive. It supports
local manufacturing, is dedicated to fostering an inclusive
and safe workplace and promotes a number of grassroots
community organisations.
CONTENTS
Our 2017 Reporting Suite
2017 Highlights
Chairman's Message
CEO's Message
About our Business
Our Strategy
Our Performance
Governance
2
3
4
6
8
10
12
14
24
Our Approach to Risk Management
Remuneration Report
Directors' Report
Auditor’s Independence Declaration
Financial Report
Shareholder Information
Glossary
Contacts
34
36
62
64
65
161
169
171
ANZ 2017 ANNUAL REPORT
OUR 2017 REPORTING SUITE
OUR 2017
REPORTING
SUITE
Stakeholder expectations of corporate reporting are changing and
we need to respond. We recognise that stakeholders want a more
holistic understanding of how we are creating value over time —
beyond the short or medium-term — and the opportunities and
challenges impacting our future. A strong financial performance
each year, while critical to the success of the bank, is not of
itself the whole story and reflects little about who we are as
an organisation and the role we play in society.
Our core reporting suite includes:
This report, our 2017 Annual Report, which describes our
strategy, our performance against that strategy and in light of
that performance how we remunerated our Senior Executives.
Our 2017 Annual Review which concisely describes how we
manage our business, including the way in which we incorporate
social and environmental considerations into our decision-
making. It draws on aspects of the International Integrated
Reporting Framework.
Our Corporate Governance Statement which discloses the
extent to which ANZ has complied with the ASX Corporate
Governance Council’s ‘Corporate Governance Principles
& Recommendations — 3rd edition’. We also provide our
Principal Risks and Uncertainties. Both are available
at anz.com/corporategovernance.
Our 2017 ANZ Corporate Sustainability Review which informs
stakeholders about our performance against our material social,
environmental and economic opportunities and challenges.
We will continue to evolve and improve our reporting suite
over the coming years and therefore welcome feedback on this
report. Please address any questions, comments or suggestions
to investor.relations@anz.com.
ANZ's 2017 reporting suite also includes
the following documents available at
shareholder.anz.com:
• News Release
• Results Presentation and Investor Discussion Pack
• Results Announcement
• The Company 2017 Financial Report
• UK DTR Submission – Principal Risks and Uncertainties
• APS 330 Pillar III Disclosure at 30 September 2017
1. 2017 Annual Review anz.com/annualreport
2. 2017 Corporate Governance Statement anz.com/corporategovernance
3. 2017 ANZ Corporate Sustainability Review anz.com/cs
2.
3.
1.
3
ANZ 2017 ANNUAL REPORT
2017
HIGHLIGHTS
$6.9
BNcash profit1
$131M
in community investment
(includes foregone revenue)3
$3,415M
taxes paid2
11.9
%cash return on equity1
20%
reduction in
Greenhouse Gas
emissions4
496,900+
people reached through
our financial education
program MoneyMinded5
1. Cash profit excludes non-core items included in statutory profit and is provided to assist readers in understanding the result of the ongoing business activities of the Group.
2. Total taxes borne by the Group, includes unrecovered GST/VAT, employee related taxes and other taxes.
3. Figure includes foregone revenue of $107 million, being the cost of providing low or fee-free accounts to a range of customers such as government benefit recipients,
not-for-profit organisations and students.
4. From premises energy against a 2013 baseline.
5. This is the estimated number of people who have benefited from ANZ’s MoneyMinded financial education program since 2003.
4
“ THE MARKETPLACE GAVE
VISITORS A CHANCE
TO LEARN ABOUT THE
IMPORTANT JOB OUR
LOCAL FARMERS DO IN
PRODUCING OUR FOOD”
— Christine Linden, General Manager,
Regional Business Banking, ANZ
During the year we held a Regional Marketplace at our
head office in Docklands, where staff and visitors had
the opportunity to sample and purchase the produce
of several of our Victorian and Tasmanian customers.
11.9 160
CENTS
fully franked dividend for FY17
2017 HIGHLIGHTS
113,127
hours volunteered
by employees
250
people employed from
under-represented groups6
NET PROFIT
AFTER TAX
$M
NET PROFIT
AFTER TAX
(Cash1)
$M
PROFIT
BEFORE
PROVISIONS
AND INCOME
TAX (Cash1)
$M
11,041
10,155
NET
LOANS AND
ADVANCES7
$BN
575.9
580.3
CUSTOMER
DEPOSITS7
$BN
467.6
449.6
6,406
5,709
6,938
5,889
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
$6.9 BN
funded and facilitated
in low carbon and
sustainable solutions
since 2015
12%
18%
9%
1%
4%
6. Includes Aboriginal and Torres Strait Islander people, people with a disability and refugees.
7.
Includes assets and liabilities held for sale.
5
ANZ 2017 ANNUAL REPORT
CHAIRMAN’S
MESSAGE
DAVID GONSKI, AC
In 2017 ANZ produced good results for shareholders,
our customers and the communities in which we operate.
Financial Outcomes
Our statutory profit was $6.4 billion, up 12%. Cash profit (which
excludes non-core items from statutory profit) was $6.9 billion,
up 18%. The final dividend of 80 cents per share brought the
total dividend for the year to 160 cents per share fully franked,
unchanged compared to 2016. This reflects a dividend payout
ratio of 68% of Cash Profit with $4.6 billion in dividends paid to
shareholders, moving ANZ closer to our target fully franked payout
ratio of 60-65% of cash profit.
Rapid economic, technological and social changes are a hallmark
of the world we live in. As one of the region’s major banks, we
have a clear strategy, which is being supported by bold action,
to make sure ANZ is fit and ready for this future.
In 2017 we made good progress to becoming a better balanced,
better capitalised and more efficient bank. This has seen the
new shape of ANZ emerge. Our retail and commercial businesses
in Australia and New Zealand now account for 53% of our capital,
up from 44% at the end of 2015. Our Common Equity Tier One capital
ratio reached 10.6% at the end of the year and our cost base has
reduced in absolute terms with annual costs down for the first
time since 1999.
Community Engagement
Banks are facing significant challenges to re-establish the trust
of the community. We need to own up to our mistakes and swiftly
make things right. We have been slower than the community
expects to be more transparent, to listen and to treat our customers
fairly and responsibly.
What is particularly pleasing about 2017 is we have not only
delivered better outcomes for shareholders, we are also making
genuine progress in delivering better outcomes for customers
and in rebuilding community trust.
This has been supported by the establishment of the Responsible
Business Committee, led by the Chief Executive Shayne Elliott,
and the revision of the charter for the Environment, Sustainability
and Governance Board Committee (ESG). The aim of both
Committees is to advance ANZ’s core purpose and increase focus
on ESG issues.
We have committed to support the Australian Bankers’
Association Better Banking initiatives and to implementing the
21 recommendations from Stephen Sedgwick’s independent
review of product sales commissions and product-based payments
in Australian retail banking. The Board and the CEO are overseeing
the implementation of the recommendations, with management
providing regular program updates to the Board Human
Resources Committee.
6
CHAIRMAN’S MESSAGE
“ IN 2017 WE MADE GOOD
PROGRESS TO BECOMING
A BETTER BALANCED,
BETTER CAPITALISED AND
MORE EFFICIENT BANK. WE PAID
OUT $4.6 BILLION IN DIVIDENDS.”
All recommendations are expected to be met within intended
timeframes, with progress this year including; Branch and Contact
Centre staff incentive plans being changed to balanced scorecard plans,
creating a strong alignment between performance management and
incentive rewards. All roles in the scope of the Sedgwick review are
on track to have the financial objective weighting in scorecards at less
than 33% for FY18 and staff recognition programs that were focused
on recognising and rewarding sales outcomes have also been changed
or closed. We are also working actively with the industry as part of the
Combined Industry Forum in relation to responding to the Sedgwick
recommendations for third parties and ASIC’s proposals for
mortgage broking.
We have also delivered a range of initiatives for customers to
make banking fairer and simpler. For example, in Australia we have
introduced a lower interest rate credit card and removed ATM fees.
We still have much to do to rebuild community trust,
however we know we need to change and we are changing.
The Board is pleased with what has been achieved in 2017
and take this opportunity of thanking all of the employees
of ANZ for their hard work and dedication.
Outlook
We expect the revenue growth environment for banking will
continue to be constrained as a result of intense competition
and the effect of regulation, including the full impact of the major
bank levy in Australia.
This environment is not new to us and our strategy is ensuring
we focus only on those areas where we can deliver exceptional
customer outcomes, solve real customer needs and, in doing
so, make a decent return for our shareholders.
As a result, ANZ’s capital position has improved significantly
and we already meet APRA’s ‘unquestionably strong’ 2020 capital
target. In 2018, as we receive the proceeds from the already
announced divestment of non-core businesses, we will have
the flexibility to consider capital management initiatives.
As we continue to deliver the benefits of our strategy, we are
well positioned to create value for our shareholders, customers,
employees and the community in 2018 and beyond.
David Gonski, AC
Chairman
7
ANZ 2017 ANNUAL REPORT
CEO’S
MESSAGE
SHAYNE ELLIOTT
Two years ago it was clear that we
needed to reshape ANZ’s future.
We had a strong and successful
business, however in recent times
the external environment was
changing faster than we were and
our customers, the community
and our shareholders expected
much more from us.
Our strategy
To ensure ANZ adapted more quickly, we simplified our strategy
to focus on being the best bank for people who want to buy and
own a home, and for people who want to start, run and grow
a business. In Institutional Banking, we want to be the best bank
in the world for customers who move goods and money around
the Asia-Pacific region.
This allowed us to focus our resources on opportunities where we
have a competitive advantage and can win. However, we have
also made some difficult calls. Some say the essence of strategy
is choosing what not to do. We have chosen to sell businesses
or investments where we were not in a winning position or
developing our ANZ brand, or where they added unnecessary
complexity and risk.
This has included the divestment of our pensions and investments
business in Australia, our retail and wealth businesses in six Asian
countries, UDC asset finance in New Zealand, and our minority
investments in China’s Shanghai Rural Commercial Bank and
Metrobank Card Corporation in the Philippines.
These choices have also involved a significant reshaping of our
Institutional Banking business as part of improving the capital
allocation and improving returns. This year it has involved a further
$18 billion reduction in Credit Risk Weighted Assets, bringing the total
reduction since September 2015 to $46 billion or 27%. We are also
focusing on a smaller number of customers who most value
our capabilities and our network, including our presence in Asia.
Today, we are at the mid-point of executing a multi-year transformation
of ANZ and I am pleased to report that 2017 has seen better outcomes
for shareholders and genuine progress in delivering better outcomes
for customers and in rebuilding community trust.
Customers and the Community
For customers our progress includes initiatives to make banking
fairer and simpler supported by an increased emphasis on
innovation. For example, we extended our mobile payments
leadership, established with Apple PayTM and Android PayTM,
with the launch of Samsung Pay and FitBitTM Pay. Mobile payments
are also important for small business and we introduced BladePayTM
to support this growing opportunity.
We also believe in the value of voice-activated transactions and
launched MyVoice identity and security solutions in Australia
and New Zealand.
8
CEO’S MESSAGE
“ I WANT US TO BE KNOWN
AS A COMPANY THAT’S
RESPECTED FOR BEING
FAIR AND BALANCED IN
THE WAY WE THINK ABOUT
ISSUES AND FOR TAKING
ACTION TO MEET THE
EXPECTATIONS OF OUR
CUSTOMERS, EMPLOYEES
AND SOCIETY.”
• Increase digitisation. Focusing on mobile and voice
solutions for customers.
• Culture. Building a stronger sense of core purpose, ethics
and fairness, and investing in people who can sense and
navigate the rapidly changing world.
ANZ today is leaner, stronger and fitter; better placed to manage
the changing environment while still investing in new capabilities
to deliver long-term sustainable earnings growth.
We could not have achieved so much in 2017 without the sustained
effort and dedication of our people, and I thank them all for
their contribution.
Shayne Elliott
CEO
We are also rebuilding trust through a focus on our core purpose:
to help shape a world where people and communities thrive.
We invested more than $131 million in the communities in which
we operate and I am particularly proud of the impact our financial
education and employment programs are having in terms of
creating opportunities for more people to participate socially
and economically.
We are focused on creating the right culture to support our
strategy. The way in which we treat our stakeholders is reinforced
by our values. Our values – the behaviours expected of our people
– are not just words on a page. They are embedded in how we do
things like how we manage and reward our people’s performance.
They are also used as a foundation for good decision making
and embedded in our operating rhythm, for example, across our
Australian Branch Network.
We took a positive and proactive stance at our appearances before
the Australian Parliament. We have made product, fee and rate
changes to benefit customers and the community and everyone
in the senior management team has spent more time in branches,
call centres and regional and rural areas talking to our customers
and the community. Looking ahead, we are seeking to deliver value
to all our stakeholders through four factors:
• Simplicity and focus. Choosing a few things to do, doing
them extremely well and stopping everything else.
• Speed to market. Listening to customers, testing, developing
and launching solutions quickly and repeating at pace.
9
ABOUT
OUR
BUSINESS
OUR PURPOSE
Our purpose is to help shape a world in which people and communities thrive. That means striving to create a balanced, sustainable
society in which everyone can take part and build a better life.
OUR CORPORATE
SUSTAINABILITY FRAMEWORK
Our Corporate Sustainability Framework supports our business
strategy and is aligned with the bank’s purpose. The Framework
has three key areas of focus:
• Sustainable Growth
• Social and Economic Participation
• Fair and Responsible Banking
OUR CULTURE
AND VALUES
Our values are the foundation of how we work and how
we bank. We recognise that we must live our values every day
if we are to execute our strategy successfully and earn back
the community’s trust.
To support our strategic priority to drive a purpose and
values-led transformation of the bank, this year we refreshed our
values with input from more than 1,000 employees. Our values,
which include a strong focus on speaking up and respectfully
disagreeing, are supported by our Code of Conduct and Ethics.
It is a requirement that all employees comply with the Code,
which contains eight guiding principles and sets the standards
for the way we do business at ANZ.
We care about:
INTEGRITY
SUSTAINABLE
GROWTH
FAIR AND
RESPONSIBLE
BANKING
SHAPE A
WORLD WHERE
PEOPLE AND
COMMUNITIES
THRIVE
SOCIAL
AND ECONOMIC
PARTICIPATION
COLLABORATION
ACCOUNTABILITY
RESPECT
EXCELLENCE
10
1010
ANZ 2017 ANNUAL REPORT ABOUT OUR BUSINESS
Founded in 1835 and headquartered in Australia, we provide banking and financial
products and services to individual and business customers, operating across 34 markets.
OUR DIVISIONS
Our business is structured across the following divisions:
Australia: comprises the Retail and the Corporate and
Commercial Banking business units, providing a full range
of banking services.
Institutional: services global institutional and business
customers located in Australia, New Zealand, Asia,
Europe, America, Papua New Guinea and the Middle
East across three product sets: Transaction Banking,
Loans & Specialised Finance and Markets.
New Zealand: comprises the Retail (including wealth
management services) and Commercial business units
providing a full range of banking services.
Wealth Australia: provides investment, superannuation,
insurance and financial advice services.
Asia Retail & Pacific: comprises the Asia Retail and
Pacific business units, connecting customers to specialists
for their banking needs.
Digital banking: leads the strategic development and
delivery of a superior digital experience for the bank’s
customers and staff.
These divisions are supported by Group-wide functions
including Technology, Services & Operations and Group Centre.
OUR
INTERNATIONAL PRESENCE
Australia
New Zealand
International
~8 million
Retail, commercial and
instituitional customers
44,896
Full-time equivalent employees
$86.9 billion
Market capitalisation
520,000+
Shareholders. 58% 1 of ANZ’s shares
are held by Institutional investors
and the remaining 42%1 by
Retail investors.
1. Based on beneficial ownership.
EARNING COMPOSITION BY GEOGRAPHY
New Zealand
$1,740 million
Australia
$4,617 million
International
$581 million
Asia
Cambodia, China, Hong Kong,
India, Indonesia, Japan, Laos,
Malaysia, Myanmar, the Philippines,
Singapore, South Korea, Taiwan,
Thailand, Vietnam
Pacific
American Samoa, Cook Islands,
Fiji, Guam, Kiribati, New Caledonia,
Papua New Guinea, Samoa,
Solomon Islands, Timor-Leste,
Tonga, Vanuatu
Europe
France, Germany, United Kingdom
Middle East U.A.E. (Dubai)
United States of America
11
ANZ is listed on the Australian Securties Exchange (ASX) with a secondary listing on the New Zealand Exchange (NZX).
OUR
STRATEGY
OUR STRATEGY IS FOCUSED ON BECOMING SIMPLER,
BETTER BALANCED AND MORE SERVICE-ORIENTED TO HELP
PEOPLE AND BUSINESSES RESPOND TO A CHANGING WORLD.
Successful execution of our strategy will deliver consistently strong results for our shareholders, achieving a balance
between growth and return, short and long-term results and financial and social impact.
CREATE A SIMPLER,
BETTER CAPITALISED,
BETTER BALANCED
AND MORE AGILE BANK
FOCUS OUR EFFORTS
ON AREAS WHERE
WE CAN CARVE
OUT A WINNING POSITION
FY17 PROGRESS
FY17 PROGRESS
• Established banking relationships with ~250,000 net new retail
customers in Australia and New Zealand.
• In Australia, we strengthened our number 3 home loan market share
position, introduced First Home Buyer coaches, and for the first time
home loan accounts exceeded 1 million.
• In New Zealand, we maintained our number 1 market share position
in home loans, held a leading position in overall brand consideration1
(at 51%) and increased our Retail Net Promotor Score2.
• Grew small business deposits by 9% in Australia and commercial
deposits by 6% in New Zealand.
Simpler bank:
• Continued to reshape and simplify the organisation, reducing full-time
equivalent staff by 4%, including 6% reduction in senior management.
• Reduced total costs in absolute terms, down year on year for the
first time since 1999.
Better capitalised:
• Increased Common Equity Tier 1 capital by 96 basis points to 10.6%.
• Generated 229 basis points of organic capital, primarily driven
by earnings growth and reduction in the Group’s Risk Weighted
Assets (RWA).
Better balanced:
• Further rebalanced the portfolio, with capital allocated to Retail
and Commercial in Australia and New Zealand increasing by 9%
to 53% since 2015.
• Improved risk adjusted returns in Institutional, through a
combination of $18 billion reduction in credit RWA and
improvement in earnings composition of markets, transaction
banking and lending.
• Progressed the sale of non-core businesses and minority investments,
expected to deliver an estimated 80 basis points of capital
once complete.
FY18 PRIORITIES
FY18 PRIORITIES
• Complete transactions in train and further progress the sale
of non-core businesses and minority investments.
• Continue repositioning the Institutional business, targeting
further RWA reductions and improved returns.
• Deliver a step-change in our cost structure.
• Run the bank prudently, balancing growth, return and risk.
• Maintain momentum in our home loan and small business
franchises to deliver consistent, above-system growth in
a cautious and responsible way.
• Build Home Owner and Small Business Ecosystems to engage
customers and improve the customer proposition and drive
new revenue streams.
• Build our Institutional’s regional trade, cash management
and markets platforms.
• Build a platform that makes payments easier, cheaper
and more integrated for individuals and organisations.
1. Source: McCulley Research Brand Tracking (online survey, first choice or seriously considered); six month rolling average.
2. Retail Market Monitor, Camorra Research, Sep'16 & Sep'17 (monthly).
12
ANZ 2017 ANNUAL REPORT OUR STRATEGY
“ WITH ANZ, WE’VE
FOUND A MORE
PERSONALISED
APPROACH. THEY’RE
INTERESTED IN US
BOTH AS PEOPLE,
AND AS A GROWING
BUSINESS.”
— Kathy Grant
Kathy Grant and Justin Davenport,
Lux Design Group — clothing designers,
wholesalers, importers and manufacturers.
DRIVE A PURPOSE
AND VALUES-LED
TRANSFORMATION
OF THE BANK
FY17 PROGRESS
BUILD A SUPERIOR EVERYDAY
EXPERIENCE FOR CUSTOMERS
AND OUR PEOPLE TO
COMPETE IN THE DIGITAL AGE
FY17 PROGRESS
• Established CEO-led Responsible Business Committee and revised
Charter of Environment, Sustainability and Governance Board
Committee to advance ANZ’s purpose and increase focus
on ESG issues.
• The only Australian major bank to offer payment options across
Apple PayTM, Apple Watch Pay, Android PayTM, Samsung Pay and
FitBitTM Pay — backed by the ability to make high-value transactions
easier with the introduction of voice biometrics.
• Contributed $131 million in community investment supported
• Expanded accessibility features for ANZ Visa Debit cards including
by 113,127 community volunteering hours by employees.
• Engaged our people and continued to build positive advocacy
for ANZ and the industry through ‘The ANZ Way’, focusing on
ANZ’s purpose, strategy, refreshed values and Code of Conduct.
• Introduced a new ‘balanced scorecard’ incentive plan in our
branches and retail banking contact centres, increasing the
weighting to good customer outcomes, and established
a new role of Customer Fairness Advisor.
• Implemented key priorities of our revised Human Rights
Standards, including strengthened customer due diligence
and employee training.
features to assist customers with visual impairment and
reading difficulties.
• Acquired online property site RealAs to bolster our digital offering
in Australia’s property market.
• Added to small business product offerings through our
Employment Hero partnership while adding payments capability
with BladePayTM and FastPay® Next Generation.
FY18 PRIORITIES
FY18 PRIORITIES
• Act boldly and aligned with our purpose to re-engage with
• Simplify and standardise our technology landscape in support
the community, regain trust and differentiate ANZ.
of our ambitions.
• Embed our values and 'New Ways of Leading' with all leaders
across the bank.
• Continue to change the way we communicate internally
• Introduce 'New Ways of Working', to more rapidly deliver valuable
new features and services to our customers, engage our people
and attract new talent.
to create a more transparent, open culture.
• Build the skills required to develop compelling customer propositions,
unlock the value of data and optimise our core processes.
• Better utilise data to strengthen relationships, grow revenue
and improve risk management.
13
OUR
PERFORMANCE
GROUP PERFORMANCE
Return on Equity – cash (%)
Cost to Income – cash (%)
Common Equity Tier 1 (%)
10.3%
11.9%
50.7%
46.1%
9.6%
10.6%
2016
2017
2016
2017
2016
2017
Earnings per Share – cash (cents)
Liquidity Coverage Ratio (%)
APRA Leverage Ratio (%)
202.6
237.1
2016
2017
126%
2016
135%
2017
5.3%
2016
5.4%
2017
Statutory net profit after tax for the year ended 30 September 2017 increased 12% on the prior year to $6,406 million. Statutory return on equity is 11.0%
and statutory earnings per share is 220.1 cents, an increase of 11% on prior year. The table below presents our performance on a statutory and cash basis.
Income Statement
Net interest income
Other operating income
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment charge
Profit before income tax
Income tax expense and non-controlling interests
Profit
2017
Statutory
$m
14,872
5,401
20,273
(9,448)
10,825
(1,198)
9,627
(3,221)
6,406
Cash
$m
14,872
5,617
20,489
(9,448)
11,041
(1,199)
9,842
(2,904)
6,938
2016
Statutory
$m
15,095
5,451
20,546
(10,439)
10,107
(1,929)
8,178
(2,469)
5,709
Cash
$m
15,095
5,499
20,594
(10,439)
10,155
(1,956)
8,199
(2,310)
5,889
WHY WE USE CASH PROFIT TO EXPLAIN THE GROUP’S FINANCIAL PERFORMANCE
We use non-IFRS metrics to manage our business. In general, they capture items that can be controlled by management and reflect our business activities.
We use these metrics internally to set targets and incentivise our Senior Executives and leaders through our remuneration plans. In addition, we believe
focusing on underlying operations is particularly important as we continue to strategically reposition ourselves to create a simpler, better capitalised,
better balanced and more agile bank.
Since 1 October 2012, the Group has used cash profit to measure performance of business activities. It is an industry wide measure which enables
comparison with our peer group. We calculate cash profit by adjusting statutory profit for non-core items. Cash profit is not subject to review or audit
by the external auditor. Our external auditor has informed the Audit Committee that adjustments have been determined on a consistent basis across
each of the periods presented.
14
ANZ 2017 ANNUAL REPORT OUR PERFORMANCE
ADJUSTMENTS BETWEEN STATUTORY PROFIT AND CASH PROFIT
$m
333
6,938
6,406
58
34
110
(3)
FY17
Statutory profit
Treasury
shares
adjustment
Revaluation of
policy liabilities
Economic and
revenue hedges
Structured credit
intermediation
trades
Reclassification
of SRCB to
held for sale
FY17
Cash profit
Description of adjustments between statutory profit and cash profit:
Adjustment
Treasury shares
adjustment
Revaluation of
policy liabilities
Economic hedges
and revenue hedges
Structured credit
intermediation trades
Reason for the adjustment
Wealth Australia holds ANZ shares as investments backing policy liabilities which are revalued through the Income
Statement. These shares are deemed to be Treasury shares and all dividends and realised and unrealised gains and
losses associated with the shares are eliminated for statutory purposes. From a cash profit perspective, earnings on
these shares are included to ensure there is no asymmetrical impact between policy liabilities and the assets held
to support such liabilities.
To calculate certain policy liabilities, projected future cash flows on insurance contracts are discounted at a market
discount rate to the present value of the obligation. Any change is reflected in the Income Statement each period.
The volatility from changes in market discount rates is removed from cash profit each year as the impact reverts
to zero over the life of the insurance contract.
Fair value gains and losses are recognised in the Income Statement on economic and revenue hedges used to
manage interest rate and foreign exchange risk. The mark to market adjustments on these derivatives, not designated
in an accounting hedge, are removed from cash profit as the fair value gains or losses will reverse over time to match
the profit or loss on the hedged item. Included in economic hedges are funding related swaps, select structured
finance and specialised leasing transactions.
ANZ entered into a series of structured credit intermediation trades with US financial guarantors from 2004 to 2007.
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). ANZ sold
protection using CDSs over these structures and then to mitigate risk, purchased protection via CDSs over the
same structures from eight US financial guarantors. Being derivatives, both the sold protection and the purchased
protection are measured at fair value and marked to model. The gains or losses on structured intermediation trades
is an adjustment to cash profit as it relates to a legacy business and, unless terminated early, fair value movements
are expected to reverse to zero in future periods.
Reclassification of SRCB
to held for sale
Represents the impact of reclassifying Shanghai Rural Commercial Bank (SRCB) to an asset held for sale in 2017.
This will be materially offset by a release of the foreign currency translation and available-for-sale reserves upon
transaction completion in late 2017.
Credit risk on
impaired derivatives
Policyholders
tax gross up
Nil profit after tax impact. The charge to income for derivative credit valuation adjustments on defaulted and
impaired derivative exposures has been reclassified to cash credit impairment charges to reflect the manner
in which the defaulted and impaired derivatives are managed.
Nil profit after tax impact. For statutory reporting purposes, policyholder income tax and other related taxes paid
on behalf of policyholders are included in net funds management and insurance income and income tax expense.
The gross up has been excluded from cash profit as it does not reflect the underlying performance of the business
which is assessed net of policyholder tax.
15
OUR PERFORMANCE (continued)
CASH PROFIT PERFORMANCE
$m
5,889
(223)
118
991
757
(594)
6,938
FY16
Cash profit
Net interest
income
Other operating
income
Operating
expenses
Credit
impairment
charge
Income tax
expense &
non-controlling
interests
FY17
Cash profit
Income Statement
Net interest income
Other operating income
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment charge
Profit before income tax
Income tax expense and non-controlling interests
Cash profit
2017
$m
14,872
5,617
20,489
(9,448)
11,041
(1,199)
9,842
(2,904)
6,938
2016
$m
15,095
5,499
20,594
(10,439)
10,155
(1,956)
8,199
(2,310)
5,889
Movt
-1%
2%
-1%
-9%
9%
-39%
20%
26%
18%
Cash profit increased 18% partly reflecting the impact of a number of large/notable items taken in 2016 and rigorous cost management in 2017.
Net interest income decreased $223 million (-1%) largely due to a 8 basis point decrease in the net interest margin, partially offset by 2% growth in
average interest earning assets. The growth in average interest earning assets reflects ANZ’s strategic focus on home loans, in particular owner occupier,
partially offset by reductions from Institutional portfolio rebalancing and the partial completion of the Asia Retail and Wealth sale. The lower net interest
margin reflects the combined impact of deposit competition, growth in the liquidity portfolio and lower earnings on capital. This was partially offset by
differentiated repricing in home loans across investor and owner occupier, principal and interest and interest only loans which on a net basis benefited
margins. The major bank levy was introduced on 1 July 2017 which also reduced net interest income by $86 million.
Other operating income increased $118 million (+2%) benefiting from a net year on year change in derivative valuation adjustments of $331 million
(2017: $229 million gain; 2016: $102 million loss), an improvement in Markets income of $102 million, and the $114 million gain on sale of
100 Queen Street, Melbourne. Prior year comparatives include the adverse impact of Asian minority valuation adjustments of $231 million and the
$237 million derivative CVA methodology change. Partly offsetting this, a number of sales related transactions had unfavourable impacts including
a $310 million net charge related to the Asia Retail and Wealth sale, and $365 million loss of income from SRCB, Bank of Tianjin (BoT) and Esanda Dealer
Finance. There was a $186 million reduction in funds management and insurance income, and a $75 million decrease in net fee and commission income.
Operating expenses decreased $991 million (-9%) primarily due to the $556 million charge for software capitalisation policy changes and the $278 million
charge for restructuring taken in 2016. Personnel expenses reduced by $363 million reflecting a 5% reduction in average Full Time Equivalent Staff (FTE).
Partly offsetting this are increases in underlying technology expenses of $55 million and increases in other expenses of $106 million as the result of non-
lending losses and higher technology related consulting expenses.
Credit impairment charges decreased $757 million (-39%). Individual credit impairment charges decreased by $598 million (-31%) primarily the result
of a benign credit environment. Collective impairment charges decreased by $159 million due to an improvement in the Group’s overall risk profile and
portfolio rebalancing in Institutional, partially offset by economic overlay adjustments.
16
ANZ 2017 ANNUAL REPORT OUR PERFORMANCE
DIVIDENDS
This performance allowed us to propose that a final dividend of 80 cents be paid on each eligible fully paid ANZ ordinary share, bringing the total
dividend for the year ended 30 September 2017 to $1.60 per share. This represents a dividend payout ratio (cash basis) of 67.7%.
The proposed 2017 final dividend will be fully franked for Australian taxation purposes, and New Zealand (NZ) imputation credits of NZ 10 cents per
ordinary share will also be attached. It will be paid on 18 December 2017 to owners of ordinary shares at close of business on 14 November 2017
(record date).
ANZ has a Dividend Reinvestment Plan (DRP) and a Bonus Option Plan (BOP) that will operate in respect of the proposed 2017 final dividend.
For the 2017 final dividend, ANZ intends to provide shares under the DRP through an on-market purchase (as approved by APRA) and BOP
through the issue of new shares.
Further details on dividends provided for or paid during the year ended 30 September 2017 are set out in Note 5 in the Financial Report.
ANALYSIS OF CASH PROFIT PERFORMANCE
NET INTEREST INCOME
Net interest income ($m)
Net interest margin (%)
Average interest earnings assets ($m)
Average deposits and other borrowings ($m)
2017
14,872
1.99%
748,000
600,186
2016
15,095
2.07%
730,835
586,453
Movt
-1%
-8 bps
2%
2%
Net interest income decreased $223 million (-1%) largely due to a 8 basis point decrease in the net interest margin, partially offset by 2% growth
in average interest earning assets.
Net interest margin decreased reflecting the combined impact of deposit competition, growth in the liquidity portfolio and lower earnings on capital.
This was partially offset by differentiated repricing in home loans across investor and owner occupier, principal and interest and interest only loans
which on a net basis benefited margins. The major bank levy was introduced on 1 July 2017 which also reduced net interest margin.
Average interest earning assets increased $17.2 billion (+2%) reflecting ANZ’s strategic focus on home loans, in particular owner occupier, partially
offset by reductions from Institutional portfolio rebalancing, and the partial completion of the Asia Retail and Wealth sale.
Average deposits and other borrowings increased $13.7 billion (+2%) from growth in customer deposits across Australia, New Zealand and Institutional
divisions, partially offset by a decline in deposits and other borrowings, as well as the partial completion of the Asia Retail and Wealth sale.
bps
207
1
(2)
(3)
4
(8)
199
FY16 Net
interest
margin - cash
Asset and
funding mix
Funding
costs
Deposit
competition
Asset
competition and
risk mix
Markets and
treasury
FY17 Net
interest
margin - cash
17
ANZ 2017 ANNUAL REPORT
OUR PERFORMANCE (continued)
OTHER OPERATING INCOME
Other operating income
Total
increase/
(decrease)
$m
(75)
Movt
-3%
(186)
-12%
670
87%
Net fee and
commission
income1
Net funds
management
and insurance
income1
Markets other
operating
income
Share of
associates' profit1
(244)
-45%
Other1
(47)
-20%
Total
118
2%
1. Excluding Markets.
2017
2017
$m$m
5,617
5,617
2016
$m
5,499
Movt
2%
Explanation
Decrease of $70 million in Asia Retail and Pacific from lower performance and the transition
of China, Singapore and Hong Kong businesses to DBS Bank. In addition, lower performance
in Institutional of $56 million primarily driven by portfolio rebalancing. This is partially offset
by an increase in the Australia division of $40 million driven by growth in Small Business
and Deposits.
Decrease in Wealth Australia of $163 million due to adverse retail life claims, reduced fee
income as expected from ongoing rationalisation of legacy investment platforms to SmartChoice,
lower income on invested capital, partially offset by favourable Lenders Mortgage Insurance
experience. The remaining decrease relates to the Asia Retail and Pacific division.
Excluding the impact of the $237 million charge from the derivative credit valuation
adjustment (CVA) methodology change recognised in 2016, Markets other operating income
increased $433 million. This was driven by an increase Balance Sheet Trading due to tighter
credit spreads which generated mark to market gains and increased income from higher
average liquidity portfolio holdings. Franchise Trading increased as the result of derivative
credit and funding valuation adjustments, net of associated hedges which benefited from
decreasing credit spreads and increasing yield curves. This was offset by a decrease in
Franchise Sales as the result of business transformational initiatives and market conditions
limiting client activity particularly for longer tenor hedging as a result of low foreign exchange
volatility and the low interest rate environment.
Decrease primarily as the result of ceasing equity accounting for BoT from March 2016 of
$86 million and SRCB from January 2017 of $201 million. This was partially offset by a net
increase of $44 million in profits from other associates.
Driven by a $310 million net charge as a result of reclassifying Asia Retail and Wealth to held
for sale and partial sale completion. A net $165 million increase due to the year on year
impact of the Asian minority valuations adjustments and the Esanda Dealer finance gain
recognised in 2016. In addition, the current year includes a $114 million gain on sale of
100 Queen Street, Melbourne.
Other operating income
$m
187
3%
300
5%
234
4%
544
10%
1,436
26%
2017
766
14%
2,362
42%
2016
2,437
44%
● Net fee and commission income
● Net funds management
and insurance income
● Markets other operating income
● Share of associates’ profit
● Other
1,332
24%
1,518
28%
18
OUR PERFORMANCE
Movt
-9%
4%
-3%
1%
-4.6%
-4%
-5%
-31%
large
-39%
-25%
-4%
-9%
6.5%
-0.3%
OPERATING EXPENSES
Operating expenses ($m)
Expensed investment spend ($m)
Capitalised investment spend ($m)
Total technology infrastructure spend ($m)
Operating expenses to operating income %
Full time equivalent staff (FTE)
Average full time equivalent staff (FTE)
Operating expenses
$m
1,631
17%
2017
2016
9,448
548
387
935
46.1%
44,896
46,068
10,439
526
400
926
50.7%
46,554
48,633
1,525
15%
278
3%
● Personnel expenses
● Premises expenses
● Technology expenses
● Restructuring expenses
● Other expenses
62
1%
1,666
18%
911
10%
2017
2,167
21%
5,178
54%
2016
5,541
52%
928
9%
CREDIT IMPAIRMENT CHARGE
Individual credit impairment charge ($m)
Collective credit impairment charge/(release) ($m)
Credit impairment charge ($m)
Gross impaired assets ($m)
Credit risk weighted assets ($b)
Total provision for credit impairment ($m)
Individual provision as % of gross impaired assets
Collective provision as % of credit risk weighted assets
Credit impairment charges decreased $757 million (-39%).
2017
1,341
(142)
1,199
2,384
336.8
3,798
47.7%
0.79%
2016
1,939
17
1,956
3,173
352.0
4,183
41.2%
0.82%
Individual credit impairment charge decreased $598 million (-31%) driven by a $402 million (-16%) decrease in new and existing provisions
predominantly in Institutional largely arising from portfolio rebalancing, combined with a $196 million (+37%) increase in recoveries and write-backs
in Australia and Institutional divisions from better than expected outcomes in impaired asset workouts.
Collective credit impairment charge decreased $159 million driven by a reduction in Institutional due to portfolio rebalancing, and further improvement
in the Institutional and New Zealand divisional risk profile. This was partially offset by an economic overlay adjustment of $75 million.
Gross impaired assets decreased $789 million (-25%) driven by Institutional (-$781 million) and New Zealand (-$39 million) divisions due to higher
repayments and upgrades on a small number of large exposures, and Asia Retail and Pacific division (-$109 million) due to the partial completion of the
Asia Retail and Wealth sale. This was partially offset by an increase in the Australia division (+$140 million) driven by Corporate Banking, Small Business
Banking and home loan portfolios. The Group’s individual provision coverage ratio on impaired assets was 47.7% at 30 September 2017 (2016: 41.2%).
19
OUR PERFORMANCE (continued)
CREDIT IMPAIRMENT CHARGE
Provision for individual
credit impairment ($m)
Provision for collective
credit impairment ($m)
Gross impaired assets ($m)
1,307
1,136
20
131
282
703
15
117
569
606
3
130
323
1,004
1,202
2,662
2,876
3
196
374
1,115
1,188
143
307
624
1,310
3,173
2,384
252
346
1,405
1,170
2017
2016
2017
2016
2017
2016
● Australia ● Institutional ● New Zealand ● Asia Retail & Pacific ● TSO and Group Centre
Australia
Institutional
New
Zealand
Wealth
Australia
2.68%
35.6%
3,695
345.4
201.4
11,387
1.01%
50.5%
1,836
119.6
186.8
4,754
2.31%
37.6%
1,369
107.9
75.3
6,207
n/a
68.4%
238
1.7
-
Asia
Retail &
Pacific
3.03%
101.2%
(148)
5.7
9.1
TSO and
Group
Centre
n/a
n/a
(52)
-
(5.0)
Group
1.99%
46.1%
6,938
580.3
467.6
2,110
3,981
16,457
44,896
Australia
Institutional
New
Zealand
Wealth
Australia
Asia
Retail &
Pacific
TSO and
Group
Centre
2.75%
36.4%
3,547
327.1
187.7
11,563
1.13%
57.1%
1,041
125.9
171.1
5,112
2.37%
39.6%
1,268
107.9
72.8
6,317
n/a
63.8%
324
2.0
0.3
2.96%
68.7%
159
13.4
22.8
n/a
n/a
(450)
(0.4)
(5.1)
2,174
4,894
16,494
46,554
Group
2.07%
50.7%
5,889
575.9
449.6
DIVISIONAL PERFORMANCE
2017
Net interest margin
Operating expenses to operating income
Cash profit ($m)
Net loans and advances ($b)
Customer deposits ($b)
Number of employees
2016
Net interest margin
Operating expenses to operating income
Cash profit ($m)
Net loans and advances ($b)
Customer deposits ($b)
Number of employees
20
ANZ 2017 ANNUAL REPORT OUR PERFORMANCE
DIVISIONAL PERFORMANCE
Australia
Net interest margin declined as the result of higher average funding costs, lower earnings on deposits due to the lower interest rate environment
and the introduction of the major bank levy. Net loans and advances grew in home loans particularly in New South Wales, and Corporate
Banking. Customer deposits grew across all portfolios. Operating expenses were broadly flat due to a reduction in FTE driven by productivity
efforts focused on simplifying the business, partially offset by inflation and increased investment in the business. Credit impairment charges
decreased primarily due to lower single name charges in Corporate and Commercial Banking, partially offset by volume growth and higher
delinquency rates for home loans in Western Australia. This led to a $148 million (+4%) increase in cash profit from prior year.
Institutional
Net interest margin ex-Markets decreased due to asset pricing competition, the introduction of the major bank levy and the mix impact of
lower lending volumes and higher deposit volumes, partially offset by margin improvements in Payments and Cash Management. Net loans
and advances were down due to portfolio rebalancing mainly in Loans & Specialised Finance and Transaction Banking. Customer deposits grew
in Markets and Transaction Banking. Other operating income increased significantly due to positive derivative valuation adjustments and higher
Markets Balance Sheet income as a result of tightening credit spreads. Operating expenses decreased due to a reduction in FTE as a result
of ongoing simplification of the business, partially offset by higher non-lending losses, regulatory and compliance spend. Credit impairment
charges decreased significantly due to a benign credit environment, higher write-backs and an overall reduction in lending assets driven
by portfolio rebalancing. This led to a $795 million (+76%) increase in cash profit from prior year.
New Zealand
Net interest margin declined as the result of a higher proportion of lower margin fixed rate lending and term deposits, pricing competition and
higher average funding costs. Net loans and advances grew in home loans (excluding foreign currency impacts) in addition to higher balances
in funds under management. Customer deposits grew across all portfolios. Other operating income decreased, more than offset by an increase
in net funds management and insurance income as the result of higher funds under management balances. Operating expenses decreased from
a reduction in FTE driven by automation and transaction migration to lower cost channels, partially offset by inflation. Credit impairment charges
decreased due to an increase in write-backs and credit quality improvements across the Retail and Commercial and Agri portfolios, partially
offset by increases in new and existing provisions. This led to a $101 million (+8%) increase in cash profit from prior year.
Wealth Australia
Insurance income decreased as the result of adverse retail life claims experience, a one-off experience loss due to the exit of a Group Life
insurance plan, partially offset by reinsurance profit share and favourable claims experience in Lenders Mortgage Insurance. Funds Management
income decreased in line with the planned strategy to rationalise the legacy portfolio to SmartChoice, a simpler and lower risk model, which is
now complete. Corporate and Other income decreased due to realised gains in 2016 which was not repeated and investment market volatility
on the guaranteed business. Operating expenses decreased due to productivity initiatives that resulted in a reduction in FTE, partially offset by
inflation and higher regulatory compliance and remediation spend. This led to an $86 million (-27%) decrease in cash profit from prior year.
Asia Retail & Pacific
Asia Retail and Pacific results for 2017 were impacted by the reclassification of Asia Retail and Wealth business to held for sale and the transition
of China, Singapore and Hong Kong businesses to DBS Bank, which resulted in a $310 million net charge (pre-tax). This led to a $307 million
decrease in cash profit from prior year.
TSO and Group Centre
TSO and Group Centre divisional results for 2016 and 2017 were impacted by a number of large/notable items outlined on page 22.
This includes Asian minority valuation adjustments in 2016, loss of equity accounted earnings in 2016 and 2017, Esanda Dealer Finance
divestment gain on sale in 2016, software capitalisation changes in 2016, and the gain on sale of 100 Queen Street, Melbourne
in 2017. This led to a $398 million (+88%) increase in cash profit from prior year.
21
OUR PERFORMANCE (continued)
LARGE/NOTABLE ITEMS INCLUDED IN CASH PROFIT
Within cash profit, the Group has recognised some large and/or notable items. The impact of these items to cash profit on a pre-tax basis is as follows:
Sale and investment related adjustments
Asian minority valuation adjustments
Equity accounted earnings
Sale of Asia Retail and Wealth businesses
Esanda Dealer Finance divestment
Derivative valuation adjustments
Market valuation adjustments
Derivative CVA methodology change
Other large/notable items
Gain on sale of 100 Queen Street, Melbourne
Software capitalisation changes
Restructuring
2017
$m
-
58
(310)
-
229
-
114
-
-
2016
$m
(231)
345
-
69
(102)
(237)
-
(556)
(278)
Description of large/notable items:
Item
Description
Asian minority valuation adjustments
Equity accounted earnings
Sale of Asia Retail and Wealth businesses
Esanda Dealer Finance divestment
Markets valuation adjustments
Derivative CVA methodology change
Impairment of our investment in AMMB Holdings Berhad (Ambank) partially offset by
a gain recognised on our investment in BoT upon cessation of equity accounting.
Earnings from BoT and SRCB prior to ceasing equity accounting on 30 March 2016 and
3 January 2017 respectively, that will no longer form part of future cash profit results.
A charge to impair software, goodwill and fixed assets as well as providing for costs
associated with the sale, partially offset by a gain relating to the transition of completed
businesses to DBS Bank.
Earnings from the Esanda Dealer Finance portfolio prior to divestment that will no longer form
part of future cash profit results, and the gain on sale recognised on transaction completion.
Gains or losses associated with the fair value of derivative positions, arising from adjustments
to include factors such as the impact of credit and funding.
A charge associated with the fair value of derivative positions, arising from a revision to our
methodology for determining derivative credit valuation adjustments to make greater use
of market information and enhanced modelling, and to align with market leading practice.
Gain on sale of 100 Queen Street, Melbourne
Gain on sale of our premises at 100 Queen Street, Melbourne.
Software capitalisation changes
Restructuring
A one-off charge as the result of the Group amending the application of its software
capitalisation policy, reflecting the shorter useful life of smaller items of software. This resulted
in an accelerated amortisation charge for software assets below the revised threshold.
Charges to re-shape our workforce and simplify our business at the reset of the Group’s
strategy in 2016.
22
ANZ 2017 ANNUAL REPORT FIVE YEAR SUMMARY
Financial performance1
Net interest income
Other operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment charge
Income tax expense
Non-controlling interests
Cash profit1
Adjustments to arrive at statutory profit1
Profit attributable to shareholders of the Company
Financial position
Assets
Net assets
Common Equity Tier 1
Common Equity Tier 1 – Internationally
Comparable Basel lll2
Return on average ordinary equity3
Return on average assets
Cost to income ratio (cash)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 (cents)
Dividend payout ratio
Net tangible assets per ordinary share4
No. of fully paid ordinary shares issued (millions)
Dividend reinvestment plan (DRP) issue price
– interim
– final
Other information
2017
$m
14,872
5,617
(9,448)
11,041
(1,199)
(2,889)
(15)
6,938
(532)
6,406
897,326
59,075
10.6%
15.8%
11.0%
0.7%
46.1%
13.1%
86,948
160c
100%
100%
$32.95
$25.78
$29.60
220.1
73.4%
$17.66
2,937
$28.80
-
2016
$m
15,095
5,499
(10,439)
10,155
(1,956)
(2,299)
(11)
5,889
(180)
5,709
914,869
57,927
9.6%
14.5%
10.0%
0.6%
50.7%
9.2%
80,886
160c
100%
100%
$29.17
$21.86
$27.63
197.4
81.9%
$17.13
2,927
$24.82
$28.16
2015
$m
14,616
5,921
(9,378)
11,159
(1,205)
(2,724)
(14)
7,216
277
7,493
889,900
57,353
9.6%
13.2%
14.5%
0.9%
45.7%
(7.5%)
78,606
181c
100%
100%
$37.25
$26.38
$27.08
271.5
68.6%
$16.86
2,903
$31.93
$27.08
OUR PERFORMANCE
2013
$m
12,772
5,619
(8,257)
10,134
(1,197)
(2,435)
(10)
6,492
(182)
6,310
702,995
45,603
8.5%
12.7%
15.0%
0.9%
44.9%
31.5%
84,450
164c
100%
100%
$32.09
$23.42
$30.78
232.7
71.4%
$13.48
2,744
$28.96
$31.83
2014
$m
13,797
5,781
(8,760)
10,818
(989)
(2,700)
(12)
7,117
154
7,271
772,092
49,284
8.8%
12.5%
15.8%
1.0%
44.7%
5.9%
85,235
178c
100%
100%
$35.07
$28.84
$30.92
267.1
67.4%
$14.65
2,757
$33.30
$32.02
No. of employees (full time equivalents)
No. of shareholders5
44,896
522,425
46,554
545,256
50,152
546,558
50,328
498,309
49,866
468,343
1. Cash profit excludes non-core items included in statutory profit and is provided to assist readers in understanding the result of the ongoing business activities of the Group. Cash profit is not audited;
2.
however, the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented.
Internationally Comparable Methodology applied for 2015–2017 aligns with APRA’s information paper entitled ‘International Capital Comparison Study’ (13 July 2015). Basel Internationally Comparable
ratios do not include an estimate of the Basel l capital floor requirement.
3. Average ordinary equity excludes non-controlling interests and preference shares.
4. Equals shareholders’ equity less preference share capital, goodwill, software and other intangible assets divided by the number of ordinary shares.
5. Excludes employees whose only ANZ shares are held in trust under ANZ employee share schemes.
23
ANZ 2017 ANNUAL REPORT
GOVERNANCE
BOARD OF DIRECTORS
A
B
D
C
A
B
David Gonski, AC
Chairman, Independent
Non-Executive Director
Graeme Liebelt
Independent
Non-Executive Director
C
D
John Macfarlane
Independent
Non-Executive Director
Paula Dwyer
Independent
Non-Executive Director
E
F
Ilana Atlas
Independent
Non-Executive Director
Shayne Elliott
Chief Executive Officer,
Executive Director
G
H
Jane Halton, AO, PSM
Independent
Non-Executive Director
Lee Hsien Yang
Independent
Non-Executive Director
24
GOVERNANCE
25
F
E
H
G
The Board comprises seven Non-Executive, Independent Directors
and one Executive Director — the Chief Executive Officer. Details of
each Director’s qualifications, experience and special responsibilities
are set out on the following pages. In addition, ANZ’s Board skills
matrix (available on anz.com/corporategovernance) sets out the
skills that ANZ considers each Director brings to the Board.
ANZ 2017 ANNUAL REPORT
GOVERNANCE (continued)
CORPORATE GOVERNANCE FRAMEWORK
BOARD OF DIRECTORS
David Gonski, AC, Chairman | Shayne Elliott, CEO
8 Directors
PRINCIPAL BOARD COMMITTEES
Environment,
Sustainability
and Governance
Committee
Audit
Committee
Human Resources
Committee
Risk
Committee
Digital Business
and Technology
Committee
Audit and Financial Governance
Internal Audit, External Audit and Financial Control
GROUP EXECUTIVE COMMITTEE
ANZ Senior Executives | Shayne Elliott, CEO
KEY MANAGEMENT COMMITTEES
Responsible
Business
Committee
Credit &
Market Risk
Committee
Group Asset
& Liability
Committee
Global Markets
& Loans Product
Committee
Capital
Management
Policy
Committee
Operational
Risk Executive
Committee
Credit Ratings
System Oversight
Committee
26
GOVERNANCE
BOARD FOCUS AREAS
The work of the Board and its Committees during the year has been focused on providing oversight of the
delivery of the Group’s strategy and ensuring that ANZ’s culture is aligned to ANZ’s purpose to shape a world
where people and communities thrive.
During the year, the Board and its Committees undertook key governance activities supporting
ANZ’s purpose. These included:
• Developing and implementing the charter of the ESG Committee.
• Embarking on a program to provide management with Board level advice on ANZ’s core sustainability issues.
• Adding a standing item to Board meeting agendas to provide insight into, and to review, ANZ’s culture.
• Endorsing and promoting a program to streamline ANZ’s annual reporting suite, with a focus on simplifying
and improving the utility of the 2017 Annual Report.
• Overseeing the creation of a new Annual Review, which integrates the former Shareholder Review with strategic
elements of the 2017 ANZ Corporate Sustainability Review to provide more comprehensive reporting to shareholders.
• Endorsing ANZ’s revised Code of Conduct, with a focus on clarity, simplicity, being action oriented, and being
more aligned with ANZ’s values and purpose.
• Recognising the contribution of directors of ANZ’s subsidiary boards by increasing engagement between
the ANZ Board and the Directors serving on ANZ subsidiary boards. Promoting and encouraging a focus
on subsidiary board composition, renewal and diversity. As at 30 September 2017, females were appointed
to 48.5% of all employee directorships on subsidiary boards.
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
Risk
Committee
Audit
Committee
Ilana Atlas
Paula Dwyer
Shayne Elliott
David Gonski, AC
A
12
12
12
12
Jane Halton, AO, PSM 11
Lee Hsien Yang
Graeme Liebelt
Ian Macfarlane2
John Macfarlane
12
12
4
12
B
11
12
12
12
11
12
12
4
12
A
6
6
6
6
2
6
B
6
6
6
6
2
6
A
5
5
5
4
1
5
B
5
5
5
4
1
5
Columns marked A indicate the number of meetings the Director was eligible to attend.
Environment,
Sustainability
and
Governance
Committee
Digital
Business and
Technology
Committee
Human
Resources
Committee
Special
Committee
Committee
of the Board1
Shares
Committee1
A
4
4
4
3
4
1
B
4
4
4
3
4
1
A
4
4
3
4
1
B
4
4
3
4
1
A
B
A
B
3
3
3
3
3
3
3
3
A
1
1
B
1
1
A
2
3
5
1
2
B
2
3
5
1
2
Columns marked B indicate the number of meetings attended. The Chairman is an ex-officio member of the Audit, Environment, Sustainability and Governance, Human Resources,
Risk and Digital Business and Technology Committees.
Any Director is entitled to attend any Committee meetings. Directors sometimes attend meetings of Committees of which they are not a member.
1. The meetings of the Committee of the Board and Shares Committee referred to in the table include those conducted by written resolution.
2. Ian Macfarlane retired as a Director on 16 December 2016.
27
ANZ 2017 ANNUAL REPORT
GOVERNANCE (continued)
DIRECTORS’ QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES
DAVID GONSKI, AC
SHAYNE ELLIOTT
Chief Executive Officer and Executive Director
BCom
Chief Executive Officer and Executive Director since 1 January 2016.
Career
Shayne has over 30 years’ experience in banking in Australia and overseas,
in all aspects of the industry. Shayne joined ANZ as CEO Institutional in June
2009, and was appointed Chief Financial Officer in 2012.
Prior to joining ANZ, Shayne held senior executive roles at EFG Hermes, the
largest investment bank in the Middle East, which included Chief Operating
Officer. He started his career with Citibank New Zealand and worked with
Citibank/Citigroup for 20 years, holding various senior positions across the
UK, USA, Egypt, Australia and Hong Kong.
As a Director of the Financial Markets Foundation for Children, Shayne
contributes to the promotion of health and welfare of Australian children.
He actively engages in the promotion of Australian economic growth,
social progress and public policy development through membership of the
Australian Bankers’ Association and Business Council of Australia. Shayne
will chair the Australian Bankers’ Association from December 2017.
Relevant Other Directorships
• Director: ANZ Bank New Zealand Limited (from 2009), ANZ Holdings
(New Zealand) Limited (from 2012) and the Financial Markets Foundation
for Children (from 2016).
• Member: Australian Bankers’ Association (from 2016) and Business
Council of Australia (from 2016).
Age 53 years | Residence Melbourne, Australia
Chairman, Independent Non-Executive Director and Chair
of the Environment, Sustainability and Governance Committee
BCom, LLB, FAICD(Life), FCPA
Chairman since 1 May 2014 and a Non-Executive Director since
February 2014. David is an ex-officio member of all Board Committees
including Chair of the Environment, Sustainability
and Governance Committee.
Chair:
Member:
Career
David started his career as a lawyer at Herbert Smith Freehills, and is now
one of Australia’s most respected business leaders and company directors.
He has business experience in Australia and internationally, and is involved
in a broad range of organisations in the government and education sectors.
He is a leading philanthropist and provides strong community leadership,
particularly in relation to education in Australia.
Relevant Other Directorships
• Chairman: The University of New South Wales Foundation Limited
(from 2005, Director from 1999).
• Director/Member: Lowy Institute for International Policy (from 2012),
Australian Philanthropic Services Limited (from 2012), ASIC External
Advisory Panel (from 2013) and Advisory Committee for Optus
Limited (from 2013).
• Chancellor: University of New South Wales Council (from 2005).
• President: Art Gallery of NSW Trust (from 2016).
• Chair: Review to Achieve Education Excellence in Australian Schools
for the Commonwealth of Australia.
Relevant Former Directorships held
in last three years, include
• Former Chairman: Coca-Cola Amatil Limited (2001-2017, Director from
1997), Sydney Theatre Company Ltd (2010-2016), Guardians of the Future
Fund of Australia (2012-2014), Swiss Re Life & Health Australia Limited
(2011-2014), Investec Bank (Australia) Limited (2002-2014), Investec
Holdings Australia Limited (2002-2014), Ingeus Limited (2009-2014)
and National E-Health Transition Authority Ltd (2008-2014).
• Former Director: Singapore Telecommunications Limited (2013-2015),
Investec Property Limited (2005-2014) and Infrastructure NSW
(2011-2014).
Age 64 years | Residence Sydney, Australia
28
GOVERNANCE
ILANA ATLAS
Independent Non-Executive Director
and Chair of the Human Resources Committee
PAULA DWYER
Independent Non-Executive Director
and Chair of the Audit Committee
BJuris (Hons), LLB (Hons), LLM
Non-Executive Director since September 2014. Ilana is a member
of the Audit Committee and Environment, Sustainability and
Governance Committee.
BCom, FCA, SF Fin, FAICD
Non-Executive Director since April 2012. Paula is a member
of the Risk Committee and Human Resources Committee.
Chair:
Member:
Chair:
Member:
Career
Ilana brings a strong financial services background and legal experience to
the Board. Ilana was a partner at law firm Mallesons Stephen Jaques (now
King & Wood Mallesons), where in addition to her practice in corporate law,
she held a number of management roles in the firm including Executive
Partner, People and Information, and Managing Partner. She also worked
at Westpac for 10 years, where her roles included Group Secretary and
General Counsel and Group Executive, People, where she was responsible
for human resources, corporate affairs and sustainability. Ilana has a strong
commitment to the community, in particular the arts and education.
Relevant Other Directorships
• Chairman: Coca-Cola Amatil Limited (from 2017, Director from 2011)
and Jawun (from 2017, Director from 2014).
• Director: Westfield Corporation Limited (from 2014) and Human
Rights Law Centre Ltd (from 2012).
• Member: Panel of Adara Partners (from 2015).
Career
Paula has extensive experience in financial markets, corporate finance,
risk management and investments, having held senior executive roles
at Calibre Asset Management, Ord Minnett (now J P Morgan) and at
Price Waterhouse (now PricewaterhouseCoopers). Her career as a
company director spans financial services, investment, insurance,
healthcare, gambling and entertainment, fast moving consumer goods,
property and construction and retailing sectors. Paula is a former member
of the Takeovers Panel. Paula has a strong interest in education and
medical research, having served as a member of the Geelong Grammar
School Council and the Business and Economics Faculty at the University
of Melbourne and as Deputy Chairman of Baker IDI.
Relevant Other Directorships
• Chairman: Tabcorp Holdings Limited (from 2011,
Director from 2005), Healthscope Limited (from 2014)
and Kin Group Advisory Board (from 2014).
• Director: Lion Pty Ltd (from 2012).
• Fellow: Senate of the University of Sydney (from 2015).
• Member: Kirin International Advisory Board (from 2012).
Relevant Former Directorships held
in last three years, include
• Former Chairman: The Bell Shakespeare Company Limited
(2010-2016, Director 2004-2016).
Relevant Former Directorships held
in last three years, include
• Former Deputy Chairman: Leighton Holdings Limited
(2013-2014, Director 2012).
• Former Director: Treasury Corporation of New South Wales (2013-2017),
Suncorp Group Limited (2011-2014), Suncorp-Metway Limited (2011-
2014), AAI Limited (2011-2014) and Scentre Group Limited (previously
known as Westfield Holdings Limited) (2011-2014).
• Former Member: John Holland Group Advisory Board (2012-2014),
Australian Government Takeovers Panel (2008-2014) and ASIC
External Advisory Panel (2012-2015).
Age 57 years | Residence Melbourne, Australia
Age 63 years | Residence Sydney, Australia
29
ANZ 2017 ANNUAL REPORT
GOVERNANCE (continued)
DIRECTORS’ QUALIFICATIONS, EXPERIENCE AND SPECIAL RESPONSIBILITIES (continued)
JANE HALTON, AO, PSM
Independent Non-Executive Director
BA (Hons) Psychology, FIML, FIPAA, NAM, Hon. FAAHMS,
Hon. FACHSE, Hon. DLitt (UNSWA)
Non-Executive Director since October 2016. Jane is a member
of the Human Resources Committee, Environment, Sustainability
and Governance Committee and Digital Business and
Technology Committee.
LEE HSIEN YANG
Independent Non-Executive Director and Chair
of the Digital Business and Technology Committee
MSc, BA
Non-Executive Director since February 2009. Hsien Yang is a
member of the Risk Committee and Human Resources Committee.
Member:
Chair:
Member:
Career
Jane’s 33 year career in the public service includes the positions of
Secretary of the Australian Department of Finance, Secretary of the
Australian Department of Health, Secretary for the Department of Health
and Ageing, and Executive Co-ordinator (Deputy Secretary) of the
Department of the Prime Minister and Cabinet. She brings to the Board
extensive experience in finance, insurance, risk management, information
technology, human resources, health and ageing and public policy.
She also has significant international experience.
Career
Hsien Yang is an experienced business executive with 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, property, publishing and
printing, financial services, education, civil aviation and land transport.
His contribution to community education activities includes membership
of the Governing Board of Lee Kuan Yew School of Public Policy.
Relevant Other Directorships
• Chairman: The Islamic Bank of Asia Limited (from 2012, Director from
2007), Civil Aviation Authority of Singapore (from 2009) and General
Atlantic Singapore Fund Pte Ltd (from 2013).
• Director: Rolls-Royce Holdings plc (from 2014), General Atlantic
Singapore Fund FII Pte Ltd (from 2014), Cluny Lodge Pte Ltd
(from 1979) and Caldecott Inc. (from 2013).
• Member: Governing Board of Lee Kuan Yew School of Public
Policy (from 2005).
• Special Adviser: General Atlantic (from 2013).
• President: INSEAD South East Asia Council (from 2013).
Relevant Former Directorships held
in last three years, include
• Former Director: Singapore Exchange Limited (2004-2016).
• Former Consultant: Capital International Inc Advisory Board (2007-2016)
Age 60 years | Residence Singapore
Jane has contributed extensively to community health through local
and international organisations including the World Health Organisation
and National Aboriginal and Torres Strait Islander Health Council.
Relevant Other Directorships
• Director: Clayton Utz (from 2017).
• Member: Executive Board of the Institute of Health Metrics and
Evaluation at the University of Washington (from 2007).
• Board Member: Coalition for Epidemic Preparedness Innovations
(Norway) (from 2016).
• Public Policy Fellow: ANU Crawford School of Public Policy (from 2012).
• Adjunct Professor: University of Sydney and University of Canberra.
• Council Member: Australian Strategic Policy Institute (from 2016).
Relevant Former Directorships held
in last three years, include
• Former Chairman: OECD Asian Senior Budget Officials Network
(2014–2016) and World Health Organisation Executive Board
(2013–2014, Member 2012-2015).
• Former Executive Board Member: World Health Organisation
(2012–2015).
• Former Member: Melbourne Institute Advisory Board (2007–2015),
the National E-Health Transition Authority (2005–2014) and
Australian Institute of Health and Welfare (2002–2014).
• Former Commissioner: Australian Sports Commission (2013–2014).
Age 57 years | Residence Canberra, Australia
30
GOVERNANCE
GRAEME LIEBELT
Independent Non-Executive Director
and Chair of the Risk Committee
BEc (Hons), FAICD, FTSE, FIML
Non-Executive Director since July 2013. Graeme is a member
of the Audit Committee and Human Resources Committee.
JOHN MACFARLANE
Independent Non-Executive Director
BCom, MCom (Hons)
Non-Executive Director since May 2014. John is a member of the Audit
Committee, Risk Committee and Digital Business and Technology Committee.
Chair:
Member:
Member:
Career
Graeme 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. He has extensive international experience and a strong
record of achievement as a senior executive including in strategy
development and implementation.
Career
John is one of Australia’s most experienced international bankers
having previously served as Executive Chairman of Deutsche Bank
Australia and New Zealand, and CEO of Deutsche Bank Australia.
John has also worked in the USA, Japan and PNG, and brings to the
Board a depth of banking experience in ANZ’s key markets in Australia,
New Zealand and the Asia Pacific.
Graeme is committed to global trade and co-operation, as well
as community education.
Relevant Other Directorships
• Chairman: Amcor Limited (from 2013, Director from 2012).
• Director: Australian Foundation Investment Company Limited
(from 2012), Carey Baptist Grammar School (from 2012) and
DuluxGroup Limited (from 2016).
Relevant Former Directorships held
in last three years, include
• Former Deputy Chairman: Melbourne Business School
(2012-2015, Director from 2008).
• Former Chairman: The Global Foundation (2014-2015,
Director from 2006).
Age 63 years | Residence Melbourne, Australia
He is committed to community health, and is a Director of St Vincent’s
Institute of Medical Research (from 2008) and the Aikenhead Centre
of Medical Discovery Limited (from 2016).
Relevant Other Directorships
• Director: Craigs Investment Partners Limited (from 2013),
Colmac Group Pty Ltd (from 2014) and AGInvest Holdings
Limited (MyFarm Limited) (from 2014, Chairman 2014-2016).
Relevant Former Directorships held
in last three years, include
• Former Executive Chairman: Deutsche Bank AG, Australia and New
Zealand (2007-2014) and Chief Country Officer, Australia (2011-2014).
• Former Director: Deutsche Australia Limited (2007-2014) and Deutsche
Securities Australia Limited (2011-2014).
• Former Chief Executive Officer: Deutsche Australia Limited (2011-2014).
Age 57 years | Residence Melbourne, Australia
31
ANZ 2017 ANNUAL REPORT
GOVERNANCE (continued)
COMPANY SECRETARIES’ QUALIFICATIONS AND EXPERIENCE
Currently there are three people appointed as Company
Secretaries of the Company. Details of their roles are contained
in the Corporate Governance Statement. Their qualifications
and experience are as follows:
BOB SANTAMARIA
Group General Counsel
BCom, LLB (Hons)
Bob joined ANZ in 2007. He had previously been a Partner at the
law firm Allens Arthur Robinson (now Allens) since 1987. He was
Executive Partner Corporate, responsible for client liaison with some of
Allens Arthur Robinson’s largest corporate clients. Bob 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.
SIMON PORDAGE
Company Secretary
LLB (Hons), FGIA, FCIS
Simon joined ANZ in May 2016. He is a Chartered Secretary and has
extensive company secretarial and corporate governance experience.
From 2009 to 2016 he was Company Secretary for Australian Foundation
Investment Company Limited and a number of other listed investment
companies. Other former roles include being Deputy Company Secretary
for ANZ and Head of Board Support for Barclays PLC in the United Kingdom.
Simon is committed to the promotion of good corporate governance.
He is a former National President and Chairman of Governance Institute of
Australia, and is a member and former Chairman of its National Legislation
Review Committee, and regularly presents on governance issues.
JOHN PRIESTLEY
Senior Legal Advisor
BEc, LLB, FGIA, FCIS
John, 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. John was responsible for the day to day operation
of ANZ’s Company Secretariat function from 2004 to July 2016 when
Simon Pordage took over that responsibility. He is currently a member
of ANZ’s Group Legal team.
32
EXECUTIVE COMMITTEE
GOVERNANCE
From left to right: Shayne Elliott – Chief Executive Officer, Maile Carnegie – Group Executive Digital Banking, Graham Hodges – Deputy Chief Executive
Officer, Farhan Faruqui – Group Executive, International, Alexis George – Group Executive Wealth, Nigel Williams – Chief Risk Officer, Michelle Jablko
– Chief Financial Officer, Fred Ohlsson – Group Executive, Australia, Mark Whelan – Group Executive, Institutional, Kathryn van der Merwe – Group
Executive Talent and Culture, Gerard Florian – Group Executive Technology, David Hisco – CEO New Zealand and Group Executive, Asia Wealth,
Pacific and International Retail.
Full biography details can be found on our website: shareholder.anz.com/our-company/executive-committee.
33
OUR APPROACH
TO RISK MANAGEMENT
The success of the Group’s strategy is underpinned by our sound management of the Group’s risks.
All of the Group’s activities involve — to varying degrees — the analysis, evaluation, acceptance and
management of risks or combinations of risks.
The Board is responsible for establishing and overseeing the Group’s risk management framework.
The Board has delegated authority to the Board Risk Committee (BRC) to develop and monitor compliance
with the Group’s risk management policies. The Committee reports regularly to the Board on its activities.
The key pillars of the Group’s risk management framework include:
• The Risk Appetite Statement (RAS), which clearly and concisely sets out the Board’s expectations regarding
the degree of risk that the Group is prepared to accept in pursuing its strategic objectives and its business
plan; and
• The Risk Management Statement (RMS), which describes the Group’s strategy for managing risks and a
summary of the key elements of the Risk Management Framework (RMF) that give effect to that strategy.
The RMS includes: a description of each material risk and an overview of how the RMF addresses each risk,
with reference to the relevant policies, standards and procedures. It also includes information on how the
Group identifies, measures, evaluates, monitors, reports and then either controls or mitigates material risks.
The material risks facing the group per the Group’s RMS, and how these risks are managed are summarised below:
Key Material Risks
Risk Type
Description
Capital
Adequacy
Risk
Compliance
Risk
The risk of loss arising from the Group failing to maintain the
level of capital required by prudential regulators and other key
stakeholders (shareholders, debt investors, depositors, rating
agencies, etc.) to support ANZ’s consolidated operations and risk
appetite.
Management of Risks
The Group pursues an active approach to Capital Management
through ongoing review, and Board approval, of the level
and composition of the Group’s capital base against key
policy objectives.
The probability and impact of an event that results in a breach of
any of the following that apply to the Group’s businesses: laws,
regulations, industry standards, codes, internal policies, internal
procedures, or principles of good governance.
Key features of our Compliance Risk framework include
centralised management of key obligations, and emphasis
on identifying changes in regulations and the business
environment, so as to enable us to:
• proactively assess emerging compliance risks; and
• implement robust reporting and certification processes.
Our Credit Risk framework is top down, being defined by
credit principles and policies. Credit policies, requirements
and procedures cover all aspects of the credit life cycle — for
example: transaction structuring, risk grading, initial approval,
ongoing management and problem debt management, as well
as specialist policy topics.
Credit
Risk
The risk of financial loss resulting from:
• a counterparty failing to fulfill its obligations; or
• a decrease in credit quality of a counterparty resulting
in a financial loss.
Credit Risk incorporates the risks associated with us lending
to customers who could be impacted by climate change or
by changes to laws, regulations, or other policies adopted by
governments or regulatory authorities, including carbon pricing
and climate change adaptation or mitigation policies.
34
ANZ 2017 ANNUAL REPORT OUR APPROACH TO RISK MANAGEMENT
Risk Type
Description
Management of Risks
Insurance
Risk
The risk of unexpected losses resulting from worse than expected
claims experience, including any of the following that expose an
insurer to financial loss: inadequate or inappropriate underwriting,
claims management, reserving, insurance concentrations,
reinsurance management, product design and pricing.
Liquidity
and
Funding
Risk
The risk that the Group is unable to meet its payment obligations
as they fall due, including:
• repaying depositors or maturing wholesale debt; or
• the Group having insufficient capacity to fund increases in assets.
Market
Risk
The risk to the Group’s earnings arising from:
• changes in any interest rates, foreign exchange rates,
credit spreads, volatility, and correlations; or
• from fluctuations in bond, commodity or equity prices.
Operational
Risk
The risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events. Operational Risk:
• includes technology risk, cyber risk, legal risk and conduct
risk, and damage arising from inadequate or failed
internal processes, people and systems; but
• excludes Strategic Risk.
Reinsurance
Risk
The risk that a reinsurer fails to meet its contractual obligations,
that is, to pay us reinsurance claims when due, which in turn
creates a counterparty credit.
We manage Insurance Risk primarily by:
• product design to price all applicable risks into contracts;
• reinsurance to reduce liability for large individual risks;
• underwriting to price, or 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.
Key principles in managing our Liquidity and Funding Risk include:
• maintaining the Group’s ability to meet liquidity ‘survival
horizons’ under a range of stress scenarios to meet cash
flow obligations over a short to medium term horizon;
• maintaining a strong structural funding profile; and
• maintaining a portfolio of high-quality liquid assets
to act as a source of liquidity in times of stress.
Our risk management and control framework for Market Risk
involves us quantifying the magnitude of market risk within the
trading and balance sheet portfolios through independent risk
measurement. First, we identify the range of possible outcomes,
the likely timeframe, and the likelihood of the outcome
occurring. Then we allocate an appropriate amount of capital
to support these activities.
The Group operates a three-lines-of-defence model to manage
Operational Risk, with each line of defence having defined
roles, responsibilities and escalation paths to support effective
two-way communication and effective management of our
operational risk. Also, we have ongoing review mechanisms
to ensure our Operational Risk framework continues to meet
organisational needs and regulatory requirements.
We manage Reinsurance Risk by:
• measuring our counterparties’ probability of default, and
• then restricting our counterparty exposures on the basis
of financial strength and concentration.
Reputation
Risk
The risk of loss that directly or indirectly impacts earnings,
capital adequacy or value, that is caused by:
We manage Reputation Risk by maintaining a positive and
dynamic culture that:
• adverse perceptions of the Group held by any of customers,
• ensures we act with integrity; and
the community, shareholders, investors, regulators, or
rating agencies;
• conduct risk associated with the Group’s employees or
contractors (or both); or
• the social or environmental (or both) impacts of our lending decisions.
Strategic
Risk
The risk that the Group’s business strategy and strategic objectives
may lead to an increase in other key Material Risks — for example:
Credit Risk, Market Risk and Operational Risk.
• enables us to build strong and trusted relationships with customers
and clients, with colleagues, and with the broader society.
We have well established decision-making frameworks and policies
to ensure our business decisions are guided by sound social and
environmental standards that take into account Reputation Risk.
We consider and manage Strategic Risks through our annual
strategic planning process, managed by the Executive
Committee and approved by the Board. Any increase to
our key Material Risks is managed in accordance with
the risk management practices specified above.
35
ANZ 2017 ANNUAL REPORT
REMUNERATION
REPORT
Dear Shareholder,
2017 Remuneration Report (audited)
I am pleased to present our Remuneration Report for the year
ending 30 September 2017.
2017 Outcomes — Strong link between performance
and remuneration outcomes
The Board assesses the performance of the Group, the Chief
Executive Officer (CEO) and each Disclosed Executive at the end
of each year. The assessments include a review of performance
against annual targets and progress towards achieving longer
term strategic goals.
In 2017 ANZ produced good results for shareholders, customers
and the communities in which we operate. Cash profit increased
by 18% and good progress was made towards becoming a better
balanced, better capitalised and more efficient bank. ANZ has
maintained a strong cost management discipline, achieved sound
risk management and compliance outcomes, improved capital
efficiency and credit quality, and rebalanced the business portfolio
to improve capital allocation and returns. While performance was
good, it is recognised that there is more to do to rebuild community
trust and improve the customer experience.
Taking into consideration Group, business and individual
performance, the Board determines remuneration outcomes for
the Chief Executive Officer and Disclosed Executives. In relation
to variable remuneration at risk, we set stretching yet achievable
objectives and targets for each executive. When executives
deliver on target performance at a Group and individual level
(taking into consideration ANZ Values and risk/compliance
standards), then variable remuneration awards are likely to be
around the target.
• For 2017, variable remuneration outcomes averaged 96% of
target overall (64% of maximum opportunity), with significant
differentiation at an individual level (ranging from 76% to
136% of target).
• The performance rights awarded in November 2013 were
tested in November 2016, but as the relative Total Shareholder
Return performance hurdles were not met these performance
rights lapsed and executives received no value from this award.
Changes to this year’s Remuneration Report
We have consolidated and simplified this year’s Remuneration
Report to help readers understand our remuneration framework and
how we determine remuneration outcomes based on performance.
We’ve included a new overview section: 'Remuneration at a glance'
on page 38, the weighting of the different elements in the Group
performance outcomes section, and two new tables which detail
1) the variable remuneration awarded; and 2) the remuneration
actually received by the CEO and current Disclosed Executives
during the 2017 performance year.
In 2018 we are reviewing our reward framework to ensure it
continues to support ANZ’s strategic direction, culture and new
ways of working. The review will also take into consideration the
new Banking Executive Accountability Regime.
On behalf of the Board, I invite you to read our refreshed
Remuneration Report which will be presented to shareholders
for adoption at the 2017 Annual General Meeting.
Ilana Atlas
Chair — Human Resources Committee
CONTENTS
1. Who is Covered by this Report
2. Remuneration at a Glance
3. Composition of Executive Remuneration
4. Application of our Remuneration Principles
37
38
39
44
5. 2017 Outcomes
6. Non-Executive Director Remuneration
7. Remuneration Governance
8. Other Information
44
52
53
55
36
1. WHO IS COVERED BY THIS REPORT
The Key Management Personnel (KMP) whose remuneration is disclosed in this year’s report are:
Non-Executive Directors (NEDs) — Current
D Gonski
Chairman
I Atlas
P Dwyer
J Halton
H Lee
G Liebelt
Director
Director
Director — appointed 21 October 2016
Director
Director
J Macfarlane
Director
Non-Executive Directors (NEDs) — Former
I Macfarlane
Director — retired 16 December 2016
Chief Executive Officer (CEO) and Disclosed Executives — Current
S Elliott
Chief Executive Officer and Executive Director
M Carnegie
Group Executive, Digital Banking
A George
Group Executive, Wealth Australia — appointed 1 December 2016
D Hisco
Group Executive and Chief Executive Officer, New Zealand
G Hodges
Deputy Chief Executive Officer
M Jablko
Chief Financial Officer
F Ohlsson
Group Executive, Australia
M Whelan
Group Executive, Institutional
N Williams
Chief Risk Officer
Disclosed Executives — Former
A Currie
Former Chief Operating Officer — concluded in role 31 October 2016, ceased employment 1 July 2017
The Remuneration Report for the Group outlines our remuneration strategy and framework and the remuneration practices
that apply to KMP.
This report has been prepared, and audited, as required by the Corporations Act 2001. It forms part of the Directors’ Report.
37
REMUNERATION REPORT
REMUNERATION REPORT (continued)
2. REMUNERATION AT A GLANCE
ANZ’S PURPOSE AND STRATEGY 1
UNDERPINNED BY:
OUR REMUNERATION
POLICY/PRINCIPLES:
Attract, motivate
and retain talent
Support the best interests
of our customers and
sound risk management
Reward for performance
and behaviours aligned
with ANZ’s Values
Focus on both short and
longer term performance/
value creation
DELIVERED TO OUR CEO AND DISCLOSED EXECUTIVES THROUGH:
Fixed remuneration
Variable remuneration delivered as
OUR CORE REMUNERATION
COMPONENTS2:
Cash
Deferred shares
Performance rights
At risk
REINFORCED BY:
ALIGNING
REMUNERATION
AND RISK:
Assessing behaviours
based on ANZ’s Values
and risk/compliance
standards
Risk is a key input in
determining variable
remuneration
Applying Board
discretion on
performance and
remuneration
outcomes
Being able to
downward
adjust deferred
remuneration
(including to zero)
Prohibiting
the hedging of
unvested equity
WHILE SUPPORTING THE ALIGNMENT OF EXECUTIVES AND SHAREHOLDERS THROUGH:
SHAREHOLDER
ALIGNMENT:
Substantial shareholding
requirements
Significant incentive deferral
(up to four years)
in ANZ equity
Use of relative and absolute
Total Shareholder Return
(TSR) hurdles
Use of Economic Profit as
a key input in determining
the incentive pool
DRIVING PERFORMANCE THROUGH OBJECTIVES WITHIN THE GROUP PERFORMANCE FRAMEWORK TO DETERMINE THE INCENTIVE POOL:
GROUP
PERFORMANCE
CATEGORIES:
ANZ’S 2017
PERFORMANCE
OVERALL:
(refer to section 5.1)
2017 FIXED
REMUNERATION
CHANGES:
Risk
Financial and Discipline
(50% weighting)
Customer
(30% weighting)
People and Reputation
(20% weighting)
(overall adjustment)
(combined weighting 100%)
The 2017 result is a good outcome which demonstrates further progress in becoming
a better balanced, better capitalised, more efficient bank.
ANZ’s overall performance assessment was slightly below target and this is reflected
in the variable remuneration outcomes.
No change to the CEO’s and Disclosed Executives’ fixed remuneration for 2017.
Fixed remuneration for new appointments has been set lower than prior incumbent.
Fixed remuneration has remained unchanged since 2014 for a number of Disclosed Executives.
No change to NED fees for 2017.
INDIVIDUAL PERFORMANCE OUTCOMES REFLECT THE PERFORMANCE OF THE GROUP, DIVISION AND INDIVIDUAL:
2017 VARIABLE
REMUNERATION
OUTCOMES3:
(refer to sections
5.2 and 5.3)
CEO
Annual Variable Remuneration:
95% of target (63% of max)
Long Term Variable Remuneration:
$2.1m/$4.2m (face value)4 at
threshold/full vesting subject
to shareholder approval
Disclosed Executives
Variable Remuneration outcomes:
% of target % of max
Average:
96%
64%
Range:
76% - 136% 51% - 91%
Nov 2013
performance rights
fully lapsed.
Executives received
no value from this award.
1. Refer to the 'About our Business' and 'Our Strategy' sections of the Annual Report.
2. The structure of our remuneration framework is aligned with our remuneration principles and has been designed to support ANZ’s purpose and strategy.
3. Variable remuneration outcomes appropriately reflect the Group’s performance against the indicators in the Group performance framework, and also the individual’s performance against their
own targets, which are appropriately stretching.
4. Face value at threshold/full vesting (50%/100% vesting).
38
ANZ 2017 ANNUAL REPORT
3. COMPOSITION OF EXECUTIVE REMUNERATION
3.1 REMUNERATION STRUCTURE
There are two core components of remuneration at ANZ:
• fixed remuneration; and
• at risk variable remuneration.
In structuring remuneration, the Board aims to find a balance between:
• fixed remuneration and at risk variable remuneration;
• cash and deferred equity; and
• short, medium, and long-term rewards in line with ANZ’s performance cycle.
In 2016 the Human Resources (HR) Committee reviewed the CEO and Disclosed Executives’ remuneration frameworks to ensure they support
the achievement of ANZ’s strategic objectives. The review considered a range of factors including market practice, changes in market conditions,
regulatory developments, feedback from shareholders and proxy advisors, and our overarching remuneration principles.
The review resulted in (as disclosed in the 2016 Remuneration Report):
• changes to the variable remuneration framework for Disclosed Executives and how we deliver variable remuneration to the CEO, effective from the
2016 year; and
• an increase to the Variable Remuneration (VR) opportunity for Disclosed Executives (excluding the Chief Risk Officer (CRO)) effective from
1 October 2016 to 200% of their fixed remuneration, in order to better align with the external market. As a result a greater proportion of
total remuneration will be at risk (67% compared to 63% previously). This change also aligns the proportion of fixed remuneration and at risk
remuneration for the Disclosed Executives with the CEO.
The CEO’s variable remuneration framework is slightly different to the Disclosed Executives, as follows:
• CEO We reward the CEO on separate Annual Variable Remuneration (AVR) and Long Term Variable Remuneration (LTVR) frameworks, in accordance
with his employment contract (as disclosed to the market at the time of his appointment) and this is also more consistent with external market practice.
LTVR reinforces the CEO’s focus on achieving longer term strategic objectives and creating long-term value for all stakeholders.
The HR Committee and the Board:
• determine the CEO’s AVR outcome (half of which is deferred over one to four years); and
• seek shareholder approval for the CEO’s LTVR.
• Disclosed Executives We reward the Disclosed Executives under a single VR framework. This approach enables us to:
• provide the appropriate mix of short and long-term rewards (including performance hurdles) to drive performance, and attract
and retain talent;
• tie the full VR award to the performance of ANZ; and
• defer VR over the short, medium and longer term (with shares deferred over four years and the performance rights tested against
their hurdles after three years).
The HR Committee and the Board determines the VR outcome for each Disclosed Executive. The delivery of VR to Disclosed Executives in
relation to the deferral periods and performance hurdles is aligned to that of the CEO.
The Board can, on the basis of each executive’s performance, adjust the executive’s variable remuneration down, potentially to zero.
We structure the CEO and Disclosed Executives’ remuneration based on the following target remuneration mix. The CEO and Disclosed Executives may
be awarded amounts above or below the target for variable remuneration.
CEO
Fixed Remuneration
1/3
Annual Variable Remuneration (AVR)
1/3
Long Term Variable Remuneration (LTVR)
1/3
Disclosed Executives2
Fixed Remuneration
1/3
At Risk
On target opportunity: 100% of fixed remuneration
Maximum opportunity: 150% of target
On target opportunity: 100% of fixed remuneration
Cash
50% of AVR
Deferred Shares
1 to 4 years
50% of AVR
Performance Rights
(face value at threshold vesting1)
3 years
100% of LTVR
Variable Remuneration (VR)
2/3
At Risk
On target opportunity: 200% of fixed remuneration
Maximum opportunity: 150% of target
Cash
33% of VR
Deferred Shares
1 to 4 years
33% of VR
Performance Rights
(face value at threshold vesting1)
3 years
34% of VR
1. 50% vesting.
2. The CRO’s 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 ANZ. The CRO’s target remuneration has a slightly different mix: fixed remuneration (37%) and VR (63%). VR is delivered as 33% cash, 33% deferred shares and 34% deferred share rights
(instead of performance rights). The CRO has a VR target of 170% of fixed remuneration and a maximum opportunity of 150% of target.
39
REMUNERATION REPORT
REMUNERATION REPORT (continued)
3. COMPOSITION OF EXECUTIVE REMUNERATION (continued)
By deferring a significant portion of an executive’s remuneration, we ensure that their variable remuneration:
• is linked to performance;
• has significant retention elements;
• aligns their interests with shareholders’ to deliver against strategic objectives; and
• can be adjusted downwards including to zero (if appropriate).
3.2 FIXED REMUNERATION
We express fixed remuneration as a total dollar amount which is delivered as cash salary and superannuation contributions. The Board sets (and
reviews annually) the CEO’s and Disclosed Executives’ fixed remuneration based on financial services market relativities reflecting their responsibilities,
performance, qualifications, experience and location. In addition, for new appointments we have looked to set fixed remuneration lower than that of
the prior incumbent (following the trend established with the CEO appointment).
3.3 VARIABLE REMUNERATION
The ANZ Incentive Plan (ANZIP) is our main variable remuneration plan covering the majority of employees, including the CEO and Disclosed Executives.
ANZIP pool sizing and allocation process
ANZIP pool determined based
on performance and affordability
Board approval of ANZIP pool
Business and individual
allocation of pool
3.3.1 HOW DO WE DETERMINE THE VARIABLE REMUNERATION POOL AT A GROUP LEVEL?
ANZIP incentive pool based on performance
As managing risk appropriately is fundamental to the way ANZ operates, it is a key element in how we measure and assess performance at a Group, Division
and individual level. The size of the overall incentive pool is determined considering Economic Profit performance (a risk adjusted financial measure)
and also our performance against the Group performance categories (Risk, Financial and Discipline, Customer, and People and Reputation).
ANZ uses a Group performance framework approach to measure the overall performance of the Group in relation
to the ANZIP. The Group performance framework is designed around three key inputs:
• Creating a safe bank with sound risk practices;
• Achieving our agreed annual and longer term goals; and
• Realising our strategic vision.
This approach provides indicators under the categories of:
• Risk — separate measure which can adjust the overall performance assessment;
• Financial and Discipline (50% weighting);
• Customer (30% weighting); and
• People and Reputation (20% weighting).
The indicators within each category encourage our people to be focused on both annual priorities and on broader
long-term strategies to deliver shareholder value.
The performance indicators are designed to be stretching yet achievable: they are approved by the Board and are set
considering prior year performance, industry standards and ANZ’s strategic objectives. Many of our indicators also
focus on targets which are set for the current year in context of progress towards longer term goals. As the specific
targets and features relating to all these indicators are commercially sensitive, we have not provided them in detail.
40
ANZ 2017 ANNUAL REPORT
3. COMPOSITION OF EXECUTIVE REMUNERATION (continued)
Determination of ANZIP Pool for Allocation
At the end of each financial year the HR Committee:
• Assesses performance against the Group performance framework (which was set at the start of the year), with input from the CEO, CRO and Chief
Financial Officer (CFO);
• Considers the pool size based on overall Group performance and affordability (for example above target performance is likely to result in an above
target pool);
• Makes a recommendation to the Board for approval, with the final ANZIP incentive pool determined by the Board.
3.3.2 HOW DO WE DETERMINE VARIABLE REMUNERATION AT AN INDIVIDUAL LEVEL?
Variable remuneration is designed to focus our CEO and Disclosed Executives on key performance measures supporting our business strategy, and
encourage the delivery of value for shareholders.
Performance objectives set
• Individual objectives are agreed for the CEO and Disclosed Executives, using a balanced scorecard
approach under the four categories of (i) Risk, (ii) Financial and Discipline, (iii) Customer, and (iv) People
and Reputation.
Start
• The weighting of measures varies to reflect the responsibilities of each individual’s role.
• Many of these measures relate to the contribution towards medium to longer term performance
outcomes aligned to ANZ’s strategic objectives.
• This methodology is replicated across ANZ for all employees reflecting the individual’s responsibilities.
ANZ
financial
year
End
Performance assessed against objectives
• The performance of the CEO and each Disclosed Executive is assessed against their objectives, ANZ’s
Values and ANZ’s risk and compliance standards.
• The HR Committee seeks input from the CEO, CRO (on risk management), CFO (on financial
performance) and Group General Manager Internal Audit (on internal audit matters).
• The HR Committee reviews (and the Board reviews and approves) the performance outcomes for the
CEO and each Disclosed Executive.
Determination of remuneration outcomes
• The HR Committee considers the performance of the Group, Division and individual to determine
remuneration recommendations for the CEO and Disclosed Executives respectively.
• Where the CEO and Disclosed Executives deliver on target performance at a Group and individual level
(taking into consideration ANZ Values and risk/compliance standards), then variable remuneration
recommendations are likely to be around target opportunity. Recommendations will be adjusted up
or down in line with performance.
• The Committee’s recommendations are then reviewed and ultimately approved by the Board.
3.3.3 HOW IS VARIABLE REMUNERATION DELIVERED?
As the table below shows, variable remuneration is delivered partly in cash, partly in shares deferred evenly over four years, and partly in performance
rights. The performance rights are subject to performance hurdles which determine whether they vest in three years’ time.
1 Oct 2016
30 Sep 2017
Nov 2017
Nov 2018
Nov 2019
Nov 2020
Nov 2021
Fixed remuneration
ANZ financial year
d
e
t
a
c
o
l
l
i
a
/
d
a
p
n
o
i
t
a
r
e
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m
e
r
e
b
a
i
r
a
V
l
h
s
a
C
d
e
r
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e
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e
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s
e
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a
h
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e
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n
a
m
r
o
f
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e
P
s
t
h
g
i
r
25%
vesting at the
end of year 1
25%
vesting at the
end of year 2
25%
vesting at the
end of year 3
Vesting is subject to meeting
TSR performance hurdles
at the end of year 3
25%
vesting at the
end of year 4
41
REMUNERATION REPORT
REMUNERATION REPORT (continued)
3. COMPOSITION OF EXECUTIVE REMUNERATION (continued)
Cash
The cash component is paid to executives at the end of the annual Performance and Remuneration Review (usually in late November).
Deferred shares
Deferred shares are ordinary shares and are deferred evenly over one to four years. By deferring part of an executives’ remuneration over time (and
it remaining subject to downward adjustment), we enable a substantial amount of their remuneration to be directly linked to delivering long-term
shareholder value. We grant deferred shares in respect of the 1 October to 30 September performance period in late November each year.
We calculate the number of deferred shares to be granted based on the Volume Weighted Average Price (VWAP) of the shares traded on the ASX in
the week leading up to and including the date of grant. For disclosure and expensing purposes, we use the one day VWAP to determine the fair value.
In some cases (generally due to regulatory/tax reasons), we may grant deferred share rights to executives instead of deferred shares. Each deferred
share right entitles the holder to one ordinary share.
Performance rights — CEO (LTVR) and Disclosed Executives (VR) excluding the CRO1
What is a
performance
right?
A performance right is a right to acquire one ordinary ANZ share at nil cost — as long as time and performance hurdles
are met.
The future value of performance rights may range from zero to an indeterminate value depending on performance
against the hurdles and the share price at the time of exercise.
What is the
performance period?
Performance rights have a three year performance period. For the 2017 grant (to be granted in November/December
2017), the performance period is from 22 November 2017 to 21 November 2020.
What are the
performance
hurdles and why?
We use a three year performance period as it: aligns to our business planning cycle, provides sufficient time for longer
term performance to be reflected, while balancing a reasonable timeframe for executives to find the award meaningful
and motivating.
We will apply two Total Shareholder Return (TSR) performance hurdles for the 2017 grants of performance rights (as we
did in 2016):
• 75% will be measured against a relative TSR hurdle (tranche 1);
• 25% will be measured against an absolute TSR hurdle (tranche 2).
TSR represents the change in value of a share plus the value of reinvested dividends paid. We regard it as the most
appropriate long-term measure as it focuses on the delivery of shareholder value and is a well understood and tested
mechanism to measure performance.
The combination of relative and absolute TSR hurdles provides balance to the plan by:
• Relative: rewarding executives for performance that exceeds that of peer companies; and
• Absolute: ensuring there is a continued focus on providing positive growth — even when the market is declining.
The two hurdles measure separate aspects of performance:
• the relative TSR hurdle measures our TSR compared to that of the Select Financial Services comparator group,
comprising of core local and global competitors. This comparator group is chosen to broadly reflect the geographies
and business segments in which ANZ competes for revenue; and
• the absolute Compound Annual Growth Rate (CAGR) TSR hurdle provides executives with a more direct line of sight to
the level of shareholder return to be achieved. It also provides a tighter correlation between the executives’ rewards and
the shareholders’ financial outcomes.
We will measure ANZ’s TSR against each hurdle at the end of the three year performance period to determine whether
each tranche of performance rights become exercisable. We measure each tranche independently from the other, so one
tranche may vest fully or partially but another tranche may not vest.
42
ANZ 2017 ANNUAL REPORT 3. COMPOSITION OF EXECUTIVE REMUNERATION (continued)
Performance rights — CEO (LTVR) and Disclosed Executives (VR) excluding the CRO1
What is the relative TSR
performance hurdle?
Relative TSR is an external hurdle that measures our TSR against that of the Select Financial Services comparator
group over three years.
(Also refer to ANZ TSR
performance in section
5.1 and hurdle outcomes
in section 5.3)
The Select Financial Services comparator group is made up of: Bank of Queensland Limited; Bendigo and Adelaide Bank
Limited; Commonwealth Bank of Australia Limited; DBS Bank Limited; Macquarie Group Limited; National Australia Bank
Limited; Standard Chartered PLC; Suncorp Group Limited; and Westpac Banking Corporation.
If our TSR when compared to the
TSR of the comparator group
then the percentage of
performance rights that vest
is less than the 50th percentile
is nil
reaches at least the 50th percentile, but is less than
the 75th percentile
is 50% plus 2% for every one percentile increase above
the 50th percentile
reaches or exceeds the 75th percentile
is 100%
What is the absolute
TSR performance hurdle?
Absolute CAGR TSR is an internal hurdle of whether ANZ achieves or exceeds a threshold level of growth the Board sets at
the start of the performance period.
The HR Committee recommends the absolute TSR targets for that year’s award to the Board for approval. In recommending
the targets the Committee considers factors including: the risk free bond rate; historical volatility of ANZ’s share price
relative to the market; and the market risk premium.
If the absolute
CAGR of our TSR
is less than 9.5%
is 9.5%
then the percentage of
performance rights that vest
is nil
is 50%
reaches at least 9.5%, but is less than 14.3%
is progressively increased on a pro-rata, straight-line,
basis from 50% to 100%
reaches or exceeds 14.3%
is 100%
When calculating performance against TSR, we:
• reduce the impact of share price volatility, by using an averaging calculation over a 90 day period for start and
end values;
• ensure an independent measurement, by engaging the services of an external organisation (Mercer Consulting
(Australia) Pty Ltd) to calculate ANZ’s performance against the TSR hurdles; and
• test the performance against the relevant hurdle once only at the end of the three year performance period — the
rights lapse if the performance hurdle is not met.
How do we calculate
TSR performance?
How do we calculate
the number of
performance rights?
The number of performance rights we grant is calculated using a face value basis (i.e. the full share price). Face value at full
(100%) vesting is split into two tranches. Each tranche value is then divided by the market price (five trading day VWAP of ANZ
shares at the start of the performance period) to determine the number of performance rights we award in each tranche.
Performance rights are allocated in November for Disclosed Executives and December for the CEO (subject to
shareholder approval).
How do we expense
performance rights?
ANZ engages an external expert to independently determine the fair value of:
• performance rights, for expensing purposes; and
• deferred share rights, for allocation and expensing purposes.
They consider factors including: the performance conditions; share price volatility; life of the instrument; dividend yield;
and share price at grant date.
1. Excluding the CRO who receives deferred share rights instead of performance rights to preserve the independence of this role and to minimise any conflicts of interest in carrying out the risk control
function across the organisation. These deferred share rights are subject to a time-based vesting hurdle of three years. The value used to determine the number of deferred share rights to be allocated
is based on an independent fair value calculation.
43
REMUNERATION REPORT
REMUNERATION REPORT (continued)
3. COMPOSITION OF EXECUTIVE REMUNERATION (continued)
3.3.4 DOWNWARD ADJUSTMENT OF DEFERRED REMUNERATION — BOARD DISCRETION
Any deferred remuneration we award is subject — even after it has been granted — to the Board’s on-going and absolute discretion to adjust
deferred remuneration downward, including to zero at any time. The Board may do that if it:
• considers such an adjustment is necessary, or appropriate, to protect the financial soundness of ANZ or to meet unforeseen regulatory requirements; or
• considers that having regard to information which has come to light after the grant of the remuneration, the remuneration was either not justified
at the time, or should not vest because of employee behaviour or conduct before, on, or after, the date of grant.
If the Board makes such an adjustment, then the relevant deferred remuneration is immediately and automatically forfeited and will not vest.
Accordingly, before any scheduled release of deferred remuneration, the Board considers whether any downward adjustment (or deferral of vesting
for a further period or periods) should be made.
No downward adjustment was applied to the deferred remuneration of the CEO and Disclosed Executives during 2017.
4. APPLICATION OF OUR REMUNERATION PRINCIPLES
Our remuneration policy and principles are a key consideration when making decisions pertaining to our remuneration frameworks.
Summary of our
remuneration principles
Attract, motivate and retain talent
Support the best interests of our customers
and sound risk management
Reward for performance and behaviours
aligned with ANZ’s Values
Focus on both short and longer term
performance/value creation
5. 2017 OUTCOMES
5.1 ANZ PERFORMANCE OUTCOMES
✓
✓
✓
✓
For example, in relation to our variable remuneration frameworks
Variable remuneration targets are set taking into consideration the external market, with
variable remuneration outcomes adjusted up or down in line with performance.
Performance objectives include customer and risk measures, in addition to financial and
people measures.
Performance assessments and remuneration outcomes take into consideration performance
assessed against individuals’ objectives, ANZ’s Values and our risk and compliance standards.
Variable remuneration is determined based on performance within the financial year and
progress towards achieving longer term strategic goals. A substantial portion is deferred
in ANZ equity over the longer term and the performance rights component will only vest
where the hurdles are achieved when tested after three years.
How we assessed the Group’s performance for the 2017 financial year
An overall assessment of performance is undertaken against the Group performance framework. The framework provides a set of indicative measures
which are used as a guide to analyse the quality of the outcomes delivered against the Group’s strategic goals. The indicative measures provide a
structure to help assess performance however in respect of the overall assessment, judgement is applied given the measures may not be of equal
weight. Risk outcomes form an integral part of the assessment as to the quality of the management of ANZ. The focus on creating a safe bank with sound risk
practices is reinforced by having the Risk assessment directly impact the overall assessment of the Group’s performance (i.e. a multiplier effect).
The 2017 ANZIP pool reflects the overall assessment of Group performance, the change in performance year-on-year, the composition of earnings
(i.e. the quality of the result), progress against strategy, and affordability.
Summary of Group Performance Assessment
Risk
+
Financial & Discipline
+
Customer
+
People & Reputation
=
Group Performance Assessment
Overall Adjustment
Assessment: Target
50% weight
Assessment: Above Target
30% weight
Assessment: Target
20% weight
Assessment: Below Target
Overall Assessment Outcome:
Slightly Below Target
44
ANZ 2017 ANNUAL REPORT
5. 2017 OUTCOMES (continued)
Performance framework: Overview of indicative measures informing our assessment of performance
The table below provides an overview of some of the indicative measures used to inform the overall assessment for each of the key performance categories.
Indicative Measure
Risk
Overall assessment: Target
Performance against Indicative Measures
[+/=/- refers to outcome against target]
Risk performance was assessed as on target taking into consideration performance against key risk indicators and an overall assessment of risk
management. There has been a strong tone from the top on Risk and Compliance and setting the right culture in line with our objectives to:
a. Maintain a culture where we understand, measure and proactively manage risk and compliance operations;
b. Ensure employees live the ANZ Values and ensure strict adherence to legal, compliance, regulatory and health/safety requirements (underpinned
by robust staff training programs); and
c. Ensure ANZ’s products, services and processes are responsible and fair for customers and ANZ.
• No material breaches of relevant regulations
(e.g. anti-money laundering, know your customer, sanctions)
• + No material breaches with positive feedback from principal regulators
on ANZ’s proactive collaboration and transparency
• Nil adverse audit trend — stretch target
• >99% of employees to complete mandatory learning
• Annual credit reviews are a key credit control. Therefore we
target to have <3% of total customer group reviews overdue
• - 4: none material or systemic across bank
• + 99.7% completion rate, reflecting the cultural importance of mandatory
learning in ensuring we understand our regulatory obligations
• + We continued to improve our performance in 2017 with <1% overdue
• Customer complaints referred to external dispute resolution
• = Assessed as on target, although recognised there is more we can do
to improve the customer experience
Financial and Discipline
Overall assessment: Above Target
Group financial performance improved on 2016, with significant progress in implementing strategic priorities including ongoing expense discipline
resulting in an absolute reduction in operating costs year-on-year (without sacrificing investment in the business) and rebalancing Group capital
through a significant reduction in Institutional capital intensity. Today, circa 53% of Group Capital is allocated to the Retail and Commercial businesses
in Australia and New Zealand up from 44% two years ago. Strong organic capital generation along with the announcement of a number of divestments
in 2017 means ANZ reported an APRA CET1 ratio of 10.6%, well in advance of APRA’s unquestionably strong CET1 requirements.
Strategy Execution
• Reshaping of the Institutional business through the reduction
of Risk Weighted assets to improve capital efficiency
• >3 transactions agreed and announced
• + Substantial reweighting of capital usage reflecting a reduction in credit risk
weighted assets in Institutional — down $18bn. Aggregate reduction
of $46bn over two years
• + Transactions announced are sale of Retail and Wealth in 6 Asian countries, sale
of Shanghai Rural Commercial Bank, UDC1, Wealth Pension and Investments
and Aligned Dealer Group businesses, as well as the sale of shareholding in
Metrobank Card Corporation2. In aggregate these will contribute ~90 bps of
CET1 capital (of which 9 bps was realised in 2017)
• Increase proportion of investment spend within total spend
• + Group expenses decreased 9% (or 1.5% after adjusting for large/notable items)
while reducing costs in absolute terms
year-on-year within which expensed investment opex was up 4%
Profitability
• Reduction in operating expenses
Returns
• Total shareholder returns (TSR) relative to peers
• Return on equity (ROE)
Funding and Liquidity
• Core funding and CET1 ratio
• + 9% year-on-year reduction of operating expenditure (1.5% year-on-year
reduction after adjusting for 2016 large/notable items)
• + Top quartile of peers
• = ROE up 159 bps to 11.9% driven by improved profit performance and the
impact of rebalancing the asset portfolio on capital consumption
• + Funding and liquidity have been managed well, with core funding ratio above
target, and CET1 up 96 bps to 10.6% against a target of 9.5%
45
REMUNERATION REPORT
REMUNERATION REPORT (continued)
5. 2017 OUTCOMES (continued)
Performance framework: Overview of indicative measures informing our assessment of performance
Indicative Measure
Performance against Indicative Measures
[+/=/- refers to outcome against target]
Customer
Overall assessment: Target
Despite a challenging external environment, customer performance was strong, with particular highlights including the strong uplift in digital
sales, the launch of a series of innovative and industry leading services like BladePayTM and the extension of our mobile payments leadership with
the launch of Samsung Pay and FitBitTM Pay (established with Apple PayTM and Android PayTM). The Group also carefully managed the impact of
reshaping the Institutional business (which involved the exit of a large number of client relationships delivering significant reduction in the size
of the asset book and an improvement in risk adjusted return in the Institutional business).
Customers as Advocates
• Improve Net Promoter Score (NPS)3
• - In aggregate the NPS score was maintained or decreased. Australia/NZ
Corporate and Commercial Banking, and NZ Retail scores maintained, Australia
Retail and Australia/NZ Institutional decreased
• Maintain or improve position in respect of relevant customer
• = Position maintained or improved
satisfaction/relationship strength indices
Diversification of sales channels
• Increase brand strength
• Launch customer innovations
• Increase profit contribution and diversity to less capital
intensive revenue streams in Institutional
• Increase the proportion of digital sales
• = Increased brand index and gap closed relative to market leader
• + A number of key innovations launched across the business (e.g. BladePayTM,
Android PayTM, FitBitTM Pay) which have proven effective in increasing customer
numbers and strengthening relationships
• - Average risk weighted assets increased from 0.6% to 1.1% and the high
returning cash management business is now 21% of Institutional income,
however there is more to be done to grow the customer franchise business
following a period of customer exits and product rationalisation
• + Digital sales as % of total sales increased in Australia Retail, NZ Retail, and
Australia Corporate and Commercial Banking
Market Share
• Increase Australia and NZ market share (in deposits,
in clients doing business outside of Australia/NZ, and revenue
in Australia/NZ from international clients)
• = Increased year-on-year
• Reduce customer attrition
• = Customer attrition has reduced in Australia Retail and was relatively flat in
NZ Retail
People and Reputation
Overall assessment: Below Target
The complex and fast changing internal and external environments created a challenging year for our people. While there are a number of
highlights such as the commencement of a program of work designed to lift productivity and embed new ways of working, there is more work to
be done in the areas of engagement and improving the reputation of the Banking and Finance industry.
Diversifying our workforce
• Improving gender diversity in management —
increase representation of women in management
Engaging our People
• Improve staff engagement
Retention and Performance Management
• Reduce staff attrition in the pool identified as 'key talent'
• 50% reduction in the number of employees with consecutive
years of poor performance outcomes
Sustainability
• Australia and New Zealand Randstad employer of
choice ratings
• - Stable at 41.5%. However % of female Senior Managers, Executives and Senior
Executives increased by 0.6%, 2.3% and 1.9% respectively
• The 2017 pulse survey showed a result of 72% (sent to 10% of bank, with 57%
response rate)4
• - 9.9% turnover of key talent — can improve further
• - 46% reduction year-on-year — can improve further
• - Target achieved in Australia, with improvement required in NZ
• Maintain strong performance on Dow Jones
• = Retained our place as a sector global leader (in the top four banks globally)
Sustainability Indices
1. UDC provides asset based finance in NZ.
2. The remaining divestments are subject to regulatory approvals.
3.
NPS is a customer loyalty metric used globally to evaluate a company’s brand, products or services. Net Promoter® and NPS® are registered trademarks and Net Promoter Score and Net Promoter
System are trademarks of Bain & Company, Satmetrix Systems and Fred Reichheld.
4. No assessment has been included as year-on-year outcomes are not directly comparable.
46
ANZ 2017 ANNUAL REPORT 5. 2017 OUTCOMES (continued)
ANZ’s Financial Performance 2013 – 2017
Statutory profit ($m)
Cash profit ($m, unaudited)
Cash return on equity (ROE) (%) (unaudited)
Cash earnings per share (EPS) (unaudited)
Share price at 30 September ($)
(On 1 October 2012, opening share price was $24.62)
Total dividend (cents per share)
Total shareholder return (12 month %)
2013
6,310
6,492
15.3%
238.3
30.78
164
31.5
2014
7,271
7,117
15.4%
260.3
30.92
178
5.9
2015
7,493
7,216
14.0%
260.3
27.08
181
(7.5)
2016
5,709
5,889
10.3%
202.6
27.63
160
9.2
2017
6,406
6,938
11.9%
237.1
29.60
160
13.1
Since 1 October 2012, the Group has used cash profit as a measure of performance for the Group’s ongoing business activities, and provides a basis
to assess Group and Divisional performance against earlier periods and against peer institutions.
• We calculate cash profit by adjusting statutory profit for non-core items, consistent with prior years.
• Although cash profit is not audited, the external auditor has informed the Audit Committee that recurring adjustments have been determined
on a consistent basis across each period presented, and the additional adjustment for Shanghai Rural Commercial Bank as held for sale in the
March 2017 half is appropriate.
• While cash profit forms part of the Financial and Discipline performance assessment, the sizing of the ANZIP pool takes account of both cash profit
and Economic Profit. Importantly, Economic Profit takes into consideration credit losses across an economic cycle.
ANZ TSR performance (1 to 10 years)
The table below compares ANZ’s TSR performance against the median TSR and upper quartile TSR of the performance rights Select Financial Services (SFS)
comparator group over one to ten years. ANZ’s TSR performance was below the median TSR of the SFS Comparator Group when comparing over one, three
and five years, and above the median over ten years to 30 September 2017.
ANZ
Median TSR SFS
Upper Quartile TSR SFS
1
13.1%
17.2%
21.0%
Years to 30 September 2017
3
12.5%
18.0%
24.9%
5
58.9%
78.8%
104.0%
10
78.7%
59.1%
85.4%
47
REMUNERATION REPORT
REMUNERATION REPORT (continued)
5. 2017 OUTCOMES (continued)
5.2 CEO'S AND DISCLOSED EXECUTIVES’ REMUNERATION OUTCOMES
The CEO and Disclosed Executives’ fixed remuneration was reviewed, with no change for the year ending 30 September 2017.
The Board approved the CEO’s 2017 AVR and the Disclosed Executives’ 2017 VR outcomes. In doing so, it considered the performance of the individual,
the business and overall Group performance, and the shareholder experience.
At the start of each year, stretching yet achievable performance objectives are set for the CEO and each Disclosed Executive. When executives
deliver on target performance at a Group and individual level (taking into consideration ANZ Values and risk/compliance standards), then variable
remuneration awards are likely to be around the target.
At year end, each executive’s performance is assessed against their objectives for the year and also taking into consideration risk/compliance standards
and their demonstration of the ANZ Values. The CEO assesses the performance of the Disclosed Executives and makes recommendations to the HR
Committee. The HR Committee assesses the performance of the CEO and makes recommendations to the Board on both the CEO and the Disclosed
Executives’ performance and remuneration outcomes.
Average VR for Disclosed Executives is 96% of target (64% of maximum), which is well aligned with overall ANZ performance. The VR differentiation
at an individual level ranges between 76% to 136% of target. The differentiation in outcomes reflects the relative performance of the different areas/
individuals and also demonstrates the at risk nature of VR. These VR outcomes (which are paid/granted in November 2017), demonstrate a clear
link between performance and reward at both an ANZ and individual level for the 2017 financial year. Whether the portion of 2017 VR delivered as
performance rights vests will be subject to ANZ’s TSR performance over a three year performance period, in line with our business planning cycle.
The CEO’s proposed 2017 LTVR of $2.1 million/$4.2 million (performance rights face value at threshold/full vesting) is subject to shareholder approval
at the 2017 Annual General Meeting.
The TSR performance hurdles reflect the importance of focusing on achieving longer term strategic objectives and aligning executives’ and shareholders’
interests.
Year-on-year Remuneration awarded
This table shows a year-on-year comparison of remuneration awarded to the CEO and Disclosed Executives for the 2016 and 2017 performance
periods. However it should be noted that year-on-year comparisons are not comparable for those shaded (Elliott, Carnegie, Jablko and Ohlsson)
as they were only in their current role for part of the 2016 year.
There were no increases to fixed remuneration for 2017. The year-on-year differences for Elliott and Whelan reflect the fixed remuneration increases
at the time they were appointed to their new roles in 2016, while for Hisco it reflects differences in exchange rates when converting NZD to AUD.
The differences for Carnegie, Jablko and Ohlsson are due to having only worked part of the 2016 year as a Disclosed Executive.
Financial
Year
CEO and Current Disclosed Executives
S Elliott
2017
M Carnegie
2017
2016 (9 months as CEO)
A George
D Hisco
G Hodges
M Jablko
F Ohlsson
M Whelan
N Williams
2016 (~3 months in role)
2017
(10 months in role)
2017
2016
2017
2016
2017
2016 (~2.5 months in role)
2017
2016 (8 months in role)
2017
2016
2017
2016
Fixed
remuneration
$
Variable
remuneration
awarded
$
Total
remuneration
awarded
$
2,100,000
1,887,500
1,000,000
260,000
664,000
1,195,013
1,186,570
1,050,000
1,050,000
1,000,000
200,000
1,000,000
660,000
1,200,000
1,166,000
1,350,000
1,350,000
4,100,000
3,650,000
1,700,000
400,000
913,000
2,200,550
2,199,905
2,220,000
1,785,000
2,240,000
400,000
1,620,000
848,100
3,275,000
2,275,000
1,900,000
2,150,000
6,200,000
5,537,500
2,700,000
660,000
1,577,000
3,395,563
3,386,475
3,270,000
2,835,000
3,240,000
600,000
2,620,000
1,508,100
4,475,000
3,441,000
3,250,000
3,500,000
This table supplements, and is different to, the Statutory Remuneration table which presents the accounting expense for both vested and unvested
awards in accordance with the Australian Accounting Standards.
A further breakdown of the variable remuneration awarded for 2017 is provided on the next page.
48
ANZ 2017 ANNUAL REPORT
5. 2017 OUTCOMES (continued)
2017 Variable Remuneration awarded
This table shows the VR awarded to the CEO and Disclosed Executives for the year ending 30 September 2017 and what this represents as a % of their
target opportunity and maximum opportunity.
The average variable remuneration awarded to the CEO and Disclosed Executives is 96% of target (64% of maximum) which is well aligned with the
Group performance assessment outcome.
Only the cash component will be received now, the deferred shares will vest over four years and the performance rights may or may not vest when
tested against the hurdles after three years.
Target opportunity
Maximum opportunity
S Elliott
AVR $2,000,000
(95% of target, 63% of max)
LTVR $2,100,000 performance rights face value at threshold vesting ($4,200,000 face value at full vesting) — subject to shareholder approval at the
2017 Annual General Meeting.
(100% of target)
M Carnegie VR $1,700,000
$1,000,000
$1,000,000
+
=
(85% of target, 57% of max)
$561,000
$561,000
$578,000
+
+
=
A George1
VR $913,000
(76% of target, 51% of max)
D Hisco
VR $2,200,550
(92% of target, 61% of max)
G Hodges
VR $2,220,000
(106% of target, 70% of max)
M Jablko
VR $2,240,000
(112% of target, 75% of max)
F Ohlsson
VR $1,620,000
(81% of target, 54% of max)
M Whelan
VR $3,275,000
(136% of target, 91% of max)
N Williams2 VR $1,900,000
(83% of target, 55% of max)
=
=
=
=
=
=
=
$301,290
+
$301,290
+
$310,420
$726,181
$732,600
$739,200
+
+
+
$726,181
+
$748,187
$732,600
$739,200
+
+
$754,800
$761,600
$534,600
+
$534,600
+
$550,800
$1,080,750
+
$1,080,750
+
$1,113,500
$627,000
+
$627,000
+
$646,000
Cash
Deferred shares or deferred share rights
Performance rights face value at threshold vesting3
1.
Remuneration disclosed from commencement in Disclosed Executive role.
2. As CRO, receives deferred share rights instead of performance rights.
3. Multiply by two to convert to face value at full vesting.
2017 Actual Remuneration received
This table shows the remuneration actually received by the CEO and current Disclosed Executives in relation to the 2017 performance year as cash,
or in the case of prior equity awards, the value which vested in 2017. The final column also shows the value of prior equity awards which lapsed
in 2017 (these awards reflect the 2013 performance rights which failed to meet the performance hurdles when tested in November 2016).
Only the cash component of the 2017 VR award appears in this table, as the other components are deferred and may/may not vest in future years.
Fixed
remuneration
$
Cash
variable
remuneration
$
CEO and Current Disclosed Executives
S Elliott
M Carnegie
A George2
D Hisco3
G Hodges
M Jablko
F Ohlsson
M Whelan
N Williams
2,100,000
1,000,000
664,000
1,195,013
1,050,000
1,000,000
1,000,000
1,200,000
1,350,000
1,000,000
561,000
301,290
726,181
732,600
739,200
534,600
1,080,750
627,000
Deferred variable
remuneration
which vested
during the year1
$
Other deferred
remuneration
which vested
during the year1
$
Total
cash
$
Deferred variable
remuneration
which lapsed/
forfeited during
the year1
$
Actual
remuneration
received
$
3,100,000
1,161,588
1,561,000
965,290
1,921,194
1,782,600
1,739,200
1,534,600
2,280,750
1,977,000
-
-
1,102,772
677,607
-
2,783,169
250,000
-
-
-
1,004,553
694,592
1,154,038
1,621,508
-
-
-
4,261,588
4,344,169
1,215,290
3,023,966
2,460,207
2,743,753
2,229,192
3,434,788
3,598,508
(1,929,199)
-
-
(1,348,887)
(964,586)
-
(254,839)
(385,812)
-
1. The point in time value of previously deferred remuneration granted as shares/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 or lapsing/forfeiture multiplied by the number of shares/share rights and/or performance rights. The amount paid as deferred cash is the value included.
2. Remuneration disclosed from commencement in Disclosed Executive role (1 December 2016).
3. Paid in NZD and converted to AUD.
This table supplements, and is different to, the Statutory Remuneration table which presents the accounting expense for both vested and
unvested awards in accordance with the Australian Accounting Standards.
49
REMUNERATION REPORT
REMUNERATION REPORT (continued)
5. 2017 OUTCOMES (continued)
2017 Statutory Remuneration — CEO and Disclosed Executives
The following table outlines the statutory remuneration disclosed in accordance with the Australian Accounting Standards.
Short-Term Employee Benefits
Post-Employment
Financial
Year
Cash salary1
$
Non monetary
benefits2
$
Total cash
incentive3
$
Other cash
$
Super
contributions
$
Retirement
benefit accrued
during year4
$
CEO and Current Disclosed Executives
S Elliott
M Carnegie7
A George8
D Hisco9, 10
G Hodges
M Jablko11
F Ohlsson10, 12
M Whelan13
N Williams
2017
2016
2017
2016
2017
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
1,917,808
1,723,744
913,242
237,443
614,521
16,995
17,110
29,920
7,072
22,468
1,195,013
465,103
1,186,570
472,574
958,904
958,904
913,242
182,648
913,242
602,740
17,753
17,110
15,515
-
46,848
30,072
1,000,000
775,000
561,000
132,000
301,290
726,181
725,969
732,600
589,050
739,200
132,000
534,600
279,873
1,095,890
11,995
1,080,750
1,064,840
1,232,877
1,232,877
11,610
19,359
19,707
750,750
627,000
709,500
Former Disclosed Executive
A Currie14
2017
2016
753,425
966,077
192,565
17,110
-
495,000
-
-
100,000
736,000
250,000
-
-
-
-
268,082
-
-
-
-
-
-
-
-
-
182,192
163,756
87,258
22,557
58,107
-
-
91,096
91,096
87,258
17,352
86,758
57,260
104,110
101,160
117,123
117,123
71,575
95,434
-
-
-
-
-
7,636
7,034
4,565
4,522
-
-
-
-
-
-
5,870
5,814
-
-
1. Cash salary includes any adjustments required to reflect the use of ANZ's Lifestyle Leave Policy.
2. Non monetary benefits generally consist of company-funded benefits such as car parking and taxation services.
3. The total cash incentive relates to the cash component only. The relevant amortisation of the AVR/VR deferred components is included in share-based payments and has been amortised over the
vesting period. The total AVR/VR was approved by the Board on 25 October 2017. 100% of the cash component of the AVR/VR awarded for the 2016 and 2017 years vested to the Disclosed Executive in
the applicable financial year.
4. Accrual relates to Retirement Allowance. As a result of being employed with ANZ before 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 three months of preserved notional salary (which is 65% of fixed remuneration)
plus an additional 3% of notional salary for each year of full-time service above 10 years less the total accrual value of long service leave (including taken and untaken).
5. As required by 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. 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 neither related to, nor indicative of, the benefit (if any) that the executive may ultimately realise if the equity becomes exercisable.
6. Termination benefits reflect payment for accrued annual leave, long service leave and pay in lieu of notice payable on termination.
7. M Carnegie commenced in a Disclosed Executive role on 27 June 2016, so 2016 remuneration reflects a partial service year. As part of M Carnegie's employment arrangement, she received $836,000
in cash (of which $736,000 was paid in 2016 and $100,000 was paid in 2017) and $3.264 million in deferred equity vesting from November 2016 to June 2018, as compensation for bonus opportunity
foregone and deferred remuneration forfeited (as disclosed in 2016).
50
ANZ 2017 ANNUAL REPORT Long-Term Employee
Benefits
Share-Based Payments5
Total amortisation value of
Variable remuneration
Other equity
allocations
Long service leave accrued
during the year
$
Shares
$
Share rights
$
Performance
rights
$
Shares
$
Termination
benefits6
$
Grand total
remuneration
$
31,819
1,105,401
113,522
1,211,322
15,152
225,446
3,985
14,282
15,405
262,448
-
-
-
-
-
1,380,645
1,065,203
-
-
177,089
2,794,880
10,496
689,853
120,594
-
21,319
19,566
15,910
16,203
15,152
3,113
15,152
68,843
18,182
51,210
20,455
20,511
-
-
554,318
607,475
281,374
11,486
669,039
757,389
865,109
-
-
-
-
788,989
610,999
587,186
221,998
952,292
8,340
181,983
162,978
299,530
331,818
-
333,975
827,073
950,540
-
-
600,960
867,287
757,057
918,106
163,593
661,203
442,551
-
-
-
212,661
343,775
504,180
16,713
538,038
151,198
783,998
533
710
-
-
533
469
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,634,860
5,069,657
4,903,987
1,853,688
1,644,833
3,842,213
4,066,521
2,986,145
2,871,546
3,494,113
536,922
2,391,459
1,536,825
3,799,203
3,372,661
3,490,931
3,780,695
563,015
2,641,196
-
3,063,568
8. A George commenced in a Disclosed Executive role on 1 December 2016, so 2017 remuneration reflects a partial service year. In relation to A George's role prior to her appointment to the Group
Executive Committee, in July 2016 the Board approved a cash retention award of $500,000 with partial vesting in June 2017 ($250,000) and December 2017 ($250,000).
9. D Hisco's fixed remuneration is paid in NZD and converted to AUD. The year-on-year difference in cash salary relates to fluctuations in the exchange rate.
10. D Hisco and F Ohlsson were eligible in 2016, to receive shares in relation to the Employee Share Offer. That offer provides a grant of ANZ shares in each financial year to eligible employees subject
to Board approval. Refer to Note 31 Employee Share and Option Plans for further details on the Employee Share Offer.
11. M Jablko commenced in a Disclosed Executive role on 18 July 2016, so 2016 remuneration reflects a partial service year. As part of M Jablko's employment arrangement, she received $268,082 in cash
and $1,657,082 in deferred equity vesting from November 2017 to February 2021, as compensation for bonus opportunity foregone and deferred remuneration forfeited (as disclosed in 2016).
12. F Ohlsson commenced in a Disclosed Executive role on 1 February 2016, so 2016 remuneration reflects amounts prorated for the partial service year.
13. M Whelan's fixed remuneration was adjusted in February 2016 when he changed Disclosed Executive roles. The year-on-year difference in cash salary and superannuation contribution reflects this change.
14. A Currie concluded in his role on 31 October 2016 and ceased employment on 1 July 2017. Statutory remuneration table reflects his remuneration up to his date of termination, 1 July 2017.
51
REMUNERATION REPORT
REMUNERATION REPORT (continued)
5. 2017 OUTCOMES (continued)
5.3 PERFORMANCE RIGHTS VESTING OUTCOMES
Performance rights granted to the CEO and Disclosed Executives (excluding the CRO) in November 2013 reached the end of their performance period
in November 2016.
Hurdle
Relative TSR — Select Financial Services
Comparator Group
Grant date
First date
exercisable
ANZ
TSR over
three years
Median
TSR over
three years
22-Nov-13
22-Nov-16
4.07%
18.01%
Relative TSR — ASX 50 Comparator Group
22-Nov-13
22-Nov-16
4.07%
19.14%
%
vested
0%
0%
Outcome
Performance
rights lapsed
Performance
rights lapsed
It is likely that the performance rights we awarded our executives in late 2014 will also lapse when we test them in November 2017.
6. NON-EXECUTIVE DIRECTOR (NED) REMUNERATION
The Board reviewed and determined not to increase NED fees for 2017.
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 serving on a Board Committee.
In setting Board and Committee fees consideration is given to: general industry practice; best principles of corporate governance; the responsibilities and risks
attached to the NED role; the time commitment expected of NEDs on Group and Company matters; and fees paid to NEDs of comparable companies.
ANZ compares NED fees to a comparator group of Australian listed companies with a similar 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 by NEDs.
This table shows the NED fee structure for 2017 (unchanged from 2016):
Board1
$825,000
$240,000
Audit
Committee
Risk
Committee
Human
Resources
Committee
Digital Business
& Technology
Committee
$65,000
$32,500
$62,000
$31,000
$57,000
$29,000
$35,000
$15,000
Environment,
Sustainability
& Governance
Committee
$35,000
$15,000
Chair fee
Member fee
1.
Including superannuation.
To maintain NED independence and impartiality:
• NED fees are not linked to the performance of the Group; and
• NEDs are not eligible to participate in any of the Group’s variable remuneration arrangements.
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.
We expect our NEDs to hold ANZ shares
NEDs are required:
• to accumulate shares — over a five year period from their appointment — to the value of 100% (200% for the Chairman) of the NED fee for a Board
member; and
• to maintain this shareholding while they are a Director of ANZ.
All NEDs have met — or, if appointed within the last five years, are on track to meet — their minimum shareholding requirement.
52
ANZ 2017 ANNUAL REPORT 6. NON-EXECUTIVE DIRECTOR (NED) REMUNERATION (continued)
2017 Statutory Remuneration — NEDs
Short-Term NED
Benefits
Current Non-Executive Directors
D Gonski
I Atlas
P Dwyer
J Halton3
H Lee
G Liebelt
J Macfarlane
Former Non-Executive Director
I Macfarlane4
Total of all Non-Executive Directors
Financial
Year
2017
2016
2017
2016
2017
2016
2017
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Fees1
$
805,276
805,615
317,776
297,115
345,276
345,615
241,063
315,276
315,615
343,151
338,615
298,776
299,115
68,225
330,115
2,734,819
2,731,805
Post-Employment
Super contributions1
Total remuneration2
$
$
19,724
19,385
19,724
19,385
19,724
19,385
18,894
19,724
19,385
19,724
19,385
19,724
19,385
4,904
19,385
142,142
135,695
825,000
825,000
337,500
316,500
365,000
365,000
259,957
335,000
335,000
362,875
358,000
318,500
318,500
73,129
349,500
2,876,961
2,867,500
1. Year-on-year differences in fees relate to changes in Committee memberships and changes to the superannuation maximum contribution base.
2. Long-term benefits and share-based payments do not apply for the Non-Executive Directors. There were no non monetary benefits or termination benefits for the Non-Executive Directors in either
2016 or 2017.
J Halton commenced as a Non-Executive Director on 21 October 2016, so 2017 remuneration reflects a partial service year.
I Macfarlane retired as a NED on 16 December 2016. Statutory remuneration table reflects his expense up to his date of retirement.
3.
4.
7. REMUNERATION GOVERNANCE
7.1 THE HUMAN RESOURCES (HR) COMMITTEE
Role The HR Committee supports the Board on remuneration and other HR matters. They review the remuneration policies and practices of the
Group, monitor market practice and also regulatory and compliance requirements in Australia and overseas.
The HR Committee has a strong focus on the relationship between business performance, risk management and remuneration. During the year the
HR Committee met on four occasions and reviewed and approved or made recommendations to the Board on matters including:
• remuneration for the CEO and other key executives (broader than those disclosed in the Remuneration Report) covered by the ANZ
Remuneration Policy;
• the design of significant variable remuneration plans — for example: the ANZIP;
• the Group performance framework (objectives setting and assessment) and annual variable remuneration spend;
• performance and reward outcomes for key senior executives;
• key senior executive appointments and terminations;
• the effectiveness of the ANZ Remuneration Policy;
• succession plans for key senior executives; and
• diversity and inclusion, employee engagement, and health and safety.
More details about the role of the HR Committee, including its Charter, can be found on our website. Go to anz.com > about us > our company >
corporate governance > ANZ Human Resources Committee Charter.
53
REMUNERATION REPORT
REMUNERATION REPORT (continued)
7. REMUNERATION GOVERNANCE (continued)
Link between remuneration and risk To further reflect the importance of the link between remuneration and risk:
• the Board had two NEDs in 2017 (increasing to three in 2018) who serve on both the HR Committee and the Risk Committee;
• the HR Committee has free and unfettered access to risk and financial control personnel; and
• the HR Committee can engage independent external advisors as needed.
External advisors provided information but not recommendations Throughout the year, the HR Committee and management
received information from the following external providers: Aon Hewitt, Ashurst, Ernst & Young, Mercer Consulting (Australia) Pty Ltd and
PricewaterhouseCoopers. This information related to market data, market practices, legislative requirements and the interpretation of governance
and regulatory requirements.
During the year, the HR Committee did not receive any remuneration recommendations from consultants about the remuneration of KMP.
ANZ employs in-house remuneration professionals who provide recommendations to the HR Committee and the Board. When doing so, they consider
market information provided by external providers. The Board made its decisions independently, using the information provided and with careful
regard to ANZ’s strategic objectives, risk appetite and the ANZ Remuneration Policy and principles.
7.2 INTERNAL GOVERNANCE
Hedging prohibition
All deferred equity must remain at risk until it has fully vested. Accordingly, executives and their associated persons must not enter into any schemes
that specifically protect the unvested value of equity allocated. If they do so, then they forfeit the relevant equity.
Shareholding guidelines
We expect the CEO and each Disclosed Executive to, over a five year period:
• accumulate ANZ shares to the value of 200% of their fixed remuneration; and
• maintain this shareholding level while they are an executive of ANZ.
For this purpose, shareholdings include all vested, and unvested, equity that is not subject to performance hurdles.
Based on equity holdings as at 30 September 2017, the CEO and all Disclosed Executives:
• who have been with us for at least five years, meet this requirement; and
• who have been with us for less than five years, are on track to meet it.
CEO and Disclosed Executives’ Contract Terms and equity treatment
The details of the contract terms and also the equity treatment on termination (in accordance with the Conditions of Grant) relating to the CEO and
Disclosed Executives are below. Although they are similar, they vary in some cases to suit different circumstances.
Type of contract
Permanent ongoing employment contract.
Notice on resignation
• 12 months’ by CEO;
• 6 months’ by Disclosed Executives.
Notice on termination by ANZ
• 12 months’ by ANZ.
However, ANZ may immediately terminate an individual’s employment at any time in the case of serious
misconduct. In that case, the individual will be entitled only to payment of fixed remuneration up to the
date of termination.
How unvested equity is treated
on leaving ANZ
Executives who resign or are terminated will forfeit all their unvested deferred equity — unless the Board
determines otherwise.
Where an executive is terminated due to redundancy or they are classified as a 'good leaver', then:
• their deferred shares/rights are released at the original vesting date; and
• their performance rights1 are prorated for service to the full notice termination date and released
at the original vesting date (if performance hurdles are met).
On an executive’s death or total and permanent disablement, their deferred equity vests.
Change of control
(applicable for the CEO only)
If a change of control or other similar event occurs, then we will test the performance conditions applying to
the CEO’s performance rights. They will vest to the extent that the performance conditions are satisfied.
1. Or deferred share rights granted to the CRO instead of performance rights.
54
ANZ 2017 ANNUAL REPORT 8. OTHER INFORMATION
8.1 EQUITY HOLDINGS
For the equity granted to the CEO and Disclosed Executives in November/December 2016, all deferred shares were purchased on the market.
For deferred share rights and performance rights, we will determine our approach to satisfying awards closer to the time of vesting.
The table below sets out details of deferred shares and rights that we granted to the CEO and Disclosed Executives:
• during the 2017 year; or
• in prior years and that then vested, were exercised/sold or which lapsed/were forfeited during the 2017 year.
CEO and Disclosed Executives equity granted, vested, exercised/sold and lapsed/forfeited
Type
of
equity
Name
Equity fair
value at
grant
(for 2017
grants
only) $
Number
granted1
First
date
exercis-
able
Date
of
expiry
Grant
date
Vested
Lapsed/
Forfeited
Exercised/Sold
Value2
Value2
Number %
$ Number %
$ Number %
Value2
$
Vested
and exer-
cisable
as at
30 Sep
20173
Unexer-
cisable
as at
30 Sep
20174
CEO and Current Disclosed Executives
S Elliott
Deferred shares
Deferred shares
18,814
22,796
21-Nov-14 21-Nov-16
-
18,814 100 524,399
18-Nov-15 18-Nov-16
-
22,796 100 637,189
Deferred shares
6,941
27.98 22-Nov-16 22-Nov-17
Deferred shares
6,941
27.98 22-Nov-16 22-Nov-18
Deferred shares
6,941
27.98 22-Nov-16 22-Nov-19
Deferred shares
6,941
27.98 22-Nov-16 22-Nov-20
-
-
-
-
Performance rights
36,049
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
32,916
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
112,862
14.01 16-Dec-16 16-Dec-19 16-Dec-21
Performance rights
37,620
12.28 16-Dec-16 16-Dec-19 16-Dec-21
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
M Carnegie Deferred shares
24,247
20-Aug-16 21-Nov-16
-
24,247 100 675,832
Deferred shares
24,336
20-Aug-16 01-Jun-17
-
24,336 100 680,040
Deferred shares
24,292
20-Aug-16 27-Feb-17
-
24,292 100 749,102
Deferred shares
19,336
20-Aug-16 20-Aug-17
-
19,336 100 578,195
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-17
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-18
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-19
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-20
-
-
-
-
Performance rights
7,309
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
2,436
10.38 22-Nov-16 22-Nov-19 22-Nov-21
A George5
D Hisco
Deferred shares
7,000
31-Oct-08 31-Oct-11
Employee Share Offer
25
04-Dec-13 04-Dec-16
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25 100
714
Deferred share rights
18,370
21-Nov-14 21-Nov-16 21-Nov-18 18,370 100 512,023
Deferred share rights
21,109
18-Nov-15 18-Nov-16 18-Nov-18 21,109 100 590,035
Deferred share rights
6,935
26.17 22-Nov-16 22-Nov-17 22-Nov-19
Deferred share rights
7,386
24.57 22-Nov-16 22-Nov-18 22-Nov-20
Deferred share rights
7,867
23.07 22-Nov-16 22-Nov-19 22-Nov-21
Deferred share rights
8,379
21.66 22-Nov-16 22-Nov-20 22-Nov-22
Performance rights
25,205
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
23,015
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
40,198
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
13,399
10.38 22-Nov-16 22-Nov-19 22-Nov-21
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(25,205) 100
(705,075)
-
(23,015) 100
(643,812)
-
-
-
-
-
-
-
-
-
(36,049) 100 (1,008,420)
-
(32,916) 100
(920,779)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (18,814) 100 541,100
- (22,796) 100 655,624
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (24,247) 100 731,900
- (24,300) 100 698,316
- (24,292) 100 767,620
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,941
6,941
6,941
6,941
-
-
- 112,862
-
-
36
-
19,336
37,620
-
-
-
-
-
-
-
-
-
-
1,182
1,182
1,182
1,182
7,309
2,436
-
(7,000) 100 211,871
-
-
-
-
-
25
- (18,370) 100 580,486
- (21,109) 100 667,038
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,935
7,386
7,867
8,379
-
-
40,198
13,399
55
REMUNERATION REPORT
REMUNERATION REPORT (continued)
8. OTHER INFORMATION (continued)
CEO and Disclosed Executives equity granted, vested, exercised/sold and lapsed/forfeited
Type
of
equity
Name
Equity fair
value at
grant
(for 2017
grants
only) $
Number
granted1
First
date
exercis-
able
Date
of
expiry
Grant
date
Vested
Lapsed/
Forfeited
Exercised/Sold
Value2
Value2
Number %
$ Number %
$ Number %
Value2
$
Vested
and exer-
cisable
as at
30 Sep
20173
Unexer-
cisable
as at
30 Sep
20174
CEO and Current Disclosed Executives
G Hodges Deferred shares
Deferred shares
Deferred shares
Deferred shares
11,102
9,055
10,975
13,298
12-Nov-12 12-Nov-13
22-Nov-13 22-Nov-14
-
-
-
-
-
-
-
-
21-Nov-14 21-Nov-16
-
10,975 100 305,904
18-Nov-15 18-Nov-16
-
13,298 100 371,703
Deferred shares
5,276
27.98 22-Nov-16 22-Nov-17
Deferred shares
5,276
27.98 22-Nov-16 22-Nov-18
Deferred shares
5,276
27.98 22-Nov-16 22-Nov-19
Deferred shares
5,276
27.98 22-Nov-16 22-Nov-20
-
-
-
-
Performance rights
18,024
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
16,458
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
32,617
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
10,872
10.38 22-Nov-16 22-Nov-19 22-Nov-21
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
M Jablko Deferred shares
20,825
20-Aug-16 27-Feb-17
-
20,825 100 642,189
Deferred shares
3,153
20-Aug-16 20-Aug-17
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-17
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-18
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-19
Deferred shares
1,182
27.98 22-Nov-16 22-Nov-20
-
-
-
-
-
Performance rights
7,309
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
2,436
10.38 22-Nov-16 22-Nov-19 22-Nov-21
3,153 100
94,283
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
F Ohlsson Employee Share Offer
25
04-Dec-13 04-Dec-16
-
25 100
714
Deferred share rights
7,361
22-Nov-13 22-Nov-16 21-Nov-18
7,361 100 205,914
Deferred share rights
4,861
22-Nov-13 22-Nov-16 21-Nov-18
4,861 100 135,980
Deferred share rights
4,406
21-Nov-14 21-Nov-16 21-Nov-18
4,406 100 122,808
Deferred share rights
8,199
18 -Nov-15 18-Nov-16 18-Nov-18
8,199 100 229,177
Deferred share rights
4,050
26.17 22-Nov-16 22-Nov-17 29-Nov-17
Deferred share rights
4,314
24.57 22-Nov-16 22-Nov-18 29-Nov-18
Deferred share rights
4,595
23.07 22-Nov-16 22-Nov-19 29-Nov-19
Deferred share rights
4,894
21.66 22-Nov-16 22-Nov-20 29-Nov-20
Performance rights
4,762
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
4,348
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
23,480
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
7,826
10.38 22-Nov-16 22-Nov-19 22-Nov-21
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
56
-
(18,024) 100
(504,196)
-
(16,458) 100
(460,390)
- (20,825) 100 646,941
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (11,102) 100 332,567
-
(9,055) 100 271,248
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,975
13,298
-
-
-
-
-
-
-
-
-
3,153
-
-
-
-
-
-
25
7,361
4,861
4,406
8,199
-
-
-
-
5,276
5,276
5,276
5,276
-
-
32,617
10,872
-
-
1,182
1,182
1,182
1,182
7,309
2,436
-
-
-
-
-
-
-
-
-
-
-
-
-
4,050
4,314
4,595
4,894
-
-
23,480
7,826
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4,762) 100
(133,210)
(4,348) 100
(121,629)
-
-
-
-
-
-
ANZ 2017 ANNUAL REPORT 8. OTHER INFORMATION (continued)
CEO and Disclosed Executives equity granted, vested, exercised/sold and lapsed/forfeited
Type
of
equity
Name
Equity fair
value at
grant
(for 2017
grants
only) $
Number
granted1
First
date
exercis-
able
Date
of
expiry
Grant
date
Vested
Lapsed/
Forfeited
Exercised/Sold
Value2
Value2
Number %
$ Number %
$ Number %
Value2
$
Vested
and exer-
cisable
as at
30 Sep
20173
Unexer-
cisable
as at
30 Sep
20174
CEO and Current Disclosed Executives
M Whelan Deferred shares
46,565
31-Oct-08 31-Oct-11
Deferred shares
Deferred shares
Deferred shares
6,299
9,448
9,407
22-Nov-13 22-Nov-16
22-Nov-13 22-Nov-16
21-Nov-14 21-Nov-16
-
-
-
-
-
-
-
6,299 100 176,206
9,448 100 264,295
9,407 100 262,199
Deferred shares
16,147
18-Nov-15 18-Nov-16
-
16,147 100 451,338
Deferred shares
6,724
27.98 22-Nov-16 22-Nov-17
Deferred shares
6,724
27.98 22-Nov-16 22-Nov-18
Deferred shares
6,724
27.98 22-Nov-16 22-Nov-19
Deferred shares
6,724
27.98 22-Nov-16 22-Nov-20
-
-
-
-
Performance rights
7,209
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
6,583
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
41,571
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
13,857
10.38 22-Nov-16 22-Nov-19 22-Nov-21
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
N Williams Deferred shares
13,327
21-Nov-14 21-Nov-16
-
13,327 100 371,461
Deferred shares
17,097
18-Nov-15 18-Nov-16
-
17,097 100 477,892
Deferred shares
6,355
27.98 22-Nov-16 22-Nov-17
Deferred shares
6,355
27.98 22-Nov-16 22-Nov-18
Deferred shares
6,355
27.98 22-Nov-16 22-Nov-19
Deferred shares
6,355
27.98 22-Nov-16 22-Nov-20
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Deferred share rights
27,603
22-Nov-13 22-Nov-16 21-Nov-18 27,603 100 772,155
Deferred share rights
31,686
23.07 22-Nov-16 22-Nov-19 29-Nov-19
-
-
-
Former Disclosed Executive
A Currie6 Deferred shares
13,327
21-Nov-14 21-Nov-16
-
13,327 100 371,461
Deferred shares
17,097
18-Nov-15 18-Nov-16
-
17,097 100 477,892
-
-
-
-
Deferred share rights
4,728
26.17 22-Nov-16 22-Nov-17 29-Nov-17
Deferred share rights
5,036
24.57 22-Nov-16 22-Nov-18 29-Nov-18
Deferred share rights
5,364
23.07 22-Nov-16 22-Nov-19 29-Nov-19
Deferred share rights
5,713
21.66 22-Nov-16 22-Nov-20 29-Nov-20
Performance rights
27,036
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
24,687
22-Nov-13 22-Nov-16 21-Nov-18
Performance rights
26,334
21-Nov-14 21-Nov-17 21-Nov-19
Performance rights
24,240
21-Nov-14 21-Nov-17 21-Nov-19
Performance rights
18,996
18-Nov-15 18-Nov-18 18-Nov-20
Performance rights
18,996
18-Nov-15 18-Nov-18 18-Nov-20
Performance rights
18,996
18-Nov-15 18-Nov-18 18-Nov-20
Performance rights
27,409
14.14 22-Nov-16 22-Nov-19 22-Nov-21
Performance rights
9,136
10.38 22-Nov-16 22-Nov-19 22-Nov-21
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(27,036) 100
(756,294)
-
(24,687) 100
(690,584)
-
-
-
-
-
(505)
(465)
2
2
(14,496)
(13,347)
(6,639)
35
(190,567)
(6,639)
35
(190,567)
(6,639)
35
(190,567)
-
(18,824)
69
(540,326)
-
(6,275)
69
(180,118)
(7,209) 100
(201,662)
(6,583) 100
(184,150)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (46,565) 100 1,337,445
-
(6,299) 100 177,367
-
(9,448) 100 266,037
-
(9,407) 100 264,882
- (16,147) 100 454,667
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (13,327) 100 398,477
- (17,097) 100 511,200
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- (27,603) 100 825,330
-
-
-
-
- (13,327) 100 375,262
- (17,097) 100 481,417
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,724
6,724
6,724
6,724
-
-
41,571
13,857
-
-
6,355
6,355
6,355
6,355
-
31,686
-
-
4,728
5,036
5,364
5,713
-
-
25,829
23,775
12,357
12,357
12,357
8,585
2,861
57
REMUNERATION REPORT
REMUNERATION REPORT (continued)
8. OTHER INFORMATION (continued)
CEO and Disclosed Executives equity granted, vested, exercised/sold and lapsed/forfeited
1. Executives, for the purpose of the five highest paid executive disclosures, are defined as Disclosed Executives or other members of the Group Executive Committee. For the 2017 financial year the
five highest paid executives include four Disclosed Executives and the Group Executive, International (F Faruqui). Rights granted to Disclosed Executives as remuneration in 2017 are included in the
table. Rights granted to F Faruqui as remuneration in 2017 include four tranches of deferred share rights and two tranches of performance rights granted on 22 Nov 2016. (6,935 (tranche 1) deferred
share rights first exercisable 22 Nov 2017, expiring 29 Nov 2017; 7,387 (tranche 2) deferred share rights first exercisable 22 Nov 2018, expiring 29 Nov 2018; 7,867 (tranche 3) deferred share rights first
exercisable 22 Nov 2019, expiring 29 Nov 2019; 8,379 (tranche 4) deferred share rights first exercisable 22 Nov 2020, expiring 29 Nov 2020; 40,202 (tranche 1) and 13,400 (tranche 2) performance rights
first exercisable 22 Nov 2019 subject to meeting performance hurdles, expiring 22 Nov 2021). No rights have been granted to the CEO, Disclosed Executives or the five highest paid executives since the
end of 2017 up to the Directors' Report sign-off date.
The point in time value of shares/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/forfeiture or exercising/
sale/transfer out of trust, multiplied by the number of shares/share rights and/or performance rights. The exercise price for all share rights/performance rights is $0.00.
2.
3. The number vested and exercisable is the number of shares, options and rights that remain vested at the end of the reporting period. No shares, options and rights were vested and
unexercisable.
4. Performance rights granted in prior years (by grant date) that remained unexerciseable at 30 Sep 2017 include:
S Elliott
M Carnegie
A George
D Hisco
G Hodges
M Jablko
F Ohlsson
M Whelan
N Williams
A Currie
Nov-16
150,482
9,745
4,738
53,597
43,489
9,745
31,306
55,428
-
11,446
5. Equity disclosed from commencement in Disclosed Executive role. There are no disclosable transactions since commencement.
6. Equity transactions disclosed up to termination date.
Nov-15
159,573
-
5,772
53,133
37,992
-
10,910
53,190
-
37,071
Nov-14
53,945
-
5,225
47,152
33,716
-
13,798
13,486
-
49,604
NED, CEO and Disclosed Executives equity holdings
The table below sets out details of equity held directly, indirectly or beneficially by each NED, the CEO and each Disclosed Executive, including their
related parties.
Opening balance
at 1 Oct 2016
Granted during
the year as
remuneration1
Received during
the year on
exercise of
options or rights
Resulting from
any other
changes during
the year2
Closing
balance at
30 Sep 20173, 4
31,488
7,360
15,000
-
2,382
8,000
10,315
1,500
2,500
12,851
2,000
5,000
66,482
87,993
282,483
144,420
14
-
-
-
-
-
-
-
-
-
-
-
-
-
27,764
-
150,482
4,728
-
9,745
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,830
136
-
10,000
-
-
5,000
-
-
(40,340)
43,686
(68,965)
(69,063)
-
-
31,488
7,360
15,000
2,830
2,518
8,000
20,315
1,500
2,500
17,851
2,000
5,000
53,906
131,679
364,000
80,085
14
9,745
Name
Type
Current Non-Executive Directors
D Gonski
I Atlas
P Dwyer
J Halton5
H Lee
G Liebelt
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Directors' Share Plan
Ordinary shares
Ordinary shares
Capital notes 1
Capital notes 2
J Macfarlane
Ordinary shares
Capital notes 2
Capital notes 3
CEO and Current Disclosed Executives
S Elliott
Deferred shares
Ordinary shares
Performance rights
M Carnegie
Deferred shares
Ordinary shares
Performance rights
58
ANZ 2017 ANNUAL REPORT
8. OTHER INFORMATION (continued)
NED, CEO and Disclosed Executive equity holdings
Name
Type
CEO and Current Disclosed Executives
A George5
Deferred shares
Ordinary shares
Capital notes 1
Performance rights
D Hisco
Deferred shares
G Hodges
Employee Share Offer
Ordinary shares
Deferred share rights
Performance rights
Deferred shares
Capital notes 4
Ordinary shares
Performance rights
M Jablko
Deferred shares
Performance rights
F Ohlsson
Employee Share Offer
Deferred share rights
Performance rights
M Whelan
Deferred shares
N Williams
Performance rights
Deferred shares
Ordinary shares
Deferred share rights
Former Non-Executive Director
I Macfarlane6
Ordinary shares
Capital notes 1
Capital notes 4
Convertible preference shares
(CPS3)
Former Disclosed Executive
A Currie6
Deferred shares
Ordinary shares
Deferred share rights
Performance rights
Opening balance
at 1 Oct 2016
Granted during
the year as
remuneration1
Received during
the year on
exercise of
options or rights
Resulting from
any other
changes during
the year2
Closing
balance at
30 Sep 20173, 4
29,438
2,678
802
15,735
7,000
74
211,178
61,906
148,505
208,692
1,350
70,639
106,190
62,176
-
74
45,718
33,818
112,715
80,468
50,525
-
88,920
18,183
1,500
1,000
1,000
50,463
1,042
-
159,285
-
-
-
-
-
-
-
30,567
53,597
21,104
-
-
43,489
4,728
9,745
-
17,853
31,306
26,896
55,428
25,420
-
31,686
-
-
-
-
-
-
20,841
36,545
-
-
-
-
-
-
39,479
(39,479)
-
-
-
-
-
-
-
-
-
-
-
-
-
27,603
(27,603)
-
-
-
-
-
-
-
-
1,188
-
-
-
(7,000)
-
(55,000)
-
(48,220)
(24,170)
-
-
(34,482)
(20,335)
-
-
-
(9,110)
(87,813)
(13,792)
(30,772)
(27,603)
-
-
-
500
-
(31,418)
-
-
(97,709)
30,626
2,678
802
15,735
-
74
195,657
52,994
153,882
205,626
1,350
70,639
115,197
46,569
9,745
74
63,571
56,014
51,798
122,104
45,173
-
93,003
18,183
1,500
1,500
1,000
19,045
1,042
20,841
98,121
1. Details of options/rights granted as remuneration during 2017 are provided in the previous table.
2. Shares resulting from any other changes during the year include the net result of any shares purchased (including under the ANZ Share Purchase Plan), forfeited, sold or acquired under the Dividend
Reinvestment Plan.
3. The following shares (included in the holdings above) were held on behalf of the NEDs, CEO and Disclosed Executives (i.e. indirect beneficially held shares) as at 30 September 2017: D Gonski - 31,488,
I Atlas - 7,360, P Dwyer - 15,000, J Halton - 0, H Lee - 2,518, G Liebelt - 24,315, J Macfarlane - 24,851, S Elliott - 185,585, M Carnegie - 80,085, A George - 34,106, D Hisco - 106,074, G Hodges - 249,711, M Jablko
- 46,569, F Ohlsson - 74, M Whelan - 51,798, N Williams - 45,173, I Macfarlane - 22,183 and A Currie - 19,045.
4. No options/rights were vested and exercisable as at 30 September 2017, except for 24,827 deferred share rights for F Ohlsson. No options/rights were vested and unexerciseable as at 30 September 2017.
There was no change in the balance as at the Directors' Report sign-off date, except for 188,638 ordinary shares for D Hisco.
5. Commencing balance is based on holdings as at the date of commencement in a KMP role.
6. Concluding balance is based on holdings as at the date of retirement/termination.
59
REMUNERATION REPORT
REMUNERATION REPORT (continued)
8. OTHER INFORMATION (continued)
8.2 LOANS
When we lend to NEDs, the CEO or Disclosed Executives, we do so: in the ordinary course of business; and on normal commercial terms and
conditions that are no more favourable than those given to other employees or customers — this includes the term of the loan, the security required
and the interest rate.
The table below sets out details of loans outstanding, to NEDs, the CEO and Disclosed Executives including their related parties, if — at any time
during the year — the individual’s aggregate loan balance exceeded $100,000.
Other than the loans disclosed below, no other loans were made, guaranteed or secured by any entity in the Group to the NEDs, the CEO and
Disclosed Executives, including their related parties.
NED, CEO and Disclosed Executives loan transactions
Name
Current Non-Executive Directors
J Macfarlane
CEO and Current Disclosed Executives
S Elliott
A George
D Hisco
G Hodges
F Ohlsson
M Whelan
N Williams
Former Disclosed Executive
A Currie3
Total
Opening
balance at
1 Oct 20161
$
Closing
balance at
30 Sep 2017
Interest paid
and payable in
the reporting
period2
Highest
balance in
the reporting
period
$
$
$
8,851,891
9,413,444
370,147
14,743,617
2,598,510
2,600,000
2,114,163
3,231,536
3,000,000
1,718,615
39,192
3,095,492
1,988,132
78,704
3,258,912
2,945,973
1,729,311
45,337
84,517
54,499
36,664
125,332
92,089
73,614
122
3,098,510
2,600,000
2,114,163
4,272,560
3,000,000
1,769,220
545,337
3,668,573
1,395,178
103,319
3,888,424
27,822,480
23,950,483
940,303
36,031,831
1. For KMP who commenced during the 2017 financial year, opening balances are as at date of commencement.
2. Actual interest paid after taking into consideration offset accounts. The loan balance is shown gross, however the interest paid takes into account the impact of offset amounts.
3. Concluding balance is based on balance as at the date of termination.
8.3 OTHER TRANSACTIONS
All other transactions involving the NEDs, the CEO and Disclosed Executives and their related parties are conducted on normal commercial terms
and conditions that are no more favourable than those given to other employees or customers. Any that are on foot, are trivial or domestic in nature.
60
ANZ 2017 ANNUAL REPORT REMUNERATION REPORT
ANZ Centre foyer
61
DIRECTORS'
REPORT
The Directors’ Report for the financial year ended 30 September 2017 has
been prepared in accordance with the requirements of the Corporations
Act 2001. The information below forms part of this Directors’ Report:
• Principal activities on page 11
• Operating and financial review on pages 14 to 23
• Dividends on page 17
• Information on the Directors, Company Secretaries and Directors’
meetings on pages 24 to 32
• Remuneration report on pages 36 to 61
Significant changes in state of affairs
There have been no significant changes in the Group’s state of affairs.
Events since the end of the financial year
On 17 October 2017, the Group announced it had agreed to sell OnePath
pensions and investments (OnePath P&I) and aligned dealer groups (ADG)
business to IOOF Holdings Limited (IOOF) for $975 million. Completion
is expected in March 2019 half subject to certain conditions including
regulatory approvals and the completion of the extraction of the OnePath
P&I business from OnePath Life Insurance. An expected accounting loss on
sale of ~$120 million is anticipated as a result of the sale, however the final
gain/loss on sale will be determined at completion and will be impacted
by transaction and separation costs, final determination of goodwill to be
disposed, other balances and final taxation impacts.
On 18 October 2017, the Group announced it had entered into an
agreement with its joint venture partner Metropolitan Bank & Trust
Company (Metrobank) regarding the sale of its 40% stake in the Philippines
based Metrobank Card Corporation (MCC). The Group has agreed to sell
one half of its 40% stake in MCC to Metrobank, for US$144 million
(A$184 million) expected to settle in late 2017. The Group also entered into
a put option to sell its remaining 20% stake to Metrobank, exercisable in the
September 2018 half on the same terms and for the same consideration.
If exercised, this would deliver a total sale price of US$288 million (A$368
million). The sale is subject to customary regulatory approvals.
On 23 October 2017, the Group announced it had reached a confidential
in-principle agreement with the Australian Securities and Investments
Commission (ASIC) to settle court action in respect of interbank trading
and the bank bill swap rate (BBSW). On 30 October 2017, ANZ informed
the Court that agreement with ASIC had been concluded. By consent
of ASIC and ANZ, the Court referred it for a hearing on penalty approval
on 10 November 2017. The financial impact to ANZ has been reflected
in the financial statements.
Other than the matters above, there have been no significant events
from 30 September 2017 to the date of signing this report.
Political donations
The Board has agreed that ANZ will donate $150,000 to each of the Liberal
Party of Australia and the Australian Labor Party during the 2017 calendar
year. All political donations are reviewed and approved by the Board, and
the matter is annually reviewed.
Environmental Regulation
ANZ recognises the expectations of its stakeholders – customers,
shareholders, staff and the community – to operate in a way that
mitigates its environmental impact.
In Australia, ANZ meets the requirements of the National Greenhouse
and Energy Reporting Act 2007 (Cth), which imposes reporting obligations
where energy production, usage or greenhouse gas emissions trigger
specified thresholds.
ANZ holds a licence under the Water Act 1989 (Vic), 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 ANZ fully complies.
The extraction of river water reduces reliance on the high quality potable
water supply and is one of several environmental initiatives that ANZ has
introduced at its Melbourne head office building.
The Group does not believe that its operations are subject to any particular
and significant environmental regulation under a law of the Commonwealth
of Australia or of an Australian State or Territory. It may become subject to
environmental regulation as a result of its lending activities in the ordinary
course of business and has developed policies to identify and manage such
environmental matters.
Having made due enquiry, and to the best of ANZ’s knowledge, no entity of
the Group has incurred any material environmental liability during the year.
Further details of ANZ’s environmental performance, including progress
against its targets and details of its emissions profile, are available on
anz.com>About us>Corporate Sustainability.
Corporate Governance Statement
ANZ is committed to maintaining a high standard in its governance
framework. ANZ confirms it has followed the ASX Corporate Governance
Council’s Corporate Governance Principles and Recommendations (3rd
edition) (ASX Governance Principles) during the 2017 financial year. ANZ’s
Corporate Governance Statement, together with the ASX Appendix 4G
which relates to the Corporate Governance Statement, can be viewed at
anz.com/CorporateGovernance and has been lodged with the ASX.
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. ANZ met those requirements during
the year.
The ASX Governance Principles may materially differ from the NZX’s corporate
governance rules and the principles of the NZX’s Corporate Governance Code.
More information about the corporate governance rules and principles of
the ASX can be found at asx.com and, in respect of the NZX, at nzx.com.
Pillar 3 information
ANZ provides information required by APS 330: Public Disclosure
in the Regulatory Disclosures section at shareholder.anz.com/pages/
regulatory-disclosure.
62
ANZ 2017 ANNUAL REPORT Non-audit services
The Group’s Stakeholder Engagement Model for Relationship with the
External Auditor (the Policy), which incorporates requirements of the
Corporations Act 2001 and industry best practice, prevents the external
auditor from providing services that are perceived to be in conflict with
the role of the external auditor or breach independence requirements.
This includes 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 Policy:
• limits the scope of non-audit services that may be provided;
• requires that audit, audit-related and permitted non-audit services
be considered in light of independence requirements and for any
potential conflicts of interest before they are approved by the
Audit Committee, or approved by the Chair of the Audit
Committee (or delegate) and notified to the Audit Committee; and
• requires pre-approval before the external auditor can commence
any engagement for the Group.
Further details about the Policy can be found in the Corporate
Governance Statement.
The external auditor has confirmed to the Audit Committee that it has:
• implemented procedures to ensure it complies with independence
rules in applicable jurisdictions, including Australia and the
United States; and
• complied with applicable policies and regulations regarding
the provision of non-audit services including those applicable
in Australia, those prescribed by the US Securities and Exchange
Commission, and the Policy.
The Audit Committee has reviewed the non-audit services provided by
the external auditor during financial year 2017, and has confirmed that
the provision of these services is consistent with the Policy, compatible
with the general standard of independence for auditors imposed by the
Corporations Act 2001 and did not compromise the auditor independence
requirements of the Corporations Act 2001. This has been formally advised
by the Audit Committee to the Board of Directors.
The categories of non-audit services supplied to the Group during the
year ended 30 September 2017 by the external auditor, KPMG, or by
another person or firm on KPMG’s behalf, and the amounts paid or
payable (including GST) by the Group are as follows:
Non-audit services
General market or regulatory insights
Training related services
Controls related assessments
Methodology and procedural reviews
Total
Amount paid/payable
$’000
2017
2016
91
8
165
478
742
-
368
137
52
557
Further details on the compensation paid to KPMG is provided in
Note 34 Compensation of Auditors to the financial statements including
details of audit-related services provided during the year of $6.17 million
(2016: $5.68 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 2017 is compatible with the general standard of
independence for external auditors imposed by the Corporations
Act 2001 and did not compromise the auditor independence
requirements of the Corporations Act 2001.
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 by an officer or employee, including liabilities incurred as a
result of appointment or nomination by the Company as a trustee
or as an officer or employee of another corporation; and
• make payments in respect of legal costs incurred by an officer or
employee in defending an action for a liability incurred as such by
an officer, employee or in resisting or responding to actions taken
by a government agency, a duly constituted Royal Commission
or other official inquiry, a liquidator, administrator, trustee in
bankruptcy or other authorised official.
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 and former
employees against any liability they incur to any third party as a result of
acting in the course of their employment with the Company or a subsidiary
of the Company and this extends to liability incurred as a result of their
appointment/nomination by or at the request of the Group as an officer
or employee of another corporation or body or as trustee.
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 indemnify them
against liabilities and legal costs of the kind mentioned in the Company’s
constitution. In accordance with Mr Elliott’s Deed, the Company has paid
legal expenses incurred by the Company, Mr Elliott and another executive
in defending defamation proceedings brought against them by a third
party. The proceedings have been resolved with no payment by the
Company on behalf of Mr Elliott or the other executive.
63
DIRECTORS’ REPORT DIRECTORS’ REPORT (continued)
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.
Key management personnel and employee share
and option plans
The Remuneration Report contains details of Non-executive Directors,
Chief Executive Officer and Disclosed Executives equity holdings
and options/rights issued during the 2017 financial year and as
at the date of this report.
Note 31 Employee Share and Option Plans to the 2017 Financial Report
contains details of the 2017 financial year and as at the date of this report:
• Options/rights issued over shares granted to employees;
• Shares issued as a result of the exercise of options/rights
granted to employees; and
• Other details about share options/rights issued, including
any rights to participate in any share issues of the Company.
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.
Rounding of amounts
The Company is a company of the kind referred to in Australian Securities
and Investments Commission Corporations (Rounding in Financial/
Directors’ Reports) Instrument 2016/191 dated 24 March 2016 and, in
accordance with that Instrument, amounts in the consolidated financial
statements and this Directors’ Report have been rounded to the nearest
million dollars unless specifically stated otherwise.
This report is made in accordance with a resolution of the Board
of Directors and is signed for and on behalf of the Directors.
David M Gonski, AC
Chairman
Shayne Elliott
Director
2 November 2017
Lead Auditor’s Independence Declaration
The Lead Auditors Independence Declaration given under Section 307C
of the Corporations Act 2001 is set out below and forms part of the
Directors Report for the year ended 30 September 2017.
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 2017, there have been:
• no contraventions of the auditor independence requirements as
set out in the Corporations Act 2001 in relation to the audit; and
• no contraventions of any applicable code of professional
conduct in relation to the audit.
KPMG
2 November 2017
Alison Kitchen
Partner
64
ANZ 2017 ANNUAL REPORT
FINANCIAL
REPORT
In 2017, we have re-designed our Financial
Report to better communicate our performance
to stakeholders by reducing complexity
and simplifying our financial note disclosures.
Consolidated Financial Statements
Income Statement
Statement of Comprehensive Income
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity
66
67
68
69
70
Notes to The Consolidated Financial Statements
Basis of Preparation
1. About our Financial Statements
71
Non-Financial Assets
20. Goodwill and Other Intangible Assets
Financial Performance
2. Operating Income
3. Operating Expenses
Income Tax
4.
5. Dividends
6. Earnings per Ordinary Share
7. Segment Reporting
Financial Assets
8. Cash and Cash Equivalents
9. Trading Securities
10. Derivative Financial Instruments
11. Available-for-sale Assets
12. Net Loans and Advances
13. Provision for Credit Impairment
Financial Liabilities
14. Deposits and Other Borrowings
15. Debt Issuances
Financial Instrument Disclosures
16. Financial Risk Management
17. Fair Value of Financial Assets and Financial Liabilities
18. Assets Charged as Security for Liabilities and Collateral
Accepted as Security for Assets
19. Offsetting
75
78
79
81
82
83
85
86
87
91
93
94
96
97
102
116
121
122
Equity
21. Shareholders’ Equity
22. Capital Management
Consolidation and Presentation
23. Parent Entity Financial Information
24. Controlled Entities
25. Investments in Associates
26. Structured Entities
27. Transfers of Financial Assets
28. Assets and Liabilities Held For Sale
Life Insurance and Funds Management Business
29. Life Insurance Business
Employee and Related Party Transactions
30. Superannuation and Post Employment Benefit Obligations
31. Employee Share and Option Plans
32. Related Party Disclosures
123
125
127
129
130
131
134
137
138
140
143
144
148
Other Disclosures
33. Commitments, Contingent Liabilities and Contingent Assets 150
153
34. Compensation of Auditors
154
35. Events Since the End of the Financial Year
Directors’ Declaration
Independent Auditor’s Report
155
156
65
FINANCIAL REPORT
INCOME STATEMENT
For the year ended 30 September
Note
Interest income
Interest expense
Net interest income
Other operating income1
Net funds management and insurance income
Share of associates’ profit
Operating income
Operating expenses1
Profit before credit impairment and income tax
Credit impairment charge
Profit before income tax
Income tax expense
Profit for the year
Comprising:
Profit attributable to shareholders of the Company
Profit attributable to non-controlling interests
Earnings per ordinary share (cents)
Basic
Diluted
Dividend per ordinary share (cents)
2
2
2
2
3
13
4
6
6
5
2017
$m
29,120
(14,248)
14,872
3,601
1,500
300
20,273
(9,448)
10,825
(1,198)
9,627
(3,206)
6,421
6,406
15
220.1
210.8
160.0
2016
$m
29,951
(14,856)
15,095
3,146
1,764
541
20,546
(10,439)
10,107
(1,929)
8,178
(2,458)
5,720
5,709
11
197.4
189.3
160.0
1.
In 2017, a change was made to the classification of certain fees payable. These items have been reclassified from other operating income to operating expenses to more accurately reflect the nature
of these items. Comparatives have been restated accordingly (2016: $17 million).
The notes appearing on pages 71 to 154 form an integral part of these financial statements.
66
ANZ 2017 ANNUAL REPORT STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September
Profit for the year
Other comprehensive income
FINANCIAL REPORT
2017
$m
6,421
2016
$m
5,720
Items that will not be reclassified subsequently to profit or loss
26
(82)
Items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve:
Exchange differences taken to equity1
Exchange differences transferred to Income Statement
Other reserve movements
Income tax attributable to the above items
Share of associates’ other comprehensive income2
Other comprehensive income net of tax
Total comprehensive income for the year
Comprising total comprehensive income attributable to:
Shareholders of the Company
Non-controlling interests
(748)
-
(339)
20
1
(1,040)
5,381
5,372
9
(456)
(126)
75
-
4
(585)
5,135
5,131
4
1.
Includes foreign currency translation differences attributable to non-controlling interests of $6 million loss (2016: $7 million loss).
2. Share of associates’ other comprehensive income includes an available-for-sale revaluation reserve loss of $1 million (2016: $10 million gain) and a foreign currency translation reserve gain of $2 million
(2016: $nil) that may be reclassified subsequently to profit or loss, and the remeasurement of defined benefit plans of $nil (2016: $6 million loss) that will not be reclassified subsequently to profit or loss.
The notes appearing on pages 71 to 154 form an integral part of these financial statements.
67
FINANCIAL REPORT (continued)
BALANCE SHEET
As at 30 September
Assets
Cash and cash equivalents
Settlement balances owed to ANZ
Collateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Regulatory deposits
Assets held for sale
Investments in associates
Current tax assets
Deferred tax assets
Goodwill and other intangible assets
Investments backing policy liabilities
Premises and equipment
Other assets
Total assets
Liabilities
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Derivative financial instruments
Current tax liabilities
Deferred tax liabilities
Liabilities held for sale
Policy liabilities
External unit holder liabilities (life insurance funds)
Payables and other liabilities
Employee entitlements
Other provisions
Debt issuances
Total liabilities
Net assets
Shareholders' equity
Ordinary share capital
Reserves
Retained earnings
Share capital and reserves attributable to shareholders of the Company
Non-controlling interests
Total shareholders' equity
The notes appearing on pages 71 to 154 form an integral part of these financial statements.
68
Note
8
9
10
11
12
28
25
20
29
14
10
28
29
15
21
21
21
21
2017
$m
68,048
5,504
8,987
43,605
62,518
69,384
574,331
2,015
7,970
2,248
30
675
6,970
37,964
1,965
5,112
2016
$m
66,220
4,406
12,723
47,188
87,496
63,113
575,852
2,296
-
4,272
126
623
7,672
35,656
2,205
5,021
897,326
914,869
9,914
5,919
595,611
62,252
241
257
4,693
37,448
4,435
8,350
530
628
107,973
838,251
59,075
29,088
37
29,834
58,959
116
59,075
10,625
6,386
588,195
88,725
188
227
-
36,145
3,333
8,865
543
666
113,044
856,942
57,927
28,765
1,078
27,975
57,818
109
57,927
ANZ 2017 ANNUAL REPORT CASH FLOW STATEMENT
For the year ended 30 September
Profit after income tax
Adjustments to reconcile to net cash provided by/(used in) operating activities:
Provision for credit impairment
Depreciation and amortisation
Profit on sale of premises and equipment
Net derivatives/foreign exchange adjustment
Profit on Esanda Dealer Finance divestment
Impairment of investment in AmBank
Reclassification of SRCB to held for sale
Sale of Asia Retail and Wealth businesses
Other non-cash movements
Net(increase)/decrease in operating assets:
Collateral paid
Trading securities
Net loans and advances
Investments backing policy liabilities
Other assets
Net increase/(decrease) in operating liabilities:
Deposits and other borrowings
Settlement balances owed by ANZ
Collateral received
Life insurance contract policy liabilities
Other liabilities
Total adjustments
Net cash provided by operating activities1
Cash flows from investing activities
Available-for-sale assets:
Purchases
Proceeds from sale or maturity
Esanda Dealer Finance divestment
Sale of Asia Retail and Wealth businesses
Other assets
Net cash (used in) investing activities
Cash flows from financing activities
Debt issuances:
Issue proceeds
Redemptions
Dividends paid
Share buy-back
Net cash (used in)/provided by 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
1. Net cash provided by/(used in) operating activities includes income taxes paid of $2,864 million (2016: $2,840 million).
The notes appearing on pages 71 to 154 form an integral part of these financial statements.
FINANCIAL REPORT
2016
$m
5,720
1,929
1,475
(4)
(1,434)
(66)
260
-
-
(338)
(3,183)
332
(14,797)
(2,062)
(441)
23,128
(589)
(1,027)
1,921
17
5,121
10,841
(44,182)
23,745
6,682
-
(655)
(14,410)
35,381
(28,859)
(4,564)
-
1,958
(1,611)
69,278
(1,447)
66,220
69
2017
$m
6,421
1,198
972
(114)
(3,409)
-
-
231
338
(242)
3,533
2,081
(17,838)
(2,122)
509
30,904
(627)
(310)
2,260
187
17,551
23,972
(27,220)
19,751
-
(5,213)
(148)
(12,830)
25,128
(27,409)
(4,210)
(176)
(6,667)
4,475
66,220
(2,647)
68,048
FINANCIAL REPORT (continued)
STATEMENT OF CHANGES IN EQUITY
Shareholders’
equity
attributable
to equity
holders of
the Group
$m
57,247
5,709
(578)
5,131
Retained
earnings
$m
27,309
5,709
(74)
5,635
(5,001)
(5,001)
24
-
-
-
8
27,975
6,406
15
6,421
24
413
(153)
138
19
57,818
6,406
(1,034)
5,372
Non-
controlling
interests
$m
Total
shareholders’
equity
$m
106
11
(7)
4
(1)
-
-
-
-
-
109
15
(6)
9
57,353
5,720
(585)
5,135
(5,002)
24
413
(153)
138
19
57,927
6,421
(1,040)
5,381
(4,609)
(4,609)
(1)
(4,610)
26
-
-
-
-
21
29,834
26
374
(176)
69
56
29
58,959
-
-
-
-
-
(1)
116
26
374
(176)
69
56
28
59,075
Ordinary
share capital
$m
28,367
-
-
-
-
-
413
(153)
138
-
28,765
-
-
-
-
-
374
(176)
69
56
-
29,088
Reserves1
$m
1,571
-
(504)
(504)
-
-
-
-
-
11
1,078
-
(1,049)
(1,049)
-
-
-
-
-
-
8
37
As at 1 October 2015
Profit or loss
Other comprehensive income for the year
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
Other equity movements:
Treasury shares Wealth Australia adjustment
Group employee share acquisition scheme
Other items
As at 30 September 2016
Profit or loss
Other comprehensive income for the year
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
Group share buy-back2
Other equity movements:
Treasury shares Wealth Australia adjustment
Group employee share acquisition scheme
Other items
As at 30 September 2017
1. Further information on individual reserves is disclosed in Note 21 Shareholders' Equity to the financial statements.
2. Following the issue of $176 million shares under the Dividend Reinvestment Plan for the 2017 interim dividend, the Company repurchased $176 million of shares via an on-market share buy-back.
The notes appearing on pages 71 to 154 form an integral part of these financial statements.
70
ANZ 2017 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ABOUT OUR FINANCIAL STATEMENTS
These are the financial statements for Australia and New Zealand Banking Group Limited (the Company) and its controlled entities (together,
‘the Group’ or ‘ANZ’) for the year ended 30 September 2017. The Company is incorporated and domiciled in Australia. The address of the
Company’s registered office and its principal place of business is ANZ Centre, 833 Collins Street, Docklands, Victoria, Australia 3008.
On 2 November 2017, the Directors resolved to authorise the issue of these financial statements.
In 2017, we reviewed the content and structure of the financial statements with the aim of increasing their relevance to shareholders. This review has
resulted in a number of changes to the financial statements from previous years, including:
• preparation of separate financial statements for the Company and removing these from the Group’s Annual Report - they are available at anz.com;
• re-organising disclosures into sections with common themes that are aligned with how we manage our business;
• information about the Group’s recognition and measurement policies and key judgements and estimates has been relocated and is now disclosed
within the relevant notes to the financial statements;
• removing immaterial disclosures; and
• aggregating prior year numbers in certain disclosures.
Information in the financial statements is included only to the extent we consider it material and relevant to the understanding
of the financial statements. A disclosure is considered material and relevant if, for example:
• the dollar amount is significant in size (quantitative factor);
• the dollar amount is significant by nature (qualitative factor);
• the user cannot understand the Group’s results without the specific disclosure (qualitative factor);
• the information is critical to a user’s understanding of the impact of significant changes in the Group’s business during the year – for example:
business acquisitions or disposals (qualitative factor);
• the information relates to an aspect of the Group’s operations that is important to its future performance (qualitative factor); and
• the information is required under legislative requirements of the Corporations Act 2001, the Banking Act 1959 (Cth) or by the Group’s principal
regulators, including the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).
This section of the financial statements:
• outlines the basis upon which the Group’s financial statements have been prepared; and
• discusses any new accounting standards or regulations that directly impact financial statement disclosure requirements.
BASIS OF PREPARATION
This financial report is a general purpose (Tier 1) financial report prepared by a ‘for profit’ entity, in accordance with Australian Accounting
Standards (AASs) and other authoritative pronouncements of the Australian Accounting Standards Board (AASB), the Corporations Act 2001,
and International Financial Reporting Standards (IFRS) and interpretations published by the International Accounting Standards Board (IASB).
We present the financial statements of the Group in Australian dollars, which is the Company’s functional and presentation currency. We have
rounded values to the nearest million dollars ($m), unless otherwise stated, as allowed under the ASIC Corporations (Rounding in Financial/Directors
Report) Instrument 2016/191. We measure items included in the financial statements of each entity in the Group using the currency of the primary
economic environment in which each entity operates (the functional currency).
BASIS OF MEASUREMENT
We have prepared the financial information in accordance with the historical cost basis - except the following assets and liabilities which
we have stated at their fair value:
• derivative financial instruments and in the case of fair value hedging, a fair value adjustment is made on the underlying hedged exposure;
• available-for-sale financial assets;
• financial instruments held for trading;
• other financial assets and liabilities designated at fair value through profit or loss; and
• certain other assets and liabilities held for sale where the fair value less cost of disposal is less than their carrying value (except for certain assets
and liabilities held for sale which are exempt from this requirement).
In accordance with AASB 1038 Life Insurance Contracts (AASB 1038) we have measured life insurance liabilities using the Margin on Services (MoS) model.
In accordance with AASB 119 Employee Benefits (AASB 119) we have measured defined benefit obligations using the Projected Unit Credit Method.
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. ABOUT OUR FINANCIAL STATEMENTS (continued)
BASIS OF CONSOLIDATION
The consolidated financial statements of the Group comprise the financial statements of the Company and all its subsidiaries. An entity, including
a structured entity, is considered a subsidiary of the Group when we determine that the Company has control over the entity. Control exists when
the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through
its power over the entity. We assess power by examining existing rights that give the Group the current ability to direct the relevant activities
of the entity. We have eliminated, on consolidation, the effect of all transactions between entities in the Group.
FOREIGN CURRENCY TRANSLATION
TRANSACTIONS AND BALANCES
Foreign currency transactions are translated into the relevant functional currency at the exchange rate prevailing at the date of the transaction.
At the reporting date, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the relevant
spot rate. Any foreign currency translation gains or losses are included in profit or loss in the period they arise.
We measure translation differences on non-monetary items at fair value through profit or loss and report them as part of the fair value gain
or loss on these items. We include any translation differences on non-monetary items classified as available-for-sale financial assets in the
available-for-sale revaluation reserve in equity.
FINANCIAL STATEMENTS OF FOREIGN OPERATIONS THAT HAVE A FUNCTIONAL CURRENCY THAT IS NOT AUSTRALIAN DOLLARS
The financial statements of our foreign operations are translated into Australian dollars for consolidation into the Group Financial Statements
using the following method:
Foreign currency item
Exchange rate used
Assets and liabilities
The reporting date rate
Equity
The initial investment date rate
Income and expenses
The average rate for the period – but if for a significant transaction we believe
the average rate is not reasonable, then we use the transaction date rate
Exchange differences arising from the translation of financial statements of foreign operations are recognised in the foreign currency translation reserve
in equity. When we dispose of a foreign operation, the cumulative exchange differences are transferred to profit or loss as part of the gain or loss on sale.
FIDUCIARY ACTIVITIES
The Group provides fiduciary services to third parties including custody, nominee, trustee, administration and investment management services
predominantly through the wealth businesses. This involves the Group holding assets on behalf of third parties and making decisions regarding
the purchase and sale of financial instruments. If ANZ is not the beneficial owner or does not control the assets, then we do not recognise these
transactions in these financial statements, except when required by accounting standards or another legislative requirement.
KEY JUDGEMENTS AND ESTIMATES
In the process of applying the Group’s accounting policies, management has made a number of judgements and applied estimates
and assumptions about future events. Further information on the key judgements and estimates that we consider material to the
financial statements are contained within the notes to the financial statements.
72
ANZ 2017 ANNUAL REPORT 1. ABOUT OUR FINANCIAL STATEMENTS (continued)
ACCOUNTING STANDARDS NOT EARLY ADOPTED
A number of new standards, amendments to standards and interpretations have been published but are not mandatory for the financial
statements for the year ended 30 September 2017, and have not been applied by the Group in preparing these financial statements.
We have identified four standards where this applies to the Group and further details are set out below.
AASB 9 Financial Instruments (AASB 9)
AASB 9 was issued in December 2014. When operative, this standard will replace AASB 139 Financial Instruments: Recognition and
Measurement (AASB 139) and includes requirements for impairment, classification and measurement and general hedge accounting.
Impairment
AASB 9 replaces the incurred loss model under AASB 139 with a forward-looking expected loss model. This model will be applied to financial assets
measured at amortised cost, debt instruments measured at fair value through other comprehensive income, lease receivables, and certain loan
commitments and financial guarantees. Under AASB 9, a three-stage approach is applied to measuring expected credit losses (ECL) based on credit
migration between the stages as follows:
• Stage 1: At initial recognition, a provision equivalent to 12 months ECL is recognised.
• Stage 2: Where there has been a significant increase in credit risk since initial recognition, a provision equivalent to full lifetime ECL is required.
• Stage 3: Similar to the current AASB 139 requirements for individual impairment provisions, lifetime ECL is recognised for loans where there
is objective evidence of impairment.
ECL are probability weighted and determined by evaluating a range of possible outcomes, taking into account the time value of money,
past events, current conditions and forecasts of future economic conditions.
Classification and measurement
There are three measurement classifications under AASB 9: amortised cost, fair value through profit or loss (FVTPL) and, for financial assets,
fair value through other comprehensive income (FVOCI). Financial assets are classified into these measurement classifications taking into account
the business model within which they are managed, and their contractual cash flow characteristics.
The classification and measurement requirements for financial liabilities under AASB 9 are largely consistent with AASB 139 with the exception
that for financial liabilities designated as measured at fair value, gains or losses relating to changes in the entity’s own credit risk are included
in other comprehensive income. This part of the standard was early adopted by the Group from 1 October 2013.
General hedge accounting
AASB 9 introduces general hedge accounting requirements which more closely align with risk management activities undertaken when
hedging financial and non-financial risks.
Transition and impact
Other than noted above under classification and measurement, AASB 9 has a date of initial application for the Group of 1 October 2018.
The classification and measurement, and impairment requirements will be applied retrospectively by adjusting the opening balance sheet
at the date of initial application, with no requirements to restate comparative periods. ANZ does not intend to restate comparatives.
AASB 9 provides an accounting policy choice to continue with AASB 139 hedge accounting given the International Accounting Standards
Board’s ongoing project on macro hedge accounting. The Group’s current expectation is that it will continue to apply the hedge accounting
requirements of AASB 139.
The Group is in the process of assessing the impact of the application of AASB 9 and is not yet able to reasonably estimate the impact
on its financial statements.
AASB 15 Revenue from Contracts with Customers (AASB 15)
AASB 15 was issued in December 2014 and is not effective for the Group until 1 October 2018. AASB 15 contains new requirements
for the recognition of revenue.
The standard requires identification of distinct performance obligations within a contract and allocation of the transaction price of the
contract to those performance obligations. Revenue is recognised as each performance obligation is satisfied. Variable amounts of revenue
can only be recognised if it is highly probable that a significant reversal of the variable amount will not be required in future periods.
Although a significant proportion of the Group’s revenue is outside the scope of AASB 15, certain revenue streams are in the scope
of the standard. The Group is in the process of assessing the impact of the application of AASB 15 and is not yet able to reasonably
estimate the impact on its financial statements.
AASB 15 may be applied under different transition approaches which could impact (a) revenue recognised in future periods and (b) the opening
adjustment to retained earnings at the relevant date of initial application. The Group has not determined which transition approach it will adopt.
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. ABOUT OUR FINANCIAL STATEMENTS (continued)
AASB 16 Leases (AASB 16)
The final version of AASB 16 was issued in February 2016 and is not effective for the Group until 1 October 2019. AASB 16 requires a lessee
to recognise its:
• right to use the underlying leased asset, as a right-of-use asset; and
• obligation to make lease payments as a lease liability.
AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases (AASB 117).
The Group is in the process of assessing the impact of the application of AASB 16 and is not yet able to reasonably estimate the impact
on its financial statements.
AASB 17 Insurance Contracts (AASB 17)
The final version of AASB 17 was issued in July 2017 and is not effective for the Group until 1 October 2021. It will replace AASB 4 Insurance Contracts,
AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts. AASB 17 establishes principles for the recognition, measurement,
presentation and disclosure of insurance contracts.
The measurement, presentation and disclosure requirements under AASB 17 are significantly different from current accounting standards. Although
the overall profit recognised in respect of insurance contracts will not change, it is expected that the timing of profit recognition will change.
The Group is not yet able to reasonably estimate the impact of AASB 17 on its financial statements.
Mandatory Application of New Accounting Standards to the Group
1 October 2017
1 October 2018
1 October 2019
1 October 2020
1 October 2021
Beyond
AASB 9 & AASB 15
AASB 16
Financial Year 2018
Financial Year 2019
Financial Year 2020
Financial Year 2021
Financial Year 2022
AASB 17
74
ANZ 2017 ANNUAL REPORT
2. OPERATING INCOME
Net interest income
Interest income by type of financial asset
Financial assets not at fair value through profit or loss
Trading securites
Available-for-sale assets
Financial assets designated at fair value through profit or loss
Interest income
Interest expense by type of financial liability
Financial liabilities not at fair value through profit or loss
Securities sold short
Financial liabilities designated at fair value through profit or loss
Interest expense
Major bank levy
Net interest income
Other operating income
i) Fee and commission income
Lending fees1
Non-lending fees and commissions2
Fee and commission income
Fee and commission expense
Net fee and commission income
ii) Other income
Net foreign exchange earnings and other financial instruments income
Impairment of AmBank
Gain on cessation of equity accounting of investment in Bank of Tianjin (BoT)
Gain on the Esanda Dealer Finance divestment
Derivative CVA methodology change
Derivative valuation adjustments
Gain on sale of 100 Queen Street, Melbourne
Loss on sale of Asia Retail and Wealth businesses
Reclassification of SRCB to held for sale
Other
Other income
Other operating income3
Net funds management and insurance income
Funds management income
Investment income
Insurance premium income
Commission expense
Claims
Changes in policy liabilities4
Elimination of treasury share gain
Net funds management and insurance income
Share of associates' profit
Operating income
2017
$m
26,790
1,099
1,223
8
29,120
2016
$m
27,621
1,288
1,028
14
29,951
(13,839)
(14,379)
(131)
(192)
(14,162)
(86)
14,872
732
2,993
3,725
(1,272)
2,453
1,216
-
-
-
-
229
114
(310)
(231)
130
1,148
3,601
964
2,471
1,703
(554)
(763)
(2,260)
(61)
1,500
300
20,273
(166)
(311)
(14,856)
-
15,095
779
2,928
3,707
(1,162)
2,545
969
(260)
29
66
(237)
(102)
-
-
-
136
601
3,146
932
2,350
1,562
(457)
(734)
(1,843)
(46)
1,764
541
20,546
1. Lending fees exclude fees treated as part of the effective yield calculation of interest income.
2.
In 2017, a change was made to the classification of certain fees payable. These items have been reclassified from other operating income to operating expenses to more accurately reflect the nature
of these items. Comparatives have been restated accordingly (2016: $17 million).
3. Other operating income includes external dividend income of $27.3 million (2016: $27.3 million).
4.
Includes policyholder tax gross up, which represents contribution tax (recovered at 15% on the superannuation contributions made by members) debited to the policyholder account
once a year in July when the policyholder annual statement is issued to members at the end of the 30 June financial year.
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. OPERATING INCOME (continued)
RECOGNITION AND MEASUREMENT
NET INTEREST INCOME
Interest Income and Expense
We recognise interest income and expense for all financial instruments, including those classified as held for trading, available-for-sale-assets
or designated at fair value, in profit or loss using the effective interest rate method. This method uses the effective interest rate of a financial
asset or financial liability to calculate its amortised cost. The effective interest rate is the rate that discounts the stream of estimated future cash
receipts or payments over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of
the financial asset or liability. For assets subject to prepayment, we determine their expected life on the basis of historical behaviour of the
particular asset portfolio - taking into account contractual obligations and prepayment experience.
We recognise fees and costs, which form an integral part of the financial instrument (for example loan origination fees and costs), using
the effective interest method. This is presented as part of interest income or expense depending on whether the underlying financial
instrument is a financial asset or financial liability.
Major Bank Levy
The Major Bank Levy Act 2017 (‘Levy’ or ‘Major Bank Levy’) was introduced in 2017 and is effective from 1 July 2017. The Levy applies
a rate of 0.06% to certain liabilities of the Company. The Group has determined that the levy represents a finance cost for the Group
and is included as a component of net interest income. This is presented within interest expense in the Income Statement.
OTHER OPERATING INCOME
Fee and Commission Income
We recognise fees or commissions:
• that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees and underwriting fees)
when the significant act has been completed; and
• charged for providing ongoing services (for example, maintaining and administering existing facilities) as income over the period the
service is provided.
Net Foreign Exchange Earnings and Other Financial Instruments Income
We recognise the following as net foreign exchange earnings and other financial instruments income:
• exchange rate differences arising on the settlement of monetary items and translation differences on monetary items translated
at rates different to those at which they were initially recognised or included in a previous financial report;
• fair value movements (excluding realised and accrued interest) on derivatives not designated as accounting hedges that we use
to manage interest rate and foreign exchange risk on funding instruments;
• the ineffective portions of fair value hedges, cash flow hedges and net investment hedges;
• fair value movements on financial assets and financial liabilities designated at fair value through profit or loss or held for trading; and
• immediately upon sale or repayment of a hedged item, the unamortised fair value adjustments in items designated as fair value
hedges and amounts accumulated in equity related to designated cash flow hedges.
Gain or Loss on Disposal of Non-Financial Assets
The gain or loss on the disposal of assets is the difference between the carrying value of the asset and the proceeds of disposal net
of disposal costs. This is recognised in other income in the year in which the significant risks and rewards transfer to the buyer.
76
ANZ 2017 ANNUAL REPORT 2. OPERATING INCOME (continued)
RECOGNITION AND MEASUREMENT
NET FUNDS MANAGEMENT AND INSURANCE INCOME
Funds Management Income
We recognise the fees we charge to policyholders in connection with life insurance and life investment contracts when we have
provided the service.
Investment Income
Investment income primarily relates to gains and losses on investments held to back policy liabilities (Refer to Note 29 Life Insurance Business).
Investment income excludes gains and losses on treasury shares and intercompany balances including cash and term deposits held as
policyholder or shareholder assets.
Insurance Premium Income
We recognise:
• premiums with a regular due date as income on an accruals basis;
• unpaid premiums as income and include them as receivables in the balance sheet only during the grace periods in the contract,
or for longer only where secured by the surrender value of the policy; and
• premiums with no due date (such as one off premiums) in income when the premiums are received.
We show these insurance premiums net of any reinsurance premium, which we account for on the same basis as the underlying
direct insurance premium.
Claims
Insurance claims relate to us paying benefits to policyholders. We recognise these on an accruals basis once our liability to the policyholder
has been confirmed under the terms of the contract. We show these insurance claims net of reinsurance, which we account for on the
same basis as the underlying direct insurance claims.
Changes in Policy Liabilities
Change in policyholder liabilities represents the movement of the life insurance contract liability. Under the Margin of Service (MoS)
model, this movement represents:
• the release of the planned profit margin for the year on existing life insurance policies;
• offset by the recognition of contracts in an expected loss position; and
• the deferral of expected future profit margins on new life insurance policies.
We recognise the movement as the service is provided and we show this change in policyholder liabilities net of reinsurance.
Life Insurance Acquisition Costs
The Group incurs life insurance acquisition costs to acquire new business. We recognise those costs in the profit or loss as incurred.
In addition, these acquisition costs form part of the calculation to determine a contract’s planned profit margin under the MoS model
(see Changes in Policy Liabilities above).
SHARE OF ASSOCIATES’ PROFIT
The equity method is applied to accounting for associates in the consolidated financial statements. Under the equity method, the
Group’s share of the after tax results of associates is included in the Income Statement and the Statement of Comprehensive Income.
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. OPERATING EXPENSES
i) Personnel
Salaries and related costs
Superannuation costs
Other
Personnel expenses
ii) Premises
Rent
Other
Premises expenses
iii) Technology
Depreciation and amortisation1
Licences and outsourced services2
Other
Technology expenses
iv) Restructuring
v) Other
Advertising and public relations
Professional fees
Freight, stationery, postage and telephone
Other
Other expenses
Operating expenses
2017
$m
4,556
322
300
5,178
500
411
911
727
637
302
1,666
62
254
453
266
658
1,631
9,448
2016
$m
4,879
337
325
5,541
485
443
928
1,198
614
355
2,167
278
261
413
277
574
1,525
10,439
1.
2.
In 2016, the Group recorded a $556 million charge for accelerated amortisation associated with a software capitalisation policy change.
In 2017, certain fees payable have been reclassified from other operating income to operating expenses to more accurately reflect the nature of these items. Comparatives have been
restated accordingly (2016: $17 million).
RECOGNITION AND MEASUREMENT
OPERATING EXPENSES
Operating expenses are recognised as services are provided to the Group over the period in which an asset is consumed or once
a liability is incurred.
SALARIES AND RELATED COSTS - ANNUAL LEAVE, LONG SERVICE LEAVE AND OTHER EMPLOYEE BENEFITS
Wages and salaries, annual leave, and other employee entitlements expected to be paid or settled within twelve months of
employees rendering service are measured at their nominal amounts using remuneration rates that the Group expects to pay
when the liabilities are settled.
We accrue employee entitlements relating to long service leave using an actuarial calculation. It includes assumptions regarding
staff departures, leave utilisation and future salary increases. The result is then discounted using market yields at the reporting date.
The market yields are determined from a blended rate of high quality corporate bonds with terms to maturity that closely match
the estimated future cash outflows.
If we expect to pay short term cash bonuses, then a liability is recognised when the Group has a present legal or constructive
obligation to pay this amount (as a result of past service provided by the employee) and the obligation can be reliably measured.
78
ANZ 2017 ANNUAL REPORT 3. OPERATING EXPENSES (continued)
RECOGNITION AND MEASUREMENT
Personnel expenses also include share-based payments which may be cash or equity settled. We calculate the fair value of equity settled
remuneration at grant date, which is then amortised over the vesting period, with a corresponding increase in share capital or the share
option reserve as applicable. When we estimate the fair value, we take into account market vesting conditions, such as share price performance
conditions. We take non-market vesting conditions, such as service conditions, into account by adjusting the number of equity instruments
included in the expense.
After the grant of an equity-based award, the amount we recognise as an expense is reversed when non-market vesting conditions are
not met, for example an employee fails to satisfy the minimum service period specified in the award on resignation, termination or notice
of dismissal for serious misconduct. However, we do not reverse the expense if the award does not vest due to the failure to meet a market-
based performance condition.
Further information on share-based payment schemes operated by the Group during the current and prior year is included in
Note 31 Employee Share and Option Plans.
4. INCOME TAX
INCOME TAX EXPENSE
Reconciliation of the prima facie income tax expense on pre-tax profit with the income tax expense recognised in profit or loss:
Profit before income tax
Prima facie income tax expense at 30%
Tax effect of permanent differences:
Wealth Australia – policyholder income and contributions tax
Share of associates’ profit
Write-down of investment in AmBank
Reclassification of SRCB to held for sale
Tax provisions no longer required
Interest on convertible instruments
Overseas tax rate differential
Gain on cessation of equity accounting for BoT
Other
Subtotal
Income tax over provided in previous years
Income tax expense
Current tax expense
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
Income tax expense
Australia
Overseas
Income tax expense
Effective tax rate
2017
$m
9,627
2,888
194
(90)
-
172
-
69
(37)
-
29
3,225
(19)
3,206
3,094
(19)
131
3,206
2,349
857
3,206
33.3%
2016
$m
8,178
2,453
152
(162)
78
-
(71)
70
(45)
(9)
15
2,481
(23)
2,458
2,738
(23)
(257)
2,458
1,752
706
2,458
30.1%
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. INCOME TAX (continued)
TAX CONSOLIDATION
The Company and all its wholly owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. The Company is the
head entity in the tax-consolidated group. We recognise each of the following in the separate financial statements of members of the tax-consolidated
group on a ‘group allocation’ basis: tax expense/income, and deferred tax liabilities/assets, that arise from temporary differences of the members of the tax-
consolidated group. The Company (as head entity in the tax-consolidated group) recognises current tax liabilities and assets of the tax consolidated group.
Under 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.
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 were the head entity to default on its income tax payment obligations.
UNRECOGNISED DEFERRED TAX ASSETS AND LIABILITIES
Unrecognised deferred tax assets related to unused realised tax losses (on revenue account) total $4 million (2016: $4 million). Unrecognised deferred
tax liabilities related to additional potential foreign tax costs (assuming all retained earnings in offshore branches and subsidiaries are repatriated)
total $413 million (2016: $416 million).
RECOGNITION AND MEASUREMENT
INCOME TAX EXPENSE
Income tax expense comprises both current and deferred taxes and is based on the accounting profit adjusted for differences in the
accounting and tax treatments of income and expenses (that is, taxable income). We recognise tax expense in profit or loss except
to the extent to which it relates to items recognised directly in equity and other comprehensive income, in which case we recognise
directly in equity or other comprehensive income respectively.
CURRENT TAX EXPENSE
Current tax is the tax we expect to pay on taxable income for the year, based on tax rates (and tax laws) which are enacted at the
reporting date. We recognise current tax as a liability (or asset) to the extent that it is unpaid (or refundable).
DEFERRED TAX ASSETS AND LIABILITIES
We account for deferred tax using the balance sheet method. Deferred tax arises because the accounting income is not always the same
as the taxable income. This creates temporary differences, which usually reverse over time. Until they reverse, we recognise a deferred tax
asset, or liability, on the balance sheet. We measure deferred taxes at the tax rates that we expect will apply to the period(s) when the asset
is realised, or the liability settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the reporting date.
We offset current and deferred tax assets and liabilities 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.
80
ANZ 2017 ANNUAL REPORT 5. DIVIDENDS
ORDINARY SHARE DIVIDENDS
Dividends are provided for in the financial statements once determined, accordingly, the final dividend announced for the current financial year
is provided for and paid in the following financial year.
Dividends
Financial Year 2016
2015 final dividend paid
2016 interim dividend paid
Bonus option plan adjustment
Dividends paid during the year ended 30 September 2016
Cash
Dividend reinvestment plan
Dividends paid during the year ended 30 September 2016
Financial Year 2017
2016 final dividend paid
2017 interim dividend paid
Bonus option plan adjustment
Dividends paid during the year ended 30 September 2017
Cash
Dividend reinvestment plan
Dividends paid during the year ended 30 September 2017
% of total
Amount
per share
Total dividend
$m
95.0 cents
80.0 cents
80.0 cents
80.0 cents
91.7%
8.3%
91.9%
8.1%
2,758
2,334
(91)
5,001
4,588
413
5,001
2,342
2,349
(82)
4,609
4,235
374
4,609
Dividends announced and to be paid after year-end
Payment date
Amount
per share
Total
dividend
$m
2017 final dividend (fully franked at 30%, New Zealand imputation credits
NZD 10 cents per share)
18 December 2017
80.0 cents
2,350
DIVIDEND REINVESTMENT PLAN AND BONUS OPTION PLAN
Eligible shareholders can elect to reinvest their dividend entitlement into ANZ ordinary shares under the Company’s Dividend Reinvestment Plan (DRP).
Eligible shareholders can elect to forgo their dividend entitlement and instead receive ANZ ordinary shares under the Company’s Bonus Option Plan (BOP).
For the 2017 final dividend, DRP participation will be satisfied by an on-market purchase of shares (as approved by APRA) and BOP participation will be
satisfied by an issue of ANZ ordinary shares. There will be no discount applied to the DRP and BOP price.
See Note 21 Shareholders’ Equity for details of shares the Company issued or purchased in respect of the DRP and BOP.
DIVIDEND FRANKING ACCOUNT
Australian franking credits available at 30% (2016: 30%) tax rate
New Zealand imputation credits available (which can be attached to our Australian
dividends but may only be used by New Zealand resident shareholders)
Currency
AUD
NZD
2017
$m
171
3,680
2016
$m
118
3,494
The above amounts represent the balances of the franking accounts as at the end of the financial year, adjusted for:
• franking credits that will arise from the payment of income tax payable as at the end of the financial year; and
• franking credits/debits from the receipt/payment of dividends that have been recognised as tax receivables/payables as at the end
of the financial year.
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. DIVIDENDS (continued)
The final proposed 2017 dividend will utilise the entire balance of $171 million franking credits available at 30 September 2017. Instalment tax payments
on account of the 2018 financial year which will be made after 30 September 2017 will generate sufficient franking credits to enable the final 2017
dividend to be fully franked. The extent to which future dividends will be franked will depend on a number of factors, including the level of profits
generated by the Group that will be subject to tax in Australia.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
APRA’s written approval is required before paying dividends:
• on ordinary shares if the aggregate dividends exceed the Company’s after tax earnings (in calculating those after tax earnings,
we take into account any payments we made on senior capital instruments) in the financial year to which they relate; or
• if the Group’s Common Equity Tier 1 capital ratio falls within capital range buffers specified by APRA.
The terms of the ANZ Convertible Preference Shares limit payments of dividends on those securities if as a result of the payment
the Company becomes, or is likely to become, insolvent or breaches specified capital ratios or if APRA objects to the payment.
If the Company fails to pay a dividend or distribution on its ANZ Convertible Preference Shares, ANZ Capital Notes or ANZ Capital Securities
on the scheduled payment date, it may (subject to a number of exceptions) be restricted from resolving to pay or paying any dividend
on ANZ ordinary shares.
6. EARNINGS PER ORDINARY SHARE
Earnings per ordinary share (EPS)
Basic
Diluted
2017
cents
220.1
210.8
2016
cents
197.4
189.3
Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding
during the period (after eliminating treasury shares). Diluted EPS is calculated by adjusting the profit or loss attributable to ordinary shareholders and the
weighted average number of ordinary shares outstanding for the effect of dilutive potential ordinary shares.
Reconciliation of earnings used in EPS calculations
Profit for the year
Less: Profit attributable to non-controlling interests
Earnings used in calculating basic earnings per share
Add: Interest on convertible subordinated debt
Earnings used in calculating diluted earnings per share
Reconciliation of weighted average number of ordinary shares (WANOS) used in EPS calculations
WANOS before elimination of treasury shares
Less: Weighted average number of treasury shares held
WANOS used in calculating basic earnings per share
Add: Weighted average number of dilutive potential ordinary shares:
Convertible subordinated debt
Share based payments (options, rights and deferred shares)
WANOS used in calculating diluted earnings per share
2017
$m
6,421
(15)
6,406
288
6,694
2017
millions
2,934.6
(24.3)
2,910.3
253.3
11.9
3,175.5
2016
$m
5,720
(11)
5,709
297
6,006
2016
millions
2,917.3
(25.6)
2,891.7
273.9
6.8
3,172.4
82
ANZ 2017 ANNUAL REPORT 7. SEGMENT REPORTING
DESCRIPTION OF SEGMENTS
The Group’s six operating segments are presented on a basis that is consistent with the information provided internally to the Chief Executive Officer,
who is the chief operating decision maker. This reflects the way the Group’s businesses are managed, rather than the legal structure of the Group.
We measure the performance of these segments on a cash profit basis. To calculate cash profit, we remove certain non-core items from statutory profit.
Details of these items are included in the 'Other items' section of this note. Transactions between business units across segments within ANZ
are conducted on an arm's-length basis and disclosed as part of the income and expenses of these segments.
The reportable segments are divisions engaged in providing either different products or services or similar products and services in different
geographical areas. They are as follows:
Australia
The Australia division comprises the Retail and Corporate & Commercial Banking (C&CB) business units.
• Retail provides products and services to consumer and private banking customers in Australia via the branch network, mortgage specialists, the
contact centres, a variety of self-service channels (internet banking, phone banking, ATMs, website and digital banking) and third party brokers.
• C&CB provides a full range of banking services including traditional relationship banking and sophisticated financial solutions through dedicated
managers focusing on privately owned small, medium and large enterprises as well as the agricultural business segment.
Institutional
The Institutional division services global institutional and business customers across three product sets: Transaction Banking, Loans & Specialised
Finance and Markets.
• Transaction Banking provides working capital and liquidity solutions including documentary trade, supply chain financing as well as cash
management solutions, deposits, payments and clearing.
• Loans & Specialised Finance provides loan products, loan syndication, specialised loan structuring and execution, project and export finance,
debt structuring and acquisition finance, structured trade and asset finance, and corporate advisory.
• Markets provide risk management services on foreign exchange, interest rates, credit, commodities, debt capital markets and wealth solutions
in addition to managing the Group's interest rate exposure and liquidity position.
New Zealand
The New Zealand division comprises the Retail and Commercial business units.
• Retail provides a full range of banking and wealth management services to consumer, private banking and small business banking customers.
We deliver our services via our internet and app-based digital solutions and network of branches, mortgage specialists, relationship managers
and contact centres.
• Commercial provides a full range of banking services including traditional relationship banking and sophisticated financial solutions (including
asset financing) through dedicated managers focusing on privately owned medium to large enterprises and the agricultural business segment.
Wealth Australia
The Wealth Australia division comprises the Insurance and Funds Management business units, which provide insurance, investment and
superannuation solutions intended to make it easier for customers to manage, protect and grow their wealth.
• Insurance includes life insurance, general insurance and ANZ Lenders Mortgage Insurance.
• Funds Management includes the Pensions and Investments business and ANZ Share Investing.
Asia Retail & Pacific
The Asia Retail & Pacific division comprises the Asia Retail & Pacific business units, connecting customers to specialists for their banking needs.
• Asia Retail provides general banking and wealth management services to affluent and emerging affluent retail customers via relationship
managers, branches, contact centres and a variety of self-service digital channels (internet and mobile banking, phone and ATMs). Core products
offered include deposits, credit cards, loans, investments and insurance. Refer to Note 28 Assets and Liabilities Held for Sale for details on the sale
of Asia Retail and Wealth businesses.
• Pacific provides products and services to retail customers, small to medium-sized enterprises, institutional customers and Governments located
in the Pacific Islands. Products and services include retail products provided to customers, traditional relationship banking and sophisticated
financial solutions provided to business customers through dedicated managers.
Technology, Services & Operations (TSO) and Group Centre
TSO and Group Centre provide support to the operating divisions, including technology, operations, shared services, property, risk management,
financial management, strategy, marketing, human resources and corporate affairs. The Group Centre includes Group Treasury, Shareholder Functions,
Enablement Functions and minority investments in Asia.
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. SEGMENT REPORTING (continued)
OPERATING SEGMENTS
During 2017, the Group made changes to the Group’s operating model for technology, operations and shared services to accelerate delivery of its
technology and digital roadmap, bringing operations closer to its customers and continuing to drive operational efficiency gains. As a result of
these organisational changes, divisional operations from Technology, Services & Operations (TSO) and Group Centre have been realigned to divisions.
The residual TSO and Group Centre now contains Group Technology, Group Hubs, Enterprise Services and Group Property and the Group Centre.
Australia Institutional
$m
$m
New
Zealand
$m
Wealth
Australia
$m
Asia
Retail &
Pacific
$m
TSO and
Group
Centre
$m
Income tax expense and non-controlling interests
(1,587)
3,695
1,836
1,369
Year ended 30 September 2017
Interest income
Interest expense
Net interest income
Other operating income
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment (charge)/release
Profit before income tax
Profit after income tax attributable to
shareholders
Non-cash items
Share of associates’ profit
Depreciation and amortisation
Equity-settled share based payment expenses
Credit impairment (charge)/release
Financial position
Goodwill
Investments in associates
Year ended 30 September 2016
Interest income
Interest expense
Net interest income
Other operating income
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment (charge)/release
Profit before income tax
15,886
(7,502)
8,384
1,218
9,602
(3,423)
6,179
(897)
5,282
2
(184)
(18)
(897)
5
19
16,153
(7,951)
8,202
1,206
9,408
(3,426)
5,982
(920)
5,062
Income tax expense and non-controlling interests
(1,515)
Profit after income tax attributable to
shareholders
Non-cash items
Share of associates’ profit
Depreciation and amortisation
Equity-settled share based payment expenses
Credit impairment (charge)/release
Financial position
Goodwill
Investments in associates
3,547
3
(177)
(19)
(920)
-
17
6,960
(3,892)
3,068
2,346
5,414
5,398
(2,879)
2,519
653
3,172
(2,736)
(1,193)
2,678
(80)
2,598
(762)
1,979
(78)
1,901
(532)
(1)
(201)
(91)
(80)
5
(49)
(8)
(78)
73
(64)
9
1,077
1,086
(743)
343
-
343
(105)
238
-
(77)
(5)
-
1,077
1,868
1,452
2
7
2
7,079
(3,632)
3,447
1,733
5,180
5,627
(3,179)
2,448
644
3,092
(2,958)
(1,225)
2,222
(743)
1,479
(438)
1,041
(3)
(198)
(106)
(743)
1,867
(120)
1,747
(479)
1,268
5
(48)
(11)
(120)
82
(71)
11
1,244
1,255
(801)
454
-
454
(130)
324
-
(79)
(7)
-
1,119
4
2,061
6
1,452
3
685
(79)
606
37
643
(651)
(8)
(144)
(152)
4
(148)
-
(14)
(4)
(144)
45
-
810
(112)
698
478
1,176
(808)
368
(172)
196
(37)
159
-
(24)
(5)
(172)
97
-
118
168
286
286
572
(702)
(130)
-
(130)
78
(52)
294
(447)
(32)
-
-
2,218
200
89
289
194
483
(1,221)
(738)
(1)
(739)
289
(450)
536
(949)
(34)
(1)
-
4,242
Other
items1
$m
-
-
-
(216)
(216)
Group
Total
$m
29,120
(14,248)
14,872
5,401
20,273
-
(9,448)
(216)
10,825
1
(215)
(317)
(532)
-
-
-
1
-
-
-
-
-
(48)
(48)
-
(48)
27
(21)
(159)
(180)
-
-
-
27
-
-
(1,198)
9,627
(3,221)
6,406
300
(972)
(158)
(1,198)
4,447
2,248
29,951
(14,856)
15,095
5,451
20,546
(10,439)
10,107
(1,929)
8,178
(2,469)
5,709
541
(1,475)
(182)
(1,929)
4,729
4,272
1. Cash profit represents ANZ's preferred measure of the results of the segments. We remove certain other items from the statutory profit if we consider them not integral to the ongoing performance of
the segment.
84
ANZ 2017 ANNUAL REPORT 7. SEGMENT REPORTING (continued)
OTHER ITEMS
The table below sets out the profit after tax impact of other items which are removed from statutory profit to reflect the cash profit of each segment.
Item
Treasury shares adjustment
Revaluation of policy liabilities
Economic hedges
Revenue hedges
Related segment
Wealth Australia
Wealth Australia and New Zealand Division
Institutional, TSO and Group Centre
TSO and Group Centre
Structured credit intermediation trades
Institutional
Reclassification of SRCB to held for sale
TSO and Group Centre
Total
Profit after tax
2017
$m
(58)
(34)
(209)
99
3
(333)
(532)
2016
$m
(44)
54
(102)
(92)
4
-
(180)
SEGMENT INCOME BY PRODUCTS AND SERVICES
The primary sources of our external income across all divisions are interest income and other operating income. The Australia, New Zealand, and Asia
Retail & Pacific divisions derive income from products and services from retail and commercial banking. The Institutional division derives its income
from institutional products and services. The Wealth Australia division derives income from funds management and insurance businesses. No single
customer amounts to greater than 10% of the Group’s income.
GEOGRAPHICAL INFORMATION
The following table sets out total operating income earned and assets to be recovered in more than one year based on the geographical regions
in which the Group operates. The assets consist of available-for-sale assets, net loans and advances and investments backing policy liabilities.
Australia
Europe & Americas
New Zealand
Total
Asia Pacific,
Total operating income
2017
$m
2016
$m
13,603
13,281
Assets to be recovered in more than one year
387,954
378,774
2017
$m
2,945
42,266
2016
$m
3,688
48,479
2017
$m
3,725
96,453
2016
$m
3,577
2017
$m
2016
$m
20,273
20,546
92,006
526,673
519,259
8. CASH AND CASH EQUIVALENTS
Coins, notes and cash at bank
Money at call, bills receivable and remittances in transit
Securities purchased under agreements to resell in less than 3 months
Balances with central banks
Settlement balances owed to ANZ within 3 months
Cash and cash equivalents
2017
$m
1,544
108
21,479
24,039
20,878
68,048
2016
$m
1,457
98
21,200
25,920
17,545
66,220
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. TRADING SECURITIES
Trading securities ($m)
5,002
7,056
9,668
2017
11,634
2016
28,935
28,498
Government securities
Corporate and financial institution securities
Equity and other securities
Trading securities
● Government securities
● Corporate and financial
institution securities
● Equity and other securities
2017
$m
28,935
9,668
5,002
43,605
2016
$m
28,498
11,634
7,056
47,188
RECOGNITION AND MEASUREMENT
Trading securities are financial instruments we either:
• acquire principally for the purpose of selling in the short-term; or
• hold as part of a portfolio we manage for short-term profit making.
We recognise purchases and sales of trading securities on trade date:
• initially, we measure them at fair value through the profit and loss; and
• subsequently, we measure them in the balance sheet at their fair value with any revaluation recognised in the profit or loss.
KEY JUDGEMENTS AND ESTIMATES
Judgement is required when applying the valuation techniques used to measure the fair value of trading securities not valued using
quoted market prices. Refer to Note 17 Fair Value of Financial Assets and Liabilities for further details.
86
ANZ 2017 ANNUAL REPORT 10. DERIVATIVE FINANCIAL INSTRUMENTS
Fair Value
Derivative financial instruments - held for trading
Derivative financial instruments - designated in hedging relationships
Derivative financial instruments
FEATURES
Derivative financial instruments are contracts:
Assets
2017
$m
60,387
2,131
62,518
Liabilities
2017
$m
(59,602)
(2,650)
(62,252)
Assets
2016
$m
83,787
3,709
87,496
Liabilities
2016
$m
(85,174)
(3,551)
(88,725)
• whose value is derived from an underlying price index (or other variable) defined in the contract – sometimes the value is derived from more
than one variable;
• that require little or no initial net investment; and
• that are settled at a future date.
Movements in the price of the underlying variables, which cause the value of the contract to fluctuate, are reflected in the fair value of the derivative.
PURPOSE
The Group’s derivative financial instruments have been categorised as following:
Trading
Derivatives held in order to:
• Meet customer needs for managing their own risks.
• Manage risk in the Group’s positions that are not part of a designated hedge accounting relationship.
• Undertake market making and positioning activities to generate profits from short-term fluctuations
in prices or margins.
Designated in Hedging
Relationships
Derivatives designated into hedge accounting relationships in order to minimise profit or loss volatility
by matching movements to underlying positions relating to:
• Hedges of the Group’s exposures to interest rate risk, currency risk and credit risk.
• Hedges of other exposures relating to non-trading positions.
TYPES
The Group offers and uses four different types of derivative financial instruments:
Forwards
Futures
Swaps
Options
A contract documenting the rate of interest, or the currency exchange rate, to be paid or received on a notional
principal obligation at a future date.
An exchange traded contract in which the parties agree to buy and sell an asset in the future for a price agreed on the
transaction date, with a net settlement in cash paid on the future date without physical delivery of the asset.
A contract in which one party exchanges one series of cash flows for another.
A contract in which the buyer of the contract has the right - but not the obligation - to buy (known as a 'call option')
or to sell (known as a 'put option') an asset or instrument at a set price on a future date. The seller has the corresponding
obligation to fulfil the transaction to sell or buy the asset or instrument if the buyer exercises the option.
RISKS MANAGED
The Group offers and uses the instruments described above to manage fluctuations in the following market factors:
Interest Rate
Fixed or variable interest rates applying to money lent, deposited or borrowed.
Foreign Exchange
Currencies at current or determined rates of exchange.
Commodity
Soft commodities (that is, agricultural products such as wheat, coffee, cocoa and sugar) and hard commodities
(that is, mined products such as gold, oil and gas).
Credit
Counterparty risk in the event of default.
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS – HELD FOR TRADING
The majority of the Group’s derivative financial instruments are held for trading. The fair value of derivative financial instruments held for trading are:
Fair Value
Interest rate contracts
Forward rate agreements
Futures contracts
Swap agreements
Options purchased
Options sold
Total
Foreign exchange contracts
Spot and forward contracts
Swap agreements
Options purchased
Options sold
Total
Commodity contracts
Credit default swaps
Structured credit derivative purchased
Other credit derivatives purchased
Credit derivatives purchased
Structured credit derivatives sold
Other credit derivatives sold
Credit derivatives sold
Total
Assets
2017
$m
2
102
Liabilities
2017
$m
(1)
(56)
31,331
(30,814)
746
-
32,181
15,232
10,298
517
-
26,047
1,991
52
13
65
-
103
103
168
-
(1,365)
(32,236)
(14,943)
(10,374)
-
(475)
(25,792)
(1,398)
-
(110)
(110)
(58)
(8)
(66)
(176)
(59,602)
Assets
2016
$m
12
28
57,656
1,098
-
58,794
10,957
10,678
887
-
22,522
2,294
40
117
157
-
20
20
177
83,787
Liabilities
2016
$m
(17)
(107)
(55,475)
-
(2,076)
(57,675)
(10,791)
(14,309)
-
(802)
(25,902)
(1,395)
-
(125)
(125)
(50)
(27)
(77)
(202)
(85,174)
Derivative financial instruments - held for trading
60,387
88
ANZ 2017 ANNUAL REPORT 10. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
DERIVATIVE FINANCIAL INSTRUMENTS – DESIGNATED IN HEDGING RELATIONSHIPS
There are three types of hedge accounting relationships the Group utilises:
Fair value hedge
Cash flow hedge
Net investment hedge
Objective of this
hedging arrangement
To hedge our exposure to changes
to the fair value of a recognised
asset or liability or unrecognised
firm commitment caused by interest
rate or foreign currency movements.
Recognition of effective
hedge portion
The following are recognised
in profit or loss at the same time:
• all changes in the fair value
of the underlying item relating
to the hedged risk; and
• the change in the fair value
of derivatives.
To hedge our exposure to variability
in cash flows of a recognised asset or
liability, a foreign exchange component
of a firm commitment or a highly
probable forecast transaction caused
by interest rate, foreign currency or
other price movements.
We recognise the effective portion
of changes in the fair value of
derivatives designated as a cash
flow hedge in the cash flow
hedge reserve.
To hedge our exposure to exchange
rate differences arising from the
translation of our foreign operations
from their functional currency to
Australian dollars.
We recognise the effective portion
of changes in the fair value of the
hedging instrument in the foreign
currency translation reserve.
Recognition of ineffective
hedge portion
If a hedging instrument
expires, or is sold,
terminated, or exercised;
or no longer qualifies for
hedge accounting
Recognised immediately in other operating income.
When we recognise the hedged item in
profit or loss, we recognise the related
unamortised fair value adjustment in
profit or loss. This may occur over time
if the hedged item is amortised to profit
or loss as part of the effective yield over
the period to maturity.
Only when we recognise the
hedged item in profit or loss is
the amount previously deferred
in the cash flow hedge reserve
transferred to profit or loss.
Hedged item sold
or repaid
We recognise the unamortised
fair value adjustment immediately
in profit or loss.
Amounts accumulated in equity
are transferred immediately to
profit or loss.
The amount we defer in the foreign
currency translation reserve remains
in equity and is transferred to profit
or loss only when we dispose of,
or partially dispose of, the
foreign operation.
The gain or loss, or applicable
proportion, we recognise in equity is
transferred to profit or loss on disposal
or partial disposal of a foreign operation.
The fair value of derivative financial instruments designated in hedging relationships are:
Fair Value
Foreign exchange swap agreements
Interest rate swap agreements
Interest rate futures contracts
Interest rate swap agreements
Foreign exchange swap agreements
Hedge
accounting
type
Fair value
Fair value
Fair value
Cash flow
Cash flow
Foreign exchange spot and forward contracts
Cash flow
Foreign exchange spot and forward contracts
Net investment
Assets
2017
$m
1
1,366
80
638
35
-
11
Liabilities
2017
$m
-
(2,114)
-
(476)
(49)
(5)
(6)
Assets
2016
$m
2
2,661
5
1,038
-
-
3
Liabilities
2016
$m
-
(2,616)
(12)
(920)
-
-
(3)
Derivative financial instruments - designated in hedging relationships
2,131
(2,650)
3,709
(3,551)
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The impact recognised in profit or loss arising from derivative financial instruments designated in hedge accounting relationships, is as follows:
Gain/(loss) recognised in other operating income
Hedged item
Hedging instrument
Ineffective portion of hedged instrument
Hedge
accounting type
Fair value
Fair value
Cash flow
2017
$m
122
(128)
(18)
2016
$m
469
(428)
5
RECOGNITION AND MEASUREMENT
Recognition
Initially and at each reporting date, we recognise all derivatives at fair value. If the fair value of a derivative is
positive, then we carry it as an asset, but if its value is negative, then we carry it as a liability.
Valuation adjustments are integral in determining the fair value of derivatives. This includes:
• a derivative credit valuation adjustment (CVA) to reflect the counterparty risk and/or event of default; and
• a funding valuation adjustment (FVA) to account for funding costs and benefits in the derivatives portfolio.
Derecognition of
assets and liabilities
We remove derivative assets from our balance sheet when the contracts expire or we have transferred
substantially all the risks and rewards of ownership. We remove derivative liabilities from our balance sheet
when the Group’s contractual obligations are discharged, cancelled or expired.
Impact on the
Income Statement
How we recognise gains or losses on derivative financial instruments depends on whether the derivative
is trading or is designated into a hedging relationship.
Trading
Hedging
We recognise gains or losses from the change in the fair value of trading securities in profit or loss as other
operating income in the period in which they occur. Contracted interest payments are included in interest
income and expense.
For an instrument designated into a hedging relationship the recognition of gains or losses depends on
the nature of the item being hedged. Refer to the previous table on page 89 for profit or loss treatment
depending on the hedge type.
Hedge effectiveness
To qualify for hedge accounting a hedge is expected to be highly effective. A hedge is highly effective
only if the following conditions are met:
• the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk during the period for which the hedge is designated (prospective
effectiveness); and
• the actual results of the hedge are within the range of 80-125% (retrospective effectiveness).
The Group monitors hedge effectiveness on a regular basis but at a minimum at least at each reporting date.
KEY JUDGEMENTS AND ESTIMATES
Judgement is required when we select the valuation techniques used to measure the fair value of derivatives, particularly the selection
of valuation inputs that are not readily observable, and the application of valuation adjustments to certain derivatives. Refer to Note 17
Fair Value of Financial Assets and Liabilities for further details.
90
ANZ 2017 ANNUAL REPORT 11. AVAILABLE-FOR-SALE ASSETS
Available-for-sale-assets ($m)
3,284
4,532
17,392
2017
2016
19,115
● Government securities
● Corporate and financial
institution securities
● Equity and other securities
48,708
39,466
Period
Less than 3 months
Between 3 and 12 months
Between 1 and 5 years
Greater than 5 years
No maturity
Security
type
Government
securities
$m
6,745
5,576
19,302
17,085
-
2017
Corporate
and
financial
institution
securities
$m
1,201
2,738
12,960
493
-
Available-for-sale-assets
48,708
17,392
Equity
and
other
securities
$m
-
-
403
2,134
747
3,284
Total
$m
7,946
8,314
32,665
19,712
747
69,384
2016
Corporate
and
financial
institution
securities
$m
Equity
and
other
securities
$m
Government
securities
$m
3,760
2,483
9,762
23,461
-
1,457
2,729
14,045
884
-
39,466
19,115
-
-
592
3,085
855
4,532
Total
$m
5,217
5,212
24,399
27,430
855
63,113
During the year, the Group recognised a net gain (before tax) in respect of available-for-sale (AFS) assets of $15 million (2016: $48 million) in other
operating income.
The carrying value of AFS equity securities is $747 million (2016: $855 million). This includes the Group’s $676 million (2016: $795 million) investment
in the Bank of Tianjin (BoT) that ceased being classified as an associate in March 2016.
91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. AVAILABLE-FOR-SALE ASSETS (continued)
RECOGNITION AND MEASUREMENT
AFS assets comprise non-derivative financial assets which we designate as AFS since we do not hold them principally for trading purposes.
They include both equity and debt securities. AFS assets are initially recognised at fair value plus transaction costs and are revalued at least
bi-annually. On revaluation, we include movements in fair value within the available-for-sale revaluation reserve in equity, except for certain
items which are recognised directly in profit or loss, being interest on debt securities, dividends received, foreign exchange on debt securities
and impairment charges.
When we sell the asset, any cumulative gain or loss from the available-for-sale revaluation reserve is recognised in profit or loss.
At each reporting date, we assess whether any AFS assets are impaired. We assess the impairment of any debt securities if an event has
occurred which will have a negative impact on the asset’s estimated cash flows. For equity securities, we assess if there is a significant
or prolonged decline in fair value below cost.
If an AFS asset is impaired, then we remove the cumulative loss related to that asset from the available-for-sale revaluation reserve.
We then recognise it in profit or loss for:
• debt instruments, as a credit impairment expense; and
• equity instruments, as a negative impact in other operating income.
We recognise any later reversals of impairment on debt securities in the profit or loss through the credit impairment charge line.
However, we do not make any reversals of impairment for equity securities. To the extent previously impaired equity securities recover
in value, gains are recognised directly in equity.
KEY JUDGEMENTS AND ESTIMATES
Judgement is required when we select valuation techniques used to measure the fair value of AFS assets not valued using quoted
market prices, particularly the selection of valuation inputs that are not readily observable. Refer to Note 17 Fair Value of Financial Assets
and Liabilities for further details.
92
ANZ 2017 ANNUAL REPORT 12. NET LOANS AND ADVANCES
The following table provides details of net loans and advances for the Group:
Overdrafts
Credit cards
Commercial bills
Term loans – housing
Term loans – non-housing
Other
Subtotal
Unearned income
Capitalised brokerage/mortgage origination fees
Customer liability for acceptances1
Gross loans and advances (including assets classified as held for sale)
Provision for credit impairment (refer to Note 13)
Net loans and advances (including assets classified as held for sale)
Less: Net loans and advances classified as held for sale (refer to Note 28)
Net loans and advances
Residual contractual maturity:
Within one year
After more than one year
Net loans and advances
Carried on Balance Sheet at:
Amortised cost
Fair value through profit or loss (designated on initial recognition)
Fair value through profit or loss (held for trading)
Net loans and advances
1. Customer liability for acceptances has been recognised in other assets from 30 September 2017.
2017
$m
7,345
11,009
11,068
337,309
213,308
3,405
583,444
(411)
1,058
-
584,091
(3,798)
580,293
(5,962)
574,331
108,555
465,776
574,331
2016
$m
8,153
11,846
12,592
323,144
219,198
4,011
578,944
(544)
1,064
571
580,035
(4,183)
575,852
-
575,852
116,135
459,717
575,852
574,175
575,440
156
-
397
15
574,331
575,852
RECOGNITION AND MEASUREMENT
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market
and are facilities the Group provides directly to customers or through third party channels.
Loans and advances are initially recognised at fair value plus transaction costs directly attributable to the issue of the loan or advance,
which are primarily brokerage/mortgage origination fees. These costs are amortised over the estimated life of the loan. Subsequently, we then
measure loans and advances at amortised cost using the effective interest rate method, net of any provision for credit impairment, or
at fair value when they are specifically designated on initial recognition as fair value through profit or loss or when held for trading.
We classify contracts to lease assets and hire purchase agreements 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. We include these facilities in ‘other’ in the table above.
The Group enters into transactions in which it transfers financial assets that are recognised on its balance sheet. When the Group retains
substantially all of the risks and rewards of the transferred assets, then the transferred assets remain on the Group’s balance sheet, however
if substantially all the risks and rewards are transferred then the Group derecognises the asset.
If the risks and rewards are partially retained and control over the asset is lost, then the Group derecognises the asset. If control over the
asset is not lost, then the Group continues to recognise the asset to the extent of its continuing involvement.
We separately recognise the rights and obligations retained, or created, in the transfer as assets and liabilities as appropriate.
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. PROVISION FOR CREDIT IMPAIRMENT
PROVISION FOR CREDIT IMPAIRMENT - BALANCE SHEET
Provision for credit impairment
Individual provision
Balance at start of year
New and increased provisions
Write-backs
Bad debts written off
(excluding recoveries)
Other1
Total individual provision
Collective provision
Balance at start of year
Charge/(release) to profit or loss
Other2
Total collective provision
Total provision for credit impairment
Net loans and
advances
Off-balance sheet credit
related commitments
2017
$m
1,278
2,068
(501)
(1,693)
(34)
1,118
2,245
(76)
(51)
2,118
3,236
2016
$m
1,038
2,435
(311)
(1,722)
(162)
1,278
2,279
49
(83)
2,245
3,523
2017
$m
2016
$m
29
1
-
-
(12)
18
631
(66)
(21)
544
562
23
10
-
-
(4)
29
677
(32)
(14)
631
660
Total
2017
$m
1,307
2,069
(501)
(1,693)
(46)
1,136
2,876
(142)
(72)
2,662
3,798
1. Other individual provision includes the Esanda Dealer Finance divestment, an adjustment for exchange rate fluctuations, and the impact of discount unwind on individual provisions.
2. Other collective provision includes the Esanda Dealer Finance divestment, Asia Retail and Wealth business divestment and an adjustment for exchange rate fluctuations.
CREDIT IMPAIRMENT CHARGE - INCOME STATEMENT
Credit impairment charge
New and increased provisions
Write-backs
Recoveries of amounts previously written-off
Individual credit impairment charge
Collective credit impairment charge/(release)
Total credit impairment charge
2017
$m
2,069
(501)
(228)
1,340
(142)
1,198
2016
$m
1,061
2,445
(311)
(1,722)
(166)
1,307
2,956
17
(97)
2,876
4,183
2016
$m
2,445
(311)
(222)
1,912
17
1,929
94
ANZ 2017 ANNUAL REPORT 13. PROVISION FOR CREDIT IMPAIRMENT (continued)
RECOGNITION AND MEASUREMENT
The Group recognises two types of impairment provisions for its loans and advances:
• Individual provisions for significant assets that are assessed to be impaired; and
• Collective provisions for portfolios of similar assets that are assessed collectively for impairment.
The accounting treatment for each of them is detailed below:
Individually
Collectively
Assessment
Impairment
If any impaired loans and advances exceed
specified thresholds and an impairment event has
been identified, then we assess the need for
a provision individually.
Loans and advances are assessed as impaired
if we have objective evidence that we may not
recover principal or interest payments (that is, a
loss event has been incurred) and we can reliably
measure the impairment.
To allow for any small value loans and advances
where losses may have been incurred but not yet
identified, and individually significant loans and
advances that we do not assess as impaired, we
assess them collectively in pools of assets with
similar risk characteristics.
We estimate the provision on the basis of
historical loss experience for assets with credit risk
characteristics similar to others in the respective
collective pool. We adjust the historical loss
experience based on current observable data – such
as: changing economic conditions, the impact of the
inherent risk of large concentrated losses within the
portfolio and an assessment of the economic cycle.
Measurement
We measure impairment loss as the difference between the asset’s carrying amount and estimated
future cash flows discounted to their present value at the asset’s original effective interest rate. We
record the result as an expense in profit or loss in the period we identify the impairment and recognise a
corresponding reduction in the carrying amount of loans and advances through an offsetting provision.
Uncollectable
amounts
If a loan or advance is uncollectable (whether partially or in full), then we write off the balance
(and also any related provision for credit impairment).
We write off unsecured retail facilities at the earlier of the facility becoming 180 days past due, or
the customer’s bankruptcy or similar legal release from the obligation to repay the loan or advance.
For secured facilities, write offs occur net of the proceeds determined to be recoverable from the
realisation of collateral.
Recoveries
If we recover any cash flows from loans and advances we have previously written off, then we recognise
the recovery in profit or loss in the period the cash flows are received.
Off-balance sheet
amounts
Any off-balance sheet items, such as loan commitments, are considered for impairment both on an
individual and collective basis.
KEY JUDGEMENTS AND ESTIMATES
When we measure impairment of loans and advances, we use management’s judgement of the extent of losses at reporting date.
Key Judgements
• Estimated future cash flows
• Estimated future cash flows
Individually
Collectively
• Business prospects for the customer
• Historical loss experience of assets with similar
• Realisable value of any collateral
• Group’s position relative to other claimants
• Reliability of customer information
• Likely cost and duration of recovering loans
risk characteristics
• Impact of large concentrated losses inherent
in the portfolio
• Assessment of the economic cycle
We regularly review our key judgements and update them to reflect actual loss experience.
95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. DEPOSITS AND OTHER BORROWINGS
Deposits and other borrowings ($m)
55,222
18,979
59,292
22,913
61,429
20,867
193,371
57,759
192,147
2017
20,892
2016
250,392
235,101
Certificates of deposit
Term deposits
On demand and short term deposits
Deposits not bearing interest
Deposits from banks and securities sold under repurchase agreements
Commercial paper and other borrowings1
Deposits and other borrowings (including liabilities held for sale)
Less: Deposits and other borrowings classified as held for sale (refer to Note 28)
Deposits and other borrowings
Residual contractual maturity:
- to be settled within 1 year
- to be settled after 1 year
Deposits and other borrowings
Carried on Balance Sheet at:
Amortised cost
Fair value through profit or loss (designated on initial recognition)
Deposits and other borrowings
● Certificates of deposit
● Term deposit
● On demand and
short term deposit
● Deposits not bearing interest
● Deposit from banks
and securities sold under
repurchase agreements
● Commercial paper
and other borrowings
2017
$m
55,222
193,371
250,392
22,913
59,292
18,979
600,169
(4,558)
595,611
577,495
18,116
595,611
592,114
3,497
595,611
2016
$m
61,429
192,147
235,101
20,892
57,759
20,867
588,195
-
588,195
567,567
20,628
588,195
583,002
5,193
588,195
1. Other borrowings related to secured investments of the consolidated subsidiary UDC Finance Limited (UDC) of NZD 1.0 billion (September 2016: NZD 1.6 billion) and the accrued interest thereon
which are secured by a security interest over all the assets of UDC NZD 3.0 billion (September 2016: NZD 2.7 billion).
RECOGNITION AND MEASUREMENT
For deposits and other borrowings that are:
• not designated at fair value through profit or loss on initial recognition, we measure them at amortised cost and recognise their
interest expense using the effective interest rate method; and
• managed on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded derivative, we designated
them as fair value through profit or loss.
Refer to Note 17 Fair Value of Financial Assets and Liabilities for details of the split between amortised cost and fair value.
For deposits and other borrowings designated at fair value we recognise the amount of fair value gain or loss attributable to changes in the
Group’s own credit risk in other comprehensive income in retained earnings. Any remaining amount of fair value gain or loss we recognise
directly in profit or loss. Once we have recognised an amount in other comprehensive income, we do not later reclassify it to profit or loss.
Securities sold under repurchase agreements represent a liability to repurchase the financial assets that remain on our balance sheet since
the risks and rewards of ownership remain with the Group. Over the life of the repurchase agreement, we recognise the difference
between the sale price and the repurchase price and charge it to interest expense in the Income Statement.
96
ANZ 2017 ANNUAL REPORT 15. DEBT ISSUANCES
The Group uses a variety of funding programmes to issue senior debt (including covered bonds and securitisations) and subordinated debt. The difference
between senior debt and subordinated debt is that holders of senior debt take priority over holders of subordinated debt owed by the relevant issuer and
subordinated debt will be repaid by the relevant issuer only after the repayment of claims of depositors, other creditors and the senior debt holders.
Senior debt
Covered bonds
Securitisation
Total unsubordinated debt
Subordinated debt
- Additional Tier 1 capital
- Tier 2 capital
Total subordinated debt
Total debt issued
2017
$m
68,852
19,859
1,552
90,263
8,452
9,258
17,710
107,973
TOTAL DEBT ISSUED BY CURRENCY
The table below shows the Group’s issued debt by currency of issue, which broadly represents the debt holders’ base location.
USD
EUR
AUD
NZD
JPY
CHF
GBP
HKD
Other
United States Dollars
Euro
Australian Dollars
New Zealand Dollars
Japanese Yen
Swiss Francs
Pounds Sterling
Hong Kong Dollars
Chinese Yuan, Norwegian Kroner, Turkish Lira, Singapore Dollars, Canadian Dollars, Mexican Peso
and South African Rand
2017
$m
45,799
22,507
23,194
6,361
3,233
2,248
854
1,136
2,641
2016
$m
70,041
21,039
-
91,080
9,493
12,471
21,964
113,044
2016
$m
44,536
25,141
24,083
6,972
4,069
2,074
1,744
1,188
3,237
Total debt issued
Residual contractual maturity:
- to be settled within 1 year
- to be settled after 1 year
- no maturity date (instruments in perpetuity)
Total debt issued
107,973
113,044
13,458
92,159
2,356
107,973
23,348
87,177
2,519
113,044
SUBORDINATED DEBT
Subordinated debt qualifies as regulatory capital for the Group and is classified as either Additional Tier 1 (AT1) capital or Tier 2 capital for APRA’s capital
adequacy purposes depending on their terms and conditions:
• AT1 capital - perpetual capital instruments such as:
• ANZ Convertible Preference Shares (ANZ CPS);
• ANZ Capital Notes (ANZ CN);
• ANZ Capital Securities (ANZ CS); and
• ANZ NZ Capital Notes (ANZ NZ CN).
• Tier 2 capital - all other perpetual or term subordinated notes.
97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. DEBT ISSUANCES (continued)
AT1 CAPITAL
All outstanding AT1 capital instruments (other than CPS3) are Basel III fully compliant instruments (refer to Note 22 Capital Management for further
information about Basel III). For CPS3, APRA has granted the Group transitional Basel III capital treatment until 1 September 2019. CPS3, and each
of the ANZ CN and ANZ CS rank equally with each other.
Distributions on the AT1 capital instruments are non-cumulative and subject to the issuer’s absolute discretion and certain payment conditions
(including regulatory requirements). Distributions on CPS3 and ANZ CN are franked in line with the franking applied to ANZ ordinary shares.
Where specified, the AT1 capital instruments provide the issuer with an early redemption or conversion option on a specified date and in certain other
circumstances (such as a tax or regulatory event). This option is subject to APRA’s and, in respect of the ANZ NZ CN, the Reserve Bank of New Zealand’s
(RBNZ) prior written approval.
Where specified, the AT1 capital instruments will immediately convert into a variable number of ANZ ordinary shares (based on the average
market price of the shares immediately prior to conversion less a 1% discount, subject to a maximum conversion number) if:
• ANZ’s or, in the case of the ANZ NZ CN, ANZ Bank New Zealand Limited’s (ANZ NZ) Common Equity Tier 1 capital ratio is equal to or less than
5.125% - known as a Common Equity Capital Trigger Event; or
• 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 or, in the case of the ANZ NZ CN, the RBNZ directs ANZ NZ to convert
or write-off the notes or a statutory manager is appointed to ANZ NZ and decides that ANZ NZ must convert or write-off the notes – known
as a Non-Viability Trigger Event.
The AT1 capital instruments (other than the ANZ CS) mandatorily convert into a variable number of ANZ ordinary shares (based on the average
market price of the shares immediately prior to conversion less a 1% discount):
• on a specified date; or
• on an earlier date under certain circumstances.
However the mandatory conversion is deferred for a specified period if certain conversion tests are not met.
The tables below show the key details of the Group’s AT1 capital instruments on issue at 30 September in both the current and prior year:
ANZ Convertible Preference Shares (ANZ CPS)
Issuer
Issue date
Issue amount
Face value
Dividend frequency
Dividend rate
Issuer’s early redemption or
conversion option
Mandatory conversion date
Common equity capital trigger event
Non-viability trigger event
Cash dividend payments treated
as interest expense
CPS2
ANZ
CPS3
ANZ
17 December 2009
28 September 2011
$1,968 million
On 27 September 2016, ANZ bought
back and cancelled $900 million of CPS2,
and reinvested the proceeds into CN4.
The remaining CPS2 was bought back
and cancelled on 15 December 2016.
$1,340 million
On 28 September 2017, ANZ bought back
and cancelled $767 million of CPS3, and
either reinvested the proceeds into
CN5 or returned the cash proceeds
to investors.
$100
Quarterly in arrears
$100
Semi-annually in arrears
Floating rate: (90 day Bank Bill rate +3.1%)x
(1-Australian corporate tax rate)
Floating rate: (180 day Bank Bill rate +3.1%)x
(1-Australian corporate tax rate)
No
N/A
No
No
1 March 2018 and each subsequent
semi-annual dividend payment date
1 September 2019
Yes
No
$8 million (2016: $75 million)
$47 million (2016: $51 million)
Carrying value 2017 (net of issue costs)
$nil million (2016: $1,068 million)
$573 million (2016: $1,340 million)
98
ANZ 2017 ANNUAL REPORT 15. DEBT ISSUANCES (continued)
ANZ Capital Notes (ANZ CN)
Issuer
Issue date
Issue amount
Face value
Distribution frequency
Distribution rate
CN1
ANZ
7 August 2013
$1,120 million
$100
CN2
ANZ
31 March 2014
$1,610 million
$100
CN3
ANZ, acting through
its New Zealand branch
5 March 2015
$970 million
$100
Semi-annually in arrears
Semi-annually in arrears
Semi-annually in arrears
Floating rate: (180 day Bank Bill
rate +3.4%)x(1-Australian
corporate tax rate)
Floating rate: (180 day Bank
Bill rate +3.25%)x(1-Australian
corporate tax rate)
Floating rate: (180 day Bank
Bill rate +3.6%)x(1-Australian
corporate tax rate)
Issuer’s early redemption or conversion option
1 September 2021
Mandatory conversion date
1 September 2023
24 March 2022
24 March 2024
Yes
Yes
24 March 2023
24 March 2025
Yes
Yes
Yes
Yes
Common equity capital trigger event
Non-viability trigger event
Carrying value 2017 (net of issue costs)
Issuer
Issue date
Issue amount
Face value
Distribution frequency
Distribution rate
Issuer’s early redemption or conversion option
Mandatory conversion date
Common equity capital trigger event
Non-viability trigger event
Carrying value 2017 (net of issue costs)
$1,116 million
(2016: $1,115 million)
$1,604 million
(2016: $1,602 million)
$963 million
(2016: $962 million)
CN4
ANZ
CN5
ANZ
27 September 2016
28 September 2017
$1,622 million
$100
$931 million
$100
Quarterly in arrears
Quarterly in arrears
Floating rate: (90 day Bank
Bill rate +4.7%)x(1-Australian
corporate tax rate)
Floating rate: (90 day Bank
Bill rate +3.8%)x(1-Australian
corporate tax rate)
20 March 2024
20 March 2026
Yes
Yes
20 March 2025
20 March 2027
Yes
Yes
$1,608 million
(2016: $1,604 million)
$925 million
(2016: $0 million)
99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. DEBT ISSUANCES (continued)
ANZ Capital Securities (ANZ CS)
Issuer
Issue date
Issue amount
Face value
Interest frequency
Interest rate
ANZ, acting through its London branch
15 June 2016
USD 1,000 million
Minimum denomination of USD 200,000 and an integral multiple of USD 1,000 above that
Semi-annually in arrears
Fixed at 6.75% p.a. until 15 June 2026. Reset on 15 June 2026 and each 5 year anniversary
to a floating rate: 5 year USD mid-market swap rate + 5.168%
Issuer’s early redemption option
15 June 2026 and each 5 year anniversary
Common equity capital trigger event
Non-viability trigger event
Yes
Yes
Carrying value 2017 (net of issue costs)
$1,206 million (2016: $1,329 million)
ANZ NZ Capital Notes (ANZ NZ CN)
Issuer
Issue date
Issue amount
Face value
Interest frequency
Interest rate
ANZ Bank New Zealand Limited (ANZ NZ)
31 March 2015
NZD 500 million
NZD 1
Quarterly in arrears
Fixed at 7.2% p.a. until 25 May 2020. Resets in May 2020 to a floating rate: New Zealand 3 month
bank bill rate + 3.5%
Interest payments are subject to ANZ NZ’s absolute discretion and certain payment conditions
(including APRA and RBNZ requirements)
Issuer’s early redemption option
Mandatory conversion date
Common equity capital trigger event
Non-viability trigger event
25 May 2020
25 May 2022
Yes
Yes
Carrying value 2017 (net of issue costs)
$457 million (2016: $473 million)
100
ANZ 2017 ANNUAL REPORT 15. DEBT ISSUANCES (continued)
TIER 2 CAPITAL
The convertible term subordinated notes are Basel III fully compliant instruments. If a Non-Viability Trigger Event occurs, the convertible term
subordinated notes will immediately convert into ANZ ordinary shares (based on the average market price of the shares immediately prior to
conversion less a 1% discount, subject to a maximum conversion number).
APRA has granted transitional Basel III capital treatment for:
• all other term subordinated notes until their first call date;
• the USD 300 million perpetual subordinated notes until the end of the transitional period (December 2021); and
• the NZD 835 million perpetual subordinated notes until the April 2018 call date.
The table below shows the Tier 2 capital subordinated notes the Group holds at 30 September in both the current and prior year:
Currency
Face value
Maturity
Next optional call date – subject
to APRA’s prior approval
Interest
rate
Basel III transitional subordinated notes (perpetual)
USD
NZD
300m
835m1
Perpetual
Perpetual
2018
Each semi-annual interest payment date
Floating
Basel III transitional subordinated notes (term)
EUR
AUD
AUD
USD
AUD
750m
500m
1,509m
750m
750m
2019
2022
2022
2022
2023
N/A
2017
2017
2017
2018
Total Basel III transitional subordinated notes
Basel III fully compliant convertible subordinated notes (term)
AUD
USD
CNY
SGD
AUD
JPY
AUD
USD
JPY
JPY
AUD
750m
800m
2,500m
500m
200m
20,000m
700m
1,500m
10,000m
10,000m
225m
2024
2024
2025
2027
2027
2026
2026
2026
2026
2028
2032
2019
N/A
2020
2022
2022
N/A
2021
N/A
2021
2023
2027
Total Basel III fully compliant subordinated notes
Total Tier 2 capital
1. Call is subject to prior RBNZ and APRA approval.
Non-
Viability
Trigger
Event
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
2017
$m
382
768
1,205
-
-
-
747
3,102
750
1,061
478
478
199
226
699
1,817
112
111
225
6,156
9,258
Fixed
Fixed
Floating
Floating
Fixed
Floating
Floating
Fixed
Fixed
Fixed
Fixed
Fixed
Floating
Fixed
Fixed
Fixed
Fixed
2016
$m
394
796
1,224
499
1,507
978
749
6,147
750
1,158
491
493
199
264
700
2,011
129
129
-
6,324
12,471
101
RECOGNITION AND MEASUREMENT
Debt issuances are measured at amortised cost, except where designated at fair value through profit or loss. Where the Group enters into
a hedge accounting relationship, the fair value attributable to the hedged risk is reflected in adjustments to the carrying value of the debt.
Interest expense is recognised using the effective interest rate method.
Subordinated debt with capital-based conversion features (i.e. Common Equity Capital Trigger Event or Non-Viability Trigger Events) are
considered to contain embedded derivatives that we account for separately at fair value through profit and loss. The embedded derivatives
have no value as of the reporting date given the remote nature of those triggering events.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT
RISK MANAGEMENT FRAMEWORK AND MODEL
INTRODUCTION
The use of financial instruments is fundamental to the Group’s businesses of providing banking and other financial services to our customers.
The associated financial risks (primarily credit, market, and liquidity risks) are a significant portion of the Group’s principal risks.
We disclose details of all principal risks impacting the Group, and further information on the Group’s risk management activities, in the Governance
and Risk Management section.
This note details the Group’s financial risk management policies, processes and quantitative disclosures in relation to the key financial risks:
Principal financial risks
Overview
Credit risk
Credit risk is the risk of financial loss from a customer, or counterparty,
failing to meet their financial obligations – including the whole and
timely payment of principal, interest, collateral, and other receivables.
Market risk
Market risk is the risk of loss arising from potential adverse changes in
the value of the Group’s assets and liabilities and other trading positions
from fluctuations in market variables. These variables include, but are
not limited to interest rates, foreign exchange, equity prices, commodity
prices, credit spreads, implied volatilities, and asset correlations.
Liquidity and funding risk
Liquidity risk is the risk that the Group is unable to meet its payment
obligations when they fall due; or does not have the appropriate
amount, tenor and composition of funding and liquidity to fund
increases in its assets.
Refer to Note 29 Life Insurance Business for details of the insurance
and funds management risk management.
Key sections applicable to this risk
• An overview of our Risk Management Framework
• Credit risk overview, management and control responsibilities
• Maximum exposure to credit risk
• Credit quality
• Concentrations of credit risk
• Collateral management
• Market risk overview, management and control responsibilities
• Measurement of market risk
• Traded and Non-traded market risk
• Equity securities classified as Available-for-sale
• Foreign currency risk – structural exposures
• Liquidity risk overview, management and control responsibilities
• Key areas of measurement for liquidity risk
• Funding position
• Residual contractual maturity analysis of the Group’s liabilities
102
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
OVERVIEW
AN OVERVIEW OF OUR RISK MANAGEMENT FRAMEWORK
This overview is provided to aid the users of the financial statements to understand the context of the financial disclosures required under AASB 7 Financial
Instruments: Disclosures. It should be read in conjunction with the Governance and Risk Management section.
The Board is responsible for establishing and overseeing the Group’s Risk Management Framework (RMF). The Board has delegated authority to the
Board Risk Committee (BRC) to develop and monitor compliance with the Group’s risk management policies. The BRC reports regularly to the Board
on its activities.
The Board approves the strategic objectives of the Group including:
• the Risk Appetite Statement (RAS), sets out the Board’s expectations regarding the degree of risk that ANZ is prepared to accept in pursuit
of its strategic objectives and business plan; and
• the Risk Management Strategy (RMS), which describes ANZ’s strategy for managing risks and the key elements of the Risk Management Framework
(RMF) that gives effect to this strategy. This includes a description of each material risk, and an overview of how the RMF addresses each risk, with
reference to the relevant policies, standards and procedures. It also includes information on how ANZ identifies measures, evaluates, monitors,
reports and controls or mitigates material risks.
The Group, through its training and management standards and procedures, aims to maintain a disciplined and robust control environment
in which all employees understand their roles and obligations. At ANZ, risk is everyone’s responsibility.
The Group has an independent risk management function, headed by the Chief Risk Officer who:
• is responsible for overseeing the risk profile and the risk management framework;
• can effectively challenge activities and decisions that materially affect ANZ’s risk profile; and
• has an independent reporting line to the BRC to enable the appropriate escalation of issues of concern.
The Internal Audit Function reports directly to the Board Audit Committee (BAC). Internal Audit provides:
• an independent evaluation of the Group’s RMF annually and undertakes a comprehensive review every three years;
• assurance on the appropriateness, effectiveness and adequacy of the risk management framework, which includes assurance the framework
is operating effectively; and
• recommendations to improve the framework and/or work practices to strengthen the effectiveness of day to day operations.
103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK
CREDIT RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Granting credit facilities to customers is one of the Group’s major sources of income. As this activity is also a principal risk, the Group dedicates considerable
resources to its management. The Group assumes credit risk in a wide range of lending and other activities in diverse markets and in many jurisdictions.
Credit risks arise from traditional lending to customers as well as from inter-bank, treasury, trade finance and capital markets activities around the world.
Our credit risk management framework ensures we apply a consistent approach across the Group when we measure, monitor and manage the credit risk
appetite set by the Board. The Board is assisted and advised by the BRC in discharging its duty to oversee credit risk. The BRC:
• sets the credit risk appetite and credit strategies; and
• approves credit transactions beyond the discretion of executive management.
We quantify credit risk through an internal credit rating system (masterscales) to ensure consistency across exposure types and to provide a consistent
framework for reporting and analysis. The system uses models and other tools to measure the following for customer exposures:
Probability of Default (PD)
Expressed by a Customer Credit Rating (CCR), reflecting the Group’s assessment of a customer’s ability
to service and repay debt.
Exposure at Default (EAD)
The expected amount of loan outstanding at the time of default.
Loss in the Event of Default (LGD)
Expressed by a Security Indicator (SI) ranging from A to G. The SI is calculated by reference to the percentage
of loan covered by security which the Group can realise if a customer defaults. The A-G scale is supplemented
by a range of other SIs which cover such factors as cash cover and sovereign backing. For some customers,
we group exposures into large homogenous pools - and the LGD is assigned at the pool level.
Our specialist credit risk teams develop and validate the Group’s PD and LGD rating models. The outputs from these models drive our day-to-day
credit risk management decisions including origination, pricing, approval levels, regulatory capital adequacy, economic capital allocation, and
credit provisioning.
All customers with whom ANZ has a credit relationship are assigned a CCR at origination via either of the following assessment approaches:
Large and more complex lending
Retail and some small business lending
Rating models provide a consistent and structured assessment, with
judgement required around the use of out-of-model factors. We handle
credit approval on a dual approval basis, jointly with the business writer and
an independent credit officer.
Automated assessment of credit applications using a combination of
scoring (application and behavioural), policy rules and external credit
reporting information. If the application does not meet the automated
assessment criteria, then it is referred out for manual assessment.
We use the Group’s internal CCRs to manage the credit quality of financial assets neither past due nor impaired. To enable wider comparisons, the Group’s
CCRs are mapped to external rating agency scales as follows:
Internal Rating
ANZ Customer Requirements
Strong credit profile
Satisfactory risk
Demonstrated superior stability in their operating and financial
performance over the long-term, and whose capacity is not significantly
vulnerable to foreseeable events.
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.
Sub-standard but not
past due nor impaired
Demonstrated some operational and financial instability, with variability
and uncertainty in profitability and liquidity projected to continue over
the short and possibly medium term.
Moody’s Rating
Standard & Poors Rating
Aaa - Baa3
AAA - BBB-
Ba1 - Ba3
BB+ - BB-
B1 - Caa
B+ - CCC
104
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
MAXIMUM EXPOSURE TO CREDIT RISK
For financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. In certain circumstances there may
be differences between the carrying amounts reported on the balance sheet and the amounts reported in the tables below. Principally, these differences
arise in respect of financial assets that are subject to risks other than credit risk, such as equity instruments which are primarily subject to market risk,
or bank notes and coins.
For undrawn facilities, this maximum exposure to credit risk is the full amount of the committed facilities. 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.
The table below shows our maximum exposure to credit risk of on-balance sheet and off-balance sheet positions before taking account of any
collateral held or other credit enhancements.
On-balance sheet positions
Net loans and advances2
Other financial assets:
Cash and cash equivalents
Settlement balances owed to ANZ
Collateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Regulatory deposits
Investments backing policy liabilities
Other financial assets3
Total other financial assets
Subtotal
Off-balance sheet positions
Undrawn and contingent facilities2, 4
Total
Reported
Excluded1/Other2
Maximum exposure
to credit risk
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
580,293
575,852
(562)
(660)
580,855
576,512
68,048
5,504
8,987
43,605
62,518
69,384
2,015
37,964
3,764
301,789
882,082
66,220
4,406
12,723
47,188
87,496
63,113
2,296
35,656
3,541
322,639
898,491
232,162
245,189
1,114,244
1,143,680
1,544
5,504
-
4,713
-
747
-
1,457
4,406
-
6,597
-
855
-
37,964
35,656
-
48,971
48,311
-
50,472
49,910
562
50,472
66,504
64,763
-
8,987
38,892
62,518
68,637
2,015
-
3,764
251,317
832,172
-
12,723
40,591
87,496
62,258
2,296
-
3,541
273,668
850,180
660
231,600
244,529
48,971
1,063,772
1,094,709
1. Excluded comprises bank notes and coins and cash at bank within liquid assets, equity securities within available-for-sale financial assets and investments relating to the insurance business where the
credit risk is passed onto the policy holder. In 2017, equity securities and precious metal exposures recognised as trading securities and trade dated assets recognised as settlement balances owed to
ANZ have been excluded as they do not carry credit risk. Comparatives have been restated accordingly.
2. Other relates to the transfer of individual and collective provisions related to off-balance sheet facilities held in net loans and advances. The provisions are transferred for the purposes of showing the
maximum exposure to credit risk by relevant facility type in this and the following tables. Net loans and advances include loans and advances held for sale.
3. Other financial assets mainly comprise accrued interest, insurance receivables and acceptances.
4. Undrawn facilities and contingent facilities includes guarantees, letters of credit and performance related contingencies.
105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
CREDIT QUALITY
The table below provides an analysis of the credit quality of the maximum exposure to credit risk split by:
• neither past due nor impaired financial assets by credit quality;
• past due but not impaired assets by ageing; and
• restructured and impaired assets presented as gross amounts and net of individual provisions.
Net loans
and advances
Other financial
assets
Off-balance sheet
credit related
commitments
Total
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
409,119
432,049
246,774
268,744
189,811
200,510
845,704
901,303
138,018
110,861
4,429
114
4,567
343
39,765
41,500
182,212
156,928
1,943
2,438
19,574
20,963
Neither past due nor impaired
Strong credit profile
Satisfactory risk1
Sub-standard but not past due or impaired
17,517
18,182
Subtotal
Past due but not impaired
≥ 1 < 30 days
≥ 30 < 60 days
≥ 60 < 90 days
≥ 90 days
Subtotal
Restructured and impaired
Impaired loans
Restructured items2
Non-performing commitments and contingencies
Other
Gross impaired financial assets
Individual provisions
Subtotal restructured and net impaired
564,654
561,092
251,317
273,654
231,519
244,448 1,047,490
1,079,194
8,790
2,143
1,148
2,953
7,966
1,910
1,070
2,703
15,034
13,649
2,118
167
-
-
2,285
(1,118)
1,167
2,646
403
-
-
3,049
(1,278)
1,771
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
14
14
-
14
-
-
-
-
-
-
-
99
-
99
(18)
81
-
-
-
-
-
-
-
110
-
110
(29)
81
8,790
2,143
1,148
2,953
7,966
1,910
1,070
2,703
15,034
13,649
2,118
167
99
-
2,384
(1,136)
1,248
2,646
403
110
14
3,173
(1,307)
1,866
Total
580,855
576,512
251,317
273,668
231,600
244,529 1,063,772
1,094,709
1. Movement in credit profile in 2017 was due to the implementation of ANZ’s revised Capital Mortgage model, which re-rated the Australian mortgage portfolio.
2. 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 for new facilities with similar risk.
106
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
CONCENTRATIONS OF CREDIT RISK
Credit risk becomes concentrated when a number of customers are engaged in similar activities, have similar economic characteristics, or have
similar activities within the same geographic region – therefore, they may be similarly affected by changes in economic or other conditions.
The Group monitors its credit portfolio to manage risk concentration and rebalance the portfolio. The Group also applies single customer
counterparty limits to protect against unacceptably large exposures to one single customer.
Composition of financial instruments that give rise to credit risk by industry group are presented below:
Loans
and advances
Other financial
assets
Agriculture, forestry, fishing and mining
35,592
37,003
2017
$m
2016
$m
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
8,413
6,965
6,472
12,462
39,741
2,307
21,107
7,846
7,265
6,388
11,972
39,094
2,224
22,913
352,841
346,922
42,514
13,375
11,884
14,178
15,593
41,487
13,331
13,148
14,799
15,123
Off-balance sheet
credit related
commitments
2017
$m
2016
$m
16,093
17,090
7,251
6,419
6,103
3,650
29,640
2,733
38,872
62,090
13,057
6,506
6,998
20,501
12,249
7,420
6,668
5,900
3,629
22,207
3,084
45,597
70,156
14,611
6,748
6,942
25,630
9,507
Total
2017
$m
52,458
15,846
13,468
13,761
16,559
2016
$m
55,138
15,506
14,053
14,295
16,216
231,579
252,382
78,944
62,670
70,603
71,985
416,833
419,506
56,409
20,202
20,045
37,496
30,653
57,500
20,530
21,775
43,109
25,774
2017
$m
773
182
84
1,186
447
2016
$m
1,045
240
120
2,007
615
162,198
191,081
73,904
65,295
2,691
1,902
838
321
1,163
2,817
2,811
3,475
2,428
1,402
451
1,685
2,680
1,144
583,444
579,515
251,317
273,668
232,162
245,189
1,066,923
1,098,372
Provision for credit impairment
(3,236)
(3,523)
-
-
(562)
(660)
(3,798)
(4,183)
Subtotal
Unearned income
Capitalised brokerage/mortgage
origination fees
580,208
575,992
251,317
273,668
231,600
244,529
1,063,125
1,094,189
(411)
(544)
1,058
1,064
-
-
-
-
-
-
-
-
(411)
(544)
1,058
1,064
Maximum exposure to credit risk
580,855
576,512
251,317
273,668
231,600
244,529
1,063,772
1,094,709
107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISK (continued)
COLLATERAL MANAGEMENT
We use collateral for on and off-balance sheet exposures to mitigate credit risk if a counterparty cannot meet its repayment obligations from its expected
cashflows. For some products, the collateral provided by customers is fundamental to the product’s structuring, so it 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 nature of collateral or security held for the relevant classes of financial assets is as follows:
Loans – housing
and personal
Housing loans are secured by mortgage(s) over property and additional security may take the form
of guarantees and deposits.
Personal lending (including credit cards and overdrafts) is predominantly unsecured. If we take security,
then it is restricted to eligible vehicles, motor homes and other assets.
Loans – business
Business loans may be secured, partially secured or unsecured. Typically, we take security by way
of a mortgage over property and/or a charge over the business or other assets.
If appropriate, we may take other security to mitigate the credit risk – for example: guarantees,
standby letters of credit or derivative protection.
Trading securities, Available-
for-sale assets, Derivatives
and Other financial assets
For trading securities, we do not seek collateral directly from the issuer or counterparty. However, the
collateral may be implicit in the terms of the instrument (for example, with an asset-backed security).
The terms of debt securities may include collateralisation.
For derivatives, we typically terminate all contracts with the counterparty and settle on a net basis at
market levels current at the time of a counterparty default under International Swaps and Derivatives
Association (ISDA) Master Agreements.
Our preferred practice is to use a Credit Support Annex (CSA) to the ISDA so that 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 when their position is out of the money (or provided
to the counterparty by ANZ when our position is out of the money).
The table below shows the estimated value of collateral we hold and the net unsecured portion of credit exposures:
Credit exposure
Total value of collateral
Unsecured portion of
credit exposure
Net loans and advances
Other financial assets
Off-balance sheet positions
2017
$m
580,855
251,317
231,600
2016
$m
576,512
273,668
244,529
Total
1,063,772
1,094,709
2017
$m
474,746
25,429
46,083
546,258
2016
$m
461,271
30,968
49,786
542,025
2017
$m
106,109
225,888
185,517
517,514
2016
$m
115,241
242,700
194,743
552,684
108
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK
MARKET RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Market risk stems from ANZ’s trading and balance sheet management activities, the impact of changes and correlation between interest rates,
foreign exchange rates, credit spreads and volatility in bond, commodity or equity prices.
The BRC delegates responsibility for day-to-day management of both market risks and compliance with market risk policies to the Credit & Market
Risk Committee (CMRC) and the Group Asset & Liability Committee (GALCO).
Within overall strategies and policies established by the BRC, business units and risk management have joint responsibility for the control of market
risk at the Group level. The Market Risk team (a specialist risk management unit independent of the business) allocates market risk limits at various
levels and monitors and reports on them daily. This detailed framework allocates individual limits to manage and control exposures using risk factors
and profit and loss limits.
Management, measurement and reporting of market risk, the management of market risk is undertaken in two broad categories:
Traded Market Risk
Non-Traded Market Risk
Risk of loss from changes in the value of financial instruments due to
movements in price factors for both physical and derivative trading
positions. Principal risk categories monitored are:
1. Currency risk – potential loss arising from changes in foreign
exchange rates or their implied volatilities.
2. Interest rate risk – potential loss from changes in market
interest rates or their implied volatilities.
3. Credit spread risk – potential loss arising from a movement
in margin or spread relative to a benchmark.
4. Commodity risk – potential loss arising from changes
in commodity prices or their implied volatilities.
5. Equity risk – potential loss arising from changes in equity prices.
Risk of loss associated with the management of non-traded interest rate
risk, liquidity risk and foreign exchange exposures. This includes interest
rate risk in the banking book. This risk of loss arises from adverse changes
in the overall and relative level of interest rates for different tenors,
differences in the actual versus expected net interest margin, and the
potential valuation risk associated with embedded options in financial
instruments and bank products.
MEASUREMENT OF MARKET RISK
We primarily manage and control market risk using Value at Risk (VaR), sensitivity analysis and stress testing.
VaR gauges the Group’s possible daily loss based on historical market movements.
The Group’s VaR approach for both traded and non-traded risk is historical simulation. We use historical changes in market rates, prices and volatilities over:
• the previous 500 business days, to calculate standard VaR; and
• a 1-year stressed period, to calculate stressed VaR.
We calculate traded and non-traded VaR using one-day and ten-day holding periods. For stressed VaR, we use a ten-day period. Back testing is used
to ensure our VaR models remain accurate.
ANZ measures VaR at a 99% confidence interval which means there is a 99% chance that a loss will not exceed the VaR on any given day.
109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK (continued)
TRADED AND NON-TRADED MARKET RISK
Traded market risk
The table below shows the traded market risk VaR on a diversified basis by risk categories:
Traded value at risk 99% confidence
Foreign exchange
Interest rate
Credit
Commodity
Equity
Diversification benefit1
Total VaR
30 September 2017
30 September 2016
As at
$m
High for
year
$m
Low for
year
$m
Average
for year
$m
As at
$m
High for
year
$m
Low for
year
$m
Average
for year
$m
4.2
6.3
4.4
2.2
-
(7.6)
9.5
10.5
21.3
5.4
3.8
0.5
n/a
24.9
2.5
5.1
2.0
1.4
-
n/a
6.9
5.1
7.9
3.4
2.1
0.2
(7.7)
11.0
4.0
4.7
3.3
2.5
0.5
(6.8)
8.2
11.4
20.1
4.6
2.8
2.0
n/a
25.4
2.2
4.1
2.2
1.1
0.1
n/a
6.1
5.2
9.1
3.2
1.7
0.2
(6.2)
13.2
1. The diversification benefit reflects risks that offset across categories. The high and low VaR figures reported for each factor did not necessarily occur on the same day as the high and low VaR reported
for the Group as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted from the table.
Non-traded market risk
Balance sheet risk management
The principal objectives of balance sheet risk 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 management
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, namely 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 VaR and scenario analysis (based on the impact of
a 1% rate shock). The table below shows VaR figures for non-traded interest rate risk for the combined Group as well as Australia, New Zealand and Asia
Pacific, Europe and Americas (APEA) geographies which are calculated separately.
Non-traded value at risk 99% confidence
Australia
New Zealand
APEA
Diversification benefit1
Total VaR
30 September 2017
30 September 2016
As at
$m
31.6
11.8
14.6
(20.6)
37.4
High for
year
$m
Low for
year
$m
Average
for year
$m
37.5
15.1
19.0
n/a
44.0
25.9
11.1
14.3
n/a
33.5
31.3
12.4
15.9
(19.7)
39.9
As at
$m
38.4
11.4
14.7
(24.0)
40.5
High for
year
$m
Low for
year
$m
Average
for year
$m
40.6
11.4
17.3
n/a
44.7
28.0
8.8
14.4
n/a
31.3
33.7
10.0
15.8
(22.9)
36.6
1. The diversification benefit reflects the historical correlation between the regions. The high and low VaR figures reported for the region did not necessarily occur on the same day as the high and low
VaR reported for the Group as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted from the table.
110
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK (continued)
We undertake scenario analysis to stress test the impact of extreme events on the Group’s market risk exposures. We model an 1% overnight parallel
positive shift in the yield curve to determine the potential impact on our net interest income over the next 12 months. This is a standard risk measure
which assumes the parallel shift is reflected in all wholesale and customer rates.
The table below shows the outcome of this risk measure for the current and previous financial years, expressed as a percentage of reported net interest
income. A positive number signifies 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)
2017
2016
0.52%
0.65%
0.01%
0.28%
0.37%
0.48%
0.00%
0.21%
EQUITY SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE
Our available-for-sale financial assets contain equity investment holdings which predominantly comprise investments we hold for longer-term strategic
reasons. The market risk impact on these equity investments is not captured by the Group’s VaR processes for traded and non-traded market risks.
Therefore, the Group regularly reviews the valuations of the investments within the portfolio and assesses whether the investments are impaired
based on the recognition and measurement policies set out in Note 11 Available-for-sale Assets.
FOREIGN CURRENCY RISK – STRUCTURAL EXPOSURES
Our investment of capital in foreign operations — for example, branches, subsidiaries or associates with functional currencies other than the
Australian Dollar — exposes the Group to the risk of changes in foreign exchange rates. Variations in the value of these foreign operations arising
as a result of exchange differences are reflected in the foreign currency translation reserve in equity.
Where it is considered appropriate, the Group takes out economic hedges against larger foreign exchange denominated revenue streams (primarily
New Zealand Dollar, US Dollar and US Dollar correlated). The primary objective of hedging is to ensure that, if practical, the consolidated capital ratios
are neutral to the effect of changes in exchange rates. During the current and prior years, we had selective hedges in place. Further detail on the
Group’s hedging relationships is disclosed in Note 10 Derivative Financial Instruments.
111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISK
LIQUIDITY RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Liquidity risk is the risk that the Group is either:
• unable to meet its payment obligations (including repaying depositors or maturing wholesale debt) when they fall due; or
• does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets.
Management of liquidity and funding risks are overseen by GALCO. The Group’s liquidity and funding risks are governed by a set of principles approved
by the BRC and include:
• 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;
• ensuring the liquidity management framework is compatible with local regulatory requirements;
• preparing daily liquidity reports and scenario analysis to quantify the Group’s positions;
• targeting a diversified funding base to avoid 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.
KEY AREAS OF MEASUREMENT FOR LIQUIDITY RISK
Scenario modelling of funding sources
ANZ’s liquidity risk appetite is defined by a range of regulatory and internal liquidity metrics mandated by the Board. The metrics cover a range of
scenarios of varying duration and level of severity.
A key component of this framework is the Liquidity Coverage Ratio (LCR), which is a severe short term liquidity stress scenario mandated by banking
regulators including APRA. As part of meeting LCR requirements, the Group has a Committed Liquidity Facility (CLF) with the Reserve Bank of Australia.
The CLF has been established to offset the shortage of available High Quality Liquid Assets (HQLA) in Australia and provides an alternative form of
contingent liquidity. The total amount of the CLF available to a qualifying Australian Deposit-taking Institution is set annually by APRA. From 1 January
2017, ANZ’s CLF is $43.8 billion (2016 calendar year end: $50.3 billion).
Liquid assets
The Group holds a portfolio of high quality (unencumbered) liquid assets to protect the Group’s liquidity position in a severely stressed environment,
to meet regulatory requirements. HQLA comprise three categories consistent with Basel III LCR requirements:
• HQLA1 – Cash and highest credit quality government, central bank or public sector securities eligible for repurchase with central banks to provide
same-day liquidity.
• HQLA2 – High credit quality government, central bank or public sector securities, high quality corporate debt securities and high quality covered
bonds eligible for repurchase with central banks to provide same-day liquidity.
• Alternative liquid assets (ALA) – Assets qualifying as collateral for the CLF and eligible securities listed by Reserve Bank of New Zealand (RBNZ).
112
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISK (continued)
Market values post discount
HQLA12
HQLA2
Internal Residential Mortgage Backed Securities (Australia)2
Internal Residential Mortgage Backed Securities (New Zealand)3
Other ALA4
Total liquid assets
Cash flows modelled under stress scenario
Cash outflows
Cash inflows
Net cash outflows
Average for year1
2017
$bn
127.8
4.5
32.0
0.9
15.3
180.5
173.6
39.7
133.9
2016
$bn
118.5
3.7
35.2
1.3
18.1
176.8
181.9
41.1
140.8
Liquidity Coverage Ratio (%)5
135%
126%
1. Average for year is calculated as prescribed by APRA Prudential Regulatory Standard (APS 210 Liquidity) and consistent with APS 330 requirements.
2. RBA open repo arrangement netted down from CLF, with a corresponding increase in HQLA.
3. New Zealand LCR surplus is excluded from NZ internal Residential Mortgage Backed Securities, consistent with APS 330 treatment.
4. Comprised of assets qualifying as collateral for the CLF, excluding internal RMBS, up to approved facility limit; and any liquid assets contained in the RBNZ’s Liquidity Policy – Annex: Liquidity Assets –
Prudential Supervision Department Document BS13A12.
5. All currency Level 2 LCR.
Liquidity crisis contingency planning
The Group maintains APRA-endorsed liquidity crisis contingency plans for analysing and responding to a liquidity threatening event at a country
and Group-wide level. Key liquidity contingency crisis planning requirements and guidelines include:
Ongoing business management
Early signs/mild stress
Severe Stress
• Establish crisis/severity levels
• Monitoring and review
• Activate contingency funding plans
• Liquidity limits
• Early warning indicators
• Management actions not requiring
• Management actions for altering asset
business rationalisation
and liability behaviour
Assigned responsibility for internal and external communications and the appropriate timing to communicate.
Since the precise nature of any stress event cannot be known in advance, we design the plans to be flexible to the nature and severity of the stress
event with multiple variables able to be accommodated in any plan.
Group funding
The Group monitors the composition and stability of its funding so that it remains within the Group’s funding risk appetite. This approach ensures
that an appropriate proportion of the Group’s assets are funded by stable funding sources, including customer deposits; longer-dated wholesale
funding (with a remaining term exceeding one year); and equity.
Funding plans prepared
Considerations in preparing funding plans
• 3 year strategic plan prepared annually
• Customer balance sheet growth
• Annual funding plan as part of budgeting process
• Changes in wholesale funding including: targeted funding volumes;
• Forecasting in light of actual results as a calibration to the annual plan
markets; investors; tenors; and currencies for senior, secured,
subordinated, hybrid transactions and market conditions
113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISK (continued)
FUNDING POSITION
During the year ended 30 September 2017, the Group issued $22.0 billion of term wholesale debt (excluding Additional Tier 1 Capital) with a remaining
term greater than one year (2016: $32.1 billion). The weighted average tenor of new term debt was 5.3 years (2016: 5.5 years).
The following tables represent the Group’s funding composition at 30 September:
Customer deposits and other liabilities1
Customer deposits
Other funding liabilities2,3
Total customer liabilities (funding)
Wholesale funding4
Debt issuances
Certificates of deposit
Commercial paper
Other wholesale borrowings2,5,6
Total wholesale funding
Shareholders' equity
Total funding
Funded assets
Other short term assets & trade finance assets7
Liquids6
Short term funded assets
Lending & fixed assets8
Total funded assets
Funding liabilities4,6
Other short term liabilities2
Short term funding
Term funding < 12 months
Other customer and central bank deposits1,2,9
Total short term funding liabilities
Stable customer deposits1,10
Term funding > 12 months
Shareholders' equity and hybrid debt
Total stable funding
Total funding
1.
Includes term deposits, other deposits and an adjustment to eliminate Wealth Australia investments in ANZ deposit products.
2. Securitites sold under repurchase agreements reclassified to align with current period presentation.
3.
Includes interest accruals, payables and other liabilities, provisions and net tax provisions, excluding other liabilities in Wealth Australia.
2017
$m
467,630
12,838
480,468
107,973
55,222
18,023
65,441
246,659
59,075
786,202
2017
$m
58,576
169,317
227,893
558,309
786,202
46,021
62,119
18,872
78,652
205,664
421,172
91,840
67,526
580,538
786,202
2016
$m
449,623
14,049
463,672
113,044
61,429
19,349
65,924
259,746
57,927
781,345
2016
$m
65,800
161,302
227,102
554,243
781,345
49,288
69,028
23,668
79,115
221,099
402,146
90,708
67,392
560,246
781,345
4. Excludes liability for acceptances as they do not provide net funding.
5.
Includes borrowings from banks, securitites sold under repurchase agreements, net derivative balances, special purpose vehicles and other borrowings.
Includes RBA open-repo arrangement netted down by the exchange settlement account cash balance.
Includes short-dated assets such as trading securities, available-for-sale securities, trade dated assets and trade finance loans.
6.
7.
8. Excludes trade finance loans.
9. Total customer liabilities (funding) plus central bank deposits less stable customer deposits.
10. Stable customer deposits represent operational type deposits or those sourced from retail/business/corporate customers and the stable component of other funding liabilities.
114
ANZ 2017 ANNUAL REPORT 16. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISK (continued)
RESIDUAL CONTRACTUAL MATURITY ANALYSIS OF THE GROUP’S LIABILITIES
The tables below provides residual contractual maturity analysis of financial liabilities at 30 September within relevant maturity groupings. All outstanding
Debt Issuance and Subordinated Debt is profiled on the earliest date on which the Group may be required to pay. All at-call liabilities are reported in
the “Less than 3 month” category. Any other items without a specified maturity date are included in the “After 5 years” category. The amounts represent
principal and interest cash flows - so they may differ from equivalent amounts reported on balance sheet.
It should be noted that this is not how the Group manages its liquidity risk. The management of this risk is detailed on page 112.
2017
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Policy liabilities
External unit holder liabilities (life insurance funds)
Liability for acceptances
Debt issuances1,2
Derivative liabilities (trading)3
Derivative assets and liabilities (balance sheet management)
- Funding
Receive leg
Pay leg
- Other balance sheet management
Receive leg
Pay leg
2016
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Policy liabilities
External unit holder liabilities (life insurance funds)
Liability for acceptances
Debt issuances1,2
Derivative liabilities (trading)3
Derivative assets and liabilities (balance sheet management)
- Funding
Receive leg
Pay leg
- Other balance sheet management
Receive leg4
Pay leg4
Less than
3 months
$m
9,914
5,919
490,282
37,075
4,435
614
4,673
51,556
(18,598)
18,374
(28,031)
28,246
Less than
3 months
$m
10,625
6,386
483,364
35,910
3,333
569
11,057
73,592
(35,443)
35,927
(22,629)
22,820
3 to 12
months
$m
-
-
1 to 5
years
$m
-
-
94,449
19,003
2
-
-
15,290
-
(20,058)
19,830
(8,685)
9,152
3 to 12
months
$m
-
-
19
-
-
75,732
-
(82,876)
83,827
(14,900)
17,024
1 to 5
years
$m
-
-
86,442
21,426
1
-
-
20,348
-
(26,506)
25,920
(9,685)
10,321
29
-
-
68,963
-
(85,478)
84,703
(14,534)
16,436
After
5 years
$m
-
-
145
352
-
-
24,131
-
Total
$m
9,914
5,919
603,879
37,448
4,435
614
119,826
51,556
(29,295)
29,659
(150,827)
151,690
(5,021)
5,552
After
5 years
$m
-
-
464
205
-
-
25,406
-
(31,163)
31,221
(6,610)
8,168
(56,637)
59,974
Total
$m
10,625
6,386
591,696
36,145
3,333
569
125,774
73,592
(178,590)
177,771
(53,458)
57,745
1. Any callable wholesale debt instruments have been included at their next call date.
2.
Includes subordinated debt instruments that may be settled in cash or in equity, at the option of the Company, and perpetual investments at next call date.
3. The full mark-to-market of derivative liabilities held for trading purposes is included in the ‘less than 3 months’ category.
4. Prior year’s profile has been restated to ensure comparability.
At 30 September 2017, $191,323 million (2016: $207,410 million) of the Group’s undrawn facilities and $40,839 million (2016: $37,779 million) of its
issued guarantees mature in less than 1 year, based on the earliest date on which the Group may be required to pay.
115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The Group carries a significant number of financial instruments on the balance sheet at fair value. The fair value of a financial instrument is the price
that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
VALUATION OF FINANCIAL INSTRUMENTS
The Group has an established control framework, including an appropriate segregation of duties, to ensure that fair values are accurately
determined, reported and controlled. The framework includes the following features:
• products are approved for transacting with external customers and counterparties only where fair values can be appropriately determined;
• when using quoted market prices to value an instrument, these are independently verified from external sources;
• fair value methodologies and inputs are evaluated and approved by a function independent of the party that undertakes the transaction;
• movements in fair values are independently monitored and explained by reference to underlying factors relevant to the fair value; and
• valuation adjustments (such as FVA, CVA and bid-offer) are independently validated and monitored.
If the Group holds offsetting risk positions, then the Group uses the portfolio exemption in AASB 13 Fair Value Measurement (AASB 13) to measure
the fair value of such groups of financial assets and financial liabilities. We measure the portfolio based on the price that would be received to sell
a net long position (an asset) for a particular risk exposure, or to transfer a net short position (a liability) for a particular risk exposure.
FAIR VALUE APPROACH AND VALUATION TECHNIQUES
We use valuation techniques to estimate the fair value of financial assets and liabilities for recognition, measurement and disclosure purposes
where no quoted market price for the instrument exists. For those purposes, we use the following approaches:
Financial Asset or Liability
Fair Value Approach
Financial instruments classified as:
- trading securities
- securities short sold
- derivative financial assets and liabilities
- available-for-sale assets, and
- investments backing policy liabilities
Net loans and advances, deposits and other
borrowings and debt issuances
In instances where there is no quoted market price, modelled valuation techniques are
used that incorporate observable market inputs for securities with similar credit risk,
maturity and yield characteristics; and/or current market yields for similar instruments.
Discounted cash flow techniques in which contractual future cash flows of the instrument
are discounted using discount rates incorporating wholesale market rates, or market
borrowing rates, for debt with similar maturities or with a yield curve appropriate for
the remaining term to maturity.
Life investment contract liabilities and external
unit holder liabilities (life insurance funds)
Valuation based on the fair value of the asset backing policy liabilities using observable
inputs. Refer to Note 29 Life Insurance Business.
Non-financial instrument component of assets
held for sale
Valuation based on the agreed foreign currency sales price combined with the applicable
foreign exchange rate less an estimate of the costs to dispose of the assets.
116
ANZ 2017 ANNUAL REPORT 17. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The following tables set out the classification of financial asset and liability categories according to measurement bases together with their carrying
amounts as reported on the balance sheet.
Fair value
details refer
to Note
At
amortised
cost
$m
2017
2016
At
fair
value
$m
-
-
-
43,605
62,518
69,384
At
amortised
cost
$m
66,220
4,406
12,723
-
-
-
Total
$m
68,048
5,504
8,987
43,605
62,518
69,384
At
fair
value
$m
-
-
-
47,188
87,496
63,113
Total
$m
66,220
4,406
12,723
47,188
87,496
63,113
68,048
5,504
8,987
-
-
-
574,175
156
574,331
575,440
412
575,852
2,015
5,966
-
-
-
37,964
4,364
-
2,015
5,966
37,964
4,364
2,296
-
-
4,198
-
-
35,656
-
2,296
-
35,656
4,198
669,059
213,627
882,686
665,283
233,865
899,148
9,914
5,919
-
-
9,914
5,919
10,625
6,386
592,114
3,497
595,611
583,002
-
62,252
4,635
342
-
6,458
106,221
725,603
-
37,106
4,435
1,892
1,752
110,934
62,252
4,635
37,448
4,435
8,350
107,973
836,537
-
-
190
-
6,485
110,852
717,540
-
-
5,193
88,725
-
10,625
6,386
588,195
88,725
-
35,955
36,145
3,333
2,380
2,192
137,778
3,333
8,865
113,044
855,318
Financial assets
Cash and cash equivalents
Settlement balances owed to ANZ
Collateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Regulatory deposits
Assets held for sale1
Investments backing policy liabilities
Other financial assets
Total
Financial liabilities
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Derivative financial instruments
Liabilities held for sale1
Policy liabilities2
External unit holder liabilities (life insurance funds)3
Payables and other liabilities
Debt issuances
Total
9
10
11
12
29
14
10
29
1. Assets held for sale and liabilities held for sale include only the components of assets or liabilities held for sale which are financial instruments.
2. Policy liabilities includes:
• life insurance contract liabilities of $342 million (2016: $190 million) measured in accordance with AASB 1038 Life Insurance Contracts; and
• life investment contract liabilities of $37,106 million (2016: $35,955 million) which have been designated at fair value through profit or loss under AASB 139 Financial Instruments: Recognition and
Measurement. None of the fair value is attributable to changes in the credit risk of the life investment contract liabilities.
3. External unit holder liabilities are designated on initial recognition at fair value through profit or loss.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES CARRIED AT FAIR VALUE ON THE BALANCE SHEET
The Group categorises financial assets and liabilities carried at fair value into a fair value hierarchy as required by AASB 13 based on the observability
of inputs used to measure the fair value:
• Level 1 – valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 – valuations using inputs other than quoted prices included within Level 1 that are observable for a similar asset or liability,
either directly or indirectly; and
• Level 3 – valuations using inputs for the asset or liability that are not based on observable market data (unobservable inputs).
117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
The table below summarises the attribution of financial instruments carried at fair value to the fair value hierarchy:
Fair value measurements
Quoted market price
(Level 1)
Using observable
inputs (Level 2)
Using unobservable
inputs (Level 3)
Total
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
Investments backing policy liabilities1
27,308
24,270
10,306
10,879
Financial assets
Trading securities1
Derivative financial instruments
Available-for-sale assets1
Net loans and advances (measured at fair value)
Assets held for sale2
Total
Financial liabilities
Deposits and other borrowings (designated at fair value)
Derivative financial instruments
Policy liabilities3
External unit holder liabilities (life insurance funds)
40,435
44,856
3,170
2,332
-
433
453
61,996
86,934
61,694
55,294
-
-
7,479
156
7,580
397
-
-
1,748
-
129,870
124,873
84,855
108,122
-
275
-
-
-
408
-
-
3,497
61,900
37,106
4,435
166
1,752
5,193
88,215
35,955
3,333
86
2,192
-
109
239
15
507
-
43,605
62,518
69,384
156
47,188
87,496
63,113
412
37,964
35,656
1,748
-
870
215,375
233,865
-
102
-
-
-
-
3,497
62,252
37,106
4,435
1,892
1,752
5,193
88,725
35,955
3,333
2,380
2,192
89
211
-
350
-
650
-
77
-
-
-
-
Payables and other liabilities (measured at fair value)4
1,726
2,294
Debt issuances (designated at fair value)
-
-
Total
1. During the period we transferred:
2,001
2,702
108,856
134,974
77
102
110,934
137,778
• $713 million (2016: $495 million) from Level 1 to Level 2 following reduced trading activity in the associated securities; and
• $44 million (2016: $53 million) from Level 2 to Level 1 following increased trading activity to support the quoted prices.
We deem transfers into and out of Level 1 and Level 2 to have occurred as at the beginning of the reporting period in which the transfer occurred.
2. The amount classified as Assets held for sale relates to non-financial instruments required to be measured at fair value less costs to sell in accordance with AASB 5 Non-current Assets Held for Sale
and Discontinued Operations.
3. Policy liabilities relate only to life investment contract liabilities, as we designate these at fair value through profit or loss.
4. Payables and other liabilities relates to securities short sold, which we classify as held for trading and measured at fair value through profit or loss.
Level 3 fair value measurements
The net balance of Level 3 financial instruments is an asset of $573 million (2016: $768 million). The financial instruments which incorporate significant
unobservable inputs primarily include:
• structured credit products for which credit spreads and default probabilities relating to the reference assets and derivative counterparties cannot
be observed;
• other derivatives, including reverse mortgage swaps for which the mortality rate cannot be observed;
• asset backed securities and illiquid corporate bonds for which the effect on the fair value of issuer credit cannot be directly or indirectly observed
in the market; and
• investments in illiquid or suspended managed funds that are not currently redeemable.
The movement in Investments backing policy liabilities classified as Level 3 is predominantly due to sales of assets in this category. Aside from this
movement, there have been no significant movements or changes in the composition of the balance of Level 3 instruments that the Group carries
at fair value during the current or prior periods.
118
ANZ 2017 ANNUAL REPORT
17. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
Sensitivity to Level 3 data inputs
If we make assumptions due to significant inputs not being directly observable in the market place (Level 3 inputs), then changing these assumptions
changes the Group’s estimate of the instrument’s fair value. The majority of transactions in this category are ‘back-to-back’ in nature — that is, the Group
either acts as a financial intermediary or hedges the market risks. As a result, changes in the Level 3 inputs generally have minimal impact on net profit
and net assets of the Group.
Deferred fair value gains and losses
If we use unobservable data that is significant to the fair value of a financial instrument at initial recognition then we do not immediately recognise
the difference between the transaction price and the amount we determine based on the valuation technique (day one gain or loss) in profit or loss.
After initial recognition, we recognise the day one gain or loss in profit or loss over the life of the transaction on a straight line basis or until all inputs
become observable.
The day one gains and losses we defer are not significant. They predominately relate to derivative financial instruments. This is consistent with
the low level of derivative transactions that the Group enters into which incorporate significant unobservable inputs.
Fair value designation
We designate certain loans and advances and certain deposits and other borrowings and debt issuances as fair value through profit or loss:
• where they contain a separable embedded derivative which may significantly modify the instruments' cash flow; or
• in order to eliminate an accounting mismatch which would arise if the asset or liabilities were otherwise carried at amortised cost. This mismatch
arises as we measure the derivative financial instruments (which we acquired to mitigate interest rate risk of the assets or liabilities) at fair value
through profit or loss.
Our approach ensures that we recognise the fair value movements on the assets or liabilities in profit or loss in the same period as the movement
on the associated derivatives.
We may also designate certain loans and advances and certain deposits and other borrowings and debt issuances as fair value through profit
or loss where they are managed on a fair value basis to align the measurement with how the instruments are managed.
FINANCIAL ASSETS AND FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE
The following sets out the Group’s basis of estimating fair values of the above financial instruments carried at amortised cost:
Financial Asset and Liability
Fair Value Approach
Net loans and advances to banks
Discounted cash flows using prevailing market rates for loans with similar credit quality.
Net loans and advances to customers
Deposit liability without a specified maturity or at call
Present value of future cash flows, discounted using a curve that incorporates changes
in wholesale market rates, the Group’s cost of wholesale funding and the customer
margin, as appropriate.
The amount payable on demand at the reporting date. We do not adjust the fair value
for any value we expect the Group to derive from retaining the deposit for a future period.
Interest bearing fixed maturity deposits and other
borrowings and acceptances with quoted market rates
Market borrowing rates of interest for debt with a similar maturity are used to discount
contractual cash flows to derive the fair value.
Debt issuances
Calculated based on quoted market prices or observable inputs as applicable. If quoted
market prices are not available, we use a discounted cash flow model using a yield curve
appropriate for the remaining term to maturity of the debt instrument. The fair value
reflects adjustments to credit spreads applicable to ANZ for that instrument.
119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
The financial assets and financial liabilities listed in the table below are carried at amortised cost on the Group’s Balance Sheet. While this is the
value at which we expect the assets will be realised and the liabilities settled, the Group provides an estimate of the fair value of the financial
assets and financial liabilities at balance date in the table below.
At amortised cost
Categorised into fair value hierarchy
Fair value (total)
Quoted market price
(Level 1)
Using observable
inputs (Level 2)
With significant non-
observable inputs
(Level 3)
2017
$M
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
Financial assets
Net loans and advances1
Total
Financial liabilities
580,137
575,440
580,137
575,440
Deposits and other borrowings1
596,672
583,002
-
-
-
-
-
-
558,013
551,575
558,013
551,575
22,310
22,310
24,649
580,323
576,224
24,649
580,323
576,224
Debt issuances
Total
106,221
110,852
702,893
693,854
45,836
45,836
47,186
61,663
64,332
47,186
658,525
647,752
596,862
583,420
-
-
-
-
-
-
596,862
583,420
107,499
111,518
704,361
694,938
1. Net loans and advances and deposits and other borrowings include amounts reclassified to assets and liabilities held for sale (refer Note 28 Assets and Liabilities Held for Sale).
KEY JUDGEMENTS AND ESTIMATES
The Group evaluates the material accuracy of the valuations incorporated in the financial statements as they can involve a high degree
of judgement and estimation in determining the carrying values of financial assets and liabilities at the balance sheet date.
The majority of valuation models the Group uses employ only observable market data as inputs. However, for certain financial instruments,
we may use data that is not readily observable in current markets. If we use unobservable market data, then we need to exercise more
judgement to determine fair value depending on the significance of the unobservable input to the overall valuation. Generally, we derive
unobservable inputs from other relevant market data and compare them to observed transaction prices where available.
When establishing the fair value of a financial instrument using a valuation technique, the Group considers valuation adjustments in
determining the fair value. We may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation
adjustments – refer Note 10 Derivative Financial Instruments) to the techniques used to reflect the Group’s assessment of factors that
market participants would consider in setting fair value.
120
ANZ 2017 ANNUAL REPORT 18. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS
SECURITY FOR ASSETS
The following disclosure excludes the amounts presented as collateral paid and received in the Balance Sheet that relate to derivative liabilities
and derivative assets respectively. The terms and conditions of those collateral agreements are included in the standard Credit Support Annex
that forms part of the International Swaps and Derivatives Association Master Agreement.
ASSETS CHARGED AS SECURITY FOR LIABILITIES
Assets charged as security for liabilities include the following types of instruments:
• Securities provided as collateral for repurchase transactions. These transactions are governed by standard industry agreements.
• UDC Secured Investments are secured by a security interest granted under a trust deed over all of UDC’s present and future assets and
undertakings, to Trustees Executors Limited, as supervisor. The assets subject to the security interest comprise mainly loans to UDC's customers
and certain plant and equipment. The security interest secures all amounts payable by UDC on the UDC Secured Investments and all other
monies payable by UDC under the trust deed.
• Specified residential mortgages provided as security for notes and bonds issued to investors as part of ANZ’s covered bond programs.
• Collateral provided to central banks.
• Collateral provided to clearing houses.
The amortised cost of assets pledged as security are as follows:
Securities sold under arrangements to repurchase1
Assets pledged as collateral for UDC Secured Investments
Covered bonds
Other
1. The amounts disclosed as securities sold under arrangements to repurchase include both:
• assets pledged as security which continue to be recognised on the Group's balance sheet; and
• assets repledged, which are included in the disclosure below.
2017
$m
36,242
2,746
29,353
3,140
2016
$m
26,637
2,541
31,790
2,948
COLLATERAL ACCEPTED AS SECURITY FOR ASSETS
ANZ has received collateral associated with various financial instruments. Under certain transactions ANZ has the right to sell, or to repledge,
the collateral received. These transactions are governed by standard industry agreements.
The fair value of collateral we have received and that which we have sold or repledged is as follows:
Fair value of assets which can be sold or repledged
Fair value of assets sold or repledged
2017
$m
30,085
19,965
2016
$m
31,646
14,428
121
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. OFFSETTING
We offset financial assets and liabilities in the balance sheet (in accordance with AASB 132 Financial Instruments: Presentation) when there is:
• a current legally enforceable right to set off the recognised amounts in all circumstances; and
• an intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.
If the above conditions are not met, the financial assets and liabilities are presented on a gross basis.
The Group does not have any arrangements that satisfy the conditions necessary to offset financial assets and financial liabilities within the balance sheet.
The following table identifies financial assets and financial liabilities which have not been offset but are subject to enforceable master netting agreements
(or similar arrangements) and the related amounts not offset in the balance sheet. We have not taken into account the effect of over collateralisation.
Amount subject to master netting agreement or similar
2017
Derivative assets
Reverse repurchase, securities borrowing and
similar agreements1
Total financial assets
Derivative financial liabilities
Repurchase, securities borrowing and similar
agreements2
62,518
28,966
91,484
(62,252)
Total amounts
recognised
in the
Balance Sheet
$m
Amounts not
subject to
master netting
agreement or
similar
$m
Total
$m
Financial
instruments
$m
Financial
collateral
(received)/
pledged
$m
(3,226)
59,292
(49,243)
(5,185)
Net
amount
$m
4,864
(5,289)
23,677
(819)
(22,858)
-
(8,515)
3,662
82,969
(58,590)
(50,062)
49,243
(34,536)
9,590
(24,946)
819
(28,043)
6,517
24,127
30,644
4,864
(2,830)
-
(2,830)
Total financial liabilities
(96,788)
13,252
(83,536)
50,062
Amount subject to master netting agreement or similar
Total
$m
83,552
18,840
102,392
(85,032)
(13,388)
Financial
instruments
$m
Financial
collateral
(received)/
pledged
$m
Net
amount
$m
(71,394)
(5,259)
6,899
(707)
(18,133)
(72,101)
71,394
707
(23,392)
9,486
12,681
22,167
-
6,899
(4,152)
-
(4,152)
(98,420)
72,101
Total amounts
recognised
in the
Balance Sheet
$m
Amounts not
subject to
master netting
agreement or
similar
$m
87,496
30,160
117,656
(88,725)
(25,049)
(113,774)
(3,944)
(11,320)
(15,264)
3,693
11,661
15,354
2016
Derivative assets
Reverse repurchase, securities borrowing and
similar agreements1
Total financial assets
Derivative financial liabilities
Repurchase, securities borrowing and similar
agreements2
Total financial liabilities
1. Reverse repurchase agreements:
• with less than 90 days to maturity are presented in the Balance Sheet within cash and cash equivalents; or
• with 90 days or more to maturity are presented in the Balance Sheet within net loans and advances.
Repurchase agreements are presented in the Balance Sheet within deposits and other borrowings.
2.
122
ANZ 2017 ANNUAL REPORT 20. GOODWILL AND OTHER INTANGIBLE ASSETS
Balance at start of year
Additions
Amortisation expense3
Impairment expense
Impairment on reclassification of Retail Asia and
Wealth businesses to held for sale
Derecognised on disposal
Transferred to held for sale (refer to Note 28)
Foreign currency exchange difference
Balance at end of year
Cost
Accumulated amortisation/impairment
Carrying amount
Goodwill1
Software
Other Intangibles2
Total
2017
$m
4,729
5
-
(3)
(50)
-
(122)
(112)
4,447
4,447
n/a
4,447
2016
$m
4,597
-
-
-
-
-
-
132
4,729
4,729
n/a
4,729
2017
$m
2,202
404
(567)
(17)
(154)
-
-
(8)
1,860
2016
$m
2,893
431
(1,056)
(27)
-
-
-
2017
$m
741
-
(73)
-
-
-
-
(39)
2,202
(5)
663
2016
$m
822
1
(83)
-
-
(3)
-
4
2017
$m
7,672
409
(640)
(20)
(204)
-
(122)
(125)
2016
$m
8,312
432
(1,139)
(27)
-
(3)
-
97
741
6,970
7,672
6,092
6,022
1,358
1,396
11,897
12,147
(4,232)
(3,820)
1,860
2,202
(695)
663
(655)
741
(4,927)
(4,475)
6,970
7,672
1. Goodwill excludes notional goodwill in equity accounted investments.
2. Other intangible assets comprises: aligned advisor relationships, distribution agreements and management fee rights, acquired portfolio of Insurance and Investment business and other intangibles.
3.
In 2016, we made a $556 million charge for accelerated amortisation associated with a change in the software capitalisation policy.
GOODWILL ALLOCATED TO CASH–GENERATING UNITS (CGUs)
An annual assessment is made as to whether the current carrying value of goodwill is impaired. For the purposes of impairment testing, goodwill
is allocated at the date of acquisition to a CGU. Goodwill is considered to be impaired if the carrying amount of the relevant CGU exceeds its
recoverable amount.
To estimate the recoverable amount of the CGU to which each goodwill component is allocated, we use a fair value less cost of disposal assessment
approach for each segment, with the exception of Wealth Australia, for which the Group applied a value-in-use approach for the year ended
30 September 2017.
FAIR VALUE LESS COST OF DISPOSAL
For those CGUs where the impairment assessment was undertaken using a market multiple approach, the Group has determined that the result represents
the fair value less costs of disposal of each CGU, and is primarily based on observable price earnings multiples reflecting the businesses and markets in
which each CGU operates plus a control premium. The earnings are based on the current forecast earnings of the divisions. As at 30 September 2017,
our impairment testing did not result in any material impairment being identified.
For each of ANZ’s CGUs with goodwill, the price earnings multiples applied were as follows:
Division
Australia
Institutional
New Zealand
Wealth Australia
Asia Retail & Pacific1
1.
In 2017, goodwill in this segment consists of amounts attributable to Pacific only.
2017
17.3
15.4
17.0
n/a
17.3
2016
16.1
13.7
16.1
20.8
13.7
VALUE-IN-USE – WEALTH AUSTRALIA
Due to various strategic options being considered for certain components of the Wealth Australia CGU, we have undertaken a value-in-use assessment
excluding ANZ Lenders Mortgage Insurance, ANZ Share Investing and ANZ Financial Planning businesses and compared this to the net assets of the CGU.
The value-in-use is in excess of the net asset value and confirms our conclusion that the goodwill is not impaired.
The valuation is based on the embedded value which represents the present value of future profits and releases of capital arising from the business in-
force at the valuation date, and adjusted net assets. It is determined using best estimate assumptions with franking credits included at 70% of face value.
Projected cash flows have been discounted using capital asset pricing model risk discount rates of 7.75% and 9.50%.
123
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
RECOGNITION AND MEASUREMENT
The table below details how we recognise and measure different intangible assets:
Intangible
Goodwill
Software
Other Intangible Assets
Definition
Excess amount the Group has paid
in acquiring a business over the
fair value less costs of disposal of
the identifiable assets and liabilities
acquired.
Carrying
value
Cost less any accumulated
impairment losses.
Allocated to the cash generating
unit to which the acquisition relates.
Useful life
Indefinite.
Goodwill is reviewed for
impairment at least annually or
when there is an indication of
impairment.
Purchases of off the shelf software
assets are capitalised as assets.
Internal and external costs incurred
in building software and computer
systems costing greater than $20
million. Those less than $20 million are
expensed in the year in which the costs
are incurred.
Initially, measured at cost.
Subsequently, carried at cost less
accumulated amortisation and
impairment losses.
Costs incurred in planning or
evaluating software proposals
or in maintaining systems after
implementation are not capitalised.
Acquired portfolios of insurance and
investment business, management
fee rights and aligned advisor
relationships.
Initially, measured at fair value at
acquisition.
Subsequently, carried at fair value
less accumulated amortisation and
impairment losses.
Except for major core infrastructure,
amortised over periods between
3-5 years.
Acquired portfolios of insurance and
investment business are amortised
over periods between 15 and 23 years.
Major core infrastructure amortised
over periods between 7 or 10 years.
Management fee rights with a finite
life are amortised over periods up to
7 years. Those with an indefinite life
are reviewed for impairment at least
annually or where there is an indication
of impairment.
Aligned advisor relationships are
amortised over periods up to 8 years.
Depreciation
method
Not applicable.
Straight-line method.
Straight-line method.
KEY JUDGEMENTS AND ESTIMATES
Management judgement is used to assess the recoverable value of goodwill, and other intangible assets, and the useful economic life
of an asset (or if an asset has an indefinite life). We reassess the recoverability of the carrying value at each reporting date.
The carrying amount of goodwill is based on judgements including the basis of assumptions and forecasts used for determining cash flows for
CGUs, headroom availability, and sensitivities of the forecasts to reasonably possible changes in assumptions. The Group undertakes an annual
assessment to evaluate whether the carrying value of goodwill on balance sheet is impaired. The level at which goodwill is allocated for testing,
the estimation of future cash flows and the selection of discount rates or earnings multiples applied requires significant judgement.
At each balance sheet date, software and other intangible assets are assessed for indicators of impairment. In addition, software and intangible
assets not ready for use are tested annually for impairment. In the event that an asset’s carrying amount is determined to be greater than its
recoverable amount, the carrying value of the asset is written down immediately.
124
ANZ 2017 ANNUAL REPORT 21. SHAREHOLDERS’ EQUITY
SHAREHOLDERS’ EQUITY - SUMMARY
Ordinary share capital
Reserves
Foreign currency translation reserve
Share option reserve
Available-for-sale revaluation reserve
Cash flow hedge reserve
Transactions with non-controlling interests reserve
Total reserves
Retained earnings
Share capital and reserves attributable to shareholders of the Company
Non-controlling interests
Total shareholders’ equity
ORDINARY SHARE CAPITAL
The table below details the movement in ordinary shares for the period.
Balance at start of the year
Bonus option plan
Dividend reinvestment plan
Group share option scheme
Group employee share acquisition scheme1
Share buy-back
Treasury shares in Wealth Australia2
2017
$m
29,088
(196)
87
38
131
(23)
37
29,834
58,959
116
59,075
2017
Number of
shares
2016
$m
Number of
shares
2,927,476,660
28,765
2,902,714,361
2,880,009
13,159,331
-
-
(6,100,673)
-
-
374
-
56
(176)
69
3,516,214
15,916,983
18,062
5,311,040
-
-
Balance at end of year
2,937,415,327
29,088
2,927,476,660
2016
$m
28,765
544
79
149
329
(23)
1,078
27,975
57,818
109
57,927
$m
28,367
-
413
-
138
-
(153)
28,765
1. The Company issued 7.5 million shares under the Dividend Reinvestment Plan and Bonus Option Plan for the 2017 interim dividend (8.6 million shares for the 2016 final dividend; 9.7 million shares for the
2016 interim dividend) and nil shares to satisfy obligations under the Group’s Employee share acquisition plans during 2017 (2016: 5.3 million shares). Following the provision of 7.5 million shares under
the Dividend Reinvestment Plan and Bonus Option Plan for the 2017 interim dividend, the Company repurchased 6.1 million of shares via an on-market share buy-back resulting in 6.1 million shares
being cancelled.
2. Treasury shares in ANZ Wealth Australia (AWA) are shares held in statutory funds as assets backing policy holder liabilities. AWA Treasury shares outstanding as at 30 September 2017 were 15,386,741
(2016: 17,705,880).
125
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. SHAREHOLDERS’ EQUITY (continued)
RECOGNITION AND MEASUREMENT
Ordinary shares
Ordinary shares have no par value. They entitle holders to receive dividends, or proceeds
available on winding up of the Company, in proportion to the number of fully paid
ordinary shares held. They are recognised at the amount paid per ordinary share net of
directly attributable costs. Every holder of fully paid ordinary shares present at a meeting
in person, or by proxy, is entitled to:
• on a show of hands, one vote; and
• on a poll, one vote, for each share held.
Treasury shares
Treasury shares are shares in the Company which:
• the ANZ Employee Share Acquisition Plan purchases on market and have not yet
distributed, or
• the Company issues to the ANZ Employee Share Acquisition Plan and have not yet
been distributed, or
• the life insurance business purchases and holds to back policy liabilities in the
statutory funds.
Treasury shares are deducted from share capital and excluded from the weighted average
number of ordinary shares used in the earnings per share calculations.
Includes differences arising on translation of assets and liabilities into Australian dollars
when the functional currency of a foreign operation (including subsidiaries and branches)
is not Australian dollars. In this reserve, we reflect any offsetting gains or losses on hedging
these exposures, together with any tax effect.
Includes fair value gains and losses associated with the effective portion of designated
cash flow hedging instruments, net of deferred taxes to be realised when the position is
settled.
Includes the changes in fair value and exchange differences on our revaluation of
available-for-sale financial assets, net of deferred taxes to be realised upon disposal of the
asset.
Reserves:
Foreign currency translation
reserve
Cash flow hedge reserve
Available-for-sale reserve
Share option reserve
Includes amounts which arise on the recognition of share-based compensation expense.
Transactions with non-
controlling interests reserve
Non-controlling interests
Includes the impact of transactions with non-controlling shareholders in their capacity as
shareholders.
Share in the net assets of controlled entities attributable to equity interests which the
Company does not own directly or indirectly.
126
ANZ 2017 ANNUAL REPORT 22. CAPITAL MANAGEMENT
CAPITAL MANAGEMENT STRATEGY
ANZ’s capital management strategy aims to protect the interests of depositors, creditors and shareholders. We achieve this through an Internal Capital
Adequacy Assessment Process (ICAAP) whereby ANZ conducts detailed strategic and capital planning over a 3 year time horizon. The process involves:
• forecasting economic variables, financial performance of ANZ’s divisions and the financial impact of new strategic initiatives to be implemented
during the planning period;
• performing stress tests under different economic scenarios to determine the level of additional capital (‘stress capital buffer’) needed to absorb
losses that may be experienced under an economic downturn;
• reviewing capital ratios and targets across various classes of capital against ANZ’s risk profile; and
• developing a capital plan, taking into account capital ratio targets, current and future capital issuances requirements and options around capital
products, timing and markets to execute the capital plan under differing market and economic conditions.
The capital plan is approved by the Board and updated as required. The Board and senior management are provided with regular updates of ANZ’s capital
position. Any actions required to ensure ongoing prudent capital management are submitted to the Board for approval. Throughout the year, the Group
maintained compliance with all the regulatory requirements related to Capital Adequacy in the jurisdictions in which it operates.
REGULATORY ENVIRONMENT
Australia
As ANZ is an Authorised Deposit-taking Institution (ADI) in Australia, it is primarily regulated by APRA under the Banking Act 1959 (Cth). ANZ must comply
with the minimum regulatory capital requirements, prudential capital ratios and specific reporting levels that APRA sets and which are consistent with
the global Basel III capital framework. This is the common framework for determining the appropriate level of bank regulatory capital as set by the Basel
Committee on Banking Supervision (“BCBS”). APRA requirements are summarised below:
Regulatory Capital Definition
Common Equity Tier 1 (CET1) Capital
Tier 1 Capital
Tier 2 Capital
Total Capital
Shareholders’ equity adjusted
for specific items.
CET1 Capital plus certain
securities with complying loss
absorbing characteristics known
as Additional Tier 1 Capital.
Subordinated debt instruments
which have a minimum term
of 5 years at issue date.
Tier 1 plus Tier 2 Capital.
Minimum Prudential Capital Ratios (PCRs)
CET1 Ratio
Tier 1 Ratio
Total Capital Ratio
CET1 Capital divided by total
risk weighted assets must
be at least 4.5%.
Tier 1 Capital divided by total
risk weighted assets must
be at least 6.0%.
Total Capital divided by total risk weighted
assets must be at least 8.0%.
Reporting Levels
Level 1
Level 2
Level 3
The ADI on a stand-alone basis (that is
the Company and specified subsidiaries
which are consolidated to form the
ADI’s Extended Licensed Entity).
The consolidated Group less
certain subsidiaries and associates
that are excluded under
prudential standards.
A conglomerate Group at the widest level.
ANZ reports to APRA on a Level 1 and Level 2 basis, and measures capital adequacy monthly on a Level 1 and Level 2 basis, and is not yet required
to maintain capital on a Level 3 basis until at least 2019 (APRA have yet to conclude required timing for Level 3 reporting).
Life Insurance and Funds Management
As required by APRA’s Prudential Standards, insurance and funds management activities are:
• de-consolidated for the purposes of calculating capital adequacy; and
• excluded from the risk based capital adequacy framework.
We deduct the investment in these controlled entities 100% from CET1 capital, and if we include any profits from these activities in the Group’s
results, then we exclude them from the determination of CET1 capital to the extent they have not been remitted to the Company.
127
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. CAPITAL MANAGEMENT (continued)
Outside Australia
In addition to APRA, the Company’s branch operations and major banking subsidiary operations are also 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. They may impose minimum capitalisation levels on operations in their individual jurisdictions.
CAPITAL ADEQUACY
The following table provides details of the Group’s capital adequacy ratios at 30 September:
2017
$m
2016
$m
59,075
(481)
58,594
(17,258)
41,336
7,988
49,324
8,669
57,993
10.6%
12.6%
2.2%
14.8%
57,927
(481)
57,446
(18,179)
39,267
9,018
48,285
10,328
58,613
9.6%
11.8%
2.5%
14.3%
391,113
408,582
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
128
ANZ 2017 ANNUAL REPORT 23. PARENT ENTITY FINANCIAL INFORMATION
Australia and New Zealand Banking Group Limited (the Company) has prepared a separate set of financial statements to satisfy the requirements
of its Australian Financial Services License it holds with ASIC. These separate Company financial statements are available on the ANZ website at anz.com
and have been lodged with ASIC.
Selected financial information of the Company is provided as follows:
SUMMARY FINANCIAL INFORMATION
Income statement information for the financial year
Profit after tax for the year
Total comprehensive income for the year
Balance sheet information as at the end of the financial year
Cash and cash equivalents
Net loans and advances
Total assets
Deposits and other borrowings
Total liabilities
Shareholders' equity
Ordinary share capital
Reserves
Retained earnings
Total shareholders' equity
PARENT ENTITY’S CONTRACTUAL COMMITMENTS
PROPERTY RELATED 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 commitments1
Due within 1 year
Due later than 1 year but not later than 5 years
Due later than 5 years
Total lease rental commitments1
2017
$m
6,234
5,915
63,399
452,424
797,379
494,235
745,531
29,416
36
22,396
51,848
2017
$m
98
98
1,818
145
1,963
394
908
661
1,963
2016
$m
5,687
5,002
61,994
446,531
823,962
479,963
773,703
29,162
344
20,753
50,259
2016
$m
103
103
2,044
144
2,188
403
982
803
2,188
1. Total future minimum sublease payments we expect to receive under non-cancellable subleases at 30 September 2017 is $91 million (2016: $114 million). During the year, we received sublease
payments of $28 million (2016: $22 million) and netted them against rent expense.
CREDIT RELATED COMMITMENTS AND CONTINGENCIES
Contract amount of:
Undrawn facilities
Guarantees and letters of credit
Performance related contingencies
Total
2017
$m
150,339
18,062
18,890
187,291
2016
$m
161,178
15,633
17,710
194,521
129
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
23. PARENT ENTITY FINANCIAL INFORMATION (continued)
PARENT ENTITY GUARANTEES
The Company has issued letters of comfort and guarantees in respect of certain of its subsidiaries in the normal course of business. Under these letters
and guarantees, the Company undertakes to ensure that those subsidiaries continue to meet their financial obligations - subject to certain conditions
including that the entity remains a controlled entity of the Company. Further information is outlined in Note 32 Related Party Disclosures.
24. CONTROLLED ENTITIES
The ultimate parent of the Group is Australia and New Zealand Banking Group Limited
All controlled entities are 100% owned, unless otherwise noted.
Incorporated in
Australia
Nature of Business
Banking
The material controlled entities of the Group are:
ANZ Bank (Lao) Limited1
ANZ Bank (Taiwan) Limited1
ANZ Bank (Vietnam) Limited1
ANZ Capel Court Limited
ANZ Commodity Trading Pty Ltd
ANZ Funds Pty. Ltd.
ANZ Bank (Europe) Limited1
ANZ Bank (Kiribati) Limited1 (75% ownership)
ANZ Bank (Samoa) Limited1
ANZ Bank (Thai) Public Company Limited1
ANZcover Insurance Private 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, 4
ANZ Wealth New Zealand Limited1
ANZ New Zealand Investments Limited1
OnePath Life (NZ) Limited1
UDC Finance Limited1
ANZ International (Hong Kong) Limited1
ANZ Asia Limited1
ANZ Bank (Vanuatu) Limited2
ANZ International Private Limited1
ANZ Singapore Limited1
ANZ Royal Bank (Cambodia) Limited1 (55% ownership)
Votraint No. 1103 Pty Limited
ANZ Lenders Mortgage Insurance Pty. Limited
ANZ Residential Covered Bond Trust4
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 Bancorp3
ANZ Guam Inc3
ANZ Finance Guam, Inc.3
ACN 003 042 082 Limited
Share Investing Limited
PT Bank ANZ Indonesia1 (99% ownership)
1. Audited by overseas KPMG firms — either as part of the Group audit, or for standalone financial statements as required.
2. Audited by Law Partners.
3. Audited by Deloitte Guam.
4. Not owned by the Group. Control exists as the Group retains substantially all the risks and rewards of the operations.
130
Laos
Taiwan
Vietnam
Australia
Australia
Australia
United Kingdom
Kiribati
Samoa
Thailand
Singapore
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
Hong Kong
Hong Kong
Vanuatu
Singapore
Singapore
Cambodia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Papua New Guinea
China
China
Guam
Guam
Guam
Australia
Australia
Indonesia
Banking
Banking
Banking
Securitisation Manager
Finance
Holding Company
Banking
Banking
Banking
Banking
Captive-Insurance
Holding Company
Banking
Funds Management
Finance
Finance
Holding Company
Funds Management
Insurance
Finance
Holding Company
Banking
Banking
Holding Company
Merchant Banking
Banking
Investment
Mortgage Insurance
Finance
Holding Company
Trustee
Funds Management
Insurance
Holding Company
Insurance
Banking
Banking
Banking
Holding Company
Banking
Finance
Holding Company
Online Stockbroking
Banking
ANZ 2017 ANNUAL REPORT 24. CONTROLLED ENTITIES (continued)
ACQUISITION AND DISPOSAL OF CONTROLLED ENTITIES
We did not acquire, or dispose of, any material entities during the year ended 30 September 2017 or the year ended 30 September 2016.
ANZ Capital Hedging Pty Ltd (listed as a material entity for the year ended 30 September 2016) has been removed as a material entity for the
year ended 30 September 2017 as its operations have been transferred to other parts of the Group and it is in the process of being liquidated.
RECOGNITION AND MEASUREMENT
The Group’s subsidiaries are those entities it controls through:
• being exposed to, or having rights to, variable returns from the entity; and
• being able to affect those returns through its power over the entity.
The Group assesses whether it has power over those entities by examining the Group’s existing rights to direct the relevant activities
of the entity.
If the Group sells or acquires subsidiaries during the year, it includes their operating results in the Group results to the date of disposal
or from the date of acquisition. When the Group’s control ceases, it derecognises the assets and liabilities of the subsidiary, any related
non-controlling interest and other components of equity.
When the Group ceases to control a subsidiary, it:
• measures any retained interest in the entity at fair value; and
• recognises any resulting gain or loss in profit or loss.
If the Group’s ownership interest in a subsidiary changes in a way that does not result in a loss of control, then the Group accounts
for that as a transaction with equity holders in their capacity as equity holders.
All transactions between Group entities are eliminated on consolidation.
25. INVESTMENTS IN ASSOCIATES
Significant associates of the Group are:
Name of entity
AMMB Holdings Berhad
PT Bank Pan Indonesia
Shanghai Rural Commercial Bank1
Aggregate other individually immaterial associates1,2
Total carrying value of associates
Principal activity
Banking and insurance
Consumer and business bank
Rural commercial bank
Ordinary share
interest
Carrying amount
$m
2017
24%
39%
20%
n/a
2016
24%
39%
20%
n/a
2017
1,185
1,033
-
30
2,248
2016
1,198
997
1,955
122
4,272
1. During 2017, Shanghai Rural Commercial Bank (SRCB) and Metrobank Card Corporation (MCC) were reclassified as held for sale. Refer to Note 28 Assets and Liabilities Held For Sale for further details.
2. On 30 March 2016, the Bank of Tianjin (BoT) completed a capital raising and initial public offering (IPO) on the Hong Kong Stock Exchange. As a result, the Group’s equity interest reduced from
14% to 12% and the Group ceased equity accounting the investment due to losing the ability to appoint directors to the Board of BoT at this date. From 31 March 2016, the investment was classified
as an available for sale asset.
131
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
25. INVESTMENTS IN ASSOCIATES (continued)
FINANCIAL INFORMATION ON SIGNIFICANT ASSOCIATES
Set out below is the summarised financial information of each associate that is significant to the Group. The summarised financial information is based
on the associates’ IFRS financial information.
AMMB Holdings
Berhad
PT Bank Pan
Indonesia
Shanghai Rural
Commercial Bank
Principal place of business and country of incorporation
Malaysia
Indonesia
People's Republic
of China
Summarised results
Operating income
Profit for the year
Other comprehensive income/(loss)
Total comprehensive income
Less: Total comprehensive income attributable to non–controlling interests
Total comprehensive income attributable to owners of associate
Summarised financial position
Total assets1
Total liabilities1
Total Net assets1
Less: Non–controlling interests of associate
Net assets attributable to owners of associate
Reconciliation to carrying amount of Group's interest in associate2
Carrying amount at the beginning of the year
Group's share of total comprehensive income
Dividends received from associate
Group's share of other reserve movements of associate and foreign currency
translation reserve adjustments
Impairment charge
Less: Carrying value transferred to assets held for sale (Note 28)
Carrying amount at the end of the year
Market value of Group's investment in associate3
2017
$m
2016
$m
2017
$m
2016
$m
2017
$m
2016
$m
2,469
2,698
415
(1)
414
(19)
395
414
(8)
406
(26)
380
930
253
22
275
(10)
265
960
160
2
162
(11)
151
41,304
36,004
5,300
(320)
4,980
41,442
36,092
5,350
(312)
5,038
20,216
17,298
2,918
(259)
2,659
19,692
16,873
2,819
(252)
2,567
-
-
-
-
-
-
-
-
-
-
-
3,390
1,338
59
1,397
(36)
1,361
129,081
119,027
10,054
(281)
9,773
1,198
1,424
95
(38)
(70)
-
-
1,185
943
90
(35)
(21)
(260)
-
1,198
929
997
103
-
(67)
-
-
1,033
1,009
904
1,955
1,981
59
-
34
-
-
997
779
58
-
273
(41)
(46)
(258)
(219)
(1,748)
-
n/a
-
-
1,955
n/a
1.
Includes market value adjustments (including goodwill) the Group made at the time of acquisition (and adjustments for any differences in accounting policies).
2. For SRCB this includes movements up to the cessation of equity accounting.
3. Applies to those investments in associates with published price quotations. Market Value is based on a price per share and does not include any adjustments for the size of our holding.
132
ANZ 2017 ANNUAL REPORT 25. INVESTMENTS IN ASSOCIATES (continued)
IMPAIRMENT ASSESSMENT
On 3 January 2017, the Group announced that it had agreed to sell its 20% stake in Shanghai Rural Commercial Bank (SRCB). On 18 September 2017
the Group announced a revision to the 3 January arrangement in which Baoshan Iron & Steel Co. Ltd. (Bao) replaced Shanghai SinoPoland Enterprise
Management Development Corporation Limited to join China COSCO Shipping Corporation Limited (COSCO) to acquire ANZ’s 20% stake in SRCB.
Under the updated arrangement, COSCO and Bao will each acquire a 10% stake in SRCB. The key financial terms of the revised sale agreement are
unchanged from the transaction announced previously. The sale is subject to customary closing conditions and regulatory approvals and is expected
to be completed by late 2017. Based on the agreed purchase price less costs of disposal, an impairment of $219 million was recorded against the
carrying value to reflect the recoverable amount of the investment which has been transferred to held for sale assets (refer to Note 28 Assets and
Liabilities Held For Sale). This impairment and subsequent foreign exchange translation adjustments have been recognised in other operating
income (refer to Note 2 Operating Income).
As at 30 September 2017, for AMMB Holdings Berhad (AmBank) and PT Bank Pan Indonesia (PT Panin), the market value (based on share price) was
below the respective carrying values of these investments. The Group performed value-in-use (VIU) calculations to assess whether the carrying value
of the investments was impaired. The VIU calculations supported the carrying value for both AmBank (2016: $260 million impairment recognised in
other operating income) and PT Panin (2016: nil impairment).
RECOGNITION AND MEASUREMENT
An associate is an entity over which the Group has significant influence over its operating and financial policies but does not control.
The Group accounts for associates using the equity method. Its investments in associates are carried at cost plus the post-acquisition
share of changes in the associate’s net assets less accumulated impairments. Dividends the Group receives from associates are recognised
as a reduction in the carrying amount of the investment. The Group includes goodwill relating to the associate in the carrying amount
of the investment. It does not individually test for impairment the goodwill incorporated in the associates carrying amount.
At least at each reporting date, the Group reviews investments in associates for any indication of impairment. If an indication of impairment
exists, then the Group determines the recoverable amount of the associate using the higher of:
• the associate’s fair value less cost of disposal; and
• its value-in-use.
We use a discounted cash flow methodology, and other methodologies (such as capitalisation of earnings methodology), to determine
the recoverable amount.
KEY JUDGEMENTS AND ESTIMATES
The value-in-use calculation is sensitive to a number of key assumptions requiring management judgement, including: future profitability
levels, capital levels, long term growth rates and discount rates. A change in any of the key assumptions below could have an adverse effect
on the recoverable amount of the investments. The key assumptions used in the value-in-use calculation are outlined below:
As at 30 September 2017
Post-tax discount rate
Terminal growth rate
Expected NPAT growth (compound annual growth rate – 5 years)
Core Equity Tier 1 rate
AMMB
9.6%
4.8%
4.5%
10.5% - 13.3%
PT Panin
13.3%
5.4%
9.9%
11.3%
133
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
26. STRUCTURED ENTITIES
A Structured Entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the
entity, such as when any voting rights relate to administrative tasks only and the relevant activities (being those that significantly affect the entity’s returns)
are directed by means of contractual arrangement. A SE often has some or all of the following features or attributes:
• restricted activities;
• a narrow and well defined objective;
• insufficient equity to permit the SE to finance its activities without subordinated financial support; and
• financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).
The Group is involved with both consolidated and unconsolidated SEs which may be established by the Group or by a third party. SEs are classified as
subsidiaries and consolidated when control exists. If the Group does not control a SE, then it will not be consolidated (an unconsolidated SE). This note
provides information on both consolidated and unconsolidated SEs.
The Group’s involvement with SEs is as follows:
Type
Securitisation
Covered bond issuances
Structured finance
arrangements
Funds management
activities
Details
The Group uses SEs to securitise customer loans and advances that it has originated, in order to diversify
sources of funding for liquidity management. Such transactions involve transfers to an internal securitisation
(bankruptcy remote) vehicle which we create for the purpose of structuring assets that are eligible for repurchase
under agreements with the applicable central bank (these are known as ‘Repo eligible’). The Group’s internal
securitisation SEs are consolidated. Refer to Note 27 Transfers of Financial Assets for further details.
The Group also establishes SEs on behalf of customers to securitise their loans or receivables. The Group may
manage these securitisation vehicles or provide liquidity or other support. Additionally, the Group may acquire
interests in securitisation vehicles set up by third parties through holding securities issued by such entities.
In limited circumstances, where control exists, these SEs are consolidated.
Certain loans and advances have been assigned to bankruptcy remote SEs to provide security for issuances
of debt securities by the Group. The Group retains control over these SEs and therefore they are consolidated.
Refer to Note 27 Transfers of Financial Assets for further details.
The Group is involved with SEs established:
• in connection with structured lending transactions to facilitate debt syndication and/or to
ring-fence collateral; and
• to own assets that are leased to customers in structured leasing transactions.
The Group may manage the SE, hold minor amounts of the SE’s capital, or provide risk management products
(derivatives) to the SE.
In most instances, the Group does not control these SEs. Further, the Group’s involvement typically does not establish
more than a passive interest in decisions about the relevant activities of the SE, and accordingly we do not consider
that interest disclosable.
The Group’s Wealth Australia and New Zealand businesses conduct investment management and other fiduciary
activities as a responsible entity, trustee, custodian or manager for investment funds and trusts – including
superannuation funds and wholesale and retail trusts (collectively ‘Investment Funds’). The Investment Funds are
financed through the issue of puttable units to investors and the Group considers them to be SEs. The Group’s
exposure to Investment Funds includes holding units and receiving fees for services. When the Group invests in
Investment Funds on behalf of policyholders, then those funds are consolidated if control is deemed to exist.
134
ANZ 2017 ANNUAL REPORT 26. STRUCTURED ENTITIES (continued)
CONSOLIDATED STRUCTURED ENTITIES
Financial or Other Support Provided to Consolidated Structured Entities
The Group provides financial support to consolidated SEs as outlined below. As these are intra-group transactions, they are eliminated on consolidation:
Securitisation and covered
bond issuances
The Group provides lending facilities, derivatives and commitments to these SEs and/or holds debt instruments
that they have issued.
Structured finance arrangements
The assets held by these SEs are normally pledged as collateral for financing provided. Certain consolidated
SEs are financed entirely by the Group while others are financed by syndicated loan facilities in which the
Group is a participant. The financing provided by the Group includes lending facilities where the Group’s
exposure is limited to the amount of the loan and any undrawn amount. Additionally, the Group has provided
Letters of Support to these consolidated SEs confirming that the Group will not demand repayment of the
financing provided for the ensuing 12 month period.
The Group did not provide any non-contractual support to consolidated SEs during the year (2016: nil). Other than as disclosed above, the Group
does not have any current intention to provide financial or other support to consolidated SEs.
UNCONSOLIDATED STRUCTURED ENTITIES
Group’s Interest in Unconsolidated Structured Entities
An ‘interest’ in an unconsolidated SE is any form of contractual or non-contractual involvement with an SE that exposes the Group to variability of returns
from the performance of that SE. These interests include, but are not limited to: holdings of debt or equity securities; derivatives that pass-on risks specific
to the performance of the SE; lending; loan commitments; financial guarantees; and fees from funds management activities.
For the purpose of disclosing interests in unconsolidated SEs:
• no disclosure is made if the Group’s involvement is not more than a passive interest - for example: when the Group’s involvement constitutes
a typical customer-supplier relationship. On this basis, exposures to unconsolidated SEs that arise from lending, trading and investing activities are
not considered disclosable interests - unless the design of the structured entity allows the Group to participate in decisions about the
relevant activities (being those that significantly affect the entity’s returns).
• ‘interests’ do not include derivatives intended to expose the Group to market-risk (rather than performance risk specific to the SE) or derivatives
through which the Group creates, rather than absorbs, variability of the unconsolidated SE (such as purchase of credit protection under a
credit default swap).
The table below sets out the Group’s interests in unconsolidated SEs together with the maximum exposure to loss that could arise from those interests:
On-balance sheet interests:
Available-for-sale assets
Investments backing policy liabilities
Loans and advances
Total on-balance sheet
Off-balance sheet interests:
Commitments (facilities undrawn)
Total off-balance sheet
Maximum exposure to loss
Securitisation and structured
finance
Investment funds
Total
2017
$m
2,532
-
7,130
9,662
4,371
4,371
14,033
2016
$m
3,591
-
7,269
10,860
2,588
2,588
13,448
2017
$m
2016
$m
-
21
-
21
-
-
21
-
156
-
156
-
-
156
2017
$m
2,532
21
7,130
9,683
4,371
4,371
14,054
2016
$m
3,591
156
7,269
11,016
2,588
2,588
13,604
In addition to the interests above, the Group earned funds management fees from unconsolidated SEs of $493 million (2016: $524 million) during the year.
135
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
26. STRUCTURED ENTITIES (continued)
The Group’s maximum exposure to loss represents the maximum amount of loss that the Group could incur as a result of its involvement with
unconsolidated SEs if loss events were to take place – regardless of the probability of occurrence. This does not in any way represent the actual
losses expected to be incurred. Instead, the maximum exposure to loss is contingent in nature – for example, it may arise: on the bankruptcy
of an issuer of securities, or a debtor; or if liquidity facilities or guarantees were to be called on. Furthermore, the maximum exposure to loss is
stated gross of the effects of hedging and collateral arrangements entered into to mitigate ANZ’s exposure to loss.
For each type of interest, the maximum exposure to loss has been determined as follows:
• available-for-sale assets and investments backing policy liabilities – carrying amount; and
• loans and advances – carrying amount plus the undrawn amount of any commitments.
Information about the size of the unconsolidated SEs that the Group is involved with is as follows:
• Securitisation and structured finance: size is indicated by total assets which vary by SE with a maximum value of approximately $2.1 billion
(2016: $1.7 billion); and
• Investment funds: size is indicated by Funds Under Management which vary by SE with a maximum value of approximately $35.9 billion
(2016: $35.0 billion).
The Group did not provide any non-contractual support to unconsolidated SEs during the year (2016: nil): nor does it have any current intention
to provide financial or other support to unconsolidated SEs.
SPONSORED UNCONSOLIDATED STRUCTURED ENTITIES
The Group may also sponsor unconsolidated SEs in which it has no disclosable interest.
For the purposes of this disclosure, the Group considers itself the ‘sponsor’ of an unconsolidated SE if it is the primary party involved in the design
and establishment of that SE and:
• the Group is the major user of that SE; or
• the Group’s name appears in the name of that SE, or on its products; or
• the Group provides implicit or explicit guarantees of that SE’s performance.
The Group has sponsored the ANZ PIE Fund in New Zealand, which invests only in deposits with ANZ Bank New Zealand Limited. The Group does
not provide any implicit or explicit guarantees of the capital value or performance of investments in the ANZ PIE Fund. There was no income
received from, nor assets transferred to, this entity during the year.
KEY JUDGEMENTS AND ESTIMATES
Significant judgement is required in assessing whether control exists over Structured Entities involved in securitisation activities
and structured finance transactions, and investment funds. Judgement is required in relation to the existence of:
• power over the relevant activities (being those that significantly affect the entity’s returns); and
• exposure to variable returns of that entity
136
ANZ 2017 ANNUAL REPORT
27. TRANSFERS OF FINANCIAL ASSETS
In the normal course of business the Group enters into transactions where it transfers financial assets directly to third parties or to SEs. These transfers
may give rise to the Group fully, or partially, derecognising those financial assets - depending on the Group’s exposure to the risks and rewards or control
over the transferred assets. If the Group retains substantially all of the risk and rewards of a transferred asset, the transfer does not qualify for derecognition
and the asset remains on the Group’s balance sheet in its entirety.
SECURITISATIONS
Net loans and advances include residential mortgages securitised under the Group’s securitisation programs which are assigned to bankruptcy
remote SEs to provide security for obligations payable on the notes issued by the SEs. This includes mortgages that are held for potential repurchase
agreements (Repos) with central banks. The holders of the issued notes have full recourse to the pool of residential mortgages which have been
securitised and the Group cannot otherwise pledge or dispose of the transferred assets.
In some instances the Group is also the holder of the securitised notes. In addition, the Group is entitled to any residual income of the SEs and
sometimes enters into derivatives with the SEs. The Group retains the majority of the risks and rewards of the residential mortgages and continues
to recognise the mortgages as financial assets. The obligation to pay this amount to the SE is recognised as a financial liability of the Group.
The Group is exposed to variable returns from its involvement with these securitisation SEs and has the ability to affect those returns through
its power over the SEs activities. The SEs are therefore consolidated by the Group.
COVERED BONDS
The Group operates various global covered bond programs to raise funding in its primary markets. Net loans and advances include residential
mortgages assigned to bankruptcy remote SEs associated with these covered bond programs. The mortgages provide security for the obligations
payable on the issued covered bonds.
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, subject to legal arrangements it may repurchase and substitute assets as long as the required cover is maintained.
The Group is required to maintain the cover pool at a level sufficient to cover the bond obligations. In addition the Group is entitled to any residual
income of the covered bond SEs and enters into derivatives with the SEs. The Group retains the majority of the risks and rewards of the residential
mortgages and continues to recognise the mortgages as financial assets. The obligation to pay this amount to the SEs is recognised as a financial
liability of the Group.
The Group is exposed to variable returns from its involvement with the covered bond SEs and has the ability to affect those returns through its power
over the SEs activities. The SEs are therefore consolidated by the Group. The covered bonds issued externally are included within debt issuances.
REPURCHASE AGREEMENTS
If the Group sells securities subject to repurchase agreements under which substantially all the risks and rewards of ownership remain with the Group,
then those assets are considered to be transferred assets that do not qualify for derecognition. An associated liability is recognised for the consideration
received from the counterparty.
STRUCTURED FINANCE ARRANGEMENTS
The Group arranges funding for certain customer transactions through structured leasing and commodity prepayment arrangements. At times, other
financial institutions participate in the funding of these arrangements. This participation involves a proportionate transfer of the rights to the lease
receivable or financing arrangement. The participating banks have limited recourse to the leased assets or financed commodity and related proceeds.
In some circumstances the Group continues to be exposed to some of the risks of the transferred lease receivable or financing arrangement through a
derivative or other continuing involvement. When this occurs, the Group does not derecognise the lease receivable or loan. Instead, the Group recognises
an associated liability representing its obligations to the participating financial institutions.
137
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
27. TRANSFERS OF FINANCIAL ASSETS (continued)
The table below sets out the balance of assets transferred that do not qualify for derecognition, along with the associated liabilities:
Current carrying amount of assets transferred
Carrying amount of associated liabilities
Securitisations1,2
Covered bonds
Repurchase agreements
Structured finance
arrangements
2017
$m
1,520
1,552
2016
$m
-
-
2017
$m
29,353
19,859
2016
$m
31,790
21,039
2017
$m
36,242
34,536
2016
$m
26,637
25,049
2017
$m
98
91
2016
$m
275
266
1. Does not include transfers to internal structured entities where there are no external investors.
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 approximates
their fair value.
28. ASSETS AND LIABILITIES HELD FOR SALE
The Group announced the following strategic divestments in line with the Group’s strategy to simplify the businesses and improve capital efficiency.
Accordingly, they are presented as assets and liabilities held for sale.
• Asia Retail & Wealth Businesses
The Group announced that it had agreed to sell Retail and Wealth businesses in Singapore, Hong Kong, China, Taiwan and Indonesia to Singapore’s
DBS Bank on 31 October 2016, and its Retail business in Vietnam to Shinhan Bank Vietnam on 21 April 2017. During the September 2017 half, the Group
successfully completed the sales in China, Singapore and Hong Kong. Subject to regulatory approval, the sales in Vietnam, Taiwan, and Indonesia are
expected to complete in late 2017 and early 2018 and these remaining countries form part of the assets and liabilities held for sale. These businesses
are part of the Asia Retail & Pacific division.
• UDC Finance
On 11 January 2017, the Group announced it had agreed to sell UDC Finance to HNA Group. The sale is subject to certain conditions (including
regulatory approvals) and we are working with HNA Group towards completion of the sale. This business is part of the New Zealand division.
• Shanghai Rural Commercial Bank
On 3 January 2017, the Group announced that it had agreed to sell its 20% stake in Shanghai Rural Commercial Bank (SRCB). On 18 September 2017
the Group announced a revision to the 3 January arrangement in which Baoshan Iron & Steel Co. Ltd. (Bao) replaced Shanghai Sino-Poland Enterprise
Management Development Corporation Limited to join China COSCO Shipping Corporation Limited (COSCO) to acquire ANZ’s 20% stake in SRCB. Under
the updated arrangement, COSCO and Bao will each acquire a 10% stake in SRCB. The key financial terms of the revised sale agreement are unchanged
from the transaction announced previously. The sale is subject to customary closing conditions and regulatory approvals and is expected to complete
late 2017. This asset is part of the TSO and Group Centre Division.
• Metrobank Card Corporation
On 18 October 2017, the Group announced it had entered into an agreement with its joint venture partner Metropolitan Bank & Trust Company
(Metrobank) in relation to its 40% stake in the Philippines based Metrobank Card Corporation (MCC). The Group has agreed to sell 20% of its stake,
and entered into a put option to sell the remaining 20% stake, exercisable in the fourth quarter of 2018 on the same terms for the same consideration.
The asset has been classified as held for sale at 30 September 2017 as sale negotiations were well progressed at that time, and it was highly probable
the sale transaction would complete within 12 months. The sale is subject to customary closing conditions and regulatory approvals. This asset is part
of the TSO and Group Centre Division.
INCOME STATEMENT IMPACT RELATING TO ASSETS AND LIABILITIES HELD FOR SALE
During the September 2017 full year, the Group recognised the following impacts in relation to assets and liabilities held for sale:
• $310 million loss relating to the reclassification and partial completion of the Asia Retail and Wealth sale comprising of $222 million of software,
goodwill and other assets impairment charges and $88 million of various other charges net of recoveries and sale premium.
• $333 million loss relating to the Group’s investment in SRCB comprising of a $219 million impairment to the investment, $12 million of foreign
exchange losses, and $102 million of tax expenses.
The net result of these impacts is included in ‘Other income’ and ‘Income tax expense’ (refer to Note 2 Operating Income and Note 4 Income Tax).
138
ANZ 2017 ANNUAL REPORT 28. ASSETS AND LIABILITIES HELD FOR SALE (continued)
ASSETS AND LIABILITIES HELD FOR SALE
At 30 September 2017, assets and liabilities held for sale are measured at the lower of their carrying amount and fair value less costs of disposal, except for
assets such as deferred tax assets, financial assets and contractual rights under insurance contracts, which are specifically exempt from this requirement.
As at 30 September 2017
Net loans and advances
Investments in associates
Goodwill and other intangible assets
Other assets
Total assets held for sale
Deposits and other borrowings
Current tax liabilities
Deferred tax liabilities
Payables and other liabilities
Provisions
Total liabilities held for sale
Asia Retail
& Wealth
Businesses
$m
3,283
-
-
-
3,283
3,602
-
-
47
43
UDC
Finance
$m
2,679
-
122
18
2,819
956
22
(8)
30
1
3,692
1,001
Shanghai
Rural
Commercial
Bank
$m
Metrobank Card
Corporation
$m
-
1,748
-
-
1,748
-
-
-
-
-
-
-
120
-
-
120
-
-
-
-
-
-
KEY JUDGEMENTS AND ESTIMATES
A significant level of judgement is used by the Group to determine:
• whether an asset or group of assets is classified and presented as held for sale or as a discontinued operation; and
• the fair value of the assets and liabilities classified as being held for sale.
Any impairment we record is based on the best available evidence of the fair value compared to the carrying value before the impairment.
The final sale price the Group may achieve will depend on a number of factors and may be different to the fair value we estimate when
recording the impairment. We expect that the sales will complete within 12 months after balance date, subject to the relevant regulatory
approvals and customary terms of sale for such assets.
Total
$m
5,962
1,868
122
18
7,970
4,558
22
(8)
77
44
4,693
139
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
29. LIFE INSURANCE BUSINESS
The Group conducts Life Insurance and Funds Management business (the Life Insurance Business) in Australia and New Zealand. The following
information summarises the statutory Life insurance business transactions contained in the Group financial statements and the underlying
methods and assumptions used in their calculations.
LIFE INSURANCE BUSINESS PROFIT ANALYSIS
The net shareholder profit after tax in the regulated insurance entities represents the net profit after tax of OnePath Life Limited and
OnePath Life (NZ) Limited.
Net shareholder profit after tax of regulated insurance entities
Represented by:
Emergence of planned profit margin
Difference between actual and assumed experience
Reversal of previous losses on groups of related products
Investment earnings on retained profits and capital
Life insurance
contracts
Life investment
contracts
Total
2017
$m
158
186
(58)
1
29
2016
$m
335
208
45
1
81
2017
$m
2016
$m
55
36
16
-
3
81
65
5
-
11
2017
$m
213
222
(42)
1
32
LIFE INSURANCE BUSINESS LIABILITIES
Policy Liabilities are the Group’s liabilities to compensate policyholders. Policy liabilities include both Life Insurance Contract Liabilities and
Life Investment Contract Liabilities.
Policy Liabilities
Life insurance contract liabilities
Life investment contract liabilities (at fair value through profit or loss)
Total policy liabilities
Residual contractual maturity:
- due within 12 months
- due after 12 months
- no maturity specified
Total policy liabilities
2017
$m
342
37,106
37,448
37,077
29
342
37,448
2016
$m
416
273
50
1
92
2016
$m
190
35,955
36,145
35,911
44
190
36,145
LIFE INSURANCE CONTRACTS
Life insurance contracts are insurance contracts regulated under the Australian Life Insurance Act 1995 and similar contracts issued by entities operating
outside Australia.
Life insurance contracts are contracts through which the:
• insurer accepts significant insurance risk from the policyholder; and
• policyholder is compensated if a future uncertain event negatively impacts the policyholder — for example, death or disability.
We purchase reinsurance either to reduce the impact of large claims, or for capital relief.
Life Insurance Contracts
Life insurance contract liabilities
Best estimate liabilities:
Value of future policy benefits
Value of future expenses
Value of future premium
Unreleased future profit margin
Other
Total life insurance contract liabilities (net of reinsurance)
Unvested policyholder benefits
Liabilities ceded under reinsurance contracts (other assets)
Total life insurance contract liabilities
140
2017
$m
2016
$m
10,107
2,290
(15,310)
2,471
26
(416)
40
718
342
10,811
2,483
(16,544)
2,631
32
(587)
40
737
190
ANZ 2017 ANNUAL REPORT 29. LIFE INSURANCE BUSINESS (continued)
Life investment contracts are contracts written by a registered life insurer that do not meet the definition of an insurance contract. The amounts
received from these contracts comprise of two components:
• the amount we receive from policyholders - which we recognise as a liability; and
• the amounts policyholders pay for investment management services - which we recognise as funds management income.
The table below provides a reconciliation of life investment contract liabilities, the related assets backing the policy liabilities and the external unit
holders liabilities included in the Group’s balance sheet.
Life Investment Contracts
Life investment contract liabilities
Capital guaranteed element
Investment performance guarantee
Other - not subject to any guarantees
Total life investment contract liabilities
Related assets
Residual contractual maturity:
- due within 12 months
- due after 12 months
Investments backing policy liabilities
Add: Amounts removed due to elimination of intercompany balances and treasury shares
Less: Assets backing life insurance contract liabilities (available-for-sale)
Total assets backing life investment contract liabilities (at fair value through profit or loss)
Less: External unit holder liabilities (at fair value through profit or loss)
Net assets backing life investment contract liabilities
2017
$m
800
495
35,811
37,106
30,191
7,773
37,964
4,570
(993)
41,541
(4,435)
37,106
2016
$m
1,230
668
34,057
35,955
28,798
6,858
35,656
4,670
(1,038)
39,288
(3,333)
35,955
LIFE INSURANCE BUSINESS RISK
Insurance risk is the risk of loss due to unexpected changes in current and future insurance claims rates. The changes primarily arise due to claims
payments, mortality (death) or morbidity (illness or injury) rates being greater than expected.
We control and minimise the key risks of the life insurance business in the following ways:
• Insurance risks – We use underwriting procedures including strategic decisions, limits to delegated authorities and signing powers.
We analyse reinsurance arrangements using analytical modelling tools to achieve the desired type of reinsurance and retention levels;
• Financial risks – We select appropriate assets to back contract liabilities. If possible, we segregate policyholders funds from shareholders’
funds and we set investment mandates that are appropriate for each.
• Market risks – For liabilities to policyholders which are guaranteed and for Life investment contracts where the investment management
services fees earned are directly impacted by the value of the underlying assets. We monitor assets for market risk on a regular basis.
141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
29. LIFE INSURANCE BUSINESS (continued)
RECOGNITION AND MEASUREMENT
Life insurance contract liabilities
We calculate Life insurance contract Liabilities under the Margin on Service (MoS) model using a projection method through which
we determine the liability as the present value of:
• expected future cashflows (premiums, expenses, and benefit payments); plus
• planned profit margin to be released in future periods.
We discount these cashflows at the risk-free discount rate. We calculate the Life insurance contract liabilities across portfolios of contracts
using recognised actuarial principles and standards (e.g. Life Insurance Prudential Standard 340 Valuation of Policy Liabilities issued by APRA).
This methodology takes into account the risks and uncertainties of the particular portfolio.
Liabilities ceded under reinsurance contracts
We account for reinsurance on the same basis as the underlying direct insurance contracts for which we purchased the reinsurance.
Unvested policyholder benefits
We issue participating contracts to policyholders where the policyholder is entitled to a share of the profits as they are exposed to the
performance of specific assets in addition to a guaranteed benefit. This profit sharing is governed by the Life Act and the life insurance
company’s constitution. If any benefits remain payable at the end of the reporting period, then we recognise them as unvested
policyholder benefits.
Life investment contract liabilities
A life investment contract liability is measured at fair value and is directly linked to the fair value of the assets that back it. We determine
the liability as the fair value of those assets after tax. For guaranteed policies, we determine the liability as the net present value of expected
cash flows, subject to a minimum of current surrender value.
External unit holder liabilities
The life insurance business includes controlling interests in investment funds which we aggregate. When we aggregate a controlled investment
fund, we recognise the external unit holder liabilities as a liability and include them on the balance sheet in external unit holder liabilities.
Investments backing policy liabilities
Investments backing policy liabilities include:
• Assets backing investment contract liabilities - being the assets held in regulated insurance entities that are not segregated
and managed under a distinct shareholder investment mandate. We also call these policyholder assets.
• Assets backing life insurance contract liabilities - being the assets held in regulated insurance entities that are managed under
a distinct shareholder mandate. We also call these shareholder assets.
Our determination of fair value of the policyholder and shareholder assets involves the same judgement as other financial assets
as described in Note 17 Fair Value of Financial Assets and Liabilities.
KEY JUDGEMENTS AND ESTIMATES
The key factors that affect how we estimate life insurance liabilities and related assets are:
• the cost of providing benefits and administering contracts;
• mortality and morbidity experience, which includes enhancements to policyholder benefits;
• discontinuance experience, which affects the Group’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.
Our estimates of life insurance liabilities are affected by: regulation, competition, interest rates, inflation, taxes and general economic conditions.
We have performed sensitivity analysis on key variables influencing insurance liabilities and assets — namely: interest, inflation, mortality,
morbidity and discontinuance risk. We have determined that there would be no material impact to the Group for a reasonable change
in any of these variables.
142
ANZ 2017 ANNUAL REPORT 30. SUPERANNUATION AND POST EMPLOYMENT BENEFIT OBLIGATIONS
Set out below is a summary of amounts recognised in the Balance Sheet in respect of the defined benefit superannuation schemes:
Defined benefit obligation and scheme assets
Present value of funded defined benefit obligation
Fair value of scheme assets
Total
As represented in the Balance Sheet
Net liabilities arising from defined benefit obligations included in payables and other liabilities
Net assets arising from defined benefit obligations included in other assets
Total
Weighted average duration of the benefit payments reflected in the defined benefit obligation (years)
2017
$m
(1,406)
1,496
90
(32)
122
90
16.8
2016
$m
(1,509)
1,567
58
(51)
109
58
16.8
As at the most recent reporting dates of the schemes, the aggregate deficit of net market value of assets over the value of accrued benefits on a
funding basis was $18 million (2016: $52 million). In 2017, the Group made defined benefit contributions totalling $5 million (2016: $55 million).
It expects to make around $3 million next financial year.
GOVERNANCE OF THE SCHEMES AND FUNDING OF THE DEFINED BENEFIT SECTIONS
The main defined benefit superannuation schemes in which the Group participates operate under trust law and are managed and administered on behalf
of the members in accordance with the terms of the relevant trust deed and rules and all relevant legislation. These schemes have corporate trustees,
which are wholly owned subsidiaries of the Group. The trustees are the legal owners of the assets, which are held separately from the assets of the Group,
and are responsible for setting investment policy and agreeing funding requirements with the employer through the triennial actuarial valuation process.
The Group has defined benefit arrangements in Australia, Japan, New Zealand, Philippines, Taiwan and United Kingdom. The defined benefit section of
the ANZ Australian Staff Superannuation Scheme, the ANZ UK Staff Pension Scheme and the ANZ National Retirement Scheme in New Zealand are the
three largest plans. They have been closed to new members since 1987, 2004 and 1991 respectively. None of the schemes had a material deficit, or
surplus, at the last full valuation. The Group has no present liability under any of the schemes’ trust deeds to fund a deficit (measured on a funding basis).
A contingent liability of the Group may arise if any of the schemes were wound up.
RECOGNITION AND MEASUREMENT
Defined benefit superannuation schemes
The Group operates a small number of defined benefit schemes. Independent actuaries calculate the liability and expenses related to providing
benefits to employees under each defined benefit scheme. They use the Projected Unit Credit Method to value the liabilities. The balance sheet
includes:
• a defined benefit liability if the obligation is greater than the fair value of the schemes assets; and
• an asset (capped to its recoverable amount) if the fair value of the assets is greater than the obligation.
In each reporting period, the movements in the net defined benefit liability are recognised as follows:
• the net movement relating to the current period’s service cost, net interest on the defined benefit liability, past service costs and other
costs (such as the effects of any curtailments and settlements) as operating expenses;
• remeasurements of the net defined benefit liability (which comprise actuarial gains and losses and return on scheme assets, excluding
interest income included in net interest) directly in retained earnings through other comprehensive income; and
• contributions of the Group directly against the net defined benefit position.
Defined contribution superannuation schemes
The Group operates a number of defined contribution schemes. It 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 plans. The Group’s contributions to these
schemes are recognised as personnel expenses when they are incurred.
143
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
30. SUPERANNUATION AND POST EMPLOYMENT BENEFIT OBLIGATIONS (continued)
KEY JUDGEMENTS AND ESTIMATES
The main assumptions we use in valuing defined benefit assets and liabilities are listed in the table below. A change to any assumptions,
or applying different assumptions, could have a significant effect on the income statement, statement of other comprehensive income
and balance sheet.
Sensitivity analysis
change in significant
assumptions
Increase/(decrease) in
defined benefit obligation
Assumptions
Discount rate (% p.a.)
Future salary increases (% p.a.)
Future pension indexation
2017
2016
2.5 - 3.8
1.6 - 3.7
2.2 - 3.0
1.5 - 3.6
0.5% increase
In payment (% p.a.)/In deferment (% p.a.)
1.7 - 3.0/2.2
1.5 - 2.9/2.1
0.5% increase
Life expectancy at age 60 for current pensioners
1 year increase
– Males (years)
– Females (years)
25.4 - 28.9
22.6 - 28.8
28.6 - 31.0
26.3 - 30.8
2017
$m
(112)
95
50
2016
$m
(140)
118
63
31. 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 schemes that operated during the 2016 and 2017 years were the Employee Share Offer and the Deferred Share Plan.
Employee Share Offer
Eligibility
Grant
Allocation value
Australia
New Zealand
Expensing value
(fair value)
Most permanent employees employed in either Australia or New Zealand with three years continuous service for
the most recent financial year.
Up to AUD1,000 in Australia (and AUD800 in New Zealand) ANZ shares each financial year, subject to Board approval.
One week Volume Weighted Average Price (VWAP) of ANZ shares traded on the ASX in the week leading up to and
including the date of grant.
ANZ ordinary shares are granted to eligible employees for nil consideration. The shares vest on grant and are held in
trust for three years from grant date, after which time they may remain in trust, be transferred to the employee’s name
or sold. Dividends are automatically reinvested in the Dividend Reinvestment Plan.
Shares are granted to eligible employees on payment of NZD one cent per share. Shares vest subject to satisfaction
of a three year service period, after which they may remain in trust, be transferred to the employee’s name or sold.
Unvested shares are forfeited if the employee resigns or is dismissed for serious misconduct. Dividends are either paid
in cash or reinvested into the Dividend Reinvestment Plan.
In Australia, the fair value of the shares is expensed in the year shares are granted, as they are not subject to forfeiture.
In New Zealand, the fair value is expensed on a straight-line basis over the three year vesting period.
The expense is recognised as a share-based compensation expense with a corresponding increase in share capital.
FY 2017
FY 2016
Zero shares were granted in the 2017 financial year.
626,121 shares were granted on 3 December 2015 at an issue price of $27.60.
144
ANZ 2017 ANNUAL REPORT 31. EMPLOYEE SHARE AND OPTION PLANS (continued)
Deferred Share Plan
i) Chief Executive Officer (CEO) and Group Executive Committee (ExCo)
Eligibility
Grant
Group CEO and ExCo.
50% of the CEO’s Annual Variable Remuneration (AVR) and 33% of ExCo’s Variable Remuneration (VR)
received as deferred shares.
Conditions
Deferred evenly over four years from grant date.
ii) ANZ Employee Reward Scheme1 (ANZERS) and Business Unit Incentive Plans (BUIPs)
Eligibility
Grant
Employees participating in ANZ’s standard Short Term Incentive (STI) arrangements.
Half of all incentive amounts exceeding AUD100,000 (subject to a minimum deferral amount of AUD25,000)
received as deferred shares.
Conditions
Deferred evenly over two years from grant date.
iii) Total Incentives Performance Plan1 (TIPP)
Eligibility
Grant
Employees participating in the Institutional TIPP.
60% of incentive amounts exceeding AUD80,000 (subject to a minimum deferral amount of AUD18,000)
received as deferred shares.
Conditions
Deferred evenly over three years from grant date.
iv) Long Term Incentives (LTIs)
Eligibility
Grant
Conditions
v) Exceptional circumstances
Remuneration forgone
Retention
vi) Further information
Downward adjustment
Cessation
Dividends
Instrument
Allocation value
Expensing value
(fair value)
FY 2017 grants
FY 2016 grants
Selected employees.
100% deferred shares.
Vest three years from grant date.
In exceptional circumstances, we grant deferred shares to certain employees when they start with ANZ to
compensate them for remuneration they have forgone from their previous employer. The vesting period
generally aligns with the remaining vesting period of the remuneration they have forgone, and therefore
varies between grants.
We may grant deferred shares to high performing employees who are regarded as a significant
retention risk to ANZ.
Deferred shares remain at risk and the Board can adjust the number of deferred shares downwards to zero at any
time before the vesting date. ANZ’s downward adjustment provisions are detailed in section 3.3.4 of the 2017
Remuneration Report.
Unless the Board decides otherwise, employees forfeit their unvested deferred shares if they resign, are
terminated on notice, or are dismissed for serious misconduct. The deferred shares may be held in trust
beyond the deferral period.
Dividends are paid in cash or reinvested in the Dividend Reinvestment Plan.
Deferred share rights may be granted instead of deferred shares in some countries as locally appropriate
(see deferred share rights section).
All deferred shares are issued based on the VWAP of ANZ shares traded on the ASX in the week leading
up to and including the date of grant.
We expense the fair value of deferred shares on a straight-line basis over the relevant vesting period and we
recognise the expense as a share-based compensation expense with a corresponding increase in share capital.
2,016,835 deferred shares were granted with a weighted average grant price of $28.03. No deferred shares
were adjusted downward to zero, based on Board discretion.
5,797,450 deferred shares were granted with a weighted average grant price of $26.15. Board discretion
was exercised to adjust downward 9,397 deferred shares to zero.
1. Allocations under the ANZ Incentive Plan (ANZIP) in November 2017 will be disclosed in the 2018 Annual Report. See Section 3.3 of the 2017 Remuneration Report for details on the ANZIP.
145
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
31. EMPLOYEE SHARE AND OPTION PLANS (continued)
Expensing of the ANZ Employee Share Acquisition Plan
Expensing value
(fair value)
The fair value of shares we granted during 2017 under the Employee Share Offer and the Deferred Share Plan, measured
as at the date of grant of the shares, is $56.7 million (2016: $171.3 million) based on 2,016,835 shares (2016: 6,423,571)
at VWAP of $28.09 (2016: $26.67).
ANZ SHARE OPTION PLAN
Allocation
We may grant selected employees options/rights which entitle them to acquire fully paid ordinary ANZ shares at a fixed
price at the time the options/rights vest. 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.
Exercise price of options, determined in accordance with the rules of the plan, is generally based on the VWAP 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.
Rules
Prior to the exercise of the option/right if ANZ changes its share capital due to a bonus share issue, pro-rata new share
issue or reorganisation the following adjustments are required:
• Issue of bonus shares - When the holder exercises their option, they are also entitled to be issued the number of
bonus shares they would have been entitled to had they held the underlying shares at the time of the bonus issue;
• Pro-rata share offer - We will adjust the exercise price of the option in the manner set out in the
ASX Listing Rules; and
• Reorganisation - In respect of rights, if there is a bonus issue or reorganisation of ANZ’s share capital, then
the Board may adjust the number of rights or the number of underlying shares 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 before they exercise their options/rights; or
• in a share issue of a body corporate other than ANZ (such as a subsidiary).
Expensing
Cessation
For equity grants made after 1 November 2012, any portion of the award which vests may, at the Board’s discretion,
be satisfied by a cash equivalent payment rather than shares.
We expense the fair value of options/rights on a straight-line basis over the relevant vesting period and we recognise
the expense as a share-based compensation expense with a corresponding increase in share options reserve.
The provisions that apply if the employee’s employment ends are in section 7.2 of the 2017 Remuneration Report.
Downward adjustment
ANZ’s downward adjustment provisions are detailed in section 3.3.4 of the 2017 Remuneration Report.
Option Plans that operated during 2017 and 2016
i) Performance Rights
Allocation
We grant performance rights to selected employees as part of ANZ’s incentive plans. Performance rights provide
the holder with the right to acquire ANZ shares at nil cost, subject to a three year vesting period and Total Shareholder
Return (TSR) performance hurdles.
FY 2017 and FY 2016 grants
During the 2017 year, we granted 944,419 performance rights (2016: 1,570,627). No performance rights were
adjusted downward to zero in 2017 and 2016, based on Board discretion.
146
ANZ 2017 ANNUAL REPORT 31. EMPLOYEE SHARE AND OPTION PLANS (continued)
ii) Deferred Share Rights (no performance hurdles)
Allocation
Satisfying vestings
Deferred share rights provide the holder with the right to acquire ANZ shares at nil cost after a specified
vesting period. We adjust the fair value of rights for the absence of dividends during the restriction period.
Any portion of the award of share rights may be satisfied by a cash equivalent payment rather than shares
at the Board’s discretion. All share rights were satisfied through a share allocation, other than 67,573
deferred share rights (2016: 5,297) for which Board discretion was exercised.
Downward adjustment
Board discretion was also exercised to adjust downward 3,835 deferred share rights to zero in 2017
and 4,583 in 2016.
FY 2017 and FY 2016 grants
During the 2017 year 2,547,377 deferred share rights (no performance hurdles) were granted (2016: 1,211,021).
Options, Deferred Share Rights and Performance Rights on Issue
As at 2 November 2017, there were 1,292 holders of 3,652,926 deferred share rights on issue and 174 holders of 3,425,497 performance rights on issue.
Options/Rights Movements
This table shows the options/rights over unissued ANZ shares and their related weighted average (WA) exercise prices as at the beginning and end of 2017
and the movements during 2017:
Opening
balance
1 Oct
2016
Options/
rights
granted
Options/
rights
forfeited1
Number of options/rights
6,424,117
3,491,796
(1,815,732)
$0.00
$0.00
$0.00
WA exercise price
WA closing share price
WA remaining contractual life
WA exercise price of all exercisable
options/rights outstanding
Outstanding exercisable options/rights
Options/
rights
expired
(629)
$0.00
Options/
rights
exercised
Closing
balance
30 Sep
2017
(985,768)
7,113,784
$0.00
$0.00
$29.50
2.4 years
$0.00
143,839
This table shows the options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2016 and
the movements during 2016:
Opening
balance
1 Oct
2015
Options/
rights
granted
Options/
rights
forfeited1
Options/
rights
expired
Options/
rights
exercised
Closing
balance
30 Sep
2016
Number of options/rights
6,241,157
2,781,648
(1,440,051)
$0.07
$0.00
$0.00
WA exercise price
WA closing share price
WA remaining contractual life
WA exercise price of all exercisable
options/rights outstanding
Outstanding exercisable options/rights
–
–
(1,158,637)
6,424,117
$0.37
$0.00
$25.31
3 years
$0.00
163,244
1. Refers to any circumstance where equity can be forfeited (for example on cessation, downward adjustment and performance conditions not met).
Of the shares issued as a result of the exercise of options/rights during 2016, 18,062 were issued at an exercise price of $23.71 per share. The balance and
those issued in 2017 were issued at a nil exercise price.
As at the date of the signing of the Directors’ Report on 2 November 2017:
• no options/rights over ordinary shares have been granted since the end of 2017; and
• shares issued as a result of the exercise of options/rights since the end of 2017 are 16,489 all with nil exercise prices.
147
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
31. EMPLOYEE SHARE AND OPTION PLANS (continued)
Fair Value Assumptions
When determining the fair value, we apply the standard market techniques for valuation, including Monte Carlo and/or Black Scholes pricing models.
We do so in accordance with the requirements of AASB 2 Share-based Payments. The models take into account early exercise of vested equity,
non-transferability and internal/external performance hurdles (if any).
The table below shows the significant assumptions we used as inputs into our fair value calculation of instruments granted during the period.
We present the values as weighted averages, but the specific values we use for each allocation are the ones we use for the fair value calculation.
Exercise price ($)
Share closing price at grant date ($)
Expected volatility of ANZ share price (%)1
Equity term (years)
Vesting period (years)
Expected life (years)
Expected dividend yield (%)
Risk free interest rate (%)
Fair value ($)
2017
Deferred
Share
Rights
Performance
Rights
2016
Deferred
Share
Rights
Performance
Rights
0.00
27.95
24.9
2.3
2.1
2.1
6.49
1.76
24.59
0.00
28.18
25.0
5.0
3.0
3.0
6.46
1.86
13.73
0.00
26.62
20.2
3.9
1.9
1.9
6.28
2.10
23.67
0.00
26.73
20.5
5.0
3.0
3.0
6.28
2.08
9.12
1. Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the 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 deferred 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 rights.
SATISFYING EQUITY AWARDS
All shares underpinning equity awards may be purchased on market, reallocated or be newly issued shares, or a combination.
The equity we purchased on market during the 2017 financial year (either under the ANZ Employee Share Acquisition Plan and the ANZ Share Option Plan,
or to satisfy options or rights) for all employees amounted to 2,704,206 shares at an average price of $27.83 per share (2016: 1,344,200 shares at an average
price of $26.14 per share).
32. RELATED PARTY DISCLOSURES
KEY MANAGEMENT PERSONNEL COMPENSATION
Key Management Personnel (KMP) are defined as all directors and those executives who report directly to the CEO:
• with responsibility for the strategic direction and management of a major income generating division; or
• who control material income and expenses.
KMP compensation included within total personnel expenses in Note 3 Operating Expenses is as follows:
Short-term benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments
Total
1. Prior period includes the former Group CEO and former disclosed executives until the end of their employment.
2017
$'000
21,002
1,046
169
563
14,926
37,706
20161
$'000
21,362
1,216
314
2,418
19,382
44,692
148
ANZ 2017 ANNUAL REPORT 32. RELATED PARTY DISCLOSURES (continued)
KEY MANAGEMENT PERSONNEL LOAN TRANSACTIONS
Loans made to KMP are made in the ordinary course of business and on normal commercial terms and conditions that are no more favourable than
those given to other employees or customers, including: the term of the loan, security required and the interest rate. The aggregate of loans made,
guaranteed or secured to KMP, including their related parties, were as follows:
Loans advanced1
Interest charged2
2017
$'000
23,950
940
2016
$'000
50,892
2,091
1. Balances are at the balance sheet date (for KMP in office at balance sheet date) and at termination date (for KMP no longer in office at balance sheet date).
2.
Interest is for all KMP’s during the period.
KEY MANAGEMENT PERSONNEL HOLDINGS OF ANZ SECURITIES
KMP, including their related parties, held subordinated debt, shares, share rights and options over shares in the Company directly, indirectly
or beneficially as shown below:
Shares, options and rights
Subordinated debt
1. For KMP that are no longer in office at balance sheet date, the balances are calculated as at their termination date.
2017
Number1
2,233,182
17,152
2016
Number1
4,174,363
15,850
OTHER TRANSACTIONS OF KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIES
All other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s length transactions. These transactions
generally involve providing financial and investment services, including services to eligible international assignees ensuring they are neither financially
advantaged nor disadvantaged by their relocation. All such transactions that have occurred with KMP and their related parties have been trivial or
domestic in nature. In this context, we disclose only those transactions considered of interest to the users of the financial report in making and evaluating
decisions about the allocation of scarce resources.
ASSOCIATES
We disclose significant associates in Note 25 Investments in Associates. During the course of the financial year, transactions conducted with
all associates were on terms equivalent to those made on an arm’s length basis:
Amounts receivable from associates
Amounts payable to associates
Interest income from associates
Interest expense to associates
Other expenses paid to associates
Dividend income from associates
Costs recovered from associates
2017
$'000
77,350
2,481
2,817
35
23,078
42,317
748
2016
$'000
59,111
8,409
1,677
77
25,880
94,400
3,105
There have been no material guarantees given or received. No outstanding amounts have been written down or recorded as allowances, as they are
considered fully collectible.
149
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
33. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
PROPERTY RELATED 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 commitments1
Due within 1 year
Due later than 1 year but not later than 5 years
Due later than 5 years
Total lease rental commitments1
2017
$m
104
104
1,760
251
2,011
461
1,042
508
2,011
2016
$m
111
111
2,001
218
2,219
486
1,114
619
2,219
1. Total future minimum sublease payments we expect to receive under non-cancellable subleases at 30 September 2017 is $91 million (2016: $114 million). During the year, sublease payments we received
amounted to $31 million (2016: $25 million) and were netted against rent expense.
CREDIT RELATED COMMITMENTS AND CONTINGENCIES
Credit related commitments and contingencies
Contract amount of:
Undrawn facilities
Guarantees and letters of credit
Performance related contingencies
Total
2017
$m
191,323
20,009
20,830
232,162
2016
$m
207,410
18,056
19,723
245,189
UNDRAWN FACILITIES
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 only partially used, and others may never be used at all. As such, the total of the nominal principal amounts is not necessarily
representative of future liquidity risks or future cash requirements. Based on the earliest date on which the Group may be required to pay, the total
undrawn facilities of $191,323 million (2016: $207,410 million) mature within 12 months.
GUARANTEES, LETTERS OF CREDIT AND PERFORMANCE CONTINGENCIES
Guarantees and contingent liabilities relate to transactions that the Group has entered into as principal – including: guarantees, standby
letters of credit and documentary letters of credit.
Documentary letters of credit involve the Group issuing letters of credit guaranteeing payment in favour of an exporter. They are 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 if the customer fails to fulfil its
non-monetary obligations under the contract.
To reflect the risk associated with these transactions, we apply the same credit origination, portfolio management and collateral requirements that
we apply to loans. The contract amount represents the maximum potential amount that we could lose 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. Based
on the earliest date on which the Group may be required to pay, the total guarantees and letters of credit of $20,009 million (2016: $18,056 million)
and total performance related contingencies of $20,830 million (2016: $19,723 million) mature within 12 months.
150
ANZ 2017 ANNUAL REPORT 33. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
OTHER CONTINGENT LIABILITIES
As at 30 September 2017, the Group had contingent liabilities in respect of the matters outlined below. Where relevant, expert legal advice has
been obtained and, in the light of such advice, provisions and/or disclosures as deemed appropriate have been made. In some instances we have
not disclosed the estimated financial impact of the individual items either because it is not practicable to do so or because such disclosure may
prejudice the interests of the Group.
BANK FEES LITIGATION
A litigation funder commenced a class action against the Company in 2010, followed by a second similar class action in March 2013. The applicants
contended that certain exception fees (honour, dishonour and non-payment fees on transaction accounts and late payment and over-limit fees on
credit cards) were unenforceable penalties and that various of the fees were also unenforceable under statutory provisions governing unconscionable
conduct, unfair contract terms and unjust transactions. A further action, limited to late payment fees only, commenced in August 2014.
The penalty and statutory claims in the March 2013 class action failed and the claims have been dismissed. The August 2014 action
was discontinued in October 2016.
The original claims in the 2010 class action have been dismissed. A new claim has been added to the 2010 class action, in relation
to the Company’s entitlement to charge certain periodical payment non-payment fees.
BENCHMARK/RATE ACTIONS
In July and August 2016, class action complaints were brought in the United States District Court against local and international banks, including the
Company – one action relating to the bank bill swap rate (BBSW), and one action relating to the Singapore Interbank Offered Rate (SIBOR) and the
Singapore Swap Offer Rate (SOR). The class actions are expressed to apply to persons and entities that engaged in US-based transactions in financial
instruments that were priced, benchmarked, and/or settled based on BBSW, SIBOR, or SOR. The claimants seek damages or compensation in amounts
not specified, and allege that the defendant banks, including the Company, violated US anti-trust laws, anti-racketeering laws, the Commodity
Exchange Act, and (in the BBSW case only) unjust enrichment principles. The Company is defending the proceedings. The matters are at an early stage.
In February 2017, the South African Competition Commission commenced proceedings against local and international banks including the Company
alleging breaches of the cartel provisions of the South African Competition Act in respect of trading in the South African rand. The potential civil penalty
or other financial impact is uncertain. The matter is at an early stage.
REGULATORY REVIEWS AND CUSTOMER EXPOSURES
In recent years there have been significant increases in the nature and scale of regulatory investigations and reviews, enforcement actions (whether
by court action or otherwise) and the quantum of fines issued by regulators, particularly against financial institutions both in Australia and globally.
The nature of these investigations and reviews can be wide ranging and, for example, currently include a range of matters including responsible lending
practices, product suitability, wealth advice, pricing and competition, conduct in financial markets and capital market transactions. During the year,
ANZ has received various notices and requests for information from its regulators as part of both industry-wide and ANZ-specific reviews. There may
be exposures to customers which are additional to any regulatory exposures. These could include class actions, individual claims or customer
remediation or compensation activities. The outcomes and total costs associated with such reviews and possible exposures remain uncertain.
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.
CLEARING AND SETTLEMENT OBLIGATIONS
Under the following arrangements, the Company has a commitment to comply with rules which could result in a bilateral exposure and loss if a member
institution fails to settle: the Australian Payments Clearing Association Limited’s Regulations for the Australian Paper Clearing System, the Bulk Electronic
Clearing System, the Issuers and Acquirers Community and the High Value Clearing System (HVCS). The Company’s potential exposure arising from these
arrangements is unquantifiable in advance.
Under the Austraclear System Regulations (Austraclear), and the CLS Bank International Rules, the Company has a commitment to participate in loss-
sharing arrangements if a member institution fails to settle. The Company’s potential exposure arising from these arrangements is unquantifiable in
advance. For HVCS and Austraclear, the above obligation arises only in limited circumstances.
The Company is a member of various central clearing houses globally, including ASX Clear (Futures), London Clearing House (LCH) SwapClear, Korea
Exchange (KRX), Hong Kong Exchange (HKEX) and the Shanghai Clearing House. These memberships allow the Company to centrally clear derivative
instruments in line with cross-border regulatory requirements. Common to all of these memberships is the requirement for the Company to make
default fund contributions. In the event of a default by another member, the Company could potentially be required to commit additional default fund
contributions which are unquantifiable in advance.
151
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
33. COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (continued)
PARENT ENTITY GUARANTEES
The Company has issued letters of comfort and guarantees in respect of certain subsidiaries in the normal course of business. Under these letters and
guarantees, the Company undertakes to ensure that those subsidiaries continue to meet their financial obligations, subject to certain conditions including
that the entity remains a controlled entity of the Company.
SALE OF GRINDLAYS BUSINESSES
On 31 July 2000, the Company 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. The Company
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 liabilities. The issue below has not adversely impacted the reported results. All settlements and
penalties to date have been covered within existing provisions.
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 (India). 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.
REVOCATION OF DEED OF CROSS GUARANTEE IN RESPECT OF CERTAIN CONTROLLED ENTITIES
ASIC class order 98/1418 (as amended) provided relief to a number of wholly owned controlled entities from the requirements for preparation,
audit, and lodgement of individual financial statements.
Relief was previously granted to the following entities:
• ANZ Properties (Australia) Pty Ltd
• ANZ Capital Hedging Pty Ltd (in liquidation)
• ANZ Funds Pty Ltd
• Votraint No. 1103 Pty Limited
• ANZ Securities (Holdings) Pty Limited
• ANZ Commodity Trading Pty Ltd
• ANZ Nominees Pty Limited
During the current year, ASIC replaced this class order with a new legislative instrument ASIC Corporations (Wholly owned Companies) Instrument
2016/785. Under the new instrument, APRA regulated companies are not eligible to rely on the ASIC Class Order relief for financial reporting
obligations under Part 2M.3 of the Corporations Act 2001 (Cth).
As Australia and New Zealand Banking Group Limited is regulated by APRA, the parties to the Deed are no longer able to obtain relief. The Company
and the other entities which were party to the deed executed a deed of revocation on 30 March 2017 and lodged that deed with ASIC on 31 March 2017.
All companies were released from the Deed of Cross Guarantee by 30 September 2017.
CONTINGENT ASSETS
NATIONAL HOUSING BANK
The Company 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 the Company and NHB.
152
ANZ 2017 ANNUAL REPORT 34. COMPENSATION OF AUDITORS
KPMG Australia
Audit or review of financial reports
Audit-related services1
Non-audit services2
Total3
Overseas related practices of KPMG Australia
Audit or review of financial reports
Audit-related services1
Non-audit services2
Total
Total compensation of auditors
2017
$’000
9,418
4,760
732
14,910
6,263
1,410
10
7,683
22,593
2016
$’000
8,983
4,246
536
13,765
6,332
1,432
21
7,785
21,550
1. Comprises prudential and regulatory services of $4.71 million (2016: $4.13 million), comfort letters $0.72 million (2016: $0.94 million) and other $0.74 million (2016: $0.61 million).
2. The nature of the non-audit services includes general market and regulatory insights, training, controls related assessments, methodology and procedural reviews. Further details are provided in the
Directors’ Report.
Inclusive of goods and services tax.
3.
The Group’s 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 an external auditor. These include regulatory and prudential reviews requested by regulators such
as APRA. Any other services that are not audit or audit-related services are non-audit services. The 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 or breach auditor independence. These include consulting advice and subcontracting
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.
153
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
35. EVENTS SINCE THE END OF THE FINANCIAL YEAR
On 17 October 2017, the Group announced it had agreed to sell OnePath pensions and investments (OnePath P&I) and aligned dealer groups (ADG)
business to IOOF Holdings Limited (IOOF) for $975 million. Completion is expected in the March 2019 half subject to certain conditions including
regulatory approvals and the completion of the extraction of the OnePath P&I business from OnePath Life Insurance. The expected accounting loss on sale
of ~$120 million is anticipated, however the final gain/loss on sale will be determined at completion and will be impacted by transaction and separation
costs, final determination of goodwill to be disposed, other balances and final taxation impacts.
On 18 October 2017, the Group announced it had entered into an agreement with its joint venture partner Metropolitan Bank & Trust Company
(Metrobank) regarding the sale of its 40% stake in the Philippines based Metrobank Card Corporation (MCC). The Group has agreed to sell one half of its
40% stake in MCC to Metrobank, for US$144 million (A$184 million) expected to settle in late 2017. The Group also entered into a put option to sell its
remaining 20% stake to Metrobank, exercisable in the September 2018 half on the same terms and for the same consideration. If exercised, this would
deliver a total sale price of US$288 million (A$368 million). The sale is subject to customary regulatory approvals.
On 23 October 2017, the Group announced it had reached a confidential in-principle agreement with the Australian Securities and Investments
Commission (ASIC) to settle court action in respect of interbank trading and the bank bill swap rate (BBSW). On 30 October 2017, ANZ informed
the Court that agreement with ASIC had been concluded. The financial impact to ANZ has been reflected in the financial statements. On 10 November
2017, there will be a hearing to determine whether the court is prepared to make the orders which ANZ and ASIC seek so as to give effect to
the settlement.
Other than the matters above, there have been no significant events from 30 September 2017 to the date of signing this report.
154
ANZ 2017 ANNUAL REPORT CONSOLIDATED GROUP DIRECTORS' DECLARATION
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 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 Consolidated Entity as at 30 September 2017
and of its performance for the year ended on that date;
b) the notes to the financial statements of the Consolidated Entity include a statement that the financial statements and notes
of 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; and
d)
in the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when
they become due and payable.
Signed in accordance with a resolution of the Directors.
David M Gonski, AC
Chairman
2 November 2017
Shayne C Elliott
Director
155
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
REPORT ON THE AUDIT OF THE FINANCIAL REPORT
OPINION
We have audited the Financial Report of Australia and New Zealand Banking Group Limited (the Company) and the entities it controlled
at the year end and from time to time during the financial year (together, the Group).
In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including:
• giving a true and fair view of the Group’s financial position as at 30 September 2017 and of its financial performance for the year ended
on that date; and
• complying with Australian Accounting Standards and the Corporations Regulations 2001.
The Financial Report comprises the:
• consolidated statement of financial position as at 30 September 2017;
• consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, and
consolidated statement of cash flows for the year then ended;
• Notes 1 to 35 including a summary of significant accounting policies; and
• Directors’ Declaration.
BASIS FOR OPINION
We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report.
We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical
Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia.
We have fulfilled our other ethical responsibilities in accordance with the Code.
KEY AUDIT MATTERS
The Key Audit Matters we identified are:
• Provision for Credit Impairment;
• Valuation of Financial Instruments held at Fair Value; and
• IT Systems and Controls.
Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the
current period.
These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
156
ANZ 2017 ANNUAL REPORT
KEY AUDIT MATTERS (continued)
PROVISION FOR CREDIT IMPAIRMENT ($3,798M)
Refer to the critical accounting estimates and judgements and disclosures in relation to credit impairment provisioning in Notes 13 and 16 to the
Financial Report.
The Key Audit Matter
The provision for credit impairment is a Key Audit Matter as the Group has significant credit risk exposure to a large number of counterparties across a
wide range of lending and other products, industries and geographies. The value of loans and advances on the balance sheet is significant and there is a
high degree of complexity and judgement involved for the Group in estimating individual and collective credit impairment provisions against these loans.
These features resulted in significant audit effort to address the risks around loan recoverability and the determination of related provisions.
How the matter was addressed in our audit
Our audit procedures for the individual and collective provision for credit impairment included:
Provisions estimated across loan portfolios (individual provision)
• Testing the key controls over counterparty risk grading for wholesale loans (larger customer exposures that are monitored individually). We tested
the approval of new lending facilities against the Group’s lending policies, the performance of annual loan assessments, and controls over the
monitoring of counterparty credit quality. This included testing controls over the identification of exposures showing signs of stress, either due to
internal factors specific to the counterparty or external macroeconomic factors, and testing the timeliness of and the accuracy of counterparty risk
assessments and risk grading against the requirements of the Group’s lending policies and regulatory requirements;
• Performing credit assessments of a sample of wholesale loans managed by the Group’s specialist workout and recovery team assessed as higher
risk or impaired, and a sample of other loans, focusing on larger exposures assessed by the Group as showing signs of deterioration, or in areas
of emerging risk (assessed against external market conditions). We challenged the Group’s risk grading of the loan, their assessment of loan
recoverability and the impact on the credit provision. To do this, we used the information on the Group’s loan file, discussed the case with the
loan officer and management, and performed our own assessment of recoverability. This involved using our understanding of relevant industries
and the macroeconomic environment, engaging KPMG specialists where required, and comparing assumptions of inputs used by the Group
in recoverability assessments to externally sourced evidence, such as commodity prices, publicly available audited financial statements, and
comparable external valuations of collateral held; and
• For retail loans (smaller customer exposures not monitored individually), testing controls over the systems which record lending arrears, group
exposures into delinquency buckets based on the number of days loans are overdue, and calculate individual provisions. We tested automated
calculation and change management controls and evaluated the Group’s oversight of the portfolios, with a focus on controls over delinquency
statistics monitoring. We tested a sample of the level of provisions held against different loan products based on the delinquency profile and
challenged assumptions made in respect of expected recoveries, primarily from collateral held.
Provisions estimated across loan portfolios (collective provision)
• Testing the Group’s processes to validate the models used to calculate collective provisions, and evaluating the Group’s model methodologies
against established market practices and criteria in the accounting standards;
• Testing the key controls within IT systems used to calculate the collective provision, specifically those relating to data management
and the completeness and accuracy of data transfer from underlying source systems to the collective provision models;
• Testing the accuracy of key inputs into models by checking a sample of year-end balances to the general ledger, and repayment history
and risk ratings to source systems;
• Challenging the key assumptions in the models such as emergence periods, probability of default and loss given default, for a sample of
retail and wholesale portfolios. We compared modelled estimates against actual losses incurred by the Group; and
• Re-performing, for a sample of retail and wholesale portfolios and using a KPMG-constructed calculation tool, the calculation of collective
provisions, to determine the accuracy of model output.
We also challenged key assumptions in the components of the Group’s collective provision balance held above modelled provision estimates.
This included:
• Evaluating inputs to the concentration risk and economic cycle provisions by comparing underlying portfolio characteristics to recent loss
experience, current market conditions and specific risks inherent in the Group’s loan portfolios;
• Assessing the requirement for other additional provisions by considering model or data deficiencies identified by the Group’s model validation
processes; and
• Assessing the completeness of additional provisions by checking the consistency of risks identified in the portfolios to their inclusion in the
Group’s assessment.
157
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT (continued)
KEY AUDIT MATTERS (continued)
VALUATION OF FINANCIAL INSTRUMENTS HELD AT FAIR VALUE:
- FINANCIAL ASSETS HELD AT FAIR VALUE $213,627M
- FINANCIAL LIABILITIES HELD AT FAIR VALUE $110,934M
Refer to the critical accounting estimates, judgements and disclosures of fair values in Note 17 to the Financial Report.
The Key Audit Matter
Financial instruments held at fair value on the Group’s balance sheet include available for sale assets, trading securities, derivative assets and liabilities,
investments backing policy liabilities, policy liabilities, certain debt securities, and other assets and liabilities designated as measured at fair value through
profit or loss. The instruments are mainly risk management products sold to customers and used by the Group to manage its own interest rate and foreign
exchange risk.
The valuation of financial instruments held at fair value is considered a Key Audit Matter as:
• Financial instruments held at fair value are significant (24% of total assets and 13% of total liabilities);
• The significant volume and range of products transacted, in a number of international locations, increases the risk of inconsistencies in transaction
management processes that could lead to inaccurate valuation;
• Determining the fair value of trading securities and derivatives involves a significant level of judgement by the Group, increasing the risk of error,
and adding complexity to our audit. The level of judgement increases where internal models, as opposed to quoted market prices, are used to
determine fair value of an instrument, or where inputs to the internal models, such as discount rates and measures of volatility, are not observable;
and
• The valuation of certain derivatives held by the Group is sensitive to inputs including funding rates, probabilities of default and loss given default,
and industry practice is evolving as to how the impact of both funding and credit risk is incorporated within the valuation of certain derivative
instruments. This increased our audit effort in this area and necessitated the involvement of valuation specialists.
How the matter was addressed in our audit
Our audit procedures for the valuation of financial instruments held at fair value included:
• Testing access rights and change management controls for key valuation systems;
• Testing interface controls, notably the completeness and accuracy of data transfers between transaction processing systems, key systems
used to generate valuations and any related valuation adjustments, and the Group’s market risk management and finance systems to identify
inconsistencies in transaction management and valuation processes across products and locations;
• Testing the governance and approval controls, such as management review and approval of the valuation models, and approval of new products
against policies and procedures;
• Testing the front office management review and approval of the daily financial instrument trading profit and loss reconciliations prepared by the
Group’s independent product control function;
• Testing the management review and approval of model construction and validation, aimed at assessing the validity and robustness of underlying
valuation models; and
• Testing the Group’s data validation controls, such as those over key inputs in generating the fair value to market data where fair values were
determined by front office teams.
We carried out testing over the valuation of financial instruments with both observable and unobservable inputs. Our specific testing involved valuation
specialists and included:
• Re-performing the valuation of ‘level 1’ and ‘level 2’ available for sale assets and trading securities, which are primarily government, semi-
government and corporate debt securities, by comparing the observable inputs, including quoted prices, to independently sourced market data;
• Using independent models, re-calculating the valuation of a sample, across locations, of derivative assets and liabilities where the fair value
was determined using observable inputs. This included comparing a sample of observable inputs used in the Group’s derivative valuations to
independently-sourced market data, such as interest rates, foreign exchange rates and volatilities;
• Where the fair value of derivatives and other financial assets and liabilities were determined using unobservable inputs (‘level 3’ instruments),
challenging the Group’s valuation model by testing the key inputs used to comparable data in the market, including the use of proxy instruments
and available alternatives. We compared the Group’s valuation methodology to industry practice and the criteria in the accounting standards; and
• Evaluating the appropriateness of the Group’s valuation methodology for derivative financial instruments, having regard to current and emerging
derivative valuation practices across a range of peer institutions, and against the required criteria in the accounting standards. We tested
adjustments made to valuations, particularly funding and credit valuation adjustments on un-collateralised derivatives. In particular, for a sample of
individual counterparties, across locations, we tested key inputs to the credit valuation adjustment calculation, including the probability of default,
against observable market data. Where proxies were used, we assessed the proxy against available alternatives, across a number of locations.
158
ANZ 2017 ANNUAL REPORT KEY AUDIT MATTERS (continued)
IT SYSTEMS AND CONTROLS
Refer to the basis of preparation in Note 1 to the Financial Report.
The Key Audit Matter
As a major Australian bank, the group’s businesses utilise a large number of complex, interdependent Information Technology (IT) systems to process
and record a high volume of transactions. Controls over access and changes to IT systems are critical to the recording of financial information and the
preparation of a financial report which provides a true and fair view of the Group’s financial position and performance. The IT systems and controls, as
they impact the financial recording and reporting of transactions, is a key audit matter and our audit approach could significantly differ depending on the
effective operation of the Group’s IT controls. KPMG IT specialists were used throughout the engagement as a core part of our audit team.
How the matter was addressed in our audit
We tested the control environment for key IT applications (systems) used in processing significant transactions and recording balances in the general
ledger. We also tested automated controls embedded within these systems. Our audit procedures included:
• Testing the governance controls used by the Group’s technology teams to monitor system integrity, by checking matters impacting the
operational integrity of core systems for escalation and action in accordance with the Group’s policies;
• Testing the access rights given to staff by checking them to approved records, and inspecting the reports over the granting and removal of access
rights. We also looked for evidence of escalation of breaches;
• Testing preventative controls designed to enforce segregation of duties between users within particular systems;
• Testing the operating effectiveness of automated controls, principally relating to the automated calculation of financial transactions. We tested the
inputs used within automated calculations to source data and also tested the accuracy of the calculation logic for a sample of transactions within
each identified control; and
• Testing the operating effectiveness of automated reconciliation controls, both between systems and intra-system. We checked a sample of
identified breaks in reconciliations were recorded on exception reports, and subsequently investigated and cleared by the Group.
OTHER INFORMATION
Other Information is both financial and non-financial information in Australia and New Zealand Banking Group Limited’s annual reporting which is
provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information.
Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance
conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion.
In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other
Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the
Other Information that we obtained prior to the date of this Auditor’s Report, we have nothing to report.
RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL REPORT
The Directors are responsible for:
• preparing a Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001;
• implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material
misstatement, whether due to fraud or error; and
• assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL REPORT
Our objective is:
• to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error;
and
• to issue an Auditor’s Report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or
in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report.
A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board
website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report.
159
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT (continued)
REPORT ON THE REMUNERATION REPORT
In our opinion, the Remuneration Report of Australia and New Zealand Banking Group Limited for the year ended 30 September 2017, complies
with Section 300A of the Corporations Act 2001.
DIRECTORS’ RESPONSIBILITIES
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 RESPONSIBILITIES
We have audited the Remuneration Report included in pages 36 to 61 of the Directors’ report for the year ended 30 September 2017.
Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.
KPMG
Alison Kitchen
Partner
Melbourne
2 November 2017
160
ANZ 2017 ANNUAL REPORT SHAREHOLDER INFORMATION - unaudited
SHAREHOLDER INFORMATION - UNAUDITED
ORDINARY SHARES
At 4 October 2017, the twenty largest holders of ANZ ordinary shares held 1,715,161,341 ordinary shares, equal to 58.39% of the total issued ordinary
capital. At 4 October 2017 the issued ordinary capital was 2,937,415,327 ordinary shares.
Name
1 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
2
J P MORGAN NOMINEES AUSTRALIA LIMITED
3 CITICORP NOMINEES PTY LIMITED
4 NATIONAL NOMINEES LIMITED
5
6
BNP PARIBAS NOMINEES PTY LTD
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